Financial bubble - who will say that the emperor is naked?

This post is not directly about energy, but it is about one of the other big imbalances of our times - the giant financial bubble that has been inflating for the past few years, on the heels of the prevous bubble, the now-infamous dotcom bubble. It is about how society can be blind to trends that are obvious to many - including amongst those that are in a position to act and should know better than to do nothing.

I'm on record saying (repeatedly) that we have a huge, unsustainable asset price bubble, and that banks are doing insane things right now. And those of you that have read me previously may remember my quip that a good banker is not one who is right, it is one who is wrong at the same time as the other bankers (and thus bankers right now have no incentive not to participate to the increasingly aggressive deals one can see around).

The scariest thing is that a large number of senior bankers are aware of what I'm saying, are on the same line - and are doing nothing about it.

A headache awaits when the credit party fizzles out

A few days ago in London, a senior banker made a striking admission to me: in his long career, he had almost never seen such bubble-like conditions in the credit markets as exist now. “Perhaps back in the 1980s – just before the collapse,” he muttered, with a despairing chuckle, over an elegant (and expensive) lunch.

That is alarming stuff. But worse is to follow: this very same banker makes a living by arranging loans and bonds to risky companies – and he freely admits there is little chance that his institution is about to switch off this financial tap.

Other senior financiers are privately echoing these concerns, sometimes even more forcefully. But right now, nobody appears ready to take away the punchbowl from the credit party. On the contrary, as Mr Bolton noted, the standards used to lend money to the private equity world are becoming weaker by the day, as new innovations keep appearing such as “cov-lite” loans (instruments on which the normal covenants protecting investors have been stripped away).

Why? One factor is what the Bank of England coyly calls “strong incentives [at banks] to match performance by competitors” – perhaps better described as “the banking rat race”. When times are good, bankers make large bonuses by arranging deals. But they rarely get paid for pulling them. While some financiers and investors have tried to argue that credit conditions looked over-exuberant in recent years, the credit cycle has stubbornly refused to turn. As a result, most bankers are now terrified of refusing deals, particularly at a time when the European economy is picking up. *No one gets rewarded for taking the risk of crying wolf – yet again*.

As one of those that have been crying wolf - repeatedly over the past 2 years and more - and getting mocked for it, and at the same time being a participant (1, 2) in the "rat race" (or arms race, really), let me give a few thoughts on this.

:: ::

The hard truth is that banks need to earn money, and thus they do the deals that are in line with then current market practices, however unpalatable these might be. And the rationale is thus that 'others are doing it, so we have to (and it's okay, then)'. And bankers will of course push for deals as their personal income is directly linked to doing deals.

And thus the only way this ends is when some deals actually hit the rocks and bring about some real pain for the financial markets - at which point, those bankers aware of the context will finally have an excuse to pull out, thus triggering a stampede out, and generating more 'credit events' as more companies suddenly become unable to refinance.

Because the dirty secret of today's financial world is that it is, just like a poor household trying to buy an overpriced home on an interest-only, resettable ARM loan, hoping that prices will keep on rising to make the transaction affordable. Loans in a number of markets today are made on the basis of no principal repayment, and available cash used to pay interest only; investors are allowed to take money out upfront and will have very little incentive to stay in the project if it turns bad (leaving the lenders holding the bag); and full payment of the loans in the absence of a refinancing would require quite heroic operational performance, and benign market conditions, for a number of years. 'Foreclosures' (defaults) will happen, and they will have the same effect as in the housing market: generate more need for lender support precisely at the time when lenders will decide thay can no longer afford to.

And the big characteristic of today's bubble, i.e. that risk is spread around, will come back to bite those that took advantage of it: bank loans are not always the most attractive products, in terms of pricing, but they have one great quality in hard times: there is only one person to talk to (the banker), and in most circumstances, banks are able - and have an interest - to take a longer view and organise a resturcturing. If the underlying business is not losing money, a bank will often find it more reasonable to help it survive than to pull the plug. Financial investors, especially multiple and diverse ones, will not behave like this - they will simply sell their 'paper' to those, like vulture funds, that thrive on squeezing just a bit of money from any business (just as long as it's more than what they paid for the paper). They will not care about survival of businesses and full repayment, just about extracting enough cash.

Thus banks that have taken extravagant risks and passed them on to investors will find themselves in the worst of worlds - they will still be nominally responsible for the loans going bad, but will have no power to solve them as they have passed on the relevant rights to outsiders (who will likely sue them while looking for any short term out).

Of course, today's investment bankers, having cashed in their big bonuses, will either be simply fired (but keep their money) or get more money to try to untangle the messes they created in the first place.

:: ::

It's a bit hard to write very specifically about my role in all this and not betray any secrets, but let's say that, while we see the very same pressures for aggressive deals, I am not yet too worried about the transactions I've worked on for a number of reasons set below. Remember that I work in project finance, which is seen as a relatively stodgy bit of investment banking - it's hard to make a quick buck with deals that take from 6 months to several years, the resulting asset is usually not tradeable on a market and thus not very 'sexy', and you actually need to delve deep in commercial and financial legal documents, and generally spend a lot of time in (yuck) due diligence processes to fulfill the standard requirements of the banks. Even our little corner of the banking world has been submerged by the maelstrom of liquidity unleashed since 2001 by the main central banks; financing terms have become increasingly aggressive, bank protections, and their remuneration, have gone steadily worse; underlying commercial hypotheses have become more and more optimistic. That means, for instance, longer loans, more price risk (for instance, instead of having a long term contract with a fixed price, your project sells on the market, with increasingly optimistic price assumptions) and less headroom should anything go wrong. Now, that said, here's what I see on my side of that business (energy):

- I'm working mostly in renewable energy. As these are investment-heavy projects, once they are built, they generate money whatever else happens - so there will be a financial incentive (in addition ot the obvious ones linked to global warming and energy independence) to keep them operating, and they will still generate funds which can be used to pay debt (their main cost to bear, as there is no fuel cost, and only a little maintenance), however slowly;

- being a market leader, we've chosen to take new technical risks (like offshore wind or solar projects) rather than fight it out with latecoming banks and investors in sectors that are becoming well-trodden (i.e. ferociously competitive on the lending side), like onshore wind;

- in addition, the likelihood of energy prices going down, even in the case of a pretty strong recession, is pretty weak. Electricity will still be needed, and its price will remain set by "low cost" producers like nuclear and carbon, the same as today; with wind power fully competitive with these when taking into account support mechanisms (and sometimes even without them) and before any carbon pricing is included, prices are likely to provide for sufficient income to repay debt within reasonablt time periods even in the worst scenarios;

- project finance is also a sector where there hasn't been a lot of repackaging of debt into fancy financial instruments. So if anything goes wrong, I'll be the one in charge of dealing with the outcome - together wil a small number or similarly-minded and experienced bankers. I already did that in 1998 with the Russian financial crisis (and nursed my deals then to full repayment) and expect that it could be done here again, with sound fundamentals underpinning (I'll tell you what 'sound fundamentals' I saw in Russia in 1998 on another occasion...). It is actually one of the strengths of the financial techniques we use that the projects are precisely more resilient in times of crises - it's their main selling point, and it is what makes us a kind of backwater in highrolling times (because it's an expensive strength), but some clients still value that - or simply don't have the choice. As in offshore wind finance, out thoroughness allows us to be the first to finance new classes of (industrial) assets.

But pain in other sectors will make the banks shy and will have indirect repercussions everywhere anyway.

This may sound a bit self-serving, but I can tell you that it is an appreciable luxury to have a job in finance that does not require for consumers to increase their spending (and their driving) by 2% per year for the next 15-30 years to still exist in a few years' time, and it is even better to be able to have a job whose purpose and actual results are not in direct contradiction with the lessons read here on a daily basis. But being deep in the banking world, it means that I also see what's happening there, and identify all the hidden assumptions (the biggerst being permanent growth) that underpin so much of our world today, driven by high finance, and do little else but watch in morbid fascination, and warn those that will listen, as the crash approaches

Nice essay, Jerome, but I'm so tired of waiting for this impending implosion.

I've made plans to come over to Paris in October ... unless of course, economic armageddon happens first.

Don in Colorado said,

"I'm so tired of waiting for this impending implosion."

What a great sentence!

I don't know how long you've been waiting, but some of us have been waiting since the 1970's....gas lines, hyper inflation, double digit interest rates and unemployment...of course, the era of "growth" was over, the book "Limits Of Growth" was written then, so was Treasury Secretary William Simmons book "A Time For Truth" that said if the U.S. ever went more than 1 trillion in the red, that was pretty much the end of the nation....

Of course, many who kept waiting for the "impending implosion" missed out on the biggest personal wealth building era in world history. And I have to love those who say, "well it's all fiat money, not the REAL thing". These folks are living in giant homes (REAL), on dozens of acres of paid for land (REAL), with big luxury cars (REAL), and their kids are by now graduated from REAL colleges and making nice incomes....., they have spent their lives eating REAL food at nice restuarants, going to REAL vacation spots, wearing REAL clothes and jewelry.....what wasn't REAL about it?

Oh, fuel costs....I'll give an example...I know a guy who just bought a big sport ute (I tried to talk him into one of the Diesel Benzes, but he said, "I'm not listening to that racket...(referring not to me, but to the Diesel engine clatter! :-) When I pressed him on the issue of fuel costs, he said, "let it go up, I can pay for the gas out of my energy investment dividends alone...."

I recently heard one of the "coming doom" debunkers say he didn't have time for it, he was going to enjoy life....the person speaking to him said, "but just you wait", to which he replied, "NO, you wait, I'll live.."

Remember, we are only one cubic mile from freedom

You know, you don't have to wait any longer for the disaster, you are allready right in it. You have to grasp the larger picture. Your rich friend, he eats supermarket-food, so even when he choses only the alleged healthy stuff (fruits and vegetables), he gets a lot less for his health as twenty or thirty years ago, because it is all produced industrially and so the healthy things (vitamins etc...) in it are almost gone (REAL).

He works in a hyper-clean office and therefore has all kinds of allergies (REAL).

To displace himself, he uses his nice climatised car instead of walking or cycling, he doesn't know the weather, he doesn't meet someone accidentally, he gets fat (REAL).

To not get fat, he works out in a fittnes-club and pays 50€ a month (REAL).

In fact, he lives a complete sterile life. He follows the fashion and the offers he sees in the advertisement at 20:00, just when he comes home, he eats what they tell him, he wears what they tell him, he looks how they tell him, his girlfriend also, his flat or house, his insurrances, his „friends“, his opinion about everything, even his freetime, where he is supposed to be free, is stuffed to fulfill the wishes of the system. He is a slave to this system, that he is so happy that it functions so great. This is all REAL.

Your friend doesn't live while you wait, he is desperate (REAL) while you live, because you know what is going on (you read the oildrum), you can decide, he doesn't have a choice, until he in turn begins to wait, as he calls it.

Interesting isn't it those of us who considered disaster the last 20 or 30 years probably have a better life than the players? Better prepared, less hubris, more time.

"I'm so tired of waiting for this impending implosion."

That pretty much sums up the problem. If a event doesn't happen in the time frame humans are concerned about, they assume it will not ever happen.

Jared Diamond described it best in his book “Collapse” as “creeping normalcy.” Then one day, the last whatever is used up.

Nice essay, Jerome, but I'm so tired of waiting for this impending implosion.

That pretty much sums up my opinion. In the early nineties there were a lot of books which predicted imminent collapse of the US economy and Japan was supposed to become the next superpower. Anyone remember books with names like "Bankruptcy 1995", "The Great Reckoning" and "Blood in the Streets"? And Robert Prechter has been calling for the Grand Supercycle Great Depression since at least 1995. And in 2002 market seers like Martin Weiss were predicting that the Dow Jones Indistrial Average was going to plunge by 1000 points any day now.....

On any given day there are a lot of people predicting the next great depression or the stock market collapse. On rare occassions they are right. I have arrived at the conclusion that no one can predict the financial markets with any degree of certainty.

You know, when the doomsters made their predictions in the 70s, they were writing about 70 years of oil left - we're still pretty much in that time frame, except that we've wasted 20 years in the last 30 in a senseless last splurge. It has indeed lasted a lot longer than pretty much everybody expected (but so did the dotcom bubble, if you remember that time. I was also one of the bears then, and I was long mocked), but it will come to an end - and in fact, the longer it goes, the more painful it will end.

Look at this and tell me it will not end in tears:

I agree that it will come to an end. But my point is that no one knows when. Take it from someone who has lost a lot of money on put options.

But my point is that no one knows when.

Correction: no one knows exactly when. But we know it ain't gonna be ten years from now, and it almost certainly won't be five, and it is very unlikely to be three, and it's unlikely to be two, and it may not be even one, and it just could be very soon, and there's a chance it could be very, very soon.

Credentials? I've been predicting the coming collapse since 1959. A lesser person would have lost all self-confidence.

"Credentials? I've been predicting the coming collapse since 1959. A lesser person would have lost all self-confidence."

Dave, you think your good, I've predicted 6 of the last 4 recessions!
That's 150% accuracy! Well, by my math anyway....:-)

Remember, we are only one cubic mile from freedom

One blog I'd like to recommend to both you and Jerome is interfluidity, the weblog of Steve Randy Waldman. It seems to me he is among the most pessimistic of the really good econ-bloggers (leaving out Jerome for a moment!) He's written a lot of insightful articles on shorting, and troubles with our current market mechanisms, derivative markets in particular.

Here's one he wrote on the ethics of shorting:

Look at this and tell me it will not end in tears:

Jerome, in the financial world nothing is obvious. If you think otherwise you are going to lose a lot of money.

Five years ago, OPECs stated goal was to maintain the price of oil between $22-$28 per barrel. People thought that oil at $35 per barrel was a calamity. Here we are at $70 per barrel and the global economy is doing fine. Yeah I know that Senegal and Nepal are beginning to have problems, but most people thought that even the economies of developed world would take a big hit above $40/barrel.

