Olduvaiblog: Musings on the coming collapse

Home » 2014 » January » 26

Daily Archives: January 26, 2014

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?.

Currency CollapseThis time, the Federal Reserve has created a truly global problem.  A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets.  But now that the Fed has decided to begin “the taper”, investors see it as a sign to pull the “hot money” out of emerging markets as rapidly as possible.  This is causing currencies to collapse and interest rates to soar all over the planet.  Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far.  In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008.  And all of this chaos in emerging markets is seriously spooking Wall Street as well.  The Dow has fallen nearly 500 points over the last two trading sessions alone.  If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.

A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens.  But actually, right now just the opposite is happening and it is causing chaos all over the planet.

For instance, just check out what is happening in Turkey according to a recent report in the New York Times

Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.

On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”

“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”

As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze.  Just having enough money to purchase the basics is going to become more difficult.

And this is not just limited to a few countries.  What we are watching right now is truly a global phenomenon

“You’ve had a massive selloff in these emerging-market currencies,” Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. “Ruble, rupee, real, rand: they’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”

So why is this happening?  Well, there are a number of factors involved of course.  However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis.  A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets…

Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.

But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.

“Emerging markets need the hot money but capital is exiting now,” says Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.'”

What we are potentially facing is the bursting of a financial bubble on a global scale.  Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say…

If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.

I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.

And many smaller nations are being deeply affected already as well.

For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse

Liberia’s finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia’s currency against the US dollar.

“Let’s be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control,” Amara Konneh told lawmakers, while adding that the government was “concerned” about the trend.

Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness.  If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.

Like I said, this is something that is happening on a global scale.

If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.

Hopefully something can be done to stop this from happening.  But once a bubble starts to burst, it is really difficult to try to hold it together.

Meanwhile, I find it to be very “interesting” that last week we witnessed the largest withdrawal from JPMorgan’s gold vault ever recorded.

Was someone anticipating something?

Once again, hopefully this crisis will be contained shortly.  But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.

And if you listen carefully, global officials are telling us that is precisely what we should expect.  For example, consider the following statement from the finance minister of Mexico

“We expected this year to be a volatile year for EM as the Fed tapers,” Mexican Finance Minister Luis Videgaray said, adding that volatility “will happen throughout the year as tapering goes on”.

Yes indeed – it is looking like this is going to be a very volatile year.

I hope that you are ready for what is coming next.

Wheelbarrow of Money

First HSBC Halts Large Withdrawals, Now Lloyds ATMs Stop Working | Zero Hedge

First HSBC Halts Large Withdrawals, Now Lloyds ATMs Stop Working | Zero Hedge.

Update: things are back to normal – Lloyds will gladly accept your deposits again:

Lloyds Banking Group says problems affecting cash machines and debit cards have been resolved

— Sky News Newsdesk (@SkyNewsBreak) January 26, 2014

First HSBC bungles up an attempt at pseudo-capital controls by explaining that large cash withdrawals need a justification, and are limited in order “to protect our customers” (from what – their money?), which will likely result in even faster deposit withdrawals, and now another major UK bank – Lloyds/TSB – has admitted it are experiencing cash separation anxiety manifesting itself in ATMs failing to work and a difficult in paying using debit cards. Sky reports that customers of Lloyds and TSB, as well as those with Halifax, have reported difficulties paying for goods in shops and getting money out of ATMs.

All three banks are under the Lloyds Banking Group which said: “We are aware that some customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. “We are working hard to resolve this as swiftly as possible and apologise for any inconvenience caused.”

Further from SkyNews, TSB, which operates as a separate business within the group, issued a statement saying: “We are aware that some TSB customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. “This has impacted all Lloyds Banking Group brands. We are working hard to resolve this and unreservedly apologise for any inconvenience caused.”

TSB chief executive Paul Pester said in a tweet: “My apologies to TSB customers having problems with their cards. I’m working hard with my team now to try to fix the problems.”

Clients were not happy:

On the microblogging site, one TSB customer Nicky Kate said: “Really embarrassed to get my card declined while out shopping, never had any problems with lloyds then they changed my account.”

Hannah Smith: “I am a TSB customer with a Lloyds card still (like everyone else). And I’ve been embarrassed three times today re: card declined.”

Another customer Julia Abbott ‏said: “Lloyds bank atm and card service down. 20 mins on hold to be told this. Nothing even on website. Shoddy lloyds. … shoddy.”

Helen Needham ‏said: “#lloyds bank having problems with there card service… Can’t pay for anything or get money out!”

Another Twitter user wrote: “This problem is also affecting Halifax debit cards as I found out trying to pay for lunch with my wife!”

And Jane Lucy Jones tweeted Halifax, saying: “Why can’t I get any money out of any cashpoints, what is going on?

What is going on is known as a “glitch” for now, and perhaps as “preemptive planning” depending on who you ask. Sure, in a few months in may be called a bail-in (see Cyprus), but we will cross that bridge when we get to it.

James Turk: We’re Living Within A Money Bubble of Epic Proportion | Peak Prosperity

James Turk: We’re Living Within A Money Bubble of Epic Proportion | Peak Prosperity.

James Turk believes the time we live in now will be studied by future historians for generations to come. Just as we today marvel at the collective madness that resulted in the South Sea and Dutch Tulip manias, our age will be known as the era when society lost sight of what money really is.

And as result, the wrong kinds of wealth – today, that’s mostly financial assets – are valued and pursued. And just like those bubbles from centuries ago, when the current asset boom goes bust, the value of paper wealth will vaporize.

In contrast, those holding tangible productive assets or real money will fare much better on a relative basis.

James and co-author John Rubino (of DollarCollapse.com) have recently published a new book covering the details of this prediction called The Money Bubble: What to Do Before It Pops. Within it, they delve into the reasons for why the world is destined for what Ludwig von Mises termed a “crack-up boom“:

Wealth comes in two forms.  It comes in financial assets, bonds, and T-Bills, and things of that nature, and it also comes in tangible assets: real estate, oil wells, timberland, farmland, houses and things that are tangible. And when you’re in a financial bust – and we’ve been in a financial bust since the dot-com bubble collapsed back in 2000 – what you want to do is you want to be involved with tangible assets and you want to avoid, as much as possible, your involvement in any financial assets.  So, consequently, what people should still be focusing on, even though we’re 14 years into this bust, is continuing the accumulation of tangible assets.

Because when this bust is over, promises are going to be broken left and right.  And that means financial assets where you have counterparty risk where you own an asset, the value of which is based on someone’s promise – a lot of those financial assets are going to be diminished in value.  Now, there’s a special kind of financial asset called a stock in a company.  It’s almost like a tangible asset in the sense that if you own stock in EXXON, you’re basically owning a tangible asset, because it’s involved in oil and it owns tangible assets all over the world.

But then, there are financial stocks, credit-card companies and banks, that are financial wealth rather than tangible wealth.  So, you don’t want to own stocks in those companies.  So, basically, own tangible assets or stocks in companies that are involved with tangible assets – those stocks, I call near-tangible – I think that’s the thing that everybody should be focusing on.

And when it comes to money and liquidity, the money, of course, would be physical gold or physical silver or a combination thereof because they will re-emerge in the historical and traditional role as money.

Keep in mind, gold’s been money for 5,000 years.  It was made money by the market.  Money comes from the market.  It doesn’t come from the government.  Over the past century, government’s certainly usurped that authority to control money.  And over the last 40 years, they’ve gone even further afield by completely divorcing fiat currency from the gold that used to back money.  And because of the time element that’s involved, we’ve lost sight of what money really is, and that’s what’s created the money bubble, Chris.

And it’s this money bubble where people have to come back to reality as to what money really is.  It’s liquid, tangible assets being used in the economy in exchange for real goods and services.  And it’s ultimately where we’re going.  And I think it’s going to be very, very disruptive because if you look at an individual country like Weimar, Germany or Zimbabwe more recently, or what Venezuela or Argentina are going through now.  You can see the disruption to the economy when the money is no good.

