Thursday, November 25, 2010
The End Of The Dollar Carry Trade? Presenting The Dollar Short Panic In A Burning Theater
After it became fashionable to say one was short the dollar at cocktail parties, the net result was a surge in CFTC-reported spec USD gross short positions and a plunge in net USD exposure. And since options traders are nothing but momentum chasing lemmings the theater is now fully on fire. Granted, while some of the recent spike in short interest has been covered, there are still just over a whopping 7.5k contract shorts that need to be covered before a reversion to the recent trendline. This is why we are currently seeing a massive unwind in the dollar short carry trade, and why once again rumors that macro funds are slowly and quietly receiving billions in margin calls behind the scenes.
Source: CFTC Commitment of Traders report
$598 Billion Wellington Management Busted
Not just hedge funds any more. Insider trading probe moves to mutual funds.
And yes, hedge and mutual funds are perfectly happy to pay $1,000/hour for information that is completely public and totally accessible to everyone...
Top 25 holdings: Exxon, Pfizer, Wells, Merck and, tada, Apple.
And yes, hedge and mutual funds are perfectly happy to pay $1,000/hour for information that is completely public and totally accessible to everyone...
Top 25 holdings: Exxon, Pfizer, Wells, Merck and, tada, Apple.
European Bloodbath Intensifies As Spanish Bond Yield Hits All Time Highs, EURUSD On Verge Of Going Bidless
As we speculated two weeks ago, the key word that will be regurgitated by all pundits through the end of the year is "contagion". Sure enough, the bond vigilantes who are now fully awake and stretching have brought a mauling to Spanish bonds, where 10 Year yields are now at lifetime highs. The chart below shows what will happen to US bond prices sooner or later. Should the 10 Year experience such a move in a comparable time frame, the Federal Reserve's $56.3 billion in total capital will be exhausted about 4 times over, and Ben Bernanke will be presiding over an insolvent central bank, begging for intelligent life from Proxima Centauri to have departed about 4.27 years ago in direction earth, bringing with it an extra $1 quadrillion in Terra backstop capital.
Wednesday, November 24, 2010
Guest Post: It's Official: The Economy Is Set To Starve
It's Official: The Economy Is Set To Starve
Once a year, the International Energy Agency (IEA) releases its World Energy Outlook (WEO), and it's our tradition here at ChrisMartenson.com to review it. A lot of articles have already been written on the WEO 2010 report, and I don't wish to tread an already well-worn path, but the subject is just too important to leave relegate to a single week of attention.
Because some people will only read the first two paragraphs, let me get a couple of conclusions out right up front. You need to pay close attention to Peak Oil, and you need to begin adjusting, because it has already happened. The first conclusion is mine; the second belongs to the IEA.
Okay, it's not quite as simple as that; there are a few complexities involved that require us to dig a bit deeper and to be sure our terms and definitions are clear so that we are talking about the same things.
But if we can simply distinguish between two types of "oil" (you'll see why that term is in quotes in a second), the story becomes much easier to follow.
The IEA now sees all forms of oil, conventional and unconventional, hitting a high of 99 million barrels per day (mbd) by 2035 (including 3 mbd of 'refinery gains'). Of course, we may wish to take even this tepid estimate of growth in oil supplies with a grain of salt, because in every annual report, like clockwork, the IEA has been ratcheting down its estimate of how much oil we'll have in the future:
Assuming that this trend will continue, our prediction is that next year the estimate of future oil supplies will be ratcheted down one more notch. Perhaps by another 6 mbd, to match the difference between the 2009 and 2010 reports?
It's when we eyeball the graph that shows us the breakdown in petroleum sources by type that a few important details jump out at us:
First, pay close attention to the legend for the chart. Starting at the bottom, note that crude oil from "currently producing fields" (dark blue) is already in sharp decline and is expected to decline from a high of 70 mbd in 2006 to ~15 mbd in 2035; a loss of 55 mbd over 25 years, or 2.2 mbd per year. The next band up (gray) is crude oil from "fields yet to be developed," which we largely know about but have not yet really started producing significantly.
My only comment here is that these fields cannot overcome the expected rate of loss in the dark blue band below them. All of the conventional oil that we know about is now past peak. In order to keep conventional oil flat, we have to move up to the third band (light blue), which goes by the spine tingling name "fields yet to be found" - which will apparently be delivering a very hefty 22 mbd by 2035. In other words, the IEA is projecting that in 25 years, more oil will be flowing from "fields yet to be found" than from all the fields ever found and put into production by the year 2010.
Colin Campbell, one of the earliest analysts of peak oil who has decades of oil field experience, is on record as saying that the "fields yet to be developed" category, originally introduced to the world as unidentified Unconventional in 1998, is a "coded message for shortage" and was, off the record, confirmed as such by the IEA. That coded message is getting easier and clearer to receive by the day.
But back to the main story line. Even if the final assessment of future oil production isn't notched down even one more tick, we have all the information we need to spot an enormous problem in the global story of growth. Assuming that we stick with the 99 mbd by 2035 estimate going forward, this represents a growth rate in oil of only around one-half of one percent (0.5%) per year between now and then.
This means that over the next 25 years, the global economy will have to make do with less than half the rate of growth in oil that it enjoyed over the prior 25 years. How will the economy grow with less oil available? What will happen to the valuations of financial assets that explicitly assume that prior rates of growth stretch endlessly into the future?
To cut to the chase, the admission by the IEA that we will not be achieving past levels of energy growth should be the most gigantic red flag in history, at least to those who might care that their money or other paper-based forms of wealth be worth something in the future. What if that future growth does not emerge? What happens when the collateral for a loan goes sour? The IEA report indicates an enormous set of risks for an over-leveraged world reliant on constant growth.
The bottom lines are these:
Scouring the Globe for Fuel
Okay, let's head deeper into the World Energy Outlook (WEO) 2010 report. Here's my quick summary of the report.
By 2035:
So how does the IEA suppose that oil growth can slow down to a paltry 0.5%/year, see China and India increase their consumption massively, and still have everything balance out? We all know that China and India (et al.) have been growing their oil consumption by massive percentages in the recent past, and there's some evidence that we can expect more of that behavior in the years to come.
In fact, this was what India's Premier told the world on November 1, 2010:
And this is exactly what the IEA has modeled and proposed:
I want to draw your attention to the green circles that I placed on there. Yes, you are reading that right. To balance everything out, the IEA has modeled the OECD as actually decreasing its consumption of coal and oil by significant amounts (that's what a negative 'incremental demand' requires: a decrease in current consumption). The difference is made up from a mix of renewables, biomass, nuclear, and natural gas.
Never has such a thing happened in the entire industrial history of the OECD. Never. There are no models or examples to follow here. No guidance is offered to suggest how such a monumental feat will be accomplished, beyond tossing a few more bucks at renewables, as if money alone could correct for vast differences in energy quantity and quality.
To suggest that the next 25 years for the OECD will be characterized by a significant reduction in the use of the two primary industrial fuels is an astonishing claim, and so it deserves to be carefully examined. But, speaking bluntly, this is not going to happen.
Any suggestion that the OECD is going to reduce its use of coal for electricity and oil for liquid fuels has to be accompanied by evidence of massive programs of investment towards energy transitioning that, truth be told, have to have been started a decade or more before the arrival of Peak Oil. Hinting that it might possibly be a good idea to move these renewable dreams to the drawing board after the advent of Peak Oil is akin to playing tunes on a sinking ship; at best, you are providing a captivating diversion.
Regardless, no such programs operating at appropriate scale are even remotely in sight.
A point that I try to make clear in my upcoming book (due out in March 2011 from Wiley) is that such an energy transition would be evident by such things as the trillions of dollars being dedicated to it, by eminent domain actions to secure new land for natural gas pipelines, and by vehicles that could run on electricity or natural gas being churned out by the millions. While we can debate whether we might get there someday, there can be no doubt that we are not there today.
So if one is a card-carrying member of the mainstream media, what does one do with such a major event as the WEO 2010 report? In the case of the New York Times, the answer is to run a completely schizophrenic pair of articles, but bury the supportive one deep in the "blogs" section while placing the one that completely ignores the WEO 2010 report prominently in the business section.
The first of these two articles, separated by only a day and centering firmly on the IEA report, is titled "Is ‘Peak Oil’ Behind Us?" to which the article correctly answers "Yes":
The second article is entitled "There Will Be Fuel" and is chock full of comforting anecdotes and quotes from oil industry executives:
Seriously, any country or corporation that cannot foresee the end of cheap and abundant oil is being run by dangerous people. To suggest that even the most optimistic assessment of oil, which has it peaking in 2030, is too far away to begin planning for today is just silly. Really, now...responsible planners considering major capital projects with multi-decade life spans (which can be 30 years or more for many things) should just ignore energy? That's the message here? Goodness, gracious.
