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Economist Warns of Collapse Risk: “Will Not Allow Life to Continue As We Know It”

Economist Warns of Collapse Risk: “Will Not Allow Life to Continue As We Know It”.

Mac Slavo
March 7th, 2014
SHTFplan.com

theendisnear-wide

Earlier this week we noted that an invasion of the Ukraine by Vladimir Putin would likely lead to a complete destruction of U.S. stock markets. It’s not so much the invasion force itself, but rather, the economic maneuvers that would come with it should Russia take this course of action.

Well known economist and founder of the Shadow Stats web site John Williams seems to agree. If Russia were to begin unloading US Dollars it would almost instantly lead to a collapse of not only our financial markets, but our entire way of life. And while Russia alone may not have the economic power to single-handedly crush the U.S. economy, if their trading partners and allies like China got into the mix, coupled with front-running investors who may suspect the move is about to happen, it could well be a blood bath on a global scale.

This wouldn’t even be an issue if the U.S. economy were operating at healthy levels, but as Williams notes in the following interview with Greg Hunter’s USA Watchdog, it’s anything but:

What you have to keep in mind is that back in 2008 we had one of the greatest financial crises the United States ever faced. The system was on the brink of collapse at that point in time. 

What the Fed and the federal government did was spend every penny they could, anything they could create or anything they could guarantee.  They did everything they could possibly do to keep the system from crashing.  They guaranteed all bank accounts.  So, they saved the system, but now what they did has not borne fruit.  We have not seen an economic recovery.  We have not seen a return of health to the banking system.

So, the system is very vulnerable; and if the Russians carry through with their threat, you have, indeed, the risk of it collapsing the system.


(Video via Alt Market)

It does have the effect of creating a hyperinflation, which I think it would.  It’s the type of circumstance that will not allow life to continue as we know it because the U.S. is not able to handle hyperinflation.

We’re not structured for it.  Zimbabwe had one of the worst hyperinflations that anyone has ever seen.  They were still able to function for a while because they get paid in a rapidly depreciating currency.

It was so rapid it became like toilet paper overnight… they would go to a black market and exchange it for dollars.  We (the U.S.) don’t have a black market to escape from our dollars.  Gold is probably the closest thing to that.  Gold will tend to rally here as the dollar sells off, barring very heavy intervention by the central banks which you may see.

The fundamentals will eventually dominate, and you will see a very weak dollar and very strong gold coming out of this.

As it stands now, even without Russia and China, our economic system is, once again, on the cusp of a serious deleveraging. John Williams highlights that January retail sales, a leading indicator of economic health, gave the strongest signal since September 2007 that a recession is looming, if not already here.

One huge indicator of this is that Staples, a leading supplier of office supplies nationwide, is shutting the doors on 225 stores. And, they aren’t the only ones getting hammered by a pullback in consumer spending. The world’s largest retailer, Walmart, saw sales drop over 20% year-over-year in the fourth quarter of 2013.

And as trend forecaster Gerald Celente once noted, “as goes Walmart, so goes America.”

So, in reality, Russia can probably sit back and watch the U.S. economy slip into a coma over the next couple of years. Of course, if their intention is to return their nation to super power status, an attack on the US economy by dumping the dollar would speed up the process and amplify the fall-out, causing a multi-generational depression.

Last year Barack Obama faced off with Russia over Syria, a situation that could easily have led to a much wider conflict.

Now, the same players have taken the game to Ukraine.

In both instances we’ve heard warnings of a potential collapse of our economic system in the event of an escalation.

The point is that it really doesn’t matter if it’s Syria, Ukraine, Iran or some other periphery conflict.

It should be clear that eventually this is exactly how it’s going to play out with respect to the US dollar.

China and Russia will make their move when they are good and ready.

When that day comes the implosion will be so fast that most Americans won’t even realize what has happened or know how to cope.

Economist Warns of Collapse Risk: "Will Not Allow Life to Continue As We Know It"

Economist Warns of Collapse Risk: “Will Not Allow Life to Continue As We Know It”.

Mac Slavo
March 7th, 2014
SHTFplan.com

theendisnear-wide

Earlier this week we noted that an invasion of the Ukraine by Vladimir Putin would likely lead to a complete destruction of U.S. stock markets. It’s not so much the invasion force itself, but rather, the economic maneuvers that would come with it should Russia take this course of action.

