People often ask me why I think this recession will become a depression when we've had many recessions in the 70 years since the Great Depression i.e. what's different this time? The fact is that nothing's different. What's different for a guy who has been living an unhealthy lifestyle for 30 years and eventually has a heart attack? The answer is nothing. Complex systems are often able to absorb substantial "adverse stimuli", but eventually they reach a critical tipping point that ends in disaster. Contrary to human optimism, the passage of time does not lessen the likelihood of an adverse event, it only increases the probability of an adverse event. When the tipping point occurs, it's not because of a "Black Swan Event", it's because of a "Dumb Swan Event".
In the case of our economy, the negative factor that's been building up all of this time isn't cholesterol, it's credit. Not to say that all forms of credit are bad, but just as with cholesterol, there is good credit and bad credit. In the case of our economy, our figurative "arteries" are clogged with "bad credit" also known as non-self-liquidating credit. This "nsl" credit refers to money borrowed to pay for consumption as opposed to self-liquidating credit which is is debt used to invest in productive assets (factories etc.). Borrowing for consumption imposes a negative burden (debt service) on future consumption, whereas productive investment creates a future source of income that (usually) more than offsets the cost of the debt service.
Non Amortizing debt
There is an even worse form of credit that the Government uses, which is non-amortizing credit. As opposed to a mortgage or even revolving credit, the Government's favourite debt instrument, Treasury bonds, does not require periodic payments on principal. Government bonds only require interest payments, so for example, on a thirty year bond our Government can defer paying back principal for the entire time to maturity (30 years). And when these "long bonds" do eventually expire, what does Government do? They of course issue a new long bond to pay off the old one and hence extend the time for repayment by another 30 years. Needless to say, this is an extremely handy way of shifting the repayment burden from one generation to the next. So, not only does Government run up obscene amounts of debt, they've even found a great way of paying the least amount possible in the current period against the debt. This is equivalent to an interest-only mortgage where you basically never pay off a dime against your house.
Why Now?
So then people ask me why do I think we are reaching this critical point now? I first came to realize that we were facing the first depression in 70 years when I observed the response of the Government and Federal Reserve to get us out of the last recession (2001-2002). In the end, the Fed had to lower interest rates from the 6% range all the way down to 1% in order to revive the economy. In addition, we had the massive fiscal stimulus caused by the war in Afghanistan and the war in Iraq AND the Bush tax cut. That for me was the wake up call. What that told me right there, is that monetary policy is losing its effectiveness. Fast forward 6 years to today and we've been borrowing steadily throughout this expansion and now we face yet another recession, this time much more leveraged thanks to all of the additional debt that's been incurred in the meantime. Add to that the recent evidence that the long-awaited "deleveraging" process is already well underway, to wit, the extreme turmoil and massive writedowns we've seen across the credit markets to date. And, as I wrote recently, (Fed Funds) rates are all the way back down to 2% and yet Fed policy is now trapped between the Scylla of inflation and Charybdis of bank failure.
Debt Addiction
The real story is how the hell did we get here? As I've indicated before, coming out of the 1970s, the U.S. was incurring structural fiscal and balance of trade deficits, indicating that the economy was no longer competitive. That's when the "neo" Supply Side Economics movement came along and convinced us that we could have our cake and eat it too, we just had to get used to taking on a little bit of debt. Or as Cheney put it "Reagan proved that deficits don't matter" (which makes as much sense as eating a Big Mac and declaring cholesterol doesn't matter). The other insidious element of SSE is the relentless drive for growth, because growth hides a lot of underlying problems - in the short-term. Stated GDP is never adjusted for debt levels which means that recent years' GDP is massively overstated relative to historic GDP.
The End of Credit
Our economy represents a 30 year bubble in credit. As the bubble expanded, our sponsors (China, Japan, Saudi Arabia) were more than willing to lend to us, in the belief they would be paid back with interest. More importantly, our current level of economic activity is predicated upon continued and growing access to credit. Credit is extended based on confidence in the likelihood of repayment. Once lenders' confidence is lost, it will go away for a long time and it will take with it the biggest part of our economy.
In short, it's wake up time folks. There are signs everywhere that we are at or near the all important "tipping point", you just have to be willing to look for them. Paraphrasing from Robert Prechter (EWI), it's better to be a year early, than an hour late when it comes to preparing for financial calamity. For those reading this near the time of writing, you must take steps to protect yourself, your family and your assets before it's too late.
Saturday, July 19, 2008
Tuesday, July 15, 2008
Goodbye Fannie and Freddie, we hardly knew ye
The meltdown started late last spring with the implosion of a few lesser-known financial firms such as New Century Financial. Then in March of this year, once-venerable investment bank Bear Stearns basically evaporated overnight after 85 years of business and having weathered the Great Depression. The company was bought for $2/share by JP Morgan (w/Fed backing), after falling from $150/share in less than 9 months.
Moving on up, we are just now witnessing the nationalization of Fannie Mae (FNM) and Freddie Mac (FRE), the two companies chartered to provide liquidity to the U.S. mortgage market. Just this past Friday, the Federal Government stepped in and indicated they will "make good" on the implicit Government guarantee to backstop these companies financially.
I have no doubt that the Government will do whatever it takes to keep these companies from failing outright, because these companies now underwrite roughly half of the $12 trillion U.S. mortgage market. But to be sure, equity (stock) holders will be wiped out in the process and the cost to taxpayers could run north of a trillion dollars [unofficial guess]. Further to the point, in reaction to the news, U.S. Government bonds sold off sharply, based on genuine fear that through this action the U.S. Government may be at risk of losing it's AAA bond rating as a Sovereign borrower. As indicated here, major rating agencies were quick to clarify that a downgrade of the U.S. government, is not an immediate concern; however, the mere fact that a Sovereign downgrade is even on the table is beyond disturbing, and portends badly for the future. These bond rating agencies (Moody's/S&P) have been so incompetently behind the curve on their ratings relative to the market reality, that their reassurances basically have no value at this point.
That these two companies have lost 90% of their equity value and now are on the verge of massive failure, can come as no surprise. One would be hard pressed to find two companies more leveraged to the Global Ponzi scheme than these two. Both companies were chartered to bring liquidity to the mortgage market by buying up mortgages from local banks, thus providing local banks with fresh cash to originate still more loans. The FNM/FRE portfolios were typically leveraged 30:1 (you read that right), meaning for every dollar of equity, these companies held $30 of debt. What this means is that only a 3% decrease in value in the portfolio wiped out all of the equity. In other words, these companies had become massive call options on the U.S. economy, that worked great when the economy and housing market were growing, but have now since "expired" - and "out of the money", I might add.
