Nearly everyone believes that oil prices will trend higher and higher, allowing increasing amounts of oil to be extracted. This belief is based on the observation that the cost of extraction is trending higher and higher. If we are to continue to have oil, we will need to pay the ever-higher cost of extraction. Either that, or we will have to pay the high cost of some type of substitute, if one can be found. Perhaps such a substitute will be a bit less expensive than oil, but costs are still likely to be high, since substitutes to date are higher-priced than oil.
Even though this is conventional reasoning based on experience with many substances, it doesn’t work with oil. Part of the reasoning is right, though. It is indeed true that the cost of extracting oil is trending upward. We extracted the easy to extract oil, and thus “cheap” to extract oil, first and have been forced to move on to extracting oil that is much more expensive to extract. For example, extracting oil using fracking is expensive. So is extracting Brazil’s off-shore oil from under the salt layer.
There are also rising indirect costs of production. Middle Eastern oil exporting nations need high tax revenue in order to keep their populations pacified with programs that provide desalinated water, food, housing and other benefits. This can only be done though high taxes on oil exports. The need for these high taxes acts to increase the sales prices required by these countries–often over $100 barrel (Arab Petroleum Investment House 2013).
Even though the cost of extracting oil is increasing, the feedback loops that occur when oil prices actually do rise are such that oil prices tend to quickly fall back, if they actually do rise. We know this intuitively–in oil importing nations, deep recessions have been associated with big oil price spikes, such as occurred in the 1970s and in 2008. Economist James Hamilton has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes (Hamilton 2011). Hamilton also showed that the effects of the oil price spike were sufficient to cause the recession of that began in late 2007 (Hamilton 2009).
In this post, I will explore the reasons for these adverse feedback loops. I have discussed many of these issues previously in an academic paper I wrote that was published in the journal Energy, called “Oil Supply Limits and the Continuing Financial Crisis” (availablehere or here).
If I am indeed right about the path of oil prices being down, rather than up, the long-term direction of the economy is quite different from what most are imagining. Oil companies will find new production increasingly unprofitable, and will distribute funds back to shareholders, rather than invest them in unprofitable operations. In fact, some oil companies are already reporting lower profits (Straus and Reed 2013). Some oil companies will go bankrupt. As an example, the number two oil company in Brazil, OGX, recently filed for bankruptcy, because it could not profitably find and extract Brazil’s off-shore oil (Lorenzi and Blout 2013).
Oil companies will increasingly find that the huge amount of debt that they must amass in the hope of producing profits sometime in the future is not really sustainable. The Houston Chronicle reports that an E&Y survey of Oil and Gas Companies indicates that the percentage of companies that expect to decrease debt to capital ratios jumped to 48% in October 2013 from 31% a year ago (Eaton 2013). If companies with huge debt loads cut back production to the amount that their cash flow will sustain, oil extraction can be expected to fall–just as it can be expected to fall if oil and gas companies go bankrupt or give back investment funds to shareholders.
The downward path in oil production is likely to be steep, if oil prices do indeed drop. The economy depends on oil for many major functions, including most transportation, agriculture, and construction. Increasingly expensive to extract oil is a sign of diminishing returns. As we utilize more resources for extracting oil (oil, steel, water, human labor, capital, etc.), there will be fewer resources to invest in the rest of the economy, reducing its ability to grow. This lack of economic growth feeds back as low demand, bringing down the prices of commodities, including oil. It is because of this feedback loop that I believe that the path of oil prices is generally lower. This path is the opposite of what a naive reading of “supply and demand” curves from economics textbooks would suggest, and the opposite of what we need if the economy is to continue on its current path.
Adverse Feedback 1: Wages stagnate as oil prices rise, tending to slow economic growth.
Suppose we calculate average US wages over time, by dividing “Total Wages” by “Total Population,” (everyone, not just those working) and bring this amount to the current cost level using the CPI-Urban inflation adjustment. On this basis, US wages flattened as oil prices rose, both in the 1970s and in the 2000s. The average inflation-adjusted wage is 2% lower in 2012 ($22,040) than it was in 2004 ($22,475), even though labor productivity rose by an average of 1.7% per year during 2005-2012, according to the US Bureau of Labor Statistics. Between 1973 and 1982, average inflation-adjusted wages decreased from $17,294 to $16,265 (or 6%), even though productivity reportedly grew by an average of 1.1% per year during this period.
Figure 1. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.
To see one reason why wages might flatten, consider the situation of a manufacturer or other company shipping goods. The cost of goods, with shipping, would rise simply because of the cost of oil used in transport. Companies using oil more extensively in producing their products would need to raise prices even more, if their profits are to remain unchanged. If these companies simply pass the higher cost of oil on to consumers, they likely will sell fewer of their products, since some consumers will not be able to afford the products at the new higher price. To “fix” the problem of selling fewer goods, companies would likely lay off workers, to reflect the smaller quantity of goods sold–one reason for the drop in wages paid to workers shown on Figure 1. (Note that Figure 1 will reflect reduced wages, whether it results from fewer people working or lower wages of those working.)
Another approach businesses might use to deal with the problem of rising costs due to higher oil prices would be to reduce costs other than oil, to try to keep the total cost of the product from rising. Wages are a big piece of a business’s total costs, so finding a way to keep wages down would be helpful. One such approach would be a wage freeze, or a cut in wages. Another would be to outsource production to a lower cost country. A third way would be to use increased automation. Any of these approaches would reduce wages paid in the United States. The latter two approaches would tend to have the greatest impact on the lowest paid workers. Thus, we would expect increasing wage disparity, together with the flattening or falling wages, as companies try to hold the cost of goods and services down, despite rising oil prices.
The revenue received by businesses and governments ultimately comes from consumers. If the wages of lower-paid consumers flattens, these lower wages can be expected to reduce economic growth, because with lower wages, these workers will have less income to buy discretionary goods and services. The higher-paid workers may have more income, but this won’t necessarily feed back into the economy well–it may inflate stock market prices, but not feed back as spending on goods and services, necessary for growth.
There is even a feedback with respect to debt. The portion of the population with falling inflation-adjusted wages will find it harder to borrow, making it more difficult to buy big-ticket items such as cars and houses.
Adverse Feedback 2: Consumers cut back on discretionary spending because of the higher cost of food and oil, leading to more layoffs and recession.
Clearly, based on Figure 1, consumers cannot expect wage increases to match oil price increases. Even workers who work in the oil industry cannot expect wage increases equal to the increase in the price of oil, because part of the increase in cost comes from the need for more workers per barrel of oil. For example, it is more labor-intensive to extract oil from a large number of small wells, each of which require fracking, than it is to extract oil from a few larger wells, none of which require fracking.
One cost that tends to increase with the cost of oil is the cost of food (Figure 2). The cost of food and the cost of commuting are necessities for most workers. They will cut down on discretionary expenditures, if necessary, to make certain these costs are covered.
Figure 2. FAO Food Price Index versus Brent spot oil price, based on US Energy Information Agency. *2013 is partial year.
If wages are inadequate, workers will cut back in such area as restaurant meals, vacation travel, and charitable contributions, leading to even more problems with a lack of jobs in these and other discretionary sectors.
It might be noted that even countries that export oil can encounter difficulties as oil prices rise. These countries need a way to get the extra revenue from selling high-priced oil over to the many residents who must buy higher-priced food, but do not benefit from the wages paid to oil workers. It is not a coincidence that the Arab Spring uprisings took place in several oil exporting nations in early 2011, when food prices peaked on Figure 2.
Adverse Feedback 3: Higher oil and food prices together with stagnating wages lead to cutbacks in spending for new cars and new homes, falling prices for new homes, defaults on home and car loans, and banks in need of bailouts.
Purchasing more-expensive homes and new cars are types of discretionary spending. If consumers find their incomes are squeezed by high oil prices, they will cut back on expenditures such as these as well, leading to layoffs in the home construction and auto manufacturing industries. Such cutbacks can also result in bankruptcies of auto and home builders.
If people buy fewer move-up homes, the price of resale homes will tend to fall. This in turn makes defaults on mortgages more likely. Layoffs will also tend to make defaults on mortgages more likely, as well as missed payments on auto loans.
Figure 3. S&P Case-Shiller 20-City Home Price Index, using seasonally adjusted three month average data. April 2006 is the peak month. Data is latest shown on website as of November 2013.
