Wednesday, February 17, 2010

February 17 2010: Did peak oil cause the present financial crisis?

Unknown I WANT SPRING!!!! March 28, 1939
Pretty Peggy Townsend, who will be crowned Cherry Blossom Queen at the festival to be held Friday, picked out a Cherry Tree to get her first glimpse of the beautiful blossoms in Potomac Park.

Ilargi: There is a long-standing misunderstanding about the perceived influence of perceived limits to energy availability in our societies that leaves people from the energy field, or even those who have trouble understanding finance, convinced that what is known as peak oil is the driving force in our present financial collapse.

As crucial as energy is to our lives and lifestyles, such claims are simply wrong. People -except in exceptional cases- don't lose their homes because gas at the pump became more expensive, and banks wouldn’t have gone bankrupt -barring trillions in public bailouts- because their energy costs went up. I don't want to regurgitate the entire topic, but then there’s no need for that either; a brief glance at the numbers should say enough.

An example.

As you may remember, sometime in 2008, the price of gas temporarily went up by about $1 per gallon. This is when the first accounts began to appear of people linking the present financial crisis to the energy crisis, claiming that the latter caused the former. To me, this never made much sense. I do, however, have fond memories of very interesting discussions on the topic at the time with very smart oil man Jeffrey Brown.

Still, the numbers were what they were, even back then, and in the end, derivatives didn’t cause peak oil anymore than peak oil caused derivatives. Some phenomena simply need no help destroying themselves.

Say, to drive 25,000 miles (40.000 km) per year, the average American needs about 1000 gallons of gas. The price rise in 2008 then cost her an extra $1000 for the year. In that same year, her home lost about 20% of its value, or $40,000. Her pension went down an often reported 30%, which can, depending on her age, range anywhere from say, $100,000 to $1 million. In other words, the average American easily lost about 50 times as much in pure financial market terms as she did at the pump in 2008.

In 2009, gas prices came down considerably, but home prices kept on falling. Hence: while her financial losses on energy costs diminished, the home price losses continued.

Yes, home price losses lessened somewhat towards the end of the year, but Bob Shiller predicts a 28% additional loss for 2010. Yes, pension funds made good on some of their losses on rising stock markets, but that was achieved through what I like to call the $1 trillion-a-month government financial injection. Which means that while our protagonist may now thus have the fleeting promise of a tad more pension income when she passes the eligible age in the future (a receding horizon in and of itself), she also has additional "personalized federal" losses tacked onto her account that run in the tens if not hundreds of thousand dollars. And since the annual US federal deficit is acknowledged by all sides to remain at least in the multiple trillion dollar range for many years to come, she will be called on to pay goddess-only-knows how much going forward.

Where did the financial losses originate? In the energy field? Not even close. They stem instead from low post tech bubble interest rates which led to low mortgage costs which led to everyone wanting to buy a home which led to no-questions asked loans which led to high volumes of mortgage based securities which led to a zillion other forms and sorts of derivatives which led to untold trillions in lost wagers which led to a collapsing financial economic system, a process we find ourselves in the early stages of. We can argue about the sequence in which these things happened, but not about whether they did happen, or about the role of peak oil in their occurrence.

A derivative is a bet, pure and simple, and the time when more than 50% of all bets turn winners is of necessity limited by the same laws that limit the life expectancy of any ponzi scheme. They are self-destructive. Since energy prices have nothing to do with the collapse of the MBS ponzi tower, which doesn’t need any help breaking down, thank you very much, since its demise is firmly written into its own foundations, the idea that peak oil or any other form of energy crisis was the cause of the financial crisis, i.e. the cause of the collapse of the housing/securities/derivatives scheme(s), can be safely discarded and put out by the curb with the rest of our broken dreams. Once you understand what derivatives are, and why there were $1 quadrillion of them floating around at one point in time, maybe that's where you start to see why peak oil is not a factor in this crisis of ours.

That is not to say that energy issues could never be, or even never have been, the cause of financial problems. Just that they are not this time around. Nor were they, obviously, in the 1930's depression, not an insignificant point for those who are still confused. Neither does any of this take away from the importance of peak oil. That importance, however, will play out in the future, it does not do so now. For one thing, energy demand and usage have plunged in the past two years. For another, oil producing countries are pumping out fuel literally like there's no tomorrow, because the finance crisis hits their budgets like so many sledgehammers. Something, incidentally, that I've long predicted, not a hard call to make, since an organization such as OPEC, and the quota it boasts, have credence only in times of economic plenty. The financial losses on investments incurred by Middle East nations are surely staggering, though we have no concrete numbers other than Dubai's demise, and they were definitely not caused by oil running out, but by Saudi and Abu Dhabi investments in US securities.

Admittedly, there is a different aspect to this theme, though it's not a game- or evidence changer. On March 7, 1956, Shell geologist Marion King Hubbert spoke at a conference in Texas, where he launched his now famous notion of a peak in both US and world oil production. The pre-printed version of Hubbert's paper distributed at the meeting made the following statements:
"According to the best currently available information, the production of petroleum and natural gas on a world scale will probably pass its climax within the order of a half a century, while for both the United States and for Texas, the peaks of production may be expected to occur within the next 10 or 15 years."

In the official company version after the talk, Shell left out Hubbert’s world oil production prediction altogether and changed his words about the US to:
"[..] the culmination for petroleum and natural gas in both the United States and Texas should occur within the next few decades."

The truly powerful people on this planet, and they do exist, and no, you don’t know their names and faces, may of course have picked up on what Hubbert said, then and there or in subsequent years, devised strategies to hold on to what they had in the face of what he predicted, and decided to (pre-)crash the entire world economy in the face of the inevitable crash peak oil would bring about sometime down the line.

But that is all merely a guessing game, with anonymous potential actors toting potential ideas about potential outcomes playing out over many decades, during which many potential power players would have died. Nice theory, but not exactly something we can base any solid idea on about a connection between energy and the economy.

Peak oil will take its well-deserved center stage place when our debt drama has somehow been resolved, many years from now, and at the expense of the lives and health of many millions of our friends and family members. Could you survive losing your entire wealth and belongings after gambling them all away in Vegas? Yes, you could, and many have. Could you do so in the face of a mortal disease, let's call it peak oil, in your new found poverty? Yes, you could, many have, and for many years too. Peak oil is mortal, but not instantly. Peak oil isn't even an issue, is it, if demand collapses?

Maybe it's not the impact of peak oil on finance, but the impact of finance on peak oil that will be the biggest threat to our societies. As oil prices linger at record highs, albeit below the 2008 $147 a barrel, exploration budgets have been cut to the bone. And trust me, new-fangled notions of using spent nuclear rods to develop shale oil won’t change that. That, after all, is what I based my Law of Receding Horizons on, with kudo’s to Ken Deffeyes. Shale is dead, and it was never born other than in the minds of people with dollar signs in their eyes.

I tried to write the above as a train of thought piece, didn’t research my own words through the years on the topic, nor anyone else’s, apart from the exact date and words for Hubbert’s Texas speech. I see no need to do so. I could write ten times as much as I have here on this, but I hope that won't be necessary. I hope you better understand now what the links are between peak oil and you losing your homes and jobs, and that they are not what some well-meaning people would like you to believe.

PS: Wait, Greece? The EU can’t do a thing unless it promises to deal with Italy the same way it does with Greece, and with JPMorgan and Société Générale the same way it does with Goldman Sachs. Not too likely for now. So Ron Paul's suggestion that the US Fed is busy bailing out Athens sounds perfectly plausible to me. Don't believe a word you hear. I don't.

Ilargi: Make the world a better, and a smarter place, while you make yourself better and smarter. We call this win-win. Donate to The Automatic Earth, so we can continue to explain the world around you as only we can. And visit our advertisers frequently, that's what they're here for.

Speaking of which: Stoneleigh speaks February 23 in Ottawa, ON at the McNabb Community Centre.

Brussels threatens to widen net on currency swaps
The European Commission has said it will widen its investigation into complex currency transactions, used to hide the true extent of national debt levels, if evidence suggests they were deployed in more than one member state. The EU's statistics office, Eurostat, launched an investigation into Greece over the weekend, following recent reports that Wall Street investment banks provided Athens with swaps and other financial instruments throughout the last decade.

Speaking after a meeting of EU finance ministers in Brussels on Tuesday (16 February), EU economy commissioner Olli Rehn said Greece has until 19 February to justify their legitimacy, adding that the net could be widened to other capitals. "In case there is reason to expect that these kind of techniques have been used by other member states, not only Greece, then we will request information from other member states," said Mr Rehn. The Finnish politician said Eurostat had no evidence of other capitals using the swaps, but the statistics agency was also unaware of Athens' activities until very recently.

Media reports over the weekend said Europe's other chronic big spender, Italy, has also used the off-balance sheet items in the past to hide its debt pile. Greek finance minister George Papaconstantinou told journalists on Monday: "Greece was not the only country using them. They have since been made illegal and Greece has not used them since." Spanish economy minister and current chair of the bloc's finance meetings, Elena Salgado, said Spain had not been approached by investment banks concerning the products. "If such a proposal had been made it would not have been accepted, but there has not been any proposal along those lines," she said. Mr Rehn also extended a warning to the firms themselves. "If confirmed that some investment banks have been involved in these kind of exercises, we have to see whether the rules have been respected," he said.

Investment bank Goldman Sachs is alleged to have arranged so-called cross-currency swaps for Greece at the start of 2002, under which government debt issued in dollars and yen was swapped for euro debt for a certain period, to be exchanged back into the original currencies at a later date. The procedure is widely practised by governments looking for different currencies, but questions have been asked about the validity of the exchange rates used in the Greek case. The reports suggest Goldman Sachs used fictional rates to enable Athens to receive a far higher sum than the actual euro market value of its dollar / yen denominated debt, with the additional credit gained in this way going undetected by Brussels.

As well as formally adopting commission excessive deficit recommendations on a number of EU countries, and approving the Greek government's deficit cutting programme, EU finance ministers also listened to presentations from the bloc's various economic commissioners regarding plans for the next five years. Internal market commissioner Michel Barnier said the EU was currently studying recent US proposals to reform its banking sector, but indicated the EU was not intending to merely adopt them whole scale.

"You can't just transpose or copy the ideas or reforms proposed by [US President] Obama to the European continent," said Mr Barnier who is heading to Washington and New York in the coming days to discuss the plans with American officials. "In Europe we have more problems related to the interconnection of the banks, rather than the specific nature of the activities or the scale of individual banks," he said. The US plans, named after their chief architect and former Federal Reserve Chairman Paul Volcker, aim to limit the size and risk-taking of banks operating in America.

Robert Mundell Says Italy is Biggest Threat to Euro
Bloomberg's Sara Eisen reports on Nobel laureate Robert Mundell's comments on the euro.

Credit markets flash hottest warning signal since crisis
by Ambrose Evans-Pritchard

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months. Jitters over Chinese credit tightening and default risks in Greece and Dubai are causing bond vigilantes to batten down the hatches across the world, bringing the most dramatic credit rally for a century to a shuddering halt.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. "This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit's credit analyst. "The index is a leading indicator so it is a warning signal. This is being driven by volatility in sovereign debt, with Greece being the biggest issue at the moment but tightening in China could be a bigger negative catalyst in the long-term," he said.

The rating agency Moody's said market ructions have led to a "material" rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy's Snai betting group, and the UK's Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada's Bombardier. Dr Suki Mann, a credit specialist at Societe Generale, said stronger companies should weather any squall but concerns are mounting. "The world has woken up to the real possibility of a double dip. These are nervous times," he said.

BusinessEurope, the EU-wide lobby, warned this week of a "very worrying situation" as it become harder to raise money at a viable cost, if at all. The group called on the European Central Bank to send a "clear signal" about its collateral policy. Fears of tougher ECB rules are a key factor causing market flight from Greek debt. The sudden halt in bond issues is disturbing since companies have been relying on capital markets to raise money as an alternative to Europe's fragile banks. The ECB said on Tuesday that 42pc of small businesses in the eurozone had reported worsening credit conditions in the second half of last year, despite the emergency stimulus of the authorities.

Conditions appear to be deteriorating. Bank loans to companies contracted at an annual rate of 1.9pc in November and 2.3pc in December. Consumer credit also fell. The Bundesbank fears that disastrous earnings last year will cause scores of German companies to breach loan covenants, triggering a wave of downgrades that further damage German banks and potentially setting off a second wave of the credit crisis. New Basel III rules intended to force banks to raise risk-adjust capital levels may be making matters worse. The rules are causing weaker banks to cut lending, throwing the 'credit multiplier' into reverse.

Andrew Sheets, a credit expert at Morgan Stanley, said corporate bond spreads have not spiked as far as Greek or southern European sovereign yields, so they may rise higher as the price of risk comes back into alignment. "What's changed over the last two weeks is that valuations have become too rich compared to broader sovereigns," he said. Credit rallied far ahead of stocks last year, creating the chance of a "equity carry trade". Dividend yields on Telefonica are 8.2pc while yields on the company's five-year debt are 3.8pc, comparable to Spanish state debt. Likewise for France Telecom at 8.5pc against 3.3pc. This is an extreme aberration by historical standards. Either equity prices must rise a long way, or credit spreads must widen.

Is The Federal Reserve Secretly Bailing Out Greece (on Goldman’s behalf)?
by Ron Paul

Last week we were reminded that ours is not the only country suffering from severe economic turmoil. The Greek government is the latest to come close to default on their massive public debt.  Greece has insufficient funds in their treasury to make even the minimum payments that are now coming due.  Their debt level is about 120 percent of their gross domestic product and their public sector absorbs what amounts to 40 percent of GDP.  Any talk of cutting costs and spending is met with violent protests from the many Greeks heavily dependent on government payments. Mounting fears of default have sent shockwaves through their creditors and all of the eurozone countries.

But there have been statements made by the European Central Bank to calm fears and give assurances that Greece will get the aid it needs. Details of agreements are not forthcoming. Is it possible that our Federal Reserve has had some hand in bailing out Greece? The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.

Greece is only the latest in a series of countries that have faced this type of crisis in recent memory.  Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland.  Several other countries (Spain, Portugal, Ireland, Latvia) are approaching crisis levels with public debt as well.  Many have strong ties to Goldman Sachs and the case could easily be made that default could have serious implications for big US banking cartels.  Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent.  Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.

This global financial crisis is a predictable result of secretive central banking and unsound fiat currency.  Governments are entirely committed to this system of fiat money and fractional reserve banking for obvious reasons: it enables them to do what they love most, namely, spend hoards of money with near impunity.  Without the limitations of sound money, governments will spend without limit.  They will spend money to hire their cronies, pay off special interests, give out favors, create dependence and generally distract from the terrible job they do at their chief mandate, which is to protect the liberties of the people.  Fiat money is a blank check to government, which is very dangerous, and we are witnessing the death throes of the system as the bills come due and the underlying capital is squandered away.

Because of our globe-straddling empire and lingering reserve currency status, perhaps no one has a more vested interest in keeping this system cobbled together than our own government and the Federal Reserve.  The agreements that Iceland and Dubai and Greece have negotiated can amount to little more than kicking the can down the road, as their overall spending habits remain largely intact, fiat currencies are still legal tender and more debt is issued on top of unsustainable debt.  The American people have the right to know if they are going to be the ones holding the bag in the end because the Federal Reserve secretly put them on the hook for it.  This knowledge would be a key factor in peacefully dismantling this immoral and unconstitutional system.

Greece loses EU voting power in blow to sovereignty
by Ambrose Evans-Pritchard

The European Union has shown its righteous wrath by stripping Greece of its vote at a crucial meeting next month, the worst humiliation ever suffered by an EU member state. The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty. While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.
"We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoing views shared by colleagues in Northern Europe. Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership". The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of "constructive ambiguity" to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.

Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union. Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.

Tuesday's EU verdict amounted to a thumbs down on Greece's earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week. However, premier George Papandreou has won support from key political parties and a majority of the people. Greece may yet surprise critics by mustering its Spartan Spirit.

Goldman Sachs, Greece Didn’t Disclose Swap, Leaving Investors ‘Fooled’
Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit. No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager. “The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”

Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators. The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said. Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.

Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained. The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points. The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.

“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts. Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”

The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities. “From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”

A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry. European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.

The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time. That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.

European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said. “Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”

When is a Fraud Not a Fraud? (Greece-Goldman Edition)
by Yves Smith

The short answer to the question in the headline is “When there are no rules.”

A headline in a current Bloomberg story illustrates the problem: “Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’.”

“Fooled” is an unusual choice of words, particularly when applied to to presumed grown-ups like institutional investors and international overseers. Bloomberg seems to be mincing around the more obvious F-words, like “fraud” (as in defrauded) or “fleeced.”

Although there is a considerable amount of well-warranted consternation about how Goldman sold swaps to Greece that allowed it to mask how bad its deteriorating finances were from the EU budget police, there has been perilous little discussion of why the fact that this was permissible says there is something very wrong with the rules in place.

The latest twist is that Goldman managed $15 billion of debt sales for Greece after the debt-disguising swaps were in place, and (needless to say) there was no disclosure of the existence of the hidden debt (Bloomberg was able to obtain only six of ten prospectuses in question and found no mention of the swaps; it seems pretty unlikely that the others disclosed their existence). That means investors were hoodwinked. It goes without saying they would have seen Greece as a worse credit risk if they had been in full possession of the facts, and would presumably have required a higher interest rate.

Yet we get amazingly weak statements from the experts quizzed by Bloomberg:

Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”

Yves here. I’m not certain how much a US law professor knows about the securities laws that govern this particular offering (as in it most certainly is NOT US securities regs). But there seem to be three issues:

1. What disclosure standards would apply to the Greece bond offering. The offering memorandum, from a legal standpoint, is the issuer’s document, meaning Greece’s, not Goldman’s. So any shortcoming in disclosure is a liability issue for Greece (no joke, the deal manager makes the issuer sign a little letter acknowledging what portions of the offering memo were provided by it, and it is just a few sentences, like the selling price of the bonds, the underwriters’ spread, stuff like that. The description of the issuer and the securities themselves is most assuredly NOT the responsibility of the issuer).

2. OK, but what about this famous due diligence that investment bankers are supposed to perform? Well I have to tell you, even in good old SEC land, it’s less than you might think. In my day, the only thing that seemed to be required was visiting the major facilities of a new issuer (as in a company doing an IPO or first bond offering) and having outside counsel read board minutes (and tell the managers if they saw anything they found troubling).

3. But in this case, we have an interesting conundrum. Goldman clearly HAD TO KNOW the Greek offering documents were incomplete, right? They had arranged those swaps, they knew there was more debt than Greece was ‘fessing up to in its later offering memoranda.

Point 3 is where matters get a bit sticky. Under SEC regs, the failure to mention the swaps or their effect (that there was additional debt that had been deferred) would be a violation. This is a simplification, , but the concept is that the offering documents have to make a full and fair disclosure. That means not only do the statement made need to be accurate as of the date when they were made, but further more, they cannot fail to state a material fact if leaving that information out would be misleading. So question is whether under the regs governing this deal, whether an omission of this sort would also be considered a regulatory violation and/or an investor fraud.

If so, it’s pretty clear Greece defrauded investors. But what about Goldman? Here, Prof. Hazen is far too charitable to Goldman. “Smoking gun memo?” No, you just need to understand how Goldman works. Even though my knowledge is dated, I strongly suspect the firm is still organized more or less the same way, because it was considered a competitive strength and was widely emulated in the industry (t had the effect of creating loyalty to the brand rather than individuals).

Goldman has centralized account management. One person, a relationship manager, is ultimately responsible for selling all products to particular corporate clients and government entities. His full time job is client coverage; he then works with product specialists as needed to get deals done (specialists are also assigned to particular accounts, but the relationship manager is always in the mix. Hank Paulson was one of these relationship managers, called investment banking services). So Goldman cannot pretend that somehow the team that handled the bond offering didn’t know about the swaps deal. That’s unlikely to begin with, given Goldman’s fetish about communication, but structurally impossible (the new business guy would have known about both sets of deals).

In addition, Goldman new business officers (the account managers) are required to document every meeting with the client (this is to protect the firm in case someone is hit by a bus or leaves the firm). This was also a long-standing fetish. In the 1980s, I as a junior account member could ask the library for the “credit memos” as these notes were called. On well-established clients, the meeting notes went back to the 1950s.

So I’m not certain you need a particular memo, even though such documents probably exist. All you need to do is walk through the structure of Goldman relationship management and their usual client communication protocols to establish that it is just not credible that the team working on the bond issues could not have known about the swaps. Then you just need to figure out a legal theory as to why what Goldman did was not kosher (presumably it was an investor fraud, but you’d need the relevant statutes and precedents).

Some people are willing to say in a pretty straightforward fashion that this sort of thing is not right. And if the regs really are so lax that this sort of omission is permissible, that is yet another bit of evidence that deregulation has gone too far (and I fail to understand why investor would be willing to buy paper in a disclosure regime that inadequate, but that is a bigger topic that we will hopefully turn to at another point). From the Bloomberg story:

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s [Bill] Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”

Even before this latest wrinkle, Simon Johnson was quite clear that these deals did not pass the smell test:
Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients…

If the Federal Reserve were an effective supervisor, it would have the political will sufficient to determine that Goldman Sachs has not been acting in accordance with its banking license. But any meaningful action from this direction seems unlikely….

To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible.

Yves here. Goldman has made a science of being too clever by half, but it may have made a fatal mistake. Governments do not take well to being abused or made to look foolish, and Goldman appears to have done both.

EU demands details on Greek swaps
Wall Street’s role in the unfolding Greek debt crisis will come under greater scrutiny after European Union authorities requested information from Athens about currency swaps. The transactions were undertaken from 2001 to 2008, and may have allowed the highly indebted Greek government to conceal billions of euros of new debt from the public and regulators. The information was requested by Eurostat, the EU’s statistical office, and is due by the end of the month. “The question is, was this legitimate in government management operations?” Amadeu Altafaj Tardio, a European Commission official, said.

A key focus for authorities, according to Mr Altafaj Tardio, would be whether the currency swaps, a derivatives transaction, had been calculated based on prevailing market rates. Goldman Sachs, Morgan Stanley, Deutsche Bank and other investment banks arranged complex transactions that enabled the Greek government to raise cash for budget spending without having to classify the proceeds as public debt. One of the biggest of such deals was a securitisation in 2001 in which Greece raised €2bn backed by grants the finance ministry expected to receive from EU structural funds.

Italy, Spain and Portugal used similar forms of off-balance sheet accounting as they sought to keep their budget deficits within the 3 per cent of gross domestic product mandated by the eurozone. The Commission said on Monday that the Greek government failed to disclose information about the currency swaps to a Eurostat team that visited Athens in September 2008 to monitor Greece’s debt management. But Greeks with knowledge of a 2002 currency swap and a series of asset-backed securitisation deals – all carried out under the previous Socialist government that held power between 2000 and 2004 – disputed that contention.

“Eurostat knew all about these deals, which were perfectly legal at that time. We didn’t keep them secret,” said a former senior Greek finance ministry official. George Papaconstantinou, Greece’s finance minister, told a meeting of the European Policy Centre think-tank: “The kind of derivatives contracts that are being reported by some newspapers were, at the time, legal and Greece was not the only country to use them. They have since been made illegal, and Greece has not used them since.” He added: “The current government has neither mandated not considered any instrument which is not compliant with Eurostat rules.”

A Eurostat representative declined to say which transactions were subject to the group’s request, or whether it was focusing on the work of specific banks. The focus on Wall Street, first detailed in a New York Times report, came as the Commission on Monday moved to tighten control over member states’ book-keeping. It approved proposals that would strengthen Eurostat’s hand to audit governments’ finances and ensure they provided accurate data. Those measures will now go to the European Council for consideration.

EU asks Greece to explain derivatives reports
The European Union has asked Greece to explain reports that it engaged in derivatives trades with U.S. investment banks that may have allowed it to mask the size of its debt and deficit from EU authorities. According to the New York Times, one contract in 2001 -- carried out just as Greece was joining Europe's monetary union -- involved Greece selling forward future lottery receipts and airport landing fees in exchange for cash to write down debts. The deal was treated as a currency trade rather than a loan, according to the newspaper, allowing Greece to hide it from public view while meeting EU deficit limits.

Greece's finance minister, George Papaconstantinou, on Monday dismissed suggestions that his country may have played fast and loose with monetary rules, saying the transactions Greece took part in were permissible at the time. "The kind of derivatives contracts reported by some newspapers were legal at that time," he told reporters in Brussels. "Greece was not the only country to use them...They were made illegal; we have not used them since then." The issue has become a focus of attention as Greece has now acknowledged that it has a budget deficit of nearly 13 percent of gross domestic product -- more than four times EU limits -- and a national debt equivalent to 120 percent of GDP.

The fiscal problems have led to pressure on Greek debt in bond markets and weakened the European single currency. The European Commission, the EU's executive that is responsible for enforcing EU laws, said it had asked Greece to explain what contracts it had engaged in as Eurostat, the EU's statistics agency, had never been informed. "I want to state that Eurostat was not aware of such transactions," Commission spokesman Amadeu Altafaj told a regular briefing on Monday. "But I can tell you that Eurostat has indeed, following these reports, already requested the Greek authorities for an explanation by the end of February."

Asked if the derivatives trades that Greece is alleged to have conducted fell within EU budget rules, Altafaj said: "We need the information on what kind of transactions took place, if they did (take place), and what was the effect on the government accounts of Greece...This is something that we don't have the information (on) yet and we have requested." A senior Greek finance ministry official told Reuters that Greece's current debt financing operations were transparent and complied with Eurostat rules.

