Countdown to $200 oil meets Anglo Disease

One of the more interesting things about this Friday's economic news was the very obvious connection between the unemployment number and oil prices. What links the two is debt, the defining feature of what I have called the Anglo Disease, ie the highly unequal economy whereby the rich and the financial sector (almost the same thing these days) capture most of the income but hide it by providing cheap debt to the middle classes so that they can continue to spend.

Oil has played a fascinating side role in my Anglo Disease series, allowing the debt bubble to go on for much longer than expected. But now, instead, it is accelerating the crash. Let me take you through the whole cycle.

Anglo Disease diaries

Countdown to $200 oil diaries

A good summary of what the Anglo Disease is about can be found in this diary, written up as an Op-Ed text, but let me take you through the concept again:

  • the name mirrors that of the "Dutch disease", which was coined to describe the impact of the rapid development of the oil&gas sector in the Netherlands on therest of the economy: the high profitability of the new sector captured a high share of investment, thus weakening other parts of the economy, which were partly neglected; in addition, the fact that it created a large boost to exports pushed the currency up, thus further making other industrial activities uncompetitive in what was a largely export-oriented economy. The "Dutch disease" describes that shrivelling of the rest of the economy as money flowed to oil&gas producers.
  • in today's economy, the cannibalistic sector is not oil&gas, but finance. Bankers, through debt, have the ability to convert future cash-flows into immediate profits. Such immediate returns attract more capital, talent and resources (which cannot go to other sectors) and impose an iron discipline on the rest of the economy: those that provide the debt want to ensure that the future cash-flows will indeed materialize, and move in to ensure a relentless focus, in the underlying activities, on profitability at the expense of all other criteria. The immediate contribution of the financial world to measured GDP and growth makes it a popular industry, thus reinforcing its influence - and spreading out its way of thinking, focused on monetary gains and financial "efficiency." So not only the rest of the economy gets squeezed for any extra drop of profitability, but the language of financial analysts becomes the dominant one of not only economic discourse but also political discourse;
  • one of the more attractive features of the financial world, for its promoters, is its ability to concentrate huge fortunes in a small number of hands, and promote this as a good thing (these people are said to be creating wealth, rather than capturing it). Making money, lots of it, is the ultimate arbiter of not just success, but also morality;
  • of course, the reality is that such wealth concentration is created by squeezing the rest, as is obvious in the stagnation of incomes for most in the middle and lower rungs of society. This is not so much wealth creation as wealth redistribution, from the many to the few. But what has made this unequality (the fundamental feature of the Anglo Disease) tolerable is that the financial world itself was able to provide a convenient smokescreen, in the form of cheap debt, provided in abundance to all. The wealthy used it to grab real assets in funny money, and the rest were kindly allowed to keep on spending by tapping their future income rather than their insufficient current one;
  • in a nutshell, the debt bubble hid the class warfare waged by the rich against everybody else, conveniently trapping those that could not or would not live within their means in the system, by making their livelihood increasingly dependent on not rocking the boat.
  • but the debt bubble was (duh) a debt bubble, and it is now bursting, as it inevitably would. What matters is how the pain is shared, and, right now, it does not look as it will be shared the same way the loot was on the way up. The whole cycle was just a way to permanently transfer wealth from the many to the few. It was wilfully created by the combination of ultra low interest rates as set by the Fed (thus my moniker of "Bubbles" Greenspan), tax cuts for the rich (Bush's helpful but hardly invisible hand) and the permanent propaganda for liberalisation, deregulation, "reform" and "freedom."

The outside world had a role in this bubble, because part of the squeeze on the working classes was made possible by the threat of outsourcing and offshorisation to China, India et al (which kept wages in check and workers tame), and a lot of the bubble was in turn funded by the surplus cash generated by these countries through their exports and their policies to keep their currencies weak (to maintain their price competitivity), which had them accumulate huge amounts of dollars which they then lent back to the US via the purchase of Treasurys.

This is where oil shows up for the first time in the story: the growing demand from China, India et al. started pushing prices up as this happened at a time when supply was suddenly become tighter.

Paradoxically, the oil price increases provided an additional boost to the debt bubble: while they started biting into consumer spending, they also generated a new round of cheap liquidity, as oil producing countries suddenly found themselves with huge amounts of money, in dollars, which they could not, or chose not to, spend right away - presto, these were invested into Treasurys, ie loaned to the US. This provided the liquidity to finance consumer spending in the US (including for gas) and kept the interest rates on long term debt very low (demand for bonds pushes the price for bonds up, and thus brings the yield, is the interest rate, down). This happened at a time when the Fed had finally decided to increase its short term rates as it could no longer justify the extravagantly low rates of 2001-2004 and created what Greenspan called his "conundrum" - that apparent disconnect between short term and long term interest rates. It was just the bubble going on afterburner, thanks to oil prices.

Effectively, the liquidity created by high oil prices hid for two years the fact that the bubble was bursting.

But now, everything is aligned - in the wrong direction:

  • the debt bubble is bursting, as long announced by observers not blinded by greed or ideology, with all the expected pain: the real estate crash, the banking crisis, the foreclosures, and the coming inevitable recession;
  • the income capture mechanisms set up during the bubble have not been reversed, so the pain is falling disproportionately on the poorest, and the finance world (ie the rich) is being bailed out. The rescue of Bear Stearns may have inflicted pain on shareholders, but it saved bondholders, which is unprecedented and ominous. Public discourse is still largely about "reform", tax cuts and "letting the market" solve things;
  • and oil prices are still going up, and are biting increasingly hard into people's incomes. They are going up because of global trends (oil production from friendly regions are inconveniently declining now, after a couple of decades temporarily hiding the reality of global scarcity; the countries that piggybacked on the US debt-fuelled growth have prospered and are consuming more, oil producing countries are booming and using more oil themselves, and their growing prosperity makes them more assertive and less willing to listen to Western pleas to produce more and/or to let oil majors have access to their resources: thus, for a combination of political and geological reasons, oil supply is stagnant), and our own economic woes will not be enough to bring them down: they will thus worsen the economic outlook here;
  • an additional factor that comes in is that an alternative to the dollar exists: the euro. For the first time, the rest of the world has the possibility to store value elsewhere than in dollar-denominated instruments. The debt bubble was largely a dollar phenomenon, and the easiest way to deflate it is to lower the value of the dollar. Gold played that role in the past, but it's not that convenient a tool; now the euro is the perfect outlet to express skepticism about the value of the dollar. As this makes investors less keen to hold dollars able to actually do something about it, it WILL drive interest rates up in the US, after many years of flows the other way round keeping them down.

Yesterday was a perfect demonstration of these links. Beyond the bellicose words against Iran coming from Israel, what drove the markets yesterday was the announcement that the unemployment rate had gone up a lot more than was expected (to 5.5% instead of the 5.1% predicted by analysts). That announcement, in turn, made the markets brutally change their expectations about future Fed rate changes. They had been expecting increases in the coming months, to fight inflation, but increases are impossible, politically, at a time when unemplyment is going up rapidly. The expectation of lower short term rates in turn drove the dollar down (especially as this came the day after the European Central Bank said that it would increase rates itself this summer). The flight away from the dollar then pushed commodities up, and in particular oil. As speculators had been betting on oil prices going down, they were wrongfooted and had to abandon their positions brutally to avoid further losses, thus magnifying the price increase (an aside here: speculators were betting on oil going down not up).

So there you have it: wage stagnation (Anglo Disease) and oil production stagnation (the fundamental driver of the Countdown diaries) combining in a perfect storm. But hey, the financiers are still sitting pretty, and will say that more "reform" and "deregulation" and tax cuts are needed.

Maybe it's time to stop listening to what is highly self-interested drivel, and take back what they grabbed: it's not theirs. And maybe it's time to actually worry about using lots less oil (and gas and coal).

And, wonderfully, a programme to invest in housing and vehicle energy efficiency, renewable energy, and infrastructure, paid for by massive tax hikes on the rich, will help solve the current recession and the oil crisis.

"The rescue of Bear Stearns may have inflicted pain on shareholders, but it saved bondholders, which is unprecedented and ominous."

I was under the impression that in the USA, holders of common shares in a business are normally the very last in line, behind holders of preferred shares, bondholders and just about everyone else, in a bankruptcy. Am I mistaken, or is this different in Europe?

It is quite correct that shareholders should be last in line and, in a bankruptcy, get nothing (or whatever's left after everybody else was paid). In that respect, the Bear Stearns was not a bailout.

Where it WAS a bailout is that there would not have been enough money, without the combined intervention of JPMorgan and the Fed, to repay a lot of the lenders to BS. The Fed guarantee to JPMorgan effectively bailed out unsecured lenders of BS - and that is quite unusual. There was no reason to do that. The only creditors with special rights in the financial world are ordinary account holders with retail banks - their deposits up to a certain threshhold are protected by a public guarantee, but this is not the kind of lenders we are talking about here.

The excuse to bail out these lenders was the systemic risk - ie the risk that BS's downfall would bring down along other banks as it was involved in too many transactions that would have failed. The case was not really made for that - and certainly not justified after the fact.

I also read somewhere that JPM was on the other end of a lot of the swaps with BS (as were many others) and this was one reason JPM moved in. I don't pretend to understand the details. But the deal could not have happened without the Fed protecting JPM against bad paper. It was a huge gift to JPM.

Thanks for a great article.
To what extent does the 'Anglo disease' hold sway in Europe?
Post Thatcher,it is my understanding that considerable steps in that direction have been made in much of Europe.

Oh it's on the move in Europe, or over Europe - the ideology is gaining ground. It has more ground to cover, because continental Europe never had a big dominant money center like the City or Wall Street, and had a stronger culture of public action and preference for collective, social action. But the discourse of "reform" is everywhere, and highly influential; sadly, it could be said to be gaining at the very moment it is being discredited in the US and, increasingly, the UK, as its collateral damage is becoming too obvious there.

This leads to an important issue, the relation of the political system and the financial.
Neither the US nor the UK have effective means of changing the system.
In the US the process has overtaken any policy considerations or possibility of implementing them.
The never-ending Presidential selection system effectively reduces the choices available, so that McCain would try to minimise government whilst actually supporting the over-leant banks and throwing people out of their homes to the benefit of the rentier class, whilst Obama would create vast and inefficient systems to prop up consumption whilst still being entirely in hock to the banking and governmental systems.
In the UK change is even harder.
The labour party has enthusiastically adopted the Thatcherite system, as it gives those at the top unlimited opportunities to realise unearned income.
They are socialist only in their penchant for creating bloated bureaucracies and socialising losses, as at Northern Rock, which is pretty straightforward pork.
In any case by the time of an election in 2010 economic conditions will likely lead to it's effective disintegration in it's present form.
The Conservative party is unwavering in it's commitment to the financial institutions and procedures that got us into this mess.
Practicality has never been a criteria by which Liberal policy is set.
In both countries the financial system is the real government, and they are not about to legislate themselves out of easy money and start working.
Real change likely will arrive via a 1789 style purge, rather than through the incremental adaption of the system.

DaveMart - "real change will probably arrive via a 1789 style purge"- you are probably right.

It is the aftermath of such a purge,bloody and brutal as it was with a lot of collateral damage,which is problematic.Napolean rose out of 1789.

Although history can teach us many lessons the present situation is unique with it's multiple severe stressors.

Also,a question - If a meltdown occurs in the US as is becoming increasingly more likely,what are the chances of,and the likely outcome of, the US government of the day declaring a moratorium on national and international debt?

Virtually nil, in my estimation.
They will instead simply inflate it to worthlessness, but never admit that the debts are irrecoverable.
I know little about these matters though - check out memmel and Gail's posts for a thoroughly knowledgeable, although rather depressing, estimation of this sort of issue.
Euan also intends an article on the ruin that used to be the UK economy, I believe.
I recently posted graphs of the UK financials showing budget deficits and balance of payments, which would all be bad if we were about to enter the sunniest of financial times, instead of trying to keep our head above water in a world of greatly elevated oil costs.

Both for the UK and US my estimate would be that the wheels come off by this winter.

so that McCain would try to minimise government

What is your basis for thinking that Senator McCain would do that?

