What Do Economists Know, Anyway?

According to this article in the Business Insider, economists have no better idea of what the economy is going to do than 'normal' people. Consequently, they simply follow the herd as published in the media. The consensus opinion is GDP growth of approximately 4%.

Notice a few things about this chart: the first is that real GDP is extremely choppy. Except for a five year period beginning in 1995, economic activity swings dramatically from year to year. Another thing to notice is the long- term downtrend in GDP from the dramatic +8% explosion in 1984. Even with a big increase in productivity over this period with cheap computers and means of communication and the widespread introduction of robotics/automation in all areas of production from retail self- checkouts to PC- controlled CNC machines, the overall output has been steadily declining. Notable in this regard is the period from 2003 to 2008 where real GDP growth was diminishing even as the country was recovering from the 'Dot- Com' recession.

This period was known as a 'Jobless Recovery', what will economists label the current 'recovery'? Notice too, that every period of negative growth has been accompanied an energy 'shock' of some kind or other. These crude oil prices @ or above $90 per barrel are something to pay attention to.

Here's the Brent crude weekly chart from the estimable TFC Chartz:

The trading on the exchange exceeded $99 per barrel on Friday. The question for the economists is what sort of activity can be done profitably when a gallon of crude oil costs the wholesaler $2.50? Certainly not run around in circles for the 'fun' of it.

The small open interest relative to the OI in 2008- 09 indicates this is not an index fund- or speculator- driven market.

Here's NYMEX/WTI crude, there is a $8 spread between Brent and Cushing fuels. One reason is weather demand has been higher in the Eurozone. Another is the NYMEX market is larger and represents a lower grade of crude product. Keep in mind that there is usually a very small price differential between the two markets:

The moral of this article is the contra- economist notion that there are limits to use/consumption of inputs and we are reaching them. Even if GDP does not plummet next week the current fuel price level has a constraining effect on output.

For example, the estimable Jeffrey Brown discusses with others @ The Oil Drum the Brent- WTI spread:

My guess is that it is due to a combination of a few million extra barrels of oil in a remote area of Oklahoma, (WTI) combined with the fact that the US is more or less in the process of being outbid for a (so far) slowly declining supply of global net oil exports. One would think that this kind of imbalance can't continue indefinitely. Something will have to change.

The question is who is outbidding whom and to what end? High prices as the outcome of F/X intricacies means oil traders are being forced to outbid currency traders. It's also hard to see the point of countries pushing petroleum prices higher when doing so bids up the cost of food at the same time! The same countries presumably supporting faddish 'modernity' and more auto use are the same countries who cannot afford food!

How long can this last?

Food riots in turn lead to instability and the overthrow of governments which happened last week in Tunisia. It's all part of the current dynamic where choices must be made: whether to either drive a car or have a job, to drive a car or have something to eat.

Modernity has obviated the need for choices. Americans in particular have been able to choose, 'all the above'. That era is past. Americans and those who wish to imitate them from this point forward are going to be disappointed because they are going to have to make existential choices.

At some point society is going to have to acquire less costly forms of transport. Our current 'system' is too gluttonous. The world cannot afford all the above: both a reasonable living with a modicum of control over ourselves, a nature that provides vital services and a massively inefficient and wasteful means of transport.

The recent editorial "SANDAG wins for North County" demonstrates a tragic and potentially fatal flaw in the current American conversation. The editorial applauds a decision by SANDAG to commit $4 billion to a widening of the I-5 corridor. It dismisses the informed opinion of thousands of residents who have thoughtfully explained transit alternatives in many town hall meetings. The editorial lauds the idea of a muscular expansion as transportation progress.

The flaw derives from three essential facts. First, America is now a second-tier economy, because the love of personal mobility has shut out societal advances in shared transportation. While Europe expands its high-speed rail in all countries, including Croatia, Poland and Western Europe, and while China completes 9,900 miles of 200-plus-mph rail, San Diego will still be constructing a completely useless 23-mile widening of an already massive freeway. Is widening an already wide freeway transportation innovation and progress? Where are the voices in San Diego planning who speak for transportation innovation?

Second, our domestic security depends on weaning ourselves from fossil fuels lest we continue to be held in the grip of those societies who will export every last drop of their oil to dominate one of the great democracies in history. With peak oil comes the realization that the price and supply of oil is a risk too high for domestic security. The widening of I-5, like a co-dependent or alcoholic enabler, says: "I like my citizens dependent on fossil fuels." Wrong now ---- and future generations will scorn the expansion as criminally wasteful.

It's us or our machines! Modern auto transport returns very little on the capital expended on it while the 'environment' this transport requires is both soul- destroying and unproductive. Creating the transport environment of roads, stores, tract houses, freeways, parking lots and all that supports this infrastructure precludes other profitable uses of the land- and money capital.

The economists cannot see the zero- sum forests because of the trees. They ignore high fuel costs undermining economies. Finance combined with a slowdown in production creates a condition where economic dynamics converge. 'Market forces' in finance are driving fuel costs higher along with other asset classes such as gold and stocks. The same increased costs are undermining the productive economy which needs cheap oil to run profitably. Further increases in finance asset values destroy more wealth in the real economy than is gained by finance. We need to get serious, ditch the cars and the wasteful infrastructure and come up with a 'Plan B'.

This chart from the Energy Information Agency proposes a large consumption increase both in this year and next. Where is this new oil going to come from? USA energy consumption is shown to have a modest growth in consumption. How does this align with a 4% rise in GDP? Our energy consuming mechanisms are not any more efficient than they were a couple of years ago. Demand destruction and accompanying deflation stifled energy use in 2008 and 2009. Of the 250 million vehicles on the US highways the percentage that are hybrids or electric- only is minuscule. Three of the top- ten selling vehicles in the US were the 'Big Three's giant Pickup Trucks.

$95 crude is presumed to be safe to enrich oil traders and 'friends' in the Middle East and elsewhere with no harm to the rest of the world's economies. This is a fantasy. $97 was the average price of crude during 2008 when the US and the developed world was overflowing with credit. This price level was unsupportable and the economies unraveled. According to the EIA the average price for crude last year was almost $78 per barrel. The average for the last four months of 2010 was $81.60. The noose is tightening. The 2 million barrel per day increase in consumption is not matched by an equal increase in production or an equivalent increase in discoveries.

Oil prices may spike higher to the $97 annual price limit or the economy could turn down from this point forward following a fuel price decline. Current price levels are unaffordably high for a system built upon an assumption of $25 per barrel fuel inputs.

This last chart from estimable Gregor Macdonald indicating the last ten year's crude output. I've taken the liberty to make a point: about the slowdown in production that began in 2005. The dashed line is a growth in production more or less equal to the 6 million barrel per day increase in extraction from  2002 to 2005. Equivalent growth would peg petroleum production 'off the chart'!

Take ten minutes and be a 'pretend economist' and ask yourself if the world was producing 80 million barrels per day or more of crude oil would there be a recession now?

Bitz and Piecez ...

Views from China aren't that much different from Economic Undertow's. This is today's New York Times:

Chinese Foreign Currency Reserves Swell by Record Amount

China’s foreign exchange reserves surged in the fourth quarter by a record amount while the money circulating within the Chinese economy also climbed more than expected in December, according to government statistics released Tuesday that underline the country’s worsening inflation dilemma.

