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Financial skeptic

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Neoliberal Attacks on Social Security Casino Capitalism Unemployment Inflation vs. Deflation Coming Bond Squeeze Notes on 401K plans Vanguard
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John Kenneth Galbraith The Roads We Take Economics Bookshelf Who Rules America Financial Quotes Financial Humor Etc

“When the capital development of a country becomes a by-product
of the activities of a casino, the job is likely to be ill-done.”

John Maynard Keynes

"Life is a school of probabilities."

Walter Bagehot

Neoliberal economics (aka casino capitalism)  function from one crash to another. This is given taking into account hypertrophied role of financial sector under neoliberalism, the sector that introduces strong positive feedback look into the economic system. As attempt to put some sand into the wheels in the form of increasing transaction costs or jailing some overzelous bankers or hedge fund managers are blocked by political power of financial oligarchy, which is the actual ruling class under neoliberalism for ordinary investor  (who are dragged into stock market by his/her 401K) this in for a very bumpy ride. I managed to observe just two two financial crashed under liberalism (in 2000 and 2008) out of probably four (daving and loan crisis was probably the first). The next crash is given, taking into account hypertrophied role of financial sector under neoliberalism. Timing is anybody guess but it might well be close. And as always nobody from financial oligarchy will go to jail ;-):

This morning that meant a stream of thoughts triggered by Paul Krugman’s most recent op-ed, particularly this:

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

As most 401K investors are "over bullish" and this page is strongly bearish in "perma-bear" fashion. Funny, but this page  is accessed mostly during periods of economic uncertainty. At least this was the case during the last two financial crisis(2000 and 2008). No so much during good times: the number of visits drops to below 1K a month.   And I hope it plays a small but important role: to warn about excessive risk taking by 401K investors in neoliberal economic system.  It designed to serve as a warning sign and inject a skeptical note into MSM coverage. There are not many such sites, so a warning about danger of taking excessive risk in 401K accounts under neoliberalism has its value. The following cartoon from 2008 illustrated the point nicely

A lot of 401K investors are 100% or almost 100% invested at stocks. I came across a very relevant to this situation joke which nicely illustrated the ideas of this page:

Seven habits that help produce the anything-but-efficient markets that rule the world by Paul Krugman in Fortune.

1. Think short term.
2. Be greedy.
3. Believe in the greater fool
4. Run with the herd.
5. Overgeneralize
6. Be trendy
7. Play with other people's money

As Mark Twain aptly observed "A thing long expected takes the form of the unexpected when at last it comes". This is especially true about stock market crashes. They are given under neoliberalism, But each time they catch most people by surprise.  Mispricing of risk in 401K accounts can become so extreme for "overbullish" 401 investors, that a calamities like one which happened in 2001-2002 and again 2008-2009 can wipe 30 to 50% of value of their 401k account in a very short period of time (and if you think that S&P500 can't return to 1000, think again; its all depends on FED). At this point many freak out and sell their holdings making paper losses permanent.

Even for those who weathered the storm and held to their stock holdings, it is important to understand that paper losses were eliminated mostly by Fed money printing. As such risks remains as at one point FED might find itself out of ammunition. The fact that S&P500 recovered very nicely it does not diminish the risk of such behavior. There is no guarantee that the third crisis will behave like previous two.

Next crash will have a new key determinant: the attitude toward the US government (and here I mean the current government of Barack Obama) and Wall Street after 2008 is the lack of trust. That means that you need to hope for the best but prepare for the worst. Injection on so much money into financial system was a novel experiment which is not ended yet. So how it will end is anybody's guess. We are now in uncharted waters. I think when Putin called Bernanke a hooligan, he meant exactly this. Since Bernanke was printing money out of thin air to buy financial paper, his action were tantamount to shoplifting. In some way this probably is more similar to running meth labs inside Fed building. The system was injected with narcotics. Everybody felt better, but the mechanism behind it was not healthy.  

The complexity of modern financial system is tremendous and how all those new financial instruments will behave under a new stress is unknown. At the same time in the Internet age we, the great unwashed masses, can't be keep in complete obscurity like in good old time. Many now know ( or at least suspect ) that the neoliberal "show  must goes on"  after 2008 is actually going strongly at their expense. And while open rebellion is impossible, that results in lack of trust which represents a problem for financial oligarchy which rules the country. The poor working slobs are told be grateful for Walmart's low (poverty-subsidized) prices. Middle class is told that their declining standard of living is a natural result of their lack of competitiveness in the market place. Classic "bread and circuses" policy still works but for how long it will continue to work it is unclear.

But nothing is really new under the sun. To more and more people it is now clear that today the US is trying to stave off the inevitable decline by resorting to all kinds of financial manipulations like previous empires; yesterday, it was the British Empire and if you go further back, you get the USSR, Hapsburg empire, Imperial Russia, Spanish empire, Venetian empire, Byzantium and Roman empire. The current "Secretary of Imperial Wars" (aka Secretary of Defense) Ashton Baldwin Carter is pretty open about this:

“We already see countries in the region trying to carve up these markets…forging many separate trade agreements in recent years, some based on pressure and special arrangements…. Agreements that…..leave us on the sidelines. That risks America’s access to these growing markets. We must all decide if we are going to let that happen. If we’re going to help boost our exports and our economy…and cement our influence and leadership in the fastest-growing region in the world; or if, instead, we’re going to take ourselves out of the game.”

For the US elite it might be a time to rethink its neocon stance due to which the US is exposing ourselves to the enmity of the rising economic powers, and blowing serious cash to maintain it hegemony via maintaining huge military budget, financing wars and color revolutions in distant countries. In a way the US foreign policy became a financial racket, and racket can't last forever because it incite strong opposition from other countries.

Neoliberalism (aka casino capitalism) entered the state of decline after 2008. Now it is in zombies state and it is unclear how long it will say in this state. Much depends on the availability of "cheap oil" on which neoliberalism and related globalization are based. But the fact the this social system is down slope and on its way to the cliff means that financial calamities should became more, not less frequent. Attempts to neo-colonize other states by the West became less and less successful and now become close to XIX century colonial conquests with a lot of bloodshed (over a million of Iraqis). As always this is mainly the blood of locals, which are cheap. Libya and Ukraine are two recent examples. Both countries are now destroyed (which might be the plan). In Ukraine population is thrown in object poverty with income of less that $5 a day for the majority of population. And there is no other way to expand markets but to try to "neo-colonize" new countries by putting them into ominous level of debt while exporting goods to the population on credit. That is not a long term strategy as Greece, Bulgaria, and now Spain and Portugal had shown. With shrinking markets stability of capitalism in general and neoliberalism in particular might decrease.

Several researchers points to increased importance Central banks now play in maintaining of the stability of the banking system. That's already a reversal of neoliberal dogma about free (read "unregulated") markets.  Which as far as the USA is concerned actually was from the very beginning mainly the product designed for export (read about  Washington consensus).

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[Aug 31, 2015] Is China's Devaluation a Game Changer

"...I don't believe the Western financial system is axiomatically all bad. It's under contest. Dodd-Frank. Who knows, maybe it is. Look at Greece.

What they need are capital controls and financial transaction taxes to slow down the hot money. All economies need that. "

Aug 31, 2015 | Economist's View

rayward

Too complicated. China's politicians are no different from our politicians (well, a little different - ours may be sent into exile but theirs, well), they respond to their constituency: the investor class. Until they don't.

Ridiculing China's government for not understanding markets is a little rich given the recent history in the U.S. What I find interesting is the similarity between China and the U.S.: both share a high level of inequality and a bubble in financial assets.

What they don't share is fiscal stimulus: China with a fiscal stimulus on steroids, the U.S. fiscal stimulus non-existent. If China's economy ascends and the U.S. economy doesn't, how ironic that China understands capitalism better than us. How else does one explain all the China bashing in the U.S.: it's the insecurity, stupid.

JF said in reply to rayward...

Rayward, very nice.

I am hopeful that chinese officialdom is not measuring themselves or their society on the basis of whether they obtain hegemon status within the financial system.

I am hopeful that they want stability, rising living standards, and other elements within their society that fulfill the promises of the US Constitution's Preamble and the 'life, liberty and pursuit of happiness' phrase from the Declaration.

They believe in money, they believe in markets (not idolatry though), they understand systems and freedoms-of-order, and they have the US to emulate for their 1.3+ Billion people. Financial hegemon??

anne said in reply to anne...

The Chinese economy needs to resist global integration of both
The RMB
And
The domestic credit system

The only cost to credit systems are opportunity costs

China has more directions of opportunity than any economy on earth

Throw a dart at a board and grant credit

What is necessary
A viciously punitive system for fraudsters and looters

[ I think the Chinese leadership agrees, but Western analysts seldom understand. No matter, the passage is interesting, clever and important. ]

Peter K. said in reply to Paine ...

"The Chinese economy needs to resist global integration"

Some random thoughts and brainstorming:

The Chinese economy is delivering rising living standards and wages. Full integration into the global (Western) system will halt that, you suggest.

However partnership with Western corporations has allowed them access to Western markets and know-how (tech, etc.)

Their living standards are going up at the expense of the Western job class and to the benefit of Western corporations and finance.

Is this the "Chinese economy" or their partnership with Western corporations?

What they need to do is sell to their own workers rather than the Western consumer market.

I don't believe the Western financial system is axiomatically all bad. It's under contest. Dodd-Frank. Who knows, maybe it is. Look at Greece.

What they need are capital controls and financial transaction taxes to slow down the hot money. All economies need that.

The neoliberals will argue it will slow growth and probably it will but growth will be more sustainable. Growth needs to be driven by the job class and income gains, not finance and debt.

Peter K. said...

Barkley Rosser has asked how China is different and how to define it. This appears to go some of the way. I don't know how much of it is true.

"Last August, we posted our most popular blog piece to date: China's Capital Controls and the Exchange Rate Regime.

In it, we explained how capital controls make it possible for China to maintain a fixed exchange rate while policymakers could adjust interest rates to stabilize their domestic economy.

We also highlighted how these same capital controls are incompatible with the objectives of making Shanghai a global financial center and the renminbi (RMB) a leading international currency.

Given the risks inherent in freeing cross-border capital flows, we concluded that the process of financial liberalization (both domestically and externally) would remain gradual. Yet, having seen China develop in unprecedented ways in the past, we have been watching to see if China could also alter conventional paradigms of finance and monetary policy. Could China do what no one else has done?"

anne said...

Well, it turns out that the "impossible trinity" or "trilemma" – which compels policymakers to choose only two of three from among free capital flows, discretionary monetary policy, and a fixed exchange rate – may be more like a physical law than nearly any economic principle we know....

-- Cecchetti and Schoenholtz

Using a technique Brad DeLong employs:

a) free capital flows and discretionary monetary policy but not fixed exchange rate

b) free capital flows and fixed exchange rate but not discretionary monetary policy

c) discretionary monetary policy and fixed exchange rate but not free capital flows


d) free capital flows, discretionary monetary policy and fixed exchange rate

a, b and c are possible, but d is impossible

Which then should China choose a, b or c?

anne said in reply to anne...

A problem is that I find no reason to believe Chinese leaders want free capital flows, which would mean that c) discretionary monetary policy and fixed exchange rate would be possible. China should be able to have a discretionary monetary policy and a fixed exchange rate as long as capital flows are controlled.

The question then is why would China need free capital flows? Should the Chinese leadership control capital flows, monetary policy would be effective in limiting or quickening growth at a given exchange rate or over a narrow currency value range as Chinese leadership are evidently choosing.

JF said in reply to anne...

My answer to your question about why they might want free capital flow is not telling for those who invest in China - my view is that they want the flow of commodities and some currencies to come into China. Flowing out, not freely. They can create credit and money all they want for flow within their jurisdiction, they don't need outsider's 'capital' - but really like other currencies of value and other things of value to come in.

I think only a few should be putting their hard-money into China. It is their risk, and I wish them well.

If this population attains an economic system and society like we had in 1965 (not counting the warfighting stuff at all here) - all the more power to them, and it will be a great place to invest then - just like the US was in 1965.


[Aug 31, 2015] Price of Oil Jumps Above $48 Per Barrel for WTI by Doug Madson

Daily violatility was over 13%.
August 31, 2015 | dakotafinancialnews.com

Share on StockTwits

Oil traders recently scared off due to an apparent glut of oil in the U.S. received good news on Monday.

The price of the dominant blend of North American oil jumped by close to 6% in a bit less than two hours on Monday. It was trading at $48 per barrel for the first time in nearly one month.

By midmorning on Monday, West Texas Intermediate's price was down slightly from its close on Friday or changing hands at approximately $43.75 a barrel. However, at that time the Energy Information Administration lowered forecasts for oil output in the U.S. The U.S. pumped over 9.3 million barrels daily of oil during June, about 100,000 less than what had been initially reported.

It was less than was churned out by the country in May, which was good news to the oil traders who were scared off due to the oil glut that has been seeing the world pump up to as much as 2 million more barrels per day that the overall world economy needs during this period of the year. All the excess oil that sits in storage tankers is what drove the price of oil per barrel down to $38 recently.

The new numbers by the EIA were sufficient to send WTI soaring in price to as much as $48 per barrel only two hours after the report had been released. Crude prices also were buoyed by an OPEC statement that suggested the oil cartel might be willing to reduce production until prices were to come back to levels that were higher.

Some traders had interpreted the statement as new evidence that the group, which is led by Saudi Arabia could be willing to turn the taps off in what is considered a meaningful way. Monday also is the last day of August, and the oil future contract often times has a volatile day during its last day of a particular month as the traders rush to settle positions prior to the activity of the previous month starting.

[Aug 31, 2015] Bernie Sanders Interview: The Business Model of Wall Street Is Fraud

"...The biggest problem with popular movements is that they either tend to be co-opted by the most powerful in the status quo and used badly, misdirected and deceived, as in the case of the Tea Party, or diffused by too many factions and lack of prioritization resulting in a lack of effective cohesion, as in the case of the Occupy Movement. "
.
"...And so we have the ascendancy of the Wall Street wing of the Democratic Party, and the Koch Brothers wing of the Republicans."
.
"...the more focused, non-establishment campaigns of Bernie Sanders and Donald Trump shaking up the accepted norms in political campaigning wisdom."
.
"...the power of money and of powerful connections between the shadow government and the moneyed interests is still there, still lurking in the shadows and pulling strings."
Aug 30, 2015 | Jesse's Café Américain

Most people are sick and tired of the system as it is now. And they are once again attempting to reject the status quo, having been badly disappointed by Obama and the Congress. And this gives rise to popular movements and even third parties.

The biggest problem with popular movements is that they either tend to be co-opted by the most powerful in the status quo and used badly, misdirected and deceived, as in the case of the Tea Party, or diffused by too many factions and lack of prioritization resulting in a lack of effective cohesion, as in the case of the Occupy Movement.

And so we have the ascendancy of the Wall Street wing of the Democratic Party, and the Koch Brothers wing of the Republicans.

And the corrupting power of Big Money underlies all of it, in part thanks to the Supreme Court ruling in Citizens United that defined corporations as having the rights but not the obligations of people, and money as free speech, while doing nothing to remediate the actual use of free speech by real people except in special zones and restricted venues, subject to some of the most oppressive abuse of the secrecy laws..

Contrast this with the anti-War movement of the 1960's which was driven by a single issue: end the war in Vietnam. The message was simple and clear, and it took hold, frightening the political establishment and hounding first Johnson to withdraw, and then Nixon to be so weakened and desperately foolish that he caused his own downfall.

And so we have the more focused, non-establishment campaigns of Bernie Sanders and Donald Trump shaking up the accepted norms in political campaigning wisdom.

I would like to think that finally, after all these misspent years, the 'same old same old,' no matter how artfully the spin machines may brand them, cannot win again.

The probability for change is higher now than in the past. But how it eventually turns out is another question. The electoral process is still very young, and many things may happen between now and next November. And the power of money and of powerful connections between the shadow government and the moneyed interests is still there, still lurking in the shadows and pulling strings.

https://www.youtube.com/watch?feature=player_embedded&v=QRztZ7p_65k

Interesting times.

[Aug 31, 2015] The Case for Realism in the Social Realm

"...So there is nothing to choose. Current economics consists of political economics, which is scientifically worthless, and theoretical economics, which is logically and materially inconsistent. Luckily, Jackson Hole shows: economists are clueless but never speechless."
"...We will understand that there are real social processes, mechanisms, and powers; that they derive from the actions and agency of actors; and that these processes can be traced out through fairly direct sociological and historical research. And we will understand too that claims about the reality of "capitalism", the world financial system, or fascism are to be understood less weightily than they first appear. Capitalism exists in a time and place; but it is understood to be an ensemble of relations and actions by the people of the time."
Aug 31, 2015 | Economist's View

RC AKA Darryl, Ron -> djb...

[Yes, I know mine is exactly 6.25 inches because I measured it, but I can only guess that yours is shorter because there is no way that I am ever going to measure it :http://economistsview.typepad.com/economistsview/2015/08/us-inflation-developments.html

Egmont Kakarot-Handtke said...

Always clueless, never speechless
Comment on 'U.S. Inflation Developments'

For a dispassionate observer Stanley Fischer's speech and the tidal wave of blog comments makes it pretty clear that there is an intellectual black hole where something like a true economic theory should be.

There is absolutely no use in entering into the morass of conflicting nonsense. Here are two fixpoints to secure some orientation.

• Inflation theory has never risen much above the commonplace Quantity Theory. The QT is plausible but ultimately untenable. The correct formula for the overall price level is given herehttps://commons.wikimedia.org/wiki/File:AXEC64.pngfor details see (2015, eq. (12)).

• Alternative macroeconomic approaches like Krugman's IS-LM are fundamentally flawed since Keynes and Hicks (2014) without any economist ever spotting the provable formal defect.

So there is nothing to choose. Current economics consists of political economics, which is scientifically worthless, and theoretical economics, which is logically and materially inconsistent. Luckily, Jackson Hole shows: economists are clueless but never speechless.

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350

RC AKA Darryl, Ron -> RC AKA Darryl, Ron...

[WOW! Typepad really screwed up that post. Here is what it dropped.

Keynes' definitions are debatable. I am in no way advocating the comment from yesterday's 'U.S. Inflation Developments' thread that I copy here nor its linked academic papers. I am actually defending Little's poorly written paper on this thread because there is a cogent point buried in his muddled over elaborated treatise on the distinctions between physical and social sciences. After reviewing the following and considering the sources of the actual "metrics" used in macro (e.g., interest, GDP, unemployment) then you might ask whether formalization or usefulness are the more important goals for macroeconomics.

For my part, then I find no fault in a heuristic approach as long as we know where we are trying to go. I am a huge fan of Keynes.]

RogerFox said...

"First, there are no theories in the social sciences that have the predictive and explanatory success of the physical sciences ..."

That admission necessarily puts the sword to social science theorizing, including interventionist macro, as an ethical guide to real world decision-making - the intervenors themselves admit they don't know whether the consequences of their interventions will make things worse or better.

Away with all the charlatans who insist on meddling anyway.

ilsm -> RogerFox...

Admission? Nah!

But there are no pentagon theories for war that can be relied upon.

See Vietnam, Iraq three times, Afghanistan.......

Fox admission only applies if you ignore reality.

djb -> RogerFox...

Yes RogerFox

Daniel Little who represents all people who have ever studied economics has let the cat out of the bag

That economists don't know anything

We were all hoping no one would notice, but of course, you are too sharp for us

Now of course it is probably too difficult for your shrunken brain to understand that your laissez faire philosophy is an economic concept, the results of which be studied and tested

But that's alright you got us

DAMN !!!

Peter K. -> RogerFox...

"interventionist macro,"

How can macro not be interventionist? In the middle of Krugman's latest blog post, he writes:

"What determines where we end up on that curve? Monetary policy. The Fed sets interest rates, whether it wants to or not — even a supposed hands-off policy has to involve choosing the level of the monetary base somehow, which means that it's a monetary policy choice."

"the intervenors themselves admit they don't know whether the consequences of their interventions will make things worse or better."

Not so, it's often easy to judge result.

What is Mr. Fox's school of thought? Know-nothingism? The Austrian school?

Peter K. -> Peter K....

https://en.wikipedia.org/wiki/Know_Nothing

"The immigration of large numbers of Irish and German Catholics to the United States in the period between 1830 and 1860 made religious differences between Catholics and Protestants a political issue. Violence occasionally erupted at the polls. Protestants alleged that Pope Pius IX had put down the failed liberal Revolutions of 1848 and that he was an opponent of liberty, democracy and Republicanism. One Boston minister described Catholicism as "the ally of tyranny, the opponent of material prosperity, the foe of thrift, the enemy of the railroad, the caucus, and the school."

"The origin of the "Know Nothing" term was in the semi-secret organization of the party. When a member was asked about its activities, he was supposed to reply, "I know nothing." Outsiders called them "Know-Nothings", and the name stuck."

One can imagine an old-timey Donald Trump railing against Irish and German immigrants.

Lafayette said...

{We will understand that there are real social processes, mechanisms, and powers; that they derive from the actions and agency of actors; and that these processes can be traced out through fairly direct sociological and historical research. And we will understand too that claims about the reality of "capitalism", the world financial system, or fascism are to be understood less weightily than they first appear. Capitalism exists in a time and place; but it is understood to be an ensemble of relations and actions by the people of the time.}

Good point.

Capitalism is a mechanism, a tool. All outcomes depend upon how it is employed in a given socioeconomic context.

Have all property owned by the state, then all profits will also be owned by the state, since individuals will receive only income. Of course, they tried that (calling it commune-ism), and it worked very badly.

Having property owned by individuals is just as bad if said properties generate Income that trickles-up to Wealth, then is used to manipulate political outcomes that favor uniquely a certain class of individuals. (Which, for lack of a better word, we can call "Plutocrats".)

Who then, because they think they are good-parents, leave their riches to their children thus extending dynastically the inherent Income Disparity into Wealth Disparity. That's not the case? Then why does Domhoff show this class breakdown of Net Worth (Wealth - Debt) in 2010:
Top 1% Next 19% Bottom 80%
35.4% .....53.5% .....11.1%

No wonder the relatively poorer classes remain poor. Because if you don't have the educational qualifications (vocational, college, university) to scramble into the next class breakdown (the 20Percenters), then forget of any pretense to an existence without constant worry about how solid your job-prospects will be throughout your lifetime.

And, with that, any social coverage for either illness or pension, etc. - ad nauseam.

ilsm -> Lafayette...

Capitalism is a tool [scam] to keep useful fools asking for more flogging.

likbez -> Lafayette...

"Capitalism is a mechanism, a tool. All outcomes depend upon how it is employed in a given socioeconomic context."

I think outcomes can be by-and-large predicted from the form of social relations capitalism enforces. Looks like Marx prediction about increasing misery of the proletariat (or bottom 80%, if you wish) holds, despite temporary reversal of the trend in 1945-1985.

Yes, the current form of capitalism which is neoliberalism is a tool, but it is a tool only for financial oligarchy. The tool of oppression to be exact.

For workers of Asian sweatshops and Mexican maquiladoras and probably for a large part of Americans who face shrinking working hours (with the redefinition what full employment means -- now it does not mean 40 hours a week) and push into contractors without any social protection and McJobs, it is more of a prison then a tool.

Here we get into the concept of countervailing force. Without countervailing force capitalism inevitably degrades into horrible, comparable with feudalism and slavery level of oppression of human beings. And in a way it creates such forces by the mere fact of its existence. In this sense the collapse of the USSR, while improved fortunes of top 20% in the USSR region, was a huge blow to lower 80% of Americans.

Despite Margaret Thatcher pronouncement about TINA, now mankind (including large part of commenters of this blog ;-) is trying to find another viable countervailing force that can held neoliberalism in check.

Very high oil prices might do the trick, as they will reverse globalization but they also can lead to the collapse of Western civilization as we know it.

Some countries, like several in Latin America, try to revive elements of socialism on a new (post USSR crash) level, some elements of religious fundamentalism (with the most strong trends in Islam and Catholicism), some like Russia and China -- elements of state capitalism.

But those development should be probably be understood in the context of the reaction on neoliberalism, not as completely independent developments.

EugenR said...

You speak here about Social sciences about economic factors that drive the society, about the political power in the society, and out there it is not relevant at all. Out there in the other half of the world, which is banging on the doors of your world, the main agenda is tribalism, cultural and ethical belonging.

The leading agenda of these people, in the other half of the world is the faith in their local tribal myths. Their myth is not about God and submission to it, but about conspiracy theory of being victims. Victims of whom? Not of political and spiritual leaders from their tribes, who dragged them to the desperate existential problems. Not against the belief system, that pushes them to legitimize self imposed slavery, submission to the cruelest authority, and above all faith causing self imposed ignorance to knowledge. They don't see themselves victims of those among them, who by using force and violence, actively oppose learning and adaptation of modern teachings about social justice, political correctness, ethical systems of morality, legality, equality, fraternity.

No! They will chose to be stuck in their old belief system familiar to them. Ancient tribal stories full of contradictions, indoctrinating and legitimating hatred, murder of the different, slavery, inequality, female discrimination, minority suppression, racism, etc. All these values, that created the political social systems and brought all this destruction in their homeland, from where they try in these days to run away, still remains to be THEIR value system. They will blame all the "others" who caused them their misery. The European colonists, the US Imperialists, the Zionists, the infidels, the homosexuals, the women exposing their natural beauty to admiration of man and women, the atheists, the scientists who still stick to their rational way of thinking, etc. But most of all will be hated those who gave them hand, when they most needed it, the humanitarian volunteers, because they are the first others, whom they encounter, when they exited from their burning world of destruction, and hate.

They will start a fight against all the ideas of Western philosophers from Descartes to the post modernists, who seemingly successfully brought to the awareness of most of the "Western world" population the idea of human-centralism, following the disastrous WWII caused by similar myth imitators . After they settle down in their now homes, they will not torn their "Holly books", indoctrinating hate and violent action against the humanists, who put in front of their God the human being. They will not torn the burqa, the symbol of women's submission to arrogant male domination upon the women. Their spiritual leaders, when they will stand up in their legal or illegal houses of "GOD", and point to those who have to be hated. And it is not to hard to guess who they will be.

RC AKA Darryl, Ron -> EugenR...

Colonialism breeds reactionary radicalism among indigenous souls. On a grand scale nations do eventually reap a bit more than they sewed. Call it karma for lack of a better word.

EugenR -> RC AKA Darryl, Ron...

You are right, colonialism was a creepy, disastrous idea, even if at certain stage of human history it helped in the development of human understanding of the realities of the world. In the late nineteen century it became a very lousy business, and partially brought the first world war. Still to blame the Western colonialism that ended more than 50 years ago, for all the misery of Africa and the Arab world is just self deception...

ilsm said...

Observations on economics are blurred by the con artists and snake oil salesmen ruining civil society.

Observer and instrument effects are symptoms.

Peter K. said...

"If this is the approach we take, then our claims about what is "real" in the social realm will be more modest that some have thought. We will understand that there are real social processes, mechanisms, and powers; that they derive from the actions and agency of actors; and that these processes can be traced out through fairly direct sociological and historical research."

It's all shorthand. What needs to be kept in mind is that words and phrases are shorthand and don't really capture the concept or "real thing" they are relating between the person who employs them and the listener or reader. Math and equations too obviously are shorthand. You can follow the word or phrase with qualifying sentences to specify and clarify what you mean by it.

So when we talk about inflation, or full employment or "real" full employment or potential GDP or the Wicksellian Natural Rate or expected inflation, they are often contested concepts because they are shorthand and don't apply in an obvious manner to something "real" out there we can touch.

Because of all of this, people disagree on some basic ideas about the social realm. Monetary policy doesn't work they say. Fiscal policy doesn't work they say. Even if most of the smart, objective, honest, knowledgeable people you meet - or dead authors you read - say otherwise.

Just look at Mr. Fox. Language (shorthand) and contestable ideas bend easily to those under the influence of power, privilege and money.

[Aug 31, 2015] China can ride out this crisis. But we're on course for another crash

"...Conclusion: dramatic market fluctuations of the past few weeks were primarily irrational !! Most losses have already been recouped and for all of the sound and fury, corrections appear to be marginal, not precipitous."
.
"...There is every reason to fear more fallout from casino capitalism"
.
"...A dysfunctional model of capitalism, built on deregulation, privatisation and low wages, crashed and burned seven years ago. But the fallout from that crisis is still ricocheting around the world, from Europe to the "emerging economies", as the attempt to refloat a broken model with cheap credit inflates asset bubbles and share buybacks – or enforce it with austerity – fuels new crises."
.
"...That's one reason why the anti-austerity movement and the demand for economic alternatives is growing across Britain, Europe and the US. The elites so evidently don't know what they're doing, even as they rake in the spoils. "
.
"...Steve Keen, for example, saw the 2008 crash coming, and continues to provide very good, reasoned analysis about what continues to occur."
.
"...Is it the West's fault?

In this case, a resounding yes. West caused this crisis by promoting and exporting neoliberal capitalism, a system that thrives on instability. You can regard it as a virus infecting the organism of interconnected world economy."
.
"...First, we all know that markets have been rigged since QE was introduced to pull the Establishment's irons out of the fire. But surely there is an uncomfortable paradox in the knowledge that, in this latest saga, while the world's greatest totalitarian regime was signally unable to rig its market, conversely it took only a day for the great champion of free market capitalism to do so?"
.
"...In 2013, 45.3 million people (14.5 percent) in the USA were in poverty."

Aug 30, 2015 | The Guardian

Market mayhem is the product of the aftershocks of 2008. No wonder calls for alternatives are growing


It may not yet be the moment to get in supplies of tinned food. That was what Gordon Brown's former adviser during the 2008 crash, Damian McBride, suggested on Monday as stock markets crashed from Shanghai to New York and $1tn was wiped off the value of shares in one day. But seven years after the collapse of Lehman Brothers brought down the global financial system and plunged half the world into a slump, it's scarcely alarmist to see the financial panic as the harbinger of a new crisis in a still crippled world economy.

The market gyrations that followed "Black Monday" this week and the 40% drop in the value of Chinese stocks since June have only underlined the fragility of what is supposed to be an international recovery. For all the finger-wagging hubris of western commentators over the fact that the latest mayhem has erupted in China, this is a global firestorm. And after three decades of deregulation punctuated by financial crises and a systemic meltdown, there is every reason to fear more fallout from casino capitalism.

Financial markets pumped up with credit and quantitative easing to keep the real economy afloat are in any case ripe for a crash – or "correction", as the market players like to call it. The only question is how far and fast they go – and how great is the price paid by the rest of us.

Paradoxically, Beijing may be better placed than others to ride out this storm. China's economy is slowing down, as it shifts from export-led growth to consumption. But it's still growing at 7%, nearly three times as fast as Britain and the US, which are supposed to be the west's current star performers. Even if China's figure is overstated, its growth is still at least double the Anglo-American rate: the kind of economic problem the rest of the world would be happy to have.

That follows three decades when Chinese growth averaged 10% a year, delivering the fastest economic development and reduction in poverty in world history – as well as rising inequality and environmental degradation. But China's stock market is small compared with its western equivalents and relatively insulated from the rest of the economy.

Despite its huge private sector, China is still a hybrid economy, dominated by state banks and publicly owned corporations. That means its financial system is shielded from the impact that a stock market crash on this scale would have in a western-style private banking system.

China rode out the 2008 crash by pumping public investment into the economy, delivering 78% growth between 2007 and 2014, while the US managed 8%. That has left it with a huge debt pile, estimated at 282% of national income, which some now believe will bring China's economy to a juddering halt.

But that is mostly debt between state-owned institutions, so there is no basis for a speculative Lehmans-type collapse. In fact, some of the problems China is now facing as it tries to bring the stock market crisis under control, such as capital outflow, stem from the liberalisation urged on it by the World Bank and its own home-grown would-be oligarchs.

There is every reason to fear more fallout from casino capitalism

China's room for manoeuvre would certainly be much narrower if it had gone for their full deregulation and privatisation package. But the main drag on the Chinese economy isn't the failings of its own economic model, but stagnation in the rest of the world. Global trade suffered its largest contraction since 2008 in the first six months of this year, partly as a result of the ongoing crisis in the eurozone. Eight years after the financial crisis erupted in the US, its aftershocks are still being felt across the world.

A dysfunctional model of capitalism, built on deregulation, privatisation and low wages, crashed and burned seven years ago. But the fallout from that crisis is still ricocheting around the world, from Europe to the "emerging economies", as the attempt to refloat a broken model with cheap credit inflates asset bubbles and share buybacks – or enforce it with austerity – fuels new crises.

That is what has been played out across financial markets this week, in which China has been a transmission belt rather than the motor. Any idea that the western economies that generated stagnation have been fixed is not serious. Their recoveries have been the slowest on record and interest rates remain at a historic low – because owners of capital are prepared to invest in anything except the productive economy. The likelihood must be that this stagnation continues indefinitely, punctuated by financial upheavals. Without far-reaching change in economic policy, they can be expected to trigger crises that will tip western economies, and others, back into full-blown recession.

That's one reason why the anti-austerity movement and the demand for economic alternatives is growing across Britain, Europe and the US. The elites so evidently don't know what they're doing, even as they rake in the spoils. In such a context, calls for large-scale public investment, ownership and quantitative easing for the real economy made by Labour's leadership frontrunner, Jeremy Corbyn, look far more realistic than the business-as-usual offered by his rivals.

If the current market chaos turns into another crash, the demand for much stronger measures will become unstoppable.


the_thoughtful_one 29 Aug 2015 06:47

well said article - and in the BBC news the ex Sainsbury's boss attacks a living wage - while he earns 176 times that wage and hardly presided over a great Sainsbury's did he - because their share price dropped 30% after his shift, his foundations

and they still pay 3p/hr less than Tesco after a 4% pay rise so you can see this was forced on the company

people of his ilk "ARE" the problem.

HeinzH 29 Aug 2015 06:37

With todays capitalism ,which derailed under Thatchers/Reagans reign,the problem is not deregulation and privatisation but looting of the economy.Free hands to the bank establishment has given us a never ending criminality in the markets and a rising number of extremly rich people in the industrialized world.Is it that difficult to understand that the amassment of riches amongst the already rich is no way for creating a just and sustainable society?


soundofthesuburbs 29 Aug 2015 06:26

The timeline for the collapsing global economy.

Japanese banks had been on a maniacal lending spree into real estate and the bubble popped in 1989. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

Japan then had the rest of the world to trade with that was still doing well but it never really recovered.

US banks went on a maniacal lending spree into real estate and the bubble popped in 2008. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

US banks used complex financial instruments to spread this problem throughout the West.

"It's nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world" (pg 404, "All the Presidents Bankers", Nomi Prins).

Rather than own up to losses and admit their bankers were fools, the UK and Euro-zone
covered up the problems with loose monetary policy.

Japan, the UK, the US and the Euro-zone had the BRICS nations to trade with that were still doing well but they never really recovered.

The BRICS nations are now heading for recession.

Doesn't look good does it.


coplani 29 Aug 2015 04:45

The fundamental question is simply this....

Can millions of people continue to make a living from sitting on their backsides and investing or gambling on the stock markets.
"Loads of Money" and "Money Making Money from Investing"...

Is it sustainable in a World where growth is no more...

Markets and asset values at an all time high...Can this money making money from investing continue indefinitely...Especially when others are joining in by the million.

Our whole way of life is now dependent on the markets and they cannot be allowed to go down in value...Thus Q.E. and record low interest rates....Currency devaluation could be next as has already happened elsewhere...

Investment funds, Pension Schemes, Banks, Massive Financial Institutions etc now depend wholly on money making money....

Any enterprise started, which seems to be profitable is snapped up by the market looking for money to make money...

For how long can this be sustained....That is the question.


KassandraTroy 28 Aug 2015 19:06

Yup. The definition of insanity is doing the same thing over and over and expecting different results.

Yet here we are, courtesy of the new "free trade agreements", ready to turn 40% of the global economy over to these same players right when we need to put on the brakes. Because, of course, the oligarchs have bought our governments. I shudder to think of a world ruled by the multi national corporations. It'll probably collapse in 6 months...maybe a few more for the planet to just stop

nnedjo 28 Aug 2015 15:16

Their recoveries have been the slowest on record and interest rates remain at a historic low – because owners of capital are prepared to invest in anything except the productive economy.

Well, something like this, only more exclusively, says also a former Greek Finance Minister Yanis Varoufakis. In his article "How I became an erratic Marxist" Varoufakis says:

Today, turning to the European crisis, the crisis in the United States and the long-term stagnation of Japanese capitalism, most commentators fail to appreciate the dialectical process under their nose. They recognise the mountain of debts and banking losses but neglect the opposite side of the same coin: the mountain of idle savings that are "frozen" by fear and thus fail to convert into productive investments.

So, indeed, it seems that rich people of today are chosen only to remain rich, and to enjoy life. So they keep their money in banks, not taking anything with them, nor even think to invest it in something and so increase their capital. Accordingly, in addition to reducing the number of workers as a result of the automation of production, modern capitalism is faced with another phenomenon. He is in danger of losing the capitalists too.

And, capitalism that has no workers, and at the same time has no capitalists too, in many ways resembles Marx's ideal of a classless society by the name of communism. :-)

konga76 28 Aug 2015 15:08

The author's message is suspect. The stock market crash of the last week was mostly panic. Fundamentals in China market are unchanged, Western investor participation in said market was severely limited by Chinese law, and Western exposure to market contraction was meager.

In US, where biggest Western drop was seen, only 1% of economy hurt by China contraction. Additionally, there is considerable doubt that the author's 7% growth in China is accurate. Many economists inside and out of China believe it to be significantly less, and these suspicions are not of recent vintage. And, recent data corrections have shown US economy grew at 3.5% earlier this year, not the 2% previously reported.

Conclusion: dramatic market fluctuations of the past few weeks were primarily irrational !! Most losses have already been recouped and for all of the sound and fury, corrections appear to be marginal, not precipitous.

ID401112 -> goodlife9 28 Aug 2015 13:28

Good post. Economics is imprecise, granted, and it doesn't help that most world leaders are completely financially illiterate. But there are different schools of thought and economist that offer very robust analysis of the current economic situation. They're just not listened to because the needed measures are both in direct conflict with the needs of party donors, and expectations of the voting public.

Steve Keen, for example, saw the 2008 crash coming, and continues to provide very good, reasoned analysis about what continues to occur.

Similary, the Austrian school of economics gives very good critique on the inherent dangers and problems associate with fiat money.

But who in power would significantly reduce the value of housing or return to a gold standard as party policy.


OstanesAlchemy 28 Aug 2015 09:57

Who thought a debt based monetary system was a good idea? Oh yes, it was those people who had capital they wanted to "leverage" (multiply) without obligation.

So why don't we face the fact that over 90% of the money in the economy was issued as debt, and that leads to the mathematical certainty that the debt is, not only never going to be paid off, but thanks to the compound interest, completely unsustainable.

We must be so stupid as a species to allow the massive excess capacity in our economies to go to waste, and for our populations to go without for the want of the right numbers, in the right places on a computer chip. A problem that could literally be solved (or at least alleviated) at the stroke of a few keys.


nishville -> Limiting_Factor 28 Aug 2015 02:14

Is it the West's fault?

In this case, a resounding yes. West caused this crisis by promoting and exporting neoliberal capitalism, a system that thrives on instability. You can regard it as a virus infecting the organism of interconnected world economy.


RalphTheStaller 28 Aug 2015 01:17

As the dust settles on the latest "correction", one is left with a sense of unease.

First, we all know that markets have been rigged since QE was introduced to pull the Establishment's irons out of the fire. But surely there is an uncomfortable paradox in the knowledge that, in this latest saga, while the world's greatest totalitarian regime was signally unable to rig its market, conversely it took only a day for the great champion of free market capitalism to do so?

Secondly, we all know that when a market is challenged it is either the earnings base which is called into question or the multiplier used to capitalise the income. Would it not have been healthier for the philosophical base of neo-capitalism if the challenge to valuation had come from bond investors seeking a real return rather than fears that corporate earnings would not fulfil expectations?


nnedjo lib410 28 Aug 2015 00:36

And some of the former Soviet and Communist bloc countries have already reached about 50% of this level, after only about 10 years of EU membership?

More precisely, only one of the former socialist countries and it is Slovenia. Also, it should be noted that Slovenia was the most developed of the former Yugoslav republics. And former Yugoslavia had never belonged to the eastern bloc - Warsaw Pact, and besides that, by its economic development was roughly at the level of the least developed European countries, like for example Greece.

So the fact that Slovenia, which had previously been economically developed as Greece, after 25 years of capitalism has again reached Greece in average salaries, for you is "an incredibly fast transformation".

A very interesting observation, I must admit. :-)


OneCommentator 27 Aug 2015 21:49

Hunger eliminated in the developed world?? You must be a comedian.

Here's a statistic for you to chew on:
"According to the United States Department of Agriculture (USDA), 15.8 million children under 18 in the United States live in households where they are unable to consistently access enough nutritious food necessary for a healthy life.

And another:
"In 2013, 45.3 million people (14.5 percent) in the USA were in poverty.

You say "very few cases" -
You mean 15% or 1-in-7 qualifies as "very few"?

Here's another fact:
"Nearly 70 percent of the households served by food banks report that their most common spending tradeoff was between paying for utilities or food.

If you're saying that 15% of American households are in poverty because they're drug-addicted, that's delusional. They're in jobs & paying their bills - But they can't keep up with expenses.


eminijunkie 27 Aug 2015 19:24

Henry Ford is one of the very few people of the modern, or near modern perhaps, age who actually understood the basic concept of a consumer based economy. There must be consumers, consumers must have the means to obtain what the consume, and if they consume those that produce that which is consumed can make a living by selling the goods that are consumed.

Cut back on the money people have with which to purchase things and you strangle the economy as a whole. This is called austerity, and so naturally it does not work. The less one pays consumers to consume, the less they consume and the less the producers produce and eventually the whole scheme grinds to a point of catharsis of some sort.

The idea of a small number of people becoming extravagantly by gained vast wealth is something that is entirely destructive of the whole idea of any economy, whether you call it communistic or capitalistic.

The problem, of course, is that the earth just might not have unlimited resources, but there is such a thing as recycling and alternate forms of energy etc. The one thing there can't is a rich of inordinately wealthy hoarding all the money and mobs of consumers who don't have the wherewithal to consume.

Ultimately, of course, if that continues too long and too seriously, history tells us the day will come when the consumers consume the wealthy.

Perhaps some compromise will come first.

As a side note, there was a problematic gentleman in Germany in the 1930's that listened to Ford and got himself on the cover of time magazine a number of times as an economic miracle worker, but we no longer pay any attention to him or what he accomplished by implementing the above concept of solving a server economic crisis by just giving citizens money to spend.

People without wealth who are given money go right out and spend it all, and that's good for business everywhere.

And a person who works hard enough and/or smart enough to make a billion dollars will, for the most part, work just as hard to earn a million if that's all he or she can get, because a measly million beats the public dole any day of the week.


smalltownboy shaun 27 Aug 2015 19:15

It means that the question is, who will now buy US treasuries? (Who will now back-stop the dollar?).

Don't worry your pretty little head about it, shaun. There are lots of takers for US treasuries. China had no problem selling some of their stockpile in an an effort to prop up the yuan, which is still pegged to a basket of world currencies, including the dollar. You need to stop getting your financial news from Zero Hedge and RT.


nnedjo nnedjo 27 Aug 2015 17:48

Thus, the average EU-28 wage per hour amounts to about 18 euros, according to this chart.

Realworldview 27 Aug 2015 17:48

China can ride out this crisis. But we're on course for another crash

We are certainly in for another crash, and its scale will be beyond all previous crashes, also China will not ride it out, it will crash along with other nations. The consequences of the looming financial collapse will last for centuries, because the era of economic growth is over meaning debt cannot be paid down. How Economic Growth Fails provides a plausible explanation, with the consequences explored in Deflationary Collapse Ahead? These extracts reveal a major blind spot in the discipline of economics that means economic and political elites fail to understand the impact of limits on the economy and why their "conventional" economic policies are failing:

Today's general level of understanding about how the economy works, and energy's relationship to the economy, is dismally low. Economics has generally denied that energy has more than a very indirect relationship to the economy....

