Fears of global oil crisis aired at Transatlantic Energy Security Dialogue. : Jeremy Leggett’s Triple Crunch Log
Jeremy Leggett column in Recharge magazine: “We are betting our entire national economic life on the hope — indeed the expectation — that the fracking boom will continue until well into the 2020s, and that, at a rate and cost we desire, significant amounts of ‘yet to be discovered’ oil will somehow be found to meet the demand.”
“If any of that proves incorrect, we have no plan, no alternative, and have given no thought to how we would respond in such a case.”The speaker is national-security expert Lieutenant Colonel Daniel Davis, a veteran of four tours of duty with the US Army in Iraq and Afghanistan. I am not a military man, but I worry just as much about the energy security of my own country as he does about his. In the UK, the government, the civil service and most of the big energy companies seem perfectly content to replicate the grand gamble under way in the US.
On 10 December, Lt Col Davis and I convened video-linked gatherings in Washington and London of people who share our concerns about the risk of a global oil crisis. We also invited key people who don’t, but who were interested in probing beyond the propaganda that energy-policy discourse seems to attract these days. [Two powerpoints, and Agenda / Participants / Transcript of first half are appended below.]
Those joining us included retired military officers, security experts, senior executives from a wide spectrum of industry and politicians of all the main parties, including two former UK ministers.
We began with a presentation by Mark Lewis, a former head of energy research at Deutsche Bank. With this background, you might expect Lewis to be a disciple of the conventional narrative of plenty in oil markets. Many of his peers are. But he suggested that three big warning signs in the oil industry point to a counter-narrative of impending problems for supply: high decline rates, soaring capital expenditure and falling exports.
The decline rates of all conventional crude-oil fields producing today are spectacular; the International Energy Agency projects output falling from 69 million barrels per day (bpd) today to just 28 million bpd in 2035. Current total global production of all types of oil is some 91 million bpd.
Consider the spending needed to try to fill that gap.
Capex for oilfield development and exploration has nearly trebled in real terms since 2000: from $250bn to $700bn in 2012. The industry is spending ever more to prop up production, and its profitability is reflecting this trend, notwithstanding an enduringly high oil price. Meanwhile, consumption is soaring in Opec nations. As a result, global crude-oil exports have been declining since 2005. It is difficult to conflate this data and not see an oil crunch ahead, Lewis concludes.
What of the recent addition of two million bpd of new oil production from American shale: the boom that has even been cast as a “game-changer” and a route to “Saudi America” by industry cheerleaders?
Geological Survey of Canada veteran David Hughes, who has conducted the most detailed analysis of North American shale of anyone outside the oil and gas companies, offered some sobering views on this. His data shows that spectacularly high early decline rates in existing shale gas and shale oil (more correctly known as tight oil) wells means high levels of drilling are needed just to maintain production. This problem is compounded because “sweet spots” become exhausted early in field development.
As a result, shale-gas production is already dropping in several key drilling regions, and production of tight oil in the top two regions is likely to peak as early as 2016 or 2017. These two regions, in Texas and North Dakota, comprise 74% of total US tight-oil production.
Like Lewis, Hughes believes that the oil and gas industry is leading the world by the nose towards an energy crisis.
In my book The Energy of Nations, I describe how military think-tanks have tended to side with those, like Lewis and Hughes, who distrust the cornucopian narrative of the oil incumbency. One 2008 study, by the German army, puts it thus: “Psychological barriers cause indisputable facts to be blanked out and lead to almost instinctively refusing to look into this difficult subject in detail. Peak oil, however, is unavoidable.”
This blanking-out extends to the mainstream media, which has enthusiastically echoed the mantras of the oil companies, to the extent that the very words “peak oil” have been positioned as a badge of baseless scaremongering.
We should never forget that in the run-up to the credit crunch, the financial incumbency deployed exactly the same PR tactics against those warning about the fragility of mortgage-backed securities.
We investigate the long-term effects of the 2011 tsunami, including a potential cancer threat for Fukushima’s children.
101 East Last updated: 10 Jan 2014 09:59
|On March 11, 2011, the ground trembled and the sea engulfed the coastal towns in Japan’s Fukushima prefecture. The earthquake and tsunami led to a nuclear disaster which became synonymous with the infamous Chernobyl and Three-Mile accidents.
Today, spacious luxury neighbourhoods have been dramatically transformed into decaying ghost towns, a scene from a post-apocalypse movie. And two years on, while the country struggles to rebuild itself, many say the crisis is far from over.
