“There is no other endeavor in which men and women
of enormous intellectual power have shown total disregard for higher-order
reasoning than monetary policy.
— David Collum
American
Notes
Apart from all the ill-feeling about the election,
one constant ‘out there’ since November 8 is the Ayn Randian rapture that
infects the money scene. Wall Street and big business believe that the
country has passed through a magic portal into a new age of heroic
businessmen-warriors (Trump, Rex T, Mnuchin, Wilbur Ross, et. al.) who will
go forth creating untold wealth from super-savvy deal-making that un-does all
the self-defeating malarkey of the detested Deep State technocratic
regulation regime of recent years. The main signs in the sky, they say, are
the virile near-penetration of the Dow Jones 20,000-point maidenhead and the
rocket ride of Ole King Dollar to supremacy of the global currency-space.
I hate to pound sleet on this manic parade, but,
to put it gently, mob psychology is outrunning both experience and reality.
Let’s offer a few hypotheses regarding this supposed coming Trumptopian
nirvana.
The current narrative weaves an expectation that
manufacturing industry will return to the USA complete with all the
1962-vintage societal benefits of great-paying blue collar jobs, plus an orgy
of infrastructure-building. I think both ideas are flawed, even allowing for
good intentions. For one thing, most of the factories are either standing in
ruin or scraped off the landscape. So, it’s not like we’re going to
reactivate some mothballed sleeping giant of productive capacity. New
state-of-the-art factories would require an Everest of private capital
investment that is simply impossible to manifest in a system that is already
leveraged up to its eyeballs. Even if we tried to accomplish it via some kind
of main force government central planning and financing — going full-Soviet —
there is no conceivable way to raise (borrow) the “money” without altogether
destroying the value of our money (inflation), and the banking system with
it.
If by some magic any new industrial capacity were
built, much of the work in it would be performed by robotics, not brawny men
in blue shirts, and certainly not at the equivalent of the old United Auto
Workers $35-an-hour assembly line wage. We have not faced the fact that the
manufacturing fiesta based on fossil fuels was a one-time thing due to
special historical circumstances and will not be repeated. The future of
manufacturing in America is frighteningly modest. We’ll actually be lucky if
we can make a few vital necessities by means of hydro-electric or direct
water power, and that will be about the extent of it. Some of you may
recognize this as the World Made By Hand scenario. I’ll stick by that.
Similarly for “infrastructure” spending touted by
the forces of Trump as the coming panacea for economic malaise. I suspect
most people assume this means a trillion-dollar stimulus spend on highways
and their accessories. Well, that also assumes that we expect another fifty
years of Happy Motoring and suburban living. Fuggeddabowdit. We’re in the twilight
of motoring anyway you cut it, despite all the chatter about electric cars
and “driverless” cars. We won’t have the electric capacity to switch over the
Happy Motoring fleet from gasoline. The oil industry itself is already headed
for collapse on its sinking energy-return-on-investment. And our problems
with money and debt are so severe that the motoring paradigm is more prone to
fail on the basis of car loan scarcity and unworthy borrowers before the
fueling issues even kick in. Every year, fewer Americans can afford to buy
any kind of car — the way they’re used to buying them, on installment loans.
The industry has gone the limit to help them — seven-year loans for used
cars! — but they have no more room to maneuver. The car financing system is broken.
Bear in mind the original suburbanization of America back in the 20th century
— along with its accessory automobiles — must be regarded as the greatest
misallocation of resources in the history of the world. So, a rebuild of all
this stuff would represent more and possibly even greater malinvestment. We
could have applied our post-WW2 treasure to building beautiful walkable towns
and cities with some capacity for adaptive re-use, but we blew it in order to
enjoy life in a one-time demolition derby. Life is tragic. Societies make
poor choices sometimes, and then there are consequences.
We also might have been in better shape now if,
beginning twenty years ago, we began a major rebuild of our railway
infrastructure. But we blew that off, too, and shortly it will be very
difficult to get around this geographically large country by any mechanical
means. It may be too late now to do anything about that for the financing
reasons already touched on — and which I will elaborate on next. The bottom
line is that President Donald Trump will be overwhelmed by a sea of financial
troubles from the very get-go, and here’s why.
Designated
Bag-Holder
The American people have been punked by their own
government and their central bank, the Federal Reserve, for years and the jig
is now up. In 2017 both will lose their authority and legitimacy, a very
grave matter for the survival of this republic.
Insiders surely have seen this coming for a long
time. The people running this so-called Deep State of overblown and overgrown
institutions probably acted at first with the good intentions of keeping the
national lifestyle afloat. But in the end (now approaching) they stooped to
too much duplicity and deceit in the desperate attempt to not just preserve
the system, but to protect their own reputations and personal perquisites.
And now there ought to be some question with the election of 2016 that they
have engineered all of this system fragility to blow up on Mr. Trump’s watch,
so they can blame him for it. It was going to blow up anyway. But had Hillary
Clinton won the election, at least the right gang would have had to take the
blame — the people in charge for the past twenty years. Instead, Donald Trump
has been elected Designated Bag-Holder.
About
That “Big Fat Ugly Bubble” and its Consequences
Part 1:
History Lesson
The USA ran out of growth capacity around the turn
of the millennium because we ran out of affordable energy to run our
techno-industrial economy. It was hard to see this with seemingly plenty of oil
available. And, of course, the computer tech fiesta was blossoming, but for
all that glitzy stuff to attract dwindling real capital, other old stuff had
to go, and did go, and when all was said and done the computers did not
generate much wealth or social value. In fact, the diminishing returns and
blowback of computer tech were arguably more damaging than beneficial to
society and its economy. Look at where the middle class is today. Computer
tech gave the magical appearance of growth while actually undermining it.
