For all practical purposes the markets are closed right now

Banks Delay Sale Of Chrysler Debt As Market Stalls

Wall Street's corporate-debt machine has helped to finance the increasingly exotic takeover deals of the buyout boom and to shore up some of the nation's ailing industries with cheap loans and bonds. Now, that machine is sputtering.

Yesterday, Chrysler Group became a signpost for the high-yield-debt market's strain as bankers for the ailing auto giant postponed a $12 billion sale of debt to investors as part of a buyout severing Chrysler from German parent DaimlerChrysler AG.


"For all practical purposes the markets are closed right now," said Chad Leat, co-head of Global Credit Markets at Citigroup.

While you've certainly heard of the big drop in the Dow Jones in the past two days, and probably heard that the housing market keeps on getting worse, the most ominous news are actually coming from a distinct part of the financial markets - leveraged debt.

That particular market, as suggests the quote I used in the title of the diary, is undergoing a dramatic change in mood as bankers, which had been bending over backwards to lend ever more money at ever more favorable conditions have suddenly decided that this was not a good idea and are brutally turning off the taps. Deals such as the huge $12 billion financing for the purchase of Chrysler by Cerberus have been canceled - or, to be more precise, the syndication of these deals has been killed, which means that the client will still get the money, but the banks that structured the deal initially and underwrote the loans (i.e. they committed to lending the money) won't be able to share that risk with others on the market and are stuck with it. For those deals already underwritten, the victims are the banks that did the deal; for deals not yet underwritten, the client won't see any money.

That market matters, as it is the one that has been feeding the private equity boom, i.e. the increasingly aggressive purchases of companies by funds which were able to bid high prices precisely because they could find cheap and easy finance. That boom had fueled the increase in stock market prices (with the price of targeted companies after jumping on such deals, and many others going up on speculation that they could be purchased) and in the price of many other assets - simply because buyers had lots of money.

It's the same kind of market that lent money to subprime lenders for them to on-lend to clients borrowing to buy overpriced houses (in the hope of flipping them quickly). As long as money was plentiful, prices kept on going up and the bet on them going up was vindicated, further fueling the boom.

Easy lending came through lower interest rates, and lower financing costs. Thus, for a while, higher acquisition prices (whether of homes or of other companies) did not translate into higher financing burdens, making such acquisitions not unreasonable proposals. But as interest rates increased (because of Fed-driven increases, out of inflation fears), these costs jumped up - at least for those borrowers on adjustable rates.

The first to feel the pain were those home owners that took out the most recent mortgages, i.e. the most aggressive and those the most unlikely to resist to any market deterioration like those called "ninja" loans: no income, no job or assets, which often included interest rate triggers after a year or two and delayed principal repayments. Many of these are in payment arrears, dragging down with them the subprime lenders that provided the money, and damaging the banks that financed these. That has been going on for a number of months, and will take many more months to fully reveal itself, as lenders are not keen to take drastic action that would reveal how bad things are: acknowledge payment defaults and you trigger covenants (obligations to inform your own lenders and the markets) and risk downgrades and increased costs, repossess and you end up with hard to sell houses in a tough market (repossess lots of houses and you cause a supply glut and a price crash), call in loans to weakened subprime lenders and you might push it to bankruptcy, and get handed a big pile of dodgy loans instead of actual money, etc... So everybody is trying to slow the day of reckoning as much as possible, and we're basically seeing a big slow motion crash, with no panic as of yet.

Everybody is tightening lending and practices (so as at least not to increase the size of the existing problem), which is a good thing per se, but is contributing to the market slowdown as buyers can no longer access aggressive financing terms and can afford to spend less on their purchases, thus bringing the market down and forcing additional tightening.

But as the tightening includes lending to many funds that dabbled into real estate, banks are reconsidering their lending practices to other sectors, starting with those where other funds are active, and that's where we get to the leverage buy-out / private equity credit crunch: banks are simply becoming more prudent and, to put it simply, have stopped throwing money at funds for big-ticket acquisitions. That does not mean that existing deals are going bad, but that it's getting harder to do new deals. But, again, we have a vicious circle starting: with fewer buyers, the price of the targets will stop going up and may go down as market speculation on take-over recedes. As prices go down, older deals look increasingly expensive, and may create (as of yet virtual) losses for those that bought at inflated prices. Should any buyer be unable to service its debts, the banks that lent the money will end up owning assets that are worth less than the money they put on the table to help buy it, and will swallow real losses (the investors lost their money first, but as they borrowed a lot, they may not have lost that much in absolute amounts).

Currently, default rates are at record lows, so there is no emergency yet. But part of that was made possible because companies that were in trouble (you know, in their actual economic activity, not in the financial engineering layer on top of it that hides the real business) could simply borrow more to go past their difficulties - which were usually of the debt servicing kind. They borrowed to pay old debts they would otherwise had trouble paying. But if borrowing more is suddenly no longer an option, then paying debt, especially if large new piles have been added on top of everything, is going to become, again, an issue. Thus default rates are likely to increase again simply because there is no longer any easy money to help hide the problems. And with record numbers of companies burdened with record level of debt following the private equity binge, defaults can only go up, especially as the economy slows down.

Financial markets make bets on the future income of the actual underlying economic activity of companies. Often, simply, financial deals effectively allow one side to "sell" (or "lock in") the future profits of a company, i.e; make these profits appear today. The other side, which puts up (borrowed) money today, expects to be repaid over the long term and usually will lowball somewhat the expectation of future streams in order to be sure to be repaid. What happened in the past couple of years is that these expectations became increasingly optimistic, and those that lent the money need the underlying economic performance to continue to do well.
Thus, the pressures that have driven profits up (and wages down, or sideways) in recent years are not going to abate, quite the opposite; in fact, they will become even more violent as the economy slows down: in order to continue to squeeze profits out of increasingly tough, or stagnant, markets, you can expect the time-tested restructurings, downsizings, rightsizings and wage restrictions to continue with ever more viciousness.

As we know, US consumers have barely seen their incomes increase in recent years. Consumption has been propped up by ever increasing levels of debt, and by buoyant house prices (whch made possible to raise home equity, i.e. to pile in again more debt). Such levels of debt are no longer going to be available, both as banks tighten standards, and as house prices stagnate or worse. And as incomes are unlikely to go anywhere in the context described above, consumption is likely to struggle, leading to lower growth, creating more economic hardship and tightening the noose over weak, over-indebted borrowers, whether households or companies, and putting their lenders in the position of having to take over assets (houses, businesses, or financial assets underpinned by the same) and holding them or trying to sell them in a hostile market. Selling makes the cost visible, but at least ends the problem. The problem is that if everybody tries to do the same, the markets will crash, as there won't be enough buyers on the other side - or not at the prices needed by the sellers.

Banks have lots of reserves, built up in the good days, and ways to hold on to assets (essentially by refinancing them, or restructuring their payment obligations) in the hope that they will survive and be worth more after things get better, and they will absorb a lot of the crisis (that process has started a while ago already in the real estate market). But at some point, there may be a bigger credit accident than the market can swallow (say, a bankruptcy by Ford or GM or by a medium-sized bank) and then all bets are off.

And of course, markets are all interlocked and all of this may have an impact on - or may be impacted by - the dollar exchange rate (a further weakening of the dollar would probably push interest rates up in order to incentivize foreigners to keep on buying the dollars needed to cover the current account deficit, which would worsen the woes of the weakest borrowers), the commodity markets and others.

What's happening today is that some alerts are ringing, and the overall financial system is highly vulnerable. Any shock could destabilise it. Some will say it will inevitably happen; some will say that the markets will manage to absorb the risks and spread them around. But we simply don't know. And the banks are clearly saying that some markets are vulnerable, and they are getting in a much different behavior than until recently, suddenly preferring prudence to doing what it takes to get the next deal.

:: ::

Politically, we need to say loudly that the current boom was the cause of much of the increasing inequality in recent years, and has been the source of many extravagant fortunes. As the bubble unwinds (or pops), it is essential to make it clear that it should not be workers, or taxpayers, that end up paying for the recklessness of the financiers, and that those that gorged on the good times should bear the pain of the new, leaner times. The dismantling of all the barriers between commercial banking and investment banking unsurprisingly took place near the beginning of the great Greenspan Bubble, it might be necessary to reconsider it. Taxes on capital gains, and on income on capital, have been lowered in the past; maybe it's time to change that again. The crushing of labor, and the erosion of labor rights, has made ever-increasing profits a reality and has fuelled the ever-more optimistic expectations of the financial markets. That should also be reconsidered. The focus on financial profits over industrial ones, unable to provide the same instant returns, has skewed the economy ever more towards financial services rather than other "real" activities (except the finance fuelled construction sector). That may not prove to have been the most sustainable policy.

Altogether, the politics of individual greed over those of a collective future need to be blamed.

PG here, and I think this brings up a couple of questions about interruptions in the trends of consolidation in the oil industry as well. Will those deals dry up too? I doubt it.

One of the largest problems I see is the accounting that allows corporations to book profit on future streams of income. This caused the Enron collapse IMHO, and looks to me as though it has fueled the Hedge Fund proliferation.

I suggest we need to make the officers of corporations and the boards of trustees financially liable for their mistakes doing these types of transactions. It may only partially recompense the pension holders and the shareowners, but it will make any board members in the future a lot more wary. They profit exhorbitantly by machinations to increase the price of stocks, but don't suffer any consequences
Bob Ebersole

Hey folks, this post is, as I write, #55 on reddit. I just wanted to let you know in case you were inclined to go vote it up.

(and no, I don't know if that means we're back at reddit or not...)

Simply put, it means that "corporate personhood" must, by necessity, be redefined or, more accurately, more properly defined. The notion that a fictional entity may demand all of the rights and freedoms of a flesh and blood human being has been a one-sided concept since its inception in 1889.
"Juristic persons", as corporations are sometimes called, have been free to demand and enjoy these rights without shouldering any of the responsibilities.
Time and time again we are admonished that "freedom isn't free", or that "with freedom and liberty goes an awesome amount of responsibility", as if we the citizens have somehow been lackadaisical in our shirking of such dues.
I don't know if it will take a generation of "Schoolhouse Rock" television skits to teach the idea of giant multi-story "persons" weighing in the hundreds of thousands of tons, moving about the city, crushing anyone who gets in their way, feeding at the trough and littering the landscape with their economic waste and frivolity.
I'd like to think that the grownups can grasp the concept a little better, but so far all we hear are the howls of outrage as "fictional persons" scream about how their rights are being infringed whenever the people demand they show a little responsibility.
Apparently all that responsibility, and the economic burdens associated with it, are "for the little people".
It's time to start treating these entities as the objects that they truly are, or else force them to shoulder the same discipline and responsibilities that we the little people, are forced to carry.

Couldn't agree more with your comments. Personally, I'd like to see the practice of corporations as legal entities abolished. And in it's place REAL people who are held accountable and responsible... same for government.



More like A.D. 400, Methinks. The cusp of Change is upon us, and the massiveness of the infrastructure is unsustainable, regardless of the availability of energy. The peaking of energy supplies surely isn't going to bode well for all the people who depend upon high resource flow from ground to landfill.

"If you want Change, keep it in your pocket."

This is all very bad news for peak oil mitigation. Economies will weaken, perhaps go into depression, as credit dries up. As we've discussed here many times, the energy markets (oil and natural gas) are priced at the marginal barrel - todays supply demand situation trumps predictions of future supply/demand imbalances. If there is plenty of oil available for the forseeable future (several months), oil prices drop.

If a credit collapse leads to depression, etc. we could have $40 oil, maybe higher maybe lower, but enough for policymakers, who are just now getting a whiff about oil depletions acrid scent, will ignore the Peak Oil warnings and go back to focusing on economic growth, jobs, etc. New wind, solar and other energy flows that were starting to be competitive at high oil prices, will look far less attractive to entrepreneurs and policy people at $50 oil or at $30 oil. After the stock market crash in 1932, oil went from $1.43 a barrel recent high, to 10 cents a barrel and stayed low for many years.

If demand destruction trumps depletion, what kind of signals will that send??

Then when the economy starts to reload, we are that much further along depletion, and have lost several more years of infrastructure planning and change

Dang, Nate, that would be true if the US was the whole world, but it's not. Instead, the US would just be priced out of the oil market, and "our" oil would just go to the higher bidder overseas. We are probably going to see a Weimar type hyperinflation that leaves just about everything produced overseas priced out of reach.

the credit crunch is not just going to affect the US - globalization/international trade has effectively connected ALL countries at least in the OECD. If we sneeze someone else will get the flu - some countries milder than others. China has built massive infrastructure and production capacity in last 5 years - if US goes into deep recession what do you think happens to China? Everything is linked - thats part of the problem

But China has 10% growth. An economic crisis, for them, means 5% growth or thereabouts. At that range, you still have demand growth for oil and other energy sources. That is likely to be enough to keep the markets tight, given that our own elasticity is not huge.

5% growth for China is not just an economic crisis, but also a political crisis. Those who have looked at China over the past number of years know that the place is a giant mess, physically, socially and economically. Slow down the growth that everybody over there depends on even slightly, and you can have giant riots on your hands in no time. And the Chinese gov't doesn't play games in using force against its own people, especially when they're protesting the gov't (see Tiannamin square).

IF the above scenario happens, and China's growth slows, it is possible that the Chinese economy could collapse, since it was built on the predication of high growth rates-somewhat similar to what we're seeing here in the US credit crisis, but more extreme (with possibly more extreme consequences/results).

Best hopes for a soft, managed landing (sorry Alan)
Franc (penguinzee)

I agree with Nate and Penguinzee on this. China is far from immune to any downturn here. Moreover, the Chinese revolution is only 58 or so years old -- there are many millions who still remember the revolution. The Chinese gov't is a giant labor contractor -- should the demand for goods in the West shrink significantly, they have a tremendous problem on their hands. The situation is quite different from the 30s -- whatever one might think of Stalin, the SU at that time was to a considerable extent immune to the economic disaster in the West -- but not the military consequences of course.

Moreover, the Chinese revolution is only 58 or so years old -- there are many millions who still remember the revolution.

"Wars will come and governments will change, but the land and the people will go on." -paraphrased
-from "The Good Earth" by Pearl S. Buck

Dave: Stalin? The Soviet Union in the 30s? Open your eyes-China's economy is already almost as large as the USA. This was done in less than 30 years.

"China's economy is already almost as large as the USA."

Source please? By GDP China's GDP in 2006 was less than 20% of the US, and was still behind Germany and Japan, according to the IMF.

Shaman: CIA Factbook has it at approx 77% of USA (PPP). China is already the largest consumer market in the world for every product except autos. It is the second largest exporter. Does that sound to you like a country 20% the size of the USA? At the current pace, China will be the largest consumer market in the world by 2015 and by far the largest exporter.

Thanks for the source. I wish they had more detail about their methodology on PPP - it would appear that they are valuing the Yuan at four times its official rate. I must say I'm a bit skeptical about that, but that's a gut feeling, not based on inside knowledge.

It's tough to predict China's trajectory - we're in uncharted territory.

Massive importer of food, but strong agrarian base. Low domestic energy production, but very low energy requirement for basic survival. Catastrophic environmental depletion, but lots of resources in the empty quarter to the North. And the biggest standing army in the world.

Low domestic energy production?!

Chinese coal production is huge (and then there's Daqing)! The biggest increase in global primary energy supply during the last 10 years has very likely come from exploding Chinese coal mining.

Sure, domestic demand is even greater than the domestic supply, but you can say that too about another vast energy producer, the USA.

You call it uncharted territory. The Chinese could simply call it another "five year plan", one which involves a certain staged withdrawal and some "healthy" austerity measures.

The capacity for China to revert back to one bowl of rice per day, two sets of green pajamas and a rusty bicycle is not to be dismissed. I think a lot of people are underestimating the Chinese government's willingness to strike an abrupt 180 degree turn seemingly overnight.

Why do you assume collapse is linear?

I highly doubt that international markets will fare well during a US recession or depression.

During the market rout this last week did any exchanges in any other nations avoid tumbling?

It is a global market now, not national.

No assumptions. Just saying that it will take more than a recession to stop demand growth. It would take an outright depression, or some other kind of meltdown.

It's by no means impossible, of course. But oddly enough, in that situation, energy probably won't be the biggest issue of the day.

Thats my point. Energy IS the issue of the day, but its going to be obfuscated by other issues and when the average person next notices it, its teeth will be sharper and bigger.

Jerome- has this/will this credit selloff effect wind project financings?

Project finance is always late compared to other types of financings (lots of inertia, long lead times for the underlying projects, etc...), so we're still in boom mode right now.

And renewable energy is especially booming right now, so no lack of work. In fact, I worry about how insane the end of the year is likely to be for me.

Even if the markets crash, renewable energy, thanks to both favorable regulation (guaranteed tariffs, i.e. no volume and no price risk, are going to be a risk banks love in the context of a market meltdown) and the overall favorable context (global warming, energy independence, etc...) is unlikely to suffer as much as other sectors.

Shanghai wasn't correlating....

Not the FXI BS, the actual SSE was up thurs, not fri, and again today. It's the only market that bucked on thurs, i do believe. Honestly, China has 1.2 Trillion in USD paper, so they can sterilize any downturn in their economy for awhile. Like some have noted, they are much larger than most people think. We're all stuck with this podunk image of China, but when you do the numbers they are doubling in under seven years. Our image is off each month they add that 1% more.

Revisit history...why did the ROARING twenties happen? We were loaning massive amts to Britian after WWI. The money supply was exploding, then the unthinkable happened. The pound sterling defaulted and the dollar became defacto world reserve currency. What's changed? The US is in debt to the Chinese (& Japan, but lets simplify) and the Yuan will become the new world reserve currency. It's hard for you patriots to accept I know, but it's going to happen and history will once again rhyme.