The Chinese government has been printing renminbi at a furious pace to buy foreign currencies like the dollar and the euro, which are pouring faster and faster into the country through trade surpluses and foreign investment. The People’s Bank of China, which is the country’s central bank, has been doing so in an effort to hold down the value of the renminbi and preserve a competitive advantage in foreign markets for exporters in China and the tens of millions of workers they employ.

The extra renminbi issued to pay for rising foreign exchange reserves will make China’s inflation problem even worse, said Diana Choyleva, an economist in Hong Kong for Lombard Street Research. The extra renminbi come as the Chinese central bank has been grappling with the additional money that it pumped into the Chinese banking system in 2009 and early 2010 to keep the economy growing through the global financial crisis.

An analysis of the data by Standard Chartered said that trade and government-approved foreign investments into China accounted for less than half of the increase in foreign reserves in the fourth quarter; investors around the world have also been putting money into Chinese real estate, bank accounts and other investments despite efforts by the Chinese government to discourage these capital inflows.

The Chinese foreign reserves leaped by $199 billion in the fourth quarter, to $2.85 trillion. The increase was much larger than economists expected, and the numbers suggested that China had about doubled its intervention in currency markets to about $2 billion a day.

Which means two things: first is the 'unofficial' flows of F/X into China are as large as the unofficial flows and that the Chinese establishment is adding 12+ billion yuan into circulation every single day in an attempt to manage the difference between official and unofficial flows.

The article points out that the inflation rate in China is greater than the released figures would indicate. Sacre bleu! The Chinese are misstating figures? Who would have guessed?

Meanwhile, a look around the web reveals the dog that does not bark, that the class war has begun for real. That is, the shooting war has broken out between the pampered 'haves' versus the penniless and desperate 'have- nots' who are armed to the teeth.

Pop culture has made an industry of 'sexing up' our outlaws making them all 'Queens for a day (of so)', while at the same time celebrating their ill- gotten 'loot'. The next step is lust/envy and the sale of person- hood to the 'idiot box' and what goes with it. Outlaw Goldman- Sachs has been a tough sell but given the efforts of estimable Matt Taibbi and Max Keiser the reprehensible Lloyd Blankfein has a spot in the gay outlaw pantheon next to Tupac Shakur and John Dillinger.

"Steal from the 'rich' and give to the richest, eh Lloyd?" Tres Robin Hood, the archetypal gay outlaw figgah. That's right, gay. You just want to be butt- fucked by these people. And you are, over and over again.

Class war shrivels the gay outlaw archetype into another systemic fraud. Once the shooting starts and blood flows outlawry ceases to be an hegemonic American culture phenomenon and something far more real. Class warfare is anti- anti- heroic and is unable to pimp anything, not even gold- plated trash cans or lavatory faucets.

The 'haves' aren't hard to find. Like a large (and growing) minority in Congress Gabrielle Giffords is a millionaire albeit a minor variant. She is not in the league with Darrell Issa ($300 million) who prepares to take taxpayer- funded cheap shots @ 'Government Corruption' (the president) as if there is nothing better to do.

Where are these people going to hide? Not just Congress but the entire constellation of pop culture moneyed hotshots: rappers, real estate executives, business tycoons, hedge fund managers, investment bankers, media starz, professional athletes, stock swindlers and their various and sundry establishment lackeys. 'Bling America' is a target- rich environment. Anyone with a Ferrari or Aston Martin is a potential victim.

What pop- culture created as figures to be emulated and adored now threatens to become despised, unsympathetic, arrogant creatures to be hunted down like rats. The bodyguard business is going to explode along with the market for armored luxury cars and stylish 'personal body armor', but these are of limited effect. Bodyguards or police escorts in Tucson would have been shot along with the rest.

The easy solutions would be to cut back on the inequality that fuels the class war. Sez Warren Buffett,

“There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Nobody has yet made the connection between the lucrative tax deal cut by the billionaire class and their lackeys on Capital Hill and the Giffords' shooting. The timing is hard to ignore. Maybe ordinary folks have gotten fed up with the looting and maybe not but maybe the uppers might ought to consider hedging themselves while they have the luxury of 'time remaining'. The 'other' class has just fired back and has used live ammunition.

Too bad, Mr Buffett you can't go outside any more.

Meanwhile, there is the ongoing crackdown by 'capital a' Authority on its harmless critics. The establishment and its minions gives its best impression of the buffoonish 'Federation' in Woody Allen's 'Sleeper':





Instead of shutting down militias and 'patriot' groups the FBI focuses on Wikileaks and anti- war activists! It would be funny if not tragic.

Government-created climate of fear

Glenn Greenwald

One of the more eye-opening events for me of 2010 occurred in March, when I first wrote about WikiLeaks and the war the Pentagon was waging on it (as evidenced by its classified 2008 report branding the website an enemy and planning how to destroy it). At the time, few had heard of the group -- it was before it had released the video of the Apache helicopter attack -- but I nonetheless believed it could perform vitally important functions and thus encouraged readers to donate to it and otherwise support it. In response, there were numerous people -- via email, comments, and other means -- who expressed a serious fear of doing so: they were worried that donating money to a group so disliked by the government would cause them to be placed on various lists or, worse, incur criminal liability for materially supporting a Terrorist organization.

At the time, I dismissed those concerns as both ill-founded and even slightly paranoid. From a strictly legal standpoint, those concerns were and are ill-founded: WikiLeaks has never even been charged with, let alone convicted of, any crime, nor does it do anything different than what major newspapers around the world routinely do, nor has it been formally designated a Terrorist organization, nor -- I believed at the time -- could it ever be so designated. There is not -- and cannot remotely be -- anything illegal about donating to it. Any efforts to retroactively criminalize such donations would be a classic case of an "ex post facto" law unquestionably barred by the Constitution. But from a political perspective, the crux of the fear was probably more prescient than paranoid: within a matter of months, leading right-wing figures were equating WikiLeaks to Al Qaeda, while the Vice President of the U.S. went on Meet the Press and disgustingly called Julian Assange a "terrorist."

But more significant than the legal soundness of this fear was what the fear itself signified. Most of those expressing these concerns were perfectly rational, smart, well-informed American citizens. And yet they were petrified that merely donating money to a non-violent political and journalistic group whose goals they supported would subject them to invasive government scrutiny or, worse, turn them into criminals. A government can guarantee all the political liberties in the world on paper (free speech, free assembly, freedom of association), but if it succeeds in frightening the citizenry out of exercising those rights, they become meaningless.

So much of what the U.S. Government has done over the last decade has been devoted to creating and strengthening this climate of fear. Attacking Iraq under the terrorizing banner of "shock and awe"; disappearing people to secret prisons; abducting them and shipping them to what Newsweek's Jonathan Alter (when advocating this) euphemistically called "our less squeamish allies"; throwing them in cages for years without charges, dressed in orange jumpsuits and shackles; creating a worldwide torture regime; spying on Americans without warrants and asserting the power to arrest them on U.S. soil without charges: all of this had one overarching objective. It was designed to create a climate of repression and intimidation by signaling to the world -- and its own citizens -- that the U.S. was unconstrained by law, by conventions, by morality, or by anything else: the government would do whatever it wanted to anyone it wanted, and those thinking about opposing the U.S. in any way, through means legitimate or illegitimate, should (and would) thus think twice, at least.

