Apr 072018
 
 April 7, 2018  Posted by at 12:32 pm Finance Tagged with: , , , , , , , , , , , ,  


Dorothea Lange Farmers’ supply co-op. Nyssa, Malheur County, Oregon 1939

 

 

It’s Dr. D again. Told you he’s on a roll. He remains convinced America can re-invent itself. If only because it must.

 

 

Dr. D: Herbert Stein’s Law states “What Can’t Go On Forever, Doesn’t.” This is a neat summary of the present trade and currency imbalance. China makes real goods and the U.S. consumes them by typing digits on a keyboard. This is the very definition of what cannot go on forever.

 

• How long do you expect a nation can make nothing and consume everything?

• How long do you expect a nation without manufacturing, without a workforce, and now without a viable military to remain pre-eminent?

• How long does wealth and influence remain in a nation that makes nothing, does nothing, and knows nothing?

 

Reminds me of that other Law: “A fool and his money should be parted as soon as possible”, for to be wealthy, and helpless, and dumb, is not a combination that lasts for very long.

Since China cannot send the U.S. free goods forever, ergo, they won’t. That means slowly or quickly, now or later, they will cut us off. Right now it appears that can never happen, but I assure you it will very soon. And what will the U.S. do then? Actually, that’s very simple: the U.S. will have to close a $600B trade deficit instantly. Roughly, that means the U.S. will no longer import $600B worth of goods and be $600B/year poorer, or $2,000/year per person. Nor is this unusual. History is rife with examples of nations that once were prosperous and were suddenly cut off: Spain and Greece come immediately to mind. So how does this happen?

The Core nation, the trading hub has failed dozens of times in history, from Venice to Holland, Spain to England, and although most of history was on a gold standard, nevertheless the same thing happened: repudiation and devaluation of the currency. That’s why a U.K. Pound is no longer a troy pound of pure silver ($192) and why the U.S. Dollar is no longer 1/20th ounce of gold ($267). So let’s run down how this might unfold.

Like other empires, the U.S. rose to prominence with hard work and industry. Like other empires, this personal and physical industry was the foundation of an effective military. This military eventually stood alone, leaving the U.S. to set the rules of trade, the rules of diplomacy, and the rules of conduct. Like other nations, the U.S. bent those rules in its own favor, both early and late. Like other nations, the natural way to take advantage was to run an overvalued currency, which draws in capital from all trading partners worldwide, creating a 100-year spiral of wealth and influence that seems truly endless.

However math, the cruelest of Mother Nature’s laws, is not fooled. If you bend the rules to create market distortions, those distortions are indeed created. If there were fair trade, a gold standard, a nation that increases their wealth would find its currency rise. A rising currency would dampen manufacturing and efficiency, the gold would flow back out, and the unfair advantage would be corrected. But only in a free market. Any market on Earth has an Army, and that Army’s job day and night is to make sure that unfair advantage does NOT end. Ask Smedley Butler.

 

Mother Nature is never deterred. However long it takes, she waits. Lacking fair trade, an abnormally strong currency does the only other thing it can: destroy the Core nation’s industry, totally and completely. More certain than a nuclear explosion, economics will not miss a single spot until the wrong is righted and the truth is out. At first the low-gain commodity industries go: mining, shipping, smelting; then their sooty kinsmen: heavy rail, ships, ports, transportation.

After that go the lighter industries: manufacturing, stamping, autos, and so on up to mainframes, silicon chips and phones, and with them, their children, manufacturing processes and R&D. However, as London and NY showed, you can forestall currency correction even now by moving market distortions into services and financial engineering. At this point, however, the Core nation has nothing left but Banks, Universities, and the Government/Military, and no underlying economy to support them.

However, what Charles Hugh Smith calls the fiefdoms of monopoly cartels and apparatchiks of the 1% now lead an empty parade, horse-whipping the uncompliant 99% into supporting an economy that exists only in their minds. And then “What can’t go on, doesn’t.” The empire collapses from within, to the total surprise of historians of the 1%, and the total lack of interest of the 99%, for whom it had already collapsed decades before.

