2009 December 26 Saturday
Government Laying Groundwork For Next Crisis

At The Automatic Earth Ilargi says the economic recovery is a mirage created by replacing private debts with public debts. That sounds about right.

Ilargi: Many people today feel happy and positive when they look at the stock markets, because they think these reflect the real economy, and since the markets are up, things must have changed for the better in the past year.

But they haven't, not below the surface. It's all veneer and no substance. What actually has happened is that -virtually- no debt has been paid off in our economies, in fact we’ve added trillions of dollars more in debt. What is different from a year ago is that a huge part of the old debt and all of the new debt has been transferred to the public, and away from private business, in particular financial institutions (and, to an extent, carmakers).

So it comes down to the fact that people feel happy for being deeper in debt, and quite a bit deeper. Being the humans we are, we focus on the short term gratification which can be found in the Dow and a whole slew of increasingly fabricated numbers and government reports, while we conveniently ignore the enormous increases in debts, both public and private, that we will have to pay off down the line.

Ilargi writes from the perspective of someone who believes Peak Oil is going to rip the guts out of the world economy. I pretty much share that perspective - though I'm less apocalyptic in my views. I expect industrial civilization to survive intact, albeit at considerably lower living standards.

A poor handling of the current financial crisis will make for a much more dysfunctional response to world oil production decline. Marc Faber sees government credit policy as giving drugs to drug addicts.

"If we agree that excessive credit and excessive leverage led to the crisis, then what the Federal Reserve is doing is giving a wrong medicine to the patient—they are giving the drug addicts more drug instead of sending them to rehabilitation, which is not good for the economy. So I think that the whole policy will eventually end in another disaster but we don’t know when and many things can happen in between."

The price of oil will run up again high enough to cause another recession. More debts will go bad. The US governments own total debt will spike up again in the next recession.

Julian Robertson sees high inflation, depression, or both.

“I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we’re doing now will either fail, or it will result in unbelievably high inflation – and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening.”

Jim Rogers says governments are suppressing a needed natural process of bankruptcy.

"The way to solve this problem is to let people go bankrupt," Rogers said.

"Then you will hit bottom and then you start over. The people who are sound will take over the assets from the people who aren't sound and we will start over. This is the way the world has worked for a few thousand years."

Government misregulation of banks (and reckless lending by the US government's own Fannie Mae and Freddie Mac) resulted in the banks issuing huge amounts of bad debts that caused a huge bubble. We can't get out of that bubble without lots of liquidation of debts. Bush and Obama have tried to prevent some of the needed adjustment. This means that when oil prices run up again and cause another recession the financial institutions will still be awash with bad debts and the next recession will be even more painful.

Share |      By Randall Parker at 2009 December 26 06:53 PM  Economics Credit


Comments
James Bowery said at December 26, 2009 7:39 PM:

Yeah you especially have to take over the assets of people who have been ripped off by the reigning kleptocracy. That way the thieves will own all the assets and have the middle class as slaves.

Bob Badour said at December 26, 2009 9:06 PM:

The crisis is no doubt laying the groundwork for the next Government too. I hope we do better than the most recent few.

Eric Johnson said at December 27, 2009 6:49 AM:

Your econo-pessimism, along with La Griffe's, is a significant part of my wanting to become a programmer even though I would sort of rather just mow lawns and be outdoors. Like you I dont think peak oil will be the end of the world by a long shot assuming it happens, but of course we simultaneously face the inverted demographic age pyramid (in context of a powerful obstructionist boomer-retiree lobby, no less), etc. Do you think programming will be a good business over the longer term? Having been born in 1980, I might want to work until 2050. I think it should be decently in demand, because manufacturing is going to push to become more and more automated, as ever. We will have less spare capital to invest in automatiziation, but other factors favoring it will intensify, such as a very high number of dependent persons -- thus greater demand for products per active worker. And manufacturing will see a comeback in the USA soon, as Chinese labor gets more expensive, and as China at the same time wants our abused currency less and less.

Do you think there is any chance the US GDP/head could stop rising right now, already, due to its demography, and the artificially spread-out contraction of the financial sector, which could hang over us for years? Especially if the price of oil over the next decade ends up being on the expensive side of what America (or at least its global warming denialist half) devoutly prays for.