Most people do not associate the drop in US home prices with the rise in oil prices, but the latest rise in oil prices began as early as 2003 and 2004 (see Figure 2), and the drop in home prices began in 2006. Some of the earliest drops in home prices occurred in the most distant suburbs, where oil prices played the biggest role.
Banks increasingly found themselves in financial trouble, as defaults on mortgages and other loans grew. These defaults are often blamed on bad underwriting. While bad underwriting may have played a role (and may also have helped prevent the US from falling into recession even earlier, when oil prices began rising), the falling prices of homes created part of the default problem, as did job layoffs associated with higher oil prices.
All of these feedbacks led to a need for more government involvement–lower interest rates to try to hold the economy together, get spending back up, and raise home prices.
Adverse Feedback 4: Cutbacks in consumer debt combined with flat wages appear to have led to the decline in spending that precipitated the July 2008 drop in oil prices. Consumer debt still remains depressed.
Oil prices started falling in July 2008, and did not hit bottom until the winter of 2008 (Figure 4).
Figure 4. West Texas Intermediate Monthly Average Spot Price, based on us Energy Information Administration data.
What could have precipitated such a fall? Many people consider the bankruptcy of Lehman Brothers on September 15, 2008 to be pivotal in the financial crisis of 2008, but the drop in oil prices started months earlier. What could have precipitated such a steep drop in oil prices?
It seems to me that the real underlying cause was a mismatch between what goods cost (such as high food and oil prices) and the amount consumers had available for spending. There are two basic sources of consumer spending–wages and increases in debt. If consumer debt suddenly starts decreasing, rather than increasing, consumer spending can be expected to fall (especially if wages are not rising).
In fact, consumer debt did start falling at precisely the time that oil prices crashed. Mortgage debt started falling in the third quarter of 2008, reflecting a combination of falling home prices and mortgage defaults. As noted previously, both of these were indirectly related to high oil prices.
Figure 5. US Home Mortgage Debt, based on Federal Reserve Z.1 data.
Other consumer debt fell at the same time. Revolving credit (primarily credit card debt) hit a peak in July 2008, and began to fall (Figure 6).
Figure 6. US Revolving Credit outstanding (primarily credit card debt), based on Federal Reserve G.19 Report.
Adverse Feedback 5: Even after high oil prices have been in place for several years, many governments find themselves trapped by the need for deficit spending and ultra-low interest rates to cover up problems with stagnant wages and inadequate demand for homes and cars at “normal” interest rates.
With the slack in consumer debt, US government debt soared (Figure 7). Governments in Europe and Japan found themselves in a similar bind.
Figure 7. US government publicly held debt, based on Federal Reserve Z.1 data.
Even as US Federal Government debt soared, it was not enough to fully make up for the cutback in debt elsewhere in the economy (Figure 8).
Figure 8. US Debt based on Federal Reserve Z.1 data.
How do governments get themselves caught in such a bind? Businesses can to a significant extent overcome their problems with high oil prices by laying off workers and finding lower cost methods of production. Individuals, however, find that the wage problems persist as long as oil prices remain high and businesses have the option of replacing their services with lower cost workers elsewhere. Globalization definitely makes this problem worse.
When workers have job problems, governments find themselves in the unfortunate position of trying to fix the situation by providing more unemployment benefits, food stamps, and disability benefits. Governments also find themselves with lagging tax revenue, because businesses increasingly are located in offshore tax havens, and workers’ incomes are lagging.
Adverse Feedback 6: Rising prices of oil have contributed to long term inflation. If oil prices start falling, this tends to create the opposite problem–deflation. Once oil price deflation starts, it may lead to a self-reinforcing debt default cycle.
Not all inflation is related to higher energy prices, but some of it is. This is one reason the US government sometimes gives an inflation estimate “excluding volatile food and energy prices.” Inflation over the years appears to be one way that a small amount of diminishing returns has fed into the economy.
The concern a person has is that deflation will tend to lead to debt defaults. Clearly lower oil and gas prices mean that oil and gas businesses will become less profitable, and loans in this area will tend to default. But loans related to other types of commodities may tend to default as well. There will also tend to be layoffs in these industries, and in surrounding communities.
Also, with deflation, the low interest rate policies of governments no longer have the stimulating impact that they would have without deflation. So governments will have to concoct negative interest rate plans, and see if they can make these work, to take the place of current plans.
One question is how effective today’s Quantitative Easing and ultra-low interest rate programs have been. We know that they have tended to blow bubbles in asset prices, such as stock market prices. But are ultra-low interest rates part of what allowed oil prices to re-inflate after the July 2008 drop? Certainly, they have helped hold up auto and home sales, and have supported oil drilling operations that rely heavily on debt.
To some extent, the current system appears to be held together with duct tape. It looks like it could fall apart on its own, or it could fall apart as governments try to reduce their deficits by higher taxes and lower spending (See Figure 7). Adding deflation to the combination would seem to be another way of making the current approach for covering up our problems even more vulnerable to collapse.
The frightening thing is that there is already some evidence that oil prices (and commodity prices in general) are starting to trend downward. The chart I showed in Figure 4 showed West Texas Intermediate (WTI) oil prices–a price that is often quoted in the US. On Figure 9, I show WTI oil prices alongside Brent, another oil benchmark. Brent reflects world oil prices to a greater extent than WTI price does. It seems to be showing a recent downward trend in world oil prices. To the extent that this downward trend in prices feeds back into inflation rates and makes Quantitative Easing work less well, this downward trend becomes a potential problem. Its effect would tend to offset the stimulating effect on economies that lower oil prices would normally have.
Figure 9. Brent oil price compared to West Texas Intermediate oil price, based on EIA monthly average spot prices.
Oil and other fossil fuels are unusual materials. Historically, their value to society has been far higher than their cost of extraction. It is the difference between the value to society and their cost of extraction that has helped economies around the world grow. Now, as the cost of oil extraction rises, we see this difference shrinking. As this difference shrinks, the ability of economies to grow is eroding, especially for those countries that depend most heavily on oil–Japan, Europe, and the United States. It should not be surprising if the growth of these countries slows as oil prices rise. The trend toward globalization can only make this trend worse, because it gives businesses an opportunity to lower wage costs by outsourcing part of their production to lower-cost countries (that use less oil!). When costs are reduced in this manner, businesses are also able get the “benefit” of more lax pollution laws overseas.
We saw in Figure 9 that global oil prices seem already to be trending downward, as growth in countries such as China, Brazil, and India is faltering. At the same time, oil from easy to extract locations is depleting, and oil companies have no choice but move on locations where more resources of all kinds are required, leading to diminishing returns and ever-higher cost of extraction. The way I view our predicament is shown in Figure 10.
Figure 10. Our Oil Price Predicament. Over time, if we want to maintain constant oil consumption, the price consumers can afford tends to fall, while the price required by oil producers in order to earn a profit tends to rise.
Over time, in order to maintain constant oil production, the price consumers can afford tends to fall, because governments need to “take back” the huge deficit spending they are using now to prop up the system. At the same time, prices required by producers tend to rise, as the mix of oil production moves to more difficult locations.
While in theory oil prices could spike again because of rising demand of the less developed countries, it is hard to see how this price spike could be sustained. We would likely run into the same problems we had before, with more layoffs and plus credit contraction leading to a cutback in demand in the US, the European Union, and Japan. These users represent a big enough share of the total that their drop in demand would tend to bring world prices back down.
The problem this time, though, is that governments seem to be getting close to being “out of ammunition,” in trying to fight what is really diminishing returns of one of the major drivers of our economy. I don’t know exactly how things might play out, but experience with prior civilizations suggests that “collapse” might be a reasonable description of the outcome.
The dogfight over Japan’s biggest problem, its gargantuan government deficit, entered its annual ritual of leaks and pressure tactics that usually leads to a pre-Christmas draft budget with even bigger deficits. But this time, it’s different. Very different.
Japan has always has been a place of huge natural disasters – earthquakes, tsunamis, volcanos, typhoons, to name a few – and the people have long ago come to grips with it, adapted to it, and incorporated it into their spiritual views. When, not if, disaster strikes, they’re shocked and scared like all human beings, but they’re disciplined, stoic in their manner, and there isn’t much looting, at least not from the lower 99% of society.