And of the other side? Thanks to the overly-high currency of the Core nation, the perimeter nation has an artificially LOW currency. They didn’t do that, because they are by definition small and weak and aren’t using an army to set the rules. The artificially low currency leads to low costs, low labor, high enterprise, and in the mirror image of the Core nation, the constant INCREASE in manufacturing. The increase in wealth, and the addition of commodity goods, then heavy industry, then manufacturing, then R&D. Whose fault is that? Who used a worldwide army to enforce the very rules that gutted their homeland? Not the Vandals; not China. It was Rome; it was D.C.

What is this whole imbalance based on? In our case, the artificially strong dollar, backed by a worldwide U.S. military. So how must it end? With a weak dollar, falling real markets, and a U.S. military returning home.

You say this can’t happen? Yet it must happen. To say otherwise means China will give us free goods for 10,000 years, and the U.S. will get always weaker that whole time. So how does the transition go?

The U.S. financial bulwark cracks, being highest and most based on psychology, not reality, very likely in conjunction to a military failure or withdrawal, as in empire finance, the military and currency are equivalent. Slowly, then rapidly, the tide flows out, the U.S. dollar gets weaker, the Chinese Yuan gets stronger, and the whole process reversed as it should have done years ago.

 


(mind the log scale)

 

Mother Nature isn’t fooled, and those 70 years of repression and manipulation are made up in a few years.

Down on the ground, what happens is not that China shuts off free imports to the U.S. directly, with a political embargo, what happens is the U.S. is seen as a has-been and the U.S. dollar falls in purchasing power on the world market, raising the price of foreign goods in a “free” and “open” marketplace. Lacking manufacturing and the military power to stop it, the U.S. can’t hold off Mother Nature and the laws of physics any more.

Knowing this to be inevitable, how would a nation prepare? For one thing, you would need to kick-start your industry, post-haste. Anything that can be made internally will find its prices stabilize and not rise. Yet before the currency rates are corrected this face overwhelming headwinds. Second, as income will be lost and the borders will be shut off, you need to switch the focus of taxation from income to tariffs, from finance to real goods.

Third, you need to open your pipelines, ports, and infrastructure, and expand the required steel, oil by any means necessary, even armed standoffs. Fourth, you’ll need to shove the culture away from government support and subsidies that will soon disappear, and into self-reliance and productivity. Firth, you’ll need to downsize the government and especially the military, which will and must return home. Any of those platforms sound familiar?

 

Despite what you read, it’s not all bad. Just as “The arrogant people will be brought down, and high and mighty people will be humbled”, “Every valley shall be raised up, and every mountain and hill shall be made low; and the crooked shall be made straight, and the rough places smooth.”

 

This is a master reversal of all manipulations, of all imbalances that have reached extremes. As the U.S. – China trade deficit must balance, we know that Chinese goods must rise. But that also means the cost of production for U.S. goods must fall. This cost-advantage puts Americans back to work just as it did the Chinese, while the rise of the Yuan will make China rich, but less productive.

What’s more, as matters reverse, the U.S. will raise prices on their exports: food and oil, two things China must have and cannot get elsewhere. Agriculture is at an all-time, 1,000 year low and must rise. Stocks and housing are at an all-time high and must fall. In a reversal, the high prices fall, the low prices rise, that’s obvious. That’s what “reversal” means, that’s what “extreme” means.

As for manufacturing, the world is changing fast. Even China is opening “dark” factories that employ no people, only robots. That will be true here as well, which undercuts any labor savings they once had. There’s a few problems, however: robotic mega-factories only work with very large scale of identical goods that can source reliable, high-quality inputs. If oil is too high, and/or shipping or marketing fractures, those factories scale down, retool more, and therefore require more people than presently.

How is China going to have huge robotic mega-factories if half their export market can no longer afford them? If the U.S. and China split the market, aren’t all those factories half the size of present? Since the U.S. will now have low-cost people and raw materials, what advantage does China bring to offset shipping and tariffs? The “market” isn’t uniform. There was worldwide mass-integration of manufacturing between India and England and the world in 1910 too, yet it’s didn’t persist; it changed.

 

One way it can change is to leapfrog China. We hear about how the U.S. is a has-been as we are supporting legacy copper telephones while the 3rd world goes directly to fiber and cell, and this is true. However, China has mainlined on low-price, low-profit, mass-manufacturing. Why would anyone compete with them there? It’s irrational. Build a baseline and let them have all the low-profit, environment-destroying work they want, the U.S. can’t and won’t beat them there.