That a large percentage of those brutalized by this system turned out to be innocent -- knowingly innocent -- is a feature, not a bug: that one can end up being subjected to these lawless horrors despite doing nothing wrong only intensifies the fear and makes it more effective. The power being asserted is not merely unlimited and tyrannical, but arbitrary.

And so it goes, Le Capitaine orders that the 'usual subjects' be rounded up. Good Grief!

Meanwhile, grab a credit card and purchase any number of full- automatic carbines, sub- machine guns and belt- fed machine guns online! It is widely considered unlawful for Americans to own full auto weapons in the US. This is true in some states but in others such as Virginia, machine gun ownership is permitted.





Only full auto weapons manufactured after 1986 are prohibited nationwide. Considering that millions of military weapons were manufactured prior to 1986 including those made during the Second World War by all combatants there is practically an unlimited lawful supply of the tools needed to turn America into Afghanistan.

Keep in mind that a lot of this firepower is flooding into Mexico to equip the drug cartels.

Welcome to the Thunderdome!

Wicked Fairy Tales ...

Marc Davis- Walt Disney Company 'Maleficent and Diablo'

The shooting tragedy in Arizona is set to trigger market revulsion for American finance 'products' in the marketplace. America is now broken politically even as homicide rampages remain an integral part of the cultural landscape. The shooting may be a reality jolt that is extreme enough to destabilize the US stock exchanges.

The five or six people who read this blog know there are two simultaneously operating economies in the US and world, the real economy of production and labor, resources and capital with an abstract and parasitic finance economy attached where the real cannot reach to remove it.

The tapeworm economy is in the spasm of hyperinflation as credit is formed by finance firms with the moral hazard- encouragement of central banks and governments. Finance lends itself trillions so as to bid up assets and create a wealth 'effect' for itself. Ongoing real economy difficulties have so far not been allowed to spoil the wealth creation party. The tapeworm seeks to feed off the real economy more or less permanently rather than kill it outright.

The real economy is deflating, burdened by real costs for inputs alongside the excess debt service that the tapeworm economy refuses or is unable to lighten. The 'container' for both of these economies is a culture that holds out a (so- far false) material utopia of inevitable, endless progress. Advertising which is the lever of culture is a 'diktat': it is not just television or mobility that is demanded and promised but only acceptable types of flat screen televisions and SUV mobility.

Progress is our past: the visions of Hollywood designers and commercial artists of the 1950s. Our present mobility is leveraged to the automobile. The future is not just cars but flying cars: not just flying cars but gigantic flying pickup trucks.

Culture demands, "Carz or social/cultural death" while the real economy insists the choice is between having a car or having a job, then having a car or having something to eat. This is our cultural dilemma: our culture clothes the unreachable as the virtue 'hope' even as hopefulness undermines itself. Meanwhile, our auto- centric culture is intolerant of other 'non- material progress' cultural narratives.

The fairy tale world insists on better lives for all, for children and grandchildren who will possess more conveniences and services and who will lives better than their parents. The real world of inconvenient entropy is shuffled off to the side and ignored. The fairy tale is promoted as real and the real made into a fraud.

The culture dictates and the participants act their appointed roles without question. Bankers look and act in the manner bankers are expected to look and act. The same is true of politicians and wicked fairies. Ben Bernanke is as locked into his central banker role as was Maleficent in her role as a wicked fairy. Alongside both is the role- playing wicked fairy in Tucson.

A difference is the Maleficent is more 'real' than both Bernanke and Loughner: unlike the two flesh- and- blood contemporaries, she is desperate to exit the super- max confinement of her script, even as/because the outcome is her destruction. This is the tension that her character embodies, which in turn reflects the artistry of her animators. Maleficent is the most vibrant of Disney's menagerie of two dimensional, 'No Negroes Allowed' suburban Styrofoam cutouts. Like all theatrical characters, she becomes a carrier of what we bring to her outside of what the script demands. Even as she is trapped within her role, she quivers with the desperate energy of attempting to expand outside it. From ink lines on pieces of cellophane she becomes human then tragic. Maleficent's complexity animates her character and the empathy felt by her viewers. Maleficent destroys herself when the one creature she loves and who loves her is turned to stone. Rejecting the script to the degree that she can, Maleficent lives outside the chances the animators and her two- dimensional world allow her.

Bernanke does the exact opposite, burying himself into the abstraction of the 'central bank dude' role, sacrificing his human identity or ability to act independently in the process. Bernanke is the opposite of the cartoon Maleficent, he abhors existence outside the script. Bernanke cannot separate himself from his role to accept the possibility of risk of any kind. Bernanke has become the establishment zombie without any life outside of what the word 'Fed' on a piece of paper dictates.

Bernanke's role makes destroying the country he pretends to serve a pesky and ignorable externality. Our hyper- materialist culture destroys the country by hollowing itself out while role playing confines 'central banker' to being a voice over. Bernanke's empathy vanishes as does ours for him. He is a blank, a familiar for the tapeworm which gets 'fed' while the country dies.

Loughner is the central banker golem/doppelganger, ranting about gold and hard currencies, submerging himself in the Bernanke role and cannibalizing his identity in the process. The tragedy spirals outward from Loughner who vanishes. Instead of Bernanke's vacuous zombie, Loughner is replaced by a monster with blood on his teeth. Loughner has not seen fit to accept any options beyond what lies behind the Charles Manson mask. Unlike Maleficent's brilliant animator who charged every frame with her impossible desire to escape a deathly life and crushing loneliness, Loughner has engulfed the false promises of the tapeworm economy along with those of its vicious shills. Engulfed in turn, he's strip- mined of identifiable truths then everything else. He is a vapid and avenging thing, banal and outside of ruthlessness, a bowling ball that rolls down the alley then knocks other things over.

The hegemonic nature of our culture creates non- linear roles that carry through to logical (or illogical) conclusions. Loughner's role was to behave in a threatening manner in public, to be menacing and eventually become the central heroic figure in the pop- theater, the gay outlaw: a character from a Truman Capote novel. What destabilizes is that political assassination is not part of the theater, it's too serious. America does not have a gay culture analog of anarchist Gavrilo Princip and his Bosnian- Serb gang.

Markets accept the idea that American politics is dysfunctional and untrustworthy. The shooting tears away the scrim or plausible deniability that is the foundation of the tapeworm economy. It's too real. We are forced to accept that the fake American representative political system was shot in the head in a supermarket parking lot. Acting out has knocked a prop out from under the already hopelessly corrupted political system while amplifying the harmful outcome of the corruption at the same time. It is a short step from role playing to stomping out the roles altogether. At that point there is no need for Fed Chairmen, or Feds or central banks or even markets. Uncertainty becomes the country's only asset.

Here is a chart of M2, by the way, from the estimable John Williams' Shadow Government Statistics:

While all this cheap theater is taking place the foundations of both the finance and 'real' economies are being constantly eroded by increasingly expensive fuel/input costs. Input costs are unsupportable by the output of the real economy which spells an end to the tapeworm version. Finance's output is a demonstrable fraud. The real economy attempts to bootstrap input costs, externalities and profits. What has worked for the economic evil twins in the past of cheap energy inputs and ignorable externalities has been rendered unprofitable by the simple exhaustion of cheap energy.