Economics modelling is based on observations of how the economy worked when we were far from limits of a finite world. The indications from this modelling are not at all generalizable to the situation when we are reaching limits of a finite world. The expectation of economists, based on past situations, is that prices will rise when there is scarcity. This expectation is completely wrong when the basic problem is lack of adequate wages for non-elite workers. When the problem is a lack of wages, workers find it impossible to purchase high-priced goods like homes, cars, and refrigerators. All of these products are created using commodities, so a lack of adequate wages tends to "feed back" through the system as low commodity prices. This is exactly the opposite of what standard economic models predict.

For a comprehensive overview of our situation and just how limited our future options are, this article by Nicole Foss posted on The Automatic Earth website is a must read: Nicole Foss: The Boundaries and Future of Solution Space. These extracts reinforce the role of plentiful cheap fossil fuel based energy in our industrial civilisation, and the unwelcome consequences of its future unaffordability once a global deflationary collapse has occurred:

We are facing limits in many ways simultaneously – not surprising since exponential growth curves for so many parameters have gone critical in recent decades, and of course even more so in recent years. Some of these limits lie in human systems, while others are ecological or geophysical. They will all interact with each other, over different timeframes, in extremely complex ways as our state of overshoot resolves itself (to our dissatisfaction, to put it mildly) over many decades, if not centuries. Some of these limits are completely non-negotiable, while others can be at least partially mutable, and it is vital that we know the difference if we are to be able to mitigate our situation at all. Otherwise we are attempting to bargain with the future without understanding our negotiating position.

The vast majority has no conception of the extent to which our modernity is an artefact of our discovery and pervasive exploitation of fossil fuels as an energy source. No species in history has had easy, long term access to a comparable energy source. This unprecedented circumstance has facilitated the creation of turbo-charged civilization.

Huge energy throughput, in line with the Maximum Power Principle, has led to tremendous complexity, far greater extractive capacity (with huge 'environmental externalities' as a result), far greater potential to concentrate enormous power in the hands of the few with destructive political consequences), a far higher population, far greater burden on global carrying capacity, and the ability to borrow from the future to satisfy the insatiable greed of the present. The fact that we are now approaching so many limits has very significant implications for our ability to continue with any of these aspects of modern life. Therefore, any expectation that a future in the era of limits is likely to resemble the present (with a green gloss) are ill-founded and highly implausible.

nnedjo Hippokl, 27 Aug 2015 17:43

Well, these are the data obtained from Eurostat, the statistical office of the European Union. And on the left side of the graph you have data for the EU-28, and the Euro area EU-18. In the previous post I am slightly increased earnings per hour in the EU-28 at 25 euros, because it is in fact the information when other labour costs are added to the wages and salaries.


nnedjo 27 Aug 2015 17:16

Let's simplify things a bit. Technological development leads inevitably to the fact that things that were previously available only to a few individuals become available to most average people. The reason is that the development of technology increases the productivity of the average man, so that someone who previously could produce goods only for a few people, now can produce goods for the huge number of people.
So, if we neglect the economy, judging solely on the basis of technological development should not be such a thing as stagnation in production, and every man would become constantly richer and richer because he would have received more and more goods, as well as other values in the field of health care, education, entertainment, recreation, ... etc.
And, since even today is nothing wrong with technology, it is obvious that this is not a technological crisis, but this is the economic crisis.

And, how did it come to this economic crisis? Well, advocates of austerity measures obviously claim that the crisis was created so that people are spending more than they earn, and this is why they must now spend less, or to agree to austerity measures. However, if someone is spending more than it earns, then someone else had to earn more than what he spent. In other words, if this is true, then the economic crisis would have occurred only in some countries and not in all countries of the world, including the most developed ones. That's the obvious flaw of this argument, and it is clear that this is a classic crisis of capitalism, like many that have occurred previously, and on which, among others, Karl Marx also was talking about.

So the basis of Marx's teaching is precisely the fact that the employer pays employees based on quantitative measures of labor, ie the number of hours spent at work, and not on the basis of what he can really produce for the same number of hours. In this way, the worker always produces more values than it receives from the employer as wages. And in this way the owner appropriates this surplus of created values , and thus becomes more and more rich.

However, that the surplus of produced values turned into capital, the owner must sell goods in the market. But who is going to buy the goods, if most customers are workers who also produced more goods than they get money for it? In other words, on the market appears surplus of goods, which nobody can buy. You have on one side the huge number of empty houses, and on the other side, you have a huge number of the homeless. (Does this sound familiar?). You have overproduction of food on one side, and on the other side, you have an army of hungry. Or, on the one hand, the huge number of cars, and on the other hand, people go on foot.
And, since it is impossible to sell previously manufactured goods, it is clear that there is no purpose to increase the new production. In other words, production is decreasing, and the economy falling into recession.

And how this crisis of capitalism can be overcome? Advocates of austerity say that capitalism can be saved only "by becoming more capitalist". Or in other words, so that the workers will be paid even less than before, either from private owners or by the state, and commodity (electricity, gas, water, etc ...) will become even more expensive. But, whether is not the main cause of the crisis precisely because the goods have become expensive for people who are not paid enough to be able to buy it? And then, how austerity measures may increase production and pull the economy out of recession? It is obvious that they can not, which means that the solution is not "capitalism that will become more capitalistic". Recession can be solved only in that way that capitalism will become more socialist, or roughly with the introduction of those measures that Jeremy Corbyn suggests. In that sense I would say that Seumas Milne is right because he gives Jeremy Corbyn for the right.

MarkThomason 27 Aug 2015 17:11

I should add that I know of three stores near me that had been in business a long time, and closed because their usual suppliers were unable to extend the usual terms for inventory, because the suppliers had lost their credit lines. None had new risks or new problems, they just had their long-standing arrangements cancelled on them due to the financial crisis.

Meanwhile, the casino ran full blast with borrowed money provided by the government.

[Aug 30, 2015]The Dollar Now What

Aug 30, 2015 | Zero Hedge
Canada's fundamentals are poor and this seemed to outweigh the recovery in oil prices. Also, the US two-year premium over Canada recouped most of the ground it had lost earlier in the week. Canada is expected to report a contraction in Q2 GDP in the coming days and a softening of the labor market in August. The US dollar's pullback from the CAD1.3355 spike on August 25 fizzled near CAD1.3140. Another run at the highs looks likely. Over the longer term, we look for the Australian dollar to fall toward $0.6000 and the US dollar to rise toward CAD1.40.

Oil prices staged a strong rebounded in the second half of last week after falling to $37.75 on August 24. The bounce carried the October light crude futures contract to $45.25, which completes a 61.8% retracement of the slide in prices since July 29. The next objective is seen near $46.80 and then $48.00. There is good momentum, and the October contract finished the week above its 20-day moving average (~$42.95) for the first time since June 23. The October contract posted a potential key reversal on the weekly bar charts. It made a new multi-year low early in the week and then proceeded to rally, taking out the previous week's highs. It closed at its highest level since the end of July.

... ... ...

7. The net long speculative light sweet crude oil futures positions were pared by 5k contracts, leaving 215.6k. Given the large movement in prices, it is surprising to see how small of a position adjustment took place. The longs added 1k contracts, lifting the gross position to 474.2k contracts. The bears trimmed their gross position by 4k contracts, leaving 215.6k.

[Aug 30, 2015] 15 Science-Backed Way4s To Fall Asleep Faster

"A power nap is a sleep session that happens during the day (ideally between 1:00 to 4:00 PM) lasting between 10 and 30 minutes. Any longer and you run the risk of developing "sleep inertia" — that unpleasant groggy feeling that takes a considerable amount of time to shake off. And naps later than 4:00 PM can disrupt your regular nighttime sleep."

[Aug 30, 2015] Brace for Quantitative Tightening, As China Leads Forex Reserves Purge

Aug 30, 2015 | NDTVProfit.com

Faith in the power of "quantitative easing" has prompted central banks, led by the US Federal Reserve, to pump trillions of dollars of stimulus into the global financial system to cushion the impact of the 2007-08 market crisis and recession.

This supply of liquidity continues to flow. The European Central Bank has taken the baton from the Fed and is leading the way with its 1 trillion euro ($1.1 trillion) bond-buying programme that will run through September next year. The Bank of Japan is also buying large quantities of bonds.

But a counter flow - call it "quantitative tightening" - is gathering force as China sells foreign exchange reserves to protect its economy and markets from the recent surge of capital out of the country. Other emerging markets are following suit.

Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion over the last few months. A source at another large global bank said emerging market central banks may have sold up to $200 billion of FX reserves this month alone, of which $100-$150 billion likely came from China.

[Aug 30, 2015] The Scary Number Hiding Behind Today's GDP Party

"...Hmm. Which to believe? As the old joke goes: "A person with one clock always knows what time it is. A person with two is never quite sure.""
Aug 30, 2015 | Bloomberg Business

The federal government today released two very different estimates of the U.S. economy's growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.

That's a big discrepancy for two numbers that should theoretically be the same, since they're two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you're happy. If you believe the GDI number, you're thinking the U.S. is skating close to a recession.

The Bureau of Economic Analysis always gives more prominence to the GDP number in its quarterly press release. But today, for the second time in a quarterly report, it released an average of GDP and GDI growth rates. That average came in at 2.1 percent after rounding—and in this case, that's probably closer to the truth than either number alone.

There is no name for the new hybrid data series, which was described rather prosaically as "the average of real GDP and real GDI." President Obama's Council of Economic Advisers nicknamed it gross domestic output in a July issue brief. Here's what it wrote:

GDP tracks all expenditures on final goods and services produced in the United States, whereas GDI tracks all income received by those who produced that output. Conceptually the two should be equal because every dollar spent on a good or service (in GDP) must flow as income to a household, a firm, or the government (and therefore must show up in GDI). However, the two numbers differ in practice because of measurement error.

[Aug 30, 2015] Under the Hood of U.S. GDP Was Divide Between Growth, Incomes

Aug 30, 2015 | Bloomberg Business

Here's one key takeaway from the Commerce Department's report on gross domestic product Thursday in Washington: Gross domestic income climbed at a 0.6 percent annualized rate, well short of the rebound in growth.

* The increase in GDI last quarter followed a 0.4 percent advance in the first three months of the year, marking the weakest back-to-back gains since mid-2012

* The 3.1 percentage-point gap between GDI and GDP, which climbed at a 3.7 percent rate, was the largest in favor of GDP since the third quarter of 2007

* While GDI and GDP should theoretically match over the long run, they can diverge from quarter to quarter. There has been a debate about which is more accurate, with some Federal Reserve researchers finding incomes give better signals

[Aug 30, 2015] China Sneezes, Europe Catches a Cold

Aug 30, 2015 | naked capitalism


… the concerns of German firms,"

Stock market declines around the world would in this view only represent some short-term financial contagion without a connection to real economic activity.

The second hypothesis is that the collapsing stock prices are linked to a slowdown in economic activity in China. Such a slowdown will then be passed on through trade linkages to China's trading partners.

We want to investigate whether the stock market falls in Europe are primarily a financial contagion problem or whether they are linked to trade exposure to China. We look at the decline since the start of August until now, compared to the extent to which the respective OECD economy is linked to China, measured in gross exports to China as a share of GDP.

Contrary to the first hypothesis that this episode is just a matter of turbulence in financial markets, we can see that in Europe those countries with stronger trade connections to China have generally suffered bigger losses in their stock markets. We take this as an indication that there is a disruption in the real economy in China, leading to less demand for European exports to China that is passed on to European stock markets through trade channels.

For example, if we look at Germany, we can see that the DAX has fallen by around 12% (second highest in the sample), and also has the highest exports to China as a share of GDP at 2.66%.

Overall, we would warn European policy makers not to take the Chinese crisis lightly. The health of the Chinese economy is of essence to the global economy and there are reasons to believe that this could turn out to be a more fundamental cooling of China than previously thought.

Saudi Oil Strategy Brilliant Or Suicide

This is too simplistic explanation... The role of the USA and the fact that Saudi Arabia is a vassal of Washington is ignored.
Aug 30, 2015 | naked capitalism
The Saudi miscalculation has several sources. One is the negative feedback loop between oil production, GDP, and national budgets that plagues many non-Western oil producers. Their GDP and national budgets depend significantly on the revenues from their oil exports. As a result, the revenue shortfalls incentivize them to produce as much oil as possible to mitigate the shortfall.

According to the IEA, daily output in June 2015 increased 3.1 million barrels over 2014, with 60 percent (1.8 million barrels) coming from OPEC. At 31.7 million barrels per day, OPEC output reached a three-year high.

This increase in output occurs with the context of a narrow global demand opportunity. Growth in demand in 2015, which the IEA forecasts to average around 1.4 million barrels per day, comes primarily from Asia and North America. In other major export markets, demand is stagnant. That has oil exporting countries, including OPEC members, Russia and others, focusing their sales on Asia, particularly China. North American demand is growing now that oil prices are low, but due to high levels of domestic production, the U.S. is no longer a growth market for oil exporters.

Each producer, therefore, is incentivized to undercut other producers directly (price per barrel) or indirectly (absorbing shipping cost or delivery risk) to win sales in Asia (or displace incumbent suppliers in other major markets). National oil producers can and are shifting the cost of the lowered prices to other sectors of the economy. The U.A.E., for example, has ended fuel subsidies, thereby essentially, increasing its budget revenues, while Saudi Arabia recently floated a $4 billion domestic bond offering to help finance its budget.

Asian customers are taking advantage of the competition. They are reducing the share of long-term contracts in favor of spot purchases. For example, as the Wall Street Journal reported, some Japanese refiners are cutting the proportion of oil purchased through long-term contracts to around 70 percent from more than 90 percent, while some South Korean refiners are reducing the proportion from 75 to 50 percent. Furthermore, several national oil companies, Venezuela's among them, are building refineries with local partners in Asia, which will use their crude.

Given this environment, it is not surprising that the revenue elasticity of production is highly sensitive, and negative. Saudi Arabia increased production by 6.8 percent in the first quarter of 2015 but saw export revenues shrink by 42 percent.

Any Saudi Victory Will Be Pyrrhic

Saudi confidence in their financial wherewithal is proving misplaced.

  1. Their need for revenue is intensifying rather than moderating. They are fighting a multi-front war with Iran directly (in Yemen) and indirectly (in Syria, Lebanon, and Iraq). ISIS, Al Qaeda, and disaffected Shias present a significant domestic security threat. Countering external and internal threats demands increased spending (including, perhaps, a very expensive future nuclear weapons program), as does placating the fast growing male and female youth demographic, which requires substantial spending on education, training, employment, and support. Hence, the budget deficit equal to 20 percent of GDP, noted above.
  2. Increased production does not offer a solution. Saudi Arabia doesn't have the capacity to increase production sufficiently to reduce the shortfall significantly in any meaningful timeframe. They currently do not have the spare capacity—to make up for the $291 million in export revenue lost in Q1, 5.4 million more barrels a day would have been necessary at $53.92 a barrel. Of course, such a drastic increase in output would have driven prices even lower. It is doubtful they can increase capacity substantially even in the medium- to long term. They won't be able to spend significantly more than other major national oil companies. First, low prices reduce Aramco's cash flow and therefore its ability to fund investment. Second, the Saudi government likely will increase its draw from this cash flow to fund higher priority national security and domestic security needs.
  3. Third, Saudi refusal to act as price guarantor undercuts the confidence foreigners need to invest in, or loan to, oil projects. What might be attractive at $75 per barrel oil isn't at $50 oil, and even less attractive if the price of oil is thoroughly unpredictable.
  4. Fourth, in terms of political risk, Saudi Arabia with its Gulf allies, Iran, and Iraq, and the Middle East in general, is at the epicenter of global tension, turmoil, and tumult.
  5. Fifth, its influence within OPEC, and therefore its ability to manage OPEC output and prices, is diminished. Their underestimate of the impact of their policy change on prices, their indifference vis-à-vis the financial damage to other OPEC members, and their willingness to take market share at the expense of other OPEC members undercut their credibility within OPEC (particularly since it derived from Saudi willingness to protect the interests of all members (and sometimes to endure disproportionately).

While Saudi financial reserves are substantial (circa $672 billion in May), drawing on them is little more than a stop-gap measure. If its major competitors (Russia, Iraq, Iran, and North America) maintain or even increase output (and they have the incentive to do so), prices could stay lower far longer than the Saudis anticipated. Saudi reserves have decreased some $65 billion since prices started to fall (in November), so ~$100 billion to ~$130 billion at an annual rate. The longer prices stay low, the faster their reserves fall, and, as reserves plummet, the greater the pressure to prioritize spending, to the disadvantage of some Saudis.

Saudi Arabia Caused The Problem, Can It Engineer A Solution?

Saudi officials apparently viewed $90 or even $80 per barrel oil for "one or two years" with equanimity. Can they maintain the composure they have displayed thus far as they incur in a single year the revenue losses they expected to take four years (at $90 oil) or two years (at $80 oil)?

And if they can't—and surely, though they are loath to admit it, they can't—can they engineer a durable increase in prices—i.e., a durable decrease in output? At first glance, it seems impossible. Daily output from Saudi Arabia (10.5 million), and its allies, UAE (2.87), Kuwait (2.8), and Qatar (.67), is roughly equal to the daily output from countries with which it is in conflict, directly or indirectly, Russia (11.2), Iran (2.88), and Iraq (3.75), and therefore have an incentive to take advantage of any unilateral Saudi output concessions.

Yet, in effect, these countries are engaged in the oil equivalent of mutually assured destruction. The sharp drop in oil revenue damages each of these countries economically and financially, while the wars they wage directly and indirectly against each other drain resources from vital domestic projects.

Moreover, given the sensitivity of prices to changes in volume, it is possible, if not likely, that holding output steady or matching a Saudi

[Aug 30, 2015] Why The Great Petrodollar Unwind Could Be $2.5 Trillion4 Larger Than Anyone Thinks

"...The US has already destroyed Iraq, Lybia, and Syria to secure oil flows and ensure the dollar supremacy. Only Iraq cost them over 2 trillions, projected to go as high as 6 trillion over the next decades once veteran medical care and pensions are factored in, says Reuters. But according to ZH, they are somehow going to allow the Saudis to break the dollar regime as if it was a cheap plastic toy. They will just stand by and watch how their world domination project goes down the drain because of a small desert kingdom of 18 million people. How realistic is this scenario?"
Aug 30, 2015 | Zero Hedge
In short, China's FX management means that Beijing has joined the global USD asset liquidation party which was already gathering pace thanks to the unwind of the petrodollar system. To understand the implications, consider what BofAML said back in January:

During the oil-boom era, oil-exporters used oil earnings to finance imports of goods and services, and channeled a portion of surplus savings into foreign assets. 'Petrodollar' recycling has in turn helped boost global demand, liquidity and asset prices. With the current oil price rout, external and fiscal balances of oil exporters are undermined, and the threat of lower imports and repatriation of foreign assets is cause for concern.

Recycling of Asia-dollars might partly replace the recycling of petrodollars. Asian sovereign wealth funds ($2.8tn) account for about 39% of total sovereign wealth funds, and will likely see their size increase at a faster clip. Sovereign wealth funds of China (CIC & SAFE), Hong Kong (HKMA), Singapore (GIC & Temasek) and Korea (KIC) rank in the Top-15 globally

Yes, the "recycling of Asia-dollars might partly replace the recycling of petrodollars." Unless of course a large Asian country is suddenly forced to become a seller of USD assets and on a massive scale. In that case, not only would the recycling of Asian-dollars not replace petrodollar recycling, but the "Eastern liquidation" (so to speak) would simply add fuel to the fire - and a lot of it. That's precisely the dynamic that's about to play out.

A careful reading of the above from BofA also seems to suggest is that looking strictly at official FX reserves might underestimate the potential size of the petrodollar effect. Sure enough, a quick check across sellside desks turns up a Credit Suisse note on the "secular downtrend in EM reserves" which the bank says could easily be understated by focusing on official reserves.

First, note the big picture trends (especially Exhibit 2):

And further, here's why the scope of the unwind could be materially underestimated.

Taken into context, the year-to-date fall in EM reserves accounts for only 2% of the total stock of EM reserves. However, the change in the behavior of EM central banks from persistent buyers to now sellers of reserve assets carries important implications. Importantly, official reserves will likely underestimate the full scale of the reversal of oil exporters' "petrodollar" accumulation.

Crucially, for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters' "petrodollar" accumulation. This is because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia, where they are counted as FX reserves).

Now that the tide has turned, it is likely that not only official reserves drop but that SWF asset accumulation slows to nil or even reverses. SWF selling may be a slower process as assets tend to be less liquid, but the opportunity might still be taken to repatriate some investments, for instance to boost domestic rather than foreign infrastructure projects.

In other words, looking at the total amount of official reserves for oil exporters understates the potential for petrodollar draw downs by around $2.5 trillion. Now obviously, it's unlikely that exporters will exhaust the entirety of their SWFs. Having said that, the fact that EM FX reserve accumulation turned negative for the first time in history during Q2 underscores how quickly the tide can turn and how sharp reversals can be. If one fails to at least consider the SWF angle then the effect is to underestimate the worst case scenario by $2.5 trillion, and if 2008 taught us anything, it's that failing to understand just how bad things can get leaves everyone unprepared for the fallout in the event the situation actually does deteriorate meaningfully.

So that's the big picture. In other words, the above is a discussion of the pressure on accumulated petrodollar investments and is an attempt to show that the pool of assets that could, in a pinch, be sold off to finance things like massive budget deficits (Saudi Arabia, for instance, is staring down a fiscal deficit that amounts to 20% of GDP) is likely being underestimated by those who narrowly focus on official reserves. Switching gears briefly to consider what $50 crude means for the flow of petrodollars (i.e. what's coming in), RBS' Alberto Gallo has the numbers:

If petroleum prices continue in to year end at their current YtD average ($52), this would represent a 60% decline in Petrodollar generated in 2015 vs between 2011 and 2014. Assuming that 30% of gross Petrodollars generated per year are invested in financial markets, this would imply $288bn ready for investments in 2015 vs a $726bn average between 2011 and 2014. Lower purchasing power from oil-exporting countries may in turn reduce demand for $-denominated fixed income assets, including $ IG and $ HY. US IG and HY firms have issued $918bn and $220bn YtD, which in total marks a record-high vs past years.

And while all of this may seem complex, it's actually quite simple: less petrodollars coming in without a commensurate reduction in what's going out means the difference has to be made up somewhere and that somewhere is in the sale of USD reserve assets which are prone to being understated if one looks only at official FX reserves. Contrast this with the status quo which for years has been more petrodollars coming in than what's going out (in terms of expenditures) with the balance being reinvested in USD assets.

Simplifying even further: the virtuous circle (for the dollar and for USD assets) has not only been broken, but it's now starting to reverse itself and the potential scope of that reversal must take into account SWF assets.

Where we go from here is an open question, but what's clear from the above is that between China's FX reserve drawdowns in defense of the yuan and the dramatic decrease in petrodollar flow, the self-feeding loop that's sustained the dollar and propped up USD assets is now definitively broken and we are only beginning to understand the consequences.

JustObserving

Obama's plan to attack Putin by crashing oil prices is backfiring. But then Obama has failed at everything but killing brown people and defending the NSA/CIA infinte spying on the American people and signing NDAA.

Forward

Think about how the Obama administration sees the state of the world. It wants Tehran to come to heel over its nuclear programme. It wants Vladimir Putin to back off in eastern Ukraine. But after recent experiences in Iraq and Afghanistan, the White House has no desire to put American boots on the ground. Instead, with the help of its Saudi ally, Washington is trying to drive down the oil price by flooding an already weak market with crude. As the Russians and the Iranians are heavily dependent on oil exports, the assumption is that they will become easier to deal with.

John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.

http://www.theguardian.com/business/economics-blog/2014/nov/09/us-iran-r...

CaptainAmerika

An empire founded by war has to maintain itself by war
http://www.philiacband.com/propaganda.html

johngaltfla

Nicely done Tyler. And the funny part is all the nations stupid enough to buy and peg reserves to the USD which will get destroyed in the process. When Singapore and Hong Kong de-peg, it is over boys and girls.

Son of Captain Nemo

And what a fine strategy it is?...

Create massive over capacity to the market by looting the hell out of every other ME country's reserves (which has been non-stop since 9/11) to destroy Russia and Iran's revenue "party" which everyone by now knows was the objective 14 years ago... Trouble is according to the town crier of the Aspen Institute General "Let's start a nuclear war over an airport in the Balkans"... It was only supposed to take 5 years and ended up taking much longer and at a much more exorbitant price than was previously anticipated!

That "overcapacity" can be systematically fucked in a major way... Sabotage to those reserves comes to mind and will be the perfect segue for either side in the event the Anglo-American team decides to get another "wild hair up it's ass"to put it's helmet back on again only this time for the last major ass kicking unlike any they have ever had before!!!

I guess for the truly delusional and criminally insane it's a fun way to end both the party and your life!

Trouble with this behavior is that the rest of the 99% probably don't see it this way?!!!

Jack Burton

Always good posts Captain Nemo! The Iranians have said that should Israel, the USA or Saudi Arabia participate in an attack on Iran, then Saudi oil fields would see a hail of missiles arrive on refineries, Shipping facilities , key pipeline junctions. Iran has build crusise and ballistic missiles to spread their attack around both low altituded and high altitude. So YES, IF the USA plays it's cards Too hard, Iran will burn the fucking Saudi Oil.

Russia, while still bending over backwards to please the EU, can be counted on to burn some Saudi Oil if need be. Russia has till now been peaceful. But they might just begin to fund their own favorite anti Saudi groups! Then things will change fast.

Bluntly Put

Just guessing, but it seems to me the fed doesn't print currency directly, they issue credit, reserves at least in loans. I agree when they monetize debt like buying MBS they are essentially printing money, but what if they sold those assets?

So, some of their actions result in hot currency, while other actions are more related to the interdependent network of banks as capital flows related to interest and principle payments on outstanding loans/bonds/debt.

If all those channels get mucked up, then liquidity freezes and you get a credit crisis. If the fed actually just printed money it would retain it's value however much that value might drop over time and depreciation via debasement.

Son of Captain Nemo

Good points BP

The problem is we know how derivatives laden those "assets" are, especially with respect to paper vs. physical in the COMEX.

Suffice it to say eventually the "Emperor" will default what is underneath the "kimono"...And when he does the ladies (shall we say) will be disappointed!

cherry picker

Everything is so convoluted I don't understand it. Maybe it is designed that way so main street can't see it.

I can understand shipping tonnages dropping, means less goods bought and sold.

I can understand selling oil at margins to kill off competition.

I can understand China selling Treasuries to either bolster their finances or to "pay' back the USA for 2008 and sticking their noses in the South China Sea.

I can understand tax revenues going down among other recession/depression indicators as people have no money, affecting business, labor markets and so on.

I don't understand at all how this 'reserve currency' stuff will play out and the above post really does not clarify it in my mind.

DanDaley

I don't understand at all how this 'reserve currency' stuff will play out and the above post really does not clarify it in my mind.

I think of it like this:

As other countries decide that they prefer something other than dollars for trade settlements, all of those FRNs sitting in foreign banks (estimated to be several trillions) will make their way home. When they do, you get big-time inflation.

Also, when noone overseas wants to take dollars any more for payment, then our we have less cheap stuff...our standard of living takes a nose-dive. Everything that you need or want becomes more expensive and harder (or impossible) to obtain.

There are going to be a lot of surprised and unhappy muppets out there, and none of them will have the faintest clue of what went wrong.

Winston Churchill

Missing a big piece of the puzzle here Tyler.A very big piece.

$14tn in shadow banking 'assets'.

Some is within the Venn intersection, but how much ?

The elephant sitting in the room.

Urban Redneck

Counter parties, custody chains, leverage and capitalization ratios... at this point, what difference does it make?

Urban Redneck

After MF Global blew up, I stepped up my atypically thorough and anal due diligence to full retard. I discovered that the physical certificates for JBSICA I own through through a US trust with a US account at EuroPac are sitting in a vault at ShitiBank in London! I couldn't find any documentation of the custodial relationship between the two entities even after going though mountains of account/fund paperwork and corporate disclosures and filings. Ratscam tested taking physical delivery of JBSICA here in Switzerland a while back and I have friends at Julius Baer who can do everything short of breaking Swiss law to reissue certificates... But if this thing actually blows up, it won't make any difference, there's simply too much interdependence and complexity to reverse direction if it starts gaining momentum. Midnight harvesting of yesteryear's midnight gardening and wreck diving past boating accidents will be about it.

Hope your lawyer didn't bill you too much and only confirm what you already knew.

AC_Doctor

What do you think King Salman is going to say to Obozo, when he visits next week?

A. We are going to start taking Yuan for payment of crude

B. We are going to start liquidating US Treasurys like our buds the Chinese

C. Both A & B and Oboza doesn't get a reach around

Aaron Hillel

Obamas handler will answer *well, my dear king, look out to the sea, do you see the MAU cruising out there, and that? oh thats just a carrier group, nothing to be afraid of, its for your protection.Of course, if they ever land on your hallowed shores, they could install a TrueDemocracy(c) in here and what would you do then?So, what were you saying?*

The rotten house of Sa'ud is as much puppet of Washington-TelAviv axis as Merkel or Hollande, perhaps more.

JD59

Bath house Barry is sending the U.S. Carrier Group back home, no more on station in the Persian Gulf.

wrs1

What are they going to buy with Yuan? If so, wasn't it utterly stupid to dump crude at way below market for $ they didn't want anymore? Seems really, really unlikely that your scenario in anyway connects wth their previous actions. Will they sell other assets before Treasuries to get $? You bet and the first thing on the list is stocks and HY bonds no doubt.

lasvegaspersona

The flow of surplus oil revenues reversing course does not surprise me. What does is the quantities. We are talking about a few trillion probably over a few years. That is a lot but compared to the 16 trillion in currency swaps and other dollar movement the Fed is said to have engaged in during the 2008 to 2009 period it is trivial.

I'm thinking that if the Fed could play hide the weiner with 16 trillion or so they can probably pull this off.

The difference of course is that then the money was probably used to buy worthless assets to prevent global deflationary collapse.

This time it will be dollars hitting the international currency market and being spent into the economy.

16 trillion protecting bad assets did not change the number of dollars being spent. A few trillion affecting prices at the margin...that could be an inflationary force to be reconned with.

cherry picker

It is humorous to note that the words "In God We Trust" are printed on the greenback.

Does that mean "In God We Trust" is only true if there is money?

If there is no money you can't trust "God" anymore?

A few decades ago all the evangelicals were always crying for donations to help with "God's Work" and Goldman Sach's states it is doing "God's" work too.

I think that may be a problem for many. They may feel God can't do anything without money, which strips the divine out of the "God" belief, doesn't it?

For many, God is the big financier in the sky :)

VW Nerd

A few years ago, the Social Security fund went into the negative also, meaning that extra revenue used to mask the Federal deficit was gone. I'm thinking that between these two major changes, the American way of life (social and economic) might experience some profound changes going forward. Much more than we've witnessed thus far.

Also, for decades the petrodollar monopoly has been used by USG, Wall St. and Corp. USA as a political and economic weapon, fomenting hatred toward the US. The only ones who don't get this are the American public. They keep believing "they hate us for our freedom".

Glorious Kataifi

I agree. The US has already destroyed Iraq, Lybia, and Syria to secure oil flows and ensure the dollar supremacy. Only Iraq cost them over 2 trillions, projected to go as high as 6 trillion over the next decades once veteran medical care and pensions are factored in, says Reuters.

But according to ZH, they are somehow going to allow the Saudis to break the dollar regime as if it was a cheap plastic toy. They will just stand by and watch how their world domination project goes down the drain because of a small desert kingdom of 18 million people. How realistic is this scenario?

Whatever the game is, the US elites are certainly running it. At least that's my two pennies.


[Aug 29, 2015] Here's Why The Markets Have Suddenly Become So Turbulent

Aug 29, 2015 | Zero Hedge
Submitted by Charles Hugh-Smith via PeakProsperity.com,

When stock markets are free-falling 10+% in a matter of days, it's natural to seek some answers to the question "why now?"

Some are saying it was all the result of high-frequency trading (HFT), while others point to China's modest devaluation of its currency the renminbi (a.k.a. yuan) as the trigger.

Trying to finger the proximate cause of the mini-crash is an interesting parlor game, but does it really help us identify the trends that will shape markets going forward?

We might do better to look for trends that will eventually drag markets up or down, regardless of HFT, currency revaluations, etc.

Five Interconnected Trends

At the risk of stating the obvious, let's list the major trends that are already visible.

1. The China Story is Over

And I don't mean the high growth forever fantasy tale, I mean the entire China narrative is over:

  1. That export-dependent China can seamlessly transition to a self-supporting consumer economy.
  2. That China can become a value story now that the growth story is done.
  3. That central planning will ably guide the Chinese economy through every rough patch.
  4. That corruption is being excised from the system.
  5. That the asset bubbles inflated by a quadrupling of debt from $7 trillion in 2007 to $28 trillion can all be deflated without harming the wealth effect or future debt expansion.
  6. That development-dependent local governments will effortlessly find new funding sources when land development slows.
  7. That workers displaced by declining exports and automation will quickly find high-paying employment elsewhere in the economy.

I could go on, but you get the point: the entire Story is over. (I explained why in a previous essay, Is China's "Black Box" Economy About to Come Apart? )

This is entirely predictable. Every fast-growing economy starting with near-zero debt and huge untapped reserves of cheap labor experiences an explosive rise as the low-hanging fruit is plucked and the same abrupt stall and stagnation when the low-hanging fruit has all been harvested, leaving only the unavoidable results of debt-fueled speculation: an enormous overhang of bad debt, malinvestment (a.k.a. bridges to nowhere and ghost cities) and policies that seemed brilliant in the good old days that are now yielding negative returns.

2. The Emerging Market Story Is Also Done

Emerging currencies and markets have soared on the back of the China Story, as China's insatiable demand for oil, iron ore, copper, soy beans, etc. drove global demand to unparalleled heights.

This demand pushed prices higher, which then pushed production (supply) higher, as the low cost of capital globally enabled marginal resources to be put into production with borrowed money.

Now that China's demand has fallen off—by some accounts, China's GDP is actually in negative territory, despite official claims that it's still growing at 7% annually—commodity prices have crashed, taking the emerging markets' stock and currency markets down. (Source)

Here is a chart of Doctor Copper, a bellwether for industrial and construction demand:

Here is Brazil's stock market, which has declined 54% in the past 12 months:

These are catastrophic declines, and with China's growth story over, there is absolutely nothing on the global horizon to push demand back up.

3. Diminishing Returns on Additional Debt

The simple truth is that expanding debt has fueled global growth. Though people identify China as the driver of global demand for commodities, China's growth is debt-driven. As noted above, China quadrupled its officially tracked debt from $7 trillion in 2007 to $28 trillion as of mid-2014—an astonishing 282 percent of gross domestic product (GDP). If we add the estimated $5 trillion of shadow-banking system debt and another year's expansion of borrowing, China's total debt of $35+ trillion is in excess of 300% of GDP—levels associated with doomed to default states such as Greece and Spain.

While China has moved to open the debt spigot in recent days by lowering interest rates and reserve requirements, this doesn't make over-indebted borrowers good credit risks or more empty high-rises productive investments.

Borrowed money that poured into ramping up production in emerging nations is now stranded as prices have plummeted, rendering marginal production intensely unprofitable.

In sum: greatly expanding debt boosted growth virtually everywhere after the Global Financial Meltdown of 2008-2009. That fix is a one-off: not even China can quadruple its $35+ trillion debt to $140 trillion to reignite growth.

Here is a sobering chart of global debt growth:

4. Limits on Deficit-Spending (Borrowed) Fiscal Stimulus

When the global economy rolled over into recession in 2008, governments borrowed money by selling sovereign bonds to fund increased state spending. In the U.S., federal borrowing soared to over $1 trillion per year as the government sought to replace declining private spending with public spending.

Governments around the world have continued to run large deficits, piling up immense debts since 2008. The global move to near-zero yields has enabled governments to support these monumental debt loads, but even at near-zero yields, the interest payments are non-trivial. These enormous sovereign debts place some limits on how much governments can borrow in the next global recession—a slowdown many think has already started.

Here is a chart of U.S. sovereign debt, which has almost doubled since 2008:

As noted on the chart: what structural inadequacies or problems did governments fix by borrowing gargantuan sums to fund state spending? The basic answer is: none. All the same structural problems facing governments in 2008 remain untouched in 2015. These include: over-indebtedness, bad debts that haven't been written down, insolvent banks, soaring social spending as the worker-retiree ratio slips below 2-to-1, externalized environmental damage that has yet to be remediated, and so on.

5. Central Bank Stimulus (Quantitative Easing) as Social Policy Has Been Discredited

In the wake of the Global Financial Meltdown of 2008-2009, central banks launched monetary stimulus programs aimed at pumping money into the economy via bank lending. The stated goals of these stimulus programs were 1) boost employment (i.e. lower unemployment) and 2) generate enough inflation to stave off deflation, which is generally viewed as the cause of financial depressions.

While it can be argued that these unprecedented monetary stimulus programs achieved modest successes in terms of lowering unemployment and pushing inflation above the zero line, they also widened wealth and income inequality.

Even as these programs made modest dents in unemployment and deflation, they pushed asset valuations to the moon—assets largely owned by the few at the top of the wealth pyramid.

Here is a chart of selected developed economies' income/wealth skew:

The widespread recognition that the benefits of central bank stimulus mostly flowed to the top of the pyramid places political limits on future central bank stimulus programs.

The 2008-09 Fixes Are No Longer Available

In summary, the fixes for the 2008-09 recession are no longer available in the same scale or effectiveness. Expanding debt to push up demand and investment, rising state deficit spending, massive monetary stimulus programs—all of these now face limitations. This means the central banks and states have very limited tools to reignite growth as global recession trims borrowing, investment, hiring, sales and profits.

What Ultimately Matters: Capital Flows

In Part 2: What Happens Next Will Be Determined By One Thing: Capital Flows, we'll look at the one dynamic that ultimately establishes assets prices: capital flows.

I personally don't think the world has experienced a period in which capital preservation has become more important than capital appreciation since the last few months of 2008 and the first few months of 2009. Other than these five months, the focus has been on speculating to obtain the highest possible yield/appreciation.

This suggests to me that the next period of risk-off capital preservation will last a lot longer than five months, and perhaps deepen as time rewards those who adopted risk-off strategies early on.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

A_MacLaren

Sure would be nice if the the Tylers would post up a real discussion about the Markets vs the Real Economy, policy failures and problems aren't resolved with the same thinking that created them.

Except the Central Wankers aren't really interested in the real economy, only the fictious one that wears the mask of financial markets.

https://www.youtube.com/watch?v=lA0BbDe2RL4

Are we experiencing the Great Recession of 2015 or merely a painful paradigm shift in how the global economy is run? Many in the West quickly blame China for mismanagement of its economy and currency. This may or may not be true, but this is only a small fraction of a much bigger story. Has anything been learned since the financial crisis of 2008?

CrossTalking with Mitch Feierstein, Stephen Keen, and Mark Weisbrot.

thunderchief

Last week, 28 billion pulled out of the Market.

28 billion pumped in by the PPT, to keep the market from accelerating into margin calls and panic.

Ready, set, go on Monday. .Anyone else want out while the fed props this crap up a little longer?

junction

The markets are turbulent because people with insight are pulling their money out of the market, flight capital in the face of a fast spreading global war. Obama's ISIS is now out of control, there is a mass migration from war zones in the Middle East and North Africa and, worse of all, jihadists are pouring into Western Europe and America. Smiling, friendly jihadists like the guy who wanted to kill everyone on that French train. I wonder if, behind that smile, Obama also is a jihadist? Nah, he is a NWO follower through and through.

Stroke

What Ultimately Matters: Capital Flows.....


Sounds like somebody's been reading Martin Armstron's blog

B2u

"We will not have any more crashes in our time."
- John Maynard Keynes in 1927

novictim

...he said, assuming that his sound policies would be followed to the letter.

That the fiscal policies of Keyenes have been ingored in favor of monetary policy that just feeds asset bubbles lets Keynes off the hook.

I might add that Keynes believed in cutting deficits and increasing taxes in prosperious years and the opposite in down years. No one can say that his policies have been followed in the least.

polo007

http://www.barrons.com/articles/quantitative-easing-redux-1440826605

Quantitative Easing Redux?

Fed officials always try to disconnect the bank's actions from stock-market gyrations, but history doesn't support that indifference.

By Vito J. Racanelli

August 29, 2015

If a "rate hike" is Wall Street's obsession this year, the effective opposite, "quantitative easing," gets much less mention after three mammoth rounds of central-bank asset buying, or quantitative easing, in the past few years. But what's that we hear? Another thing the Fed's Dudley said last Wednesday was, "I'm a long way from quantitative easing. The U.S. economy is performing quite well."

Fed officials always try to disconnect the bank's actions from stock-market gyrations, but history doesn't support that indifference. "It will take less than a 20% decline in U.S. stock prices for the Fed to begin discussing a new round of quantitative easing," says Darren Pollock, a portfolio manager with Cheviot Value Management.

On several occasions in recent years, a Fed official has stepped in with easing statements following market routs. The Fed knows it can't let the stock market fall without backpedaling on its tough monetary talk, Pollock says. It must try to keep stock prices from plummeting and pulling down consumer confidence, which could affect the economy.

Stocks recovered big-time last week, but remain vulnerable. Should the market fall some more, Pollock says, "It may force the Fed to do a U-turn and speak of a willingness to provide more stimulus—like QE."

The Fed won't let all the effort and money invested in propping up the economy since 2008 go to waste. It won't stand at the plate and strike out looking. The Yellen put lives.

Temerity Trader

If the Fed bankers are so f***ing omnipotent, then they would NEVER let the markets drop at all. Why should they? It just makes the highly trained and obedient lemmings, get fearful and panic. The Dow tumbled almost 3,000 points from its recent Fed-enabled all time-high. Why did they not stop it, and stop EVERY fall, at -250 or so? Why did they not stop the last big decline to below 7K? Everyone would remain blissfully ignorant and living happily ever after in their personal 'Matrix'. If the Fed wound up owning 50% of the entire market float, who cares so long as millions of 401K's go up?

Or, are these falls engineered conspiracies only designed to allow the wealthy to put billions in cash to work, before the next Fed pump begins? Maybe. At any rate, if the "growth" story is really dead and millions more immigrants just accelerate the decline of America, than more debt to hide the mess will fail. Entitlements will have to be cut, sowing the seeds of more anger in the entitled masses.

In the end, Mr. Market will tame and humble even the arrogant Fed bankers and the multitudes who worship them.

I Write Code

CHS swings, and misses.

QE as social policy was never more than an academic's vaporous apparition, like the succubus scene in Ghostbusters.

Here's my take on the "China Story", which is they've now stolen all the manufacturing they can and now, for the first time in twenty years, can no longer grow by mere theft (of course I mean "theft" in a good way, they work smart and hard to "steal" manufacturing from the US and Europe, it's the vulture capitalists at *our* end who are the criminals).

And, maybe their vaunted central planners didn't see this coming and they smashed through the wall and over the cliff. Oops.

But y'know, it's not a disaster for all that, just an overshoot that requires a correction. It's not like China is about to dry up and blow away.

TeethVillage88s

Charles Hugh Smith has done twice as well as I could have done here.

I like what he explained about China for instance. I'm still reading through it, think this would be great to forward to the DNC, RNC, and Congressmen.

The Federal Reserve Created our Banking System.

I think it is fair to place the blame on the FED and to end the FED on this basis... while stressing the S&L Crisis, the Deregulation, and the 2008 Global Financial Collapse which surely might have triggered a war with Europe. And the fact that the US TBTF Banks are much bigger than European Banks since the crisis even though the are responsible for poor stewardship of the World Reserve Currency and for Toxic Paper spread to pension funds world wide.

Of course the solutions will be more controversial than this article that lays out part of the problem or symptoms.