We’re talking here about fiat currencies throughout the world because nobody’s tied to gold anymore.  No country’s currency is tied to gold anymore.  So this is going to be the bubble, I think, that generations from now, hundreds of years from now people are going to be talking about just like we talk today about the South Sea Bubble or the Mississippi Bubble, from those episodes in history a couple hundred years ago.

Click the play button below to listen to Chris’ interview with James Turk (35m:26s):


Chris Martenson: Welcome to this Peak Prosperity Podcast. I am your host, Chris Martenson, and today we have the distinct privilege of speaking with James Turk, founder of GoldMoney and whose experience in markets and precious metals spans more than four decades. He is also Director of The GoldMoney Foundation, a not-for-profit, educational organization dedicated to providing information on sound money.

James is one of the foremost authorities on precious metals and has long offered market forecast and commentary, including co-authoring The Collapse of the Dollar and How to Profit from It, with our good friend, John Rubino of DollarCollapse.Com.

John and James, they have a new book out called, The Money Bubble, which has some interesting insights, which we’re going to discuss today.

I’m delighted to have you back, James.

James Turk: Thanks, Chris. It’s always great to speak with you.

Chris Martenson: I have a tall stack of questions prepared. Are you ready to dive in?

James Turk: I sure am.

Chris Martenson: All right. Well, great. Let’s start here. It’s been a while since “The Coming Collapse of the Dollar” was written. Obviously, a lot has changed. And some things haven’t changed. The landscape has some familiar features that you wrote about back then. Some of the things you wrote about came to pass.

Obviously, there have been some heroic measures, if we can call them that, on the part of central banks to continue things as they are.

What sort of a grade would you give them?

James Turk: Well, whenever you’re going to intervene in free markets, I always have to give them an “F.” In terms of what they should be doing, they should be allowing individuals to buy out early, interact with one another without all of this intervention and trying to control individual lives by trying to control all economic activity.

But in terms of being able to kick the can down the road, which is I think what you’re getting at, I’d probably give them an A+ because they’ve managed to keep this system together longer than John and I originally suspected when we put “The Coming Collapse of the Dollar” together back in 2004.

In that book, Chris, were a couple of major themes that John and I made. One was that you should be buying gold, and secondly, you should be betting against the housing bubble, and do that in a variety of different ways including shorting financial stocks.

And when 2008 came along, we thought that the final piece of the puzzle would fall at the place where the dollar would collapse. Generally, as currency, gold would soar. And maybe central bankers and central pawners would get the idea that they’re on the wrong road and we have to go back to basics. But what they’ve managed to do is, an unprecedented amount of money printing has just built yet a bigger bubble. And this is the theme of the new book; the bubble itself is now money.

Chris Martenson: Money. And by money, quick definition – what do you mean when you say, “money”?

James Turk: Let me explain it this way. If you’re a shopkeeper, Chris, and I want to buy a loaf of bread from you, I go in and I’ll say, Well, I’ll pay you in a week’s time, but give me the loaf of bread now. You, as a shopkeeper, haven’t been paid. You’ve accepted credit. If I go into your shop and use “fiat” currency, it’s the same thing. You’ve accepted credit, and you’ve got payment risk associated with that. But if I go into your shop and buy a loaf of bread with a silver coin or a gold coin, the assets are exchanged for assets. There’s no lingering payment risk. The exchange is extinguished at that particular moment of time.

And that’s what really money is. Money is the most liquid, tangible asset in the economy, and that happens to be gold and, to a certain extent, silver as well. But we’ve lost sight of that. What we’re using today is not money. We’re using a money substitute in place of money, and that’s what’s created the illusion that that everybody’s acting upon, and it’s this illusion that’s really created the money bubble.

I think we have to go back to basics when this final, biggest bubble finally pops. The basics, of course, are that money is the most tangible asset and the most liquid tangible asset in the economy, which, of course, is gold.

Chris Martenson: I needed to check what you meant by “money” because there’s been this big debate between the deflationists/inflationists, and the proper definition of money has to include certain debt instruments and credit. And as you note in your book, and something that I’ve noted as well – since about 1980, we’ve been expanding our total credit markets by roughly twice the rate of the underlying economies underneath them. And that’s across most of the developed world.

So with this, when you’re borrowing like crazy – it gives you the sense of prosperity, that illusion, the idea is that you have to pay it back at some point. I think the debate, as I understand it right now, is between those who believe that fundamentally that catches up with you. You have to pay it back. You pay it back in the form of defaults or inflation or hyperinflation. But one way or the other, those claims get diminished or destroyed.

And on the other side, I think we have people who believe that you can just kick this can down the road indefinitely. And is that a fair way to summarize the state of the spectrum of thinking on this right now?

James Turk: Yes. I think that’s really a very good description of it. But clearly, I’m in the former camp that you can only take so much debt on in the economy because debt has to be serviced. You have to generate wealth to pay back the interest expense on the debt that you’re accumulating.

And ultimately that determines how far you can go. And we’re long past the stage where the amount of debt has been put on the – the burden on the economy where the service interest can be properly serviced. And what they’re trying to do is to perpetuate the system by debasing the currency. But as you debase the currency, you’re ultimately destroying capital.

Look at the middle class and savers and generally how badly they’re being hurt by this policy of zero interest rates. You’re basically destroying capital with this policy of zero interest rates. You’re destroying purchasing power. But it’s being done simply to make it appear that the U.S. Government can continue to fulfill all of these promises that it has made and that it can continue to service this debt burden – but it can’t.

Let’s put some numbers on it. There’s $17-trillion of debt now, and that’s just the direct obligations of the U.S. Government. If interest rates were at one percent, that’s $170 billion. That’s about five percent of government revenues. If they went to a more normal level, you’re talking about an additional trillion dollars of expenses. And what that does is it puts you on this vicious downward cycle where the higher the interest expense becomes, the more money has to be printed to keep the system going. But that just leads to higher interest expense and ultimately hyperinflation of the currency.

And my guess is that’s the way we’re headed.

Chris Martenson: Well, let’s take a petri dish sort of an example around this. Japan – and Japan cuts both ways in this story. One, some people hold it out and say, Well, look, obviously you can hold interest rates at one percent pretty much indefinitely. Japan’s got a couple of decades of financial repression under their belt. And so that’s held up as an idea that that can carry on forever.

I just saw a tweet this morning from a Robert Ward, very interesting. In 2010, the population of Japan was 128 million. Best-case trend is that in 2100 they’ll have 65 million. Worst case, they’ll have 38 million people.

The question that was asked on that: Who pays back all the public debt again? So, here’s Japan piling up their public debt faster and faster and faster into a declining population, which I think just lays bare, in a fairly large petri-dish example, just how ridiculous this glide path that they happen to be on really is.

And is that a fair way to look at it? And if it is, is Europe or the United States on any different of a path?

James Turk: No. They’re really not. And ultimately, if you really look at the total level of debt, not just the direct debt but all of the promises that it made, the only rational conclusion that one could come up with is that a lot of promises are going to be broken.

What those broken promises will be, will be determined in the future by politicians. But we’re generally – given the fact that they only have a limited capacity to fulfill all of these promises, you as an individual investor has to basically decide, do you want to participate in any kind of government promise, be it the T-Bill or T-Bond, Social Security payment or whatever, hoping that you’re going to choose correctly and that they’ll continue to make good on the promise that they’ve given you?

Or, do you just want to avoid the sector completely, which is what I recommend, and go to something that’s safe, which is basically tangible assets and avoid debt instruments.

Chris Martenson: Let’s get to the theory of how this all comes to an end. Obviously, interest rates are one form of the Achilles’ heel, but you have in your book a notion of something called the “crack-up boom.” What is a crack-up boom?

James Turk: Yes. The term comes from Ludwig von Mises, the Austrian School of Economics. And basically, it’s just a shorthand way of saying that governments will destroy the currency to relieve the burden of all of the promises that they made when you reach that point in time that you can’t fulfill all of the promises.

So yes, crack-up boom is basically a flight from the currency, because people want to exit the currency, because they know it’s going to continue losing purchasing power, because of government and central bank actions that debase the currency.

Chris Martenson: This is an interesting point, then, because all fiat currencies owe a large portion of their value, as it were, to faith. We have to have faith, particularly on an international setting. Within a border, a government can dictate that your currency has value because a) you have to pay taxes, and b) they can arrest you and do other things in circumstances if you don’t trust their currency appropriately.