I've commented on that for the last year and a half, that I believe it will be the yuan and not the euro that will succeed the dollar. Though far from identical, there are some interesting parallels between the historical fall of the pound and the rise of the dollar versus the current fall of the dollar and rise of the yuan.

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone

But isn't that 10% growth fueled by both international sales and increased domestic consumption by a rising middle class? If international sales drop, won't that then impact the middle class and their spending thereby creating a ripple effect and a much larger drop in the economy?

Another interesting tidbit:

Via the Big Picture

90% foreign sounds very suspect - one usually reads estimates around 60% quoted, and they can only cite "internal figures" meaning they have no source.

Except that the Chinese government is fully prepared to lay waste to twenty years of ventures into capitalistic experiments and plunge their citizenry back into 1949 at the drop of a hat, even if they have to kill off a third of their population in order to make it so.
Please remember that a purge in China is not limited to size, severity or duration, but rather linked to a goal set forth by the old moustaches who own or control the bulk of economic power in the region.
If China sees that it is in its best interests to punish the West or "teach it a lesson" they will do so, even if they must invent a new "Gang of Four" and restart the purges.
China must prevail, or die, and something tells me that we won't be seeing the largest nation on earth dissolve itself just because a few rich capitalists wish it to be so.
That dog might hunt in the rotted corpses of Europe and the North American continent but not in the Asian Empire.
And by this action we WILL see China ultimately prevail and re-emerge as the top superpower in the world.

China plays for the long term win, it only dabbles for the short term glory, and it only gambles what it is willing to lose.

China is and always has been willing to lose a lot in order to make a point.

Spot on, Nate. Peak Oil is a problem that politicos are all too willing to sweep under the rug and a $40 barrel gives them a brand new broom!

Demand destruction is the way this system works. Recession, here we come.

The big question I can't answer is whether China has built up a big enough middle class to absorb a significant amount of the production that now comes to America. I believe that's their main strategy but I doubt they have achieved it yet.

If they can make that crucial transition we'll find out quickly enough because they will be able to weather the recession and keep increasing their oil use even as our use declines. That should provide a floor for the marginal price of oil.

$40 oil falls under the catagory of Desperate Wishfulness. You will never, ever see oil priced that low again.

Never say never. I am very bullish on oil but fully expect to see $50 oil in the next few years. I wouldnt make a bet on $40 oil, but I would on $50. (and also $150)

The demand is there world-wide that other nations will pay the equivalent of $70 USD for a barrel of oil. The price will not go down. Someone else will buy it first. Like I said, Desperate Wishfullness. I'll bet you believe CERA and OPEC figures as well. You will see the error sooner than later.

Cid: IMHO, the size and strength of China is underestimated greatly by almost all Americans. I think this is caused by the psychological effect of growing up in a country which was the undisputed economic global leader. Current estimates project China's consumer market surpassing the USA by 2015.

Brian: Where does that estimate come from. It strikes me as not credible. In 2006 the US GDP was over 13 trillion dollars, China's about 2.6. For their domestic market to catch ours, they would have to grow 5 fold. I know that GDP doesn't match "domestic consumer market" exactly, so what the measure here?

China's GDP in comparable prices (PPP) is $10.2 trillion for 2006. PPP is the more accurate indicator to use in this case, as most of the US GDP of $13T is spent in services which in China would cost tens of times less.

source please?

Thanks Levin - Brian also gave me that source up above. Must say that I'm skeptical, but that's a different issue.

Sham: CIA Factbook. When someone tells you that China's economy is 1/5 the size of the USA, doesn't it occur to you to question that? How is it that an economy 1/5 the size of the USA manufactures almost every product sold in the USA? The USA taxpayer owes well over a trillion dollars to this tiny country.

Brian, yes, of course I question it, I question IMF stats just as much as I question CIA ones.

All I know for certain is this; I traveled to China, held Yuan in my hand and spent them. This was in 1999, so certainly the situation has changed, but at that time my dollar equivalent in Yuan did not buy as much as my dollar would have back home.

The other aspect of this that has me skeptical is knowledge of how capitalism works. Yes, a substantial amount of manufactured goods are made in China. But in most cases these are subcontractors of American, Japanese and EU companies. We are not looking at a case of Chinese manufacturers directly selling to American retailers (except for some very large retailers like WalMart, who essentially turn them into subcontractors anyway). And knowing how capitalism works, I know these companies are taking their share of profits out of the supply chain.

Shaman: Almost none of the profits is being reinvested in the USA- it is being invested in China. Future wealth flows from current capital investment (that is how capitalism works).

Brian: It matters not where the profit is reinvested from the perspective of capital. National boundaries are of no interest to capital except for the tax burdens. That is why capital has moved manufacture to China and elsewhere. It cares not one wit about the nation or its workers. The ownership class remains pretty much the same(although certainly the expansion of the global economy allows for the expansion of that ownership class to include some Chinese).

That said - do you have anything other than the CIA numbers (not dissing them, just wondering about how you corroborate) that suggests the PPP for China is so great?

I didn't include this before, but the CIA PPP number concerns me in the sense that such a large difference between nominal GDP and PPP would support the assertion that Chinese military expenditures are of concern (note that the Factbook puts US mil expenditures at 4.06% of gdp compared to China's 3.8% of gdp (not ppp).

Already in 2008, probably, China will become the world's largest producer of motor vehicles.

Source? And how much of the production chain is is owned by the Chinese? Doing the work is not the same as owning the work.

As far as global capital is concerned, the USA is no longer a "rising star" - China is that now. Nor is the USA any longer even a "cow" to be milked dry -- they've just finished doing that over the past couple of decades or so. Now the USA is quickly becoming a "dog" to be sold out and killed off. Disinvestment in the USA is now the order of the day.


The price will not go down. Someone else will buy it first. Like I said, Desperate Wishfullness.

I am wishing for high oil prices, not low ones, for many reasons - not the least of which it will give people correct signals in changing consumptive patterns.

There is a big piece being overlooked here. The financial markets size DWARFS the energy markets size. Last year one hedge fund, Amaranth, had natural gas positions, on and off balance sheet, that were in excess of the annual consumption of natural gas in the USA - over 20 trillion cubic feet - the unwinding of these positions caused a 'crash' in nat gas prices. Don't believe for a second that this couldnt and won't happen to oil at some point in the future when all hedge funds come to understand peak oil and bid up the price via leverage etc. $50 oil, while fundamentally difficult to imagine, is almost a mathematical certainty, given a long linear time series.

I'll bet you believe CERA and OPEC figures as well. You will see the error sooner than later

Perhaps you were on vacation when my "Peak Oil - Whom to Believe? CERAiously" and the subsequent Parts II and III, were posted.

$50 oil, while fundamentally difficult to imagine, is almost a mathematical certainty

Virtually all asset prices should fall across the board in a deflation (ie as the money supply contracts substantially). What it amounts to is a bull market in cash, because everyone will be looking to cash out at the same time. I would agree with Nate that $50 oil is extremely likely, but that doesn't imply greater affordability if purchasing power is falling more quickly than price.

I would also agree that in the longer term oil prices should head much higher, and if they are higher in nominal terms, they will be far higher than that in real terms (ie adjusted for changes in the money supply). Most people would probably be priced out of the market entirely.

Higher highs. higher lows. (Matt Simmons has a great graphic of this somewhere.). The volatility will hamstring policy just as much as the absolute price rise. Look at nat gas for an example. 2 mild winters, and now 2 mild summers in a row means we are just a little more complacent on replacing NG in the electricity and heating mix.

I don't know that oil will hit $50 again. Im just pretty confident in normal or accelerated volatility which could kiss that price at any time...

I don't know that oil will hit $50 again.

What we do know is that the EROEI of oil has fallen by close to an order of magnitude over the Oil Age. If demand falls enough so that the planet can return to consuming only the easy oil, then the price might fall - assuming all the sunk costs in the more expensive new oil are ignored.

Just how is demand going to fall that much? By the industrial world shutting down? [Well, yeah, probably.]

I drove through a bit of western maine today to visit my son at summer camp. Outside of a few cottages, everything in Steep Falls, Standish and Bridgton is courtesy of petroleum. There are huge rock walls everywhere - it used to be farmland but is now grown over. Currenly populated with BMWs and fat Americans eating ice cream and french fries.

cfm back in Gray, ME

Just to clarify. All we know is that EROEI of DOMESTIC oil has declined from 100:1 in the 1930s to 30:1 in the 1970s to 10-17:1 in 2000. We can estimate global EROI on oil but no one has done this analysis (probably because the analysis wouldn't be worth much due to the lack of reliable data.)

We can surmise that world oil will follow the same best first mechanics that the US/Louisiana did, but we really don't know.

Amaranth unwinding was after much Katrina damage was restored, the drilling for NG intensified, and numerous LNG facilities were brought online or under construction. They get more than 60 mmcf/day per well in some areas.

There was an argument about why bread is not 4 loaves for a dollar anymore even though there were more loaves on the supermarket shelves? It is because they increased the supply of dollars faster than the supply of wheat, energy, labor, transport, etc.

If you get deflationary trends with people not using oil as much and producing more of it, then the price of oil might dip. I figure there is a traffic jam somewhere in the world as I write.

In going to a poor underdeveloped nation, what one recognized is the absence of street lights at night. It was like a person had one's headlights and everything else was pitch black. They are working on making cheap diode lights...if you build a better light bulb, the world will send a ship to your port.

At $50/barrel, I would expect:

1) China to be spending some of that $1 trillion on strategic oil reserves. Likewise India and anyone else with spare $.

2) Norway, Kuwait and other reserve rich (oil and money) nations to cut back production for "later".

3) Major oil users to hedge like crazy ! (See airliens)



(See airliens)

"Airliens" is right...hard to see the airline industry as profitable in a debt/diesel constrained future.

It was not a typo >:-)


I am, BTW, Short Delta. My first short sale ever. 12% gain in a week (beating that younger brother of the Pepsi Chairwomen).

A wise short, IMO.
If I were back in hedge fund land (the old paradigm...;), I'd be scouring stock lists to see which companies had a)alot of debt and b)had debt coming up in the next 6-12 months. These companies are going to be really hurt - a)their financing costs will be dramatically higher than they were, meaning corresponding drop in profits or worse b)they won't get financing at all...

Nate and Alan,
Take a look at Landry's restaurants-just had $400,000,000 in debt called.Their quarterlies are late because of an options backdating scandal. Looks to me like a possible bankruptcy. They have 83% institutional investors, so I'd guess they'll drop like a rock on Monday.
Bob Ebersole

I got you both beat. 147% increase in my forex account last week. If I do that for the rest of the year, I will be able to buy my own island for post PO.

Was someone betting on the end of the Yen carry trade in all this mess? Nice call. More coming, probably.

Arkansawyer here:

If oil goes to $40, a 12 oz Budweiser will sell for fifty cents.

$40 oil falls under the catagory of Desperate Wishfulness. You will never, ever see oil priced that low again.

Maybe in "New Dollars" once a few zeroes have been knocked off. (For example, $400,000,000 becomes New$40.) There is abundant precedent worldwide for that ploy.


Although I pretty much agree with your post, I very much disagree with the idea that the economy will "reload." In fact, I believe that the second window of opporunity, the first being in the '70s, to make the changes necessary will be lost. In fact, I would go so far as to say that it will be lost, essentially, forever.

We all use the Depression as a reference point and the only thing that got the economy going was WWII. As a Depression baby, I know how it impacted financial decision making throughout my family, essentially to the day they died. I see no reason why a similar psychological response would not be made today were the economy to tank.



I know WestTexas has mentioned in context with his ELP suggestions the oil patch depression that lasted from 1988 until prices started running up in 2002. That's 14 years, longer than the Great Depression. His attitudes, and mine, have been shaped by that downturn. My grandfather was a young man with a family in 1929, and he saved bent nails and glass jars until his death. So yes, economic hard times shape all of us and our families.

There's a huge difference between the current economy and that of 1929. In the early part of the 20th century we were the low cost manufacturer of the developed world, as our economy changed from a farm economy. And, now, most people are in jobs with intangible products-the service economy. And, Nate is very possibly right that demand destruction could outpace depletion and oil prices fall to $40 a barrel.People don't need gasoline for a repossed SUV to drive to a foreclosed McMansion.

Whether that will happen, especially with the rapid devaluation of the dollar and other economies rapidly changing away from links with the dollar, I just don't know. My crystal ball has a few smudges and is murky.

If its not too late, people need to focus on the economise parts of the ELP program, and the produce part too.


If everyone economizes then there will be no "reloading" of the economy as Nate states. This would be especially true were there Depression II. My point was that the window of opportunity to do something will have been lost since capital will not be available. Now, it could be argued that the millions of unemployed people will be put to work on public works projects. But I don't see that as realistic in a credit drought...unless we are talking about a dictatorship of some kind.



You are 120% right on, and that includes the dictatorship. Will the masses be used to build mass transportation? Why would they?

There will be demand destruction alright, but it will be for credit, not for oil. Lenders will not be willing to lend, and borrowers will stop borrowing.

For oil, there is a huge latent demand already, and it will only increase. Once production is known to be going down, everyone and their pet canary will be scrambling to pick up what's left. Much more of an economy will be diverted towards oil reserves. It's now or never.

The largest increase in demand will come from armies. Without sufficient oil, countries will be impossible to defend. Oil will equal power.

Few people in the decision making business have overlooked or forgotten that the lack of oil was what did in Germany and Japan. Today's armies use far more oil, per soldier, than did those 60 years ago. Use your army to get the oil to feed the army. In other words: Iraq.

"especially with the rapid devaluation of the dollar and other economies rapidly changing away from links with the dollar"

The Kuwaiti dinar rose to an 18-year high of KD 0.2820 against the dollar after the country's central bank allowed its currency to appreciate by 1.7 per cent, the third such revaluation in two months.

Analysts said that the move could encourage other Gulf Arab oil producers to review the level at which their currencies were pegged against the dollar.

The UAE dirham and the Saudi Arabian riyal moved to the upper end of their trading bands to stand at DH3.6716 and SR3.7495 against the dollar respectively.

_July 26, 2007, pg. 24, Financial Times (US edition)

Hey, I thought we had agreements with each of them, they can't start breaking away from the...

Politically, we need to say loudly that the current boom was the cause of much of the increasing inequality in recent years, and has been the source of many extravagant fortunes. As the bubble unwinds (or pops), it is essential to make it clear that it should not be workers, or taxpayers, that end up paying for the recklessness of the financiers, and that those that gorged on the good times should bear the pain of the new, leaner times.

A very European view, and the way it should be. Extremely unlikely to be handled this way in the US, the people that own the government will bail themselves out and pass the cost on to the taxpayer.

As far as the Chrysler deal word here is that the banks changed the arrangement and now both Cerberus and Daimler have to to contribute an extra 2bn (each) to get the deal done.

What seems dead is the Allison deal. Hard to see how GM and Ford can make it to the end of the year even with massive UAW givebacks during the current contract negotiations. GM is in a position to force a strike and subsequent bankruptcy as they reportedly have over 1m unsold vehicles, but both are technically in default.

EDIT, post was intended as response to original post by Jerome.

A very European view, and the way it should be.

sadly, I have no doubt that, even in Europe, it is the weaker members of society that will bear the brunt of any recession/unwinding, as usual. What is likely and what should be are, as often, quite different animals... but the difference gives political action a purpose, I suppose.

I am generally in your camp, however remember that Peak Oil, if it is indeed now, means we will start the inexorable decline of production but it also means its the highest production ever. Depletion, even if its over 5% annualized, can easily be overcome by demand destruction. The question we are debating I guess is if lower oil prices can overcome a credit crunch depression.

We all use the Depression as a reference point and the only thing that got the economy going was WWII.

Well of course all we need now is to get involved in a war to get us out of this mess! All this peace is hurting the economy! ;)

If the price of oil drops significantly, won't that be a sign that many people cannot afford to buy oil?

If I can buy gas at 3 bucks a gallon today, but tomorrow have only 50% of my current purchasing power, will I be able to spend very much on gasoline at half the price?

I might be forced to focus on food and medicine and then see if there is money left for gasoline.

Likewise, corporations and governments will need to re-prioritise spending to some degree. Even cheap petroleum products will not find as much demand when people are scrambling to find food, water, and shelter.

This looks to me like an opportunity for the powers that be to make the de facto "Corrupt Corporatist Command Economy" more transparently so, without all the phony democratic trappings and so-called humanitarian values.

Look for the supply of alcohol, marijuana, cocaine,and heroin to grow, and for common folks to be made to live more like serfs than ever. The rich will finance the sure bet that the rabble will need lots more dope to keep them in line.

Of course, there will be openings for new bike businesses and such.

Look for the supply of alcohol, marijuana, cocaine,and heroin to grow

Its happening. I know how those on the 2nd bottom rung in my generation (not the bottum rung, these guys have jobs, but the shittest jobs) live with themselves, and that is quite often through escaping via drugs.

I wonder if its a coincidence that the price and availability of drugs has been on a continual decline in the last 10 years I have been paying any attention?

However, my point of view is that its the demand that is growing... more and more people not really wanting to think too deeply about anything and taking the easy way out.

I wonder what would happen if there were no drugs (and alcohol...?) I imagine that the current system would not survive very long...

Then when the economy starts to reload, we are that much further along depletion, and have lost several more years of infrastructure planning and change

But wouldn't a recession be an excellent time to built such infrastructure -- cheap labor, oil, steel, ....

