Guest Post by Jim Kunstler
It remains to be seen what the impact will be from Mother Nature putting the nation’s fourth largest city out-of-business. And for how long? It’s possible that Houston will never entirely recover from Hurricane Harvey. The event may exceed the physical damage that Hurricane Katrina did to New Orleans. It may bankrupt large insurance companies and dramatically raise the risk of doing business anywhere along the Gulf and Atlantic coasts of the USA — or at least erase the perceived guarantee that losses are recoverable. It may even turn out to be the black swan that reveals the hyper-fragility of a US-driven financial system.
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Houston also happens to be the center of the US oil industry. Offices can be moved elsewhere, of course, but not so easily the nine major oil refineries that sprawl between Buffalo Bayou over to Beaumont, Port Arthur, and then Lake Charles, Louisiana. Harvey is inching back out to the Gulf where it will inhale more energy over the warm ocean waters and then return inland in the direction of those refineries.
The economic damage could be epic. Much of the supply for the Colonial Pipeline system emanates from the region around Houston, running through Atlanta and clear up to Philadelphia and New York. There could be lines at the gas stations along the eastern seaboard in early September.
The event is converging with the US government running out of money this fall without new authority to borrow more by congress voting to raise the US debt ceiling. Perhaps the emergency of Hurricane Harvey and its costly aftermath will bludgeon congress into quickly raising the debt ceiling. If that doesn’t happen, and the debt ceiling is not raised, the federal government might have to pretend that it can pay for emergency assistance to Texas and Louisiana. That pretense can only go so far before government contractors balk and maybe even walk.
Ordinarily, failure to raise the debt ceiling would lead to a government shut-down, including hurricane recovery operations, unless the president invoked some kind of emergency powers. That would be decisive action, but it could also be the beginning of something that looks like a full-out dictatorship. Powers assumed are often not surrendered when the original emergency is over. And what would the president use for money if a substantial enough number of congresspersons and senators are prompted by their distaste for Mr. Trump to drag out the process of financially re-liquefying the government? (And nevermind even passing a budget.)
Meanwhile, two other major sources of aggravation are waiting off-stage: one is North Korea. Why wouldn’t Kim Jong-un use the opportunity of political disarray in the US to create more headaches for a distracted US government? Never let a crisis go to waste. Another potential irritant is the return of students to American college campuses. Imagine how the campus Antifa forces would react to Mr. Trump assuming emergency powers. It’s easy to foresee an acceleration of violence between the extreme Left and the Extreme right during what is shaping up to look like a major crisis in governing. If the campus Left had any tactical brains, they’d stop marching around in black uniforms and instead organize a mass renunciation of college loan debt.
Behind all this political strife will be wobbling financial markets. The message from the debt ceiling stalemate to the bond market would be that the US can no longer be relied on to pay its debts. Interest rates on US Treasury paper would have to go up as the long-lost concept of risk returned to the bond scene. People and institutions will not be induced to hold bonds unless the yield is recalibrated to the actual risk. Of course, in the mysterious world of bonds (i.e. securitized debt), the price of bonds goes down as interest rates rise. Meaning a lot of current holders of bonds would be hammered if they tried to sell. Rates rising would also spell big trouble for corporations and governments who have to make regular interest payments to bond-holders. A rate rise to as little as 3 percent on US Treasury bonds could spin the country into comprehensive bankruptcy.
How might stock markets and currency markets react to the scenario above? To me it would look like a drop of at least 1000 points on the S & P. The US dollar might actually rise initially as a whole lot of debt is renounced — which makes money actually disappear — but then you have the Federal Reserve waiting on another flank to roll out their own emergency response: Quantitative Easing No. 4, flooding the system with new “money” that has all the appearance and none of the mojo of value, tanking the dollar anew. As a wise correspondent of mine wrote a while back: “financialization is nothing more than money with its value removed.” (Graham Reinders.)
A lot can happen when a faraway butterfly flaps its wings and sets a slight current of air in motion.
Lots of Butterflies in the past and the future will be no different.
Tomorrow is another day.
I don’t need to change my underwear.
Speaking of the once again looming debt ceiling crisis……….
From the Daily Pfenning news letter this morning:
I learned that the U.S. Treasury holds its Gold at Fort Knox at a value of $42.50 per ounce, instead of the market value of $1,297… James Rickards was explaining:
“The Treasury could get $355 billion in cash from thin air without increasing the debt simply by revaluing U.S. gold to a market price. Once the Treasury revalues the gold, the Treasury can issue new ‘gold certificates’ to the Fed and demand newly printed money in the Treasury’s account under the Gold Reserve Act of 1934. Since this money comes from gold revaluation, it does not increase the national debt and no debt ceiling legislation is required. This would be a way around the debt ceiling if Congress cannot increase it in a timely way.”
