Monday, November 24, 2008

Bye Bye American Pie

The end of suburbia is near and almost no one gets it yet. The whole gigantic misallocation of national wealth has probably ended soon to be followed by the great national garage sale. My borther who lives in California's central valley told me that unemployment has jumped to 11 %
In Merced a town just north of him, 75% of all house sales are foreclosures and property values have dropped 50%. Even people not in foreclosure can't sell their houses unless they price them at foreclosure prices. Access to american dream boxes is only possible by private car and the charade in Washington of uber wealthy Auto CEOs's with tin cups was act 2 of The Great Depression Revisited, a play coming to your town soon. And the financing of all these boxes and BMWs was c/o the american banking dream which is in full retreat begging all the way down, with Citigroup the lucky reipient of today's cash for trash award. So now the two pillars of the american dream: cars and crapboxes are collapsing with congress falling over itself trying to keep the dream alive with more credit and debt. But I think the music has died. What most economists and politicians have failed to see is that in an environment of declining economic growth, assuming more long term debt makes no sense whatsover.The banks may have already figured this out. How will you pay back the debt if you lose your job? The only thing that keeps credit alive is the assumption that you can pay back the loan with every rising income and appreciating asset values. The music has died and those assumptions are dying with it. This great suburban build out of America with its sprawl of highways, crapboxes and big boxes, strip malls and office parks could only have happened with free energy. That party will be over soon. The sudden world delationary economic collapse has detroyed all asset classes, oil included, and slackening demand will buy us a few years until supply falls to meet demand and then we're back to the roller coaster again. With credit drying up, there will be no drill baby drill. We need renewable energy and infrastructure upgrades but it is beginning to look like we wont get very much change from the new administration. The names have changed but the pool of applicants come from the same" growth is good" school of economics. Obama's solutions look perilously close to Paulson and bush solutions. We don't need any more stimulus packages. We need savings, we need manufacturing jobs at home, we need local food production and rail transportation and taxation of wealth, not income but I don't see it happening until the depression worsens to a full scale collapse. Trying to keep John McCains's American Dream alive will ultimately bankrupt the country and lead to full scale default. We need real change, a new American Dream but I don't see it happening. We were lucky to elect a president who has intelligence and perhaps he will find a way to lead us to a new paradigm but if the quality of his advisors to date is any indication, I will remain skeptical. Gertrude Stein of "a rose is a rose is a rose..." fame summed up our current economic predicament :"There ain't no answer. There ain't gonna' be an answer. There never has been an answer. That's the answer."

Sunday, November 9, 2008

Swiss and Icelandic solutions


This is the quiet time in Jackson Hole. The motor homes have long since departed down the winding road in Hoback Canyon, the hotels are empty, the restaurants slow. The recession is starting to show. The local paper historically had pages of want ads to a few columns of rentals and that ratio has reversed with pages of rentals. Rents appear to be off 20%. There is talk of falloff in visitation of perhaps 25%, the local GM lot is full of unsold Suburbans and Tahoes. The ski area at Teton Village has spent a fortune replacing its old Tram with a new 100 passenger module made in Switzerland complete with new towers and buildings. I have no knowledge of the financing involved but it is a business model that caters to only the well to do and in a world where trillions of wealth has vaporized, one wonders how long that business model will continue.
A large real estate development, the Canyon Club has gone bankrupt and we are starting to see a few residential foreclosures.
Over in another snowy part of the world in Iceland, the unraveling continues. The NY Times ran an article last week highlighting layoffs and inflation in Reykjavik:
http://www.nytimes.com/2008/11/09/world/europe/09iceland.html?hp. Some of her generous neighbors: The Faroe Islands, Poland and Norway have sent offers of help but I have read no significant help from the US which is odd considering that the US military long used Iceland as a North Atlantic aircraft carrier. I landed there on numerous occasions when I wore the uniform. The Times article mentioned the fall of the Icelandic Krona from 65 to the dollar earlier this year to 130/dollar. On Yahoo finance the rate this morning was 225/dollar. I get the impression reading blogs and the Icelandic press that no one has been punished and the government is unsure what to do. There are allusions to the spoiled indolent youth who couldn't be bothered to work during the recent boom in jobs that required getting up early and going home tired such as agriculture and construction, jobs that went to laborers from Eastern Europe The layoffs have just started, but Iceland's employment safety net precludes immediate layoffs for 90 days after which unemployment kicks in. One wonders where the money to pay these benefits will come from with an insolvent government making payments in a plunging currency. Fortunately Iceland made some really sound decisions within the past 3 decades which will at least keep them warm and help them cope. The US could learn from their prescient planning. In the 1970's Iceland used imported coal for 3/4 of its energy yet in 2007 over 82% of its energy was met with hydro and geothermal sources. Iceland has no petroleum resources of its own yet 16% of its energy is met with imported oil , chiefly to power cars, trucks and buses and of course its fishing fleet. Paying for that oil in the krona will get increasingly expensive especially world oil prices rebound which they almost certainly will. I regard the current plunge in the world oil price as an unfortunate event which will impede US and world planning to lessen dependence upon petroleum. Renewable energy is more than competitive when oil is $150 barrel but with a drop of 50% in all the major fossil energy prices, the incentive to conserve and switch to renewable energy vanishes. I am not a conspiracy theorist but if I were a Middle East oil producer I would be doing exactly what they are doing. Keep oil high enough to continue the transfer of trillions of western wealth but not so high that those same western economies start switching to energy sources that might eventually end up bypassing their sun baked sandstorm paradises.The US citizenry is starting to get it. They for a while were using less petroleum, and the impending recession will continue that reduction in energy use, but the reduction is nowhere near enough to make a significant difference. Oil and gas supplies 65% of US energy and 16% of Iceland's energy. Iceland uses 25% of the Oil per capita that the US uses. If the US could get to that figure we would be using 5 million barrels per day instead of 20 million per day. At 5 million barrels per day we would be Energy Independent in oil. 5 million barrels per day is our domestic production. But 5 million barrels per day is still a lot of oil use compared to most of the rest of the world.The US could get to this number if it embarked upon massive electrification of its transportation as the Swiss did 70 years ago. Now here is an amazing statistic: The US today consumes 400 times the oil per capita that Switzerland consumed in WW2. We consume about 20 million barrels/day. If we were to consume at the rate of Switzerland in the second world war we would be consuming at a rate of 1/4 of 1 % or only 50,000 barrels per day! Could the US ever get to that figure? Of course not. But I think it could get to a consumption rate 100 times that figure if we made massive investment in electrification and upgrade of our electrical grid. Of course to get to that figure we would as a nation have to end our sprawling suburban missallocation of national wealth and begin to live and work locally. But that will have to be the subject of another blog.