In fact, there are so many problems with "There Will Be Fuel" that I hardly know where to turn to next. I suppose we could note that the article quoted "100 years of natural gas" left in the US without mentioning the all-important phrase "at current rates of consumption." To those who are familiar with exponential processes, and who know that energy consumption has been increasing exponentially for decades, such an oversight is an enormous red flag. It betrays either ignorance or deception on somebody's part (perhaps the editor?), and neither are acceptable at this stage of the energy debate. Once we increase consumption at reasonable and prior rates, that 100 years can rapidly shrink to mere decades in a hurry.
What's the difference between "100 years of gas" and "maybe a couple of decades"? Night and day.
Next, we might note that the article goes out of its way to make the case that "estimates for how much oil there is in the world continue to increase," while somehow avoiding the essential point that it's not the amounts that matter, but the rates at which the oil can be coaxed to flow out of the ground. Peak Oil is, has been, and always will be about flow rates, not amounts.
For example, if the very center of the earth were entirely filled with oil, but we could only get to it through a single, very thin tube (limiting how fast we could pull the oil out), it wouldn't really matter how much was there - a hundred trillion barrels could be there - because how much we could do with it would be limited by the rate of extraction. Exponential economic growth requires increases in fuel consumption. It always has and it always will, until and unless a brand new model of economics is developed.
Again, the lack of awareness of this basic concept of the difference between rates and amounts leaves the New York Times piece very much in doubt.
I could go on, but it's not all that helpful to once again catch the New York Times playing fast and loose with the facts in order to advance an agenda; for now, let's just observe that Peak Oil refers to a condition where the rate of extraction cannot be increased. If it were about amounts, then I suppose we would call it "Peak Reserves," but it's not, and for a reason: We care about the flow rates.
It is on this matter of flow rates that the IEA report was especially jarring and succinct: Peak Oil has happened.
At this point, it may be good to remind ourselves that last year an IEA whistleblower said that the organization had willfully underplayed looming shortages due to political pressures from the US.
Please read the following very carefully; it represents very important context for what we are about to discuss next. (I'm quoting at length because it's all essential):
This is just another example of Fuzzy Numbers, but the consequences of fibbing to ourselves about oil are far more dire than when we lie about employment. If it weren't so serious, it would be just another somewhat regrettable obfuscation of reality created to serve narrow and temporal political purposes.
Note: There is a well-recorded history, going back at least 13 years, of the IEA being fully aware of Peak Oil but bowing to political pressure to soften the message. Read paragraphs 4 & 5 of this piece by Colin Campbell for some more essential background.
The very best personal investments you can make at this stage will involve increasing your energy resilience. Make your house require less heating and cooling, use the sun wherever and whenever possible, and increase your personal storage of the fuels you use (if and when possible).
The potential knock-on effects of less energy to the complex system known as our economy are unpredictable in their exact details and timing, but are thoroughly knowable via their broad, topographical outlines. The economy will become simpler and less ordered.
Once a year, the International Energy Agency (IEA) releases its World Energy Outlook (WEO), and it's our tradition here at ChrisMartenson.com to review it. A lot of articles have already been written on the WEO 2010 report, and I don't wish to tread an already well-worn path, but the subject is just too important to leave relegate to a single week of attention.
Because some people will only read the first two paragraphs, let me get a couple of conclusions out right up front. You need to pay close attention to Peak Oil, and you need to begin adjusting, because it has already happened. The first conclusion is mine; the second belongs to the IEA.
Okay, it's not quite as simple as that; there are a few complexities involved that require us to dig a bit deeper and to be sure our terms and definitions are clear so that we are talking about the same things.
But if we can simply distinguish between two types of "oil" (you'll see why that term is in quotes in a second), the story becomes much easier to follow.
- "Conventional oil" is the cheap and easy stuff. A well is drilled, pipe is inserted and oil comes up out of the ground that can be shipped directly to a refinery. Whether the oil is "sour" or "sweet" doesn't matter; it's still conventional oil.
- "Unconventional oil" refers to things like tar sands, ultra-deep-water oil, coal-to-liquids, oil shale, and natural gas liquids. In other words, oil that is much more difficult and expensive to produce.
I might quibble that the all-time peak remains 2005 in the US Energy Information Agency data set, but the main point here is that the IEA has not only used the words "Peak Oil" (finally!) but they've done so in the past tense, at least with regard to conventional oil.Crude oil output reaches an undulating plateau of around 68-69 mb/d by 2020, but never regains its all-time peak of 70 mb/d reached in 2006, while production of natural gas liquids (NGL) and unconventional oil grows quickly.
WEO 2010 - Executive Summary
The IEA now sees all forms of oil, conventional and unconventional, hitting a high of 99 million barrels per day (mbd) by 2035 (including 3 mbd of 'refinery gains'). Of course, we may wish to take even this tepid estimate of growth in oil supplies with a grain of salt, because in every annual report, like clockwork, the IEA has been ratcheting down its estimate of how much oil we'll have in the future:
It's when we eyeball the graph that shows us the breakdown in petroleum sources by type that a few important details jump out at us:
My only comment here is that these fields cannot overcome the expected rate of loss in the dark blue band below them. All of the conventional oil that we know about is now past peak. In order to keep conventional oil flat, we have to move up to the third band (light blue), which goes by the spine tingling name "fields yet to be found" - which will apparently be delivering a very hefty 22 mbd by 2035. In other words, the IEA is projecting that in 25 years, more oil will be flowing from "fields yet to be found" than from all the fields ever found and put into production by the year 2010.
Colin Campbell, one of the earliest analysts of peak oil who has decades of oil field experience, is on record as saying that the "fields yet to be developed" category, originally introduced to the world as unidentified Unconventional in 1998, is a "coded message for shortage" and was, off the record, confirmed as such by the IEA. That coded message is getting easier and clearer to receive by the day.
But back to the main story line. Even if the final assessment of future oil production isn't notched down even one more tick, we have all the information we need to spot an enormous problem in the global story of growth. Assuming that we stick with the 99 mbd by 2035 estimate going forward, this represents a growth rate in oil of only around one-half of one percent (0.5%) per year between now and then.
This means that over the next 25 years, the global economy will have to make do with less than half the rate of growth in oil that it enjoyed over the prior 25 years. How will the economy grow with less oil available? What will happen to the valuations of financial assets that explicitly assume that prior rates of growth stretch endlessly into the future?
To cut to the chase, the admission by the IEA that we will not be achieving past levels of energy growth should be the most gigantic red flag in history, at least to those who might care that their money or other paper-based forms of wealth be worth something in the future. What if that future growth does not emerge? What happens when the collateral for a loan goes sour? The IEA report indicates an enormous set of risks for an over-leveraged world reliant on constant growth.
The bottom lines are these:
- The IEA now admits that conventional crude oil peaked in 2006. Permanently. Any gains from here are due to contributions from unconventional oil and natural gas-to-liquids.
- Under no scenario envisioned will future growth in fossil fuel supplies be equal prior rates of growth.
- Energy from here on out is going to be (much) more expensive.
Scouring the Globe for Fuel
The implications from this report are too important to preserve just for the enrolled members who support this site's mission, people, and goals. We're going to open up most of this report to the general public because we feel it's the right thing to do. For those unfamiliar with my work, the job I do most frequently is a combination of information scout (I connect dots) and analyst (I dig deep)."Tomorrow’s [economic] expansion was collateral for today’s debt."
~ Colin Campbell
Okay, let's head deeper into the World Energy Outlook (WEO) 2010 report. Here's my quick summary of the report.
By 2035:
- Between 2008 and 2035, total energy demand grows by 36%, or 1.2% per year; far less than the 2% rate of growth seen over the prior 27 years. (Note: This comes from the "New Policies Scenario," which is the middle scenario of three in the report. We'll discuss this one throughout.)
- Renewables will be contributing very little to the overall energy landscape, just 14% of the total, and this includes hydro.
- 93% of all the demand increase comes from non OECD countries (mainly China and India).
- Oil remains the dominant fuel (although diminishing in total percentage).
- The global economy will grow by an average of 3.2% per annum.
- It's time to cut demand for oil by raising prices (they recommend ending energy subsidies for fossil fuels as the mechanism).
- Conventional oil has peaked, and this is a permanent condition. All oil gains from here forwards will come from non-conventional sources and gas and coal-to-liquids programs.
So how does the IEA suppose that oil growth can slow down to a paltry 0.5%/year, see China and India increase their consumption massively, and still have everything balance out? We all know that China and India (et al.) have been growing their oil consumption by massive percentages in the recent past, and there's some evidence that we can expect more of that behavior in the years to come.