We can beat them by leapfrogging into technology that’s out there, but no one is revealing yet, things they haven’t done, but Americans are good at doing: innovating, high-tech, medical. Much as I hate high-tech and its panacea as an answer, yet I believe there are goods, ideas out there that can transform the way things work.

Look at the rapid development and uptake of LEDs for example. The patent office is filled with them, and an outsized number are American. We have superconducting maglev, field physics, material science of no-weight foam, color-shifting paint, hyperconducting graphite, and transparent concrete to name a few. All there, all unused. Let’s make an example case in a very large, very quiet investment.

Medical and Biotech are to some extent used up, with overpriced, mass-market pharmaceuticals being rejected by price and form even by the wider population. But that’s so last-century. The new biotech is going to take a blood or DNA sample and synthesize a drug specifically for your blood and DNA. They are going to create another organ, a blood transfusion no one but you can use.

In one way, this may be more expensive, and that’s good for profits, but in another way, they will work for you, much better and guaranteed, and therefore fix your health faster, spare you useless drugs, bad side effects, and actually work, and therefore be cheaper. What does it take to make them? A complete revolution in drug manufacturing. Multi-billion dollars’ worth of equipment, extremely unique development and patents, a 20 year head start.

 

Could you sell such a thing to the Chinese? You bet. Could they get off retail manufacturing and scoop us on it? Not a chance. So you see how such a thing could happen, even with a U.S. dollar falling and a hard readjustment ahead. And that’s just one.

If boutique and robotic goods are the new industries, what do we do with 200 million unemployed? We won’t have 200 million. That’s a consequence of the distorted extreme of our finance, our centralization, our currency. For one thing, we have only 100 million now and a lower dollar will definitely restore the competitive advantage of highly-productive U.S. workers. At the same time, if work requires fewer workers, we will find a solution. Why?

Because you can’t have 200 million unemployed. Not even 100 million. The resulting inequity and income disparity can and has caused a revolution. Faced with that, any nation will adjust because they must or perish. As difficult as Americans can be, they are a practical people above all. This has happened to dozens of nations in the past: Spain, France, Germany, England, China, Japan, and they all still exist. Things rotated out in the big wheel of time. New things were made and the old ones faded away, and we will too.

We’re going back to being just one of many nations, and a fair and productive one too. There are ways and we will find them. How can I be so sure? Because “What Can’t Go On Forever, Doesn’t,” and it won’t this time either.

 

 

Apr 042018
 
 April 4, 2018  Posted by at 12:49 pm Finance Tagged with: , , , , , , , , , , , , ,  


Mayfair Building, Times Square NYC 1951

 

 

Dr. D is on a roll.

 

 

Dr. D: Since tariffs are in the news again, let’s run down the topic , first in micro, then in macro.

 

“Trump said this week he’ll slap 25% tariffs on $50 billion to $60 billion in Chinese exports to the U.S., including aerospace, information and communication technology, and machinery. The move is aimed at countering Chinese cyber and intellectual property theft of U.S. technology . It also tries to push back against China’s demands for technology transfers from U.S. companies in return for access to China’s market.

The Chinese government, in turn, said it would hit U.S. shipments to China with $3 billion in tariffs, affecting goods such as pork, aluminum pipes, steel and wine.

“A family of four will end up paying about $500 more to buy (clothing, shoes, fashion accessories and travel goods) every year” if those products are subject to 25% tariffs, the American Apparel and Footwear Association says…

Retaliatory tariffs from China, meanwhile, could especially hurt American farmers.  China is the world’s top soybean importer, with the U.S. providing close to 60% of the commodity. And the country is the second-largest purchaser of U.S. pork. Growing talk about a trade war has worried Iowa farmers. The state is the nation’s largest corn and pork producer and second-largest soybean grower.”

Historical background, when Clinton added China to the WTO, it opened the borders and U.S. markets to Chinese goods, but likewise, China promised to treat the exports of the U.S. fairly, which are driven by movies, patents, and intellectual property rights. In theory, that’s how the deal would be equitable. However for 20 years they have not been paying billions in patents or media royalties back to the U.S.. Stealing everything, patents, intellectual rights, ignoring international law, building a mile high tariff wall, and polluting their whole nation to boot, just like we did back in the 19th century when we were a wee country.

