What a year 2008 was. So much greed got bitch-slapped in the wallet. Fat-cat fights broke out on Wall Street as they all scrambled for the new Federal Reserve kitty litter. Bubbles were bursting everywhere like over-inflated bubble-wrap turf at the Super Bowl.
The big question is how far is this unravelling going to go? And what will happen when Wiley Coyote finally succumbs to gravity and hits bottom, wherever bottom is? The other important thing, for me, controversial as it may be, is to put 2008 in a peak oil perspective. I tend to do that. Based on the statistics, it appears that we hit peak oil in the spring of 2005. That, of course, is hotly debated. Those in power and those honest and unbiased mouthpieces for the energy industry and oil companies still claim that peak oil is decades away. And proponents of the abiotic oil theory claim that oil is self-regenerating and infinite (queue Bobby McFarren singing Don't worry, be happy!).
I don't like to engage in the statistical debate. There is a general lack of reliability in all of those statistics. There is always a major political component behind what gets reported. OPEC nations, for example, who doubled their reported reserves when they formed OPEC and established reserve-dependent production quotas, have never changed the numbers they report despite decades of drawdown on those reserves. Oil statistics, as with most statistics, are as meaningless as a sumo wrestlers new year's resolution to lose weight and can be interpreted many ways to support a variety of agenda.
There is little question that energy costs (the cost of all forms of energy rose in tandem with the price of oil) were a significant contributor to the economic collapse that began in 2008. Whether they were a cause or a coincidence is unclear. One of the debates that will probably persist through 2009 is whether peak oil or commodity speculators drove the price of oil up to $147.67. The statistics suggesting that we hit peak in the spring of 2005 do exist. But it is a question of interpretation.
From the time that M. King Hubbert first correctly forecast, in the early 1950s, that the U. S. lower-48 oil production would peak in 1970 (he further forecast that global production would peak in or about 2000, a date that was delayed by the oil crises of the 1970s and '80s) the basis of the peak oil argument has been a simple one. It was and still is based on production of conventional crude. The reason is simple. When global conventional crude passes the peak and goes into decline the combination of other sources will not be able to offset the declines in conventional crude. What has changed over the years, rather, in an attempt to disguise that inevitability, is the official definition of oil that is included in government and industry statistics.
Oil reserve reporting, for example, has been loosened from its original proven to provable. Those within the oil industry would like it loosened further still, perhaps all the way to ultimately recoverable. Such distinctions may be lost on all but industry insiders but it makes a tremendous difference in defining something like peak oil.
More importantly, the industrial and political definition of oil itself has changed significantly over the past few decades, as well as the definition of the liquid fuels such as gasoline, diesel, jet fuel and marine fuel normally derived from oil. The definition of oil has expanded far beyond conventional crude as well. It now encompasses synthetic crude produced from tar sands and oil shale, synthetic biofuels, extra heavy oil, vegetable and plant inputs to biofuels, deep water oil. It has also expanded to encompass, as barrels of oil equivalents (BOE), substances like natural gas, methane, and coal used as raw material for producing liquid fuels through processes like GTL (Gas to Liquid) and CTL (Coal to Liquid). Essentially anything that can be converted into liquid fuels, such as recycled motor oils and used cooking oil, either is or eventually will be included in the definition of oil. Whether or not this is an intentional misdirection to disguise the rapid decline in oil reserves, the effect on public awareness is the same.
However, even incorporating deepwater crude and extra heavy oil (which the majority of the world's refineries are not designed to process), global oil discoveries peaked way back in the 1960s and have been declining ever since. We are now producing or extracting every year over four barrels of oil for every new barrel of oil discovered, and have been consuming more oil per year than that discovered for nearly three decades. Taken on a field by field basis, peak generally follows discovery by about thirty years, but this can vary significantly from one field to another. Some will peak and go into decline in as short a time as ten years. Some large fields like Gawhar, Cantarell and Burgan may not reach peak production for forty or fifty years.
There is an ever-accelerating effort to find or identify alternatives from which liquid fuels can be produced. For a variety of reasons that effort is meeting ever-growing opposition. The push for bio-fuels resulting in rapidly rising food grain prices is largely seen as a major contributor to increasing world hunger. There is rapidly accelerated destruction of old growth rainforests to bring more land into bio-fuel production. Financing has been diverted into bio-fuel subsidies from research and development funding for other viable energy alternatives like solar and wind. There has been increased land consolidation for efficient fuel crop production pushing more indigenous, self-sufficient farmers off their land in poor third world countries.
Massive investments continue in tar-sands and oil-shale operations, possibly the most environmentally destructive energy projects on the planet. Coal production (coal is the dirtiest, least energy-dense of the fossil fuels) is again on the rise, using ever-poorer grades of coal for the production of liquid fuels. Massive volumes of natural gas are being diverted to liquid fuels or used as the energy source for tar-sands and oil-shale processing. And all of these efforts are running into increased public opposition as the damage they do becomes clearer.
