"... with shale fields as an important source of output, he said. While Goldman's official forecasts extend to 2020, there is a "very high probability" prices will stay depressed until the end of next decade, he said. ..."
"... U.S. benchmark West Texas Intermediate crude futures fell 25 cents to settle at $46.90 on the New York Mercantile Exchange. Prices are down 12 percent this year and 50 percent over the past 12 months. ..."
Goldman cut its crude forecasts this month, saying the global surplus of oil is bigger than it
previously thought and that failure to reduce production fast enough may require prices to fall
near $20 a barrel to clear the glut. Prices may touch that level when stockpiles are filled to
capacity, forcing producers in some areas to cut output, Currie said Wednesday.
"The last time we saw a period that was similar to today was 1986, 29 years ago," he said. "We
waited 15 years" for oil to start rising again.
Lower iron ore, copper and steel prices as well as weaker currencies in commodity-producing
countries have reduced costs for oil companies, according to Currie. The world is shifting from
an "investment phase" of a 30-year commodity cycle to an "exploitation phase," with shale fields
as an important source of output, he said. While Goldman's official forecasts extend to 2020,
there is a "very high probability" prices will stay depressed until the end of next decade, he
said.
U.S. benchmark West Texas Intermediate crude futures fell 25 cents to settle at $46.90 on the New
York Mercantile Exchange. Prices are down 12 percent this year and 50 percent over the past 12
months.
Should oil fall to $20, it would be "one touch," he said. Inventories would top out in parts of
the world, some producers would shut production and the market would come into balance.
This aritcle is two years old and not much happned during those two years. But still there is a chance that highly authomated factories
can make manufacturing in the USA again profitable. the problme is that they will be even more profible in East Asia;-)
The rise of technologies such as 3-D printing and advanced robotics means that the next few decades for Asia's economies will
not be as easy or promising as the previous five.
OWEN HARRIES, the first editor, together with Robert Tucker, of The National Interest, once reminded me that experts-economists,
strategists, business leaders and academics alike-tend to be relentless followers of intellectual fashion, and the learned, as Harold
Rosenberg famously put it, a "herd of independent minds." Nowhere is this observation more apparent than in the prediction that we
are already into the second decade of what will inevitably be an "Asian Century"-a widely held but rarely examined view that Asia's
continued economic rise will decisively shift global power from the Atlantic to the western Pacific Ocean.
No doubt the numbers appear quite compelling. In 1960, East Asia accounted for a mere 14 percent of global GDP; today that figure
is about 27 percent. If linear trends continue, the region could account for about 36 percent of global GDP by 2030 and over half
of all output by the middle of the century. As if symbolic of a handover of economic preeminence, China, which only accounted for
about 5 percent of global GDP in 1960, will likely surpass the United States as the largest economy in the world over the next decade.
If past record is an indicator of future performance, then the "Asian Century" prediction is close to a sure thing.
Unemployment rates in the U.S. and the U.K. might be low, but a stall in productivity proves that
both economies are far from full health, according to Nobel prize-winning economist Paul Krugman.
The noted Keynesian said Thursday that there had been an "unprecedented stall in productivity"
in the U.K. since 2006, adding that the U.S. wasn't "doing great either."
There were several reasons for this shortfall, according to Krugman, who was speaking at the University
of Oxford's Saïd Business School. These included a lack of improvement in technology and also the
possibility that the U.K. was in a "disguised depression."
"All technology from the iPhone onwards has had zero impact on the British economy. It's made no
progress whatsoever despite all of this stuff," he told the audience.
Productivity has been a hot topic this week in the U.K., with Mark Carney, governor of the Bank
of England, also raising concerns. Economists have spoken of low-income, low-skilled occupations
and new employees doing jobs they're not yet accustomed to.
Krugman joked that the Apple (NASDAQ: AAPL) iPhone - launched in 2007 -- might not have driven
advancements in labor productivity - rather, it may have had an adverse effect on people's attention
spans.
He also said that the mystery of high employment but low productivity could be explained by semi-employed
people, or "lots and lots of people calling themselves consultants."
"Employment is pretty good and that's the really, really weird thing," he added.
The widely-watched economist has been a vocal critic of the U.K. government's policies over the last
five years. The ruling Conservative Party's program of fiscal retrenchment has been praised by the
International Monetary Fund (IMF), however, and the party was re-elected last week with even more
parliamentary seats than in its first term.
Krugman's main argument is that the supposed fiscal tightening actually stopped in 2013, which allowed
the economy to recover, thus winning over voters at the ballot box.
"The largest challenge (for the U.K.) is that the government believes its own propaganda," he
said at the discussion panel. "(They've been) given the chance to make the same mistakes again."
He referred to "disruptive, destabilizing policies" and advocated major public investment programs
for the U.K. He even urged students in the audience to build a movement against the current policies
of austerity.
"Try to build a foundation, because the wheel does turn and there will be another chance, however
hard it may be to see that a week after the election," Krugman said.
Fellow panelists at the University of Oxford event were equally scathing about the ruling Conservative
Party. Martin Wolf, chief economics commentator at the Financial Times, said the country wasn't being
governed by "sane people" and that the U.K. economy was a "complete mess."
He called on policymakers to support innovation, reform corporate governance and liberalize land-use
planning laws so more houses could be built. David Hendry, a professor at Oxford University's Oxford
Martin School, called for more immigration to offset an ageing U.K. population and better education
of new skills.
Not all analysts and economists believe that governments should spend more, however. Harvard historian
Niall Ferguson launched a stinging retort at Krugman last weekend, arguing in the Financial Times
that Keynesian economists had been "ignominiously humbled" by the results of the U.K. election.
Actually another way of dancing around this May pole is to say that what you are calling unemployment
is something else and thus saying its lower than it actually is. As long as your driving force
is employment and quality of jobs don't count on much going forward into the future. You no longer
can raise prices forever in a continual cat and mouse game of inflation and wages. But what we
have not talked about is underemployment. Which needs to be factored in here as well. Lots of
people with university education ends with McJobs. AKA large personal efforts producing little
results.
R
Productivity in the workplace is the highest it's ever been. Companies are doing more with
less everyday. you can say people surf the net and you lose hours..
30 years ago, you would have a secretary that would type a document, management review and
with changes, retypes, One page could take 20 minutes or more of man hours.
The same page now, would be typed, saved on a server. a manager not even in the same office
can review, make changes him/herself or notify the assistant. 20 years before that, you would
have a whole secretarial pool just to type documents...snail mail to another office to find out
changes had to be made.
Automation and processes have also ramped up productivity tremendously.
Commenter
It's beautiful. they mimic us at every turn. British conservatives will cry that all improvement
in jobs are low wage ones and that a mysterious true unemployment is hidden from the people in
a grand scheme to bring about socialism. QE and the banks will hoard and not lend, while analysts
warn of an impending crash in their market. Meanwhile their market roars to new highs and they'll
fixate on the immigrant as the leading cause for their economic doom. Brilliant man, but fails
to explain how productivity can be improved absent demand for their products. I do feel the same
about Apple, but again hear the same old rhetoric without solutions to follow it up.
Joe
As wage decrease the workload increases productivity will go down. I do not know anyone who
will work as hard or voluntarily give their knowledge for a lower wage. Especially when after
25 years or more experience you have to report to a snot nosed punk with a college degree that
is worth no more than high school!
Tom S
He is right. Many, many people are obsessed with their smartphones. Whether at work, with family
and friends, at the restaurant, everywhere their faces are buried in their smartphones. They are
addicted to these toys - and they are expensive toys for most people.
BrunoD
But wait a minute... Didn't they say that hiring H1B's would be more productive than Americans
because they're more brilliant? So now they're back-peddling because a productive economy would
mean they wouldn't get any more SUBSIDIES, OR QE OR ZERO INTEREST RATES.
Joe
As wage decrease the workload increases productivity will go down. I do not know anyone who
will work as hard or voluntarily give their knowledge for a lower wage. Especially when after
25 years or more experience you have to report to a snot nosed punk with a college degree that
is worth no more than high school!
Tom S
He is right. Many, many people are obsessed with their smartphones. Whether at work, with family
and friends, at the restaurant, everywhere their faces are buried in their smartphones. They are
addicted to these toys - and they are expensive toys for most people.
None
The UK has actually been implementing huge public works projects over the past 5 years - so
the story of austerity there is not quite true. They have been massively investing in infrastructure
to help get the economy going.
christophero
couldn't agree more about the crapple iPhone. never even owned any cell phone. like sir clive
Sinclair I don't want any tech around me when I am trying to be creative (in tech design). as
soon as all my attention is diverted to trying to make a damned application simulation work I
stop trying to get the design right.
Phil
Krugman is right. Austerity doesnt work in a highly leveraged economies. Of course the argument
against Keynesian policy is that it is inflationary which is wrong cause the Fed continuously
monitors inflation and will tighten when this occurs.
So as long as we have a low inflation environment deficit spending should proceed. These larger
deficits could finance tax cuts and infrastructure spending for example which will stimulate growth.
The Ron Pauls and Peter Schiffs of the world are completely wrong on this point.
freda
Any "productivity" gains from 2000 on were driven by workers simply working harder/longer/off
the books. there is a limit krugman.
the fact is we are working 7 days a week to feed the .01 percent vampires and subsidize their
sub 20% income tax rates on "carried interest" that Obama just loves
(while our tax rates on labor have SKYROCKETED both federally and state wise in the last few
years - gotta love the democrats - always looking out for the working man like colonel sanders
cared about chickens)
Bo Yo
U.S. stock run up won't hold.... has tried this multiple times and always FALLS back.....
$19 TRILLION debt, earnings not so good even with bailouts given to Co., especially U.S. banks,
which would probably be bankrupt without the bailout...
something is AMISS.... U.S.stocks UP 100%, economy UP barely 1%...??
earnings UP barely 1%....??? and that's with HUGE TRILLIONS in bailouts given these Co.
WATCH OUT PPL...HUGE selloff coming...
(g)ayhoo, retail sales has SUXED for years now..????
Bo Yo
barack Obozo/Hilary clinton supporters, and market TYCOONS, Buffett,cook, Soros, Gates, Zuckerberg
have done GREAT on you the middle class taxpayer's stock market BAILOUT....
100s of BILLIONS given to already BILLIONAIRES.....????
who's left to pay this HUGE $19 TRILLION taxpayer DEBT..???
you the POOR middle class.
Jim
As a former manager and recruiter I can name 3 major things holding back productivity. Most
employees spend a majority of their time surfing the Internet and on social media all day. Cell
phone use is rampant and wastes many hours daily.
Good training opportunities are becoming fewer as all the good teachers are retiring in droves
and taking all the institutional knowledge with them.
One last issue is over educated employees are working part time with few benefits then we had
20 to 30 years ago lowering morale.
JOSEPH
I saw a factoid recently, I believe on the PBS NewsHour, that China had used more concrete
in one year than the US had used in the last century. You can see what that means when you
drive US streets and highways as I did between Baltimore, MD and Boston, MA this week, that took
me through some of the richest states in America.
We support our military to the hilt but we let our inner wellbeing, both socially and structurally
eat us alive. But then again, we have all those billionaires to make us feel good. And can't justify
a living wage for anyone who works. But can criticize and eat each other up, as I am sure many
of the comments below do. Our politicians reflect us. I feel sorry for America..
Smartest Guy in the Room
As a near 60 year old Engineer my anecdotal evidence over the years has led me to believe that
the more liberalism seeps into our society the worse off we get...
It started in the late 60's (America had the highest avg SAT scores in the world in 1968) and
has been on a steady march ever since...
From my perspective it seems to have reached critical mass about ten years ago...and so here
we are where the average High School grad can't even do long division and yet the libs want us
to pay for their college education for them to get a degree is sociology...
And then we wonder why our economy is limping along.
BrunoD
I am fed up with these people whining about the corporate tax rate. Who cares what the rate
is. It's the ACTUAL rate they pay after deducting their endless tax credits. Romney only paid
12%.
A working class citizen still pays over 30%. Why is that exactly? And, corporate millionaires
get MILLIONS in SUBSIDIES (not for being poor). Why did the American people have to pay for
Fracking when big energy makes hundreds of billions in clear profit every quarter?
What justifies THEM to get all that FREE WELFARE WHILE THEY'RE THE RICHEST IN THE WORLD????
Martin
I love Krugman but don't understand what the British economic challenges are or if the current
policies are helpful.
I do know if you are a conservative in the US and somehow identify with a conservatives
in England then you are a fool.
Not the same at all and if you don't think so ask a Tory if they want to privatize health care.
This is an old article by Jesse, but today it sound even more pertinent then two years ago, before Trump ascendance to power.
"... Corrupt officials burden taxpayers with unsustainable amounts of debt for unproductive, grossly overpriced projects. "
.
"...would be wrong in these instances to blame the whole country, the whole government, or all corporations, except perhaps for
sleepwalking, and sometimes willfully, towards the abyss. For the most part a relatively small band of scheming and devious fellows
abuse and corrupt every form of government and organization and law in order to achieve their private ambitions, often using various
forms of intimidation and reward."
. "...The TPP and TTIP are integral initiatives in this effort of extending financial obligations, debt, and control."
. "..."Economic powers continue to justify the current global system where priority tends to be given to speculation and
the pursuit of financial gain. As a result, whatever is fragile, like the environment, is defenseless before the interests of the deified
market, which becomes the only rule." Francis I, Laudato Si "
This video below may help one to understand some of the seemingly obtuse demands from the Troika with regard to Greece.
The video is a bit dated, but the debt scheme it describes remains largely unchanged. The primary development has been the creation
of an experiment called the European Union and the character of the targets. One might also look to the wars of 'preventative intervention'
and 'colour revolutions' that raise up puppet regimes for examples of more contemporary economic spoliation. From largely small and
Third World countries, the candidates for debt peonage have become the smaller amongst the developed Western countries, the most
vulnerable on the periphery. And even the domestic populations of the monetary powers, the US, Germany, and the UK, are now feeling
the sting of financialisation, debt imposition through crises, and austerity. What used to only take place in South America and Africa
has now taken place in Jefferson County Alabama. Corrupt officials burden taxpayers with unsustainable amounts of debt for unproductive,
grossly overpriced projects.
It would be wrong in these instances to blame the whole country, the whole government, or all corporations, except perhaps
for sleepwalking, and sometimes willfully, towards the abyss. For the most part a relatively small band of scheming and devious fellows
abuse and corrupt every form of government and organization and law in order to achieve their private ambitions, often using various
forms of intimidation and reward. It is an old, old story. And then there is the mass looting enable by the most recent financial
crisis and Bank bailouts. If the people will not take on the chains of debt willingly, you impose them indirectly, while giving the
funds to your cronies who will use them against the very people who are bearing the burdens, while lecturing them on moral values
and thrift. It is an exceptionally diabolical con game.
The TPP and TTIP are integral initiatives in this effort of extending financial obligations, debt, and control. You might
ask yourself why the House Republicans, who have fought the current President at every turn, blocking nominees and even stages many
mock votes to repeatedly denounce a healthcare plan that originated in their own think tank and first implemented by their own presidential
candidate, are suddenly championing that President's highest profile legislation, and against the opposition of his own party? The
next step, after Greece is subdued, will be to extend that model to other, larger countries. And to redouble the austerity at home
under cover of the next financial crisis by eliminating cash as a safe haven, and to begin the steady stream of digital 'bailing-in.'
This is why these corporatists and statists hate gold and silver, by the way. And why it is at the focal point of a currency war.
It provides a counterweight to their monetary power. It speaks unpleasant truths. It is a safe haven and alternative, along with
other attempts to supplant the IMF and the World Bank, for the rest of the world. So when you say, the Philippines deserved it,
Iceland deserved it, Ireland deserved it, Africa deserves it, Jefferson County deserved it, Detroit deserved it, and now Greece deserves
it, just keep in mind that some day soon they will be saying that you deserve it, because you stood by and did nothing.
Because when they are done with all the others, for whom do you think they come next? If you wish to see injustice stopped,
if you wish to live up to the pledge of 'never again,' then you must stand for your fellows who are vulnerable. The economic hitmen
have honed their skills among the poor and relatively defenseless, and have been coming closer to home in search of new hunting grounds
and fatter spoils.
There is nothing 'new' or 'modern' about this. This is as old as Babylon, and evil as sin. It is the power of darkness of the
world, and of spiritual wickedness in high places. The only difference is that it is not happening in the past or in a book, it is
happening here and now.
"Economic powers continue to justify the current global system where priority tends to be given to speculation and the
pursuit of financial gain. As a result, whatever is fragile, like the environment, is defenseless before the interests of the
deified market, which becomes the only rule." Francis I, Laudato Si
You may also find some information about the contemporary applications of these methods in The IMF's 'Tough Choices' On Greece
by Jamie Galbraith.
"Plunderers of the world, when nothing remains on the lands to which they have laid waste by wanton thievery, they search
out across the seas. The wealth of another region excites their greed; and if it is weak, their lust for power as well. Nothing from
the rising to the setting of the sun is enough for them. Among all others only they are compelled to attack the poor as well as the
rich. Robbery, rape, and slaughter they falsely call empire; and where they make a desert, they call it peace."
Tacitus, Agricola Posted by Jesse at 11:46 AM Email This BlogThis! Share to Twitter Share to Facebook Share to Pinterest
Category: currency war, debt peonage, debt slavery, neo-colonialism, new world order
Summers's remarks and articles were followed by an explosion of debate concerning "secular stagnation"-a term commonly
associated with Alvin Hansen's work from the 1930s to '50s, and frequently employed in Monthly Review to explain developments
in the advanced economies from the 1970s to the early 2000s.2
Secular stagnation can be defined as the tendency to long-term (or secular) stagnation in the private accumulation process of the
capitalist economy, manifested in rising unemployment and excess capacity and a slowdown in overall economic growth. It is often
referred to simply as "stagnation." There are numerous theories of secular stagnation but most mainstream theories hearken back to
Hansen, who was Keynes's leading early follower in the United States, and who derived the idea from various suggestions in Keynes's
General Theory of Employment, Interest and Money (1936).
Responses to Summers have been all over the map, reflecting both the fact that the capitalist economy has been slowing down, and
the role in denying it by many of those seeking to legitimate the system. Stanford economist John B. Taylor contributed a stalwart
denial of secular stagnation in the Wall Street Journal. In contrast, Paul Krugman, who is closely aligned with Summers,
endorsed secular stagnation on several occasions in the New York Times. Other notable economists such as Brad DeLong and
Michael Spence soon weighed in with their own views.3
Three prominent economists have new books directly addressing the phenomena of secular stagnation.4
It has now been formally modelled by Brown University economists Gauti Eggertsson and Neil Mehrotra, while Thomas Piketty's high-profile
book bases its theoretical argument and policy recommendations on stagnation tendencies of capitalism. This explosion of interest
in the Summers/Krugman version of stagnation has also resulted in a collection of articles and debate, edited by Coen Teulings and
Richard Baldwin, entitled Secular Stagnation: Facts, Causes and Cures.5
Seven years after "The Great Financial Crisis" of 2007–2008, the recovery remains sluggish. It can be argued that the length and
depth of the Great Financial Crisis is a rather ordinary cyclical crisis. However, the monetary and fiscal measures to combat it
were extraordinary. This has resulted in a widespread sense that there will not be a return to "normal." Summers/Krugman's resurrection
within the mainstream of Hansen's concept of secular stagnation is an attempt to explain how extraordinary policy measures following
the 2007–2008 crisis merely led to the stabilization of a lethargic, if not comatose, economy.
But what do these economists mean by secular stagnation? If stagnation is a reality, does their conception of it make current
policy tools obsolete? And what is the relationship between the Summers/Krugman notion of secular stagnation and the monopoly-finance
capital theory?
... ... ...
In "secular stagnation," the term "secular" is intended to differentiate between the normal business cycle and long-term, chronic
stagnation. A long-term slowdown in the economy over decades can be seen as superimposed on the regular business cycle, reflecting
the trend rather than the cycle.
In the general language of economics, secular stagnation, or simply stagnation, thus implies that the long-run potential economic
growth has fallen, constituting the first pillar of MISS. This has been most forcefully argued for by Robert Gordon, as well as Garry
Kasparov and Peter Thiel.6
Their argument is that the cumulative growth effect of current (and future) technological changes will be far weaker than in the
past. Moreover, demographic changes place limits on the development of "human capital." The focus is on technology, which orthodox
economics generally sees as a factor external to the economy and on the supply-side (i.e., in relation to cost). Gordon's position
is thus different than that of moderate Keynesians like Summers and Krugman, who focus on demand-side contradictions of the system.
In Gordon's supply-side, technocratic view, there are forces at work that will limit the growth in productive input and the efficiency
of these inputs. This pillar of MISS emphasizes that it is constraints on the aggregate supply-side of the economy that have diminished
absolutely the long-run potential growth.
The second pillar of MISS, also a supply-side view, goes back at least to Joseph Schumpeter. To explain the massive slump of 1937,
Schumpeter maintained there had emerged a growing anti-business climate. Moreover, he contended that the rise of the modern corporation
had displaced the role of the entrepreneur; the anti-business spirit had a repressive effect on entrepreneurs' confidence and optimism.7
Today, this second pillar of MISS has been resurrected suggestively by John B. Taylor, who argues the poor recovery is best "explained
by policy uncertainty" and "increased regulation" that is unfavorable to business. Likewise, Baker, Bloom, and Davis have forcefully
argued that political uncertainty can hold back private investment and economic growth.8
Summers and Krugman, as Keynesians, emphasize a third MISS pillar, derived from Keynes's famous liquidity trap theory, which contends
that the "full-employment real interest rate" has declined in recent years. Indeed, both Summers and Krugman demonstrate that real
interest rates have declined over recent decades, therefore moving from an exogenous explanation (as in pillars one and two) to a
more endogenous explanation of secular stagnation.9
The ultimate problem here is lack of investment demand, such that, in order for net investment to occur at all, interest rates have
to be driven to near zero or below. Their strong argument is that there are now times when negative real interest rates are needed
to equate saving and investment with full employment.
However, "interest rates are not fully flexible in modern economies"-in other words, market-determined interest rate adjustments
chronically fail to achieve full employment. Summers contends there are financial forces that prohibit the real interest rate from
becoming negative; hence, full employment cannot be realized.10
Some theorists contend that there has been demographic structural shifts increasing the supply of saving, thus decreasing interest
rates. These shifts include an increase in life expectancy, a decrease in retirement age, and a decline in the growth rate of population.
Others, including Summers, point out that stagnation in capital formation (or accumulation) can be attributed to a decrease in
the demand for loanable funds for investment. One mainstream explanation offered for this is that today's new technologies and companies,
such as Google, Microsoft, Amazon, and Facebook, require far less capital investment. Another hypothesis is that there has been an
important decrease in the demand for loanable funds, although they argue this is due to a preference for safe assets. These factors
can function together to keep the real interest rate very low. The policy implication of secular low interest rates is that monetary
policy is more difficult to implement effectually; during a recession, it is weakened and can even become ineffectual.
Edward Glaeser, focusing on "secular joblessness," places severe doubt on the first pillar of MISS, but then makes a very important
additional argument. Glaeser rejects the notion that there has been a slowdown in technological innovation; innovation is simply
"unrelenting." Likewise, he is far less concerned with secular low real interest rates, which may be far more cyclical. "Therefore,"
contends Glaeser, "stagnation is likely to be temporary."
Nonetheless, Glaeser underscores secular joblessness, and thus the dysfunction of U.S. labor markets constitutes a fourth pillar
of MISS: "The dysfunction in the labour market is real and serious, and seems unlikely to be solved by any obvious economic trend."
Somehow, then, the problem is due to a misfit of skills or "human capital" on the side of workers, who thus need retraining. "The
massive secular trend in joblessness is a terrible social problem for the US, and one that the country must try to address" with
targeted policy.11
Glaeser's argument for the dysfunction of U.S. labor markets is based on recession-generated shocks to employment, specifically of
less-skilled U.S. workers. After 1970, when workers lost their job, the damage to human capital became permanent. In short, when
human capital depreciates due to unemployment, overall abilities and "talent" are "lost" permanently. This may be because the skills
required in today's economy need to be constantly practiced to be retained. Thus, there is a ratchet-like effect in joblessness caused
by recessions, whereby recession-linked joblessness is not fully reversed during recoveries-and all this is related to skills (the
human capital of the workers), and not to capital itself. According to Glaeser, the ratchet-like effect of recession-linked joblessness
is further exacerbated by the U.S. social-safety net, which has "made joblessness less painful and increased the incentives to stay
out of work."12
Glaeser contends that, if his secular joblessness argument is correct, the macroeconomic fiscal interventions argued for by Summers
and Krugman are off-base.13
Instead, the safety net should be redesigned in order to encourage rather than discourage people from working. Additionally, incentives
to work need to be radically improved through targeted investments in education and workforce training.14
Such views within the mainstream debate, emphasizing exogenous factors, are generally promoted by freshwater (conservative) rather
than saltwater (liberal) economists. Thus, they tend to emphasize supply-side or cost factors.
The fifth pillar of MISS contends that output and productivity growth are stagnant due to a failure to invest in infrastructure,
education, and training. Nearly all versions of MISS subscribe to some version of this, although there are both conservative and
liberal variations. Barry Eichengreen underscores this pillar and condemns recent U.S. fiscal developments that have "cut to the
bone" federal government spending devoted to infrastructure, education, and training.
The fifth pillar of MISS necessarily reflects an imbalance between public and private investment spending. Many theorists maintain
that the imbalance between public and private investment spending, hence secular stagnation, "is not inevitable." For example, Eichengreen
contends if "the US experiences secular stagnation, the condition will be self-inflicted. It will reflect the country's failure to
address its infrastructure, education and training needs. It will reflect its failure to…support aggregate demand in an effort to
bring the long-term unemployed back into the labour market."15
The sixth pillar of MISS argues that the "debt overhang" from the overleveraging of financial firms and households, as well as
private and public indebtedness, are a serious drag on the economy. This position has been argued for most forcefully by several
colleagues of Summers at Harvard, most notably Carmen Reinhart and Kenneth Rogoff.16
Atif Mian and Amir Sufi also argue that household indebtedness was the primary culprit causing the economic collapse of 2007–2008.
Their policy recommendation is that the risk to mortgage borrowers must be reduced to avoid future calamities.17
As noted, the defenders of MISS do not necessarily support a compatibility between the above six pillars: those favored by conservatives
are supply-side and exogenous in emphasis, while liberals tend towards demand-side and endogenous ones. Instead, most often these
pillars are developed as competing theories to explain the warrant of some aspect of secular stagnation, and/or to defend particular
policy positions while criticizing alternative policy positions. However, the concern here is not whether there is the possibility
for a synthesis of mainstream views. Rather, the emphasis is on how partial and separate such explanations are, both individually
and in combination.
Hans G. Despain teaches political economy at Nichols College, where he is the chair of the Department of Economics.
In ten years time I doubt very much most people around the world will care about small changes
in shale oil production.
The United States uses 19 million barrels of oil per day. The same
population in Germany, Great Britain, France, Poland, the low countries and Scandinavia use 10
million.
The United States could reduce it's exorbitant consumption by firstly having the sort of extensive
bus services that most European countries have. Ever time a train system can be built up and people
would still get to work etc without any real hardship.
http://www.bueker.net/trainspotting/map.php?file=maps/germany/germany.gif
The real problems facing the world are far more difficult to adapt to.
"... L. Summers claims the fed faces asymmetric risks, because failure of a too-loose policy can more easily be corrected than failure of a too-tight policy ..."
Why? What the Fed did today was raise the Fed funds rate. The Fed funds rate is the rate at which
banks lend their excess reserves to one another in the interbank lending market. Interbank lending
is at an all-time low because banks are already holding such a staggering quantity of excess reserves
that they have very little need to borrow any of them from anybody else. Many banks could increase
their lending 5 or 10 fold without acquiring a single additional dollar of reserves.
The prevailing effective Fed funds rate was at a historically unprecedented 0.12% rate that
was only half of the historically unprecedented target rate of 0.25%. Now that the target rate
has gone up to 0.50%, the Fed funds rate will still be *far* lower than it was at any time between
1954 and 2009.
So the Fed has slightly increased the rock bottom price in a market few people are availing
themselves of because of gross excess supply in that market for something they don't need to obtain.
It increased that rock bottom price to a slightly higher rock bottom price. And yet there are
people who are concerned this is going to make money too "tight".
The number and convoluted complexity of the tall stories the neo-monetarist and New Keynesian
quacks have had to tell to sell people on this patently absurd confusion and hysteria is breathtaking.
Now those people are all quite sad, because their 5 year experiment in string pushing and do-nothingism
is coming to an end, and they weren't able to prove their conservative theory that the nation's
economic goals can be achieved with central bank rate twiddling and verbal exercises in expectations
management.
Ben Groves -> Dan Kervick...
Milton Friedman was a very very very bad man.
am -> am
The early BBC take on the move. I think we will see currency movements against the dollar and
matching interest rate moves, especially in the developing world. If they do proceed to normalisation
over the next several quarters then this instability will continue world wide over the next several
quarters. Its effect on the US and the world economy will be depressive although probably not
recessive. That will show it should have been avoided. Apologies for the crystal ball. http://www.bbc.com/news/business-35117405
JF said...
What happens with the FED's book of assets? At the end of the press release they indicated
that they will continue to roll-over their book of assets as the bonds mature - " it anticipates
doing so until normalization of the level of the federal funds rate is well under way."
That is a significant alteration in their policy - it ties the redemption of the maturing book
of assets to increasing interest rates - targeting something they call normalization.
So does this mean that interest rates have to come up to 3% or so before they will stop the roll-over?
spencer said...
Maybe the interesting thing is that almost all of them expect 2.0%, or maybe a bit higher,
real GDP growth over the next two years. That is about the same as it has been. Does this imply
that they expect higher rates to have little of no impact?
pgl -> spencer...
Some suggest potential real GDP is growing at only 2%. Let's say that is correct. The GDP gap
is over 3%. So are they saying they want this gap to continue? If so - a bad decision.
don said...
L. Summers claims the fed faces asymmetric risks, because failure of a too-loose policy
can more easily be corrected than failure of a too-tight policy. Not sure I see this. For
example, I would expect a reverse course by the fed now to quickly bring dollar weakening and
exuberance in equity markets...
"... The Feds decision to raise interest rates today is an unfortunate move in the wrong direction. In setting interest rate policy the Fed must decide whether the economy is at risk of having too few or too many jobs, with the latter being determined by the extent to which its current rate of job creation may lead to inflation. It is difficult to see how the evidence would lead the Fed to conclude that the greater risk at the moment is too many jobs. ..."
"... While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002. ..."
"... While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent productivity growth, this would be consistent with a rate of inflation of 1.2 percent. ..."
"... One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. ..."
Washington, D.C.- Dean Baker, economist and a co-director of the Center for Economic and Policy
Research (CEPR) issued the following statement in response to the Federal Reserve's decision regarding
interest rates:
"The Fed's decision to raise interest rates today is an unfortunate move in the wrong direction.
In setting interest rate policy the Fed must decide whether the economy is at risk of having too
few or too many jobs, with the latter being determined by the extent to which its current rate
of job creation may lead to inflation. It is difficult to see how the evidence would lead the
Fed to conclude that the greater risk at the moment is too many jobs.
"While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures
of the labor market are near recession levels. The percentage of the workforce that is involuntarily
working part-time is near the highs reached following the 2001 recession. The average and median
duration of unemployment spells are also near recession highs. And the percentage of workers who
feel confident enough to quit their jobs without another job lined up remains near the low points
reached in 2002.
"If we look at employment rates rather than unemployment, the percentage of prime-age workers
(ages 25-54) with jobs is still down by almost three full percentage points from the pre-recession
peak and by more than four full percentage points from the peak hit in 2000. This does not look
like a strong labor market.
"On the other side, there is virtually no basis for concerns about the risk of inflation in
the current data. The most recent data show that the core personal consumption expenditure deflator
targeted by the Fed increased at just a 1.2 percent annual rate over the last three months, down
slightly from the 1.3 percent rate over the last year. This means that the Fed should be concerned
about being below its inflation target, not above it.
"While wage growth has edged up somewhat in recent months by some measures, it is still
well below a rate that is consistent with the Fed's inflation target. Hourly wages have risen
at a 2.7 percent rate over the last year. If there is just 1.5 percent productivity growth, this
would be consistent with a rate of inflation of 1.2 percent.
"Furthermore, it is important to recognize that workers took a large hit to their wages in
the downturn, with a shift of more than four percentage points of national income from wages to
profits. In principle, workers can restore their share of national income (the equivalent of an
8 percent wage gain), but the Fed would have to be prepared to allow wage growth to substantially
outpace prices for a period of time. If the Fed acts to prevent workers from getting this bargaining
power, it will effectively lock in place this upward redistribution. Needless to say, workers
at the middle and bottom of the wage distribution can expect to see the biggest hit in this scenario.
"One positive point in today's action is the Fed's commitment in its statement to allow
future rate hikes to be guided by the data, rather than locking in a path towards "normalization"
as was effectively done in 2004. If it is the case that the economy is not strong enough
to justify rate hikes, then the hike today may be the last one for some period of time. It will
be important for the Fed to carefully assess the data as it makes its decision on interest rates
at future meetings.
"Recent economic data suggest that today's move was a mistake. Hopefully the Fed will not compound
this mistake with more unwarranted rate hikes in the future."
RC AKA Darryl, Ron said in reply to Peter K....
I like Dean Baker. Unlike the Fed, Dean Baker is a class warrior on the side of the wage class.
He makes the point about the path to normalization being critical that I have been discussing
for quite a while. Let's hope this Fed knows better than Greenspan/Bernanke in 2004-2006. THANKS!
likbez said in reply to RC AKA Darryl, Ron...
Very true !
pgl said in reply to RC AKA Darryl, Ron...
"Longer-term bond rates barely moved, showing that there was very little news." This interest
rate rose from 4.45% to 5.46% already. So the damage was already done:
"... This interest rate rose from 4.45% to 5.46% already..."
[Exactly! Corporate bond rates have been rising steadily since May. Yellen is not doing what
Greenspan did in 2004. Yellen's Fed waited until the bond rate lifted off on its own (and maybe
with some help from policy communications) before they raised the FFR. So far, there is no sign
of their making a fatal error. They are not fighting class warfare for wage class either, but
they seem intent on not screwing the pooch in the way that Greenspan and Bernanke did. No double
dip thank you and hold the nuts.]
"... Full employment is important for long-term reduction of inequality. Periods of high unemployment not only do damage to workers who lose their jobs and see their skills atrophy, but also cause those who keep their jobs to experience weaker wage growth. This is especially hard on those with lower incomes, who see larger cuts in working hours during periods of high unemployment. ..."
"... The elites like Feldman seem to be fine with golden parachutes for the wealthy but want to give the poor a lottery in place of a pension. Social Security is insurance that provides a safety net. Replacing SS with investments that allow people to fall through the cracks is not a good idea. ..."
Full employment is important for long-term reduction of inequality. Periods of high
unemployment not only do damage to workers who lose their jobs and see their skills atrophy, but
also cause those who keep their jobs to experience weaker wage growth. This is especially hard
on those with lower incomes, who see larger cuts in working hours during periods of high unemployment.
...As it looks like the economy will be weak, and interest rates low, for the foreseeable future,
this is a problem that won't go away on its own. And as she concludes, "excessive emphasis on
low and stable inflation at the expense of a strong labor market is unwarranted. Privileging low
inflation over maximum employment means that more people are likely to experience unemployment,
underemployment, or stagnant wages."
bakho -> pgl...
Our wealthy elites like cheap labor. High unemployment leads to cheap labor.
The newly employed are not likely to take up a collection to hire an outgoing Fed member. A banker
might be willing to hire at a premium.
BenIsNotYoda -> pgl...
The Fed can not reduce inequality. This should be done with fiscal action - taxes, min wage
hikes etc. To push Fed to consider inequality is pure mission creep and delusional. They will
create more problems trying. What is next on the list? Cancer?
pgl -> BenIsNotYoda...
I'm not against fiscal stimulus but that is not decided by the FED. Congress is run by gold
bug idiots. So the point that the FED should not be run by gold bug idiots stands...
BenIsNotYoda -> pgl...
The rule should be - do not do stupid things. And by absolving congress and pushing the Fed
to do things they can not, you are part of the problem.
Peter K. -> BenIsNotYoda...
"The Fed can not reduce inequality."
Why not?
"This should be done with fiscal action - taxes, min wage hikes etc."
Why not all of the above?
"To push Fed to consider inequality is pure mission creep and delusional."
Why?
"They will create more problems trying."
Not true.
"What is next on the list? Cancer?""
reductio ad absurdum
William -> Peter K....
A Reductio is not actually a fallacy, it's an acceptable form of refutation.
His actual fallacy was a Slippery Slope.
That being said, I agree with pgl. Just because the person behind the steering wheel is trying
to drive you into a ditch doesn't mean the person controlling the pedals can't hit the breaks.
(Though our current situation is more like the person behind the wheel is refusing to steer, and
is instead spending their time drilling holes in the gas tank to keep us from going anywhere.)
Sanjait -> William...
His fallacy was in the original claim that the Fed can't do anything to reduce inequality.
It's an especially obtuse claim at this moment in time.
Syaloch -> BenIsNotYoda...
Binder: "Privileging low inflation over maximum employment means that more people are likely
to experience unemployment, underemployment, or stagnant wages."
Sure sounds to me like the Fed can reduce inequality.
Or do you think unemployment, underemployment, and stagnant wages have no impact on inequality?
RGC -> RGC...
Pushing on a string
From Wikipedia, the free encyclopedia
Pushing on a string is a figure of speech for influence that is more effective in moving things
in one direction than another – you can pull, but not push.
If something is connected to someone by a string, they can move it toward themselves by pulling
on the string, but they cannot move it away from themselves by pushing on the string. It is often
used in the context of economic policy, specifically the view that "Monetary policy [is] asymmetric;
it being easier to stop an expansion than to end a severe contraction
According to Roger G. Sandilans[1] and John Harold Wood[2] the phrase was introduced by Congressman
T. Alan Goldsborough in 1935, supporting Federal Reserve chairman Marriner Eccles in Congressional
hearings on the Banking Act of 1935:
Governor Eccles: Under present circumstances, there is very little, if any, that can be done.
Congressman Goldsborough: You mean you cannot push on a string.
Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the
depths of a depression and... beyond creating an easy money situation through reduction of discount
rates, there is very little, if anything, that the reserve organization can do to bring about
recovery.[2]
The phrase is, however, often attributed to John Maynard Keynes: "As Keynes pointed out, it's
like pushing on a string...",[3] "This is what Keynes meant by the phrase 'Pushing on a string.'"
The biggest factor increasing inequality is not high unemployment right now. It is sky high
asset prices that is raising the net worth and income of the top 1% or 0.1%. Piketty documented
this as well - asset prices and inequality cycles are highly correlated.
So what is Fed to do? They caused it in the first place.
Letting the economy run hot so wages go up - this way will take forever to reduce inequality
to any appreciable degree.
Cascatore Хачатурян -> BenIsNotYoda..
"
Fed can not reduce inequality. This should be done with
"
~~BenIsNotYoda~
Do FG have 4 trillion $$$$ of assets still on their balance sheet? What happens when they auction
these off into the free market? All asset prices drop? By supply/price/demand? As asset prices
drop what happens to buying power of 1% jokers? Drops?
As buying power of 1% dudes drops they are able to buy less thus to some extent they cease to
price 99% out of the market. Do you see the mechanism involved?
When the benBernank pushed onto the top of the stack first high rates then middle rates then low
rates then small balance sheet as he expanded sheet with *twist*, you are thinking that the graniteJanet
will pop balance sheet off the top of the stack first later pop 0% rates off top of the stack
as we come out of the inner loop then revert to the parent process. This is subtle but important.
The graniteJanet used an offset on the stack pointer to dip into the middle of the stack to access
higher rate first, bypassing the 4 trillion balance sheet. Do you see how all this fits together?
You now have 64 micro-seconds to crunch the numbers.
Good
luck
!
JohnH -> pgl...
As usual, pgl opposes any ideas that carry of whiff of criticism of the Fed and its ineffective,
redistributive monetary policy. He must be responsible for PR for the Fed...
In fact the criticisms are spot on--its focus is more on higher inflation than on legally mandated
maximum employment, it refuses to enforce regulations, and it is rife with cronyism, as Bernie's
audit of the Fed revealed years ago.
Stiglitz advocates reform, noting that "The real problem is that money does not go to where it
should go, as we see for example in the United States. The money does not flow into the real economy,
because the transmission mechanism is broken...Access for small and medium enterprises to credit
is too expensive. That's why it is so important that the transmission mechanism work." And of
course, consumer credit rates barely budged since the Fed cut rates to zero, so ordinary people
don't see the benefit, except for affluent mortgage holders.
Of course, all of this is anathema to Fedbots like pgl, who insist that everything is hunky dory...if
only the Fed would feed free money to his cronies forever, it would be heaven on earth.
Instead of taking any criticism of the Fed off the table, as pgl and his coterie fervently desire,
it's long past time for a thorough debate about the Fed, its failed policies, and ways to extensively
reform it.
bakho said...
Noah Corrects Feldman's funny numbers on entitlements and wealth inequality and comes to the
opposite conclusion. The elites like Feldman seem to be fine with golden parachutes for the
wealthy but want to give the poor a lottery in place of a pension. Social Security is insurance
that provides a safety net. Replacing SS with investments that allow people to fall through the
cracks is not a good idea.
"CBO's Publications - CBO's 2015 Long-Term Projections for Social Security: Additional Information"
New From CBO
pdf 446.38 KB
"CBO's 2015 Long-Term Projections for Social Security: Additional Information"
"Under current law, CBO projects, Social Security's trust funds, considered together, will be
exhausted in 2029. In that case, benefits in 2030 would need to be reduced by 29 percent from the
scheduled amounts."
Summary
"Social Security, which marked its 80th anniversary in 2015, is the largest single program in
the federal government's budget. About 72 percent of the roughly 60 million people who currently
receive Social Security benefits are retired workers or their spouses and children, and another 10
percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age
and Survivors Insurance (OASI). The remaining 18 percent of beneficiaries are disabled workers or
their spouses and children; they receive Disability Insurance (DI) benefits.
In fiscal year 2015, spending for Social Security benefits totaled $877 billion, or almost one-quarter
of federal spending. OASI payments accounted for about 84 percent of those outlays, and DI payments
made up about 16 percent."
"... So let's see how things go this week, keeping in mind that there may be antics aplenty after the Fed announcement and into the quad witch for stocks on Friday. ..."
...There is a heavy lean towards believing that the Fed will raise rates 25 basis points.
Fed Funds futures are indicating expectation of a move to 100 basis points total by the end of next
year. Let's see if they can pull that one off. It seems aspirational, if one wishes to have room
to cut when their latest folly falls back upon them.
The idea that since recoveries are often accompanied by inflation, if we can only use monetary
policy to create inflation then the recovery will come, is so wrong-headed that it leaves me aghast.
Even Keynes recognized that the point of stimulus was to provoke aggregate demand, which is the
organic form of growth in the economy that will provide all the inflation that one might expect.
But to pursue this effete, top down stimulus focused primary on the still unreformed Banking system
and the wealthiest top few percent is beyond policy error, and more policy malpractice. And of course,
if one puts austerity and financial parasitism into the mix, then we just aren't in Kansas anymore
Toto.
So let's see how things go this week, keeping in mind that there may be antics aplenty
after the Fed announcement and into the quad witch for stocks on Friday. The miners have
been beaten bloody.
"... Yeah but its junk credit... who cares! I am invested in solid megacaps and even solider FANGs - what can go wrong? ..."
"... The biggest buyer of stocks in 2016, will be, according to Goldman Sachs, the same as it was in 2015 - corporate management teams buying back their own stock in near record quantities. But there is a problem with this thesis... the cost of funding these epic buybacks is surging, making the un-economic actions of the CFO (if very economical for their own bank accounts as they sell record amounts of their own personal stock to their company) even more irrational. ..."
"... Charts: Bloomberg ..."
"... And this is why the contagion to IG matters: the biggest buyer of stocks of the last few years is about to priced away as its (cheap debt) funding dries up, removing the biggest pillar of delusion from current equity valuations. ..."
"... Did nobody tell this stupid asshole that the west funds jihadism in order to conquer Russia? ..."
"... ...After Ukraine and Syria, Russians have no illusions left about how the West intends to treat Russia. Russians are ready for any action Putin may take against the West and any fall out from it for themselves. ..."
"... What is sometimes forgotten, is how the Bush neo-cons gave their "spin" to this narrative for the Middle East by casting Arab national secularists and Ba'athists as the offspring of "Satan": David Wurmser was advocating in 1996, "expediting the chaotic collapse" of secular-Arab nationalism in general, and Baathism in particular. He concurred with King Hussein of Jordan that "the phenomenon of Baathism" was, from the very beginning, "an agent of foreign, namely Soviet policy." ..."
"... Putin knows Erdogan was following Obama's orders when Erdogan let US Air Force pilots in Turkish planes shot down the Russian bomber. ..."
"... if the US were ever to develop the capability to neutralise a Russian nuclear attack, Russia can be guaranteed she will be treated with no greater respect than Iraq under Saddam was. Neither being locked in a weapons race to keep the US vulnerable to Russian attacks nor being prepared to live under Western dictates are options for Russia. ..."
"... Our DC Beltway and NYC elites are wildly delusional about their ability to win a nuclear war. They listen only to the defense contractors. In fact the West's elites are the prime target in a nuclear war, and even though a small and select strata might have time to hide in a deep bunker, the vast substrata that supports them, runs their bureaucracies and mans their deep state will certainly be annihilated. ..."
"... The nuclear war our elites seek to provoke will be the first in nearly a thousand years in which the elites themselves will be on the front lines of the combat. ..."
"... Personally, I think the biggest weakness the USA has is its increasingly diverse and divided population ..."
"... The Pentagon and their masters must expect to resolve any future major conflict by means of technologic jujitsu; if they think that Americans from all walks of life are going to rally in support of a major foreign war of choice, support mass conscription etc., they're making IMHO a big mistake. ..."
"... Still, with enough provocation and manipulation, perhaps the typical Amurican can be goosed into enthusiasm for a fight against Islam ; TPTB certainly seem to be giving this angle their best shot these days. ..."
"... What a shame, such stupidity; the other great power and nation that is at least still Western and Christian. Europe appears to be lost, and yet the U.S. arms Muslim armies and pokes Russia on its borders. Abject insanity. ..."
"... Simple. Kill the Neocons one by one and we have a safer world for your children, your family and you. ..."
"Yeah but it's junk credit... who cares! I am invested in solid megacaps and even
solider FANGs - what can go wrong?"
The biggest buyer of stocks in 2016, will be, according to Goldman Sachs, the same as it
was in 2015 - corporate management teams buying back their own stock in near record quantities. But
there is a problem with this thesis... the cost of funding these epic buybacks is surging, making
the un-economic actions of the CFO (if very economical for their own bank accounts as they sell
record amounts of their own personal stock to their company) even more irrational.
Here is Goldman's David Kostin explaining who the biggest
buyer of stocks is (and will be) - as a reminder, it's not "mom(o) and pop".
We expect corporations will continue to be the largest source of demand for stocks,
with net purchases by US companies totaling $450 billion, equal to about 2% of public equity cap.
We forecast equity inflows from equity-related ETFs ($225 billion), equity mutual funds
($200 billion), life insurance ($50 billion), and foreign investors ($25 billion). We forecast
net outflows from households ($25 billion) and pensions ($150 billion).
Well, the cost of funding that carnival of financial engineering and artifice (just ask
Nordstrom, Macy's, IBM and so on) is soaring, as high-yield decompression pukes over into
investment grade markets, spiking the cost of funding and crushing the 'economic feasibility' of
debt-funded shareholder-friendliness:
Charts: Bloomberg
And, in case you thought "well, cost of funding has only gone up 30-40bps in IG, they can handle
that," you are wrong! To all those who claim US corporate balance sheets are in great shape
- they are not! Leverage is at record highs and interest coverage near record lows for the IG universe.
And judging by today's collapse in Investment Grade bond prices, the market just woke up
to this reality.
Simply put, the Fed's policies enabled massive releveraging and now corporations are stuck with
few options to escape a vicious circle - which by the way, is why it's called the credit
'cycle'.
And this is why the contagion to IG matters: the biggest buyer of stocks of the last
few years is about to priced away as its (cheap debt) funding dries up, removing the biggest pillar
of delusion from current equity valuations.
Professor Steve Cohen, the foremost Russia scholar in the U.S., laments, is that it is this narrative which has precluded America from ever concluding any real ability to find a mutually acceptable modus vivendi with Russia – which it sorely needs, if it is ever seriously to tackle the phenomenon of Wahhabist jihadism (or resolve the Syrian conflict).
Wow, the foremost scholar on Russia is one dumb motherfucker. Did nobody tell this stupid asshole that the west funds jihadism in order to conquer Russia?
sam i am
The Western nations underestimated the horrible trauma that the Russian society experienced
in 1990s when the Russians peacefully surrendered their society, their lands, their economy to
the West, hoping to be accepted and treated as equals by the "world" community. Instead, the
West dealt with the Russian skillfully, decisively, and mercilessly, just like the American
Indians were dealt with by the colonizers. The Russia was gutted, scalped, and hanged on a
cross to die slow and painful death. Some say that Russia like a cat has nine lives. Others
say that Russia died and resurrected like Phoenix or Jesus. Open wounds have not healed yet,
when after the February 22nd 2014 putsch in Kiev, and publication of the US Department of
Defense tenders on the constructions of facilities in Sevastopol for the US fleet and NAVY
everyone in Russia, including its government, understood that it was a declaration of war, and
stood up in arms.
...After Ukraine and Syria, Russians have no illusions left about how the West intends
to treat Russia. Russians are ready for any action Putin may take against the West and any
fall out from it for themselves.
Ghordius
"It is the basis to America's and Europe's claim to exceptionalism and leadership".
seriously?
"What is sometimes forgotten, is how the Bush neo-cons gave their "spin" to this
narrative for the Middle East by casting Arab national secularists and Ba'athists as the
offspring of "Satan": David Wurmser was advocating in 1996, "expediting the chaotic collapse"
of secular-Arab nationalism in general, and Baathism in particular. He concurred with King
Hussein of Jordan that "the phenomenon of Baathism" was, from the very beginning, "an agent of
foreign, namely Soviet policy.""
so? yes, King Hussein is right, in the very beginning it was mainly the Soviet Union that
fostered Ba'athism. and again, so? the Soviet Union is no more
junction
Obama is stark raving mad, and his female neocons - Nuland, Powers and assorted other power
hungry bitches - are too busy following orders from Israel to realize they are on a treasonous
path to World War III. Putin will vaporize Raqqa with one of his new nuclear weapons that
works like a neutron bomb. In all likelihood, when the first Kalibr cruise missiles hit
ISIS/Bush's Captagon meth plant in Raqqa, the U.S. National Reconnaissance Office couldn't
even detect them to warn CIA black ops spies in the drug facility to run. Putin knows
Erdogan was following Obama's orders when Erdogan let US Air Force pilots in Turkish planes
shot down the Russian bomber.
Global Observer
NOBODY WINS A NUCLEAR WAR.
I hope that Putin and his Military Advisors are smart enough to figure that out.
They are. But what the Americans don't seem to be aware of is that for some there are worse
things than being dead and in order to avoid these worse things, people are prepared to die
and nations willing to risk annihilation.
Russia is willing to risk annihilation in order to be able to live peacefully and with
dignity. Is the USA willing to risk annihilation in order to be able to continue to insult
Russia and bully the world? If the USA is indeed willing to risk annihilation to continue to
do that, it would be silly for Russia not to attack the USA while she still can, because
if the US were ever to develop the capability to neutralise a Russian nuclear attack, Russia
can be guaranteed she will be treated with no greater respect than Iraq under Saddam was.
Neither being locked in a weapons race to keep the US vulnerable to Russian attacks nor being
prepared to live under Western dictates are options for Russia.
monk27
If the US will be stupid enough to start a war with Russia or/and China, it will lose such
a fight big time. That will be the end of America as we know it, and also the end of the
contemporary Western "elite" whether they believe it or not. Their move...
MrPalladium
"and also the end of the contemporary Western "elite"
Our DC Beltway and NYC elites are wildly delusional about "their" ability to win a
nuclear war. They listen only to the defense contractors. In fact the West's elites are the
prime target in a nuclear war, and even though a small and select strata might have time to
hide in a deep bunker, the vast substrata that supports them, runs their bureaucracies and
mans their deep state will certainly be annihilated.
No intelligent power like Russia is likely to waste a perfectly good nuke on Paducah
Kentucky, but it is certain that the entire population of Manhattan Island, and the DC beltway
will be vaporized along with West Los Angeles (propaganda production central) and Silly
Valley. The effluvia of the silos in Iowa and Nebraska can be intercepted. Remarkably, our
elites and their supporting substrata still believe that the main combatants will be rural
boys from Texas and Tennessee which in a strange turn of justice will be the safest places to
hide. Our 400 or so billionaire oligarchs who control this country are concentrated in about
20 zip codes. Do you really think that Russia hasn't already targeted them? The whole point of
nuclear war is to decapitate the regime but spare the resources and general population for
future use, and the real regime, the oligarchs, occupy a very modest and easily cleared amount
of territory.
The nuclear war our elites seek to provoke will be the first in nearly a thousand
years in which the elites themselves will be on the front lines of the combat.
August
I do like the way you think, Mr. P, and it's entertaining to speculate about war, TEOTWAWKI
etc.
Personally, I think the biggest weakness the USA has is its increasingly diverse and
divided population (which is also rather dumbed-down, infantile and irresponsible).
The Pentagon and their masters must expect to resolve any future major conflict by means of
technologic jujitsu; if they think that "Americans from all walks of life" are going to rally
in support of a major foreign war of choice, support mass conscription etc., they're making
IMHO a big mistake.
Still, with enough provocation and manipulation, perhaps the typical Amurican can be
goosed into enthusiasm for a "fight against Islam"; TPTB certainly seem to be giving this
angle their best shot these days.
monk27
"They" (i.e. the Russians) stand a better chance to survive than us. Ours is a much more
complex AND violent society than theirs. The Mad Max way of living works only in movie...
Tall Tom
NO. THEY DO NOT. NUCLEAR WINTER, PAL.
You will either freeze to death or succumb to suffocation due to LACK OF OXYGEN.
The ash will blot out most sunlight. Plants require sunlight to photosynthesize Carbon,
from CO2, into complex sugars and starches.
They transpire OXYGEN. Without the plants...YOU ARE DEAD.
Watch this video. Even the former Soviet Academy of Sciences concur with this modeling.
NOBODY WILL SURVIVE. It is GLOBAL EXTINCTION. It is a God Damned Extinction Level Event.
I am a physicist. This is valid science. My warning is not without a solid foundation.
Volkodav
Soviet did not so much invade. Soviet was already, support moderate government, building
infrastructure, schools and other. Girls attended school in dresses.
Search for photos Kabul in 60's 70's
Moderate leader was murdered in coup by extremist backed from outsiders. Russians, moderates
and monorities were slaughtered. That is when Soviet, after much concern debate, sent
additional forces. Soviet was not defeated, but withdrew orderly result of collapse of funds,
problems.
Soviet controlled more of country than west coalition ever did and alone, against outside
interferences aiding radicals there was some beginning of what is today, some nasty creations.
You never understood there was other side, moderate and civil
What a shame, such stupidity; the other great power and nation that is at least still
Western and Christian. Europe appears to be lost, and yet the U.S. arms Muslim armies and
pokes Russia on its borders. Abject insanity.
Insurrexion
Simple. Kill the Neocons one by one and we have a safer world for your children, your
family and you.
"... For investors who hold bonds primarily for the income they generate, the drop in prices doesn't matter as much. That's because if you hold a bond until maturity, you never have to sell it and take a loss. ..."
Keep in mind that the Fed's first rate hike won't really change much. Rates will still be at
historic lows. It all depends on how much the central bank raises rates in the coming months. So
you don't have to rush to do anything.
An increase of 0.25 percentage point on Wednesday will almost certainly not result in big swings
in bond values, especially given how many in the market expect the hike. And the Fed is likely to
say that the pace of future increases will be slow.
Still, higher rates lessen the value of the bonds you currently own. That's because newly issued
bonds under those higher rates will pay out more than older ones. So the price of your older
bonds falls as a result.
For investors who hold bonds primarily for the income they generate, the drop in prices
doesn't matter as much. That's because if you hold a bond until maturity, you never have to sell
it and take a loss.
But it's a different story if you hold bonds through a mutual fund, as most investors do. The
value of the fund declines with any interest rate hike because the fund becomes less attractive
to investors.
The drop in value is closely linked with the term of the bonds, known as duration. Those
durations are usually indicated as short term, intermediate term, or long term. In theory,
short-term bonds will drop the least in value, and long-term bonds will drop the most when rates
go up.
So what should investors do?
Larry Swedroe, author of The Only Guide to a Winning Bond Strategy You'll Ever Need, urges
investors not to make big moves without making a plan first.
"Inaction is almost always better" than making a sudden shift in strategy in a panic, he said.
"The most anticipated event of any we can think of is that the Fed is going to raise interest
rates on Dec. 16," Swedroe said. "The market must already have that information incorporated into
the current price" of bonds (and stocks too, for that matter).
Don't try to outsmart the market, said Swedroe, who also is director of research for the BAM
Alliance of financial advisers.
Investors "stretching for yield" can make "very bad errors," Swedroe said, including investing
in real estate investment trusts, dividend-paying stocks, emerging-market bonds, and other
securities that are much more risky than bonds.
If the economy falters and investors flee those asset classes and move to high-quality
investments, investors in riskier assets "get crushed, just when you need the safety the most,"
said Swedroe.
Swedroe suggests three possible strategies for investors looking for yield in this market.
1.Stick to the middle. For bonds, the "sweet spot" for balancing risk and reward is via
intermediate-term bonds with about a 5-year duration, Swedroe said. Investors there can get "most
of the term premium without the longer-term inflation risk." Consider any low-cost,
intermediate-term, high-quality bond fund, he said. That could include the Vanguard
Intermediate-Term Bond ETF (BIV) or the Fidelity Spartan U.S. Bond Index Fund (FBIDX) -- there
are many such funds available.
2.Move to CDs. Investors who really want yield but can't stomach the market fluctuation of bond
funds should look at certificates of deposit, "where you can have much higher yields" than bonds
but with very low risk and no mutual fund fees. For example, 5-year CDs can pay up to 2.45% in
annual percentage yield, while 5-year U.S. Treasury securities pay a yield of a mere 1.56%.
Swedroe said CDs are most useful for investors with IRAs, who can choose where they hold their
assets.
3.Embrace the wisdom of the markets. This is the most Zen option. Swedroe said investors should
take a page out of Warren Buffett's book, ignore market forecasts, and simply develop a financial
plan. Find the best way to implement the plan -- with simplicity and low costs. "Stop worrying
and stick with your plan," he said. Forever.
If investors really do want to rely on the consensus judgment of the markets, they should
consider the world's largest bond fund, the Vanguard Total Bond Market Index (VBMFX) (VBTLX) (BND)
. (In April, Vanguard's fund surpassed Pacific Investment Management's Pimco Total Return Fund (PTTAX)
, which had been the largest bond fund for decades.)
Must Read: Why Wall Street Won't Be Pouring Cristal on New Year's Eve
Vanguard's Total Bond index fund is totally market weighted, with no active calls about which
types of bonds will outperform and which will not. The investor class charges a 0.2% fee
annually, and the ETF class charges 0.07%. The fund's SEC yield is 2.27% and its average duration
is 5.8 years (in the "sweet spot"), and its pretax return for the past 12 months as of Sept. 30
has been 2.64%. It's hard to get cheaper or simpler.
Investors can also buy Treasury bonds directly from the government via Treasury Direct -- and pay
no fees. The bonds available there are high-quality and simple to buy. There are some caveats: EE
and E savings bonds must be held for at least one year, and you'll pay a penalty of three months'
interest if you sell them within five years of buying them; they earn interest for 30 years.
Other Treasury notes and bonds can be bought directly through Treasury Direct, but if you want to
sell them before their term is up, you'll need to move them to a broker for sale. You can also
buy resold Treasury securities at auction on Treasury Direct.
And investors should also maintain perspective, according to Vanguard.
"Many people look at bonds independently from their stocks," Fran Kinniry, of Vanguard's
Investment Strategy Group, said in a statement. "But it's more beneficial to think, 'How do my
bonds complement my stocks and fit into my whole investment picture?' You really want to put the
two types of investments together and see how they interact as a whole. Ask yourself: 'What's my
risk level for all my holdings? Does it align with my risk comfort if there's a downturn?' If you
answer no, make the appropriate adjustments."
In other words, investors should hold bonds to manage volatility, to provide consistency in a
portfolio, and to earn a reasonable return. Using bonds for speculation or to take more risk
makes an entire portfolio more volatile.
So investors may want to stick to plain-vanilla bonds. If they plan to hold a bond fund to its
average duration, which is listed on the prospectus, they will likely come out ahead even after
an interest rate hike -- being paid more in interest than they have lost to reduced principal (or
the face value of the bonds).
Investors hold bonds for safety -- or at least they should. If you have too much money tied up in
junk bonds or in long-term bonds, be prepared for swings in the value of the principal. If you
can wait out the duration of the bonds, you will likely be OK. If you can't stomach big swings,
face that about yourself and move to shorter duration bonds or CDs. They could pay less, but they
will also fluctuate less in value.
Must Read: 8 Winning Financial Stocks Once the Fed Raises Interest Rates
Fixed-income investing is about reducing risk and receiving a predictable payment on schedule.
Remember that the bonds will keep paying the same even if their face value has dropped.
Now's the time when bond investors should verify that they have enough -- not too much, not too
little -- in bonds, then sit back and collect the interest.
"... Many people are merely worried about having a job and getting by rather than profoundly changing
the system or being organized under shrewd far sighted leadership. ..."
"... Mr. Harris, for one, is not ready. "It's scary when you hear that the government is planning
to slow things down," the wiry 39-year-old said as he folded menus. "We live on people's extra money.
That's the money they spend on pizza. And it still feels very fragile." ..."
"... The Fed didnt demonstrate technical know-how. The corrupt politicians appointed the wrong technocrats.
..."
"... You regulate the financial sector to decrease risk and increase sustainability. You dont starve
it of credit so the entire thing collapses. ..."
Many people are merely worried about having a job and getting by rather than "profoundly"
changing the system or being organized under "shrewd far sighted" leadership.
In Denver, Worries That the Fed Will Chill a Sizzling Recovery
By BINYAMIN APPELBAUM
DEC. 13, 2015
AURORA, Colo. - William Harris tapped his retirement savings to open A-Town Pizza, a Neapolitan
pizzeria, in this Denver suburb three years ago. He borrowed $200,000 to open a second location
this year and now employs 60 people. On a good Friday, his shops sell 1,200 pies.
In such stories, the Federal Reserve finds evidence that its seven-year campaign to reboot
the American economy is succeeding. So on Wednesday, the Fed, which has held short-term interest
rates near zero since December 2008, will most likely announce that it will start nudging rates
upward, slowly ending what has amounted to a once-in-a-lifetime sale on money.
Mr. Harris, for one, is not ready. "It's scary when you hear that the government is planning
to slow things down," the wiry 39-year-old said as he folded menus. "We live on people's extra
money. That's the money they spend on pizza. And it still feels very fragile."
Monetary policy is conducted in a language of bloodless abstraction, and most Americans pay
little, if any, attention. But the Fed is about to make a big bet, and the decisions it makes
in Washington have large consequences, here in Colorado and across the nation.
Janet L. Yellen, the Fed's chairwoman, and her colleagues have concluded that the economy is
finally strong enough to grow with a little less help from the central bank. Indeed, they worry
inflation will rise too quickly if they do not start raising interest rates. The first rate increase
will be small, then the Fed expects to raise rates about one percentage point a year for the next
few years.
The Fed's move is coming in the face of worries about the health of the stock market and falling
commodities prices. Still, by itself, the increase probably will not matter much. The Fed is expected
to set short-term rates in a range from 0.25 to 0.5 percent, a small jump from the current range
of zero to 0.25 percent.
It is what follows that will make the difference.
Denver seems ready for higher rates. The area's economy has enjoyed one of the nation's strongest
rebounds from the recession. The local unemployment rate fell to 3.1 percent in October. There
are new skyscrapers downtown and new subdivisions in every direction. The former oil town is now
at the center of one of the nation's largest booms of technology start-ups.
Yet the local mood is fragile. Housing prices have climbed 24 percent above the precrisis peak,
but whereas that once would have encouraged economic optimism, now people fret that home prices
are due for a fall.
Optimists say that the economic expansion is just gaining steam and that modestly higher rates
will probably not slow the region's growth.
Pessimists see evidence of fragility in the same facts. Josh Downey, president of the Denver
Area Labor Federation, says the resurgence of development has created construction jobs for a
new generation of workers. They need cars to reach their jobs, and jobs to pay for their cars.
"If those buildings stop going up in Denver, they're going to be out of a job and a car," he said.
Mark McKissick, director of fixed-income research at Denver Investments, says he is waiting
to see how quickly the Fed raises rates before he adjusts the firm's investment holdings. The
economy, he says, does not seem strong enough to handle higher rates, and he expects the Fed to
reach the same conclusion. Otherwise, he worries it could push the economy back into recession.
"The Fed threw a bunch of money into the financial system, but it hasn't stimulated growth
or inflation the way it might have in earlier periods," he said.
Builders, for example, will start construction on about 9,000 single-family homes in the Denver
metropolitan area this year, according to Metrostudy, a real estate research firm. That is up
14 percent from last year - but less than half the 20,000 home starts in the Denver area at the
peak of the bubble in 2005.
Some workers will be getting raises. Bakery and deli clerks at King Soopers, a grocery chain,
will earn a minimum wage of $10.50, an increase of as much as $2 an hour, under the terms of a
new contract negotiated by the United Food and Commercial Workers Union. The previous four-year
deal held wages steady.
Others, however, are still waiting for prosperity to affect them.
Ethel Ayo's landlord raised her rent this year by $400 a month, to $1,126. Ms. Ayo has a part-time
job as a home-care worker and her son, a college student, works at Enterprise Rent-a-Car. Together
they can barely afford the rent - and then only because the landlord does not require full payment
at the beginning of the month. "And you didn't hear me talk about food," Ms. Ayo said. "After
I work two or three days, I buy $50 of food and make it last two or three weeks."
Mr. Harris, the restaurateur, says Denver's growth feels nothing like the boom he lived through
in Southern California a decade ago. He is struggling to repay his start-up costs, particularly
during the holidays, when people eat less pizza. The Fed will most likely raise rates before his
risks have paid off. If it has overestimated the recovery and moves too fast, people would have
less money to spend, and Mr. Harris said he could lose his restaurants and his retirement savings.
On South Broadway, a commercial strip south of downtown lined with dilapidated auto dealerships
and freshly painted marijuana shops, those worries seem far away. Khalid Sarway, sales manager
at Famous Motors, says he is selling about 25 used cars a month, and he does not think higher
rates will bother his customers.
"The people, they don't care about the rate," said Mr. Sarway, who added that he was making
more money now than in the best years before the recession. "They just want a vehicle. They just
want to be able to get back and forth between their jobs and school, or whatever their lifestyle
is."
North of downtown, Denver's tech entrepreneurs also see little immediate danger from higher
rates.
Steve Adams, the 62-year-old chief executive of Leo Technologies, runs a start-up, his sixth,
in a former produce warehouse that has been renamed Industry, where the nearest thing to manual
labor occurs when people play table tennis in the atrium.
Uber has its Denver office in one corner of the sprawling building.
Mr. Adams is trying to raise $500,000 to test a biometric device that uses blood pressure readings
to measure hydration levels - data he says could help athletes as well as people with medical
conditions, like those on dialysis.
Like many of his peers, Mr. Adams thinks low rates have made it easier for young companies
to raise money from investors seeking higher returns. Denver is also a technology frontier town,
reliant on coastal capital, so it may be more vulnerable if the availability of funding begins
to recede.
But Mr. Adams said he expected the money to keep flowing even as rates on safer investments
like corporate bonds started to rise. "The people I'm pitching want to get in early and make a
big multiple," he said.
Some in the real estate business similarly insist that the local market will probably remain
hot. Greg Geller, the owner of Vision Real Estate, says builders are struggling to keep pace with
population growth because it takes years to find land, obtain permits and train replacements for
workers laid off during the recession.
Others are less sanguine. Mitchell Goldman, the owner of Apex Homes, said customers rushed
to buy houses in recent years because they worried prices would climb. Now people are holding
back, wondering if prices will fall.
"I've been getting asked the question a lot, 'Should we wait?'"
Mr. Goldman said he expected that higher rates would also push some buyers out of the market.
The math, after all, is inexorable. If mortgage rates increase by one percentage point, the monthly
cost of a $300,000 mortgage increases by $177.
He added that he was looking for land to build a home for his own family. They have moved several
times in recent years, but with higher interest rates on the horizon, he wants to build "a more
permanent forever home."
"I'm a little more anxious," Mr. Goldman said. "Interest rates are never going to be what they
were when I was growing up, but every little bit makes a difference."
djb said in reply to Peter K....
"Like many of his peers, Mr. Adams thinks low rates have made it easier for young companies
to raise money from investors seeking higher returns."
yes exactly how monetary policy is
supposed to work
Again, the Fed tightening in 2008 was not just about the absence of a 2% interest rate cut.
It was about an expectation that the Fed was going to raise rates going forward, even though the
economy was weakening. This development was huge because current spending decisions are shaped
more by the expected path of interest rates than by current interest rates.
So why did the public expect this tightening? Because the Fed was signalling it! Among other
places, this signalling was clear in the August and September 2008 FOMC statements. Here is a
gem from the August FOMC meeting (my bold):
"Although downside risks to growth remain, the upside risks to inflation are also of significant
concern to the Committee."
And from the September FOMC meeting we get a similar warning:
"The downside risks to growth and the upside risks to inflation are both of significant concern
to the Committee"
This was forward guidance at its worst and points to a far more intense tightening cycle than
is apparent by looking only at the current policy interest rate. The Fed was willing to strangle
the already weak economy over inflation concerns and the market knew it.
It was this severe tightening of monetary policy that turned an otherwise ordinary recession
into the Great Recession. As I noted before, this tightening of policy occurred before the worst
part of the financial crisis in late 2008. Recall that many of the CDOs and MBS were not subprime,
but when the market panicked in late 2008 a liquidity crisis became a solvency crisis for all.
Had the Fed not tightened during the second half of 2008 the financial panic probably would have
been far less severe and the resulting bankruptcies far fewer. So no, it is not obvious that a
severe financial crisis was inevitable.
P.S. The Fed was not the only central bank to tighten in 2008 because of inflation concerns.
The ECB did as well and repeated the mistake two times in 2011. These experiences illustrates
the the limits of inflation targeting and why it is a monetary regime that has outlived its expiration
date.
Peter K. said in reply to Peter K....
This is policy malfeasance by Bush's Fed. Once can think of it as macro policy rather than strictly
monetary policy. The Fed needs its independence b/c politicians don't have the technical know-how?
The Fed didn't demonstrate technical know-how. The corrupt politicians appointed the wrong
technocrats.
Imagine there was one of Wren-Lewis's fiscal councils deciding on fiscal spending
for the year. As the housing bubble deflated, they should have increased fiscal spending to replace
lost home builder jobs and lost housing wealth, instead of tightening fiscal policy over inflation
fears.
Peter K. said in reply to Peter K....
You regulate the financial sector to decrease risk and increase sustainability. You don't
starve it of credit so the entire thing collapses.
Dan Balz and the Pew Research Center Discover Wage Stagnation
by Dean Baker
Published: 13 December 2015
Okay, this one is a bit personal, but it reflects a larger issue. The Pew Research Center just
put out a study showing that declining share of the U.S. population is middle class, with greater
percentages falling both in the upper and lower income category than was the case four decades
ago. Washington Post columnist Dan Balz touted this declining middle class story as an explanation
for the rise of Donald Trump.
The problem here is that there is zero new in the Pew study. My friend and former boss, Larry
Mishel, has been writing about wage stagnation for a quarter century at the Economic Policy Institute.
The biannual volume, The State of Working America, has been tracking the pattern of stagnating
middle class wages and family income (for the non-elderly middle class, income is wages) since
1990.
The Pew study added nothing new to this research. They simply constructed an arbitrary definition
of middle class and found that fewer families fall within it.
Perhaps having a high budget "centrist" outfit like Pew tout this finding is the only way to
get a centrist Washington Post columnist like Balz to pay attention, but it is a bit annoying
when we see someone touted for discovering what was already well-known. Oh well, at least it creates
good-paying jobs for people without discernible skills.
"... Within days the Fed will begin hiking interest rates in an effort to prevent inflation. This is nuts. There's no sign of dangerous inflation anywhere. Raising rates will just slow the economy, making it harder for people to find jobs. The share of working-age people in jobs is near a 40-year low. Watch our video to find out what this is all about -- and how it will affect you. ..."
Within days the Fed will begin hiking interest rates in an
effort to prevent inflation. This is nuts. There's no sign of
dangerous inflation anywhere. Raising rates will just slow
the economy, making it harder for people to find jobs. The
share of working-age people in jobs is near a 40-year low.
Watch our video to find out what this is all about -- and how
it will affect you.
Dwight McCabe
According to Paul Krugman the banks
desperately need rates higher so they make more
profits. With these very low rates they are stuck in
low profit. The Fed lives in the financial culture
and all the learned people around them, bankers, are
convinced that the economy needs higher rates. The
economy will not benefit but the financial community
sure will.
David Van Dyne
...By the way, how about the negative returns on
money market funds invested through a 401(k) plan?
The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment
where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying
cost. Add to this fake earnings and share repurchases that weaken many companies including such stalwart
as IBM and you get the message.
Notable quotes:
"... A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals
while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the months
long junk-bond plunge that has swept Wall Street. ..."
"... All 30 of the largest high-yield bond funds tracked by Morningstar have lost money this year,
reflecting price declines as investors shied away from risk. ..."
"... "Investors have been dazzled that yields on bonds have climbed so high, even while default
rates remained low," said Martin Fridson, founder of Lehmann Livian Fridson Advisors and a longtime
junk-bond analyst. "Currently, though, the ability to sell a large position is especially poor…. When
that tension gets especially high, you can see something snap." ..."
"... Speculation by retail investors in high risk instruments like high yield bonds, oil ETN funds
(based off oil futures), gold funds, etc rose tremendously during ZIPR period. Probably several
billions were lost by retail investors during this period in search for yield. The same is true
about participation of retail investors in regular casino games such as stock funds and indexes
like S&P500. ..."
Third Avenue Focused Credit Fund takes rare step, seeking an orderly liquidation as junk-bond
market swoons
A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals
while it liquidates its high-yield bond fund, an unusual move that highlights the severity of
the months long junk-bond plunge that has swept Wall Street.
The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue
Focused Credit Fund may not receive all their money back for months, if not more.
BenIsNotYoda said in reply to BenIsNotYoda...
of course, biotech has to be added to this list; down 20%.
pgl said in reply to BenIsNotYoda...
Amgen shares trading at $145 and Gilead shares trading at $102. Not feeling sorry for these dudes.
pgl said in reply to BenIsNotYoda...
Talk about burying the lead:
"The yield spread between junk-rated debt and U.S. Treasurys narrowed to a multiyear low
in mid-2014, reflecting investors' confidence in companies' business prospects. But spreads
have since risen, reflecting lower prices, as the energy bust intensified questions about junk-rated
companies' ability to repay debts. All 30 of the largest high-yield bond funds tracked
by Morningstar have lost money this year, reflecting price declines as investors shied away
from risk.
"Investors have been dazzled that yields on bonds have climbed so high, even while default
rates remained low," said Martin Fridson, founder of Lehmann Livian Fridson Advisors and a
longtime junk-bond analyst. "Currently, though, the ability to sell a large position is especially
poor…. When that tension gets especially high, you can see something snap."
The Securities and Exchange Commission has been warning mutual-fund managers who purchase illiquid
securities-those that may be difficult to buy or sell at stated prices because of a lack of willing
investors-to prepare better for potential redemptions and is drawing up new rules requiring such
measures."
Simply put - people who go into the junk bond market get a very high return but they also take
the risk. No feeling sorry for these guys especially given that the SEC gave them fair warning.
Peter K. said in reply to pgl...
"All 30 of the largest high-yield bond funds tracked by Morningstar have lost money this year,
reflecting price declines as investors shied away from risk."
Investors are shying away from risk? I thought ZIRP encouraged reach-for-yield.
The market goes up and down. Only drama queens would see a bubble like the tech stock bubble
or housing bubble in the data.
"Preventing the rebirth of housing bubbles in these markets was a very good thing in my
book. I will add the qualification that high interest rates is not my preferred way of bursting
bubbles. The first recourse should be talk, as in using the Fed's bully pulpit, coupled with
its research, to warn the markets of rising bubbles. Janet Yellen did this successfully in
the summer of 2014 when she used congressional testimony to warn of bubbles in social media
companies, biotech stocks, and junk bonds. She did not follow through with subsequent warnings,
but all three markets did take a hit in the weeks following her testimony.
For some reason most economists reject the idea of having the Fed talk down bubbles. I guess
it is considered impolite. This seems more than a bit bizarre given the enormous damage done
by bursting bubbles compared with the virtually costless effort to talk them down.
Of course the Fed also has substantial regulatory powers which can be used to curb bank
lending to support bubbles. This is also a policy option that should be pursued before deliberately
slowing the economy with higher interest rates.
Anyhow, I was not happy to see the economy slowed by the Taper Tantrum, but I was very happy
to see that it prevented the growth of another bubble. It is unfortunate that almost no one
knows this story - I guess it is difficult for reporters to get access to the Case-Shiller
data on the web."
pgl said in reply to Peter K....
"The market goes up and down. Only drama queens would see a bubble like the tech stock bubble
or housing bubble in the data."
Yep! And the lack of QE of late has driven up both government
bond rates and credit spreads. Now wonder these vulture investors lost money. I'm not feeling
for them a bit. And yes - BenIsNotYoda was being a drama queen.
likbez said in reply to Peter K....
"Investors are shying away from risk? I thought ZIRP encouraged reach-for-yield."
Yes, very
true.
Speculation by retail investors in high risk instruments like high yield bonds, oil ETN funds
(based off oil futures), gold funds, etc rose tremendously during ZIPR period. Probably several
billions were lost by retail investors during this period in search for yield. The same is true
about participation of retail investors in regular casino games such as stock funds and indexes
like S&P500.
"... Robert Waldmann writes that that the reason Krugman was surprised by the failure of the supply side is that he didn't pay enough attention to the European unemployment problem. The natural unemployment rate hypothesis failed spectacularly in Europe in the 1980s. Extremely high unemployment did not lead to deflation - rather it coexisted with moderate inflation for a long time, then with low inflation. By 2008, the flat Phillips curve was already very clear to anyone who read Italian newspapers. ..."
The natural unemployment rate hypothesis failed spectacularly in Europe in the 1980s. Extremely
high unemployment did not lead to deflation - rather it coexisted with moderate inflation for a long
time, then with low inflation.
Krugman posted a graph showing how the US graph of inflation and unemployment has changed (just
click the
link and look). In the past high unemployment gradually lead to lower inflation and then to lower
inflation and unemployment - this is the pattern predicted by Friedman, Phelps, Tobin (and discussed
already by Samuelson and Solow in 1960). But in the recent past extremely high unemployment has come
with low and stable core inflation.
Things used look very different here in Italy than in the USA. Here is a graph of data from before
January 2008. Extremely high unemployment was consistent with moderate and then with low inflation.
The only clear shift in inflation occurred in 1996 and 1997 (which may or may not be when Italians
began to think they might actually earn the wonderful reward of being allowed to adopt the Euro).
By 2008, The flat Phillips curve (the Fillipo curve?) was already very clear to anyone who read
Italian newspapers.
Here are all data which are available on FRED (yes I sit in Rome and surf to St Louis for Italian
data). Oddly the harmonized unemployment series is only available (at FRED) from 1983 on.
In this graph there is also very little sign of Friedman-Phelps cycles. The old pattern was a
steady decline from extremely high inflation - it looks almost like an expectations unaugmented Phillips
curve. But then (really from 1986 on) there was fairly stable moderate to low inflation along with
extreme swings in unemployment. I stress that this is CPI inflation including food and energy not
core inflation. the peak oil spike in 2007 and the collapse in 2008 are clearly visible. It is possible
that the most recent observations show a slide to actual persistent deflation, but it is more likely
that the recent decline in inflation is due to the collapse of the price of oil.
[…] Robert Waldmann writes that that the reason Krugman was surprised by the failure of the
supply side is that he didn't pay enough attention to the European unemployment problem. The natural
unemployment rate hypothesis failed spectacularly in Europe in the 1980s. Extremely high unemployment
did not lead to deflation - rather it coexisted with moderate inflation for a long time, then
with low inflation. By 2008, the flat Phillips curve was already very clear to anyone who read
Italian newspapers. […]
Presumably, Yellen and her posse know that we did not have seven years running of negative real
money market rates even during the Great Depression of the 1930s.
So after one pretension, delusion, head fake and forecasting error after another, the denizens of
the Eccles Building have painted themselves into the most dangerous monetary corner in history. They
have left themselves no alternative except to provoke a riot in the casino - the very outcome that
has filled them with fear and dread all these years.
... ... ...
But the fantastic global credit bubble summarized below has now reached its apogee. China and
the EM economies are rolling over into a debilitating deflation, thereby catalyzing the mother of
all margins calls. This time subprime is lettered in Chinese and speaks with a Portuguese accent.
... ... ...
According to Dr. Summers, the thing to do when recession strikes is to cut interest rates by 300
basis points. But even he admits it ain't going to happen this time.
Even if were technically possible
to have a negative 300 bps federal funds rate, what is already a 2016 election year gong show would
take on a whole new level of crazy. The brutally trod upon savers and retirees of American would
well and truly revolt.
Historical experience suggests that when recession comes it is necessary to cut interest rates
by more than 300 basis points. I agree with the market that the Fed likely will not be able to
raise rates by 100 basis points a year without threatening to undermine the recovery. But even
if this were possible, the chances are very high that recession will come before there is room
to cut rates by enough to offset it. The knowledge that this is the case must surely reduce confidence
and inhibit demand.
Central bankers bravely assert that they can always use unconventional tools. But there may
be less in the cupboard than they suppose. The efficacy of further quantitative easing in an environment
of well-functioning markets and already very low medium-term rates is highly questionable. There
are severe limits on how negative rates can become. A central bank that is forced back to the
zero lower bound is not likely to have great credibility if it engages in forward guidance.
Just spent the major part of my day putting together the records to file the old man's tax this
year. We have contributed mightily to the insurance industry, the pharmaceutical industry,
the medical industry and yes, a major part of our income that makes up our yearly retirement amount
has ended up in the pockets of these Wall Street bums! Therefore, I am posting this
song as a tribute to Wall Street...thanks to you guys we barely have a dime left over! Hope
you choke on your fucking bonus!
"... We had a sluggish economy during the Bush Mismanagement years. The Fed compensated by allowing an under regulated housing bubble to form. We never fixed the core problem that led to the 2001 recession. It would be foolish to try to fix the jobs problem with housing alone and I think Bondad has a point that housing is not saving us this time. ..."
"... the crucial indicator being real wage growth. ..."
"... Another problem is that we live in a bad society. Whether or not there is another recession affects the precise level of pain. But even if there is no recession the future will only be bright for a select class of socially privileged winners. For many, many Americans, the future is bleak no matter what - absent major structural political and economic changes. ..."
"... Clintons tech stock bubble popped and morphed into Bushs housing bubble. Bush thought military Keynesianism and tax cuts for the rich would help but they didnt help much. The solution is to regulate and tax the financial industry to prevent bubbles from forming. Greenspan denied its existenc ..."
"... The simple tool for reining in our excessively top-heavy financial sector is deflation! ..."
"... Its generally useful to talk about macroeconomic factors in terms of cyclical and structural factors. Its a reductionist framework, but one that IMO holds up well and is quite clarifying. So when I hear someone say something about a nebulous core problem that leads to recessions, I am very suspicious. Usually, such claims are about someones hobby horse structural issue, which may or may not be important, but is generally not the cause of recessions. ..."
We had a sluggish economy during the Bush Mismanagement years.
The Fed compensated by allowing an under regulated housing bubble to form.
We never fixed the core problem that led to the 2001 recession.
It would be foolish to try to fix the jobs problem with housing alone and I think Bondad has a
point that housing is not saving us this time.
cawley said in reply to bakho...
Agreed. Also with the crucial indicator being real wage growth.
ken melvin said in reply to bakho...
Yup, housing is the effect, not the cause.
RC AKA Darryl, Ron said in reply to ken melvin...
Exactly!
New Deal democrat said in reply to bakho...
Thanks.
My post at Bonddad was an elaboration on a comment I made here two days ago. I had been
meaning to reply to CR last year when he made the same argument, but never got around to it.
In fairness, I think Bill makes an excellent case that we won't have another recession brought
about by a housing bubble, and/or too much consumer leverage any time soon. But there are plenty
of other reasons why the economy might tip back into recession, as comments here have already mentioned.
Dan Kervick said in reply to New Deal democrat...
Another problem is that we live in a bad society. Whether or not there is another recession affects
the precise level of pain. But even if there is no recession the future will only be "bright" for
a select class of socially privileged winners. For many, many Americans, the future is bleak no matter
what - absent major structural political and economic changes.
Dan Kervick said in reply to JF...
Well I said the prospects are bleak only absent major structural political and economic changes.
And they are. American society is killing off whole classes of people. The prisons are full; there
are epidemics of substance abuse going on, and rising suicide rates. The Financial Times reported
today Even if there is no recession, that just means that these people are not also laid off, and
can trudge back and forth every day from their Wal-Jobs to their hardscrabble communities, slums
and trailer parks and afford more booze to drink themselves to death or buy lottery tickets to win
imaginary pots of gold that will never come, and to have a functioning TV so they can watch people
scream at each other all night. Oh, and the prices of hookers and drugs are down. Bright times!
Why should any of these people care what the "Bonddad" thinks about how bright the future is for
people who ... well, own bonds; or who party in Manhattan and Silicon Valley with their fortunes;
or who make use of their abundant low-anxiety leisure to talk to their college chums all day in the
establishment punditariat?
The up and down cyclical motions of the pretty horsies going up and down mean little to the people
who sleep in the dark machinery underneath the merry-go-round.
If US society keeps its basic overall shape, the future isn't bright. But it does contain just
enough glare to make sure that the party boys with their ever-evolving fashion lines of fancy sunglasses
will continue not to see half of the world.
Dan Kervick said in reply to Dan Kervick...
Incomplete sentence. I meant to say, "The Financial Times reported today on the further hollowing
out of the US middle class and growing income stratification."
Yes. Net Wealth of US residents is nearly $85 T with an annual flow of economic activity over $17
T.
We have a rising population, not a declining one.
We produce more food than we can eat and have access to immense energy sources.
And we have one of the better judicial systems and at least historically a governing set of institutions
that brings up to the pragmatic middle that has made sound currency and nationwide payment systems,
lots of supportive infrastructure including some good literacy levels from the educational system
part of it.
We can do better, but I'd take the US over any other place (we even have a moderate climate).
This election might change my thinking on this last point about taking the US over say Canada
- but I think I'll be happy to remain.
Yes, I went through some of the same thoughts when we reelected Bush-Cheney. But here I am.
Dan Kervick said in reply to JF...
JF, I agree that the aggregates and net numbers are great. But our cruel, stratified, inegalitarian
social system is the problem. The way those aggregate quantities are spread out over the population
is a global scandal.
America is good for me too, personally. My wife and I live in a well-off upper
middle class community in New Hampshire. Very good schools, no crime to speak of, a town full of
healthy and advantaged kids 95% bound for colleges. We had and still do have various recession-related
anxieties, but they are the anxieties most people in the world only dream of.
But my life isn't America. It's a privileged and charmed part of it. If I get pulled over by a
policeman for driving a bit too fast, I just get a courteous and smiling warning from Officer Friendly.
Many others run a good chance of getting tasered, shot or sodomized in a police station. And that's
just the tip of the iceberg of the savage inequalities.
The Future is Bright . . . or perhaps not By New Deal democrat
[ Really nicely done. ]
Peter K. said in reply to bakho...
Clinton's tech stock bubble popped and morphed into Bush's housing bubble. Bush thought military Keynesianism and tax cuts for the rich would help but they didn't help much. The solution is to regulate and tax the financial industry to prevent bubbles from forming. Greenspan
denied its existence.
The solution is not to raise interest rates in a depressed economy.
As DeLong has written the housing bubble was deflating and housing jobs were being replaced by
export jobs.
Then the whole thing short-circuited with the financial crisis.
At the time the Fed was passively tightening over inflation concerns.
Peter K. said in reply to Peter K....
Another solution is more fiscal policy so that monetary policy doesn't carry all of the burden.
Tax cuts for the rich isn't good fiscal policy.
pgl said in reply to Peter K....
Greg Mankiw links to some report on the effects of the Jeb! tax cuts but does not comment (Krugman
did comment in this report). I followed the link and read the abstract. It is not exactly what Mankiw
usually says about the wonders of tax cuts for rich people.
Peter K. said in reply to pgl...
I avoid Mankiw's website. No comments.
:D
Interesting though. Didn't Krugman blog that the report backs up his (everyone's) claims?
pgl said in reply to Peter K....
Krugman did. Abstract of the report and Krugman's comment below. I just found it funny that Mankiw
gave a hat tip to something that I doubt he even read first. I guess Greg is getting a lot like JohnH
in that way.
Peter K. said in reply to pgl...
"I guess Greg is getting a lot like JohnH in that way."
So much trolling to do, so
little time. It's hard to keep up with all the misinformation.
PPaine said in reply to Peter K....
Pay roll tax cuts and increased retirement payments
Plus a greatly expanded earned income subsidy aka tax credit
These are job class macro moves
Bernie gets this
Hillary ???
PPaine said in reply to PPaine ...
The fed needs to be captured first before we can rely on. It to operate in sync with a pro job class
macro policy
ilsm said in reply to PPaine ...
ARAMCO and the pentagon need the cash!
Norovirus said in reply to Peter K....
"tax the financial industry to prevent"
~~Peter K~
When you need less of something, tax it. This will shift the supply/price/demand curve
of financial "services". We need more of sawmills but less of banks, brokers and quants. Production
we need. Casino we don't need. Hell!
If you want casino then go to Vegas -- more bells and whistles for you money!
Guten fahrt !
Laundry Bank & Trust said in reply to Norovirus...
Most efficient way to tax financial services is a simple tool.
"simplicity is the meaning of life. " ~~Ockham's axiom~
" Simplicity is more sustainable than complexity. " ~~Ockham's first theorem~
The simple tool for reining in our excessively top-heavy financial sector is
deflation!
sanjait said in reply to bakho...
It's generally useful to talk about macroeconomic factors in terms of "cyclical" and "structural"
factors. It's a reductionist framework, but one that IMO holds up well and is quite clarifying.
So when I hear someone say something about a nebulous "core problem" that leads to recessions, I
am very suspicious. Usually, such claims are about someone's hobby horse structural issue, which
may or may not be important, but is generally not the cause of recessions.
PPaine said in reply to sanjait...
Well a chronic trade deficit And. Spontaneous over accumulation are clearly structural problems that may well require significant if varying
full employment budget deficits over the whole cycle
The inter action of structural and cyclical requires composite macro policy programs using multiple
instruments
The dollar should stay at the assumed long run balanced trade forex thru out the cycle Over accumulation suggests a ceiling of zero real for the policy rate
Etc etc
Sanjait said in reply to PPaine ...
Rich developed countries are supposed to have a chronic trade deficit.
But sure, let's humor that
concern for a sec:
What then, do you claim, is the structural factor that causes chronic trade deficits? This should
be interesting.
RC AKA Darryl, Ron said...
RE: The Evolution of Work
[This piece is sort of like the David Warsh broad brush economic history
short form pieces except that it is focused purely on the plight of the proletariat instead of elites.]
RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron...
Dani Rodrik seems to be on the side of the weebles.
ken melvin said in reply to RC AKA Darryl, Ron...
Are we still evolving?
RC AKA Darryl, Ron said in reply to ken melvin...
Yep. Evolution never seems to be happening when most of what one sees is within their own generation,
sort of by definition. What the millennials are evolving into is something I want to learn, but have
not had the chance to duly observe for myself yet. Jealousy between my current wife and the mother
of my children created an atmosphere too tedious for my current wife to be subjected to. You should
know though that I am not the father of my children either. I just raised them from 4, 6, and 12.
Husbands number one and two of the mother of my children were the biological fathers. She had no
children with husbands number three (me) nor four. She is still hunting for number five but her powder
is too wet now to fire.
So, what have you learned from your grandchildren?
From our three girls I learned that progress is mighty slow.
PPaine said in reply to RC AKA Darryl, Ron...
Yes
I love his strong advocacy for cross border labor mobility. Control the borders but increase the OECD inflow
We should set a huge quota for middle easterners
But let them in very slowly Meanwhile those that apply Get to stay in a safe area provided by lady liberty
Inside the us !
RC AKA Darryl, Ron said in reply to PPaine ...
That would trump Trump.
ilsm said in reply to PPaine ...
Wll st banks already get a cut on banking al Qaeda!
bakho said in reply to RC AKA Darryl, Ron...
Dani does not address hours worked or time off. The US has one of the worst leave policies in the developed world.
When was the last reduction in the work week? There are a lot of services that are not being provided due to lack of money. Some of the underemployed
could move into low level service jobs if other workers moved up to a higher level.
It is a failure
when large numbers of people do not have productive work. They have too little money to sustain potential
output, leaving employment far below potential. It is a vicious downward spiral. The spiral is fixed
by intervention that reverses the spiral. We have a failure of fiscal policy to address the root
problem.
Dan Kervick said in reply to bakho...
He's a development economist and his article is about work in the developing world.
RC AKA Darryl, Ron said in reply to bakho...
We have a lot of failures and I don't have time enough to make a full list. Changing stuff requires
political action on behalf of and usually orchestrated by those that have the needs that require
addressing. We need massive working class majority electoral solidarity. Until then the political
establishment is safe to treat us as second rate constituents and focus on the desires of the elite.
JF said in reply to bakho...
The Tim Taylor piece is helping to remind people to focus more attention on economic policies related
to work practices being seen in society. More talk about this the better.
My two cents, is that
society is better when people are hired for stable, full-time jobs. All kinds of definitional matters
attend to just saying this, but I still think it needs to be a predominating focus. Society wants
more people to have full-time jobs, however you define full-time. So we need to watch developments
in the gig economy carefully.
By predominating full-time employment as a policy-making factor, I'd say this view means that
in serious downturns, for instance, we do not want govts eliminating full time, stable jobs if we
can somehow do fiscal sharing to avoid this as much as can be done.
The largest employer segment in the US (well at least it used to be bigger than retail, last time
I studied this) is state and local govt employment. These employers don't pay out of whack high-salaries
and for the most part the hiring has had a stable and proportional growth rate (political bosses
in the US don't hand out jobs to create voters much anymore). These employers create floors in the
labor marketplace and this forces other employers to compete on stability factors and on the notion
of being full-time. I think we want this type of competition.
The right-wing Machiavelli ones understand this dynamic and that is why they are very happy to
undermine govt employment (cut it, they are lazy anyway, ugh-bureaucrats don't do real things, etc.)