Guess what that shows? Tariffs work. It worked for us then and it works for China now. Go to a store and look for any item that isn’t made in China. That has devastated industry, and is arguably dumping, i.e. selling at a loss to ruin your competition. How? China isn’t a “capitalist” country, really. It’s an amalgam of communism and protectionism meant to rapidly modernize China in the footsteps of Stalin or Mao’s “Great Leap Forward,” and it works. As such, factories are built of debt money printed by the Central State then protected from bankruptcy with more printing and bailing out hand-picked winners by the state — just like we do.

Just like Abe buying up the entire Nikkei or the Swiss Bank buying a trillion in foreign stocks. So in a roundabout way, China is creating all these products at a loss, but doesn’t care about profit because people are employed and their industry rockets into the 21st century. Since profit is not a motive and bankruptcy is not a possibility, the strategy to modernize and compete with the U.S. is enhanced not only by moving China forward, but also by moving the U.S. backward into the last century. So the very concept of WTO, “Free Trade”, “Fair Trade” does not and cannot exist with a centrally-planned, centrally-protected, non-free market economy – theirs and ours. Only national strategy remains.

When that’s the case, you see Trump merely advocating for consequences to China breaking the original treaty, the original parity of hard goods for intellectual property. And why shouldn’t breaking a treaty have consequences? The problem of course is what those consequences mean.

Since from the Chinese perspective, they have reduced U.S. wealth, production, capacity for production, and even the U.S. military to 3rd world levels, and the U.S. no longer has the bargaining power to reverse what was supposed to be a free-market trade, but was executed by China as a mercantile/protectionist trade. And good on them, well played!

Here in the States, we hear people say –still!—“well if they give us cheap goods at a loss, who are we not to take them?” Regardless of the jobs lost since that giant sucking sound started. Or worse, “Since rebuilding industry will cost money, any move to help ourselves should be avoided because it will raise prices.” Yes people, we already missed the 21st century, let’s move back from the 20th century into an 19th century African colony because fighting it would cost something and be inconvenient. Worked for Argentina, right?

 

Trump said in his Asian tour:

“I don’t blame China – after all, who can blame a country for taking advantage of another country for the benefit of its citizens… I give China great credit,” said Mr. Trump while addressing a room of business leaders. Instead, the US leader said previous US administrations were responsible for what he called “a very unfair and one-sided” trade relationship with China.”

China seemed to understand this and take it pretty well: in the last 30 years 500 million were lifted out of poverty, they got everything they wanted, and are arguably already the largest, most modern economy, but the ride is over. Asia loves gold-plated show-boaters like Trump and their equanimity was unreported by the press.

It’s no surprise; I’m sure they knew it would end someday. Probably never dreamed it would go on this long. However, the way the game is played, China will still negotiate all they can as the inevitable ends. And with retaliatory tariffs, they negotiate their best deal, and as quoted, Trump understands that too. Nothing personal.

 

Daily news covered, let’s go Macro.

In the bigger sense, a lot of this is window dressing. We hear a lot about how “the world can’t feed itself if such and such,” but it’s feeding itself now: clearly it’s perfectly possible: if anything we may have too much! Same with trade and tariffs. So China refuses to buy American soybeans, but buys Brazilian, great: stick it to those farmers (mega corps actually) in the voting states! Show ‘em!

But here’s the thing: there are X hectares of soybeans grown on planet earth, and Y people who eat them. If China buys “The Beans of Brazil”™, then whoever bought Brazil last year won’t get theirs and will buy American. Same with steel, same with oil. If China now buys Saudi oil or Russian oil, then that oil is simply removed from Europe, and Europe must buy Norwegian or Venezuelan oil. But it’s the same oil, from the same wells, going to the same people: that is, FROM planet earth, TO planet earth, BY the people of planet earth.

There are strategies and prices, advantages and minutia down there, but in the big picture, the effect becomes more subdued than may appear. So China places tariffs, even boycotts Iowa corn, then that corn is sold to Europe instead. What kind of political pressure are they really bringing, aside from making headlines?

The same is with Trump attempting to change the composition of U.S. industry. It’s a lot harder and takes a lot longer to rotate out of services and back into hard goods than it seems. What’s more, to start making your own chips or medical equipment requires a constellation of support industries: power lines, rails, screw machines, sheet metal stamping, servo motors, and behind them the dirty, heavy industries we erased: mining, steel and aluminum smelting, and so on. Yet this has to be done. We can’t run a country by asking China, “pretty please sell us some steel so we can make battleships to bomb you with.”

