Image above: Famous capitalist and banker J. P. Morgan in top hat on Wall Street. From (http://irrationalgeographic.wordpress.com/2009/10/28/the-giant-and-the-midget).
By Guy McPherson on 31 October 2010 in Nature Bats Last -
(http://guymcpherson.com/2010/10/empire-of-lies)
Benny and the Inkjets are tossing the money around, but it didn’t pump up the industrial economy the last time and QE2 will be no better, even if the next version is expectedly gihugic. He’s destroying the dollar in the process of printing fiat currency, but he cannot keep up with the ongoing economic contraction. Fiat currency is rapidly turning into compost.
Call it Screwflation Nation, for short, and it’s an approach that might lead to a new American Revolution, one that has been criticized even by Peter Orszag, Obama’s former economic adviser. Even McDonald’s is raising prices, for the first time in two decades. And, although government statistics indicate prices are declining, the numbers based on things we actually buy suggest otherwise.
This essay will not go down the rabbit hole of inflation vs. deflation, preferring instead to use the simple, technically incorrect, but well-understood route of equating increasing prices with inflation. The academic ground of inflation vs. deflation has been worked to death with little understanding. If you want to pursue that topic, I encourage you to check in with Mish Shedlock, Nicole Foss, John Embry, Peter Schiff, and Gonzalo Lira (Lira believes hyperinflation has already been triggered).
Rather than chase the tail of terminology, I’ll simply assume that when average folks can no longer afford food and water, economic collapse has occurred. At that point, we needn’t worry about the terms of the debate.
The U.S. industrial economy still faces strong headwinds from the four horsemen of the economic apocalypse: energy, employment, credit, and housing. Ultimately, the U.S. gets to choose from few remaining options. They all spell the end of American Empire: default or hyperinflation seem likely, along with extreme deflation. And although we’re already there, these 23 latter-day doomsayers figured out we’ll be in an economic depression next year.
The oil crunch has arrived, despite OPEC’s lies, and the oil squeeze is running the show. Oil prices are headed up on the perception of global economic growth, according to JP Morgan and a report prepared for the New Zealand Parliament.
Even the International Energy Agency questions whether reserves will fill the gap between supply and demand. They’ve never been so circumspect. Similarly, the United States Geological Survey has infused reality into its estimates by reducing Alaska’s reserves by 90%. Meanwhile, the U.S. military — charged with making sure U.S. consumers have enough crude oil to keep the Hummers running — is feeling the squeeze.
Never mind that we’re still in an economic depression, according to unemployment numbers and other metrics of macroeconomic reality. The United States, and indeed the Organization of Economic Co-Operaton & Development (OECD), is no longer driving the world’s economic bus. And, of course, the entire field of economics is a sham built on a foundation of incorrect assumptions, lies, and misinformation. To call economics the dismal science is to denigrate all legitimate sciences while smearing the word “dismal.”
Is France foreshadowing the rest of the developed world? Will protests in France make it across the pond? Personally, I doubt Americans can be bothered to turn off the television long enough to notice the lies in which they are immersed. But I’ve been wrong a few million times before.
The only question of economic significance now is which event puts the stake in the heart of the industrial economy. At this point, a single tremor, an inopportune echo, an unexpected shift in the winds, and the entire icy edifice will come down like an avalanche.
Will the derivatives explode? They’re still out there, and the exposure of JP Morgan alone exceeds global GDP. Or maybe somebody will notice the actual U.S. government debt is beyond belief, and repayment.
[Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The U.S. is bankrupt.” From (http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/the-scary-actual-us-government-debt/article1773879/)]
Perhaps the big bank death spiral will get it done. Maybe the ongoing, ever-growing foreclosure crisis will bring it all down. The natives are growing restless about that issue. Perhaps a Keynesian liquidity trap will do the trick — and, by the way, we’re already in that trap, and there’s no way out.
Under this scenario, the monetary authority (in our case, the Fed) loses control because long-term interest rates are very low (we’re stuck at zero for the Fed’s foreseeable future, and even the Fed acknowledges they’ve lost control when — in an act of treason — they defer decisions on monetary policy to banks).
Although Benny Bucks have levitated the stock markets until now the impending collapse of those markets, as foretold by insider trading at a sell to buy ratio of 3177 to 1, might be sufficient to terminate the industrial economy. Most stock trades are done robotically, so don’t think stock prices have anything to do with the worth of a company or that the time-tested buy-and-hold strategy is a safe bet. In fact, regular people have already fled the stock markets because the markets no longer reflect economic reality (although, unlike conspiracy theorists such as Charles Hugh Smith, I don’t believe stock-market movements are engineered).