- they don't want the competition as it raises the costs of their decades long control over wages.
But any employer offering stability and full-time jobs - this is good, and economic policies for
our society ought to take this into account as a predominating factor.
sanjait said in reply to JF...
Hey JF.
I didn't have time to write up a solid reply the other day, but I did want to eventually
respond to your question and comments about whether the central bank has control of long term interest
rates ("it's own instruments...") through purchases.
My quick answer:
It influences their prices, but not through inducing scarcity. That is because, unlike commodities,
securities are not priced based on their scarcity, they are priced based on their expected returns.
So when the Fed buys $40b in bonds per month, in a $500+b per month liquid market, it's hardly
going to move the price.
But, the Fed does influence long term bond rates both by modulating the entire money supply and
by setting expectations for how it will modulate the money supply in the future (aka., the reaction
function.)
One very huge observation apropos of all this: every time the Fed announced a new round of QE, longer
term bond rates went UP rather than DOWN. Why? Because it showed the Fed's reaction function was
looser than previously thought, and also they were more committed to staving off disinflation.
Though I will concede, not everyone sees it this way. Even inside the Fed many of them had a simple
model that says: buying more bonds = pushing down the price. But I get the impression they generally
abandoned that model after operation twist utterly failed to work in that way.
JF said in reply to sanjait...
OK. Yield, price, cost to the govt - not always the same thing, but each has a perspective.
Assuming
you are correct that the later QE, and I don't know myself, just assumed that the cost to the govt
of a new 10 year moderated a bit in a later QE, I think this evidence points to why they don't use
new-QEing now.
It dawned on them that its initial cost-to-govt effects, lowering interest rates, was just not
happening. So why subsidize the dealer networks and stuff more assets on to their books using electronic
entries into reserve accounts as payment when we (the FRB) have no idea what to do with assets of
this magnitude.
"... EIA forecasts that Brent crude oil prices will average $53/b in 2015 and $56/b in 2016. Forecast West Texas Intermediate (WTI) crude oil prices average $4/b lower than the Brent price in 2015 and $5/b lower in 2016. ..."
EIA forecasts that Brent crude oil prices will average $53/b in 2015 and $56/b in 2016. Forecast
West Texas Intermediate (WTI) crude oil prices average $4/b lower than the Brent price in 2015 and
$5/b lower in 2016. The current values of futures and options contracts for March 2016 delivery (Market
Prices and Uncertainty Report) suggest the market expects WTI prices to range from $30/b to $63/b
(at the 95% confidence interval). ...
The monthly average price of U.S. regular retail gasoline was $2.16/gallon (gal) in November, a
decrease of 13 cents/gal from October and 75 cents/gal lower than in November 2014. EIA forecasts
U.S. regular gasoline retail prices to average $2.04/gal in December 2015 and $2.36/gal for 2016.
This important event falls at a peculiar time–less than 48 hours before the largest option
expiry in many years," wrote Kolanovic, noting that $1.1 trillion worth of Standard & Poor's
500-stock index options–of which $670 billion are puts–will expire on Dec. 18. Roughly one-third
of the puts poised to expire are at or near the money, with strike prices from 1,900 to 2,050.
"Clients are net long these puts and will likely hold onto them through the event
and until expiry," the strategist wrote. "At the time of the Fed announcement, these put options
will essentially look like a massive stop loss order under the market."
When a put is close to expiry, the writer of the option becomes a seller of the
underlying security as it hits the strike price in order to mitigate the exposure. Thus, a
negative reaction in the S&P 500 index to the Fed decision could trigger a wave of forced
selling, potentially agitating markets.
No one knows better than Kolanovic how systematic selling can amplify price
changes in financial markets.
However, it's fair to quibble with the premise: Is Janet Yellen really monitoring open interest
in options linked to the S&P 500?
...Seriously though, aren't HYG's always the canary in the coal mine...... No better buzzer
for an incomming slowdown.
anti Oligarchy
I work right in the thick of the real economy... construction / utility / etc. It is
happening right now on the ground floor, sales are drying up, inventories going up. It is as
serious as you are projecting in these articles.
Paint By Number
My experience exactly. The industrial market (except for the flash in the pan oil boom) has
been struggling since 2008. But something changed in September/October of this year. I can't
tell you how many times I've heard "it's like someone flipped a switch."
Most people have no idea of how many highly technical and specialized products (valves,
cables, pumps, transformers, special alloy components) are keeping electricity, gas, and water
going to their homes. Many of these manufacturers are teetering on the edge. If this situation
does not change for the better in the next few months we will begin to see major and
spectacular failures in our infrastructure.
I can't overstate the potential devastating social and environmental chaos. It's all great
fun to talk about popcorn and watching bankers jump from the 14th floor, but if the lights go
out and don't come back on, there won't be much laughing.
kelley805
J.P. Morgan analysts wrote that the three best leading indicators for recession have been
credit spreads, the shape of the yield curve and profit margins.
Here are some signs of a coming recession.
1. Investors in high-yield bonds are expecting to see their first negative return since the
start of the credit crisis in 2008.
"... We have so messed with market forces and reporting and baselines and seasonal adjustments that all the old metrics are useless. Weve also financialized everything. That means velocity. It means contagion. It means liquidity freezes. You know the list. The speed at which the next recession arrives will render any prediction useless except to historians. ..."
"... .... so, now we have an unduly enlarged glut of savings chasing an ever dimming prospect of profit. .... ultimate fiat trapped in a ponzi. ..."
Note: I've made one recession call since starting this blog. One of my
predictions for 2007 was a recession would start as a result of the housing bust (made it by
one month - the recession started in December 2007). That prediction was
out of the consensus for 2007 and, at the time,
ECRI was saying a "recession is no longer a serious concern". Ouch.
For the last 6+ years, there have been an endless parade of incorrect recession calls. The most reported
was probably the multiple recession calls from ECRI in 2011 and 2012.
... ... ...
Also on Friday I posted an excerpt from a Citi's research piece also suggesting a 65% chance of
a recession in 2016.
[A] statistical approach is shown in Figure 46 and highlights the cumulative probability of a
recession based on data from 1970-14 across US, UK, Germany and Japan. As the U.S. economy enters
year seven, the cumulative probability of a recession in the next year rises to 65%.
This is just an historical statistical approach based on elapsed time.
Looking at the economic data, the odds of a recession in 2016 are very low (extremely unlikely in
my view). Someday I'll make another recession call, but I'm not even on recession watch
now.
Rob_Dawg
We have so messed with market forces and reporting and baselines and seasonal adjustments
that all the old metrics are useless. We've also financialized everything. That means velocity.
It means contagion. It means liquidity freezes. You know the list. The speed at which the next
recession arrives will render any prediction useless except to historians.
sum_luk
Rob_Dawg:
all the old metrics are useless.
.... so, now we have an unduly enlarged glut of savings chasing an ever dimming prospect
of profit. .... ultimate fiat trapped in a ponzi.
sum_luk
Rajesh:
I don't expect the U.S. economy to boom except on a relative basis.
... of course, Janet's theory is domestic US will carry on despite the fact that a strong dollar
makes for cheap imports.
Rob_Dawg
Eventually China will have a shadow banking crisis that will leave the rest of the world with
the problem of deciding how much to contain it. Very dangerous. 2016? No way of telling.
sm_landlord
Rajesh
I'm with you on that, Rajesh. To the extent that I'm doomy about the macro economy, it's mostly
about the rest of the world. The US looks to do far less well than it could, but so far, it doesn't
look like a US recession is imminent.
On the middle/micro level, I see a lot of government spending on things like street/road maintenance,
which should prop some things up. Also, auto traffic seems to be back to pre-GR levels. Based
on my recent visit to SM, anyway, most of the downtown area is approaching gridlock for much of
the day again...
Can't say the risk is zero, though, because I still see a lot of fragility and testing of limits.
Cinco-X
Rajesh:
My no recession call for 2015 is looking good. I'm making a no recession in 2016 call
now.
I was in Walmart on Friday evening picking up a prescription, and the place was a ghost town.
Drove by Best Buy the previous evening and the parking lot was about 25% full
yuan
sm_landlord:
The US looks to do far less well than it could, but so far, it doesn't look like a US
recession is imminent.
Umm...so pretty much business as usual since 2008 (and the republican plan to sabotage obummers
by opposing anything that might benefit working class 'merkins).
Early on in the housing bubble, Bill made a number of comments about bubbles using a plot
of Household Net Worth to GDP ratio. Early on, he wrote that the ratio had been stable for
nearly 50 years. He then changed his tune and started talking about a gradual increase since
the 70's.
Here's the raw data series.
CitizenAllenM
Funny how the Boomer generation peak is going to change the economics of so much, just like
I predicted.
I also predict a stunning comeback for Wal-Mart as the cost of living cuts really get going, and
the Social Security Day Sales and Foodstamp sales kick off the monthly sales.
The America of limited everything, as free riders are eliminated.
Now, have you written off your skybox for 2015?
LoL- business has so much fat they will need to cut to survive the increase in poverty that will
be the boomer retirement.
Already planning to shed vehicles as fast as Google Cars become available in 10 years
Yup, $250 bucks for the middle class 1950s fantasy item!
Can't really give them away- Upright Pianos are the worst- worth more as parts for creative reuse
than as instruments.
Grand Pianos still have some marginal value- unless a decent name brand and in excellent condition.
One of my friends was talking about how valuable the family Steinway was, and I told them to contact
the local piano dealer to get an idea of the value, and then see how much it was going to cost
to have shipped down from Minnesota- after she made the calls she decided it was no prize and
stopped negotiating for it in the estate settlement :wink:
Technology is ruthlessly destroying mass books next, along with vinyl records, dvds, cds, etc.
8 tracks are worthless, cassette tapes even more worthless.
"... So after the Fed created mini-crash, then a Santa Claus Bullcrap Rally, we move into year end and on to January with a smashing potential for a 10-20% rapid correction in the S P along with a Treasury market crashing in parallel and no buyers. ..."
Fascinating article Tyler. Because if the math is correct, which I believe it to be or
damned close, then the Fed is about to drain several hundred billion dollars from an illiquid
credit market leaving no bid at year end.
So after the Fed created mini-crash, then a Santa Claus Bullcrap Rally, we move into
year end and on to January with a smashing potential for a 10-20% rapid correction in the S&P
along with a Treasury market crashing in parallel and no buyers.
Shit could get real between the next two Fed meetings, that is for certain.
FireBrander
Bernanke did a little "draining" of his own; and brought down the global financial
system...
THEN "SAVED IT", AND HE WAS HAILED AS A FUCKEN HERO!
Yellen my just be trying to secure her spot on the cover of Time for "Saving Us Again".
Fish Gone Bad
In October of 2008 there was a fairly large drain of money and things got scary (https://research.stlouisfed.org/fred2/graph/?chart_type=line&height=600&...[1][id]=MULT&width=1000).
You need to distinguish "creative destruction" due to new technologies invented from "greed based" destruction
caused by financization and outsourcing... In both cases old job dissaper, but in case of
finanzition based destruction of jobs no new jobs are ever created. It's just plain vanilla wealth
transfer to upper 1% of the society.
The social instability that comes alongside creative destruction - or 'disruption' - is often justified
by the notion that unemployment effects are only temporary since in the long run a multitude of new
jobs (many of which we can't even imagine yet) will inevitably be created.
Only 0.5% of the US labor force is employed in industries that did not exist in 2000.
Even in Silicon Valley, only 1.8% of workers are employed in new industries
The majority of the 71 new 'tech' jobs relate to the emergence of digital technologies,
(such as online auctions, video and audio streaming and web design) but also include renewable
energy and biotech.
New jobs cluster in skilled cities, making economic activity increasingly concentrated
and contributing to growing regional inequalities.
This, in other words, is the reality of the new "zero to one" tech world, where moving fast and
breaking things (including jobs), then not worrying about the consequences until you're a billionaire
who can give his wealth away in one billion dollar tranches, is the acceptable norm. (Even though,
arguably, the accumulation of those billions in the first place is often the job-destroying problem.)
Dr. Frey adds the valuable commentary that:
"Because digital businesses require only limited capital investment, employment
opportunities created by technological change may continue to stagnate as economies become increasingly
digitized. Major economies like the US need to think about the implications for lower-skilled
workers, to ensure that vast swathes of people don't get left behind."
Very fair point.
Limited capital investment equals extremely low barriers to entry. This in turn equals absolutely
ruthless competition, which - somewhat ironically - leads to the "why should I bother investing in
anything at all since there's nothing in it for me in the long run" effect. The real-world equivalent,
if you will, of the Grossman Stiglitz Paradox.
As a consequence, faddy network effects - a.k.a who's first to benefit from natural monopoly formation
or old-fashioned populism by another name - increasingly mean everything, reducing successful entrepreneurial
enterprise to a simple lottery/gambling game or (at best) a highly politicised popularity contest,
wherein marketing spend stands equivalent to political campaigning outlay.
Except, whereas political campaigns pay off electorate loyalty with promises of better lives in
material terms, the most successful technology campaigns tend to do the opposite: pay off users for
network loyalty with the promises of better digital returns, at the same time as transferring a greater
share of material wealth to a tiny platform owning elite.
Indeed, because tech firms are mainly focused on redistributing existing wealth rather than creating
more of it, for them to profit, some share of real economy product must be snatched from those who
actually worked to produce it. That's Schumpeterian creative destruction in action, albeit at the
cost of producers who tend to share their profits with workforces through wages.
The lowest cost producer will always be the one with smallest human workforce.
All of which then sparks a dangerous race to the bottom focused on cutting out the most expensive
material input: the human.
What's worse, once that race starts, there's little to no incentive for anyone to invest in any
business which ever involves human capital again.
The irony is, without any beneficiary workforce within the new business structure, it's only capital
owners (or lucky billionaire charity cases) who get to benefit from the dividends created by the
system. Demand for products and services is destroyed. To wit, a vicious deflationary cycle begins,
which shrinks the pie rather than grows it.
Regarding the labour-destroying digital/tech trend, Frey and Berger's paper says specifically:
Relative to major corporations of the early computer revolution, the companies leading the
digital revolution have created few employment opportunities: while IBM and Dell still employed
431,212 and 108,800 workers respectively, Facebook's headcount reached only 7,185 in 2013.
To be blunt, that arguably means it's not looking good for three of the core Schumpeterian presumptions,
namely:
Technological disruption will eventually create jobs of equal merit elsewhere in the system
(i.e. unemployment is temporary).
Recessions lead to efficiency gains that create social well-being for all.
Successful innovation must be rewarded with a temporary monopoly if it's to continue incentivising
anyone to bear the risks of entrepreneurship.
It is, however, looking better for the Schumpeterian conclusion that eventually capitalism must
give way to socialism if it's to create a widespread commonwealth.
Why? Because, whilst it's never been easier, cheaper or less risky to grab yourself a ticket for
the 'monopoly reward' lottery - and thus more profitable when you do win - these cheap tickets are
only available to businesses redistributing existing wealth that's focused on contracting consumer
surplus as a whole.
In the digital tech era, that's at best an exercise in political-populism (marketing
spend to get consumers to support this platform rather than another, for as low a consumer surplus
cost as possible to the platform leader) and at worst an exercise in total utter randomness. Neither,
consequently, really justifies outsized rewards to any winning party.
To the contrary, if you're in the business of creating new value utilising real human workforces
or focused on creating new areas of demand, it's arguably never been more difficult, expensive or
risky to take a punt on success - and thus less profitable if you do win. And that's because the
very concept of rewarding a large workforce or consumer base with a steady, dependable and secure
consumer surplus is considered to be a fundamental competitive disadvantage.
Izabella Kaminska joined FT Alphaville in October 2008. Before that she worked as a producer at
CNBC, a natural gas reporter at Platts and an associate editor of BP's internal magazine.
Mr. Long stated that the credit cycle is now changing, taking its signals from the business cycle.
This was agreed upon by Mr. Laggner who in his own words said:
"We're at the end of the credit cycle, the whole mal-investment in shale oil...tens of billions
of dollars in lost wealth"
For the future, Mr. Laggner anticipates a massive series of defaults, resulting from huge deflationary
pressures and a tightening by the market place, which is basically an unintended result of constant
intervention. We are looking at corporate bond defaults, sovereign defaults which will send shockwaves
into the currency system.
"... Most forecasters are barely familiar with what happened in the past. Based on what they say and write, it is apparent they often do not understand what is occurring here and now. Why would anyone imagine that they have the slightest clue about the future? ..."
"... This is not my opinion, but a simple statistical fact: The data overwhelmingly show that the skill set of the predictive pundits is no better than a coin toss. ..."
"... Course some of these 'predictions' are just some ones ideology. Course none of then ever seem to be punished when they fail. ..."
My Sunday Washington Post Business Section
column is out. This morning, we look at the annual forecasting foolishness so prevalent in the
media.
By now, you know the drill: A bunch of analysts make their annual predictions, and of course,
they are utterly useless. Here's an excerpt from the column:
"It's that time of year again when the mystics peer deep into their tea leaves, entrails and
crystal balls to divine what's ahead.
Which means it's also time for my annual reminder: These folks cannot tell the future. Ignore
them.
Most forecasters are barely familiar with what happened in the past. Based on what they say
and write, it is apparent they often do not understand what is occurring here and now. Why would
anyone imagine that they have the slightest clue about the future?
This is not my opinion, but a simple statistical fact: The data overwhelmingly show that the
skill set of the predictive pundits is no better than a coin toss. The odd person gets these forecasts
about the economy and stock markets right each year, but the lack of any sort of consistent winners
and losers means that, mathematically, it is a random outcome."
I speak with numerous experts about the subject, including:
-James O'Shaughnessy (author of the classic "What Works on Wall
Street," and CIO of O'Shaughnessy Asset Management
-Morgan Housel, a columnist for the Motley Fool
-Michael Johnston (Poseidon Financial. author of "A Visual History of Market
Crash Predictions" and "The Not-So-Surprising Truth About Gold Bugs.")
-Laszlo Birinyi (researcher and market historian)
-David Rosenberg (chief economist and strategist at Gluskin
Sheff)
Course some of these 'predictions' are just some ones ideology. Course none of then
ever seem to be punished when they fail. Like the folks who predicted the end of the US
economy that was supposed to happen back in September, you will notice they now predict it
will be in 2016 (which of course means they will just keep changing the year when that doesnt
happen) eithe
"... those of us who warned of the housing bubble and predicted that the resulting downturn would be hard to reverse saw the weak growth as a 100 percent predictable problem from a shortfall in aggregate demand. There was no source of demand to replace the construction and consumption demand driven by the bubble. ..."
"... We later get the strange statement: Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers. ..."
"... Actually, these are two very different stories that need to be considered separately. Suppose companies dont have enough customers. This is a story of inadequate demand. How do we solve it? Spend money. The private sector can do it, the government can do it, counterfeiters can do it. In this story, more demand will create more supply. The only obstacle to generating the demand is our own stupidity. (We can also all decide to work fewer hours, since we are producing more than we need, we should be able to all work less and still meet our needs.) ..."
"... The story of too few workers is a story of inadequate supply. We have needs that we just cant meet because there is no one to do them. The problem with this story is that it only focuses on half of the equation, and by far the less important half. The ability of the working population to meet the needs of the total population depends on both the size of the workforce relative to the whole population and also its productivity. The productivity portion of the story swamps the population portion of the story. ..."
WSJ Goes Long on the Hard to Get Good Help Story by Dean Baker Published: 23 November 2015
The usually astute Greg Ip gets derailed in a high production values piece that tries to tell
us that our problems stem from not having enough kids. For those left scratching their heads while
sitting in traffic jams or standing in over-crowded subway cars, the basic story is that we somehow
don't have enough workers to do all the work. (Where are those damn robots when we need them?)
Anyhow, the piece starts out quickly on the wrong foot:
"Ever since the global financial crisis, economists have groped for reasons to explain why
growth in the U.S. and abroad has repeatedly disappointed, citing everything from fiscal austerity
to the euro meltdown. They are now coming to realize that one of the stiffest headwinds is also
one of the hardest to overcome: demographics."
Umm no, those of us who warned of the housing bubble and predicted that the resulting downturn
would be hard to reverse saw the weak growth as a 100 percent predictable problem from a shortfall
in aggregate demand. There was no source of demand to replace the construction and consumption
demand driven by the bubble.
And, I don't recall being at all troubled by slower aggregate growth, the issue was that we
were seeing insufficient growth to fully employ the population. The United States and many other
wealthy countries have seen a sharp decline in the employment to population ratio. This is true
even when we look at the employment to population ratio for prime age (ages 25-54) workers. This
is down by three full percentage points from its pre-recession peak and by more than four percentage
points from its 2000 peak. It is pretty hard to explain the drop in the percentage of people working
by demographics.
We later get the strange statement: "Simply put, companies are running out of workers, customers or both. In either case, economic
growth suffers."
Actually, these are two very different stories that need to be considered separately. Suppose
companies don't have enough customers. This is a story of inadequate demand. How do we solve it?
Spend money. The private sector can do it, the government can do it, counterfeiters can do it.
In this story, more demand will create more supply. The only obstacle to generating the demand
is our own stupidity. (We can also all decide to work fewer hours, since we are producing more
than we need, we should be able to all work less and still meet our needs.)
The story of too few workers is a story of inadequate supply. We have needs that we just can't
meet because there is no one to do them. The problem with this story is that it only focuses on
half of the equation, and by far the less important half. The ability of the working population
to meet the needs of the total population depends on both the size of the workforce relative to
the whole population and also its productivity. The productivity portion of the story swamps the
population portion of the story.
Here's what I wrote in response to a Washington Post piece on China earlier in the month.
"To see why this is not true, we will take a very simple story where we contrast a country
with moderate productivity growth and no demographic change with a country rapid productivity
growth and a rapid aging of its population. The figure below shows the basic story.
[graph]
"We assume that in 1985 there are five workers to every retiree in both the Washington Post
and China story. If we set output per worker in 1985 equal to 100, then the amount of output per
worker and retiree in 1985 is 83.3 (five sixths of the output per worker). We then allow for different
rates of productivity growth and population growth over the next three decades.
"In the China scenario, we have 5.0 percent annual productivity growth. This is somewhat slower
than the actual rate of growth of output per worker over the last three decades, but it is still
sufficient to make the point. The calculation assumes the ratio of workers to retirees falls to
just two to one, a sharper decline than has actually been the case.
"In the Washington Post scenario, we assume a moderate 2.0 percent rate of productivity growth,
roughly the average rate for the U.S. economy over the last three decades. To make the case extreme
in the other direction, it is assumed there is no change in the ratio of workers to retirees so
that in 2015 the ratio is still five to one.
"As should be obvious, in the high productivity case output per worker is far higher in 2015
than in the Washington Post scenario. Output per worker reaches 432.2 in 2015 in the China scenario,
compared to just 181.1 in the Washington Post scenario.
"Because of the extraordinary differences in output per worker, China is still much better
capable of supporting its retired population in 2015 than a country following the Washington Post
scenario. Its output per person is equal to 288.1 in 2015. This means that both its workers and
retirees can enjoy an income that is 188.1 percent higher in 2015 than it was in 1985. By contrast,
in the Washington Post scenario output per person in 2015 is just 150.9 in 2015, meaning that
its workers and retirees can only enjoy an income that is on average 50.9 percent higher than
in 1985.
"In this case, it should be evident that China will have a much easier time supporting its
retirees than a country that had enjoyed just moderate productivity growth and no demographic
change. It is also worth noting that some demographic change was inevitable. Regardless of what
policies China had pursued it was going to see an aging of its population, which would have meant
a decline in the ratio of workers to retirees.
"These numbers also overstate the benefits of the Washington Post scenario for two other reasons.
The numbers treat retirees as the only dependents. Of course there are also children. The ratio
of children to workers would be far larger in the Washington Post scenario than in the China scenario.
Incorporating children into the calculation would further increase the gap in the change in output
per person between the two scenarios.
"The other difference is that the Washington Post scenario of more rapid population growth
would imply much greater strains on China's natural resources. The country would require much
more food and water and emit a much larger amount of greenhouse gases into the atmosphere. This
would further reduce the standard of living in the Washington Post scenario relative to the China
scenario shown here.
In short, China is actually extraodinarily well-prepared for the aging of its population. It
should in principle have no problem generating enough output so that both its workers and retirees
can enjoy much higher standards of living in ten years than they do today. (This does require
setting up a good public pension system.) Countries with a slower rate of aging but worker productivity
growth will find this more difficult.
In keeping with the confusion throughout the piece we also get the complaint that builders
are suffering from a shortage of labor:
"For example, home builders are simultaneously suffering from shrinking demand since the homeownership
rate is declining, and from labor shortages as the baby boomers retire."
A shortage of labor would imply construction workers' wages are rising rapidly. They aren't.
[graph]
There is some uptick in the rate of nominal wage growth, but it remains below 3.0 percent annually,
which is well below pre-recession levels. In short, not much evidence of a shortage here.
Just to repeat, the question we have to ask is whether the problem is a shortage of demand
or supply. If the problem is demand, then we can easily deal with it. If the problem is supply
then we have to explain why in the era of computerization and robots we aren't seeing productivity
growth. If the economy is broken and unable to sustain productivity growth, this is the real problem.
Getting more people to make our cities and natural spaces more crowded is not the solution.
In the case of the US (using the
NBER business cycle dates), in the post-WWII period expansions have lasted from 12 months in
the expansion ending in 1981to 120 months in the expansion ending in 2001. The current expansion
is already 77 months long, longer than the previous expansion of 2001-2007.
... ... ...
And this second reading the chart reminds us of the risk that we are facing if the next
recession is somewhere in the near future and monetary policy has not had the time to go back to
normal, to go back to levels of short term rates that allow for a decrease in these rates that is
consistent with what we have seen in previous recession. And entering the next recession in
Europe or the U.S. with interest rates that are too close to zero does not sound like a good idea
and in addition there is a lot of uncertainty given that we have not seen such a case in the
recent business cycles.
"... Higher unemployment reduced workers bargaining power and lowered demand in the economy. This slowed inflation. In fact, the skipping from Gerald Ford to Paul Volcker, misrepresents the actual course of inflation over this period. Inflation did in fact come down. After peaking at 10.4 percent in 1974, it fell back to 5.5 percent in 1976 before it started to rise again. The main factor bringing inflation down was a steep recession in 1974-1975, so the method for bringing inflation under control was not quite as difficult to figure out as the piece implies. ..."
"... In sum, the inflation in the 1970s was nowhere near as debilitating as this piece implies. It was not in the least mysterious and would likely have come down even without the magic of Paul Volcker. The Volcker recession destroyed the lives of millions of workers and their children. It is very much an open question as to whether a more rapid reduction in the rate of inflation was worth this pain. ..."
Thoughts on NPR's Discussion of the Weimar 70s: Deflating Inflation Myths
National Public Radio had a piece * on the horrible inflation of the 1970s and how the country
was rescued by the herioics of Paul Volcker who was Federal Reserve chair at the time. The piece
raises several points that could use a bit more context and leaves out some important information.
First and most importantly, the piece implies a world that did not exist. It begins with a
discussion of a speech by President Gerald Ford in 1974. It told listeners:
"Inflation was the silent thief, and every year it got worse. Inflation got worse. It went
from 10 percent to 11 percent to 12 percent. It wasn't clear exactly why and no one could agree
on a simple way to fix it."
Neither part of this story is especially true. Inflation was hardly silent. It was widely reported,
so people did know about it. Nor was it obviously a thief. Many, perhaps most, wage contracts
were indexed to inflation, which meant that wages rose more or less in step with prices. While
this was not true for everyone, a substantial segment of the population was able to insulate itself
from the effects of inflation. This is one of the factors that made it harder to contain inflation.
It is also not true that no one knew how to fix it. Higher unemployment reduced workers'
bargaining power and lowered demand in the economy. This slowed inflation. In fact, the skipping
from Gerald Ford to Paul Volcker, misrepresents the actual course of inflation over this period.
Inflation did in fact come down. After peaking at 10.4 percent in 1974, it fell back to 5.5 percent
in 1976 before it started to rise again. The main factor bringing inflation down was a steep recession
in 1974-1975, so the method for bringing inflation under control was not quite as difficult to
figure out as the piece implies.
Then we get this account of the period from New York University economist Bill Silber:
"SILBER: It sort of took over your life. You had to worry about buying things before they went
up in price. Every time you turned around you'd say, well, I mean, I better buy it now rather
than later and of course that's the process, which makes the inflation accelerate because everybody
starts thinking that way. Just buy something because you know if you buy it now you're better
off than if you wait.
"KESTENBAUM: Do you remember that happening with you? Did you buy anything for that reason?
"SILBER: I think I bought a house.
"KESTENBAUM: People buying houses just because they think they'll be more expensive the next
year - that is not good...."
Perhaps inflation took over Mr. Silber's life, but this is not likely true for many other people.
House price inflation peaked at 16.3 percent in the year from February of 1978 to February of
1979. This is not good, but there are two points worth noting. First, it was already on its way
down by the time our hero, Paul Volcker, enters the stage in the fall of 1979. On a year over
year basis the rate of house price inflation was down to 14.8 percent and if we annualize the
rate for the immediate three months before Volcker took the job it was down to 11.8 percent.
The other point is that we have seen comparable rates of house price increases more recently.
For example, in the year from August 2004 to August 2005 house prices rose by 14.5 percent. Did
it take over your life?
The other point worth noting here is that most prices were not rising anywhere near this fast.
For example car prices were rising at a 7.5 percent annual rate when Volcker took the job. This
meant that if you were considering buying a car for $20,000 (in today's dollars) and waited a
month, it would cost you $150 more. Clothes were rising at less than a 4.0 percent rate. This
meant that it would cost you $1.30 if you put off buying that $400 suit for a month. Waiting a
month on a $20 shirt would cost you 7 cents. This was not Weimar Germany where inflation was reaching
the point people could not do ordinary business.
In addition to the misrepresentations, there is an extremely important part of the story left
out of the discussion in this piece. Oil prices quadrupled in the early 1970s as OPEC first flexed
its muscle as a cartel. They quadrupled again in the late 1970s as the Iranian revolution took
the country's production, then the world's second largest exporter, off the market. At the time
the economy was both more dependent on oil and less flexible than it is today.
These price increases played a huge role in driving up inflation as there was no easy way for
the economy to deal with this jolt. The impact of the oil price rises was widely known and discussed
at the time so there is nothing mysterious in this story. Oil prices plunged in the 1980s as increased
supply and reduced demand, both due to the recession and conservation efforts, put downward pressure
on prices. Lower oil prices would have dampened inflation with or without Paul Volcker's magic.
The other important piece of the inflation puzzle left out off this discussion is that official
consumer price index seriously overstated the rate of inflation at the time, with the gap approaching
2 full percentage points in 1978 and 1979. This mattered both because many contracts were legally
tied to the rate of inflation and also because many workers would likely have seen the official
CPI as setting a target for wage increases. This overstatement disappeared in the 1980s, first
because the factors driving it went into reverse, and second because the Bureau of Labor Statistics
changed its methodology. This also had nothing to do with Paul Volcker's magic.
In sum, the inflation in the 1970s was nowhere near as debilitating as this piece implies.
It was not in the least mysterious and would likely have come down even without the magic of Paul
Volcker. The Volcker recession destroyed the lives of millions of workers and their children.
It is very much an open question as to whether a more rapid reduction in the rate of inflation
was worth this pain.
it wasn't just the collusion of the oil producing nations that played a role in the rising
oil prices of the 1970's. The American oil companies were part of that collusion as well. Tankers
full of oil stayed parked off the cost and prices went up every 15th and 30th of the month like
clockwork. That from an industry insider, my father.
Those factors were not controlled by opec nations or market forces other than collusion
For the oil company he worked for the price increases during the 79 crisis would come in on
the 15th and the 30th of each month during the period when the oil prices were increasing
this was not what normally happened
he found it fishy
Dan Kervick ->anne...
"Many, perhaps most, wage contracts were indexed to inflation, which meant that wages
rose more or less in step with prices."
This is a good piece by Dean Baker. I was only in high school in the mid-seventies, but I was
an undergrad from 77-81, and was taking a bunch of economics courses at the time when inflation
was a big issue. And Baker's telling more closely resembles the way I remember it going down.
The main economic theme I remember being in the air at the time was the idea of the "wage-price
spiral". the analogy was with the arms race. Basically everyone had come to have high inflation
expectations, and the high expectations were self-fulfilling. Producers continually raised their
prices both to keep up with actual increases in the prices they paid for their own supplies and
labor, and to be ahead of the curve on the increases they expected to occur in the near future.
Workers negotiated hefty COLAs into their contracts to keep up with the anticipated price rises,
which caused their employers to raise their prices, which caused labor to demand higher wages,
etc. - and on and on it went.
I also remember the economics professors emphasizing very strongly the difference between inflation
and changes in the "cost of living" - basically consumer prices. This is a distinction that seems
frequently lost in many contemporary discussions. It is possible to have high persistent inflation
without any change in the cost of living whatsoever. Similarly, if there is a change in the relative
prices of labor and consumer goods, then the cost of living could go up or down, even if there
is no general inflation.
The reason the high inflation of the period was considered "bad" was that inflation at that high
a level tends to be very jerky and somewhat unpredictable, and the size of the prediction uncertainty
potentially very significant. Since contracts of all kinds have inflation expectations priced
into them, then the inability to accurately anticipate nominal changes added an extra element
of risk to ordinary business dealing.
The picture many people now have is that Volcker "broke the back" of inflation. But the way I
remember it, the decline in inflation rates was a much more complex process having to do with
(i) trends in the decline in union membership and labor bargaining power, (ii) unions being convinced
to back off COLA demands, or replace them with other demands - especially in industries that were
under heavy international competitive pressure, (iii) subsiding of the impact of the OPEC supply
shocks. Volcker's attempt to re-set inflation expectations via shock treatment was only one of
several factors.
pgl ->Dan Kervick...
"The reason the high inflation of the period was considered "bad" was that inflation at that
high a level tends to be very jerky and somewhat unpredictable"
One of the reasons it was "jerky" had to do with really dumb periods of monetary restraint as
in those stupid Ford WIN buttons. And yes Volcker killed off inflation but creating a massive
and prolonged output gap. No magic - the kind of economic waste a model by James Tobin predicted.
I was taking a class from Tobin back then and he loathed the Volcker regime.
Peter K. ->Peter K....
Steve Randy Waldman is an interesting and articulate blogger. I liked his take:
"... Mass malinvestments in U.S. shale oil, Brazilian mines, and Chinese factories and real estate must be reckoned with. ..."
"... Instead of economic strength and robust growth, economic fundamentals are breaking down. Manufacturing is slowing. Consumer spending is soft. For additional edification, just look at copper, iron ore, or aluminum.. ..."
But somewhere between collapsing oil prices, dollar strength, and consumer lethargy
the economy's narrative has drifted off plot. The theme has transitioned from one
of renewed growth and recovery to one of recurring sickness and stagnation. Mass malinvestments
in U.S. shale oil, Brazilian mines, and Chinese factories and real estate must be reckoned with.
Price adjustments, bankruptcies, and debt restructuring must be painfully worked through like
a strawberry picker hunkered over a seemingly endless furrow row of over ripening fruits.
Sore backs, burnt necks, and tender fingers are what the over-all economy has in front of it.
The U.S. economy is not immune to the global disorder after all.
More evidence is revealed each week that the unexpected is happening. Instead
of economic strength and robust growth, economic fundamentals are breaking down. Manufacturing
is slowing. Consumer spending is soft. For additional edification, just
look at copper, iron ore, or aluminum...
"... The biggest market in the world today is derivatives, money making money without a useful product or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making useful products and providing useful services is nearly irrelevant even today. ..."
"... "When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything." ..."
"... This problem of debt vs income seems to reflect the ongoing financialization (extraction, not to be confused with financing) of the global economy rather than a focus on capital development of people and the social and productive infrastructure. ..."
"... The "new model" was inefficient (too many fingers in the pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with reverse amortization), and critically dependent on rising home prices. Even leaving aside the pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion of the capital development of the economy. It left behind whole neighborhoods of abandoned homes as well as new home developments that could not be sold. ..."
"... In my understanding, the Great Depression was an implosion of the credit system after a period of over investment in productive capacity. The investors failing to pay the workers enough to buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom! ..."
"... China still has implicit state control of the banking sector, they may still have the political will to make any bad debt disappear with the puff of a fountain pen. That option is always available to a sovereign. ..."
"... They specialized in mass production the way agribusiness has here, where the production is not where the consumption is. It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The economic results in the grain belt would not be pretty. Ditto China. ..."
"... Except that China ain't Iowa, they can create a middle class as big as Europe and US combined. ..."
"... It's just anathema for the ruling class to give the little guys a break. ..."
"... The global glut of oil and other resources can't just be attributed to rising production in "tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and other metals as inputs. What I want to know is the extent of the cover-up, and what the global economy really looks like. ..."
"... We are not competent to forecast the future yet. Even the weather surprises us. Its also the case that people who do have relevant data are quite likely to convert that into profit rather than share it. ..."
"... It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation. I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market. ..."
"... Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman? ..."
We shouldn't be too surprised at falling commodity prices.
Using raw materials to make real things is all very 20th Century, financial engineering is
the stuff of the 21st Century.
When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything.
Central Bank inflated asset bubbles will provide for all.
The biggest market in the world today is derivatives, money making money without a useful product
or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making
useful products and providing useful services is nearly irrelevant even today.
"When Capitalism reaches its zenith, everyone will be an investor and no one will be doing
anything."
+1000
Ah, that glorious day when we're all rich, rich, RICHer than Midas from interest, dividends, and
rents!!!
Just to amuse myself, I intend to be a dog poop scooper – and pick up some pocket change of 1
million dollars a poop…
This problem of debt vs income seems to reflect the ongoing financialization (extraction,
not to be confused with financing) of the global economy rather than a focus on capital development
of people and the social and productive infrastructure.
I liked how Wray and Mazzucato linked the two in their Mack the Turtle analogy.
"Underlying all of this financialization was the homeowner's income-something like Dr. Seuss's
King Yertle the Turtle-with layer upon layer of financial instruments, all of which were supported
by Mack the turtle's mortgage payments. The system collapsed because Mack fell delinquent on payments
he could not possibly have met: the house was overpriced (and the mortgage could have been for
more than 100% of the price!), the mortgage terms were too unfavorable, the fees collected by
all the links in the home mortgage finance food chain were too large, Mack had to take a cut of
pay and hours as the economy slowed, and the late fees piled up (fraudulently, in many cases as
mortgage servicers "lost" payments).
The "new model" was inefficient (too many fingers in the
pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with
reverse amortization), and critically dependent on rising home prices. Even leaving aside the
pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion
of the capital development of the economy. It left behind whole neighborhoods of abandoned homes
as well as new home developments that could not be sold."
Interesting, the supposition here is that China is heading for a depression similar to the
Great Depression.
In my understanding, the Great Depression was an implosion of the credit system after a period
of over investment in productive capacity. The investors failing to pay the workers enough to
buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom!
China could well be headed down that road, there isn't enough money getting into the pockets
of ordinary Chinese that's for sure. Elites everywhere just can't bring themselves to give a break
for those at the bottom.
China still has implicit state control of the banking sector, they may still have the political
will to make any bad debt disappear with the puff of a fountain pen. That option is always available
to a sovereign.
Then again they may just realize in time, someone needs to be paid to buy all the junk.
They were counting on us and the Europeans, but we've let them down. The race to the bottom
erased the global middle class that could buy Chinese consumer products.
They specialized in mass
production the way agribusiness has here, where the production is not where the consumption is.
It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning
and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The
economic results in the grain belt would not be pretty. Ditto China.
The global glut of oil and other resources can't just be attributed to rising production in
"tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the
world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and
other metals as inputs. What I want to know is the extent of the cover-up, and what the global
economy really looks like.
Where were you in 2011? I was here reading NC. One of the Links posted was a graph of the abrupt
shutdown of China's economy – It was a cliffscape.
Very long vertical drop off. So dramatic I
could hardly believe it and I said I was having trouble catching my breath. Another commenter
said it looked like a tsunami. Of exported deflation as it turns out.
Things have been extreme
since 2007 when the banksters began to fall; 2008 when Lehman crashed (just after the Beijing
Olympics, how convenient for China…) and credit shut down. China was doin' just fine until then.
In spite of the irrational mess in global capitalist eonomix.
The only way to remedy it was to
shut it down I guess. That's really not very fine-tuned for a system the whole world relies on,
is it?
Proceeds from the laughable assumption that official China economic numbers 'may not be as
reliable as we'd like' rather than being 'persistently and hugely faked,' (especially during slowdowns)
and ignores that the housing-market slowdown and huge unsold-RE-overhang will also necessarily
be accompanied by a price crash, hence a huge amount of toxic debt being exposed – really basic
boom/bust dynamics.
And no demographic boom coming to the rescue, either. (But he does repeatedly
invoke the magic 'service economy boom' mantra mentioned by Ilargi.) Thankfully most of the commenters
rightly take the author to task.
Firstly, its only China's buying that stops oil falling even further Sr Ilargi.
Secondly its a Peoples' Republic – employment must be maintained.
We are not competent to forecast the future yet. Even the weather surprises us. Its also the
case that people who do have relevant data are quite likely to convert that into profit rather
than share it.
Received a small airmail parcel today containing some replacement attachments for my Dremel
moto-tool … package was addressed from Shenzen, specifically the "Fuming Manufacturing Park".
It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation.
I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market.
Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman?
The first point Summers raised ... pointed out that a major global trend over the last few decades
has been the substantial disemployment-or withdrawal from the workforce-of relatively unskilled
workers. ... In other words, it is a real puzzle to observe simultaneously multi-year trends of
rising non-employment of low-skilled workers and declining measured productivity growth. ...
Another related major challenge to standard macroeconomics Summers put forward ... came in response
to a question about whether he exaggerated the displacement of workers by technology. ... Summers
bravely noted that if we suppose the "simple" non-economists who thought technology could destroy
jobs without creating replacements in fact were right after all, then the world in some aspects
would look a lot like it actually does today...
The third challenge ... Summers raised is perhaps the most profound... In a
working paper the Institute just released, Olivier Blanchard, Eugenio Cerutti, and Summers
examine essentially all of the recessions in the OECD economies since the 1960s, and find strong
evidence that in most cases the level of GDP is lower five to ten years afterward than any prerecession
forecast or trend would have predicted. In other words, to quote Summers' speech..., "the classic
model of cyclical fluctuations, that assume that they take place around the given trend is not
the right model to begin the study of the business cycle. And [therefore]…the preoccupation of
macroeconomics should be on lower frequency fluctuations that have consequences over long periods
of time [that is, recessions and their aftermath]."
I have a lot of sympathy for this view. ... The very language we use to speak of business
cycles, of trend growth rates, of recoveries of to those perhaps non-stationary
trends, and so on-which reflects the underlying mental framework of most macroeconomists-would
have to be rethought.
Productivity-based growth requires disruption in economic thinking just as it does in the real
world.
The full text explains
these points in more detail (I left out one point on the measurement of productivity).
An
essential read from Martin Wolf this Thursday on the manner in which corporate surpluses are
contributing to the savings glut problem and causing all sorts of distributive chaos in the process.
So, whereas it used to be the sovereigns over-hoarding international claims and under-consuming/under-investing
in their own infrastructure for the benefit of getting a leg up in the global hierarchal order, it's
now corporates over-hoarding retained earnings for the sake of protecting their dominant positions
instead (retaining earning piles being different to explicit cash piles, which can be generated with
debt not just profit).
Says Wolf:
The observation that a structural surplus of savings over investment appears to have emerged
in the corporate sectors of the big high-income countries is highly significant. It is
significant for the growth of potential supply, since it reflects relatively feeble investment,
but it is also significant for the shape of aggregate demand.
If the corporate sector runs a structural surplus of savings over investment, other sectors
must run offsetting structural deficits. If the government is to be in financial balance, either
households or foreigners must run these deficits. In the eurozone, this logic has led to huge
current-account surpluses (a financial deficit for foreigners). For the UK and US, it is likely
to mean renewed household deficits - a perilously destabilising possibility.
Why is corporate investment structurally so weak then? Wolf proposes a few reasons. One is the ageing
of societies, which lowers the level of investment needed. The other is globalisation, which motivates
relocation out of high-income countries. But the one we think might be most relevant is his
proposition that technological innovation is quietly killing the incentive to invest. This is critical:
Much investment today is in IT, whose price is collapsing: constant nominal investment finances
rising real investment. Again, much innovation seems to reduce the need for capital: consider
the substitution of warehouses for retail stores.
We've taken for granted that "technology" is a force for good in the world. But perhaps the reality
is a little different? Perhaps for every 'good' information tech creates, an equal and equivalent
'ungood' is created too? Or perhaps more so, the reason we're seeing the computer age everywhere
but in the productivity statistics is precisely because information technology is and always has
been another manifestation of a rent-extracting financial type of business.
Here's a chart by way
of
Iren Levina at Kingston University to cement our argument that banks were the original network-based
technology platform unicorns - with business models equally focused on gathering privileged data
about customer behaviours for the purpose of influencing more profitable behaviours elsewhere:
It is with good reason, then, that banks dedicate the biggest chunk of operating expenses to personnel,
algorithms, IT infrastructure and hardware equipment. Banks, like information tech firms today, are
and always have been information processing businesses.
On which note, Diana Hancock, of the Fed, argued
convincingly in the 1990s
that the Financial Firm is a financial technology which takes input (data), processes said input,
and then creates monetary goods which distribute existing capital to sectors which can draw returns
more effectively than others, in exchange for a leasing fee for that matching service.
But as Hancock says, financial profits can only be assured only if the purchase cost of one unit
of the capital good less the rental received during the period is equal to the discounted
depreciated value of the capital good in the rental period.
That's another
way of saying bank profits are only justifiable if the added value from redistributing leased
capital more than compensates for its natural depreciation - something that's only possible if the
total value add is over and above total lease fees charged by the intermediaries. If at the end of
the rental period society has no more capital (or less!) than it had to begin with, fees charged
on an ex-ante basis will have proven unjustified.
The parallels between banks and technology platforms are thus uncanny.
In the banking process, data input represents the process by which information about future consumption
(or lack thereof) - as extrapolated from previous behaviour - is collected from user networks to
facilitate more constructive consumption elsewhere. By the time capital is returned, enough new capital
is supposed to have been created to ensure both the original investors can be paid back as well as
the banking/intermediary layer compensated for. Banking crises emerge when it turns out investments
have failed to compensate for the natural depreciation rate.
Shrinking the pie?
In the unicorn IT process, data input represents the process by which information about future
consumption (or lack thereof) - as extrapolated from previous behaviour - is collected from user
networks to facilitate less constructive consumption at source.
In other words, instead of using information about long-term non-consumption to benefit value-adding
industries which grow the pie for all, tech firms are focused on using information about fleeting
periods of non-consumption to draw down existing capital more efficiently.
The better tech firms are at predicting or shaping behaviours through their information processes,
the less new capital investment is needed, because reduced consumer optionality allows for increased
supplier predictability. To wit, those who can predict their customer's behaviours best or mould
them, become the lowest cost marginal producers - deferring more risky capital investment (by way
of retained earnings) to the moment they can be sure they're the last monopolists left standing.
The pie as a whole stops growing, with only information tech providers - the modern-day rentiers
of the system - benefiting from the structure.
To conclude, some points from Hancock's book which incidentally highlight the parallels between
financial firms and modern-day unicorns:
The amount of profit generated, depends upon the strength of the banking system's monopoly
position.
And..:
The traditional reason given for deposit rate ceilings is that bank competition for deposits
allegedly leads to a high rate of bank failures. According to this view, bank competition for
deposits led individual banks in the 1920′s and early 1930′s to offer higher interest rates in
order to maintain or increase individual share of the market. The banks were forced to rely on
higher yielding riskier assets to offset incurred deposit costs. This placed the banks in a vulnerable
position. Any adverse economic developments, either national or local, would be sufficient to
make these risky assets uncollectible by the bank. Deposit rate ceilings affect consumers,
since they receive less for deposits than would otherwise be the case, but the accompanying increased
monopoly power of financial institutions makes them allegedly more sound.
The techies would argue they're just making the world more efficient.
We can't help wonder if solutions based on substituting new goods for pre-existing goods (or virtual
ones) are somewhat different to solutions which grow the pie for everyone. There seems to us an inherent
risk in creating monopolistic systems which overstretch themselves to the point they
essentially
run on empty.
Izabella Kaminska joined FT Alphaville in October 2008. Before that she worked as a producer at
CNBC, a natural gas reporter at Platts and an associate editor of BP's internal magazine.
How much sake did Noah Smith drink when he wrote this about Japan:
"Sustained higher inflation would represent a net transfer of resources from the old to the
young. That would increase optimism, and hopefully raise the fertility rate, helping with demographic
stabilization."
Optimism leading to more fertility - OK!
RC AKA Darryl, Ron said in reply to pgl...
"...Any of these solutions for raising inflation -- electronic money, "escape velocity,"
Neo-Fisherism -- would represent a dramatic departure from standard monetary policy. The latter
two would also require a deep rethink of everything we know about macroeconomics..."
[Wouldn't a fiscal expansion backed by printing debt-free money create the inflation that they
want? Why doesn't the Japanese government just print money to buy free sake for all of its married
young people and solve both the inflation problem and the fertility rate problem at the same time?
(joke)]
pgl said in reply to RC AKA Darryl, Ron...
Fiscal stimulus is the right solution to secular stagnation.
But whenever we suggest this - JohnH freaks out over the debt/GDP ratio. And yet he also says
he is the only one for fiscal stimulus. Go figure.
likbez said in reply to pgl...
"Fiscal stimulus is the right solution to secular stagnation. "
Much depends on the price of the energy. There is a hypothesis that when EROEI crosses a certain
threshold stagnation inevitably follows.
I think if the current drop of energy prices was engineered by Obama administration, we need
radically rethink the statue of this "change we can believe in" President.
DrDick said in reply to pgl...
"That would increase optimism, and hopefully raise the fertility rate, helping with demographic
stabilization"
This of course completely ignores the historical evidence that greater prosperity and economic
security actually *lowers* the fertility rate. Indeed, the low birthrates in Japan, most of Europe,
and white Americans (all generally below replacement rate) are a direct result of that.
RC AKA Darryl, Ron said in reply to DrDick...
We have actually had both. Off the top of my pointed little head the WWII post-war baby boom
lasted through to the late fifties. That was more than just horny GIs returning home from war.
It was a period of widespread prosperity that lifted all boats.
Now of course subsequently man invented more user friendly birth control than had in the immediate
(WWII) post-war period, but we also urbanized the previously more rural black population and then
we created poor family economic support with single-parent eligibility requirements. Children
added, but dads subtracted from (total) income (including transfer payments) for poor families.
More affluent families took advantage of birth control to increase their per capita wealth by
keeping kiddy capita low.
That said then you are most probably quite correct about Japan. Japan's Gini coefficient is
lower than the US but still higher than most of Europe. It seems like the more inequality that
wealthy people have then the more inequality that wealthy people want. Increased prosperity can
grow families when that prosperity is widespread and shared rather than narrowly distributed under
stiff competition and hoarded.
Pharaoh's Joseph said in reply to Anonymous...
"now that credit spreads are back down to normal why should the Fed NOT raise rates?
"
~~Anonymous~
Is Our Most Important Export, Deflation?
How much framing lumber do we export? What is PM, profit margin on lumber? PM on aircraft?
PM on B Movies? Which of our exports offers us our highest PM? That's it!
Highest PM is on our GTF. Using slight of hand, fed governors put ink onto paper to generate
enough GTF, global Triffin fiat to foreign-exchange for Chinese Checkers, Canadian Checker Cabs,
Korean Sports Cars, and Germanic VW Factories for Chattanooga.
ooga ooga!
Do you see how works? Brilliant foreigners exchange their counterfeit trash for our authentic
cash. And we let them get away with it. Why?
We can afford to act lenient to them because of our 99% profit margin on GTF.
We must be careful, however, to print up less supply of GTF, less than demand. Smaller print
job drives the buying-power-denominated-price of $$$$ up thus packing more deflation wallop into
each dollar we print. More deflation you print, more popular our product becomes. When our product
popularity increases then we get to play the game again.
And again! We are no longer saw mill mules, aircraft designers, and porno actresses. We
have become the Bankers of World !
run75441 said in reply to Pharaoh's Joseph...
Profit without Labor
ilsm said in reply to run75441...
The idolatry of US capitalism profit from exploiting labor and collecting rents assured
by the gumint that is paid only by labor.
"... And the moral of this tale, he says, is that he had been phished for a phool - or manipulated into buying something. ..."
"... we live in a constructed world thats filled with deception like this. Fools or not ..."
"... Phishing was initially coined to describe internet fraud, but Profs Shiller and Akerlof use it more broadly to cover a world of deception, and add the term phools to describe its victims. ..."
"... The financial crisis of 2008 was caused in part, says Prof Shiller, by buyers being manipulated into buying financial products that were ultimately destructive to them and to society. ..."
"... Most people will pick little shortcuts, little dishonesties, says Prof Shiller. You are pushed [to dishonesty] by many pressures, one is a sense of responsibility to your investors, another is to your employees. And you think everybody does this. Nobodys making a stink.... of course you do it, and the ones who dont do it are failing and going out of business. Thats a phishing equilibrium. ..."
"... Profs Shiller and Akerlof argue that the free markets persuade us to do things with results that no one could possibly want... ..."
"Once upon a time a Nobel Prize winning economist had a cat called Lightning.
Now, Lightning appeared to like his cat food, a rather pricey gourmet dish which claimed to be
a cut above the rest. But maybe, thought the Nobel Prize winning economist, I have been fooled into
thinking this cat food is a cut above the rest - when it isn't. There is only one way to find out,
said the economist. And that is to eat it myself. And so he did. It was, he said with a giggle, pretty
much like any other cat food.
And the moral of this tale, he says, is that he had been "phished for a phool" - or manipulated
into buying something.
Now the economist in question, Robert Shiller and his fellow Nobel laureate George Akerlof, have
written Phishing for Phools, about how the sellers of cat food and thousands of other products and
services "phish" us into buying things we do not want or need.
"Of course they do it," he says. "If you had a cat food company you wouldn't say 'Dried Dead Fish'
on the label...we live in a constructed world that's filled with deception like this." Fools or not
"Phishing" was initially coined to describe internet fraud, but Profs Shiller and Akerlof use
it more broadly to cover a world of deception, and add the term "phools" to describe its victims.
Being gulled into paying more for cat food is hardly a serious affair. But the two economists
see it as a microcosm of something much bigger in society.
The financial crisis of 2008 was caused in part, says Prof Shiller, by buyers being manipulated
into buying financial products that were ultimately destructive to them and to society.
So the sale of deeply flawed mortgage-backed securities and their accompanying credit-default
swaps flourished on the back of free markets and the reputations of the banks and finance house that
sold them.
... ... ...
Profs Shiller and Akerlof argue that if people were fooling themselves there were plenty of others
happy to help them on their way. ...The two authors are behavioral economists, who inject psychology and sociology into their economics. There's nothing new about that, but this latest foray into the "dismal art" has a distinctly dismal
view of human nature.
"Most people will pick little shortcuts, little dishonesties," says Prof Shiller. "You are pushed [to dishonesty] by many pressures, one is a sense of responsibility to your investors,
another is to your employees. And you think everybody does this. "Nobody's making a stink.... of course you do it, and the ones who don't do it are failing and
going out of business. That's a phishing equilibrium."
... ... ...
Profs Shiller and Akerlof argue that the free markets persuade us to do things with results
that no one could possibly want..."
"... cheaper oil has boosted GDP growth in 2015 by 0.2 pp. Looking ahead, we think that about 0.1 pp of oil growth stimulus is left in the tank, which should lift growth over the next 18 months. ..."
"... Judging by the recent earnings reports from retailers, one has to question the Oil Stimulus theory. ..."
"... Can't wait until Goldman tells us that higher oil prices lead to higher GDP. ..."
"... Total real personal income expenditure is at the pre-97 trend. Markets keep on wanting 97-06 consumption levels. They simply don't get it. ..."
"... This is not worthy of a post. It is just sucking up to Goldman, of all disreputable firms to quote. Ridonculous. Really. ..."
"... Credo: Economic Beliefs in a World in Crisis ..."
A few excerpts from a Goldman Sachs research piece by economist Daan Struyven: Shale, States
and the Shrinking Oil Stimulus
... ... ...
Our state-level analysis suggests that a 50% decline in oil prices is associated with an
eventual rise in aggregate output of 0.4% and 400,000 to 500,000 extra jobs. These estimates
are broadly consistent with our most recent research, but below the impact implied by many
earlier studies. Taking together our new state-level estimates as well as our earlier work and
a few back-of-the-envelope calculations, our best estimate would be that cheaper oil has
boosted GDP growth in 2015 by 0.2 pp. Looking ahead, we think that about 0.1 pp of oil growth
stimulus is left in the tank, which should lift growth over the next 18 months.
"... There may be little doubt that the trickle down stimulus that has been bloating the paper assets of the wealthiest few while no progress is being made by all the rest is going to lead to a break point in the current socio-economic equilibrium. At least, this is what history has proven. ..."
"... the huge increase in corporate debt that has been facilitated by the Feds easy money AND generous tax breaks, loopholes, and offshore tax havens for the biggest and the wealthiest corporations, has been largely deployed not to build for the future, or pay living wages, but rather to pump up the price of their stocks through buybacks that benefit insiders and the wealthiest few. ..."
"To know and to serve God, of course, is why we're here, a clear truth, that, like the nose
on your face, is near at hand and easily discernible but can make you dizzy if you try to focus
on it hard. But a little faith will see you through. What else will do except faith in such a
cynical, corrupt time? When the country goes temporarily to the dogs, cats must learn to be circumspect,
walk on fences, sleep in trees, and have faith that all this woofing is not the last word.
What is the last word, then? Gentleness is everywhere in daily life, a sign that faith rules
through ordinary things: through cooking and small talk, through storytelling, making love, fishing,
tending animals and sweet corn and flowers, through sports, music and books, raising kids - all
the places where the gravy soaks in and grace shines through. Even in a time of elephantine vanity
and greed, one never has to look far to see the campfires of gentle people."
Garrison Keillor
The economic data continued in weakly this morning, with an oversized number of newly unemployed,
and a continuing unemployment number that was higher than expected. Tra la.
There may be little doubt that the 'trickle down' stimulus that has been bloating the paper assets
of the wealthiest few while no progress is being made by all the rest is going to lead to a break
point in the current socio-economic equilibrium. At least, this is what history has proven.
On the right is a chart that shows how the huge increase in corporate debt that has been facilitated
by the Fed's easy money AND generous tax breaks, loopholes, and offshore tax havens for the biggest
and the wealthiest corporations, has been largely deployed not to build for the future, or pay living
wages, but rather to pump up the price of their stocks through buybacks that benefit insiders and
the wealthiest few.
But such abuses of policy and regulation can go quite far. And the further it goes, the more messy
the reversion to the mean may be.
"... In truth, the real jobless rate would be 9.8% if those who have given up looking for work and part-timers who want a full-time job were included. ..."
"... The labor force participation rate is at its lowest level in 38 years. ..."
"... This Federal Reserve chart (November 6) shows that only 62.4% of working-age Americans are employed or looking for work ..."
"... A record 94,610,000 Americans were not in the workforce in September. But the questionable health of the U.S. labor market doesn't stop here. ..."
"... the point is that many of the new jobs in the U.S. have been at the lower end of the income brackets. ..."
In truth, the real jobless rate would be 9.8% if those who have given up looking for work and
part-timers who want a full-time job were included.
The labor force participation rate is at its lowest level in 38 years.
This Federal Reserve chart (November 6) shows that only 62.4% of working-age Americans are
employed or looking for work:
A record 94,610,000 Americans were not in the workforce in September. But the questionable
health of the U.S. labor market doesn't stop here.
Even those who are working are struggling to make headway.
And what about the 2.95 million new jobs that were created in 2014, and the slightly more
than 2 million so far in 2015?
The numbers sound impressive until you dig deeper. This is
from the Atlantic magazine (September 4):
According to new research, between 2009 and 2014, wage loss across all jobs averaged
4 percent. But for those in the bottom quintile, those losses averaged 5.7 percent. ...
The [jobs] where declines in real wages have been the most acute -- are also the jobs
that have hired the highest share of new workers during the recovery.
It's true that average hourly earnings increased by nine cents in October. Even so, the
point is that many of the new jobs in the U.S. have been at the lower end of the income
brackets.
Also consider that in September, the U.S. Consumer Price Index fell 0.2% and that the
Producer Price Index declined by 0.5%.
All told, our stance remains that deflation is knocking at the door.
Currency devaluation's role in the developing global crisis
How the self-reinforcing aspect of deflation is already apparent in commodities
trading
Why the top 1% of earners are in for a rude awakening
How Europe's biggest economies are screeching to a halt
The hair-raising future for U.S. stocks
Just recall how swiftly the 2007-2009 financial crisis unfolded. We anticipate
that the next global financial crisis could be even more sudden and severe.
West Texas Intermediate crude futures was down 2.75 percent at $41.75 per barrel. WTI set an
intraday low of $37.75 on Aug. 24. Brent crude was down nearly 3 percent Thursday at $45.23 per
barrel.
Real gross domestic product (GDP) growth is seen averaging 3.1 percent year-on-year across the
globe in 2015 and 3.6 percent next year by the IMF. This is down from the international body's
July forecasts, which suggested economic expansion of 3.3 percent in 2015 and 3.8 percent in
2016. It is also marginally slower than the growth rates of 3.3 percent and 3.4 percent seen in
2013 and 2014, respectively.
"Growth remains fragile and could be derailed if transitions are not successfully navigated. In
an environment of declining commodity prices, reduced capital flows to emerging markets, and
higher financial market volatility, downside risks to the outlook remain elevated, particularly
for emerging economies," the IMF said.
... ... ...
Overall, growth is seen declining in emerging economies for a fifth year in a row in 2015,
before strengthening next year. Notably, Russia's economy is seen shrinking 3.8 percent this year
and 0.6 percent next, while Brazil's economy is declining by 3.0 percent this year and 1.0
percent in 2016.
"... "The Cantarell oil field - an aging supergiant oil field in Mexico - saw its lowest production in over 30 years with an output of 206,000 barrels per day in October, said PEMEX Exploration and Production (PEP) on Thursday. In its latest weekly report, Pemex said that Cantarell was producing 256,000 bpd at the beginning of 2015, its lowest level since 2004, sparking fears that Mexico's most productive field was running out of oil." ..."
"... Wow, thats an average decline rate of about 18% per year (since 2003). ..."
MEXICO'S CANTARELL OIL FIELD POSTS RECORD LOW OIL PRODUCTION
"The Cantarell oil field - an aging
supergiant oil field in Mexico - saw its lowest production in over 30 years with an output of 206,000
barrels per day in October, said PEMEX Exploration and Production (PEP) on Thursday. In its latest
weekly report, Pemex said that Cantarell was producing 256,000 bpd at the beginning of 2015, its
lowest level since 2004, sparking fears that Mexico's most productive field was running out of oil."
Meanwhile Ku-Maloob-Zaap remains on a production plateau of about 850,000 bpd which is expected
to continue until 2017.
Yeh, so much for the long fat tail theory. Mind you, there are extenuating circumstances (Aren't
there always?). I.E., PEMEX started shifting resources away from Cantarell a year or so back.
"... It's perhaps more so high yield paper issuance ..."
"... We imagined that a mini Apocalypse loomed, derived from shutting down oil production via loan shutoff simply because it was not profitable. How absurd, in retrospect. Profitable. Profitable was a lot more powerful a requirement pre 2009 than post 2009. Now, it's almost laughable. No one is going to allow horrible outcomes just because numbers on a screen are red. ..."
The "big news" this month is that the banks granted over leveraged, loss making shale oil drillers
a stay of execution by continuing to provide credit lines. Consequently, there was no major move
in US oil drilling or production though both are trending down. Elsewhere, the story is one of production
plateaus and stabilisation of rig counts. The modest production rises and falls detailed below are
simply noise on these production baselines.
Against this backdrop of no news, the oil price traded sideways in October. OPEC countries, Russia
and International Oil Companies are all losing billions and look set to continue doing so throughout
2016 as over-supply now looks set to continue until early 2017. The situation is one of stalemate
as opposed to checkmate.
"Banks". It's perhaps more so high yield paper issuance, and we have seen at least one
story indicating a bank (JP Morgan) orchestrated placement of the issuance in order to service debt
JPM had actually loaned. So this would mean banks are selling debt to the public (with their powerful
sales force), and doing so to protect their own loan portfolios. One might also wonder about their
managed accounts (client money entrusted to in-house advisors) and if those accounts were put into
this HY paper.
There was that JPM quote in response to a question about the risks to their loan portfolio. "We
have offloaded that risk to investors."
To a certain extent it all says that I forgot my own mantra: Nothing relevant to money is going
to be allowed to destroy civilization, because it can be created from nothingness.
We imagined that a mini Apocalypse loomed, derived from shutting down oil production via loan
shutoff simply because it was not profitable. How absurd, in retrospect. Profitable. Profitable was
a lot more powerful a requirement pre 2009 than post 2009. Now, it's almost laughable. No one is
going to allow horrible outcomes just because numbers on a screen are red.
"... Oil demand is expected to be 94 million barrels a day this year, rising 1.5 percent from last year, with about 2 million barrels a day of spare capacity, mainly held in Saudi Arabia, the prince said. Growth in Asia's demand may slow "by efforts to efficiency enhancement and oil substitution," he said. ..."
"... "But the petroleum industry should not lose sight of the fact that scale matters," with billions of people moving up into the middle class, the prince said. The size of the world's middle class will expand from 1.8 billion to 3.2 billion in 2020, and to 4.9 billion in 2030, with the bulk of this expansion occurring in Asia, he said. ..."
"... The oil market will rebalance in 2016 or 2017, as demand grows between 1.2 million barrels per day and 1.5 million barrel per days through 2020, Yergin, vice chairman of consultants IHS, said in a speech in Abu Dhabi. Demand will rise by about 17 million barrels a day to almost 110 million barrels a day by 2040, with 70 percent of the growth to come from Asia, the head of the Organization of Petroleum Exporting Countries said at an event in Doha. ..."
"... "The next few quarters are going to continue to be tough as Iranian oil comes back into the market," Yergin said Monday. "We really see 2016 as the year of transition." ..."
"... "We have a vested interest to keep prices as stable as possible, but we cannot do that by reducing production," Mazrouei said. "We expect the market will recover by itself because high-cost production will continue to decline." ..."
"... "We're near the bottom at $40, and there's a potential upside that's much higher." ..."
The scale of the global oil and gas industry's spending cuts are making another surge in energy
prices possible by diminishing future supply, Saudi Vice Minister of Petroleum & Mineral Resources
Prince Abdulaziz bin Salman said.
Investments have been cut by $200 billion this year and will drop another 3 percent to 8 percent
next year, marking the first time since the mid 1980s that industry cut the spending for two consecutive
years, Prince Abdulaziz said in a copy of his speech for delivery to energy ministers in Doha Monday.
Nearly 5 million barrels a day of projects have been deferred or canceled, he said in the remarks.
Just like high oil prices can't last, a prolonged period of low prices is "also unsustainable, as
it will induce large investment cuts and reduce the resilience of the oil industry, undermining the
future security of supply and setting the scene for another sharp price rise," the prince said in
the remarks. "As a responsible and reliable producer with long-term horizon, the kingdom is committed
to continue to invest in its oil and gas sector, despite the drop in the oil price."
Oil demand is expected to be 94 million barrels a day this year, rising 1.5 percent from last year,
with about 2 million barrels a day of spare capacity, mainly held in Saudi Arabia, the prince said.
Growth in Asia's demand may slow "by efforts to efficiency enhancement and oil substitution," he
said.
"But the petroleum industry should not lose sight of the fact that scale matters," with billions
of people moving up into the middle class, the prince said. The size of the world's middle class
will expand from 1.8 billion to 3.2 billion in 2020, and to 4.9 billion in 2030, with the bulk of
this expansion occurring in Asia, he said.
"Rather than being a commodity in decline, as some would like to portray, supply and demand patterns
indicate that the long-term fundamentals of the oil complex remain robust."
-------------------------
OPEC's Badri says oil market to be more balanced in 2016
The oil market is expected to become more balanced in 2016 as demand continues to grow, OPEC Secretary-General
Abdullah al-Badri said on Monday ahead of the producer group's policy meeting next month.
"The expectation is that the market will return to more balance in 2016," he said in a speech at
an Asian ministerial energy roundtable in the Qatari capital Doha.
"We see global oil demand maintaining its recent healthy growth. We see less non-OPEC supply. And
we see an increase in the demand for OPEC crude," Badri said, according to the text of the speech
published on the OPEC website.
Most of the oil supply increases in recent years have come from high-cost production, Badri said,
in a clear reference to supply sources such as U.S. shale oil.
"The market is now taking on board this new reality and gradually resetting itself, as we can see
with falling non-OPEC supply growth and stronger demand," he said.
---------------------------- Yergin Joins OPEC in Seeing Market Balanced as Soon as 2016
Global demand for crude will bring more balance to the oil market as soon as next year, according
to Pulitzer Prize-winning author and energy consultant Daniel Yergin and OPEC Secretary General Abdalla
El-Badri.
The oil market will rebalance in 2016 or 2017, as demand grows between 1.2 million barrels per day
and 1.5 million barrel per days through 2020, Yergin, vice chairman of consultants IHS, said in a
speech in Abu Dhabi. Demand will rise by about 17 million barrels a day to almost 110 million barrels
a day by 2040, with 70 percent of the growth to come from Asia, the head of the Organization of Petroleum
Exporting Countries said at an event in Doha.
"The next few quarters are going to continue to be tough as Iranian oil comes back into the market,"
Yergin said Monday. "We really see 2016 as the year of transition."
Current market volatility was caused by oversupply, mostly from high-cost producers, and oil stocks
are above the five-year average, El-Badri said. Energy industry investment in exploration and production
fell 20 percent, or by about $130 billion from 2014 to 2015, he said.
"The expectation is that the market will return to more balance in 2016," El-Badri said Monday. "We
see global oil demand maintaining its recent healthy growth. We see less non-OPEC supply. And we
see an increase in the demand for OPEC crude."
Oil prices are unsustainable at current levels and will rise gradually as international companies
defer projects and production plans, United Arab Emirates Energy Minister Suhail Al Mazrouei told
reporters .
"We have a vested interest to keep prices as stable as possible, but we cannot do that by reducing
production," Mazrouei said. "We expect the market will recover by itself because high-cost production
will continue to decline."
The U.S. is now the new swing producer of oil, with much room for efficiency gains, Yergin said.
If U.S. law would allow it, the nation could be a major oil exporter by the end of decade, he said.
Canada's oil sands production will add more than 800,000 barrels a day by the decade's end, and Iran
will add 400,000 to 600,000 barrels a day to world markets within a few months of sanctions ending.
"The market will have to deal with a very significant overhang of inventories," Yergin said. "There's
more volatility in this process." --------------------– Speculators Share Andy Hall's Optimism That Oil Prices at Bottom
Andy Hall and Daniel Yergin think oil prices are bottoming out. Hedge funds agree. Money managers' net-long position in West Texas Intermediate crude rose 20 percent in the week ended
Nov. 3, the most in seven months, according to data from the U.S. Commodity Futures Trading Commission.
Bets on rising prices increased to the highest level since June. U.S. onshore oil production fell for the fifth month in a row in August and supplies grew at the
slowest pace since September in the week ended Oct. 30. Inventory data don't indicate a surplus in
the crude market and prices are set to rise, said Hall, one of the world's best-known oil traders.
Global supply and demand will begin to move into balance by late 2016 or 2017, according to Yergin.
"The fundamentals are starting to play out," said David Pursell, a managing director at investment
bank Tudor Pickering Holt & Co. in Houston. "You've got greater recognition that U.S. supply is falling
and maybe falling faster. Inventories are building, but the pace of that build is more manageable."
Onshore production excluding Alaska fell to 7.25 million barrels a day in August, down 334,000 barrels
a day from March, according to Energy Information Administration data. U.S. oil inventories grew
by 2.8 million barrels a day the week ended Oct. 30, the smallest gain since Sept. 18.
U.S. output will retreat by about 10 percent in the 12 months ending April, according to Yergin,
vice chairman at IHS Inc.." Prices may rise to $70 to $80 a barrel by the end of the decade, he said
in an interview.
Hall, the crude trader, said Saudi Arabia is producing close to capacity while Iraq is struggling
to maintain output, while U.S. rig counts will continue to decline.
"We think the degree of negativity is unwarranted," Hall, who runs $2.6 billion hedge fund Astenbeck
Capital Management, said Nov. 4.
"The economy is on the rebound, China is coming out of a bear market, people are saying let's get
long oil," said Carl Larry, head of oil and gas for Frost & Sullivan LP.
"We're near the bottom at
$40, and there's a potential upside that's much higher."
"... I focus on the oil price necessary to be cash flow neutral and maintain production. That price is different for every company and constantly changes, but overall it remains much higher than current oil and natural gas prices. Shale companies have been hiding behind this for quite awhile, but recently management is beginning to talk about maintaining production and cash flow neutrality. Apparently some one important has signaled to them that the cash burn has to stop. I do not think $55 WTI or even $65 WTI will result in a return to 2011-2014 like drilling, which is what will be needed to cause US oil production to reverse its decline. The shale companies cannot return rigs at these price levels without burning more cash, on the whole. ..."
"... At the current price level some companies may stop completing wells and may stop drilling. There are a fair number of drilled uncompleted wells in the Bakken (Enno has two estimates 450 and 900, I am not sure which he favors, let's call it 675). These wells are a sunk cost and are likely to be completed to keep up cash flow levels. Even if all drilling stops (which is unlikely) if 75 wells are completed from the frack log each month, there are 9 months supply of DUCs, if 40 wells per month are drilled the supply would be enough for 19 months of completions at 75 wells completed each month. My scenario assumes well productivity (the estimated ultimate recovery over the first 60 months) of new wells remains at 2013 to 2014 levels. So far the actual data shows no change in new well EUR (it actually increased slightly in 2013 and 2014 from earlier levels and has remained steady in 2015). Perhaps Enno or Freddy W have a 3 month or 6 month cumulative chart for the Bakken Three Forks. I have an old chart but they may have something more recent. Chart below is from data in April or May 2015. ..."
"... I just want to add that yes production has stayed relatively flat over the years. But water content has increased significantly. Fracking has become more costly also with more fracking fluids and so on. They have on the other hand become more efficient in what they are doing, but I think overall that costs have gone up. ..."
"... "The short investment cycle of US tight oil and its ability to respond quickly to price signals are changing the way that the oil market operates. The plunge in prices means US tight oil production is now stumbling: if prices out to 2020 remain under $60/bbl, without a rapid evolution in drilling efficiency and technology learning, tight oil production in the United States will likely see a substantial decline in output. However, with tighter markets leading to higher mid-term prices in the New Policies Scenario ($80/bbl in 2020) US tight oil ultimately resumes its upward march, growing by 1.5 mb/d by 2020 to over 5 mb/d." ..."
"... Plunging oil prices may suggest that the world is awash with cheap oil but, in reality, what the world is really awash with is lots of expensive oil, much of it being produced at a loss. ..."
"... In any event, I bet the extra 1/2 to 1 million barrels (if truly produced) are the most expensive barrels they have. So one wonders how much more income is really earned by the extra barrels. ..."
"... Oil and gas debt held by US banks is over $270 billion, but that would include conventional production. ..."
"... Looking at Iraq and Iran more closely. I think those two are greater threats to KSA market share than US shale at this point in time. As US shale continues to drop, looks like Iran and Iraq are set to grow, with total costs likely lower than even KSA. ..."
"... Oil Industry Needs Half a Trillion Dollars to Endure Price Slump. Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, (2015) about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years. ..."
"... A lot of money borrowed by US upstream, and they are in tremendous trouble if prices stay below $60 WTI though 2016, and do not substantially recover in 2017 ..."
Heinrich. Your point about CAPEX v operating expense is on the money.
I focus on the oil price necessary to be cash flow neutral and maintain production. That
price is different for every company and constantly changes, but overall it remains much higher
than current oil and natural gas prices. Shale companies have been hiding behind this for quite
awhile, but recently management is beginning to talk about maintaining production and cash flow
neutrality. Apparently some one important has signaled to them that the cash burn has to stop.
I do not think $55 WTI or even $65 WTI will result in a return to 2011-2014 like drilling, which
is what will be needed to cause US oil production to reverse its decline. The shale companies
cannot return rigs at these price levels without burning more cash, on the whole.
Thank you for your reply. My point is also that many shale companies have published
low operating expenses over years by moving most of their expenses into the category 'capex'.
By the recent impairments they have moved a big chunk of their capex into the category expenses.
So, basically they are saying to investors: sorry folks you have invested your money, but actually
it is not invested anymore we have spent the money already on producing gas and oil and you will
see a big part of your money never again. This is in my view a very unfair way to pretend to have
low operating costs.
Enno Peters posts charts each month showing the well productivity. It has not
decreased.
At the current price level some companies may stop completing wells and may stop drilling.
There are a fair number of drilled uncompleted wells in the Bakken (Enno has two estimates 450
and 900, I am not sure which he favors, let's call it 675). These wells are a sunk cost and are
likely to be completed to keep up cash flow levels. Even if all drilling stops (which is unlikely)
if 75 wells are completed from the frack log each month, there are 9 months supply of DUCs, if
40 wells per month are drilled the supply would be enough for 19 months of completions at 75 wells
completed each month. My scenario assumes well productivity (the estimated ultimate recovery over
the first 60 months) of new wells remains at 2013 to 2014 levels. So far the actual data shows
no change in new well EUR (it actually increased slightly in 2013 and 2014 from earlier levels
and has remained steady in 2015). Perhaps Enno or Freddy W have a 3 month or 6 month cumulative
chart for the Bakken Three Forks. I have an old chart but they may have something more recent.
Chart below is from data in April or May 2015.
I just want to add that yes production has stayed relatively flat over the years. But
water content has increased significantly. Fracking has become more costly also with more fracking
fluids and so on. They have on the other hand become more efficient in what they are doing, but
I think overall that costs have gone up.
Newer wells produce more in the beginning, but has higher decline rates for at least the first
year. My guess is that the earlier wells will eventually have recovered more oil than the later
ones.
New data will probably come out on Friday. Maybe I have something to show after that.
"The short investment cycle of US tight oil and its ability to respond quickly to price
signals are changing the way that the oil market operates. The plunge in prices means US tight
oil production is now stumbling: if prices out to 2020 remain under $60/bbl, without a rapid evolution
in drilling efficiency and technology learning, tight oil production in the United States will
likely see a substantial decline in output. However, with tighter markets leading to higher mid-term
prices in the New Policies Scenario ($80/bbl in 2020) US tight oil ultimately resumes its upward
march, growing by 1.5 mb/d by 2020 to over 5 mb/d."
"The short investment cycle of tight oil and its ability to respond quickly to price signals
is changing the way that the oil market operates, but the intensity with which the tight oil resource
is developed in the United States eventually pushes up costs. US tight oil production stumbles
in the short term but resumes its upward march as prices recover, helped by continued improvements
in technology and efficiency improvements. But tight oil's rise is ultimately constrained by the
rising costs of production, as operators deplete the "sweet spots" and move to less productive
acreage. US tight oil output reaches a plateau in the early-2020s, just above 5 mb/d, before starting
a gradual decline."
Change in production (2015-2020) of US tight oil for a range of 2020 oil prices
mb/d
In its short term energy outlook, the EIA sharply revised its U.S. C+C production estimates
for 2H15 and forecast for 2016.
Estimate for this year's growth was increased to 580 kb/d from a 540 kb/d in previous month
STEO, due to stronger than expected performance in onshore production. The biggest upwards revisions
were made for August 2015: +187 kb/d, September: +160 kb/d and October: + 108 kb/d. The new production
forecast for 2015 is 9.29 mb/d vs. 9.25 mb/d in October STEO.
Despite these revisions, the EIA still notes that "monthly crude oil production started to
decrease in the second quarter of 2015, led by Lower 48 onshore production. From March 2015 through
October 2015, Lower 48 onshore output has fallen from more than 7.6 million b/d to about 7.1 million
b/d. EIA estimates total crude oil production has declined almost 0.5 million b/d since April,
averaging 9.1 million b/d in October", down 43 kb/d from September.
The EIA expects declines to continue through September 2016, when total production is forecast
to average 8.54 mb/d. This level of production would be almost 1.1 mb/d less than the 2015 peak
reached in April.
"Plunging oil prices may suggest that the world is awash with cheap oil but, in reality,
what the world is really awash with is lots of expensive oil, much of it being produced at a loss.
OPEC, home to the world's lowest-cost oil, is pretty much producing what it always has. The
market glut is from increased output from high-cost producers like the oil sands. Their existential
dilemma in today's market is that it is they, not OPEC, who must cut production to clear the glut.
I wish I knew more about production costs for the four Gulf OPEC members plus Iran and Iraq.
I also wish I knew how much of KSA's increase in oil production, for example, which began in
March, 2015, was oil from storage as opposed to produced.
In any event, I bet the extra 1/2 to 1 million barrels (if truly produced) are the most
expensive barrels they have. So one wonders how much more income is really earned by the extra
barrels.
KSA's production was increasing from March and peaked in June. Since then, it has slightly
declined.
I don't think they will (and can, and intend to) increase it further.
Saudi Arabia's oil production
Source: JODI, OPEC (direct communications)
AlexS. Thanks. Surprisingly, KSA has really not increased oil production that much, especially
in relation to the United States.
Euan's post above indicates there is negligible spare capacity and it is almost all heavy oil
with no refining capacity available for it. Given KSA interest in shale tech, would appear 10.6
may be their conventional peak.
Russia has been able to continue to slowly increase production. Do you think Russia is nearing
conventional peak? Any recent news on Russian LTO efforts?
The IEA estimates Saudi capacity at 12.26 mb/d and sustainable spare capacity at 2.06 mb/d
(in September). However these numbers can be overstated and actual capacity may not exceed 11-11.5
mb/d.
Euan is right that most spare capacity consists of heavy oil with high sulphur content.
3 other Gulf states have very small spare capacity of around 100 kb/d.
Hence production increases in 2016 can be expected only from Iran and Iraq. Libya is a big
unknown, which potentially can add up to 1 mb/d
I think Russia could further increase production in the near term, but not by much. In the
medium to long term it will try to maintain production at current levels, so it's probably not
a peak, but a plateau.
Russian LTO is a long-term story, similarly to the Arctic projects. No significant additions
are expected until next decade.
Among other non-OPEC, non-US sources, some growth may be expected from Canada and Brazil, but
in both cases it will be slower than previously expected due to lower oil prices.
With the declining US output and continued (albeit slower) growth in demand, the market will
begin rebalancing next year.
In 1H15, that will mean lower excess supply vs demand, and from 2H15 demand will likely exceed
supply.
This scenario implies that additional supplies from Iran do not exceed 500-700 kb/d, Libya remains
in doldrums, and there is no dramatic slowdown in global economic growth.
AlexS. Thanks for the post. I agree with you that Iran and Iraq appear to be able to add much
more production than Saudi Arabia, Kuwait, UAE and Qatar combined.
Iraq in particular has many areas to be developed, subject primarily to political instability.
For example, Rumalia oil field production has ramped up significantly and it appears there
is much room to run at a very low price.
"Oil and gas commitments to the exploration and production sector and the services sector totaled
$276.5 billion, or 7.1 percent, of the SNC portfolio. Classified commitments-a credit rated as
substandard, doubtful, or loss-among oil and gas borrowers totaled $34.2 billion, or 15.0 percent,
of total classified commitments, compared with $6.9 billion, or 3.6 percent, in 2014."
I went looking for this because a local bank is seeking to increase is liquidity via a preferred
stock offering. It is trying to raise a multi-million $ amount. The offered terms are a 5% dividend,
5 year term, and share repurchase at redemption date. The bank is 30 + years old.
I am told another local bank is doing a similar offering.
Hmmm…..liquidity issues and off balance sheet financing. Where has that been tried before in
the oil patch?
Quick example, go to finance.google.com and enter stock symbol bac. and that's a period after
the c and look at all the preferred offerings/issues.
Quick lesson for the partially washed. Preferred stock is equity that usually has no voting
rights for corporate governance determination. Speaking practically it's usually priced about
$25/share and pays a higher yield than any common dividend. Preferreds get their dividend first.
If there isn't enough profit to pay preferred divvies and common, common has to get zero.
There are cumulative preferreds and convertible preferreds. Cumulative means if a quarter's
dividend is missed, ya gotta make up that quarter's missed payout before you can pay to common
shares. Convertible means can convert to XXX shares of common. blahblah
Anyway, a bank issuing preferred stock is not eyebrow raising in any environment. That is,
excluding issuance bought by Buffet in 2009. Anything at all done that year was eyebrow raising.
John S. Thanks for the link! That is the release I was referring to earlier.
WTI below $43. Wow. Have to think the substandard or worse oil and gas backed loans are only
going to grow.
Looking at Iraq and Iran more closely. I think those two are greater threats to KSA market
share than US shale at this point in time. As US shale continues to drop, looks like Iran and
Iraq are set to grow, with total costs likely lower than even KSA.
KSA has said repeatedly shale is no threat to them and they are no threat to shale. Shale oil
can't export. It CAN'T compete. And almost all US imports are coming from Canada and Mexico and
Ven and Nigeria. Only about 1 mbpd from KSA.
They're right - besides which shale oil isn't the medium / heavy oil out of KSA. It's not even
the same product to envision as competing.
Watcher, you occasionally make some sense, sorta kinda.
But you know better, or at least you ought to know better, than to say shale oil doesn't matter
because it cannot be exported.
Oil is a fungible commodity traded in a brutally competitive world market.
A million barrels a day of domestic yankee production above and beyond "the usual" is a million
barrels somebody formerly exported to us Yankees looking for a new home in some other importing
country.
Taking a million barrels a day off our Yankee production would have approximately the same
effect on the world market as if Saudi Arabia were to cut back by a million barrels a day.
But your remarks about oil supposedly going into storage recently seem to be very reasonable.
SURELY TO SKY DADDY the tank farms of the world must be getting pretty damned close to overflowing
by now, and every rusty old tanker that will hold a few thousand barrels is probably full as well,
sitting anchored someplace.
"Patrick Rodgers, the chief executive of Euronav, one of the world's biggest listed tanker
companies, said oil glut was so severe traders were asking ships to go slow to help them manage
storage levels."
And btw all you supply and demand worshippers . . . just who is buying oil to store, when storage
has throughput? You aren't buying to store it for future higher price. You buy it to store it
to flow it outward incrementally to consumption, with new oil coming in to refill the tanks. FIFO.
That's how Cushing works. If price rose, the oil getting sold from storage just went in there
last week or 2 weeks ago. It didn't get there in January. There's no big profit.
Oil Industry Needs Half a Trillion Dollars to Endure Price Slump. Debt repayments will
increase for the rest of the decade, with $72 billion maturing this year, (2015) about $85 billion
in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans
are due for repayment over the next five years.
Watcher and Shallow: Your numbers on total debt look a bit low, but I'm only siting the
Financial Times.
dmg555. I was just throwing out things off the top of my head, which is probably not the best
thing to do.
A lot of money borrowed by US upstream, and they are in tremendous trouble if prices stay
below $60 WTI though 2016, and do not substantially recover in 2017.
"... Much steeper oil production declines in the Eagle Ford and Niobrara are apparently due to much
higher and accelerating decline rates of the existing wells compared to the Bakken and Permian basin.
..."
Combined oil production from 7 shale plays is expected to decline by 558 kb/d, from 5507 kb/d
in April to 4949 (these numbers include ~800-900 kb/d of conventional production, mainly from
the Permian basin).
New combined estimates for 7 plays were revised down by about 25-35 kb/d
from March to May, and by 40-50 kb/d from June to December.
Much steeper oil production declines in the Eagle Ford and Niobrara are apparently due to
much higher and accelerating decline rates of the existing wells compared to the Bakken and Permian
basin.
Monthly legacy production declines as % of total production by 4 key LTO plays
Source: EIA DPR
"... Saudi was selling 9 m/bbl/day when oil was at $100+, now they are selling 10.5 mbbl/day at
$43. The math on that is staggering. ..."
"... So why are they overproducing, selling more of their finite resource at a low price instead
of over the longer term at more than double its current price. ..."
"... If the real reason of this stunt is to cause severe pain for Russia, Iran, Venezuala and others,
well the oil doesn't go away. Someone will still own it and someone will still drill and pump when prices
are more favorable. ..."
OPEC's meeting in Vienna is less than a month away, and oil producers – countries and companies
alike – have been raising their concerns at an energy conference in the United Arab Emirates over
the cartel's strategy to keep prices low.
The issue arose on Monday when Mohammed bin Hamad al-Rumhy, the oil minister of Oman – not a member
of OPEC – told the annual Abu Dhabi International Petroleum Exhibition and Conference that oil production
is at "irresponsible" levels, leaving little latitude for variations in production.
"This is [a] man-made crisis in our industry we have created," al-Rhumy said. "And I think all
we're doing is irresponsible."
Al-Rhumy added, "This is a commodity that if you have 1 million barrels a day extra in the market,
you just destroy the market. We are hurting, we are feeling the pain, and we're taking it like a
God-driven crisis. Sorry, I don't buy this, I think we've created it ourselves."
The next day, al-Rhumy's concerns, if not his criticism, were shared by executives of leading
international oil companies: ExxonMobil of the United States, BP of Britain and Total of France.
All said they expect the current glut of oil, and the resultant depression in oil prices, to last
longer than anyone expected – months longer, if not years longer.
"I'm not sure we will exit from low prices before many months," Total CEO Patrick Pouyanne said.
Lamar McKay, the director of exploration and production for BP, said he expects oil prices will
stay low for some time, and Michael Townshend, the company's director for Middle East operations,
said he expects the price of a barrel of oil will rise no higher than about $60 for three more years.
These gloomy forecasts contrasted with the OPEC view. The group's secretary general, Abdullah
al-Badri, told the conference on Tuesday that 2016 is likely to be a year for positive momentum in
oil markets. And on Monday, UAE Oil Minister Suhail al-Mazrouei, said a decision by OPEC to cut production
to shore up oil prices would only play into the hands of its competitors.
As a result, al-Mazrouei said, he doesn't expect OPEC to change its strategy when it meets Dec.
4. "When you are the least expensive oil, you should be the base producer," he said.
At its meeting in November 2014, OPEC adopted Saudi Oil Minister Ali al-Naimi's strategy of keeping
production at 30 million barrels a day, despite the fall in oil prices caused by a rapid increase
in production by non-members, especially the United States, which had ramped up production of shale
oil.
The goal was to wage a price war that would keep oil prices so low that such producers, who rely
on relatively expensive hydraulic fracturing, or fracking, can't afford to drill for oil. The break-even
point for fracking is around $60 per barrel, and oil now averages about $50 per barrel, leading to
a noticeable drop in U.S. drilling.
In the meantime, OPEC nations are exceeding their production limit of 30 million barrels per day
by more than 1.5 million barrels, so it's no wonder oil prices are so low.
Concerns about low oil prices were raised before last year's OPEC meeting, particularly by Venezuela.
Saudi Arabia had already said it opposed production cuts. Venezuela's president, Nicolas Maduro,
said he was hoping to work out ways to bolster oil prices in meeting both with members of OPEC and
producers who weren't part of the 12-member cartel.
That came to naught, however, and the Saudi plan became OPEC policy. Despite current dissatisfaction
from some oil producers, there's no reason to expect the cartel to change course if it believes its
strategy is working.
I have posted this comment on 7 million forums and discussion boards and I have yet to get
a reasonable answer.
If an oil producer, big or small, has X barrels of oil in the ground, a finite number, why
would they (especially OPEC countries who can 'control' the price) overproduce to sell today at
$43 instead of $110+ ??
How does driving down the price get one more 'market share' ? When oil was $100/bbl, all things
being equal, it was $100 across the globe. At $43, its $43 across the globe. Again, all things
being equal, how does that impact market share ?
Sure, at a point in the future, when competitors fold you gain market share. Does this fall
into the "market can stay illogical longer than one can remain solvent" category ?
Completely short sighted vision in my book. WTF was the intention of OPEC in the first place?
Saudi was selling 9 m/bbl/day when oil was at $100+, now they are selling 10.5 mbbl/day
at $43. The math on that is staggering.
Back to the finite X reserves. No doubt Saudi and every oil producer will pump and drill and
do everything they can to get down to the last drop. Then it's over, literally pack up your tent
and call it a day.
So why are they overproducing, selling more of their finite resource at a low price instead
of over the longer term at more than double its current price.
If the real reason of this stunt is to cause severe pain for Russia, Iran, Venezuala and
others, well the oil doesn't go away. Someone will still own it and someone will still drill and
pump when prices are more favorable.
So WTF is really going on here ?
Benjamin123
I sort of answered below.
They dont care. Those countries do not feel any pain. Countries are not even real, only people
or animals feel pain and those oil ministers are rich either way.
Gregor Samsa
Easy answer: cashflow. These companies / countries need any revenue they can get. Turning off
the lights and going home is simply not an answer.
A secondary answer is that many oil plays, such as tarsands and fracking literally cannot be
shut down once started (at least not without incurring extra costs in the millions).
erk
US oil production is still up around 9 mill barrels according to EIA. Once their unsustainable
shale oil output drops a million BBL or two, then OPEC are back to business as usual.
The energy sector's capital expenditure, or capex, on spending for
fixed infrastructure that secures future business activity, has
slumped 8% this year according to Goldman Sachs.
There's usually a lag between energy-sector capital spending and
oil prices, with prices leading. That means even if oil prices defy
most forecasts and rise sharply from current levels, capex will
likely still fall.
"... In The Economic Growth Engine Warr and Ayres have some interesting historical data on how most improvements in, say, fuel efficiency come not from actual technological innovation but a straightforward process of making vehicles lighter, suggesting that there's a hard cap on how far such work can go. ..."
"... The report states, "The plunge in oil prices has set in motion the forces that will lead the market to rebalance, via higher demand and lower growth in supply. This may take some time, as oil consumers are not reacting as quickly to changes in price as they have in the past." Here we see the inability to perceive the unfolding consequences of peak oil playing out in a neoliberal world run for the benefit of the 1%. It's as if "The market" will "rebalance" because it is eternal and, well, since it's eternal it just has to rebalance. ..."
"... A few generations from now our descendants will wonder, "What took them so long to figure out that we'd reached the limits to growth?" The answer, of course, is that growth is the core of the myth holding the American psyche together. If it's false, what's the meaning of "life, the universe, everything?" ..."
Green smoke. "These projected figures are a figment of our imagination. We hope you like
them." (New Yorker cartoon from the 1980s
vteodorescu, November 11, 2015 at 5:31 am
The path to low carbon is nuclear. Anything else is a palliative. Technical fact: wind and
solar have to be backed up with equal capacity of baseload generation, usually gas, to keep
the grid balanced, to compensate the highly variable supply wind and solar produce. They are
largely politically driven and a sop to the misinformed intelligentsia.
Energy scarcity is another tool to keep the huddled masses huddled.
Disclaimer: I am an organic farmer in the northeast of Brazil. I do not work for or have any
financial interest in the nuclear industry.