Saturday, November 1, 2008

Weekend Update








The first winter snows have already arrived and we will see more fresh snow this weekend. The pond is beginning to freeze, a metaphor for the world economy.Icelandreview.com carried a recent survey that said 50% of Icelanders age 18-24 would consider emigrating compared to 33% aged 18-75 . These are stunning numbers especially when you consider that just a few years back Icelanders were considered among the planet's most wealthy and fortunate, at least on a per capita income level. Iceland must be suffering. But consider her neighbor Sweden especially if you are a Volvo Truck AG employee.In the 3rd quarter of 2007 Volvo trucks for export to Europe totaled 41,970. The 3rd quarter 2008 figures recently released total........are you ready for this.....?...155!!. That is not a misprint. Here is the link:
http://www.scoopit.co.nz/story.php?title=VOLVO_Truck_orders_decline_99-63_in_08-1.
Any you thought only US car makers were in trouble. More evidence comes from the Baltic Dry Shipping Index, which is a measure of world shipping costs. It is down 90% year to date which means it is 90% cheaper to ship cargo on the world's oceans now than it was on Jan 1st of this year. I have posted the apocalyptic news about the credit collapse in Eastern Europe and the news continues to be even bleaker. Even Italy which somehow escaped the toxic waste of US Subprime is sinking on world credit markets as the government is finding it harder to peddle its bonds compared to comparable Eurobonds. Italy has had to price its bonds 108 basis points(1.08%) higher to unload them.
Back in the US, Paulson's shameful and shameless bailout of garbage is picking up speed. More money is flowing to AIG and the 9 big banks who are going forward with enormous bonus plans for their executives and plans to buy out weaker rivals with our taxpayer money.That first bailout sure worked good. In the first 9 months of this year $108 billion was set aside for bonuses by those banks and Paulson just gave them $125 Billion. Whew! Just in the nick of time for Christmas. What will it take to get the attention of these clueless crooks? Mobs with torches and pitchforks marching on the Hamptons? With the exception of a few watchful congressmen like Henry Waxman, nothing is being done. My final item will get your attention if you are one of those sub prime or alt A borrowers. On the books is a proposal to offer lower interest fixed government mortgages but the bankers have slipped in one slight catch. If you take the bait you are offered the mortgage as a recourse loan. The mortgage is now not secured by the house as collateral but by the immortal soul of the borrower. If the borrower loses his job or health and defaults, he will owe that money for the rest of his days!! No one but no one should ever accept such an offer from these Faustian bankers. I would urge all voters in this country to vote their representatives out of office if they voted for TARP. My Wyoming senators voted against it and so it appears I will be voting Republican this year.

Friday, October 31, 2008

Why Jackson Hole needs to be worried

The worldwide economic and financial collapse could be coming soon to a town near you. In case you haven’t noticed the entire world is enveloped in an unprecedented deflationary collapse of equities, real estate and commodities. It is not just the magnitude and breadth of the collapse that is stunning, it is the rapidity of the meltdown, which is sweeping like a Santa Ana driven wildfire all over the world and the impact here could be severe. With the exception of Corpus Collosum’s Jonathan Schechter, I see very little mention in our local publications of how this collapse could impact Jackson Hole. In talking with friends and acquaintances, I have been stunned by the level of ignorance and insouciance from these very intelligent people about the factors causing this economic crisis and what consequences it might pose to our isolated alpine valley far from the madding crowds of Wall Street.. How did it happen? The proximate cause began within the last decade as deregulation of financial markets and a flood of cheap money from Al Greenspan’s Fed led to a credit and debt bonanza as mortgage brokers rushed to offer loans to anyone with a pulse. These loans were then repackaged as CDOs and other securities baptized by wink and nod credit rating agencies who reaped huge fees which were then marketed by poorly regulated investment banks to the entire world as high yield low risk securities virtually backed by quasi government agencies within the Federal Government. Just to be safe, the buyers utilized the insurance from CDS(credit default swaps) another entirely unregulated enterprise which purportedly insured these CDOs against default.. CDS’s were offered by scores of companies including the world’s largest insurance company, AIG. Unfortunately, the reserves were nowhere near sufficient to cover the risk of default. The amount of leverage to market these securities exploded as the Bush administration lifted leverage limits about 5 years ago. It was a classic bubble with asset prices rocketing skyward fueled by greater profits fueling more investment and borrowing by consumers as they borrowed on these assets to fuel yet more consumption and investment until “Poof!”. It ended. But the problem didn’t end there. The bankers and their political allies using a “shock doctrine” developed from the Iraq War shocked the congress into a sudden massive taxpayer bailout of the greedy incompetents who caused this fiasco, putting on yet more debt onto the American public which has seen the national debt double under the Republican Bush administration to over $10 trillion. And it is nowhere near over. These defaults and the ensuing deflation is rippling around the world in an interconnected world financial system of derivatives, credit and other forms of leveraged debt which is threatening to bring this world to its knees. The response here and abroad has been to flood world markets with more debt and credit to try to jumpstart a world economy dependent on debt and credit. But these solutions pose a huge risk of inflation longer term and even failure in the near term. Einstein once said” We can’t solve problems by using the same kind of thinking we used to create them”. So now we have a world tottering over the precipice of what could turn into a world deflationary depression. And yet there is one more piece to this puzzle of how and why these distant events may soon impact our lives here in Wyoming.

That is the almost certain reality of a peaking in world petroleum production. The International Energy Agency (IEA) will release its long awaited World Energy Outlook in a few weeks that may mark a huge change in the perceived availability of oil. Many governments and government entities and consulting firms, among them the USGS, CERA, the EIA, and energy officials in the UK have projected stable supplies out as far as 2030. The Financial Times of London recently leaked excerpts of this IEA paper, that suggest a significant decline in worldwide oil production with or without massive investment in exploration and infrastructure. The worldwide credit collapse is already curtailing such projects worldwide. Within as little as 2 to 5 years we may see production falling behind demand even with huge investment. That will mean big price increases for oil and likely all energy sources. These increases may start to occur just as the world is trying to work its way out of what could be a deep recession. Any way you slice it, the United States and the World are saddled with stalled growth and huge deficits and a good many of us will be suddenly poorer. This country and the world are almost certainly looking at rising unemployment and bankruptcies on a scale not seen since the great depression. So let’s get to the crux of this essay. How will it affect us here in Northwest Wyoming?

We are a region dependent upon discretionary spending and tourism. We make nothing of value and we are at the tail end of many supply chains. We cannot feed ourselves. We cannot even feed our subsidized elk herds. We are a long way from where our visitors live. We started to lose visitation when gasoline hit $4 a gallon and most people still had their homes, their jobs and some money. How many will come when that changes, when fuel costs climb to $5,$10 or $15 a gallon or worse becomes scarce or rationed? When those people begin to lose their jobs? When their 401K and IRA accounts don’t bounce back ?

I certainly have no idea how the current situation will play out but I take it as a given that this is a pause in our real estate boom and a real estate decline going forward seems inevitable. As a community I hope we can come together to do contingency planning for coping with what could be a pronged and deep recession and trying to design a valley economy and an even more livable community that is not so dependent upon wealthy visitors for its prosperity and survival.

Thursday, October 30, 2008

IEA World Energy Outlook


The International Energy Agency headquartered in Paris is an organization that looks at all aspects of world energy use. On November 12th they will release their widely anticipated World Energy Outlook report. It seems that the Financial Times in London yesterday leaked a portion of that report and the numbers if true are stunning.
    What the report allegedly says is that world petroleum production will be declining 9.1 %/year unless investments of at least $360 Billion /year
in exploration and infrastructure are made..........................................for the next 22 years!!!. That is almost $8 Trillion.
      Now get this next figure. If this level of investment occurs, the decline in world petroleum output  will only be 6.4%!
     The world has just entered a severe recession and these figures may be subject to revision I would assume but this is stunning data which directly contradicts projections from many world government agencies including   CERA(Cambridge Energy Research Associates) and the USGS in the US and projections from the UK which assume sufficient petroleum supplies out to 2030. In light of daily reports of financing difficulties being experienced by oil and gas producers world wide I think we can conclude that the annual decline rate will be from 6.4 to 9% per year for the foreseeable future. There are a number of oil fields coming on line within the next3 to 5 years which will offset these figures but there is little on the drawing board after that.
 I have included a  graph posted above from yesterdays Financial Times with a graph of world oil production going forward. I believe the data is from Chris Skrebowski who is a consulting editor for The Petroleum Review.
      The consequences of this magnitude of a drop in world production to the large industrialized economies could be severe. If ever there was a wake up call for a national energy plan to wean the US off imported oil, this is it.