But Eurostat, which already has profound concerns about the reliability of Greek macroeconomic data, is likely to take a very hard look at exactly what transactions took place and when. "This is why we are requesting more capacity for Eurostat to indeed to have more thorough and deeper view on these statistics. Reliable statistics are a key issue in management of public finances," Altafaj said. What Greece appears to have carried out, at least on one occasion, is a currency swap, which Altafaj said would have to be examined to see if it met EU rules. In particular, Eurostat will assess if underlying exchange rates and interest rates in any swaps were calculated based on observed market rates, which may be necessary for such deals to be considered legitimate, he said.

An article in Risk magazine last week said a deal between Greece and Goldman Sachs, completed in 2002, had effectively allowed Greece to borrow about 1 billion euros without adding to its public debt figures, at a time when the size of its borrowing threatened to attract a fine by Brussels. Risk said such swaps were legal, common at the time, and widely marketed by a number of banks. Under the deals, a country could reduce the size of the debt on its balance sheet by issuing euro-denominated debt and swapping it into a foreign currency such as dollars, using an artificially weak or off-market euro exchange rate.

The debt would be recognized by Eurostat at the market rate, cutting the country's recorded debt burden, although the country would end up paying higher coupons on the debt, Risk said. At a meeting later on Monday, euro zone finance ministers were expected to exert more pressure on Greece to implement planned budget deficit cuts. EU leaders pledged last week to help Athens resolve its crisis if needed, but they are still hoping to avoid having to provide concrete aid.

Greek Tax-Dodgers Threaten Papandreou’s Plan to Cut Budget Gap
Apostolis Rigas took his Opel sedan for a 220-euro ($354) service at a repair shop in northern Athens. When he asked for a receipt, the price jumped to 260 euros as his mechanic would have to declare the income and pay tax. “There’s no taboo about this,” the 23-year-old student said in a Feb. 2 interview. “Tax evasion helps support families, but it’s not good for the Greek state.” Prime Minister George Papandreou’s drive to tackle the European Union’s biggest budget deficit and pacify investors who have dumped Greek assets may hinge on convincing more people like Rigas to abandon this tax-dodging tradition. Papandreou says that Greek workers and companies have skirted tax worth 31 billion euros, more than 10 percent of gross domestic product.

Greece’s revenue from income tax was 4.7 percent of GDP in 2007, compared with an EU average of 8 percent, EU statistics show. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a euro region-low of 32 percent even as economic growth averaged 4.1 percent a year. That decline has helped push the deficit to 12.7 percent of GDP, more than four times the EU limit. It has also inflated the national debt, which at 120 percent of GDP will be the highest in the euro region this year
oncerns about Greece’s finances led to a slump in bond prices, pushing the premium investors demand to buy its debt over comparable German bonds to almost 400 basis points on Jan. 28, the highest since 1998. The EU’s Feb. 11 pledge to potentially aid Greece narrowed that gap, though at 301 basis points, it’s still twice the level of early November. EU finance ministers in Brussels today are reviewing the government’s three-year deficit reduction plans that call for 2.4 billion euros in additional revenue from squeezing tax evaders and dodged social security payments. That’s about a quarter of the entire deficit-reduction package, which includes a wage freeze for public workers, less government spending and higher levies on fuel, tobacco and property. “If these practices continue, they will lead to much bigger problems for us all,” Papandreou said in Brussels on Feb. 11 after EU leaders agreed to offer aid if Greece sticks to the deficit goals.

The government is seeking to tap more revenue from a society in which 95 percent of taxpayers declare annual income of less than 30,000 euros. The Bank of Greece estimates a campaign against evasion and corruption could glean as much as 5 billion euros a year. “What distinguishes Greece from the rest of the pack is the extent of tax evasion,” said Michael Massourakis, chief economist at Athens-based Alpha Bank, the country’s third biggest-lender, in a Feb. 5 telephone interview. “If you don’t attack tax evasion you don’t have the moral authority to cut spending.” As part of its drive to pressure the country’s one million self-employed to declare more income, the government is offering a tax break for expenses with receipts. That’s why Rigas accepted the extra repair cost to get a receipt from his mechanic in the Nea Ionia neighborhood of Athens.

Papandreou’s plan also targets doctors and gas stations, and seeks to discourage bribery of tax inspectors. The government is establishing Internet and telephone-based systems for filing returns to make bribery more difficult. It will also put barcodes on prescriptions to monitor how many patients doctors treat and track gasoline tankers by satellite to detect black market fuel sales. The government has started scrutinizing professionals suspected of widespread evasion. An investigation in the central Athens neighborhood of Kolonaki, where shoppers can buy Manolo Blahnik shoes and find the city’s only Prada store, showed more than half of doctors declared less than 30,000 euros in annual income, Finance Minister George Papaconstantinou said in November. The probe led to an audit.

Papandreou also announced an overhaul of the tax system to broaden its base and make taxes more equitable. The threshold for paying the highest rate of 40 percent was lowered to 60,000 euros from 75,000 euros, the government said last week. Those earning less than 40,000 euros will pay less and the corporate rate will be lowered by 5 points to 20 percent. Greece has been here before. Virtually every modern prime minister, including Papandreou’s father, Andreas, pledged to act. This time, the pressure from the EU and investors may help, said Harris Stamatopoulos, chairman of Athens-based Opap SA, Europe’s biggest traded gambling company. “Greeks are late starters but very good finishers,” he said in a Feb. 2 interview. “We have to be told many times before we believe things are as urgent as politicians say, but once we realize, we really move.”

More than 64 percent support the government’s efforts to rein in the deficit, a Kappa Research poll for To Vima newspaper published Feb. 7 said. Still, Papandreou’s campaign against evasion comes as he cuts public wages and services, and risks fueling mistrust of government corruption and inefficiency that helps many justify dodging the tax man, said Evangelos Karaindros, 41, a self- employed lawyer based in downtown Athens. “I pay taxes, but I don’t get any services,” he said in a Feb. 1 interview. “The man on the street feels this country offers him nothing.”

That anger taps into a tradition of tax evasion-as-protest against nearly four centuries of rule by the Ottoman Turks that ended with Greek independence in 1829, Massourakis said. Even for those who pay, colluding with tax-dodging of taxi drivers and bar-owners is still considered a form of solidarity. “If this was a friend of mine he wouldn’t give me a receipt and I wouldn’t ask,” Rigas said. “I’m not so sure they’ll succeed.”

European Union Sets Deadline for Greece to Make Cuts
Greece faced increased pressure Tuesday over its use of complex financial instruments to mask its rising debt, with European officials demanding detailed explanations by the end of the week and saying they could extend their inquiry to other countries. The announcement came at the end of a meeting of European Union finance ministers in Brussels, a gathering that threatened Athens with further austerity measures unless it proves within a month that its deficit reduction program is working.

A crisis of confidence in the financial markets over Greece’s huge public deficit and high debt levels has prompted the biggest test for the European single currency since its inception. The finance ministers on Tuesday told Greece that it will have to show by March 16 that spending cuts it is planning can bring its deficit down from 12.7 percent of gross domestic product, to 8.7 percent this year. The ministers warned Athens — which already faces a wave of strikes — to ready itself for additional cuts in case a verification mission finds that the Greek austerity program is insufficient to achieve the targets set.

Though E.U. leaders promised last week to take determined and coordinated action to defend the euro if necessary, there was no public discussion Tuesday on what form that could take.
Ireland’s finance minister, Brian Lenihan, said that the 16 euro zone finance ministers had agreed “that we will not talk about what the instruments are. We believe that would be unwise.” On Tuesday, the European commissioner for economic and monetary affairs, Olli Rehn, moved forward a deadline for Athens to give its explanation of the use of sophisticated financial instruments that concealed the scale of the deficit. The use of such instruments was first reported in The New York Times.

The deadline, which the European Commission said Monday night had been set for the end of the month, would be set for the end of this week, Mr. Rehn said. “It is clear that a profound investigation must be done on this matter,” he said, “and I will ensure that we conduct the inquiry so we see whether all the rules were respected.” He added that if it turned out that the use of the instruments was “not in line with the rules of the time, then of course we would need to take action,” including requesting information from other member states if necessary.

Asked at a press conference if Spain, another heavily indebted E.U. state, had been approached by big investment banks with similar ideas about using derivatives, the Spanish economy minister, Elena Salgado, replied: “No, absolutely not, and if such a proposal had been made it would not have been accepted.” E.U. officials suspect that investment banks may have exploited loopholes in procedures for reporting debt and deficit figures, both of which are central criteria for euro membership. Mr Rehn said pointedly that “the banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics.”

It remains unclear what, in addition to the measures already being taken against Greece, Mr. Rehn could do if the answers he gets from Athens are not to his liking. Greece is already facing action by the European Union over its excessive budget deficit, which far exceeds the limit of 3 percent of G.D.P. set by the treaty that established the euro. Greece also faces legal proceedings brought by the European Commission, the E.U. executive, over flaws in its statistical reporting. The use of complicated derivative swaps by Greece to mask its deficit was not reported to E.U. authorities or to the European Union statistical agency, Eurostat.

“Eurostat made a methodological visit to Greece on 15-19 September 2008,” said Amadeu Altafaj, spokesman for Mr. Rehn. “At the time the Greek authorities confirmed that, by law, government units could not enter into fictitious derivatives transactions.” On Monday the Greek finance minister, George Papaconstantinou, said that such swaps were legal when Greece used them. He added that they were no longer being used.

Britain and the PIGS
by Ambrose Evans-Pritchard

As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone. The yields on 10-year British Gilts have risen to 4.06pc, compared to 4.05pc and 4.01pc for Spain. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds.

Eurosceptics should resist any Schadenfreude over the unfolding EMU drama in Greece. (Not to mention the huge exposure of British banks to Club Med). The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray. While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club — and perhaps the world — at 13pc of GDP.

I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending. Of course, bond yields do not tell the whole story. Credit Default Swaps (CDS) measuring bankruptcy risk are much lower for the UK than for Greece or Spain. Bond yields capture the risk of devaluation and inflation, where CDS measure pure default risk (or do in theory — though they are also speculative tools). Britain may engage in stealth default by monetizing debt and inflating, but that does not count for CDS contracts. Countries in a fixed exchange system with loans in somebody else’s currency — the Gold Standard in the 1930s, EMU today — can indeed default.

Britain’s current account deficit is down to 1.4pc of GDP, much better than Club Med. Still, It would be unwise to count too much on this distinction. Devaluation has acted as a shock absorber for Britain in this crisis, but it is no cure. It is a necessary condition for recovery, but it is not sufficient and it creates its own dangers. A disorderly fall in sterling at this stage (ie collapse) could prove as traumatic as default. Like many Telegraph readers, I am quite angry that neither Labour nor the Tories seem willing to grasp the nettle. They absolutely must map out systematic and draconian cuts, stretched out over four years in an orderly way, leaving it to the Bank of England to offset fiscal tightening with an easy monetary policy.

The Tories were complicit in Labour’s fiscal madness (3pc deficit at the top of the cycle, compared to a surplus of 2pc in Spain and 4pc in Finland) since they pledged to match to the spending programmes. They are now repeating the error by ring-fencing the lion’s share of the welfare state. David Cameron views the NHS as sacrosanct, but that is precisely what must be cut. It is anachronistic that you cannot obtain prescription drugs without going through a doctor — wasting everybody’s time — as if doctors these days reach a better decision in two minutes than well-informed patients with an acute self-interest in getting the matter right.

It is precisely this edifice that needs to be hacked down with a machete in a revolutionary rethink about the functions of the state. And not just the NHS either. I suspect that if the Tories came out swinging, they could win an election that promised nothing but blood, toil, sweat, and tears. The new taste for austerity was amply demonstrated in the Massachusetts Senate election. Having got that off my chest, I will return to Greece.

Beijing Sells Whopping $34.2 Billion Treasuries In December As Japan Becomes Largest Official Holder Of US Debt
Gradually we are getting confirmation that Chinese "posturing" about offloading US debt is all too real. The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009, and for the first time in many years relinquishing the top US debt holder spot to Japan, which bought $11.5 billion (mostly in Bonds, selling $1.4 billion Bills) bringing its total to $768.8 billion.

Also, very oddly, the surge in UK holding continues, providing yet another clue as to the identity if the "direct bidder" - as we first assumed, these are merely UK centers transacting primarily on behalf of China as well as hedge funds, which are accumulating US debt under the radar. UK holdings increased from $230.7 billion to $302.5 billion in December: a stunning $70 billion increase in a two month span. Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.

China Has a Plan, America Doesn't
America has been squandering money it borrowed from the Chinese. Instead of criticizing China's monetary policy, US President Barack Obama should acknowledge the financial skill being displayed by the new world power and learn a few useful lessons. Everyone knows that it is important to have friends. But in politics it is just as important to have enemies. Being united against a common foe can be more than helpful. So it may come as no surprise that the embattled US president, Barack Obama, is continuing where his predecessor George W. Bush left off: complaining about the Chinese. Obama recently said China's monetary policy was hurting the US job market. That strikes a chord with Americans. It's even true. But it doesn't make any difference.

The US is the world's biggest debtor and therefore not in the best position to get its way with the People's Republic of China. Of each dollar that Obama wants to spend in 2010, over 30 cents are borrowed. And a large part of the loan comes from China. It might be smarter for the US to stop with the reproaches and to learn from the Chinese instead. When compared to the Americans, their financial situation is more than rosy. And their monetary policy is highly sophisticated. The Chinese don't borrow, they save. And they do this with the kind of dedication with which the Americans spend. An ordinary Chinese person puts 40 percent of his or her salary into their bank account, while an ordinary American saves at most 3 percent. The People's Bank of China has hoarded over $2 trillion in currency reserves. America meanwhile has a small dollar reserve and an XXL-sized budget deficit which currently stands at just under $14 trillion.

China is gently putting a stop to the expansionary monetary policy that helped to stabilize the fragile monetary system during the financial crisis. The government has increased interest rates and forced private commercial banks to hold larger reserves. It is withdrawing the liquidity it pumped into the market. The days of cheap money are ending. America can't yet bring itself to end its debt-financed anti-crisis policy. The Federal Reserve is still lending money at close to zero interest. It is devoting billions of dollars to shoring up the real estate market. It's an attempt to buy the recovery now and pay for it later. On the international stage, China's monetary policy officials are givers, not takers. They are starting to issue government debt abroad, even though the country doesn't need to borrow any money. But many states, for example Brazil, India and Russia, are happy to have an alternative to the US bond market. They buy Chinese bonds, and the Chinese in turn use this money to buy Russian, Indian and Brazilian bonds. This has created a second monetary circuit alongside the dollar.

This won't replace the dollar as a global currency in the foreseeable future, but it will help to prepare the ground for its replacement. Xiao Gang, the chairman of the board of directors of the Bank of China, said last summer: "The time has come to internationalize the yuan." America by contrast is self-absorbed with its monetary policy. It has ignored warnings of rising inflation and a new asset price bubble -- and in doing so is isolating itself, also from the Europeans. In the meantime, China is forging new alliances. The People's Republic has quietly been taking stakes in virtually all the world's regional development banks. Like a mini-World Bank, China has been helping to shore up financially troubled countries in Latin America, Africa and Asia. It has also increased its stake in the International Monetary Fund, by $50 billion. Chinese monetary experts, not Chinese soldiers, have been driving the nation's expansion -- silently and efficiently.

The oil business is the foundation of the dollar's hegemony. The oil-producing states do some $2.2 trillion dollars' worth of business each year in the US currency. Larry Summers, Obama's top economic adviser, once compared the dollar to the English language in terms of its importance to international trade. But China, a huge consumer of oil, is already discussing alternative means of payment with its suppliers. It would like to pay in yuan. The oil states wouldn't be able to use that currency worldwide, but they could make purchases in China. That, by contrast, would be like learning Mandarin. China is talking down the dollar to serve its own interests. When the dollar depreciates against the euro and the yen, the yuan declines as well, because the Chinese currency is pegged to the dollar. And the declining yuan helps boost Chinese exports to Europe and elsewhere in Asia.

China now sells significantly more goods in Europe than it does in America. Rarely has a government used the instruments of state monetary policy in such a calculated way. Obama is complaining, China keeps on growing and we're all confused. The economics textbooks never imagined a planned economy that was also run so cleverly. The world of planned economies is "a completely paralyzed, artificially distorted, pseudo-order incapable of reaction," Ludwig Erhard, the former German chancellor and economy minister widely credited with engineering Germany's post-war economic miracle, once said. It would "collapse like a pack of cards." If he were alive today, Erhard would definitely change his mind, given Asia's successes. That's because China has a plan, and America apparently doesn't.

Wall Street Is A High-On-Crack Driver That Just Smashed Into Your House
by Janet Tavakoli

If a high-on-crack driver crashed his speeding rental car into your house and killed your spouse, you would be outraged if law enforcers took bribes and gave the driver a pass on a blood test. If the judge then merely fined the killer and ordered you to pay it, you would appeal, wondering what happened to justice. If the government then handed the crack-driver keys to a bigger rental car and presented you with the rental bill, you would certainly protest.
How is it, then, that you have remained largely silent in the face of the same sort of behavior by Wall Street and Washington? Bonus-seeking bankers careened off the right path and ran Ponzi schemes that nearly ruined our economy. Bureaucrats and elected officials bailed them out without demanding consequences. Bankers are revving their engines again.

Bankers Get Bonuses, the USA Gets the Great Recession
Taxpayers are asked to believe that over-borrowing by U.S. consumers created a global financial crisis. This myth aids and abets Wall Street. The economy was nearly destroyed because banks borrowed massively, and they borrowed many multiples more than they could afford. Wall Street pumped the Fed's cheap money through financial meth labs, and deceptive financial vehicles ran over securities laws at top speed. More than 20% of mortgage loans--including originally sound loans--are underwater, meaning the borrower owes more than the home is worth. Official unemployment numbers hover at around 10%. If you include underemployment, it is around 18%. In depressed areas where the nation's poorest--chiefly minorities--have been hurt the most, unemployment has soared past 30%. For this destitute group, unemployment combined with underemployment exceeds 50%. As U.S. soldiers fought wars in Iraq and Afghanistan, Wall Street flattened Main Street. Our foreign wars drag on, while the U.S. battles a crippling recession at home.

Global Ponzi Scheme
Fraud by borrowers, fraud on borrowers, and speculation by people who thought home prices would rise forever have all tarnished mortgage lending. Yet this pales compared to the epidemic of predatory lending. Predatory snipers committed financial murder as deliberately as British soldiers sold smallpox contaminated blankets to Native Americans. Honest homeowners were systematically targeted and actively misled into bad mortgage products. Loans were presented as gifts, but these Trojan horse loans hid destructive risk. "Disclosures" were acts of malice.

When Wall Street packaged these loans and sold deceptive "investments," documents did not specifically disclose that credit ratings were misleading. If you know or should know a car's gas tank will blow up, you cannot use a misleading third-party consumer report as an excuse. Yet bonus-seeking bankers used this sort of excuse to get through a few more highly-paid bonus cycles, before it all fell apart. Only the elite crowd of insiders prospered.* This was the most massive Ponzi scheme in the history of the global capital markets. U.S. taxpayers became unwilling unsophisticated investors when we bailed out the financial system. We must hold Wall Street accountable for its fraud.

More Bonuses for Bankers, a Deeper Recession for the USA
Banks that contributed to our economic distress are heralded as geniuses at risk management, after taxpayers saved them from ruin. Wall Street escaped prosecution (so far), and Congress gave it a faster and more powerful car.
Paul Volcker suggested reforms, and special interest groups successfully lobbied to make them meaningless. His proposal to limit "proprietary" trading--a small step in the right direction--has been thwarted by banks claiming they engage in high risk trades on behalf of customers. Washington seems to have already forgotten that AIG nearly went bankrupt--and nearly took the entire financial system down with it--because of Wall Street's "customer" trades. Wall Street and AIG insiders grew rich on bonuses based on a myth, and taxpayers funded AIG's $180 billion bailout.

Wall Street now makes most of its "profits" from high-risk trading, and rewards risk with huge bonuses. It has unfettered access to more U.S. taxpayer money than in the history of the United States. Traditional banking suffers; it cannot generate enough revenue to "justify" massive bonuses. Bankers get billions in bonuses based on a myth, and U.S. taxpayers get a deeper recession and more risk.

Reform Starts with the President and Congress
Congress has protected Wall Street and passed on the costs to hard-working taxpayers. "Too-big-to-fail" financial institutions are too big to exist, and it is past time to break them up. They currently enjoy around $13 trillion of taxpayer-funded support, including tens of billions of FDIC debt guarantees for each of the too-big-to-fail banks and more than $2 trillion in nearly zero-cost funding from the Fed. President Obama has not yet condemned Wall Street's massive fraud, and Congress's bailout methods rewarded Wall Street's malicious mischief. The House just passed a bigger bailout bill that will give too-big-to-fail Wall Street banks access to $4 trillion dollars the next time they crash the economy. Congress must start again from scratch, and give us real reform. Washington needs to get back in the driver's seat, and voters need to make Congress steer straight this time by calling and writing representatives and senators.

* In a control fraud, only insider agents prosper. The losers are financial institutions' shareholders and debtors, investors, borrowers, and the U.S. taxpayer. Banks covered-up indefensible lending--enabled by complicit rating agencies, "creative" accounting at related mortgage lenders, crooked CDO "managers," venal hedge funds, crony accountants, and captured regulators. They parked the risk on their own balance sheets, on the balance sheets of Fannie Mae or Freddie Mac, in off-shore vehicles, or on unwary investors around the globe. Sometimes banks "transferred" risk with credit derivatives backed by phony securities that harmed "sophisticated" insurers like AIG, Ambac, MBIA, FGIC, and ACA--all of which were either bankrupted or damaged.

Ilargi: No, inflation didn’t accelerate in the UK. The pound went down.

UK Should Mull Plea to IMF, Economist Stelzer Says
Conservative leader David Cameron should consider a “profoundly unpopular” move such as calling for aid from the International Monetary Fund if his party wins this year’s U.K. election, economist Irwin Stelzer said. “What would I do if I were David Cameron? I would look at the books” and “I would say: ‘Shock, horror, I’ve found it’s much worse than I thought and so Gordon Brown has forced me to call in the IMF,’” Stelzer said, speaking at an event in London late yesterday.

Such a move would be reminiscent of 1976 when then- Chancellor of the Exchequer Denis Healey sought an emergency loan from the IMF. Under Prime Minister Gordon Brown, the U.K. is now running the largest budget deficit since at least World War II, prompting Standard & Poor’s to lower its outlook on Britain’s AAA rating to negative from stable in May. “You need to do something profoundly unpopular,” said Stelzer, who is director of the economic policy studies group at the Washington-based Hudson Institute and an adviser to Rupert Murdoch. “If it takes undemocratic means, I would say you have no choice but to call in the IMF.”

The British economy is in a “terrible shape” and has “a serious structural deficit,” Stelzer said. Neither Brown’s Labour Party nor Cameron’s Conservatives has set out a credible plan to reduce the budget shortfall, he said. “When the rating agencies say they’re looking at your AAA rating, the markets are warning you that now is the time to have a credible plan to reduce the deficit,” Stelzer said, speaking at an event hosted by Politeia, a London-based research group. “The markets are saying: ‘This is it, fellas.’”

The U.K.’s budget deficit will equal 12.9 percent of gross domestic product this year, compared with a European Union average of 7.5 percent, according to European Commission forecasts published in November. The U.S. deficit will be 13 percent of GDP, while Greece’s will amount to 12.2 percent. The forecasts were published before Greece announced additional austerity measures to reduce its deficit. As the budget shortfall takes center stage in the fight for the election due by June, Brown has pledged to cut the deficit in half by April 2014 and Cameron says measures to reduce it should begin this year. Stelzer said Brown might not be the best candidate to lead Britain out of its predicament.

“Gordon got it right, I think, on fiscal stimulus. He got it right on saving the banks, whereas Cameron got it wrong on a lot of these issues,” Stelzer said. “But we are where we are right now, and the question is: Who do you trust to go on from here?” “I love Gordon, but I wouldn’t trust him to go on from the situation with this level of deficit,” Stelzer said. “His every instinct is to spend more because he believes in social justice” and “he wants the state to do nice things for people and that’s the wrong mindset for right now.” Bank of England policy makers unanimously agreed to pause their 200 billion-pound ($315 billion) bond-purchase plan this month on optimism that inflation will return to their 2 percent target, minutes of the Feb. 4 meeting published today showed. Inflation accelerated in January to the fastest in 14 months. The pound has fallen about 23 percent on a trade- weighted basis in the past three years, pushing up import costs.

Policy makers are debating whether more stimulus is needed as reports show the economy’s recovery from recession is patchy. While GDP expanded 0.1 percent in the fourth quarter, a report today showed unemployment claims unexpectedly jumped in January to the highest level since 1997. “We don’t really know whether quantitative easing is a useful recession fighting tool, or whether it’s simply storing inflation up for the future,” Stelzer said. “The markets are warning you and you’ve been saved by the pound depreciating, but I think there’s a limit to that because then you trigger inflation.”

UK house prices 'to slump as credit crunch returns'
A second mortgage credit crunch that will send UK house prices into a new tailspin is looming, economists and credit experts have warned. The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK's entire £1.3 trillion stock of mortgages. To pay the money back, credit-rating agency Moody's said, banks and building societies may "limit their lending through tighter credit criteria" – in other words reducing availability and making mortgages more expensive. Capital Economics added: "The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery."

Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007. Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014. Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody's said yesterday: "If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant ... The contraction will put pressure on house prices."

The £319bn "funding gap" is the difference between the amount the banks hold in retail deposits and the sum they have lent. The gap used to be financed in the wholesale markets, which froze in August 2007. They have been replaced with emergency state schemes. Illustrating the scale of the crisis, CML data shows that UK lenders raised £130bn in the markets in the 12 months before the crunch but just £11.5bn in the past two years. Moody's added that the benign environment of low interest rates and "other Government stimulus [which] have helped borrowers" may just have been "transitory".

Rising bad debts would be particularly severe for building societies, which lost £7.6bn of deposits last year. Their credit ratings have also been slashed, effectively barring all but Nationwide, the largest society, from using the wholesale markets. "Building societies have been the main victims," Moody's said. "Without access to cheaper Government-backed funding, many will find it increasingly difficult to survive." Societies are in discussions with the Financial Services Authority about creating a new debt instrument to shore up their balance sheets. Called mutual ordinary deferred shares (MODS), the debt will not mature and will pay an annual coupon that can be axed to preserve capital in extreme circumstances. The FSA has not yet approved the instruments.

U.K. Unemployment Claims Jump to Highest Since 1997
U.K. jobless claims unexpectedly jumped in January to the highest level since Tony Blair led the ruling Labour Party to power almost 13 years ago as the recession destroyed work at businesses from carmakers to banks. The number of people receiving unemployment benefits rose by 23,500 from the previous month to 1.64 million, the highest since April 1997, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 27 economists was for a drop of 10,000. The jobless rate on that basis stayed at 5 percent.

The Bank of England said last week that employment is at risk of falling "significantly further" if the economy's recovery from the longest recession on record falters. Prime Minister Gordon Brown is counting on the pickup to gather momentum and help him to claw back voter support in time for an election due by June. "It's a concern given that we thought the labor market was improving," George Buckley, chief U.K. economist at Deutsche Bank AG in London, said in a telephone interview. "Firms are faced with the possibility that the level of economic activity is lower and weaker than they thought, and that raises the possibility that they'll decide to shed jobs in the future."

The pound was little changed after the release, trading at $1.5770 as of 10:55 a.m. in London, unchanged on the day. The yield on the two-year benchmark government bond rose 3 basis points today to 1.177 percent. A wider survey-based measure of unemployment based on International Labour Organization counting methods fell by 3,000 in the three months through December to 2.46 million. The 7.8 percent U.K. jobless rate on that basis is below the 9.7 percent figure in the U.S., 10 percent in the euro region. The rate is 5.1 percent in Japan.

General Motors Co.'s Adam Opel GmbH division said Feb. 9 it plans to cut 369 positions at the Luton, England plant for its Vauxhall brand vehicles. Lloyds Banking Group Plc, the U.K.'s biggest mortgage lender, said Jan. 21 it plans to eliminate 685 jobs in its wholesale and consumer divisions, resulting in a net reduction of 585 jobs across the U.K. Brown's Labour party is trying to eliminate the Conservatives' lead in opinion polls in an election campaign where arguments on measures to tame a record budget deficit and cement the recovery have taken center stage. A ComRes Ltd. poll published Feb. 14 gave the Conservatives 40 percent support, up 2 percentage points. Labour had 29 percent, a drop of 2 points. The party has been in power since May 1997.

"It would be completely barmy to be slashing public spending, just as the Conservatives are proposing right now," Work and Pensions Secretary Yvette Cooper told Sky News television today. Unemployment is lower than the government forecast a year ago, thanks to government support, she said. The Bank of England said last week more Britons may have kept their jobs during the slump because wage growth stayed low. Governor Mervyn King said it was "far too soon" to say that no more purchases will be needed through the bank's bond-buying program after policy makers paused the plan at 200 billion pounds ($315 billion) this month. Policy makers voted unanimously to keep the program unchanged on optimism that inflation will return to the 2 percent target, minutes of the Feb. 4 meeting released today in London showed.

"The weakness of earnings growth may have contributed to the resilience of employment during the downturn relative to the amount of lost output," the bank said in its quarterly Inflation Report. "There remains a risk that employment could fall significantly further" which "could happen if the recovery in demand is more sluggish than companies expect, causing them to shed staff." The statistics office said today its measure of average weekly pay including bonuses rose 0.8 percent in the fourth quarter, while excluding bonuses it increased by 1.2 percent.

Credit card holders face 'crippling' interest rates
Millions of borrowers are facing “crippling” debts after banks put up interest rates on credit cards to a 12 year high, it can be disclosed. The cost of paying on plastic has gone up by more than a quarter in just four years, new figures show. Almost seven million card holders saw their rates increas over the last year. The average rate of interest has now climbed to 18.8 per cent, the highest since 1998, with some card holders being forced to pay as much as 46 per cent in interest. Experts said the figures, uncovered by personal finance researchers Moneyfacts, reflect the growing squeeze on struggling households by Britain’s credit card operators and banks, who have also increased the profit margins on mortgages and lowered savings rates. They accused lenders of “sticking the knife in” on households who are already facing the most difficult financial circumstances in living memory.

The figures emerged as a separate report by price comparison website showed how two out of five borrowers are relying on their credit cards to buy even the most basic of everyday items, such as food and petrol. Having three or more credit cards is now standard practice for one in five Britons, with 17 per cent of credit card holders using their card at least once a day. Those aged over 70 are likely to hold the most credit cards; poor performing pensions is forcing many to work well into retirement.

In further evidence of the bleak financial situation of Britain’s households, experts at Moneysupermarket also disclosed that millions can no longer be bothered to save. Historically low savings rates mean many are failing to earn any real return on their money, once tax and inflation is taken into account. As many as 26 per cent now claim to have no interest in saving, while 51 per cent said they could not afford to save at all. Peter Harrison, a credit cards expert at Moneysupermarket, said: “We are a credit card nation. The British public’s reliance on credit cards, especially for day to day living, is deeply concerning. “Funding everyday items such as petrol or food, and still paying for it long after the product has been used, can be a dangerous habit to get into.”

James Daley, of consumer campaigners Which? said: “It’s hard to justify these increases when the Bank Rate has been at an all time low for a year. It comes at the worst time for consumers who are already suffering from higher unemployment, rising inflation and poor savings rates.” Phil Hammond, the shadow chief secretary to the Treasury, said: “For thirteen years Gordon Brown borrowed and spent as if there were no tomorrow – and encouraged householders to do the same by claiming he’d abolished boom and bust. “Now Britain has the highest level of household debt of any major economy, Gordon Brown’s recession has left millions struggling with crippling debts.”

The Government recently announced plans to clampdown on credit card companies in a bid to tackle consumer debt. The measures include forcing credit card companies to raise the minimum monthly repayments to encourage people to reduce their debts more quickly. The results of the consultation is due to be published within weeks. Total household debt has reached £1.46 trillion, of which £226 billion is consumer credit, which includes credit cards and unsecured loans, according to the Bank of England. It said there is £55 billion outstanding on credit cards. Credit card providers are increasing rates amid concerns about borrowers failing to repay their debts.

A quarter of the 30 million credit cards in Britain had their interest rates increased over the last year, according to the industry body the UK Cards Association. The typical credit card debt of £2,000 takes two years to clear, based on monthly repayments of £100. Fees for balance transfers, cash withdrawals and foreign transfers also continue to go up, meaning customers are paying more across the board. Michelle Slade, a spokesman for Moneyfacts, said: “Britain continues to suffer from a high level of unemployment and providers are worried about the increased risk of customers not repaying their debts. “This increased risk continues to be passed on to both new and existing credit card customers through higher rates.”

Credit card provider Capital One recently increased the rates on some of its credit cards by as much as 7 per cent, blaming economic uncertainty. Andrew Hagger, of personal finance website Moneynet, said: “Cardholders are having a tough enough time as it is at the present, without greedy card providers sticking the knife in. “The average rate is far from the real picture as applicants with a less than squeaky clean credit record will end up paying much more.

“Just because you sign up to a card with an attractive rate, it doesn’t mean it’s going to remain that way, with increasing numbers of customers receiving notification that their rate is being hiked even though they are adhering to the terms and conditions of their agreement. “With Britain suffering from a surge in unemployment and the potential of more job losses to come, it’s no surprise to see rates remain stubbornly high.” Consumer Minister Kevin Brennan said: "As a result of Government action, credit card companies now have to tell customers if they raise individual interest rates so they can, if they choose, pay off the debt at their existing rate. "We have asked credit and store card companies to get their act together and will shortly be announcing our plans to make sure consumers get a fairer deal."

'Lies, Damned Lies and Greek Statistics'
European Union finance ministers on Monday accepted Greece's austerity package, aimed at radically shrinking its budget deficit by the end of the year. But many would like to see Athens do more. German commentators doubt whether the correct strategy has been found. European finance ministers, meeting in Brussels on Monday and Tuesday, have rubberstamped a package of deep budget cuts and strict savings measures proposed by Greece in an effort to slash its budget deficit from its current level of 12.7 percent of gross domestic product to 8.7 percent by 2011.

Nevertheless, the agreement has done little to quell the ongoing debate in the European Union as to how best to deal with Greece and the dangers the country is posing to the common European currency, the euro. In a Tuesday interview with German radio, Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurogroup -- a body made up of finance ministers from countries in the euro zone -- said that the EU will impose further savings measures on Greece should the country fail to meet its budget deficit reduction targets. Others, though, were more pointed in their comments about Greece's savings package. Swedish Finance Minister Anders Borg demanded stricter measures, saying that "if (Greece) wants to build credibility in the market, they must surpass expectations and they have not done that so far."

Borg also called for a greater surveillance role for the International Monetary Fund in Athens -- an idea rejected by Juncker. Juncker called the proposal "absurd" and said it was "fuelled by Anglo-Saxon voices." Greece had been hoping that the meeting would provide details of the safety net agreed to by European Union leaders last week. So far, though, the EU has declined to outline exactly how it proposes to help should Greece prove unable to withstand speculators currently zeroing in on the country's weak finances. Greek finances have been placed under strict EU surveillance with a progress report due next month. Greece's public debt has ballooned in the last year and now stands at €300 billion, or 113 percent of GDP.

Just how aggressively the country will be able to pay down that debt, however, remains to be seen. A number of unions in Greece have called for strikes to protest the austerity measures announced by Athens, with the Greek customs workers' union staging a three-day walkout starting on Tuesday. Many countries in the European Union, though, are likewise facing restless populations, unimpressed with the apparent need to bail out Greece. The news that Athens worked together with American investment banks to hide state debt from the European Union has further angered Europeans. Fully 71 percent of Germans are against sending EU funds to Greece, according to a survey by the research group Emnid. A survey conducted for the tabloid Bild am Sonntag found that just over half of Germans would like to see Greece thrown out of the euro zone altogether. German commentators on Tuesday take a look at how the crisis currently facing the euro might best be solved.

Financial daily Handelsblatt writes:
"The debt crisis has developed a dangerous dynamic. Austerity measures have become the favored strategy for confronting threatening mountains of debt. It seems to have been forgotten, however, that savings is not a cure-all --  the economy must find its way back onto the path of growth. It wasn't all that long ago that politicians and economists were searching desperately for a strategy to scale back the state's role in the economy without disrupting fragile growth. This careful exit strategy, however, has now given way to mindless panic: Get out and save, is the new motto. Despite examples to the contrary, one cannot deny that a conflict exists between savings policies and growth strategies. The only way to get around that conflict is by coupling austerity measures with structural reforms aimed at improving economic efficiency. Competitive products must, however, find buyers. The Club Med of debt would be served better in the long term were Germany to buy their products instead of sending tax money."

The center-left Süddeutsche Zeitung writes:
"Historical revisionism related to the financial crisis is in high gear. Higher powers are blamed, Wall Street is ascribed supernatural influence and bankers have been credited with omnipotence. Indeed, high finance is now said to have lured Greece with a siren song of concealed debt, to Europe's vexation. But this mystification conceals reality. Those responsible for the Greek debt crisis can be found in Athens. The Greek government made promises to the country that it couldn't afford. That is why they worked with the investment bank Goldman Sachs to conceal the true dimensions of public debt from the European Union budget watchdogs. The adage currently circulating in Brussels is true: There are lies, damned lies and Greek statistics. Yes, Goldman helped in the deception and even profited from it. But the bankers weren't sirens. Competition mandated that they offer all of their financial products to those who were willing to pay for them -- including governments who were only interested in cheating."

The Financial Times Deutschland writes:
"The European common currency zone was not created to guarantee peace in Europe, despite what former German Chancellor Helmut Kohl liked to tell his citizenry. Rather, it was designed to insulate industry and trade from the unpredictable ups and downs of international currency markets. How should German automakers find success in the Italian, Spanish and French markets when they were constantly confronted with the drastic devaluation of the lira, peseta and franc? Without a currency union, it would have been impossible. But a common currency among countries that follow radically different economic policies cannot go well. That was clear even to Kohl and his Finance Minister Theo Waigel.

They devised the trick of placing euro zone countries in shackles. Governments were required to strictly limit their influence over the economy and a public debt ceiling was mandated.... In addition, economic policies were aligned.... But the real economies of euro zone countries have drifted apart. The actual purpose of the euro --  the creation of an economic and currency zone insulated from the vagaries of the financial markets -- was counteracted. In order to save the euro, (politicians) in Berlin and Brussels could do two things -- both of which contradict market principles. The simplest, though merely temporary in nature, would be to provide a nice large loan or loan guarantee to Greece (and other problem countries). Better, however, would be coordinated, expansive economic policies in the problem countries in order to spur investment. Following both paths would be the best of all strategies."

Spanish government struggles with crisis message
Could Spain be the next Greece? The government bristles at the very thought, and points out its debt burden isn't nearly as heavy. It's a stinging comparison nonetheless for a country that only a few years ago had burgeoning growth but is now lumped with other deficit-laden countries on a watch list for a Greek-style crisis. The collapse of a real estate- and consumer-fueled boom has left Spain with a eurozone high jobless rate of nearly 20 percent, and the government ran up a deficit that in 2009 equaled 11.4 percent of GDP. That is way over the eurozone limit of 3 percent and earned Spain a place as the letter "S" in the inelegant PIGS acronym coined by analysts (the others are Portugal, Ireland, and Greece).

Spanish officials argue they are better off in several respects. National debt as a proportion of GDP -- 66 percent this year and peaking at 74 percent in 2012 -- is well below the EU average and far under Greece's 113.4 percent for 2009.
It does not have credibility problems like Greece, which is accused of fudging its debt numbers, and its banking system is relatively sound compared with other countries that had to bail their banking systems out. Still, Spain has tried to spend its way out of recession with costly job-creation and stimulus measures, running up a budget shortfall that has spooked markets and lenders. Spanish sovereign debt has come under pressure, with creditors demanding a steeper interest rate to buy it and rates also rising for insurance against default.

Spain's economy is much larger than that of Greece, so it's a far bigger problem for the European Union and the euro if markets begin to doubt Spain's ability to pay. If there is an EU country next in line for troubles with financing itself, it is Spain, even if the likelihood of this is low for now, said Javier Diaz-Jimenez, an economist at Madrid-based IESE Business School. "Spanish public finances are under severe stress. Nobody in their sane mind can deny that," he said.

Spain's Socialist government rejects suggestions that the eurozone's fourth-largest economy, which had posted budget surpluses and robust growth as recently as 2007 but has suffered dearly following the collapse of a real estate bubble, has a debt mess similar to Greece's, which has driven down the euro and shaken the European Union. But Spain did see fit to dispatch a team led by Finance Minister Elena Salgado to London and Paris last week to meet with ratings agencies and investors in an effort to explain Spain's deficit-reduction plans and restore its credibility.

And at times the government has looked on the defensive. Last week it sent Brussels a document that raised the possibility of lowering most Spaniards' retirement pensions by changing the way it measures their working life. Amid a furious outcry from unions, hours later the government literally erased that paragraph from the document, saying it was not a firm proposal but rather an accounting simulation. This fueled long-standing criticism from opposition conservatives that the government lacks a coherent policy to confront the recession and just makes things up as it goes along. Polls say that if elections were held now, Prime Minister Jose Luis Rodriguez Zapatero would lose to the center-right Popular Party.

One of the government's most prominent spokesmen, Infrastructure Minister Jose Blanco, also raised eyebrows by saying that shadowy outside forces are ganging up on Spain. He said: "Spain is the victim of an international conspiracy designed to destroy the country's economic status and, then, the euro." The deficit-cutting blueprint calls for euro50 billion ($70 billion) in budget cuts over the next four years, with the goal of cutting the deficit to the EU limit of 3 percent in 2013. When Salgado announced it, she left out the deficit numbers for the intervening years, and markets were rattled when days later Spain released projections for them that were about two points higher than they had previously banked on.

There are also concerns that the plan is short on details and not aggressive enough. Ireland, by comparison, has slashed pay for state workers, cut welfare benefits and imposed new environmental taxes on fuel to try to contain its runway deficit. But Spain is not touching public-sector wages, most of the spending cuts have been assigned to regional governments that Madrid cannot control, and the only taxes due to rise are VAT and levies on capital income like stock dividends. This is not expected to make a big dent, and even then the rises do not kick in until July. Compared with Ireland's, or even Greece's deficit-cutting plans, Spain's ideas "look pretty paltry," said Ben May of Capital Economics Ltd. in London.

Another problem is that Spain's plan is predicated on forecasts of economic growth resuming relatively soon, thus raising tax revenue and easing the government's unemployment benefit payout load. However, the International Monetary Fund has said Spain will be the world's only major economy not to post year-on-year growth in 2010, and that its economy will expand only 0.9 percent in 2011. "I think it would be very unlikely that the deficit gets anywhere near 3 percent unless they implement further, significant fiscal measures," May said. Nuno Serafim of IG Markets said Spain and also Portugal need to serve up a bitter cocktail of higher taxes and deep spending cuts, but this is a hard sell because of the entitlement-heavy mentality of people in southern Europe. "Governments in southern Europe are less pragmatic than in northern Europe," he said. "Normally, they try to avoid unpopular policies because they are more prisoners of the political agenda and the electoral agenda."

Five Million US Workers to Exhaust Unemployment Benefits by June
Back in December, the qualification dates for existing tiers of unemployment benefits were extended for an additional two months. Time is up at the end of February.

Now another extension is needed or millions of workers will lose benefits over the next few months.

The National Employment Law Project (NELP) released a new report last week showing that ...
1.2 million jobless workers will become ineligible for federal unemployment benefits in March unless Congress extends the unemployment safety net programs from the American Recovery and Reinvestment Act (ARRA). By June, this number will swell to nearly 5 million unemployed workers nationally who will be left without any jobless benefits.
Currently, 5.6 million people are accessing one of the federal extensions (34-53 weeks of Emergency Unemployment Compensation; 13-20 weeks of Extended Benefits, a program normally funded 50 percent by the states).
Exhaust Unemployment Benefits This table shows the NELP's projections:
Of the almost 1.2 million workers facing a cut off of benefits in March alone:

  • 380,000 workers will exhaust their 26 weeks of state benefits without accessing the temporary EUC extension program or the permanent federal program of Extended Benefits.

  • Another 814,000 workers will not be eligible to continue receiving EUC past their current tier of benefits.
  • The following graph is based on the January employment report and shows the number of workers unemployed for 27 weeks or more ...

    Unemployed Over 26 Weeks Click on graph for larger image in new window.

    The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.

    According to the BLS, there are a record 6.31 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.1% of the civilian workforce. (note: records started in 1948).

    The current qualification dates extension being considered is for another three months. Cynics might argue that some Senators want to limit the extension to an additional three months, so they can use the popular benefit extension in May to once again extend the homebuyer tax credit - hopefully the cynics are wrong!

    US mortgage rates poised to jump as Fed cuts funds
    The Federal Reserve is poised to turn off a major money spigot that has helped sustain the ailing real estate sector, as an extraordinary program under which the Fed has pumped $1.25 trillion into the mortgage market is slated to end March 31. "Housing has been on government life support, and without it the crash would have been much more severe," said Mark Zandi, chief economist with Moody's in Pennsylvania. "This spring and summer as those policy efforts unwind, we most likely will see mortgage rates move higher and more house-price declines."

    Rather than being held by banks, today's mortgages are sliced, diced and resold on Wall Street to create liquidity - money that then can be lent in more mortgages. After the credit crunch beginning in the fall of 2008, investors lost their appetite for these mortgage-backed securities, so the Federal Reserve stepped in to purchase them to ensure that money would keep flowing to home purchasers. The Fed started buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 and originally planned to conclude the program by year's end. It extended it for three months to ease the impact on mortgage markets, although it didn't allocate more money. The program's ultimate cost won't be known until the Fed sells off the securities, something that officials said it will do gradually starting this year. It's conceivable that the program could end up generating a modest profit, breaking even or losing money, depending on what prices the securities go for.

    While experts agree that the Fed's exit will cause mortgage rates to rise, the big unknown is how severe the effect will be. "There is no question rates have been kept artificially low by the Fed's heavy buying," said Guy Cecala, publisher of Inside Mortgage Finance. "My opinion is that rates will go up a full percentage point initially," meaning that 30-year fixed conforming loans, now hovering around 5 percent, would hit 6 percent. Keith Gumbinger, vice president of HSH Associates, which compiles mortgage loan data, thinks that rates will slowly rise to about 5.75 percent after the Fed withdraws. "Right now the Fed is acting as a sponge, absorbing about $12 billion a week of what you might consider excess supply," he said. "When they stop, the market will have to pick up some chunk of change."

    Julian Hebron, branch manager at RPM Mortgage's San Francisco office, anticipates a bump up to around 5.5 percent by summer with rate volatility all year. "The Fed isn't going to start dumping mortgage bonds on April 1, they're just going to stop buying," he said. "By that time, improving economic data is likely to push the Fed toward a rate hike bias. This will contribute to higher mortgage rates, slowing refi activity, and less mortgage bond supply. So while the Fed won't be buying anymore, rates shouldn't spike immediately because there will be less supply for markets to absorb."

    Christopher Thornberg, principal at Beacon Economics in Los Angeles, thinks the Fed's withdrawal will have a radical impact. "Clearly, when they stop printing all that money, it's going to be a shock to the system. I have to assume that when they pull back on it, it will cause a 100- to 200-basis-points rise" to rates of 6 percent or 7 percent, he said. "When they start selling off the stuff they purchased, which by my guess would come early next year, that would cause another 100- to 150-basis-points rise."

    The Fed has indicated that it might resume buying mortgage-backed securities if mortgage rates spike. In written Congressional testimony released last week, Fed Chairman Ben Bernanke said the Fed eventually will take steps to forestall inflation that also are likely to result in higher interest rates for all loans. Several other government programs designed to prop up the housing market also are in play:
    • The home buyers tax credit of $8,000 for first-time buyers and $6,500 for repeat buyers expires April 30. Although many experts think the program simply caused people to buy houses earlier than they had planned, its end is likely to cause a dip in home sales. "Higher interest rates without a tax credit means the cost of buying a home will rise significantly," Zandi said. "We should expect much weaker home sales in May, June and July." Cecala thinks that if home sales are anemic, Congress may extend the tax credit an additional six months, as it's already done once before.
    • Federal Housing Administration loans, an increasingly important source of financing for many borrowers, especially those with low and moderate incomes, imposed more stringent lending criteria in January. As FHA delinquencies rise, the rules could tighten still more, eliminating some potential buyers. "The FHA portfolio has all sorts of bad debt in it," Thornberg said. "Eventually they'll have to pull back" on lending.
    • Home Affordable Modification Program, the government-backed plan to get banks to help troubled homeowners, has kept the market from being flooded with foreclosures, as hundreds of thousands of borrowers are negotiating with their lenders for lower payments. Eventually, observers say, much of that backlog will wind up in foreclosure because homeowners simply don't have the income or ability to make modified payments. A new surge of bargain-basement foreclosures would undermine home prices. "We have a boatload of homes that ultimately will find their way to a foreclosure sale, and that will put pressure on house prices," Zandi said. "The more that distressed home sales rise, the more home prices get pushed down."

    Redoing the Kitchen While the House Burns Down
    by John Rubino 

    Wall Street Journal columnist Thomas Frank is by far the most interesting part of that paper’s dull gray Op Ed page. Back in January he suggested that the world’s governments smack down those wing-nut gold bugs by selling all the gold in their central bank vaults — a plan that most gold bugs found hilarious, since they doubt that central banks have much gold left to sell.

    And last week he explained that our current troubles were due, get this, to a lack of trust in government’s ability to solve our problems. A few excerpts:

    Once in office, the strategic thinking went, Democrats could slowly brighten the antigovernment mood by setting up various transparency and accountability programs. And they could turn that frown upside-down simply by doing what Democrats do, namely, by using government to solve big public problems, beginning with the grotesquely expensive health-care system.

    But as the drama played out, these clever flanking maneuvers failed. Now it seems unlikely that Democrats will ever get their chance to change the public’s attitude toward government in this indirect way; the antigovernment animus struck first, bringing the health-care debate to an end with a summer of unanswered town-hall protests and a voter revolt in Massachusetts.

    Bruised by the backlash, President Barack Obama came before the nation last month to address the problem. “We face a deficit of trust,” Mr. Obama observed in his State of the Union address, “deep and corrosive doubts about how Washington works that have been growing for years.”

