Temporary Recession or the End of Growth?
This is a guest post by Richard Heinberg. Richard is a Senior Fellow of the Post Carbon Institute and author of five books on resource depletion and societal responses to the energy problem. He can be found on the web at www.richardheinberg.com and www.postcarbon.org.
Everyone agrees: our economy is sick. The inescapable symptoms include declines in consumer spending and consumer confidence, together with a contraction of international trade and available credit. Add a collapse in real estate values and carnage in the automotive and airline industries and the picture looks grim indeed.
But why are both the U.S. economy and the larger global economy ailing? Among the mainstream media, world leaders, and America’s economists-in-chief (Treasury Secretary Geithner and Federal Reserve Chairman Bernanke) there is near-unanimity of opinion: these recent troubles are primarily due to a combination of bad real estate loans and poor regulation of financial derivatives.
This is the Conventional Diagnosis. If it is correct, then the treatment for our economic malady might logically include heavy doses of bailout money for beleaguered financial institutions, mortgage lenders, and car companies; better regulation of derivatives and futures markets; and stimulus programs to jumpstart consumer spending.
But what if this diagnosis is fundamentally flawed? The metaphor needs no belaboring: we all know that tragedy can result from a doctor’s misreading of symptoms, mistaking one disease for another.
Something similar holds for our national and global economic infirmity. If we don’t understand why the world’s industrial and financial metabolism is seizing up, we are unlikely to apply the right medicine and could end up making matters much worse than they would otherwise be.
To be sure: the Conventional Diagnosis is clearly at least partly right. The causal connections between subprime mortgage loans and the crises at Fannie Mae, Freddie Mac, and Lehman Brothers have been thoroughly explored and are well known. Clearly, over the past few years, speculative bubbles in real estate and the financial industry were blown up to colossal dimensions, and their bursting was inevitable. It is hard to disagree with the words of Australian Prime Minister Kevin Rudd, in his July 25 essay in the Sydney Morning Herald: “The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom…. However, as we later learnt, the global boom was built in large part on a … house of cards. First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: ‘For 25 years [the West] has been consuming more than we have been producing … living beyond our means.’” (1)
But is this as far as we need look to get to the root of the continuing global economic meltdown?
A case can be made that dire events having to do with real estate, the derivatives markets, and the auto and airline industries were themselves merely symptoms of an even deeper, systemic dysfunction that spells the end of economic growth as we have known it.
In short, I am suggesting an Alternative Diagnosis. This explanation for the economic crisis is not for the faint of heart because, if correct, it implies that the patient is far sicker than even the most pessimistic economists are telling us. But if it is correct, then by ignoring it we risk even greater peril.
Economic Growth, The Financial Crisis, and Peak Oil
For several years, a swelling subculture of commentators (which includes the present author) has been forecasting a financial crash, basing this prognosis on the assessment that global oil production was about to peak. (2) Our reasoning went like this:
Continual increases in population and consumption cannot continue forever on a finite planet. This is an axiomatic observation with which everyone familiar with the mathematics of compounded arithmetic growth must agree, even if they hedge their agreement with vague references to “substitutability” and “demographic transitions.” (3)
This axiomatic limit to growth means that the rapid expansion in both population and per-capita consumption of resources that has occurred over the past century or two must cease at some particular time. But when is this likely to occur?
The unfairly maligned Limits to Growth studies, published first in 1972 with periodic updates since, have attempted to answer the question with analysis of resource availability and depletion, and multiple scenarios for future population growth and consumption rates. The most pessimistic scenario in 1972 suggested an end of world economic growth around 2015. (4)
But there may be a simpler way of forecasting growth’s demise.
Energy is the ultimate enabler of growth (again, this is axiomatic: physics and biology both tell us that without energy nothing happens). Industrial expansion throughout the past two centuries has in every instance been based on increased energy consumption. (5) More specifically, industrialism has been inextricably tied to the availability and consumption of cheap energy from coal and oil (and more recently, natural gas). However, fossil fuels are by their very nature depleting, non-renewable resources. Therefore (according to the Peak Oil thesis), the eventual inability to continue increasing supplies of cheap fossil energy will likely lead to a cessation of economic growth in general, unless alternative energy sources and efficiency of energy use can be deployed rapidly and to a sufficient degree. (6)
Of the three conventional fossil fuels, oil is arguably the most economically vital, since it supplies 95 percent of all transport energy. Further, petroleum is the fuel with which we are likely to encounter supply problems soonest, because global petroleum discoveries have been declining for decades, and most oil producing countries are already seeing production declines. (7)
So, by this logic, the end of economic growth (as conventionally defined) is inevitable, and Peak Oil is the likely trigger.
Why would Peak Oil lead not just to problems for the transport industry, but a more general economic and financial crisis? During the past century growth has become institutionalized in the very sinews of our economic system. Every city and business wants to grow. This is understandable merely in terms of human nature: nearly everyone wants a competitive advantage over someone else, and growth provides the opportunity to achieve it. But there is also a financial survival motive at work: without growth, businesses and governments are unable to service their debt. And debt has become endemic to the industrial system. During the past couple of decades, the financial services industry has grown faster than any other sector of the American economy, even outpacing the rise in health care expenditures, accounting for a third of all growth in the U.S. economy. From 1990 to the present, the ratio of debt-to-GDP expanded from 165 percent to over 350 percent. In essence, the present welfare of the economy rests on debt, and the collateral for that debt consists of a wager that next year’s levels of production and consumption will be higher than this year’s.
Given that growth cannot continue on a finite planet, this wager, and its embodiment in the institutions of finance, can be said to constitute history’s greatest Ponzi scheme. We have justified present borrowing with the irrational belief that perpetual growth is possible, necessary, and inevitable. In effect we have borrowed from future generations so that we could gamble away their capital today.
Until recently, the Peak Oil argument has been framed as a forecast: the inevitable decline in world petroleum production, whenever it occurs, will kill growth. But here is where forecast becomes diagnosis: during the period from 2005 to 2008, energy stopped growing and oil prices rose to record levels. By July of 2008, the price of a barrel of oil was nudging close to $150—half again higher than any previous petroleum price in inflation-adjusted terms—and the global economy was beginning to topple. The auto and airline industries shuddered; ordinary consumers had trouble for buying gasoline for their commute to work while still paying their mortgages. Consumer spending began to decline. By September the economic crisis was also a financial crisis, as banks trembled and imploded. (8)
Given how much is at stake, it is important to evaluate the two diagnoses on the basis of facts, not preconceptions.
It is unnecessary to examine evidence supporting or refuting the Conventional Diagnosis, because its validity is not in doubt—as a partial explanation for what is occurring. The question is whether it is a sufficient explanation, and hence an adequate basis for designing a successful response.
What’s the evidence favoring the Alternative? A good place to begin is with a recent paper by economist James Hamilton of the University of California, San Diego, titled “Causes and Consequences of the Oil Shock of 2007-08,” which discusses oil prices and economic impacts with clarity, logic, and numbers, explaining how and why the economic crash is related to the oil price shock of 2008. (9)
Hamilton starts by citing previous studies showing a tight correlation between oil price spikes and recessions. On the basis of this correlation, every attentive economist should have forecast a steep recession for 2008. “Indeed,” writes Hamilton, “the relation could account for the entire downturn of 2007-08…. If one could have known in advance what happened to oil prices during 2007-08, and if one had used the historically estimated relation [between price rise and economic impact]… one would have been able to predict the level of real GDP for both of 2008:Q3 and 2008:Q4 quite accurately.”
Again, this is not to ignore the role of the financial and real estate sectors in the ongoing global economic meltdown. But in the Alternative Diagnosis the collapse of the housing and derivatives markets is seen as amplifying a signal ultimately emanating from a failure to increase the rate of supply of depleting resources. Hamilton again: “At a minimum it is clear that something other than housing deteriorated to turn slow growth into a recession. That something, in my mind, includes the collapse in automobile purchases, slowdown in overall consumption spending, and deteriorating consumer sentiment, in which the oil shock was indisputably a contributing factor.”
Moreover, Hamilton notes that there was “an interaction effect between the oil shock and the problems in housing.” That is, in many metropolitan areas, house prices in 2007 were still rising in the zip codes closest to urban centers but already falling fast in zip codes where commutes were long. (10)
Why Did the Oil Price Spike?
Those who espouse the Conventional Diagnosis for our ongoing economic collapse might agree that there was some element of causal correlation between the oil price spike and the recession, but they would deny that the price spike itself had anything to do with resource limits, because (they say) it was caused mostly by speculation in the oil futures market, and had little to do with fundamentals of supply and demand.
In this, the Conventional Diagnosis once again has some basis in reality. Speculation in oil futures during the period in question almost certainly helped drive oil prices higher than was justified by fundamentals. But why were investors buying oil futures? Was the mania for oil contracts just another bubble, like the dot.com stock frenzy of the late ’90s or the real estate boom of 2003 to 2006?
During the period from 2005 to mid-2008, demand for oil was growing, especially in China (which went from being self-sufficient in oil in 1995 to being the world’s second-foremost importer, after the U.S., by 2006). But the global supply of oil was essentially stagnant: monthly production figures for crude oil bounced around within a fairly narrow band between 72 and 75 million barrels per day. As prices rose, production figures barely budged in response. There was every indication that all oil producers were pumping flat-out: even the Saudis appeared to be rushing to capitalize on the price bonanza.
Thus a good argument can be made that speculation in oil futures was merely magnifying price moves that were inevitable on the basis of the fundamentals of supply and demand. James Hamilton (in his publication previously cited) puts it this way: “With hindsight, it is hard to deny that the price rose too high in July 2008, and that this miscalculation was influenced in part by the flow of investment dollars into commodity futures contracts. It is worth emphasizing, however, that the two key ingredients needed to make such a story coherent—a low price elasticity of demand, and the failure of physical production to increase—are the same key elements of a fundamentals-based explanation of the same phenomenon. I therefore conclude that these two factors, rather than speculation per se, should be construed as the primary cause of the oil shock of 2007-08.”
Aftermath of the Peak
There is also controversy over to what degree troubles in the automobile, trucking, and airline industries should be attributed to the oil price spike or the economic crash. Of course, if the Alternative Diagnosis is correct, the latter two events are causally related in any case. However, it may be helpful to review the situation.
Everyone knows that GM and Chrysler went bankrupt this year because U.S. car sales cratered. The current forecast is for sales of about 10.3 million vehicles in the U.S. for 2009, down from last year’s 13.2 million and 16.1 million in 2007. U.S. car sales have not been this low since the 1970s. Sales of light trucks, the most profitable vehicles, took the biggest hit during 2008, as fuel prices soared and car buyers avoided gas-guzzlers. It was at this point that the auto companies really began feeling the pain.
The airline industry’s ills are summarized in a recent GAO document: “After 2 years of profits, the U.S. passenger airline industry lost $4.3 billion in the first 3 quarters of 2008 [as jet fuel prices climbed]. Collectively, U.S. airlines reduced domestic capacity, as measured by the number of seats flown, by about 9 percent from the fourth quarter of 2007 to the fourth quarter of 2008…. To reduce capacity, airlines reduced the overall number of active aircraft in their fleets by 18 percent…. Airlines also collectively reduced their workforces by about 28,000, or nearly 7 percent, from the end of 2007 to the end of 2008…. The contraction of the U.S. airline industry in 2008 reduced airport revenues, passengers’ access to the national aviation system, and revenues for the Trust Fund.” (11)
For the trucking industry, fuel accounts for nearly 40 percent of total operational costs. In 2007, as diesel prices rose, carriers began losing money and added fuel price surcharges; meanwhile the volume of freight began falling. After July 2008, as oil prices crashed, tonnage continued to decline. Overall, the cumulative decrease in loads for flatbed, tanker, and dry vans ranged between 15 percent and 20 percent just in the period from June to December 2008. (12)
This last set of statistics raises a couple of questions crucial to understanding the Alternative Diagnosis: Why, if global oil production had just peaked, did petroleum prices fall in the last five months of 2008? And, if oil prices were a major factor in the economic crisis, why didn’t the economy begin to turn around after the prices softened?
Why Did Oil Prices Fall? And Why Didn’t Lower Oil Prices Lead to a Quick Recovery?
The Peak Oil thesis predicts that, as world oil production reaches its maximum level and begins to decline, the price of oil will rise dramatically. But it also forecasts a dramatic increase in the volatility of prices.
The argument goes as follows. As oil becomes scarce, its price will rise until it begins to undermine economic activity in general. Economic contraction will then result in substantially reduced demand for oil, which will in turn cause its price to fall temporarily. Then one of two things will happen: either (a) the economy will begin to recover, stoking renewed oil demand, leading again to high prices which will again undermine economic activity; or (b), if the economy does not quickly recover, petroleum production will gradually fall due to depletion until spare production capacity (created by lower demand) is wiped out, leading again to higher prices and even more economic contraction. In both cases, oil prices remain volatile and the economy contracts. (13)
This scenario corresponds very closely with the reality that is unfolding, though it remains to be seen whether situation (a) or (b) will ensue.
Over the past three years, oil prices rose and fell more dramatically than would have been the case if it had not been for widespread speculation in oil futures. Nevertheless, the general direction of prices—way up, then way down, then part-way back up—is entirely consistent with the Peak Oil thesis and the Alternative Diagnosis.
Why has the economy not quickly recovered, given that oil prices are now only half what they were in July 2008? Again, Peak Oil is not the only cause of the current economic crisis. Enormous bubbles in the real estate and finance sectors constituted accidents waiting to happen, and the implosion of those bubbles has created a serious credit crisis (as well as solvency and looming currency crises) that will likely take several years to resolve even if energy supplies don’t pose a problem.
But now the potential for renewed high oil prices acts as a ceiling for economic recovery. Whenever the economy does appear to show renewed signs of life (as has happened in May-July this year, with stock values rebounding and the general pace of economic contraction slowing somewhat), oil prices will take off again as oil speculators anticipate a recovery of demand. Indeed, oil prices have rebounded from $30 in January to nearly $70 currently, provoking widespread concern that high energy prices could nip recovery in the bud. (14)
A barrel of oil from newly developed sources costs in the neighborhood of $60 to produce, now that all of the cheaper prospects have been exploited: finding new oilfields today usually means drilling under miles of ocean water, or in politically unstable nations where equipment and personnel are at high risk. (15) So as soon as consumers demand more oil, the price will have to stay noticeably above that figure in order to provide the incentive for producers to drill.
Volatile oil prices hurt on the upside, but they also hurt on the downside. The oil price collapse of August-December 2008, plus the worsening credit crisis, caused a dramatic contraction in oil industry investment, leading to the cancellation of about $150 billion worth of new oil production projects—whose potential productive capacity will be required to offset declines in existing oilfields if world oil production is to remain stable. (16) This means that even if demand remains low, production capacity will almost certainly decline to meet those demand levels, causing oil prices to rise again in real terms at some point, perhaps two or three years from now. Volatile petroleum prices also hurt the development of alternative energy, as was shown during the past few months when falling oil prices led to financial troubles for ethanol manufacturers. (17)
One way or another, growth will be highly problematic if not unachievable.
Big Picture Diagnosis: Continuing the Trail of Logic
At this point in the discussion many readers will be wondering why alternative energy sources and efficiency measures cannot be deployed to solve the Peak Oil crisis. After all, as petroleum becomes more expensive, ethanol, biodiesel, and electric cars all start to look more attractive both to producers and consumers. Won’t the magic of the market intervene to render oil shortages irrelevant to future growth?
It is impossible in the context of this discussion to provide a detailed explanation of why the market probably cannot solve the Peak Oil problem. Such an explanation requires a discussion of energy evaluation criteria, and an analysis of many individual energy alternatives on the basis of those criteria. I have offered brief overviews of this subject previously and a much longer one is in press. (18)
My summary conclusions in this regard are as follows.
About 85 percent of our current energy is derived from three primary sources—oil, natural gas, and coal—that are non-renewable, whose price is likely to trend sharply higher over the next years and decades leading to severe shortages, and whose environmental impacts are unacceptable. While these sources historically have had very high economic value, we cannot rely on them in the future; indeed, the longer the transition to alternative energy sources is delayed, the more difficult that transition will be unless some practical mix of alternative energy systems can be identified that will have superior economic and environmental characteristics.
But identifying such a mix is harder than one might initially think. Each energy source has highly specific characteristics. In fact, it has been the characteristics of our present energy sources (principally oil, coal, and natural gas) that have enabled the building of an urbanized society with high mobility, large population, and high economic growth rates. Surveying the available alternative energy sources for criteria such as energy density, environmental impacts, reliance on depleting raw materials, intermittency versus constancy of supply, and the percentage of energy returned on the energy invested in energy production, none currently appears capable of perpetuating this kind of society.
Moreover, national energy systems are expensive and slow to develop. Energy efficiency likewise requires investment, and further incremental investments in efficiency tend to yield diminishing returns over time, since it is impossible to perform work with zero energy input. Where is there the will or ability to muster sufficient investment capital for deployment of alternative energy sources and efficiency measures on the scale needed?
While there are many successful alternative energy production installations around the world (ranging from small home-scale photovoltaic systems to large “farms” of three-megawatt wind turbines), there are very few modern industrial nations that now get the bulk of their energy from sources other than oil, coal, and natural gas. One example is Sweden, which obtains most of its energy from nuclear and hydropower. Another is Iceland, which benefits from unusually large domestic geothermal resources not found in most other countries. Even for these two nations, the situation is complex: the construction of the infrastructure for their power plants mostly relied on fossil fuels for the mining of the ores and raw materials, for materials processing, for transportation, for the manufacturing of components, for the mining of uranium, for construction energy, and so on. Thus a meaningful energy transition away from fossil fuels is still a matter of theory and wishful thinking, not reality.
My conclusion from a careful survey of energy alternatives, then, is that there is little likelihood that either conventional fossil fuels or alternative energy sources can be counted on to provide the amount and quality of energy that will be needed to sustain economic growth—or even current levels of economic activity—during the remainder of this century. (19)
But the problem extends beyond oil and other fossil fuels: the world’s fresh water resources are strained to the point that billions of people may soon find themselves with only precarious access to water for drinking and irrigation. Biodiversity is declining rapidly. We are losing 24 billion tons of topsoil each year to erosion. And many economically significant minerals—from antimony to zinc—are depleting quickly, requiring the mining of ever lower-grade ores in ever more remote locations. Thus the Peak Oil crisis is really just the leading edge of a broader Peak Everything dilemma.
In essence, humanity faces an entirely predictable peril: our population has been growing dramatically for the past 200 years (expanding from under one billion to nearly seven billion), while our per-capita consumption of resources has also grown. For any species, this is virtually the definition of biological success. And yet all of this has taken place in the context of a finite planet with fixed stores of non-renewable resources (fossil fuels and minerals), a limited ability to regenerate renewable resources (forests, fish, fresh water, and topsoil), and a limited ability to absorb industrial wastes (including carbon dioxide). If we step back and look at the industrial period from a broad historical perspective that is informed by an appreciation of ecological limits, it is hard to avoid the conclusion that we are today living at the end of a relatively brief pulse—a 200-year rapid expansionary phase enabled by a temporary energy subsidy (in the form of cheap fossil fuels) that will inevitably be followed by an even more rapid and dramatic contraction as those fuels deplete.
The winding down of this historic growth-contraction pulse doesn’t necessarily mean the end of the world, but it does mean the end of a certain kind of economy. One way or another, humanity must return to a more normal pattern of existence characterized by reliance on immediate solar income (via crops, wind, or the direct conversion of sunlight to electricity) rather than stored ancient sunlight.
This is not to say that the remainder of the 21st century must consist of a collapse of industrialism, a die-off of most of the human population, and a return by the survivors to a way of life essentially identical to that of 16th century peasants or indigenous hunter-gatherers. It is possible instead to imagine acceptable and even inviting ways in which humanity could adapt to ecological limits while further developing cultural richness, scientific understanding, and quality of life (more of this below).
But however it is negotiated, the transition will spell an end to economic growth in the conventional sense. And that transition appears to have begun.
How Do We Know Which Diagnosis Is Correct?
If the patient is an individual human and the cause of distress is uncertain, more diagnostic tests can be prescribed. But to what sorts of blood tests, x-rays, and CAT scans can we subject the national or global economy?
In a sense, the tests have already been done. During the past few decades thousands of scientific surveys of natural resources, biodiversity, and ecosystems have showed increasing rates of depletion and decline. (20) The continuing increase in human population, pollution, and consumption are likewise well documented. This information formed the basis for the Limits to Growth studies, previously mentioned, which use computer modeling to show how current trends are likely to play out—and most resulting scenarios show them leading to an end of economic growth and a collapse of industrial output some time in the early 21st century.