Perhaps they look at their public budget deficits and the resulting mountain of debt in a similar manner, a giant volcano that can erupt anytime and do phenomenal damage. And they’re no more alarmed about it than they are about the next Big One. But when this disaster hits, it’s going to be entirely man-made. And by democratic means!
So the leaks have started. The Asahi Shimbun, citing an unnamed source, reported that the Ministry of Finance wants to reduce the amount of debt it will issue next fiscal year to below the amount issued this year. Turns out, tax revenues are rising. But pressure is already building up in the ruling coalition to spend even more, now that there is more money coming in.
Japan’s numbers make you dizzy. This fiscal year, ending March 31, Japan is expected to borrow ¥42.9 trillion ($423 billion) to fund its regular budget of ¥92.6 trillion. Regularbecause a “supplementary budget” of ¥10.3 trillion – a stimulus package, in English – was passed along with it, without which, as MOF Taro Aso explained at the time, “the economy would fall into a severe situation in April-June.”
It brought the first Abenomics budget to ¥102.9 trillion, an all-time record!
The Japanese budget game – like that in the US and other countries – has many kinks to obfuscate reality. So $5.2 trillion of the supplementary budget had to be borrowed, and that additional debt was conveniently accounted for in fiscal 2012, though the bonds would be issued and the money would be spent in fiscal 2013. It sure makes fiscal 2013 look betterslightly less horrible.
Nearly 47% of every yen the government spends is borrowed.
The ¥102.9 trillion in outlays are being funded in part by issuing ¥48.1 trillion in new debt, including the debt for the stimulus package. This is great promise of Abenomics. Damn the torpedoes, full speed ahead.
We knew that. But now the source whispered that tax revenues have been rising and will likely hit ¥45 trillion this year, instead of the expected ¥43.1 trillion. This trend would continue into the next fiscal year with tax revenues expected to jump to ¥50 trillion – close to the ¥51 trillion collected in 2007 before the financial crisis.
Where is this new moolah supposed to come from?
The consumption tax hike to 8%, from 5%, effective April 1, might bring in ¥4.6 trillion. The government hopes that salaries and annual bonuses will rise, though this may be wishful thinking. And corporate earnings have been soaring as companies translate their foreign earnings into devalued yen. Thus, the government expects revenues from individual and corporate income taxes to rise by ¥2 to ¥3 trillion.
So the MOF has calculated that bond issuance next fiscal year might actually drop below this year’s level, a micro-step in the right direction that would be welcomed by the ratings agencies and might stave off another downgrade – but not disaster.
But no way. With so much free money being pumped out by the Bank of Japan, and with new tax revenues pouring in, lawmakers want to do what they’ve always done: hand outeven more goodies to Japan, Inc. and their constituents.
Some of the extra expenditures are based on demographics. The aging population will drive up social security costs, which includes health care and nursing care. The Ministry of Health, Labor, and Welfare Ministry, with a budget of over ¥30 trillion, is projecting nearly ¥1 trillion in additional outlays just for that.
The endless desire to spend even more money (that they don’t have) came to light in August, when the various ministries submitted their budget requests. The Ministry of Land, Infrastructure, Transport, and Tourism, for instance, asked for a 16.3% increase to make infrastructure more resilient to disasters. The Ministry of Agriculture, Forestry, and Fisheries asked for an additional 13.6% to enrich the already heavily subsidized ag and fishing interests. These budget requests exceeded ¥100 trillion for second year in a row. Now the MOF is trying to whittle them down somewhat. And the fight is on.
Then there’s the consumption-tax hike. Yup, the big money maker. Companies and households are currently frontloading big-ticket purchases. And these purchases will grind to a halt after the tax hike takes effect; Japan went through this last time it hiked the consumption tax. Frontloading caused the economy to boom for several quarters before the tax hike. The aftermath was a long and steep long recession.
Dreading a repeat, members of the ruling coalition are already clamoring for even morestimulus spending to cover that hole next year. Much of it would be dedicated to public works projects, including incomprehensible structures, like the unfinished bridges to nowhere that now dot the land.
Japan Inc. is salivating.
But the MOF is trying to dig in its heels. It wants to use the extra revenues to reduce bond issuance by a smidgen. So if it prevails, the budget fiasco will continue to get much worse, at a slower pace.
But there is nothing to worry about. The BOJ is printing about ¥85 trillion per fiscal year to buy mostly government bonds with it. Simultaneously, the MOF will sell ¥48 trillion in new bonds. Behind the smokescreen of the “market,” the BOJ will buy them all, plus another ¥36 billion, and rumor has it that it will pick up the pace next year. It is not only monetizing Japan’s deficit, but also big chunks of its outstanding debt.
The Japanese know this. They know that this is just another huge disaster coming their way, the next Big One, so to speak, and they’ll keep going about their lives and doing the things they enjoy doing, or have to do, and they’re not going to panic, because it may be years before this disaster will hit, though the looting at the top has already started.
The beneficiaries of Abenomics are now coming out of the woodwork with soaring profits. But they’re doing the opposite of what Abenomics promised they’d do: they’re diversifyingaway from Japan. Read…. Here Is Proof (Provided By Japan Inc.) Why Abenomics Fails The Real Economy
A few days ago, when GMO released its quarterly thoughts, most focused immediately on the claim that the market is 75% overvalued. However perhaps an even more important analysis by author Ben Inker, and one which was largely ignored by most, is what front-loading so much market gains thanks to the Bernanke surge in the S&P means for future returns especially as it pertains to pension funds the bulk of which are already underfunded. GMO’s conclusion was not a happy one.
If equity returns for the next hundred years were only going to be 3.5% real or so, today’s prices are about right. We would be wrong about how overvalued the U.S. stock market is, but every pension fund, foundation, and endowment – not to mention every individual saving for retirement – would be in dire straits, as every investors’ portfolio return assumptions build in far more return. Over the standard course of a 40-year working life, a savings rate that is currently assumed to lead to an accumulation of 10 times final salary would wind up 40% short of that goal if today’s valuations are the new equilibrium. Every endowment and foundation will find itself wasting away instead of maintaining itself for future generations. And the plight of public pension funds is probably not even worth calculating, as we would simply find ourselves in a world where retirement as we now know it is fundamentally unaffordable, however we pretend we may have funded it so far.
One person who read this part of Inker’s paper and did do the calculation is none other than Bridgewater’s Ray Dalio. His conclusion is terrifying.
The reason why public and all other pension funds are the least discussed aspect of modern finance, is that while Bernanke has done his best to plug the hole in the asset side of the ledger resulting from poor asset returns, it is nowhere near sufficient since the liabilities have been compounding throughout the financial crisis since the two grow independently. Which means that anyone who does the analysis sees a very disturbing picture.
Indeed, while the asset side can and has suffered massively as a result of the great financial crisis, the liabilities are compounding on a base that has grown steadily. As Dalio notes, each year a growing percentage of assets are paid out in the form of distributions, leaving less assets to compound at a given return.
This dynamic is shown in the chart below, which shows the change of pension fund assets over the past decade relative to the present value of liabilities discounted at a rate that has been roughly constant at around 7.5%, and rising to reflect the growth in future liabilities. Obviously, if the assets equal the value of liabilities, then the fund would be able to make its payments at a 7.5% asset return. The problem is that even with the Bernanke rally of the past five years, public pension assets are now at about the same level as in 2007 while commitments have grown. Sadly, this means that recent good returns have barely closed the gap. Needless to say, the gap grows much faster in the coming years if the future returns are less than the assumed 7.5%, something that was the basis for the GMO observations.
A key component of the pension fund calculation is the increasing portion of annual distributions less contributions as a percentage of assets. Since each year public pensions distribute about 5% of the future value of their liabilities, and these liabilities have been growing at a compounded rate of about 4%, the net cash out as a percentage of flat and/or declining assets has been progressively rising. Today, annual cash outflows amount to roughly 9% of total assets which contributions are a paltry 5% of assets, which has led to a 4% cash flow drag. This increase in net cash outflows from 1.5% of assets in 2000 to 4% most recently is shown in the second chart below. The take home from this chart is that funds need to return 4% a year
in the near term just to avoid losing assets, and thanks to compounding,
over time the rising amount of NPVed liabilities raises the required
return even further.