    But what will the president do to assuage those doubts? In his speech, he mentioned a crackdown on earmarks, implementing government transparency measures, and banning lobbyists from his administration’s high positions. They are all good and necessary reforms, of course. But one suspects they will do little to allay the grandiose fears of the broader antigovernment set.

    A more daring course would be finally to confront the antigovernment catechism directly, to attack his opponents where they are strongest. For decades, conservatives have explained every episode of government failure by shrugging: What do you expect? That’s just the way government is. When government fails to do the job—even when it’s a government presided over by conservatives themselves—it automatically reinforces core assumptions of the right.

    Although this explanation is hollow and a little bit poisonous, it carries the day even in the unlikeliest circumstances. So the Bush administration screws up emergency operations in the aftermath of Hurricane Katrina, and conservatives use the episode to call for the privatization of federal emergency operations. Government didn’t work because government never works.

    And yet the toxic truth is staring us right in the face: The reason government has failed so spectacularly in our time is because it’s been run into the ground by antigovernment politicians. Government agencies failed because they were often turned over to industry lobbyists. Government regulators didn’t regulate because they were starved for resources. The government work force had no esprit de corps because it was constantly being insulted by its bureaucrat-denouncing bosses. According to a story that ran in the Washington Post last week, government workers earn 26% less than private-sector workers in comparable jobs.

    The debate is coming soon, whether liberals like it or not. The most colossal government failure in many years may be the next big issue in Washington, as Congress turns to proposals for re-regulating the financial industry.

    No one denies that federal bank regulators dropped the ball during the housing boom of the last decade. Conservatives, for their part, will fit that failure neatly into their usual story line, asserting that those regulators need to take the blame for the deeds of the nation’s mortgage lenders, bond-rating agencies, and financial innovators. The answer, conservatives will say, is not more regulation but less. They will wave their rattlesnake flags. They will holler for freedom. They will pocket contributions from Wall Street.

    And unless the president and the Democrats in Congress are prepared to steel their nerves and speak forthrightly for once about the causes of government failure, the Democrats will lose again. Nothing will be done. And failure this time around won’t just look bad at the polls, it may well set the stage for another financial disaster.

    This is classic stuff: “And they could turn that frown upside-down simply by doing what Democrats do, namely, by using government to solve big public problems, beginning with the grotesquely expensive health-care system.” ; “The reason government has failed so spectacularly in our time is because it’s been run into the ground by antigovernment politicians.”

    But it’s classic not just because it’s out-of-left-field absurd. It’s classic because it reflects the dominant view of both major parties that a policy fix is possible, that there is a combination of spending programs, tax rates, foreign policy initiatives and such that would set things right. So we have this non-stop debate over universal health care, the Afghan troop surge, cap-and-trade, and a “spending freeze”, all of which are sold as crucial to “getting us back on track”.

    All, without exception, are irrelevant. If, through some grand compromise, the entire wish list of both left and right is enacted tomorrow, it won’t make a bit of difference. And if legislative gridlock stops anything from passing for the next ten years, the outcome will be pretty much the same.

    Think of the U.S. as a family that’s busily renovating the kitchen while their house burns down.

    Debt, of course, is the fire in this analogy. The U.S. has borrowed more it can ever hope to pay off, and for a country as for a family, when you owe too much your life changes in unpleasant, sometimes catastrophic ways. By now virtually everyone who cares has seen a debt-to-GDP chart, but I can’t help tossing up one more, because this single image conveys more useful information that a year’s worth of cable news talking heads or newspaper Op Ed columns.

    No one really understands the U.S. balance sheet, of course, and because we own a printing press, the growing imbalances have yet to bite. Which is why the struggles of Greece are so enlightening. As part of the euro zone it doesn’t own the printing press that makes its currency. And now that it can’t borrow to fund its deficits, it has to decide — very publicly — how to live within its means.

    As numerous analysts have concluded, that can only be achieved by cutting every citizen’s income by a painful amount. But the resulting drop in consumer spending will push the government budget even further into the red, requiring more cuts, which will lower spending even more, and so on. You see the problem: Without a printing press a bloated public sector can’t function.

    The Greeks aren’t debating how many new soldiers to commit to their many foreign adventures or how to expand entitlements to cover everyone all the time. That’s because they’ve smelled the smoke and seen the flames. Now they’re standing in the front yard, garden-hoses in hand, trying to save some small part of what they’ve spent the past generation building.

    America—A Country of Serfs Ruled By Oligarchs
    by Paul Craig Roberts 

    The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.

    More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest. Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy. Housing is still under pressure, and commercial real estate is about to become a big problem.

    The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.

    The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.

    Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes. Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

    As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one that recently arrived:
    "Thank you for your continued truthful commentary on the 'New Economy.' My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband's job stagnated.

    After several years of no pay raises, he finally lost his job a year and a half ago. But he didn't just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted.

    We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can't find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn't have made it. So, I could tell you just how that 'New Economy' has worked for us, but I'd really rather not use that kind of language."

    Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers. Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.

    It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.

    To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden. Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.

    Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit. The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.

    If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit. America is on its way to becoming a country of serfs ruled by oligarchs.

    Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term


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    Fuser said...

    Go ahead and add this one to TAE Primers, Must Reads & More. People will be clicking on this topic as long as there's access to the internet.

    Zeke said...

    I sure wish "peak oil" were as simplistic as your discussion. For one thing, you mixed apples and oranges so to speak. Losses on homes, pension plans, etc are, in a sense, virtual. Money in the gas tank, increasing prices at the supermarket and everywhere else for that matter is real. In other words, the "real" expenditures come right out of my budget. For the untold millions commuting to work/living everyday life, the losses in there 401 (if they have one) are academic questions.

    I haven't a clue as to how much oil prices contributed to our present debacle. Frankly, I don't think you do either. But if you're content to pass off peak oil as "many years in the future" and a knowledge scarcely beyond some vague words about Hubberts predictions, so be it.

    Frankly, I think the "reasons" for our present situation are several and varied depending on ones life situation. I didn't/don't hear anyone at the street level rattling on in an academic manner about losses in my home value, pension value, etc. What I hear is how far my paycheck goes. And when my paycheck is hit, what I can pay for is hit meaning my house payment, the weekend trip to go fishing, the use of my snowmobile and a range of other activities that affect the real economy, today. The governor on the semi affects diesel sales. The tracking of fleet gasoline consumption affects gasoline sales.

    I haven't any doubt the inability to borrow on home equity impacted sales on many, many products. I saw that at the street level as well. The closing of two local RV dealers, energy prices, home value losses or both?

    Hombre said...

    Thanks Ilargi! Makes sense to me!

    And I know it has all been said before, but a periodic review is sometimes helpful to people whose lives and families are so dependent on current events.
    Peak resources, depletion, the earth is round (finite), that I can understand. Alternative energy sources and equivalent btu and megawatt relationships I can calculate (albeit slowly).
    But the complexity of the international economic "system" I cannot fathom, so I am glad TAE is here to help sort the wheat from the chaff.

    Of course, it matters little (what is the cause) to the folks who lived behind me in the house next door who lost their home and livelihood. It's too late for them, and millions like them. I fear that before it's all said and done there will be millions more!

    Unknown said...

    Gasoline in summer 2008 was $4/gal, not $1 -- better correct the intro paragraph 3

    EconomicDisconnect said...

    I am not much of an oil/energy watcher but I thank you for this post; Higher taxes or other wealth confiscation is more dangerous than peak oil.

    Anyone heard of "Modern Monetary Theory" or MMT as discussed by some like Bill Mitchell? It is pretty complicated but argues that no sovereign country can ever print too much money (my abridged version). Needless to say I am at a loss to understand it, but I am pretty slow anyway. Any ideas?

    Fuser said...

    It looks plausible that the two, Peak Oil and the financial crisis, are running concurrently –even if not related. And that one seals the fate of the other.

    Ilargi said...

    DId y'all catch that

    Stoneleigh speaks February 23 in Ottawa, ON at the McNabb Community Centre.?

    Ottawanoninigans, prepare!!!! She's a force of nature and them some.

    Ilargi said...


    Better correct your prescription:

    [..] ... sometime in 2008, the price of gas temporarily went up by about $1 per gallon.


    Phlogiston Água de Beber said...

    @ Susan

    He didn't say gas was AT $1. He said it had gone UP $1. In my area IIRC, it went to about $3.40

    el gallinazo said...

    Zeke said...

    "I haven't any doubt the inability to borrow on home equity impacted sales on many, many products. I saw that at the street level as well. The closing of two local RV dealers, energy prices, home value losses or both?"

    Yeah, but that inability to borrow on the home and spend the money on more expensive gas is only "virtual money," while money spent on a price increase in gas is real money. Once again, when this causes your small business to fail and the bank short sells your house and sticks you with the balance, fear not, it's only virtual money. Thanks for straightening out my confusion Zeke.


    Cantankerous old buzzard that I am, I tend to be stingy with compliments, but your intro essay today was a definitely winner, and I agree, should be put in the primer list.

    Also, yeah, we have hit peak oil by its formal definition, which is, the greatest amount of oil which will be extracted from the ground in a year. The point is that it doesn't matter. Let's make a credit analogy. You have had an open line of credit with the bank for $100k. Suddenly the bank drops that line to $50K. But you do not wish to use more than $10k now or for the next 20 years. OK. You are past peak credit but it means nothing since you don't need it or want it. Same with peak oil for at least the next decade. Yeah we hit it, but demand will fall so much faster that it just doesn't affect anything. And remember as Stoneleigh keeps reminding us - demand is not what you want, but rather, what you want and can pay for.

    Unknown said...

    What time is Stoneleigh's talk going to be? Any attendance fee? Is the topic going to be mainly finance or is she expecting to roam into energy and system analysis topics (notwithstanding questions that might be asked after). The more information I have, the easier it will be to get more people to attend!

    Fuser said...

    So … regarding today’s topic. In five years Ilargi and Jeffrey Brown will be sitting around a campfire roasting grasshoppers and locusts, talking about this mess. Ilargi may say that the financial crisis destroyed the oil industry, as well as every other industry and Jeffrey Brown will say that Peak Oil brought down the financial industry, as well as every other industry. Are the effects of one not unlike the other? Isn’t the bleakness of our future what brings these two camps together?

    Regarding Stoneleigh on the 23rd: I would consider going … but Fuser turns 40 on that day and will be face down at a local pub surrounded by family and friends.

    EconomicDisconnect said...

    Boston is nice as cities go if Stoneleigh makes a trek this way.

    Compound F said...

    the idea that peak oil or any other form of energy crisis was the cause of the financial crisis, i.e. the cause of the collapse of the housing/securities/derivatives scheme(s), can be safely discarded and put out by the curb with the rest of our broken dreams.

    Fair enough, but what if the county waste-management and scavenger teams have been laid off?

    thethirdcoast said...

    Does anyone here know the capacity of the lecture hall at the McNabb Centre? The Google results I got did not seem to specify the number of persons this facility could hold.

    I would like to know this information so I can make some reasonably intelligent recommendations for lecture locations in my area that may be suitable for Stoneleigh.

    MikeB said...

    1. The "peak oil didn't cause the housing market to crash" argument is a red herring. Peak oil (rather, peak-plateau) occurred first, and as higher prices were bludgeoning the economy, the housing market crashed, independent of peak oil. But this doesn't mean the economic collapse happened regardless of peak oil. Both the financial situation and the energy predicament are "causes" of our current economic distress.

    2. That the peak oil argument can be reduced to "gasoline jumped $1.00 per gallon in 2008" is just silly. The price of OIL jumped to $147 per barrel, and the price of EVERYTHING, not just gasoline, went through the roof: yes, gasoline, but also food, (i.e. diesel), heating, and all shipped goods. People began paying through the nose for the effects of peak/plateau.

    3. Let's stop this inane either/or nonsense. Both the mortgage crisis AND peak oil have their (independent) fingerprints all over this mess. One didn't cause the other, and one doesn't matter more than the other.

    I am a "coincidence theorist." Humans seem not to be able to wrap their minds around the fact that two bad things can happen nearly simultaneously without being necessarily linked.

    It would only be remarkable if such coincidences never happened.

    Peak oil is ruining us.

    Insane amounts of debt is ruining us.

    bernie said...

    I was going to comment on this topic, but I think I'll wait 2 years. I really need to drop this stuff and move on.

    Anonymous said...

    ".. such claims are simply wrong.." I respect and admire your work, drive and knowladge about your topics however I would argue about an above the finla anlaysis they "... such claims are simply right ..".
    When, how... it is hard to say, but termodynamic laws are superseeding any economic, social, etc. rules, laws etc.


    Jim R said...

    In the Daily Kos and other popular journals, I keep reading "the stimulus worked", in past tense like that. All we need is a few more million employed and we'll be back to BAU.

    Iconoclast421 said...

    I dont understand how automatic earth would throw years of research out the window to reach this sort of conclusion. Peak oil did cause the financial crisis.

    "...which led to (x) a zillion other forms and sorts of derivatives which led to (y) untold trillions in lost wagers..."

    Here is the key fallacy. Those lost wagers didnt just happen by chance, and I dont see any explanation as to why those wagers were lost. I need to see the clear progression from x to y. I am not seeing it in this post. It is not acceptable to simply say those bets blew up. We have to understand the exact mechanism behind it. Peak oil provides that mechanism.

    It is true that the high cost of gas in 2007-2008 only had a marginal impact on the economy in dollar terms. But the entire economy was leveraged to the hilt. The economy could not grow because energy costs (including natural gas) cost the average family an extra $300 a month. That was money that couldn't be spent at Home Depot, Target, etc. That caused corporate revenues to decline, and hiring to slow, and incomes to fall. So the rate of home sales fell, real estate topped, and home prices began falling. This brought the HELOC game to an end, and that is what really gave the crisis its momentum. But it all stems from fossil fuel production growth not being able to keep up with the ponzi scheme the bankers were playing.

    The important key point is that this $300 a month being sucked out of the economy beginning in 2005 was $300 a month that couldn't be leveraged in the same direction. Given a leverage ratio of 10:1, we're talking about $3000 a month, per family, in notional derivatives. There is the source of your "lost wagers". At 10:1 leverage, we're talking about 3 trillion a year in derivatives being erased, a recipe for disaster. I doubt we ever really reached a "real" overall leverage ratio that high, but obviously we came pretty close.

    IF oil production did not plateau in 2004/2005, that $300 a month would not have been redirected, and the real estate bubble would have kept inflating. Surely, eventually the real estate bubble would have popped, but only after oil production plateaued.

    It doesn't matter how much paper value is at stake in notional derivatives. They are, when it comes down to it, based on something tangible. They're just a fancy way of applying leverage to the infinite growth paradigm. That paradigm met a roadblock in 2005. All the leveraged bets blew up because 3-4% real (resource) growth was no longer possible.

    shargash said...

    The current mess has it roots in our reaction to the 1970s. It was under Reagan in the 80s that our best-paying jobs began to be shipped overseas, incomes began to stagnate, the trade deficit ballooned as we shipped enormous amounts of money overseas along with the good jobs. Debt replaced income as the means of a rising standard of living. Industry became hollowed out and was supplanted by the FIRE part of the economy as the main driver for profits. And it was in the 80s that the financial games began, resulting in the first of the string of financial crises (the S&L debacle).

    America had a big economic problem in the 1970s, and we "solved" it by entering into an unhealthy and unsustainable relationship with the rest of the world.

    What was the problem in the 70s? In a word -- oil.

    American oil production peaked in 1971. We became dependent on foreign oil, and OPEC began to throw its weight around.

    While you are narrowly correct that the rise in oil prices in 2008 did not cause our current financial crisis (it at most acted as a nudge), I think you are wrong in the larger sense. Peak oil (at least the American peak) DID cause derivatives.

    Stoneleigh said...


    The talk is at 7pm, and we have the room until 10pm if people want to chat afterwards. I believe the room holds 45. I asked if they might be able to squeeze in more if necessary and am waiting for the answer.

    I'll be talking mainly about finance and energy. I'd be happy to get into other things, but we only have the room for 3 hours ;)

    Stoneleigh said...


    I'm planning a trip to New England because there have been several requests. I don;t know when and I haven't decided exactly where yet, but I have fond memories of Maine and Vermont from many years ago.

    Unknown said...

    Thanks for all the insight you dispense here at TAE – your work is much appreciated!

    Have you seen this paper by J.D. Hamilton linking the 07-08 oil price spike to the recession?

    I agree with you that our debt-binge economy has a Ponzi structure and has/will collapse all on its own. I also believe that energy could have been a factor affecting the timing and severity of the financial crisis. The Ponzi scheme survives as long as it accelerates, but drag it off its mandatory growth curve even a little, and suddenly it’s reckoning day. It’s tempting to believe that PO will be a single event with obvious, drastic and catastrophic energy shortages, but I’m not so sure. Perhaps all that happens is that rising resource costs apply a drag to growth-dependent activities increasing the chances of a bust, leaving the catastrophic events to play out in the financial markets. It’s not that resource constraints hit us that hard, yet, it’s just that we’ve been close to the economic edge for a while.

    I see your example of the average American not feeling that much pain at the pump. But our industries also depend on far poorer people, typically half way around the world. Do you remember the “rice riots” in SE Asia a few years go? It’s been argued that a small diversion of food crops to biofuel was the key cause. I see the oil spike as a similar small trigger having a disproportionate impact. The economy reacted homeostatically as systems theory would predict, by contracting to alleviate the stress of high energy prices. The teetering house of derivatives cards, normally decoupled from energy, couldn’t handle a small contraction in the “real” economy.

    Perhaps we’ll see a few such cycles over the coming years – collapse followed by partial recovery, followed by a bigger collapse. Ask yourself this – what would it take to get back on the ~3% mandatory growth curve for the long term? Would we have the energy to keep this up using our current economic model? I think not. The model will either evolve to suit the new circumstances or we’ll keep hitting the same wall for a while, getting poorer each time.

    Phlogiston Água de Beber said...

    @ DIYer

    Did you lose your Magic Decoder Ring? Or were you one of those kids that didn't like that cereal and never got one? I have to assume one or the other, since you totally misinterpreted the secret message the Ori (Stargate SG-1 reference) have been disseminating.

    The stimulus worked, does not refer to anything having to do with employment or business. The decoder ring would tell you that it means the rabble were successfully lulled into patiently waiting, while the Big Dogs wolfed down every kibble in the bag.

    At five box tops and a crisp new five dollar bill, those Magic Decoder Rings were one of the 20th century's biggest bargains. :)

    jal said...

    ( ... and I’m sticking by it ;-) )

    Once upon a time, some 45 years ago, there was no credit cards and no student loans. People lived within their income and saved for larger purchases.

    This was when there was money from savers, pension funds, trust funds, insurance funds, etc. which had few places to get a safe high returns for their depositors.
    The money changers found and created programs that allowed them to get commissions, fees and bonuses from the spread between what a saver received and what a borrower paid. That was what happened in the good old days.

    When you buy a car its value decreases immediately after the sale because all of the commissions and fees are reflected right away in the potential resale price.

    However, with other kinds of investment purchases this is not done.

    The hiding of this loss was accomplished by saying that the investment was worth more than its purchase price. Of course we all know the opposite is true.

    This artificial increase in worth is most often referred to as inflation.

    The premise was that the savers would not be able to determine the loss of their savings and that the money changers would be able to collect their commissions in peace.

    For the last 45 years people, governments etc. continued to accept that it was okay to live on credit. After all, credit is only borrowing from their future earning potential and everyone knows that they will have more earning tomorrow than today. Therefore, there would be no problem paying back what the borrowed money and the interest on those credit loans. Everybody was doing it.

    Can’t meet payroll ... borrow it from someone’s saving fund against potential future earnings.

    Want and feel that you need a holiday, like your neighbor ... put the cost on your credit card and the money will come from somebody’s saving fund.

    THEN ... something terrible happened ... people and businesses suddenly realized that their present income was not sufficient to pay for the money that they had borrowed and later they couldn’t even pay the interest on those loans.

    (next page)

    jal said...

    Now, don’t think that the money changers were stupid. They knew that there would be some people that would not be able to pay and would default on their credit payment. So, ... they bought credit default insurance so that the insurer would pay them for the lost stream of revenue.

    Unfortunately, those insurers figured that this was a real cash cow because they had models that showed that the risk of having to pay out more money than they were receiving from the money lenders was far less than what would happen. When things started to look like it was going to get bad they turned around and got insurance from another insurer.

    Everyone has or knows someone who has had experience with an insurance company. (Health insurance, katrina, etc.). The insurance companies will try everything that they can to avoid paying out on a claim. Maybe its because they spent too much of their revenue streams to keep buying their yachts from their commissions.

    Again, everybody forgot that all of those commissions were coming from deposits of the savers and from the spread of lending and borrowing.
    It wasn’t.

    As more and more people and businesses could not meet their credit obligations, the money changers realized that without those revenue streams from the borrowers that all of those saving funds could go to zero.

    The loses would reveal that the money changers had taken all of those nice juicy bonuses that were way out of line with the spread; They were taking the money from the deposits of the savers. (Ponzi)

    All of those assets that the money changers had bought for the savers would be reevaluated at their true value, (market corrections).

    Instead of having those savers, mostly retired by now, thinking how prudent and wise they had been in saving for their retirement, the savers would find themselves without any retirement income.

    In panic, at what could happen if they were found out to have been nothing more than white collar criminals, they turned to the governments to cover their bad financial manipulations.
    Let’s not forget that the governments were just as bad in handling their borrowing and using credit to finance todays operations that should have been deferred until they had the money saved before making the expenditures. However, government are much better situated to hide their mismanagement of their credit.

    (next page)

    jal said...

    So, .... government printed money and gave it to the money changers. With relief, at not having been found out, the money changers changed their ways.

    They started to increase the spread on credit cards, (extortion rates), to get rid of the credit market business that had caused them so much trouble.

    They sold off their inflated assets to the government.

    They sold off their bad loans to the governments.

    But, and I repeat, but, they continued to give themselves income that is over the lender-borrower spread margins. They are still taking from the deposits to pay themselves huge bonuses. (Ponzi)

    We now find ourselves with the money lenders out of trouble and with the governments in trouble. (Municipal, state, federal, health care, welfare, pensions)

    The artificial growth is over. Credit prosperity is being curtailed.

    Governments, at all levels, are facing a political crisis.

    Their taxation base are deteriorating, needs are growing, demands are not abetting.

    Politicians of all stripes are not going to commit suicide by taking away the basic infrastructures of their societies. Their only way out is to have someone to blame for removing the punch bowls. (ie. The money changers at IMF)

    Yes, the money changers will make money through out the whole process.

    Yes, all economies will reset to a pay-as-you-go.

    Yes, the money changers will make money through out the whole process.

    Yes, we have reached peak everything. Growth for everyone is over.

    Yes, the money changers will make money through out the whole process.

    Yes, we are going towards a zero sum game structure.

    Yes, the money changers will make money through out the whole process.

    The best doomstead to have is to be living within your income, keep the money changers out of your pocket and not to use the money changers to safeguard your savings. Of course everyone knows that the money changers charge you a fee every time you need to make a withdraw.

    If you want to gamble, (invest), then take the time to learn and be prepared to lose the money that you gave to your financial advisor. Your advisor will be still making money while you are losing yours.

    Who or what will replace the money changer Oligarchs?

    Will said...

    I think what Ilargi misses is that once oil went beyond $120/barrel the automotive industry cratered.

    The ramifications of that destroyed our confidence in housing values and safety/stability of 401K's.

    The MBS/CDS stuff was tied to real estate confidence. Without societal support it cratered.

    I agree with Ilargi's assessment that the trillions of dollars of derivative bullshit were doomed regardless. Nevertheless, the price of oil issue was a key destabilizing issue.

    We watched it rise without a comforting narrative. And it exposed our precarious economic situation.

    Jim R said...

    I think the point Ilargi is making here is that the financial ponzi house of cards had gotten so top heavy that the wingbeats of a butterfly would bring it down.

    Here in Usanistan, we are several decades post-peak already. I think (maybe) a case could be made that all the financial engineering was intended to keep the crude imports coming in.

    N. Zero said...

    (part 2)

    But allow me to bring it back to the topic at hand...

    Take the crisis with the automotive manufacturers... certainly they suffered from horrible banking and lending practices but, simultaneously, they suffered a sudden and colossal lack of interest in the items they mark up and profit from the most (SUVs). And this lack of interest wasn't solely because people couldn't get loans to pay for the vehicles and fuel. Many people are relatively responsible and wouldn't have depended so heavily on such loans in the first place. But these people weren't going to invest in these vehicles, in part, because their month to month earnings couldn't afford the fuel prices (not after the related cost rise in food & other products). And then we get back to... why are fuel costs rising? And that answer has to do with the politics and economics of peak oil. Greenspan himself made it clear that the Gulf War II was, plainly, about seizing access and control over the region's oil reserves. And, clearly, fuel prices were driven up by political instability related to, in the truest final analysis, peak oil.

    Let's put it this way... even if the bailouts were repaid in the name of the people (so that they could keep their homes), and even if the national debt was somehow forgiven or repaid... we would still be in a crisis because the economy is running out of fuel. The cost of every necessity rises in evermore frequent spurts, people are having funds shifted away from the discretionary consumer spending (which drives the economy as it is), and, in the end, people are without work and without the funds to obtain the the basic necessities.

    If nothing else, the underlying psychological knowledge of peak oil could be held responsible for the current crisis. And isn't it suspiciously coincidental that current economic crisis is peaking just as we get over the hump of peak oil? When we all know subconsciously that the party is ending it almost makes sense to spend and behave so recklessly.