Why are the results of such diagnostic tests not universally accepted as a challenge to expectations of continued growth? Primarily because their conclusion runs counter to the beliefs and proclamations of most economists, who maintain that there are no practical limits to growth. They deny that resource constraints provide an eventual cap on production and consumption. And so their diagnostic efforts tend to ignore environmental factors in favor of easily measured internal features of the human economy such as money supply, consumer confidence, interest rates, and price indices.
Ecologist Charles Hall, among many others, has argued that the discipline of economics, as currently practiced, does not constitute a science, since it proceeds primarily on the basis of correlative logic rather than through the building of knowledge by a continuous, rigorous process of proposing and testing hypotheses. (21) While economics uses complex terminology and mathematics, as science does, its basic assertions about the world—such as the principle of infinite substitutability, which holds that for any resource that becomes scarce, the market will find a substitute—are not subjected to careful experimental examination. (It is worth noting that Hall and others have made the effort to lay the conceptual foundations for a new economics based on scientific principles and methods, which they call “biophysical economics.” (22)
Moreover, mainstream economists failed on the whole to foresee the current crash. There was no consistent or concerted effort on the part of Secretaries of the Treasury, Federal Reserve Chairmen, or “Nobel” prize-winning economists to warn policy makers or the general public that, sometime in the early 21st century, the global economy would begin to come apart at the seams. (23) One might think that this predictive failure—the inability to foresee so historically significant an event as the rapid contraction of nearly the entire global economy, entailing the failure of some of the world’s largest banks and manufacturing companies—would cause mainstream economists to stop and re-examine their fundamental premises. But there is little evidence to suggest that this is occurring.
At the risk of repetition: physical scientists from several disciplines have indeed foreseen an end to economic growth in the early 21st century, and have warned policy makers and the general public on many occasions.
Whom should we believe?
The specifics of the Alternative Diagnosis are falsifiable. If economic activity were to rebound above 2007 levels, or if oil production were to rise above the July 2008 high-water mark, then the attribution of the current economic crisis to resource-tied limits to growth may be considered at least partly disproven. However, even if these things were to occur, the underlying reasoning behind the Alternative Diagnosis might still be correct. If the world oil production peak is delayed until, let us say, 2015 or 2020, and if another—this time bottomless—global economic crash results then, the ultimate outcome will be essentially the same. But if, meanwhile, the Alternative Diagnosis were to be taken seriously and acted upon, the consequences of doing so would be beneficial: a decade would have been spent preparing for the event.
Could the Alternative Diagnosis be altogether wrong? That is, might conventional economists be right in thinking that growth can continue forever? It is often said that anything is possible, but some things are clearly much more possible than others. The perpetual growth of human population and consumption within the confines of a finite planet seems like a very long shot indeed, especially since warning signs are everywhere apparent that ecological limits are already being reached and surpassed. (24)
What Not to Do: Prescribe Punishingly Expensive Placebos
If the physical scientists who warn about limits to growth are right, confronting the global economic meltdown implies far more than merely getting the banks and mortgage lenders back on their feet. Indeed, in that case we face a fundamental change in our economy as significant as the advent of the industrial revolution. We are at a historic inflection point—the ending of decades of expansion and the beginning of an inevitable period of contraction that will continue until humanity is once again living within the limits of Earth’s regenerative systems.
But there are few signs that policy makers understand any of this. Their thinking appears to be shaped primarily by mainstream economists’ assurances that growth can and must continue into the indefinite future, and that the economic contraction the world is currently experiencing is only temporary--a problem that can and must be solved.
Still, the problem is not a minor one in the eyes of economists and policy makers. Consider the gargantuan size of the Treasury and Federal Reserve bailouts and stimulus packages that have been deployed in the possibly futile attempt to end contraction and restart growth. According to the special inspector general of the U.S. government’s Troubled Asset Relief Program (TARP), in remarks submitted to the House Committee on Oversight and Government Reform on July 21, $23.7 trillion have been committed in “total potential federal government support.” This is expensive medicine indeed. It takes a moment to even begin to comprehend the enormity of the figure. It represents about half of annual world GDP, and is over three times the total amount spent by the U.S. government, in inflation-adjusted dollars, on all wars combined, from 1776 to the present. It is nearly fifty times the cost of the New Deal.
Other nations, including Britain, China, and Germany have committed to paying for stimulus packages and bailouts that, while much smaller in absolute terms, represent an impressive (or should we say frightful?) share of national GDP.
If the Alternative Diagnosis is valid, none of this will work in the end, because existing financial institutions—with their basis in debt and interest and their requirements for constant expansion—cannot be made to function in a context where energy and resource constraints impose effective caps on manufacturing and transport.
Are the bailouts and stimulus packages working? Much evidence suggests that they are not, except in limited ways. In the U.S., unemployment continues to increase, while real estate values continue to fall. And most of the reputed “green shoots” in the economy so far sighted amount merely to an arguably temporary decline in the rate of contraction. For example, the home price index released July 28 of this year showed that in May, seasonally adjusted prices fell just 0.16 percent from the previous month. That represents an annual rate of decline of a little under 2 percent, which is a substantial improvement over the annualized rate of more than 20 percent that prevailed from September 2008 through March of 2009. Many commentators seized upon this news as a sign of an imminent turnaround. Nevertheless, new home sales are down from 1.4 million per year in 2005 to 350,000 per year today, and house prices are down 50 percent from the bubble peak and still declining in most places. Moreover, manufacturing is still shrinking, small businesses are in trouble, there are still significant danger signs on the horizon, including a new round of mortgage resets, a likely dive in commercial real estate values, and the looming reality that toxic assets at the center of the banking crisis have yet to be dealt with. (25)
President Obama has made the argument that bailouts are justified to stabilize the system long enough so that leaders can make fundamental changes to institutions and regulations, enabling the economy to then go forward healthier and more immune to similar crises in the future. But there is little to suggest that the kinds of systemic changes that are actually needed (ones that would enable the economy to function during a prolonged period of contraction) are under way or even contemplated. Meanwhile, as growth-based institutions are temporarily propped up, the ultimate scale of the damage is likely only to increase: when the inevitable collapse of those institutions does come, the consequences will likely be even worse because so much capital will have been squandered in attempting to salvage them.
In using up non-renewable resources like metals, minerals, and fossil fuels, we have stolen from future generations. Now in effect we are stealing from those generations the financial wherewithal that could have been used to build a bridge to a sustainable economy. The construction of a renewable energy infrastructure (including not only generating capacity, but distribution and storage systems, as well as post-petroleum transport and agriculture systems) will require enormous investments and decades of work. Where will the investment capital come from if governments are already buried in debt? If we have committed nearly $24 trillion to propping up an old economy with no real survival prospects, what’s left with which to finance the new one?
If the current prescription for our economic malady is wrong-headed, the same is true of many proposed cures for our energy problems. According to the Conventional Diagnosis, today’s high oil prices are due to speculation; the cure must therefore lie in the tighter regulation of oil futures trading (which may be a good idea, though it doesn’t get to the heart of the problem), while providing more opportunities to oil companies to explore for domestic oil (even though the likely production rates from currently off-limits reserves would be relatively paltry, and would have a negligible effect on oil prices). In fact, though, investing further in fossil fuel energy systems (including “clean coal” technology) will yield declining returns, given that the highest quality resources have already been used up; meanwhile, doing so takes investment capital away from the development of renewable energy, which we will have to rely on increasingly as fossil fuels deplete. (26)
What is required but is still utterly lacking is a fundamental recognition that circumstances have changed: what worked decades ago will not work now.
What To Do: Adapt to the New Reality
If the Alternative Diagnosis is correct, there will be no easy fix for the current economic breakdown. Some illnesses are not curable; they require that we simply adapt and make the best of our new situation.
If humanity has indeed embarked upon the contraction phase of the industrial pulse, we should assume that ahead of us lie much lower average income levels (for nearly everyone in the wealthy nations, and for high wage earners in poorer nations); different employment opportunities (fewer jobs in sales, marketing, and finance; more in basic production); and more costly energy, transport, and food. Further, we should assume that key aspects of our economic system that are inextricably tied to the need for future growth will cease to work in this new context.
What can we do to adapt most rapidly and successfully?
Rather than attempting to prop up banks and insurance companies with trillions in bailouts, it would probably be better simply to let them fail, however nasty the short-term consequences, since they will fail anyway sooner or later. The sooner they are replaced with institutions that serve essential functions within a contracting economy, the better off we will all be. (27)
Meanwhile the thought-leaders in society, especially the President, must begin breaking the news—in understandable and measured ways—that growth isn’t returning and that the world has entered a new and unprecedented economic phase, but that we can all survive and thrive in this challenging transitional period if we apply ourselves and work together. At the heart of this general re-education must be a public and institutional acknowledgment of three basic rules of sustainability: growth in population cannot be sustained; the ongoing extraction of non-renewable resources cannot be sustained; and the use of renewable resources is sustainable only if it proceeds at rates below those of natural replenishment.
Without cheap energy, global trade cannot increase. This doesn’t mean that trade will disappear, only that economic incentives will inexorably shift as transport costs rise, favoring local production for local consumption. But this may be a nice way of putting it: if and when fuel shortages arise, fragile globe-spanning systems of provisioning could be disrupted, with dire effects for consumers cut off from sources of necessary products. Thus a high priority must be placed on the building of community resilience through the preferential local sourcing of necessities and the maintenance of larger regional inventories—especially of food and fuel. (28)
It currently takes an average of 8.5 calories of energy from oil and natural gas to produce each calorie of food energy. Without cheap fuel for agriculture, farm production will plummet and farmers will go bankrupt—unless proactive efforts are undertaken to reform agriculture to reduce its reliance on fossil fuels. (29)
Obviously, alternative energy sources and energy efficiency strategies must be high priorities, and must be subjects of intensive research using a carefully chosen spectrum of criteria. The best candidates will have to be funded robustly even while fossil fuels are still relatively cheap: the build-out time for the renewable energy infrastructure will inevitably be measured in decades and so we must begin the process now rather than waiting for market forces to lead the way.
In the face of credit and (potential) currency crises, new ways of financing such projects will be needed. Given that our current monetary and financial systems are founded on the need for growth, we will require new ways of creating money and new ways of issuing credit. Considerable thought has gone into finding solutions to this problem, and some communities are already experimenting with local capital co-ops, alternative currencies, and no-interest banks. (30)
With oil becoming increasingly expensive in real terms, we will need more efficient ways of getting people and goods around. Our first priority in this regard must be to reduce the need for transport with better urban planning and re-localized production systems. But where transport is needed, rail and light rail will probably be preferable to cars and trucks. (31)
We will also need a revolution in the built environment to minimize the requirement for heating, cooling, and artificial lighting in all our homes and public buildings. This revolution is already under way, but is currently moving far too slowly due to the inertia of established interests in the construction industry. (32)
These projects will need more than local credit and money; they will also require skilled workers. There will be a call not just for installers of solar panels and home insulation: millions of new food producers and builders of low-energy infrastructure will be needed as well. A broad range of new opportunities could open up to replace vanishing jobs in marketing and finance—if there is cheap training available at local community colleges.
It is worth noting that the $23.7 trillion recently committed for U.S. bailouts and loan guarantees represents about $80,000 for each man, woman, and child in America. A level of investment even a substantial fraction that size could pay for all needed job training while ensuring universal provision of basic necessities during the transition. What would we be getting for our money? A collective sense that, in a time of crisis, no one is being left behind. Without the feeling of cooperative buy-in that such a safety net would help engender, similar to what was achieved with the New Deal but on an even larger scale, economic contraction could devolve into a horrific fight over the scraps of the waning industrial period.
However contentious, the population question must be addressed. All problems that have to do with resources are harder to solve when there are more people needing those resources. The U.S. must encourage smaller families and must establish an immigration policy consistent with a no-growth population target. This has foreign policy implications: we must help other nations succeed with their own economic transitions so that their citizens do not have to emigrate to survive. (33)
If economic growth ceases to be an achievable goal, society will have to find better ways of measuring success. Economists must shift from assessing well-being with the blunt instrument of GDP, and begin paying more attention to indices of human and social capital in areas such as education, health, and cultural achievements. This redefinition of growth and progress has already begun in some quarters, but for the most part has yet to be taken up by governments. (34)
A case can be made that after all this is done the end result will be a more satisfying way of life for the vast majority of citizens—offering more of a sense of community, more of a connection with the natural world, more satisfying work, and a healthier environment. Studies have repeatedly shown that higher levels of consumption do not translate to elevated levels of satisfaction with life. (35) This means that if “progress” can be thought of in terms of happiness, rather than a constantly accelerating process of extracting raw materials and turning them into products that themselves quickly become waste, then progress can certainly continue. In any case, “selling” this enormous and unprecedented project to the general public will require emphasizing its benefits. Several organizations are already exploring the messaging and public relations aspects of the transition. (36) But those in charge need to understand that looking on the bright side doesn’t mean promising what can’t be delivered—such as a return to the days of growth and thoughtless consumption.
Can We? Will We?
It is important to state the implications of all this as plainly as possible. If the Alternative Diagnosis is correct, there will be no full economic “recovery”—not this year, or the next, or five or ten years from now. There may be temporary rebounds that take us back to some fraction of peak economic activity, but these will be only brief respites.
We have entered a new economic era in which the former rules no longer apply. Low interest rates and government spending no longer translate to incentives for borrowing and job production. Cheap energy won’t appear just because there is demand for it. Substitutes for essential resources will in most cases not be found. Over all, the economy will continue to shrink in fits and starts until it can be maintained by the energy and material resources that Earth can supply on ongoing basis.
This is of course very difficult news. It is analogous to being told by your physician that you have contracted a systemic, potentially fatal disease that cannot be cured, but only managed; and managing it means you must make profound lifestyle changes.
Some readers may note that climate change has not figured prominently in this discussion. It is clearly, after all, the worst environmental catastrophe in human history. Indeed, its consequences could be far worse than the mere destruction of national economies: hundreds of millions of people and millions of other species could be imperiled. The reason for the relatively limited discussion of climate here is that (assuming the Alternative Diagnosis is correct) it is not climate change that has proven to be the most immediate limit to economic growth, but resource depletion. However, while there is not as yet general agreement on the point, climate change itself and the needed steps to minimize it both constitute limits to growth, just as resource depletion does. Moreover, if we fail to successfully manage the inevitable process of economic contraction that will characterize the coming decades, there will be no hope of mounting an organized and coherent response to climate change—a response consisting of efforts both to reduce climate impacts and to adapt to them. It is important to note, though, that the measures advocated here (including the development of renewable energy sources and energy efficiency, a rapid reduction of reliance on fossil fuels in transport and agriculture, and the stabilization of population levels) are among the steps that will help most to reduce carbon emissions.
Is this essay likely to change the thinking and actions of policy makers? Unfortunately, that is unlikely. Their belief in the possibility and necessity of continued growth is pervasive, and the notion that growth may no longer be possible is unthinkable. But the Alternative Diagnosis must be a matter of record. This essay, composed by a mere journalist, in many ways represents the thinking of thousands of physical scientists working over the past several decades on issues having to do with population, resources, pollution, and biodiversity. Ignoring the diagnosis itself—whether as articulated here or as implied in tens of thousands of scientific papers—may waste our last chance to avert a complete collapse, not just of the economy, but of civility and organized human existence. It may risk a historic discontinuity with qualitative antecedents in the fall of the Roman and Mayan civilizations. (37) But there is no true precedent for what may be in store, because those earlier examples of collapse affected geographically bounded societies whose influence on their environments was also bounded. Today’s civilization is global, and its fate, Earth’s fate, and humanity’s fate are inextricably tied.
But even if policy makers continue to ignore warnings such as this, individuals and communities can take heed and begin the process of building resilience, and of detaching themselves from reliance on fossil fuels and institutions that are inextricably tied to the perpetual growth machine. We cannot sit passively by as world leaders squander opportunites to awaken and adapt to growth limits. We can make changes in our own lives, and we can join with our neighbors. And we can let policy makers know we disapprove of their allegiance to the status quo, but that there are other options.
Is it too late to begin a managed transition to a post-fossil fuel society? Perhaps. But we will not know unless we try. And if we are to make that effort, we must begin by acknowledging one simple, stark reality: growth as we have known it can no longer be our goal.
Notes
1. “Pain on the Road to Recovery” (http://www.smh.com.au/national/pain-on-the-road-to-recovery-20090724-dw6...).
2. Here, for example, are a few relevant excerpts from the present author’s book The Party’s Over: Oil, War and the Fate of Industrial Societies (Gabriola Island, BC: New Society, 2003): “Our current financial system was designed during a period of consistent growth in available energy, with its designers operating under the assumption that continued economic growth was both inevitable and desirable. This ideology of growth has become embodied in systemic financial structures requiring growth…. Until now, this loose linkage between a financial system predicated upon the perpetual growth of the money supply, and an economy growing year by year because of an increasing availability of energy and other resources, has worked reasonably well—with a few notable exceptions, such as the Great Depression…. However, [when global oil production peaks] the financial system may not respond so rationally…. This might predictably trigger a financial crisis….”
3. See Albert Bartlett, “Arithmetic, Population and Energy” (lecture transcript), (http://www.globalpublicmedia.com/transcripts/645).
4. Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W. Behrens III, Limits to Growth (New York: Universe Books, 1972); Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers, Beyond the Limits (Post Mills, VT: Chelsea Green, 1992); Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers, Limits to Growth: The 30 Year Update (White River Junction, VT: Chelsea Green, 2003). See also the recent CSIRO study, “A Comparison of the Limits to Growth with Thirty Years of Reality” (2009) (www.csiro.au/files/files/plje.pdf).
5. See, for example, Robert U. Ayers and Benjamin Warr, The Economic Growth Engine: How Energy and Work Drive Material Prosperity (Cambridge, UK: Edward Elgar Publishing, 2005); and Robert Barro and Xavier Sala-i-Martin, Economic Growth (Cambridge, MA: MIT Press, 2003) (http://www.bookrags.com/research/economic-growth-and-energy-consumpt-mee...).
6. See Richard Heinberg, The Party’s Over: Oil, War and the Fate of Industrial Societies (2003, 2005); Powerdown: Options and Actions for a PostCarbon World (2004); and The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism, and Economic Collapse (2006); as well as books by Kenneth Deffeyes, Colin Campbell, and Matthew Simmons; and websites www.theoildrum.com and www.energybulletin.net. The Association for the Study of Peak Oil organizes international conferences to study issues related to oil and gas depletion (www.peakoil.net and www.aspo-usa.com), and the U.S. chapter of ASPO publishes a weekly survey of relevant news, “Peak Oil Review,” compiled by former CIA analyst Tom Whipple. At the annual Association for the Study of Peak Oil conference in Cork, Ireland, in September 2007, former U.S. Energy Secretary, James Schlesinger, said: “Conceptually the battle is over. The peakists have won. We’re all peakists now.” See also Steve Connor, “Warning: Oil supplies are running out fast,” The Independent, August 3, 2009 (http://www.independent.co.uk/news/science/warning-oil-supplies-are-runni...).
7. The declining rate of discovery of new oilfields, and the list of past-peak oil producing countries, are widely documented; e.g.: Roger D. Blanchard, The Future of Global Oil Production: Facts, Figures, Trends and Projections by Region (Jefferson, NC: McFarlane and Co., 2005).
8. A May 4, 2009 report from Raymond James Associates (“Stat of the Week”) argued that world oil production peaked in July 2008 (http://blogs.wsj.com/environmentalcapital/2009/05/04/peak-oil-global-oil...). In a subsequent interview, Marshall Adkins, author of the report, suggested that most knowledgeable players within the petroleum industry now accept the Peak Oil thesis in some form, whether or not they acknowledge it publicly (www.aspousa.org/index.php/2009/07/interview-with-marshall-adkins/).
9. Brookings Papers on Economic Activity, March 2009. www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spr...
10. See Joe Cortright, “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” Discussion paper, CEOs for Cities, 2008 (http://www.ceosforcities.org).
11. U.S. Government Accountability Office, “Commercial Aviation: Airline Industry Contraction Due to Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, and Federal Government Revenues ,” April 21, 2009 (www.gao.gov/products/GAO-09-393). For a detailed discussion of the likely future impacts of high oil prices and oil shortages on the airline industry, see Charles Schlumberger, “The Oil Price Spike of 2008: The Result of Speculation or an Early Indicator of a Major and Growing Future Challenge to the Airline Industry?” Annals of Air and Space Law, Vol. XXXIV, [2009], McGill University (http://www.globalpublicmedia.com/the_oil_price_spike_of_2008).
12. American Trucking Association (www.truckline.com/Pages/Home.aspx).
13. This scenario is implied in Robert L. Hirsch, Roger Bezdek, and Robert Wendling, “Peaking of World Oil Production: Impacts, Mitigatin and Risk Management” (U.S. Department of Energy: 2005): “As peaking is approached, liquid fuel prices and price volatility will increase dramatically….” (http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf).