Lastly, and almost forgotten in the excitement over FNM/FRE, IndyMac went bankrupt last week and was taken over by the FDIC. This was the third largest bank failure in U.S. history - so far...
Moving on up, we are just now witnessing the nationalization of Fannie Mae (FNM) and Freddie Mac (FRE), the two companies chartered to provide liquidity to the U.S. mortgage market. Just this past Friday, the Federal Government stepped in and indicated they will "make good" on the implicit Government guarantee to backstop these companies financially.
I have no doubt that the Government will do whatever it takes to keep these companies from failing outright, because these companies now underwrite roughly half of the $12 trillion U.S. mortgage market. But to be sure, equity (stock) holders will be wiped out in the process and the cost to taxpayers could run north of a trillion dollars [unofficial guess]. Further to the point, in reaction to the news, U.S. Government bonds sold off sharply, based on genuine fear that through this action the U.S. Government may be at risk of losing it's AAA bond rating as a Sovereign borrower. As indicated here, major rating agencies were quick to clarify that a downgrade of the U.S. government, is not an immediate concern; however, the mere fact that a Sovereign downgrade is even on the table is beyond disturbing, and portends badly for the future. These bond rating agencies (Moody's/S&P) have been so incompetently behind the curve on their ratings relative to the market reality, that their reassurances basically have no value at this point.
That these two companies have lost 90% of their equity value and now are on the verge of massive failure, can come as no surprise. One would be hard pressed to find two companies more leveraged to the Global Ponzi scheme than these two. Both companies were chartered to bring liquidity to the mortgage market by buying up mortgages from local banks, thus providing local banks with fresh cash to originate still more loans. The FNM/FRE portfolios were typically leveraged 30:1 (you read that right), meaning for every dollar of equity, these companies held $30 of debt. What this means is that only a 3% decrease in value in the portfolio wiped out all of the equity. In other words, these companies had become massive call options on the U.S. economy, that worked great when the economy and housing market were growing, but have now since "expired" - and "out of the money", I might add.
Lastly, and almost forgotten in the excitement over FNM/FRE, IndyMac went bankrupt last week and was taken over by the FDIC. This was the third largest bank failure in U.S. history - so far...
Thursday, July 10, 2008
(Bear) Market Update
Since I subtly indicated here last May, that the stock market was carving out a multi-year double-top, the market soon after topped out in October and has declined 20% from the top.
Below is the current updated view of the S&P 500:
Granted my market calls have been early, and cynics might say that's because I am overly zealous about anticipating the "end of the world". To which I say, mea culpa. In reality, I should really refrain from making time-based predictions, even though it's a lot of fun, especially when I am right. And in all fairness to me, who knew that Bernanke would have been so *creative* in attempting to keep the Global Ponzi Scheme alive. By all accounts, he has come up with some historically novel ways of handing tens of billions of dollars to big banks and brokerage houses to make sure they don't suffer from their own greed and stupidity. Regardless, the man from Oz has only postponed the inevitable and taken the Federal Reserve basically out of the picture. With the Fed Funds rate at a mere 2% and inflation running at the highest level in decades, the Fed really has neither the option to cut nor to raise interest rates - if they cut, then inflation will accelerate killing consumers; if they raise, then banks will fail. The next option that Bernanke has hinted he might take is to "buy" long-term U.S. government bonds aka. monetize the debt, which is tantamount to "printing money".
Regardless of my calls being early, the trajectory and velocity of the current stock market decline thoroughly validates my overall thesis. We are still very early in this overall market decline and with each step lower, more and more of my longer-term predictions will be validated.
As for the commodities market, oil is hanging in there valiantly (~$140/barrel as of today). Paradoxically, despite being a big believer in Peak Oil Reality, I think the next major move in oil will be to the downside. I base this on demand destruction from high prices, weak overall economic fundamentals and over-supply from speculators who took oil out of the markets and will be puking it back onto the markets as the decline accelerates. I am clearly not among the current cohort of deceivers trying to convince everyone that speculation plays no role in commodity prices. If you believe that, then there's this bridge over here...
Also to date, contrary to my predictions here and here, and despite the fact that this has been the most volatile market in years, the major options put sellers have seemingly not yet shit the proverbial brick. however, I suspect that this past two times that the VIX touched 30, these guys had some serious nicotine stains in their underwear. As for the full scale filling of drawers, in my opinion that event is only a matter of when, not if. After all, stupid is as stupid does, and selling puts into a decline is like selling house insurance when the house next door is already on fire.
Also to date, contrary to my predictions here and here, and despite the fact that this has been the most volatile market in years, the major options put sellers have seemingly not yet shit the proverbial brick. however, I suspect that this past two times that the VIX touched 30, these guys had some serious nicotine stains in their underwear. As for the full scale filling of drawers, in my opinion that event is only a matter of when, not if. After all, stupid is as stupid does, and selling puts into a decline is like selling house insurance when the house next door is already on fire.
Tuesday, July 1, 2008
Desecration
We've desecrated the Blue Planet.
This one, unique, gorgeous gift from God - for all we know the only hospitable planet that exists in the universe or at least within say a hundred million light years - and we've done our level best to destroy it.
Vanishing species, desertification, polluted land, air and waterways, depleted ozone and unprecedented climate change.
We've taken billions of tons of hydrocarbons that took hundreds of millions of years to form underground and released it into the atmosphere in less than 100 years. And now like a bunch of stunned dunces we stand around asking ourselves "I wonder if that caused a problem". One plan that's been put forward to slow global warming, is to pump carbon back underground i.e. take atmospheric gas that was converted from dense liquid oil and pump the expanded gas back into the ground - BRILLIANT! Let's put Exxon and the Saudis to work on that plan...
We've created myriad religions that put us at the center of the universe and rationalize our pathetic existence because we do not have the capacity nor courage to understand how insignificant we are in the context of the universe. We study holy books full of gibberish written hundreds (thousands) of years ago by people who were even more ignorant and backward than we are (hardly seems possible), to give ourselves the short stories we need to put ourselves to bed each night. The books all say we own this planet, so we can do what we want with it. To "worship" or admire anything that's natural or to find God's beauty in anything that's natural is deemed "Pagan". After all, religion, like all businesses, hates competition. Nothing can compete with such a deceptively alluring and self-serving way of thinking - science can't, logic can't, commonsense - no chance. Somehow God appeared a few thousand years ago to part the Red Sea and punish the Egyptians, but since then no one has seen hide nor hair of him - even as half a billion children evaporated from the face of this earth in the last century alone. I guess he was on his lunch break. The Book also says the Hebrews were punished for worshipping a golden calf, to which I say our entire consumption-oriented way of life including the pseudo religions that tell us to embrace it - are all one giant golden calf - a false idol.