That’s where we stand now, but where are we headed? Assuming a 4% return and a steady growth of the liabilities means the financial gap will grow at an accelerating pace, making it more and more difficult to close the funding gap. It also means that with every passing year the required rate of return to plug the gap will grow even faster. Today, for example, the required return is 8.9%. In the future, once again assuming a 4% return on assets, means the required rate of return grows to 13% in ten years and 16% in fifteen years. Naturally, if a fund has a larger funding gap, the required return is even larger and the funding gap blows out much faster. As Bridgewater summarizes this feedback mechanism, “the dynamics of compounding cause this case machine to operate like the event horizon of a black hole: the pressures rise exponentially until it is virtually impossible to recovery.”
But the scariest chart of all is the following simulation of the underfunding process over time and total fund assets held, assuming a 4% return on assets, which shows the accelerating decline in the value of asset holdings due to an increasingly negative cash flow yield, causing virtually all pension funds to run out of money. In the case of a 4% return, a pension fund that is assumed to be fully-funded today will run out of cash in 30 years; pensions that are 80% funded run out of money in 25 year, and so on. A fund with just a 20% funding ratio will have no money left in just over 5 years!
Curious what the current distribution of funds that match these criteria is? The chart below shows the percentage of current pension funds at each funding bracket. Nearly 50% of all fund are funded 80% or less.
The charts and simplistic calculations above show not only why virtually all pension funds are set for extinction in the not too distant future, but why Bernanke is stuck artificially reflating asset values if only to preserve the myth of the public pension funded welfare state. Because the biggest threat to Keynesians and monetarists everywhere is the social instability that would result once the myth of the Bismarckian welfare state unwinds.
But wait, there’s more.
Bridgewater next proceeds to calculate what the economic impact is in a world in which a generous, consistent 4% return on assets is assumed. As Dalio’s fund notes, in such a case the path to public pension sustainability will require some combination of benefit cuts or increased contributions to net out the liabilities and assets and close the funding gap. “Any way you cut it this will reduce someone’s income, with a likely impact on their spending. Higher taxes will reduce the disposable income of workers, although the impact will be different depending on whose taxes are raised; less government spending on other things will hurt growth directly; lower benefits will reduce the disposable income of retirees who have a high propensity to spend; borrowing to finance the deficit will hurt growth less directly and over the longer term.”
Bridgewater concludes that if public pensions don’t delay and start plugging the hole now, they will need to contribute just under $200 billion per year over the next 30 years, amounting to 1.2% of GDP and 8.8% of state and local tax revenues. If funds wait a decade, the impact per year explodes to $325 billion over 30 years and will “cost” 1.2% of GDP and 12.2% of tax revenues. But the most likely, and worst case scenario, is if pension funds do nothing at all, “let the machine run its course”, then the economic damage is unquantifiable as low asset returns inevitably cause lower income through benefits after assets are fully depleted.
And that in a nutshell is why the pension system, erected on an asset-liability mismatch gone horribly wrong, is doomed: a fact well known by the Fed chairman, and whose only countermeasure is to keep doing more of what has been done to date: inflating asset value while monetizing massive amounts of debt in the hope that the higher asset return will offset the funding gap. In principle this is great assuming the Fed can keep doing QE for the foreseeable future. However here, as everywhere else, we run into the fundamental problem with QE – the Fed is currently monetizing 0.3% of all private sector 10 Year equivalents per week, or about 15% per year. Since the Fed already holds about a third of the total, it has one, at best two years of QE left, before it is in control of an unprecedented two thirds of the entire bond market, and before the complete lack of market liquidity from central-planning gone wild, grinds Bernanke’s experiment to a halt.
It is at that point that the entire flawed economic system of the past century will finally be on its last legs, as one of the core pillars of the biggest lie of all, the welfare state, resting on the flawed assumption that asset grow at a faster compounded rate than liabilities, will have no choice but to look into the abyss.
Negotiators are poised to seal the first global trade deal for more than a decade, in a rare victory for the World Trade Organisation, whose struggle to secure an international pact has increasingly threatened its relevance.
The US and powerful developing-nation players, including China and India, have overcome differences in agriculture. This leaves negotiators in Geneva to put the final touches to a deal that will impose binding requirements to reduce red tape and ease the path for goods at borders around the world.
ON THIS STORY
- Philip Stephens Trade trumps missiles
- US works to win over greens in trade deal
- Global talks on tech trade tariffs collapse
- China and EU in investment treaty talks
- Ukraine freezes trade talks with EU
ON THIS TOPIC
- China proves resistant in IT trade talks
- Top Democrat ties currency to trade talks
- Benefits likely to flow from liberalisation in Shanghai
- UK minister urges global trade deal
IN GLOBAL ECONOMY
It could add about $1tn to annual global trade worth more than $18tn, some analysts have said.
Roberto Azevêdo, the recently appointed head of the WTO, is expected to present a finished draft of the agreement to the body’s highest organ, the general council, in a meeting as soon as Sunday or Monday.
Barring any unforeseen problems – and negotiators gave warning on Thursday that they could still emerge – the agreement would be signed by trade ministers from the WTO’s 159 member countries in Bali next month. “They have crossed over the threshold,” said a senior trade official in Geneva.
Sealed, the deal would be a victory for Mr Azevêdo, who warned that the WTO risked irrelevancy if it did not deliver something substantive in Bali when took over in September.
The deal’s three broad pillars – tackling bureaucratic barriers at borders, a series of agriculture issues, and several development-related subjects – were plucked from the wider Doha agenda two years ago as watered-down but “deliverable” elements of a deal.
But they have still been the subject of difficult negotiations and officials and observers of the process insist the deal at hand is important in both substance and what it says about the state of the WTO as a forum for trade negotiations.
“We can do negotiations on a multilateral basis and deliver. That’s the big lesson,” one senior ambassador to the WTO said.
Mr Azevêdo, a former Brazilian diplomat, and others want to use the deal to re-energise the now 12-year-old Doha Round of trade negotiations which for years has been stalled due to differences between the US and developing world countries over agriculture.
The biggest element of the Bali deal is the chapter on “trade facilitation”, WTO jargon for removing bureaucratic barriers at borders. It will set binding standards for WTO members on matters such as how long goods should take to clear borders, how customs officials can charge tariffs and penalties and what paperwork can be required at borders.
Some details of the facilitation deal need to be finalised, such as how poor countries should be required to meet the obligations. Mr Azevêdo is due to present a potential wording on that issue to negotiators on Friday and officials in Geneva expect negotiations through the weekend.
But the most prickly issues in Geneva have been related to agriculture and involved India, China, and Argentina.
After months of haggling, negotiators earlier this week settled on a four-year “peace clause” that will give India and other countries latitude to buy staples from farmers and operate food programmes for the poor.
The US and China have also agreed to set aside a dispute over certain agricultural tariffs, while Argentina appeared set to allow compromise language linked to eliminating subsidies for agricultural exports, a long-standing bone of contention in the developing world.
China just dropped an absolute bombshell, but it was almost entirely ignored by the mainstream media in the United States. The central bank of China has decided that it is “no longer in China’s favor to accumulate foreign-exchange reserves”. During the third quarter of 2013, China’s foreign-exchange reserves were valued at approximately $3.66 trillion. And of course the biggest chunk of that was made up of U.S. dollars. For years, China has been accumulating dollars and working hard to keep the value of the dollar up and the value of the yuan down. One of the goals has been to make Chinese products less expensive in the international marketplace. But now China has announced that the time has come for it to stop stockpiling U.S. dollars. And if that does indeed turn out to be the case, than many U.S. analysts are suggesting that China could also soon stop buying any more U.S. debt. Needless to say, all of this would be very bad for the United States.
For years, China has been systematically propping up the value of the U.S. dollar and keeping the value of the yuan artificially low. This has resulted in a massive flood of super cheap products from across the Pacific that U.S. consumers have been eagerly gobbling up.
For example, have you ever gone into a dollar store and wondered how anyone could possibly make a profit by making those products and selling them for just one dollar?
Well, the truth is that when you flip those products over you will find that almost all of them have been made outside of the United States. In fact, the words “made in China” are probably the most common words in your entire household if you are anything like the typical American.
Thanks to the massively unbalanced trade that we have had with China, tens of thousands of our businesses, millions of our jobs and trillions of our dollars have left this country and gone over to China.
And now China has apparently decided that there is not much gutting of our economy left to do and that it is time to let the dollar collapse. As I mentioned above, China has announced that it is going to stop stockpiling foreign-exchange reserves…
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.