By affordable energy I mean energy with a
greater-than 30-to-one energy-return-on-investment, which is the ratio you
need for the kind of life we lead. That’s what the now-ridiculed Peak Oil
story was really about: not running out of oil, but not getting enough bang
for our bucks pulling the remaining oil out of the earth to maintain our
standard of living. I’ll return to this issue in more detail later. But that
was what provoked America’s 21st century economic malaise. Everything we’ve done
in finance since then has been an attempt to compensate for our fundamental
problem with debt — borrowing from the future to maintain our current
(unaffordable) standard of living. Our debt has grown ever larger and faster
each year, and our methods for managing it have become more desperate and
dishonest as that occurred.
The culprit at the center is America’s central
bank, the Federal Reserve, which is actually not a government agency as it
seems, but a consortium of the nation’s biggest private banks, lately known
as Too-Big-To-Fail. The Fed was created in 1913, when the complexities of
capital finance were multiplying in step with the complexities of industrial
production, which, remember, was a new and evolving phenomenon of human
history. Mankind had no prior experience with industrialism. We discovered
toward the end of the 19th century — decades of unprecedented industrial
growth — that the system’s dynamic produced booms accompanied by very
destructive busts. The operations of banking usually outran the cycles of
trade, industry, and war that were coloring evolving Modernity. So the Fed
was created to smooth out these cycles. It had two basic mandates for this:
acting as the lender of last resort between banks during financial panics so
that some money would always be available in an emergency; and stabilizing
the money supply and prices in the system. The Fed failed spectacularly to
smooth out the cycles of boom and bust and to maintain the value of the
dollar over time.
Sixteen years after the Fed’s creation, America
entered its worst economic downturn ever, the Great Depression, which was
only mitigated by the colossal abnormality of World War Two. America emerged
from that episode as the last industrial society standing amid everyone
else’s smoldering ruins. That gave us an extraordinary advantage in world
trade lasting roughly thirty years. That high tide of the era of seeming
“normality” — the 1950s and 60s, which the Trumpian-minded might recall as
“great” — started unraveling in the 1970s, which was not coincidentally the
moment of America’s all-time oil production peak.
In 1977, the Fed was given a third mission of
promoting maximum employment with a trick-bag of tools for manipulating the
money supply and credit creation that have proven to be fatally mischievous.
This new task elevated Fed officials, and especially its chairperson, to the
status of viziers — magicians using occult mathematical models and formulas —
to cast spells capable of controlling the macro economy the way wizards are
thought to control external reality. Their pretenses seemed to work for
reasons unrelated to the spells they were learning to cast.
It is still largely unrecognized that America
recovered from the financial disorder of the 1970s not because of the charms
of “Reaganomics” but for the simple reason that the last giant finds of oil
with greater than 30-to-one energy-return-on-investment came on line in the
1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and
Siberia. That allowed the USA and the West generally to extend the
techno-industrial fiesta another twenty years. As that bounty tapered down
around the year 2000, the system wobbled again and the viziers of the Fed
ramped up their magical operations, led by the Grand Vizier (or “Maestro”)
Alan Greenspan, who worked the control rods of interest rates as though the
financial system were a great nuclear powered pipe organ that could be revved
up and tamped down by a wondrous Fed control panel. This period of Fed
spell-casting was characterized by ever more systemically complex finance,
growing systemic fragility, pervasive institutionalized accounting fraud, and
ever-greater bubbles and busts. Deregulation, especially the 1998 repeal of
the Glass-Steagall Act of 1932, sealed America’s financial fate.
Debt was the meat-and-potatoes of the Fed’s
wizardry, but the “secret sauce” of Fed magic was fraud, in the form of
market interventions, manipulations, regulatory negligence, and just plain
systematic lying about the numbers that defined the economy. It amounted to
nationalized financial racketeering. Under the consecutive Grand Vizierships
of Greenspan and Ben Bernanke, control fraud (using official authority to
cover up misconduct) was perfected by banking executives, eventuating in the
mortgage securities fiasco of 2008, which took down the housing market and
the economy. (That housing market, by the way, was made up mainly of suburban
houses, the sine qua non of the greatest misallocation of resources in the
history of the world.)
Of course, nobody paid a criminal penalty for any
of this misconduct besides the maverick Ponzi artist Bernie Madoff, and a few
other small fish. The regulators looked the other way, on orders from their
bosses. Unlike the earlier Savings and Loan bank crisis of the late 1980s,
none of the leading bank officer perps went to jail. The damage of the 2008
crash was epic and never repaired, only papered over with more debt, more
deceit, and more racketeering.
The supposed remedy, the Dodd-Frank Act of 2010, was
a cover for continued pervasive fraud and the institutional “capture” of
government by the banking industry and its handmaidens, really a fascist
melding of banking and government, a swindle machine in which anything goes
and nothing matters. The frauds have only been rechanneled since 2008 into
college loans, car loans, corporate stock buyback monkey business, currency
arbitrage shenanigans, private equity asset-stripping, and the gigantic black
box of derivatives trading.
About
That “Big Fat Ugly Bubble” and its Consequences
Part 2:
2017, the Year of Living Anxiously
Under Bernanke’s
successor, UC-Berkeley Professor Janet Yellen, the emphasis in Fed policy has
been an elaborate game of “data-dependent” foot-dragging — a lot of talk with
no action — with the data itself largely fraudulent, especially the easily
gamed employment and GDP numbers that supposedly determine the rise or fall
of interest rate policy. In short, the racketeering continues while the
authorities quail in the face of accumulated and now inescapable debt
quandaries ever more certain to end in systemic collapse.
Get this: the Fed is completely full of shit. It
is terrified of the conditions it has set up and it has no idea what to do
next. The “data” that it claims to be so dependent on is arrantly fake. The
government’s official unemployment number at Christmas 2016 was 4.6 percent.