But given that trust is a component of this, that’s really what in my mind shifts you from an inflation to a hyperinflation. Hyperinflation is just a state of mind more than an actual mathematical place to be. It’s when people have lost confidence in the paper currency and they want to be in anything else.

So let’s talk about – you talked in your book, again, about distorted signals and lost trust. What are you talking about when you say “lost trust”? Because I’ve lost plenty of trust; I’m wondering how you characterize that?

James Turk: Yes. People don’t trust institutions anymore. They don’t trust the government anymore. The approval rating of Congress is something like 8%. And ultimately, people start to question what’s going on. They realize they’re not being treated fairly by what government is doing. The banking system is favored over individuals. Eighty percent of the American population was against the bailout in 2008, the bailout of the banks. But the banks got bailed out anyway.

And all of these things lead to, ultimately, a breakdown in trust. And the economy depends upon everybody being able to work with everybody else on a level playing field. That’s what governments are supposed to do. They’re supposed to maintain a level playing field by maintaining a standard rule of law that everybody abides by regardless of whether you’re a big bank or a little shopkeeper on Main Street or a husband and wife trying to get by in a very difficult situation.

But the playing field has been tilted now. It’s been tilted by various vested interests to serve themselves, rather than to serve the general public. And that ultimately leads to a major breakdown in trust and a flight from the currency in the Crack-Up Boom.

Chris Martenson: You talked about shrinking trust horizons. You had a list of things that might be indicators of that. This reads like my personal indicator list, by the way, where people might begin buying local food instead of national brands because they no longer trust the institutions that are producing the food. Community banks over money center banks. I have most of my wealth stored in community or local banks. Homeschooling over public schools – started that about eight, 10 years ago, tuning out national politics, etc. and so forth.

There’s a whole list there saying that people have lost a bit of faith. We detect that in the Congressional approval ratings.

There’s another one I’d like to talk about here for a minute, which is sort of my own proxy. And I’m looking at a chart here of CNBC viewership. So, CNBC being one of the primary mouthpieces for Wall Street, Here’s how you invest in the markets. Buy stocks. Here’s how you participate in the equity markets.

And what’s interesting in this chart is that their viewership rose all the way through the 1990s right up through 2000. So, the viewership rose with a rising market. And then it fell again down into a depth at around 2003 or 2004, and then it rose again with the markets up to 2007; fell and has continued falling; there’s been no recovery in their viewership with the so-called return of prosperity as evidenced by all-time new highs in global stock markets in many cases.

Why do you – is this – is it fair? I mean, when I’m looking at this, I’m thinking that the reason their viewership is falling off is the same reason I’m not watching, which is, I don’t think there’s any useful information on that program for a person like me.

James Turk: Yes. I think you’re right. There’s a bigger-picture issue here. You sort of touched on it in what you were just saying, that during periods of rising prosperity, the viewership rose, but during periods of declining prosperity, it didn’t.

So, despite what you hear in the media about the economy supposedly getting better, it’s not. There’s no rising prosperity in pretty much most of the world today, because the economy is getting worse and worse, because fewer and fewer people are working today. There are less people working now in America than there were back in 2005.

And the only way an economy is going to improve is if you have people interacting with one another, and that comes with a greater number of people working.

So, it brings up another point, Chris. Not only is there a decline in trust, but we have to look at the other side of the coin. It’s that the less people trust institutions or governments, the more governments respond by exercising financial repression.

What they do is, they try to maintain the system by imposing more and controls. And it’s these controls that ultimately are the final last-gasp effort by government to maintain a system that is no longer sustainable.

And you’re seeing these controls now being imposed regularly, not only in the United States but in many countries around the world. Increasing government intervention is not the solution to the problems that are faced today. The solution to the problem is less government, less taxes, less burden on working individuals and a sound money so that people can interact regardless where they are in the world, on a level playing field, because these interactions create commerce and it’s commerce which raises everybody’s standards of living.

And that’s ultimately what government should be doing – withdrawing all of this financial repression, withdrawing all the taxes and the overheads and the burdens, and let individuals get on with their lives.

Chris Martenson: Well, James, one man’s repression is another man’s gold mine. The financial repression has certainly been hitting savers of all stripes, people living on fixed incomes, pensions, endowments, you name it. But there have been absolutely enormous beneficiaries of that, not the least of which is seeing the rising wealth gaps that occurs everywhere – which, by the way, is just a mathematical function of what happens when you print money. Those closest to it certainly do very, very well. And those further from it do less well, even negatively well.

And so what I’m seeing in this data is, first of all, it’s fully predictable that when the Fed, et al., meaning all the other central banks, do what they do, there’s going to be a certain class of speculators that are going to reap the majority of those gains.

What do you think – I mean, just to speculate for a second – the Fed’s now got five going on six years of information about how their policies are working by many, many of the statistics that we’ve talked about here: unemployment, the true nature of the unemployment when you dig into the statistics a little between part-time/full-time jobs, the amount of capital expenditure spending by corporations. There’s a lot of things to say the seeds for good, organic growth are simply not there.

They’ve created a speculative arena, which they should have known was what they were going to create, because there’s lots of papers written about that well-known phenomenon. What do you think they’re thinking now going on into the sixth year of this?

James Turk: I don’t know. It’s hard to put myself in the shoes of a central banker. But I mean, if they looked at themselves honestly, here we are supposedly five, six years into an economic recovery, and they’re still printing money hand over fist? I mean, how can that possibly be? If they’re supposedly having good economic activity, why do they continue to print money?

Central bankers only have one solution to everything. They just print money and print money. But what they don’t understand is they’re ultimately destroying the currency and destroying the economy as a consequence.

Yes, Bernanke today could be very much compared to Doctor Havenstein, who ran the Reichsbank in Germany, which was its central bank during the Weimar Republic in the early 1920s. He felt that he had to continue buying government debt and turning it into currency because if he didn’t, that there would be an economic collapse and unemployment would rise.

Well, Bernanke’s turning U.S. government debt into currency for the same thing. It didn’t work out well in Germany. Obviously, central bankers should be reading the history books to see what happens as a consequence of money printing. This is one of the key themes that John and I are putting in this book, that we’re on a path that’s unsustainable, and we have to turn around and basically go back in the right direction. And each individual themselves has to take those steps to make sure that they themselves – they and their family – are protected come what may. And what we do is offer a variety of different ideas as to how to do that. And of course, precious metals are a key element of that strategy.

Chris Martenson: Let’s get to precious metals in a minute. One of the more enduring debates is whether or not precious metals are being manipulated in any way, shape, or form. So, before we talk about the potential for various market participants, I’ll call them, to manipulate the price of gold or silver – let’s review a couple of the other market riggings and overt frauds that we know about.

The LIBOR Scandal, if you followed that, that’s the very definition of a huge, gigantic conspiracy involving lots and lots of players that persisted for years and years. And yet, it was, they are fiddling around with rates that literally impact hundreds of trillions of dollars of derivatives and related investments.

So, when you look at the LIBOR Scandal, what – do you see anything other than big banks behaving badly?

James Turk: Absolutely not. I think that is a good example, and it’s just one of many. I mean, look at the number of things that various banks have become involved with in terms of scandals, and lying to authorities, lying to regulators, lying to customers. Why are precious metals any different from any of the other things that central banks have tried to do?

And it all comes down to the interest rates. Gold is money. It has its own interest rate. The market is basically for interest rates controlled by governments, so they have to control the gold price in order to control gold interest rates. It’s very simple and very straightforward.

But there’s a bigger picture here, Chris. What governments are doing now is no different than what they’ve been doing for over 100 years. It used to be under the classical gold standard, but what governments did is they managed domestic currency in order to maintain the constant purchasing power of gold.

About 100 years ago, they flipped that around. They started managing gold in order to maintain the ever-diminishing purchasing power of the domestic currency, and they do that by trying to control the gold price. I mean, we saw a good example of it in the 1960s, particularly with the collapse of the central Banking Cartel called the London Gold Pool. When eventually they couldn’t sustain the financial depression anymore, the gold pool collapsed and the gold price rose.