About the only one who is running who has a history of voting 'no' to bills is Dr. Paul - and the 20% he got in the last round of voting is more a protest VS McCain than support.

Real change likely will arrive via a 1789 style purge,

I'd say the change will happen once the people think that change will be less painful than staying the present course.

Jerome, what do you mean by this?

and take back what they grabbed: it's not theirs.

As far as I can tell, there is plenty of responsibility to be shared for this situation, including those in the middle class who couldn't resist the temptation (like my wife and me) to go into debt for a bigger home, a new car, etc. Are we not all part of the machine? Personally, I am just learning now how the machine was set up, including the whole notions of money as debt, fiat currencies, ever-expanding credit, etc.

The rich got a thousand or ten-thousand times as much as you did - and probably by getting you to take out a loan from them by their command of media and regulation - let alone culture.

Shoes in the machine. And not cheap plastic shoes, but steel horseshoes.

cfm in Gray, ME

I love how people never like to take responsiblity for their actions. "O, the media made me buy the house I could never afford". That's exactly it.

Most people don't have the self-confidence in their analytical capabilities to resist the endless drumbeat from the media, from their neighbors, from the government. Many people thought they could not afford their house, but figured they must be wrong because everyone was saying they could.

For obvious reasons, the government & the media do not teach or encourage independent thinking. They want sheeple. They got sheeple. And while I do hold the sheeple accountable, there are mitigating circumstances.

"mitigating circumstances" is exactly what it is. It is ironic that we are in an epoch that claims that individual freedom and responsibility trumps everything, and where there is an incessant drumbeat to make sure that people use their "freedom" in the proscribed way.

It's like "democracy" around the world: a country that "freely" choose to ally itslef with the USA will be labelled a democracy, while one that uses its freedom to be hostile will be denigrated and called a dictature or worse. We have responsibility, and we have the "right" choice. You can't mix and match.

So yes, there are mitigating circumstances - although not for the cheerleaders of "freedom."

Jerome - I really believed all of the stories growing up about the U.S. being the greatest country on earth and the missionary zeal that Americans tried to spread "freedom". I lived abroad in the Philipines for over a year when I was a kid and the fact that the Philipinos had so much less only served as evidence of our obvious superiority.

I was in my second year in college when I had a sociology course and in the testbook was a cartoon of a group of pirates raising the Jolly Roger exclaiming "Aye it's a grand flag". It made me laugh but from then on I started questioning things.

Now when I consider all that we've done to "F" up the planet we really are the easy villains, but unlike the Nazis in old WWII pictures we seemed to have started out with the best of intentions.

Is stupidity a crime?

"called a dictature"
Nah, just socialist, like Yerup is. The Germans, for instance:-)
Cheers from Munique

These comments are all fascinating. I agree that the media, the government, the banking/credit industries, etc. are all partially responsible for the overuse/abuse of consumer credit. What can combat this most successfully is education in the home--kids learn about money and sustainablity as they grow up, mainly from their parents but also other adults, and they tend to keep those habits or adopt new (probably bad) habits in place of no training at all. If parents teach their children to be cautious and feel confident in their decision-making, financial and otherwise--no sheeple! I doubt there was any way our parents could fully forsee the kind of supermarketing for easy credit that the "Anglo Disease" has so disastrously dealt, along with a host of other problems, but parents and their children can no longer afford any lapses in financial reality training. We can't expect some sort of visionary understanding the moment they leave home of what frugality/economy, interest, sustainability and self-sufficiency really mean--it has to be embedded over years of careful teaching moments. (Teenagers heading to college, at least in the US, are offered thousands and thousands of dollars in "student loans" which could strap and stunt them for years. Cost of education skyrocketing? well of course, what will all this "free money" lying around . . . ). Children are not able to train themselves and we can't expect more untrained adults to make any better decisions than what's gone on already. Loads of work for parents like myself! But, it is empowering to realize how important we our to the next generation's quality of living.

That's what I'm pointing to, in part.

I'm looking at the fundamentally untenable situation we've set up with our fiat currency and its imminent collapse. Who of the rich knew that they were operating in a system that was unsustainable? Whether they would have done something about it is another matter, but I'm quite certain that there were/are many people who authentically thought that free markets, which tend to permit positive feedback loops to be set up quite easily ("the rich get richer"), were "the right" way to better the collective good. I am not blind, by the way, to the fact that the human emotion of greed is operating in many cases when people advocate free markets, too.

On the other hand, I think people "without" also often have a story/narrative that they are somehow disadvantaged ("I wasn't born rich" "I'm not smart" "The system is set up against me" "I have x/y/z skin color" "I think money is evil" "Poor people are better people, therefore I 'choose' to be poor" "People who are rich are somehow sneaky or cheaters or liars") and then they don't take the actions that would make a difference because they are trapped by their story. They may in fact have certain circumstances that are true, but circumstances can almost always be worked around, perhaps with some exceptions. These stories (or "limiting beliefs" as we call them in the coaching world) aren't unique to people without money, but when someone doesn't have money, there is always, in my experience, one of these stories operating. Have the person see that they are just stories ("limiting beliefs") and suddenly they are freed up to take actions they would not have taken before.

Back to the free market system. I come across people now in the environmental field who still think development of "underdeveloped" countries via free market mechanisms will lift the people there out of poverty. Well, it will, and in the early stages of development I don't think people are worried about the end game i.e. that the system will result in what we have in the Western nations with vast differences between the rich and the poor.

It seems to me it always comes down to education. As I said, I just in the past six months learned about the worldwide credit bubble. I don't think many of "the rich" knew that collapse was mathematically the only result possible once the system is set up.

I don't think many of "the rich" knew that collapse was mathematically the only result possible once the system is set up.

The most fascinating thing in the past two years was to see bankers talking about the bubble, and announcing that they were ready for the crash (sometimes going so far as to hire restructuring professionals) while continuing the practices that fed the bubble ("it's where the market is") - and getting caught with their pants down when the crisis did strike, brutally.

I love how people never like to take responsiblity for their actions.

I ride my bike frequently to Portland - an 18 mile each-way trip. I grow more than enough food for family. My house is paid for. But that is not responsibility, it is congruence. It is as much as I can do and to do less would not be personally acceptable. But it is a luxury that I have that most of those in the vehicles passing me on the road do not have. It's not responsibility - frankly it is more of an experiment: how far can I go on the bleeding/leading edge?

"Never take responsibility for the actions". What would Homer Simpson say? It takes two to fraud. One to create the fraud and another to accept it. And that is American business. Responsibility and American? Oh please - oxymoron. What are consumers supposed to think? Are they supposed to know better than the system, to know that all these loans are fraud?

Who is responsible for the polar bears, the eels, the plankton, the bees, the bats, the trees and the rocks? Perhaps they should hire lobbyists? It's their fault they did not?

cfm in Gray, ME, manufacturer of fine guillotines.

I teach my clients that responsibility is a choice. That's because it exists only in language, as all concepts do.

This trips people up when they confuse "responsibility" with "causality," which happens often.

I can literally take responsibility for anything and everything, or nothing. All that's required is a declaration of responsibility on the part of the person taking responsibility.

When others are holding a person to their word when the person says he will be responsible for something, then we say that the person is accountable.

Looking from this perspective, people generally take responsibility for a narrow set of items when they are first born (actually, until they gain language, they are unable to take responsibility for anything). One could say that through education, maturity and wisdom, people gradually take on being responsible for more and more things, like concentric circles that wrap around them. Many people's concentric circles never get very far from them while some people, like Martin Luther King, take responsibility for all of it. Dr. King took responsibility for the condition of all men in this country (notice he did not say just black men — he said all men) then he started taking actions consistent with that responsibility.

So Dryki, it is perfectly valid for you to say that you are not taking responsibility — until you declare that you are.

DT - What you're saying is not exactly right. People are looking at circumstances from a societal perspective that have to do with our culture of greed and consumerism. We always wanted more yet more was never enough and we believed that consuming was good at least that was what we were led to believe.

We all went along with it therefore we are complicit in the crimes. But what people are trying to do now is break the spell of these stories once and for all.

TOD is about creating new stories, stories worth living.

Or a wooden clog perhaps...


Sabot-age? Whether or not the etymology is from the sabot shoe and using it to ruin the cogs of machinery is questionable, but is a good story...

I wrote this:

the debt bubble hid the class warfare waged by the rich against everybody else, conveniently trapping those that *could not or would not* live within their means in the system, by making their livelihood increasingly dependent on not rocking the boat.

For some, there was little choice (or the choice was to go without food or heat or something similarly vital); for some, it was more a question of keeping up with the Jones, social conformity, or just being able to at no obvious immediate cost.

It was usually possible to stay out of that system, but it took a lot of awareness of the world, and a willingness not to conform to all social norms. It was never easy, when the whole system was encouraging you to go the "easy" route.

or the choice was to go without food or heat or something similarly vital

Nobody in the Uk would have had to go into debt to feed or heat themselves. They may have had to cut back on other things, or eat lower quality food, but this is somewhat different from suggesting everyone was out buying food on their credit cards because they spent their last pennies on last weeks bread. Debt is only for the things you desire but can't afford, such as flat screen televisions etc. I have a friend who works with children from disadvantaged, low-income families. He is constatly amazed that the one thing almost every family has, is a large flat-screen tv.

For whatever reason, people chose to go into debt. You can argue that they were conned or manipulated, but they were not forced.

For whatever reason, people chose to go into debt. You can argue that they were conned or manipulated, but they were not forced.

For whatever reason, banks chose to make loans. You can argue that they were conned or manipulated, but they were not forced.

And the banks aren't human. Though you can be sure their senior managers and directors will never be cold or hungry. Which side are you on?

It's hard to explain to a crying child
Why her Daddy can't go back
So the family suffer
But it hurts me more
To hear a scab say Sod you, Jack

How do you know that debt is only for things you desire but can't afford? I am a single parent with a full time job, and I have to go into debt to pay for anything over and above food and utility bills: dentist, car repairs, school trips, house maintenance and repairs. We have an old TV, don't take foreign holidays (we only go camping in the UK), I don't smoke, drink or go out socialising and most of our clothes are second hand. Christmas and birthday presents are usually bought on credit. Of course I could choose not to go to the dentist, repair the car, leave the house to crumble around us, etc - but please don't tell me I'm buying luxuries on credit.

Well said, Sue! You stand up for yourself against impertinent observations!

It was usually possible to stay out of that system, but it took a lot of awareness of the world, and a willingness not to conform to all social norms. It was never easy, when the whole system was encouraging you to go the "easy" route.

We had a small dinner party Friday night. One of the couples is in their twenties. They live in a small rented apartment, own one small paid for car, and the husband takes the train to work (in the Dallas area). The wife said that all of their friends think they are crazy and are encouraging them to buy a house, i.e., to conform to the social norm. She particularly cited one her friends who had gone wildly into debt, new house, new furniture, new car--and presently unable to pay all of their bills out of cash flow (staying current by going further into debt).

It occurred to me that these debt ridden suburbanites, who are encouraging their friend to join them, are basically analogous to passengers from the Titanic who are splashing around in the water about to die from drowning and/or hypothermia, yelling to the passengers in lifeboats that they should "Come on in, the water's fine!"

I told the wife that they are doing exactly the right thing. She said that I was literally the first person to tell her that.

Taking the train, in Dallas? Surely you're jesting? ;-)

There is a secret cult of rail commuters in the Dallas/Fort Worth area (but it is a growing cult, increasingly standing room only at peak periods).

I have spoken to many others in similar positions as this young couple. It is great that you gave them positive feedback. To go down the same "crazy" path as a couple is a low probability event and if one wavers the relationship is at risk.

Sanity can be viewed as either conforming to social norms (very Freudian) or having a good grasp on reality (very scientific). However, given that we are highly social creatures it is very difficult to base decisions on a reality-based rather than social norm-based epistemology because being told you are crazy feels bad even if you know the people telling you this are clueless. Especially because in the short term they can look like they are doing much better than you!

"However, given that we are highly social creatures it is very difficult to base decisions on a reality-based rather than social norm-based epistemology..."

This is the difficulty I encounter, and I suspect many others do too. Thankfully my wife is somewhat receptive to PO and the possible/probable knock-on effects... but not always.