Yes, it would. But the prices signals won't be to build oil and steel infrastructure if the clearing price on those products gives signals of long term abundance.

I agree that a fall in oil price is a possibility if a recession develops in the next year or two and that it would send an incorrect signal about investment in energy-efficient technology and lifestyle. This reminiscent of the views of John Michael Greer as expressed in his Archdruid Report blog. His assumption is that such recessions and falls in commodity prices will effectively prevent proper adaptation which could otherwise save industrial society. His view is of a "cyclic decline" of recession, fall in commodity/energy prices, lack of ELP adaptation, partial recovery, increase in commodity/energy prices, followed by another recession - i.e., the worst of all possible worlds.

No cornucopia, no quick ELP-style adaptation caused by sky-high energy prices, no sudden collapse followed by rapid rebuilding of s sustainable society. Instead, the long, lingering, uneven decline over many decades he says is characteristic of the decline of complex societies and very difficult for societies (but maybe not aware individuals), to mitigate against.

But wouldn't a recession be an excellent time to built such infrastructure -- cheap labor, oil, steel, ....

You have to make people hungry enough to work for their food (or kill for it: which is one and the same to some, who would die before working in dirt)

We have spent the last 100 years replacing the 'drudgery' of hand labors with cheap oil and gas. The logical thing is to replace the oil we are using with hand labor and put people back on the land to raise food (the money of the near future).

"I am trying myself to choose an expression which will accurately convey the whole of the idea I have formed of it, but in vain; the old words despotism and tyranny are inappropriate: the thing itself is new; and since I cannot name it, I must attempt to define it.
"The first thing that strikes the observation is an innumerable multitude of men, all equal and alike, incessantly endeavoring to procure the petty and paltry pleasures with which they glut their lives. Each of them, living apart, is as a stranger to the fate of all the rest--his children and his fellow-citizens, he is close to them, but he sees them not;--he touches them, but he feels them not; he exists, but in himself and for himself alone; and if his kindred still remain to him, he may be said at any rate to have lost the country."
-Alexis de Tocqueville, 1835

Thanks to Thom Hartmann for quoting this in "Unequal Protection".

Didn't the horse collar spell the end to the human being as "best motor"? An electric tractor powered by hydroelectricity will still be much more effective than people power.

I doubt that we'll have people replacing tractors on farms--the value of work produced by human powered activity is outweighed by the cost of producing the premium food they require; humans are not much more efficient in changing food-to-work than internal combustion engines, and they have huge overhead too (20% ICE efficiency versus 25% for people?). Before we convert to electric? Well, a tractor can do a lot of work on a tank of soybean oil, doesn't need to be fed all winter, and besides, we don't have the hand tools to make people useful anyways.

We will have people "salvaging" copper to wire up more electric tractors.

I believe Marx called it "the commoditization of all relationships."

But wouldn't a recession be an excellent time to built such infrastructure -- cheap labor, oil, steel, ....

Lower nominal prices (ie unadjusted for changes in the money supply) and affordability are not the same thing. In a credit deflation, nominal prices would fall due the contraction of the money supply, but this would be very unlikely to lead to increased affordability. For affordability to increase, prices would have to fall while purchasers still had the same amount of money, or the same access to credit, and this is exceptionally unlikely to be the case for most people. While prices would fall, purchasing power would almost certainly fall much faster, which amounts to a price increase in real terms.

Nate, I tend to agree with you. I don't believe energy will be the immediate problem. Economic collapse will essentially remove demand and also disrupt the economy's ability to organise itself or respond to events. The true effects of climate change will then make themselves fully felt by degrading food security and destroying human habitation, throwing social systems into disarray. Finally, when humanity makes its call on energy resources to save it, it will also fail due to depletion; leaving civilisation totally vulnerable to collapse.

That doesn't even include the effects of geopolitical turmoil and mass migration caused by the three main drivers; economy, ecosystem and energy.

Economic failure is only the beginning and the whole sequence of events will take decades to unwind. I really don't believe people, even here, have fully internalised what lies ahead. The whole of civilisation will be more-or-less helpless in the face of an escalating crisis.

People will adapt, this will completely change the demand map/patterns. Like I said on today's Drum Beat; what will happen when people stay put and stop moving around, stop buying consumer junk and frivolous consumption. Life will go on but differently.

Triumvirate of collapse - Economy, Ecosystem, Energy

Thanks for pointing out something of major significance - we are seeing what appears to be the end of our seemingly endless credit expansion and the offering of loans to less and less qualified individuals / companies.

Nearly all of this debt makes sense only in an expanding economy. If we are at or near peak oil, expanding economies will be very much the exception. If we put together the problems of the past overly aggressive lending standards with the fact that economies will be reaching decades of plateau or decline, we are reaching a situation where a truly major change in the role of debt must take place. It is hard to know what is ahead. Some thoughts:

• How far will the decline in debt extend? Will even governments have difficulty rolling over their debt in years ahead?

• Debt is very closely tied to the monetary supply. If the reduction in debt results in deflation, a large percentage of debtors will become unable to repay their loans - not an acceptable outcome. Governments are likely to try to engineer inflation (even hyper-inflation) instead.

• We take a lot of things for granted - including an international monetary system that makes foreign trade easy. Could the international monetary system be badly disrupted by a credit meltdown?

"Could the international monetary system be badly disrupted by a credit meltdown?"

The rest of the world already recognizes the danger. That is why they are dumping US Dollar reserves, and in the case of China, providing US Dollar credits to other nations in exchange for hard assets, resources and leases(and diplomatic good will). They have also stopped buying US debt. They won't have to engineer hyperinflation. All those US Dollars are coming home to roost. I don't think there is a chance in hell of avoiding hyperinflation. Russia recently stated they would rather leave their oil in the ground than sell it for US dollars.

In many ways, I think the whole financial services market is a different kind of bubble. The financial services market assumes that money will have approximately the same value going forward - or to the extent that it doesn't one can adjust for it with interest rates. If hyper-inflation becomes common, most of the financial services products cease to make sense - life insurance, for example. All of the lending. Derivatives. I hope the people in London and New York that make their living in the financial services markets can find other things to do.

Great point Gail! What's the financial service affecting most people? Insurance! Most are ignorant of the effect the parasite known as insurance has on their budget. As a small biz owner my total nut for medical, car insurance (4 drivers in family), homeowners insurance, and an additional umbrella policy significantly exceeds my total combined expenditure for food and energy. I think of food and energy as essentials insurance too if I have a positive net worth. Either in price or insurance demanded maybe both. If people are forced to decide between the two I see the insurance expediture being rationalized more than food & energy. Net Net I still don't see the pressure on energy use/price being as great as other luxuries. Food and energy combined still account for less than 20% of most peoples incomes. Other comsumption will suffer the brunt unless we have the mother of all depressions. Bottom line energy/price use will be the last to fall maybe just before food. We already have ample proof...increasing energy demand in the face of stagnant/contracting income.


I'm with you on a Reinflation. That does seem to have always been the Feds raison d'être. Bill Gross, at PIMCO, sees it in the near future. I question how this is going to effect the Dollar. I would hazard to guess that an infusion of new dollars (lots of new dollars) onto Wall Street balance sheets would quicken the decline of the dollar faster than the rate that we've witnessed since 2001.

Bill Gross recently wrote that it was about time Private Equity (aka, junk bond) credit was repriced. For now too many years lenders have underpriced their merchandise (i.e., debt) allowing excess returns to be earned by corporate buyers. The Chrysler deal was so absurd on its face that, had it been financed, lenders would have reached new heights of stupidity. This game - like those played in all credit cycles - had to end, and it just did, preceded by the other symptom of credit excess, the subprime market. That the latter, without a peep from the Fed, was allowed to go to such extremes reflects poorly on Greenspan, under whose "leadership" the money supply expanded by 186%. Arthur Burns said it was the job of the Fed to take away the punchbowl before the party gets totally out of hand; under Greenspan more booze was added to keep the good times rolling. Instapundit media commentators on the stock market are freaking out with comments about a "credit crunch." Don't think so - this is not like Volker turning on the credit screws in the early '80s to break inflation; rather, lenders have (after being beat on the head by subprime) adjusted their credit standards to more rational levels, a change too long in coming, but that it would arrive was inevitable. Ten-year T bond yields have declined from around 5.25% a few months ago to 4.5% in an obvious flight to quality. This too is good as rational risk aversion is - in the long term - preferable to the idiocy behind most "Private Equity" deals - or making Ninja housing loans. The stock market is nothing but fear and greed imposed over a credit cycle. My hunch is we get through this repricing of junk credit without major damage; I'm more concerned with the $12 billion a month being dumped down the rat hole in Iraq, an amount that could escalate if the knuckleheads in D.C. continue their disastrous foreign policy course. Finally, whilst only a "trend" of a few days, while the bourse was getting swacked the price of oil went up, possibly for supply-demand reasons or a repricing of oil in dollar-denominated terms. Absent a global economic collapse (not in my crystal ball) I'd rather own oil stocks than the US$ that Bush & Co have done their best to destroy.

Mr. Chainsaw -

It's comforting to hear some less dire thoughts on where we may be headed. I generally feel some repricing/collapse/reality needs to occur in the current system. But it is getting a little scary...

My paltry savings ARE in foreign oil/energy/service companies, but I'm feeling a little insecure right now. The US will drag the world down to some extent, no?

Any words from you on how you think this will affect the value of some of these foreign companies in Asia, Australia, Europe...??

Will even governments have difficulty rolling over their debt in years ahead?

I don't think so. Government bonds are usually the safe havens. If we get to the point where governments cannot refinance themselves, it means we'll have other things to worry about (full economic meltdown or big wars).

Governments are likely to try to engineer inflation (even hyper-inflation) instead.

The interestign twist here is that this may not be an option for the US government, given that this would cause a loss of the role of international currency for the dollar - because there is an alternative available, and one with institutions that still have internalised the memory of earlier hyperinflationary episodes: the euro.

So currency competition may protect us from hyperinflation.

Everytime anyone mention "big wars", I think of that scene in The Good Shepherd:

Joseph Palmi: You're the guys that scare me. You're the people that make big wars.
Edward Wilson: No, we make sure the wars are small ones.

Deflation could be a result of the 'cleansing effect' of bankruptcy.

In my opinion
he USA is a peculiar situation -
1. It has been able to export its existing inflation for many years due to the currency being required for oil purchase; i.e. USA, alone amongst countries can print money without inflating it.
2. While it is true the US Govt is deeply indebted through printing "securities", the institutional holders have such huge exposure to the dollars viability that they dare not simply drop the hot potato.
3. The USA's printing presses have bought the most advanced military in the world. This allows the US to use an unique 'self-mandate'to acquire a significant gas and oil resource beyond its own not inconsiderable resources - and to control the major oil export choke points of the middle east.
4. As Earl Butz said, "Agripower has to be more important than petropower." He meant that the Middle East, at the time of the first 'oil shock', was vunerable to an embargo on grain. Climate variability and rocketing population may see the US dollar backed by grain carbohydrates exported to the Middle East(unprocessed, higher return on investment than processed into ethanol). The Middle East is in the unfortunate position of not being able to eat oil. Oil for food. A deal whose terms can be unilaterally set.

The era of 'markets' setting the price of oil, and 'financial markets' setting the price of the dollar may begin to fade. There may be an era of 'strongarm' enforced exclusive bilateral agreements between middle east oil producers and the USA.

Some see the US being increasingly marginalised. Some see the US as a price taker. In the short run, yes. In the medium long run, no.

Where does this leave the rest of the world? With whats left. 2 tier pricing. 2 tier access. 2 tier certainty/security of supply.IMO


"Agripower" is not going to work.

Argentina and Brazil alone can supply the import needs of the Middle East. Wheat, coffee, soybeans, orange juice, tobacco, sugar, beef, ... (Add Chile for established fruit exports).

And, in a triangle trade, EU & Japan can give all the imported goods that Argentina and Brazil need in exchange for oil.

The world's biggest goods exporter is not the USA, but Germany.



My assumption is that the USA has effective military control over Middle East oil producing countries.

And that the deal is:
1. buy your carbohydrates from us or we will use military force to block your access to carbohydrates from other sources. Note the feudal societies in these countries, the overpopulation. Bread and circuses. The USA may be the biggest Empire, but there are other smaller empires.

2. Swap our food for your oil. Or pay in US dollars.

3. Click! Safety catch off. "This is the nominal price you will charge us for your oil. The exchange rate is now fixed. We will nominate it. Take it or leave it.

This is a crudely drawn ultimate scenario. IMO it play out more diplomatically, more 'nicely' than that. Or not.


Hi 72,

Interesting (not nice) scenarios.

re: "My assumption is that the USA has effective military control over Middle East oil producing countries."

What's your take on the effectiveness of the military control?
Current? Future? And under the conditions described by "ace" with his/(her?) update numbers?

Funny, when I hear people saying that "Communism lost; Capitalism won", I can't help but to wonder if in reality they both lost. It so happens that Capitalism's defeat is taking a bit longer to play out...

Cultural: Capitalism hasn't lost a penny yet. Contrary to MSM myth, the end game of globalism capitalism never included an American middle class as a goal.

Cultural: Capitalism hasn't lost a penny yet. Contrary to MSM myth, the end game of globalism capitalism never included an American middle class as a goal.


Serious question:

What (without conspiracy theories) were the GOALs of global capitalism, according to the economists? Perhaps mistakenly, I had percieved that the creation of a global middle-class figured somewhere into that ideology.

[I could maybe accept that certain players have leveraged the ideology to their own means, perhaps even conspiratorealy(sp?), but I have trouble buying that ideological economists thought they'd end up as the spoilt elite as a result.]

Serious reply:

I am the same age as GWB's current chief of staff and went to the same school for my advanced degree. So I had an elite education - albeit financed by ruinous debts that didn't get paid off until I was in my mid 40s. I had personal friends at school from very big, very old money.

Until recently my income and savings were depressingly typical middle class. Just 2.5 years of fortunate leveraged peak oil investing have suddenly vaulted me into near elite economic position. If my luck holds, I could in theory join the elite by 2010. The change in perspective has been most illuminating.

Before, like everyone else, my concerns were monthly living expenses and enjoying myself. Now a new world of possibilities has opened. Now I think about how to pass my good fortune on to my heirs. In fact, I now understand how the families of my old money classmates think.

Basically, almost everyone with an opportunity to create or perpetuate a dynasty will try to do so. This is hardwired in the DNA. Elites in any civilization are out for their own Houses. Sometimes it is best to make alliance with other elites through business deals or marriages. No conspiracy there, just self interest. Sometimes it is best to compete head to head with rival elites, a high stakes game that can destroy a family or a fortune if you lose. But in the end, other elites are not the enemy, only rivals.

As for the middle classes, they are the true enemy of the elites. Only the middle classes have the education and resources to possibly erode the power and wealth of the elites. Containment of the middle classes through propaganda (religion, ideology, infotainment) and taxation is always the elite objective. Notice I haven't said anything about any "isms". That is because "isms" have nothing to do with the process. This is human nature and the way all human civilizations have always functioned.

Best serious post of the day. (and honest)

MH, thanks

I don't imagine you remember, but we went head-to-head a couple of times on Still, always respected what you had to say - and won't deny you taught me thing or two to balance my cornucopian tendencies (I've still got them mind).

My leveraged peak oil investments have so far only got me a nice [very fuel efficient] car and mortgage free, but I've always been hugely risk averse.

If I remember correctly, you were moving to my homeland - where I plan to visit later this year to buy a nice spot up north and sometime later build a storm-proof home. Hope it's working out nicely.


Now I think about how to pass my good fortune on to my heirs. [...] This is hardwired in the DNA.

Had you read my post down vvvv there before you wrote those?

But my key question remains: Putting it another way, how do the 'Elite's' control econonomic theory? Perhaps it's because there is such variety of theory that they can control which variants get airtime?

I'm still stuck with the concept that western government treasuries staffed by fairly highly educated, capable civil servants [well - you know what I mean anyway] seem to support and promote the global capitalism ideal.

Accepting it's very much in their interest, how do the 'Elite's' manage to make this the approach? Surely there has to be a dependance on promoting the beliefs of those who really believe it's socially a good idea?


There was a debate on exactly this topic maybe a month ago at TalkingPointsMemo, in the Cafe I think.

how do the 'Elite's' control econonomic theory?

You put your family wealth into a tax sheltered foundation. Family members are paid officers of the foundation. You give research grants to the academics you like. You also make donations to universities. This gets family members or their employees on the board of trustees. You use your influence to choose who gets tenure. If that isn't enough, you create think tanks where academics get paid better than at universities to push your ideas full time.

As for media:
Buy the major media corporations (done)
Payola for small time reporters (done)
And increasingly, put actual old and/or big money in front of the camera or typewriter. A few actual ruling class people in media:
Anderson Cooper (Gloria Vanderbilt's son)
Tucker Carlson (stepmother was Swanson frozen foods heir)
Andrea Mitchell (wife of Fed Chairman Alan Greenspan)
Cristianne Amanpour (wife of Jamie Rubin, fmr head of GoldmanSachs and US Treasury Dept. - as if there is a difference anymore)
Tom Freidman - old money billionaire, married very well
These people have a point of view, and it is not middle class.

Had you read my post down vvvv there before you wrote those?


I don't imagine you remember, but we went head-to-head a couple of times on

I don't recall. I had a huge number of people on my IGNORE list before I left the site. The people I carried on debates with were the people I thought were worth talking to.

If I remember correctly, you were moving to my homeland - where I plan to visit later this year to buy a nice spot up north and sometime later build a storm-proof home. Hope it's working out nicely.