So what prediction would you have made for the financial markets if you knew in 2002 that the price of oil was going to be around $70 per barrel in 2007?

We all know that debt cannot grow forever and oil will not last forever, but no one can use that to time the collapse of financial markets. It could last a lot longer than most people here imagine.

Hi Suyog,

Thanks and

re: "It could last a lot longer than most people here imagine."

I'm you see any possibilities for anything other than collapse?

If so, could you share?

Major financial bubbles are like VLCC's they take a while to get going in one direction and then they take a while to get turned around. If October 2005 was the peak in the real estate finance bubble (the biggest of them all), we just finished the first year of gradual decline and are ready for the first serious downleg. Compare the stock market in 2000 where it more or less treaded water for a year before making the first plunge in April 2001.

It is interesting to compare the 1929 crash. It was such a gradual thing. There was a great sucker rally in 1930 as people refused to accept that the implosion was occurring. Inflation will further mask the crash this time around. The best comparison is the Great Disorder in Germany in the early 20's. It was a great time to be leveraged in stocks.

Gas is $3.50, homes are impossible to sell. The stock market is booming. Few realize that the implosion is actually well underway already.

Houses are possible to sell. I just sold mine, for a gain of 3% (which is not much of course, bought it in 2002).

Ah, but if you had recently refinanced it and spent the extra cash on that shiny new Ford Excursion you've been flauting in front of your neighbors, you'd probably be in the hole by about 10% and up feces creek lacking propulsion apparatus while looking at further declines. Much harder to sell when it's a losing proposition and you can't cover the difference.

I'm not sure how it is in other parts of the world, but here in Los Angeles the roads are full of new, shiny 12 mpg SUV's. The drivers: ordinary folk making a middle class income that simply does not support such extravagance.

People here literally believe they have been given a free $300,000 (the rise in price of the median home in '01 to '05) to spend as they wish and now they are getting the SUV they never could afford in the 80's and 90's. Never before in history have so many ordinary people been given eight year's salary tax free, but maybe this time it really is different : )

A cashout refi paid for the vehicle and the $400 monthly gas bill is what a car payment used to be, so see, it is affordable.

Of course, the home prices will adjust in real terms over time and that gas bill will jump to $800 and even $1200 per month. Resources that could be used to purchase plug-in hybrids that could get us through the nightmare ahead are being devoted to vehicles that will be obsolete within a few years. It is a foolishness so extraordinary that one is baffled and amazed. And yet given the information available to them, people are not making irrational choices. Plumbers are not financial historians, nor are they geologists. History is full of follies like this and why should it be any different this time?

Home sales are at a 13 year low and a large share of those are forecosure sales. Yet people still think of their homes as being worth the 2005 peak price, and they are spending money (and planning for future expenditures including energy) as if they had $200,000 "in the bank." When that money disappears and America is forced to purchase its oil with "hard currency" it will be a very, very rude awakening indeed.

is that figure inflation adjusted? - 3% in 4 years isn't that much.

>Nice essay, Jerome, but I'm so tired of waiting for this impending implosion.

You're nuts if you want this to happen. When a global finance crisis begins its going to affect billions of people. Violence, Poverty, Drug abuse will all rise.

The German Hyperinflation of 1923 and Parallels with the US Monetary Policy

Could the current administration be trying to crash the currency? A Weimar type hyperinflation would:

Eliminate the Middle Class

Concentrate Wealth even more at the top

'Reset' the economy by wiping out debt

Soften the public up towards an even more repressive Govt that will take 'drastic measures' to 'handle the crisis'

It occured to me while I was reading an article about using famine as a weapon

Thanks Jerome for alerting what could be the most terrific event in the near future. I'm a complete newbie in economics (I'm actually an astrophysicist), and I can hardly catch half of what you're describing. But from the distant star point of view, it looks much like how earthquakes work : the stress is slowly accumulating without any visible consequence, and an enormous amount of energy is suddenly released.

So it seems to me that the most probable consequence of PO will be economical before being energetical : the required demand destruction will not be a consequence of a voluntary reduction of individual consumption, just because most people would happily stop buying SUV, insulate their houses, eat organic vegetables, or cover their roofs with solar panel. It will be most probably insured by a wave of poverty following the economicl tsunami you're predicting. The most efficient way of reducing global consumption has always been an economic crash, because poverty is by far the most efficient way of cutting off individual consumption.

Looking at what happened in Russia, it is rather easy to predict the risk of a formation of a ultra-rich, mafious class controlling the natural resources (and first of course energetic ones), ruling a mass of poorer and poorer people. The first emergency is to think of how avoiding this situation, which is a political and economical challenge before being an energetical one.

The most efficient way of reducing global consumption has always been an economic crash, because poverty is by far the most efficient way of cutting off individual consumption.

Sadly the most likely prediction to come true in that whole thread. And then more "reform" will be advocated to liberalise labor markets and deregulate corporations (if these concepts still have any meaning then).

Thank you for letting the guys on TOD learn from the FT. I read it daily and so have noticed an uptick in these kinds of articles recently. However, my guess is that exuberance still has some way to go - another 30% perhaps. A little petrol crisis this summer in the USA may prevent things from getting that wild - I doubt it though.

So, if one gets out of debt completely, and owns there own home/property , what do they invest in with whatever cash they have ?

I have the same question.

WT pointed out a good chart that shows alot of other countries are inflating thier currencies as well. I have watched the pound vrs dollar for bussiness reasons and the dollar has dropped from @1.32 to @1.99 per pound in the last 6 years.

Given that CPI in the US is used as a measure for increases in entitlement spending there is a vested interest in keeping it low to save the gov. money to spend on other pseudo-adventures like Iraq and of course Halliburton needed a boost as well.

I think it is hard to get real returns that are above inflation. If real inflation is 12% and your investments returns 13% then you re still losing because of the taxes on your "13% of income".

Inflation is a method of taxation. The gov spends (real) money and causes inflation(real) your money you have saved is worth less(real). They have gained a benefit and you have suffered a loss just as real as if they had taken it from you, which they have, you just don't know it(or maybe you do).

Some of the simplest (and least glamorous) things a person can do is buy things that you don't need right now but know you will use in the future. Buying at todays price vrs tommorows higher price give you a return (real) that is not subject to taxation. The only problem is you really don't want a room full of PT, TP, and car tires (:-) It is hard to invest large sums this way, but does give you a bit a satisfaction in a middle finger sort of way.

I'm not so sure of investor advisors at this point. PO is indeed a remarkable event, that most are not aware of(and indeed what would they tell you ?).

I think reading TOD is a good place to start, but I do notice a terminology gap. When WT or others calls Chatarell "crashing" this must be filtered through a slower geological perspective (occupational verbage?) vrs mine of a glass falling from the cupboard and hitting the floor.

There is also vested interest in maintaining the status quo. As Jerome alludes to in the above post this is indeed as force to be considered.

Also I read WT's posts and try very hard to understand his perspective. I think he has pointed out the right direction(s) but it will unfold slower or more slowly than my Hollywood 2.5 hr conditioned brain speed runs at. You are strting to seeing it unfold right now (today). Yesterdays paper has housing prices falling as supply increases.

I also believe that WT ELP is the way to go. Then if you have no debt, and have savings left comes the question how to PRESERVE that wealth, and in the other hand possibly make some gains.

I would not invest anything in papers(stocks, bonds). Even oilstocks are risky. When PO sets in oilcompany recources are a target for nationalisation(Venezuela comes to mind).

Cash is as you said confiscated via inflation.

So what´s left. I believe it should be something tangible. First a shelter/house, that you own outright. Than precious metals. Gold has been money for thousands of years, and can not be printed.

Like i said i have 100% of my savings in gold and silver, and they have appreciated nicely since i begun to accumulate the metals. They are outright cheap just now after a long bearmarket from 1980.

An ounce of gold could buy you a suit 1913, and can still do the same. The dollar has lost 95% of value since 1913.


I tend to agree with your position. I think metals are a buy. I suspect some manipulation is going on to hold them down or hold everything else up, no actually both at the same time.
Real, physical (usefull for making/providing/repairing the necessities) assets are a buy in my mind as well.
This techno-party with Ipods is coming to a close.

Well I would say real estate. Granted there is a slight 'bubble' due to investors. But ... I've been thinking that, inflation factored in, real estate is not really overvalued, especially in a 'population growth' scenario.

So someone please argue with my conclusion that real estate is actually reflecting the value of the US dollar. Look at real estate (a true asset like a pound of gold) and you are looking at the relative value of fiat currency.

If we will have a great depression, real estate will not be a good investment. They fell 90% last depression.

But you need a well located shelter anyway.

well how about paid for rental real estate ? people will need a place to live (until we all convert to cavedwelling, at least) and if you are recieving an income off the real estate, do you really care what the market says it is worth ?

Real estate doesn't have to be a house in the city, it can be farm or woodland with a good water supply and in some areas it is still dirt cheap.

In the US there already is a trend of caucasian people moving out of cities on both coasts (only exception is the NW coast).

You can buy as much top Canadian farmland as you want for $300-$1000/acre. As an investment the cash rent would give you a 5% return at around $400 per cultivated acre after taxes. As a way to buy something that will hold it's real value, I can't think of anything better than topsoil.

Some areas like Star City have a couple of feet of black topsoil. My farm is over here which is also heavy black soil.

How much do you have to invest in land in Canada to get permanent resident status?

How much do you have to invest in land in Canada to get permanent resident status?

It looks like it is $400,000 of investment and some experience in the related business:

The foreign property ownership of farmland for non-residents is strict at 10 acres in Saskatchewan.
There could be a workaround for foreign investors by purchasing shares in an actively farming corporation that owns land. Although most farms are family run, a large percentage (like ours) are incorporated.

They have a joint provincial/federal "fast-track" for immigration to Saskatchewan:

Thanks, interesting reading.

Under what criteria do the 3rd world people with no skills and no net worth come in?

I really don't know how well refugee or impoverished people do getting into Canada lately. I work with people that moved here from U.K, Germany, US, Iran, Pakistan, India, etc. Some came as students and have been here since.

I would think that for non-refugee poor it's the same problem as everywhere else, there are a large quantity of Canadian poor already and it's difficult to take on more.

My great-grandfather settled here from the Ukraine in 1896 by paying $10 for a quarter section and there was a requirement that they live on it for a period of time. Imagine the first winter of -30C with 3 small children in whatever shelter they could put together over the summer. At least my ancestors were at the tree line and could build out of logs, the ones out on the open prairie built sod houses and survived in there. The later Ukrainian immigrants were running from Stalin and Holodomor, I guess taking your chances with babies in a Canadian winter looked like a dream compared to that.

So what are the rules to keep US citizens from doing so and moving in? Any recommendations?

We can tell them we are conservative republicans and apply for political refugee status. :-)

I think it's pretty easy to immigrate if you qualify for the business/farming/skill conditions in the link I posted above. Where I work is pretty diverse internationally and I haven't heard of any complaints or problems with the people I know that have immigrated in the last few years. Quite a few of the people I know sponsored their families to move here after they were established.

There has been a recent influx of people cashing out of Alberta and moving back to Saskatchewan in the last year, but on the last census released lately our population was actually down and has floated around a million since the 1920's. I think the government departments do their best to assist people wishing to immigrate.

Although I own shares in the family farm, I work in IT and live in Regina. There has been a recent housing price jump, you can still buy a new 2000 sq ft home in a nice area for under $300k and be 10 minutes from downtown. I paid $128k for my 1900 sq ft built 1978 home 5 years ago right here.

It depends--
Antibiotics and bullets may be a better investment--
Some fish hooks will be real valuable, along with glue and matches--
But we could have a gradual and soft landing-- But I see no past historical evidence that this is the case.

The dollar has lost 95% of value since 1913


When someone deflates the value of paper money by, for instance, the CPI without inflating the amount of paper money by the T-Bill rate then they haven't correctly calculated the change in the value of money over time.

This mistake is repeated ad nauseum by gold bugs. Paper money has NOT lost 95% of its value to inflation.

wstephens - This is interesting, could you post a link elaborating this argument?

I don't have time to dig up the complete exegesis, but here's something I got quick off the internet:

Treasury Bills
If you have 30 years in which to wait, you might enjoy growth of over 600 percent (609.8 percent through Dec. 31, 2002), although this figure might dip below 600 percent for the 30 years at the end of 2003. If so, this would be the first sub-600 percent return for a 30-year rolling period since that which ended in 1989.

also see the table

Another quick search shows gold high/low prices

1972: low=44 high=70
2002: low=277 high=342
ratios: low=6.3x high=4.9x

So a 600% profit in 30 years from T-Bills and a 533% profit in 30 years from gold. This can easily be extended in time.

Try the same from 2002 to 2007. :-)


That just goes to show how volitile gold is -- it's a very risky asset. T-Bills are considered a "riskless" asset. Perhaps there are isolated 30 years periods where gold has outperformed, but *absolutely not* on a risk adjusted basis. Of course the larger point is the gold lie told by gold bugs. They are getting beaten by a riskless asset!

Anyway, oil has outperformed gold in the '02 to '07 timeframe ($30 to $65 versus $350 to $660) -- there are probably many risky assets that have outperformed gold over every timeframe.

I still don't buy it

The original argument says "If you have 30 years in which to wait,..."
I would say "if my mother had wheels I would be a bicycle"

I don't know that I want to hang on to anything for very long these days, buy and sell the same day yes, the same week maybe, otherwise I rather sit on the beach with a cigar and an umbrella drink.

I still don't buy it...30 years in which to wait

It's really a compound interest story. Gold doesn't have that -- so the long timeframes are very important. Anyhow, it's a far far different story than gold pushers recite isn't it?

Perhaps think of it this way -- given gold, cash, and seeds under a mattress then gold will compare well, but if you put the cash in riskless T-Bills and the seeds in fertile soil then they both "outgrow" gold.

Be it what it will. For my own sake, i am sleeping well with my gold hoard, waiting for the interesting years to come.
Gold is the only real money left in this enviroment, as i see it. Now is not the time to have gains, but to PRESERVE your wealth if you have any left after your other preps.