So how will all of this play out in 2009? In 2008 oil prices rocketed up to over $147.00 per barrel only to collapse, right along with the stock markets and the global economy, to under $40.00 per barrel by year end. There was a serious amount of demand destruction, in rich and poor nations alike, in the second half of the year. Repeated production cuts by OPEC have not succeeded in halting the plummeting price of oil. Where oil, according to the experts, was way above what the fundamentals would support at $147.00, it is now as far below the fundamentals at $40.00 and lower.
No one seems to be quite sure what the fundamentally supportable price of oil should be anymore. It is likely that this confusion and uncertainty of oil prices will continue through 2009. Prices may, if there are signs of some measurable economic recovery, be driven by speculators back above the $100.00 per barrel mark, perhaps even surpassing the $147.00 level of mid 2008. If there are no signs of economic recovery, however, the downward momentum will likely see the global economy contract even further. Moving from recession to depression is clearly a possibility. The fundamentals will not again form the basis of oil prices until the economic turmoil settles. Just as there was a fear (of war) premium built into the price on the way up, there is a fear (of recession/depression) penalty built into it on the way down.
There is one unavoidable truth underlying all of this, however. Whatever the price of oil, somewhere around 30-billion barrels of it will be consumed globally in 2009. When we are talking about total, remaining, recoverable oil of less than a trillion barrels that is still a lot of drawdown. It appears that we are on a global production plateau with minor new discoveries and alternatives thus far effectively offsetting (hiding?) the production decline in existing fields. This will likely delay the recognition and admission of peak oil in official circles until we fall off the plateau and have clearly and unarguably begun our slide down the depletion slope. The demand destruction during the current global economic uncertainty will lengthen the plateau slightly and delay a little longer that recognition and admission. On the other hand, major developed nations may decide to take advantage of the temporarilly low oil prices to top up their Strategic Petroleum Reserves, which China has already begun to do.
The other reality is, however, that more and more effective voices are beginning to talk about peak oil in government, in the mainstream media and in books. A momentum is beginning to build, a momentum that has been a long time coming. The Exxons and CERAs and EIAs can no longer cavalierly dismiss peak oil and sweep it under their tired old threadbare carpet. The experts are beginning to have to justify the credibility they have been granted and increasingly it is clear the emperor has no clothes. Their reassurances and promises are increasingly being recognized for what they are: sleights of hand, parlour tricks, smoke and mirrors. The house of cards is built on shifting sand.
Increasingly the deniers and naysayers are now resorting to claiming that peak oil is a manufactured hoax meant to drive up the price of oil. Up until now they had comfortably clung to the accusation that peak oilers are a wacko fringe using fudged statistics. As more and more of those peak oilers are previous respected members of their own profession and industry (people like Fatih Birol, Matt Simmons, Ali Samsan Baktiari and Colin Campbell) armed with the same statistics as the so-called experts, that old accusation has finally lost the credibility it should never have had. Once those brave people leave the oil industry they no longer have a professional obligation to push the industry or corporate agenda. They are free to tell the truth and deal with the harsh reality of peak oil.
I believe that in 2009, partly because of the global financial crisis and partly in spite of it, peak oil will move its way toward the top of the agenda for the governments of developed and developing nations throughout the world. With the tremendous amount of debt incurred with the global financial crisis, the large amount of wealth lost, the major devaluation and revaluation of currencies through the printing of trillions of dollars of new money to bail out the economy, the on-going captivity of the world's governments by the perpetual growth economic paradigm, those governments will try to direct a great deal of energy into the recovery of their national economies. As they do so the reality of declining global energy reserves is going to smack them in the face. The hole we have dug with this collapse of the virtual economy is deep enough that there are not enough of those reserves left to push energy production to the levels that such a major recovery can be achieved.
By the end of 2009, I believe, we will either invent and implement a new economic paradigm that is not based on perpetual growth, or we will, in trying to recover, turn the current global recession into a global depression, not the second Great Depression but the Last Great Depression. We may finally come to the full realization that it is not money that makes the world go round. It is energy. You can always print more money but it has no value, like the Emperor's new clothes, if there is no energy. Money has no value unless it is working and it can't work without energy.
Oh, and one last truth or reality for 2009...... These are certainly interesting times in which to live. Buckle up and enjoy the ride.
Showing posts with label post peak economics. Show all posts
Showing posts with label post peak economics. Show all posts
Sunday, January 04, 2009
Wednesday, October 22, 2008
Peak Oil and the Global Financial Crisis
I am not an economist, nor do I play one on television. Nor would I want to be one. How limiting and depressing it must be to constrain oneself to constantly viewing the beauty and wonders of this magnificent living planet through the lens of cold, hard, lifeless money, seeking nothing more from it than profit.
Economist preach the faith that money makes the world go round. And they have the charts and graphs to prove it. And therein lies the problem. We can not solve our problems, including the serious global financial crisis, by looking at the world through a dollar sign, through the same economic lens that has contributed so largely to creating that crisis.