Then I ask myself, how can we expect the average person to ever care about this planet when we are so busy stuffing our own bodies full of fast/factory food toxic waste? Logic dictates that guys like Dick Cheney who eat beef at every meal and have had 5 heart attacks, aren't worried about the fact that yogourt containers aren't recyclable.
The one true God gave us the greatest gift - our home - and we threw it away. This is desecration of the highest order and it shows more than anything what we think of God...and I have no doubt before it's all said and done, God is going to show what he thinks of us.
This one, unique, gorgeous gift from God - for all we know the only hospitable planet that exists in the universe or at least within say a hundred million light years - and we've done our level best to destroy it.
Vanishing species, desertification, polluted land, air and waterways, depleted ozone and unprecedented climate change.
We've taken billions of tons of hydrocarbons that took hundreds of millions of years to form underground and released it into the atmosphere in less than 100 years. And now like a bunch of stunned dunces we stand around asking ourselves "I wonder if that caused a problem". One plan that's been put forward to slow global warming, is to pump carbon back underground i.e. take atmospheric gas that was converted from dense liquid oil and pump the expanded gas back into the ground - BRILLIANT! Let's put Exxon and the Saudis to work on that plan...
We've created myriad religions that put us at the center of the universe and rationalize our pathetic existence because we do not have the capacity nor courage to understand how insignificant we are in the context of the universe. We study holy books full of gibberish written hundreds (thousands) of years ago by people who were even more ignorant and backward than we are (hardly seems possible), to give ourselves the short stories we need to put ourselves to bed each night. The books all say we own this planet, so we can do what we want with it. To "worship" or admire anything that's natural or to find God's beauty in anything that's natural is deemed "Pagan". After all, religion, like all businesses, hates competition. Nothing can compete with such a deceptively alluring and self-serving way of thinking - science can't, logic can't, commonsense - no chance. Somehow God appeared a few thousand years ago to part the Red Sea and punish the Egyptians, but since then no one has seen hide nor hair of him - even as half a billion children evaporated from the face of this earth in the last century alone. I guess he was on his lunch break. The Book also says the Hebrews were punished for worshipping a golden calf, to which I say our entire consumption-oriented way of life including the pseudo religions that tell us to embrace it - are all one giant golden calf - a false idol.
Then I ask myself, how can we expect the average person to ever care about this planet when we are so busy stuffing our own bodies full of fast/factory food toxic waste? Logic dictates that guys like Dick Cheney who eat beef at every meal and have had 5 heart attacks, aren't worried about the fact that yogourt containers aren't recyclable.
The one true God gave us the greatest gift - our home - and we threw it away. This is desecration of the highest order and it shows more than anything what we think of God...and I have no doubt before it's all said and done, God is going to show what he thinks of us.
Monday, June 30, 2008
Don't Blame Bush
President Bush's popularity is falling faster than the stock market and the anti-Bush chorus gets louder each day.
But don't blame one man for everything bad that you see going on around you. After all, (almost) half the electorate of the U.S. voted for Bush, not once, but TWICE if you can imagine!!! Worse yet, the second time they voted for him, the "War" (occupation/fiasco/etc.) in Iraq was already well underway.
Of course they couldn't vote for Gore and Kerry, because those guys were too "boring" - after all, neither one of them has run a company into the ground, or speed balled coke (who knows, maybe one of them did speed ball coke - did anyone think to ask?). Meanwhile, Gore and Kerry both have real-world military experience and now they don't like war anymore - BOO FREAKING HOO! Maybe if they had spent the '60s doing everything possible to avoid Vietnam, they would still have their cajones!!! Worse yet, I heard Bore's house is the size of Rhode Island and requires 15 coal fueled power plants to power it! (Heard that on Fox News - or maybe my hill billy neighbour told me - can't remember which).
So just remember, there are still 62 million people (+/-) out there who voted for Bush TWICE and these people are just lurking in the shadows waiting to plunge us into the next abyss of stupidity and short-sightedness. If you encounter one of these people, run like hell, because reason, logic or reality will not avail you in a confrontation with the almighty BUSH VOTER. As for the future, as long as these people stalk the earth, there really isn't much hope I'm afraid (but if you are reading this, you pretty much already came to the same conclusion)...
But don't blame one man for everything bad that you see going on around you. After all, (almost) half the electorate of the U.S. voted for Bush, not once, but TWICE if you can imagine!!! Worse yet, the second time they voted for him, the "War" (occupation/fiasco/etc.) in Iraq was already well underway.
Of course they couldn't vote for Gore and Kerry, because those guys were too "boring" - after all, neither one of them has run a company into the ground, or speed balled coke (who knows, maybe one of them did speed ball coke - did anyone think to ask?). Meanwhile, Gore and Kerry both have real-world military experience and now they don't like war anymore - BOO FREAKING HOO! Maybe if they had spent the '60s doing everything possible to avoid Vietnam, they would still have their cajones!!! Worse yet, I heard Bore's house is the size of Rhode Island and requires 15 coal fueled power plants to power it! (Heard that on Fox News - or maybe my hill billy neighbour told me - can't remember which).
So just remember, there are still 62 million people (+/-) out there who voted for Bush TWICE and these people are just lurking in the shadows waiting to plunge us into the next abyss of stupidity and short-sightedness. If you encounter one of these people, run like hell, because reason, logic or reality will not avail you in a confrontation with the almighty BUSH VOTER. As for the future, as long as these people stalk the earth, there really isn't much hope I'm afraid (but if you are reading this, you pretty much already came to the same conclusion)...
Friday, June 27, 2008
Chaos and Anarchy
Don't like Armageddon? How about Chaos and Anarchy? Because long before we get to any crazy end-times scenario, the "thin veneer of civilization" will be stretched to its breaking point and then a whole lot further.
As I've said before, we are now witnessing in real-time, the utter failure of governance at all levels. From the Federal Government to State, Local Governments, the Judiciary, Federal Reserve and all regulatory bureaucracies in-between, they have all become frozen and incapacitated by the unfolding financial crisis. These are bureaucracies that have grown increasingly incompetent over the decades and have no chance of ever becoming effective, well-run institutions.
Democracy has been totally undermined by special interest groups. On the right you have the Military Industrial Complex, the Christian Fundamentalists, Ultra-wealthy tax dodgers, and fanatical gun owners. On the left you have Gays/Lesbians, Abortion Advocates and Ambulance-chasing lawyers looking to sue anyone at the drop of the hat. Some choice.