It isn’t going to happen overnight, but the value of the U.S. dollar is going to start to go down, and all of that cheap stuff that you are used to buying at Wal-Mart and the dollar store is going to become a lot more expensive.
But of even more importance is what this latest move by China could mean for U.S. government debt. As most Americans have heard, we are heavily dependent on foreign nations such as China lending us money. Right now, China owns nearly 1.3 trillion dollars of our debt. Unfortunately, as CNBC is noting, if China is going to quit stockpiling our dollars than it is likely that they will stop stockpiling our debt as well…
Analysts see this as the PBoC hinting that it will let its currency fluctuate, without intervention, thus negating the need for holding large reserves of the dollar. And if the dollar is no longer needed, then it could look to curb its purchases of dollar-denominated assets like U.S. Treasurys.
“If they are looking to reduce these purchases going forward then, yes, you’d have to look at who the marginal buyer would be,” Richard McGuire, a senior rate strategist at Rabobank told CNBC in an interview.
“Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys.”
So who is going to buy all of our debt?
That is a very good question.
If the Federal Reserve starts tapering bond purchases and China quits buying our debt, who is going to fill the void?
If there is significantly less demand for government bonds, that will cause interest rates to rise dramatically. And if interest rates rise dramatically from where they are now, that will set off the kind of nightmare scenario that I keep talking about.
In a previous article entitled “How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System“, I described how China could single-handedly cause immense devastation to the U.S. economy.
China accounts for more global trade that anyone else does, and they also own more of our debt than any other nation does. If China starts dumping our dollars and our debt, much of the rest of the planet would likely follow suit and we would be in for a world of hurt.
And just this week there was another major announcement which indicates that China is getting ready to make a major move against the U.S. dollar. According to Reuters, crude oil futures may soon be pricedin yuan on the Shanghai Futures Exchange…
The Shanghai Futures Exchange (SHFE) may price its crude oil futures contract in yuan and use medium sour crude as its benchmark, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.
China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.
If that actually happens, that will be absolutely huge.
China is the number one importer of oil in the world, and it was only a matter of time before they started to openly challenge the petrodollar.
But even I didn’t think that we would see anything like this so quickly.
The world is changing, and most Americans have absolutely no idea what this is going to mean for them. As demand for the U.S. dollar and U.S. debt goes down, the things that we buy at the store will cost a lot more, our standard of living will go down and it will become a lot more expensive for everyone (including the U.S. government) to borrow money.
Unfortunately, there isn’t much that can be done about any of this at this point. When it comes to economics, China has been playing chess while the United States has been playing checkers. And now decades of very, very foolish decisions are starting to catch up with us.
The false prosperity that most Americans are enjoying today will soon start disappearing, and most of them will have no idea why it is happening.
The years ahead are going to be very challenging, and so I hope that you are getting ready for them.
Such is the power of wishful thinking that a set of fool-making memes now pulses through the word-clouds of financial chatter in America spreading the false good cheer that our economic troubles are behind us and pimping for perpetual motion in wealth expansion. A poster boy for this bundle of falsehoods is financial analyst A. Gary Schilling. Just last week, he was talking out of his cloacal vent about US “energy independence” and “the manufacturing renaissance” that will allow this country to magically decouple from the compressive contraction driving the rest of the world.
Shilling is among the growing chorus of cheerleaders who believe that the shale oil and gas boom will make it possible for so-called “consumers” (what we foolishly call ourselves) to keep driving to Wal-Mart forever — which is the master wish behind all the current fantasies of endless expansion. That idea is going to leave a lot of people disappointed and put the nation further behind in the necessary reorganization of all the key systems that support everyday civilized life, namely: food production, commerce, transport, and the management of capital.
Here’s what’s actually going to happen with shale oil and gas. Best case scenario: shale oil production rises for three more years to about 2.3 million barrels a day and then crashes so quickly that in 10 years the shale oil industry ceases to exist. A less rosy forecast would admit that the exorbitant costs of drilling-and-fracking will not find the necessary capital to even take the industry that far. Rather, dwindling capital will see the shocking decline rates of shale wells (commonly 50 percent the first year and double digits the following) and will run shrieking for other places to hide.
Contrary to Gary Schilling’s blather, America is not practicing “energy conservation.” Rather, an economy engineered strictly to run on cheap oil has gotten crushed by oil that is not cheap. Does Schilling believe, for example, that American suburbia works just as well on $90-a-barrel oil as it did on $11-a-barrel oil, or that it has a future as the basic armature of daily life, or that we are doing anything meaningful to alter the burdens of living this way? My guess is that he has never thought about it.
Likewise, as the American economy got crushed by no-longer-cheap oil, all the working classes in this country below the one-percenters got crushed, hammered, and trashed. Among other things they can no longer afford is gasoline. Total vehicle miles driven has gone down by almost 3 percent since 2007. It will keep going down, and the Happy Motoring matrix will collapse for another reason: capital scarcity will translate into fewer available car loans for Americans, and fewer qualified borrowers, and Americans are used to buying their cars on installment loans.
The shale gas situation is also not the “energy savior” it’s cracked up to be. Because it costs so much to export the stuff, and we don’t have the export infrastructure in place — ocean terminals, fleets of special (expensive!) tanker ships — shale gas is hostage to the US domestic market. The initial boom was so extravagant that it produced a gas glut, which drove the price way below the level that makes it economically rational to drill for the stuff. Now, a lot of those drilling rigs are migrating to North Dakota, where the Bakken shale oil fields require perpetual increases in rig-counts to offset the rapid decline of existing wells.
The shale gas regions of Barnett (Fort Worth), Haynesville (Louisiana), and Fayetteville, Arkansas, are already dwindling. The “sweet spots” turned out to be smaller than the hype suggested. The Marcellus (Pennsylvania and New York) is next. Several of the other hyped shale gas “plays” — the Antrim and the Utica — proved too unpromising to even bother with and never made it out of the wish bag.
The problems with fracking and groundwater pollution are secondary to the economic quandaries as far as the fate of the industry is concerned. At under $8 a unit (1000 cubic feet), shale gas is not worth drilling-and-fracking for. It’s currently around $4. Above $8, Americans are going to have a hard time paying for it. So, enjoy the temporary glut and now stand back and watch the industry begin to dry up and blow away.
As for the “industrial renaissance,” clowns like Gary Shilling can’t put together the obvious trends. The talked-about new factories will be operated by robots, so there would be no employment renaissance to go along with them. Then there is the question of who might the products be sold to? To Americans who have no jobs and no money? To Europeans who are also going broke and also have the ability to roboticize industrial production and impoverish their own working people? To Asia, which is already at industrial over-capacity — and which will only grow worse as Americans and Europeans buy less stuff? I guess that leaves South America and Africa. Well, good luck with that.
Schilling is really only shilling for delusional stock market psychology, which tends to be a self-reinforcing racket until it reaches a threshold of credulity criticality and then implodes from a sudden loss of faith, ruining even a great many one percenters. Money may indeed keep pouring into the US stock markets, especially from other countries, where the money is frightened. I’ll tell you what it ought to be really frightened about: that it doesn’t represent genuine capital, i.e. has no real value. One day not distant, all the nations will discover that their money is only notional and that notions have a way of going up in a vapor. Foolish ideas, though, appear more durable and plentiful. They just keep coming, no matter what’s going on in reality.
My basic wish is that we would quit all our wishing in America and get on with the job of transforming our economic arrangements to a scale and mode that are consistent with the resource and capital realities of these times — before they whap us upside the head and put and end to the project of remaining civilized.
Justice Minister Peter MacKay announces the government’s new cyberbullying act on Parliament Hill on Wednesday. (Sean Kilpatrick / Canadian Press)
When Justice Minister Peter MacKay unveiled the federal government’s proposed cyberbullying law on Wednesday, he touted it as a necessary tool to combat the often hurtful spread of intimate images. To emphasize the underlying point, he made the announcement during national Bullying Awareness Week.
But legal experts were left wondering why a piece of legislation that is meant to rein in online tormentors is also taking on terror suspects and people who steal cable TV signals.
“There is a much larger agenda at play here,” says Rob Currie, director of the Law and Technology Institute at Dalhousie University.
Under the banner of anti-cyberbullying measures, the government is “trying to push through a number of things that have to do with law enforcement but nothing to do with cyberbullying.”