We have a similar set of circumstances today. We’re getting, I think, very close to the stage where the managing of the gold price or manipulation or the intervention in the market, however you want to describe it, is approaching its end. And that ultimately means a much higher gold price in the months and years ahead.

Chris Martenson: I just want to tick down this list I’ve got because it’s really instructive. So, my view is this: Anything that banks or central banks can do in order to achieve a profit or a policy aim, they will do. And banks, in particular, have proven extraordinarily aggressive at all manner of frauds, many of them just rather dramatic.

So we mentioned LIBOR. They’ve also been implicated now in Forex and currency manipulations, particularly banging the close on those markets. There’s the gold price fix. Certainly, in London they had an investigation there. I think Germany’s now in on that. Bafin’s checking out Deutsche Bank.

Others, on the CDL markets there were material withholdings from clients. The energy markets in California and other states were heavily manipulated by banks that got tagged in that. Mortgages, obviously, the Platt’s oil prices for global oil prices, those benchmarks had been – it’s been alleged and is under investigation. Active rigging there.

The ISDA fix that sets the benchmark for a $380-trillion stock market also been tagged with banks just quietly backpedaling away, saying, We’re leaving. Don’t investigate us. And obviously, the daily high-frequency trading, quote-stuffing shenanigans, overt price manipulation – this is the world we live in now.

If it turns out that – when I look at that constellation, I say, Oh, you really just can’t trust that the bank’s self-interest and your interest align even remotely. They don’t.

So, what does a person who’s more of an average investor supposed to do when they see that’s the world that we live in and that regulators seem to be rather uninterested in untangling that mess. And what a mess it is. Where do they go? What do they do?

James Turk: Wealth comes in two forms. It comes in financial assets, bonds, and T-Bills, and things of that nature, and it also comes in tangible assets: real estate, oil wells, timberland, farmland, houses and things that are tangible. And when you’re in a financial bust – and we’ve been in a financial bust since the dot-com bubble collapsed back in 2000 – what you want to do is you want to be involved with tangible assets and you want to avoid, as much as possible, your involvement in any financial assets. So, consequently, what people should still be focusing on, even though we’re 14 years into this bust, is continuing the accumulation of tangible assets.

Because when this bust is over, promises are going to be broken left and right. And that means financial assets where you have counterparty risk where you own an asset, the value of which is based on someone’s promise – a lot of those financial assets are going to be diminished in value. Now, there’s a special kind of financial asset called a stock in a company. It’s almost like a tangible asset in the sense that if you own stock in EXXON, you’re basically owning a tangible asset, because it’s involved in oil and it owns tangible assets all over the world.

But then, there are financial stocks, credit-card companies and banks, that are financial wealth rather than tangible wealth. So, you don’t want to own stocks in those companies. So, basically, own tangible assets or stocks in companies that are involved with tangible assets – those stocks, I call near-tangible – I think that’s the thing that everybody should be focusing on.

And when it comes to money and liquidity, the money, of course, would be physical gold or physical silver or a combination thereof because they will re-emerge in the historical and traditional role as money.

Keep in mind, gold’s been money for 5,000 years. It was made money by the market. Money comes from the market. It doesn’t come from the government. Over the past century, government’s certainly usurped that authority to control money. And over the last 40 years, they’ve gone even further afield by completely divorcing fiat currency from the gold that used to back money. And because of the time element that’s involved, we’ve lost sight of what money really is, and that’s what’s created the money bubble, Chris.

And it’s this money bubble where people have to come back to reality as to what money really is. It’s liquid, tangible assets being used in the economy in exchange for real goods and services. And it’s ultimately where we’re going. And I think it’s going to be very, very disruptive because if you look at an individual country like Weimar, Germany or Zimbabwe more recently, or what Venezuela or Argentina are going through now. You can see the disruption to the economy when the money is no good.

We’re talking here about fiat currencies throughout the world because nobody’s tied to gold anymore. No country’s currency is tied to gold anymore. So this is going to be the bubble, I think, that generations from now, hundreds of years from now people are going to be talking about just like we talk today about the South Sea Bubble or the Mississippi Bubble, from those episodes in history a couple hundred years ago.

Chris Martenson: If a country was going to behave more rationally and responsibly, how would we detect that? Looking at, say, Europe to the U.S., some are saying Europe is not printing nearly to the same degree as the United States.

Do you find any merit in that sort of, let’s say, jurisdictional analysis where you’re lumping, all fiat currencies are headed for the same cliff?

James Turk: Yes. All fiat currencies are headed for the same cliff. And the way you’re going to turn away from the cliff is, you have to look at what the central bank has in terms of gold reserves. If the central bank still has a credible amount of gold reserves relative to the amount of promises that the government has issued and the amount of paper that the central bank has issued, they have the ability to go back to some kind of a gold standard.

I mean, if the U.S. Gold Reserves are still there, they could probably do it at a gold price of $10 or $12 thousand an ounce or maybe a little bit higher. And you’d still have a lot of promises be broken, though, by the U.S. Government.

But if the gold’s not there in the central bank, then there’s no hope. And that’s really the worrying thing, because we don’t really know where all of the physical gold is these days. All we do know is that a lot of physical gold is moving from West to East, is being accumulated by people in Asia who understand gold and its historical role as money that is being taken away from people in the West, who view gold as an investment and something to speculate on, rather than something that’s fundamental to economic activity.

Chris Martenson: Well, it’s interesting. I’ve seen several studies that have done this same thing and asked the question, If you wanted to have a permanent portfolio…? meaning it would survive every war and it would perform well on every single up and down cycle as you go forward, the perfect weighting has 20% gold in it and then different weightings in stocks and bonds.

So, it had a role. And the thing that’s interesting to me is that you can, with just simple risk-adjusted returns put gold in a portfolio. Dial it up and down. Ask what’s going on. A very high weighting delivers the best efficient frontier on an idealized portfolio, back-tested through the last 100 years of history, and what I detect in my country from the United States is the slandering of gold at every opportunity in the mainstream press.

Do you see the same thing? And if so, what’s the motivation?

James Turk: Yes. Because it’s a type of financial repression. Propaganda is repression. They can’t let the truth get out that gold really is money, because if they do, then you’re going to have people fleeing fiat currency and going into gold. And that’s the worst fear of central bankers.

So governments and central bankers have this unholy alliance that governments borrow money and central banks facilitate that process by making sure that governments have all the money they want to spend. And the mainstream media basically facilitates it by providing anti-gold propaganda and telling everybody the economy is good, when in fact, all you have to do is talk to some of your neighbors and you’ll find out that the economy is not as good as the media tends to portray.

And we’re on this path where trust in institutions and things is rapidly declining.

Chris Martenson: And maybe for good reason, if you pay attention.

As we get towards the end here, here is a common question I get, and I think this is a tricky one. It’s around the idea of debt. And if you have to break the subject of debt down, that’s fine, because not all debts are created equal.

You have a chapter in here entitled, “Pay Off Debt and Internationalize,” but on the debt side of this, why would you advise getting out of debt at this point in history?

James Turk: Yes. There is this beguiling belief that if you have a lot of debt and the currency gets destroyed, your obligation will get destroyed with it. It may not work out that way. We live in an economy today where governments are heavily influenced by the banking system. If the currency collapses, there’s no reason to believe that the bank’s obligations are going to be minimized. They may impose on the government a rule that the debt has to be repaid in the new currency at fair economic value, not in a depreciated currency.

And I like to use the example of what happened to Thomas Jefferson – other than the Declaration of Independence and third president of the United States – he ended up dying a pauper because he ended up paying the debt on his father-in-law’s estate twice. He paid it once during the War of Independence and put the money with the Virginia Government, but the currency was destroyed by the end of the war. And he was then obligated to repay the debt again in pound sterling, which of course, was on a gold standard. And that basically bankrupted him and he ended up dying a pauper years later.

So, don’t assume that you’re going to benefit from having debt. It could very well be that the debt is going to be re-denominated in the new currency after the fiat currency collapses. The safe way to play it is to own tangible assets without any debt obligations.