On a stretch of lonely beach in the heavily contaminated no-go zone surrounding the crippled Fukushima nuclear plant, one man is on a lonely mission. His seven-year-old daughter is the only person unaccounted for after a five-storey tsunami crushed the nearby town of Okuma in March 2011. The authorities stopped looking for her long ago, but Norio Kimura has not and never will. It is unlikely he will find his little girl and yet he trudges on, looking for clues. Among the pieces he has found is a shoe he says belonged to his dead child.
In a private children’s hospital well away from the no-go zone, parents are holding on tight to their little sons and daughters, hoping doctors will not find what they are looking for – thyroid cancer.
Tests commissioned by the local authorities have discerned an alarming spike in the incidence of thyroid cancer in Fukushima children. Out of 200,000 children screened so far in government-ordered tests, there are 18 confirmed cases of thyroid cancer and 25 suspected cases. While specialists and experts are reluctant to draw a definitive link between the tumours and the nuclear radiation that erupted from the stricken power station, they are nonetheless deeply concerned.
Former thyroid surgeon, Akira Sugenoya says the spike in numbers should be taken seriously. He knows the devastation radiation can have after spending five years operating on hundreds of Chernobyl children suffering from thyroid cancer. But Professor Geraldine Thomas, a specialist in the molecular pathology of cancer in Imperial College London, says the fears are unfounded and have driven Japanese mothers to make unnecessary choices, including abortions.
It is not just the children who are a cause for concern. Farmer Kazuya Tarukawa worries that his crops have been contaminated and fears the radiation effects will be passed down the food chain. His crops may have passed the government’s radioactive safety limits but Tarukawa’s conscience is burning. He believes the government’s safety limits are inaccurate.
What are the long-term effects of Japan’s earthquake and tsunami? 101 East investigates the next wave of pain and fear after Japan’s nuclear crisis.
Spike in cancer detections and tainted crops. Is there a link to the #Fukushima nuclear disaster? @AJ101East #JapanNextWave
Today’s Reserve Currency = Tomorrow’s Wallpaper
Somehow, like it or not, the world turns. Today’s hegemon becomes tomorrow’s also-ran. Today’s reserve currency becomes tomorrow’s wallpaper. Today’s cock o’ the walk becomes tomorrow’s dinner.
Hey, we didn’t create this system. We don’t even especially like it. But that’s just the way it is. We’ll come back to this in a minute. First, let’s just note that Wednesday’s markets were losers for just about everyone. The Dow lost 68 points. Gold was down $4 an ounce.
Now, back to our thoughts on money – the same thoughts, incidentally, we’re having at Bonner & Partners Family Office,the family wealth advisory service my eldest son, Will, and I set up back in 2009 to help families hold onto … and pass on … their wealth.
Whether you already have made a fortune, or are trying to build one, you need to be very careful about what currency … or currencies … your wealth in denominated in.
The End of History?
Governments were set up to take control. Ruling elites – by force of arms – established laws, protocols and armies to try to prevent anyone from taking their place. Their wealth, power and status were to be preserved – at all cost. But in the 18th and 19th centuries, firearms started to become ubiquitous. It was harder for elites to maintain their authority over the masses.
Every farmer on the American frontier had a rifle. A rag-tag band of insurgents in the American colonies (with the help of the French Navy) could defeat the best army in the world. An out-of-work actor could buy a handgun and pop off a president.
Unable to stay in control by force alone, governments had to resort to fraud. Ordinary citizens were allowed to vote on who would rule over them. They were also promised the fruits of others’ labors, if they voted the right way. For a time, it looked as though this new model – social democracies run by flaming politicians and professional functionaries – had defeated all rivals.
The Soviet Union – which had relied on more old-fashioned blunt force to run its slave-driven economy – capitulated in 1989. Maoist China had thrown in the towel, more or less, 10 years earlier when the country’s “paramount leader,” Deng Xiaoping, announced, “To get rich is glorious.” (Historians now claim he never uttered those words. But the phrase accurately captured his vision for China.) And Francis Fukuyama – hallucinating – wondered if the “end of history” was at hand.
If the end of history were at hand, the dollar, the Fed and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we’d put our money on history. Most likely, history will trundle forward. And the renminbi will join (or replace) the dollar as the world’s leading currency sometime before the 21stcentury comes to a close.
But how, exactly, will that happen? No one knows … but few imperial elites give up the No. 1 position without a fight. As they see their power, their status and their wealth challenged, they typically find a casus belli, hoping to stomp the newcomer before it is too late.
The phenomenon is known to historians as the “Thucydides’ Trap.” Political scientist Graham Allison explains:
“When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, “It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable.”