Well known economist and founder of the Shadow Stats web site John Williams seems to agree. If Russia were to begin unloading US Dollars it would almost instantly lead to a collapse of not only our financial markets, but our entire way of life. And while Russia alone may not have the economic power to single-handedly crush the U.S. economy, if their trading partners and allies like China got into the mix, coupled with front-running investors who may suspect the move is about to happen, it could well be a blood bath on a global scale.

This wouldn’t even be an issue if the U.S. economy were operating at healthy levels, but as Williams notes in the following interview with Greg Hunter’s USA Watchdog, it’s anything but:

What you have to keep in mind is that back in 2008 we had one of the greatest financial crises the United States ever faced. The system was on the brink of collapse at that point in time. 

What the Fed and the federal government did was spend every penny they could, anything they could create or anything they could guarantee.  They did everything they could possibly do to keep the system from crashing.  They guaranteed all bank accounts.  So, they saved the system, but now what they did has not borne fruit.  We have not seen an economic recovery.  We have not seen a return of health to the banking system.

So, the system is very vulnerable; and if the Russians carry through with their threat, you have, indeed, the risk of it collapsing the system.


(Video via Alt Market)

It does have the effect of creating a hyperinflation, which I think it would.  It’s the type of circumstance that will not allow life to continue as we know it because the U.S. is not able to handle hyperinflation.

We’re not structured for it.  Zimbabwe had one of the worst hyperinflations that anyone has ever seen.  They were still able to function for a while because they get paid in a rapidly depreciating currency.

It was so rapid it became like toilet paper overnight… they would go to a black market and exchange it for dollars.  We (the U.S.) don’t have a black market to escape from our dollars.  Gold is probably the closest thing to that.  Gold will tend to rally here as the dollar sells off, barring very heavy intervention by the central banks which you may see.

The fundamentals will eventually dominate, and you will see a very weak dollar and very strong gold coming out of this.

As it stands now, even without Russia and China, our economic system is, once again, on the cusp of a serious deleveraging. John Williams highlights that January retail sales, a leading indicator of economic health, gave the strongest signal since September 2007 that a recession is looming, if not already here.

One huge indicator of this is that Staples, a leading supplier of office supplies nationwide, is shutting the doors on 225 stores. And, they aren’t the only ones getting hammered by a pullback in consumer spending. The world’s largest retailer, Walmart, saw sales drop over 20% year-over-year in the fourth quarter of 2013.

And as trend forecaster Gerald Celente once noted, “as goes Walmart, so goes America.”

So, in reality, Russia can probably sit back and watch the U.S. economy slip into a coma over the next couple of years. Of course, if their intention is to return their nation to super power status, an attack on the US economy by dumping the dollar would speed up the process and amplify the fall-out, causing a multi-generational depression.

Last year Barack Obama faced off with Russia over Syria, a situation that could easily have led to a much wider conflict.

Now, the same players have taken the game to Ukraine.

In both instances we’ve heard warnings of a potential collapse of our economic system in the event of an escalation.

The point is that it really doesn’t matter if it’s Syria, Ukraine, Iran or some other periphery conflict.

It should be clear that eventually this is exactly how it’s going to play out with respect to the US dollar.

China and Russia will make their move when they are good and ready.

When that day comes the implosion will be so fast that most Americans won’t even realize what has happened or know how to cope.

8 Real World Events That Prove Your Money Isn’t Safe In Europe (Or Anywhere)

8 Real World Events That Prove Your Money Isn’t Safe In Europe (Or Anywhere).

[The following post is by TDV editor-in-chief, Jeff Berwick.]

As I write this, the European Union has just announced a possible $15b aid package to the Ukraine (including 8 billion euros in fresh credit). Everybody has read the headlines about Europe: record unemployment, no end in sight, and so on. So you might be wondering just where the European Union, and its’ constituent nations, scrapped together the money to propose aid for the Ukraine. Well, wonder no more, because the following eight events might give you an idea of where governments go to get a little extra cash.

1. In March, 2009, Ireland seized €4bn from its Pension Reserve fund in order to rescue its banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country.

2. In December, 2010, Hungary told its citizens that they could either remit their private pension money to the state or lose their state pension funds (but still have to pay for it nonetheless)

3. In November, 2010, the French parliament decided to earmark €33bn from the national reserve pension fund FRR to reduce the short-term pension scheme deficit.

4. In early January 2011, $60 million in private retirement funds were transferred to the state’s pension scheme in Bulgaria.  They wanted to transfer $300 million, but were denied on their first attempt

5. In the Spring of 2013 Cyprus took it a step further and outright confiscated up to 50% of the funds from bank account holders in that country.