In fact, this was what India's Premier told the world on November 1, 2010:
So, yes, it's pretty much expected that China and India, et al., will be increasing their consumption by rates much (much) higher than 0.5%, which means, logically, that some other countries will have to consume at negative rates in order for the equation to balance.Premier Manmohan Singh told India's energy firms on Monday to scour the globe for fuel supplies as he warned the country's demand for fossil fuels was set to soar 40 percent over the next decade.
The country of more than 1.1 billion people already imports nearly 80 percent of its crude oil to fuel an economy that is expected to grow 8.5 percent this year and at least nine percent next year.
(Source)
And this is exactly what the IEA has modeled and proposed:
Never has such a thing happened in the entire industrial history of the OECD. Never. There are no models or examples to follow here. No guidance is offered to suggest how such a monumental feat will be accomplished, beyond tossing a few more bucks at renewables, as if money alone could correct for vast differences in energy quantity and quality.
To suggest that the next 25 years for the OECD will be characterized by a significant reduction in the use of the two primary industrial fuels is an astonishing claim, and so it deserves to be carefully examined. But, speaking bluntly, this is not going to happen.
Any suggestion that the OECD is going to reduce its use of coal for electricity and oil for liquid fuels has to be accompanied by evidence of massive programs of investment towards energy transitioning that, truth be told, have to have been started a decade or more before the arrival of Peak Oil. Hinting that it might possibly be a good idea to move these renewable dreams to the drawing board after the advent of Peak Oil is akin to playing tunes on a sinking ship; at best, you are providing a captivating diversion.
Regardless, no such programs operating at appropriate scale are even remotely in sight.
A point that I try to make clear in my upcoming book (due out in March 2011 from Wiley) is that such an energy transition would be evident by such things as the trillions of dollars being dedicated to it, by eminent domain actions to secure new land for natural gas pipelines, and by vehicles that could run on electricity or natural gas being churned out by the millions. While we can debate whether we might get there someday, there can be no doubt that we are not there today.
So if one is a card-carrying member of the mainstream media, what does one do with such a major event as the WEO 2010 report? In the case of the New York Times, the answer is to run a completely schizophrenic pair of articles, but bury the supportive one deep in the "blogs" section while placing the one that completely ignores the WEO 2010 report prominently in the business section.
The first of these two articles, separated by only a day and centering firmly on the IEA report, is titled "Is ‘Peak Oil’ Behind Us?" to which the article correctly answers "Yes":
That's pretty accurate. You'd think that such a stunning admission by the preeminent body responsible for preparing such reports for the OECD would have sparked a fury of investigation and maybe even self-investigation by the New York Times, which through the years has pooh-poohed the entire idea of Peak Oil rather religiously. But that didn't happen.Is ‘Peak Oil’ Behind Us?
Peak oil is not just here — it’s behind us already
That’s the conclusion of the International Energy Agency, the Paris-based organization that provides energy analysis to 28 industrialized nations. According to a projection in the agency’s latest annual report, released last week, production of conventional crude oil — the black liquid stuff that rigs pump out of the ground — probably topped out for good in 2006, at about 70 million barrels a day. Production from currently producing oil fields will drop sharply in coming decades, the report suggests.
The second article is entitled "There Will Be Fuel" and is chock full of comforting anecdotes and quotes from oil industry executives:
Somebody get that man a pair of glasses (!)There Will Be Fuel
Just as it seemed that the world was running on fumes, giant oil fields were discovered off the coasts of Brazil and Africa, and Canadian oil sands projects expanded so fast, they now provide North America with more oil than Saudi Arabia. In addition, the United States has increased domestic oil production for the first time in a generation.
“The estimates for how much oil there is in the world continue to increase,” said William M. Colton, Exxon Mobil’s vice president for corporate strategic planning. “There’s enough oil to supply the world’s needs as far as anyone can see.”
Seriously, any country or corporation that cannot foresee the end of cheap and abundant oil is being run by dangerous people. To suggest that even the most optimistic assessment of oil, which has it peaking in 2030, is too far away to begin planning for today is just silly. Really, now...responsible planners considering major capital projects with multi-decade life spans (which can be 30 years or more for many things) should just ignore energy? That's the message here? Goodness, gracious.
In fact, there are so many problems with "There Will Be Fuel" that I hardly know where to turn to next. I suppose we could note that the article quoted "100 years of natural gas" left in the US without mentioning the all-important phrase "at current rates of consumption." To those who are familiar with exponential processes, and who know that energy consumption has been increasing exponentially for decades, such an oversight is an enormous red flag. It betrays either ignorance or deception on somebody's part (perhaps the editor?), and neither are acceptable at this stage of the energy debate. Once we increase consumption at reasonable and prior rates, that 100 years can rapidly shrink to mere decades in a hurry.
What's the difference between "100 years of gas" and "maybe a couple of decades"? Night and day.
Next, we might note that the article goes out of its way to make the case that "estimates for how much oil there is in the world continue to increase," while somehow avoiding the essential point that it's not the amounts that matter, but the rates at which the oil can be coaxed to flow out of the ground. Peak Oil is, has been, and always will be about flow rates, not amounts.
For example, if the very center of the earth were entirely filled with oil, but we could only get to it through a single, very thin tube (limiting how fast we could pull the oil out), it wouldn't really matter how much was there - a hundred trillion barrels could be there - because how much we could do with it would be limited by the rate of extraction. Exponential economic growth requires increases in fuel consumption. It always has and it always will, until and unless a brand new model of economics is developed.
Again, the lack of awareness of this basic concept of the difference between rates and amounts leaves the New York Times piece very much in doubt.
I could go on, but it's not all that helpful to once again catch the New York Times playing fast and loose with the facts in order to advance an agenda; for now, let's just observe that Peak Oil refers to a condition where the rate of extraction cannot be increased. If it were about amounts, then I suppose we would call it "Peak Reserves," but it's not, and for a reason: We care about the flow rates.
It is on this matter of flow rates that the IEA report was especially jarring and succinct: Peak Oil has happened.
At this point, it may be good to remind ourselves that last year an IEA whistleblower said that the organization had willfully underplayed looming shortages due to political pressures from the US.
Please read the following very carefully; it represents very important context for what we are about to discuss next. (I'm quoting at length because it's all essential):
The idea expressed above is simple enough: The oil data has been fudged to the upside by the IEA. Pressure has allegedly been applied upon the IEA to paint a rosier picture than a strict interpretation of the data would warrant. To speculate, the reason why is that there are a host of interlocking vested interests in the financial but especially political spheres that would find the public recognition of Peak Oil to be disruptive and therefore unwelcome.The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.
The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.
The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.
Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.
"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.
A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.
(Source)
This is just another example of Fuzzy Numbers, but the consequences of fibbing to ourselves about oil are far more dire than when we lie about employment. If it weren't so serious, it would be just another somewhat regrettable obfuscation of reality created to serve narrow and temporal political purposes.
Note: There is a well-recorded history, going back at least 13 years, of the IEA being fully aware of Peak Oil but bowing to political pressure to soften the message. Read paragraphs 4 & 5 of this piece by Colin Campbell for some more essential background.
Conclusion
Here's where we are:- The IEA has known about looming Peak Oil issues for more than a decade and is only now explicitly recognizing the idea in their public documents.
- People inside and outside of the IEA say that the organization has downplayed both the timing and potential severity of Peak Oil.
- Peak Conventional Oil has already happened.
- Any possible growth in future oil that the IEA can envision -- and we might suspect that even this is fudged to the upside and will retreat in subsequent reports -- is going to be almost entirely eaten up by China and India.
The very best personal investments you can make at this stage will involve increasing your energy resilience. Make your house require less heating and cooling, use the sun wherever and whenever possible, and increase your personal storage of the fuels you use (if and when possible).
The potential knock-on effects of less energy to the complex system known as our economy are unpredictable in their exact details and timing, but are thoroughly knowable via their broad, topographical outlines. The economy will become simpler and less ordered.
Citadel Receives Subpoena
Putting a cheery on top of one of the best days in capital markets history, FOX Business Network’s Charlie Gasparino is reporting that Citadel Investment Group, the giant hedge fund run by Ken Griffin, has received a subpoena from the Department of Justice. It is unclear if the Chicago's fund long-rumored 'dark pool' dealings with Brian Sack's Open Market Group will be exposed as a result. From Charlie: “They got a subpoena. It’s the same subpoena that sources tell FOX Business Network that Steve Cohen over at SAC Capital got. It’s a wide ranging subpoena and it dates back to 2008 asking for information on certain stocks. From what I understand, it’s not just healthcare stocks, which has been a primary focus. FOX Business Network has learned two other hedge funds have received subpoenas. We have put calls into Millennium Capital Management and Maverick Capital Management and we are waiting to hear back to them.”