Note that Thucydides identified two factors: a rising rival and fear of that rise. China is rising. The US power elite fears its rise. And for good reason. Having the world’s reserve currency is an “exorbitant privilege,” as Charles de Gaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as reserves. Or it is lent back to us.
From an economic point of view, the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer … based on promises to settle up sometime in the future.
In practice, nobody wants the day of reckoning to come. Because they all know that there are vastly more claims on tomorrow’s output than tomorrow can satisfy. Between 1971 and today, roughly $10 trillion more has been received by Americans in goods from overseas than has been shipped to foreigners. That money is an outstanding claim on US existing wealth and future output.
There is also (with some overlap) about $17 trillion worth of US government debt … also a claim on future American output. And this is just part of the total credit market debt of $55 trillion. (Not to mention the feds’ unfunded liabilities.)
To pay off these claims, the US would have to run a surplus. (When? How?) But instead of running a surplus, we run deficits. The federal government’s deficit, for example, is expected to be $744 billion this year. And the current account deficit is running at about $500 billion. Neither is near a surplus.
Edging Toward a Reckoning
Instead of edging toward a reckoning, all major governments seem to want to make the situation worse. The US stimulates its people to buy more Chinese-made goods. And China stimulates its manufacturers to make more stuff for people who can’t really afford it. Both are heading for trouble.
Americans are hooked on spending. They consume their wealth … and more. China is hooked on producing. As it adds productive know-how and capacity, it becomes more and more competitive. Not only can it produce more consumer output at lower prices, but also it can produce the latest in military hardware. It’s a matter of time before that fighting gear comes out. At least, that’s what history suggests.
If there is a military conflict, how will it turn out?
The US spends three times more than China on “defense.” Advantage: Pentagon. But as the Persians discovered in their wars with the Greeks, having the biggest, best-funded army does not necessarily give you an edge. Instead, it invites sluggishness, complacency and overreaching.
The US military is arguably the fattest, most zombie-infested bureaucracy in the world. It suffers from an overabundance of resources. It supports troops (at a cost of $1 million per soldier per year) all over the globe. It builds weapons systems that are often obsolete before they are put into service. It coddles armies of lobbyists, contractors, consultants, retirees, hangers-on and malingerers. Like all bureaucracies, it looks out first and foremost for itself. Looking out for the security of the nation is a distant second.
Its 11 huge aircraft carriers, for example, may be marvelous ways to generate contracts, fees and expenses. They may also be great ways to throw US military muscle into two-bit conflicts around the world. But put them up against a modern, electronically-sophisticated enemy … Then what?
We will probably find out …
The above article is from Diary of a Rogue Economist originally written for Bonner & Partners.
Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
Canada’s pipeline projects have been the focus of a series of mass demonstrations [Reuters]
|Two decades ago, deep within British Columbia’s coastal old-growth forests, a fierce battle was waged and won to preserve Clayoquot Sound from large-scale clearcutting.
The legendary clash between environmentalists and industry in Canada’s westernmost province sparked a new kind of eco-activism – and the biggest fight since is poised to play out in the months ahead, as the country moves closer towards approving a controversial oil pipeline to the Pacific coast.
Last month, project proponent Enbridge Inc received a substantial boost through a federally commissioned report, which recommended approval of the Northern Gateway pipeline – subject to a host of environmental and administrative conditions. Advocates say the pipeline, which would whisk more than 500,000 barrels of oil daily from the Albertan tar sands to supertankers in Kitimat, BC, would benefit the country by opening Canada’s oil industry to growing Asian and Pacific Rim markets. But environmental and aboriginal groups, whose lands the pipeline would cross, maintain it would threaten some of the country’s most precious natural resources.
While the federal Conservatives – who have vowed no project will be approved unless it is “safe for Canadians and safe for the environment” – have until July to consider the report and come to a final decision, it is widely expected the government will green-light the Northern Gateway. And once that happens, Chief Martin Louie of the Nadleh Whut’en First Nation says aboriginal groups will swiftly launch court action.
“That’s the only avenue that we have to try to protect our rights,” Louie told Al Jazeera, speaking on behalf of a group of aboriginal bands known as the Yinka Dene Alliance, who have banned Enbridge’s pipeline from their territories under indigenous law. “Beautiful British Columbia – that’s what it should be for our kids too. The way I grew up enjoying the land and everything, I want my children and grandchildren to do too.”