6. In the Fall of 2013 the Polish government announced it would transfer to the state (aka. confiscate) the bulk of assets owned by the country’s private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation.

7.  In February 2014, Italian banks were ordered by the Italian government to withhold a 20% tax on all inbound wire transfers. Il Sole reported, “the deductions will be automatic (unless prior request for exclusion), and then it will be up to the taxpayer to prove that the money is not in the nature of compensation “income.'”

8. The savings of all 500 million Europeans can be stolen by the European Union. Why? Because the financial crisis is not over, according to an EU document. The Commission is looking to ask the bloc’s insurance watchdog in the second half of 2014 for advice on how to draft a law “to mobilize more personal pension savings for long-term financing,” the document said.

So you see, european governments and institutions have already begun seizing private pension funds, slapping 20% taxes on all incoming wire transfers, confiscating up to 50% from private bank accounts and even stating all the savings of Europe are fair game.  As we’ve said before, this phenomenom of wealth confiscation won’t stay confined to Europe. The US has also taken measures to ensure ease of access to the funds of everyday Americans. 

We’ve said for many years now that the US government and almost all Western governments are bankrupt. This means they will try to confiscate as much wealth as possible from people who don’t carefully save before the collapse. Mark our words: US 401ks and IRAs will be nationalized in the next four years as well—maybe as soon as the next one or two years. If you’ve stayed in tune with the Dollar Vigilante blog, you probably already understood this. If you haven’t already, be sure to check into our subscription services to gain access to the intelligence you need to stay ahead of the pack.

 

picAnarcho-Capitalist.  Libertarian.  Freedom fighter against mankind’s two biggest enemies, the State and the Central Banks.  Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast.  Jeff is a prominent speaker at many of the world’s freedom, investment and gold conferences as well as regularly in the media including CNBC, CNN and Fox Business.

8 Real World Events That Prove Your Money Isn't Safe In Europe (Or Anywhere)

8 Real World Events That Prove Your Money Isn’t Safe In Europe (Or Anywhere).

[The following post is by TDV editor-in-chief, Jeff Berwick.]

As I write this, the European Union has just announced a possible $15b aid package to the Ukraine (including 8 billion euros in fresh credit). Everybody has read the headlines about Europe: record unemployment, no end in sight, and so on. So you might be wondering just where the European Union, and its’ constituent nations, scrapped together the money to propose aid for the Ukraine. Well, wonder no more, because the following eight events might give you an idea of where governments go to get a little extra cash.

1. In March, 2009, Ireland seized €4bn from its Pension Reserve fund in order to rescue its banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country.

2. In December, 2010, Hungary told its citizens that they could either remit their private pension money to the state or lose their state pension funds (but still have to pay for it nonetheless)

3. In November, 2010, the French parliament decided to earmark €33bn from the national reserve pension fund FRR to reduce the short-term pension scheme deficit.

4. In early January 2011, $60 million in private retirement funds were transferred to the state’s pension scheme in Bulgaria.  They wanted to transfer $300 million, but were denied on their first attempt

5. In the Spring of 2013 Cyprus took it a step further and outright confiscated up to 50% of the funds from bank account holders in that country.

6. In the Fall of 2013 the Polish government announced it would transfer to the state (aka. confiscate) the bulk of assets owned by the country’s private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation.

7.  In February 2014, Italian banks were ordered by the Italian government to withhold a 20% tax on all inbound wire transfers. Il Sole reported, “the deductions will be automatic (unless prior request for exclusion), and then it will be up to the taxpayer to prove that the money is not in the nature of compensation “income.'”

8. The savings of all 500 million Europeans can be stolen by the European Union. Why? Because the financial crisis is not over, according to an EU document. The Commission is looking to ask the bloc’s insurance watchdog in the second half of 2014 for advice on how to draft a law “to mobilize more personal pension savings for long-term financing,” the document said.

So you see, european governments and institutions have already begun seizing private pension funds, slapping 20% taxes on all incoming wire transfers, confiscating up to 50% from private bank accounts and even stating all the savings of Europe are fair game.  As we’ve said before, this phenomenom of wealth confiscation won’t stay confined to Europe. The US has also taken measures to ensure ease of access to the funds of everyday Americans. 

We’ve said for many years now that the US government and almost all Western governments are bankrupt. This means they will try to confiscate as much wealth as possible from people who don’t carefully save before the collapse. Mark our words: US 401ks and IRAs will be nationalized in the next four years as well—maybe as soon as the next one or two years. If you’ve stayed in tune with the Dollar Vigilante blog, you probably already understood this. If you haven’t already, be sure to check into our subscription services to gain access to the intelligence you need to stay ahead of the pack.