Solutions are like the Third Rail.

tall sarah

The multiple rounds of QE and ZIRP put the markets and the economy on a course for failure. There were four trends in place before the Great Depresion and FED POLICIES cemented those trends in place for this time period.

1. the rich got richer- thanks to QE/ZIRP

2. investing turned to speculation- on steroids thanks to QE/ZIRP

3. soaring market credit- thanks to QE and ZIRP

4. lagging business investment- stock buybacks are at all time highs since tracking began in 1990. Stock buy backs are not a business investmet. They are a disinvestment. A stock buy back is a loud and clear signal that there is no reason to invest in the business because economic conditions are not present that would allow the business to recoup those monies.

The FED is the ultimate cause of all our woes as everyone at this site knows. Spread the word to those who do not. Preaching to the choir will not bring the end to the FED.

Berspankme

Don't forget to mention that US and EU enables China's corruption to continue by providing a safe place for money laundering. Asset prices in US are dramatically effected by China and other EM's corrupt practices


[Aug 29, 2015] Fly Me To the Moon

Qualis dominus talis est servus.
As is the master, so is the servant.

Titus Petronius

Stocks came in weakly, but managed to rally in the last hour to closely largely unchanged.

The GDP revision for 2Q yesterday was a bit much.

The conversation on financial tv today was replete with interviews from that moveable feast of finance, from the rarified world at Jackson Hole, where the black swans of monetary policy return every so often to molt old forecasts and acquire new ones that are certain to work better than the last seven years of the same old thing.

Mostly it is just the usual nonsense. Alan Blinder had some interesting and surprisingly realistic things to say. Most of the others were just mouth breathing the talking points about our exceptional and improving economy which will allow the Fed to raise interest rates.

The research paper from the Fed asserting that the US is relatively immune (ok they said insulated) from global currency and economic shocks because of the position of the dollar as the settling currency of choice for international invoices was-- interesting. Why is it that so many economic, and especially monetary, theories feel so comfortable inhabiting an alternate universe where trees are blue and pigs can fly?

And as a particularly astute reader observed, if this is actually true, is there any wonder why the rest of the world would resent the dollar hegemony if it grants that sort of power to the single nation that controls it? That they are able to wreak havoc on the rest of the world, exporting malinvestment and willfully fraudulent financial instruments, without having to endure any consequences?

Well it doesn't work so nicely as that, but yes they do resent it for other reasons, and they have been doing more than resenting it for some time now. And that is the basis for the 'currency war' that these jokers still do not understand. They think it is only 'currency devaluations' which, along with tariffs, was the tactic of choice in the last currency war in the 1930's.

But the one that left me gaping was the tendentious conversation this afternoon on Bloomberg about how fragile China and its markets are. And as evidence they cited the 'obvious interventions' in their stock market this week, wherein the Chinese markets slump, but then miraculously recover in the last hours of trading. They are obviously doing this so the leadership will not be embarrassed for their 70th commemoration of the end of WWII next week. Which by the way, the US is gracelessly boycotting.

Knock, knock, hello? Is self-awareness or unintentional irony at home?

Is there any doubt that we have been seeing the exact types of intervention by a powerful unseen hand in our own stock markets this week, on steroids, after the Monday flash crash? Does that mean that our economy is fragile and doomed as well?

Do these people actually believe what they are saying, or is this just some clumsy attempt to try to reassure our public that if their public gets into trouble there is no need to panic because, wait for it, we are so much better, more wisely and so much more virtuously blessed to be led by those archangels of benevolent wisdom in Washington and New York.

One can only wonder.

Have a pleasant weekend.

[Aug 29, 2015] Maintaining Confidence - Keep On Dancing

Aug 29, 2015 | Jesse's Café Américain

The action was a bit heavy in the metals today, as the Powers-That-Be quietly attempted to restore confidence and a sense of well-being and recovery after the somewhat disconcerting equity market plunge of Monday.

There was intraday commentary here about some interesting Goldman Sachs activity in an otherwise exceptionally sleepy week at The Bucket Shop.

People often ask me for a possible motive as to why central banks might care about gold and silver. Willem Middelkoop does a decent job of briefly explaining why in the first pictorial below. It is all a part of the confidence game, when a series of bad decisions place a strain on one's full faith and credit.

The goal of the financial class is to keep the music going, and the public out there on the floor dancing so they don't have time to think.

Still out there bottom watching.

Have a pleasant weekend.

[Aug 29, 2015] Leveraged Financial Speculation to GDP in the US at a Familiar Peak, Once Again

Aug 29, 2015 | jessescrossroadscafe.blogspot.com
"I believe myriad global "carry trades" – speculative leveraging of securities – are the unappreciated prevailing source of finance behind interlinked global securities market Bubbles. They amount to this cycle's government-directed finance unleashed to jump-start a global reflationary cycle.

I'm convinced that perhaps Trillions worth of speculative leverage have accumulated throughout global currency and securities markets at least partially based on the perception that policymakers condone this leverage as integral (as mortgage finance was previously) in the fight against mounting global deflationary forces."

Doug Noland, Carry Trades and Trend-Following Strategies

The basic diagnosis is correct. But the nature of the disease, and the appropriate remedies, may not be so easily apprehended, except through simple common sense. And that is a rare commodity these days.

Like a dog returns to its vomit, the Fed's speculative bubble policy enables the one percent to once again feast on the carcass of the real economy.

'And no one could have ever seen it coming.'

Once is an accident.

Twice is no coincidence.

Remind yourself what has changed since then. Banks have gotten bigger. Schemes and fraud continue.

What will the third time be like? And the fourth?

Do you think that Jamie bet Lloyd a dollar that they couldn't do it again?

Should we ask them to please behave, levy some token fines, watch the politicans yell and posture in some toothless public hearings, let all of them keep their jobs and their bonuses? And then bail them out, wind up the old Victrola, and have another go at the same old thing again?

Maybe we can vote for one of their hired servants, or skip the middlemen and vote for one of the arrogant hustlers themselves, and hope they get tired of taking us for a ride before we all go broke.

This policy we have now is the trickle down stimulus that the wealthy financiers have been sucking on with every opportunity that they have made for themselves since the days of Andrew Jackson. Whenever the ability to create and distribute money has been handed over by a craven Congress to private corporations and banking cartels without sufficient oversight and regulation, excessive speculation, financial recklessness, and moral hazard have acted like a plague of misery and stagnation on the real economy.

"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank.

You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin!

You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."

From the original minutes of the Philadelphia bankers sent to meet with President Jackson February 1834, from Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels

I believe all of the above is entirely possible. Because we still have an unashamed cadre of quack economists and their ideologically blind followers blaming the victims, prescribing harsh punishments for the weak, laying all the blame on 'government' and not corrupt officials on the payrolls of Big Money, and giving the gods of the market and their masters of the universe a big kiss on the head, and expecting them to just do the right thing the next time out of the natural goodness of their unrestrained natures the next time. What could go wrong with that?

Genuine reform. It's too much work, and too much trouble.


Related: Comprehensive Tally of Banker Fraud

h/t Jesse Felder for the chart

[Aug 29, 2015] U.S. Inflation Developments

This establishment stooge can't care less about employment. All he cares is 0.1%.
.
"..."and the labor market is approaching our maximum employment objective..." I stopped reading there."
.
"...The wealthy special interests really want a rate hike. There must be a large amount of profit riding on a rate hike."
.
"..."The Fed is being clear. They are not going to be responsible for full employment. Full employment is up to Congress, fiscal policy and the administration. Of course, the GOP Congress will block fiscal stimulus." We are ruled by idiots. "
.
"...Idiots [pandering to those who will get a larger piece of the pie, and] who don't care that the "pie" shrinks. When the fed goes insane on rates the shorters (wall st gamblers/hedgers) and the cash hoarders will celebrate. It is not idiocy it is [class treachery] selling out the masses for the rentier class. A skirmish in the class wars, maybe Bernie would comment."
.
"...Industrial Deflation is what causes inflation to look "low". This was a problem in the 00's when consumer price inflation was being covered up by deflation in industrial prices. The way prices are computed and trimmed don't always reflect reality. The deflation caused by the tech revolution for industrial production needs to be outright stripped out of indices.

The mythical "full employment" or a overheated economy doesn't imply inflation is coming either. This is where I reject most of the analysis on this board. Inflation didn't see it in 97 or especially in 05. It failed. All you have left is to guess. "
.
"...What Fisher and the other governors can't and won't say is that they are very worried about another major global downturn, and they are worried about the fact that if interest rates are not higher when that recession hits, they will have no room to lower them sharply when they need to."

[A speech by Stanley Fischer at Jackson Hole turned into a pretend interview]

Hello, and thank you for talking with us.

Let me start by asking if you feel like it gives the Fed a bad image to have a conference in an elite place like Jackson Hole. Why not have the conference in, say, a disadvantaged area to send the signal that you care about these problems, to provide some stimulus to the area, etc.?

I am delighted to be here in Jackson Hole in the company of such distinguished panelists and such a distinguished group of participants.

Okay then. Let me start be asking about your view of the economy. How close are we to a full recovery?:

Although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent. That has been especially true recently, as the drop in oil prices over the past year, on the order of about 60 percent, has led directly to lower inflation as it feeds through to lower prices of gasoline and other energy items. As a result, 12-month changes in the overall personal consumption expenditure (PCE) price index have recently been only a little above zero (chart 1).

Why are you telling us about headline inflation? What about core inflation? Isn't that what the Fed watches?

...measures of core inflation, which are intended to help us look through such transitory price movements, have also been relatively low (return to chart 1). The PCE index excluding food and energy is up 1.2 percent over the past year. The Dallas Fed's trimmed mean measure of the PCE price index is higher, at 1.6 percent, but still somewhat below our 2 percent objective. Moreover, these measures of core inflation have been persistently below 2 percent throughout the economic recovery. That said, as with total inflation, core inflation can be somewhat variable, especially at frequencies higher than 12-month changes. Moreover, note that core inflation does not entirely "exclude" food and energy, because changes in energy prices affect firms' costs and so can pass into prices of non-energy items.

So are you saying you don't believe the numbers? Why bring up that core inflation is highly variable unless you are trying to de-emphasize this evidence? In any case, isn't there reason to believe these numbers are true, i.e. doesn't the slack in the labor market imply low inflation?

Of course, ongoing economic slack is one reason core inflation has been low. Although the economy has made great progress, we started seven years ago from an unemployment rate of 10 percent, which guaranteed a lengthy period of high unemployment. Even so, with inflation expectations apparently stable, we would have expected the gradual reduction of slack to be associated with less downward price pressure. All else equal, we might therefore have expected both headline and core inflation to be moving up more noticeably toward our 2 percent objective. Yet, we have seen no clear evidence of core inflation moving higher over the past few years. This fact helps drive home an important point: While much evidence points to at least some ongoing role for slack in helping to explain movements in inflation, this influence is typically estimated to be modest in magnitude, and can easily be masked by other factors.

If that's true, if the decline in the slack in the labor market does not translate into a notable change in inflation, why is the Fed so anxious to raise rates based upon the notion that the labor market has almost normalized? Is there more to it than just the labor market?

...core inflation can to some extent be influenced by oil prices. However, a larger effect comes from changes in the exchange value of the dollar, and the rise in the dollar over the past year is an important reason inflation has remained low (chart 4). A higher value of the dollar passes through to lower import prices, which hold down U.S. inflation both because imports make up part of final consumption, and because lower prices for imported components hold down business costs more generally. In addition, a rise in the dollar restrains the growth of aggregate demand and overall economic activity, and so has some effect on inflation through that more indirect channel.

That argues against a rate increase, not for it. Anyway, I interrupted, please continue.

Commodity prices other than oil are also of relevance for inflation in the United States. Prices of metals and other industrial commodities, and agricultural products, are affected to a considerable extent by developments outside the United States, and the softness we've seen in these commodity prices, has in part reflected a slowing of demand from China and elsewhere. These prices likely have also been a factor in holding down inflation in the United States.

So you must believe that all of these forces holding down inflation (many of which are stripped out by core inflation measures, which are also low) that these factors are easing, and hence a spike in inflation is ahead?

The dynamics with which all these factors affect inflation depend crucially on the behavior of inflation expectations. One striking feature of the economic environment is that longer-term inflation expectations in the United States appear to have remained generally stable since the late 1990s (chart 6). ... Expectations that are not stable, but instead follow actual inflation up or down, would allow inflation to drift persistently. In the recent period, movements in inflation have tended to be transitory.

Let's see, lots of factors holding down inflation, longer-term inflation expectations have been stable throughout the recession and recovery, remarkably so, yet the Fed still thinks a rate raise ought to come fairly soon?

We should however be cautious in our assessment that inflation expectations are remaining stable. One reason is that measures of inflation compensation in the market for Treasury securities have moved down somewhat since last summer (chart 7). But these movements can be hard to interpret, as at times they may reflect factors other than inflation expectations, such as changes in demand for the unparalleled liquidity of nominal Treasury securities.

I have to be honest. That sounds like the Fed is really reaching to find a reason to justify worries about inflation and a rate increase. Let me ask this a different way. In the Press Release for the July meeting of the FOMC, the committee said it can be " reasonably confident that inflation will move back to its 2 percent objective over the medium term." Can you explain this please? Why are you "reasonably confident" in light of recent history?

Can the Committee be "reasonably confident that inflation will move back to its 2 percent objective over the medium term"? As I have discussed, given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade. The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level. And slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well.

Yet when these forces were absent -- they weren't there throughout the crisis -- inflation was still stable. But this time will be different? I guess falling slack in the labor market will make all the difference? More on labor markets in a moment, but let me ask if you have more to say about inflation expectations first.

...with regard to expectations of inflation, it is possible to consult the results of the SEP, the Survey of Economic Projections, which FOMC participants complete shortly before the March, June, September, and December meetings. In the June SEP, the central tendency of FOMC participants' projections for core PCE inflation was 1.3 percent to 1.4 percent this year, 1.6 percent to 1.9 percent next year, and 1.9 percent to 2.0 percent in 2017. There will be a new SEP for the forthcoming September meeting of the FOMC.
Reflecting all these factors, the Committee has indicated in its post-meeting statements that it expects inflation to return to 2 percent. With regard to our degree of confidence in this expectation, we will need to consider all the available information and assess its implications for the economic outlook before coming to a judgment.

You will need to consider all the available information, I agree wholeheartedly with that. I just hope that information includes how poor forecasts like those just cited have been in the past, and the Fed's own eagerness to see "green shoots" again and again, far before it was time for such declarations.

What might deter the Fed from it's intention to raise rates sooner rather than later?

Of course, the FOMC's monetary policy decision is not a mechanical one, based purely on the set of numbers reported in the payroll survey and in our judgment on the degree of confidence members of the committee have about future inflation. We are interested also in aspects of the labor market beyond the simple U-3 measure of unemployment, including for example the rates of unemployment of older workers and of those working part-time for economic reasons; we are interested also in the participation rate. And in the case of the inflation rate we look beyond the rate of increase of PCE prices and define the concept of the core rate of inflation.

I find these kinds of statement difficult to square with the statement that labor markets are almost back to normal. Anyway, what, in particular, will you look at?

While thinking of different aspects of unemployment, we are concerned mainly with trying to find the right measure of the difficulties caused to current and potential participants in the labor force by their unemployment. In the case of the core rate of inflation, we are mainly looking for a good indicator of future inflation, and for better indicators than we have at present.

How do recent events in China change the outlook for policy?

In making our monetary policy decisions, we are interested more in where the U.S. economy is heading than in knowing whence it has come. That is why we need to consider the overall state of the U.S. economy as well as the influence of foreign economies on the U.S. economy as we reach our judgment on whether and how to change monetary policy. That is why we follow economic developments in the rest of the world as well as the United States in reaching our interest rate decisions. At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.

I know you won't answer this directly, but let me try anyway. When will rates go up?

The Fed has, appropriately, responded to the weak economy and low inflation in recent years by taking a highly accommodative policy stance. By committing to foster the movement of inflation toward our 2 percent objective, we are enhancing the credibility of monetary policy and supporting the continued stability of inflation expectations. To do what monetary policy can do towards meeting our goals of maximum employment and price stability, and to ensure that these goals will continue to be met as we move ahead, we will most likely need to proceed cautiously in normalizing the stance of monetary policy. For the purpose of meeting our goals, the entire path of interest rates matters more than the particular timing of the first increase.

As expected, that was pretty boilerplate. When rates do go up, how fast will they rise?

With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening. Should we judge at some point in time that the economy is threatening to overheat, we will have to move appropriately rapidly to deal with that threat. The same is true should the economy unexpectedly weaken.

The Fed has said again and again that it's 2 percent inflation target is symmetric with respect to errors, i.e. it will get no more worried or upset about, say, a .5 percent overshoot of the target than it will an undershoot of the same magnitude (2.5 percent versus 1.5 percent). However, many of us suspect that the 2 percent target is actually a ceiling, not a central tendency, or that at the very least the errors are not treated symmetrically, and statements such as this do nothing to change that view.

I have quite a few more questions, and I wish we had time to hear your response to the charge that the 2 percent target is functionally a ceiling, but I know you are out of time and need to go, so let me just thank you for talking with us today. Thank you.

bakho said...

The wealthy special interests really want a rate hike. There must be a large amount of profit riding on a rate hike.

The Fed is being clear. They are not going to be responsible for full employment. Full employment is up to Congress, fiscal policy and the administration. Of course, the GOP Congress will block fiscal stimulus. Wealthy special interests would like the economy to be less good by this time next year to tilt the presidential election their way.

ilsm -> pgl...

The fed (Cossacks) works for the .1% (Tsar).

Sandwichman

"and the labor market is approaching our maximum employment objective..."

I stopped reading there.

Peter K. -> Sandwichman...

Yeah. Nice appointment, thanks Obama....

ilsm -> Sandwichman...

Mc Donald's may have to start paying $7.75!!

pgl -> ilsm...

Actually some are paying $9. Oh my - a Big Mac might actually cost something.

ilsm -> pgl...

The big mac is helping out your embalmer.

Joke is most of us cannot afford anything more than a cremator.

Cardiologists follow Mickey D sales!

anne -> Sandwichman...

"and the labor market is approaching our maximum employment objective..." I stopped reading there.

[ Really, really awful comment but limiting employment is what Stanley Fischer is all about so the only surprise is in the saying so. ]

pgl -> Sandwichman...

But later he admitted there was ongoing economic slack. He sounded very confused.

Peter K. -> pgl...

On the one hand he's trying to inspire confidence in the economy, cheerlead, and clap his hands to conjure the confidence fairy.

On the other he's being more realistic which hopefully is their frame of mind when making interest rate decisions.

One is public relations, one is where the rubber hits the road.

RC AKA Darryl, Ron -> Peter K....

A rubber chicken in every pot :<0

Peter K. said...

"Although the economy has made great progress, we started seven years ago from an unemployment rate of 10 percent, which guaranteed a lengthy period of high unemployment."

It didn't guarantee it. An insufficient monetary-fiscal mix guaranteed a lengthy period of high unemployment, wage stagnation and increasing inequality.

But at least inflation remained low and the deficit came down!

ilsm -> Peter K....

If UE rate counted people out longer than 26 weeks......

anne said...

http://stats.oecd.org/Index.aspx?DatasetCode=LFS_SEXAGE_I_R

January 4, 2015

Employment-Population Ratios, 2014

United States ( 76.7) *

Australia ( 78.8)
Austria ( 83.4)
Belgium ( 79.1)
Canada ( 81.2)

Denmark ( 82.0)
Finland ( 80.4)
France ( 80.5)
Germany ( 83.5)

Greece ( 62.4)
Iceland ( 85.7)
Ireland ( 72.3)
Israel ( 78.2)

Italy ( 67.9)
Japan ( 82.1)
Korea ( 75.7)
Luxembourg ( 83.7)

Netherlands ( 81.7)
New Zealand ( 81.8)
Norway ( 83.9)
Portugal ( 77.4)

Spain ( 67.4)
Sweden ( 85.4)
Switzerland ( 86.9)
United Kingdom ( 82.0)

* Employment age 25-54

anne said...

http://stats.oecd.org/Index.aspx?DatasetCode=LFS_SEXAGE_I_R

January 4, 2015

Employment-Population Ratios for Women, 2014

United States ( 70.0) *

Australia ( 72.0)
Austria ( 80.3)
Belgium ( 74.9)
Canada ( 77.4)

Denmark ( 78.4)
Finland ( 78.0)
France ( 76.2)
Germany ( 78.8)

Greece ( 53.1)
Iceland ( 82.1)
Ireland ( 66.6)
Israel ( 74.3)

Italy ( 57.6)
Japan ( 71.8)
Korea ( 62.7)
Luxembourg ( 76.8)

Netherlands ( 76.5)
New Zealand ( 74.9)
Norway ( 81.4)
Portugal ( 74.3)

Spain ( 62.3)
Sweden ( 82.8)
Switzerland ( 81.8)
United Kingdom ( 76.1)

* Employment age 25-54

anne -> anne...

As in the child's game, one of these things is not like the other, the United States employment-population ratio for men and women, and for women, from 25 to 54 was remarkably lower than 19 of 24 developed countries in 2014. The exceptions were the austerity beset countries Ireland, Spain, Italy and Greece as well as Korea in which women are just entering the workforce in significant numbers.


pgl -> bakho...

"The Fed is being clear. They are not going to be responsible for full employment. Full employment is up to Congress, fiscal policy and the administration. Of course, the GOP Congress will block fiscal stimulus."

We are ruled by idiots.

ilsm -> pgl...

Idiots [pandering to those who will get a larger piece of the pie, and] who don't care that the "pie" shrinks. When the fed goes insane on rates the shorters (wall st gamblers/hedgers) and the cash hoarders will celebrate. It is not idiocy it is [class treachery] selling out the masses for the rentier class.

A skirmish in the class wars, maybe Bernie would comment.

Mike Sparrow said...

Industrial Deflation is what causes inflation to look "low". This was a problem in the 00's when consumer price inflation was being covered up by deflation in industrial prices. The way prices are computed and trimmed don't always reflect reality. The deflation caused by the tech revolution for industrial production needs to be outright stripped out of indices.

The mythical "full employment" or a overheated economy doesn't imply inflation is coming either. This is where I reject most of the analysis on this board. Inflation didn't see it in 97 or especially in 05. It failed. All you have left is to guess.

Peter K. said...

Scroll, scroll, scroll:

Thoma:

"I just hope that information includes how poor forecasts like those just cited have been in the past, and the Fed's own eagerness to see "green shoots" again and again, far before it was time for such declarations."

Well put. This is probably why markets don't fear an uptick in inflation anytime soon. Quite the contrary. It's probably partly why longterm inflation expectations are "stable."

anne said...

http://www.project-syndicate.org/commentary/fed-monetary-policy-tightening-risks-by-j--bradford-delong-2015-08

August 28, 2015

A Cautionary History of US Monetary Tightening
By J. Bradford DeLong

BERKELEY – The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed's staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history – and of the current state of the economy – suggests that the United States is about to enter dangerous territory.

Between 1979 and 1982, then-Fed Chair Paul Volcker changed the authorities' approach to monetary policy. His expectation was that by controlling the amount of money in circulation, the Fed could bring about larger reductions in inflation with smaller increases in idle capacity and unemployment than what traditional Keynesian models predicted.

Unfortunately for the Fed – and for the American economy – the Keynesian models turned out to be accurate; their forecasts of the costs of disinflation were dead on. Furthermore, this period of monetary tightening had unexpected consequences; financial institutions like Citicorp found that only regulatory forbearance saved them from having to declare bankruptcy, and much of Latin America was plunged into a depression that lasted more than five years.

Then, between 1988 and 1990, another round of monetary tightening under Alan Greenspan ravaged the balance sheets of the country's savings and loan associations, which were overleveraged, undercapitalized, and already struggling to survive. To prevent the subsequent recession from worsening, the federal government was forced to bail out insolvent institutions. State governments were on the hook, too: Texas spent the equivalent of three months of total state income to rescue its S&Ls and their depositors.

Between 1993 and 1994, Greenspan once again reined in monetary policy, only to be surprised by the impact that small amounts of tightening could have on the prices of long-term assets and companies' borrowing costs. Fortunately, he was willing to reverse his decision and cut the tightening cycle short (over the protests of many on the policy-setting Federal Open Markets Committee) – a move that prevented the US economy from slipping back into recession.

The most recent episode – between 2004 and 2007 – was the most devastating of the four. Neither Greenspan nor his successor, Ben Bernanke, understood how fragile the housing market and the financial system had become after a long period of under-regulation. These twin mistakes – deregulation, followed by misguided monetary-policy tightening – continue to gnaw at the US economy today.

The tightening cycle upon which the Fed now seems set to embark comes at a delicate time for the economy. The US unemployment rate may seem to hint at the risk of rising inflation, but the employment-to-population ratio continues to signal an economy in deep distress. Indeed, wage patterns suggest that this ratio, not the unemployment rate, is the better indicator of slack in the economy – and nobody ten years ago would have interpreted today's employment-to-population ratio as a justification for monetary tightening.

Indeed, not even the Fed seems convinced that the economy faces imminent danger of overheating. Inflation in the US is not just lower than the Fed's long-term target; it is expected to stay that way for at least the next three years. And the Fed's change in policy comes at a time when its own economists believe that US fiscal policy is inappropriately restrictive.

Meanwhile, given the fragility – and interconnectedness – of the global economy, tightening monetary policy in the US could have negative impacts abroad (with consequent blowback at home), especially given the instability in China and economic malaise in Europe....

Dan Kervick said...

"At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual."

I think this is probably the most important sentence in the entire speech.

What Fisher and the other governors can't and won't say is that they are very worried about another major global downturn, and they are worried about the fact that if interest rates are not higher when that recession hits, they will have no room to lower them sharply when they need to.

Richard H. Serlin said...

But what about asymmetric loss Dr. Fischer?!

You have to know what that is.

Why don't you think the loss and overall risk is much bigger from pulling the trigger too early than from pulling the trigger too late?

How is inflation that gets up to 3%, 4%, even higher single digits more of a danger than a lost decade, severe unemployment (low labor force participation) and underemployment? Especially when overly high inflation is far easier to remedy?

I really really wonder what you're really thinking.

Richard H. Serlin -> Richard H. Serlin...

And I also seriously wonder how much of it has to do with the fact that no one ever making these decisions ever has any risk of ever being unemployed without means and with a family to support.

[Aug 29, 2015] The Fed Looks Set to Make a Dangerous Mistake

economistsview.typepad.com

Larry Summers says "Raising rates this year will threaten all of the central bank's major objectives":

The Fed looks set to make a dangerous mistake: Will the Federal Reserve's September meeting see US interest rates go up for the first time since 2006? Officials have held out the prospect that ... rates will probably be increased... Conditions could change... But ... raising rates ... would be a serious error that would threaten all three of the Fed's major objectives— price stability, full employment and financial stability.
Like most major central banks, the Fed has ... a 2 per cent inflation target. The biggest risk is that inflation will be lower than this — a risk that would be exacerbated by tightening policy... Tightening policy will adversely affect employment levels... Higher interest rates will also increase the value of the dollar, making US producers less competitive... This is especially troubling at a time of rising inequality. Studies ... make it clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.
There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks... That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job. ...
It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. ... This is the "secular stagnation" diagnosis...
New conditions require new policies. There is much that should be done, such as steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

[Aug 29, 2015] Shiller: Rising Anxiety That Stocks Are Overpriced

"...You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal government, and will figure out that with a more assertive and economically engaged central government dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely avoidable mistake."
Robert Shiller (a reason to agree with Tim Duy):
Rising Anxiety That Stocks Are Overpriced: Over the five trading days between Aug. 17 and Aug. 24, the U.S. stock market dropped 10 percent — the official definition of a "correction," with similar or greater drops in other countries. ...

But there are reasons to question whether this was a quick, effective slap on the wrist, or if the market is still too overactive, and thus asking for a more extended punishment. ...

It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.

Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

Mark Thoma on Thursday, August 27, 2015 at 10:08 AM in Economics, Financial System | Permalink Comments (65)

Dan Kervick -> Peter K....

The post-2008 recovery has been the worst on record in terms of the recovery of both growth rates and jobs. As has been well-discussed and well-recognized by almost everyone here, the employment-to-population rate was dramatically lowered as a result of the recession, and has grown at a snails pace since then, and come nowhere near to recovering its previous level. There is no clear evidence that extraordinary monetary policy measures have had any significant impact on recovery whatsoever relative to the baseline recovery trend that could be expected anyway in the absence of such policies.

I admit it is an extremely hard question to answer, since the economy has had to deal with an MIA federal government this time.

anon said...

The Fed wants to raise interest rates:

- in the hope of preserving there institutional economic significance,

- out of a sense of loyalty to the Fed's history of financial influence using interest rates,

- because using rates to influence economic events increases their professional comfort,

- and because their economic grad school training was to fear wage push inflation above all else (they seem to believe that if inflation exceeds 2% it is a harbinger of hyper inflation).

Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding. The precision of models is ersatz, more or less inversely proportional to its real world relevance. The delusion of being a scientist is critical to their professional self-respect.

Dan Kervick -> pgl...

This is an area in which you seem to be persistently incapable of avoiding lies. You know very well that are a large number of ambitious long-term projects the US could do that are non-military, have nothing to do with immigration and could boost output tremendously.

You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."

That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.

That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet partisan servings to keep Democrats' attention riveted on the foibles of the Republicans.

That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green Lanternism".

You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal government, and will figure out that with a more assertive and economically engaged central government dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely avoidable mistake.

40% of this country has household income of under $40,000 per year. If we remove the plutocratic capitalist stranglehold on this economy, use government to more efficiently distribute and invest our national wealth, and demote private enterprise to its proper subordinate place, we could double that rapidly and drive a wave of high-growth social transformation with all of the liberated economic energy.

This is going to happen. Take your pick: we're either going to get the somewhat fascistic and racist Trump version on strong government or democratic socialist version. The Ivy League twits hanging on for dear life to their established networks, revolving doors, tit-for-tatting, sinecures and don't-rock-the-boat regime of stagnant managerialism are going to butts handed to them by history.

pgl -> Dan Kervick...

Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are already doing at Census.

Dan Kervick -> pgl...

The Census doesn't and can't combine income distribution numbers with growth numbers on a monthly and quarterly basis. The BEA could collect this data, but doesn't, because it is part of their mission to pretend class conflict doesn't exist.

The top quintile in the US pulls down about 50% percent of the income. That means we could get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by less than 1/2 a percent.

Is that what's happening? Inquiring minds want to know. It seems like a natural mission for the BEA to track this. But they don't.

[Aug 29, 2015] Great Recession Job Losses Severe, Enduring

Nothing particularly surprising here -- the Great recession was unusually severe and unusually long, and hence had unusual impacts, but it's good to have numbers characterizing what happened:

Great Recession Job Losses Severe, Enduring: Of those who lost full-time jobs between 2007 and 2009, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs.
The economic downturn that began in December 2007 was associated with a rapid rise in unemployment and with an especially pronounced increase in the number of long-term unemployed. In "Job Loss in the Great Recession and its Aftermath: U.S. Evidence from the Displaced Workers Survey" (NBER Working Paper No. 21216), Henry S. Farber uses data from the Displaced Workers Survey (DWS) from 1984-2014 to study labor market dynamics. From these data he calculates both the short-term and medium-term effects of the Great Recession's sharply elevated rate of job losses. He concludes that these effects have been particularly severe.

Of the workers who lost full-time jobs between 2007 and 2009, Farber reports, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs. This means only about 35 to 40 percent of those in the DWS who reported losing a job in 2007-09 were employed full-time in January 2010. This was by far the worst post-displacement employment experience of the 1981-2014 period.
The adverse employment experience of job losers has also been persistent. While both overall employment rates and full-time employment rates began to improve in 2009, even those who lost jobs between 2011 and 2013 had very low re-employment rates and, by historical standards, very low full-time employment rates.
In addition, the data show substantial weekly earnings declines even for those who did find work, although these earnings losses were not especially large by historical standards. Farber suggests that the earnings decline measure from the DWS is appropriate for understanding how job loss affects the earnings that a full-time-employed former job-loser is able to command.
The author notes that the measures on which he focuses may understate the true economic cost of job loss, since they do not consider the value of time spent unemployed or the value of lost health insurance and pension benefits.
Farber concludes that the costs of job losses in the Great Recession were unusually severe and remain substantial years later. Most importantly, workers laid off in the Great Recession and its aftermath have been much less successful at finding new jobs, particularly full-time jobs, than those laid off in earlier periods. The findings suggest that job loss since the Great Recession has had severe adverse consequences for employment and earnings.

[Aug 28, 2015] A third scenario for stock markets

The key problem is that there is natural limit to offshoring, layoffs and stock buyouts, which was three game that corporate brass way playing since 2008. May be one or more of those limits was already reached or we are close to it.
Antonio Fatas on the Global Economy

Robert Shiller on the New York Times argues that the stock market is expensive by historical standards using the cyclically-adjusted price earnings ratio (CAPE) that he has made popular through his writings since the late 1990s.

There is no doubt that the CAPE ratio for the US stock market is high by historical standards. Using Shiller's estimates it stands around 26 today, clearly above the historical average of about 17. What a higher CAPE means is that you are paying more for the same earnings.

... ... ...

How much do we need those numbers to change to justify higher-than-normal CAPE ratios? A quick calculation using current bond interest rates would tell us that the stock market at a 25 CAPE ratio offers a risk premium over bonds that is similar to what the stock market offered when the CAPE ratio was 17 (around 6-7%). In that sense, the stock market is not expensive, it is prices in a way that is consistent with historical levels. If you want to make the stock market cheap you just need to argue that risk premium should be lower than that. If you want to make the stock market very expensive you need to argue that interest rates on bonds will soon go back to historical levels. In that scenario the US stock market should go down by about 30-40% relative to current levels.

Predicting which scenario will be realized is not easy, as Shiller argues. But I wished that he would have considered as well the third possible scenario where current CAPE levels are fine and investors should get used to lower-than-historical returns but returns that are consistent with what is going on in other asset classes. Maybe we put too much emphasis on the bouncing back and crashing scenarios when we talk about stock prices and we forget a much more boring but as plausible one that delivers a less volatile stock market.

Antonio Fatas is the Portuguese Council Chaired Professor of European Studies and Professor of Economics at INSEAD, a business school with campuses in Singapore and Fontainebleau (France), a Senior Policy Scholar at the Center for Business and Public Policy at the McDonough School of Business (Georgetown University, USA) and a Research Fellow at the Center for Economic Policy Research (London, UK).

[Aug 28, 2015] Q2 GDP Revised up to 3.7%

Aug 28, 2015 | Economist's View

anon

The Fed wants to raise interest rates:

- in the hope of preserving there institutional economic significance,

- out of a sense of loyalty to the Fed's history of financial influence using interest rates,

- because using rates to influence economic events increases their professional comfort,

- and because their economic grad school training was to fear wage push inflation above all else (they seem to believe that if inflation exceeds 2% it is a harbinger of hyper inflation).

Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding. The precision of models is ersatz, more or less inversely proportional to its real world relevance. The delusion of being a scientist is critical to their professional self-respect.

Dan Kervick -> lower middle class...

A 3.7% quarter with several hands tied behind our backs by a don-nothing government. Think about what we could do if we were really trying.

pgl -> Dan Kervick...

YEA! Let's build that Mexican wall. Let's wage war on China. Lord - the stupidity here is multiplying!

Dan Kervick -> pgl...

This is an area in which you seem to be persistently incapable of avoiding lies.

You know very well that are a large number of ambitious long-term projects the US could do that are non-military, have nothing to do with immigration and could boost output tremendously.

You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."

That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.

That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet partisan servings to keep Democrats' attention riveted on the foibles of the Republicans.

That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green Lanternism".

You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal government, and will figure out that with a more assertive and economically engaged central government dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely avoidable mistake.

40% of this country has household income of under $40,000 per year. If we remove the plutocratic capitalist stranglehold on this economy, use government to more efficiently distribute and invest our national wealth, and demote private enterprise to its proper subordinate place, we could double that rapidly and drive a wave of high-growth social transformation with all of the liberated economic energy.

This is going to happen. Take your pick: we're either going to get the somewhat fascistic and racist Trump version on strong government or democratic socialist version. The Ivy League twits hanging on for dear life to their established networks, revolving doors, tit-for-tatting, sinecures and don't-rock-the-boat regime of stagnant managerialism are going to butts handed to them by history.

pgl -> Dan Kervick...

Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are already doing at Census.

Dan Kervick -> pgl...

The Census doesn't and can't combine income distribution numbers with growth numbers on a monthly and quarterly basis. The BEA could collect this data, but doesn't, because it is part of their mission to pretend class conflict doesn't exist.

The top quintile in the US pulls down about 50% percent of the income. That means we could get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by less than 1/2 a percent.

Is that what's happening? Inquiring minds want to know. It seems like a natural mission for the BEA to track this. But they don't.

pgl -> Dan Kervick...

You have no clue what these people do or the task you are whining about. With all you incessant babbling and whining - your keyboard is likely ready to just rot away.

Me? I'm headed down to the Starbucks to whine that they don't make tacos. Duh.

Dan Kervick -> pgl...

I know what they do, and I know what they don't do. Their mission should be expanded.

likbez -> Dan Kervick...

Dan,

I think you are mistaken about "a natural mission for the BEA to track this". Our elected officials and Wall Street executives all have a vested interest in keeping the perception of a robust economy alive. The economy growth numbers and the employment data announced are critical to this perception, but a thorough analysis of the data suggests something quite different that what we are told.

Statistics now became more and more "number racket" performed, like in the USSR, in the interest of the powers that be.

  • Think about "substitution" games in measuring consumer inflation.
  • Think about "Birth/Death adjustment" in employment data.
  • Think about tricks they play with GDP measurement.

The net result of this tricks is that the error margin of government statistics is pretty high. And nobody in economic profession is taking into account those error margins.

So in no way we can accept this 3.7% annualized growth figure. This is a fuzzy number, a distribution from probably 2.7% to 3.7%. Only upper bound is reported. And if you delve into the methodology deeper this range might be even wider. What is actually the assumption of quarterly inflation in the USA used in calculation of this number?

Which is another factor that makes neoliberal economics a pseudoscience, a branch of Lysenkoism.

JohnH -> Dan Kervick...

This is very revealing...nobody provides regular statistics on distribution. That lack of interest makes it blatantly obvious that policy makers only care about the top number--GDP--and are totally uninterested in knowing whether most Americans are prospering or not.

There is one source that updates Census data on a monthly basis. It shows that real median household income is still 3.8% below where it was in 2008 or in 2001. In fact, it's back where it was in the 1980s.

Of course, the 'recovery' has trickled down a bit, just as you would expect from trickle down monetary policy. Real median household incomes are no longer 9.6% below where they were in 2008...they're now only 3.8% below.
http://www.advisorperspectives.com/dshort/updates/Median-Household-Income-Update.php

Meanwhile, Saez and Montecino have pointed out that the 1% got 58% of the gains from the 'recovery,' while the 99% got 42%.

Of course, pgl doesn't even care enough about this to know where the data is...and, apparently, most 'liberal' economists are just as indifferent to distribution as he is.

Dan Kervick -> JohnH...

If it weren't for Piketty and Saez, we'd still be fumbling around in the dark on income and wealth distribution.

JohnH -> JohnH...

There's more here: real median household income by quintile 1967-2013
http://www.advisorperspectives.com/dshort/updates/Household-Income-Distribution.php

It shows the dramatic the separation between the top quintile and the bottom 80% during the Clinton years. Separation was even greater for the top 5%.

Yet the only thing that most economists ever notice is GDP growth...

pgl -> JohnH...

"Yet the only thing that most economists ever notice is GDP growth".

There you go again. Clueless as can be and lying your ass off.

likbez -> pgl...

And what you actually know about methodology of calculation of this GDP number. Inquiring minds want to know.

Correct calculation of nominal GDP depends on correct calculation of inflation, which is the most politicized of economic metrics and as such subject to tremendous level of manipulation.

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

=== Start of quote ====
The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

JohnH -> JohnH...

Another look at the ineffectiveness of trickle down monetary policy: all but the top decile have suffered decreases in wages and compensation since 2007.
http://www.epi.org/publication/pay-is-stagnant-for-vast-majority-even-when-you-include-benefits/

[Aug 27, 2015] Lies You Will Hear As The Economic Collapse Progresses

Aug 27, 2015 | Zero Hedge
Public statements by globalist entities like the IMF on China, for example, have argued that their current crisis is merely part of the "new normal"; a future in which stagnant growth and reduced living standards is the way things are supposed to be. I expect the Fed will use the same exact argument to support the end of zero interest rates in the U.S., claiming that the decline of American wealth and living standards is a natural part of the new economic world order we are entering.

That's right, mark my words, one day soon the Fed, the IMF, the BIS and others will attempt to convince the American people that the erosion of the economy and the loss of world reserve status is actually a "good thing". They will claim that a strong dollar is the cause of all our economic pain and that a loss in value is necessary. In the meantime they will, of course, downplay the tragedies that will result as the shift toward dollar devaluation smashes down on the heads of the populace.

A rate hike may not occur in September. In fact, as I predicted in my last article, the Fed is already hinting at a delay in order to boost markets, or at least slow down the current carnage to a more manageable level. But, they WILL raise rates in the near term, likely before the end of this year after a few high tension meetings in which the financial world will sit anxiously waiting for the word on high. Why would they raise rates? Some people just don't seem to grasp the fact that the job of the Federal Reserve is to destroy the American economic system, not protect it. Once you understand this dynamic then everything the central bank does makes perfect sense.

A rate increase will occur exactly because that is what is needed to further destabilize U.S. market psychology to make way for the "great economic reset" that the IMF and Christine Lagarde are so fond of promoting. Beyond this, many people seem to be forgetting that ZIRP is still operating, yet, volatility is trending negative anyway. Remember when everyone was ready to put on their 'Dow 20,000' hat, certain in the omnipotence of central bank stimulus and QE infinity? Yeah...clearly that was a pipe dream.

ZIRP has run it's course. It is no longer feeding the markets as it once did and the fundamentals are too obvious to deny.

The globalists at the Bank for International Settlements in spring openly deemed the existence of low interest rate policies a potential trigger for crisis. Their statements correlate with the BIS tendency to "predict" terrible market events they helped to create while at the same time misrepresenting the reasons behind them.

The point is, ZIRP has done the job it was meant to do. There is no longer any reason for the Fed to leave it in place.

Get Ready For QE4

Again, don't count on it. Or at the very least, don't expect renewed QE to have any lasting effect on the market if it is initiated.

There is truly no point to the launch of a fourth QE program, but do expect that the Fed will plant the possibility in the media every once in a while to mislead investors. First, the Fed knows that it would be an open admission that the last three QE's were an utter failure, and while their job is to dismantle the U.S. economy, I don't think they are looking to take immediate blame for the whole mess. QE4 would be as much a disaster as the ECB's last stimulus program was in Europe, not to mention the past several stimulus actions by the PBOC in China. I'll say it one more time – fiat stimulus has a shelf life, and that shelf life is over for the entire globe. The days of artificially supported markets are nearly done and they are never coming back again.

I see little advantage for the Fed to bring QE4 into the picture. If the goal is to derail the dollar, that action is already well underway as the IMF carefully sets the stage for the Yuan to enter the SDR global currency basket next year, threatening the dollar's world reserve status. China also continues to dump hundreds of billions in U.S. treasuries inevitably leading to a rush to a dump of treasuries by other nations. The dollar is a dead currency walking, and the Fed won't even have to print Weimar Germany-style in order to kill it.

It's Not As Bad As It Seems

Yes, it is exactly as bad as it seems if not worse. When the Dow can open 1000 points down on a Monday and China can lose all of its gains for 2015 in the span of a few weeks despite institutionalized stimulus measures lasting years, then something is very wrong. This is not a "hiccup". This is not a correction which has already hit bottom. This is only the beginning of the end.