TheCatSaid, November 11, 2015 at 6:54 am
These crystal-ball gazing exercises leave out the high likelihood like pandemics. Losing a
significant % of population will impact demand but also supply (just imagine what losing key
engineers and scientists could impact on development of better technologies, or on production
facilities).
likbez -> TheCatSaid, November 11, 2015 at 9:34 pm
If I remember correctly in 1956 Hubbert correctly predicted the peak of the USA production
in 1970. From Wikipedia
==== quote ===
Hubbert, in his 1956 paper,[3] presented two scenarios for US crude oil production:
most likely estimate: a logistic curve with a logistic growth rate equal to 6%, an ultimate
resource equal to 150 Giga-barrels (Gb) and a peak in 1965. The size of the ultimate resource
was taken from a synthesis of estimates by well-known oil geologists and the US Geological
Survey, which Hubbert judged to be the most likely case.
upper-bound estimate: a logistic curve with a logistic growth rate equal to 6% and ultimate
resource equal to 200 Giga-barrels and a peak in 1970.
Hubbert's upper-bound estimate, which he regarded as optimistic, accurately predicted that US
oil production would peak in 1970, although the actual peak was 17% higher than Hubbert's
curve.
Production declined, as Hubbert had predicted, and stayed within 10 percent of Hubbert's
predicted value from 1974 through 1994; since then, actual production has been significantly
greater than the Hubbert curve.
Nicholas Cole, November 11, 2015 at 8:51 am
Is the title of this article supposed to be funny?
To echo Paper Mac, I'd like to know more about their assumptions re: energy efficiency
investments and improvements.
In The Economic Growth Engine Warr and Ayres have some interesting historical data on
how most improvements in, say, fuel efficiency come not from actual technological innovation
but a straightforward process of making vehicles lighter, suggesting that there's a hard cap
on how far such work can go.
DanB, November 11, 2015 at 9:35 am
The report states, "The plunge in oil prices has set in motion the forces that will
lead the market to rebalance, via higher demand and lower growth in supply. This may take some
time, as oil consumers are not reacting as quickly to changes in price as they have in the
past." Here we see the inability to perceive the unfolding consequences of peak oil playing
out in a neoliberal world run for the benefit of the 1%. It's as if "The market" will
"rebalance" because it is eternal and, well, since it's eternal it just has to rebalance.
The counter explanation that the price of oil fell because people are going broke while the
cost of extracting oil is climbing cannot be conceived, let alone entertained.
And the peak oil scenario is actually hidden in plain sight in classical economics: if a
resource becomes scarce what happens? Price increases and then encourages more exploration and
recovery of the resource. If that does not work then price incentivizes the introduction of
substitutes. And if that doe not work you get demand destruction, because the market always
clears -- even if people go hungry the market clears.
A few generations from now our descendants will wonder, "What took them so long to figure
out that we'd reached the limits to growth?" The answer, of course, is that growth is the core
of the myth holding the American psyche together. If it's false, what's the meaning of "life,
the universe, everything?"
IDG, November 11, 2015 at 9:50 am
Humans are awfully bad at predicting things, specially under radical uncertainty conditions
(so basically this situation); yet we see this sort of rubbish published on daily basis. Call
me back when we can predict what will happen in a year reliably, until then… 20y-30y
projections are a joke, for all I know humanity could have self-exterminated itself in a
nuclear war by then (one century with nuclear weapons around and no nuclear-conflict having
happened yet looks like defying probability to me!).
But I guess economists need employment too after all, how would such useless profession be
justified if wouldn't swallow rubbish like this.
"... People of privilege will always risk their complete destruction rather than surrender any material part of their advantage. Intellectual myopia, often called stupidity, is no doubt a reason. But the privileged also feel that their privileges, however egregious they may seem to others, are a solemn, basic, God-given right. ..."
"... The Fed wants to raise rates for their own policy purposes, so they can cut them, without going overtly negative, when their latest financial bubble starts to collapse, which it may already be doing. They cannot really raise rates in a Presidential election year past June, so they will push ahead, to serve their own purposes, even as they harm the real economy. ..."
"People of privilege will always risk their complete destruction rather than surrender any material
part of their advantage. Intellectual myopia, often called stupidity, is no doubt a reason.
But
the privileged also feel that their privileges, however egregious they may seem to others, are a
solemn, basic, God-given right."
John Kenneth Galbraith, Age of Uncertainty
"Misdeeds, once exposed, have no refuge but in audacity. And they have accomplices in those who are
fearful in their complicity."
Tacitus, Annals
I was discussing the markets this morning with my friends Dave and Bill Murphy as we generally do.
This is what I just wrote back in response to a question from Bill. I read his columns at
LeMetropoleCafe.com every day. His is
an amazing crossroads for discussion of things that are interesting about precious metals. I have
been a subscriber since 2000. Dave has a new site at
Investment Research Dynamics
that is quite good and different since he has a very different background in the heart of darkness as
a NYC bond trader from mine as a Bell Lab rat and Silicon Valley roustabout.
We just saw a very historically significant decline in the precious metals in terms of days lower
without relief. And we have seen a remarkable rise in the US dollar index against the Euro and the
Swiss franc that cannot possibly be good for the real economy of the US, when every other developed
nation is trying to devalue their currencies to stimulate their exports and inhibit imports.
I
believe that a portion of the gold selling in particular is an effort to knock down the open interest
in gold for December. If there was any serious attempt for holders of those contracts to stand for
delivery, even JPM, which has been obviously building up its stores of gold to act as the 'fixer'
in that market, would not be able to cover the demand.
JPM was consistently taking delivery for their house account in gold, and just transferred 70,000+
ounces over from Nova Scotia's warehouse, from whom they had been taking delivery.
As we know, in the last big delivery month, JPM stepped up with an enormous amount of their gold,
400,000+ ounces, to provide enough real bullion to satisfy the contracts standing for delivery. Even
now their inventories remain somewhat depleted.
The dollar has also been soaring, because the Fed is trying to pretend that the US is recovering
so that they can raise rates. A strong dollar and higher rates are very harmful to what is
almost undoubtedly a fragile economic recovery in the US.
And it is fantasy to think that the US can somehow go it alone, and continue to improve while
the rest of the world is cutting rates because their economies are slowing.
The Fed wants to raise rates for their own policy purposes, so they can cut them, without going
overtly negative, when their latest financial bubble starts to collapse, which it may already be
doing. They cannot really raise rates in a Presidential election year past June, so they will push
ahead, to serve their own purposes, even as they harm the real economy.
There will be another financial crisis as the IMF warned today. There will be a serious dislocation
in several financial markets, including the precious metals and the bonds at some point, that will
rock the current system to its foundations. It is a portion of the credibility trap which inhibits any meaningful remedy and reform.
It is an almost perfect storm of incompetence and felony.
"... Yergin predicts a 10 percent drop in US oil production, April 2015 to April 2016. That's a 960,000 bpd drop and will take us to 8,638,000 bpd in April 2016 if he is correct. ..."
"... U.S. crude output, which surged to the most in more than three decades this year and triggered a price collapse, will retreat by about 10 percent in the 12-months ending April, according to Yergin, vice chairman at IHS Inc. ..."
"... How big a drop do you expect? I think Yergin may be right in this case. The drop in output in the US, along with increased demand at low oil prices will eventually balance the oil market, prices will rise and output will level off and may increase slightly if oil prices get above $75/by the end of 2016. ..."
"... I have no idea when oil prices will get to $75/b, but my WAG is mid 2017 at the latest when World output will be struggling to increase. ..."
Yergin predicts a 10 percent drop in US oil production, April 2015 to April 2016. That's a 960,000
bpd drop and will take us to 8,638,000 bpd in April 2016 if he is correct.
U.S. crude output, which surged to the most in more than three decades this year and triggered
a price collapse, will retreat by about 10 percent in the 12-months ending April, according to Yergin,
vice chairman at IHS Inc.
Guy Minton, 11/04/2015 at 8:59 pm
Actually, Yergin's estimate drop to 8,600,000 is in line with EIA's projection. Both are
too conservative, my guess the drop will eventually surprise most.
Dennis Coyne, 11/05/2015 at 8:30 am
Hi Guy,
How about some numbers?
How big a drop do you expect? I think Yergin may be right in this case. The drop in output
in the US, along with increased demand at low oil prices will eventually balance the oil
market, prices will rise and output will level off and may increase slightly if oil prices get
above $75/by the end of 2016.
I have no idea when oil prices will get to $75/b, but my WAG is mid 2017 at the latest
when World output will be struggling to increase. That assumes no major World recessions
(like 2008/9) between now and 2017, if the pessimists' forecast of an impending crash due to a
stock market and debt bubble are correct, then output could fall much more than forecast by
Yergin due to sustained low oil prices due to lack of demand for oil due to low income growth
(or negative income growth).
"... Most certainly, and here is one explanation for the recent market revulsion with prolific repurchasers (see IBM, KORS, CAT). It comes from Citi which shows that contrary to conventional, and wrong, wisdom, gross corporate leverage has never actually been higher. Throw in rising rates, and blowing out spreads, and suddenly all these companies that enjoyed a free ZIRP lunch by engaging in the dumbest of capital allocation decisions, namely pushing their own stock higher (by issuing debt no less), are about to vomit it all right back. ..."
Managements will remain committed to returning cash S&P 500
firms will return more than $1 trillion to shareholders in 2016 with
buybacks and dividends each growing by 7%. We expect high
cash return strategies to outperform given modest GDP growth, low
rates, and slim equity returns. A similar macro environment in 2015
rewarded stocks with high cash returns to shareholders while firms
investing in capex lagged.
So buy stocks the buy their own stock. Got it. Only.... any time Goldman tells its client to
do something, the opposite usually happens. Could that be the case again?
Most certainly, and here is one explanation for the recent market revulsion with prolific
repurchasers (see IBM, KORS, CAT). It comes from Citi which shows that contrary to conventional,
and wrong, wisdom, gross corporate leverage has never actually been higher. Throw in rising
rates, and blowing out spreads, and suddenly all these companies that enjoyed a free ZIRP lunch
by engaging in the dumbest of capital allocation decisions, namely pushing their own stock higher
(by issuing debt no less), are about to vomit it all right back.
Give up. Reality is not scientific nor even mathematical
Yes, and from all the ugliness will come an even tighter grip on the New American Century.
Get ready for the rate hikes that will follow by understanding, the dollar, not gold and
certainly not the yuan, is going to rule the world.
Opportunity abounds for those who aren't the typical alternative media America hater, and who
also have sense enough to see the next logical step in this march toward the future. Given the
alternative, the world will welcome what they will see as a new golden age of prosperity and
progress.
It won't be that, but only the old will be in on the massive deceit. Civilization merely rides
the mercilous bucking bronco of reality.
Yen Cross
He's joking right? CapEx has been in the shitter since 2008-09.
" Furthermore, according to the latest forecast by Goldman's David Kostin, this surge
in buybacks will continue for the simple reason that with Capex spending set for its first
decline since 2009."
"... monthly low is forecast for June 2016 at 8.77 mb/d. ..."
"... It is interesting that the time lag between capex and production response for conventional
production stands around 18 months. Therefore production in the Golf of Mexico is still rising (up 200,000
bbl/d in the last two months alone). This mitigates somehow the decline of shale production. This explains
e.g. also the resilience of Russian production, which will in my opinion still rise over the next half
year. ..."
"... However, if the oil price stays below $50 per barrel, production will keep falling at roughly
1% per month, which is the average decline of the FED oil and gas production index since April 2015.
..."
"... This scenario implies an at least 1.5 mill bbl/d decline until the end of next year – provided
the oil price stays at the current level. My personal view is that US production will be down by more
than 3 mill bbl/d by end of next year as there are strong signs of depletion of sweet spots, which accelerate
the underlying decline. ..."
"... The projected decline in U.S. production comes primarily from shale plays, and to a much less
degree from Alaska and other conventional fields, while production in the GoM is expected to increase.
..."
"... If, as you say, U.S. production drops by 3 mb/d by year-end 2016, that would mean a decline
in LTO production by almost 2/3. That is impossible even if shale operators completely stop drilling
new wells. According to the estimates I've seen, with no new wells, LTO production in the Bakken and
the Eagle Ford would decline by between 30 and 40% within a 12-months period. ..."
"... 3mill bbl/d is a lot and it is the top end of my estimate, yet also conventional production
will decline by end of next year. It is just my gut feeling and I guess it has to do something with
depletion of sweet spots. ..."
AlexS. The title of the article does not exactly match the content. Good, short read.
The article states US will average 9.2 million bopd this year, 8.8 next year. This ignores
that US climbed to 9.6 and will end below 12/14. The 2016 number assumes a rebound in the second
half of the year. I am not sure about that.
If OPEC can keep a lid on oil prices through the end of 2016, I wonder what US production will
average in 2017?
The EIA estimates annual average U.S. C+C production at 9.25 mb/d this year (+540
kb/d y-o-y) and 8.86 mb/d in 2016 (-390 kb/d y-o-y).
Monthly peak of 9.60 mb/d was in April 2015, monthly low is forecast for June 2016 at 8.77
mb/d.
Thus, projected decline in monthly average between 4/15 and 6/16 is 830 kb/d.
Projected decline for Lower 48 onshore between 3/15 and 6/16 is 910 kb/d.
The EIA expects U.S. production to rebound in 2H16, from 8.77mb/d in June to 9.02 mb/d
in December.
The EIA assumes WTI to average $55.3 in 2H16 vs. $51.7 in 1H16 and $45.9 in 2H15.
So they think that $55 is sufficient to trigger an increase in drilling/completion activity.
Again I think there is a time lag of six months between lower capex and
and actual production response. As shale companies have kept capex until recently quite high at
the price of huge losses (http://wolfstreet.com/2015/11/05/giant-sucking-sound-of-capital-destruction-in-us-oil-gas-impairments/),
they have finally responded with much lower capex in 3q15. This implies that the production decline
will start in earnest during the first quarter 2016.
It is interesting that the time lag between capex and production response for conventional
production stands around 18 months. Therefore production in the Golf of Mexico is still rising
(up 200,000 bbl/d in the last two months alone). This mitigates somehow the decline of shale production.
This explains e.g. also the resilience of Russian production, which will in my opinion still rise
over the next half year.
Future production of oil will strongly depend on the oil price. If the oil price rises to over
$80 per barrel in December (through a possible OPEC cut), US production will still be down until
mid next year and then rise again. This is the scenario the above forecast implies.
However, if the oil price stays below $50 per barrel, production will keep falling at roughly
1% per month, which is the average decline of the FED oil and gas production index since April
2015.
This scenario implies an at least 1.5 mill bbl/d decline until the end of next year – provided
the oil price stays at the current level. My personal view is that US production will be down
by more than 3 mill bbl/d by end of next year as there are strong signs of depletion of sweet
spots, which accelerate the underlying decline.
According to the EIA, U.S. LTO production at the peak earlier this year was about 4.6 mb/d
(it is now 200-300 kb/d lower). The projected decline in U.S. production comes primarily from
shale plays, and to a much less degree from Alaska and other conventional fields, while production
in the GoM is expected to increase.
If, as you say, U.S. production drops by 3 mb/d by year-end 2016, that would mean a decline
in LTO production by almost 2/3. That is impossible even if shale operators completely stop drilling
new wells. According to the estimates I've seen, with no new wells, LTO production in the Bakken
and the Eagle Ford would decline by between 30 and 40% within a 12-months period.
3mill bbl/d is a lot and it is the top end of my estimate, yet also conventional
production will decline by end of next year. It is just my gut feeling and I guess it has to do
something with depletion of sweet spots.
"... in another recent report , Exxon Mobil essentially ruled out the possibility that governments
would adopt climate policies stringent enough to force it to leave its reserves in the ground, saying
that rising population and global energy demand would prevent that. "Meeting these needs will require
all economic energy sources, especially oil and natural gas," it said. ..."
"... You legally aren't allowed to knowingly and purposely hide or distort data you are aware of
which may materially affect your shareholders. ..."
"... The issue is based on oil companies selectively releasing data and research in exclusive support
of their conclusions, while suppressing or distorting material that didnt fit the narrative. ..."
"... if I want to know about climate change, I dont seek reliable information from oil and gas companies,
supermarket tabloids, or members of Congress. ..."
"... These are the United States of America, where corporations have (and use) the power to lie
constantly to their detractors and their customers alike. For me to expect anything else would suggest
a lack of basic skepticism on my part where the products and activities of the corporate world are concerned.
..."
The people said the inquiry would include a period of at least a decade during which Exxon Mobil
funded outside groups that sought to undermine climate science, even as its in-house scientists were
outlining the potential consequences - and uncertainties - to company executives.
... ... ...
"This could open up years of litigation and settlements in the same way that tobacco litigation
did, also spearheaded by attorneys general," said Brandon L. Garrett, a professor at the University
of Virginia School of Law. "In some ways, the theory is similar - that the public was misled about
something dangerous to health. Whether the same smoking guns will emerge, we don't know yet."
In the 1950s and '60s, tobacco companies financed internal research showing tobacco to be harmful
and addictive, but mounted a public campaign that said otherwise and helped fund scientific research
later shown to be dubious. In 2006, the companies were found guilty of "a massive 50-year scheme
to defraud the public."
... ... ...
in another recent
report, Exxon Mobil essentially ruled out the possibility that governments would adopt climate
policies stringent enough to force it to leave its reserves in the ground, saying that rising population
and global energy demand would prevent that. "Meeting these needs will require all economic energy
sources, especially oil and natural gas," it said.
Jeff, Atlanta
This sounds like a fishing expedition on reports published 40 years ago that Exxon wasn't even
obligated to do. On top of this, the allegations aren't even that Exxon lied or misled in the
reports but financial impact of alleged lies (i.e. similar to misstating earnings). Also, aren't
scientific climate reports the entire purpose of the IPCC, not private companies like Exxon? Sounds
like a grandstanding opportunity for the NY AG.
Michael, is a trusted commenter North Carolina
I would like to think that Schneiderman has undertaken this investigation purely out of concern
for our planet, and not primarily as a way to heighten his personal profile, and he may well have.
That said, it is unrealistic to think that it will drive Exxon Mobil or any other major energy
company out of business. But, given that the political climate in DC is such that there is zero
chance for leadership on implementing a tax on carbon, which to me represents the single most
powerful way to address climate change, this may be the next best thing. Hefty fines, if large
enough, will inevitably find their way to the pump, and to the utility bill, and may finally alter
our behavior, our collective behavior. Whether it might come in time to save the planet is the
question.
Andy W, Chicago, Il
You legally aren't allowed to knowingly and purposely hide or distort data you are aware
of which may materially affect your shareholders. The problem isn't that Exxon executives
put forward biased opinions about the existence or extent of environmental impacts. The issue
is based on oil companies selectively releasing data and research in exclusive support of their
conclusions, while suppressing or distorting material that didn't fit the narrative.
Their legal and ethical obligation was to release all of the data and let the public and regulators
judge if their conclusions were correct. In any sworn testimony provided through the years, executives
were also obligated not to suppress or distort any requested information in their possession.
That is the legal basis for any legal inquiry, your basic tobacco industry style cover-up.
David Nicholas, Centennial, Colorado
I am an Exxon Mobil shareholder. I am also a scientist who holds degrees from reputable universities,
and if I want to know about climate change, I don't seek reliable information from oil and
gas companies, supermarket tabloids, or members of Congress. These are often sources of misinformation
where, as a moderately well educated and pragmatic adult, I expect to be provided with utter nonsense.
These are the United States of America, where corporations have (and use) the power to lie
constantly to their detractors and their customers alike. For me to expect anything else would
suggest a lack of basic skepticism on my part where the products and activities of the corporate
world are concerned.
Companies like Exxon Mobil exist to make money in any way they can, for themselves and for
stockholders like me. Do I condemn their unethical practices? Certainly, but I'm not foolish enough
to think I can change them. I cash my dividend checks along with all the other stockholders --
and I vote for representation in Washington, D.C. that knows enough about the science of global
climate change to do something meaningful about our role in it. So far, most of the elected officials
in Washington, D.C. have been a dismal disappointment; they're the best politicians money can
buy.
"... If an oil company spends six million dollars to complete an oil well that produces 300,000 barrels of oil over a twenty year period and the average price of oil is $45, an income of $13,500,000 is what you will have in twenty years. ..."
"... Net $7.5 million realized in twenty years, $375,000 average annual income for the life of the well. Subtract 18% for royalties, 10% to pay for extraction taxes, costs to operate, hauling it to market. All-in-all 1/3 needs to subtracted on average. In our case this is $125,000 ..."
"... That means a whopping annual profit of $250,000 for the producer each from a six million dollar investment , or a return on the original investment of 4.2%. Not to mention the taxes to be paid at filing time or an accident that can happen during the lifetime of the well. ..."
When you want to have some gross income from the production and sale of any commodity, it
is desirable to earn more then two dollars for every dollar of expense. A general rule
of thumb for the life of the well the total costs can't be more then 1/2 of total earnings.
Otherwise you are losing money.
If
an oil company spends six million dollars to complete an oil well that produces
300,000 barrels
of oil over a twenty year period and the average price of oil is $45, an income of
$13,500,000
is what you will have in twenty years.
Net $7.5 million realized in twenty years, $375,000 average annual income
for the life of the well. Subtract 18% for royalties, 10% to pay for extraction
taxes, costs to operate, hauling it to market. All-in-all 1/3 needs to subtracted on average.
In our case this is $125,000
That means a whopping annual profit of $250,000 for the producer each from a six million dollar
investment, or a return on the original investment of 4.2%. Not to mention the taxes
to be paid at filing time or an accident that can happen during the lifetime of the well.
You might as well invest your six million in a CD, and earn 2% return, sit at home to watch
TV and drink coffee. The oil in the ground is making money just sitting there like you are. If
you are going to be a fool, might as well be one while watching TV, not drilling for oil all day
long and be making pennies. You'll be doing the world a favor. You'll be dancing, not drinking
booze all day long and crying over all of the losses.
I know the numbers are not in any way near what they really will be, but you have the idea.
Its not that humans can't adapt to the changes, its all of the rest of the flora and fauna and
biosphere in general all of which humans rely 100% on to exist which is dying off at exponential
rates that will kill us.
You've got it wrong. We HAVE to kill off flora and fauna to make room for more humans. Getting
rid of buffalo was a master stroke but now there's the other stuff to exterminate. Think about
how many people we can fit into Africa by getting rid of that useless wildlife. And, all the bio-fuel
we can generate with land wasted by jungle in the Amazon. The key is HUMAN CARRYING CAPACITY.
That's what really matters guy.
Who needs these large animals on our planet anyway? We are the dominant predator species, including
prey on one another; these animals simply have failed to evolve and adapt with a neo-cortex, superior
technology, will to power, and the imperative to grow numbers and resource consumption per capita
perpetually.
Human apes are superior, and the 7 billion of us and counting is unambiguous proof of our superiority.
Exactly, we're like rats: better at what we do than anyone else. And like rats we deserve to inherit
the earth. But I do wonder what happens when all that's left is us and rats? Maybe they eat us.
"... I've seen my children's generation living a lifestyle kings and queens couldn't have dreamt
of (in the not too distant past): their own furnished homes upon marriage, multiple new-ish cars, international
travel, etc. This was a blip in history, one that was financed by – debt. ..."
"... The question here is: why would oil patch debt cause a systemic crisis? The 2007 real estate
crisis was a crisis because it threatened to bankrupt very, very large banks. The Great Depression was
caused by bank failures, and the failure of Lehman Brothers scared everyone with the possibility of
a re-run of 1929. So, is there a threat that the oil patch will bring down Chase, or Bank of America??
I don't see any evidence of that – that's what needs to be looked at. ..."
"... I suspect any mainstream economist, including Krugman, would think Gail is crazy to suggest
that excess debt is causing the current commodity deflation. The straightforward explanation, AFAIK,
is that commodity deflation is a long-term (secular) phenomenon, that was temporarily interrupted by
a construction bubble in China. ..."
"... The thing is as the total debt levels grows and it becomes apparent that the debtor is not
capable of repaying the debt, trust is lost in the debtor (and its currency) and it gets harder to run
a deficit, which means austerity measures are introduced. ..."
"... "Would an economy with 25% unemployment be good for them?" Dennis Coyne ..."
"... "There is nothing crappy or fake about the current economy," ~ ChiefEngineer ..."
"... "1. thrifty management; frugality in the expenditure or consumption of money, materials, etc."
~ dictionary.com ..."
"... "Do you need a job Caelan ?" ~ ChiefEngineer ..."
"This is the same as borrowing even more from the future to maintain today's over consumptive
life styles and leaving their children and grand children with the bill." And, that says it all,
thanks Rune.
Imagine your children were just graduating from college. Would an economy with 25%
unemployment be good for them? That's what we get when we are too concerned over high public debt
as the Hoover administration clearly was. You should read Keynes (it is a short book), The General Theory of Employment, Interest, and Money
I've seen my children's generation living a lifestyle kings and queens couldn't have dreamt
of (in the not too distant past): their own furnished homes upon marriage, multiple new-ish cars,
international travel, etc. This was a blip in history, one that was financed by – debt.
My daughter just graduated from University. You avoided the question, if your daughter
had just graduated do you think a World with a 25% unemployment rate would be better, or one with
a 6% unemployment rate?
Low government debt and balanced budgets (Herbert Hoover thinking) gets you low employment.
Keynesian policies done properly get you higher employment.
Debt is important, of that there is no doubt.
When the economy is doing poorly it is usually because of too little debt rather than too much
debt.
Greece is a notable exception and there are other cases where countries have taken on too much
debt, in Greece's case the lack of control over its own monetary policy is a big problem. If they
had the ability to increase their money supply to get some moderate inflation (5% or so), they
could have eased their debt burden and gradually got there spending and taxation to sustainable
levels. The Euro was not a good idea for this reason, that is why the United Kingdom did not join
in the monetary union, a smart economic and political move.
Dennis, there are two types of debt, public and private. If you read Gail's article, you will
see that it deals exclusively with private debt and not public debt. Keynes theories deals primarily
with public debt, efforts by the government to prime the economy with public money.
I don't
think Krugman would disagree that strongly with Gail. I read some of the reviews of his book,
End This Depression Now! It appears to me that they are talking about two entirely different
subjects.
But back to Keynes, do you really believe that the economic theories of John Maynard Keynes,
written in 1936 have more than a remote connection to today's financing in the oil patch.
The US government public debt today is totally different from the public debt during the Hoover
administration. It is more than just silly to compare the US economy today with that of the Hoover
administration. But even doing so would would have only marginal connection to the oil patch.
The question here is: why would oil patch debt cause a systemic crisis? The 2007 real
estate crisis was a crisis because it threatened to bankrupt very, very large banks. The Great
Depression was caused by bank failures, and the failure of Lehman Brothers scared everyone with
the possibility of a re-run of 1929. So, is there a threat that the oil patch will bring down
Chase, or Bank of America?? I don't see any evidence of that – that's what needs to be looked
at.
-------–
I suspect any mainstream economist, including Krugman, would think Gail is crazy to suggest
that excess debt is causing the current commodity deflation. The straightforward explanation,
AFAIK, is that commodity deflation is a long-term (secular) phenomenon, that was temporarily interrupted
by a construction bubble in China.
BIS (Bank for International Settlements) apparently gives some attention to the oil and gas sector
total debt.
"First, the oil–debt nexus illustrates the evolving risks in the financial system. Rapidly
rising leverage creates risk exposures in the non-financial corporate sector that may be transferred
across the global financial system. Similarly, rising leverage puts a greater premium on the
liquidity of the markets for the assets that back debt. Both developments underscore the need
to better understand the functioning, behaviour and interaction of markets and intermediaries.
Second, the build-up of debt in the oil sector provides an example of how high debt levels
can induce new linkages between individual markets and the wider economy. Such interaction
needs to be taken into account in assessments of the economic implications of falling oil prices." https://www.bis.org/publ/qtrpdf/r_qt1503f.pdf
Doug was talking about public debt, I used to read Gail's stuff at the Oil Drum, on
economics she is not very good in my opinion.
One thing she may be missing is that when oil companies go bankrupt, they may sell off their
assets to bigger companies with deeper pockets. When oil prices recover, these financially stronger
companies will be able to get financing to drill profitable wells.
I won't comment further, there will be much less of a lag in new drilling once oil prices get
above $75/b than Gail believes.
There is something called a balanced budget (I am aware that there are pockets on this planet
that this principles do not apply).
To run a deficit means spending more than what is received
as income. This may work temporarily if that puts the economy back on an organic growth trajectory.
The US has since 1945 accumulated a total debt of around $12Trillion from (total) fiscal deficits
(OMB) and has not run a surplus since 2001 and OMBs estimates now is for deficits through 2020.
So solving the debt problem created by one generation by arguing that youth unemployment needs
to be kept in check by adding more debt for them to service later is [insert appropriate description
here].
The thing is as the total debt levels grows and it becomes apparent that the debtor is
not capable of repaying the debt, trust is lost in the debtor (and its currency) and it gets harder
to run a deficit, which means austerity measures are introduced.
"The thing is as the total debt levels grows and it becomes apparent that the debtor is not
capable of repaying the debt, trust is lost in the debtor (and its currency) and it gets harder
to run a deficit, which means austerity measures are introduced."
If this is true, why do so many right wing conservatives have their panties in a wad about
the United States ? The US is the strongest economy in the world and the dollar is at record strength.
Why won't Republicans return to the tax policies of the year 2000 if debt is that important to
them? The year of a record surplus.
History shows Conservatives only care about debt when a Progressive is in the White House.
I never heard a word about debt from the Republicans during the Bushy and Raygun years. Remember,
Dick Cheney said deficits don't matter.
Yes when unemployment is low, a balanced budget makes perfect sense to me.
I am not in favor of unending deficits (though I probably don't sound like it). It would be
better for the government to pay down debt when the economy is doing well (lets say 5.5% unemployment
rate or lower).
When the unemployment rate is high (I was talking about unemployment in general rather than
youth unemployment rates), government deficits make perfect sense, even if too much private debt
initially caused the recession. Sometimes solving a problem caused by too much private debt, requires
increasing public debt to get the economy growing. The economic growth should decrease the deficit
as increased income will increase tax revenue and reduce government spending on unemployment benefits
and government aid to low income citizens.
"There is nothing crappy or fake about the current economy," ~ ChiefEngineer
The economy
is uneconomical, so, yes, it's crappy.
…Well, ok, its much worse than crappy. Happy?
Economy: "1. thrifty management; frugality in the expenditure or consumption of money, materials, etc."
~ dictionary.com
"Do you need a job Caelan ?" ~ ChiefEngineer
You mean like one that manufactures a need for a relatively useless, overpriced and/or otherwise
crappy junk sweatshopped product that breaks more often and sooner than ever before and cannot
be fixed or fixed easily or cheaply by the owner?
That crappy economy produced that crappy computer which keeps posting your crappy comments. All
because of the crappy education you got from the fake school from a crappy fake government.
Ya all this fake/virtual communication in place of the real, all the while those with an education
(in what?) run around and help to perpetuate the above, the aforementioned and this kind of uneconomy
that pushes the planet ever closer to the precipice.
Back to the ol' drawing board, ChiefEngineer.
My daughter just graduated from University.
You avoided the question, if your daughter had just graduated do you think a World with a 25%
unemployment rate would be better, or one with a 6% unemployment rate?
I think you are living
far far in the past. I have a son who is still at a University, My brother's daughter also just
graduated. so I think I can relate to your concerns. However I think what is happening now, is
going to change how society views employment at a fundamental level. The idea of a career might
not even apply at all anymore for the current crop of graduates.
"We are in the middle of an economic transition, from the old industrial economy to the
new collaborative economy" – Peers Inc.
New sharing practices, facilitated by information technology and pervasive networking, are
disrupting the status quo in business, education and society. As co-founder of Zipcar, Robin Chase
has been a pioneer and leading thinker in this movement since its emergence. Now, with Peers Inc,
Robin aims to "combine the best of people power with the best of corporate power" to help realise
the wider benefits when decentralisation, localisation and specialisation meet scale and resources.
On top of examples and success stories from this 'new collaborative economy', what could
this mean for the economy as a whole? Are we in the midst of a transition from capitalism to something
new and different? Are the rules of our current economic model being rewritten? If so, what are
the new rules of the game and how do we play by them?
The transition may be good for many, my point is that many University graduates are
having a tough time finding work that utilizes what they have learned at University.
This is potentially much more of a problem for young people than excess government debt. In
addition, the idle labor and capital is wasteful, there is work to be done to transition away
from fossil fuel we should get to it. The ensuing economic growth will reduce government deficits
so that the debt incurred to jump start the economy will be reduced if the government surplus
that results is not given away in lower tax rates (as Republican presidents since 1980 have tended
to do.)
And a bear market for the broad equity market is underway (especially value and small-cap stocks,
which typically is followed by the large-cap stocks "catching down" thereafter):
Without subprime auto loans, vehicle sales would be 13M vs. 17-18.
Subprime debt and ACA-induced spending (subsidies to insurers) for "health" care is what is
preventing the US economy from decelerating from around stall speed to recession since late 2014.
But "health" care spending has become a net drag on the rest of the economy.
The recession-like contraction in the acceleration of money velocity to private GDP implies
that the market is tightening financial conditions (credit/debt-money acceleration) before the
Fed can begin raising rates and tightening reserves.
Therefore, rather than raising rates, the Fed (and ECB, BOJ, BOE, and PBoC) is more likely
to resume QEternity to fund increasing deficits/GDP to prevent nominal GDP from contracting from
the post-2007 trend rate per capita of below 2% (slowest since the Great Depression, 1890s, and
1830s-40s).
Moreover, don't be surprised if the Fed is compelled to resort to negative interest rate policy
(NIRP) because of debt and price deflation hereafter, including for the service sector ("health"
care, "education", law, personal services, etc.).
Normally I would think twice before commenting/correcting you, but this time I
noticed you used "Credit" and "Debt" as equivalent terms, therefore I will try:
although many economists and finance people erroneously use those terms as equivalent – they are
NOT!
Simply/shortly said: credit is a "worthiness" notion -economically not useful in practical terms.
In order for it to be "useful" economically (i.e generate economic activity/GDP), it has to become
debt.
Signatory parties with COLLATERAL who are pledging/willing to circulate it (i.e. spend it) are
necessary for credit to become debt.
Although this " concept" is altered by Glass_Stegal repeal and interest paying central bank reserves
(i.e. FED) which erased the line between commercial and investment banking (today they are one
and the same), it still holds generally true throughout economy.
Be well,
Petro
P.S.: an essential mistake most economic/finance luminaries make is: "money is backed by debt".
Today money is debt – debt is money!
If one does not clear that concept up, one is certain to stay in the fog when it comes to money/debt/credit…
"... Chesapeake CHK published its 3q15 results. Loss $5.4 bn on revenue of $880 mill. ..."
"... Total oil and gas industry loss of $25 bn during last quarter indicates deeply uneconomic production. ..."
"... If oil prices do not take off, CLR will have no choice and make the impairment. The longer oil prices stay low, the more dramatic the situation. What strikes me is that OXY left the Bakken at a huge loss. Fidelity Oil Gas closed…. There must be something going on here. There is probably more to asset impairments other than price (depletion of sweet spots, monster decline of monster wells?) I think we will see more when the next Bakken production numbers are out. ..."
"... 63 Billion USD went poof in the Enron Collapse. ..."
"... Impairments are a non-cash item. My preliminary analysis of companies' 3Q results suggests that operating cashflows remained close to 2Q levels, while capex was sharply reduced. As a result, cash burn was also considerably lower than in previous two quarters, and some companies were cash positive. ..."
"... Banks traditionally lend money only on PDP reserves, or if PUD is included, there is a large discount applied, per Office of the Comptroller of the Currency regulations. Also, it should be noted SEC reserve valuations and bank reserve valuations are not necessarily the same. SEC uses the average of the price of WTI and Henry Hub on the first day of each month, with no escalation in the event of contango, nor deceleration in the event of futures backwardization. ..."
Total oil and gas industry loss of $25 bn during last quarter indicates deeply uneconomic production.
As no economic system could carry on to produce at such losses, companies have already responded.
Chesapeake has cut rig count to 18 from 69. Gross wells completed are down to 84 (from 309) and gross
wells spud are down to 81 from 296. Activity is reduced threefold!!! As there is a time lag of six
to nine months from lower capex to actual production, I expect a significant fall of natgas production
for the first quarter 2016. As CHK is one of the leading producers in the US, this will also impact
total US production.
Reminds me of some old cars I have had, keep pouring money into them and get poor performance all
the way to the next time they suck your wallet dry. Answer, dump the old one, get a newer more efficient
car.
So if oil is not working out for us, dump it. Get our energy elsewhere. Time to stop throwing money
at it, it's in a death spiral.
AlexS, Thank you for the link. As prices – especially natgas – are now even lower than in 3q15, this becomes
even bigger this quarter. I get the feeling that this is very big and I am wondering what the consequences
will be.
If oil prices do not take off, CLR will have no choice and make the impairment. The
longer oil prices stay low, the more dramatic the situation. What strikes me is that OXY left the
Bakken at a huge loss. Fidelity Oil&Gas closed…. There must be something going on here. There is
probably more to asset impairments other than price (depletion of sweet spots, monster decline of
monster wells?) I think we will see more when the next Bakken production numbers are out.
It doesn't matter if prices will take off now, the impairment still has to be made. Only December
may make a very small difference:
"The United States Securities and Exchange Commission (SEC) calculates
the economics of proved reserves using the unweighted, trailing 12-month average of the closing prices
from the first day of each month. Year-end 2014 impairment tests were evaluated using a $94.99/barrel
of oil prices and a $4.31 per MCF gas price, with 2014's low year-end prices buoyed by strong prices
from the first 10 months of the year."
I saw wolf richters article this mornings as well. Those are some ugly numbers mainly because of
the write downs. I think I already know the answer, but without the write downs are any of these
guys even cash neutral much less making money?
Wasn't it Harold Hamm that said by spring production will fall off a cliff?
"What strikes me is that OXY left the Bakken at a huge loss"
Occidental was planning to sell its Bakken assets long before the drop in oil prices.
But the actual price was far from what they were initially expecting. Occidental Reportedly Sells Bakken Assets To Lime Rock
As recently as last fall, Wall Street had expected Oxy's Bakken assets to sell for more than $3
billion. The sharp drop in the deal's value represents the most-significant pullback in valuation
yet in the second-largest U.S. oil producing state. =================================
Occidental Petroleum cuts spending, scales back in the Bakken
Occidental Petroleum Corp. will scale back operations in the Williston Basin and is reducing its
2015 capital cost budget by 33 percent in response to low oil prices. "Our capital program will focus on our core assets in the Permian Basin and parts of the Middle East,"
said Stephen Chazen, president and CEO. "We have minimized our development activities in the Williston
Basin, domestic gas properties, Bahrain, and the Joslyn oil sands project, as these have subpar returns
in this current product price environment." ======================================== Oxy Says Permian Operations Still Solidly Profitable
… while Hess regards the Bakken as a crown jewel in its portfolio, it is far less important to
Oxy, which lacks the core acreage positions and sheer scale that Hess enjoys there. In fact, Oxy is cutting spending in the Bakken to "virtually nil" this year, matching similar cuts
across its gas-weighted Midcontinent holdings, Chazen said. =========================================== Oxy sale of Bakken assets would make strategic sense -analysts
Any sale of Occidental Petroleum Corp's roughly 330,000 acres in North Dakota's oil-rich Bakken
shale formation would make strategic sense for the company, which is likely eager to strike a deal,
two analysts said on Tuesday. Oxy is looking to sell its Bakken holdings, which are largely undeveloped, for as much as $3 billion,
according to a report from Bloomberg News. Even with the recent dip in crude oil prices, the divestment "makes sense to us, strategically,"
Raymond James analysts Pavel Molchanov and Kevin Smith said in a note to clients on Tuesday. "This is substantially undeveloped acreage, and Occidental has long cited it as a likely monetization
candidate, so it's been puzzling why the company kept it this long," the analysts said. Oxy is spending about $510 million this year on its North Dakota holdings, and any buyer would have
to invest significant capital to boost production. Currently, Oxy is the 18th-largest oil producer
in North Dakota with about 17,000 barrels per day as of July, trailing peers of the same size and
even much-smaller rivals. Oxy said last October that it would pursue "strategic alternatives" for some of its North American
assets, including those in North Dakota. In a statement to Reuters on Tuesday, the company reiterated
that position. ===============================================
Occidental said to seek buyer for $3 billion Bakken oil business
HOUSTON (Bloomberg) - Occidental Petroleum is seeking to sell oil assets in North Dakota for as
much as $3 billion, people with knowledge of the matter said. Occidental is working with investment bank Tudor Pickering Holt & Co. to sell about 335,000 net drilling
acres in the Williston Basin, said the people, who asked not to be identified because they were discussing
private information. The holdings include a part of North Dakota's Bakken formation, an area that
has been less successful for Occidental because of higher costs, though it's one of the fastest-growing
oil-producing regions in the U.S. Melissa Schoeb, an Occidental spokeswoman, said the Houston-based company reported plans last year
to "pursue strategic alternatives" for some assets, including in the Williston Basin. Occidental, CEO, Stephen I. Chazen has embraced a restructuring plan that includes selling part of
Occidental's Middle East business and spinning off the company's California operations. Chazen told
investors in July that he might accelerate plans to sell assets in what the company calls its "midcontinent"
operations in the Piceance and Williston basins. ==============================================
… Occidental Petroleum has decided to slim down as well. Oxy's plan, announced last Friday, will be dramatic. Its California assets will be rolled into a
separate publicly traded company … . Analyst Tim Rezvan with Sterne Agee expects Oxy to sell down
its Middle Eastern and Bakken assets as well as its oil trading division in order to focus on Texas. ============================================= Occidental Petroleum starts breakup plan in Middle East, North Africa
Bloomberg, 10/18/2013
The company said today it will pursue "strategic alternatives" for Mid-continent assets, including
some in the oil-bearing Bakken shale of North Dakota as well as in the Hugoton gas field in Kansas
and the Piceance gas fields in the Rocky Mountains.
I think this one was more impressive. These are "energy companies".
Evaluate Energy has
analysed the preliminary Q3 earnings statements of 48 U.S. companies and compared it with their earnings
in previous periods. The 48 companies had a combined total net loss of US$25.5 billion, which is
a staggering 70% and 58% larger than these companies' significant combined net losses of US$14.9
billion and US$16.6 billion in Q1 and Q2 2015 respectively.
In fact, the sharp increase in combined net losses was largely due to the increase in asset impairments.
"Impairments are clearly the main reason for this continued downward trend".
Impairments are a non-cash item. My preliminary analysis of companies' 3Q results suggests that operating
cashflows remained close to 2Q levels, while capex was sharply reduced. As a result, cash burn was
also considerably lower than in previous two quarters, and some companies were cash positive.
However
lower capex will likely results in lower 1h16 production volumes.
Do you have any statistics on gas/ oil ratio trend? Seems to me oil production is declining faster
than gas and NGLs production for the oil weighted companies.
I think Enno has posted that associated gas is not falling to the extent oil is, and this masks
oil decline in the company headline reports. Have to look at each report/10Q.
An example of this is SD, who saw Mid-Continent BOE production fall 10%, but oil fell 18%.
Asset impairments relate to revisions of reserves and resources. However, the main question
is now did the revisions relate to oil and gas prices only or is there also a revision of the quantity
of reserves due to faster than expected decline? Is there any way to find this out?
I think impairments mainly reflect the reduction in the value of the reserves (due to
lower prices), rather than volumes.
There was no mention of faster decline rates
I think it should be noted in the SEC reserve reports there are the following categories:
PDP –
Proved Developed Producing PDNP – Proved Developed Non-Producing PUD- Proved Undeveloped
Although admittedly simplistic, and I stand to be corrected, PDP are active wells, PDNP are inactive
wells and PUD are where there are no wells, but the locations have been "proved" by offsetting wells,
and there are plans to drill and complete the location within 5 years.
All categories will be hit by WTI and Henry Hub prices being half of 2014, but also there should
be a hit due to a number of PUD locations being no longer economically viable.
Banks traditionally lend money only on PDP reserves, or if PUD is included, there is a large discount
applied, per Office of the Comptroller of the Currency regulations. Also, it should be noted SEC
reserve valuations and bank reserve valuations are not necessarily the same. SEC uses the average
of the price of WTI and Henry Hub on the first day of each month, with no escalation in the event
of contango, nor deceleration in the event of futures backwardization.
Banks, on the other hand, use a price deck, which should closely mirror the WTI and Henry Hub
strips, subject to maybe a little of the banks' own forecasts on future prices.
As I have noted many times, total debt levels for all US companies operating in the Bakken, except
for XOM, EOG and Abraxas will be greater than 65% of SEC PDP PV10 at 2015 year end, if my calculations
are close. Prior to the shale boom, would have meant no further monies advanced using reserves as
collateral, assuming bank price decks are close to the current strips.
Yes, this will include, companywide, the likes of COP, MRO, HES, QEP, CLR and WLL.
Another exception would be Statoil (not US), I did not include them, as I could not get a handle
on their debt/PDP PV10. I did also not analyze Canadian firms operating in the Bakken. However, most
Canadian shale firms have large amounts of long term debt, similar to US shale firms.
"... Of the 48 companies, 38 recognized impairment charges totaling $32.8 billion in Q3 alone, a 79% jump from Q2, when impairments hit $18.4 billion. Since Q4 2014, these 48 companies recognized impairments of $84.6 billion; 39% of that in Q3. ..."
"... In Q4 2014, many investors thought the oil bust was a blip, that this was just a correction of sorts in oil prices and that they'd rebound in early 2015. But in 2015, oil and natural gas both have plunged to new cycle lows. And yet, over and over again, sharp sucker rallies gave rise to hopes that it would all be over pronto, that the price would settle safely above $80 a barrel, or at least above $65 a barrel, where some of the oil companies could survive. ..."
"... he game has boiled down to who can slash operating costs and capital expenditures fast enough without losing too much production, who has enough cash to burn through while this lasts, and who can still get new money at survivable rates. And that game is accompanied, as in Q3, by the giant sucking sound of capital destruction. ..."
"... Banks, when reporting earnings, are saying a few choice things about their oil gas loans ..."
"... Its a legitimate industry with high costs. It came online before its time. Fast forward 10 years and conventional depletion+Chinese/Indian demand will let it flourish again. ..."
"... If it was a scheme, it was a rather elaborate one, involving tens of billions of dollars and tens of thousands of workers. Also, they maintained the facade for years before winding it down. ..."
"... Dunno, it's certainly a cluster-f*ck, but I think the dumb bastards actually believed the recoverable reserves numbers in the beginning. ..."
"... Thank The Saudis for crashing the price of energy, perhaps with a little assistance on the broader political front to crush Russia? How is that going? ..."
"... You simply cannot build up an industry on leveraged debt when there is no future of sustainable demand. ..."
"... Yep, the Fed created this monster, but the oil patch is the obvious problem. things are just as bad or worse in all the other economic sectors. Of course when all the defaults start, it will be a complete surprise to all the financial Frankensteins who created the monster... ..."
Chesapeake Energy is a good example. The second largest natural gas producer in the US, after
Exxon, reported its debacle yesterday.
Revenues plunged 49% from the quarter a year ago, when the oil bust had already set in. The company
has been slashing costs and capital expenditures. In June, it eliminated its dividend. And yesterday,
it recognized $5.4 billion in impairment charges, bringing impairments for the nine months to a staggering
$15.4 billion.
Impairment charges are a sudden accounting recognition of accumulated capital destruction. These
impairments pushed its losses from operations to $5.4 billion in Q3 and to $16 billion for the nine
months.
Chesapeake currently gets 72% of its production from natural gas, 17% from oil, and 11% from natural
gas liquids. The oil bust has been going on since the summer of 2014. The US natural gas bust has
been going on since 2009! Two natural gas producers have already gone bankrupt this year: Quicksilver
Resources and Samson Resources.
Its annual free cash flow has been negative since 1994, even during good times, with only two
tiny exceptions (Bloomberg
chart). After
living off borrowed money, it's now trying to hang on by selling assets and lowering its mountain
of debt. But it still owes $16 billion, much of which QE-besotted, ZIRP-blinded, yield-hungry investors
had handed it over the years, based on hype and false hopes.
Its shares last traded at $7.50, down 75% from peak hype in June 2014. Its 4.875% notes due 2022
and its 5.75% notes due 2023, according to
S&P Capital IQ LCD yesterday, traded
for 66 cents on the dollar.
In terms of capital destruction, Chesapeake is in good company, and not even the leader. A new
report by
Evaluate Energy, which covers Oil & Gas companies around the globe, examined the financial statements
of the 48 US oil & gas companies that have reported earnings for the third quarter so far. The amounts
and the speed of deterioration are just stunning.
Turns out, what started in Q4 last year is getting worse relentlessly. And now it's getting serious:
plunging revenues, squeezed operating margins, whopping impairment charges, and horrendous losses
are combining into a very toxic mix.
Evaluate Energy determined that net income of those 48 companies was a gigantic loss for the three
quarters combined of $57 billion.
On a quarterly basis, the losses in Q3 jumped 58% from Q2 and 70% from Q1 to $25.5 billion. This
fiasco, which has been spiraling down at a breath-taking pace, looks like this:
The biggest factor in these losses, as in Chesapeake's case, was the impairments. For this study,
Evaluate Energy only counted impairments of property and equipment, not of financial assets such
as "goodwill." Including charge-offs of goodwill, it would have been even worse (an example is Whiting
Petroleum, which we'll get to in a moment).
Of the 48 companies, 38 recognized impairment charges totaling $32.8 billion in Q3 alone, a 79%
jump from Q2, when impairments hit $18.4 billion. Since Q4 2014, these 48 companies recognized impairments
of $84.6 billion; 39% of that in Q3.
Devon Energy was king of the hill, with $5.9 billion in impairments in Q3, after having recognized
impairments every quarter this year, for a total of about $15.5 billion.
Our natural-gas hero Chesapeake is in second place, if only barely, with $5.4 billion in impairments
this quarter, and $15.5 billion for the nine months.
Of note, Occidental Petroleum, with impairments of $3.3 billion in Q3, Murphy Oil, Whiting Petroleum,
and Carrizo Oil & Gas all recognized over 90% of their respective impairments this year in this misbegotten
third quarter. They were in no hurry to grant their investors a peek at reality.
However, Whiting's impairments of $1.7 billion do not include an additional $870 million in write-offs
of goodwill in connection with its once highly ballyhooed acquisition of Kodiak Oil & Gas, which
closed in December last year.
In Q4 2014, many investors thought the oil bust was a blip, that this was just a correction of
sorts in oil prices and that they'd rebound in early 2015. But in 2015, oil and natural gas both
have plunged to new cycle lows. And yet, over and over again, sharp sucker rallies gave rise to hopes
that it would all be over pronto, that the price would settle safely above $80 a barrel, or at least
above $65 a barrel, where some of the oil companies could survive.
But now that oil in storage is practically coming out of our ears, globally, the meme
has become "lower for longer," and the game has boiled down to who can slash operating costs and
capital expenditures fast enough without losing too much production, who has enough cash to burn
through while this lasts, and who can still get new money at survivable rates. And that game is accompanied,
as in Q3, by the giant sucking sound of capital destruction.
Banks, when reporting earnings, are saying a few choice things about their oil & gas loans, which
boil down to this: it's bloody out there, but we made our money and rolled off the risks to others
in a trade that has become blood-soaked.
Which plays right into the hands of those manipulating Brzezinski's "Grand Chessboard," as
energy choke-points grow ever more valuable to those who ultimately control them.
Frumundacheeze
You were a complete inbecile if you ever believed the US fracking industry was anything more than
a false pretense for pump and dump schemes. If you did, you didn't do your homework, or you bought
into the hype.
Benjamin123
Its a legitimate industry with high costs. It came online before its time. Fast forward 10
years and conventional depletion+Chinese/Indian demand will let it flourish again.
The conventional oil industry was also in trouble in the early 90s when oil slipped under
$7. Oh, that was also a pump and dump.
Casey Jones
I was in North Dakota recently and was shocked, appalled and utterly devastated by the
environmental damage up there, not to mention all the cheap ass construction of lousy housing
and fact food outlets. The place is wrecked. Fracking is a cruel joke.
divingengineer
I guess that makes me a complete imbecile. The industry seems a little complex to reduce to
a pump and dump.
If it was a scheme, it was a rather elaborate one, involving tens of billions of dollars and
tens of thousands of workers. Also, they maintained the facade for years before winding it
down.
Dunno, it's certainly a cluster-f*ck, but I think the dumb bastards actually believed the
recoverable reserves numbers in the beginning.
philipat
Thank The Saudis for crashing the price of energy, perhaps with a little assistance on the
broader political front to crush Russia? How is that going?
NotApplicable
I still say that this narrative is more of an after the fact blame-game, as prices would've
crashed regardless of what the Saud's are doing. You simply cannot build up an industry on
leveraged debt when there is no future of sustainable demand. Mises laid all of this out
nearly a century ago.
new game
thank the fed with zirp and qe stimulas. without it and market discipline none of this
would be happening. fascism, what is the future now. the fed is the enemy from within that is
destroying freedom...
KnuckleDragger-X
Yep, the Fed created this monster, but the oil patch is the obvious problem. things are
just as bad or worse in all the other economic sectors. Of course when all the defaults start,
it will be a complete surprise to all the financial Frankensteins who created the monster...
"... Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies that powered the shale revolution. These loans were backed by oil and gas reserves. ..."
"... fresh money is already lining up again. They're trying to profit from the blood in the street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce. Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the timing right and come out ahead. ..."
"... Next year is going to be brutal, explained the CEO of oil-field services giant Schlumberger. But then, there are dreams of "a potential spike in oil prices." Read… The Dismal Thing Schlumberger Just Said about US Oil ..."
Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies
that powered the shale revolution. These loans were backed by oil and gas reserves.
... ... ...
Magnetar Capital, with $14 billion under management, sports an energy fund that is down 12%
this year through September on "billions of dollars" it had invested in struggling oil-and-gas
companies. But optimism reigns. It recovered a little in October and plans to plow more money
into energy.
... ... ...
Brigade Capital Management, which sunk $16 billion into junk-rated energy companies, is
"having its worst stretch since 2008." It fell over 7% this summer and is in the hole for the
year. But it remained gung-ho about energy investments.
... ... ...
But fresh money is already lining up again. They're trying to profit from the blood in the
street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce.
Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the
timing right and come out ahead.
Next year is going to be brutal, explained the CEO of oil-field services giant
Schlumberger. But then, there are dreams of "a potential spike in oil prices." Read… The Dismal
Thing Schlumberger Just Said about US Oil
Important point is that the answer to virtually any economic policy question was "education" is
the neoliberal ploy. This is simply not true in the current environment. It is important what specialty
to choose at the university. And taking into account shifting job market it is difficult to choose right
(decimation of IT is one great story in this respect). Stories of university graduates working as bartenders
are abundant. Especially graduates from such fields as psychology, public relations, English literature,
etc.
Notable quotes:
"... The labor market is no less pivotal to Marxist analyses of capitalism. The treatment of labor
as a commodity, to be bought and sold on a market, is what allows capitalists to acquire more value
from workers than they actually pay for, which explains the accrual of profits. Without labor, there
could be no value. Without labor markets, there could be no capitalism. ..."
"... Marx liked to depict capital as a vampire that sucked the blood from living labor. But the
fantasy of fully automated capitalism contains a different monstrosity altogether: the zombie that no
longer needs us at all. ..."
"... This question lurks in Thomas Piketty's Capital, which highlights how the inheritance of capital
is a far more effective route to riches than the exertion of effort in the workplace. Piketty's account
forces us to pay attention to the family as a source of income - work is an increasingly unlikely path
to acquiring wealth. ..."
"... Theories of financialization, such as those of the economist Costas Lapavitsas or the sociologist
Greta Krippner, point in a similar direction, showing how firms have deliberately sought to shift away
from productive activities and toward balance-sheet manipulation and financial innovations as sources
of profit. ..."
"... The neoliberal ploy that each individual be treated as a chunk of capital was present in the
discourse of the 1990s knowledge economy, and the answer to virtually any economic policy question was
education. This no longer feels adequate ..."
"... An economy in which capital has replaced labor may witness the rise of a few thousand well-paid
YouTube stars, but it would also feature a promulgation of unpaid internships, adults living off their
parents, and unpaid workfare contracts. ..."
"... Ford advocates a basic income guarantee, an idea that is accumulating support right now. If
the labor market will not provide the income that people need, some other institution will be required
to take its place. He makes the case well, dismissing the simplistic policy narrative that people need
to be cajoled and incentivized to work or else the economy will grind to a halt. On the contrary, neoliberal
economies seem to be teeming with people wanting to do fulfilling and creative things but struggling
to get paid for them. ..."
"... Piketty's proposal for a global wealth tax, they require not only greater political coordination
than seems available right now, but also a wholesale inversion of policy orthodoxy. Neoclassical economics,
which provides the basis for so much policy, starts from the assumption that resources and time are
scarce. ..."
Since the Victorian era, the labor market has been the arena in which the virtues and injuries
of capitalism can been seen. Classical economic liberals look at the labor market and see a platform
for social mobility, one in which individual effort is matched by monetary reward. The neoliberals
of the 20th century took this optimism further still, adding the notion of human capital - that people
could augment themselves through education or self-branding so as to increase their own value in
the market.
The labor market is no less pivotal to Marxist analyses of capitalism. The treatment of labor
as a commodity, to be bought and sold on a market, is what allows capitalists to acquire more value
from workers than they actually pay for, which explains the accrual of profits. Without labor, there
could be no value. Without labor markets, there could be no capitalism.
Marx liked to depict capital as a vampire that sucked the blood from living labor. But the
fantasy of fully automated capitalism contains a different monstrosity altogether: the zombie that
no longer needs us at all. As the economist Joan Robinson has written, if there is one thing
worse than being exploited by capital, it is not being exploited by capital. The vision that Kaplan
and Ford put before us is of a world in which machines don't even bother to extract value from us
any longer - they're too busy trading with one another. What might capitalism look like if labor
markets lose their political centrality? Would this even be capitalism?
This question lurks in Thomas Piketty's Capital, which highlights how the inheritance of capital
is a far more effective route to riches than the exertion of effort in the workplace. Piketty's account
forces us to pay attention to the family as a source of income - work is an increasingly unlikely
path to acquiring wealth.
Theories of financialization, such as those of the economist Costas Lapavitsas or the sociologist
Greta Krippner, point in a similar direction, showing how firms have deliberately sought to shift
away from productive activities and toward balance-sheet manipulation and financial innovations as
sources of profit. The vaudevillian horror show of machines broken free from human control is
mirrored in the anxieties of contemporary political economy. The specter of autonomous machines is
also the specter of autonomous capital, no longer anchored in society via the wage relation.
The neoliberal ploy that each individual be treated as a chunk of capital was present in the
discourse of the 1990s "knowledge economy," and the answer to virtually any economic policy question
was "education." This no longer feels adequate. As Kaplan and Ford point out, the market value
of most qualifications is diminishing all the time. Given the possible scale of automation, Ford
argues, the idea that education can achieve prosperity for all is like "believing that, in the wake
of the mechanization of agriculture, the majority of displaced farmworkers would be able to find
jobs driving tractors."
An economy in which capital has replaced labor may witness the rise of a few thousand well-paid
YouTube stars, but it would also feature a promulgation of unpaid internships, adults living off
their parents, and unpaid workfare contracts. As Ford points out, even where humans are cheaper
than robots to employ, there are various reasons that automation may nevertheless be preferable.
Robots bring less baggage than people. The prospects for inequality under these conditions are terrifying.
... ... ...
Ford advocates a basic income guarantee, an idea that is accumulating support right now. If
the labor market will not provide the income that people need, some other institution will be required
to take its place. He makes the case well, dismissing the simplistic policy narrative that people
need to be cajoled and incentivized to work or else the economy will grind to a halt. On the contrary,
neoliberal economies seem to be teeming with people wanting to do fulfilling and creative things
but struggling to get paid for them.
The chance of such policy ideas being adopted is slim at best. As with Piketty's proposal
for a global wealth tax, they require not only greater political coordination than seems available
right now, but also a wholesale inversion of policy orthodoxy. Neoclassical economics, which provides
the basis for so much policy, starts from the assumption that resources and time are scarce.
Hence the curiosity that as our national productive capacity swells from year to year, political
discourse seems ever more fixated on constraints and cuts.
... ... ...
...there is an unavoidable sense in which the robots can't understand what they're doing. Their
inability to complain, which is precisely what makes them attractive to the likes of Uber and Amazon,
is also what renders them somewhat stupid after all. They are locked into what Max Weber termed instrumental
rationality. Endlessly performing, relentlessly producing, they are incapable of ever saying "enough's
enough."
In this they hold up a daunting mirror for us to look in. They represent an impossible benchmark
of success and efficiency, one that recedes so far into the distance ahead that the only sane response
is to abandon the idea of humans as capital altogether.
... ... ...
William Davies is a senior lecturer in politics at Goldsmiths, University of London. He is the
author of The Happiness Industry (Verso, 2015).
"... the wilful DENIAL inherent in U.S. Govt. analysis of the American Labour (Labor) market. Everything is awesome. Repeat till it becomes fact. ..."
"... To me, this is the central problem: the corruption and demise of American democracy, leading to paralysis of fair, efficient, effective government. Instead, government serves as the enactor or enabler of rules, regulations, statutes and laws that protect the kleptocratic crony capitalists. ..."
"... That the US cannot deliver an unemployment rate devoid of trickery and opacity is an indictment of their government, not their labour market, especially when they ride the holier-than-thou-art horse of greater transparency for the private sector, and we are the worlds police in their foreign policy. ..."
"... That, of course, almost every US academic would question, and call you nuts if not worse for standing up to their chicanery. Intelligent, honest people, on the other hand, would say that in 2014, the unambiguous US unemployment figure was 12 per cent. Your whole piece is not about splitting hairs, or even splitting limbs, but more to the point-breaking families. ..."
"... The reasons: death from drug overdoses, suicide, other addictions and diseases resulting therefrom, i.e. kidney and liver failure. Perhaps this is a sign that something is indeed very wrong with the whole U.S. Neoliberal capitalist system which regards citizens as mere cogs in its money machine. ..."
"... American newspapers are quite droll by comparison because frank discussions of on-the-ground realities in this country are strictly taboo. Much more important is the burning question of which bathroom should be used by trans students, or - as in the New York Times - what are the best recipes for your next dinner party. ..."
"... Wolf has a point. Im in the U.S., in my prime at 52, and have stopped looking for for work after losing a job for no fault of my own. My undergraduate and graduate education was at elite universities in technical disciplines, and I have much experience. Im also very physically fit and energetic. But after more than a year of hearing that I was well-qualified but too senior, I stopped looking. ..."
"... ordinary people who rely on jobs to supply lifes necessities - food, clothing and shelter - get short shrift when economic priorities are being set. ..."
"... Maybe it has something to do with the breakdown of the lower middle class family in the US ..."
"... In light of studies showing that low quality jobs are worse for folks mental health than staying unemployed, further deregulation is only an answer to be entertained by sadists. ..."
"... @cg12348 And this is why I read the FT Comments section. Bravo -- One fact was missing: US imports educated foreign naturals more than exported low level jobs. ..."
"... The employment numbers are a political fiction as with all developed economies. Unemployment is much higher than reported. ..."
"... I was amazed to discover that legal immigration averaged one million a year in the 1990s. I suspect estimated illegal immigrant, mostly prime-aged, are included in population estimates but do not appear in household surveys. ..."
"... Trucking companies cannot find drivers and regional airlines cannot find pilots. There are plenty available - but many will not accept the low wages offered. ..."
"... The FT published my letter to the editor in about 2010 that economic concentration in virtually every economic sector of the US had reached unprecedented levels and represented a major threat to the US economy. ..."
"... In virtually every industrial sector of the US economy, the top competitors are way too big and way too dominant. ..."
"... The BLS lists the following factors as primary drivers of the decline in the LFP rate since 2000: (1) the aging of the baby boomer cohort; (2) the decline in the participation rate of those 16-24 years old; (3) the declining LFP rate of women (since its peak in 1999), and (4) the continuous decline of the LFP rate of men (since the 1940s). ..."
"... Perhaps Mr Wolf should follow up this article with one about the abysmal record on male and household median earnings since 1970. Male median earnings are now lower than in 1973, more than 4 decades agao and household median earnings are back to the late 1980s, a generation ago. ..."
"... the evisceration of the middle class by globalisation and other factors that has progressed further and faster in the US than elsewhere, resulting in the proceeds of growth being concentrated on the top 1 per cent, or even the top 10 per cent of the top 1 per cent. His views on why and what should be done would be interesting. ..."
"... @lennerd If you want to look at the data you need to realise the US imported 10-15 million low-skilled, non-English speaking immigrants during the 1990s and 2000s. If you take out the very bottom of the income distribution (note that their income is understated as a good portion of the earnings is off the books ) the results look better. You cannot make an apples to apples comparison between the US labour force of the 1970s and 1980s and the labour force of the 1990s and 2000s. The demographics are very different. ..."
"... You might even say that the US has employed its native population AND created jobs for millions of unskilled, non-English speaking workers who are now earning two or three times what they were in their home countries and sending tens of billions annually back to those countries to increase wealth there. That sounds like a success story (well, I would not classify the current economy or labour market as a success story, but on par it does describe much of the 1990-2006 period). ..."
"... Having experienced both the NHS and the private US system, I promise you the NHS wins hands down in every department, most especially in quality of care. I do know the UK private system, but if you want third world care with chaotic service delivery and outrageous hidden costs, please feel free to come to the US and pay over of thousand per month (for a family) with co-pays for it. ..."
"... I suspect that declining levels of health, especially for those lacking a college degree may account for some of the falling work-force participation rates. Recent studies have uncovered a rise in death rates with this same population that may be part of the same phenomena. Rural populations seem especially venerable with declining access to mental health services and rising levels of substance abuse. Red America may have outsized political power but its leadership has no interest in serving the population it represents. ..."
"... Pensioners with no pensions; they are more reliable at shelf stacking and other such jobs. There are going to be so many people over 60 in the UK working in the future now that final salary schemes have been reducing in number. ..."
The causes are multi factorial, but what is really disturbing is the wilful DENIAL inherent
in U.S. Govt. analysis of the American Labour (Labor) market. 'Everything is awesome'. Repeat
till it becomes fact.
To me, this is the central problem: the corruption and demise of American democracy, leading
to paralysis of fair, efficient, effective government. Instead, government serves as the enactor
or enabler of rules, regulations, statutes and laws that protect the kleptocratic crony capitalists.
The discovery mechanisms in America's so called free markets are terminally broken.
The whole charade is necessary to keep the terrifying monster that circles the deep below the
surface: debt. Irreconcilable, measured in numbers so stupendous it makes Zimbabwe's terminal
hyperinflation seem tame by comparison.
There is only one way the monster of debt can be tamed: war.
E. Scrooge, 3 hours ago
The rise of the underground economy, pay cash and you can get sizable discounts on construction,
repairs, all sorts of things. Many, but not all of those able, are providing products and mainly
services as part of the underground economy. This was and I still believe is the fastest growing
segment of the US economy. Mostly out of necessity, but will likely remain a very significant
part of the overall economy for quite some time, as many of these workers are years away from
Social Security eligible.
ceteris paribus
The irony of this title. The American labour force--the people who do real jobs in the real
economy are working harder than ever, for less and less money to keep themselves afloat. So American
labour does work while the American labour market is apparently on a permanent vacation.
Kevin Alexanderman
"America's labour market is not working"?
You mean "America's government is not working".
That the US cannot deliver an unemployment rate devoid of trickery and opacity is an indictment
of their government, not their labour market, especially when they ride the holier-than-thou-art
horse of "greater transparency" for the private sector, and "we are the world's police" in their
foreign policy.
They can't even competently establish metrics to adequately assess performance of their economy.
Mr. Martin, you say "In all, the proportion of the fall in the unemployment rate because of
lower participation cannot be more than a quarter." Is that your best attempt at one-liner humour?
Are you still mocking Greenspan-speak?
So I gather you are saying that a fall from 10% to 5% is more on the order of a fall from 10%
to 6.25%.
That, of course, almost every US academic would question, and call you "nuts" if not worse
for standing up to their chicanery. Intelligent, honest people, on the other hand, would say that
in 2014, the unambiguous US unemployment figure was 12 per cent. Your whole piece is not about
splitting hairs, or even splitting limbs, but more to the point-breaking families.
Astrophysicist111
Interesting that the author doesn't consider the possible role of the increased death rate
among middle aged U.S. whites - as recently reported, e.g. in the NY Times - to be a factor in
the low labor participation rate. As one economist who studied the data observed: "There are a
half million people dead who shouldn't be". This is over the interval 1993-2014. Prior to 1993
the specific age demographic, 45-64 years old, had enjoyed a 2 percent improvement in life span
- but no more. The reasons: death from drug overdoses, suicide, other addictions and diseases
resulting therefrom, i.e. kidney and liver failure. Perhaps this is a sign that something is indeed
very wrong with the whole U.S. Neoliberal capitalist system which regards citizens as mere cogs
in its money machine.
Legal Tender
For those interested, here is an NPR piece (and follow-up from The Atlantic) on the disability
situation in the US. Note that an adult need not be disabled themselves to collect payments and
leave the workforce. Children are eligible for disability payments in the US for learning disabilities
(including ADD, ADHD, dyslexia, etc) with the income going to the parent (reducing the need for
that parent to enter the workforce).
From 2009 to 2013, there were 2.5 million jobs created in the US while 5.9 million people were
added to the disability system.
One thing I enjoy a great deal is good comedy. And as an American reader I find plenty of fabulous
comedy in these "what's wrong with America" articles. Soaring rates of morbidity among white middle-aged
Americans? How can that be? Pathologically low LFP rates? What could possibly explain that? Billionaire
clowns near the top of opinion polls? Go figure!
After the first course, one then moves on to the comments, littered with the aromatic excretions
of right-wing American idiots. The incredulous replies subsequently posted are often quite hilarious,
because respondents find it so hard to believe the amazing levels of stupidity on display.
American newspapers are quite droll by comparison because frank discussions of on-the-ground
realities in this country are strictly taboo. Much more important is the burning question of which
bathroom should be used by trans students, or - as in the New York Times - what are the best recipes
for your next dinner party.
Thanks FT!
TJG
Thank you Mr. Wolf for pointing out that the declining employment participation rate portends
significant community and social problems. I would like to suggest that two issues play a significant
role in this decline. The low minimum wage combined with the high cost of competent child care
make it financially pointless for a spouse earning less than $10.00/hour to work. Secondly racially
tinged mass incarceration has produced an ever growing number of unemployable people. The moment
an applicant indicates he or she has been incarcerated it is pretty certain the application will
be rejected. Until societal attitudes and public policies change the problems illuminated by Mr.
Wolf's opinion piece will only continue to grow.
JMC22
The title of this piece -- that the US labour market is not working -- is way out of line with
the content. A highly contentious issue regarding the fall in the measured participation rate
is hardly an indication of a non-working labour market, especially given the huge increase in
employment in recent years. One issue not discussed -- the fact of a very considerable increase
in the employment in the grey markets. Self-employed persons, partly growing out of internet activities,
are not properly measured. Nor are those who simply work outside the formal economy, including
many illegal immigrants.
ciwp1
@JMC22 Good points. Worth bearing in mind also, wrt self-employed, there are large numbers
'officially' self-employed who are not doing much; similar irregular work patterns afflict temps,
part-time works, zero hours...
Mark Feldman
Mr. Wolfe, the problem is a lack of education. And I don't mean a lack of degrees.
I'm not an economist (I'm a former math professor.), but it certainly seems to me that if an
economy needs educated (Again, don't confuse that with "degreed".), workers, and they aren't readily
available, then there will be more unemployment.
What I mean by "degreed but uneducated" should be obvious, but I do want to make one point
with an example.
If you learn how to do calculus - just how to do it period - that will not make it easier to
learn how to use a spreadsheet; but, if you really learn calculus, you will find it much easier
to use a spreadsheet. That is because you will have trained your mind to think quantitatively.
It's that simple.
In the 60's students who took calculus learned it. Now, they mainly just get certified in it.
(If you doubt me, just compare today's AP Calculus with the one from 1970.)
This same phenomena is true across all disciplines. It is because the American higher educational
system, as a whole, is corrupt. (In a recent issue,The Economist has done an excellent job reporting
and analyzing the system. Thank you.)
But here is what is even worse.
The effect of this corruption has seeped down to America's K-12 system. To see how, just ask
yourself where high school teachers go to learn, and within what system do "professors" at regional
state schools get their "credentials", and why it might be in the interest of more "elite" schools
to credential them.
For anyone who wants to know more, I have a blog inside-higher-ed that has convincing examples
and documentation.
Veiled One
Wolf has a point. I'm in the U.S., in my prime at 52, and have stopped looking for for
work after losing a job for no fault of my own. My undergraduate and graduate education was at
elite universities in technical disciplines, and I have much experience. I'm also very physically
fit and energetic. But after more than a year of hearing that I was "well-qualified but too senior,"
I stopped looking.
Now, I'm a rentier with 100% free time, and read the FT every morning. I suppose I should be
happy to enjoy the guerdons of a career when very young.
Kevin Alexanderman
@Veiled One ,
Sounds like you are a victim of age-racism. The leftist journalist crowd know the money is
with the older people. Just as they slander the banks, (who have the money), and as the German
national socialists slandered the Jews (who had the money), today's socialists slander older people.
The leftists are preparing some kind of way to swindle more experienced people out of their
money, just haven't figured out how yet.
Gail Johnson
This is a political problem. Ordinary Americans are no longer represented by the national government.
In other major industrialized democracies, the equivalent of US congressional districts include
about 100,000 people. For example, in the UK there are 650 members of the House of Commons representing
about 64 million people. In a district with 100,000 people it is possible to contest an election
without a $1 million war chest.
In the US congressional districts average over 700,000 people. There are 435 representatives
for over 310 million people. Congress has an approval rating on the low teens, and yet in the
last election 95% of incumbents got reelected. Why? Their demonstrated willingness to vote the
way big money tells them to in return for the funds needed to stay in office.
Thus, ordinary people who rely on jobs to supply life's necessities - food, clothing and
shelter - get short shrift when economic priorities are being set.
The US is focused on Austerity. Cultural, Economic and Political Austerity. The right wing
drive to kill everything for everyone ( save for the elite that are rapidly accumulating it all)
has destroyed the infrastructure and the fabric of the country. The US is the laggard in the 'leading
developed countries' of the world and is certainly vectored in the wrong direction.
Michael Moran
I wonder how much of this can be explained by furtive self-employment. The ridiculous tax system
provides every reason for a smart person to try and avoid formal employment through LLCs or other
dodges. The LLC structure and their tax status is unique to the US, after all. It could be part
of the explanation.
RDRAVID
@Michael Moran
If someone is self-employed they would be counted as actively participating in the Labour market.
Rather than self-employment, I think the issue is a growth in informal activity in the US. Its
becoming more common there for people to do undeclared work, whether of the handyman, domestic
helper or running a mobile food shack.
The bottom 20% in the US are effectively living a third world style life.
Isaias
I always said that if US unemployment was measured by Spain unemployment standards ( the strictest
in the EU ), it would probably be around 12 % if not more.
What free market?
While Martin Wolf explains a deeply worrying trend, particularly for those who have given up
the struggle to find work, there is another bar to job creation.
Small businesses find the bureaucratic hassle of taking on staff a nightmare: the intrusion
of form filling, record keeping, the tax authorities, local authorities etc, all of which have
their own, separate agendas, is sufficient deterrent to employing anyone except on a casual basis
- which the very young and old are happy to engage with the process.
The only common strategy for bureaucrats and tax men is job creation - theirs and those of
the ilk - their role is job destructive in the real economy.
gkjames
@What free market? Really? How so? What "bureaucratic hassle"? Are standard record-keeping
and accounting practices an "intrusion" or, more likely, a useful mechanism by which shareholders
can track the health of the enterprise? In most US states, by the way, it takes all of a single
form and a modest fee to incorporate. As for the alleged "common strategy for bureaucrats and
tax men," you do realize, presumably, that it is elected legislatures who write the tax laws,
laws that reflect extensive (and, not infrequently, exclusive) input from the business community.
What free market?
Yes, it is BIG business that controls the output of legislatures, small business does not get
a look in - those running them are too busy running their businesses and coping with bureaucracy.
It is often overlooked that rules and regulations that are imposed universally suit big business
but place a disproportionate burden on small business who have to comply with the same dictats
but without the administrative cohort and infrastructure that large firms can justify.
What free market?
Indeed, without sounding too conspiratorial, I would say there is an unwritten pact between
big business and legislators that allows big business to comply with onshore rules and forces
competing small business to do the same.
Meanwhile offshore, big business can engage in tax evasion on a massive scale using offshore
tax havens, transfer pricing and the freedom from jurisdictional control that obviates their need
to remit revenues that would be taxable (viz Apple) . Small businesses are captive, they have
to be 100% complient and that suits big business as the administrative burden crushes incipient
competition from small business.
Anon2
Maybe it has something to do with the breakdown of the lower middle class family in the
US and the subsequent poor performance in school, crime, prison etc. I guarantee those not
participating exhibit a higher percentage of having had no father in the home as a child.
LJH
@Anon2 Yes, we don't like poor people in the US, or minorities - including women. The problem
is the ruling class of white rich men is morally and intellectually bankrupt.
Those that create the problems are usually not the first to suffer the consequences. That comes
later as the empire crumbles.
M_T
@Hell No -- Given the minimal welfare in the US, and that it seems implausible that one in eight
American working age men are starving, my personal assumption would be that a large proportion
of the remainder are working in the unregistered economy. That includes crime but would also include
casual work where the employer doesn't pay proper taxes etc.
RiskAdjustedReturn
@M_T @Hell No --
"... casual work where the employer doesn't pay proper taxes etc."
In my local bank, on a Saturday morning, one will see lines of middle-aged white guys standing
in line to take out thousands of dollars each in cash, which I'm assuming is meant to pay their
workers
Adam Bartlett
An issue that's only going to get more severe and widespread as technological unemployment
continues its advance.
In light of studies showing that low quality jobs are worse for folk's mental health than
staying unemployed, further deregulation is only an answer to be entertained by sadists.
The choice facing us is probably between the statist solution of a massive increase in public
sector employment, or the relatively libertarian option of a generous universal basic income.
Let's pray it won't be too many years before such options get to the table.
pangloss
Surely an American (or any other) worker is worth no more than say a Chinese worker + some
translation factor. The translation factor includes the presence of infrastructure and human capital
on both sides. The low skill worker suffers first because of an early and easy shift in the translation
factors. Sooner or later the high-end designers of Silicon Valley will suffer the same fate. Excluding
nuclear war there is likely to be a flattening of wages across the developed world. This is especially
bad news for those at the lower end of the ability scale, no credible amount of education or training
will make enough difference. There are limits to human capital. Start thinking about redistribution
and the niches that are immune from this effect.
nonuthin
The question that bothered me through this is what do they actually do if they're not "working".
Clearly not all sustained by welfare, does this indicate a significant increase in either the
black economy, the criminal economy or both. E.g. it would be statistically fascinating ( if politically
unachievable) to see the impact of a legally licenced drugs trade on the employment participation
rates.
Adam Bartlett
@nonuthin Some in single earner households, having to accept a lower material quality of life
than they would if both adults could earn. Others drawing down savings and living frugally. Many
dependent on food banks and other forms of charity. Others subsisting in the informal economy,
but activity one would call 'grey' at worst, not the black or criminal economy.
Big Dipper
There is more to life's responsibilities than your "men and women whose responsibilities should
make earning a good income". Perhaps you could consider high-quality child raising, other care
activity, community and education. The ratio is dangerous.
cg12348
Every week Martin Wolf reminds me why the self proclaimed experts are really idiots - you can
make stats sing if you know what you are doing........but the reality is easy to see. Americans
have a work force that is seeing its jobs exported - notice he does not give the stats on companies
moving out of the US over the past 30 years. Again the experts say we could not stop It - NO they
cant stop it that is true - but there is a way to stop it.
They would further tell you that the 11 million immigrant workers have little to no effect
because they take jobs that we don't want - wrong again. As you age your are happy to be employed
even if the job does not hold the allure of your previous job. What immigrant workers do is they
take less money because they are willing to live at a lower standard. They will live many families
to one home etc. In fact if they were not here to take the job the job would get done when the
pay increased to attract a willing worker - FACT. Finally what stats do not capture is the moral
of a work force.
There is nothing "decent" about our unemployment stats. We are not a nation of any one race
we are a nation of opportunity with one of the most powerful economies and plenty of natural resources
and demand and opportunity for innovation - so what sickness has befallen the US - large government
- corporate taxation - political mediocrity - the same thing that has recently become apparent
in Germany and France - idiots who give away what we worked hard for and expect us to pay more
for those they choose to support.
Todays social programs breed a generation that no longer asks what they can do for their nation
- but what their nation can do for them. Obama and his ilk have handed the world to those who
were unwilling to fight to fix their own countries - instead they want to come here for opportunity
that did not exist at home and then in a great act of irony turn our land into theirs - we do
not want to be Europe - nor do we want to be Mexico and we certainly do not want to be the middle
east - instead what we want those who love our opportunity to come here and become American -
but in numbers and within a legal process that does not exacerbate or marginalize those who were
born here and should have the right to the first jobs here.
Profitsee
@cg12348 And this is why I read the FT Comments section. Bravo -- One fact was missing:
US imports educated foreign naturals more than exported "low level" jobs. Even as a Democrat,
I confess, you provide a lucid argument.
Tiger II
The employment numbers are a political fiction as with all developed economies. Unemployment
is much higher than reported. Sclerotic labor laws and regulations make it impossible to
create many jobs that can produce more than they cost, especially given the dumbing down of the
work force by public monopoly schools. Regulated labor markets are one of the biggest drivers
of unemployment on both sides of the Atlantic and should be abolished.
Brian Reading
While not disputing in any way Martin Wolf's analysis, the devil may still be in the detail.
Population estimates by age cohorts come from ten-yearly census data - the denominator for participation
rates. These estimates are interpolated between censuses from births, deaths and migration data.
The numerator, the number in each age cohort at work or seeking work, comes from regular household
sample surveys. Using one source for denominator and another for numerator, which cannot be avoided,
entails a margin of error. In looking into this, I was amazed to discover that legal immigration
averaged one million a year in the 1990s. I suspect estimated illegal immigrant, mostly prime-aged,
are included in population estimates but do not appear in household surveys.
DougInCalifornia
What I am seeing where I live is the emergence of a part-time, informal service economy. You
might call it the Craigslist/Ebay/PayPal economy. I think that a lot of people make a (minimal)
living this way. And my guess is that most of it doesn't get picked up in official statistics.
I think that "employment" will need to be measured differently in the post-internet era.
RiskAdjustedReturn
@cg12348 @Boston1
"Show me a middle class kid that expects to work his way up and willing to start at the bottom
and I will show you..."
...a recent immigrant.
WL - Minneapolis
One clue into the declining labor force participation rate may have been discovered in a study
reported in the NY Times today, that may account for a substantial portion. The death rate among
middle-aged (45-54) whites with high school education or less has increased in recent years, reversing
a long-term trend. The cause appears to be poor health/chronic pain/mental health issues that
result in death by drug/alcohol abuse and/or suicide.
Clearly unskilled and low-skilled workers have more trouble finding well paying jobs, and the
wages for those jobs have fallen around 19% since 2000 in real, inflation-adjusted terms. But
an increase in health problems of one sort or another may also be the cause of the lower participation
rate as well.
Excellent article on education difficulties in the US by Edouardo Porter in today's NYT. One
problem is that children living in poverty in the US struggle to learn in the education system
partially because overall public support for impoverished families is so poor in the US.
If we think the current labor market is not working, wait till the Trans Pacific Partnership
(TPP) trade deal passes the US Congress & signed into law .
Capital ($), aided by misguided policies of the US economic elites, will prevail over (skilled)
Labor.
Paul A. Myers
A major contributor to lack of hiring men age 25-54 is the massive underinvestment in infrastructure
in the U.S. This is a prime age for construction employment and this industry provides a ladder
of advancement from low and semi-skilled labor up to more skilled labor. My experience with construction
contractors in Southern California is that they are interested in individuals who can get to the
job site and do the work and are often willing to overlook criminal records. A dollar of public
spending on construction puts American workers to work, not someone in Korea. You can't import
a highway or a building from the Far East.
The other major failure is the large urban school district. These "too big to succeed" institutions
have a record for over a half a century of failure to turn out skilled young people. In the massive
Los Angeles Unified School District, they shut down skill-based vocational education during the
period 1970-1990 with the lame excuse of everyone is going to college. The duopoly of a wooden-headed
educational establishment fostered by graduate schools of education and powerful job-protecting,
mediocrity-fostering teachers unions have created the largest statist failure since the collapse
of East Germany. (And you can remember how much Germany paid to clean up that mess!)
There are recent reports that there are 4-5 million unfilled jobs in the US due to lack of
skilled applicants.
A crummy labor market is almost always the creation of bad public policy. And today's America
swims in bad public policies.
beforethecollapse.com
@Paul A. Myers As an educator, I wonder what role poor nutrition plays in the US?
beforethecollapse.com
Also, I must say that the family unit is far more influential and important to the youth than
any teacher. The teacher can operate as a third parent, or second parent if the family breaks
down, but a youth needs a stable environment for healthy emotional and instinctual development.
Excellent diet, physical exercise and regimented sleep patterns are essential. It's easy for parents
to blame teachers but I have noted that such complaints arise from personalities that resent strong
authority figures and duty enforces. As such, they are incapable of disciplining their own child.
In China, society encourages the family to be unconditionally supportive to the child, this
is balanced by the teacher who is a strict disciplinarian, often by way of corporeal punishment.
Philip Verleger
@Paul A. Myers A crummy labor market can also be the result of increased monopsonistic power
of employers. Trucking companies cannot find drivers and regional airlines cannot find pilots.
There are plenty available - but many will not accept the low wages offered. The employers
cannot offer more because their customers - the large airlines and the big shippers will not pay
more. The trained workers are there. They just will not accept the scarps.
The public policy mistake was allowing the creation of such large monopolies/monopsonies.
Look outside your silo!
Paul A. Myers
@Philip Verleger @Paul A. Myers Good points. The FT published my letter to the editor in
about 2010 that economic concentration in virtually every economic sector of the US had reached
unprecedented levels and represented a major threat to the US economy. (I think I was seriously
outside my silo and I think the FT editors were very receptive to this argument--then and now.)
Oligopolies (the only kind of major corporations and markets in the US today) produce lower
volumes, at higher prices, and with fewer employees than a more competitive economic sector would
employ, produce, price.
In virtually every industrial sector of the US economy, the top competitors are way too
big and way too dominant. In the 1950s and 60s, it used to be the Big Three in most sectors;
today is at most the Big Two.
The Progressives understood the economic concentration argument; the Democratic Leadership
Council generation embraces concentration's contributory support.
Philip Verleger
@Paul A. Myers @Philip Verleger
Could not agree more. I am on the board of a family firm. We cannot find truck drivers although
we pay well and train (to move gasoline - it takes an extra license). There is just little interest
in joining the profession because the large companies keep wages down.
The FTC and Justice Department unfortunately failed to do their jobs.
BelCan
Mr Wolf seems to have missed the fact that the FT already covered this issue on 16 October.
The BLS lists the following factors as primary drivers of the decline in the LFP rate since
2000: (1) the aging of the baby boomer cohort; (2) the decline in the participation rate of those
16-24 years old; (3) the declining LFP rate of women (since its peak in 1999), and (4) the continuous
decline of the LFP rate of men (since the 1940s).
The main factors that keep the aggregate LFP rate from falling further are the increase of
the LFP rate of those 55 and older and the strong attachment to the labor force of Hispanic and
Asian people, who constitute the main share of the immigrant population.
Henry C
@nb Your good post is reinforced plenty by the more recent talk by Bullard. He notes:
"If you know only one aspect of the data on labor force participation, it should be this: Labor
force participation used to be relativelylow, it rose during the 1970s, 1980s and 1990s,peaking
in 2000, and it has generally been declining since 2000.From 1948 to 1966, the labor force participation
rate was relatively low and relatively stable, averaging 59.1 percent. That's substantially lower
than today's value of 63 percent. It is important to note that we normally consider the U.S. economy
to have performed relatively well during this period, especially during the long expansion of
the 1960s.
Evidently, low labor force participation does not equate with weak economic growth. Surely
this is because the factors driving economic growth are different from the factors driving labor
force participation."
Why are you surprised? You genuflected to my employer.. The People's Republic of China.
Where slavery is a tool for political control. Perhaps you should have thought harder and better
when you and your friends were nattering on about The Great Moderation. What was your long game?
Did you think there would be a revolution or revolt that you could manipulate? Or were you a true
believer in The Circular Theory of Income?
Action? What action? How are you going to move production back to the West? How can you undo
what you are responsible for?
As to family support, the other aspect one might look at is whether US household disposable
income growth has been deficient relative to other G7 countries (which all have higher LFPR).
But that's not the case: see
So on the face of it, it seems to take a higher LFPR in other G7 countries to match the same
approximate growth in US disposable income in the long run.
L'anziano
"What might explain the extent to which prime-aged men and women have been withdrawing
from the labour market in the US over a long period?"
Heartless as this sounds (and I am sure I will not gain any friends for this on this page)
the reason on the male side of the equation is that it is much easier to fire ineffective, unproductive,
middle-aged, male dinosaurs in the US than it is in the UK, France or Japan. At least this has
always been the case in every global firm in which I have worked. I am acutely aware of this as
a middle aged man myself.
lennerd
Perhaps Mr Wolf should follow up this article with one about the abysmal record on male
and household median earnings since 1970. Male median earnings are now lower than in 1973, more
than 4 decades agao and household median earnings are back to the late 1980s, a generation ago.
This, of course, is the evisceration of the middle class by globalisation and other factors
that has progressed further and faster in the US than elsewhere, resulting in the proceeds of
growth being concentrated on the top 1 per cent, or even the top 10 per cent of the top 1 per
cent. His views on why and what should be done would be interesting.
Olaf von Rein
@lennerd Those income statistics right? Frightening.
Legal Tender
@lennerd If you want to look at the data you need to realise the US imported 10-15 million
low-skilled, non-English speaking immigrants during the 1990s and 2000s. If you take out the very
bottom of the income distribution (note that their income is understated as a good portion of
the earnings is "off the books") the results look better. You cannot make an "apples to apples"
comparison between the US labour force of the 1970s and 1980s and the labour force of the 1990s
and 2000s. The demographics are very different.
If Europe admits millions of refugees over the next few years, I can assure you it will depress
average male household earnings. But you always need to look at what has changed in the composition
of the data before drawing conclusions about the data. The fact that there might be millions of
Middle Eastern and African arrivals earning very little (officially) would impact the overall
data for wages but may not accurately describe the experience of the pre-existing labour force.
You might even say that the US has employed its native population AND created jobs for
millions of unskilled, non-English speaking workers who are now earning two or three times what
they were in their home countries and sending tens of billions annually back to those countries
to increase wealth there. That sounds like a success story (well, I would not classify the current
economy or labour market as a success story, but on par it does describe much of the 1990-2006
period).
Cuibono
As somebody who has worked in both Europe and the US I would add to the list of underlying
causes mentioned. First employee rights in the US are abysmal. Poor conditions, no training or
upward mobility, little or no personal privacy, cult like "motivation" exercises, passive aggressive
annual reviews, drug testing, binding non-compete contracts that disallow moving to competitors
for long periods of time and now declining benefits. The list goes on and on.
The employer gets everything and gives nothing more than an "at-will" commitment to continue
employment.
It gets to a point where it's not profitable to bother.
Raver
@Cuibono Yes it's gotten pretty bad. The benefit packages are barely cheaper than what you
can buy in the health insurance marketplace, maybe $20 less a month if you're lucky.
Banker
@Cuibono yea but salaries are 2-3x as much as in the UK.
Cuibono
@Banker @Cuibono Right, until you factor in the cost of health care and college tuition for
your kids.
Banker
@Cuibono @Banker @Cuibono Ahm? Most ivies have $0 fees for families under $60k and a lot of
support. Health insurance also provided from employer covers everything. Have you even got any
idea how expensive private healthcare is in the UK? Unless you want to use 3rd world NHS ofcourse.
All public universities also charge minimum £9k/year fees here.
Learn your facts before you post.
Cuibono
Well I believe I know facts. I also have manners, and you apparently don't. So get off your
high horse before you post!
Having experienced both the NHS and the private US system, I promise you the NHS wins hands
down in every department, most especially in quality of care. I do know the UK private system,
but if you want third world care with chaotic service delivery and outrageous hidden costs, please
feel free to come to the US and pay over of thousand per month (for a family) with co-pays for
it.
You 9k per year number is, frankly hilarious to any middle class US parent. Try 60k per year
for fees and board for a good university.
And if you are earning 60k per year how are you going to afford the basic second level education,
complete with top SAT scores and cultural experiences that will get you selected to the mythical
ivy.- especially if you are white and without legacy connections? You should take your own advice
and read up on US colleges and their outrageous manipulation of statistics to hide the fact that
they are little more than vehicles that allow the elite to transfer status across generations.
You are upset about an opinion I expressed based on my own experiences and you set yourself
up as the comment police to challenge that opinion without.
Something to think about. . .
US corporations have the developed world's highest remuneration scale to executives and the
lowest benefits to other employees. How else can these corporate executive maintain their life
style without hiring from the two employee pools (young and old) that work for such low wages?
Young are beginning and old augmenting income.
ForgottenHistory
I recall how in the Netherlands and in Germany (and i think to a lesser degree also in France
but haven't got a clue on the UK in this matter) policymakers and governments were very concerned
for just this: an increase in the longer -and ultimately eternally- unemployed. Therefore people
weren't just been laid off but held on and send on courses or only half-employed(=50% or so) and
the government added some funds to that.
This way people retained and even improved their skills, in stead of losing skills and become
unemployable and ultimately end up being a costly burden for society.
It doesn't surprise me at all this didn't happen in the US, as the US has equal opportunities(supposed
to) but no proper sense of community in the sense of a government with a long term-planning; US
has been doing the opposite, e.g. cutting-off anything which would help the unemployed, poor,
or disadvantaged -that's equal opportunities in reality.
Smyrna Cracker
I suspect that declining levels of health, especially for those lacking a college degree
may account for some of the falling work-force participation rates. Recent studies have uncovered
a rise in death rates with this same population that may be part of the same phenomena. Rural
populations seem especially venerable with declining access to mental health services and rising
levels of substance abuse. Red America may have outsized political power but its leadership has
no interest in serving the population it represents.
Mr Passive
Pensioners with no pensions; they are more reliable at shelf stacking and other such jobs.
There are going to be so many people over 60 in the UK working in the future now that final salary
schemes have been reducing in number.
Is it another function of very low bond yields & therefore pension rates, the side-effects
of QE we may call it.
Time for the CBs to hold up their hands and admit they've done all they can and at the margin
further extra-ordinary measures will be counter productive.
Massachusetts
@Mr Passive In the US the only age group that has seen incomes increase consistently is the
65-74 decile. I cannot speak to the UK.
Suppose the government issued a financial asset that, adjusted for risk and liquidity, promised
a higher rate of return than any alternative asset. The government can do this, because it has the
power to tax. Everybody prefers holding that government-issued financial asset to any other asset.
There would be an excess demand for that government-issued asset. The only way to eliminate that
excess demand would be for the government to buy up all the other assets in exchange for that asset.
