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The DJIA Is A Hoax Washington’s Blog

The DJIA Is A Hoax Washington’s Blog.

The Dow Jones Industrial Average Is a Farce

Guest post by Wim Grommen. Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 18 years as trainer for Transfer Solutions in the Netherlands.

The last 15 years he studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines / sites in The Netherlands and Belgium.

The paper “The present crisis, a pattern: current problems associated with the end of the third industrial revolution” was accepted for an International Symposium in Valencia: The Economic Crisis: Time for a paradigm shift, Towards a systems approach. 

On January 25 2013, during the symposium in Valencia he presented his paper to scientists.

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a hoax.

Transitions

Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

A transition has the following characteristics:

–          it involves a structural change of civilization or a complex subsystem of our civilization

–          it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other

–          it is the result of slow changes (changes in supplies) and fast dynamics (flows)

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.

Four transition phases

In general transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  1. a pre development phase of a dynamic balance in which the present status does not visibly change
  2. a take off phase in which the process of change starts because of changes in the system
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  1. the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

 

 

Figure 1. The S curve of a transition
Four phases in a transition best visualized by means of an S curve:
Pre-development, Take-off, Acceleration, Stabilization.

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect :

1. The first industrial revolution (1780 until circa 1850); the steam engine

2. The second industrial revolution (1870 until circa 1930); electricity, oil and the car

3. The third industrial revolution (1950 until ….); computer and microprocessor

Dow Jones Industrial Average (DJIA)

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

The False Appreciation of the Dow Explained

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30.

On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there!

On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes.

How the Dow Divisor Contributed to the Crash of ‘29

From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well.

Dow Jones Industrial Index is a Hoax

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

Dow1985 = (x1 + x2 +..+x30) / 1

Dow2014 = (x1 + x2 +.. + x30) / 0.15571590501117

In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution and 5 financial institutions, which always play an important role in every transition, were added to the Dow Jones.

Period

Basket changes

Stock splits

Dow Divisor end period

1930-1940

18

0

15,100

1940-1950

0

12

9,060

1950-1960

5

27

3,824

1960-1970

0

26

1,894

1970-1980

3

12

1,465

1980-1990

5

32

0,586

1990-2000

11

40

0,201

2000-2010

7

13

0,132

Table 1. Changes in the Dow, stock splits and the value of the Dow Divisor after the market crash of 1929

 Dow Jones Industrial Average

Figure 2 Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

Overview from 1997 : 20 winners in – 20 losers out, a figure of 67%

September 23, 2013: Hewlett – Packard Co., Bank of America Inc. and Alcoa Inc. will replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc.
Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36.
Bank of America has dropped from $50 in 2007 to $14.48.
But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.
Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.
 Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Do.

September 22, 2008: Kraft Foods Inc. replaced American International Group. 
American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.
Altria was split into two companies and was deemed no longer suitable for the Dow.
 Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.
AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

March 17, 1997:  Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Real truth and fictional truth

Is the number of points that the Dow Jones now gives us a truth or a fictional truth? 
If a fictional truth then the number of points now says absolutely nothing about the state that the economy or society is in when compared to the past. In that case a better guide would be to look at the number of people in society that use food stamps today – That is the real truth

The DJIA Is A Hoax Washington's Blog

The DJIA Is A Hoax Washington’s Blog.

The Dow Jones Industrial Average Is a Farce

Guest post by Wim Grommen. Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 18 years as trainer for Transfer Solutions in the Netherlands.

The last 15 years he studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines / sites in The Netherlands and Belgium.

The paper “The present crisis, a pattern: current problems associated with the end of the third industrial revolution” was accepted for an International Symposium in Valencia: The Economic Crisis: Time for a paradigm shift, Towards a systems approach. 

On January 25 2013, during the symposium in Valencia he presented his paper to scientists.

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a hoax.

Transitions

Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

A transition has the following characteristics:

–          it involves a structural change of civilization or a complex subsystem of our civilization

–          it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other

–          it is the result of slow changes (changes in supplies) and fast dynamics (flows)

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.

Four transition phases

In general transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  1. a pre development phase of a dynamic balance in which the present status does not visibly change
  2. a take off phase in which the process of change starts because of changes in the system
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  1. the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

 

 

Figure 1. The S curve of a transition
Four phases in a transition best visualized by means of an S curve:
Pre-development, Take-off, Acceleration, Stabilization.