I have been working in the Waikato for a couple of years, but will move up to the Bay of Islands in December. Probably will rent until the market finds sanity. Properties with a water view are absurdly overpriced as are "lifestyle blocks" - basically remote gravel road exurbs with no utilities or services similar to what very poor people had in 1930s Oklahoma. Inland grazing land goes as low as $2000/acre in large parcels, that is probably a fair deal if one is energetic enough to manage hundreds of livestock. Bush blocks are a good deal if one likes hunting or simply the privacy.

Hi Micro - what areas have you looked at as far as property goes? And what are you looking for in a property?

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

Maria Shriver could be added to that list.

Consider how such shared class interests - even between rivals - direct our political system here in US. [I can't speak for others.] The Iraq occupation devolves into a discussion about which party can better force the Iraqis to give us back our oil. Impeachment is off the table because there would be no way to enforce it; besides that would prevent the Democratic "leadership" from having its turn.

cfm in Gray, ME

Great analysis-
Globalization is just capital getting more efficient--
It must, or get absorbed or die--
There really is no other way to survive--
Just breaking through new barriers. Capitalism has been very resilient, given human nature, until it has run into the Second Law of Thermodynamics head on--
I can't see it surviving much longer, but it had one hell of a run from the Italian City States of the 15th Century until reality is setting in now.

This makes a lot of sense.

Now when we say that a "middle class" has certain characteristics like education, do we mean that in the old-style definition of middle class as Bourgeoisie, meaning the owners of small businesses who are actually the lower part of the upper fifth of the population? Or do we mean middle class in the demographic sense that appeared in prosperous postwar America, where we mean (or wish to mean) the middle 40-50% of the population?

Because I think that in our version of capitalism, different segments of the bourgeoisie take turns hitting the jackpot and holding unnatural influence over the society, usually due to bubbles (defense boom, stock boom, tech boom, housing boom). This turnover creates the illusion of meritocracy, but statistics reveal the truth: after steady levels of income distribution from about 1935 to 1980, there is a segment of the population who have gone into financial overdrive, always coming out further ahead whether it's a tech boom or an asset boom, recession or recovery. Yet the rest of the bourgeoise still assumes the system is to its benefit. Not much hope for a reform movement from this quarter.

If we mean a middle class in the post-WW2 sense, then a lot of things make sense. That was the age of the GI Bill, when a lot of working-class guys became the first in their families to go to state colleges. It looked a lot like a meritocracy, and it wielded political power. The cream of the industrial workforce moved to the suburbs and made huge incomes. This must have driven the old fatcat Nazis like H. L. Hunt crazy. According to an article I saw in Harper's, in the late 1960s a coalition of ultra-right family charitable foundations began work on a project to rewrite Americans' beliefs and end the New Deal. Yet many other wealthy families accepted the status quo and ignored them. How did this tiny faction (who Eisenhower derided as a "few Texas oilmen") end up convincing the other elite factions that they could pull off this historic class war against the middle?

I was thinking of middle class in the generic sense, and shouldn't have brought education into it as that is a modern feature - my mistake. Basically the independent middle class is self employed landowners, skilled trades/professions, or merchants and without significant debts. Ukranian peasants living on their own debt free small farms inside the Chernobyl exclusion zone would qualify as middle class. Pre-corporate America had a lot of middle class people. Most Americans do not qualify anymore. If you have a boss and a mortgage, you are more like a serf or a vassal of old.

It is not possible to exercise any political freedom if displeasing your employer and getting a negative employment reference would lead to loss of your home. One thing that is fascinating to me is the steady decline in political bumper stickers over the last 40 years. In part it is because so many people do not feel represented by any party. But then why so few "protest" stickers? I think it is because people are worried that they would get fired if they showed up in the company parking lot with the wrong sort of sticker.

The genius of the last few decades in the US is that most of the last couple of generations of Americans have been demoted to indentured worker status without any social upheaval. Now it is too late and they can't revolt effectively. A small percentage of lucky formerly middle class people have been allowed to slip into the entry level rich category - able to live off passive income - and they now share interests with the true elite and won't revolt either.

As to how it was done, I think that generational warfare was a large part of it. The generation that already owned their California dream home (not starter home) in 1978 got a huge tax lifetime benefit with prop 13, at the expense of the younger people. Likewise, the people making peak incomes in the 1980s got a benefit from tax cuts and deficit spending, at the expense of future generations. Most of the early beneficiaries either died comfortably or soon will. Now the endgame is in sight, as their survivors face crushing generational debts and no hope of pensions.

Similarly, the outsourcing was done in a very incremental fashion. First the factory jobs went, then the IT jobs, and finally the managerial/professional level is being outsourced too. I even heard an Atlanta HMO was sending some elective surgeries to India.

I think it is because people are worried that they would get fired if they showed up in the company parking lot with the wrong sort of sticker.

As a scientist myself, I actually restrained myself from making up my own stickers in case I ever needed a government security clearance for my job.

One more observation.

All elites get on top in different ways - but they try to keep their descendants on top the same ways. I would argue, as a radical, that a class system based on clever computer geekdom is no more a meritocracy than the one based on being real good at riding on a horse chopping other people's heads off, the origin of Europe's lords, because after the first generation it always is about training your kids to trigger subservience in the masses. You know, "leadership."

This is why I dig Ian McKellen's 1930s-style adaptation of "Richard III", where Richard and Henry Tudor must duke it out in tanks for the throne of England. I think that this form of meritocracy will soon be making a big comeback.

Basically, meritocracy is meaningless if you allow inheritance. A true meritocracy would have a 100% death tax. When you die, everything you own reverts to the commons. A great dream, but never has been done except in some primitive tribes.

Inherited property rights also supercharges greed. If one has accumulated enough to live well until death, one should stop hoarding. But then one thinks about the social position of their children, grandchildren, and so on. Since the needs of future generations are without clear bound, the desire to accumulate can grow without limit. So one exploits their neighbors to provide for a high social status for their unborn great grandchildren.

A less common variation of greed unbounded is pharonic dreams of personal immortality. Rumor has it that Larry Ellison has this bug. He has been funding anti-aging research. I guess he has to stay alive long enough to win the Americas Cup? That would be forever.

Shouldn't that be called feodalism?

"Society is like a stew, if not stirred up on a regular basis, the scum rises to the top"
-- Edward Abbey

Or another version, I forget who said it:

"America is a melting pot, in which those on the bottom get burnt, and the scum rises to the top."

I agree 100%, but it can be taken further. The middle class can still produce far in excess of their needs despite taxation, etc.
The reason the elites pretend to be liberals is to create a lower class that is totally unproductive while also allowing unchecked fourth world immigration, as this is the biggest millstone that can be put around the middle class neck.

It pretty much guarantees no middle class challenge, because the middle class has to be constantly concerned about attacks from below. Any major confrontation will always be between the middle class and the welfare class.

Your wrong the middle classes ceases to exist when their is no welfare class. This is easy to figure out. With out the social net extreme poverty creates wage slaves that undermine the wages of the lower middle class and removes the whole concept of unskilled and semi-skilled jobs that pay well.

Understand professional/skilled labor is not middle class and existed long before we had a middle class and will exist long after.

The days of the office clerk making or secretary or factory worker making 20-40k will be over if welfare is reduces.
I think your completely wrong about welfare/middle class battles the vast majority of the taxes for welfare come from the upper and higher middle classes. While middle and lower middle pay for about what they use in government services esp if you include a military tax.

I don't see why you can not both be right.

The elites have all the reasons to inspire the confrontation between the two groups without allowing actually destroying any one of them. Just to keep them busy. How was it also called? "Divide and conquire"?

Understand professional/skilled labor is not middle class and existed long before we had a middle class and will exist long after.

The Romans called them "Artisans" to distinguish them from the Patricians and the Plebians. As all professions and skilled trades could still loosely be called "arts", the term could still apply. I suspect that almost everyone posting on TOD could be classified as artisans.

Thanks !

Now that you mention Rome. The middle class in Rome was supported by two basic themes. A welfare state for the unemployed citizen ( bread and circus's) and slave labor.
The nice thing about slave labor is since they are not citizens they generally perform menial tasks unsuited for the citizen to perform and since they are not free they don't pressure the easy job market that the citizen prefers.
These citizen jobs are generally in the retail trade or low level supervisor type positions. As Rome became more corrupt it also became more bureaucratic and had more citizens working
effectively behind a desk or in the Roman equivalent of todays cube. A good country to look at for this sort of situation is KSA.

The kept wages fairly high for the semi-skilled unskilled citizen that wanted to work while removing the lazy citizen via subsidized welfare. Note that American culture thinks its great if you can have a spouse stay home and raise the kids but a unwed mother that chooses to use state funds to do the same thing is a bad person. No one like to talk about children since that brings up birth control and abortion.

Once you remove the welfare state the wage support for the citizen collapses and the resentment against slave labor grows.

And now for the big one.

Spiraling oil prices will lead to the collapse of the Welfare state as welfare cannot be increased to cover the cost of gasoline so people can cash their welfare checks.
As people on welfare lose mobility you will see issues amongst the poorest. Also food costs are another huge issue.
The welfare state will collapse simply because of inflation and lack of increased funding and eventually even decreased funding. Once welfare recipients can no longer live a reasonable life then ????

Many people talk about Social Security being inflated away but I think a more immediate concern is the loss of buying power of people on welfare forcing them back into the work force but unable to afford gasoline.

not everyone. my family could be classified as "patrician", so since those things run in families, so am I. I don't need to work for a living, although just for fun I picked up a PhD in chemistry and a law degree, and am currently an active member of the bar (Kansas, US Patent). I was always under the impression that if your grandparents had to work for a living, you were middle class. btw, my grandparents didn't... but they did anyway, one grandmother ran a (large) family business until she was totally incapacitated by Parkinsons at the age of 79, she basically went in to the office and did a full 8 to 12 hour day until she could no longer get out of bed.

We have to disagree. I think MicroHydro's definition of middle class above is 100% accurate. Middle class used to be pretty much defined by being one's own boss and totally debt free.

IMO now you have to add the ability of not having to do business with the public, ie just enter the game you want to enter when you want.

In a way it is boring, middle class now has enough resources not to have to do anything they don't want to do, and at the same time they don't have the resources to do anything they want to do.

The reason the elites pretend to be liberals is to create a lower class that is totally unproductive while also allowing unchecked fourth world immigration, as this is the biggest millstone that can be put around the middle class neck.

It pretty much guarantees no middle class challenge, because the middle class has to be constantly concerned about attacks from below. Any major confrontation will always be between the middle class and the welfare class.

Agree 100%, especially with the "pretend to be liberals". New Zealand's political elite is importing thousands of fundamentalist Somali refugees to create an alien underclass. The white middle class just wasn't worried enough about working class Pacific Islanders, so some real fourth worlders were needed. Absolutely nobody is in favour of this, not the Maori, not the Chinese, not the Koreans, not the Indians. Amazing what can be done in a supposed democracy against the wishes of 100% of the population. Now we can have "war on terror" scares too. Brilliant.

Way it goes.

Partially answered up thread. This BB format sometimes gets the better of me.

If you guys believe the above & MicroHydro's observations then it is fascinating that you are supporters of Ted Kennedy et al. All of these guys & their backers and folks like Michael Moore have their money safe in tax exempt foundations. Yet they are quite willing to impose additional restrictions and taxes on the middle class and take away freedom of choice.

Under Bush's tax cuts the rich are paying a far higher share of the total Federal tax burden (but a smaller share of their incomes). Tax exempt foundations are not subject to any capital gains taxes and trade without regard to short term or long term capital gains consequences. An inheritance FOREVER - and no taxes; sweet.

High capital gains taxes only benefit those whose money is safe in tax exempt foundations or for e.g. foreign governments that are exempt from capital gains taxes.

And if social security taxes are so regressive for the CURRENT generation of lower paid social security taxpayers then why not an "ownership society" where these very taxpayers who may not otherwise collect be allowed to keep and invest some of these regressive taxes that they are paying.

I charge "hooey." Equating capitalism with genetic predeterminism is just plain hogwash.

First, the claim to know what "human nature" is is simple hubris. We simply don't have the wherewithal to draw such conclusions from our meager understanding of genetics. And remember, that when you claim to know "human" nature, you are also claiming to know the intent of "nature" itself (whatever that might be).

Second, beware of slippery syntax that becomes mismanaged logic. Note the last sentence which essentially equates human nature with civilization. And yet, the era of civilization covers only a small portion of our history as "humans." So, what was it that governed human behavior for the 95% of human existence that preceded civilization?

I think this book by Gaetano Mosca should interest anyone who has middle-class pretensions. I read it when I was a school kid in the 1960's and learnt a lot, The book was published by its Italian author in 1896. We are returning to the past in a very convoluted way and let's not forget that Machiavelli was an Italian (there was not such thing as Italy at the time but it was his dream).

Here is what one reviewer had to say about this book:

The Ruling Class is an excellent example of early twentieth elite theory. It is a scathing retort to Marx and those who believe in a utopian vision without an elite. This book is clear and brilliant. It challenges the political thinker in a democratic society to examine the basic assumptions of democracy and representational government. This book is a must read for the political scientist.

That sounds a little bit like a line of thought that sometimes I try to clarify in my own mind. Ol' Marx and Engels may have called it communism, but it's just a label.
The 10 pillars of liberalism are basically the same as the ones of communism.
Now we have the "globalization" crowd.

Me thinks it's the same crowd changing names, and I'm not even italian. LOL.

We've not even tried Communism or Capitalism.

Well, I guess the very early Christian Church "held all things in common" for awhile, but that obviously did not last too long. There have been other attempts at communal living, but with varying degrees of success over time.

The communism we knew was corrupt and brutal, as is the capitalism we once knew. We've never had a "free market" but rather markets constantly being re-arranged by big players for their own benefit, often in tandem with other big players. Always the small players -- true capitalists because they have no other choice -- are taken advantage of.

Work and creation of real wealth and just distribution of wealth has never been tried on a large scale that I know of.

We are currently trying "Corrupt Crony Corporatism" in an advanced stage of cultural dementia.

Yes, the MSM still promotes the myth that we have capitalism and democracy and are guided by humanitarian values.

I'd like to see us try Communism or Democratic Capitalism. This might look too much like real civilization.

We are far from Pareconomics (participatory economics -- see, for example, ZNet)and I do not see an easy route to get there.

sorry but from what i understand civilization requires a division of a society into unequal classes. a large underclass of indentured servants or slaves to do all the very hard work that is needed to keep the whole thing going. A much smaller set of middle classes so to speak who are well enough off in the social construct to not be slaves or indentured servants, maybe even enough too own a few of the bottom class. These are the needed middle managers. on the top is the very small group of people who figured out that they could get enormous wealth and power by managing the other classes. Only this group receives the full benefit of such a structure.

ironically the closest thing to both communism and capitalism is the old barter system of hunter gatherer tribes.

To be more precise, civilization doesn't just require the division of society into unequal classes, it IS the division of society into unequal classes.

We can't really say that "communism" lost, since it hasn't really been established anywhere before. What the Industrialized Socialists tried wasn't exactly people living simply on communes, now was it?
I'm not saying it would succeed, just that humans haven't been ready to try. Unless something changes about our ideologies, it never will be tried properly on any scale other than a few isolated incidents.

Intentional communities could work in conjunction with other ideas, even Capitalism, but not with Socialized Corporatism, and first, we have to prioritize basic needs over luxuries, future needs over present wants, etc. "The Children are our Future" needs to be more than a sales slogan for schoolteacher unions and the future has to be something other than a bank to borrow from.

Maybe the next species will be able to do it...

I'd like to see it explained how communism could ever succeed without totalitarian government.
Capitalism is, at its heart, individuals and corporations engaging in free enterprise, creating wealth however they see fit, within the limits of a modest legal framework.
Communism essentially forbids the people from engaging in wealth-making exercises, hence requires a highly authoritarian system of government to prevent it from occurring. All enterprise is centrally-controlled, meaning an enormous and fixed concentration of power.
Unfortunately modern capitalism/corporatism is heading much the same direction: putting vast amounts of power in the hands of huge global corporations, that the people essentially have little control over (though, by keeping money in their pockets, they do have some: unfortunately it rarely gets exercised). In principle that should be preventable with a more intelligent regulatory framework, and at any rate I suspect it tends to be self-destructive, as oversized corporations become moribund and so excessively wedded to the status quo that any rapid underyling change in economic fundamentals (including resource shortages) leaves them unable to adapt quickly enough.

Communism, is at its heart, assumes people will be willing to put aside personal greed to work towards the common good.

Capitalism, assumes people working for personal greed will somehow benefit the common good.

Neither case is accurate.

Under communisim, people cannot put aside personal greed, and any effort to enforce this only results in insurrection against the system.

Under capitalsim, people working towards personal greed have no care for the common good, and if they have the power (wealth) to ensure they get a greater share of the common good, they will.

What is required is an advanced society where there is real empathy for people outside the immediate circle, such that the desire for the common good trumps the desire for personal greed. I'm not sure if this will ever happen with homo sapiens, certainly not in my lifetime.

A nice summary. You could also say that they fall down on the quality control/auditing. If you made the system accountable then either would work.

'I'd like to see it explained how communism could ever succeed without totalitarian government.' I also agree, but a totalitarian govt doesnt have to be a bad thing overall. It's just very risky. You could implant a 'lobotomy chip' into every head of head of state [a pun intended there btw] - No chip, no job. Then you use referenda, fora, whateva to decide. No more Mugabe, Idi Amin etc.

Or we could ban all marketing. I think that would be enough...

There are inherent problems wiht both state socialism (of which communism is a subset) and capitalism.

