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What do you think about the chatter that suggests that the new corona virus isn’t another bat to mammal to human affair, but rather a man-made illness? Wuhan Institute of Virology is just a short distance from the wet market that is taking the heat for the outbreak.
This would explain the difference in transmissibility.
Regardless of origin, the way to stop it must begin by grounding the world’s commercial airplane service. You would have thought that a bright 5th grade student could have figured that out by now.Commodities are collapsing left and right. You would think there would be signs of monetary deflation, which is, of course, the only kind of deflation that ultimately matters when trying to determine the character of the incoming depression.
Oddly, there is no sign at all of monetary deflation. According to shadowstats, M1,2,&3 are all above +5%, yoy, with M1 recently ticking up to +7% yoy. And the oil:natural gas ratio has held steady at 18:1 for over a year, signally very strong monetary inflation. In early 2009, this deflation indicator dropped all the way to 6:1, below par of 7:1, signaling strong deflationary forces were wrecking havoc, which we already knew from looking out the window.
How do you think the world is going to cope with the problem of decommissioning of the world’s nuclear power plants? You spoke of energy simplicity, but some are saying that the advanced technology to solve the Fukushima plant disaster hasn’t even been invented yet, and will take another 20 years, regardless.
I am not praying for a one world dictatorship, but who else will be able to extract the vast wealth needed for the cleanup and decommissioning chores from a world increasingly unable to pay for them?
@johnDay. The rules of the road here at TAE state the ‘deflation’ is a DROP in the money supply. But y-o-y, M1,M2, and M3 are all UP about 7%, except m1, up almost 10%. So by Raul’s rule, not only is there no ‘deflation’, but were actually looking at the start of hyper INFLATION, if those ‘M’ charts start ticking even higher.
The USA economy is getting a bump from the drop in oil prices, because gasoline is lower, but capital spending by oil companies is just now starting to drop significantly. Production, domestically, is actually still rising!! So we are headed for $30 oil, or lower, but that is prices, not money supply. Certainly the fed knows this drop is coming, but perhaps they will raise interest rates anyway, for unknown reasons.
The reason I like the story about oil storage, or the soon to be lack of oil storage, is that we won’t have long to wait to see how it plays out. Maybe two or three months.
Incredibly, oil production in the USA is still rising, nine months into one of steepest crude oil pricing collapses of all time. The reason is that, even though they have cut way back on drilling, they are still completing (e.g. fracking) the many wells that are already drilled.
The important thing to know about shale oil wells is that they produce a majority of their oil in the first year, in a huge flush of production. Then they taper off quickly and produce a small amount per year for many years. So the peak production stream of the heavy leveraged shale oil producers will fetch $50/bbl, and soon to be a money losing $30/bbl.
Even if oil prices recover next year, which I doubt, it will be too late. Everyone in this industry smaller than Exxon Mobile is dead on arrival. Even XOM is cutting back on capital spending, at $50/bbl. What do you think will happen at $30/bbl?
The problem with this is that these are the high paying jobs that have propped up the American economy the last few years. So there will be downward pressure on wages, as low gasoline prices allow workers to accept lower paying jobs than they otherwise could accept if commuting costs were higher.
There is definitely some deflationary forces at work when a real currency (swiss franc) unpegs itself from communist fiat confetti (Euro, dollar, yen, etc.). So yes, there will be a deflationary end game in Switzerland, and hyperinflation everywhere else.
M1, M2, and shadowstats version of a continued M3 are all up over 5% yoy, and M1 is up almost 10% yoy. So much for dollar ‘deflation’. And the USA govt. is still running deficits of about 40% gdp, if measured using gaap accounting. So, the M’s are virtually guaranteed to start rising by double digits, yoy, within a couple of years, and by triple digits, yoy, within 10 years.
No chance of deflation, if you define that as a decline in the money supply. They might call some sort of emergency action to fight ‘terrorism’, or similar, together with a bank holiday. Hard to see them shrinking the money supply in this case, though.
Where I think you are making your mistake is that you have to realize that all govt. handouts are ‘money’, because they can (and are) converted to money sooner or later. Whether it is food stamps that are immediately spent upon arrival, or someone’s perception of future social security benefits. Any attempt to redefine these benefits as being other than ‘money’ will cause the savings rate to skyrocket. In this scenario, I will concede there would be a brief period of ‘deflation’. But it will be so short if you blink you miss it, and anarchy will take its place.