Margin has been removed from the bootstrapping function. No profits equals no business. No business equals no workers. No workers means no customers for 'other' businesses. So it goes and has gone since fuel was dirt cheap in the 'dollar peak oil days' of 1998. Since then fuel prices have increased almost eight times from $12 a barrel to the current + $95! Eventually, all the businesses that need fuel will fail. There is nothing structural or within the fuel- use 'culture' to prevent this from happening.

High fuel costs are economy killers. Finance cannot parasitize a corpse. This does not mean high fuel costs are killers to all aspects of the real and finance economies at once. Once fuel becomes valuable it will be hoarded like gold, Picassos and all other valuable things. That will be the end of wasting fuel!

The damage done by high input costs emerges outside the strict fuel- supply ambit. People can afford the increased prices at the pump. They cannot afford the house, the vacation, the second car, the jet ski. This effects profits and company survival. Bond yields rise as funds to bid bond prices are diverted toward fuel. Labors' ability to consume disappears along with 'overpriced' jobs that cannot compete with the fuel required to support them. Businesses fail for lack of customers driven off by higher fuel and goods prices. Since all goods are embodiments of petroleum and coal in differing forms, the increase in fuel cost translates into higher store- shelf prices even as the means to afford those increased prices evaporates.

This price squeeze is eroding economies while the waste- enabling culture built upon the scaffold of cheap input remains. Since the culture does not allow any deviation from the 'progress' narrative, non- linear events are either swept into one of the culture's many mansions or ignored.

Our fairy tale fantasies which we have convinced ourselves are useful have unintended consequences. Putting cross-hairs on a map is violently suggestive. Our vitriolic partisanship and organized denial is also suggestive. What makes pop culture powerful is its ability to partner with atrocity as long as the 'pop' part can render the 'atrocity' part fashionably stylish. The American 'love that dare not speak its name' for aggressively militaristic German fascism and its various machine fetishes is just as much a part of Warholian pop culture as Notorious B.I.G., Bonnie and Clyde ... and Thelma and Louise.

This is undermining: our fairy tales are ultimately self- destructive. Loughner's Golem is another denier, equidistant from energy company shills Michael Lynch and Fred Seitz. The fairies pimp a life without work, that our wastes are harmless, that we can fill the world over and over with ourselves, our machines and our agriculture with no consequences; that there is a large and benevolent fairy looking out for us when we should be shouldering responsibilities and looking our for ourselves and our only home. Our fairy tales should give us duties along with handsome princes and beautiful princesses, but they don't. The duties have been scraped off and lost in the shuffle of endless advertising and cheap distractions.

Anarchy suggests the existence of something outside the pop culture narrative. A vulnerable narrative leaves little to inspire future confidence in markets which are the axle around which culture turns. The establishment is given a choice: to tolerate an outlier as part of 'business as usual' or accept that the establishment is fatally flawed cannot defend itself.

Furthermore, the libertarian container for the anarchist narrative and its insistence that the only restraint must be upon the idea of restraint itself becomes auto- destructive when carried to its logical conclusion. American finance is undone by disorder and uncertainty. If disorder is embraced by the establishment ostensibly as part of the progress narrative (along with its neo- fascist fascination with pomp) the establishment is set to annihilate itself as it cannot be comfortably financial and anti- financial @ the same time.

What does this all mean in practical terms? It suggests the injection of anarchism into the heart of the establishment along with violence at the extremities will destabilize the markets. Bond markets are jittery about the tea party activists shutting down the government, not increasing the debt ceiling and now the apparent passive acquiescence toward the use of lethal force against political adversaries.

We have just exited the fairy tale world of permanent growth and progress and entered someplace a lot more real.

Bits and Pieces ...

Here's an addendum to the Yuan article, this is from former Australian Prime Minister Paul Keating:

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post.

The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."

"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

This is charitable. The IMF and its US hucksters such as Geithner continually apply the same prescription. It's a strategy not a policy error.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."

Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

China could also recall George Soros' raid on sterling in 1992 and numerous other F/X 'runs' and came to the obvious conclusion.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.

"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."

As noted the other day:

Again, the (Chinese) central bank is in a box. If they could somehow push the yuan's value upward, dollar- investments already made in China @ the lower rate would be claimed in more valuable yuan. This would represent a value loss to China and a gain for 'evil' dollar speculators. Avoiding this outcome was the reason for the dollar/yuan peg and increase in dollar surplus in the first place.

The IMF's strategy is to create conditions whereby Wall Street financiers are able to loot by way of foreign exchange the value of another country. The victim's foreign currency reserves are fed into the hopper, loans to banks and firms are paid at the expense of labor, pensions, education and public investment. The outcome is greater debt and diminishing ability to service it.

Here is Michael Hudson @ the Guardian:

Latvia provides no magic solution for indebted economies

Despite being hailed by bankers as a shining example of how to pay off debts, the true picture in Latvia is far from rosy

The "Latvian option" is the buzzword of the moment among European bankers and financial journalists. In October, the Latvian people voted in a coalition headed by the incumbent prime minister Valdis Dombrovskis, whose government had savaged social benefits, cut pay and inflated unemployment in 2009. Was this proof that austerity measures could not only work, but actually be popular? Was Latvia the model that Greece, Ireland and Spain should emulate?

The Wall Street Journal, for one, has published several articles promoting this view. Most recently, Charles Doxbury advocated Latvia's internal devaluation and austerity strategy as the model for Europe's crisis nations to follow. The view commonly argued is that Latvia's economic freefall (the deepest of any nation from the 2008 crisis) has finally stopped and that recovery (albeit very fragile and modest) is under way.

On politics, the standard narrative (as rolled out in the Economist recently) is that Latvia's taciturn and honest prime minister, Valdis Dombrovskis, won re-election in October even after imposing the harshest tax and austerity policies ever adopted during peacetime, because the "mature" electorate realised this was necessary, "defying conventional wisdom" by voting in an austerity government.

Latvia endures its misery so as to make use of the euro. Its own currency, the lat, is accordingly hard to find and extremely valuable, which accompanies the demise of any organic output in that country. Sez Hudson:

As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labour force) now works abroad.

Children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So, unless other debt-strapped European economies with populations far exceeding Latvia's 2.3 million people can find foreign labour markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.

So what about the much-quoted 3.3% growth rate? Projected for 2011, it is often cited as evidence that Latvia's austerity model has stabilized its bad-debt crisis and the chronic trade deficit that was financed by foreign-currency mortgage loans. But the real question to ask is whether 3.3% is really enough. Given a 25% fall in GDP during the crisis, such a growth rate would take a decade to just restore the size of Latvia's 2007 economy. Is this "dead cat" bounce sufficiently compelling for other EU states to follow it over the fiscal cliff?

The method by which the EU's creditor nations and banks would like to resolve this crisis is "internal devaluation": lower wages, public spending and living standards to make the debtors pay. This is the old IMF austerity doctrine that failed in the developing world. It looks like it is about to be reprised. The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by going into poverty.