Two types of Americans: Those who now realize that we live in a finite world, and those who will realize that we live in a finite world--in much the same way that there were two types of passengers on the Titanic, those who realized that the ship would sink, and those who would realize that the ship would sink.

Bloomberg: Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers
2008-06-08 19:00 (New York)
By Rich Miller and Matthew Benjamin

June 9 (Bloomberg) -- Sky-high gasoline prices aren't just
raising the cost of Eugene Marino's 120-mile round-trip to his
job in the Washington area. They're reducing his wealth, too.
House prices in his rural subdivision beyond the Blue Ridge
Mountains in Charles Town, West Virginia, have plunged as
commuting expenses have soared. A four-bedroom home down the
street from his is listed for $239,000, after selling new for
$360,000 five years ago.

Homeowners in the exurbs aren't the only ones whose assets
have taken a hit because of the surge in energy costs. Companies
such as General Motors Corp. and UAL Corp. are writing off
billions of dollars in plants and equipment that are no longer
viable in an age of dearer oil. The destruction of wealth and
capital will weigh on U.S. growth for years to come.

``Our whole economy reflects the relative costs of energy:
the cars we drive, the houses we occupy, the kinds of factories
we have and the equipment in them,'' says Dana Johnson, chief
economist at Comerica Bank in Dallas. ``I'm expecting relatively
large changes in all of these things.'' The loss of wealth could be a
double whammy for the U.S. economy. In the short run,
it depresses demand as homeowners save more and spend less,
and companies fire workers. Longer run, it curbs productivity growth,
as firms shift their focus from increasing worker efficiency to
reducing energy costs.


Hi WT,

Three types of people:

those who make things happen
those who watch things happen
those who wonder what happened

A couple of weeks ago i was at something similar to your dinner party and trying to discuss PO and on to ELT. One guy, the CEO of an oil services company, was in denial but could not refute PO. Another couple, extremely bright, just did not want to know and were convinced some tech fix would solve the problem. One of their kids in her mid teens said life would not be worth living if she could not have her flat screens, ipods... They find it really difficult to understand why I don't buy large flat screens & status cars:-)

The system is set up to make you think that its your fault as you lose your home or possessions because of the debt you have incured.
This way you accept the responsibility yourself instead of blaming the organisations that have pushed the debt upon you.
Most people dont even think of their mortgage as debt. Its so ingrained that a mortgage goes with owning a house no one realy thinks twice about it.

It is your fault. You fell victim to advertising and peer pressure and made a stupid decision and got in over your head. Read Jeff's post a couple up about a smart couple in their 20's.

There must be some unwritten rule that if you don't have a wife and 2+ kids in your mid 20's along with an over-sized mortgage and multiple SUV payments, you aren't doing it right. Grow up and learn to make wise and humble decisions.


Peer Pressure.

Is a terrible thing.

During the late 90's and early Noughties, people were being swamped by offers of loose credit. They offers from card companies and loan companys would hit the door mat daily.

It was made to seem normal. People saw other people getting the house/car/holiday/ lifestyle of their dreams and followed suit. Access to credit was easy - so, why not?

Before the crunch I reduced all our cards to zero balance. This made me a credit 'dead loss'. In terms of a credit company I am exactly the kind of joe soap they dont want.

They sent threatening letters because I had zero balance and zero interest, they threatened to a) reduce my limit, b) tried to tell me it would affect my future credit score!

They got the card back by return post in little bits.

I keep two, put stuff through occasionally, just to keep them warm.

Only today, even now I was offered a loan when I renewed my car insurance.

It is easy to fall into this trap and should not surprise anyone that it happens.

One thing that doesnt happen in the education system is basic financial training.

People were gulled. The small-time victims will pay and the perps will get bail outs and large bonuses.

The system only works if the victim continues to believe thay were at fault.

The only way to win is not to play.

What will be interesting for the Anglo-US model is that the 'Raptor Class' only make money in times of change. Up or down is not the issue for them, but it will be hard to place bets on a chilled system in stasis - without credit or liquidity, they cannot create bubbles to feed off the joe soaps.

Thats what we had: Bubble Capitalism.

What will be interesting for the Anglo-US model is that the 'Raptor Class' only make money in times of change. Up or down is not the issue for them, but it will be hard to place bets on a chilled system in stasis - without credit or liquidity, they cannot create bubbles to feed off the joe soaps.

Yep. In a static society they switch over to straight wars of conquest - you grab more of the non-appreciating assets such as land and peasants. Check out the Middle ages.

“Many positive feedback loops in society reward the winners of a competition with the resources to win even bigger next time. System folks call them “success to the successful” loops. Rich people collect interest; poor people pay it. Rich people pay accountants and lean on politicians to reduce their taxes; poor people can’t. Rich people give their kids inheritances and good educations; poor kids lose out."
~Meadows, p12 PDF

Hey,Hey AngryChimp!

Welcome back! Please post when you can--Thxs!

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

Hey Bob I thought about you the other day when I came across this:

Richard Russel said:
Those who understand interests collect them, and those who don´t understand interests pay them.

In economic systems, interest rates are not guaranteed.

Hence, the really smart collect the interests rates that are too important to fail AND can be enforced.

Personally, I am just learning now how the machine was set up, including the whole notions of money as debt, fiat currencies, ever-expanding credit, etc.

In the "Black Swan" book, there is an explanation of what the author calls, "the narrative fallacy".

It's a phony, made up story that sounds convincing.

A prime example is in how we humans make up stories about why "The Market" went up or down today. In fact no one knows. It's all BS. Market pundits want to appear as if they have control & understanding over market "fundamentals". They don't. But they make up stories to create an appearance of knowing the unknown.

Another example of "narrative fallacy" is money. People make up a convincing story for themselves: I know what money is. I go to work & I get money. The money entitles me to goods and services. As long as I keep doing this "work" thing, I will continue to obtain the goods and services I am entitled to (i.e. cheap oil).

Recent events have shaken many people. The "I know what money is" story doesn't float as well any more. Their core beliefs are rattled. It's pretty unnerving. They sense that they are no longer on the "right track" (whatever that means).

Honey I'm home, where's my dinner? --Pleasantville

Your picture of a black swan displays as "To view this image please visit". Guess they block hotlinking. Probably displays correctly for you because it's in your browser cache.

Here's trying again with a new image source:-)

I think a lot of mathematicians, engineers, physicists etc. who had no idea of how the whole money system works have recently started to take a close look. It's frankly shocking. I think it was Gail who referred to it as "Alice in Wonderland" territory in a previous post.

That phrase also caught my eye and I'd like Jerome to expand on it. Jerome, do you think there will be some kind of "mass awareness" by the middle class and below that they were "had". Do you think there is any way they will ever pull together as a unified group to combat what has happened to them? So, much has been done here in the USA to weaken the system by which the underclasses could mobilize and congeal, such as busting of unions, threats against protesting, media not covering protests, etc.

What is your take on the future of the US grassroots movements to combat what's going on?

Also, excellent article tying together the financial world and oil. There has been some discussion earlier on TOD about how it was all tied together (US housing bust and oil prices) and some like Westexas insisted there were connections, but this really clarifies a lot. This is an article worthy of bookmarking...thanks for putting it out.

I think there is a general sense of being had, although it is generally misdirected (deflected?), towards the wrong targets. NAFTA is one favorite. Greedy oil companies (as the sole cause of gas prices) another. And as you've said, the media has long since sold its soul, so it will distract and obfuscate far more than shed light.

Jerome, that is a very good summary. My only complaint, is that I suspect it needs a reader of well above median intelligence to get it. I don't know how to rewrite it, so that its effectiveness can be extended further down the IQ scale, but if anyone has any good ideas, they would be useful.

"well above median intelligence"-- whatever that is. I know a lot of people who don't qualify as having a high I.Q. but who have a lot of experience and common sense, and a lot of brainy college grads who do not. The former "get" it, the latter do not.

There is some faculty besides "intelligence" as it is usually defined by academic psychologists that allows people to see the world fairly clearly and to determine their own advantage. And I think JáP has captured it quite well. Even though the "French Disease" might be said to be writing in far too abstruse a manner.

There is some faculty besides "intelligence" as it is usually defined by academic psychologists that allows people to see the world fairly clearly and to determine their own advantage.

You refer to "Wisdom" yes?

From Wikipedia:
"Wisdom is having gained knowledge, understanding, experience, discretion, and intuitive understanding, along with a capacity to apply these qualities well. It is the judicious application of knowledge."

I think generally those who are able to achieve wisdom are also fairly intelligent. Most people lack enough of basic curiosity about the way things around them work. They've just never developed this habit of mind. Intelligence is something that tends to build on itself. it's fun to be smart and to piece together the world, but those who lack a basic level of intelligence will simply never embark on this journey. Yes, i also know a lot of high IQ people are obtuse, but I'm not sure this means there must also be a lot of wise people with dull minds out there.


The problem with wisdom is that by the time you have reached the age where you have gained enough knowledge to become wise, the memory goes and you cant remember what it was you needed all that knowledge for in the first place. Ah! what were we talking about again ??

p.s. great stuff here thanks :)

so that its effectiveness can be extended further down the IQ scale

Maybe you could keep it simple by first saying, "I win and you lose". You know, just to get the listeners' blood flowing to their dull brains. Then make them a new offering of finance, for the group purchase of pitchforks. I think they would get the point but then so likely would you.

As far as intelligence goes though, merely winning the game to lose the world doesn't strike me as all that bright.

I love the Black Adder sketch where Nursie talks about her crippled relative who was so smart he invented a way to cut his toenails all at once ... using a scythe.

there will be some kind of "mass awareness" by the middle class and below that they were "had".

At the point where 'the masses' who 'were playing by the rules' and did not 'get what was supposed to happen when you play by the rules' - yes.

One can listen to the 'you have been had' message on places like GCN, RBN (and I'm sure others)

What I fear is reactions like because the people who've "had" others are many - and any large scale violence of the haves VS have nots won't be pretty.

Aangel, While you certainly are in part responsible for your predicament, it was Big Money that sold the notion to everyone that it was the thing to do. That it was perfectly safe. The markets will keep going up, so you are foolish not to buy in to real estate, or not to borrow tax deductabile interest money against your home equity so you can have it all now. Beside, you as a good patriot should do your part to stimulate the economy (whispered ... "So us rich folks can make a killing heh heh heh!").

However sensible you are, it is not always possible to act prudently in an environment which is seeking the main chance.
Just to give one example, your personal preference might be to save up enough money to buy a house outright, and not incur any debt.
However, whilst the money supply is being inflated then you could easily find yourself sitting on a pile of devalued cash and still unable to purchase a house, or alternatively making highly leveraged investments and so exposed to high risk in an effort to maintain the value of your assets.
Financial imprudence at the centre undermines the whole structure, and makes sensible decisions not only difficult but impossible.
Bad money drives out good.

Very wise commentary Dave, but, following on that, maybe it would also be wise to start the inflation versus deflation controversy going again? I'll start off with this little ditty.

Leaving aside the population growth implication in those lyrics, I imagine you can see on which side I figure my bread will be buttered .

Very good!
Sounds like you ought to move to Europe, as they are raising interest rates which should lead to deflation.
The US intends to maintain it's sunny optimism in the greatest country on earth.

Sunny optimism?

That sounds like a drug (on/in?) the market.

If I didn't speak French like an Englishman (or Western Canadian) I would move to Europe, if one is going to starve one might as well do it artistically and with aplomb:)

A ton cul usually serves when driving in France to introduce yourself!

Gee Dave are you sure? I think maybe my Western Canadian Babblefish must on the Fritz as I keep getting this picture when I plug that there 'ton cul' into it, of course maybe the tune has some significance?

Absolutely. The correct response in polite society in France is to respond with a friendly 'A votre mere'.
Works every time.
I thought you would be all over my link in Drumbeat today about the return of the mud hut and 10 uses for abandoned airports!

Sheese, why didn't you say so sooner, those subjects are both very high on my reason-to-be list! I'll be there before you can say open the window!

Once upon a time, to get a mortgage you needed:

A savings track record of at least two years with the intended mortgage lender - Usually a Building Society of common ownership and not a bank owned by stock holders.