It’s a compound lie. The 4.6 percent does not include the 95 million people
out of the workforce, most of them able-bodied, who have simply run through
their unemployment benefits and given up looking for work. Nor does it figure
in the fact that roughly 90 percent of the new jobs created are part time
jobs, many of them held by people working several jobs (because they have to,
to pay the bills). Nor does it detail the quality of the jobs created
(minimum wage shit jobs.)
That 4.6 unemployment figure is the main pillar of
the Fed’s “data.” They interpret it as meaning the economy is roaring and has
their full confidence. They‘re lying about that, of course. They have been
touting “the recovery” (from the crash of 2008) continually and heralding a
program of “normalizing” interest rates upward for two years. In 2015 they
didn’t do anything until the very last Fed meeting of the year when they raised
the Fed Funds rate 25 basis point (that’s a measly one-quarter of a percent).
They raised, they said, because they were “confident” about the economy. No,
that’s not why. They did it because they talked about it all year without
doing anything and their credibility was on the line. They also promised four
rate hikes altogether in 2016, which they then failed to carry out.
After that December 2015 rate hike, the stock
markets tanked 10 percent. By springtime, the markets appeared to be bouncing
back, so the Fed started talking about more rate hikes again. They talked it
up all year without acting, an impressive act of fakery. The surprise Brexit
vote gave them the heebie jeebies. They laid low. Meanwhile, the US election
season was on. The Fed denies this, but they did not raise interest rates for
eleven months in 2016 solely because they wanted to make the Democratic
administration look good heading into the November vote, and they knew the
economy was fragile. Once Hillary was nominated they were determined to usher
her into the White House on a high tide of fake good economic news.
When she lost the election the stock markets
surprised everyone by entering a super-bubblicious Trumpxuberance rally. There
is a narrative for that too in the media chatter and it is simpleminded
nonsense based on the sheer hope that Trumponomics will be great for
business. More on that below.
Roaring stock markets were a secondary pillar of
the Fed’s economic world-view. The post-election 2000 point upsurge in the
Dow, along with the historically low 4.6 unemployment number, gave the Fed
the opportunity on December 15 to do the same thing they did the previous
year: cover their asses and preserve some credibility by hiking the Fed Funds
rate one-quarter percent. You’d think if they were really confident in the
economy — especially given the year–end rally — they would venture to raise
by half a percent or more. They are not confident. They are lying with their
fingers crossed.
The Fed Funds rate is one thing. As it happens,
the Fed does not directly control the interest rates on US treasury bonds,
and they have been rising shockingly through the second half of 2016. The
crucial ten-year treasury rate has gone up a hundred percent since the
summer. Because bond values move inversely to bond rates, the price of
treasuries has tanked, inducing trillions of dollars in losses to
bond-holders around the world. The bond market is many times larger than the
stock markets. Bonds have been in a bull market since the early 1980s and
that bull rolled over in mid-2016. A bear market is now on, meaning
bond-holders are dumping their bonds. China and Saudi Arabia are among the
leading dumpers of US Treasuries because they need the money for one reason
or another. They will dump more in 2017 because both countries are in deep
economic trouble. Too many bond sellers and not enough buyers in the market
drive interest rates up. Rates have a lot room to move up, since they started
at near-zero. Accordingly, their value has a long way to fall.
Bonds, of course, represent debt. Total US debt
has doubled under President Obama from around ten trillion to twenty trillion
dollars (as it doubled under Bush Two from five to ten trillion dollars). The
reason, as stated above, is that we don’t produce enough to cover the cost of
our national way of life, so we have to borrow continually at ever-greater
volume. Every year, the Treasury has to pay interest on all that debt. It’s a
lot of money. This year, with interest rates starting out at historically
unprecedented lows (not seen ever in recorded history), the Treasury paid
over a quarter-trillion dollars in interest. By the way, the government
borrows money to make these interest payments too. An interest rate rise of
one percent, would drive the annual US debt higher by $190 billion. As the
late, great Senator Everett Dirkson (R-Ill) once pungently remarked: “…a
billion here, a billion there, sooner or later you’re talking about real
money.”
A sharply rising interest rate on the ten-year
Treasury bond will thunder through the system. A lot of other basic interest
costs are keyed to the ten-year bond rate, especially home mortgages,
apartment rentals (landlords hold mortgages), and car payments. When the ten
year bond rate goes up, so do mortgage payments. When mortgage rates go up,
house prices go down, because fewer people are in a position to buy a house
at higher mortgage rates, and rents go up (more competition among people who
can’t buy a house). Zero Interest Rate Policy (ZIRP), in force for ten years,
has driven house prices back to stratospheric levels. They are now primed to
fall, perhaps severely, leaving many homeowners “underwater,” with houses
worth way less on the market than the amount of mortgage left to pay off. The
re-financing market is dead. Housing starts were already down by a stunning
19 percent in November. Automobile sales are rolling over. Manufacturing and
retail sales numbers are down at year end. What’s up: stocks, stocks, stocks.
Yet investors did not execute the usual
end-of-year profit-taking in the expectation that Trump would lower the
capital gains tax in 2017, so why sell now? You can wait until January 3,
2017 to sell, and then not have to pay tax on your profits until April of
2018. Will investors start dumping in the first trading days of 2017? I think
so. And will that selling beget a stampede for the exits? And what will
happen if the interest rate on the ten-year bond hits three percent? (It
doesn’t have far to go). Or maybe even four percent? What happens is the
stock markets go down in the first quarter of 2017. My forecast is 20 percent
down on the S & P. That will only be a preview of coming attractions once
Trump gets his mitts on the levers of power. A still bigger crash ahead later
in the year!