The environment is not a part of the economy to be bought and sold for a profit. It does not conform neatly to human economic rules and laws. The economy, conversely, is just one subset of the environment. We need to look at economics through a worldview that is broad and all-encompassing, need to put it in a more realistic perspective in tune with the realities of the planet itself.
We have pushed this planet and its environment to the brink and must now place human economy in the service of protecting and preserving what is left while there is still something of it left to protect and preserve. Because sooner or later that chance will be lost. We will at some point pass the tipping point, all for the sake of profit. In fact, if we continue with the same economic mindset we will probably try to make even more profit out of the terminal scarcity that our pursuit of profit has created.
Climbing back out of any recession means increasing energy consumption. Period. Recession recovery means increasing manufacturing production, transportation, increasing mobility, increased credit, increased shipping and trade. All of this involves increases in the use of energy.
In the five years from 1930-35 U.S. energy consumption dropped by nearly 14%. In the next five years, with the onset of war manufacturing and increased trans-Atlantic trade with the western European nations who would soon be pitted against Germany in WWII, it rose by 23.3% and another 29.5% during the war years to 1945. In fact, as Michael T. Klare points out in his excellent video, Blood and Oil, "The U.S. consumed more than one third of its total oil reserves during WWII." Other periods of recovery following recessions have also been accompanied by similar measurable peaks in increased energy consumption.
But how do we know if/when we are in a recession/depression? As they unfold there is invariably a serious and increasing disconnect between the Rosy and optimistic pronouncements - as if trying to wish it away - of leading politicians and industry leaders measured against the increasingly painful realities seen and felt by people on the street, whether that be Main Street or the workers and stock-hawkers in the pits on Wall Street. This is not unlike John McCain's confident campaign-trail assertion that "The fundamentals of the economy are strong," just hours before Treasury Secretary Paulson started the ball rolling on the $700-billion financial system bailout package.
In November, 1930 Alfred P. Sloan Jr. of General Motors confidently proclaimed, "I see no reason why 1931 should not be an extremely good year." Compare that to similar "public" optimism of today's GM leaders as the company implodes and seeks merger with Chrysler, itself currently struggling and a phoenix recently arisen from the ashes of near bankruptcy. On June 9, 1931, eight years before the depression was finally ended by WWII, Dr. Julius Klein, then U.S. Assistant Secretary of Commerce, announced "The depression has ended."
We, of course, have a very different reality to deal with today than what existed in 1929. If lack of energy or the high cost of energy in any way contributes to a recession, as it very clearly has in the 2008 global recession (depression?), then climbing back out of the recession will now be very much constrained by the same factors that caused it. That energy scarcity or high energy cost will increase right along with the increase in activity in the attempted economic recovery.
In the few weeks following the first admission of a global financial crisis, spotlighted by the U.S. Treasury's request for its first $700-billion bailout package, oil prices on the world's commodity exchanges began to move uncharacteristically in lockstep with the wild swings on global stock markets. Over the previous couple of years the stock markets and oil prices had more often gone in opposite directions as investors moved their money back and forth between equities and commodities in search of the highest profits. This new tandem pattern was the clearest signal that investors were simply removing their money from the investment arena, both equities and commodities, as profit opportunities dwindled and moving it into cash or gold.
If it's not this recession it will be the next one. There isn't time (historically 10-20 years to fully recover from a deep recession) to climb back out of this recession before the next one hits (bull periods tend to be 8-15 years duration). Peak oil is either already upon us or about to hit within the next 5-10 years, depending on who you listen to.
Suddenly real people, and economists, will come to realize that it is a serious liability, not an asset, that we have a credit/debt driven economy. The proposed solutions to this crisis thus far have been to throw more credit/debt at it. Our current global economy is critically dependent on growth. That growth is critical to support the U.S. Federal Reserve's policy (now essentially practiced globally by all national reserve banks) of growing the money supply through Fractional Reserve Banking. Through fractional reserve banking each dollar on loan (debt) is treated as an asset which the bank uses as the asset base to issue up to ten more dollars of loans out of money that does not exist, and can never, in a shrinking economy, be paid back.
Growth is also critically dependent on never-ending expansion of the energy supply tp support the social activity to generate the money to repay the debts incurred under the fractional reserve banking system. If you can't increase the energy supply growth stops. If growth stops the credit/debt economy dies. A debt-based economic system ultimately incorporates the assumption of its own eventual bankruptcy.
This recession, as has become painfully clear, is global. The recovery, likewise, must be global. For one nation to try to pull itself out of the recession at the cost of other nations cannot work, or at least will not be tolerated by other nations. There is considerable fear, however, that that is exactly what will happen. There is even greater fear in the U.S. that not one but many nations will decide to take advantage of the situation and use it to destroy U.S. hegemony by taking the U.S. dollar down the toilet.
