So that's what they mean when they say we're losing the war in Afganistan. Losing out on the drug trade!

Let's cut to the bottom line: What we are talking about is GREED. plain and simple whether it's drug money or lier's loans. Moral rectitude is no longer something that is valued. Over the year's I've come close to getting into some pretty dicey situations which led to try to live by this - Righteousness Pays with Happy Days.

Todd

Chimp: You have a great website-I just hope we don't hear that you got "depressed" and decided to jump out of a helicopter like that BreX guy. Keep up the fight for truth.

For those of use who are not proficient at searching LATOC, could someone assist in getting these links posted here? Thanks.

Ok this is something I know nothing about. (never have done cocaine or heroine but did have Fentanyl after a routine procedure once - nice!)
But trillions of dollars?!? C'mon.
The average dose is 300-500mg - lets say 400.
The average price is $71 per gram. So 2.5 uses per $71. So $28 per use.
$1,000,000,000,000 / $28 = 35.2 billion doses.
You said 'trillions' so lets triple that to 100 billion doses.
Assuming each heroin user uses the drug once a day, that is 100 billion / 365 = 275,000,000 users?
Can that be right?
To put that 'trillions' number in perspective, 86 million barrels of oil per day x $97 per barrel x 365 days = $3,044,000,000,000 or just over $3 trillion spent on oil each year (though this would be most ever since 2008 is highest price ever for oil, while heroin prices have plummeted)

Something not right here. Though it makes me think that there would be a positive feedback loop on the ratio of Heroin use/Oil use - e.g. the more heroin used globally, the less oil, as people would be crashed out on their basement carpets.

=============
Booms in drug money laundering tend to coincide with construction booms, in case anybody here wasn't aware of that. Examples include Dubai which is both the money laundering capital of the world and the construction capital. In the 1980s, that distinction belonged to Miami. In the documentary "Cocaine Cowboys" a former drug lord explain that cocaine money built "half of Miami." That's just one example.
=============

Another example (supposedly) is the boom along the Spanish Med coast in the run up to the currency switchover (when people were faced with having the origin of their peseta's being looked at - some people didn't want to say where the peseta's came from).

Drugs, Oil, and the bankers. Yes! May as well add terrorism in there too. They are all tied together. That is why I have always given my very highest recommendation to watch the The Truth and Lies of 9/11, Mike Ruppert's post 9/11 lecture. It's a great starting point.

As further reading, I would recommend "Drugs, Oil, and War: The United States in Afghanistan, Colombia, and Indochina" by Peter Dale Scott.

This book shows the connections between the three, the involvement of the CIA and the banks involved in the money laundering. Particularly interesting to me were the parallels drawn between what is known to have happened in Indochina in the 1960s and 70s with what appears to be happening in Afghanistan and Colombia today.

Theories of the illicit drug business being connected to international banks or the White House or oil services companies or Dick Cheney have been around for a long time. Unfortunately, they don't add up.

I suspect a lot of the heroin money from Afghanistan was laundered into the Big Banks now getting their asses kicked who used it to fund the suburban building boom (borrowing it from the drug bank at say 4% and then loaning it the subprime and Alt-A lumpenproles at 6%.)

You should learn how financing works before making these kinds of claims. The large homebuilders are public companies which borrow against their value - cumulative worth of their company as measured by their stock - in the bond market using Credit Default Swaps (CDS) to insure against risk. They do not borrow from banks. Smaller homebuilders borrow construction funds from the regional banks; it has been the only business these banks could find as the costomer loan business - revolving credit and auto loans - have been taken over by large, national banks. It is doubtful that Sovereign Bank or Suntrust ... or Wachovia ... are 'drug banks'.

Please provide sources if you can.

You also need to study how the mortgage market is structured. 'Drug banks' or other banks don't turn around deposits into mortgages. If they did so, the current financing crisis would probably not have taken place. Mortgages are originated then transfered to companies that 'deconstruct' the loans into sections and repackage those sections as bonds; the bonds are given high ratings by rating agencies then sold to investors. The investors have little knowledge of what it is - or was - they're buying.

While there is the cloak or anonimity to this process, this would be too dangerous to a criminal, since the 'counterparty' could be a person who would call the FBI. Commercial (depository) banks are highly regulated. Criminals deal with people they know and trust for this reason. Drug financing tends to be simple, cellular and personal.

Also, unless you really know what you are doing, you can lose your shirt in a hurry in the 'trading' markets. Criminals don't want to risk a big loss in a market similar to today's.

... a lot of the big energy infrastructure projects are being financed with laundered drug money from off-shore money-laundering banks as these banks offer very competitive interest rates

Again, this is nonsense. An energy company will finance a large project directly from the bond market, it won't borrow from a bank. Part of the financing will be Federal Agency subsidized with state- issued loans loans or loan guarantees providing the balance. These loans will be made from the bond market.

Part of the current crisis exists bacause a large part of the banking industry's core business - making loans to large (and safer) entities - has decamped for the bond markets.

The last notable bank caught up in a money laundering operation was Riggs Bank in Washington, DC in 2004. It was convicted of laundering funds for the account of the late Augusto Pinochet, for the dictator of Equatorial Guinea and for some Saudi diplomats. None of these accounts were related to drug trafficking.

http://www.usatoday.com/money/industries/banking/2005-01-27-riggs_x.htm

Believe it or not, the government gats money from busting banks and others convicted of illicit activities, in the Riggs case, the fine to the Treasury was $25 million.