Why
Trump Can’t Pull a Reagan
When Reagan came into office in 1981, inflation was raging largely because of
the effects of the oil crises of 1973 and 1979, which had produced the
“stagflation” that confounded the reigning economists’ models (they knew
nothing about the relationship between energy dynamics and capital
formation). The Fed Funds rate was almost 20 percent in 1981. It had a lot of
room to move down. The national debt was less than one trillion (Reagan
eventually ran it up to $2.8 trillion). Reagan was able to endure a sharp
recession early in his first term — and voodoo economics got him through all
the rest of his tenure, with both inflation and interest “normalizing” — as
mentioned earlier, he enjoyed the bonanza of the last great non-OPEC oil
discoveries coming on-line during his two terms, which ramped up economic
activity and growth.
Today, the US is in a box and Trump comes on the
scene with nowhere to move. Too much debt can only be managed if interest
rates are kept low. Everybody and his mother around the world is dumping US
Treasuries. With a bear market in bonds on, the Fed as buyer of last resort
will have to sop up whatever comes on the market to keep the interest rate
from rising above three percent on the ten-year, and even that may not
prevent it. Trump’s vaunted infrastructure stimulus plan will be impossible
to carry out without the Fed monetizing the necessary debt. So stimulus
implies bigger deficits, which means more bonded debt that nobody wants to
buy. The result will be inflation and accordingly further upward pressure on
interest rates. Higher interest rates, in turn, will negatively impact
economic activity, lowering tax revenue, inducing larger fiscal imbalances and
greater instability.
Trump may never even get the stimulus he seeks.
The Republican controlled-congress has vowed not to increase the national
debt. How can Trump fulfill his pledge to cut taxes and bring on stimulus
without hugely increasing the debt? If there is war over spending between
Trump and Congress, Congress is likely to win, since they control the fiscal
purse strings. Of course, Donald Trump cannot abide not winning. Hostilities
between them may become permanent early in Trump’s term and bring on even
more dangerous paralysis of governance.
Also early in 2017, the Fed will abandon its “dot
plot” talk about further interest rate hikes. They may also surrender their
credibility in the process. The system can’t take the strain of three
interest rate rises in 2017. It may be that Janet Yellen has raised the Fed
Funds rate a total of one-half a percent in two years solely to be able to
lower them again when the real economy finally tanks under that strain of
incessant central bank chicanery. By the second quarter of 2017, following a
20 percent stock dump, the Fed will start making noises about Quantitative
Easing 4 (QE), or they will cook up some other program that accomplishes the
same thing under a new cockamamie label. More QE (or something like it) will
drive the dollar back down and gold back up. The housing market will be in
the toilet and the rest of the economy will follow it down the drain. By the
end of Trump’s first year in office, there will another, greater, dump in the
stock markets after the initial 20 percent drop in the first quarter. America
will be great again, all right: we’ll be entering a depression greater than
the Great Depression of the 1930s.
Desperate
Measures
One of the other big and dark trends of the past
year has been the move of governments around the world — and among the
economist / necromancers who advise them — to ban cash from the scene in
order to herd all citizens into a digital banking system that will allow the
authorities to track all financial transactions and suck every possible cent
of taxes into national coffers. It would also be an opportunity for the
bank-and government cabal to impose negative interest rates (NIRP) on bank
accounts so that money herded into the digital system could be surreptitiously
“taxed” by charging account holders just for being there (against their
will). It’s a little hard to see how that might happen just now in a broad
rising rate environment, but it would be the natural accompaniment to banning
cash — and renewed aggressive QE (QE forever!) might do the trick.
Harvard economist Kenneth Rogoff literally wrote
the book on this (The Curse of Cash; Princeton University Press, 2016), a
mendacious argument that cash money merely enables drug dealers and
terrorists to operate and has no useful place otherwise in a regular economy.
Rogoff appeared to be angling for the Treasury slot in Hillary’s cabinet, and
would have fit in perfectly with this totalitarian assault on the public’s
financial liberty — but, as we know, Hillary didn’t make it.
Efforts to eliminate cash are already underway
around the world. The EU officially discontinued the €500 note from
circulation. Ken Rogoff’s Harvard colleague, Larry Summers, was calling for abolition
of the $100 bill a year ago. Sweden is successfully herding its people out of
fiat krona. India’s Prime Minister Narendra Modi pulled a fast one in
November by banning the 1000 and 500 rupee note (worth respectively $14 and
$7), and threw India’s economy into a epileptic seizure. The idea was to
discipline tax evaders who operate in a cash economy. The catch was that more
than 85 percent of India’s economy operates on a cash basis among people too
poor to have bank accounts and credit cards — including millions of truck
drivers and ordinary laborers. Naturally, the Indian economy froze. Nobody
could get paid. Food rotted in stalled trucks. ATM withdrawals were limited
to a few day’s walking-around-money. Citizens could not even exchange their
1000 and 500 rupee notes at the banks without going through onerous
time-consuming bureaucratic rigmarole, including fingerprinting and the
submission of tax records. The process caused discouraging long queues to
form at the banks, and was probably designed to discourage the exchange of
the 1000 and 500 rupee notes altogether and instead just retire them from
circulation — which means a lot of poor people lost the minimal cash savings
they had.
It’s hard to see the US government banning cash as
clumsily as India did, but they have other ways to herd the multitudes into
the black box of all-digital banking. Financial author James Rickards calls
this the “Ice-Nine” program, in reference to the isotope of water in Kurt
Vonnegut’s sci-fi novel Cat’s Cradle that freezes the world in a horrifying
chain reaction. Rickards’ Ice-Nine financial nightmare would include features
like freezing bank accounts, bail-ins (confiscation of accounts), limits on
ATM withdrawals, and the “gating” of investment funds. Ice-Nine would be
invoked in a banking emergency — say, a derivatives “accident” that took out
some Too-Big-Too-Fail giant, or really anything that triggered the extreme
fault lines in the ultra-fragile system that the world’s money elites have
cobbled together to keep the garbage barge of global finance from sinking. In
his recent book, The Road to Ruin, Rickards reminds readers that the
emergency act signed by Bush Two after 9/11 has remained in effect under
Obama, so that America is “just one phone call away from martial law.”