    So... which came first, the culturally subconscious realization of peak oil or the insane financial and economic practices? Either way... in regard to the current economic situation, I think peak oil factors in prominently. And, either way... the better question becomes: now what?

    N. Zero said...

    (You've inspired a 2 part comment)
    Part 1:

    As a regular reader I felt both challenged and enlightened, as always, after reading your analysis of peak oil in relation to the current economic crisis. Nevertheless... I think I agree more with Zeke's comment in the final analysis.

    Perhaps you look at the situation the way you do because you are invested in various areas and are conscious and conscientious about what is happening to and with your money? But not only don't many people have 401k investments, indeed, even many who do are fairly hands off in watching their money ebb and flow while they don't make much practical use of it. But it's the former group (the masses who get by month to month) who may be more noteworthy.

    And I'm not saying that corrupt and incompetent banking practices didn't play a huge (quite arguably the largest) part in the current economic crisis! But that big spike in oil prices (which occurs always with the reality of peak oil as a backdrop at some level) may have had greater negative reverberations throughout the economy than you realize.

    In broad cliched terms, I'd suggest that the current crisis is a combination of the perfect storm with the question of the chicken or the egg. To wit... this economy has been established by people who, psychologically and in practice, never got over the cultural way of behaving as if the earth was flat and boundless -- even after they they cognitively realized the earth was round and finite. That is to say... the insane lending practices, and the massive accumulation of national debt, would make far more sense if the world was flat and if new resources could always be discovered over the horizon (and if, therefore, someday the massive debts could actually be paid). But the fact is that western culture has always been going down the path of excessive resource extraction whether it was recognized or not. Perhaps this is an ill-conceived tangent but, suffice it to say, western economics has always been, as Gandhi suggested, far from economical. This economic culture has always been a trap waiting to be sprung -- and there was, obviously, little doubt that we inevitably venture far enough down the path to fall into this pit.

    gylangirl said...

    "...Is peak oil going to cause TEOTWAWKI? No. It got the ball rolling by complicating the simultaneous financial storm with initially high oil prices.
    The peak production point probably occurred in 2005. After that, oil prices began to rise until they reached levels that threatened the existence of cheap oil -dependent industries like commercial airlines, SUV manufacturers, and exurban mcmansion builders.

    The experts were projecting scenarios of over $200/ barrel oil for the foreseeable future. Resentments and worries about whether or not we could control the future flow of oil in our direction resulted in policy planning as far back as 1998 involving military invasions of those countries. So Peak Oil indirectly put us into higher national debt. Higher oil prices did affect the initial decline in exurban home demand which, combined with the suburban ponzi subprime scheme, eventually exposed the morgage deriviatives investment toxicity.

    Peak Oil will prevent us from climbing out of the financial abyss caused by the ponzi schemes of Wall Street. We climbed out of the last Great Depression because we had increasing levels of oil production available at the time. This is how we supported both WWII and the manufacturing base of the post war era. But because we have passed "Peak" Oil production, calls for stimulus spending and war spending jobs will not work this time: As productivity ramps up, the price of the increasingly expensive oil to maintain it would threaten the system again. So these Keynesian economic solutions from the 1940's era are no longer feasible. We can't oercome this financial crisis like we did the last one because of peak oil."
    excerpted from

    Stoneleigh said...


    There have been financial bubbles since time immemorial. Society-wide Ponzi schemes do not need an energy boom to spark them and certainly do not need an energy bust to end them, as they sew the seeds of their own destruction.

    I very much disagree that higher energy prices caused the bust, even taking leverage into account. The end of the home-as-ATM process was far more significant, not just because of the direct impact of the now unavailable money, but because of the psychological impact of a negative wealth effect.

    Deflation is primarily a psychological phenomenon. Once the mood shifts from optimism and greed to pessimism and risk aversion, contagion is the order of the day, as we are seeing in relation to sovereign default risk now. It doesn't matter at all that the the countries under threat (so far) are tiny. The absolute amount is not the point. What matters is that a switch has been flicked in people's heads, and that places all sovereign debt under much greater suspicion. The reaction of speculators under those circumstances is to pick off the weakest, one at a time.

    The same thing happened with the securitization crisis. The switch that flicked there was from securitization is fine to all securities are now potentially at risk, and from leverage is fine to leverage can kill you. The effect of that kind of psychological risk can be simply massive. Any fear (or greed before it) that gets the power of the collective behind it can sweep all before it.

    You mention years of research, but I find that often (though not always) energy research is done by people who misunderstand financial markets, assuming them to be objective constructs akin to machines, in accordance with standard economic theory. This model of markets is simply wrong. Markets do not need external drivers, although they do interact with the fundamentals in complex ways that create positive feedback spirals.

    I am NOT saying that energy is not important - obviously it is the master resource. However, financial markets have endogenous dynamics that affect the fundamentals while being affected, not by the fundamentals themselves so much as by the perception of them.

    I agree with Ilargi that the financial crisis will be firmly in the driver's seat for a long time. We are going to see a massive drop in aggregate demand, which will lead to a collapse in supply greatly aggravating a net energy cliff that would have been more than bad enough by itself. Initially though, it will look like a supply glut, with production geared up for present demand. The cutbacks in new investment and maintenance will be savage, meaning that much production will be lost sooner than it might have been, as well as new supplies not being developed. This becomes a huge problem when the economy tries to recover and hits a hard energy ceiling at a very much lower level than we have currently.

    I addressed this topic in the peak oil primer - Energy, Finance and Hegemonic Power (on the right hand sidebar).

    Philip Bogdonoff said...

    I strongly suspect the financial collapse is related to peak oil. The global economy, and esp. the U.S. economy is "growth"-addicted. For many, many decades it has seen 3-5% growth per year. Money is lent (created) and interest is expected to be repaid. The only way that interest can be repaid is if there is growth, if the pie gets bigger. The main driver of economic growth for the last 100 years or so has been the increasing consumption of fossil fuels, and lately, oil. As oil production reached a plateau (post 2005), real growth could no longer be sustained. Artificial devices were created to sustain "growth" in the face of what would have otherwise been economic stagnation. Those devices could only last so long. I don't think it was a conscious strategy. I think the expectation of quarterly profits was the Mother "necessity" that created the financial "inventions".

    Anonymous said...


    Thank you for another great intro.


    Unknown said...

    I enjoy your verve - but IHMO you're dead wrong on this topic.

    Iconoclast and M have it right:

    1. Oil, the largest material prize in history, underwrote the derivatives markets and

    2. The laws of physics predate those of economics.

    I do agree with you that Peak oil per se is not the cause of our problems. What is wreaking havoc with the economy is a side effect of the world's oil production rate maxing out - namely, growing unpredictability in the price of energy.

    The article below lays out the case pretty nicely - including quantitative data from different sources.

    Oil caused recession, not Wall Street

    gasman said...

    While true that the irrationally levered Credit Default swaps which were insurance for levered asset backed securities are the proximate cause of the credit collapse. The whole ponzi failed when the performance on the underlying securities failed. The underlying securities failed to perform when people living on the edge of financial collapse failed to pay their mortgage.

    Yes, the ponzi would have eventually failed of its own weight, however there is more than just one immediate cause of the crisis. Because oil is the elixar of industrial economies, rising oil prices are a driver for inflation. I don't care what the numbers the US Gov. published on inflation, it was pure garbage. Everyone in the lower and middle class living paycheck to paycheck knew it. 30 years of exporting jobs and importing people have pushed the people of this country to the very limit. Now take someone making 15 dollars an hour in Dallas Texas where the average commute is 25 miles one way driving an 8 year old Ford F150 getting 15 miles per gallon and at $4.00 a gallon for gas people went from spending 5% of take home pay on gas in 1999 to 20% of take home pay in 2008. You can make the argument that the way things are done here is insane and I would agree with you. Most people were and are trapped by the situation. Something had to give and for many it was their mortgage payment.

    QED:immediate cause

    Steve From Virginia said...

    This is too large a topic to confine to a comment to an internet post, but rest assured I disagree completely.

    The suggestion is that oil is simply a commodity and what matters most is the pump price. Oil is a platform. The entire mechanism of production, distribution, use, financing and remediation are part of the oil platform. All bits are required to make a profit from the platform's use. The 500% increase in price since 1999 has made increasing parts of the oil platform/infrastructure unprofitable.

    That, not pump price, is what has been killing the economies, all of them. Peak oil took place in 1998. The party, she is ovah!

    Because of credit intermediation, there are no physical shortages of fuel. Instead the shortages manifest themselves in distortions in the money/credit markets.

    This has been an ongoing economic condition for many, many years and involves far more than the pump price of gasoline.

    Keep in mind that the trend concepts of the past thirty years; finance deregulation, excess credit formation and asset bubbles, outsourcing and currency unions are all hedges against rising energy costs and uncertain availability.

    Unknown said...
    This comment has been removed by the author.
    Phlogiston Água de Beber said...

    Oil smoil, the peak that really mattered was the moment(s) of peak good sense. Unlike oil production, good sense does not exhibit anything like a logistic curve function. It's more like spikes on a nearly flat-line chart.

    The first instance of a good sense spike, in the 20th century, occured in 1918 when Kaiser Bill threw in the towel rather than see the French do to Germany what Germans had done to France. Thus ending The War To End All Wars, which it turned out was really just the warm-up act for The War That Has No End.

    The last and possibly final good sense spike occured in 1953 when Ike agreed to an Armistice in Korea, which ended that senseless slaughter. Since that time, those who smugly refer to themselves as the OECD have indulged themselves in ever increasing acts of foolishness.

    Even if we had found a creamy petro-nougat center inside the Earth's crust, we'd still be screwed if we couldn't bring ourselves to do something sensible now and then. And apparently we no longer can. I don't know, maybe the good sense gene got flushed out of the pool somehow.

    "Oh great sage, Nasrudin," said the eager student. "I must ask you a very important question, the answer to which we all seek: What is the secret to attaining happiness?"

    Nasrudin thought for a time, then responded. "The secret of happiness is good judgment."

    "Ah," said the student. "But how do we attain good judgement?"

    "From experience," answered Nasrudin.

    "Yes," said the student. "But how do we attain experience?"

    "Bad judgment."

    Somehow, this sage advice has been quietly rewritten as: "What is the secret to attaining happiness?"

    "Make lotsa money."

    "What is the secret to making lotsa money?"

    "Only deal with people who exhibit bad judgement."

    Nassim said...


    Thank you for stating the obvious once more!

    ccpo said...

    Once again Ilargi displays his blind spot. We all have them. So be it.

    Anyone who thinks @1.5 trillion in increased costs to consumers over a five year period is nothing needs to rethink their thinking.

    Did PO cause the crisis? Yes, along with a slew of other things. Was it THE cause? Probably not just yet. Would we have had a recession anyway with PO effects (volatility) and the war drag? Yup. Was that greatly exacerbated by the financial stupidity? Oh, yes, in deedy. Would we have had a recession with the financial stupidity but without PO and the wars? Yup.

    But look at what we got when the two scenarios came together.

    Martin said...

    Is there a problem with the TAE RSS feed?

    I was used to read TAE offline via RSS, however, the feed has been broken for days, i.e. it contains only the first few lines of a blog entry.

    I can still download TAE for offline reading but RSS was fully automatic and therefore the most convenient way available.

    ccpo said...

    Where did the financial losses originate? In the energy field? Not even close.

    Utterly incorrect. See above. To figure the impact, look at the exponential rises in crude prices from 2002 onward and figure the extra costs to consumers. When you figure only the extra cost of crude alone the number is between $1T and $1.5T. The follow on costs in terms of prices of items made with that crude would clearly be even greater.

    Blind spot.


    soundOfSilence said...

    memphis said…

    Why would you quote me as though I had written the article? I said NOTHING about a million dollar house.

    I didn’t say that you said anything about a million dollar house – or that the article did for that matter (or when it comes down to it that you implied there was anything wrong with a 1000 sq ft apartment).

    Oh, she has something she'll probably have to give up, and that's the lifestyle that so many perspective physicians anticipate.

    I don’t see where the article describes her as having any grand visions as to future lifestyle while she was in medical school. There is some mention that she “loves her work”… it goes on to end saying that she is and has given up / postponed a few things that she would really like at this point while she pays down debt.

    What I did imply was that you painted a picture of her and to a large extent most people going through medical school with brush strokes that were as wide as they were short - and at this point I don’t feel much different. 32k collection cost on top of 52k collection cost is bullshit meant to be nothing other that a millstone around someone’s neck.

    It's a different post at this point and in any event I’ll forgo any developing pissing match.

    zander said...

    aggravating a net energy cliff ......

    When the finance crisis ends/stabilises, and supply has been greatly reduced due to dearth of investment, demand will slowly pick up until once again it reaches limits, which will have a much lower ceiling due to said supply restraints right?

    IYO, what will happen then?, will the economy re-crash bringing down oil demand and prices with it, or will the economy re-crash but demand and prices stay up because of supply shortage? or will oil prices go up indefinitely regardless of a re-crash?

    Ta in advance


    Gravity said...

    You gonna fight the energistas again?
    Ha, that'll be a laugh!
    (sounds of fist-fight and cheering crowd)

    TAE - A friendly place

    Gravity said...

    you do make a decent point from a certain perspective, although your model does not seem to account for efficiency-improvements.

    You mention that industrial output cannot increase if the absolute amount of energy input cannot grow concurrently, but it would be perfectly possible for output to grow by 1% if the efficiency of fixed energy usage were increased by 2%, though there are eventual limits to such gains.

    Stoneleigh said...

    Of course the laws of physics are fundamental and of course the discovery of a massive energy subsidy would be expected to drive a corresponding increase in socioeconomic complexity (as Tainter explains). However, while energy is a key driver on the way up, the interaction between finance and energy is much more complex on the way down. Understanding finance is absolutely key to understanding how the energy situation will play out in practice.

    As we have pointed out many times here, financial bubbles have occurred many times prior to the fossil fuel age, and have collapsed even amid plentiful energy supplies. The available energy has a major role in determining how turbo-charged a bubble can become, but once a bubble has formed, its own internal dynamics become the critical factor in the shorter term. Depressions involve a collapse of aggregate demand which leads to an over supply of almost everything temporarily - including energy - as no one has the purchasing power to connect buyers with sellers. The collapse in the money supply will be the key driver for several years, which is Ilargi's point.

    We are NOT saying that energy is not important, but that energy will not be the limiting factor for while - money will be. The shortage of money will then have a major adverse impact on the energy supply, which in turn will limit the potential for economic recovery down the line.

    We are all headed for an energy-poor future which will look nothing like the present. The reason we concentrate on finance here is that the timescale is shortest, that is where the greatest impact lies at the moment, and those who do not successfully navigate the short term do not have a long term to worry about.

    Ilargi said...

    "Martin said...
    Is there a problem with the TAE RSS feed?

    I was used to read TAE offline via RSS, however, the feed has been broken for days, i.e. it contains only the first few lines of a blog entry.

    There were lots of complaints about the feed not updating. I switched it to the short version, so at least that issue is healed now. Choice of two evils.


    Gravity said...

    Certain countries have a much lower logistical tolerance threshold for energy costs. Several industrialised nations, as they are currently configured, likely cannot attain GDP growth at all if oil were consistently priced above 90$ or so, and some might even start to malfunction at 60$ or lower, at current efficiencies.

    Considering the natural global depletion rate for crude has supposedly reached around 9% annually at current production, by compounding lack of sufficient investments the actual net depletion rate may start to approach the gross rate at some point, forcing the level of crudely energized economic activity to also shrink by roughly the percentage of the natural depletion rate.

    That is, if crude was the only energy input and unsubstitutable, the actual percentile decrease of global economic activity should be at least as high as the net/gross global depletion rate, at fixed efficiency.

    el gallinazo said...

    Economic downturns have two basic causes. One has the standard cyclical recession which is essentially caused by inventories being excessive and having to be worked off. And one has the depression downturn caused by a manic expansion leading to debt being unsupportable.

    While there have been several major depression collapses in western economies in the past 500 years, the most recent global one was, of course, the Great Depression, which first overtly manifested itself in 1929.

    The argument here between the energistas and the financistas is over causation. Neither camp seems to deny that the globe is heading into a severe deflationary depression which will dwarf the one of 80 years ago.

    I have read the energista arguments here fairly closely, and none has dealt with the causes of the last great depression. So please enlighten me as to how energy was the primary factor for GD v. 1.0.

    el gallinazo said...


    I am trying to crunch your numbers as presented. My arithmetic seems to be different than yours. What price did you calculate gas at the pump at in 1999? Also, what percentage of discount did you use to go from gross pay to take home pay? Thanks.

    jimKunstler said...

    A major implication of peak oil is the inability to continue expansion of productive industrial activity, which is the kind of "growth" our economic system requires. This growth is reflected in the value and viability of financial instruments: stocks, currencies, tradable commercial paper, etc. It seems to me that some time in the late 20th century, financial engineers apprehended that these instruments would lose their validity -- and this coincided with the imminence of peak oil. (For one thing, wealth as represented by stock market indexes was not increasing due to inflation erosion.) This led, in turn, to the "innovation" of financial instruments designed to make money by other means than representing conventional industrial growth. These were "derivatives" based, when all was said and done, on getting something for nothing. Though regarded as legitimate, they were largely swindles and frauds. The mischief was so enormous and pervasive that we have not been willing recognize it for what it was. The current crisis in capital (i.e. accumulated, deployable surplus wealth) is the result. I do believe that ultimately there is a connection between energy resources (inputs to the economic system) and the fiasco in capital finance as embodied in currencies and tradable paper.
    --Jim Kunstler

    Iconoclast421 said...


    "I very much disagree that higher energy prices caused the bust, even taking leverage into account. The end of the home-as-ATM process was far more significant..."

    If you compare 2004 Mortgage Equity Withdrawal (MEW) with 2003 MEW, and then compare 2004 MEW with 2005 MEW, it makes the point very clear. 2004 was a breakout year, in terms of real growth. 2004 was the one year where the economy actually grew at a pace to support the ponzi. MEW shot up as a response to that. 2005 was flat, and MEW flattened. While energy prices were up some 50% y/y.

    At that point the damage was done, and a crisis was inevitable. Through various schemes, frauds, and rackets, TPTB were able to stave off crisis for 2+ years. But in the end, their actions made the inevitable correction much much worse. But the real story I think is 2005, and the extremely significant acceleration of the rise in energy prices. That explains why MEW failed to grow (significantly) beyond 2004. Once that happened then all that happened afterwards was academic.

    Unknown said...

    "I have read the energista arguments here fairly closely, and none has dealt with the causes of the last great depression. So please enlighten me as to how energy was the primary factor for GD v. 1.0."

    El gallinazo

    You appear to be making an error of logic. A common mechanism for the Great depression and the Financial Crisis of 2008 would provide a certain neatness to the story, but it is not a necessary consideration.

    Occam's razor is typically sharper when used as a retrospective as oposed to a prospective tool.

    Jim Kunstler

    Try reading

    Volatility in the Price of Oil since Hubbert's Peak and Investment Risk

    You'll find some grist to your argument that what we've just witnessed is the grandest swindle ever perpetrated.

    jal said...

    Now I realize that the commentators at the oil drum read TAE.

    It seems that they have all showed up for this discussion.

    J6P can only say, "... I'm Sc****d. and its hurting and its not going to get better.

    Stoneleigh said...


    Globally the rise in the price of energy is not as clear as you suggest. Look at what happened to the dollar. A rising oil price, denominated in dollars, was partially a result of a falling dollar. The same thing happened in gold, and equities. The impact on Americans was larger than on most others. Clearly it made life more difficult and pushed more people over the edge, but rising energy prices were not the dominant factor in the decline.

    Here is my take on the interaction between finance and energy from December 2007 at TOD. People need to understand both energy and finance to be able to predict where we are going. Both are drivers, but their respective impacts on our lives vary with time and place. Energy was a driver of hyper-complexity (very much including finance) on the way up, and clearly played a role in the development of a catabolic situation. The way down will be much more multi-dimensional.

    Gravity said...

    Seeing how demand should drastically collapse in the next few years, existing depletion rates for crude should level off somewhat until noninvestment becomes a deciding factor.
    Then there's the export land model, maybe that could run in reverse if newly vehicled classes should become increasingly destitute.

    Electricity usage is perhaps more directly proportionate to industrial production than liquid fuel usage, and more accurately measurable.
    If industrial electric consumption has always grown proportionately to output since the 2nd industrial revoltage, one could argue that peak electricks, due to underfunded and insufficient infrastructural investment in conjunction with plateau coal, was the primary reason for stalled industrial output, besides credit contraction, and not oil.

    Unknown said...
    This comment has been removed by the author.
    Unknown said...
    This comment has been removed by the author.
    Unknown said...
    This comment has been removed by the author.
    Stoneleigh said...


    You appear to be making an error of logic. A common mechanism for the Great depression and the Financial Crisis of 2008 would provide a certain neatness to the story, but it is not a necessary consideration.

    On the contrary, it is a vital factor. All such credit expansions follow the same story, and have done since antiquity. They all have the same underlying logic - that of the Ponzi scheme (see the primer From the Top of the Great Pyramid on the right hand sidebar). That logic guarantees that they will all meet the same fate.

    Fossil fuels turbo-charged this particular credit hyper-expansion, guaranteeing far more horrific and all-consuming consequences to its demise than would otherwise have been the case. Energy will by no means be the sole factor in determining what comes next, though. One cannot ignore the pyramid logic that underlies such a mania. That will be the dominant factor in the short term (ie probably several years).

    Peak oil does not preclude a temporary over-capacity of oil as aggregate demand plummets. We will see energy prices fall off a cliff, although purchasing power will fall even faster for many. While essentials such as energy and food will receive relative price support, as a much larger percentage of a much smaller money supply chases them, prices will still fall. This will have a significant impact on exploration, development and maintenance of existing infrastructure. In this way a demand collapse sets up a supply collapse, and it is then that energy becomes the dominant factor.

    Unknown said...
    This comment has been removed by the author.
    Stoneleigh said...


    If drastic REALLY meant drastic, as in 20-30%... well, that would be the end of the world. Unemployment would be at around 50% if that happened.

    That is what we are expecting, if not in fact considerably worse.

    Unknown said...
    This comment has been removed by the author.
    Hombre said...

    It seems the dispute between our hosts and the "energistas" (thanks gravity) is a matter of timing.

    I'm an energista myself, but I can see that if I lose my job before my car runs out of gas I won't need the gas!
    Or if I lose my home before I can no longer afford to heat it, then the fuel is a moot point.

    The effect of energy depletion will be with regard to the potential to recover from our economic debacle. In the 1930's we had abundant energy in the future, now we do not. So the recovery will be dampened... no, scratch that! There may well be no recovery, at least in the sense of a return to late 20th century lifestyle normalcy. That party is over (unless you believe in cold fusion and the tooth fairy.)

    Unknown said...

    Well you are probably right to conclude that peak oil production did not directly cause the collapse of financial capitalism, but it is curious that the peak-oil production plateau (2005-2008) just happened to occur while financial capitalism was committing suicide.

    The "financial services" sector of the US economy, as defined by Kevin Phillips in "Bad Money" is 22% of the economy. The other 78% or the "real" economy was affected by rising oil prices. It was noted on TOD and other places that when oil prices rise above $80/bbl GDP takes a hit. There is no "real" economy without energy and oil is the key liquid fuel that makes the "real" economy go round.

    Over the next two decades, declining net energy ratios from fossil fuels and declining flow rates in oil and gas production will end industrial civilization.

    The only serious question that remains to be answered is whether the TPTB will quickly agree to undertake a "sustainable retreat" from capitalism and economic growth or will they adopt a business as usual (politics as usual) approach, which will make World War III inevitable.

    Stoneleigh said...


    Wow.... well the only way to get through something like that is to start behaving nicely to each other again. I fear that that's not going to happen, which would be a great pity. We're really quite capable of being nice to each other, we just haven't done it in a long time.

    As sad as it is to say, considering the extent of man's inhumanity to man that is evident all around us, our current situation represents something akin to 'peak niceness'. Expansionary times lead to relative inclusiveness and trust, while contractionary times have the opposite effect. People generally have no idea just how far we're going to be from 'peak niceness' in a few years time. It is the tragedy of our times.

    VK said...

    Oh for a lil' piece of paper,
    man chose to do a lil' caper.
    He created debt to death,
    fully fractional too.

    Man, what have you done?
    For a lil' piece of paper,
    and some electronic digits,
    Sold yourself to the temple of doom.

    At night the children howl,
    Of hunger and pain,
    they cry, they cry,
    from all the plunder n blunder.

    Man, what have you done?
    The bankers cheat n steal,
    you soldiers rape n pillage,
    The leaders cry rivers of blood.

    The spin on it all,
    The spin on it all,
    The forests are burnin',
    the seas are reeling.

    The mountains of waste,
    and the mountains of debt.
    The rivers afoul,
    the credit keeps wheeling n dealin'

    The screws are tightening,
    The children will scream,
    the ill wind blows,
    Man, what have you done?

    Sold your soul for twopence of debt,
    Wither thy fracional world,
    Oh for a lil' piece of paper,
    and some electronic digits.

    The minions on wall street,
    cheer and growl with every uptick and downtick.
    Wither thy world, scream thy children, crumble thy lands, wickedness reigns from hill to hill.

    The world as we know,
    ends with deflation,
    deflation of all things,
    man, debt and ego.