Joseph Moroco said at December 27, 2009 9:40 AM:

Wasn't it 2000 when Deffeyes first said peak oil would hit. Still waiting.

miles said at December 27, 2009 1:22 PM:

" Many people today feel happy and positive when they look at the stock markets, because they think these reflect the real economy, and since the markets are up, things must have changed for the better in the past year"

Randall,
Exactly. We have over 10% unemployment with 15.7 million unemployed Americans and 8 million employed illegals. The average guy _isn't_ doing all that well, but as long as the DOW is over 10,000, Wall Street and our 401K-crazy investment class really doesn't care.


I caught some flack for noting somewhere else that if the top 100 million taxpayers simply paid in an extra $400 a year, we'd get rid of this 12 trillion-dollar defecit in a mere 3 years. We need to knock at least half of that number off in the next several years or Im afraid we wont be able to borrow money from the Chinese et al when we really might need it (as in the rebuilding of our ageing infrastructure/implementing new energy alternatives). In my mind, what we have done in this country is replaced the robber barrons (that we could tax the living hell out of) with a large "investment class" that has managed (through illegals, outsourcing, and HIB) to transfer wealth to itself temporarily while killing the golden goose, all why fighting higher taxes for itself tooth-n'-nail. That debt needs to get paid off, and Wall Street should be first in line to pay it out of its -personal- pockets first and foremost. If we get to the point that nobody will lend to us, we really will be living in the *genuinely exciting times* Vox Day has written about--a new, real Depression, not a 'Great Recession' like we have been experiencing.

Lajaunie said at December 27, 2009 1:57 PM:

Miles, in constant dollars, an extra $40 Billion a year would pay down a $12 Trillion dollar debt in 300 years. A moderate inflation coupled with real expansion would do a better job, assuming the government can cap expenditures. Probably wishful thinking on my part.

miles said at December 27, 2009 3:10 PM:

Lajaunie,

Yes, somebody pointed out to me that I got the math wrong. Its too many zeroes to compute in my head (LOL). Its really dispriting to contemplate just how far in the red we are. We are in roughly $30,000 debt-per-PERSON in the United States in the Obama administration, http://www.lewrockwell.com/orig7/darby1.html (that page went as far as Bush, when we were 28K-per-citizen-in-the-hole). Its really ludicrious. Growth would be the only real way out, and a cap on spending, but the most talented wealth creators will be leaving the economy over the next 20-30 years leaving behind a lower I.Q. populace on the whole. I hope we see some profound technological advancement to help us out of this.

Randall Parker said at December 27, 2009 6:34 PM:

Eric Johnson,

Career: There'll be jobs for software developers for many years to come. They'll pay better than lots of manual labor jobs and you'll be able to do them more years than manual labor jobs. How much money you will make depends in part on how smart you are, how hard you try to get better, and where you live.

I would tell a kid going to college to become a medical doctor though. Even with all sorts of regulations and cost controls it'll pay better, be higher in status, and much harder to outsource.

There's a lot to be said for getting really good in some engineering specialty that few understand. Have few competitors in a rare valuable skill.

Of course, the ideal job is in Goldman Sachs.

miles,

The deficit can not be cut without reducing the amount of things the government does. It has taken on too many obligations. It can not fulfill them all. The numbers will get worse because the economy won't do as well as the White House and Congress expect. We are living beyond our means. Our living standards will either stagnate or decline for years to pay off the debts.

Taxes can't cut the deficit without a value added tax (similar to a sales tax). Income taxes will not collect enough money. A VAT of sufficient magnitude would substantially lower living standards. Imagine everything costing 10% more.

gig said at December 28, 2009 3:55 AM:

I am from Brazil, and we just made the largest discovery of an oil field in the last 40 years in the "pre-salt" area in the Atlantic. I work financing such projects, and people from the oil sectorHere say that the pre-salt area in the Gulf of Mexico dwarfes the Brazilian one and there are strong signals that areas as big as the Brazilian fields exist both in the South China Sea and the Niger Delta. Every evidence points to one thing: the Brazilian fields are the tip of the iceberg. Technological factors and (in the Gulf of Mexico) environmental concerns have prevented the production of such fields

There is also evidence that Raul Castro is starting the Cuban Perestroika. He hopes to avoid the Soviet-style collapse through oil, in the Gulf of Mexico. The conspiracy theory continues, saying that environmental pressure in the US are partly Cuban-oriented.