Another method for depriving citizens of their
financial liberty would be for the government to declare that retirement
accounts had to contain a set percentage of US Treasury paper — once again herding
people into a financial corral against their will — in order to prop up the
value of bonds and tamp down interest rates. David McAlvany (his excellent
podcast here) makes the interesting point that if herding the public into the
digital financial corral was a key ingredient to “making America great
again,” who could object? — because now you’d be opposing American greatness!
Trump inherited a much bigger problem than Barack Obama did in 2009. Obama
still had enough soft-soap left in the machine to blow more bubbles. Trump
arrives on the scene with the machine out of bubble-blowing mojo. He’ll be
overwhelmed by financial disorder in 2017 and then the nation’s focus will
turn to a tumultuous political scene
Wild in
the Streets
The public is just plain pissed off, and remains
pissed off after the Trump Victory. Their anger has been fermenting for
decades as their economic prospects dwindled and they began to understand how
it all worked against them. The battered middle class might have gotten a temporary
thrill from the election, but an awful lot of them are still out of work, or
working at the humiliating shit-jobs that replaced their old lost jobs in the
old real stuff economy. Worse is coming their way in 2017. Theirs is a true
existential crisis.
Even under the most favorable circumstances, a
stimulus program would not likely get out of congress until much later in
2017, and I personally doubt that it will get through at all. The
so-far-fortunate retirees plugged into pensions represent another potential
trouble spot. Pension funds are going bust all over the country from the
incapacity to stay solvent in a near-ZIRP environment. In 2016, fissures
started to show in places like the Dallas Police and Firemen’s Pension fund,
when pensioners’ redemptions were shut down. There are pension funds all over
the country floundering from the same conditions, since the Fed took the
“fix” out of “fixed income.” In the absence of decent “yield,” the pension
funds have been herded into risky stock markets, and if those markets blow
up, the pension funds are going to blow with them… and then the pensioners’
lives are going to blow up… and then maybe civil order dissolves around the
country.
That may be the moment when President Trump and
his militarily-weighted cabinet appointees opt for martial law. What a
goddamned mess that will be. There is no civilized country on earth with as
many small arms per capita than the USA, and despite the fearsome appearance
of militarized police forces, you cannot overstate how much deadly mischief a
small number of pissed-off people can make with automatic rifles,
rocket-propelled-grenades, Semtex plastic explosive, and other fun stuff. It
could morph easily to a literal war on bankers and Wall Street in particular,
especially if Ice-Nine goes into effect. Bear in mind that a lot of veterans
of the endless Middle East wars belong to this suffering economic class, and
they actually have some training in the warrior arts.
Their political counterparts in the Democrat /
Prog coastal elite, hardcore Hillary, PC-and-unicorn crowd are moving through
their post-election Kubler-Ross Transect-of-Grief from denial to anger too.
So both sides are quite pissed off and primed for conflict. The Left will
certainly do everything possible to oppose Trump and try to make him look
bad, whether it’s in the public interest to do so or not. They will throw
every monkey-wrench possible into the machinery of governance, up to and
including the (mostly Democratic Party weighted) Federal Reserve hierarchy,
whose interest rate “dot plot” could be truly a plot to exact revenge on
Trump. Of course, that would blow up in their faces since proportionately the
coastal elites own much more stock than the Trumpenlumpenprole red-staters,
and they could be wiped out in a significant market crash triggered by rising
interest rates. But that’s the thing about political rage: it’s the opposite
of rational.
There’s no sign that the Democrat / Progs have
recognized that their poisonous identity politics played a significant role
in their electoral defeat. They will not abandon that endeavor in 2017. They
will double-down on it. And as that happens, the Democratic Party will go the
way of the Whigs in 1856 — with a whimper, not a bang. God knows who or what
will replace them as a credible opposition to Trumpist crypto-Republicanism,
although Trump himself stands a good chance of leading that party to
oblivion, too, if my forecast of a big financial blow-up comes to pass.
The Red Guard-like action on campus may continue, though
it’s hard to imagine the “Snowflakes” besting their infantile hijinks of
2016. What they are demonstrating now is that coercive identity politics is
just a new form of leisure-time recreation on campus, like Ultimate Frisbee
and the beer blasts of old! Have fun wrecking faculty careers and basking in
the Facebook feed! A few still-sane people of all political persuasions are
sick of their censorious attacks, reckless persecutions, and insults to
reality — such as the mandatory “white privilege” trainings and gender
identity personal pronoun crusades. I predict that there will be a revolt
among the university trustees and boards of directors against college
presidents and deans who pander to the Maoist hysteria, as the damage to
higher education and intellectual freedom more generally finally manifests in
dropping enrollments and the loss of public funding.
There is every sign that black and white racial
conflict will grow worse in the year ahead. The week after Christmas 2016 saw
an impressive number of shopping mall mass melees of black teens all over the
country. For years, the media went along with the hyperbolic story that
innocent black men were being killed by police for no reason — when the
overwhelming majority of those cases involved victims brandishing guns or
grossly misbehaving in some way liable to get themselves in trouble.
Victimology still rules in America. It’s a psychological defense mechanism to
relieve the Dem / Prog’s shame and anxiety with the outcome of the long civil
rights campaign — namely, black family disintegration, educational failure,
and a shocking rate of black-on-black murder. A subsidiary grievance
industry, lately led by Black Lives Matter, fans the flames of vengeance
against the universal villain, Whitey, whose “privilege” keeps other people
down (except, notice, immigrants from China, Korea, Vietnam, India, and other
places where Whitey is absent.)