Begin with the understanding that economists classify all economic goods by a grid, with opposing axes for consumption (individual vs. collective) and exclusion (feasible vs. non-feasible). This establishes four quadrants: private goods, toll goods, common-pool goods and public goods.

The problem with state socialism is that it expands government control of production beyond the public sector (which is it's natural realm and where it is most efficient) into the toll good, common-pool good, and even private good sectors. Unfortunately, this sets up a conflict of interest. One of the primary public goods produced by government is protection of the public (or public interst) through regulation. However, doing what is in the best interest of efficient and profitable management of an enterprise is not necessarilly what is in the best interest of the public. Because government ends up "wearing both hats", so to speak, it inevitably ends up doing neither job well. You end up with either inefficiently run enterprises being a drain on the treasury, or else corners are cut on regulatory compliance, or both.

With what passes these days as capitalism, we are seening the opposite phenomenon: privately owned corporations have expanded beyond the private sector to control virtually all toll goods, an increasing amount of common-pool goods, and even some public goods, all under an ideology of "business good, government bad". The problem is, private sector businesses are only really good at doing one thing, and that is maximizing profitability. Unfortunately, maximizing private profits has nothing at all to do with promoting public goods, nor is it necessarilly the most important consideration in the efficient production of toll goods and commmon-pool goods either. Furthermore, while classical economic theory is correct in recognizing the eelegance of free markets in efficiently allocating scarce resources when there are both a large number of buyers and sellers, such a condition is increasingly becoming the exception rather than the rule. Concentration of productive capacity and market-distorting power amongst a decreasing number of increasingly large corporations is becoming the rule rather than the exception. Thus, in spite of anti-trust laws (which are only minimally enforced at best), capitalism as actually practiced is characterized by massive market failures in the private sector, disasters in the toll good and (especially) the common-pool goods sectors (tragedy of the commons), and stunted, ineffective government operating in the public goods sector.

Is there a better way? Yes, but I'm not sure it has a name, and certainly has never been tried.

The better way would consist of a strong, healthy government effectively providing a full array of public goods. A free market, protected by strong enforcement of anti-trust laws, efficiently provided private goods. Toll goods (utilities, roads, etc.) are public-owned, but not government-owned. Rather, toll goods would be owned and operated by a public trust; trustees would NOT be appointed by the government, but rather directly elected by the people. A similar arrangement would also apply for common-pool goods.

Thus, you would have a three-tier system, comprising government, private enterprises, and public enterprises each operating within their proper spheres.

The advantages of such a system are clear. For example, while we all know that we need to get moving on projects like Alan's electrification of transportation, not much of anything is happening. Neither government nor corporations seem to be able to act. However, what if these toll goods (for that is what transportation systems are) were public enterprises, owned and operated by elected boards of trustees? Is it not possible that there would be more responsiveness to what is in the best long-term interest of the public? Of course, no such public enterprise could afford to proceed with a project that made no economic sense. The problem now, though, is that even if a project does make sense, it often doesn't happen through government inertia and excessive greed on the part of private enterprise (a project that might payback the bond issue might not be able to do that and turn a large profit).

Similarly, we should all be familiar with the whole idea of "the tragedy of the commons". This phenomenon is at the root of much of our environmental degradation and resource depletion issues. Neither private enterprise nor government have a very good record of achieving sustainable management of common-pool resources. Might we not hope that better results might be obtained when such resources are held in trust and managed in behalf of the general public?

I don't expect to see such a system come into being in my lifetime, which is a shame. It just might have made a real difference for the better.

Fascinating comment, thanks.

There is a book on this system already out.

America Beyond Capitalism
By Gar Alperovitz

He doesn't say anything about peak oil. The book is a response to our current system of capitalism. I found it to be an excellent solutions guide to anyone who is planing on having a civilization worth living in.

IMO peak oil is not the problem. It is the result of the problem, which is our present inability a as species to make good plans.

In nature, government, economics or any complex evolving system something is replaced only by something that out competes it. We live in an unsustainable culture that must at some point, likely peak oil, come to an end. When that happens any sustainable system is going to become very competitive. What we need to be worrying about right now is what those new systems are going to look like. If we start building them before the crunch hits then they will be in a good position to dominate the land scape after the peak. The alternative is to let old proven systems like feudalism reemerge.

I think this issue is at the heart of the doomer cornicopian split. The doomers don't like the system we have and can't wait for it to come crashing down and the cornicopians are holding their breath waiting for peak oil to force that wonderful new utopian civilization to get here. I think they are both right. I think the world population is going to drop 2-4 billion in an unpleasant way people before we start making good plans. After that it should be smooth sailing.


Hi team,

This is interesting:

re: "It is the result of the problem, which is our present inability a as species to make good plans."

To see "peak" as a result, not a cause. True enough.

I'm not so sure about the rest of your line of thinking here.

The idea of "competing systems" I'm not sure holds up as a way to look at it. Also, my guess is the labels of "d" and "c" don't fit with the emotional stances you describe. I personally don't know anyone who (IMHO) sees the situation clearly and welcomes it in any sense.

That said, there's something to be said at trying to pursue "first causes" as a way to look at the problems.

re: "I think the world population is going to drop 2-4 billion in an unpleasant way people before we start making good plans. After that it should be smooth sailing."

The "unpleasant way" I'm sure you mean ironically. Still, I tend to have the view that the trauma of loss of that magnitude in itself could essentially cripple any chance for humans to develop or perfect an ability to "make plans".

Historians talk of a "long 19th century" (1789-1914) and a "short 20th century" (1914-1989 -- when communism collapsed).

I've long thought we'll probably be changing this outlook.

During the long 19th century, European aristocracy (which ruled most of the world) slowly collapsed.

During the short 20th century, fascism, capitalism and communism fought to replace the fallen aristocrats.

We assume capitalism won. But the story is not over. with 20-20 Peak oil vision, it may be the case that communism collapsed first because it was less efficient, but that capitalism may not survive for very far into the depletion curve.

communism collapsed first because it was less efficient

Actually, communism was more efficient ... at fostering corruption and cronyism.

In a true communist system, because there is no money, people trade by doing personal "favors" for each other. All comrades are equal, but some get more equal treatment than others for doing the Party's work.

In a free market capitalist system it takes a little longer for the elites to establish mental dominion over the underclass. The emergence of broadcast TV was probably one of the greatest boons to TPTB to psychologically manipulate the working class, i.e. fight a war for us, go to college on GI bill, get a good job (guaranteed after college). That system is now "broken". The younger generation is waking up to the realization that college does not guarantee a good job; or any job whatsoever. The "Be all you can be" message is falling on deaf ears. No wonder army recruitments are down. Soon it will be time to instigate a new major war and bring back a patriotic draft. For love of country, that kind of thing.

An open and neutral internet is a huge threat to TPTB. Who wants peons talking to each other about "Peak Oil"? That might create an informed underclass. Not good. Keep them pregnant, barefoot and stupid. That's the way to shepherd the herd before marching them to the slaughterhouse.

Actually, communism was more efficient ... at fostering corruption and cronyism

Yes... and no. It is true that small scale corruption was a mass phenomenon during socialism. Actually it was almost considered a "good thing" to steal bricks from your factory to build your own fence. Everyone did that.

On the other hand large scale corruption, of the types demonstrated by companies like Enron, or lawfully exercised by big corporations in US was largely impossible. You could not earn millions in any possible way, without ending into jail. The exceptions would include just a handful of party members, and even they could not afford excesses because of their visibility as public figures.

Small scale corruption and lack of competition of course caused the collapse of industrial socialism back then; Unfortunately in the affected countries the culture of corruption remained and with the advent of private enterprise grew to unbelievable heights. That's how we got today's Russia and Eastern Europe in general.


Very nice analysis. One of your last points is that the economy has been skewed toward financial services rather than other "real" activities. This leads me wonder quite a bit.

I have seen quite a bit by Alan from the big Easy and others about electrified rail, re-urbanization, etc. In the US, I am curious about the survival of large cities and the investments of re-urbanization. Does anyone have any thoughts about what will be the drivers for cities in the future? Historically cities arose at junctions of commerce, or where industries were centered. The lure to the city was primarily the opportunities for employment. Will this continue? With the global economy we have outsourced and offshored most of the US heavy industry. What REAL services do we have left that will continue to be viable in a Post Fossil Fuel world? With an economic un-winding and collapse, how will our global commerce continue? If it does not survive, major cities will be of reduced importance for commercial hubs. Why will people desire to continue to live there? Is the answer that in addition to re-building the rail infrastructure, and electrification of rail lines, we also must now rebuild the industrial base and manufacturing infrastructure in the US for cities to remain viable? I think this is a proposition which adds difficulty several levels of magnitude greater than just rail electrification.
Will this rebuilding of the total infrastructure be achievable in an economic downturn?

Just food for thought...


In addition to your thoughts, why would farmers go all the way to the cities to sell their food when small towns are closer? Why would you grow more than enough to provide for your needs and to barter with? Without oil, growing food will be a bitch. You won't grow any more than you have to.

This is not a very hard question. Why did farmers grow surplus food in the 19th century? So they could sell it, and buy other things they needed. Why did they send it to the cities? Because they could get higher prices there. Why do people work more than is necessary to meet their minimum survival needs? Many possible reasons, but certainly one for farmers is that agricultural outcomes are inherently variable and farmers need reserves in case of a bad crop year.

Farmers will produce a surplus because otherwise there won't be enough after taxes for them to live. They don't live in a vacuum. Feudal warlords or bureaucrats will continue to find a way to take the "excess".

Cid Yama,

I was talking to an friend that I drink coffe with here in Galveston. He's in his 70's, a retired union pipe fitter, and rides his bicycle everywhere in town. He's frugal, takes care of his health, has a paid for house, and is an interesting guy.

He was reminiscing about riding with his uncle every week to small farms in the upper Gulf Coast of Texas purchasing eggs and chickens, then bringing them back to Galveston to sell to the corner groceries.

That's a probable type of economic activity that will be reborn. Many of the vendors at the local Farmer's Markets that are springing up do that around here-go to farmers and buy their produce. There are also people at the Farmer's Market in Houston on Airline (the real one, not the handmade soap crowd) who purchase vegetables by the case from trucks bring them up from Mexico and the Rio Grande valley, then delivering the vegetables to restaurants and small stores. Some set up roadside stands.

I suspect if there is a giant recession we'll see more of that activity. It won't support a McMansion, but at least you eat. Many lower income immigrants are in that business. They are jobbers who purchase from shrimp boats and sell the fish and shrimp door to door, homemade tamale vendors and people with fruit stands.

Another activity that he was talking about was netting fish and helping to sell them to markets and restaurants. Thats also gone by the wayside due to state regulations, but I would suspect it will become a way of life again. There are still people who catch unregulated fish like croaker, whiting and pompano and sell them to the fish markets, plus a lot of crabbers.
Bob Ebersole

Manhattan was once the major garment manufacturing center of the USA.

Clothes are 1) essential and 2) can be made anywhere one can get supplies to.

So why Manhattan ?

Industry of all types requires a diverse labor force and an even wider diversity of supplies. Manhattan could supply that in spades !

I have driven by manufacturing plants sitting isolated, surrounding by corn fields or cattle grazing, the parking lot full of pick-ups and a semi-truck parked at the loading dock.

If they run out of paper clips, how far do they need to drive to get more ? Or a specialty bearing or belt ? Computer specialists ?

The best site solution "back then" in the 1970s etc.

A city that can supply industry with labor via Urban Rail (or bicycles) and supplies via railroads (and other low energy transportation) has a massive advantage post-Peak Oil IMO.

New Orleans is still a major coffee roasting center (an addiction that will NOT disappear post-Peak Oil). Coffee beans come in by ship, we roast and package them and ship them out via rail (6 of the 7 Class I RRs) and truck.

It is hard to think of a better place to roast and package coffee.

Post-Peak Oil, we may truck less and start barging processed coffee.

And if the infrastructure is there, the market can and will adapt. Living standards are likely to decline in any scenario.

Where is the best place to build wind turbines ? Package spices ? Make shoes ? Clothing ? Eyeglass frames ? Drugs ? Shovels ? Rail cars ?

Economies of scale will not disappear, although the trade off between smaller scale regional production and transportation will change. That is, for some products, several regional plants may be better than one national plant.

Example, shoes are essential but there is demand for a variety. Shoe repair will be done in any area with enough people to support a cobbler. Shoe repair supplies may come from a half dozen regional plants in the USA. It is likely that shoe manufacturers will have a single "national" plant and sell more regionally, but some nation-wide, suppling the need for variety.

Eyeglass frames are light and can be shipped at low energy/value anywhere. No real need for local production there.

Best Hopes for Cities,


"And if the infrastructure is there, the market can and will adapt"

The market will adapt in any case; that is what markets do. The main difference (in my opinion) between a doomer and a cornucopian is their notion of what the costs of adapting are. Clearly, the more energy-efficient infrastructure we have in place, the lower the adaptation costs. Conversely, the more inappropriate infrastructure, the higher. The faster we need to adapt, the more expensive, which is why it is important whether we face a production plateau or a production plunge.

But cities have existed for a really, really long time, and I would bet a lot on their continued existence, which is not to say that they will not have to adapt as well.

But cities have existed for a really, really long time

Cities have, but U.S. cities have not. Simon Winchester has written a lot about this.

In mature countries in the old civilisations of Asia, Europe and Africa, the big cities are, by and large, where they ought to be.

So London, Paris, Cairo, Beijing, Moscow, all thousands of years old, all in seismically stable places untroubled by terrible weather.

But by the same token these ancient countries are littered with the ruins of cities built where they ought not to have been built - Pompeii, Petra, Ayutthaya in Thailand, Heliopolis.

As tourists we cluster around these ruins, in awe. Ruins are part of our cultural inheritance, important for the perspective that they bring, reminders of our impermanence.

But America is a country without any ruins.

Maybe the odd ghost-town in Utah and Nevada, but basically no ruined cities.

The country is young enough to have set down its cities wherever it pleases, without ever stopping to ask if the world agrees.

And the world does not always agree.

Which prompts me to wonder out loud whether - if one can imagine a map of America drawn up, say, two centuries from now - whether there may in fact be a litter of abandoned and ruined cities.

New Orleans, for example.

It is a little eccentric to create a city on a swamp, six metres below sea-level, between a river and a lake, in a part of the world afflicted by near-constant summer hurricanes. Might this not, one day, be abandoned to the elements?

And what of Tucson, Phoenix, Las Vegas, even?

There is no water there. And there is no great world tradition of building cities to last in the middle of deserts. So Phoenix may go the way of Petra, though it is a little difficult to imagine its ruins attracting quite so many tourists.

And then what of San Francisco?

A heresy, of course, to imagine it ever being abandoned and yet it does lie athwart one of the most dangerous tectonic plate boundaries on the planet.

Might it not be possible to suppose that some peoples of the future will wander, amazed, around the stumps of the Golden Gate Bridge, or the shell of the TransAmerica Pyramid and wonder - why did anyone ever choose to live here?

A posted on European Tribune has a great signature line: Europeans think a hundred kilometers is far; Americans think a hundred years is a long time.

by: Percy Bysshe Shelley

I met a traveler from an antique land
Who said: "Two vast and trunkless legs of stone
Stand in the desert... Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed;
And on the pedestal these words appear:
My name is Ozymandius, King of Kings,
Look on my works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.


Simon Winchester is excessively gloomy about some places.

New Orleans is not entirely 10 meters below sea level. Only a few areas are as much as ten feet below sea area. The older areas like the French Quarter and the Garden District are on natural levees and are well above sea level. Plus, since its near the mouth of the river draining the central US, its a natural location. Its been the major town in that part of the US for 300 years.

San Francisco has a natural harbor and is the port for a wonderful agricutural area and a good fishery. Even in a collapse I'd expect a decent size city to remain.

There are a lot of ruined cities in North America. The Indians in Mexico left a bunch of them-Monte Alban in Oaxaca, Tepaticlan near the Valleys of Mexico, and Mexico City is on the ancient capital of the Aztecs, Tenochtitlan. There are a number of Mayan cities, Uxmal and Chichen Itza and others. The Caddos left the ceremonial center of Spero in Oklahoma, while the mound builders left a large city north of St. Louis, Cayoga. New Mexico and Colorado had many ancient towns of the Pueblo Imdians.

He may be a cute writer, but he's full of misinformation. I suggest anyone who wants to read about North American populations pick up 1491, which has a pretty good survey of precolumbian populations in America.
Bob Ebersole

Simon Winchester is excessively gloomy about some places.

I suspect he's not gloomy enough. If sea levels rise as much as James Hansen fears, even "correctly" sited cities like London are screwed, blued, and tatooed.

with respect to the location of New Orleans, it is located near the mouth of a river, true. Geologically the Mississippi has changed its course significantly a number of times and has spanned almost from Sabine to Pensacola. If it weren't for the efforts of the Corp of Engineers, it would most likely has altered it's course in Baton Rouge to flow through the present Bayou La Forche. Who says we can't harness nature?


The US Army Corps of Engineers noted that an increasing percentage of the water flow was flowing down the Atchalaya Swamp (20 to 30 miles wide) and River in the 1930s (up from 10% to 15% in 1850s from vague memory) and decided to freeze the percentage at that level.

In the 1990s, a hydroelectric dam was installed there that generates 280 MW in the spring, thereby extracting the energy.and stabilizing the situation.

Best Hopes for Good Civil Engineering,


The TransAmerica Pyramid rests on giant ball bearings, it is one of the most earthquake safe structures ever built. The Golden Gate Bridge was designed to survive any quake, and was undamaged in 1989. The lovely suspension portion of the SF-Oakland Bay Bridge is also robust - the tacky part that failed in 1989 was essentially an elevated freeway. The point being that in 200 years, perhaps the stucco "little boxes" of the SF area will be long gone, but the great urban monuments will endure like the pyramids.