But like the soybeans, this shift of capacity doesn’t work in the macro view: if we’re not buying Chinese goods because we’re making our own, what is China going to do with all their factories? That capacity exists. It’s going somewhere or it will collapse, we BOTH have a lot to lose. A cutoff of most retail goods, their factories idled and people in the streets, Mutual Assured Destruction.

This goes back to 2005 and something Ben Bernanke said about the “Global Savings Glut.” That is, the problem wasn’t that the U.S. spent too much, but the real problem was the darn Chinese were too productive, too responsible, and spent too little. You might recognize this same argument from Germany and Greece. As much as this deserves raucous laughter, the larger macroeconomic imbalance is only this: the U.S. imports instead of producing, and China exports instead of consuming.

That’s how we come to a $700B yearly trade deficit, a deficit that is not ours alone, but China’s too. This goes back to righting the trade imbalance, the tariffs, in fact the overall inequality of the present (former) globalism: the U.S. prints fake digits and the Chinese send us real goods. If the imbalances are righted, there is only one path: China must spend more and the U.S. must spend less.

 

What will China do with their own factories if the U.S. reindustrializes and makes their own goods? They’ll buy those Chinese products themselves.

 

This is a long time coming, too. For decades, China has worked hard and developed their country, so why should they make cheap products and get nothing for their work? They deserve the products of their labor — arguably more than the Americans do. They need to spend more, and as we see with input costs rising back home, we need to spend less. So let them buy their “Make-happy ginsu mango-mango slicer.” No one deserves it more.

What do you think Chairman-for-life Xi thinks of this? Trump is going to make China stop saving and force their middle class to start spending, to start behaving like the modern nation they are. Xi and his predecessors have been unable to convince China to spend. But now Trump can blame his problems on China and Xi can blame his problems on Trump. So do you think Xi is angry? Or happy?

This had to happen. A nation cannot live at the expense of everyone else forever, amen. The only question is when and how it ends. So if China makes and buys Chinese products, and the U.S. makes and buys U.S. products, and we trade equally, where’s the harm?

It’s no fun to re-industrialize, to fall back to the level of real production your country is capable of minus extractive, extortive credit, but there are only two choices: the Neocon’s one world unipolar empire of murder and force, or nation states with borders and the independence and the internal capacity to produce for and defend themselves on all fronts, agricultural, manufacturing, intellectual, and military.

That’s what the “America First” plan was and in the Asian tour, China showed they understand this. So since nation states are going to persist for now, the best we can do is rebuild, re-normalize, and re-localize independently as best we can.

As the imbalances are reversed, it’s going to be a bumpy ride, but if we can do it, it will be worthwhile. At the very least, better than the alternative (They tried). We can – it is possible – recover our nation again, and with it, what it means to be “America”, and that may be worth the work.

 

 

Oct 162017
 
 October 16, 2017  Posted by at 2:00 pm Finance Tagged with: , , , , , , , , ,  


Marc Riboud Zazou, painter of the EIffel Tower 1953

 

Central bankers have never done more damage to the world economy than in the past 10 years. One may argue this is because they never had the power to do that. If their predecessors had had that power, who knows? Still, the global economy has never been more interconnected than it is today, due mostly to the advance of globalism, neoliberalism and perhaps even more, technology.

Ironically, all three of these factors are unremittingly praised as forces for good. But living standards for many millions of people in the west have come down and/or are laden with uncertainty, while millions of Chinese now have higher living standards. People in the west have been told to see this as a positive development; after all, it allows them to buy products cheaper than if they had been made in domestic industries.

But along with their manufacturing jobs, their entire way of life has mostly disappeared as well. Or, rather, it is being hidden behind a veil of debt. Still, we can no longer credibly deny that some three-quarters of Americans have a hard time paying their bills, and that is very different from the 1950s and 60s. In western Europe, this is somewhat less pronounced, or perhaps it’s just lagging, but with globalism and neoliberalism still the ruling economic religions, there’s no going back.