Stocks are not a predictive indicator. They do not follow positive or negative fundamentals. Stocks do not crash before or during the development of an ailing economy. Stocks crash after the economy has already gone comatose. Stocks crash when the system is no longer salvageable. Since 2008, nothing in the global financial structure has been salvaged and now the central banking edifice is either unable or unwilling (I believe both) to supply the tools to allow us even to pretend that it can be salvaged. We're going to feel the hurt now, all while the establishment tells us the whole thing is in our heads.

[Aug 27, 2015] Shiller: Rising Anxiety That Stocks Are Overpriced

"...So people sold what may have been just under $2 T in positions. "
"...But if E were unsustainably high due to an output gap leaving businesses to operate under-capacity for their capital stock while simultaneously cutting wage expenses via layoffs and increased use of part time workers to boost E (earnings) then what would that say about P (share price)? Shiller puts a lot of faith in Cyclically Adjusted Price Earnings ratio (CAPE). My guess is there is a reason for that."
"...[ Interesting, when wealth is significantly invested in nonproductive assets, what then? ] Nonproductive, like corporate stock buybacks. When buybacks exceed investment in R&D, plant & equipment, systems, etc. for a decade or more, then growth in the subsequent decade is likely to be merde, n'est-ce pas? Uncreative destruction. Schumpeter *rolls over in grave*"
Robert Shiller (a reason to agree with Tim Duy):
Rising Anxiety That Stocks Are Overpriced: Over the five trading days between Aug. 17 and Aug. 24, the U.S. stock market dropped 10 percent — the official definition of a "correction," with similar or greater drops in other countries. ...
But there are reasons to question whether this was a quick, effective slap on the wrist, or if the market is still too overactive, and thus asking for a more extended punishment. ...
It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.
Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

JF said...

So people sold what may have been just under $2 T in positions.

Well, we do hope they invest in a real business with some of this, and maybe people will just enjoy themselves a bit and spend where there are lots of multiples that follow.

But otherwise, where do they put their money to get a return? The basic "psychology" is that worldwide it is still better to put your money into an equity compared to a bond, and into the US for safety and for returns, compared to most other choices.

More might go directly into real-economy businesses if we can get the economy moving and less into the stock market, but then again if the economy moves out smartly then the stock market will also benefit from improvements in the fundamentals and profits of real businesses too.

sanjait said in reply to JF...

What you describe is the main story.'

Stocks are highly valued, relative to historic P/Es, because the opportunity cost of capital is low. Earnings yields on stocks have gone down, driving up their prices, because the alternatives aren't great either.

This is what Shiller's CAPE ratio misses. It's designed to capture cyclical changes in earnings to make P/E a more reliable metric, but it leaves out cost of capital. So when we have this unusual situation with massive decline in interest rates, that projects to persist for a number of years, of course multiples expand...

Anonymous said in reply to sanjait...

What you are describing is true. Low interest rates means higher multiples can persist. However, we saw that scenario in Japan in the 90s for years. The low interest rates made Japanese stocks look like good value (even though PE was high). That did not prevent big big 30% drawdowns multiple times. I am not sure that low interest rates are a guarantee that high PEs are ok. Just putting in an observation to add to the discussion.

mulp said in reply to JF...

Investors sold shares of private companies and bought Federal government debt signalling the market wants more government spending.

Yet the claimed free market loving Republicans keep bucking the free market that is begging for much more government spending.

And there is so much needed capital assets to be built by government because We the People will not build the capital assets we want to see as individuals, nor do We the People want private corporations to build the capital assets We the People call for. The free market clear is calling for the Republican controlled legislatures to borrow and invest in big government capital asset building:

  • Big investments in transportation infrastructure
  • Big investments in water management infrastructure
  • Big investments in power and communications infrastructure

Corporations are demanding lots of investment in human capital because they claim they can't find qualified machinists, welders, engineers, technicians, plumbers, carpenters, architects, and on and on, to hire, saying that without Americans being invested in, they need to import skilled workers or move the jobs out of the US

Every bit of the above we know how to do at twice or three times the rates currently being done based on the rate of investment from about 1920 to 1970. The number of miles of paved highway in the 20s was massive. The electric grid built was massive. Post WWII the investment in human capital accelerated from the rate in the 30s and 40s when the minimum standard education for every citizen shifted from grade 8 to grade 12.

Dan Kervick said...

FWIW, anybody who has iTunes U can listen to a whole semester-long Shiller Yale class on financial markets. Highly recommended.

pgl said...

I can't seem to post the WSJ to the 8/26/2015 P/E ratios but they are near 17. Not that high in light of current interest rates.

RC AKA Darryl, Ron said in reply to pgl...

But if E were unsustainably high due to an output gap leaving businesses to operate under-capacity for their capital stock while simultaneously cutting wage expenses via layoffs and increased use of part time workers to boost E (earnings) then what would that say about P (share price)? Shiller puts a lot of faith in Cyclically Adjusted Price Earnings ratio (CAPE). My guess is there is a reason for that.

pgl said in reply to RC AKA Darryl, Ron...

Granted we should address cyclical issues as the issue is not historical earnings but rather expected future earnings. But here's the puzzle. Let's assume we get a quick return to full employment. Would earnings rise or fall? A lot of folks might argue that they would rise as we returned to full capacity. But you are right - a lot of the extra production would finally go to higher real wages.

Ray Fair - we need your 93 equation CC model!

mulp said in reply to pgl...

Extra production requires higher wages first.

No business is idiot enough to produce stuff without knowing that buyers already have the cash or credit to buy it.

On the other hand, government can offer to buy increased production knowing it will be able to charge the people who benefit by its power to tax. For example, the US has built tens of thousands miles of highways to nowhere, train rail lines to nowhere, knowing it would pay for it all by levying taxes. Water and sewer to nowhere.

I'm old enough to remember Interstate highways off to the side of the crowded two lane highway my family drove year after year on vacation or church business. It was easy to buy right of way across farm fields and easy to lay down high quality payment, but building overpasses on existing heavily used roads too what seemed like forever. In Indiana, bulldozing subsoil into hills took a year or more. It is the weight of the soil that compresses the soil to the required compaction, but that requires time. And then building interchanges in or near cities requires even more planning.

While those Interstates built in my youth require constant rebuilding because entropy obeys no economist, the bill for building them is long paid while the utility value of the Interstates increases constantly. And the highest utility value is seen when a bridge goes out and the cost of rerouting traffic hits the users. Bundles of cash get showered on replacing the bridge because government, We the People, can shower cash if We the People demand it.

sanjait said in reply to RC AKA Darryl, Ron...

"Shiller puts a lot of faith in Cyclically Adjusted Price Earnings ratio (CAPE). My guess is there is a reason for that."

Yeah, he invented it.

It's a nice way of smoothing PE data to account for some cyclical factors, but it doesn't account for everything.

JF said in reply to RC AKA Darryl, Ron...

Ratio of workforce hours to the Investment Base and value of Intangibles. This is different from how the stock market "prices" a share (it can't know, I'd expect very few people know these ratios for a company and few understand them by sector and over time - while accounting for intangibles was a very late development too).

Shiller recognizes the psychology of these financial asset markets. We know the participants in these markets; i.e., buyers, seller, market-makers, demonstrate herd behaviors. Shiller does want to teach about more rational methods for the pricing of stocks. But markets price as they do - not always "rational" expectations here.

Stocks are good - participants are sharing in risks, unlike debt instruments. Stocks are, fundamentally, better economics for society, imho.

JF said in reply to JF...

So put your money directly into a business or buy ownership shares in some market (different forms of taking risk in the making of business). US is still the best place to do that.

mulp said in reply to JF...

Investment must result in wages and benefits paid, or else its just asset trading or pump and dump asset churn.

sanjait said in reply to pgl...

That's what I'm saying.

What everyone needs to realize is that low interest rates change the *fundamentals* of stock valuation.

Sure, we could be experiencing some degree of pop in corporate earnings due to weak labor demand, competitive washout during the crash and the unusual way that low investment can in the short term lead to higher profitability. All of that is worth examining.

But none of that changes the other side of the coin, which is that ... cost of capital matters.

pgl said in reply to sanjait...

Check out James Glassman's What We Got Wrong (re DOW 36000). He never admits either one of his two bizarre errors. It is more the world changed after 9/11. Really? What changed? The cost of capital fell which should have meant higher valuations. OK - maybe steady state growth is no longer 3% as some say it is 2%. But wait? Glassman tells Jeb! steady state growth should be 4%. So what changed should have had him change his book to DOW 72000!

RC AKA Darryl, Ron said...

The stock market is almost always experiencing a speculative bubble except for a few blue chips that are less volatile.

Justin Cidertrades said in reply to RC AKA Darryl, Ron...

"almost always experiencing a speculative bubble except for a few blue chips"
~~AKA~

buy low, but sell high, Hawaii!
Go through your portfolio! Mark up the price on everything you have! Put it up for sell on limit order! Then commit all your cash to limit orders to buy but at very low bid. Buy things that are a cinch to grow with the underlying business but only after researching the business for debt levels etc. Whoops! You can't use that rent money for stock bid. Remember! All stocks are equally worthless until proved otherwise.

Ben Groves said...

A speculative commodity bubble. Not sure that has every happened before by itself. Don't know what that really means. Stocks may have been overinflated or its damage to the real economy may mean stocks are underinflated.

sanjait said...

I don't think we're seeing a Minsky Moment in stock valuations.

What instead I think we're seeing is a Minsky Moment in China. Or, at least, people openly wondering how far off their previous assumptions were about growth and demand in China, and whether there is risk of contagious defaults somewhere there.

In other words, they aren't worried about multiples, they are worried about fundamentals.

rayward said...

What's the alternative to speculative financial assets? It's been conventional wisdom that the rate of return on productive capital (r) has been falling for 30 plus years. Larry Summers has repeated this often.

But now along comes Paul Gomme, B. Ravikumar, and Paul Rupert (https://research.stlouisfed.org/publications/es/article/10406) who conclude that the rate of return on productive capital is actually high not low as Summers and others claim. Both can't be right.

It depends on the meaning of "is", or "productive capital". My take is that Gomme et al. (in their 2011 paper cited in the August paper referenced and on which the August paper is based) are not altogether clear on what they mean by "productive capital" (which they refer to as "business capital"). In a footnote to the 2011 paper, they indicate that it "includes" such things as plant and equipment, but "includes" is not the same as "is". If Summers et al. are correct (and this view goes back to research conducted by James Tobin), then unless and until r is improved, we are stuck with speculation in financial assets and the financial instability that goes with it. Why haven't economists devoted more research to r?

anne said in reply to rayward...

It's been conventional wisdom that the rate of return on productive capital (r) has been falling for 30 plus years. Larry Summers has repeated this often....

[ Where would a specific reference be where this argument has been made by Summers? The argument makes no sense to me and I wonder what I have missed or possibly I do not understand the passage. ]

pgl said in reply to anne...

Summers calls this Secular Stagnation. Of course some people think this Summers thesis is not quite right.

ilsm said in reply to anne...

Conventional wisdom is a signal that the rest of the sentence is epistemic closure........

pgl said in reply to anne...

That's the paper that takes Summers on. But check out my post on this issue as well as Noah Smith's doubts.

Sandwichman said...

What? People are afraid the imaginary money doesn't really exist?

anne said...

http://www.multpl.com/shiller-pe/

Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2015

(Standard and Poors Composite Stock Index)

August 27, 2015 PE Ratio ( 25.12)

Annual Mean ( 16.62)
Annual Median ( 16.01)

-- Robert Shiller

pgl said in reply to anne...

OK - his ratio is near 25. Sanjait is right - this is not that high given the low real interest rates.

anne said...

http://www.multpl.com/s-p-500-dividend-yield/

Dividend Yield, 1881-2015

(Standard and Poors Composite Stock Index)

August 27, 2015 Div Yield ( 2.11)

Annual Mean ( 4.40)
Annual Median ( 4.34)

-- Robert Shiller

anne said...

http://www.econ.yale.edu/~shiller/data.htm

January 15, 2015

Ten Year Mean Price Earnings Ratio, 1960-2015

(Standard and Poors Composite Stock Index)

1960 ( 18.3)
1961 ( 18.5) Kennedy
1962 ( 21.0)
1963 ( 19.0) Johnson
1964 ( 21.3)

1965 ( 22.9)
1966 ( 23.8)
1967 ( 20.1)
1968 ( 21.2)
1969 ( 20.8) Nixon

1970 ( 16.9)
1971 ( 16.4)
1972 ( 17.1)
1973 ( 18.6)
1974 ( 13.4) Ford

1975 ( 8.9)
1976 ( 11.3)
1977 ( 11.5) Carter
1978 ( 9.2)
1979 ( 9.2)

1980 ( 8.8)
1981 ( 8.5) Reagan
1982 ( 7.4)
1983 ( 9.6)
1984 ( 9.4)

1985 ( 10.7)
1986 ( 13.4)
1987 ( 16.0)
1988 ( 14.4)
1989 ( 16.6) Bush

1990 ( 16.5)
1991 ( 17.9)
1992 ( 19.5)
1993 ( 20.8) Clinton
1994 ( 20.5)

1995 ( 22.7)
1996 ( 25.9)
1997 ( 31.0)
1998 ( 36.0)
1999 ( 42.1)

2000 ( 41.7)
2001 ( 32.1) Bush
2002 ( 25.9)
2003 ( 24.1)
2004 ( 26.4)

2005 ( 26.0)
2006 ( 26.0)
2007 ( 26.8)
2008 ( 20.8)
2009 ( 16.9) Obama

2010 ( 20.7)
2011 ( 21.8)
2012 ( 21.4)
2013 ( 23.2)
2014 ( 25.5)

July

2015 ( 26.5)

-- Robert Shiller

anne said in reply to anne...

The price earnings ratio for stocks in July 2015 was 26.5 as compared to 26.7 in 1929. Such a price earnings ratio would have seemed especially high, however rationalized, before 1996 but since then no matter the bear markets that have occurred such a ratio has come to be taken as reasonable by a range of economists.

The ratio may well be reasonable, I would however like an understanding as to why.

pgl said in reply to anne...

1929? 1929's financial markets were a lot like those in 2007. About to see a huge increase in interest rates on corporate bonds rated BBB even as government bond rates fell. Krugman noted a small increase in credit spreads but no where near 2009 or 1930.

You can't just compare P/E ratios without thinking through the fundamentals. Interests are low and credit spreads are modest.

anne said in reply to anne...


Robert Shiller found indexing stock prices from 1881 through 2015 important. I would agree.

Possibly 1996 when the stock market price earnings ratio was 25.9 and Shiller suggested stock investors might be too optimistic and Alan Greenspan wondered about what made for irrational exuberance, possibly a 25.9 p/e ratio for 1996 should never have been compared with any ratio in the past but I think otherwise.

Sandwichman said in reply to anne...

That settles that!

Numbers go way up then they go down a bit then back up a bit. Clearly the numbers will either go up or down in the future.

and the wheels on the bus go 'round and 'round...

anne said in reply to Sandwichman...

I have no idea how the prices of investment assets will change from here, what I do know however is what the price patterns have been for better than a century and that rationales that have been used to justify prices for investment assets in the past do not make sense presently.

Sandwichman said in reply to Sandwichman...

To be clear, these numbers are index numbers. That means they are constructed by assembling together various bits of data that are ASSUMED to indicate this or that, so the resulting index is then ASSUMED to indicate some other thing. This is fine in an analytical context but becomes mystification when the indexes take on a life of their own. People forget about the analytical context. They forget the qualifications and the artificial nature of the indexes. They think they are talking about something analogous to a measurement taken with a standardized yardstick.

Same yardstick fallacy.

If my height is the yardstick by which I measure my height, then I am always exactly one my height high.

All of economics seems now to revolve around a glaring silence about the composition of the yardstick.

What is a "Real Home" anyway? Is it anything like a Fun Home?

https://youtu.be/PK-FJRtB7SY

anne said in reply to Sandwichman...

Investing for long periods of time in the stock market index and a range long-term investment grade bonds, which is essentially an index, has been remarkably successful. Stock and bond indexes or near indexes then strike me as quite real, quite tangible:

https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT#hist%3A%3Atab=1&tab=1

Vanguard 500 Stock Index Fund

Average annual returns as of 7/31/2015

7/31/2014 ( 11.05%)
7/31/2012 ( 17.40)
7/30/2010 ( 16.07)
7/29/2005 ( 7.60)

08/31/1976 ( 11.02)


https://personal.vanguard.com/us/funds/snapshot?FundId=0028&FundIntExt=INT#hist%3A%3Atab=1&tab=1

Vanguard Long-Term Investment-Grade Bond Fund

Average annual returns as of 7/31/2015

7/31/2014 ( 3.45%)
7/31/2012 ( 2.83)
7/30/2010 ( 7.27)
7/29/2005 ( 6.46)

07/09/1973 ( 8.50)

anne said in reply to Sandwichman...

What the real home price index was remarkably good for was for showing analysts that homes generally and home especially in relatively high priced markets were becoming increasingly risky to buy from about 2002 on if a buyer was counting on price appreciation, especially counting on price appreciation to pay a mortgage.

The work of Robert Shiller has been remarkably helpful for analysts trying to understand market movements.

anne said in reply to anne...

Looking to real home prices, Shiller found that over time prices generally tracked inflation so that where the real home price index was 100 in 1890 the index was at 113 in 1996. Between 1996 and 2006 the real home price index increased from 113 to 194.7 which was an altogether unprecedented level.

In June 2015, however, after the supposed deflating of the housing bubble the real home price index was 155.9 which is a level never even approached before 2003 when the housing bubble should have been obvious.

What does this mean?

Sandwichman said in reply to anne...

"What does this mean?"

A decade and a half of Potemkin Village Economy.

http://www.counterpunch.org/2010/02/26/the-potemkin-village-economy/

anne said in reply to Sandwichman...

http://www.counterpunch.org/2010/02/26/the-potemkin-village-economy/

February 26, 2010

The Potemkin Village Economy
By ALAN FARAGO

US politics are in gridlock because elected officials, Democrats and Republicans alike, are fighting to revive an economic model based on construction, development and housing. Instead of breaking with the past– and confessing that trillions of taxpayer handouts have been given to banks to shore up a failed economic model– elected officials in the US are maintaining a steadfast silence to paper over their ruined circular logic.

In the New York Times yesterday, "New-Home Sales Plunged To Record Low in January", the chief economist of Metrostudy described that logic with crystalline clarity, "You're not going to have a robust housing market until you have more jobs, and you're not going to add jobs fast enough to bring down the unemployment rate until you have robust housing market."

In "Florida struggles to carve out new jobs: spurred by state unemployment soon expected to top 12 percent," (St. Pete Times) Mark Wilson, head of the Florida Chamber of Commerce, says, "There is no silver bullet." The Chamber, this year, will be using all its bullets to shoot down the citizens' petition to amend the Florida constitution, Florida Hometown Democracy, providing for local elections on changes to growth plans. The measure was born from the public revulsion with rampant overdevelopment that created temporary jobs in construction but permanently scarred the Florida landscape, wrecking Floridians' quality of life, the environment, and undermined the potential for "jobs" that legislators are desperate to create.

The core of the problem is not just Florida's. An economy so dependent on housing is, by definition, a Potemkin Village. Potemkin Villages in 18th century Russia were "fake settlements" built to impress the political upper class. Imperial Russia's delusions of grandeur have much in common with the ours....

JF said in reply to anne...

"savings glut" comes to mind - too much wealth and some of it chases homes- then and still.

But also, the "wealth" was created in the period you mention by leveraging positions, and we know many of these new lending-account-deposits bought positions (e.g. MBS) that lacked any reality. So it isn't just too much wealth but also the fact that many gained it, not from running a business and earning it, but via endogenous leverage, and this made home prices even more disconnected from real economics.

A tax-cut-and-borrow scheme of public finance, in concert with the already wealthy also transferred huge sums, unearned.

Rent-seeking led to imprudent leveraging and the investors all gained new wealth positions (but homeowners picked up the pieces and the rest of society too). So too much unearned wealth chases all kinds of assets (homes, stocks, luxury items and collectibles).

Only public policy can remedy once the financial positions become lawfully established (again, even though these were obtained by rent-seeking and distortion of markets).

anne said in reply to JF...

"Savings glut" comes to mind - too much wealth and some of it chases homes - then and still....

[ Interesting, when wealth is significantly invested in nonproductive assets, what then? ]

JF said in reply to anne...

We need economic policy to intervene. Can the FED change its regulations to encourage investments in non-financial matters within the core of society's needs (housing, durables, education come to mind)?

Right now the FED is paying banks .25% IOER to hold their "reserves" - accounting matters is what Keynes would call this type of action - we need them to sponsor rules that get reserves into the real economy (certainly not leveraging other debts, even margin buying support for stocks, imo). Seems to me this is in their current authority. The FED can redeem the public debt on their books and take the current fiscal position of the govt to primary surplus (via remittance/offset) and this will cause public debt markets to change, and hopefully push investors to put their money elsewhere (public debt markets will not see interest rates rise where they are). Perhaps they should consider altering the margin rules too, again forcing owners of this excess wealth to invest outside these financial-asset trading marketplaces. Or spend - which would at least be taxed by capital gains provisions and by sales taxes.

Oh well. What are they going to talk about in Wyoming??

anne said in reply to JF...

BigBozat said in reply to anne...

[ Interesting, when wealth is significantly invested in nonproductive assets, what then? ]

Nonproductive, like corporate stock buybacks. When buybacks exceed investment in R&D, plant & equipment, systems, etc. for a decade or more, then growth in the subsequent decade is likely to be merde, n'est-ce pas? Uncreative destruction. Schumpeter *rolls over in grave*

anne said in reply to anne...

Looking to real home prices, Shiller found that over time prices generally tracked inflation so that where the real home price index was 100 in 1890 the index was at 113 in 1996. Between 1996 and 2006 the real home price index increased from 113 to 194.7 which was an altogether unprecedented level.

In June 2015, however, after the supposed deflating of the housing bubble the real home price index was 155.9 which is a level never even approached before 2003 when the housing bubble should have been obvious.

What does this mean? Possibly homes should be considered remarkably inexpensive, remarkably fine investment currently, but a real home price index of 155.9 which had never been approached between 1890 and 2003 suggests that I, at least, need to understand why home are really so inexpensive currently.

ThomasH said... \

Yes, we are in one of these rare, anxious "just don't know situations" in which stock prices could go up or down, particularly if you ask about the future.

pgl said in reply to ThomasH...

That was Shiller's final thought. He does not if the market is overvalued or not - so the rest of us clearly do not know. Oh wait - James Glassman and Kevin Hassert are writing their DOW 72000! You say Glassman is an idiot? Yea but he is one of Jeb!'s economic advisers.

[Aug 27, 2015]Where Is Neo When We Need Him

Aug 27, 2015 | zerohedge.com

In The Matrix in which Americans live, nothing is ever their fault. Nowhere in the Western media other than a few alternative media websites is there an ounce of integrity. The Western media is a Ministry of Truth that operates full-time in support of the artificial existence that Westerners live inside The Matrix where Westerners exist without thought. Considering their inaptitude and inaction, Western peoples might as well not exist. More is going to collapse on the brainwashed Western fools than mere stock values.

In The Matrix in which Americans live, nothing is ever their fault. For example, the current decline in the US stock market is not because years of excessive liquidity supplied by the Federal Reserve have created a bubble so overblown that a mere six stocks, some of which have no earnings commiserate with their price, accounted for more than all of the gain in market capitalization in the S&P 500 prior to the current disruption.

In our Matrix existence, the stock market decline is not due to corporations using their profits, and even taking out loans, to repurchase their shares, thus creating an artificial demand for their equity shares.

The decline is not due to the latest monthly reporting of durable goods orders falling on a year-to-year basis for the sixth consecutive month.

The stock market decline is not due to a weak economy in which after a decade of alleged economic recovery, new and existing home sales are still down by 63% and 23% from the peak in July 2005.

The stock market decline is not due to the collapse in real median family income and, thereby, consumer demand, resulting from two decades of offshoring middle class jobs and partially replacing them with minimum wage part-time Walmart jobs without benefits that do not provide sufficient income to form a household.

No, none of these facts can be blamed. The decline in the US stock market is the fault of China.

What did China do? China is accused of devaluing by a small amount its currency.

Why would a slight adjustment in the yuan's exchange value to the dollar cause the US and European stock markets to decline?

It wouldn't. But facts don't matter to the presstitute media. They lie for a living.

Moreover, it was not a devaluation.

When China began the transition from communism to capitalism, China pegged its currency to the US dollar in order to demonstrate that its currency was as good as the world's reserve currency. Over time China has allowed its currency to appreciate relative to the dollar. For example, in 2006 one US dollar was worth 8.1 Chinese yuan. Recently, prior to the alleged "devaluation" one US dollar was worth 6.1 or 6.2 yuan. After China's adjustment to its floating peg, one US dollar is worth 6.4 yuan. Clearly, a change in the value of the yuan from 6.1 or 6.2 to the dollar to 6.4 to the dollar did not collapse the US and European stock markets.

Furthermore, the change in the range of the floating peg to the US dollar did not devalue China's currency with regard to its non-US trading partners. What had happened, and what China corrected, is that as a result of the QE money printing policies currently underway by the Japanese and European central banks, the dollar appreciated against other currencies. As China's yuan is pegged to the dollar, China's currency appreciated with regard to its Asian and European trading partners. The appreciation of China's currency (due to its peg to the US dollar) is not a good thing for Chinese exports during a time of struggling economies. China merely altered its peg to the dollar in order to eliminate the appreciation of its currency against its other trading partners.

Why did not the financial press tell us this? Is the Western financial press so incompetent that they do not know this? Yes.

Or is it simply that America itself cannot possibly be responsible for anything that goes wrong. That's it. Who, us?! We are innocent! It was those damn Chinese!

Look, for example, at the hordes of refugees from America's invasions and bombings of seven countries who are currently overrunning Europe. The huge inflows of peoples from America's massive slaughter of populations in seven countries, enabled by the Europeans themselves, is causing political consternation in Europe and the revival of far-right political parties. Today, for example, neo-nazis shouted down German Chancellor Merkel, who tried to make a speech asking for compassion for refugees.

But, of course, Merkel herself is responsible for the refugee problem that is destabilizing Europe. Without Germany as Washington's two-bit punk puppet state, a non-entity devoid of sovereignty, a non-country, a mere vassal, an outpost of the Empire, ruled from Washington, America could not be conducting the illegal wars that are producing the hordes of refugees that are over-taxing Europe's ability to accept refugees and encouraging neo-nazi parties.

The corrupt European and American press present the refugee problem as if it has nothing whatsoever to do with America's war crimes against seven countries. I mean, really, why should peoples flee countries when America is bringing them "freedom and democracy?"

Nowhere in the Western media other than a few alternative media websites is there an ounce of integrity. The Western media is a Ministry of Truth that operates full-time in support of the artificial existence that Westerners live inside The Matrix where Westerners exist without thought. Considering their inaptitude and inaction, Western peoples might as well not exist.

More is going to collapse on the brainwashed Western fools than mere stock values.

Barnaby Barnaby's picture

One of the youngest states in the world is hardly a threat. Client status means they're held by the balls. Any other understanding is simple paranoia.

What you should be worried about is that your UN sponsor allows ethnic cleansing on such a scale in Palestine. That makes you culpable.

DontWorry
Don't worry, the USA is recognized as a beacon of freedom and democracy throughout the world. There are always multiple viewpoints, but the US media represents a fair, unbiased and mainstream view. Our press is the freest in the world, and supported by our Constitution. The US will be the center of western democracy, culture and commerce for the forseeable future.

lasvegaspersona

Many of the problems of modern life, including the actions of the US government, are founded in the very currency that enables it to act seemingly without effort.The ability to create the medium of exchange for the entire world has given this same government the appearance of invulnerability. It has allowed the federal government to make demands upon the states that comprise it. It can control citizens whose consent used to be required for it to act. It seems to have the ability to control the entire world.

This is an illusion. It has been granted these abilities, it has not earned them nor won them. The world needed a monetary system post WW2 and even post 1971. The final stages of this whole episode was seen by Rueff and triffin quite clearly considering they spoke 40 plus years ago.

Now the world has changed. It is withdrawing the permission it granted every time it bought treasuries or did other things that kept all those excess dollars from coming back to their country of birth to cause rising prices. The chinese are selling, the Arabs are selling and the ECB stopped buying long ago. They are not going to kill the dollar (and cause a war). They are going to let it fail through inaction. The actions of our nation do not make much sense to most folks who viewed thenUS as a good country. It seems to have been taken over by evil people.

I think these are the actions of spoiled children who don't have to pay for what they get.

Now the trust fund has run out. Daddy took the T-Bird away. Soon we will have to get a real job.

About 50% of American exceptionalism is due to the exorbitant privilege. The other part is actually real...if we can salvage those things that once made us truly great. Most Americans, who pay attention, are shocked and angry by what they see their government doing.

Both the government and the American people are not worse than any other country would have been if it was granted the same power over money itself. I just hope the ending of this chapter comes smoothly before we wreck the car and kill a lot more people.

It is time to grow up and get a real job.

Renfield

<<Many of the problems of modern life, including the actions of the US government, are founded in the very currency that enables it to act seemingly without effort.The ability to create the medium of exchange for the entire world has given this same government the appearance of invulnerability. It has allowed the federal government to make demands upon the states that comprise it. It can control citizens whose consent used to be required for it to act. It seems to have the ability to control the entire world... Now the world has changed. It is withdrawing the permission it granted every time it bought treasuries or did other things that kept all those excess dollars from coming back to their country of birth to cause rising prices. The chinese are selling, the Arabs are selling and the ECB stopped buying long ago. They are not going to kill the dollar (and cause a war). They are going to let it fail through inaction. The actions of our nation do not make much sense to most folks who viewed thenUS as a good country. It seems to have been talen over by evil people. I think these are the actions of spoiled choildren who don't have to pay for what they get. Now the trust fund has run out. Daddy took the T-Bird away. Soon we will have to get a real job.>>

Bravo. THIS is why the idea of any fiat "world reserve currency" needs to die for the good of the planet.

On a national scale, I don't mind a fiat currency as long as it is not 1) issued by the government, 2) fraudulently claimed to be anything but fiat, or 3) mandated as the sole currency allowed for a nation. (Or city, or town, or any group.) That way people are free to ignore it in favor of real money.

"Counterfeiting" laws should be scrapped in favor of good old-fashioned anti-fraud enforcement. But no government should ever be allowed by its people to traffic in a fraudulent, fiat currency, let alone to mandate it as the only currency legal to use. This puts criminals at the top of the system and riddles your financial system with fraud, and with such a foundation, of course bad money drives out good and eventually 'malinvestment' in unproductive or evil commerce becomes its entire result.

buzzsaw99

Without Germany as Washington's two-bit punk puppet state, a non-entity devoid of sovereignty, a non-country, a mere vassal, an outpost of the Empire, ruled from Washington, America could not be...

AWESOME!

MalteseFalcon

The USA still has bases, army and air force in Germany. So the Germans are not completely feckless punks.

What about France?

[Aug 27, 2015] Oil markets catch breath after biggest gains in six years

"A short covering rally, led by crude oil pushed commodities higher across the board. Better than expected U.S. GDP numbers was the main spark, although the force majeure on BP's exports from Nigeria extended the gains," ANZ said in a note on Friday morning.

"The recovery in commodity prices looks fragile with concerns over China's growth still weighing on market activity," the bank added.

The U.S. economy grew faster than initially thought in the second quarter on solid domestic demand. Gross domestic product expanded at a 3.7 percent annual pace instead of the 2.3 percent rate reported last month, the Commerce Department said on Thursday in its second GDP estimate for the April-June period.

Shell's Nigerian unit, Shell Petroleum Development Company (SPDC), declared force majeure on Bonny Light crude oil exports on Thursday after shutting down two key pipelines in the country due to a leak and theft.

China's falling auto sales have been at the forefront of concerns that its economy is slowing much faster than expected, weighing on oil prices.

Venezuela has been contacting other members of the Organization of the Petroleum Exporting Countries (OPEC), pushing for an emergency meeting with Russia to come up with a plan to stop the global oil price rout, the Wall Street Journal reported.

[Aug 27, 2015] Smoke and Mirrors of Corporate Buybacks Behind the Market Crash

"...What we're seeing is that short-term thinking really hasn't taken into account the long run. And that's why this is very much like the long-term capital market crash in 1997, when the two Nobel prize winners who said the whole economy lives in the short term found out that all of a sudden the short term has to come back to the long term."
.
"...Well, companies themselves have been causing this crisis as much as speculators, because companies like Amazon, like Google, or Apple, especially, have been borrowing money to buy their own stock. And corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at 1 percent to buy your stock yielding 5 percent. You'll get rich in no time. So all of these stock buybacks by Apple and by other companies at high prices, all of a sudden yes, they can make that money in the short term. But their net worth is all of a sudden plunging. And so we're in a classic debt deflation."
.
"...HUDSON: Well, what they cause is the runup–companies are under pressure. The managers are paid according to how well they can make a stock price go up. And they think, why should we invest in long-term research and development or long-term developments when we can use the earnings we have just to buy our own stock, and that'll push them up even without investing, without hiring, without producing more. We can make the stock go up by financial engineering. By using our earnings to buy [their own] stock.
.
So what you have is empty earnings. You've had stock prices going up without really corporate earnings going up. Although if you buy back your stock and you retire the shares, then earning the shares go up. And all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and it's not real. There's been no real gain in industrial profitability. There's just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring.
"
.
"...What people don't realize usually, and especially what Lawrence Summers doesn't realize, is that there are two economies. When he means a bad situation, that means for his constituency. The 1 percent. The 1 percent, for them they think oh, we're going to be losing in the asset markets. But the 1 percent has been making money by getting the 99 percent into debt. By squeezing more work out of them. By keeping wages low and by starving the market so that there's nobody to buy the goods that they produce."

Michael Hudson, the author of Killing the Host: How Financial Parasites and Debt Destroy Global Economy, says the stock market crash on Monday has very little to do with China and all to do with shortermism and buybacks of corporations inflating their own stocks - August 25, 2015

... ... ...

And this is what most of the commentators don't get, that all this market runoff we've seen in the last year or two has been by the Federal Reserve making credit available to banks at about one-tenth of 1 percent. The banks have lent out to brokers who have lent out to big institutional traders and speculators thinking, well gee, if we can borrow at 1 percent and buy stocks that yield maybe 5 or 6 percent, then we can make the arbitrage. So they've made a 5 percent arbitrage by buying, but they've also now lost 10 percent, maybe 20 percent on the capital.

What we're seeing is that short-term thinking really hasn't taken into account the long run. And that's why this is very much like the long-term capital market crash in 1997, when the two Nobel prize winners who said the whole economy lives in the short term found out that all of a sudden the short term has to come back to the long term.

Now, it's amazing how today's press doesn't get it. For instance, in the New York Times Paul Krugman, who you can almost always depend to be wrong, said the problem is there's a savings glut. People have too many savings. Well, we know that they don't in America have too many savings. We're in a debt deflation now. The 99 percent of the people are so busy paying off their debt that what is counted as savings here is just paying down the debt. That's why they don't have enough money to buy goods and services, and so sales are falling. That means that profits are falling. And people finally realize that wait a minute, with companies not making more profits they're not going to be able to pay the dividends.

Well, companies themselves have been causing this crisis as much as speculators, because companies like Amazon, like Google, or Apple, especially, have been borrowing money to buy their own stock. And corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at 1 percent to buy your stock yielding 5 percent. You'll get rich in no time. So all of these stock buybacks by Apple and by other companies at high prices, all of a sudden yes, they can make that money in the short term. But their net worth is all of a sudden plunging. And so we're in a classic debt deflation.

PERIES: Michael, explain how buybacks are actually causing this. I don't think ordinary people quite understand that.

HUDSON: Well, what they cause is the runup–companies are under pressure. The managers are paid according to how well they can make a stock price go up. And they think, why should we invest in long-term research and development or long-term developments when we can use the earnings we have just to buy our own stock, and that'll push them up even without investing, without hiring, without producing more. We can make the stock go up by financial engineering. By using our earnings to buy [their own] stock.

So what you have is empty earnings. You've had stock prices going up without really corporate earnings going up. Although if you buy back your stock and you retire the shares, then earning the shares go up. And all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and it's not real. There's been no real gain in industrial profitability. There's just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring.

PERIES: Michael, Lawrence Summers is tweeting, he writes, as in August 1997, 1998, 2007 and 2008, we could be in the early stages of a very serious situation, which I think we can attribute some of the blame to him. What do you make of that comment, and is that so? Is this the beginnings of a bigger problem?

HUDSON: I wish he would have said what he means by 'situation'. What people don't realize usually, and especially what Lawrence Summers doesn't realize, is that there are two economies. When he means a bad situation, that means for his constituency. The 1 percent. The 1 percent, for them they think oh, we're going to be losing in the asset markets. But the 1 percent has been making money by getting the 99 percent into debt. By squeezing more work out of them. By keeping wages low and by starving the market so that there's nobody to buy the goods that they produce.

So the real situation is in the real economy, not the financial economy. But Lawrence Summers and the Federal Reserve all of a sudden say look, we're not really trying–we don't care about the real economy. We care about the stock market. And what you've seen in the last few years, two years I'd say, of the stock runup, is something unique. For the first time the stock, the central banks of America, even Switzerland and Europe, are talking about the role of the central bank is to inflate asset prices. Well, the traditional reason for central banks that they gave is to stop inflation. And yet now they don't want, they're trying to inflate the stock market. And the Federal Reserve has been trying to push up the stock market purely by financial reasons, by making this low interest rate and quantitative easing.

Now, the Wall Street Journal gets it wrong, too, on its editorial page. You have an op-ed by Gerald [incompr.], who used to be on the board of the Dallas Federal Reserve, saying gee, the problem with low interest rates is it encourages long-term investment because people can take their time. Well, that's crazy Austrian theory. The real problem is that low interest rates provide money to short-term speculators. And all of this credit has been used not for the long term, not for investment at all, but just speculation. And when you have speculation, a little bit of a drop in the market can wipe out all of the capital that's invested.

So what you had this morning in the stock market was a huge wipeout of borrowed money on which people thought the market would go up, and the Federal Reserve would be able to inflate prices. The job of the Federal Reserve is to increase the price of wealth and stocks and real estate relative to labor. The Federal Reserve is sort of waging class war. It wants to increase the assets of the 1 percent relative to the earnings of the 99 percent, and we're seeing the fact that this, the effect of this class war is so successful it's plunged the economy into debt, slowed the economy, and led to the crisis we have today.

PERIES: Michael, just one last question. Most ordinary people are sitting back saying well, it's a stock market crash. I don't have anything in the market. And so I don't have to really worry about it. What do you say to them, and how are they going to feel the impact of this?

HUDSON: It's not going to affect them all that much. The fact is that so much of the money in the market was speculative capital that it really isn't going to affect them much. And it certainly isn't going to affect China all that much. China is trying to develop an internal market. It has other problems, and the market is not going to affect either China's economy or this. But when the 1 percent lose money, they scream like anything, and they say it's the job of the 99 percent to bail them out.

PERIES: What about your retirement savings, and so on?

HUDSON: Well, if the savings are invested in the stock market in speculative hedge funds they'd lose, but very few savings are. The savings have already gone way, way up from the market. And the market is only down to what it was earlier this year. So the people have not really suffered very much at all. They've only not made as big of gains as they would have hoped for, but they're not affected.
... ... ...

Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. He is the author of The Bubble and Beyond and Finance Capitalism and its Discontents. His most recent book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

[Aug 27, 2015] Oil Prices Must Rebound. Here's Why

OilPrice.com

You can see two things on this chart, the first is that when capacity exceeds demand, prices are low (and vice versa); the second is that, since about 2005, despite the oil price being rather high, outside North America the world has struggled to add any oil production capacity at all. In fact, since 2010 oil production capacity outside North America has been in decline. If it weren't for the USA & Canada, where production growth has been driven by LTO & SAGD, we would have been in a right pickle.

... ... ...

In the short term, the oil market is in the doldrums and projects are being delayed or cancelled, left right and center. That will mean that, outside North America, oil production capacity will decline even faster and with the growth knocked out of the shale producers and SAGD projects being put on the back burner, it is only a matter of months before demand starts to exceed world oil production capacity again.

A nasty recession might put a dent in demand growth and turn those months into quarters, but eventually capacity will wane, demand will wax, and the oil price will climb once again.

In fact if traders looked hard at these charts they might wonder if the continued weakness in the 2022 Brent Oil future was a tad overdone. For this time, I think the price response might be even stronger and more sustained than before.

Oil Prices Driven Lower By Everything Except Fundamentals

By Leonard Brecken

"...According to Reuters, 50 to 60 hedge funds have taken short positions that account for around 160 million barrels of oil in near term contracts. In fact, the amount of short positions in oil options and futures now exceeds levels in the great financial meltdown of 2008, believe it or not, despite talk of a good economy and the Fed needing to raise interest rates. Madness, right?"
"...All these things still don't explain the panic in oil markets other than financially driven events that aren't directly tied to the supply and demand of oil which, as I stated, has improved vs. the start of 2015. "
Aug 24, 2015 | OilPrice.com

It is clear that it is no longer supply and demand for oil that is dictating the price but is instead the financial markets and more importantly money flows tied to central bank policy.

Bearish sentiment in the oil markets is taking over as net short positions near record highs. According to Reuters, 50 to 60 hedge funds have taken short positions that account for around 160 million barrels of oil in near term contracts. In fact, the amount of short positions in oil options and futures now exceeds levels in the great financial meltdown of 2008, believe it or not, despite talk of a good economy and the Fed needing to raise interest rates. Madness, right?

... ... ...

Fundamentally, almost every bear case presented by the media in 2015 has been proven false. Doomsday events such as rig count (vertical rigs being dropped vs. horizontal), Cushing overflowing, China demand slowing, to Iran floating storage of 50 million barrels being unleashed, U.S. production rising, have all been dispelled.

In fact, as I said, the fundamentals have even improved as U.S. production has entered into decline, crude stocks have been drawing down since the spring, and demand for gasoline is at record highs (much higher vs. expectations going into 2015). Furthermore, the worries on Iran are completely overblown given that the hype on floating storage – the millions of barrels of crude oil sitting in tankers turned out to be low quality condensate that is hard to process. Also, the 500,000 to 1 million barrels per day (mb/d) increase tied to the nuclear deal will be absorbed by higher demand, which has averaged 1 million barrels or more each year (in 2015, it has been even higher than that; closer to 1.4 mb/d or higher).

Furthermore, China alone will add 600,000 barrels per day in refinery capacity, as it allows independent refineries to process oil. What has been incrementally negative has been additional capacity added by Iraq and Saudi Arabia since the start 2015. However, aside from Iran, OPEC doesn't have any spare capacity left and, Saudi Arabia has already announced intentions of reducing output by 200,000-300,000 barrels per day post their seasonally strong domestic period.

Yet even though the dollar has weakened recently, oil has still collapsed some 35 percent. The E&P equities have fallen even further as in addition to shorts, there are also pressing bets on the upcoming fall credit redetermination and hedge funds taking positions in E&P bonds while shorting equities.

All these things still don't explain the panic in oil markets other than financially driven events that aren't directly tied to the supply and demand of oil which, as I stated, has improved vs. the start of 2015. In fact, demand is soaring while days of supply are improving dramatically as evidenced by the charts the charts below:

... ... ...

Leonard Brecken, Brecken Capital LLC. Leonard is a portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities

[Aug 27, 2015] Why Saudi Arabia Won't Cut Oil Production By Nick Cunningham

"...Rafael Correa the president of Ecuador said that his country it's producing oil at a loss by $ 6.00 per barril . his country It's also an OPEC member.. "
Aug 27, 2015 | OilPrice.com

U.S. oil production, after years of blistering growth, has not only ground to a halt, but has started to decline. Output peaked in March at 9.69 million barrels per day (mb/d), dropping to 9.51 mb/d in May (the latest month for which accurate data is available). In all likelihood, the decline has picked up pace in the intervening months.