A 10% deposit.

An interview with a scary mortgage officer (you and your wifey)

Then you would get 2.5 times your salary and 1 times of hers ('the little women will be with child soon anyway').

This made two things form the bulwark of capitalism for little people:

1. They did not lend to dickheads
2. They did not create a bubble and houses were, by and large , affordable.

But then they 'improved' things.

I have sat through a few marketing meetings and marketing people spend a huge amount of time and money figuring out how to get the 'consumer' to spend more. It doesn't matter what they spend the money on, just so long as they spend it.

Looking around, here in the US anyway, it is blatantly obvious that the humongous marketing machine we have in the business world has been successful beyond its wildest dreams. From double mortgages on top of 3 car payments to an obesity epidemic, it is apparent that people are like the goose with the funnel crammed down its through, being force fed.

Unfortunately, the marketing machine has no brain and has no notion that it sows the seeds of not only its own destruction, but the seeds of society's destruction as well.

Yes, there is plenty of blame to go around. It seems a complicated and delicate process by which a relatively successful and benign socio/economic paradigm becomes the accepted norm, rather than the destructive one we have now. I haven't yet read anyone who has an overall grasp of the subject in terms of how to steer out of the mess.

has no notion that it sows the seeds of not only its own destruction, but the seeds of society's destruction as well.

Well, I'm sure I'm not the *only* one in the world who sometimes wonders if his day job is a purely honest undertaking. I'm sure there are plenty of marketers/salesmen out there who know their songs of seduction might help personal and societal ruin along the way.

But if it pays the bills..
I sure ain't gonna quit my job (and doing a "good" job at it) 'cause of it.

It's called "paying the reaper"...

Cheers, Dom á Munique

It seems a complicated and delicate process by which a relatively successful and benign socio/economic paradigm becomes the accepted norm, rather than the destructive one we have now.

Have you read Charles Dickens? Have you read John Ruskin? Have your read Henry George? Have you read about colonialism?Have read about the slave trade? Have you read Upton Sinclair? Have you heard about the Great Depression? Exactly at what period of time was this "benign" socio/economic paradigm operating?

By the way it is a mistake to believe that the 'Anglo Disease' is the fundamental cause of our current predicament. Our financial system causes huge inequalities in the distribution of wealth and may lead to a spectacular economic crash much sooner than would be the case under a more conservative financial regime. However, it is in no way the fundamental cause of resource depletion. One can make a good case (See J.W. Smith's Democratic Cooperative Capitalism) that if the cost of financing economic innovation had not incuded paying for rich people's mansions, ski condos, yachts, sports cars etc. then global economic development would have proceded even faster that it has done in fact. If we had not financed our wasteful lifestyles through debt then people in the underveloped world would have taken up the slack and consumed the resources that we stole from them. And in fact by accelerating the development of other parts of the world problems of resource depletion might have hit even sooner.

As long as the route to middle class security consists of 'storing up wealth' for the future then a drive for constant growth in economic output is inevitable. Society as a whole does not store up wealth. If we do not consume what we produce then factories close down and people lose their jobs. One person's savings is another person's consumption. Only if our future security depends on the community of which we are a part and which we support during our productive years, and not on how much value we store up, is there any hope of creating a stable economic system. The only real store of value is communal (Yes I used the evil "C" word.) Our collective economic infrastructure, our collective skilled work force, the natural resource base upon which we all depend in common, these are the only real stores of value. We need to make the creation and preservation of this real source of wealth our primary economic objective and not a secondary, tertiary, or non-existent objective. The goal cannot be accomplished simply by limiting financial speculation.

Anglo disease reminds me of Hayek talking about inflation:

The influx of the additional money into the system always takes place at some particular point. There will always be some people who have more money to spend [financial sector] before the others. Who these people are will depend on the particular manner in which the increase in the money stream is being brought about. It may be spent in the first instance by government on public works or increased salaries, or it may be first spent by investors mobilizing cash balances or borrowing for the purpose; it may be spent in the first instance on securities, on investment goods, on wages or on consumer's goods. It will then in turn be spent on something else by the first recipients of the additional expenditure, and so on. The process will take very different forms according to the initial source or sources of the additional money stream; and all its ramifications will soon be so complex that nobody can trace them. But one thing all these different forms of the process will have in common: that the different prices will rise, not at the same time but in succession, and that so long as the process continues some prices will always be ahead of the others and the whole structure of relative prices therefore very different from what the pure theorist describes as an equilibrium position. There will always exist what might be described as a prices gradient in favor of those commodities and services which each increment of the money stream hits first and to the disadvantage of the successive groups which it reaches only later--with the effect that what will rise as a whole will not be a level but a sort of inclined plane--if we take as normal the system of prices which existed before inflation started and which will approximately restore itself sometime after it has stopped.

So basically the financial sector, get the new money first before the wage earners and other people lower on the economic food chain. By the time people lower on the food chain get the money, prices have already risen and their buying power in diminished. This expansion of credit continues until the people lower on the food chain finally get access to the debt money flowing into the economy via cheap credit or rising wages. Then there is finally a rise in the price level which triggers the central bank to raise interest rates, and a contraction of debt. The people at the end of the food chain get wiped out and the people at the top of the food chain begin again and are never threatened thanks to their access to discount window lines, TAF, TSLF, and other special forms of credit that the little people do not have access to. Remember! The most important industry in the whole country is banking! ;)

In a non-fractional reserve banking system, or at least a more controlled expansion of money supply the people with economic power would be savers and profitable companies not banks and the corporations that have grown up around them who use their bank leverage to dominate the economy. Also, prices for goods would slowly fall as the creation of new capital, such as factories and so forth would increase the efficiency of the production of products, lowering their price. This natural lowering of prices is covered up by the money that the banks create which cause an offsetting rise in price levels. Currently we are faced with a situation however where in a non-inflationary economy the price of oil would be rising, as it is getting more scarce. When this is compounded by bank credit inflation the effects trigger runaway inflation and give little room for banks to expand credit without triggering further inflation -- leading to a contracting debt environment -- thus, stalling the re-initialization of the money/credit cycle leading to a credit-collapse driven recession/depression.

Exactly :)

Something I've been trying to make clear is mud in 10,000 words or more.

Furthermore its also becoming clear that because commodities play a intrinsic role in what I call the base economy that once they become scarce attempts at further games with fiat currencies become impossible.
The problem is commodity prices increase to rapidly and collapse this money gradient that your describing.

This makes one of the few profitable moves for injection of new cash commodities themselves which just makes matters worse. This situation used to be quit common back in history and its what prevented the kings from inflating the currencies to any large degree they quickly caused a commodities boom which shut down other sectors of the economy as people become unable to pay for food.

So we are now entering a financial situation thats not been seen for about 100 years.

The central banks are being forced to play by the old rules of money which where closely coupled to the yearly harvest. Although we have focused on the role of gold in such economies in my opinion its clear that commodities where the real standard for these old style economies. The value of gold rose and fell in accord with the harvest but it allowed you to buy food in lean years.

A few more words :)

The fact we where able to go off the gold standard in the 1970's successfully was because the combination of ample oil and the green revolution removed the hold of the real commodity standard.

Today in my opinion its fairly clear that the end of the gold standard was possible because we had effectively infinite supplies of commodities to spur growth and allowed us to successfully play the fiat money game.

But it looks like the game is up.

We can all go back to the goldstandard(in part) by putting our savings in gold, which seems to me as the only way to preserve wealth in this Fiat money printing world.

The gold standard had its fair share of bank collapses and bubbles. In fact the depressions where often sharper under the gold standard I'm not going to blast you directly but people that talk about going under a gold standard don't know what there talking about. Fractional banking was a time honored practice even under the gold standard.

A bubble or inflation in a currency is done very simply. You agree to accept a receipt for a debt in exchange for cash. This receipt can represent any debt payable some what at some future date. The original holder of the debt sells it to you at a discount the difference is your profit or interest.

If this becomes acceptable you can resale some of this debt to someone at your principal level and you get your money back and the interest viola without putting money in.

Eventually these receipts are accepted and exchanged in lieu of real money often denominated in gold.

Lets say they are promissory notes from a farmer for a portion of his grain. If the farmer prints to many of these ( over subscribes ) or his crops fail when the notes come do not everyone gets paid and the ponzi scheme collapses.

The point is that debt bubbles can be created to run fiat money schemes regardless of the nature of the currency. In this case once the scheme collapses no one has any money and the value of goods and services in the real currency drops.

What you really want is a store of value and stable banks this is all determined by reserve requirements see my post below.

Even if you want to sell a debt the bank would be in a position to underwrite it via a fully secured loan.
Once the loan amount reaches the banks lending level no more loans. Anyone that goes beyond this and plays the ponzi scheme privately takes there chances. But buying and selling 100% secured debt is fine.

Hey Swede,

When the gas runs out of the Industrial/Capitalist/corporate/consumer 'economy', I would guess the past
will be us and as gold pre-dates that, gold will be a trump card.

Of course in the meantime there is still time for all of us to do a lot of grasping and grinding, and then, as the disfigured man in the ad says, "Save your money" ... in Gold, yellow or black IMO both good choices There will always be oil lamps to fill and gold to buy with, even when the black of asphalt crumbles into dark of memory and the Athabasca River runs clear;)

And if you have gold, but don't belong to the establishment, you will be clubbed over the head and your gold will be stolen...

What about the insurance companies? How does the demand destruction like people taking cars off the road hurt the insurance industry? In a lot of cases isn't vehicle insurance pretty much easy money? Is there a knock on effect in the financial sector? Bond insurance? Is this post entirely misplaced?

yes, of course.

Cars off the road impacts Insurance, finance companies, tax take on fuel duty, road fund licence, motorway cafes, garages , the whole lot.

Suddenly a lot of essential jobs become exactly the opposite.

Banks gives the middle class the option to take on debt. Some choose not to.
Government takes on debt on behalf of the middle class. There is no choice.

I would like bankers to be given more regulatory control over the government.

There is the choice to vote or not for Republican governments. The track record over several decades shows that all they do in government, (apart from badly running it, but that's an opinion) is build up the debt (that's a fact).

CATO had a fascinating paper a couple of years ago that demonstrated that Democrats were better managers of public money, because, in a "tax and spend" logic, you have to justify that the spending you engage in has a good cause. In "borrow and squander" mode, not so much.

Consistent conservatives focus on cutting spending as much as on cutting taxes, but that's not been the practice of Republicans in government.

How opaque would all of this be if there were a simple and real standard for monetary value? Namely, how would it be possible to hide the obvious fact that it takes real energy to do work and an equivalent amount of money to buy that work if money were equated with energy -- that is energy available to do useful work? It wouldn't be possible to have a fractional-reserve banking system or secondary markets of any kind since money could only be created by expanding the usable energy reserves. What would the economy look like under such a scenario?

See: What is money, really?

I have explored this concept in various blog posts at: Question Everything


Well my friends---
No one said late stage capitalism would be fun.
Reality is finally closing the door on a superstition based economic system.
It was a fun ride for a few, but it is best if we jettison this nightmare before the planet is a ball of ashes.

Money has three functions as far as I can tell:
1. As a medium of exchange (no problem with this one)
2. It is a commodity (a bit strange, but realistic)
3. A a depository of wealth (this was the downfall, as it became a financial instrument and became a entity in itself)
We are now dealing with the consequences of the third.

Money has three functions ...

Money is a many more splendid thing than just 3.

4. Money is a "promise" (of what society will deliver to the bearer).
5. Money is power
6. Money makes the world go round
7. He with the gold rules (he who has money is wisest)
8. __________ (add your own additional ideas of what $$$ is is)

Yes, I understand this (and Step Back's additions) is what economists have asserted for money's functions. My question is more to the point of what should money be? My assertion is that the real currency of the economy, indeed the world, is energy available to do useful work. That is real. Work is needed to have an economy and work requires energy. Pretty simple, really.

Money should be a token message of how much energy is to be used or controlled for work processes. Presumably if we knew or understood this connection we would be in a better position to judge exactly how best to spend our resource. This means both individually and collectively. If you knew that you were handing over a token for X amount of work, and thanks to the Second Law of Thermodynamics that was a non-reversible decision, don't you think you would consider the commitment carefully? [Actually you might, but I have serious doubts about the vast majority of humanity, especially politicians.]