Stamp of approval
The Northern Gateway twin pipeline would stretch 1,177km between Bruderheim in northern Alberta and the deep-water port of Kitimat, BC. The westward line would have the capacity to transport 525,000 barrels per day of oil for export, while the eastward line would carry up to 193,000 barrels per day of condensate, a product used to thin oil for pipeline transport.
The $8bn project has been years in the making; in 2009, Enbridge announced it was seeking regulatory approval, setting off a public and governmental review process that will culminate with this summer’s final decision.
A major part of that process was the independent joint review panel, mandated by the Environment Ministry and the National Energy Board, which delivered its final report last month.
Tasked with assessing the environmental, social and economic impacts of the pipeline, along with the effects of tanker traffic within Canadian territorial waters, the panel ultimately recommended approval of the project subject to 209 separate conditions. “We have concluded that the project would be in the public interest,” the panel noted in its final report. “We find that the project’s potential benefits for Canada and Canadians outweigh the potential burdens and risks.”
Enbridge has said it will work to meet all of the panel’s 209 conditions – which range from developing a marine mammal protection plan to researching the behaviour and cleanup of heavy oils – along with a broader set of five criteria, including addressing aboriginal land rights, for heavy oil pipeline development set out by the BC government.
“We remain hopeful that we can work to address all concerns that our opponents have in a mutual spirit of cooperation and collaboration,” Enbridge spokesperson Ivan Giesbrecht told Al Jazeera, calling the December report “just one important step in a long process”.
The company contends the Northern Gateway will deliver more than $270bn in GDP to Canada over 30 years, along with $300m in employment and contracts for aboriginal communities and billions more in tax revenue and labour-related income during construction. Enbridge and other advocates, including the Alberta government, have described the pipeline as key to diversifying Canadian crude oil exports to markets beyond the United States.
“Access to ocean ports for Alberta’s abundant resources is important to not just Alberta’s but Canada’s economic future,” Alberta Energy Minister Diana McQueen said, noting resource developers get a lower price in the North American market than they could globally. The situation is compounded by the stalled Canada-US Keystone XL pipeline proposal, which has been awaiting US government approval amid years of debate over its route and environmental impacts.
Opponents, meanwhile, question Enbridge’s employment numbers and suggest the pipeline’s economic benefits have been overstated. The Northern Gateway has generated a wall of opposition from aboriginals and environmental activists who cite the risk of an Exxon-Valdez-level oil spill in BC’s pristine coastal waters. Dozens of aboriginal bands have signed a declaration against the project, pledging to refuse Enbridge access to their lands and watersheds, including the salmon-stocked Fraser River.
In addition to the risk of spillage from the pipeline itself, Greenpeace Canada – which has criticised Enbridge’s history of spills and leaks – points out that the oil-loaded, Asia-bound supertankers would have to navigate “one of the trickiest marine routes in Canada”, passing by a series of small islands in the Douglas Channel. More than a year ago, Enbridge came under fire for releasing promotional materials in which the islands had apparently been erased from a rendering of the channel, in what critics called an effort to downplay the risks.
“Enbridge’s Northern Gateway pipeline would stream the world’s dirtiest oil from northern Alberta to the BC coast and would be the catalyst for unbridled exploitation and potentially calamitous disturbance of our land, air, freshwater and marine environment,” said Chris Genovali, executive director of the Raincoast Conservation Foundation in Sidney, BC. Industrial activities accompanying the transportation of oil could destroy habitats for caribou, wolves, whales and wild salmon, he added.
Opposition House Leader Nathan Cullen, the federal New Democratic MP for BC’s Skeena-Bulkley Valley, believes a major spill from either the pipeline or tankers over the 50-plus-year lifespan of the project is a certainty. “The ability to clean up bitumen in the water is virtually nil,” Cullen told Al Jazeera.
The Northern Gateway proposal faces an additional hurdle from BC’s provincial government, which has refused to lend support to the pipeline until Enbridge proves it will employ “world-leading practices” on oil-spill prevention and response, respect aboriginal rights and ensure the province gets a fair slice of the economic pie. “Enbridge hasn’t met any of the conditions yet,” government spokesperson Sam Oliphant said.
Legal fight ahead
Enbridge points out that it has already incorporated input from British Columbians and aboriginal communities, resulting in almost two dozen changes to the pipeline route and other alterations, such as thicker-walled pipes and an increased capability to respond to marine spills. In addition, the federal panel found Enbridge had taken steps to minimise the chances of a large spill “through its precautionary design approach and its commitments to use innovative and redundant safety systems”.
None of this is enough for the project’s opponents, who maintain the Northern Gateway will be a pivotal issue in the 2015 federal election – and set the stage for a landmark court fight.