The government would be operating one big closed-end mutual fund, that owned all the assets in the
economy, with people owning shares in that mutual fund. And the rate of return on those mutual fund
shares would be guaranteed by the government's power to tax.
Most people would be against that policy. Perhaps we could call the few people who supported it
"Mutual Fund Marxists"?
Now let's suppose that particular government-issued financial asset is also used as the medium
of exchange. An excess demand for the medium of exchange causes a recession. Each individual tries
to ensure that the flow of money leaving his pocket is less than the flow of money entering his pocket,
so the stock of money in his pocket increases over time. This is possible for each individual, but
impossible in aggregate (unless the government increases the aggregate stock sufficiently quickly
over time), but the attempt by each to do something they cannot all do causes a recession.
So we would have a permanent recession, unless the government implemented Mutual Fund Marxism,
by buying up all the assets in the economy in exchange for government-issued money, to eliminate
that excess demand for government-issued money.
The threat of permanent recession I have just described is usually called "secular stagnation".
The proposed cures of ever-expanding central bank balance sheets and national debts are the first
steps towards Mutual Fund Marxism.
Should we blame the economy for secular stagnation, or should we blame the government for issuing
a financial asset that promises a more attractive rate of return than other assets, and that also
is used as medium of exchange?
Would private financial institutions, that lack the power to tax, ever do the same thing?
Some might reasonably argue that the twin threats of permanent recession or Mutual Fund Marxism
themselves lower the expected rate of return on other assets.
Just a slightly different way of looking at some old questions. Secular stagnation is the same
question as the Optimum Quantity of Money.
Addendum: If we want to avoid having to choose between secular stagnation or Mutual Fund Marxism,
we need to increase the yield spread between government-issued money and other assets. One way would
be to target NGDP level path, with a suitably high growth rate for NGDP (presumably a rough proxy
for the nominal rates of return on other assets). A second way would be to raise the inflation target.
A third way would be a Gesellian tax (negative interest rate) on money.
Benoit Essiambre
Exactly!
I don't understand why there isn't a immense sense of urgency from central banks, governments
and the economic profession to fix this.
People argue about details meanwhile central banks like the ECB are maintaining an asset that
is directly subsidizing disinvestment and economic inactivity and leading to colossal amounts
of needless suffering and a relative decline of the western world.
"... Edit: I found the answer. Per a 2013 National Geographic article, all Bakken and TFS wells require water flushing such that when the field is fully developed with 40-45K wells, the field will require in excess of 10 billion barrels of fresh water annually. ..."
"... Throw on top that the companies have added to product gathering and salt water disposal costs by selling of this infrastructure to raise cash, I believe long term ND oil production will be among the hugest cost in the lower 48 on strictly an operating basis. ..."
"... shallow sand, For big oil companies, selling and buying assets is a constant process. They are "optimizing asset portfolio" ..."
"... Sunk-cost fallacy occurs when people make decisions about a current situation based on what they have previously invested in the situation. For example, spending $100 on a concert and on the day you find that it's cold and rainy. You feel that if you don't go you would've wasted the money and the time you spent in line to get that ticket and feel obligated to follow through even if you don't want to. It's is cold and rainy in the oil industry right now. ..."
"... Yes, but if the $30,000/acre price Aubrey McClendon paid is typical, it looks like oil gas asset prices in the Permian Basin are hotter than ever. And this despite the drop in oil prices. ..."
"... Just imagine, McClendon paid over $30,000 per net acre for leasehold working interest, with oil at $45. ..."
Interesting to see the large publicly traded companies are selling legacy
assets.
In particular, Chevron is selling its interest in the Seminole San Andreas
Unit in Gaines Co., TX. The unit is generating them over $400K per month. It is
a CO2 flood still producing over 20K BOE per day gross, and is operated by
Hess.
Shell is selling a large block of lower 48 royalty interests located in 10
states, generating over $250K per month.
Chevron is also selling another legacy block of conventional wells operated
by them in the Permian Basin, which currently generates over $300K per month.
What is also interesting is of all is these are all listed for sale on the
Internet auction. IMO they are selling these assets at a really poor time. Are
even the super majors in need of cash to the extent they would sell premium
onshore lower 48 assets at the low end of the market? Maybe they do not see a
rebound anytime soon? Yikes. However, the same things happened in 1998 and many
buyers hit it big with prices from late 1999-2014.
Also looked at conventional wells for sale in Dunn Co. ND. They are under
water with oil at the well around $30. I note that the wells produce super
saturated salt water and require fresh water flushes to operate. Watcher has
mentioned this before. These wells are in the Duperow formation. Do middle
Bakken and TFS require large amounts of fresh water also?
Edit: I found the answer. Per a 2013 National Geographic article, all Bakken
and TFS wells require water flushing such that when the field is fully
developed with 40-45K wells, the field will require in excess of 10 billion
barrels of fresh water annually.
Looking at the production and lease operating statements for the older
conventional wells I examined, I estimate 10+ year old middle bakken and TFS
wells will need over $50 WTI just to break even on an operating basis, not
including any work over expense.
North Dakota wells are at a distinct disadvantage due to the salt issue.
Throw on top that the companies have added to product gathering and salt
water disposal costs by selling of this infrastructure to raise cash, I believe
long term ND oil production will be among the hugest cost in the lower 48 on
strictly an operating basis.
Perhaps selling off assets looks better than borrowing money from a bank to
pay dividends to your shareholders? Watcher would probably know the answer
to this.
IMO they are selling these assets at a really poor time.
It's hard to tell, since everything hinges on what happens in the future. One thing is for sure, and that is that Permian Basin O&G assets are,
despite the low oil and gas prices, still selling for several times what
they sold for in the pre-shale days.
Take Concho Resources purchase of Marbob in 2010, for instance:
Based on the acquisition price, Concho's purchase is equivalent to
$19.84 per BOE of proved reserves and $104,167 per flowing barrel.
Concho picked up 150,000 net acres in the deal. That's a little bit north
of $8,000 an acre. At the time of the sale, the old timers thought Marbob's founder and
president, Johnny Gray, had cut a fat hog. But if you compare $8,000 an acre to the more than $30,000 per acre
Aubrey McClendon just paid, it looks like Gray sold too soon. One could find other comps, but I think the price of Permian Basin O&G
assets over the past 15 years has been consistently upwards.
Analyzing why the companies are selling legacy properties that make some
money at this moment can lead you to the trap called "sunk cost fallacy".
"Sunk cost fallacy" is exactly the same for big oil companies as for
individuals.
Sunk-cost fallacy occurs when people make decisions about
a current situation based on what they have previously invested in the
situation. For example, spending $100 on a concert and on the day you
find that it's cold and rainy. You feel that if you don't go you would've
wasted the money and the time you spent in line to get that ticket and
feel obligated to follow through even if you don't want to. It's is cold and rainy in the oil industry right now.
Glenn. I got an email from Raymond James which detailed Q3 sales. Permian
basin were substantially higher per flowing barrel than the rest of the
US lower 48.
AlexS. I do agree companies are always selling assets, but interesting
to see larger higher quality assets on the public block. Either no solid
offers privately, or maybe companies are finding online sales are the
best way to go.
Yes, but if the $30,000/acre price Aubrey McClendon paid is typical,
it looks like oil & gas asset prices in the Permian Basin are hotter
than ever. And this despite the drop in oil prices.
Diamondback
Energy, for instance, in September 2013 paid $440 million for 12,500
acres of net mineral rights in the shale play in Midland County.
That's $35,000/acre, but for mineral interest, and back when oil was
selling for well over $100/barrel.
Boomer said "Considering that populations have grown in most
places in the world, I would say this chart does indicate a
lessening of interest in cars."
Maybe it is not so much
interest as need or economics. Much of the new population is in
the cities where cars are not generally essential. Also many
people are way too poor to afford a car even if they needed one,
a bicycle or scooter is about their peak ability to afford.
Here in the US there are at least twice as many registered cars
as there are licensed drivers. So there is little necessity to
buy new.
Low oil prices are approximately $180 billion stimulus for the USA. I wonder why results are not
better for 2015.
Notable quotes:
"... Yes the rich and their little wanna-bee sock puppets come up with all kinds of elaborate contraptions to support their self-serving narrative of "serve the investor class and all shall be good". ..."
"... Who the heck would build a new production facility if they don't have or predict increased demand. ..."
"... I would agree that demographics will hurt long run growth, but over the short run we should be seeing some disinvestment as people retire and tap into savings, which should stimulate demand. And when private sector consumption and investment are weak, government spending does not weaken the economy, it lifts it up. ..."
"... Too many of today's millionaires and billionaires made their money the old fashioned ways…inheritance and rent-seeking. I would suggest that you read some of the current literature on economic growth (long run growth). It's not capitalists who drive that growth, but ordinary people who innovate at the ground level. Innovation is what drives growth, not some cult of leadership personality, which is what you seem to have bought into. ..."
"... CFOs anticipate a marked deceleration of revenues, earnings, and spending hereafter. The aggregate of payroll receipts and reported wages and salaries implies that US employment is significantly overstated, and civilian employment is decelerating to ~0% YoY. ..."
"... Once a time, James predicted the future : at least 100 USD for oil per barrel forever (was it during the late 2007 speculator spike ?). ..."
"... The year over year change in real GDP is just 2%. Moreover, the second quarter strength was largely a bounce back from the first quarter when weather related problems contributed to real GDP growth of under 1%. ..."
"... Final demand looks OK, as you observed. But there is still extremely limited information suggesting the economy if breaking out of the past several years poor performance of some 2% plus real growth. ..."
The Bureau of Economic Analysis announced yesterday that U.S. real GDP grew at a 1.5% annual rate
in the third quarter. Although the headline number sounds disappointing, the underlying fundamentals
look solid.
It was encouraging that housing, nonresidential investment, and the government sector all made positive
contributions. The one negative was a drawdown in inventories (goods sold but not produced during
the quarter). Leaving inventories out, real final sales grew at a healthy 3% annual rate.
Paul Mathis, October 30, 2015 at 1:18 pm
In The General Theory (p. 104) Keynes famously said: "Consumption - to repeat the obvious -
is the sole end and object of all economic activity."
Without consumption, it is obvious from the graph that there would be no recovery at all and
we would still be in a recession. Why do economist today completely ignore the essential role
of consumption in our economy? Why is there no emphasis on spurring consumer demand especially
when government fiscal policy is MIA. We need to follow Keynes' advice:
"I should support at the same time all sorts of policies for increasing the propensity to consume.
For it is unlikely that full employment can be maintained, whatever we may do about investment,
with the existing propensity to consume." The General Theory, p. 325.
DeDude, November 1, 2015 at 7:50 am
Yes the rich and their little wanna-bee sock puppets come up with all kinds of elaborate
contraptions to support their self-serving narrative of "serve the investor class and all shall
be good". Yet simple 5'th grade math tells us that the GDP is driven by consumption. Consumption
in itself is about 70% and investments (20%) rarely occur unless consumption is increasing.
Who the heck would build a new production facility if they don't have or predict increased
demand. Looking at the observable world even a 5'th grader should have the sense of logic
to understand that economic activity is driven by consumption (private or government). It is a
pathetic spectacle to watch those whose ideology and self-interest dictate that they must reach
another conclusion.
2slugbaits, November 1, 2015 at 1:14 pm
Making consumers pay too much, because of government policies and/or lawyers, doesn't
improve consumption, but depletes saving.
Huh? Those things might reduce welfare through deadweight loss, but as one wise man noted,
it takes a lot of Harberger holes to fill a recession…or words to that effect. And some government
policies and a legal system with property rights vigorously defended by lawyers do contribute
to growth. If you want to point a finger at non-productive actors who engage in rent seeking,
then point your finger at many in finance and asset trading.
We're still in a weak recovery after the severe recession. The anemic economic growth
is driven by population growth, federal borrowing, and emergency monetary policy.
More nonsense. I would agree that demographics will hurt long run growth, but over the
short run we should be seeing some disinvestment as people retire and tap into savings, which
should stimulate demand. And when private sector consumption and investment are weak, government
spending does not weaken the economy, it lifts it up. Have you not learned anything after
all these years visiting this blog?
We need to unleash the entrepreneurs and eliminate crony-capitalism to expand the economy.
The new millionaires and billionaires will create lots of good jobs and a great deal of value
to consumers.
Too many of today's millionaires and billionaires made their money the old fashioned ways…inheritance
and rent-seeking. I would suggest that you read some of the current literature on economic growth
(long run growth). It's not capitalists who drive that growth, but ordinary people who innovate
at the ground level. Innovation is what drives growth, not some cult of leadership personality,
which is what you seem to have bought into.
CFOs anticipate a marked deceleration of revenues, earnings, and spending hereafter. The
aggregate of payroll receipts and reported wages and salaries implies that US employment is significantly
overstated, and civilian employment is decelerating to ~0% YoY.
Once a time, James predicted the future : at least 100 USD for oil per barrel forever (was
it during the late 2007 speculator spike ?).
spencer, October 31, 2015 at 9:53 am
The year over year change in real GDP is just 2%. Moreover, the second quarter strength
was largely a bounce back from the first quarter when weather related problems contributed to
real GDP growth of under 1%.
Final demand looks OK, as you observed. But there is still extremely limited information
suggesting the economy if breaking out of the past several years poor performance of some 2% plus
real growth.
"... Oh, and by the way, it was also this same so-called "smart crowd" who also touted this very monetary policy would bolster GDP prints far higher and consistent than they are now. And let's not forget – 1.5% GDP is now formulated with "double seasonally adjusted accounting." i.e., If the print isn't what you want or need; feel free to fudge the inputs as high or, low as needed without causing any obvious unwanted attention or, outright laughter. ..."
"... Gordon Gekko: The richest one percent of this country owns half our countrys wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. Its bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now youre not naive enough to think were living in a democracy, are you buddy? ..."
"... The way the fragmented market is set up there is no need for fundamentals, or anything really for it to go up or down. Price movement is no longer dependant on the true value of the underlying, but value is assigned to the underlying by the amount of market pieces or liquidity participants it attracts at any point in time. ..."
"... I was thinking about it today and it would be possible to have completely imaginary markets (no underlyings) that rely on the best algo to win, Darwinism for quantitation. I guess it would be like the Kentuky derby for computers, may the biggest and fastest server win. You could dump money into it/invest by betting on your favorite algo. In my mind the whole thing is pretty complicated, but thats the gist of it. Anyway.... ..."
The now immortal line spoken by Clint Eastwood as "Dirty Harry" (1971 Warner Bros.) has never fit
as a descriptor these financial markets more so than it does today. For if you believe you're
investing as opposed to gambling? These markets are now poised to show everyone the difference.
From an economic standpoint; not only has the current October surge in market prices been an absolute
absurdity. Rather, just look to where the market as a whole has propelled itself right back to: within
spitting distance of taking out the never before seen in the history of mankind highs. And why shouldn't
it be up here? After all, the economy is absolutely booming right? Right?
So one has to wonder exactly how does an economy in which its latest GDP report prints a blazing
1.5% warrant such a valuation? I know, trick question – it doesn't. However, if one tuned into many
(if not all) of the current financial media outlets this question or, reasoning was never addressed
in any shape manner or, form.
As a matter of fact, there was praise by many of the next in rotation economists for how it was
derived at in the first place, citing the "inventory" figures as a good news catalyst. Only an economist
can find "good news" in a GDP print so pathetic it continues to warrant a continuation of extreme
monetary policy by this very group.
Oh, and by the way, it was also this same so-called "smart crowd" who also touted this very
monetary policy would bolster GDP prints far higher and consistent than they are now. And let's not
forget – 1.5% GDP is now formulated with "double seasonally adjusted accounting." i.e., If the print
isn't what you want or need; feel free to fudge the inputs as high or, low as needed without causing
any obvious unwanted attention or, outright laughter.
What does it say when accounting standards have evolved into a discipline more suited for a massage
parlor than anything resembling a house of academic standards – and 1.5% was the best print available?
What one should infer from that data point alone is well worth contemplating by anyone truly serious
about business or, their wealth. For that little number speaks volumes if one truly cares to dig
deeper.
Looking at the markets "its hard to argue with price" is the old saw. And that price is, as iterated
earlier, extremely high.
That's just fantastic if you're an "investor" with the tendencies of a river boat gambler.
However, if you're someone trying to distinguish the subtleties of when to invest precious resource
capital into cap-ex projects for the prospects of future growth, or whether or not to expend that
capital in hedging strategies to help smooth out input costs – you're out-a-luck. You have just
as good of a chance in flipping a coin for your macro business decisions. For hedging is now "What
Fed. official will say what today?" Heaven help you if it's the opposite of what they said the previous
day. Like the title implied, "Do you feel lucky?" doesn't seem that out of line.
Boris Alatovkrap
Ignore "invisible hand", but eventually is b*tch-slap those that defy.
Escrava Isaura
Invisible Hand?
How about the rabbit hand.
Gordon Gekko: The richest one percent of this country owns half our country's wealth,
five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance,
interest on interest accumulating to widows and idiot sons and what I do, stock and real estate
speculation. It's bullshit. You got ninety percent of the American public out there with little
or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine,
upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out
there wondering how the hell we did it. Now you're not naive enough to think we're living in a
democracy, are you buddy?
antonina2
The way the fragmented market is set up there is no need for fundamentals, or anything
really for it to go up or down. Price movement is no longer dependant on the true value of the
underlying, but value is assigned to the underlying by the amount of market pieces or liquidity
participants it attracts at any point in time. So, you could say the market or price action
has been more or less decoupled from the true state of its underlying. Supply and demand due to
fundamentals was true before hft and multiple exchanges, but can now be skewed in any direction
for any length of time due to all the new technology and types of order flow that have been introduced.
As long as people are getting paid to provide liquidity and other people are there to pay for
taking liquidity away you can have a market that reaches the moon and beyond while the world is
in a deep recession. So, if you think about it, while the pundits will have you believe that the
market is priced at true valuations, it's not your Grandpa's market anymore, that is why the market
can go up on relatively small volume and shitty data. It is a whole new game and beside disastrous
glitches, the only time positive movement is threatened is when the big fish start placing large
sell order blocks.
I was thinking about it today and it would be possible to have completely imaginary markets
(no underlyings) that rely on the best algo to win, Darwinism for quantitation. I guess it would
be like the Kentuky derby for computers, may the biggest and fastest server win. You could dump
money into it/invest by betting on your favorite algo. In my mind the whole thing is pretty complicated,
but that's the gist of it. Anyway....
It is my belief that things have developed in this manner to keep big money in the markets.
So, I guess the question isn't what is up with the markets, but rather why do large holders continue
to hold, my guess would be that they don't have anything else they want/need to do with their
money. They say, who cares if Bob, Jen, Greg, and half of America can't find a decent job, we
are making more money investing in the market (greater shareholder returns) than by helping to
improve the actual economy and investing in more tangible things like people. It's pretty shitty,
but that is how I have come to make sense of the whole thing. I mean yeah, the market should be
about half of what it is now if it followed fundamentals, but it's not and I think that's why.
Basically, in order for there to be the big market crash that everyone constantly talks about,
some pretty big institutions are going to have to fuck up big time and receive no help in getting
out of it. As long as there is enough money out there this fiasco can go on as long as people
see fit. We all say, oh the FED is dumb and they are doing the wrong thing blah blah blah and
while they are destroying the economy they are keeping the TBTF in the clear and being rewarded
handsomely for it, completely aware of their actions. And to the public, they say fuck em and
feed em cake, so just watch, a Republican with a great tax package will be elected in 2016 to
satiate the people for the next four years while they continue to go about their business, increasingly
bad data is reported and retail investors are like wtf is up with the markets?
"... Nevertheless, the truth is that the United States economy is not exactly in good health. The labour market data published during the 12 months before March of 2015 is not as robust as was presumed by the Federal Reserve: the Department of Labor recognized recently that it had overestimated the jobs created by the private sector by at least 255,000 [3]. ..."
"... The policies of the Federal Reserve are not capable of increasing the economy by their own efforts [6]. Yellen bet everything on a reduction of the unemployed, hence businesses would be pressured to increase wages, so that the acquisitive power of families and price levels would increase (inflation). ..."
"... This has not happened. While the rate of unemployment fell from 5.7 to 5.1% between January and September of this year, hourly wages hardly increased 2.2% in annual terms the past month, still far from the levels reached before the crisis, when increases above 4% were noted. Inflation has not succeeded in passing 2% in more than 3 years, the objective of the US central bank [7]. ..."
The ego of Janet Yellen has broken into a thousand pieces. The new data published some days ago
by the US Department of Labor confirms the hypothesis of the economist Ariel Noyola Rodríguez, who
had maintained since last year that the United States' labour market was much more fragile than was
presumed by the head of the Federal Reserve. If the situation of the North American economy continues
to get worse it is probable that in coming weeks new measures will be taken to mitigate structural
unemployment.
In her public discourses, the president of the Federal Reserve, Janet Yellen, has avoided the
serious problems that the United States economy suffers. When in mid-September the Federal Open Market
Committee (FOMC) took the decision to maintain the federal funds rate between zero and 0.25% the
target of Yellen's worries was directed to China [1] and the debts of emerging economies [2].
In accord with the President of the Federal Reserve, the process of recovery of the North American
economy has been strengthening for considerable time. And, because of this, if the FOMC has not raised
the cost of credit is due, above all, to a high rate of "obligation" and "responsibility" with the
rest of the world.
Nevertheless, the truth is that the United States economy is not exactly in good health. The labour
market data published during the 12 months before March of 2015 is not as robust as was presumed
by the Federal Reserve: the Department of Labor recognized recently that it had overestimated the
jobs created by the private sector by at least 255,000 [3].
On the other hand, during the month of September the non-agricultural employment reached 143,000,
much less than the 200,000 hoped for [4]. The greatest reversals were in sectors tied to external
trade and energy. The rise of the dollar, and the fall in prices of commodities and the extreme weakness
of global demand with the rest of the world precipitated the structural deterioration of the US economy.
The bad news does not end here: the numbers of the jobs generated in July and August were also
lower [5]. Now we know that in August only 136,000 jobs were created, rather than the 176,000 originally
reported: while in the month of July there were created 21,000 fewer jobs than those counted in the
previous revision.
Hence with the data actualized by the Department of Labor, in the United States there were registered
an average of 167,000 new jobs between July and September, an amount that represents less than 65%
of the 260,000 (average per month) that were created during the previous year.
The policies of the Federal Reserve are not capable of increasing the economy by their own efforts
[6]. Yellen bet everything on a reduction of the unemployed, hence businesses would be pressured
to increase wages, so that the acquisitive power of families and price levels would increase (inflation).
This has not happened. While the rate of unemployment fell from 5.7 to 5.1% between January and
September of this year, hourly wages hardly increased 2.2% in annual terms the past month, still
far from the levels reached before the crisis, when increases above 4% were noted. Inflation has
not succeeded in passing 2% in more than 3 years, the objective of the US central bank [7].
Hence it is now clear that the fall of the unemployment rates in recent months depends more on
the reduction of the rate of participation in the labour market - as a consequence of the despair
of thousands of US citizens - and less on the creation of quality long range jobs: on Friday October
2 it was announced that in September 350,000 persons abandoned the search for work [8]. There is
no turning around, in the United States job growth has been submerged in stagnation.
"... Monthly EIA US Crude + Condensate (C+C) data (the short term energy report) show a decline in US production from 9.6 million bpd in May to 9.0 million bpd in September. The annualized exponential rate of decline, based on May to September data, would be about 20%/year. If this (net) rate of decline were to continue for another year, US C+C production would be down to about 7.4 million bpd in September, 2016. ..."
"... Regarding one of life's little ironies, we keep hearing that oil exports from a net oil importer, the US (with recent four week running average net crude oil imports of 6.8 million bpd), will have a meaningful impact on global oil markets, just as the US is currently showing a 20%/year annualized rate of decline in C+C production, implying that US net oil imports will be increasing in the months ahead, if the production decline continues. ..."
"... If it took trillions of dollars in global upstream capex to keep us on an "Undulating Plateau," in actual global crude oil production (45 and lower API gravity crude, i.e., the quantity of the stuff corresponding to WTI Brent oil prices), what happens to global crude oil production going forward given the ongoing cutbacks in global upstream capex? ..."
"... Haynesville didn't drop because "they ran out of sweet spot" but because the price dropped. There is actually more resource available, now, if we go back to previous prices…because of improvements in drilling and completion efficacy. ..."
"... But for what it's worth (perhaps not much), I think that this is a tremendous buying opportunity, in regard to oil and gas investments. I don't have any idea what Warren Buffet is doing right now, but I would not be surprised to learn that he is aggressively investing in oil and gas. ..."
"... In other words, the available data seem quite supportive of my premise that actual global crude oil production (45 API and lower gravity crude oil) effectively peaked in 2005, while global natural gas production and associated liquids, condensate and NGL, have (so far) continued to increase. ..."
Monthly EIA US Crude + Condensate (C+C) data (the short term energy report) show a decline
in US production from 9.6 million bpd in May to 9.0 million bpd in September. The annualized exponential
rate of decline, based on May to September data, would be about 20%/year. If this (net) rate of
decline were to continue for another year, US C+C production would be down to about 7.4 million
bpd in September, 2016.
Louisiana is an interesting case history. As drilling activity declined in the Hayneville Shale
Gas Play, gas production from the play production initially continued to increase (as operators
worked through the backlog of drilling but uncompleted wells), but production from the play ultimately
showed a sharp decline, with annual marketed natural gas production falling at a rate of 20%/year
from 2012 to 2014. Measured from the monthly peak in December, 2011, it took about two and a half
years for the exponential rate of decline in Louisiana's monthly marketed gas production (from
both shale gas + conventional production) to fall below 20%/year. The three year 12/11 to 12/14
rate of decline was 18.5%/year.
Regarding one of life's little ironies, we keep hearing that oil exports from a net oil
importer, the US (with recent four week running average net crude oil imports of 6.8 million bpd),
will have a meaningful impact on global oil markets, just as the US is currently showing a 20%/year
annualized rate of decline in C+C production, implying that US net oil imports will be increasing
in the months ahead, if the production decline continues.
And the question that I have periodically posed, to-wit:
If it took trillions of dollars in global upstream capex to keep us on an "Undulating Plateau,"
in actual global crude oil production (45 and lower API gravity crude, i.e., the quantity of the
stuff corresponding to WTI & Brent oil prices), what happens to global crude oil production going
forward given the ongoing cutbacks in global upstream capex?
As noted above, it's more than a little ironic that there are so many claims that oil exports
from a net oil importer, the US, will have a material impact on global oil markets, even as US
Crude + Condensate (C+C) production is declining.
In any case, I just noticed something very interesting in the EIA Annual Energy Review data
tables, which provide monthly and/or annual data back to 1950:
Note that US total liquids net imports were up year over year, from 4.9 million bpd in August,
2014 (2014 annual average of 5.1) to 5.6 million bpd in August, 2015, a 14% year over year increase
in net total liquids imports.
Saw some analyst meeting (Genscape maybe) where the person projected rigs continuing to drop
through 1Q16, ending up 200 more down (or about 400 remaining). This was based on prices staying
in this ~$47-50 band, with commensurate strip. [A drop down to ~$40, with commensurate strip would
lead to an additional 200 rigs going away.]
I think the Haynesville is a nice example to show the "lag" effect when rigs drop. And really,
we can already use the US oil production as an example of this already. Another easy example is
2009 in the Bakken.
I would be leery of thinking too much that the Haynesville is some sort of example of Hubbert
peak because a lot of the drop is price caused, not exhaustion. [In a classic Hubbert peak case
for global oil or national gas, you would have the normal curve AND would have Hotelling price
increase. In this case, it's not even constant price…it's reaction to a price crash.] Haynesville
didn't drop because "they ran out of sweet spot" but because the price dropped. There is actually
more resource available, now, if we go back to previous prices…because of improvements in drilling
and completion efficacy. [This is Adelman's point of how you don't just eat away at lower
cost oil and move to higher…yes, you may be doing that. But in addition, knowledge can grow the
pool of available low cost oil or reduce the price of getting out what you already know about.
Both effects can occur and they fight each other and you have to get into the specifics to see
which is winning.]
In addition, concentrating on the Haynesville, when the Marcellus and Utica have occurred is
missing the main story from an economic impact perspective. After all, volume is up and price
is down for natural gas. So for all the H or the B dropped, the M and U more than made up for
it. "The App" is the key place to look at in US natural gas.
In addition, FWIW, H did drop very beautifully in a Hubbert-like manner from the peak of 7,
BUT for the last 18 months has been near flat at 4 BCF/day. Download the excel data (last figure
at bottom of page) and graph it and you will see that. Peak oilers discussing the Haynesville
as some sort of organic product life cycle analogy (born, grow, mature, die), never mention this
key insight (how it has flattened out dramatically now). But it's in the data. Just graph to see
it.
http://www.eia.gov/naturalgas/weekly/
(note this shows the shale only, not the conventional production. EIA DPR as a data source makes
the fat tail look even more prominent, but includes conventional in the region.)
So, given the right price incentives, the sum of the output of discrete sources of oil & gas–that
individually peak and decline–will never peak and decline?
In any case, in regard to price versus production, we have an interesting case history when
it comes to actual crude oil production (generally defined as 45 API and lower crude oil). Following
is an essay, which I sent to some industry acquaintances a few weeks ago:
Regarding oil prices, I may be one of the worst prognosticators around, especially when it
comes to demand side analysis. My primary contribution has been as an amateur supply side analyst,
especially in regard to net exports.
In any case, earlier this year I thought that we had hit the monthly low in Brent prices for
the current oil price decline ($48 monthly average in January, 2015), and I thought we were more
or less following an upward price trajectory, from the 1/15 low, similar to the price recovery
following the 12/08 monthly oil price low ($40 for Brent).
However, a key difference between the 2008/2009 price decline and subsequent recovery and the
2014/2015 decline is that Saudi Arabia cut production from 2008 to 2009 while they increased production
from 2014 to 2015.
But for what it's worth (perhaps not much), I think that this is a tremendous buying opportunity,
in regard to oil and gas investments. I don't have any idea what Warren Buffet is doing right
now, but I would not be surprised to learn that he is aggressively investing in oil and gas.
The bottom line for me is that depletion marches on.
A few years ago, ExxonMobil put the decline from existing oil wells at about 4% to 6% per year.
A recent WSJ article noted that analysts are currently putting the decline from existing oil wells
at 5% to 8% per year (in my opinion, the 8% number is more realistic). At 8%/year, globally we
need about 6.5 MMBPD of new Crude + Condensate (C+C) production every single year, just to offset
declines from existing wells, or we need about 65 MMBPD of new C+C production over the next 10
years, just to offset declines from existing wells. This is equivalent to putting on line the
productive equivalent of the peak production rate of about thirty-three (33) North Slopes of Alaska
over the next 10 years.
It appears quite likely that global crude oil production (45 and lower API gravity crude oil)
has been more or less flat to down since 2005, as annual Brent crude oil prices doubled from $55
in 2005 to $110 for 2011 to 2013 inclusive (remaining at $99 in 2014)–while global natural gas
production and associated liquids, condensate and NGL, have (so far) continued to increase.
Following are links to charts showing normalized production values for OPEC 12 countries and
global data. The gas, natural gas liquids (NGL) and crude + condensate (C+C) values are for 2002
to 2014 (except for gas, which is through 2013, EIA data in all cases). Both data charts show
similar increases for gas, NGL and C+C from 2002 to 2005, with inflection points in both cases
for C+C in 2005. My premise is that condensate production, in both cases, accounts for virtually
all of the post-2005 increase in C+C production.
Currently, we only have crude oil only data for the OPEC 12 countries and for Texas (note that
what the EIA calls "Crude oil" is actually C+C).
Also following is a link to OPEC 12 implied condensate (EIA C+C less OPEC crude) and OPEC crude
only from 2005 to 2014 (OPEC data prior to 2005 was for a different set of exporters than post-2005).
Obviously, data quality is an issue, and the boundary between actual crude and condensate is sometimes
fuzzy. In any case, we have to deal with the data that we have.
As of 2014, OPEC and the US accounted for 53% of global C+C production (41 MMBPD out of 78
MMBPD). Implied OPEC condensate production increased by 1.2 MMBPD from 2005 to 2014 (1.2 to 2.4).
The EIA estimates that US condensate production increased by about 1.0 MMBPD from 2011 to 2014.
I'm estimating that US condensate production may have increased by around 1.2 MMBPD or so from
2005 to 2014. Based on the foregoing, increased condensate production by OPEC and the US may have
accounted for about 60% (about 2.4 MMBPD) of the 4 MMBPD increase in global C+C production from
2005 to 2014.
Combining the US and OPEC estimates, the US + OPEC ratio of condensate to C+C production may
have increased from about 4.6% in 2005 to about 10% in 2014. If this rate of increase in the global
condensate to C+C ratio is indicative of total global data, it implies that actual global crude
oil production (45 and lower API gravity) was approximately flat from 2005 to 2014, at about 70
MMBPD.
In other words, the available data seem quite supportive of my premise that actual global
crude oil production (45 API and lower gravity crude oil) effectively peaked in 2005, while global
natural gas production and associated liquids, condensate and NGL, have (so far) continued to
increase.
If it took trillions of dollars of upstream capex to keep us on an "Undulating Plateau"
in actual global crude oil production, what happens to crude production given the large and ongoing
cutbacks in global upstream capex?
And given the huge rate of decline in existing US gas production (probably on the order of
about 24%/year from existing wells), it's possible that we might see substantially higher North
American gas prices this winter, given the decline in US drilling.
Furthermore, through 2013 we have seen a post-2005 decline in what I define as Global Net Exports
of oil (GNE, the combined net exports from the Top 33 net exporters in 2005), which is a pattern
that appears to have continued in 2014. GNE fell from 46 MMBPD in 2005 to 43 MMBPD in 2013 (total
petroleum liquids + other liquids). The volume of GNE available to importers other than China
& India fell from 41 MMBPD in 2005 to 34 MMBPD in 2013.
Here are the mathematical facts of life regarding net exports:
Given an ongoing, and inevitable, decline in production in the net oil exporting countries,
unless the exporting countries cut their liquids consumption at the same rate as, or at a faster
rate than, the rate of decline in production, the resulting rate of decline in net exports will
exceed the rate of decline in production and the net export decline rate will accelerate with
time.
In addition, while we are currently seeing signs of weak demand in China, given an ongoing,
and inevitable, decline in GNE, unless China & India cut their net oil imports at the same rate
as, or at a rate faster than, the rate of decline in GNE, the rate of decline in the volume of
GNE available to importers other than China & India will exceed the rate of decline in GNE, and
the rate of decline in the volume of GNE available to importers other than China & India will
accelerate with time.
For example, from 2005 to 2013 the rate of decline in the volume of GNE available to importers
other than China & India (2.3%/year) was almost three times the observed rate of decline in GNE
from 2005 to 2013 (0.8%/year).
And a massively under-appreciated aspect of what I call "Net Export Math" is that the rate
of depletion in the remaining cumulative volume of net oil exports, after a net export peak, tends
to be enormous. Saudi Arabia is showing a year over year increase in production and net exports,
but based on available annual data through 2014, Saudi Arabia's net exports fell from 9.5 MMBPD
in 2005 to 8.4 MMBPD in 2014 (total petroleum liquids + other liquids), and I estimate that Saudi
Arabia may have already shipped close to half of their total post-2005 supply of cumulative net
exports of oil.
Nony
"So, given the right price incentives, the sum of the output of discrete sources of oil & gas–that
individually peak and decline–will never peak and decline? "
So again, the argument for imminent decline is some eventual limit to the amount of hydrocarbons
on the entire planet? it is not cherrypicking to emphasize the Haynesville and Barnett as gas plays
"peaking" when overall gas production in the US has grown 40%, even in the face of a huge price drop????
"In any case, in regard to price versus production, we have an interesting case history when it comes
to actual crude oil production (generally defined as 45 API and lower crude oil)."
Nope. Lease condensate (~55) is legally considered crude oil. EF 47 is a normal listed form of oil
in Platts price lists. Light oil and condensate is used to make gasoline and other products and runs
through a refinery. It is easily and routinely blended with heavy oil and is actually needed for that
(not just as a diluent for transport but for optimizing the subunits of complex refinery (non complex
refineres, e.g. those without cokers or visbreakers or with less cracking actually function better on
just light blends to start…the extreme are teakettle refineries).
Condensate and EF crude is withing a few dollars of WTI and correlates with price moves very closely.
EF 47 is actually pricier than heavy sour crudes. Talk to any trader, refinery buyer, or even just a
microeconomist familiar with looking at substitutes. It is crazy to say that growth of 45+ oil has not
affected overall oil prices. Perhaps some small shrinking of spreads between qualities, but often not
even a directionality change. The much larger impact though is on the overall supply demand balance
for C&C. Does any economist think the goods are sufficiently different to justify a separate P-Q curve
for 45- and 45+ oil? [Oh…and the extra funny thing is the peak oil meme of mid 2000s was that we wouldn't
find more light sweet!]
P.s. If you really think 45+ isn't oil, then why not agree to remove the export restriction on at
least them?
"Following is an essay, which I sent to some industry acquaintances a few weeks ago:"
Your cut and pasting the things on the net (ELM stuff, net export arguments) is almost spammy. Total
conversation killer and often ignored by even your compatriots.
Erik Poole
Nony: You make good arguments for lumping crude oil and condensates.
The problem with a net export perspective is that it ignores the global nature of the market place
and at some point, an indifference to whether heavy oil imported into the US refinery complex hails
from western Canada, Venezuela, Mexico or Colombia. Or even Iran some day.
If we could draw and compare distribution curves of oil grades over the last , I suspect we would
see the distributions flattening out over time as extreme grades become more prominent. It may even
be bi-modal at this point.
Given the expense of retooling refineries and the robust growth in US condensate production, one
can see the interest in securing more pipeline access to Canadian bitumen. And perhaps the interest
in hoping/praying for growth in Colombian heavy oil production as Mexican production declines and
the populist Neo-Marxist experiment in Venezuela violently implodes stagnating heavy oil production
in that country.
Jeffrey Brown: I don't want to suggest that the net export perspective is not useful. It
clearly illustrates symptoms of the Resource Curse and the general difficulty experienced
by citizens in weak societies to play and cooperate well together. It does not however say much about
the US cheap energy entitlement and how that attitude has hurt US national security and economic
performance over time. America's well earned reputation for killing grandchildren and grandparents
in part stems from this ill-advized quest for cheap energy security (sic).
Jeffrey J. Brown
Erik,
I'm not arguing the relative merits of crude oil versus condensate, although distillate yield
begins to drop off precipitously over an API gravity of about 40 or so.
I am arguing that the available data strongly suggest that global crude oil production probably
peaked in 2005, while global natural gas production and associated liquids, condensate and natural
gas liquids, have (so far) continued to increase.
In regard to net oil exports, here's the problem: Given an ongoing, and inevitable, decline in
production in a net oil exporting country, unless they cut their liquids consumption at the same
rate as, or at a faster rate than, the rate of decline in production, it's a mathematical certainty
that the resulting rate of decline in net exports will exceed the rate of decline in production and
that the net export decline rate will accelerate with time.
Nony
I don't think it makes economic sense to put lease condensate with NGLs and away from crude. NGLs
are more gas like, so you can put them with gas if you want instead of oil or just make a third grouping.
[But don't forget them! If you cut the total liquid products to being C&C, they still belong somewhere…have
use!]
NGLS are mostly (c2-c4) molecularly pure, separated, gaseous products. [minor amount of C5+ liquid
("plant condensate" obtained at the gas refrigeration separation plant].
Lease condensate is just the associated entrained liquid oil from a primarily gas well. It is obtained
at the atmospheric, three phase separator at the wellhead. Similarly, wet gas is separated from predominantly
oil streams. Eagle Ford 47 isn't even coming out of "gas wells" (in terms of phase) but single phase
liquid oil wells that are very light. Lease condensate and Eagle Ford 47 look like oil, smell like oil,
mess up your Nomex coveralls in a similar manner to 30 API oil. They are each that glorious natural
product that contains a soup of hundreds of different molecules, of different lengths, aromaticities,
branching. Oh and less sulfur (which makes them BETTER oil) but still with some. Lease condensate also
tends to be a bit lower API and more variable in composition versus plant condensate (although higher
than oil), but still pretty similar.
There is a reasonable argument to exclude NGLs entirely from crude time series or at least C3 and
C2 from being lumped in with crude. Ethane in theory competes with naphtha and is an occasional substitute
(and some crackers are convertible), but given the glut, prices have diverged and started to follow
C1 a couple years ago. And like C1, it is quite difficult to transport across oceans. C3 is more exportable,
but still has a pretty different market (mostly heating) than premium liquid petroleum products (mostly
transport fuels: gasoline, diesel, jet). [In a sense, C1 is a substitute for oil, but it's a pretty
weak substitute!]
So yeah, sure, strip out the NGLs. And throw in the C4 and C5+ with being stripped out, since they
are minor…even though ARE mostly used for transport. Either direct gasoline mixing for butane or for
C5+ mixed into crude (at refineries or upstream at heavy oil sites) or used as naphtha in crackers (thus
competing with a refined liquid stream. But fine keep them all apart.
But keeping condensate (or Eagle Ford 47 oil) apart from other grades of crude makes no sense. That
stuff goes through refineries and makes gasoline…a lot of gasoline, which is generally what the refinery
is optimized for. (Other products have value and you go for a global optimum, not a local. Like you
don't optimize production of RFO and make little gasoline! Diesel and jet have value of course and at
times, pricing of diesel can beat out gasoline, but generally gasoline is top in both value. And certainly
in volume (typical refinery cracks some product that could have been diesel to make more gasoline).
Just look at Platts prices and the correlation of EF47 and DJ condensate versus WTI. It's the same stuff,
but slightly different flavors, man. If you look at it on a world basis (where the explosion of light
and super light is export-ban trapped on a continent that wants to refine 28 API), the correlations
will be even stronger. But I bet even in the US, you find a very consistent correlation: maybe just
look at annual average prices for 2008, 2009, 2014 and 2015 YTD. Condensate belongs with crude, from
a supply-demand standpoint. Not with NGLs or with NG.
Nony
Here's a link showing Saudi 50 API crude selling in the same setting as other grades of crude
(i.e. considered a similar good, not considered an NGL). AND at a premium to medium grade Gulf oil.
AND even at a greater premium than other light, but less light oils.
"... "don't tell people you're unemployed. Tell them you're semiretired. It changed my self-identity.
I still look for jobs, but I feel better about myself." ..."
"... More and more I have to accept this is the Third Act in Life and working for a traditional
company in a traditional job is no longer a reality ..."
"... Without real income, you eventually become another victim of our perverse, experience-averse
corporate economy. ..."
For those over 50 and unemployed, the statistics are grim. While unemployment rates for Americans
nearing retirement are lower than for young people who are recently out of school, once out of a
job, older workers have a much harder time finding work. Over the last year, according to the Labor
Department, the average duration of unemployment for older people was 53 weeks, compared with 19
weeks for teenagers.
There are numerous reasons - older workers have been hit both by the recession and globalization.
They're more likely to have been laid off from industries that are downsizing, and since their salaries
tend to be higher than those of younger workers, they're attractive targets if layoffs are needed.
Even as they do all the things they're told to do - network, improve those computer skills, find
a new passion and turn it into a job - many struggle with the question of whether their working life
as they once knew it is essentially over.
This is something professionals who work with and research the older unemployed say needs to be
addressed better than it is now. Helping people figure out how to cope with a future that may not
include work, while at the same time encouraging them in their job searches, is a difficult balance,
said Nadya Fouad, a professor of educational psychology at the University of Wisconsin-Milwaukee.
... ... ...
Sometimes simply changing the way you look at your situation can help. My friend Shelley's husband,
Neal, who also asked that I use his middle name, said the best advice he received from a friend was
"don't tell people you're unemployed. Tell them you're semiretired. It changed my self-identity.
I still look for jobs, but I feel better about myself."
He also has friends facing the same issues, who understand his situation. Such support groups,
whether formal or informal, are very helpful, said Jane Goodman, past president of the American Counseling
Association and professor emerita of counseling at Oakland University in Rochester, Mich.
"Legitimizing the fact that this stinks also helps," she said. "I find that when I say this, clients
are so relieved. They thought I was going to say, 'buck up.' "
And even more, "they should know the problem is not with them but with a system that has treated
them like a commodity that can be discarded," said David L. Blustein, a professor of counseling,
developmental and educational psychology at the Lynch School of Education at Boston College, who
works with the older unemployed in suburb of Boston. "I try to help clients get in touch with their
anger about that. They shouldn't blame themselves."
Which, of course, is easy to say and hard to do. "I know not to take it personally," Neal said,
"but sure, I wonder at times, what's wrong with me? Is there something I should be doing differently?"
It is too easy to sink into endless rumination, to wonder if he is somehow standing in his own
way, like a cancer patient who is told that her attitude is her problem, he said.
Susan Sipprelle, producer of the Web site overfiftyandoutofwork.com and the documentary "Set for
Life" about the older jobless, said she stopped posting articles like "Five Easy Steps to get a New
Job." "People are so frustrated," she said. "They don't want to hear, 'Get a new wardrobe, get on
LinkedIn.' "
As one commenter on the Facebook page for Over Fifty and Out of Work said, "I've been told to
redo my résumé twice now. The first 'expert' tells me to do it one way, the next 'expert' tells me
to put it back the way I had it."
Some do land a coveted position in their old fields or turn a hobby into a business. Neal, although
he believes he'll never make as much money as in the past, recently has reason to be optimistic about
some consulting jobs.
But the reality is that the problem of the older unemployed "was acute during the Great Recession,
and is now chronic," Ms. Sipprelle said. "People's lives have been upended by the great forces of
history in a way that's never happened before, and there's no other example for older workers to
look at. Some can't recoup, though not through their own fault. They're the wrong age at the wrong
time. It's cold comfort, but better than suggesting that if you just dye your hair, you'll get that
job."
Flatlander, August 5, 2013
Age discrimination is a sad reality today and always has been. It is also very difficult to
prove in a legal action. From what I have heard,...
Jay, August 5, 2013
Ok, I took some knocks on this, one that I deserve. I really do feel badly for the guys that
didn't make it. I was wrong on that one. Yes,...
Walter, August 5, 2013
This is a great article. I'm in this situation but worse. Trying to entice myself to nowadays
corporations I went and enrolled in a MBA program and got myself into a $40K student loan debt.
I had already paid my previous loans long time ago so I figure, if I update myself educational-wise
and prove these people that my mind is still fresh and sharp at a high level that I could raise
my chances.
Now, I am 56 and I still cant get a job. Taking a minimum wage position is out of the question
for me since all my salary would actually go to pay my debt and I would not have money even for
transportation back and forth to work.
What I find amazing is that employer are failing to understand that old folks like us would
really appreciate the opportunity and work harder to try to excel than probably any of nowadays
young kids, that, like the article mentioned, are more prone to leave the company to get promotions.
I keep telling my friends that I would even sign a contract guaranteeing that I would work for
them until the day I die or retire.
I like the idea presented by one of the readers here that the government should provide some
kind of economic incentive in the way of lower taxation for businesses that hire people over 50.
They do it for career criminals. Why not for qualified and educated/trained people.
This is totally age discrimination and it is a federal offense. However, I try that channel
also and I got no response from the Labor Dept. I thank the NYT for bringing this up.
Jovality, Las Vegas, NV. August 5, 2013
I'm 57 and have or had been employed in the high tech industry for over 25 years with never
a period of more than two weeks unemployment until now. During that time I rose from a software
developer to product manager, to VP of Sales and Marketing. I was laid off from that position
at the end of 2012, but luckily I was able to reach out to an old colleague who was able to sneak
me into a marketing position in his company at less than half my previous salary.
I was surprised by the younger people's reaction to me. They said things to me I had to take
as compliments such as, "You're really cool for an older guy." "I would never expect someone your
age would know so much or be so talented".
Unfortunately the company had a major layoff which I was caught in. Now I am like many of the
others who have posted her, "A ghost with a resume". Since being laid off in June of 2013 I have
sent out 100's of resumes with only a very limited response.
More and more I have to accept this is the "Third Act in Life" and working for a traditional
company in a traditional job is no longer a reality. It's time to take the vast experience
and talents I've built up or an entire career and use them to open my own business. It's a frighten
challenge to be sure.
But as someone once told me there is only one real form of security in life, when life knocks
you down you must have the drive and self-confidence to get up handle the situation and both survive
and succeed.
Jon K. Polis, East Greenwich, Rhode Island August 3, 2013
Bohemienne: In answer to your question; look up the movie " Soylent Green " from 1973, that
starred Charlton Heston and Edward G. Robinson....and see what fate be-fell Mr. Robinson's character....if
our government today offered me the same options/opportunities to me that they offered to him;
I would take advantage of them in a heartbeat...
Glenn, Cary, NC July 31, 2013
"People's lives have been upended by the great forces of history...."
Nonsense. People's lives have been upended by soulless capitalists and their lackeys in Congress
(read Republicans). There are no great forces of history at work here, just good, old-fashioned
GREED.
Rhea Goldman, Sylmar, CA July 31, 2013
I find it strange, very strange indeed, that all of us have so easily accepted our plight of
hardship. Have we been so cowed that collectively we take no action to put a stop to this harsh
treatment from employers? Re-read Dickens' Christmas Carol.....we are allowing the economics of
the United States to make Bob Cratchets of us all.
J. Campbell, Chicago, IL July 31, 2013
I'm amazed that an article from the NYT (to which I subscribe) actually suggests that people
in their 50's who are unemployed can somehow just "accept that they may *never* work again". How
could we live? What legal source of income could we obtain that would bridge us to Social Security
(even for those of us eventually eligible for SS retirement)? What are the people responsible
for this article (including the NYT editors who released it) thinking? What if someone suggested
that *they* accept a future where they never worked again, and had no income?
If there were several major American riots, that involved hundreds of thousands of unemployed
people (a fraction of the millions of current long-term unemployed in the US), the NYT would be
out front in demanding that order be restored *at any cost*. Where is the mainstream press demand
that *economic stability for the working class* be restored at any cost?
Or do you think, because of our current corporate/NSA state, such riots are impossible? If
so, look at Europe--right now.
Sam, Florida July 31, 2013
My husband was just laid off due to company merger. His entire department was eliminated. The
only good news, is that we've been expecting the lay off for about a year or so, as such we had
time to prepare. We also, have worked very hard to get our finances in order since we got married.
We killed all our unsecured debt in 2007, $55,000+, and we have saved a good chunk every year
since then. I'm still working on our lay off budget, but I hope that we will be able to cover
our regular monthly expenses on my salary.
Been there. Done that. It didn't work. The money disappeared - slowly but surely. Without
real income, you eventually become another victim of our perverse, experience-averse corporate
economy.
MJ, New York City August 5, 2013
Actually, it is possible to live on one salary. Best way is to start early on in the marriage,
keeping your first home rather than moving "up." Even if you have moved "up" it is possible and
no shame at all to move "down." It is a brave journey and takes real guts, but in many cases it
can be done.
Sam, Florida July 31, 2013
In addition to the costs to the individual and the families, their is a cost to society. Obviously
there is a cost to support many of these people in their later years, but there is also an uncalculated
cost to workers in their peak earning years, the height of their careers falling out of the job
market.
There is a cost to society to lose this knowledge, to losing their mentoring and training skills
for the next generation, to losing their consumer spending power, etc.
Melanie Dukas, Saugus, mass July 31, 2013
I am 59 years old, and I lost my job during the high tech bust in 2002 as marketing communications
manager at a fiber optic start-up. In Massachusetts, this was for many of us worse than the Great
Recession. At the height of my career at 48 years old, I was determined to get a job and interviewed
for 5 years. I drove a taxi and limo 6 days a week, but still couldn't make ends meet, so I moved
in with my parents 5 years ago and started my own business developing websites and marketing.
I just couldn't take interviewing anymore! It was like heartbreaking, kind of like dating - I
would go on the interview and get so excited and they never called.
It's been a long road, but at I am happy to be working in my field and making a living. Luckily,
I had done this before and although I would have preferred to work at a company full time, at
my age in marketing the jobs are few are far between and I need to work for the rest of my life
because I have no retirement. Even if I get a job, it is unlikely to last and then I would be
back in the same boat. Now I am in.
Henry, New York July 31, 2013
I think people must understand that the nature of WORK is changing. - In the past you worked
from 9-5 for a Company and as long you performed adequately you continued on your Job...
Well, welcome to the New Economy ...
Companies can no longer afford to Hire all the people they need "full time" people. The cost
is becoming prohibitive, especially if you add on the benefits costs ( avg. est. 30 % above salary).
In the future, I believe most people will become Independent Contractors and/or work on a Part-time
basis - to be utilized when needed and working Jobs or "Gigs" for many different employers- with
periods of " downtime."
This type of flexible Work will, soon become the mainstay. Therefore the "grayling" workforce
must adapt and think and plan accordingly. - In fact, there are many Employment Firms or " Headhunters"
who are already adapting this model. - and as the Baby Boomers retire en masse, they will be looking
for people since, in my opinion, there will not be enough "younger" to fill all the jobs needed.
Splenetix, Muskegon August 3, 2013
The conversion of full-time workers into freelancers is an exploitation of capitalism, forcing
you to waste your time self-marketing and administering. You won't have any of the scales of economy
that larger businesses enjoy so you won't be competitive.You won't succeed, you won't be able
to manage and get the work done. It's all about worker repression.
"... Older workers were less likely to lose their jobs during the recession, but those who were
laid off are facing far tougher conditions than their younger colleagues. Workers in their fifties are
about 20% less likely than workers ages 25 to 34 to become re-employed, according to an Urban Institute
study published last year. ..."
"... The point made in several articles of this nature revolve around lack of knowledge and experience
with newer technologies. In an effort to address this issue, I went back to school (again) to obtain
expertise in IT Networking and Security, PMP Path Project Management and ITIL. Now I am being told that
my education is of no value since I do not have the requisite 'Real World' experience using these newly
acquired skills. ..."
On one hand, they're too young to retire. They may also be too old to get re-hired.
Call them the "new
unemployables," say researchers at Boston College.
Older workers were less likely to lose their jobs during the recession, but those who were
laid off are facing far tougher conditions than their younger colleagues. Workers in their fifties
are about 20% less likely than workers ages 25 to 34 to become re-employed, according to
an Urban Institute study published last year.
"Once you leave the job market, trying to get back in it is a monster," said Mary Matthews, 57,
who has teetered between bouts of unemployment and short temp jobs for the last five years. She
applies for jobs every week, but most of the time, her applications hit a brick wall.
Employers rarely get back to her, and when they do she's often told she is "overqualified" for
the position. Sometimes she wonders: Is that just a euphemism for too old?
Her resume shows she has more than 30 years of experience working as a teacher, librarian, academic
administrator and fundraiser for non-profits.
"I've thought about taking 10 years off my resume," she said. "It's not like we're senile. The
average age of Congress is something like 57. Joe Biden is 70. Ronald Reagan was in his 70s when
he was president. So what's the problem?"
... ... ...
About 23,000 age discrimination complaints were filed with the Equal Employment Opportunity Commission
in fiscal 2012, 20% more than in 2007.
Proving discrimination is next to impossible, though, unless it's blatant.
"It's very difficult to prove hiring discrimination, because unless somebody says, 'you're too
old for this job,' you don't know why you weren't hired," said Michael Harper, a law professor at
Boston University.
As a former public servant teaching University Level Econometrics for nearly 15 years and possessing
numerous 'Excellence' awards, this development is nothing short of shameful. I have had dozens
of recruiters and HR 'specialists' debase my public service as not being 'Real World' experience
despite the fact that without my commitment to 'Real World Applications' education, many of those
with whom I apply for employment would not hold a college degree. Indeed, I find many of the hiring
managers with whom I speak regarding positions for which I have both technical and applications
experience, there is impenetrable discrimination once they meet me in person.
The point made in several articles of this nature revolve around lack of knowledge and
experience with newer technologies. In an effort to address this issue, I went back to school
(again) to obtain expertise in IT Networking and Security, PMP Path Project Management and ITIL.
Now I am being told that my education is of no value since I do not have the requisite 'Real World'
experience using these newly acquired skills.
Indeed, to meet the criteria for many positions I find open requires that I be a 'recent college
graduate.' When I point out that I have been continually retraining and taking online courses
to keep my IT skills current, I am once again met with the lack of 'Real World' experience requirement.
For a society that purports itself to value education and hard work, for those among us that have
worked very hard for substandard pay and benefits to be so casually cast aside is absolutely inexcusable.
Paul Stukin, Apr 24, 2015
This is nothing new, especially if you are in IT. I was laid off from IBM in August 2001, then
9/11, and the bottom fell out of the jobs market. I have not worked in IT since. I truncated my
resume to show the last 10 years of "relevant" experience and then got interviews, but never the
job.
DJM22, Apr 24, 2015
@Richard Thwaites
Where does this group turn; what is this demographic to do. For instance in my case based on
the type of work I've done for a lifetime I've been laid off a total of 5 times. The monies you've
had saved during these periods had to be used for survival and take care of family. No it wasn't
wasted.
But now boomers are going into that area where as they are tooyoung to retire in order to just
obtain social security. And then this won't be a whole bunch.
Are we suppose to give up everything we've worked for and live a less than mediocre livelihood?
That's a good 10/15 years away. Then they will say next how the boomers are becoming more of a
problem and mooching in order to survive. I'm not suggesting hand outs, but if ageism is going
to be the problem for boomers then boomers need to press somewhere, someone, something so we don't
end up with problems that will become even more major problems. What a way to end your career
and what a legacy to leave your children.
Look at all the characters in our government. None of them worked, simply kept chairs warmed
and signed papers they were told to sign and as stated they're up in their 70's + and have enough
money to aid their next 10 generations and the normal joe can't even complete his generation.
"... The NC Employment Security agent told a bunch of us to try to conceal our age when interviewing.
When asked if age discrimination wasn't against the law, he said very candidly it is, but there is no
penalty for it in these times. ..."
When the most recent employment report was released, PBS NewsHour
presented
a segment on a group of people over 50 who had been out of work. The participants said that employers
had little interest in even talking to them. Sometimes, when applying for jobs, these older applicants
deleted up to 15 years of experience from their resumes to get through the door, but as soon as the
interviewers saw how old the applicants were, their faces dropped and they cut the interview short.
... ... ...
Add to this mix the results of a recent study that explored the relationship between the number
of weeks of unemployment and the likelihood of receiving a callback after submitting an application.
The researchers submitted fictitious resumes to real online job postings in each of the largest U.S.
metropolitan areas. They sent roughly 12,000 resumes to roughly 3,000 job postings in sales, customer
service, administrative support and clerical job categories. They tried to make their fictitious
resumes look as close as possible to real resumes posted on job boards. In some cases, the resumes
showed the applicant as currently employed, in other cases as unemployed for spells of between one
and 36 months. They found that the callback rate sharply declined during the first eight months of
unemployment – from 7% to 4% – and then stabilized. This 45% decline compares to the results of another
study where black-sounding names received 33% fewer callbacks than white-sounding names.
... ... ...
The problem is that when the stigma of being unemployed is added to the stigma of being old, the
chance of getting a job becomes very, very small. This outcome is not only unfair, but also wasteful
from a national perspective as a substantial amount of experience and talent goes unused. Extended
periods of unemployment also destroy the lives of the individuals affected. They use up their savings,
they tap their 401(k)s, they sell their homes, and then they are left with nothing. And the number
of older unemployed workers is large. As of 2012, almost 2 million people over 50 had been unemployed
for more than six months; 1.3 million for a year or more. We need a jobs corps for these individuals
and we need it fast.
Robert E. Pin, May 15, 2013
I applied for one of the numerous jobs online and they asked point blank - what year did you
graduate HS? OMG! It was a required field so it was either lie, or put 1979. I felt it was good
Karma to say the truth.
So hard to prove age discrimination in this case but boy would I love to give them a piece
of my mind.
Doc y, May 15, 2013
@Brady White What would it do to your karma if you told them you were a child prodigy and graduated
at six years old? Also, for the math challenged, I often give my age as 28 years old, when counting
in base 20.
Sort of like there are 10 types of people: Those who understand binary and those who don't.
Wayne MacNeil, May 15, 2013
Bravo Alicia. Finally someone who understands what is going on. Only the numbers are probably
much higher. Age discrimination is supposed to be against the law. This needs to be enforced just
as strongly as discrimination against women or religion. There is a crisis in unemployment for
those over 50. Many of these people are the best educated and would be among the most capable
workers in the country. Someone has to pave a path requiring companies to employ older capable
workers. This is criminal and as mentioned by the author is destroying people, families, retirements.
People who have been productive for 30 years are losing everything. And younger workers dont seem
to get it. If they dont stand up to this - their time is coming too.
People think they will need to work until they are 70 to pay their debts. The shock comes when
the system wont let the majority work after they are about 50.
Rainier Rollo, May 15, 2013
Wayne -- I once asked a friend in her late 50s who was lamenting her long term unemployment
how many people over the age of 40 she hired when she was in a position to hire --- the answer
was ZERO. So don't just say that today's young people are afflicted with this way of looking at
people. Most of those now unemployed 50+ in poisitons of hiring also passed over older candidates.
Lois Land, May 15, 2013
In that PBS segment, it was amazing to watch that university woman (clearly over 60) talk about
how people become less productive after the age of 40.
Then doesn't she owe it to the university to resign/retire? Or does she think she's special/different?
I might be special/different too. I'm 64 and I've never been sharper or more productive.
Doc y, May 15, 2013
@Lois Land I hate to admit it, but something that has enhanced my productivity now that I am
50+ is I no longer have to leave work to attend kids' events, or take them to their appointments,
etc. I miss my children very much, but they are grown and on their own. I loved doing stuff with
them, and I made their activities my number one priority while they were growing up. Being laid
off three years after the youngest left home was never in the financial plan, and like others
on this site, employers have not been breaking my door down to come work for them.
The NC Employment Security agent told a bunch of us to try to conceal our age when interviewing.
When asked if age discrimination wasn't against the law, he said very candidly it is, but there
is no penalty for it in these times.
richard harris, May 15, 2013
The root cause of massive unemployment in the over 50 crowd is legal immigration. The 2010
census reported 40 million legal immigrants were residing in the US. These 40 million immigrants
translate to about 24 million potential workers. The real unemployment level is 23 million people.
Thus the real unemployment level of 23 million people is approximately equal to the work force
inflation caused by legal immigration.
Thus the only hope for the over 50 chronically unemployed is to ban all further legal immigration.
Zulauf this that this is bear market rally and the slide will resume the next year. His forcast
is at the beginning of the video clip. He expects S&500 drops to 1600 the next year.
Notable quotes:
"... Zulauf says he expects a global stock swoon next year. ..."
Speaking at Barron's Art of Successful Investing conference, Zulauf says he
expects a global stock swoon next year. He sees short-term gains for e-commerce
beneficiaries Amazon, Facebook and Google; longer term, hold bonds.
James 37 minutes ago
"What the American people cant take is their government not being square
with them"
When the #$%$ have they EVER been square with us...the hypocrisy in this
statement hurts my brain
"... I wish the author had discussed his current estimates of recoverable oil in the $50-70 range
rather than just implying it's there for the taking. A lot of countries have had their own individual
peaks in production (i.e. Egypt, Syria) and only much higher oil prices may reverse that (like
how high prices lead the US to increase energy extraction w/fracking). ..."
"... One question I'd really love to see tackled: if you could calculate the true, total cost of
production and use of a barrel of oil, including all the costs currently externalized (such as
the cost of repairing damage from earthquakes from fracking, or full ecosystem restoration and
financial restitution to affected people from pipeline breaks, etc) and compare that to the market
price, are a greater percentage of costs externalized than in the past? And where does that trend
go in the future? ..."
"... including all the costs currently externalized ..."
"... With all the mountains of BS on the internetz, this fundamental mat'l you will not find.
BTW add the cost of attributable MIC and Failed States to the list. ..."
"... differently ..."
"... responsible ..."
"... responsible ..."
"... Population will plateau at some point during this century. ..."
"... The problem is to get smart non-psychopaths in power, that's the #1 problem we have right now. ..."
"... It flies in the face of capitalist orthodoxy and its requirement of ever-expanding markets ..."
"... First, a big piece of what's going on stems from happy memories among Western policy makers
of how a similar Saudi-initiated oil price war played a big role in breaking the USSR back in
the 1980's. It's true that the price cut attends to some necessary cartel-management housekeeping,
but this is a side benefit – the motives are mainly geopolitical rather than commercial. War by
other means, as somebody said. For Putin, of course, the 1980's memories are not so happy. His
objectives include showing that Russian policy can't be jerked around via the oil price, and ideally
setting up consequences so painful to the Saudis that they'll never want to try this again. So
events won't follow the path you'd expect in a normal OPEC cartel management exercise – either
in time or in plot line. ..."
"... Second, there's a wicked price spike coming. It could be the day after tomorrow, if the Russians
and Iranians engineer something kinetic around the export facilities and trade routes on the western
shore of the Gulf. Or it could be a year or two from now, as the two sides – exhausted and poorer
– settle for some kind of mutually livable compromise. In either case the capex cuts now in train
will flip the oil supply from its present "glut" (very small in percentage terms as compared to
the 1980's experience) to a shortage at least as severe as the one in the middle years of the
last decade.. ..."
"... Oil price feedback will eventually kick in, though this is far in the future.
High oil prices increase the prices of all things dependent on oil for production or
transport. Eventually, the high price of oil starts to affect the price of oil itself. Those
spikes will be numerous and rapid, for a while. ..."
"... My take in Oil Dusk was to leave global warming out of the book and focus on the importance
of oil to the current infrastructure in the developed world and what a disruptive transition might
look like. Also, oil is truly scarce and took many millions of years to produce a quantity that
will mostly be gone within the next hundred years. Oil scarcity concerns me a lot more than climate
change. ..."
"... Within the
next five years, we will almost certainly see oil prices return to at least $90 a barrel – and
perhaps considerably more. ..."
"... The real alternative right now to oil is natural gas and it's likely that we transition from
a oil to a natural gas energy infrastructure before we get to a solar and wind driven world structure.
..."
"... The Saudis have the largest reserves of high quality cheaply extractable oil. They are the
highest rent producer. (There are likely further reserves of such cheap, high quality oil to be
found in a couple of places, Libya and Iraq, but you can see the problem there, and after that
there's nothing left to be found of conventional reserves). But they must also realize that the
age of oil is coming to a close over the next few decades. Hence it is in their interest to make
sure that they sell off their reserves to the last drop, before the end, and thus to squeeze out
higher cost unconventional producers. In the meantime, they also have an interest in keeping the
global economy from recession, since the value of their immense financial reserves depend on the
health of the global economy, which can readily be sent into recession by high oil prices. SO
likely they will try to keep the oil price from rising above , say, $70 for quite some time. so
as to balance out their various objectives. ..."
"... Conversion to renewables is just happytalk. Conversion to anything is just happytalk. A quick
look at physical fundamentals would reveal that there is simply not the means to continue industrial
civilization in anything vaguely like its current configuration. ..."
"... Civilization will be seriously disrupted–more likely, ended. Any technology or process that
would mitigate the resulting suffering would need to be robust against disruption. High technologies
and complex systems will not be robust, and will be of no use. ..."
"... Capitalism has been mentioned. The key point is that return on investment (on loans) is in
fact usury, and fundamentally criminal on a finite planet. The Industrial West "got away with"
usury for five centuries firstly because of imperialism (colonialism–the immiseration of the periphery
to prop up the center) and secondly because of cheap fossil fuels. Now that both of those are
at an end usury just means destroying the economy that already exists in the name of trying to
pay back the unpayable. Usury drove expansion, when expansion was physically possible; now it
accelerates decline. If we eliminated return on investment tomorrow, we would open a window for
addressing our problems. But usury will not be eliminated, and thus the chance of addressing our
problems is nonexistent. Won't happen–end of story. ..."
"... Meanwhile greenscams are everywhere, and will increase. Greenscams -- proposals for endless energy
and stuff (delivered in an environmentally friendly way, of course)–are about to become their
own proper industry. As everyone wants the impossible, greenscammers promise just that -– money up
front (from you, the sucker) for unicorns delivered in the future. After all, who can prove the
unicorns won't appear? This industry will be very profitable until we run out of suckers. I give
it a decade. ..."
I wish the author had discussed his current estimates of recoverable oil in the $50-70 range
rather than just implying it's there for the taking. A lot of countries have had their own individual
peaks in production (i.e. Egypt, Syria) and only much higher oil prices may reverse that (like
how high prices lead the US to increase energy extraction w/fracking).
One question I'd really love to see tackled: if you could calculate the true, total cost of
production and use of a barrel of oil, including all the costs currently externalized (such as
the cost of repairing damage from earthquakes from fracking, or full ecosystem restoration and
financial restitution to affected people from pipeline breaks, etc) and compare that to the market
price, are a greater percentage of costs externalized than in the past? And where does that trend
go in the future?
optimader
including all the costs currently externalized
With all the mountains of BS on the internetz, this fundamental mat'l you will not find.
BTW add the cost of attributable MIC and Failed States to the list.
jgordon
Rather than rehash things I've said before many times, I'll just provide a link to this classic
post from Nicole Foss at the Automatic Earth website. I think it offers context and interpretation
that's quite a contrast from the rosy and perhaps ill informed post above:
I agree with you, but this is a hard sell at this site due to deeply entrenched mythological
beliefs about 1. what money is and can do and 2. about infinite growth on a finite planet (collectively,
we're at the bargaining stage on this latter one as the signs of the end of growth and ecological
overshoot abound but are blocked from recognition by a paradigm that explains them as aberrations
or human failures). I'd add to the Nichole Foss post the book "Green Illusions: The Dirty Secrets
of Clean Energy and the Future of Environmentalism (Our Sustainable Future)," the webiste of Gail
Tveberg, Our Finite World," and the site "Economic Undertow".
jsn
It's not such a hard sell, I read plenty of comments here that understand what is in your references.
The issue is how you get where we need to go from where we are. Calling everyone who disagrees
ignorant doesn't help much: we all know what we know and don't know exponentially more. But it
is very hard to propose actionable ideas beyond "personal virtues" which on their own have no
chance. This is possibly the ultimate coordination problem: agreement on goals is much further
along than agreement on means.
MikeNY
+1
very perceptive comment
DanB
Please note I use "collectively" to refer to our culture, not to NC readers. Perhaps that was
not clear. And i've been reading and commenting here since 2009.
washunate
This is a great exchange. Perhaps what I might add is I'm not so sure we do have agreement
on goals. I think that does a disservice to those voices that quite passionately advocate moar.
They genuinely believe that more work, more output, more deficit spending, more higher education,
more home equity, more development and infrastructure, more aggregate activity, will improve society.
It is a moral calling they see, and it is quite distinct from the perspective that we should live
differently. We can't paper over how deep that chasm is between those that want full
employment and those that want a world where less is more. One irony of the post-Keynesian (and
post-Bretton Woods) MMT world is that Keynes himself thought we'd only need to be working a few
hours a week by now. Capital accumulation was the great liberator of our time, to allow us human
beings to do more important and exciting (and less polluting) things than go to work. But the
secularization of the puritan work ethic – the notion that human life is directionless without
an authoritative (and fatherly) figure to give direction – dies hard.
bdy
And for whatever reason, the less-is-more crowd isn't so much in the habit of proposing actionable
ideas. We might consider that dismissal and scorn are nothing more than rhetorical tools in a
conversation about power. (See Ghandi or Nicholas Klein: "first they ignore you…")
– We can tax excessive consumption at the rate of its externalities, even (and especially)
for necessities like food, water and housing
– We can publicly fund taking people and institutions off of the grid.
– We can publicly fund light industry and massive agricultural infill in our cities.
– We can lift property taxes and subsidize rents for anyone who walks or bicycles to work.
– We can tax energy in direct proportion to the loss rate of whatever grid carries it.
– We can enable the State to enter the Market wherever a discernible demand is not being met,
as consumer or provider (see giving medicine to sick children or eating unadulterated food)
– We can scrunch city streets to the size of cart paths, confiscate any vehicle that exceeds 25
mph, shade everyone's windows, turn off our a/c, criminalize the use of drinking water for anything
but drinking, locally compost all our bio-waste, end the industry of converting sunlight to meat,
criminalize bulk possession of any bio-toxin, enforce a 25 hr / 3 day work week with no overtime,
revoke the commerce clause (or not), buy back guns at triple the sticker price and melt them into
strollers and windmills…
It's simply a matter of keeping the conversation on point (what works within the limits of
our solar income?) and being willing to discuss policies that might or might not reduce our level
of comfort and privilege.
Naomi Klein reads like USA Today, but The Shock Doctrine is right. The inevitability of scarcity
means that crises will escalate. And with each escalating crisis, the most unthinkable ideas will
become potentially acceptable (including comic-book nastiness like a nuclear first strike; ethnic
cleansing in Kansas; a 0% capital gains tax; or declaring global, never-ending war against
non-christians terror).
If enough of us agree that shit is really going South in a bucket, and that the Fiat dollar
allows us to spend relatively freely on things like war in Iraq; QE; or mitigating the disruption
of mass industrial shrinkage, then we should also agree that the "actionable" in actionable ideas
is all encompassing. Because the next time someone flies a false flag or blows up a critical asset
class, the table will be in dire need of transformative food for thought.
washunate
It's simply a matter of keeping the conversation on point (what works within the limits
of our solar income?) and being willing to discuss policies that might or might not reduce
our level of comfort and privilege.
Yep. I think that's one of the characteristics that makes proposals to do less (for example,
tax the rich or end the drug war or scale back IP law) the most realistic in a system as corrupt
intellectually and financially as ours is today.
It's the first rule of holes: stop digging. Almost all of the big ideas to do more require
an infrastructure of good faith management that simply doesn't exist.
Brooklin Bridge
Thanks for the link. That is a very interesting and well written article, worth reading and
re-reading since it gives a good perspective on many issues. But you should also take into account
that it (and all the links inside it) was written in 2012 and the costs of producing renewable
energy are dropping to such an extent (like compound interest) that they are changing the nature
of the issue.
Moreover, the argument the article makes doesn't negate the need to transition to renewables;
rather it acknowledges that need but emphasizes the gains of doing so locally in support of (as
alleviation to) the current centralized power model rather than immediately replacing it. My argument
about corruption below, I think, is one of the reasons that this effort has not gone further.
Example, Hawaii, where electric utilities have had considerable success in halting renewables
at the local level by individuals due to fear of reduction in profits.
Brooklin Bridge
Note, the fear of reduction in profits isn't entirely without merit. But what is without merit
is the capitalist system that makes it possible for the utilities to win a battle for profits
in a war for existence.
jgordon
The article is even more relevant than it was in 2012; the issue is not the cost of a solar
panel, which is perhaps the least important cost in the process. Rather, it's the way our infrastructure
is set up. The centralized utility/grid model is still just as incompatible with renewable energy
today as it was in 2012.
It's possible that we could all have a solar panel array and a windmill directly adjacent to
the demand–but we'll still have to cut our energy consumption by 95%. In that kind of a world,
things like personal passenger vehicles and the internet will not exist. I'm looking forward to
it.
hidflect
The primary issue is one polite society refuses to address: population.
jsn
That is the issue that makes it "possibly the ultimate coordination problem". The moral reality
of billions of lives lie in the balance of the actions one takes or doesn't take. That weight
may be among the biggest barriers to responsible action: those who aspire to be responsibleare
the most unnerved by this issue.
washunate
I'm much more optimistic on that front. Population is not a large coordination problem because
there is no scaling needed to have fewer kids later in life (at least until the authoritarians
perfect their Huxley Bokanovsky groups, I guess). Those are individual choices that can be made
at the ultimate local level.
It's already happening all around the globe, and outside of China, it's mostly happening as
a genuinely free choice made available by the intersection of reproductive healthcare and a basic
standard of living. It's almost like our species subconsciously recognizes the value of reducing
the total population. Even against the stern worrying of the Serious People that declining birth
rates threaten The Economy(TM).
Ignacio
+1, an other perceptive comment.
Also the 'population problem' is a relative problem to consumption, resources and distribution.
Population will plateau at some point during this century.
There is no such thing as 'population problem' with the appropriate policies if the population
does not go beyond 10 bill. (and old people consumes much less, by then humanity will be aging,
damn, it already is in developed nations).
The problem is to get smart non-psychopaths in power, that's the #1 problem we have right now.
jsn
Right now the real resources ratchet is producing civil wars and mass migrations, for instance,
among other problems that are just beginning to blossom.
It isn't population per se that is the coordination problem, it is equitable distribution of
diminishing real resources in real time to support it without mass die offs that is.
So far industrial overshoot is playing out with all the harbingers of collapse which will solve
the distribution problem by natural selection. The coordination problem is to solve the distribution
problem ethically to prevent nature taking its course.
Nature bats last, so the trick is to keep the inning going.
MikeNY
I think this is true, and there are two big reasons for it:
1. It flies in the face of capitalist orthodoxy and its requirement of ever-expanding markets
2. If flies in the face of certain religious teachings on sexuality
Both of these need to be rethought.
Eric Patton
The article does not mention the word "capitalism" even once.
Private enterprise market economies - capitalism - are literally incompatible with reduced
emissions. As long as we have a private enterprise economy with market-based allocation, we will
simply continue to destroy the planet.
Private enterprise centrally planned economies, public enterprise centrally planned economies,
and public enterprise market economies have all existed in real life: Nazi Germany, the former
Soviet Union, and the former Yugoslavia. None of these are viable alternatives to capitalism,
if the goal is reduced carbon emissions.
People are not yet ready to discuss the alternative though. This is not good.
JTMcPhee
…it's not "market based allocation," unless one does a little trick with definitions and categories–
I'd call it "corruption based allocation," with a secondary diagnosis of terminal metastatic idiotic
greed…
Pwelder
This post is OK as far as it goes, but it misses a couple of realities in the current situation
that are relevant to finance and politics when viewed – as Yves does – from 50,000 feet.
First, a big piece of what's going on stems from happy memories among Western policy makers
of how a similar Saudi-initiated oil price war played a big role in breaking the USSR back in
the 1980's. It's true that the price cut attends to some necessary cartel-management housekeeping,
but this is a side benefit – the motives are mainly geopolitical rather than commercial. War by
other means, as somebody said. For Putin, of course, the 1980's memories are not so happy. His
objectives include showing that Russian policy can't be jerked around via the oil price, and ideally
setting up consequences so painful to the Saudis that they'll never want to try this again. So
events won't follow the path you'd expect in a normal OPEC cartel management exercise – either
in time or in plot line.
Second, there's a wicked price spike coming. It could be the day after tomorrow, if the Russians
and Iranians engineer something kinetic around the export facilities and trade routes on the western
shore of the Gulf. Or it could be a year or two from now, as the two sides – exhausted and poorer
– settle for some kind of mutually livable compromise. In either case the capex cuts now in train
will flip the oil supply from its present "glut" (very small in percentage terms as compared to
the 1980's experience) to a shortage at least as severe as the one in the middle years of the
last decade..
Why should progressives care? Many good reasons, but the big one I haven't seen mentioned is
this: There's a good chance the spike lands smack in the middle of the 2016 election. That being
the case, this is probably not a great time to be parading around bragging about successes in
blocking pipelines and keeping the oil on trains.
MrColdWaterOfRealityMan
There are a number of issues not mentioned that factor into any prediction:
1) Oil isn't electricity. It's not used the same way and currently can't be used the
same way. There are no electric airplanes, freight trains or cargo ships. Despite innumerate
claims to the contrary, no current battery technology is capable of replacing hydrocarbon
fuels. The volumetric energy density is not there and won't be for the foreseeable future.
2) Price is a proxy for energy return. Prior to the current overproduction glut (the
equivalent of squeezing a sponge harder for a few seconds), oil became expensive because
acquiring it from fracking or drilling in deep water is more expensive, both energetically and
economically. Despite the current overproduction blip, the upward pricing trend will
inevitably continue.
3) Production breakdown will be nonlinear. The world's current interdependent,
global, just-in-time supply chains depend on *cheap* oil to be economical. When oil prices
jump again, as they inevitably will, these will start breaking down in unpredictable ways as
production and transportation costs increase. This affects everything, including the price of
oil
4) Oil price feedback will eventually kick in, though this is far in the future.
High oil prices increase the prices of all things dependent on oil for production or
transport. Eventually, the high price of oil starts to affect the price of oil itself. Those
spikes will be numerous and rapid, for a while.
Oildusk
I was involved in a book entitled the Carbon Conundrum, by Bob Kelly. Bob has a PDH in economics
from Harvard. He mapped out the anticipated volume of fossil fuels remaining and it's impact on
the world climate. His take was that we'd run out of oil in the not too distant future and that
it would take the world about 500 years to get back to pre-industrial carbon levels.
My take in Oil Dusk was to leave global warming out of the book and focus on the importance
of oil to the current infrastructure in the developed world and what a disruptive transition might
look like. Also, oil is truly scarce and took many millions of years to produce a quantity that
will mostly be gone within the next hundred years. Oil scarcity concerns me a lot more than climate
change.
While a book about oil scarcity might seem unrealistic at this juncture with world prices hovering
in the $45 – $50 range, I remember twelve years ago when I couldn't persuade the bank to provide
me with a price deck above $30 a barrel so that I could make some energy investments. Within the
next five years, we will almost certainly see oil prices return to at least $90 a barrel – and
perhaps considerably more.
The real alternative right now to oil is natural gas and it's likely that we transition from
a oil to a natural gas energy infrastructure before we get to a solar and wind driven world structure.
Energy transitions are difficult and the actual path will make a huge difference in where we
are as a species in the next 100 years.
Ignacio
There are different ways of looking at the energy issue depending on where do you live and
I appreciate very much the insigths from Mumbay, India. I live is Spain and I have a different
view. India is growing briskly while spain is stagnated and will be so for years to come it
seems. Instead of growing fossil fuel consumption we have seen a quite noticeably decline,
particularly for petrol products. Since the beggining of the crisis, petrol products
consumption has declined by 28% (From 75 million tons annually in 2015-2017 to 54 million tons
in 2014). Domestic oil production covers less than 1% of total consumption. We depend almost
totally on oil imports.
The observed decline has been caused of course by the financial crisis and high oil prices.
Nevertheless, I bet that in Spain we have already seen an all-time peak oil consumption. Of
course, lower oil prices are now playing in reverse and 2015 will see a modest rise in petrol
products consumption for the first time since 2007. Nevertheless the observed decline shows
clearly that an economy can function with much lower oil energy input. And there is still a
lot of room to reduce consumption.
A country like Spain, totally dependent on oil imports and crushed by bad debt is very
sensitive to oil price volatility and there are many economic incentives to reduce oil
consumption and replacement with renewables. In a depressed economy like ours, every
euro/dollar saved on imported petrol products has a multiplier effect on growth. Besides,
pressure is mounting from the side of public health (toxic emissions from gasoil, fueloil and
kerosene) and climate protection. Spain has not the size nor the population of India and its
international impact is small. But it migth become an advanced laboratory trial to test the
end of the Oil Age.
DanB
You write, "While a book about oil scarcity might seem unrealistic at this juncture with world
prices hovering in the $45 – $50 range…" Actually, the reason the price is low is due to the scarcity
of cheap light sweet crude oil. We're seeing more and more people unable to afford more and more
of life's necessities while simultaneously the cost of extracting oil is increasing (along with
bankruptcies and mergers among energy companies to fend off the inevitable consequences of peak
oil on debt, finance and the economy.) Low prices do not mean a glut of oil; they signal just
the opposite. And then we have a neoliberal political/economy that worsens the matter.
susan the other
I agree and I'm convinced that every government on Earth agrees. What I see playing out between
the Saudis-Qataris and the Russians is a struggle to control natural gas. The Gulf wants to pipe
gas thru Syria and turkey to the EU. Russia wants to pipe gas from the Caspian to southern Europe.
France wants to gain a share of the gas fields belonging to Egypt and get in on the action. It
looks like Iran intends to supply China with natural gas via a pipeline thru Pakistan. What this
looks like is a pact among the producers to leave oil in the ground after a certain window of
time needed to switch to natural gas and then the reduction of the use of natural gas as it is
replaced by renewables. The Saudis are using their natural advantage to sell as much of their
oil as they can before the window closes. Maybe.
john c. halasz
The Saudis have the largest reserves of high quality cheaply extractable oil. They are the
highest rent producer. (There are likely further reserves of such cheap, high quality oil to be
found in a couple of places, Libya and Iraq, but you can see the problem there, and after that
there's nothing left to be found of conventional reserves). But they must also realize that the
age of oil is coming to a close over the next few decades. Hence it is in their interest to make
sure that they sell off their reserves to the last drop, before the end, and thus to squeeze out
higher cost unconventional producers. In the meantime, they also have an interest in keeping the
global economy from recession, since the value of their immense financial reserves depend on the
health of the global economy, which can readily be sent into recession by high oil prices. SO
likely they will try to keep the oil price from rising above , say, $70 for quite some time. so
as to balance out their various objectives.
Gaianne
One hesitates to add to an overly long thread.
Conversion to renewables is just happytalk. Conversion to anything is just happytalk. A quick
look at physical fundamentals would reveal that there is simply not the means to continue industrial
civilization in anything vaguely like its current configuration.
Civilization will be seriously disrupted–more likely, ended. Any technology or process that
would mitigate the resulting suffering would need to be robust against disruption. High technologies
and complex systems will not be robust, and will be of no use.
Photovoltaic technology is a mid-term, niche, small-scale amelioration. It cannot power the
grid, and it cannot replace the grid. Until panels can be made without rare-earth elements, the
supply is seriously constrained by geology. Even if they are freed from rare-earths, the high
technology and long suppy chains mean they will not go more than a few decades into the future.
The grid itself will go down, region by region, never to return.
Those of us who use photovoltaics know they are wonderful for the small-scale low-power applications
to which we put them. And of no use for the high-energy large-scale schemes we keep hearing about.
Capitalism has been mentioned. The key point is that return on investment (on loans) is in
fact usury, and fundamentally criminal on a finite planet. The Industrial West "got away with"
usury for five centuries firstly because of imperialism (colonialism–the immiseration of the periphery
to prop up the center) and secondly because of cheap fossil fuels. Now that both of those are
at an end usury just means destroying the economy that already exists in the name of trying to
pay back the unpayable. Usury drove expansion, when expansion was physically possible; now it
accelerates decline. If we eliminated return on investment tomorrow, we would open a window for
addressing our problems. But usury will not be eliminated, and thus the chance of addressing our
problems is nonexistent. Won't happen–end of story.
There is much to be done nonetheless. Learning to live will less, and on things which can obtained
locally, is both possible and necessary. Managing local, available sunlight for heating and cooling
was well researched (and ignored) back in the 1970s. Much can be done on a small, local scale.
Meanwhile greenscams are everywhere, and will increase. Greenscams -- proposals for endless energy
and stuff (delivered in an environmentally friendly way, of course)–are about to become their
own proper industry. As everyone wants the impossible, greenscammers promise just that -– money up
front (from you, the sucker) for unicorns delivered in the future. After all, who can prove the
unicorns won't appear? This industry will be very profitable until we run out of suckers. I give
it a decade.
–Gaianne
Steven
Just about the best take I've found on this subject – and on money and economics – is Frederick
Soddy's "Wealth, Virtual Wealth and Debt" (2nd edition). Here are some samples:
…though as yet the applications of the knowledge to the economics of life are not generally realised, life in its physical aspect is fundamentally a struggle for energy,… p. 49
As Ruskin said, a logical definition of wealth is absolutely needed for the basis of economics
if it is to be a science. p. 102
The vast potential productivity of the industrialised world, particularly in the engineering
and chemical industries, must find an outlet. If that outlet is by financial folly denied it in
the building up and reconstruction of the home-life of nations, it remains as a direct and powerful
incentive to the fomenting of war. p. 303
The first bullet obviously goes far beyond mere oil wars. Ecology 101 says we can't turn the earth
into one wriggling mass of humanity, that other forms of life are necessary to sustain our existence.
You've heard variations of the second bullet before, e.g. Oscar Wilde describing the Anglo Saxon
version of economics: "they know the price of everything and the value of nothing."
If the third bullet doesn't ring a bell, you have been listening to too much Fox news. The
military industrial complex gained its death grip on the American economy in the aftermath of
a Great Depression that left America's financial and political leadership with a profound fear
of the return of peace. At stake was not just unparalleled political and military hegemony but
the power to create money ex nihilo and exchange it for the world's wealth.
We have been covering the ongoing collapse in global manufacturing as tracked by Caterpillar
retail sales for so long that there is nothing much to add.
Below we show the latest monthly data from CAT which is once again in negative territory across
the board, but more importantly, the global headline retail drop (down another 11% in August)
has been contracting for 33 consecutive months! This is not a recession; in fact the nearly 3
year constant contraction - the longest negative stretch in company history - is beyond what most
economists would deem a depression.
We got the answer just three days later when the industrial bellwether confirmed the world is
now in an industrial recession, when it not only slashed its earnings outlook, but
announced it would fire a record 10,000.
Moments ago, CAT reported its
latest monthly retail sales and they were even worse than last month: in the month of September
there was not a single region that posted either a increase of an unchanged print. This was the first
month in all of 2015 in which every region posted a drop.
Putting CAT's result in context, the Great Financial Crisis resulted in 19 consecutive months
of sales declines. We are currently at 34 months and showing no signs of any pick up.
As such, based on CAT's ongoing shockingly bad retail sales we wonder if it is no longer merely
a global recession: perhaps that time has come to call it what it really is - a global industrial
(at first) depression, which has so far been hidden from plain view thanks to $13 trillion in central
bank liquidity, whose marginal impact is evaporating by the day and a Chinese credit machine which
recently hit a brick wall.
"... I would suggest that right wing policy shoveling all the income and wealth gains into
the pockets of a few rich plutocrats are incompatible with economic growth. ..."
"... But why is inequality rising in nearly all societies worldwide (including the northern
European societies)? Could it be that sovereign governments are trapped in a race for
current-account surpluses and improve their current-account balances by transferring income
from consumer households to saver/investor households (and in some cases, such as Saudi Arabia
or China, governments)? See Michael Pettis, The Great Rebalancing ..."
I listened for quite a while hoping for something that sounded like an actual insight but
never got past why Hansen became Keynesian. Capitalists do not need to be euthanized.
Capitalists are suicidal. They would rather bet their money in a Wall Street casino than pay
wages high enough for their customers to buy their goods because they keep forgetting that
their workers ARE their customers. Trade deficits driven by offshoring are one of the most
effective ways of making capital more efficient while simultaneously lowering wages and
aggregate demand including even for those goods our corporations produce offshore.
If per capita income/demand falls, prices are stable, and profit margins increase then volume
is bound to fall.
Jan said...
Great lecture! O'Rourke's close attention to both the history of economic thought and
economic history sets him apart (above) most of the debate on secular stagnation.
According to Martin Wolf, world interest rates were unusually low from about 1895 until WWI
and lower still during the 1920s. This suggests that secular stagnation might be a chronic
problem. Perhaps Hansen is right that humans normally save too much. Or perhaps the
interaction among sovereign states in a global economy causes a secular trend of rising world
savings. Or perhaps something else. What do you think?
DeDude said in reply to Jan...
I would suggest that right wing policy shoveling all the income and wealth gains into
the pockets of a few rich plutocrats are incompatible with economic growth. There is a
reason that the Scandinavian countries are so wealthy (in spite of 5-6 week annual vacation
etc.).
DeDude said...
The economy IS consumption. Even the 30% of GDP that is not direct consumption is not going
to grow unless consumption is growing. So to grow the economy you either increase private
sector consumption or you increase public sector consumption. The only way to obtain a
sustainable increase in private sector consumption is to get a better income and wealth
distribution away from investor class and into consumer class pockets. Alternatively, when the
private sector resist increased consumption you have to increase public sector consumption
(financed either by debt or by taxing the investor class). GDP is not rocket science, it is
5th grade math.
Jan said...
I totally agree (and so does Summers) that growing income inequality is a proximate cause
of excess saving and, hence, secular stagnation.
(By the way, although the USA is commonly perception as a profligate spender, the USA private
sector's ratio of wealth (accumulated saving) to consumption has risen by about 5% since 1980.
So contrary to the common perception, the USA's private sector has been contributing to the
growth of the world saving glut.)
But why is inequality rising in nearly all societies worldwide (including the northern
European societies)? Could it be that sovereign governments are trapped in a race for
current-account surpluses and improve their current-account balances by transferring income
from consumer households to saver/investor households (and in some cases, such as Saudi Arabia
or China, governments)? See Michael Pettis, The Great Rebalancing, on how sovereigns
improve their current account balances. (Warning: you won't find Pettis's brilliant exposition
in an International Economics textbook, which is stuck in the neoclassical obsession with
allocative efficiency and, hence, "free trade.")
The author is pretty naive assuming the KAS can decide to move oil prices without the USA
blessing and the US controlled financial market support of such a move. In a sense it's no longer
KAS that determine the oil price, it's Wall street as volume of "paper oil" exceeds "real oil" by
several times now. Making oil more like a play in another currency. Also probably some
tangible or intangible compensation was promized for KAS for putting pressure on Russia.
The Saudi government is also scrambling. After an eight year hiatus from issuing sovereign
debt, the Saudi government announced a plan during the summer to borrow $28 billion in 2015 and
launched the borrowing with a $5 billion offering in August. The Ministry of Finance has banned
contracts for new projects, hiring and promotions, and purchase of vehicles or furniture in the
fourth quarter, while the newly created Council for Economic and Development Affairs must now
approve all government projects worth more than $27 million. The Saudi government also is
preparing to privatize airports and contemplating seeking private financing for infrastructure
projects.
Related: Airstrikes Have Yet To Stop ISIS Oil Industry
The budget situation puts the Saudi government in a difficult situation. On the one hand, the
size of the deficits requires drastic cuts in spending, but such drastic cuts would impact
politically sensitive areas such as energy subsidies, government employment opportunities for
Saudi citizens, education, and economic development projects. On the other hand, depleting Saudi
government reserves to finance the deficits will put the Saudi sovereign credit rating at risk,
which would raise the cost of borrowing as well as pressure the Saudi currency (the consequences
of which are discussed below).
"... a prolonged period of low oil prices is now baked into analysts' earnings expectations,
although some Canadian analysts will probably have to ratchet down their estimates even farther.
..."
"... In December, he noted that his clients were consumed with in energy, and he cautioned against
holding on to the previous cycle's winners. Two months later, he quipped that the short period of
crumbling crude prices would not "cure a decade-long notion of oil and energy being the place to
be." ..."
"... In December, he noted that his clients were consumed with in energy, and he cautioned against
holding on to the previous cycle's winners. Two months later, he quipped that the short period of
crumbling crude prices would not "cure a decade-long notion of oil and energy being the place to
be." ..."
"... Earnings per share revisions are one of our most trusted contrarian indicators and the fact
that they have hit extreme negative levels is encouraging to us for sector performance
prospects ..."
Earlier this year, Bank of Montreal Chief Investment Strategist Brian Belski called energy
stocks a value trap.
He has become more constructive, upgrading the sector to market weight, from underweight.
A confluence of factors influenced the strategist's decision to "neutralize" his portfolio
position for both U.S. and Canadian energy stocks. The first is that the sector has reached what
he called "peak negativity," underperforming the Standard & Poor's 500-stock index by the most
since 1986, when the last supply side-driven crash in oil prices occurred.
Second, a prolonged period of low oil prices is now baked into analysts' earnings expectations,
although some Canadian analysts will probably have to ratchet down their estimates even farther.