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect :

1. The first industrial revolution (1780 until circa 1850); the steam engine

2. The second industrial revolution (1870 until circa 1930); electricity, oil and the car

3. The third industrial revolution (1950 until ….); computer and microprocessor

Dow Jones Industrial Average (DJIA)

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

The False Appreciation of the Dow Explained

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30.

On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there!

On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes.

How the Dow Divisor Contributed to the Crash of ‘29

From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well.

Dow Jones Industrial Index is a Hoax

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

Dow1985 = (x1 + x2 +..+x30) / 1

Dow2014 = (x1 + x2 +.. + x30) / 0.15571590501117

In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution and 5 financial institutions, which always play an important role in every transition, were added to the Dow Jones.

Period

Basket changes

Stock splits

Dow Divisor end period

1930-1940

18

0

15,100

1940-1950

0

12

9,060

1950-1960

5

27

3,824

1960-1970

0

26

1,894

1970-1980

3

12

1,465

1980-1990

5

32

0,586

1990-2000

11

40

0,201

2000-2010

7

13

0,132

Table 1. Changes in the Dow, stock splits and the value of the Dow Divisor after the market crash of 1929

 Dow Jones Industrial Average

Figure 2 Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

Overview from 1997 : 20 winners in – 20 losers out, a figure of 67%

September 23, 2013: Hewlett – Packard Co., Bank of America Inc. and Alcoa Inc. will replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc.
Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36.
Bank of America has dropped from $50 in 2007 to $14.48.
But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.
Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.
 Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Do.

September 22, 2008: Kraft Foods Inc. replaced American International Group. 
American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.
Altria was split into two companies and was deemed no longer suitable for the Dow.
 Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.
AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

March 17, 1997:  Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Real truth and fictional truth

Is the number of points that the Dow Jones now gives us a truth or a fictional truth? 
If a fictional truth then the number of points now says absolutely nothing about the state that the economy or society is in when compared to the past. In that case a better guide would be to look at the number of people in society that use food stamps today – That is the real truth

Blinkered to threat of rising oil prices

Blinkered to threat of rising oil prices.

Oil production in Australia peaked in 2000. It would have peaked worldwide too by now, had it not been for the shale oil boom in the US.

Some interesting work by this country’s most unrelenting peak oil proponent, retired engineer Matt Mushalik, shows that without shale oil – which accounts for 1.5 million barrels a day – world oil production last year was back at 2005 levels. It seems a monumental economic crisis may have been averted.

Still, the price of crude oil has stubbornly hovered around its present mark of $US108 a barrel for the past three years even as shale oil production has ramped up.

For motorists in Australia, should consensus predictions of a falling Australian dollar come to pass, prices will head higher at the petrol pump in coming years.

This currency effect, however, is a sideshow compared with the big question of world oil prices and production.

Thanks to the shale oil boom, the more alarmist cries of the peak oil brigade have been subdued. Even with advancing technology and ever more sophisticated extraction methods though, it is London to a brick that the price of crude oil will rise sharply in the longer term.

You would think then that peak oil might be factored in to major policy decisions about the future of the nation and its infrastructure.

Energy security is paramount.

But it is not so. In early 2012, then industry minister Kim Carr declined to table the federal government’s peak oil report BITRE 117 before a Senate hearing on grounds that it was ”not up to scratch”.

Later that year, the energy white paper also failed to deliver an updated version. Research on oil, perhaps the most critical commodity for Australia’s long-term security, has been abandoned.

As the Abbott government grapples with the tricky question of how to fund big projects ahead of public hearings on infrastructure next month, the question of oil prices is not even on the agenda.

Already, the bias of state and federal governments for roads over rail has been well documented. As oil is the most critical commodity in fuelling any transport option, you could be forgiven for thinking that it should be on the agenda.

Nothing in the issues papers, nothing in the draft report from the Productivity Commission. It seems to be an article of faith that people will keep finding oil somewhere, so let’s not give it a second thought.

In an interview with the US Association for the Study of Peak Oil and Gas in January, an ex-Saudi Aramco geologist, Dr Sadad Al-Husseini, predicted oil price spikes of $140 by 2016-17.

”My base oil price forecast in 2012 dollars still ranges between $US105 and $US120/barrel … with a volatility floor of $US95/barrel and more probable upward spiking to $US140/barrel within 2016-17.”