Tuesday, October 28, 2008

What goes on in Iceland, does not stay in Iceland

I felt I was remiss not to share the beautiful currency of Iceland which at the moment is frozen for the purposes of international exchange.
Today's news from Iceland is the big jump in the national interest rate from their central bank from 12% to 18%. It was just 2 weeks ago that the rate was cut from 15.5 to 12%. This 50% increase is the result of conditions imposed on Iceland by the IMF who has tentatively offered $2 Billion to the besieged nation. Meanwhile Prime Minister Geir Haarde is on a tour of other Nordic capitals hat in hand seeking additional loans. Back in Reykjavik there is a display in a shopping mall of Icelandic "Terrorists" photographs: pictures of women and children in colorful native garb mocking Gordon Brown's use of terrorist legislation to freeze Icelandic assets in the UK. Icelandic citizens are pretty angry at what the nations incompetent and greedy bankers have done to their country. A particularly good column by guest columnist Hafdis Erala Hafsteinsdo'ttir in today's icelandreview Daily Life section shows the resentment of the government using the image of the ship of state Tjo'darsku'ta, to excuse their blundering. The image portrayed by the nation is that of a ship encountering an unforeseen storm. Hafdi's is having none of it nor is a good part of the nation that is increasingly demanding accountability for the mess that has led the country to the brink of bankruptcy.
Back on the continent the latest shoe to fall is the currency crisis involving the huge losses of European banks who had recklessly lent to emerging('submerging") markets in Asia, Latin America, and Eastern Europe and not so emerging nations like Iceland and Russia. And the losses are immense: an estimated $4.7 TRILLION with the bulk of the losses held by European banks. The losses in Switzerland are equivalent to 50% of the entire GNP of Switzerland. Austria with an estimated 85% of GNP was hit the hardest. But Germany, the UK, Sweden and Spain all have losses approaching 25% of their respective GNPs. Source: BIS. If there is any good news for the US, our losses to submerging markets only amount to about 4% of our GNP. The US has other ways to lose money. The list of the emerging markets perilously close to default is growing daily and IMF is shuttling from one capital to another imposing harsh terms as it doles out its billions. The IMF which amounts to what seems like an International Federal Reserve Bank is going through it's reserves of $200 Billion at a rapid clip and the big question is where will it obtain additional funds when the reserves are depleted. It's Faustian choice is drawing from donor nations or the printing press. In the midst of world deflation is the spectre of future world INflation. Neil Mellor at NY's Mellon Bank says that this is "biggest crisis the world has ever seen." Those are strong words and I hope Neil's hyperbole followed an evening of drowning his sorrows at a local pub. Meanwhile back on the campaign trail nary a word from erratic john who has long admitted he knows nothing about economics but that hasn't kept him from telling crowds he will bring the economy and the markets back if he's elected. Barak is finally starting to drop hints that sacrifice and pain may be in the nation's future. It's high time someone starts stating the obvious. Nowhere do we hear from our politicians the magnitude of the financial collapse which I have dubbed The Panic of 2008 and what it means to our nation's future. Maybe they know better. TS Eliot said "Mankind cannot stand very much reality."
I hope Barak can bring the nation to the table to discuss our dwindling options going forward, constrained as we are by shrinking resources and catastrophic debt. Sadly, all I see are solutions using the same way of thinking that got us to this precipice in the first place: more lending, more credit, more cheap printing press liquidity, more lack of oversight, more drilling, more energy independence, more infrastructure and more destruction of our children's financial future by larding on yet more debt and deficits. In the midst of the biggest housing collapse in the nation's history, McCain and others are calling for a bailout of profligate irresponsible house buyers who took the free money and bet the farm.....and lost. Responsible American homeowners will keep their homes. Bailing out the foolish and the overextended home buyers is ludicrous and all talk of such a bailout should stop. We must let real estate values revert to the mean. When they do, at least our children might be able to afford a home of their own someday. It's a zero sum game and it should be. What to do about the 18 million vacant houses in the US is any body's guess. Jim Kunstler in "The Long Emergency" called the huge American suburban housing build out with it's network of highways and ring beltways "the biggest misallocation of resources in the history of the world." John McCain calls it the American Dream. If you want a definition of "unsustainable" it's living in a distant 3000 square foot vinyl sided chipboard McMansion accessed only by automobile on failing bridges and crumbling highways. That is not a dream. It is an American nightmare and with soaring energy prices in our future, it is an unsustainable nightmare. We have dug a hole for ourselves and it's time to stop digging. The country will need good jobs, good housing, good transportation and good communities but with a new model . We need a national inventory of critical transportation hubs and links, critical housing stock and critical food growing areas and resource and energy regions. Perhaps it could be modeled after the Pentagon base closing model. Some highways and airports and suburbs will have to be abandoned or downscaled for different uses. The Interstate corridors offer an obvious route for a national Interstate Electrified Rail network which would be vastly cheaper to build and maintain than the sprawling interstate concrete and asphalt highway system. We will always have steel. We are running out of cheap asphalt very rapidly. Fortunately, we will always have gravel. Moving cargo by rail is significantly cheaper than by truck per ton mile and rail networks and steel bridges are far less expensive to build than huge fragile short lifespan rebar and concrete highway bridges which are destroyed in only a matter of years by salt and heavy trucks. That's my vision for the future for the US. It will require a massive upgrade of the electrical grid and changing how we travel and live and work and eat but what we have now wont work very well for much longer. I hope we can make this change. Don't ask me where we will get the money. This little financial thing kinda caught me by surprise.
The picture to the right is my wife Karlene in the Rome terminal by the Eurostar.
And finally click on the youtube link to hear a great blues singer from Iceland:Lovisa Sigrunadottir singing her hit "please don't hate me".
http://www.gayice.is/news/243-lay-low

Monday, October 27, 2008

Auschwitz Guards

You might think this photo a bizarre image to be in a blog dealing with Peak Oil and striving toward sustainability. But it was the quote from a reader of Richard Heinberg in the Post Carbon Institute web site that inspired me. I had talked to family and friends this weekend concerning who was culpable in this ongoing tragicomedy I have chosen to call the Panic of 2008. As I have previously stated, we must punish the perpetrators who not only have destroyed our American economy, but the the world's economy by their greed, fraud and incompetence. I don't think we should close Guantanamo in Cuba yet. The blog respondent said:" Just like the Auschwitz guards: Let them be known. Let them be hated. Let them be hunted for the remaining days of their miserable lives."
A bit harsh perhaps. But not harsh enough. Bush never could find Osama but I'll bet Henry Paulson and his gaggle of rogues will be easy to track down. In September of 2001 with twisted girders and toxic dust in the streets of NY, we had a president who offered a useful response for the nation:SHOP!
A national united response to a horrific terrorist act should be to go shopping?
Any fence sitters out there who had any doubt about whether America was on the right track or not were no longer in doubt. And you know what? We did just that. And now we sit here in the United States contemplating the rubble of our economy wondering how all this happened and why everybody is so mad at us. Naomi Klein has a best seller entitle "shock Doctrine:The rise of disaster capitalism" which has been a recent best seller which certainly describes today's events.
And it will take a huge shock to get this country moving away from a Las Vegas mentality of something-for-nothing to a society where honest work that produces products of real value. But in the meanwhile we will have to figure out what we are going to do with 18 million vacant homes, $10 trillion+ of public debt, $10 trillion of commercial debt, $2.6 trillion of credit card debt and unfunded debt from medicare and SS debt of over $42 trillion. Over $13,7 trillion of that debt is owed to foreign lenders. And the news over the weekend from China wasn't exactly encouraging. The communist online newspaper the People'sDaily called for banishing the US dollar from direct trade relations and relying upon local currency. And over across the Taiwan Straits in the non communist china, Taiwan government regulators were calling on national insurance companies to reduce government exposure to US agency debt such as Fannie and Freddy which was $55 billion in 2007. As I've repeated here several times, the real thing to fear is not falling real estate values or a drop in your 401K or $5 gas. The real thing to fear is when the world stops buying our debt. The financial bobbleheads in Bobbleonia rend their garments reminding us what a crisis it is when banks wont lend to each other. What do you think will happen when no countries will loan to Uncle Sam? Does the word "default" come to mind? How about insolvency? Could it happen here? Could this increasingly interrelated tightly globalized net work within a complex society collapse? Of course it could. It's happened to complex societies for millennia. A society built on out of control consumption of resources in a finite world is going to collapse eventually. Whether the collapse begins in 2008 or 2108 is in some ways irrelevant. At some point we as a nation will have to realize we must stop over consuming, over sprawling and overeating and decide that there is no such thing as something for nothing. As a nation we must live within our means, develop tight local communities and use far less energy in transportation, in housing, in manufacturing, and in food production. The unspoken US goal of controlling the world's energy by military occupation and invasions must cease before we or the world is destroyed.
Meanwhile over it Reykjavik it has been a slow news day except for some flag burnings and demands to sack the bankers and a good part of the government. The good news was that the snow is early and heavy. It is shaping up as a good ski year.