The expected avalanche of legal cases upon the pipeline’s approval will tie it up for years, said Keith Stewart, climate and energy coordinator for Greenpeace Canada. And if the government tries to proceed regardless, he said, thousands of people have pledged to engage in peaceful civil disobedience, just as protesters did decades ago in Clayoquot Sound – using blockades and peaceful demonstrations to achieve their environmental goals.
The question of land ownership, meanwhile, is a complex one. Aboriginal rights are protected under section 35 of Canada’s constitution, but proving aboriginal title requires proof of use and occupation, said lawyer Drew Mildon, who works for a BC-based firm planning to represent aboriginals in the anticipated Northern Gateway court battle. While many aboriginal groups living along the pipeline route assert title and rights, they have not yet gone to court to prove them, Mildon told Al Jazeera.
“I have no doubt the governments will try to ram through the pipeline regardless of First Nations objections,” he said. “As a lawyer working for First Nations in BC, and given the overwhelming First Nations and public opposition here, I believe the pipeline will likely never happen.”
Stewart agreed, citing a failure on the part of Enbridge and the federal government to shore up public support for the pipeline.
“Without that support,” he said, “it won’t be built.”
|Gunfire has been reported on the streets of Bangui in the Central African Republic’s capital after the news that interim President Michel Djotodia, facing international pressure, had agreed to resign after failing to halt inter-religious violence.
The resignations of Djotodia and Nicolas Tiangaye, the prime minister, were announced on Friday in a statement issued at a two-day summit of the Economic Community of Central African States (CEEAC) in neighbouring Chad.
Talks to decide on new leadership will take place in CAR, it said.
Under an agreement brokered by the CEEAC last year, CAR’s transitional assembly (CNT) elected Djotodia to his position as interim president in April to take the former French colony to elections, due at the end of this year.
As news from the summit reached Bangui, thousands of residents took to the streets, dancing, singing and honking horns in celebration.
Cheers erupted at a camp for 100,000 displaced Christian civilians at the city’s French-controlled airport.
There were no signs of the pro-Djotodia fighters who once dominated Bangui, Reuters news agency reported.
Power vacuum feared
Al Jazeera’s Barnaby Phillips, reporting from Bangui on Friday, said the gunfire broke out shortly after the resignation announcement.
“It is not possible to work out who is firing at who at this stage,” he said.
“The international community is going to have to react very quickly as there is no one regionally who can unite CAR.
“The foreign troops are largely welcome but they are not necessarily enough. The trouble in recent weeks and month has not just been in Bangui.”
Despite the celebrations on Friday, there are fears that the resulting power vacuum will lead to greater instability if it is not filled quickly.
Jean-Yves Le Drian, the French defence minister, said he wished for the new leadership to be announced “as soon as possible”, adding that “the aim is to move forward with elections before the end of the year”.
“We need the National Transitional Council to find a provisional alternative,” he said.
Thousands of people have been killed and one million displaced by cycles of violence since abuses by Djotodia’s mainly Muslim rebels, known as Seleka, prompted the creation of Christian self-defence armed groups after he seized power in March.
Chad summit decision
Djotodia’s resignation was announced after members of the CNT were summoned to the Chad summit late on Thursday to take a decision on the country’s future.
“We take note of the resignation. It is up to the CNT to decide what happens now,” Romain Nadal, a French Foreign Ministry spokesman, said.
“France does not interfere in any case with this process.”
With memories of Rwanda’s 1994 genocide stirred by the unrest, France sent hundreds of troops to CAR last month to support African peacekeepers trying to keep the peace.
But the killings have continued, and France has repeatedly voiced its frustration with Djotodia’s government.
France has 1,600 troops in the country, operating under a UN mandate to assist an African force that is due to be bolstered to 6,000 men.
It strengthened its military presence on the streets on Friday.
European Union officials have also proposed this week sending a military force to support the French contingent.
Despite telling us just yesterday that it would not take sides in the tensions in South Sudan…
- *U.S. NOT TAKING SIDES IN S SUDAN: PSAKI
the US government is on the verge of deciding to… take sides. As Reuters reports, the United States is weighing targeted sanctions against South Sudan due to its leaders’ failure to take steps to end a crisis that has brought the world’s youngest nation to the brink of civil war. Africa, aswe have discussed at length, remains the only region on earth with incremental debt capacity (and therefore growth in a Keynesian world) and so it is no surprise the US wants to get involved in yet another conflict.