So, now Left and Right are both equally pissed
off. It also means you have two adversarial groups who might give themselves
permission to turn violent to justify their grievances. If the financial
markets tank and the economy freefalls, it is easy to imagine the potential
for violent conflict between the Dem / Progs with their Black Lives matter
proxies against the Trumpista lumpenproles. It would be a terrible tragic
distraction from the business of repairing the common weal, the economy, and
the common culture — but so was the Civil War
The Oil
Quandary
The reports of Peak Oil’s death are exaggerated,
to borrow a gag from Mr. Twain. It’s just been playing out in ways that many
of us didn’t quite anticipate and it is still at the heart of our economic
predicament — which is that you can’t rationalize an annual debt growth rate
of 8 percent if your actual economic growth rate is under 4 percent
(paraphrasing Chris Martenson at Peak Prosperity.com).
We haven’t run out of oil, but we have run out of
oil that is rationally economical to pull out of the ground. The so-called “shale
oil miracle” extended the oil age a few years by debt-financed legerdemain.
Yes, we drove US oil production way up, almost back up to the 1970 peak
production level around 10 million barrels-a-day (b/d). The trouble was that
the companies producing it didn’t make a red cent in the process. They just
ran up a huge amount of debt to pursue the shale project. The pursuit was on
wholeheartedly beginning around 2006, because 1) the Peak Oil story was
scaring folks, including folks in the oil industry, and 2) the market price
of crude oil soared after 2004 and shale looked like a possibly winning
venture — especially since conventional exploration in recent years was
turning up almost nothing of significance.
From 2004 the price of oil skyrocketed from around
$40-a-barrel until 2008, when it reached a high point of about $140-a-barrel.
Then, of course, the price crashed catastrophically for a year, along with
Wall Street and the economy. But, by then, the fracking industry was all
ramped up in the Bakken fields of North Dakota and the Eagle Ford range of
Texas. Plus the industry was learning some additional new fracking tricks to
goose more oil out of the “tight” rock. So they were full of confidence,
despite the price crash. Then, in 2009 the oil price turned sharply upward
again — with central bank ZIRP and QE and other maneuvers to prop up the
economy with more debt at lower interest rates. And the price of oil just
climbed and climbed again back into the $110-plus range in 2011, and lingered
there until 2015, when it crashed again.
Of course, most of the producers weren’t making
any money even at the $110-a-barrel, but they expected improved technology to
mitigate that eventually. In the meantime, they just produced too much shale
oil and the market was flooded and OPEC got into the act and pumped all-out
trying to crash the price further to put the US shale producers out of
business, and then nobody made a red cent fracking for shale oil. So, you can
see there was a pattern.
The pattern nicely describes the dynamic advanced
by Joseph Tainter in his seminal work, The Collapse of Complex Societies:
namely that over-investments in complexity lead to diminishing returns. That
is, as you keep making your systems extra-hyper-complex, you get less value
back for doing it, until you get to the point where there’s no benefit
whatsoever, and then the system implodes. And that is exactly what has
happened with oil and the economy that was engineered to run on it, and the
financial system that evolved to manage the wealth it used to produce.
A few other things happened the past few years on
the oil scene. The American oil companies bowed out of Arctic drilling. The
Canadian Tar Sands went bust. The overthrow of Muammar Gaddafi choked off
Libyan production, which was offset by Iran coming back onto the
international market, which was offset by political mischief in Nigeria that
choked off production, which was offset by increased Iraqi production, which
was offset by the collapse of Venezuela. Most of the world’s oil producers
had entered decline anyhow.
Don’t be fooled. The low prices at the gasoline
pumps only mean that US oil companies are going broke fast, as are American “consumers.”
There’s a basic equation I’ve repeated a few times on this blog: oil over
$75-a-barrel destroys industrial economies; oil under $75-a-barrel destroys
oil companies. That’s were things stand when the energy return on investment
falls to 5-to-1, as is the case with shale oil. Steve St. Angelo over at the
SRSRocco Report makes the excellent point that it takes at least 30-to-1
energy return on investment to maintain plain vanilla modern life. Anything
below that and parts of the economy have to be sacrificed. Trucking, air
travel, commuting, theme park vacations, your job…. It’s just another way of
describing the pernicious effects of the diminishing returns of
over-investments in complexity.
In the fall of 2016, OPEC members tried again to
agree on an oil production output limit, as they have done many time before.
Each time, they all managed to cheat in order to sell greater volumes of oil
and make more short-term money — a classic Tragedy of the Commons story.
Consequently, the price of oil went up to about $53-a-barrel by Christmas
2016. Don’t expect that to last. Unless, of course, there is a geopolitical
event somewhere out on the oil scene, most likely in the Middle East, though
Venezuela’s economy is approaching total collapse. The forecast here is for
oil prices to follow the stock markets down in the first quarter of 2017. A
lot of junk bonds in the oil space will default as a result, leading to a
general crisis in shale oil investment.
Vagrant
Thoughts on Geopolitics
As I write just before New Year’s Eve, President
Obama is trying to start World War Three with Russia as a parting gift to the
voting public. I’m among the skeptics who think that the “Russia Hacks
Election story” is a ruse to divert the public’s attention from the stupendous
failure of the Democratic Party to win, as expected. Rather, Wikileaks should
get the Pulitzer Prize for revealing so much about the nefarious workings of
the Clinton Foundation and the Democratic National Committee.
Regular readers
know I didn’t vote for Trump, that I heaped considerable abuse on him in the
campaign commentaries. But I didn’t take any comfort in the nostrum about
being “better off with the Devil you know (Hillary) than the one you don’t
know (Trump).” Both candidates were awful, and the condition of the country
is pretty awful as we turn the corner onto 2017. Readers also know from these
commentaries and from my books that I expect we will have to make big changes
in our living arrangements up ahead as the techno-industrial fiesta winds
down. I won’t reiterate the particulars here, but 2017 is the hinge year for
that. The strains on global finance are so spectacular that something’s got
give. President Trump is sure to be overwhelmed by epic dislocations in
markets, currencies, debt, and misguided central bank efforts to hold back
the tides of a necessary re-set — a re-set which will see a lot of wealth
vanish and a lot of pain inflicted on the losers of wealth, including whole
societies.