    Such is nature,
    the nature of time,
    the time of reckoning,
    the reckoning of man, the weeping of man.

    Oh for a lil' piece of paper,
    and some electronic digits too.

    Stoneleigh said...


    The only serious question that remains to be answered is whether the TPTB will quickly agree to undertake a "sustainable retreat" from capitalism and economic growth or will they adopt a business as usual (politics as usual) approach, which will make World War III inevitable.

    There is no such thing as a sustainable retreat from a pyramid collapse. Deflation NEVER plays out as a slow squeeze. Think Enron times a factor of at least many millions. It will be a chaotic wealth grab unfolding over the next few years. The late 20th century lifestyle is history permanently, at least from the perspective of the masses, and international conflict is inevitable. It is only a matter of time.

    Unknown said...
    This comment has been removed by the author.
    Cassandra said...

    ..just popped over to TOD, blimey it's like a trip down memory lane - makes me realise how much I've jumped ship.

    "I'm deeply disappointed in Ilargi. I think he's losing it. Stoneleigh, at least, has some interesting things to say, but she tends to sound like a broken record after a few readings.

    TOD is increasingly becoming one of the few places to find pertinent articles and insightful commentary.

    I think it's an ego thing, TOD have been saying 'it's all cos of oil' for years, and almost crave vindication.

    But when the $147 spike came and 'the only way was up, baby' dissenters such as Ilargi were already predicting a slump.

    What about scientific method?

    Observation-hypothesis-prediction in iterative cycles..

    When the consensus for the "prediction" was ever upward (I can remember all the polls on TOD, took part in a few too) and therefore wrong, you need to redo your hypothesis.

    I did. The scales fell from my eyes. It's not easy to admit you had over played your below ground factors, and underplayed your above ground ones. But meh, get over yourselves.

    Hombre said...

    StoneLady said...
    "We are all headed for an energy-poor future which will look nothing like the present. The reason we concentrate on finance here is that the timescale is shortest, that is where the greatest impact lies at the moment, and those who do not successfully navigate the short term do not have a long term to worry about."

    You can't do a much better job than that of summing things up! IMO

    Stoneleigh said...


    I am not suggesting giving up, however difficult the struggle may become. We must never give up trying to do what is right, no matter what the odds. Of course working with others is vitally important, and those who do so will benefit enormously.

    I am very much a proponent of cooperation, even though I think the odds of it are falling, especially on an inter-tribe basis. People need to build solid relationships of trust now - strong enough to withstand the severe stress that is coming. That is the way to survive, and the way to find a meaningful life.

    As for energy demand, we now have a structural dependency on cheap energy at will be vastly more impacted by economic collapse than in the 1930s. Back then most people had little access to exogenous energy sources, with the exception of animal labour. The fall in their purchasing power made little difference. We also had nothing like the commercial/industrial energy use we have now, much of which will become redundant very quickly once no one can afford to buy its products or services.

    Ilargi said...

    Other than with an obviously evil wicked enjoyment in seeing one comment praise my words into the wide blue skies, while the next one declares me retarded, I also appreciate the discussions on a rational level.

    I think many of you don’t know how much Stoneleigh and I have read and written on energy issues, or why we, after doing all that, decided to move away from that particular topic and into finance. Stoneleigh explained that one above: finance is a far more urgent issue. Still, presuming that we don’t know the energy field is not going to get you any bonus points. We do. You’d have to go for the bigger prize: that we have never understood any of it.

    There are several statements indicating that in the final run, energy underlies everything. That, however, is so broad an idea that it fails to explain anything at all in a way that would be satisfactory to Columbo or Horatio Caine. I can’t imagine any interrogation performed by either that wraps up with: "Energy done it, we can all go home now". Let alone every single interrogation. "Darn, I knew it, energy done it again. Send out an APB."

    Please remember that my question is quite narrow to start with:"Did peak oil cause the present financial crisis?". In the end the point we are trying to make at TAE all along is that our economy has become one giant ponzi scheme, something I don’t think everybody here necessarily fully understands, and that ponzi schemes must always fail, no matter what the accompanying circumstances, just as you won’t live forever, no matter what you try.

    If we would have found another 826 Saudi Arabia's on the planet last week, or last year, or next year, the present economic collapse would still have been inevitable. And that is the point that I think many of you are missing. A possible rebuilding, or new building, phase after the embers stop smoking may turn out different with all that hypothetical new found oil, but that is not the question here.


    $$$Dollar$$$ said...


    Very though provoking stuff. How pervasive do you think the downturn is going to be? That is, how far-reaching will the effects be? Will it affect pretty much everybody (albeit to varying degrees) or do you think that it will be felt worse by the lower and middle class, but the wealthy and professional class will be largely spared?

    Anonymous said...

    Stoneleigh said:

    "There is no such thing as a sustainable retreat from a pyramid collapse. Deflation NEVER plays out as a slow squeeze. Think Enron times a factor of at least many millions. It will be a chaotic wealth grab unfolding over the next few years. The late 20th century lifestyle is history permanently, at least from the perspective of the masses, and international conflict is inevitable. It is only a matter of time."

    Thank you for being so explicit, Stoneleigh. So many people are in denial and will not listen. It's sad to see so many squandering their little savings and the Earth's resources. So few are preparing (physically and psychologically) for what's coming.

    VK said...

    Oh Kumbaya! Lets sing and dance, I now know that declining oil production caused the following bubbles and busts.

    Tulip mania bubble (And the Dutch go wild!! First hippies in the world, profit, flowers, love)

    The South Sea Company bubble("a company for carrying out an undertaking of great advantage, but nobody to know what it is")

    Mississippi Company Bubble (The Scot John Law brings France to near ruin)

    Railway Mania in the 1840's (Build and they shall come)

    The panic of 1873-1879! (Close similarities to today)

    Roaring Twenties stock-market bubble, led to GD1 (The gilded age)

    Japanese asset price bubble of the 80's, Nikkei hits 40,000 and the Imperial Palace in Tokyo is worth more than the whole of California according to myth and legend.

    The Dot-com bubble (IPO mania! You couldn't lose, till you did and now you're still down 60 odd percent from the peak).

    I know it now! I get it, oil causes irrational exuberance and leads to ever higher asset prices that are not justified by cash flow generation. The excessive risk taking and leverage are fueled by Oil from the North Sea and this leads to an epic Minionskoil moment when oil declines and thus there is not enough cash to service debt leading to a debt deflation spiral of falling wages and defaults as the oil from Ghawar dries up!!

    THERE! We have a theory of nothing on everything.

    Unknown said...
    This comment has been removed by the author.
    Unknown said...
    This comment has been removed by the author.
    Stoneleigh said...


    Very though provoking stuff. How pervasive do you think the downturn is going to be? That is, how far-reaching will the effects be? Will it affect pretty much everybody (albeit to varying degrees) or do you think that it will be felt worse by the lower and middle class, but the wealthy and professional class will be largely spared?

    Everyone will be affected in many ways. A very small number will benefit financially, as the seeds of the great fortunes are sown in times like these, but even they will have to put up with far more physical risk than they are used to in a highly uncertain world.

    For most it will be somewhere between dire and irredeemably disastrous. Many people who are currently wealthy will be completely ruined. Many of them are just as over-extended as any subprime borrower, and even those who are creditors instead will find that the massive deleveraging of deflation ruins debtors and creditors alike.

    The middle class will be shoved unceremoniously down into the proletariate, and we will have oligarchy to a much greater extent than we do now.

    The effects will not be even, as local circumstanced will vary much more than they do now in our homogenized world, where cheap energy and cheap credit have evened out many disparities in the developed world (the rest of the world that we have been rapidly undeveloping through our avarice is a different story). Some places will die s socioeconomic centres, as there simply will be no opportunity to earn a living within hundreds of miles. In other places circumstances will be much better.

    Transport links will help, especially rail and river/canal/ocean. Over-land transport gets difficult very quickly once roads are no loner maintained. A climate where one doesn't require much external energy is also a major bonus, as is a local supply of clean water, and many other factors.

    Nelson said...

    I'm inspired by the really, really smart discussion here about this really, really provocative article. I think (and hope) that Ilargi is deliberately acting as a foil with his absolute either/or assertions.

    Many here have embraced a larger and more interlinked narrative about "triggers" versus "causes," as well as the past possibility (now gone) of growing out of a crisis when cheap energy is abundant.

    Here's a story from the Left Coast: It's getting more expensive to die.
    "The City Council on Tuesday voted to approve a contract with a company that will later this year bill residents when the fire department responds to medical emergencies and car accidents."
    "Residents will pay $300 for every fire department response to a medical emergency. Non-residents can expect to pay $400."
    "One person joked if her husband has a heart attack, she’ll be tempted to light the kitchen table on fire to dodge the fees."

    Phlogiston Água de Beber said...

    VK said...
    THERE! We have a theory of nothing on everything.

    I knew I was right to bring you into the family. But, I'm starting to worry that I might be rubbing off on you. :)
    --Grandpa Nobody

    Iconoclast421 said...

    It is true that in the rearview mirror, the last 5 years certainly looks like a giant ponzi scheme that blew up.

    But you have to ask yourself what if 2005, 2006, 2007, and 2008 had been just like 2004 in terms of real resource and energy production growth? I contend that the ponzi would not have imploded. Because having real growth means it would no longer be ponzi growth. The reason ponzi growth is so bad is that it allows banksters to take their share of profits that never actually materialized. We have to remember that while it is true that ponzi schemes always end, we are more concerned with when will they end; ie what is the mechanism behind the end of the ponzi. I dont accept that these things end all on their own, or that they end when there are no more suckers, etc. Peak/plateau oil is the only thing that makes sense to me. I can model it in my head.

    Stoneleigh said...


    Is it not the case that a ponzi scheme is somewhat less likely in a low-energy system than a high-energy system?

    Yes. As I said above, a large energy subsidy can turbo-charge a Ponzi scheme, thereby setting up much worse consequences (a much deeper collapse) to follow. It takes a certain level of socioeconomic complexity for a pyramid dynamic to be possible, and socioeconomic complexity is energy-driven (as Tainter explains).

    Once you have reached a level conducive to that kind of development, it can take on a life of its own though. For instance, Albania in the 1990s was hardly a hotbed of energy surplus (although they did engage in a fair amount of oil sanctions busting), but it saw a series of pyramid schemes that beggared 80% of the population in a few short years. Similar schemes, constituting massive financial fraud, cropped up all over eastern Europe at the time.

    We are indeed trying to integrate soft-system and hard system modeling, and yes, soft-system modeling is much more difficult as it is so much more complex. Neither can be ignored as both are vital to understanding our current predicament.

    Ilargi said...

    In a fine example of not getting nor trying to get the point (or is it dyslexia?), Gail at TOD says this about what I wrote:

    "The reasoning in his post is that if one can find other reasons for the financial collapse, that proves that peak oil was not part of the problem."

    Not only is that very clearly -to the point of blinding- not at all what I said, it shows why hammers see and seek only nails. It's of course also a conscious and malicious attempt to twist my words into something they don't say, but which suits her purpose and agenda. Unless, of course, dyslexia drives events. I don't want to be accused of pushing the cripple down the hill.

    You heard it here first: I predict that homosexuality will soon get the blame for the financial crisis. Or at least, that is, if people like Gail can’t find a way to blame peak oil. And yes, I admit, that is highly unlikely.


    Anonymous said...

    Stop by and read my post Peak Oil: Looking for the Wrong Symptoms. I say that the two big impacts expected from peak oil are an increase in debt defaults and recession.

    I also suggest reading Gregor's post Coal and Treasuries. He points out that when the price of oil rose, countries outside the developing world turned to coal, but the developing world "replaced their lost demand, lost credit, and the loss of cheap energy the best they knew how: with paper".

    Stoneleigh said...


    But you have to ask yourself what if 2005, 2006, 2007, and 2008 had been just like 2004 in terms of real resource and energy production growth? I contend that the ponzi would not have imploded. Because having real growth means it would no longer be ponzi growth. The reason ponzi growth is so bad is that it allows banksters to take their share of profits that never actually materialized. We have to remember that while it is true that ponzi schemes always end, we are more concerned with when will they end; ie what is the mechanism behind the end of the ponzi. I dont accept that these things end all on their own, or that they end when there are no more suckers, etc.

    Most 'real growth' has been an illusion for a long time. When Ponzi growth comes to dominate a financial system, the real economy is largely cannibalized over time (hence Ponzi schemes are catabolic). Pyramids collapse under the weight of the debt that they create - a debt that can no longer be serviced. Reaching the 'greatest fool' is another part of the dynamic. Thy do not need a trigger for collapse, although one is typically rationalized after the fact, as humans are a rationalizing species.

    Peak/plateau oil is the only thing that makes sense to me. I can model it in my head.

    And I model Ponzi dynamics, and any other relevant factors, in my head, in a continuing search for a big enough big picture ;)

    Ilargi said...


    "I contend that the ponzi would not have imploded. Because having real growth means it would no longer be ponzi growth."

    You don't understand ponzi schemes. All ponzis implode.

    Ilargi said...

    " gailtheactuary said...
    Stop by and read my post Peak Oil: Looking for the Wrong Symptoms."

    I stopped reading the moment I saw how you twisted my words. Why continue after that?

    Unknown said...
    This comment has been removed by the author.
    gylangirl said...

    The question is not whether all ponzis implode, of course they do, but how much longer could they have kept up the pretense this time. Due to concentration of mass media and better propaganda control over the populace, I suspect that there were a few more years of suckers available but the impact of the peak oil crisis unexpectedly shortened the life of this particular ponzi scheme.

    Stoneleigh said...

    I would like to point out that I have no desire whatsoever to fight with The Oil Drum. Fighting is entirely counter-productive.

    Stoneleigh said...


    So what we basically have here is a wildly turbo-charged ponzi scheme whose collapse will be so total that any energy problems we may be facing are irrelevant for the foreseeable future?

    I wouldn't say irrelevant for the foreseeable future, but not a limiting factor in the short term (at least in most places). Down the line energy will absolutely be a limiting factor again, and it will be limiting at a very much lower level than we have now. The implication of this is that we will transition to a much lower level of socioeconomic complexity.

    I do expect significant spatial and temporal variability in energy supply, and very volatile prices wherever and whenever we go from temporary energy glut to energy scarcity again.

    Weaseldog said...

    Stoneleigh said... "I very much disagree that higher energy prices caused the bust, even taking leverage into account."

    We keep saying 'triggered' or words to that effect.

    You and Ilargi keeping using the word 'caused'.

    These words have very different meanings in this context, and keeps us discussing entirely different points.

    You're arguing that point against nobody.

    I agree that the derivatives would've blown up on their own. They were accelerating faster than real industrial growth.

    But Peak Oil ended industrial growth, while the derivatives and other financial shenanigans continued.

    To go back to another analogy...

    Avalanches happen. But they can be triggered. It's well known that a shout, gunshot or the toss of a snowball can trigger them.

    But those are not the causes of the avalanche. the cause of the avalanche is an accumulation of snow that exceeds the slopes ability to support it.

    Ilargi's continued insistence that Peak Oil didn't cause derivatives trading, is a straw man. I haven't seen anyone argue that yet.

    I argued some almost like that. I argued that with the industrial economy slowing, the financial wizards looked for other strategies to keep the money coming in and ramped up their dependable on derivatives.

    If you envision a game of chess, throughout most of the game, you have a choice of moves. Your opponent doesn't force you to make one move or another. But you do 'react' to your opponents moves. And if you're playing with any concept of strategy, your opponent does help shape the that you play.

    Likewise, Peak Oil didn't force the financial wizards to play the game the way they did, but it changed the lay of the economy, and the wizards played accordingly.

    VK said...

    @ gylangirl

    Depends, this ponzi scheme credit bubble began all the way back in the day of Reagan and Thatcher. 1982 is when it all began, the piling up of debt, the borrow and spend ideology and it got a huge boost with Alan, Ben and Summers et al.

    Ofcourse once Cheney said, "Deficit's don't matter" and Bush said,"Either you're with us or against us", it didn't matter. The sky was the limit. Halleluyaaaah!

    1982 till 2007. 25 years for it to build to such a level. That is quite long compared to other bubbles. Infact this credit bubble had micro bubbles within it - tech bubble, housing bubble etc. It's really the mother of all bubbles. The actual credit bubble burst in 2007 while oil prices peaked one year later in 2008 as a lagging effect of the credit excesses.

    el gallinazo said...

    ahkeem said...
    "I have read the energista arguments here fairly closely, and none has dealt with the causes of the last great depression. So please enlighten me as to how energy was the primary factor for GD v. 1.0."

    El gallinazo

    You appear to be making an error of logic. A common mechanism for the Great depression and the Financial Crisis of 2008 would provide a certain neatness to the story, but it is not a necessary consideration.

    Occam's razor is typically sharper when used as a retrospective as oposed to a prospective tool."


    I would say my primary lapse in logic was that I forgot that:


    (And I gave up Occam's razor when I switched to a Panasonic.)

    Blindweb said...

    Terrible article...too narrow in scope to be of any use. An event half a millennium in scope can't be approached with a,b, c linear approach.

    U.S. oil production peaked around 1970. In a broad sense the entire foreign policy and economic direction of the U.S. has been directed by oil since that point. To maintain its edge over the rest of the world the U.S. had to increasingly rely on fraudulent methods. (derivatives and wars of aggression)

    gylangirl said...

    "The actual credit bubble burst in 2007 while oil prices peaked one year later in 2008 as a lagging effect of the credit excesses.'

    The oil price increase phenomena did not magically occur in 2008. It was a phenomena affecting oil-sensitive manufacturing industies by 2005. By 2007 it was crippling the growth economy.

    Crude oil prices by year,
    nominal and inflation-adjusted:

    2003 $27.69 $32.47
    2004 $37.66 $42.97
    2005 $50.04 $55.21
    2006 $58.30 $62.36
    2007 $64.20 $66.66
    2008 $91.48 $91.35

    el gallinazo said...

    IMO, the peaking of crude to $147/barrel had nothing to do with any facts on the ground or under the ground. It was a flight to "physical safety" which included all classes of commodities, but oil was must affected because it was deemed the master commodity. When the dam(n) started bursting, TPTB, who were quite aware of their frauds and Ponzi schemes, felt that fiat currency and financial securities were on the brink of becoming worthless and that they better lay claim to stuff with intrinsic value. Oil speculation then went into a positive feedback loop and became its own mini-Ponzi, and then collapsed into the $30's. This spike had everything to do with peak finance and almost nothing to do with peak oil. To me, the most interesting thing about it was that it indicated that there were a lot of billionaires around who didn't understand squat about the contraption they had built and purportedly owned.

    But then again, they say that the squid is the most intelligent of all invertebrates, but if our Squid were so intelligent, why did the Fed have to convert it to a pulbic holding company in 24 hours to avoid insolvency on its gambling debts?

    Unknown said...
    This comment has been removed by the author.
    Weaseldog said...

    Gravity said... "@Weasel,
    you do make a decent point from a certain perspective, although your model does not seem to account for efficiency-improvements.

    You mention that industrial output cannot increase if the absolute amount of energy input cannot grow concurrently, but it would be perfectly possible for output to grow by 1% if the efficiency of fixed energy usage were increased by 2%, though there are eventual limits to such gains."

    In many industrial processes, there isn't much in the way of improvements to make. Improving efficiency is an ongoing process to reduce costs. Further, in many cases where processes can be improved, to do so incur more embedded energy and dollar costs.

    When the economy is in a downturn, infrastructure investments geared to more efficiency, become unaffordable. When the economy is good, they become unnecessary. It's a Catch-22.

    If you look at replacing the auto fleet, a similar problem arises. The world would have to increase energy production to cover such a massive undertaking in industry, so it can't happen.

    And keep in mind, your efficiency improvements must be repeated every year. An industrial process must be improved by 1% every year, forever. Fundamental physical forces quickly end such a regression.

    For instance, the energy need to break bonds between iron and oxygen in ores, won't change for any technological process. This sets the limit on the minimum energy needed to smelt iron ore.

    Blindweb said...

    I'd have to say 90% of you fail at logic and philosophy. I see an entire page of people who fundamentally agree but are arguing semantics and time frames back and forth.

    All systems are ponzi schemes depending on what time frame you use, and how narrowly you define it.

    jal said...

    The last man standing will be the undertaker as he feed the oil extractor machine with the last body of the Oligarchs.

    Now for a little bit of si-fiction

    "Conditions in that fireball are such that a cube with sides about one quarter the thickness of a human hair could contain the total amount of energy consumed in the United States in a year."

    Just think, ... you could have a pressurized squirt bottle of this perfect liquid and have enough energy to reach the stars or go mining the asteroids.

    I realize that when writing for the the news media that things have got to be “dumbed down” to make it understandable.
    The repeating of “measuring the temperature of the quark-gluon plasma as 4 trillion degrees Celsius,” should be clarified.
    The temperature of the “ball/bubble of plasma/liquid/fire” is not being measured.

    What is being measured are the temperatures of the jets.

    Therefore, the presumption and assumption that the perfect liquid is at those “temperatures” needs to be taken with a grain of salt.


    goritsas said...

    I'm interested in anyone that has ever heard of Modern Markets Theory (MMT). Google results are rather thin on the ground.

    For an example of the concept, take a look here: Person the lifeboats!. Here's another equally thought provoking: A modern monetary theory lullaby.

    stoneleigh, ever heard of it or, for that matter, the blogger?

    Weaseldog said...

    Stoneleigh said, "People need to understand both energy and finance to be able to predict where we are going. Both are drivers, but their respective impacts on our lives vary with time and place. Energy was a driver of hyper-complexity (very much including finance) on the way up, and clearly played a role in the development of a catabolic situation. The way down will be much more multi-dimensional."

    I don't think anyone is arguing against that point.

    Now as I read further down the comments, I see people using the word, 'caused'. So I'll say no more on that point except that they are couching their arguments well.

    I think a big difference in our perspective is that you're fixated on price as a governing factor, where I'm looking at supply.

    Price can viewed as a rationing tool, that determines who buys the product and for what uses.

    Supply on the other hand, determines how much product can be made.

    With supply in decline, product production and distribution is forced to decline. This forces manufacturing and distribution facilities into bankruptcy. Even if we had price stability due to some form of central bank price fixing, we'd still have bankruptcies and financial dislocations due to supply shortages.

    If you consider the case of a specific automobile. It's operation is influenced by the quantity and quality of fuel you put into it. the price you pay for this fuel, has no bearing at all on how the engine runs. If you pay $1/gal or $2/gal for fuel, it makes no difference.

    Further the price at the pump has no bearing on how the car operates when it's out of fuel.

    I think we all agree that finance matters. So long as supply and demand are balanced though at the current price point, I don't think that you can make a case the finance is the overwhelming factor.

    I think we'd need an oil glut and rapidly dropping crude prices to make a case for such an argument.

    el gallinazo said...

    I have only been interested in global economics and global finance for about three years. TAE was pretty much my first consistently followed economic blog. I never did visit TOD.

    That said, I did listen to Gail the Actuary as she was interviewed by Mad Max Keiser. I believe it was in last October. My feelings about it were similar to watching Eddie "The Eagle" Edwards compete in the 1988 winter Olympics.

    Weaseldog said...

    Tero said... "Well, how much is drastic? In GD 1.0, "drastic" was perhaps something like 2-3%.

    I would not say that a 2-3% drop in demand reduces depletion rates very much at all.

    If oil production is dropping at 9% / year, then energy production may be dropping at something close to half that rate. (I'll have to do the BTU math soon)...

    So we need to drop demand faster than 4.5% / year.

    el gallinazo said...

    Blindweb said...
    "I'd have to say 90% of you fail at logic and philosophy. I see an entire page of people who fundamentally agree but are arguing semantics and time frames back and forth."

    What about the other 90%?

    scrofulous said...

    In the peak oil verses financial crisis debate one has almost a chicken and egger, and that makes for many opinions and pointless argument.

    So let me give youse the straight dope, I got this recently from a ex-logger who was remaindered from that industry with a rather nasty chainsaw head wound ...

    "If one looks at the South Sea Bubble and as well as the population distribution, I think one would see, that with most people living on the land, it would be few that were affected by their financial ponzi.

    In our situation, one way or the other, most people are being affected by this financial crises. Due to the leverage oil gives most of the world is included, i.e. with Globalization oil gives us the means to be many times more interconnected.

    In the 70's the US went from being an oil exporting nation to an importer. The financial stress of diminishing cheap resources I think has led to compensation through items like wage arbitrage, and resulted in financial engineering in the US and so the formation of an unstable ponzi financial structure.

    While oil is not the cause of the bursting of our bubble, I think it, or it's diminishment, allowed the formation of the Humongous Bubble.

    World peak oil will merely prevent the formation of another bubble of such magnitude."

    Well, I don't think my friend with the head wound does too bad with his world picture, eh? BTW with retirement these days being what it is he also gives one-to-one financial instruction along with a course in,Chain Saw Use and Emergency Procedures for the Bush (or more commonly refeered to as, How to Sharpen one's Brain right down to the Stem).

    Weaseldog said...

    Stoneleigh said... Ahkeem,

    You appear to be making an error of logic. A common mechanism for the Great depression and the Financial Crisis of 2008 would provide a certain neatness to the story, but it is not a necessary consideration.

    On the contrary, it is a vital factor. All such credit expansions follow the same story, and have done since antiquity. They all have the same underlying logic - that of the Ponzi scheme (see the primer From the Top of the Great Pyramid on the right hand sidebar). That logic guarantees that they will all meet the same fate.

