Guest Post by Jim Kunstler
The mentally-challenged kibitzers “out there” — in the hills and hollows of the commentary universe, cable news, the blogosphere, and the pathetic vestige of newspaperdom — are all jumping up and down in a rapture over cheap gasoline prices. Overlay on this picture the fairy tale of coming US energy independence, stir in the approach of winter in the North Dakota shale oil fields, put an early November polar vortex cherry on top, and you have quite a recipe for smashed expectations.
Plummeting oil prices are a symptom of terrible mounting instabilities in the world. After years of stagnation, complacency, and official pretense, the linked matrix of systems we depend on for running our techno-industrial society is shaking itself to pieces. American officials either don’t understand what they’re seeing, or don’t want you to know what they see. The tensions between energy, money, and economy have entered a new phase of destructive unwind.
The global economy has caught the equivalent of financial Ebola: deflation, which is the recognition that debts can’t be repaid, obligations can’t be met, and contracts won’t be honored. Credit evaporates and actual business declines steeply as a result of all those things. Who wants to send a cargo ship of aluminum ore to Guangzhou if nobody shows up at the dock with a certified check to pay for it? Financial Ebola means that the connective tissues of trade start to dissolve, and pretty soon blood starts dribbling out of national economies.
One way this expresses itself is the violent rise and fall of comparative currency values. The Japanese yen and the euro go down, the dollar goes up. It happens in a few months, which is quickly in the world of money. Foolish US cheerleaders suppose that the rising dollar is like the rising score of an NFL football team on any given Sunday. “We’re numbah one!” It’s just not like that. The global economy is not some stupid football contest.
When currencies change value quickly, as has happened since the past summer, big banks get into big trouble. Their revenue streams are pegged to so-called “carry trades” in which big blobs of money are borrowed in one currency and used to place bets in other currencies. When currency values change radically, carry trades blow up. So do so-called “derivatives” such as bets on interest rate differentials. When the sums of money involved are grotesquely large, the parties involved discover that they never had any ability to pay off their losing bet. It was all pretense. In fact, the chance that the bet might go bad never figured into their calculations. The net result of all that foolish irresponsibility is that banks find themselves in a position of being unable to trust each other on virtually any transaction.
When that happens, the flow of credit, a.k.a. “liquidity,” dries up and you have a bona fide financial crisis. Nobody can pay anybody else. Nobody trusts anybody. Fortunes are lost. Elephants stomp around in distress, then keel over and die, and a lot of “little people” get crushed in the dusty ground.
The happy dance about low gasoline pump prices featured on Fox News, combined with the awful instability in currency markets, will cut a swathe of destruction through the shale oil “miracle.” That industry has been relying on high yield “junk” financing to perform its relentless drilling-and-fracking operations — imperative due to the extremely rapid depletion rate of shale oil wells. Across the board, shale oil production has not been a profitable venture since it was ramped up around 2006. Below $80 a barrel, chasing profit only becomes more difficult for those who couldn’t make a profit at $100. A lot of those junk bond “investments” are about to become worthless, and the “investment community” will lose its appetite for any more of it. That will leave the US government as the investor of last resort. Expect that to be the object of the next round of Quantitative Easing. The ultimate destination of these shenanigans will be the sovereign debt crisis of 2015.
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Jim K. has an idea of what’s wrong, but he writes like, and from the perspective of, a political hack trying to swing people’s emotions. Although I credit one of his books for getting me into this area of interest, I’ve since found that almost any other reputable author has deeper knowledge and better analysis.
Calling the problem “financial ebola” is a huge stretch, and using last month’s meme instead of this month’s. I too can dig out tired memes from the news cycle. Why not call the problem a “financial MH17: the economy was shot down and no one agrees who did it!” or “a financial MH370: the economy has gone missing, there are theories and trace evidence, but it’s gone, Gone, GONE!!!!” or he could even have done “the economy is like Kim Kardashian’s ass: it’s huge, obtrusive, and utterly meaningless, but you just can’t help staring at it.”
Anyway. Jim K is now claiming that low oil prices are a symptom of problems. I believe this is a brand new view for him, and a reversal. Wasn’t he always claiming prices would rise to the sky and happy motoring would be unaffordable? No, I remember one single person who has consistently claimed that oil scarcity would lead to low prices (bizarre as that sounds), Gail Tverberg (aka Gail the Actuary), who has been writing about her theory for quite some time. You can read up at:
http://gailtheactuary.wordpress.com/
If you wish.
This just reads like so much pop-culture author trying to get an angle on something he doesn’t completely comprehend.
Know what you are saying Persnikety, and he is a peak oiler or was anyway.
To be fair this entire oil thing has been quite a puzzle for many the past decade, Fortune telling in this area has been a tough business.
I wouldn’t knock his intelligence however, or comprehension skills. All my instincts tell me he is an extremely intelligent gent, with a valuable perspective on our situation.