“As much as the Euro needs to go, it will take more than an election in Greece to make that happen.”
It might take a little more than that, but not much. What if the Euro takes a swan dive, like the Ruble?
What’s to stop whoever it is that’s in charge from causing (or allowing) a crash about 10 X bigger than 2008, in order to scare everyone, and then imposing a 1-world currency? With modern, debit card technology, this would be fairly easy.
Bingo. All the debt is reset to zero, all the banks are recapitalized, all the derivative books are squared, and the top 1% still have all the wealth.
I watched the indicated 5 minutes. They make a good case for chemtrails, as if it were even needed. But it did little to make the case that they are an agent of climate change.
Far more likely, they are getting ready for a huge biological war. I’m not sure how it will play out. One way would be to spray a biological agent over all major population centers using the refined chemtrail technology. Then they say, ‘come in and get your vaccine, and bring in all your guns for safekeeping, and maybe your gold, silver, etc. We’re only doing this to root out the terrorists’.
The idea that spraying chemicals over 1/100th of 1% of the world’s surface could cause climate change seems far fetched. Rarely do you see large chemtrails over rural areas.
TAE has a link to Jay Hanson on the front page. I’m surprised you don’t quote him on energy matters more often. He said, over 15 years ago, that if production input costs are mispriced, you can TEMPORARILY maintain oil production at an artificially high level. Hanson used as an example mispriced electricity with which to pump oil from a deep well. But the same is true for mispriced capital or other inputs.
The so called ‘oil resurgence’ of the USA has been exposed for what it was, financial engineering. Falling gasoline prices will give USA consumers a break in the near term. But the underlying problem, that the USA doesn’t produce much of value, will get worse. Look for a hyperinflationary collapse soon, as the decline in real gdp is balanced by greater levels of ‘out of thin air’ money.
One of the concepts that has been stressed here at TAE over the years is that rising or falling prices are not necessarily indicative of the direction of the money supply (rising or falling). This is borne out in spades with respect to the recent drop in oil prices.
Oil prices are down due to a massive glut on the market. The glut is not due to a fluke discovery of a massive new field. It is due to the presence on the market of heavily subsidized oil, mainly in the USA. The shale oil and other marginal production is on the market (but not for long) due to favorable tax treatment, zero bound interest rates, and the Bernanke-Yellen ‘put’ that encourages absurd risk taking. As one would expect it has lead to a junk bond market where uneconomic energy plays are priced as if they have zero risk.
The ongoing hyperinflation of the money supply has allowed this uneconomic production to creep onto the market. This concept of uneconomic oil production is explained, in part, by Jay Hanson. (see link on front page of TAE).
The destruction of this uneconomic production is being brought about by another economic concept: the reluctance of exporters to let go of market share. If the World’s economy continues to slow, or heaven forbid contracts, look for other classes of prices to drop as well, even as major governments continue to deficit spend many trillions of dollars (and Euro, yen, yuan, etc.) into existence every year.
At some point governments like the USA federal govt. might opt to default of their social security and medicare obligations, at which point we will have massive deflation. We are not that close to a decision point on that matter, yet. Give it another couple of years, I figure.
What ‘rigged market’ are you talking about? I was clearly referring to the ng and crude oil markets. And with these markets, unlike stocks or precious metals, you have to take delivery. So the amount of rigging is several orders of magnitude less than a market in paper goods, like paper gold, lol.
With respect to your comment about central banks being everywhere, that is just another way of saying that the central banks are wandering around, hyperinflating the money supply, in every nook and cranny into which they can stuff a trillion dollars.
Oil prices have come down, but so have those of natural gas. Therefore, the oil:gas ratio remains stubbornly high as 22:1 as of last Friday, and will be higher at Monday’s end-of-day.
The oil to gas ratio is important in an analysis of deflation and inflation because a key component of it is an unalterable scientific fact. That fact is that, on a btu equivalent basis, the oil to gas ratio is 7:1, if we are talking about 42 gallon barrels of W. TX intermediate crude and 1000 cu-ft of gas, which are the benchmark units.
So at 22:1, crude is selling for a 200% premium to natural gas on a btu equivalent basis. To put this in perspective, the oil:gas ratio hovered around 9:1 for the 1980’s and 1990’s. So you see, despite all the ‘deflation’ chatter, the free market is still seeing hyperinflation of the money supply on an ongoing basis.