    Alright, I'll bit on this, though I know I'm beginning to spam this discussion a bit. I'll try to hold back the rest of the day...)

    The important thing to keep in mind about energy is that it must be usable and available energy.

    Sunlight hitting the sand in a desert, isn't usuable energy for industrial purposes, unless you have the means to capture it, distribute it and do something with it.

    During the GD 1.0, finance overwhelmed our productive capability. It far exceeded our ability to capture, distribute and use energy to produce products.

    It wasn't until after WWII that we really rose up out of the GD 1.0, by utilizing industrial capacity and new technologies for extracting and consuming energy at exponentially growing rates.

    Further after WWII we increased the rate at which we produce the consumers for these new goods, even as we increased the quantity of goods per consumer.

    As GD 1.0 began, people didn't know that they needed a giant house, full of plastic crap from China. There was a limited market for industrial expansion. Once it was exhausted, the bottom fell out.

    Stoneleigh said...


    I think we'd need an oil glut and rapidly dropping crude prices to make a case for such an argument.

    That is exactly what I am expecting to see this year. Watch this space.

    You mentioned you were writing a paper. I would be interested in reading it. I would like to get into your arguments in more detail than I have time for at the moment.

    Ilargi said...

    " el gallinazo said...
    Blindweb said...
    "I'd have to say 90% of you fail at logic and philosophy. I see an entire page of people who fundamentally agree but are arguing semantics and time frames back and forth."

    What about the other 90%?"

    No, no no, you shouldn't have said that. Now I forgot which 90% I want to belong to.


    Weaseldog said...

    Ilargi said, "If we would have found another 826 Saudi Arabia's on the planet last week, or last year, or next year, the present economic collapse would still have been inevitable. And that is the point that I think many of you are missing. A possible rebuilding, or new building, phase after the embers stop smoking may turn out different with all that hypothetical new found oil, but that is not the question here."

    I agree with that statement.

    But had we discovered them 15 years ago, we'd still be riding high on seemingly infinite growth.

    We'd have even bigger McMansions, bigger cars, more televisions, and bigger piles of cheap plastic crap from China.

    $$$Dollar$$$ said...

    Stoneleigh - I have made a point to live in an area that is metro/mass transit accessible. Do you think these communities will fare better? When the USSR collapsed people couldn't drive, but the metro still ran. Your thoughts?

    $$$Dollar$$$ said...

    I really fail so why what is causing the lack of comprehension on this. Also, I cannot understand why people confuse cause and correlation.

    Ilargi said...


    "We keep saying 'triggered' or words to that effect.

    You and Ilargi keeping using the word 'caused'."

    Who is we? And what sort of semantics arguments are these? Peak oil neither caused nor triggered the financial collapse, if you will. If you can't get that much out of what i wrote, maybe you haven't really read it all that well.


    Ilargi said...

    "But had we discovered them 15 years ago, we'd still be riding high on seemingly infinite growth.

    We'd have even bigger McMansions, bigger cars, more televisions, and bigger piles of cheap plastic crap from China."

    How many times do I have to repeat that you don't understand?

    Stoneleigh said...


    Transit availability is indeed a major plus. Of course there has to be sufficient money and organizational control to run it, but that is more likely than a continued BAU availability of private transport. If people have no jobs to go to though, service is very likely to be heavily cut back.

    kjmclark said...

    Whew! Look, there's an easy way to reconcile the credit bubble/peak oil argument, that really should make both sides happy.

    The US, at least, was clearly building up an epic, unsustainable amount of debt and ponzi-style credit over the 90s and 00s. At some point, like all ponzi schemes, this credit mountain was going to collapse in an avalanche of defaults, foreclosures, and deflation. The collapse was inevitable, it was just a matter of time.

    In the early aughts, we began having a problem that either is or looks like what we would expect from peak oil. Oil prices increased from a low around $20 a barrel in the late 90s to $147 a barrel in 1998. This increase in energy costs directly and materially affected main street's ability to keep the game going.

    So while peak oil was not the "cause" of the credit crunch - since the credit bubble was going to burst anyway at some point - those record high oil prices were probably the anvil that broke the camel's back. Peak oil was not the cause, but it was likely the trigger, of the credit crash.

    Looking forward, for the near future (next 3-10yrs), peak oil is not likely to be the biggest concern. The credit crunch has already and will continue to reduce oil demand in the developed world, and may eventually even reduce demand in China. For the near future, the credit crunch and likely deflation will be much bigger factors.

    However, in the long run, peak oil will be a significant problem. The ability of the US and other wealthy countries to recover from this credit crunch will be limited in part by energy prices, which are likely to increase as demand increases, since energy supply will be extremely unlikely to increase significantly.

    Ilargi said...


    "However, in the long run, peak oil will be a significant problem."

    And not only that, but A) that's what I said, and B) that's not the topic (see the title).


    Weaseldog said...

    Stoneleigh said... "Weaseldog,
    You mentioned you were writing a paper. I would be interested in reading it. I would like to get into your arguments in more detail than I have time for at the moment."

    I'm still on this. It's not intended to be the quick hack job I normally engage in on the internet. My plan is to spend at least a month working on it in the odd hours. It may go longer.

    I've debated with myself over the last few days whether I should take on this as book length project.

    mikel paul said...

    It's simple. Something for nothing. It caught up to all of us.
    IM Nobody and his sidekick Tonto VK get a 9.8 (I deduct .2 for neither of them demanding we write WTFU a thousand times on the blackboard).
    Comparitively speaking and directed to those of you who will surely continue into the next life in search of external blame for that too, decoder rings are the finest contemporary invention ever created (following the earlier two sticks rubbing and the tree limb in hand).
    At least Stone and Ilargi know and explain the difference between why it is and what it is.
    Get your humanity on folks. What matters is waking up.

    Stoneleigh said...


    If you'd like to discuss it, by all means drop me a line at theautomaticearth(at)gmail(dot)com

    Weaseldog said...

    Ilargi said... "weaselgod

    "We keep saying 'triggered' or words to that effect.

    You and Ilargi keeping using the word 'caused'."

    Who is we? And what sort of semantics arguments are these? Peak oil neither caused nor triggered the financial collapse, if you will. If you can't get that much out of what i wrote, maybe you haven't really read it all that well."

    The meaning of words is very important. I'm surprised you're not wholly in agreement on that point.

    Thank you for the clarification.

    "But had we discovered them 15 years ago, we'd still be riding high on seemingly infinite growth.

    We'd have even bigger McMansions, bigger cars, more televisions, and bigger piles of cheap plastic crap from China."

    How many times do I have to repeat that you don't understand?

    You gave a three time frame for the discovery of these fields. This year, next year and last year.

    Once discovered, it takes many years to bring a supergiant field up to peak production. i thought this point was salient to your argument. After all, our current situation would of course be the same, whether we discover new fields next year or not. If we discovered 826 Saudi Arabias last year, I'd expect some incredible mania in the financial markets.

    Now if I understand your position on Ponzi Schemes...

    Had we experienced several decades of continuing robust energy growth without interruption, the housing boom and bust, along with the derivative bust would've occurred in exactly the same time frame and in exactly the same severity.

    This is because these events have occurred in a system that is wholly independent of the physical systems, that other parts of the economy rely on.

    Further it's your contention that Ponzi Schemes fail on their own and cannot be triggered to fail early by external events.

    Am i getting closer to understanding what you are saying? Or have I completely missed it again?

    zander said...

    Hi Stoneleigh,

    Posted this earlier then realised it would be in the middle of the night for you:

    "aggravating a net energy cliff ......

    When the finance crisis ends/stabilises, and supply has been greatly reduced due to dearth of investment, demand will slowly pick up until once again it reaches limits, which will have a much lower ceiling due to said supply restraints right?

    In your opinion what will happen then?, will the economy re-crash bringing down oil demand and prices with it, or will the economy re-crash but demand and prices stay up because of supply shortage? or will oil prices go up indefinitely regardless of a re-crash?


    Phlogiston Água de Beber said...

    Unlike The Buzzard of Paradise, I was a TODler long ago when it was mostly just Goose, HO, Ianqui and Super G. Nobody had yet heard of Stoneleigh or Ilargi. I learned almost everything I know about oil there. They really know oil there. I fully embraced the mantra that past peak, everything was headed down hill.

    Unfortunately, while the contributors were high quality, the commentariat all too quickly degenerated to a level of rudeness entirely unworthy of the blog's mission. It would appear that having nothing new left to prove, TOD has nominated itself to be the Saudi Arabia of OREB, the Organization of Rudeness Exporting Blogs. That's the trouble with Barbarians. They can't be satisfied with just ruling the forest. They simply must go and sack Rome.

    TAE has (had?) IMHO, about the best class of commentors on the web, even in spite of my presence. Once again it's being amply demonstrated that no good deed will go unpunished.

    So listen up Drummers! Oil and the oil biz are on and of this world, which means they are part and parcel of the ponzi, both up and down. There are other actors that could come out for a bow as well. Like, for instance, computers, credit cards, even the lowly pneumatic nail gun played a not insignificant role.

    It is not possible to identify exactly which raindrop initiated the mudslide. What can be seen, is that when it's over the road to the rosy future won't just be closed, it will be gone.

    Speaking of which, I think I'll now do my best Chuck Norris imitation. Why don't you TODlers drift back on over to the forest. When we want your opinion, we'll come over there and beat it out of you. :)

    scrofulous said...

    You don't understand ponzi schemes. All ponzis implode.

    As do we all -- just mere ponzis, and all our little lives are rounded with an implode.

    Ponzis are not only financial but organic and universal. and the stuff life is made of.

    Phlogiston Água de Beber said...

    @ mikel paul

    That sort of recognition is an honor I'm certain I don't deserve. I am flabbergasted to learn that decoder rings rank up there with rubbing sticks. Who knew?

    I make it a policy never to issue WTFU's. I was carefully taught to let sleeping dogs lie. But, tell you what, give my handsome and extremely bright Grandson a 10 and I'll take a 9.6. Deal?

    BTW, are you available to be a sidekick? I'm starting a collection. :)

    Ilargi said...

    "Further it's your contention that Ponzi Schemes fail on their own and cannot be triggered to fail early by external events."

    I never said anything like that, you're just making it up.

    "Am i getting closer to understanding what you are saying? "

    Well, apparently not. But then, how could you if you can't (or won't?) read what it actually written?


    snuffy said...


    I think I will just keep my head down,and read both sides,and make no comments.It is interesting to see a whole bunch of fairly sharp folks discuss a topic...and beat it to death with logic


    $$$Dollar$$$ said...

    Stoneleigh - Ironically, any major city in the United States with metro (DC as a perfect example, where I live) would be considered "the center" and therefore should hold up better in terms of retaining mass transport. Do you disagree?

    Stoneleigh said...


    When the finance crisis ends/stabilises, and supply has been greatly reduced due to dearth of investment, demand will slowly pick up until once again it reaches limits, which will have a much lower ceiling due to said supply restraints right?

    In your opinion what will happen then?, will the economy re-crash bringing down oil demand and prices with it, or will the economy re-crash but demand and prices stay up because of supply shortage? or will oil prices go up indefinitely regardless of a re-crash?

    Past a certain point it is very difficult to see with any prospect of accuracy. If all else were to remain the same (which of course it won't), and oil was just another commodity (which it isn't), then you would expect a repeated boom and bust cycle.

    These days though, oil IS hegemonic power. The perception of scarcity on the international stage will drive a resource grab. I think we'll see a huge demand bust, followed by a supply collapse, and that will be grounds for the end of fungible oil.

    I don't see a global market for oil surviving. It will be just too valuable to be readily available. I fully expect a collapse in all manner of international trade for a while, but I don't think oil as a market commodity comes back afterwards, even if other things do. I think it will either be tied up in bilateral contracts or fought over and under military control. Either way that would mean it wouldn't be available for use by ordinary people. Economic activity will be limited by having to run on other sources of energy which will also be scarce, and, as Jim Kunstler is fond of saying, the happy motoring lifestyle is over.

    Weaseldog said...

    Ilargi said... "Further it's your contention that Ponzi Schemes fail on their own and cannot be triggered to fail early by external events."

    I never said anything like that, you're just making it up.

    "Am i getting closer to understanding what you are saying? "

    Well, apparently not. But then, how could you if you can't (or won't?) read what it actually written?

    You've continually misrepresented what I write. To some degree, I've used that as a clue as to understanding what you're trying to express.

    I really thought you were trying to argue that these financial shenanigans exist separately from the material world, where forces are driven by energy and matter.

    That energy availability has no effect on them, and thus events driven by energy have no effect.

    I admit, at this time I really have no idea what your position is in this matter. It seems to either highly compartmentalized or contradictory from my viewpoint. The cat is neither dead nor alive...

    VK said...

    @Weaseldog, Gylangirl

    In 1981, the yearly average price of crude oil was $35 or so, after the oil shock.

    Adjusted for inflation in 2009 using offical US govt data. we have crude oil priced at $82.61 in today's dollars.

    Now the US govt understated inflation massively in the intervening years with such obscurations as the Owner's equivalent rent, hedonics and the substititution effect.

    College and healthcare costs went up at twice or thrice the national inflation rate and home prices shot up as well during the bubble.

    So at 70 bucks a gallon, the price of oil is lower than it was in 1981. And if they only computed inflation correctly we'd find the 2008 peak was no peak at all.

    Now the US imports 15Million or so barrels of crude oil per day, average price in 2008 was $100. So for 1 year, the cost of crude oil imports for the US was $548 Billion.

    In the 2007-2009 Leg 1 down, US households lost 13 Trillion in wealth.

    So what weighs more here? The financial losses of 13 Trillion or the fact that the import bill maybe doubled so that they had to cough up $250 Bn more.

    The financial bailout of AIG cost $182 Bn and the Greece fiasco is set to cost $410 Bn to the EU if bloomberg is to be believed.

    Peak oil just ain't as important for now. Down the line, sure! It's the big kahuna, Jay Hanson is so going to be right. Right now, oil is small fry.

    Stoneleigh said...

    El G,

    IMO, the peaking of crude to $147/barrel had nothing to do with any facts on the ground or under the ground. It was a flight to "physical safety" which included all classes of commodities, but oil was must affected because it was deemed the master commodity.

    There are a couple of very important points being made here, namely that perception rather than reality drives prices, and that herding behaviour drives public perception independently of reality.

    The public perception of both peak oil and climate change, for instance, has nothing to do with the actual science, which most people have never even been exposed to. The public either believes or disbelieves these things based on received wisdom, which changes with a collective state of optimism versus pessimism.

    We here have mostly seen the science surrounding peak oil. I find it to be highly credible, to the point where I regard peak oil as fact. I can still analyze peak oil as a human herding phenomenon as well though, as this is an entirely separate issue.

    The oil price peak was driven by the perception of scarcity. Commodity tops, like equity bottoms are typically driven by fear, which is why they tend to be sharp. We saw a classic run-up in price that at that time had little to do with actual scarcity. That actual scarcity is our future, but it is not our present, even though we have seen another (lesser) run up in price. IMO we will see the oil price fall with equities, precious metals, others commodities, collectibles, real estate etc, while the purchasing power of cash skyrockets.

    The effects of peak oil will be felt after the deleveraging and demand destruction phase, primarily as a result of perceived scarcity at the imperial level leading to a resource grab. Above ground factors will probably prevent us from ever being able to identify a clear geological limit to what we might have achieved in an ideal world. A resource grab would mean far less available information, when we would need far more to identify exactly where we would be on Hubbert's curve at any given time.

    Phlogiston Água de Beber said...

    @ snuffy

    Hey, if you keep your head down, how are you gonna take the body count? Now that Charon is hiring, they'll disappear almost as soon as they expire.

    Heck, if you don't want to take a side, attack both sides. Logic torpedoes be damned, full speed ahead! :)

    Stoneleigh said...


    It may depend on the local economy, and whether there would be the ridership to support transit. All kinds of centralized municipal services could be threatened when municipalities hit the wall, and they're headed for it at high speed. My guess is that some kind of service would survive, but it would probably be much less reliable and convenient than it is now.

    el gallinazo said...

    Re Austin Texas airplane suicide incident into the IRS building

    Since the FBI took down Joe Stack's blog site with his "note," Zero Hedge is performing a service by reposting it.

    I would imagine that anything which the FBI doesn't want us to read should be read. The first American suicide bomber of the modern era. I guess it is fitting that it be done with a small private plane. It's all very sad and bound to get sadder. The first violent strike back against the corrupt Empire from inside the Empire. Of course it will only accelerate the intensification of the police state. We will be assimilated ( though a case can be made that it happened decades ago.) However, reading the note indicates that Joe Stack was not a dummy.

    I must be losing my edge along with my tin foil collection, because many of the ZH commentariat figured it was another false flag operation. I can't see it unless Obama uses it as an excuse to invade Texas for its oil resources - then I'll buy it.

    VK said...

    @ Weaseldog,

    Say it ain't so!! Say it ain't so!

    But Peak Oil ended industrial growth, while the derivatives and other financial shenanigans continued.

    Industrial growth declined in America. The rest of the world was/ is busily expanding to cater for future demand and mind you Chinese production is really inefficient resource wise compared to Japan, Germany, the US.

    The chinese have factories lined up coast, to coast. 5 x 5 cubicles of office space for every man, women and child in the country. Enough office space under construction to equal 6,800 burj khalifas (160 story tower in Dubai).

    Factories, plants and what not's have been popping up all over the world - Brazil, China, India, Russia etc all rapidly industrialized and more than made up for the decline in the US.

    Energy efficiency also greatly improved since the oil shocks of the 1970's. One gets more bang from a joule now than in the 70's except if you happen to drive a car in America.

    mikel paul said...

    The last club I joined (the first and last) didn't turn out so well. Another one of those grail thingies.
    I have a process. It does not include being right or having the answer. Plausibilities are my weakness (among many other 'what's that taste like?" attributes) and alternatives, not solutions, get my attention. I don't keep what I know in a bank and what I do not know has shone on me most of the light that has guided me (D cells notwithstanding).
    Funny how all this bubbly water finds its level here.
    And thank you. It is nice indeed to be noticed and be good at it too (a trait VK seems to share with you). However you wish to redo the score is fine by me. I don't look for nor care to crown anyone a winner, I actually much prefer not keeping score. Always have. When no one's looking is the best time to do your best.
    But I am, in all my imperfection, really here.

    Weaseldog said...

    VK said... "@Weaseldog, Gylangirl

    In 1981, the yearly average price of crude oil was $35 or so, after the oil shock."

    I appreciate what your saying on the prices.

    I don;t however think that's the really important part of the equation.

    It's the availability of oil that matters. The price will bounce around to smooth out the supply and demand relationship. If supply is dropping, then it's killing demand by destroying businesses.

    If you cut the flow of fuel to an engine, it's ability to do work is diminished. What you pay for the fuel, doesn't matter to the engine. All that matters to it, is the quantity and quality of fuel.

    Now in economics, price does matter. But as I argued earlier, price simply defines which players participate in the market, and how they participate.

    in the current economic environment, the industrial players have been severely weakened. Their credit lines diminished. Their ability to absorb losses is declining. So swings in price have a more dramatic effect on them, than in times when the economy was more robust.

    el gallinazo said...

    For what it's worth:

    The Fed just raised the discount rate from 0.5% to 0.75%.

    Phlogiston Água de Beber said...


    Bringing together in one sentence the 70's and American cars is a serious breach of good manners. You need to go stand in the corner for awhile Grandson.

    All the banging from American cars back then had nothing to do with Mr. Joule. It was entirely due to the Dukes of Detroit refusing to authorize anything remotely resembling good engineering. Probably just to spite them no-good enviromentalists.

    Thankfully, American motorists were rescued from automotive hell by heroic Asians with their despicable work ethic and intelligent management. Sadly, it now appears that they have engaged in unprotected industrial intercourse with us and have acquired the bogus-engineering disability. What a bummer!

    Weaseldog said...

    VK said... "@ Weaseldog,

    Say it ain't so!! Say it ain't so!

    But Peak Oil ended industrial growth, while the derivatives and other financial shenanigans continued.

    Industrial growth declined in America. The rest of the world was/ is busily expanding to cater for future demand and mind you Chinese production is really inefficient resource wise compared to Japan, Germany, the US."

    That's right. since oil peaked in the US in the early 1970s, there's been a continuous flight of industry to locations where energy locally cheaper and more abundant. we saw this accelerate in 2000, when DOW and DuPont began moving their operations to Asia in anticipation of a natural gas squeeze in the USA. We can thank the flight of industry for keeping our lighting and heating bills relatively low, even as we suffer the economic losses.

    But growth in those countries will hit the wall if other nations don't reduce their consumption. It's not even a zero sum game anymore. The world is in an energy decline. And if these nations have spare capacity to free up through efficiency improvements, that will only buy them a little time.

    Bryan McNett said...

    The energy boom-bust cycle is a high-amplitude low-frequency wave. The financial boom-bust cycle is a low-amplitude high-frequency wave.

    Peak oil happened in 2005, but since the decline has been so slow, nothing visible crashed as a result. It will ultimately crash everything into rubble *** in slow motion ***.

    The financial peak happened in 2007, and the decline has been fast enough to watch and make comment with some certainty.

    I can't see any relationship between peak oil and the finance crash. There have been very many finance crashes during the long slow climb to peak oil, and there will be many more on the way back down.

    Lack of oil will limit the scope of our adventures going forward, but the business boom-bust cycle will continue as usual.

    Ilargi said...


    You're a genius. Without even knowing it, you just gave us (drumroll):

    The Dukes of Moral Hazard


    Phlogiston Água de Beber said...

    Mr. Ilargi, sir. You do me a great honor. But, cool it with the genius talk. It is not true and conflicts with my attempt to convince your esteemed co-host that I am simply not a dummy. :)

    In a few minutes, I shall depart and retire to my favorite den of iniquity, where I shall fog my not-a-genius mind with a little Canadian Mist.

    @ mikel paul

    It's not a club, there is no application form, no rules, no obligations, no uniform and no meeting place, except here.

    You're IN!

    @ VK

    Thanks to mikel's indifference, you're now a 10.0, Whoohoo!

    carpe diem said...

    LA Council orders 3000 more city jobs cut 'by any means necessary'.

    Surprise surprise.

    VK said...

    @ Weaseldog

    That's right. since oil peaked in the US in the early 1970s, there's been a continuous flight of industry to locations where energy locally cheaper and more abundant.

    I disagree entirely. Two words to make my case below.

    Japan. Germany.

    acomfort said...

    Maybe peak oil is not the driving force behind the present financial collapse but likely played a role in triggering it.

    When the oil price went over $140 nearly every CEO and CFO in the world knew their investments weren’t going to give them the returns they had predicted.

    From this knowledge they knew that their profits would drop.

    From this knowledge they would halt many planned future investments.

    From this knowledge investors would know that many of their bets were off course.

    When everyone in the world saw the price of oil hit $147 this would change how the financial world did it’s business . Peak oil could have been the what started the collapse of the financial system even if it wasn’t the driving force.

    KLR said...

    Debt or peak oil? What is this, voting season?

    Some pertinent Seinfeld dialogue:

    Elaine: "You know that just admitting a man is handsome doesn't necessarily make you a homosexual."

    George: "It doesn't help"

    andrew said...

    The banks and the wealthy people now in full control of the United States of America are petrified at the statement Joe Stack left behind. That's why their FBI has tried to bury it.

    Here's an excerpt, "I remember reading about the stock market crash before the "great" depression and how there were wealthy bankers and businessmen jumping out of windows when they realized they screwed up and lost everything. Isn't it ironic how far we've come in 60 years in this country that they now know how to fix that little economic problem; they just steal from the middle class (who doesn't have any say in it, elections are a joke) to cover their asses and it's "business-as-usual". Now when the wealthy fuck up, the poor get to die for the mistakes... isn't that a clever, tidy solution.

    As government agencies go, the FAA is often justifiably referred to as a tombstone agency, though they are hardly alone. The recent presidential puppet GW Bush and his cronies in their eight years certainly reinforced for all of us that this criticism rings equally true for all of the government. Nothing changes unless there is a body count (unless it is in the interest of the wealthy sows at the government trough). In a government full of hypocrites from top to bottom, life is as cheap as their lies and their self-serving laws.

    I know I'm hardly the first one to decide I have had all I can stand. It has always been a myth that people have stopped dying for their freedom in this country, and it isn't limited to the blacks, and poor immigrants. I know there have been countless before me and there are sure to be as many after. But I also know that by not adding my body to the count, I insure nothing will change. I choose to not keep looking over my shoulder at "big brother" while he strips my carcass, I choose not to ignore what is going on all around me, I choose not to pretend that business as usual won't continue; I have just had enough."

    This was no Tea Party patriot! Joe Stack was a cold-blooded revolutionary.

    Frank said...


    I am sincerely trying to follow you here, as I believe are Gail and Weaseldog. Perhaps I've finally figured it out:

    "No matter that the first bits of the financial ponzi started to implode in 3Q 2007 (subprime, DOW), as a whole it continued for another year, finally topping in the commodity (including but not limited to oil) blow off in June-July of 2008. Two months later it reached the point that Hank Paulson was able to threaten martial law.

    No matter how much you've written on the subject, that is the first coherent version I've been able to tease out, and my confidence that I finally understand is still not high.

    If I am correct about what you're saying, I still have concerns:

    1. None of production, consumption nor price has followed the trajectory you predicted. While did hit $31 in Q4 08, it quickly returned to 50, and then spent most of 09 at $80ish.