...Saudi Arabia's decision to cut its budget should be seen not as evidence that it is buckling under crushing weight of low prices, but that it is in the game for the long haul. It is shrinking its budget to fit a world of depressed oil prices, positioning itself to ride the wave as far as it goes. Cutting spending is actually a signal of the government's resolve in regards to its current oil strategy, not a sign of wavering.

Marty on August 27 2015 said:

Just A few hours ago, Rafael Correa the president of Ecuador said that his country it's producing oil at a loss by $ 6.00 per barril . His country is also an OPEC member..

[Aug 27, 2015] Oil Industry Needs Half a Trillion Dollars to Endure Price Slump

"...Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years."
"... In the U.S., the number of bonds yielding greater than 10 percent has increased more than fourfold to 80 over the past year, according to data compiled by Bloomberg. Twenty-six European oil companies have bonds in that category, including Gulf Keystone Petroleum Ltd. and EnQuest Plc."
"...Some earnings metrics are already breaching the lows of the 2008 financial crisis. The profit margin for the 108-member MSCI World Energy Sector Index, which includes Exxon Mobil Corp. and Chevron Corp., is the lowest since at least 1995, the earliest for when data is available."
"...Credit-rating downgrades are putting additional strain on the ability of oil companies to raise money cheaply. Standard & Poor's cut the rating of Eni SpA, Italy's biggest oil company, in April while Moody's Investors Service downgraded Tullow Oil Plc's debt in March."
"...The biggest companies, with global portfolios that span oil fields to refineries, will probably emerge largely intact from the slump, Norton Rose's Wood said. Smaller players, dependent on fewer assets, could have problems, she said."
Aug 27, 2015 | Bloomberg Business

... ... ...

"The look and shape of the oil industry would likely change over the next five to 10 years as companies emerge from this," Wood said. "If oil prices stay at these levels, the number of bankruptcies and distress deals will undoubtedly increase."

Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years.

U.S. drillers account for 20 percent of the debt due in 2015, Chinese companies rank second with 12 percent and U.K. producers represent 9 percent.

In the U.S., the number of bonds yielding greater than 10 percent has increased more than fourfold to 80 over the past year, according to data compiled by Bloomberg. Twenty-six European oil companies have bonds in that category, including Gulf Keystone Petroleum Ltd. and EnQuest Plc.

... ... ...

Slumping crude prices are diminishing the value of oil reserves and reducing borrowing power, even as pressure builds to find replacement fields.

Some earnings metrics are already breaching the lows of the 2008 financial crisis. The profit margin for the 108-member MSCI World Energy Sector Index, which includes Exxon Mobil Corp. and Chevron Corp., is the lowest since at least 1995, the earliest for when data is available.

"There are several credits which simply won't be able to refinance and extend maturities and they may need to raise additional equity," said Eirik Rohmesmo, a credit analyst at Clarksons Platou Securities AS in Oslo. "The question is: Would they be able to do that with debt at these levels?"

Credit Ratings

Some U.S. producers gained breathing space by leveraging their low-cost assets to raise funds earlier this year and repay debt, Goldman Sachs Group Inc. wrote in a Aug. 6 report. This helped companies shore up their capital and reduce debt-servicing costs.

That may no longer be an option because energy companies have been the worst performers in the past year among 10 industry groups in the MSCI World Index.

Credit-rating downgrades are putting additional strain on the ability of oil companies to raise money cheaply. Standard & Poor's cut the rating of Eni SpA, Italy's biggest oil company, in April while Moody's Investors Service downgraded Tullow Oil Plc's debt in March.

Spokesmen for Eni and Tullow declined to comment.

The biggest companies, with global portfolios that span oil fields to refineries, will probably emerge largely intact from the slump, Norton Rose's Wood said. Smaller players, dependent on fewer assets, could have problems, she said.

"Clearly, those companies with debt to pay will have one eye firmly on oil prices," said Christopher Haines, a senior oil and gas analyst at BMI in London. "With revenues collapsing and debt soon to mature, a growing number of companies may find themselves unable to meet repayment schedules."

[Aug 26, 2015] What If The Crash Is As Rigged As Everything Else

"...Oh yeah... EVERYTHING is rigged now. So we can't blame ourselves for any of it. Duhhhh. It's the fucking greed of all the Muppets to blame as well."
.
"...The reason why I know this was no engineered event is the damage control I have seen due to it. Even the lowliest podunk local talk show host was able to have on some talking head who was talking about why this was just an over reaction and macro is golden and our economy is the cat's meow."
.
"...Most of the actions taken by government are taken to increase debt. In the USA, the housing bubble was blown because of the dumb thought of "everyone should own a home" or, as the bankers like to think of it "Everyone should have a mortgage". Same shit with subprime auto loans, student loans. All these things involve creating massive new conduits for debt creation. If you don't exponentially grow, you blow. But, when these bubbles get blown, the extra $$ created has to go somewhere. And it chases yield that is greater than the inflation the debt creation creates. Before you know it BOOM."
Aug 26, 2015 | Zero Hedge
Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Take your pick--here's three good reasons to engineer a "crash" that benefits the few at the expense of the many.

... ... ...

3. Settling conflicts within the Deep State. I have covered the Deep State for years, in a variety of contexts--for example:

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Dollar and the Deep State (February 24, 2014)

Surplus Repression and the Self-Defeating Deep State (May 26, 2015)

Without going into details that deserve a separate essay, we can speculate that key power centers with the Deep State have profoundly different views about Imperial priorities.

One nexus of power engineers a trumped-up financial crisis (i.e. a convenient "crash") to force the hand of opposing power centers. As I have speculated here before, the rising U.S. dollar is anathema to Wall Street and its apparatchiks, while a rising USD is the cat's meow to those with a longer and more strategic view of dollar hegemony.

Take your pick--here's three good reasons to engineer a "crash" that benefits the few at the expense of the many.

remain calm

Everything is managed for control. They think they have control and can manage everything. They can't and then they lose control. They will lose control again. But the loss of control is not staged. Again, they think they can manage eveything. Their models fail. We are about to see a big failure. Some of you need to add another layer of tin foil added to your head. They will manage after the failure, again, because they think they know what they are doing.

Captain Debtcrash

I wrote on the "planned crash" scenario several months ago. Why would the fed raise rates into poor macro economic conditions, officially no inflation, with bubbles popping throughout the world, if not to cause or exacerbate a crash, all to allow them to try some new policy tools. After all the st Louis fed did come out and say QE is ineffective. I think they really want to ban cash and push rates significantly negative. Not possible under current statute, but that's easy enough to change with the politicians shitting themselves.

Crash N. Burn

"They will manage after the failure, again, because they think they know what they are doing."

Could be because "they" have done it before. People should be taught who "they" are

"The Rothschilds were universally acknowledged as the wealthiest clan on the planet in the 19th century. They never lost that wealth. We simply lost all knowledge of it. The House of Rothschild has effectively erased itself from our (so-called) history books. That takes power.

Are children taught in our classrooms that most of the (endless) wars between European powers during the 19th century were examples of House Rothschild already "playing" the governments of Europe against each other, like puppets? Are the children taught that a basically unknown cabal of bankers created the Bank for International Settlements in the early part of the 20th century, so that these Western bankers could do the money-laundering necessary to allow Western industrialists to supply armaments to the Third Reich?

They certainly aren't taught that one of those "industrialists" – Prescott Bush – was convicted of "trading with the Enemy". Because if they had been, clearly it would not have been possible for both his son and grandson to be elected as presidents of the United States, where they could serve the bankers.

Postulating a group of ringleaders for this banking crime syndicate other than House Rothschild is problematic. It involves manufacturing an entire mythology around such hypothetical ringleaders, whereas with this clan of megalomaniacs, the historical, financial, and political context is already in place.

Their wealth is undeniable. Their intentions are unequivocal. The amoral malice they hold toward the rest of humanity is documented, historical fact."

How Western Governments Will Steal Your Land, Part III

"They" are Rothschild!

"People without homes will not quarrel with their leaders."

- The Bankers Manifesto of 1892

"Simply put, there was/is no other clan on the planet that already possessed the wealth and power to make the pledges contained in The Bankers Manifesto of 1892, in 1892 – and then to (finally) pursue that crime-against-humanity to (near) fruition, in 2015."

pods

They aren't that powerful. Why give them the benefit of the doubt? They (if there really is a they that has control) would like nothing more than for you to sit home whimpering, worried about how much control "they" have.

Macro has been in the shitter for years. China was bubblicious and bound to crack.

The reason why I know this was no engineered event is the damage control I have seen due to it. Even the lowliest podunk local talk show host was able to have on some talking head who was talking about why this was just an over reaction and macro is golden and our economy is the cat's meow.

Don't buy into it.

And fuck numerology too. The only way where they can set the closing price is if we are all stuck in a damn powerplant with tubes coming out of our body.

If that is the case, where the fuck are you Morpheus?

Beam Me Up Scotty

I'm not so sure. This article might be spot on. Consider this:

Federal Reserve can print and create INFINITE digital and physical dollars. With infinite dollars, they can control EVERYTHING. Both UP and DOWN. We can't audit the Fed, how do you know their balance sheet is really 4 trillion? Because they say so? They could literally decide the prices of every single thing in dollar terms with unlimited dollars at their disposal.

messymerry

Yo pods, next time you get a bag of M&Ms, eat the red ones first,,,

;-D

I don't think the Skxawng in charge have the organizational capability to pull off an event of this magnitude with any reasonable expectation of success. They manipulate where they can and surf the waves just like the rest of us...

pods

Most of the actions taken by government are taken to increase debt. In the USA, the housing bubble was blown because of the dumb thought of "everyone should own a home" or, as the bankers like to think of it "Everyone should have a mortgage". Same shit with subprime auto loans, student loans. All these things involve creating massive new conduits for debt creation. If you don't exponentially grow, you blow. But, when these bubbles get blown, the extra $$ created has to go somewhere. And it chases yield that is greater than the inflation the debt creation creates. Before you know it BOOM.

tc06rtw

I truly wish it were all rigged… There could be some comprehensible intelligence behind all this disaster

Oh, no -- They were smart enough to wreck the machine in stripping out all its wealth, but THEY ARE NOT SMART ENOUGH TO UN-WRECK IT!

pods

You blow a bubble.

As the bubble gets bigger, you know it is getting weaker. But a crowd cheers you to keep going cause they love the bubble. So you keep blowing.

Can someone step in and buy some futures to sway the futures market, sure. But the problem is that the price of credit is below market. When that happens, you get too much credit. Too much credit sloshes around wreaking havoc on all things of substance or fancy that might increase your worth (in your mind).

Now, crashes are a known side effect of the system, and they do take advantage of it, but they are not planned.

Payne

The horrible secret is that no one is manipulating the system. Instead it is run by the Greedy self interest of multiple parties a conspiracy of sorts with no real organization. The TARP program is an excellent example of bubblegum and bandaid repairs.

Usurious

the system was designed to crash............all debt money systems are.....they knew in 1913 and they know it now

DeadFred

The UN will be meeting up next month to figure out how to replace the worthless Agenda 21 with the next step, what a wonderful time to have the markets in turmoil. Maybe we should schedule the Pope to talk to them and Congress about his vision of replacing evil capitalism with a benevolent world-wide central control, oops they already have him scheduled?

My question is what happens if you hold a 'fake' meltdown and something real happens when volatility is already really high? Nothing like people playing Russian roulette only they point the gun at your head, not theirs.

PTR

PTR's picture

Russian roulette only they point the gun at your head, not theirs.

That, sir, is an awesome quote and should be used repeatedly.

Wed, 08/26/2015 - 09:33 | 6472428 ThroxxOfVron

IF it is possible to move specific securites higher via HFT/deliberate buying/spoofing/etc. and concerted buying by institutions and/or the fabled PPT, then it is only logical to assume that the same activities and entities can move those same securites lower via HFT/spoofing/deliberate selling/naked shorting/etc...

I believe that the desks sell what they do not have and buy with funds that do not exist/re-hypothecated client funds ( 'MF Global-ation' ) interbank and/or inter-affiliate leverage.

NON DELIVERY? WHAT DOES THAT MEAN?

"This Act (the Federal Reserve Act, Dec. 23rd 1913) establishes the most gigantic trust on earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed. The trusts will soon realize that they have gone too far even for their own good. The people must make a declaration of independence to relieve themselves from the Monetary Power. This they will be able to do by taking control of Congress. Wall Streeters could not cheat us if you Senators and Representatives did not make a humbug of Congress... The greatest crime of Congress is its currency system. The worst legislative crime of the ages is perpetrated by this banking bill. The caucus and the party bosses have again operated and prevented the people from getting the benefit of their own government."

"The new law will create inflation whenever the trusts want inflation...they can unload the stocks on the people at high prices during the excitement and then bring on a panic and buy them back at low prices...the day of reckoning is only a few years removed."

"When the President signs this act [Federal Reserve Act of 1913],
the invisible government by the money power -- proven to exist
by the Monetary Trust Investigation -- will be legalized.
The new law will create inflation whenever the trusts want inflation.

*** From now on, depressions will be scientifically created. ***"

-Senator Charles A. Lindbergh

[Aug 26, 2015]Peter Schiff The market's 'pipe dream' is ending

"For awhile, people thought that the stock market can handle higher interest rates. That was just a pipe dream. They can't," Schiff said Tuesday on CNBC's " Futures Now ." "That's the only thing propping up the market."

[Aug 25, 2015] What cheap oil means, and where do prices go from here

Let's take the unassailable good news first: The price of benchmark West Texas Intermediate crude oil recently dipped below $39 a barrel, which is down from $140 in 2008. That's an incredible 72% drop. And, yes, lower oil prices have pushed down gas prices. At $2.60 a gallon, gas is now about a dollar below where it was last year at this time. And it could continue to fall. Some analysts are looking for prices to drop below $2, maybe even down toward $1.60 a gallon, the low during the Great Recession in early 2009. When President Obama predicted in his State of the Union Address in January that "the typical family this year should save $750 at the pump," he was probably right. Multiply that by the nation's 115 million households and you get a total savings of over $86 billion. That's huge.

Lower gas prices help poor people in particular; households with incomes of less than $50,000 spent 21% of their income on energy in 2012, according to analysts at Bank of America Merrill Lynch, while households earning more than $50,000 spent 9%. Additionally, Americans who live in chillier regions like New England and the Midwest could save another $750 or so on energy bills.

... ... ...

But the biggest problem with cheap oil may well be the destabilizing effect that it can have on oil-dependent nations around the world. Yes, some may cheer the pain Saudi Arabia and other OPEC nations will feel, but they should be careful of what they wish for as a raft of difficulties looms here. There are 19 countries that produce over a million barrels of oil a day, and it's a diverse group, including, of course, the U.S., Saudi Arabia and Kuwait, but also the likes of Brazil, Norway and Angola, and Canada. Each country will have to adjust to less income and lower employment in oil-related businesses. The nation's that stand to lose the most, though, are Russia, Saudi Arabia, Iran and Iraq—in order, the biggest oil exporters in the world.

... ... ...

bur

Well this was a crock of manure.... A 72% decrease in oil cost only provides approximately a $1 difference at the gas pump??? Who is making all the money? The price at the pump should be around $1.25 at the most. Seems like the oil refineries making fuel are paying significantly less for oil and minimally reducing costs at the pump based on their savings! Also, this whole thing was directed at fuel.

Many of our daily use products (plastics etc.) are petroleum based. Has consumption of those items gone down? Did Coca Cola, Pepsi, etc. quit putting their product in plastic bottles? Did the world quit using plastics over night? Its all an attempt to make the general public feel guilty about low fuel prices.

Give us a small break here. The Middle East has raped the United States for years with the oil prices and we are supposed to feel sorry for them? I don't think so.

Lou

I was pleasantly surprised to read such a sober and balanced article. Cheap energy and lots of it is what has made America the industrial leader of the world. Although low oil prices hurt my income (I am a Petroleum Engineer), easy-to-find-and-produce oil is not unlimited in supply and demand for innovation in oil recovery will continue.

So, I am bullish on Industrial America thriving with these low prices and on the future of the oil industry in meeting future demand. We will not only survive as a nation and as an industry, we will continue to lead the world.

Mica

I see the drop in oil prices this way - everything should be cheaper. Truckers can transport products cheaper. Manufacturers can produce a less expensive product. Travel will be more plentiful because the price of fuel is cheaper. Unemployment will go down because businesses will need to employ more people because the demand will go up. People will have more money to spend.

People don't generally save their money so they will spend more. I'm not really losing sleep over the people struggling in Russia or Saudi Arabia because quite frankly it will be the kings not the general public who will suffer. The general public is suffering already in these countries. As for the people here in the US who work in the oil industry, they have reaped the benefits that we had to pay for so what goes around comes around, Lets face it - there is not an endless supply of oil so the price will soar again.

Joe

Translation: We the left hhhhaaaaattttteeee cheap oil, cheap oil means people are free to do as they please, drive wherever they want, and worst of all drive an SUV!. We MUST put stop to this STAT, quick find someone who will write an article and throw in a bunch of BS that weak minded people with buy into, in other words tell them to ignore common sense and only believe what we tell you. "We are the left you will be assimilated, resistance is futile"

drp

Peak oil was a valid theory. Hubbert was referring to cheap conventional oil. The new oil which has come onto the market as on late amounts to a world surplus of about 3%. Since world demand is about 93 Million BOPD, the 3% represents about 3 MBOPD. The US brought about 4 to 5 million bbls of new expensive unconventional oil online over the past 5 years. The companies that brought that oil online are mostly cashflow negative, and most of them will go broke due to owing more money than they are bringing in. The new shale oil cost more than conventional oil, and the expensive new oil was financed by low interest rates. About 40 million bbls of the world 93 million bbls of demand comes from expensive unconventional oil (such as deep water oil, tar sands, offshore deep water Brazil oil, shale oil, etc.). Once the OPEC countires become unstable to the point where they could lose their regime, they will cut back on production of oil in order to raise the price of crude oil so that they can finance their countries socal programs and finace their armies to protect the regimes which allows the OPEC countries to stay in power and under civil law. Again, the world needs both cheap oil and also unconventional more expensive oil. We do not have enough cheap conventional oil to meet world demand. So, expect the price of world crude oil to increase again once the CAPEX programs that have already been cut result in less oil production. Again, the 5 million bbls of new shale oil that has been brought on the market in the US is not economic, thus prices will have to increase, or this shale oil will not be produced economically and the companies will go out of business. ZIRP -- zero interest rate production cannot last forever, and shale oil, deep water oil, unconventional oil cost more than $40/bbl to produce. Hopefully we will see the need for increased prices in oil so that the price doesnt go up in a whipsaw way, and cause disruptions in production. $65-$80/bbl will be about the price where OPEC might be stable (although their budgets call for about $112 to $86/bbl to remain out of debt and able to remain stable regimes). There is much more to the world oil picture than this articles brings to folks who would like to know. Regards.

Gene

"Another problem with cheap oil, though, is that it will likely derail efforts to develop alternative sustainable energy sources like solar, wind and hydro. These businesses suddenly become uneconomical when the price of oil drops precipitously."

That is a bad argument. Those alternative energy sources were uneconomical and unpractical when oil price was $140 per barrel. We are not ready technologically yet to deliver efficient solution for alternative source of energy, regardless of what Hollywood said. All other arguments such as feeling of Saudi Arabia and other Arabs - are not our "primary" concern at all.

paul

don't let yahoo fool you! What this really means it they cannot pursue further drilling developments without the high price of oil. It cost almost a billion dollars to drill deep and without oil at 80 dollars a barrel they will no longer be able to dig deep. But Alas we have a overflow of oil so why do we need to dig deep still? This is all about big oil not lining their pockets will thousand dollar bills but instead with hundred dollar bills!

[Aug 25, 2015] Norway's Oil Minister Says Crude Price at $40 Can't Last

Bloomberg Business

Crude at $40 a barrel is unsustainable and prices will have to rise as supply drops out of the market, according to Norway's Oil Minister.

"There has developed a surplus capacity on the production side and the supply side -- the supply side will be reduced in today's oil prices," Tord Lien said in an interview in Oslo on Tuesday. "But $40 oil prices? They are clearly unsustainable in the medium- to long-term."

... ... ...

"There's no reason to think we will see oil prices last under $55 a barrel but we will have to adjust to lower oil prices," Lien said. "It's important for Norway to make the adjustments and prepare for a lower price-range than we were getting used to."

[Aug 25, 2015] Out in the Real World, Oil Market Is Much Better Than It Looks

Aug 25, 2015 | Bloomberg Business

The global oil market is healthier than it looks, signaling that crude's plunge to six-year lows has probably gone too far.

While futures tumbled below $45 a barrel in London for the first time since 2009, Morgan Stanley and Standard Chartered Plc say other measures suggest physical markets for crude have stabilized or even strengthened in recent weeks. China, the world's second-biggest oil consumer, will keep buying extra barrels to fill its strategic reserve this year, according to Goldman Sachs Group Inc.

"While oil fundamentals aren't strong, physical markets do not corroborate the substantial weakness in flat price," New York-based Morgan Stanley analyst Adam Longson said in a report Monday. The "latest oil pricing pressure appears more financial than physical."

... ... ...

The gap between the price of the first-month Brent contract, October, and futures for settlement 12 months forward hasn't widened enough over the past few weeks to suggest the world is running out of space to store crude, according to Longson. The spread was more than $11 a barrel in January, compared with about $6 on Tuesday, ICE data show. This suggests the supply surplus is smaller today than it was at the start of the year, said Horsnell.

The spread between Brent and Dubai, the grade used as Asia's regional crude benchmark, is at its narrowest for this time of year in several years, according to Morgan Stanley. This signals continued strength in demand from Asia for Middle Eastern crude, Longson said. Prices for West African crude grades relative to Brent have strengthened in recent weeks, he said.

... ... ...

"Despite poor headline macro data, most China oil demand data points remain resilient," Longson said. The nation's apparent demand for gasoline rose 17 percent last month, the highest growth rate all year, he said.

The filling of emergency crude reserves in China "gives the market a lifeline" that distinguishes the current situation from the Asian crash of 1998, Jeff Currie, head of commodities research at Goldman Sachs, said in an interview on Bloomberg Television Aug. 21. Brent crude dropped to as low as $9.55 a barrel in December 1998, according to ICE data.

... ... ...

Another weight lifted from the oil market is the conclusion of Mexico's annual hedging program, Morgan Stanley's Longson said. The Latin American producer locked in 2016 prices for 212 million barrels, its Finance Ministry said on Aug. 20. The biggest hedge undertaken by any national government, the program was an "under-appreciated negative" for prices and its completion "removes a bearish overhang for oil," he said.


[Aug 25, 2015] Oil Traders Race for Cover as Light at End of Tunnel Dims

Bloomberg Business

The most active WTI options Monday were October $35 puts, which surged 38 cents to 66 cents a barrel on volume of 14,240 lots. It was the highest price since April. The second-most active were November $30 puts, with 8,138 contracts trading.

The so-called skew, measuring the premium for December 25-delta put options versus 25-delta calls, almost doubled in the past two trading sessions.

WTI crude for October delivery fell $2.21, or 5.5 percent, to $38.24 a barrel on the New York Mercantile Exchange Monday. It was the lowest settlement since Feb. 18, 2009. The December contract fell 5.4 percent to $39.65. Tuesday, October futures rose $1.37, or 3.6 percent, to $39.61 at 9:22 a.m.

The Chicago Board Options Exchange Crude Oil Volatility Index surged 12 percent to highest level since April. The gauge measures hedging costs on the United States Oil Fund LP, an exchange-traded fund tracking crude futures. Shares of the ETF dropped 5.6 percent to $12.49.

[Aug 25, 2015] It Feels Like 1997 Warns Art Cashin, Watch High Yield

"... The high yield market has been of some concern of the last several weeks. If that begins to show appreciable weakness than I would think the caution flags stay up. "

Aug 25, 2015 | Zero Hedge

Another scary development is the crash in energy markets. On Monday, the price of WTI oil dropped temporarily below 38 $. How does that affect the stock market?
People keep talking that cheap oil means more money to spend. But we're not seeing that at all. I think that the weakening of the oil price is counter-beneficial: Here in the United States, a lot of the employment that we picked up after the recession came from energy related areas like fracking. And now they're certainly not employing any extra people and in some cases they're laying off. Also, as oil is going down it is putting more pressure on stocks. You see the big oil companies trading lower and they're all prominently represented in different stock market averages.

... ... ....

ready to raise interest rates.

What are the signals you are looking for to stay on top in such a market?
I continue to monitor the high yield market and see where that goes. The high yield market has been of some concern of the last several weeks. If that begins to show appreciable weakness than I would think the caution flags stay up.

[Aug 25, 2015] Bulls back in charge; Intervention the 'new normal'; Hollywood's China love story

Braden

A bounce back to pre-correction levels will prove once and for all that the 1% are completely manipulating the Casino through the use of the media for their gain. It would mean that the news about China and the world markets was somehow false. Why would the market correct and then go back up within a week unless it were pure manipulation? We shall see. This is a real test as to how rigged the game really is. We have not had a correction like this in about 4 years and I don't see how the market continues to march upward based on the reasons it just corrected unless they are false.

[Aug 25, 2015] Oil rallies but still near six-and-a-half-year lows

U.S. crude <CLc1>, also known at West Texas Intermediate or WTI, was up $1.40 at $39.64 a barrel by 1320 GMT, while Brent <LCOc1> was up $1.50 at $44.19.

... ... ...

Several members of the Organization of the Petroleum Exporting Countries are producing record volumes of oil in an attempt to squeeze out competition.

Adding to supply glut concerns, OPEC member Iran said on Tuesday it would increase crude production and reclaim its lost export share after international sanctions are lifted, even if prices remain low.

gigi

This is what causes high prices in gas and makes the 10% rich.

The Commodity Futures Modernization Act of 2000 Signed by Bill Clinton was ® Senator Phil Gramm's desire to prevent the SEC from regulating swaps, and against CFTC regulation preventing "bank products." derivatives passed allowing banks to invest in risky OIL and farm commodities such as corn, wheat and soybeans Driving the prices up for the consumer and creating large profits for a few people and doing nothing for 90% of the people. Thus SPECULATION in the futures trades in commodities OIL , paper trades, was made possible and is a main driver for higher PRICES at the pump and in groceries at the store. This was good for 10% of America and HURT 90% of of the people and we still are feeling the effects every day!

Wrekins

coincidentally, phil gramm's wife worked at the CFTC and puhsed for deregulation that Enron was lobbying for, and then later GRamm's wife left the CFTC and joined the board of directors of Enron. Somehow they managed to stay out of jail. Incredible. As corrupt as the day is long. "Serving their country"

Rudy

that was "better self service".

[Aug 24, 2015] Advice After Stock Market Drop Take Some Deep Breaths, and Don't Do a Thing

"...I think low bank interest is a scam to force people into the markets. That's one result of banking deregulation."
"...Whenever the stock market falls sharply the "professionals" advise the "amateurs" not to do a thing, to stick with their long term goals. Then the professionals sell and the amateurs take the loss."
"... If you are near retirement or in retirement, think twice about the advice here to not adjust your portfolio. Can you sustain a 30 to 40 percent drop in the value of your retirement account and wait, perhaps, years for it to recover? If not, question the advice here and act accordingly. One strategy: Lighten up your equity position, but stay invested. The middle ground, safer approach."
"...Consider this: In 1929 your portfolio (i.e. life savings) disappeared - down 86% overnight. So you held on - for 26 years, until 1955. Now, you are even! Then, ten years later (1965), the market stalled for 17 years…"
"...My question is - why does the average American who isn't a financial expert have to risk his/her money in the stock market at all?... I have no interest in spending all of my spare time educating myself about the market and what it may or may not do. I do have a financial advisor, but if the bank gave a much better rate on savings accounts I wouldn't need one. Me thinks this is a grand conspiracy to steal people's money. "
Aug 24, 2015 | The New York Times
Rutger Fitz, Sweden, 2015/08/22
On your 4th point: Are you seriously comparing selling off at (probably) almost the pinnacle of a seven year fantastic bull market to selling off at the low point of an 18 month crash in 2009?

Of course it's a good idea to get rid of everything you've got now and investing in something extremely stable, if you're 70 years old. Don't be stupid with your money.

jeffgs, home
The Times has, on a number of occasions, printed such articles as this. It may be good advice. It may also be that the Times is part of the corporate body that would loose if more people sold, and so the Times' encouragement to hold is to protect itself, and Capitalism in general. And that it would be in many peoples' advantage to sell now.

I trust that you read me to say I don't know...and it well could be possible. Certainly those who have sold, and so have moved so many markets so far, most of whom [with the big accounts, who effect the prices] think its in their best interest to sell.

Which raises the question: why would it be that so many of those who are paid so much to be 'right', and can make arguments that they are likely to be so, have sold so much? They, and others who care about such things, certainly think that it was right to sell. Why would it be in their best interest, and not in yours or mine?

mancuroc, is a trusted commenter Rochester, NY

The market is perfect for people with money. You can afford the losses, then buy cheap and make a bundle when the market goes up. Meanwhile, the rest of us are at the mercy of the market, depending on its timing.

I think low bank interest is a scam to force people into the markets. That's one result of banking deregulation.

And if some politician seeking your vote proposes converting Social Security to private account, vote the other way.

Kenneth Ranson, Salt Lake City 2 hours ago

Whenever the stock market falls sharply the "professionals" advise the "amateurs" not to do a thing, to stick with their long term goals. Then the professionals sell and the amateurs take the loss.

My advice, sell, sell everything, and when the Dow goes to 4,000 the professionals will have to rethink their investment strategies since they can no longer count on long term investors to stabilize the markets.

wmeyerhofer, New York 2 hours ago

I hate to brag, but I shifted everything to bonds - and insisted my husband shift everything to bonds - about 2 months ago. It was starting to feel downright greedy to expect anything more out of the equity markets. So I'm sitting pretty and I'll put a toe back into equities in, say, a year or two. Meanwhile, I'm whistling a happy tune. Don't hate me. I put everything into bonds in Autumn of 2007 too, so I have a perfect record so far of knowing when I've made too much money and it's time to calm down and batten down the hatches and not get greedy.

treabeton, new hartford, ny

If you are near retirement or in retirement, think twice about the advice here to not adjust your portfolio. Can you sustain a 30 to 40 percent drop in the value of your retirement account and wait, perhaps, years for it to recover?

If not, question the advice here and act accordingly. One strategy: Lighten up your equity position, but stay invested. The middle ground, safer approach.

Fourteen, Boston 2 hours ago

Majortrout and Ron Lieber. Neither of you have it right. Anyone who still believes in buy and hold as a viable investment strategy is a person who will never sleep well at night.

Consider this: In 1929 your portfolio (i.e. life savings) disappeared - down 86% overnight. So you held on - for 26 years, until 1955. Now, you are even! Then, ten years later (1965), the market stalled for 17 years…

Remember 2008? You lost 50%! How did that feel? Now, your life savings are teetering again, so how well are you sleeping, Mr. Buy and Hold?

Buy and hold has been dead for at least ten years, when globalization and algo trading took over. Note that the big money does not "buy and hold".

Don't listen to the big money shills, journalists, or neophyte day-traders....

Jake, Pittsburgh

Famous quote from JP Morgan, when asked what the stock market will do: "It will fluctuate".

Angela, Elk Grove, Ca

My question is - why does the average American who isn't a financial expert have to risk his/her money in the stock market at all? Why can't we get better rates for pass book savings accounts and other safer, government protected investments? Yes, I know that interest rates are set by the Fed, however, many banks and quite a few credit unions seem to have a lot of money for some pretty frivolous things. Are they allowed to set a higher savings rate? Or are they required by law to set their rates at a certain amount. You are lucky if you can get 1% on a passbook savings account. Banks have many sources of interest income and should be able to increase what they pay on their savings accounts.

A case in point, Golden 1 Credit Union in California just recently spent over a million dollars for the naming rights to the new Kings stadium in downtown Sacramento, yet, I am getting about 1% on my passbook account. First of all NO credit union should have that kind of slush fund, second, if they can spend that kind of money on naming rights, then they should be able to give me a much better ROI on my passbook account as well as other savings instruments. Not being a financial person, I have no interest in spending all of my spare time educating myself about the market and what it may or may not do. I do have a financial advisor, but if the bank gave a much better rate on savings accounts I wouldn't need one. Me thinks this is a grand conspiracy to steal people's money.

Ignatius Pug, NYC 59 minutes ago

Yes indeed. There seems to be a periodic sucking sound that pulls the meager profits out of my 401k into the accounts of those who are better off financially. Surely some big players will be profiting from this plunge at the expense of the retirement accounts of the masses. Meanwhile those of us who do something more socially constructive for a living-- as opposed to playing elaborate slot machines-- are forced to fritter away our time and money in support of the "financial industry." I'm sure that members of congress all know this and also have very healthy portfolios.

[Aug 24, 2015] A bedside guide for Henry Paulson By Julian Delasantellis

Blast from the past ;-)
Dec 9, 2008 | Asia Times

It was the unique genius of Woody Allen that turned Dr David Reuben's daring (for the time, anyway) 1969 question-and-answer book, Everything You Always Wanted to Know About Sex (but were afraid to ask) into a 1972 skit comedy film. To illustrate the book's inquiry "Why do some women have trouble reaching orgasm?", Allen presents the story of a modern Italian couple, Fabrizio (played by Allen) and Gina (played by Allen's real-life former paramour, Louise Lasser).

In response to Fabrizio describing to a worldly friend Gina's aforementioned problem, Fabrizio is advised that perhaps what Gina needs is the spark of danger, of risk, in their lovemaking. The pair start cautiously, making love in a friend's house, but before long they are locked in erotic embrace in a restaurant, even in front of a church. Fabrizio is pleased that he has solved the couple's problem, but he worries. He realizes that it is getting harder and harder, that he is having to subject himself and Gina to more and more risk, in order to create a satisfactory conclusion. What must he do next?

Lately, the US stock market is proving equally as hard to please as Gina. ...Much like Gina, it seems the government is being called to engage in ever-more vigorous and extensive endeavors to stimulate the stock market.

[Aug 24, 2015] It might well be the forth neoliberal financial crash on the horizon so it is time to update "Protecting your 401K savings" page

I started to update again Protecting your 401K savings -- the pages that are widely read during periods of extreme uncertainty and almost never during "good" periods of rising stock market ;-).

Neoliberal economics (aka casino capitalism) function from one crash to another. This is given taking into account hypertrophied role of financial sector under neoliberalism, the sector that introduces strong positive feedback look into the economic system. As attempt to put some sand into the wheels in the form of increasing transaction costs or jailing some overzelous bankers or hedge fund managers are blocked by political power of financial oligarchy, which is the actual ruling class under neoliberalism for ordinary investor (who are dragged into stock market by his/her 401K) this in for a very bumpy ride. I managed to observe just two two financial crashed under liberalism (in 2000 and 2008) out of probably four (daving and loan crisis was probably the first). The next crash is given, taking into account hypertrophied role of financial sector under neoliberalism. Timing is anybody guess but it might well be close.

Actually some people are worried. This month the most read pages include:

[Aug 24, 2015] Black Monday Brings Global Market Rout, Investors Mourn The Death Of Central Bank Omnipotence

Aug 24, 2015 | Zero Hedge
NoDebt

My central premise since joining ZH was that we were all going to turn into Japan. As I always pointed out, the only thing not lining up with that theory was a persistent bear market in equities.

What's that? 1200 Dow points in two days? On NO NEW NEWS.

Hey, if you've enjoyed the crash so far you're really going to like the multi-year slow grind lower that follows it.

Bay of Pigs

Its been a long wait for some of us NoDebt.

To see the bulls utterly crucified will be heartwarming to me.

Oldwood

Delusion's greatest enemy is truthiness. Truth is becoming more popular if not also more hated, and this will let the air out. People know its all fake but they choose to ignore that fact as long as they think everyone else will do the same. After all, why not when their economic gains are at stake. Reality always wins however and that inevitability is what people hear ringing in their ears.

Not My Real Name

Multi-year slow grind to be preempted this time by a currency crisis -- and then reset.

gatorengineer

I cannot see how this is possibly going to go slow. Another day or so and Hedgies will start blowing up.

[Aug 24, 2015] Why $20 Oil Won't Happen

"...U.S. crude oil production is now falling. The Energy Information Administration (EIA) reported in its most recent Short Term Energy Outlook (STEO) that U.S. crude oil production declined by 100,000 bpd in July compared with June, and they expect these declines to continue because of the steep cuts shale oil producers have made to their budgets. The EIA reduced its forecast for oil production next year to 400,000 bpd less than this year. "
"...Canadian oil producers are in an even deeper bind than U.S. oil producers. A recent article stated that at $40/bbl WTI, Canada's largest synthetic crude project is losing about $10 on every barrel."
Aug 24, 2015 | OilPrice.com
There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil — easily," influential money manager David Kotok told CNNMoney. "I'm an old goat. I remember when oil was $3 a barrel," said Kotok, whose clients include former New Jersey Governor Thomas Kean.

Yes, and you could get a candy bar and soda for a nickel. But I will bet him $10,000 we don't see WTI at $15/bbl unless he has access to a time machine. Today I want to address this argument. I got into a debate on this topic with a person yesterday, and I am seeing enough of these predictions that I thought it warranted addressing. Again. The $20/bbl argument goes something like this: Crude oil inventories are extremely high. U.S. oil production keeps rising. Demand is falling. Something has to give.

Crude Inventories Did Rise

The problem is that this conventional wisdom argument is wrong on 2 counts. It is true that crude oil inventories are high. Last week there was a surprise build in U.S. crude oil inventories. Analysts were expecting inventories to fall — which they have been doing since April — but instead crude inventories rose by 2.6 million barrels. Following this week's release of the Weekly Petroleum Status Report announcing the surprise build in inventories, I saw more than one person claim "We are definitely going below $40/bbl today."

Related: Donald Trump Sees No Danger For Environment In Keystone XL Pipeline

Didn't happen. Now it could happen within the next few days. We are close, so one really bad day could drop us below $40, disproving my January prediction that WTI would not close below $40/bbl in 2015. But the price won't stay there because that is well below the marginal cost of production at the current level of world demand. More on that below.

I don't believe the people predicting $20 oil are seeing the whole picture. The person I debated this week essentially argued "High inventories = much lower oil prices." But you have to dig down a bit more than that. Why did inventories rise last week? There were two primary drivers.

The first is that the BP refinery in Whiting, Indiana — one of the largest in the country — is dealing with unexpected maintenance problems. They have 235,000 barrels per day (bpd) of crude oil refining capacity offline. (For those who think this is some sort of conspiracy by BP to drive up gasoline prices, get real. This helps all the other refiners — not BP). So BP didn't consume about 1.6 million barrels of crude during the week that they otherwise would have consumed. Yet inventories rose even more than that. Why? Did U.S. production surge?

U.S. Crude Production is Falling

No, U.S. crude oil production is now falling. The Energy Information Administration (EIA) reported in its most recent Short Term Energy Outlook (STEO) that U.S. crude oil production declined by 100,000 bpd in July compared with June, and they expect these declines to continue because of the steep cuts shale oil producers have made to their budgets. The EIA reduced its forecast for oil production next year to 400,000 bpd less than this year. More on the significance of this below.

So why did inventories increase last week? It was actually because crude oil imports surged. Crude oil imports were 465,000 bpd higher than the previous week. That means 3.3 million barrels more oil came into the country than arrived in the previous week. Add that to the BP outage, and there was a surplus of oil of 4.9 million barrels relative to the previous week. This more than explains the 2.6 million barrel weekly gain in inventories. The question is "Will that continue to happen?"

In my opinion, "No." The BP outage will continue for an indefinite period, but the import surge was an anomaly. Crude imports from Canada surged by 404,000 bpd from the previous week. But guess what? Canadian oil producers are in an even deeper bind than U.S. oil producers. A recent article stated that at $40/bbl WTI, Canada's largest synthetic crude project is losing about $10 on every barrel. How long do you suppose that can continue? The larger producers will hang in as long as they can, but some of the smaller guys are going to be shutting in production at $40 WTI (which implies an even lower price for them due to the distance to market). That will reduce imports from Canada — the very imports that surprisingly drove crude inventories higher this week.

[Aug 23, 2015] Are Stock Markets Setting Up For A New 'Black Monday'

Aug 23, 2015 | Zero Hedge

atthelake

Depends on how long tptb want to keep this Ponzi floating. If they're not ready for a crash, they'll do something to stop it. If they're ready for a crash, this will be it. If they've lost control of it, hold on to your hats. It's going to be a memorable ride.

Jungle Jim

But what I'm afraid of is that nothing much will happen tomorrow. Just another Big Nothing. No fireworks. No walls come tumbling down. No heads roll.
Instead, the Nice Government Men will just push a few buttons and pull a few strings and click a few mouse clicks and the stock market will soar right back up to its all-time highs again.
Or they may even dump 24.7 Billion ounces of "gold" in a nanosecond in the wee hours of the morning, strictly to move the price. Move it *down*, that is. I don't think there even *are* 24.7 Billion ounces of physical gold, actual physical three-dimensional metal, on this planet. But that never stopped them before.
Honestly, I'm not psychic, but something just tells me tomorrow's going be a dud, just another non-happening.

farmboy

Who knows, one thing is for sure :

1. Margin requirements will rise that is not good with margin debt at all time high.

2. Option expiration on Friday will mean a lot of people get a call to cover this "free put premium"

3. Momo player must switch sides.

But he expect also tap dancing FED members singing with Krugman for "Fly me to the moon" Frank sinatra.


ebworthen

Take away, the bailouts, 7 years of ZIRP, and Trillions in QE slathered on Wall Street and what do you get?

Dow 6,000 and S&P 666!

silverer

I was thinking about 8,500. But you know what? I don't think I'd bet against your #. The only thing we have to look forward to now is how many people Trump will fire in the first two months if he's elected Prez. Best entertainment ever!

Hope Copy

Don't count earning, as the company still controls the money... they can hold for a crash and do a stock buyback at the bottom and the remaining stock holders get no income.. You guys need to get off the mythical earnings horse as it can break a leg at anytime and you are dumped having gone no where (still on the race track and not in the real world)... gambling without a clue but the horse's name...

In a crash, cash is king, as margins have to be covered. The tals will ose some also and will be bought by those that have cash and want a safe haven, but only at a discount. It is when Bonds also dive and liquidity is provided, the metals will rise.

The FED will buy gold and all refinable metals that are easily transportable. This I suggest to them if they are to do another QE.. at least get omething of value for the release of cash.

the grateful un...

nirvana in the stock buyback game is when you have almost all your float, you buy it back (from yourself) and you go private. the problem with buybacks is when you start losing share value jsut because the indexes are crashing, the only shares being traded are being sold, as bob prechter says it only take two a buyer and seller to make a market, buying up your own stock only works on the upside, with low volume. at the bottom there is no easy money to buyback stock and theres a good chance you held on and still have most of the float, worth less than half what you paid for it with borrowed money. a crash is the one thing the share buyback program is not going to like

the grateful unemployed

the 87 drop included a pretty good snapback rally before we got to monday, (this is august and the crash came in october) then the USG pledged money (we will outdo the Chinese on buying back our stock market I wager) more to the question is this the 2000 nasdaq selloff, which was steady and relentless. that crash came about because of a RATE HIKE. greenspan wanted to pop the tech bubble. the 87 event was as nearly as postiive a crash as you could hope for, most stock had their precrash value back within a year, and the market went bullish, from 2500 precrash to 1500 to 12000 by 2000. it was classic bubble reflating. the nasdaq crash wiped out some really big names, MS never came back instead there were new faces, apple and google. the Nasdaq victims had no earnings, while the current DOW companies have financially engineered earnings (pretty similar on that account) the BTFD crowd was amply rewared on black monday and punished in 2000. currently commodities are in the L shaped recovery, which will confound the BTFD crowd this time, down and flat for a long long time. if the government owns the stock market what should it be worth?

[Aug 23, 2015] IMF official says 'premature' to speak of Chinese crisis

Aug 23, 2015 | Reuters

China's economic slowdown and a sharp fall in its stock market herald not a crisis but a "necessary" adjustment for the world's second biggest economy, a senior International Monetary Fund official said on Saturday.