We have three major European elections to look
forward to in 2017: The Netherlands and France in the Spring, and Germany in
the fall. Geert Wilders (a member of the Trump Big Hair Club), is virulently
against the “Islamisation” of his country. He has campaigned previously to
leave the European Union and for the return to the old guilder currency.
Should the right-wing Marine LePen win in France, the EU experiment will
likely end — she has made express promises to take France out of the EU.
Angela Merkel has made herself impressively unpopular by opening the gates to
a flood of immigrants fleeing the breakdown zones of the Middle East and
Africa. And then, because of the Schengen Agreement (free passage across EU
borders), the immigrants were unleashed on the rest of Europe.
Those of us paying attention may have easily lost
count of the terror atrocities carried out across Europe by Islamic fanatics.
Charlie Hebdo, Bataclan, the Bastille Day truck attack in Nice, the Brussels
airport, the Berlin Christmas Market were only the most recent and spectacular.
For years, individuals have been stabbed, had their heads cut off, throats
cut, been blown up, machine-gunned. Take a look at this comprehensive list
going back to 2001. You may be astonished. In that light, it’s pretty hard to
keep waving the “diversity” banner, and I sense that Europe has had enough of
it. One big question is whether the new European right-wing leaders will
actually move as far as mass deportations. I rather think they will.
The UK “Brexit” vote was surprise all right. (I
hit a white-tailed deer on the Maine Turnpike at 70mph that June morning,
uccchhh, and lived to tell about it.) Now there’s a fair chance that
Parliament will find a way to wiggle out of Brexit. Noises are also emanating
out of Brussels to the effect that the EU could loosen up some of their rules
— e.g. the Schengen Agreement — to induce Britain to stay in the EU. But
there are so many other fissures and fragilities in that system that the
Brexit may not matter anymore. The European banking system is melting down
and there is absolutely no way to rescue it on the macro EU scale. Italy was
heading for a banking crackup before Christmas. Deutsche Bank has been
whirling around the drain for a couple of years. When the US markets and
banks shudder in 2017, Europe will get the vapors. Hence, I’ll forecast
breakup of the EU by this time next year.
We’ve come to the pass where “all that is solid
melts into air,” in the poetic phrase of old Karl Marx. Marx was referring to
the “specter” of communism that loomed over burgeoning industrial society of
the mid-19th century, and indeed it turned into quite a world struggle
through the century that followed. But now communism is down for the count
and we begin to see what is truly melting into air: Modernity itself, this
colossal, hulking, grinding, machine of destruction that threatens the global
eco-system, and all its sub-systems including the human realms of money and
politics.
The idea that Modernity itself might go down is inconceivable
to those in thrall to the Religion of Progress, which declares that the world
(and life in it) only gets better and better every year. This would appear
demonstrably untrue, just in the visible damage to the landscape and the
living things that struggle to dwell there. The most obvious problem with
Modernity has been human population overshoot. The truth is, we’re not going
to do a darn thing about it. There won’t be any policy or protocol, despite
the good intentions of the groups inveighing against it. It will just go on…
until it can’t, to paraphrase the late Herb Stein. Of course, people still
have sex under conditions of hardship, so the population may plateau for a
while until we are well into the long emergency. But the usual suspects of
starvation, disease, and war are all still out there, doing their thing, and
will only ramp up their operations.
The reason the Middle East and North Africa are
melting down most conspicuously is because they are geographically among the
places least well endowed for supporting the swollen populations they
acquired over the past two hundred years. Iraq, Syria, the whole Arabian
peninsula. Egypt, Libya, et. al. are all deserts artificially supported by
the perquisites of Modernity: cheap energy, fertilizers made from that,
irrigation, money derived from it, and continuing life-support
subsidies from even wealthier modern nations outside the region. In recent
years that life-support has flipped into deadly violence imposed from both
within and without, as homegrown Sunni ad Shiite vie for supremacy and their
puppeteers in the First World rush in with bombers, rockets, and small arms
to “help.”
Iraq and Libya were already goners in 2016.
They’ll never be politically stable again in the modern sense. Egypt is still
headed down the drain despite the grip of General al-Sisi and his army. In
all these places the “youth bulge” has no prospects for earning a living or
supporting a family. The young men, especially, put their energy into Jihad,
revolution, and civil war because there’s nothing else to do. Making war may
be thrilling, but it won’t lead to a better future because those benefits of
Modernity are running out and there’s nothing to replace them.
Syria is the current goner-du-jour. Whatever it
ends up being, either under Assad or someone else, it will not be stable the
way it was. The USA ended up arming and funding the Sunni Salafist “bad guys”
there because they opposed Shiite Iran and its regional proxy Hezbollah plus
Assad. Russia eventually came in on that side on the theory that another
failed state is not in the world’s interests. President Obama blinked after
he drew his infamous “line in the sand” years ago and now America is too
spooked to act directly. In fact, the Russians and Assad have the best chance
of restoring a semblance of order, but America’s support for the “moderate”
Salafists will necessarily keep undermining that. In the meantime, all this
activity has sparked a demographic emergency as refugees flee the country for
Europe and elsewhere, creating greater tensions where they land. Trump could
stop the flow of US arms to our favored maniacs in Syria. He may see the
practical benefit of letting Russia be the policeman on the beat there, and
maybe he can sort out the underlying competing interest between the
Russian-sponsored gas pipeline proposed to cross Syria and the
American-sponsored one — a dynamic underlying all the mayhem there — and make
some kind of “deal.” Or maybe he’ll just fuck it up even more.