    This because, unlike being 'flat out', which would have been at least 85 milling bpd, production fell to 83 (OPEC almost worked?), and consumption also stabilized at 83 rather than being 81 as you claimed a year ago.

    2. Your reiterated analysis including only the direct costs of gasoline, which even in the US is buffered by nontrivial taxation, and ignoring all the knock on effects of energy costs for fertilizer, steel, commodity transportation etc. I've seen several analyses that did allow for those effects and in no case were they less than the direct gasoline costs, and usually much more.

    3. Stoneleigh's claim that within 5 years ordinary folk will not be able to afford oil at all. I can buy this only if demand holds up to match the ongoing capacity declines. If there is an imminent sharp 20-30% drop in demand, as Stoneleigh also predicts, then in five years there still will enough cheap capacity for even want-to-be working stiffs to buy a gallon or two a week.

    I am not being intentionally obtuse, but it has taken me a year to come up with even a coherent hypothesis about what you mean, and as you can see, I still don't get the details.

    NZSanctuary said...

    DIYer said...
    "In the Daily Kos and other popular journals, I keep reading "the stimulus worked", in past tense like that. All we need is a few more million employed and we'll be back to BAU."

    Propaganda 101.

    EconomicDisconnect said...

    Wow, 156 comments and counting!

    I am a bit late, had to work all day, but I remember there was a email list detailing Stoneleigh's speaking engagements and I would be interested in attending if she makes it to Vermont or Maine. I don't like Massachusetts myself ( I live here!) so I can understand her avoiding it!

    VK said...

    @ Frank

    If there is an imminent sharp 20-30% drop in demand, as Stoneleigh also predicts, then in five years there still will enough cheap capacity for even want-to-be working stiffs to buy a gallon or two a week.

    Eh? No, no, no! And I know! I'm from a piss poor country.

    I'll give you an example.

    Germany and Ethiopia have similar populations at 83 Million or so.

    Germany uses 2,600,000 barrels per day.

    Ethiopia uses 37,000 barrels per day.

    If Ethiopian's had enough money, they'd buy more oil. Demand is what you're willing and able to pay for, otherwise Ethiopia would love to be consuming 2 Million barrels plus per day.

    Ethiopian GDP per capita is 900 dollars, German GDP per capita is around 35,000.

    So imagine a glut of cheap oil like there is in Sudan, Nigeria and Angola but there is hardly any purchasing power to support that much oil consumption so they export it abroad to where there is purchasing power and an industrial economy.

    Bryan McNett said...

    >The perception of scarcity on the
    >international stage will drive a
    >resource grab.

    >perceived scarcity at the imperial
    >level leading to a resource grab

    This resource grab has been ongoing for more than a century.

    A 1944 U.S. State Department memo called oil “a stupendous source of strategic power, and one of the greatest material prizes in world history.”

    The change will be in how the ongoing resource grab is sold to the public. The violence will need to get far larger and indiscriminate. The cover of "nation-building" will be changed out for something more plausible as things unwind.

    ogardener said...

    18 February 2010

    Joe Stack, author of the statement below, is reported to have crashed his plane this morning into a building housing the Internal Revenue Service in Austin, TX.

    Joe Stack's written statement.

    Phlogiston Água de Beber said...

    Hey, everybody! I'm back with a moderately misted brain. That should certainly guarantee no more ingenuity from me tonight. :)

    I've been wondering about something and this seems like a good time to ask. If everyone was blessed with equal certainty that peak oil was the source of all our depressing troubles, why pray tell would that really matter? As opposed to, oh let's say Al Gore's Inconvenient Truth. Would the depression somehow be less horrible? It doesn't seem like it would make a healthy recovery any more likely. I'm just wondering why this has become such a cause célèbre?

    ParkerMama said...

    This is the first post that Ilargi has written that I actually understood start to finish.

    Either he's dumbing down, or I'm getting smarter.

    scrofulous said...

    Is this the a safe injection site for 'I gotta be right' addicts?

    EconomicDisconnect said...

    What if we were all equal but only by intrusion:
    Harrison Bergeron:
    A misunderstood essay.
    Hint: It is anti-intrusion.

    Jim R said...

    The Fed just raised the discount rate from 0.5% to 0.75%.

    ... just got back from Maudie's and we had not 1 but 2 margaritas this evening. The booze bill was more than the food. ...

    Wanted everyone to know I'm ok, if that IRS nut had steered his plane about four or five tall buildings to the right he would've hit mine. We heard the sirens, looked out the window and saw the smoke, and then started getting the news.

    I have nothing more to say that hasn't been said ...

    ccpo said...

    Maybe peak oil is not the driving force behind the present financial collapse but likely played a role in triggering it.

    When the oil price went over $140 nearly every CEO and CFO in the world knew their investments weren’t going to give them the returns they had predicted.

    More pertinently, having spent a trillion to 1.5 trillion more for oil - not including follow-on costs - commuters were hammered. People living paycheck to paycheck don't have wiggle room. When you drive two hours a day, it adds up.

    Someone commuting 70 miles a day, as I did for four years, you could have been spending as much as $180 extra a month for gas. If you lived in the northeast, you'd have more expensive fuel in the cold months, as well.

    At least one study done on this showed the implosion started with the suburbs. Sure, that's where a lot of marginal mortgages were made, but the extra costs sure as heck helped pop that bubble.

    Yes, the simplest look at the timeline probably starts at the Glass-Steagall repeal and flows through two wars (at least one of which is a direct result of PO) and the Bush/Greenspan idiocy, the Alphabet Craziness on Wall Street to the giant POP we all heard.

    But to dismiss the role of oil costs is to have your fingers in your ears singing La-la-la-la-la...


    Bigelow said...

    “Nearly half of all voters believe that people randomly selected from the phone book could do as good a job as the current Congress.”
    "Only 21% Say U.S. Government Has Consent of the Governed ... Those with the Lowest Incomes are the Most Skeptical" ZeroHedge

    “Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out.”
    Wall Street's Bailout Hustle MATT TAIBBI, RollingStone

    “The following documentary from Dutch channel Vpro is a must watch for all who still believe there is something else to this market than pure low-volume, math-modelled momentum chasing courtesy of Wall Street's quant community (which is still happily front-running whale orders courtesy of such presumably banned inventions as Flash trading which the SEC bitched about then quickly swept under the rug). With appearances by Paul Wilmott, Mike Osinski, Emanuel Derman and Zero Hedge friend Matt Goldstein, the clip provides a much needed refresh course into the facts behind the biggest risk to the market since the 1987 crash.”
    Quants: Wall Street's Alchemists ZeroHedge

    Starcade said...

    I would really be looking at this weekend strongly, whether you believe in the numerologists of the NWO or not.

    This has the potential to go explosive in a God-awful hurry.

    You have the Greece-EU situation, you have the Fed and options expiry, you have the beginnings of a full-out violent citizens' revolt (which is about the only thing which _can_ bring about true change in this country)...

    ... and you have the Clusterf*** Olympics, which Jerry Springer would be proud of for the train-wreck it's becoming.

    N. Zero said...

    This is one of the best collection of comments I've ever read about any subject. TAE should be very proud to have such thoughtful readers.

    Blindweb, in particular, wrote something not to be overlooked: "U.S. oil production peaked around 1970. In a broad sense the entire foreign policy and economic direction of the U.S. has been directed by oil since that point. To maintain its edge over the rest of the world the U.S. had to increasingly rely on fraudulent methods. (derivatives and wars of aggression)"

    BINGO! Much of the corrupt financial shenanigans perpetrated by the U.S. at the expense of other nations has been because of military might which has been particularly interested in controlling fuel supplies. The "schemes" have really been nothing more than SIMPLE EXTORTION. You give us this, you accept this IOU, we'll be friends and try to find someone even weaker for you to prey on. The notion of getting paid back was really just a pleasantry.

    To a lesser extent, and with less relation to peak oil, the $trillion+ bailouts have been the same thing -- extortion of the American people by the state and it's corporate sponsors. Many people recognized that these people in charge never had good plans or ways to return a profit but... who has a choice but to accept the offered deal? And then when it all gets stolen right in front of us the corruption is codified and the benefactors rest comfortably behind the protection of the state and its police.

    And while I agree with Weaseldog and kjmclark that the schemes may have burst early because of spiking fuel costs & concerns, because of the aforementioned military aspect I disagree that "peak oil is not likely to be the biggest concern" in the next ten years or so. Underlying everything from war, to trade with China, to domestic tranquility, is the focus on near and long term access to oil. Ponzi schemes and such may cause stress, but oil brings the food to the grocery stores and holds up the international system (such as it is).

    Unknown said...

    I thionk you are over selling this one Ilargi.

    I agree that the debt bomb was always going to collapse of its own weight.

    The contribution of PO was that when prices spiked they did enough damage both to confidence and to those businesses such as airlines and tourism that depend on cheap, plentiful oil that it triggered the collapse a bit earlier than it would otherwise have done.

    PO driven price spikes were the Black Swan that landed on the house of (credit) cards.

    Ilargi said...

    "ParkerMama said...
    This is the first post that Ilargi has written that I actually understood start to finish.

    Either he's dumbing down, or I'm getting smarter."

    Apologies for the confusion this may have caused. Rest assured, I'll work on that one.

    bosuncookie said...

    I.M. Nobody, you made my morning! Anybody that can bring Nasrudin in to comment upon Peak Oil and Financial Crisis is to be applauded! Bravo!

    HappySurfer said...

    If you read the following blog by George Mobus ( about halfway down page)

    The Dynamics of an Abstract Economic System
    George Mobus

    He shows how energy flows through a system and although the current acute gyrations can be ascribed to credit withdrawl, he shows how energy flows have an "out of phase" correlation to the ability to repay debt and asset growth

    see esp. graph 2

    Hombre said...

    We Hoosiers aren't real smart, but we are practical folks and often know when to keep quiet and just listen.
    I have appreciated just sitting back and enjoying the articulate TAE comment section, very interesting for the most part I must say.
    OK, so even some very smart people here can't agree on the "trigger" or the "cause" of the Great Recession. So... it's not really a necessary, or even a primary conclusion. The value of the discussion was/is in the discussion itself.
    "Predicaments have no solutions."

    Phlogiston Água de Beber said...


    Thank you very much. What I could use this morning is for Nasrudin to tell me why the furnace failed last night. :)

    @ Ilargi

    Here are some more one-liners for you to consider, just in case Dukes of Moral Hazzard gets a little stale.

    Princes of Pension Pilferage

    Barons of Bogus Bonds

    Earls of Exaggerated Valuations

    Knights of the Tilted Table

    Tom Therramus said...

    Earl said...

    "PO driven price spikes were the Black Swan that landed on the house of (credit) cards."

    Nice summary of mechanism. That's it in a nutshell. Its not the high cost of gas, it is the onset of whipsawing in oil price associated with Peak Oil that creates market instabilities. Unpredictability in oil price has knock on effects on inflation rate. But most importantly of all it freaks out financial professionals, who can not get a handle on investment risks.

    Some further thoughts along these lines.

    1. Spikes in price and/or supply are characteristic of a resource in terminal decline. A good example of this was whalebone , a material used for hooped dresses and corsets during the 19th century. The price of whalebone underwent large fluctuations as the whale species from which it came were hunted to near extinction.

    2. The 2008 oil price surge was one in a series of spikes in oil price instability that PREDATE the financial crisis of 2008 by at least 6 years. For example, think the run-up in gas prices that was attributed to Hurricane Katrina. A chart of this whipsawing instability in oil price can be found here
    Oil Spikes 2000-2008

    3. Perhaps one of the best and least recognized examples of an oil price volatility spike in action is the mysterious Black Monday stock market crash of 1987. No cause has ever been identified for Black Monday. It occurred in a time of steady and positive GDP growth. However, what is missed by many economists searching for explanations of this event is that just prior to the Black Monday crash there had been a huge and unexpected surge in oil price volatility triggered by a temporary collapse of the OPEC cartel.

    As we say down South... its not the heat that gets you, its the humidity.

    Tom Therramus

    Martin said...

    Ilargi: You do not have to make a choice of evils, you could simply provide an additional full text feed.

    VK said...

    @ N. Zero

    Ponzi schemes and such may cause stress, but oil brings the food to the grocery stores and holds up the international system (such as it is).


    The role of credit is far more important in the short run. Credit and oil are equally important to the Intl. System. The difference is that one can recover from a credit crisis over many years, you can't recover from peak oil.

    Also credit contraction can cause the system to fall apart faster than most people realize.

    In Sept 2008, the US banking system was about 6 hours away from collapse. Can you imagine waking up one fine morning and not being able to access your bank account, can't pay your staff, can't buy anything on credit, can't pay your grocery bills as the system has gone down.

    Such a situation is coming and in a short relative time frame. The Intl shipping, finance, transport systems etc all depend on credit.

    Credit is like oxygen and oil is like blood. Without oxygen or blood one is likely to die. Just that without oxygen for even 1 minute, one is likely to die very quickly.

    The global economy functions on credit and is far more important than most realize. Accelerating contraction will mean shortages, deep wage cuts, fall in purchasing power and purchasing choice.

    Oil Shmoil, oil is useless without an industrial economy with a functioning credit system.

    el gallinazo said...

    The question came up a bit earlier on this posting as to whether, on a practically level, does it make a rat's ass of difference whether the economic decline was caused or triggered by peak oil. Or, OTOH, it is another one of those economically theological arguments involving angels and pinheads, and as they would say at the dying mall lands, "Like we're all screwed anyway, dude."

    After giving this some thought, lubricated by the cheapest Panama rum (or ron as it is called here), I would think that there are two differences, one in the near future and one in the more distance future.

    But first we will have to deal with the question of what is is, and I don't have Slick Willie as a resource. This is the question of causation or triggeration :-) And it leads to a very important prediction - namely the shape of the collapse. On the ordinate you might have asset values or production (GDP is only good for making fudge brownies) and on the abscissa you have time.

    I lived in Colorado for several years before moving to a tiny tropical island, but I never became an expert on avalanches. But I would assume that if one were triggered endogenously or by a cannon, it would make little to no difference in the result a few milliseconds after it started. So with the collapse we are in right now. If the driving energy came from the imbalances of the global financial Ponzi scheme, whether the trigger were $147 oil or excessively short miniskirts distracting the quants on Wall Street makes little difference. After the avalanche starts, like all Ponzi schemes in recorded history, the collapse will be dramatic and abrupt.

    A global economic collapse from peak oil, where a financial Ponzi played little or no roll, would have quite a different shape. It would be a slow, sad, fairly linear, highly skewed bell distribution curve - not a virtual cliff. This is a huge practical difference.

    The second factor would be how much recoverable oil is left in the ground if the world ever attempts an economic recovering in which fossil fuels play a major part. The answer to that is if the financial Ponzi were the imbalance driving the collapse, there would be quite a bit more than a slow peak oil depletion, where one could hear a great sucking sound when the straw runs dry.

    Happy motoring!

    Unknown said...
    This comment has been removed by the author.
    Weaseldog said...

    VK said... "I disagree entirely. Two words to make my case below.

    Japan. Germany."

    Can you expand on this?

    South East Asia has abundant natural gas supplies and Germany has access to cheap overland routes for oil, coal and natural gas.

    And besides cheap shipping by ship for Japan, they've also got a government that actually wants it's country to be a world leader in tech industries. In the US, we have a leadership that is dedicated to shipping jobs to these countries.

    Further, if you're going to leave out South Korea, Indonesia, India,and China, then you're just cherry picking.

    Tom Therramus said...

    VK: "Credit is like oxygen and oil is like blood. Without oxygen or blood one is likely to die. Just that without oxygen for even 1 minute, one is likely to die very quickly."

    Curious metaphor. Not quite getting what you're driving at here, but it seems backwards to me. Forgive me if I misconstrue you.

    A pertinent remark from earlier in the discussion went along the lines of:

    The laws of physics were in place long before the laws economics or finance.

    IMO you'all have to heat the pot to make gumbo.

    Tom Therramus

    Weaseldog said...

    I. M. Nobody said... "I've been wondering about something and this seems like a good time to ask. If everyone was blessed with equal certainty that peak oil was the source of all our depressing troubles, why pray tell would that really matter?"

    Understanding brings predictive power. Predictive power allows you to anticipate events. Anticipation can lead to preparation.

    Using my model, I was able to predict the timing of the 2001 market crash and sold all of my stock at the top. Thank goodness for that, because in 2003-2004, I was unable to find much meaningful work.

    Because I saw the housing boom and bailouts coming years in advance, I adjusted my lifestyle accordingly and focused entirely on eliminating my debts.

    Of course in the long run, being prudent with money and keeping debts to a minimum, is a good way to live anyway.

    Phlogiston Água de Beber said...

    @ el gallinazo

    I completely agree that an avalanche is an avalanche and it doesn't matter what broke it loose as far as how it slides.

    What the Oil Drum crowd would apparently prefer that we not remember is that for many years they were not predicting anything like what has happened. There was lots of hand wringing over how third worlders would by now be getting no oil at all. IIRC the general consensus was that Usans would be paying about $10 a gallon right about now.

    Basically, the only thing they were anywhere near right about was dating the peak. It seems that isn't enough glory for them and so the story gets a new ending. I love history, but it's pretty easy to see how a lot of it is fiction.

    Weaseldog said...

    El Gallinazo said, "A global economic collapse from peak oil, where a financial Ponzi played little or no roll, would have quite a different shape. It would be a slow, sad, fairly linear, highly skewed bell distribution curve - not a virtual cliff. This is a huge practical difference."

    I don't know that this is possible in a human managed economy.

    The Ponzi Schemes must occur as a side effect of resource declines. when everything else is spinning out of control, finance wizards can still manipulate the financial systems. This is the only place where they still operate controls when they are in full panic mode.

    Just listen to all of the politico and econo speak, about stimulating growth using monetary mechanisms.

    Ponzi schemes and resource depletion go together like a horse and carriage.

    Ilargi said...

    "Ponzi schemes and resource depletion go together like a horse and carriage."

    Can we stop the blind nonsense now, please? I'd rather not have to do it for you.

    TAE Summary said...

    * "Did Peak Oil Cause the Financial Crisis" should be in the primers and an Olympic event

    * Peak oil and peak credit were unrelated; They are just two ships hitting the fan in the night

    * Peak oil and the financial crisis are not unrelated; They are bastard half brothers both sired by Ronald Reagan while Nancy was at a seance

    * Peak oil was not THE cause, just A cause; The reasons for the financial crisis are many and varied

    * Peak oil didn't cause the financial crisis, it just triggered it; Triggers aren't causes; Triggers don't kill people, .45 ACP 230-grain hollow-point rounds kill people

    * Peak oil didn't pop other bubbles so it couldn't have popped this one

    * Peak oil has popped every bubble with which it was concurrent

    * Peak oil didn't push us into the gorge but it will stop us from climbing out

    * Peak oil did cause the financial crisis for me since I couldn't afford the gas to rob banks

    * Since oil drove the economy peak oil must have cause peak economy; When oil went up in price everything went up in price

    * Energy prices didn't cause the bust; Deflation is in your head, not in your tank

    * Ponzi schemes survive as long as they accelerate; When you're green you're growin', when your ripe you're rottin'; Star Trek proves that infinite energy and gullible Vulcans can keep a ponzi scheme going forever

    * The ponzi house of cards could be brought down by a butterfly, just not the peak oil butterfly

    * Losing your wallet is worse than losing your 401K because the liqour store don't take 401Ks, dude

    * Round things are finite; Gasoline was $4 a gallon in 2008; The stimulus worked

    * This time it's different; All happy bubbles are happy in the same way whereas all unhappy bubbles are unhappy in their own way

    * There is no orderly retreat from a tsunami, avalanche, theatre fire or ponzi collapse

    * Fighting is counterproductive; In TOD we trust; Jane, you ignorant slut

    * We all have blind spots; We all make logic errors; Studies have shown that 90% of the populace is dumber than the other 10%; Occams razor is best at shaving yesterday's stubble

    * Q: Why do Catholics argue with Protestants?
    A: Because the Ayatollah doesn't speak English

    * I would not join any club that would have someone like me for a member

    Phlogiston Água de Beber said...

    @ Weaseldog

    So, you are telling me that the predictions of inevitable doom that I've been making for I guess somewhere around 40 years now must be the product of understanding. I wonder what is was that I understood. It sure wasn't peak oil. I didn't even know such a thing was in the cards until Goose started the Drum.

    I sure could have used that model of yours. I had to learn my lesson about the stock market the Nasrudin way. But, back to your model, what's it predicting now?

    Punxsutawney said...

    A survey of the leading news sites this morning regarding the plane crash yesterday show that it is not as important a story as Tiger Woods. Personally, I think the pilot made some very poor choices in life: (Hint if you want to make your life a living hell in the US, become a tax protester). I’ve seen what happens to these people.

    More importantly his letter and the comments on web sites about it, clearly show that the national government here is rapidly losing its creditability and is clearly being seen as a tool for the wealthy elites.

    As has been mentioned many times here by a certain guy whose name starts with an “I”, I believe this is a sign of the political crisis that is inevitably coming and would expect more lashing out from individuals at wits end.

    Weaseldog said...

    Ilargi said... "Ponzi schemes and resource depletion go together like a horse and carriage."

    Can we stop the blind nonsense now, please? I'd rather not have to do it for you."

    Alright Ilargi. I'll go away.

    Phlogiston Água de Beber said...

    @ TAE Summary

    I see you have taken my advice to snuffy and worked both sides of every issue.

    Well Done!

    ccpo said...

    TAE Summary: Brilliant as ever! Pretty much always gets a smile, even a laugh, out of me.

    Ego likes when I'm included.

    I'm bad; what can I say?


    Greenpa said...

    Just so ya know- not dead here, just cackling a little, and very grateful I do not have any dogs, or gods, in this fight.

    I truly don't much care why. Just want to know what.

    Sure, it's NICE to know why- but it's really not all that necessary.

    I know, heresy. Sosumi.

    VK said...

    @ Weaseldog

    South East Asia has abundant natural gas supplies and Germany has access to cheap overland routes for oil, coal and natural gas.

    I was using the example of first world nations. But me thinks you're forgetting that the US still produces a huge amount of oil, has some of the world's largest reserves of coal and Canada and Mexico have huge energy supplies.

    The fact that the US deindustrialized in terms of jobs (the US still makes more things by volume and dollar value than it did in 1980.) was a strategy not in terms of peak oil but because of the US economic ideology. As the to become and maintain the world's reserve currency, the US must buy more from the world than it consumes.

    As that is the only way to get more dollars 'out' there. The only way a currency can become a reserve currency is by excess circulation. The US in thus process started outsourcing it's manufacturing. No other country can do what it did, it literally stepped on it's own citizens to cater to it's ideology and in the process unleashed Chinese economic growth.

    Japan hardly has any natural energy resources and imports everything, so you are right it was a conscious decision by them to maintain an industrial economy inspite of resource constraints.

    The US could've easily done the same thing but it chose not to, due to the free market ideologies.

    The fact is energy is a long term issue, right now it is irrelevant. US industrial decline can't be explained by peak oil production in the 70's as evidenced by Japan, Germany etc, they kept going regardless even though their energy is more expensive as Europe & Japan have been paying a lot more for it's energy for a long time due to higher taxation.

    It was a national decision, based on ideology more than anything else and the need to get more dollars out there to preserve reserve currency status, so they simply shifted the plants overseas.

    VK said...

    The laws of physics were in place long before the laws economics or finance.

    IMO you'all have to heat the pot to make gumbo.


    Try buying the gumbo without credit?

    Try manufacturing a pot without excess to shipping credit to import the iron ore?

    Try managing cash flows in the iron pot factory without credit?

    Try paying worker salaries when your customers haven't paid you without credit?

    How about transporting and distributing those goods without access to credit?

    Try having a functioning society without credit?

    Complexity is maintained in a society by credit and energy. They are equally important and energy is much less important for now. In the future, YES! Now, it's like Paris Hilton's news articles, a distraction but hardly newsworthy.

    Hombre said...

    I know it's off topic... but... I find it an interesting and compelling contrast in what the public expects and from whom. In this case I am thinking of a president and a sports star.

    A sports star cheats, many times, and when it is discovered, the public expects an elongated contrite public apology and is treated to the same--as per today on CNN and repeated on cable around the world.

    A president (and his administration) perpetrate an agressive war on a foreign country, bringing death and destruction to tens of thousands, and producing an ongoing chaotic and violent environment. And what does the public expect? Are there any consequences?

    OK, I too, condemn Tiger's meanderings which surely hurt and dissappointed a circle of those near and dear to him. Regrettable actions from a young man basking in the limelight of fame. Nothing new I suspect.

    But really, did he drop bombs on cities? Did he shoot civilians (even by mistake)? Does his trifling arrogance compare in any way to the complete overrunning of another land with tanks and planes and the hellish application of "shock and awe!"?

    I am convinced that most of those who still uphold the actions of Bush and Cheney know, deep down, that they are wrong. They have to know it! But they are safe, and secure, and living in a dream world far from the violence and it scares them to death that that would ever change.

    Unknown said...

    @ TAE Summary,

    Truly one of your best! Keep up the good work.

    bluebird said...

    Great discussions today, a lot to read thru, thanks to everyone who contributed. Because credit is so important in today's global economy, as VK posted @12:58, when the financial Ponzi implodes, does that indicate that all credit will immediately stop, at that time? Or will the use of credit slowly wind down as businesses decide not to accept credit any more?

    Stoneleigh said...

    TAE Summary,

    Brilliant. You always make me laugh :)

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