Much Ado About Nothing: China, Russia Drop Dollar In Bilateral Trade
Somehow the China Daily story we pointed out yesterday morning that China and Russia are expanding their trading terms and will conduct all bilateral trade exclusively in local currencies, thus dropping the dollar as an intermediary, is only today starting to make the rounds. Alas, this story is nothing but more posturing for several reasons: Bloomberg notes: "China and Russia will drop the U.S. dollar for bilateral trade and use their own currencies for settlement, China Daily reported, citing Chinese Premier Wen Jiabao and Russian Prime Minister Vladimir Putin." Oddly enough this is an identical overture from June 2009: yet very little has happened in terms of actual dollar lock out since then. Note the following story from June 17, 2009: "The leaders of Russia and China agreed to expand use of the ruble and yuan in bilateral trade to lessen dependence on the U.S. dollar a day after they took part in the first summit of the so-called BRIC countries." And judging by the market's reaction, and the dollar resurgence overnight it appears that everyone has read through this as just posturing. Furthermore, keep in mind that Russia was not even a top 10 trading counterparty of China in 2010. If China does the same with any of its top 10 partners then there may be a reason to worry. For now, China is merely testing the waters, and has absolutely no intent on isolating the US, nor making its nearly $3 trillion US FX reserves lose a double digit percentage of their value overnight.
It's Official: There Is Not Enough Money To Bail Out Spain
It seems that the European bailout buck will stop with Portugal for one simple reason: when Europe created the EFSF it did not think it would need to serially bail out everyone; now the EFSF does not have enough money to cover a bailout of Spain. From Dow Jones: "The European emergency fund, promoted as having the financial firepower to douse a financial crisis in the euro zone, may not even have enough money to cover a bailout of Spain. "[The fund] will be very close to the line, it will be precarious and it won't leave anything for anybody else," said Whitney Debevoise, a sovereign-debt lawyer with Arnold Porter and former World Bank executive director." Of course, if and when Spain is bailed out, other bail outs will be irrelevant, as at that point the vigilantes will focus squarely on Germany. At that moment, nothing less than a complete dissolution of the currency union and an unmitigated monetization ala Weimar will save what is left of the productive powers remaining in Europe.
From Dow Jones:
So what does happne when domestic sources of funds are exhausted? Nothing pretty:
The endgame? Unbridled printing:
As for those who still may be confused by how the various bailout mechanisms in Europe operate, we present to you this useful infographic by the Guardian.
From Dow Jones:
The last is not too surprising: an admission that the EMU is over due to lack of foresight to add one extra zero may not be to most politically correct thing to do. But luckily, there is always the IMF, which courtesy of its recent amendment now has infinite capital. And if Europe needs bailing out that means Europe won't be paying for that particular multi-trillion rescue. Which leaves guess who. Hopefully, Bernanke's foolproof plan of ultimately flooding the world with US dollars is starting to be perceived by everyone.The EU has EUR440 billion committed from member countries to its European Financial Stability Facility, the fund being used to extend bailout aid to Ireland. Requirements by European officials that the bailout bonds have a triple-A rating lowers the EU's lending capability to EUR250 billion, in addition to EUR60 billion available in the EU budget. The International Monetary Fund has said it will lend an additional 50% to European countries.
If Ireland requires between EUR80 billion and EUR100 billion--as officials indicate--and Portugal needs an estimated EUR50 billion to cover its sovereign debt refinancing needs, that barely leaves enough to cover Spain's sovereign debt rollover requirements over the next three years. Greece's EUR110 billion package was arranged before the bailout fund was set up.
The problem, said an IMF official, is that Portugal and Spain may also ultimately need to fund banks' recapitalization or wholesale liabilities, and the European bailout mechanism just doesn't have the capacity to cover those financing gaps.
"The [bailout fund] as it is currently structured does not have the firepower without a much, much larger contribution from the IMF," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. "But how much does the IMF as a global institution want to be exposed to Europe as a region?," he said.
Although only Ireland has so far requested aid from the joint European Union-International Monetary Fund program, fears that Portugal and Spain may need external assistance have already spiked the cost of borrowing in both countries' sovereign and banking debt markets as perceived risks rise.
Both the EU and the IMF declined to comment for this article.
So what does happne when domestic sources of funds are exhausted? Nothing pretty:
Notice how they don't call it patriotic... Because don't forget that the EMU has been around for a decade: it a modestly difficult to engender patriotic affiliation with a monetary union, whose sole purpose just like the CNYUSD peg by the way is to keep the German "currency" undervalued, which everyone hates.Alternative funding could come through bilateral loans from countries heavily exposed to Spain or extra International Monetary Fund support. But tapping out the EU's emergency financing mechanism would leave nothing for other countries and may force Brussels to try to boost the funding cap to save the euro zone and leave Europe stretched critically thin.
Aside from direct bilateral loans, such as those being considered for Ireland from the U.K., Sweden and Denmark, Debevoise says EU countries may have to boost the cap on their bailout program, a politically difficult task for a raft of reasons.
"At that point, it will be to save Europe, saying, 'this is your political duty,'" he said.
The endgame? Unbridled printing:
....which is one thing Bernanke will not allow. And should there be a liquidity crunch, every single European bank will need dollars. Many trillions of dollars. Which will be unavailable in the open market, leaving just the FRBNY's FX swap as a viable option. Of course, should Europe pursue a monetary policy in true independent isolation, and should the tsunami of dollar buying actually occur, the resulting historic surge in the USD may just end up being the most poetic end to the currency bottom..."The willingness of the political sector to overcome what I believe will ultimately be proven to be an irrational liquidity squeeze by the market cannot be underestimated," he said.
That commitment to the euro zone is so strong, Kirkegaard says, "The European Central Bank would purchase outright with printed money Spanish debt before the Spanish government was forced into a disorderly default."
As for those who still may be confused by how the various bailout mechanisms in Europe operate, we present to you this useful infographic by the Guardian.
29 Consecutive Equity Mutual Fund Outflows
Any minute now, any minute, we promise, investors will regain all their confidence in this non-charade of a market which reflects all the fundamental realities of the economy. Just not yet: last week saw the 29th consecutive outflow from domestic mutual fund flows, which incidentally surged to $2.8 billion from the $677 million outflow the week prior. Sarcasm aside, nobody except for CNBC's Fast Money is putting money in the market. Well, so are the Primary Dealers, and to an extend the Hedge Funds. Although now that the letter no longer have access to pervasive insider info courtesy of expert network, it may be up to just the Fed, HFT and the 18 primary dealers to take the Dow to 36,000. After all, there is a wealth effect to be created. Also, ICI reports last week muni funds saw a massive $4.8 billion outflow. Have no fear - this will also be spun as bullish. Incidentally, from its 2010 lows in July, the market has risen to fresh all time highs as investors have pulled just under $60 billion from mutual funds. Once Bernanke is done with his latest mandate which is nothing short of genocide, he is a shoe in to replace David Copperfield at the MGM.
And as a reminder, this is what insiders did last week:
In the first full week of the latest iteration of post-QE2 POMO, which was supposed to see a dramatic ramp in stocks, the only thing we have seen is the biggest insider buying to selling imbalance since the data has been tracked. Overall, selling by S&P500 insiders was 8,279.5x times greater than buying (per Bloomberg). There were 5 insider buys for a total of $150,673, and 117 sales for a total of $1,247,500,249. There is no point to even discuss what this data point indicates.
In the first full week of the latest iteration of post-QE2 POMO, which was supposed to see a dramatic ramp in stocks, the only thing we have seen is the biggest insider buying to selling imbalance since the data has been tracked. Overall, selling by S&P500 insiders was 8,279.5x times greater than buying (per Bloomberg). There were 5 insider buys for a total of $150,673, and 117 sales for a total of $1,247,500,249. There is no point to even discuss what this data point indicates.
Dazed and Confused: The Fed’s Clouded Vision Of The Future
If you are looking for guidance and clarity from the Federal Reserve, your trust will be misplaced. The recently released minutes of the Federal Reserve Open Market Committee's (FOMC) November meeting reveal a deeply divided Fed with no clear consensus on the effectiveness of their policies.
Their review of recent (publicly available) data and their assessment of the current state of the economy reveals their concern and frustration with their inability to effect the course of the economy. Their current projections are:
They agreed to expand their balance sheet up to $2.6 trillion by March, 2011. They will target maturities in the 2 to 10 range. They also discussed the possibility of purchasing "longer-term Treasury securities." According to the Wall Street Journal article:
Also, as noted by Bloomberg, they discussed adopting what is known as the Taylor Rule, which is to target an inflation level but "decided to retain the policy of giving policy makers’ long-run inflation projections."