There are many side effects to the growing global financial crisis. One of the most dangerous for the industrial nations is that the JIT (Just In Time) theology is breaking down. There is no credit available to finance shipping costs, to finance an inventory buildup, especially the large retail build-up for the Christmas season. Shelves will become bare so much more quickly than in the Great Depression because nobody holds an inventory. The inventory is in the pipeline. If the pipeline is shutdown the only inventory to draw on is what is on the shelves, generally a few days or weeks of product. The financial system will not free up massive amounts of money to allow for the building up of inventory, something manufacturers and producers would clearly love. What better solution to the woes of the manufacturing sector than to suddenly have retailers abandon JIT and suddenly start stocking their shelves and backrooms with inventory.
Since oil and other energy forms are such a crucial and costly input to the exploitation of all energy sources those other forms of energy have risen in cost in tandem with the price of oil (and do not, as we constantly observe, do not drop as quickly as oil when it drops). This has, however, had an odd and now clearly unfortunate side effect.
The higher selling price of energy has encouraged the development of many higher cost alternatives necessitated by the declining availability of the preferred and less costly primary sources such as crude oil, natural gas and black coal. The Canadian tar sands, deepwater offshore oil extraction and oil extraction in landlocked countries like Azerbaijan are prime examples. If and when the price of oil declines due to demand destruction, and other forms of energy with it, financially over-extended energy projects like those mentioned, which were viable only because of the high selling price of the energy those projects produced, begin to fall on serious financial difficulties. The energy they produce no longer brings the selling price that their much higher production costs require to remain viable.
The global oil production and demand figures show very clearly that we hit a peak in global oil production in May, 2005. We may still have times over the next few years where that peak is surpassed as we bounce along on the peak oil plateau. The trend, however, shows that growth in global oil production has ceased though the terminal decline has not yet begun.
Growth in liquid fuels since that peak has come not from conventional crude but from alternatives such as tar sands, oil sands, oil shale, coal-to-liquid, natural gas to liquid, synthetics and biofuels, primarily from sugar cane, corn and wheat. This latter, in fact, is contributing to a serious rise in world food prices that is raising the specter of a new round of mass starvation such as we have not seen since the beginning of the green revolution.
If this recession is prolonged, which there is every indication it will be, it is unlikely, considering the global energy production statistics, that we will have the energy required to support the growth in industrial and economic activity it will take to bring it to an end. If it does end it will not be for long. We will quickly run up against the limits in the energy supply and slip yet again into a global recession, that one terminal.
Governments of the major economic nations, and their economists, are beginning to make noises about redesigning the global financial system. If that redesign does not properly take into the account the current energy limitations and future energy declines it will be very short-lived.
Economist preach the faith that money makes the world go round. And they have the charts and graphs to prove it. And therein lies the problem. We can not solve our problems, including the serious global financial crisis, by looking at the world through a dollar sign, through the same economic lens that has contributed so largely to creating that crisis.
The environment is not a part of the economy to be bought and sold for a profit. It does not conform neatly to human economic rules and laws. The economy, conversely, is just one subset of the environment. We need to look at economics through a worldview that is broad and all-encompassing, need to put it in a more realistic perspective in tune with the realities of the planet itself.
We have pushed this planet and its environment to the brink and must now place human economy in the service of protecting and preserving what is left while there is still something of it left to protect and preserve. Because sooner or later that chance will be lost. We will at some point pass the tipping point, all for the sake of profit. In fact, if we continue with the same economic mindset we will probably try to make even more profit out of the terminal scarcity that our pursuit of profit has created.
Climbing back out of any recession means increasing energy consumption. Period. Recession recovery means increasing manufacturing production, transportation, increasing mobility, increased credit, increased shipping and trade. All of this involves increases in the use of energy.
In the five years from 1930-35 U.S. energy consumption dropped by nearly 14%. In the next five years, with the onset of war manufacturing and increased trans-Atlantic trade with the western European nations who would soon be pitted against Germany in WWII, it rose by 23.3% and another 29.5% during the war years to 1945. In fact, as Michael T. Klare points out in his excellent video, Blood and Oil, "The U.S. consumed more than one third of its total oil reserves during WWII." Other periods of recovery following recessions have also been accompanied by similar measurable peaks in increased energy consumption.
But how do we know if/when we are in a recession/depression? As they unfold there is invariably a serious and increasing disconnect between the Rosy and optimistic pronouncements - as if trying to wish it away - of leading politicians and industry leaders measured against the increasingly painful realities seen and felt by people on the street, whether that be Main Street or the workers and stock-hawkers in the pits on Wall Street. This is not unlike John McCain's confident campaign-trail assertion that "The fundamentals of the economy are strong," just hours before Treasury Secretary Paulson started the ball rolling on the $700-billion financial system bailout package.
In November, 1930 Alfred P. Sloan Jr. of General Motors confidently proclaimed, "I see no reason why 1931 should not be an extremely good year." Compare that to similar "public" optimism of today's GM leaders as the company implodes and seeks merger with Chrysler, itself currently struggling and a phoenix recently arisen from the ashes of near bankruptcy. On June 9, 1931, eight years before the depression was finally ended by WWII, Dr. Julius Klein, then U.S. Assistant Secretary of Commerce, announced "The depression has ended."