Banks in Miami have made money by processing remittances to immigrants or taking as deposits remittances from relatives in Latin American countries. The banks in these countries are unreliable and the Miami banks are substitutes ... for burying money in the back yard. The amount of remittances is very large; approximately $70 billion:

http://www.iadb.org/mif/remesas_map.cfm?language=English&parid=5&item1d=2

While the drug trade is large, the greatest amount of money is in the marijuana business, which is largely domestic or Canadian and Mexican.

Trying to put a value on street drugs is difficult, anyway, since drugs are usually easy and cheap to produce. So- called 'street' prices (cumulative) are more or less speculations, but would not reflect on global totals since producers do not sell the drugs on the street, but simply transfer uncut drugs out of the producing areas. The prices at this level is a lot lower than the street price. The cumulative producer price is about $12 billion, which seems a reasonable number:

http://www.havocscope.com/Drugs/drugs.htm

It does not add to the credibility of the Oil Drum when conspiracy theories are recycled.

That is likely why we are seeing declining oil prices, at a time when fundamentals would say they should be rising.

???? Most of the established fundamentals analysts have been sceptical of these high oil prices all along. Everybody in the oil industry I've talked to in the last year said they didn't believe these prices were sustainable. Everybody outside the oil industry said prices could only go up. Number one industry number cruncher PIRA has been the biggest bear all through the 140+ bull market, and they're now vindicated.

Obviously all the distressed selling (not to mention all the short spec money) is going take this market to rediculous lows, but anyone claiming that fundamentals say oil should be rising has not read many reports.

I seriously doubt that, huge restrictions have been put on money transfers between countries since 9/11. All important transactions are closely watched, I have a friend that got into trouble because of an substantial transfer of money between Haiti and Canada in relation to a family inheritance, the money is frozen and basically in limbo now. Having say that, I know there is an important shadow economy where drug related money is recycled in real estate projects (we have a lot of recent stories around that here in Montreal).

Hopefully this will pull the plug on coal fired power projects in Nevada (Ely Energy Center), Texas (Spruce), and Virginia (Dominion). Also, it seems as though the aquisition of Merrill Lynch by BoA will give BoA too large and exposure in this area and we will see other cancellations. The Sierra Club is keeping track here: http://www.sierraclub.org/environmentallaw/coal/plantlist.asp

Chris

People always told me to wait until I got gray hair. That would add an image of authority. It still hasn't happened though, and my children are grown.

It is hard to separate the deleveraging and the speculating. It is looking more and more like speculators got caught and the top, and are a big piece of the deleveraging.

I don't think I ever made an estimate of how the split broke out.

Financial markets and energy, my favorite topic! Sorry to be late to the party...

My take: Of Bailouts, Hedge Funds and Energy

Speculators may have played more of a role in the oil price boom and bust than I previously believed (although the new Masters report and the CFTC report are at odds on the question), but what we're seeing now in the energy sector has little to do with questions of supply and demand for energy, and everything to do with flows of hedge fund money and bizarre beasts like credit default swaps.

Attributing the action to almost anything is difficult, though, because it's all so interrelated. The dollar has probably played as much of a role in setting the price of oil as futures speculators, but it's difficult to tease those factors apart. Ultimately you can only really point the finger at sentiment: either fear or greed. Fear has ruled the day for most of this year.

I expect there to be more widespread and indiscriminate selling of stocks in every sector until most of the deleveraging has been accomplished, punctuated by short broad-market rallies. And I think Roubini was right to say, in his Tech Ticker appearance today, that Goldman and Morgan Stanley are probably not long for this world either.

So energy stocks and hydrocarbons could be beat down even further from their current irrationally low levels.

Until all this mess is unwound, investing in the stock market is going to be only for the bold and the bulletproof.

I'd contend this is Lehman meltdown is the 3rd major financial crisis is just over a year. The initial sub prime meltdown really hit the first 2 weeks of August. Bear Sterns hit in Mar of '08. Take a look at the weekly NYMEX crude oil price chart on both of those:

http://futuresource.quote.com/charts/charts.jsp?s=CL%20V8&o=&a=W&z=610x3...

Both entailed a massive liquidity infusion into the system. Both funded a flight to tangibles and oil got bid up.

This time its no Fed bail out and they'll allow the chips fall where they may. I'll contend the PTB (powers that be) know another bailout would mean more dollar pounding and oil and metals rallies. Cant have that again now.

That's the classic dichotomy to watch, will oil fall becuase of a disfunctional meltdown economy or will there be a flight to tangibles? Equities and derivatives are going down. Real world cash values for oil and metals are disconnecting from the bogus futures markets. Try going into a coin dealer and buying gold or silver for offical prices. You can't. The precious metals ebay premium is 30=50%.

The 54 cycle on Colonial Pipeline (now current) is trading 1.25 over the NYMEX futures. It looks like real world premiums are running 30-50% over the bogus futures in oil too.

Longer term, the flight to tangibles will prevail.

How many cars were there in 1939 vs 1929? I think that answers the question, don't you? It was the beginning of mass production.

Speaking of 1929 (and the iconic stories of bankers leaping from high windows)...have you seen today's Non Sequiter cartoon? It is here:
http://news.yahoo.com/comics/nonsequitur

(If somebody knows how to make it appear in the thread as a picture please do so)

Things are really getting deeply ingrained in the social consciousness when they start appearing in the mainstream funnies.