Fresh evidence of easing growth in China hammered global stock markets on Friday, driving Wall Street to its steepest one-day drop in nearly four years.

"Monetary policies have been very expansive in recent years and an adjustment is necessary," said Carlo Cottarelli, an IMF executive director representing countries such as Italy and Greece on its board.

"It's totally premature to speak of a crisis in China," he told a press conference.

[Aug 23, 2015] Investors Race to Escape Risk in Once-Booming Emerging-Market BondsBy LANDON THOMAS Jr

"...While these funds do not use borrowed money, as did the banks that failed during the mortgage crisis, they have invested large sums in a wide variety of high-yielding bonds and bank loans that are not easy to sell — especially in a bear market."
"...In January, economists at the Bank for International Settlements, or B.I.S., a clearinghouse for global central banks, published a study that highlighted how fast dollar-based lending to companies and countries outside the United States had increased since the financial crisis — doubling to over $9 trillion."
"...For example, Pimco's Total Return bond fund, which last year suffered the loss of its star manager, William H. Gross, and is a mainstay for investors with fairly conservative investment goals, has 21 percent of its $101 billion in assets invested in emerging-market bonds and derivatives."
Aug 22, 2015 | The New York Times

... ... ...

The currency devaluation increased concerns that growth in China was slowing and that other countries might follow with their own devaluations. The notion unnerved bond investors, who began to retreat out of fear they would not be repaid. General uneasiness about a global economic slowdown spread to stocks, which many have believed to be overvalued and due for a decline.

"The growth rates for many of these countries were vastly overstated," said Dani Rodrik, a professor at the Harvard Kennedy School of Government who has studied the impact of foreign capital flows in developing economies. "It was all very unsustainable." The selling spree has raised concerns among regulators and economists about a broader contagion that could make it difficult for individual investors to withdraw money from their mutual funds.

While these funds do not use borrowed money, as did the banks that failed during the mortgage crisis, they have invested large sums in a wide variety of high-yielding bonds and bank loans that are not easy to sell — especially in a bear market.

If investors ask to be repaid all at once — as happened in 2008 — a run-on-the-bank scenario could unfold because funds would have difficulty meeting the demands of people wanting their cash back.

During previous global investment booms and busts, large commercial banks were the dominant overseas lenders. These institutions were just as prone to making bad lending decisions as bond investors, but they also tended to have longer-term relationships with their borrowers and were less likely to cut and run.

Because large global banks suffered significant losses during the financial crisis and were forced to rein in their lending, more nimble — and fickle — bond investors stepped in.

In January, economists at the Bank for International Settlements, or B.I.S., a clearinghouse for global central banks, published a study that highlighted how fast dollar-based lending to companies and countries outside the United States had increased since the financial crisis — doubling to over $9 trillion.

What struck the authors most was that this growth was coming not from global banks but from American mutual funds buying the bonds of emerging-market issuers.

Large fund companies like BlackRock, Franklin Templeton and Pimco and have been inundated with money from investors eager to invest in the high-yielding bonds of emerging-market corporations and countries.

For example, Pimco's Total Return bond fund, which last year suffered the loss of its star manager, William H. Gross, and is a mainstay for investors with fairly conservative investment goals, has 21 percent of its $101 billion in assets invested in emerging-market bonds and derivatives.

Among the many beneficiaries of this largess were commodity-driven borrowers such as the state-owned oil companies Petrobras in Brazil and Pemex in Mexico, the Russian state-owned natural gas exporter Gazprom, and real estate developers in China.

One of the more extreme cases of this bond market frenzy was Mongolia. In 2012, with expectations high that the relatively tiny economy would reap the benefits from China's ceaseless appetite for raw materials, the government sold $1.5 billion worth of bonds, with demand from investors reaching $10 billion.

That meant, in effect, that the country was in a position to borrow an amount twice the size of its $4 billion gross domestic product.

Three years later, the International Monetary Fund is warning that Mongolia may not be able to make good on these loans — 14 percent of which are owned by Franklin Templeton, according to Bloomberg data — and the yields have shot up to about 9 percent from 4 percent.

Of course, a Mongolian bond deal gone bust does not spell disaster. But it illustrates the risks global mutual fund investors were willing to take on in their desire to load up on high-yielding securities.

Mongolia, which was able to sell an additional $500 million in bonds this spring, was not the only dubious borrower to attract cash from global bond investors. Russian train companies easily sold dollar bonds, despite the fact that their revenues were earned in rubles. Even Ecuador, a country that defaulted in 2008, was able to raise $2 billion last year.

Brazil, China, Malaysia, Russia, Turkey and others have sold more than $2 trillion in bonds, mostly to American mutual fund companies, since 2009. As this money flowed into their countries, financing skyscrapers in Istanbul and oil exploration in Brazil, economies and currencies strengthened.

Now the reverse is occurring, led by a slowing Chinese economy, and as that money heads for safety, local currencies are plunging.

In a follow-up paper this month, B.I.S. economists warn of the consequences if bond investors sell these positions in a panic at more or less the same time. And they point out that because bond funds have become so large and own so many of the same securities (many of which tend to be hard to sell), a bond-selling panic can spread quickly.

For example, there has been explosive growth in so-called unconstrained bond funds, which operate somewhat like a hedge fund, with a mandate to buy any security in any part of the world.

According to Morningstar, these funds have increased to $154 billion from $9 billion in 2009, with many of them invested in emerging-market bonds. Because these funds tend to take on more risk and buy securities that are harder to sell — such as emerging-market bonds — the fear is that the managers of these funds will not be able to provide cash to investors when they demand it.

Pimco's unconstrained bond fund, to name one, has 42 percent of its $7.9 billion in assets in emerging-market bonds — mostly Brazilian government securities. (Last month, investors withdrew $492 million from the fund.)

Exchange-traded funds, a type of mutual fund that trades like a stock and promises instant liquidity, have also been large investors in emerging markets.

What worries many regulators and economists is how much mutual fund money is now tied up in these hard-to-sell bonds — an amount that far exceeds the exposure investors had to these markets in earlier emerging-market crises.

EPFR Global, a fund-tracking company, calculates that global bond funds have allocated 16 percent of their holdings to emerging-market bonds. Relative to the 2.5 percent recommended benchmark for these securities suggested by the Barclays aggregate bond index, that is a very aggressive bet.

Ricardo Adrogue, an emerging-markets-debt investor at Babson Capital in Boston, says it is the extreme declines in the currencies of Malaysia, Mexico, Russia and Turkey that worry him — not so much the Chinese devaluation.

"People are saying, 'I want out,' " he said. "It is difficult to see the bottom with all these depreciating currencies."

[Aug 23, 2015] Thomas Piketty: New Thoughts on Capital in the Twenty-First Century

"...growing wealth concentration is kind of a natural tendency of capitalism"

[Transcript]

Thomas, I want to ask you two or three questions, because it's impressive how you're in command of your data, of course, but basically what you suggest is growing wealth concentration is kind of a natural tendency of capitalism, and if we leave it to its own devices, it may threaten the system itself, so you're suggesting that we need to act to implement policies that redistribute wealth, including the ones we just saw: progressive taxation, etc.

In the current political context, how realistic are those? How likely do you think that it is that they will be implemented?

djb said...

If you can't read his book

This short clip covers all his basic ideas

[Aug 23, 2015] This Wasnt Supposed To Happen Crashing Inflation Expectations Suggest Imminent Launch Of QE4

"...They have to raise rates if only to appear to be doing anything more than pushing on a string."
.
"...What does credibility matter when the sheeple can't remember further back than the last commercial and will tout the wonders of the apparel of the emperor because that's what their TV tells them to do, despite their fair emperor standing right in front of them naked as the day they were born?"
Aug 22, 2015 | The New York Times
Aug 23, 2015 | Zero Hedge

Here is a better way of summarizing it: the last three times inflation expectations tumbled this low, the Fed was about to launch QE1, QE2, Operation Twist and QE3.

And the Fed is now expected to hike rates in less than a month even as inflation expectations are the lowest since Lehman?

Good luck. The Fed - which is damned if it hikes rates (and crushes financial conditions by tightening, sending deflationary signals surging even higher and undoing 7 years of stock market levitation), and damned if it launches QE4 (as it loses all verbal jawboning credibility it worked so hard to establish in the past year ) - is now truly boxed in.

James_Cole

The Fed - which is damned if it hikes rates (and crushes financial conditions by tightening, sending deflationary signals surging even higher and undoing 7 years of stock market levitation), and damned if it launches QE4 (as it loses all verbal jawboning credibility it worked so hard to establish in the past year )

Talk is cheap. Unexpected china, unexpected greece, unexpected weather... qe4eva.

NihilistZero

WHAT THE FUCK ARE THEY GONNA BUY WITH A QE4???

There's no big increase in government spending coming with a GOP congress and a Dem President. Mortgage originations are at historic lows because Housing Bubble 2.0 has made real-estate MORE UNAFFORDABLE than during Bubble 1.0. The FED is in a complete liquidity trap.

They have to raise rates if only to appear to be doing anything more than pushing on a string. Unless equities continue to crash and the recession actually starts there's no way to get the government spending going to support another round of QE. And there sure as fuck aren't going to be enough MBS for them to purchase without a return to 2012 RE prices at least.

NorthernPike

$5.00 on Biflation for next 36 months @ .05%/month average both lines.

Line 1 = LIfe support items = Inflate

Line 2 = Non life support = Deflate

Winston Smith 2009

"as it loses all verbal jawboning credibility it worked so hard to establish in the past year"

Bullshit. It should have lost credibility so many times before and didn't. Extend and pretend can easily continue but will fix nothing, of course, just delay the eventual crash as it has done so far.

Question Reality

What does credibility matter when the sheeple can't remember further back than the last commercial and will tout the wonders of the apparel of the emperor because that's what their tele tells them to do, despite their fair emperor standing right in front of them naked as the day they were born?

cougar_w

There is a lot of virtue in delaying the crash. Every one wants the crash delayed including you. And in this case whoever crashes last might crash best, I'm pretty sure the Chinese were betting on it anyway.


El Vaquero

I'd rather get it over with. If I survive, it'll be like taking a giant shit after being constipated for a week. An extremely painful process that needs to be done with, and delaying it only makes it worse.

cougar_w

The metaphor is not a good one. Taking a shit is a normal thing.

The Crash will be more like; having a diseased limb removed with a bone saw without anesthesia, by a guy who never cut off a limb before, and who frankly doesn't like you much because you married his ex.

Yeah extremely painful but also potentially lethal, probably crippling too so that even should you survive it you'll be disfigured for the rest of your life.

We need to get our framing down here folks. And I don't think you really want your wife's ex hacking off your limbs.

Temerity Trader

<"...The Fed - which is damned if it hikes rates (and crushes financial conditions by tightening, sending deflationary signals surging even higher and undoing 7 years of stock market levitation), and damned if it launches QE4 (as it loses all verbal jawboning credibility it worked so hard to establish in the past year ) - is now truly boxed in...">

Couldn't agree more, and I think most everyone can see it now. To even hint at QE4 is to admit total failure and, most importantly, that more QE is worthless except to create another momentary algo-driven pop. Just to not go through with the tiny rate hike will be further evidence the Fed is f***ed. We are so close to the final collapse that nothing can stop it. The markets are now 98% based upon Fed worship and hope.

I will be a lonely voice that says more QE is likely impossible to do. Behind the scenes Janet may have to push back and tell the oligarchs quietly, it just won't work. Mr Market is about to exact punishment for the intervention that should never have happened. The spiral down will be self-reinforcing and very ugly...

[Aug 23, 2015] Gold Driving Higher: Spec Flambé

"...A short squeeze, also known as speculator flambé."
.
"...It requires some 'juice' to get the minions in the media and the pros on the exchanges to all dance to the same tune, and lure the specs in for 'Pee Wee's Big Adventure' with their Big Bad Short, not only on the metals, but the miners, the ETFs, yada yada. "\
.
"...Official reports will no doubt cite an excess of animal spirits in the bearish outlook that took them to an excess, and the markets, in their glorious efficiency, were merely reverting to the mean."
What do you get when you add the volatile sauce of a 'flight to safety' to the hot pan of a record net short in the large and small speculators?

A short squeeze, also known as speculator flambé.

They probably caught a lot of the other peoples' money crowd as well, momentum players and the managed mayhem merchants.

But don't blame the poor beleagured goldbugs for this one. They are just glad for a break from the pounding they have been taking.

It requires some 'juice' to get the minions in the media and the pros on the exchanges to all dance to the same tune, and lure the specs in for 'Pee Wee's Big Adventure' with their Big Bad Short, not only on the metals, but the miners, the ETFs, yada yada.

Finger lickin' good. A lot of cool money, and a lot of powerful connections. The grifters giveth to themselves, and the grifters taketh away, from everyone else.

Official reports will no doubt cite an excess of animal spirits in the bearish outlook that took them to an excess, and the markets, in their glorious efficiency, were merely reverting to the mean.

That might be plausible except that it took a lot of energy to drive the futures prices as low as they had gone, starting with that $50 overnight mugging in the quiet early hours of the gold markes few weeks ago. No one sees Mackie Messer, and no one knows.

Especially with China dragging gold in by the tonne. About 302 of them in July according to the second chart below. Nothing to see there, move along.

No one wants a pet rock, until you have to provide the one you sold but didn't have.

And lets not forget about silver. That's in chart three. Plenty of tinder for a short squeeze there.

Or a bonfire of the inanities.

Let's see how far it goes. Is it just a flash in the pan, or the first act in something different.

Must be nearly time to tighten up those margin requirements.

[Aug 23, 2015] 330 Ramp Capital™ on Twitter @BarbarianCap not what I'm seeing

Extreme fear

[Aug 22, 2015] Carnage Worst Week For Stocks In 4 Years, VIX Soars Most Ever

Aug 22, 2015 | Zero Hedge

Dow enters correction... this was the 9th largest point drop in the history of The Dow...

And The VIX ETF saw its biggest 2-day rise since 2011 (no wonder with 61.7mm shares short agaionst just 60.6mm outstanding)

Dropping for 8 straight weeks for the first time since 1986...

[Aug 22, 2015] From Russia to Iran, the consequences of the global oil bust

I always was low opinion about Farid Zakaria. He is just a tool.
Aug 22, 2015 | The Washington Post

Nick Butler, former head of strategy for BP, told me, "We are in for a longer and more sustained period of low oil prices than in the late 1980s." Why? He points to a perfect storm. Supply is up substantially because a decade of high oil prices encouraged producers throughout the world to invest vast amounts of money in finding new sources. Those investments are made and will keep supply flowing for years. Leonardo Maugeri, former head of strategy for the Italian energy giant Eni, says, "There is no way to stop this phenomenon." He predicts that prices could actually drop to $35 per barrel next year, down from more than $105 last summer.

A primary reason for the accelerated price decline is that Saudi Arabia, the world's "swing supplier" — the one that can most easily increase or decrease production — has decided to keep pumping. The Saudis "know it hurts them but they hope it will hurt everyone else more," says Maugeri, now at Harvard. One of Saudi Arabia's main aims is to put U.S. producers of shale and tight oil out of business. So far, it has not worked. Though battered by plunging prices, U.S. firms have used technology and smart business practices to stay afloat. The imminent return of Iran's oil — which markets are assuming will happen, but slowly — is another factor driving down prices. So is the increasing energy efficiency of cars and trucks.

Major oil-producing countries everywhere are facing a fiscal reckoning like nothing they have seen in decades, perhaps ever. Let's take a brief tour of the new world.

... ... ...

Many American experts and commentators have hoped for low oil prices as a way to deprive unsavory regimes around the globe of easy money. Now it's happening, but at a speed that might produce enormous turmoil and uncertainty in an already anxious world.

[Aug 22, 2015]How Complex Systems Fail

"...This is really a profound observation – things rarely fail in an out-the-blue, unimaginable, catastrophic way. Very often just such as in the MIT article the fault or faults in the system are tolerated. But if they get incrementally worse, then the ad-hoc fixes become the risk (i.e. the real risk isn't the original fault condition, but the application of the fixes)."
.
"...It is that cumulative concentration of wealth and power over time which is ultimately destabilizing, producing accepted social norms and customs that lead to fragility in the face of both expected and unexpected shocks. This fragility comes from all sorts of specific consequences of that inequality, from secrecy to group think to brain drain to two-tiered justice to ignoring incompetence and negligence to protecting incumbents necessary to maintain such an unnatural order."
.
"...The problem arises with any societal order over time in that corrosive elements in the form of corruptive behavior (not principle based) by decision makers are institutionalized. I may not like Trump as a person but the fact that he seems to unravel and shake the present arrangement and serves as an indicator that the people begin to realize what game is being played, makes me like him in that specific function."
.
".... . .but it is also true that the incentives of the capitalist system ensure that there will be more and worse accidents than necessary, as the agents involved in maintaining the system pursue their own personal interests which often conflict with the interests of system stability and safety."
.
"...Globalization factors in maximizing the impact of Murphy's Law..."
.
"...Operators or engineers controlling or modifying the system are providing feedback. Feedback can push the system past "safe" limits. Once past safe limits, the system can fail catastrophically Such failure happen very quickly, and are always "a surprise"."
.
"...Where one can only say: "Forgive them Father, for they know not what they do""
.
"...The Iron Law of Institutions (agents act in ways that benefit themselves in the context of the institution [system], regardless of the effect those actions have on the larger system) would seem to mitigate against any attempts to correct our many, quickly failing complex social and technological systems."
Aug 21, 2015 | naked capitalism
August 21, 2015 by Yves Smith

Lambert found a short article by Richard Cook that I've embedded at the end of the post. I strongly urge you to read it in full. It discusses how complex systems are prone to catastrophic failure, how that possibility is held at bay through a combination of redundancies and ongoing vigilance, but how, due to the impractical cost of keeping all possible points of failure fully (and even identifying them all) protected, complex systems "always run in degraded mode". Think of the human body. No one is in perfect health. At a minimum, people are growing cancers all the time, virtually all of which recede for reasons not well understood.

The article contends that failures therefore are not the result of single causes. As Clive points out:

This is really a profound observation – things rarely fail in an out-the-blue, unimaginable, catastrophic way. Very often just such as in the MIT article the fault or faults in the system are tolerated. But if they get incrementally worse, then the ad-hoc fixes become the risk (i.e. the real risk isn't the original fault condition, but the application of the fixes). https://en.wikipedia.org/wiki/Windscale_fire#Wigner_energy documents how a problem of core instability was a snag, but the disaster was caused by what was done to try to fix it. The plant operators kept applying the fix in ever more extreme does until the bloody thing blew up.

But I wonder about the validity of one of the hidden assumptions of this article. There is a lack of agency in terms of who is responsible for the care and feeding of complex systems (the article eventually identifies "practitioners" but even then, that's comfortably vague). The assumption is that the parties who have influence and responsibility want to preserve the system, and have incentives to do at least an adequate job of that.

There are reasons to doubt that now. Economics has promoted ways of looking at commercial entities that encourage "practitioners" to compromise on safety measures. Mainstream economics has as a core belief that economies have a propensity to equilibrium, and that equilibrium is at full employment. That assumption has served as a wide-spread justification for encouraging businesses and governments to curtail or end pro-stability measures like regulation as unnecessary costs.

To put it more simply, the drift of both economic and business thinking has been to optimize activity for efficiency. But highly efficient systems are fragile. Formula One cars are optimized for speed and can only run one race.

Highly efficient systems also are more likely to suffer from what Richard Bookstaber called "tight coupling." A tightly coupled system in one in which events occur in a sequence that cannot be interrupted. A way to re-characterize a tightly coupled system is a complex system that has been in part reoptimized for efficiency, maybe by accident, maybe at a local level. That strips out some of the redundancies that serve as safeties to prevent positive feedback loops from having things spin out of control.

To use Bookstaber's nomenclature, as opposed to this paper's, in a tightly coupled system, measures to reduce risk directly make things worse. You need to reduce the tight coupling first.

A second way that the economic thinking has arguably increased the propensity of complex systems of all sorts to fail is by encouraging people to see themselves as atomized agents operating in markets. And that's not just an ideology; it's reflected in low attachment to institutions of all sorts, ranging from local communities to employers (yes, employers may insist on all sorts of extreme shows of fealty, but they are ready to throw anyone in the dust bin at a moment's notice). The reality of weak institutional attachments and the societal inculcation of selfish viewpoints means that more and more people regard complex systems as vehicles for personal advancement. And if they see those relationships as short-term or unstable, they don't have much reason to invest in helping to preserving the soundness of that entity. Hence the attitude called "IBY/YBG" ("I'll Be Gone, You'll Be Gone") appears to be becoming more widespread.

I've left comments open because I'd very much enjoy getting reader reactions to this article. Thanks!

James Levy August 21, 2015 at 6:35 am

So many ideas….
Mike Davis argues that in the case of Los Angeles, the key to understanding the city's dysfunction is in the idea of sunk capital – every major investment leads to further investments (no matter how dumb or large) to protect the value of past investments.

Tainter argues that the energy cost (defined broadly) of maintaining the dysfunction eventually overwhelms the ability of the system to generate surpluses to meet the rising needs of maintenance.

Goldsworthy has argued powerfully and persuasively that the Roman Empire in the West was done in by a combination of shrinking revenue base and the subordination of all systemic needs to the needs of individual emperors to stay in power and therefore stay alive. Their answer was endlessly subdividing power and authority below them and using massive bribes to the bureaucrats and the military to try to keep them loyal.

In each case, some elite individual or grouping sees throwing good money after bad as necessary to keeping their power and their positions. Our current sclerotic system seems to fit this description nicely.

Jim August 21, 2015 at 8:15 am

I immediately thought of Tainter's "The Complex of Complex Cultures" when I starting reading this. One point that Tainter made is that collapse is not all bad. He presents evidence that the average well being of people in Italy was probably higher in the sixth century than in the fifth century as the Western Roman Empire died. Somewhat like death being necessary for biological evolution collapse may be the only solution to the problem of excessive complexity.

xxx August 22, 2015 at 4:39 am

Tainter insists culture has nothing to do with collapse, and therefore refuses to consider it, but he then acknowledges that the elites in some societies were able to pull them out of a collapse trajectory. And from the inside, it sure as hell looks like culture, as in a big decay in what is considered to be acceptable conduct by our leaders, and what interests they should be serving (historically, at least the appearance of the greater good, now unabashedly their own ends) sure looks to be playing a big, and arguably the defining role, in the rapid rise of open corruption and related social and political dysfunction.

Praedor August 21, 2015 at 9:19 am

That also sounds like the EU and even Greece's extreme actions to stay in the EU.

jgordon August 21, 2015 at 7:44 am

Then I'll add my two cents: you've left out that when systems scale linearly, the amount of complexity, and points for failure, and therefore instability, that they contain scale exponentially–that is according to the analysis of James Rickards, and supported by the work of people like Joseph Tainter and Jared Diamond.

Ever complex problem that arises in a complex system is fixed with an even more complex "solution" which requires ever more energy to maintain, and eventually the inevitably growing complexity of the system causes the complex system to collapse in on itself. This process requires no malignant agency by humans, only time.

nowhere August 21, 2015 at 12:10 pm

Sounds a lot like JMG and catabolic collapse.

jgordon August 21, 2015 at 2:04 pm

Well, he got his stuff from somewhere too.

Synoia August 21, 2015 at 1:26 pm

There are no linear systems. They are all non-linear because the include a random, non-linear element – people.

Jim August 21, 2015 at 2:26 pm

Long before there were people the Earth's eco-system was highly complex and highly unstable.

Ormond Otvos August 21, 2015 at 4:37 pm

The presumption that fixes increase complexity may be incorrect.

Fixes should include awareness of complexity.

That was the beauty of Freedom Club by Kaczinsky, T.

JTMcPhee August 21, 2015 at 4:44 pm

Maybe call the larger entity "meta-stable?" Astro and geo inputs seem to have been big perturbers. Lots of genera were around a very long time before naked apes set off on their romp. But then folks, even these hot, increasingly dry days, brag on their ability to anticipate, and profit from, and even cause, with enough leverage, de- stability. Good thing the macrocosms of our frail, violent, kindly, destructive bodies are blessed with the mechanisms of homeostasis.

Too bad our "higher" functions are not similarly gifted… But that's what we get to chat about, here and in similar meta-spaces…

MikeW August 21, 2015 at 7:52 am

Agree, positive density of ideas, thoughts and implications.

I wonder if the reason that humans don't appreciate the failure of complex systems is that (a) complex systems are constantly trying to correct, or cure as in your cancer example, themselves all the time until they can't at which point they collapse, (b) that things, like cancer leading to death, are not commonly viewed as a complex system failure when in fact that is what it is. Thus, while on a certain scale we do experience complex system failure on one level on a daily basis because we don't interpret it as such, and given that we are hardwired for pattern recognition, we don't address complex systems in the right ways.

This, to my mind, has to be extended to the environment and the likely disaster we are currently trying to instigate. While the system is collapsing at one level, massive species extinctions, while we have experienced record temperatures, while the experts keep warning us, etc., most people to date have experienced climate change as an inconvenience — not the early stages of systemwide failure.

Civilization collapses have been regular, albeit spaced out, occurrences. We seem to think we are immune to them happening again. Yet, it isn't hard to list the near catastrophic system failures that have occurred or are currently occurring (famines, financial markets, genocides, etc.).

And, in most systems that relate to humans with an emphasis on short term gain how does one address system failures?

Brooklin Bridge August 21, 2015 at 9:21 am

Good-For-Me-Who-Effing-Cares-If-It's-Bad-For-You-And-Everyone-Else

would be a GREAT category heading though it's perhaps a little close to "Imperial Collapse"

Whine Country August 21, 2015 at 9:52 am

To paraphrase President Bill Clinton, who I would argue was one of the major inputs that caused the catastrophic failure of our banking system (through the repeal of Glass-Steagall), it all depends on what the definition of WE is.

jrs August 21, 2015 at 10:12 pm

And all that just a 21st century version of "apres moi le deluge", which sounds very likely to be the case.

Oregoncharles August 21, 2015 at 3:55 pm

JT – just go to the Archdruid site. They link it regularly, I suppose for this purpose.

Jim August 21, 2015 at 8:42 am

Civilizational collapse is extremely common in history when one takes a long term view. I'm not sure though that I would describe it as having that much "regularity" and while internal factors are no doubt often important external factors like the Mongol Onslaught are also important. It's usually very hard to know exactly what happened since historical documentation tends to disappear in periods of collapse. In the case of Mycenae the archaeological evidence indicates a near total population decline of 99% in less than a hundred years together with an enormous cultural decline but we don't know what caused it.

As for long term considerations the further one tries to project into the future the more uncertain such projections become so that long term planning far into the future is not likely to be evolutionarily stable. Because much more information is available about present conditions than future conditions organisms are probably selected much more to optimize for the short term rather than for the largely unpredicatble long term.

Gio Bruno August 21, 2015 at 1:51 pm

…it's not in question. Evolution is about responding to the immediate environment. Producing survivable offspring (which requires finding a niche). If the environment changes (Climate?) faster than the production of survivable offspring then extinction (for that specie) ensues.

Now, Homo sapien is supposedly "different" in some respects, but I don't think so.

Jim August 21, 2015 at 2:14 pm

I agree. There's nothing uniquely special about our species. Of course species can often respond to gradual change by migration. The really dangerous things are global catastrophes such as the asteroid impact at the end of the Cretaceous or whatever happened at the Permian-Triassic boundary (gamma ray burst maybe?).

Ormond Otvos August 21, 2015 at 4:46 pm

Interesting that you sit there and type on a world-spanning network batting around ideas from five thousand years ago, or yesterday, and then use your fingers to type that the human species isn't special.

Do you really think humans are unable to think about the future, like a bear hibernating, or perhaps the human mind, and its offspring, human culture and history, can't see ahead?

Why is "Learn the past, or repeat it!" such a popular saying, then?

diptherio August 21, 2015 at 9:24 am

The Iron Law of Institutions (agents act in ways that benefit themselves in the context of the institution [system], regardless of the effect those actions have on the larger system) would seem to mitigate against any attempts to correct our many, quickly failing complex social and technological systems.

jgordon August 21, 2015 at 10:40 am

This would tend to imply that attempts to organize large scale social structures is temporary at best, and largely futile. I agree. The real key is to embrace and ride the wave as it crests and callapses so its possible to manage the fall–not to try to stand against so you get knocked down and drowned. Focus your efforts on something useful instead of wasting them on a hopeless, and worthless, cause.

Jim August 21, 2015 at 2:21 pm

Civilization is obviously highly unstabe. However it should remembered that even Neolithic cultures are almost all less than 10,000 years old. So there has been little time for evolutionary adaptations to living in complex cultures (although there is evidence that the last 10,000 years has seen very rapid genetic changes in human populations). If civilization can continue indefinitely which of course is not very clear then it would be expected that evolutionary selection would produce humans much better adapted to living in complex cultures so they might become more stable in the distant future. At present mean time to collapse is probably a few hundred years.

Ormond Otvos August 21, 2015 at 4:50 pm

But perhaps you're not contemplating that too much individual freedom can destabilize society. Is that a part of your vast psychohistorical equation?

washunate August 21, 2015 at 10:34 am

Well said, but something I find intriguing is that the author isn't talking so much about civilizational collapse. The focus is more on various subsystems of civilization (transportation, energy, healthcare, etc.).

These individual components are not inherently particularly dangerous (at a systemic/civilizational level). They have been made that way by purposeful public policy choices, from allowing enormous compensation packages in healthcare to dismantling our passenger rail system to subsidizing fossil fuel energy over wind and solar to creating tax incentives that distort community development. These things are not done for efficiency. They are done to promote inequality, to allow connected insiders and technocratic gatekeepers to expropriate the productive wealth of society. Complexity isn't a byproduct; it is the mechanism of the looting. If MDs in hospital management made similar wages as home health aides, then how would they get rich off the labor of others? And if they couldn't get rich, what would be the point of managing the hospital in the first place? They're not actually trying to provide quality, affordable healthcare to all Americans.

It is that cumulative concentration of wealth and power over time which is ultimately destabilizing, producing accepted social norms and customs that lead to fragility in the face of both expected and unexpected shocks. This fragility comes from all sorts of specific consequences of that inequality, from secrecy to group think to brain drain to two-tiered justice to ignoring incompetence and negligence to protecting incumbents necessary to maintain such an unnatural order.

Linus Huber August 21, 2015 at 7:05 pm

I tend to agree with your point of view.

The problem arises with any societal order over time in that corrosive elements in the form of corruptive behavior (not principle based) by decision makers are institutionalized. I may not like Trump as a person but the fact that he seems to unravel and shake the present arrangement and serves as an indicator that the people begin to realize what game is being played, makes me like him in that specific function. There may be some truth in Thomas Jefferson's quote: "The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure." Those presently benefiting greatly from the present arrangement are fighting with all means to retain their position, whether successfully or not, we will see.

animalogic August 22, 2015 at 2:18 am

Well said, washunate. I think an argument could be run that outside economic areas, the has been a drive to de-complexity.
Non economic institutions, bodies which exist for non market/profit reasons are or have been either hollowed out, or co-opted to market purposes. Charities as vast engines of self enrichment for a chain of insiders. Community groups, defunded, or shriveled to an appendix by "market forces". The list goes on…and on.
Reducing the "not-market" to the status of sliced-white-bread makes us all the more dependant on the machinated complexities of "the market"….god help us….

Jay Jay August 21, 2015 at 8:00 am

Joseph Tainter's thesis, set out in "The Collapse of Complex Societies" is simple: as a civilization ages its use of energy becomes less efficient and more costly, until the Law of Diminishing Returns kicks in, generates its own momentum and the system grinds to a halt. Perhaps this article describes a late stage of that process. However, it is worth noting that, for the societies Tainter studied, the process was ineluctable. Not so for our society: we have the ability -- and the opportunity -- to switch energy sources.

Moneta August 21, 2015 at 5:48 pm

In my grandmother's youth, they did not burn wood for nothing. Splitting wood was hard work that required calories.

Today, we heat up our patios at night with gas heaters… The amount of economic activity based on burning energy not related to survival is astounding.

A huge percentage of our GDP is based on economies of scale and economic efficiencies but are completely disconnected from environmental efficiencies.

This total loss is control between nature and our lifestyles will be our waterloo .

TG August 21, 2015 at 8:20 am

An interesting article as usual, but here is another take.

Indeed, sometimes complex systems can collapse under the weight of their own complexity (Think: credit default swaps). But sometimes there is a single simple thing that is crushing the system, and the complexity is a desperate attempt to patch things up that is eventually destroyed by brute force.

Consider a forced population explosion: the people are multiplied exponentially. This reduces per capita physical resources, tends to reduce per-capita capital, and limits the amount of time available to adapt: a rapidly growing population puts an economy on a treadmill that gets faster and faster and steeper and steeper until it takes superhuman effort just to maintain the status quo. There is a reason why, for societies without an open frontier, essentially no nation has ever become prosperous with out first moderating the fertility rate.

However, you can adapt. New technologies can be developed. New regulations written to coordinate an ever more complex system. Instead of just pumping water from a reservoir, you need networks of desalinization plants – with their own vast networks of power plants and maintenance supply chains – and recycling plans, and monitors and laws governing water use, and more efficient appliances, etc.etc.

As an extreme, consider how much effort and complexity it takes to keep a single person alive in the space station.

That's why in California cars need to be emissions tested, but in Alabama they don't – and the air is cleaner in Alabama. More people needs more controls and more exotic technology and more rules.

Eventually the whole thing starts to fall apart. But to blame complexity itself, is possibly missing the point.

Steve H. August 21, 2015 at 8:30 am

No system is ever 'the'.

Jim Haygood August 21, 2015 at 11:28 am

Two words, Steve: Soviet Union.

It's gone now. But we're rebuilding it, bigger and better.

Ormond Otvos August 21, 2015 at 4:54 pm

If, of course, bigger is better.

Facts not in evidence.

Ulysses August 21, 2015 at 8:40 am

"But because system operations are never trouble free, human practitioner adaptations to changing conditions actually create safety from moment to moment. These adaptations often amount to just the selection of a well-rehearsed routine from a store of available responses; sometimes, however, the adaptations are novel combinations or de novo creations of new approaches."

This may just be a rationalization, on my part, for having devoted so much time to historical studies– but it seems to me that historians help civilizations prevent collapse, by preserving for them the largest possible "store of available responses."

aronj August 21, 2015 at 8:41 am

Yves,

Thanks for posting this very interesting piece! As you know, I am a fan Bookstaber's concept of tight coupling. Interestingly, Bookstaber (2007) does not reference Cook's significant work on complex systems.

Before reading this article, I considered the most preventable accidents involve a sequence of events uninterrupted by human intelligence. This needs to be modified by Cook's points 8, 9. 10 and 12.

In using the aircraft landing in the New York river as an example of interrupting a sequence of events, the inevitable accident occurred but no lives were lost. Thus the human intervention was made possible by the unknowable probability of coupling the cause with a possible alternative landing site. A number of aircraft accidents involve failed attempts to find a possible landing site, even though Cook's point #12 was in play.

Thanks for the post!!!!!

Brooklin Bridge August 21, 2015 at 8:47 am

A possible issue with or a misunderstanding of #7. Catastrophic failure can be made up of small failures that tend to follow a critical path or multiple critical paths. While a single point of origin for catastrophic failure may rarely if ever occur in a complex system, it is possible and likely in such a system to have collections of small failures that occur or tend to occur in specific sequences of order. Population explosion (as TG points out) would be a good example of a failure in a complex social system that is part of a critical path to catastrophic failure.

Such sequences, characterized by orders of precedence, are more likely in tightly coupled systems (which as Yves points out can be any system pushed to the max). The point is, they can be identified and isolated at least in situations where a complex system is not being misused or pushed to it's limits or created due to human corruption where such sequences of likelihood may be viewed or baked into the system (such as by propaganda->ideology) as features and not bugs.

Spring Texan August 21, 2015 at 8:53 am

I agree completely that maximum efficiency comes with horrible costs. When hospitals are staffed so that people are normally busy every minute, patients routinely suffer more as often no one has time to treat them like a human being, and when things deviate from the routine, people have injuries and deaths. Same is true in other contexts.

washunate August 21, 2015 at 10:40 am

Agreed, but that's not caused by efficiency. That's caused by inequality. Healthcare has huge dispariaties in wages and working conditions. The point of keeping things tightly staffed is to allow big bucks for the top doctors and administrators.

susan the other August 21, 2015 at 2:55 pm

Yes. When one efficiency conflicts with and destroys another efficiency. Eq. Your mother juggled a job and a family and ran around in turbo mode but she dropped everything when her kids were in trouble. That is an example of an efficiency that can juggle contradictions and still not fail.

JTMcPhee August 21, 2015 at 11:38 am

Might this nurse observe that in hospitals, there isn't and can't be a "routine" to deviate from, no matter how fondly "managers" wish to try to make it and how happy they may be to take advantage of the decent, empathic impulses of many nurses and/or the need to work to eat of those that are just doing a job. Hence the kindly (sic) practice of "calling nurses off" or sending them home if "the census is down," which always runs aground against a sudden influx of billable bodies or medical crises that the residual staff is expected to just somehow cope with caring for or at least processing, until the idiot frictions in the staffing machinery add a few more person-hours of labor to the mix. The larger the institution, the greater the magnitude and impact (pain, and dead or sicker patients and staff too) of the "excursions from the norm."

It's all about the ruling decisions on what are deemed (as valued by where the money goes) appropriate outcomes of the micro-political economy… In the absence of an organizing principle that values decency and stability and sustainability rather than upward wealth transfer.

Will August 21, 2015 at 8:54 am

I'll join the choir recommending Tainter as a critical source for anybody interested in this stuff.

IBG/YBG is a new concept for me, with at least one famous antecedent. "Après moi, le déluge."

diptherio August 21, 2015 at 9:17 am

The author presents the best-case scenario for complex systems: one in which the practitioners involved are actually concerned with maintaining system integrity. However, as Yves points out, that is far from being case in many of our most complex systems.

For instance, the Silvertip pipeline spill near Billings, MT a few years ago may indeed have been a case of multiple causes leading to unforeseen/unforeseeable failure of an oil pipeline as it crossed the Yellowstone river. However, the failure was made immeasurably worse due to the fact that Exxon had failed to supply that pump-station with a safety manual, so when the alarms started going off the guy in the station had to call around to a bunch of people to figure out what was going on. So while it's possible that the failure would have occurred no matter what, the failure of the management to implement even the most basic of safety procedures made the failure much worse than it otherwise would have been.

And this is a point that the oil company apologists are all too keen to obscure. The argument gets trotted out with some regularity that because these oil/gas transmission systems are so complex, some accidents and mishaps are bound to occur. This is true–but it is also true that the incentives of the capitalist system ensure that there will be more and worse accidents than necessary, as the agents involved in maintaining the system pursue their own personal interests which often conflict with the interests of system stability and safety.

Complex systems have their own built-in instabilities, as the author points out; but we've added a system of un-accountability and irresponsibility on top of our complex systems which ensures that failures will occur more often and with greater fall-out than the best-case scenario imagined by the author.

Brooklin Bridge August 21, 2015 at 9:42 am

As Yves pointed out, there is a lack of agency in the article. A corrupt society will tend to generate corrupt systems just as it tends to generate corrupt technology and corrupt ideology. For instance, we get lots of little cars driving themselves about, profitably to the ideology of consumption, but also with an invisible thumb of control, rather than a useful system of public transportation. We get "abstenence only" population explosion because "groath" rather than any rational assessment of obvious future catastrophe.

washunate August 21, 2015 at 10:06 am

Right on. The primary issue of our time is a failure of management. Complexity is an excuse more often than an explanatory variable.

abynormal August 21, 2015 at 3:28 pm

abynormal
August 21, 2015 at 2:46 pm

Am I the only hearing 9″Nails, March of the Pigs

Aug. 21, 2015 1:54 a.m. ET

A Carlyle Group LP hedge fund that anticipated a sudden currency-policy shift in China gained roughly $100 million in two days last week, a sign of how some bearish bets on the world's second-largest economy are starting to pay off.
http://www.wsj.com/articles/hedge-fund-gains-100-million-in-two-days-on-bearish-china-bet-1440136499?mod=e2tw

oink oink is the sound of system fail

Oregoncharles August 21, 2015 at 3:40 pm

A very important principle:

All systems have a failure rate, including people. We don't get to live in a world where we don't need to lock our doors and banks don't need vaults. (If you find it, be sure to radio back.)

The article is about how we deal with that failure rate. Pointing out that there are failures misses the point.

cnchal August 21, 2015 at 5:05 pm

. . .but it is also true that the incentives of the capitalist system ensure that there will be more and worse accidents than necessary, as the agents involved in maintaining the system pursue their own personal interests which often conflict with the interests of system stability and safety.

How true. A Chinese city exploded. Talk about a black swan. I wonder what the next disaster will be?

hemeantwell August 21, 2015 at 9:32 am

After a skimmy read of the post and reading James' lead-off comment re emperors (Brooklin Bridge comment re misuse is somewhat resonant) it seems to me that a distinguishing feature of systems is not being addressed and therefore being treated as though it's irrelevant.

What about the mandate for a system to have an overarching, empowered regulatory agent, one that could presumably learn from the reflections contained in this post? In much of what is posted here at NC writers give due emphasis to the absence/failure of a range of regulatory functions relevant to this stage of capitalism. These run from SEC corruption to the uncontrolled movement of massive amount of questionably valuable value in off the books transactions between banks, hedge funds etc. This system intentionally has a deliberately weakened control/monitoring function, ideologically rationalized as freedom but practically justified as maximizing accumulation possibilities for the powerful. It is self-lobotomizing, a condition exacerbated by national economic territories (to some degree). I'm not going to now jump up with 3 cheers for socialism as capable of resolving problems posed by capitalism. But, to stay closer to the level of abstraction of the article, doesn't the distinction between distributed opacity + unregulated concentrations of power vs. transparency + some kind of central governing authority matter? Maybe my Enlightenment hubris is riding high after the morning coffee, but this is a kind of self-awareness that assumes its range is limited, even as it posits that limit. Hegel was all over this, which isn't to say he resolved the conundrum, but it's not even identified here.

Ormond Otvos August 21, 2015 at 5:06 pm

Think of Trump as the pimple finally coming to a head: he's making the greed so obvious, and pissing off so many people that some useful regulation might occur.

Another thought about world social collapse: if such a thing is likely, (and I'm sure the PTB know if it is, judging from the reports from the Pentagon about how Global Warming being a national security concern) wouldn't it be a good idea to have a huge ability to overpower the rest of the world?

We might be the only nation that survives as a nation, and we might actually have an Empire of the World, previously unattainable. Maybe SkyNet is really USANet. It wouldn't require any real change in the national majority of creepy grabby people.

Jim August 21, 2015 at 9:43 am

Government bureaucrats and politicians pursue their own interests just as businessmen do. Pollution was much worst in the non-capitalist Soviet Union, East Germany and Eastern Europe than it was in the Capitalist West. Chernobyl happened under socialism not capitalism. The present system in China, although not exactly "socialism", certainly involves a massively powerful govenment but a glance at the current news shows that massive governmental power does not necessarily prevent accidents. The agency problem is not unique to or worse in capitalism than in other systems.