We, of course, have a very different reality to deal with today than what existed in 1929. If lack of energy or the high cost of energy in any way contributes to a recession, as it very clearly has in the 2008 global recession (depression?), then climbing back out of the recession will now be very much constrained by the same factors that caused it. That energy scarcity or high energy cost will increase right along with the increase in activity in the attempted economic recovery.
In the few weeks following the first admission of a global financial crisis, spotlighted by the U.S. Treasury's request for its first $700-billion bailout package, oil prices on the world's commodity exchanges began to move uncharacteristically in lockstep with the wild swings on global stock markets. Over the previous couple of years the stock markets and oil prices had more often gone in opposite directions as investors moved their money back and forth between equities and commodities in search of the highest profits. This new tandem pattern was the clearest signal that investors were simply removing their money from the investment arena, both equities and commodities, as profit opportunities dwindled and moving it into cash or gold.
If it's not this recession it will be the next one. There isn't time (historically 10-20 years to fully recover from a deep recession) to climb back out of this recession before the next one hits (bull periods tend to be 8-15 years duration). Peak oil is either already upon us or about to hit within the next 5-10 years, depending on who you listen to.
Suddenly real people, and economists, will come to realize that it is a serious liability, not an asset, that we have a credit/debt driven economy. The proposed solutions to this crisis thus far have been to throw more credit/debt at it. Our current global economy is critically dependent on growth. That growth is critical to support the U.S. Federal Reserve's policy (now essentially practiced globally by all national reserve banks) of growing the money supply through Fractional Reserve Banking. Through fractional reserve banking each dollar on loan (debt) is treated as an asset which the bank uses as the asset base to issue up to ten more dollars of loans out of money that does not exist, and can never, in a shrinking economy, be paid back.
Growth is also critically dependent on never-ending expansion of the energy supply tp support the social activity to generate the money to repay the debts incurred under the fractional reserve banking system. If you can't increase the energy supply growth stops. If growth stops the credit/debt economy dies. A debt-based economic system ultimately incorporates the assumption of its own eventual bankruptcy.
This recession, as has become painfully clear, is global. The recovery, likewise, must be global. For one nation to try to pull itself out of the recession at the cost of other nations cannot work, or at least will not be tolerated by other nations. There is considerable fear, however, that that is exactly what will happen. There is even greater fear in the U.S. that not one but many nations will decide to take advantage of the situation and use it to destroy U.S. hegemony by taking the U.S. dollar down the toilet.
There are many side effects to the growing global financial crisis. One of the most dangerous for the industrial nations is that the JIT (Just In Time) theology is breaking down. There is no credit available to finance shipping costs, to finance an inventory buildup, especially the large retail build-up for the Christmas season. Shelves will become bare so much more quickly than in the Great Depression because nobody holds an inventory. The inventory is in the pipeline. If the pipeline is shutdown the only inventory to draw on is what is on the shelves, generally a few days or weeks of product. The financial system will not free up massive amounts of money to allow for the building up of inventory, something manufacturers and producers would clearly love. What better solution to the woes of the manufacturing sector than to suddenly have retailers abandon JIT and suddenly start stocking their shelves and backrooms with inventory.
Since oil and other energy forms are such a crucial and costly input to the exploitation of all energy sources those other forms of energy have risen in cost in tandem with the price of oil (and do not, as we constantly observe, do not drop as quickly as oil when it drops). This has, however, had an odd and now clearly unfortunate side effect.
The higher selling price of energy has encouraged the development of many higher cost alternatives necessitated by the declining availability of the preferred and less costly primary sources such as crude oil, natural gas and black coal. The Canadian tar sands, deepwater offshore oil extraction and oil extraction in landlocked countries like Azerbaijan are prime examples. If and when the price of oil declines due to demand destruction, and other forms of energy with it, financially over-extended energy projects like those mentioned, which were viable only because of the high selling price of the energy those projects produced, begin to fall on serious financial difficulties. The energy they produce no longer brings the selling price that their much higher production costs require to remain viable.
The global oil production and demand figures show very clearly that we hit a peak in global oil production in May, 2005. We may still have times over the next few years where that peak is surpassed as we bounce along on the peak oil plateau. The trend, however, shows that growth in global oil production has ceased though the terminal decline has not yet begun.
Growth in liquid fuels since that peak has come not from conventional crude but from alternatives such as tar sands, oil sands, oil shale, coal-to-liquid, natural gas to liquid, synthetics and biofuels, primarily from sugar cane, corn and wheat. This latter, in fact, is contributing to a serious rise in world food prices that is raising the specter of a new round of mass starvation such as we have not seen since the beginning of the green revolution.