“It’s a tool that has been discussed,” a source told Reuters on condition of anonymity about the possibility of U.S. sanctions against those blocking peace efforts or fueling violence in South Sudan. Another source confirmed the remarks, though both declined to provide details on the precise measures under consideration.
No decisions have been made yet, the sources added. Targeted sanctions focus on specific individuals, entities or sectors of country.
The U.S. government was unlikely to consider steps intended to economically harm impoverished South Sudan but would likely focus on any measures on those individuals or groups it sees as blocking efforts at brokering peace or committing atrocities.
As we discussed previously, there is an African scramble so it is unsurprisng the US would choose to take sides and get involved:
While those in the power and money echelons of the “developed” world scramble day after day to hold the pieces of the collapsing tower of cards in place (and manipulating public perception that all is well), knowing full well what the final outcome eventually will be, those who still have the capacity to look, and invest, in the future, are looking neither toward the US, nor Asia, and certainly not Europe, for one simple reason: there is no more incremental debt capacity at any level: sovereign, household, financial or corporate. Because without the ability to create debt out of thin air, be it on a secured or unsecured basis, the ability to “create” growth, at least in the current Keynesian paradigm, goes away with it. Yet there is one place where there is untapped credit creation potential, if not on an unsecured (i.e., future cash flow discounting), then certainly on a secured (hard asset collateral) basis. The place is Africa, and according to some estimates the continent, Africa can create between $5 and $10 trillion in secured debt, using its extensive untapped resources as first-lien collateral.
Africa is precisely where the smart money (and those who quietly run the abovementioned “power echelons”), namely China and Goldman Sachs, have refocused all their attention in the past year precisely because they both realize that Africa is the last and only bastion of untapped credit growth and capacity. But you won’t read about it in the mainstream papers: the last thing those who are currently splitting up Africa into its constituent parts want is for the general public to become aware what is in play. You will, however, read about it on these pages (see here and here and here). Also, if you are a Goldman client, you will certainly know all about it, as the firm ventures out with reverse inquiry indications of interest to its wealthy clients giving them the right of first equity refusal, and slowly but surely providing “financial services” to the last great hope for the developing world, which ironically is what most still consider the poorest continent…
Africa in geographical perspective…
Perhaps the most amusing and curious aspect of this entertaining summary of the Mississippi Bubble of 1720, the resulting European debt crisis (the first of many), how bubble frenzies are as old as paper money, the man behind both – convicted murderer and millionaire gambler, John Law, what happens when paper money’s linkage to gold is broken, and how everyone loses their wealth and hyperinflation breaks out, is who the source is. The New York Fed. Perhaps the Fed-employed authors fail to grasp just what their institution does, or have a truly demonic sense of humor. In either case, the following “crisis chronicle” highlighting how banking worked then, how it works now, and how it will always “work”, is a must read by all.
Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis
Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver. At the time, Law’s Banque Generale was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa. Things didn’t turn out exactly as Law had hoped, and in this edition of Crisis Chronicleswe meet the South Sea’s lesser-known cousin, the Mississippi Bubble.
Who Wants to Be a Millionaire?
John Law was an interesting figure with a colorful past. He was convicted of murder in London but, with the help of friends, escaped to the continent, where he became a millionaire through his skill at gambling. Like South Sea Company Director John Blunt in England, Law believed that a trading company could be leveraged to exchange the monopoly rights of trade for the ability to make low-interest-rate loans to the government. And like Blunt, in 1719 Law formed a trading company—the Mississippi Company—to exploit trade in the Louisiana territory. But unlike Blunt or the South Sea Company, the Mississippi Company made an earnest effort to grow trade with the Louisiana territory.
In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.
Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.
By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. The word millionaire was first used, and in January 1720 Law was appointed Controller General.
The Trickle Becomes a Flood
Reminiscent of a handful of florists failing to reinvest in tulip bulbs as we described in a previous post on Tulip Mania, in early 1720 some depositors at Banque Generale began to exchange Mississippi Company shares for gold coin. In response, Law passed edicts in early 1720 to limit the use of coin. Around the same time, to help support the Mississippi Company share price, Law agreed to buy back Mississippi Company stock with banknotes at a premium to market price and, to his surprise, more shareholders than anticipated queued up to do so—a surprise we’ll see repeated at the apex of the Panic of 1907. To support the stock redemptions, Law needed to print more money and broke the link to gold, which quickly led to hyperinflation, as we saw in our post on the Kipper und Wipperzeit.
The spillover to the economy was immediate and most notable in food prices. By May 21, Law was forced to deflate the value of banknotes and cut the stock price. As the public rushed to convert banknotes to coin, Law was forced to close Banque Generale for ten days, then limit the transaction size once the bank reopened. But the queues grew longer, the Mississippi Company stock price continued to fall, and food prices soared by as much as 60 percent.