Money has a long and (forgive the pun) rich history. Economics has a few hundred years of groping to understand it and the dismal scientists made some rather telling mistakes in formalizing economic theory. Yet it is their definitions we have all been indoctrinated with. And, of course, bankers and stock brokers love it. They have a license to subvert the First Law - they create energy out of nothing!

So everybody believes they know more of less exactly what money represents. I think we got it really wrong and we are suffering the consequences of that mistake right now. The only way we got away with it up until now (peak oil) is that we were constantly increasing the supply of energy. And at one time, we were increasing it faster than the money supply grew (with ups and downs of course). But now we are coming to a real physical limit with a slowdown of energy (at sufficient quality) production that has forced us to try to keep things going on debt (borrowing energy from the future). Even that is catching up with us, isn't it?

Inflation occurs when there are too many money tokens in circulation chasing too little real work (goods and services). What work is accomplished takes more tokens to account for. Prices in monetary terms rise.

All I'm proposing is that if we want to really understand what is happening in our economy we ought to measure the economy according to a real physical and meaningful quantity. Gold doesn't cut it. It is an arbitrary standard. But energy (BTUs) is what money was originally. It is the real underlying currency, so why not simply acknowledge that reality and get on with figuring out what is really going on in the economy.

Question Everything


Why energy? Why not work (In the everyday, not thermodynamic, sense of "work")?

That's what most folk have to sell.

That is the way we think about it now. What are my efforts worth (or what can I get for my time!)? The point of a standard is that it allows us to gauge a value based on something fixed and hopefully meaningful. What kind of standard is your sense of work (effort/time)?

Energy available to do useful work (the energy reserve times efficiencies in work processes) is a measure of how much additional work we can do in the future. That is really what we want to know.

Incidentally, energy reserves would be computed from all sources, including net agricultural production (food) that allows each of us to do the work we do. The brain and body use BTUs, not fiat tokens. As we go through peak fossil fuels, without a concomitant increase in alternative sources, which appears to be the track we are on right now, net energy reserves will be in decline. Hence the money supply should shrink accordingly. Otherwise inflation will continue to distort the picture and we will never really get a good handle on what is going on.

It strikes me that the issue is not what money is 'backed' by, whether gold, energy, or other countries' money (floating). The issue is that bankers f**k with the relationship and eventually screw things up by some kind of fractional banking ponzi scheme.

Exactly it always happens.

The difference is that with a currency backed by commodities and maybe using some metal as a accumulator of wealth and for money you find that the ponzi schemes burst fast because you rapidly reach the point you cant convert back to real money.

Thus all the runs on the banks in the 1800's. Its not that it prevents the blowing of bubbles but it pops them fast and rewards the prudent saver.

So the key is our economy is converting to one the rewards behavior that had gone almost extinct which is being responsible.
Until I figured out they the economy had transformed I was really scared that the bastards would get in one more stupid bubble.

But this is not going to happen simply because we don't have enough commodities to back our economy. You literally cannot blow a bubble big enough with commodities give the way they work to support the current economy.

The price of oil as a input into the economy is important but as a overall store of wealth given our current economy it can't happen. In fact no sort of "real" money works. It should work and the fact it cant emphasis's the size of the bubble we have blown.

I think it would not be opaque at all. But since the point of the money wizardry is opacity, this will not happen. Fairly clearly there would be no inflation in a strictly barter system, or even in which there was a strict gold standard without any ability to borrow against the gold. The minute you introduce time value into exchange systems you create inflation. And the hallmark of "modernity" is the time value of trade -- i.e., money.

The Australian counterpart to Dutch Disease is the never ending mining boom now fuelled by Asian demand. The glaring inconsistencies have created what is called the '2 speed economy'. While cities and drought ravaged farmers struggle some outback towns are awash with money. For example up the road from my place a new nickel mine (Avebury) and a new zinc mine (Comstock) just 4km away are competing for miners and construction crew.

In rough chronological order the sequence of boom minerals went iron ore, bauxite, coal, nickel, uranium and LNG. The new wonder 'mineral' is coal seam methane. By happy coincidence coal and LNG exports largely pay for imports of oil and refined fuels. That is likely to turn into a growing deficit in the next few years with $200 oil.

Over the last 20 years this cargo cult mentality has been deeply ingrained into Australians. It seems inconceivable that either Asian demand could collapse or there will be no new discoveries. However I think the run of good luck must end soon.

Boof,good to hear from a fellow Australian who actually "gets it".We are a rare,if not endangered species.

I dunno Boof, it sounds like you think there is actually some justice in the world.

I expect things will get tough for the average Aussie over the next decade. I also expect there will still be plenty of rich people driving around in Lexus Hybrids. If oil goes to $200 dollars a barrel - scratch that, WHEN oil goes to $500 per barrel, won't the price of coal go up as well? We don't seem to be in any danger of running out of that soon. The world may have hit peak gas by 2020 and peak coal by 2025 - but that will just make our dirty black stuff worth more, right?

Like I said, no justice.

I don't see Asian demand for rice or wheat collapsing any time soon. I expect to see widespread starvation instead as crops fail - bound to happen sooner or later with an increasing world population.

As for coal, iron ore, etc - I think the Chinese see the writing on the wall and are making an all out effort to build themselves into a Great Power before it all goes to shit. Its a strategic buildup. They are going to keep building the airports and "car factories" even if they go into a depression - they already have the money put aside. Cos they need to ramp up their industrial capacity for any coming resource wars. They're not as dumb as us.

If you want to see our future, look at Brazil. There are rich people with houses on the beach and their own helicopters, and there are shanty towns in the hinterland. Maybe Sydney will turn into Rio.

Personally, I expect everywhere to turn into Brazil - China will get there by rising, the USA will get there by falling.

This is where "globalisation", "free trade" and "open borders" will get us. A return to the USA of the 30s - where Jesse Livermore could commute to Wall Street from his Long Island home on his 200ft private steam yacht, while his fellow Americans starved in Hoovervilles.

Well the "Two Speed" economy is an interesting reality, that is one economy going forward and the other going backwards, The winners economy and the losers economy if you will. I would never advocate building steam trains just to keep boiler makers in a job though, a good way to describe this would be this singular example, a kind of reverse engineering of how the US economy took off, "The last time the trucking industry will make a profit is when they truck all the rail lines and ships mooring pylons out to the Mines in the Timor triangle," I disagree with the gloomy scenario's proposed, this is because Oz has a very rosey postcode, in respect to Asia, There is not much competition except from India, and that is unlikely to materialize due to there own population pressures. Hopefully those in the Reverse gear economy will be smart enough, creative enough, and have the politicians to extract enough capital to make those lives bearable, and manipulative enough to shift those parts of the population who refuse to accept reality off to the (Pilbara etc) where they can live out there suburban hyper-reality, or that is how it should be sold to them, allowing the rest of us to get on with it. I just wonder how long we will have to hold our breath for? Anyway while we are doing that we can all take a course in Mandarin, and learn to love Peking Duck, yum yum cha, and as for the talk of a 30% chance of recession next year, that ofcourse will only apply to the re3verse speed economy, but overall the figures will show the whole country is in recession, but it will be a recession that "We have to have." {later digga's ;)}

Thank you for this informed article.

I agree. This is a really great article. I loved the ending. Keeping up with TOD posts is like taking a really good college course.

My first impulse was to discreetly inquire where the author was standing so that we could put up a small plaque and worship the ground below it. (Rejected due to expense of traveling to France.)

My second thought was to find the button on the TOD site saying "Donate here!" But alas, I could find such a button.

So instead I clicked on "Share this" below and put up a comment recommending the article on I hope that this is sufficient to express my appreciation.

The grandest scam.

Let me ask you, "Where does money come from?" How does it come into existence? The real answer for most of the supply of money is it comes into existence as a "bookkeeping entry" on the books of some bank.

What does this have to do with debt bubbles or transfers of wealth out of the hands of the majority into the hands of the privileged few (or alternatively, why are banks always the nicest buildings in town?)? The answer is that all of our money is bank debt except for coins; this money is created in loan transactions in which you, the rube, or your government, the accomplice, borrow this newly created money from the banks, paying interest on the loan.

Coins, currency, and checking accounts are thought of as money in most peoples minds; you can spend them almost anywhere. You have you money in your pocket or at your bank. You don't think of your house, car, stocks or bonds as money. Maybe you think of your savings account or CD's or money, maybe not, but some economist think of them also as money or almost money.

If you look at the total of coins, currency and checking accounts in the US back in 1913, the total was about 50 Billion. Today it is over 25 times that. Well, as I said earlier, bookkeeping entry is how they inflated the money supply. You go the bank to borrow $20,000 for a car; they have you sign a note payable to them and they add $20,000 to your checking account so you can write a check to the car dealer. The bookkeeping entry on their books is to increase an asset account they call customer notes receivable by $20,000 and simultaneously increase a liability account on their books called customer checking accounts payable. The money supply just went up by $20,000. Notice the note you signed payable to them provides not only that you pay them back the $20,000, but you also pay them interest. The US government wants to spend more than they tax, so they print up some interest bearing bonds, send them over to a bank and the bank creates a checking account balance for them to spend; the money supply goes up as a result.

This system was imposed upon us by collusion in 1913 between government and banks as the federal reserve system was established. You can see why they both like it. When the government cannot tax enough, it has a ready source of funds and the banks love to collect interest for managing the expansion of the money supply.

There are two really serious problems with this scam money system.

The first is that when new money comes into existence it is used to bid up the prices of things. This is why what could be bought for a few pennies in 1913 now requires dollars instead. The price changed because the value of the money was diluted. We don't know today how much of the price increase in oil is due to physical supply demand relationships and how much is due to diluting the value of our money. I think, given the current financial crisis that latter is more significant than the former.

And speaking of financial crisis, this is the second serious problem. Initially when loans are made there is an increase in economic activity because of the demand created by the new money. When loan principal and interest must be repaid it creates a drag economic on activity because repayment of a loan is the reverse of the original transaction and it decreases the money supply. This system amplifies economic swings. Progressively this system concentrates wealth in the hands of the few and concentrates poverty in the hands of the many. Ultimately it destroys the middle class. Ultimately it bankrupts the very banks who spawned the system because ultimately the banks cannot collect the loans they made and ultimately people do not want bank debt money because the banks really have nothing to pay them. Talk about an unsustainable growth curve.

You might get frightened about your checking account and go to get your money, but all they can give you is federal reserve notes (those things in your pocket otherwise thought of as currency or "bills of credit") which is debt of the private federal reserve bank, and if you don't want that, I suppose you could ask for a mountain of coins, which they would politely refuse. But you really could not likely get even federal reserve notes in a run since banks keep only a small fraction of their asset as "vault cash" so they would run out pronto once everyone heads for the door at once.

The problem we all face is that we don't have real money. All we have is bank debt, and debts can be expanded or defaulted upon. When gold and silver coins were money, you had something that was real and others would willing take based on centuries of human experience.

We all have been scammed by our beloved governments and our local, national and international bankers.

I think that maybe we are witnessing the demise of the unstable fractional reserve, debt based monetary system. Maybe we will be lucky and the debacle will take down the federal government as well, so not only can we go back to localized production but also enjoy the advantages of localized government as well.

This system can be converted to a stable system fairly simply simultaneously increasing interest rates and reserve requirements until banks are well funded say 50% of outstanding debt. Fractional lending is possible always a gold standard does not prevent it ask the Rothschilds.

Once reserves are up then the interest rate will begin to drop towards zero as the value of money slowly increases.

You can continue to inject money into the system as long as you continue to increase reserve requirements.
They can them be allowed to vary say between 150-200% of the loans outstanding. Effectively your force the banks to be over capitalized. This is how accredited investing is supposed to work i.e you can only loan out a fraction of your wealth. As your reserves approach 200% you get a new cash injection say 5% of reserves and you lend back down to your 150% low water mark. This can of course be done via traditional interest.

If you drop below 150% then your out of the banking business. If you say decide to split then you are forced to wait until reserves hit 450% of outstanding loans then the bank can split. Generally if a bank fails and you have one close to split level you merge the failed bank and then split the result with all defaulted debt made whole out of the reserves.