What happened? Well, we don’t make stuff anymore. That’s what. We have to buy our stuff from others. Increasingly, we lack the skills to make stuff too. We have become dependent on nations half a planet away just to survive. Nations that are only interested in selling their stuff to us if we can pay for it. And who see their domestic wage demands go up, and will -have to- charge ever higher prices for their products.

And we have no choice but to pay. But we can only pay with what we can borrow. As nations, as companies, and as individuals. We need to borrow because as nations, as companies, and as individuals we don’t make stuff anymore. It’s a vicious circle that globalization has blessed us with. And from which, we are told, we can escape only if we achieve growth. Which we can’t, because we don’t make anything.

 

So we rely on central bankers to manage the crisis. Because we’re told they know how to manage it. They don’t. But they do pretend to know. Still, if you read between the lines, they do admit to their ignorance. Janet Yellen a few weeks ago fessed up to the fact that she has no idea why inflation is weak. Mario Draghi has said more or less the same. Why don’t they know? Because the models don’t fit. And the models are all they have.

Economic models are more important in central banking than common sense. The Fed has some 1000 PhDs under contract. But Yellen, their boss, still claims that ‘perhaps’ the models are wrong, with it comes to inflation, and to wage growth. They have no idea why wages don’t grow. Because the models say they should. Because everybody has a job. 1000 very well paid PhDs. And that’s all they have. They say the lack of wage growth is a mystery.

I say that those for whom this is a mystery are not fit for their jobs. If you export millions of jobs to Asia, take workers’ negotiating powers away and push them into crappy jobs with no benefits, only one outcome is possible. And that doesn’t include inflation or wage growth. Instead, the only possible outcome is continuing erosion of economies.

The globalist mantra says we will fill up the lost space in our economies with ‘better’ jobs, service sector, knowledge sector. But reality does not follow the mantra. Most new jobs are definitely not ‘better’. And as we wait tables or greet customers at Wal-Mart, we see robots take over what production capacity is left, and delivery services erase what’s left of our brick and mortar stores. Yes, that means even less ‘quality’ jobs.

 

Meanwhile, the Chinese who now have taken over our jobs, have only been able to do that amidst insane amounts of pollution. And as if that’s not bad enough, they have recently, just to keep their magical new production paradise running, been forced to borrow as much as we have been -and are-, at state level, at local government level, and now as individuals as well.

In China, credit functions like opioids do in America. Millions of people who had never been in touch with the stuff would have been fine if they never had, but now they are hooked. The local governments were already, which has created a shadow banking system that will threaten Beijing soon, but for the citizens it’s a relatively new phenomenon.

And if you see them saying things like: “if you don’t buy a flat today, you will never be able to afford it” and “..a person without a flat has no future in Shenzhen.”, you know they have it bad. These are people who’ve only ever seen property prices go up, and who’ve never thought of any place as a ghost city, and who have few other ways to park what money they make working the jobs imported from the US and Europe.

They undoubtedly think their wages will keep growing too, just like the ‘value’ of their flats. They’ve never seen either go down. But if we need to borrow in order to afford the products they make in order to pay off what they borrowed in order to buy their flats, everyone’s in trouble.

 

And then globalization itself is in trouble. The very beneficiaries, the owners of globalization will be. Though not before they have taken away most of the fruits of our labor. What are you going to do with your billions when the societies you knew when you grew up are eradicated by the very process that allowed you to make those billions? It stops somewhere. If those 1000 PhDs want to study a model, they should try that one.

 

Globalization causes many problems. Jobs disappearing from societies just so their citizens can buy the same products a few pennies cheaper when they come from China is a big one. But the main problem with globalization is financial: money continually vanishes from societies, who have to get ever deeper in debt just to stand still. Globalization, like any type of centralization, does that: it takes money away from the ‘periphery’.

The Wal-Mart, McDonald’s, Starbucks model has already taken away untold jobs, stores and money from our societies, but we ain’t seen nothing yet. The advent of the internet will put that model on steroids. But why would you let a bunch of Silicon Valley venture capitalists run things like Uber or Airbnb in your location, when you can do it yourself just as well, and use the profits to enhance your community instead of letting them make you poorer?

I see UK’s Jeremy Corbyn had that same thought, and good on him. Britain may become the first major victim of the dark side of centralization, by leaving the organization that enables it -the EU-, and Corbyn’s idea of a local cooperative to replace Uber is the kind of thinking it will need. Because how can you make up for all that money, and all that production capacity, leaving where you live? You can’t run fast enough, and you don’t have to.