During the depression in Germany in the twenties, there was a hotelboy who got a one ounce goldcoin as a tip from a guesting american. The boy kept the coin as his savings.

Later the hotel went bust, and the hotel owner said right out in the air, that if he could get one ounce of gold, he would sell the hotel for it. The boy happened to stand there, and heard that. He took up the coin, and said to the hotel owner; Do you really mean it, then i will buy the hotel. Yes said the owner and took the coin.

So now the boy owned a hotel for a goldcoin, and he managed to get the hotel running again. After the war he founded a worldwide chain of hotels.

The boys name was Hilton.

So who knows, after this modern bust, one perhaps can buy a house or something similar for a goldcoin.

Best hopes for gold

That's a nice story, but unfortunately completely untrue.

Conrad Hilton (the founder of the Hilton Hotel chain) was born in 1887. That would make him 36 in 1923. Hardly a boy.

He entered the hotel business by buying the Mobley Hotel in Cisco, Texas, in 1919. Well before the German depression.

Also there is no mention of such a fabulous story anywhere. It's a nice 'child beats the system' fable so gets repeated and passed off as fact.

Yes, but why come with the truth, and spoil a nice story??
Very disturbing indeed. Perhaps you don´t believe in Santa Clause either?

Yesterdays paper has housing prices falling as supply increases.

And yet, the Daily Express still tries to fuel the "you've never had it so good" line by saying HOUSE prices are set to rise by up to eight per cent this year as the property bonanza shows no signs of slowing.

Which sounds like the kind of talk that happens just before the prices start to tumble

True, cash will eventually be confiscated by hyperinflation; but at this point, i.e., early in the crisis, it may well make sense to maintain as large a cash position as possible (after paying off debt, of course). The first major quakes of the collapse will be felt in the markets, and the resulting liquidity crunch will undoubtedly yield bargains and profits for those who are able to buy at post-crash discounts after some of the dust has settled from, say, the initial 50-70% drop. Even precious metals will dive with the markets during these major initial shocks (as was shown in February's 400 point drop in the Dow). On that basis alone I believe holding cash now makes more sense than front loading with metals. Cash investments are self-evidently very low risk short term and are now earning decent returns that interest rates have risen to five percent or more. Those who choose to keep riding the bull market in stocks will only do well if they're smart enough to sell before it all comes crashing down. And who is that smart? Maybe Warren Buffet, but probably not you or I.

As for precious metals being the ultimate refuge, I would venture that gold and silver prices may prove to be very volatile post crash, For most people, precious metals do not make real sense as investments until they are cashed out to buy something more useful, like food or fuel. This in itself is likely to translate into volatility as the investment climate grows more fearful and subject to panic at all levels. Holding gold may prove to be no more relaxing than holding other investments with little or no intrinsic value.

Furthermore, to the extent that gold and silver become the only money of value as the crisis developes, the more liable they will become to confiscation by the state.

Of course, if the storm is finally big enough it will engulf all and there will be no financial shelter. In that case, as many have concluded, the best capital will be community and survival skills.

Silver will always have real value (and gold will too) unless society reverts to very primative conditions. Silver is an antibiotic for a start - my wife has worked in burns and plastics wards, where silver based meds are used to prevent infection in burn victims. They have other uses too, and precious metals have always (in the last few millennia) served as a barter tool. There may be some times and places where it is of no use, but overall precious metal will retain value. Like all investment, whether it is in stocks, education, etc. it is best to have diversification - don't put all your eggs...

"You can never solve a problem on the level on which it was created."
Albert Einstein

Hi Jerome,

Thank you for your fine article.

Jmyngann, above, asks 'where to invest?' and Swede below says to invest in gold and silver.

You seem to be indicating energy sectors where, despite a recession, energy prices will be 'stable'. (have I read you correctly in this?)


- I'm working mostly in renewable energy. As these are investment-heavy projects, once they are built, they generate money whatever else happens - so there will be a financial incentive (in addition ot the obvious ones linked to global warming and energy independence) to keep them operating, and they will still generate funds which can be used to pay debt (their main cost to bear, as there is no fuel cost, and only a little maintenance), however slowly;


it is an appreciable luxury to have a job in finance that does not require for consumers to increase their spending (and their driving) by 2% per year for the next 15-30 years to still exist in a few years' time,
it is even better to be able to have a job whose purpose and actual results are not in direct contradiction with the lessons read here on a daily basis

Living off personal investments, I have been trying as far as possible to keep those investments in 'new' energy and energy saving areas (mainly wind and nuclear and rail). That as well as having a small amount in gold, (I see gold as something necessary to pay things like property taxes should all else fail).

What I would like to see here on TOD, by yourself if you feel it suitable and have time, is to write something on the line of
Dmitry Orlov
in his writings about Russia and it's crash, I assume you are familiar with his writing? I think something that would speak to the three main ages: youth, middle age , and old age and how a they should look at their finances would be very welcomed.

I've read Dmitry Orlov. We discusszed it recently in a thread over at the European Tribune.

As to energy prices, I don't know about stable. I expect them to be quite volatile, but I don't expect them to drop, in the case of electricity (other than for very short periods) beyond the cost of generation by coal or nuclear (2-3 c/kWh). Oil prices can only go up, in my view, because of demand growth in emerging economies (where a recession will take the form of lower growth, which will be plenty painful for them already, but that's still growth).

As to investments, I'd stay away from financial assets altogether, and move out of dollar assets as well, as a general rule. But my track record for predictions is not stellar, so take that with the appropriate grain of salt.

>As to energy prices, I don't know about stable. I expect them to be quite volatile, but I don't expect them to drop, in the case of electricity (other than for very short periods)

Prices for electricity will fall if people can't afford to by it, and because factories that use large qualities of electricity are shutdown. demand for coal will fall and it would affect the price of electricity. Then there is also supply that does rely on fossil fuels (hydro and nuclear).

>Oil prices can only go up, in my view, because of demand growth in emerging economies (where a recession will take the form of lower growth, which will be plenty painful for them already, but that's still growth).

I doubt oil prices will continue to make a steady rise up. Much of the emerging economies growth originates from globalization, as western businesses move production overseas to produce goods sold in the West. Without a market to sell to, production globally will fall and so with the demand for fossil fuels. Eventually production will slip below demand and prices will rise again. I would expect a heck of a lot of volitility in prices.

Its also likely that in a severe recession, oil produces will cut back spending on exploration and new projects to expand production. This will probably have significant issues in the future as producers paint themselves into a corner. Gov'ts will raise taxes on the oil industry to make up some of the losses from higher unemployment, and thus leave them less money to invest. Mexico is a good example of this scenero as PEMEX is heavily taxes and does not have the investment capital to drill new fields.

>As to investments, I'd stay away from financial assets altogether, and move out of dollar assets as well, as a general rule

Well, I would be concerned with investing overseas. I suspect that when a severe finance crisis occurs, most countries would change the laws to prevent the flow of capital from leaving. I recall an article in the FT about the ECB having plans to prevent capital from leaving during a crisis. I don't think the US would ever impose this restriction (but who knows!)

Some major currencies like the Euro and the Yen aren't in much better shape than the dollar. The Euro M3 is soaring and the Japanese Gov't debt makes the US debt look small. Much of the EU economy is dependant on exports to finance their huge entitlement programs. With a downfall in exports and Europe's high dependance on energy imports I don't believe the Euro would fair very well. The same applies to much of Asia (aka, Japan, Korea, China, India). I don't think there is a safe haven for capital.

The only advice I can offer is:

1. Use the time remaining to build career skills away from non-discretionary industries. Find something or work for a company that is likely to remain in business during a severe recession. Diversify your skills. Don't become so specialized in what you can do that your completely depend on that skill to find employment. A jack of all trades will have more employment opportunites than a master of one skill. If you have a steady paycheck you be better off no matter how much money you have saved if your perpetually unemployed. If there is inflation, your salary will adjust.

2. Learn to become more self-sufficient. For instance plant a garden (nothing beats fresh picked vegitables), learn how to do basic maintance on your vehicle. Learn how do basic home repair. What ever you spend your money on for services see if you can figure out how to do it on your own.

3. Locate to area with low taxes. As unemployment soars its likely that taxes will rise (especially in urban regions) as local gov't need to support spending with fewer workers contributing revenue. Is also likely that wealthfare services costs will rise, as local gov'ts provide assistance to unemployeed workers.

Beware that crime and drug abuse will rise in less well to do neighborhoods. Do you want to be looking over your shoulder everytime you go to work, or the grocery store? In the last few years there has been a rise of home-invasions in the US. Criminals kidnap you in your own home to rob you. Sometimes they torture people to get them to tell them were they hide jewerly and other valuables. There is little law enforcement agents can do to prevent these crimes since the attacks are at random. In virtually all cases neighbors failed to notice the attacks. If you decide to remain, give serious thought to a neigborhood watch or some arrangement for neighbors to be on the lookout for home invasions.

4. Avoid risky investments. The higher the yield or return on investment, the more risk is associated with the investment. Sure you might lose some money to inflation but it really sucks to lose it all in one shot if the investment goes belly up. Remember the big push by investment banks to to profit from service fees, not direct investments. The main reason why investment banks are making all these deals is because they profit handsomely with every transaction and usually don't invest much of their own capital (if at all).

5. One idea is to build a small business that sells non-discretionary goods or services. Perhaps a small retail store or repair shop. Skills as a plumber, electrician, or home repair man might be useful.

6. My personal view is to move way from major populated areas. During bad times, high population densities spells higher crime, drug abuse, violence, and other issues related to poverty. The main reason which people elect to live in urban region is jobs and accessable services. In a severe recession or depression, the jobs and services will disappear but the people will remain. While rural areas afford less job opportunites, the fair no worse than urban areas during the bad times.

Sorry to be dim, but would you mind defining or refining my definition: financial assets, for me. To me a financial asset could include just about anything, stocks, bonds, futures, real estate trading, etc, anything other than direct ownership of a tangible commodity, i.e. that sack of beans or bar of gold. You say electricity will with volatility hold value, I would think holding stock in companies in hydro, wind and nuclear that produce electricity would hold value yet my definition of financial asset excludes stocks.

Thanks for taking the time to respond to my previous post.

A fair question... My take is the wide definition that you provide. I agree that some narrow classes of assets should do a lot better than others, but will that be only relative performance, or will it actually be absolute positive performance is not clear to me at that stage. In a really big financial class, I'd expect the negative macro effect to be larger for a while.

Moving the debts into dollars is a cheap way of selling something short for the little guy. In Austria yen credits have been very popular, with most of them being switched to Swiss Franc credits (banks and also the national reserve have been warning about the exchange rate risk lately) , with US Dollar debts as a distant second. The general public apparently still believes in the US as the economic powerhouse. The Yen exchange rate is unreal, and when the yen carry trade unwinds, the yen will appreciate over night.

When the yen carry trade unwinds, everything unwinds.

There are things that may not be obvious to people in Europe, in the US the tax code makes real estate the best investment, nothing else lets a couple pull half a million out tax free every few years.
As far as normal assets, and I don't care if it is physical possession of gold or silver, one would have to be crazy to keep it in the US or U$S these days.

... and owns there own home/property, what do they invest in with whatever cash they have?

One possibility is to invest in energy savings or energy production around your home. If your home doesn't have proper insulation or modern windows, those would be a good upgrades to make. Next up would be high-efficiency appliances. If you heat with natural gas in North America, perhaps installing solar thermal for hot water would be a worthwhile (depending on your location). And so on. Any of these improvments should be judged by a cost/benefit analysis, but both against current energy costs and possible future energy costs.

Now, of course, these aren't 'investments' as the term is usually understood, but the traditional meaning is somewhat narrow. If you believe the markets are about to go haywire (I have no particular insight into this, and have doubts about anyone who claims they do) then hard assets are a way to 'lock-in' what assets you currently have - at the risk of forgoing possible gains. And while the 'value' of you home may go down, it won't lose any of its utility in the process. You'll just be SOL if you are forced to move.

Disclaimers: TINFA, IANAL, YMMV.

Invest in getting off the grid and producing your own electricity. The dividend of not paying an electric bill anymore is the gift that keeps on giving. It is also, a wonderful hedge against the times ahead. Also to consider, your own well. Generally, investing to reduce your overhead is always a good thing. Just look at what you pay for then figure out ways to reduce or stop paying.

"invest in getting off the grid"

to me electricity used for lighting, running appliances and power tools is still very cheap. electricity for heating is expensive, as is natural gas. imo, electricity other than heating and cooling, is high hanging fruit.

I would recommend anyone wanting to get a handle on the coming financial collapse, Try visiting these sites a few times a week and do some reading.

First go here and just look at the total. I started followng this in Jan it was in the 20's. Just a month ago it was in the 40's.

Good financial article sites.

Try a few Jim Willie articles for example.


The financial collapse is coming. I think it is a well engineered deliberate collapse. It is perfect in it's size and eventual effect. It will reduce the 6 billion people. People probably won't even know there was Peak Oil or that an energy shortage was coming.


Here are three more articles from today's FT that convey a similar message:

Private equity industry loses the plot over timing

By Tony Jackson

Published: May 21 2007 03:00 | Last updated: May 21 2007 03:00

Every time you think private equity has scaled the peaks of death-defying risk, a new Everest comes into view. Cerberus's purchase of Chrysler is only tangentially to do with the fortunes of a clapped-out carmaker. The real economic risk lies in taking on $48bn (£24.3bn) of long-term financial liabilities, which mostly lie outside the company's control.

Comment on this has focused on Chrysler's $19bn of healthcare liabilities, which are essentially unfunded. What matters more, though, is the $29bn of pension liabilities. These are deemed not to be a problem because, as the seller Daimler put it last week, the pension plan is "significantly overfunded".

Perhaps. US pension accounting is still fairly primitive - five years behind the UK, according to John Ralfe, the pension consultant. And Cerberus has apparently agreed to put in an extra $1.2bn - odd behaviour for a fund supposedly in surplus.