If this recession is prolonged, which there is every indication it will be, it is unlikely, considering the global energy production statistics, that we will have the energy required to support the growth in industrial and economic activity it will take to bring it to an end. If it does end it will not be for long. We will quickly run up against the limits in the energy supply and slip yet again into a global recession, that one terminal.
Governments of the major economic nations, and their economists, are beginning to make noises about redesigning the global financial system. If that redesign does not properly take into the account the current energy limitations and future energy declines it will be very short-lived.
Monday, September 17, 2007
Why there will be a Fast Crash and not a Slow Decline
"Confidence in a secure tomorrow makes life brighter today."
Radio ad for a financial services company
The economy, whether the local community economy, the national economy, or the global economy, is based on one commodity, and that commodity is not oil. It is confidence.
Whether a person, a corporation, or a government, we borrow against tomorrow's income to buy unneeded baubles and trinkets today. We accept being a consumer society because we have confidence that our economy, as well as our standard of living, will continue to grow. How else can one explain the plethora of useless new products brought on the market each year and willingly snapped up by sheeple consumers with only a little needed encouragement from Madison Avenue via their wide-screen, high-definition television sets?
That confidence is based on an assumption of perpetual growth,which economists and government leaders persist in putting forward as a given. A sudden loss of confidence has been the reality check that has brought on every economic downturn in history, from a small, hardly-noticed and quickly-forgotten double-digit decline on the stock market to a catastrophic global market collapse such as happened in 1929. If the basis for that confidence is not as quickly restored, which it was not in 1929 even though the potential still existed then to do so, then a comparatively rapid economic implosion ensues.
For those to whom this is news, you haven't been paying attention. For those who are ensconced in their state of denial and reject this reality, I will paraphrase a song;
"If you don't know it by now, You will never, never, never know it....."
How can confidence so quickly disappear? Usually the answer is because the confidence ran way ahead of reality and the market got badly over-extended. There was no valid reason for the high degree of confidence that existed.
"Confidence is the feeling you have before you fully understand the situation."
Source unknown
Confidence, by its very nature, is essentially irrational. It is not based on knowledge but rather on faith that something you wish to be true actually is true. There is never a proper amount of confidence. Just as a sudden loss of confidence can spell doom for an economy, an excess of confidence, particularly a sudden irrational surge of confidence, can over-extend an economy, keep it running too hot for too long. When it does eventually falter it turns what should have been a softening into a recession, a recession into a depression. And people's confidence in our present economy and culture has been far too high for far too long. This has been achieved by a coordinated, intentional effort on the part of government, business and industry to keep people ignorant of the soon-to-be-encountered constraints to continuing the growth economy. When that confidence does finally weaken - when people finally understand the reality and the fallacy of the beloved perpetual-growth economy - it will drop suddenly and dramatically and we will have a hard and devastating crash.
Almost all corporate earnings estimates and targets are based on that assumption of growth. Most companies today are so highly debt-leveraged that it takes a minimum of 2% growth just to service that debt. That has nothing to do with confidence. That is just cold, hard reality. If a company does not achieve enough growth to service its debt then the debt grows, requiring even more corporate growth to service it. It is a vicious cycle-down to bankruptcy.
Those government, business and industry leaders (TPTB) who manipulate people's confidence are constantly playing a balancing game. In a perpetual-growth economy, they want to keep confidence growing slightly ahead of what is reasonable in anticipation and expectation that conditions will improve to meet those expectations. By that time, of course, they want expectations to be moving out ahead to the next level of expectation. In order to play this game they must always have information one step ahead of the pack, must know whether the higher expectations can reasonably be achieved. When information comes to them that suggests they cannot, they must manipulate events to lower people's expectations to fit the new attainable.
The danger arises when the information being used to manipulate people's confidence is not accurate. Then the manipulators do not reasonably know that the higher expectations can not be met. They fall into a trap of their own ignorance (business managers never like to pass negative information up the line). The degree of backlash they are exposed to is dependent upon the degree to which those expectations are wrong (confidence can be almost as easily lost when the reality is significantly better than promised - wrong is wrong) and the degree to which it affects those whose confidence has been manipulated. The greater the discrepancy, the greater the backlash. They are also dependent on their ability to make up that discrepancy in the future. If they can, and continue to grow, confidence quickly comes back and is maintained. If TPTB are still dealing with bad information and promise to make up the discrepancy and continue growth when, in reality, things continue to worsen, the severity of the backlash, when it occurs, increases. If TPTB lower their estimate there is, likewise, a reduction in confidence based on the perception that they are not in control and only reacting to changed circumstances after the fact. If estimates are reduced and the results still fall short then there is a major loss of confidence. Not only are TPTB not in control but cannot even react and keep up with the changes around them. A loss of confidence of this magnitude can cause a complete collapse. Enron, Worldcom, Northern Telecom, are all excellent examples of this type of collapse. The anger, incrimination, and rapid collapse are all the inevitable outcome of such extreme manipulation of confidence and the inability to control the environment upon which that confidence critically depended.