 

picAnarcho-Capitalist.  Libertarian.  Freedom fighter against mankind’s two biggest enemies, the State and the Central Banks.  Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast.  Jeff is a prominent speaker at many of the world’s freedom, investment and gold conferences as well as regularly in the media including CNBC, CNN and Fox Business.

A Century of Challenges Peak Oil & Economic Crisis  |  Peak Oil News and Message Boards

A Century of Challenges Peak Oil & Economic Crisis  |  Peak Oil News and Message Boards.

Nicole M. Foss is co-editor of The Automatic Earth, where she writes under the name Stoneleigh.

Nicole Foss – How I Prepared My Home for Peak Oil and Economic Uncertainty videos..

A Century of Challenges Peak Oil & Economic Crisis  |  Peak Oil News and Message Boards

A Century of Challenges Peak Oil & Economic Crisis  |  Peak Oil News and Message Boards.

Nicole M. Foss is co-editor of The Automatic Earth, where she writes under the name Stoneleigh.

Nicole Foss – How I Prepared My Home for Peak Oil and Economic Uncertainty videos..

Reasons for our Energy Predicament – An Overview | Our Finite World

Reasons for our Energy Predicament – An Overview | Our Finite World.

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system.

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

 

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and service affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transpire food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energyin 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30′s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply
  3. GDP growth
  4. Wage growth
  5.  Debt growth
  6. Growing government programs

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

Reasons for our Energy Predicament – An Overview | Our Finite World

Reasons for our Energy Predicament – An Overview | Our Finite World.

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system.

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

 

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and service affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transpire food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energyin 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30′s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply
  3. GDP growth
  4. Wage growth
  5.  Debt growth
  6. Growing government programs

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

oftwominds-Charles Hugh Smith: Who Gets Thrown Under the Bus in the Next Financial Crisis?

oftwominds-Charles Hugh Smith: Who Gets Thrown Under the Bus in the Next Financial Crisis?.

The speculative excesses and political power of Wall Street pose a strategic threat to the Deep State, and as a result a showdown between the Deep State and the surface machinery of governance that has been captured by Wall Street is looming.

The basic idea of the Deep State is that the visible machinery of governance–electoral politics and the Federal Reserve–doesn’t set strategic policy, it ratifies and implements decisions made behind closed doors. In Mike Lofgren’s definition, the Deep State is “effectively able to govern the United States without reference to the consent of the governed as expressed through the formal political process.”

In my analysis, the Deep State is the National Security State which enables a vast Imperial structure that incorporates hard and soft power–military, diplomatic, intelligence, finance, commercial, energy, media, higher education–in a system of global domination and influence.

The Dollar and the Deep State (February 24, 2014)

Ukraine: A Deep State Analysis (February 27, 2014)

Like any other bureaucracy, the Deep State is prone to group-think, the tendency to join the prevailing “herd” in accepting a dominant paradigm and narrative that identifies key dynamics and sets priorities.

Group-think responds to both success and failure. In the case of the Deep State, key elements of the neo-conservative paradigm have been discredited. The Rise and Fall of the Failed-State Paradigm: Requiem for a Decade of Distraction (Foreign Affairs)

(Anyone seeking a public reflection of the current thinking within the Deep State would do well to read Foreign Affairs, with an emphasis on reading between the lines.)

For the sake of argument, let’s assume the leaders of the U.S. Deep State are not complete morons. Granted, that is quite a stretch, given that these are the people who gambled the lives of thousands of American troops and trillions of dollars in treasure on discretionary wars in Iraq and Afghanistan.

But it is also reasonable to assume that the neo-conservatives who naively assumed that residents of Baghdad would not only welcome their foreign liberators with baskets of flowers but would magically reconstruct the social institutions that had been systemically destroyed by Saddam over the previous 30 years–yes, those neo-con nincompoops– have been quietly put to pasture on their mini-estates in Northern Virginia.

In other words, it is reasonable to assume that the Deep State has accepted that “mistakes were made” and flushed those responsible for the previous decade’s disasters.

The Deep State undoubtedly has its own niceties and protocols, but it is by necessity ruthlessly Darwinian: failure is not only always an option, it is inevitable as a systems-level consequence of tightly connected, interactive complex systems; such failures are known as “normal accidents,” catastrophes resulting from seemingly small miscalculations and miscues that cascade into systemic crises.

As a result, incompetence cannot be rewarded lest the Deep State itself suffer the consequences.

The Deep State’s prime directive is to preserve the Deep State itself and the nation it depends on for its survival. My analysis starts by identifying the vectors of dependency. (To the best of my knowledge, I am the first to use this term in this context.) The Deep State depends on the survival of the U.S. nation-state, but the nation-state does not depend on the Deep State for its survival, despite the certainty within the Deep State that “we are the only thing keeping this thing together.”

Strategy is one thing, responding to crisis is another. The surface government (elected officials, regulatory agencies, the Federal Reserve, etc.) responds to crisis in two basic ways: it chooses whatever short-term politically expedient fix reduces the immediate political pain (also known as “kicking the can down the road”) and it sacrifices the interests of politically weak groups to protect its cronies and fiefdoms.

This crisis-response triage requires that somebody gets thrown under the bus. In the 2008 financial crisis, the Fed threw savers and the bottom 95% under the bus to funnel hundreds of billions of dollars–what was previously paid in interest–to the banks to rebuild their broken balance sheets. The Fed also provided limitless liquidity to bank trading desks and financiers to skim billions from carry trades, effectively channeling the nation’s financial resources to enrich its cronies, the top 1/10th of 1%.

The Deep State must take a longer view, and make strategic triage decisions. All sorts of people, groups and policies are routinely tossed under the bus–foreign leaders, resistance groups, civil liberties, etc.–as the Deep State adjusts to long-term developments and crises with strategic consequences.

Many Deep State decisions and policies are barely noticed, even though they are completely public. For example, the U.S. Deep State recognized that the dissolution of the Soviet Union opened an extremely dangerous door to nuclear weapons falling into non-state hands. So the U.S. spent tens of billions of dollars helping secure the thousands of Soviet nuclear weapons left in limbo after the breakup.

Though the Deep State’s institutional bias is to focus on conventional national security issues, it must also monitor potential strategic threats created by issues such as climate change, immigration and Peak Cheap Oil. The financial crisis was apparently an unexpected and unwelcome distraction from the geopolitical Great Game, and the response of the Deep State was muted.
while the surface policies of the Federal Reserve and Federal government appear to serve the interests of the financial Elites, I am beginning to discern the possibility of a strategic Deep State response to the next (and inevitable) financial crisis.

This crisis is simple to summarize: the paper claims on wealth so far exceed actual wealth that something’s gotta give. These claims include trillions of dollars in shadow-banking bets (derivatives and other leveraged claims all teetering on a tiny base of real collateral) and trillions of dollars in debt-based claims on future income.

Simply put, the vast majority of these claims will have to be zeroed out, i.e. these phantom-claim “assets” will be voided and declared worthless. This leads to the key question: who will the Deep State throw under the bus to preserve itself and the nation-state?

Once again, identifying the vectors of dependency clarifies the strategic priorities. As I pointed out in The Dollar and the Deep State, the pre-eminence of both the Deep State and the U.S. nation-state depend on the U.S. dollar remaining the key reserve currency in the global economy.

The collapse of the U.S. dollar would destroy the foundation of both the Deep State and the U.S. nation-state, hence my conclusion that the Deep State will not enable that collapse.

As for all the financial claims on real wealth that will have to go to zero value, let’s identify the operative vector of dependency with a question: which scenario most threatens the Deep State: 50 million hungry Americans taking to the streets shouting, “we’re mad as hell and we’re not going to take it any more!” or 10,000 financiers losing a couple trillion dollars in phantom wealth?

In other words, the phantom financier claims of Wall Street now pose a strategic threat to the integrity of the U.S. and its Deep State.

The Deep State needs a functioning U.S. nation-state, and a mass uprising arising from the collapse of the state cannot be suppressed with a few whiffs of grapeshot. The collapse of global pre-eminence and state financing of food stamps and other social welfare programs directly threaten the Deep State.

The collapse of financier fortunes? While that would hurt some Yalie cronies, the Deep State is not Wall Street; it attracts those who prefer power to wealth and strategy to trading. I have no doubt whatsoever that the leadership of the Deep State would have no qualms about throwing bankers and financiers under the bus once they pose a strategic threat to the U.S. dollar and other financial interests vital to the Deep State, for example, keeping 300 million Americans distracted, placated and docile.