So do Greece, Ireland and perhaps Spain and Portugal understand just what they are being asked to emulate? How much "Latvian medicine" will these countries take? If their economies shrink and employment plunges, where will their labour emigrate?

Apart from the misery and human tragedy that will multiply in its wake, fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession. What is needed is a reset button on the EU's economic and fiscal philosophy. Bank lending inflated its real estate bubbles and financed a transfer of property, but not much new tangible capital formation to enable debtor economies to pay for their imports.

Hudson leaves out Ireland which is facing its own IMF- driven deflation and a compounding debt spiral. It seems the current Fianna Fail government is going to smashed @ the polls in March, when elections will presumably be held.

Yesterday the Taoiseach's supporters claimed that Mr Cowen was being lined up as a "scapegoat" for what will undoubtedly be the most difficult election for Fianna Fail in living memory.

Mr Cowen's allies remain convinced that the true level of Fianna Fail support will be higher than that recorded in recent opinion polls. A Red C poll last week showed Fianna Fail running neck and neck with Sinn Fein.

The poll for Paddy Power found: Fine Gael (35 per cent), Labour (21 per cent), Sinn Fein (14 per cent), Fianna Fail (14 per cent), Greens (4 per cent), and Others (12 per cent).

Ominously, the Irish establishment still is without a clue:

Last night Mr O'Keeffe, said that while he fully accepted that Mr Cowen had the "best interests of the country at heart" it was abundantly clear that the time had come for him to resign. "The country is experiencing the worst economic crisis of our lifetime but we do not have the strong leadership that is required to address the many major problems," he said.

He added that the future of the country was being squandered because, among other things, there was "still no overall strategic plan for the banking sector two years after the crisis began".

Which is where the rest of the world is, nobody has a plan except for more pursuit of 'growth', more looting and more crossed fingers.

A good place to start a plan would be with the world's energy budget which is completely busted. Expensive crude inputs are effecting everything that uses or embeds fuel. The outcome is high food prices, declining bond yields, onrunning forex imbalances, inflation/deflation and rising worldwide unemployment. The easiest and best first strategy is for economy- wide conservation. Let's cut energy use in half.

How hard can it be?

Here's a quick look @ Brent crude futures weekly front month from the estimable TFC Chartz:

Even though crude prices pulled back a bit toward the end of the week, the traders have this as a manic bull. At the same time, this price level is one where major breakage is happening/going to happen Look for default noise in Europe or bad news such as food riots or a large interest rate rise in China. Ugliness in US politics might scare stocks but the underlying cause is the oil price train- wreck taking place under our noses. The world economy simply cannot make a profit with $90 crude. The lack of profits in the real economy over a short span of time will in turn bring down the price of crude.

The instrument will be business failures along with more workers fired. Same ol' same ol'.

Here is the gold weekly chart:

Gold might be rolling over. I don't see a new bear market in gold as nothing fundamental has changed regarding gold supply or demand. The high value encourages hoarding. Meanwhile, there is a three- way dilemma: a strong bull market in crude is weakening the dollar in the near term, as dollars are 'priced' in crude. This is not a condition that can endure as the high fuel prices strangle both dollar and non- dollar economies.

What, then are gold traders looking at? Are they looking @ the current low value of the dollar or are they savvy to the inevitable high value of the dollar when crude dives? Are there other reasons why gold is pulling back?

Time will tell ...

Accepting the New Yuan Reality?

It's hard to say what dynamic really going to take hold in China, but it looks like the bust is well underway. Inflation in that country is spiraling out of control even as money authorities 'ramp' up a fake inflation- fighting campaign. China raises interest rates by piddling amounts.

According to Bloomberg there is a yuan cash crunch taking place right now:

PBOC Extending Biggest Cash Crunch Since Lehman: China Credit

Borrowing costs for China’s banks will rise to the highest in more than two years in the first quarter as policy makers curb supplies of cash to fight inflation, according to a survey of bond analysts.

The seven-day repurchase rate, which measures interbank funding availability, may average 2.9 percent in the first quarter, compared with 2.75 percent in the previous three months, according to the median estimate in a Bloomberg survey of eight analysts. Both levels were the highest since the third quarter of 2008, when Lehman Brothers Holdings Inc.’s bankruptcy caused global credit markets to seize up.

Central bank Governor Zhou Xiaochuan’s tolerance of the funding shortage shows his determination to curb the fastest inflation in two years in a country where 150 million people live on less than $1 a day. The seven-day repo rate has doubled in the past year to 3.14 percent, as the one-week U.S. dollar Libor remained little changed at around 0.25 percent.

“The pool of liquidity is getting smaller, but corporate demand for funds hasn’t dropped as China is still an investment- driven economy,” said Sheng Nan, an analyst in Shanghai at UOB Kayhian Investment Co., a unit of Singapore’s United Overseas Bank Ltd. “That means higher borrowing costs for some companies, and for others there could be no funding available at all. That’s certainly not conducive to economic growth, but the government’s priority now is fighting inflation.”

The People’s Bank of China ordered lenders on Dec. 10 to set aside more deposits as reserves for a third time in five weeks. Governor Zhou pledged Dec. 31 to keep prices “basically stable” this year, after a second interest-rate increase in three months on Christmas Day. He said inflation pressures are rising, partly as a result of monetary easing in the U.S., according to an article posted on the website of the China Finance magazine on Jan. 4.

The issue is how much control Zhou Xiaochuan has over China's money supply along with whether he is willing to stare a systemic real estate- and accompanying debt deflation in the eye. Zhou is in a dangerous box. China needs inflation the same way Bernanke does. Without a constant flow of new money the structure of bad debts becomes a cascade of defaults.

Clamping down on inflation means crimping cash flows: this results in unserviceable debts and lenders falling insolvent. Credit destruction ruins borrowers who must find instantly scarce and increasingly valuable funds to repay loans. When they cannot, collateral is forfeited and capital annihilated in currency traps. Deflation rewards the cautious, who hold cash. Among the ruined by deflation are the elites who used their connections to massively overleverage themselves and cannot meet margin calls.

The costs of inflation are balanced against the cost of having to bail the banking system, or, not bailing it out and letting the excesses self- liquidate. The lesson Lehman's failure teaches is that the road that leads from economic growth and 'good times' to systemic collapse is very short.

At the same time, ramping hyperinflation ruins savers and liquidates investment capital while putting food prices out of the reach of the average Chinese citizen. Riots and worse follow when food is unavailable. Zhou is damned if the does and damned if he doesn't.

When countries are experiencing very high rates of inflation, one effect is an apparent 'shortage' of cash, which ultimately compels money authorities to add more and more to the money supply. Right now, industries are clamoring for cash. These companies will turn to loan sharks to gain the funds they need if the authorities cannot satisfy them.

Zhou's problem is that China's money supply does not flow entirely through banks but also through a gigantic, informal black market of local government entities, developers, overseas traders and lending pools. China is increasingly tolerant of this informal economy because it is 'backup liquidity' @ no questions asked and because this shadow economy provides 'services' for the elites. No black market will survive only to provide goods for the proletariat, there simply isn't enough margin.