Anyway, peak oil is BS. It is a millenarist belief, and as Saint Augustine explained to the faithful 1600 years ago, every millenarist belief fails

Engineer-Poet said at December 28, 2009 7:02 AM:

Joseph Moroco and gig:  Deffeyes was off by less than 3 years.  There was a first peak around November 2005, and then oil production fell and did not surpass that peak until 2008.  During that period, prices doubled every year while production changed hardly at all; the price elasticity of oil production is very, very low.

gig:  I was at ASPO in October.  I saw the presentation by Marcio Rocha Mello, who is extremely gung-ho about oil in the pre-salt off the Brazilian and African coasts and in both the Amazon basin and continental Africa.  Suppose he is right, that there is another trillion or more barrels of oil in the pre-salt and so forth.  Does it change anything?

If he's right, we are still post-peak.  The existing world production is dropping at about 1 million bbl/day/year.  If the Brazilian pre-salt can be brought to market starting about 2016, it will have to fill a bigger-than-Saudi Arabia-sized hole in oil exports just to stay level with last year's production peak.

Deep oil is not cheap.  The amount of capital investment required to bring this oil up and get it to market guarantees that it cannot happen quickly, and that same investment requires high prices to pay it all back.  Demand will be destroyed instead.  This means we are past peak.

Joseph Moroco said at December 28, 2009 3:58 PM:

http://peakoildebunked.blogspot.com/2009/03/397-deffeyes-craps-out-again.html

There is a bit of a disagreement E-P

Engineer-Poet said at December 29, 2009 7:12 AM:

You give a link to a blog post which essentially repeats the facts I gave (the 2005 peak was just barely surpassed by the 2008 peak), and call this "disagreement"?

The "debunker" has no explanation for the failure of oil supplies to grow significantly during the extreme run-up in prices over 3 years.  Aren't you the least bit curious about that?

Joseph Moroco said at December 29, 2009 4:40 PM:

Why would it. Supply just has to exceed demand, not set records. Maybe we'll see dozens of tiny, successive peaks, or maybe you will be proved correct. So far, POD is ahead.

Bob Badour said at December 29, 2009 6:32 PM:

Joseph,

Supply does not exceed demand. Demand does not exceed supply. (At least not for long.) All we have is a price where supply and demand equal. Supply, price and demand tend to move toward that point.

Supply is a curve not a single point. The higher the price the more suppliers will sell or producers will produce.
Demand is a curve not a single point. The higher the price the less buyers will buy.

These curves can move over time.

The question is: Given the historically high price for a barrel of oil, why aren't producers producing more oil? Producers have now had time to respond to the market signal and to produce more. Why haven't they?

In the past, when prices increased, production increased too. Then, a couple years ago, that trend stopped. Why did it stop? The price is high. Why isn't production?

Joseph Moroco said at December 29, 2009 7:10 PM:

Bob,

Actually, the price isn't that high. Mish Shedlock sees a decline in price. Time will tell.

My mantra with my kids is, Is this trip necessary? I expect that is more and more so in a lot of families. Demand is declining. We can talk about peak when world economy rebounds and drilling can't keep pace.

Joseph Moroco said at December 29, 2009 7:11 PM:

Bob,

Actually, the price isn't that high. Mish Shedlock sees a decline in price. Time will tell.

My mantra with my kids is, Is this trip necessary? I expect that is more and more so in a lot of families. Demand is declining. We can talk about peak when world economy rebounds and drilling can't keep pace.

Bob Badour said at December 29, 2009 8:41 PM:

Obviously, there is a decline in price since the peak price. How does the price today compare with the price when production ceased to grow with growing price?

Randall Parker said at December 30, 2009 8:24 AM:

Joseph Moroco,

How can you deny that the price is high? Inflation from 2000 thru 2008 made a $20 barrel of oil into a $24.77 barrel of oil. Okay, so why are oil prices 3 times higher than that? Oil is only cheap now compared to the first half of 2008. Otherwise it looks very expensive.

Why has the market failed to respond with more supply? Peak Oil.

joseph Moroco said at December 31, 2009 4:40 PM:

Randall,

A lot of prices are high due to inflation. For oil, one of the factors is the large speculation that collapsed. See pod for this about the speculation. I think this has something to do with the runup. Why did it not collapse more? Maybe it will. With all the tankers anchored around the world, it should and it may.

When the world does end, I'll admit it. My suspicion is that when it does, it will do so because of government shenanigans rather than peak oil.


Post a comment
Comments:
Name (not anon or anonymous):
Email Address:
URL:
Remember info?

      
 
Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©