"Earnings per share revisions are one of our most trusted contrarian indicators and the fact
that they have hit extreme negative levels is encouraging to us for sector performance
prospects,"he wrote.
"Energy sector growth expectations in Canada have come down significantly, but still remain too
optimistic given the oil price outlook and especially when compared to estimates for the U.S.,"
he added.
... ... ...
In December, he noted that his clients were consumed with in energy, and he cautioned against
holding on to the previous cycle's winners. Two months later, he quipped that the short period of
crumbling crude prices would not "cure a decade-long notion of oil and energy being the place to
be."
But the "pain trade," Belski now says, is for energy stocks to move higher.
"... That could mean that only one branch of this family of some seven thousand princes will
have power, a prescription for potential conflict as thirty-four of the thirty-five surviving
lines of the founders family could find themselves disenfranchised. ..."
"... Todays Saudi Arabia is reminiscent of the dying decade of the Soviet Union, when one
aged and infirm Politburo chief briefly succeeded another-from Brezhnev to Andropov to Chernenko ..."
"... In moves announced on Saudi state television, Salman replaced Crown Prince Muqrin bin
Abdulaziz and named the powerful interior minister, Prince Mohammed bin Nayef, as next in line.
He also named his son, Prince Mohammed bin Salman, as deputy crown prince and relieved the
long-serving foreign minister, Prince Saud al-Faisal, who has shaped the kingdoms foreign
policy for nearly four decades. ..."
"... But that was before their father, King Salman bin Abdulaziz, 79, ascended to the throne.
Now Prince Mohammed, the eldest son of the kings third and most recent wife, is the rising
star. He has swiftly accumulated more power than any prince has ever held, upending a longstanding
system of distributing positions around the royal family to help preserve its unity, and he
has used his growing influence to take a leading role in Saudi Arabias newly assertive stance
in the region, including its military intervention in Yemen. . . . ..."
"... some
Western diplomats, speaking on the condition of anonymity for fear of alienating the prince
and the king, say they are worried about the growing influence of the prince, with one even
calling him rash and impulsive. And in interviews, at least two other princes in the main
line of the royal family made it clear that some older members of the clan have doubts as well.
Both questioned the costs and benefits of the Yemen campaign that Prince Mohammed has spearheaded.
. . . ..."
"... The prince, one of the grandsons of the states founder, Abdulaziz Ibn Saud, has told
the Guardian that there is disquiet among the royal family – and among the wider public – at
the leadership of King Salman, who acceded the throne in January. ..."
What scares many royals and most ordinary Saudis is that the succession, which historically
has passed from brother to brother, soon will have to jump to a new generation of princes.
That could mean that only one branch of this family of some seven thousand princes will
have power, a prescription for potential conflict as thirty-four of the thirty-five surviving
lines of the founder's family could find themselves disenfranchised. Saudis know from
history that the second Saudi state was destroyed by fighting among princes. Older Saudis vividly
recall how this third and latest Saudi state was shaken by a prolonged power struggle between
the founder's two eldest sons after his death in 1953.
Today's Saudi Arabia is reminiscent of the dying decade of the Soviet Union, when one
aged and infirm Politburo chief briefly succeeded another-from Brezhnev to Andropov to Chernenko-before
Gorbachev took power with reform policies that proved too little too late. "They keep dying
on me," Ronald Reagan famously said of the four Soviet leaders he dealt with in less than three
years. The next U.S. president almost surely will have the same experience with ailing Saudi
rulers.
BEIRUT - King Salman of Saudi Arabia issued a series of surprise royal decrees early
Wednesday, shaking up the line of princes slated to succeed him to the throne, replacing a
number of ministers and further enhancing the power of his own line.
In moves announced on Saudi state television, Salman replaced Crown Prince Muqrin bin
Abdulaziz and named the powerful interior minister, Prince Mohammed bin Nayef, as next in line.
He also named his son, Prince Mohammed bin Salman, as deputy crown prince and relieved the
long-serving foreign minister, Prince Saud al-Faisal, who has shaped the kingdom's foreign
policy for nearly four decades.
The moves show Salman is shifting further away from the legacy of his predecessor, King
Abdullah, who died in January.
Saudi Arabia has joined a United States-led coalition that is bombing the militants of the
Islamic State in Syria and Iraq. It is also leading a bombing campaign against Houthi rebels
who have seized a large portion of territory in neighboring Yemen. The new appointments are
unlikely to lead to big changes in these policies.
Of all the changes, the reordering of the line to the throne is likely to draw the most
scrutiny inside the kingdom because of competition between branches of the sprawling royal
family for positions leading to the throne.
RIYADH, Saudi Arabia - Until about four months ago, Prince Mohammed bin Salman, 29, was
just another Saudi royal who dabbled in stocks and real estate. He grew up overshadowed by
three older half brothers who were among the most accomplished princes in the kingdom - the
first Arab astronaut; an Oxford-educated political scientist who was once a research fellow
at Georgetown and also founded a major investment company; and a highly regarded deputy oil
minister.
But that was before their father, King Salman bin Abdulaziz, 79, ascended to the throne.
Now Prince Mohammed, the eldest son of the king's third and most recent wife, is the rising
star. He has swiftly accumulated more power than any prince has ever held, upending a longstanding
system of distributing positions around the royal family to help preserve its unity, and he
has used his growing influence to take a leading role in Saudi Arabia's newly assertive stance
in the region, including its military intervention in Yemen. . . .
The sweeping changes have thrust the young prince into power at a time when Saudi Arabia
is locked in a series of escalating conflicts aimed at defending its vision of the regional
order and holding back its chief rival, Iran. The kingdom is financially sustaining the rulers
of Egypt and Jordan and propping up the Sunni monarchy in neighboring Bahrain against a revolt
by its Shiite majority. It is also arming rebels in Syria against the Iranian-backed president,
fighting in the United States-led air campaign over Iraq and leading its own air assault on
an Iranian-backed faction in Yemen. And it is ramping up its military spending even as plunging
oil prices and growing domestic expenditures have reduced its financial reserves by $50 billion
over the last six months, to less than $700 billion.
"The king has put his son on an incredibly steep learning curve, clearly," said Ford M.
Fraker, the president of the Middle East Policy Council and a former United States ambassador
to Saudi Arabia. "The king is obviously convinced he is up to the challenge." But some
Western diplomats, speaking on the condition of anonymity for fear of alienating the prince
and the king, say they are worried about the growing influence of the prince, with one even
calling him "rash" and "impulsive." And in interviews, at least two other princes in the main
line of the royal family made it clear that some older members of the clan have doubts as well.
Both questioned the costs and benefits of the Yemen campaign that Prince Mohammed has spearheaded.
. . .
Prince Mohammed's three older half brothers - sons of their father's first wife, Sultana
Bint Turki Al Sudairi, who died in 2011 - all have distinguished résumés and were once considered
contenders for top government roles. . . .
Prince Mohammed, however, is the firstborn son of the King Salman's third and most recent
wife, Fahda bint Falah bin Sultan, who worked hard to promote him as his father's successor,
according to Western diplomats who know the family, several family members and associates who
have worked for the family.
"He is her eldest," said one longtime associate who works closely with the clan. "For her,
he is her glory at the end of the day."
Someone recently posted a story about a memo circulating among the Saudi Royal family that
was highly critical of King Salman and his designated successors.
A senior Saudi prince has launched an unprecedented call for change in the country's leadership,
as it faces its biggest challenge in years in the form of war, plummeting oil prices and criticism
of its management of Mecca, scene of last week's hajj tragedy.
The prince, one of the grandsons of the state's founder, Abdulaziz Ibn Saud, has told
the Guardian that there is disquiet among the royal family – and among the wider public – at
the leadership of King Salman, who acceded the throne in January.
The prince, who is not named for security reasons, wrote two letters earlier this month
calling for the king to be removed.
"The king is not in a stable condition and in reality the son of the king [Mohammed bin
Salman] is ruling the kingdom," the prince said. "So four or possibly five of my uncles will
meet soon to discuss the letters. They are making a plan with a lot of nephews and that will
open the door. A lot of the second generation is very anxious."
"The public are also pushing this very hard, all kinds of people, tribal leaders," the prince
added. "They say you have to do this or the country will go to disaster."
Saudi King Hospitalized for Dementia (October 6, 2015)
Informed sources told Arabic-language al-Ahd news agency that King Salman is now in the
Intensive Care Unit (ICU) section of King Faisal Specialist Hospital in the Saudi capital.
The sources also said that given the Saudi king's unstable and aggravating health conditions,
officials have ceased plans to transfer him to US hospitals.
I agree with this guy, the chances imo of the Russians and the Saudis getting together to cut
back on oil production are exceedingly slim to approaching zero.
My opinion is based not on their finances but on their rivalry. The Saudis have a LOT of reasons
to fear and hate the Russians and to try to bankrupt them.
"... (Cannibalization) will slow the industrys ability to ramp the rig count back up so
it will delay the production response from oil prices, ..."
"... While there are no official statistics available, cannibalization has been so pervasive
in this slump that industry experts say it is possible a majority of the 1,100 rigs that are not
working have been scoured for parts. ..."
"... Investors, still seeing an oversupply of rigs, and are encouraging companies to scrap more
rigs to halt the slide in daily rental rates, now around $20,000, depending on the rigs speed
and power. ..."
"... However, the scrapping of more rigs would likely increase the number of those ripe for
cannibalizing, analysts said. ..."
"... Our U.S. domestic customers, the oil producers, are shutting off all capital spending
on just about anything, said Hewell, whose Houston company is backed by Houston-based private
equity firm Global Energy Capital LP. ..."
"... The current US active rig count is 809. The 2014 peak level was 1931. In 2011 rig count
exceeded 2000. Total number of oil and gas rigs, including rigs idled for long-term, was close
to 3000. The common view among experts is that when drilling activity rebounds active rig count
will is unlikely to exceed 1200-1400 units. ..."
In a bid to save cash, rig owners are cannibalizing parts such as motors and drill pipe from
idled rigs to fix 800 active ones in the U.S. when stuff breaks.
In good times, they would buy new equipment … when parts fail. Now, they just pick over any
of about 1,100 rigs idled by the price crash.
Cannibalization is so widespread in this downturn that services companies and others say even
after oil prices recover it will take six months or more to see a significant rebound in drilling
and production – a timeframe that will allay fears of a quick uptick in drilling promptly sinking
prices again.
NOV [National Oilwell Varco] has said so many rigs are idled that firms could cannibalize drill
pipe for up to a year before placing new orders.
"(Cannibalization) will slow the industry's ability to ramp the rig count back up so
it will delay the production response from oil prices," said James West, oilfield services
analyst with Evercore ISI.
While there are no official statistics available, cannibalization has been so pervasive
in this slump that industry experts say it is possible a majority of the 1,100 rigs that are not
working have been scoured for parts.
Land rig utilization is hovering around 60 percent for larger U.S. drilling contractors, according
to data from Tulsa, Oklahoma-based Helmerich & Payne Inc, which has a higher utilization rate
because it has a fleet of newer rigs.
There are lots of spares available because the U.S. rig fleet was near a 15-year high when
prices started to tumble.
Investors, still seeing an oversupply of rigs, and are encouraging companies to scrap more
rigs to halt the slide in daily rental rates, now around $20,000, depending on the rig's speed
and power.
"Companies have to continue to scrap idle rigs and do all that they can to balance supply with
demand," said Robert Thummel, a portfolio manager at Tortoise Capital Advisors.
However, the scrapping of more rigs would likely increase the number of those ripe for
cannibalizing, analysts said.
To escape the downturn gripping the U.S. shale market, Premium Oilfield is expanding in the
Middle East.
"Our U.S. domestic customers, the oil producers, are shutting off all capital spending
on just about anything," said Hewell, whose Houston company is backed by Houston-based private
equity firm Global Energy Capital LP.
The current US active rig count is 809. The 2014 peak level was 1931. In 2011 rig count
exceeded 2000. Total number of oil and gas rigs, including rigs idled for long-term, was close
to 3000. The common view among experts is that when drilling activity rebounds active rig count
will is unlikely to exceed 1200-1400 units.
Furthermore, there is a constant shift towards newest and most efficient rigs.
I am sure that most rigs that drilling companies are disassembling are relatively old and will
never be needed.
I am not sure that I would agree that explanation on justification for disassembling the rigs.
1) "Experts" predict that rig count will not likely exceed 1200-1400 rigs.
Well then why these experts did not foresee collapse in 2013-14 and advise drilling companies
to rain spending on the new rigs? The simple truth is that their opinion is worth it as much yours
or mine.
2) Second justification that they are disassembling rigs are relatively old and will never
be needed is also weak. They need them now because the parts that are taking from them are for
the rigs that are drilling right now. So these are not obsolete rigs. They do serve the function.
3) And the third about constant shift towards newest and most efficient rigs. Well my question
is did the drillers retired the loans that they got for the current rigs? With huge decline in
the rig rates the answer is clearly not. So the question is where they will find capital to buy
newer and fancier rigs? They will not get it. So that is why this is delusion on their part.
U.S. oil & gas active rig count remained within a relatively narrow range between 1700 and
2000 for almost 4 years, while US C+C production increased from 5.5 mb/d to 9.5 mb/d, and natural
gas and NGL production was also increasing.
Drilling companies were actively modernizing their drilling fleet, so there were also about
1000 permanently idled old rigs.
There is no doubt that all existing rigs will not be needed even if the drilling activity rebounds.
(1) Shale production will increase at much slower rates, and the drilling frenzy of 2011-14
will not be repeated.
(2) New rigs are more efficient and
(3) The is a constant shift to pad drilling
Thanks to (2) and (3) less rigs are needed to drill the same number of wells.
(4) If the demand for rigs start ito rise, customers (the E&P companies) will require newer
and more efficient rigs, so there is no need to store old rigs.
Remember the 80's, when 3/4 of U.S. rigs were scrapped
It has been common practice almost forever to strip parts off of idle equipment in slow times
to keep equipment still on the job running.
For example, a couple of EXPERIENCED guys with a boom truck can remove a twenty thousand dollar
(used) diesel engine from a dozer in half a day – and put it in a dozer on the job in another
day and a half.
The bad engine that comes out can be put in the maintenance shop for a rebuild at leisure and
installed in the donor dozer at leisure or kept on a pallet for a ready spare.
This way the mechanics are kept busy, helping keep the crew together, the dozer on the job
gets fixed pdq, and the twenty or thirty grand needed to purchase a rebuilt or used running engine
in a hurry is conserved to help the company get thru bad times.
Almost nothing is actually LOST except a day or two day of labor. The cost of that labor is
apt to be less than the cost of a rental dozer for a couple of days.
Now I have never been around an oil rig, but I bet a five hundred horsepower weather proof
electric motor can be removed in a day and that a new one would cost at least fifteen or twenty
thousand and probably more.
Getting a bad one rewound would most likely take at least a week to a month because when times
are slow for contractors, they are generally pedal to the metal for the specialists who fix stuff
contractors cannot fix in their own maintenance shops.
Any large company that uses a lot of big diesel engines most likely has in house diesel mechanics.
But electric motors are so dependable hardly any company has enough to maintain their own electric
motor shop – so they get sent out.
Having said all this, older machines are indeed frequently robbed to the point they are never
put back in service.
Manufacturers expect to make more money on parts than they do on selling new equipment, over
the years. If you go to a heavy truck dealer and ask for the prices of the fifteen or twenty most
expensive parts of a given truck, the total will exceed the price of a complete truck by a wide
margin.There would be a thousand parts still to be bought to assemble a truck.
It doesn't cost THAT much to keep parts in a warehouse and ship them to a dealer. Parts are
THE profit center- along with the service department of course.
It is totally common place for a dealer to bill labor at five or more times what a mechanic
makes.
People who sell new parts like to make fun of used parts, but the fact of the matter is that
as soon as you drive a car off the dealer lot, with ten miles or less on the odometer, EVERY single
part of it is a USED part.
See Glencore -
Wikipedia: "According to an Australian Public Radio report, "Glencore's
history reads like a
spy novel".[14]
The company was founded as Marc Rich & Co. AG in 1974 by
billionaire commodity trader
Marc Rich, who was charged with tax evasion and illegal
business dealings with Iran in the US, but pardoned by President
Bill Clinton in 2001.[15]
He was never brought before US courts before his pardoning,
therefore there was never a verdict on these charges."... "In 2005,
proceeds from an oil sale to Glencore were seized as fraudulent, in
an investigation into corruption in the
Democratic Republic of Congo (Allen-Mills 17 June 2008)" ...
"In May 2011 the company launched an IPO valuing the business at
US$61 billion[26]
and creating five new billionaires.[27]
Trading was limited to institutional investors for the first week
and private investors were only allowed to buy the shares from 24
May 2011." ... "A
BBC
investigation in 2012 uncovered sale documents showing the company
had paid the associates of paramilitary killers in Colombia. In
2011, a Colombian court had been told by former paramilitaries that
they had stolen the land so they could sell it on to Glencore
subsidiary Prodeco, to start an open-cast coal mine; the court
accepted their evidence and concluded that coal was the motive for
the massacre. Glencore refuted the allegations" ... ""In
Ecuador, the
current government has tried to reduce the role played by
middle men such as Glencore with state oil company Petroecuador"
due to questions about transparency and follow-through, according
to Fernando Villavicencio, a Quito-based oil sector analyst." ...
A visual Relationship Map of Glencore executive board and
stakeholders with their connections.
Overnight we got confirmation that Glencore has indeed become a
systemic risk from a regulatory standpoint after the FT reported
that the Bank of England has asked British financial
institutions to reveal their full exposure to commodity traders and
falling prices of raw materials amid concerns over the impact of
the oil and metals slump. Or, in other words,
their exposure to Glencore, Trafigura, Vitol, Gunvor and Mecuria.
Dr. Engali
The BOE is trying to figure out who is going to need a bail
out before shit hit the fan.
Edit: Oh by the way, that 11%
move to the upside is short covering not a sign that Glencore is
okay you dumb fucks.
"The shares jumped as much as 11 percent
in London". "Analysts promptly cheered the move"...., Idiots.
Why is the Bank of England
protecting Stemcor, the mining
giant owned by the Oppenheimer
family? Former PM Tony Blair is
probably the person responsible,
protecting MP Margaret Hodge She
should have been sent to prison in
1994 for her role in protecting
the pedophile ring operating in
the London Borough of Islington
instead of going to Parliament.
Hodge is an Oppenheimer family
member who backed Blair.
I have heard they fired
hundreds in Zug...does anyone
have a link?
Kayman
"The BOE is trying to figure out who is going to need a
bail out before shit hit the fan."
More precisely, the BOE is trying to figure out how much
money will be needed to stiff the taxpayers on behalf of their
swill drinking friends.
kliguy38
Glencore was a massive Ponzi from the start and designed to
fail. When it goes it will pull a 2 Trillion in derivatives down
its rabbit hole. They know it and they're stalling for another
bagman to take the derivatives. gl with that one.
Willbros Group Inc. has completed amendments to its 2015 term-loan and ABL credit facilities.
The amendments establish less-stringent term loan financial covenants beyond the end of the first
quarter of 2016 that are designed to address the impact of current market conditions.
Consistent with the company's expected revenue levels for 2016, the ABL commitment has been reduced
from $150 million to $100 million, with an accordion feature to expand up to $175 million to accommodate
future revenue growth.
These amendments also enable Willbros to proceed with its asset sale initiatives, including the
sale of its Professional Services segment, which will allow the company to strengthen its balance
sheet through debt reduction.
The amended financial covenants are more aligned with current market conditions and the company's
performance objectives, and the amendments approve the sale of certain assets, including discrete
assets that it may market in future periods. Net proceeds will be used primarily for debt reduction
and secondarily for working capital.
====================================================
PDC Energy extends maturity of revolving credit facility
PDC Energy Inc. has extended the maturity of its revolving credit facility by two years to
May 2020. The borrowing base has been reaffirmed at $700 million of which the company has elected
to keep its commitment level at $450 million.
CFO Gysle Shellum stated, "We are very pleased with the support of our bank group and its agreement,
given the current market conditions, to not only reaffirm our current borrowing base, but to also
extend the maturity of the revolving credit facility by two years. This liquidity and flexibility
provides us the ability to continue operating with a clear focus on maintaining favorable debt
metrics and executing on our strategic vision of delivering shareholder value through continued
production and cash flow growth, and strong returns."
PDC Energy's operations are focused on the horizontal Niobrara and Codell plays in the Wattenberg
field in Colorado and on the condensate and wet gas portion of the Utica shale play in southeastern
Ohio.
===============================================
Chesapeake Energy Corp. has amended its five-year, $4 billion revolving credit facility agreement
maturing in 2019 with its bank syndicate group.
Key attributes include:
• Facility moves to a $4 billion senior secured revolving credit facility from a senior unsecured
revolving credit facility
• The initial borrowing base is confirmed at $4 billion, consistent with current availability
• Previous total leverage ratio financial covenant of 4.0x trailing 12-month earnings before interest,
depreciation and amortization (EBITDA) is suspended
• Two new financial covenants include a senior secured leverage ratio of 3.5x through 2017 and
3.0x thereafter, and an interest coverage ratio of 1.1x through the first quarter of 2017, increasing
incrementally to 1.25x by the end of 2017.
Chesapeake's credit facility may become unsecured when specific conditions set forth in the credit
agreement are met. During an unsecured period, the total leverage ratio would be reinstated and
the senior secured leverage ratio and interest coverage ratio would no longer apply. While Chesapeake's
obligations under the facility are secured, the amendment gives Chesapeake the ability to incur
up to $2 billion of junior lien indebtedness. As of Sept. 30, Chesapeake has $12 million in outstanding
letters of credit under the facility with the remainder of the $4 billion available.
New Source Energy Partners LP, due to a pending borrowing base deficiency under its revolving
credit facility, will be prevented from paying the quarterly cash distribution on its 11% Series
A cumulative convertible preferred units.
"While it was the Partnership's intention to pay this distribution, there are covenants in our
credit agreement with our reserve based lending group that prevent our ability to make the payment
while in a deficiency," said Kristian Kos, chairman and CEO. "We are not in a deficiency at this
time. However, based on initial communication from our reserve based lending group, we expect
to be in a borrowing base deficiency after our biannual redetermination takes place in early October,
which will prevent us from making a distribution on Oct. 15. We will be working with our lenders
to finalize the new borrowing base over the next several days, as well as exploring alternatives
to remedy the deficiency to allow the Partnership to resume making distributions on the preferred
units as soon as possible."
New Source Energy Partners is an independent energy partnership engaged in the production of its
onshore oil and natural gas properties that extends across conventional resource reservoirs in
east-central Oklahoma and in oilfield services that specialize in increasing efficiencies and
safety in drilling and completion processes.
=====================================================
Bill Barrett Corp.'s (NYSE: BBG) semi-annual borrowing base review has been completed with
the bank group reaffirming the $375 million borrowing base related to its revolving credit facility
maturing in April 2020. The credit facility has $375 million of commitments and there are currently
no borrowings under the credit facility.
As part of the redetermination process, the company and its lender group agreed to amend the maintenance
covenants in the revolving credit facility by replacing the leverage covenant limiting the maximum
total debt to trailing 12-month EBITDAX ratio of 4.0x with a covenant limiting the maximum senior
secured debt to trailing 12-month EBITDAX ratio of 2.5x through March 31, 2018, after which the
leverage covenant reverts to a maximum total debt to trailing 12-month EBITDAX of 4.0x, as of
June 30, 2018. In addition, an interest coverage ratio requirement was included, pursuant to which
the ratio of EBITDAX to interest expense may not be less than 2.5 to 1.0 for each quarter through
March 31, 2018.
=======================================================
Approach Resources confirms reaffirmation of lender commitments in credit facility at $450M
Approach Resources Inc. has completed the scheduled semiannual borrowing base redetermination
of its revolving credit facility, and as a result, the bank group has set the lender commitment
amount and borrowing base at $450 million.
Under the terms of the credit agreement, the bank group redetermines the borrowing base semiannually,
using the banks' estimates of reserves and future oil and gas prices. The next borrowing base
redetermination is scheduled to occur by April 1, 2016. As of Sept. 24, Approach had $276 million
outstanding under its revolving credit facility, resulting in liquidity of $177 million.
Approach Resources is an independent energy company focused on the exploration, development, production,
and acquisition of unconventional oil and gas reserves in the Midland Basin of the greater Permian
Basin in West Texas.
Enterprise Products Partners LP's operating subsidiary, Enterprise Products Operating LLC,
has increased its bank credit facilities by $500 million to provide the company with up to $5.5
billion of aggregate borrowing capacity.
The facilities consist of an amended $4 billion multi-year revolving credit agreement that matures
in September 2020 and a new $1.5 billion 364-day revolving credit agreement, both of which are
unconditionally guaranteed by Enterprise on an unsecured and unsubordinated basis. As of today,
aggregate available borrowing capacity under the increased bank credit facilities is $4.7 billion.
==================================================
Gastar Exploration Inc. has completed its second scheduled borrowing base redetermination of
its revolving credit facility for 2015 and, as a result, the borrowing base has been reaffirmed
by the lending participants at $200 million.
Currently, Gastar has drawn $65 million under its revolving credit facility, resulting in $135
million of unused borrowing capacity. The next scheduled borrowing base redetermination is to
occur by May 1, 2016.
Gastar's principal business activities include an emphasis on unconventional reserves, such as
shale resource plays. In Oklahoma, Gastar is developing oil-bearing reservoirs of the Hunton Limestone
horizontal play and expects to test other prospective formations on the same acreage, including
the Meramec shale play (middle Mississippi Lime) and the Woodford shale play, which Gastar refers
to as the STACK play. In West Virginia, Gastar is developing liquids-rich natural gas in the Marcellus
shale play, and has drilled and completed two dry-gas Utica/Point Pleasant wells on its acreage.
========================================
RSP Permian completes bolt-on Midland Basin acquisitions and increases borrowing base
RSP Permian Inc. closed an amendment with the lenders under its revolving credit facility that,
among other things, increases the borrowing base 20% to $600 million. The company currently has
no amounts drawn under its revolving credit facility and the next scheduled borrowing base redetermination
is May 1, 2016.
Exterran Holdings Inc. (NYSE: EXH) has provided an update to the planned financing in connection
with its previously announced separation.
In November 2014, Exterran Holdings said that it intends to separate its international contract
operations, international aftermarket services, and global fabrication businesses into a stand-alone,
publicly traded company named Exterran Corp. Upon completion of the spin-off, Exterran Holdings,
which will continue to own and operate its contract operations and aftermarket services businesses
in the US, will be renamed Archrock Inc.
As previously announced, Exterran Corp. entered into a $750 million revolving credit facility
on July 10 that would become available upon the completion of the separation and the satisfaction
of certain other conditions. On Oct. 5, Exterran Corp. amended and restated the credit agreement
to provide for a new $925 million credit facility, consisting of a $680 million revolving credit
facility and a $245 million term loan facility. The revolving credit facility will have an interest
rate subject to a leverage grid with an expected initial interest rate of LIBOR plus 2.75%. The
term loan will carry an interest rate of LIBOR plus 5.75%, with a 1.00% LIBOR floor.
Availability under the new credit facility is conditioned upon the completion of the separation
and the satisfaction of certain other customary conditions. The revolving credit facility will
mature five years after the effective date of the separation transaction, and the term loan facility
will mature two years after the effective date of the separation transaction.
The new credit facility includes, among other covenants, financial covenants requiring Exterran
Corp. to maintain (after the separation) an interest coverage ratio of not less than 2.25:1.00
and a total leverage ratio of not greater than 3.75:1.00. Should Exterran Corp. refinance the
term loan facility with the proceeds of certain qualified unsecured debt or equity issuances,
the financial covenants in the revolving credit facility will be modified to require that Exterran
Corp. maintain a total leverage ratio of not greater than 4.50:1.00 and a senior secured leverage
ratio of not greater than 2.75:1.00, while the interest coverage ratio will not change. Such capitalized
terms are defined in the amended and restated credit agreement.
In connection with the spin-off, Exterran Holdings anticipates that Exterran Corp. initially will
borrow under its new credit facility and transfer an amount of proceeds to Exterran Holdings which,
when taken together with the proceeds from borrowings under the Archrock credit facility as described
below, will enable Exterran Holdings to repay all of its existing indebtedness.
As of June 30, on a pro forma basis after giving effect to the spin-off, Exterran Corp. would
have borrowed and transferred to Exterran Holdings approximately $539 million. Subsequent to June
30, and prior to the completion of the spin-off, Exterran Holdings expects to incur additional
borrowings under its existing credit facility of between $40 million and $50 million to finance
expenses related to the completion of the spin-off, which will increase the amount that Exterran
Corp. borrows under its new credit facility and transfers to Exterran Holdings.
Also, Exterran Holdings entered into a $300 million credit facility on July 10 that would become
available upon the completion of the separation and the satisfaction of certain other conditions.
On Oct. 5, Exterran Holdings executed a first amendment to the credit agreement that, among other
things, increases the aggregate commitments under the revolving credit facility from $300 million
to $350 million. The revolving credit facility includes, among other covenants, financial covenants
requiring Archrock Inc. to maintain (after the separation) an interest coverage ratio of not less
than 2.25:1.00 and a total leverage ratio of not greater than 4.25:1.00 (except that the maximum
total leverage ratio during a specified acquisition period will be increased to 4.75:1.00), as
those capitalized terms are defined in the credit agreement. The revolving credit facility will
have an interest rate subject to a leverage grid with an expected initial interest rate of LIBOR
plus 1.75%.
"... 2016 will be another year
of record mainland deficit which need to be covered by the offshore sector and its 6,900 bn NOK sovereign
wealth fund (SWF). ..."
"... As Eurodollar liquidity dries up and consequently pushes up the price of actual dollar (note,
Eurodollars are international claims to domestic US dollars but for which no such dollars actual
exists) the problem for petro-states compounds. One way this manifest itself is through international
purchasing power of prior savings. ..."
"... In other words, the drawdown of the SWF will exceed its inflow even after adding financial
income flows. The last remnant of the petro-dollar will thus die in 2016 ..."
"... For a country 100 per cent dependent on continued leverage in the Eurodollar system the
absolutely best case scenario is for the US economy to grow just slowly enough for international
monetary policy to again realign; reducing the value of the USD through continued ZIRP in the US. ..."
According to the proposed budget submitted by the current 'blue-blue' government the Norwegian deficit
will reach another record high in 2016. Mainland taxes are expected to bring in 1,008 billion NOKs,
while expenditures are estimated at 1,215 billion NOKs. In other words, 2016 will be another year
of record mainland deficit which need to be covered by the offshore sector and its 6,900 bn NOK sovereign
wealth fund (SWF).
While record mainland deficits covered by the petroleum sector is nothing new
in Norwegian budget history, on the contrary it is closer to the norm, the 2016 budget did raise
some eyebrows. The other side of the ledger, the net inflow to the SWF from activities in
the North Sea will, again according to budget, be lower than the required amount to cover the deficit.
This has never happened before and is testimony of the sea change occurring in the world of petrodollar
recycling. Interestingly enough, the need to liquidate SWF holdings is helping to create further
deflation in the Eurodollar system in a self-reinforcing loop.
As Eurodollar liquidity dries up and consequently pushes up the price of actual dollar (note,
Eurodollars are international claims to domestic US dollars but for which no such dollars actual
exists) the problem for petro-states compounds. One way this manifest itself is through international
purchasing power of prior savings. A SWF as the Norwegian was created through a surplus of exports
over imports meaning it can only be utilized through future imports over exports. When the Norwegians
look at their wealth expressed in Norwegian kroner it all looks fine, but expressed in dollars the
SWF has shrunk considerably in size. Thus, the surfeit imports expected by the Norwegian populace
cannot be met. Norway rode high on a wave of liquidity which pushed up commodity currencies, leading
Norwegians to consume more imported goods today, without realizing they were tapping into the principal
of their future. When the tide turns the gross misconception is revealed.
The Government claims it is all fine though. The current down-cycle will, according to them,
end early 2016 so despite a 2 percentage point reduction in corporate- and personal income tax,
mainland tax revenues are expected to increase 1.9 per cent. That is obviously a pipedream, just
as the expected 17.9 per cent increase in interest and dividend income which will make sure the
SWF continue to grow at a healthy pace despite the massive mainland deficit.
Assuming oil prices remain low, mainland tax revenue will plummet as they are very much a
function of what goes on offshore, while expenditure will rise as they do in all welfare states
during a down cycle.
If we are right, a global recession is imminent, meaning the expected increase in dividend
income will never materialize.
In other words, the drawdown of the SWF will exceed its inflow even after adding financial
income flows. The last remnant of the petro-dollar will thus die in 2016.
For a country 100 per cent dependent on continued leverage in the Eurodollar system the
absolutely best case scenario is for the US economy to grow just slowly enough for international
monetary policy to again realign; reducing the value of the USD through continued ZIRP in the US.
Robust growth in the US will prompt Yellen to hike, spiking the dollar (as Eurodollar claims
scramble for actual dollars) while paradoxically a recession in the US will lead to the exact
same outcome. The goldilocks scenario of 1-2 per cent growth is the best that the Norwegian
government can hope for. It will minimize the gap between the lies and propaganda spewed out by
the Ministry of Finance and reality.
Latina Lover
Death to the Fed Reserve! Time for a currency reset. Down with the Banksters, or rather,
hang them high!
The financial turmoil of the past month has brought the high yield debt market to a screeching halt.
A number of deals have been called off or shifted to the loan market. Late last month, chemical company
Altice had to cut back a bond offering and increase the interest rate to 11% on a portion of a multi-billion
dollar deal.
Just $12 billion in high yield bonds were issued last week, down from $34 billion
during the same week a year ago, according to S&P Leverage Commentary and Data. Total issuance of
leveraged loans and high yield bonds is down by nearly $140 billion this year compared to 2014, to
about $575 billion.
The biggest risks to the global economy are now in emerging markets, where private companies have
racked up considerable debt amid a fifth straight year of slowing growth, the International Monetary
Fund said Wednesday.
The current values of futures and options contracts for January 2016 delivery (Market
Prices and Uncertainty Report) suggest the market expects WTI prices to range from $32/b to
$67/b (at the 95% confidence interval) in January 2016.
... ... ...
Projected U.S. crude oil production averages 9.2 million b/d in 2015 and 8.9 million b/d in
2016.
Larry Summers continues his call for fiscal expansion:
Global economy: The case for expansion: ...The problem of secular
stagnation - the inability of the industrial world to grow at
satisfactory rates even with very loose monetary policies - is
growing worse in the wake of problems in most big
emerging markets, starting with China. ... Industrialised
economies that are barely running above stall speed can ill-afford
a negative global shock. Policymakers badly underestimate the
risks... If a recession were to occur, monetary policymakers lack
the tools to respond. ...
This is no time for complacency. The idea that slow growth is only
a temporary consequence of the 2008 financial crisis is absurd. ...
Long-term low interest rates radically alter how we should think
about fiscal policy. Just as homeowners can afford larger mortgages
when rates are low, government can also sustain higher deficits.
...
The case for more expansionary fiscal policy is especially strong
when it is spent on investment or maintenance. ... While the
problem before 2008 was too much lending, many more of today's
problems have to do with too little lending for productive
investment.
Inevitably, there will be discussion of the need for structural
reform... - there always is. ...
Traditional approaches of focusing on sound government finance,
increased supply potential and the avoidance of inflation court
disaster. ... It is an irony of today's secular stagnation that
what is conventionally regarded as imprudent offers the only
prudent way forward.
[The full post is much, much longer.]
bakho said in reply to pgl...
If Bush would have done fiscal stimulus instead of tax cuts and low interest rates in 2001,
we could have avoided the worst of the 2008 mess. When the wealthy hoard capital in an
unproductive way and use their political power to increase their wealth, it leads to a stalled
economy.
Peter K. said...
Everyone is for fiscal stimulus. Even Republicans like Ben Bernanke and Martin Feldstein.
"The problem of secular stagnation - the inability of the industrial world to grow at
satisfactory rates even with very loose monetary policies - is growing worse in the wake of
problems in most big emerging markets, starting with China."
Interest rates are low by historical standards but monetary policy isn't "loose."
If it was loose we'd see inflation and tight labor markets.
bakho said in reply to Peter K....
Monetary stimulus at the ZLB is weak and carries more risk than fiscal stimulus. The
problem for Yellen and the Fed: fiscal policy is dragging the economy down. Monetary policy
would be adequate if fiscal policy were doing its part. It does not even come close. The Fed
can create more money, but the wealthy are positioned to grab it so very little goes to where
it is needed.
Monetary policy, no matter how good cannot fully correct for bad or inadequate fiscal and
regulatory policy.
D said in reply to Peter K....
"Even Republicans like Ben Bernanke..."
Maybe that should be: former Republicans like Ben Bernanke.
"I didn't leave the Republican Party. I felt that the party left me."
-JJF
Peter K. said...
"It is an irony of today's secular stagnation that what is conventionally regarded as
imprudent offers the only prudent way forward."
Summers borrows/steals from Krugman.
bakho said in reply to Peter K....
The Fed lacked the authority for Cramdown and Geithner who had the power block most of the
help that should have bailed out home owners. Obama's Harvard buddies were against Cramdown,
the GOP is a wholly owned subsidiary of the banksters so a good policy was blocked.
BigBozat said in reply to JaaaaayCeeeee...
"But why is Larry Summers saying that the problem before 2008 was too much lending? Said so
baldly, doesn't it just support austerians, like the Tory argument that Labor caused the
recession by spending too much on entitlements?"
Only if you conflate "lending" with "public debt" (and/or argue that spending on entitlements
is a totally non-productive use of the public fisc). If the Tories are good at conflating
(and/or believe entitlements are a complete waste of money), then yeah I guess they could make
claims... 'tho they'd be either disingenuous or ignorant in doing so.
FWIW, I tend to associate "lending" more with private sector activity. What Larry means by
"too much lending" - in this case, anyway - was the cheap & poorly/fraudulently underwritten
credit-fueled housing sector bubble.
Dan Kervick said in reply to BigBozat...
The problem was private debt. There was long secular run of private debt to gdp prior to
the crash. Eventually private debt was at its highest level since 1929.
One True Measure of Stagnation: Not in the Labor Force
This is a stark depiction of underlying stagnation: paid work is not being created as population
expands.
Heroic efforts are being made to cloak the stagnation of the U.S. economy. One
of these is to shift the unemployed work force from the negative-sounding jobless category
to the benign-sounding Not in the Labor Force (NILF) category.
But re-labeling stagnation does not magically transform a stagnant economy. To
get a sense of long-term stagnation, let's look at the data going back 38 years, to 1977.
I've selected data from three representative eras:
The 20-year period from 1977 to 1997, as this encompasses a variety of macro-economic conditions:
five years of stagflation and two back-to-back recessions (1977 - 1982), strong growth from 1983
to 1990, a mild recession in 1991, and growth from 1993 to 1997.
The period of broad-based expansion from 1982 to 2000
The period 2000 to 2015, an era characterized by bubbles, post-bubble crises and low-growth
"recovery"
In all cases, I list the Not in Labor Force (NILF) data and the population of the U.S.
1977-01-01: 61.491 million NILF population 220 million
1997-01-01 67.968 million NILF population 272 million
Population rose 52 million 23.6%
NILF rose 6.477 million 10.5%
1982-07-01 59.838 million NILF (start of boom) population 232 million
2000-07-01 68.880 million NILF (end of boom) population 282 million
Population rose 50 million 22.4%
NILF rose 9.042 million 15.1%
2000-07-01 68.880 million NILF population 282 million
2015-09-01 94.718 million NILF ("recovery") population 322 million
Population rose 40 million 14.2%
NILF rose 25.838 million 37.5%
Notice how population growth was 23.6% 1977-1997 while growth of NILF was a mere 10.5%
As the population grew, job growth kept NILF to a low rate of expansion. While the population soared
by 52 million, only 6.5 million people were added to NILF.
In the golden era of 1982 - 2000, population rose 22.4% while NILF expanded by 15%. Job growth
was still strong enough to limit NILF expansion. The population grew by 50 million while NILF expanded
by 9 million.
But by the present era, Not in the Labor Force expanded by 37.5% while population
grew by only 14.2%. This chart shows the difference between the two eras: those Not in the
Labor Force soared by an unprecedented 26 million people--a staggering 15.6% of the nation's work
force of 166 million. (Roughly 140 million people have some sort of employment or self-employment,
though millions of these earn less than $10,000 a year, so classifying them as "employed" is a bit
of a stretch).
This is a stark depiction of underlying stagnation: paid work is not being created
as population expands. Those lacking paid work are not just impoverished; they lose the skills and
will to work, a loss to the nation in more than economic vitality.
The concept of "tipping point" - a change beyond which there's no turning back - comes up a lot
in climate discussions. An obvious tipping point involves polar ice. If the earth keeps warming -
both in the atmosphere and in the ocean - at some point a full and permanent melt of Arctic and Antarctic
ice is inevitable. Permanent ice first started forming in the Antarctic about 35 million years ago,
thanks to global cooling which crossed a tipping point for ice formation. That's not very long ago.
During the 200 million years before that, the earth was too warm for permanent ice to form, at least
as far as we know.
We're now going the other direction, rewarming the earth, and permanent ice is increasingly disappearing,
as you'd expect. At some point, permanent ice will be gone. At some point before that, its loss will
be inevitable. Like the passengers in the car above, its end may not have come - yet - but there's
no turning back....
I think the American Southwest is beyond a tipping point for available fresh water. I've written
several times - for example,
here - that California and the Southwest have passed "peak water," that the most water available
to the region is what's available now. We can mitigate the severity of decline in supply (i.e., arrest
the decline at a less-bad place by arresting its cause), and we can adapt to whatever consequences
can't be mitigated.
But we can no longer go back to plentiful fresh water from the Colorado River watershed. That
day is gone, and in fact, I suspect most in the region know it, even though it's not yet reflected
in real estate prices.
Two of the three takeaways from the above paragraphs are these: "California and the Southwest have
passed 'peak water'" and "most in the region know it." (The third takeaway from the above is discussed
at the end of this piece.)
I think it is very dangerous. and I am not taking about market next month here or the next
quarter. Right now I can't understand why companies are sold at this multiple of earning,
22 for S&P500. A lot of those earnings are mirage. I remember times when 5 or 6 were good
numbers. If you really dig in earning, that nobody wants to do. Earning are overstated in many
cases.
Gloom, Boom & Doom Report Editor Marc Faber discusses how low interest rates have helped to
raise asset prices with Bloomberg's Scarlet Fu, Joe Weisenthal and Alix Steel on "What'd You
Miss?" (Source: Bloomberg)
... What evidence is there that worries about a global economic slowdown are figuring prominently
in recent oil prices? Exhibit one is the remarkable
comovement between commodity and asset prices. Concerns about global economic weakness show
up in commodity prices and asset markets across the board. ...
The turbulence in the global financial markets in the past few weeks has been widely attributed
to a "China shock" that has increased the risks of a major downturn in global activity. Last month,
this blog concluded that our regular "nowcasts" for global activity had not yet corroborated this
narrative.
This month, we have identified the first clear evidence that the global economy has slowed down
since mid year, with emerging markets and advanced economies both now growing more slowly. ...
The latest update of the Brookings-Financial Times TIGER (Tracking Indexes for the Global Economic
Recovery) reveals sharp divergences in growth prospects between the advanced economies and emerging
markets, and within these groups as well.
Growth prospects for the advanced economies have improved, but this is largely on account of
good growth in the U.S. and the U.K. The euro zone remains mired in low growth and Japan's economy
appears to have stalled again. Commodity-exporting countries, both advanced and emerging, have
been hit by sharp growth slowdowns.
The U.S. economy continues to strengthen, with domestic demand picking up momentum, as reflected
in rising retail sales and investment. Despite healthy employment growth and a falling unemployment
rate, wage pressures remain muted. Inflation has stayed low, aided by a strong dollar and weak
energy prices, and the CPI index has flirted on and off with deflation. Credit growth remains
robust but U.S. equity markets, industrial production, and exports have all been held back by
economic weakness in the rest of the world. The strong possibility that the Federal Reserve will
commence its rate hike cycle in December points to how asynchronous the U.S. recovery is relative
to business cycle conditions in most other advanced economies.
The euro zone and Japan face a difficult combination of weak growth, near-deflationary price
changes, and the absence of fundamental reforms needed to revive domestic demand. Any growth at
all in the euro zone is considered a victory and the zone has certainly kept to those expectations,
growing at less than half a percent in the second quarter. The Japanese economy contracted in
the second quarter. Despite highly expansionary monetary policies, inflation in both economies
is barely positive.
Emerging market economies, which had become the main drivers of global growth in the aftermath
of the financial crisis, are now leading the world economy into a slump. Growth has fallen, business
and consumer confidence are eroding, and financial markets have taken a beating in these economies.
Most economic indicators point to a loss of growth momentum in China, with high-frequency indicators
such as electricity consumption and freight volumes pointing to an even sharper manufacturing
slowdown. While policymakers still have some room to boost growth closer to the 7 percent target,
the inability of monetary policy measures to gain traction in raising growth has elevated risks
to the financial system and shaken confidence in the economic management skills of the leadership.
These concerns have been exacerbated by recent missteps in managing stock market volatility and
the shift to a more market-determined exchange rate, both of which have been marred by an unclear
strategy and weak communication.
Among the major emerging markets, India alone continues to maintain strong GDP growth, although
industrial production and other indicators of economic activity suggest that the economy is in
less robust shape. ...
Icahn predicts junk bind crash for almost a year now. that does not mean that
he is wrong. But that does mean that he is a bad timer. Also he might be a buyer of CDS on
junk bonds. Carl Icahn mentioned that although the short-term outlook for the energy
sector is bad, the sector as a whole could make a comeback in a couple of years.
"... In the context of the high yield bond market, activist investor Carl Icahn
mentions the use of credit default swaps as a form of protection or insurance
against credit events. However, he terms these products as "arcane" and implies
that investors should possess sophisticated knowledge of the fixed income markets
to enter that playing field. ..."
Oil price nosedive could trigger a crash in the junk bond markets
According to Sean Hanlon's December 16, 2014, article Oil's
Price Decline Weighs On High Yield Debt in Forbes, US energy
companies borrowed heavily using the junk bond market to finance hydraulic
fracking operations. However, this occurred when oil prices were above the $100
per barrel level, resulting in an economically viable business model.
With the nosedive in oil prices in the latter half of 2014, the ability of
these energy firms to retain their profitability was called into
question-including their ability to service the payments on their high-yield debt.
... ... ...
As seen in the above graph, the prices of the iShares iBoxx $ High Yield
Corporate Bond ETF (HYG)
declined with the fall in oil prices. With the looming uncertainty over oil
prices, the times ahead are probably not bright for the high yield bond market.
Credit default swaps and a correction in high yield bonds
In the context of the high yield bond market, activist investor Carl Icahn
mentions the use of credit default swaps as a form of protection or insurance
against credit events. However, he terms these products as "arcane" and implies
that investors should possess sophisticated knowledge of the fixed income markets
to enter that playing field.
Credit default swaps (or CDS) are analogous to insurance contracts. The buyer
of the CDS makes periodic fixed payments to the seller of the CDS, who receives
these premiums and in exchange, compensates the buyer in the event of a default
involving the underlying reference entity.
ProShares launched the ProShares CDS North American HY Credit ETF (TYTE)
and the ProShares CDS Short North American HY Credit ETF (WYDE)
in August 2014. Although TYTE offers investors a long exposure to North American
high yield bonds, WYDE offers a short exposure to the same. For instance,
investment in WYDE could hedge a portfolio of high yield bonds against a drop in
prices. The decreased prices typically result from increasing defaults by energy
firms due to falling oil prices.
In the final part of this series, we'll discuss Carl Icahn's view on the energy
sector. The analysis specifically focuses on the outlook for oil companies such as
EOG Resources (EOG),
Exxon Mobil (XOM),
Phillips 66 (PSX),
and Valero Energy Corporation (VLO).
Phillips 66 and Valero are oil refiners, EOG Resources is independent and lacks
downstream operations, and Exxon Mobil is an integrated company.
EOG Resources has an 8.2% weight in the iShares US Oil & Gas Exploration &
Production ETF (IEO).
Phillips 66 has a 7.2% weight in IEO, and Valero has a 4.9% weight in IEO. EOG is
also part of the iShares US Energy ETF (IYE),
with a 3.1% exposure.
In a note seeking to "explain" why the US labor participation rate just crashed to a nearly 40
year low earlier today as another half a million Americans decided to exit the labor force bringing
the total to 94.6 million people...
... ... ...
...
this is
what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history:
"Generally speaking, people in the 25–54 age group are the most likely to participate in the labor
market. These so-called prime-age individuals are less likely to be making retirement decisions
than older individuals and less likely to be enrolled in schooling or training than younger individuals."
This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire
taxpayer-funded "analysis."
However, as the chart below shows, when it comes to participation rates within the age
cohort, while the 25-54 group should be stable and/or rising to indicate economic strength
while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners,
we see precisely the opposite. The Fed, to its credit, admits this: "participation among the prime-age
group declined considerably between 2008 and 2013."
Yeah see what happens! Great idea! Remove the only thing keeping this country in one piece!
Let's not close corporate tax loopholes and handouts, egregious MIC spending or in any
significant way stop financial crime. Before we address those trifling concerns which amount
to many trillions, let's cut TANF and SNAP benefits to recipients who statistically are mostly
CHILDREN. I for one hate having cities that aren't on fire and have been pining for LA Riots
times one hundred thousand. Yes let's not address elites crimes first let's crack down on
single moms and children. We wouldn't want to do anything to address Jamie Dimon, Lloyd
Blankfein and Hank Paulson's crimes. Let's go after the real power brokers who got us here,
children in poverty. And by doing so let's unleash days of rage and an American Spring.
Absolute genius!!!!
cynicalskeptic
Sadly that is exactly what will happen when the merde hits the fan. The poor and starving
WILL riot in the streets - as they have throughout history when they lose all hope. Clearly
TPTB know this - and know time is running out. They are preparing - militarized police and an
obsession with monitoring the population, repressing ANY discontent (like Occupy Wall Street).
Things are as bad as they were in 1932 - government money is the only thing preventing 'Hoovervilles'
and obvious signs of what has happened - minimal payments to keep people from taking to the
streets. Yes, some people do abuse these programs and the abuse of things like disability is
increasing as people run out of options, but the root cause of all this is the LACK OF JOBS.
Our political leaders - following the wishes of corporate leaders - have embraced 'free trade'
- sending American jobs overseas - and bringing in cheap labor (illegal at the low skill end
and H1B's at the high skill end), all in a never ending effort to find the cheapest possible
labor costs. Some goods may be cheaper but that means little if people are unemployed and
cannot afford to buy anything. A toaster from China may cost less but who cares when you can't
afford the bread to put in it?
Perimetr
Fed to the unemployed:
"Let them eat cake"
And remember what happened to the French aristocrats . . .
ZerOhead
DEA might be hiring... they are looking into possibly replacing their workers who are
failing drug tests.
"... Cheniere Energy Inc. (NYSE: LNG) was the clear highlight of the week. This
liquefied natural gas player had a very high-profile buyer step up to the plate
more than once. Activist investor and Wall Street legend Carl Icahn bought a
gigantic amount of the company's stock. ..."
We cover insider buying every week at 24/7 Wall St., and we like to remind our readers that
while insider buying is usually a very positive sign, it is not in of itself a
reason to run out and buy a stock. Sometimes insiders and 10% owners have stock
purchase plans set up at intervals to add to their holdings. That aside, it still
remains a positive indicator.
Cheniere Energy Inc. (NYSE: LNG) was the clear highlight of the week. This
liquefied natural gas player had a very high-profile buyer step up to the plate
more than once. Activist investor and Wall Street legend Carl Icahn bought a
gigantic amount of the company's stock. He purchased 2,042,928 shares at a
price of $47.14 apiece. The total for the buy came to a massive $96.3 million. Not
stopping there, Icahn purchased an additional 1,503,313 shares at $48.30. The
total for second buy was a whopping $72.6 million.
Oddly enough, as Icahn was buying millions of shares of Cheniere Energy, the
CEO of the company was selling. He parted with a total of 100,000 shares at
between $46.25 and $50.42 per share. The total for the sale came to $4.8 million.
It was also the only one major company that reported insider selling last week.
Cheniere shares ended trading on Friday at $50.50, and it is pretty easy to assume
that Icahn's high-profile purchase was viewed as very positive.
"... Icahn slams using junk bonds for doing deals, comparing it to drug addiction, writing, "Making
acquisitions with junk bonds may increase earnings for the short-term, but this gives companies a
short-term high, just as heroin does to their users." ..."
Yahoo Finance has obtained a policy paper written by Carl Icahn on income inequality that the
billionaire financier recently sent to Donald Trump and others on Wall Street and in Washington.
In the paper, Icahn warns of "dangerous systemic problems that will affect each and every American
in the coming years."
The five and a half page paper has some similarities to the
video that Icahn is releasing on
www.carlicahn.com, but focuses more on imbalances
in our society.
The paper was sent to Trump before the GOP presidential candidate revealed his economic proposals.
"I sent it to a number of people," Icahn said. "A few of the ideas in the paper are reflected in
Donald Trump's plan. I think that shows what an open-minded guy he is, which is what we need in the
White House."
In the paper, Icahn takes a decidedly egalitarian tone, writing:
"The average worker makes approximately $50,000 per year. The average annual compensation of
the thirty highest paid CEOs is approximately $47 million per year. (I don't believe this disparity
was ever this great even in most dictatorships!) You will hear many politicians argue that government
should not interfere with the 'business judgment', of our companies and, therefore they cannot
pass laws to encourage 'income equality.' This is completely untrue – the sad fact is that the
government has actually passed many laws that have brought about 'income inequality.'"
In a phone interview with Yahoo Finance Icahn says, "In this country, you talk about the wealth
gap and politicians say, 'well, you can't legislate equality,' but we legislate inequality."
Of all the corporate raiders and junk bond kings that came of age in the 1980s, Carl Icahn has
become the richest and most powerful. He shows little sign of slowing down. Now 79, and with a net
worth of some $21 billion according to Forbes, Icahn has moved beyond being a fixture of CNBC and
the business pages to being something of a general news subject. With unusual tentativeness and nuance
Icahn has linked himself to Donald Trump thereby guaranteeing him a place at the grown-ups' table
this news cycle. In the recent phone interview with Yahoo Finance, Icahn says that while he admires
Trump, (the two worked with each other in the maw of the Atlantic City casino business) the two don't
see eye to eye on everything. Icahn wouldn't comment specifically on where they disagree. As for
being Trump's Treasury Secretary, Icahn apparently said he would and then retracted that point. "He's
his own man," Icahn says of Trump.
In the policy paper, Icahn writes about the complicity of CEOs and Wall Street:
"…the American worker is also getting 'screwed' …boards and CEOS have allowed property, plants
and equipment of our companies to become the oldest on record and, as a result, the growth rate
in productivity per hour of our workers has also become the worst on record and has actually decreased
compared to last year. The average age of corporate property, plants and equipment is an astounding
22.3 years, the oldest it has reached since 1941. But I do not believe that most boards and CEOs
really give a damn. With many exceptions, CEOs only care about short term results. Perhaps you
can't really blame them because unfortunately, Wall Street judges them based on quarter to quarter
results and CEOs receive their egregious compensation based on those short-term results."
Icahn also writes about CEOs and how hard it is to remove them: "How would we feel if laws were
passed that certain criteria had to be met to vote for President and there were no term limits on
the President's ability to serve, thus making it almost impossible to remove Obama? Amazingly, there
are many state laws in existence that protect the CEOs that are analogous to the example I just made."
Icahn slams using junk bonds for doing deals, comparing it to drug addiction, writing, "Making
acquisitions with junk bonds may increase earnings for the short-term, but this gives companies a
short-term high, just as heroin does to their users."
Icahn closes his piece by again coming back to the plight of the common man versus CEOs: "When
it comes time to pay the Piper, CEOs will have taken their bonuses and again the workers will be
left, holding the proverbially 'empty bag.'"
Carl Icahn warn about junk bonks bubble. more then 2 trillion of junk bond spread in various ETF
and mutual funds in case of crisis will be illiquid. Warning of many companies are fallacious.
They are archived by tricks like mergers and acquisitions and stock back backs. It's all
financing engineering. It's loading companies with bet.
Billionaire investor Carl Icahn reiterated
his warnings about high-yield bond ETFs in a wide-ranging
video released on his website overnight, complaining
that these so-called junk bonds "are being sold en masse to the public" by companies such as BlackRock,
whose high-yield bond ETF (HYG) holds
about $13 billion worth of assets.
"People are buying these not really understanding what they're buying," Icahn said in the video,
referring specifically to BlackRock's "junk bond" ETFs.
Ironically, nearly 1 percent of what those people are buying is debt issued by
Icahn's company itself.
The HYG ETF holds four separate bonds issued by the investor's company,
Icahn Enterprises. These four bonds
cumulatively make up 0.7 percent of the ETF - for a total notional value of $91 million, according
to
data available from BlackRock's ETF arm, iShares.
It is worth noting that BlackRock does not have any say in the holdings of its ETF; the HYG simply
tracks the Markit iBoxx USD Liquid High Yield Capped Index. Nor is the presence of Icahn Enterprises
bonds in the ETF new; various Icahn Enterprises securities can be found in it going back to April
2012.
Icahn's broader point about high-yield debt is that stimulative
Federal Reserve policies have created
a stock and bond bubble that will be resolved messily, due to a lack of willing buyers and hence
loss of liquidity. BlackRock, for its
part,
contends that ETFs can provide liquidity and improve market stability
Icahn's office did not immediately respond to a call for comment.
New orders and production both fell sharply and a measure of hiring also declined, according
to the ISM, a trade group of purchasing managers. All three measures still barely remained in
expansion territory.
U.S. manufacturers are getting hit by slower growth in China, the world's second-largest economy,
and a stronger dollar, which makes U.S. goods more expensive overseas. The 15 per cent rise in
the dollar's value in the past year has also made imports cheaper compared with U.S.-made goods.
Oil and gas drillers are also cutting back on their orders for steel pipe and other equipment in
the wake of sharply lower oil prices.
... ISIS attacks in Libya could have a much more direct impact. On October 1, ISIS militants
attacked
one of Libya's main oil ports, Es Sider. The port is under the control of the recognized
government and has been closed since December 2014, preventing Libya from reviving oil exports.
One guard at Es Sider was reportedly killed but the attack was repelled. Still, Libya has been
torn apart by conflict, and the two warring factions are at a stalemate, with a security vacuum
across most of the country.
The average hourly wage dropped slightly in September, bringing the annual rate of growth
over the last three months compared with the prior three to 2.2 percent, the same as its rate
over the last year. The drop in the hourly wage, combined with the fall in hours, led to a 0.3
percent drop in the average weekly wage.
... ... ...
On the whole this report suggests the labor market is considerably weaker than had been generally
believed. The plunge in oil prices is taking a large toll on the formerly booming mining sector.
In addition, the high dollar and the resulting trade deficit is a major hit to manufacturing.
The 138,000 three-month average rate of private sector job growth is the lowest since February
of 2011. The strong growth in government jobs is not likely to continue with budgets still tight.
With GDP growth hovering near 2.0 percent, weaker job growth is to be expected, but it will make
it much more difficult for the Federal Reserve Board to raise rates this year.
Mike Sparrow:
This looks like a adjustment to the ADP's 2015 mean more than anything else. That is the
trouble with the birth/death model. It misses turning points and this mid-cycle correction
started in January. Yet, they kept NFP elevated in many of the next 7 months outside March
which was another mess(created by the weather that time). ADP was much more tamed and
consistent.
The good news is, it looks like the global economy may have bottomed in September and China's
move to more consumption balance is panning out a bit, which will help growth there. Though
the multi-national boom is over as investment driven growth necessarily reduces in these
countries. Monthly wages also accelerated.
anne said in reply to Mike Sparrow...
I think the ADPs are better than the NFPs, though on a wet field field hockey in tricky and
who knows which school will win. Anyway, Go ADPs! I was a midfielder.
am said...
Correct take off by DB that this weak report makes rate rises this year difficult to
justify. Chair Yellen identified weakness in the labour market in her last report. This latest
monthly labour report shows that that weakness continues.
DB concentrates on the weak stats for the prime age groups of men and women and states that
it is clearly not retirement related. If he has any analysis on older cohorts continuing in
employment longer than normal and impacting on the 25-54 cohort employment rates then I would
appreciate a link.
It is clear that there is a structural change in employment. It may also be partly
demographic but it is more than that hence I say structural.
cm said in reply to JohnH...
You can only offshore jobs that can actually be performed offshore. Not to deny offshoring
which has been rampant in tech and various industries where services/labor can be delivered
over the internet, but the probably more significant factors overall have probably been
automation and computer/IT enabled "self service" i.e. pushing work off to the customer/client
or just cutting the service level - e.g. "self help" web FAQs instead of printed manuals and
phone support, or phone support (offshore or not) who basically read from the same
documents/scripts you can search on the internet for yourself.
cawley said in reply to JohnH...
While I want to be cautious in thinking that I speak for anyone else, I would guess most of
the QE supporters on this blog fully recognize that there are other factors besides interest
rate/fed policy.
In fact, I would hazard (tho I may be wrong) that most of them would have preferred stronger
fiscal policy.
Maybe I'm just projecting my own view which is that fiscal policy would have been preferable.
Unfortunately, it was not happening. Clearly the republicans weren't in the mood - at least as
long as there was a non white muslim atheist socialist communist dictator from the other party
in the House f/k/a White. To me, it doesn't seem like Obama had a sufficient appetite either -
altho some argue that didn't matter.
That being the case, monetary policy was pretty much the only game in town. Is it a panacea?
Hell no. Has it been enough to get the economy back to full employment? Obviously not. Is it
possible there are/will be some pernicious unintended consequences? Maybe, but I would argue
they are second order concerns compared to employment and probably manageable.
But I've got no reason to think that withholding QE would have resulted in better fiscal
policy - or any other change that would have improved employment. And I tend to think that the
counterfactual consistent with no QE and the same fiscal policy would have been even worse
employment.
Peter K. said in reply to JohnH...
"Strong dollar, weak dollar. It doesn't seem to matter. "
You're just a nihilist. Facts and theory don't matter. Dean Baker:
"In addition, the high dollar and the resulting trade deficit is a major hit to
manufacturing. The 138,000 three-month average rate of private sector job growth is the
lowest since February of 2011."
New Deal democrat said in reply to pgl...
This downshifting in the employment numbers was foreseeable, and foreseen:
It is party strong US$, partly oil patch collapse, and part pass-through from last year's
stall in housing starts.
Fred C. Dobbs said...
What the Terrible September Jobs Report Means for the
Economy
http://nyti.ms/1Vsx2rO via @UpshotNYT
NYT - Neil Irwin - Oct 2
The September jobs numbers are
easily the worst of 2015 so far. They offer an unpleasant
combination of a bad overall headline, bad details and bad
timing, amid a volatile and unsettling time in global
markets.
The weak numbers offer some vindication for those
Federal Reserve officials who preferred to hold off on
interest rate increases last month to ensure the economy
was on sound footing before tightening the money supply.
They also give reason to worry that those wild market
swings in August were less random fluctuations and more an
indication that something deeper is wrong with the global
economy - not so much that the stock market drop in August
caused weak September jobs numbers, but that there is an
underlying economic fragility causing both.
The question now is whether it means anything - whether
the United States economic expansion, which seemed set to
roar into 2015, is slowing in some meaningful way. We
don't know that yet, and it would be a mistake to leap to
that conclusion. But that possibility became quite a bit
more plausible after the September numbers popped onto
economists' computer screens.
As always, it is a useful exercise on jobs report
Fridays to take a deep breath and remember that this is
but one set of indicators, with a large margin of
statistical error, that will be revised repeatedly. But
the fact that the latest jobs numbers are consistent with
another report, from the Institute of Supply Management,
earlier this week that suggested United States
manufacturing slowed to a standstill in September doesn't
do anything to help an economy-watcher maintain that zen
perspective.
The new numbers are poor on pretty much every level.
American employers added a mere 142,000 jobs last month,
far below the analyst forecast of 201,000 or the average
over the last year of 229,000. Revisions pushed July and
August numbers down substantially. The unemployment rate
was unchanged at 5.1 percent.
This is usually the point in one of these stories where
we would list the silver linings - the countervailing
details that suggest it isn't as bad as all that. This
report doesn't really offer any. Average weekly hours
fell. Average hourly pay was unchanged. The number of
people in the labor force fell by 350,000, and the number
of people who reported having a job fell by 236,000.
We don't even have a major snowstorm or other weird
weather event to blame, nor a strike in a major industry,
nor some outsize shift in the results from one category of
employer that might suggest an aberration.
The most positive angle I could come up with, with
credit to the anonymous Twitter user @modestproposal1, is
the possibility that with the unemployment rate scraping
relatively low numbers, we should expect the rate of job
creation to slow simply because the pool of potential
workers is dwindling.
That said, that theory doesn't match up with the
stagnant hourly pay and data in the survey of households
suggesting people may be leaving the work force. ...
modest proposal @modestproposal1
Remain cognizant that job growth may naturally slow as we
approach full employment and will instead be interpreted
as economy slowing
Fred C. Dobbs said in reply to Fred C. Dobbs...
The pool of skilled/trained
workers dwindles; those who remain
are simply not worth hiring?
"... Not only were far fewer jobs added
than we expected, the jobs added were low wage, part-time jobs … such as bartenders and restaurant waitstaff. ..."
Bartenders And Wait Staff Dominate Jobs Added, Manufacturing Jobs Decline (Fed's Fischer
See No Bubbles)
The September jobs report was nothing short of disastrous. Not only were far fewer jobs added
than we expected, the jobs added were low wage, part-time jobs … such as bartenders and restaurant waitstaff.
Even worse, higher paying manufacturing jobs declined.
"... The frenzied drilling that made it No.
1 in personal-income growth and job creation for five consecutive years hasn't lasted long enough
to support the oil-fueled building explosion ..."
many previous oil-boomtowns across Texas and North Dakota are facing a real-estate crisis. As
Bloomberg reports, the former bustling "man-camps" of towns like Williston, ND are now desolate with
hundreds of skeletons or wood & cement as predictions that fracking would sustain production and
a robust tax base for decades have failed completely.
... ... ...
Chain saws and staple guns echo across a $40 million residential complex under construction in
Williston, North Dakota, a few miles from almost-empty camps once filled with oil workers.
As Bloomberg reports, after struggling to house thousands of migrant roughnecks during
the boom, the state faces a new real-estate crisis: The frenzied drilling that made it No.
1 in personal-income growth and job creation for five consecutive years hasn't lasted long enough
to support the oil-fueled building explosion.
Civic leaders and developers say many new units were already in the pipeline, and they anticipate
another influx of workers when oil prices rise again. But for now, hundreds of dwellings approved
during the heady days are rising, skeletons of wood and cement surrounded by rolling grasslands,
with too few residents who can afford them.
"We are overbuilt," said Dan Kalil, a commissioner in Williams County in the heart of
the Bakken, a 360-million-year-old shale bed, during a break from cutting flax on his farm.
"I am concerned about having hundreds of $200-a-month apartments in the future."
The surge began in 2006, when rising oil prices made widespread hydraulic fracturing economically
feasible. The process forces water, sand and chemicals down a well to crack rock and release the
crude. Predictions were that fracking would sustain production and a robust tax base for decades.
Laborers descended on the state, many landing in temporary settlements of recreational vehicles,
shacks and even chicken coops. Energy companies put up some workers in so-called man camps.
In 2011, Williams County commissioners approved 12,000 beds, says Michael Sizemore, the county
building official.
Everyone levered up on this "no-brainer"...
The camps were supposed to be an interim solution until subdivision and apartment complexes
could be built.
Civic leaders across the Bakken charged into overdrive, processing hundreds of permits and
borrowing tens of millions of dollars to pay for new water and sewer systems. Williston has
issued $226 million of debt since January 2011; about $144 million is outstanding. Watford City
issued $2.34 million of debt; about $2.1 million is outstanding.
and many remain delusional...
"We didn't build temporary housing on purpose because we viewed North Dakota as a long-term
play," said Israel Weinberger, a principal at Coltown Properties, which invests in multi-family
real-estate developments.
"We think the local production of oil is here to stay. Yes, prices have dropped, but it's
a commodity and commodities fluctuate. There is always a risk."
Fracking's success has created another glut...
As the migrant workers leave, their castoffs pile up in scrap yards such as TJ's Autobody &
Salvage outside Alexander, about 25 miles (40 kilometers) south of Williston. More than 400
discarded vehicles crowd its lot, including souped-up pickup trucks and an RV with rotting
potatoes and a dead mouse in the sink.
"I wake up and RVs are in my driveway," said owner Tom Novak. "It's insane; there are empty
campers everywhere."
Unfortunately most are no longer from agrarian roots, and have no concept of living within
one's means, and storing away excess in times of feast - for the times of famine that
inevitably follow.
The correction in August brought the market down ten percent," Shiller says. "But it's halfway
back up. It's still looking pretty frothy."
Shiller adds that his valuation confidence index, known as the CAPE ratio, is far above the
historical norm of 17. The ratio, which compares current stock prices to earnings over a ten-year
period, currently measures 24.5, near the peak it reached before the financial crisis in 2007.
"On top of that, I have survey data showing that [a high percentage of] people think the market
is overpriced," he says. "This this creates a little bit of fear that there could be a
correction. When we saw the correction in August of this year, there was some anxiety thrown into
people's hearts."
Investors piled into cash-equivalent, money-market funds over the last week, making the asset
class more popular than bond and equity funds for the first time in 25 years, new data shows.
Some $17 billion was pumped into cash funds in the week to Wednesday, while $3.3 billion where
pulled out of stocks through ETFs and mutual funds, according to research from Bank of America
Merrill Lynch and EPFR Global published Friday.
Meanwhile bond funds saw just $400 million in inflows over the same period, meaning cash is
outperforming both asset classes this year for the first time since 1990, the data reveals.
Money market funds invest in very short-term, liquid debt such as U.S. Treasurys and offer
investors low volatility, meaning they are often thought of as a cash-equivalent.
Corporate bonds saw their twelfth straight week of outflows, with safe-haven Treasury bond funds
picking up some of the slack.
Global chief investment officer at UBS Wealth management, Mark Haefele has cut his U.S.
high-yield corporate bond position this month, having been overweight the asset class since the
end of 2011.
... ... ...
As well as sticking to cash, investors pulled $7.4 billion from the State Street's SPDR S&P
500 ETF (NYSE Arca: SPY), the world's largest ETF.
The problem with Paul Craig Roberts thinking is that China and Russia are also neoliberal
economies which exist within global financial system, controlled from Washington. But this not
a typical ZeroHedge "dooms day porn". He manages to make some relevant observations about the
current situation, without he definitely underestimates the resilience of the American financial
empire.
"... Submitted by Paul Craig Roberts, ..."
"... China is America's largest creditor after the Federal
Reserve. If the Chinese government were so inclined, China could cause
Washington many serious economic, financial, and military problems. Yet
China pursues peace while Washington issues threats. ..."
"... he Wolfowitz Doctrine states that
Washington's principal objective is to prevent the rise of countries that
could be sufficiently powerful to resist American hegemony. Thus,
Washington's attack on Russia via Ukraine and Washington's
re-militarization of Japan as an instrument against China, despite the
strong opposition of 80 percent of the Japanese population. ..."
"... neoliberal economics is
blind to reality and serves to justify the destruction of the economic
prospects of the Western World. It remains to be seen if Russia and China
can develop a different economics or whether these rising superpowers
will fall victim to the "junk economics" that has destroyed the West.
..."
"... With so many Chinese and Russian economists educated in the US
[neoliberal] tradition, the prospects of Russia and China might not be
any better than ours. ..."
Washington's IQ
follows the Fed's interest rate - it is negative. Washington is
a black hole into which all sanity is sucked out of government
deliberations.
Washington's failures are everywhere visible. We can
see the failures in Washington's wars and in Washington's approach to
China and Russia.
The visit of Chinese President Xi Jinping, was scheduled for the
week-end following the Pope's visit to Washington. Was this Washington's
way of demoting China's status by having its president play second fiddle
to the Pope? The President of China is here for week-end news coverage?
Why didn't Obama just tell him to go to hell?
Washington's cyber incompetence and inability to maintain cyber
security is being blamed on China. The day before Xi Jinping's arrival in
Washington, the White House press secretary warmed up President Jinping's
visit by announcing that Obama might threaten China with financial
sanctions.
And not to miss an opportunity to threaten or insult the President of
China, the US Secretary of Commerce fired off a warning that the Obama
regime was too unhappy with China's business practices for the Chinese
president to expect a smooth meeting in Washington.
In contrast, when Obama visited China, the Chinese government treated
him with politeness and respect.
China is America's largest creditor after the Federal
Reserve. If the Chinese government were so inclined, China could cause
Washington many serious economic, financial, and military problems. Yet
China pursues peace while Washington issues threats.
Like China, Russia, too, has a foreign policy independent of
Washington's, and it is the independence of their foreign policies that
puts China and Russia on the outs with Washington.
Washington considers countries with independent foreign
policies to be threats. Libya, Iraq, and Syria had independent
foreign policies. Washington has destroyed two of the three and is
working on the third. Iran, Russia, and China have independent foreign
policies. Consequently, Washington sees these countries as threats and
portrays them to the American people as such.
Russia's President Vladimir Putin will meet with Obama next
week at the UN meeting in New York. It is a meeting that seems destined
to go nowhere. Putin wants to offer Obama Russian help in
defeating ISIS, but Obama wants to use ISIS to overthrow Syrian President
Assad, install a puppet government, and throw Russia out of its only
Mediterranean seaport at Tartus, Syria. Obama wants to press Putin to
hand over Russian Crimea and the break-away republics that refuse to
submit to the Russophobic government that Washington has installed in
Kiev.
Despite Washington's hostility, Xi Jinping and Putin continue
to try to work with Washington even at the risk of being humiliated in
the eyes of their peoples. How many slights, accusations, and
names (such as "the new Hitler") can Putin and Xi Jinping accept before
losing face at home? How can they lead if their peoples feel the shame
inflicted on their leaders by Washington?
Xi Jinping and Putin are clearly men of peace. Are they
deluded or are they making every effort to save the world from the final
war?
One has to assume that Putin and Xi Jinping are aware of the
Wolfowitz Doctrine, the basis of US foreign and military policies, but
perhaps they cannot believe that anything so audaciously absurd can be
real. In brief, the Wolfowitz Doctrine states that
Washington's principal objective is to prevent the rise of countries that
could be sufficiently powerful to resist American hegemony. Thus,
Washington's attack on Russia via Ukraine and Washington's
re-militarization of Japan as an instrument against China, despite the
strong opposition of 80 percent of the Japanese population.
"Democracy?" "Washington's hegemony don't need no stinkin' democracy,"
declares Washington's puppet ruler of Japan as he, as Washington's
faithful servant, over-rides the vast majority of the Japanese
population.
Meanwhile, the real basis of US power-its economy-continues to
crumble. Middle class jobs have disappeared by the millions. US
infrastructure is crumbling. Young American women, overwhelmed with
student debts, rent, and transportation costs, and nothing but lowly-paid
part-time jobs, post on Internet sites their pleas to be made mistresses
of men with sufficient means to help them with their bills. This
is the image of a Third World country.
In 2004 I predicted in a nationally televised conference in
Washington, DC, that the US would be a Third World country in 20 years.
Noam Chomsky says we are already there now in 2015. Here is a recent
quote from Chomsky:
"Look around the country. This country is falling apart.
Even when you come back from Argentina to the United States
it looks like a third world country, and when you come back from
Europe even more so. The infrastructure is collapsing. Nothing works.
The transportation system doesn't work. The health system is a total
scandal–twice the per capita cost of other countries and not very good
outcomes. Point by point. The schools are declining . . ."
Another indication of a third world country is large inequality in the
distribution of income and wealth.
https://www.cia.gov/library/publications/the-world-factbook/fields/2172....
">According to the CIA itself, the United States now has one of the worst
distributions of income of all countries in the world. The
distribution of income in the US is worse than in Afghanistan,
Albania, Algeria, Armenia, Australia, Austria, Azerbaijan, Bangladesh,
Belarus, Belgium, Benin, Bosnia/Herzegovina, Burkina Faso, Burundi,
Cambodia, Cameroon, Canada, Cote d'Ivoire, Croatia, Cyprus, Czech
Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Germany,
Ghana, Greece, Guinea, Guyana, Hungary, Iceland, India, Indonesia, Iran,
Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, South Korea,
Kyrgyzstan, Laos, Latvia, Liberia, Lithuania, Luxembourg, Macedonia,
Malawi, Mali, Malta, Mauritania, Mauritius, Moldova, Mongolia,
Montenegro, Morocco, Nepal, Netherlands, New Zealand, Nicaragua, Niger,
Nigeria, Norway, Pakistan, Philippines, Poland, Portugal, Romania,
Russia, Senegal, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland,
Taiwan, Tajikistan, Tanzania, Timor-Leste, Tunisia, Turkey, Turkmenistan,
Uganda, Ukraine, UK, Uzbekistan, Venezuela, Vietnam, and Yemen.
The concentration of US income and wealth in the hands of the
very rich is a new development in my lifetime. I ascribe it to
two things.
One is the offshoring of American jobs. Offshoring
moved high productivity, high-value-added American jobs to countries
where the excess supply of labor results in wages well below labor's
contribution to the value of output. The lower labor costs abroad
transform what had been higher American wages and salaries and,
thereby, US household incomes, into corporate profits, bonuses for
corporate executives, and capital gains for shareholders, and in the
dismantling of the ladders of upward mobility that had made the US an
"opportunity society."
The other cause of the extreme inequality that now prevails in the
US is what Michael Hudson calls the financialization of the
economy that permits banks to redirect income away from
driving the economy to the payment of interest in service of debt
issued by the banks.
Both of these developments maximize income and wealth for the
One Percent at the expense of the population and economy.
As Michael Hudson and I have discovered, neoliberal economics is
blind to reality and serves to justify the destruction of the economic
prospects of the Western World. It remains to be seen if Russia and China
can develop a different economics or whether these rising superpowers
will fall victim to the "junk economics" that has destroyed the West.
With so many Chinese and Russian economists educated in the US
[neoliberal] tradition, the prospects of Russia and China might not be
any better than ours.
The entire world could go down the tubes together.
Oh regional Indian
PCR is always good at rehashing crappy kabuki story-lines with a dose of "I was once a DC
insider" gravitas...
And while there will be a lot of going down together (seems un-avoidable at this point),
questions is who will rise back up first?
Hint: not nations considered "westerley". so to speak...
UndroppedClanger
'Leader' implies people at the front with some direction. Perhaps a different word would be
more appropriate for this global circlejerk cadre!
ToSoft4Truth
The inverse of 'Leader' is 'follower'
Anytime you hear a person say, "There's no leadership"…. They are telegraphing to you, "I
need someone to follow."
kaiserhoff
So Chomsky would rather live in Argentina?
Who's stopping him?
ebear
"I was once a DC insider"
You don't understand. I coulda had class. I coulda been a contender.
philipat
"You don't understand. I coulda had class. I coulda been a contender."
I do think that there is large dose of spite in PCR's writings, probably as a result of "The
Establishment's" refusal to elect him to the CFR. However, better late than never? The one's
that do get religion always do so after the event, which is, of course, part of the problem
also....
Bach's_bitch
PCR is always good at rehashing crappy kabuki story-lines with a dose of "I was once
a DC insider" gravitas...
"Kabuki story-lines"? Did you make that up yourself or something?
questions is who will rise back up first?
Whoever is least affected, meaning none of the big economies.
Oh regional Indian
I don't think you appreciate the subtle push of an old adage: The bigger they are, the
harder they fall. You can keep nursing dreams of manifest destiny as they turn into mani-festering
realities....
Jeffersonian Liberal
Any nations or ethnicities that have benefitted from parasiting on this failed, corrupt
monetary system will also fall together.
The BRICS are sinking like stones. They tried to parasite off what they saw was an unending
Western economic boom, unrealizing, or perhaps turning a blind eye to the fact that it has all
been a bubble since the central banks took control of the currency.
TheEndIsNear
I doubt that American Generals could be bribed as easily as our government politicians.
Thick Willy
Actually, they are probably much cheaper to bribe. Dimon had to give Eric Holder a
$77,000,000 per year salary to keep bankers out of prison. The generals are easily bribed with
a mid 6 figure salary at some defense contractor. Some for even less.
algol_dog
I Strongly encourage people to read Mish's short blog and then check out the accompanying
video. It will enlighten much more about China than this guys rant.
"... markets are less and less
supportive of deja vu innovation. ..."
"... However, a HUGE part of the problem is we have a (mostly) energy illiterate general
public, AND a scientific community that often does not speak in a language that the general
public can comprehend; there is A HUGE disconnect here. ..."
"... US electricity consumption per capita is at the levels of the late 1990s to early 2000s.
Efficiency, demographics reducing the growth of household formations, and a halving of the
growth of real GDP per capita since 2000 and a further deceleration to near 0% since 2007-08
are the primary factors reducing consumption per capita. ..."
"... It ..."
"... would be nice if our only problem were with oil. We have a problem with electricity too,
and with keeping the roads paved. Electric cars don't solve those problems. ..."
@CalifornuiaLiving you are right about the California economy booming. Record tourism, agriculture,
fossil fuels, high tech, etc. all have been strong. Problem is drought , wild fires, and climate
change have significant impact on the future. Also wage stagnation in non-elite worker sector is
a deepening problem. And high tech sector is starting to feel the pinch as markets are less and less
supportive of deja vu innovation.
The reality of ocean acidification, coastal marine life die off due to heat caused algae bloom
and potential sea rise from Arctic ice melting are no longer deniable. This is is not doom and gloom
– this is as you I am sure can recognize required input for planning how to adjust oir at the east
manage the risk.
What I appreciate from Gail is her careful analytical models that provide data points to monitor
as part of the risk assessment and adjustments that any pragmatist must consider.
Massive EV rollout is only good in tandem with a MASSIVE increase in installed renewable
energy systems technologies. It will take decades to do this based on today's generation mix.
And based on the escalation of the 'undesirables' and 'indifference' of Mother Nature, I'm
predicting there will be A LOT more pain in the near future.
Better if the leadership trains and educates the populous to conserve, leave these bad habits
of hyper-consumption in the past, and to PREPARE. to RESPOND. and ADAPT., because Mother
Nature is not going to wait.
BTW: I'm a renewable energy engineer.
kimgerly, September 14, 2015 at 7:16 pm
The way I see it is hyper-consumerism will be the bane of (wo)mans' and other species'
existence.
However, a HUGE part of the problem is we have a (mostly) energy illiterate general
public, AND a scientific community that often does not speak in a language that the general
public can comprehend; there is A HUGE disconnect here. And so, why would those of us in
the scientific/engineering realm expect the lay person to get onboard when we, although I try
my best not to, spew in language that goes over most peoples' heads. More storytelling is
needed…
On top of the fact that we have leaders who don't understand thermodynamics, so they make BAD
policy. Right, I blame a great deal on leadership who is failing to plan and not the sheeple.
But it's happened before and it is quite likely happening again. And so it goes…
CL, September 15, 2015 at 1:14 pm
@Kimgerly
I agree with you that "illiterate general public" is a major problem in setting the world on a
correct course and Gail with this blog is part of that problem. There is one simple proven way
to get the public to learn what is needed to point them in the right direction. It is though
the tax code. The government needs to taxes the public on the actions that are damaging our
environment and give credits to behavior that improves our environment. The one thing the
public understands is money. I'm sure the fools will come after me. When they read this post.
Telling me I'm obstructing their freedom that is destroying mother earth.
I also don't buy your statement that " leaders who don't understand". There is one party that
gets it and another that refuses to at knowledge the situation protecting it's special
interest ( oil companies for one ). This site lead by Gail is part of that special interest
infrastructure. I have yet to see since she fell out of favor at TheOilDrum. A solution to
anything. It's always Fear, Collapse, Fear and more Collapse.
Please Gail, let us know the last time you offered a solution ? You've been calling for
collapse for five years and it hasn't happened. When do you admit your wrong ?
PleaseExplain, September 15, 2015 at 2:56 pm
I'm sick of reading your negative doomsday scenario and disinformation that this site
pushes on the public for special interest. That's who I am.
US electricity consumption per capita is at the levels of the late 1990s to early 2000s.
Efficiency, demographics reducing the growth of household formations, and a halving of the
growth of real GDP per capita since 2000 and a further deceleration to near 0% since 2007-08
are the primary factors reducing consumption per capita.
EV sales are plunging with the crash in the price of gasoline and coincident with a global
recession that likely began in late 2014 to earlier this year.
Growth of wind and solar energy production overall and as a share of total energy production
has likely peaked for the cycle and will decelerate to 0% or negative in the years ahead, as
occurred in the 1990s.
Gail Tverberg, September 15, 2015 at 6:54 am
Yes, we do have a population problem.
Gail Tverberg, September 15, 2015 at 6:45 am
It would be nice if our only problem were with oil. We have a problem with electricity too,
and with keeping the roads paved. Electric cars don't solve those problems.
Russia has invested another $10 billion in the US national debt
In July Russia increased its investment in US Treasury bonds by $9.7 billion of dollars, according
to information given by the United States Treasury and Federal Reserve.
It's odd, but $10 Billion doesn't really represent much of an adventure. The least Russia has held
of American securities
in the last two years was in April this year, when it held only $66.5 Billion. The most during
the period shown was in August last year, when Russia held nearly twice that, $118.1 Billion. And
China, while media mythology has them shoveling dollars out the windows, held $1.24 Trillion at the
end of July this year, up slightly from January. Nobody seemed to notice that Belgium sold of $20
Billion more than China did.
The number of "unicorn" tech companies is increasing dramatically-but the bubble will
burst eventually.
... ... ...
The last tech bubble, in the late '90s, came with more utopian ambitions than quick mattress delivery.
The web and the New Economy it made possible would flatten hierarchies, make work more meaningful,
make recessions a thing of the past, and promote peace, love, and understanding. The classic statement
of techno-utopianism and its new era of decentralization and abundance was former Wired editor Kevin
Kelly's "New Rules for the New Economy," which
featured such assertions as "1) Embrace the Swarm. As power flows away from the center, the competitive
advantage belongs to those who learn how to embrace decentralized points of control" and "3) Plentitude,
Not Scarcity. As manufacturing techniques perfect the art of making copies plentiful, value is carried
by abundance, rather than scarcity, inverting traditional business propositions." On a more wonky
yet no less exuberant note, the noted economist Rudi Dornbusch wrote in 1998: "The U.S. economy likely
will not see a recession for years to come. We don't want one, we don't need one, and, as we have
the tools to keep the current expansion going, we won't have one. This expansion will run forever."
And who can forget Thomas Friedman's nonsensical declaration, made in 1999 as the new economy bubble
was reaching extreme proportions, that "no two countries that both had a McDonald's had fought a
war against each other," so powerful were the charms of globalization, one of the cornerstones of
New Era thinking?
The last tech bubble, in the late nineties, came with more utopian ambitions than quick mattress
delivery.
Exuberant rhetoric is often the accompaniment to financial exuberance. At the turn of the 21st
century, labor markets were tight-the unemployment rate briefly broke below 4 percent for the first
time since 1969-and wages grew across the board. The stock market was booming, led by tech stocks,
and the mania pervaded the culture; Joey Ramone even wrote a love song to CNBC's Maria Bartiromo,
who became a celebrity known as the Money Honey. According to the Federal Reserve's Survey of Consumer
Finances, the share of US households directly owning stock (as distinguished from indirect ownership
through mutual funds) rose from 15.2 percent in 1995 to 21.3 percent in 2001. Since that peak, it's
fallen steadily; as of 2013, the most recent survey, the share was down to 13.8 percent. This time
around, the exuberance seems more muted. Like the left, capitalism seems to have lost its utopian
capacities. Exuberance is now a luxury good, and only a minority is participating in the new boom.
While bouts of irrational exuberance often end badly, it must be conceded that some degree of
economic and technical progress can be their byproduct. The dot.com mania helped turn the internet
from a niche product into one of life's essentials. This one is offering new ways to hail a cab and
order takeout. But one shouldn't get carried away with that: most major technological advances of
the last decades have been publicly financed. As Mariana Mazzucato shows in The Entrepreneurial
State, all the major advances that made the iPhone possible were publicly funded, from the touch
screen to GPS.
This bubble has been publicly financed in a more subtle way. While American finance is often
subject to major bouts of irrational exuberance, the latest round has almost certainly been fueled
by the
Federal Reserve's extraordinary efforts to reflate the economy after the financial crisis. Since
Lehman Brothers collapsed in September 2008, the central bank has pumped $3.6 trillion into the economy
by buying Treasury and mortgage bonds. (Point of comparison: GDP is $17.8 trillion, so even by the
standards of the US economy, $3.6 trillion is a large number.)
All the major advances that made the iPhone possible were publicly funded, from the touch screen
to GPS.
While all this pumping has probably had some good effect on the real economy (though opinions
differ), even proponents
concede that it was fairly modest. But it looks to have been immensely stimulative to the financial
markets. Stocks
are up about 175 percent from their post-Lehman low. (They've come a few percentage points off
their highs, thanks to jitters about the Chinese economy, but the gains remain largely intact.) Long-term
interest rates fell from 4.3 percent in June 2008 to a low of 1.4 percent in July 2012; they've since
come up but not by much-to 2.2 percent. When interest rates fall like that, bondholders enjoy huge
capital gains (older, higher-yielding bonds become more valuable as rates fall), which they need
to redeploy. And as interest rates fell to minimal levels-that July 2012 interest rate on 10-year
Treasury bonds was the lowest since the Federal Reserve's historical series began in 1953-it became
cheaper to borrow funds to speculate with. Investors, bored with sub-2 percent rates, were happier
to "reach for yield"-invest in risky ventures in hope of earning higher returns. All this together
is an ideal formula for unicorn feed.
The pump priming has, unfortunately, provided little fodder for working people. Though the labor
market has recovered, it's hardly bubbly. In July 2000, 56 percent of respondents to the Conference
Board's monthly consumer confidence survey described jobs as "plentiful"; in August 2015, just 22
percent did. And most of today's tech startups are tightly held, meaning financed by venture capitalists
(who themselves work with money provided by institutional investors, like pension funds and your
finer universities, and very rich people), and not by initial public offerings (IPOs) of stocks,
which were widely held by affluent individuals, either directly or through mutual funds. And no CNBC
personalities qualify as celebrities today, unless you count Rick Santelli, author of the 2008 rant
that gave birth to the Tea Party.
The tech bubble is a byproduct of the Federal Reserve's extraordinary efforts to reflate the economy
post-crisis.
Of course, when this bubble bursts-as it inevitably will, especially with the Fed having ended its
massive money injections and now talking about raising interest rates in the fall-the narrow holding
of tech investments means that fewer innocents will suffer collateral damage from the implosion. (So
far, the market stumbles of late summer haven't dampened spirits among venture investors-yet. Should
a more serious financial retrenchment ensue, that will change.) There aren't going to be as many busted
401(k) accounts as there were in 2000–01. But it means that the greatest benefits of the Fed's reinflation
policy are tightly held, too.
There's something sad about this echo-bubble, with its constricted ambitions and minimal use of utopian
rhetoric. We're accustomed to hearing that there's just "no money available" for all manner of excellent
pursuits-though clearly we have plenty of money available to fund serial bubbles and busts, and few
unreconstructed social critics ever denounce that with a "Remember last time?" I'm only partly thinking
of social benefits like childcare and libraries; those are day-to-day expenditures, not big-ticket items
financed out of long-term money, like transit and green-energy research.
GOP eagerness to slash Amtrak by $242 million got headlines while Uber has had no problem raising
almost $7 billion.
Congressional Republicans' eagerness to
slash Amtrak funding by $242 million got some headlines, but the railroad's $1.3 billion current
level of federal funding was none too generous to start with. But
Uber has had no problem raising
almost $7 billion so far, and rival
Lyft another $1 billion.
This is a staggering misallocation of capital. Nor do we have the imagination or funding to follow up
on the suggestion by Mike Konczal and others to "socialize
Uber," by turning the thing into a driver-owned cooperative. There really are some more urgent tasks
than devising a better way to hail a cab-or buy a mattress-and it would be nice to steer some money
towards them instead of towards capitalist phantasms.
"...China's demand growth is set to slow to an annual rate of 2.3 percent by the fourth
quarter compared with 5.6 percent in the second quarter, a reflection of "weak car sales data,
declines in industrial activity, plummeting property prices and fragile electricity output," the IEA
said in a report on Sept. 11."
Goldman Sachs says Chinese hoarding may avert $20 oil scenario
....In the first seven months of the year, China purchased about half a million barrels of
crude in excess of its daily needs, the most for the period since 2012, according to data
compiled by Bloomberg. As the country gathers bargain barrels for its strategic petroleum
reserve, the demand is cushioning an oversupplied market from a further crash, according to
Columbia University's Center on Global Energy Policy.
"It throws a lifeline to the market" that safeguards against the risk of crude touching $20 a
barrel, Jeff Currie, head of commodities research at Goldman Sachs Group Inc. in New York, said
by phone. "That lifeline lasts through late 2016."
Over the next 18 month, the EIA estamates that China will put 132 million barrel of
crude into storage. Another 149 million barrels of capacity is planned by 2020. 218.9 are
filled.
...the U.S. Strategic Petroleum Reserve has been stable at about 700 million barrels for years
... ... ...
China's demand growth is set to slow to an annual rate of 2.3 percent by the fourth
quarter compared with 5.6 percent in the second quarter, a reflection of "weak car sales data,
declines in industrial activity, plummeting property prices and fragile electricity output," the
IEA said in a report on Sept. 11.
... ... ...
When amassing inventories, China's import demand can swing by as much as 1 million barrels a
day
... ... ...
"The surplus in the market at the moment is close to 2 million barrels a day," said Miswin
Mahesh, an analyst at Barclays in London. "China's support for the SPR would only be able to take
a fraction out of that.
... ... ...
By mopping up some of the surplus, China encourages a gentler scenario in which the "financial
stress" of $40 oil gradually causes highly indebted shale producers to curb production, Currie
said. "You reduce the likelihood of a scenario where the market only balances when prices
collapse below production costs, at about $20 a barrel," he said.
If we assume that at each price point only a finite amount of oil can be profitably extracted
from Earth (which is a small planet, that is now well researched for oil) , the current slump in oil
prices looks extremely suspicious. It means robbing of future generations, as conservation efforts
are now derailed.
The problem with the view expressed is that cost of production can't be changed dramatically. That
should slow the rate of increase of consumption but such dramatic drop in prices requires special engendering
and some backstage agreement between the USA and Saudi Arabia.
"...Demand will continue to rise -- that's undeniable, given expected growth in world income
and population -- but not at the pace to which Big Oil has become accustomed. Consider this: in 2005,
when many of the major investments in unconventional oil were getting under way, the EIA projected that
global oil demand would reach 103.2 million barrels per day in 2015; now, it's lowered that figure for
this year to only 93.1 million barrels. Those 10 million "lost" barrels per day in expected consumption
may not seem like a lot, given the total figure, but keep in mind that Big Oil's multibillion-dollar
investments in tough energy were predicated on all that added demand materializing, thereby generating
the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated
demand vanishing, however, prices were bound to collapse."