Obama v.s. McCain? It really doesn't matter. These guys spend 80% of their time campaigning and 20% of their time pretending to make decisions and passing still more useless laws taking away yet more freedoms. Two years of making false promises followed by two years of broken commitments followed by two more years of false promises - an endless cycle of hype and deceit. None of these career politicians (Obama, McCain, Clinton etc.) have any experience actually DOING anything. They are career sales people who have never been on the hook to delivery anything of substance.
The current debate about Iraq (stay in vs. get out) is out of our hands. Historically all governments have had to make a choice between "guns and butter". The Bush Administration chose both guns and butter, which means the next administration won't have the choice of either. Again, the Chinese control U.S. fiscal and monetary policy. All signs (weak dollar, rising interest rates) indicate they are growing weary of sponsoring the U.S. fantasy. Once they pull the funding, the war will be over. Those who think we have a choice in the matter don't understand history, economics or even basic math.
The Government is thoroughly corrupt and untrustworthy. They publish a 4% inflation rate when the true inflation rate is running at close to 10%. They adjust the stated inflation rate because they don't want to pay full benefits that are indexed to the rate of inflation. Also, if they announced true inflation of 10%, that means inflation-adjusted GDP is negative! i.e. We are already in a recession and have been for many months. Thanks to understated price increases we been conned into thinking the economy is still strong.
Crime and anarchy are on the verge of exploding. The social safety net that was put in place following the Great Depression has been whittled down and dismantled. Social Security and Medicare are completely unfunded Ponzi Schemes - IOUs from one generation to the next, based on the assumption that each successive generation can support the previous one. Unfortunately the designers of these programs were not forward thinking enough to predict declining birth rates or baby booms, like the one that occurred almost immediately after the system was put in place. The irony of the situation is that the Baby Boomers need the next few generations to fund their retirement, yet the Baby Boomers have raised the most incompetent, helpless, entitled generation in the history of the planet! How can your kids fund your retirement when most of them are still living at home? Thirty-five year-olds playing with their XBoxes, wondering what they want to be when they "grow up".
Hard-core conservatives will tell us that we need to privatize Social Security i.e. put the money in the stock market. The stock market is the biggest casino in the world. When people are down on their luck, the last thing they need is to have their sole remaining safety net be subjected to the vagaries of the stock market. When the economy is down, people lose their jobs, the stock market collapses and charity dries up i.e. all income streams are 100% correlated to the downside - Does anyone get this? A public Social Security system was SUPPOSED to be non-correlated with the business cycle. Replacing a bad public system with an even worse private one, is the kind of leadership we get these days.
The fact remains that most people are in denial about the crisis unfolding all around them, because they don't want to confront the reality that our entire way of life is a consumption-oriented fantasy propagated by cheap natural resources and massive debt. Hundreds of years ago the developed nations secured early control of Third World natural resources through war, colonization/imperialism, bribery/corruption and exploitation. Now that a few of these countries (China, India) have bootstrapped themselves up to the big table, we are finding out that there just isn't enough to go around. Therefore, it's time for all of us to wake up and downsize our lifestyles to the new reality, before the new reality is rudely crammed down our throats.
As for Chaos and Anarchy, like it or not, those two features are coming soon to a neighbourhood near you, just as sure as God made little green apples and mankind made Hornady 9mm. Batten down those hatches, because here comes Katrina x 100...
As I've said before, we are now witnessing in real-time, the utter failure of governance at all levels. From the Federal Government to State, Local Governments, the Judiciary, Federal Reserve and all regulatory bureaucracies in-between, they have all become frozen and incapacitated by the unfolding financial crisis. These are bureaucracies that have grown increasingly incompetent over the decades and have no chance of ever becoming effective, well-run institutions.
Democracy has been totally undermined by special interest groups. On the right you have the Military Industrial Complex, the Christian Fundamentalists, Ultra-wealthy tax dodgers, and fanatical gun owners. On the left you have Gays/Lesbians, Abortion Advocates and Ambulance-chasing lawyers looking to sue anyone at the drop of the hat. Some choice.
Obama v.s. McCain? It really doesn't matter. These guys spend 80% of their time campaigning and 20% of their time pretending to make decisions and passing still more useless laws taking away yet more freedoms. Two years of making false promises followed by two years of broken commitments followed by two more years of false promises - an endless cycle of hype and deceit. None of these career politicians (Obama, McCain, Clinton etc.) have any experience actually DOING anything. They are career sales people who have never been on the hook to delivery anything of substance.
The current debate about Iraq (stay in vs. get out) is out of our hands. Historically all governments have had to make a choice between "guns and butter". The Bush Administration chose both guns and butter, which means the next administration won't have the choice of either. Again, the Chinese control U.S. fiscal and monetary policy. All signs (weak dollar, rising interest rates) indicate they are growing weary of sponsoring the U.S. fantasy. Once they pull the funding, the war will be over. Those who think we have a choice in the matter don't understand history, economics or even basic math.
The Government is thoroughly corrupt and untrustworthy. They publish a 4% inflation rate when the true inflation rate is running at close to 10%. They adjust the stated inflation rate because they don't want to pay full benefits that are indexed to the rate of inflation. Also, if they announced true inflation of 10%, that means inflation-adjusted GDP is negative! i.e. We are already in a recession and have been for many months. Thanks to understated price increases we been conned into thinking the economy is still strong.
Crime and anarchy are on the verge of exploding. The social safety net that was put in place following the Great Depression has been whittled down and dismantled. Social Security and Medicare are completely unfunded Ponzi Schemes - IOUs from one generation to the next, based on the assumption that each successive generation can support the previous one. Unfortunately the designers of these programs were not forward thinking enough to predict declining birth rates or baby booms, like the one that occurred almost immediately after the system was put in place. The irony of the situation is that the Baby Boomers need the next few generations to fund their retirement, yet the Baby Boomers have raised the most incompetent, helpless, entitled generation in the history of the planet! How can your kids fund your retirement when most of them are still living at home? Thirty-five year-olds playing with their XBoxes, wondering what they want to be when they "grow up".
Hard-core conservatives will tell us that we need to privatize Social Security i.e. put the money in the stock market. The stock market is the biggest casino in the world. When people are down on their luck, the last thing they need is to have their sole remaining safety net be subjected to the vagaries of the stock market. When the economy is down, people lose their jobs, the stock market collapses and charity dries up i.e. all income streams are 100% correlated to the downside - Does anyone get this? A public Social Security system was SUPPOSED to be non-correlated with the business cycle. Replacing a bad public system with an even worse private one, is the kind of leadership we get these days.