14. See, for example, “Troubling Signs That Oil Prices Could Hamper Recovery,” Wall Street 24/7, May 8, 2009 (http://247wallst.com/2009/05/08/troubling-signs-that-oil-prices-could-ha...)
15. See, for example, James Herron, “Low Oil Prices, Credit Woes Could Spell Trouble for UK North Sea,” Rigzone, November 14, 2008 (www.rigzone.com/news/article.asp?a_id=69507).
16. Jad Mouawad, “Big Oil Projects Put in Jeopardy by Fall in Prices,” New York Times, December 15, 2008 (www.nytimes.com/2008/12/16/business/16oil.html)
17. See David R. Baker, “Low oil prices take wind out of renewable fuels,” San Francisco Chronicle, October 27, 2008 (www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/26/MNSK13NNK4.DTL).
18. See The Party’s Over, Chapter 4; Powerdown, Chapter 4; The Oil Depletion Protocol, pages 23-31. A longer treatment of the subject, tentatively titled Energy Limits to Growth, will be published by International Forum on Globalization and Post Carbon Institute in September.
19. This conclusion is echoed in, for example, Ted Trainer, Renewable Energy Cannot Sustain a Consumer Society (Dordrecht, The Netherlands: Springer, 2007); and (with some reservations), David J. C. McKay, Sustainable Energy Without the Hot Air (Cambridge, UK: UIK Cambridge, 2008), (www.withouthotair.com).
20. Just one example, from a press release April 20, 1998 describing the results of a poll commissioned by the American Museum of Natural History: “The American Museum of Natural History announced today results of a nationwide survey titled Biodiversity in the Next Millennium, developed by the Museum in conjunction with Louis Harris and Associates, Inc. The survey reveals that seven out of ten biologists believe that we are in the midst of a mass extinction of living things, and that this loss of species will pose a major threat to human existence in the next century.”
21. Charles A. S. Hall and Kent A. Klitgaard, “The Need for a New, Bioplysical-Based Paradigm in Economics for the Second Half of the Age of Oil,” International Journal of Transdisciplinary Research, Vo. 1, NO. 1 (2006), (http://74.125.155.132/search?q=cache:DtdKR2ZWgNoJ:www.peakoil.net/files/...); Charles A. S. Hall, D. Lindenberger, R. Kummell, T. Kroeger and W. Eichorn, “The Need to Reintegrate the Natural Sciences with Economics.” Bioscience 51:663-673, 2001.
22. Cutler J. Cleveland, “Biophysical Economics,” The Encyclopedia of Earth (www.eoearth.org/article/Biophysical_economics). See also the related field of Ecological Economics, especially the books of Herman Daly, including Toward a Steady State Economy (New York: Freeman, 1973); and, with Joshua Farley, Ecological Economics: Principles and Applications (Washington: Island Press, 2004).
23. The quotation marks around the Nobel name are justified because the Nobel family has never acknowledged economics as a science: the so-called “Nobel prize in economics” is awarded by a Swedish Bank.
24. See The Millennium Ecosystem Assessment (www.millenniumassessment.org/en/index.aspx).
25. See, for example, J. S. Kim, “Irrational Exuberance of the Green Shoots,” July 24, 2009 (http://seekingalpha.com/article/151101-irrational-exuberance-of-the-gree...).
26. See Richard Heinberg, Blackout: Coal, Climate and the Last Energy Crisis (Gabiola Island, BC: New Society, 2009), pages 137-143, 145-168.
27. The opinion that banks and insurance companies should be allowed to fail rather than being bailed out was voiced by many knowledgeable observers throughout late 2008 and early 2009. See for example Ambrose Evans-Pritchard, “Let banks fail, says Nobel economist Joseph Stiglitz,” London Daily Telegraph, Feb. 2, 2009 (www.telegraph.co.uk/finance/newsbysector/banksandfinance/4424418/Let-ban...).
28. See Jeff Rubin, Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization. (New York: Random House, 2009).
29. See Richard Heinberg and Michael Bomford, “The Food and Farming Transition” (Sebastopol, CA: Post Carbon Institute, 2009), (http://postcarbon.org/food).
30. See Bernard Lietaer, “White Paper on All the Options for Managing a Systemic Bank Crisis” (www.lietaer.com/images/White_Paper_on_Systemic_Banking_Crises_final.pdf). JAK in Sweden is a cooperative, member-owned bank that operates without interest (http://en.wikipedia.org/wiki/JAK_members_bank).
31. See Richard Gilbert and Anthony Perl, Transport Revolutions: Moving People and Freight Without Oil (Gabriola Island, BC: New Society, 2009).
32. The Passivhaus Institute pioneers construction methods that reduce energy input to buildings in many cases to zero (www.passivehouse.us). Roughly 20,000 Passivhauses have been built in Europe, only about 12 in the U.S.
33. See websites of Population Media Center (www.populationmedia.org/issues/), and SUSPS (www.susps.org/overview/immigration.html).
34. The organization Redefining Progress has developed a Genuine Progress Indicator (GPI) that incorporates many such indices (www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm).
35. See, for example, “Understanding Human Happiness and Well-Being,” The Sustainable Scale Project (http://www.sustainablescale.org/AttractiveSolutions/UnderstandingHumanHa...).
36. The burgeoning Transition Town movement (www.transitiontowns.org) proceeds from the premise that “life can be better without fossil fuels.” YES! Magazine (www.yesmagazine.org) is a publication of the Positive Futures Network and highlights examples of low-impact ways of living that bring personal and social benefits. And the Simple Living Network (www.simpleliving.net) provides “resources, tools, examples and contacts for conscious, simple, healthy and restorative living.”
37. See Jared Diamond, Collapse How Societies Choose to Fail or Succeed (New York: Viking, 2005); Joseph Tainter, The Collapse of Complex Societies (Cambridge, UK: Cambridge University Press, 1988); and John Michael Greer, The Long Descent (Gabriola Island, BC: New Society, 2008).
9 August 2009
The Stock Market and Monetary Disorder:
I’ll restate my thesis as concisely as I can (not my strong suit): The deeply maladjusted U.S. “Bubble” economy requires $2.5 Trillion or so of net new Credit creation to stem systemic (Credit and economic Bubbles) implosion. Only “government” (Treasury, agency debt, and GSE MBS) debt can, today, fill the gigantic void created with the bursting of the Wall Street/mortgage finance Bubble. The private sector Credit system is severely impaired, and there is as well the reality that the market largely lost trust (loss of “moneyness”) in Wall Street obligations (private-label MBS, CDOs, ABS, auction-rate securities, etc.). The $2.0 Trillion of U.S. “government” Credit creation coupled with the Trillion-plus expansion of Federal Reserve Credit over the past year has stabilized U.S. financial and economic systems.
The synchronized global expansion of government deficits, state obligations, and central bank Credit amounts to an historic government finance Bubble. Markets have thus far embraced the surge of debt issuance. This U.S. and global reflation will have decidedly different characteristics when contrasted to previous Fed and Wall Street-induced reflations.
First off all, the most robust inflationary biases are today domiciled in China, Asia and the emerging markets generally. The debased dollar has provided China and the “developing” world Credit systems unprecedented capacity to inflate (expand Credit/financial claims without fear of spurring a run on their currencies). Asian and emerging markets are outperforming, exacerbating speculative inflows. Things that the “developing” world need (energy/commodities) and want (gold, silver, sugar, etc.) should demonstrate increasingly strong inflationary pressures. Their overflow of dollars provides them, for now, the power to buy whatever they desire.
Here at home, the post-Wall Street Bubble financial landscape ensures the old days of the Fed slashing rates and almost instantaneously stoking mortgage Credit, home price inflation and consumption have run their course. Accordingly, the unfolding reflation will be of a different variety than those of the past – and, importantly, largely bypass U.S. housing. This sets the stage for a lackluster recovery in consumption and economic revival generally. Household sector headwinds will likely be exacerbated by higher-than-expected inflation (especially in energy and globally-traded commodities), higher taxes and rising interest rates.
There is a confluence of factors that expose the market to an upside surprised in yields. The bond market has been overly sanguine, emboldened by the prospect of the Bernanke Fed maintaining ultra-loose monetary policy indefinitely. Bond bulls have been further comforted by the deep structural issues overhanging both the U.S. financial system and economy. However, massive government Credit creation has, for now, put systemic issues on hold. Especially in Asia, unfettered Credit expansion creates the backdrop for a surprisingly speedy economic upsurge. The weak dollar plays a major reflationary role globally, while also raising the prospect for inflationary pressures here at home. Massive issuance, global economic resurgence, heightened inflation and a weak currency are offering increasingly tough competition to the bullish “forever loose policy” view.
Meanwhile, fixed income must gaze at the feverish equities market with disbelief – and rising trepidation. The bond market discerns incessant economic impairment, a historic debt overhang, 9.4% unemployment, and begrudging recovery. An intoxicated stock market ganders something altogether different, with the Morgan Stanley Retail Index up 61% y-t-d, the Morgan Stanley High Tech Index up 47%, the Morgan Stanley Cyclical Index up 52%, and the Broker/Dealers up 45%. The bond market has been content to laugh off the silly equities game. The chuckles may have ended today.
My secular bearish thesis rests upon a major assumption: The U.S. economy is sustained by $2.5 Trillion (or so) of new Credit. Only this amount will stem a downward spiral of asset prices, Credit, incomes, corporate cash flows and government finances. On the other hand, if forthcoming, the $2.5 Trillion of additional – chiefly government-directed and non-productive - Credit will foment problematic Monetary Disorder. In simplest terms, another bout of Credit inflation leads further down the path of unhinged market prices, destabilizing speculation, and unwieldy flows of finance.
The stock market has become illustrative of what we might experience in the way of Monetary Disorder. Speculation has returned with a vengeance, galloping blindly ahead of fledgling little greenish shoots. Those of the bullish persuasion contend that the marketplace is, as it should, simply discounting a rosy future. I would counter that problematic market dynamics have taken over, with prices increasingly disconnected from reality. In short, the market is in the midst of one major short squeeze.
There are myriad risks associated with the government’s unprecedented market interventions. Likely not well appreciated, policymaker actions have forced the destabilizing unwind of huge positions created to hedge against systemic risk (as well as to profit from bearish bets). This reversal of various bear positions has created enormous buying power, especially in the securities of companies (and sectors) most exposed to the Credit downturn. The reversal of bets in the Credit default swap (and bond) market has certainly played a role. Surging junk bond and stock prices have fed one another, as the highly leveraged and vulnerable companies provide phenomenal market returns. The markets are today throwing "money" at the weak and leveraged.
The resulting outperformance of fundamentally weak companies spurred short covering more generally, creating a dynamic whereby heavily shorted stocks became about the best performing sector in the equities market. This dynamic put significant pressure on so-called market neutral strategies that have proliferated over the past few years. The strategy of attempting to own the good companies and short bad ones is faltering, likely causing a flow out of these strategies - and a self-reinforcing unwind of positions. The “bad” stock soar and the “good” ones languish.
There’s nothing like a short squeeze panic to get the markets’ speculative juices flowing. Many will say all’s just fine and dandy – let the fun and games continue! My retort is that the stock market is indicative of the current dysfunctional financial backdrop. At the end of the day, the financial system must be capable of effectively allocating finance and real resources throughout the economy. I would argue that this is not possible for a system that congenitally misprices risk and distorts financial asset prices. Today’s stock market will inherently finance mainly speculative Bubbles and fragility. And the core systemic problem, the maladjusted "Bubble economy," well, the financial backdrop only worsens the situation.
I have great confidence that government finance Bubble dynamics ensure ongoing distortions in the markets’ pricing of risk and, as well, a continued misallocation of resources (financial and real). And it is increasingly clear that the stock market is embroiled in this problematic dynamic. But that is a dilemma for another day, as surging stocks fan optimism and risk embracement – not to mention forcing many into the stock market with both nostrils plugged. And speculative equities and Credit markets will spur increased economic output in the short-run.
Everything has been extraordinary; the boom, the bust, policymaker interventions, and now the bear market rally. I wish I could see some mechanism in the works that will help kick our system’s addiction to easy Credit and commence the inevitable process of economic adjustment and restructuring. Instead, I see confirmation everywhere that policy and market dynamics are working in concert to sustain the existing financial and economic structure. I have huge doubts it will work and no doubt about the risks of failure.
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10257
The synchronized global expansion of government deficits, state obligations, and central bank Credit amounts to an historic government finance Bubble. Markets have thus far embraced the surge of debt issuance. This U.S. and global reflation will have decidedly different characteristics when contrasted to previous Fed and Wall Street-induced reflations.
First off all, the most robust inflationary biases are today domiciled in China, Asia and the emerging markets generally. The debased dollar has provided China and the “developing” world Credit systems unprecedented capacity to inflate (expand Credit/financial claims without fear of spurring a run on their currencies). Asian and emerging markets are outperforming, exacerbating speculative inflows. Things that the “developing” world need (energy/commodities) and want (gold, silver, sugar, etc.) should demonstrate increasingly strong inflationary pressures. Their overflow of dollars provides them, for now, the power to buy whatever they desire.
Here at home, the post-Wall Street Bubble financial landscape ensures the old days of the Fed slashing rates and almost instantaneously stoking mortgage Credit, home price inflation and consumption have run their course. Accordingly, the unfolding reflation will be of a different variety than those of the past – and, importantly, largely bypass U.S. housing. This sets the stage for a lackluster recovery in consumption and economic revival generally. Household sector headwinds will likely be exacerbated by higher-than-expected inflation (especially in energy and globally-traded commodities), higher taxes and rising interest rates.
There is a confluence of factors that expose the market to an upside surprised in yields. The bond market has been overly sanguine, emboldened by the prospect of the Bernanke Fed maintaining ultra-loose monetary policy indefinitely. Bond bulls have been further comforted by the deep structural issues overhanging both the U.S. financial system and economy. However, massive government Credit creation has, for now, put systemic issues on hold. Especially in Asia, unfettered Credit expansion creates the backdrop for a surprisingly speedy economic upsurge. The weak dollar plays a major reflationary role globally, while also raising the prospect for inflationary pressures here at home. Massive issuance, global economic resurgence, heightened inflation and a weak currency are offering increasingly tough competition to the bullish “forever loose policy” view.
Meanwhile, fixed income must gaze at the feverish equities market with disbelief – and rising trepidation. The bond market discerns incessant economic impairment, a historic debt overhang, 9.4% unemployment, and begrudging recovery. An intoxicated stock market ganders something altogether different, with the Morgan Stanley Retail Index up 61% y-t-d, the Morgan Stanley High Tech Index up 47%, the Morgan Stanley Cyclical Index up 52%, and the Broker/Dealers up 45%. The bond market has been content to laugh off the silly equities game. The chuckles may have ended today.
My secular bearish thesis rests upon a major assumption: The U.S. economy is sustained by $2.5 Trillion (or so) of new Credit. Only this amount will stem a downward spiral of asset prices, Credit, incomes, corporate cash flows and government finances. On the other hand, if forthcoming, the $2.5 Trillion of additional – chiefly government-directed and non-productive - Credit will foment problematic Monetary Disorder. In simplest terms, another bout of Credit inflation leads further down the path of unhinged market prices, destabilizing speculation, and unwieldy flows of finance.
The stock market has become illustrative of what we might experience in the way of Monetary Disorder. Speculation has returned with a vengeance, galloping blindly ahead of fledgling little greenish shoots. Those of the bullish persuasion contend that the marketplace is, as it should, simply discounting a rosy future. I would counter that problematic market dynamics have taken over, with prices increasingly disconnected from reality. In short, the market is in the midst of one major short squeeze.
There are myriad risks associated with the government’s unprecedented market interventions. Likely not well appreciated, policymaker actions have forced the destabilizing unwind of huge positions created to hedge against systemic risk (as well as to profit from bearish bets). This reversal of various bear positions has created enormous buying power, especially in the securities of companies (and sectors) most exposed to the Credit downturn. The reversal of bets in the Credit default swap (and bond) market has certainly played a role. Surging junk bond and stock prices have fed one another, as the highly leveraged and vulnerable companies provide phenomenal market returns. The markets are today throwing "money" at the weak and leveraged.
The resulting outperformance of fundamentally weak companies spurred short covering more generally, creating a dynamic whereby heavily shorted stocks became about the best performing sector in the equities market. This dynamic put significant pressure on so-called market neutral strategies that have proliferated over the past few years. The strategy of attempting to own the good companies and short bad ones is faltering, likely causing a flow out of these strategies - and a self-reinforcing unwind of positions. The “bad” stock soar and the “good” ones languish.
There’s nothing like a short squeeze panic to get the markets’ speculative juices flowing. Many will say all’s just fine and dandy – let the fun and games continue! My retort is that the stock market is indicative of the current dysfunctional financial backdrop. At the end of the day, the financial system must be capable of effectively allocating finance and real resources throughout the economy. I would argue that this is not possible for a system that congenitally misprices risk and distorts financial asset prices. Today’s stock market will inherently finance mainly speculative Bubbles and fragility. And the core systemic problem, the maladjusted "Bubble economy," well, the financial backdrop only worsens the situation.
I have great confidence that government finance Bubble dynamics ensure ongoing distortions in the markets’ pricing of risk and, as well, a continued misallocation of resources (financial and real). And it is increasingly clear that the stock market is embroiled in this problematic dynamic. But that is a dilemma for another day, as surging stocks fan optimism and risk embracement – not to mention forcing many into the stock market with both nostrils plugged. And speculative equities and Credit markets will spur increased economic output in the short-run.
Everything has been extraordinary; the boom, the bust, policymaker interventions, and now the bear market rally. I wish I could see some mechanism in the works that will help kick our system’s addiction to easy Credit and commence the inevitable process of economic adjustment and restructuring. Instead, I see confirmation everywhere that policy and market dynamics are working in concert to sustain the existing financial and economic structure. I have huge doubts it will work and no doubt about the risks of failure.
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10257
Trouble with our foreign creditors | The Economic Populist
Trouble with our foreign creditors | The Economic Populist
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The massive and unprecedented amount of debt being issued by the Treasury Department, and the relatively finite amount of savings in the world, has left the country vulnerable to a currency crisis. The place where evidence of this crisis might first turn up is in the treasury bond market.
That evidence might have happened in the last two weeks.
Just last week a treasury auction of 5-year bonds nearly failed.
but for the primary dealers the bid-to-cover was less than one, meaning that some of the issue would have been left on the table.
That's a fail; but for the primary dealers the issue would not have subscribed.
Primary dealers are required to bid. That's the deal in exchange for their being named as "primary dealers."
It's very unusual for a treasury debt auction to receive so few bids, but doesn't necessarily mean anything in and of itself.
However, what happened during the following auction was enough to raise an eyebrow.
Just one week after the Treasury Department issued $28 Billion in 7-year bonds, $10 Billion being bought by Primary Dealers, the Federal Reserve turned around and bought up 47% of the primary allocated bonds in Open Market Purchases. This is backdoor monetization of debt.
They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.
This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
While certainly suspicious, this doesn't necessarily prove anything major. It could be just a temporary slack in demand...which just happens to accompany an enormous increase in supply.
Either that or it was a pre-arranged agreement, explicitly or not, that the Primary Dealers buy up the auction and the Fed would purchase half of them back the following week.
It doesn't take a konspiracy minded person to start drawing some conclusions. But a person might want some more evidence. Which brings me to this.
Foreign central bank liquidity swaps are again at the lowest level since the Lehman bankruptcy ($77 billion) - the level in 2008 pre-Lehman was $62 billion. The Fed is aggressively recalling any and all liquidity swaps.
So what exactly does that mean? I'll let someone more fluent in macroeconomics answer that question.
by means of USDollar Swap Facilities, the USDept Treasury is handing money to friendly foreign central banks in order to purchase USTreasurys in hidden or custodial accounts, all indirect bidders. Without them, the auctions would fail miserably.
Jim Willie goes on to point out that the "Toronto Dominion and Royal Bank (both of Canada) as well as Nomura (of Japan)" are all primary bond dealers now. Thus it appears that foreign demand for our debt appears larger than it really is.
What we are looking at is deceptive, nearly criminal attempts that propping up the American debt market, and on the backside the Fed is creating money out of thin air to buy back that debt.
Shared via AddThis
The massive and unprecedented amount of debt being issued by the Treasury Department, and the relatively finite amount of savings in the world, has left the country vulnerable to a currency crisis. The place where evidence of this crisis might first turn up is in the treasury bond market.
That evidence might have happened in the last two weeks.
Just last week a treasury auction of 5-year bonds nearly failed.
but for the primary dealers the bid-to-cover was less than one, meaning that some of the issue would have been left on the table.
That's a fail; but for the primary dealers the issue would not have subscribed.
Primary dealers are required to bid. That's the deal in exchange for their being named as "primary dealers."
It's very unusual for a treasury debt auction to receive so few bids, but doesn't necessarily mean anything in and of itself.
However, what happened during the following auction was enough to raise an eyebrow.