The value of a home site (let's say a vacant lot) is closely tied to its relation to work sites (aggregated as urban centers or sub-centers) mediated by the cost of commuting to and from the home (along with errands). When gas was cheap, commuting costs were almost an afterthought and many distant locales were developed en masse (think of people "driving until they qualified for a mortgage"). The approach was based on 50 years of suburban experience and seemed to work very well.

As gasoline stopped being cheap, distant sites actually lost value. People would no longer pay what they used to in order to obtain them (there are other housing options available). Most such lots were debt financed, and the value behind that debt has been evaporating. Those values will not return unless somehow commuting costs are brought back to previous lows and can be assumed to stay low (mortgages are long term commitments).

One could analyze the loss in value at just one distant home site, say -$20,000, and simply multiply it across all such home sites to arrive at a very large figure for the amount of real estate value lost (gone, *poof*) thanks in large part to the rise is fuel costs. We are now addressing the question of who do those losses affect; how are they covered?

Sharon,

I think you are right about oil being behind the massive changes in the workforce and the run up in industrial production. Oil is also behind globalization, which is another force we have encountered since WWII.

As oil supplies go down, they will have huge impacts on industrial production and globalization, probably operating in close to reverse the direction they operated going up.

Gail

Agreed, praetzel, the ability of the producers to supply oil in a major downturn is an open question.
We're seeing now that equity can be destroyed orders of magnitude faster than even Helo Ben can print it. The rules of the game are:

Cash is king during a depression.
Economic theory works for price rationing, but it can't make predictions about scarcity-rationed markets.
As the velocity of money falls, all investment slows, even for energy and food production.
Inflation still happens for essentials, even in a broke, broken system.

Going long on energy at some point means burying a propane tank on your property, rather than playing the CBOE paper game. Sure, we'll all still need money to pay our property taxes, but the daily essentials of food and energy trump all else.

The lesson from Argentina's collapse:
http://www.powerswitch.org.uk/portal/index.php?option=com_content&task=v...

It's my understanding that AIG has been bailed by the Fed accepting equity for collateral.
There may be something like this going on in the takeover of Merril Lynch too, so as far as I can make out the Fed may have taken on up to another $90bn in doubtful assets - not a bad average over the last two weekends.
It could get expensive if this carries on.
I may have misunderstood though, as the financial shell-game - oops, financial industry - it outside my ken, just the way the bankers like it.

Backstop,

Natural catastrophes, like hurricanes, do put sudden stresses on the system that make the impacts of peak oil suddenly stand out. Having the oil offline will put more stress on the economy. Needing to do all of the repairs in the Houston area will take resources that could otherwise be used in other areas.

There are at least theoretically safeguards in the insurance arena. The parts of AIG that are US insurance companies (part of it is offshore insurance companies and non-insurance companies) are subject to post-insolvency assessment plans, intended to protect small claimants. They typically pay up to $100,000 per claim on most lines of insurance. This won't go very far in paying a big commercial claims, but it does provide some protection for homeowners (not that $100,000 will go very far in repairing some of the homes, either).

If there is big damage, virtually no insurance coverage, and no loans available for rebuilding, your are right that this could be a serious problem. I think that such a problem isn't likely to be widespread now. It looks like the federal government is loaning AIG money to bail them out. Also, I would guess that AIG doesn't write more than 10% of Houston exposure, so even if it did fail, the impact would only be partial.

...numerous high-rise office windows are blown out....

This in itself is a huge scandal. Skyscrapers are built to take up windloads according to codes

Guide to the Use of the Wind Load Provisions of ASCE 7-02
http://www.techstreet.com/cgi-bin/detail?product_id=1170725

But why did the windows fail? Sometimes you have extreme wind conditions due to the positioning of skyscrapers. But that should have been checked out in wind tunnels.

Comparison of Wind-Tunnel Measurements of the Flow and Turbulence Fields in Arrays of Two- and Three-Dimensional Buildings
http://www.epa.gov/asmdnerl/Library/AnnualReports/2001/fig8.jpg

From here: http://www.epa.gov/asmdnerl/Library/AnnualReports/2001.html

A couple of broken windows could have been caused by extra high wind suction at a particular point, bad workmanship during installation, material failure or similar. But a whole facade? That suggests a design error.

I am sure there will be endless court cases on compensation claims.

For more intelligent heads, listen to Aaron Task and friends:

Crisis on Wall Street: Roubini Predicts Another 20 Percent Stock Drop, Sale of Goldman, Morgan

He looks like he hasn't slept in a month. That's what Clinton looked like by the end of his presidency.

An open auction for assets is the atomic bomb that the industry has been trying to prevent all year. Bet the Feds find some way to intervene to prevent this from happening. Declare it all "national security related"? Hold the auction in an undisclosed location, Bush Pioneers only invited?

If the government simply froze the value of every asset in place to prevent panic, and trading ground to a halt as a response, how long would it take for the rest of the economy to be dragged down with it?

The nest media seem to be reporting it as a Chapter 11 bankruptcy. For example, this Reuters articles says:

U.S. stock index futures were down sharply early on Monday, pointing to a steep fall at the opening on Wall Street after Lehman Brothers (LEH.N: Quote, Profile, Research) filed for Chapter 11 bankruptcy protection, heightening fears over the embattled financial sector.