Chris Martenson: I agree, and I have one other wrinkle on that, which is, there’s also this enduring idea, maybe a fantasy that as the currency debases, your income will be going up. But if it turns out labor markets have no power and your income stays low in nominal terms and is below the rate of inflation, you get a 3% percent raise but inflation goes to 10%, then you’re going to find that your disposable income is just shrinking and shrinking and shrinking. Your debt payments are fixed, and all of your other non-discretionary payments are fixed, and so things just get tighter and tighter.

Hey, that’s just the ‘70s. It’s stagflation again, in some way, but this time without the rising wages that we had back then. So I think it could be quite damaging to be holding debt.

James Turk: That’s a very good point and one of the things that John and I talk about in the book is that it’s becoming more and more difficult to actually measure wealth. What you really need to do is you need to measure the wealth by determining purchasing power, and we use, in this regard, ounces of gold. That’s a great way to measure whether your wealth is actually increasing or decreasing as an indication measure of purchasing power, rather than using dollars or Swiss francs or euros or any other currency.

But it’s just an indication of how bad things have become with regard to the monetary unit. One of the basic things as to why things are money is because they use them for economic calculation, to measure the prices of goods and services. And it’s becoming extremely difficult when you’re adjusting the size of the measuring stick.

In the book we use the example of what happened if a meter kept changing; how would you measure records at the Olympics from year to year? And that’s what we’re trying to do with this fiat currency that’s in circulation today.

Chris Martenson: So, from a macro perspective, nothing’s really changed. We’re trying to paper over it – the issues. We’re trying to sustain the unsustainable, as it were. We’re trying to pretend as if the next 30 years can resemble the past 30 years, which were extraordinarily unique in financial history with the run-up in debt relative to income.

So, that’s the macro story. And so you’re saying that even though it’s been a rough couple of years for precious metals investors, that they still remain one of the obvious solutions to the story; one of the obvious resolutions will come through precious metals, at least in part, with precious metals as a representative of tangible assets?

James Turk: Yes. Because, the last year, gold was down, but it was up 12 prior years. You can’t look at just the last year in isolation. You have to look at the big swing of things. And we’ve been in a gold boom market, believe it or not, since 100 years ago, since the Federal Reserve was created.

If you had held gold over that period of time instead of owning dollars, because a 1913 dollar has been so debased compared to what we have as dollars today, it takes only a penny of a 1913 dollar to purchase today what a full dollar today purchases.

So, I mean, it’s sort of like the end of currency in the Roman Empire. In over 100 years, it kept getting debased and debased and debased until it finally collapsed. And the same thing is likely to happen with the dollar. And every individual has to take those steps to protect themselves, come what may.

Chris Martenson: Absolutely. I agree.

Well, the book is, The Money Bubble: What to Do Before It Pops. I’m sure it’s going to be a great read if it’s anything like The Coming Collapse of the Dollar.

James, it’s been a pleasure talking with you. Where would people find your book?

James Turk: It’s available on Amazon, of course, and it’s also available through local bookstores.

Chris Martenson: Well, fantastic. You self-published this, didn’t you?

James Turk: Yes. We did. But it’s so easy to self-publish a book now that you can use the same distribution systems that the big publishing company houses use. What John and I wanted to do is, we self-published this because we didn’t want to go through the editing process that’s required when you’re using big publishing houses. What we wanted to say, we actually say without having to worry about what a publishing house might or might not cut out.

Chris Martenson: Oh, yes. That’s a very important consideration.

Well, thank you so much for your time today. I’m going to look forward to reading more of the book, and it’s going to be a very interesting 2014, I hope. Thank you for everything you’ve been doing to help raise awareness around one of the most important topics of our generation.

Thank you very much, Chris, I’m hopeful that The Money Bubble will be – well, it already is well-received, I hope it gets a lot of attention, because I think that I’m hoping that, as “Coming Collapse of the Dollar” did, it helped a lot of people, I think The Money Bubble will provide a lot of educational material that people will find useful as they try to get a handle on the crazy things that are going on today.

Well, James, thanks again and be well.

Rising Costs Hit Balance Sheets of Major Oil Companies

Rising Costs Hit Balance Sheets of Major Oil Companies.

Quarterly earnings for Royal Dutch Shell have declined sharply due to large expenditures, delays, and lower than expected production. The oil-giant reported that it expects fourth quarter earnings from 2013 to come in 70% lower than the same quarter for the previous year. Fourth quarter earnings are expected to decline to $2.2 billion, down from $7.3 billion in 2012. The decline prompted Shell to issue a profit warning, its first in 10 years, hitting its stock price. The company expects to release a full-earnings report on January 30.

Shell’s capital spending surpassed $44 billion in 2013, a 50% jump over the prior year.  While investing in growth is necessary to turn a profit, many of Shell’s projects are floundering. After sinking over $5 billion in a multi-year effort to tap oil in the Arctic, Shell has nothing to show for it except for a series of mishaps and bad publicity. The company wants to return to the Arctic in 2014 after taking the year off last year to regroup, and submitted a scaled-back plan that they hoped would soothe the concerns of the Department of Interior. Yet with a January 22, 2014 decision from the Court of Appeals from the Ninth Circuit found that Interior violated the law when it sold offshore leases for exploration back in 2008. The ruling throws Shell’s plan into deep uncertainty, and is merely the latest blow to the company’s bungled Arctic campaign.

Select the reports you are interested in:
Who Will be the Big Winners in the Coming LNG Bonanza
How to Play the Coming Boom in Advanced Fracking Technology
Why the Subsea Processing Sector will See Huge Gains in the Near Future
Investment Opportunities in Geothermal Power Generation
Machine to Machine Technology – A $1 Trillion Opportunity!
Our Top Water Technology Picks for 2013
NO-SPAM: Under no circumstances will weEVER rent, sell or give away your email


Shell has also bet big on Kazakhstan, sinking over $30 billion in a project, again with little to show for it thus far. The project is 8 years overdue.

Related article: UAE to Invest $1.2bn in Kurdish Oil

The latest news may be indicative of a new phase for major international oil companies. Shell is not alone in investing huge sums to develop complex oil fields in far flung places around the globe. As easy-to-get oil declines, Shell and other oil companies are forced to search for oil in places that present geological and engineering difficulties –and thus present significantly higher costs. According to Reuters, the rising cost of oil projects around the world is a major topic of discussion at the World Economic Forum in Davos.

Another example is Chevron’s Gorgon LNG project, which is expected to come in at $54 billion, or $20 billion more than originally expected. Italian oil company ENI expects to blow around $50 billion on the Kashagan oil field in Kazakhstan, five times what it expected.

Ben van Beurden, Shell’s new CEO, hopes to take a more conservative approach, paring back large investments in “elephant projects,” according to the Wall Street Journal.Other major oil companies are also promising their shareholders they will cut back on expenditures. Reducing costs may be a good strategy in the short-term, but the profitability of major oil companies depends on their ability to replace reserves and produce oil, not just now, but 10-20 years from now. If these companies decide not to invest in new oil fields, they will not have additional capacity coming online in the years ahead.

But it is telling that Shell and others do not find it wise to invest in new oil projects. If that is indeed the case, then the world could be looking at much more expensive oil in the not-so-distant future as existing fields naturally decline and supply tightens.

By. Nick Cunningham

North Korea ‘executes slain general’s family’ – Asia-Pacific – Al Jazeera English

North Korea ‘executes slain general’s family’ – Asia-Pacific – Al Jazeera English.

Jang was a powerful general in the military before his execution in December [Reuters]
North Korea’s leader Kim Jong-un has ordered the execution of his uncle’s entire family, including his children and relatives serving as ambassadors to Cuba and Malaysia, according to South Korea’s state news agency, Yonhap.Jang Song-thaek, a once powerful North Korean military general, was executed last month as divisions between him and his nephew Kim widened.

All relatives of Jang have been put to death, including even children.Unnamed source for Yonhap.

Kim referred to Jang as “worse than a dog” and “human scum” in his announcement of his execution, which he said was for treachery and betreyal. Pictures showed Jang being led from his office by state security.