This is the Roman Empire’s centralization conundrum all over. Though the Romans never pushed their peripheries to stop producing essentials; they instead demanded a share of them. Their problem was, towards the end of the empire, the share they demanded -forcefully- became ever larger. Until the periphery turned on them -also forcefully-.

 

The world’s central bankers’ club is set to get new leadership soon. Yellen may well be gone, so will Japan’s Kuroda and China’s Zhou; the ECB’s -and Goldman’s- Mario Draghi will go a bit later. But there is no sign that the economic religions they adhere to will be replaced, it’ll be centralization all the way, and if that fails, more centralization.

The endgame of that process is painfully obvious way in advance. Centralization feeds central forces, be they governmental, military or commercial, with the fruits of labor of local populations. That is a process that will always, inevitably, run into a wall, because too much of those fruits are taken out. Too much of it will flow to the center, be it Silicon Valley or Wall Street or Rome. Same difference.

There are things that you can safely centralize (peace negotiations), but they don’t include essentials like food, housing, transport, water, clothing. They are too costly at the local level to allow them to be centralized. Or everybody everywhere will end up paying through the nose just to survive.

It’s very easy. Maybe that’s why nobody notices.

 

 

Jan 072015
 
 January 7, 2015  Posted by at 11:25 am Finance Tagged with: , , , , , , ,  


DPC Oyster luggers along Mississippi, New Orleans 1906

Another ‘guest post’ by Euan Mearns at Energy Matters. I thought that, given developments in oil prices, we can do with some good solid numbers on production.

Euan Mearns: This is the first in a monthly series of posts chronicling the action in the global oil market in 12 key charts.

  • The oil price crash of 2014 / 15 is following the same pace of the 2008 crash. The 2008 crash was demand driven and began 2 months ahead of the broader market crash.
  • The US oil rig count peaked in October 2014, is down 127 rigs from peak and is falling fast.
  • Production in OPEC, Russia and FSU, China and SE Asia and in the North Sea are all stable to falling slowly. The bogey in the pack is the USA where a production rise of 4 Mbpd in 4 years has upset the global supply dynamic.
  • It is unreasonable for the OECD IEA to expect Saudi Arabia to cut production of cheap oil in order to create market capacity for expensive US oil [1].
  • There are likely both over supply and weak demand factors at play, weighted towards the latter.

Figure 1 Daily Brent and WTI prices from the EIA, updated to 29 December 2014. The plunge continues at a similar speed to the 2008 crash. The 2008 oil price crash began in early July. It was not until 16th September, about 10 weeks later, that the markets crashed. The recent highs in the oil price were in mid July but it was not until WTI broke through $80 at the end of October that the industry became alert to the impending price crisis. As I write, WTI is trading at $48 and Brent on $51.

Figure 2 Oil and gas rig count for the USA, data from Baker Hughes up to 2 January 2015. The recent top in operating oil rigs was 1609 rigs on 10 October 2014. On January second the count was down 127 to 1482 units. US oil drilling is clearly heading down and a crash of similar magnitude, if not worse, to that seen in 2008 is to be expected. Gas drilling has not yet been affected with about 340 units operational.

Figure 3 US oil production stood as 12.35 Mbpd in November, up 140,000 bpd from October. In September 2008, US production crashed over 1 million bpd to 6.28 Mbpd. That production crash was short lived as shale oil drilling got underway. US oil production has doubled since the September 2008 low. C+C+NGL = crude oil + condensate + natural gas liquids.

Figure 4 Only Saudi Arabia has significant spare production capacity that stood at 2.79 Mbpd in November 2014 representing 22.5% of total capacity that stands at 12.4 Mbpd. Total OPEC spare capacity was 3.86 Mbd in November, up 250,000 bpd on October. While OPEC spare capacity may be showing signs of turning up, Saudi Arabia is adamant that production will not be cut.

Figure 5 OPEC production plus spare capacity (Figure 4) in grey. The chart conveys what OPEC could produce if all countries pumped flat out and there are signs that OPEC production capacity is descending slowly which casts a different light on the current glut. OPEC countries have skilfully raised and lowered production to compensate for Libya that has come and gone in recent years, and for fluctuations in global supply and demand. But with OPEC production broadly flat for the last three years, all production growth to meet increased demand has come from elsewhere, namely N America. Total OPEC production was 30.32 Mbpd in November down 320,000 bpd from October.