Thanks George you said it all.

Cheers!

ALL economic activity is work in the physical sense.

Gail doesn't include this basic aspect in the key post but I think it's critical. Thinking in terms of dollars alone maybe muddies the concept. Imagine instead that all of a sudden our economy - based on countless slaves - now has a lot fewer slaves. We cannot do the same amount of work - let alone for the same cheap prices. All the houses of cards built on and requiring continued energy slave labor can no longer stay up. The thermodynamic analysis amounts to "case closed".

cfm in Gray, ME

Thanks George. Great statement.

Some of us have known that money is another form of energy for many decades. The concept goes back to the Technocrats and has been expanded on by people like Howard Odum (Environment, Power and Society). That our government and financial institutions have ignored this truth for so long will make it much more difficult to teach the public the facts of thermodynamic life.

What we forget is that all civilization is solar powered. That's the result of the fact that humans are ultimately "powered" by plants, i.e., crops in the fields or animals which consume plants. We live in a world where the lowest valued commodity is "raw" land, or, as the saying goes, "Land is dirt cheap". But, solar collection is an area based process, and we ignore the solar energy inputs to our food system, which actually represents a massive quantity of BTU's, since plants are not very efficient in their conversion of light to stored energy. That modern science and technology has been able to increase agricultural output presents the illusion that we don't need worry about the solar collection side of agriculture, but, fossil fuels required to make the fertilizer, pump the water for irrigation and then process, preserve and ship the food to our plates. Without the fossil fuel, it's back to reality.

What we are seeing this week is just the beginning, IMHO. It's just a taste of life after Peak Oil really begins to impact the U.S. Yet, the U.S. is one of the few nations which actually has alternative energy sources, but we must begin to make the transition NOW, else there won't be enough mechanical energy available to build the alternative systems before TSHTF. I like to hope there will be enough time to make the transition, but I fear our delusional political process will preclude that from happening. If the public understanding leads them vote for the easy "Drill, Drill, Drill" solution, I think there will be no change before we slide off the cliff.

E. Swanson

G.M - Thank you for this. You have clearly stated the very complex manner in which net energy very simply determines our fate. I concur completely. And while I could never have explained the links as you do, not understanding the machinations of our financial institutions much at all, I do understand, and wish the masses could, that ultimately money is worthless, and only hard assets have real value, and only net available energy allows us to manufacture products or grow food or do anything else with those resources. All the money in the world can't buy what doesn't exist. We will collectively learn that in the coming decades. Starting about now.

During the century, events had conspired to disparage in the national estimation the more prosaic virtues of hard work and consistent effort. The mines of Potosi brought to the country untold wealth, if money was short today, it would be abundant again tomorrow when the treasure fleet reached Seville. Why plan, why save, why work? Around the corner would be the miracle--or perhaps the disaster. Prices might rise, savings be lost, the crops fail. There seemed little point in demeaning oneself with manual labour, when, as so often happened, the idle prospered and the toilers were left without reward...

The uniqueness of Spain lay...in the absense of a middling group of solid, respectable, hard-working bourgeois... In Spain, these people, as Gonzalez de Cellorigo appreciated, had commmitted the great betrayal. They had been enticed away by the false values of a disoriented society--a society of 'the bewitched, living outside the natural order of things'. The contempt for commerce and manual labour, the lure of easy money from investment in censos and juros, the universal hunger for titles of nobility and social prestige--all these, when combined with the innumerable practical obstacles in the way of profitable economic enterprise, had persuaded the bourgeoisie to abandon its unequal struggle, and throw in its lot with the unproductive upper class of society.

--J.H. Elliott, Imperial Spain: 1469-1716

Several responses to an interesting and insightful post:

1: Total energy is not actually in decline (yet). The financial slight of hand maneuvering were more around masking a plateau I think then an actual decline.

2: Not all economic activity is activity in the physical sense. Mental work that results in altering the physical laws by which energy and work are related is one example (think Manhatten Project). Also some economic activity is simply disconnected from physical reality entirely (creation of art as example). However, I think all economic activity must be paid for, subsidized by physical activity.

3: First Law of Thermodynamics's doesn't really apply, since in theory we could convert the planets mass to energy and live off 0.00001% of the earth for a billion years. The problems are practical problems of implementation not theoretical problems of potential.

Thanks George. I agree with your analysis.

One of the ways the financial wizards were able to pull of the big run-up in debt was related to declining interest rates. Interest rates were very high in the late 1970s and early 1980s. Once the (oil caused) inflation rate settled down to something reasonable, interest rates dropped.

With declining interest rates, financial types (including the huge numbers of MBAs being graduated from business schools) began teaching that leverage was a great opportunity. With lower interest rates, loans even looked affordable. The stock market also shot up, because the present value of future earnings looked a lot better thanks to (1) the lower interest rate used in the calculation and (2) all of the leverage and assumed profits that the new investment would provide.

Now, we are walking into a reverse of the above scenario. Interest rates have no place to go but up, as the real inflation rate goes higher, and the threat of default rises. Leveraging will almost certainly go down, reducing the anticipated growth rate. Lack of resources will cripple growth further, and in fact, because of the issues you point out, lead to a decline in real work done in the future. This does not look good for stock prices, or for the economy in general.

I hope the MBAs have alternative job skills they can put to use.