"...the IEA believes that oil prices will only average about $55 per barrel in 2015 and not reach
$73 again until 2020. "
Many reasons have been provided for the dramatic plunge in the price of oil to about US$60 per
barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation;
overproduction at shale fields in the United States; the decision of the Saudis and other Middle
Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers
in the US and elsewhere); and the increased value of
Big oil's broken model
By Michael T Klare
Many reasons have been provided for the dramatic plunge in the price of oil to about US$60 per
barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation;
overproduction at shale fields in the United States; the decision of the Saudis and other Middle
Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers
in the US and elsewhere); and the increased value of the dollar relative to other currencies.
There is, however, one reason that's not being discussed, and yet it could be the most important
of all: the complete collapse of Big Oil's production-maximizing business model.
Until last fall, when the price decline gathered momentum, the oil giants were operating at full
throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the
high prices. For most of the previous six years, Brent crude, the international benchmark for crude
oil, had been selling at $100 or higher. But Big Oil was also operating according to a business
model that assumed an ever-increasing demand for its products, however costly they might be to produce
and refine.
This meant that no fossil fuel reserves, no potential source of supply - no matter how remote
or hard to reach, how far offshore or deeply buried, how encased in rock - was deemed untouchable
in the mad scramble to increase output and profits.
In recent years, this output-maximizing strategy had, in turn, generated historic wealth for the
giant oil companies. Exxon, the largest US-based oil firm, earned an eye-popping $32.6 billion in
2013 alone, more than any other American company except for Apple. Chevron, the second biggest oil
firm, posted earnings of $21.4 billion that same year. State-owned companies like Saudi Aramco and
Russia's Rosneft also reaped mammoth profits.
How things have changed in a matter of mere months.
... ... ...
According to the Energy Information Administration (EIA) of the U.S. Department of Energy, world
oil production rose from 85.1 million barrels per day in 2005 to 92.9 million in 2014, despite the
continuing decline of many legacy fields in North America and the Middle East. Claiming that industry
investments in new drilling technologies had vanquished the specter of oil scarcity, BP's latest
CEO, Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing
that had "peaked" was "the theory of peak oil."
That, of course, was just before oil prices took their leap off the cliff, bringing instantly
into question the wisdom of continuing to pump out record levels of petroleum. The production-maximizing
strategy crafted by O'Reilly and his fellow CEOs rested on three fundamental assumptions:
that, year after year, demand would keep climbing;
that such rising demand would ensure prices high enough to justify costly investments in unconventional
oil;
and that concern over climate change would in no significant way alter the equation.
Today, none of these assumptions holds true.
Demand will continue to rise -- that's undeniable, given expected growth in world income and
population -- but not at the pace to which Big Oil has become accustomed. Consider this: in 2005,
when many of the major investments in unconventional oil were getting under way, the EIA projected
that global oil demand would reach 103.2 million barrels per day in 2015; now, it's lowered that
figure for this year to only 93.1 million barrels. Those 10 million "lost" barrels per day in expected
consumption may not seem like a lot, given the total figure, but keep in mind that Big Oil's multibillion-dollar
investments in tough energy were predicated on all that added demand materializing, thereby generating
the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated
demand vanishing, however, prices were bound to collapse.
Current indications suggest that consumption will continue to fall short of expectations in the
years to come. In an assessment of future trends released last month, the EIA reported that, thanks
to deteriorating global economic conditions, many countries will experience either a slower rate
of growth or an actual reduction in consumption. While still inching up, Chinese consumption, for
instance, is expected to grow by only 0.3 million barrels per day this year and next -- a far cry
from the 0.5 million barrel increase it posted in 2011 and 2012 and its one million barrel increase
in 2010. In Europe and Japan, meanwhile, consumption is actually expected to fall over the next two
years.
And this slowdown in demand is likely to persist well beyond 2016, suggests the International
Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club
of rich industrialized nations). While lower gasoline prices may spur increased consumption in the
United States and a few other nations, it predicted, most countries will experience no such lift
and so "the recent price decline is expected to have only a marginal impact on global demand growth
for the remainder of the decade."
This being the case, the IEA believes that oil prices will only average about $55 per barrel
in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed
to justify continued investment in and exploitation of tough-oil options like Canadian tar sands,
Arctic oil, and many shale projects. Indeed, the financial press is now full of reports on stalled
or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned
plans for a $6.5 billion petrochemical plant in Qatar, citing "the current economic climate prevailing
in the energy industry." At the same time, Chevron shelved its plan to drill in the Arctic waters
of the Beaufort Sea, while Norway's Statoil turned its back on drilling in Greenland.
There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can
no longer be discounted in any future energy business model. The pressures to deal with a phenomenon
that could quite literally destroy human civilization are growing. Although Big Oil has spent massive
amounts of money over the years in a campaign to raise doubts about the science of climate change,
more and more people globally are starting to worry about its effects -- extreme weather patterns,
extreme storms, extreme drought, rising sea levels, and the like -- and demanding that governments
take action to reduce the magnitude of the threat.
Europe has already adopted plans to lower carbon emissions by 20% from 1990 levels by 2020 and
to achieve even greater reductions in the following decades. China, while still increasing its reliance
on fossil fuels, has at least finally pledged to cap the growth of its carbon emissions by 2030 and
to increase renewable energy sources to 20% of total energy use by then. In the United States, increasingly
stringent automobile fuel-efficiency standards will require that cars sold in 2025 achieve an average
of 54.5 miles per gallon, reducing U.S. oil demand by 2.2 million barrels per day. (Of course, the
Republican-controlled Congress -- heavily subsidized by Big Oil -- will do everything it can to eradicate
curbs on fossil fuel consumption.)
Still, however inadequate the response to the dangers of climate change thus far, the issue is
on the energy map and its influence on policy globally can only increase. Whether Big Oil is ready
to admit it or not, alternative energy is now on the planetary agenda and there's no turning back
from that. "It is a different world than it was the last time we saw an oil-price plunge," said IEA
executive director Maria van der Hoeven in February, referring to the 2008 economic meltdown. "Emerging
economies, notably China, have entered less oil-intensive stages of development… On top of this,
concerns about climate change are influencing energy policies [and so] renewables are increasingly
pervasive."
The oil industry is, of course, hoping that the current price plunge will soon reverse itself
and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel
price levels. But these hopes for the return of "normality" are likely energy pipe dreams. As van
der Hoeven suggests, the world has changed in significant ways, in the process obliterating the very
foundations on which Big Oil's production-maximizing strategy rested. The oil giants will either
have to adapt to new circumstances, while scaling back their operations, or face takeover challenges
from more nimble and aggressive firms.
Michael T. Klare, a TomDispatch regular, is a professor of peace and world security studies at
Hampshire College and the author, most recently, of The Race for What's Left. A documentary movie
version of his book Blood and Oil is available from the Media Education Foundation.
Follow TomDispatch on Twitter and join us on Facebook. Check out the newest Dispatch Book, Rebecca
Solnit's Men Explain Things to Me, and Tom Engelhardt's latest book, Shadow Government: Surveillance,
Secret Wars, and a Global Security State in a Single-Superpower World.
Copyright 2015 Michael T. Klare
Michael T Klare, a TomDispatch regular, is a professor of peace and world security studies at
Hampshire College and the author, most recently, of The Race for What's Left. A documentary movie
version of his book Blood and Oil is available from the Media Education Foundation.
Follow TomDispatch on Twitter and join us on Facebook. Check out the newest Dispatch Book,
Rebecca Solnit's Men Explain Things to Me, and Tom Engelhardt's latest book, Shadow Government: Surveillance,
Secret Wars, and a Global Security State in a Single-Superpower World.
"... Now with his war under attack, even President George W. Bush has gone public, telling reporters
last August, "[a] failed Iraq … would give the terrorists and extremists an additional tool besides
safe haven, and that is revenues from oil sales." Of course, Bush not only wants to keep oil out of
his enemies' hands, he also wants to put it into the hands of his friends. "
"...Guaranteeing access to Iraq's oil, however isn't the whole story. Despite the lives lost
and the utter ruin that the war has brought, the overarching economic agenda that the administration
is successfully pursuing in the Middle East might be the most enduring legacy of the war-and the most
ignored. Just two months after declaring "mission accomplished" in Iraq, Bush announced his plans for
a U.S.-Middle East Free Trade Area to spread the economic invasion well-underway in Iraq to the rest
of the region by 2013. Negotiations have progressed rapidly as countries seek to prove that they are
with the United States, not against it."
"...In 2004, Michael Scheuer-the CIA's senior expert on al-Qaeda until he quit in disgust with
the Bush administration-wrote, "The U.S. invasion of Iraq was not preemption; it was … an avaricious,
premeditated, unprovoked war against a foe who posed no immediate threat but whose defeat did offer
economic advantages." How right he was. For it is an absolute fallacy that the Bush administration had
no post-invasion plan for Iraq. The administration had a very clear economic plan that has contributed
significantly to the disastrous results of the war. The plan was prepared at least two months prior
to the war by the U.S. consultancy firm, Bearing Point, Inc., which then received a $250 million contract
to remake Iraq's economic infrastructure.
"...Halliburton received the largest contract, worth more than $12 billion, while 13 other U.S.
companies received contracts worth more than $1.5 billion each. The seven largest reconstruction contracts
went to the Parsons Corporation of Pasadena, Calif. ($5.3 billion); Fluor Corporation of Aliso Viejo,
Calif. ($3.75 billion); Washington Group International of Boise, Idaho ($3.1 billion); Shaw Group of
Baton Rouge, La. ($3 billion); Bechtel Corporation of San Francisco ($2.8 billion); Perini Corporation
of Framingham, Mass. ($2.5 billion); and Contrack International, Inc. of Arlington, Va. ($2.3 billion).
These companies are responsible for virtually all reconstruction in Iraq, including water, bridges,
roads, hospitals, and sewers and, most significantly, electricity."
"...Put simply, U.S. oil companies want access to as much of Iraq's oil as they can get and
on the best possible terms. The fact that Iraq is a war-ravaged and occupied nation works to the companies'
benefit. As a result, the companies and the Bush administration are holding U.S. troops hostage in Iraq
until they get what they want. Once the companies get their lucrative contracts, they will still
need protection to get to work. What better security force is there than 144,000 American troops?
{Following this pattern, we can know understand why the U.S. has not completed medical clinics, re-establish
electric service, etc. They are holding the country hostage, with a promise of approve the sale of the
oil fields and then these projects will be completed--jk.}"
Both parties support neoliberalism, and
this is sufficient to explain the course of events leading up to and following the invasion of Iraq.
Biparticism and media support of neoliberalism has left a gap in debate and reporting. The article
below fills that gap-jk.
Spoils of War: Oil, the U.S.-Middle East Free Trade Area and the Bush Agenda
By Antonia Juhasz, Antonia Juhasz,
a visiting scholar at the Institute for Policy Studies, is the author of The Bush Agenda: Invading
the World, One Economy at a Time, on which part of this article is based. She is working on a new
book that will make the case for the break-up of the largest American oil companies. Learn more at
www.TheBushAgenda.net.
Remember oil? That thing we didn't go to war in Iraq for? Now with his war under attack,
even President George W. Bush has gone public, telling reporters last August, "[a] failed Iraq …
would give the terrorists and extremists an additional tool besides safe haven, and that is revenues
from oil sales." Of course, Bush not only wants to keep oil out of his enemies' hands, he also wants
to put it into the hands of his friends.
The President's concern over Iraq's oil is shared by the Iraq Study Group, which on December 6
released its much-anticipated report. While the mainstream press focused on the report's criticism
of Bush's handling of the war and the report's call for (potential) removal of (most) U.S. troops
(maybe) by 2008, ignored was the report's focus on Iraq's oil. Page 1, chapter 1 laid out in no uncertain
terms Iraq's importance to the Middle East, the United States and the world with this reminder: "It
has the world's second-largest known oil reserves." The group then proceeds to give very specific
and radical recommendations as to what should be done to secure those reserves.
Guaranteeing access to Iraq's oil, however isn't the whole story. Despite the lives lost and
the utter ruin that the war has brought, the overarching economic agenda that the administration
is successfully pursuing in the Middle East might be the most enduring legacy of the war-and the
most ignored. Just two months after declaring "mission accomplished" in Iraq, Bush announced his
plans for a U.S.-Middle East Free Trade Area to spread the economic invasion well-underway in Iraq
to the rest of the region by 2013. Negotiations have progressed rapidly as countries seek to prove
that they are with the United States, not against it.
The Bush Agenda
Within days of the 9/11 terrorist attacks, then-U.S. Trade Representative Robert Zoellick announced
that the Bush administration would be "countering terror with trade." Bush reiterated that pledge
four years later when he told the United Nations, "By expanding trade, we spread hope and opportunity
to the corners of the world, and we strike a blow against the terrorists. Our agenda for freer trade
is part of our agenda for a freer world." In the case of the March 2003 invasion and ongoing occupation
of Iraq, these "free trade"-or corporate globalization-policies have been applied in tandem with
America's military forces.
The Bush administration used the military invasion of Iraq to oust its leader, replace its government,
implement new economic and political laws, and write a new constitution. The new economic laws have
transformed Iraq's economy, applying some of the most radical-and sought-after-corporate globalization
policies in the world and locking in sweeping advantages to U.S. corporations. Through the ongoing
occupation, the Bush administration seeks to ensure that both Iraq's new government and this new
economic structure stay firmly in place. The ultimate goal-opening Iraq to U.S. oil companies-is
reaching fruition.
In 2004, Michael Scheuer-the CIA's senior expert on al-Qaeda until he quit in disgust with
the Bush administration-wrote, "The U.S. invasion of Iraq was not preemption; it was … an avaricious,
premeditated, unprovoked war against a foe who posed no immediate threat but whose defeat did offer
economic advantages." How right he was. For it is an absolute fallacy that the Bush administration
had no post-invasion plan for Iraq. The administration had a very clear economic plan that has contributed
significantly to the disastrous results of the war. The plan was prepared at least two months prior
to the war by the U.S. consultancy firm, Bearing Point, Inc., which then received a $250 million
contract to remake Iraq's economic infrastructure.
L. Paul Bremer III-the head of the U.S. occupation government of Iraq, the Coalition Provisional
Authority (CPA)-followed Bearing Point's plan to the letter. From May 6, 2003 until June 28, 2004,
Bremer implemented his "100 Orders" with the force of law, all but a handful of which remain in place
today. As the preamble to many of the orders state, they are intended to "transition [Iraq] from
a … centrally planned economy to a market economy" virtually overnight and by U.S. fiat. Bremer's
orders included firing the entire Iraqi military-some half a million men-in the first weeks of the
occupation. Suddenly jobless, many of these men took their guns with them and joined the violent
insurgency. Bremer also fired 120,000 of Iraq's senior bureaucrats from every government ministry,
hospital and school. {By removing the Sumi bureaucracy, they removed opposition to globalization.
The U.S. could now shop for support from what would soon be a newly elected factionalized parliament-jk.}
His laws allowed for the privatization of Iraq's state-owned enterprises (excluding oil) and for
American companies to receive preferential treatment over Iraqis in the awarding of reconstruction
contracts. The laws reduced taxes on all corporations by 25 percent and opened every sector of the
Iraqi economy to private foreign investment. The laws allowed foreign firms to own 100 percent of
Iraqi businesses (as opposed to partnering with Iraqi firms) and to send their profits home without
having to invest a cent in the struggling Iraqi economy. Iraqi laws governing banking, foreign investment,
patents, copyrights, business ownership, taxes, the media, agriculture and trade were all changed
to conform to U.S. goals.
After the U.S. corporate invasion of Iraq
More than 150 U.S. companies were awarded contracts for post-war work totaling more than $50 billion.
The American companies were hired, even though Iraqi companies had successfully rebuilt the country
after the previous U.S. invasion. And, because the American companies did not have to hire Iraqis,
many imported foreign workers instead. The Iraqis were, of course, well aware that American firms
had received billions of dollars for reconstruction, that Iraqi companies and workers had been rejected
and that the country was still without basic services. The result: increasing hostility, acts of
sabotage targeted directly at foreign contractors and their work, and a rising insurgency.
Halliburton received the largest contract, worth more than $12 billion, while 13 other U.S.
companies received contracts worth more than $1.5 billion each. The seven largest reconstruction
contracts went to the Parsons Corporation of Pasadena, Calif. ($5.3 billion); Fluor Corporation of
Aliso Viejo, Calif. ($3.75 billion); Washington Group International of Boise, Idaho ($3.1 billion);
Shaw Group of Baton Rouge, La. ($3 billion); Bechtel Corporation of San Francisco ($2.8 billion);
Perini Corporation of Framingham, Mass. ($2.5 billion); and Contrack International, Inc. of Arlington,
Va. ($2.3 billion). These companies are responsible for virtually all reconstruction in Iraq, including
water, bridges, roads, hospitals, and sewers and, most significantly, electricity.
U.S. Air Force Colonel Sam Gardiner, author of a 2002 U.S. government study on the likely effect
that U.S. bombardment would have on Iraq's power system, said, "frankly, if we had just given the
Iraqis some baling wire and a little bit of space to keep things running, it would have been better.
But instead we've let big U.S. companies go in with plans for major overhauls."
Many companies had their sights set on years-long privatization in Iraq, which helps explain their
interest in "major overhauls" rather than getting the systems up and running. Cliff Mumm, head of
Bechtel's Iraq operation, put it this way: "[Iraq] has two rivers, it's fertile, it's sitting on
an ocean of oil. Iraq ought to be a major player in the world. And we want to be working for them
long term."
And, since many U.S. contracts guaranteed that all of the companies' costs would be covered, plus
a set rate of profit (known as cost-plus contracts), they took their time, building expensive new
facilities that showcased their skills and would serve their own needs should they be runing the
systems one day.
Mismanagement, waste, abuse and criminality have also characterized U.S. corporations in Iraq-leading
to a series of U.S. contract cancellations. For example, a $243 million contract held by the Parsons
Corporation for the construction of 150 health care centers was cancelled after more than two years
of work and $186 million yielded just six centers, only two of which are serving patients. Parsons
was also dropped from two different contracts to build prisons, one in Mosul and the other in Nasiriyah.
The Bechtel Corporation was dropped from a $50 million contract for the construction of a children's
hospital in Basra after it went $90 million over budget and a year-and-a-half behind schedule. These
contracts have since been turned over to Iraqi companies.
Halliburton's subsidiary KBR is currently being investigated by government agencies and facing
dozens of charges for waste, fraud and abuse. Most significantly, in 2006, the U.S. Army cancelled
Halliburton's largest government contract, the Logistics Civil Augmentation Program (LOGCAP), which
was for worldwide logistical support to U.S. troops. Halliburton will continue its current Iraq contract,
but this year the LOGCAP will be broken into smaller parts and competitively bid out to other companies.
The Special Inspector General for Iraq Reconstruction (SIGIR), a congressionally-mandated independent
auditing and oversight body, has opened 256 investigations into criminal fraud, four of which have
resulted in convictions. SIGIR has provided critical oversight of the U.S. reconstruction, but this
fall it nearly fell prey to a GOP attempt to shut down its activities well ahead
of schedule. Fortunately, it survived.
SIGIR's October 2006 report to Congress reveals the failure of U.S. corporations in Iraq. In the
electricity sector, less than half of all planned projects in Iraq have been completed, while 21
percent have yet to even begin. Even the term "complete" can be misleading as, for example, SIGIR
has found that contractors have failed to build transmission and distribution lines to connect new
generators to homes and businesses. Thus, nationally, Iraqis have on average just 11 hours of electricity
a day, and in Baghdad, the heart of instability in Iraq, there are between four and eight hours on
average per day. Before the war, Baghdad averaged 24 hours per day of electricity.
While there has been greater success in finishing water and sewage projects, the fact that 80
percent of potable water projects are reported complete does little good if there is no electricity
to pump the water into homes, hospitals or businesses. Meanwhile, the health care sector is truly
a tragedy. Just 36 percent of planned projects are reported as complete. Of 20 planned hospitals,
12 are finished and only six of 150 planned public health centers are serving patients today.
Overall, the economy is languishing, with high inflation, low growth, and unemployment rates estimated
at 30 to 50 percent {being part of a militia is providing employment} for the nation and as high
as 70 percent in some areas. The International Monetary Fund has enforced a structural adjustment
program on Iraq that mirrors much of Bush's corporate globalization agenda, and the administration
continues to push for Iraq's admission into the World Trade Organization.
Iraq has not, therefore, emerged as the wealthy free market haven that Bush & Co. had hoped for.
Several U.S. companies are now preparing to pack up, head home and take their billions of dollars
with them, their work in Iraq left undone. The Bush administration is likely to follow a dual strategy:
continuing to pursue a corporate free-trade haven in Iraq, while helping U.S. corporations extricate
themselves without consequence. The administration will also focus on the big prize: Iraq's oil.
Winning Iraq's oil prize:
The Bush Agenda does have supporters, especially those corporate allies that have both shaped
and benefited from the administration's economic and military policies. In the 2000 election cycle,
the oil and gas industry donated 13 times more money to Bush's campaign than to Al Gore's. The Bush
administration is the first in history in which the president, vice president and secretary of state
are all former energy company officials. In fact, the only other U.S. president to come from the
oil and gas industry was Bush's father. Moreover, both George W. Bush and Condoleezza Rice have more
experience running oil companies than they do working for the government.
Planning to secure Iraq's oil for U.S. companies began on the tenth day of the Bush presidency,
when Vice President Dick Cheney established the National Energy Policy Development Group-widely referred
to as "Cheney's Energy Task Force." It produced two lists, titled "Foreign Suitors for Iraqi Oilfield
Contracts as of 5 March 2001," which named more than 60 companies from some 30 countries with
contracts for oil and gas projects across Iraq-none of which were with American firms. However, because
sanctions were imposed on Iraq at this time, none of the contracts could come into force. If the
sanctions were removed-which was becoming increasingly likely as public opinion turned against the
sanctions and Hussein remained in power-the contracts would go to all of those foreign oil companies
and the U.S. oil industry would be shut out.
As the Bush administration stepped up its war planning, the State Department began preparations
for post-invasion Iraq. Meeting four times between December 2002 and April 2003, members of the State
Department's Oil and Energy Working Group mapped out Iraq's oil future. They agreed that Iraq "should
be opened to international oil companies as quickly as possible after the war" and that the best
method for doing so was through Production Sharing Agreements (PSAs).
PSAs are considered "privatization lite" in the oil business and, as such, are the favorite of
international oil companies and the worst-case scenario for oil-rich states. With PSAs, oil ownership
ultimately rests with the government, but the most profitable aspects of the industry-exploration
and production-are contracted to the private companies under highly favorable terms. None of the
top oil producers in the Middle East use PSAs, because they favor private companies at the expense
of the exporting governments. In fact, PSAs are only used in respect to about 12 percent of world
oil reserves {such as Nigeria}.
After the invasion
Two months after the invasion of Iraq, in May 2003, the U.S.-appointed senior adviser to the Iraqi
Oil Ministry, Thamer al-Ghadban, announced that the new Iraqi government would honor few, if any,
of the dozens of contracts signed with foreign oil companies under the Hussein regime.
At the same time, Bremer was laying the economic groundwork for a "U.S. corporate friendly"
Iraq. When Bremer left Iraq in June 2004, he bequeathed the Bush economic agenda to two men,
Ayad Allawi and Adel Abdul Mahdi, who Bremer appointed interim Prime Minister and Finance Minister,
respectively {viz., two sell the oil lackeys to head the Iraq government}. Two months later, Allawi
(a former CIA asset) submitted guidelines for a new petroleum law to Iraq's Supreme Council for Oil
Policy. The guidelines declared "an end to the centrally planned and state dominated Iraqi economy"
and advised the "Iraqi government to disengage from running the oil sector, including management
of the planned Iraq National Oil Company (INOC), and that the INOC be partly privatized in the future."
Allawi's guidelines also turned all undeveloped oil and gas fields over to private international
oil companies. Because only 17 of Iraq's 80 known oil fields have been developed, Allawi's proposal
would put 64 percent of Iraq's oil into the hands of foreign firms. However, if a further 100
billion barrels are discovered, as is widely predicted, foreign companies could control 81 percent
of Iraq's oil-or 87 percent if, as the Oil Ministry predicts, 200 billion barrels are found.
On December 21, 2004, Mahdi joined U.S. Undersecretary of State Alan Larson at the National
Press Club and announced Iraq's plans for a new petroleum law that would open the oil sector to private
foreign investment. "I think this is very promising to the American investors and to American
enterprise, certainly to oil companies," said Mahdi. He described how, under the proposed law, foreign
companies would gain access both to "downstream" and "maybe even upstream" oil investment in Iraq.
("Downstream" refers to refining, distribution, and marketing of oil. "Upstream" refers to exploration
and production.)
The draft petroleum law adopted Allawi's recommendation that currently producing oil fields are
to be developed by Iraq's National Oil Company, while all new fields are opened to private companies
using PSAs.
The Bush administration and U.S. oil companies have maintained constant pressure on Iraq to pass
the petroleum law. The administration appointed an advisor to the Iraqi government from Bearing Point
to support completion of the law. And in July 2006, U.S. Energy Secretary Samuel Bodman announced
in Baghdad that oil executives told him that their companies would not enter Iraq without passage
of the new oil law. Petroleum Economist magazine later reported that U.S. oil companies
considered passage of the new oil law more important than increased security when deciding whether
to go into business in Iraq.
The Iraq Study Group, recognizing as it did the primacy of oil in its Iraq calculations, recommended
that the U.S. "assist Iraqi leaders to reorganize the national oil industry as a commercial enterprise"
and "encourage investment in Iraq's oil sector by the international community and by international
energy companies."
Put simply, U.S. oil companies want access to as much of Iraq's oil as they can get and on
the best possible terms. The fact that Iraq is a war-ravaged and occupied nation works to the companies'
benefit. As a result, the companies and the Bush administration are holding U.S. troops hostage in
Iraq until they get what they want. Once the companies get their lucrative contracts, they will
still need protection to get to work. What better security force is there than 144,000 American
troops? {Following this pattern, we can know understand why the U.S. has not completed medical clinics,
re-establish electric service, etc. They are holding the country hostage, with a promise of approve
the sale of the oil fields and then these projects will be completed--jk.}
Three days after the release of the Iraq Study Group Report, the al-Maliki government announced
that Iraq's oil law was near completion. The law adopts PSAs and not only opens Iraq to private foreign
companies, but permits "for the first time-local and international companies to carry out oil exploration
in Iraq."
To ensure that this model prevails, the Iraq Study Group recommends that Iraq's constitution
be rewritten to give the central government of Iraq-as opposed to individual regions-the ultimate
decision-making authority over all of Iraq's developed and undeveloped oil fields.
Standard Oil Company's John D. Rockefeller famously said, "Own nothing, control everything." He
would be proud of the U.S. oil companies and the Bush administration, as they seem poised to get
exactly the control they want over Iraq's oil.
Beyond Iraq: the U.S.-Middle East Free Trade Area
But the Bush agenda has never been limited to Iraq. As the Wall Street Journal reported
in May 2003, "For many conservatives, Iraq is now the test case for whether the U.S. can engender
American-style free-market capitalism {neoliberalism} within the Arab world." To this end, the
administration has used the "stick" of the Iraq war to convince nations across the Middle East to
adopt its free trade agenda. The mechanism for doing so is the president's U.S.-Middle East Free
Trade Area (MEFTA).
The corporate lobbying group behind the MEFTA, the aptly named U.S.-Middle East Free Trade Coalition,
includes among its 120 members Chevron, ExxonMobil, Bechtel and Halliburton-companies intimately
connected to the Bush administration that have already been big winners in Iraq.
Insulated by oil revenue, the Middle East has largely avoided succumbing to the sacrifices
required under free trade agreements. But since the war began, negotiations for the MEFTA have progressed
rapidly.
The Bush administration devised a unique negotiating strategy for the MEFTA. Rather than negotiate
with all of the nations as a bloc, the United States negotiates one-on-one with each country. This
means that every nation-some half the size of one state in the United States-must try to make a deal
that serves its own interests with the most economically and militarily dominant nation in the world.
The reality is that there can be no "negotiation" between such thoroughly unequal pairings.
These individual free trade agreements are then united under the MEFTA. If successful, the MEFTA
would be concluded by 2013 and include 20 countries: Algeria, Bahrain, Cyprus, Egypt, Palestine,
Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, the
United Arab Emirates, Tunisia and Yemen.
To date, the Bush administration has signed 13 Trade and Investment Framework Agreements (TIFAs),
which demonstrate a country's commitment to the MEFTA, and are considered the key step towards passage
of a full Free Trade Agreement (FTA). Things have moved briskly since the invasion of Iraq. Algeria
and Bahrain signed before the war, while agreements with Lebanon (the most recent, signed in December),
Tunisia, Saudi Arabia, Kuwait, Yemen, the United Arab Emirates, Qatar, Egypt, Morocco, Oman and Iraq
all followed the war. The United States has signed FTAs with five Middle Eastern countries: Israel,
Jordan, Morocco, Bahrain, and Oman. The last three were signed after the 2003 invasion of Iraq. Negotiations
with the United Arab Emirates are underway and near completion.
The winners, of course, are U.S. corporations. On January 19, 2006, for example, then-U.S. Trade
Representative Robert Portman sent a letter to Oman's minister of commerce and industry affirming
that, when it signs contracts, the Omani government may not give preference to the government's state-controlled
oil companies. As for Oman's apparel industry, the U.S. International Trade Commission estimates
that the U.S.-Oman agreement will lead to a 66 percent increase in U.S. imports of apparel manufactured
in Oman. What are the likely effects? In May, a report by the National Labor Committee detailed the
cost of the first Middle East trade agreement signed by Bush in December 2001-the U.S.-Jordan FTA.
After that agreement was implemented, new factories arrived in Jordan to service American companies,
primarily apparel firms such as Wal-Mart, JC Penney, Target and Jones New York. These factories have
engaged in the worst kinds of rights violations, including 48-hour shifts without sleep, physical
and psychological abuse, and, in the case of imported foreign workers, employers who hold passports
and refuse to pay. (Wal-Mart also is a member of the U.S.-Middle East Free Trade Coalition. The Bush
administration will spend the next two years aggressively pushing the MEFTA as it seeks to expand
the economic invasion of Iraq to the entire region.
What's next?
Throughout his presidency, George W. Bush has claimed that we will live in a safer, more prosperous,
and more peaceful world if the United States remains at war and if countries throughout the world
change their laws and adopt economic policies that benefit America's largest multinational corporations.
The Bush Agenda has proven to have the opposite effect: increasing deadly acts of terrorism and economic
insecurity, reducing freedom, and engendering more war. To replace the Bush Agenda, we must address
each of its key pillars individually-war, imperialism and corporate globalization.
The most urgent first step is ending the war in Iraq by ending both the military and corporate
occupations. We in the peace movement have already made tremendous progress in reaching these ends.
Most Americans now oppose the war. The peace movement has welcomed with open arms U.S. soldiers and
their families who share this opposition and unity has made us all stronger. Counter-recruitment
efforts are blossoming across the country. The U.S. labor movement has joined forces with its counterpart
in Iraq. Protests at corporate headquarters and shareholder meetings have led to U.S. war profiteers
being called to account for their abuses in Iraq. Our success was made concrete with the dismissal
of the president's party from power in both the House and the Senate.
According to "Election 2006: No to Staying the course on Trade," by Public Citizen, 18 House races
saw "fair traders" replace "free traders" in the midterm election, and not a single "free trader"
beat a fair trade candidate. {Staying the course translates into holding the Iraq nation
hostage until they pass PSA-jk.} In every Senate seat that changed hands, a fair trader beat
a free trader. One of their most important tasks this year will be to deny Bush the renewal of Fast
Track negotiating authority when it expires in July. Fast Track allows the president to move trade
bills through Congress quickly by overriding core aspects of the democratic process, such as committee
deliberations, full congressional debate and the ability to offer amendments. In addition to the
newcomers, several existing allies have been elevated to new positions of power. Rep. Ike Skelton
(D-Mo.) is now chairman of the House Armed Services Committee. He has pledged to resurrect the subcommittee
on oversight and investigations. Rep. David Obey (D-Wisc.) will use his chairmanship of the House
Appropriations Committee to exercise greater oversight of Bush's war spending. The most important
ally, however, will likely be Rep. Henry Waxman (D-Calif.), the new chairman of the House Government
Reform Committee. Waxman has been one of the most effective and aggressive critics of Halliburton's
work in Iraq, greatly contributing to Halliburton's loss of its LOGCAP contract.
Our allies in the new Congress should put forward two key demands:
First, all remaining and future U.S. reconstruction funds must be turned over to Iraqi companies
and Iraqi workers. SIGIR found that when Iraqi companies receive contracts (rather than subcontracts
from U.S. companies), their work is faster, less expensive and less prone to insurgent attack. There
are literally hundreds of both private and public Iraqi companies-and millions of Iraqi workers-ready,
able and willing to do this work. U.S. military commanders and soldiers in Iraq have repeatedly made
this demand as they have learned firsthand that a person with a clipboard or a shovel in his or her
hands is far less likely to carry a gun.
Second, U.S. corporations must not be allowed to "cut and run." Every U.S. corporation with reconstruction
contracts in Iraq must be individually audited and each project investigated by SIGIR. Misspent funds
must be returned and made available to Iraqis for reconstruction. SIGIR has begun this process with
plans for a full audit of Bechtel's work due out early this year. SIGIR needs more staff, greater
oversight authority and more money to complete this work in a timely manner.
The Democrats must abandon the Bush administration's plan to remake Iraq into an economic wonderland
for U.S. corporations. Iraq must belong to the Iraqis to remake as they see fit. Nowhere is this
demand more critical than in the case of Iraq's oil. It is clear that Iraq needs to develop its oil
sector to survive and that it needs to retain as much of the proceeds from its oil as possible. It
is also clear that it should be the Iraqi public-freed of the external pressure of a foreign occupation,
the Bush administration and U.S. corporations-that decides how its oil is developed. U.S. oil corporations
cannot be permitted to "win" the war in Iraq while we-Iraqis and Americans-pay the price for their
victory.
IMF policy is to sell of the assets of each
nation-which was consistent with the Whitehouse plan. From the point of view of Muslim zealots, this
Americanization of the Arab world is the greatest immediate threat to their faith. Our presence on
their turf and our plans for free trade turns these zealots into freedom fighters--jk.
Read about how neoliberalism brought about the
war in Iraq, and the plans to sell off the oil field through our puppet government there.
What we all thought about the cause of the war, oil. However this article ties in international
corporations and their wanting to upon up markets with the war. The politicians are not about informing
through debate what is going on, but rather about selling their product and making their opponents
look bad.
Why should investors care?
Investors need to care because the above is just a proxy for all risky assets, including what is
sometimes referred to the ultimate risk asset, the stock market.
All else equal, economic theory
suggests that when volatility (risk premia) is lower, asset prices are higher. Investors are more
willing to pay for an asset when the future appears less uncertain. As volatility increases, for
whatever reason, asset prices should tend adjust lower to provide the higher expected future return
needed to compensate the investor for the increased risk level.
Stock prices were rising on the backdrop of low volatility. Such an environment, in our assessment,
fosters complacency: investors have been lured, courtesy of the Fed, to buy the stock market.
The trouble is that risky assets are, well, still risky. So while central bankers can mask risk,
they cannot eliminate it.
As a result, our analysis suggests many investors may be holding assets that are riskier than
they think.
Where we are
The Fed's hope was that the economy would be on sound enough footing by now, so that the 'extraordinary
accommodation' can be removed. Alas, hope is not a plan.
In our assessment, the Fed has tried to boost economic growth through asset price inflation. While
we don't think printing money creates jobs in the long-run, it does impact various sectors of the
economy and, well, asset prices. Housing, for example, is affected by monetary policy: as home prices
rise, fewer home-owners are "under water" in their mortgage (there are more implications, such as
rather hot housing markets in places such as San Francisco).
Relevant to this discussion, though, is that if asset prices were to deflate, there might be higher
headwinds to economic growth than had asset prices not previously been artificially boosted. And
that's exactly where we are: in our analysis, the reason the markets are so nervous about a rate
hike is because it signals a shift towards rising risk premia. As the Fed is trying to engineer an
exit, risky assets, from junk bonds to stocks, warrant a higher risk premium. In our analysis, all
else equal, we don't even need a Fed "exit:" even a perceived Fed exit warrants higher volatility
and, with it, lower asset prices.
Where we may be heading
Think about it: we have investors that have enjoyed years of bull market; investors that have been
told to "buy the dip;" investors that have invested in the markets under the faulty assumption that
the markets are a low risk endeavor. Now let volatility spike for any reason - blame the Chinese
if you wish - and our assessment is that an increasing number will say: "I didn't sign up for this.
I didn't know investing in the market is risky."
Differently said, rather then the glass being half full, it may be half empty. Rather than buy
the dips, investors may now sell the rallies. Investors may scramble to preserve their paper profits.
It will take a while for most investors to embrace this new regime, but we believe the tide may well
have shifted.
So will we get a rate hike?
It doesn't matter. What matters is what the Federal Reserve Open Market Committee (FOMC) has been
arguing since the spring of 2014 in their Minutes:
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent
levels, economic conditions may, for some time, warrant keeping the target federal funds rate
below levels the Committee views as normal in the longer run.
To us, this is a promise to be "behind the curve," i.e. to be late in raising rates. The Fed will
try to keep rates lower than the Fed itself 'views as normal.' Presumably, it will try to avoid risk
premia to blow out too much too quickly. Maybe they'll succeed, but I would not want to bet my house
on it.
What should investors do?
Just as with every bubble that has been built, investors have been most reluctant to take chips off
the table when times were good. We urge all investors to have a close look at whether they are comfortable
with the risk profile of their portfolio. Based on our discussions with both retail and professional
investors we believe many are over-exposed to risky assets. We don't expect everyone to do what I
did in early August, which is to actually go short the market (please read:
Coming Out - As a Bear!),
but we urge everyone to do some serious stress testing on his or her portfolio.
Which asset classes do we think will outperform?
In August, any trade that appeared to have worked, went into reverse. In fact, one could argue there
is no such thing as a risk free asset anymore, and given that risky assets were in decline, most
investors lost money. It's one reason why looking at alternative strategies, such long/short strategies
(in currencies, equities or otherwise) might be worth considering.
The so-called "flight to safety" did not benefit the greenback; instead, the euro surged on days
when U.S. equities plunged. While the media was highlighting how some emerging market currencies
plunged, the greenback was down versus all major currencies on numerous days when the S&P was down
sharply. We are not suggesting that the euro, or any one currency, will necessarily, be the bastion
of strength. Instead, what's been happening is that investors had been piling in to the same trades,
such as "the dollar must rally because the U.S. has the cleaner shirt, will raise rates, because
..." well, a good trade works even better with leverage; except that when "risk is off," i.e. when
the pessimists take over, de-leveraging is the mode du jour. As such, all those out of favor investors
are suddenly outperforming.
In our assessment, different asset classes adjust at different speeds. The currency markets,
when it comes to free-floating currencies at least, adjust faster than equity markets. In the equity
market, we expect downward pressure to persist for an extended period until public sentiment is firmly
in bearish territory (this may take months, more likely years).
"...OECD oil demand is up 800 kbpd over last year, and I am still
trying to find another 300-400 kbpd of refined products in the OECD which have disappeared, statistically
speaking. So OECD demand growth could be up as much as 1.1-1.2 mbpd, depending on where those
missing barrels end up. No visible weakness in the demand in the OECD. "
"Increases in oil production in the United States and the Middle East were certainly key
factors in the huge drop in oil prices over the last year."
Don't you have this backward? Actually, huge drops in oil prices have reduced production. Reductions
in production would tend to lower supply and tend to creare higher prices than if the supply did
not change.
Understanding this gives us the answer to your second sentence.
"Nevertheless, one can't help but be struck by the fact that the weekly changes in oil prices
correlate with dramatic moves in other commodity and financial markets."
We would expect overall commodity prices to drop – especially oil – with an appreciating currency.
Scott Sumner might point out that we are reasoning from price changes.
As I recall, shale oil production has moved the trade deficit by 2% of GDP since 2012. I believe
this is not a small adjustment.
The OECD seems to be doing fine. OECD oil demand is up 800 kbpd over last year, and I am still
trying to find another 300-400 kbpd of refined products in the OECD which have disappeared, statistically
speaking. So OECD demand growth could be up as much as 1.1-1.2 mbpd, depending on where those
missing barrels end up. No visible weakness in the demand in the OECD.
The global economy, ex-China and China-derived demand (eg, Brazil, Australia, Indonesia, Canada,
Norway, and some other commodity exporters) is doing fine. So if we're talking weakness in the
global economy, we're talking about weakness in China. And if we're talking weakness in China,
we're talking first and foremost an over-valued yuan. See the second graph ("Rush to Exit") in
the article below, and tell me the yuan doesn't need a write-down. And note flight of capital
from China corresponds to the collapse of the oil price, the devaluation of other currencies against
the dollar (excluding China), and that in turn corresponds to the acceleration of shale oil production
in Q3 2014.
One could argue that China collapsed just as shale oil production was accelerating, but that
seems a bit too coincidental.
The conventional unemployment rate (U3) is now close to assessments of its longer-run normal level,
but other dimensions of labour market slack remain elevated:
U3 does not reflect the incidence of hidden unemployment, namely, about 2½ million
Americans who are not actively searching for work but are likely to rejoin the labour force as
the economy strengthens; and
U3 does not incorporate the extent of underemployment (individuals working part-time
who are unable to find a full-time job), which remains significantly higher than its pre-recession
level.
Thus, the 'true' unemployment rate – including hidden unemployment and underemployment –currently
stands at around 7¼%, and the total magnitude of the US employment gap is equivalent to around 3½
million full-time jobs.
Non-farm payrolls have been expanding at a solid pace, but that pace will need to be maintained
for about two more years in order to close the employment gap.
In particular, recent analysis indicates that the potential labour force is expanding by about
50,000 individuals per month due to demographic factors. Thus, if non-farm payrolls continue rising
steadily by about 200,000 jobs per month (the average pace over the past six months), then the employment
gap will diminish next year and be eliminated in mid-2017. By contrast, a tightening of monetary
conditions would cause the economic recovery to decelerate and the pace of payroll growth might well
drop below 100,000 jobs per month, in which case the employment gap would barely shrink at all.
The contours of the inflation outlook
The FOMC has established an inflation goal of 2%, as measured by the personal consumption expenditures
(PCE) price index. Its recent communications have stated that the tightening process will commence
once the FOMC is "reasonably confident" that inflation will move back to the 2% objective
over the medium term.
It seems unwise for such a crucial policy decision to place so much weight on the FOMC's inflation
outlook and little or no weight on the observed path of wages and prices.
FOMC participants' inflation forecasts over the past few years have proven to be persistently
overoptimistic (see Figure 1).
Figure 1. The recent evolution of core PCE inflation
Note: In this figure, the core PCE inflation rate is given by the four-quarter
average change in the PCE price index excluding food and energy, and the FOMC's outlook is given
by the midpoint of the central tendency of core PCE inflation projections, as published in the FOMC
Summary of Economic Projections (SEP) at each specified date.
For example, in early 2013, when core PCE inflation was running at about 1½%, FOMC participants
generally anticipated that it would rise to nearly 2% over the course of 2014 and 2015, whereas in
fact it has declined to around 1.2%. Indeed, its underlying trend has been drifting steadily downward
since the onset of the last recession.
Despite some recent suggestions to the contrary, there is a strong empirical linkage between
the growth of nominal wages and the level of the employment gap.
Moreover, as shown in my recent joint work with Danny Blanchflower, the wage curve exhibits some
flattening at high levels of labour market slack, which explains why nominal wage growth has remained
subdued over the past few years even as the employment gap has declined from its post-recession peak
(see Figure 2). This empirical pattern also implies that the pace of nominal wage growth is likely
to pick up somewhat over coming quarters as the employment gap declines further.
Figure 2. The wage curve
Note: In this figure, each dot denotes the pace of nominal wage growth (as
measured by the 12-month change in the average hourly earnings of production and non-supervisory
workers) and the average level of the employment gap (including hidden unemployment and underemployment)
for each calendar year from 1985 to 2014 and for August 2015 (the latest BLS employment report).
Gauging the stance of monetary policy
Fed officials have recently characterised the current stance of monetary policy as "extremely
accommodative." Such characterisations may be helpful in motivating the onset of "policy
normalisation" but seem inconsistent with professional forecasters' assessments of the equilibrium
real interest rate and with the implications of simple benchmark rules.
The distance between the current federal funds rate and its longer-run normal level depends crucially
on the magnitude of the equilibrium real interest rate.
Most FOMC participants have projected the longer-run normal rate to be about 3¾%, consistent
with an equilibrium real rate only slightly lower than its historical average of about 2%.
Over the past few years professional forecasters have made substantial downward revisions to their
assessments of the 'new normal' level of interest rates.
Surveys conducted by the Philadelphia Fed indicate that professional forecasters expect short-term
nominal interest rates to be around 2¾% in 2018 and to remain at that level on average over the
next ten years, corresponding to an equilibrium real interest rate of only ¾%.
Such revisions presumably reflect the downgrading of the outlook for potential output growth as
well as prospects for headwinds to aggregate demand persisting well into the future.
If professional forecasters' assessments are roughly correct, then the current funds rate
is by no means extremely accommodative.
In June 2012, then-Vice Chair Yellen noted that "simple rules provide a useful starting point
for determining appropriate policy" while emphasising that such rules cannot be followed mechanically.
That speech considered the Taylor (1993) rule along with an alternative rule analysed by Taylor (1999)
that Yellen described as "more consistent with the FOMC's commitment to follow a balanced approach."
Thus, it is instructive to evaluate each of these simple rules using the current core PCE inflation
rate (which is 1.2%), the CBO's current assessment of the output gap (3.1%), and professional forecasters'
consensus estimate of the equilibrium real interest rate (r* = 0.75).
Using these values, the Taylor rule prescribes a funds rate of 0.1%, exactly in line with
the FOMC's current target range of 0 to 0.25%; and
The Taylor (1999) rule prescribes a funds rate well below zero (-1.4%).
Neither of these two benchmarks calls for a tighter stance of policy. Indeed, the 'balanced approach'
rule preferred by Yellen (2012) indicates that macroeconomic conditions will not warrant the initiation
of monetary policy tightening until sometime next year.
Assessing the balance of risks
Over the past 18 months, FOMC statements have regularly characterised the balance of risks to
the economic outlook as "nearly balanced." Of course, that assessment has recently
come into question due to a bout of financial market volatility in conjunction with shifting prospects
for major foreign economies (most notably China).
Regardless of how financial markets may evolve in the near term, however, it seems clear that
the balance of risks remains far from symmetric. If the US economy were to encounter a severe adverse
shock within the next few years (whether economic, financial, or geopolitical in nature), would the
FOMC have sufficient capacity to mitigate the negative consequences for economic activity and stem
a downward drift of inflation?
For example, if safe-haven flows caused a steep drop in Treasury yields along with a sharp widening
of risk spreads, would a new round of QE still be feasible or effective? Alternatively, would the
Federal Reserve implement measures to push short-term nominal rates below zero, as some other central
banks have done recently?
In the absence of satisfactory answers to such questions, it is essential for the FOMC to maintain
a highly accommodative stance of monetary policy as long as needed to ensure that labour market slack
is fully eliminated and that inflation moves back upward to its 2% goal. Such a strategy will help
strengthen the resilience of the US economy in facing any adverse shocks that may lie ahead.
Concluding remarks
The FOMC's near-term strategy has become so opaque that even the most seasoned analysts can only
guess what policy decisions may be forthcoming at its upcoming meetings. Moreover, the FOMC has provided
no information at all (apart from the phrase "likely to be gradual") about how its policy
stance will be adjusted over time in response to evolving macroeconomic conditions.
Unfortunately, such opacity is likely to exacerbate economic and financial uncertainty and hinder
the effectiveness of monetary policy in fostering the goals of maximum employment and price stability.
Therefore, it is imperative for the FOMC to formulate a systematic monetary policy strategy and to
explain that strategy clearly in its public communications.
References
Blanchflower, D G and A T Levin (2015), "Labor Market Slack and Monetary Policy," NBER Working
Paper No. 21094.
Taylor, J B (1993), "Discretion Versus Policy Rules in Practice", Carnegie-Rochester Series on
Public Policy 39, pp. 195-214 (also released as SIEPR Publication No. 327, November 1992).
Taylor, J B (1999), "An Historical Analysis of Monetary Policy Rules", in J. B. Taylor (ed.),
Monetary Policy Rules, Chicago, IL: University of Chicago Press
Yellen, J L (2012), "Perspectives on Monetary Policy", speech at the Boston Economic Club Dinner,
Boston, MA, 6 June.
A backlash occurs from countries sanctioned by the US
European countries default on their debt
The US dollar ends as the
petrocurrency (causing a sale in US treasuries)
The US or EU introduce significant tariffs, diminishing world trade
Interest rates rise, as they did in 1929
The paper gold market crashes, when the shortage of physical gold is revealed
Banks freeze or confiscate deposits
FATCA accelerates the demise of the US dollar as the default currency
A credit collapse occurs (followed by dramatic inflation or hyperinflation)
Any of the above is capable of triggering a collapse (and, as stated, this is not by any means
an exhaustive list). Therefore, it would be wise to keep an eye out for indicators that one of them
may occur. Any one of them that appears to be nearing the point of becoming a reality would suggest
that the tipping point may occur soon.
"How Will I Know in Advance?"
Whatever advance warning you may have will be based on how closely you're following the indicators
that any of the possible triggers may be nearing fruition. Some, like the overbought stock market
or the rise in commodity prices could kick in at any time.
Others, such as a bank freeze on deposits, or the collapse of the ETF market in gold, could happen
quite suddenly and without any warning at all.
In discussing the above condition with investors, they often say, "Well, if it's inevitable and
I can't time the event, there's no use thinking about it. We're all going to go down with the ship,
so why bother?"
Quite frankly, I'm astonished that so many investors are so complacent that they're prepared to
shrug their shoulders and accept their own economic demise, yet this assumption is very common.
The enemy is not the coming events; the enemy is complacency toward
those events.
The investor therefore has two viable choices: to either get blindsided by events and become an
economic casualty, or be prepared (as much as possible) for the crashes, regardless of what the trigger
might turn out to be.
"...China is building islands in the SCS as a shot at Japan; Japanese brokerage takes a shot at
China's economy. Shots fired. But, not saying they're wrong."
"...Yet another instance of a person or entity that is fucking causing this meltdown with
their fraud and theft suddenly warning about it. Just like that brit douche bag, just like greenspan,
and now this. Just trying to protect themselves when the disaster they have wrought comes unglued,
so they can say something along the lines of "it wasn't me, I was trying to warn you this would
happen, remember?""
"...This is very obviously preemptive damage control. This bank knows the crash is coming
and is announcing that it is china's fault before they get dragged out into the street and killed.
Very very smart."
"...The meltdown is coming and well known to the elites ... thus we have more war intensity in
the MENA areas. The West classically uses war as a tool to fight depressions. Now is no exception.
Of course the politicans and business leaders want not only war but massive flooding of refugees
so they can justify stealing taxpayer money to build houses for them [and line their pockets at the
same time] ... using "humantitarian" purposes as the ruse."
"...The Western Oligarchs want to keep China, Russia and other emerging economies in their place. They
control capital flows AT ALL COSTS "
One bank that is now less than optimistic that China can escape a total economic meltdown is
the Daiwa Institute of Research, a think tank owned by Daiwa Securities Group, the second largest
brokerage in Japan after Nomura.
Actually, scratch that: Daiwa is downright apocalyptic.
In a report released on Friday titled "What Will Happen if China's Economic Bubble Bursts", Daiwa
- among other things - looks at this pernicious relationship between debt (and thus "growth") and
China's capital stock. This is what it says:
The sense of surplus in China's supply capacity has been indicated previously. This
produces the risk of a large-scale capital stock adjustment occurring in the future.
Chart 6 shows long-term change in China's capital coefficient (= real capital stock / real
GDP). This chart indicates that China's policies for handling the aftermath of the financial
crisis of 2008 led to the carrying out of large-scale capital investment, and we see that in
recent years, the capital coefficient has been on the rise. Recently, the coefficient has
moved further upwards on the chart, diverging markedly from the trend of the past twenty
years. It appears that the sense of overcapacity is increasing.
Using the rate of divergence from past trends in the capital coefficient, we can calculate
the amount of surplus in real capital stock. This shows us that as of the year 2013, China
held a surplus of 19.4 trillion yuan in capital stock (about 12% of real capital stock).
Since China is a socialist market economy, they could delay having to deal directly with
the problem of capital stock surplus for 1-2 years through fiscal and financial policy.
However, there is serious risk of a large-scale capital stock adjustment occurring in the
mid to long-term (around 3-5 years).
Daiwa then attempts to calculate what the magnitude of the collapse of China's economic bubble
would be. Its conclusions:
Even in an optimum scenario China's economic growth rate would fall to around zero
We take a quantitative look at the potential magnitude of the collapse of China's economic
bubble to ensure that we can get a good grasp of the future risk scenario. If a surplus
capital stock adjustment were to actually occur, what is the risk for China and how far would
its economy fall?
Chart 7 shows a factor analysis of China's potential growth rate. The data here suggests
that (1) China's economy has gradually matured in recent years, and this has slowed progress
in technological advancement, (2) Despite this fact, it has continued to depend on the
accumulation of capital mainly from public spending to maintain a high economic growth rate,
and (3) As a result, this has done more harm than good to technological advancement. Between
the years 2012-15 China's economy declined, yet still was able to maintain a high growth rate
of over 7%.
However, 5%pt of the growth rate was due to the increase in capital stock. Labor input and
total factor productivity contributed only 2%pt.
The major decline in the rate of contribution from total factor productivity is especially
noteworthy, as it had maintained an annualized rate of 5% for thirty years straight since the
introduction of the reform and opening-up policy and on through the era of rapid
globalization.
According to a DIR simulation, if a capital stock adjustment were to occur under such
circumstances, China's potential growth rate would fall to around 4% at best. This adjustment
process is shown in the bottom left Chart 7. As far as can be determined from the capital
stock circulation diagram, capital spending at the level seen in 2014 should not have been
allowable without an expected growth rate of over 10%. Hence if adjustment progresses to the
point where the potential growth rate is only 4%, the situation for capital spending will
continue to be harsh.
If the adjustment process lasts from the year 2016 to 2020, capital spending will likely
continue in negative numbers on a y/y basis. If this scenario becomes a reality, the real
economic growth rate will hover at around zero as is shown in the lower right portion of Chart
7.
... ... ....
The stunning punchline:
"Of all the possible risk scenarios the meltdown scenario is, realistically speaking, the
most likely to occur. It is actually a more realistic outcome than the capital stock
adjustment scenario. The point at which the capital stock adjustment is expected to hit bottom
is at a much lower point than in the previously discussed capital stock adjustment scenario
(see Chart 8). As shown in the bottom right portion of this chart, the actual economic growth
rate will continue to register considerably negative performance. If China's economy, the
second largest in the world, twice the size of Japan's, were to lapse into a meltdown
situation such as this one, the effect would more than likely send the world economy into a
tailspin. Its impact could be the worst the world has ever seen."
greenskeeper -> carl
Yet another instance of a person or entity that is fucking causing this meltdown with
their fraud and theft suddenly warning about it. Just like that brit douche bag, just like
greenspan, and now this. Just trying to protect themselves when the disaster they have wrought
comes unglued, so they can say something along the lines of "it wasn't me, I was trying to
warn you this would happen, remember?"
FinalEvent
Not only warn, but blame it on china as well.
chunga
I'm curious how the squid will profit by making it all worse.
A Lunatic
I guess the same way they have always profited from death and hell and misery...
THX 1178
This is very obviously preemptive damage control. This bank knows the crash is coming
and is announcing that it is china's fault before they get dragged out into the street and
killed. Very very smart.
CheapBastard
The meltdown is coming and well known to the elites ... thus we have more war intensity in
the MENA areas. The West classically uses war as a tool to fight depressions. Now is no
exception.
Of course the politicans and business leaders want not only war but massive flooding of
refugees so they can justify stealing taxpayer money to build houses for them [and line their
pockets at the same time] ... using "humantitarian" purposes as the ruse.
to me, there are some internal inconsistencies: e.g. sometimes financial debt is included in
the ratios, sometimes not. in any case there are many more-leveraged countries than china, the
u.s, and south korea: japan and much of europe for instance.
CheapBastard
Good read. Lax lending standards are rampant again and I am not sure they ever tightened
much, esp in places like the usa where lenders know they will get bailed out. it also sounds
as if we are going to have brutal deflation before any serious inflation due to austerity,
defaults, etc.
Arnold
Lax lendig is social policy in the US.
ThroxxOfVron
"This bank knows the crash is coming and is announcing that it is china's fault
before they get dragged out into the street and killed. Very very smart. "
China's fault, huh? All by themselves?
Somehow I think that the globalists and banksters that made billions if not trillions on this
misadventure might be as much to blame as the Party Poobahs that welcomed the chance to farm
the peasants out and pave the whole country over in 30 short years...
I say we drag them ALL, Party/Politcal hacks, Globalist Feudalist, Banksters, THE LOT: out
into the street anyway.
As the Cultural Revolution proved all too well: 'cleaning the slate' is 'morally acceptable'
to 'civilization' in both the East and the West.
Groundhog Day
the only solution for the banksters (and elites) is to cause a major economic meltdown, where
rich (small business owners, doctors, lawyers) and poor people are starving to death for a long
time. This way they won't really care about the trillions lost but will only be concerned about
thier next meal. same as it ever was throughout history. Then the elite can come in and start the
game all over again with new rules and clean hands
yogibear
Being on the right side of the trade. Since Goldman knows first hand which way the Fed is blowing
it knows how to set itself up.
William Dudley is a former Goldman boy. Goldman will be the first to know.
TeethVillage88s
A Goldman Boy!! How can the EU, Russia, China, and vassal states like the PIIGS not fight
back?
- Well there were a few and still are a few rebels, but you have to search your soul about
supporting their ideas:
1) PIIGS
2) Venezuela
3) Argentina
4) Brazil
5) Russia
6) China
7) India
8) South Africa
9) Indonesia
10) Cuba
(BRIICS)
Who gets a pass on Global Principals and their participation in Global Events:
1) Belgium
2) Luxembourg
3) Nederland
4) United Kingdom (and Vassal States)
5) France
6) Germany
7) Switzerland
8) Asian Tigers (Singapore, Hong Kong, Indonesia, Malaysia, Thailand, Vietnam, Burma)
9) Australia, New Zealand, Canada
Are there other Alternative Societies or Constructs?
A) Off Shore Structures in the Sea
B) Vessels that declare sovereignty
C) Regions or Places declared communes or under the command of a Captain of the Sea
D) Islands or Arctic Areas with no permanent settlements
**If the USA reclaims it's US Constitution and forces the 3 Branches of Federal Government to
comply then the USA could be born again
ZippyDooDah
China is building islands in the SCS as a shot at Japan; Japanese brokerage takes a
shot at China's economy. Shots fired. But, not saying they're wrong.
JRobby
Chicken Little? No, I think not. The people that have profited most by creating the scenario for collapse now calling for it is what is to be expected.
The Western Oligarchs want to keep China, Russia and other emerging economies in their place. They
control capital flows AT ALL COSTS
Superficially correct, Supernova Born, but actually
WAY WORSE, because all of that "money" made out of nothing was
being used to strip-mine the natural resources of the planet.
China jumped in the deep end with both feet, when it decided
to imitate and out-do the Western systems based on fundamentally
fraudulent financial accounting, and therefore, created
something about three times more "money" out of nothing as
debts. The Chinese economy
deliberately adopted those systems, and therefore, what we
thought of as their economic systems was more like ENFORCED
FRAUDS ON STEROIDS.
The ways that most people think about "economics"
are as absurdly backwards as possible, because those ways of
thinking tend to take completely for granted that the public
"money" supplies are being made out of nothing, as debts, while
then that "money" does NOT actually "pay" for anything, but
rather, is the expression of ENFORCED FRAUDS, where having been
able to ENFORCE FRAUDS never stopped those FRAUDS BEING FALSE.
Sure, it appears that "Nobody but the
house wins in a rigged casino." However, that
casino is way more profoundly
rigged, to the degree to which nobody
wins. The world's political economy is based upon
governments ENFORCING FRAUDS by privately controlled banks.
Since China could not beat them, China decided to join them, and
indeed, create flabbergastingly more "money" out of nothing than
the previous "leaders" in those areas had ever done!
As the saying goes:
"I do not know who discovered water, but is was
not fish."
For generation after generation, almost everyone has been
used to living inside of a political economy based upon
ENFORCING FRAUDS. That drove almost everyone to develop
attitudes which deliberately ignored the principle of the
conservation of energy as much as possible, while also
deliberately misunderstanding the concept of entropy in the most
absurdly backward ways possible. The ways that people think
about economic activities could not be more absurdly backwards,
because they could not be more based on ENFORCING FRAUDS than
they already are, which is pretty well more than 99%, which is
matched by the ratios between physical realities versus
financial frauds, being about 1 to 100, while automatically
still getting worse, since the political economy is still based
upon governments ENFORCING FRAUDS by privately controlled banks.
While it may well appear that those privately controlled
banks are "winning" fantastically, inside of the
casinos that they have rigged, that perception is relatively superficial, because
their fundamentally fraudulent financial accounting systems were
simultaneously based upon deliberately ignoring the laws of
nature as much as possible, both by building everything on the
basis of strip-mining, as well as discounting the consequences
of doing that as much as possible.
The appearance of those who rigged the casinos
"winning" ONLY exists within the fundamentally
fraudulent accounting systems that operated through those
rigged casinos, which became based on
governments ENFORCING FRAUDS by privately controlled banks. The
intense paradoxes of social systems based on ENFORCING FRAUDS is
that the more successful they become, the more they get locked
into vicious spirals of psychosis. Those who appear to be
"winning" inside of their rigged casinos are actually playing while they are burning that
casino down.
By and large, it is practically impossible for most people to
go through the cognitive dissonance it would take for them to
come to terms with the degree to which everything "economic" was
built on the basis of being able to ENFORCE FRAUDS. While it is
theoretically possible to do that, by developing the
intellectual scientific revolutions necessary to approach
understanding human being and civilization as entropic pumps of
environmental energy flows, it is politically impossible to do
that, since one has to go through profound paradigm shifts, in
order to comprehend how and why everything became based upon
ENFORCING FRAUDS, and that China decides to embrace that kind of
political economy, and do it more than anyone else had
previously done.
There are intense paradoxes, in the form of consistent
contradictions, which arise from better understanding how and
why civilization actually operates according to the principles
and methods of organized crime. On a superficial level, it may
well appear that those who rigged their casinos were the only
ones "winning." However, on deeper levels, they were also lying
to themselves, because those systems which privatized the
profits, while socializing the losses, were based upon being
able to deliberately ignore that those socialized losses were
accumulating to become greater than the privatized profits.
"Of all the possible risk
scenarios the meltdown scenario is, realistically speaking, the
most likely to occur. It is actually a more realistic
outcome than the capital stock adjustment scenario. If China's
economy, the second largest in the world, twice the size of
Japan's, were to lapse into a meltdown situation such as this
one, the effect would more than likely send the world economy
into a tailspin. Its impact could be the worst the world
has ever seen."
Since everything the globalized
political economy has been doing was based upon ENFORCING
FRAUDS, and China enthusiastically jumped on that bandwagon, the
basic problems regarding having done that were almost totally
globalized. Since the world is run by people who degree of
social successfulness was based upon their abilities to be the
best available professional liars and immaculate hypocrites, in
order to be socially successful within the established systems
ENFORCING FRAUDS, it continues to be politically impossible for
most of those people to admit the magnitudes to which they were
lying to themselves, and to everyone else, regarding how the
political economy was really doing, due to how it really worked.
Collectively, the globalized
political economy was based upon runaway triumphant organized
crime, whose excessive successfulness became runaway criminal
insanities. While it appeared to those who had
rigged their casinos were "winning" that was
their own delusional sense of what was actually going on, due to
the degree that short to medium term social successes could be
based on continuing to ENFORCE FRAUDS.
However, at the same time, the
deeper underlying realities were actually developing, because
the fundamentally fraudulent financial accounting systems were
able to trick human beings, but that did not change the
underlying laws of nature. Despite human beings dominated by
social systems based upon ENFORCING FRAUDS feeling like they
were "winning"inside of the casinos that they
had rigged, what was actually really happening was that
they were behaving in ways where the only connections between
human laws and natural laws were the abilities to back up lies
with violence. Hence, those runaway systems of ENFORCED FRAUDS
were actually directing civilization to behave in ways that
deliberately ignored the basic laws of nature as much as
possible.
The interesting questions that
arise are what could the possible "corrections" to that
become, after the development of systems of globalized
electronic monkey money frauds, backed by the threat of force
from apes with atomic bombs. Of course, the laws of nature are
still there, and human beings never actually violated any of
those laws of nature when human societies became based on more
and more be able to back up lies with violence, while most
people adapted to that by adopting those systems, such as the
Chinese did, when they decides to make vastly more "money" out
of nothing as debts than ever before done by anybody else.
I am NOT asserting that human
beings' ERRORS will never be corrected. Rather, I am am
attempting to point out the magnitude of those ERRORS. While the
global political economy more and more became a
rigged casino, based upon governments ENFORCING
FRAUDS by privately controlled banks, in my view it was a
dangerous delusion for those who appears to be "winning"
to believe that they actually were "winning."
Those who appeared to thereby be
able to privatize the profits from controlling the political
economy through ENFORCING FRAUDS were actually always also
accumulating their own shares of the collective losses. Those
collective losses tended to be deliberately discounted and
disregarded as much as possible. However, those were always
actually accumulating in the real world. Hence, those who
appears to be privately winning inside of their rigged
casinos were NOT actually winning, but rather, driving
the human species as a whole towards committing collective
suicide, due to the degree to which civilization thus became
psychotic and manifested runaway criminal insanities.
tumblemore
Yeah it's like when China adopted Communism and then took it to even worse extremes. This time they adopted the western banking system and took that to even worse extremes.
The lesson for them should be don't copy ****** inventions because (reasons).
Self reliance = isolationism. Grouping up with like-minded
people is racism. Promoting an ideology that reveals the
morally bankrupt current state = hate speech. Anarchy =
extremism. Protests = terrorism.
The countermeasures being employed against us are
asymetrical in nature due to legality and technology.
The collective herd, ridden hard by their psychopath
overlords, are approaching the Cliff.
Those of us who are awake and mindful swim upstream,
because of duty, regardless of outcome
sun tzu
Lions don't attack the entire buffalo or wildebeest herd. They pick the weakest ones.
yogibear
Only when the riggers dump all their holdings on the sheeple will they take this baby down.
Much faster making money on the way down. Usually those not well connected never see it
coming.
Oldballplayer
How much money flows into 401k accounts each week.
Those are the ultimate rip off. Get two entire generations pumping 4% of their gross in every
payday. And when they think they are all set--pull the rug from under them.
At this point, take the penalty, pay the taxes and but as many 2017 dec puts as you can get.
You will make it all back. And more.
Chuck Knoblauch
US doom a certainty. Yuan devaluation exposing USD$ weakness.
Global dumping of US Treasuries.
Stop the bullshit. It's really obvious, captain.
TeethVillage88s
Daiwa Securities Group Inc.,Daiwa Securities Group Inc.*,,,,
Ticker,8601 JP Equity,,,,
Includes Loans to:,Daiwa Securities Group Inc. and Daiwa Securities Group Inc.,,,,
Identified in Fed Documents as:,Daiwa Securities America Inc. and Daiwa Securities America
Inc.,,,,
Capital Raised From Home Governments,,,,,
Programs,"PDCF, ST OMO",,,,
Country,Japan,,,,
Industry,Diversified Financial Services,,,,
"Average Daily Balance
From 8/1/2007 to 4/30/2010",$76.32 ,,,,
Peak Amount of Debt,"$1,000.00 ",,,,
Peak Date,12/24/2008,,,,
Number of Days In Debt to the Fed,99,Market Cap,Percent of Market Cap,ST OMO,PDCF
So looks like the FED loaned them peak amount of $1 Billion.
- No such thing as conservative Banking at the FED or Wall Street.
- We are still seeing the fall out from US Created problems
A socialist market economy; aka a CP classical totalitarian model
under the surface of market manipulation drowning in debt and malinvestment; as opposed to the
west's version of the same beast :
A capitalistic oligarchical economy; now more and more CP'd under CB print and debt
accumulation just like China; inverted totalitarianism.
When Charybdis MOCKS Scylla, the Gods of Capitalism and Statism have gone as mad as their
mortal look alikes running around the financialized world like headless chickens.
Diogenes can truly mock Alexander's expedition on its march to his fool's paradise in
Persepolis.
When Syrac dreams burn like Babylon.
ndree
I personally am not concerned with the prophecies of doom and
gloom about China. Of course, they could not maintain a 7-10% growth forever. The economy is
pivoting, not just to another level, but also to a different nature. Once the projects of the
New Silk Road are ramped up (and I am certain they would accelerate this), all talk of slow
growth, doom and gloom would be moot. Why should the Chinese be responsible for overall world
growth, or providing Wall Strret gamblers and junkies with more ill gotten gains, and
additional cocaine for their pipes?
a vast debt build up (by now everybody should be familiar with
McKinsey's chart showing
China's consolidated debt buildup) leading to a just as vast build
up of excess capacity, also known as capital stock accumulation.
And/or vice versa.
Has the writer looked at his own linked chart? It shows in 2000 a
ratio of non-financial corporate debt to total debt to be 69%. In 2Q14
it shows it to be 44%.
Isn't it non-financial corporate activity that leads to "excess
capacity"?
It's becoming more and more difficult to make sense of these
articles.
Faith in the
QE world is waning everywhere and with very good reason. If the "wholesale money" eurodollar takeover
was instead responsible for the serial asset bubbles of
the past two decades, then it would make far more sense to
extrapolate stock trends from that starting point rather than
the irrelevant and overstated federal funds monkeying.
In this context, the panic in 2008 makes perfect sense as it was
a total failure of the eurodollar/wholesale system which not
only reversed in total the prior bubble levels it crushed the
global economy with it.
Stock prices have risen rapidly over the past six years or so, but
they were also severely depressed during and just after the financial
crisis. Arguably, the Fed's actions have not led to permanent
increases in stock prices, but instead have returned them to trend. To
illustrate: From the end of the 2001 recession (2001:q4) through the
pre-crisis business cycle peak (2007:q4), the S&P500 stock price index
grew by about 1.2 percent a quarter. If the index had grown at that
same rate from the fourth quarter of 2007 on, it would have averaged
about 2123 in the first quarter of this year; its actual value was
2063, a little below that. There are of course many ways to calculate
the "normal" level of stock prices, but most would lead to a similar
conclusion.
From this view, the Fed acted quite appropriately with regard
to stock prices in order to get them back to their own
established trend; therefore no bubble. It isn't surprising that his math
works out, as you can plot his figures on a chart of the S&P 500 and see
his reasoning painted forth.
Starting at the end of the dot-com recession sometime in the last
quarter of 2001, a 1.2% per quarter trend nicks the top of the market in
2007. Ignoring the implications of panic and crash through March 2009, as
he does, filling out the rest of the chart puts the current (before
August 24) stock index directly within the path of his trend.
It is a ridiculously weak argument for obvious reasons, not at
all unlike his defense of QE in the real economy via the unemployment
rate without mentioning the denominator. It isn't clarified in
his post, but it seems equally evident that he picked the end of the
dot-com recession as a start date because that is when Greenspan's Fed
brought forth "ultra-low" interest rates (see below). So if you believe
that "ultra-low" interest rates are responsible for the current stock
bubble, there you go.
... ... ...
If the eurodollar takeover was instead responsible
for the serial asset bubbles of the past two decades, then it would make
far more sense to extrapolate stock trends from that point rather than
the irrelevant and overstated federal funds monkeying. So
where Bernanke's stock trend aligns the peaks as if that were "fair" and
of the real market, the troughs instead just as easily conform traced
back to the plainly obvious eurodollar deviation.
In this context, the panic in 2008 makes perfect sense as it
was a total failure of the eurodollar/wholesale system which not only
reversed in total the prior bubble levels it crushed the global economy
with it. The failure of the eurodollar standard to heal or
rebuild to its prior upswing (ended on August 9, 2007) was seen more so
in the real economy (the 2012 slowdown) but also in the stock market in
2010 and again in 2011; both those outbreaks appeared to revert back to
that "dollar baseline."
The fact that asset inflation can continue on its own apart
from any financial contribution of the wholesale "dollar" is due to
partially separate liquidity and funding sources. Liquidity
isn't everything always, but when it is failing it takes over for the
dominant marginal direction. In other words, corporate repurchases and
retail flows might be sufficient for stock prices to rise and rise
rapidly where the "dollar" isn't as supportive, but those are easily
overwhelmed where the "dollar" is acutely retreating (as August 24).
When we plot Bernanke's 1.2% per quarter benchmark at a start date of
January 1995, that compounding growth works out to a "target"
S&P 500 level of 1236.09 for Q3 2015.
Where his 1.2% per quarter within the bubble
mechanics calculates to 2123 (as of June) for the S&P 500, applying the
same idea to starting outside the serial bubbles is vastly
different (-42%).
I'm not making any claims about whether 1236.09 is "fair value" for
the S&P 500, only realizing the true nature of the stock bubble makes a
huge difference. He isn't quite taking the full weight of the
Yellen Doctrine here (I define that as her notion that a bubble isn't
really a bubble unless it doesn't "work" in the real economy) but you can
see how he is, by the construction of his trend narrative, thinking in at
least that direction. Both are attempts to justify asset inflation by
moving the perspective to within the bubble period so as not to have to
explain how it all arrived in the first place (inferring from Bernanke's
intent: since the dot-com bubble predates "ultra-low" interest rates it
can't possibly be the Fed's fault, and therefore the Fed has been
successful in simply re-establishing what the "market" did on its own
beforehand).
I think that is true but only in the narrow view that interest
rate targeting didn't actually do much of anything – which was
and remains the whole problem. If interest rate targeting didn't
directly cause the asset bubbles, it didn't restrain them either. This is
not a small or trivial reflection, as the whole point of controlling the
liquidity rate was to not just "stimulate" but also to restrict
where "necessary." To say that there was no limitation upon the
eurodollar advance is an understatement since banks simply wrote their
own, to the point that they even
manufactured their own currency (collateral) far outside of what
these economists considered to be well-aligned financial behavior.
The relevant point to consider for stocks is which trend is closer to
the "truth" of asset inflation. That is, of course, amplified in 2015 by
the revisiting of eurodollar decay in much more strained and openly
chaotic fashion. If the "dollar" is again to fail, what might that do to
stocks? While that isn't knowable we do have some methods of gaining
insight, for which only certain central bankers will provide useful
perspective.
Retail Sweep Programs and Bank Reserves, 1994-1999
Richard G. Anderson and Robert H. Rasche
"In January 1994, the Federal Reserve Board permitted a
commercial bank to begin using a new type of computer software that
dynamically reclassifies balances in its customer accounts from
transaction deposits to a type of personal-saving deposit, the
money market deposit account (MMDA).1 This reclassification reduces
the bank's statutory required reserves while leaving unchanged its
customers' perceived holdings of transaction deposits.
The use of deposit-sweeping software spread slowly between
January 1994 and April 1995, but rapidly thereafter. Estimates of
the amounts of transaction deposits reclassified as MMDAs at all
U.S. depository institutions, prepared by the Board of Governors'
staff, are shown in Figure 1.2 By late 1999, the amount was
approximately $372 billion. In contrast, the aggregate amount of
transaction deposits (demand plus other checkable deposits) in the
published M1 monetary aggregate, as of December 1999, was $599.2
billion."
So . . .
"Our analysis suggests that the willingness of bank regulators
to permit use of deposit-sweeping software has made statutory
reserve requirements a "voluntary constraint" for most banks. That
is, with adequately intelligent software, many banks seem easily to
be able to reduce their transaction deposits by a large enough
amount that the level of their required reserves is less than the
amount of reserves that they require for day-to-day operation of
the bank. For these banks at least, the economic burden of
statutory reserve requirements is zero."
Don't worry. Many things changed in 1995, some permanently, and this article takes a rather
myopic view. Remember the Netscape browser that hailed the beginning of the commercial
Internet? That was released in December of 1994. This article doesn't even mention the
Internet! That changed the world economy as much or more than the invention of the railroad!
Preposterous!
The world is awash in central bank money for the forseeable future, and as things get worse in
the rest of the world, that money will come to the US stock market. Invest with confidence,
and always with a qualified investment professional who can design a diversified portfolio
based on your risk tolerance.
daveO
Why the Japanese, who import over 90% of their oil, put up with this guy is a testament to
their gullibility. It really should be more apparent to them what a fool he is.
"I'm still really, really worried," Krugman said at a conference in Tokyo on Wednesday. A big
problem remains building enough momentum in the economy to escape deflation, he said.
Krugman said he is concerned that Abenomics is getting bogged down as the Bank of Japan fails
to spur inflation to a 2 percent target, hampered by falling oil prices.
Clowns on Acid
What happened in 1995? That's easy .. the repeal of Glass Steagal. Baks, brokers, and
Insurance companies no longer competing for funds ...at a market price . cost.
Once the Banks, brokers and insurance get "centralized" they use one balance sheet to lever
all risk ... chasing the same asset groups. With a ZIRP policy the respective demand of funds
does not cause an increase in interest rates.
Thus they all bid up all asset groups usig the same risk metrics ... until 2007/08 when it all
crashes ... until the Fed shows how printing money is the answer.... to lack of liquidity and
falling asset prices.
Stockman unleashes truthiness hell on Bloomberg TV: "Federal Reserve [actions]
will have disastrous long-term consequences... when you deny price-discovery in the
market for so long, it is a massive subsidy to speculation... In an era of peak debt, the
only thing zero interest rates achieve is create an enormous incentive for Wall Street to gamble
more and more recklessly..."
His analysis and the points he makes are spot on, yet he really needed an editor. He has
brilliant and important things to say, but the general public will never read the 700 pages of
it. He needs a cliffs notes edition or a 40 page kids version with some pictures, pop-ups and
maybe some soft porn.
Brief, concise, pointed summaries of the numerous ongoing bubbles, misallocations and
dysfunctional markets are available daily at Stockman's website, giving new meaning to 'cliff
notes':
And of course the shill from Bloomberg attempted to bait Stockman into saying he was against
the Fed... For no other reason to brand him a whack-job... It's time for all the pundits be
forced to pledge transparency and stick to it, or they get to walk the plank...
Most people don't want to hear his truth though. They won't want the cliff notes version
either. They've been conditioned to believe markets are a one-way ride up up up. His work
requires thinking.
Sex Pistol John Lydon wonders if Hillary 'really is that clumsy'
"Most people don't want to hear his truth though."
True, but even worse, the vast majority are economically illiterate and wouldn't have a clue
about what he was talking about. Besides, his book is #31,738 in books on Amazon and that's among
the minority of people who read more than the tweet from a fellow twit about what they had for
lunch.
Don't judge the majority by yourself or those you associate with. To quote Carlin, "Just think
of how stupid the average person is, and then realize half of them are even stupider!" We
didn't get to this point via an intelligent voting public.
Excellent points Winston. Too many people assume others have built up the same background of
knowledge and are critical thinkers looking for truth. Ha! They are anything But! Have you ever
had a deep discussion withsome you repsected for their high level career in business, science,
education or technology? I have many times. I leave bewildered at how such people advance to high
levels of performance. They are narrow minded, stick to their one field of expertise, and prosper
in it, as for knowing anything else, they are like 3 year old toddlers.
i've met a few too many and yea, box of rocks looked smart, ha...
unfortunately, future schoolers are not gonna be anymoar economically smarter.
an app for it. ha...
doesn't matter; dear honorable david, understand we are past the point where this can be
straightened out. 18.x trillion, and sir, you know math. right? so . you must throw in the
towel, spike the bowl and party on like its 1999, ha again.
The dopes in D.C. could read all 700 pages and not get it, or understand it perfectly and not
give a shit.
Twice as true for the Criminals of Wall Street and the banking/corporate/insurance cartel
because they are getting rich off of it at the expense of the future itself.
I haven't read him but plan to. I'm disturbed, however, that he isn't bothered by the
existence of the Fed, just by its practice of going far beyond its original intent.
I don't trust anyone that wants to "reform" the Fed. If you cannot admit that it was a
treasonous conspiracy from its inception, it makes me question your allegience or at the very
least your judgment.
simple, just end the abomination and be done with it. let the markets with myriads of
participants make the policies on the fly; through market forces.
He makes perfect sense to me . . . that scares me, maybe he's wrong. I remember him ranting
about Reaganomics back in the 80's, if he's correct, there's an unwind coming of biblical
proportions.
The rich, the banks, hedge funds, etc get all the low interest financing to buy all the assets
esp equities. Sell their positions at the top and watch the whole thing crumble while most
suffer. This is the greatest transfer of wealth to the rich ever. How is any of this legal?
(Because the idiots trust the govetnment.)
"...The shorthand way of understanding this is that in the last century we extracted all the
easy-to-get fossil fuels."
"...Annual world economic growth from 1961 through 2000 according to the World Bank was 3.8
percent per year. From 2000 to 2013, an era of increasingly expensive energy, it slowed to 2.4
percent. From the initial spurt of 4.1 percent growth in 2010 (after a contraction of 2.1 percent in
2009), growth settled down to 2.3 percent in 2012 and 2013, slightly below the recent average. This
is despite unprecedented efforts to stimulate the world economy through large increases in
government spending and record low interest rates."
The characteristic feeling of the post-2008 world has been one of anxiety. Occasionally, that
anxiety breaks out into fear as it did in the last two weeks when stock markets around the world
swooned and middle class and wealthy investors had a sudden visitation from Pan, the god from
whose name we get the word "panic." Pan's appearance is yet another reminder that the relative
stability of the globe from the end of World War II right up until 2008 is over. We are in
uncharted waters.
Here is the crux of the matter as expressed in a piece which I wrote last year:
The relentless, if zigzag, rise in financial markets for the past 150 years has been sustained by
cheap fossil fuels and a benign climate. We cannot count on either from here on out....
Another thing we cannot necessarily count on is the remarkable geopolitical stability that the
world experienced for two long stretches during the fossil fuel age. The first one lasted from
the end of the Napoleonic Wars in 1815 to the beginning of World War I in 1914 (interrupted only
by the brief Franco-Prussian War). The second lasted from the end of World War II in 1945 until
now.
Following the withdrawal of U.S. military forces from Iraq, the Middle East has experienced
increasing chaos devolving into a civil war in Syria; the rapid success of forces calling
themselves the Islamic State of Iraq and Syria which are busily reshaping the borders of those
two countries; and now the renewed chaos in Libya. We must add to this the Russian-Ukranian
conflict. It is no accident that all of these conflicts are related to oil and natural gas.
... ... ...
But hidden from the view of most is the role that increasingly expensive energy has played
since the beginning of this century in slowing economic growth. The shorthand way of
understanding this is that in the last century we extracted all the easy-to-get fossil fuels.
Now we are going after the hard-to-get remainder which are costly to extract. That takes
resources away from the energy-consuming part of the economy and creates a drag on economic
growth. Hence, a dramatically slower economy in 2015 after four years of record or near record
average daily prices for the most critical fossil fuel, oil. (The recent drop in oil prices is
primarily a reflection of slowing demand that comes from a slowing economy.)
The financial industry through the media has intervened forcefully during the recent stock market
sell-off to tell us all not to panic. These corrections are normal, they say, and long-term
investors--that is, virtually everyone except Wall Street--should ignore them. What the industry
and the media do not tell us is that these are not normal times.
Circumstances have changed dramatically. The evidence is there if only we have eyes to see it.
Interest rates in much of the world are still stuck at or near zero seven years after the last
worldwide downturn. How will the world's central banks stimulate the economy after the next
inevitable recession? By lowering interests that are already at zero? In the post-World War II
paradigm, rates would be at much higher levels today, say four or five percent, and economic
growth would be much faster.
Annual world economic growth from 1961 through 2000 according to the World Bank was 3.8
percent per year. From 2000 to 2013, an era of increasingly expensive energy, it slowed to 2.4
percent. From the initial spurt of 4.1 percent growth in 2010 (after a contraction of 2.1 percent
in 2009), growth settled down to 2.3 percent in 2012 and 2013, slightly below the recent average.
This is despite unprecedented efforts to stimulate the world economy through large increases in
government spending and record low interest rates.
... ... ...
...Franklin Roosevelt is famous for saying: "The only thing we have to fear is fear itself."
But fear is a protective mechanism. We are right to fear things that can hurt us and to act
accordingly. We cannot solve our problems if we refuse to accept that we have them.
"..."Combining the US and OPEC estimates, the US + OPEC ratio of condensate to C+C production may
have increased from about 4.6% in 2005 to about 10% in 2014. If this rate of increase in the global
condensate to C+C [crude + condensate] ratio is indicative of total global data, it implies that actual
global crude oil production (45 and lower API gravity) was approximately flat from 2005 to 2014, at
about 70 MMBPD." "
The big thing that is happening is that the world financial system is likely to collapse.
Back in 2008, the world financial system almost collapsed. This time, our chances of avoiding
collapse are very slim.
Without the financial system, pretty much nothing else works: the oil extraction
system, the electricity delivery system, the pension system, the ability of the stock market to
hold its value. The change we are encountering is similar to losing the operating system on a
computer, or unplugging a refrigerator from the wall.
We don't know how fast things will unravel, but things are likely to be quite different
in as short a time as a year. World financial leaders are likely to "pull out the stops,"
trying to keep things together. A big part of our problem is too much debt. This is hard to fix,
because reducing debt reduces demand and makes commodity prices fall further. With low prices,
production of commodities is likely to fall. For example, food production using fossil fuel inputs
is likely to greatly decline over time, as is oil, gas, and coal production.
The electricity system, as delivered by the grid, is likely to fail in approximately
the same timeframe as our oil-based system. Nothing will fail overnight, but it seems
highly unlikely that electricity will outlast oil by more than a year or two. All systems are
dependent on the financial system. If the oil system cannot pay its workers and get replacement
parts because of a collapse in the financial system, the same is likely to be true of the electrical
grid system.
Our economy is a self-organized networked system that continuously dissipates energy,
known in physics as a dissipative structure.
Other examples of dissipative structures include all plants and animals (including humans)
and hurricanes. All of these grow from small beginnings, gradually plateau in size, and eventually
collapse and die. We know of a huge number of prior civilizations that have collapsed. This appears
to have happened when the return on human labor has fallen too low. This is much like
the after-tax wages of non-elite workers falling too low. Wages reflect not only the workers'
own energy (gained from eating food), but any supplemental energy used, such as from draft animals,
wind-powered boats, or electricity. Falling median wages, especially of young people, are one
of the indications that our economy is headed toward collapse, just like the other economies.
The reason that collapse happens quickly has to do with debt and derivatives.
Our networked economy requires debt in order to extract fossil fuels from the ground and to create
renewable energy sources, for several reasons: (a) Producers don't have to save up as much money
in advance, (b) Middle-men making products that use energy products (such cars and refrigerators)
can "finance" their factories, so they don't have to save up as much, (c) Consumers can afford
to buy "big-ticket" items like homes and cars, with the use of plans that allow monthly payments,
so they don't have to save up as much, and (d) Most importantly, debt helps raise the
price of commodities of all sorts (including oil and electricity), because it allows
more customers to afford products that use them. The problem as the economy slows, and as we add
more and more debt, is that eventually debt collapses. This happens because the economy fails
to grow enough to allow the economy to generate sufficient goods and services to keep the system
going–that is, pay adequate wages, even to non-elite workers; pay growing government and corporate
overhead; and repay debt with interest, all at the same time. Figure 2 is an illustration of the
problem with the debt component.
philsharris, August 26, 2015 at 8:08 am
Gail,
Modern industrial expansion has clearly been driven by the key enabling fuel, petroleum. Not
all petroleum, however, has the same potential value as the original stuff of the 1950s to 2005.
Nevertheless 'condensate' (gas condensate derived from expanding NG fields) is included in world
'total oil' as if it was.
US geologist Jeffrey Brown, who has specialised in studying the quantities of oil available to
economies round the world – particularly amounts available to the larger economies who are net
importers, – that includes US, EU, Japan & China, – has a long comment just now on peakoilbarrel
(Ron Patterson blog). He includes an interesting apparent statistic concerning condensate. We
should note that the amount of 'real stuff' to go round the industrial world is probably stalled
since 2005. The world generally appears to have a lower-value resource to enable any future expansion.
The exlixir of youth is going to be in short supply, it seems.
Jeffrey: "Combining the US and OPEC estimates, the US + OPEC ratio of condensate to C+C production
may have increased from about 4.6% in 2005 to about 10% in 2014. If this rate of increase in the
global condensate to C+C [crude + condensate] ratio is indicative of total global data, it implies
that actual global crude oil production (45 and lower API gravity) was approximately flat from
2005 to 2014, at about 70 MMBPD."
Gail Tverberg, August 26, 2015 at 8:55 am
Yes, the high quality crude has been flattening in supply. I am not sure how important this
is in the whole scheme of things, however.
When we look at energy consumption vs GDP on a world basis, the correlation is best with total
energy, rather than with just oil. Also, our oil production has been growing at both the long
carbon chain end of the spectrum (oil sands, etc.), and the short carbon chain end (Bakken, etc).
In some sense, the mix changes tend to offset.
I think it is probably more important that world coal consumption grew at an unusually slow rate
in 2014, and perhaps is even shrinking in 2015. China's consumption is down, and its electricity
use seems to be something like flat in 2015. Natural gas consumption worldwide also grew at an
unusually low rate in 2015. These are indications of a world-wide slowdown.
We certainly need an economic model which accommodates a downturn in our civilization. I don't
think it is impossible but the longer we remain inactive the less likely we will be to avoid chaos
no matter what we do. Governments need to survive but the way they behave these days is not conducive
to trust, being so partisan and polarised one one side and head in the sand ignorant on the other.
It all looks just so unlikely that we will pull any rabbit out of the hat, even temporarily.
Michael , August 26, 2015 at 8:02 pm
Mr. Doyle, I agree with your statement on a need for an economic which accommodates a downturn.
Have you found any proposals yet? I've done some jury rigging of models for such but have not
found any good alternatives.
Gail Tverberg , August 28, 2015 at 4:08 pm
The continuing debt part is the hard part. Very short term works, but longer term doesn't.
Contradictory statements. On one hand Iran wants $80per barrel prices, on the other is ready to
serve as a Trojan horce to keep oil prices low. That's probaly the ffect of Bloomberg reporting ;-).
Oil at $70 to $80 a barrel would be "fair," he said. Brent crude, the global benchmark, fell
as much as 2.3 percent to $48.40 a barrel on the London-based ICE Futures Europe exchange and
traded at $49.12 at 3:36 p.m. local time. Brent sold for as much as $102.86 a barrel a year ago.
... ... ...
OPEC said in a bulletin from its Vienna-based secretariat on Monday that the group won't
shoulder the burden of propping up prices by cutting supply on its own, and non-member producers
would have to contribute. OPEC will protect its interests and there is "no quick fix" for market
instability, it said.
... ... ...
Iran plans to produce 3.8 million to 3.9 million barrels of oil a day by March, with output
rising by 500,000 barrels a day soon after sanctions are lifted and by 1 million barrels within
the following five months, Zanganeh said. Iran is producing 2.8 million barrels a day, its
highest level in three years, and is exporting more than 1 million barrels a day, he said.
Iran has about 60 million barrels of condensate in floating storage and has no crude stored
offshore, Zanganeh said.
"Immediately after lifting sanctions, it's our right to return to the level of production we
historically had," Zanganeh said. "We have no other choice," he said. A slump in oil prices won't
slow Iran's return to the market, he said.
U.S. crude (CLc1) was at $44.31 per barrel at 0425 GMT,
down $1.74 since Friday's close, weighed down by the closure of the largest crude distillation
unit at Exxon Mobil Corp's (XOM.N) 502,500 barrel-per-day (bpd) Baton Rouge, Louisiana, refinery.
... ... ...
"Brent will likely be range-bound and volatile over the
next 12 months as the supply overhang is worked off," Morgan Stanley said, adding that it
expected the glut to be worked off and result in higher prices by the fourth quarter of next
year.
"In the interim, non-fundamental factors (FX, macro
themes, fund flows, etc.) and headlines will likely remain key price drivers," the bank said.
Oil prices have fallen almost 60 percent since June 2014
...
On the supply side, recent speculation that Russia might
be willing to cooperate with the Organization of the Petroleum Exporting Countries (OPEC) to curb
output in support of prices was given a blow on Monday after the chief executive of Russian oil
major Rosneft ruled out a Russian cut.
"...Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones." . "...I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity." . "...But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag " . "..."if wage increases for the business sector as a whole lag behind productivity increases deflation
occurs"..."
The summary "Deflation and money" by Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara, and Hiroshi
Iyetomiof says:
Deflation and money,
Vox EU: Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more
than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound,
the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing
the money supply. This column explores its effectiveness, through the application of novel methods
to distinguish signals from noises.
The conclusion:
...all in all, the results we obtained have confirmed that aggregate prices significantly change,
either upward or downward, as the level of real output changes. The correlation between aggregate
prices and money, on the other hand, is not significant. The major factors affecting aggregate
prices other than the level of real economic activity are the exchange rate and the prices of
raw materials represented by the price of oil. Japan suffered from deflation for more than a decade
beginning at the end of the last century. More recently, Europe faces a threat of deflation. Our
analysis suggests that it is difficult to combat deflation only by expanding the money supply
bakho said in reply to pgl...
Monetary policy weak is at the ZLB. Fiscal and regulatory can have much stronger effects and
complete swamp monetary like a tidal wave to a ripple.
Exchange rates and other economic shocks have more effect than monetary policy at the ZLB.
Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones.
bakho said in reply to pgl...
Efficiency standards backed by a carbon tax would be much more effective that a carbon tax
alone.
Efficiency standards work for electric appliances and prevent a races to the bottom.
pgl said in reply to bakho...
True. It seems Carly and Jeb! do not want to regulate but rather to encourage innovation by
giving subsidies to rich people. Not only is this Republican reverse Robin Hoodism on steroids
- it will not has as much effect as a tax combined with regulations.
Simply put - conservatives should not be listened to as their agenda is not economic efficiency
but rather making the Koch Brothers ever richer.
Peter K. said...
As a thought experiment I would wonder what bakho's re-education course would look like.
There is this paper, but could it be it says the same thing as those graphs which show the
large increases in the monetary base would just sit there with at the Zero Lower Bound because
of the liquidity trap?
The inflationistas were wrong that all of that monetary policy would cause runaway inflation.
But considering what needed to be done to move long-term interest rates, was it really large
enough?
David Beckworth's blogpost in today's links suggests the Fed did what they wanted to do.
And maybe part of that was to offset the unprecedented fiscal austerity we say after Obama's
stimulus ran out. (And that stimulus was pretty much canceled out by 50 little Hoovers.)
If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe.
Maybe fiscal policy works better and more directly but if it is blocked or even reversed with
austerity, monetary policy shouldn't be ruled because it is supposedly ineffective.
Maybe Friedman and Schwartz's maximalist claims aren't true, but that doesn't mean one should
flip to the opposite extreme.
Bernanke says in a speech that Tobin suggested that the Fed could have mitigated the Great
Depression by lowering long-term rates.
Peter K. said in reply to Peter K....
"What is the total number of months during the Ford, Carter, Reagan and Bush I administrations,
plus the first term of Clinton, when the unemployment rate was lower than today?"
"The inflationistas were wrong that all of that monetary policy would cause runaway inflation."