Just one week after the Treasury Department issued $28 Billion in 7-year bonds, $10 Billion being bought by Primary Dealers, the Federal Reserve turned around and bought up 47% of the primary allocated bonds in Open Market Purchases. This is backdoor monetization of debt.
They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.
This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
While certainly suspicious, this doesn't necessarily prove anything major. It could be just a temporary slack in demand...which just happens to accompany an enormous increase in supply.
Either that or it was a pre-arranged agreement, explicitly or not, that the Primary Dealers buy up the auction and the Fed would purchase half of them back the following week.
It doesn't take a konspiracy minded person to start drawing some conclusions. But a person might want some more evidence. Which brings me to this.
Foreign central bank liquidity swaps are again at the lowest level since the Lehman bankruptcy ($77 billion) - the level in 2008 pre-Lehman was $62 billion. The Fed is aggressively recalling any and all liquidity swaps.
So what exactly does that mean? I'll let someone more fluent in macroeconomics answer that question.
by means of USDollar Swap Facilities, the USDept Treasury is handing money to friendly foreign central banks in order to purchase USTreasurys in hidden or custodial accounts, all indirect bidders. Without them, the auctions would fail miserably.
Jim Willie goes on to point out that the "Toronto Dominion and Royal Bank (both of Canada) as well as Nomura (of Japan)" are all primary bond dealers now. Thus it appears that foreign demand for our debt appears larger than it really is.
What we are looking at is deceptive, nearly criminal attempts that propping up the American debt market, and on the backside the Fed is creating money out of thin air to buy back that debt.
5 August 2009
Congrats to Zero Hedge....
Kinda like what we try to do here in our iconoclastic aussie way, I'd like to think; wadda they got anyway, only more panache, a team and lots more energy..
Given the blurry line between journalism and entertainment, Wall St. Cheat Sheet has decided to launch a First Amendment Award Series for Outstanding Journalism. The inaugural winner for Best Blog is Zero Hedge. We like to think of Zero Hedge as the gritty, indie Bloomberg.
Most recently, Zero Hedge’s relentless coverage of Goldman Sachs has brought countless critical issues from the smokey back-rooms of Wall Street to the public corridors of Congress. Many in the mainstream media will refuse to give credit where credit is due because such an acknowledgment is an admission they did not do the reporting encouraged by the Constitution.
We believe media is continuing a major paradigm shift wherein old-school media outlets will continue to lose market and mind share to those who simply do the best reporting and offer the most valuable information. We believe that cynical investors will gravitate away from cheerleading and entertainment because no matter how financially illiterate they are, Pavlov’s Dog tells us investors will ultimately learn to not respond to the bell if the bowl is empty or filled with poison.
We are proud to bring you the first ever interview with Zero Hedge co-founder Tyler Durden. Tyler and his team are perfectly branded as the protagonists from Chuck Palahniuk’s classic Fight Club. The team of brilliant ex-Wall Streeters is on a mission to liberate us from the Old World Order where journalism is nothing more than a means to selling ads.
Damien Hoffman: Tyler, can you share the general story of your career?
Tyler: Alas, I can not go into details for obvious reasons. However, I can tell you that between the four authors of Zero Hedge, we have over two decades of corporate finance advisory, investing and operational experience. For example, between my colleagues and myself we have experience with Credit Default Swaps, financial restructuring, equity capital markets, M&A advisory, private equity, macroeconomic and FOREX analysis. Marla [Singer] is the legal expert in the Zero Hedge family. We also have a variety of experience with all facets of business including front, middle, and back office operational expertise.
Damien: Why did you start Zero Hedge?
Tyler: Last year I realized there was a gaping hole in analytical financial reporting. The vast majority of financial journalists become finance experts by necessity. Alas, there is only so much they can learn without being actively engaged in what they discuss and report. It is still very rare to have an individual with a practical financial background do research, reporting, and analysis in a public medium — and do so coherently — due to the substantial opportunity cost.
Zero Hedge hopes to satisfy the need for objective, unbiased analysis and news. Thanks to the backgrounds of our founders, we are able to connect the dots between seemingly unrelated data sets faster and better than most mainstream media outlets.
Damien: How did you decide to brand the news agency with the Fight Club theme?
Tyler: Since its inception, Zero Hedge had activist overtones to it. Activism not only in the sense of pointing out errors and fraud in the financial system, but also as a grassroots campaign in which people can feel part of a force for change. And real change — not its hollow replica being shoveled down people’s throats in the form of empty campaign promises.
In this sense, Fight Club represents nothing less than the growing disenchantment with a highly leveraged consumer culture, a financial system that merely redistributes wealth from the middle class to Wall Street, and a crony political system which never changes its substance. However, in order to succeed in real change, the truth about the reality behind the scenes has to be exposed. People need to see just how deep the rabbit hole goes. This is the main priority of Zero Hedge for the time being.
Damien: Some of your critics try to discredit you as a result of your anonymity. Can you please explain why you are anonymous and respond to this criticism?
Tyler: Our method is pseudonymous speech because anonymity is a shield from the tyranny of the majority. Thus, anonymity exemplifies the purpose behind the Bill of Rights, and of the First Amendment in particular: to protect unpopular individuals from retaliation, and their ideas from suppression, at the hand of an intolerant society.
Our pseudonymous speech is responsibly used. In 1995, Supreme Court Justice Stevens, writing for the majority in the case of McIntyre v. Ohio Elections Commission [514 U.S. 334], stated, “The right to remain anonymous may be abused when it shields fraudulent conduct. But political speech by its nature will sometimes have unpalatable consequences, and, in general, our society accords greater weight to the value of free speech than to the dangers of its misuse.”
Though often maligned — typically by those frustrated by an inability to engage in ad hominem attacks — anonymous speech has a long and storied history in the United States. We think ourselves in good company in using one or another nom de plume. Anonymity was used by the likes of Mark Twain, also known as Samuel Langhorne Clemens, to criticize common ignorance. Perhaps, most famously, it was used by Alexander Hamilton, James Madison and John Jay — also known as Publius — to write the Federalist Papers.
Particularly in light of an emerging trend against vocalizing public dissent in the United States, we believe in the critical importance of anonymity and its role in dissident speech. Like The Economist magazine, we also believe that keeping authorship anonymous moves the focus of discussion to the content of speech and away from the speaker — as it should be. We believe not only that you should be comfortable with anonymous speech in such an environment, but that you should be suspicious of any speech that isn’t.
Damien: You were recently embroiled in a WWE-style argument with CNBC anchor Dennis Kneale. During Kneale’s rant, he alleged your audience must be morons for reading a blog rather than watching a major media outlet. Can you share a rough breakdown of your real audience and why Dennis is wrong?
Tyler: Discussing Dennis Kneale is counterproductive as I really have no desire to be grouped in even remotely close circles to him. He is an entertainer. I provide information. However, I will tell you that two-thirds of Zero Hedge’s readers originate on Wall Street and its equivalents around the globe at major investment banks and hedge funds. We also have a large segment of readers at the most critical establishments in Washington D.C. Ironically, these are the very people who will never be caught watching the 8pm segment of CNBC.
Damien: What do you want Zero Hedge to be in five years?
Tyler: Let’s follow up on this question in five years. The growth of Zero Hedge has been a shock to me. From its humble beginnings a little over six months ago, Zero Hedge has become the fastest growing, most frequented finance-focused blog in America. While I am very happy with the growth rate, it is both a little puzzling and somewhat concerning. People’s demands of Zero Hedge continue growing, and absent a significant expansion, the blog may soon reach its threshold. Which is also exciting, as I have many new ideas which I am preparing to launch in the very near future.
My ultimate goal is to make Zero Hedge a self-sustaining source of unbiased information, which is not at the mercy of corporate sponsorships or blessings from Wall Street or Washington D.C. Luckily, the currently deplorable condition of mainstream media, which has only so many years to exist in its current format, will undoubtedly make the growth of blogs such as Zero Hedge a pull rather than a push process.
Damien: Tyler, thanks for taking the time to do your first interview with me. You and your team set the bar very high for those who wish to win this award in years to come.
Tyler: We are delighted and honored to win this award. My team and I thank you very much.
For more information about Zero Hedge, please visit: zerohedge.com
Given the blurry line between journalism and entertainment, Wall St. Cheat Sheet has decided to launch a First Amendment Award Series for Outstanding Journalism. The inaugural winner for Best Blog is Zero Hedge. We like to think of Zero Hedge as the gritty, indie Bloomberg.
Most recently, Zero Hedge’s relentless coverage of Goldman Sachs has brought countless critical issues from the smokey back-rooms of Wall Street to the public corridors of Congress. Many in the mainstream media will refuse to give credit where credit is due because such an acknowledgment is an admission they did not do the reporting encouraged by the Constitution.
We believe media is continuing a major paradigm shift wherein old-school media outlets will continue to lose market and mind share to those who simply do the best reporting and offer the most valuable information. We believe that cynical investors will gravitate away from cheerleading and entertainment because no matter how financially illiterate they are, Pavlov’s Dog tells us investors will ultimately learn to not respond to the bell if the bowl is empty or filled with poison.
We are proud to bring you the first ever interview with Zero Hedge co-founder Tyler Durden. Tyler and his team are perfectly branded as the protagonists from Chuck Palahniuk’s classic Fight Club. The team of brilliant ex-Wall Streeters is on a mission to liberate us from the Old World Order where journalism is nothing more than a means to selling ads.
Damien Hoffman: Tyler, can you share the general story of your career?
Tyler: Alas, I can not go into details for obvious reasons. However, I can tell you that between the four authors of Zero Hedge, we have over two decades of corporate finance advisory, investing and operational experience. For example, between my colleagues and myself we have experience with Credit Default Swaps, financial restructuring, equity capital markets, M&A advisory, private equity, macroeconomic and FOREX analysis. Marla [Singer] is the legal expert in the Zero Hedge family. We also have a variety of experience with all facets of business including front, middle, and back office operational expertise.
Damien: Why did you start Zero Hedge?
Tyler: Last year I realized there was a gaping hole in analytical financial reporting. The vast majority of financial journalists become finance experts by necessity. Alas, there is only so much they can learn without being actively engaged in what they discuss and report. It is still very rare to have an individual with a practical financial background do research, reporting, and analysis in a public medium — and do so coherently — due to the substantial opportunity cost.
Zero Hedge hopes to satisfy the need for objective, unbiased analysis and news. Thanks to the backgrounds of our founders, we are able to connect the dots between seemingly unrelated data sets faster and better than most mainstream media outlets.
Damien: How did you decide to brand the news agency with the Fight Club theme?
Tyler: Since its inception, Zero Hedge had activist overtones to it. Activism not only in the sense of pointing out errors and fraud in the financial system, but also as a grassroots campaign in which people can feel part of a force for change. And real change — not its hollow replica being shoveled down people’s throats in the form of empty campaign promises.
In this sense, Fight Club represents nothing less than the growing disenchantment with a highly leveraged consumer culture, a financial system that merely redistributes wealth from the middle class to Wall Street, and a crony political system which never changes its substance. However, in order to succeed in real change, the truth about the reality behind the scenes has to be exposed. People need to see just how deep the rabbit hole goes. This is the main priority of Zero Hedge for the time being.
Damien: Some of your critics try to discredit you as a result of your anonymity. Can you please explain why you are anonymous and respond to this criticism?
Tyler: Our method is pseudonymous speech because anonymity is a shield from the tyranny of the majority. Thus, anonymity exemplifies the purpose behind the Bill of Rights, and of the First Amendment in particular: to protect unpopular individuals from retaliation, and their ideas from suppression, at the hand of an intolerant society.
Our pseudonymous speech is responsibly used. In 1995, Supreme Court Justice Stevens, writing for the majority in the case of McIntyre v. Ohio Elections Commission [514 U.S. 334], stated, “The right to remain anonymous may be abused when it shields fraudulent conduct. But political speech by its nature will sometimes have unpalatable consequences, and, in general, our society accords greater weight to the value of free speech than to the dangers of its misuse.”
Though often maligned — typically by those frustrated by an inability to engage in ad hominem attacks — anonymous speech has a long and storied history in the United States. We think ourselves in good company in using one or another nom de plume. Anonymity was used by the likes of Mark Twain, also known as Samuel Langhorne Clemens, to criticize common ignorance. Perhaps, most famously, it was used by Alexander Hamilton, James Madison and John Jay — also known as Publius — to write the Federalist Papers.
Particularly in light of an emerging trend against vocalizing public dissent in the United States, we believe in the critical importance of anonymity and its role in dissident speech. Like The Economist magazine, we also believe that keeping authorship anonymous moves the focus of discussion to the content of speech and away from the speaker — as it should be. We believe not only that you should be comfortable with anonymous speech in such an environment, but that you should be suspicious of any speech that isn’t.
Damien: You were recently embroiled in a WWE-style argument with CNBC anchor Dennis Kneale. During Kneale’s rant, he alleged your audience must be morons for reading a blog rather than watching a major media outlet. Can you share a rough breakdown of your real audience and why Dennis is wrong?
Tyler: Discussing Dennis Kneale is counterproductive as I really have no desire to be grouped in even remotely close circles to him. He is an entertainer. I provide information. However, I will tell you that two-thirds of Zero Hedge’s readers originate on Wall Street and its equivalents around the globe at major investment banks and hedge funds. We also have a large segment of readers at the most critical establishments in Washington D.C. Ironically, these are the very people who will never be caught watching the 8pm segment of CNBC.
Damien: What do you want Zero Hedge to be in five years?
Tyler: Let’s follow up on this question in five years. The growth of Zero Hedge has been a shock to me. From its humble beginnings a little over six months ago, Zero Hedge has become the fastest growing, most frequented finance-focused blog in America. While I am very happy with the growth rate, it is both a little puzzling and somewhat concerning. People’s demands of Zero Hedge continue growing, and absent a significant expansion, the blog may soon reach its threshold. Which is also exciting, as I have many new ideas which I am preparing to launch in the very near future.
My ultimate goal is to make Zero Hedge a self-sustaining source of unbiased information, which is not at the mercy of corporate sponsorships or blessings from Wall Street or Washington D.C. Luckily, the currently deplorable condition of mainstream media, which has only so many years to exist in its current format, will undoubtedly make the growth of blogs such as Zero Hedge a pull rather than a push process.
Damien: Tyler, thanks for taking the time to do your first interview with me. You and your team set the bar very high for those who wish to win this award in years to come.
Tyler: We are delighted and honored to win this award. My team and I thank you very much.
For more information about Zero Hedge, please visit: zerohedge.com
China Building Yuan Strength
China has massive savings and massive trade surpluses and is capable of tremendous growth on the back of rural and regional development. Strategies such as yuan loans to the third world in return for access to resources might work and levering up at this point in China's development, if it is based on stimulating manufacturing and Chinese access to resources rather than property prices in Shanghai, might successfully run for a long while...
Some new economic paradigm is in the works; something along the lines of cuban advisors trained in community based urban agriculture enabled by access to cheap finance for building materials and, say, alternate energy infrastructure made in and financed by China will likely sweep through the third world and lay the basis for the next step in human economic progress.
Thats my guess but its a bit early to be sure....but I don't buy doomsday post fossil fuels, thats for sure.
This is a great article on Chinese technicals....
http://www.minyanville.com/articles/FXI-UDN-GLD-BIDU-uup/index/a/23845
I hear her heart beating, loud as thunder
Saw the stars crashing
China Girl (David Bowie)
Last week a subscriber asked me to comment on the Chinese market.
My feeling about the subject reminds me somewhat of Willie Sutton’s response when asked why he robbed banks: “That’s where the money is.”
Asking me to comment on China is like asking an economist to analyze a potential time/price harmonic with Kaiser Soze pattern following a Rule of 4 Breakout. Well, you get the point. Other than my economics class in college and my stint at Drexel Burnham in Beverly Hills, I have no formal fundamental economic training--and frankly, that may have been a blessing. I am not carrying a lot of the preconceived baggage regarding the financial markets that many educations have shoved down the throats of those hungry to matriculate.
In all seriousness, there is a lot of magical thinking and a lot of statistical significance imbued in both the "science" of economics and the "art" of reading the technical picture of the financial markets--neither of which will yield a high degree of certainty. If you are looking for certainty in the fundamentals of economics or the technical’s of the stock market, you won’t find it either place. Prowling the bowels of economic theory will offer little clarity: put 10 economists in a room and you will get 11 opinions. Nor are charts the compass of certainty when it comes to the stock market: there are many ships at the bottom of the ocean and I am quite certain they all had chart rooms.
This is a game of probabilities, not certainties. Nothing always works. What we are looking for is an edge. Many edges, ideally. I won’t make you do this again, promise, but read that again: this is a game of probabilities, not certainties. Nothing always works.
That is why the secret to stock market profits is two-fold: use a stop, and decide where that stop is beforeyou initiate a position. Trying to figure out how to get out of trouble after you’ve gotten into it doesn’t work well. Oh, and from my experience, a third prong to success is that after identifying an edge (set-up) and getting stopped out, consider taking that set-up the second time around if it retriggers. The stock market likes to bait participants. The second mouse usually gets the cheese. And if stopped out the second time, consider taking a perfectly good set-up the third time if it triggers yet again. There is a reason why the cliché, ‘the third time is a charm’ is so well-worn.
None of this has anything to do with China. The recent eclipse that was the tightest in the last 100 years and the next 100 years cut a swath directly over the country and may have nothing to do with China either. But it is interesting in light of the cycles regarding the Federal Reverse offered in this space in past months and the challenge that some in Congress are giving to the Fed. This is interesting in view of the idea that the amount of greenbacks that we owe cannot be supported by demographics, i.e. we can’t earn our way out of the debt leaving three choices: default, remodification, or monetization.
The symbiotic relationship between the U.S. and China seems to be reaching a point of critical mass. Last week a high level Chinese delegation came to Washington. After they left, the US dollar made a 10 month low late in the week and gold exploded. Did the Chinese ask for something they didn’t get and in response is the US getting slapped in the face? Trying to decipher the delicate relationship is a job for Jake.
According to recent reports, China is rapidly accelerating efforts to internationalize its currency with a series of maneuvers that could see the Yuan become one of the top three monetary units in the world. Some analysts expect that by 2012 as much as $2 trillion worth of trade flows may be settled using the ‘redback’ as China shifts its commercial tentacles throughout the commodity producing world. The red octopus is holding hands with the emerging markets of Asia, South America and the Mid-East. Will it become a choke hold on the US? It is worth considering that with all their wealth versus the great wealth destruction in the West in the last year, the US is bogged down militarily while China is not.
Currently, Chinese dreams of a major role in international currency transactions are impeded by Chinese government policy which restricts the yuan from trading freely around the world and being fully convertible. But that could change quickly. China has already inked a series of agreements with Argentina, Malaysia and Indonesia to allow their central banks to acquire yuan for use in trade with China.
The radical shift in attitude may arise from a desire to protect China from what it may perceive as a ‘dollar trap’. This problem emerges when a country, through its trade, amasses a huge surplus of dollars, which it is effectively forced to reinvest in dollar assets. This is why China is the US’s largest creditor. It has as much to do with necessity as desirability. China’s US dollar assets have in the past been vulnerable to the whims of Washington. But the greenback is losing some of its hue. Moreover, the specter of a US consumer without the same tools to spend wildly should be making China nervous about the export of goods/import of US Treasuries double helix.
Not all is peachy-keen for China. They may have a few economic curve balls of their own to duck: during the first part of the year China came in with a much heavier stimulus than took place in the US. However, the export market in China which relied heavily on a now devastated American consumer must rely on domestic, organic growth. Because the domestic economy in China is 25% the size of the US, all that money sloshing around could cause a very serious inflation problem in China. Can the Chinese consumer replace the American consumer--quickly? That’s a big transformation which may entail China having to deal with a bubble of its own. Will China be forced to raise interest rates?
At the same time some analysts say China is not ready to take reforms needed to allow the yuan to be an true international contender. In making the yuan a freely traded currency would mean losing control by Chinese policy makers over its value and flows of capital in and out of the country. China’s government loves control and ruthless competition and may be fearful about protecting China’s domestic financial sector from seismic shifts in the global economy.
Another interesting issue is that at the same time the Chinese population is big buyers of gold as in the past they have been forced to turn in their gold for paper currency that turned worthless.
Speaking of gold, just as it appeared to be breaking down early last week, the metal reversed offsetting the stab down and recaptured its 50 day moving average. Last week left an outside up week in gold and any extension this week looks as if it will trigger a move out of a bullish Cup & Handle pattern.
This pattern exists within the pattern of a short-term inverse head and shoulders pattern as well as a larger inverse head and shoulders pattern. Last week’s turnaround in gold sets up a potential move over resistance in the way of a long declining 3 point trendline. A breakout over triple tops will trigger a Rule of 4 Breakout which has a strong likelihood of follow through. As many of you know panicky moves often times culminate at/near the 49th period of a move.