Friday, October 24, 2008

Speed and Complexity



I continue to study previous panics and depressions and the search for pictures to illustrate this blog has been an education. There is a paucity of images from depressions previous to the 1930’s, which limits my choices. It is the sheer pace of economic events that astound, not so much the actual events themselves. I must now veer off the path of pattern comparisons of the Panic of 2008 with other panics and today focus on what I see as a great danger and I will be wandering in areas out of my realm of competence into for example systems theory, economics and networks. Simply put I think the two greatest risks to our economic and financial system is the near instantaneous pace at which information is exchanged, and the complexity of the components. Systems theory began almost 100 years ago as a way to try to explain the interrelationships within biological organisms. It developed legs and began to be utilized to explain non-biological systems and it spawned many related disciplines and in turn was influenced by them. A biological organism has many systems. Let us take the example of the cardiovascular system. There are redundancies built into this system. In the heart for example oxygen can be carried to the same area of heart muscle by several blood vessels. It has redundancy. If one vessel becomes blocked by a plaque or clot, the redundant vessel will carry the blood and the heart muscle will not be damaged. In this sense, the cardiovascular system is not optimized. It is not efficient. But by virtue of redundancy, the heart has protection from failure. A network is a collection of nodes linked together by pathways. If there is just one pathway from one node to another, failure of that pathway is catastrophic much the same way if one city has only one road to an adjacent city, failure of that road is catastrophic to transport. It is more efficient to have just one road. If you need more transport density, it is more efficient to build one very large multilane fast road than a myriad of little roads but failure of the one optimized efficient road collapses the system. So system speed trumps system stability. Our current economic system is a tightly coupled, optimized and interrelated network of financial nodes linked by high-speed connections. Money isn't money the way it was in 1930 or 1873. Money and capital is an abstraction, a digital abstraction. Mortgages and credit and debt are abstractions. George Bailey doesn't hold your mortgage at the Building and Loan as was portrayed in the Capra movie It's a wonderful life. Everyone knows by now what happens to mortgages. They are sliced and diced and bundled into securities that might pass thru Freddy and Fannie and be sold to the Norwegian Teacher's Union. That mortgage ahs become not a obligation to pay off a debt but a security, much like a stock but it is a type of structured investment vehicle. I am using this example to show how the mortgage market is now very much more complex than it was in the time of George Bailey. It's not efficient to hold millions of mortgages in thousands of Building and Loans when Goldman Sachs can do the whole thing with a few dozen servers and a few thousand computers. But in this process a simple system has been optimized and made more complex and more fragile. It is more fragile for a variety of reasons among them cybernetic. Cybernetics is a broad field but in a general sense studies structure and regulation in systems. The feedback loop is one of those regulatory mechanisms. By shipping and slicing and packaging mortgages, a hugely important feed back loop is lost. In fact one of the most peculiar and absurd features of this CDO market has been the discovery by lawyers that finding who actually holds the mortgage can be impossible. So say the lawyers and the judges in defending some clients, "You want to foreclose? Produce the Mortgage!" In many cases this has brought the foreclosure process to a standstill.

Banking and finance has become globalized and financial transactions and information is exchanged worldwide at the speed of light. It is a fast and complex system and it is layered with risk derivatives from interest rate and currency derivatives to credit default swaps(CDS) and many others totaling in the trillions of dollars! None of which would have been possible without high-speed computers and acres of server farms all over the world. This is not George Bailey’s world. It took a long time for a bank run to develop at the Building and Loan. Now collapse of banks and countries can occur almost in the blink of an eye. I contend that our next depression will be blazing fast. In 1929 the stock market crashed. It took years for the bottom to be reached in 1932. People had time to prepare and consider their options. In the optimized linked globalized economy of today, collapse could be very rapid, much like a tsunami. . The water recedes and villagers rush out to see what is happening and suddenly a wave appears on the horizon and all are swept away.

I do not of course know how this recession will play out and whether it will progress to a depression but I do contend that we have an overly complex world financial system, which is teetering, and if collapse ensues, it could be very rapid.

Iceland has just concluded the tenth annual Iceland airwaves music festival that had to be a welcome break for that besieged nation. But Iceland’s problems are in no way unique and as someone said, “What happens in Iceland does not stay in Iceland.”

Similar fires are popping up seemingly everywhere: Belarus, Ukraine, the Baltic, Pakistan, and Argentina. The list keeps growing. IMF firefighters will be busy.

Now as the natives in SE Alaska used to say “I jokes……”

What is the worst hit sector in employment in Iceland? Bank robbers.

Thursday, October 23, 2008

How did this happen?

It should be obvious by now that I am a fan of the haunting photographs of Dorthea Lange who chronicled the people of the Great Depression. I have spent the past week researching the causes of the previous depressions and panics looking for patterns that might offer clues and perhaps help in dealing with the economic calamity unfolding all around us. I have derived some insights which I would like to share with my readers. I have some tentative conclusions although "conclusion" may be a bit too strong a word. Conclusions imply a measure of certainty which I lack. I am on a journey of discovery. My conclusions thus far are 1. Most people are clueless as to how we arrived to this predicament and I include most of the financial media, our governmental and corporate leaders and most economic thinkers. 2. Most of the solutions proposed are likely to aggravate, delay and ultimately worsen the crisis. I include in this all measures exchanging something of value, ie., treasury securities for trash eg., toxic mortgage debt, CDS, CDOs and a host of other derivatives. The ultimate payoff for us and our children is likely to be prolonged and sustained inflation and ultimately failure and collapse of our government and our economy. I have scoured the library and the Internet researching panics and depressions going back to 1837 and looking for patterns of similarity and dissimilarity to today's panic which I shall hereafter refer to as "The Panic of 2008." In the blogs to follow, I will attempt to analyze some of the features common to these previous depressions with the conditions we are experiencing today. Writing about an issue enhances my understanding of the issue and I hope my analysis will shed some light on a very dismal subject.
Meanwhile over in Iceland life goes on. The IMF might, just might offer a loan of $5 or $6 billion in aid and the UK has tentatively offered a loan of $3 billion to Iceland to try to repay some of the UK savers and municipalities who deposited pounds in Icesave accounts. It's a peculiar offer as I see it. The UK prints up $3 billion in paper with a picture of the Queen and gives them to UKers and then sends the bill to Reykjavik. I have no idea of the terms and I can only assume this offer if that is what you call it, will go over like a a lead haddock. It hearkens back to the cod wars. I haven't seen anything on what the Rooskies are up to. I have been reading as I said previously, online publications and interesting blogs posted in English.Reykjavik Harbor Watch by ECS is thoughtful and my latest discovery is Jessica B. Her URL is:
http://jrbowe.blogspot.com/. She writes in an entertaining fashion and the human aspects of the problem are everywhere in evidence. One final article is rather long and deals in exquisite detail
about what it is like to fall into poverty. It is poignant. It is written by John Dolan and is entitled: "5 pieces of advice for the new paupers. The URL:
http://www.alternet.org/story/102992/5_pieces_of_advice_for_the_new_paupers/.