PS: I am not saying that things will be wonderful. But even if all the copper wire is stripped from the skyscrapers, and all the glass windows are broken by vandals, the buildings themselves will still soar to their full heights for hundreds of years. They will not be stumps unless someone starts playing with thermite and RDX.

I think you're wrong. One, even if individual structures are built to be earthquake proof, they won't survive forever without the city around them - the infrastructure that keeps them inspected, repaired, etc. That Bradbury story someone posted a link to awhile back was striking, but fundamentally silly. The house, with its computer, power, water, etc., would not continue to function if the rest of the city was nuked. And it's the same for buildings, roads, bridges, etc. The fight against entropy is constant. Every bridge in NYC is supposed to be inspected every two years, and many fear that's not often enough.

Two, many buildings that are supposed to be earthquake proof probably aren't. Northridge and Kobe were a real shock to civil engineers. The belief was always that shear was the problem with earthquakes. Hence, California overpasses have cables running along the girders underneath them that you don't see in the east.

But Northridge and Kobe had a different, and entirely different kind of motion. It was vertical. That's why it was so destructive. Engineers generally don't worry about holding buildings onto the ground. We trust gravity to take care of that for us. Turns out, that's a mistake, in an earthquake prone area.

Civil Engineering had a cover story on it, that showed an image of the Golden Gate Bridge as it would look if it were built to take this new knowledge into account. It had as much "suspension" below the bridge as above. Because the need to hold the bridge down is as great as to hold the bridge up.

Well the suspension bridges do have to be constantly painted and then recabled every 30 years or so. But this is well within the capability of a Bay Area economy reduced by 95% from the present size. The bridges generate income. Maybe in the future the toll will be paid in vegetables, and you have to pay to walk across, but there will still be a toll. Maybe the bridge tolls will be collected by a warlord, same difference. Economic collapse makes labor cheap and worker's comp insurance no longer a problem. Climb the bridge with a paintbrush or your family goes hungry - easy decision. (Heck, maybe they will even have actual slaves, the descendants of the bankrupt house flippers?)

I would argue that SF is one of the best sited cities in the world, far better than even Paris. In a world dependent on sailing ships for bulk transport, a world class natural harbor is priceless. Likely the bridge roadbeds could be torn out and replaced with rail lines long before they fall, and rails would be more robust than the current roadbeds.

Also I am standing by the TransAmerica pyramid. The Kobe and Northridge problems were with reinforced concrete structures. The pyramid is a flexible steel frame wrapped in glass. I can't see how any sort of motion would make it snap and leave a "stump". Famously, the steel skeleton of the "A-bomb dome" 160 meters from Hiroshima hypocenter survived the blast.

Hello MicroHydro,

I respect your viewpoints in your posted reply to Leanan, but I gotta go with her viewpoint: Entropy rules all.

Inner harbor steel barges and ferries, or even the renewable genre of the wooden equivalent with sails, may be much more energy-justifiable at some postPeak time than keeping the bay's bridges functioning.

Once cruise ships go postPeak defunct, they could easily handle the multi-hordes [now without cars] for crossbay traverse. Re-engineer them for max seating and two hundred gangplanks for rapid ingress and regress. Thousands of people on bicycles and/or electric scooters could quickly stream aboard or exit off in record time with double piers: starboard-exit, port-entry.

The ships can rideout an earthquake very well. Also compare the surface area of ships to the surface area of the area's bridges: the required maintenance is probably a magnitude less.

If you don't have to worry about moving countless discrete tons of self-caged hamsters who refuse to self-spin the Critter Cruiser--then all kinds of low energy possibilties open up:

Please scroll down to see the Critter Cruiser on the Hamtrac Railway plus the Hamster Hell's Angel Chopper!

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

The bridges generate income. Maybe in the future the toll will be paid in vegetables, and you have to pay to walk across, but there will still be a toll.

If the bridge is still there. Loma Prieta was only a 6.9. It wasn't "The Big One."

I came across some old papers once. I wish I'd kept them. They were records of the tolls charged to cross the Brooklyn Bridge. There were different prices for pedestrians, horses, wagons, donkeys, etc. And they were surprisingly high.

There's a toll bridge near where I live now. It costs a dollar to cross, which people pay without thinking. But according to the old-timers in the area, few could afford the bridge toll in the old days. They used to wait until the river froze, then drive across.

The barrier that the river represented still affects the community in odd ways. Though many live on the other side, because it's cheaper, and they sell commuter packs of toll tickets, the yellow pages don't show businesses on the other side of the river. Even though it's only 5 minutes and $1 away. They show businesses an hour's drive away and more on this side of the river. It's still a psychological barrier.

The Kobe and Northridge problems were with reinforced concrete structures.

In Kobe, many of the houses that collapsed were wood, while concrete buildings remained standing. That was a shock to many, because wood frame was previously thought to be among the most earthquake-proof construction, since it's flexible. Turns out, that doesn't help if the ground motion is vertical.

We don't understand nearly as much about earthquakes as we thought we did.

Also, just parenthetically RE using the Golden Gate for foot traffic, I think the closest it has probably ever come to collapse was during its anniversary when traffic was shut down and it was covered with humanity. It took the dang camber right out of the structure; was probably the greatest load by far it had ever been subjected to. An interesting experiment....

It is certainly true that some cities may shrink or even disappear over time because of changing conditions. I am somewhat familiar with that having grown up in Detroit. I am not claiming that every city will last indefinitely. On the other hand, there are an awful lot of US cities that predate the automobile and presumably have some reason to be where they are, including Detroit, which after all was founded in 1701.

I think Simon Winchester is not exactly thinking clearly in the quote you excerpt.

Moscow certainly has terrible weather. Cairo is certainly in a desert (although with a convenient river). Beijing doesn't exactly have great weather either.

Desert cities may indeed have a problem, but it isn't really a peak oil problem, it's a water problem. We are better at transporting water to large cities than the ancients were, but many cities have always needed external water supplies, so this isn't really anything that novel. And desert cities may be better placed to transition to solar than a lot of other regions--I don't think it is safe to make predictions about this, because there is a lot of uncertainty about what technology will be available in what time frame. But I suspect desert agriculture is in more danger than the desert cities. But if the costs of living in those cities go up a lot relative to other places, I bet lots of people will leave.

I do have grave doubts about New Orleans, but that isn't because of energy issues either.

It also appears that Winchester is cherry-picking capital cities as far as tectonic issues go. There have been famous giant earthquakes in Tokyo, Lisbon, and Jakarta. Istanbul and Rome are both quite seismically active and have had numerous quakes. And like much of China Beijing is seismically active and buildings there are built to withstand earthquakes because of the danger, and China is placing a ring of seismic monitoring stations around the city to provide early warning in case of a quake. Being earthquake-prone isn't very likely to cause a city not to exist.

And despite a famous and gigantic earthquake, San Francisco is still there.

Moscow certainly has terrible weather. Cairo is certainly in a desert (although with a convenient river). Beijing doesn't exactly have great weather either.

It may not be pleasant year-round as we judge things, but they aren't about to be scrubbed off the map by a hurricane or flooding, either.

Desert cities may indeed have a problem, but it isn't really a peak oil problem, it's a water problem.

You don't see a relation? If energy were unlimited, water would not be a problem.

And it's not just water. Many of those people who live in Las Vegas, Phoenix, etc., would not want to live there without cheap air conditioning.

And despite a famous and gigantic earthquake, San Francisco is still there.

Yes, but if it happens again, will we be able to rebuild, in an energy-scarce - and capital-scarce - world? There were a lot of articles about that, after New Orleans. SF was rebuilt very quickly after the quake. Chicago was rebuilt very quickly after the fire. New Orleans has not rebuilt so quickly after Katrina, and many suspect it will never recover fully. Just because we rebuilt SF on the upside of the resource curve doesn't mean we'd be able to do it again on the backside.


That is exactly what I fear, and why Alan Drake's ideas do not sync. Places like New Orleans and Holland are defenseless when sea levels rise by just one foot.

This is because dykes, levees and other works are built according to data of sea level rise like those provided by the IPCC, mere centimeters/inches over the next 100 years. But it's not "calm" sea level that is the main threat, it's the storm surge, once-in-a-100-year event, that decides the outcome.

If sea levels rise by one foot, these places are gone, because they are indefensible. You will have a Katrina-on-Steroids at some point. And what if it's in 2017?

There is no assurance that a storm surge of the needed strength will happen, but is there any justification imaginable to take that kind of risk? If anything, climate change means more extreme weather.

Perhaps the best chance we have to prevent mass build-up in the wrong places is the insurance industry, which should take long, good and hard looks at Hansen's latest work.

The basis can be found in a May 2007 report called:
Scientific reticence and sea level rise

The maps are based on a 5 meter (16.4 feet) sea level rise in 2107. Hansen et al's studies show that in the Pliocene, a 2-3 degree Celsius rise raised levels over 10 times that amount, 52 meters (170 feet). So these maps are highly conservative, not some crazy mindfcuk by a deluded amateur.

Anyone want to take a guess at what Katrina would have done if sea levels would have been one foot higher? That is an insane amount of added water, and since it will get warmer, it carries way more risk of hurricanes developing.

I have argued before that the Dutch and their engineers are caught in a trap of Catch 22,23,24 proportions: they have nowhere to go. So "no possible dykes/levees solution" is not possible in their mindframe. Well, look at that map. It's high time to start looking at what might really happen, not cling on to dreamy visions based on a future "that is FAR less knowable than you think". Is it a good idea to spend $trillions on storm defenses that can be wiped out in minutes?

NB: the worst designed city in the America's is probably the biggest of them all: Mexico City, a swamp filled by the Spanish, and which sinks further down by about a foot per year these days.

James Hansen says:

The current rate of sea level change is not without consequences. However, the primary issue is whether global warming will reach a level such that ice sheets begin to disintegrate in a rapid, non-linear fashion on West Antarctica, Greenland or both. Once well under way, such a collapse might be impossible to stop, because there are multiple positive feedbacks. In that event, a sea level rise of several metres at least would be expected.

As an example, let us say that ice sheet melting adds 1 centimetre to sea level for the decade 2005 to 2015, and that this doubles each decade until the West Antarctic ice sheet is largely depleted. This would yield a rise in sea level of more than 5 metres by 2095.

Of course, I cannot prove that my choice of a 10-year doubling time is accurate but I'd bet $1000 to a doughnut that it provides a far better estimate of the ice sheet's contribution to sea level rise than a linear response. In my opinion, if the world warms by 2 °C to 3 °C, such massive sea level rise is inevitable, and a substantial fraction of the rise would occur within a century. Business-as-usual global warming would almost surely send the planet beyond a tipping point, guaranteeing a disastrous degree of sea level rise.

Places like New Orleans and Holland are defenseless when sea levels rise by just one foot

You do NOT know what you are talking about !

The LSU plan to rebuild the wetlands (also good for fishing) by diverting spring flood water of the Mississippi River into the swamps have (from memory) a 10 inch sea level rise included.

A recent modification of the plan (post-Katrina) is to divert treated sewage from New Orleans into the nearest swamps that need building up year round. Fertilize them ! Spur rapid plant growth.

The Dutch have multiple lines of defense (except around some very rural farmland), so that if one breaches, the next will hold for the hours required till the storm abates and the tide turns.

I have proposed a wall built under the elevated I-610 freeway (we already spend a LOT of money on that !) as a secondary line if defense if the Lakeside levees breach. Minimal cost compared to the original cost of the Interstate !

In almost every case, hurricanes move through in a few hours.

Best Hopes for Engineering Logic,


You do NOT know what you are talking about !

Not a clue.

An image of the area around New Orleans, La., with the water shown in blue. The portions of the image colored pink and red represent areas that would be submerged if sea level rose about three feet (one meter). Courtesy of Jeremy Weiss and Jonathan Overpeck, The University of Arizona.

First, your statement was about a one foot rise, not three feet 4 inches. There is a major difference !

And that "red area' is without any levee protection or bringing in additional fill. With levees (and potentially fill) that red would be white. Add a secondary levee (as the Dutch have) (perhaps along I-610) and a short time surge will leave the bulk of the city dry.

So that map is of little value or relevance.

Best Hopes for Less Ignorance,


Why not just let the Mississippi change course ?

I agree with Alan that their will always be a city at the mouth but the location of the mouth of the Mississippi size of the city etc are debatable.

New Orleans could well become a backwater. I suspect that in time New Orleans will be left without federal support.

I think everyone is right on this its just a matter of timing. By the time that sea level rises enough to be a big problem for New Orleans we probably won't be supporting the engineering works required to protect the city and contain the Mississippi.

But this could be 50-75 years from now.

And it could be right after another hurricane whacks New Orleans with a death blow in the near future.

The US Army has PROMISED that they will REALLY give us what they promised us in 1968 by 2011 (slide from 2010).

If we had what was promised (and we thought we had) Katrina would have resulted in a dozen or twenty deaths in Orleans Parish and power outages for up to three weeks, downed trees, etc.

The risk is in the next 3.6 hurricane seasons. My analysis is about an 8% risk of a second major levee breach before the US Army remedies their failures of the past.

As to "why not just let the Mississippi go where it wants".

- Replacement infrastructure for a new port would be in the Iraq War cost range, or two.

- The new river would not have a natural levee, so protection would be "quite problematic".

- It would take several decades for the new river course to "settle in". Meanwhile, even barge navigation south of Natchez MS would be cut off and there would be no shipping transfers,

- The oil refining and petrochemical plants along the Mississippi River would be stranded and quite difficult to operate.

- It would show the world that promises from the US Gov't are utterly meaningless

- It would destroy a major focus of American culture. As the lead singer of ZZ Top said at JazzFest "All American music starts in New Orleans". It would also destroy the best US template for how to build a human scale low oil consumption society. As the New Urbanists admit, New Orleans is their #1 inspiration.

- I would leave the United States and worry about only my adopted countries issues post-Peak Oil. Y'all figure out what ever you want to do,



The current issue of National Geographic Magazine has an article on New Orleans and Katrina.

I would not trust the US Army sorry. I think if New Orleans needs to consider paying for and owning all the needed water mgt structures if it wants to be a viable city for the long haul. And this probably includes restrictions on where people can build. If the people of New Orleans paid for owned and maintained the needed protection for their city I'd feel a lot different about its viability. It was obvious after Katrina that the Fed has no problem writing New Orleans off.

It may be painful at first but in the long run but I think New Orleans better become effectively a city state if it wants to survive and this will probably be a lot smaller city then now but overall a lot wealthier. Btw I'd think they will turn their back on Florida also if its hit by major Hurricanes so New Orleans is not special. Houston is the only coastal city that I think the Feds have a real interest in keeping.

I might as well point out that I believe that the viability of our various cities has all ready been worked out in a number of scenarios in general its closely tied with Military bases. For example I suspect that all the cities are ranked on ones that the Military would be willing to control and retain law and order and ones they are willing to let fall into disorder.

In California for example I suspect they would work hard to keep San Diego while letting LA rot. SF would be iffy. While further up Portland/Seattle would probably be worth maintaining. Back in California outside of San Diego for sure and maybe SF its more regions around major bases which generally don't have huge populations that I think they would retain.

The point is as we get deeper and deeper into Peak Oil/Global Warming/Money Problems/Food Problems I think the Fed will become more focused on maintaining its military and a few strategic cities then a general government.

Sorry for the long winded reply but I hope it puts perspective on my comments about New Orleans.

I don't think its on the list.

I have argued before that the Dutch and their engineers are caught in a trap of Catch 22,23,24 proportions: they have nowhere to go. So "no possible dykes/levees solution" is not possible in their mindframe. Well, look at that map.

I just did, and I have found it flawed in the details. For instance higher parts like the Utrechtse Heuvelrug and Gooi are apparently flooded. Trust me, they won't.

Currently there are polders that are up to 6,5 meter below sealevel. In the five meter rise scenario they can not be maintained. Not due to floods, by the way, but because groundwater will swell faster then can be pumped away. But cities like Amsterdam are on higher grounds then that, they are one meter above sealevel. Here is a proper and very detailed height map of the Netherlands.

As for the not having anywhere to go: Germany is an option. Many Dutch already moved there.

I agree the map will change as a result of peak oil but why pick on San Francisco? It seems to me Los Angeles has the most to worry about. I can see people migrating from the southwest to the Pacific Northwest (where water actually falls).

I don't think anyone is going to leave a region due to earthquakes. Otherwise, the whole island of Japan would be empty.

The Japanese have to deal with subduction faults with far more destructive earthquakes then strike-slip faults.

For that matter, southern Europe experiences strong earthquakes too. I don't see people leaving Greece or Italy in droves.

Also, Los Angeles has alot of thrust faults capable of vertical motion because we live in a compression zone. We have a bend in the San Andreas. San Francisco doesn't have that problem. They're less likely to experience vertical motion.

OTOH, many or most North American cities were "founded" by Europeans on the sites of existing native american cities. Someone mentions Detroit in a post below, which was settled by native americans before the French arrived. The locations were probably chosen because of transportation efficiencies, which people once cared about!

That doesn't necessarily change the point, since most native american cultures didn't have writing to know that a location was periodically destroyed. Of course, they may not have cared either, if the location was valuable enough. Also, a good location for a native american city isn't necessarily a good location for a million people and sprawling suburbs. The Las Vegas valley, for example, was supposedly a bit of an oasis in the desert because of springs and was on trade routes for the area. That would make sense for a small native american settlement, but not the mess that's there today.