The fact remains that most people are in denial about the crisis unfolding all around them, because they don't want to confront the reality that our entire way of life is a consumption-oriented fantasy propagated by cheap natural resources and massive debt. Hundreds of years ago the developed nations secured early control of Third World natural resources through war, colonization/imperialism, bribery/corruption and exploitation. Now that a few of these countries (China, India) have bootstrapped themselves up to the big table, we are finding out that there just isn't enough to go around. Therefore, it's time for all of us to wake up and downsize our lifestyles to the new reality, before the new reality is rudely crammed down our throats.
As for Chaos and Anarchy, like it or not, those two features are coming soon to a neighbourhood near you, just as sure as God made little green apples and mankind made Hornady 9mm. Batten down those hatches, because here comes Katrina x 100...
Friday, May 9, 2008
Einstein's Black Hole
Einstein, a man much smarter than most (everyone?), long ago indirectly predicted that mankind would paint itself into an inescapable corner; however, he had too much pity on our feeble minds to let us in on his secret.
The trace of this secret however, can be found embedded in this profound and omniscient quote of his that I stumbled on recently:
"The significant problems we face cannot be solved at the same level of thinking we were at when we created them"
So let me get this straight, what this means is that the substantial problems we have created (as a result of short-term, ass-backward thinking) can't be solved until we evolve enough as human beings so that we can address our problems at the root cause? You mean evolution? Isn't that a slow process? Don't we first have to convince 80% of the population that evolution even exists/is possible? And what about nuclear proliferation, global warming, peak oil, mass poverty? Can we at least find someway to slow these down a bit? i.e. long enough for us to learn how to stand upright and stop dragging our knuckles on the ground? I have an idea, let's start with a "quick win" by getting that undereducated, underqualified Chimpanzee out of the White House.
Here's another thought, maybe we can figure out the theory of relativity and then we could time travel to the future, solve our problems and then jump back to the present with the solution. Unfortunately, here is another thing Einstein didn't want us to know: basic logic indicates that the news on time travel is not good. Either Einstein was full of bullshit and time travel is not possible, or human beings don't exist in the future; because if both of those were true, then we would already see people today who had come back from the future. Don't get me wrong, I am not questioning Einstein, I am therefore left to assume that human beings don't exist very far into the future.
Always the pragmatist, I personally don't think that our thorniest problems have anything to do with lack of knowledge, even though I am the first to admit that we face daily whithering attacks of disinformation, denialism, mass-commercialization and other forms of human retardation. No, I think we have more than enough knowledge if we know where to look for it -say the library (as opposed to the boob tube); instead, what we inherently lack is the DISCIPLINE to use the knowledge that we already have. Take the obesity epidemic as just one example. We know what's good for us and bad for us, but we don't act on that information. We even stand by as multinational corporations fatten our children with toxic waste (fast food) and then lie to ourselves that it's a burnt offering at the divine altar of "consumer choice". It has nothing to do with consumer choice, it has to do with base instinct. We are no different than dogs shamelessly fucking on the middle of the lawn, we can't help ourselves.
There was a story 10 years ago in the news that a group of scientists (I believe in New York) were trying to create anti-matter (i.e. the material that makes up black holes) in a laboratory setting. At first this set off a firestorm of concern within the scientific community that this was a dangerous and irresponsible experiment with an uncertain outcome. Some predictions were so dire as to believe that this experimental anti-matter (the heaviest known substance in the universe) might fall through the laboratory floor and quickly descend to the core of the earth where it would eventually consume our entire planet, solar system and galaxy. In other words some believed that this experiment would create a real black hole. Finally, that led to the theory that that's how all black holes have been created in the universe i.e. by humanoid life forms reaching their logical and predictable ending via an experiment that had unintended terminal consequences.
So, I will paraphrase Einstein's quote, since he was too polite to come out and say it himself: the basic underlying problem we face (beyond being like dogs on the lawn) is that we human beings, as a race, are too stupid to realize how stupid we are.
The trace of this secret however, can be found embedded in this profound and omniscient quote of his that I stumbled on recently:
"The significant problems we face cannot be solved at the same level of thinking we were at when we created them"
So let me get this straight, what this means is that the substantial problems we have created (as a result of short-term, ass-backward thinking) can't be solved until we evolve enough as human beings so that we can address our problems at the root cause? You mean evolution? Isn't that a slow process? Don't we first have to convince 80% of the population that evolution even exists/is possible? And what about nuclear proliferation, global warming, peak oil, mass poverty? Can we at least find someway to slow these down a bit? i.e. long enough for us to learn how to stand upright and stop dragging our knuckles on the ground? I have an idea, let's start with a "quick win" by getting that undereducated, underqualified Chimpanzee out of the White House.
Here's another thought, maybe we can figure out the theory of relativity and then we could time travel to the future, solve our problems and then jump back to the present with the solution. Unfortunately, here is another thing Einstein didn't want us to know: basic logic indicates that the news on time travel is not good. Either Einstein was full of bullshit and time travel is not possible, or human beings don't exist in the future; because if both of those were true, then we would already see people today who had come back from the future. Don't get me wrong, I am not questioning Einstein, I am therefore left to assume that human beings don't exist very far into the future.
Always the pragmatist, I personally don't think that our thorniest problems have anything to do with lack of knowledge, even though I am the first to admit that we face daily whithering attacks of disinformation, denialism, mass-commercialization and other forms of human retardation. No, I think we have more than enough knowledge if we know where to look for it -say the library (as opposed to the boob tube); instead, what we inherently lack is the DISCIPLINE to use the knowledge that we already have. Take the obesity epidemic as just one example. We know what's good for us and bad for us, but we don't act on that information. We even stand by as multinational corporations fatten our children with toxic waste (fast food) and then lie to ourselves that it's a burnt offering at the divine altar of "consumer choice". It has nothing to do with consumer choice, it has to do with base instinct. We are no different than dogs shamelessly fucking on the middle of the lawn, we can't help ourselves.
There was a story 10 years ago in the news that a group of scientists (I believe in New York) were trying to create anti-matter (i.e. the material that makes up black holes) in a laboratory setting. At first this set off a firestorm of concern within the scientific community that this was a dangerous and irresponsible experiment with an uncertain outcome. Some predictions were so dire as to believe that this experimental anti-matter (the heaviest known substance in the universe) might fall through the laboratory floor and quickly descend to the core of the earth where it would eventually consume our entire planet, solar system and galaxy. In other words some believed that this experiment would create a real black hole. Finally, that led to the theory that that's how all black holes have been created in the universe i.e. by humanoid life forms reaching their logical and predictable ending via an experiment that had unintended terminal consequences.
So, I will paraphrase Einstein's quote, since he was too polite to come out and say it himself: the basic underlying problem we face (beyond being like dogs on the lawn) is that we human beings, as a race, are too stupid to realize how stupid we are.