The crashes of 1929 and 1987 being good examples as the crash in both instances occurred 49 to 55 days from the high day. Looking at the weekly chart of gold, we see how the two most important peaks on the chart occurred 49 weeks apart. October will mark 49 weeks from the last important swing low. Will it be a spike high if gold breaks out?
While gold is poised to break out, the stock market is coming off the July Jolt. Despite the seeming bullishness of the outside up month of the S&P, the market has entered into the time period where a reversal could occur.
I don’t know what the catalyst for a reversal would be anymore than I knew what the catalyst would be at the March low. I still don’t think anyone can point to anything other than hope in a heavily oversold market that turned stocks around in the spring. The reason why any downside reversal must be respected is that it could be larger than most participants expect: bull and bear trends often play out in three’s---I don’t see 3 drives to a low on the monthly chart of the S&P which raises risk on any turndown in the Monthly Swing Chart in August.
Because of many cycles and patterns including 1979, 1929, 1990, and 1999 (the DJIA topped in August and double topped in January the next year) which I will flesh out further tomorrow, I believe that the July Jolt will lead to August Angst and a September Surprise... to the downside
Some new economic paradigm is in the works; something along the lines of cuban advisors trained in community based urban agriculture enabled by access to cheap finance for building materials and, say, alternate energy infrastructure made in and financed by China will likely sweep through the third world and lay the basis for the next step in human economic progress.
Thats my guess but its a bit early to be sure....but I don't buy doomsday post fossil fuels, thats for sure.
This is a great article on Chinese technicals....
http://www.minyanville.com/articles/FXI-UDN-GLD-BIDU-uup/index/a/23845
I hear her heart beating, loud as thunder
Saw the stars crashing
China Girl (David Bowie)
Last week a subscriber asked me to comment on the Chinese market.
My feeling about the subject reminds me somewhat of Willie Sutton’s response when asked why he robbed banks: “That’s where the money is.”
Asking me to comment on China is like asking an economist to analyze a potential time/price harmonic with Kaiser Soze pattern following a Rule of 4 Breakout. Well, you get the point. Other than my economics class in college and my stint at Drexel Burnham in Beverly Hills, I have no formal fundamental economic training--and frankly, that may have been a blessing. I am not carrying a lot of the preconceived baggage regarding the financial markets that many educations have shoved down the throats of those hungry to matriculate.
In all seriousness, there is a lot of magical thinking and a lot of statistical significance imbued in both the "science" of economics and the "art" of reading the technical picture of the financial markets--neither of which will yield a high degree of certainty. If you are looking for certainty in the fundamentals of economics or the technical’s of the stock market, you won’t find it either place. Prowling the bowels of economic theory will offer little clarity: put 10 economists in a room and you will get 11 opinions. Nor are charts the compass of certainty when it comes to the stock market: there are many ships at the bottom of the ocean and I am quite certain they all had chart rooms.
This is a game of probabilities, not certainties. Nothing always works. What we are looking for is an edge. Many edges, ideally. I won’t make you do this again, promise, but read that again: this is a game of probabilities, not certainties. Nothing always works.
That is why the secret to stock market profits is two-fold: use a stop, and decide where that stop is beforeyou initiate a position. Trying to figure out how to get out of trouble after you’ve gotten into it doesn’t work well. Oh, and from my experience, a third prong to success is that after identifying an edge (set-up) and getting stopped out, consider taking that set-up the second time around if it retriggers. The stock market likes to bait participants. The second mouse usually gets the cheese. And if stopped out the second time, consider taking a perfectly good set-up the third time if it triggers yet again. There is a reason why the cliché, ‘the third time is a charm’ is so well-worn.
None of this has anything to do with China. The recent eclipse that was the tightest in the last 100 years and the next 100 years cut a swath directly over the country and may have nothing to do with China either. But it is interesting in light of the cycles regarding the Federal Reverse offered in this space in past months and the challenge that some in Congress are giving to the Fed. This is interesting in view of the idea that the amount of greenbacks that we owe cannot be supported by demographics, i.e. we can’t earn our way out of the debt leaving three choices: default, remodification, or monetization.
The symbiotic relationship between the U.S. and China seems to be reaching a point of critical mass. Last week a high level Chinese delegation came to Washington. After they left, the US dollar made a 10 month low late in the week and gold exploded. Did the Chinese ask for something they didn’t get and in response is the US getting slapped in the face? Trying to decipher the delicate relationship is a job for Jake.
According to recent reports, China is rapidly accelerating efforts to internationalize its currency with a series of maneuvers that could see the Yuan become one of the top three monetary units in the world. Some analysts expect that by 2012 as much as $2 trillion worth of trade flows may be settled using the ‘redback’ as China shifts its commercial tentacles throughout the commodity producing world. The red octopus is holding hands with the emerging markets of Asia, South America and the Mid-East. Will it become a choke hold on the US? It is worth considering that with all their wealth versus the great wealth destruction in the West in the last year, the US is bogged down militarily while China is not.
Currently, Chinese dreams of a major role in international currency transactions are impeded by Chinese government policy which restricts the yuan from trading freely around the world and being fully convertible. But that could change quickly. China has already inked a series of agreements with Argentina, Malaysia and Indonesia to allow their central banks to acquire yuan for use in trade with China.
The radical shift in attitude may arise from a desire to protect China from what it may perceive as a ‘dollar trap’. This problem emerges when a country, through its trade, amasses a huge surplus of dollars, which it is effectively forced to reinvest in dollar assets. This is why China is the US’s largest creditor. It has as much to do with necessity as desirability. China’s US dollar assets have in the past been vulnerable to the whims of Washington. But the greenback is losing some of its hue. Moreover, the specter of a US consumer without the same tools to spend wildly should be making China nervous about the export of goods/import of US Treasuries double helix.
Not all is peachy-keen for China. They may have a few economic curve balls of their own to duck: during the first part of the year China came in with a much heavier stimulus than took place in the US. However, the export market in China which relied heavily on a now devastated American consumer must rely on domestic, organic growth. Because the domestic economy in China is 25% the size of the US, all that money sloshing around could cause a very serious inflation problem in China. Can the Chinese consumer replace the American consumer--quickly? That’s a big transformation which may entail China having to deal with a bubble of its own. Will China be forced to raise interest rates?
At the same time some analysts say China is not ready to take reforms needed to allow the yuan to be an true international contender. In making the yuan a freely traded currency would mean losing control by Chinese policy makers over its value and flows of capital in and out of the country. China’s government loves control and ruthless competition and may be fearful about protecting China’s domestic financial sector from seismic shifts in the global economy.
Another interesting issue is that at the same time the Chinese population is big buyers of gold as in the past they have been forced to turn in their gold for paper currency that turned worthless.
Speaking of gold, just as it appeared to be breaking down early last week, the metal reversed offsetting the stab down and recaptured its 50 day moving average. Last week left an outside up week in gold and any extension this week looks as if it will trigger a move out of a bullish Cup & Handle pattern.
This pattern exists within the pattern of a short-term inverse head and shoulders pattern as well as a larger inverse head and shoulders pattern. Last week’s turnaround in gold sets up a potential move over resistance in the way of a long declining 3 point trendline. A breakout over triple tops will trigger a Rule of 4 Breakout which has a strong likelihood of follow through. As many of you know panicky moves often times culminate at/near the 49th period of a move.
The crashes of 1929 and 1987 being good examples as the crash in both instances occurred 49 to 55 days from the high day. Looking at the weekly chart of gold, we see how the two most important peaks on the chart occurred 49 weeks apart. October will mark 49 weeks from the last important swing low. Will it be a spike high if gold breaks out?
While gold is poised to break out, the stock market is coming off the July Jolt. Despite the seeming bullishness of the outside up month of the S&P, the market has entered into the time period where a reversal could occur.
I don’t know what the catalyst for a reversal would be anymore than I knew what the catalyst would be at the March low. I still don’t think anyone can point to anything other than hope in a heavily oversold market that turned stocks around in the spring. The reason why any downside reversal must be respected is that it could be larger than most participants expect: bull and bear trends often play out in three’s---I don’t see 3 drives to a low on the monthly chart of the S&P which raises risk on any turndown in the Monthly Swing Chart in August.
Because of many cycles and patterns including 1979, 1929, 1990, and 1999 (the DJIA topped in August and double topped in January the next year) which I will flesh out further tomorrow, I believe that the July Jolt will lead to August Angst and a September Surprise... to the downside
4 August 2009
Bull market in slander and anger points to grass root change
The US contribution to civilisation has been without precendent and its great to see a polity that was asleep newly engaged but I must say that observers overseas, like myself, see the targets of this anger as misplaced and phenomenon like the Obama hating birth certificate nutjobs, part of the bonfire of the GOP as a political force, a real puzzle. The Republic faces great challenges but smearing Obama (as per below) and attempting to lynch congressmen seems futile and fratricidal as is the lame conspiracy mongering and righteous indignation that burdens much analysis.
The GFC will drive westerners to reconnect with their communities and take back local politics; we will all get richer only by getting poorer first, I posit.
Its all about renewal. Five years ago I was struck by the general refusal of Americans to admit the possibility that other societies or systems could have anything to offer. A viewpoint that was certified by certainties: that climate change was bogus,the health system perfect, Iraq and Afghanistan sound imperial policy.
All glory is fleeting and the preeminence of the US has been so total and universal that the readjustment is bound to be difficult. As a young man who fell in love with "space age" america the slow turning away from science, the library and the academy and the perspectives of the space age seemed retrograde and shameful.
News – Rep. Tim Bishop, D-NY. (AP Photo/Ron Edmonds)
Alex Isenstadt – Fri Jul 31, 5:30 am ET
Screaming constituents, protesters dragged out by the cops, congressmen fearful for their safety — welcome to the new town-hall-style meeting, the once-staid forum that is rapidly turning into a house of horrors for members of Congress.
On the eve of the August recess, members are reporting meetings that have gone terribly awry, marked by angry, sign-carrying mobs and disruptive behavior. In at least one case, a congressman has stopped holding town hall events because the situation has spiraled so far out of control.
“I had felt they would be pointless,” Rep. Tim Bishop (D-N.Y.) told POLITICO, referring to his recent decision to temporarily suspend the events in his Long Island district. “There is no point in meeting with my constituents and [to] listen to them and have them listen to you if what is basically an unruly mob prevents you from having an intelligent conversation.”
In Bishop’s case, his decision came on the heels of a June 22 event he held in Setauket, N.Y., in which protesters dominated the meeting by shouting criticisms at the congressman for his positions on energy policy, health care and the bailout of the auto industry.
Within an hour of the disruption, police were called in to escort the 59-year-old Democrat — who has held more than 100 town hall meetings since he was elected in 2002 — to his car safely.
“I have no problem with someone disagreeing with positions I hold,” Bishop said, noting that, for the time being, he was using other platforms to communicate with his constituents. “But I also believe no one is served if you can’t talk through differences.”
Bishop isn’t the only one confronted by boiling anger and rising incivility. At a health care town hall event in Syracuse, N.Y., earlier this month, police were called in to restore order, and at least one heckler was taken away by local police. Close to 100 sign-carrying protesters greeted Rep. Allen Boyd (D-Fla.) at a late June community college small-business development forum in Panama City, Fla. Last week, Danville, Va., anti-tax tea party activists claimed they were “refused an opportunity” to ask Rep. Thomas Perriello (D-Va.) a question at a town hall event and instructed by a plainclothes police officer to leave the property after they attempted to hold up protest signs.
The targets in most cases are House Democrats, who over the past few months have tackled controversial legislation including a $787 billion economic stimulus package, a landmark energy proposal and an overhaul of the nation’s health care system.
Democrats, acknowledging the increasing unruliness of the town-hall-style events, say the hot-button issues they are taking on have a lot to do with it.
“I think it’s just the fact that we are dealing with some of the most important public policy issues in a generation,” said Rep. Bruce Braley (D-Iowa), who was confronted by a protester angry about his position on health care reform at a town hall event several weeks ago.
“I think in general what is going on is we are tackling issues that have been ignored for a long time, and I think that is disruptive to a lot of people,” said Bishop, a four-term congressman. “We are trying, one by one, to deal with a set of issues that can’t be ignored, and I think that’s unsettling to a lot of people.”
Freshman Rep. Dan Maffei (D-N.Y.), whose event at a Syracuse middle school was disrupted, said that he still planned to hold additional town halls but that he was also thinking about other options.
“I think you’ve got to communicate through a variety of different ways. You should do the telephone town hall meetings. You should do the town hall meetings. You should do the smaller group meetings,” said Maffei. “It’s important to do things in a variety of ways, so you don’t have one mode of communication.”
“You’re going to have people of varying views, and in this case, you’ve got the two extremes who were the most vocal,” Maffei said of the flare-up at his July 12 event.
On Tuesday, Rep. Chris Van Hollen (D-Md.), who handles incumbent retention duties for House Democrats in addition to chairing the Democratic Congressional Campaign Committee, met with freshman members to discuss their plans for the monthlong August recess. While the specific issue of town hall protesters never came up, according to sources familiar with the meeting, he urged them not to back away from opponents.
“He said, ‘Go on offense. Stay on the offense. It’s really important that your constituents hear directly from you. You shouldn’t let a day go by [that] your constituents don’t hear from you,’” said one House Democratic leadership aide familiar with the meeting.
Some members profess to enjoy the give-and-take of the town halls, even if lately it’s become more take than give.
“Town halls are a favorite part of my job,” said Rep. Russ Carnahan (D-Mo.), a third-term congressman from St. Louis who noted that a “handful” of disruptions had taken place at his meetings. “It’s what I do. It’s what I will continue to do.”
“People have gotten fired up and all that, but I think that’s what makes town halls fun,” said Perriello, a freshman who is among the most vulnerable Democrats in 2010. “I think that most of the time when we get out there, it’s a good chance for people to vent and offer their thoughts. It’s been good.”
“I enjoy it, and people have a chance to speak their mind,” he said.
Both Carnahan and Perriello said they were plunging forward with plans to hold more town hall meetings.
Republicans, with an eye toward 2010, are keeping close track of the climate at Democratic events.
“We’ve seen Russ Carnahan, we’ve seen Tim Bishop, we’ve seen some other people face some very different crowds back home,” said National Republican Congressional Committee Chairman Pete Sessions (R-Texas). “The days of you having a town hall meeting where maybe 15 or 20 of your friends show up — they’re over. You’ve now got real people who are showing up — and that’s going to be a factor.”
Asked later how or whether the GOP would use the confrontations against Democrats, Sessions responded: “Wait till next year.”
But Democrats are quick to point out they’re not the only ones facing hostile audiences. They single out Rep. Mike Castle (R-Del.), who found himself in a confrontation earlier this month with a “birther” protester, and insist that Republicans face a backlash of their own if it appears the party is too closely aligned with tea party activists or other conservative-oriented protesters.
“It’s a risk that they align themselves with such a small minority in the party,” said Brian Smoot, who served as political director at the Democratic Congressional Campaign Committee in the past election cycle. “They risk alienating moderates.”
The GFC will drive westerners to reconnect with their communities and take back local politics; we will all get richer only by getting poorer first, I posit.
Its all about renewal. Five years ago I was struck by the general refusal of Americans to admit the possibility that other societies or systems could have anything to offer. A viewpoint that was certified by certainties: that climate change was bogus,the health system perfect, Iraq and Afghanistan sound imperial policy.
All glory is fleeting and the preeminence of the US has been so total and universal that the readjustment is bound to be difficult. As a young man who fell in love with "space age" america the slow turning away from science, the library and the academy and the perspectives of the space age seemed retrograde and shameful.
News – Rep. Tim Bishop, D-NY. (AP Photo/Ron Edmonds)
Alex Isenstadt – Fri Jul 31, 5:30 am ET
Screaming constituents, protesters dragged out by the cops, congressmen fearful for their safety — welcome to the new town-hall-style meeting, the once-staid forum that is rapidly turning into a house of horrors for members of Congress.
On the eve of the August recess, members are reporting meetings that have gone terribly awry, marked by angry, sign-carrying mobs and disruptive behavior. In at least one case, a congressman has stopped holding town hall events because the situation has spiraled so far out of control.
“I had felt they would be pointless,” Rep. Tim Bishop (D-N.Y.) told POLITICO, referring to his recent decision to temporarily suspend the events in his Long Island district. “There is no point in meeting with my constituents and [to] listen to them and have them listen to you if what is basically an unruly mob prevents you from having an intelligent conversation.”
In Bishop’s case, his decision came on the heels of a June 22 event he held in Setauket, N.Y., in which protesters dominated the meeting by shouting criticisms at the congressman for his positions on energy policy, health care and the bailout of the auto industry.
Within an hour of the disruption, police were called in to escort the 59-year-old Democrat — who has held more than 100 town hall meetings since he was elected in 2002 — to his car safely.
“I have no problem with someone disagreeing with positions I hold,” Bishop said, noting that, for the time being, he was using other platforms to communicate with his constituents. “But I also believe no one is served if you can’t talk through differences.”
Bishop isn’t the only one confronted by boiling anger and rising incivility. At a health care town hall event in Syracuse, N.Y., earlier this month, police were called in to restore order, and at least one heckler was taken away by local police. Close to 100 sign-carrying protesters greeted Rep. Allen Boyd (D-Fla.) at a late June community college small-business development forum in Panama City, Fla. Last week, Danville, Va., anti-tax tea party activists claimed they were “refused an opportunity” to ask Rep. Thomas Perriello (D-Va.) a question at a town hall event and instructed by a plainclothes police officer to leave the property after they attempted to hold up protest signs.
The targets in most cases are House Democrats, who over the past few months have tackled controversial legislation including a $787 billion economic stimulus package, a landmark energy proposal and an overhaul of the nation’s health care system.
Democrats, acknowledging the increasing unruliness of the town-hall-style events, say the hot-button issues they are taking on have a lot to do with it.
“I think it’s just the fact that we are dealing with some of the most important public policy issues in a generation,” said Rep. Bruce Braley (D-Iowa), who was confronted by a protester angry about his position on health care reform at a town hall event several weeks ago.
“I think in general what is going on is we are tackling issues that have been ignored for a long time, and I think that is disruptive to a lot of people,” said Bishop, a four-term congressman. “We are trying, one by one, to deal with a set of issues that can’t be ignored, and I think that’s unsettling to a lot of people.”
Freshman Rep. Dan Maffei (D-N.Y.), whose event at a Syracuse middle school was disrupted, said that he still planned to hold additional town halls but that he was also thinking about other options.
“I think you’ve got to communicate through a variety of different ways. You should do the telephone town hall meetings. You should do the town hall meetings. You should do the smaller group meetings,” said Maffei. “It’s important to do things in a variety of ways, so you don’t have one mode of communication.”
“You’re going to have people of varying views, and in this case, you’ve got the two extremes who were the most vocal,” Maffei said of the flare-up at his July 12 event.
On Tuesday, Rep. Chris Van Hollen (D-Md.), who handles incumbent retention duties for House Democrats in addition to chairing the Democratic Congressional Campaign Committee, met with freshman members to discuss their plans for the monthlong August recess. While the specific issue of town hall protesters never came up, according to sources familiar with the meeting, he urged them not to back away from opponents.
“He said, ‘Go on offense. Stay on the offense. It’s really important that your constituents hear directly from you. You shouldn’t let a day go by [that] your constituents don’t hear from you,’” said one House Democratic leadership aide familiar with the meeting.
Some members profess to enjoy the give-and-take of the town halls, even if lately it’s become more take than give.
“Town halls are a favorite part of my job,” said Rep. Russ Carnahan (D-Mo.), a third-term congressman from St. Louis who noted that a “handful” of disruptions had taken place at his meetings. “It’s what I do. It’s what I will continue to do.”
“People have gotten fired up and all that, but I think that’s what makes town halls fun,” said Perriello, a freshman who is among the most vulnerable Democrats in 2010. “I think that most of the time when we get out there, it’s a good chance for people to vent and offer their thoughts. It’s been good.”
“I enjoy it, and people have a chance to speak their mind,” he said.
Both Carnahan and Perriello said they were plunging forward with plans to hold more town hall meetings.
Republicans, with an eye toward 2010, are keeping close track of the climate at Democratic events.
“We’ve seen Russ Carnahan, we’ve seen Tim Bishop, we’ve seen some other people face some very different crowds back home,” said National Republican Congressional Committee Chairman Pete Sessions (R-Texas). “The days of you having a town hall meeting where maybe 15 or 20 of your friends show up — they’re over. You’ve now got real people who are showing up — and that’s going to be a factor.”
Asked later how or whether the GOP would use the confrontations against Democrats, Sessions responded: “Wait till next year.”
But Democrats are quick to point out they’re not the only ones facing hostile audiences. They single out Rep. Mike Castle (R-Del.), who found himself in a confrontation earlier this month with a “birther” protester, and insist that Republicans face a backlash of their own if it appears the party is too closely aligned with tea party activists or other conservative-oriented protesters.