Thursday, October 16, 2008

World Food Day

Today is UN World Food Day and my thoughts have drifted to concern about food availability and production amidst the world financial nightmare swirling around us. Yesterday I happened to be doing some necessary but distasteful deferred maintenance on my septic system and yet another metaphor came to mind of the offal and scat being flushed into my tank from the mouths of our contemptible leaders, no.......our handlers who daily deceive us and obfuscate the real issues facing our nation. Hank Paulson , the current leader of the pack told us today that hedge funds wont "initially" get federal aid. That's reasuring. Are the unregulated hedge funds whose leveraged largely untaxed trading strategies contributed to the current collapse in equities and the oil futures going to be feeding at the bailout trough too? What planet am I on? Is there no stopping this corporate juggernaut to re- inflate a debt-bloated failed market? They persist in telling us it is a liquidity squeeze, a credit crisis, but anyone with the brain of a prairie dog knows that it is in fact A DEBT CRISIS. We are daily informed by all manner of bankers, CEOs, and politicians that we "must" take these measures to save our economies. It is obvious that they are doing it to save their power and their wealth which their greed has destroyed. And the partial nationalization of the banks has done little to change their business model of privatizing the profits and socializing the risk. If this Republican administration is going to socialize the risks, it can darn well socialize the profits, if there ever are to be any. And "Plumber Joe" from last nights presidential debate was unhappy with Obama's tax plan which seemed to him "socialist." Joe! Wake up! The cowboy capitalists are taking the lowing herd of Americans from unregulated capitalism to unregulated socialism right under your nose. If they can't fuel their greed one way, they'll try another. Here in the Dammerung of our American Dream, a story from Bloomberg about a lap dancer fallen on hard times in Las Vegas added a surreal touch:
http://www.bloomberg.com/apps/news?pid=20601109&sid=a5I2yxVie96I&refer=home.
Good luck baby as you face a diminishing supply of laps in your desert paradise. Meanwhile back in Reykjavik, nothing catastrophic to relate. Icelandreview.com continues to run columns from worried islanders who are angry at billionaire bankers and Gordon Brown except that the prime minister Geir H. Haarde is thinking about filling a law suit against Gordon Brown since Gordon is suing Iceland. Geir also urged his countrymen to cope by going fishing. Our leader told us to go shopping. Iceland is looking better and better. ECS's blog Reykjavik Harbor Watch has posted a huge collection of her photographs on her blog site in an older post which soothed the turmoil in my brain this morning as I listened to the most beautiful operatic duet ever created: Jussi Bjorling singing "Au Fond du Temple Saint" from Bizet's Opera Le Pecheur de perles, the so called pearl fisher duet. If there is a better duet in the world, I'd sure like to hear it. Happy World Food Day. Dorthea Lange's haunting photographs from the Depression may become regular images on this blog.

Wednesday, October 15, 2008

Another day, another krona


The market opened today finally in Reykjavik and it was a road runner moment....down 77%. In the Hekla auto showroom, the nation's largest, not a car to be seen. The Central Bank lowered interest rates, it's so called policy rate from 15.5 to 12%. That should give a boost to the currency which still isn't being traded except under unusual circumstance. I read that income taxes will likely be raised. The young lady to the right is in the country's famous Blue Lagoon, a giant hot spring.The vapor over her head is the Icelandic Krona evaporating. I have been scouring the internet for online communique's from the beautiful country and some of the posts are almost heartrending even amid the banking delamination. Icelandonline and http://reykjavikharbor.blogspot.com/ are two samples of what is really going on away from the national media. As you would expect, folks are pretty sore but as befits a country of stoic sturdy souls, no one is in a panic. The poor folks who took out car and house mortgages in Euros because the interest rates were lower are looking at huge resets on their payments and barring a miracle, many expect to lose their homes and cars. Many have lost all their savings. Their prime minister on TV seems stolid and calm, a far cry from the jerky A.D.D spectacle of bush every time he steps up to the mike. ECS, a blogger in Reykjavik of course voices the common metaphor of Iceland being a canary in a coal mine, showing the rest of the world its possible future. It does look like Hungary, Ukraine and some of the former Soviet Republics may be facing a similar fate. The S&P is down 6.5% as I speak and oil is off as well which means we can now go out and fire up our Hummer again for a trip to the convenience mart for a pack of Camels. The bad news is that we just moved up Peak Oil a little closer. I have faith that the Icelanders will get through this. I don't have the same faith in my countrymen.

Tuesday, October 14, 2008

Peak Oil and M King Hubbert


The concept of Peak Oil is one of the core subjects of this blog and it is high time to introduce the Father of Peak oil to my reader(s) along with a simplified curve of
domestic oil production. World oil production curves are widely available from the internet although they are often laden with data and may be hard to read to a new observer. Wikipedia is a good place to start. If you are a mexican peasant, your home would likely have a picture of Jesus Christ prominently displayed . If you are a recent convert to peak oil, you need M King on your wall. He be the man. He was a Shell geologist who in 1957 at a petroleum meeting in Texas showed a curve of oil exploration and production which he had derived using statistical methodology which purported to show that oil was a soon to be depleting resource. He predicted US production would peak in 1970 and world production would peak in the first decade of the 21st century. He was vilified, criticized and largely ignored not only by oil companies but by federal agencies and world governments. But his predictions have been uncannily accurate. In fact US production of oil DID peak in 1970 and has steadily fallen even despite the discovery of the huge field in Prudoe Bay. This month US crude oil production will fall below 5 million barrels per day(mbpd) for the first time since the late 1940's. Some of the recent decline is due to shut in production from the Gulf of Mexico platforms but the number is stunning never the less. US consumption has fallen a bit over 1 mbpd from last year due to slackening demand but we are still at about 20 mbpd.(http://www.eia.doe.gov/basics/quickoil.html). Transportation accounts for 70% of this number. Enough figures. The reason I gave this history is to provide background for my next subject. How will the reality of Peak Oil change and be changed by the current world turmoil in the financial markets? My thesis is that if the peak oil depletion curve is accurate, governments and people will need time to make adjustments to their economies and their lives. If the production/depletion curve is steep on the backside, time will be limited to make needed changes. If the curve is more gradual as Daniel Yergin of CERA in Massachusetts contends, we may have some time. And here you run into a swamp of facts and opinions. Oil reserves are there. They're not there. Reserves are understated. They're overstated. High prices will result in increased production. High prices won't make any difference. Yesterday Richard Leary in the Huffingtonpost wrote an article on the cost of Saudi(KSA) oil production. Saudi minister Ali al-Nasimi said in 1999 that the all inclusive cost was less than $1.50. What is the figure now? Who knows. The Ghawar field, the world's largest has been producing more than 5 mbpd and is now allegedly is in decline with its output supported by expensive injection of pressurized salt water and the KSA does not allow auditing of its reserves or its production figures. Leary stated KSA deliberately understates its reserves. Matt Simmons in Texas who is a world's expert in oil reserves and production thinks the opposite. Who to believe? There is no way to know. What is known is that there are very few producing countries who are increasing production and for the United States our main suppliers have been Canada, Mexico, Venezuela, and the middle east, chiefly KSA. Cantarell, the huge field in Mexico is in steep decline and Mexico could become an importer of oil in as soon as 3 or 4 years. Canada has been our leading supplier and has ample reserves of bitumen in its Athabaskan Tar Sands but net energy factors necessitate a price north of $80/barrel to be marginally economical. Venezuela and the US have had terrible diplomatic relations in the bush administration and now Hugo Chavez has been striking up exclusive arrangements with China and that source could dry up quickly.New suppliers such as Brazil may step up to the plate but now I must move to the central thrust of this post. How will the recession and credit contraction affect oil production? On the one hand reduced demand here and abroad would seem to ease what was becoming a supply demand squeeze. There may be enough oil to go around, maybe even a good surplus. That could be bearish for oil prices and in fact it already has been. But reduced demand and slumping prices mean less incentive to drill and explore and refine so there is less urgency to increase supply and that is already starting to occur. in a variety of locations for a variety of reasons. The biggest problem is that new oil tends to be a lot more expensive to find and produce and low oil prices mean we will be using up the old and cheap to produce oil. There is no reason a country will sell oil at $80 if their marginal cost of a new barrel is $80. These countries have gotten addicted to oil revenues to fund their domestic consumption and it stands to reason that they will want to keep oil as high as they can and they have the ability to do just that. The world will need oil, recession or not but the OPEC producers will also have to belt tighten and where is the logical place to do that? Delay new projects which will delay new production but meanwhile the old fields will continue to deplete. If and when oil demand picks up, new production may lag and prices will go through the roof as oil consumers scramble for supply. This may have the effect of making the curve of depletion more steep and consequences for economies more severe. My conclusion is that Peak Oil meant that oil production would at some point go into terminal decline but that the credit and financial collapse may mean that it may come sooner than expected and be far worse for the US than anyone expected. If the US deficit soars, inflation is sure to follow, the dollar may collapse and with it the incentive of our chief trading partners to fund these soaring deficits by purchasing our agency debt and treasury securities. The American people do not get it, clearly McCain does not get it and I do not know if Obama gets it. Much of the congress mirrors America generally, so they don't get it. Eventually they will when they realize that our gigantic debt has hemmed us in and constrained our options. Some people like Jim Kunstler(kunstler.com) predict social unrest and regional collapse as our happy motoring and suburban sprawl model collapses along with the economy. We have seen in this election the intolerant Fascist underbelly of this country at Sara Palin and McCain rallies and a mob can quickly get out of hand. The American people are armed like Yemeni and their economic suffering could turn vengeful They may direct their anger at bankers, politicians and corporate crooks or they may lynch minorities and illegal aliens. If it ever comes to this our streets may fill up with National Guard and Army checkpoints and curfews and start to look like Baghdad. One of the reasons I spend so much time talking about Iceland is that I think it may be a model of what may happen elsewhere, and perhaps even here. We will pick up their story tomorrow perhaps.

Sunday, October 12, 2008

The calm before the storm


I am a volunteer weather observer for the cocorahs network. We picked up 6.5" here last night and the highest total amount our local Wyoming stations seems to be 15" in Thermopolis and Absarokee. Billings MT had 22". Still snowing with a winter storm warning still in effect. I thought the image of a guillotine seemed appropriate to the punishment we would like to mete out to the rogues gallery of incompetents, neocons and financial physicists who have brought us to this point. I would like to include a link to a wonderfully bright and compassionate blogger who has composed a fairy tale of the past financial events which is probably an instant classic. He is Timothy Kailing and he has some experience wring children's stories:http://seekingalpha.com/author/timothy-d-kailing. Scroll to "A grimm bedtime story." Mike Fitzsimmons who is a fellow climber and writes with clarity that few can emulate has a recent summary of shrub and the fallacy of the conservative republican neocon mantra. He of course concludes that it is a betrayal of conservatism. It is something perilously close to Fascism. I urge all of you to read this recent blog.
http://thefitzman.blogspot.com/
I did this post partly in response to a request from my brother who wanted names, places and dates. He is not happy.
The blogosphere is aflame with opinion as the server farms add backup cooling to cope with the workload. Up in Canada Stoneleigh and her fellow blogger Illargi on Automaticearth have some sensible perspective on where we go from here. And if you still have time, Jeremy Grantham and Nouriel Roubini give more scholarly background which has been entirely accurate for some years on what would happen. As for me, I have been consumed by the drama going on in Iceland as you know. I have been listening to the receiva.com radio portal(37 stations), the public radio station in Reykjavik and streaming web TV when it is broadcasting. Google appropriately if you are interested. You will need to be fluent in Icelandic of course which I am not but the emotion in their voices can be stirring. They have some great radio stations which stoop to english on occasion. The streaming TV from Europe Scandinavia and Ireland especially is great. I did hear that there will be a huge jump in homes with negative equity there. No surprise. When the krona starts trading again it will be interesting how it trades with the Euro. With all the turmoil in European Banking markets I sold my euro positions and I think the jury is out on whether European Unity can survive this Tsunami. I'm only somewhat confident in the Swiss Franc, the Yen and temporarily at least the dollar. We still don't know any specifics from the G-6 + Italy meeting here this weekend and the keystone cops will move their jalopy over to the continent next week. I am guardedly pessimistic so far. So far the so called solutions have involved attempted bailouts and partial nationalization of the banks and financial institutions and the rest of the plutocracy that got us here in the first place. They are clinging to their wealth and power with the strength in their fingernails but I fear in the end it will be to no avail. Of course the bulk of the blame goes to the Republican Party and shrub and the gang who destroyed America and the pusilanimous, pathetic dems who signed off whining all the way. The attempt to restore the status quo by trying to return debt and credit is doomed in the long term although it may temporarily get our debt junkie economy back on its feet. Bush exhorted us to spend and consume after 911 just as Barney "google" Frank, Schumer and the rest of these criminals are frantically trying to get us back on our consumption treadmill. But it wont work. At some point our overseas trading partners will realize that the gig is up and stop buying TBill s and agency debt. If and when that happens, only then you will know that the Party is over and we will have to go back to square one and rebuild our banks and our economy. We will have to start saving as Americans to fund what we need to sustain a semblance of a future. We will become more local as James Taylor says in a recent Rolling Stone interview. We will consume less, much less. We will travel much less as Peak Oil issues become dominant in how we consume energy. The drop in worldwide and national oil consumption may buy us some time on the backside of Hubbert's Curve
http://en.wikipedia.org/wiki/Hubbert_peak_theory
perhaps providing some attenuation to the looming supply demand issues but there may be delay and cancellation of projects which will reduce and delay supply and negate that attenuation. There may be bankruptcy of producers and suppliers as their credit dries up. My real fear beyond the world walking away from funding our deficit is the return of the brownshirts and the sound of jackboots in the streets. If you heard Sarah Palins inciting of the mob the other day, you heard some in the audience yelling "traitor!" and "kill them!" "Kill him" referring to Barak Obama. Dupont and JP Morgan attempted to try to raise an army in the 30's and depose FDR which failed when an army general revealed the plot to FDR. The same could happen here if the rage in the unwashed uneducated hating masses builds. I fear for our immigrants, legal and illegal as they will be blamed and I pray that they will return to their countrries while they still can. YOYO and stay tuned.

Saturday, October 11, 2008

Shrub's Big Weekend




Well, the G-7 is meeting in DC with shrub and the rest of the cops. The G-7 are ministers from the US, Japan, Canada, Germany, France, Britain and..........Italy? Are you kidding me. How did they get in there? While the world is holding their breath, they are putting out announcements that they will do what's necessary to save the world from this financial death asteroid. Like what, for example? Details are sketchy but Paulson and the shrub have just about shot their wad nationalizing everything in sight.It's gotten so bad that Hugo of the jungle and his press are calling bush "Comrade Bush," and holding their tummies rolling in the aisles but they might want to keep an eye on their national coffers with oil falling through the floor. The time to enjoy their Schadenfreude may be short lived. Ditto Judo instructor Putin. The markets are signaling their lack of confidence with Washington selling everything in sight. Monday on the trading floors should be interesting. I'll tell you what my level of confidence is. My wife and I are taking a trip to the grocer to stock up on 3 months of staples. We are at the tail end of the supply chain here in this high alpine valley and if the grocer's credit dries up I don't think I could stomach Meals ready to eat brought in by my our Wyoming national guard who is over in Iraq anyway. Gordon Brown has seized Iceland's financial assets in England using a statute designed for terrorists. That is new way to think of bankers. Probably very accurate. You can imagine how that went over in Reykjavik. We're under a winter storm warning. The wind is howling and the snow is flying with 2 to 3 feet predicted over our neighboring Wind River and Gros Ventre Mountains. Quite a metaphor for what's going on in DC and New York.

Friday, October 10, 2008

Good Morning America




This is the captain speaking! Everybody to the poop deck where the band has assembled. They would like to play for you a few songs. Apparently we have hit something. Maestro: Auld Lang Syne!
And What a voyage this has been.. Reminds me of the old road runner cartoons where he runs off the cliff but doesn't drop until he looks down, and then he drops. The dow was down 5% right after the bell this morning in a good road runner impersonation. Meanwhile back in Reykjavik..............
The Prime Minisher Geir Harde addressed the nation a few days ago and warned of national bankruptcy. Their on again off again purchase of the banks is definitely on. The biggest bank Kaupthing has been nationalized and the Chairman of Kaupthing Sigudur Einarsson(great names!) is really pissed. Yesterday he accused the government of ruining the country's financial system. Now all three banks, Kaupthing, Glitnir and Landsbanki are owned by the guvment. I checked on some numbers. The liability of Iceland's banks is $61 billion. There are about 310,000 Icelanders give or take a few blondes. Let's do the math. $61 bil divided by 310,000 blondes is $196,774 owed by every man, woman and munchkin.Whoa!
One of the reasons I am so fascinated by Iceland's story is that I happen to be reading Jared Diamond's book "Collapse" in which he in very long winded fashion is writing about the fall of different world civilizations and he has been championing Iceland's fascinating history of near collapse to top of the heap as measured by per capita income and "livability",whatever that means.. The book was written in 2005. It's a great story and I can't wait for the DVD. In Reykjavik the blondes are crying in their cafe' but over in another Celtic stronghold, tonyblairland, people are fuming. It seems that Kaupthing Bank had been paying high interest on savings accounts and a lot of brits had put their savings in these ICESAVE accounts including some local governments in England and Wales. http://www.moneyweek.com/personal-finance/which-bank-will-give-you-52-on-your-savings.aspx
As I write, a lot of these authorities are on their way to Reykjavik to kick some butt. And the ironies just keep rolling in. Iceland was one of the founding members of NATO and where have they been begging? Yup. Putinland. Old Black belt himself. I will continue to cover this compelling story because it's on a scale I can understand, real Shakespearean tragicomedy.
Over on the continent The ECB has been firing up helicopters and Volvo front end loaders dumping Euros into banks, $50 Billion euros 2 days ago and $100 Billion yesterday. Nada.
And in bushville the Keytone Cops are still running around madly trying one so far futile solution after the other. The banks are all in free fall, Insurance got hit yesterday big time and with everybody lining up at the federal trough the deficit could hit $2 trillion by early next year or sooner. Some of those insurance companies have big medical insurance arms. What happens when the health insurance business starts to sink beneath the waves? MY son who works for Dell got a 150% premium increase yesterday from Blue Cross. Hmmmm..... I'm not an economist but the whole process seems so puzzling.It seems some companies have lots of cash on hand. They make payroll, buy what they need to keep afloat with no problem. Companies like Microsoft, Exxon, Wallmart. And others have to pay all their bills with the commercial paper market which as you know is "frozen." No credit. So the guvment needs to unfreeze it. So it gives money from Bernanke's Chinook helicopter to the banks and the commercial paper market and nothing happens. The bankers rush back to their Manhattan apartments and stuff it under the mattress. Now what? I think it might be a good time to bring back some of those nice 19 year old national guard troops from Iraq and march them up to Goldman Sachs and JP Morgan and point their laser sighted rifles at the bankers and say"Lend!"
But I have a wee little voice that is whispering in my ear which is saying..."Let see. All this lending and credit is what got us to this point in the first place. So the solution is more lending and more credit?..... How does that work? Isn't that like going out to the poor junkie in the street who has been days without his fix and giving him a packet of white powder and saying "Here. Take this junk. You'll feel a lot better." As I say. I'm not an economist.
I see this morning that this market plunge is the biggest year to date drop in the history of the S&P. Bigger than the 1930's, bigger than 1974 and 1987 and 2002. And the bobbleheads keep insisting that all this depression talk is nonsense. Even plump avuncular Alan Sloan of Fortune who I really like with his goofy crackly voice told Suzy Garob on Nightly Business Report that there was no chance of a depression. This is the same Suzy who has to ask every single guest if we are having a recession. Bobble bobble, gobble, gobble.

Thursday, October 9, 2008

Paul Kedrosky

I have another economic author to introduce. He is Paul Kedrosky who has an impressive resume who writes clearly and concisely. He has a post on the seeking alpha investment website which I urge readers to examine. He is recapitulating much of what I have written in past posts regarding the debt to GDP issue. It is Thursday morning and it looks like snow here in Jackson Hole with a winter storm warning tonight. The storm going on over in Iceland continues to worsen and its leaders are frantically passing the hat to anyone who will listen including the IMF and Russia. Trading in the Icelandic Krona has ceased. Icelands equity markets are closed until at least next week. Things are not much better over in Putinland. Their equity markets seem to also have been closed more often than they have been open and though the oil boom has given them a half of trillion in foreign currency reserves they are falling with the rest of us and now a report on Bloomberg this morning on Siberian grain production falling and debt problems in their agricultural sector is alarming. The suddenness and rapidity of this economic asteroid could only have occurred with the aid of computers and the internet and meanwhile the keystone cops over in bushville race around crashing into each other with firehoses against a backdrop of the resurgent SNL and the amazing Tina Fey. Interesting times here at what is looking like the end of empire. Here is Paul's article in seekingalpha:
http://seekingalpha.com/article/99090-the-beginning-of-the-endgame-for-monetary-policy-redux

Wednesday, October 8, 2008

Cargo Bikes

I guess I will keep doing daily posts as long as this financial hurricane continues on its relentless path into, through and over our lives. The presidential debates were of low import with McCain wanted to Federalize bad mortgages of all stripes which would be trillions not billions and he will apparently do that by cutting taxes. Obama gave me a glimmer of hope when he listed energy as a top priority. The markets are still tanking everywhere and now a moment of silence for poor Iceland, the land of geothermal city heat, pretty women and volcanoes. Their debt to GDP ratio of 12:1 exceeds the current runner up, good ole US of A at only 3.5:1. Either the country of some or all of its banks may default as early as this week. So it's time for a cheery link from the LA Times:Cargobikes! Where can I get one? YOYO
http://latimesblogs.latimes.com/bottleneck/2008/09/weve-posted-ple.html

Tuesday, October 7, 2008

Meet Professor Daly

Professor Herman Daly is a well known economist who wrote a recent post on theoildrum.com dealing with among other things steady state economics, a concept of real wealth and the unfolding disaster in our financial system. He is a former senior economist at the World Bank and he wrote a seminal book on the emerging field of ecological economics entitled "Steady State Economics". I think his post in the oil drum is excellent and I will provide the link here:http://www.theoildrum.com/node/4617#more.

I wrote a comment to his article in response to a comment by Gail the Actuary who is one of the fine staff members on the Oil Drum in which she mused on possible consequences of Daly's ideas. My response follows.