Without denying the vital contribution of energy to economic productivity I am skeptical about pure energy theories of economic value. Productivity is what matters. The productivity of energy can be increased through technological advances. When the bow and arrow was invented the productivity of the energy used in hunting was improved. When the scythe was invented the productivity if the energy used to harvest crops was improved. When the wheeled cart was invented the productivity of the energy used to transport loads from point A to point B was improved. Increasing miniaturization has increased the productivity of the energy used to process silicon wafers. And so forth.

It is also true that resources other than energy have important effects on productivity. For one thing resources other than energy such as labor, fresh water, land (in the case of biofuels) have to expended to produce energy, and the opportunity cost of dedicating these resources to energy production cannot be accounted for solely by net energy calculations. For another thing, the quality of the resources available to the non-energy producing part of the economy also affects productivity. For example, on a planet which had a lesser endowment high quality metal ores than we have on earth, the same reservoir of fossil fuels would have resorted in less productivity.

Don’t get me wrong, I am firmly convinced that the assumption of continuously increasing total productivity which is the foundation stone of our current economic and financial institutions is about to land us in world of trouble, but I think that there is lot more to story of economics than net energy.

For those who might be interested, I've posted an expanded version of this comment on my own blog, Question Everything along with links to prior blogs where I go into more details in some of these areas.

George

You took the words, sort of, right out of my mouth.

I've been watching the discussion here for a few years, off and on, and more recently at Clusterf*ck and the Archdruid. It's been discouraging to see so many apparently alert people getting mired in and distracted by details - which, while important, inevitably tend to obscure the fundamentals. Lately I've seen a few people beginning to sort of sidle around the edges of the real heart of the matter. This is the first post (that I've seen) wherein someone actually says it out loud.

I would encourage everyone to consider also the Second Law, aka TANSTAAFL, especially in relation to interest and profit in general. Academic economists are notorious for piously referring to it in all sorts of contexts, but in reality, both conceptually and practically, their entire oeuvre is devoted to either denying it (conceptually) or circumventing it (practically). This denial and/or circumvention epitomizes human economic activity and has for hundreds of millennia.

And therein lies the connection between peak oil (or better, peak resources and environmental services in general) and the financial markets (or better, the pursuit of profit). Both, whether coincidentally or not, are hitting the end of the chain. We've used up the slack of cheap energy and new markets; learning to live with the chain will not be pretty.

Like Greer, I don't expect the reckoning will necessarily happen all at once (though we're going into unexplored territory now). But it's begun, and it's too late to do much of anything but duck as much as you can. In any case, as for me, I've been at the bottom of the food chain all my life and know how to survive, if it comes to that for me. I think this temporary conglomeration of matter/energy I call "I" will have re-integrated back into whence it came before we start dropping like flies, but you young'uns could see some strong stuff before your time is up.

Maybe, if they're paying attention, the long-term remnants can build on a better base than H. sapiens did ...

I would make a few additions to this concise and insightful post.

Economic activity is a complex and systemic exchange of physical resources. And thermodynamic principles apply regarding the energy required to move physical resources.

Conservation of mass principles apply regarding the resources, the actual stuff that is being moved. The things in our economic sphere, like cars, oil, food, aren't "created" so much as they are depleted from one area and recombined into another. This includes all us people walking around out there, made out of the food we've eaten.

And systemic, complex, and chaotic principles apply in how the process of economic exchange unfolds throughout a network of individual human agents.

So if money acts as an information token on the systemic (complex), interchangeability (thermodynamic) of resources (conserved matter), then the capacity of the network to process the information is also under consideration.

If the Rule of 150 applies, then each person in the network can understand or process roughly 11,000 relationships. While we evolved to be able to understand the relationships between all 150 human nodes in our local tribal network, our global society now contains 6.7 billion interconnected nodes.

The network doesn't appear capable of processing the information. The near-universal response to systemic problems, caused by over-complexity, is to increase the system complexity around the problem, yielding new problems elsewhere in the system.

Dunbar's number aka the Rule of 150 (wiki).
Social networking (wiki).
Chaos: Making a New Science, by James Gleick (amazon). Also available at your local library and on P2P.

If oil drops to $60/barrel then development should essentially stop.
Shortages will be even more severe a few years down the line.
Just about the worst of all possible worlds, I would have thought.

research24, the US still grows food. The biofool hype seems to make some sense, if we see it as a deliberate attempt to raise the prices of the only commodities we here in the US can export.

I would go a step further and also state that wrapped up in all this is a market/capitalist economies inability to measure and understand wealth that is not represented by physical items that can be clearly owned.

It's obvious with a moment's thought that not all useful activity is making THINGS. How about ideas, scientific breakthroughs, computer software, music? All those intangibles are difficult to OWN though and hence difficult to generate a profit by.

Our current financial; system doesn't know how to value anything that isn't physical.

I would argue that the destruction of the manufacturing economy is definitely oil related. A major reason we lost the manufacturing is because we didn't have the oil to do it ourselves.

A big reason for the run-up in debt was to disguise the fact that we really didn't have current resources (particularly oil) to do the things we wanted to do. It is now becoming clear that we also don't have the resources to pay back that debt.