“Extensive executions have been carried out for relatives of Jang Song-thaek,” an anonymous source said to Yonhap in a report published on Sunday. “All relatives of Jang have been put to death, including even children.”

The executed relatives include Jang’s sister Kye-sun, her husband and ambassador to Cuba, Jon Yong-jin, the ambassador to Malaysia, Jang Yong-chol, who is Jang’s nephew, as well as his two sons, the sources said.

The two ambassadors were recalled to Pyongyang in early December. The sons, daughters and grandchildren of Jang’s two brothers were all executed, the sources told Yonhap.

One source told Yonhap that some relatives were dragged out of their houses and shot in front of a crowd.

South Korea’s state news agency did not specify when they were killed. The article does not mention any specific sources and the agency is known for its anti-North Korean bias.

Why Shale Oil Boosters Are Charlatans In Disguise | Zero Hedge

Why Shale Oil Boosters Are Charlatans In Disguise | Zero Hedge.

Something has bothered me of late: why is the price of crude oil still elevated? Other commodities have taken a battering since 2011. Gold, copper and iron ore – all are way down off their peaks. But oil has seemingly defied gravity. And that’s despite increased supply from shale oil in the U.S., still soft demand particularly in the developed world and declining rates of inflation growth across the globe.

What gives? Well, shale oil proponents will say falling oil prices are just a matter of time. And that the boom in shale oil will reduce U.S. reliance on foreign oil, leading to cheaper local oil, which will free up household budgets and spur consumption as well as the broader economy. Perhaps … though I’d have thought all of that would be already reflected in prices.

On the other side, you have “peak oil” supporters who suggest high oil prices are perfectly natural when oil production has peaked, or at least the good stuff has disappeared. Yet the boom in U.S. shale oil appears to put at least a partial dent in this thesis.

There may be a better explanation, however. It comes from UK sell-side analyst, Tim Morgan, in an important new book called Life After Growth. In it, he suggests that the era of cheap energy is over. That the new unconventional forms of oil are far less efficient than old ones, meaning they require significant amounts of energy to produce. In effect, the energy production versus energy cost of extraction equation is rapidly deteriorating.

Morgan goes a step further though. He says cheap energy has been central to the extraordinary economic growth generated since the Industrial Revolution. And without that cheap energy, future growth will be permanently impaired.

It’s a bold view that’s solidified my own thinking that higher energy prices are here to stay. And the link between cheap energy and economic growth is fascinating and worth exploring further today. Particularly given the implications for the world’s fastest-growing and most energy-intensive region, Asia.

Real vs money economy

First off, a thank you to Bob Moriarty of 321gold for tipping me off to Morgan’s work in this well-written article. Morgan’s book is worth getting but if you want the skinny version, you can find it here.

Morgan begins his book outlining four key challenges facing economies today:

  1. The biggest debt bubble in history
  2. A disastrous experiment with globalisation
  3. The massaging of data to the point where economic trends are obscured
  4. The approach of an energy-returns cliff edge

The first three points aren’t telling us much new so we’re going to focus on the final one.

Here, Morgan makes a key distinction between what he terms the money economy and the real economy. He suggests economists around the world have got it all wrong by focusing on money as the key driver of economies.

Instead, money is the language rather than the substance of the real economy. The real economy is a surplus energy equation, not a monetary one, and economic growth as well as the increase in population since 1750 has resulted from the harnessing of ever-greater quantities of energy.

In fact, society and economies began when agriculture created surplus energy. Before agriculture, in the hunter-gatherer era, there was an energy balance where the energy which people derived from food was largely equivalent to the energy that they expended in finding the food.

Agriculture changed that equation. It allowed for the creation of surplus energy. In essence, three people could be supported by the labor of two people, allowing one person to engage in non-subsistence activities. This person could make better agricultural tools, build bridges for better infrastructure and so on. In economic parlance, this person didn’t have to concentrate on products for immediate consumption but rather the creation of capital goods. The surplus energy equation allowed for that.

The second key development was the invention of the heat engine by Scottish engineer James Watts in 1769, although a more efficient version was produced later in 1799. This invention allowed society to access vast energy resources contained in oil, natural gas, coal and so forth. In other words, the industrial revolution allowed the harnessing of more energy to apply vast leverage to the economy.

World fossil fuel consumption

In sum, the modern economy is the story of how society overcame the limitations of the energy equation. Or as Morgan puts it: “…all goods and services on which money can be spent are the products of energy inputs, either past, present or future.”

The creation of surplus energy during the Industrial Revolution and subsequent explosion in economic and population growth isn’t an accident. They’re tied at the hip.

Energy and the population

Understanding the distinction between the money economy and the real economy can also help us better understand debt. Debt is a claim on future energy. The ability of indebted governments to meet their debt commitments will partially depend on whether the real (energy) economy is large enough to make this possible.

Era of cheap energy is over

Morgan goes on to say that the era of surplus energy, which has driven economic growth since 1750, is over. The key isn’t to be found in the theories of “peak oil” proponents and the potential for absolute declines in oil reserves. Instead, it’s to be found in the relationship between the energy extracted versus the energy consumed in the extraction process, also known as the Energy Return on Energy Invested (EROEI) equation.

The equation maths aren’t difficult to understand. If the EROEI is 10:1, it means that 10 units are extracted for every 1 unit invested in the extraction process.

From 1750-1950, the EROEI of oil discoveries was very high. For instance, discoveries in the 1930s had 100:1 EROEIs. That ratio declined to 30:1 by the 1970s. Today, that ratio is at about 17:1 with few recent discoveries above 10:1.

Morgan’s research suggests that going from EROEIs of 80:1 to 20:1 isn’t disruptive. But once the ratio gets below 15:1, energy becomes a lot more expensive. He suggests the ratio will decline to 11:1 by 2020 and the cost of energy will increase by 50% as a consequence.

Energy returns vs cost to GDP

Non-conventional sources of oil will provide little respite. Shale oil and gas have EROEIs of 5:1 while tar sands and biofuels are even lower at 3:1. In other words, policymakers who pin their hopes on shale oil reducing energy prices are seriously deluded.

EROEI and energy sources

And further technological breakthroughs to better locate and extract oil are unlikely to help either. That’s because technology uses energy rather than creates it. It won’t change the energy equation.

While some unconventional sources offer hope, such as concentrated solar power, they won’t be enough to offset surplus energy turning to a more balanced equation.

Oeuvre to growth tool

If the real economy is energy and the days of surplus energy are coming to an end, then so too is economic growth, according to Morgan. In his own words:

“…the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend.”

This terribly pessimistic conclusion requires some further explanation. Morgan explains the link between energy and the economy thus. If your EROEI sharply declines, it means more energy is needed for extraction purposes and less energy is available to the economy. Ultimately, this results in the cost of energy rising as a proportion of GDP, leaving less value for other things. Put another way, with the leverage from surplus energy diminished, there’s less energy available for discretionary uses.


Now I don’t have total buy-in to Morgan’s thesis. It certainly solidifies my thinking that the era of cheap energy is indeed over. It provides a unique and compelling way to think about this. And the proof is seemingly all around us. It explains the high oil prices and the surge in agriculture prices (agriculture relies on energy inputs).

You can’t help but being more bullish on energy and agriculture plays in the long-term. Oil drillers for one as they’re more reliant on increased work than the price of oil. Also, the likes of fertiliser companies given agriculture land is tapped out, making an increase in output essential and thereby requiring greater quantities of fertiliser.

Morgan thinks inflation is on the way given a squeezed energy base with still escalating monetary bases. Regular readers will know that I am a deflationist over the next few years. But nothing is certain in this world and Morgan’s arguments on this front have some credibility.

As for whether this spells the end of a glorious 250 year period of economic growth, well, I’m not so sure. The link between energy and economies is compelling. But whether we’re at a tipping point where surplus energy disappears is a guess. I’m convinced that we’re coming up against resource constraints that will inhibit economic growth. To say that we’re imminently coming to the end of economic growth requires further evidence, in humble opinion.

Impact on Asia

Asia has been the largest demand driver for energy over the past decade. The region’s net oil imports total 17 million barrels of oil a day. China is now the largest net oil importer, having recently overtaken the U.S.. Other large net oil importers in Asia include India and Indonesia. Obviously, higher oil prices would be detrimental to these net importing countries.