But that is largely beside the point. What matters with pension liabilities is not how far they are funded right now, but how big they are relative to the operating business - and how far they are invested in bonds.

The value of Chrysler's operating assets is unclear - not much, presumably, since Daimler paid Cerberus to tow the whole thing away. And at the last count, the pension fund had only about 25 per cent of its assets in bonds, with more than 60 per cent in equities and 7 per cent in alternative assets.

This matters because a fall in the bond markets raises the discount rate applied to the liabilities. In other words, to the extent that the fund is invested in bonds, assets and liabilities move in lockstep.

But with an equity portfolio of maybe $18bn, Chrysler is wide open to a stock market collapse. And to the extent the fund is in alternative investments, Cerberus is investing in other outfits such as itself - a bet on a bet.

Nor is it clear what longevity assumptions Chrysler is making. This is the biggest pension fund risk of all. Yet many US corporations have yet to wake up to the ugly reality.

Then again, under US rules corporations can still value assets and liabilities pretty much as they like - so it could be argued that a deficit would not emerge, or could be ignored if it did. Against that, US GAAP is supposedly converging with international financial reporting standards. And IFRS requires assets and liabilities to be marked to market annually.

As for Chrysler's $19bn of healthcare liabilities, there has been much sanguine talk of packaging these up and getting rid of them. The model is Goodyear, which last year passed responsibility for the fund to its unions in return for a cash injection.

But Goodyear's liabilities were a mere $1.2bn and it had to put up $1bn. A similar deal would cost Cerberus a short $16bn. No wonder it is looking to raise more than $60bn in debt markets, according to press reports. Most of that relates to Chrysler's auto financing business - but not all.

None of these risks, of course, will have escaped Cerberus's notice. It is a powerful force in private equity and knows all about some aspects of the automobile business, since it owns a majority stake in GMAC, the old General Motors auto finance arm. It also started out as a vulture fund, so Chrysler should be right up its street.

Passing the parcel

By Tony Jackson

Published: May 21 2007 03:00 | Last updated: May 21 2007 03:00

It may be, of course, that Cerberus is taking a calculated bet that it can pass the parcel - that is, that Chrysler can be sold on before the risks are realised. If so, that would be troubling for the private equity industry as a whole. For Chrysler is not an isolated case.

Consider British Airways, which is regularly touted as a private equity target because of its high cash flow in relation to its market value. That rather misses the point that it has pension liabilities of about £8.4bn compared to a market value of £5.8bn. It also has a pension deficit of some £2bn. But again, it is the relative size of the liabilities that matters.

Surely, it might be thought, private equity firms would not be daft enough to buy airlines - one of the most acutely cyclical industries of the lot. But they are doing just that, or trying to. A private equity bid for Qantas of Australia has just fallen through because shareholders rejected it as too stingy. And of the three bidders for the chronically crisis-ridden Alitalia, one is a private equity consortium

As a class, airlines have above-average pension fund liabilities. That is one reason they keep going bust. Vulture funds have made good money buying them out of Chapter 11 - indeed, Cerberus picked up its stake in Air Canada that way.

But buying them at the peak of the cycle is something else. In this and other respects, private equity seems to have lost the plot. And the longer the reckoning is postponed, the crazier the risks are going to get.

The Real Deal

By Lina Saigol

Published: May 21 2007 03:00 | Last updated: May 21 2007 03:00

If it is true that those who fail to learn the lessons of history are doomed to repeat them, then investment bankers should pay attention now - and recall the frenetic pace of corporate activity seven years ago, in May 2000.

Back then, ABN Amro announced a radical restructuring after a strategic review by new chairman Rijkman Groenink. Now, ABN Amro is the target of two bidders, following calls from an activist investor to break up the bank.

May 2000 saw UniCredito Italiano, the Italian bank, paying $1.2bn for Pioneer of the US after failing to seal a pan-European cross- shareholding alliance with Spain's BBVA and win control of the Rome-based Banca Nazionale del Lavoro. Now, UniCredit is buying Capitalia, its smaller rival, for $29bn. This month seven years ago, Dresdner cut about 5,000 jobs. Today, the axe is falling at Citigroup, which is cutting some 17,000 employees.

Blue Circle, the UK cement company, rejected a £3.7bn hostile bid from its French rival Lafarge in May 2000. This week, Hanson recommended a £8bn takeover by HeidelbergCement of Germany. Then, Alcoa and Reynolds Metals, the US aluminium groups announced a $4.4bn merger. Alcoa has just launched a $27bn bid for Alcan of Canada.

Almost exactly seven years ago, British Airways sold its 86 per cent stake in Air Liberté for $62.2m after a disastrous foray into the French market. Today, BA is in talks with private equity firms about taking part in a bid for Spain's Iberia, the fourth-largest European airline.

During that same month in 2000, Mobile TeleSystems, the mobile phone operator, announced plans for a $400m initial public offering - the first by a Russian company since the August 1998 financial crisis. Earlier this month, VTB, Russia's second-largest bank, raised more than $8bn in an IPO.

The volume of European mergers and acquisitions was at a historic high of $538.7bn in the year to May 2000. Seven years on, M&A volume has hit a new record of $1,029bn.

In May 2000, the deals downturn began.

This is where the American system is a robber baron's dream.

Daimler pays Cerberus to tow Chrysler away.

So they put a billion or two into the pension fund (mainly to buy the UAW vote)

What is really meaningful here is that as of the deal it is Chrysler Holdings LLC, under US law there is no longer any liability either by Daimler or Cerberus.

They can milk operating revenue for as long as they can get away with, as a private company they don't have to file much if anything with the SEC, they force the union into a strike and force a bankruptcy. The 49b liability is history. On the other side of BK they sell the physical assets to fund X (all the same people) and the beat goes on.

Welcome to the Wild West.

I have studied theese matters quit a lot. What is approaching is the so called Kondratieff Winter washout, when all unsustainable debts are washed out from the system. This cycle goes about ca 60-70 years. The last winter was the great depression. This time the bubble is far greater, and the depression could likely also be greater.

This time we have PO at the same time, which makes this uncharted waters.

Personally i have prepared by beeing debtfree, and having 100% of my savings in physical gold and silver.

Last time the stockmarket and the housingmarket tanked 90%.


EDIT: In the great depression CASH was KING, but then the currencies were gold backed. Now we have since 1971 for the first time an all out global fiat money regime, where the central banks can (and do) print money at will. I am afraid that the whole monetary system is at risk. That´s why i hold no cash other than what i need for daily living.

Here's where an economics background may serve you.

If you truly believe the system will collapse 90%, you should be taking on debt as fast as you possible can accumulate it and using the proceeds to buy anything that will help you post crash and hiding them in the garages of as many friends and family as you can.

12v solar panels and inverters. The 12v batteries will be laying in dead Surburbans as far as the eye can see.

Seeds - Vegetable and herbs. Very small, easily hideable, and easy to trade. A pack of cucumber seeds for a battery.

Shoes, sweaters, socks, and clothing. Get those vacuum packs and keep a rotating storage.

Bicycle parts. Spokes, chains, tires and tubes, repair kits. One bicycle tire should be worth a dozen chickens.

Chicken's and rabbits. Just an "arks" worth to get started.

Gold and silver coins, maybe.

Bullets won't work forever. You need a musket and some knives. Some flint and a knife sharpener. You need tools.

Property is a tough one. My fear is the government will tax properties to whatever your bank account will allow.

Cash will be useless. My half dozen chicken eggs will trump your wad of 20s every time.

Get the idea? If you think the system will just be a smaller version of now, then just adapt as you go. Otherwise, a good Daniel Boone for Dummies book is in order.

People need to planning for a 10 year hike through Cambodia. A plug in Hybrid won't be the answer.

As for the debt? Screw em!

On one side good people get caught on the coat tails of fractional reserve banking, lets hope not too many get caught on the other side when the new Crystal Night comes.

There is a blog called Economic Rebalancing that deals with these issues. It seems to be written by someone who has a clue.

He thinks the main culprit for why things have gotten so far out of hand, is the yen carry trade.

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The problems facing global finance seem to be systemic, the human element isn't in charge and is simply being driven by the requirements of the system. What sustains a bubble (or ponzzi scheme) of such enormous size? Ever increasing amounts of credit. I wonder at what point real productive assets become more valuable than paper assets? The point when paper money won't be accepted for something that's really needed, the point when its utility as a means of transaction fails.

A rather disturbing view of the increasingly deep cracks in the structure:

Divorce inevitable as eurozone splits into two camps

I remember reading somewhere last year that France had readied an alternate national currency. Actions speak louder than words I guess.

This article fits in well with what Jerome was saying in his essay:

Slump? Don't say they didn't warn you,,2083527,00.html

Plenty of City folk have been bearish for some time about the domestic housing market, though they dare not say so publicly as prices continue to defy gravity, despite clear hints in the Bank of England's inflation report that interest rates will have to rise again.

I like this bit:

Quoted companies are routinely criticised for being 'under-geared' - not borrowing enough - and urged to mend their ways.

Got to feed the bubble with ever more credit :)

While possible, a breakdown of the common currency has been predicted by many UK-based observers from day one. I consider them splendidly biased in that regard. Of course, they will be right one day, but until then the advantages of an economic bloc that size will outweigh the disadvantages.

I even think the UK will join the Euro, after the pound has devalued enough to reach something like parity, so they can play the low wage card within Europe. When that happens, the Euro will become the global currency, with all its mixed blessings.

I believe that the UK may well be forced into the euro once the EU sorts itself out and takes a unified approach to its energy needs.

I also never took much notice of the anti-euro diatribes from the British press. But when I read about France readying a national currency, I started taking more interest in the subject.

A bit more on the Euro:

Euro helps topple Spanish property

Spain risks crisis over vanishing reserves

My antennae are telling me there's a rising tide of panic going on under the calm financial surface. All we are seeing is little splashes and ripples that give some hint of the activity going on beneath.

Divorce inevitable as eurozone splits into two camps

I would not take predictions in the Torygraph about the demise of the eurozone too seriously. They said it would never happen, then that it would be a failure, then that it would cause chaos, and now that it will break down. They just cannot get their heads around a political Europe. I seriously doubt that the eurozone will lose any member, and I've never heard of France preparing an alternate currency. That's wishful thinking from the eurosceptics, or pure propaganda.

Jerome, wish I could remember where I read about France preparing a national currency. It wasn't in a British publication, it was a European one. One which specialises in reporting and analysis of the EU I seem to remember. I haven't seen anything so specific since, other than Sarkozy wanting to bring the euro or at least the ECB under political control.

Ministers warn Sarkozy on Central Bank

I'm not a Euro-sceptic and live in France. I do however believe that to successfully implement a truly local economy, then a local currency will be required. Trade should be the link, not the currency as such, in fact anything that impedes the removal of wealth from a locality may well be beneficial. A trans-national currency enables locally created wealth to be monetised and removed from the locality with ease, leaving the area dependant on state hand -outs. A currency which allows honest transactions to take place is required, without it operating as vacuum cleaner to suck out wealth.

I should add, I've not seen anything that looks workable so far in terms of local currencies, so the euro it is for the moment.

The Euro has, in a way, been good for local economies: they're no longer forced to conform to national boundaries that mostly are the result of a few millennia of political and military powermongering..

I do however believe that to successfully implement a truly local economy, then a local currency will be required.

How small do you need to go before you are "local" enough? The county level? The town level? How many currencies would be required then? So what about exchange rates? Seems to me if you were to "zoom in" enough then you'd be better off without money and go back to direct barter. e.g. "2 eggs for that pint of milk".

OK, banks are making bad loans and it's a "follow the herd" kind of deal. The age old story: I need to make bad loans because everybody else is doing it and -- look! -- they're making money and I'm not! In other words, a bubble.

I'd like to relate this to the oil price. Jim Kunstler made this argument a few weeks back and so did a good friend of mine yesterday -- here it is:

Oil consumption is the "bubble". The market expectation is that oil will remain plentiful to meet demand. Despite 6 years of steady price rises (with lots of volatility), the positive expectation remains. However, signals of trouble keep showing up. Unquenchable gasoline demand, despite much higher prices, is such a signal, because it indicates that the market is not working the way its supposed to. The price elasticity of demand is low, the price elasticity of supply is also low. People use more and more but supply does not increase. Substitutes are not in place. Things are out of whack.

Now, what about the day (or week) when market expectations about the oil supply to meet this demand turn negative? Traders decide that the required oil supply will not be forthcoming. Like the bad bank loan that tips the system into a "correction", traders decide that oil is scarce (with respect to demand). This could happen quickly — the market would flip. The bubble bursts. In Jerome's example, the banks come tumbling down. In my example, the oil price has no ceiling and depression is right around the corner.

Could this be our future? Market flip-flops have happened before -- Crash of 1929, Savings and Loan crisis of 1987, the "dot bomb" in 2000, the recent sub-prime loan fiasco. We shall see. Unlike the Oracle at Delphi, I can not predict the future. It is a possibility worth considering, however.

Investment in oil and gas follows the herd mentality too. I watched it as it occured in the early 1980's in the oil patch in Texas when the banks were falling all over themselves to make loans to independent operators and service companies for rigs. The result was a huge round of foreclosures and rigs being stacked. I laid the blame on little pricks with MBA's and a computer who assumed oil and gas prices would increase forever. The other result was that most of our local banks and savings and loan associations were bought up out of state.

Oil and gas investment in projects also follows this herd mentality. Right now the herd is in unconventional gas, i.e. coalbed methane and shale gas and in bitumen production in Canada. The wells and mines just aren't economical to drill and complete with current prices and the high costs associated with the wells-they are relying on a doubling or tripling of natural gas prices and oil pricesto make a decent ROI, yet these kinds of wells are over half of the US wells being drilled. Yet, being the kind of prostitute I am, I'm going to keep working on them as long as they will pay me and keep my opinions to myself. Sort of like Jerome and pals in the investment banking industry.