Near as I can tell oil is only marginally involved in this collapse. The primary culprit is the massive amount of debt racked up by this nation, combined with the destruction of the manufacturing economy

I think its about rates of debt.... In point of fact I think its all about comparative rates

its the rate at which debt is created vs the rate of physical growth of consumption (energy for short) can be sustained to service said growth in debt

the manufacturing can be abroad..

simple questions

how many BOE was the average US/uk house worth in mid 1979?

how many BOE was the average US/uk house worth in mid 1999?

how many BOE was the average US/uk house worth in mid 2008?

is there a changes in BOE of energy consumption between 1979 and 2008 to account for change in debt level?

My thought is a little different -- "Head on, stick it directly up your . . . " Giggle.

By the way, I can tell by the ticker that the Fed & Company is trying to shore up the dollar against a fallin g tide -- the forex price swings are wild.

Might see a low around -3% followed by a bounce. If another low follows the bounce and goes below -3.2% or so, it might be the end of a larger head and shoulders and signal bigger drop to follow...

No, I have no idea what I'm doing. I just noticed the trend after having read about it recently and started goofing with guessing it as it developed this morning.... Ah... wish I were a day trader right now!

;)

Cheers

UPDATE: Market just took the bounce, but off a narrow head and shoulders neckline at about -2.6%... fascinating... Think I'll call the drop to that wider neckline at -3.2... but where from there?

Then again, it didn't break the neckline, so I guess it should go... up? New trend would put it up near a recovery at at least -1.2or so...?

UPDATE: I was posting around 2AM last night my time and took a little nap... that lasted till this morning... Sadly, I didn't post about the lower highs and higher lows I thought might be leading to a deep drop below -3%...

I can see why people get into this stuff. It's a bit addicting.

If you back out of our trumped up $14 trillion economy - that is, subtracting the funny money paper game, what do you have left in terms of real production? I've seen one estimate of $8 trillion of honest money work. Then refigure for a reasonable inflation deflator and what you end up with is a little over $7 trillion.

In real honest money terms this nation has been in economic decline for a decade but has made up the diff with $11 trillion in borrowed money. Since we make far less than half of all we purchase, any effort to equate energy with "economic growth" is off base since "growth" is merely a government lie.

Or to put it another way, just because you print money doesn't mean that money represents anything real.

Good point about refinery utilization.

What we call fundamentals of demand are based on falsified government AND private data. Look at retail sales, for example. Totally bogus. Retail shops are closing up everywhere, yet they claim rising numbers.

How is that? Because they don't back out import price inflation which is up 21.6%. Take the latest retail number and adjust it properly and what we really have is retail DOWN 20%.

The same applies to nearly everything. Sorry to say, we can no longer trust most data, tho I think most EIA stuff is safe.

Whilst an off-line refinery may reduce demand for crude oil, this doesn't alter the fact that the products said refinery would be producing are still very much in demand and being consumed - at present, this demand is being met, as far as possible, from inventories.

However, product inventories are declining at a pretty rapid clip; my current estimate of inventory decline for gasoline East of the rockies is about 2 million barrels per day. Ouch.

It is similar to the lineups for toilet paper in Russia circa 1970s with Pravda blaring out "we have a glut of gasoline".

welcome, mike :)

The price of oil did go up a lot earlier this year. I am not one who hears the inside rumors regarding speculation. I think what Nate and others are saying is that rumors are circulating that AIG and some hedge funds were speculating on oil futures. The investors were highly leveraged and got caught when the price started to go down. In some cases, it was speculation in some other commodity (like gold) that got a hedge fund or other buyer in trouble. When the commodity started dropping and there were margin calls, the hedge funds (or AiG) had to sell something quickly, and oil was an easy commodity to sell.

Now, there is probably irrational exuberance on the down-side. Some producers will stop production, if they are not covering their marginal costs.

That is waht you need-what you are getting is an Alzheimers patient and a moose hunter.

You are mistaken. It was Clinton & Rubin who did away with Glass-Steagal for Rubin's buddies at CITI.

OIL??????????
What is that?

My guesstimate is 1.1 trillion for 2009 deficit. Re financing the debt through t-bill sales, there is credible evidence that this monetization has been underway for a while-supposedly they conduct it through offshore banks. I have no idea and little interest in what sort of controls (or lack thereof) the USA guv and Treasury has over the mint-nothing would surprise me at this point.

There seems to be some kind of assumption that the US is the only country with any financial problems.

Check around Europe. A lot of those countries have debt and had real estate bubbles (Spain etc...)

Japan just had a negative 3% growth quarter.

So which economies are weak and which are strong ?

The US still has a very large resource base. Which countries get hit more if there is a lot less oil to be exported ?

duplicate

Further, interest rates will rise dramatically just like they did in '79 to high double digits.

Therein lies the dilemma. The US can either protect the currency in which case interest rates rise and there are very negative follow on effects for the domestic and commercial real estate markets or the US can allow the dollar to decline in which case the cost of all foreign inputs rises and the balance of payments continues to worsen until the country is on the brink of default.


The other problem is that foreign sovereign wealth funds may want to purchase the best of what is left and that will create an interesting political furor.


I wonder why the IMF does not step in and administer a strong dose of the harsh fiscal medicine they have meted out to every other nation in this position. First off, you cannot afford the 1,001 foreign bases, the adventures in Iraq and Afghanistan, low tax rates, socialized mortgages, social security, medicare, ethanol, farm price supports. It would be an interesting key post that looked at what the IMF has done elsewhere and how this same treatment would impact the US.