I think it is wise to ignore their forecasts and instead focus on what they are doing. What they are doing is monetizing federal debt. They have no idea where their policy of QE is heading and that is because (1) they have been mostly wrong so far, and (2) their internal "vigorous" debate demonstrates that they have serious questions about what they should do.
Inflation is a tricky thing for the Fed because they don't know what it is. They confuse "inflation" with increases in prices, a view held by most economists. And that is one of the main reasons their forecasts have been so wrong and their policies so ineffective. As well, most economists conflate increases in prices with supply and demand factors. For example, the common view is that if oil goes to $150bbl, the CPI will go up. Which is incorrect. It is a simple demonstration of supply and demand: if we have fewer dollars to spend on things other than gasoline then prices on those other things decline.
They do not see that inflation is actually an increase in the supply of money without a corresponding demand for money. Rising prices are one of the impacts of monetary inflation. Other serious effects occur which are even more damaging to the economy than price increases. Some of those impacts are a creation of the boom-bust cycle and the destruction of real capital (wealth created from production, not from money printing).
When the Fed says they wish to create "inflation" through printing money to spur the economy and prevent "deflation" they actually are saying that they wish to trick the citizenry into believing that rising prices are really a result of strong economic activity when it isn't. They believe that wiping out capital, punishing savers, and seeding the ground for a new destructive business cycle is a positive for economic growth.
There is a lot of discussion now about the "psychology" of inflation and how the Fed can make inflation work. Most of it is stuff mainstream economists dream up to explain why their theories don't work. For example, the advantage of "surprise" they had hoped for that would allow them to pump more money into the economy to spur growth without people catching on to what they are doing. I don't really know why mainstream economists say such things, but they do. The psychological anticipation of higher prices is all quite true as price inflation starts taking off. As people anticipate that prices will continue to rise, they will adjust their goals and demand higher returns. Or they will reduce their demand for money and start buying goods that appear to "appreciate." But that "psychology" has to start somewhere and that "somewhere" is with a central bank which likes to print money as the solution to their country's problems. You can't have inflation without it.
I would side with Mr. Hoenig who does understand something about the dangers of inflation. Inflation as a solution hasn't worked here or anywhere and it won't work now.
The markets already sense this. Recall that 30% of the buyers are foreign sovereigns, banks, and investment companies whose countries have rich traditions of destroying their economies through inflation. Perhaps even U.S. based investors understand this lesson as well. The almost instantaneous jump in Treasury rates, especially the long bond, was counterproductive to the Fed's plans to keep interest rates low and make borrowing attractive to businesses. The bond vigilantes know better. So, initially the Fed's QE hopes have somewhat diminished.
When they start discussing a whole new way at looking at how they control money supply (the Taylor Rule) or which maturities they should target in the future, you know they don't have a clue where this is going. The dissension among the members of the FOMC is a rather stark example of why mainstream economics has failed us time and again. Their ordinary tools have failed them and they are desperate, in my opinion, to find something that will work. Thus the wide disparity of opinion between the Fed's anti-deflationists and the anti-inflationists.
I think that they will pump in enough money to create some inflation, even though it may not be that apparent with powerful ongoing deleveraging forces. You can't "helicopter" $2.6 trillion into the economy and have no effect. The result in my view will be stagflation.
Their review of recent (publicly available) data and their assessment of the current state of the economy reveals their concern and frustration with their inability to effect the course of the economy. Their current projections are:
Their discussion of policy solutions were all over the board, although "most" of the members supported their quantitative easing policy (QE2):... Fed policy makers projected a fourth- quarter 2011 unemployment rate of 8.9 percent to 9.1 percent, compared with 8.3 percent to 8.7 percent in their previous forecast in June [2011]. For 2012, the jobless rate will be 7.7 percent to 8.2 percent, up from prior projections of 7.1 percent to 7.5 percent. The rate was 9.6 percent in October, marking 18 months at 9.4 percent or higher.
Officials said the economy will expand by 3 percent to 3.6 percent next year, down from [their] 3.5 percent to 4.2 percent projection in June [2010]; the 2012 forecasts of 3.6 percent to 4.5 percent growth compare with the prior projections of 3.5 percent to 4.5 percent. ...
Policy makers left forecasts for inflation, excluding food and energy, little changed for the next two years, indicating price increases may lag behind the long-run projection of 1.6 percent to 2 percent for at least two years.
Fed officials gave their first forecasts for 2013, projecting growth of 3.5 percent to 4.6 percent, a fourth- quarter jobless rate of 6.9 percent to 7.4 percent and core inflation of 1.1 percent to 2 percent.
The lone nay vote on affirming their policy was Federal Reserve Bank of Kansas City President Thomas Hoenig:Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee's mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation--an outcome that they thought would be very costly.
Mr. Hoenig is correct.Mr. Hoenig dissented because he judged that additional accommodation would do little to accelerate the economy's continuing, gradual recovery. In his assessment, the risks of additional purchases of Treasury securities outweighed the benefits. Mr. Hoenig believed that additional purchases would risk a further misallocation of resources and future financial imbalances that could destabilize the economy. He also saw a potential for additional purchases to undermine the Federal Reserve's independence and cause long-term inflation expectations to rise.
They agreed to expand their balance sheet up to $2.6 trillion by March, 2011. They will target maturities in the 2 to 10 range. They also discussed the possibility of purchasing "longer-term Treasury securities." According to the Wall Street Journal article:
The minutes reveal that is exactly what they plan to do:In the 1940s and 1950s, the Fed pinned long-term rates below 2.5%. Though the Fed didn't take action in this direction, the discussion suggests the notion could come up later if the economy worsens.
This is not additional QE; they are shifting maturity targets in order, in my belief, to "stabilize" long-term rates which, subsequent to their announcement of QE2, have climbed. Also, by extending maturities, they have less pressure to continually roll over their portfolio, as they do with shorter maturities.The Committee directs the Desk to execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion.
Also, as noted by Bloomberg, they discussed adopting what is known as the Taylor Rule, which is to target an inflation level but "decided to retain the policy of giving policy makers’ long-run inflation projections."
I think it is wise to ignore their forecasts and instead focus on what they are doing. What they are doing is monetizing federal debt. They have no idea where their policy of QE is heading and that is because (1) they have been mostly wrong so far, and (2) their internal "vigorous" debate demonstrates that they have serious questions about what they should do.
Inflation is a tricky thing for the Fed because they don't know what it is. They confuse "inflation" with increases in prices, a view held by most economists. And that is one of the main reasons their forecasts have been so wrong and their policies so ineffective. As well, most economists conflate increases in prices with supply and demand factors. For example, the common view is that if oil goes to $150bbl, the CPI will go up. Which is incorrect. It is a simple demonstration of supply and demand: if we have fewer dollars to spend on things other than gasoline then prices on those other things decline.
They do not see that inflation is actually an increase in the supply of money without a corresponding demand for money. Rising prices are one of the impacts of monetary inflation. Other serious effects occur which are even more damaging to the economy than price increases. Some of those impacts are a creation of the boom-bust cycle and the destruction of real capital (wealth created from production, not from money printing).
When the Fed says they wish to create "inflation" through printing money to spur the economy and prevent "deflation" they actually are saying that they wish to trick the citizenry into believing that rising prices are really a result of strong economic activity when it isn't. They believe that wiping out capital, punishing savers, and seeding the ground for a new destructive business cycle is a positive for economic growth.
There is a lot of discussion now about the "psychology" of inflation and how the Fed can make inflation work. Most of it is stuff mainstream economists dream up to explain why their theories don't work. For example, the advantage of "surprise" they had hoped for that would allow them to pump more money into the economy to spur growth without people catching on to what they are doing. I don't really know why mainstream economists say such things, but they do. The psychological anticipation of higher prices is all quite true as price inflation starts taking off. As people anticipate that prices will continue to rise, they will adjust their goals and demand higher returns. Or they will reduce their demand for money and start buying goods that appear to "appreciate." But that "psychology" has to start somewhere and that "somewhere" is with a central bank which likes to print money as the solution to their country's problems. You can't have inflation without it.
I would side with Mr. Hoenig who does understand something about the dangers of inflation. Inflation as a solution hasn't worked here or anywhere and it won't work now.
The markets already sense this. Recall that 30% of the buyers are foreign sovereigns, banks, and investment companies whose countries have rich traditions of destroying their economies through inflation. Perhaps even U.S. based investors understand this lesson as well. The almost instantaneous jump in Treasury rates, especially the long bond, was counterproductive to the Fed's plans to keep interest rates low and make borrowing attractive to businesses. The bond vigilantes know better. So, initially the Fed's QE hopes have somewhat diminished.
When they start discussing a whole new way at looking at how they control money supply (the Taylor Rule) or which maturities they should target in the future, you know they don't have a clue where this is going. The dissension among the members of the FOMC is a rather stark example of why mainstream economics has failed us time and again. Their ordinary tools have failed them and they are desperate, in my opinion, to find something that will work. Thus the wide disparity of opinion between the Fed's anti-deflationists and the anti-inflationists.
I think that they will pump in enough money to create some inflation, even though it may not be that apparent with powerful ongoing deleveraging forces. You can't "helicopter" $2.6 trillion into the economy and have no effect. The result in my view will be stagflation.
Tuesday, November 23, 2010
What happens when people lose faith?
the 'letter' of the law is being used to circumvent a Constitutional Republic.
mistakes? of course, there will be a few. even silver-spooned ivy league twats get it wrong every thousand times in a while. just as long as you're not in the wrong group of livestock, then its no big deal.
http://en.wikipedia.org/wiki/Holodomor
why even criticize our ruling elite? Senator Rockefeller says there is no debate, and folks should just 'trust their government'. we should all just get back on the hampster wheel, pay our taxes, and shut up!
http://hotair.com/archives/2010/11/18/sen-rockefeller-fcc-should-shut-down-fox-news-and-msnbc/
Of course, when you control national newspapers and mainstream television, such dissention in cable TV and the internet cannot be tolerated. This subversion cannot go unchecked!! Central command must get this free flow of information under control!!!!
http://www.wired.com/epicenter/2010/11/coica-web-censorship-bill/
And, why shouldn't King Rockefeller and other Feudal Lords not be upset? a 100-year United States trading monopoly on their beloved corporate currency, the private federal reserve note, may be in jeopardy someday if this continues.
http://www.save-a-patriot.org/files/view/whofed.html
They may actually have to stop causing world wars and work like everyone else!!! And everyone else may actually benefit from their own free trade instead of always enduring the financial terrorism from the private Federal Reserve Gosbank corporation: namely,
(1) that they have arranged it so that we can only pay our 'temple tax' to the un-Constitutional Internal Revenue with their private fiat (faith-based) paper money, upon which we actually pay them an interest rate to circulate within their self-serving debt-based monetary system, which allows them to sit at the top, siphon wealth upward, keep there boots on the backs of our necks, and entirely manipulate our lives,
(2) that they have arranged it so as "bankers", these seemingly 'special' men, and everyone in their cartel and inner circle, enjoy all the fruitful benefits of 'legal' counterfeiting through both the printing press and further through 'fractional reserve lending' which allows bankers to create 'legal tender' out of thin air and then loan it to your reckless borrowing neighbor so he can drive up food, energy, and real estate prices so you've got to work harder to earn yours by providing productive goods and services.
http://en.wikipedia.org/wiki/Criticism_of_fractional-reserve_banking
You, see, bankers and their buddies always get to spend the newly printed money on such things as milk and bread at today's prices, but when the privately counterfeited money finally makes it into the hands of the little old ladies scrubbing toilets for a living, they must always pay the full upwardly adjusted price for their milk and bread. Oh, well, fuck 'em, bankers have yachts to buy.
After all, we only had a Gilded Age when there were competing currencies with real assets, such as gold and silver, backing them in America, so why would we ever wish to decentralize this counterfeiting paper monopoly which has incrementally destroyed small-town agrarian American and stripped States of their sovereignty?
i'm just waiting for the private Federal Reserve Note to become the monopoly corporate currency of the world so that we can continue to live as serfs and peasants under the superior families of the Rockefellers, Rothschilds, Morgans, and Lazards. After all, the survival of their sloth offspring is much more important than our children who will probably be starved or bombed when they decide that it is time to cull the herd.
my question is, in a "faith-based" paper debt monetary system,
...what happens when people lose faith?
mistakes? of course, there will be a few. even silver-spooned ivy league twats get it wrong every thousand times in a while. just as long as you're not in the wrong group of livestock, then its no big deal.
http://en.wikipedia.org/wiki/Holodomor
why even criticize our ruling elite? Senator Rockefeller says there is no debate, and folks should just 'trust their government'. we should all just get back on the hampster wheel, pay our taxes, and shut up!
http://hotair.com/archives/2010/11/18/sen-rockefeller-fcc-should-shut-down-fox-news-and-msnbc/
Of course, when you control national newspapers and mainstream television, such dissention in cable TV and the internet cannot be tolerated. This subversion cannot go unchecked!! Central command must get this free flow of information under control!!!!
http://www.wired.com/epicenter/2010/11/coica-web-censorship-bill/
And, why shouldn't King Rockefeller and other Feudal Lords not be upset? a 100-year United States trading monopoly on their beloved corporate currency, the private federal reserve note, may be in jeopardy someday if this continues.
http://www.save-a-patriot.org/files/view/whofed.html
They may actually have to stop causing world wars and work like everyone else!!! And everyone else may actually benefit from their own free trade instead of always enduring the financial terrorism from the private Federal Reserve Gosbank corporation: namely,
(1) that they have arranged it so that we can only pay our 'temple tax' to the un-Constitutional Internal Revenue with their private fiat (faith-based) paper money, upon which we actually pay them an interest rate to circulate within their self-serving debt-based monetary system, which allows them to sit at the top, siphon wealth upward, keep there boots on the backs of our necks, and entirely manipulate our lives,
(2) that they have arranged it so as "bankers", these seemingly 'special' men, and everyone in their cartel and inner circle, enjoy all the fruitful benefits of 'legal' counterfeiting through both the printing press and further through 'fractional reserve lending' which allows bankers to create 'legal tender' out of thin air and then loan it to your reckless borrowing neighbor so he can drive up food, energy, and real estate prices so you've got to work harder to earn yours by providing productive goods and services.
http://en.wikipedia.org/wiki/Criticism_of_fractional-reserve_banking
You, see, bankers and their buddies always get to spend the newly printed money on such things as milk and bread at today's prices, but when the privately counterfeited money finally makes it into the hands of the little old ladies scrubbing toilets for a living, they must always pay the full upwardly adjusted price for their milk and bread. Oh, well, fuck 'em, bankers have yachts to buy.
After all, we only had a Gilded Age when there were competing currencies with real assets, such as gold and silver, backing them in America, so why would we ever wish to decentralize this counterfeiting paper monopoly which has incrementally destroyed small-town agrarian American and stripped States of their sovereignty?
i'm just waiting for the private Federal Reserve Note to become the monopoly corporate currency of the world so that we can continue to live as serfs and peasants under the superior families of the Rockefellers, Rothschilds, Morgans, and Lazards. After all, the survival of their sloth offspring is much more important than our children who will probably be starved or bombed when they decide that it is time to cull the herd.
my question is, in a "faith-based" paper debt monetary system,
...what happens when people lose faith?
US Bankruptcy
"To-day I may tell you that our goal is now only a few steps off. There remains a small space to cross and the whole long path we have trodden is ready now to close its cycle of the Symbolic Snake... When this ring closes, all the States of Europe will be locked in its coil as in a powerful vice."
"What form of administrative rule can be given to communities in which corruption has penetrated everywhere, communities where riches are attained only by the clever surprise tactics of semi-swindling tricks; where looseness reigns: where morality is maintained by penal measures and harsh laws but not by voluntarily accepted principles: where the feelings towards faith and country are obligated by cosmopolitan convictions? What form of rule is to be given to these communities if not that despotism which I shall describe to you later? We shall create an intensified centralization of government in order to grip in our hands all the forces of the community."
"We shall be told that such a despotism as I speak of is not consistent with the progress of these days, but I will prove to you that it is."
"Capital, if it is to co-operate untrammeled, must be free to establish a monopoly of industry and trade: this is already being put in execution by an unseen hand in all quarters of the world. This freedom will give political force to those engaged in industry, and that will help to oppress the people."
"We shall soon begin to establish huge monopolies, reservoirs of colossal riches, upon which even large fortunes ... will depend to such an extent that they will go to the bottom together with the credit of the States on the day after the political smash..."
"In every possible way we must develop the significance of our Super-Government by representing it as the Protector and Benefactor of all those who voluntarily submit to us."
"It is essential therefore for us at whatever cost to deprive them of their land. This object will be best attained by increasing the burdens upon landed property - in loading lands with debts."
"At the same time we must intensively patronize trade and industry, but, first and foremost, speculation, the part played by which is to provide a counterpoise to industry: the absence of speculative industry will multiply capital in private hands and will serve to restore agriculture by freeing the land from indebtedness to the land banks. What we want is that industry should drain off from the land both labor and capital and by means of speculation transfer into our hands all the money of the world, and thereby throw all the GOYIM into the ranks of the proletariat. Then the(y) ... will bow down before us, if for no other reason but to get the right to exist."
"...they will be compelled to offer us international power of a nature that by its position will enable us without any violence gradually to absorb all the state forces of the the world and to form a Super-Government."
"The intensification of armaments, the increase of police forces - are all essential for the completion of the aforementioned plans. What we have to get at is that there should be in all the States of the world, besides ourselves, only the masses of the proletariat, a few millionaires devoted to our interests, police and soldiers."
"We count upon attracting all nations to the task of erecting the new fundamental structure, the project for which has been drawn up by us. This is why, before everything, it is indispensable for us to arm ourselves and to store up in ourselves that absolutely reckless audacity and irresistible might of the spirit which in the person of our active workers will break down all hindrances on our way."
"When we have accomplished our coup d'etat we shall say then to the various peoples: 'Everything has gone terribly badly, all have been worn out with suffering. We are destroying the causes of your torment - nationalities, frontiers, differences of coinages. You are at liberty, of course, to pronounce sentence upon us, but can it possibly be a just one if it is confirmed by you before your make any trial of what we are offering you?' ... Then the mob will exalt us and bear us up in their hands in a unanimous triumph of hopes and expectations. Voting, which we have made the instrument which will set us on the throne of the world by teaching even the very smallest units of members of the human race to vote by means of meetings and agreements of groups, will then have served its purposes and will play its part then for the last time by a unanimity of desire to make close acquaintance with us before condemning us."
To secure this we must have everybody vote without distinction of classesand qualifications, in order to establish an absolute majority, which cannot be got from the educated propertied classes. In this way, by inculcating in all a sense of self-importance, we shall destroy ... the importance of the family and its educational value and remove the possibility of individual minds splitting off, for the mob, handled by us, will not let them come to the front nor even give them a hearing; it is accustomed to listen to us only who pay it for obedience and attention. In this way we shall create a blind, mighty force which will never be in a position to move in any direction without the guidance of our agents set at its head by us as leaders of the mob. The people will submit to this regime because it will know that upon these leaders will depend its earnings, gratifications and the receipt of all kinds of benefits."
"These schemes will not turn existing institutions upside down just yet. They will only effect changes in their economy and consequently in the whole combined movement of their progress, which will thus be directed along the paths laid down in our schemes."
"The reforms projected by us in the financial institutions and principles ... will be clothed by us in such forms as will alarm nobody. We shall point out the necessity of reforms in consequence of the disorderly darkness into which the(y) ... by their irregularities have plunged the finances. The first irregularity, as we shall point out, consists in their beginning with drawing up a single budget which year after year grows owing to the following cause: this budget is dragged out to half the year, then they demand a budget to put things right, and this they expend in three months, after which they ask for a supplementary budget, and all this ends with a liquidation budget. But, as the budget of the following year is drawn up in accordance with the sum of the total addition, the annual departure from the normal reaches as much as 50 per cent in a year, and so the annual budget is trebled in ten years. Thanks to such methods, allowed by the carelessness of the ... States, their treasuries are empty. The period of loans supervenes, and that has swallowed up remainders and brought all the ... States to bankruptcy."
(The United States was declared "bankrupt" at the Geneva Convention of 1929. [see 31 USC 5112, 5118, and 5119)
Sunday, November 21, 2010
The Fed Is Saying One Thing But Doing Something Very Different
Ben Bernanke has said that the Fed is trying to promote inflation, increase lending, reduce unemployment, and stimulate the economy.
However, the Fed has arguably - to some extent - been working against all of these goals.
For example, as I reported in March, the Fed has been paying the big banks high enough interest on the funds which they deposit at the Fed to discourage banks from making loans. Indeed, the Fed has explicitly stated that - in order to prevent inflation - it wants to ensure that the banks don't loan out money into the economy, but instead deposit it at the Fed:
These excess reserves, of course, are deposited at the Fed:
Why are banks building up their excess reserves?
As the Fed notes:
Why is the Fed locking up excess reserves?
As Fed Vice Chairman Donald Kohn said in a speech on April 18, 2009:
***
As Barron's notes:
It's not just the Fed. The NY Fed report notes:
Last week, Auerbach wrote:
In September, Auerbach explained:
I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:
For example, as I reported in March, the Fed has been paying the big banks high enough interest on the funds which they deposit at the Fed to discourage banks from making loans. Indeed, the Fed has explicitly stated that - in order to prevent inflation - it wants to ensure that the banks don't loan out money into the economy, but instead deposit it at the Fed:
Why is M1 crashing? [the M1 money multiplier basically measures how much the money supply increases for each $1 increase in the monetary base, and it gives an indication of the "velocity" of money, i.e. how quickly money is circulating through the system]
Because the banks continue to build up their excess reserves, instead of lending out money:
As the Fed notes:
The Federal Reserve Banks pay interest on required reserve balances--balances held at Reserve Banks to satisfy reserve requirements--and on excess balances--balances held in excess of required reserve balances and contractual clearing balances.The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:
Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1.1 Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.
[Figure 1 is here]
Why are banks holding so many excess reserves? What do the data in Figure 1 tell us about current economic conditions and about bank lending behavior? Some observers claim that the large increase in excess reserves implies that many of the policies introduced by the Federal Reserve in response to the financial crisis have been ineffective. Rather than promoting the flow of credit to firms and households, it is argued, the data shown in Figure 1 indicate that the money lent to banks and other intermediaries by the Federal Reserve since September 2008 is simply sitting idle in banks’ reserve accounts. Edlin and Jaffee (2009), for example, identify the high level of excess reserves as either the “problem” behind the continuing credit crunch or “if not the problem, one heckuva symptom” (p.2). Commentators have asked why banks are choosing to hold so many reserves instead of lending them out, and some claim that inducing banks to lend their excess reserves is crucial for resolving the credit crisis.Why Is The Fed Locking Up Excess Reserves?
This view has lead to proposals aimed at discouraging banks from holding excess reserves, such as placing a tax on excess reserves (Sumner, 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta, 2009). Mankiw (2009) discusses historical concerns about people hoarding money during times of financial stress and mentions proposals that were made to tax money holdings in order to encourage lending. He relates these historical episodes to the current situation by noting that “[w]ith banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”
[In fact, however,] the total level of reserves in the banking system is determined almost entirely by the actions of the central bank and is not affected by private banks’ lending decisions.
The liquidity facilities introduced by the Federal Reserve in response to the crisis have created a large quantity of reserves. While changes in bank lending behavior may lead to small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter how banks react. In other words, the quantity of excess reserves depicted in Figure 1 reflects the size of the Federal Reserve’s policy initiatives, but says little or nothing about their effects on bank lending or on the economy more broadly.
This conclusion may seem strange, at first glance, to readers familiar with textbook presentations of the money multiplier.
Why is the Fed locking up excess reserves?
As Fed Vice Chairman Donald Kohn said in a speech on April 18, 2009:
We are paying interest on excess reserves, which we can use to help provide a floor for the federal funds rate, as it does for other central banks, even if declines in lending or open market operations are not sufficient to bring reserves down to the desired level.Kohn said in a speech on January 3, 2010:
Because we can now pay interest on excess reserves, we can raise short-term interest rates even with an extraordinarily large volume of reserves in the banking system. Increasing the rate we offer to banks on deposits at the Federal Reserve will put upward pressure on all short-term interest rates.As the Minneapolis Fed's research consultant, V. V. Chari, wrote this month:
Currently, U.S. banks hold more than $1.1 trillion of reserves with the Federal Reserve System. To restrict excessive flow of reserves back into the economy, the Fed could increase the interest rate it pays on these reserves. Doing so would not only discourage banks from draining their reserve holdings, but would also exert upward pressure on broader market interest rates, since only rates higher than the overnight reserve rate would attract bank funds. In addition, paying interest on reserves is supported by economic theory as a means of reducing monetary inefficiencies, a concept referred to as “the Friedman rule.”And the conclusion to the above-linked New York Fed article states:
We also discussed the importance of paying interest on reserves when the level of excess reserves is unusually high, as the Federal Reserve began to do in October 2008. Paying interest on reserves allows a central bank to maintain its influence over market interest rates independent of the quantity of reserves created by its liquidity facilities. The central bank can then let the size of these facilities be determined by conditions in the financial sector, while setting its target for the short-term interest rate based on macroeconomic conditions. This ability to separate monetary policy from the quantity of bank reserves is particularly important during the recovery from a financial crisis. If inflationary pressures begin to appear while the liquidity facilities are still in use, the central bank can use its interest-on-reserves policy to raise interest rates without necessarily removing all of the reserves created by the facilities.As the NY Fed explains in more detail:
The central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions. In such a situation, the absence of a money-multiplier effect should be neither surprising nor troubling.Because financial conditions are not "normal", it appears that preventing inflation seems to be the Fed's overriding purpose in creating conditions ensuring high levels of excess reserves.
Is the large quantity of reserves inflationary?
Some observers have expressed concern that the large quantity of reserves will lead to an increase in the inflation rate unless the Federal Reserve acts to remove them quickly once the economy begins to recover. Meltzer (2009), for example, worries that “the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain.” Feldstein (2009) expresses similar concern that “when the economy begins to recover, these reserves can be converted into new loans and faster money growth” that will eventually prove inflationary. Under a traditional operational framework, where the central bank influences interest rates and the level of economic activity by changing the quantity of reserves, this concern would be well justified. Now that the Federal Reserve is paying interest on reserves, however, matters are different.
When the economy begins to recover, firms will have more profitable opportunities to invest, increasing their demands for bank loans. Consequently, banks will be presented with more lending opportunities that are profitable at the current level of interest rates. As banks lend more, new deposits will be created and the general level of economic activity will increase. Left unchecked, this growth in lending and economic activity may generate inflationary pressures. Under a traditional operating framework, where no interest is paid on reserves, the central bank must remove nearly all of the excess reserves from the banking system in order to arrest this process. Only by removing these excess reserves can the central bank limit banks’ willingness to lend to firms and households and cause short-term interest rates to rise.
Paying interest on reserves breaks this link between the quantity of reserves and banks’ willingness to lend. By raising the interest rate paid on reserves, the central bank can increase market interest rates and slow the growth of bank lending and economic activity without changing the quantity of reserves. In other words, paying interest on reserves allows the central bank to follow a path for short-term interest rates that is independent of the level of reserves. By choosing this path appropriately, the central bank can guard against inflationary pressures even if financial conditions lead it to maintain a high level of excess reserves.
This logic applies equally well when financial conditions are normal. A central bank may choose to maintain a high level of reserve balances in normal times because doing so offers some important advantages, particularly regarding the operation of the payments system. For example, when banks hold more reserves they tend to rely less on daylight credit from the central bank for payments purposes. They also tend to send payments earlier in the day, on average, which reduces the likelihood of a significant operational disruption or of gridlock in the payments system. To capture these benefits, a central bank may choose to create a high level of reserves as a part of its normal operations, again using the interest rate it pays on reserves to influence market interest rates.
***
As Barron's notes:
The multiplier's decline "corresponds so exactly to the expansion of the Fed's balance sheet," says Constance Hunter, economist at hedge-fund firm Galtere. "It hits at the core of the problem in a credit crisis. Until [the multiplier] expands, we can't get sustainable growth of credit, jobs, consumption, housing. When the multiplier starts to go back up toward 1.8, then we know the psychological logjam has begun to break."***
It's not just the Fed. The NY Fed report notes:
Most central banks now pay interest on reserves.Robert D. Auerbach - an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and subsequently Professor of Public Affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin - argues that the Fed should slowly reduce the interest paid on reserves so as to stimulate the economy.
Last week, Auerbach wrote:
The stimulative effects of QE2 may be small and the costs may be large. One of these costs will be the payment of billions of dollars by taxpayers to the banks which currently hold over 50 percent of the monetary base, over $1 trillion in reserves. The interest payments are an incentive for banks to hold reserves rather than make business loans. If market interest rates rise, the Federal Reserve may be required to increase these interest payments to prevent the huge amount of bank reserves from flooding the economy. They should follow a different policy that benefits taxpayers and increases the incentive of banks to make business loans as I have previously suggested.
Immediately after the recession took a dramatic dive in September 2008, the Bernanke Fed implemented a policy that continues to further damage the incentive for banks to lend to businesses. On October 6, 2008 the Fed's Board of Governors, chaired by Ben Bernanke, announced it would begin paying interest on the reserve balances of the nation's banks, major lenders to medium and small size businesses.The fact that the Fed is suppressing lending and inflation at a time when it says it is trying to encourage both shows that the Fed is saying one thing and doing something else entirely.
You don't need a Ph.D. economist to know that if you pay banks ¼ percent risk free interest to hold reserves that they can obtain at near zero interest, that would be an incentive to hold the reserves. The Fed pumped out huge amounts of money, with the base of the money supply more than doubling from August 2008 to August 2010, reaching $1.99 trillion. Guess who has over half of this money parked in cold storage? The banks have $1.085 trillion on reserves drawing interest, The Fed records show they were paid $2.18 billion interest on these reserves in 2009.
A number of people spoke about the disincentive for bank lending embedded in this policy including Chairman Bernanke.
***
Jim McTague, Washington Editor of Barrons, wrote in his February 2, 2009 column, "Where's the Stimulus:" "Increasing the supply of credit might help pump up spending, too. University of Texas Professor Robert Auerbach an economist who studied under the late Milton Friedman, thinks he has the makings of a malpractice suit against Federal Reserve Chairman Ben Bernanke, as the Fed is holding a record number of reserves: $901 billion in January as opposed to $44 billion in September, when the Fed began paying interest on money commercial banks parked at the central bank. The banks prefer the sure rate of return they get by sitting in cash, not making loans. Fed, stop paying, he says."
Shortly after this article appeared Fed Chairman Bernanke explained: "Because banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed, the interest rate the Fed pays on bank reserves should help to set a floor on the overnight interest rate." (National Press Club, February 18, 2009) That was an admission that the Fed's payment of interest on reserves did impair bank lending. Bernanke's rationale for interest payments on reserves included preventing banks from lending at lower interest rates. That is illogical at a time when the Fed's target interest rate for federal funds, the small market for interbank loans, was zero to a quarter of one percent. The banks would be unlikely to lend at negative rates of interest -- paying people to take their money -- even without the Fed paying the banks to hold reserves.
The next month William T. Gavin, an excellent economist at the St. Louis Federal Reserve, wrote in its March\April 2009 publication: "first, for the individual bank, the risk-free rate of ¼ percent must be the bank's perception of its best investment opportunity." The Bernanke Fed's policy was a repetition of what the Fed did in 1936 and 1937 which helped drive the country into a second depression. Why does Chairman Bernanke, who has studied the Great Depression of the 1930's and has surely read the classic 1963 account of improper actions by the Fed on bank reserves described by Milton Friedman and Anna Schwartz, repeat the mistaken policy?
As the economy pulled out of the deep recession in 1936 the Fed Board thought the U.S. banks had too much excess reserves, so they began to raise the reserves banks were required to hold. In three steps from August 1936 to May 1937 they doubled the reserve requirements for the large banks (13 percent to 26 percent of checkable deposits) and the country banks (7 percent to 14 percent of checkable deposits).
Friedman and Schwartz ask: "why seek to immobilize reserves at that time?" The economy went back into a deep depression. The Bernanke Fed's 2008 to 2010 policy also immobilizes the banking system's reserves reducing the banks' incentive to make loans.
This is a bad policy even if the banks approve. The correct policy now should be to slowly reduce the interest paid on bank reserves to zero and simultaneously maintain a moderate increase in the money supply by slowly raising the short term market interest rate targeted by the Fed. Keeping the short term target interest rate at zero causes many problems, not the least of which is allowing banks to borrow at a zero interest rate and sit on their reserves so they can receive billions in interest from the taxpayers via the Fed. Business loans from banks are vital to the nations' recovery.
I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:
- Reinforcing cyclical trends (when one of the Fed's main justifications is providing a counter-cyclical balance);
- Increasing unemployment (when the Fed is mandated by law to maximize employment); and
- Encouraging financial companies to make even riskier gambles in the future (when it is supposed to stabilize the financial system).
And see this.
Postscript: If the Fed really wants to stimulate the economy, it should try Steve Keen's idea.
Postscript: If the Fed really wants to stimulate the economy, it should try Steve Keen's idea.
Time-Lapse Video Of Food Stamp Participation Rates During The "New Normal"
With everyone chanting the praises of the "better than abysmal" economy, we decided to post a time lapse video (since cartoons are all that stand an even remote chance of attracting some attention) prepared by John Lohman, of just how the New Normal has been progressing, both since the starts of the great depression in December 2007, and more importantly, since the beginning of the "end" of the recession. The result may surprise you. As John points out: food stamps - the only thing keeping 43 million Americans from going postal." Hopefully the end of extended unemployment benefits coming December 1 won't be that first one additional straw on the camel's back that leads to a full blown fracture.
http://www.youtube.com/watch?v=z87XBKNto4Q&feature=player_embedded
http://www.youtube.com/watch?v=z87XBKNto4Q&feature=player_embedded
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