The situation will grow increasingly acute in
Saudi Arabia, where population growth outstrips the ability of oil production
to pay for it. Their old “elephant” oil fields are aging out and they know
quite well that they cannot depend on oil wealth many decades ahead. The
trouble is, they have no realistic replacement for it, despite noises about
creating other industries. The truth is, the country was cursed by its oil.
It grew its population too much too fast in one of the most inhospitable
corners of the globe, and it will take only a modest decline in oil income to
destabilize the place altogether. To buffer that, Saudi leaders plan an IPO
for shares in Saudi Aramaco — which was originally composed of American and
western oil companies nationalized decades ago. That may get them a few
hundred billion or so in walking-around money that won’t last very long
considering that just about everybody in the nation is on the dole.
The big news in that corner of the world last year
was the collapse of Yemen, which occupies a big slab on Saudi Arabia’s
southern border. That poor-ass country is the latest Middle East basket-case
and Saudi military operations there continue to date, using airplanes and
weapons supplied by Uncle Sam — just another case of feeding Jihadist wrath.
Make no mistake — as our Presidents like to say —
all these countries are heading back to the Middle Ages economically, maybe
even further beyond. Their culture is still basically medieval. The main
point is that Modernity inflated them and now Modernity is over and they’re
either going to pop or deflate. One wild card for now is what effect climate
change may have in ME/NA. If the trend is hotter, than that’s not good news
for a region so poorly watered and so hot that air conditioning is mandatory
for the pampered urban elites. Last one out, please turn off the lights.
Then there’s Turkey, for decades known as “the
sick man of Europe.” Now, of course, it can’t even get into Europe, the EU,
that is, and it’s probably too late to sweat that anyway. Back when it was
“sick” it was quiet at least. You barely heard a peep from the fucker through
the entire cold war and beyond. But now that the countries on its border are
breaking down, things have understandably livened up in Turkey. It was, until
World War One, the very seat of the Islamic Caliphate, and it controlled much
of the territory now occupied by the nations creatively carved out of the
Sykes-Picot Agreement. Turkey is still a power in the region, with a lot of
well-watered, habitable territory and a GDP half the size of Italy’s, though
shrinking. Its current president, Recep Tayyip Erdogan, has shown twinges of
megalomania in recent years, no doubt in fear of the radical Islam epidemic
so close at hand. Lately, Kurdish extremists have been planting bombs around
the country, too. Turkey has a lot to be paranoid about and Erdogan wants to
change the constitution so he can act the strongman without a wimpy,
pain-in-the-ass parliament weighing him down. He endured a coup last summer
and came out of with consolidated power. But he’s capable of making another
bonehead move like shooting down a Russian jet (2015). Meanwhile, Turkey’s
currency is collapsing. The population is over 80 million. In the event of
serious political upheaval, how many of them will try to flee to Europe?
Russia? It’s apparently stable. We hear no end of
complaints about “Putin the Thug,” but in this time of altered reality and
disinformation fog, it’s honestly impossible to tell what the fuck the score
is. Has he bumped off some journalists? So they say. But, not to get to
baroque about it, consider the impressive trail of dead bodies said to be
left in the wake of Bill and Hillary. That story was so toxic that Google
squashed searches for it during the election campaign. Putin seems to me, at
worst, a competent and capable Czar, in a country that likes to be ruled by
them. That’s their prerogative. He’s hugely popular, anyway, and it’s one of
the unsung miracles of recent times that Russia transitioned out of the
fiasco of communism into a pretty much normal modern society, with shopping,
movies, tourism travel, and everything. The Russian people may look back at
these decades as a golden age. They’ve been punished by Western sanctions for
a few years now, but it has prompted them to promote their own version of a
SWIFT Code for international banking transactions, and their own counterpart
to the EU, the Eurasian Customs Union, and to manufacture some products of
their own (import replacement).
Personally, I think the meme of “Russian
aggression” is not born out by actual recent geopolitical reality. They are
castigated constantly for wanting to march back into the Baltic States,
Ukraine, and other former Soviet territories. Ukraine was made a basket case
with direct American assistance. (Remember Deputy Secretary of State Victoria
Nuland: “Fuck the EU!”) Ukraine was rendered an instant failed state. As far
as I could tell, the last thing Russia wanted was to take on Ukraine as an
economic dependent. Same for the Baltic States. They need to subsidize these
places like they need a hole in the head. Russia’s 2015 annexation of the
Crimea was a special case, since it had been part of Russia one way or
another for most of the past 200 years, except for the period after
Khrushchev gifted it to his homeboys in Ukraine around 1957. Anyway, the
Crimea was the site of Russia’s only warm-water naval ports. They’d rented it
from Ukraine before the US pranged the country. The Crimean inhabitants voted
to join Russia (why do we assume that was not sincere?).
Finally, as renowned Russologist Stephen Cohen has
said, wouldn’t it make sense for the US and Russia to drop all this
antagonism nonsense and make common cause against the real threat of our
time: Islamic Jihad? How many Westerners has Russia killed or harmed the past
twenty years compared to the forces of Jihad? The tensions in Syria are
admittedly complex, but why are we making them worse while Russia attempts to
stabilize the joint? Perhaps The Donald can start there….
As I write, Mr. Putin just announced that his
country would not take any reciprocal action against American diplomats in
retribution for Mr. Obama’s fugue of punishments meted out last week for the
still-unproven “Russia Hacks Election” story. Personally, I’m content to wait
three weeks and see if relations improve after Mr. Obama departs the Oval
Office.
Finally, there’s China. I’m among those who
believe China is running the most farkakta banking system on God’s green
earth. We should not be surprised if it implodes in 2017, and does so pretty
badly, in a way that might shake the foundations of the entire banking
system. On that note, I confess that I have run out of forecast mojo for the
year, and anyway this bulletin in long enough. If you’ve gotten this far, I
commend and admire you hugely for your remarkable patience. Have a happy 2017
everybody, and don’t let our Trumpadelic president get you down.