It may be somewhat offset by agricultural prices staying higher for longer. China and India are agricultural powerhouses. And the impact of agriculture on their economies is still profound (agriculture accounts for 14% of Indian GDP and 10% of China).

On the other hand, higher agricultural prices mean higher food prices. And given lower incomes in Asia, the proportion of household budgets dedicated to purchasing food is much higher than the developed world. Therefore higher food prices has a larger impact on many Asian countries. Witness periodic recent protests on this issue in Indonesia, Thailand and India. So net-net, higher energy prices would still be a large negative for Asia.

Turning to resource constraints potentially inhibiting future economic growth: given Asia has the world’s strongest GDP growth, it would be disproportionately hit if this scenario is right. The past decade may represent a peak in the region’s economic output. Whether there’s sharp drop or gradual fade is impossible to forecast.

These are but a few of the potential implications for Asia.

AC Speed Read

– The real economy is a surplus energy equation, or the harnessing of ever-greater quantities of energy.

– That equation has deteriorated to such an extent that one can now declare the era of cheap energy over.

– If the economy is energy and cheap energy is gone, future economic growth will be inhibited.

– Consequently, higher energy and agricultural prices can be expected in the long-term.

– The impact on Asian growth may be disproportionately large.

This post was originally published at Asia Confidential:

After Davos, The China-Japan ‘Cold-War’ “Situation Is Getting Worse” | Zero Hedge

After Davos, The China-Japan ‘Cold-War’ “Situation Is Getting Worse” | Zero Hedge.

China and Japan’s war of words reveals a larger struggle for regional influence akin to a mini Cold War. Last week’s tempestuous pissing contest in Davos, which The FT’s Gideon Rachman notes, left people with the belief that “this is not a situation that is getting better; it is getting worse.” Following Abe’s analogies to WWI, China’s Yi compared Abe’s visit to the Yasukuni shrine to Merkel visiting the graves of Nazi war criminals and as the rhetoric grows the US has asked for reassurance from Abe that he will not do it again. So we have two countries, each building up their militaries while insisting they must do so to counter the threat of their regional rival. Added to this, a deep distrust of each other’s different political systems coupled with a history of animosity makes the two nations deeply suspicious of each other. Each country insists it loves peace, and uses scare tactics to try to paint its opponent as a hawkish boogeymanSound familiar to anyone else?


As The WSJ reports,

U.S. officials say they are seeking assurances from Japan that Prime Minister Shinzo Abe won’t repeat a visit to a war shrine that angered China and South Korea and will ask Mr. Abe to consider reaffirming Tokyo’s previous formal apologies over World War II in a bid to ease tensions in East Asia.


But even as Washington looks for calm, Seoul and Beijing bristled again this week over new comments by Mr. Abe on his shrine visit, underscoring the challenges the U.S. faces in its diplomatic push.

The FT sums up the tensions in Davos last week…


Via Shannon Tiezzi via The Diplomat,

Lately, it seems that Japanese officials can’t sneeze without incurring the wrath of the Chinese — and vice versa. So it’s no surprise that even conciliatory statements from Shinzo Abe have been soundly rebuffed. On Thursday, Abe wrote a message, published in local Chinese-language papers, conveying greetings for the lunar new year. According to Reuters’ translation of the Japanese-language version, Abe insisted that Japan has “taken the path of peace” since World War II, and “nothing has been changed in the policy of continuing to uphold this position.”

Friday, Abe further extended the olive branch. According to Channel NewsAsia, Abe told a parliamentary session that “Japan and China are inseparable.” He also expressed his desire for the two countries to restart diplomatic meetings. “Instead of refusing to hold dialogue unless issues become resolved, we should hold talks because we have issues,” Abe said.

China flatly rejected these overtures. Responding to earlier requests for a bilateral dialogue, Qin Gang responded with bitter sarcasm: “Such kind of dialogue will be of no effect. Chinese leaders are very busy. Let them spend more time on things useful and effective.” China has repeatedly expressed its position that no diplomatic meetings between China and Japan can be held until Shinzo Abe proves his sincerity. During Friday’s press conference, Qin Gang laid down a specific path for restarting dialogue: Abe should declare that “I will pull back from the precipice, immediately admit and correct mistakes and make no more visits to the Yasukuni Shrine.”

As I wrote earlierat this point it seems impossible that anything Abe will do will satisfy Chinese leaders (the things he could do, like apologizing for his visit to Yasukuni and/or Japan’s imperialistic past, are incredibly unlikely). To Chinese officials, Abe is “self-contradictory,” as an editorial in China Daily put it. Unless Abe apologizes for and refrains from repeating actions that upset China (from visiting Yasukuni to building up Japan’s military), China will dismiss as insincere his rhetoric about dialogue and peace. Meanwhile, from the Japanese perspective, were Abe to devote the rest of his administration to proving his friendship to China, it would have obvious negative repercussions for Japanese interests.

So we have two countries, each building up their militaries while insisting they must do so to counter the threat of their regional rival. Added to this, a deep distrust of each other’s different political systems coupled with a history of animosity makes the two nations deeply suspicious of each other. Each country insists it loves peace, and uses scare tactics to try to paint its opponent as a hawkish boogeyman. Sound familiar to anyone else?

Ever since the Cold War ended, strategists have been warning leaders to drop the “Cold War mentality.” But it apparently hasn’t worked, because that is exactly what we have right now between China and Japan. The two countries identify so strongly as rivals that it’s impossible for either country to do or say anything without triggering a response from its counterpart. The tensions pop up in the most unexpected places – during Abe’s Africa tour, during a global economic summit in Switzerland.

Even the strong economic ties between China and Japan haven’t helped forestall tensions. In fact, it’s the other way around – tensions are eroding the economic relationship. The Telegraph recently reported that, according to a poll, 60 percent of Chinese business leaders are unwilling to work with Japanese firms. In 2012, China-Japan tensions even erupted into outright calls to boycott Japanese products, with rioters targeting Japanese businesses and restaurants. While Japan’s business view of China is less affected (according to The Telegraph, 80 percent of Japanese are willing to continue trade with China and South Korea), economic interests are shifting to other regions, notably Southeast Asia. Economic ties are likely to continue worsening. It’s certainly hard to see the next round of negotiations on a trilateral China-Japan-South Korea free-trade agreement going off as planned in February 2014.

As with the Cold War, part of the problem is that both China and Japan willfully read each other’s every move as a challenge or threat. For all the distrust between China and the United States, the problem hasn’t reached this level (yet). The U.S. has too many potential enemies (Russia, Iran, North Korea) and too many global interests for China to realistically interpret every diplomatic or strategic maneuver as somehow anti-China (although certainly some hawks within China do try). Japan, with its more limited global presence and strategic interests, is a different story. Meanwhile, as China is currently limiting its military build-up and strategic goals to the near seas, it’s easy for Tokyo interpret each move (for example, a new air defense identification zone) as directly aimed at Japan.

My colleague Zachary wrote Friday that one byproduct of the United States’ decline could be the emergence of regional hegemons. We might be seeing the beginning of this process now, with China and Japan in a Cold War-style battle, not for global power but for regional dominance. The territorial dispute highlights this by increasing the possibility of military conflict, but even if the Diaoyu/Senkaku Islands were to sink into the ocean tomorrow (one possible benefit of global warming) the tensions would remain. It’s a regional Cold War, currently being fought with words but with an arms race looming on the horizon. And, like the Cold War, tensions are unlikely to end until one country claims victory.

Testosterone Pit – Home – From “Glut” To Panic: Natural Gas Soars

Testosterone Pit – Home – From “Glut” To Panic: Natural Gas Soars.

On Friday, when stocks were plunging, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010.

Back then, the “shale gas revolution” had turned into a crazy no-holds-barred land-grab and fracking boom that veered into overproduction and a “glut” – accompanied by a historic collapse in price. The US could not export its excess production due to export restrictions and the lack of major LNG export terminals. By April 2012, when the Japanese were paying around $17 per MMBtu for LNG on the world markets, natural gas in the US hit a decade low of $1.92 per MMBtu, and predictions that it would go to zero showed up in the mainstream media. That was the bottom.