Dr Al-Husseini’s forecast in 2009 of a limited plateau of oil supplies appears to have been vindicated. He said the plateau might have been inflated thanks to high-cost unconventional oils but major forecasters see this as pretty much transitional. ”The plateau itself remains a reality and unfortunately its duration is still unlikely to extend beyond the end of this decade.”

He highlighted several factors that would inhibit the expansion of production, including decline rates (more extreme than ever with shale oil and deep offshore), limited investments (quadrupled capex/barrel in the past few years) and economic growth (still recovering). ”In the long term, reserves depletion remains very high with totally inadequate reserves replacements regularly obscured by resorting to claiming ‘resources’ as reserves.”

The industry has moved into a higher-cost paradigm with very limited growth in conventional oil and condensate supplies, accelerated ”proven” reserves depletion and high levels of violence and conflicts around the world’s major basins of low-cost oil production.

Australia is fortunate in having enormous gas resources. Still, with the world population forecast to grow to 11 billion by the end of this century and the developing economies ever-thirsty for oil, it would seem foolish to ignore the oil price in long-term infrastructure planning.

Mind you, short-termism is an affliction not merely contained to oil. In the annual Mitsubishi lecture back in 2010, Don Elder, chief executive of coal company Solid Energy, said there was enough in coal reserves for 100 years. Yet in one more generation, global demand for food and energy would double.

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..

No Janet Yellen, The Economy Is NOT “Getting Better”

No Janet Yellen, The Economy Is NOT “Getting Better”.

By Michael Snyder, on February 11th, 2014 

Janet YellenOn Tuesday, new Federal Reserve Chairman Janet Yellen went before Congress and confidently declared that “the economic recovery gained greater traction in the second half of last year” and that “substantial progress has been made in restoring the economy to health”.  This resulted in glowing headlines throughout the mainstream media such as this one from USA Today: “Yellen: Economy is improving at moderate pace“.  Sadly, tens of millions of Americans are going to believe what the mainstream media is telling them.  But it isn’t the truth.  As you will see below, there are all sorts of signs that the economy is taking a turn for the worse.  And when the next great economic crisis does strike, most Americans will be completely and totally unprepared because they trusted our “leaders” when they told us that everything would be just fine.

It is amazing how deceived people can be.  Just consider the case of 56-year-old Brian Perry.  He is a former law clerk that has applied fornearly 1,500 jobs since 2008 without any success.  But he says that he is “optimistic” that he will get another job soon because he believes that the economy is recovering

By his own count, Brian Perry has applied for nearly 1,500 jobs since being let go as a law clerk in 2008. The 56-year old Perry lives in Rhode Island, where the 9.1 percent unemployment rate is 2.5 percentage points above the national average.

Perry remains optimistic that a job is forthcoming. He thinks a more robust economy would create better opportunities for the long-term unemployed like him.

Let us certainly hope that Perry does find a new job soon.  But if he does, it won’t be because we are experiencing an “economic recovery”.  Just consider the following facts…

-In January, we were told that the U.S. economy “created” 113,000 new jobs.  But that figure was arrived at only after adding a massive seasonal adjustment.  In reality, the U.S. economy actually lost 2.87 million jobs in January.  During the past decade, the only time the U.S. economy has lost more jobs in January was during 2009.  At that time, the U.S. economy was suffering through the peak of the worst economic downturn since the Great Depression.

-Prominent retailers are closing hundreds of stores all over the United States.  Things have gotten so bad that some are calling this a “retail apocalypse“…

  • JC Penney, which lost $586 million in three months in 2013, is planning to close 33 stores in 19 states and lay off 2,000 people. JC Penney’s stock has lost 84 percent of its value since February 2012.
  • Sears has decided to shut down its flagship store in Downtown Chicago, and it has closed 300 stores in the United States since 2010. Stock analyst Brian Sozzi noted that Sear’s inventory levels have fallen by 23.7 percent since 2006. He also noted that Sears had $4.4 billion in cash and equivalents in 2005 but $609 million in cash and equivalents in 2012. Sozzi, who calls himself a guerrilla analyst, has a blog full of disturbing pictures of empty Sears stores.
  • Macy’s, one of the few retail success stories, is planning to close five stores and eliminate 2,500 jobs.
  • Radio Shack is preparing to close 500 stores, according to The Wall Street Journal.
  • Best Buy recently closed 50 stores and eliminated 950 jobs at stores in Canada.
  • Target announced plans to eliminate 475 jobs and not fill 700 empty positions to reduce costs.
  • Aeropostale is planning to close 175 stores.
  • Blockbuster has closed down all of its stores.

-McDonald’s is reporting that sales at established U.S. locations were down 3.3 percent in January.

-In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.

-As I wrote about the other day, the number of “planned job cuts” in January was 12 percent higher than 12 months earlier, and it was actually 47 percent higher than in December.

-Only 35 percent of all Americans say that they are better off financially than they were a year ago.

-What is happening to the U.S. stock market right now very closely resembles what happened to the U.S. stock market just before the horrific stock market crash of 1929.  Just check out the chart in this article.

For dozens more statistics that show that the U.S. economy is not improving, please see this article and this article.

Meanwhile, things continue to unravel all around the rest of the globe as well.

In previous articles, I have detailed how the reckless money printing by the Federal Reserve has inflated massive financial bubbles in emerging markets all over the planet.  Now that the Fed is “tapering”, those bubbles are starting to burst and we are witnessing a tremendous amount of economic chaos.  Here are three more examples…

#1 Ghana:

Ghanaian Economist Dr. Theo Richardson says Ghana’s economy will crash by June this year if the Bank of Ghana continues with its kneejerk measures to rescue the cedi.

“The government is facing liquidity problems and if we don’t get the appropriate remedies to address the issues at hand the situation may worsen and by Junethe economy may crash,” Dr. Richardson said.

#2 Kazakhstan:

With only $24.5 billion left in FX reserves after valiantly defending major capital outflows since the Fed’s Taper announcement, the Kazakhstan central bank has devalued the currency (Tenge) by 19% – its largest adjustment since 2009. At 185 KZT to the USD, this is the weakest the currency has ever been as the central bank cites weakness in the Russian Ruble and “speculation” against its currency as drivers of the outflows (which will be “exhausted” by this devaluation according to the bank). The new level will improve the country’s competitiveness (they are potassium heavy) but one wonders whether, unless Yellen folds whether it will help the outflows at all.

#3 India:

In the wake of a global stock market sell-off driven by worries over slower growth in emerging markets, the head of India’s central bank, Raghuram Rajan, criticized the U.S. Federal Reserve as it pressed on with plans to dial back its monthly bond purchases: “International monetary co-operation has broken down,” said Rajan, who added that “the U.S. should worry about the effects of its polices on the rest of the world.”

We have reached a “turning point” for the global financial system.  Things are beginning to fall apart both in the United States and all around the world.

But at least the dogs at the White House are eating well.  Just consider the following photo that was recently tweeted by Michelle Obama

Dogs In The White House

Russia’s Growing Regional Debts Threaten Stability – Forbes

Russia’s Growing Regional Debts Threaten Stability – Forbes.

Editor’s Note: The following is the first installment of a three-part series on growing debt for Russia’s regional governments.

Since the 2009 financial crisis, the Kremlin has allowed Russia’s regions to take the brunt of the country’s economic decline in order to keep the federal government seemingly healthy, with a nominally small budget deficit and large currency reserves. But now most of Russia’s regional governments’ debt is so high, it is becoming dangerous for the federal government and big banks and could soon become unmanageable.

Analysis

Russia is so large that the Kremlin lacks the resources to run each region of the country directly. Currently Russia is split into 83 regions of all shapes and sizes, which fall into categories of oblasts, republics, krais, federal cities and autonomous okrugs. Historically, the Kremlin has given regional leaders (mayors, governors, heads or republic presidents) the power to run their own regions and ensure loyalty to the Kremlin and stability for the country.

However, the Kremlin is constantly concerned with its control over the regions. The federal government’s ability to maintain the loyalty of each region has been tested often throughout history. For instance, dozens of regions attempted to break away after the fall of the Soviet Union, occasionally leading to wars such as those in Chechnya.

The central government’s control over the regions was demolished during the devastating financial crisis in 1998. Many of the regional heads defied the federal government in order to look out for their own regions’ survival. It was the second-worst regional breakdown in Russia following the collapse of the Soviet Union, and it was related directly to the chaos caused by that collapse. This is why the currently growing economic strains in the regions will be of great concern for the Kremlin.