When confronted they always say that once the economy normalized, all of those reserves will
go rushing out into the economy causing inflation.
But the Fed says it will use Interest on Excess Reserves to manage that outflow.
Peter K. said in reply to Peter K....
"If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe."
I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity.
Paine said in reply to Peter K....
Very agreeably presented
But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag
Deflation? Uupps, price theory, too, is wrong
Comment on 'Deflation and Money'
The current economic situation is a clear refutation
of both commonplace employment and quantity theory. The
core of the unemployment/deflation problem is that the
price mechanism does not work as standard economics
claims.
Roughly, the formula says that the consumer price
index declines if (i) the average expenditure ratio
falls, (ii) the wage rate falls, (iii) the productivity
increases, and (iv) the employment in the investment
good industry shrinks relative to the employment in the
consumption goods industry. The formula follows from
(2014, Sec. 5).
The crucial message is that the wage rate is the
numéraire of the price system. If at all, the quantity
of money plays an indirect role via the expenditure
ratio and the employment relation of the investment
good and the consumption good industry.
The rule of thumb says: if wage increases for the
business sector as a whole lag behind productivity
increases deflation occurs (the rest of the formula
kept constant).
For the rectification of the naive quantity theory
see (2011) (I)/(II).
Real per capita Gross Domestic Product for United States and Japan, 2010-2014
(Indexed to 2010)
[ These last 5 years real per capita GDP has increased by 5.6% in the United States and 3.6%
in Japan. ]
Peter K. said in reply to spencer...
Good point. This is why I am skeptical when I read people claim that Japan's extraordinary
monetary policy has had no effect.
And even if Japan has done more than before courtesy of Abe and Yoda Kuroda, they also mitigate
it with contractionary policy like by raising consumption taxes.
"...so, if we've got plenty of oil stored, and with at least two refineries operating below
capacity, why do we continue to import near fracking-era record amounts of crude oil? one reason
is the contango trade that we've talked about in the past, wherein contracts for oil to be
delivered in the future are at a price somewhat higher than the cost of buying oil now, such
that it pays for speculators to buy oil and pay for its storage, and enter into a contract
to sell it back at a higher price in the future…at one point last week, the contract for oil
to be delivered in December was more than a dollar a barrel higher than the current price,
meaning that a speculator could buy oil at today's price, pay the fees to have it stored at
Cushing or elsewhere, and sell it back in December with a clear profit…but as we should all
know, for every contract there has to be a counterparty, and for everyone who's buying oil
now with a contract to sell it in December, there was a seller of that oil at today's price
and a someone else buying a contract to take delivery of that oil for a dollar more a barrel
in December…so for every one who's trading oil like this, there is someone on the other side
of those trades, be it a bank, commodities house, or an oil company, taking the other side
of those contracts, and effectively betting against the contango trader…they both can't be
right, and those who bet on higher prices in March and a month ago have since lost their shirts…
"
dan, when you brought up oil imports and exports in your comment here Friday, i almost responded,
because i already knew our imports the prior week were the highest since April 3, since i watch
the reports and write about that stuff every weekend…maybe since i didn't, i continued to think
about that and took a closer look at it yesterday than i normally do, which i have just posted
online…turns out our net imports of oil and oil products, ie imports minus exports, were the highest
they've ever been this year in the week ending August 12th…here's the relevant excerpt, without
the links to the data sets i cited:
US crude oil output fell this week, but our oil imports were the highest since early April,
and with a major refinery idled, that unexpectedly led to the largest increase in our inventories
of oil in storage in 4 months, precipitating yet a further crash in the price of oil…US field
production of crude oil fell for the third week in a row in the week ending August 14th, from
9,395,000 barrels per day last week to 9,348,000 barrels per day in this week's report…while
that was down 2.7% from the modern record of 9,610,000 barrels per day set in the week ending
June 5th, it was still 9.6% higher than our output of 8,556,000 barrels per day in the same
week last year…our imports of crude oil, meanwhile, rose for the 3rd week in a row, jumping
from 7,573,000 barrels per day in the week ending August 7th to 8,038,000 barrels per day in
the current report…while that's 2.4% more than the same week last year, our 7.6 million barrels
per day average crude imports of the last 4 weeks is still 0.9% lower than the same 4 week
period of last year…
however, even with the increased oil supply brought about by that large increase in imports,
that oil was not being put to use to the same degree as last week…due in large part to the
unexpected August 8 outage at the BP refinery in Whiting, Indiana, the largest BP refinery
and the largest in the US Midwest, U.S. crude oil refinery inputs dropped to 16,775,000 barrels
per day, from the 17,029,000 barrel per day level of the week ending August 7th…so with greater
supply and less refinery throughput, our crude oil inventories in storage rose by 2,620,000
barrels to 456,213,000 barrels in week ended August 14th, 24.3% more oil than the 367,019 ,000
barrels we had stored at the end of the 2nd week of August last year…that was, of course, more
than was ever stored anytime in August in the 80 years that the EIA has records for, which
had never seen the 400 million barrel inventory level breached before this year…that news of
even higher inventories during the summer driving season when inventories usually fall sent
oil prices down by 4.8% to a six and a half year low at $40.57 a barrel on Wednesday, and although
the expiring September contract price inched up on Thursday on news of the first hurricane
of the Atlantic season, oil prices for October delivery crashed again on Friday in the midst
of a global market panic, briefly slipping below $40 a barrel, before closing the week at $40.45,
capping the longest weekly losing streak for oil prices in 29 years…
so, if we've got plenty of oil stored, and with at least two refineries operating below
capacity, why do we continue to import near fracking-era record amounts of crude oil? one reason
is the contango trade that we've talked about in the past, wherein contracts for oil to be
delivered in the future are at a price somewhat higher than the cost of buying oil now, such
that it pays for speculators to buy oil and pay for its storage, and enter into a contract
to sell it back at a higher price in the future…at one point last week, the contract for oil
to be delivered in December was more than a dollar a barrel higher than the current price,
meaning that a speculator could buy oil at today's price, pay the fees to have it stored at
Cushing or elsewhere, and sell it back in December with a clear profit…but as we should all
know, for every contract there has to be a counterparty, and for everyone who's buying oil
now with a contract to sell it in December, there was a seller of that oil at today's price
and a someone else buying a contract to take delivery of that oil for a dollar more a barrel
in December…so for every one who's trading oil like this, there is someone on the other side
of those trades, be it a bank, commodities house, or an oil company, taking the other side
of those contracts, and effectively betting against the contango trader…they both can't be
right, and those who bet on higher prices in March and a month ago have since lost their shirts…
another reason for continued high imports of oil is that we're exporting more refined products
than ever before…in the 2nd week of August, our total exports of refined petroleum products
averaged 3,884,000 barrels per day, up 10.6% from the 3,512,000 barrels per day we were exporting
in the same week last year…but that's also more than double the 1,851,000 barrels per day of
refined products we were exporting in August 2009, and more than quadruple the 964,000 barrels
per day of refined products we were exporting in August of 2004…we're also exporting more crude
oil too, mostly mostly to Canada, where the lighter grades of distillates are blended with
tar from the oil sands to produce diluted bitumen, or dilbit, which can then be delivered by
pipeline…on a monthly basis, our total exports of crude and petroleum products hit a record
4,943,000 barrels per day in April, more than double the 2,432,000 total exports of April five
years earlier…
but the week just ended was somewhat an anomaly, in that with the aforementioned refinery
constraints, our total exports did not rise, and our total imports of refined products rose
to 2,614,000 barrels per day, up from 1,927,000 barrels per day of refined product we imported
just two weeks ago …that was only the 2nd time in the past two years wherein our refined product
imports topped 2.6 million barrels per day, and as a result our total imports of crude oil
and petroleum products rose to 10,652,000 barrels per day, for our highest weekly total imports
this year…subtracting the 4,460,000 barrels per day of crude and products that we exported
this week means our net petroleum and product deficit was at 6,192,000 barrels per day for
the week, which was also the greatest excess of crude and products imports over exports that
we've seen this year…
despite that, the industry is pushing to have the 40 year old crude oil export ban repealed;
it's already passed the House. why? simple; international oil prices have been running between
$5 and $10 a barrel more than US oil prices. dont have to tell you what will happen to US prices
if that happens…
run75441 , August 23, 2015 3:19 pm
RJS:
Like oil production, refining is a cartel in itself and matching refining to demand is profitable.
yeah, bill, i mine the EIA datasets every week, and the weekly EIA reports are where all the
numbers above came from…not surprisingly, the refiners are not passing through all of their lower
costs to the consumers…
the difference between crude oil and gasoline prices has increased by more
than 50% from a year ago, so the pure refiners are making a bundle…the oil majors are using refinery
profits to offset exploration and exploitation losses, and they all saw big downturns in 2nd quarter
earnings anyway…
I monitor the Census real trade data and it shows that POL ( petroleum, oils & lubricants)
is now equal to almost 50% of exports. that is partly a function of weaker imports, bottleneck
but real exports have been growing at double digit rates for several years.
West Texas Intermediate is selling at a discount to Brent, partially because of transportation
bottlenecks. The Gulf Coast refiners are taking advantage of this discount to refine WTI and sell
it in Europe where the refiners use Brent oil.
The Keystone pipeline could eliminate this unusual spread and the US refiners would lose their
price advantage - oil companies should be careful of what you wish for. Of course at today's prices
the Keystone pipeline is not profitable.
the BP refinery in Whiting i mentioned above was one of the main processors of heavy crude
such as dilbit from Canada, which is coming in to the US through the Enbridge pipeline system
(Steve Horn at Desmogblog has had a series on how the "Keystone clone" , from Alberta to Lake
Superior to the Fleming pipeline in Illinois, was quietly approved under the radar)
at any rate, with Whiting down, maybe for a month, there's no one around to process West Canada
Select…i saw it quoted with an $18 handle last week, when WTI was in the 40s…WTI has been trading
with a $38 handle all morning, so they're probably having trouble giving that tar sands output
away by now…
After bouncing around, oil prices finished off
the week with just a bit less volatility than when it started the week.
WTI stayed at around $46 per barrel as of midday on September 4, with
Brent holding at $50 per barrel.
Aside from supply and demand fundamentals in the oil markets,
central bank policymaking is another major factor determining the
trajectory of oil prices. The European Central Bank hinted that
it might consider more monetary stimulus to help the stagnant European
economy. Oil prices
rose on the news. The markets, however, are waiting on a much more
significant announcement from the Federal Reserve this month on whether
or not the central bank will raise interest rates. This summer's market
turmoil – the Greek debt crisis and the meltdown in the Chinese stock
markets – has dimmed the prospect of a rate increase.
Moreover, the global economic unease may begin to reach
American shores. On September 4, the U.S. government released
data for the
month of August, revealing that the U.S. economy added only 173,000 jobs,
a mediocre performance that missed expectations. Although an economic
slowdown is no doubt a negative for oil prices, the news could provide
enough justification for the Fed to hold off on raising interest rates. A
delay in a rate hike could push up WTI and Brent.
Although a slew of Canadian oil sands projects have been
cancelled due to incredibly low oil prices, several large projects were
already underway before the downturn. With the costs of
cancellation too high, these projects continue to move forward. When they
come online – several of which are expected by 2017 – they could
add another 500,000 barrels per day in production, potentially
exacerbating the glut of supplies not just in terms of global supply, but
more specifically in terms of the flow of oil from Canada. Canadian oil
already trades at a discount to WTI, now at around $15 per barrel.
That means that when WTI dropped below $40 per barrel last week,
Western Canada Select was nearing $20 per barrel. With the latest rebound
to the mid-$40s, WCS is only around $30 per barrel. But with
breakeven prices for many Canadian oil sands projects at $80 per barrel
for WTI, oil operators in Alberta are no doubt losing sleep over their
current situation. One important caveat to remember is that
unlike shale projects, Canada's oil sands [mines] operate for decades, so the
immediate downturn does not necessarily ruin project economics. However,
with a strong rebound in prices no longer expected in the near-term,
high-cost oil sands projects are probably not where an investor wants to
be.
Low oil prices continue to take their toll. Bank of
America
downgraded BP to "underperform" and warned that its dividend policy
faces risks.
... ... ...
Saudi Arabia's King Salman
arrived in Washington on September 4 to meet with U.S. President
Barack Obama. The two leaders will discuss the Iran nuclear
deal, a deal that the Saudi King had strongly opposed from the start, but
has since begrudgingly warmed up to following security promises from the
United States. If they can manage to stay on the same page with the Iran
deal, the two leaders will then discuss the ongoing conflicts in Syria
and Yemen. There is obviously little to no prospect that such intensely
complicated conflicts will get sorted out in the near future, so more
modest goals for the trip include simply building trust between the two
countries. Although long-term allies, Saudi Arabia has become more
mistrustful of the U.S. President following the thaw in relations between
the U.S. and Iran. The trip follows what the media has called a "snub"
when King Salman declined to come to Washington this past spring for a
summit of other Gulf state leaders.
... ... ...
Russian President Vladimir Putin met Venezuelan President
Nicolas Maduro in China this week, and the two sides apparently discussed
ways to stabilize oil prices. Maduro says that they
agreed on "initiatives" to address low oil prices, but did not
elaborate with details. In all likelihood, Maduro is engaging in a degree
of bluster and wishful thinking. Neither side has the capacity to cut oil
production as both are facing varying degrees of economic and financial
crisis. However, earlier this week oil prices briefly spiked on news that
Russia might be willing to negotiate coordinated action. Prices
subsequently retreated once expectations subsided.
"...To me the US economy means much more than the current short sighted-term artificially
inflated stock price buy back capital gains game that is being played out again on Wall St. for the
benefit of the 1% "
Yes the FRED chart does not lie. It has been almost 8 years since the last bubble burst.
Soon will be the China bubble or maybe another financial engineering bubble from Wall St. The
graph is trying to tell us that the time is near the 8 year mark. My only problem is that
there is nothing we, any of us can do about it when 95% of all corp. earnings go to stock buy
backs, dividends and acquisitions. Nothing is going to capital or people long term investment…
Even Trump will get trumpted on this one.
JimH, September 4, 2015 9:50 am
Inventories are going up.
Consumers can not spend what they do not have and producers will not produce what they can not
sell.
Or stated another way, unless labor share is increased, consumer spending on discretionary
goods must decrease. (As the prices on non discretionary goods increase.)
William Ryan, September 4, 2015 11:15 am
JimH you are so right but this is what happens when we fully participate in the greed that
perpetuates the race to the bottom in supporting other countries economies rather than our
own. We must create new domestic demand and raise the tide of our own economy for a change..
Not China's, Mexico's, South Korea's or Vietnams.
Artificially inflating stock prices on Wall St. does not constitute a growing economy or
economic recovery.
We need to actually make things here again to create new wealth of which our economy will
grow again and not to be gamed by the greedy few at the top. Then real wages will rise along
with greater domestic consumer demand.
To me the US economy means much more than the current short sighted-term artificially
inflated stock price buy back capital gains game that is being played out again on Wall St.
for the benefit of the 1% . Please go read today's PCR.com if you cannot see what is really
happening to our country.
"...Much of Macro is still operating under the Friedman myth of Monetary policy domination. Monetary
policy can have strong effects, but at other time Fiscal and Regulatory Policy are much stronger and
needed for the best economic outcomes. . A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and the Executive.
In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled a reluctant
Congress. Do the Fed an Executive even try to coordinate policy now? This Congress is the anti-Fed and
operates on a playbook from the gamma quadrant. Total lack of policy coordination " . "...1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as QE
is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before, the
Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China) is down
25% should give pause to anyone who believes parts of the market are not in a bubble. Add to that crashing
commodity prices and growth overseas in important economies. I think the Fed needs to wait and see how
it shakes out. It = asset prices, commodity prices, EM growth and finally, how all this impacts US growth."
[Actually Carmen Reinhart deserves a better pitchman here than the little comment pgl posted
above. Carmen presents a expressly well written and concise picture. Since it is international
then the same focus on core CPI that we get for domestic inflation is not referenced nor implied.
She includes commodities in the inflation. The full text following the short excerpt given by
pgl is below:]
...
Most of the other half are not doing badly, either. In the period following the oil shocks of
the 1970s until the early 1980s, almost two-thirds of the countries recorded inflation rates above
10%. According to the latest data, which runs through July or August for most countries, there
are "only" 14 cases of high inflation (the red line in the figure). Venezuela (which has not published
official inflation statistics this year) and Argentina (which has not released reliable inflation
data for several years) figure prominently in this group. Iran, Russia, Syria, Ukraine, and a
handful of African countries comprise the rest.
The share of countries recording outright deflation in consumer prices (the green line) is
higher in 2015 than that of countries experiencing double-digit inflation (7% of the total). Whatever
nasty surprises may lurk in the future, the global inflation environment is the tamest since the
early 1960s.
Indeed, the risk for the world economy is actually tilted toward deflation for the 23 advanced
economies in the sample, even eight years after the onset of the global financial crisis. For
this group, the median inflation rate is 0.2% – the lowest since 1933. The only advanced economy
with an inflation rate above 2% is Iceland (where the latest 12-month reading is 2.2%).
While we do not know what might have happened were policies different, one can easily imagine
that, absent quantitative easing in the United States, Europe, and Japan, those economies would
have been mired in a deflationary post-crisis landscape akin to that of the 1930s. Early in that
terrible decade, deflation became a reality for nearly all countries and for all of the advanced
economies. In the last two years, at least six of the advanced economies – and as many as eight
– have been coping with deflation.
Falling prices mean a rise in the real value of existing debts and an increase in the debt-service
burden, owing to higher real interest rates. As a result, defaults, bankruptcies, and economic
decline become more likely, putting further downward pressures on prices.
Irving Fisher's prescient warning in 1933 about such a debt-deflation spiral resonates strongly
today, given that public and private debt levels are at or near historic highs in many countries.
Especially instructive is the 2.2% price decline in Greece for the 12 months ending in July –
the most severe example of ongoing deflation in the advanced countries and counterproductive to
an orderly solution to the country's problems.
Median inflation rates for emerging-market and developing economies, which were in double digits
through the mid-1990s, are now around 2.5% and falling. The sharp declines in oil and commodity
prices during the latest supercycle have helped mitigate inflationary pressures, while the generalized
slowdown in economic activity in the emerging world may have contributed as well.
But it is too early to conclude that inflation is a problem of the past, because other external
factors are working in the opposite direction. As Rodrigo Vergara, Governor of the Central Bank
of Chile, observed in his prepared remarks at Jackson Hole, large currency depreciations in many
emerging markets (most notably some oil and commodity producers) since the spring of 2013 have
been associated with a rise in inflationary pressures in the face of wider output gaps.
The analysis presented by Gita Gopinath, which establishes a connection between the price pass-through
to prices from exchange-rate changes and the currency in which trade is invoiced, speaks plainly
to this issue. Given that most emerging-market countries' trade is conducted in dollars, currency
depreciation should push up import prices almost one for one.
At the end of the day, the US Federal Reserve will base its interest-rate decisions primarily
on domestic considerations. While there is more than the usual degree of uncertainty regarding
the magnitude of America's output gap since the financial crisis, there is comparatively less
ambiguity now that domestic inflation is subdued. The rest of the world shares that benign inflation
environment.
As the Fed prepares for its September meeting, its policymakers would do well not to ignore
what was overlooked in Jackson Hole: the need to place domestic trends in global and historical
context. For now, such a perspective favors policy gradualism.
Friday, September 04, 2015 at 02:44 AM
bakho said in reply to RC AKA Darryl, Ron...
Here conclusion was weak with a vague take home message.
Much of Macro is still operating
under the Friedman myth of Monetary policy domination.
Monetary policy can have strong effects, but at other time Fiscal and Regulatory Policy are
much stronger and needed for the best economic outcomes.
A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and
the Executive. In the mid 1990s, the Fed and Clinton administration were using the same playbook
and cajoled a reluctant Congress. Do the Fed an Executive even try to coordinate policy now? This
Congress is the anti-Fed and operates on a playbook from the gamma quadrant. Total lack of policy
coordination
pgl said in reply to bakho...
My take was that she was advocating more aggressive aggregate demand stimulus in general. And
you are right - we need the fiscal side to step up to the plate.
Story in NYC as how bad just
the subway stops are. The rails suck as well and we need to expand the system. But at the rate
this is going this decaying stops which are very dangerous will not be fixed until 2065. Why?
Lack of funding is the stated reason. No one in this stupid nation can say - well provide more
funding? We are ruled by idiots.
RC AKA Darryl, Ron said in reply to bakho...
[Well, yeah but that would have diverged a long way from her topic:]
"Inflation – its causes
and its connection to monetary policy and financial crises – was the theme of this year's international
conference of central bankers and academics in Jackson Hole, Wyoming. But, while policymakers'
desire to be prepared for potential future risks to price stability is understandable, they did
not place these concerns in the context of recent inflation developments at the global level –
or within historical perspective..."
[She stuck with just inflation and monetary policy because that is what she chose to write
about at this time. However, Carmen is the other intellectual half of Rogoff of the debt limit
for economic growth flameout. So, we should not depend upon her for fiscal policy recommendations.
That even someone this popular with the establishment Republican elite can understand monetary
policy is notable in contrast to the inflationistas.
Peter K. said in reply to RC AKA Darryl, Ron...
Yes she did the 90 percent government debt cutoff with Rogoff that Krugman attacked.
Also the
vaguely righwing blogger from the St. Louis Fed, Andolfatto or something, recently had link where
they said inflation wasn't a problem and the Fed shouldn't raise rates until inflation is apparent.
Peter K. said in reply to bakho...
"In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled
a reluctant Congress. "
I thought Clinton cut the deficit and the tech stock bubble helped balance
the budget so they had surpluses. Some people say those surpluses were a problem because of a
lack of safe assets. That drove money to seek safe returns in mortgage backed securities for instance.
Peter K. said in reply to Peter K....
Maybe he didn't cut the deficit - I think Dean Baker argues that - but at the beginning of his
Presidency, Clinton dropped his middle class spending bill in a deal with Greenspan who said he'd
keep interest rates low in return.
Peter K. said in reply to bakho...
"This Congress is the anti-Fed and operates on a playbook from the gamma quadrant."
haha yes.
The Fed regularly complained about fiscal "headwinds."
Chart
1 is key to understanding the rough timing. In the US and UK, we are a little past the dashed
vertical line (impact phase). UK has had a little more success importing inflation.
1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as
QE is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before,
the Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China)
is down 25% should give pause to anyone who believes parts of the market are not in a bubble.
Add to that crashing commodity prices and growth overseas in important economies. I think the
Fed needs to wait and see how it shakes out. It = asset prices, commodity prices, EM growth and
finally, how all this impacts US growth.
"...Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper hand,
the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's top priority
is making sure the cards remain stacked against wage and salary earners." . ".When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers." . "...Notice that the labor share of business income has declined by 10.6% since 2000, while real
after-tax corporate profits have increased by 143.5%."
Some argue there must be excessive slack in labor markets if wage rates are not accelerating.
But real wages are tied to productivity growth, and productivity growth has been slow for several
years now. Wage growth in real terms has at least kept pace with productivity increases over
that time period, which is perfectly consistent with an economy from which labor market slack
has largely dissipated.
Real wage growth is consistent with productivity, thus there is no excess slack in the labor
market. If you think this is some crazy hawk-talk, think again.
Fed Chair Janet Yellen in July:
The growth rate of output per hour worked in the business sector has averaged about 1‑1/4 percent
per year since the recession began in late 2007 and has been essentially flat over the past
year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding
the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and
while I do think that this is evidence of some persisting labor market slack, it also may reflect,
at least in part, fairly weak productivity growth.
For more than three decades, the pace of productivity growth has exceed that of real compensation:
Another view from real median weekly earnings:
Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper
hand, the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's
top priority is making sure the cards remain stacked against wage and salary earners.
"But real wages are tied to productivity growth, and productivity growth has been slow for
several years now."
Productivity by definition is output per worker. So when a recession lowers output, it lowers
measured productivity. So much for this garbage circular "reasoning".
Oh and the canard that JohnH does a lot - look at only what has happened of late:
"Wage growth in real terms has at least kept pace with productivity increases over that time
period, which is perfectly consistent with an economy from which labor market slack has largely
dissipated."
Tim Duy has already exposed this fallacy by looking at this over a longer period of time.
pgl -> Paine ...
Dude - this is a whole literature on this. Recessions do lower output by more than it lowers
employment but this is not exactly because firms are nice. Recessions are bad news for everyone.
Wages do not keep up with what is even limited inflation - again firms are not exactly nice. So
recessions sort of screw firms but unbelievably screw workers. Eventually the economy gets back
to full employment but workers never fully recovery.
This is why recessions are bad for everyone in the short fun but especially bad for workers
short-run and long-run.
Which brings me to why I did not go after Yellen. It seems she and hubbie Akerlof have written
some of the best papers on this topic.
Paine - stop being an arrogant lazy ass and actually check up on this literature.
Now if your point is that the FED borg (I coined this term) is about to take over Yellen's
mind, I fear this too. It seems to have taken over Stan Fischer's mind and he used to be brilliant.
ilsm -> Paine ...
The fed hawks are like pentagon version hawks since 1946.....
we cannot have any more pearl harbors
or inflation......
DrDick :
DrDick :
When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers.
mrrunangun :
Domestic US wage rates have been flat. In the graph, the lines cross between 1975 and 1985.
During those years, international competition increased in the tradable goods sector, IMO due
to the recovery of Japanese and European industrial economies from the destruction suffered in
WWII. The divergence between the curves expands more rapidly as more free trade agreements come
on line in the 90s (e.g. NAFTA in 1992 and PNTR for China in 1999).
It may be that intensifying competition in the tradable goods sector has slowed wage gains
in the US by a supply and demand imbalance for labor. The increasing wage premium to education
over the past 40 years and the capture of the domestic political system, and thus capture of the
government, by the very rich, has made it impossible for the political system to make adjustments
to the change in international competition that would benefit the unskilled or semiskilled worker.
Mike Sparrow -> mrrunangun...
The trade agreements are vastly overrated in terms of competition and instead, they are what
help surge productivity. The US began to have offshoring in the 1950's, especially after the Korean
war era boom. Companies began to bail as the US had developed a consumer base. This is very typical
of capitalism. It happened in Europe in the 19th century because of the same reason.
Keeping a strong consumer base and industrial base would liquidate capitalist positions and
turn the economy into laborism.
Mike Sparrow :
I would argue productivity is too high, still. Real productivity really zoomed from the mid-90's
and really never came back down. The late 00's recession made it worse.
Persistently high productivity causes real wages to struggle to keep up. I think many hobbyists
have it backwards with wages including myself. Yes, real wages rose rapidly between 1997-2000,
but that was only because productivity surged. The long run problem of that was wage stagnation
due to the previous high productivity, which has been there since the 80's. Real wage acceleration
coupled with correcting productivity is a good sign and the Fed doesn't like it because they want
high productivity all the time.
The Rage -> Peter K....
I think what he is trying to say, reading through his posts: technology is driving down the
need for labor investment and the information/computer/plastic/whatever you want to call it revolution
really drove that point home to the end.
So productivity is high, creating profits from reduced pace of hiring and keeping pipelines
of credit open for future output. However, productivity is slowing lately and real wages have
accelerated implicating that near term output will be higher than while future output will be
lower. Yeah, that part is a bit confusing, but the drift is that productivity/real wages need
to track together closer or you get problems. When they come unglued, the offender, this case
productivity, needs to come down for wages to catch up. Real wages were to high before 1980 and
productivity should run a bit higher than wages. So by 1995, the problems that helped spur the
great inflation had ebbed, but a new problem started: rapid productivity growth.
I read this in 2009 believe it or not in a article. Their belief was if productivity stayed
high and growing, the economy would be in permanent recession. They believed to maintain stability,
productivity had to decline for the next decade. Mercy, I wish I could remember where I read that
from. 6+ years leaves a large gap. I do think the chart shows the "panic" over slowed productivity
is pure noise. Between 95-00 it when "boom boom". Notice the pre-95 trend and the post-95 trend.
To the productivity must decline squad, a decline in productivity will help real wages rise boosting
real incomes and reducing nominal debt, creating a more stable economy.
Dickeylee :
We are still in a slave labor economy. The whole world is looking for the next labor market
to enslave. Nike in Vietnam, Apple in China, and China looks poised to take over Africa.
If you can't get your slaves shipped to you, go to your slaves!
pgl -> Dickeylee...
China looks poised to take over Africa? I guess the Chinese capitalists hate paying $3 an hour
and so will pay Africans less. If you check - multinationals are in Africa and they are mainly
US and European based companies. It seems we beat the Chinese to this.
ilsm -> pgl...
Pentagon deploying to keep the peace in Africa for the job creators........
Lafayette -> pgl...
PITY AFRICA
The plight of Africa is that it has been plundered by both Europe and America over the past
two centuries. By America principally for cheap labor brought over on slave-ships.
Do not overlook the fact that damn few African countries can seem to develop a leadership that
does not plunder its country's assets for their own personal profit.
This plague of profiteering has existed since time immemorial and China is just the newest
entrant to the game ...
DrDick -> pgl...
China has been making significant inroads there for over a decade and are currently the largest
single player there.
Your comment actually has some merit in two senses. China has recognized that its habit of
investing in government bonds of other nations (e.g. US) is giving them a lower return than what
foreign direct investment offers. And Africa is attracting a lot of foreign direct investment.
I went searching for who the big players are and this gave an interesting list:
But it shows the BRIC nations (C for China) has been doing FDI in Africa for a while.
If multinationals are going global, maybe the labor movement should do the same. Workers of
the world unite!
Julio :
Rasputin explained why the Fed must raise rates before the next recession, so it can lower
them later:
"Certainly our Savior and Holy Fathers have denounced sin, since it is the work of the Evil
One.
But how can you drive out evil except by sincere repentance?
And how can you sincerely repent if you have not sinned?"
We have considered the political reasons for the opposition to the policy of creating employment
by government spending. But even if this opposition were overcome -- as it may well be under the pressure
of the masses -- the maintenance of full employment would cause social and political changes which would
give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full
employment, the 'sack' would cease to play its role as a 'disciplinary measure. The social position
of the boss would be undermined, and the self-assurance and class-consciousness of the working class
would grow. Strikes for wage increases and improvements in conditions of work would create political
tension. It is true that profits would be higher under a regime of full employment than they are on
the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining
power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects
only the rentier interests. But 'discipline in the factories' and 'political stability' are more appreciated
RGC said...
Krugman explains why he is a Keynesian and proceeds to prove that he is not a Keynesian:
Krugman:
So, am I a Keynesian because I want bigger government? If I were, shouldn't I be advocating
permanent expansion rather than temporary measures? Shouldn't I be for stimulus all the time,
not only when we're at the zero lower bound? When I do call for bigger government - universal
health care, higher Social Security benefits - shouldn't I be pushing these things as job-creation
measures? (I don't think I ever have). I think if you look at the record, I've always argued for
temporary fiscal expansion, and only when monetary policy is constrained. Meanwhile, my advocacy
of an expanded welfare state has always been made on its own grounds, not in terms of alleged
business cycle benefits.
In other words, I've been making policy arguments the way one would if one sincerely believed
that fiscal policy helps fight unemployment under certain conditions, and not at all in the way
one would if trying to use the slump as an excuse for permanently bigger government.
In some other respects the foregoing theory is moderately conservative in its implications.
For whilst it indicates the vital importance of establishing certain central controls in matters
which are now left in the main to individual initiative, there are wide fields of activity
which are unaffected. The State will have to exercise a guiding influence on the propensity
to consume partly through its scheme of taxation, partly by fixing the rate of interest, and
partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking
policy on the rate of interest will be sufficient by itself to determine an optimum rate of
investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment
will prove the only means of securing an approximation to full employment; though this need
not exclude all manner of compromises and of devices by which public authority will co-operate
with private initiative. But beyond this no obvious case is made out for a system of State
Socialism which would embrace most of the economic life of the community. It is not the ownership
of the instruments of production which it is important for the State to assume. If the State
is able to determine the aggregate amount of resources devoted to augmenting the instruments
and the basic rate of reward to those who own them, it will have accomplished all that is necessary.
Moreover, the necessary measures of socialisation can be introduced gradually and without a
break in the general traditions of society.
Whilst, therefore, the enlargement of the functions of government, involved in the task
of adjusting to one another the propensity to consume and the inducement to invest, would seem
to a nineteenth-century publicist or to a contemporary American financier to be a terrific
encroachment on individualism. I defend it, on the contrary, both as the only practicable means
of avoiding the destruction of existing economic forms in their entirety and as the condition
of the successful functioning of individual initiative.
We have considered the political reasons for the opposition to the policy of creating employment
by government spending. But even if this opposition were overcome -- as it may well be under
the pressure of the masses -- the maintenance of full employment would cause social and political
changes which would give a new impetus to the opposition of the business leaders. Indeed, under
a regime of permanent full employment, the 'sack' would cease to play its role as a 'disciplinary
measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness
of the working class would grow. Strikes for wage increases and improvements in conditions
of work would create political tension. It is true that profits would be higher under a regime
of full employment than they are on the average under laissez-faire, and even the rise in wage
rates resulting from the stronger bargaining power of the workers is less likely to reduce
profits than to increase prices, and thus adversely affects only the rentier interests. But
'discipline in the factories' and 'political stability' are more appreciated
The dangerous separation of the American upper middle class: The American upper middle class
is separating, slowly but surely, from the rest of society. This separation is most obvious in
terms of income-where the top fifth have been prospering while the majority lags behind. But the
separation is not just economic. Gaps are growing on a whole range of dimensions, including family
structure, education, lifestyle, and geography. Indeed, these dimensions of advantage appear to
be clustering more tightly together, each thereby amplifying the effect of the other.
In a new series of Social Mobility Memos, we will examine the state of the American upper middle
class: its composition, degree of separation from the majority, and perpetuation over time and
across generations. Some may wonder about the moral purpose of such an exercise. After all, what
does it matter if those at the top are flourishing? To be sure, there is a danger here of indulging
in the economics of envy. Whether the separation is a problem is a question on which sensible
people can disagree. The first task, however, is to get a sense of what's going on.
Skipping the extensive analysis covering:
"We are the 80 percent!" Not quite the same ring as "We are the 99 percent!" ...
Defining the upper middle class...
Upper middle class incomes: on the up...
"Where did you get your second degree?" The upper middle class and education...
Families, marriage and social class...
Voting and Attitudes...
The conclusion is:
Conclusion The writer and scholar Reihan Salam has developed some downbeat views about the
upper middle class. Writing in Slate, he despairs that "though many of the upper-middle-class
individuals I've come to know are good, decent people, I've come to the conclusion that upper-middle-class
Americans threaten to destroy everything that is best in our country."
Hyperbole, of course. But there is certainly cause for concern. Salam points to the successful
rebellion against President Obama's plans to curb 529 college savings plans, which essentially
amount to a tax giveaway to the upper middle class. While the politics of the reform were badly
bungled, it was indeed a reminder that the American upper middle class knows how to take care
of itself. Efforts to increase redistribution, or loosen licensing laws, or free up housing markets,
or reform school admissions can all run into the solid wall of rational, self-interested upper
middle class resistance. This is when the separation of the upper middle class shifts from being
a sociological curiosity to an economic and political problem.
In the long run, an even bigger threat might be posed by the perpetuation of upper middle class
status over the generations. There is intergenerational 'stickiness' at the bottom of the income
distribution; but there is at least as much at the other end, and some evidence that the U.S.
shows particularly low rates of downward mobility from the top. When status becomes more strongly
inherited, inequality hardens into stratification, open societies start to close up, and class
distinctions sharpen.
Mike Sparrow
The upper middle class will also be the ones who will be thrown to the wolves if everything falls
apart. Hubris is a bitch.
Sandwichman said in reply to Mike Sparrow
Lucky them if they're thrown to the wolves.
DrDick said in reply to Mike Sparrow
There is also this possibility (given the large number in the tech industry):
"I really don't know what you do about the "taxes are theft" crowd, except possibly enter a
gambling pool regarding just how long after their no-tax utopia comes true that their generally
white, generally entitled, generally soft and pudgy asses are turned into thin strips of Objectivist
Jerky by the sort of pitiless sociopath who is actually prepped and ready to live in the world
that logically follows these people's fondest desires. Sorry, guys. I know you all thought you
were going to be one of those paying a nickel for your cigarettes in Galt Gulch. That'll be a
fine last thought for you as the starving remnants of the society of takers closes in with their
flensing tools." (John Scalzi, http://whatever.scalzi.com/2010/09/26/tax-frenzies-and-how-to-hose-them-down/)
Sandwichman
Factitious values and cost-shifting. It's all that's left, really. Everything else is just resource
depletion and overpopulation. Malthus was wrong! Then.
Sandwichman said in reply to Sandwichman
But not to worry. Nothing a little QE can't fix. Every time I get a bump or scrape I just rub
some QE on it and... all better!
Larry
My litmus test about the liberalness of (homeowning) liberals is whether they favor replacing
the mortgage interest deduction with a tax credit of fixed size. Those deductions are a huge UMC
subsidy.
Then you could talk about the massive federal aid to universities, again helping the 30% who
go but not the 70% who don't.
Sandwichman said in reply to Larry
Yep. The "Upper Middle Class" is nothing but cost-shifting and factitious values. Smoke and mirrors.
Punch one some time. It's like they are made out of twinkies.
anne said in reply to Sandwichman
Rubbish, not even sarcasm.
Dan Kervick
Maybe this is why economics has gotten so boring lately. For the upper 20%, which includes most
academic economists, there is a 100% recovery. So they have stopped talking about what is wrong
with American society, and gone back to talking about methodological issues, and about that time
someone called them a mean name in graduate school.
JF
President Obama might direct that all economic data become reported first on the data associated
with population who fit within the 90% strata and announce that this is being done to remind people
every day that the public's govt is supposed to govern with the bulk of society in mind.
The President's budget submission to Congress will discuss matters in this way too; that is,
how are the 90% affected. And as you know, I'd prefer that this grouping is done mostly on a Net
Worth basis, not income, so we have a constant reminder to consider economics looking at both
wealth and income - not just income for the coming year.
Of course the data that includes the 1% and the other 9% will be available too.
JF said in reply to JF
And I'd like academia to mirror this too. All studies will focus on the 90% and discuss from this
perspective.
Let the Koch-backed researchers do the other studies.
It really would be interesting to have all professors tell their students to only use data
for the 90% in their discussion papers.
US leads the world in too much debt - $1,720,000 per taxpayer compared to $65,000 per taxpayer
for bankrupt Greece. We may be getting dumber but at least we lead the world by a long shot
in that category
Forward
Economist Tells Congress: U.S. May Be in 'Worse Fiscal Shape' Than Greece
"The first point I want to get across is that our nation is broke," Kotlikoff testified.
"Our nation's broke, and it's not broke in 75 years or 50 years or 25 years or 10 years. It's
broke today.
Yep, but its magic debt and subject to even more magic money. The problem with the above chart
is that it makes no accounting for chaotic events since they can't be predicted, but they will
likely be the driver of the collapse.....
So, instead of saying the truth, that looters have taken over the world economy, someone calls
the situation "crisis contagion." Who are the disease vectors that are the carriers of this
pathogen causing the crisis? Mostly Goldman Sachs banksters like Mario Draghi and Henry
Paulson. Banksters and their cohorts like Obama and Eric Holder and David Cameron who have
poisoned the world economy. What we need are fewer weasel words like crisis contagion and
more words like "You are under arrest, Eric Holder, for criminal conspiracy."
Groundhog Day
if only it were that easy... a friend of mine stopped reading financial blogs like ZH, all
news outlets including the web (funny considering he's a programmer and on the web all day) and
he is much happier. he knows the inevitable will come but doesn't care. He figures he is single,
has no debt and a house paid off and is relativiely intelligent working for a 100k give or take
a few thousand....so his way of beating the system is not to particate in a 401k, ira, brokerage
at all and spend his money on vacations in different parts of the world spending all his money
so he loses no purchasing power in a savings account and spending on small mom and pop business
owners as to not feed the corporate beast..
saints51
I agree with him too. I think we all need a break from this website time to time. This place
is addictive, but it is not the articles I'd miss, it is the members. I enjoy everyone's company
even the trolls.
RaceToTheBottom
I don't believe the music on the Titanic ever stopped. They just kept playing until they were
underwater. Expect more of the same.
Also expect the same actions of the few .01% as they do the present day equivalent of dressing
up like ladies to get onto the lifeboats. At least those not already on safe land.
Implied Violins
...he says to Schopenhauer, who authored:
"...all human action (is) the product of a blind, insatiable, and malignant metaphysical will."
According to Shiller S&P 500 can go as low as 1300 based on "return to normal" of his, currently
elevated, CAPE index. " I think this is dangerous time" he said.
"... The historic average is around 17, a level that would correspond with about 11,000 on the
Dow and 1,300 on S&P 500. A retracement to those levels would represent more than 30 percent
declines. "
Based on his research of historical stock market valuations, Nobel Prize-winning economist
Robert Shiller said Thursday he sees the "risk of substantial declines" ahead.
Even with the recent turmoil, which pushed the Dow industrials, S&P 500, and Nasdaq into
correction last week and again this week, "the market is high now," the Yale University professor
told CNBC's " Squawk Box ."
As of Wednesday's close, the Dow remained in a correction, despite strong gains. But the rally
in the S&P and Nasdaq composite pulled those measures out of correction territory.
Shiller measures valuation with his cyclically adjusted price-to-earnings (CAPE) ratio, which
looks at price divided by 10-year average earnings.
"The CAPE ratio right now is around 25. It's high," he said. The historic average is around
17, a level that would correspond with about 11,000 on the Dow and 1,300 on S&P 500. A
retracement to those levels would represent more than 30 percent declines.
Shiller said he's not saying that will happen, just the CAPE ratio serves as a "warning
signal."
In fact, based on history, the stock market could more higher because the CAPE has been much
higher in the past before the air came out of the market, he said.
"The monthly CAPE ratio reached a peak of 44 in the year 2000 and that was followed by an
important [market] drop. It went down to 13 and came back up to 27 in 2007 and it was followed by
another drop," he said.
"Nobody can really forecast the market accurately. But I think this is a risky time," Shiller
concluded-adding he personally has been reducing his portfolio's exposure to U.S. stocks. "[But]
everyone's different. People need to look at their own risk situation."
Total world production is around 86 mmbl (millions barrels a day). Iran probably can
contribute additional one million barrels a day). Drop of the US shale production and Canadian sands
production might be higher then that. Also Iranian internal consumption (currently 2
million barrels a day) also will rise substantially after lifting of the sanctions.
"...Projecting from International Energy Agency (IEA) data, Iran is on track to produce an
average ~2.85 mmbl/day of crude in 2015. The IEA puts Iran's current sustainable capacity at 3.6
mmbl/day (defined as a level achievable in 90 days and sustainable for an extended period). "
"... it is possible that Iran will lack the domestic and foreign resources necessary to
increase crude output to and over 4 mmbls/day by 2020."
The P5+1 agreement with Iran on Iran's nuclear program has generated (sometimes fevered)
anticipation of an Iranian oil bonanza at the end of the nuclear agreement rainbow, both in terms
of the increase in Iranian crude output and the business opportunities for foreign firms in
driving the increase.
The anticipation comes from several sources. Iran's crude potential is one. According to the
U.S. Energy Information Administration (EIA), Iran's proven crude reserves, 158 billion barrels,
are the world's fourth largest (and among the cheapest to produce at $8-to-$17/barrel, depending
on the source).
Iranian public statements expressing determination to increase crude output significantly are
another (to 5.7 mmbl/day, according to Mehdi Hosseini, chairman of Iran's oil contracts
restructuring committee). The third is the value of potential contracts for foreign suppliers.
Hossein Zamaninia, Iran's deputy oil minister for commerce and international affairs, indicated
the government hoped to conclude nearly 50 oil and gas projects worth $185 billion by 2020.
Projected Output and Exports to 2020
Projecting from International Energy Agency (IEA) data, Iran is on track to produce an
average ~2.85 mmbl/day of crude in 2015. The IEA puts Iran's current sustainable capacity at 3.6
mmbl/day (defined as a level achievable in 90 days and sustainable for an extended period).
This is roughly comparable to Iranian Oil Minister Bijan Namdar Zanganeh's assertion Iran could
increase output 500,000 barrels per day within a few months after international sanctions on
Iran's economy are lifted and another 500,000 barrels per day in the following months .
... ... ...
Iran won't be able to finance this on its own. It has three "internal" sources of
investment-frozen Iranian funds in foreign accounts, government budget resources (oil revenues
flow to the Iranian government, a portion of which the government returns to the industry), and
oil in storage. (Iranian banks evidently can't provide meaningful funding). Rough conjectures of
the investment Iran could generate from these three sources in current low price environment are
as follows:
Perhaps $2-$4 billion annually through 2020 from frozen Iranian funds in foreign accounts.
Some estimates put the total at $100 billion (or $20 billion annually). U.S. Treasury
Secretary Lew, in testimony before Congress, put the available funds at $50 billion ($10
billion annually). Since Iran's oil industry is only one of many claimants on the frozen
funds, including the natural gas industry, the Iranian military, Iran's proxy clients in
Lebanon, the Gaza Strip, Syria, Iraq, and Yemen, the commercial aviation industry (replacing
the passenger jet fleet), other industries, and the Iranian people, maybe it will receive 20
percent of the frozen funds, or between $2 and $4 billion annually.
For the sake of argument, $10 billion annually through 2020 from government budget
resources, which is very generous given the share of crude export revenues this level of
support would consume (see last row of above table), the demands from other Iranian claimants,
and Zanganeh's data (investment fell from an average $20 annually in 2011 and 2012, when the
OPEC basket crude averaged $107.46 and $109.45 per barrel respectively, to $6 billion in 2014,
when it averaged $96.29, and virtually nothing this year, when it averaged $53.97 through
August).
Perhaps $1-$1.5 billion as a one-time contribution from oil currently in storage.
... ... ...
The possibility of direct military conflict between Iran on the one hand and Saudi Arabia and
its Gulf Arab allies on the other is another factor. The two sides are already essentially at war
indirectly in Yemen, Iraq, Lebanon, and Syria. Moreover, just the threat of direct military
conflict or an increase in regional tensions is enough to cause foreigners anxiety.
The deal structure the Iranians will offer foreign companies-Hosseini described it as a "risk
service contract"-will increase rather than mitigate risk. Given their lack of capital, the
Iranians will be asking foreigners to bear the upfront investment burden in return for payment
(cash and/or crude) in the (perhaps distant) future. Foreigners must take into account the
possibility that negative changes in the internal and/or external environment will damage the
value of their investment.
Foreign investors cannot be confident Iran's internal political dynamics will be conducive to
foreign investment. Not all influential Iranians or Iranian interest groups (for example, the
powerful Revolutionary Guards) welcome the nuclear agreement and détente with the United States
and Europe. Should the balance of power tip in their favor-or further in their favor-foreign
investments could face anything from unpleasant pressure to expropriation.
Moreover, absent a binding agreement within OPEC and between OPEC and Russia on production
levels, Saudi and Gulf Arab production policies will threaten the value of foreign investment in
the Iranian crude industry. Saudi Arabia's sustainable capacity is 2.5 mmbl/day more than its
average 10.01 mmbl daily output in 1H 2015, while the UAE has announced plans to increase output
600,000 barrels per day in the next few years, and Kuwait by 1.4 mmbl/day by 2020.
... ... ...
In Sum
While it is likely Iran will increase crude output once sanctions are lifted, it is possible
that Iran will lack the domestic and foreign resources necessary to increase crude output to and
over 4 mmbls/day by 2020. Absent a thaw in its relations with Saudi Arabia, the Gulf Arab
states, and the West, higher and more stable crude prices, and initial positive experience for
foreign companies in negotiating and implementing projects, it is more likely foreign investment
will trickle into the Iranian energy industry than gush into it.
As time passes, more and more hedges are expiring, leaving oil companies fully exposed to the
painfully low oil price environment. "A lot of these smaller guys who had bad balance sheets have
pretty good hedge books through full-year 2015," Andrew Byrne, an analyst with IHS, told the Houston
Chronicle. "You can't say that about 2016."
In fact, about one-fifth of North American production is hedged at a median price of $87.51 per
barrel. Smaller companies rely much more heavily upon hedging as they are more vulnerable to price
swings and are not diversified with downstream assets. Across the industry, IHS estimates that smaller
companies had about half of their production hedged at a median oil price of $89.86 per barrel in
2015.
... ... ...
More worrying for the oil and gas companies that are struggling to keep their lights on is the
forthcoming credit redeterminations, which typically take place in April and September. Banks recalculate
credit lines for drillers, using oil prices as a key determinant of an individual company's viability.
With oil prices bouncing around near six-year lows, more companies will find themselves on the wrong
side of that equation.
Banks were more lenient in April when oil prices were a bit higher and many analysts expected
prices to rise. This time around the pain is mounting and there will be a lot less leeway. Somewhere
around
10 to 15 percent credit offered to drillers could be cut back on average, a move that could slash
$15 billion in credit capacity, according to CreditSights Inc.
... ... ...
According to the FT, banking regulators are pushing banks to take a more conservative approach
to their energy loans.
"...Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production
costs "the dark side of the golden age of shale". In a recent analysis, it estimates that non-Opec marginal
cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3 a barrel in
2011. "
...Houston based ConocoPhillips announce that the E&P giant is about to terminate 10%,
or 1,800 people, of its global workforce, in the next several weeks as it copes with low oil prices.
As the Houston
Chroncile's FuelFix blog writes, "Daren Beaudo, a company spokesman,
confirmed that an internal communication was sent to employees earlier this
week informing them of the upcoming staff reductions. Most of those affected
workers will receive layoff notifications next month."
But don't worry: the great(ly fabricated) US jobs recovery myth will not
be impaired: all these formerly highly-paid engineers, technicians, drillers
and chemists will find minimum wage jobs flipping burgers at their local
recently IPOed Shake Shack.
Publicus
Zerohedge logic: oil going up is bad for the economy, oil going down is bad for the economy.
While gold going up means you should buy more, and gold going down means you should buy more.
LOL
El Vaquero
That's because both are true. If oil is too expensive, people cannot afford to buy as much
random crap in this "consumer economy," and if oil is too cheap, well, there's always the $550
billion in energy sector junk bonds floating around that aren't going to get repaid. This is the
result of years upon years of economic manipulation.
Berspankme
El Vaq- that requires critical thinking
Winston Smith 2009
"that requires critical thinking"
Always, unfortunately, a very rare commodity... which explains why we're where we're at.
"Five percent of the people think, ten percent of the people think they think, and the other eighty-five
percent would rather die than think." - Thomas A. Edison
HIGH PRICED OIL DESTROYS GROWTH According to the OECD Economics Department
and the International Monetary Fund Research Department, a sustained $10 per barrel increase
in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP
in the first and second years of higher prices.
http://www.iea.org/textbase/npsum/high_oil04sum.pdf
Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production
costs "the dark side of the golden age of shale". In a recent analysis, it estimates that non-Opec
marginal cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3
a barrel in 2011.
http://www.ft.com/intl/cms/s/0/ec3bb622-c794-11e2-9c52-00144feab7de.html#axzz3T4sTXDB5
JustObserving
Obama's war on oil to hurt Russia and Iran having unintended consequences. Maybe he can drone
short-sellers of US stocks
lehmen_sisters
Good paying oil workers going to get jobs at Chili's and Flingers....talk about a recovery!
Drinks on me!
The economy is a surplus energy equation,
not a monetary one, and growth in output (and in the global
population) since the Industrial Revolution has resulted from the
harnessing of ever-greater quantities of energy.
But the critical relationship
between energy production and the energy cost of extraction is now
deteriorating so rapidly that the economy as we have known it for
more than two centuries is beginning to unravel.
ConocoPhillips Fires 10% Of Global Workforce, Warns Of "Dramatic
Downturn" To Oil Industry
"Dramatic Downturn", really? These morons are in
the energy business and they just figured this out now? Or, are they simply justifying the
layoffs?
Jack Burton
the massive upcoming reserve liquidation (read Treasury selling) that is
about to be unleashed as a result of the soaring dollar
Don't discount Russia in this treasury sell off. No they are not a player like China, but they
have a roll to play, they were sitting on 350 billion dollars in FX if you believe some, of
450 billion to believe others. They have been bullsih gold for ages. But if China sells
treasuries, Russia will continue to sell theirs also. The economic war on Russia is already
worthy of WWIII, thus Russia should have only one goal, "To kick T-Bills in the balls when
they get the most kick for their efforts."
America lives by the Dollar, prints it and buys a consumer bonanza,
energy and the greatest military on earth. I suggest to you that fully 1/2 of that spending is
deficit, money printing or T-Bill selling. China, Russia and Iran should likely do what they
can to hurt the dollar, as the dollar is America's primary support, 1/2 our federal spending
is borrowed.
"...He suggested that major global policy shifts should emphasize government spending as
opposed to austerity, adding that countries should recognize that competitive devaluations do
nothing but allow temporary respite from the overreaching global problem of too little aggregate
demand versus too much aggregate supply. "
"...He suggested that major global policy shifts should emphasize government spending as
opposed to austerity, adding that countries should recognize that competitive devaluations do
nothing but allow temporary respite from the overreaching global problem of too little aggregate
demand versus too much aggregate supply. "
"...Overall, Gross said "super-size" August movements in global stocks are but one sign that
something may be amiss in the global economy itself, China notwithstanding."
"..."Cash or better yet 'near cash' such as 1-2 year corporate bonds are my best idea of
appropriate risks/reward investments," Gross said. "The reward is not much, but as Will Rogers once
said during the Great Depression – "I'm not so much concerned about the return on my money as the
return of my money.""
NEW YORK (Reuters) - Bond guru Bill Gross,
who has long called for the Federal Reserve to raise interest rates, said on
Wednesday that U.S. central bankers may have missed their window of opportunity to
hike rates earlier this year and doing so now could create "self-inflicted"
instability.
He suggested that major global policy shifts should emphasize government
spending as opposed to austerity, adding that countries should recognize that
competitive devaluations do nothing but allow temporary respite from the
overreaching global problem of too little aggregate demand versus too much
aggregate supply.
The neutral rate is the point at which the rate is neither stimulative nor
contractionary.
The Fed seems intent on raising the federal funds rate at its policy meeting
this month if only to prove that it can begin the journey to normalization, said
Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund (JUCAX.O).
"They should, but their September meeting language must be so careful," that
"one and done" is an increasing possibility, Gross said. The "one and done"
approach represents the Fed raising rates once and not again, at least for the
next six months, Gross said.
"The Fed is beginning to recognize that 6 years of zero bound interest rates
have negative influences on the real economy – it destroys historical business
models essential to capitalism such as pension funds, insurance companies, and the
willingness to save money itself."
A decline in saving would lead to other problems like decreases in investment
and long-term productivity, he added.
Gross said: "The global economy's
finance-based spine is so out of whack that it is in need of a major readjustment.
In this case, even the best of chiropractors could not even attempt it. Nor would
a one-off fed fund increase straighten it out."
He suggested that major global policy shifts should emphasize government
spending as opposed to austerity, adding that countries should recognize that
competitive devaluations do nothing but allow temporary respite from the
overreaching global problem of too little aggregate demand versus too much
aggregate supply.
"It is demand that must be increased – yes, China must move more quickly to a
consumer-based economy but the developed world must play its part by abandoning
its destructive emphasis on fiscal austerity, and begin to replace its rapidly
decaying infrastructure that has been delayed for decades," Gross said.
Overall, Gross said "super-size" August movements in global stocks are but
one sign that something may be amiss in the global economy itself, China
notwithstanding.
Fiscal and monetary policies around the world now are not constructive or
growth enhancing, nor are they likely to be, Gross said. "If that be the case,
then equity market capital gains and future returns are likely to be limited if
not downward sloping."
Gross said cash is king in this environment.
"Cash or better yet 'near cash' such
as 1-2 year corporate bonds are my best idea of appropriate risks/reward
investments," Gross said. "The reward is not much, but as Will Rogers once said
during the Great Depression – "I'm not so much concerned about the return on my
money as the return of my money."
High-quality global bond markets offer
little reward relative to durational risk, he added. Private equity and hedge
related returns cannot long prosper if global growth remains anemic, Gross said.
(Reporting By Jennifer Ablan; Editing by
Chizu Nomiyama)
China oil demand is growing modestly 3% a year, which is actually extremely fast for such a
large economy. Moderation in China demands started long ago so this is no news. so what we are
seeing is sentiment. Sentiment on all commodities is negative right now Capital investment in new
oil development this year at least 25% globally and 50% in the USA. The next year it can be worse.
Oil supply will eventually reflect this.
Worries about China and near-record production from OPEC and the U.S. have knocked oil prices
below $40 a barrel. But the markets may have beaten up crude a little too much, according to one
energy analyst.
"The markets have moved sideward for essentially the last 12 months and this year, when the crash
really happened, we were 2% lower on the S&P year-to-date…we were down 13% for the transportation
index, so the internal of the market has been weak," Faber said during an interview on FOX Business
Network's Cavuto: Coast to Coast.
He added that global markets have realized deceleration in China's
economy is worse than "optimistic" fund managers and strategists predicted.
Faber said it would not be easy for China to get its economy growing the way it once was. It it
decellerating more then most expect.
"An economy like China is not like a car where you just drive around the corner," he said. "The
Chinese economy cannot be stimulated meaningfully for the time being-it will take time."
Recently, China's stock market troubles hit U.S. markets. Faber explained why Wall Street is impacted
by negative news out of China.
"You look at announcements of Hewlett-Packard, United Technologies, car manufacturers… they have
a large exposure to China, and when the Chinese economy slows down, what really drove the growth,
namely capital spending in China, and consumption in China slows down, so in July, car sales in China
were down 7% year-over-year," he said.
Exemplary of The Guardian's forecasting where Russia is concerned – and The Guardian never met a
Russian it didn't hate, unless they were an oligarch expat, a political dissident or a member of
Pussy Riot – is this gem by The Guardian's "Economics Editor", Larry Elliott;"Russia
Has Just Lost the Economic War With the West".
For those who don't remember when the west's
economic war against Russia started, it actually kicked off with a skirmish, in which the USA
stopped service in Russia to holders of Visa and Mastercard at certain sanctioned banks in Russia, back
in the spring of 2014. Customers found that their cards did not work and their accounts were frozen.
Russian media promptly pointed out that American credit-card companies "had a record of bowing to
political decisions from Washington"; the government imposed a security deposit fee equal to two
days worth of transactions in Russia, which would cost the companies $1.9 Billion (Visa) and $1 Billion
(Mastercard), and Morgan-Stanley
issued a report which suggested the two credit-card giants would be better off terminating their
operations in Russia, where they together had 90% of market share. For his part, the Russian president
announced that Russia would
develop its own national payment system and greatly reduce its dependence on western credit-card
companies.
It's hard for me to see that as a western victory. Visa and Mastercard
squealed like pigs, Russia
introduced a prototype domestic card (Mir) which Mastercard signed on to co-brand, and Mastercard
and Visa
both humbly signed on to Russia's national payment system, which moves processing to Russia.
This results in a huge loss of financial control for the western-based cards, and a bigger one is
coming when Russia introduces its
national replacement for SWIFT, the Society for Worldwide Interbank Financial Telecommunication.
Western regulatory authorities have long been accustomed to using SWIFT to read other countries'
financial mail, and a few years back, the USA pressured the supposedly non-partisan system to shut
out Iran. It's unlikely America would have tried that with Russia – especially since European courts
ruled that it was illegal – but a couple of big-mouthed American senators started hollering for it
to be done, and that was enough.
You would think Larry Elliott would have learned something from that, but it is apparent that
he did not. He had all summer and autumn to form an assessment of how things were lining up, and
he guessed wrong.
"The west knows all about the vulnerability of Russia's economy, its creaking factories and
its over-reliance on the energy sector. When the introduction of sanctions over Russia's support
for the separatists in Ukraine failed to bring Vladimir Putin to heel, the US and Saudi Arabia decided
to hurt Russia by driving down oil prices. Both countries will face some collateral damage as a result
– and this could be considerable in the case of the US shale sector – but both were prepared to take
the risk on the grounds that Russia would suffer much more pain. This has proved to be true."
Is that so? Well, at least one insight in that passage was accurate – the damage caused to the
U.S. shale industry was considerable. Have a look at
this comical piece in The Economist, which is almost as big a failure at presenting
the world as it actually is as The Guardian; the anonymous author hedges his analysis so
hard that his regular reversals make the reader dizzy. Goodrich Petroleum's debts are six times the
size of its market-value equity – but it says it has ample liquidity and may sell some stuff.
At the start of 2015, it looked like the slaughter among the frackers would be horrific – but only
5 companies actually went bankrupt. The Saudis (treacherous dogs all) have failed to put Houston
out of business – but big services companies such as Halliburton have fallen into losses and small
ones are on life support.
Here's another, in which The Economist does not make the link: the United States has
increased its oil production to 13% of global output – but it
supplies only about half its own consumption. It puts a happy face on this by describing its
increase in production as far larger than its increase in consumption. That is
indeed a bit of good news, but the USA still consumes more daily oil output than something like the
next four nations combined (figures are from 2011), and about 20% of the world's output.
The USA put its head together with its Saudi partners, and worked out a scheme whereby OPEC would
administer a short, sharp shock to the energy markets which would tip Putin out of bed – colour revolution
successful at last, America gets to pick a new government, we've got momentum, baby! But
that's not the way it worked out at all. Who benefits from a weaker ruble?
The resource exporters who are a main source of revenue for the Russian government. Putin remains
as popular with Russians as he has been since his introduction to upper-echelon politics.
Meanwhile, in Europe, Russian sanctions coincided with perfect growing conditions and consequent
overproduction to
kick the British dairy industry in the slats. The Russian dairy market, by contrast,
is surging, with some varieties of artisan goat cheese selling for $14.00 a pound at the supplier
level. German cars and car parts exports to Russia
fell more than 27% between January and August 2014. The Russian food ban is "a
nightmare" for French farmers. Even mighty Apple saw its
smartphone sales cut in half in 2014 – although, despite the crisis, Russian smartphone sales
overall were up 39%. American car brands joined the plunge as
car sales in Russia tanked; however, the ruble began to regain strength in the first quarter
and was the best-performing of more than 170 currencies tracked by Bloomberg – bear in mind that
this is in the face of deliberate efforts to force it down. The tumble in car sales slowed in July
as government incentives began to have an effect – but the
gains were all felt by
Lada and Asian brands, and the only American car to even get on their scoreboard was the Chevrolet
Cruze. Expect western brands across the board to continue to suffer, as market replacement continues
apace.
Let us not gild the lily: the economic war against Russia hurt, and for a day or two there was
reason for western optimism that their attempt to backstab Putin out of office would bear fruit.
But it didn't, and Elliott's brainless rah-rah cheerleading for Washington was torpedoed by Russian
resolve and resilience. The west now has the global opponent it thought it wanted, but market replacement
and a rejection of western institutions within Russia signifies a decisive turning away from the
west that will not easily be reversed, if ever. Vladimir Putin could run over a pensioner with his
car on election day and still cruise to victory without breaking a sweat. None of the west's goals
of economic warfare against Russia have been realized. Not one.
It's still too soon to say whether Russia will weather the storm Washington deliberately set in
motion. But there is every reason to be optimistic if you are Russian, and no reason at all to be
optimistic if you are one of Barack Obama's foreign-policy drones. And John Kerry might as well just
run off a cliff, because he has been an even worse Secretary of State than Hillary Clinton was –
a benchmark I did not ever think to see surpassed, never mind so quickly.
As a recent Russia Insider article warned, there's no surer way to lose the next war than to live
in delusion about your own strength.
Oddlots, August 26, 2015 at 8:31 pm
Hard to pick a favourite line but I think mine is this: "Of course America makes mistakes –
grievous ones, which are scrutinised sharply in its political system and media."
Comical. Errr… Haven't seen much evidence of that for quite awhile friend.
This guy barely has the intellectual ability to run a golf club though his prejudices would
make him welcome in any of them.
Warren, August 27, 2015 at 3:55 am
Lucas is an odious sanctimonious hypocrite. He merely preaches to people who share his prejudices.
ucgsblog, August 24, 2015 at 6:48 pm
Just reread this:
"The west knows all about the vulnerability of Russia's economy, its creaking factories and
its over-reliance on the energy sector. When the introduction of sanctions over Russia's support
for the separatists in Ukraine failed to bring Vladimir Putin to heel, the US and Saudi Arabia
decided to hurt Russia by driving down oil prices. Both countries will face some collateral damage
as a result – and this could be considerable in the case of the US shale sector – but both were
prepared to take the risk on the grounds that Russia would suffer much more pain. This has proved
to be true."
Dang. Oh, oh. Where do I even start? First, I know a few US oil traders; they're in it for
long term profit. They didn't want the risks and don't give two shits about Ukraine. It's why
you don't see them lining up to donate to Ukraine. Second, in order to kill US shale, the Saudis
drove down the price, after informing Russia of their actions. Third, it's not US shale that's
currently driving up the prices, it's Saudi Arabia, and, yep, Russia. US shale is crying "uncle,
uncle!" On top of this, the oil price effectively busted Obama's green energy legacy, or as a
commentator said: "da, ne vezet cheburashke, ne vezet!" Student loans also busted his education
legacy, he's going to be an all around failure. Ouch!
But none of what I said makes that comment stupid. Not a thing. What makes said comment absolutely
asinine, is that by claiming that the Oil Wars were started by US and Saudi Arabia to hurt Russia,
and by additionally claiming that said Oil Wars are continued to be ran by US and Saudi Arabia
to hurt Russia, those idiots effectively gave Russia a powerful weapon to hurt the US financially,
and because Obama got pwnd on the Iranian Deal, (Bob Gates' words, not mine,) the Saudis want
to answer to Russia, which is why they're signing energy deals with Russia like there's no tomorrow.
To be absolutely blunt: the US media gave Putin a proverbial gun to shoot themselves with,
while claiming that they're actually holding said gun to Putin's head. When the proverbial shot
goes off, hilarity will ensue.
As if this wasn't enough, in order to keep US shale somehow functioning, low cost loans are
being made, and the current demand is a must. Low cost loans will only work by keeping the interest
rate at 0.1%. What does that mean? It means that the "poorly performing" Russo-Chinese currencies
have done something that I thought would be impossible a few months ago: they checked the dollar's
aggressive stance. Yes, the dollar is still a power to be reckoned with, but the US can no longer
lead with the dollar; rather, the US must wait until Russia and China attack the dollar, which
they won't do.
Furthermore, demand is dropping. Supply is increasing. US shale is slowly but surely going
bankrupt. In order to prevent that, US must keep interest rates low, meaning that the dollar's
effectiveness is checked, which, according to Elliot, is Obama holding a proverbial gun to Russia's
head. As if this wasn't enough, there's still the potential Greek Switch, which could lead to
the collapse of the Euro. Add the rise of Nationalist Parties in Europe, and you'll see the shift
towards Russia, thus giving Putin the Lisbon to Vladivostok trade route. Combine that with the
Silk Route, as well as India and Pakistan's dispute being solved peacefully by the SCO… do I really
need to keep going here? And remember, according to Elliot, the US has the proverbial gun, so
Putin better give Crimea back, pronto!
marknesop, August 24, 2015 at 9:17 pm
Certainly a much more optimistic forecast, what?? I wonder if Russia actually does know this,
and it is calculated, or is it just a series of big dominoes falling over one by one? It's certainly
true that Saudi Arabia and Russia are a lot chummier than you would expect, given that the former
is supposed to be part of a deal to screw the latter. And you are correct that the further out
on the limb U.S. shale goes to prove to the world that it's still unhurt, the further the drop
will be when the fiction can't be maintained any longer.
I don't really wish the USA any harm – although I despise its government and more or less its
entire political class – and I hope there's no collapse like that because it would hurt a lot
of decent people who didn't do anything worse than believe in The American Dream. Not to mention
our economic fate is inexorably tied to yours. But the global economy does appear to be unraveling
– for the second time in our lives – right before our eyes. Whose economy is hurting, Mr. President?
That's a hell of an analysis. And it's always easier to spot a trend if you're looking for
it. So let's see if you're right – if you are, you're a visionary, because nobody who feels they're
authorized to talk about it sees a picture like that. I don't dispute that some in the back room
see things starting to come apart, but of course they won't say that. Running panics the troops.
ucgsblog, August 25, 2015 at 6:31 pm
Thank you! Russia doesn't know this, but simply reacts in the best possible way possible. It's
like racing a track for the first time, you don't know where it turns, but when it does, you do
the best you can, and eventually, someone is going to have the record time, and someone else will
ask: "did they know?" Nope, they simply adapted, and when it comes to resurging and adapting,
Russia's numero uno.
In terms of US shale, it's not so much that it's going to collapse, but rather, that the capitalization
of US shale will hold back the dollar. The problem with the US political class is rooted in the
two party system, which reduces political debates to "my side yay, your side boo" type of arguments.
These in turn rely more on messaging power, i.e. dollars, which enables those with the money to
work the electoral college to play a hefty role in elections. If we simply abolished the electoral
college… that'd be an improvement, but Republicans and Democrats jointly oppose that.
I'm coming from the trend that was first displayed when Russo-Chinese leaders called the SCO
a "success beyond our wildest dreams". That's my perspective. It's hilarious to see others suggest
that Russia and China will break apart, and even paid analysts are getting pissed off at the bullshit
they have to write, which is why you get articles with "Russia is China's junior partner… Russia
and China treat each other as equals…" where any analyst reading that knows that the writer was
very pissed off at the editor.
As far as panicking the troops, the truth's that there's massive divestment from internationalism
and more and more people are pushing for the Moneyball Model. By the time the rout hits, poor
saps like Julia Ioffe will look around and go "waaa!" but no one will be there to defend them.
And then those whom they fucked in the 1990s will have their vengeance in a trollish way. As for
me, I'll be deciding which brand of popcorn to buy. We have more varieties in California than
almost anywhere else, it's a tough, tough choice. BTW, I'm open to suggestions.
Guy, August 24, 2015 at 10:37 pm
Something i would like to add. There's one more point that i think everyone has overlooked.
Fact that the US dollar is backed by other peoples traded oil means that the US is effectively
relying on that traded oil to support it's currency. International trade, commodities and the
shuffling of paper are what keeps the dollar afloat. If the price of oil drops by let's say $10,
the demand for dollars to buy that oil also falls by $10 across the entire spectrum of the oil
market. This amounts to a direct attack on the dollar price as if a country had dumped that many
dollars. Now we're seeing Chinese trade slow down, also a reduction in demand for dollars, and
the're going out of their way to defend their markets which also involves dumping of dollars.
ucgsblog, August 25, 2015 at 6:33 pm
Thank you! And you're right that both of those processes hurt the dollar; where we might disagree
is a matter of scale. I think that it hurts the dollar slightly, akin to an artillery barrage
to prevent a charge, but leaves the unit in cohesion. I'm unsure if you share that view, or if
you think that it does extensive damage to the dollar/unit.
Guy, August 25, 2015 at 9:40 pm
Well if it really did do extensive damage on it's own would think that it would be more visible
by now. I think the damage i not visible due to the fact that people won't necessarily dump their
dollars just because they don't immediately need them to buy oil. But your analogy is absolutely
correct. I think in the long term this will prevent the fed from printing too much more and facilitate
de-dollarisation by freeing that capital up to be invested in other assets, perhaps not dollar
denominated. It all depends on where the extra capital goes. If it goes back into more trade or
assets that require dollars then there would be no effect. However on it's own the quantity that
we're talking about is rather immense. This effect will become more pronounced when China opens
up it's own gold and commodities exchange because this allows the freed up capital to be funneled
elsewhere.
Regarding your views on the oil market i think you would be interested to read my analysis below.
Ehhh.. it's somewhere down there, not sure how i can link to it. My views are that US shale will
be allowed to die so that the companies can be bought up for penny's on the dollar by predatory
hedge funds and restarted once the price rises again and the crash in oil prices is solely orchestrated
by US banks which have the capital and leverage to short it on the paper market.
karl1haushofer, August 25, 2015 at 12:14 am
But generally low oil benefits the West (because they are net importers) and hurts Russia (because
they are a major exporter). The losses in US shale industry is not a doomsday scenario for the
US economy. The cheap imported oil more than compensates for that. The shale industry can always
be restarted once the oil price goes up again (whether it happens in a year or after ten years).
Russian economy has always been dependent on oil prices though. The fall of Soviet economy started
after the oil price collapsed in the 1980's. The two biggest GDP drops of Russian economy happened
when the oil price bottomed in 2008-2009 and in 2015.
So the writer is right that low oil price hurts Russia while the West mainly benefits from it.
karl1haushofer, August 25, 2015 at 12:27 am
The biggest question for Russia is that if the period of low oil price lasts for a decade how
can Russia cope with it. Easy oil money is not flowing to the economy anymore. Russia needs to
find new (and harder, more difficult) ways to earn money and generate wealth. They have no other
choice if they want to keep the country intact (since economically weak Russia would become an
easier target for disintegration by the West).
Guy, August 25, 2015 at 12:45 am
It won't be priced low for decades. The cure for low oil prices is low oil prices. Eventually
high cost suppliers will go bankrupt, keep in mind that countries such as Venezuela and even Saudi
are struggling. The US most likely won't save it's shale producers. It will use this opportunity
to cannibalism them and then yes restart production when oil prices have gone up, however this
doesn't impact the fact that they will stop production in the short term, which is already putting
hundreds and thousands of people out of jobs.
The recent hiccup by China saw $250billion wiped off the EU markets. Even if they go into a death
spiral Russia is far less affected by this than the EU, US, Japan Etc… due to it's limited exposure
to the global financial system. From what i can see THEY DEFINITELY WILL FOLD FIRST. IMO this
also strengthens Russia's position vis a vis China.
Lastly no ones going to be sitting still and twiddling their thumbs for decades. While i do feel
that more could be done in some sectors, the initiative is there to reorient the economy.
ucgsblog, August 25, 2015 at 6:41 pm
No one is saying that it's a doomsday scenario for either economy, but one has to look at the
greater picture. If Putin was truly worried about the price of oil, he would've screwed over the
Iranian Deal, which would've increased oil price. He didn't. It's more complex than a-good and
b-bad.
Russia needs to divest from oil. Badly. The fall of the oil price is forcing the Russian economy
to do that, when the Russian economy can take the damage. Think of it as having a great workout
– yes, it'll hurt, but you need to go through the pain to make the gain. Russia needs the low
price oil pain to divest. And Russia can take said pain.
Similarly, the US also needs more green energy development, but the low prices of oil is hurting
said development. The US economy isn't recovering as fast as it should. So while Russia's hitting
the gym, US is slouching around, if we are to use my comparison. Which one is going to be better
off in the long term?
The Soviet Economy was stagnating, not falling. The USSR fell due to propaganda damage from within,
not economic damage, i.e. the combination of Perestroika and Glasnost. The EU is repeating said
mistake with Open Borders and Austerity.
As thus, the writer's right in the short term. But most analysts don't care about the short term.
If we did, we'd be working in shorting stocks. We care about the long term, where the effect is
the exact opposite.
Oil traders recently scared off due to an apparent glut of oil in the U.S. received good news
on Monday.
The price of the dominant blend of North American oil jumped by close to 6% in a bit less than
two hours on Monday. It was trading at $48 per barrel for the first time in nearly one month.
By midmorning on Monday, West Texas Intermediate's price was down slightly from its close on
Friday or changing hands at approximately $43.75 a barrel. However, at that time the Energy Information Administration lowered forecasts for oil
output in the U.S. The U.S. pumped over 9.3 million barrels daily of oil during June, about 100,000 less than what
had been initially reported.
It was less than was churned out by the country in May, which was good news to the oil traders
who were scared off due to the oil glut that has been seeing the world pump up to as much as 2 million
more barrels per day that the overall world economy needs during this period of the year. All the excess oil that sits in storage tankers is what drove the price of oil per barrel down
to $38 recently.
The new numbers by the EIA were sufficient to send WTI soaring in price to as much as $48 per
barrel only two hours after the report had been released. Crude prices also were buoyed by an OPEC statement that suggested the oil cartel might be willing
to reduce production until prices were to come back to levels that were higher.
Some traders had interpreted the statement as new evidence that the group, which is led by Saudi
Arabia could be willing to turn the taps off in what is considered a meaningful way. Monday also is the last day of August, and the oil future contract often times has a volatile
day during its last day of a particular month as the traders rush to settle positions prior to the
activity of the previous month starting.
Too complicated. China's politicians are no different from
our politicians (well, a little different - ours may be
sent into exile but theirs, well), they respond to their
constituency: the investor class. Until they don't.
Ridiculing China's government for not understanding
markets is a little rich given the recent history in the
U.S. What I find interesting is the similarity between
China and the U.S.: both share a high level of inequality
and a bubble in financial assets.
What they don't share is fiscal stimulus: China with a
fiscal stimulus on steroids, the U.S. fiscal stimulus
non-existent. If China's economy ascends and the U.S.
economy doesn't, how ironic that China understands
capitalism better than us. How else does one explain all
the China bashing in the U.S.: it's the insecurity,
stupid.
JF said in reply to rayward...
Rayward, very nice.
I am hopeful that chinese officialdom is not measuring themselves or their society on the
basis of whether they obtain hegemon status within the financial system.
I am hopeful that they want stability, rising living standards, and other elements within
their society that fulfill the promises of the US Constitution's Preamble and the 'life,
liberty and pursuit of happiness' phrase from the Declaration.
They believe in money, they believe in markets (not idolatry though), they understand systems
and freedoms-of-order, and they have the US to emulate for their 1.3+ Billion people.
Financial hegemon??
anne said in reply to anne...
The Chinese economy needs to resist global integration of both
The RMB
And
The domestic credit system
The only cost to credit systems are opportunity costs
China has more directions of opportunity than any economy on earth
Throw a dart at a board and grant credit
What is necessary
A viciously punitive system for fraudsters and looters
[ I think the Chinese leadership agrees, but Western analysts seldom understand. No matter,
the passage is interesting, clever and important. ]
Peter K. said in reply to Paine ...
"The Chinese economy needs to resist global integration"
Some random thoughts and brainstorming:
The Chinese economy is delivering rising living standards and wages. Full integration into the
global (Western) system will halt that, you suggest.
However partnership with Western corporations has allowed them access to Western markets and
know-how (tech, etc.)
Their living standards are going up at the expense of the Western job class and to the benefit
of Western corporations and finance.
Is this the "Chinese economy" or their partnership with Western corporations?
What they need to do is sell to their own workers rather than the Western consumer market.
I don't believe the Western financial system is axiomatically all bad. It's under contest.
Dodd-Frank. Who knows, maybe it is. Look at Greece.
What they need are capital controls and financial transaction taxes to slow down the hot
money. All economies need that.
The neoliberals will argue it will slow growth and probably it will but growth will be more
sustainable. Growth needs to be driven by the job class and income gains, not finance and
debt.
Peter K. said...
Barkley Rosser has asked how China is different and how to define it. This appears to go
some of the way. I don't know how much of it is true.
"Last August, we posted our most popular blog piece to date: China's Capital Controls and the
Exchange Rate Regime.
In it, we explained how capital controls make it possible for China to
maintain a fixed exchange rate while policymakers could adjust interest rates to stabilize
their domestic economy.
We also highlighted how these same capital controls are incompatible with the objectives of
making Shanghai a global financial center and the renminbi (RMB) a leading international
currency.
Given the risks inherent in freeing cross-border capital flows, we concluded that the
process of financial liberalization (both domestically and externally) would remain gradual.
Yet, having seen China develop in unprecedented ways in the past, we have been watching to see
if China could also alter conventional paradigms of finance and monetary policy. Could China
do what no one else has done?"
anne said...
Well, it turns out that the "impossible trinity" or "trilemma" – which compels policymakers
to choose only two of three from among free capital flows, discretionary monetary policy, and
a fixed exchange rate – may be more like a physical law than nearly any economic principle we
know....
-- Cecchetti and Schoenholtz
Using a technique Brad DeLong employs:
a) free
capital flows and discretionary monetary policy but not
fixed exchange rate
b) free capital flows and fixed exchange rate but
not discretionary monetary policy
c) discretionary monetary policy and fixed exchange
rate but not free capital flows
d) free capital flows, discretionary monetary policy
and fixed exchange rate
a, b and c are possible, but d is impossible
Which then should China choose a, b or c?
anne said in reply to anne...
A problem is that I find no reason to believe Chinese leaders want free capital flows,
which would mean that c) discretionary monetary policy and fixed exchange rate would be
possible. China should be able to have a discretionary monetary policy and a fixed exchange
rate as long as capital flows are controlled.
The question then is why would China need free capital flows? Should the Chinese leadership
control capital flows, monetary policy would be effective in limiting or quickening growth at
a given exchange rate or over a narrow currency value range as Chinese leadership are
evidently choosing.
JF said in reply to anne...
My answer to your question about why they might want free capital flow is not telling for
those who invest in China - my view is that they want the flow of commodities and some
currencies to come into China. Flowing out, not freely. They can create credit and money all
they want for flow within their jurisdiction, they don't need outsider's 'capital' - but
really like other currencies of value and other things of value to come in.
I think only a few should be putting their hard-money into China. It is their risk, and I wish
them well.
If this population attains an economic system and society like we had in 1965 (not counting
the warfighting stuff at all here) - all the more power to them, and it will be a great place
to invest then - just like the US was in 1965.
Stock market declines around the world would in this view only represent some short-term
financial contagion without a connection to real economic activity.
The second hypothesis is that the collapsing stock prices are linked to a slowdown in economic
activity in China. Such a slowdown will then be passed on through trade linkages to China's
trading partners.
We want to investigate whether the stock market falls in Europe are primarily a financial
contagion problem or whether they are linked to trade exposure to China. We look at the decline
since the start of August until now, compared to the extent to which the respective OECD economy
is linked to China, measured in gross exports to China as a share of GDP.
Contrary to the first hypothesis that this episode is just a matter of turbulence in financial
markets, we can see that in Europe those countries with stronger trade connections to China have
generally suffered bigger losses in their stock markets. We take this as an indication that there
is a disruption in the real economy in China, leading to less demand for European exports to
China that is passed on to European stock markets through trade channels.
For example, if we look at Germany, we can see that the DAX has fallen by around 12% (second
highest in the sample), and also has the highest exports to China as a share of GDP at 2.66%.
Overall, we would warn European policy makers not to take the Chinese crisis lightly. The health
of the Chinese economy is of essence to the global economy and there are reasons to believe that
this could turn out to be a more fundamental cooling of China than previously thought.
I will choose to disagree. I think China going "down" will be a good thing for the US economy
in the short run and it depends on if China can build a consumer base in the long run.
Wall Street
literally knows now they will have to completely overhaul their investment portfolio. You could tell
they hoped in the spring, everything was going back to "normal". Now they know it cannot happen.
They must change as well and we are getting a hissy fit.
Too many econ-bears want China to cause a
credit contraction, but they don't seem to understand, the US IS the credit market. The 2008 financial
crisis was totally a US generated event. Even Europe would have trouble matching it, though a eurozone
collapse would try. Most of the credit risks are born in the US. Outside 98-00, the stock market
provides very little consumer spending.
I was out Saturday to some festivals and people were very optimistic in the future because of
gas prices. The mental damage from the 04-14 spike is starting to recede and people are hopeful for
prices even lower this winter than last. This also helps creditors because debtors have more spare
capacity to take on debt with less risk. Whatever happened to Don? He basically has been screaming
for this day for years. Much like him, I agreed China could not keep the "old" model going on forever
and it was not helping the US economy like people thought. It stole investment from the US and basically
hurt consumers through its manipulation of commodity markets with oil being the most important.
ThomasH said...
I think bubbles would cause limited damage if monetary authorities took seriously their responsibilities
to keep price level trends on target and their actions were such as to persuade markets that they
were serious. (NGDP would probably be a better target, but for these bubble popping issues it
would amount much to the same thing.)
sanjait -> ThomasH...
Yes, yes, yes.
I'm sick of central bankers who allow sagging inflation in a weak demand world,
and then make up every excuse imaginable.
Just hit your target. And if you miss, make it up next year. They talk about inflation like
it's some barely comprehensive force of black magic, but it's just the markets price level response
to a combo of current demand and forward expectations. The targets can be hit if central banks
just commit to hitting them. But instead we get fearful genuflection about how risky are ZIRP
and QE, while a generation of workers goes into year 7 of widespread underemployment.
sanjait -> sanjait...
I should have said: widespread CYCLICAL underemployment.
Paine -> sanjait...
Amen
Dan Kervick -> Peter K....
But Krugman's piece isn't about short term solutions. He says we have to take seriously the
possibility that excess savings and persistent global weakness are the new normal. He's suggesting
we are dealing with a long-term disease, not a short-term
So then the question is, "Why?" Just saying that it's because demand is too low isn't an answer.
Low demand is one of the phenomena to be explained. You can't treat a disease without an explanation
of the cause.
Paine -> Dan Kervick...
Exactly. But it's up to a class based political economy to mobilize the forces behind a true
global maxizer
sanjait -> Dan Kervick...
A few things:
1) You just restated Say's Law as if it were a fact, when it is a known fallacy.
No, output and demand aren't the same thing.
The main thing to notice is that in the short and medium term we can get substantial deviations
from a full employment equilibrium. That's what "weak demand" means. Again I think you were asking
a question to which you actually know the answer, feigning ignorance as a rhetorical strategy.
2) Yes, the world has many problems.
3) No, you don't always have to have an explanation for the cause of a disease to treat it.
From having an intermediate level of biomedical and bioscientific knowledge, I can tell you it
is quite common for diseases to be treated with mysterious etiologies.
In this case, the relevant thing to notice is that higher inflation addresses the problem of
disequilibrium regardless of the cause. It doesn't solve every problem on earth, but it does solve
the problem of a negative Hicksian natural rate of interest, and in doing so, it bolsters the
ability of the economy to bounce back from both shocks and secular stagnation-like forces.
So that's why we need more of it. At the VERY LEAST central banks should be more aggressive
about hitting their stated targets, and IMO they should have higher targets.
Sanjait -> sanjait...
I meant Wickseian natural rate.
Dan Kervick -> sanjait...
"1) You just restated Say's Law as if it were a fact, when it is a known fallacy. No, output and
demand aren't the same thing."
No, you just committed the anti-Say's Law fallacy fallacy :)
If all of the firms in the US committed tomorrow to expanding their annual output by 3%, would
that guarantee that demand would grow by the 3% needed to buy up the additional output? No, of
course not.
But would demand increase by an amount approaching the ballpark of 3%. Yes. Because it is impossible
for firms to increase their output by a given amount without increasing their own demand for their
factor inputs by some amount at least close to that. They can't just squeeze it out of the same
inputs and same quantity of labor.
Dan Kervick -> sanjait...
"So that's why we need more of it. At the VERY LEAST central banks should be more aggressive about
hitting their stated targets, and IMO they should have higher targets."
OK, why? We talk about
this month after month here, and elsewhere, and everybody seems totally convinced that it is really
really really important whet the rate of inflation if 2.5% instead of 1.5%. But nobody every explains
why in cogent terms.
How many people do you know in the business world who ever talk about the inflation target?
... ever? What reason do people have for thinking the Fed's "target" for inflation amounts to
a hill of macroeconomic beans?
And what specifically do people want the Fed to do to hit that target?
sanjait -> Dan Kervick...
"If all of the firms in the US committed tomorrow to expanding their annual output by 3%, would
that guarantee that demand would grow by the 3% needed to buy up the additional output? No, of
course not.
But would demand increase by an amount approaching the ballpark of 3%. Yes."
No. This is again just wrong. You ignored the role of capital stock entirely, which is a major
error.
"OK, why? We talk about this month after month here, and elsewhere, and everybody seems totally
convinced that it is really really really important whet the rate of inflation if 2.5% instead
of 1.5%. But nobody every explains why in cogent terms."
As I already stated ... the concept of Wicksellian natural rate of interest is a good place
to start.
Both your comments show you aren't familiar with the concept, because it answers both.
My quick summary would be this: raising the inflation rate pulls the real Wicksellian natural
rate above zero, breaking the liquidity trap.
Because, you see, what makes Say's Law actually work in practice in the medium term is if and
only interest rates are set at the natural rate, but when the natural rate falls below zero (due
to shocks, secular stagnation, whatever), then we end up with prolonged demand slumps.
Google search for Wicksell and liquidity trap before you go telling me about the supposed Say's
Law fallacy fallacy.
The very simplified version of the story is this: inflation boosts demand by making it more
expensive to sit on idle money.
It also has the added benefits of whittling away nominal debts and overcoming sticky price
problems that allow markets to clear, which are also significant.
sanjait -> sanjait...
Here's an even simpler version:
a) Business investment, housing construction, auto purchases
and other components of demand of various types based on credit will, all else equal, be higher
if real interest rates are lower.
b) At or near the zero bound, raising the rate of inflation results in lower real interest
rates on short to medium term debt instruments.
But still, before you go quibbling with that in some small way or claiming "nobody ever explains"
why higher inflation would be useful, do go read about the Wicksell natural rate of interest.
Amileoj -> sanjait...
I get the Wicksellian story, but there are at least three largish problems with it:
a) Following a collapse in aggregate demand, the effect of lower real interest rates might
well be swamped by the effects of lower expected returns and less robust job prospects. Let money
be as cheap as you will. If I think I'm not going to be able to sell any new output, or make any
new payments, I'm still unlikely to borrow more. The idea that there simply must be price of credit
(a 'natural' rate), at which all of these bench sitters will get in the game, and clear the glut,
seems to me a lot more like a postulate than a conclusion warranted by logic & evidence.
b) While it's true that a lower real rate will help debtors make existing payments, it also
diminishes the income of creditors. The net effect would seem to depend entirely on the relative
propensities to consume, but either way there's likely to be a fair amount of cancelling-out.
c) Finally, since the CB cannot directly increase spending (not at least without the cooperation
of the fiscal authority), the whole argument turns on the premise that the central bank can engineer
higher inflation by getting investors/consumers to think higher inflation is coming. In other
words, investors/consumers must be convinced that the central bank will bring something about,
that it has no direct means to bring about, and this expectation, will substitute for the lack
of such means. The evident circularity here doesn't exactly inspire confidence in the CB's ability,
never mind its willingness, to 'credibly promise to be irresponsible.'
Dan Kervick -> sanjait...
"As I already stated ... the concept of Wicksellian natural rate of interest is a good place to
start."
No, that's a very bad place to start. Keynes refuted that kind of thinking almost 80
years ago. There is no magic full employment interest rate.
"My quick summary would be this: raising the inflation rate pulls the real Wicksellian natural
rate above zero, breaking the liquidity trap."
No, even among the defenders of that line of thinking, that's not how it works. The Wicksellian
real rate does not change as a result of a change in the price level. The idea that Krugman and
others defend is that, given the fact that there is a nominal zero bound, by having higher inflation
the real interest rate can fall into negative territory. (3% inflation with a 1% nominal rate,
for example, equals a negative 2% real rate). So if the Wicksellian natural rate is negative,
the inflation allows the real rate to fall to the natural rate.)
The problem is that there is no reason to believe that such a thing as the Wicksellian natural
rate exists.
Amileoj -> ThomasH...
I agree with one stipulation: monetary authorities who took such responsibilities seriously would
need to promptly & publicly place their monetary tools at the disposal of the fiscal authorities.
The most useful thing a central bank could do in such a circumstance would be to announce that
interest rates on government debt will stay at the lower bound, no matter how large a deficit
the government decides to run, until income output and employment are restored to at least their
pre-crisis levels.
This would be QE with a purpose--namely, to enable a real upside transmission mechanism that
monetary policy alone invariably lacks.
Paul Mathis said...
"[G]overnment spending and debt aren't problems in the current environment."
When have government
spending and debt ever been a problem since FDR took us off the gold standard in 1933? Our national
debt is more than 800 times greater since then and we have become the largest economy on the planet
with the strongest military. We also overcame the Great Depression and won WWII because of the
debt.
The debt fear mongers -- Ron Paul, Tom Coburn, Alan Simpson -- have been dead wrong for years
about the debt and yet everyone in D C worships at the altar of the balanced budget. Even Krugman
won't give up his fears about the debt. Obama's 75% deficit reduction during the worst recession
in 75 years is the main reason for our slow economic and wage growth. Enough of this nonsense!
Paine -> Paul Mathis...
One the one side
Vicious no holds barred brutes
On the other side
debt hamlets
pgl -> Paul Mathis...
"Our national debt is more than 800 times greater" You love BIG numbers. What has happened to
the price-level? To population? To real per capita income? Multiply these three and you get another
really BIG number!
"Even Krugman won't give up his fears about the debt."
WTF? Was Casper the friendly ghost lurking behind him when he wrote his latest?
Paul Mathis -> pgl...
Do the debt fear mongers ever talk about the price level? Do they talk about per capita debt?
Do they talk about per capita income?
No of course not. They only talk about the total sum of
the debt and "your share." They don't even relate it to GDP! But go ahead and explain why we should
be worried about the debt. I'd love to hear it especially since we can print money to pay it at
any time.
Krugman has never completely backed away from his own fear mongering about the debt:
"But my
prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible
governments usually do: by printing money, both to pay current bills and to inflate away debt.
"And as that temptation becomes obvious, interest rates will soar. . . But unless we slide
into Japanese-style deflation, there are much higher interest rates in our future." http://www.nytimes.com/2003/03/11/opinion/11KRUG.html
Paine -> Paul Mathis...
PK joined the highly partisan attack on little bush and his wealth building top down tax cut
I
recall the absurd dembots hysterics about run away deficits etc.
Yes PK needs to fully confess self criticize and beg us to forgive him
But he really has fear of the open budget school of Fay wray etc. He has an inner VSP he hasn't shot in the head .....yet
Paul Mathis -> Paine ...
Dubya's deficits never exceeded 3.5% of GDP, yet Krugman described them as a "trainwreck" and
"a fiscal crisis that will drive interest rates sky-high."
His explanation for inexplicably
low interest rates:
"I think that the main thing keeping long-term interest rates low right now is cognitive
dissonance. Even though the business community is starting to get scared - the ultra-establishment
Committee for Economic Development now warns that "a fiscal crisis threatens our future standard
of living" - investors still can't believe that the leaders of the United States are acting
like the rulers of a banana republic."
The U.S. as a "banana republic?" Really?
pgl -> Paul Mathis...
"Dubya's deficits never exceeded 3.5% of GDP". But debt/GDP started another upward path even during
a period of prosperity. Oh yea - they would have solved that by Social Security cuts. You and
Paine are not worried about this but you don't get their agenda.
Paul Mathis -> pgl...
Wrong pgl
"But debt/GDP started another upward path even during a period of prosperity."
Dubya's debt/GDP
peaked at 3.4% in 2004 as did his real GDP. Both then declined for the next 3 years.
I'm not worried about the debt at all and I am still waiting for your explanation of why I
should be. Perhaps you can also explain why the surpluses during the entire decade of the 1920s
were good in light of what happened immediately thereafter.
pgl -> Paul Mathis...
"Dubya's debt/GDP peaked at 3.4% in 2004 as did his real GDP."
You are clueless. Debt and deficits
are not the same thing. Learn basic definitions.
pgl -> pgl...
Federal debt/GDP. It was not a mere 3.4% in 2004 and it did continue to rise:
Pedantic loop holing again eh pgl. You know what he's saying you have no answer beyond bluster
Mr bluster !
Paul Mathis -> pgl...
"Debt and deficits are not the same thing." Well duh! I never said they were. Learn to read.
half-mast tailgate streamlining -> pgl...