Among other things, these new measures include giving police easier access to the metadata that internet service providers and phone companies keep on every call and email.
MacKay has acknowledged that law enforcement did not have the tools to prevent the deaths of Canadian teens such as Rehtaeh Parsons and Amanda Todd, who endured years of torment online. C-13 would give police a greater ability to investigate incidents of cyberbullying by giving courts the right to seize computers, phones and other devices used in an alleged offence.
5 years in prison
Under the proposed legislation, anyone who posts or transmits an “intimate image” of another individual without that person’s consent could face up to five years in prison.
MacKay said C-13, also known as the Protecting Canadians from Online Crime Act, reflected the government’s commitment “to ensuring that our children are safe from online predators and from online exploitation.”
Since introducing the bill, MacKay has said that C-13 is also meant to update the Criminal Code to reflect modern communications such as email and social media.
Toronto internet lawyer Gil Zvulony says that it is a necessary step, given that some aspects of the Criminal Code pertaining to communications still refer to outmoded technologies such as telegrams.
“I don’t know what the [government’s] motivation is, but there is a logical theme to all of this, in the sense that it’s trying to modernize [the code] for the digital age,” he says.
Currie, however, raises concerns about the breadth of C-13, which not only addresses cyberbullying, but also gives police heightened powers of surveillance to track terror suspects as well as individuals who use computer programs to gain unpaid access to WiFi or cable TV service.
Currie likens the omnibus nature of C-13 to Bill C-30, also known as the Protecting Children from Internet Predators Act, which was introduced in February 2012 by then-public safety minister Vic Toews.
“It was supposed to be all about [fighting] child porn, but it had all kinds of other stuff in it,” Currie says.
The ‘other stuff’
That other “stuff” included lawful access provisions, which would force internet service providers to hand over customer information to police without a warrant. This led to a public outcry and the government’s abandonment of the bill.
Although C-30 was ostensibly killed in 2012, Michael Geist, a cyber-law expert at the University of Ottawa, says that the government has been inconsistent about its position on some of the key issues surrounding lawful access to private communications.
Earlier this year, then justice minister Rob Nicholson pledged that the government “will not be proceeding with Bill C-30 and any attempts that we will continue to have to modernize the Criminal Code will not contain the measures contained in C-30.”
Still, Andrea Slane, a law professor at the University of Ontario Institute of Technology, says C-13 is in many ways “identical” to its failed predecessor — though one of the key differences is that C-13 emphasizes judicial oversight.
For the most part, the new bill still observes “the checks and balances around what judges are meant to do to make sure warrants are issued” where they are supposed to be.
That said, one thing the new bill does is allow ISPs to voluntarily give customer information to police without civil or criminal liability, Slane points out.
“That’s the one that’s most sticky for me,” she says, because it was this kind of legislation that led to widespread surveillance in the U.S.
Geist says C-13 gives police greater access to metadata, which is the information that ISPs and phone companies keep on every call and email, and he adds that in some ways metadata can be more revealing than the substance of a phone call or email.
Metadata will enable police to pinpoint a suspect’s “geographic location. It will tell who they were talking to, it will tell what device they were using,” Geist told CBC.
Currie says that, within C-13, there are proposed amendments to other acts, including the Mutual Legal Assistance in Criminal Matters Act, which allows Canadian police to gather evidence on individuals in Canada because a foreign state has requested it.
Jennifer Stoddart, Canada’s privacy commissioner, has not had a chance to examine the bill. But her office released a statement to CBC saying C-13 “appears to be a complex bill, and we will be examining all of its privacy implications and preparing to provide our full analysis and recommendations before the parliamentary committee that will be studying the legislation.”
Currie acknowledges that the bill strengthens many of the law enforcement tools needed to stem cyberbullying. But he takes issue with the sheer size of the legislation.
“This government has a history of introducing large omnibus bills that have all kinds of stuff in them – unrelated things all under the banner of one legislation,” he says.
“The problem with that is it inhibits democratic debate. There are lots of evidence-gathering tools here that we need to have a debate about.”
With files from Alison Crawford
|Nicolas Maduro, Venezuelan president, has used his new emergency powers to pass two decrees that tighten government controls over the country’s struggling economy.
The first of the two laws, signed on Thursday, limits company profits so they do not overcharge customers, while the second gives the government more control over imports to ensure Venezuela’s dwindling dollar reserves are used properly.
Under the new laws, business profits will be limited to between 15-30 percent, while a central body – the National Foreign Trade Centre – will oversee the allocation of US dollars at the official rate of 6.3 bolivars. The country’s currency is trading right now at one-tenth of its official value on the black market.
Maduro said on Thursday he was passing the cost control legislation “for the protection of the Venezuelan family”, while the currency measures intended to “put in order all the handling of foreign currency that comes in because of oil income so it’s not robbed any more, so it’s not squandered, nor sacked from the people by the parasitic bourgeoisie”.
He had promised to enact both measures before Tuesday’s vote on the Enabling Law, which gave him the authority to create legislation without parliamentary approval for one year.
Earlier this month, Maduro declared an “economic offensive” against local businesses that he accused of inflating prices of imported products, including some by more than 1,000 percent.
Venezuela’s annual inflation has hit 54 percent, and shortages of basic products and hard currency are widespread. The economy is the biggest issue going into local elections on December 8.
Maduro’s measures have so far received support from his working-class support base.
After he forced retail businesses to cut prices over the weekend, long lines formed outside stores across Venezuela, with customers searching for big discounts.
After Tuesday’s vote, Diosdado Cabello, the National Assembly president, marched with more than 2,000 supporters from the legislature to the presidential palace to deliver the text of the decree law to Maduro.
But the changes have been criticised by the country’s political opposition, who say 15 years of socialist economic controls – under Maduro and predecessor Hugo Chavez – have hurt Venezuela.
Henrique Capriles, opposition leader, has called for a day of protests across the country on Saturday “against the crisis and corruption of the government”.
The US also criticised Maduro’s government over his new decree powers.
“As you may know, it’s constitutionally allowed in Venezuela, but that doesn’t make it okay, because we feel, of course, it’s essentially important for the people to have a voice in any country, in any decision-making process,” a State Department spokeswoman said.
Hugo Chavez, former Venezuelan president, used the presidential decree measure four times during his 14-year rule.
It is often said there only two kinds of people in this world: those who know, and those who don’t. I would expand on this and say that there are actually three kinds of people: those who know, those who don’t know, and those who don’t care to know. Members of the last group are the kind of people I would characterize as “sheeple.”
Sheeple are members of a culture or society who are not necessarily oblivious to the reality of their surroundings; they may have been exposed to valuable truths on numerous occasions. However, when confronted with facts contrary to their conditioned viewpoint, they become aggressive and antagonistic in their behavior, seeking to dismiss and attack the truth by attacking the messenger and denying reason. Sheeple exist on both sides of America’s false political paradigm, and they exist in all social “classes”. In fact, the “professional class” and the hierarchy of academia are rampant breeding grounds for sheeple; who I sometimes refer to as “intellectual idiots”. Doctors and lawyers, scientists and politicians are all just as prone to the sheeple plague as anyone else; the only difference is that they have a bureaucratic apparatus behind them which gives them a false sense of importance. All they have to do is tow the establishment line, and promote the establishment view.
Of course the common argument made by sheeple is that EVERYONE thinks everyone else is blind to the truth, which in their minds, somehow vindicates their behavior. However, the characteristic that absolutely defines a sheeple is not necessarily a lack of knowledge, but an unwillingness to consider or embrace obvious logic or truth in order to protect their egos and biases from harm. A sheeple’s mindset is driven by self centered motives.
So-called mainstream media outlets go out of their way to reinforce this aggressive mindset by establishing the illusion that sheeple are the “majority” and that the majority perception (which has been constructed by the MSM) is the only correct perception.
Many liberty movement activists have noted recently that there has been a surge in media propaganda aimed at painting the survival, preparedness and liberty cultures as “fringe,” “reactionary,” “extremist,” “conspiracy-minded,” etc. National Geographic’s television show “Doomsday Preppers” appears to have been designed specifically to seek out the worst possible representatives of the movement and parade their failings like a carnival sideshow. Rarely do they give focus to the logical arguments regarding why their subjects become preppers, nor do they normally choose subjects who can explain as much in a coherent manner. This is a very similar tactic used by the establishment media at large-scale protests; they generally attempt to interview the least-eloquent and easiest-to-ridicule person present and make that person a momentary mascot for the entire group and the philosophy they hold dear.