The Eye of the Hurricane
We are in the eye of the hurricane right now.
The birds are chirping, the sky is blue, it is eerily calm.
The stock market is rallying off the March low, thanks to Bernanke's umpteenth market intervention i.e. the Bear Stearns bailout. It's a ragged, low volume, narrow (breadth) rally, but enough to get the Wall Street Bulls believing that the next great Bull Market is well underway.
Just this week, Henry Paulson told us that the worst of the credit crisis has passed. We are told that even though the 'real' economy is getting worse (job losses/inflation/housing) that the financial markets have already priced in ('discounted') all of the bad news and are rallying in anticipation of the coming economic expansion. Listening to the perma-optimists you would believe that all debts have been paid, the trade deficit has been eliminated, both wars have ended, oil is plentiful, the housing market has stabilized, inflation has been tamed i.e. it's a 'Goldilocks' economy - not too hot, not too cold.
So if you STILL trust your elected officials (Bush & Co.) and their over-rated-Wall Street-country-club-advisors (i.e. Paulson), then by all means you too should indulge your denialistic fantasies. I will take a pass thanks, as I am not inclined to believe the ever-sunny predictions of those who didn't foresee this crisis in the first place.
Getting back to the hurricane analogy, it's the front of the hurricane that weakens the structure, but it's the back of the hurricane that destroys it.
If I am right, Papa Bear is on his way home.
The birds are chirping, the sky is blue, it is eerily calm.
The stock market is rallying off the March low, thanks to Bernanke's umpteenth market intervention i.e. the Bear Stearns bailout. It's a ragged, low volume, narrow (breadth) rally, but enough to get the Wall Street Bulls believing that the next great Bull Market is well underway.
Just this week, Henry Paulson told us that the worst of the credit crisis has passed. We are told that even though the 'real' economy is getting worse (job losses/inflation/housing) that the financial markets have already priced in ('discounted') all of the bad news and are rallying in anticipation of the coming economic expansion. Listening to the perma-optimists you would believe that all debts have been paid, the trade deficit has been eliminated, both wars have ended, oil is plentiful, the housing market has stabilized, inflation has been tamed i.e. it's a 'Goldilocks' economy - not too hot, not too cold.
So if you STILL trust your elected officials (Bush & Co.) and their over-rated-Wall Street-country-club-advisors (i.e. Paulson), then by all means you too should indulge your denialistic fantasies. I will take a pass thanks, as I am not inclined to believe the ever-sunny predictions of those who didn't foresee this crisis in the first place.
Getting back to the hurricane analogy, it's the front of the hurricane that weakens the structure, but it's the back of the hurricane that destroys it.
If I am right, Papa Bear is on his way home.
Saturday, April 26, 2008
Reality Check (April 2008)
Lately the Mainstream Media and Mainstream Economists have been bombarding us with the "happy talk" that IF there is a recession, then it will be short and shallow. Just today, Barrons released its latest "Big Money Poll" of institutional investors, the majority (55%) of whom believe the worst is over for stocks. In addition, an even larger majority believe the Fed's actions to date will be enough to improve the economy by next year. So, even at this late date and with all of the credit problems that have occurred so far, there are only a few forecasters on the "fringe" who are predicting something worse than a mild recession (if any recession at all). Of those few in the reality-based camp are: Nouriel Roubini, the most bearish of well-known economists, who sees a "U-shaped recession" (as opposed to a short, shallow 'V'-shaped recession); author Michael Panzner who sees Financial Armageddon (the title of his book); and of course EWI who, like me, are predicting a severe economic depression.
Anyone reading this in the future has to understand that in the current "marketing-based pseudo-economy", reality and honesty are strictly out of fashion. There is tremendous peer pressure among economists to cede to the permanent optimism camp. Anyone who wants to be featured in the Mainstream media cannot afford to be labeled a "perma-bear" for fear of being left in the corner to play by himself. Clearly, Faux News "reporters" (Infotainers) working for Rupert Murdoch, are by far the biggest bag of liars this side of Stalin-era "Pravda"; however, even CNBC Infotainers come to work wearing pom-poms and cheerleader outfits, ready to spin every story into a sugar-glazed pile of dumbed-down bullshit.
To what extent this “happy talk” from the leading networks is a result of pressure from Corporate advertisers vs. public demand for sugar-coated news, will be subject of much debate when this charade ends. My own sense is that at this time in history, the public at large has no stomach for true “reality-based” news, because it’s too depressing (i.e. realistic). The only place these topics are discussed openly is right here in the blogosphere.
Back to the topic at hand: IF one could find an economist who didn't have his head shoved up his ass so far he thinks it’s night, then this objective economist would undoubtedly consider the current litany of economic issues to be THE WORST COMBINATION OF FACTORS to come together at any point in U.S. history. Since this crisis first got really rolling last summer with the sub-prime meltdown, things have only gotten much worse, not better.
Below is a reality-based status update on the major issues we are facing - issues that apparently most economists seem to think are no big deal:
1) Negative Savings Rate:
This is the FIRST TIME in U.S. history that the savings rate has gone negative during an expansion. In addition, the last time the savings rate went negative was during the last depression i.e. as people pulled down their savings to buy dog food (not for their dogs). Entering an economic slowdown with an already-negative savings rate is sheer suicide - it means households have no economic buffer and the slightest financial problem can bring bankruptcy.
2) Housing Collapse:
Even I am tired about hearing about the housing collapse, yet suffice to say it's getting a lot worse not better; and as one would predict, it's starting to drag the entire economy down with it. Just this week consumer confidence hit a 26 year low.
There is a steady flow of bad news about the housing sector and for those gluttons for gory details here is the best source of information about the worsening crisis.
3) Credit/Banking crisis:
Also unprecedented in U.S. history is a major credit/banking crisis starting BEFORE a recession. Normally, credit crises are precipitated BY recessions (i.e. as bad loans pile up from the economic slowdown). Not this time - this time we are already well into a credit crisis and on top of that we are now going into recession, which will only massively accelerate bank losses. Meanwhile, round one of the crisis started last year with the big bank and brokerage firms. These big banks and brokerages securitize most of their assets and are required to mark-to-market on a regular basis in tandem with the credit market fluctuations. Smaller banks by contrast, hold most of their loans directly on their balance sheets (unsecuritized), so those losses are taken over a longer period of time in the form of continually increasing write-downs.
The FDIC already predicts over 100 banks will fail in the coming year, and that’s putting on a “happy face”. Imagine what they are really predicting…
4) Unprecedented public and private debt levels on an absolute and relative basis
Combined debt for all levels of government, businesses and consumers is roughly $50 trillion. If you add-in the unfunded liabilities from Medicare and Social Security, that adds about another $50 trillion. Altogether that’s $100 trillion - or $330,000 for EVERY single American!!!