Holly August 21, 2015 at 9:51 am

I'd throw in the theory of cognitive dissonance as an integral part of the failure of complex systems. (Example Tarvis and Aronon's recent book: Mistakes Were Made (But Not by me))

We are more apt to justify bad decisions, with bizarre stories, than to accept our own errors (or mistakes of people important to us). It explains (but doesn't make it easier to accept) the complete disconnect between accepted facts and fanciful justifications people use to support their ideas/organization/behavior.

craazymann August 21, 2015 at 10:03 am

I think this one suffers "Metaphysical Foo Foo Syndrome" MFFS. That means use of words to reference realities that are inherently ill-defined and often unobservable leading to untestable theories and deeply personal approaches to epistemological reasoning.

just what is a 'complex system"? A system implies a boundary — there are things part of the system and things outside the system. That's a hard concept to identify — just where the system ends and something else begins. So when 'the system' breaks down, it's hard to tell with any degree of testable objectivity whether the breakdown resulted from "the system" or from something outside the system and the rest was just "an accident that could have happened to anybody'"

maybe the idea is; '"if something breaks down at the worst possible time and in a way that fkks everything up, then it must have been a complex system". But it could also have been a simple system that ran into bad luck. Consider your toilet. Maybe you put too much toilet paper in it, and it clogged. Then it overflowed and ran out into your hallway with your shit everywhere. Then you realized you had an expensive Chinese rug on the floor. oh no! That was bad. you were gonna put tthat rug away as soon as you had a chance to admire it unrolled. Why did you do that? Big fckk up. But it wasn't a complex system. It was just one of those things.

susan the other August 21, 2015 at 12:14 pm

thanks for that, I think…

Gio Bruno August 21, 2015 at 2:27 pm

Actually, it was a system too complex for this individual. S(He) became convinced the plumbing would work as it had previously. But doo to poor maintenance, too much paper, or a stiff BM the "system" didn't work properly. There must have been opportunity to notice something anomalous, but appropriate oversight wasn't applied.

Oregoncharles August 21, 2015 at 3:29 pm

You mean the BM was too tightly coupled?

craazyman August 21, 2015 at 4:22 pm

It coould happen to anybody after enough pizza and red wine

people weren't meant to be efficient. paper towels and duct tape can somettmes help

This ocurred to me: The entire 1960s music revolution would't have happened if anybody had to be efficient about hanging out and jamming. You really have to lay around and do nothing if you want to achieve great things. You need many opportunities to fail and learn before the genius flies. That's why tightly coupled systems are self-defeating. Because they wipe too many people out before they've had a chance to figure out the universe.

JustAnObserver August 21, 2015 at 3:01 pm

Excellent example of tight coupling: Toilet -> Floor -> Hallway -> $$$ Rug

Fix: Apply Break coupling procedure #1: Shut toilet door.
Then: Procedure #2 Jam inexpensive old towels in gap at the bottom.

As with all such measures this buys the most important thing of all – time. In this case to get the $$$Rug out of the way.

IIRC one of Bookstaber's points was that that, in the extreme, tight coupling allows problems to propagate through the system so fast and so widely that we have no chance to mitigate before they escalate to disaster.

washunate August 21, 2015 at 10:03 am

To put it more simply, the drift of both economic and business thinking has been to optimize activity for efficiency.

I think that's an interesting framework. I would say effeciency is achieving the goal in the most effective manner possible. Perhaps that's measured in energy, perhaps labor, perhaps currency units, but whatever the unit of measure, you are minimizing that input cost.

What our economics and business thinking (and most importantly, political thinking) has primarily been doing, I would say, is not optimizing for efficiency. Rather, they are changing the goal being optimized. The will to power has replaced efficiency as the actual outcome.

Unchecked theft, looting, predation, is not efficient. Complexity and its associated secrecy is used to hide the inefficiency, to justify and promote that which would not otherwise stand scrutiny in the light of day.

BigEd August 21, 2015 at 10:11 am

What nonsense. All around us 'complex systems' (airliners, pipelines, coal mines, space stations, etc.) have become steadily LESS prone to failure/disaster over the decades. We are near the stage where the only remaining danger in air travel is human error. We will soon see driverless cars & trucks, and you can be sure accident rates will decline as the human element is taken out of their operation.

tegnost August 21, 2015 at 12:23 pm

see fukushima, lithium batteries spontaneously catching fire, financial engineering leading to collapse unless vast energy is invested in them to re stabilize…Driverless cars and trucks are not that soon, tech buddies say ten years I say malarkey based on several points made in the article, while as brooklyn bridge points out public transit languishes, and washunate points out that trains and other more efficient means of locomotion are starved while more complex methods have more energy thrown at them which could be better applied elsewhere. I think you're missing the point by saying look at all our complex systems, they work fine and then you ramble off a list of things with high failure potential and say look they haven't broken yet, while things that have broken and don't support your view are left out. By this mechanism safety protocols are eroded (that accident you keep avoiding hasn't happened, which means you're being too cautious so your efficiency can be enhanced by not worrying about it until it happens then you can fix it but as pointed out above tightly coupled systems can't react fast enough at which point we all have to hear the whocoodanode justification…)

susan the other August 21, 2015 at 12:34 pm

And the new points of failure will be what?

susan the other August 21, 2015 at 3:00 pm

So here's a question. What is the failure heirarchy. And why don't those crucial nodes of failsafe protect the system. Could it be that we don't know what they are?

Moneta August 22, 2015 at 8:09 am

While 90% of people were producing food a few decades ago, I think a large percentage will be producing energy in a few decades… right now we are still propping up our golf courses and avoiding investing in pipelines and refineries. We are still exploiting the assets of the 50s and 60s to live our hyper material lives. Those investments are what gave us a few decades of consumerism.

Now everyone wants government to spend on infra without even knowing what needs to go and what needs to stay. Maybe half of Californians need to get out of there and forget about building more infra there… just a thought.

America still has a frontier ethos… how in the world can the right investments in infra be made with a collection of such values?

We're going to get city after city imploding. More workers producing energy and less leisure over the next few decades. That's what breakdown is going to look like.

Moneta August 22, 2015 at 8:22 am

Flying might get safer and safer while we get more and more cities imploding.

Just like statues on Easter Island were getting increasingly elaborate as trees were disappearing.

ian August 21, 2015 at 4:02 pm

What you say is true, but only if you have a sufficient number of failures to learn from. A lot of planes had to crash for air travel to be as safe as it is today.

wm.annis August 21, 2015 at 10:19 am

I am surprised to see no reference to John Gall's General Systematics in this discussion, an entire study of systems and how they misbehave. I tend to read it from the standpoint of managing a complex IT infrastructure, but his work starts from human systems (organizations).

The work is organized around aphorisms — Systems tend to oppose their own proper function — The real world is what it is reported to the system — but one or two from this paper should be added to that repertoire. Point 7 seems especially important. From Gall, I have come to especially appreciate the Fail-Safe Theorem: "when a Fail-Safe system fails, it fails by failing to fail safe."

flora August 21, 2015 at 10:32 am

Instead of writing something long and rambling about complex systems being aggregates of smaller, discrete systems, each depending on a functioning and accurate information processing/feedback (not IT) system to maintain its coherence; and upon equally well functioning feedback systems between the parts and the whole — instead of that I'll quote a poem.

" Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold; "

-Yates, "The Second Coming"

flora August 21, 2015 at 10:46 am

erm… make that "Yeats", as in W.B.

Steve H. August 21, 2015 at 11:03 am

So, naturalists observe, a flea
Has smaller fleas that on him prey;
And these have smaller still to bite 'em,
And so proceed ad infinitum.

– Swift

LifelongLib August 21, 2015 at 7:38 pm

IIRC in Robert A. Heinlein's "The Puppet Masters" there's a different version:

Big fleas have little fleas
Upon their backs to bite 'em,
And little fleas have lesser fleas
And so, ad infinitum.

Since the story is about humans being parasitized and controlled by alien "slugs" that sit on their backs, and the slugs in turn being destroyed by an epidemic disease started by the surviving humans, the verse has a macabre appropriateness.

LifelongLib August 21, 2015 at 10:14 pm

Original reply got eaten, so I hope not double post. Robert A. Heinlein's (and others?) version:

Big fleas have little fleas
Upon their backs to bite 'em
And little fleas have lesser fleas
And so ad infinitum!

Lambert Strether August 21, 2015 at 10:26 pm

The order Siphonoptera….

Oregoncharles August 21, 2015 at 10:59 pm

"And what rough beast, its hour come round at last,
slouches toward Bethlehem to be born?"

I can't leave that poem without its ending – especially as it becomes ever more relevant.

Oldeguy August 21, 2015 at 11:02 am

Terrific post- just the sort of thing that has made me a NC fan for years.
I'm a bit surprised that the commentators ( thus far ) have not referred to the Financial Crisis of 2008 and the ensuing Great Recession as being an excellent example of Cook's failure analysis.

Bethany McLean and Joe Nocera's

All The Devils Are Here www.amazon.com/All-Devils-Are-Here-Financial/dp/159184438X/

describes beautifully how the erosion of the protective mechanisms in the U.S. financial system, no single one of which would have of itself been deadly in its absence ( Cook's Point 3 ) combined to produce the Perfect Storm.

It brought to mind Garett Hardin's The Tragedy Of The Commons https://en.wikipedia.org/wiki/Tragedy_of_the_commons . While the explosive growth of debt ( and therefore risk ) obviously jeopardized the entire system, it was very much within the narrow self interest of individual players to keep the growth ( and therefore the danger ) increasing.

Ormond Otvos August 21, 2015 at 5:14 pm

Bingo. Failure of the culture to properly train its members. Not so much a lack of morality as a failure to point out that when the temple falls, it falls on Samson.

The next big fix is to use the US military to wall off our entire country, maybe include Canada (language is important in alliances) during the Interregnum.

Why is no one mentioning the Foundation Trilogy and Hari Seldon here?

Deloss August 21, 2015 at 11:29 am

My only personal experience with the crash of a complex, tightly-coupled system was the crash of the trading floor of a very big stock exchange in the early part of this century. The developers were in the computer room, telling the operators NOT to roll back to the previous release, and the operators ignored them and did so anyway. Crash!

In Claus Jensen's fascinating account of the Challenger disaster, NO DOWNLINK, he describes how the managers overrode the engineers' warnings not to fly under existing weather conditions. We all know the result.

Human error was the final cause in both cases.

Now we are undergoing the terrible phenomenon of global warming, which everybody but Republicans, candidates and elected, seems to understand is real and catastrophic. The Republicans have a majority in Congress, and refuse–for ideological and monetary reasons–to admit that the problem exists. I think this is another unfolding disaster that we can ascribe to human error.

Ormond Otvos August 21, 2015 at 5:17 pm

"Human error" needs unpacking here. In this discussion, it's become a Deus ex Humanitas. Humans do what they do because their cultural experiences impel them to do so. Human plus culture is not the same as human. That's why capitalism doesn't work in a selfish society.

Oldeguy August 21, 2015 at 5:52 pm

" capitalism doesn't work in a selfish society "
Very true, not nearly so widely realized as it should be, and the Irony of Ironies .

BayesianGame August 21, 2015 at 11:48 am

But highly efficient systems are fragile. Formula One cars are optimized for speed and can only run one race.

Another problem with obsessing about (productive or technical) efficiency is that it usually means a narrow focus on the most measured or measurable inputs and outputs, to the detriment of less measurable but no less important aspects. Wages are easier to measure than the costs of turnover, including changes in morale, loss of knowledge and skill, and regard for the organization vs. regard for the individual. You want low cost fish? Well, it might be caught by slaves. Squeeze the measurable margins, and the hidden margins will move.

Donw August 21, 2015 at 3:18 pm

You hint at a couple fallacies.

1) Measuring what is easy instead of what is important.
2) Measuring many things and then optimizing all of them optimizes the whole.

Then, have some linear thinker try to optimize those in a complex system (like any organization involving humans) with multiple hidden and delayed feedback loops, and the result will certainly be unexpected. Whether for good or ill is going to be fairly unpredictable unless someone has actually looked for the feedback loops.

IsabelPS August 21, 2015 at 1:02 pm

Very good.

It's nice to see well spelled out a couple of intuitions I've had for a long time. For example, that we are going in the wrong direction when we try to streamline instead of following the path of biology: redundancies, "dirtiness" and, of course, the king of mechanisms, negative feedback (am I wrong in thinking that the main failure of finance, as opposed to economy, is that it has inbuilt positive feedback instead of negative?). And yes, my professional experience has taught me that when things go really wrong it was never just one mistake, it is a cluster of those.

downunderer August 22, 2015 at 3:52 am

Yes, as you hint here, and I would make forcefully explicit: COMPLEX vs NOT-COMPLEX is a false dichotomy that is misleading from the start.

We ourselves, and all the organisms we must interact with in order to stay alive, are individually among the most complex systems that we know of. And the interactions of all of us that add up to Gaia are yet more complex. And still it moves.

Natural selection built the necessary stability features into our bodily complexity. We even have a word for it: homeostasis. Based on negative feedback loops that can keep the balancing act going. And our bodies are vastly more complex than our societies.

Society's problem right now is not complexity per se, but the exploitation of complexity by system components that want to hog the resources and to hell with the whole, quite exactly parallel to the behavior of cancer cells in our bodies when regulatory systems fail.

In our society's case, it is the intelligent teamwork of the stupidly selfish that has destroyed the regulatory systems. Instead of negative feedback keeping deviations from optimum within tolerable limits, we now have positive feedback so obvious it is trite: the rich get richer.

We not only don't need to de-complexify, we don't dare to. We really need to foster the intelligent teamwork that our society is capable of, or we will fail to survive challenges like climate change and the need to sensibly control the population. The alternative is to let natural selection do the job for us, using the old reliable four horsemen.

We are unlikely to change our own evolved selfishness, and probably shouldn't. But we need to control the monsters that we have created within our society. These monsters have all the selfishness of a human at his worst, plus several natural large advantages, including size, longevity, and the ability to metamorphose and regenerate. And as powerful as they already were, they have recently been granted all the legal rights of human citizens, without appropriate negative feedback controls. Everyone here will already know what I'm talking about, so I'll stop.

Peter Pan August 21, 2015 at 1:18 pm

Formula One cars are optimized for speed and can only run one race.

Actually I believe F1 has rules regarding the number of changes that can be made to a car during the season. This is typically four or five changes (replacements or rebuilds), so a F1 car has to be able to run more than one race or otherwise face penalties.

jo6pac August 21, 2015 at 1:41 pm

Yes, F-1 allows four power planets per-season it has been up dated lately to 5. There isn't anything in the air or ground as complex as a F-1 car power planet. The cars are feeding 30 or more engineers at the track and back home normal in England millions of bit of info per second and no micro-soft is not used but very complex programs watching every system in the car. A pit stop in F-1 is 2.7 seconds anything above 3.5 and your not trying hard enough.

Honda who pride themselves in Engineering has struggled in power planet design this year and admit they have but have put more engineers on the case. The beginning of this Tech engine design the big teams hired over 100 more engineers to solve the problems. Ferrari throw out the first design and did a total rebuild and it working.

This is how the world of F-1 has moved into other designs, long but a fun read.
http://www.wired.com/2015/08/mclaren-applied-technologies-f1/

I'm sure those in F-1 system designs would look at stories like this and would come to the conclusion that these nice people are the gate keepers and not the future. Yes, I'm a long time fan of F-1. Then again what do I know.

The sad thing in F-1 the gate keepers are the owners CVC.

Brooklin Bridge August 21, 2015 at 3:25 pm

Interesting comment! One has to wonder why every complex system can't be treated as the be-all. Damn the torpedos. Spare no expense! Maybe if we just admitted we are all doing absolutely nothing but going around in a big circle at an ever increasing speed, we could get a near perfect complex system to help us along.

Ormond Otvos August 21, 2015 at 5:21 pm

If the human race were as important as auto racing, maybe. But we know that's not true ;->

jo6pac August 21, 2015 at 5:51 pm

In the link it's the humans of McLaren that make all the decisions on the car and the race on hand. The link is about humans working together either in real race time or designing out problems created by others.

Marsha August 21, 2015 at 1:19 pm

Globalization factors in maximizing the impact of Murphy's Law:

  1. Meltdown potential of a globalized 'too big to fail' financial system associated with trade imbalances and international capital flows, and boom and bust impact of volatile "hot money".
  2. Environmental damage associated with inefficiency of excessive long long supply chains seeking cheap commodities and dirty polluting manufacturing zones.
  3. Military vulnerability of same long tightly coupled 'just in time" supply chains across vast oceans, war zones, choke points that are very easy to attack and nearly impossible to defend.
  4. Consumer product safety threat of manufacturing somewhere offshore out of sight out of mind outside the jurisdiction of the domestic regulatory system.
  5. Geographic concentration and contagion of risk of all kinds – fragile pattern of horizontal integration – manufacturing in China, finance in New York and London, industrialized mono culture agriculture lacking biodiversity (Iowa feeds the world). If all the bulbs on the Christmas tree are wired in series, it takes only one to fail and they all go out.

Globalization is not a weather event, not a thermodynamic process of atoms and molecules, not a principle of Newtonian physics, not water running downhill, but a hyper aggressive top down policy agenda by power hungry politicians and reckless bean counter economists. An agenda hell bent on creating a tightly coupled globally integrated unstable house of cards with a proven capacity for catastrophic (trade) imbalance, global financial meltdown, contagion of bad debt, susceptibility to physical threats of all kinds.

Synoia August 21, 2015 at 1:23 pm

Any complex system contains non-linear feedback. Management presumes it is their skill that keeps the system working over some limited range, where the behavior approximates linear. Outside those limits, the system can fail catastrophically. What is perceived as operating or management skill is either because the system is kept in "safe" limits, or just happenstance. See chaos theory.

Operators or engineers controlling or modifying the system are providing feedback. Feedback can push the system past "safe" limits. Once past safe limits, the system can fail catastrophically Such failure happen very quickly, and are always "a surprise".

Synoia August 21, 2015 at 1:43 pm

All complex system contain non-linear feedback, and all appear manageable over a small rage of operation, under specific conditions.

These are the systems' safe working limits, and sometimes the limits are known, but in many case the safe working limits are unknown (See Stock Markets).

All systems with non-linear feedback can and will fail, catastrophically.

All predicted by Chaos Theory. Best mathematical filed applicable to the real world of systems.

So I'll repeat. All complex system will fail when operating outside safe limits, change in the system, management induced and stimulus induced, can and will redefine those limits, with spectacular results.

We hope and pray system will remain within safe limits, but greed and complacency lead us humans to test those limits (loosen the controls), or enable greater levels of feedback (increase volumes of transactions). See Crash of 2007, following repeal of Glass-Stegal, etc.

Brooklin Bridge August 21, 2015 at 4:05 pm

It's Ronnie Ray Gun. He redefined it as, "Safe for me but not for thee." Who says you can't isolate the root?

Synoia August 21, 2015 at 5:25 pm

Ronnie Ray Gun was the classic example of a Manager.

Where one can only say: "Forgive them Father, for they know not what they do"

Oregoncharles August 21, 2015 at 2:54 pm

Three quite different thoughts:

First, I don't think the use of "practitioner" is an evasion of agency. Instead, it reflects the very high level of generality inherent in systems theory. The pitfall is that generality is very close to vagueness. However, the piece does contain an argument against the importance of agency; it argues that the system is more important than the individual practitioners, that since catastrophic failures have multiple causes, individual agency is unimportant. That might not apply to practitioners with overall responsibility or who intentionally wrecked the system; there's a naive assumption that everyone's doing their best. I think the author would argue that control fraud is also a system failure, that there are supposed to be safeguards against malicious operators. Bill Black would probably agree. (Note that I dropped off the high level of generality to a particular example.)

Second, this appears to defy the truism from ecology that more complex systems are more stable. I think that's because ecologies generally are not tightly coupled. There are not only many parts but many pathways (and no "practitioners"). So "coupling" is a key concept not much dealt with in the article. It's about HUMAN systems, even though the concept should apply more widely than that.

Third, Yves mentioned the economists' use of "equilibrium." This keeps coming up; the way the word is used seems to me to badly need definition. It comes from chemistry, where it's used to calculate the production from a reaction. The ideal case is a closed system: for instance, the production of ammonia from nitrogen and hydrogen in a closed pressure chamber. You can calculate the proportion of ammonia produced from the temperature and pressure of the vessel. It's a fairly fast reaction, so time isn't a big factor.

The Earth is not a closed system, nor are economies. Life is driven by the flow of energy from the Sun (and various other factors, like the steady rain of material from space). In open systems, "equilibrium" is a constantly moving target. In principle, you could calculate the results at any given condition , given long enough for the many reactions to finish. It's as if the potential equilibrium drives the process (actually, the inputs do).

Not only is the target moving, but the whole system is chaotic in the sense that it's highly dependent on variables we can't really measure, like people, so the outcomes aren't actually predictable. That doesn't really mean you can't use the concept of equilibrium, but it has to be used very carefully. Unfortunately, most economists are pretty ignorant of physical science, so ignorant they insistently defy the laws of thermodynamics ("groaf"), so there's a lot of magical thinking going on. It's really ideology, so the misuse of "equilibrium" is just one aspect of the system failure.

Synoia August 21, 2015 at 5:34 pm

Really?

"equilibrium…from chemistry, where it's used to calculate the production from a reaction"

That is certainly a definition in one scientific field.

There is another definition from physics.

When all the forces that act upon an object are balanced, then the object is said to be in a state of equilibrium.

However objects on a table are considered in equilibrium, until one considers an earthquake.

The condition for an equilibrium need to be carefully defined, and there are few cases, if any, of equilibrium "under all conditions."

nat scientist August 21, 2015 at 7:42 pm

Equilibrium ceases when Chemistry breaks out, dear Physicist.

Synoia August 21, 2015 at 10:19 pm

Equilibrium ceases when Chemistry breaks out

This is only a subset.

Oregoncharles August 21, 2015 at 10:56 pm

I avoided physics, being not so very mathematical, so learned the chemistry version – but I do think it's the one the economists are thinking of.

What I neglected to say: it's an analogy, hence potentially useful but never literally true – especially since there's no actual stopping point, like your table.

John Merryman August 21, 2015 at 3:09 pm

There is much simpler way to look at it, in terms of natural cycles, because the alternative is that at the other extreme, a happy medium is also a flatline on the big heart monitor. So the bigger it builds, the more tension and pressure accumulates. The issue then becomes as to how to leverage the consequences. As they say, a crisis should never be wasted. At its heart, there are two issues, economic overuse of resources and a financial medium in which the rent extraction has overwhelmed its benefits. These actually serve as some sort of balance, in that we are in the process of an economic heart attack, due to the clogging of this monetary circulation system, that will seriously slow economic momentum.

The need then is to reformulate how these relationships function, in order to direct and locate our economic activities within the planetary resources. One idea to take into consideration being that money functions as a social contract, though we treat it as a commodity. So recognizing it is not property to be collected, rather contracts exchanged, then there wouldn't be the logic of basing the entire economy around the creation and accumulation of notational value, to the detriment of actual value. Treating money as a public utility seems like socialism, but it is just an understanding of how it functions. Like a voucher system, simply creating excess notes to keep everyone happy is really, really stupid, big picture wise.

Obviously some parts of the system need more than others, but not simply for ego gratification. Like a truck needs more road than a car, but an expensive car only needs as much road as an economy car. The brain needs more blood than the feet, but it doesn't want the feet rotting off due to poor circulation either.
So basically, yes, complex systems are finite, but we need to recognize and address the particular issues of the system in question.

Bob Stapp August 21, 2015 at 5:30 pm

Perhaps in a too-quick scan of the comments, I overlooked any mention of Nassim Nicholas Taleb's book, Antifragile. If so, my apologies. If not, it's a serious omission from this discussion.

Local to Oakland August 21, 2015 at 6:34 pm

Thank you for this.

I first wondered about something related to this theme when I first heard about just in time sourcing of inventory. (Now also staff.) I wondered then whether this was possible because we (middle and upper class US citizens) had been shielded from war and other catastrophic events. We can plan based on everything going right because most of us don't know in our gut that things can always go wrong.

I'm genX, but 3 out of 4 of my grandparents were born during or just after WWI. Their generation built for redundancy, safety, stability. Our generation, well. We take risks and I'm not sure the decision makers have a clue that any of it can bite them.

Jeremy Grimm August 22, 2015 at 4:23 pm

The just-in-time supply of components for manufacturing was described in Barry Lynn's book "Cornered" and identified as creating extreme fragility in the American production system. There have already been natural disasters that shutdown American automobile production in our recent past.

Everything going right wasn't part of the thinking that went into just-in-time parts. Everything going right — long enough — to steal away market share on price-point was the thinking. Decision makers don't worry about any of this biting them. Passing the blame down and golden parachutes assure that.

flora August 21, 2015 at 7:44 pm

This is really a very good paper. My direct comments are:

point 2: yes. provided the safety shields are not discarded for bad reasons like expedience or ignorance or avarice. See Glass-Steagall Act, for example.

point 4: yes. true of all dynamic systems.

point 7: 'root cause' is not the same as 'key factors'. ( And here the doctor's sensitivity to malpractice suits may be guiding his language.) It is important to determine key factors in order to devise better safety shields for the system. Think airplane black boxes and the 1932 Pecora Commission after the 1929 stock market crash.

Jay M August 21, 2015 at 9:01 pm

It's easy, complexity became too complex. And I can't read the small print. We are devolving into a world of happy people with gardens full of flowers that they live in on their cell phones.

Ancaeus August 22, 2015 at 5:22 am

There are a number of counter-examples; engineered and natural systems with a high degree of complexity that are inherently stable and fault-tolerant, nonetheless.

1. Subsumption architecture is a method of controlling robots, invented by Rodney Brooks in the 1980s. This scheme is modeled on the way the nervous systems of animals work. In particular, the parts of the robot exist in a hierarchy of subsystems, e.g., foot, leg, torso, etc. Each of these subsystems is autonomously controlled. Each of the subsystems can override the autonomous control of its constituent subsystems. So, the leg controller can directly control the leg muscle, and can override the foot subsystem. This method of control was remarkably successful at producing walking robots which were not sensitive to unevenness of the surface. In other words, the were not brittle in the sense of Dr. Cook. Of course, subsumption architecture is not a panacea. But it is a demonstrated way to produce very complex engineered systems consisting of many interacting parts that are very stable.

2. The inverted pendulum Suppose you wanted to build a device to balance a pencil on its point. You could imagine a sensor to detect the angle of the pencil, an actuator to move the balance point, and a controller to link the two in a feedback loop. Indeed, this is, very roughly, how a Segway remains upright. However, there is a simpler way to do it, without a sensor or a feedback controller. It turns out that if your device just moves the balance point sinusoidaly (e.g., in a small circle) and if the size of the circle and the rate are within certain ranges, then the pencil will be stable. This is a well-known consequence of the Mathieu equation. The lesson here is that stability (i.e., safety) can be inherent in systems for subtle reasons that defy a straightforward fault/response feedback.

3. Emergent behavior of swarms Large numbers of very simple agents interacting with one another can sometimes exhibit complex, even "intelligent" behavior. Ants are a good example. Each ant has only simple behavior. However, the entire ant colony can act in complex and effective ways that would be hard to predict from the individual ant behaviors. A typical ant colony is highly resistant to disturbances in spite of the primitiveness of its constituent ants.

4. Another example is the mammalian immune system that uses negative selection as one mechanism to avoid attacking the organism itself. Immature B cells are generated in large numbers at random, each one with receptors for specifically configured antigens. During maturation, if they encounter a matching antigen (likely a protein of the organism) then the B cell either dies, or is inactivated. At maturity, what is left is a highly redundant cohort of B cells that only recognize (and neutralize) foreign antigens.

Well, these are just a few examples of systems that exhibit stability (or fault-tolerance) that defies the kind of Cartesian analysis in Dr. Cook's article.

Marsha August 22, 2015 at 11:42 am

Glass-Steagall Act: interactions between unrelated functionality is something to be avoided. Auto recall: honking the horn could stall the engine by shorting out the ignition system. Simple fix is is a bit of insulation.

ADA software language: Former DOD standard for large scale safety critical software development: encapsulation, data hiding, strong typing of data, minimization of dependencies between parts to minimize impact of fixes and changes. Has safety critical software gone the way of the Glass-Steagall Act? Now it is buffer overflows, security holes, and internet protocol in hardware control "critical infrastructure" that can blow things up.

[Aug 22, 2015] Paul Krugman Debt Is Good

But debt slavery is not...
August 21, 2015 | Economist's View

JF said in reply to reason...

Good. I made a similar point last night on another thread when talking about a 1996 Vickery paper surfaced by Paine. There is a myopia in economics, in my opinion, focused only on annual flows (GDP) and completely disregarding the importance of wealth and as you call it, "economic resilience."

If Piketty has any influence, I am hoping that economic discourse and public finance no longer just focuses on annual flows and that it always also discusses Net Worth (as economic capacity of the individual and in the aggregate is also constituted by using wealth and any new income you get too).

anne said in reply to JF...
I made a similar point last night on another thread when talking about a 1996 William Vickrey paper surfaced by Paine....

[ Would there be a reference to the paper? ]

JF said in reply to anne...
Actually, it was Dan Kervick who added the link, in response to a recommendation from Paine (who apparently also went to Columbia, so can spell Vickrey's name):

http://www.columbia.edu/dlc/wp/econ/vickrey.html

For what it is worth, last night late, I then said this, and had to chuckle to my wife when I say Krugman's blog article this am:

JF - "Paine and Dan Kervick - I would prefer that this paper be re-written in light of the Piketty remonstrance that you need to look at economics and society not just in terms of income and flow but also in Net Worth terms. Plainly, a very wealthy society can raise taxes with little harm to aggregate demand if the new taxes fall on those with a lower/lowering propensity to spend, at least to some degree (see Saez and others who comment on the taxation of income tax bases).

I am one who will always make note that the public should not cut taxes on the already wealthy so that the subsequent borrowing of the cash comes from the same class of people. Clearly, we need to think in more balanced ways here. Borrow for long term assets to spread the costs to those who benefit over time, especially when interest rates are low. Borrow from foreign sources as this brings money into the US economy for the trade of a piece of paper and cash management dollops of principal and interest. But otherwise a wealthy society should tax, otherwise it is transferring wealth upward by foregoing taxation in trade for giving the wealthy class a tradeable asset.

Ouch, I'd prefer we just helicopter the money over to Treasury than the tax-cut and borrow scheme of the republican party.

Oh wait, as we redeem the public debt purchased by the FED and they offset the principal with the Treasury, we will be doing helicoptering, just had to wait six years or so.

Anyway, rambling point: public debt is not always better than taxation, and for the most part in a wealthy society like the US where we have a deep financial system with all kinds of instruments of trading efficiency, including trillions of debt products, I suspect it seldom is right to borrow anew when you can tax and target the taxation so it does not harm aggregate demand.

I think in 1996 when this was written almost everyone was myopically focused solely on flows (GDP/income)."

JF said in reply to JF...
When a new Congress comes in 2017, perhaps we can change the finance law of the US to permit the FED and Treasury to sell US public debt direct to foreigners without having to go into the open market and dealer-community.

Alas, if we can only get through this next national election with heads screwed on straight! Good to hear that Mrs. Clinton at least is saying that economic policy is the centerpiece of her campaign. We will see our well she does from a strategic communications perspective.

Perhaps some economists can help here too.

reason said...
P.S. One thing that PK doesn't say, that I think needs to mentioned is that for countries with their own currencies, they can print money rather than issuing bonds. The distributional implications are important. Even at low interest rates, government bonds are a promise of a stream of income to the already rich (and taking money out of circulation, which selling bonds does is a deflationary thing to do - increasing the real value of financial wealth). Printing money, and spending it or giving it to the poor, on the other hand does not make the government the supporter of existing wealth. This should not be forgotten.
Paine said in reply to JF...
Beware the false value the scheinvert the bubble value

The better notion is the inter temporal payments grid

We need a way other then inflation deflation to adjust this grid to on going production value and wage value. Stiglitz is very keen on wealth v productive capital

And he's on to something deep that seems to be in large part invisible to most model builders

[Aug 22, 2015] Investors Flood Oil ETFs Looking For Bottom ETF.com By Cinthia Murphy

... ...

Investors poured more than $2 billion into energy-linked ETFs in the past week alone, more than doubling the assets in funds such as United States Oil Fund (USO | A-70), and adding nearly $740 million to the Energy Select SPDR (XLE | A-96) in just five days.

... ... ...

Sam Stovall, U.S. equity strategist for S&P Capital IQ, says the energy sector is looking downright "compelling" from a relative strength perspective at these levels. ETF asset flows suggest investors are taking notice.

"There have been six times in the past quarter-century that the S&P 500 energy index traded this low, or lower," Stovall said in a recent webcast. "Over the subsequent 24 months, however, the energy index was positive six of six times, and beat the S&P 500 five of six times. It also outpaced the broad stock market by an average 16 percentage points."

Value Opportunity Brightens

Past performance is no indication of future outcomes, as Stovall noted, but the numbers do cast a positive light on the prospects for energy stocks going forward.

USO is largely considered the closest ETF proxy to oil prices, and a very liquid one at that. The fund invests only in near-month Nymex futures contracts on WTI crude oil, and trades more than $350 million, on average, every day, making it a popular choice with investors who want to tap in to oil through energy-futures-based ETFs.

XLE, meanwhile, is an equity energy fund, and owns some 44 stocks as it tracks a market-cap-weighted index of U.S. energy companies in the S&P 500. The fund has almost $11 billion in assets.

As a segment, energy-linked ETFs had more than $48.6 billion in total assets as of Dec. 18, up 4.3 percent from a week earlier.

Top 5 Commodity ETF Creations Dec. 12-18, 2014

Ticker Fund Net Flows ($,mm) AUM
($, mm)
AUM % Change
XLE Energy Select SPDR 738.14 11,085.38 7.13%
USO United States Oil 392.54 1,162.14 51.01%
DJP iPath Dow Jones-UBS Commodity Total Return ETN 354.48 1,755.75 25.30%
OIH Market Vectors Oil Services 198.62 1,091.21 22.25%
VDE Vanguard Energy 171.97 3,102.97 5.87%

[Aug 22, 2015] Scientists Do Not Demonize Dissenters. Nor Do They Worship Heroes.

Paul Romer's latest entry on "mathiness" in economics ends with:
Reactions to Solow's Choice: ...Politics maps directly onto our innate moral machinery. Faced with any disagreement, our moral systems respond by classifying people into our in-group and the out-group. They encourage us to be loyal to members of the in-group and hostile to members of the out-group. The leaders of an in-group demand deference and respect. In selecting leaders, we prize unwavering conviction.
Science can't function with the personalization of disagreement that these reactions encourage. The question of whether Joan Robinson is someone who is admired and respected as a scientist has to be separated from the question about whether she was right that economists could reason about rates of return in a model that does not have an explicit time dimension.
The only in-group versus out-group distinction that matters in science is the one that distinguishes people who can live by the norms of science from those who cannot. Feynman integrity is the marker of an insider.
In this group, it is flexibility that commands respect, not unwavering conviction. Clearly articulated disagreement is encouraged. Anyone's claim is subject to challenge. Someone who is right about A can be wrong about B.
Scientists do not demonize dissenters. Nor do they worship heroes.

[The reference to Joan Robinson is clarified in the full text.]

Adam Eran said...

Max Planck would disagree: "The truth never triumphs. Its opponents simply die out. Science advances one funeral at a time."

Friday, August 21, 2015 at 04:02 PM

anne said in reply to Adam Eran...

https://en.wikiquote.org/wiki/Max_Planck

1948

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.

-- Max Planck

[ Thomas Kuhn would later write of this. ]

likbez said...

Now science became highly political occupation. This is especially true about economics.

So dismal behavior of scientists and flourishing of pseudoscience are to be expected. Rewards offered to conformists are just too great not to seduce people.

Actually it looks like Lysenkoism is the mark of the present and the future, not so much of the past.

[Aug 21, 2015] Feels like 1986 Oil on track for longest weekly losing streak in 29 years

In late 1985, oil prices slumped to $10 from around $30 over five months as OPEC raised output to regain market share following an increase in non-OPEC production.

BP CEO Bob Dudley said in late-July, when oil prices were some $8 a barrel higher than now, that "it does feel like 1986".

U.S. crude for October delivery was 46 cents lower at $40.86 a barrel at 0656 GMT. The September contract, which expired on Thursday, ended 34 cents higher. The U.S. benchmark hit a 6-1/2 year low of $40.21 a barrel on Thursday.

Brent was on track for its seventh weekly decline in the past eight, trading 41 cents lower at $46.21 a barrel, after settling 54 cents lower on Thursday.

The dollar continued retreating on shrinking expectations of an U.S. interest rate hike in September, providing some support for oil prices.

... ... ....

"The only silver lining we are seeing coming from the United States is that refining rates remain high and that crude production continues to fall," Singapore-based Philip Futures said in a note to clients.

Despite the rout in oil prices, some mutual funds keep ploughing money into oil exploration and production companies in the United States in a bet that production will retreat sharply over the next 12 months, setting the stage for a rebound towards $65-70 per barrel.
... ... ...

Spot prices of Western Canada Select (WCS), a marker for heavy, diluted bitumen from Alberta's oil sands sank to a 12-year low near $20 per barrel.

SCOTT USMC VET 2 hours ago

Tomorrow we will be in short supply and need to raise prices. Too many people with the poker in the fires. All scam artists need to reported to sec for fraud and manipulation of commodities.

Larry 3 hours ago

IN 1986 Reagan enlisted the Saudi's to flood the market in an economic attack against Russia, in 2014 US gov. repeated the attack. Now, with the internet, US citizens can learn the truth and see that the US gov. acts unconstitutionally against it's own citizens by market manipulation.

[Aug 21, 2015] Is The Oil Crash A Result Of Excess Supply Or Plunging Demand The Unpleasant Answer In One Chart

"...I, for one, feel much better that we have returned to depleting our natural resources at a record pace. This will help to ensure that our children and our children's children have a bright future. "
"..."Breaking Russia has become an objective [for US officials] the long-range purpose should be to integrate it," the 92-year-old told The National Interest in a lengthy interview for the policy magazine's anniversary that touched on most of the world's most pertinent international issues. "If we treat Russia seriously as a great power, we need at an early stage to determine whether their concerns can be reconciled with our necessities." "
Aug 21, 2015 | Zero Hedge
One of the most vocal discussions in the past year has been whether the collapse, subsequent rebound, and recent relapse in the price of oil is due to surging supply as Saudi Arabia pumps out month after month of record production to bankrupt as many shale companies before its reserves are depleted, or tumbling demand as a result of a global economic slowdown. Naturally, the bulls have been pounding the table on the former, because if it is the later it suggests the global economy is in far worse shape than anyone but those long the 10Year have imagined.

Courtesy of the following chart by BofA, we have the answer: while for the most part of 2015, the move in the price of oil was a combination of both supply and demand, the most recent plunge has been entirely a function of what now appears to be a global economic recession, one which will get far worse if the Fed indeed hikes rates as it has repeatedly threatened as it begins to undo 7 years of ultra easy monetary policy.

Here is BofA:

Retreating global equities, bond yields and DM breakevens confirm that EM has company. Much as in late 2014, global markets are going through a significant global growth scare. To illustrate this, we update our oil price decomposition exercise, breaking down changes in crude prices into supply and demand drivers (The disinflation red-herring).

Chart 6 shows that, in early July, the drop in oil prices seems to have reflected primarily abundant supply (related, for example, to the Iran deal). Over the past month, however, falling oil prices have all but reflected weak demand.

BofA's conclusion:

The global outlook has indeed worsened. Our economists have recently trimmed GDP forecasts in Japan, Brazil, Mexico, Colombia and South Africa, while noting greater downside risks in Turkey due to political uncertainty. Asian exports continue to underwhelm, and capital outflows are adding to regional woes. Looking ahead, we still expect the largest DM economies to keep expanding at above-trend pace but global headwinds have intensified.

And yet, BofA's crack economist Ethan Harris still expects a September Fed rate hike. Perhaps the price of oil should turn negative (yes, just like NIRP, negative commodity prices are very possible) for the Fed to realize just how cornered it truly is.

Ms No

I'd say it is more like the answer in one quote, Kissinger the corpse is squealing again.

"Breaking Russia has become an objective [for US officials] the long-range purpose should be to integrate it," the 92-year-old told The National Interest in a lengthy interview for the policy magazine's anniversary that touched on most of the world's most pertinent international issues. "If we treat Russia seriously as a great power, we need at an early stage to determine whether their concerns can be reconciled with our necessities."

Budnacho

Yep, Zero demand at $3.75 a Gallon for gas....

Antifaschistische

I, for one, feel much better that we have returned to depleting our natural resources at a record pace. This will help to ensure that our children and our children's children have a bright future.

Jumbotron

"Meh - our children's children will farm or die."

Howard Kunstler talked about this in his book "The Long Emergency" back in 2005. And continues to do so on his web site.

http://kunstler.com/

The "JIT" (Just In Time) model based on cheap global energy and cheap wage slave labor arbitrage is breaking down. This is a multi-decade issue. There will be recoveries....but each drop will see the world get, poorer, slower, and more local as the decades pass.

However, the elites of the world will try the very last trick in their bag of horrors......CASHLESS. With a cashless, purely digital credit system, they can manipulate all they want, even to the point of doing "buy-ins" if the need arises...you know...to "save the children".

That's when the last attempt at total control will happen. But when there are still too many people, and not enough cheap, easily extracted and easily obtained resources for those people......shit will hit the fan none the less. Cashless or not.

Then......war. Global war....and the big reset to farming or dying.

Jumbotron

" The JIT model has exactly nothing to do with cheap energy. More like accountants telling us "we don't need to put capital into holding a stock of materials." "

Bull...Fucking...Shit.

Ever heard of Fed-Ex ? Ever heard of UPS ? Ever heard of 24/7 trucking ? Ever heard of 24/7 rail service ? Ever heard of Cloud Computing ? Ever heard of Amazon ? Ever heard of 24/7 overseas shipping ?

Ever heard of paved Interstate Highways ? What about the Internet ? What about all the steel mills, and the coke factories and the plastic factories and the asphalt makers......etc....etc....and fucking etc.

ALL of these, including so much more, rely SOLEY on cheap energy.

Go back to your magical X-Box and the comfort of your mother's basement. And her magical microwave which just made you some magical popcorn.

Apply Force

Not like when we were 16... I bought my own 1st (and 2nd, and 3rd) cars in cash that I earned working (mowing lawns/yard work) from 12 on. I worked on my own cars, which was not so hard, and usually Dad or another in the neighborhood could help out. I paid for my own ins. and my own gas.

Not so easy to buy a used car now - way more expensive per what a child can earn prior to being driving age. And good luck working on your own car now - way more complex, and parts are way, way more expensive. And insurance costs are higher as well. No need to drive to a job for a 16 year old if the wage they earn can not even pay for car maintenance - if they could even find a job to begin with!

The Age of Less is upon us - adjust accordingly!

Shaznardickleze...

No jobs, no money, no where to go, internet social life. Whats your point?
Would you pay $3 a gallon if you were paid $7 an hour?

nope-1004

Fed will raise rates? lmao. As BOP noted a few days ago, the last rate hike was in 2006.

NINE YEARS OF BULLSHITTING THE PUBLIC about raising rates. Enough.

Apply Force

The chart is Brent oil and world demand - not so sure US local gas prices and demand are reflected so well there.

"Demand" at any rate really means "affordability" and oil production lags affordability changes by quite a bit - - hence what appears to be excess production to many people. Reality just takes a while to catch up to long-term endeavors like drilling for oil.

It is simply a whipsaw in prices that is generally on it's way down... Down for the count within the decade, imo.

Cloud9.5

The demand for gasoline is to a large extent inelastic. Cougar is right that we are trapped in the car culture. I picked up my mother in law's maid this morning. She was walking the three miles from her house to my mother-in-laws. She could not afford the repairs on her car. We have no mass transit so she either walks or quits. Most people would quit and go on welfare. For all I know she may already be on welfare.


Dr_Snooz

Dr_Snooz's picture


"Yep, Zero demand at $3.75 a Gallon for gas...."

Yeah, the price of oil has halved, but the price of gas is unchanged. How does that work? If we yell loud enough at our Congresscriminals, they'll launch some price-gouging investigation, determine that there is none, sweep it all under the rug and get back to servicing their corporate constituencies.

The problem is that you can only steal so much from the people before it's all gone and the whole system crashes...

Oh wait. That's already happening.

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Fri, 08/21/2015 - 10:50 | 6451448 BustainMovealota

BustainMovealota's picture


It works when the people put their ass in the air and let their elected "representatives" have their way with that ass. ie, not good for you.


cougar_w

cougar_w's picture


People will buy gas -- at any price -- before they buy groceries. Because they have to get to work as an urgent matter, because they cannot afford to lose their job, because half the people they know are already out of work. They have to keep that job no matter what -- and work two jobs 20 milesa part maybe three -- so that later in the week they can then think about buying groceries.