There’s good news elsewhere, too: We’re blowing bubbles faster than an eight-year-old with a fresh pack of Hubba Bubba, as even historians can see, and the collapse of any of those bubbles could sink the imperial ship. Bonds, anyone? There’s a fiscal train wreck on the way in the bond market. Indeed, Ben Bernanke is acting like a possessed zombie intent on destroying the U.S. economy all by himself, through hyperinflation if necessary. Ben, you’re not alone: I’m here to help.
Non-economic phenomena could bring civilization to its knees, too. Most obviously, the ongoing environmental collapse, including profound rates of extinction, could take us with the rest of the living planet. But an overdue electromagnetic pulse from a solar flare — or a nuclear device — could terminate many of the world’s electronic infrastructure instantly. A sufficiently sophisticated Stuxnet-style cyber-attack could do some serious damage, too. On the other hand, civilization could simply starve itself to death.
If the end of American Empire is the silver lining, then continuation of the empire represents the blackest cloud in world history. If Americans would get off their collective lazy asses, they might start a civil war. That’s a big if, and I’m not willing to bet on it.
Additional imperial news includes war crimes perpetrated by U.S. soldiers and the abject shaming of this country by our naked aggression throughout the world. And then covering up the whole stinking mess, just as the oligarch’s presidential administration continues to cover up the environmental effects of the disaster in the Gulf of Mexico. But those problems are about to take care of themselves in the undertow of economic collapse. And even the silver lining bears its own bad news: Peak oil spells peak human population.
Empires are not benevolent. This world has never had a larger, more effective empire than the current one. If you’re cheering for continuation of the age of industry in an overshot world, you’re cheering for more torture, more human suffering, and more human deaths. Needless to say, we’re on opposite sides of this issue.
And if you’re living that comfortable life in the city, regardless how much you recycle, bicycle to work, and tithe at the altar, you still haven’t figured out the immorality of imperial living. Cities are the nadir of civilization, and they have an increasingly short and burning fuse. Furthermore, nothing about our survival as a species matters if we keep adhering to an irredeemable set of living arrangements, even if your city has “walkable” neighborhoods. Who wants to live as if life has no merit?
See also: Ea O Ka Aina: Grifter Nation 10/19/10
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Observe that the upward slope has a lot of interesting structure to it. There are world wars, depressions, imperial collapses, oil embargoes, discoveries of giant oil fields, not to mention the ugly boom and bust cycles that are the bane of capitalist economies (whereas socialist ones have sometimes been able to grow, stagnate and eventually collapse far more gracefully). It is a rugged slope, with cliffs and crevasses, craggy outcrops and steep inclines. Now look at the downward slope: is it not shockingly smooth? Its geologic origin must be completely different from that of the upward slope. It appears to be made up of a single giant moraine, piled to the angle of repose near the top, with some spreading at the base, no doubt due to erosion, with a gradual transition into what appears to be a gently sloping alluvial plain no doubt composed of silt from the runoff, which is then followed by a vast perfectly flat area, which might have been the bottom of an ancient sea. If climbing up to the peak must have required mountaineering techniques, the downward slope looks like it could be negotiated in bathroom slippers. One could do cartwheels all the way down, and be sure of not hitting anything sharp before gently rolling to a stop sometime around 2100.
Mathematically, the upward slope would have to be characterized by some high-order polynomial, whereas the downward slope is just e-t with a little bit of statistical noise. This, you must agree, is extremely suspicious: a natural phenomenon of great complexity that, just when it is forced to stop growing, turns around and becomes as simple as a pile of dirt. Where else have we observed this sort of spontaneous and sudden simplification of a complex, dynamic process? Physical death is sometimes preceded by slow decay, but sooner or later most living things go from living to dead in an abrupt transition. They don't shrivel continuously for decades on end, eventually becoming too small to be observable. And so I like to call this generic and widely accepted Peak Oil case the Rosy Scenario. It's the one in which industrial civilization, instead of keeling over promptly, joins an imaginary retirement community and spends its golden years tethered to a phantom oxygen tank and a phantom colostomy bag.
The really odd thing is that the Rosy Scenario can be quite accurate, under ideal circumstances, when applied to individual countries and oil-producing regions. For instance, suppose one of the world's largest oil producers, which started out with more oil than Saudi Arabia, reaches Peak Oil in, say, 1970, but then promptly goes off the gold standard, foists its paper currency on the rest of the world by backing it up with the threat of force including the possibility of a nuclear first strike, eventually comes to import over 60% of its petroleum, much of it on credit, and, a few decades later, goes bankrupt. Then, over the intervening decades, its domestic oil production would indeed exhibit this wonderfully gentle geologically and technologically constrained curve—up to the point of national bankruptcy.