Problem is, the owners are likely to ship in illegal aliens to do the work. We've had incidents in Houston where Taiwanese companies set up sweatshops with guarded barracks - which reportedly were full of mainland Chinese workers lured by fraud by Communist bureaucrats mobbed up with the Taiwanese capitalists. So even if we had the soldiers to guard the Rio Grande, we will get slavery through the back door before Americans will take these jobs.

If enslaving foreigners somehow fails, the final solution is the enslavement of Americans. This is easily done by privatizing the prison system and freeing the prison corporations to move into any kind of industry. Once the money starts rolling in, part will be used to lobby state and federal governments to pass new laws to throw more people into prison. Of course, elected legislators will only pass laws that tend to throw African Americans and Hispanics into prison - better to screw 12% or 13% of the population than 70%.

Now recall how in Iraq the same corporations that bungled the Occupation were rewarded by the resulting chaos? More insurgents bombing the things the corporations built, so they had to be paid twice, or three times, to rebuild them. More extra charges for "security". And the convenient development of the position that America must never leave until it beats the Arabs into submission.

Translate that into the prison labor scenario. Blacks will rebel against the obvious bias of the new laws. Whites will lie their asses off denying that anything is unfair about the laws - then vote in more laws to throw more blacks into prison out of fear. The prison owners will expand, then have more lobbying cash. They will saturate us with ads before every state referendum calling for the crushing of "thugs" like Michael Vick.

The rebellion will spread, more and more blacks will be turned into slave labor, and the very corporations that created the mess will be put in charge of the resulting civil war. Then entire black neighborhoods will be fenced off or relocated to factory sites (the strategic hamlet program).

So yeah, I think there are worse things than illegal Mexicans and Chinese slave labor as long as we refuse to fight inequality.

Instead, we could redistribute a few trillion from the criminals currently in charge so as to make manufacturing jobs attractive to citizens - which might actually prevent that money from vaporizing in a popped bubble - but what are the odds?

We already have an army on the Rio Grande at Ft. Sill and the Marines at Pendleton, San Diego and 29 palms and National Guard patroling with the Border patrol.

The Coyotes in Houston already set up slavery, they hold their illegals to be ransomed outand sell the women to Cantinas. The Teaxs Dept. of Corrections already has private prison contractors-Wackenhut and Corrections Company of America. There used to be a lot of contracting out of prisoners in Texas, the Sugarland Units used their labor in the sugar fields. I'm sure this could be revived.

Sorry guy, you're way behind our forward thinking government and slavemasters.
Bob Ebersole

Has Ft. Sill moved? Last time I was at Ft. Sill they kept it in Oklahoma. It was kinda big to drag to the Rio Grande.


You're right, its Ft. Bliss in El Paso, Ft. Sill is still in the Oklahoma Panhandle, defending us from the Comanches. Thanks for catching that for me!

I've driven through parts of Ft. Bliss a number of times working in the last year. Its huge! The Army uses it as their primary training ground for Iraq and Afganistan now, that stark Chihuahuan desert and mountains is similar typography.
Bob Ebersole

I know a lot of this has already started. The point of no return comes when it becomes reasonable for prison corporations to do what other corporations do - set up fake foundations to lobby for laws that have effects very different than what is advertised. In this case, to throw millions of people in prison for the specific profit of their slave labor. Right now our prison contractors can't complete with the labor of Mexicans (and some Chinese). However, a collapse and civil war in Mexico could change policy. Our paranoia towards the illegals (even though most of them are from pro-capitalist northern Mexico, not the radicalized south and center) would make it hard to use them without expensive armed guards. But the convicts already have those, right?

The role of Blackwater and other mercenary armies will be crucial. What made slavery acceptable in Virginia in the 1670s is that white indentured servants had to be freed after their rebellion threatened the government. It was necessary to give them a stake in the plantation system, and black slavery did that. The freed whites degenerated into a henchman class, committed to slavery even if they couldn't afford slaves. You've seen those Halliburton ads in the Chronicle.

We already have laws that have effects of making slaves-specificially the "war on drugs" declared in 1972 by Nixon, part of his southern strategy. It has effectively disenfranchised the blacks through unequal enforcement. The stats are 1/3rd of the black men under 35 are in jail, on probation and on parole. About 85% of the inmates of the Texas prisons are black, and most of them for non-violent crimes like possession or sales , or property crimes to support a drug habit. Its self-reinforcing, they have such dispair amoung young black men that they are prone to drug habits and the youngest criminals see sales as a way out of poverty and quick money.

There was a law passed about 15 years ago that gave felons back their voting rights after completeing their sentence successfully. The Legislator who introduced the bill, Debra Danburg, told me the main reason that the bill passed and was signed was fear that the discriminatory nature of law enforcement would be thrown out because of the voting rights act.

Meanwhile, in the name of punishment felons have to face increasing employment problems. The ubiquity of computers assures that a crime committed when someone is 17 haunts them for the rest of their lives. People with drug convictions can't get loans or grants for schools, subsidised housing, or food stamps. They can't get professional licenses for many trades, and can't getrental housing with many landlords.

So the effect is they are forced back into a criminal life just to eat. They have become a permanent underclass.And with "3 strikes and you're out" statutes and enhancement of misdemeanors to felonies because of prior convictions. they go into permanent slavery in the jails.

Like most laws, if you're rich enough anything can be fixed. The President had his cocaine conviction expunged.
Rush Limbaugh got a slap on the wrist for 3,000 Oxycontin pills, which is way past the quantity for personal use.

The another result is the proliferation of drugs and the decrease in real prices in the OECD countries. Cocaine on the street is about 10% of the price 30 years ago

And yet another terrible result is the destabilisation of a large number of countries. Panama, Columbia, Afganistan and now Mexico. There were allegations proven of the CIA importing drus in the US to finance the Contra war, and there are current allegations about the Afgan warlords marketing through the same bunch.
Bob Ebersole

Very good observations I have wondered similarly.
Ok say we make clothes. From where does the fabric come? Where are the sewing machines -(india? china?).
Yes we can do this but I don't see Nike or any others making investments here in the US on the scale needed. Why should(or could) they in this current economic setup?

I think you have to ask these questions that you have proposed? But to whom? TPTB are interested in keeping the current situation in place at all costs, until they can't and then what? collapse? depression? war?

For the few who see the problems coming I bet there are 99 who have no idea. This is the problem.

Until it gets so bad that change is forced upon us most people will not. I fear the mob mentality will rule in cities as they fail.

While I think Alan is 100% correct on the rail issue, I agree with you - you have to ask - Light Rail to where?

Light Rail to where ?

Chicken and Egg ?

I suspect that those urban areas with good non-oil transportation (including bicycles) will attract new activities by their very presence. Denver is building Light Rail in the south, commuter rail in the north, about 117 miles in toto. Good (although more is needed).

Kansas City does not have any Urban Rail (despite good freight rail connections).

A new shoe manufacturer (using regional leather) has to decide where to locate. The Urban Rail in Denver will be a strong point in favor of Denver vs. KC and the manufacturer will likely look for a spot with access to both Urban Rail and a railroad. (Trolley Freight would be a good idea).

Just a "for instance".


I really hope we can do this, really!! We have been there before and obviously can do so again. I just don't know on the "adjustment period". We have been "trained" into shoppers.

100% here for the chance.


Dana Gas Postpones Pricing of Sukuk Issue

Dana Gas PJSC, the Middle East's first regional private-sector natural gas company, announced today the postponement of pricing of its announced convertible sukuk issue due to the recent volatility in international credit markets.

"In the light of the extreme weakness currently being experienced in the global credit markets, Dana Gas has been advised by Barclays Capital and Citi to postpone the pricing of its equity-linked sukuk offering until September," said Mr. Hamid Dhiya Jafar, Executive Chairman of Dana Gas. "The Board of Directors and management of Dana Gas would like to extend its thanks for the warm response it has received from the global investment community over the past two weeks of marketing, and looks forward to continuing a strong dialogue with them."

And THIS type of news will exacerbate global depletion rates, as new projects requiring funding will, ceteris paribus, be put on hold...

Credit deflation's gonna be a bitch.

And I thought it was the other way around.

"World owes US a debt, says Brown"

Yeah, when is the world going to pay up? Did they think that all this protection was free?

Tell ya what World, we'll call it even. Hows that?

The world owes a debt to the United States for its leadership in the fight against international terrorism, Gordon Brown has said.

And I was really liking this new PM (to my suprise) so far...

But given that both UK and US intelligence have now basically said that US (+Blair) policy have made the terrorism risk worse, oddly, I don't feel very indebted.

ObOil: My first wonderings about this guy (a couple of months before he took over) was when one week he was all about reducing CO2 emissions, and the next week he was calling for more refining capacity.


Oh good we have to go through this every time the market farts?

Well, at least you guys made me go back and look at some stats....

Let’s see, 52 week low, 11,595..... 52 week high, 14.120.....and we ended the week at 13,265, so after the big catastrophe, we are....what, 1600 points up on the year.....WHAT!?

I had been looking at getting into the market, (I will tell ya’ more in sec’, it’s actually an interesting time...:-), but hey, even after the big “setback” everything is within a couple percent of their 52 week high, and most stocks worth having are within about 4 or 5% of their all time high!!

I love it when people say there is no liquidity available.....well, MY LIQUIDITY ISN’T, not at these kind of freaked out prices!

Let’s try not to lose our head folks....whatever happened to the old geezers like John Templeton, who could sit on the talking head financial shows and say with a smile something like “I don’t think it’s going to be too bad, but losses of up to one third are not beyond the realm of possibility”.....and then go on and say it will be a great buying opportuinity when it happens....guess what? It did and it was. He knew the smart ones would do what any smart businessperson does: COVER YOUR AZZ!

Now I’m supposed to go into a wild azz panic evertime some middle ager buys a luxury condo on the coast to impress his mistress, and finds out he couldn’t even afford the insurance on his “hurricane alley” toy, so he dumps the thing on some other poor sucker at a discount, and retreats to his "cheapo" lake front place inland, and he lost nothing but the money he "hoped" to make on beachfront place, because he had payed nothing but a down payment anyway....geesh, when did that idiocy become MY problem?
(iit did if I was fool enough to have a bunch of money invested in the "subprime" ripoff outfits....)

Loose money? Loose money? Depends on where you are I guess....I know young couples in my part of the world, both persons gainfully employed for the last five years, who are still living in apartments because there is not a way in helll to make the closing costs and the payments on one of these $80,000 sheds that they are now selling for $330,000 bucks.
(repeat chorus, no liquidity? MY LIQUIDITY ISN’T, not at these kind of freaked out prices!)

But a funny thing happened on the way to the financial meltdown....I started turning up in some real money.....I mean CASH, not borrowed money! Crap, how did that happen?

Just as I predicted some 3 years ago, my “legacy debt” from the pre-9/11/01 period began to roll off. While everyone else was buying cars at 0% interest, I was finishing off paying for the one I bought pre 9/11 at about 16%. When I got loose from that and some other debt made prior to 9/11, my debt dropped immediately, and I could double and triple up on the consumer debt I still had from those days....

And I am not the only one! I have many friends who have done the same! My bet stays the same....we need to get ready for a flood of freed up cash in this country, freed up as the inbalance caused by 9/11/01 recede behind us. (except for the normal assortment of whiners and hysterics, why do you think the $3 plus gasoline prices have been met with a yawn....)

Of course some are going stupid with the extra cash....buying stock at the top of their historic price, buying the market at near the top after a 2000 point run up (where do folks think that money came from? Wages sure haven’t went up that much!), buying commodities at 3 times the price they had ever seen, buying above mentioned beachfront condos and luxury townhouses....and yes, these poor dumb swine are going to get bit and bit hard....

And some of the Corporate types who tried to parachute out but waited a bit too long may have to settle for 100's of millions instead of tens of billions....the poor dears.....give me a break....

Blackstone group, who IPO’ed at 5 to 6 times what they could possibly be worth, but have only fallen back 20% (big yawn) and Kohlberg Kravis Roberts, who should have bailed into the IPO and cashed in their chips and stuck the little investor with the tab earlier, but could not give up the “power trippin’”.....and this Chrysler thing....only a few months ago, no one pictured them even finding a buyer.....Daimler wanted that mess so bad a few years ago, the common sense consensus was, they bought it, let them try to fix it before they pawned it off again on the little “last man in” on the street.....

Ah, enough. Remember that great old painting “Voyage of the Damned”....well, you can call this one the “Voyage of the suckers”.

Two ironclad rules:
1. In the “greater fool” theory of investing, try to avoid being the greater fool. (and we’ve all been there....)
2. Never buy retail (that is, at the top of the top of the market), when you can wait a bit and catch it wholesale...
Oh and one rule NOT to believe unless you can get absolute proof....”This time, it’s different.”

The market goes up. It also goes sue me.

Roger Conner Jr.
Remember, we are only one cubic mile from freedom

You forgot to mention your candidacy for president.

Thanks Jerome

some bits and pieces... observations and a quesion or two

Altogether, the politics of individual greed over those of a collective future need to be blamed

Not that I disagree, but i've long had a problem with simple critisicm of 'personal greed'.

The indirect biological drive to provide the best leg-up for one's immediate offspring, ahead of the greater support structure, or longer term support structure (ie: society) is just part of being human - actually scratch that - just part of evolution in a world where there's sufficient energy to guarantee the grandkids'll be okay, regardless of species. Classical genetic evoloution can't predict the state of the world in 100 years - but we're still [mostly] driven by our genes. [I don't have kids btw, but I believe the emotional drivers toward excess wealth come from this]

Going off-topic to global warming for a moment: It's possibly intruiging that both humanity and locusts will probably survive any impending mass extintiction - one survival stragetgy based on simplicity, and one on complexity. If it came down to it - I give homo sapiens better odds.


Cid said:
Why would you grow more than enough to provide for your needs and to barter with?
Then mwilbert said:
So they could sell it, and buy other things they needed.
And JWhitland said:
otherwise there won't be enough after taxes for them to live.

See above. Just because all life is driven to give it's genetic progeny the best shot at survival - and for humanity, for a long time, that's largely meant accumulated money/wealth, which equates to greed.

On demand destruction:
Nate pointed out

Depletion, even if its over 5% annualized, can easily be overcome by demand destruction.
Followed by Cid
that would be true if the US was the whole world, but it's not. Instead, the US would just be priced out of the oil market, and "our" oil would just go to the higher bidder overseas.

The US consumes 25% - if consumption does go down dramatically in the US, even if other economies could afford to absorb the surplus, first the machines to burn the oil need to be built - and that takes time.

But I wonder if the price goes down due to primarily economic factors, that will actually reduce the amount pumped? If you'ld been earning $100/bbl, and living the high-life, would $50/bbl mean you pumped less - or (excepting any inability to afford new drilling rigs etc), wouldn't you go full tilt to try and recover lost income, thus inadventently keeping the price down, but not slowing down geological depletion one iota.

Arguing against myself, I found this graph:

here Something like 1/3rd reduction in consumption 1930ish

Clearly, typical energy resources (ie:coal) at that time wern't at peak however - and it's not like there was a lack of people to send into the mines. What psychological impact would a knowledge of peak have on resource value, after all the rich won't know that there's all the energy they want (as per 1930), it's just got cheaper. ?

Of course, it the collapse comes before peak-oil hits global awareness, that all moot.


Now, will someone please tell me, what does it mean for my oil futures investments in Euro's, if the USD goes into massive deflation? And is that the same thing as the US going into hyper-inflation? Actually, if you could just tell me what date I should sell? :-)


thanks for the intelligent comments and graphic. 1/3 drop in consumption in the 1930s - wow.

Now, will someone please tell me, what does it mean for my oil futures investments in Euro's, if the USD goes into massive deflation?

It means you actually hold 2 investments concurrently - one in oil and one in dollar/Euro. If oil goes up 20% but the Euro rallies 20% against the dollar, you are flat. Anecdotally, that is what everyone is worried about, which tells me the flip side may occur - a decline in oil prices during a dollar rally(at least over a 6 month period). Then when those players are cleared out, we break $100 oil and have a dollar crash....;)

Then when those players are cleared out...

See, now that's why I wanted a date damnit!

Question: Does anyone think that oil traded in Euros will actually happen anytime soon in a meaningful way, or are inertia and geopolitics sufficient to preserve the status quo, even through a dollar crash?

"Does anyone think that oil traded in Euros will actually happen anytime soon in a meaningful way...?"

It is already happening. Might I suggest Robert Newman's History of Oil.

Oil-Euro trade in part 3


at part four... I should be in bed - I blame you if I get ticked off tomorrow for being late!

Seriously though, stumblers upon this thread - watch the whole thing - dead funny. If nothing else, the comment about being taught at school that the assassination of a duke triggered WWI never quite ringing true had me hooked...

i do wish satirists listed references though - I have to keep dipping out to wikipedia!

Still can't switch my futures contracts to Euros though...

Jaymax (uber-techno-conucopian-doomer)

"Does anyone think that oil traded in Euros will actually happen anytime soon in a meaningful way...?"

It is already happening.

Good point Cid. Folks, we had to know that when internationl trading was speeded up to the point that it is as easy to trade in Euro's, Yen or Dollars, or any of a hundred other currencies, the dollar was lose it's "primacy".

We did know that, didn't we....?

The error is in "euro worship". There is no indication that the Euro is any safer as a currency than any other, and I could (in fact have, many times have) made the argument that the Euro is in fact a great deal riskier than the dollar (or for that matter the Yen)

What to do, what to do? Easy. If you are going to deal in any paper currency (fiat currency, fiat currency, how dreadful!, scream the hysterics!), your best bet is play a "basket" of mixed currencies, weighted by size of the respective economies, and perhaps balanced off by a commodities basket, laddered by time and commoditie.....