These three companies and their principles did nothing different than other companies or even governments. They manipulate the confidence of their investors through, when necessary, manipulating the data and information that the outside is allowed to see. They use that excess confidence to fuel their growth rather than using the growth to build confidence. It is a shell game. you build yourself up to appear to be something you are not but expect to become. In all three cases, and most other cases like them, they lost control of the environment they were trying to manipulate, because they were relying on false data and assumptions, and could not deliver close enough to expectations to maintain that level of confidence.
That is the shell game being played to prop up the global, perpetual-growth economy, the shell game that requires the confidence of and buy-in by the people. There are several potential global disasters on the horizon, not the least of which is the beginning of the decline in global energy resources, most notably oil. Cheap energy has been the catalyst that has allowed TPTB to continue to build and maintain confidence in the global, perpetual-growth economy. There have been bumps in the road but no major roadblocks, and the illusion of growth has been able to be maintained globally where it may have failed locally. A great proportion of international trade, in fact, is not trade at all. It is the movement of goods and materials within the same company from one country to another. This accounts, in many instances, for as much as half the imports and exports of certain small economies, and represents over 40% of total US international trade. And much of this moving commodities (most importantly, including money) between different parts of a global corporation is done for the express purpose of tax evasion, to reduce the appearance of profit in money-making branches by saddling them with the debt of higher inventories acquired from less profitable branches. Much of the rest of that trade flowing from rich to poor nations is goods purchased with money from the WorldBank, IMF, OECD and other organizations established to foster globalization.
The illusion of wealth, the illusion of a robust global economy, can only be maintained by the continued availability of cheap energy. As long as that illusion can be maintained the general confidence of the sheeple in the economy can be maintained and that confidence can be used to fuel the pursuit of the mythical global economy that is presold and bought into by the people.
There are growing numbers of people prepared to see through the illusion and look at the ugly reality behind it. As global energy reserves begin their downhill slide more and more people each day will wake up to the reality. When a critical mass of people reach this point, and not until then, the economic house of cards will be suddenly and dramatically brought down by a massive loss of confidence that will feed on itself as the economy implodes. The crash, when it comes, will be very dramatic. The fallout will take years but the crash may only take weeks.
The above article was initially written in 2006. I thought it an appropriate time to put it in the blog.
The current run on the Northern Rock bank in Britain results from exactly the sort of loss of confidence that I speak of above. Fear of the bank's potential exposure to the US subprime mortgage fiasco and the move by the Bank of England to inject liquidity in the bank, have badly shaken investor/depositor confidence in the bank. That loss of confidence continues to deepen despite government and bank official reassurances that the bank remains solid. This could domino through the British banking industry and could even spill over into the global crisis that we have been anticipating. Only time will tell and this will have to be watched for some time.
Radio ad for a financial services company
The economy, whether the local community economy, the national economy, or the global economy, is based on one commodity, and that commodity is not oil. It is confidence.
Whether a person, a corporation, or a government, we borrow against tomorrow's income to buy unneeded baubles and trinkets today. We accept being a consumer society because we have confidence that our economy, as well as our standard of living, will continue to grow. How else can one explain the plethora of useless new products brought on the market each year and willingly snapped up by sheeple consumers with only a little needed encouragement from Madison Avenue via their wide-screen, high-definition television sets?
That confidence is based on an assumption of perpetual growth,which economists and government leaders persist in putting forward as a given. A sudden loss of confidence has been the reality check that has brought on every economic downturn in history, from a small, hardly-noticed and quickly-forgotten double-digit decline on the stock market to a catastrophic global market collapse such as happened in 1929. If the basis for that confidence is not as quickly restored, which it was not in 1929 even though the potential still existed then to do so, then a comparatively rapid economic implosion ensues.
For those to whom this is news, you haven't been paying attention. For those who are ensconced in their state of denial and reject this reality, I will paraphrase a song;
"If you don't know it by now, You will never, never, never know it....."
How can confidence so quickly disappear? Usually the answer is because the confidence ran way ahead of reality and the market got badly over-extended. There was no valid reason for the high degree of confidence that existed.
"Confidence is the feeling you have before you fully understand the situation."
Source unknown
Confidence, by its very nature, is essentially irrational. It is not based on knowledge but rather on faith that something you wish to be true actually is true. There is never a proper amount of confidence. Just as a sudden loss of confidence can spell doom for an economy, an excess of confidence, particularly a sudden irrational surge of confidence, can over-extend an economy, keep it running too hot for too long. When it does eventually falter it turns what should have been a softening into a recession, a recession into a depression. And people's confidence in our present economy and culture has been far too high for far too long. This has been achieved by a coordinated, intentional effort on the part of government, business and industry to keep people ignorant of the soon-to-be-encountered constraints to continuing the growth economy. When that confidence does finally weaken - when people finally understand the reality and the fallacy of the beloved perpetual-growth economy - it will drop suddenly and dramatically and we will have a hard and devastating crash.
