T he mentally-challenged kibitzers “out there” — in the hills and hollows
of the commentary universe, cable news, the blogosphere, and the pathetic
vestige of newspaperdom — are all jumping up and down in a rapture over cheap
gasoline prices. Overlay on this picture the fairy tale of coming US energy
independence, stir in the approach of winter in the North Dakota shale oil
fields, put an early November polar vortex cherry on top, and you
have quite a recipe for smashed expectations.
Plummeting oil prices are a symptom of terrible mounting instabilities in
the world. After years of stagnation, complacency, and official pretense, the
linked matrix of systems we depend on for running our techno-industrial
society is shaking itself to pieces. American officials either don’t
understand what they’re seeing, or don’t want you to know what they see. The
tensions between energy, money, and economy have entered a new phase of
destructive unwind.
The global economy has caught the equivalent of financial Ebola:
deflation, which is the recognition that debts can’t be repaid, obligations
can’t be met, and contracts won’t be honored. Credit evaporates and actual
business declines steeply as a result of all those things. Who wants to send
a cargo ship of aluminum ore to Guangzhou if nobody shows up at the dock with
a certified check to pay for it? Financial Ebola means that the connective
tissues of trade start to dissolve, and pretty soon blood starts dribbling
out of national economies.
One way this expresses itself is the violent rise and fall of comparative
currency values. The Japanese yen and the euro go down, the dollar goes up.
It happens in a few months, which is quickly in the world of money. Foolish
US cheerleaders suppose that the rising dollar is like the rising score of an
NFL football team on any given Sunday. “We’re numbah one!” It’s just
not like that. The global economy is not some stupid football contest.
When currencies change value quickly, as has happened since the past
summer, big banks get into big trouble. Their revenue streams are pegged to
so-called “carry trades” in which big blobs of money are borrowed in one
currency and used to place bets in other currencies. When currency values
change radically, carry trades blow up. So do so-called “derivatives” such as
bets on interest rate differentials. When the sums of money involved are
grotesquely large, the parties involved discover that they never had any
ability to pay off their losing bet. It was all pretense. In fact, the chance
that the bet might go bad never figured into their calculations. The net
result of all that foolish irresponsibility is that banks find themselves in
a position of being unable to trust each other on virtually any transaction.
When that happens, the flow of credit, a.k.a. “liquidity,” dries up and
you have a bona fide financial crisis. Nobody can pay anybody else. Nobody
trusts anybody. Fortunes are lost. Elephants stomp around in distress, then
keel over and die, and a lot of “little people” get crushed in the dusty
ground.
The happy dance about low gasoline pump prices featured on Fox News,
combined with the awful instability in currency markets, will cut a swathe of
destruction through the shale oil “miracle.” That industry has been relying
on high yield “junk” financing to perform its relentless
drilling-and-fracking operations — imperative due to the extremely rapid
depletion rate of shale oil wells. Across the board, shale oil production has
not been a profitable venture since it was ramped up around 2006. Below $80 a
barrel, chasing profit only becomes more difficult for those who couldn’t
make a profit at $100. A lot of those junk bond “investments” are about to
become worthless, and the “investment community” will lose its appetite for
any more of it. That will leave the US government as the investor of last
resort. Expect that to be the object of the next round of Quantitative
Easing. The ultimate destination of these shenanigans will be the sovereign
debt crisis of 2015.
