#111: A spike to puncture the bubble?

OIL PRICES

Anyone living in a bubble should beware of spikes.

Between 2001 and 2008, world debt (at current market values) increased from $60tn to $117tn.

There’s a bubble.

In 2001, the price of oil averaged $24/bbl. In the summer of 2008, it peaked at $147/bbl.

There’s a spike.

Though the connection isn’t drawn perhaps as often as it should be, there can be little doubt that the massive spike in oil prices punctured the equally massive debt bubble, leading directly to the global financial crisis (GFC).

The connection seems inescapable. Dramatically higher oil prices, in themselves, drained enormous amounts of liquidity out of the same oil-importing Western economies which were merrily bingeing on debt. Just as importantly, the surge in oil prices also drove up the cost of energy-intensive commodities, including minerals and food.

Could the same thing happen again, triggering a second (and probably much worse) global financial crash?

The bubble is certainly there – and is even bigger than the last one.

Since 2008, world debt (at current values) has expanded from $117tn to $160tn. But these headline numbers are converted to dollars at market exchange rates. Converted using the more realistic PPP (purchasing power parity) convention, debt has already reached 235% of world GDP, or $260tn. The equivalent figure in 2008 was $153tn.

On top of that, there are truly gargantuan shortfalls in pension provision, shortfalls which are “set to dwarf world GDP”.

In the period before 2008, the authorities had confined themselves to deregulatory recklessness, which facilitated a big increase in aggregate debt, and an equally big proliferation in risk.

Since then, monetary recklessness has been stirred into the mix, turbocharging debt escalation as well as bending returns on capital completely out of shape. That, ultimately, is why it has become impossible to provide adequately for retirement.

So there is certainly a bubble. Should we expect a spike?

Thus far in the bubble, a saving grace has been cheap oil. The price of oil averaged $44/bbl last year, down from $109/bbl as recently as 2013.

Demand for oil has continued to grow. Between 2007 and 2009, world oil demand decreased by 1.8 mmb/d (million barrels per day). But demand in 2016 (93.2 mmb/d) was 10.4 mmb/d, or 13%, higher than it was back in 2009 (82.8 mmb/d).

By and large, supply has kept pace. Since 2009, supplies from non-OPEC countries have increased by 5.7 mmb/d. OPEC countries have chipped in an additional 1.8 mmb/d of unconventional liquids, not subject to the cartel’s quota. The world’s need for quota crude from OPEC has therefore grown only modestly, from 29.3 mmb/d in 2009 to 32.3 mmb/d last year.

But this could now change. Much of the increase in non-OPEC supply has come from shale oil production in the United States. There are now some pretty persuasive reasons for thinking that US shale output might be at or near a peak, from which it could fall away quite quickly.

Readers will be familiar with some of the weaknesses of the shale story. Where output from conventional oil wells typically declines at between 5% and 10% annually, depletion rates for shale are dramatically more severe, with rates of 60%, and above, by no means uncommon.

This puts operators on a “drilling treadmill”, having to keep drilling new wells to offset declines from old ones. This has been fine so long as investors, convinced of the eventual profitability of “Saudi America”, keep stumping up capital. The day has to come, however – and probably sooner rather than later – when investors cease to oblige.

Where the petroleum industry is concerned, the picture is becoming clearer. The world’s appetite for oil is continuing to grow at around 1.4 mmb/d (1.5%) each year. Supplies of conventional crude have already peaked, and shale supply seems fairly close to doing the same.

Logically, this points to another spike in prices. One reservation has to be the ability of the world’s consumers to pay higher prices. But these consumers will probably do what they did at the same point in the previous cycle – which is to grumble, pay up, and add the cost to their already enormous debts.

We certainly have the bubble. We may, pretty confidently, anticipate the spike.

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Crude purchasing cyclejpg_Page1

 

90 thoughts on “#111: A spike to puncture the bubble?

  1. Oil prices cannot go up too far for too long. Carrying capacity for debt is $80,- to $90,- currently. By 2022 it is around $50,- oil.

    https://www.economic-undertow.com/2017/10/18/keeping-up-appearances/triangle-of-doom-101017/

    The oil industry cannot survive $50,- oil without piling up more debt. Relief comes from $50,- oil, cheap debt and central banks buying up financial assets. My guess is we won’t make it to 2022 without major disruptions in world finance.

    • I’m inclined to agree – in fact, sooner than that seems likely. The debt position is becoming extremely dangerous, even before new information from China. The UK has financial assets in excess of 1000% of GDP – so you can see what even a low percentage default rate would do – and its economy seems to be falling apart. We have been too quick to accept what we’re told about renewables and shales, and too slow to comprehend what low oil prices have done to investment in future capacity.

    • To summarize, central banks added liquidity into markets to prevent the system from collapsing. We are still in recover mode from ’08 ’09, the lack of net energy surplus doesn’t do the job, because net energy is in decline. CB liquidity has stabilized things but it’s getting hot in the stock markets, too hot. So they taper QE. Tapering QE will drive up bond rates, and we can’t have that, so the taper will go in reverse as soon as ‘whatever it takes’ goes inversed.

      We’re on an exponential road to ruin, because of declining net energy surplus. Physical plane goes down, monetary plane goes Jupiter.

  2. Houtskool.

    Exactly the printing machine got us this far already. Any increase in real costs will collapse the system.

    Tim is generally right but prices can’t increase. If and when they do game over for the general economy. All this debt has masked the true cost of production.

    • Thanks for your comments JT, over here, and over there. Your cocktail of knowledge is rather tasty.

  3. The ‘petro-prop’ is vital to the US, and is a principal reason why the US can issue so much debt without its currency suffering.

    Anyone wanting to buy oil (or other commodities) has first to buy dollars. This provides buying support for the dollar.

    It has been suggested – though we’ll probably never know – that Saddam’s real menace to the US was his plan to price oil in euros. It’s a plausible theory.

    • I think that we eventually will find out that Saddam’s demise ( and I think we can include Muammar Gaddafi here too ), was the result of America’s need to maintain Dollar Dominance of the world. I can see the CIA’s dirty fingerprints all over the middle east, the Qatari foreign ministers recent revelations on Syria show how it is done.
      Of course a lot of water will flow under the bridge before we get confirmation, and the USA must then be held to account for the War crimes it has committed. That is an issue that future generations will need to deal with, but more pressing for us and our generation, is that Dollar Dominance does need to end, and it needs to end now.
      Look at China and Russia for example, we can see their need to de-Dollarise. If they continue to use the Dollar, they are at the mercy of the USA and its policies. They are effectively subsidising the US Military Industrial Complex which will ultimately be used against them.
      Why would anybody want to do that ?
      We can understand China’s predicament. They own so many Dollar’s that they need it to stay strong to avoid taking a haircut, but by the same token they need to stop themselves from lending it any support.
      De-Dollarisation is the most important game in town for them. Knowing the Chinese, this will be played out over a longer period of time, unless of course world events overtake them and they need to implement rapid action. I think their plan is to accumulate Gold until they get to the stage where any losses they take by a drop in their US Treasuries can be offset by a corresponding increase in the price of Gold. That may be a bit simplistic, but Gold will play a significant role in their plans somewhere.
      As it stands China Russia Iran and Venezuala can trade amongst themselves in sea shells, and it will have no impact on the Dollar, but if Saudi were to join the act, that would be a game changer.
      Personally, I do not see it happening, but the house of does Saud have it’s share of problems too, and who knows how they intend to solve them.
      The Dollar’s position as World reserve currency has been undisputed for the past 40-50yrs., but now questions are being asked, the issue is being discussed, there is conjecture about alternatives, accusations about the “fairness” of it are levelled.
      There will ultimately be some fall out from this.