Its actually pretty trivial to run a stable banking system.

Yea, that's kinda what the fed does. They already do have reserve requirments, and changing them is a pretty blunt tool that the fed can use to control the money supply. They mostly use open market operations to influence the money supply.

A quick change to exactly what you're describing would cause a massive decline in the money supply, causing a massive recession and deflation (deflation is even worse than inflation).

The Federal Reserve reserve requirements are ridiculously low. And even at that, banks can get around them by securitizing the loans to get them off their books, replaced by cash which becomes more reserves. And even at that, the Fed allows banks to borrow money to meet their reserves.

I would agree that correcting the horrid imbalances created by the Fed will be painful and will probably involve depression and deflation. But what the heck! We're headed there anyway.

What you suggest does not address the issue of banks issuing (loaning) new money into existence and earning interest on this newly created money. This not only unjustly transfers wealth from the majority to the banks as interest is paid, but it also dilutes the value of money.

You suggest that banks can fail if gold are reserves. This has happened in the past only because the reserves were not 100%, so fractional reserve banking should be outlawed as the fraud that it is.

I am totally confused by your suggestion about increasing reserves to 150% or 200%. A bank's required reserves are the vault cash plus the checking accounts it has with other banks like at the federal reserve bank. These reserves are held to covering clearing of checks drawn on it and to meet demands of customers when they come in to "cash" a check. These reserves have nothing to do with a banks capital. They are just a class of asset. Reserves are normally just a small fraction of the checking accounts, savings accounts and cd's that the bank may be called on to "pay", closer to 15% than 150%.

Let me ask you where new reserves would come from to meet the large requirement? How would they be created? Since reserves are held to clear checks and fund demands for "cash" the only point in increasing required reserves would be to stop or slow down banks from making new loans and new checking accounts.

Perhaps you are confusing loan loss reserves with required reserves. Required reserves are an asset of the bank. Loan loss reserves are a contra account to customer loans receivable. Loan loss reserves are a "valuation" account created by a charge against the banks income. Increasing loan loss reserves diminishes a banks capital. If the loans are of such poor quality, and the charge against capital is large enough, then an bank becomes insolvent. Increasing loan loss reserves to 150% of loans would overnight wipe out all bank capital and put them all in bankruptcy.

So all in all, your thoughts make no sense to me. Managing a stable banking system would only be trivial, as you say, if it were based on honest money (gold and silver) and with 100% reserves (1 oz of gold in the vault for each 1 oz gold certificate outstanding); anything else is fraud, and is unstable.

To paraphrase William Shakespeare, "Get thee to a good accounting firm."

i think you understand why traditional Islam, and old Christianity ban the concept of 'interest'.

Christianity (and Judaism), in the book of Proverbs in the Bible, also strongly states that one should not give out more loans than they can afford to lose, and that one should never secure loans for other people.

I think they may have had the right idea there.

It would be interesting to find out where they found that out in the first place - whether there was some ancient banking crisis!

Dunno, but I seem to remember something about how they burnt a Bush, which seems reasonable....

well i have a theory.

you have to realize that religions in the past had a more important role then telling people there is some invisible giant in the sky or some such stuff. That role was social control for a stable society, a money lender who can charge interest on the money he lends will always gain a boatload of social control if they have allot of people who take their loans. this power can rival religious power in the social control area, even surpass it since people tend to be as a /whole/ short sighted. in example the majority would rather kill a person to stay alive for a short while longer rather then not kill a person for a promise of going to a heaven of some sort. so publicly they outlaw it, and privately they dispose of the practitioners. the knights templar are a good example because they ran a bank for people who did not want to carry allot of valuables on the long pilgrimage to the holy land.

The whole aspect of a stable monetary system because of no 'interest' might of been found out by accident.

And the lord Jesus said Mat 25 ,

24 Then he which had received the one talent (mine# bucket of gold) came and said, Lord, I knew thee that thou art an hard man, reaping where thou hast not sown, and gathering where thou hast not strawed:

25 And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that is thine.

26 His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed:

27 Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.

28 Take therefore the talent from him, and give it unto him which hath ten talents.

The same story from Luke Ch 19 (New International Version) in which, to my mind, the meaning is more clear.

12 He said: "A man of noble birth went to a distant country to have himself appointed king and then to return.

13 So he called ten of his servants and gave them ten minas. 'Put this money to work,' he said, 'until I come back.'

14 "But his subjects hated him and sent a delegation after him to say, 'We don't want this man to be our king.'

15 "He was made king, however, and returned home. Then he sent for the servants to whom he had given the money, in order to find out what they had gained with it.

16 "The first one came and said, 'Sir, your mina has earned ten more.'

17 " 'Well done, my good servant!' his master replied. 'Because you have been trustworthy in a very small matter, take charge of ten cities.'

18 "The second came and said, 'Sir, your mina has earned five more.'

19 "His master answered, 'You take charge of five cities.'

20 "Then another servant came and said, 'Sir, here is your mina; I have kept it laid away in a piece of cloth.

21 I was afraid of you, because you are a hard man. You take out what you did not put in and reap what you did not sow.'

22 "His master replied, 'I will judge you by your own words, you wicked servant! You knew, did you, that I am a hard man, taking out what I did not put in, and reaping what I did not sow?

23 Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest?'

24 "Then he said to those standing by, 'Take his mina away from him and give it to the one who has ten minas.'

25 " 'Sir,' they said, 'he already has ten!'

26 "He replied, 'I tell you that to everyone who has, more will be given, but as for the one who has nothing, even what he has will be taken away.

27 But those enemies of mine who did not want me to be king over them—bring them here and kill them in front of me."

It would have been understood by Jesus's audience that usury was forbidden. Though the version in Mt. is often cited by those wishing to profit from usury this version I think makes it clear that the rich man is not an example to be emulated. Rather I read the story as a cautionary tale of how the poor should expect to be treated by the rich; Rewarded materially to the extent that they benefit them, dispossessed if they do not, and killed should they challenge their authority

Thanks for that bit of illuminating... I've always thought that was an odd passage, and your comments at the end make it quite clear.

Hard money lenders routinely only lend a fraction of their accumulated wealth.
Even loan sharks follow this practice.

Your saying that forcing banks to follow the prudent practices of the typical loan shark would collapse the system. I'd argue that you better rethink your system.

I'd say your more brainwashed by the way the current system works then confused.

Lets say I have 1 million dollars. I could easily afford to lend 200k in loans at 10% without losses
ever destabilizing the system are any inflation. Eventually of course if all the prudent money is loaned out and further if your significantly over your alloted minimum at that point it makes sense to inject a small amount of cash only after you have had a bit of deflation and increase in the value of money.

Money should be injected only to damped and prevent extreme deflation not moderate deflation of say 1% a year or so.

Moderate deflation is the bankers reward for only lending a percentage of his assets. Loans made later are more valuable and the value of the money in the bank increases over time.

A mildly deflationary economic system with large reserve requirements is infinitely stable.

Hello Jerome,

Fascinating keypost, as usual. Recall that the very first banks were repositories for surplus harvest grains. I have proposed, in earlier postings, of banking being based upon the very roots of our civilization; my speculation on the biosolar mission-critical need for the creation of 'Federal Reserves Banks of I-NPK'.

You borrow I-NPK, then later repay the loan with some percentage of the photosynthesis reward generated by this I-NPK above the Liebig Minimum. Recall that job specialization is only possible by food surpluses, thus this societal food dispersement allows the supply chain replacement of the original borrowed I-NPK [if properly designed & controlled].

I-NPK and sulfur global flowrates are directly tied to decreasing net energy flowrates, thus it greatly behooves the postPeak bankers/investors to charge the absolute minimum for I-NPK & grain storage; the system becomes self-limiting to natural biosolar constraints--not some ficticious scam of charging fixed interest with no ecologic boundary impingement.

Societal parasitic overhead and waste is quickly reduced to what is actually net total ecologic-energy possible without borrowing from future generations. In short: borrowing timeframes will be limited to the natural crop-cycles plus a small time reserve directly related to size of the grain reserves.

If a person chooses to be debt-free: they can use and recycle O-NPK to achieve their harvest reward, then keep or sell the entire harvest, or some portion thereof. Entropy will eventually force 100% O-NPK reliance--afterall, it is the natural Cycle of Life--but I believe an I-NPK based banking system in the postPeak regime offers a graceful decline method, plus encourages the rapid ramping of universal O-NPK and other Element recycling.

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

Sounds fascinating. Would you consider writing a guest post to expand on this idea?

Hello Jerome,

Thxs for responding. I will have to think your generous offer over.

In the past, I used the default publishing model where I post some info, then a TopTODer carries the ball much further down the field using their far better expertise. The best example of this is when Stuart Staniford, Euan, and F_F [plus others], had great time flogging my discovery of the ARAMCO Ghawar Supercomputer 3D oil-saturation graphic. :)

For sometime now, I have been repeatedly asking for TopTODer elaboration and analysis of my voluminous I/O-NPK postings and 'Wild & Crazy' thought extrapolations. Feel free to give it your best shot. I also would like to see Memmel flog this dog too, as I suspect his recent postings appear to be converging head-on with my thought-train.

As you can probably tell: I am a big believer in WWWeb collaborative viral efforts to rapidly ramp and leverage info flow and optimal change.

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

I think you would do a good job with the article.

I think totonella's stuff is important. They just decided to save Africa again. This time they're looking to increase the amount of fertiliser the farmers use. This will help save them from high oil prices. (sorry, no link, latest UN conference on food)

Have you read the new book The Gods that Failed: How Blind Faith in Markets has Cost us our Future by Larry Elliott and Dan Atkinson, which came out on Thursday? They are respectively economics editors of the Guardian and the Mail on Sunday.

for their blog.

A very angry book about the debt bubble - I could feel the steam rising of the pages as I read it yesterday. They managed to squeeze a couple of pages on peak oil with mentions of Colin Campbell and Matthew Simmons into the penultimate chapter, together with some apocalyptic visions of the immediate financial future.

Highly recommended.

It all makes me wonder where we are going to get the necessary investment for 'post carbon' technologies given a banking system that seems to be obsessed with profit without social responsibility.


It looks like it is available only in the UK, with the usual UK to US shipping charges and exchange problems (like: unaffordable). Amazon has it available in September. By that time oil will be $200 and three gallons of gas worth the price of the book! Has anyone heard if it will be available on this side of the Atlantic any sooner?

Epilogue: ………………………sadly enough, the true ‘workers’ of this world have put their faith in the hands of people that have repeatedly touted how they would represent OUR interests, OUR health, OUR family values, and OUR hopes for a better today and tomorrow. What has NOW come to a head is the ultimate insult levied on ‘each and every one of us’; the lies and broken commitments of those chosen and NOT CHOSEN by us, causing Global economic chaos while THEY continue to prosper beyond measure. I know I’ve said it before and at the risk of being redundant I will say it, again; ALL of these unscrupulous people and the organizations they hide behind must be ‘rounded up’ like the vermin they are and exterminated immediately so they may not be permitted to breed another population of predators that only care about themselves and those who enable them. I have no problem with people making a profit, but I have a HUGE problem with people and/ or organizations making money and advances- while intentionally crippling the masses and the system that allowed them the opportunites to turn a profit in the first place. Being the catalyst of intentionally creating widespread chaos during the process of turning a profit should be a crime punishable by death; just as crimes against humanity and crimes against our environment should be. These ‘petro- dictators’, oil companies, crooked politicians, and self-serving business people & speculators have NO BUSINESS being allowed to do all the wrong they intentionally inflict upon the very people that actually perform the work and drive the economic engine that ultimately creates the opportunities these people knowingly exploit. Whatever the punishment and/ or stringent regulations imposed, I say it wouldn’t be harsh and/ or swift enough!


You understand, of course, that it is greed that is supposed to trickle down, not the profits from greed.

The artwork gallery by David Parkins for 'The Gods that Failed' puts it very eloquently:

A picture is worth a 1000 words.


I liked the first and the last "cartoon". All of them are dark, aren't they...forboding? American Heritage Dictionary Forboding: A sense of impending evil. Sometimes I find myself getting maudlin, and waking in the early morning hours with the same forboding.