The goal is to give sheeple comfort that they are “normal” and that anyone who steps outside the bounds of the mainstream is “abnormal” and a welcome target for the collective.
It would appear that the life of a sheeple is a life of relative bliss. The whole of the establishment machine seems engineered to make them happy and the rest of us miserable. But is a sheeple’s existence the ideal? Are they actually happy in their ignorance? Are they truly safe within the confines of the system? Here are just a few reasons why you should feel sorry for them.
Sheeple Are Nothing Without The Collective
A sheeple gathers his entire identity from the group. He acts the way he believes the group wants him to act. He thinks the way he believes the group wants him to think. All of his “ideas” are notions pre-approved by the mainstream. All of his arguments and talking points are positions he heard from the media, or academia, and he has never formed an original opinion in his life. Without the group telling him what to do, the average sheeple is lost and disoriented. When cast into a crisis situation requiring individual initiative, he panics or becomes apathetic, waiting for the system to come and save him rather than taking care of himself. Sheeple are so dependent on others for every aspect of their personality and their survival that when faced with disaster, they are the most likely people to curl up and die.
Sheeple Crave Constant Approval From Others
Sheeple are not only reliant on the collective for their identity and their survival; they also need a steady supplement of approval from others in order to function day to day. When a sheeple leaves his home, he is worried about how his appearance is perceived, how his attitude is perceived, how his lifestyle is perceived and how his opinions are perceived. Everything he does from the moment his day begins revolves around ensuring that the collective approves of him. Even his acts of “rebellion” are often merely approved forms of superficial “individualism” reliant on style rather than substance. This approval becomes a kind of emotional drug to which the sheeple is addicted. He will never make waves among the herd or stand out against any aspect of the herd worldview, because their approval sustains and cements his very existence. To take collective approval away from him would be like cutting off a heroin junky’s supplier. To be shunned by the group would destroy him psychologically.
Sheeple Are Incapable Of Original Creativity
Because sheeple spend most of their waking moments trying to appease the collective, they rarely, if ever, have the energy or inclination to create something of their own. Sheeple do not make astonishing works of art. They do not achieve scientific discovery. They do not make history through philosophical or ideological innovation. Instead, they regurgitate the words of others and hijack ideas from greater minds. They remain constant spectators in life, watching change from the bleachers, caught in the tides of time and tossed about like congealed satellites of Pacific Ocean garbage from the after-wash of Fukushima. The destiny of the common sheeple is entirely determined by the outcome of wars and restorations waged by small groups of aware individuals — some of them good, some of them evil.
Sheeple Have No Passion
If you draw all of your beliefs from what the collective deems acceptable, then it is difficult, if not impossible, to become legitimately passionate about them. Sheeple have little to no personal connection to their ideals or principles; so they become mutable, empty and uninspired. They tend to turn toward cynicism as a way to compensate, making fun of everything, especially those who ARE passionate about something. The only ideal that they will fight for is the collective itself, because who they are is so intertwined with the survival of the system. To threaten the concept of the collective is to threaten the sheeple’s existence by extension.
Sheeple Are Useless
The average sheeple does not learn how to be self-reliant because it is considered “abnormal” by the mainstream to be self-reliant. The collective and the state are the provider. They are mother and father. Sheeple have full faith that the system will protect them from any and all harm. When violence erupts, they cower and hide instead of defending themselves and others. When large-scale catastrophe strikes, they either sit idle waiting for the state to save them or they join yet another irrational mob. They do not take proactive measures, because they never felt the need to learn how.
Consider this: Why do the mainstream and the people subject to it care if others prepare for disaster or end their dependency on the establishment? Why are they so desperate to attack those of us who find our own path? If the system is so effective and the collective so correct in its methodology, then individualists are hurting only themselves by walking away, right? But for the sheeple, successfully self-reliant individuals become a constant reminder of their own inadequacies. They feel that if they cannot survive without the system, NO ONE can survive without the system; and they will make sure that individualists never prove otherwise. “You didn’t build that” becomes the sheeple motto, as they scratch and scrape like spoiled children, trying to dismantle the momentum of independent movements and ventures in non-participation.
Sheeple Are Easily Forgotten
To live a life of endless acceptance is to live a life of meaningless obscurity. When one arrives at his deathbed, does he want to reflect on all of his regrets or all of his accomplishments? Most of us would rather find joy than sadness when looking back over our past. For sheeple, though, this will not be possible — for what have they ever done besides conform? What will they have left behind except a world worse off than when they were born? What will they have accomplished, but more pain and struggle for future generations? In the end, what have their lives really been worth?
I cannot imagine a torture more vicious and terrifying than to realize in the face of one’s final days that one wasted his entire life trying to please the plethora of idiots around him, instead of educating them and himself and molding tomorrow for the better. I cannot imagine a punishment more severe than to spend the majority of one’s years as a slave without even knowing it. I cannot imagine an existence more deserving of pity and remorse than that of the sheeple.
In every country I can think of, the sovereignty and wealth of the Nation, which was once the embodiment of the power and will of the people, is being butchered and sold to the highest bidder. Everywhere, the Nation and the people within it, are under attack. Not from without by terrorists but from within. Because in every country the people who run the State have largely decided they no longer wish to serve the people but prefer instead to serve the interests of a Global Over-Class.
Of course we are not encouraged to see this clearly or if we do, certainly not to speak of it to others. And many of those we might try to talk to, do not want to hear.
Many of us prefer instead to find what warmth we can in the false and threadbare beliefs fed to us by the quisling elite of the State and their close friends and allies in a rigged and corrupted ‘free’ market. Together they tell us that whole functions of our nation which we built and treasure, are no longer viable because they are at odds with the ‘realities’ of a global economy. The more ideological of them proclaim that the state, whenever and wherever it tries to do good, will always and by necessity do harm. The more ‘realist’ among them tell us that once inalienable liberties, must now be curtailed or suspended in the name of defending the ‘nation’ from outside enemies. And yet I want to argue it is now, not ever us or the nation that is being defended or empowered. It is always and everywhere a small elite who own and control both the State and the Markets who are being defended.
In my view, we are, in most industrialized countries, watching the machinery of the State being used to betray the Nation in favour of global finance and the elite who own it. It is a familiar betrayal in the third world. One we have all watched with sordid complacently as the wealth of nation after nation is gutted for the benefit of the few. The disease is now with us.
I want to make it clear, as I have before, that I am neither libertarian nor anarchist and therefore have no ideological distrust of the State. In my opinion, there have been times and places, when the machinery of the State did animate and represent some of the wishes of the at least some of the people – of the Nation. There have been instances when the State was, in many, though certainly not in all ways, the means by which the great ideal, of government of the people, by the people, for the people, was made real. The creation of the National Health Service in Great Britain is one shining example.
I think that great ideal of government by and for the people is being butchered – for profit. The Nation-State is dying, because any given arrangement of power can be corrupted and will be, by those who benefit from it most – those who hold its powers – in this case the powers of the State – IF people cringingly let them. And that it what we are doing.
We are allowing the elite of the State, to convince us that we are ‘all in it together’, and to claim that our interests and their interests are still one and the same. But they are not. And we must come to see this clearly – and soon. As long as we deny the truth, that they are not standing ‘with us’, and do not have our best interests at heart – until we can face these self evident but chilling truths, then we are never going to see them for what they have become nor see their actions for what they are.
I think it is critical that we disentangle in our minds the State and the interests of those who control it, from those of what I am calling the Nation. The State and the Nation are not the same. They are, in fact, at war.
The Propaganda War
Our problem and their advantage is that it is deeply ingrained in us to see the State and the Nation as almost interchangeable. The very name, ‘The Nation State’ inclines us to believe that the State and Nation are one and therefore that any action taken by the State, no matter how harsh or unfair it might seem to us, must necessarily be for our good. It allows those who control the State to hide their narrow selfish interests behind a smokescreen of talk about the Nation.
This intentional confusion of Nation and State is everywhere in reporting about global finance and trade.