My conclusion is that real prudence is following WestTexas's advice is the best idea. Jeffry says to get out of debt and learn to live on half your income. If nothing happens you will have lower stress levels. That's the economise portion of the ELP program. I have no debts except a mortgage of $568.00 a month, and I could pay it off from savings. The Localise part I'm still working on. I'm seriously investigating some type of renewable energy on a personal level, either solar or wind or both. And Produce-I'm a contract Petroleum Landman, and I don't see the independent oil patch as vulnerable to high energy costs

I agree wholeheartedly. Your stance on Canadian bitumen sands identifies direcly with my own. It's frenzy feeding upon frenzy.

My point I would like to make is that when 'imaginary' assests (stock, fiat currency, bonds, or other pieces of paper) seem to fail, it's like making loud noises at a flock of birds, everyone takes off. This herd mentality alone rightly crashed the dot-com stocks and moved all of the resulting profits into HARD assests or tangibles (like housing).

I wish someone would post that graph relating quantity and type of loans being given for houses, one can see that after the 'best' buyers purchased (Typically 15-30 year fixed morgage), and housing prices started going up then the predatory type lending practices started with resetting rates or variable rate morgages. Those people were the speculators in the market, looking for a quick buck. Perhaps they were after the american dream of home ownership, and were trapped by their own stupidity and a lack of basic math skill.

My advice to you oilmanbob is to pay off the house if you can, if your morgage interest rate is higher than your return on investments, you can save/make more money by paying off the morgage! (The rule is pay off the highest interest debts FIRST)

And if for some miraculous reason you are getting a better return on your money than the morgage interest rate, take out another and invest it all into your portfolio and have fun with all the money you rake in!!

Gilgamesh, I expect like Dave Cohen that energy prices will go through the roof when the paradime shift happens. Our wonderful patriots in Washington will inflate the currency because its the only way to possibly pay debts.
I don't owe much money, and I pay for my household expenses including mortgage, taxes and utilities with 3 billable days a month. My new investments are in shallow oil prospects that I can sell and get an override. I figure any piece of a well where I don't have to put up money is great. Besides, I love the business and the adrenaline thrill of a new well.
Gold buggery bothers me. I remember when the goverment wouldn't let individuals own specie, and it might happen again. And the only real use for the stuff is electronic connections and teeth. The Jews at Auschwitz have shown the real utility of gold teeth and diamonds in their coat linings- it got 'em killed. Things won't be much different in a die-off, you'll still be at the mercy of any 19 year old with a faster draw. The facts are that in a die-off I'm going to die, I'm 55 with insulin dependent diabetes. And, so are most people who read this blog.
King Tutankhamen sucessfully took all his gold with him,
and how much good did it do him ? He's still dead.

If a die-off were to occur I see no real solution except hermitism. Using bacterial and herbavore die-offs to make a quick point, anywhere between 90 in 100 to 99 in 100 people on the planet will die as FF begin to wind down. (this will not be overnight, it may take 10-25 years) Imagine 10 of your closest friends, and 100 people you know, can you stand the thought of YOU being the only one to survive in each of those groups.

Gold is useful in the beginnings of a die-off, how many Jewish people bought freedom? But in a pure survival situation gold becomes just another base metal, maybe useful as a bashing weapon owing to its density.

I am currently investing in energy/europe/communications/enertainment. Enertainment lets me know if the world is going to shit, less spending on movies, tv, books, publishing, music, advertising will show up immediately and is almost a last warning. Europe investment is for where i believe the lowest pace of decline will be felt(outside of still-traditional aboriginal cultures) as they are prepping with more efficacy than anywhere else. If communications goes down, we are screwed.

The buildup was in the following order.

Mass manufacturing (automated factories)
Communications (telephone)
Mass transit [rail] (prerequisit mass manufacturing)
Green revolution (requires mass manufacturing, oil, mass transit+delivery system)
Mass transit [cars] parallel development of highway system
Nuclear power
Space (augments all observation and communication)
Internet (mass communication improved several hundred fold)

The breakdown will be in reverse with the highest upkeep items going first. The communication grid has fairly high upkeep, using loops allows for cuts in the network, but requires constant repair (downed trees, storms, lightning, accidents).

Entertainment has always been around, however look to the gaming sector to crash as disposable income dissapears down the drain. (rather look at the revenue combined of the gaming sector, include consols)



"Imagine 10 of your closest friends, and 100 people you know, can you stand the thought of YOU being the only one to survive in each of those groups." [?]

That depends. If there's a shortage of fuel, and I have to eat them raw, can I use horseradish? If there's horseradish it won't be so bad.

Likewise, investing/loaning for ethanol production facilites in the US is a great risk. A friend has a fabrication business that builds components for ethanol plants. His company is going "full bore" to supply several new plants being build in southern Illinois. These people building the plants have leveraged themselves to the max. He said when corn prices rise high enough, along with natural gas prices, some of these plants will be closed. Some, he thinks, may be built and never produce any ethanol.

Bottom line is that the banking community has latched on to this ethanol boom and it will soon go bust along with the supporting financial institutions.

To plagarize myself from a comment on RR's blog when I got told I don't know much about economics regarding the corn price adjustment.

as RR said at the end of his Comments on Senate Hearing
"Good God, we're doomed."

I grew up with grandparents who raised 5 kids in the 1930's depression living on the same farmyard and something must have rubbed off.

You have to live within your means and account for the good times coming to an end, whether thats personal or running a feedlot on $2 corn.

I don't have any debt, I own a good chunk of farmland and I know how to do everything from grow my own food, dress and butcher to carpentry and mechanics and if need be I could figure out how to run a tractor on wood gas. I don't imagine if things turn ugly that my computer skills are going to keep me employed and probably the skills I picked up putting up 5-6 cords of firewood over several winters have more value. I am not going to freeze in the dark and my kids aren't going to go hungry regardless of what happens to the economy and global energy.

But.. I guess you are astounded by my lack of understanding of economics.

To answer the question in the title.

Since many people both high and low on the totem pole have a stake in imagining that the emperor is wearing cloths so to speak, not many people in the illusion will publicly admit that it is a illusion. Those that do will be marginalized as wackos. It will only end when the amount of 'wackos' outnumber those who still think they see cloths.

this is a subject that scares the hell out of me....this is not a localized situation in one's worldwide. the housing bubble is worldwide, the financial/credit bubble is worldwide. on top of PO , it is a perfect storm. we talk about the sheeple as if it's them. it's us, it's all of us. ELP is a great idea...if and only if there is not financial collapse.

if the debt implodes, if the mortgages implode, if the stock markets implode...what is left, really?...i look at that IRA, and think...what is that fiat currency actually worth?..what will it buy in 10 years? what does having no debt (as has been my situation for the last 25 years), really mean?...i have always been a saver in a country of profligate spenders, and in the end, since there are so many of them and so few of us, what will be the difference? my money will be as worthless as their debt.

Right. Hugo Stennes became the richest man in the world by borrowing paper marks and buying (real) factories during the German hyperinflation. Debt-free makes sense in a deflation when the real value of monetary obligations increases.

In a hyperinflationary depression (which lies ahead?) you need leverage to stay ahead of the declining value of money. Unless, of course, you want to just buy land and grow your own food, but that is not a realistic option for most of us.

Fiat money is by definition just another form of debt. It says right there, 'will pay to the bearer on demand X dollars' but 'dollars' of what? Sure, it will relieve you of you obligations to the government, but that's all that is defined. As to its commodity value in the marketplace, it is only backed by the issuing body's reluctance to print more of it. In a collapse of the marketplace, the temptaion to prime the pump usually exceeds the duty to mop up the excess liquidity created. This already happened circa 2001, and those willing to read the implications of 1% fed rates saw an asset price bubble approaching.

Peak oil realizations will serve to kill that if nothing else does. Energy restrictions by definition will be deflationary unless mitigation strategies are pre emptively carried out. They haven't really started. When to take your money out and where to put it is not answerable for the public at large because most of them have a negative net worth in the long run. As Kunstler points out, what they consider as assets today, sans abundant oil are not much of an asset.

When you come up with a good place to store money, let me know. that's as big a problem as how to store electricity. Ahhh, the ephemeral nature of energy both physical and monetary.

We owned a Fiat for a while, but it got truncated by a cement truck. Or was it hoodcated?

Steverino, I knew a high school principle who felt that he could be considered a millionaire if he died a million dollars in debt as he would have had the use of that money while he lived. The only drawback that I could see in that financial plan was that he might make the big mistake of living too long and being eaten alive by his creditors....don't know if that brings you any comfort.

(Timing it's all timing and we can never get that quite right)

Me too! To work and save and have it "inflation taxed away" is a gut wrenching realization. Indeed it affects us all, in every country.
I suspect real physical assets that are productive without much FF energy input will be of greater value in the future. I suspect we will collectively be taking a step backwards toward simpler living and lower standards.

My own take on ELP -
The E part is the easiest imho. Investments in energy efficiency, perhaps as an interior portion of current housing being super insulated by adding insulated interior walls to lessen the space that needs to be heated or cooled will obviously save $. While not glamorous the money invested here will save money. In investment terms the money saved(ROI) from energy saving projects is not subject to taxes. Again some satifaction of middle finger waving here - pick your favorite nemisis. Growing as much as possible your own food as WT points out is the easiest way to save some $$ if you have the means to do so. In Portland,OR we have "urban farmers" who for a share of the crop will use your yard and keep a portion of the bounty. A great way to get your yard set up while still working. Salem, OR tried to tax peoples food gardens one year - didn't work but WTF?

The L part keeps $ in circulation locally (as much as possible). This goes against the grain of globalization and large multinational corp.'s but when did they really give a rats ass about you anyway. Keeping money flowing locally helps strenghten your community even if it only (really)provides the jobs for low wage people better to do that than over the internet shopping. I also refuse to use auto scanners, the box stores make enough to pay some young working person imho.

The P part hangs me up. Produce what? I have land so don't fit the average but for everyone else, what do you produce? A repair service comes to mind as a possible in the future when repairing is more economical than throwing away. This is one area where the Portland PO group has a focus on finding PO mitigation projects for the unemployed. This is ahead of the curve thinking, people will desperatly need some direction.

The P part hangs me up. Produce what?

Yes, we're not used to being productive in the true sense of the word. My take on it is that you must produce something that others need or want sufficiently to exchange for the results of their own productivity or something they own.

So what's the something people will need? Water, food, beverages, heating & cooking fuels, accommodation & buildings, clothing & footwear, tools, machinery, goods & public transport, services, raw materials, general stores, etc. Things they've always needed and bought without being brainwashed to do so by advertising.

The main problem I see is one of competition with the wider economy. Locally produced products probably cannot compete with those produced in the wider economy until it actually collapses. Then of course, it will probably be impossible to put together the necessary infrastructure for local production. So I believe the local economy will have to develop on the basis of trade, leveraging whatever productive capacity already exists in the locality. But how does this differ from the current economy? The source of production is owned by the local economy I guess, which means no multi-national corporations or banks.

I believe the Basques in Spain have a local infrastructure somewhat resembling the above.

Myself, I'm looking at local infrastructure that might be worth buying once collapse sets in. That's if we get a deflationary depression. Meanwhile, I'm slowly turning cash into real assets, things which help me live without dependence on the wider economy, just in case inflation sets in. I say slowly, because I watch how things are developing so as to not jump the gun.

I'd love to know what other peoples ideas are regarding local production.

I'm planning on beefing up (adding more PV arrays) to my solar/wind system. This may be far fetched but I'm imagining such power availibility could be used to run power tools like a table saw, etc., for local woodworking/home repair projects.

Where I live we have a high number of high quality wood craftsman/home builders along with a desire I believe to keep our community homes and self-repairable infrastructure intact. What we may lack oneday is a reliable or inexpensive electrical source. We will have plenty of abandoned vacation homes to recycle materials from.

Another potential avenue is that I own a couple of acres of rich bottom land (in an area that otherwise has very poor and sandy soils) that I am clearing of invasive brush that could be developed as a community garden. Plus, with my solar power system which is already wired to my submersible well pump (set-up now for yearly event grid failures due to storms) it will be possible to irrigate the whole garden field without entirely relying on rain or hand hauling/pumping water from local ponds.

Admittedly, this suggests envisioning a lot of system wide breakdowns, which may not happen. But should things get hairy WRT to energy generation, we are in a low population area that I do imagine would be sooner cut off or just provided with limited hours than all the more heavily populated areas and cities.

Like I say, maybe this is far-fectched, but at the very least it will benefit me in my ELP. Hell, I might even end up starting a battery charging station for all the electric vehicles we'll be driving in the future. ;-)

I suspect real physical assets that are productive without much FF energy input will be of greater value in the future.

I think that thought bears repeating.

If I were young I would buy a breeding pair of draft horses.

Jerome's remarks about wind projects paying off even without "account support mechanisms" and projections of no lower electricity prices that are interesting to me. The former are just government tax incentives, subsidies, and mandated markets benefiting politically correct technologies like wind.

I think what Jerome is saying is that at current market prices, most wind projects are NOT bankable without government intervention and further that the rules for bankability are currently too lax.

A wind project has several criteria to meet to be "Bankable." Ultimately, any project has to bring in sufficient revenue (in cash) to cover its O&M costs and then still cover its interest and amortization payments over the period of the load or until the net salvage value exceeds the remaining prinicipal.

The other point is that electricity prices are not likely to drop. I think that a reasonable assumption but one that due diligence would have to cover for the specific project. A great insight from the first oil crisis back in the 70's was that energy is energy and money is just an index of how much energy one could buy. That's somewhat analogous to the ounce of gold for a suit of clothes argument but in thermodynamic process terms.

Some of what Jerome is commenting upon is a function of the ultimate weakness of the euro. Many American commenters are saying that the euro is a political ambition that is failing in the financial markets.

I'd appreciate any clarification from Jerome.

I think what Jerome is saying is that at current market prices, most wind projects are NOT bankable without government intervention and further that the rules for bankability are currently too lax.