Nah. It is simpler than this.

95%+ of our money comes from debt (Look up Fractional Reserve Banking).

Debt is an exponential function. Exponential functions cannot continue forever in the real world. Therefore they hit a limit and collapse.

It is inevitable. Whether the cause is thought to be oil or tulip bulbs is irrelevant, it will always be something.

What's required is monetary reform. Decouple debt from money creation. Ironically, more deregulation rather than less is the key, allow banks to do as they wish but give them no governmental support. No bailouts. No safety net. No Federal Reserve.

, wonderfully, a programme to invest in housing and vehicle energy efficiency, renewable energy, and infrastructure, paid for by massive tax hikes on the rich, will help solve the current recession and the oil crisis

its this sort of simple punchy message I can get on board with


"That announcement, in turn, made the markets brutally change their expectations about future Fed rate changes."

i dont doubt that markets changed their expectations about the fed. i wonder how realistic those expectations were ?

I remember as a kid just after the war my folks had to put down about 90% to borrow the 10%.

What is wrong with buying only what you can afford. If one cannot save enough one has already washed oneself out of any FICO score and so is already a risk.

The reality comes when the controlling Cabals want you to buy things which make THEM rich, regardless of what is good for you.

"They" are all in an unconscious conspiracy through the culture, the media and peer pressure to guide you to Buy, Buy, Buy. Only a very few non-addictive personalities can withstand this constant pressure.

We as a culture, if we wanted, would have the capacity to create a population controlled by moderation, but unfortunately this will never be allowed.

We have the "Lottery Syndrome" of "well one of us will win, and it may be me". They say Canada 6/49 lottery has a 26 million to one chance at the jackpot and they probably sell 50 million tickets twice a week. I suspect we have a genetically controlled species-survival-strategy to take chances for resources..

People that buy lotteri tickets pays the idiottax.

In response to declining revenues, many US states have started or expanded state lotteries and licensed more casinos.

Apparently the average American regards it moral to put special taxes on people with low IQs and/or addiction problems...

Errol in Miami

Commodity markets work on the relationship between supply and demand, but it appears to me that the critical supply/demand relationship in today's commodity markets is not within the commodity, itself, but the supply of dollars searching for locations for investment.

There are too many dollars looking for a limited number of places to go. Your article seems to confirm that. It certainly seems as if most commodities markets are trading in the speculative, rather than true value, range.

How do you know what the "true value" of a commodity is?

Pricing theory says that goods are sold at the maximum price for which a buyer can be found. People are buying oil at $139/bbl. By definition that is the monetary value of oil. Now what normally happens when a commodity rises in price is that more of the commodity is made available to the market and the price goes down. This will not happen with oil, however, once we are in the peak plateau (which I believe we are).

Commodities are actually special cases of this pricing rule, because commodities (except food) are not purchased for their direct value, but for what other goods can be produced using them. In the case of oil, there may be many such levels of indirection. And it is a fact that all those levels of goods and services, starting with the oil, and ending with the finished product, are still being bought & sold with oil at $139/bbl (except for those that aren't, of course; i.e. demand destruction). In any case, since a base commodity is used for some specific utilitarian purpose, it is really impossible for the price to get very far out of line with its utility through speculative excess.

Another way to look at the true value of oil would be the cost of substituting something else for the value of oil. Looked at that way, I'd say that oil is ridiculously cheap at $139/bbl.

I have the feeling that most people who think oil is overpriced are basing that solely on the fact that oil used to be much cheaper than it is now. I would argue that at previous prices oil was significantly under-valued, and prices have now begun their ascent to oil's "true value".

Money is also a commodity. Just like oil. There is an infinite supply of money though.


A thought-provoking article indeed but I have my doubts as to your assertion that there is one major culprit (the rich) whose punishment and quasi-expropriation will mitigate our sorrows. As Aangel put it:

there is plenty of responsibility to be shared for this situation, including those in the middle class who couldn't resist the temptation (like my wife and me) to go into debt for a bigger home, a new car, etc. Are we not all part of the machine?

To that one might add the politicians whose vote-seeking behaviour drives them to expand the welfare state and drive up public debt, and the voters who vote for them. In fact, what we are facing is a double tragedy of the financial commons – one between ourselves at national and international level, where almost everybody loses, and one between the generations – where of course the older generation inevitably wins out. There is a combination of market and government failure, just as there is a combination of spiralling private and public debt. We are dealing with a buck that stops everywhere, and a buck that stops everywhere is a buck that stops nowhere.

But even if we assume for the sake of argument that the rich are ultimately to blame and the rest of us are just innocent, misled dupes, there remains a purely instrumental question. You write in conclusion:

And, wonderfully, a programme to invest in housing and vehicle energy efficiency, renewable energy, and infrastructure, paid for by massive tax hikes on the rich, will help solve the current recession and the oil crisis.

One could perhaps argue that ‘massive tax hikes’ are morally a good thing in themselves, as a form of punishment for sin, but what evidence is there that such ‘tax hikes’ actually achieve their objectives of making the rest of us better off in the long term?
Geld ist scheu wie ein Reh (‘Money is as shy as a deer’) and the rich, having lots of it, can be very shy indeed. Those ‘massive tax hikes’ can’t be imposed overnight and you can be sure that once the topic is put on the political agenda, wealth and money will begin to seek another shore --- the sky will be dark as the geese begin to fly away, together with their golden eggs. For most of us, rich or otherwise, our homeland is where we prosper: ubi bene, ibi patria . And if that homeland is abroad, that is where most of us go if we are young enough and dynamic enough. Those that cannot afford to move will then find themselves left to rot in an egalitarian dystopia where all they will be able to share is their misery -- a kind of negative selection of the untalented.
Which is about the last thing any country needs in times of trouble.

The point of taxing the rich a lot more is not just to redistribute money around, but also to make finance unattractive in the first place, by eliminating the possibility of extravagant net incomes. Once that "easy" route to wealth has been closed, those that want to be wealthy have to find more productive ways to get there, ie actually create wealth, rather than focus on capturing it. That route has other rewards than the monetary ones, so will never be closed by higher taxes.

This is exactly right on Jerome.

Now all we have to do is get all those wealthy people, who by the way run everything, to impose these taxes on themselves.

Sorry about the sarcanol spill there.

"Now all we have to do is get all those wealthy people, who by the way run everything, to impose these taxes on themselves."

The corporate\political machine happily imposes taxes on everyone, then those with power exploit loop-holes to avoid their share...

As a contrarian, I have to mildly disagree with your analysis.
The real cause of the Anglo Disease is the fact that there is NO real usury law. Under the Reaganites the credit card companies were able to overturn banking state regulations and charge consumers loan-shark rates.
This opened up an epidemic of financial gaming of the system. The solution is easy, establish a
maximum amount of interest(<10%?) that maybe legally charged.
This will direct capital to useful activities and end the speculative mania.
Of course this anti-libertarian message will drive the freakonomists, reactionaries and bankers generally crazy with threats for a capital flight abroad. That can be prevented by coordination of the various fed banks around the world.

In history, the speculative mania and rampant loan sharking actually destroyed the old Roman Republic, where
interest rates were prohibited above 8.33% in the Twelve Tables. Gradually the Roman bankers were able to screw it up to 12%. The ancient historians believed that high (+12%)interest rates would have destroyed the Roman economy and would have gasped at our 16% rates.

In my untutored opinion, the legal interest rate should be
5%, which would force investment in meaningful projects such as your windfarm. It would also destroy the 'financial economy'.

If you're an adviser to the Democrats, please suggest this benefical fix to our economy. I'm not sure this can be sold to the monied classes. But as a banker, hmmm....can you bring yourself to embrace such 'lunacy'?

I'm happy to support your suggestion. It would certainly not kill my activity.

Actually Rome did not fall They just gave up the Western part to save the eastern part, (Byzantium) because the East is where all the wealth is and always has been, That is whythe loss of Basra in Iraq is so important, The UK kicked the Portuguese out of there in 1622, to make sure that no foreign power, but particularly Russia, would ever get a foot hold on the Shat al Arab, the silk road, or what we wopuld call in the Oil age, Khuzestan, I see Lukoil has got a deaql to pipe oil from near Falujah to Tartus in Syria, That'll kill the Kirkuk Haifa line for good, No wonder the Turks are screaqming PKK terrorists, how convenient to have them on the border. The US should never be forgiven for this, and Brazil will most probably be the continental power of the Americas now as B.R.I.C. have become a super power unto themselves.

So, a question, is there any major currency that is less exposed to this debt bubble? I have always mistrutsted the financial system, my rational mind telling me that the whole caboodle just did not add up. Having read this post and the comments, it seems my lack of trust was not misplaced. I really wonder though, if there is any currency apart from precious metals etc. that did not subscribe to this fractional reserve banking madness? Is the euro any different from the dollar and the pound in this regard?

P.S. I remember once back in the nineties asking an economist how the government of a small island economy like ours could justify paying high interest on money it borrowed. My argument being that, these high interest rates (>35%) would ultimately bilk the taxpayers of the country. His response was some airy, fairy B.S. crap about govt. charging for certain services provided by the govt., but, HEY ISN'T THAT ULTIMATELY CALLED TAXATION!! I didn't buy his explanation, needless to say. By the way if you think I am kidding about the interest rates check:

Bank of Jamaica Economic Data (1993)


IMHO I believe that the Euro is even less likely to have value 10 years from now than does the US dollar. This is based on:

There is already considerable dissention between roughly the Northern countries (Germany, Switzerland, Belgium, France) who are afraid of inflation and so want higher interest rates, and the Southern countries (Spain, Portugal, Italy, Greece) who are more afraid of deflation and so want lower interest rates. and

There is no real 'full faith and credit' (read taxing power) authority backstopping the Euro.

I personally like 'junk silver' pre-1965 US silver coinage. Why:

It is still legal tender, and has the same markings as present coins. This means everyone in the US accepts them as standardized.

Fossil fuels have permitted most of the high-grade ore bodies to be mined (even remote ones). This means that most of the gold and silver that will ever be available to humanity have now been refined. Compared to aboveground stocks, remaining below-grounds stocks are small enough to be unlikely to cause a big rush of new supply.

Most interestingly, gold tends to be hoarded; humanity still has most of the gold ever mined. Silver, however, has been used industrially and much of it has been lost. Even though silver is much more abundant in the earth's crust, it's possible that there is currently not much more silver in humanity's possession than there is gold! Based on rarity, silver may well be undervalued currently.

Errol in Miami

Switzerland is not part of the EU, by the way. They have their own currency, too. You may have heard of it - the "Swiss Franc"?

But your point about eurozone divergence is valid.

I'd agree that the Euro is likely to fracture.
However a rump based around Germany and the Netherlands, the old Deutsch mark stability zone seems likely to remain a low inflation area.
It seems possible that countries will peel off one by one, leaving a rump which may still be officially called the Euro.

There is so much doom-mongering in the English-language press (and economist circles) about the euro that I wonder if it will ever be possible to have an actual dialogue between people in the eurozone and people outside it.

The problem, of course, is that most of what is written about the euro on the "international" scene is in english, and thus structurally hostile to the endeavor, because the English-language speakers have yet to grasp the obvious reality of the EU being a political project and not an economic one.

The euro is backed by the full political authority of its constituent memebers, starting with France and Germany, which are likely to be amongst the msot resilient economies in the coming years.

France and Germany may be fine, but surely some of the countries on the southern fringes are really going to go through the wringer in the coming years, being highly tourism dependent at a time when the sot of flights will go through the roof.
Their finances and deficits are, AFAIK, also truly awful, so I don't see how they can stay the pace of the Euro.

The € is the first real currency that has the ability to challenge the US sovereign currency hegemony. Im glad you included that little discloswure that you where from Miami, phew! I belive the US will make buttns legal tender to pay for a working healthcare system and payback all that debt, 2017 is not that far away

You seem to imagine I have some sort of interest in discounting French achievements.
This is far from the case, as I live in the UK and we will be far better off with a stable and prosperous France.
I had great hopes as it is one of the European countries with the best hopes of riding through the oil and gas crises best due to it's nuclear program, of which I am an enthusiastic supporter, rail investment and so on.
However I have no wish to blink myself to any issues which some to my attention and the budget deficit was drawn to mine.
Assessment is much more difficult in Europe than in the US as there are separate national accounts and accounting standards and many languages.