To make matters worse, there was an outbreak of the plague in September 1720, which further restricted economic activity—in particular, trade with the rest of Europe. By the end of 1720, Law was dismissed as Controller General and he ultimately fled France.
Balancing Dispersed Debt Issuance against Central Monetary Policy
One might argue that Law suffered a self-inflicted loss of control over monetary policy once the link between paper money issuance and the underlying value of gold holdings was broken—a lesson that monetary authorities have learned over time. (ZH: they have? where?) But what if you don’t have direct sovereign authority over banknote issuance or, in more modern times, monetary policy? A challenge that’s perhaps most visible in the Eurozone is how best to balance dispersed, country-specific debt issuance against more centralized authority over monetary policy. In an upcoming post on the Continental Currency Crisis, we’ll see why a united fiscal policy was needed along with the united currency and monetary policies. Could the same be true of Europe? And if so, would a united fiscal policy include Eurozone debt as well as centralized fiscal transfers, or perhaps even collection of taxes? Tell us what you think.
The Fed Is Playing Global Pump-and-Dump
People often criticize me for objecting to the Federal Reserve’s Quantitative Easing (QE) and Zero Interest-Rate Policy (ZIRP) on the grounds that they are setting the stage for hyperinflation and a dollar collapse. Since neither has arrived—yet—people mock me, often pretty badly: “Hey Lira! How’s that 2% ‘hyperinflation’ working out for ya!”
|“The left side reminds me of Dow Jones.”
“Hmm! There does seem to be
a family resemblance . . .”
But even if you don’t buy that QE and ZIRP will lead to a dollar collapse, you do have to admit that these Fed policies have severely brainwashed investors.
Why ‘brainwashed’? Because today, due to the Fed’s policies, stock prices are booming—we’re about to crack 16,500 on the Dow Jones, NASDAQ is well on its way to 4,200, and the S&P is close to 1,850—all record highs.
What’s wrong with record highs? What’s wrong with booming stock prices? Absolutely nothing—unless you look at the two-year charts and realize that these three indices are not reflecting a robust, booming economy. Rather, they have had unrelenting climbs that have been openly—and exclusively—caused by QE and ZIRP.
Which has brainwashed investors into dismissing value. Today,all investors are momentum-chasing pump-and-dumpers who are not worrying about fundamentals, or worrying about the long-term health and well-being of a company.
All they have been brainwashed into caring about is the rise in a stock’s price.
Which is pretty funny, if you think about it: These investors might shun penny-stocks, they might buy and sell stocks by way of “respectable” brokerage houses—but these investors are behavingexactly like the suckers taken for a ride by sketchy boiler rooms operating out of north Jersey.
And we all know how those poor saps usually end up: Broke, holding on to worthless stock certificates not worth the paper they’re printed on.
Why is this happening? Easy, because of the Fed’s QE and ZIRP have so flattened the yield curve across Treasuries and the rest of the bond markets, that anything yielding better than 5%—in anyasset class, not just bonds—quickly gets priced up.
They call Treasuries the “benchmark” for a reason: As the (supposedly) safest asset class, they set the yield curve for allassets in all classes—not just in other bonds, but in equities and real estate as well. If Treasury yields are minimal, then a “normal” yield in a riskier asset class will also be minimal.
Look at the following chart:
|Click to enlarge.|
These are the Top 20 Dow Jones stock as measured by expected stock dividend yields for 2014. The mean of these Top 20 is 3.16%, the average 3.28%.
Now, these are the bluest of the blue-chips—repeat, the Top 20 as measures by yield. If you get dividends of 3.28% on these blue-chip stocks, and pay an income tax rate of say 35% combined State and Federal, you’re looking at a yield of 2.13%.
That’s yearly. That’s less than inflation.
So why are the yields on these oh-so-blue-chips so low? Because of QE and ZIRP’s unrelenting asset price inflation. That’s why you have companies like twitter—which does not have any income to speak of—with a market valuation of $38 billion or whatever.
Since nothing yields a healthy 6% or better, the only thing investors care about today is whether the price of the asset they “invest in” will rise within the year—so that they can sell it at a profit.
That’s not investing—that’s speculating.
By the way, unrelenting asset price inflation was the whole point of the Federal Reserve’s policies. Yeah, I know I went overboard with the combined bold-italics-underlined thing, but I just wanted to emphasize that point, and one other:
The Federal Reserve is the boiler room operation that has pumped up the equities market by way of QE and ZIRP. You are investing in a pump-and-dump scam. And like in all such scams, you will lose.