I hope the Chinese take Mastercard…
5) Massive Trade Deficit:
This country is no longer competitive, so we just keep borrowing, which gets us back to point number (4)
6) Two Never-ending Wars:
Two extremely expensive wars (occupations – call them what you will) in Iraq and Afghanistan – neither of which has any prospect of ending
7) Energy Crisis:
This week oil hit $119 a barrel and, as I wrote here, the only thing that will stop it from going higher is a major recession.
8) Commodity inflation with slow growth
In the ‘70s they called this Stagflation, but that term is not really appropriate, because wages are not rising as they were back then. So today’s situation is far worse for average Americans – it’s higher prices in combination with lower wages - I call it Decimation…
9) Fed is out of ammo
Short of printing physical money, for the time being, the Fed is out of action. As I indicated, Bernanke has done yeoman's work propping up lenders, but in a credit deflation, there is only so much he can do. Once credit collapses, then they will look to print hard currency. Needless to say, at that point the gap between rich and poor in this country will get much smaller - but not because the poor will be getting any richer…
That's the reality check update for April 2008. Either I am completely full of bullshit and making this all up, or the average economist out there is completely out to lunch. It's hard to imagine so many being wrong and so few being right at this juncture, but that's often what happens at critical turning points in history.
Anyone reading this in the future has to understand that in the current "marketing-based pseudo-economy", reality and honesty are strictly out of fashion. There is tremendous peer pressure among economists to cede to the permanent optimism camp. Anyone who wants to be featured in the Mainstream media cannot afford to be labeled a "perma-bear" for fear of being left in the corner to play by himself. Clearly, Faux News "reporters" (Infotainers) working for Rupert Murdoch, are by far the biggest bag of liars this side of Stalin-era "Pravda"; however, even CNBC Infotainers come to work wearing pom-poms and cheerleader outfits, ready to spin every story into a sugar-glazed pile of dumbed-down bullshit.
To what extent this “happy talk” from the leading networks is a result of pressure from Corporate advertisers vs. public demand for sugar-coated news, will be subject of much debate when this charade ends. My own sense is that at this time in history, the public at large has no stomach for true “reality-based” news, because it’s too depressing (i.e. realistic). The only place these topics are discussed openly is right here in the blogosphere.
Back to the topic at hand: IF one could find an economist who didn't have his head shoved up his ass so far he thinks it’s night, then this objective economist would undoubtedly consider the current litany of economic issues to be THE WORST COMBINATION OF FACTORS to come together at any point in U.S. history. Since this crisis first got really rolling last summer with the sub-prime meltdown, things have only gotten much worse, not better.
Below is a reality-based status update on the major issues we are facing - issues that apparently most economists seem to think are no big deal:
1) Negative Savings Rate:
This is the FIRST TIME in U.S. history that the savings rate has gone negative during an expansion. In addition, the last time the savings rate went negative was during the last depression i.e. as people pulled down their savings to buy dog food (not for their dogs). Entering an economic slowdown with an already-negative savings rate is sheer suicide - it means households have no economic buffer and the slightest financial problem can bring bankruptcy.
2) Housing Collapse:
Even I am tired about hearing about the housing collapse, yet suffice to say it's getting a lot worse not better; and as one would predict, it's starting to drag the entire economy down with it. Just this week consumer confidence hit a 26 year low.
There is a steady flow of bad news about the housing sector and for those gluttons for gory details here is the best source of information about the worsening crisis.
3) Credit/Banking crisis:
Also unprecedented in U.S. history is a major credit/banking crisis starting BEFORE a recession. Normally, credit crises are precipitated BY recessions (i.e. as bad loans pile up from the economic slowdown). Not this time - this time we are already well into a credit crisis and on top of that we are now going into recession, which will only massively accelerate bank losses. Meanwhile, round one of the crisis started last year with the big bank and brokerage firms. These big banks and brokerages securitize most of their assets and are required to mark-to-market on a regular basis in tandem with the credit market fluctuations. Smaller banks by contrast, hold most of their loans directly on their balance sheets (unsecuritized), so those losses are taken over a longer period of time in the form of continually increasing write-downs.
The FDIC already predicts over 100 banks will fail in the coming year, and that’s putting on a “happy face”. Imagine what they are really predicting…
4) Unprecedented public and private debt levels on an absolute and relative basis
Combined debt for all levels of government, businesses and consumers is roughly $50 trillion. If you add-in the unfunded liabilities from Medicare and Social Security, that adds about another $50 trillion. Altogether that’s $100 trillion - or $330,000 for EVERY single American!!!
I hope the Chinese take Mastercard…
5) Massive Trade Deficit:
This country is no longer competitive, so we just keep borrowing, which gets us back to point number (4)
6) Two Never-ending Wars:
Two extremely expensive wars (occupations – call them what you will) in Iraq and Afghanistan – neither of which has any prospect of ending
7) Energy Crisis:
This week oil hit $119 a barrel and, as I wrote here, the only thing that will stop it from going higher is a major recession.
8) Commodity inflation with slow growth
In the ‘70s they called this Stagflation, but that term is not really appropriate, because wages are not rising as they were back then. So today’s situation is far worse for average Americans – it’s higher prices in combination with lower wages - I call it Decimation…
9) Fed is out of ammo
Short of printing physical money, for the time being, the Fed is out of action. As I indicated, Bernanke has done yeoman's work propping up lenders, but in a credit deflation, there is only so much he can do. Once credit collapses, then they will look to print hard currency. Needless to say, at that point the gap between rich and poor in this country will get much smaller - but not because the poor will be getting any richer…
That's the reality check update for April 2008. Either I am completely full of bullshit and making this all up, or the average economist out there is completely out to lunch. It's hard to imagine so many being wrong and so few being right at this juncture, but that's often what happens at critical turning points in history.
Sunday, April 20, 2008
Peak Oil vs. Kyoto
It looks as though Peak Oil is going to do for us what hundreds of politicians worldwide couldn't possibly hope to accomplish with the Kyoto Treaty - that is curb mankind's demand for burning fossil fuels. This is good news for those of us who understand and accept mankind's role in Global Climate change (for those who don't understand or accept this fact, I am curious as to why you would be reading this blog in the first place -Faux News beckons). It's also good news for those of us who have absolutely no faith that governments around the world will ever adhere to the requirements of the treaty.