There are two very different things here:

- a number of wind projects would indeed not be bankable without the support mechanisms. That reflects the fact that banks are not yet ready to bet that electricity prices will remain at the level they currently are (which are enough tma ke wind projects profitable witohut subsidy) over 10-15 years. But the need for subsidies for wind also reflects the fact that other power sources do not really pay for the externalities they generate (pollution and global warming come to mind), so they are as much about levelling the playing field as anything else;

- the fact that banks take these subsidies/support mechanisms into account when financing these projects reflect the fact that these subsidies/support mechanisms exist under current laws and it is therefore not unreasonable to take them into account. As such, that particular behavior is not worrying in itself.

My point was that wind is competitive (and able to repay the debt needed to build it) at levels like 4-5c/kWh. So, with support mechanisms in the 2-3c/kWh range, wind is fully competitive with electricity at 2-3c/kwh, which is a level that cannot be nreached for longer than short periods. Even without subsidies, wind will generate cashflow at such prices and thus will be able to repay enough debt service for banks not to complain (in a big crisis situation).

Some of what Jerome is commenting upon is a function of the ultimate weakness of the euro. Many American commenters are saying that the euro is a political ambition that is failing in the financial markets.

The euro is indeed a political ambition, and that is precisely why it is succeeding. But American commentators are probably influenced by British ones, who seem absolutely unable to understand that Europe - and the euro - is fundamentally a political project and not an economic one, and are still persuaded that the euro is a failure. I'd be curious to see by what yardstick it can be considered a failure in the financial markets, though. Its stock markets are bigger than US ones, its bond market is not bigger, it has a commercial trade surplus, it is increasing its share of reserves, etc...

No doubt that banks can make decisions based on current law so the subsidies are legitimate business decision factors.

Whether subsidies to wind power are good public policy is another issue that is outside the scope of your article and my comments. You can probably guess where I stand. If the leverage is low enough, even a wind project can get bank loans.

The key issue with the euro is that Italy and Spain are under pressure to withdraw from the euro. Even the new French leadership seems to have it doubts. If the economic pain is too great for a polity, it can make the choice to go its own way.

As to yardsticks, how about per capita income growth and unemployment rates? Some areas of the euro-zone are doing OK (Ireland?) while others are languishing. There seems to be a lot of subsidization of newer members by the core developed countries.

As to the success of the political ambition that gave birth to the euro, if a free people enter into it freely, then what ever. But the proposed EU constitution seems to be running into problems at the ballot box. I'm not an enemy of the EU and the euro, just a skeptic.

As to US energy project finance, we're seeing a flood in interest in French and Japanese money financing our new nukes at much lower rates of return compared to domestic investors. Cheap dollars, home country export policy, and US political stability (!) seem to be the draws.

About the euro again, the only place where Italy and Spain are under any pressure to leave the euro is the minds of the British eurosceptics, who spend their time looking for vulnerabilities in the eurozone to point out how fucked up Europe, and the euro, are. There is a small extre-right minority in Italy that calls for an exit out of the euro, but that's that.

The eurozone is doing ok on a number of criteria. I can only suggest that you read this for a sample of what I mean. And there is indeed a lot of subsidisation of new members by the core - that's how you bring the (poor) new members into the core, like Spain. but that's when you actually have a political project in mind.

We'll see about nuclear being projectfinanced, in the US or elsewhere. Banks would need to get a lot of more or less explicit subsidies. Hopefully you object to these as well!

The key issue with the euro is that Italy and Spain are under pressure to withdraw from the euro

I've googled about that and found nothing, except a statement from 2005, saying that some italian minister wanted the lira back. However, that's nothing unusual. You can hear statements of that kind several times a week in any european country.

So if there is a serious background behind your argument, I would like to know more about it. As far as I know there are no plans in any european country to reintroduce their before-2002 currency. In case of Spain and Italy this might even be economical suicide.

I can't claim to be an expert on the internal politics of the euro.

I did read an article on the net last week about the pressures but I can't seem to find the link today.

If politicans are regularly making these statements then there is probably a politically receptive audience.

Here's a link to a discussion of Sarko's economic policies that I find pertinent:

I will voice the opinion that the UK joining is the wrong move.

Sounds more like a tirade than a discussion. Obviously the neocon Sarkosy isn't rapacious enough for the US neocons and should get into line, rather than beating his own path without permission.

I think the US neocons have misunderstood France, it's a totalitarian state with its own designs on empire. Sarkosy is a neocon, but he's a French neocon, not necessarily a poodle like blair. He's probably also taken note of the difficulties the US neocons are having and wants to keep his distance.

Regardless, I think the French were nuts to allow this man to take control of the country.

I may be weird but I actually like the idea of bankers overextending themselves to built wind farms now (that they prudently wouldn't have) in some bubble.

I just hope that this means that when the paper money evaporates, the wind farms will actually be there making physical electricity. They'll have new owners but the juice will be going into the system.

Consider all the fiber optic laid in the dot-com and telecom boom. Google picked it up very very cheaply.

let me just say as a follow-up...there is 0% chance in the world that the U.S. federal reserve will allow a depressionary environment to exist in a financial the last fed president with any cojones was paul volker (praise be unto him)..the current fed will and are inflating their way out of "trouble"..other central banks are doing likewise.

at this rate, currency will be be replaced by "new" currency....hey buddy...i'll make you a deal..10 "new" cents on the dollar..unless you wait until next'll be one cent on the dollar.

thanks to jerome for the heads up about the same craziness over the pond.... whoda thunk it..everyone trading in a formerly strong economy's currency for one backed by the good faith of a group of countries that have a history of devisiveness and in fact are only tied together by a fiat currency backed by country, no government, no single taxing body...just some bureaucrats in brussells.

this is not a knock on europe or the euro...just a reflection on what a strange place the world has become.

What about investing in a Rental ?

Or buy a property , sell and carry the paper ??

jmygann, a rental property can have its tenant laid off in a general depression. Are you tough enough to evict him/her?
Likewise, carrying the note on a property. It doesn't protect you from inflation or deflation of the core asset. 10% inflation means your money will lose 1/2 it value in 7 years, while deflation means your purchaser will walk and buy something cheaper. And bankruptcy laws protect the purchaser from foreclosure, at your expense. And, in any case my read on the markets is that real property is already in a deflationary mode.
But there are always exceptions to any market. Real estate near a mass transit stop will gain in value with an oil crunch. A rooming house/cheap motel near a transit stop or manufacturing area will stay full. A piece of farmland can be subdivided and the notes sold on the secondary note market, or get some hippy tenant farmers who will pay you in fresh produce.
The same with financial instruments. Some real estate investment trusts have quality assets that will survive anything but a total collapse-look into Weingartens-they own three of the highest dollar shopping areas in Houston, River Oaks Shopping Center, the Village and Highland Park Village. Pays around 8%. Some of the Royalty Trusts look good to me-Hugoton Royalty Trust and the Louisiana Land and Exploration Royalty Trust look like great assets, and if energy prices go through the roof so will they.But do the research, and you do the math. And if anyone tells you how honest they are, tells you how conservative they are or mentions Jesus before they've talked about Return on Investment, put your hand over your money and walk. If they can't explain how their business makes money so that you can understand it, its not real. The no money down guys are selling video tapes, not purchasing and managing property so what they say is bull caca, IMHO.

Great article Jérôme. Paul Blustein gave a good account of financial institutions all staying trapped on the same bandwagon (even though they knew it would end in disaster) in And the Money Kept Rolling in (and Out), in relation to the financial crisis in Argentina.

The current global advance is running on fumes, and when it comes to an end, and the spiral of positive feedback shifts into reverse, a stampede for the exits will inevitably ensue. No one can afford to jump off the bandwagon 'prematurely', so everyone is waiting to jump off at the peak, assuming that they will succeed in cashing out while others will be left holding the empty bag. Unfortunately that collective strategy means that almost no one will be able to cash out. The unraveling could be frighteningly rapid and unbelievably disruptive of business as usual.

We are looking at the collapse of a credit pyramid - in other words an abrupt loss of liquidity. There is nothing the Fed can do to prevent it as the problem is global. Even all central banks acting together could not act quickly or decisively enough to prevent a money supply crash (ie deflation).

Balancing this good post against inflation and I find it hard to decide which direction to see it fall. History says inflation - maybe after deflation?

History says inflation - maybe after deflation?

That is exactly what I would expect - credit/debt deflation followed by currency hyperinflation. Relatively early in the deflationary phase, I would expect a short squeeze in the US dollar which could temporarily increase its value substantially.

While there is still access to international funds through global financial markets, bankers will need to keep all but the shortest-term interest rates high in order to (try to) attract funds and prevent capital flight. However, once international funds are no longer available in any case (ie capital controls among other things), governments are likely (IMO) to print money in order to (try to) meet an avalanche of obligations.

My best guess is that the deflationary phase would be relatively short, sharp and devastating (unlike Japan's drawn-out deflation, as they had a pile of cash to burn through first that delayed the day of reckoning for their banking system). Nevertheless I would expect it to last for several years, with the bulk of the financial losses occuring relatively early on. If I had to guess when hyperinflation might follow the second Great Depression, I would suggest perhaps 2020 (although it could be sooner).

Agreed, I think there will be very rapid deflation, a small window to acquire hard assets and then it's off to the races with (hyper?) inflation.

All we have to do now is wait for it to happen.

If I had to guess when hyperinflation might follow the second Great Depression, I would suggest perhaps 2020 (although it could be sooner).

If that is the way the game is to be played - borrow and buy on the deflation downstroke and pay back with hyper inflated money.

Not going to happen, once it goes into deflation because the credit bubble burst there will be no credit, you may be able to buy for a few cents on the dollar but only with hard currency.

If you could buy with credit in the deflation there would be no deflation to begin with, just like the US now where most everything is in technical default but they keep coming up with financing schemes they package and sell to suckers that hope the music doesn't stop while they are holding the paper.


I see today's economy as an inverted pyramid, which we are trying to build higher and higher.

It might tip in any direction; in fact, we might tip it by overcompensating against a perceived risk of a fall in one direction. Thus hyperinflation and deflation both seem credible threats, which might seem strange but is not if you look at it with this image in mind.

It would appear to be a catch 22 like the fed now finds itself in. I can see it go either way as well.

Jerome, what effect would you think gas price spikes in the US would do. Deflation?

Inflation ... Deflation? Another good possibility: hyperinflationary depression, nominal prices up very fast, real prices down very fast (except food and energy which rise in real terms and lower standards of living worldwide.)

Yep, right now this global credit bubble has everyone playing the angles to keep the hot potatoes (China's production/stock exchange bubble, Japan's Yen carry trade, US debt & $ tanking threat, etc.) spinning merrily aloft. The Central Banks are all micro-managing this macro-behemoth of globally extended risk but it's pretty much gotten to the point where it is beyond their control. Still they play the useable cards they have.

I keep thinking that China's 2008 Summer Olympics asperations will keep them (and everyone else) playing. Barring any other major unwinding shocks it is soon thereafter when I expect the control over this financial flywheel to really break apart. PO and GW will also be that much further along too, not to mention Geo-Political crisies and/or an intractable US recession, and somewhere somehow serious investors in this musical chair ponzi game will start reassessing and pulling out of their overleveraged risks.

Whatever, I've got my popcorn handy.

Let's see if I follow the logic so far....

The banks are loaning too much money, even though some of the most advanced energy saving technology in the world such as plug hybrid electric cars cannot get funding so Calcars is doing pretty much as a hobby, just because it's a kick to prove everybody wrong....

90 out of 100 people are going to die in the next 15 to 25 years, because the housing bubble is worldwide...(damm, I knew them expensive condos on the Ganges river would catch up with us...:-(

Everybody is going to bail on the dollar, even though the U.S still produces almost half of it's own oil and almost 85% of it's natural gas and has the largest coal reserves in the world, in favor of China (almost no home natural gas and only a little oil production, but does have coal), Japan (no oil no gas) and the Euro (rapidly dropping North Sea and becoming almost entirely relient on Russia for it's natural gas, and coal declining and becoming almost forbidden to use due to Kyoto accords), due to peak oil....(?)

And to top it off, the extermination of the human race due to the credit and housing bubble is being held up in getting underway by the 2008 Olympics...

Well, there's your solution....we'll just have an Olympics every year in China!

Man, I hope and pray no one serious actually sees this stuff...:-(

(I will forego signing on this one, I am not sure I want to associated with the "logic" today.....)

He he... tell us how you really feel Roger!

Sure, Jerome is the latest to cry wolf. Who knows, he may be correct (really.) The writing of financial doom books was very prolific over the last 3 decades or so... and in the era of the WWW one literally could not visit all the doom-and-gloom financial sites even if one were to sit at their desk and read them all day.

Nevertheless, recessions do come. Depressions come every several decades or so. Market crashes are not novel. All are real phenomena, but the ability of humans to predict them well is low.

BTW, the US produces more like 1/3 the oil it consumes - remember the US also imports refined products. Reduction in these products will tend towards recessions as productivity is lost when operations are shut down. Fundamentally, the loss of energy is the loss of the ability to do work, upon which all of human endeavors are built.

Thanks InJapan, for the correction, I was probably using old numbers (I'm an old man)

And although I enjoy dabbling in a bit of satire, I don't want

to sound like I am whistling past the graveyard.

There is no doubt that there is a bubble in real estate and housing.

My problem is that I have trouble understanding how this is some kind of great catastrophe. What we have here is a bunch of "investors", i.e., "home flippers" trying to make an easy buck on second and third and fourth homes, condos and townhouses, and banks stupid enough to give 'um the money.
Now, the average schmo is supposed to be all in a panic because these idiots may lose their mistress bait on the Atlantic coast....frankly, big shiit.

In our area (Kentucky, U.S.A.), we are seeing a fair number of brand newly built homes sitting empty. So the horror of deflation, in which overpriced $180,000 homes will have to become overpriced 120,000 dollar homes, on the return on bank CD's have to be cut a percent and a half to make up the cash for the bankers, now meaning that some geezer clipping coupons will have to get by on $70.000 instead of $80,000 a year. Again, big shiiit.