Battle lines drawn for EU-US trade talks
Cried a recent headline in the Telegraph. To me, it reads intentionally like an old fashioned report of a war. Wars of any sort are fantastically useful for the elite of the State because wars, better than anything else, encourage people to collapse the State and the Nation together in their minds. Faced with an external enemy it is the State and those who guide it, who marshal our defenses and face the enemy. And so we are encouraged to assume that when the EU and the US meet it will be ‘our side’ fighting for us, against theirs. But will it?
In reality it will be unelected, largely un-named trade representatives supported and surrounded by a legion of lawyers, advisors and lobbyists, nearly all of whom will be recently seconded from or still in the pay of global corporations, who will meet behind closed doors to negotiate in secret. Whose interests will they be fighting for?
They, with the help of a largely supine and grovelling media, will claim to be there for you. They will be decked out in flags and called by the names of our nations or national groupings, such as the EU. But the truth will be otherwise. Behind the national name plate a largely unseen machinery will be almost entirely corporate. Both sides will be there to seek advantage, not for you the people, not for the nations whose flags they use as camouflage , but for the corporations who pay them. The US delegation will seek advantage for US based global corporations and the EU delegation will seek advanage for EU based global corporations. Both sides will be hailed victorious. The real question – very carefully never ever raised by the compliant media – will be who lost? And the answer, studiously unreported, will be the ordinary people of both sides.
The object of the whole endeavour is to roll back soveriegn protections and powers in favour of an ‘unregulated’, unfettered, free market. How can I make such a sweeping claim? Because we have seen the results of over 200 previous Free Trade Agreements which these same people have negotiated and agreed previously. Just think of NAFTA.
If you think those agreements have benefited you, rather than, as I claim, the global corporations parasitical upon your nation and mine , then show me the proof. Don’t trot out platitudes about increased GDP without showing me who owns that GDP. Don’t bore me with text-book clap trap about how much corporations contribute unless you show me how much tax those corporations actually pay versus how much they quite legally move off-shore to low tax or no tax havens. Show me figures. I challenge you.
In part two I will return to this, and to explain what Bilateral trade Agreements are and what extrordinary and completely anti-democratic new power the State has given to corporations to over-rule Nations and to sue them for democratic decisions corporations do not like.
For now lets move from trade and finance to the actions of the machinery of State itself.
The NSA: Is It American, or British?
Is the title of a recent paper written by Edward Spannaus at Executive Intelligence Review.
What makes the author think the NSA’s primary loyalty is to either, other than simply being used to thinking they must be? The NSA and its UK counterpart, GCHQ, exist in thoir respective nations but is it really sensible to assume they feel loyal to the people who live there? And yet the author and his paper, like so many who are trying to understand what is going on around us, are stuck in the logic of what I think is now a world gone by.
If you were to ask someone from the NSA or GCHQ who they worked for would they immediately say, ‘the people’ or would they say ‘the NSA’ or ‘GCHQ’?
All those organs of power whose names and acronyms we are familiar with exist officially as servants of the… well of the what? Of the People? Of the Nation? Or of the State? Once power is created, it does not have to remain loyal to its creators. Any organization will come over time, as ambition eclipses morality, to regard its own survival and rise to greater power as paramount. Its original purpose will be drowned in a rising tide of inward looking ambition and greed for power.
It is my contention that we have become so used to the word and the idea of ‘the Nation-State’ that we have forgotten it is a compound of two very different things.
One more example, as quoted at Zerohedge,
Melissa Harris-Perry, from the otherwise progressive cable channel MSNBC, critized Snowden’s behavior as “compromising national security.”
But is it really National Security Mr Snowden compromised or State Security? When someone appeals to ‘National Security’ the unspoken assumption is that they are talking about your security and mine. We, after all, are ‘the Nation’. But I wonder if Mr Snowden might be more accurately described as having compromised the State’s security rather than the Nation’s. Which doesn’t sound nearly as good, does it? State security has a ring of the Stasi about it. And for good reason. Protecting the interests and security of the State is quite different from protecting the interests of the people who make up the Nation. One is about protecting you and me. The other is more about protecting the position, power and wealth of those who make up the State and its various organs of power. State security is about the security of the jobs and social postion of those who are ‘the State’. It is about the security of a particuar arrangement of power and those who benefit from that arrangement. Which one does the NSA or GCHQ serve? Which did Mr Snowden really compromise by revealing the extent of the NSA’s and GCHQ’s indiscriminate and unlawful spying upon ordinary and innocent citizens?
If we wish to hold on to the fiction that the NSA and GCHQ work for their respective Nations then how do we explain that the people we elect, even very senior members of the State, even within the government of the day, had NO idea what the NSA or GCHQ were doing? Certainly the NSA and GCHQ were financed by us, and draw their original legitimacy from us, but they no longer answer to those who we elect. So who do they answer to? To what are they loyal and to whom do they report?
Think of how different ‘One Nation under God’ sounds from “One State under God”.
My point is that we are so used to thinking of the State – our elected officials and the machinery that carries out their wishes, as being part of the Nation, loyal to it and us, that we are not seeing clearly that this relationship has ended. I am not saying that the old relationship between Nation/People, State and Market has altogether gone. It has not. Not everyone in the State has forsaken their old loyalties. We are in a moment of transition. But I am saying we need to see the new relationship more clearly, if we possibly can, because only then can we defend ourselves.
We are at war, we need to know who our real enemies are and take up arms against them.
The New World Order
While everyone agrees you cannot stuff a square peg into a round hole, when it comes to the new and unfamiliar, humans have a dreadful habit of trying. I think this is particularly true at the moment. The world is changing, a new order of things is taking shape around us but we are loathed to see it because we insist on trying to see everything through the lens of the previous world order.
The old order was laid out from left to right: Communist to Libertarian. From those who felt the State was there to guarantee certain protections and provide a minimum of welfare and service, over to those who felt any intervention from the State was no more than an abuse of power by a group of self serving insiders. Largely this is still the range of thought and opinion. Those on the Left see the Free Market as the greatest danger to liberty, welfare, justice and fairness, and regard the State as our best protection against it. While on the Right the fears are exactly the same but the State is now the great danger and the market the best protection. Each side regards the other as hopelessly, even criminally, misguided. Each side sees the other advocating that which will bring disaster.
Into this sterile and suffocating tweedledumness a new ideology and power has grown. It is neither Libertarian nor Left, but has been called both. The Libertarians have seen how eagerly and constantly this new politics intervenes in and distorts the market and cries “Socialism”. Which, it has to be said, makes anyone who knows anything about Socialism gasp with amazement. Nevertheless you can read this ‘it’s socialism’ opinion in most of the right wing press and on most blogs where Libertarians comment, such as ZeroHedge or The Ticker.
On the other hand the Left sees the way the new politics intervenes on behalf of and protects the interests of the wealthy (The financial class and global corporations) doing nothing about tax avoidance, nothing to regulate the banks, insisting instead that the only answer is more free market, less regulation and austerity to be borne by those least able to bear it – and sees clear evidence that this new politics is right wing and libertarian.
Both sides seems only able to see things in terms of the labels and world view they are used to and as a consequence see nearly nothing at all. The truth, I suggest, is that we are at a moment when an entire cultural form is ending. At such times it is not one part or another, government or market, which corrupts and breaks, which betrays the values it was meant to embody and ceases to do the job for which it was created, it is all parts at once. All parts of our society have become corrupted.
We must move beyond the politics of the last century, seeking to blame all ills on a corrupt and captured State or alternatively on a corrupt, captured and rigged market. BOTH are true. Both are corrupt. Neither is working for us. A new elite exists in every nation, has control over every State but which has no loyalty to the Nation of people in which it exists any more than a tape worm is loyal to the creature in whose body it feeds and grows.
The New World Order has its own ideology which does not fit happily on the old left to right axis.
The new ideology is not fully formed yet, but already it is clear that it is not Libertarian because unlike Libertarianism, the new ideology believes the State should be very powerful and large and should intervene. But neither is it Socialist, because unlike the Left the new ideology believes those interventions should be on behalf of the wealthy not the poor.
It’s a new world. We need to see it anew.
In Part Two I will look in more detail at what I merely introduced almost in passing in this introduction: the new and rapidly mutating and evolving ideology in the world of Finance, in particular at Bilateral Investment Treaties which are the real danger point inside the Trade Agreements currently being negotaited. And the mutation of the security and Intelligence world into something that spies upon Nations rather than working for them, in the serivce of a new ‘Greater Good’.