The Regions’ Mounting Debts

Most of Russia’s regional governments have always had some level of debt, but resource-based export revenues have kept it mostly manageable since the 1998 crisis. However, since the 2008-2009 financial crisis, most of the regions’ debt has risen by more than 100 percent — from $35 billion in 2010 to an estimated $78 billion in 2014, and Standard & Poor’s has estimated that this will rise to $103 billion in 2015. Russia’s overall government debt — the federal and regional governments combined — is around $300 billion, or 14 percent of gross domestic product. This is small for a country as large as Russia, but the problem is that so much of the debt is concentrated in the regions, which do not have as many debt reduction tools as the federal government does.

Russia-Govt-DebtsOf the 83 regional subjects in Russia, only 20 will be able to keep a budget surplus or a moderate level of debt by 2015, according to Standard & Poor’s calculations. This leaves the other 63 regions at risk of needing a federal bailout or defaulting on their debt.

Currently, the Russian regions are financing their debt via bank loans, bonds and budget credits (federal loans, for example). Each region has to get federal approval to issue bonds, because regional bonds create more market competition for the federal and business bonds. Most of the banking loans to the regions carry high interest rates and are short term (mostly between two and five years). The federal loans come with much lower rates and longer repayment schedules (mostly between five and 20 years), so naturally federal credits and loans are more attractive for the local governments, though unprofitable for the federal government. The issuance of federal credits or loans to the regions in 2013 was limited; initially, Moscow said it would issue $4.8 billion in new credits to the regions in 2013, but only issued $2.4 billion due to its own budgetary restrictions. This is one contributing factor to the dramatic local-government debt increases.

Economic Stagnation

The next contributing factor to the rise in regional debt is the overall economic stagnation that has plagued Russia since the 2009 financial crisis and subsequent stimulus aimed at pulling Russia out of the crisis. Despite high energy prices all year, Russia’s gross domestic product growth slowed dramatically in 2013 to 1.5 percent growth after an initial 3-4 percent growth target by the Kremlin at the start of that year. This is low compared to the 7-8 percent growth seen yearly in Russia in the mid-2000s. Most analysts believe the only way Russia’s growth remained positive was through its large energy revenues, which make up half of the federal government’s budget and 20-25 percent of the country’s gross domestic product.

There are a handful of reasons for Russia’s economic stagnation. First, investment in Russia was lower than expected in 2013. Fixed investment was down 1.8 percent year-on-year in the first 10 months of 2013, compared with a 9.1 percent year-on-year growth in the same period in 2012. Private sector outflows of capital were high in 2013, with a net outflow of $48 billion leaving Russia in the first nine months of 2013, compared with $46 billion for the same period in 2012. Moreover, the investment sentiment in Russia is poor at the moment, as the Central Bank of Russia has begun closing some 800 smaller banks in a consolidation. Many of those banks were regionally based, and their closure is making investment in the regions less attractive.

Lower investment, coupled with less corporate borrowing and a decline in demand in many sectors, such as metals, led to lower industrial production. In the first 10 months of 2013, industrial production was flat compared with 2.8 percent growth in the same period in 2012. Industrial production is region-specific in Russia; industry provides nearly the entire economy in some regions. Thirty-one Russian regions, including Komi and Barents, had negative industrial production indexes for 2013. This could get worse in 2014, as many of the metals giants are planning to continue shutting down plants due to a lack of demand and low prices. For example, the world’s largest aluminum producer, Rusal, is shutting down five aluminum plants in the Volgograd, Karelia, Leningrad and Urals regions and laying off tens of thousands of workers.

Federal Obligations

Another factor contributing to the regions’ rising debts is increasingly burdensome obligations to the federal government. Of the income generated in a particular region, only 37 percent of the income stays in that region and the rest goes to the federal budget. The federal government does return some of the funds to the region in the form of subsidies and intergovernmental transfers, but not more than 20 percent. The amount of income that the Kremlin has taken from the regions has increased 12 percent in the past three years (via increases in taxes and decreases in subsidizations), leaving less and less for the regions to work with.

There has also been a large outcry from the regional governments in response to a series of presidential edicts that Vladimir Putin declared when he was re-elected to his third term in late 2011. Putin ordered the regional governments to do a series of tasks, such as replace all dilapidated housing by 2014, and to raise regional and municipal salaries by 7-10 percent in 2014 and another 10 percent in 2015. The regions are calling these “unfunded mandates,” as the federal government is not helping the regions pay for these projects. Already, the Kremlin has had to postpone the housing replacement edict to 2016 due to lack of funding in the regions, but the salary edict remains in place and is estimated to cost the regions $56.6 billion over the next two years.

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