Since these markets cannot create a money supply (Seigniorage) they trade whatever currencies can be had on any and all markets, which would includes the currencies found within the China banking sector. Buying dollars or euros from the back door is putatively illegal in China but certainly happens if the yuan 'offer' is high enough. This currency/yuan 'spread' is the inflation basis. Ironically, the increased demand for yuan also increases the yuan price for dollars and other currencies. It's the gross demand for a sufficient supply of money that matters.

At any given time, there may be proportionately more dollars or euros and less yuan circulating on the street but the total value of the money supply as a whole will tend to increase. This is because the opportunity is far greater to profit on the street trading money with fewer barriers to entry than exist in the official economy. As with all other currency regimes, funds in circulation will tend to remain in circulation with increasing velocity which becomes self- reinforcing. Since one currency or another is in greater demand relative to another there is always incentive to sell whatever is in hand for an instant gain or to avoid an instant loss.

Within this constellation of currencies a preference for one or another takes hold which enforces an unofficial exchange rate that is never favorable to the local currency which is of course created by seigniorage in ever- expanding amounts. This preference rate is added to the 'back door' rate or yuan cost of buying the preferred currency. The two costs added together become the real rate of inflation which can be many times more than the official rate.

Like the OECD's 'shadow banking' little is sure about the size of the Chinese currency black market. Increasing inflation @ the 'Trans-China scale' indicates it is massive and will be extraordinarily hard to throttle. Entire Chinese cities have sprung up empty: how much of this is the product of 'informal finance' run amok?

Arbitrage opportunities expand along with inflation which changes the relative values of 'official' and 'street' monies: interbank lending rates are creeping upward as the black markets seek cash regardless of the cost. Unlike rocketing LIBOR rates during the '08 credit squeeze which was the result of liquidity collapse in the dollar- denominated shadow banking system, China's rise is caused by a voracious black market demand for currency. The central bank must bid against the yuan black market for dollars. At the same time, it must add yuan so as to compete with China's savers as liquidity providers.


We simply have the dude @ the Fed with the nose ring and Metallica tattoo sitting in a cubicle next to the loading dock who punches a few trillion into existence on his laptop between tokes.


Renting the cheaper 'official' funds to sell short to loan shark operations causes the cash drought at the bank level. You can read between the lines.

China is allowing companies to hold dollars. This is from a Chinese news source Caing. Where are the dollars held, again?:

China Allows Exporters to Keep Foreign Earnings Overseas

The new measure signals loosening controls on foreign exchange

China said December 31 that exporters will be allowed to keep their foreign revenues overseas from January 1, in a move to expand a trial program effective since October 1.

The new measure signals loosening controls on foreign exchange and will help slow down the growing pace of China's already massive foreign exchange reserves.

Under the new rule, it is up to qualified Chinese exporters to decide how long they park their revenues in foreign currencies in a foreign country and when to transfer the funds to China, according to the State Administration of Foreign Exchange.

In the past, exporters were required to convert their revenues in foreign currencies into Chinese yuan with commercial banks. Commercial banks in China sell the foreign currency to the central government. The People's Bank of China has been forced to increase the monetary base in order to purchase foreign currency from commercial banks, which has increased the liquidity of the yuan in China.

Oops! it seems the black market cat is already out of the bag! By making this announcement, the money authorities are accepting a fact on the ground, that exporters are already holding dollars. The next step is for the Chinese to 'allow' dollars to circulate freely on the streets. The fact of the announcement itself reflects the new reality.

Of course, there is nothing authorities can do to keep the companies from putting their dollars into informal circulation within China if, as the articles suggest, exporters are reluctant to swap them at low 'official' rates for yuan. Chinese businesses appear to be already spurning the bank- level dollar- exchange and getting better yuan rates by peddling dollars in the black market. The higher the 'street' rate of exchange, the more yuan escape from savings and flow toward the loan sharks.

The more savings that escape into circulation, the higher the rate of hyperinflation.

This is why the Chinese money authorities are quietly adding to the supply of yuan. They do this while keeping rate rises very small and pimping 'inflation fighting' noise on television. This also takes F/X pressure off the yuan, which would otherwise fall in value against the dollar. How would it do otherwise? America's yuan complaints are far away. The exchange of dollars/yuan that matters takes place on the sidewalk next to the Forbidden City. China can only offer more yuan for dollars at the banks to attract dollars away from the loan sharks.

Again, the central bank is in a box. If they could somehow push the yuan's value upward, dollar- investments already made in China @ the lower rate would be claimed in more valuable yuan. This would represent a value loss to China and a gain for 'evil' dollar speculators. Avoiding this outcome was the reason for the dollar/yuan peg and increase in dollar surplus in the first place.

Conventional macroeconomics insists the yuan appreciate because of the current account surplus held by the Chinese in debtor countries' currencies. The informal currency arbitrage within the Chinese local economy is pulling in the opposite direction. Rather than a cheap yuan stimulating Chinese exports, the Chinese cost advantage has allowed a cheap yuan. Now that costs are rising the cheap yuan advantage has morphed into hyperinflation. This in turn has created a vicious cycle where the informal dollar/yuan arbitrage is driving the yuan lower which next puts more and more yuan into circulation which sets off successive rounds of arbitrage. Each of these takes different forms such as food price hikes, wage hikes and changes in F/X policy.

That these forms have manifested themselves indicates the arbitrage is taking place. No other indicators are necessary.

Meanwhile, China also faces the dilemma of using dollars, euros and yen to buy petroleum and other commodities. China does not trade its currency freely. America can 'manufacture' dollars at the cost of a few pennies. America essentially pays for petroleum with 'nothing in particular'. China's fuel inputs are paid for with real output that has been shipped 'paid for': in other words goods that have been made out of real materials and labor then traded to America, also for ... 'nothing in particular'! The US's dollars have more worth to China as they have been earned with work than the same dollars are worth to America. We simply have the dude @ the Fed with the nose ring and Metallica tattoo sitting in a cubicle next to the loading dock who punches a few trillion into existence on his laptop between tokes.

The term 'lending into existence' does not do the process justice; 'peeing dollars into existence' makes more sense.

China buys oil with dollars and sells the oil and products within the country for yuan. These are presumably earned with sweaty brows. Buying @ increasing volumes pushes up the input cost in dollars. The dollars must be 'bought' with yuan/labor in the first place. Then the yuan spent by fuel users must be 'bought' with labor and more yuan. The yuan themselves are priced by yuan/currency arbitrage on the streets in the Chinese black market. The foreign exchange costs are paid thrice by China in yuan. As she buys more fuel overseas -- including coal -- with foreign exchange the yuan costs multiply at every point of the transactions.

The foreign exchange costs of the dollars spent of fuel are added to the yuan value of wages and to the foreign exchange costs of yuan again in China. Add bid- offer spreads at every level and it is easy to see how fuel and other commodity consumption rapidly amplifies hyperinflation.

Pundits suggest that China and other developing countries can afford to pay higher dollar costs for fuel. This does not take into account the internal costs associated with F/X and black market pricing of currencies used to pay for the fuel.

Keep in mind that any dollar devaluation for whatever reason also adds to China's F/X costs in yuan. Any fuel subsidies are also strictly zero- sum; given to one sector and taken from another.

Inflation is a wage- price spiral. Increased costs without increased wages to pay them is simply bankruptcy deferred. Wages are increasing dramatically in China: sez Financial Times:

Beijing city to raise minimum wage 21%

Jamil Anderlini and Rahul Jacob

Beijing city is to raise its minimum wage 21 per cent next year, the second such rise in barely six months, amid rising inflationary pressure and growing concern over China’s widening wealth gap.

The increase, which will come into effect on New Year's day, raises the statutory minimum monthly wage in the Chinese capital to Rmb1,160 ($175) and the hourly rate to Rmb6.7. It follows a 20 per cent rise in June.

China cash purchases are effecting markets as seen from these chartz by estimable TFC Charts. Here's the NYMEX front month crude:

Here's the July contract:

Nymex crude is back into contango with open interest starting to increase in distant contracts.

Here's the COMEX gold contracts for Feb, 2011:

Here's the December contract:

Gold has also slipped back into contango which means less intense demand for gold -- and crude -- in hand.

My personal opinion is that China will continue with more stimulus and ignore inflation while it engages in an inflation- fighting PR campaign. China's elites -- which own the Chinese government and Communist party -- need hyperinflation so that they may repay massive (gambling) debts with worthless yuan.

What about an anti- deflationary bailout of private interests as was attempted in the US?

The bailout which started in 2008 is the reason for the hyperinflation in the first place. That bolt is shot.

The danger is that China will find herself unable to control hyperinflation with any interest rate tools. The endgame from this vantage point is a completely dollarized Chinese economy, like Zimbabwe's or Ecuador's. Should China shift to a gold standard, the most likely outcome would be trading inflationary collapse for massive deflationary contraction with one crisis following hard on the heels of the other.

China embodies steve's 'First Law of Economics': that the costs of managing any surplus increase along with the surplus until the costs are greater than the value of the thing itself. Here, the cost of managing China's F/X surplus is hyperinflation that destroys the Chinese economy. What China MUST do is cut the dollar/euro surplus down to size and do so immediately.

Of course, doing so will make it more difficult for Chinese cash flow to service its yuan- denominated debts or to buy fuel. It may indeed be too late for China. Its bad choices are those given by the waste- based economic model it imported from the US. It can continue to accept hyperinflation or gamble with debt deflation ... or a combination of both.

Wow! Happy fricking new year ...

The Revenge of the Real Economy ...

Butterfly

Happy New Year everyone!

There is a lot of talk about inflation since energy costs have risen dramatically since early last summer, taking along prices for food and other goods. Whatever is for sale includes petroleum either in the manufacture, processing, packaging and transport. Basically all goods are forms of petroleum, all services require petroleum to enable them.

"They aren't making any more people with money!"

Rising prices of goods in and of themselves are not indicative of inflation which is a change in the value relationship between money and the business that money leverages. Valuable business means less valuable money: when money is given a 'negative' value by trade in the markets that is inflation. Business lends into existence what funds it needs to insure success. More money in circulation and more credit means a greater money supply and an equivalent decline in unit purchasing power. It also means an equivalent increase in debt. Both of these are benign which is what Fed Chairman Bernanke acknowledges when he proclaims his desire for a 'modest' 2% rate of inflation.

Only business expansion creates more credit/money in this way along with the benign inflation. Attempting to add more funds into bank reserves cannot increase business activity, neither can pitching horseshoes. Only the possibility of returns on time, skill and hard work can increase business activity. Because or in spite of Bernanke's efforts, the returns on increased reserves and added debt have vanished. High input prices make fuel- using enterprises unacceptably risky. This being so, what remains is finance and other Ponzi forms of outright gambling/speculation.

Finance as a consequence has found itself in grave difficulty. Finance cannot create value so it is an absolute dependency upon the real economy which is relied upon to produce useful, valuable goods and services. The productive economy fell alongside finance. Ironically, finance was rescued. What story can this tell other than to acknowledge that the real economy cannot produce any more and saving it is useless.

Too bad the Establishment cannot imagine a 'Plan B' economy that isn't machine/fuel dependent.

Sovereign bailouts of finance allocate resources away from the returns from work in exactly the same manner as do increasing fuel prices. The analog is government- sponsored 'War on Work' very much like the failed but destructive Wars on Drugs and Terror.

At some point debt increases to a point where it cannot be serviced by business cash flow. Debt then must either be repaid or liquidated. This process is integral to the business cycle. Instead of restructuring, the Establishment has been making an all- out effort to hold- harmless lenders while refusing to allow credit from being wiped out. It is doing this by replacing questionable private credit with the public version. Doing so does two things. One is to degrade sovereign credit is the one becomes the proxy of the other. Swapping bad private loans for 'better' public versions strip mines the sovereigns' creditworthiness which effects their ability to borrow cheaply. Not only is the endeavor futile, the effort cannot create the desired (hyper)inflation: credit destruction is irresistible. Even when the sovereign can keep up with credit destruction for a short period it commits itself to doing so endlessly. At some point the sovereign runs out of resources, its creditworthiness is dissolved. Debt becomes too great for the 'virtual cash flow' or monetization efforts of the central banks to service adequately. The failed establishment becomes irrelevant and useless. Debt destruction commences as before until debts fall to a level that is serviceable by the new (and far lower) cash flows of those businesses which remain. The cycle of money/credit expansion begins again.

Inflation is not to be confused with hyperinflation which is the purposeful expansion of the supply of money and credit into circulation by banking authorities. This effect is taking place right now in China where the authorities are bent on stealing what value remains to the country's bank depositors and working classes.

In both inflation and the hyper version price increases are accompanied by an increase in demand or in wages and worker earnings. Analysts in the US suggest many important goods such as food, medical care, education, staples and fuel are becoming more costly. They ignore declining wages and house prices. Wages enable workers to pay the high prices. Without wage increases or employment it is hard to see how any company raising prices will be able to stay in business.

This was the end of the real estate bubble; pundits said, "there are more people all the time and they aren't making any more land!"

"They aren't making any more people with money!" This has been the shortage since oil prices went barometric in 2004: nobody is making any more people with money. People cannot earn, they cannot find a place where such earning is possible It costs too much to pay workers and also pay for more expensive inputs at the same time. This is the point the 'high prices' people miss. High prices of primary goods are not inflationary. The allocation effect of the high prices is highly deflationary.

High prices force choices between one good at the expense of another. A company will buy fuel to transport imports from China rather than paying higher wages to local workers. Consequently, local demand erodes. Exporting jobs also exports customers. At some point the funds available to purchase goods vanishes and all the businesses fail. This is the dynamic of the early 1930's. Even low prices are to the unemployed and impoverished unaffordably high. High real prices -- either for goods or labor -- are simply a form of business suicide.

Right now petro prices are going bananas! How long before the rising prices gut the real economy? Will this effect the finance economy at all?

This is the weekly Brent Crude chart by TFC Charts:

Notice that the open interest currently is much less than during the 2008- 09 period of the Great Oil Price Spike. The institutional long index speculators are so far out of the oil markets. It is likely that China and other large customers are buying crude on the spot markets and avoiding futures altogether. The futures markets follow the spot markets since those 'paper' markets must discount risk.

The same thing is taking place in the precious metals markets. A premium is paid to take the good rather than wait so the future price is discounted as a consequence. This is self- reinforcing. Demand for physical either crude or metals is intense. At the same time it is very hard to obtain physical by purchasing the forward contracts and standing for delivery. Rising prices create an incentive to hoard. Commodities are held off markets which creates uncertainty. The markets are becoming untrustworthy as a consequence. This in turn puts more purchasers into the spot markets driving the price higher. This is the reverse of what happened in the fall of '07 and the spring of '08 where funds were piling into futures contracts some eight years out. Longs are biting the bullet and paying the spot premium knowing that the 'cheaper' futures contracts provide less of a guarantee of obtaining delivery.

How the exchanges expect to deal with this situation is hard to say but at some point they will suspend delivery altogether. The markets are completely distorted, both by purchaser preference and risk but also blatant manipulation. Only incompetents insist that the markets reflect a top- line improvement in the real economy.

The prices of commodities will rocket upward along with prices for stocks and many currencies. This is all part of the Planet Bernanke strategy to devalue the dollar and make the US economy 'competitive' in a more or less traditional, Keynesian sort of way. I acknowledge Mr Bernanke's brilliance but his efforts are self- defeating.

Americans are saturated with debt. Customers are unwilling or unable to borrow any more. Only the government is borrowing while standing in the place of private borrowers. Since the government cannot create wealth or value, it can only recycle funds that already exist and shift them from one place or custody to another. Fiscal policy is a shell game. It only works if people suspend disbelief. Traders are cynically doing so on this day but for how much longer?

Being debt saturated means large 'spending' produces diminished or negative returns. Trillion$ have been borrowed and spent to what end? To support + 16% unemployment and a piddling 2% increase in US GDP. Pumping in more trillion$ will likely to have even less effect.

As for creating hyperinflation in the US, this is practically impossible. The idea is to repay lenders with funds that are worth much less than the original amount borrowed.

Most US debt is of short duration or indexed to inflation. Short duration debt must be refinanced repeatedly as it matures. In the face of inflation lenders command higher yields which defeats the hyperinflation tactic. Indexing of yields has the same effect: the loan has a mechanism that adjusts the rate of interest to reflect higher inflation. In debt markets with short durations or 'interest indexes' there is no shortcut to keeping yields from adjusting themselves to protect lenders' capital.

At some point the rising yields become too expensive for the borrower to support: debt deflation follows.

Currency devaluation cannot work when Americans consume more fuel per capita than all the other countries' citizens. Any dollar gains in output resulting from currency devaluation are more than canceled out by increases in the fuel price 'tax' paid to oil companies and OPEC. Instead of increasing competitiveness, the price rise puts the oil- soaked US economy in a bear trap.

$95 crude is a real problem hitman for an economy that is structured around $20 crude. To pay the fuel bill other goods and services are stiffed. Since 2004 this stiffing process has wreaked havoc on the US and Eurozone economies, this ruin has trickled up toward finance. Since 2004 the $30 fuel- dependent cohort has been eliminated as prices have risen, as prices rise further the businesses that can afford moderately high crude prices are pushed to the edge of the cost abyss.

Fuel price rises are squeezing a balloon: clench on one end and the balloon expands elsewhere. High fuel prices make servicing municipalities more expensive. Unlike private companies, states, counties and 'metro areas' cannot ship fire- fighting or police jobs to low- wage countries like Vietnam. High wages, high benefits and leaping fuel/goods' costs are becoming ruinous to the municipalities. Just as these were to US businesses before China bailed them out and took all those unaffordable US manufacturing jobs.

Meanwhile, the urge to buy and drive more cars becomes the epitaph for our expiring gestalt. Our policy makers do not have the inner resources to confront the failure of our personal transportation 'choices'. This looks to be a fatal error as auto and other industrial uses of petroleum drive prices higher, bankrupt more individuals and businesses and make a general oil- driven economic crash more likely.

Somehow high oil prices and high energy company profits are painted in the business media as an unadulterated good thing: sez Bloomberg:

Stocks Rally, Treasuries Tumble on Economic Outlook

Stephen Kirkland and Nikolaj Gammeltoft


Stocks rallied, sending the Standard & Poor’s 500 Index to its best gain in a month, and oil rose as growth in U.S. and European manufacturing bolstered speculation the economic recovery will strengthen. Treasuries slid.

The S&P 500 increased 1.4 percent to 1,274.62 at 11:22 a.m. in New York and the Stoxx Europe 600 Index gained 0.7 percent for its largest advance since Dec. 21. Oil rose to a 27-month high, copper reached a record near $4.50 a pound and silver topped $31 an ounce. The 10-year Treasury note fell, sending the yield seven basis points higher. Markets in London, Shanghai, Tokyo and Sydney were closed for holidays.

All 10 industry groups in the S&P 500 advanced today after U.S. manufacturing expanded at the fastest pace in seven months in December, while data later this week is forecast to indicate growth in services and employment. European manufacturing expanded more than initially estimated in December, London-based Markit Economics said.

“It’s a happy start for the market to the new year,” said Tom Mangan, who helps oversee $2.4 billion as a money manager at James Investment Research Inc. in Xenia, Ohio. “The stronger manufacturing numbers complete the pattern from the end of last year with strong economic data, reflecting greater confidence in the economy.”

Obviously the finance economy is doing just fine, to hell with the real economy. So far, the Federal Reserve has been successful inflating assets with moral hazard and the dollar carry trade. How long can this game be kept up?

The money managers must know that higher oil prices will soon effect demand. This is basic business, 101.

Meanwhile, squeezing the balloon causes distortion in the housing markets which are beginning to resume their long decline.

Real estate during the bubble years was bizarre in many ways. As 'homebuilders' excreted millions more ugly boxes @ ever higher prices the demand became insatiable. Were houses 'Giffen goods'? These are items that are more sought after even as the prices rise, defying the laws of supply and demand. How about precious metals, now?

Is crude oil a Giffen good? At what price level do the high- priced versions become ordinary good? Seems that a lot of what is taking place in the greater world orbits around opportunity costs and time factors, both of which are fuel/machine doppelgangers. The outcome is a crisis of valuation: what is anything worth if there isn't enough fuel to run things?

Conventional analysis obscures the real picture. There are few words about the energy/infrastructure imbalances that 'back' our currencies/debt loads and stands as collateral for everything including our 'money'. Our consumption infrastructure which includes housing, shopping, transport and support and 'moderne' agriculture is unprofitable with higher priced fuels. No profits = no economy. Inputs are too pricey to allow profits.

This is our crisis in seven words.

We cling to the fuels and jettison everything else: jobs, benefits, senior care, police and other civic services, rational government, and much of our national character. This process is taking place in other countries as well ...

What is 'preserved' is the cartoon version of modernity with 'just in time' convenience at a cost that strip mines everything else.

It would be nice to see this aspect of our 'policy' appear in the public discussion along side banker care and debt remediation. In fact, economic circumstances will deteriorate until stringent energy conservation becomes the center of the public policy.

It's that or conservation will be imposed by events which is what is taking place right now. We must start taking steps to ready ourselves for the new world that is coming for us whether we are prepared for it or not.

Oops ...

Sorry about the slow- no posting gang. I have really been laid up and pretty much unable to think more than ten sentences at a time.

Hopefully some good stuff next week!

steve