(I guess the only sticky point is if there is any gold in Fort Knox )
Sometimes Kunstler has the ability to almost make me shit my pants.
Today, he succeeded.
Relax, Stuck. Houston got rained on. Those refineries are fine, they just have a couple of feet of water to deal with. The destruction was south.
Those refineries aren’t producing shit without the people who run and maintain them.
This would be the perfect time to refit them as robot refineries then.
Oil refining is NOT like making a steel widget out of steel plate. Automation is already highly effective – it has also created the need for lots of programmers, instrument mechanics and technicians for all kinds of things.
A distillation tower is not a lathe – it takes a given set of inputs and transforms them by a pneumatic-chemical process into outputs. What happens if the inputs – change? Say, a stream that was 10% propane is now 50% propane – how does the tower profile change? What needs to be changed in the operating parameters to stay on-spec and viable / stable downstream?
Modern control systems are a wonder, but they still use operators – preferably EXPERIENCED, CAPABLE operators – to handle upsets, system changes and the surprises that come every day. And believe me, you don’t want to TRY to automate a refinery completely – unless you want to burn it to the ground, with charming explosions, chemical and gas releases and sundry other ill-effects – before the fire department can come and watch helplessly as 900 psi hydrogen blowtorches (just one possibility) burn anything in their path to elements.
I’ve been there when the unpredictable happens, and it’s rarely nice and clean. The funerals are the hardest part.
Agreed Zara, but they’re not destroyed
A lot will depend on how much damage is done. If NOTHING breaks, fails or craters, it might take a week or so to re-start the units. But that’s not realistic.
Let’s say 24″ of water (a new high) sweeps across a refinery. Most of the pump foundations (pumps are the hearts of the refinery, moving liquids from step to step) are perhaps 12 – 18″ high (design based on historical data, useless in a once-in-a-century storm with never-seen-before precipitation) and the water gets up in the electrical motors that drive the pumps. Do you really want to just turn the power back on in an electric motor that’s seen dirty water up in the windings? Blue arcs, anyone? Do we have enough spares to replace and get back up online?
The water treatment plant (to keep spills out of the river) is in terrible shape, and will need attention before it can restart. If water got up in the motor control centers (with the breakers that control the pump motors) we have real problems, almost certainly not enough spares to swap them out and the busses might need cleaning as well. In the field there are instrumentation cabinets, that marshal the wires, fuses and so forth before the signals go to the control room. Did any of those get wet? Did water get in any of the power or signal conduits? Did the control room itself get wet?
How about the structural stuff? Foundations are designed to support weight against gravity, but what happens when an empty vessel (shutdown for the coming storm) gets float forces from rising water? Did any pipes get bent, twisted, torqued off? Any vessels lose a nozzle that needs welding and hydrotest before return to service? Any BIG vessels (storage tanks, reactors, columns) damaged? How long before CB&I or Trumbo can turn out a replacement for a twenty-thousand barrel storage tank?
Yeah, they’re certainly still there; the question of how quick things get back to normal is far from easy to establish.
It seems economic illiteracy is rampant.
The US debt is never going to default. All that’s need is to add a few zeros in the computers. Printing presses aren’t needed any more.
Don’t confuse value with US$ digits.
The value of pensions, savings, and what not – so long as they are denominated in US$ – are trivially devalued via fiat, but real world items of value like food, gasoline, water and so forth will not.
The same applies to foreign holdings of US Treasuries: those get devalued along with all of the US$ possessed by Americans. The effect will be interesting: so much that all of us in America actually use comes from abroad these days, so the US$ digit values will shift relatively quickly. The factories that produce these goods, however, many of which once were located in the US and employed Americans, are now abroad.
“A rate rise to as little as 3 percent on US Treasury bonds could spin the country into comprehensive bankruptcy.”….
I don’t see that being an issue…they can just print what they need to make up the difference. They will however have a problem if confidence is lost.
not if but when
Houston, we have a problem will only be true when “Houston” can no longer gin up problems. Wrecking stuff, or building-rebuilding∞ where ma nature does the wrecking is “opportunity” on the Bastiat busted window model. One song goes, “Houston, too close to New Orleans…”. Been to both, won’t be walkin’ that way again. Dino (ya’ll can look up Fats…):