Some Other People Do Some Other Things

Guest Post by Jim Kunstler

An almighty bafflement befogs the nation as the first full business week of 2020 commences and events pile up like smashed vehicles on a weather-blinded highway. Before we even smoked that Iranian bird on the Baghdad airport tarmac, something ominous was tingling away in the financial markets, in fact, has been since way back in September. Perhaps one-in-100,000 Americans has the dimmest clue as to what the repo mechanism stands for in banking circles, but it has been flashing red for months, with klaxons blaring for those who maybe missed the red flashes.

The repo market represents trillions of dollars in overnight lending in which bonds (or other “assets”) are used as collateral for ultra-short-term loans between large banks. Theoretically, this flow of supposedly secured lending acts as mere background lubricant for the engine of finance, like the motor oil circulating in your Ford F-150. You don’t notice it until it’s not there, and then all of a sudden you’re throwing rods and sucking valves, and the darn vehicle is a smoldering goner in the breakdown lane.

The strange action on the repo scene suggests that some big banks are in big trouble, and probably because the “innovative investments” they’ve engineered — as a substitute for the true purposes of capital, such as enabling production of real goods at a profit — are proving once again to be little more than swindles and frauds, like last time. Things like interest rate swaps and credit default “insurance.” Have your eyes glazed over yet? The bottom line is an impressive potential for losses to go critical, multiply daisy-chain style, cascade wildly, and then start wrecking real things — like the supply lines to your supermarket.

When you cut through all the esoteric crap, what’s likely behind all that is the dynamic of a failing affordable global energy supply. Yes, really. It’s not working to run the global economy anymore, so we resort to swindles and frauds instead. That must seem crazy to Americans especially, who look at our all-time record oil production of nearly 13 million barrels-a-day now and behold the blue sky of “energy independence” as far as the eye can see. The trouble is, it’s a hologram of a mirage of a Ponzi scheme. Suffice it to say that shale oil just doesn’t make any money and all the other regular oil around the world is harder and harder to get to. A lot of that other oil is in the Middle East.

So, a lot depends on what happens in the Middle East, easily the most politically mixed-up and confused region in the world — though central Africa may have it beat for sheer horrifying chaos. In general, we tolerate all that confusion as long as the oil keeps flowing to world markets, enabling the flows of everything else. But any hint of an interruption sends humanity and all its signaling systems — such as financial markets — into a psychotic fugue. Which is what we’re approaching now.

The financial markets know that a lot less new investment will flow into shale oil from now on, since it was a lousy investment the past ten years, despite all he admirable techno-virtuosity behind it, and that before long the mighty shale oil bell curve will turn down, and everything economic with it. Folks who make foreign policy and military plans may sense this too, perhaps dimly. But then they confront the additional mystifying calculus of all those moiling parties in the Middle East jockeying for position and advantage as the oil-hungry big dogs of the world desperately try to figure how to keep those oil flows going their way.

Eventually — and sooner rather than later — the mighty flows of everything in the global economy have to neck down, and the process will probably consist of sharp political and economic shocks rather than simple deceleration. Just such a shock was the assassination of General Qassim Suleimani. His multifarious activities all around the Middle East were in themselves a symptom of the instability dogging Iran as its economy wobbles. Much of that is due to the squeeze that the USA put on Iran in the way of trade sanctions and currency movements. And much of that stems from events over forty years ago when the mullahs ran the shah out of town and took the American embassy staff hostage for well over a year. The enmity on both sides runs wide and deep.

Iran’s neighbor, Iraq, is quite a prize oil-wise, and Iran has made significant inroads attempting to gain control of that broken country, even while the USA retains its garrisons there. The region of Iraq closest to Iran, Basra, is overwhelmingly Shia, like Iran, and produces a lot of Iraq’s oil. Baghdad is not so hot to give it up. Remember, the two countries slugged it out through the entire 1980s. About a quarter-million people died in that war. It is surely a high priority for the USA to not let that Iraqi oil slip into Iran’s hands. It’s a zero-sum game, of course, because even Iraq’s copious oil reserves will not save the global economy’s ass, let alone Iran’s economy.

Nobody knows what happens next. The Iranians are pissed off to beat the band. They’ve pulled many a prank the past couple of years, like attacking a major Saudi Arabian oil terminal, capturing American sailors, shooting down American drones, seizing tankers in the Persian Gulf and suchlike capers — all with no response from their foes, including us. And, of course, there is the question of all the other monkey business they’ve engaged in around Syria, Lebanon and even faraway Libya, which is where General Suleimani came in. Serious people wonder: is Iran crazy enough now to try to shut down the Straits of Hormuz? Or attack the Ras Tanura complex?

For the moment, impeachment is on the back burner. We’re in for a double-feature this first month of the rollicking 20s: financial carnage and something that looks like war. It will make for quite the attitude-adjustment here.

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