I think this link and post is a good place to make a important point that a lot of people don't realize.

I've come to realize that the greed of the wealthy is infinite. Its so large that they not only have to have billions in legal cash flows but billions in hidden flows of wealth to finance dirty wars and bribes etc.

I've been looking into the flow of oil using a modified logistic equation and studying the concept of hot oil. Hot Oil

By having a pretty good idea about how much technology can force increases in production I have a pretty good idea about how much oil was produced in the past. What I have found is that its possible that 10's or hundreds of billions of barrels of oil have been extracted in excess of official production numbers.

In any one year its not a huge amount of oil say 1-5% of the total amount extracted but over time this adds up. What this represents is a very large amount of cash flowing into the hands of the wealthiest people in the world. Lets say its about 100 billion a year right now. This is enough money to finance entirely out of the dark economy the war in Afghanistan for example.

This explains the immense power of the western money masters over the rest of the world. Not only do they print the money and control most of the means of production but they also have access to uncounted dark income which is greater than the GDP of most of the nations on earth. This is easily enough money to own the world given your free to spend it however you see fit.

Obviously this hidden money is a lot more powerful than the nominal public wealth and it goes a long way to explaining how Anglo disease is capable of distorting all institutions to to maintain the status quo.

The Oil industry is the only one large enough and lacking in accounting to allow enormous influx of dark money not even the illegal drug trade can provide the same cash flows.

Just a cursory examination of the oil industry shows that this is quite possible. Given todays post you can see its highly probable.

People advocating change don't understand how deeply the wealthiest most powerful people in the world depend on a opaque large oil market to control the ponzi scheme we see on the outside.

Another question few ask is why do the wealthy need a infinite amount of cash ?

Why does this concentration of wealth continue seemingly without end enough is never enough.
Certainly human greed plays a large role but this does not seem to be a complete answer.

Well it turns out that maintaining a super wealthy lifestyle is very expensive.

Consider one of your 15 million dollar mansions.

Lets assume for now that your really wealthy and you paid cash for it.

A staff of 10 at 30k a year == 300k
Maintenance and upgrades fixed costs == 200k
Taxes at 5% = 750k
5 parties at 100k each = 500k
House guest support = 200k

This already totals to about 2 million a year in expenses to support one top line mansion.

Every 7 years you could buy another mansion for the expenses. Your costs on the mansion alone with this
simple accounting are running 13% of the purchase price.

Given you have even more staff etc on hand to manage managing all your personal assets planes etc you can quickly see that the super wealthy need a return of 20% just to maintain their lifestyle.

This does not include saving money to buy more stuff add that in and lets say its 30%.

The cost of being super rich is the driving force behind this endless concentration of wealth.
Its really a potlatch society at the end of the day with most of the wealth concentrated in the rich almost immediately destroyed maintaining the lifestyle.

No wonder they seem to have infinite hunger for money.

The other thing, of course, is that wealth is relative I suspect that a number of billionaires don't look at how many billions they have, but at what their ranking in the Forbes listing of the rich is - so the goal is not to be rich, it is to be richer than the others.

It's an endless arms race of sorts, with the same concept of collateral damage along the way - except even more extensive in terms of how many people are amongst the victims.

Keeping up with the Gates's?


Last summer I had an overnight visit with my brother the airline pilot. His household income is roughly 10 times mine. He sees the world very differently than I do even though he has economic burdens much greater than I do. There is sort of a cognitive dissonance in that he is personally very generous but favors the social miserliness of the GOP. After spending that time with him I see we have nothing in common anymore. Those in the professional/managerial class live in a different world than those who live payday to payday. For them the biggest problem they face is taxes. Health care is not a problem for them. Educating their children is not a problem for them. Missing a few days of work due to illness is no problem for them. Having their job exported to Chindia is not a problem for them. Sending other people's children to a war that only benefits the rich is no problem for them. If this difference in their world view between to people who have the same parents exists how much greater is the difference between the top 2% and the 98% who work for a living must be.

I make a pretty high income top 10% and I assure you if I had not suffered through some personal tragedies and became peak oil aware I would be exactly like your brother. For me at least when I moved to Irvine CA I was unwilling because of things in my past to pay the outrageous prices they wanted for home here. This caused me to find the blogs about housing bubbles and thence peak oil. If there hand not been such a outrageous housing bubble going here even with my experience I probably would not have awakened if you will to the real situation we are in.

At least for me it seems the only people that are financially secure and "get it" are those that have lived through a brutal phase and life and realize how fleeting and to a large extent meaningless wealth is.

Don't get me wrong its nice to have money and being financially secure helps you pursue hopefully noble goals esp if you have a family. But few recognize and value what they have. I'm certainly willing and able to have a fine dinner or fine bottle of wine or nice vacation on my salary but I treasure these instances now and don't treat them lightly. In fact for example we don't go out to eat all that often simply so that it does not become mundane. I think that French and Japanese culture recognize this form of I don't know respectful wealth vs crass consumerism. I think the difference is that the consumer and the creator treat each other as equals. The chef who prepares the fine dinner is equal to the wealthy patron.
And I don't mean financially but socially or artistically. The reason I bring the example up is its relatively easy to pick out these different classes of people in a fine restaurant. For me at least it obvious who is there to treat and enjoy themselves and who is there because they deserve to be there and would have been at a better restaurant but where in a rush this evening.

Irvine will do that to you---
( I once lived there)
Not really the Tarantino like reality of LA (every time I'm in LA, it seems within 1 hour I have entered a movie of his), but something is happening there.
Something Bad--
I was just in Laguna, and am very afraid for my friends and family, as they don't even have the information to reject.

now the euro is the perfect outlet to express skepticism about the value of the dollar

I agree with many of your points in this piece, but not this. What makes the Euro so special in a worldwide currency deflation? The poorest countries in the EU will be nearly bankrupt and need help from the richer countries - when things get stressful, long term cultural wounds/pride come back to the surface. The dollar has problems, but the Euro has more, IMO.

Maybe it's time to stop listening to what is highly self-interested drivel, and take back what they grabbed

What do you mean here? Higher taxes or something more draconian? And keep in mind that the people making the decisions on such action are precisely the ones at the top of the ponzi pyramid. One can hope they turn into altruists overnight but not likely. A tax system like Sweden or Netherlands takes decades to become part of culture - doubling taxes overnight is tantamount to revolution.

One area I totally agree with you on - the next phase of this whole enchilada is equity (or rather, inequity). The worlds GINI coefficient can only stretch so high before the lower echelons realize they have been used. As Herman Daly proposed a few weeks ago on a post here, the gap between the richest and poorest will never be zero, but it can and will shrink.

The dollar has problems, but the Euro has more, IMO.

Not easy to measure but having just read Francois de Closets’ recent book ‘Le Divorce Francais’ what you say could well be true of France. Chapter Six is entitled ‘Finance: la catastrophe annoncée” (no translation required): -- annual government expenditure now running 18% in excess of government revenue, or €42 billion (misleading presented as 3% of GIP in order to hoodwink the general public).

Makes the dollar look as solid as the Swiss Franc (allowing for some poetic licence).

And Sarkozy? = Déjà vu all over again + Carla Bruni.

BTW (perhaps of interest to Jerome) de Closets is actually peak oil aware [Chapter 3 of LDF being entitled “Il n’y a plus de petrole” (= There’s no oil left)] – writes about oil peaking between 2007 and 2027, tipping points, no bullshit about the market resolving all our energy problems, need to bite the bullet etc.

Does that mean that France now has three peak oilers? Up 50% since 2007?

Jerome + Yves Cochet (Green politician, ASPO fan) + Francois de Closets.

Bah. Doom porn about France is the last industrial activity left in the UK... It does not make it true (even if Sarkozy and friends repeat the same in order to sell their "reforms".

If I may suggest it again, go read this: France is not in decline and the last thing it needs is 'reform'

Thanks for putting that into context.
Perhaps I can ask you a question:
Is the budget deficit running out of control in France?
I understand it is relatively high.
My French if fair but not excellent, so I occasionally look at 'Le Figaro' but otherwise as you remark assessing conditions in France tends to be through the English presses' filter.

The French Deficit is running at about 2.7 % and is not likely to hit 3% so no, it is far from out of control, but not under as much control as the € zone would like, (US Deficit 25.56%) Another thing to remember is that in France value is not just something that can be measured in terms of monetary value. Things like Quality of life, Health care, and the Happiness index, apply here, not just rampant consumerism


You write:

The French deficit is running at about 2.7 % and is not likely to hit 3% so no, it is far from out of control, but not under as much control as the € zone would like ...

The point made by Francois de Closets is that the 3% deficit relates to French GDP as a whole, but is equivalent to 18% as a proportion of state revenue. That is to say, each year the French government spends approx 18% more than it collects via taxation etc. The cumulative French deficit is huge --- and yet most people still swallow the 3% yarn. No wonder de Closets refers to 'le mirage des 3%'.

When you state that the US deficit is 25.56% you are referring to the deficit as a proportion of government revenue, not the country's GDP.

So I think you are unwittingly comparing apples with oranges (deficit as a proportion of gov. revenue for the US with deficit as a proportion of GDP for France). At any rate the situation in both countries is pretty disastrous, even if the US is closer to doomsday than France.


you write:

Is the budget deficit running out of control in France?
I understand it is relatively high...

The answer is yes, it is -- see my reply below. For 2007, French GIP was Euro 1860 billion, the deficit was Euro 42 billion. That's less than 3% of GIP but approx 18% of gov. revenue. It's been like that for some 25 years.


I read with interest your article in ‘Le Monde’ entitled ‘France is not in decline and the last thing it needs is "reform"’ . In the final paragraph you write:

In fact, one gets the nagging suspicion that the French economy comes in for such consistent bashing precisely because it shows that overall standards of living can increase without the rich getting extravagantly richer …

[emphasis mine]

That strikes me as somewhat cornucopian and contradictory, especially coming from a peak oil man like yourself. How on earth can overall standards of living increase, if we’re running out of cheap fossil fuels?

All this has nothing to do with frog-bashing, at least not as far as I am concerned. After all, I quoted a French author, not les fuckoffs from across the Channel.

Anyhow, Germany and Britain are in much the same predicament, ditto France, Spain …..

I’d be interested to know your stand on the French deficit, BTW.

The article for Le Monde was deliberately written to fit in within the usual narrative of "growth", "economic prosperity" and the like, and did not go into sustainability or energy issues, so your point is a fair one, but one that was chosen and which I admit to...

Re: deficits, I'm personally favorable to reducing the deficit, and think that the efforts made by French governments since 2002 have been pretty weak (no surprise - they were all rightwing: if you want better budget discipline these days, get a leftwing government). That said, the deficits, while bad, are not really worrying per se, and certainly not a sign of decline or of doom, as usually argued by many (including significant swathes of the French establishment).

Yes the biggest threat to the French economy at the moment would have to be Sarkozy himself. The rest is just Euro Death porn, the comments above quoting the 18% figure need to add the word inflation to their vocabularies I dont see any wages breakouts happening so this is just more death porn. The € is going great now all those gulf countries are switching to it, only 95$ a barrel adjusted for exchange rates,

Nate, you wrote:

"What do you mean here? Higher taxes or something more draconian? And keep in mind that the people making the decisions on such action are precisely the ones at the top of the ponzi pyramid. One can hope they turn into altruists overnight but not likely. A tax system like Sweden or Netherlands takes decades to become part of culture - doubling taxes overnight is tantamount to revolution."

I've read that in Japan the rich are 'taxed back into the middle class' within 3 generations by means of inheretance taxation. That sounds like a good system to me:

The wealthy are more likely to empathize with the working class because perhaps their parents were members of it and their grandchildren will be too, and

Americans have demonstrated to my complete satisfaction that they don't give a damn about their grandchildren's future. So they shouldn't have a big problem with their grandkids having to work for a living.

Errol in Miami

Well if you are into fantasy:

Thx for this good post Jerome.

Used to be Noirette (MoA and here as well)