Oh, the fuel cringes at the horror of driving a $50.000 turbo Diesel Benz at 37 miles per gallon instead of a $50,000 Sport Ute that gets 16 miles per gallon. Again, big shiit.

I don't seem to be taking this nearly seriously enough, do I?

But, of course, Europe has problems too, but I feel that they have little to do with a credit bubble. Europe got to see a possible portent of it's future just today:;_ylt=AuGWXuO7YXRPC...

The economic issues can be handled with good management, but in the ethnic, demographic, and cultural areas, Europe is facing a new world.

These are the stresses that can tear a great culture to bits, and leave money as only a small side issue as people struggle for their very lives and for the last salvation of the only culture they have known.

Peak oil and credit issues may come to be small details compared to a coming bigger struggle. May God have mercy on Europe and the World.

Remember we are only one cubic mile from freedom.

Regarding this picture you linked:

I'll play the european optimist here, and I would say that this is progress!! Instead of bombing the statue or killing dozens of people in a train station they decided just to dress the little mermaid, c'mon Roger, you play the optimist here, is your optimism stopped at US border?

RC sanguine about a financial implosion, which is nice, as I, for one, am not ready to go and buy a rifle and hunting knife, and still enjoy the idea of doing something productive with my savings, that is, not only productive for me as a person, but for others as well. (err I also admit I am stumped on this point right now.)

However, I presume that perceived problems on another continent can be seen as more alarming.

The vision of Europe swamped in a Muslim horde is absolutely fantastical.

Demographically, one might argue that Catholics are rising in numbers as compared to Protestants, as the latter tend to leave the church and become a-religious..; or that the Evangelicals present a great danger as they have the highest expansion rate and can be viewed as ‘fundamentalist’; or that one should now ‘get a grip on this Bahai stuff’ (growing fast, and one of the few religions that has a permanent rep. at the UN.)

Or one could contest all that - based only on my knowledge of Swiss demographics .. whatever; certainly these are not issues that affect the socio-cultural-political future of the EU in any important way.

‘Muslims’ in the popular ‘Anglo’ sense seems to comprise a category that is not religious per se, but melds together ideas of immigration, poverty, low education, foreign provenance, darker skin, inferior ethnicity, primitiveness (eg. treatment of women, etc.), aggression and expansion.

It is a wild stereotype, unrelated to what is going on on the ground. The US public has been propagandized to relate ‘Muslims’ to the ‘enemy’ - terrorists, fundamentalists, crazed bombers, Al Quaida, vicious, backward people who gloat at blood and have strange customs, etc. etc. As Europe is ‘weak’ (ie. not keen on killing millions of people who happen to be sitting on oil fields) it is a foregone conclusion that the Muslim hordes will slowly take it over!

Or at least, that is what they should watch, rather than the salient demographic issue - baby boomer retirees.

I exagerate! to get my point across.

The sad thing is that stigmatizing billions of people does finally have an effect (though, I reckon, it has been uphill work by the mainstream ‘anglo’ media), people eventually become distant, and suspicious, etc. Slowly, painfully, the division is created, and ‘muslims’ themselves react to the media ‘ghettoization’ - see the Danish Mohamet cartoons scandal. Yes, Denmark, then and now...

Too bad for those savages.... They have no right, no right to that oil. They are ugly and evil, strange and dangerous, unpredictable, violent, suicidal, or dopey and grasping...

Roger, you're right, when we get into doomer porn on this site rationality goes out the window. I can't see getting out of financial instruments because I'm scared of a stock market wobble. I think there's a lot more money to be made in oil stocks-no punitive legislation will become law as there is a veto power and the oil lobby has invested plenty in "campaign donations" on both sides of the aisle. A lot of noise will be made, but its going to be to increase the shakedown. I haven't heard that Soros and Buffet are selling their stakes in the energy business, au contrair they are both loading up on ConnocoPhillips and oil service stocks like Fluor-Daniels , Schlumberger, CoreLabs ect. and railroads. This isn't a sign that they're worried, and they're smarter about the markets than almost anyone in the world

I suppose you don't think the Chinese have had a mighty big hand in keeping afloat our depreciating currency to the tune of 2-3 billion $ a day infusions of foreign purchases of our Treasury bonds? You'd of course be mistaken.

As spelled out by Antal E. Fekete on May 18th, here:

"Is it possible that I am wrong and the dollar will succumb sooner rather than later? While not impossible, it is unlikely. Why? Because the clique of the bond bulls has a vested interest in the charade to continue. Most importantly, it has the power to make its wishes stick. Its members were lucky enough to start riding the charging bond bull early. Make no mistake: China has been in it from start, since 1981 when US interest rates were over 16 percent. Don’t be fooled: the one-trillion-dollar kitty is not all trade surplus. So much of it is profits from China’s bond trading portfolio. Other bond bulls are similarly sitting on mountains of paper profits. In spite of appearances, the Chinese are not stupid. They will keep the game of musical chairs going. They are calling the shots. The music will stop when they stop it. But not yet."

Hence, for a lot of reasons, of which the 2008 Olympic Games is just one speculation of mine about when this bond music could start seriously sputtering (of which PO is one key element that some financial minds, such as Mr. Fekete, notwithstanding his other observations, make no account of), at which point even the Chinese might surmise the time is now to check out of this dollar propping game, that I offered my amusing opinion on these matters.

While you may believe our 1/3rd home oil production will suffice, I am under no illusions that it will be enough to keep our floundering 'service/debt based' economy from completely tanking once the foreign holders of our debt decide to dump it back onto us for a number of conceivable (albeit dangerous) strategic future reasons.

On the other hand this global financial house of cards (stacked with more wild card jokers than imaginable) could all come to a screeching halt before then by a turbulent unwinding of the recent and huge internal Chinese stock market mania. This is an area over which the Chinese authorities may not have a lot of wiggle room to control. For insight into this crazy bubble try this May 17th article Casino Royale, China and the Ghosts of 1929:

"The herds of investors are stampeding into the market, and stampeding is the right word for what is unfolding. Two weeks ago I would not have written this missive, believing that while the overvaluations were severe, the sums involved were puny, six to twelve months ago a good day on the Chinese stock markets was 1 billion dollars worth of stock changed hands. This week a report was released illustrating that now the amount of domestic Chinese stock business eclipses all the volume in all the stock markets in the Asian region COMBINED. Yes, the amount of business is now more than the developed markets of Japan, Hong Kong, Australia, South Korea, Singapore, Thailand and Taiwan. Well here is a frightening statistic for you, these usually conservative savers have WITHDRAWN 1.674 TRILLION Yuan in April alone, and translated into dollars that is 219 BILLION DOLLARS. Yesterdays volume was over 46 billion dollars. This is BIG money even in the US."

When this bubble bursts, and there are a lot of reasons why it will one day, it may well be seen as the straw which breaks the whole lot of financially imbalanced camels now held together by pins and needles. If the Chinese can manage to hold this internal malinvestment mania from bursting while trying to buy up all manner of resources for a future they think or hope they will be able to control, they will do so; and here again I don't think it unreasonable to suggest that after the 2008 Olympics is as good a marker as any other of when such things may well begin to come unhinged.

In any event, all the warnings of looming financial disaster coming from all manner of financial players and thinkers of late are just the silly musings of brain dead folk addicted to their doomer porn. Hence:

Peak Oil imbalance realities = doomer porn rantings
Financial imbalance realities = doomer porn rantings
Climate Change imbalance realities = doomer porn rantings
Population/Ecologic imbalance realities = doomer porn rantings
Geo-Political imbalance realities = doomer porn rantings

I guess all these realities combined are ignorable because they'll all get magically fixed according to your credo: "Remember, we are only one cubic mile from freedom."

By gosh, you must be correct with such logical brilliance!

godraz, we may differ, but I like your style! :-)

Your extraction:

"This week a report was released illustrating that now the amount of domestic Chinese stock business eclipses all the volume in all the stock markets in the Asian region COMBINED. Yes, the amount of business is now more than the developed markets of Japan, Hong Kong, Australia, South Korea, Singapore, Thailand and Taiwan. Well here is a frightening statistic for you, these usually conservative savers have WITHDRAWN 1.674 TRILLION Yuan in April alone, and translated into dollars that is 219 BILLION DOLLARS. Yesterdays volume was over 46 billion dollars. This is BIG money even in the US."

So am I understanding you that the the bubble burst will be caused by a collapse in Chinese equity markets?

In one way, I can see the logic of that, but I don't see how it leaves China in a better position then the U.S. It seems that China is in the same runaway stock market we were in in the 1990's. When our bubble finally burst, and the dot coms followed by the Enron energy and wireless collapse came, it didn't seem to hurt China much....However, I have been arguing that China and Europe are both bubbles for some time now, much more so than the U.S. is, and to the extent that the U.S. and Europe are invested in China, they could just as easily be sucked down wth the Chinese collapse.

Your sentence "In any event, all the warnings of looming financial disaster coming from all manner of financial players and thinkers of late are just the silly musings of brain dead folk addicted to their doomer porn."

If all the financial experts are saying the doom is coming, then how is all this money being poured in? Again, I am not denying it could happen. I am also not denying that it may not happen for another two decades.

Your best bet: hedge your bets.

Remember, we are only one cubic mile from freedom (that's from information in a post by Khebab, by the way, showing that the world consumption of oil in one year would fill a volume of one cubic mile. It is said that the consumption of the U.S. is approx. one quarter of the world's consumption, which means that U.S. consumption would be aprpox. one quarter of a cubic mile, or the width by the depth by the height of a standard U.S. drag strip)

Reality is not optional.
I am a new poster on this board although I have lurked for several years, have enjoyed the conversations and have learned from them. Thanks My parents lived through the depression on a farm in poor farming country. They raised what they needed to eat along with a few small cash crops (and two kids) but their real income came from making shine. Sugar is cheap right now. Plastic drums are cheap if purchased in quantity. It is perfectly legal to buy as many tons of sugar as you feel you will need. Buy as much sugar as can cheaply and safely store, store it in the plastic drums and if the need arises it can be easily turned into an alcoholic beverage. While you are buying your sugar attempt to make arrangements to trade some finished product for more sugar in the future. Look around on the internet and you will find all manner of directions on how to build, set up and operate a still. Buy what you will need but dont set up the still and operate it until the right time comes. You will know when the right time comes for you will see lots of people looking for a drink but no liquor to be had. There is always a good market for alcohol and when times get tough and people are doing lots of hard manual labor they drink more. Liquor will also be readily acceptable as barter. As medicines such as pain killers become harder to get people will return to the old pain killer, alcohol. Alchohol consumption per person today is a tiny fraction of what it was during the first 150 years of American History. The Americans that cleared land and pulled stumps by hand to create farmland needed painkillers every evening. If the situation in the world gets as bad as I believe its going to, the governments are going to have more to do than chase moonshiners. I believe this is a good example of what can be done on a local level for those that dont have their own farm as a resource.

One problem with using sugar. It creates acetic acid and thus gives one a massive hangover and headache.

Best to use corn. Very good moonshine is smooth and not harsh at all. The oldtimers here used nothing but corn. Corn mash in a good copper still with white oak kindling. Near a running branch for good water. The Foxfire series has some good articles on this.

Myself I prefer homebrew beer or good fruit wine. Strong and sweet like good country wine should be. My stepfathers parents were 1st generation French. They made very good country wine from peaches. Lived down in the Ozarks where many of french descent lived and mined iron ore(tiff they called it)..Long ago times that was. We would go to a backwoods tavern and listen to them play original french music. Drank likker out of a fruit jar.

Times was good then. Big catholic church in town. Lots of good hunting. Old Mines was the town they lived in. Near Potosi. Back down in timber rattler and copperhead country.
There was some wild and wooly outback down there. Still is and even wilder now I believe.


I think the thing that bears, (and bulls) repeating, especially on this site is that financial growth and prosperity are directly linked to energy. Cheep, high intensity, transportable energy can be ramped up to accommodate massive financial growth, and visa versa.

The participants in the producing and consuming of that energy benifite hugely. Those who are denied or limited in access to it wither and DIE.

Capitalism has worked ideally in allowing the fastest possible degree of consumption and wealth building but is completely inadequate for what we are about to enter into.

There are no ideal investments or acquisitions to deal with what is about to transpire which will not ultimately become used for common good. We must stop thinking in terms of the existing model of have and have not, me and mine, and least of all that killer greed unless you believe in soft landing, slight adjustment then business as usual.

Do you think you can have lights on in your house when others do not?
Do you think you can fish in the river and eat well when hundreds around can not?
Do you think you can grow a personal garden whith hundreds , thousands are unable to and out looking for food for their young?

Unless you can hire a platoon of blackwater guards it ain’t gon’a happen. Besides you would have to feed them also.

I propose adding to the ELP model the very critical element of COMMUNITY

Or I suppose as others have already proposed HUMANITY

We all need to acknowledge that we need HELP

I would have to agree with you airdale if the object of our enterprise was to please the palate of those that know a fine liquor when they taste one. However, since a great deal of posters to this thread seemed concerned about how to make a living during an economic collapse I believe that cheap busthead liquor would provide a greater ROI. A couple of hours of hard work in the morning will get rid of a hangover. Mind you, I dont propose to introduce any harmful ingredients into the mash via the use of lead soldered radiators, etc, but advocate a quality still that would crank out enough high octane liquor to keep the business on a sound financial footing.
My parents were cajuns and lived south of Monroe La. near where the piney woods meet the Mississippi Delta. You are certainly right about the wild times back then! There were pulp wood cutters, roughnecks working the oil/gas rigs, swampers that cut cypress in the bayous, paper mill workers, farmers and sharecroppers, barge crews, levy gangs, and they all hit the honkeytonks on Saturday nights. Shootings and stabbings were common. One night an arguement ensued about a crap game and a couple of the guys walked outside and flung a bundle of dynamite in through the front door. It blew the walls out and the roof fell down on the joint. No body was killed but the guys that dragged themselves out of that pile of sticks had nearly all their clothes blown off and in tatters. Looked like something out of the funny books. I guess they heard the blast over in town cause the sheriff showed up a while later. Course, no one remembered what happened.
Maybe I should write up a financial plan for my still and submit it to one of these banks that are so eager to loan money? What do you think? In my entire life I dont recall a liquor store going belly up.