BAD MATH:
As oil continues its relentless ascent ($115/barrel as of today), it's clear that the supply/demand fundamentals have hit the long-anticipated wall. In a “surprise” announcement, the WSJ reported this week that Russian oil output fell in the first quarter for the first time in a decade. It’s well known that the Russians have used very aggressive methods for extracting oil from their wells (including pumping sea water in etc.), so it should come as no surprise that this day would come sooner rather than later. Meanwhile, due to declines across all of the World’s large oil fields, daily oil production is now dropping at a rate of 4.5m barrels a year as against total daily production of 87m barrels. Meanwhile, oil demand is expected to hit 100m barrels per day by 2015. Even if one believes that daily oil supply will decrease in a linear (as opposed to accelerating) fashion through 2015, that amounts to 4.5m x 7 years = 31.5m in lost daily output (based on current known reserves) vs. an increase of 13m in demand (100-87), which is a combined delta of 31.5 + 13 = 44.5m barrels of daily production that we need to “find” in the next 7 years to bridge the supply/demand gap. Unless we develop a way to convert water into oil, it will be virtually impossible to find enough new oil reserves to produce 44.5m barrels per day of output.
Add to the fact that OPEC producers have been less than forthright about their remaining oil reserves (because it affects their output quotas) and one has to believe that the supply (daily output) of oil could well be heading off of a steep cliff. It’s important to remember that “Peak Oil” production says nothing about the remaining production life of a well or field. In fact, the experience to-date has shown that peak oil output tends to occur relatively late in life for most wells. This is probably due to the fact that new techniques are constantly being invented to increase the flow of oil. So when graphed, the total output from a given well/field is asymmetric, indicating most oil is extracted prior to peak production, and then falls off rapidly once peak production is reached.
Unfortunately, on the demand side, the linkage between high prices and reduced demand, is not as direct as one would hope. This is due to the fact that the demand for oil is relatively price “inelastic”. Consider the following two scenarios: Let’s say you work in India in IT and your salary is increasing at 20% per year. So you go out and buy your first car to impress your girlfriend. Now if oil increases 10%, 20% or 30% will that stop you from driving your new car? No. You may drive less than you would otherwise, but you are still driving more than you were last year when you didn’t even own a car. In addition, you have plenty of newfound discretionary income to offset the rise in gas prices. Consider scenario two, that of the typical middle-class American worker. Her salary is going down on an inflation adjusted basis. She is being squeezed by higher medical costs, education costs, food costs and now fuel is increasing as well. She would like to cut back on fuel, but can’t afford (or isn't willing) to buy a smaller car and has to drive to work 40 miles round trip, because there is no mass transit option. So she keeps spending on gas, but cuts back in other areas. Both of these examples demonstrate (in different ways) why in the short-term at least demand for fuel is relatively inelastic (i.e. not responsive to price increase).
However, long-term, as the price of oil increases, middle-class consumers in the U.S. and Europe will be squeezed enough that this will be yet another major factor precipitating an inevitable economic decline. As consumers cut back on “other areas” to keep spending on gasoline, that will have a ripple effect on the entire economy and eventually lead to lower demand for oil as well.
So, it seems that after having faced a similar energy crisis in the 1970s and having completely ignored those lessons learned, here we are again 30 years later, facing a similar crisis except orders of magnitude worse.
The bright side of all this is that one way or another, the days of burning massive amounts of fossil fuels will eventually be coming to a forced and abrupt ending.
Go Green!!!
BAD MATH:
As oil continues its relentless ascent ($115/barrel as of today), it's clear that the supply/demand fundamentals have hit the long-anticipated wall. In a “surprise” announcement, the WSJ reported this week that Russian oil output fell in the first quarter for the first time in a decade. It’s well known that the Russians have used very aggressive methods for extracting oil from their wells (including pumping sea water in etc.), so it should come as no surprise that this day would come sooner rather than later. Meanwhile, due to declines across all of the World’s large oil fields, daily oil production is now dropping at a rate of 4.5m barrels a year as against total daily production of 87m barrels. Meanwhile, oil demand is expected to hit 100m barrels per day by 2015. Even if one believes that daily oil supply will decrease in a linear (as opposed to accelerating) fashion through 2015, that amounts to 4.5m x 7 years = 31.5m in lost daily output (based on current known reserves) vs. an increase of 13m in demand (100-87), which is a combined delta of 31.5 + 13 = 44.5m barrels of daily production that we need to “find” in the next 7 years to bridge the supply/demand gap. Unless we develop a way to convert water into oil, it will be virtually impossible to find enough new oil reserves to produce 44.5m barrels per day of output.
Add to the fact that OPEC producers have been less than forthright about their remaining oil reserves (because it affects their output quotas) and one has to believe that the supply (daily output) of oil could well be heading off of a steep cliff. It’s important to remember that “Peak Oil” production says nothing about the remaining production life of a well or field. In fact, the experience to-date has shown that peak oil output tends to occur relatively late in life for most wells. This is probably due to the fact that new techniques are constantly being invented to increase the flow of oil. So when graphed, the total output from a given well/field is asymmetric, indicating most oil is extracted prior to peak production, and then falls off rapidly once peak production is reached.
Unfortunately, on the demand side, the linkage between high prices and reduced demand, is not as direct as one would hope. This is due to the fact that the demand for oil is relatively price “inelastic”. Consider the following two scenarios: Let’s say you work in India in IT and your salary is increasing at 20% per year. So you go out and buy your first car to impress your girlfriend. Now if oil increases 10%, 20% or 30% will that stop you from driving your new car? No. You may drive less than you would otherwise, but you are still driving more than you were last year when you didn’t even own a car. In addition, you have plenty of newfound discretionary income to offset the rise in gas prices. Consider scenario two, that of the typical middle-class American worker. Her salary is going down on an inflation adjusted basis. She is being squeezed by higher medical costs, education costs, food costs and now fuel is increasing as well. She would like to cut back on fuel, but can’t afford (or isn't willing) to buy a smaller car and has to drive to work 40 miles round trip, because there is no mass transit option. So she keeps spending on gas, but cuts back in other areas. Both of these examples demonstrate (in different ways) why in the short-term at least demand for fuel is relatively inelastic (i.e. not responsive to price increase).
However, long-term, as the price of oil increases, middle-class consumers in the U.S. and Europe will be squeezed enough that this will be yet another major factor precipitating an inevitable economic decline. As consumers cut back on “other areas” to keep spending on gasoline, that will have a ripple effect on the entire economy and eventually lead to lower demand for oil as well.
So, it seems that after having faced a similar energy crisis in the 1970s and having completely ignored those lessons learned, here we are again 30 years later, facing a similar crisis except orders of magnitude worse.
The bright side of all this is that one way or another, the days of burning massive amounts of fossil fuels will eventually be coming to a forced and abrupt ending.
Go Green!!!
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