"If you can find a way to escape from this, I'd sure be glad to hear it."
A response that I have given to this question before is that there is a global threat to the food supply and holders of dollars are looking to a US food surplus as an insurance policy. This particularly applies to China.

But there is Al Capone's law - "A gun and a kind word take you much further than just a kind word" that can be brought into play to those that refuse US paper.

Srivathsa

I thought you made a good call looking for a fall in the market of around 15% today.
The fact that there has not been anything like it indicates to me that we have probably had massive intervention in the markets, and that can't go on forever.
Otherwise it is just weird that the fall the last I heard was greater outside of America.
They are probably intervening more than the Europeans.

Brother Can You Spare a Dime
There is an interesting movie by the same name

http://www.library.csi.cuny.edu/dept/history/lavender/cherries.html

DJIA Energy vs. Financial Markets Scorecard:

Imminent GOM Hurricane: -11
Imminent Financial Tsunami: -504

Down over 500. Yikes.

That's untrue. Resources can be miss allocated and become worthless.
A house which has been built too far out in the sticks in the last boom will cost too much due to rising fuel prices, some of the surrounding areas get abandoned, the householder defaults and soon the whole suburb is worthless, not to the householder, the bank or anyone else.

This is true in the case of a simple market transactions where a dollar moves from one player to the other and the total number of dollars are conserved.

The problem being faced now, however, is that of credit being destroyed. In our fractional reserve banking system, almost all money in existence was created by a loan being issued somewhere to someone. Money is created like magic by opposing ledger entries on the bank's books. As such it really doesn't exist independent of faith in the borrower's promise to pay it back. Once confidence is lost in this bargain, money that came into existence as a debt obligation is simply destroyed: it vanishes into the thin air from whence it came. In a highly leveraged system, defaults can set off chain reactions of defaults and produce a cascading collapse in trust.

So, yes, trillions can simply disappear by cascading failures of financial debt obligations, which can be triggered by falling market prices of core assets used to underwrite these debt-money pyramids.

Our money is based on debt, not assets. It doesn't work that way.

What we have is what is real-trees, houses, land, factories, etc. Even these may not be worth what we think they are worth, if they require oil or electricity to make them usable, and they suddenly become unavailable.

Money is mostly promises to pay. If these promises cannot be met, the money is worth nothing. Regardless of the money, all we have is what is real. We can make promises to pay in the future, but if the resources aren't there in the future, the promises will never be kept.

Of course oil prices would drop when no one has money to buy it. I don't think any of the OD front-pagers would have denied that.

But now how is economic recovery possible? Oil prices will rise dramatically as soon as we have a little money to buy it, crashing us right back down.

The Amero ?

http://en.wikipedia.org/wiki/Amero

I once suggested currencies issued by individual states.

Maybe a basket of currencies with internationally agreed ratios of each.

Bush is the captain and McCain is the first mate( with Sarah as the sexy/psycho secretary) in this US version of the Posiden Adventure(Hell Upside Down).

But they won't let Obama out of steerage.

http://en.wikipedia.org/wiki/The_Poseidon_Adventure_(film)

Be the scapegoat for all of the problems.

Not sure why anyone would want this.

Jeff, to comment on your thoughtful post,analysts are talking in terms of this crash being as bad as the 1929 crash including, notably, Greenspan, who since he did as much as any man alive to create it may know what he is talking about.

This would seem to indicate a much more protracted period of recovery, perhaps 10 years, which also makes sense when you compare it to the 1990's Japanese crash which had similarly overvalued assets.

Even after this period, grave damage is likely to have been done to the underlying structure, with vast debts built up.
These factors might take 30 years to work out, if we avoid on-going collapse.

On the other hand, it is not clear to what extent this will infect the BRIC countries.

The effects there may even be so limited that oil shortages will come into play again fairly soon - we will just have to wait to see.

I generally agree with Jeff but for an important missing element. The Wall Street finance is run by extremely complex computer models. The people who run these banks and their salesmen and managers do not understand them This massive,heavily interlinked counterparty relationships have created a system that defies all traditional notions of economics due to massive hedging. All risk is hedged, but all hedged in the same way. The system is extremely fragile to the ten sigma event, which is the one that the computer modelers didn't think of or stress test.

It was this whole computerized derivatives scheme that created the illusion that money could be generated endlessly through endless generation of credit. And the worst of it is that the Fed is part of the whole scheme.That's why Greenspan was so enamored of derivatives and said so many outrageous things.

Where I disagree is the recovery part. If you do the math you will see that there is no way to recover from this unimaginable amount of debt. Moreover, when the dollar finally collapses below the level of most other currencies, those trillions of foreign dollars will come rushing home a la Weimar Germany. I'm afraid a hyperinflationary depression is in the works.

Jeffvail,
Your comments about a financial mess, being a distraction from the real crisis( peak oil) rings true.
I challenge on your thesis that wind power only appears to have a high EROEI. Your link noted that costs for installing wind power in Texas has increased. One reason given is the cost of new transmission infrastructure, the other the increase in the cost of steel, a major input to wind turbines and towers.
Some of these costs are because wind power is new to Texas and growing very rapidly(25% per year). The rising costs of wind turbines is due to a shortage of manufacturing capacity not related to costs of energy.
The increased cost of steel is due to the rapid growth in China, putting pressures on iron ore and coal supplies. The EROEI is still 20:1, and not directly related to costs of NG or coal in the US which is still relatively inexpensive compared to oil prices. Wind power is competing with NG and coal generated electricity, not oil.
A financial crisis may have a more direct role in reducing the available funding of wind or solar energy( at least in US). This may also reduce the long term response in US to higher oil prices by reducing the replacement of low mpg vehicles. However, less expensive small cars often have higher fuel economy, so a mild recession may assist in increasing average mpg. A prolonged depression. however, would probably stop almost all new vehicle sales, but give a very big reduction in VMT.