Past the point of national bankruptcy circumstances are bound to become decidedly non-ideal, but the implications of this remain unclear. Will that hapless country still be able continue borrowing money internationally in order to import enough oil to keep its economy functioning, and, if so, under what terms, and for how much longer? It would be nice to know how this story ends ahead of time, but unfortunately all we can do is wait and see.
But we do have another example (Fig. 3), which may offer some insights into what we mean when we say that circumstances will be “non-ideal.” The country that is currently the world's largest oil producer reached Peak Oil around 1987. Its sclerotic, geriatric, ideologically hidebound, systemically corrupt leadership was unable to grasp the importance of this fact, and just three years later the country was bankrupt and, shortly thereafter, it dissolved politically. In this case, plummeting oil production became the country's leading economic indicator: it plummeted, then the GDP plummeted, then coal and natural gas production plummeted, and a decade later the economy was down 40%. Behind these numbers was a precipitous drop in life expectancy and a pervasive atmosphere of despair in which many lives were either lost or ruined.
But as long as no messy internal or external political or economic factors interfere with the natural depletion curve, the après-Peak predictions of Peak Oil theory do seem to hold. (When I say “ideal circumstances,” I suppose that I must mean circumstances that are ideal from the point of view of sentient though irrational hydrocarbon molecules, whose desire is to be pumped out of the ground and burned up as quickly and efficiently as possible, because it is unclear who else ultimately benefits, but let's not quibble.)
Since the problem of not having enough oil to go around is known to cause all sorts of nasty political and economic problems, and since this is exactly the problem we should expect to encounter soon after the world reaches Peak Oil, the base assumption on which the predictions of Peak Oil theory for global oil production rest is not realistic. The specialists who are in a position to predict Peak Oil are not able to gauge its economic and political effects, and so all they can do is give us the Rosy Scenario as an ultimate upper bound. However, this caveat is not spelled out as clearly as it should be. The result is that we might as well be working with a theory which predicts that, once global Peak Oil is reached, delicious chocolate petits fours will spontaneously bake themselves into existence and fly into our mouths on dainty gossamer wings of marzipan.
The Peak Oil theory-based explanation is that while the upward slope is economically constrained, the downward slope is only constrained by the geology of depleting oil reservoirs and by oil extraction technology, which is subject to thermodynamic limits and cannot improve forever without encountering diminishing, then negative, returns. While the oil supply is growing, oil demand fluctuates, resulting in numerous ups and downs in production superimposed on the overall upward trend as production tries to match demand. But on the downward side, demand permanently exceeds supply, and so every barrel of oil that can be produced at each instant will be produced.
When extrapolating the aftermath of local oil production declines to global Peak Oil, the unstated assumption is that the global economy will continue to function with uncanny smoothness at the level of demand that can be met, while unmet demand will be cleanly washed off into the gutter by a strong, steady stream of economic and political nonsense. This will all sort itself out spontaneously with rational market participants responding to price signals and deciding at each instant whether they should:
A. continue consuming oil in the manner to which they have become accustomed, or
B. quietly wander off and die without calling attention to themselves or making a fuss.
Where else have we seen such flawless organization, in situations where a key commodity—like, say, food, or drinking water—becomes critically scarce? Anywhere? Anywhere at all?
And I suppose a further unstated assumption is that a shrinking economy (what with all this unmet demand and resulting attrition among market participants) can function much as a growing one does, without suffering a financial collapse. Special financial instruments called credit-default swaps can be used as a hedge against increased counterparty risk from your counterparties dying in droves from self-inflicted wounds, although after a while these instruments would become a bit too expensive. But I don't suppose that much of anything can be done about the economic growth projections baked into every single financial plan at every level.
Once these turn out to be unfounded, then all the debt pyramids will come tumbling down. And since a fiat currency (such as the US Dollar) is composed of debt—credit advanced based on a promise of future growth—it is unclear how and with what the remaining oil will continue to be purchased. The end of growth is an imponderable; start talking about it, and everyone suddenly decides that it's lunchtime and starts ordering drinks. At least the French have a proper word for it: décroissance (literally, “de-growth”); here in the anglophone world all we can do is gibber and mumble about “double-dips.” Perhaps Geithner and Bernanke can come up with a dance number to illustrate.
Let us look at it another way. As I mentioned, Peak Oil theory has been quite good at predicting the depletion profile of certain stable and prosperous countries and provinces. But these predictions become meaningless when extrapolated to the world as a whole, for one very obvious reason: the world cannot import oil. Let me say it again, this time in title-case, bolded and centered, to emphasize the significance of this statement:
