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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.

IMF report: ‘Debt is good’. What are these people smoking?

IMF report: ‘Debt is good’. What are these people smoking?.

February 18, 2014
Sovereign Valley Farm, Chile

Probably every kid in the world has at some point dreamed of having a time machine and being able to travel back to the past… usually to see dinosaurs or something like that.

Time travel is an almost universal fantasy. And if I could snap my fingers and turn the pages of time, I’d be seriously curious to check out the thousand-year period between the decline of the Western Roman Empire and the rise of the Renaissance.

They used to refer to this period as ‘the Dark Ages’ (though historians have since given up that moniker), a time when the entire European continent was practically at an intellectual standstill.

The Church became THE authority on everything– Science. Technology. Medicine. Education. And they kept the most vital information out of the hands of the people… instead simply telling everyone what to believe.

People living in that time had to trust that the high priests were smart guys and knew what they were talking about.

Interpreting facts and observations for yourself was heresy, and anyone who formed original thought and challenged the authority of church and state was burned at the stake.

Granted, human civilization has come a long way since then. But the basic building blocks are not terribly different than before.

Anyone who challenges the state is still burned at the stake. And our entire monetary system requires that we all trust the high priests of central banking and economics. Those that stray from the state’s message and spread economic heresy are cast down and vilified.

You may recall the case of Harvard professors Ken Rogoff and Carmen Reinhart who wrote the seminal work: “This Time is Different: Eight Centuries of Financial Folly”.

The book highlighted dozens of shocking historical patterns where once powerful nations accumulated too much debt and entered into terminal decline.

Spain, for example, defaulted on its debt six times between 1500 and 1800, then another seven times in the 19th century alone.

France defaulted on its debt EIGHT times between 1500 and 1800, including on the eve of the French Revolution in 1788. And Greece has defaulted five times since 1800.

The premise of their book was very simple: debt is bad. And when nations rack up too much of it, they get into serious trouble.

This message was not terribly convenient for governments that have racked up unprecedented levels of debt. So critics found some calculation errors in their Excel formulas, and the two professors were very publicly discredited.

Afterwards, it was as if the entire idea of debt being bad simply vanished.

Not to worry, though, the IMF has now stepped up with a work of its own to fill the void.

And surprise, surprise, their new paper “[does] not identify any clear debt threshold above which medium-term growth prospects are dramatically compromised.”

Translation: Keep racking up that debt, boys and girls, it’s nothing but smooth sailing ahead.

But that’s not all. They go much further, suggesting that once a nation reaches VERY HIGH levels of debt, there is even LESS of a correlation between debt and growth.

Clearly this is the problem for Europe and the US: $17 trillion? Pish posh. The economy will really be on fire once the debt hits $20 trillion.

There’s just one minor caveat. The IMF admits that they had to invent a completely different method to arrive to their conclusions, and that “caution should be used in the interpretation of our empirical results.”

But such details are not important.

What is important is that the economic high priests have proven once and for all that there are absolutely no consequences for countries who are deeply in debt.

And rather than pontificate what these people are smoking, we should all fall in line with unquestionable belief and devotion to their supreme wisdom.

Can the Markets Crash? | Zero Hedge

Can the Markets Crash? | Zero Hedge.

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”

 

Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).

 

 

Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.

 

The Tech bubble was a stock bubble.

 

The 2007 bust was a housing bubble.

 

This next bust will be the sovereign bond bubble.

 

Why does this matter?

 

Because of the dreaded “C word” COLLATERAL.

 

In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.

 

This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.

 

This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).

 

Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.

 

 

The reason?

 

The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.

 

WHAT DOES THIS HAVE TO DO WITH TODAY?

 

The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.

 

By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.

 

SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?

 

Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.

 

At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.

 

This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…

 

THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.

 

They will fail eventually. When they do, the markets will experience yet another terrible collapse even worse than that of 2008.

 

For a FREE Special Report on how to prepare your portfolio for this, visit us at:

 

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

The European Debt Crisis Visualized | Zero Hedge

The European Debt Crisis Visualized | Zero Hedge.

At the heart of the European debt crisis is the euro, the currency that ties together 17 countries in an intimate manner. So when one country teeters on the brink of financial collapse, the entire continent is at risk. The following excellent mini-documentary visually explains how such a flawed system came to be… and what’s next?

The Limits of Stock Chart Reading – Ludwig von Mises Institute Canada

The Limits of Stock Chart Reading – Ludwig von Mises Institute Canada.

Tuesday, February 11th, 2014 by  posted in Economics.

Any time people are compelled to decipher the future, strange methods and theories are sure to abound. The stock market has long been a haven of such folly.  Among the diviners in that arena, there are believers in the notion that planetary movements affect share values, that stock prices move in predictable wave sequences, and that certain geometric patterns on stock charts presage a change in trend. Nor are these habits of thought restricted to tiny corners of the stock exchange. Such is the eagerness to gain a clue into the future that there’ll always be numerous takers for far-fetched prognostications.

Scary Parallel

Source: http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11

The latest example of this is a chart (see above) that is getting wide dissemination on Wall Street. The chart depicts two prices series, one of the Dow Jones Industrial Average between 1928-1929 and the other of that same index from mid-2012 to the present day. The two lines are strikingly similar in their undulations. Indeed, since the resemblance first caught people’s attention this past November, the correlation has persisted. What this is supposed to portend, of course, is a crash along the lines of October 1929.

Yet this presumes that patterns from the past can be reliably expected to recur in the future. It is, as Ludwig von Mises might have put it, to assume that there are constant relations in economic life — that the fact that events of type B have previously followed events of type A means that B will recur whenever A happens to arise. But there are no constant relations in human affairs. For, unlike natural objects, human beings are continually exposed to novel  experiences, from which they learn and orient their actions accordingly in unforeseeable ways.

Even the original purveyor of the above chart, Tom McClellan (publisher of the McClellan Market Report), concedes that: “Every pattern analog I have ever studied breaks correlation eventually, and often at the point when I am most counting on it to continue working”. Undaunted by this realization that the past is no certain guide to the future, he nevertheless persists in warning us to be wary about the market.

The only historical pattern with any semblance of predictive significance is the proclivity of the stock market to trend in the same direction for a significant period of time. These trends are commonly known as bull and bear markets. Why these exist is actually something of a puzzle. Stock prices, being time-discounted estimates of future company dividends, ought to gyrate randomly in response to new information. To the extent one ought to expect a trend, it should be a very gently rising one mirroring the long-term rate of economic growth.  The reason why this does not occur, however,  is that the central bank generates booms and busts with its monetary policies, booms and busts that the stock market ends up reflecting in bull and bear markets.

All that can be usefully gleaned, then, from a stock chart is the prevailing trend. To gauge that one need not draw precise historical parallels with past price movements. A simple moving average — like a 10 month — might do.  In other words, if a major index like the S&P 500 is above its 10 month moving average, the trend is up. Conversely, if the index is below the average, the trend is down. Even then, there is no guarantee that the indicated trend will continue for any specific amount of time.

Tomas Salamanca is a Canadian Scholar.

Ponzi World (Over 3 Billion NOT Served): Buy The Fucking Collapse (BTFC)

Ponzi World (Over 3 Billion NOT Served): Buy The Fucking Collapse (BTFC).

Aside from the totally asinine and impossible strategy of attempting to borrow the global economy out of a debt crisis, we currently face a staggering array of risks unprecedented in modern history. Fortunately, the Idiocracy is fat and happy, comforted by the abiding assumption that printing money is the secret to effortless wealth…

 

MAXIMUM RISK
 
The Log Periodic Bubble formation called for a top by mid-January, which is exactly when the current top occurred in the S&P 500 (even earlier in the Dow – see below).
 
The maximum reading in the Greedometer, confirms the log periodic wave formation. 
 
And then there are all of the other risk factors simmering in the background (NYSE margin at record high, carry trades unwinding, Fed tapering, bullish sentiment @26 year high, lack of hedging, IPO speculation, earnings valuation, sector correlation, low volume, HFT glitches) etc. etc. 
 
The Week In Review: Still Buying the Dip with Both Hands
Once the HFT bots figured out that Friday’s weak employment report may mean a slowing of Fed tapering, they ramped the futures, driving massive short-covering and the obligatory sell-off in Japanese Yen.
Still, for the week, the markets were just barely positive and by no means recovered overall losses for the past two weeks. Bulls have expended a huge amount of firepower to basically get them back at the same level they were at last Friday. It took a mere 8 trading days to wipe out 3 and half months of upside gains, as volume doubled on the down days.
Dow Casino: 
The Dow hit its 200 DMA (red line) for only the second time in a year. It’s currently still well below the 50 DMA (blue line)
Russell 2000
The R2K small cap index was the leading market index since 2009. It is now dramatically underperforming and the past week’s rally barely made a dent.
Emerging Markets Death Cross
The 50 DMA crossing over the 200 DMA
The Fadebook Indicator: 100 P/E stock trading @ the whim of teenage girls
Facebook is still leading the market. Unbelievable
These are early days for this market “sell-off”:
 
 
Full Casino In the Casino
Go All In @WYNN
Walmart can’t meet estimates, but casinos are rocking…
 
 
Much Ado About Nothing
Here is some perspective for those getting all lathered up about this rally. The Nasdaq is still over a thousand points below where it was @Y2K. Unbelieveable. 
Skydiving Without a Parachute
CBOE Index Put/call ratio (50 DMA)
The reason why this collapse will go further and faster than anyone can predict
It’s hard to put a parachute on in mid-air…
 
It’s still going down…
 
BitCasino
Not This Again !
 
Lurching Towards the Minsky Moment
Of course, the stock market is merely a side show – a barometer of social mood and risk appetite. The real money is in the bond (credit) markets. As the various speculative excesses unwind during this collapse, one by one we will find out who has been taking the fullest advantage of 0% interest rates and printed money. Like dominoes falling, it will start in one region and spread like an epidemic. Asset “re-pricing” will reveal underlying insolvency that has been papered over solely by asset price levitation.
 
The Elliot Straight Down Wave (ESDW)
– “In the broadening top formation five minor reversals are followed by a substantial decline.”
– “most of the selling is completed in the early stage by big players and the participation is from general public in the later stage.”
– “It is a difficult formation to trade in” [No shit, thanks for sharing]
 
Of course we can only be certain that it’s a broadening top, if the market pierces the floor which is below 666 SPX (i.e. the Lehman Low)…
 

Is the Stock Market Repeating the 1929 Run Up to the Great Depression? Washington’s Blog

Is the Stock Market Repeating the 1929 Run Up to the Great Depression? Washington’s Blog.

Is History Repeating … Or Throwing a Head-Fake?

Chart courtesy of Tom McClellan of the McClellan Market Report (via Mark Hulbert)

Hulbert notes that the chart “has been making the rounds on Wall Street.”

On the other hand, Martin Armstrong predicts that a worsening economy – and bank deposit confiscation – in Europe will cause people to flood into American stocks as a “safe haven” for a couple of years.

And the Fed has more or less admitted that propping up the stock market is a top priority.

Australia to suffer biggest property collapse since Great Depression – Yahoo!7

Australia to suffer biggest property collapse since Great Depression – Yahoo!7.

7NEWSFebruary 7, 2014, 5:57 pm

The expert who predicted the global financial crisis has a dire warning for Australia’s property markets.

Melbourne, Sydney, Brisbane and Perth are on the verge of the most violent property collapse since the great depression, economist guru Harry Dent has said.

Speaking exclusively with 7News, the author, economist and property guru says as an entire country, Australia is the most over-valued real estate in the developed world.

“I think it’s probably going to go down at least 30 percent to kind of take off the bubble, [and] I think 50 percent down the road is even more likely,” Mr Dent said.

After London, Melbourne and Sydney are the most expensive cities in the world when housing prices are compared to earnings.

On average, Australians are shelling out more than ten times their annual income on a home.

“[Over] the next three to six years, we’re going to have a bigger GFC, we’re going to have the next Great Depression,” Mr Dent said.

“I think the most dangerous years are 2014 and 2015,” he said.

The American, who begins his Secure the Future speaking tour this week, was lambasted when he predicted the collapse of the Japanese economy when most economists said it would overtake the US as the biggest economy in the world.

He also accurately predicted the timing and severity of the 2008 Global Financial Crisis.

“An everyday person with a million dollar mortgage is going to go underwater,” Mr Dent said.

A lot of people are going to have a house worth less than their mortgage, and they apparently will not be able to refinance.

Leading analyst from Residex John Edwards disagrees with Harry Dent, and says if anything, our market is getting stronger.

Dent says his predictions are based on long-terms statistics on how Australians live and spend, and data from governments worldwide.

He says the key is to look to China, where almost a quarter of all new properties are sitting empty, and that cities like Shanghai could lose 85 per cent of their value.

“All it takes is something to burst the bubble,” he said.

“If China blows it’s going to have a much bigger impact than the 2008 GFC.”

Limits to Growth–At our doorstep, but not recognized | Our Finite World

Limits to Growth–At our doorstep, but not recognized | Our Finite World.

How long can economic growth continue in a finite world? This is the question the 1972 book The Limits to Growth by Donella Meadows and others sought to answer. The computer models that the team of researchers produced strongly suggested that the world economy would collapse sometime in the first half of the 21st century.

I have been researching what the real situation is with respect to resource limits since 2005. The conclusion I am reaching is that the team of 1972 researchers were indeed correct. In fact, the promised collapse is practically right around the corner, beginning in the next year or two. In fact, many aspects of the collapse appear already to be taking place, such as the 2008-2009 Great Recession and the collapse of the economies of smaller countries such as Greece and Spain. How could collapse be so close, with virtually no warning to the population?

To explain the situation, I will first explain why we are reaching Limits to Growth in the near term.  I will then provide a list of nine reasons why the near-term crisis has been overlooked.

Why We are Reaching Limits to Growth in the Near Term

In simplest terms, our problem is that we as a people are no longer getting richer. Instead, we are getting poorer, as evidenced by the difficulty young people are now having getting good-paying jobs. As we get poorer, it becomes harder and harder to pay debt back with interest. It is the collision of the lack of economic growth in the real economy with the need for economic growth from the debt system that can be expected to lead to collapse.

The reason we are getting poorer is because hidden parts of our economy are now absorbing more and more resources, leaving fewer resources to produce the goods and services we are used to buying. These hidden parts of our economy are being affected by depletion. For example, it now takes more resources to extract oil. This is why oil prices have more than tripled since 2002. It also takes more resource for many other hidden processes, such as deeper wells or desalination to produce water, and more energy supplies to produce metals from low-grade ores.

The problem as we reach all of these limits is a shortage of physical investment capital, such as oil, copper, and rare earth minerals. While we can extract more of these, some, like oil, are used in many ways, to fix many depletion problems. We end up with too many demands on oil supply–there is not enough oil to both (1) offset the many depletion issues the world economy is hitting, plus (2) add new factories and extraction capability that is needed for the world economy to grow.

With too many demands on oil supply, “economic growth” is what tends to get shorted. Countries that obtain a large percentage of their energy supply from oil tend to be especially affected because high oil prices tend to make the products these countries produce unaffordable. Countries with a long-term decline in oil consumption, such as the US, European Union, and Japan, find themselves in recession or very slow growth.

Figure 1. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 1. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

Unfortunately, the problem this appears eventually to lead to, is collapse. The problem is the connection with debt. Debt can be paid back with interest to a much greater extent in a growing economy than a contracting economy because we are effectively borrowing from the future–something that is a lot easier when tomorrow is assumed to be better than today, compared to when tomorrow is worse than today.

We could not operate our current economy without debt. Debt is what has allowed us to “pump up” economic growth. Consumers can buy cars, homes, and college educations that they have not saved up for. Businesses can set up factories and do mineral extraction, without having past profits to finance these operations. We can now operate with long supply chains, including many businesses that are dependent on debt financing. The ability to use debt allows vastly more investment than if potential investors could only the use of after-the-fact profits.

If we give up our debt-based economic system, we lose our ability to extract even the oil and other resources that appear to be easily available. We can have a simple, local economy, perhaps dependent on wood as it primary fuel source, without debt. But it seems unlikely that we can have a world economy that will provide food and shelter for 7.2 billion people.

The reason the situation is concerning is because the financial situation now seems to be near a crisis. Debt, other than government debt, has not been growing very rapidly since  2008. The government has tried to solve this problem by keeping interest rates very low using Quantitative Easing (QE). Now the government is cutting back in the amount of QE.  If interest rates should rise very much, we will likely see recession again and many layoffs. If this should happen, debt defaults are likely to be a problem and credit availability will dry up as it did in late 2008. Without credit, prices of all commodities will drop, as they did in late 2008. Without the temporary magic of QE, new investment, even in oil, will drop way off. Government will need to shrink back in size and may even collapse.

In fact, we are already having a problem with oil prices that are too low to encourage oil production. (See my post, What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs.) Other commodities are also trading at flat to lower price levels. The concern is that these lower prices will lead to deflation. With deflation, debt is strongly discouraged because it raises the “inflation adjusted” cost of borrowing. If a deflationary debt cycle is started, there could be a huge drop in debt over a few years. This would be a different way to reach collapse.

Why couldn’t others see the problem that is now at our door step?

1. The story is a complicated, interdisciplinary story. Even trying to summarize it in a few paragraphs is not easy. Most people, if they have a background in oil issues, do not also have a background in financial issues, and vice versa.

2. Economists have missed key points. Economists have missed the key role of debt in extracting fossil fuels and in keeping the economy operating in general. They have also missed the fact that in a finite world, this debt cannot keep rising indefinitely, or it will grow to greatly exceed the physical resources that might be used to pay back the debt.

Economists have missed the fact that resource depletion acts in a way that is equivalent to a huge downward drag on productivity. Minerals need to be separated from more and more waste products, and energy sources need to be extracted in ever-more-difficult locations. High energy prices, whether for oil or for electricity, are a sign of economic inefficiency. If energy prices are high, they act as a drag on the economy.

Economists have missed the key role oil plays–a role that is not easily substituted away. Our transportation, farming and construction industries are all heavily dependent on oil. Many products are made with oil, from medicines to fabrics to asphalt.

Economists have assumed that wages can grow without energy inputs, but recent experience shows the economies with shrinking oil use are ones with shrinking job opportunities. Economists have built models claiming that prices will rise to handle shortages, either through substitution or demand destruction, but they have not stopped to consider how destructive this demand destruction can be for an economy that depends on oil use to manufacture and transport goods.

Economists have missed the point that globalization speeds up depletion of resources and increases CO2 emissions, because it adds a huge number of new consumers to the world market.

Economists have also missed the fact that wages are hugely important for keeping economies operating. If wages are cut, either because of competition with low-wage workers in warm countries (who don’t need as high a wages to maintain a standard of living, because they do not need sturdy homes or fuel to heat the homes) or because of automation, economic growth is likely to slow or fall. Corporate profits are not a substitute for wages.

3. Peak Oil advocates have missed key points. Peak oil advocates are a diverse group, so I cannot really claim all of them have the same views.

One common view is that just because oil, or coal, or natural gas seems to be available with current technology, it will in fact be extracted. This is closely related to the view that “Hubbert’s Peak” gives a reasonable model for future oil extraction. In this model, it is assumed that about 50% of extraction occurs after the peak in oil consumption takes place. Even Hubbert did not claim this–his charts always showed another fuel, such as nuclear, rising in great quantity before fossil fuels dropped in supply.

In the absence of a perfect substitute, the drop-off can be expected to be very steep. This happens because population rises as fossil fuel use grows. As fossil fuel use declines, citizens suddenly become much poorer. Government services must be cut way back, and government may even collapse. There is likely to be huge job loss, making it difficult to afford goods. There may be fighting over what limited supplies are available.What Hubbert’s curve shows is something like an upper limit for production, if the economy continues to function as it currently does, despite the disruption that loss of energy supplies would likely bring.

A closely related issue is the belief that high oil prices will allow some oil to be produced indefinitely. Salvation can therefore be guaranteed by using less oil. First of all, the belief that oil prices can rise high enough is being tested right now. The fact that oil prices aren’t high enough is causing oil companies to cut back on new projects, instead returning money to shareholders as dividends. If the economy starts shrinking because of lower oil extraction, a collapse in credit is likely to lead to even lower prices, and a major cutback in production.

4. Excessive faith in substitution. A common theme by everyone from economists to peak oilers to politicians is that substitution will save us.

There are several key points that advocates miss. One is that if a financial crash is immediately ahead, our ability to substitute disappears, practically overnight (or at least, within a few years).

Another is key point is that today’s real shortage is of investment capitalin the form of oil and other natural resources needed to manufacture the new natural gas powered cars and the fueling stations they need. A similar shortage of investment capital plagues plans to change to electric cars. Wage-earners of modest means cannot afford high-priced plug in vehicles, especially if the change-over is so fast that the value of their current vehicle drops to $0.

Another key point is that the alternatives we looking at are limited in supply as well. We use far more oil than natural gas; trying to substitute natural gas for oil will lead to a shortfall in natural gas supplies quickly. Ramping up electric cars, solar, and wind will lead to a shortage of the rare earth minerals and other minerals needed in their production. While more of these minerals can be accessed by using lower quality ore, doing so leads to precisely the investment capital shortfall that is our problem to begin with.

Another key point is that electricity does not substitute for oil, because of the huge need for investment capital (which is what is in short supply) to facilitate the change. There is also a timing issue.

Another key point is that intermittent electricity does not substitute for electricity whose supply can be easily regulated. What intermittent electricity substitutes for is thefossil fuel used to make electricity whose supply is more easily regulated. This substitution (in theory) extends the life of our fossil fuel supplies. This theory is only true if we believe that  coal and natural gas extraction is only limited by the amount those materials in the ground, and the level of our technology. (This is the assumption underlying IEA and EIA  estimates of future fossil use.)

If the limit on coal and natural gas extraction is really a limit on investment capital (including oil), and this investment capital limit may manifest itself as a debt limit, then the situation is different. In such a case, high investment in intermittent renewables can expected to drive economies that build them toward collapse more quickly, because of their high front-end investment capital requirements and low short-term returns.

5. Excessive faith in Energy Return on Energy Investment (EROI) or Life Cycle Analysis (LCA) analyses. Low EROI returns and poor LCA returns are part of our problem, but they are not the whole problem.  They do not consider timing–something that is critical, if our problem is with inadequate investment capital availably, and the need for high returns quickly.

EROI analyses also make assumptions about substitutability–something that is generally not possible for oil, for reasons described above. While EROI and LCA studies can provide worthwhile insights, it is easy to assume that they have more predictive value than they really do. They are not designed to tell when Limits to Growth will hit, for example.

6. Governments funding leads to excessive research in the wrong directions and lack of research in the right direction. Governments are in denial that Limits to Growth, or even oil supply, might be a problem. Governments rely on economists who seem to be clueless regarding what is happening.

Researchers base their analyses on what prior researchers have done. They tend to “follow the research grant money,” working on whatever fad is likely to provide funding. None of this leads to research in areas where our real problems lie.

7. Individual citizens are easily misled by news stories claiming an abundance of oil. Citizens don’t realize that the reason oil is abundant is because oil prices are high, debt is widely available, and interest rates are low. Furthermore, part of the reason oil appears abundant is because low-wage citizens still cannot afford products made with oil, even at its current price level. Low employment and wages feed back in the form of  low oil demand, which looks like excessive oil supply. What the economy really needs is low-priced oil, something that is not available.

Citizens also don’t realize that recent push to export crude oil doesn’t mean there is a surplus of crude oil. It means that refinery space for the type of oil in question is more available overseas.

The stories consumers read about growing oil supplies are made even more believable by forecasts showing that oil and other energy supply will rise for many years in the future. These forecasts are made possible by assuming the limit on the amount of oil extracted is the amount of oil in the ground. In fact, the limit is likely to be a financial (debt) limit that comes much sooner. See my post, Why EIA, IEA, and Randers’ 2052 Energy Forecasts are Wrong.

8. Unwillingness to believe the original Limits to Growth models. Recent studies, such as those by Hall and Day and by Turner, indicate that the world economy is, in fact, following a trajectory quite similar to that foretold by the base model of Limits to Growth. In my view, the main deficiencies of the 1972 Limits to Growth models are

(a) The researchers did not include the financial system to any extent. In particular, the models left out the role of debt. This omission tends to move the actual date of collapse sooner, and make it more severe.

(2) The original model did not look at individual resources, such as oil, separately. Thus, the models gave indications for average or total resource limits, even though oil limits, by themselves, could bring down the economy more quickly.

I have noticed comments in the literature indicating that the Limits to Growth study has been superseded by more recent analyses. For example, the article Entropy and Economics by Avery, when talking about the Limits to Growth study says, “ Today, the more accurate Hubbert Peak model is used instead to predict rate of use of a scarce resource as a function of time.” There is no reason to believe that the Hubbert Peak model is more accurate! The original study used actual resource flows to predict when we might expect a problem with investment capital. Hubbert Peak models overlook financial limits, such as lack of debt availability, so overstate likely future oil flows. Because of this, they are not appropriate for forecasts after the world peak is hit.

Another place I have seen similar wrong thinking is in the current World3 model, which has been used in recent Limits to Growth analyses, including possibly Jorgen Randers’2052. This model assumes a Hubbert Peak model for oil, gas, and coal. The World3 model also assumes maximum substitution among fuel types, something that seems impossible if we are facing a debt crisis in the near term.

9. Nearly everyone would like a happy story to tell. Every organization from Association for the Study of Peak Oil groups to sustainability groups to political groups would like to have a solution to go with the problem they are aware of. Business who might possibly have a chance of selling a “green” product would like to say, “Buy our product and your problems will be solved.” News media seem to tell only the stories that their advertisers would like to hear. This combination of folks who are trying to put the best possible “spin” on the story leads to little interest in researching and telling the true story.

Conclusion

Wrong thinking and wishful thinking seems to abound, when it comes to overlooking near term limits to growth. Part of this may be intentional, but part of this lies with the inherent difficulty of understanding such a complex problem.

There is a tendency to believe that newer analyses must be better. That is not necessarily the case. When it comes to determining when Limits to Growth will be reached, analyses need to be focused on the details that seemed to cause collapse in the 1972 study–slow economic growth caused by the many conflicting needs for investment capital. The question is: when do we reach the point that oil supply is growing too slowly to produce the level of economic growth needed to keep our current debt system from crashing?

It seems to me that we are already near such a point of collapse. Most people have not realized how vulnerable our economic system is to crashing in a time of low oil supply growth.

The Archdruid Report: The Steampunk Future

The Archdruid Report: The Steampunk Future.

WEDNESDAY, FEBRUARY 05, 2014

The Steampunk Future

For those of us who’ve been watching the course of industrial civilization’s decline and fall, the last few weeks have been a bit of a wild ride.  To begin with, as noted in last week’s post, the specter of peak oil has once again risen from the tomb to which the mass media keeps trying to consign it, and stalks the shadows of contemporary life, scaring the bejesus out of everyone who wants to believe that infinite economic growth on a finite planet isn’t a self-defeating absurdity.
Then, of course, it started seeping out into the media that the big petroleum companies have lost a very large amount of money in recent quarters, and a significant part of those losses were due to their heavy investments in the fracking boom in the United States—you know, the fracking boom that was certain to bring us renewed prosperity and limitless cheap fuel into the foreseeable future?  That turned out to a speculative bubble, as readers of this blog were warned a year ago. The overseas investors whose misspent funds kept the whole circus going are now bailing out, and the bubble has nowhere to go but down. How far down? That’s a very good question that very few people want to answer.
The fracking bubble is not, however, the only thing that’s falling. What the financial press likes to call “emerging markets”—I suspect that “submerging markets” might be a better label at the moment—have had a very bad time of late, with stock markets all over the Third World racking up impressive losses, and some nasty downside action spilled over onto Wall Street, Tokyo and the big European exchanges as well. Meanwhile, the financial world has been roiled by the apparent suicides of four important bankers. If any of them left notes behind, nobody’s saying what those notes might contain; speculation, in several senses of that word, abounds.
Thus it’s probably worth being aware of the possibility that in the weeks and months ahead, we’ll see another crash like the one that hit in 2008-2009: another milestone passed on the road down from the summits of industrial civilization to the deindustrial dark ages of the future. No doubt, if we get such a crash, it’ll be accompanied by a flurry of predictions that the whole global economy will come to a sudden stop. There were plenty of predictions along those lines during the 2008-2009 crash; they were wrong then, and they’ll be wrong this time, too, but it’ll be few months before that becomes apparent.
In the meantime, while we wait to see whether the market crashes and another round of fast-crash predictions follows suit, I’d like to talk about something many of my readers may find whimsical, even irrelevant. It’s neither, but that, too, may not become apparent for a while.
Toward the middle of last month, as regular readers will recall, I posted an essay here suggesting seven sustainable technologies that could be taken up, practiced, and passed down to the societies that will emerge out of the wreckage of ours. One of those was computer-free mathematics, using slide rules and the other tools people used to crunch numbers before they handed over that chunk of their mental capacity to machines. In the discussion that followed, one of my readers—a college professor in the green-technology end of things—commented with some amusement on the horrified response he’d likely get if he suggested to his students that they use a slide rule for their number-crunching activities.
Not at all, I replied; all he needed to do was stand in front of them, brandish the slide rule in front of their beady eyes, and say, “This, my friends, is a steampunk calculator.”
It occurs to me that those of my readers who don’t track the contemporary avant-garde may have no idea what that next to last word means;  like so many labels these days, it contains too much history to have a transparent meaning. Doubtless, though, all my readers have at least heard of punk rock.  During the 1980s, a mostly forgettable literary movement in science fiction got labeled “cyberpunk;” the first half of the moniker referenced the way it fetishized the behavioral tics of 1980s hacker culture, and the second was given it because it made a great show, as punk rockers did, of being brash and belligerent.  The phrase caught on, and during the next decade or so, every subset of science fiction that hadn’t been around since Heinleins roamed the earth got labeled fill-in-the-blankpunk by somebody or other.
Steampunk got its moniker during those years, and that’s where the “-punk” came from. The “steam” is another matter. There was an alternative-history novel, The Difference Engine by William Gibson and Bruce Sterling, set in a world in which Victorian computer pioneer Charles Babbage launched the cybernetic revolution a century in advance with steam-powered mechanical computers.  There was also a roleplaying game called Space 1889—take a second look at those numbers if you think that has anything to do with the 1970s TV show about Moonbase Alpha—that had Thomas Edison devising a means of spaceflight, and putting the Victorian earth in contact with alternate versions of Mars, Venus and the Moon straight out of Edgar Rice Burroughs-era space fantasy.
Those and a few other sources of inspiration like them got artists, craftspeople, writers, and the like  thinking about what an advanced technology might look like if the revolutions triggered by petroleum and electronics had never happened, and Victorian steam-powered technology had evolved along its own course.  The result is steampunk:  part esthetic pose, part artistic and literary movement, part subculture, part excuse for roleplaying and assorted dress-up games, and part—though I’m far from sure how widespread this latter dimension is, or how conscious—a collection of sweeping questions about some of the most basic presuppositions undergirding modern technology and the modern world.
It’s very nearly an article of faith in contemporary industrial society that any advanced technology—at least until it gets so advanced that it zooms off into pure fantasy—must by definition look much like ours. I’m thinking here of such otherwise impressive works of alternate history as Kim Stanley Robinson’s The Years of Rice and Salt. Novels of this kind portray the scientific and industrial revolution happening somewhere other than western Europe, but inevitably it’s the same scientific and industrial revolution, producing much the same technologies and many of the same social and cultural changes. This reflects the same myopia of the imagination that insists on seeing societies that don’t use industrial technologies as “stuck in the Middle Ages” or “still in the Stone Age,” or what have you:  the insistence that all human history is a straight line of progress that leads unstoppably to us.
Steampunk challenges that on at least two fronts. First, by asking what technology would look like if the petroleum and electronics revolutions had never happened, it undercuts the common triumphalist notion that of course an advanced technology must look like ours, function like ours, and—ahem—support the same poorly concealed economic, political, and cultural agendas hardwired into the technology we currently happen to have. Despite such thoughtful works as John Ellis’ The Social History of the Machine Gun, the role of such agendas in defining what counts for progress remains a taboo subject, and the idea that shifts in historical happenstance might have given rise to wholly different “advanced technologies” rarely finds its way even into the wilder ends of speculative fiction.
If I may be permitted a personal reflection here, this is something I watched during the four years when my novel Star’s Reach was appearing as a monthly blog post. 25th-century Meriga—yes, that’s “America” after four centuries—doesn’t fit anywhere on that imaginary line of progress running from the caves to the stars; it’s got its own cultural forms, its own bricolage of old and new technologies, and its own way of understanding history in which, with some deliberate irony, I assigned today’s industrial civilization most of the same straw-man roles that we assign to the societies of the preindustrial past.
As I wrote the monthly episodes of Star’s Reach, though, I fielded any number of suggestions about what I should do with the story and the setting, and a good any of those amounted to requests that I decrease the distance separating 25th-century Meriga from the modern world, or from some corner of the known past.  Some insisted that some bit of modern technology had to find a place in Merigan society, some urged me to find room somewhere in the 25th-century world for enclaves where a modern industrial society had survived, some objected to a plot twist that required the disproof of a core element of today’s scientific worldview—well, the list is long, and I think my readers will already have gotten the point.
C.S. Lewis was once asked by a reporter whether he thought he’d influenced the writings of his friend J.R.R. Tolkien. If I recall correctly, he said, “Influence Tolkien? You might as well try to influence a bandersnatch.” While I wouldn’t dream of claiming to be Tolkien’s equal as a writer, I share with him—and with bandersnatches, for that matter—a certain resistance to external pressures, and so Meriga succeeded to some extent in keeping its distance from more familiar futures. The manuscript’s now at the publisher, and I hope to have a release date to announce before too long; what kind of reception the book will get when it’s published is another question and, at least to me, an interesting one.
Outside of the realms of imaginative fiction, though, it’s rare to see any mention of the possibility that the technology we ended up with might not be the inevitable outcome of a scientific revolution. The boldest step in that direction I’ve seen so far comes from a school of historians who pointed out that the scientific revolution depended, in a very real sense, on the weather in the English Channel during a few weeks in 1688.  It so happened that the winds in those weeks kept the English fleet stuck in port while William of Orange carried out the last successful invasion (so far) of England by a foreign army.
As a direct result, the reign of James II gave way to that of William III, and Britain dodged the absolute monarchy, religious intolerance, and technological stasis that Louis XIV was imposing in France just then, a model which most of the rest of Europe promptly copied. Because Britain took a different path—a path defined by limited monarchy, broad religious and intellectual tolerance, and the emergence of a new class of proto-industrial magnates whose wealth was not promptly siphoned off into the existing order, but accumulated the masses of capital needed to build the world’s first industrial economy—the scientific revolution of the late 17th and early 18th century was not simply a flash in the pan. Had James II remained on the throne, it’s argued, none of those things would have happened.
It shows just how thoroughly the mythology of progress has its claws buried in our imaginations that many people respond to that suggestion in an utterly predictable way—by insisting that the scientific and industrial revolutions would surely have taken place somewhere else, and given rise to some close equivalent of today’s technology anyway. (As previously noted, that’s the underlying assumption of the Kim Stanley Robinson novel cited above, and many other works along the same lines.)  At most, those who get past this notion of industrial society’s Manifest Destiny imagine a world in which the industrial revolution never happened:  where, say, European technology peaked around 1700 with waterwheels, windmills, square-rigged ships, and muskets, and Europe went from there to follow the same sort of historical trajectory as the Roman Empire or T’ang-dynasty China.
Further extrapolations along those lines can be left to the writers of alternative history. The point being made by the writers, craftspeople, and fans of steampunk, though, cuts in a different direction. What the partly imaginary neo-Victorian tech of steampunk suggests is that another kind of advanced technology is possible: one that depends on steam and mechanics instead of petroleum and electronics, that accomplishes some of the same things our technology does by different means, and that also does different things—things that our technologies don’t do, and in some cases quite possibly can’t do.
It’s here that steampunk levels its second and arguably more serious challenge against the ideology that sees modern industrial society as the zenith, so far, of the march of progress. While it drew its original inspiration from science fiction and roleplaying games, what shaped steampunk as an esthetic and cultural movement was a sense of the difference between the elegant craftsmanship of the Victorian era and the shoddy plastic junk that fills today’s supposedly more advanced culture. It’s a sense that was already clear to social critics such as Theodore Roszak many decades ago. Here’s Roszak’s cold vision of the future awaiting industrial society, from his must-read book Where the Wasteland Ends:
“Glowing advertisements of undiminished progress will continue to rain down upon us from official quarters; there will always be well-researched predictions of light at the end of every tunnel. There will be dazzling forecasts of limitless affluence; there will even be muchreal affluence. But nothing will ever quite work the way the salesmen promised; the abundance will be mired in organizational confusion and bureaucratic malaise, constant environmental emergency, off-schedule policy, a chaos of crossed circuits, clogged pipelines, breakdowns in communication, overburdened social services. The data banks will become a jungle of misinformation, the computers will suffer from chronic electropsychosis. The scene will be indefinably sad and shoddy despite the veneer of orthodox optimism. It will be rather like a world’s fair in its final days, when things start to sag and disintegrate behind the futuristic façades, when the rubble begins to accumulate in the corners, the chromium to grow tarnished, the neon lights to burn out, all the switches and buttons to stop working. Everything will take on that vile tackiness which only plastic can assume, the look of things decaying that were never supposed to grow old, or stop gleaming, never to cease being gay and sleek and perfect.”
As prophecies go, you must admit, this one was square on the mark. Roszak’s nightmare vision has duly become the advanced, progressive, cutting-edge modern society in which we live today.  That’s what the steampunk movement is rejecting in its own way, by pointing out the difference between the handcrafted gorgeousness of an older generation of technology and the “vile tackiness which only plastic can assume” that dominates contemporary products and, indeed, contemporary life. It’s an increasingly widespread recognition, and helps explain why so many people these days are into some form of reenactment.
Whether it’s the new Middle Ages of the Society for Creative Anachronism, the frontier culture of buckskinners and the rendezvous scene, the military-reenactment groups recreating the technologies and ambience of any number of of long-ago wars, the primitive-technology enthusiasts getting together to make flint arrowheads and compete at throwing spears with atlatls, or what have you:  has any other society seen so many people turn their backs on the latest modern conveniences to take pleasure in the technologies and habits of earlier times? Behind this interest in bygone technologies, I suggest, lies a concept that’s even more unmentionable in polite company than the one I discussed above: the recognition that most of the time, these days, progress no longer means improvement.
By and large, the latest new, advanced, cutting-edge products of modern industrial society are shoddier, flimsier, and more thickly frosted with bugs, problems, and unwanted side effects than whatever they replaced. It’s becoming painfully clear that we’re no longer progressing toward some shiny Jetsons future, if we ever were, nor are we progressing over a cliff into a bigger and brighter apocalypse than anyone ever had before. Instead, we’re progressing steadily along the downward curve of Roszak’s dystopia of slow failure, into a crumbling and dilapidated world of spiraling dysfunctions hurriedly patched over, of systems that don’t really work any more but are never quite allowed to fail, in which more and more people every year find themselves shut out of a narrowing circle of paper prosperity but in which no public figure ever has the courage to mention that fact.
Set beside that bleak prospect, it’s not surprising that the gritty but honest hands-on technologies and lifeways of earlier times have a significant appeal.  There’s also a distinct sense of security that comes from the discovery that one can actually get by, and even manage some degree of comfort, without having a gargantuan fossil-fueled technostructure on hand to meet one’s every need. What intrigues me about the steampunk movement, though, is that it’s gone beyond that kind of retro-tech to think about a different way in which technology could have developed—and in the process, it’s thrown open the door to a reevaluation of the technologies we’ve got, and thus to the political, economic, and cultural agendas which the technologies we’ve got embody, and thus inevitably further.
Well, that’s part of my interest, at any rate. Another part is based on the recognition that Victorian technology functioned quite effectively on a very small fraction of the energy that today’s industrial societies consume. Estimates vary, but even the most industrialized countries in the world in 1860 got by on something like ten per cent of the energy per capita that’s thrown around in industrial nations today.  The possibility therefore exists that something like a Victorian technology, or even something like the neo-Victorian extrapolations of the steampunk scene, might be viable in a future on the far side of peak oil, when the much more diffuse, intermittent, and limited energy available from renewable sources will be what we have left to work with for the rest of our species’ time on this planet.
For the time being, I want to let that suggestion percolate through the crawlspaces of my readers’ imaginations.  Those who want to pick up a steampunk calculator and start learning how to crunch numbers with it—hint:  it’s easy to learn, useful in practice, and slide rules come cheap these days—may just have a head start on the future, but that’s a theme for a later series of posts. Well before we get to that, it’s important to consider a far less pleasant kind of blast from the past, one that bids fair to play a significant role in the future immediately ahead.

That is to say, it’s time to talk about the role of fascism in the deindustrial future. We’ll begin that discussion next week.

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