But nothing can be priced below the cost of production forever. By Friday, natural gas was up 170% from the April 2012 low. Turns out, only a low price can cure a low price.

The low price caused demand to creep up.

Gas exports via pipeline to Mexico have been growing, especially since additional pipeline capacity went into service last year. Mexico is switching power generation from using its own oil to cheap US natural gas. This allows it to export its more valuable oil to the US. Ka-ching. But building gas-fired generating capacity is a slow-moving process.

Other exports are also moving forward – in people’s heads. There are pipelines between the US and Canada, but the US is a net importer. Exports of LNG are at this point still a pipedream, so to speak, though deals are being made, contingent on getting government approvals to export LNG. It’s going to take years before LNG can be exported in large quantities.

But the low price had short-term and structural impacts. Utilities dispatched electricity generation from their coal-fired plants to their gas-fired plants. And there have been structural changes: utilities have built gas-fired power plants and have retired – not mothballed! – their oldest, most inefficient, and most polluting coal-fired power plants. Global industrial companies have been building plants in the US for energy-intensive processes and for processes that use natural gas as feed stock. Even natural gas in transportation is picking up.

The low price destroyed the business model for drillers.

Thousands of unprofitable wells litter the land. Many billions were written off. Real money that had been recklessly thrown around during the boom disappeared into the ground. Investors were lured with false promises. The bloodletting in the industry was enormous. Some of the largest drillers have pulled back from drilling for dry natural gas. Most of the wells that are still being drilled are in fields that are rich in natural-gas liquids and oil, which sell for much higher prices and make wells profitable. Dry natural gas has become a byproduct. In the immensely productive Bakken shale-oil field in North Dakota, where gas occurs along with oil, 30% of it is flared – burned at the well as a waste product. The low price doesn’t justify building pipelines to haul it off.

But shale gas wells have sharp decline rates, and new wells need to be drilled constantly to make up for the decline in older wells. These days, not enough wells are being drilled, and production in all gas plays combined – except for the Marcellus – is already in slight decline. The only production boom left is in the Marcellus: the “shale gas revolution” in the US is now a one-pony show.

In January 2012, according to Baker Hughes, there were 143 rigs drilling for natural gas in the Marcellus – the most prolific parts of which are in Pennsylvania. Today, there are 86. But during the drilling boom, someone forgot to install sufficient pipeline infrastructure. So, wells were shut in, perhaps thousands of them, a giant reservoir waiting for takeaway capacity. That was 2012. Last year, part of a new pipeline network went into service, and bottlenecks were removed, and the gas started flowing to New York City and other places. Drilling is down. Production – the delivery of gas to the markets – is soaring!

How long can it last? Well decline rates in the Marcellus are as steep as elsewhere, and this sudden burst in production, if not supported by a new bout of drilling, will taper off as it has in other fields. And that’s today’s one-pony show of the US “shale gas revolution.”

Then cold fronts swept across the country.

These polar vortices, as they’re now referred to for additional flair, have caused demand for gas as heating fuel to spike to record highs. And more bitter cold weather is being forecast. Natural gas in underground storage dropped to 2,423 billion cubic feet (Bcf) for the weekending January 17. The last time storage levels were this low during an equivalent week was in January 2005!

At the time, gas was selling for $12 to $14 per MMBtu and hit an all-time high of $15.40 in December that year. But demand has changed. In 2013, demand was over 18% higher than in 2005; this year, it might be over 20% higher [my article from nine days ago…. Natural Gas Squeeze? “Panic hasn’t ensued just yet”]. 

And the big money has jumped into the fray.

For years, the favorite game was to short natural gas, playing the glut for all it was worth, a sport that has gotten very complex and, if you get the timing wrong by a few hours, very expensive. Some of the spike late Friday, and some of the action all week, was due to a hard squeeze on these folks – as the big money arrived en masse.

On Wednesday, the big money went public. As reported by MarketWatch, Citi analysts wrote that, “With tight fundamentals, $5 gas is not impossible.” What had been obvious for a while, showed up in the media: “Strong demand is expected to push gas inventories to very low levels with cold weather lingering.” And the price took off once again.

Now everyone is bent over weather data, trying to figure out what nastiness the winter will still serve up, and they’re betting on the weather because cold snaps happen relatively fast and are observable. Watching the fundamentals is like watching paint dry. But it’s the fundamentals that have changed the equation. The polar vortices are merely speeding up the calculus.

Natural gas is famous for its head fakes, unexpected plunges when it should rise, and inexplicable rises when it should drop. It’s being manipulated in a myriad ways. It’s always a bet on the weather, except when it’s not. It can turn around in a second and cause whiplash. It’s a seatbelt-mandatory commodity. And once every few years, there is a panic, and it spikes to dizzying highs.

While natural gas was soaring on Friday, and all week, the rest of the markets were tanking, with emerging markets “trading in full-blown panic mode.” What gives? Read….  A Teeny-Weeny Bit Of Taper, And Look What Happened

Follow @testosteronepit

Activist Post: Is Self-Reliance a Threat to Society?

Activist Post: Is Self-Reliance a Threat to Society?.


For decades, Eustace Conway has lived an independent, sustainable life, building shelter for himself on his land, growing his own food, setting up outhouse facilities, composting, and allowing others to learn these methods first-hand so that we may once again have a populous versed in the healthy manner of primitive survival skills.

After a preliminary visit from the local Planning & Inspections department, several independent local government agencies together performed a raid on Mr. Conway’s property, and now the Watauga County Health Department has ordered a cease & desist on Mr. Conway’s educational activities.

Venture Capitalist Compares ‘Progressive War On 1 Percent’ To Nazi Anti-Semitism

Venture Capitalist Compares ‘Progressive War On 1 Percent’ To Nazi Anti-Semitism.

Venture capitalist Thomas Perkins wrote a letter to the editors at the Wall Street Journal, comparing the plight of the rich to the Holocaust, called “Progressive Kristallnacht Coming?”… and the WSJ published it.

“I would call attention to the parallels of fascist Nazi Germany to its war on its ‘one percent,’ namely its Jews, to the progressive war on the American one percent, namely the ‘rich,'” Perkins writes. Thomas Perkins, one of the founders of venture capital firm Kleiner Perkins Caulfield & Byers, was comparing taxes on the super rich to the slaughter of millions in the Holocaust.

“From the Occupy movement to the demonization of the rich embedded in virtually every word of our local newspaper, the San Francisco Chronicle, I perceive a rising tide of hatred of the successful one percent,” Perkins continues. “There is outraged public reaction to the Google buses carrying technology workers from the city to the peninsula high-tech companies which employ them. We have outrage over the rising real-estate prices which these ‘techno geeks’ can pay.”

Perkins ends his rant with: “This is a very dangerous drift in our American thinking. Kristallnacht was unthinkable in 1930; is its descendent ‘progressive’ radicalism unthinkable now?”

Obviously, there has been backlash to the letter. “It certainly proves you can get rich without being very thoughtful, perceptive, or intelligent,” Slate’s Matt Yglesias writes. More people took to Twitter to express their outrage:

Serious rich-dude bubble to see “treatment” of rich by progressives as parallel to Nazi treatment of Jews… http://t.co/wATqtmPxQe

— Justin Wolfers (@JustinWolfers) January 25, 2014

Late to this wild letter to @WSJ. Do people really think like this!? Letters: Progressive Kristallnacht Coming? http://t.co/mviFzonaL5

— Matthew Campbell (@MattCampbel) January 25, 2014

Venture capitalist warns that Occupy, etc. will lead to “progressive Kristallnacht,” gets that printed in the@WSJhttp://t.co/Xw9S0zUYgc

— Jamil Smith (@JamilSmith) January 25, 2014

Rich idiot warns of looking “progressive Kristallnacht”: http://t.co/Ik228BONLq

— Matt Yglesias (@mattyglesias) January 25, 2014

The Wall Street Journal did not immediately respond to The Huffington Post’s request for comment.

CORRECTION: A previous headline misrepresented the analogy Perkins made in his letter.

%d bloggers like this: