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.

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.

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

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.

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.

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/.

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.