The last time we had actual deflation, in late 2008 and early 2009, the oil:gas ratio plunged all the way to 6:1, below par!!!!!
This doesn’t mean we won’t get deflation in the near future. But the markets are not expecting it at all. The view seems to be that no matter what happens, the central banks will figure out a way to keep everything liquid and the money flowing. The DOW sold off over 10% in a couple of weeks and the oil:gas ratio dropped, but not that much.
“My point is, if we did nothing in the Oil Embargo, what makes you think we’ll do anything now?”
Up until a few years ago, rising prices have been met with rising incomes. That is no longer happening. I’m in the ‘hyper inflation’ camp, but this is certainly an argument for deflation. Anyway, since incomes aren’t rising, price increases will be met with consumption decreases.
It is way too late to do anything now, on a national level. Save yourself.
“The future belongs to those who will have access to “free” energy.”
Yes, and there are many common place examples. For example, I’m building a permaculture project on an Appalachian hillside that is immediately down hill from a culvert pipe that directs water from washing out a gravel road. I have ‘free’ gravity powered irrigation water forever, at basically zero cost.
Since you have links to Jay Hanson’s work on the home page, you probably already know this, but it is worth repeating. It takes a long time to adjust to a new reality. In the case of Hanson, he is mainly interested in energy. I’m also interested in energy, but more so food production.
After going about 15 years w/o much gardening activity, due to excessive shade, I moved to a new home and started gardening again. Despite having a decade of gardening experience in my distant past, it still took me about three years to really get up to speed again.
The next time you are out and about, make a conscious effort to peak into as many back yards as you can. This is particularly easy in newer subdivisions with few tall trees. Less than 5% have vegetable gardens. What are all these people going to do when food no longer comes from the supermarket, or the prices rise by 5 times relative to income?
You could ask similar questions about gasoline. It takes a long time to get into bike riding shape, especially if you are over weight. And we are an overweight country.
“…don’t ever let yourself get caught without some cash on hand.”
Probably good advice. But doesn’t that assume that there won’t be a complete breakdown in the general order? I think this is a far more important question. From my vantage point, either hyper inflation or deflation could easily cause a complete breakdown. What is to stop such a breakdown from happening, if for example, we get a huge deflationary down draft?
In my view it will be far worse than the Great Depression. This is due to the overly large share of the economy that is retail sales/consumer spending. This sector is already under pressure, and it is so overbuilt, the contraction will be monumental.
So, where are 100 million people going to go and what are they going to do? I know it sounds defeatist, but you see all those unsupported stories about FEMA concentration camps and Homeland Security buying a billion rounds of ammunition, and to me those stories are consistent with the assumed trajectory of the economy.
“TAE has made a compelling case that they’ll be worth much more than they are worth now (i.e. their purchasing power will have increased markedly)”
But the credit bust started in 2007, and it is now seven years later, and those dollars are buying less every year. You can verify this yourself quite easily at the gas pump, grocery store, or where you buy health insurance. Also, base money is up several hundred percent in that time span. The federal budget deficit is over $6.5 TRILLION, every year, when measured with gaap accounting, rather than the preferred phony baloney Congressional under counting.
Also, the dollar is not gaining on the yen nor on the Euro, despite those areas being clear basket cases. Therefore, we are a basket case too. So TAE and many others are correct about the major economies circling the toilet bowl.
All attempts at ‘Dutch Boy’ leak plugging or domino propping are vast increases in the money supply. But the world’s economy is stagnant, so you have more fiat buying stuff, but no increase in the amount of stuff, so prices are rising, even with the strong deflationary undertow that you mentioned.
Which force will ultimately prevail? This is unknowable. However we know that every time this has happened in the past, fiat currencies have gone to zero in purchasing power. This is because it is easier to print fiat out of thin air and hand it out like candy than it is sit there and watch the peasants come at you with tar and pitchforks.
You could argue that it is different this time. The weapons that the state has now are so far advanced, technologically, that they could decide to reduce the population of the USA from 330 million to 10 million, if that’s what they want to do. maybe that will happen anyway, if there is a complete breakdown in t he general order.
Note that we’re already back in recession, with below zero economic growth so far this year, and CPI inflation is near 10%, if you measure it the same way they did in the 1970’s. So it looks like it will be stagflation for the time being.
“Record-setting constructions with dominoes take a lot time to fall, even when huge numbers are falling rapidly. So guessing “when the big deflation will occur” might be misguided.”
Yeah, you just made a good argument for hyperinflation first, then collapse. If they are gonna keep playing Dutch boy and plug all the major leaks, the TBTF banks will keep on doing what they’re doing. Probably the best example of ‘Dutch boy’ behavior is right next door in Belgium. Ever since the phony ‘taper’ started, tiny Belgium started buying an amount of Treasury bonds equal to the ‘tapered’ amount. They are not even trying very hard to hide it at this point.
The only question is ‘how does it end’? I think that at $8 or $9/gal gasoline (USA price) the fed will say, ‘we hear the American people. They demand action.’ That’s when they make the conversion to IMF-World Bank depository receipts as the new money.
“Besides it seems impossible such a thing [monetary reset] could simply be imposed from above.”
Seems like the IMF has forced a few monetary resets, although on smaller countries. The top 4 or 5 economies are too intertwined for one to go belly up without dragging all the others down with it. That’s why I don’t understand all the focus on Japan or the Euro zone as basket cases that most likely will implode soon. They will all implode or none of them will.
So let’s assume that a reset is coming, and all the major countries will get reset. If it isn’t like I described above, or similar, then the only other alternative is complete anarchy, as far as I can tell.
“…it will be forced to steadily liquidate its overseas investments to pay its current bills—an investment surplus built up over the course of 50 years.”
Wouldn’t it be to Japan’s massive advantage to let (or force) the Yen much lower against the dollar and Euro during the period of liquidation of overseas investments? That way, the sale of US Treasury Bonds, for example, would fetch far more Yen. Once they are done selling they could allow the Yen to rise to fight CPI inflation.
The yen, at 102 to the dollar, is at basically the same place it has been for the last 20 years. If they are such a basket case, and I believe that they are, why isn’t the Yen tanking like a lead weight? I think it is because the dollar and euro are equally suspect.
My guess is that we all wake up some Sunday morning, in 2015, and find that dollars, yen, and euros have been outlawed. They will be replaced in all your accounts with IMF-World Bank depository receipts with a buying power to be determined by the ‘free’ market, or 1/3 of your current buying power, whichever is lower, lol.
“If you were landed on a vacant planet made of abandoned suburbs, you’d think it was candyland compared to landing in the woods.”
Not really. Suburbs are designed to make it very easy for rainwater to get out of the subdivision as fast as possible. You could say the same for most paved areas.
You are going to want to be in the woods, with a huge clearing for a garden. Woods are structured to hold rain water, slowly releasing it.
After the great reset, there will no income pouring into the suburbs in the form of paychecks or social security checks. You can trade your excess tomatoes for a neighbor’s excess apples, but what about clothing, maintenance or your bicycle, guitar lessons, or whatever?
What if someone gets sick? And the nearest doctor (more likely nurse) is a cab ride that costs the equivalent of week’s worth of sales from your store? (not to mention what the nurse charges)
The suburbs will be a horrible existence after the great reset. Far better off in the country where you can actually build some wealth. Your view is distorted. You think one can build all sorts of wealth out of a quarter acre piece of land. Not going to happen. You are going to need several acres to build a decent amount of wealth, probably more than five acres.
Also, the suburbs will be easy pickings for marauding gangs.
The other posters have nailed it. There are too many people on the planet. The excess are alive because we have rifled through our savings, and have devised schemes to borrow the next two or three generations’ savings. The only hope is to find a place where you can build wealth. Even if you get three or four suburban houses for free, they will be deteriorating assets requiring a huge amount of maintenance. They should be considered a stop gap way station will you plot your escape.
Diogenes–You don’t know me very well. As far as I can tell, I’m one of the few posters at TAE who actually uses the word ‘permaculture’ as part of my regular vocabulary, lol. I think a few others might mention it in passing.
I tried to engage Nicole Foss in a discussion of permacuture techniques, on a couple of her permaculture threads, and she ignored me, as far as I know. It’s not like she she won’t respond to me. She always offers a solid counter argument every time I whisper ‘hyperinflation’, lol.
And yes, I really do have a food forest in Appalachia. If it gets overrun, everyone else will already be dead, locked up, or starving, so I’m not too worried.
As far as the other fellow’s idea of folks opening small stores in suburbia, I have my doubts. Suburbia is serviced by a huge web of infrastructure. This is paid for by two or more persons per household driving to relatively good paying jobs in gasoline powered cars. Take away the cars and there is no way to pay for electricity, natural gas, drinking water, sewer service, garbage pickup, homeowners’ assn., etc.
So yes, there will be little stores selling soft drinks, chips, and phone cards. But that is not the only similarity to Latin America, lol. The neighborhoods will deteriorate to match.
We’re at a bit of a disadvantage, since other countries have highways filled with tiny, high mileage cars, and we’re still driving gas guzzlers. Anyway, there seems to be pretty good supply/demand balance when it comes to the world oil market. The fact that the oil price is firm, even with a sluggish world economy is not a good sign for future economic growth.
The human race had many decades of cheap oil with which to use a transition tool to the next epoch, but we decided to not to use it. Opting instead to wait for the current phase of expensive oil to start the transition will prove costly.
We still want to import oil, but we don’t have enough exports to pay for it. Therefore, we will print the difference. At some point, I’m guessing below $10/gal gasoline, the system will fall apart. Places like NYC, with excellent public transportation, will be o.k. Places without much public transportation will be devastated.
Raul-“Treasuries will be less, not more, risky for the near future.”
I disagree. Everyone that has purchased 10-yr treasuries (the USA benchmark, w/ stockcharts symbol $tnx) since Aug. 2011 is even or underwater. Theoretically, you can hold them to maturity, and not lose any DOLLAR DENOMINATED principal.
But CPI inflation, as it was measured prior to 1980, is running 8.5%, compounded annually. You are getting a small yield, but you will still lose over 6% compounded annually.
You could argue that there will be a huge crash of 1929 proportions. But in that case, you will probably never get your principal back. Just the opposite, you will probably see a lot of forced savings’ conversions to treasuries. This could be overt, or simply by making the tax consequences prohibitive to do otherwise. I doubt they would ever default on the interest payments, but nothing is certain.
ProfLockLoad-“Rents can easily be price supported by Section 8 increases,….”
Possibly, although with this Congress, I sort of doubt it.As a talking point, though, let’s say they (whoever ‘they’ is, lol) figure out how to keep rents high in price. The obvious reaction of the rent paying marketplace will be to avoid new household formation. You can see this is already in play in one of Raul’s graphs, above.
This lack of new household formation is also a key factor in the decline in new and existing home sales. The key to a robust housing market is the first time buyer. They buy a small starter home. The seller of the starter home moves up to 2000 sq-ft middle class home, and the seller of the 2000 sq-ft place moves up to a 3500 sq-ft dream home. A tiny $10,000 or $15000 down payment starts all that buying frenzy in motion. But today’s young folk have, in their possession, a negative down payment of ($50,000), also called a student loan.
LEAP’s main argument is that the USA is more of a basket case than the EU. Using the Euro/dollar ratio as a crude proxy, they appear to be marginally correct.
In all probability, the USA (and the dollar) will continue to lose ground to the EU (Euro). We are much more dependent on crude oil, which will continue to rise in price due the exhaustion of oil supplies from the legacy cheap oil fields. There is still plenty of oil, but it is expensive (to produce) oil.
A 1-world, all powerful state is certainly inevitable, on an inhabited planet. The nuclear cleanup in Japan is going to take multiple decades. There are hundreds of these places around the world, and more are still being built.
As far as when it will happen, they can force the issue whenever they want to, with a freezing up of the bank clearing system. They might blame it on terrorists, and say that we MUST have a 1-world currency immediately, to prevent a repeat. In the ensuing panic, it will be an easy sell.
I agree with D that farmers will be first in line when fuel runs low. It won’t be a smooth transition, though. Car pooling isn’t going to be easy with most folks living in far flung suburbs.
I got away from gardening for a couple of decades, mainly because I didn’t have a good space for it. When I started back up, it was very frustrating, because it took 3 or 4 years to get that ‘green thumb’ back. The idea that the masses will respond to exponentially higher food prices by growing their own food is an idea that is logical, but there is that pesky learning curve getting in the way.
I tried selling some vegetables from my permaculture project last Summer. It is a hard sell, because people generally believe that food comes from supermarket. They go to the farmers’ market mainly to buy sno cones or donuts or some other specialty item. This year I’m skipping the farmers’ market and selling to a produce market.
Btw, if you want to see a blank stare, just use the word ‘permaculture’ in just about any social or work setting. This is the only realistic global warming workaround that has a remote (or better) chance of working, and not one in a thousand has a clue it even exists, and at this late date. Not good.
Although they are down today, most of the major grain crops’ spot prices are up substantially in 2014. What is a lot harder to gauge is the price of fruits and vegetables, since these are, individually, much smaller markets.
Last week saw some precipitation on the west coast, including California. But with the rainy season just about over, it is probably a case of ‘too little, too late’. I think that one can make a good case for the idea that fruit and vegetable prices are going to be substantially higher in the USA within a couple of months. Presumably the higher prices would spill over to countries that export those products to the USA as well.
It is an oft repeated meme that the majority, the bottom 51%, can vote themselves huge benefits and tax breaks. If so, then why don’t they do so?
Look at the Social Security Tax. All income over $117,000 is not subject to this tax. The top 1%, with incomes averaging $380,000 pay less than 1/3 the tax rate as poor schmucks making less than $117,000.
Also, the rate at which people vote is in inversely related to income and education. In other words, poor people don’t vote, at least not in the USA.
I don’t see how raising the retirement age does that much good, when there aren’t any jobs, unless they raise the early retirement age too. However, let’s say they are somehow able to significantly cut ss benefits by under reporting COLA CPI inflation and other means. That will mean you have a millions of people sitting at home, eating saltine crackers and not much else, and staring at the boob tube all day. In a consumer based society, I’d hate to see how we go from the present system of 70% consumer spending to one where it is more like 50%. Almost all community service work for lawbreakers will be in tearing abandoned malls and shopping centers.
Good, thought provoking post, William. I worked in the petroleum industry for over 15 years, and based on my experience you are spot on.
Just to follow up on one of your themes, the 5 people per car idea, let me say that this will be a horrible transition, from a economic infrastructure perspective. Good for the environment, good for health (running shoes), but we’re talking about a huge contraction of many parts of the economy. If we’re burning 1/4 the gas, we need only 1/4 the gas stations. 1/4 the cars, 1/4 the repair shops, 1/4 road repairs (less wear and tear), almost no new roads or added lanes, no new bridges. We’ll need a lot less govt. 1/4 of the motor vehicle offices, hardly any highway dept.
This is a good outcome for our country, but the transition will be difficult.
To pick up on another of your points, the staggering price increases for oil and refined products will contribute to the death of the petro dollar system and its twin, the dollar as world’s reserve currency. We just won’t be able to buy near as much stuff. The retail sector is so overbuilt, think how many stores will be empty and how many sales jobs will be lost, plus warehouse, trucking, accounting, and so forth.
World oil production has responded favorably to sustained, high oil prices in the last decade. The fact that North Sea production hasn’t tells you that it just isn’t economic at $110/bbl Brent. Maybe if oil prices double to $220/bbl oil(Brent), but costs only go up 50% to $160/bbl they will be able to go back in and extract some economically.
You have a couple of links to Jay Hanson on your front page. You should know that oil can be produced below its economic limit, if part of the extraction process is mispriced. e.g. if a well with an electric driven pump jack has subsidized electricity powering it. But why would you do that? Kind of like a drill Sargent telling someone to dig a hole and then fill it back up, lol.
The bottom line is the same as it has been for a decade–we are well past peak cheap oil. The best strategy is probably to wait and see if oil prices rise faster than costs. If they do, you can always go back in and extract the newly economic oil.
This is the thing that is stunting the world’s economy. Oil is the key commodity, and it is going to cost more and more to extract it going forward.
@john-day’ Perhaps you saw my post on Nicole’s article about Holmgren. Permaculture could potentially add many tens of millions of acres to the category of highly productive land.
Unfortunately, we’re stuck in this mode of maintaining the current, cheap oil based system. The various manifestations of fraud that are listed above are just part of the story. The biggest fraud of all is the fiat currency systems, where money is created from thin air, and then can be used to purchase real goods and services.
Fortunately, at least some of the problems can be fixed fairly easily. For example, food stamp recipients could be ordered to attend a gardening or permaculture class concurrently with receiving benefits. No class attendance, no food stamps.
Raul quoted Spiegel, “India’s central bank raised interest rates higher than expected in an effort to get massive inflation under control.”
The USA continues to export high rates of inflation by the mechanism of owning the World’s Reserve Currency. It won’t be long, however, before those high rates of consumer price inflation reach the USA, followed shortly thereafter by hyper inflation.
The underlying cause of collapse of the financial system is the fact that we passed peak cheap oil ten years ago. Even with gasoline consumption steadily dropping for years in the world’s biggest market, the USA, the price of crude remains high. With each passing day, the percentage of legacy cheap oil in the world’s supply mix drops a little bit more.
Regarding India’s (and Turkey, South Africa, etc.) decision to raise interest rates to fight inflation, the USA does not have this option. I have posted at TAE several times references to John Hussman’s ‘liquidity preference’ charts. Suffice it to say that the fed cannot raise short term rates even 25 basis points without first tapering to zero QE, THEN, IN ADDITION shrinking base money by about $1.5 trillion!!! So, obviously, raising rates here is not an option.
Their only real option is to manage the economy in such a way that it does not grow at all, thereby taking some of the pressure off longer term interest rates. You can clearly see this is in play in the percentage of adult Americans with a job, now at multi decade lows and dropping.
Raul said, “The no. 1 problem[in Argentina], again, is the lack of foreign reserves.”
I’ll buy that. And that is the exact same problem we have in the USA, no significant amount of foreign reserves. And most of the gold in Fort Knox is long gone too.
So you just made a fairly rock solid case for the hyper inflationary ending in the USA, perhaps inadvertently.
There’s no escaping hyper inflation here [usa]. Most labor that can be exported to low wage offshore centers has been exported. Most savings of foreigners that can be ‘borrowed’ with dollars have already been ‘borrowed’, at least at current Treasury rates. And the dollar is losing ‘World Reserve currency’ status, slowly, one bilateral trade agreement at a time.
My guess is that before hyper inflation sets in, the dollar and other leading fiat currencies will be declared null and void and a one world fiat imposed in their collective place. For dollar savers, this will feel very much like hyper inflation.
Integral R. said, “.Until the system recognizes “Permaculture” as a word, we probably don’t have to worry about a segment of the middle class bringing down the financial system…”
I don’t follow you. Permaculture is eventually going to add billions, maybe even low single digit trillions (today’s dollars) to the planet’s GDP. So obviously, it will not ‘save’ a financial system with hundreds of trillions in debt and derivatives. However, it might cushion the force of the blow of the unwinding.
One of the positive features of permaculture is that it makes land that is marginal with current farming methods into a sustainable, goods producing asset. So it supplements the non-financial section of the economy. All financial systems are based, ultimately, on this goods producing sector.
Cory. Don’t feel too bad. We all make mistakes. The problem is that people brag about their successes and hide their failures, so it feels like you are much worse at finance than most, when you are more likely average.
That being said, even the most outspoken deflationists that I read made it very clear that they did not advocate the selling of one’s primary residence, IF you could afford the monthly payment, you planned to stay in the area, close to your employment, good school nearby, etc. All the chatter about selling real estate was strictly regarding rental/investment property. Instead, why not take advantage of low rates and refinance down to once in a century low cost capital?
At this point, the water is muddier than ever. It looks like deflation and hyper inflation are both at arm’s length, or closer, at the same time!!! This is probably by design. The people rigging the system have no reason to tip their collective hand, so why should they. This is why people like gold, since it should do reasonably well in either scenario.
I have decided to sink most of my capital and time into developing a permaculture project. Everyone’s gotta eat, they say. In the coming collapse, however, I’m wondering how many people will die of starvation. Most folks think food comes from the supermarket. Of course that is and will be true, until the market closes.
@Raleigh-Not to be argumentative, but you and Denninger are quite wrong on short rates rising. Perhaps Denninger is not familiar with the work of John Hussman. Hussman has established, through his ‘liquidity preference’ work, that one of the most rock solid mathematical relationships, when it comes to finance, is the one between short rates and base money.
Hussman says, “we define liquidity preference as the amount of base money that individuals choose to hold per dollar of nominal GDP, given any particular level of short-term interest rates.” I don’t post links, but google ‘john Hussman liquidity preference’
As with stocks, gold, or anything else, all of it is owned by someone, 100% of the time. When short rates are low (present case), the fed can get away with creating more base money (as a % of nominal GDP). They do this by creating money (reserve notes) and trading that to bankers for Treasury Bonds and mortgage securities.
When short rates are near zero, people and institutions holding money have little incentive to exchange their money for interest bearing securities. But if short interest rates rise, ” upward pressure on interest rates which reduces the attractiveness of non-interest bearing cash. If the Federal Reserve does not reduce the monetary base sufficiently to move left to the appropriate point on the “demand curve,” the burden of adjustment is instead thrown onto nominal GDP. Since variations in real GDP have a fairly limited range, the majority of that adjustment is forced to take the form of price increases (i.e. inflation) sufficient to bring the ratio of the monetary base to GDP down to the appropriate level.” hussman
According to Hussman, in order for the fed to raise short term rates even a paltry 25 basis points (without sparking massive price increases) they would have to stop QE entirely AND SELL over a trillion dollars worth of bonds from their portfolio. And that was many months ago. It is probably closer to two trillion dollars worth of junk now they would have sell BEFORE even raising short rates.
As bad as the picture painted by your first graph (gross fed. debt) looks, it really only tells about 1/10 of the story. A more accurate picture would be a graph of debt PLUS unfunded liabilities (present worth). I don’t have one, but the consensus seems to be that the current total is now approaching $200 trillion. Even if that figure is $40 trillion too high, at $160 trillion we would still have an order of magnitude more debt than the size of the economy.
The total of debt plus unfunded liabilities increased by $6.8 trillion last fiscal year (2013), on a GAAP basis, or about 35% of GDP. So you can see that the money supply is increasing in hyperbolic fashion.
The question continues to be, how will the USA federal govt. make good on its promises? Will they arbitrarily renege on these promises (social security, medicare, VA benefits, etc.) , or will they continue to mail out checks to individuals and hospitals, sparking massive price inflation at the consumer level?
I believe we will get the answer within a year or so. If a large nation could run deficits of 35% of GDP for sustained periods of time, surely someone would have figured that out a long time ago.
My guess is that they there will be some sort of crisis within a year, and our masters will inform us that we need to switch to a one world currency or go back to the Dark Ages. I further predict that the fear levels will be so high that everyone will either meekly go along, or be on the rooftops cheer leading the move to a new currency.
I’m sorry to say that I don’t have the means to attend the Permaculture design course in Belize. Maybe next year.
I started working on my own permaculture project in Appalachian Ohio a couple of years ago. It is a slow process, since I haven’t given up my day job, yet, lol. Anyway, I’m terracing an east facing hillside with a modified hugelkulture design, with some of the backfill being composted horse manure. The manure is ‘free’, not counting the cost of hauling it.
Another interesting feature is that my project, although high up on the ridge, is just enough below the summit to have a source of irrigation water that is entirely gravity fed.
Nuclear power was only mentioned in passing in the article. At some point, all the existing nuke plants are going to have to be decommissioned. At present, the view appears to be that those that benefited from the electricity production should be the ones that pay for the decommissioning. Don’t you think that at some point, in a future, poorer world, the mentality will be that those that benefit from the alternative to wanton, naked abandonment (in other words, the entire world) should be the ones to pay for decommissioning?
I could see a future world where 10% or more of the world’s GDP is going to nuclear clean up. Unfortunately, there would have to be fairly strong, central (world wide) govt. to oversee such a project.
It certainly looks bleak. I think that there might be some reasons for optimism, though. One small example is the end of the cheap oil era is already leading to reduced gasoline consumption. This has at least two benefits. First, less gasoline burned means less pollution. It also means that some of those miles that were not driven will be walked, meaning healthier people and reduced health care costs. Also, to the extent that burning of hydrocarbons contributes to global climate change, perhaps that might be mitigated a bit.
Another reason for optimism is that as new technologies are developed, they are not all lost in an economic melt down. We still have the wheel, despite quite a few economic cycles since its invention. One small modern day example is the agricultural practice known as ‘Hugelkultur’. Apparently, it has been around for centuries, and more recently has been practiced in Austria, by a guy named Sepp Holzer. And with the internet, it has pretty much gone viral in the gardening sphere. Basically, Hugelkultur is a method of drought proofing your crops by burying organic matter. This technology is now widespread and will not be lost during the coming depression. In fact, it will be a huge factor in the mitigation of the ravages of economic contraction.
My general point on technology is that it would almost take a nuclear war for humans to lose all our newly gained technology, not that I’m saying a nuclear war is unlikely. I can’t handicap its probability. More likely, it seems, will be many nuclear power incidents. Might be better to be in the southern hemisphere.