Clear enough for ya?
Crazy as this may sound, when you look at those measely yields for the Top 20 performer, you realize that investors for the time being are acting rationally: Since yields are minimal—in fact negative, after you factor in income tax and inflation—it pays investors to speculate, rather than to properly invest. Not only are the Fed’s policies goosing the equities markets, the tax code privileges speculators as well, by way of a capital gains tax rate which is lower than the income tax rate. You pay less taxes if you speculate than if you invest responsibly. (!)
Thus both the Federal Reserve and the IRS are encouragingspeculation. That’s how investors have become brainwashed: They think that this low-yield, high-asset price inflation, low-capital gains tax environment is the way things ought to be.
But even though the Fed is deliberately, openly goosing the market, no different from a Jersey boiler room operation, nobody’s complaining—or even realizing it—because at this time, investors are making money with this Global Pump-and-Dump.
It ought to be beautiful, right? Everybody making money, all happy in the world. Only problem is, these pump-and-dum scams always end. When do they end? When people stop believing in the hype. When people realize that the global economy is in the toilet, companies are not booming but barely getting by, and there’s nothing on the horizon which will restart the economy. When people—and not a lot of people, mind you, just a tipping point estimated at about 10%—realize that this game that the Fed is playing with QE and ZIRP is a game of musical chairs.
That’s when the Fed’s Global Pump-and-Dump Scam will blow up.
You don’t think as I do that QE and ZIRP will lead to hyperinflation and dollar collapse? Fine, that’s cool—but admit that these Fed policies are skewing the market: They are turning investors into speculators—scratch that, brainwashing them intogamblers.
And it will all end in tears—these schemes usually do. I for one am keeping an ear on this game of musical chairs, trying to anticipate when the music will stop.
» Household Gun Ownership Surges In 40 Year Trend Reversal Alex Jones’ Infowars: There’s a war on for your mind!
January 10, 2014
The number of households owning guns in 2013 has surged to 39 percent, a five point increase on 2012 figures, and signaling that a general decline in gun ownership may be reversing.
A survey by The Economist and YouGov found that almost 4 in every 10 US households now have guns. A slim majority of 56 percent say they do not keep guns at home.
The poll found that 30 percent of households with guns identify as Democrat, while 49 percent say they are Republican.
Gun sales hit new records in 2013
Gun control proponents have routinely argued that a large increase in gun sales in recent years is not a reliable indicator of increasing gun ownership popularity, because the same individuals may be buying multiple firearms. These latest figures, however, are more difficult to dispute.
Indeed, the aggressive push for increased gun control by the government in the last year, seems to have been the driving force for actually increasing gun ownership among American households.
According to the General Social Survey, the leading societal trends data source in the US, household gun ownership has been in decline for four decades. In the 1970s gun ownership was at 50 percent, falling slightly to 49 percent in the 1980s, 43 percent in the 1990s, and down to 35 percent in the last decade. In 2012, the figure was at 34 percent, meaning that the general trend has been halted and reversed.
The real trend of gun ownership has not gone unnoticed by investors, with stocks in gun companies soaring. According to The Wall Street Journal’s Market Watch, “those who bought [stock in] Smith & Wesson in the aftermath of [the heinous crime at Sandy Hook Elementary] have made profits of more than 60 percent.”
Those who bought Sturm, Ruger & Co. stock have made profits of “nearly 80 percent.” These investments beat “the overall stock market by more than two-to-one.” the report notes, concluding that “Gun control is dead as an issue.”
The latest Economist and YouGov poll also found that more Americans believe it very unlikely (31%), or somewhat unlikely (27%) that new gun control measures will pass, than those who believe it very likely (10%) or somewhat likely (24%).
When asked whether gun control laws should be made more strict, 48 percent said yes, while a total of 49 percent said there should be no change or that gun laws should be made less strict.
Gun proponents and pro Second Amendment rights groups believe that crime statistics often cited by the government have been spun to suit the Obama administration’s crack down on gun ownership.
As Alex explains in the following clips, more accurate figures can be garnered from the FBI’s analysis, which concludes that increased gun control directly correlates with more gun related crime, as more individuals are left unarmed and defenseless.
Steve Watson is the London based writer and editor for Alex Jones’ Infowars.com, andPrisonplanet.com. He has a Masters Degree in International Relations from the School of Politics at The University of Nottingham, and a Bachelor Of Arts Degree in Literature and Creative Writing from Nottingham Trent University.