"Debt and deficits are not the same thing. Learn"
~~pgl~
Not identical but vitally intertwined. Deficits can lead to debt, but debt service can
lead to deficits. Do you see the recursion? The retroflexive self-reinforcement that can spiral
upward?
No the spiral really doesn't matter because we owe it all to ourselves, to our own wealthy
folks. Hell! They actually enjoy the debt servitude that we shoulder. No! Owning it to ourselves
is not the problem. The spiral upward is not a problem, unless . . .
Unless we are also the jokers who print up the GTF, global Triffin fiat. No! We don't make
big bucks from the print jobby that foreigners buy from us with their goods and services, but
But the amount per capita is better than a kick in the butt. We don't want to lose that concession
until we are independently wealthy, wealthy enough to stop burning up the resources that will
morph into the kind of CO2 that will destroy the human species. Then again we definitely deserve
to be trashed.
pgl -> Paine ...
Partisan attacks? The entire purpose of those tax cuts was to give to the rich as they tried to
take for the poor. Sorry but that is CLASS WARFARE.
Paine -> pgl...
The class war is won with solid attacks not shoddy opportunism that appears to certify the deficit
fetish
pgl -> Paul Mathis...
"Do the debt fear mongers ever talk about the price level? Do they talk about per capita debt?
Do they talk about per capita income?"
Not the fear mongers and I don't take their rants seriously.
But those who want to do real analysis do.
Paul Mathis -> pgl...
Fear mongering about the debt is political and those who do it should be refuted with all available
facts. Serious economic analysis has NOTHING to do with our debt discussions over the past 6 years.
People who know facts should use them to stop the debt fear mongers who have no interest in serious
analysis. That should be obvious by now.
pgl -> Paul Mathis...
Listen - I am not Chris Christie or Jeb Bush. And I have called for fiscal stimulus. So enough
with this straw man nonsense.
Paine -> pgl...
Chris C is your bench mark ?
Talk about a low bar
Peter K. -> Paul Mathis...
"Obama's 75% deficit reduction during the worst recession in 75 years is the main reason for our
slow economic and wage growth. Enough of this nonsense!"
Exactly. But the Republicans in the House helped push it.
Paul Mathis -> Peter K....
Obama wanted MORE cuts than Repubs had done: In his 2013 State of the Union speech, Pres. Obama
noted that the deficit had decreased "more than $2.5 trillion" under his administration and the
vast majority was spending cuts. Also, he wanted another $1.5 trillion of deficit reduction.
Obama negotiated at length with Repubs to get a "Grand Bargain" only to fail because Cantor stabbed
Boehner in the back at the last moment. Obama is definitely responsible for the 75% deficit reduction
and he is very proud of it.
pgl -> Paul Mathis...
I never supported the Grand Bargain. I have consistently based this GOP austerity nonsense. So
has PeterK. You are preaching to the choir.
Paul Mathis -> pgl...
I'm not letting Obama off the hook for our economic debacle and I am calling out Krugman too.
Enough with the nonsense!
EMichael -> Paul Mathis...
BS
Nothing quite like sound bytes in a political speech to "prove" a point.
Yeah, Obama should have said I got my ass kicked by these nut jobs running our country.
The Rage -> Paul Mathis...
Debt is irrelevant in some respects. QE failed because it was being absorbed into a global financial
system that was geared toward Asian,Commodity and domestic financial bank accounts. The real problem
since 2003 triggered by the end of the cold war was the disinvestment nationally in favor of Asian
development and Oil producing countries ate it up. If you really want to "improve" growth in the
US, this system had to go. Don has been talking about this for years on this blog.
Just surging public debt to keep a domestically bad system in place, is bad policy. Time for
capital to diversify and bring some of that money back home. China will have to change. If they
want to really challenge the US, they will need a consumer base strong enough to do so.
Paul Mathis -> The Rage...
"Just surging public debt to keep a domestically bad system in place, is bad policy."
How about
cutting the deficit 75% during the worst recession in 75 years? Is that good policy?
The Rage -> Paul Mathis...
Cutting the deficit after it surged 75% is ad hoc
Paine -> The Rage...
Dollar Finance is unlimited
Forget the flight
The fed in he peoples hands can fund everything
We need to forget these artificial hedge rows
created by and for
Private profit driven finance capital
We can build a giant fully automated green social production system
All with uncles funds
RGC said...
The counterpart to the global savings glut is the global private debt glut.
The giant vampire squid
has sucked so much blood of the common citizenry that demand is anemic.
The solution is to redistribute the blood from the squid to the citizenry and all will be well.
EMichael -> RGC...
No, that is not true.
The squid has sucked all the income into the way upper class.
Paine -> EMichael...
We need a wage boom
And we've known how to trigger one since 1940
Paine -> Paine ...
And I don't mean build a huge new war machine
pgl -> Paine ...
But 1940 was a huge new war machine. No - we need to build school buildings, infrastructure, and
green technology. In contrast to Carly - let's regulate so the private sector has to innovate.
Umm... not that I would trust anything from Mankiw,(and the MA proposal that he supports from what
I've read of it is crap), but an carbon tax-and-rebate scheme is an essential, though not sufficient
measure, and rebating it through the FICA tax, with a progressive tilt, and building it out from
there would be the most logical way to do it on the national scale.
john c. halasz -> Paine ...
Public investment and indicative planning are also essential, to transform infrastructure and capitals
stocks are also essential. I object to the idea that any tax should be used to funding that rather
than rebated. But my intuition is that the tax-and-rebate is the more readily attainable, given the
current politics, and has the additional benefit of bringing in virtually the entire population into
the issue, rather than being an "elite' concern, once the effects of rebates are felt, enabling further
required programs and projects. (Of course, stripping away the $500 bn in annual fossil fuel subsidies
would also surely help.)
Ellis -> EMichael...
You're right.
Where did the supposed "savings glut" (they're just saving too much money! Ha! Ha!
Ha!) come from.
"Corporate profitability is not translating into widespread economic prosperity.
The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the
449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that
period those companies used 54% of their earnings-a total of $2.4 trillion-to buy back their own
stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their
earnings. That left very little for investments in productive capabilities or higher incomes for
employees."
So rather than invest profits, companies distribute their profits right back to their shareholders
in the form of dividends and stock buybacks, trillions of dollars worth. Those investors place their
holdings with financial companies.
So, the glut in savings is really a glut in uninvested capital.
What's so disgusting is that the money could be put to work by producing the things that we need
and in the process create jobs. Instead, it is simply used to blow up financial bubbles... and crises
and depressions.
And no one holds them accountable. No one even dares mention their name... capitalists.
Dan Kervick said...
"a huge excess of savings over investment in China and other developing nations... He worried a bit
about the fact that the inflow of capital was being channeled, not into business investment, but
into housing; obviously he should have worried much more. ..."
Yes, good.
"What's ... important now is that policy makers take seriously the possibility, I'd say probability,
that excess savings and persistent global weakness is the new normal."
But *why* is it the new normal? What is going on now? What would explain this phenomenon?
A problem perhaps is that the people with wealth to invest, and the people who manage that wealth
for them, to are dedicated to the proposition that all investors are entitled to a safe, risk-free,
easy money return on their investments at a level that exceeds the growth rate.
So what have they done? Expand the "financial sector" in desperate pursuit of these elusive real
returns. That includes all of the schemes involved in squeezing, wringing, twisting and scamming
returns out of the economic flows generated by the people who are actually producing the value. The
financial sector isn't just
What is to be done about it? Well one thing that must be done is more assertive action to pull
more of that accumulated wealth out of the safety-and-rent-farming sector and push it into real productive
activity - at the firm level, the state level, the national level and the global level.
Use more supply side sticks instead of supply side carrots. Instead of giving concentrated wealth
another tax break and begging them to, pretty-please, invest their wealth in economic expansion instead
of retaining earnings and paying dividends, threaten them with an additional punitive tax if they
*don't* invest a greater proportion of profits in expansion.
Also, the public has the option of simply *taxing wealth away* from the rent-farmers and using
it for smarter, more coordinated, and more strategically ambitious purposes.
Jeff Bezos has one thing right: Amazon plows most of its profits back into growing Amazon instead
of rewarding stock-holders in the short-term. (Of course he pays himself a buttload of money, which
is recorded as a "labor cost" instead of profit, and stiffs his own workers, so it's not a perfect
object lesson.)
Another problem is the graying of the developed world. This is giving us a world in which a dwindling
proportion of workers have to produce more and more output to provide for the consumption needs of
an expanding proportion of non-producing population. The greater abundance of retirees and near-retirees
has given us a greater volume of funds in desperate search of real returns from a productive sector
that is struggling to supply them, and has blown up the financial sector to supply dubious nominal
returns through semi-Ponzi bubblicious asset price inflations as a substitute.
Anyway, if the market system by itself is not-generating the right balance of consumption to investment,
and is not succeeding in channeling savings into productive investment and out of rent-farming and
ponzi-economy fluff, then it is the job of government to do this job for us.
Dan Kervick -> Dan Kervick...
The paragraph that reads,
"So what have they done? Expand the "financial sector" in desperate pursuit
of these elusive real returns. That includes all of the schemes involved in squeezing, wringing,
twisting and scamming returns out of the economic flows generated by the people who are actually
producing the value. The financial sector isn't just"
was supposed to be completed this way:
"So what have they done? Expand the "financial sector" in desperate pursuit of these elusive real
returns. That includes all of the schemes involved in squeezing, wringing, twisting and scamming
returns out of the economic flows generated by the people who are actually producing the value. The
financial sector isn't just the sector that channels savings into productive investment; it also
contains the sub-sector that manufactures new ways of collecting rents."
JF -> Dan Kervick...
Let's see, the NY FED just released a study reporting that around 2007 the trading units of the banks
were operating with leverage at 48-1.
We need to stop using the loanable funds theory when discussing policy and the facts - yes the
banks used lots of "schemes involved in squeezing, wringing, twisting and scamming" but they did
not need to concern themselves about returns from the economic flows generated by the people who
are actually producing the value - they created the lending accounts, out of whole cloth. That is
where the new "wealth" came from, it came from account-entries used to fuel financial asset positions,
huge amount 2000-2007, conspicuous years. A glut of these positions were created, divorced from those
who produce real value in terms of goods and services that can profit from the test of good markets.
We have a new generation of "investors" who have learned that financial asset trading, using leverage,
is how wealth is produced - sure these financial positions are owned and traded as financial positions
- but is that the production function economics of Smith, Wicksell, Bagehot, Marshal, Keynes, etc.?
What should the FED do instead of what it is doing now (or contemplating as some are apparently,
with regard to raising payments being made to banks for donig nothing with the intention of causing
credit prices to rise affecting all aspects of the economy)?
Paine -> Dan Kervick...
The Chinese elite resists the obvious solution: Helicopter money on a grandiose scale
Send the peasants a 30 year social dividend.
In a series of pay outs and through a payment system that becomes the infrastructure of a vast state of the art transfer system
Based on plastic cards with chips
Paine -> Paine ...
State of the art railroads are hardly as valuable as state of the art payment and depository systems
Do it comrades DOIT Nooooooow
pgl -> Paine ...
The Chinese are putting us to shame on investment in infrastructure. But they save so much that they
could be financing our infrastructure investment.
Paine -> pgl...
They need to sell more household durables
To their vast lower middle income households Thru a subsidy sell off of great leap proportions
"...You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal
government, and will figure out that with a more assertive and economically engaged central government
dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation,
cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely
avoidable mistake."
Rising Anxiety That Stocks Are Overpriced: Over the five trading days between Aug. 17 and
Aug. 24, the U.S. stock market dropped 10 percent - the official definition of a "correction,"
with similar or greater drops in other countries. ...
But there are reasons to question whether
this was a quick, effective slap on the wrist, or if the market is still too overactive, and thus
asking for a more extended punishment. ...
It is entirely plausible that the shaking of investor complacency in recent days will, despite
intermittent rebounds, take the market down significantly and within a year or two restore CAPE
ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on
Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical
average is not a floor.
Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious
"just don't know" situation, where the stock market is inherently risky because of unstable investor
psychology.
The post-2008 recovery has been the worst on record in terms of the recovery of both growth
rates and jobs. As has been well-discussed and well-recognized by almost everyone here, the employment-to-population
rate was dramatically lowered as a result of the recession, and has grown at a snails pace since
then, and come nowhere near to recovering its previous level. There is no clear evidence that
extraordinary monetary policy measures have had any significant impact on recovery whatsoever
relative to the baseline recovery trend that could be expected anyway in the absence of such policies.
I admit it is an extremely hard question to answer, since the economy has had to deal with
an MIA federal government this time.
anon said...
The Fed wants to raise interest rates:
- in the hope of preserving there institutional economic significance,
- out of a sense of loyalty to the Fed's history of financial influence using interest rates,
- because using rates to influence economic events increases their professional comfort,
- and because their economic grad school training was to fear wage push inflation above all
else (they seem to believe that if inflation exceeds 2% it is a harbinger of hyper inflation).
Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding.
The precision of models is ersatz, more or less inversely proportional to its real world relevance.
The delusion of being a scientist is critical to their professional self-respect.
Dan Kervick -> pgl...
This is an area in which you seem to be persistently incapable of avoiding lies. You know very
well that are a large number of ambitious long-term projects the US could do that are non-military,
have nothing to do with immigration and could boost output tremendously.
You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."
That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.
That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet partisan
servings to keep Democrats' attention riveted on the foibles of the Republicans.
That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green
Lanternism".
You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal
government, and will figure out that with a more assertive and economically engaged central government
dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation,
cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and
completely avoidable mistake.
40% of this country has household income of under $40,000 per year. If we remove the plutocratic
capitalist stranglehold on this economy, use government to more efficiently distribute and invest
our national wealth, and demote private enterprise to its proper subordinate place, we could double
that rapidly and drive a wave of high-growth social transformation with all of the liberated economic
energy.
This is going to happen. Take your pick: we're either going to get the somewhat fascistic and
racist Trump version on strong government or democratic socialist version. The Ivy League twits
hanging on for dear life to their established networks, revolving doors, tit-for-tatting, sinecures
and don't-rock-the-boat regime of stagnant managerialism are going to butts handed to them by
history.
pgl -> Dan Kervick...
Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are already
doing at Census.
Dan Kervick -> pgl...
The Census doesn't and can't combine income distribution numbers with growth numbers on a monthly
and quarterly basis. The BEA could collect this data, but doesn't, because it is part of their
mission to pretend class conflict doesn't exist.
The top quintile in the US pulls down about 50% percent of the income. That means we could
get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by less
than 1/2 a percent.
Is that what's happening? Inquiring minds want to know. It seems like a natural mission for
the BEA to track this. But they don't.
This establishment stooge can't care less about employment. All he cares is 0.1%. . "..."and the labor market is approaching our maximum employment objective..." I stopped
reading there." . "...The wealthy special interests really want a rate hike. There must be a large amount of
profit riding on a rate hike." . "..."The Fed is being clear. They are not going to be responsible for full employment. Full
employment is up to Congress, fiscal policy and the administration. Of course, the GOP Congress will
block fiscal stimulus." We are ruled by idiots. " . "...Idiots [pandering to those who will get a larger piece of the pie, and] who don't care that
the "pie" shrinks. When the fed goes insane on rates the shorters (wall st gamblers/hedgers) and the
cash hoarders will celebrate. It is not idiocy it is [class treachery] selling out the masses for
the rentier class. A skirmish in the class wars, maybe Bernie would comment." . "...Industrial Deflation is what causes inflation to look "low". This was a problem in the
00's when consumer price inflation was being covered up by deflation in industrial prices. The way
prices are computed and trimmed don't always reflect reality. The deflation caused by the tech
revolution for industrial production needs to be outright stripped out of indices.
The mythical "full employment" or a overheated economy doesn't imply inflation is coming either.
This is where I reject most of the analysis on this board. Inflation didn't see it in 97 or
especially in 05. It failed. All you have left is to guess. "
. "...What Fisher and the other governors can't and won't say is that they are very worried about
another major global downturn, and they are worried about the fact that if interest rates are not
higher when that recession hits, they will have no room to lower them sharply when they need to."
Let me start by asking if you feel like it gives the Fed a bad image to have a conference
in an elite place like Jackson Hole. Why not have the conference in, say, a disadvantaged area to
send the signal that you care about these problems, to provide some stimulus to the area, etc.?
I am delighted to be here in Jackson Hole in the company of such distinguished panelists and such
a distinguished group of participants.
Okay then. Let me start be asking about your view of the economy. How close are we to a full recovery?:
Although the economy has continued to recover and the labor market is approaching our maximum
employment objective, inflation has been persistently below 2 percent. That has been especially
true recently, as the drop in oil prices over the past year, on the order of about 60 percent,
has led directly to lower inflation as it feeds through to lower prices of gasoline and other
energy items. As a result, 12-month changes in the overall personal consumption expenditure (PCE)
price index have recently been only a little above zero (chart
1).
Why are you telling us about headline inflation? What about core inflation? Isn't that what the
Fed watches?
...measures of core inflation, which are intended to help us look through such transitory price
movements, have also been relatively low (return to chart 1). The PCE index excluding food and
energy is up 1.2 percent over the past year. The Dallas Fed's trimmed mean measure of the PCE
price index is higher, at 1.6 percent, but still somewhat below our 2 percent objective. Moreover,
these measures of core inflation have been persistently below 2 percent throughout the economic
recovery. That said, as with total inflation, core inflation can be somewhat variable, especially
at frequencies higher than 12-month changes. Moreover, note that core inflation does not entirely
"exclude" food and energy, because changes in energy prices affect firms' costs and so can pass
into prices of non-energy items.
So are you saying you don't believe the numbers? Why bring up that core inflation is highly variable
unless you are trying to de-emphasize this evidence? In any case, isn't there reason to believe these
numbers are true, i.e. doesn't the slack in the labor market imply low inflation?
Of course, ongoing economic slack is one reason core inflation has been low. Although the economy
has made great progress, we started seven years ago from an unemployment rate of 10 percent, which
guaranteed a lengthy period of high unemployment. Even so, with inflation expectations apparently
stable, we would have expected the gradual reduction of slack to be associated with less downward
price pressure. All else equal, we might therefore have expected both headline and core inflation
to be moving up more noticeably toward our 2 percent objective. Yet, we have seen no clear evidence
of core inflation moving higher over the past few years. This fact helps drive home an important
point: While much evidence points to at least some ongoing role for slack in helping to explain
movements in inflation, this influence is typically estimated to be modest in magnitude, and can
easily be masked by other factors.
If that's true, if the decline in the slack in the labor market does not translate into a notable
change in inflation, why is the Fed so anxious to raise rates based upon the notion that the labor
market has almost normalized? Is there more to it than just the labor market?
...core inflation can to some extent be influenced by oil prices. However, a larger effect comes
from changes in the exchange value of the dollar, and the rise in the dollar over the past year
is an important reason inflation has remained low (chart
4). A higher value of the dollar passes through to lower import prices, which hold down U.S.
inflation both because imports make up part of final consumption, and because lower prices for
imported components hold down business costs more generally. In addition, a rise in the dollar
restrains the growth of aggregate demand and overall economic activity, and so has some effect
on inflation through that more indirect channel.
That argues against a rate increase, not for it. Anyway, I interrupted, please continue.
Commodity prices other than oil are also of relevance for inflation in the United States. Prices
of metals and other industrial commodities, and agricultural products, are affected to a considerable
extent by developments outside the United States, and the softness we've seen in these commodity
prices, has in part reflected a slowing of demand from China and elsewhere. These prices likely
have also been a factor in holding down inflation in the United States.
So you must believe that all of these forces holding down inflation (many of which are stripped
out by core inflation measures, which are also low) that these factors are easing, and hence a spike
in inflation is ahead?
The dynamics with which all these factors affect inflation depend crucially on the behavior of
inflation expectations. One striking feature of the economic environment is that longer-term inflation
expectations in the United States appear to have remained generally stable since the late 1990s
(chart
6). ... Expectations that are not stable, but instead follow actual inflation up or down,
would allow inflation to drift persistently. In the recent period, movements in inflation have
tended to be transitory.
Let's see, lots of factors holding down inflation, longer-term inflation expectations have been
stable throughout the recession and recovery, remarkably so, yet the Fed still thinks a rate raise
ought to come fairly soon?
We should however be cautious in our assessment that inflation expectations are remaining stable.
One reason is that measures of inflation compensation in the market for Treasury securities have
moved down somewhat since last summer (chart
7). But these movements can be hard to interpret, as at times they may reflect factors other
than inflation expectations, such as changes in demand for the unparalleled liquidity of nominal
Treasury securities.
I have to be honest. That sounds like the Fed is really reaching to find a reason to justify worries
about inflation and a rate increase. Let me ask this a different way. In the Press Release for the
July meeting of the FOMC, the committee said it can be " reasonably confident that inflation will
move back to its 2 percent objective over the medium term." Can you explain this please? Why are
you "reasonably confident" in light of recent history?
Can the Committee be "reasonably confident that inflation will move back to its 2 percent objective
over the medium term"? As I have discussed, given the apparent stability of inflation expectations,
there is good reason to believe that inflation will move higher as the forces holding down inflation
dissipate further. While some effects of the rise in the dollar may be spread over time, some
of the effects on inflation are likely already starting to fade. The same is true for last year's
sharp fall in oil prices, though the further declines we have seen this summer have yet to fully
show through to the consumer level. And slack in the labor market has continued to diminish, so
the downward pressure on inflation from that channel should be diminishing as well.
Yet when these forces were absent -- they weren't there throughout the crisis -- inflation was
still stable. But this time will be different? I guess falling slack in the labor market will make
all the difference? More on labor markets in a moment, but let me ask if you have more to say about
inflation expectations first.
...with regard to expectations of inflation, it is possible to consult the results of the SEP,
the Survey of Economic Projections, which FOMC participants complete shortly before the March,
June, September, and December meetings. In the June SEP, the central tendency of FOMC participants'
projections for core PCE inflation was 1.3 percent to 1.4 percent this year, 1.6 percent to 1.9
percent next year, and 1.9 percent to 2.0 percent in 2017. There will be a new SEP for the forthcoming
September meeting of the FOMC.
Reflecting all these factors, the Committee has indicated in its post-meeting statements that
it expects inflation to return to 2 percent. With regard to our degree of confidence in this expectation,
we will need to consider all the available information and assess its implications for the economic
outlook before coming to a judgment.
You will need to consider all the available information, I agree wholeheartedly with that. I just
hope that information includes how poor forecasts like those just cited have been in the past, and
the Fed's own eagerness to see "green shoots" again and again, far before it was time for such declarations.
What might deter the Fed from it's intention to raise rates sooner rather than later?
Of course, the FOMC's monetary policy decision is not a mechanical one, based purely on the set
of numbers reported in the payroll survey and in our judgment on the degree of confidence members
of the committee have about future inflation. We are interested also in aspects of the labor market
beyond the simple U-3 measure of unemployment, including for example the rates of unemployment
of older workers and of those working part-time for economic reasons; we are interested also in
the participation rate. And in the case of the inflation rate we look beyond the rate of increase
of PCE prices and define the concept of the core rate of inflation.
I find these kinds of statement difficult to square with the statement that labor markets are
almost back to normal. Anyway, what, in particular, will you look at?
While thinking of different aspects of unemployment, we are concerned mainly with trying to find
the right measure of the difficulties caused to current and potential participants in the labor
force by their unemployment. In the case of the core rate of inflation, we are mainly looking
for a good indicator of future inflation, and for better indicators than we have at present.
How do recent events in China change the outlook for policy?
In making our monetary policy decisions, we are interested more in where the U.S. economy is heading
than in knowing whence it has come. That is why we need to consider the overall state of the U.S.
economy as well as the influence of foreign economies on the U.S. economy as we reach our judgment
on whether and how to change monetary policy. That is why we follow economic developments in the
rest of the world as well as the United States in reaching our interest rate decisions. At this
moment, we are following developments in the Chinese economy and their actual and potential effects
on other economies even more closely than usual.
I know you won't answer this directly, but let me try anyway. When will rates go up?
The Fed has, appropriately, responded to the weak economy and low inflation in recent years by
taking a highly accommodative policy stance. By committing to foster the movement of inflation
toward our 2 percent objective, we are enhancing the credibility of monetary policy and supporting
the continued stability of inflation expectations. To do what monetary policy can do towards meeting
our goals of maximum employment and price stability, and to ensure that these goals will continue
to be met as we move ahead, we will most likely need to proceed cautiously in normalizing the
stance of monetary policy. For the purpose of meeting our goals, the entire path of interest rates
matters more than the particular timing of the first increase.
As expected, that was pretty boilerplate. When rates do go up, how fast will they rise?
With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary
policy influences real activity with a substantial lag, we should not wait until inflation is
back to 2 percent to begin tightening. Should we judge at some point in time that the economy
is threatening to overheat, we will have to move appropriately rapidly to deal with that threat.
The same is true should the economy unexpectedly weaken.
The Fed has said again and again that it's 2 percent inflation target is symmetric with respect
to errors, i.e. it will get no more worried or upset about, say, a .5 percent overshoot of the target
than it will an undershoot of the same magnitude (2.5 percent versus 1.5 percent). However, many
of us suspect that the 2 percent target is actually a ceiling, not a central tendency, or that at
the very least the errors are not treated symmetrically, and statements such as this do nothing to
change that view.
I have quite a few more questions, and I wish we had time to hear your response to the charge
that the 2 percent target is functionally a ceiling, but I know you are out of time and need to go,
so let me just thank you for talking with us today. Thank you.
bakho said...
The wealthy special interests really want a rate hike. There must be a large amount of
profit riding on a rate hike.
The Fed is being clear. They are not going to be responsible for full employment. Full
employment is up to Congress, fiscal policy and the administration. Of course, the GOP
Congress will block fiscal stimulus. Wealthy special interests would like the economy to be
less good by this time next year to tilt the presidential election their way.
ilsm -> pgl...
The fed (Cossacks) works for the .1% (Tsar).
Sandwichman
"and the labor market is approaching our maximum employment objective..."
I stopped reading there.
Peter K. -> Sandwichman...
Yeah. Nice appointment, thanks Obama....
ilsm -> Sandwichman...
Mc Donald's may have to start paying $7.75!!
pgl -> ilsm...
Actually some are paying $9. Oh my - a Big Mac might actually cost something.
ilsm -> pgl...
The big mac is helping out your embalmer.
Joke is most of us cannot afford anything more than a cremator.
Cardiologists follow Mickey D sales!
anne -> Sandwichman...
"and the labor market is approaching our maximum employment objective..." I stopped
reading there.
[ Really, really awful comment but limiting employment is what Stanley Fischer is all about
so the only surprise is in the saying so. ]
pgl -> Sandwichman...
But later he admitted there was ongoing economic slack. He sounded very confused.
Peter K. -> pgl...
On the one hand he's trying to inspire confidence in the economy, cheerlead, and clap his
hands to conjure the confidence fairy.
On the other he's being more realistic which hopefully is their frame of mind when making
interest rate decisions.
One is public relations, one is where the rubber hits the road.
RC AKA Darryl, Ron -> Peter K....
A rubber chicken in every pot :<0
Peter K. said...
"Although the economy has made great progress, we started seven years ago from an
unemployment rate of 10 percent, which guaranteed a lengthy period of high unemployment."
It didn't guarantee it. An insufficient monetary-fiscal mix guaranteed a lengthy period of
high unemployment, wage stagnation and increasing inequality.
But at least inflation remained low and the deficit came down!
ilsm -> Peter K....
If UE rate counted people out longer than 26 weeks......
Italy ( 57.6)
Japan ( 71.8)
Korea ( 62.7)
Luxembourg ( 76.8)
Netherlands ( 76.5)
New Zealand ( 74.9)
Norway ( 81.4)
Portugal ( 74.3)
Spain ( 62.3)
Sweden ( 82.8)
Switzerland ( 81.8)
United Kingdom ( 76.1)
* Employment age 25-54
anne -> anne...
As in the child's game, one of these things is not like the other, the United States
employment-population ratio for men and women, and for women, from 25 to 54 was remarkably
lower than 19 of 24 developed countries in 2014. The exceptions were the austerity beset
countries Ireland, Spain, Italy and Greece as well as Korea in which women are just entering
the workforce in significant numbers.
pgl -> bakho...
"The Fed is being clear. They are not going to be responsible for full employment. Full
employment is up to Congress, fiscal policy and the administration. Of course, the GOP
Congress will block fiscal stimulus."
We are ruled by idiots.
ilsm -> pgl...
Idiots [pandering to those who will get a larger piece of the pie, and] who don't care that
the "pie" shrinks. When the fed goes insane on rates the shorters (wall st gamblers/hedgers)
and the cash hoarders will celebrate. It is not idiocy it is [class treachery] selling out the
masses for the rentier class.
A skirmish in the class wars, maybe Bernie would comment.
Mike Sparrow said...
Industrial Deflation is what causes inflation to look "low". This was a problem in the
00's when consumer price inflation was being covered up by deflation in industrial prices. The
way prices are computed and trimmed don't always reflect reality. The deflation caused by the
tech revolution for industrial production needs to be outright stripped out of indices.
The mythical "full employment" or a overheated economy doesn't imply inflation is coming
either. This is where I reject most of the analysis on this board. Inflation didn't see it in
97 or especially in 05. It failed. All you have left is to guess.
Peter K. said...
Scroll, scroll, scroll:
Thoma:
"I just hope that information includes how poor forecasts like those just cited have been in
the past, and the Fed's own eagerness to see "green shoots" again and again, far before it was
time for such declarations."
Well put. This is probably why markets don't fear an uptick in inflation anytime soon. Quite
the contrary. It's probably partly why longterm inflation expectations are "stable."
A Cautionary History of US Monetary Tightening
By J. Bradford DeLong
BERKELEY – The US Federal Reserve has embarked on an effort to tighten monetary policy four
times in the past four decades. On every one of these occasions, the effort triggered
processes that reduced employment and output far more than the Fed's staff had anticipated. As
the Fed prepares to tighten monetary policy once again, an examination of this history – and
of the current state of the economy – suggests that the United States is about to enter
dangerous territory.
Between 1979 and 1982, then-Fed Chair Paul Volcker changed the authorities' approach to
monetary policy. His expectation was that by controlling the amount of money in circulation,
the Fed could bring about larger reductions in inflation with smaller increases in idle
capacity and unemployment than what traditional Keynesian models predicted.
Unfortunately for the Fed – and for the American economy – the Keynesian models turned out to
be accurate; their forecasts of the costs of disinflation were dead on. Furthermore, this
period of monetary tightening had unexpected consequences; financial institutions like
Citicorp found that only regulatory forbearance saved them from having to declare bankruptcy,
and much of Latin America was plunged into a depression that lasted more than five years.
Then, between 1988 and 1990, another round of monetary tightening under Alan Greenspan ravaged
the balance sheets of the country's savings and loan associations, which were overleveraged,
undercapitalized, and already struggling to survive. To prevent the subsequent recession from
worsening, the federal government was forced to bail out insolvent institutions. State
governments were on the hook, too: Texas spent the equivalent of three months of total state
income to rescue its S&Ls and their depositors.
Between 1993 and 1994, Greenspan once again reined in monetary policy, only to be surprised by
the impact that small amounts of tightening could have on the prices of long-term assets and
companies' borrowing costs. Fortunately, he was willing to reverse his decision and cut the
tightening cycle short (over the protests of many on the policy-setting Federal Open Markets
Committee) – a move that prevented the US economy from slipping back into recession.
The most recent episode – between 2004 and 2007 – was the most devastating of the four.
Neither Greenspan nor his successor, Ben Bernanke, understood how fragile the housing market
and the financial system had become after a long period of under-regulation. These twin
mistakes – deregulation, followed by misguided monetary-policy tightening – continue to gnaw
at the US economy today.
The tightening cycle upon which the Fed now seems set to embark comes at a delicate time for
the economy. The US unemployment rate may seem to hint at the risk of rising inflation, but
the employment-to-population ratio continues to signal an economy in deep distress. Indeed,
wage patterns suggest that this ratio, not the unemployment rate, is the better indicator of
slack in the economy – and nobody ten years ago would have interpreted today's
employment-to-population ratio as a justification for monetary tightening.
Indeed, not even the Fed seems convinced that the economy faces imminent danger of
overheating. Inflation in the US is not just lower than the Fed's long-term target; it is
expected to stay that way for at least the next three years. And the Fed's change in policy
comes at a time when its own economists believe that US fiscal policy is inappropriately
restrictive.
Meanwhile, given the fragility – and interconnectedness – of the global economy, tightening
monetary policy in the US could have negative impacts abroad (with consequent blowback at
home), especially given the instability in China and economic malaise in Europe....
Dan Kervick said...
"At this moment, we are following developments in the Chinese economy and their
actual and potential effects on other economies even more closely than usual."
I think this is probably the most important sentence in the entire speech.
What Fisher and the other governors can't and won't say is that they are very worried about
another major global downturn, and they are worried about the fact that if interest rates are
not higher when that recession hits, they will have no room to lower them sharply when they
need to.
Richard H. Serlin said...
But what about asymmetric loss Dr. Fischer?!
You have to know what that is.
Why don't you think the loss and overall risk is much bigger from pulling the trigger too
early than from pulling the trigger too late?
How is inflation that gets up to 3%, 4%, even higher single digits more of a danger than a
lost decade, severe unemployment (low labor force participation) and underemployment?
Especially when overly high inflation is far easier to remedy?
I really really wonder what you're really thinking.
Richard H. Serlin -> Richard H. Serlin...
And I also seriously wonder how much of it has to do with the fact that no one ever
making these decisions ever has any risk of ever being unemployed without means and with a
family to support.
"...According to Reuters, 50 to 60 hedge funds have taken short positions that account for around
160 million barrels of oil in near term contracts. In fact, the amount of short positions in oil options
and futures now exceeds levels in the great financial meltdown of 2008, believe it or not, despite talk
of a good economy and the Fed needing to raise interest rates. Madness, right?"
"...All these things still don't explain the panic in oil markets other than financially driven
events that aren't directly tied to the supply and demand of oil which, as I stated, has improved vs.
the start of 2015. "
It is clear that it is no longer supply and demand for oil that is dictating the price but is
instead the financial markets and more importantly money flows tied to central bank policy.
Bearish sentiment in the oil markets is taking over as net short positions near record highs.
According to Reuters, 50 to 60 hedge funds have taken short positions that account for around
160 million barrels of oil in near term contracts. In fact, the amount of short positions in oil
options and futures now exceeds levels in the great financial meltdown of 2008, believe it or not,
despite talk of a good economy and the Fed needing to raise interest rates. Madness, right?
... ... ...
Fundamentally, almost every bear case presented by the media in 2015 has been proven false. Doomsday
events such as rig count (vertical rigs being dropped vs. horizontal), Cushing overflowing, China
demand slowing, to Iran floating storage of 50 million barrels being unleashed, U.S. production rising,
have all been dispelled.
In fact, as I said, the fundamentals have even improved as U.S. production has entered into decline,
crude stocks have been drawing down since the spring, and demand for gasoline is at record highs
(much higher vs. expectations going into 2015). Furthermore, the worries on Iran are completely overblown
given that the hype on floating storage – the millions of barrels of crude oil sitting in tankers
turned out to be low quality condensate that is hard to process. Also, the 500,000 to 1 million barrels
per day (mb/d) increase tied to the nuclear deal will be absorbed by higher demand, which has averaged
1 million barrels or more each year (in 2015, it has been even higher than that; closer to 1.4 mb/d
or higher).
Furthermore, China alone will add 600,000 barrels per day in refinery capacity, as it allows independent
refineries to process oil. What has been incrementally negative has been additional capacity added
by Iraq and Saudi Arabia since the start 2015. However, aside from Iran, OPEC doesn't have any spare
capacity left and, Saudi Arabia has already announced intentions of reducing output by 200,000-300,000
barrels per day post their seasonally strong domestic period.
Yet even though the dollar has weakened recently, oil has still collapsed some 35 percent. The
E&P equities have fallen even further as in addition to shorts, there are also pressing bets on the
upcoming fall credit redetermination and hedge funds taking positions in E&P bonds while shorting
equities.
All these things still don't explain the panic in oil markets other than financially driven
events that aren't directly tied to the supply and demand of oil which, as I stated, has improved
vs. the start of 2015. In fact, demand is soaring while days of supply are improving dramatically
as evidenced by the charts the charts below:
... ... ...
Leonard Brecken, Brecken Capital LLC. Leonard is a portfolio manager and principal at Brecken
Capital LLC, a hedge fund focused on domestic equities
You can see two things on this chart, the first is that when capacity exceeds demand, prices
are low (and vice versa); the second is that, since about 2005, despite the oil price being
rather high, outside North America the world has struggled to add any oil production capacity at
all. In fact, since 2010 oil production capacity outside North America has been in decline. If it
weren't for the USA & Canada, where production growth has been driven by LTO & SAGD, we would
have been in a right pickle.
... ... ...
In the short term, the oil market is in the doldrums and projects are being delayed or
cancelled, left right and center. That will mean that, outside North America, oil production
capacity will decline even faster and with the growth knocked out of the shale producers and SAGD
projects being put on the back burner, it is only a matter of months before demand starts to
exceed world oil production capacity again.
A nasty recession might put a dent in demand growth and turn those months into quarters, but
eventually capacity will wane, demand will wax, and the oil price will climb once again.
In fact if traders looked hard at these charts they might wonder if the continued weakness in
the 2022 Brent Oil future was a tad overdone. For this time, I think the price response might be
even stronger and more sustained than before.
In The Matrix in which Americans live, nothing is ever their fault. Nowhere in the Western
media other than a few alternative media websites is there an ounce of integrity. The Western media
is a Ministry of Truth that operates full-time in support of the artificial existence that Westerners
live inside The Matrix where Westerners exist without thought. Considering their inaptitude and inaction,
Western peoples might as well not exist. More is going to collapse on the brainwashed Western fools
than mere stock values.
In The Matrix in which Americans live, nothing is ever their fault. For example,
the current decline in the US stock market is not because years of excessive liquidity supplied by
the Federal Reserve have created a bubble so overblown that a mere six stocks, some of which have
no earnings commiserate with their price, accounted for more than all of the gain in market capitalization
in the S&P 500 prior to the current disruption.
In our Matrix existence, the stock market decline is not due to corporations using their profits,
and even taking out loans, to repurchase their shares, thus creating an artificial demand for their
equity shares.
The decline is not due to the latest monthly reporting of durable goods orders falling on a
year-to-year basis for the sixth consecutive month.
The stock market decline is not due to a weak economy in which after a decade of alleged economic
recovery, new and existing home sales are still down by 63% and 23% from the peak in July 2005.
The stock market decline is not due to the collapse in real median family income and, thereby,
consumer demand, resulting from two decades of offshoring middle class jobs and partially replacing
them with minimum wage part-time Walmart jobs without benefits that do not provide sufficient income
to form a household.
No, none of these facts can be blamed. The decline in the US stock market is the fault
of China.
What did China do? China is accused of devaluing by a small amount its currency.
Why would a slight adjustment in the yuan's exchange value to the dollar cause the US and European
stock markets to decline?
It wouldn't. But facts don't matter to the presstitute media. They lie for a living.
Moreover, it was not a devaluation.
When China began the transition from communism to capitalism, China pegged its currency to the
US dollar in order to demonstrate that its currency was as good as the world's reserve currency.
Over time China has allowed its currency to appreciate relative to the dollar. For example, in 2006
one US dollar was worth 8.1 Chinese yuan. Recently, prior to the alleged "devaluation" one US dollar
was worth 6.1 or 6.2 yuan. After China's adjustment to its floating peg, one US dollar is worth 6.4
yuan. Clearly, a change in the value of the yuan from 6.1 or 6.2 to the dollar to 6.4 to the dollar
did not collapse the US and European stock markets.
Furthermore, the change in the range of the floating peg to the US dollar did not devalue China's
currency with regard to its non-US trading partners. What had happened, and what China corrected,
is that as a result of the QE money printing policies currently underway by the Japanese and European
central banks, the dollar appreciated against other currencies. As China's yuan is pegged to the
dollar, China's currency appreciated with regard to its Asian and European trading partners. The
appreciation of China's currency (due to its peg to the US dollar) is not a good thing for Chinese
exports during a time of struggling economies. China merely altered its peg to the dollar in order
to eliminate the appreciation of its currency against its other trading partners.
Why did not the financial press tell us this? Is the Western financial press so incompetent
that they do not know this? Yes.
Or is it simply that America itself cannot possibly be responsible for anything that goes
wrong. That's it. Who, us?! We are innocent! It was those damn Chinese!
Look, for example, at the hordes of refugees from America's invasions and bombings of
seven countries who are currently overrunning Europe. The huge inflows of peoples from America's
massive slaughter of populations in seven countries, enabled by the Europeans themselves, is causing
political consternation in Europe and the revival of far-right political parties. Today, for example,
neo-nazis shouted down German Chancellor Merkel, who tried to make a speech asking for compassion
for refugees.
But, of course, Merkel herself is responsible for the refugee problem that is destabilizing Europe.
Without Germany as Washington's two-bit punk puppet state, a non-entity devoid of sovereignty, a
non-country, a mere vassal, an outpost of the Empire, ruled from Washington, America could not be
conducting the illegal wars that are producing the hordes of refugees that are over-taxing Europe's
ability to accept refugees and encouraging neo-nazi parties.
The corrupt European and American press present the refugee problem as if it has nothing whatsoever
to do with America's war crimes against seven countries. I mean, really, why should peoples flee
countries when America is bringing them "freedom and democracy?"
Nowhere in the Western media other than a few alternative media websites is there an ounce
of integrity. The Western media is a Ministry of Truth that operates full-time in support
of the artificial existence that Westerners live inside The Matrix where Westerners exist without
thought. Considering their inaptitude and inaction, Western peoples might as well not exist.
More is going to collapse on the brainwashed Western fools than mere stock values.
Barnaby Barnaby's picture
One of the youngest states in the world is hardly a threat. Client status means they're held
by the balls. Any other understanding is simple paranoia.
What you should be worried about is that your UN sponsor allows ethnic cleansing on such a
scale in Palestine. That makes you culpable.
DontWorry
Don't worry, the USA is recognized as a beacon of freedom and democracy throughout the world.
There are always multiple viewpoints, but the US media represents a fair, unbiased and mainstream
view. Our press is the freest in the world, and supported by our Constitution. The US will be
the center of western democracy, culture and commerce for the forseeable future.
lasvegaspersona
Many of the problems of modern life, including the actions of the US government, are founded
in the very currency that enables it to act seemingly without effort.The ability to create the
medium of exchange for the entire world has given this same government the appearance of invulnerability.
It has allowed the federal government to make demands upon the states that comprise it. It can
control citizens whose consent used to be required for it to act. It seems to have the ability
to control the entire world.
This is an illusion. It has been granted these abilities, it has not earned them nor won them.
The world needed a monetary system post WW2 and even post 1971. The final stages of this whole
episode was seen by Rueff and triffin quite clearly considering they spoke 40 plus years ago.
Now the world has changed. It is withdrawing the permission it granted every time it bought
treasuries or did other things that kept all those excess dollars from coming back to their country
of birth to cause rising prices. The chinese are selling, the Arabs are selling and the ECB stopped
buying long ago. They are not going to kill the dollar (and cause a war). They are going to let
it fail through inaction. The actions of our nation do not make much sense to most folks who viewed
thenUS as a good country. It seems to have been taken over by evil people.
I think these are the actions of spoiled children who don't have to pay for what they get.
Now the trust fund has run out. Daddy took the T-Bird away. Soon we will have to get a real job.
About 50% of American exceptionalism is due to the exorbitant privilege. The other part is actually
real...if we can salvage those things that once made us truly great. Most Americans, who pay attention,
are shocked and angry by what they see their government doing.
Both the government and the American people are not worse than any other country would have been
if it was granted the same power over money itself. I just hope the ending of this chapter comes
smoothly before we wreck the car and kill a lot more people.
It is time to grow up and get a real job.
Renfield
<<Many of the problems of modern life, including the actions of the US government, are
founded in the very currency that enables it to act seemingly without effort.The ability to
create the medium of exchange for the entire world has given this same government the appearance
of invulnerability. It has allowed the federal government to make demands upon the states that
comprise it. It can control citizens whose consent used to be required for it to act. It seems
to have the ability to control the entire world... Now the world has changed. It is withdrawing
the permission it granted every time it bought treasuries or did other things that kept all
those excess dollars from coming back to their country of birth to cause rising prices. The
chinese are selling, the Arabs are selling and the ECB stopped buying long ago. They are not
going to kill the dollar (and cause a war). They are going to let it fail through inaction.
The actions of our nation do not make much sense to most folks who viewed thenUS as a good
country. It seems to have been talen over by evil people. I think these are the actions of
spoiled choildren who don't have to pay for what they get. Now the trust fund has run out.
Daddy took the T-Bird away. Soon we will have to get a real job.>>
Bravo. THIS is why the idea of any fiat "world reserve currency" needs to die for the good
of the planet.
On a national scale, I don't mind a fiat currency as long as it is not 1) issued by the government,
2) fraudulently claimed to be anything but fiat, or 3) mandated as the sole currency allowed for
a nation. (Or city, or town, or any group.) That way people are free to ignore it in favor of
real money.
"Counterfeiting" laws should be scrapped in favor of good old-fashioned anti-fraud enforcement.
But no government should ever be allowed by its people to traffic in a fraudulent, fiat currency,
let alone to mandate it as the only currency legal to use. This puts criminals at the top of the
system and riddles your financial system with fraud, and with such a foundation, of course bad
money drives out good and eventually 'malinvestment' in unproductive or evil commerce becomes
its entire result.
buzzsaw99
Without Germany as Washington's two-bit punk puppet state, a non-entity devoid of sovereignty,
a non-country, a mere vassal, an outpost of the Empire, ruled from Washington, America could not
be...
AWESOME!
MalteseFalcon
The USA still has bases, army and air force in Germany. So the Germans are not completely feckless
punks.
"...So people sold what may have been just under $2 T in positions. "
"...But if E were unsustainably high due to an output gap leaving businesses to operate under-capacity
for their capital stock while simultaneously cutting wage expenses via layoffs and increased use of
part time workers to boost E (earnings) then what would that say about P (share price)? Shiller puts
a lot of faith in Cyclically Adjusted Price Earnings ratio (CAPE). My guess is there is a reason for
that."
"...[ Interesting, when wealth is significantly invested in nonproductive assets, what then? ] Nonproductive,
like corporate stock buybacks. When buybacks exceed investment in R&D, plant & equipment, systems, etc.
for a decade or more, then growth in the subsequent decade is likely to be merde, n'est-ce pas? Uncreative
destruction. Schumpeter *rolls over in grave*"
Rising Anxiety That Stocks Are Overpriced: Over the five trading days between Aug. 17 and Aug.
24, the U.S. stock market dropped 10 percent - the official definition of a "correction," with similar
or greater drops in other countries. ...
But there are reasons to question whether this was a quick, effective slap on the wrist, or if the
market is still too overactive, and thus asking for a more extended punishment. ...
It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent
rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical
averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow
at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.
Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious "just
don't know" situation, where the stock market is inherently risky because of unstable investor psychology.
JF said...
So people sold what may have been just under $2 T in positions.
Well, we do hope they invest in a real business with some of this, and maybe people will just
enjoy themselves a bit and spend where there are lots of multiples that follow.
But otherwise, where do they put their money to get a return? The basic "psychology" is that
worldwide it is still better to put your money into an equity compared to a bond, and into the
US for safety and for returns, compared to most other choices.
More might go directly into real-economy businesses if we can get the economy moving and less
into the stock market, but then again if the economy moves out smartly then the stock market will
also benefit from improvements in the fundamentals and profits of real businesses too.
sanjait said in reply to JF...
What you describe is the main story.'
Stocks are highly valued, relative to historic P/Es, because the opportunity cost of capital
is low. Earnings yields on stocks have gone down, driving up their prices, because the alternatives
aren't great either.
This is what Shiller's CAPE ratio misses. It's designed to capture cyclical changes in earnings
to make P/E a more reliable metric, but it leaves out cost of capital. So when we have this unusual
situation with massive decline in interest rates, that projects to persist for a number of years,
of course multiples expand...
Anonymous said in reply to sanjait...
What you are describing is true. Low interest rates means higher multiples can persist. However,
we saw that scenario in Japan in the 90s for years. The low interest rates made Japanese stocks
look like good value (even though PE was high). That did not prevent big big 30% drawdowns multiple
times. I am not sure that low interest rates are a guarantee that high PEs are ok. Just putting
in an observation to add to the discussion.
mulp said in reply to JF...
Investors sold shares of private companies and bought Federal government debt signalling the
market wants more government spending.
Yet the claimed free market loving Republicans keep bucking the free market that is begging
for much more government spending.
And there is so much needed capital assets to be built by government because We the People
will not build the capital assets we want to see as individuals, nor do We the People want private
corporations to build the capital assets We the People call for. The free market clear is calling
for the Republican controlled legislatures to borrow and invest in big government capital asset
building:
Big investments in transportation infrastructure
Big investments in water management infrastructure
Big investments in power and communications infrastructure
Corporations are demanding lots of investment in human capital because they claim they can't
find qualified machinists, welders, engineers, technicians, plumbers, carpenters, architects,
and on and on, to hire, saying that without Americans being invested in, they need to import skilled
workers or move the jobs out of the US
Every bit of the above we know how to do at twice or three times the rates currently being
done based on the rate of investment from about 1920 to 1970. The number of miles of paved highway
in the 20s was massive. The electric grid built was massive. Post WWII the investment in human
capital accelerated from the rate in the 30s and 40s when the minimum standard education for every
citizen shifted from grade 8 to grade 12.
Dan Kervick said...
FWIW, anybody who has iTunes U can listen to a whole semester-long Shiller Yale class on financial
markets. Highly recommended.
pgl said...
I can't seem to post the WSJ to the 8/26/2015 P/E ratios but they are near 17. Not that high
in light of current interest rates.
RC AKA Darryl, Ron said in reply to pgl...
But if E were unsustainably high due to an output gap leaving businesses to operate under-capacity
for their capital stock while simultaneously cutting wage expenses via layoffs and increased use
of part time workers to boost E (earnings) then what would that say about P (share price)? Shiller
puts a lot of faith in Cyclically Adjusted Price Earnings ratio (CAPE). My guess is there is a
reason for that.
pgl said in reply to RC AKA Darryl, Ron...
Granted we should address cyclical issues as the issue is not historical earnings but rather
expected future earnings. But here's the puzzle. Let's assume we get a quick return to full employment.
Would earnings rise or fall? A lot of folks might argue that they would rise as we returned to
full capacity. But you are right - a lot of the extra production would finally go to higher real
wages.
Ray Fair - we need your 93 equation CC model!
mulp said in reply to pgl...
Extra production requires higher wages first.
No business is idiot enough to produce stuff without knowing that buyers already have the cash
or credit to buy it.
On the other hand, government can offer to buy increased production knowing it will be able
to charge the people who benefit by its power to tax. For example, the US has built tens of thousands
miles of highways to nowhere, train rail lines to nowhere, knowing it would pay for it all by
levying taxes. Water and sewer to nowhere.
I'm old enough to remember Interstate highways off to the side of the crowded two lane highway
my family drove year after year on vacation or church business. It was easy to buy right of way
across farm fields and easy to lay down high quality payment, but building overpasses on existing
heavily used roads too what seemed like forever. In Indiana, bulldozing subsoil into hills took
a year or more. It is the weight of the soil that compresses the soil to the required compaction,
but that requires time. And then building interchanges in or near cities requires even more planning.
While those Interstates built in my youth require constant rebuilding because entropy obeys
no economist, the bill for building them is long paid while the utility value of the Interstates
increases constantly. And the highest utility value is seen when a bridge goes out and the cost
of rerouting traffic hits the users. Bundles of cash get showered on replacing the bridge because
government, We the People, can shower cash if We the People demand it.
sanjait said in reply to RC AKA Darryl, Ron...
"Shiller puts a lot of faith in Cyclically Adjusted Price Earnings ratio (CAPE). My guess is
there is a reason for that."
Yeah, he invented it.
It's a nice way of smoothing PE data to account for some cyclical factors, but it doesn't account
for everything.
JF said in reply to RC AKA Darryl, Ron...
Ratio of workforce hours to the Investment Base and value of Intangibles. This is different
from how the stock market "prices" a share (it can't know, I'd expect very few people know these
ratios for a company and few understand them by sector and over time - while accounting for intangibles
was a very late development too).
Shiller recognizes the psychology of these financial asset markets. We know the participants
in these markets; i.e., buyers, seller, market-makers, demonstrate herd behaviors. Shiller does
want to teach about more rational methods for the pricing of stocks. But markets price as they
do - not always "rational" expectations here.
Stocks are good - participants are sharing in risks, unlike debt instruments. Stocks are, fundamentally,
better economics for society, imho.
JF said in reply to JF...
So put your money directly into a business or buy ownership shares in some market (different
forms of taking risk in the making of business). US is still the best place to do that.
mulp said in reply to JF...
Investment must result in wages and benefits paid, or else its just asset trading or pump and
dump asset churn.
sanjait said in reply to pgl...
That's what I'm saying.
What everyone needs to realize is that low interest rates change the *fundamentals* of stock
valuation.
Sure, we could be experiencing some degree of pop in corporate earnings due to weak labor demand,
competitive washout during the crash and the unusual way that low investment can in the short
term lead to higher profitability. All of that is worth examining.
But none of that changes the other side of the coin, which is that ... cost of capital matters.
pgl said in reply to sanjait...
Check out James Glassman's What We Got Wrong (re DOW 36000). He never admits either one of
his two bizarre errors. It is more the world changed after 9/11. Really? What changed? The cost
of capital fell which should have meant higher valuations. OK - maybe steady state growth is no
longer 3% as some say it is 2%. But wait? Glassman tells Jeb! steady state growth should be 4%.
So what changed should have had him change his book to DOW 72000!
RC AKA Darryl, Ron said...
The stock market is almost always experiencing a speculative bubble except for a few blue chips
that are less volatile.
Justin Cidertrades said in reply to RC AKA Darryl, Ron...
"almost always experiencing a speculative bubble except for a few blue chips" ~~AKA~
buy low, but sell high, Hawaii! Go through your portfolio! Mark up the price on everything you have! Put it up for sell on limit
order! Then commit all your cash to limit orders to buy but at very low bid. Buy things that are
a cinch to grow with the underlying business but only after researching the business for debt
levels etc. Whoops! You can't use that rent money for stock bid. Remember! All stocks are equally
worthless until proved otherwise.
Ben Groves said...
A speculative commodity bubble. Not sure that has every happened before by itself. Don't know
what that really means. Stocks may have been overinflated or its damage to the real economy may
mean stocks are underinflated.
sanjait said...
I don't think we're seeing a Minsky Moment in stock valuations.
What instead I think we're seeing is a Minsky Moment in China. Or, at least, people openly
wondering how far off their previous assumptions were about growth and demand in China, and whether
there is risk of contagious defaults somewhere there.
In other words, they aren't worried about multiples, they are worried about fundamentals.
rayward said...
What's the alternative to speculative financial assets? It's been conventional wisdom that
the rate of return on productive capital (r) has been falling for 30 plus years. Larry Summers
has repeated this often.
But now along comes Paul Gomme, B. Ravikumar, and Paul Rupert (https://research.stlouisfed.org/publications/es/article/10406)
who conclude that the rate of return on productive capital is actually high not low as Summers
and others claim. Both can't be right.
It depends on the meaning of "is", or "productive capital". My take is that Gomme et al. (in
their 2011 paper cited in the August paper referenced and on which the August paper is based)
are not altogether clear on what they mean by "productive capital" (which they refer to as "business
capital"). In a footnote to the 2011 paper, they indicate that it "includes" such things as plant
and equipment, but "includes" is not the same as "is". If Summers et al. are correct (and this
view goes back to research conducted by James Tobin), then unless and until r is improved, we
are stuck with speculation in financial assets and the financial instability that goes with it.
Why haven't economists devoted more research to r?
anne said in reply to rayward...
It's been conventional wisdom that the rate of return on productive capital (r) has been
falling for 30 plus years. Larry Summers has repeated this often....
[ Where would a specific reference be where this argument has been made by Summers? The argument
makes no sense to me and I wonder what I have missed or possibly I do not understand the passage.
]
pgl said in reply to anne...
Summers calls this Secular Stagnation. Of course some people think this Summers thesis is not
quite right.
ilsm said in reply to anne...
Conventional wisdom is a signal that the rest of the sentence is epistemic closure........
pgl said in reply to anne...
That's the paper that takes Summers on. But check out my post on this issue as well as Noah Smith's
doubts.
Sandwichman said...
What? People are afraid the imaginary money doesn't really exist?
anne said...
http://www.multpl.com/shiller-pe/
Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2015
(Standard and Poors Composite Stock Index)
August 27, 2015 PE Ratio ( 25.12)
Annual Mean ( 16.62) Annual Median ( 16.01)
-- Robert Shiller
pgl said in reply to anne...
OK - his ratio is near 25. Sanjait is right - this is not that high given the low real interest
rates.
The price earnings ratio for stocks in July 2015 was 26.5 as compared to 26.7 in 1929. Such
a price earnings ratio would have seemed especially high, however rationalized, before 1996 but
since then no matter the bear markets that have occurred such a ratio has come to be taken as
reasonable by a range of economists.
The ratio may well be reasonable, I would however like an understanding as to why.
pgl said in reply to anne...
1929? 1929's financial markets were a lot like those in 2007. About to see a huge increase
in interest rates on corporate bonds rated BBB even as government bond rates fell. Krugman noted
a small increase in credit spreads but no where near 2009 or 1930.
You can't just compare P/E ratios without thinking through the fundamentals. Interests are
low and credit spreads are modest.
anne said in reply to anne...
Robert Shiller found indexing stock prices from 1881 through 2015 important. I would agree.
Possibly 1996 when the stock market price earnings ratio was 25.9 and Shiller suggested stock
investors might be too optimistic and Alan Greenspan wondered about what made for irrational exuberance,
possibly a 25.9 p/e ratio for 1996 should never have been compared with any ratio in the past
but I think otherwise.
Sandwichman said in reply to anne...
That settles that!
Numbers go way up then they go down a bit then back up a bit. Clearly the numbers will either
go up or down in the future.
and the wheels on the bus go 'round and 'round...
anne said in reply to Sandwichman...
I have no idea how the prices of investment assets will change from here, what I do know however
is what the price patterns have been for better than a century and that rationales that have been
used to justify prices for investment assets in the past do not make sense presently.
Sandwichman said in reply to Sandwichman...
To be clear, these numbers are index numbers. That means they are constructed by assembling
together various bits of data that are ASSUMED to indicate this or that, so the resulting index
is then ASSUMED to indicate some other thing. This is fine in an analytical context but becomes
mystification when the indexes take on a life of their own. People forget about the analytical
context. They forget the qualifications and the artificial nature of the indexes. They think they
are talking about something analogous to a measurement taken with a standardized yardstick.
Same yardstick fallacy.
If my height is the yardstick by which I measure my height, then I am always exactly one my
height high.
All of economics seems now to revolve around a glaring silence about the composition of the
yardstick.
What is a "Real Home" anyway? Is it anything like a Fun Home?
Investing for long periods of time in the stock market index and a range long-term investment
grade bonds, which is essentially an index, has been remarkably successful. Stock and bond indexes
or near indexes then strike me as quite real, quite tangible:
What the real home price index was remarkably good for was for showing analysts that homes
generally and home especially in relatively high priced markets were becoming increasingly risky
to buy from about 2002 on if a buyer was counting on price appreciation, especially counting on
price appreciation to pay a mortgage.
The work of Robert Shiller has been remarkably helpful for analysts trying to understand market
movements.
anne said in reply to anne...
Looking to real home prices, Shiller found that over time prices generally tracked inflation
so that where the real home price index was 100 in 1890 the index was at 113 in 1996. Between
1996 and 2006 the real home price index increased from 113 to 194.7 which was an altogether unprecedented
level.
In June 2015, however, after the supposed deflating of the housing bubble the real home price
index was 155.9 which is a level never even approached before 2003 when the housing bubble should
have been obvious.
US politics are in gridlock because elected officials, Democrats and Republicans alike, are
fighting to revive an economic model based on construction, development and housing. Instead of
breaking with the past– and confessing that trillions of taxpayer handouts have been given to
banks to shore up a failed economic model– elected officials in the US are maintaining a steadfast
silence to paper over their ruined circular logic.
In the New York Times yesterday, "New-Home Sales Plunged To Record Low in January", the chief
economist of Metrostudy described that logic with crystalline clarity, "You're not going to have
a robust housing market until you have more jobs, and you're not going to add jobs fast enough
to bring down the unemployment rate until you have robust housing market."
In "Florida struggles to carve out new jobs: spurred by state unemployment soon expected to
top 12 percent," (St. Pete Times) Mark Wilson, head of the Florida Chamber of Commerce, says,
"There is no silver bullet." The Chamber, this year, will be using all its bullets to shoot down
the citizens' petition to amend the Florida constitution, Florida Hometown Democracy, providing
for local elections on changes to growth plans. The measure was born from the public revulsion
with rampant overdevelopment that created temporary jobs in construction but permanently scarred
the Florida landscape, wrecking Floridians' quality of life, the environment, and undermined the
potential for "jobs" that legislators are desperate to create.
The core of the problem is not just Florida's. An economy so dependent on housing is, by definition,
a Potemkin Village. Potemkin Villages in 18th century Russia were "fake settlements" built to
impress the political upper class. Imperial Russia's delusions of grandeur have much in common
with the ours....
JF said in reply to anne...
"savings glut" comes to mind - too much wealth and some of it chases homes- then and still.
But also, the "wealth" was created in the period you mention by leveraging positions, and we
know many of these new lending-account-deposits bought positions (e.g. MBS) that lacked any reality.
So it isn't just too much wealth but also the fact that many gained it, not from running a business
and earning it, but via endogenous leverage, and this made home prices even more disconnected
from real economics.
A tax-cut-and-borrow scheme of public finance, in concert with the already wealthy also transferred
huge sums, unearned.
Rent-seeking led to imprudent leveraging and the investors all gained new wealth positions
(but homeowners picked up the pieces and the rest of society too). So too much unearned wealth
chases all kinds of assets (homes, stocks, luxury items and collectibles).
Only public policy can remedy once the financial positions become lawfully established (again,
even though these were obtained by rent-seeking and distortion of markets).
anne said in reply to JF...
"Savings glut" comes to mind - too much wealth and some of it chases homes - then and still....
[ Interesting, when wealth is significantly invested in nonproductive assets, what then? ]
JF said in reply to anne...
We need economic policy to intervene. Can the FED change its regulations to encourage investments
in non-financial matters within the core of society's needs (housing, durables, education come
to mind)?
Right now the FED is paying banks .25% IOER to hold their "reserves" - accounting matters is
what Keynes would call this type of action - we need them to sponsor rules that get reserves into
the real economy (certainly not leveraging other debts, even margin buying support for stocks,
imo). Seems to me this is in their current authority. The FED can redeem the public debt on their
books and take the current fiscal position of the govt to primary surplus (via remittance/offset)
and this will cause public debt markets to change, and hopefully push investors to put their money
elsewhere (public debt markets will not see interest rates rise where they are). Perhaps they
should consider altering the margin rules too, again forcing owners of this excess wealth to invest
outside these financial-asset trading marketplaces. Or spend - which would at least be taxed by
capital gains provisions and by sales taxes.
Oh well. What are they going to talk about in Wyoming??
anne said in reply to JF...
BigBozat said in reply to anne...
[ Interesting, when wealth is significantly invested in nonproductive assets, what then?
]
Nonproductive, like corporate stock buybacks. When buybacks exceed investment in R&D, plant
& equipment, systems, etc. for a decade or more, then growth in the subsequent decade is likely
to be merde, n'est-ce pas? Uncreative destruction. Schumpeter *rolls over in grave*
anne said in reply to anne...
Looking to real home prices, Shiller found that over time prices generally tracked inflation
so that where the real home price index was 100 in 1890 the index was at 113 in 1996. Between
1996 and 2006 the real home price index increased from 113 to 194.7 which was an altogether unprecedented
level.
In June 2015, however, after the supposed deflating of the housing bubble the real home price
index was 155.9 which is a level never even approached before 2003 when the housing bubble should
have been obvious.
What does this mean? Possibly homes should be considered remarkably inexpensive, remarkably
fine investment currently, but a real home price index of 155.9 which had never been approached
between 1890 and 2003 suggests that I, at least, need to understand why home are really so inexpensive
currently.
ThomasH said... \
Yes, we are in one of these rare, anxious "just don't know situations" in which stock prices
could go up or down, particularly if you ask about the future.
pgl said in reply to ThomasH...
That was Shiller's final thought. He does not if the market is overvalued or not - so the rest
of us clearly do not know. Oh wait - James Glassman and Kevin Hassert are writing their DOW 72000!
You say Glassman is an idiot? Yea but he is one of Jeb!'s economic advisers.
Public statements by globalist entities like the IMF on China, for
example, have argued that their current crisis is merely part of the "new
normal"; a future in which stagnant growth and reduced living standards
is the way things are supposed to be. I expect the Fed will use the same
exact argument to support the end of zero interest rates in the U.S.,
claiming that the decline of American wealth and living standards is a
natural part of the new economic world order we are entering.
That's
right, mark my words, one day soon the Fed, the IMF, the BIS and others
will attempt to convince the American people that the erosion of the
economy and the loss of world reserve status is actually a "good thing".
They will claim that a strong dollar is the
cause of all our economic pain and that a loss in value is necessary.
In the meantime they will, of course, downplay the tragedies that will
result as the shift toward dollar devaluation smashes down on the heads
of the populace.
A rate hike may not occur in September. In fact, as I
predicted in my last article, the Fed is already hinting at a delay
in order to boost markets, or at least slow down the current carnage to a
more manageable level. But, they WILL raise rates in the near term,
likely before the end of this year after a few high tension meetings in
which the financial world will sit anxiously waiting for the word on
high. Why would they raise rates? Some people just don't seem to grasp
the fact that the job of the Federal Reserve is to destroy the American
economic system, not protect it. Once you understand this dynamic then
everything the central bank does makes perfect sense.
A rate increase will occur exactly because that is what is needed to
further destabilize U.S. market psychology to make way for the "great
economic reset" that the IMF and Christine Lagarde are so fond of
promoting. Beyond this, many people seem to be forgetting that ZIRP is
still operating, yet, volatility is trending negative anyway. Remember
when everyone was ready to put on their 'Dow 20,000' hat, certain in the
omnipotence of central bank stimulus and QE infinity? Yeah...clearly that
was a pipe dream.
ZIRP has run it's course. It is no longer feeding the markets as it
once did and the fundamentals are too obvious to deny.
The globalists at the Bank for International Settlements in spring
openly deemed the existence of low interest rate policies a
potential trigger for crisis. Their statements correlate with the BIS
tendency to "predict" terrible market events they helped to create while
at the same time misrepresenting the reasons behind them.
The point is, ZIRP has done the job it was meant to do. There is no
longer any reason for the Fed to leave it in place.
Get Ready For QE4
Again, don't count on it. Or at the very least, don't expect renewed
QE to have any lasting effect on the market if it is initiated.
There is truly no point to the launch of a fourth QE program, but do
expect that the Fed will plant the possibility in the media every once in
a while to mislead investors. First, the Fed knows that it would be an
open admission that the last three QE's were an utter failure, and while
their job is to dismantle the U.S. economy, I don't think they are
looking to take immediate blame for the whole mess. QE4 would be as much
a disaster as the ECB's last stimulus program was in Europe, not to
mention the past several stimulus actions by the PBOC in China. I'll say
it one more time – fiat stimulus has a shelf life, and that shelf life is
over for the entire globe. The days of artificially supported markets are
nearly done and they are never coming back again.
I see little advantage for the Fed to bring QE4 into the picture. If
the goal is to derail the dollar, that action is already well underway as
the IMF carefully sets the stage for the Yuan to enter the SDR global
currency basket next year, threatening the dollar's world reserve status.
China also continues to dump hundreds of billions in U.S. treasuries
inevitably leading to a rush to a dump of treasuries by other nations.
The dollar is a dead currency walking, and the Fed won't even have to
print Weimar Germany-style in order to kill it.
It's Not As Bad As It Seems
Yes, it is exactly as bad as it seems if not worse. When the Dow can
open 1000 points down on a Monday and China can lose all of its gains for
2015 in the span of a few weeks despite institutionalized stimulus
measures lasting years, then something is very wrong. This is not a
"hiccup". This is not a correction which has already hit bottom. This is
only the beginning of the end.
Stocks are not a predictive indicator. They do not follow positive or
negative fundamentals. Stocks do not crash before or during the
development of an ailing economy. Stocks crash after the economy has
already gone comatose. Stocks crash when the system is no longer
salvageable. Since 2008, nothing in the global financial structure has
been salvaged and now the central banking edifice is either unable or
unwilling (I believe both) to supply the tools to allow us even to
pretend that it can be salvaged. We're going to feel the hurt
now, all while the establishment tells us the whole thing is in our
heads.
"For awhile, people thought that the stock market can handle higher interest
rates. That was just a pipe dream. They can't," Schiff said Tuesday on CNBC's "Futures Now." "That's the only thing propping up the market."
A bounce back to pre-correction levels will prove once and for all that the 1% are
completely manipulating the Casino through the use of the media for their gain. It would mean
that the news about China and the world markets was somehow false. Why would the market
correct and then go back up within a week unless it were pure manipulation? We shall see. This
is a real test as to how rigged the game really is. We have not had a correction like this in
about 4 years and I don't see how the market continues to march upward based on the reasons it
just corrected unless they are false.
Good. I made a similar point last night on another thread when talking about a 1996 Vickery paper
surfaced by Paine. There is a myopia in economics, in my opinion, focused only on annual flows
(GDP) and completely disregarding the importance of wealth and as you call it, "economic resilience."
If Piketty has any influence, I am hoping that economic discourse and public finance no longer
just focuses on annual flows and that it always also discusses Net Worth (as economic capacity
of the individual and in the aggregate is also constituted by using wealth and any new income
you get too).
anne said in reply to JF...
I made a similar point last night on another thread when talking about a 1996 William Vickrey
paper surfaced by Paine....
[ Would there be a reference to the paper? ]
JF said in reply to anne...
Actually, it was Dan Kervick who added the link, in response to a recommendation from Paine (who
apparently also went to Columbia, so can spell Vickrey's name):
For what it is worth, last night late, I then said this, and had to chuckle to my wife when
I say Krugman's blog article this am:
JF - "Paine and Dan Kervick - I would prefer that this paper be re-written in light of the
Piketty remonstrance that you need to look at economics and society not just in terms of income
and flow but also in Net Worth terms. Plainly, a very wealthy society can raise taxes with little
harm to aggregate demand if the new taxes fall on those with a lower/lowering propensity to spend,
at least to some degree (see Saez and others who comment on the taxation of income tax bases).
I am one who will always make note that the public should not cut taxes on the already wealthy
so that the subsequent borrowing of the cash comes from the same class of people. Clearly, we
need to think in more balanced ways here. Borrow for long term assets to spread the costs to those
who benefit over time, especially when interest rates are low. Borrow from foreign sources as
this brings money into the US economy for the trade of a piece of paper and cash management dollops
of principal and interest. But otherwise a wealthy society should tax, otherwise it is transferring
wealth upward by foregoing taxation in trade for giving the wealthy class a tradeable asset.
Ouch, I'd prefer we just helicopter the money over to Treasury than the tax-cut and borrow
scheme of the republican party.
Oh wait, as we redeem the public debt purchased by the FED and they offset the principal with
the Treasury, we will be doing helicoptering, just had to wait six years or so.
Anyway, rambling point: public debt is not always better than taxation, and for the most part
in a wealthy society like the US where we have a deep financial system with all kinds of instruments
of trading efficiency, including trillions of debt products, I suspect it seldom is right to borrow
anew when you can tax and target the taxation so it does not harm aggregate demand.
I think in 1996 when this was written almost everyone was myopically focused solely on flows
(GDP/income)."
JF said in reply to JF...
When a new Congress comes in 2017, perhaps we can change the finance law of the US to permit the
FED and Treasury to sell US public debt direct to foreigners without having to go into the open
market and dealer-community.
Alas, if we can only get through this next national election with
heads screwed on straight! Good to hear that Mrs. Clinton at least is saying that economic policy
is the centerpiece of her campaign. We will see our well she does from a strategic communications
perspective.
Perhaps some economists can help here too.
reason said...
P.S. One thing that PK doesn't say, that I think needs to mentioned is that for countries with
their own currencies, they can print money rather than issuing bonds. The distributional implications
are important. Even at low interest rates, government bonds are a promise of a stream of income
to the already rich (and taking money out of circulation, which selling bonds does is a deflationary
thing to do - increasing the real value of financial wealth). Printing money, and spending it
or giving it to the poor, on the other hand does not make the government the supporter of existing
wealth. This should not be forgotten.
Paine said in reply to JF...
Beware the false value the scheinvert the bubble value
The better notion is the inter temporal payments grid
We need a way other then inflation deflation to adjust this grid to on going production value
and wage value. Stiglitz is very
keen on wealth v productive capital
And he's on to something deep that seems to be in large part invisible to most model builders
"As flies to wanton boys are we to the gods.
They kill us for their sport."
William Shakespeare, King Lear
That disruption was caused by the China currency devaluations which reminded those who have
not been paying attention that
a) there is a currency war underway,
b) there is no
sustainable economic recovery despite rosy reassurances and the facade of statistical growth,
and
c) there are a number of bubbles in financial assets that have been functioning primarily as
wealth transfer mechanisms, and are wobbling in a manner that could bring the economy back to the
brink once again.
"..."this drop in oil prices, this drop industrial metal prices, this is not
good. It's a canary in the coal mine that something is not right in the global economy, and that
is a concern for us all."" . "...On the supply side we are still producing. Regardless of what the oil bulls will tell
you about the pullback in production, or the anticipated pullback in production, we have not yet
seen it, and we will not see significant pullback I believe through the end of this year.
So you marry those two facts together, fall in demand, strong production, i.e. I do think
oil prices are headed below $40 a barrel in the latter half of this year. " . "...That can't be,
because energy prices or commodity prices in general don't drive economic growth. Economic
growth drives commodity prices." . "...So we have the rout in oil prices. We have the rout in copper prices, in aluminum prices.
If we look at the industrial metals complex, that's now trading at lows not seen since
the recession. We're looking at bellwethers such as Caterpillar, a bellwether of industrial
production. That stock is trading again at a post-great recession low. . So there are a lot of telltales out there that this drop in oil prices, this drop industrial
metal prices, this is not good. It's a canary in the coal mine that something
is not right in the global economy, Pimm. And that is a concern for us all.
"
The best thing about the commodity crash relapse taking place so quickly after the last swoon - recall
tha we have had two oil bear markets within 8 months - is that all those hollow chatterboxes
and econo-tourists who swore that tumbling oil is "unambiguously good" and "great for the economy"
(first and foremost Larry Kudlow and then proceeding with every single sellside strategist and
economissed), have been laughed out of even CNBC's studio, and are nowhere to be found this
time around because not only did all those promises of a surge in consumer spending never materialize
(for reasons, or rather one reason
which we explained extensively before), but the observent public still remembers all too well
how countless 'experts' confusing cause (a gobal slowdown in the economy) with effect (crashing commodities).
Therefore, we were delighted when someone who actually understands the energy market for a change,
The Schork Report's Stephen Schork, appeared on BBG's Pimm Fox yesterday to explain not only what
the immediate future holds for both oil and gasoline prices, but why, when one actually gets cause
and effect right, "this drop in oil prices, this drop industrial metal prices, this is not
good. It's a canary in the coal mine that something is not right in the global economy, and that
is a concern for us all."
The full interview is below, here are the key spot-on highlights, first about the futures of commodity
prices :
... from a demand perspective on the seasonal front, it's August 7. We only have four more
weeks left of summer driving, then the peak gasoline season is over. Then we head into the fall
where the fall turnaround; that is the refinery maintenance season begins. So refineries
will scale back in their crude oil purchases. So right now we are at the peak of the
demand season. Demand is only going to fall between now and the end of the year.
On the supply side we are still producing. Regardless of what the oil bulls will tell
you about the pullback in production, or the anticipated pullback in production, we have not yet
seen it, and we will not see significant pullback I believe through the end of this year.
So you marry those two facts together, fall in demand, strong production, i.e. I do think
oil prices are headed below $40 a barrel in the latter half of this year.
FOX: All right. So, Stephen, let's say that gasoline ends up being
around $2.00, $2.10 a gallon by the end of the year, that extra money that people are not spending
on gasoline, going to go somewhere else?
SCHORK: Yes. It's going to go to a big government health care. Look,
I spend $100 -- and I'm saving $100 a week at the pump, excuse me, $25 a week, $100 a month, but
my health care premium went up $160 a month for my family. So I'm still diggings $60 in.
And so that's the big misnomer here, Pimm. People tend to think that this pullback at the pump
is somehow good. No. It's a zero sum game because, yes, those dollars are being spent
elsewhere, but those are not additional dollars being spent elsewhere. We're just moving the pieces
around on the chessboard. We're not creating economic growth.
Putting it all together:
And this is the big concern because we keep on thinking that lower energy prices are
somehow good for the economy. That can't be,
because energy prices or commodity prices in general don't drive economic growth. Economic
growth drives commodity prices.
So we have the rout in oil prices. We have the rout in copper prices, in aluminum prices.
If we look at the industrial metals complex, that's now trading at lows not seen since
the recession. We're looking at bellwethers such as Caterpillar, a bellwether of industrial
production. That stock is trading again at a post-great recession low.
So there are a lot of telltales out there that this drop in oil prices, this drop industrial
metal prices, this is not good. It's a canary in the coal mine that something
is not right in the global economy, Pimm. And that is a concern for us all.
Full interview with Stephen Schork after the jump:
"...I would completely agree that the "petrodollar" is a pillar of American power but am frankly
confused by what the essential mechanism of this is. To my mind to institute the petrodollar it is not
sufficient to say that oil will be denominated in dollars or even sold only in dollars. The key is that
the proceeds need to STAY in dollar assets. This was only achieved once Kissinger brokered Petro-dollar
recycling, meaning that the dollars earned in this way would be recycled into treasury securities or
used to purchase American weaponry or the engineering skills of the American firms that basically built
the Kingdom as it now exists. This is what I was hinting at when I was talking about the circular nature
of trade between currency blocs. No non-circular trade patterns can persist for long.
.
We emphasize different things. I suspect that the simple scale of the dollar value of trading of financial
claims on things – trading in which London and New York are dominant – contributes more to the maintenance
of the dollar reserve system than you are proposing. The upshot being that America's "debt" problem
is actually a demonstration of its financial power. "
. "..."The result was a depreciation of the dollar and other industrialized nations'
currencies. Because oil was priced in dollars, oil producers' real income decreased. In September 1971,
OPEC issued a joint communiqué stating that, from then on, they would price oil in terms of a fixed
amount of gold."
.
So it seems that the oil sellers, seeing that their "real" income from selling oil was decreasing (they
were selling oil at the same price in terms of dollars, but at a lower price in terms of gold), were
determined not to let the depreciating dollar erase a big chunk of their earnings. I think this goes
to show how deep is entrenched in the collective psyche the idea that gold is THE medium for storing
wealth. Barbarous relic? I think not…
.
After all, value is a social construct and economic relations are social relations mediated through
these things we call "commodities". Gold has proven itself to be a very good mediator of these social
relations, not because some magical qualities, but because of obvious practical advantages. So, although
its role is significantly smaller these days, I think it still retains the roles of "medium of last
resort" and "measuring stick of wealth"."
I had to start a new thread, Mark. Your first question – "does the fact that the USA's debt
is more than 100% of its GDP not make it insolvent?"
I take it you are using the definition of insolvency being when an organizations liabilities exceed
it's assets. The nation's GDP does not belong to the government and so cannot be seen as an asset
of the govt. So the question, as framed, is not 'well English', speaking economically :) Perhaps
you could rephrase it?
Insolvency can also be defined as an inability to meet current liabilities as they fall
due which is a cash flow problem rather than an asset problem. A government that owns and
controls its central bank cannot ever have a cash flow problem; that would be Iran, for instance,
or Libya before Terror Inc was unleashed on it.
A govt that does not own and control its central bank cannot have a cash flow problem so long
as its debt is denominated in its own national currency and the privately owned central bank continues
to monetize the government's newly issued bond/treasury certificates; that is countries like the
US and the UK.
A government that has its debt nominated in a foreign or external currency, such as Greece
and other Euro zone countries, is in the position of any other business and can be declared insolvent
and its assets sold up for the creditors. This situation with Greece was always going to come
right from the beginning.
I don't follow what you are asking with your second question – "Would it, if there were
a deliberate run on the dollar to drive it down and reduce its circulation, by refusing to use
it as a medium of exchange?" Could you rephrase it also?
A government that has its debt nominated in a foreign or external currency, such as Greece
and other Eurozone countries, is in the position of any other business and can be declared insolvent
and its assets sold up for the creditors. This situation with Greece was always going to come
right from the beginning.
Bang! I do not follow all of your points, but on this one I totally agree. To reconnect with
what Tim was writing about Italy, the problem with Italy (and Greece) is that they both have:
– a currency which is grossly overvalued with respect to their economies (this makes import
artificially easier than it should be, and export artificially harder)
– no control on what the value of that currency is (e.g. by devaluing its currency Italy
could keep its products competitive in the past)
When did the Italian crisis start? Answer: when Italy pegged its currency to the future
Euro, with the Maastrich Treaty.
In the second question, I meant ""Would it (be insolvent), if there were a deliberate
run on the dollar to drive it down and reduce its circulation, by refusing to use it as a medium
of exchange?" That is, would a deliberate turning-away from the dollar put the USA in a position
where it had to pay its debts and live within its means? And the answer is, not likely, because
the government does not control the bank or own the money, although there is most definitely a
very close relationship between the governors and the bankers. Still, there must be a relationship
between the whole world using the dollar and U.S. power, because if there were not the U.S. would
not attack a country on some made-up excuse as soon as it made noises about dropping the dollar.
Unless that's just a crackpot conspiracy theory.
Thanks for the clarification, Mark. The US could well find itself in trouble and that is my
expectation but "insolvent" is the wrong word to use.
First, the basics of the relationship between the Fed and the US Treasury dept. I think someone
here (Tim?), about a year ago, spelt out the actual mechanics of it all but a rough Idea will
suffice for our purposes. When the US govt wants to get more money, they have the Treasury Dept
draw up treasury certificates which are essentially IOU's and hand them to the Fed. The Fed creates
the credit to the value of the IOU's and places it in the US govt's a/c (at interest). The govt
can then meet all future expenses including maturing loans with this money because all of the
US's trade and loan contracts are written in US$.
There is no limit to the debt that the US can run up in this manner so there will always be
money to meet commitments. So the US govt cannot become technically insolvent.
Crystal ball stuff now – the problem for the US govt (and the Fed) is that it is committed
to printing ever more money at a time when the demand for it internationally is shrinking because
the BRICS countries and others are avoiding using the US dollar when possible. This will lead
to inflation for the dollar. In other words, it will lose value and make it less and less attractive
for people, companies and govts to hold it and thus further decreasing demand. We now have a self
fuelling downward spiral for the dollar.
The inflation happens because the US dollar is backed not only by the domestic GDP of the US
but also by all the international trade that is conducted using the dollar. As the total amount
of dollars in circulation increases and the demand decreases (because people are avoiding using
it) we have more dollars to buy less goods (because sellers do not want US dollars for their goods)
so the prices on the goods that are still available for US dollars will be bid upwards by the
excess money over goods available causing the inflation. I have been very impressed how the FED/govt
and Wall st generally have been able to stave off this inevitable inflation so far.
As for the US ever 'living within its means' that will only come when other trading partners
en masse refuse to accept US dollars for their goods (incl military materiel). The US will then
have to sell something tangible to raise the foreign currency (as most other countries now have
to do) to buy Chinese clothing and uniforms and ammunition etc. They may not be able to pay for
the military occupation in foreign countries using US dollars and so the Empire will start visibly
shrinking.
If this happens, countries like israel and Saudi Arabia will be left high and dry and have
to fend for themselves – and good luck with that! But psychopaths never say die so they just might
pull something out of the hat other than a rabbit. We'll see soon enough, I think. You can see,
though, that time is not on the side of the usual suspects.
I hope that answers your question adequately, Mark. If not, come on back to me!
" … Still, there must be a relationship between the whole world using the dollar and U.S. power,
because if there were not the U.S. would not attack a country on some made-up excuse as soon as
it made noises about dropping the dollar. Unless that's just a crackpot conspiracy theory."
I mentioned earlier in this thread that in 2000, Iraqi President Saddam Hussein switched to
trading oil for euros and then Iraq began conducting all its trade in euros. Not long afterwards,
the euro appreciated in value, perhaps in part as a result of its use as a trading currency, and
the value of Iraq's gold reserves also shot up as a result. http://www.theguardian.com/business/2003/feb/16/iraq.theeuro
Iran and North Korea then switched to trading in euros. Next thing you know, all three countries
became the New Axis of Evil.
If the world has to use the US dollar for trade, this means there will always be a demand from
exporters and importers for US dollars and this keeps the value of the US dollar high relative
to other currencies. To an extent this means that in a situation where all currencies are free-floating
(that is, not subjected to any controls on their value or supply by governments in the countries
where they are legal tender) and are completely subject to market supply and demand, the US dollar
will not experience high and low extremes when its value against other currencies fluctuates.
This keeps the US dollar's value high and steady.
The use of the US dollar as a world currency for trade was adopted during the Bretton Woods
conference in the late 1940s just after the Second World War. At the time, the US was the pre-eminent
manufacturing economy in the world and could dictate its terms to a ruined Europe. If the rest
of the world were to catch up with the US in manufacturing and trading capability, then everyone
needed to use US dollars to buy US goods, services and intellectual know-how in the form of patents,
advice and training. Few people at the time foresaw what would happen to the US economy if the
US dollar became the world's trading currency: the US economy would start to suffer persistent
trade and balance of payment deficits and the US government would be unable to control the supply
of US dollars. This is known as the Triffin Dilemma.
The British economist John Maynard Keynes who attended Bretton Woods was one of the few who
knew – that was partly why he advocated for adopting an international trade currency (bancor)
and an international clearing house for balance-of-payments surpluses and deficits – but as he
was the representative of an exhausted and defeated empire, his ideas were given short shrift
by the US attendees.
Posted this on earlier thread one page back before I saw this:
Here's where I think you, James and I agree: the reserve status of the dollar allows the U.S.
to fund it's deficit at the expense of other countries.
Here's' where I think (?) we disagree:
my point is that the reserve status makes it possible for the U.S. to run persistent trade
deficits but the ability to run a deficit is a virtue of all fiat systems. The fact that the
reserve status of the dollar means those deficits can be much higher doesn't change the fact.
Nor should it discredit deficit-spending by association.
I would completely agree that the "petrodollar" is a pillar of American power but am
frankly confused by what the essential mechanism of this is. To my mind to institute the
petrodollar it is not sufficient to say that oil will be denominated in dollars or even sold
only in dollars. The key is that the proceeds need to STAY in dollar assets. This was only
achieved once Kissinger brokered Petro-dollar recycling, meaning that the dollars earned in
this way would be recycled into treasury securities or used to purchase American weaponry or
the engineering skills of the American firms that basically built the Kingdom as it now exists.
This is what I was hinting at when I was talking about the circular nature of trade between
currency blocs. No non-circular trade patterns can persist for long.
We emphasize different things. I suspect that the simple scale of the dollar value of trading
of financial claims on things – trading in which London and New York are dominant – contributes
more to the maintenance of the dollar reserve system than you are proposing. The upshot
being that America's "debt" problem is actually a demonstration of its financial power. *
Could it become it's greatest weakness? It's possible I suppose but I don't see this happening
when western finance dwarfs the trading clout of its rivals. The system develops over time and,
with time it gains scale and so momentum. In other words I'm suggesting that a dollar collapse
is less likely than one might suppose.
*This was the point I was trying to make with the dollar as "safe haven" comments above. If
the dollar zigs (strengthens) when your mental model of the world says it should zag (weaken)
then this should really suggest that your model is missing some important part of the complex
mechanism it is trying to simulate.
Tim, I'll quote your words back to you and insert some clarifying (for me) words to demonstrate
my understanding and to see if it is the same as yours-
– my point is that the reserve status makes it possible for the U.S. to run persistent
(international) trade deficits but the ability to run a (domestic budgetary) deficit
is a virtue of all fiat systems. The fact that the reserve status of the dollar means those
(international trade and domestic budgetary) deficits can be much higher doesn't change
the fact. Nor should it discredit (domestic budgetary) deficit-spending by association."
The Bretton Woods agreement specified that the US would make gold available for purchase at
an agreed fixed price. This condition was thought to inhibit the US from printing money to excess.
But the Vietnam War came along and the US was printing money to pay for it. This extra money was
not financing extra productive capacity or creating wealth. Quite the opposite, in fact. So we
had an increasing supply of US dollars around the world but no commensurate extra production to
absorb the extra dollars.
This is exactly what the French thought would happen and they started demanding gold for their
US dollars. Eventually, the US had to stop selling gold now that it was greatly undervalued because
the dollar was overvalued. So Nixon took the US dollar off the gold standard. Inflation ensued.
Something was needed to soak up the extra purchasing power of the extra US dollars sloshing
around the world. This money was called "EuroDollars" at the time. Oil was the answer. The Saudis
(at the behest of Wall St) and OPEC jacked up the price of oil by a factor of four (IIRC) and
rapidly increased the demand for dollars and reversed the inflationary trend and the subsequent
loss of value.
As Tim points out, the Saudis had to not only sell oil exclusively for US dollars but they
had to deposit their surplus with New York banks. This way the banks won in three different ways.
1. they had overnight increased the international demand for US dollars and boosting its strength
and prestige (perceptions are everything)
2. They had handed a fortune to the Saudis but by keeping the money in the NY banks, the bankers
still controlled the Saudis
3. This surplus money was also kept out of other international banks and so could not be used
by them to effectively compete with the NY banks and so kept those other banks under control as
well and Wall St dominant.
Point 1 was the most important for the bankers, in my view. This created the petrodollar –
a dollar that used to be covered by gold as well as international trade and the US domestic GDP.
Then gold dropped out of the equation and was replaced with oil at a hugely inflated price.
At a bankers symposium during the eighties (I think from memory), the head of Citibank at the
time, Walter Wriston, answered a question concerning what his bank would do if the Saudis wanted
their money back. He replied blithely, "No problem. We'll write them a cheque!" His reply was
met with dumbfounded silence which told me told me that most of the audience of bankers did not
understand banking at that level. There should have been laughter because the money cannot escape
the system. It can only get transferred from one bank to another and each bank is dependent on
remaining in the system to keep operating.
It's just a matter of borrowing from each other. If Citibank has the Saudi's money to cover
their other loans, then this will be more profitable for them than having to borrow it from other
banks. But it is not a system breaker if they do have to borrow it from other banks. That's what
the system is for.
It would be interesting to know when the Saudis also started buying up weapons and military
hardware from the US and the UK. If they began some time in the early / mid 1970s to buy such
equipment, and it were possible to find out where the money was coming from, that would be another
piece in a big puzzle that links the collapse of the Bretton Woods agreement, the Vietnam War,
the 1973 oil crisis and subsequent decline in the US car manufacturing industry, the Yom Kippur
War and maybe more besides.
https://en.wikipedia.org/wiki/1973_oil_crisis#End_of_the_Bretton_Woods_accord
Hello Jen! From the Wiki article you linked, I found this paragraph to be very interesting:
"The result was a depreciation of the dollar and other industrialized nations' currencies.
Because oil was priced in dollars, oil producers' real income decreased. In September 1971, OPEC
issued a joint communiqué stating that, from then on, they would price oil in terms of a fixed
amount of gold."
So it seems that the oil sellers, seeing that their "real" income from selling oil was decreasing
(they were selling oil at the same price in terms of dollars, but at a lower price in terms of
gold), were determined not to let the depreciating dollar erase a big chunk of their earnings.
I think this goes to show how deep is entrenched in the collective psyche the idea that gold is
THE medium for storing wealth. Barbarous relic? I think not…
After all, value is a social construct and economic relations are social relations mediated
through these things we call "commodities". Gold has proven itself to be a very good mediator
of these social relations, not because some magical qualities, but because of obvious practical
advantages. So, although its role is significantly smaller these days, I think it still retains
the roles of "medium of last resort" and "measuring stick of wealth".
The currency Gaddafi had moved to introduce was the gold dinar, an actual negotiable gold coin,
and he proposed all African and Muslim nations
accept only the dinar for oil. The sources speculating on this look a little tabloid-ey, but
as with many such subjects, the mainstream press just never mentions it, as if deciding not to
talk about it removes it from consideration as an issue.
Similarly, the disappearance of Libya's gold is easily explained – unscrupulous people, including
Gaddafi himself,
stole it. The guy who was planning to introduce a gold currency to Africa actually stole all
the gold for himself, the tricky devil.
Jen, my recollection is that the Saudi's started buying armaments big-time during the seventies
because I remember asking myself, "what's wrong with this picture?" Here is a supposed enemy of
Israel buying huge amounts of military equipment, particularly fighter jets, from the country
it has just imposed sanctions on, the US. Added to that, the US is THE big supporter of Israel
and indeed, saved its bacon during the Yom Kippur war!
The money for the military hardware could only have come from the increased price of oil
and looking back it is increasingly obvious that these sales were part of the original deal to
increase the price of oil. It is part of the circular trading that Tim was talking about.
The petrol rationing exercises in the US and elsewhere are looking more and more like theatre
to condition the punters that we have to pay more. The whole crisis was stage managed and nothing
has changed in forty years!
The USA has a similar arrangement with Israel, in which it transfers billions in foreign aid
to this prosperous country and Israel then uses it to buy U.S. weapons and military equipment.
It would be simpler to just gift them the military equipment, but that would look as if the USA
was building a military ally to extend its own power – which it is – and the former way helps
create the need for more dollars.
This paper examines the major competing interpretations of the economic crisis in the US
and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to
stabilize and save the economy, but failed to change the underlying neoliberal economic
policy model. That failure explains the emergence of stagnation, which is likely to
endure. Current economic conditions in the US smack of the mid-1990s. The 1990s
expansion proved unsustainable and so will the current modest expansion. However, this
time it is unlikely to be followed by financial crisis because of the balance sheet
cleaning that took place during the last crisis.
[READ MORE]
daily i review articles on zerohedge, full of doom and gloom. unfortunately
they are written by ron paul types, not even socialists, let alone
communists. the way i see it a crash really is coming but the ones calling
the shots are not stupid: they want a crash that will demand/justify their
draconian repressive and warmaking moves.
(what i find amazing – given my slant – is the large number of smart,
knowledgeable people who must understand yet go along with it, like your
immortal cyborg comment: why aren't these people moving to tropical isles?)
my point being that analysis of armageddon and calling to account the enemy
is for the future.
ignore the provocateurs! he's not worth the increased bp
HHNW_GDP.jpg 1920x1080 105 KB
a) free capital flows and discretionary monetary policy but not fixed exchange rate
b) free capital flows and fixed exchange rate but not discretionary monetary policy
c) discretionary monetary policy and fixed exchange rate but not free capital flows
d) free capital flows, discretionary monetary policy and fixed exchange rate
a, b and c are possible, but d is impossible
Which then should China choose a, b or c?