“It’s a risk that they align themselves with such a small minority in the party,” said Brian Smoot, who served as political director at the Democratic Congressional Campaign Committee in the past election cycle. “They risk alienating moderates.”
DECLINE AND FALL OF THE AMERICAN EMPIRE
Quinn is a great writer and analyst.. from
http://www.financialsense.com/editorials/quinn/2009/0802.html
"The decline of Rome was the natural and inevitable effect of immoderate greatness.
Prosperity ripened the principle of decay; the causes of destruction multiplied
with the extent of conquest; and as soon as time or accident had removed
the artificial supports, the stupendous fabric yielded to
the pressure of its own weight."
Edward Gibbon – The Decline and Fall of the Roman Empire
After ruling much of the known world for centuries, Rome fell due to a number of factors that, historians believe, would not have been fatal in isolation, but that proved terminal in combination. Military overspending and overreach, an untenable economic system, and currency debasement all played a role. As has been well documented, the Roman emperors attempted to distract the populace from the increasingly dire reality of their situation by providing bread and circuses. But entertainments could not stop the nation-state from yielding to the pressure of its own weight.
There are numerous parallels between the end of the Roman Empire and the path the 226-year-old American republic is now on. One difference in these fast-moving times is that empires can rise more rapidly, but are also likely to decline more rapidly.
Conquest & Overreach
“The decay of trade and industry was not a cause of Rome’s fall. There was a decline in agriculture and land was withdrawn from cultivation, in some cases on a very large scale, sometimes as a direct result of barbarian invasions. However, the chief cause of the agricultural decline was high taxation on the marginal land, driving it out of cultivation. Taxation was spurred by the huge military budget and was thus ‘indirectly’ the result of the barbarian invasion.” Arthur Ferrill – The Fall of the Roman Empire: The Military Explanation
The Roman Empire’s economy was based on the plunder of conquered territories. As the empire expanded, it installed remote military garrisons to maintain control and increasingly relied on Germanic mercenaries to man those garrisons.
Ultimately, as its territorial expansion waned and began to contract, less and less booty became available to support the empire’s widespread ambitions and domestic economy. The outsourcing of the military and the cultural dilution from the bloated empire led to lethargy, complacency, and decadence amongst the formerly self-reliant and hard-working Roman citizenry.
In the modern context, as the only major power whose productive capacity was not destroyed during World War II, the American Empire emerged from the ashes of that conflict.
The parallels with Rome do not repeat, but they do rhyme.
Rather than plunder, the U.S. used its unique status to dictate terms that made the U.S. dollar the world’s de facto reserve currency and positioned its robust new manufacturing sector to supply the world with the cars, machinery, appliances, and electronics it so desperately needed. The U.S. trade surplus with the nations of the world led to escalating U.S. wealth and prosperity.
Meanwhile, the U.S. military, about which I’ll have more to say in a moment, was increasingly asked by the nation’s politicians to take on the role of the world’s policeman, leading to action in dozens of conflicts. And even where no direct military role was taken, the U.S. has shown a keen willingness to exert coercive power – including threats, sanctions, and even assassinations – if it was seen to advance American interests.
Simply, in the 20th century, the U.S. became an empire in all but name.
Bread and Circuses
“Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions — everything, now restrains itself and anxiously hopes for just two things: bread and circuses.” Roman Poet Juvenal – 77 AD
British historian Andrew J. Toynbee convincingly argues that the Roman Empire had a rotten economic system from its inception and its institutions steadily decayed over time.
The government didn’t have proper budgetary systems, and so it squandered resources maintaining the empire while producing little of value. When the spoils from conquered territories were no longer sufficient to cover its many expenses, it turned to higher taxes, in effect shifting the burden of the immense military structure onto the back of the citizenry. The higher taxes forced many small farmers to let their land go barren. To distract its citizens from the worsening conditions, Roman politicians played the populist card by providing free wheat to the poor and entertaining them with circuses, chariot races, and other entertainments.
The American Empire has reached the point where it now faces similar structural imbalances, but to pay its bills, it has largely chosen to borrow from foreign countries in recent years. And the bills are large.
The $765 billion of annual military expenditures by the United States equals the military expenditures of the rest of the world combined.
The social safety net put in place over the decades by politicians attempting to get reelected has resulted in a large number of Americans now almost totally dependent upon the almighty state for their well-being. Threatening to rip apart the country’s social fabric, the “new American” will vote for anyone who promises to sustain his dependency even as the nation increasingly struggles under the weight of $56 trillion of unfunded liabilities.
The non-farm workforce in the United States totals 133 million people. Of that number, the government directly employs 22.5 million. Millions more are employed by industries heavily dependent on government spending, such as defense, construction, and healthcare. The annual maintenance cost of the country’s safety net now costs American taxpayers hundreds of billions.
Medicare and Medicaid annual spending $682 billion
Social Security annual spending $612 billion
Food stamps & other food programs $60 billion
Federal unemployment payments $45 billion
America has evolved from a nation of savers to a nation of consumers with a throw-away mentality and driven by little more than the desire for instant gratification. Worse, large segments of our society are convinced that they are owed something. To most, civic duty has become a quaint, outmoded concept. Happy to accommodate – in exchange for a reliable vote come election time – the government keeps the public satiated and sedated by providing them with an ever-increasing list of “public services.”
Roman poet Juvenal described how the Roman citizens abdicated their duties to the state and turned to bread and circuses. The programs listed above represent just some of the bread that American citizens now feel entitled to.
Here in America, we know how to provide circuses on a grand scale. Roman citizens were satisfied with a good chariot race. In these modern times, Americans can find entertainment and distraction with 24-hour-a-day cable TV, the Internet, iPhones, iPods, Blackberries, 1.1 million retail stores, 1,100 malls, 17,000 golf courses, Britney Spears, Kim Kardashian, Housewives of Orange County, New York, Atlanta, and New Jersey, American Idol, Survivor, Rock of Love, Flip That House, 660 stations with nothing on, Las Vegas, Disney World, MLB, NFL, NBA, NHL, WWF, porn, and mega-churches all competing to fill the void in people’s lives.
There isn’t enough time in the day to take in all of the circuses, but with what little spare time we have available, we are now able to check our email anywhere on Earth and stay in constant contact with the office even in the middle of the night or, more typically these days, in the middle of dinner. And we can text and twitter our every thought to our circle of friends and followers, providing next to no lasting purpose or benefit to anyone.
Approximately 12% of the U.S. population (36 million people) is considered poor, and many of them are totally dependent upon the state. Yet that term seems out of sync with the fact that many of those individuals have cell phones ($500/yr.), cable TV ($900/yr.), Internet access ($500/yr.), cars ($5,000/yr. lease), houses ($6,000/yr.), eat fast food ($1,000/yr.), and can smoke a pack a day ($1,500/yr.).
How can this be?
For the answer, look no further than Alan Greenspan, Ben Bernanke, and the Federal Reserve, in cahoots with the financial geniuses on Wall Street, who made it standard practice to create money out of thin air and encourage anyone with a heartbeat to avail themselves of it in the form of low-cost loans – no proof of income or assets required.
The arrangement worked just fine until the banks could no longer hide the bad debt or sell it to the greater fool. Now it has collapsed onto the backs of American taxpayers.
Debasement
"The supply of foodstuffs in the cities declined. The people in the cities were forced to go back to the country and to return to agricultural life. Consequently, the emperors made laws against this movement. There were laws preventing the city dweller from moving to the country, but such laws were ineffective. As the people did not have anything to eat in the city, as they were starving, no law could keep them from leaving the city and going back into agriculture. The city dweller could no longer work in the processing indus tries of the cities as an artisan. And, with the loss of the markets in the cities, no one could buy anything there anymore." Ludwig von Mises – Human Action
Economist Ludwig von Mises argued that flawed economic policies played a key role in the impoverishment and decay of the Roman Empire. He contended that interventionist economic policies, including price controls that resulted in prices substantially below their free-market equilibrium levels, ultimately led to inflation.
Further, Rome was spending more than it could afford. The free food rations for the poor of Rome and Constantinople – as well as the many entertainments – were costing a fortune. The purchasing of exotic spices, silks, and other luxuries from the Orient bled Rome of its gold… gold that didn't return. Soon Rome didn't have enough gold to produce coins. And so it debased its coins with lesser metals until there was no gold left.
To cover the trillions it is spending each year propping up its empire, the U.S. government is now increasingly forced to rely on printing and borrowing the funds to do so, steadily debasing the currency in the process.
But the nation’s currency debasement is nothing new. Rather, it began in 1913 with the creation of the Federal Reserve. It accelerated when FDR confiscated all the gold in the country in the 1930s. When Richard Nixon took the U.S. off the gold standard in 1971, the show really got on the road, as that freed the Federal Reserve to print unlimited amounts of dollars. As a result, the dollar has lost 93% of its value versus gold since 1970.
The Military Complex
Lessons from ancient Rome regarding the cost of maintaining a far-flung empire have been ignored. Today, U.S. boots stomp on the ground of over 117 countries. Even the use of mercenaries, in the form of thousands of Blackwater guards and other private contractors filling roles formerly left to the military, has become commonplace.
Using military assets to pursue political goals, as is the norm in empire building, has led to unintended consequences and wasted opportunities.
One of the most egregious of those lost opportunities came following the bankruptcy and collapse of the Soviet Union. The United States had won the Cold War, but failed to recognize the cautionary signs on the path ahead.
As the only remaining superpower on earth, America fell into the same trap that has befallen previous empires. Instead of concentrating on proactively confronting domestic challenges, such as unfunded Social Security and Medicare liabilities, and developing a comprehensive energy plan to wean ourselves off Middle East oil, we continued to intervene in costly foreign adventures.
Including, among many others, supplying both Osama bin Laden and Saddam Hussein with weapons and money during their fights against our enemies, leading to unintended consequences we live with to this day.
Seeking to maintain its widespread interests and to defend itself from the many enemies created by building and protecting those interests, the American military complex has grown to the point where it now spends an amount equal to 44% of all taxes collected from its citizens.
Since 1991 alone, the U.S. has interceded in Kuwait, Somalia, Bosnia, Sudan, Afghanistan, and Iraq, among others. In no case has Congress fulfilled its obligation of declaring war. Instead, it has delegated sole responsibility for waging war to the president, weakening the structure of our three-branch government. Over that period of time, the U.S. has spent $7 trillion on defense.
The National Debt in 1991 was $3.2 trillion. Today, it is $11.6 trillion, a 360% increase in eighteen years. In 2001, spending on defense was 17% of the government budget. In 2008, defense, Homeland Security, and war spending accounted for 26% of government spending.
Collapse
Economic history books will likely mark 1980 as the year that the rapid phase of the decline of the American Empire began. That’s when the first wave of the Baby Boomer generation reached the age of 35 and turned its attention to living the American dream – on borrowed money. Since that year, household debt has surged from $1 trillion to $14 trillion, while the savings rate has plunged from 12% to below 0%.
There are many ways to use credit, some quite intelligent and practical. Rotating credit card debt to buy the latest non-necessity does not fall into that category. Today in America, there are $956 billion of credit card debt outstanding, or $9,000 per household. The average American has nine credit cards. A credit card allows every person to live above their means for awhile... just as did the home equity loans taken against artificially elevated house prices anchored on mortgages people couldn’t afford.
This is where reality and fantasy meet. People can only borrow and spend if the Federal Reserve and bankers provide the funds to do so, and without asking a lot of questions about suitability. By creating money out of thin air and handing it out to people with no legitimate means of repaying it, the financial elite and their friends in Washington have played an essential role in bringing the U.S. and even the global economy to its knees.
Yet, for all the evidence, a large swath of Americans still believes the nation hasn’t gone off course. These people consider borrowing in order to live beyond their means a rational choice. They expect the government to save them when they get into trouble and think that taxing the rich to pay for a bigger and bigger safety net is a reasonable idea.
In a truly free-market society, this sizable segment of the public would have already learned a brutal lesson they’d remember for the rest of their lives. Instead, the brutal lesson is being learned by people who played by the rules and didn’t take ridiculous risks, but who are now being coerced by the government to pay for the misdeeds of the over-indebted fools who did.
The crushing levels of debt resulting from decades of excess; the far-reaching military presence; the politically motivated social safety net and other popular but unaffordable programs have now reached the point that the economic decline of the American Empire is a foregone conclusion.
The current downturn is not going to be like previous recessions that lasted on average 16 months. Even as the government responds by trying to borrow and spend the country back to prosperity, there is no ignoring that the economic base has been gutted and the future social program liabilities have essentially bankrupted the country.
As was the case in the final stages of the Roman Empire, the unsustainable military, social, and political excesses have reached the point that, in combination, they are now likely to prove catastrophic.
A Final Thought
"For over a thousand years, Roman conquerors returning from the wars enjoyed the honor of a triumph – a tumultuous parade. In the procession came trumpeters and musicians and strange animals from the conquered territories, together with carts laden with treasure and captured armaments. The conqueror rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot, or rode the trace horses. A slave stood behind the conqueror, holding a golden crown, and whispering in his ear a warning: that all glory is fleeting." George C. Scott as Patton [emphasis added]
http://www.financialsense.com/editorials/quinn/2009/0802.html
"The decline of Rome was the natural and inevitable effect of immoderate greatness.
Prosperity ripened the principle of decay; the causes of destruction multiplied
with the extent of conquest; and as soon as time or accident had removed
the artificial supports, the stupendous fabric yielded to
the pressure of its own weight."
Edward Gibbon – The Decline and Fall of the Roman Empire
After ruling much of the known world for centuries, Rome fell due to a number of factors that, historians believe, would not have been fatal in isolation, but that proved terminal in combination. Military overspending and overreach, an untenable economic system, and currency debasement all played a role. As has been well documented, the Roman emperors attempted to distract the populace from the increasingly dire reality of their situation by providing bread and circuses. But entertainments could not stop the nation-state from yielding to the pressure of its own weight.
There are numerous parallels between the end of the Roman Empire and the path the 226-year-old American republic is now on. One difference in these fast-moving times is that empires can rise more rapidly, but are also likely to decline more rapidly.
Conquest & Overreach
“The decay of trade and industry was not a cause of Rome’s fall. There was a decline in agriculture and land was withdrawn from cultivation, in some cases on a very large scale, sometimes as a direct result of barbarian invasions. However, the chief cause of the agricultural decline was high taxation on the marginal land, driving it out of cultivation. Taxation was spurred by the huge military budget and was thus ‘indirectly’ the result of the barbarian invasion.” Arthur Ferrill – The Fall of the Roman Empire: The Military Explanation
The Roman Empire’s economy was based on the plunder of conquered territories. As the empire expanded, it installed remote military garrisons to maintain control and increasingly relied on Germanic mercenaries to man those garrisons.
Ultimately, as its territorial expansion waned and began to contract, less and less booty became available to support the empire’s widespread ambitions and domestic economy. The outsourcing of the military and the cultural dilution from the bloated empire led to lethargy, complacency, and decadence amongst the formerly self-reliant and hard-working Roman citizenry.
In the modern context, as the only major power whose productive capacity was not destroyed during World War II, the American Empire emerged from the ashes of that conflict.
The parallels with Rome do not repeat, but they do rhyme.
Rather than plunder, the U.S. used its unique status to dictate terms that made the U.S. dollar the world’s de facto reserve currency and positioned its robust new manufacturing sector to supply the world with the cars, machinery, appliances, and electronics it so desperately needed. The U.S. trade surplus with the nations of the world led to escalating U.S. wealth and prosperity.
Meanwhile, the U.S. military, about which I’ll have more to say in a moment, was increasingly asked by the nation’s politicians to take on the role of the world’s policeman, leading to action in dozens of conflicts. And even where no direct military role was taken, the U.S. has shown a keen willingness to exert coercive power – including threats, sanctions, and even assassinations – if it was seen to advance American interests.
Simply, in the 20th century, the U.S. became an empire in all but name.
Bread and Circuses
“Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions — everything, now restrains itself and anxiously hopes for just two things: bread and circuses.” Roman Poet Juvenal – 77 AD
British historian Andrew J. Toynbee convincingly argues that the Roman Empire had a rotten economic system from its inception and its institutions steadily decayed over time.
The government didn’t have proper budgetary systems, and so it squandered resources maintaining the empire while producing little of value. When the spoils from conquered territories were no longer sufficient to cover its many expenses, it turned to higher taxes, in effect shifting the burden of the immense military structure onto the back of the citizenry. The higher taxes forced many small farmers to let their land go barren. To distract its citizens from the worsening conditions, Roman politicians played the populist card by providing free wheat to the poor and entertaining them with circuses, chariot races, and other entertainments.
The American Empire has reached the point where it now faces similar structural imbalances, but to pay its bills, it has largely chosen to borrow from foreign countries in recent years. And the bills are large.
The $765 billion of annual military expenditures by the United States equals the military expenditures of the rest of the world combined.
The social safety net put in place over the decades by politicians attempting to get reelected has resulted in a large number of Americans now almost totally dependent upon the almighty state for their well-being. Threatening to rip apart the country’s social fabric, the “new American” will vote for anyone who promises to sustain his dependency even as the nation increasingly struggles under the weight of $56 trillion of unfunded liabilities.
The non-farm workforce in the United States totals 133 million people. Of that number, the government directly employs 22.5 million. Millions more are employed by industries heavily dependent on government spending, such as defense, construction, and healthcare. The annual maintenance cost of the country’s safety net now costs American taxpayers hundreds of billions.
Medicare and Medicaid annual spending $682 billion
Social Security annual spending $612 billion
Food stamps & other food programs $60 billion
Federal unemployment payments $45 billion
America has evolved from a nation of savers to a nation of consumers with a throw-away mentality and driven by little more than the desire for instant gratification. Worse, large segments of our society are convinced that they are owed something. To most, civic duty has become a quaint, outmoded concept. Happy to accommodate – in exchange for a reliable vote come election time – the government keeps the public satiated and sedated by providing them with an ever-increasing list of “public services.”
Roman poet Juvenal described how the Roman citizens abdicated their duties to the state and turned to bread and circuses. The programs listed above represent just some of the bread that American citizens now feel entitled to.
Here in America, we know how to provide circuses on a grand scale. Roman citizens were satisfied with a good chariot race. In these modern times, Americans can find entertainment and distraction with 24-hour-a-day cable TV, the Internet, iPhones, iPods, Blackberries, 1.1 million retail stores, 1,100 malls, 17,000 golf courses, Britney Spears, Kim Kardashian, Housewives of Orange County, New York, Atlanta, and New Jersey, American Idol, Survivor, Rock of Love, Flip That House, 660 stations with nothing on, Las Vegas, Disney World, MLB, NFL, NBA, NHL, WWF, porn, and mega-churches all competing to fill the void in people’s lives.
There isn’t enough time in the day to take in all of the circuses, but with what little spare time we have available, we are now able to check our email anywhere on Earth and stay in constant contact with the office even in the middle of the night or, more typically these days, in the middle of dinner. And we can text and twitter our every thought to our circle of friends and followers, providing next to no lasting purpose or benefit to anyone.
Approximately 12% of the U.S. population (36 million people) is considered poor, and many of them are totally dependent upon the state. Yet that term seems out of sync with the fact that many of those individuals have cell phones ($500/yr.), cable TV ($900/yr.), Internet access ($500/yr.), cars ($5,000/yr. lease), houses ($6,000/yr.), eat fast food ($1,000/yr.), and can smoke a pack a day ($1,500/yr.).
How can this be?
For the answer, look no further than Alan Greenspan, Ben Bernanke, and the Federal Reserve, in cahoots with the financial geniuses on Wall Street, who made it standard practice to create money out of thin air and encourage anyone with a heartbeat to avail themselves of it in the form of low-cost loans – no proof of income or assets required.
The arrangement worked just fine until the banks could no longer hide the bad debt or sell it to the greater fool. Now it has collapsed onto the backs of American taxpayers.
Debasement
"The supply of foodstuffs in the cities declined. The people in the cities were forced to go back to the country and to return to agricultural life. Consequently, the emperors made laws against this movement. There were laws preventing the city dweller from moving to the country, but such laws were ineffective. As the people did not have anything to eat in the city, as they were starving, no law could keep them from leaving the city and going back into agriculture. The city dweller could no longer work in the processing indus tries of the cities as an artisan. And, with the loss of the markets in the cities, no one could buy anything there anymore." Ludwig von Mises – Human Action
Economist Ludwig von Mises argued that flawed economic policies played a key role in the impoverishment and decay of the Roman Empire. He contended that interventionist economic policies, including price controls that resulted in prices substantially below their free-market equilibrium levels, ultimately led to inflation.
Further, Rome was spending more than it could afford. The free food rations for the poor of Rome and Constantinople – as well as the many entertainments – were costing a fortune. The purchasing of exotic spices, silks, and other luxuries from the Orient bled Rome of its gold… gold that didn't return. Soon Rome didn't have enough gold to produce coins. And so it debased its coins with lesser metals until there was no gold left.