There has been a disconnect between the actual price of some commodities and the paper (virtual) price. Examples are gold, silver and currently gasoline. With such a disconnect, supply of and demand for the actual product become irrelevant to the paper price. The price of refined product (gasoline) is in freefall on the financial markets currently, far lower than the actual wholesale price of gasoline. Gasoline is in short supply right now (see the top article re rationing) but you would never guess this looking at the financial market price.

I have to agree with you. The run up was, I think, justified given the fundamentals early in the year and what we saw with future supply in megaprojects, Russia, etc. When we got over 120-125, though, I thought things were going a little wacky. I expressed to my wife the wish that I had a trading account with a good bit of cash so I could short oil.

Now,I was one of those saying this wasn't speculation, but I may have been wrong about that. There might be more intentional and unintentional speculation driving things than I thought. Again, up to 125 I thought this. But after the run to 147 and the drop since? Something smells. Eau de Election, perhaps? A little PPT?

What has happened in the fundamentals, I think, is that the fundamentals have changed and a bit of overshoot on the drop. Demand destruction has been much-discussed here at TOD, but few of us really expected the degree of destruction we are seeing. Call it the Youtube Effect: People are watching all the economic doomsday predictions there, seeing it in their daily lives and seeing the bull excreted by BuCheney/Paulson, et al. about a "fundamentally strong" economy, etc., etc., and are scared out of their minds. And others had just been priced out of the market for energy and food. Something had to give.

I think that oil is fundamentally under-priced now, but that real demand destruction will catch up to that underpricing and, thus, oil will go lower. The question now is, is decline going tocatch up to demand destruction? Or, are those economies that are still growing going to continue to do so long enough to re-balance supply and demand and push prices back up?

Inquiring minds want to know...

Cheers

Grey Zone - while I agree with your main points (and have written often here that demand destruction would cause a large reversal in crude prices), demand for refined product has NOT dropped 42%, as prices for reformulated gasoline and heating oil have, from their peak 2 months ago. Unless stopping gas sales due to fear of gouging by the stations who are paying high cash basis is ubiqutous, I think you might see an increase in gasoline demand the next 2 wednesday reports due to hoarding, topping off, repairs etc. trumping loss of business from the hurricanes. But I suppose the futures markets often know something we do not -perhaps the pump shortages mean that 'demand' is still high but that 'actual consumption' dropped...

Historically there has been a 1 for 1 relationship in price elasticity of oil demand. Refined product as you say above has DROPPED in price, not risen. If this was all about demand destruction why wouldnt airlines and transport companies be trading down in kind....In the longer run drop in demand from deflationary credit unwind will exert a larger impact on oil prices - but right now, oil demand has hardly dropped commensurate with prices - this is deleveraging from financial firms pure and simple. AIG has HUGE short swap/long futures oil position on - if they go under oil gonna dump (unless they are out already - the futures will tell you when they are done)

This is all such a lesson that short term price signals don't give us much good information on long term health or lack thereof of a stock/commodity/system.

I wouldn't disagree with most of what you are saying.

I expect a credit implosion to lead to a deflationary depression, unless the government continues to try to prop up everyone, in which case it could be hyper-inflation. Now that the government has decided to step back, I think we may very well see the deflationary depression scenario unfold.

Regarding the price of oil, I think it will depend on how much of the world follows the US into a deflationary depression. Oil may not be priced in dollars any more, either.

Oil is rising in the sense that it is taking a bigger piece of people's incomes to buy a similar amount. This is likely to continue to be the case, because it is becoming more scarce and underlies most economic activity. People's incomes will drop as well in the depression. It is only a question of which resources become relatively more valuable. Oil producers will not stand by and let prices drop below the cost of production--US imports will be cut off before this happens.

I tend to agree. There is too much waste in the US (and that includes Bush and Cheney :)) that can be taken out of the system. The US uses twice as much oil/$GDP as does the UK,Germany and Japan.

There is a good likelihood that the US economy will contract (I think the current GDP deflator is understated and the US is probably in recession) and that means lower oil usage.

I think this means that demand for oil from the US will drop. When demand from the single biggest consumer of oil falls it means lower prices.

I also think that the climb to 147 from 100 in 6 months and when markets correct they will also swing too much in the opposite direction.

Srivathsa

I totally agree with what you said, the current oil price fall is clearly demand related. In addition, there is a good evidence that supply is still growing. I don't buy the speculation thesis either, there are little evidence in the data to support this, on the contrary data shows that investors in the future market are trend followers (price changes lead trader changes in position).

"Should be interesting to see how long foreigners continue to back US borrowings."

Well, I think that really is the question. Either they do, and we try to inflate our way out of this mess, or they don't, and then we go through a very painful deflationary consolidation, which I think everyone wants to avoid at all costs. My guess is that our foreign creditors will try to prop the dollar up as long as possible, but it may be beyond their control.