Almost all corporate earnings estimates and targets are based on that assumption of growth. Most companies today are so highly debt-leveraged that it takes a minimum of 2% growth just to service that debt. That has nothing to do with confidence. That is just cold, hard reality. If a company does not achieve enough growth to service its debt then the debt grows, requiring even more corporate growth to service it. It is a vicious cycle-down to bankruptcy.
Those government, business and industry leaders (TPTB) who manipulate people's confidence are constantly playing a balancing game. In a perpetual-growth economy, they want to keep confidence growing slightly ahead of what is reasonable in anticipation and expectation that conditions will improve to meet those expectations. By that time, of course, they want expectations to be moving out ahead to the next level of expectation. In order to play this game they must always have information one step ahead of the pack, must know whether the higher expectations can reasonably be achieved. When information comes to them that suggests they cannot, they must manipulate events to lower people's expectations to fit the new attainable.
The danger arises when the information being used to manipulate people's confidence is not accurate. Then the manipulators do not reasonably know that the higher expectations can not be met. They fall into a trap of their own ignorance (business managers never like to pass negative information up the line). The degree of backlash they are exposed to is dependent upon the degree to which those expectations are wrong (confidence can be almost as easily lost when the reality is significantly better than promised - wrong is wrong) and the degree to which it affects those whose confidence has been manipulated. The greater the discrepancy, the greater the backlash. They are also dependent on their ability to make up that discrepancy in the future. If they can, and continue to grow, confidence quickly comes back and is maintained. If TPTB are still dealing with bad information and promise to make up the discrepancy and continue growth when, in reality, things continue to worsen, the severity of the backlash, when it occurs, increases. If TPTB lower their estimate there is, likewise, a reduction in confidence based on the perception that they are not in control and only reacting to changed circumstances after the fact. If estimates are reduced and the results still fall short then there is a major loss of confidence. Not only are TPTB not in control but cannot even react and keep up with the changes around them. A loss of confidence of this magnitude can cause a complete collapse. Enron, Worldcom, Northern Telecom, are all excellent examples of this type of collapse. The anger, incrimination, and rapid collapse are all the inevitable outcome of such extreme manipulation of confidence and the inability to control the environment upon which that confidence critically depended.
These three companies and their principles did nothing different than other companies or even governments. They manipulate the confidence of their investors through, when necessary, manipulating the data and information that the outside is allowed to see. They use that excess confidence to fuel their growth rather than using the growth to build confidence. It is a shell game. you build yourself up to appear to be something you are not but expect to become. In all three cases, and most other cases like them, they lost control of the environment they were trying to manipulate, because they were relying on false data and assumptions, and could not deliver close enough to expectations to maintain that level of confidence.
That is the shell game being played to prop up the global, perpetual-growth economy, the shell game that requires the confidence of and buy-in by the people. There are several potential global disasters on the horizon, not the least of which is the beginning of the decline in global energy resources, most notably oil. Cheap energy has been the catalyst that has allowed TPTB to continue to build and maintain confidence in the global, perpetual-growth economy. There have been bumps in the road but no major roadblocks, and the illusion of growth has been able to be maintained globally where it may have failed locally. A great proportion of international trade, in fact, is not trade at all. It is the movement of goods and materials within the same company from one country to another. This accounts, in many instances, for as much as half the imports and exports of certain small economies, and represents over 40% of total US international trade. And much of this moving commodities (most importantly, including money) between different parts of a global corporation is done for the express purpose of tax evasion, to reduce the appearance of profit in money-making branches by saddling them with the debt of higher inventories acquired from less profitable branches. Much of the rest of that trade flowing from rich to poor nations is goods purchased with money from the WorldBank, IMF, OECD and other organizations established to foster globalization.
The illusion of wealth, the illusion of a robust global economy, can only be maintained by the continued availability of cheap energy. As long as that illusion can be maintained the general confidence of the sheeple in the economy can be maintained and that confidence can be used to fuel the pursuit of the mythical global economy that is presold and bought into by the people.
There are growing numbers of people prepared to see through the illusion and look at the ugly reality behind it. As global energy reserves begin their downhill slide more and more people each day will wake up to the reality. When a critical mass of people reach this point, and not until then, the economic house of cards will be suddenly and dramatically brought down by a massive loss of confidence that will feed on itself as the economy implodes. The crash, when it comes, will be very dramatic. The fallout will take years but the crash may only take weeks.
The above article was initially written in 2006. I thought it an appropriate time to put it in the blog.
The current run on the Northern Rock bank in Britain results from exactly the sort of loss of confidence that I speak of above. Fear of the bank's potential exposure to the US subprime mortgage fiasco and the move by the Bank of England to inject liquidity in the bank, have badly shaken investor/depositor confidence in the bank. That loss of confidence continues to deepen despite government and bank official reassurances that the bank remains solid. This could domino through the British banking industry and could even spill over into the global crisis that we have been anticipating. Only time will tell and this will have to be watched for some time.
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