To cover the trillions it is spending each year propping up its empire, the U.S. government is now increasingly forced to rely on printing and borrowing the funds to do so, steadily debasing the currency in the process.
But the nation’s currency debasement is nothing new. Rather, it began in 1913 with the creation of the Federal Reserve. It accelerated when FDR confiscated all the gold in the country in the 1930s. When Richard Nixon took the U.S. off the gold standard in 1971, the show really got on the road, as that freed the Federal Reserve to print unlimited amounts of dollars. As a result, the dollar has lost 93% of its value versus gold since 1970.
The Military Complex
Lessons from ancient Rome regarding the cost of maintaining a far-flung empire have been ignored. Today, U.S. boots stomp on the ground of over 117 countries. Even the use of mercenaries, in the form of thousands of Blackwater guards and other private contractors filling roles formerly left to the military, has become commonplace.
Using military assets to pursue political goals, as is the norm in empire building, has led to unintended consequences and wasted opportunities.
One of the most egregious of those lost opportunities came following the bankruptcy and collapse of the Soviet Union. The United States had won the Cold War, but failed to recognize the cautionary signs on the path ahead.
As the only remaining superpower on earth, America fell into the same trap that has befallen previous empires. Instead of concentrating on proactively confronting domestic challenges, such as unfunded Social Security and Medicare liabilities, and developing a comprehensive energy plan to wean ourselves off Middle East oil, we continued to intervene in costly foreign adventures.
Including, among many others, supplying both Osama bin Laden and Saddam Hussein with weapons and money during their fights against our enemies, leading to unintended consequences we live with to this day.
Seeking to maintain its widespread interests and to defend itself from the many enemies created by building and protecting those interests, the American military complex has grown to the point where it now spends an amount equal to 44% of all taxes collected from its citizens.
Since 1991 alone, the U.S. has interceded in Kuwait, Somalia, Bosnia, Sudan, Afghanistan, and Iraq, among others. In no case has Congress fulfilled its obligation of declaring war. Instead, it has delegated sole responsibility for waging war to the president, weakening the structure of our three-branch government. Over that period of time, the U.S. has spent $7 trillion on defense.
The National Debt in 1991 was $3.2 trillion. Today, it is $11.6 trillion, a 360% increase in eighteen years. In 2001, spending on defense was 17% of the government budget. In 2008, defense, Homeland Security, and war spending accounted for 26% of government spending.
Collapse
Economic history books will likely mark 1980 as the year that the rapid phase of the decline of the American Empire began. That’s when the first wave of the Baby Boomer generation reached the age of 35 and turned its attention to living the American dream – on borrowed money. Since that year, household debt has surged from $1 trillion to $14 trillion, while the savings rate has plunged from 12% to below 0%.
There are many ways to use credit, some quite intelligent and practical. Rotating credit card debt to buy the latest non-necessity does not fall into that category. Today in America, there are $956 billion of credit card debt outstanding, or $9,000 per household. The average American has nine credit cards. A credit card allows every person to live above their means for awhile... just as did the home equity loans taken against artificially elevated house prices anchored on mortgages people couldn’t afford.
This is where reality and fantasy meet. People can only borrow and spend if the Federal Reserve and bankers provide the funds to do so, and without asking a lot of questions about suitability. By creating money out of thin air and handing it out to people with no legitimate means of repaying it, the financial elite and their friends in Washington have played an essential role in bringing the U.S. and even the global economy to its knees.
Yet, for all the evidence, a large swath of Americans still believes the nation hasn’t gone off course. These people consider borrowing in order to live beyond their means a rational choice. They expect the government to save them when they get into trouble and think that taxing the rich to pay for a bigger and bigger safety net is a reasonable idea.
In a truly free-market society, this sizable segment of the public would have already learned a brutal lesson they’d remember for the rest of their lives. Instead, the brutal lesson is being learned by people who played by the rules and didn’t take ridiculous risks, but who are now being coerced by the government to pay for the misdeeds of the over-indebted fools who did.
The crushing levels of debt resulting from decades of excess; the far-reaching military presence; the politically motivated social safety net and other popular but unaffordable programs have now reached the point that the economic decline of the American Empire is a foregone conclusion.
The current downturn is not going to be like previous recessions that lasted on average 16 months. Even as the government responds by trying to borrow and spend the country back to prosperity, there is no ignoring that the economic base has been gutted and the future social program liabilities have essentially bankrupted the country.
As was the case in the final stages of the Roman Empire, the unsustainable military, social, and political excesses have reached the point that, in combination, they are now likely to prove catastrophic.
A Final Thought
"For over a thousand years, Roman conquerors returning from the wars enjoyed the honor of a triumph – a tumultuous parade. In the procession came trumpeters and musicians and strange animals from the conquered territories, together with carts laden with treasure and captured armaments. The conqueror rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot, or rode the trace horses. A slave stood behind the conqueror, holding a golden crown, and whispering in his ear a warning: that all glory is fleeting." George C. Scott as Patton [emphasis added]
More debate about the validity of chinese economic data
http://mpettis.com/2009/08/more-debate-about-the-validity-of-economic-data/
More debate about the validity of economic data
August 3rd, 2009 by Michael Pettis | Filed under Economic growth, Fiscal stimulus.
Some of the blog readers have noticed some weird goings-on with recent entries. From time to time an entry will pop up that seems totally inappropriate to current events.
Sorry. This is because the old host of my blog, when it was on a different site, is closing down, and I have been going through the time-consuming and boring task of trying to take as many entries as I can from the old site and posting them in the archives on this site. The repetitive nature of this process leads me sometimes to forget to post the original date of the entry, in which case it shows up as the current entry until I see the mistake and change it.
I am still planning to post the longish piece I wrote, on my view of what the SED discussions should have been about. However since I am beginning tomorrow an eight-day trip organized by two different banks to meet with and speak to their clients (full disclosure: since one of the meetings is in Bangkok I am sneaking out to Phuket for a couple of days to get in some beach time), I thought I would save that post for during my trip and talk about a few other interesting things.
First off, a lot of investors and government officals have recently been trudging to Beijing in spite of the heat and mugginess and seem to be eager to discuss the outlook for China. Perhaps because the press, and more importantly a lot of Chinese academics and think tank types, are beginning to worry much more in public about the medium term outlook, the conversations seem to be a lot more worried than they have in the past. On my upcoming trip I hope to get some more idea of what big investors are thinking, and if I am allowed to repeat their views, I will.
Next, I see that recent US GDP numbers are getting a mixed reception. Second quarter GDP contracted by an annualized 1.0%. That isn’t a good thing, of course, but it is much better than the 6.4% contraction in the first quarter, and also better than the 1.5% contraction that the market was expecting. According to an article in today’s Financial Times:
While the contraction was much smaller than in the previous three quarters and slightly better than economists had expected, the data showed that the government stimulus and a slowdown in imports had cushioned the drop.
Of course most analysts continue to be worried about, and debate, whether the US is better off slowing the stimulus, and so reducing debt while speeding up the needed adjustments at the cost of higher unemployment, or continuing pushing forward – a debate very similar to that taking place in China. Given my focus on China my main concern – no big surprise – was US consumption, which declined by more than GDP, which I expect to be a regular feature of the next few years.
Consumer spending, which represents about two-thirds of GDP and has traditionally been the engine of US growth, fell a much worse-than-expected 1.2 per cent as Americans continued to cut back in the face of rising unemployment and the falling value of their homes and investments.
In Japan, a country that I am spending more and more time learning about because of some worrying parallels between their 1980s and China’s current condition, the numbers continue to be very poor. Again the Financial Times today tells the story:
Wages in Japan suffered their sharpest drop in nearly two decades in June, fuelling concerns that the economy would remain under pressure from depressed consumer spending. Monthly wages, including overtime and bonuses dropped 7.1 per cent from a year earlier for the 13th decline in a row to Y430,620, according to the Labour Ministry. It was the steepest drop in wages since the government began compiling data in 1990.
Wages in China, on the other hand, seem to moving in a very different direction – no surprise, I think, given the extent of the stimulus package. Here is what Xinhua said on Wednesday:
Average wage per capita for Chinese urban employees grew 12.9 percent year on year to 14,638 yuan (about 2,149.78 U.S. dollars) in the first half of this year, said the National Bureau of Statistics Wednesday. The growth rate was 5.1 percentage points lower than that in the same period last year, the bureau said.
Even acknowledging all the distortions, and recognizing that this year’s growth rate in wages was much lower than last year’s (will this put pressure on consumption growth?), this still seems like a very healthy growth rate. Funnily enough however the numbers were questioned in, of all places, today’s People’s Daily. In their article they had this to say:
Banter and sarcasm erupted in the wake of a National Bureau of Statistics (NBS) report Wednesday saying the average pre-tax wage per capita for urban employees grew 12.9 percent, year-on-year, to 14,638 yuan (2,142.43 U.S. dollars) in the first half of this year.
The seemingly inspiring and encouraging news did not draw much applause, but a hail of criticism from the public, with many being skeptical of the figures’ credibility. The term: “I’ve been given a raise,” referring to the furor over the NBS’s statistics, has become increasingly popular among China’s mass of Internet users.
On the popular online forum tianya.cn, a commentary read, “The statistics released by the NBS are miraculous, as the increase managed to surpass the GDP growth of 7.9 percent registered in the second quarter against a backdrop of the global financial crisis.” However, the poster noted, most people’s pockets remain shallow.
…A poll on tom.com showed as many as 88 percent of 2,816 respondents believed it is reasonable to doubt the income rise announced by the NBS.
I was impressed by the fact that the article just reported the skepticism and didn’t make much more than a very half-hearted attempt to explain why the public is wrong to be skeptical. As an aside, in recent weeks it seems to me that there has been an increasingly heated, but not always on-the-record, debate about the conflicts and contradictions implied by official Chinese growth numbers and other indirect measures of growth – with Marc Faber last week giving an especially blunt assessment. I have been hearing from a lot of Chinese and foreign colleagues about challenges to the data, and although I am not smart enough to contribute much to this debate, I expect it to become more public – already there have been several articles in the Chinese press referring obliquely to disagreements about the data and defending the quality of the NBS statistics. Perhaps the People’s Daily is now leading the charge for prosecution?
Speaking of prosecution in the Chinese press, Caijing continues to feature a series of excellent articles questioning the impact of the stimulus package. I won’t summarize them all, but I found this article in this week’s issue, by Chen Changhua, interesting:
Through bank lending and money supply, liquidity has been ample in the market. However, nominal GDP growth lagged far behind the growth in lending and money supply, which could raise suspicion that a large portion of the funding has entered asset markets.
In the next one or two years, the global economy won’t be able to recover and, due to overcapacity, consumer price index (CPI) will not be able to rise sharply. Even if the central bank wants to tighten money supply then, various aspects of society won’t support it. It’s no longer a question of whether the central bank should rein in its loose monetary policy, but whether or not it will actually do it.
China’s fiscal and monetary policies in the past few years have placed growth before anything else. It is unlikely that the Chinese government will raise interest rates when economic recovery has not yet been secured.
Chen’s basic argument is that policymakers should be encouraging private enterprises to compete with SOE’s because when the “bubble implosion” occurs (he doesn’t seem to think that the “if” is worth pondering), China will be better served by the productivity-enhancing private sector:
How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990 slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises.
If it is difficult to avert a new round of asset bubbles, then opening domestic markets to private enterprises is a good option. In the past few years, state-owned enterprises have become larger and stronger while playing the role of the offense while private enterprises have been on defense. Maybe it’s just a hope of mine that private enterprises will muster their forces soon as well.
One of the big worries about the stimulus, of course, is that it is forcing a further concentration of credit and economic activity into the SOEs, who are among the least productive players in the Chinese economy – even when you don’t question whether or not their profits are real or simply a function of highly subsidized interest rates.
Meanwhile the debate about the duration of the fiscal stimulus rages on. On the one hand Andy Xie, former chief Asian economist for Morgan Stanley, and someone well plugged into Chinese policymaking circles, said in an interview with Bloomberg:
“The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” said Xie, now an independent economist, in a Bloomberg Television interview in Hong Kong today. “I think the property and stock markets will come under pressure probably around October time.”
China’s banking regulator said yesterday it plans to tighten rules on work capital loans, seeking to prevent misuse of funds. New loans in July may be less than 500 billion yuan, the Shanghai Securities News reported on its front page, without saying where it got its information.
It’s “undeniable” that a portion of this year’s new lending entered the nation’s stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, China’s parliament, said in June.
On the other hand Vice Premier Li Keqiang (a graduate of Peking University, I am proud to say) wrote recently in Qiushi, according to an article in today’s Bloomberg:
China will maintain its “proactive” fiscal and “moderately loose” monetary policies to help the economy recover from a slump, according to Vice Premier Li Keqiang. The foundations of the recovery aren’t yet solid enough, as evidenced by the continued slide in exports, lower corporate earnings, falling prices and industry overcapacity, Li wrote in the Aug. 1 issue of Qiushi, a twice-monthly Communist Party magazine.
The outlook for the global economy is still uncertain and recovery is being hampered by rising trade and investment protectionism around the world, Li wrote. There’s been no “fundamental change” to the dollar’s dominant position in the international financial system, though the trend of diversifying away from the greenback will continue, he added.
Finally, and on a separate point, like me Nouriel Roubini has been wondering about the impact of recent Chinese commodity stockpiling. According to an article in Reuters today he gave a speech in which he discussed the impact of future commodity prices. Among other things he said:
“In the short term there has been a massive stockpiling of commodities by China,” he said. “My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.”
I agree. I am pretty sure that a lot of recent purchases represent many quarters and even years of future demand, and so they are distorting the trade numbers by implying the country is importing more than current demand implies. By the way for those interested in my argument as to why China should not be stockpiling commodities quite so quickly, here is today’s version of my bi-weekly column for the South China Morning Post.
More debate about the validity of economic data
August 3rd, 2009 by Michael Pettis | Filed under Economic growth, Fiscal stimulus.
Some of the blog readers have noticed some weird goings-on with recent entries. From time to time an entry will pop up that seems totally inappropriate to current events.
Sorry. This is because the old host of my blog, when it was on a different site, is closing down, and I have been going through the time-consuming and boring task of trying to take as many entries as I can from the old site and posting them in the archives on this site. The repetitive nature of this process leads me sometimes to forget to post the original date of the entry, in which case it shows up as the current entry until I see the mistake and change it.
I am still planning to post the longish piece I wrote, on my view of what the SED discussions should have been about. However since I am beginning tomorrow an eight-day trip organized by two different banks to meet with and speak to their clients (full disclosure: since one of the meetings is in Bangkok I am sneaking out to Phuket for a couple of days to get in some beach time), I thought I would save that post for during my trip and talk about a few other interesting things.
First off, a lot of investors and government officals have recently been trudging to Beijing in spite of the heat and mugginess and seem to be eager to discuss the outlook for China. Perhaps because the press, and more importantly a lot of Chinese academics and think tank types, are beginning to worry much more in public about the medium term outlook, the conversations seem to be a lot more worried than they have in the past. On my upcoming trip I hope to get some more idea of what big investors are thinking, and if I am allowed to repeat their views, I will.
Next, I see that recent US GDP numbers are getting a mixed reception. Second quarter GDP contracted by an annualized 1.0%. That isn’t a good thing, of course, but it is much better than the 6.4% contraction in the first quarter, and also better than the 1.5% contraction that the market was expecting. According to an article in today’s Financial Times:
While the contraction was much smaller than in the previous three quarters and slightly better than economists had expected, the data showed that the government stimulus and a slowdown in imports had cushioned the drop.
Of course most analysts continue to be worried about, and debate, whether the US is better off slowing the stimulus, and so reducing debt while speeding up the needed adjustments at the cost of higher unemployment, or continuing pushing forward – a debate very similar to that taking place in China. Given my focus on China my main concern – no big surprise – was US consumption, which declined by more than GDP, which I expect to be a regular feature of the next few years.
Consumer spending, which represents about two-thirds of GDP and has traditionally been the engine of US growth, fell a much worse-than-expected 1.2 per cent as Americans continued to cut back in the face of rising unemployment and the falling value of their homes and investments.
In Japan, a country that I am spending more and more time learning about because of some worrying parallels between their 1980s and China’s current condition, the numbers continue to be very poor. Again the Financial Times today tells the story:
Wages in Japan suffered their sharpest drop in nearly two decades in June, fuelling concerns that the economy would remain under pressure from depressed consumer spending. Monthly wages, including overtime and bonuses dropped 7.1 per cent from a year earlier for the 13th decline in a row to Y430,620, according to the Labour Ministry. It was the steepest drop in wages since the government began compiling data in 1990.
Wages in China, on the other hand, seem to moving in a very different direction – no surprise, I think, given the extent of the stimulus package. Here is what Xinhua said on Wednesday:
Average wage per capita for Chinese urban employees grew 12.9 percent year on year to 14,638 yuan (about 2,149.78 U.S. dollars) in the first half of this year, said the National Bureau of Statistics Wednesday. The growth rate was 5.1 percentage points lower than that in the same period last year, the bureau said.
Even acknowledging all the distortions, and recognizing that this year’s growth rate in wages was much lower than last year’s (will this put pressure on consumption growth?), this still seems like a very healthy growth rate. Funnily enough however the numbers were questioned in, of all places, today’s People’s Daily. In their article they had this to say:
Banter and sarcasm erupted in the wake of a National Bureau of Statistics (NBS) report Wednesday saying the average pre-tax wage per capita for urban employees grew 12.9 percent, year-on-year, to 14,638 yuan (2,142.43 U.S. dollars) in the first half of this year.
The seemingly inspiring and encouraging news did not draw much applause, but a hail of criticism from the public, with many being skeptical of the figures’ credibility. The term: “I’ve been given a raise,” referring to the furor over the NBS’s statistics, has become increasingly popular among China’s mass of Internet users.
On the popular online forum tianya.cn, a commentary read, “The statistics released by the NBS are miraculous, as the increase managed to surpass the GDP growth of 7.9 percent registered in the second quarter against a backdrop of the global financial crisis.” However, the poster noted, most people’s pockets remain shallow.
…A poll on tom.com showed as many as 88 percent of 2,816 respondents believed it is reasonable to doubt the income rise announced by the NBS.
I was impressed by the fact that the article just reported the skepticism and didn’t make much more than a very half-hearted attempt to explain why the public is wrong to be skeptical. As an aside, in recent weeks it seems to me that there has been an increasingly heated, but not always on-the-record, debate about the conflicts and contradictions implied by official Chinese growth numbers and other indirect measures of growth – with Marc Faber last week giving an especially blunt assessment. I have been hearing from a lot of Chinese and foreign colleagues about challenges to the data, and although I am not smart enough to contribute much to this debate, I expect it to become more public – already there have been several articles in the Chinese press referring obliquely to disagreements about the data and defending the quality of the NBS statistics. Perhaps the People’s Daily is now leading the charge for prosecution?
Speaking of prosecution in the Chinese press, Caijing continues to feature a series of excellent articles questioning the impact of the stimulus package. I won’t summarize them all, but I found this article in this week’s issue, by Chen Changhua, interesting:
Through bank lending and money supply, liquidity has been ample in the market. However, nominal GDP growth lagged far behind the growth in lending and money supply, which could raise suspicion that a large portion of the funding has entered asset markets.
In the next one or two years, the global economy won’t be able to recover and, due to overcapacity, consumer price index (CPI) will not be able to rise sharply. Even if the central bank wants to tighten money supply then, various aspects of society won’t support it. It’s no longer a question of whether the central bank should rein in its loose monetary policy, but whether or not it will actually do it.
China’s fiscal and monetary policies in the past few years have placed growth before anything else. It is unlikely that the Chinese government will raise interest rates when economic recovery has not yet been secured.
Chen’s basic argument is that policymakers should be encouraging private enterprises to compete with SOE’s because when the “bubble implosion” occurs (he doesn’t seem to think that the “if” is worth pondering), China will be better served by the productivity-enhancing private sector:
How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990 slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises.
If it is difficult to avert a new round of asset bubbles, then opening domestic markets to private enterprises is a good option. In the past few years, state-owned enterprises have become larger and stronger while playing the role of the offense while private enterprises have been on defense. Maybe it’s just a hope of mine that private enterprises will muster their forces soon as well.
One of the big worries about the stimulus, of course, is that it is forcing a further concentration of credit and economic activity into the SOEs, who are among the least productive players in the Chinese economy – even when you don’t question whether or not their profits are real or simply a function of highly subsidized interest rates.
Meanwhile the debate about the duration of the fiscal stimulus rages on. On the one hand Andy Xie, former chief Asian economist for Morgan Stanley, and someone well plugged into Chinese policymaking circles, said in an interview with Bloomberg:
“The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” said Xie, now an independent economist, in a Bloomberg Television interview in Hong Kong today. “I think the property and stock markets will come under pressure probably around October time.”