Of course that would be hedging, in the "old" sense of the word....COVER YOUR AZZ.

Roger Conner Jr.
Remember, we are only one cubic mile from freedom

i've long had a problem with simple critisicm of 'personal greed'.

Oh I agree that personal greed is a natural instinct, and one that can be channelled into useful action (Adam Smith's "natural hand").

What is annoying is the way the political discourse of the past 30 years (pushed by the right wing) has managed to convince everybody that greed _alone_ creates prosperity for all, and thus that all forms of regulation and public intervention (those in fact that used to channel that greed into acceptable outcomes) should be eliminated for our greater good.

It is that particular propaganda that I'm fighting. Greed, tempered by collective institutions and regulation, is good. We've lost the qualifier thanks to Reagan Thatcher et al.

Greed tempered by well run state institutions, rule of law and non government institutions where people cooperate is good. But to much state interference hurts such institutions. In Sweden we can be gratefull to Thatcher and Reagan for inspiring renewal after toying far too much with socialism.

I agree. But Sweden was an extreme case back then and we are still living with the painful legacy of the 68'ers.

If you'ld been earning $100/bbl, and living the high-life, would $50/bbl mean you pumped less - or (excepting any inability to afford new drilling rigs etc), wouldn't you go full tilt to try and recover lost income?

Post peak oil---the mentality will be very different.

Oil in the ground, instead of being seen as depreciating (at least relative to the cost of capital you needed to buy the property) will be seen as long-term increasing.

Likely the mentality between capitalist and nationalized/socialized producers will flip from their pre peak mentality.

Pre-peak, capitalists produced as much as they could right now to gain maximum cash flow over their cost inputs. Earnings per share dominated everything.

Socialized/national oil producers felt like this was a "rape of our country's wealth for foreigner's benefit" and inhibited production.

Post peak, capitalists may see oil in the ground as a long-term asset guaranteed to appreciate faster than inflation, contrary to before, where flows dominated profits. Now financial structures which value accumulating assets in place (and hence production decisions) may win, and the motivation will be to inhibit production at low prices. At low prices---if seen as temporary post peak oil---capital will flow to "asset accumulators" out of "oil producers"

The socialized/nationalized oil companies however will face increasing domestic demand, and may not be able to resist continuing to produce.

Russian saying:

"Everything Marx told us about communism was false."

"Everything Marx told us about capitalism was true."

Another one:
- Capitalism has succeeded in doing in eight years what communism couldn't do in eighty years.
- What?
- Make communism look good.

So very true----
Marx may have proven time travel possible-
No one could of been that correct in his analysis 150 years out---
He must of had a time machine--
Bakunin is the one who predicted communism to the letter--
And, as it was being formed-

I never ever say never when it comes to future oil prices. It may be $40 it may be $140, who knows. One thing seems certain to me, that the easy money times of 2003-2006 were caused by Greenspan keeping the fed funds rate so low for so long after exiting the last recession in 2001-2002. You do not keep it that low and not get speculation in the stock market, buyouts and real estate. He should have known better and I believe he did know better. But being a lifelong Republican, he wanted to make Bush look good after 9/11 and now we will pay the price for that.

Worse than that. He was part of Ayn Rand's personal circle. A real capitalist sado-masochist. Maybe he thought if he kept his foot on the gas long enough, they would break through lightspeed and attain nirvana.

Allah shrugged.


Excellent analysis and explanation. Maybe with your knowledge, you can answer a question that has been troubling me--the fed funds rate is supposedly the rate at which the Fed will lend money to banks, but where does this money come from and how is it reflected? We have an almost $9 trillion national debt and are running deficits at $400 billion a year. I know, technically, any lending transaction could be a wash on a balance sheet since it would be both a liability and an asset, but wouldn't any new money lent increase the money supply? Or do the funds come from the federal reserves, which effectively negate reserve requirements?
(I'll plead this is on-topic since to my mind it is contributing to the multiple economic bubbles which energy costs may eventually pop.)



The Fed funds rate is not the rate at which the Fed will lend to member banks--that is the discount rate. The Fed Funds rate is the rate at which member banks lend reserves to each other--so if one bank is over-reserved at the end of the day, and another is under-reserved (there are rules as to how much each bank needs to have on reserve with the Fed based upon its assets) then one bank can lend reserves to the other.


Thanks for the clarification. I will, however, roll my question over to use correct terminology--If the discount rate is the rate at which the Feds will lend money to banks, where do they get the money to lend? Or does the Fed not lend at all?

The Federal Reserve creates the dollars it needs to lend.

From an accounting point of view, the bank requesting the loan has an account with the Federal Reserve. When they request funds at the discount window, the Federal Reserve deposits those funds into the banks account (a number is changed in a computer somewhere) and then enters a loan on its books for the same amount of money. The new cash and the loan balance itself out on the books.

The bank has to be in sound financial condition and also post collateral. The process isn't much different then when you go to the bank for a loan. The bank checks your credit, takes a lien on your collateral, and then deposits money in your account.

In reality, the discount window isn't often used. The rate at the discount window is 1% higher than the Federal Funds Rate. The discount windows is more of an "emergency" backup in case the interbank market were to freeze-up (something that happened after 9/11).

Hi kicker,


I'm curious about what counts as collateral - ? And (in the real world) - does the fed ever collect? I also wonder what the loan picture is - what %, say, of banks currently owe on such loans (from the Federal Reserve)?

(Just trying to put together a picture of the "fiat system" and it's intersection with "peak".) Apologies in advance if this requires a too-long answer.

I'm also interested in this too. Lending money one creates out of thin air is a good business to be in. Where does the interest that the fed collects from discount window loans go?

I know that the US Government has to roll over massive amounts of bonds constantly to finance the 9 Trillion $$ National Debt. Is it possible that they would set up dummy purchasers to buy all those bonds-in other words, fake the sales, so as to keep their interest rates low and prevent a panic?
Bob Ebersole

Part of the debt is owed to the social security and medicare funds.

Is the Federal employee pension plan financed with T-bills?

Anyone like to criticize big government spending? The largest percentage of GDP spent on the military since WWII?
Cutting taxes in times of war? Invading a nation based on false accusation instead of for self defense?

"Great is the guilt of an unnecessary war." John Adams

The largest number of interest only loans since the Great Depression were written in the past four years. First the subprime notes were falling, now some of the exotic prime loans cannot perform well in an environment of rising interest rates.

Real estate prices continue to slide ... was it cheaper to own a house or to rent one?

Inflation was nominal, whatever that means.

It is hard to fake a bond sale. The government yet owns millions of acres of federal lands out west and in Alaska. They might be able to sell a few acres at a time to pay the bills so as not to panic the nervous land market.

I would think if they set up dummy purchasers and were really buying the debt themselves with newly printed money, it would increase money supply (a fairly closely watched figure) and be extremely inflationary. But the need to constantly refinance the national debt is what is scary about the weakening US dollar. The national debt has 2 components: debt traded among government entities (with social security being a large creditor in that) and public debt. But a lot of the public debt (about 2.2 trillion )(see held by foreign nationals. But there lies Bernanke's dilemma: as the dollar weakens, he needs to raise interest rates to keep foreign investors willing to continue lending (or rolling over their T-bills and bonds) but raising rates risks (today's alliteration letter is "r") crushing America's over-indebted people. As Jerome's article points out, the free lending is slowing so people can't continue borrowing to pay off existing debts; as their ARM's adjust or as the cost of new money rises, the rate of defaults will increase. If he doesn't raise rates and foreign investors don't continue lending, how do we finance the debt?

"If he doesn't raise rates and foreign investors don't continue lending, how do we finance the debt?"

Indeed. The answer is we don't. Brick Wall. Hyperinflation as everyone refuses to take US Dollars and it becomes worthless. US becomes the new Mexico as the Canadians scramble to build a fence.

We have seen the stock market bounce down 300 points and then drop another 100 points or so, this past week has been quite a rollercoaster ride. remember, this is 2nd quarter earning reports, i recently saw in the news that retail sales had the worst drop in 16 years, combine this with new home sales dropping, sub-prime mortgage resets coming up, add in oil prices as well the fact that consumer goods are going up in price, due to oil, throw in hurricane season, etc...rumor heard today on the radio is that we can expect to see an October surpise, code word for a serious market correction, someone earlier mentioned Oct 29! to the tune of a 2000 point drop. Possibly back down to the 11,000 or 12,000 point range. I really think we are going to see something like that too. Anyone here follow the Fibonacci rule?

Someone mentioned earlier that when the USA sneezes, the rest of the world gets a flu. I tend to agree since the world markets are more intertwined today then they were 20 yrs ago. I also heard oil will possibly rise to $80 this week. but will draw down to a few bucks, and hold as it starts to rally over $80.

Oh and to top it off, shotgun shell sale prices go up too, will it ever end?

Geez, we live in interesting times! I need another beer and case of shells! happy hunting all!

Hello TODers,

I was just musing on all the interesting comments from this entire keypost [thxs Jerome!]. Between now and the ASPO/USA conference [OCTOBER 17-20] all sorts of things could happen: from stock market decline, to OPEC refusal to expand exports, to hurricanes & earthquakes, etc, etc.
[recent ASPO Conf. Promotion keypost on TOD--BS]

Confirmed speakers include T. Boone Pickens (pioneer oilman & acquisition expert), Houston Mayor Bill White (former U.S. Deputy Secretary of Energy), Bob Hirsch...[SNIP]....

...****** We are awaiting RSVPs from other high-profile speakers including Former President Bill Clinton.******

If something Very Serious Happens [I have no idea what it could be, but something MAJOR], will former President Bill Clinton appear at Houston making ASPO a huge media event? Will Hillary, or other Pres. candidates arrive too?

Just imagine if Bill & Hillary asked all their Hollywood supporters and other national political buddies to attend ASPO. Barack Obama, and the other Dem & Repub candidates would have to hustle down to Houston too, or be left looking foolish and un-informed. I hope you have all written George Clooney's agent by now in support of Peakoil Outreach.

This could be a key 'tipping point' in the 2008 election if
this hot potato can be politically handled in the proper manner. I will leave it up to the Poly Sci experts to discuss, dispute, and further elaborate.

I have got to believe that Peakoil Outreach among just the US topdogs has reached the point where many candidates possibly see this as the 'brass ring' to grab to differentiate themselves from the other contenders on the carousel.

The candidates' pollsters must be checking the public pulse and devising strategies for this possibility. They would be foolish to not consider the possibility of some macro-event occuring between now and the election. Could the ASPO conference be the right venue, or social construct, for a political sea-change?

If Bill Clinton can politically play his ASPO cards right [with giant pre-arranged corp, MSM, and Hollywood support]: it would be like he snuck four aces into Hillary's poker hand at the gaming table; she would have a huge headstart and a whole year to outline and explain her platform to keep her Dem & Repub contenders rocked back on their heels in this very high stakes game.

My suggestion would be to invite former President Carter [with the Famous Sweater, of course], to be the 'surprise' keynote speaker, and then have him read the best excerpts from his April 18, 1977 speech again:
Tonight I want to have an unpleasant talk with you about a problem unprecedented in our history. With the exception of preventing war, this is the greatest challenge our country will face during our lifetimes. The energy crisis has not yet overwhelmed us, but it will if we do not act quickly.

It is a problem we will not solve in the next few years, and it is likely to get progressively worse through the rest of this century.

We must not be selfish or timid if we hope to have a decent world for our children and grandchildren.
If I was in Houston to see Carter say these words again from the podium, I would need tissues to soak up my tears.

Steve Andrews, Jim Baldauf, Randy Udall, and Dick Lawrence, [ASPO/USA principals and co-founders] would then have a truly spectacular conference, with CNBC & C-SPAN, and maybe other MSM carrying some speeches live, and the print & internet media racing to catch up.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Well, come to Houston! Its going to be great fun.

It looks like peak oil is about to be as much in people's conciousness as global warming. I think there's a pretty good chance of a lot of media coming and covering us, since CNBC followed Boone Picken to China.
Bob Ebersole

Invite the next president of the United States.

Fred Dalton Thompson.

As mentioned previously in "Drum Beat", there is already a move to price oil in other currencies on the international markets.

As this movement away from the US dollar continues, interest in the us dollar will wane and the dollar will continue to depreciate.

the government has stressed the system by allowing for cheap money to be available to individual investors, home buyers, corporations, hedge funds, etc.

now the availability of inexpensive financing is drying up. which way will the fed jump now? they have 3 choices. raise rates, lower rates or do nothing.

my guess is that they will do nothing because 1) they don`t know what to do. 2) they are afraid that whichever way they jump they will do the wrong thing.

not to be an alarmist but i feel that the U.S financial system is so stressed that it could be pushed over by a feather. perhaps it is just happening in slow motion.

further more. my guess is that those funds who may be lightening up on equities will be buying oil futures. these fund managers are paid a 2 pct fee on the money they manage and a 20 pct commission/share of the profit in those funds. they cannot/will not sit around while their fund money sits in low yield cd`s. they have all to gain and little to loose by actively staying in the game.

From the perspective of one who lived in China for 3 years...

The Chinese care about their people.....

The Chinese have 1.2 Trillion USD..... which are depreciating..

All Chinese officials must spend 2 years abroad before they can be promoted above entry level....

It is no accident China bought 10% of Blackstone.....

China will spend that pool of money on domestic infrastructure projects, to keep things going.....

Which brings to mind the real problem....

According to market historians... the US propped up the British Pound, and European currencies during the period 1917-1929, in the process accumulating massive amounts of foreign bonds.... but the current scale of Chinese and other central bank purchases of US Dollar bonds is several orders of magnitude greater...
The collapse of the system in 29 led to global recession...
The collapse of the current system is a matter of time....



Interesting view of US Economy follows. Imagine "pulling out" the food/energy component. What would happen to the top heavy US economy?
Published on 29 Jul 2007 by Resource Insights. Archived on 29 Jul 2007.
Upside down economics
by Kurt Cobb

This method for depicting the economy was suggested to me by two things. First, Liebig's Law of the Minimum states that an organism's growth is limited by the amount of the least available essential nutrient. In the case of world society that nutrient would be food, though many would argue that fossil fuels are the essential nutrient since so much food production depends on the use of fossil fuels and their derivatives including fertilizers and pesticides.

Second, a piece by Dmitry Podborits argues that it is nonsense to say that the U. S. economy is less vulnerable to oil supply disruptions today than in 1970s because it produces twice as much GDP per barrel of oil. Instead, Podborits suggests, we are more vulnerable to oil supply disruptions because we have so much more GDP balanced on each barrel of oil.

The same argument might be made with respect to agriculture which in the United States in 1930 employed 21.5 percent of the workforce and made up 7.7 percent of GDP. In 2000 the numbers were 1.9 percent of the workforce and 0.7 percent of GDP. We are balancing an ever larger total economy on an agricultural economy that on a relative basis is shrinking. Certainly, we are getting more efficient, but are we becoming more vulnerable?

Interesting -- in regards to oil usage it seems to me one can segment: 1) the industrial usage is inflexible 2) and the transportation usage and residential usage is more flexible.

The petrochemical industry, for example, is most likely very efficient currently in the US and a drop in feedstock would lower output proportionally.

Public transportation has room for significant gains in efficiency in the US (higher fuel economy, more utilization of public transport) residential energy has significant room for higher efficiency (insulation, conservation, etc).

If one views the overall energy usage as a static (not increasing) "pool" then lower efficiency by transportation and residential leads to lower output of industry and petrochemicals, assuming efficiency gains in industry have been maximized.

Hello TODers,

I hope you check Jim Kunstler's latest posting called "Vanishing Point". He ties WT's ExportLand Model, Entropy, housing markets, and stock market gyrations together in quite an interesting manner:

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

video from housing doom.
"Craemer gets religion"

Mentions prime not just subprime because if you have negative equity with falling values your you should just walk away...

Now that was an angle I didn't fully appreciate.

The newer bankruptcy laws might hold the borrower liable for his/her/their debts.

Was it cheaper to buy a home or to rent one?

Foreclosures were increasing YOY.

Federal Funds Rates:

12/2003, 0.98
01/2004, 1.00
02/2004, 1.01
03/2004, 1.00
04/2004, 1.00
05/2004, 1.00
06/2004, 1.03
07/2004, 1.26
08/2004, 1.43
09/2004, 1.61
10/2004, 1.76
11/2004, 1.93
12/2004, 2.16
01/2005, 2.28
02/2005, 2.50
03/2005, 2.63
04/2005, 2.79
05/2005, 3.00
06/2005, 3.04
07/2005, 3.26
08/2005, 3.50
09/2005, 3.62
10/2005, 3.78
11/2005, 4.00
12/2005, 4.16
01/2006, 4.29
02/2006, 4.49
03/2006, 4.59
04/2006, 4.79
05/2006, 4.94
06/2006, 4.99
07/2006, 5.24
08/2006, 5.25
09/2006, 5.25
10/2006, 5.25
11/2006, 5.25
12/2006, 5.24
01/2007, 5.25
02/2007, 5.26
03/2007, 5.26
04/2007, 5.25
05/2007, 5.25
06/2007, 5.25

Interest Rates up 5 times in less than 5 years.
ARM resets to follow. Balloon note refinances needed. The crisis is not over.

Whoa! that was interesting. Nothing (realestate) is appreciating? Sub-prime loans reset in October? Like a frieght train, We are heading straight for a brick wall.
Now not everyone will be affected, but it looks like 3rd qtr earnings are not gonna be pleasant, then come Xmas sales etc, then comes 4th qtr results in Jan.
Not a good time to be in a big city!