It’s certainly not lost on the Deep State that a palpable hatred of bankers, financiers and the Federal Reserve is taking root across the land. I know this is outside the mainstream, but I think it is increasingly likely that the financial system’s skimmers and swindlers are being recognized as potential strategic threats to the Deep State.

What is essential to the Deep State’s survival and supremacy and what is not essential? Are 10,000 obscenely wealthy financiers essential? No. Between saving the U.S. dollar and making whole the $100 trillion in nominal-value bets made by financiers in offshore shadow-banking accounts–there’s no contest.

Conventional wisdom has it that Wall Street dominates the state and the Fed. To the degree that these formal surface institutions can be influenced by lobbying, campaign contributions and plum positions, this is true. But these surface institutions only ratify and implement Deep State directives.

I know this sounds “impossible” within conventional narratives, but I am increasingly confident that the financiers’ phantom claims on real wealth will be thrown under the bus in the next global financial crisis. Look at it this way: there’s essentially nothing left to stripmine from the bottom 80%; most have been reduced to neofeudal debt-serfdom. Since the survival of the nation-state depends on the 80% remaining either passive or productive, the Deep State has a vital strategic interest in both the U.S. dollar and in maintaining the social welfare programs that enable the bottom 80%’s survival.

The Three-and-a-Half Class Society (October 22, 2012)

The Deep State also needs the top 20% to remain productive to maintain U.S. soft and hard power. Transferring trillions of dollars in real wealth to make good the claims of the financier class would require the stripmining of the whatever assets the top 20% still hold. This transfer would directly threaten both the nation-state and the Deep State.

The dominance of Wall Street over the formal, visible machinery of governance has persuaded many that Wall Street is the Deep State. I believe this is a serious misread of the real Deep State. As I noted in The Dollar and the Deep State, to even discern the outlines of the Deep State requires a senior military position or national-security civilian equivalent.

Those writing knowledgeably about Wall Street and finance typically show near-zero knowledge of high-echelon U.S. military and national-security assets, policies and networks, so this blind spot is understandable.

It’s widely assumed that Wall Street rules the roost in both the mainstream financial media and in the alternative financial blogosphere. In my view, the speculative excesses and political power of Wall Street pose a strategic threat to the Deep State, and as a result a showdown between the Deep State and the surface machinery of governance that has been captured by Wall Street is looming.

Though everyone who is convinced the U.S. dollar will go to zero is confident that Wall Street will emerge victorious from the next financial crisis, I am convinced of the opposite: the Deep State will do whatever it takes to eliminate strategic threats to the integrity of the Deep State and the nation it depends on for its power and survival. In a financial crisis that threatens the dollar and the Deep State, the phantom claims of Wall Street’s financier skimmers, scammers and swindlers will be tossed under the bus with few qualms. The triage might even be performed with a certain relish.

Put another way: we’ve reached Peak Wall Street and it’s all downhill from here.

Did Canada’s Housing Bubble Just Get Popped? | CANADIAN MARKET REVIEW

Did Canada’s Housing Bubble Just Get Popped? | CANADIAN MARKET REVIEW.

FEBRUARY 12, 2014

Canada’s housing market has soared while the US market crashed.

Canada has the most overvalued housing market in the world:

The WSJ recently commented:

Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system.

Now, the Canadian government is eliminating “its controversial investor Visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.”

The story continues in The South China Morning Post:

Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.

The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.

The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.

The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires. Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.

In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.

For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.

Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.

A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.

Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.

All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.

The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.

The investor visa plan is truly stupid and should be eliminated. The idea of requiring loans to the government in exchange for citizenship is incredibly perverse. All money lent to the government is wasted and hurts the economy. The Chinese and Hongkongers who participated in this program could have really invested that money in productive endeavors instead. But this is a double-whammy to the Canadian economy, because to pay back those loans the Canadian state must tax its citizens, which hurts the economy even more.

But what effect will this have on Canada’s housing bubble? It will reduce demand for Canadian real estate. That obviously doesn’t help keep prices high.

Yet the really critical factor is central bank policy. The Bank of Canada is not up to date on its financial statements, but as of November it held more assets than ever. I am interested to see whether Poloz will “taper” with his American counterparts.

My intuition says that he won’t. Poloz wants to keep down the Canadian dollar and subsidize exports.  The Bank of Canada has been expanding its balance sheet since mid-2010. Canada’s M1 money supply has grown dramatically. Canada’s housing prices are high. Canada’s interest rates are low. Yield on Canadian government bonds have fallen below American bonds. Yet consumer prices are not rising quickly, so the Bank of Canada sees its policy as an epic success so far.

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