  4. I’ve always believed that his threat to the petro-prop was a primary reason for removing Saddam.

    It’s become increasingly difficult to defend the dollar’s pre-eminence – in 1945, and indeed through much of the 1950s, the US was half of entire global GDP, and the world’s biggest creditor. It’s now about 25% of GDP (depending how you measure it), and the world’s biggest debtor (though China is catching up fast on that score as well).

    China does continue to hold large dollar amounts – but these can be (or are?) weaponised. If China sold a meaningful chunk of its dollar holdings, the dollar would crash. Even hints that China might do this could have a huge impact.

    China’s bigger concern now, though, must be capital flight. After 20+ years of capital inflows, over $600bn (net) flowed out of China in 2015. I think there was a net outflow, but smaller, last year. Capital flight is a very real danger where countries’ debt levels are risky, and large in proportion to ongoing ability to service and repay/recycle these debts. Capital flight, ultimately, is “the one that brings you down”.

    Capital flight is, for instance, what will probably “do for” the United Kingdom. The EIB has all but ceased investing in the UK, not because of “Brexit” (the EIB is separate, and Britain will continue to own 16% of it), but because they’re no longer convinced that the UK is a safe borrower. The sums involved aren’t enormous (about EUR 6bn annually), but it’s more “writing on the wall” – why would anyone put money into the UK if the EIB takes this view? I remain convinced that a GBP crash is likely to happen in a context of capital flight.

    Now, China has similar concerns, but different methods of responding. It’s economy isn’t a basket-case, as the UK is becoming, but the rate of growth in debt (a) raises questions about the reliability of China as a borrower, and (b) also raises the possibility that their rapid “growth” is really just a bubble.

    Beijing recently moved to prohibit Chinese investment in certain forms of asset classes overseas – essentially, Chinese citizens and businesses are not now allowed to buy into leisure, hospitality and entertainment (so they can’t now buy hotels or football clubs). Next, they might ban the purchase of property overseas – they might even require sale of overseas property and repatriation of the capital.

    These aren’t exactly exchange controls, but they’re not too dissimilar.

    But China’s biggest need – beyond preventing capital flight – is to make people need to buy RMB in order to buy commodities. In other words, they’d like to have the ‘petro-prop’ that the US has now.

    This is one reason why Washington urged its friends not to get involved with the AIIB, China’s rival to the World Bank. These friends were itching to get into it, of course, and have done so since the British (almost inevitably) broke the line and went into the AIIB (to the huge anger of Washington).

  5. In the 70s just as US domestic oil production peaked Nixon made some unusual but very interesting moves.

    Opened China for trade.
    Established the EPA
    Created a Petro-Dollar deal with Saudi’s
    Took the Dollar off Gold

    I have a very difficult time believing that he, or his cabinet, or congress had any clue of the significance of those particular moves. I think that in particular they would not have understood the Limits to Growth reality, since they decided not to give ear to the findings by Meadows and Forester. US wealth had been built on abundant easily accessible energy and mineral resources. The US was the manufacturer to the world up until 1970 not because of innovation but because the world couldn’t compete on price. ( The Battle of Somme was the effective killing machine it was because of the cheap steel rails that had been supplied by the US, these latter became the light gauge system in the UK ) No other country had the combination of resources at the volumes that the US had. As these became depleted it hampered growth because of affordability. Had it only been a matter of raising the price to meet increased cost of production why didn’t that happen? Affordability is the real driver of growth not supply and demand.

    By opening China it gave the US access to offshore its energy intensive industries like steel production, and mining. As well as labor intensive industries like clothing. ( A population living on rice is far less costly in energy terms then one living on hamburgers) Establishing the EPA created additional pressure to move manufacturing elsewhere. The suspension of Dollar-Gold convertibility was a necessity as there wasn’t enough gold to cover the dollars in circulation. It also hampered the ability to create currency. The risk was that dollar demand would collapse but that was countered with the Petro-Dollar arraignment effectively giving the currency a place to go rather than returning to the US to be inflated away. That move calmed the markets, because they felt that at least their dollars could now be converted to oil, which is of higher value than Gold.

    Saddam Hussein, and Qaddafi threatened the stability of that system. Saddam had boycotted sales of crude to the US in 2002 and started selling his oil in Euros. For 30 days he stopped all exports in a show of force that he had control of their national petroleum system. What he didn’t understand was he was threatening to limit access to what the US needs most, energy and resources. The war was the answer to that threat. Now Iraqi oil is safely in the control of the international oil majors. Qaddafi had made a similar error since his interest wasn’t to allow the state owned system to be controlled by the oil majors. He also threatened the the Petro-Dollar by creating a competing gold currency that was being used in Africa. The French were particularly at risk as it was replacing the Franc still in use in there former colonies.

    If we look closely at NAFTA we see that much of it revolves around access to resources. In exchange for easier economic trade with the US, both Canada and Mexico have agreed to unlimited access to their oil and other resources. When the USSR fell we saw the same pattern. Anglo-US corporations rushed in to gain access to whatever resources they could. Putin the patriot didn’t play ball like Yeltsin. So now he is vilified. Canada and Mexico have peaked in oil production, and now NAFTA is at risk. The UK joined the EU just as it had oil to sell and promptly left when it didn’t.

    What we see is a common pattern that is larger then any political system.

    Capitalism is a dissipative system out of equilibrium, as all dissipative system are. Like hurricanes Capitalism requires energy input to exist, anything that threatens that will collapse the system. It must grow or die. Within the structure, like hurricanes, there can be self organized subsystems. Tornado’s, Micro-bursts, and other elements that feed off the core. With Capitalism these are corporations and governments. In order for the core to survive the entire system must grow in aggregate. As the net energy driving the system declines the structure weakens, like a hurricane on land or cold water.

    Not only is it impossible to return to a local agricultural existence. It is also impossible to decouple the elements of the system. We see that with Trump. His platform was isolation, and now its war. He has no choice he’ll make similar moves as Nixon did, but it can’t work because there is no more sweet spots to exploit.

    Just as the shale play is a high cost desperate act of a dying industry. (Shale was well know in the 70s but as uneconomical as it remains today) The US will attempt to turn back time with it’s military machine as it has in the past. The problem is they can’t return affordability so the system will simply grind to a halt.

    I guess Adam Smith was right about an Invisible Hand.

    • The high point of the resource wealth – but also the innovation – of the United States was demonstrated by the Apollo programme, but change was already happening. There was Vietnam, of course, and there had been Eisenhower’s prescient warning about the dangers of the “military-industrial complex”.

      The US “slammed the gold window” because the gold bluff had been called by France. This destroyed the Bretton Woods system, because other currencies were linked indirectly to gold via the dollar.

      What has happened since, as I see it, is a variant of the Eisenhower warning. Increasingly, a ‘financial-political-corporatist’ complex has assumed control. As resources have declined, the share of the American economy – in terms of GDP, profits, market cap and influence – has drifted away from ‘conventional’ industry and towards the FIRE sector (finance, insurance and real estate), a process described by some observers as the “financialization” of the American economy. Alongside this, there has been a loss of (a) tough regulation of financial activities, and (b) of the anti-trust vigilance which broke up Standard Oil and Ma Bell. As a result, key sectors now suffer from a lack of competition, and there is too much influence and wealth attached to simply moving money around.

      Underlying all this is resource depletion. Shales have never been cash-positive, because rapid depletion rates put producers on a drilling treadmill, forever relying on investors to put up huge amounts of capital. One story of 2017 has been a belated investor unwillingness to carry on doing this. Other resources have depleted, too. Of note are water resources and topsoil, the latter requiring increased reliance on inputs which – of course! – are energy-intensive.

      I’m reluctant to join in (establishment-promoted) criticism of Mr Trump, because he was elected on an “anyone but the establishment” roll which is hard to gainsay. He may not be one of America’s best presidents, but I doubt if he’s the worst (I felt that George W was much, much worse).

      On economics, though, resource depletion – together with finanancialisation – has pushed the US into massive debt issuance (facilitated by the ‘petro-propped’ dollar), and this has in turn pushed on into QE and ZIRP (an inevitable next step when debt becomes simply too big to service). SEEDS shows American prosperity deteriorating – a link, I’m sure, to the election of Mr Trump, just as deteriorating prosperity in Britain led to Brexit, the loss of the Conservative majority and, next, probably, a left-leaning government.

      It’s interesting that these two countries share deteriorating prosperity and influence, high levels of financialisation….. and an orthodoxy based on ‘free market’ principles which don’t extend to breaking up monopolies, or to turning down taxpayer handouts when neededby the financial sector….

    • I’m wondering if, with SEEDS now fully functional, and some economic trends becoming ever clearer, it might be an idea to discuss the US here again.

  6. Without energy to drive real growth all you have left is moving money around. I think most mistake the symptom for the cause. The lax regulations are needed to increase debt which increases money supply. So strangely the corruption is part of the system.

    For example it has been documented that the primary money laundering economies are US and U.K. So for all their show as the bastions of freedom and democracy the reality is they benefit from corrupt dictators that stuff their ill gotten gains in the western banking and real estate system.

    With Trump it’s just irrelevant he’s neither good or bad. He is no different then any other elected president. He is limited to the resources at his disposal and won’t accomplish anything beyond that. Basically a symptom not a cause.

    The Appolo success if we so call it really needs to be considered in context. If you compare the energy production of the US with the USSR it becomes clear that technology wasn’t the key to the space race. In actuality the Soviet rocket engines were 20% more efficient and more powerful. They dared to pipe oxygen rich exhaust from the turbos into the primary engine. But it was done because of necessity they couldn’t afford to waste the fuel. It also constrained their ability to test run the engines. Instead they choose to test them at launch.

    The arrow all points in the same direction. Without the resources that the US had access to the USSR could not compete. But it had nothing to do with technology because they were winners with technology.

    AK 47 is another example.

    I sum it up this way. If you have wood you cook with wood. If you have coal you cook with coal. If you have oil you cook with oil. If you have gas you cook with gas. If you have a lot of it you have trains, planes, and automobiles. I might add rockets. With a little of it you cook.

    Technology is a function of abundance not the cause of it.

    It’s interesting to note the Roman Empire grew in wealth through military conquest. Then it started developing schools of higher learning in imitation of the Greeks.

    Education has never preceded empire. So the thought that education or technology are the source of wealth is false. It has always been resources. It will always be. So in that regard it is no coincidence that the US military is larger then the next 10 militaries combined. So the military industrial complex was also a necessity.

    Ironically the competitive economic system, communism thought that they could only find success within a highly educated society. Lenin targeted Germany for that reason. But educated people make poor soldiers. Ignorant religious zealots make far better soldiers. Which system promoted religious freedom and zealotry? For God and Country. God save the Queen. In God we trust. One nation under God.

    So in many places Americans are hated because of there ignorance. But perhaps their ignorance has been their strength all along. In this regard we might want to watch closely the current US administration.

    War is Peace
    Freedom is Slavery
    Ignorance is Strength

    • Excellent points. Resources,human, animal, mineral, vegetable, come first and foremost

      Dane Defoe wrote a book in the early 18th century trying to convince landowners that they should have all their sons educated,and, above all, the eldest male – the heir.

      The counter-argument was ‘I inherited my father’s lands, my son will inherit from me in due course, with so much wealth there’s no need at all for him to study.’

      Cynically, I hope all the money-laundering helps to keep the UK afloat for a little while yet. 300 years of financial manipulation and amoral banking – a glorious tradition!.

    • Thank you, both, these are interesting ideas, and maybe I should do a brief piece on the US, from a SEEDS perspective, something we can open up to discussion.

      My understanding is that about a quarter of the world’s ‘black money’ is in UK territories, but virtually none of this is on the UK mainland – it’s in the archipelago of tax havens. I take the point about ethics, though – indeed, long experience has persuaded me, with regret, not to deal with British firms, except some small ones that I know and trust.

      I think you’ll be disappointed, Xabier, on your next point – it seems certain that a crash is coming, and Britain won’t dodge this next bullet. Financial assets at 1008% of GDP is risky anyway – but when an economy is palpably falling apart?

  7. Thanks Dr Morgan for another excellent read.

    My understanding was always that the GFG was caused by the US decision to relax banking regulation for purely politically correct ideological reasons.
    Easy credit created a bubble in house prices that was punctured by largely poor back Americans defaulting on the loans.

    • You must read:

      HIGH PRICED OIL DESTROYS GROWTH
      According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

      OIL PRODUCERS NEED $100+ OIL
      Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

      THE PERFECT STORM
      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

    • Following the GFC I, like most people, had steam coming out of my ears at the mere mention of Ben Bernanke.

      He was stupid/venal/insane….. the devil, even….

      But then I thought hang on — he is none of the above — so why was he doing what he was doing… and the search was on for answers.

      I have yet to find a single research paper that comes close to The Perfect Storm in terms of explaining the cause of the GFC and why the central banks had no choice but to respond as they did.

      And of course why they continue to respond with seemingly stupid/venal/insane policies….

      Desperate times call for desperate measures.

      Absolutely!

    • The regulation you are referring to about lending by banks into black neighbourhoods went on the statue book in 1977, long before the GFC, and stipulated only that the banks had to lend a percentage of the savings deposited in their branches in black neighbourhoods back into them i.e. lending the black residents their own money back to them, hardly bubble making. In the Fed engineered mortgage credit boom between the dot com bubble and the GFC, mortgage brokers would write ninja loans to anyone who could fog a mirror, a lot of black people go suckered into thinking they were joining the middle class. A combination of teezzer rates ending, the raising of interest rates by the FED to rope in the bubble, and rising gas/oil prices cut the floor from out under the ability of many poor people to continuing payments on loans, large numbers of whom were black. PC had nothing to do with it, the banks managed not to lend to high risk poor blacks in the 80’s and 90’s, but then they carried the loans on their own books, they took the risk! At the turn of the century securitisation allowed the banks to off load high risk loans onto bond holders, while taking big fees for doing some paperwork. They got greedy thereafter. The story you have heard is right wing click bate aimed at shifting the blame from those who truly own it for the GFC. No bank credit binge, no GFC.

    • You really must read Tim’s paper on what resulted in the GFC:

      THE PERFECT STORM
      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

    • Thank you. I don’t think the US rig count need worry the Saudis unduly – the way I read it, investors are becoming increasingly reluctant to pour money into lubricating the shale ‘drilling treadmill’. If I’m right, that’s when very high per-well depletion rates kick in.

      Reducing reliance on oil is a long-standing Saudi ambition – or might one say pipe-dream?

    • “Reducing reliance on oil is a long-standing Saudi ambition – or might one say pipe-dream?”

      Pipe-dream!

      The recent Aramco float debacle has been interesting too – last g(r)asp of (at) an almost exhausted field? Reliable figures for the water cut are hard to find – but it’s certainly been rising for a long time!

      Re your Perfect Storm, Tim, still a great work to reference – I pointed my dad at it just the other day!

  8. It seems to me that our economy is bounded by (1) increasing debt/low interest will eventually increase oil prices to the point of destroying demand, and (2) decreasing debt/high interest is likely to spurn a recession. Some people hope for the latter, in the thought that the possibility for organic economic growth is still there. I don’t think so – mainly because of declining real wages. If these are a function of the demand for labor then they involve at least productivity and population change. A solution could be increases in productivity which increase the value of labor – but this seems unlikely. Most technology in the last decade has decreased real wages. This of course has a complicated relationship to energy – and the way human labor could in the past leverage cheap energy. Like Odysseus navigating the straits between two dangerous shores – it may be too much to hope that we can just go faster.

    • Indeed. Perhaps I can best comment with a summary narrative. With growth decelerating, the authorities, being unwilling to adapt to this, instead unleashed credit adventurism in or around 2000. This led to the 2008 GFC, which effectively forced them into monetary adventurism. This is inflicting almost incalculable economic damage, and, as I see it, must create a second and worse crash.

      Of your alternatives, neither deleveraging nor higher rates – positive rates in real terms – seems to me possible, politically and perhaps financially, desirable though they might be. Curbing credit creation would undercut demand, inducing a severe recession/depression, whilst higher rates would puncture asset bubbles and crash property markets. I can’t see politicians contemplating this for one moment.

      So, as I see it, ‘the die is cast’, or the next crash ‘is hard-wired’ into the system. Policy responses to GFC#1 seem to me to make GFC#2 a racing certainty.

    • “So, as I see it, ‘the die is cast’, or the next crash ‘is hard-wired’ into the system. Policy responses to GFC#1 seem to me to make GFC#2 a racing certainty.”

      I agree – though I see us as already being in a single and continuous, though surprisingly long drawn out, crash.

      The car began the skid with GFC#1 – the policy responses to that are a series of wild over-corrections –
      and we have yet to leave the tarmac and start our tumble towards the precipice and free-fall to flaming ruin!

      We are still fighting with the steering wheel and seeing our lives flashing before our eyes.

      The thing that amazes me is just what a slow motion crash it is turning out to be – and how blithely unaware the passengers manage to remain.

  9. Should such an event occur and we have a more serious financial crash than the last one, what would the effect on digital currencies such as Bitcoin? Is this fear the reason for an extortionate price in Bitcoin?

    • I should say at once that I’m not an expert on digital currencies, though I hope I can give an intelligent answer.

      First, I’m sure another crash looms. The financial system has been distorted quite grotesquely. Last time, it was what I call “credit adventurism” which got us into trouble. The banks could be rescued, partly because government debts were generally low, but mainly because trust in money remained solid.

      This time, the problem is “monetary adventurism”. Monetary policies since 2009 (ZIRP, QE, negative real rates, asset bubbles, and the rest of it) are – and I mean this literally – insane. This time, because the madness has been monetary, fiat money could be at the eye of the storm, though with banks not far behind. In fairness, some economists understand this, but they’re a minority. Business, for the most part, either don’t understand or don’t care – look at how business groups have complained because Britain put its rate up to a lofty 0.5%!

      So, there is risk, but I’m not sure there’s risk awareness. There seldom is, until a crash begins.

      If there was risk awareness, we’d be seeing it in gold (physical gold, I mean – ultimately, paper entitlements to gold are still just paper).

      There probably is a desire to diversify, as most fiat currencies have few attractions and, after all, we’ve been living through a “race to the bottom” in FX. But I don’t think that “diversify” has become “find a safe haven”, or gold would be stratospheric.

  10. I am not an expert either, but I have been told that Governments can possibly reclaim gold from the public (I think it’s happened in other countries in the past) and possibly outlaw digital currency transactions.

    • In the event of a serious financial crisis, I wonder if a relatively useless metal like gold would really hold it’s value. If I had potatoes, petrol or candles to trade that would be useful….but who would want my shiny decorative metal at a time of great stress?.

    • When things eventually do go “Bang”, there will be largescale confiscation of wealth. So if you do have anything shiney, shut up about it and be discrete.
      Forget any money that you thought you had in the bank, that’s gone.
      The mechanics of a Global Financial Reset is something that I often ponder over. How will it all play out, I ask myself ?
      Well, I think that what is important to note is that, providing we can prevent a major war breaking out, we are not going back to the Stone Age.
      Well, not quite, but we will go back to a period more economically reminiscant of the 1950’s or 60’s, but with the internet.
      We will still have gas and electricity, maybe not as well supplied as we would like, but women will continue to have babies, and I thoroughly intend to keep drinking beer.
      It is important to note, that not all parts of the world will be equally affected. Agrarian societies will for the greater part continue on as before, but what is more relevant to us, is what will the impact be upon the UK and Europe ?
      If the financial system were to collapse, and the UK were to default on its debt, how would the country continue to function ? If the UK fails to attract the $100 billion foreign investment that it needs every year, what are the real life implications of that ? Well the government would need to start living within its means.The government would have to stop spending money that it does not have.
      The consequence of that is that the bloated public sector in the UK would need to be culled – drastically ! probably by about 75% !
      Benefits would need to be cut, NHS would need to be cut, Education would need to be cut ( nowadays that actualy might prove to be beneficial for our children ), Military would need to be cut, and all discretionary spending would need to be cut. Most private pension funds will collapse and the government will renage on its pension commitments. Widespread real absolute poverty will ensue.
      This would of course lead to the collapse of law and order on the streets, food rationing would be imposed and those who can leave the country will do so.
      Property prices will crater as everybody tries to sell up at the same time, people who thought themselves as comfortably off, will find that they have a roof over their heads, but nothing in the fridge and no money to pay the heating bills. Frivolous weekend breaks with Ryanair or Easyjet will be a thing of the past as personal liquidity dries up. Hairdressers and Nail Salons will close, Sky-TV subscriptions will be cancelled en-masse.
      If you can be canny enough to keep a few gold sovereigns away from the authorities and from thieves, ( much the same thing ), then you will always be able to purchase what you need on the black market, just like during WWII.
      Life is not going to end, it is just going to change.
      If you can make it out of the country with your Au and Ag then you will find that these forms of payment are eagerly accepted.
      Of course, it will always be prudent to keep your larder stocked with rice, beans, pasta etc. a few bars of soap, some candles and don’t forget the matches !

    • ‘Global Financial Reset’

      We are going to collapse because we are out of cheap to extract energy.

      Cheap to extract energy is the foundation of our civilization. Not money as Tim points out below — but every increasing amounts of cheap energy.

      Without it — there is no civilization – there is no reset.

      Think of it this way. You are driving your car on the Australian outback. You make a wrong turn and you get lost. You keep driving into oblivion. You run of of petrol. There is no petrol station for 500km. There are no people to help you.

      You cannot magically reset the fuel tank to full.

      We are here:

      THE PERFECT STORM (see p. 58 onwards)
      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

  11. Johan

    Some very interesting points, most of which are spot-on, I think.

    Maybe we need a debate here on the societal effects of economic downturn and/or a financial crash?

    • Appreciated. There already are lots of it, debates on economic downturn, but maybe we can extract a more serious approach of outcomes. As we speak, there’s major trouble developing in the KSA. You know, that piece of desert that needs $110,- oil to keep its budget balanced and to feed the GIW.

      $140,- oil wrecks, and so does $50,-

      Personally, i own some physical gold and silver, not much, but enough for emergencies. Some food, waterfilters, first aid kit, you know the drill.

      I consider to buy a full copper moonshine kettle. Cigarettes and booze are good for trade in hard times. Weird? Maybe. I also bought 100% woolen blankets, and cotton sheets. Basic stuff.

      I wouldn’t mind going back to 1910. Going back to 1310 is another story.

    • Interesting you paint a gloomy picture. I believe the scenario you describe is towards the unlikely end of the spectrum of probability but not impossible .. as someone once said if you take an argument too far you fall of the cliff..

      As I see it there is plenty of fat to be cut from our Western lifestyles before reaching bone. Even going back to the standard of living enjoyed in 1990 or 1975 wouldn’t be so bad would it ?.

      Political correctness would be curbed. There simply wouldn’t be the money available for ‘virtue signalling’ foreign aid spending and extravagant welfare programs borne of a mythical ‘relative poverty’.

      Diabetes would be reduced as take away food and eating out would once again become what was once a ‘treat’ rather than something taken for granted.
      Children would again rediscover the joy of Christmas as they wouldn’t be spoiled rotten every bloody day of the year with the latest ‘must have’ gadgets. Furthermore parents would think twice before having more children than they can comfortably provide for without an overbearing nanny government there to bail them out.

      Energy use would be reduced as fit and able bodied people realise that wearing an extra jumper is far cheaper than putting the heating on.
      Then perhaps if we were all a little less spoilt and money was harder to come by we might once again, go into our sheds and start inventing things, strive to become more self reliant and look after ourselves and relatives better..

      Coffee shops, nail bars, hand car washes, convenience food producers will go into decline to be replaced by real value adding activities that don’t amount to the economic equivalent of ‘taking in each others washing’.

      Out of the ashes, a stronger, more sustainable nation will emerge. Poorer yes but happier perhaps.

      Not such a bad thing, just a necessary correction to the social and economic fabric of Britain ..

    • So you think we can shrink the global economy …. let’s see what that looks like:

      That we are entering a period of decline is not in any real doubt, at least not among those with the inclination to think about it.

      ‘Downsizing’ seems to be the commonly used term, but few really understand what it will really mean. No one will willingly accept downsizing if it means a meaningful drop in their standard of living. So it remains a vague notion that it might be somebody else’s problem, and nothing too drastic on a personal level.

      There is a misplaced concept that we will drift into it gradually as oil decline eases us into another mode of living that will not be too far removed from the one that we enjoy now. We want the creature comforts that we have known for less than a century to remain a permanent feature of our imagined future.

      Our most recent history shows that the slightest slowdown of our current economy by just a few percentage points brings an immediate chaos of unemployment and global destabilisation.

      Yet somehow that won’t apply to a permanent ‘downsizing’; that seems to follow a different set of social rules, as if we can do it and still retain a civilised existence. And of course without downsizing wages too much.

      We will still expect to eat, buy ‘stuff’ and carry on in employment and even retain our wheels, with the strange certainty that as long as we have wheels, we will have prosperity by involving ourselves in the exchanges of trade that will not differ much to what we have now.

      More http://www.endofmore.com/?p=1464

      Of course any attempt to shrink the global economy … remember – shrink is the same as recession …. what happens if a recession is unchecked? Of course it will turn into a deflationary death spiral and the complete collapse of BAU:

      The global economy either grows – or it collapses. Those are the only options.

  12. Yes, Dr. Tim, I agree fully, and I would be very interested to read your own and also other readers perspective on this. Maybe some can look further into the future, to a world consuming less oil and using more renewables. A world of greatly reduced population I think.
    Of course, the big unknown for us all, is the speed at which change takes place. Whether we go into a controlled collapse over a period of 5-15 yrs. or whether we have sudden and abrupt change. That will be a big determining factor.

    • “I find it fascinating (in a morbid sort of way) that, with all of this coming down the tracks, the politicians and media are obsessing over sleaze…”

      Displacement activity? When you know the ship is sinking and there’s nothing you can do – rearranging the deckchairs takes your mind off the real problem?

  13. Johan mentioned that money in the bank could be lost.
    But what about Goverment held bonds, or Government held savings.
    Surely they would be more secure.

    • Government? What government?

      BAU MUST have cheap to extract energy to exist — we are not finding any more cheap to extract energy — therefore BAU is going to collapse.

      The collapse will be total.

      Industry will end – food production will for the most part end — government will end. There will be global starvation – epic violence — disease — no police — chaos.

      And then of course there are 4000+ spent fuel ponds around the world that require high tech computerized systems to keep the toxic fuel in them from poisoning the planet.

      To answer your question — bonds will be worthless – gold will be worthless – property will be worthless.

      There will NOT be a reset – they cannot be a reset — collapse will come because we have run out of the cheap fuels that have made our comfortable lives possible.

      When collapse comes you will be — literally – fighting for your life.

      We’ve got a massive population overshoot – 7.5 billion people are alive on this planet today ONLY because of cheap to produce energy. End that cheap energy – and the nightmare that follows is unimaginable.

    • We have been painted a picture of what a world without oil or cheap energy will look like. It really will be a “Mad Max” kind of world.
      My thoughts however do not project that far, I look about 20yrs down the line, and I try to envisage the actual mechanics of the breakdown itself. I try to rationalise a series of events as they would unfold and I try to consider their consequences.
      As I mentioned earlier, I do not see collapse happening everywhere at the same rate or at the same time. Some nation states are better prepared and have more resources available than others. Take Russia for example, I think that they would be able to feed and shelter their population for much longer, than the likes of the UK. In fact, I see Russia in a very positive light- it has got abundant resources.
      The UK however, will break down cataclysmically simply because it is overpopulated and under-resourced, its population has been nannied for decades and few will be able to survive without the teat of government handouts.
      Once the Supermarkets are emptied and Subway are no longer making sandwiches, government control / rationing of food supplies will need to be enforced.
      As a first step towards this downfall, I imagine a collapse of the currency, and Dr. Tim has suggested capital flight out of the country.
      So where would an event like that put us ?
      What does capital flight and currency collapse ultimately mean for us ?
      Effectively it means that the UK government no longer has any money to pay its way.
      So what does it do ?
      It prints “£’s” just like Zimbabwe and Venezuela.
      OK, that will kick the can down the road for 6 months or so until rampant inflation kicks in.
      After that ?
      Well I can see bank bail-ins and the confiscation of gold, silver and any holdings of cash. We have witnessed similar events in Greece and Cyprus.
      The Government will rob its citizens.
      Then, after the government has blown its way though that, and it can plunder no more, then all unnecessary government functions will get shut down.
      Pensions and benefits will get cut, as a first step to stopping them altogether.
      Nobody will have any money. Personal liquidity will dry up.
      At this point the government will have two options.
      Government Option 1. Manage delcine.
      Mass unemployment will result from the service based economy imploding.
      Think about that – try to envisage 3/4 of all public sector workers on the dole, (every cloud has a silver lining 🙂 ) then include 3/4 of all people employed in the service sector. Include lawyers, accountants, bankers and estate agents in that.
      What will be the effect of having 20 Million people unemployed in the UK ?
      How are these people going to survive without a government safety net ?
      If you are still in the UK at this time, now would be a good time to get out if you can.
      In the first year of this, we can look at many, many deaths from the old and the sick, simply through lack of care and from stress. At this stage everybody’s survival will be determined by what you physically possess and how you can protect it. People who have been prudent enough to prepare will also need to protect what they have, not just from lawless marauding gangs, but also from the authorities. An inner-city area is not the kind of place that you will want to be.
      During WWII there was a strong sense of community and of belonging.
      Today UK society no longer has that cohesion.
      If you are too poor, too old, or too weak, then it will also be too bad.

      Government Option 2.
      Invade and colonize Zimbabwe,
      or some other resources rich, poor country.

    • Recall 2008.

      The entire world stopped on a dime. Literally on a dime. All trade stopped because bank a did not know if bank b would be in business the next day — so letters of credit were rejected.

      The global supply chain is just in time. Russia is in no better position than any other country to hold out.

      Russia requires JIT to supply the spare parts and materials required to extract resources – to transport them to where they are needed – to refine them — to generate electricity – to maintain the grid.

      When the global financial system breaks — the electricity goes off in short order — everywhere.

      And total chaos will roll over the planet. Violence – starvation – famine – darkness. The only places that will likely be immune to this will be the remote places where pockets of people are already living as hunter gatherers.

      But even these groups will be able to survive…. because there are 4000 spent fuel ponds scattered around the planet. And 4000 x 14,000 = 56,000,000 Hiroshima bombs of radiation headed their way.

      “Containing radiation equivalent to 14,000 times the amount released in the atomic bomb attack on Hiroshima 68 years ago, more than 1,300 used fuel rod assemblies packed tightly together need to be removed from a building that is vulnerable to collapse, should another large earthquake hit the area.”

      A world without electricity — in total chaos — will not be able to hold the centre on those ponds. Look at Fukushima – no ponds involved and we can barely manage a single reactor core … with BAU in full force.

    • Reference http://www.reuters.com/article/2013/08/14/us-japan-fukushima-insight-idUSBRE97D00M20130814

      If any of the spent fuel rods in the pools do indeed catch fire, nuclear experts say, the high heat would loft the radiation in clouds that would spread the radioactivity.
      “It’s worse than a meltdown,” said David A. Lochbaum, a nuclear engineer at the Union of Concerned Scientists who worked as an instructor on the kinds of General Electric reactors used in Japan. “The reactor is inside thick walls, and the spent fuel of Reactors 1 and 3 is out in the open.”

      If you don’t cool the spent fuel, the temperature will rise and there may be a swift chain reaction that leads to spontaneous combustion–an explosion and fire of the spent fuel assemblies. Such a scenario would emit radioactive particles into the atmosphere.

      Pick your poison. Fresh fuel is hotter and more radioactive, but is only one fuel assembly. A pool of spent fuel will have dozens of assemblies. One report from Sankei News said that there are over 700 fuel assemblies stored in one pool at Fukushima. If they all caught fire, radioactive particles—including those lasting for as long as a decade—would be released into the air and eventually contaminate the land or, worse, be inhaled by people. “To me, the spent fuel is scarier. All those spent fuel assemblies are still extremely radioactive,” Dalnoki-Veress says.

      It has been known for more than two decades that, in case of a loss of water in the pool, convective air cooling would be relatively ineffective in such a “dense-packed” pool. Spent fuel recently discharged from a reactor could heat up relatively rapidly to temperatures at which the zircaloy fuel cladding could catch fire and the fuel’s volatile fission product, including 30-year half-life Cs, would be released. The fire could well spread to older spent fuel. The long-term land-contamination consequences of such an event could be significantly worse than those from Chernobyl.
      http://science.time.com/2011/03/15/a-new-threat-in-japan-radioactive-spent-fuel/

      Today there are 103 active nuclear power reactors in the U.S. They generate 2,000 metric tons of spent nuclear waste per year and to date have accumulated 71,862 tons of spent fuel, according to industry data.[vi] Of that total, 54,696 tons are stored in cooling pools and only 17,166 tons in the relatively safer dry cask storage. http://www.psr.org/environment-and-health/environmental-health-policy-institute/responses/the-growing-problem-of-spent-nuclear-fuel.html

      The problem is if the spent fuel gets too close, they will produce a fission reaction and explode with a force much larger than any fission bomb given the total amount of fuel on the site. All the fuel in all the reactors and all the storage pools at this site (1760 tons of Uranium per slide #4) would be consumed in such a mega-explosion. In comparison, Fat Man and Little Boy weapons dropped on Hiroshima and Nagasaki contained less than a hundred pounds each of fissile material – See more at: http://www.dcbureau.org/20110314781/natural-resources-news-service/fission-criticality-in-cooling-ponds-threaten-explosion-at-fukushima.html

  14. Johan

    A lot of useful comment here, especially as I’m planning an article on how things go wrong.

    You refer to the UK, where events (as seen from overseas) look increasingly surreal. The decision to raise interest rates by 0.25% has provoked yelps of dismay from, amongst others, industry bodies. But 0.5% is still very low, and is -2.5% when compared with inflation of 3.0%. Ten years ago, rates were 5.75%, I think, and no-one minded too much.

    Logically, any viable borrower should be able to pay a real interest rate of, say, CPI+1.5%, meaning 4.5% nominal at the moment. Any borrower who cannot pay a real rate of interest has too much debt, which used to mean is technically insolvent. An entire economy that struggles with a 0.5% rate has to be very nearly moribund.

    Yet what is the debate now for the media and the political establishment? Certainly not economics…

  15. The current debate in Britain is about nasty old men telling equally tired and repellent old women where they can put their hands to warm them, and launching their alcohol-laden breath at some younger ones in a state of delusion, as far as one can tell from the headlines. Oh, and randy gay actors trying to get a leg-over at every opportunity – such a surprise.

    Economy? Where? But that’s like articles on soil-depletion and eco-system death, reserved for a lower listing, or the fantasy ‘opinion’ sections which try to pass for political and economic analysis.

    Corbyn, of course, will most likely be voted in on a promise to spend and re-distribute all this fantastic British wealth, the main totem for which is real estate values, and build hundreds of thousands of new ‘homes.’ He will crash and burn spectacularly.

    But really it is crazy: in this village, on the edge of a ‘growth hub’ university town, a modest 3-bed 1960’s house probably worth £125-50k in 2001, recently sold for £550k. Now an estimated
    £75,000 extension has been started. The new owners look like standard English shabby middle class, nothing special. Quite breathtaking – have they heard the words’over-valued’,’unsustainable’ and ‘bubble’?!!

    You are quite right: all the indicators are flashing red, and alarms ringing: obvious and deafening for those who can look beyond the trivial distractions of the day.

    Growing high-nutritional value crops to compensate for irregular and poor-quality rations might seem to be in order, preparedness to take in lodgers, and an escape route to the Eurozone (even, maybe, that fast-desertifying madhouse known as Spain.)

    One thing about holding one’s money in a bank in another stronger currency than Sterling: I seem recall that in Argentina those who had their money in dollar accounts simply had it all confiscated during their great crisis. Rich friends have it all stashed in Zurich, but that’s not an option for most of us.

    • For the Short Emergency… I suggest physical gold/silver… it may hold value for a short period — before the masses realize what is happening… i.e. the world is ending.

      For the collapse… only food will hold any value … and there will soon be none available… so I suggest a couple of Oxycontin tabs per person … washed down with a cup of good single malt….that should do the trick…

  16. I still maintain that holding money and savings in government bonds and savings (rather than in banks) is a good strategy.
    Whatever we think may happen in the future, none of us can know for certain what will really happen.
    But it’s my guess that banks will be hit before the Government and that will give me time to think a new strategy before I run.
    Where am I going to run? I’m not sure yet!

    • Wally,
      I am not a financial advisor. I am a scientist and an Engineer.
      Government bonds can go pop just as quick as the banking sector can go pop.
      Look at Argentina.
      Do you think the Govt. is going to announce that it will default ?
      When things go pear shaped, it will be too late to think of a new strategy. Everybody will be reacting at the same time, all exits will be jammed.
      The government will clamp down, your assets will be frozen even before you pick up the FT and read about it, or switch on your telly to watch Bloomberg.
      On a Monday morning coming soon, the banks will stay closed.
      On a Monday morning coming soon, the markets will not open.
      You need a better plan.
      You need a better plan now !
      Planning to make a plan, only when you need a plan, is not really a plan at all.
      It is better to prepare yourself 5 years too early, than one day too late.
      I am not giving anybody any advice here, I am just stating a few obvious facts.

    • Wally – you get no return on bonds and savings… and when BAU collapses … your ‘investments’ will vapourize.

      Two Options:

      1. Put your money into an index fund. Because the CBs will prop the markets up right to the bitter end. In fact I expect that the day that BAU ends – the stock markets will hit record highs. Of course when that happens your fund will be worthless — so in the meantime you will want to be taking some of your gains off the table and spend that cash on enjoying the time we have left alive.

      2. My personal favourite is to buy some physical gold or silver — a just in case fund — this could come in handy as we enter the death spiral and fiat gets devalued….. then just blow through savings as various whims catch your fancy …. now ideally you also have ongoing income so that you remain solvent up until the end

      The key point to keep in mind here is to forget about there being a future. There is no future.

      Read this a few times until it sinks in …. we are out of cheap to extract energy sources …. no cheap energy — no civilization.

      No cheap energy — no food — no government — no medical care — no police — only chaos.

      Enjoy the time you have remaining. When you realize there is no future — and you accept our fate as a species… trust me…. the anxiety melts away…. realizing there is no way out…. is actually calming….

      “The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.”

  17. Many fascinating points are being made here, notably about Britain and Spain.

    The accusations being made in Hollywood and Westminster – places with similar characteristics, I wonder? – are of great and legitimate concern to the victims. In serious cases, punishment is in order, and prevention, if at all possible, is essential.

    For the rest of the public, however, how much is genuine concern, how much is sanctimonious puritanism, and how much is simply prurience?

    Speaking personally, I couldn’t care less about Hollywood. Judging from ads and trailers, most of its output seems violent and mindless, in which everyone holds a gun, and the only difference is whether they’re shooting aliens, criminals or ‘the enemy’. The ‘casting couch’ dates right back to the silent era, and there’s an Eagles song about it dated 1980. It’s disgusting, but not new. If we could put a stop to it – and great if we could – is it then fine if they go back to churning out violent films?

    Westminster isn’t a nice place, and wouldn’t be, even if people didn’t invade the personal space of others. There are natural rules for these things. If A is attracted to B, he can make a non-invasive advance. If her reply signal is NO, it should – MUST – stop right there. Hasn’t every civilized person always known where to draw the line? Anyone who doesn’t understand this isn’t fit to be at large, let alone in politics.

    But what offends me a lot more is when politicians make claimants spend 55p/min on calling a benefits helpline, bail out bankers but not BHS workers, or take highly paid “consultancies” or join a ludicrously over-rewarded “lecture circuit” after retiring. £150,000 for a speech? I can think of very few British politicians I’d pay 10p to listen to.

    As for bubbles, the signs are becoming ever more visible. Estate agencies are springing up like mushrooms, always a good late-stage indicator. House prices are ludicruous. As I remarked earlier, an individual, a business – or an economy – which can’t pay interest of, say, 4.5% on its debts has too much debt. A very good writer on the economy wrote (of the GFC) that, when he saw lads going to Budapest for a weekend’s boozing, or girls hiring a stretch limo for a night out, he knew the crash was imminent.

    Finally, I was one of very few who predicted that Mr Corbyn might take away Mrs May’s majority. I also predicted both “Brexit” and Mr Trump. The current Conservative administration looks finished. I’m not saying that, or Mr Corbyn in number 10, is good or bad. I’m just observing. When any government becomes fractious, chaotic and incompetent, its days are numbered.

    • Hi Tim

      Looking at the latest from that buffoon Boris Johnson and the doings of Priti Patel (contravening established British policy re the Golan Heights) it really does beggar belief that these people are actually in charge; I find it quite alarming.

    • Agreed – the government is falling apart as we watch, which isn’t good, with the economy in deep trouble, the public increasingly angry and the “Brexit” negotiations to get done. I’m not sure if Mr Corbyn could do any better than this lot – but voters might conclude that he’d be hard pressed to do any worse….

  18. The Conservatives are now morally and intellectually bankrupt, have nothing to offer – except not being Labour – and May’s lame ‘defence’ of Capitalism was probably the last death spasm. They are not even competent enough to maintain some semblance of a facade of unity, and to put away the clowns like Boris Johnson, to the international embarrassment of us all.

    However, it is just possible, still, that enough people will (in ever-deteriorating conditions) fear a fully- unleashed Corbyn sufficiently to keep him out.

    The treatment of the honest poor is disgraceful and callous, while the real, organised, crooks can still game the system (illegal sub-letting of social housing anyone?) hiding behind their minority status. I feel ashamed reading about the treatment of the desperate,and the awful delays in receiving benefits, the absurd penalties, etc.

    When the next crisis hits, a great many people will be shocked to discover how threadbare, cruel and incompetent the welfare ‘net’ actually is.

    Another lunatic housing statistic from the Bubble: in 2001, one could rent a (very nice) village house (10 mins drive from town) for around £500 per month. That is now less than the rent for a tiny room in a shared house in a shabby part of town, and that house now rents for £1,200-500 per month.

    Throughout Britain, this asset bubble has to have been the biggest contributor to declining standards of living and loss of discretionary spending power. An ordinary person on an ordinary wage had a decent life then: it is now impossible in many areas.

  19. I’ve been saying for a long time now that the outlook for the British economy, in particular, is pretty grim, and many comments here reinforce that.

    What we do need to do – thinking globally now – is to distinguish between the financial system, which is clearly going to crash, and the real economy of goods and services. A full-blown financial crash isn’t like a nuclear war or a natural disaster. After a financial crash, factories, houses, roads, cars, ships, aeroplanes, bridges and offices will all still exist. What really changes is who owns them.

    • But Tim… how would any of these assets have any value or use when the global economy collapses?

      1. The cause of the collapse ultimately is the depletion of cheap to extract resources. The stimulus (debt – ZIRP etc…) is a response to that problem. How does collapse fix that problem?

      2. And then there is the Humpty Dumpty scenario … scientifically presented by David Korowicz in:

      Trade Off: Financial system supply-chain cross contagion – a study in global systemic collapse

      This new study by David Korowicz explores the implications of a major financial crisis for the supply-chains that feed us, keep production running and maintain our critical infrastructure. He uses a scenario involving the collapse of the Eurozone to show that increasing socio-economic complexity could rapidly spread irretrievable supply-chain failure across the world.

      http://www.feasta.org/wp-content/uploads/2012/10/Trade_Off_Korowicz.pdf

    • This is a crucial point.

      When Rome collapsed, bit by bit, in the West, the towns and fortresses and villas and bridges and so on were all standing fine – some still there, above all in dryer climates favouring the preservation of stone.

      But the re-organised society couldn’t maintain them anymore, partly due to fragmentation for the system – no Empire-wide ‘wealth pump’ operating any more. Heroic efforts were made to maintain roads here and there, but most failed after a short while. Rulers could command all the labour of their subjects, but that didn’t help much.

      Much of our infrastructure -industrial, transport – would be ruined beyond repair with only a short period out of use.

      Infrastructure is, surely, mere junk once the exact system which once built it has collapsed?

      The energy crisis is surely something more profound than just another crash in the cycle when the rich can come in and pick up assets cheaply, as in Greece today.

  20. I think we have to be really, really careful here about assuming the future. I recall the Millenium Bug issue, where the banks would shut, aircraft fall out of the sky and general chaos was predicted. I recall one particular instance where a family sold their house and went to live in a tent, only to find the world unchanged in January 2000, and being unable to repurchase a house!

    • Wally,
      Well said !
      We all need to keep our feet firmly on the ground, and not allow ourselves to get carried away with our own biases and pet theories.

      However, I would point out that the Millenium Bug, was nothing more than hype coming out of the tech companies to get us all to upgrade our systems.

      What is being discussed here is much more fundamental and fact based.
      The fact is, that the world is running out of cheap energy.
      This is not conjecture or speculation, this is real life.
      The ramifications of this are epic and will ultimately affect everybody.
      Millions of lives are literally at stake.
      The Millenium bug hype had a timeline and also a commercial agenda.
      The coming collapse of the financial economy cannot be marked on a calendar
      and very few of us are going to profit from it !
      However, the facts demonstrate clearly that the system is fundamentally unsustainable.
      What is unsustainable will eventually collapse.
      Nobody can put a date on it, but it will come to an End,
      and all indicators are, that this End is coming soon.
      Certainly within our lifespans.

  21. The Millenium bug was predicted by many of the world’s famous software experts, one, namely Ed Yourdon was the US leading light in software analysis and design.

    There were other countless software experts that predicted disaster for the outcome of the new century.

    Where they all went wrong was not understanding the new designs of database systems and innovations in object oriented programming. These new innovations made all the difference.

    Could rapid improvements in battery technology make an impact on the future? I dare to say that few people can give an accurate forecast.

    • Anything is possible but it seems we have hit efficiency barriers. We already are developing batteries from the lightest components we can effectively mine. This article on Toshiba battery technology makes it seem like we can make great strides. But if you read it carefully you’ll notice that the only improvement is reduced charging times. Not overall weight to power ratios.

      https://www.toshiba.co.jp/about/press/2017_10/pr0301.htm

      Presently a Tesla S has a 1200lb battery with energy storage that is the same as 15lbs diesel.

      It’s important not to forget Carnot’s work. Efficiency has limits. Past gains are not a future indicator.

      I’ve had this conversation with economist several times and they tend to not understand that past productivity gains are not repeatable or guaranteed. Moores law isn’t a law. At some point you reach molecular limits. That’s about where we are now.

      I like to illustrate it this way. When your traveling in an airplane when is the most efficient part of your flight?

      Any pilot will tell you that the plane uses less fuel per hour the longer it is in the air. So the most efficient moment is just prior to landing.

      An economist will tell you that is precisely the time you should be flying because it’s the most productive. Where as the pilot would tell you that it is the time to land the plane.

      Who are we going to listen to? Economic Science or Physical Science?

    • HIGH PRICED OIL DESTROYS GROWTH
      According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

      OIL PRODUCERS NEED $100+ OIL
      Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

      So…. the price of oil MUST exceed $120 or the industry will eventually collapse.

      But oil cannot remain at $120 for a sustainable period or the economy will collapse.

      There are no alternatives to oil. None. And if any alternatives emerge in the period while Wile E Coyote hangs in mid air over the cliff — they MUST be cheap (as in require minimal energy) to produce – and they must be able to completely replace oil as an energy source and

      A partial list of products made from Petroleum (144 of 6000 items)

      One 42-gallon barrel of oil creates 19.4 gallons of gasoline. The rest (over half) is used to make
      things like: http://www.ranken-energy.com/products%20from%20petroleum.htm

      I hate to be a pessimist …. but this is not going to be like the Y2K bug where the calendar flips into 2000 and nothing happens…

      Cheap oil is a finite thing …. when we burn up enough of it and have nothing to replace it – and we will NOT replace oil with anything — something will happen —- civilization will unplug…

      The world will go dark — the violence and disease and starvation and radiation from the spent fuel ponds will happen.

      There is ZERO doubt about that.

      The only doubt is with respect to how long we the central banks can keep BAU alive with their increasingly desperate policies.

      This is as good as it gets – enjoy it.

  22. I agree with this entirely, but the question is whether or not efficiencies and new resource will alleviate the crisis and give more time to adapt to the new circumstances rather than creating total chaos.

    • Could have would have had Limits to Growth been listened to. Instead we are living the Jevon’s paradox.

      It’s too late now.

  23. We cannot close out comments to this article without some mention of the recent events in Saudi Arabia. The coup by crown prince MSB must have taken everybody by surprise, not least those who suffered arrest or loss of life.
    The whole kingdom is in a bit of disarray just now, to put a touch of english understatement on things, and now there is all this talk of war with Lebanon.

    Maybe the world debt bubble will burst not on a spike, but on the razor sharp edge of a sabre.

    • Good point.

      I’m not unaware of it, but I’m spending a lot of time look at data on oil consumption, supply and capacity. Things are looking rather tighter than I previously thought, suggesting the spike could now happen as early as 2019, or maybe even 2018.

      Some years ago I developed a model of the monthly purchasing cycle (which is significantly different from the quarterly consumption cycle that everyone looks at). I’ll see if I can append a chart at the foot of the article.

      Anyway, the current purchasing cycle as I interpret it is nearing its seasonal high. After November things could look deceptively slack until April/May 2018.

      Finally, China’s import needs look set to explode upwards, reflecting the peaking of domestic energy production. Put that together with debt that is growing exponentially and we have the ingredients for an “interesting” time near-term.

    • Chart of crude purchasing cycle now placed at foot of article. I’m a bit coy about where I get this information from, because it’s been a valuable tool in the past.

      What matters right now is that customers start scaling back purchases at the end of November, even though end-user consumption is still rising into the winter.

    • I live in the Netherlands and prime time news just told me Alibaba does good business. We should/could take advantage of those low priced stuff… Imagine that, prime time promoting imports from China. While China just opened its financial institutions for foreign investment. Like an Aramco ipo; hop in, the water is nice!

      Another “ding ding ding” moment for me. China is fucked, msm, central banks and the kitchen sink, they throw everything to maintain our growth illusion. Another war in the Middle East drives up oil prices and we’re back in business for another year. Madness.

  24. Desperate times call for desperate measures. I’m just not sure if there is any conscious thought involved. Growth at all cost is being implemented but everyone is talking sustainable development. It’s like watching a slow moving self driving train wreck.

    • When human -and other animal – communities are living sustainably, they don’t use the term.

      ‘Sustainabie’ is now almost without meaning, as commonly used.

      If it has any, it simply means ‘this particular suite of technologies dependent on high-intensity, globalised, resource extraction and manufacturing, whose defects (pollution, intermittency, etc) we will not look at too closely, and which we have decided to call virtuous.’

      See the EU ‘Stardust Project’, for ‘sustainable cities.’ .

    • Try telling that to a Tesla driving — iphone toting — hipster hanging at the organic coffee shop.

      In fact try telling them to take the bus….

  25. My own suspicion is that knowledge that Ghawar is now almost watered out is beginning to spread in Saudi Arabia. And maybe elsewhere too, looking at the continuing problems – and timing – of the upcoming Saudi Aramco IPO. The situation in Saudi Arabia seems very significant indeed to timeline of next financial crisis.

    Here is link to a well written, very prescient and very relevant short story – dating back to 2002 – about exactly this situation:

    http://www.sustainablecitynews.com/dim_ages-html/

    • Indeed so, in fact I mentioned Ghawar in my 2013 book. They’ve been pumping in at least 2 bbls of water in for each bbl produced for some years now. That ratio may now be higher, and nearing the finish. Matthew Simmons was first to pick up on this in his famous book Twilight in the Desert, derided by many at the time, but looking very prescient now.

      It’s probably no coincidence that Saudi wants to shift its domestic consumption to other fuels, shoring up export supplies. And might political developments in the Kingdom be linked to this as well?

      Interesting timing for the Saudi Aramco IPO, I wonder…..

      Since publishing this piece I’ve switched my attention from the financial bubble to the oil situation because this seems to be deteriorating very rapidly indeed. A follow-up article is urgent, I think, because my timescale for a supply squeeze has shortened from 2021 to 2019, and maybe even mid-2018, based on the information I’m seeing.

  26. Of course, there are two more reasons that any trouble in Saudi Arabia is so important as a possible trigger for a second global financial crisis.
    First is that Saudi Arabia made a secret deal with the USA to sell oil for US Treasury Bonds and US military protection, the “petrodollar recycling system”:
    http://www.independent.co.uk/news/business/news/the-untold-story-behind-saudi-arabia-s-41-year-us-debt-secret-a7059041.html
    https://sputniknews.com/world/201604011037326591-petrodollar-recycling-system/

    And second is that Saudi Arabia almost certainly has nuclear weapons:
    http://www.telegraph.co.uk/news/worldnews/middleeast/saudiarabia/11658338/The-Saudis-are-ready-to-go-nuclear.html
    https://www.theguardian.com/world/julian-borger-global-security-blog/2013/nov/07/pakistan-saudi-nuclear-proliferation
    https://www.timesofisrael.com/saudi-arabia-reportedly-purchased-nukes-from-pakistan/

  27. This reminds me that, with oil prices soaring, one of my bosses asked me in about 2006 if oil would peak and, if so, when. My replies were “yes” and “2018”…..

  28. Gavin

    Thank you for the links you posted.

    Events in KSA make a pretty comprehensive picture of we look in the right direction.

    Art Berman makes a few comments regarding oil price moves that help complete the picture as well.

    Excerpt

    Supply and its alter-ego credit are central to mapping the implications of the topics I have discussed here. Most investors and analysts assume—perhaps unconsciously—that future supply will be more abundant than present supply. What if they are wrong?

    http://www.artberman.com/u-s-supply-oil-ending/

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