Figure 6 Relatively small adjustments to Saudi production has maintained order in the oil markets for many years. It is important to understand that the rapid price recovery in 2009 (Figure 1) came about because Saudi Arabia and other OPEC countries made deep production cuts. Saudi production stood at 9.61 Mbpd in November and total production capacity stood at 12.4 Mbpd. I believe it is significant that US production stood at 12.35 Mbpd. In an excellent post on Monday, Steve Kopits made the point that it was no longer viable for the OECD IEA to call on OPEC to cut production and these numbers illustrate this point [1]. Saudi Arabia already has 2.79 Mbpd withheld. It is clearly no longer acceptable for them to cut production further in order that the USA can produce more. NZ = neutral zone which is neutral territory that lies between Saudi Arabia and Kuwait and shared equally between them.

Figure 7 Russia remains one of the World’s largest producers with 10.95 Mbpd in November 2014, more than Saudi Arabia. Together with the FSU, production in this block reached a plateau in 2010 and has since been stable and has not contributed to the turmoil in the oil markets.

Figure 8 In 2002, European production touched 7 Mbpd but it has since halved and the region is no longer a significant player on the global production stage. The cycles are caused by annual offshore maintenance schedules where production dips every summer. The decline of the North Sea was probably a significant factor in the oil price run since 2002 as Europe had to dip deeper into global markets. It is also evident that the long term decline has now been arrested on the back of several years with record high oil prices and investment. With several new major projects in the pipeline North Sea production was expected to rise in the years ahead. The current price rout is bound to have an adverse impact.

  • Norway Nov 2013 = 1.90 Mbpd; Nov 2014 = 1.85 Mbpd
  • UK Nov 2013 = 0.87 Mbpd; Nov 2014 = 0.95 Mbpd
  • Other Nov 2103 = 0.60 Mbpd; Nov 2014 = 0.58 Mbpd

Figure 9 China is a significant though not huge oil producer and has been producing on a plateau since 2010. Production was 4.13 Mbpd in November up 50,000 bpd from October. This group of S and E Asian producers have been declining slowly since 2010. This, combined with rising demand from this region will eventually lead to renewed upwards pressure on the oil price.

Figure 10 N American production is dominated by the USA (Figure 3). Canadian production has been flat for a year and Mexican production is in slow decline.

Figure 11 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. The chart reveals surprisingly little about the current low price crisis with a barely perceptible blip above the trend line. Most areas of the world have either stable or slowly falling production. The bogey in the pack is the USA that has seen production sky rocket by 4 Mbpd in 4 years.

Figure 12 To understand this important chart you need to read my earlier posts [2, 3]. The data are a time series and the pattern describes production capacity, demand and price. There are undoubtedly both supply and demand factors driving the current price rout. The last time this happened, OPEC cut production thereby preserving global production capacity. This time the Saudi plan is to see global production capacity reduced by low oil prices.

Data

Getting up to date data on global oil production is frustratingly difficult. While this report is titled “January 2015″, only the rig count data are for this month, the production data is all from November 2014, the most recent available.

Owing to budget cuts, the EIA are months behind. Their most recent reports are for September 2014 when WTI was still over $90 / bbl. The EIA are however up to date with daily oil price information reported in Figure 1.

The JODI oil production data are more up to date but the global data set is still incomplete. Crude + condensate are reported separately to NGL and overall this source does not yet provide a coherent production time series.

The IEA OMR, used here, is I believe the best source. Published monthly, the mid-December report has data for November. However, the most recent months are always revised in subsequent reports. One snag, to get the full report mid-month you have to pay €2,200, and even then I doubt the IEA would be very pleased if I published their data before it became public domain. The data becomes available to all in two weeks, at the beginning of the following month. The other benefit from the IEA is they report OPEC spare capacity which I view as an important indicator (Figure 4).

The most up to date source of key data is the Baker Hughes rig count which is updated weekly providing a useful indicator for action in the US oil industry (Figure 2).

References

[1] Steve Kopits Scrap “The Call on OPEC”
[2] Energy Matters The 2014 Oil Price Crash Explained
[3] Energy Matters Oil Price Scenarios for 2015 and 2016