One problem with using sugar. It creates acetic acid and thus gives one a massive hangover and headache.

Boiling point of Acetic acid 244.5 °F
Boiling point of ethyl alcohol 174 °F

So how, in a vapor separation operation of 'making shine' is your assertion correct?

And we all know how the government for years has tried to ban Vinegar due to the massive hangover and headaches caused by the Acetic acid that is the main ingredient.
Them thar Vinegar headaches are well known...right?

I had a double parental headache from acetic acid when in elementary school I sold my mothers vinegar relabeled...ACETIC another kid. His parents charged over to my parents and etc...when the dust settled and primary charges dropped, I was still convicted of unfair trade practices.

Lot's of intersting posts, here're my 2 cents.
When will the shitstorm hit? Next week, next year, 10 years from now? The data is very vague as far as PO, credit bubble and other parameters are concerned. The only sure bet is that the current paradigm is not sustainable on the long run. My guess is somewhere between next week and 20 years from now. I think we still have at least 5 years before things get really ugly. So you have to find a balance between living and planing ahead. Personally I don't derive too much enjoyment out of fancy cloth, restaurants, BMWs and other finance intensive toys.
I still go on extended vacations (by plane), have good food and beer/wine and the likes. " wait, I live", there's certainly something to that. Enjoy the good times while they last but don't lose focus on the long run.
Living arrangemnts: I think the best places are small to medium sized towns. Richmond, Raleigh, Greenville, Nashville, Little Rock, etc. come to mind. Personally I set up camp in Durham, NC. Working in Maimi right now, but that's only temporary.
- moderate to low housing costs. Not all markets experienced a bubble. There still plenty of good real estate bargains out therte if you bother to look in the right places. (no not in CA, AZ or FL but in AK, SC, NC, TN you still find lots of reasonbly priced properties)
- not too extreme climates (heating/cooling considerations)
-no or few natural catastrophes (draughts, earth quakes, hurricanes)
- get a place with at least 1+ acres for gardening, 5+ to grow heating fuel (i.e. wood) & food, chicken or learn to operate a gun and gut a deer (that's a skill).
- stay away from totally unsustainable places (Phoenix, Vegas, New Orleans, Miami, most of CA), Once the crunch is on, those place will NOT be bailed out once TSHFT (like major natural disaster/draught) 'cos of a lack of resources from the federal/state government. Tough luck, too bad suckers.
- insulate your house, get a stove. Invest in a geo-sourced heating/cooling system. They are more efficient than anything else on the market as long as there's electricity (google waterfurnace).
- learn a skill that's useful. Any hobbies other than watching TV? Electrical, gardening, plumbing, wood working, etc.
- investments. Hard to say. We are looking at potentially high inflation. A fallacy would be to assume that if the dollar goes down your income goes up by the same ratio. PAY OFF DEBT!!! Better save than sorry. Metals? Maybe but don't put all your eggs in one basket. A heating system and insulation are a much better investments, as are tools and skills. A well with a hand pump & reservoir, a garden, a fruit/nut orchard, a home brewing set up (people always follow their vices)...if you brain storm there're plenty of other good investments. Gold is fine, but in the end you can't eat it, you can't heat your house with it and you can't catch a buzz from it. I talked to a lot of older relatives in Germany that lived through WWII and the years that followed. Gold and Silver retain some value, but not as much as most people believe. Food, heat and drugs (booze, tobacco) rule supreme. Make sure you have those bases covered before you think about some high flying investments.

The bubbles
housing, stocks, natural resources.
Naturally as the currency declines assets will increase. Even in Weimar Germany the stock market exploded in nominal terms; it failed to keep up with monetary inflation. I don't think we will have a major market crash, a minor adjustment maybe, but no full scale crash. Same is true for housing. Inflation running 10+%, assets increase about the same give or take. So even if housing prices stay the same in nominal terms, I consider that somewhat of a crash.
60% of the worlds population live in Asia (India & China mostly). For investments, buy what China buys, sell what China sells; that's a good rule of thumb. What does China buy? Raw materials and energy mostly.
Oh yeah, what I forget to mention. Quit your membership in the fitness club and get a nice bike. That will come in handy once the pumps at the local gas station will start to sputter.

Speaking of China, is anyone looking for a bubble? Here is the kind of thing the financial "pump and dump" newsletters are saying (my inbox stays full of them)

"The jump in popularity can be reduced to one major cause: the CSRC (the SEC's Chinese cousin) lifting the moratorium on new IPOs on the Chinese exchanges. Since new IPOs received the green light last fall, the Chinese markets have surged. So have most other markets in the world.

And it's not only mainland Chinese companies that are seeking out the ocean of liquidity unleashed by Chinese speculators and investors -- and, of course, international institutions. Every company in Hong Kong or Macau is now seeking to channel some of the green their way, by launching new stock offerings in Shanghai or Shenzhen. The list of companies scheduled to go public is a veritable who’s who of China's high and mighty.

The surge in the Chinese markets is only beginning. It is fueled by unstoppable economic growth, unprecedented prosperity -- the Chinese "middle class" is now as big as the entire population of the United States -- and equally inescapable demographics."

Whenever the national regulatory agencies look the other way and "release the hounds", that's a sign to get out of the way....remember the days of the Enron type accounting when all you had to do is "project" profit, and you could sell paper on projected profit?

Yeah, all we have to do is sit back and wait for this one to blow up....and just be sure and steer clear of China IPO's, (o.k. maybe a few exceptions to that one....PV solar if you can catch it after a big drop, and have your sell order in for the dead cat bounces :-), which reminds me, PV solar looks a bit over cooked too....potential is HUGE in the long run but could get slammed pretty hard in the short term...

Remember, we are only one cubic mile from freedom

Jerome - I understand that bubbles do happen, but it seems to me there has to be a reality check here that's keeping things in hand to some degree - or else perhaps we can point the finger at something that's the key to the unreality. If banks are making high risk loans at excessively low rates, shouldn't that show up to shareholders as a decline in return on capital, and bank stocks should drop? Yet stock market valuations for banking and financial firms seem to be very high right now - why is that?

Is the problem in the accounting system? You mention valuations based on growth projections - surely there are standard accounting rules that limit what can legitimately be assigned in such cases? Are people circumventing accounting rules, or has something fundamentally changed?

there is a development that many are not aware of - its commonly called the Plunge Protection Team.
The PPT was formed by Reagan after the crash of 87. The purpose is to foster a coordinated rapid response by all major participants to sudden market declines or events like LTCM or Amranth. The PPT includes the wall street banks - Goldman, JP Morgan, as well as the Fed Reserve, the Fed Gov, the SEC, etc.

What has developed over the past 20 years is a pattern of direct, covert, (illegal) intervention in the markets.

Since Henry Paulson came on board the PPT has been meeting every six weeks.

Here is what happens -
1. in Feb, the Shanghai Index took a sudden tumble. this spread around the world. the US markets dropped. Then suddenly, as if by magic, "someone" came in and started buying futures on a massive scale, and drove the market up.

2. Gold is commonly seen as an indicator of inflation - the Fed Gov drives power from the printing press and cannot have the gold price accelerate too rapidly. So the wall street banks directly manipulate the glod price in a variety of ways. Same with silver

The way it works (I think) is that Goldman Sachs has, lets say, a $500 billion line of credit from the Federal Reserve.
The Fed can do this, because its all paper money, and the Fed can print as much money as they want. Goldman intervenes and buys or sells as required to stabilize the market. Goldman does not care if they lose - losing or making money is not the point - broad market price stability is the point.

So if it looked like a crash was going to happen, and all the hedge funds pressed the sell button at the same time, who is on the other side of the trade?
Uncle Sam thats who.
Then when the hedge funds realize that a crash is not going to happen, fear turns to greed and they jump back in on the buy side and the normal market forces take over, and Uncle Sam (PPT) can withdraw.

The point is to stop market trends before they start. Mr Market is manic depressive. Psychology rules.
So if the Fed Gov can intervene and keep a nice steady uptrend, this is to everyones benefit - right?

I mean what is the point of a market crash?
Everyone loses including the Fed Gov because they lose tax revenue, people are thrown out of work, then they have to jack around the interest rate, the dollar declines, gas prices go up etc.

So is this illegal? Who defines illegal?

[This is a financial orientated article so I will post this here.]

I still have not found an answer to the simple question as to whether US/UK Interest rates are likely to go up or down in response to PO.

If the financial markets go pop b4 PO declared is it likely to go lower like after 2000 Dotcom bust to prime economy? If markets collapse after PO then what?

I have seen Inflationary arguments that make sense: more expensive inputs to goods translates to more expensive 32,000 mile BLT sandwich, etc. High Inflation = Higher Interest rates

I have seen Deflationary arguments that make sense: contraction of lending/debt = less money in economy = deflation. Certainly general awareness of PO consequence is going to trash people belief in their future ability to repay large loans and hence take out debt. Banks want people to borrow so they offer low low rates but no-one bites (wasn't this what happend to Japan over the last 15 years or so?)

On top of this the indexes mask out housing and direct energy costs as 'volotile' yet these have been and will be the main causes of spending increase and isn't this Inflation? Havn't the banks simply created a huge amount of liquidity/debt/economy by printing money while the Inflationary effects have been masked and only show up in Asset price bubbles??

What would be the Inflation/Interest rate level today if housing and Energy HAD been factored in?


P.S. I have read a previous article on TOD concerning this and the two 'models'/definitions of 'Inflation' but am still unsure!

When the topic turns from oil to economics, the quality of understanding and commentary at the Oil Drum goes from very high to pretty low in a hurry.

Be really careful following advice you read in this thread.

Which topics here do you think are the most questionable?

Bonjour to Jerome and all the comments here. As an ex oilman working in the UK in financial engineering with an investment house, the only true money that ever was invented worth anything in stagflation, inflation, deflation, hyperinflation or whatever mechanism phases the central banks (not the retail, investment, merchant and commercial banks)want you to believe we are in is gold.

There is no question we are on an extended leg feeding frenzy where the domino effect will start someday, the only missing link people should watch are the charts of various financial instruments for clues.

I am surprised how few discussions take place on fundamental and technical factors without stressing what basic charts are telling us.

As of today, the yen carry trade moves on although some early clues on what I call the anglo commonwealth currencies (Australia, New Zealand, Canada) are there to be seen. Nobody wants a strong currency vis-a-vis the US dollar in this scenario or find themselves in the crossfire head on with rising commodity prices and a depressed manufacturing sector. Think the 'rust belt' US states, Ontario and Victoria unlike Western Australia in Australia for this scenario.

There are bargains out there yet they need to be placed into perspective. I happen to like property (real estate) in stable growth potential areas overlooked or sub performing. In the US, cities like Boise and the Austin-San Antonio corridor give yield and good returns for less outlay and thats just been over 2 years now versus many high priced over extended areas where it is negative and no yield growth. Look for quality of life and diversification. Even in Europe parts of Slovakia and France show promise if one has an eye for value.

Property aside, cash and metals are good as is uranium ETFs for now. When central banks pull the plug on all of this, its cities and places with service based economies this time that will suffer the most, anywhere one finds excess.

If oil did what few in the world think and corrected swiftly (not as bullish on it long term, believe with technology and allowing the private sector independents to innovate we can diffuse peak oil challenges), those regions that are not properly diversified will suffer immensely due to short sightness and not keeping pace with public infrastructure expenditures.

We can do a better job at extracting our oil in place and see a more manageable price environment closer to $45 that central banks and big oil may initiate to 'reflate' and shake out the excess that their dreaded fear of deflation may cause. By elimination, if not by wisdom, we will eventually turn to a massive national and international conservation effort to manage what we have and get technology and innovation away from colleges and institutes right down to SMEs who were the backbone of the oil industry in the first place managing risk.

It should be launched with further development of coal and nuclear energy, along with imported liquid natural gas, tight-sands gas, coal-bed methane, gas-to-liquids conversion, tar sands and wind power. (Solar and biomass are not yet sufficiently developed to play a leading role.) And the ubiquitous oil shale needs a rethink as the 2% replacement factor may be made while paying homage to community endeavors to foster some common sense conservation away from NGOs, governments and special interest groups.

Mankind's ability to adapt with ingenuity, such as the provision of blogs like this is a good start along that progressionary road.

Many banks are on tenderhooks right now yet it is their multiplier and need to compete and build balance sheets that is allowing them to make loans and 'tranches' to companies well over extended currently. There are more then enough private equity and hedge funds now not far off heading towards the cliff edge as we speak.

I do think however we may be some time off yet and the catalyst after today's meetings in Washington will possibly be China. While more then a few central banks have been propping up their exchanges and bourses in particular since 9/11, China will have to be careful and start letting out some air on their indices very swiftly as although it would like the world to observe an economic powerhouse by the time of the Beijing games, it will have egg on its face if the world finds itself in a severe downturn laying the blame on her feet. Its different then in 1997, we all watch for signs of a 40,000 Nikkei like 1989 Japan from China's quarter now.

In summary, the charts do not lie and they will when read correctly give us signs of change and where we all need to switch funds fast from one mechanism to another. I see a renewed'golden future' long term with corrections for the yellow metal despite what large central banks try to do.

We may be in a paper fiat world but sooner or later, some emerging and mid sized nations will revert back to fractional reserve startegies whereby gold becomes a significant part of that equation as it should in any portfolio.

When some billionaires are divesting part of their debt back to safehouse quasi government and teacher pension funds hungry for yield and returns, then the smaller investor and individual should take notice 'when big fish look to leave the estuary' for whatever economic cycle we are presently in.