China’s banking regulator said yesterday it plans to tighten rules on work capital loans, seeking to prevent misuse of funds. New loans in July may be less than 500 billion yuan, the Shanghai Securities News reported on its front page, without saying where it got its information.
It’s “undeniable” that a portion of this year’s new lending entered the nation’s stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, China’s parliament, said in June.
On the other hand Vice Premier Li Keqiang (a graduate of Peking University, I am proud to say) wrote recently in Qiushi, according to an article in today’s Bloomberg:
China will maintain its “proactive” fiscal and “moderately loose” monetary policies to help the economy recover from a slump, according to Vice Premier Li Keqiang. The foundations of the recovery aren’t yet solid enough, as evidenced by the continued slide in exports, lower corporate earnings, falling prices and industry overcapacity, Li wrote in the Aug. 1 issue of Qiushi, a twice-monthly Communist Party magazine.
The outlook for the global economy is still uncertain and recovery is being hampered by rising trade and investment protectionism around the world, Li wrote. There’s been no “fundamental change” to the dollar’s dominant position in the international financial system, though the trend of diversifying away from the greenback will continue, he added.
Finally, and on a separate point, like me Nouriel Roubini has been wondering about the impact of recent Chinese commodity stockpiling. According to an article in Reuters today he gave a speech in which he discussed the impact of future commodity prices. Among other things he said:
“In the short term there has been a massive stockpiling of commodities by China,” he said. “My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.”
I agree. I am pretty sure that a lot of recent purchases represent many quarters and even years of future demand, and so they are distorting the trade numbers by implying the country is importing more than current demand implies. By the way for those interested in my argument as to why China should not be stockpiling commodities quite so quickly, here is today’s version of my bi-weekly column for the South China Morning Post.
Creativity on demand or collision with culture,,
China courts its creative types in a massive way
It aims to repeat its manufacturing success by grouping artistic professions the way it did its factories.
By Jeremy Kutner | Correspondent of The Christian Science Monitor
from the August 2, 2009 edition
GUANGZHOU, CHINA - He Jiankiang is not a romantic. He doesn't pine for a lost China buried under skyscrapers. But when he heard that an old factory at the edge of town was being converted to office space for creative types, the architect leapt at the chance to move.
"In the past, there was nobody thinking about this kind of thing ... about what creative people need," Mr. He says from his balcony, overlooking old warehouses and machine rooms at the Yangcheng Evening News Creative Industry Zone in Guangzhou, southern China. "Nobody was thinking about what the future would be."
Spurred by the unlikely success of a factory-turned-art-space in Beijing called 798 and a desire to diversify the economy, cities across China are converting dozens of abandoned factories into art galleries, industrial-chic office space, and entertainment destinations. Many that aren't yet repurposing old industrial sites are drawing up plans – motivated by hope of profits or fear of criticism from higher-ups for failing to follow the latest trends in city development.
"China's investing heavily in the knowledge worker writ large, and this has become another part of that investment," says Eugenie Birch, chair of the University of Pennsylvania's Department of City and Regional Planning. "And when China does something, it does it at full force."
The 'creative industry' concept, born overseas in the mid-1990s, took hold here a few years ago, when government leaders began referringto it in speeches and planning documents.
Projects are springing up across China, from Shenzhen to Hangzhou to Chengdu. They aim to attract artists, architects, photographers, designers, and advertising firms – the core of what China has labeled "the creative industry." Beijing has more than 20 such districts, and Shanghai more than 70, though not all are factory conversions.
The Yangcheng project, conceived two years ago, is one of at least seven large-scale projects in Guangzhou under construction, with varying degrees of official support. They include a former plastics factory and a shipping warehouse. All offer cheap rent and cavernous workshops.
"We've been opening up our economy for so many years, and it's all been so fast, but it's reached a level where we need to change our development strategy," says a spokeswoman for one of the city's larger creative industry zone projects, who cited company policy against speaking with foreign media in requesting anonymity. "The whole economy has to change to develop this higher-level work."
The fast, large-scale way factory creative space has taken off is a very Chinese phenomenon, says Michael Keane, an associate professor at the Queensland University of Technology in Brisbane, Australia. Planners here have long grouped businesses by industrial types.
"The way the Chinese see it, creativity is just like every other industry, so you put everyone in clusters and try to aggregate their capabilities," he says. "They want to have creativity in a box, but a lot of creativity requires out-of-the-box thinking."
The iconic project that showed what disused factory space could achieve, 798, grew from a cheap outpost for artists into a major tourist spot earlier this decade. As its popularity soared, its grass-roots nature changed, and it is this second, commercially minded stage that planners hope to replicate.
Though some say that will drive up prices and stifle creativity, those things aren't inevitable, says Li Xiangqun, an art professor at Beijing's Tsinghua University and a sculptor who has offices at 798. The financial desires of real estate developers don't prevent artists from doing good work, he says.
Yet in Guangzhou, the massive focus on creative industry projects has already begun to foster sameness. Lots of simultaneous construction means developers must compete to attract creative firms.
Chen Zhiyan, a commercial art gallery owner who recently moved into the Xinyi International Club, a converted plant on the banks of the Pearl River, says poaching has already begun. A close friend of his is building his own creative industry zone up the road and is looking for tenants.
While such zones threaten to put profit above creative output, the overall effect is good, says Professor Keane. "This is about modernization and modernity, image building," he says. "It's a positive force, the ideas that come with the whole project can open people's minds" – and encourage policymakers to think more creatively about urban development.
As for He, the architect, he says life is going well. His new digs suit his quirky staff, and he's been contracted to consult on two new creative industrial zones being built. And if this experiment doesn't work out, he'll just move somewhere else.
"Three years from now, will this place exist? No one knows," he says. "But the thing about change in China is, we're used to it."
It aims to repeat its manufacturing success by grouping artistic professions the way it did its factories.
By Jeremy Kutner | Correspondent of The Christian Science Monitor
from the August 2, 2009 edition
GUANGZHOU, CHINA - He Jiankiang is not a romantic. He doesn't pine for a lost China buried under skyscrapers. But when he heard that an old factory at the edge of town was being converted to office space for creative types, the architect leapt at the chance to move.
"In the past, there was nobody thinking about this kind of thing ... about what creative people need," Mr. He says from his balcony, overlooking old warehouses and machine rooms at the Yangcheng Evening News Creative Industry Zone in Guangzhou, southern China. "Nobody was thinking about what the future would be."
Spurred by the unlikely success of a factory-turned-art-space in Beijing called 798 and a desire to diversify the economy, cities across China are converting dozens of abandoned factories into art galleries, industrial-chic office space, and entertainment destinations. Many that aren't yet repurposing old industrial sites are drawing up plans – motivated by hope of profits or fear of criticism from higher-ups for failing to follow the latest trends in city development.
"China's investing heavily in the knowledge worker writ large, and this has become another part of that investment," says Eugenie Birch, chair of the University of Pennsylvania's Department of City and Regional Planning. "And when China does something, it does it at full force."
The 'creative industry' concept, born overseas in the mid-1990s, took hold here a few years ago, when government leaders began referringto it in speeches and planning documents.
Projects are springing up across China, from Shenzhen to Hangzhou to Chengdu. They aim to attract artists, architects, photographers, designers, and advertising firms – the core of what China has labeled "the creative industry." Beijing has more than 20 such districts, and Shanghai more than 70, though not all are factory conversions.
The Yangcheng project, conceived two years ago, is one of at least seven large-scale projects in Guangzhou under construction, with varying degrees of official support. They include a former plastics factory and a shipping warehouse. All offer cheap rent and cavernous workshops.
"We've been opening up our economy for so many years, and it's all been so fast, but it's reached a level where we need to change our development strategy," says a spokeswoman for one of the city's larger creative industry zone projects, who cited company policy against speaking with foreign media in requesting anonymity. "The whole economy has to change to develop this higher-level work."
The fast, large-scale way factory creative space has taken off is a very Chinese phenomenon, says Michael Keane, an associate professor at the Queensland University of Technology in Brisbane, Australia. Planners here have long grouped businesses by industrial types.
"The way the Chinese see it, creativity is just like every other industry, so you put everyone in clusters and try to aggregate their capabilities," he says. "They want to have creativity in a box, but a lot of creativity requires out-of-the-box thinking."
The iconic project that showed what disused factory space could achieve, 798, grew from a cheap outpost for artists into a major tourist spot earlier this decade. As its popularity soared, its grass-roots nature changed, and it is this second, commercially minded stage that planners hope to replicate.
Though some say that will drive up prices and stifle creativity, those things aren't inevitable, says Li Xiangqun, an art professor at Beijing's Tsinghua University and a sculptor who has offices at 798. The financial desires of real estate developers don't prevent artists from doing good work, he says.
Yet in Guangzhou, the massive focus on creative industry projects has already begun to foster sameness. Lots of simultaneous construction means developers must compete to attract creative firms.
Chen Zhiyan, a commercial art gallery owner who recently moved into the Xinyi International Club, a converted plant on the banks of the Pearl River, says poaching has already begun. A close friend of his is building his own creative industry zone up the road and is looking for tenants.
While such zones threaten to put profit above creative output, the overall effect is good, says Professor Keane. "This is about modernization and modernity, image building," he says. "It's a positive force, the ideas that come with the whole project can open people's minds" – and encourage policymakers to think more creatively about urban development.
As for He, the architect, he says life is going well. His new digs suit his quirky staff, and he's been contracted to consult on two new creative industrial zones being built. And if this experiment doesn't work out, he'll just move somewhere else.
"Three years from now, will this place exist? No one knows," he says. "But the thing about change in China is, we're used to it."
2 August 2009
Gold Techs, Kapoom Theory....
But this is no more than an argument that the U.S. is not likely to experience a replica of an Argentina 2001 debt and currency crisis, and of course that is true. But that does not mean that a related, equally unseemly but fundamentally different catastrophic result may follow from similar causes and crisis triggers. Evidence abounds that the U.S. is trapped in a cycle of economic contraction and declining creditworthiness from which an Argentine style default with U.S. characteristics is all but inevitable.
Here we take a deep dive into the macro economics of the Argentine crisis—GDP growth, consumption, investment, inflation, industrial production, unemployment and a dozen other details of the Argentine economy in the period before it collapsed at the end of 2001. We compare the same macro economic measures during the U.S. economic crisis that started in 2008.
A few items, such as currency reserves, stand out in ways that show how different the U.S. situation is now from Argentina’s then, but most of the macro economic comparisons reveal astonishing similarities, especially measures of output and inflation.
http://www.itulip.com/forums/showthread.php?p=106493#post106493
GOLD
LONG TERM
The long term P&F chart is still in a bullish phase but it has now set a new upper support at the $915 level. A move to $900 would break below the support and two previous lows as well as an up trend line for a trend reversal signal. Just something to keep in the back of one’s mind if the price should start to drop.
As for our normal chart and indicator analysis, things are still a-okay for now. The price of gold remains above its positive sloping moving average line and the long term momentum indicator (daily version) remains in its positive zone above its positive trigger line. The volume indicator is at its highest point since its highs in late February and is above its long term positive trigger line. Nothing here yet to get worried from the long term standpoint. The rating remains BULLISH.
INTERMEDIATE TERM
Since the end of January the price of gold has been basically in a wide lateral drift with the upper and lower barriers at about the $1000 and $870 levels. I guess as long as it remains in this box, with the right wall continually moving further to the right, it would be hard to really guess which way the eventual direction of future trend will be.
While in this box the intermediate term moving average line will move in a basically lateral direction and the price of gold will continue to fluctuate above and below the moving average line. This makes it very difficult to definitively gauge the influence a crossing of the moving average line by the price will have. So, although I will continue with my normal commentary as to the positive or negative nature of the price versus its intermediate term moving average line one should keep in mind this box situation. An intermediate term trend will most likely start inside the box but its confirmation must await a move outside the box.
Having given myself the cop-out excuse in case my analysis is wrong, let’s go to the intermediate term analysis.
The price of gold has once more moved above its moving average line and the line slope is once more in the positive direction. The momentum indicator has set up a strong support just above the 48% level. This would be a level to watch (instead of the 50% level) for a real change in strength of the price move. In the mean time the momentum continues in its positive zone above its positive trending trigger line. The volume indicator is also trending positively and remains above its positive sloping trigger line. All normal indicators give me an intermediate term rating as BULLISH, at this time.
SHORT TERM
From the short term perspective we are still in good shape. The price remains above its positive trending moving average line and the momentum indicator remains in its positive zone just above its positive trigger line. As for the daily volume action, well that could be a little better but I wouldn’t complain yet. All in all, the short term rating is BULLISH.
As for the immediate direction of least resistance, that’s another story. We have the price above its very short term positive moving average line (8 DMAw) while the line remains above the short term line. However, if one looks carefully the moving average line has started its turn towards the negative (although it’s not there yet) in keeping with the lateral move of the price over the past few days. Of greater concern is the action of the more aggressive Stochastic Oscillator. It had topped out in its overbought zone and has now dropped below the overbought line and its trigger line. It is now heading lower. This is too often a precursor to a turn down in the price, at least for a short while. So, I must go with the down side as the direction of least resistance until something in the indicators changes.
SILVER
First, a quick comment on my P&F chart of silver. It has set up a strong support at the $12.00 level. A move to $11.50 would break that support and would break below an up trend line. From a P&F standpoint this is the level to watch. Until then silver remains long term bullish, P&F wise.
Silver still has a better performance versus gold over the intermediate and long term but is losing its advantage. Although this past week it performed better than gold it still has some catching up to do from the shorter term standpoint. A comparison of the two short term charts here shows that silver dropped more than gold in June and although it is recovering nicely these past two weeks it is a catch-up game and still better performance is required.
From a long term perspective silver had dropped below its moving average for a couple of weeks in early July but is back above the moving average. The average continues to slope upwards. The momentum indicator also dropped into its negative zone at the same time but is also back into the positive, above its positive trigger line. For the long term the rating is back into a BULLISH rating.
The intermediate term is not quite so lucky. Although the momentum indicator has moved back into its positive zone and above its positive trigger line the price of silver remains just below its intermediate term moving average line. The line itself is still in a negative slope. The volume indicator has been moving in a basic lateral direction over the past couple of months although it is presently above its positive sloping trigger line. On the intermediate term the best I can give the rating is a – NEUTRAL rating. Next week, should the price of silver advance again most likely this rating will go full bullish. But we’ll have to wait for it.
The short term is more encouraging. It often tells us what’s ahead for the other time periods. The price is above its moving average line and the line is sloping upwards. The very short term moving average line remains above the short term line for a direction confirmation. The momentum indicator is in its positive zone above its positive trigger line and heading higher. Only the daily volume activity could be a whole lot better. The recent two week advance in price was not accompanied by any significant increase in volume activity, in fact the daily volume seemed to have dried up. This is a real concern for the longevity of this rally. In the mean time the short term rating is BULLISH.
http://www.kitco.com/ind/burak/jul272009.html
Each major bear market in the D. J. I. A. has been accompanied by a bull market in gold and gold shares. The first two major bear markets in the D. J. I. A. did not end until the bottom green area was violated. The third and current major bear market has not yet gone below the bottom green area. This is powerful evidence that the bear market may not be complete but is ongoing.
Based on the previous bull markets in gold and gold shares the current gold bull market will not end until after the bear market in the D. J. I. A. ends.
http://www.kitco.com/ind/rosen/jul272009.html
Here we take a deep dive into the macro economics of the Argentine crisis—GDP growth, consumption, investment, inflation, industrial production, unemployment and a dozen other details of the Argentine economy in the period before it collapsed at the end of 2001. We compare the same macro economic measures during the U.S. economic crisis that started in 2008.
A few items, such as currency reserves, stand out in ways that show how different the U.S. situation is now from Argentina’s then, but most of the macro economic comparisons reveal astonishing similarities, especially measures of output and inflation.
http://www.itulip.com/forums/showthread.php?p=106493#post106493
GOLD
LONG TERM
The long term P&F chart is still in a bullish phase but it has now set a new upper support at the $915 level. A move to $900 would break below the support and two previous lows as well as an up trend line for a trend reversal signal. Just something to keep in the back of one’s mind if the price should start to drop.
As for our normal chart and indicator analysis, things are still a-okay for now. The price of gold remains above its positive sloping moving average line and the long term momentum indicator (daily version) remains in its positive zone above its positive trigger line. The volume indicator is at its highest point since its highs in late February and is above its long term positive trigger line. Nothing here yet to get worried from the long term standpoint. The rating remains BULLISH.
INTERMEDIATE TERM
Since the end of January the price of gold has been basically in a wide lateral drift with the upper and lower barriers at about the $1000 and $870 levels. I guess as long as it remains in this box, with the right wall continually moving further to the right, it would be hard to really guess which way the eventual direction of future trend will be.
While in this box the intermediate term moving average line will move in a basically lateral direction and the price of gold will continue to fluctuate above and below the moving average line. This makes it very difficult to definitively gauge the influence a crossing of the moving average line by the price will have. So, although I will continue with my normal commentary as to the positive or negative nature of the price versus its intermediate term moving average line one should keep in mind this box situation. An intermediate term trend will most likely start inside the box but its confirmation must await a move outside the box.
Having given myself the cop-out excuse in case my analysis is wrong, let’s go to the intermediate term analysis.
The price of gold has once more moved above its moving average line and the line slope is once more in the positive direction. The momentum indicator has set up a strong support just above the 48% level. This would be a level to watch (instead of the 50% level) for a real change in strength of the price move. In the mean time the momentum continues in its positive zone above its positive trending trigger line. The volume indicator is also trending positively and remains above its positive sloping trigger line. All normal indicators give me an intermediate term rating as BULLISH, at this time.
SHORT TERM
From the short term perspective we are still in good shape. The price remains above its positive trending moving average line and the momentum indicator remains in its positive zone just above its positive trigger line. As for the daily volume action, well that could be a little better but I wouldn’t complain yet. All in all, the short term rating is BULLISH.
As for the immediate direction of least resistance, that’s another story. We have the price above its very short term positive moving average line (8 DMAw) while the line remains above the short term line. However, if one looks carefully the moving average line has started its turn towards the negative (although it’s not there yet) in keeping with the lateral move of the price over the past few days. Of greater concern is the action of the more aggressive Stochastic Oscillator. It had topped out in its overbought zone and has now dropped below the overbought line and its trigger line. It is now heading lower. This is too often a precursor to a turn down in the price, at least for a short while. So, I must go with the down side as the direction of least resistance until something in the indicators changes.
SILVER
First, a quick comment on my P&F chart of silver. It has set up a strong support at the $12.00 level. A move to $11.50 would break that support and would break below an up trend line. From a P&F standpoint this is the level to watch. Until then silver remains long term bullish, P&F wise.
Silver still has a better performance versus gold over the intermediate and long term but is losing its advantage. Although this past week it performed better than gold it still has some catching up to do from the shorter term standpoint. A comparison of the two short term charts here shows that silver dropped more than gold in June and although it is recovering nicely these past two weeks it is a catch-up game and still better performance is required.
From a long term perspective silver had dropped below its moving average for a couple of weeks in early July but is back above the moving average. The average continues to slope upwards. The momentum indicator also dropped into its negative zone at the same time but is also back into the positive, above its positive trigger line. For the long term the rating is back into a BULLISH rating.
The intermediate term is not quite so lucky. Although the momentum indicator has moved back into its positive zone and above its positive trigger line the price of silver remains just below its intermediate term moving average line. The line itself is still in a negative slope. The volume indicator has been moving in a basic lateral direction over the past couple of months although it is presently above its positive sloping trigger line. On the intermediate term the best I can give the rating is a – NEUTRAL rating. Next week, should the price of silver advance again most likely this rating will go full bullish. But we’ll have to wait for it.
The short term is more encouraging. It often tells us what’s ahead for the other time periods. The price is above its moving average line and the line is sloping upwards. The very short term moving average line remains above the short term line for a direction confirmation. The momentum indicator is in its positive zone above its positive trigger line and heading higher. Only the daily volume activity could be a whole lot better. The recent two week advance in price was not accompanied by any significant increase in volume activity, in fact the daily volume seemed to have dried up. This is a real concern for the longevity of this rally. In the mean time the short term rating is BULLISH.
http://www.kitco.com/ind/burak/jul272009.html
Each major bear market in the D. J. I. A. has been accompanied by a bull market in gold and gold shares. The first two major bear markets in the D. J. I. A. did not end until the bottom green area was violated. The third and current major bear market has not yet gone below the bottom green area. This is powerful evidence that the bear market may not be complete but is ongoing.
Based on the previous bull markets in gold and gold shares the current gold bull market will not end until after the bear market in the D. J. I. A. ends.
http://www.kitco.com/ind/rosen/jul272009.html
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