Comments top

Gail points to some consequences of Herman's ideas. It does seem obvious that there will be less credit but it will take VASTLY less credit and debt to bring the system back toward a steady state. It is the sheer huge size of our combined government, corporate and individual debt about $50+ trillion vs our GDP $13 or $14 trillion) that daunts me.That is a ratio of over 3.5 to 1. At the nadir of the Great D that ratio had soared to only 2.5 to 1. Most TOD ers believe that cheap energy has allowed the kind of productivity that has converted that oil drum into a drum of something more valuable but if that cheap drum of oil isn't replaced with another cheap drum of a different energy, then where will the productivity emanate from? If growth slows or stops or becomes negative, that debt will never be repaid unless the currency is expanded, ie inflation. I think we have here not a problem but a "predicament" as JM Greer has pointed out in his latest book,"The Long Descent." Greer points out that problems may have solutions but predicaments do not.We know what expanded debt and credit did to the economy when the expansion was out of phase with real wealth creation and we fear what the consequences of pulling the plug on debt and credit might be, but what other choices are there? The huge majority of the nation opposed the banking bailout by a treasury secretary who was a Goldman Sachs former CEO. The problems were created and advanced by investment banks and bankers such as Paulson and his tribe so here we had the ludicrous spectacle of a banker bailing out himself paid by us using a hurry up offense. He promoted the banking bailout to prevent something worse.But he advanced no evidence to support his assertions that something worse might happen. Something worse may happen anyway but at least his former bank and his former tribal members are sleeping better.The morons and crooks who devised and promoted this debacle are not being punished but most of their employees are, as well as most of the country. The wall street banking industry owned the government and now the positions are reversed. They have the cash and we have the trash. As to How Prof Daly would handle a transition......well how can we transition from a situation of debt and credit created wealth to wealth? We can't. There is no easy way to erase wealth. Most of our wealth was chimera. It was never there anyway. Should we punish the banking axis of evil? Of course. Would it yield much money? of course not but sending a horde of these bankers and buffoons to the guillotine would send a message.This hurried and poorly thought out propping up of a failed financial system just delays the inevitable collapse. The investment banks should have been allowed to fail. There would have been huge financial harm to all manner of people and not just the investment banks who were leveraging and trading their own securities but innocents like the Norwegian Teacher's union and pensioners in Japan and Korea and other banks and insurance and pension funds and even governments worldwide. But they bought those securities. I didn't nor did 99% of my citizens. You choose. You lose. Will the world ever trust the US financial system again? Not in my lifetime, with or without a bailout. Daly points out the obvious that for wealth to be real, it has to be real. Real wealth is created by people doing real work not pushing paper oops! I mean hitting a keyboard to create a CDS to insure against a default which the bogus insurer can't pay anyway. GDP will fall and fall hard. There will be no way to balance a trade deficit that is 70% due to our purchase of imported oil any more than we can have energy independence by drilling off Virginia or California. YOYO folks. You're on your own. Hugh in Jackson Hole.

Depression thoughts

Today a veritable mushroom field has sprung up using the debt to GDP figures I noticed several weeks ago that compelled yesterdays post. There is a an excellent article by James Quinn on the seekingalpha investment website which lays it out far better than I did and he gives detailed historical perspective to the problem which is illuminating. Dupont and JP Morgan trying to raise an army? MY, MY. The ad hominem attacks which follow in the comments were ludicrous but good for a few laughs. People simply cannot abide a messinger of bad news. I am sorry that my graph of debt to GDP did not display the years after 2002. Use the link here to see them better.
http://seekingalpha.com/article/98769-our-coming-depression?source=email#comment-275646

Monday, October 6, 2008

A Warning

I sent an email to friends 2 weeks ago today that I thought the Great Depression had begun. I qualified my statement to say that a recession was ongoing and that a depression was possible. This morning's events in world markets increases the odds. The commodity drop is now the worst in 50 years. Source: Bloomberg. Iceland which until recently had the highest per capita income and was judged the most livable country is in free fall with soaring debt and interest rates and failing banks.
http://www.guardian.co.uk/world/2008/oct/05/iceland.creditcrunch
Bill Fleckenstein who posts at MSNMoney and Jim Grant who has a financial consulting firm were the first sources for the following figures and Matt Blackman at the seekingalpha site has recently put them in very readable form. If you are not sitting down, by all means, sit down. No, LAY DOWN.
We seem to be entering a deflationary recession/depression.A variety of authors, Nouriel Roubini among them have stated that in a deflationary bear barket there are no safe havens. Almost everything will lose value(Website: rgemonitor.com). The US equity markets as of last Friday had lost a quick trillion. The Case-Shiller index reports 3 trillion in housing losses to date. The numbers that stun are the debt to GDP figures.

click to enlarge


Since 2000 all debt from homeowners, companies and government has grown 25% faster than the economy. And what kind of economy have we had in the past 8 or 10 years? Investment banking generating financial weapons of mass destruction, the last gasp of our suburban housing sprawl and mindless consumption of cheap Chinese products often funded by home equity loans. And a large part of this debt has been explosively augmented by leveraging at all levels of the investment banking, insurance, hedge fund and pension fund markets in an unregulated but highly linked greedy free for all capitalistic market which is imploding on a collossal scale. Debt as a percentage of GDP has doubled since Reagan took office and IMO when historians write the story, this depression will have said to have begun with the Reagan administration. In the first quarter of this year the total credit to GDP ratio had soared to 350%. That's right:Our credit was 3 1/2 times our GDP. In 1932 that ratio was about 2 and 1/2 times GDP. Despite what CNBC and other bobbleheads say, Treasury was struggling to peddle enough TBills and other securities to fund a deficit of "just"$400 Billion. With the bailout, that struggling could turn to flailing. Scroll down about halfway to see the pertinent graph .

http://tradesystemguru.com/content/view/214/58/#TIC
The government leaders have demonstrated their cluelessness with rushed decisions poorly deliberated at odds with the wishes of their main street constuents. Will the bailout work? Probably not. The problem seems too big. Perhaps we are in the same predicament as was Henry Kissinger during the Balkan crisis when he said "Whatever we do will be wrong, including doing nothing."
There is little doubt that we are nowhere near the end of this story. What can we do as individuals?
Raise cash if you can. Sell anything that is not essential to survival. Buy nothing BUT essentials. Buy tools.Cut expenses to the bone and reduce all forms of energy consumption. Turn the heat down, buy a clothesline, carpool,combine car trips, use a bicycle, buy bulk foods and stockpile a year of staples like the Mormons. Stockpile other obious essentials like medication , batteries, warm clothing and comfortable footwear etc. In some parts of this country you may need ammunition and firearms if for no other reason than acquiring venison. Consider the possibility of losing your job, your house, your health insurance. It may not happen but try to formulate plans dealing with a calamity of this scale. You may need to move in with friends or family to save costs and combine resources. Be nice and don't burn any bridges. If you have a house, petition your local officials to slash your property taxes but be aware that if tax revenue plummets, so will services from police and fire to trash collection and road repair. Make sure you have a rleliable vehicle capable of a long road trip. Store fuel with fuel stabilizer added but be careful of the obvious danger. Discuss the situation with the family in a calm and controlled fashion.The government, the congress, and the financial markets are out of control. It doesn't mean you have to be. Your family, your neighborhood and your community may need leaders. Think about what it takes to be a good leader and try to become one.Have money and perhaps some gold or silver coins on hand and be prepared to barter.
It's not the end of the world and if it becomes a full scale depression, it will take perhaps a long time to play out. This country and many parts of the world were on an unsustainable path of heedless consumption and impossible expansion driven my unbelievable cheap energy. That party is over and we will need to think about how to remake our country and our communities into something sustainable and liveable. We will need to rebuild domestic manufacturing,build regional food production and distribution and learn to take care of ourselves on a local and regional level. We were a nation of specialists and we will have to become a nation of generalists. Our lives will likely become more like our grandparents than our parents. That could be a very positive way to live. We will have less mobility. Some regions of the country will not be able to survive at their current density and will depopulate. If somehow this current economic calamity plays out better than expected, be grateful, but the paradigm is changing and there will be no going back to the old sprawling profligacy of the last 30 or 40 years. These are exciting times.