I'm kind of surprized the ZH crowd doesn't get this part.

The price of gas will go down when a lot of people are homeless or dead.

samsara

"Calling Gail Tverberg, whose finite world is looking ominously true."

Yes, GailTheActuary of course was correct. Smart lady, read her comments/articles for years on TheOilDrum.

Falak, Try this one from AutomaticEarth. Nicole(aka StoneLeigh) nails the future I believe very correctly.

Nicole (and Ilargi) used to run TheOilDrum Canada before AutomaticEarth.

http://www.theautomaticearth.com/2015/08/nicole-foss-the-boundaries-and-future-of-solution-space/

Nicole Foss: The Boundaries and Future of Solution Space

falak pema

thanks I enjoyed it.

Local area networks and value chains, not cancerous globalization. Minimal mercantile exchanges to starve the Oligarchy beast, to sustain human chains; except where labour lacks like in Germany.

Peak Oil and peak RM were already in the cards in 1979 with world population exploding. We should have learned from second oil shock.

Help Africa grow don't rape it! Respect Che Guevara's legacy by doing same in Land of Latinos. All those guys who died for what : Che, Gandhi, Mandela, even Giap!

But Pax Americana was on another page : Reaganomics!

I said this back in 2007 -2010, to the wind!

I wrote it all down but haven't published it.

Lol, it blows back now.

moneybots

"the most recent plunge has been entirely a function of what now appears to be a global economic recession, one which will get far worse if the Fed indeed hikes rates as it has repeatedly threatened as it begins to undo 7 years of ultra easy monetary policy."

The boom causes the bust. Years of QE is the problem, not potential rate hikes. Can't burst a bubble, until you build one. A bubble is 100% guaranteed to burst.

DaveyJones

Gail the Actuary (The Oil Drum) and many others have been predicting this phenomenon for some time now. The (modern) world (and their economic models) are entriely built on the fiction of never ending growth. Since energy drives everything and since the economic world has exponentially bet way out into the future, the economic structure will fall (completely apart) before the energy structure does. Even though it will take more and more money (read energy) to get the same energy out of the ground, the people will not be able to afford the price the companies need to charge and, as Ruppert said, everything wil just shut down.

ejmoosa

Central planners who pushed electric vehicles to the tune of 8,000 dollar tax credits and forcing fuel standards higher and higher despite the cost are baffled by the drop in oil demand.

[Aug 21, 2015] What Will It Take For The Fed To Panic And Bail Out The Market Once Again BofA Explains

"...Nobody but Madoff went to jail in '08 the last time they were bailed out. -No "Pecora" investigation(s) took place with officer(s) of AIG, Bear Sterns, Lehman, Citigroup, JP Morgan and our favorite bank in the whole World that had their fingers among other appendages up the sphincty of everyone and has a revolving door to the Federal Reserve, U.S. Treasury EU and IMF -Leadman Sucks..."

Aug 20, 2015 | Zero Hedge
One of the main reasons a month ago we started carefully following the commodity trading giants, the Glencores, Mercurias and Trafiguras of the world...

... is because nobody else was.

Perhaps due to their commodity-trading operations, these companies were expected to be immune from the mark-to-market vagaries of the commodity collapse on their balance sheet, and as such presented far less interest to market participants than pure-play miners whose stocks have gotten crushed since the commodity collapse and subsequent relapse.

And then, yesterday, Glencore "happened" and everyone was so shocked by the company's abysmal results, which as we explained may servce as "The Next Leg Of The Commodity Carnage: Attention Shifts To Traders - Glencore Crashes, Noble Default Risk Soars." This took place a day after we penned "Noble Group's Kurtosis Awakening Moment For The Commodity Markets" in which we profiled the ongoing slow-motion trainwreck of Asia's largest commodity trader.

Of course, Glencore's problems should not have been reason for surprise: after all it was a bet on a surge in Glencore's default risk that prompted us to write "Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?" in March of 2014 as a levered and relatively safe way to trade crashing copper prices (since then, Glencore CDS have doubled).

And so others started to notice.

So with Wall Street's attention suddenly focused, with the usual delay, almost exclusively on the commodity hybrids, it was none other than Bank of America which earlier today reserved a very special place for a possible collapse of these companies. In fact, the "credit event" (read "failure") of a company like Glencore is precisely what BofA's Michael Hartnett said "may be necessary to cause policy-makers to panic."

Bank of America starts with a chart that ZH readers are all too familiar with: a comparison of the CDS of Noble and Glencore which as duly noted many times already, have recently spiked:

And here is why Bank of America decided to suddenly focus on a small subset of the commodity sector, one which we have been fascinated with for over a month: to BofA the collapse of either of these two companies is the necessary and/or sufficient condition for the Fed to exit its recent trance, and reenter and bailout the market.

That's right: Bank of America is begging for another Fed-assisted market bailout, which gladly hints would be accelerated should Glencore experience a premature "credit event." To wit:

Short-term, markets seem intent on forcing either the Fed to pass in September, or the Chinese to launch a more comprehensive and credible policy package to boost growth expectations. Alternatively, a credit event in commodities (note CDS is widening sharply for resources companies – front page chart) may be necessary to cause policy-makers to panic. Markets stop panicking when central banks start panicking. We think that is increasingly likely in September, thus arguing that risk-takers should soon look to add risk, particularly on any further weakness.

We thank Bank of America for making it quite clear what the catalyst for QE4 will be (and why we should double down on the Glencore long CDS trade), but we are confused: how is the Fed expected to "panic" in September when that is when BofA's crack economists predict the Fed will hike rates. If anything, a rate hike is supposed to calm the market and give confidence that the Fed is on top of the situation, even if as has been clearly the case, the US economy, not to mention the global one, are both going into reverse.

And while that is a major loose end to any trading thesis BofA may want to present, it does hedge by saying that all bets on a market bailout are off if the Fed and other central banks have now "lost their potency", i.e., if the market's faith in money printing has ended.

Finally, we believe the inexorable rise in volatility as QE programs wane leads to the ultimate risk. In our view, all investment strategies have been tied in recent years to the power of central banks. There are few bond vigilantes willing to punish profligate governments, fewer currency speculators willing to defy central bank intervention, and investors have become adept at front-running policy-makers and/or expecting central banks will "blink" at signs of market volatility. We believe a loss of central bank potency is an unambiguous risk-off.

Indeed, we too believe that if not even central banks can boost this market, then the time to get the hell out of Dodge is at hand. And while exiting, make sure to have a lot of gold, silver and lead. Because if the days of Keynesian voodoo and fiat are almost over, then absolutely nobody has any idea what lies ahead.

Son of Captain Nemo

That's right: Bank of America is begging for another Fed-assisted market bailout, which gladly hints would be accelerated should Glencore experience a premature "credit event."

And why the fuck "not"?...

Nobody but Madoff went to jail in '08 the last time they were bailed out. -No "Pecora" investigation(s) took place with officer(s) of AIG, Bear Sterns, Lehman, Citigroup, JP Morgan and our favorite bank in the whole World that had their fingers among other appendages up the sphincty of everyone and has a revolving door to the Federal Reserve, U.S. Treasury EU and IMF -Leadman Sucks...

If you don't put them on the top of the Federal Reserve headquarters and the Freedom Tower to be thrown off the roof 7 years after the irreparable harm they continue to carry out...

This is what you get and what you deserve!

OldPhart

We're just waiting for the Statute of Limitations to run out. Then we'll investigate. [Obama Administration]

Crocodile

Quote: "if not even central banks can boost this market, then the time to get the hell out of Dodge is at hand."

Got that right; seems like they are losing the handle and ready to implement "Plan B"; massive short squeeze followed by "pulling the plug" and letting the chips fall. Seems we are at or near the end-game. I was hoping the DJIA would not go below 17K and it did, so tomorrow will give strong forward guidance that will answer the question; "have they lost control altogether?". I hope not.

Pareto

News flash Dundee. The FED has NEVER been in control. Being forced to react to redemptions is not becoming of someone who is "in control". Short of buying stocks, like the PBOC, or more MBS and CDS (QE1,2, Twist, 3), or, more Treasuries (QE forever), they're done. The thing about the market is that eventually it exposes the reality of central planning - that it doesn't work, hasn't worked, and never will work. It is simply naiive to think that any central bank has been in control of anything - ever. If they have been in control of anything at all, it would be that they own one of the greatest wealth redistributions that has ever occurred in history. They own that, And they also own every major recession since 1913. And they will own this cluster fuck too when it is all said and done. Because there is no free lunch. Sooner or later - everybody pays.

Angry Plant

Do higher interest rates represent a greater threat than lower growth to the 1% is the question?

The Fed will always serve the interests of the 1%.

Current stock, housing, car loan, and college loan bubble will all get worse if Fed does more QE. More QE really just means more malinvestment while no QE means that current malinvestment will come due. Those bubbles popping is inevitable so popping them now while they're smaller is maybe the best course.

China and Europe are now in position where they have to QE to stop economic implosion so US can exploit that to shut down US QE and let China and Europe carry the load.

In regards to the 1% the big loser of this would be Hillary and the likely big winner would be Jeb. Both candidates are completely in the pocket of the 1% so the rest of the 1% really don't care.

Angry Plant

I don't think I explained it well.

To be more clear I believe the fed will let the stockmarket tank instead of raising interest rates. The drop in stocks will have same impact as rate increases. That will allow fed to keep rates low and avoid a surge in US dollar.

It will also correct one of the bubbles currently in the US economy. The oil buble got popped last year now it's time for the stock bubble to be popped.

[Aug 20, 2015] Wolf Richter It Starts – Broad Retaliation Against China in Currency War

Aug 20, 2015 |
naked capitalism

Kazakhstan saw what's happening to oil, its main export product, and to the currencies in China and Russia, its biggest trading partners. The yuan devaluation was relatively small, compared to the ruble, which is now allowed or encouraged to drop with oil. It has plunged 14% against the dollar over the past 30 days and 45% over the past 12 months, to 66.7 rubles to the dollar. With the Russian economy losing its grip, the ruble is dropping perilously close to the panic levels of last December and January.

And Kazakhstan freaked out and devalued the tenge by 4.5% today, to 197.3 per dollar, the biggest drop since that infamous day in February 2014 when the central bank let the tenge plunge 20%. So today's move is likely just a foretaste of what is still to come.

... ... ...

But devaluations are not free lunches. They're desperate measures that demolish domestic consumption and real incomes (see Japan), business investment, and overall credibility. And capital flees. They can also heat up inflation. But many emerging market countries and their banks and corporations borrow in other currencies to get access to lower interest rates. That foreign-currency debt can't be devalued or inflated away.

Instead, the opposite happens. Their struggling or battered economies have to service foreign-currency debt with their own devalued currencies. Commodity exporters are getting sapped additionally by plunging commodity prices. Then that foreign currency debt, that cheap easy money everyone got to used playing with, becomes an insurmountable pile of expensive debt in a currency they can't control and whose exchange rate might run away from them.

This is when a debt crisis begins to spiral elegantly through the emerging markets, taking down banks, entire economies, and gobs of investors as it goes – or taxpayers in other countries if there is a bailout. It's always the same story. But this time, it's different: after years of global QE, low interest rates, and hot money sloshing through the system, the sums are larger, and the risks are higher.


MyLessThanPrimeBeef, August 20, 2015 at 12:47 pm

Only one nation is exceptionally lucky with an import-driven/global reserve currency circulated model that's free from this need to devalue or to service foreign currency loans.

Mike Sparrow, August 20, 2015 at 12:59 pm

Currency war? Not seeing it.

[Aug 20, 2015] Rosneft Doubling Down To Survive Oil Price Storm By Gaurav Agnihotri

A very weak article. The actual volumes Rosneft produces and volume growth dynamics are left behind...
"...With a production of more than 10 million barrels per day in month of July, Russia's oil output has reached its post-Soviet era production levels."
OilPrice.com

In fact, some market analysts and traders are even predicting oil prices will fall to $30 per barrel.

... ... ...

In contrast, the drilling volumes at Rosneft have increased by 27 percent during the first seven months of 2015 where more than 800 new wells were drilled. At a time when oil companies are shying away from newer acquisitions, Rosneft is all set to buy Trican Well Service Limited's Russian Hydraulic Fracturing business. So how does Rosneft manage to increase spending on its operations and acquisitions when other major oil companies are struggling?

....the ruble has weakened substantially against the U.S. dollar and is now trading at almost half of the value it was a year ago. The devaluation in the ruble has reduced the operational costs as oil companies would earn in dollar and pay their expenses in rubles.

Moreover, Russian tax laws have resulted in domestic oil companies bearing just one fifth of the burden related to the total drop in the crude oil prices. "As we expected, changes to Russia's taxation mechanism on the oil sector at the start of 2015 are cushioning domestic companies within the sector from the effects of lower oil prices," said Julia Pribytkova of Moody's. With a production of more than 10 million barrels per day in month of July, Russia's oil output has reached its post-Soviet era production levels.

... ... ...

According to a study by Citigroup, Russia's exports are still as profitable as they were during the $100 per barrel oil price levels, because of the currency devaluation. It is therefore quite obvious that Russia is set to increase its exports (and add to the supply glut) as the country has no other choice but to produce more oil in order to maintain its market share. This is highlighted by Rosneft's first quarter profits, which fell by more than 35percent, yet it still decided to increase its production levels

... ... ...

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai

[Aug 20, 2015] Low Oil Prices Could Break The "Fragile Five" Producing Nations By Nick Cunningham

| naked capitalism

By Nick Cunningham, a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Originally published at OilPrice

... ... ...

Meanwhile, in southern Iraq, which produces the bulk of the country's oil and has been far from the violence associated with ISIS, protests have threatened oil operations there. Protests at the West Qurna-2 oilfield operated by Russian firm Lukoil have raised concerns within both the company and the Iraqi central government about disruptions. The Prime Minister even traveled to the site to reassure Lukoil about the stability of its operations.

... ... ...

Low oil prices could also push Venezuela into a deeper crisis.

... ... ...

For Libya, already torn apart by civil war and the growing presence of ISIS militants, low oil prices are the last thing the country needs. ISIS violently crushed a civilian rebellion last week in the coastal city of Sirte, according to Al-Jazeera. Libya's internationally-recognized government has called upon Arab states for help in fighting ISIS, something that the Arab League has endorsed. Meanwhile, the country's oil sector – the backbone of the economy – is producing less than 400,000 barrels per day, well below the 1.6 million barrels per day Libya produced during the Gaddafi era. In other words, Libya is selling far less oil than it used to, and at prices far below what they were as recently as last year.

... ... ...

Saudi Arabia could run a fiscal deficit that is equivalent to about 20 percent of GDP. To finance public spending, Saudi Arabia has returned to the bond markets for the first time in eight years, issuing 15 billion riyals ($4 billion) in July, only to be followed up by an additional bond offering of 20 billion riyals ($5.33 billion) in August. The government plans on taking on more debt in the coming months as well.

... ... ...

Praedor, August 20, 2015 at 9:01 am

I am always automatically dubious about instability in Latin America, particularly Brazil, Ecuador, Venezuela. I cannot but assume that the CIA and State Dept are all over it, pushing it beyond what it would otherwise be organically, perverting it towards coup if a rightwing US-selected leader cannot be "elected". The US wants nothing MORE than instability and overthrow of these national governments and will do anything possible to manufacture disaffection inside their borders. There's water to privatize, oil to privatize, schools to privatize, corporations to feed.

shinola, August 20, 2015 at 10:56 am

My local newspaper carried a story this a.m. about low oil prices becoming a problem for Mexico too.

Sam Kanu, August 20, 2015 at 12:41 pm

Any clarity yet on who is funding Boko Haram in Nigeria?

PlutoniumKun, August 20, 2015 at 3:27 pm

The War Nerd (Gary Brecher) is required reading on Boko Haram, although unfortunately his work is increasingly being screened by paywalls. From memory, he was pretty clear that much of its funding comes from the usual suspects among 'our allies' in the Middle East.

Sam Kanu, August 20, 2015 at 6:22 pm

Local opinion on the source of funding seems to settle on certain elements of the Nigerian military, and possibly them acting as a conduit from global suspect #1.

Never mind the so called allies and the so called "experts" who have never set foot in the country.

Now start adding up 2 and 2.

Charles Fasola, August 20, 2015 at 1:16 pm

More bull crap from the controlled main stream media concerning Venezuela. Which is a target for regime change by the empire and its CIA organized criminal syndicate. Any nation that attempts to serve public purpose in any form becomes a target. Assassinations, overthrowal of legitimately elected governments, opium and narcotics production in Afghanistan and now Ukronazistan, money laundering for drug cartels, theivery and human trafficking are the specialties of this vile cesspool called the USA.

[Aug 16, 2015] You Don't Need to Hire Rapacious Private Equity Firms to Get Their Returns by

August 14, 2015 | naked capitalism

A myth that has allowed private equity to persist in its predatory ways is that private equity delivers returns that investors can't obtain through other investment strategies.

We've described the large body of research that demonstrates otherwise. Private equity has conditioned investors to use IRR, a return metric that exaggerates their performance. Average private equity industry performance does not beat the S&P 500, which is a much more flattering metric than smaller-cap indicies that would make for better comparables. Moreover, investors need to be compensated for the illiquidity of private equity and most investors use a rule of thumb of 300 to 400 additional basis points. Even the mighty CalPERS, which has better access to private equity funds than just about any market participant, has failed to meet its private equity performance benchmarks for the last 10, 5, 3, and one years. If CalPERS can't eke out an adequate risk-adjusted return out of private equity, pray tell who can?

The justification for investing in private equity has rested almost entirely on the idea that investors could gain access to the best funds. If they could invest only in top quartile funds, private equity looks like a winner. But that notion has also been roundly debunked. It was once true that top quartile firms stayed in the top quartile, so investors could in theory target them. But top quartile outperistence no longer holds, so investors might as well throw darts at a list of private equity fund managers. Moreover, even in the days when top funds were able to maintain a performance lead over their peers, the also-rans were able to muddy the selection waters. One study found that 77% of the funds were able to claim top quartile status. Oops.

As we wrote last year:

Rather than question the logic of investing in private equity at all, everyone in the industry has convinced themselves that it is reasonable to believe that they can be the Warren Buffett of private equity. The investment consultants go through the shooting-fish-in-a-barrel exercise of convincing their institutional clients that each of them is prettier, smarter, and more charming than average, and therefore capable of achieving sparking results. Needless to say, flattery is an easy sell….

Fundamentally, this is an intellectually dishonest exercise, and diametrically opposed to the way many public pension funds construct other parts of their investment portfolios. With public equity in particular, it's almost certain that a significant majority of U.S. pension fund assets are invested in index funds. That's because pension funds have recognized that, collectively, they cannot do better than average, and that after paying active management fees, actively managed public equity portfolios typically perform worse than the market average.

So it's not as if these investors are so clueless that they can't grasp the point that all of them cannot achieve above average results, let alone significantly above average results. Instead, with private equity, there is a desperate desire to be in the asset class for reasons that probably reflect a combination of intellectual capture by the PE managers, political corruption in legislatures that control public fund board appointees, and the need to have a strategy that could conceivably solve the pension underfunding problem over time.

In other words, the very long term, illiquid nature of private equity investments allows limited partners to fool themselves about how realistic it is for them to achieve their desired returns, and there's a well-honed industry of private equity professionals and consultants who stoke those illusions.

But it's going to be hard to keep those fantasies alive when academics show how to beat private equity returns with much cheaper public equity strategies. Matthew Klein of FT Alphaville summarizes a new paper by Brian Chingono and Dan Rasmussen that shows how to exceed the average private equity fund's return by a solid margin. We've embedded the article at the end of the post. Klein does a fine job of recapping it, so we'll quote liberally from his post.

The Chingono/Rasmussen strategy, in simple form, seeks to replicate what private equity funds do with a portfolio of public stocks by creating a portfolio of leveraged but low-priced yet solid cash flow generating firms. They focus on midsized stocks, in the 25th to 75th percentile of market capitalization, that are cheap (bottom 25% in enterprise value to EBITDA terms) and are leveraged more than average. The academics then tested several ways for selecting the best performers from this bunch. They found the best measures to be sales growth relative to assets and debt repayment ability (as in cash flow relative to debt levels). The only anomaly seems to be that rejiggering the portfolio annually in the 4th quarter produces sub-par returns; all the other variants produced impressive results of an average of 9.1% to 11.7% outperformance. That puts private equity to shame.

From Klein's post:

It's well known among finance academics that the performance of the average private equity fund is overwhelmingly determined by 1) junk bond spreads and 2) the amount of capital invested in PE funds. General partners overpay for their target companies when they have too much money to play with, which kills returns. But when credit is tight and few investors are willing to commit to private equity, general partners can get better deals and deliver the massive gains that underfunded pension plans salivate over.

In other words, returns are cyclical and can be predicted by the purchase multiples being paid, which in turn can be predicted by macro factors. (That's not surprising, since basically all asset returns are inversely related to how much you pay.) You may want to have some exposure to this kind of thing, but you shouldn't be paying pay 2 and 20 for it. Plus, there's no telling that the particular funds you invest in generate returns representative of the strategy.

And get a load of the margin of outperformance over time:

Looking at US data going back to the early 1960s, they found that if you'd bought a portfolio consisting of companies in the top quartile according to each of these filters, you would have made around 23 per cent per year between 1965 and 2013. You would have done slightly better with an equal-weighted portfolio and slightly worse with a value-weighted portfolio.) Compare that to the roughly 10 per cent annual returns you would have gotten over the same period if you invested in the S&P 500 index and reinvested all dividends, or the long-run net of fees returns of the Cambridge Private Equity Index of around 13 per cent per year.

So what's the fly in the ointment? Public stocks are more volatile than private equity funds. But that in large degree is a fallacy, by virtue of turning the defect of private equity, its illiquidity and infrequent valuations, into a trumped-up virtue. Moreover, PE firms flat out lie about what their portfolios would be worth in a bad market, like the fall of 2008. The authors mention the importance of this fibbing to private equity's perceived superiority:

The key advantage of private ownership of leveraged businesses, however, is that the private equity investor can mask volatility because the equity securities are not publicly listed.

This truncating the bottoms of the worst of market cycles gives private equity the illusion of lower price volatility than it really has. Or put it another way, the valuation consultants haven't adequately priced the fact that the investors have handed over the option as to when they get their money back to the general partners, which is not the same as "illiquidity". That option is a very long-dated option, and long dated options are extremely expensive. It's a virtual certainty that if this option were properly priced, limited partners would need to seek a far higher premium than the 300 to 400 basis point the industry has agreed upon as a heuristic.

But even handicapping the higher volatility using conventional metrics, this levered public equity strategy still beats private equity. As Klein sums up:

True, you would have endured extreme volatility to go along with your leverage-fueled returns, but the risk to return ratio would still have been somewhat better than the market as a whole…

But we can easily imagine investment committees lacking the stomach for this kind of strategy even if it is far more liquid than the private-market equivalent. Some may prefer to take comfort in the apparent stability of made-up numbers generated from appraisals of untraded assets even if that means leaving money on the table.

Yet we see CalPERS, which is better run than any other public pension fund, assuming more risks to eke out mere single-digit basis point improvements in performance, while ignoring what amounts to free money opportunities by getting out of the high-fee private equity regime, either by moving to cut out the middleman, as Canadian pension funds are doing, or by employing public market strategies to achieve equity like returns (Chingono/Rasmussen isn't the only approach we've heard about, but it appears to be the most rigorously tested one). But until investors feel more pressure, either due to evidence of more private equity chicanery or faltering private equity returns, they aren't likely to kick their private equity bad habit.

[Aug 16, 2015] And Quiet Flows the Con

"As flies to wanton boys are we to the gods.
They kill us for their sport."

William Shakespeare, King Lear

That disruption was caused by the China currency devaluations which reminded those who have not been paying attention that

a) there is a currency war underway,

b) there is no sustainable economic recovery despite rosy reassurances and the facade of statistical growth, and

c) there are a number of bubbles in financial assets that have been functioning primarily as wealth transfer mechanisms, and are wobbling in a manner that could bring the economy back to the brink once again.

Welcome To The World Of ZIRP Zombies Zero Hedge

Bay of Pigs

It is amazing that most people don't realize the last time the FED actually raised rates.

June 2006

RaceToTheBottom

Central Banksters are afraid, because they have nowhere to backtrack to.

Economics profession is also scared because they have been acting like a one religion Religious Studies department for over 50 years. They only now just realized that their livelihood has become tied to that one religion and that one religion is a religion based on having a Spaghetti strainer on your head.

MagicMoney

What Mises means by:

falling value of money = rising interest rate is that people prefer to buy goods versus saving money. They prefer goods over money. Higher interest rates is a regulatory price that prevents over consumption of loan-able funds.

Rising value of money = falling interest rate, because people prefer to save more money versus spending their money on goods. Interest rates can be lower, because there is less demand for present goods, which means funds are cheaper for entrepreneur can engage in new types of production today to bring about consumption in the future.

I will repeat..

When people prefer goods over money, there is high demand for funds to buy it, thus like any supply and demand law, prices rise for those funds. When people prefer money over goods, it's inverse. Demand for funds is lower, means consumers are not spending as much, and this allows room for capital investment, because funds are not competing for consumption. Consumption levels have subsided, and the investment period can began today to bring about new goods for consumers tommorrow.

I don't know how you missed that.

withglee

I don't know how you missed that.

My concern is with anyone who thinks they got it!

When people prefer goods over money, there is high demand for funds to buy it, thus like any supply and demand law, prices rise for those funds.

A properly managed Medium of Exchange (MOE) does not respond to a supply/demand relationship for the MOE. It responds to the default/interest collection relationship. But with proper management, the process "guarantees" both these ratios are unity ... all the time and everywhere. And such proper management is trivial. How? Monitor defaults. When there is one, immediately collect an equal amount of interest.

Money is "a promise to complete a trade". It is an efficiency that allows simple barter trades to proceed over time and space. Money is created by traders making trading promises and getting them certified. The certificates are destroyed when the trader delivers. If the trader defaults, the orphaned certificates are recovered with interest collections. During the delivery process, the certificates circulate as the most desired object of simple barter. This is because, under a properly managed MOE process, they never lose their value. Thus they are universally accepted.

Supply and demand for these certificates (money) is in perpetual perfect balance ... it's the nature of trade.

Demand for funds is lower, means consumers are not spending as much, and this allows room for capital investment, because funds are not competing for consumption.

This is a "capitalists" notion and was imposed by capitalists. It gives capitalists control over traders and their desire and ability to trade where no such natural control exists.

It is ridiculous to require that someone first save before he, or someone else using money, can trade. In the beginning there was "no" capital. Yet trade got started and has continued ever since.

Consumption levels have subsided, and the investment period can began today to bring about new goods for consumers tommorrow.

Consumption and savings have nothing to do with proper management of an MOE process. Under a properly operating MOE process, reliable traders (those who don't default) enjoy zero interest load. Thus, in time value of money calculations (i.e. (1+i)^n) the zero "i" term makes all these "buy it now with future money or save present money for a future purchase" considerations go away. With inflation guaranteed to be zero, a consideration to trade is governed only by the traders desire to do so and ability to deliver.

Without some capitalist jacking the system with their farming operation (i.e. diddling interest rates and restricting traders ability to get their promises certified) traders are far less likely to default ... and there is no cascading effect if they do.

A properly managed MOE process "automatically" increases interest collections in the face of defaults. This is what the capitalists claim to be doing with all the nonsense described in this article.

So again... if you "get that", you are putty in the capitalists hands and you are a major part of the problem.

NoWayJose

We had the chance in 2007-2009 to re-set everything and come out with a stable growing economy and severe limitations on banks. It did not happen. We will get another chance, but the pain threshold will be much higher!

[Aug 16, 2015] Deal or War': Is Doomed Dollar Really Behind Obama's Iran Warning?

"..."At that point, I think much of the world would have had enough of the US use of the international payments system to dictate to others, and they would cease transacting in dollars."
The US dollar would henceforth lose its status as the key global reserve currency for the conduct of international trade and financial transactions..."
.
"...Many analysts have long wondered at how the US dollar has managed to defy economic laws, given that its preeminence as the world's reserve currency is no longer merited by the fundamentals of the US economy. Massive indebtedness, chronic unemployment, loss of manufacturing base, trade and budget deficits are just some of the key markers, despite official claims of "recovery.""
.
"..."If the dollar lost the reserve currency status, US power would decline," says Roberts. "Washington's financial hegemony, such as the ability to impose sanctions, would vanish, and Washington would no longer be able to pay its bills by printing money. Moreover, the loss of reserve currency status would mean a drop in the demand for dollars and a drop in willingness to hold them. Therefore, the dollar's exchange value would fall, and rising prices of imports would import inflation into the US economy.""
.
"...Doug Casey, a top American investment analyst, last week warned that the woeful state of the US economy means that the dollar is teetering on the brink of a long-overdue crash. "You're going to see very high levels of inflation. It's going to be quite catastrophic," says Casey. He added that the crash will also presage a collapse in the American banking system which is carrying trillions of dollars of toxic debt derivatives, at levels much greater than when the system crashed in 2007-08.... "Now, when interest rates inevitably go up from these artificially suppressed levels where they are now, the bond market is going to collapse, the stock market is going to collapse, and with it, the real estate market is going to collapse. Pension funds are going to be wiped out… This is a very bad situation. The US is digging itself in deeper and deeper," said Casey, who added the telling question: "Then what's going to happen?"..."
.
"...President Obama's grim warning of "deal or war" seems to provide an answer. Faced with economic implosion on an epic scale, the US may be counting on war as its other option..."
August 15, 2015 | ronpaulinstitute.org

US President Barack Obama has given an extraordinary ultimatum to the Republican-controlled Congress, arguing that they must not block the nuclear accord with Iran. It's either "deal or war," he says.

In a televised nationwide address on August 5, Obama said: "Congressional rejection of this deal leaves any US administration that is absolutely committed to preventing Iran from getting a nuclear weapon with one option: another war in the Middle East. I say this not to be provocative. I am stating a fact."

The American Congress is due to vote on whether to accept the Joint Comprehensive Plan of Action signed July 14 between Iran and the P5+1 group of world powers – the US, Britain, France, Germany, Russia and China. Republicans are openly vowing to reject the JCPOA, along with hawkish Democrats such as Senator Chuck Schumer. Opposition within the Congress may even be enough to override a presidential veto to push through the nuclear accord.

In his drastic prediction of war, one might assume that Obama is referring to Israel launching a preemptive military strike on Iran with the backing of US Republicans. Or that he is insinuating that Iran will walk from self-imposed restraints on its nuclear program to build a bomb, thus triggering a war.

But what could really be behind Obama's dire warning of "deal or war" is another scenario – the collapse of the US dollar, and with that the implosion of the US economy.

That scenario was hinted at this week by US Secretary of State John Kerry. Speaking in New York on August 11, Kerry made the candid admission that failure to seal the nuclear deal could result in the US dollar losing its status as the top international reserve currency.

"If we turn around and nix the deal and then tell [US allies], 'You're going to have to obey our rules and sanctions anyway,' that is a recipe, very quickly for the American dollar to cease to be the reserve currency of the world."

In other words, what really concerns the Obama administration is that the sanctions regime it has crafted on Iran – and has compelled other nations to abide by over the past decade – will be finished. And Iran will be open for business with the European Union, as well as China and Russia.

It is significant that within days of signing the Geneva accord, Germany, France, Italy and other EU governments hastened to Tehran to begin lining up lucrative investment opportunities in Iran's prodigious oil and gas industries. China and Russia are equally well-placed and more than willing to resume trading partnerships with Iran. Russia has signed major deals to expand Iran's nuclear energy industry.

American writer Paul Craig Roberts said that the US-led sanctions on Iran and also against Russia have generated a lot of frustration and resentment among Washington's European allies.

"US sanctions against Iran and Russia have cost businesses in other countries a lot of money," Roberts told this author.

"Propaganda about the Iranian nuke threat and Russian threat is what caused other countries to cooperate with the sanctions. If a deal worked out over much time by the US, Russia, China, UK, France and Germany is blocked, other countries are likely to cease cooperating with US sanctions."

Roberts added that if Washington were to scuttle the nuclear accord with Iran, and then demand a return to the erstwhile sanctions regime, the other international players will repudiate the American diktat.

"At that point, I think much of the world would have had enough of the US use of the international payments system to dictate to others, and they would cease transacting in dollars."

The US dollar would henceforth lose its status as the key global reserve currency for the conduct of international trade and financial transactions.

Former World Bank analyst Peter Koenig says that if the nuclear accord unravels, Iran will be free to trade its oil and gas – worth trillions of dollars – in bilateral currency deals with the EU, Japan, India, South Korea, China and Russia, in much the same way that China and Russia and other members of the BRICS nations have already begun to do so.

That outcome will further undermine the US dollar. It will gradually become redundant as a mechanism of international payment.

Koenig argues that this implicit threat to the dollar is the real, unspoken cause for anxiety in Washington. The long-running dispute with Iran, he contends, was never about alleged weapons of mass destruction. Rather, the real motive was for Washington to preserve the dollar's unique global standing.

"The US-led standoff with Iran has nothing to do with nuclear weapons," says Koenig. The issue is: will Iran eventually sell its huge reserves of hydrocarbons in other currencies than the dollar, as they intended to do in 2007 with an Iranian Oil Bourse? That is what instigated the American-contrived fake nuclear issue in the first place."

This is not just about Iran. It is about other major world economies moving away from holding the US dollar as a means of doing business. If the US unilaterally scuppers the international nuclear accord, Washington will no longer be able to enforce its financial hegemony, which the sanctions regime on Iran has underpinned.

Many analysts have long wondered at how the US dollar has managed to defy economic laws, given that its preeminence as the world's reserve currency is no longer merited by the fundamentals of the US economy. Massive indebtedness, chronic unemployment, loss of manufacturing base, trade and budget deficits are just some of the key markers, despite official claims of "recovery."

As Paul Craig Roberts commented, the dollar's value has only been maintained because up to now the rest of the world needs the greenback to do business with. That dependency has allowed the US Federal Reserve to keep printing banknotes in quantities that are in no way commensurate with the American economy's decrepit condition.

"If the dollar lost the reserve currency status, US power would decline," says Roberts. "Washington's financial hegemony, such as the ability to impose sanctions, would vanish, and Washington would no longer be able to pay its bills by printing money. Moreover, the loss of reserve currency status would mean a drop in the demand for dollars and a drop in willingness to hold them. Therefore, the dollar's exchange value would fall, and rising prices of imports would import inflation into the US economy."

Doug Casey, a top American investment analyst, last week warned that the woeful state of the US economy means that the dollar is teetering on the brink of a long-overdue crash. "You're going to see very high levels of inflation. It's going to be quite catastrophic," says Casey.

He added that the crash will also presage a collapse in the American banking system which is carrying trillions of dollars of toxic debt derivatives, at levels much greater than when the system crashed in 2007-08.

The picture he painted isn't pretty: "Now, when interest rates inevitably go up from these artificially suppressed levels where they are now, the bond market is going to collapse, the stock market is going to collapse, and with it, the real estate market is going to collapse. Pension funds are going to be wiped out… This is a very bad situation. The US is digging itself in deeper and deeper," said Casey, who added the telling question: "Then what's going to happen?"

President Obama's grim warning of "deal or war" seems to provide an answer. Faced with economic implosion on an epic scale, the US may be counting on war as its other option.

Reprinted with permission from RT.

[Aug 16, 2015] The Ron Paul Institute for Peace and Prosperity Republicans Cant Face the Truth About Iraq

"...For Cheney and his oil pals, conquering Iraq would secure the Arab world's biggest oil reserves for Uncle Sam and offer a central military base in the region. For Washington's bloodthirsty neocons, pulverizing Iraq would remove one of Israel's most determined enemies, crush the only Arab nation that might challenge Israel's nuclear monopoly, and cost Israel nothing. Invading Iraq produced the slow disintegration of the Mideast so long sought by militant Zionists."
.
"...It all worked brilliantly, at least from Israel's viewpoint. Not, however for the US. Bush's invasion shattered Iraq, led to al-Qaida and ISIS, and left Washington saddled with a $1 trillion-dollar bill instead of the $60 million cost estimated by Wolfowitz. The Mideast is in a tailspin, Palestinians are totally isolated, and Egypt, the region's key nation, is run by an Arab-fascist military dictatorship."
August 15, 2015 | ronpaulinstitute.org

Gov. Jeb Bush repeated one of the biggest falsehoods of our time during the recent presidential candidate debate: "we were misled (into the Iraq War) by faulty intelligence."

US intelligence was not "misled." It was ordered by the real, de facto president, Dick Cheney, to provide excuses for a war of aggression against Saddam Hussein's Iraq.

PM Tony Blair, forced British intelligence services to "sex up" reports that Iraq had nuclear weapons; he purged the government and the venerable broadcaster BBC of journalists who failed to amplify Blair's lies. Bush and Blair reportedly discussed painting a US Air Force plane in UN colors and getting it to buzz Iraqi anti-aircraft sites in hope the Iraqis would fire on it. Bush told Blair that after conquering Iraq, he intended to invade Iran, Syria, Libya and Pakistan.

In fact, Iraq had no "weapons of mass destruction," save some rusty barrels of mustard and nerve gas that had been supplied by the US and Britain for use against Iran. I broke this story from Baghdad back in late 1990.

Tyler Drumheller, who died last week, was the former chief of CIA's European division. He was the highest-ranking intelligence officer to go public and accuse the Bush administration of hyping fabricated evidence to justify invading Iraq.

Drumheller was particularly forceful in denouncing the Iraqi defector codenamed "Curveball," whose ludicrous claims about mobile Iraqi germ laboratories were trumpeted before the UN by former Secretary of State Colin Powell. "Curveball's" claims were outright lies and Powell, whose career was ruined by parroting these absurd allegations, should have known better.

"Curveball" was an 'agent provocateur' clearly sent by a neighbor of Iraq to help promote a US attack on that nation. Whether it was Kuwait, Saudi Arabia or Israel that sent Curveball," we still don't know. All three fabricated "evidence" against Iraq and passed it to Washington. That is where US intelligence was indeed misled. But that's only a minor part of the story.

A Washington cabal of pro-Israel neocons, oil men, and old-fashioned imperialists joined to promote a grossly illegal invasion of oil-rich Iraq. One of its senior members, former Pentagon official Paul Wolfowitz, admitted that weapons of mass destruction was chosen as the most convenient and emotive pretext for war. Orders went out to CIA and NSA to find information linking Iraq to 9/11 and weapons of mass destruction.

Some of the worst torture inflicted on suspects kidnapped by CIA's action teams was designed to make them admit to a link between 9/11 and Saddam Hussein. There was, of course, none. But administration officials, like the odious Condoleeza Rice, kept broadly hinting at a nuclear threat to America.

Prior to the 2003 invasion of Iraq, polls showed a majority of Americans believed Iraq was threatening the US with nuclear attack and was behind 9/11. Amazingly, a poll taken of self-professed evangelical Christians just before the US attacked Iraq showed that over 80% supported war against Iraq. So much for turning the other cheek.

Most of the US media, notably the New York Times, Washington Post and Wall Street Journal, amplified the lies of the Bush administration. TV networks were ordered never to show American military casualties or civilian dead. Those, like this writer, who questioned the rational for war, or who wouldn't go along with the party line, were blanked out from print and TV.

For example, I was immediately dropped from a major TV network after daring mention that Israel supported the 2003 Iraq war and would benefit from it. I was blacklisted by another major US TV network at the direct demand of the Bush White House for repeatedly insisting that Iraq had no nuclear capability.

Very few analysts, journalists, or politicians took time to ask: even if Iraq had nuclear weapons, how could they be delivered to North America? Iraq had no long-range bombers and no missiles with range greater than 100kms. Perhaps by FedEx? No one asked, why would Iraq invite national suicide by trying to hit the US with a nuclear weapon?

The most original answer came from George W. Bush: nefarious Iraqi freighters were lurking in the North Atlantic carrying "drones of death" that would attack sleeping America. This hallucination was based on a single report that the bumbling Iraqis were working a children's model airplane that, in the end, broke and never flew. What inspired such a phantasmagoria? Pot, too much bourbon, LSD, or thundering orders from Dick Cheney to find a damned good excuse for invading Iraq.

For Cheney and his oil pals, conquering Iraq would secure the Arab world's biggest oil reserves for Uncle Sam and offer a central military base in the region. For Washington's bloodthirsty neocons, pulverizing Iraq would remove one of Israel's most determined enemies, crush the only Arab nation that might challenge Israel's nuclear monopoly, and cost Israel nothing. Invading Iraq produced the slow disintegration of the Mideast so long sought by militant Zionists.

It all worked brilliantly, at least from Israel's viewpoint. Not, however for the US. Bush's invasion shattered Iraq, led to al-Qaida and ISIS, and left Washington saddled with a $1 trillion-dollar bill instead of the $60 million cost estimated by Wolfowitz. The Mideast is in a tailspin, Palestinians are totally isolated, and Egypt, the region's key nation, is run by an Arab-fascist military dictatorship.

Tyler Drumheller was the only senior CIA officer to stand up and tell Americans they were lied into an unnecessary, illegal war. Today, we have Iraqi déjà vu anew as the lie factories and fear mongers work overtime to promote war with Iran.

Reprinted with permission from EricMargolis.com.

'International Money Mania'

Aug 16, 2015 | Economist's View
Paul Krugman:
International Money Mania: China is claiming that it's not devaluing the renminbi to gain competitive advantage, it's adding flexibility to prepare for the yuan as an international reserve currency, becoming part of the basket in the IMF's SDRs and all that. That's highly implausible as a story about what's happening right now; but it may be true that China's urge to loosen capital controls is driven in part by its global-currency ambitions. ...
So what are the advantages of owning a reserve currency? ...
What you're left with, basically, is seigniorage: the fact that some people outside your country hold your currency, which means that in effect America gets a zero-interest loan corresponding to the stash of dollar bills — or, mainly $100 bills — held in the hoards of tax evaders, drug dealers, and other friends around the world. In normal times this privilege is worth something like $20-30 billion a year; that's not a tiny number, but it's only a small fraction of one percent of GDP.
The point is that while reserve-currency status may have political symbolism attached, it's essentially irrelevant as an economic goal — and definitely not worth distorting policy to achieve. Someone needs to tell the Chinese, you shall not crucify this country on a cross of SDRs.

am said...


Wo! Prof K pulls the reins on the reserve currency objective. I think that prestige is the main objective in China's moves in this direction and they wouldn't mind a bit of the seignorage too. But to get prestige fully they will have to let the currency float.
China won't peg the yuan forever and doesn't want to either, I think. Their long term objective is surely international bonds in yuan to rival the USA dollar bonds.

RogerFox said...


'Reserve' status tends to make a currency stronger that it otherwise would be. When they think it through, the Reds will eventually come to the realization that such an outcome might not be to their benefit, any more than it has been for blue-collar-types in the States.

Manipulating their currency down, then up, then down again - that's hardly demonstrative of an embrace of market-forces, is it?


RC AKA Darryl, Ron said in reply to RogerFox...


'Reserve' status tends to make a currency stronger that it otherwise would be.

[Krugman doesn't seem to believe in the Triffin dilemma, but you are correct. What you mean by "stronger than it otherwise would be" is having a higher foreign exchange value relative to its surplus trading partner's currencies than if they were not holding securities denominated in the reserve currency. So, the reserve currency does have a higher import purchasing power in the face of persistent trade deficits. Whether that increases or decrease the overall trade deficit for the reserve currency nation depends upon the real balance of trade relative to the effect of exchange rates. If US based MNCs were going to offshore production regardless of exchange rates just because of arbitrage over regulation and standard of living (real wages) and the US was going to import the same amount of oil anyway then the over-valued dollar actually reduced the US trade deficit. That may be why Krugman just tiptoed past the Triffin dilemma. ]

*

...When they think it through, the Reds will eventually come to the realization that such an outcome might not be to their benefit, any more than it has been for blue-collar-types in the States...

[The US had developed a higher standard of living including higher environmental quality and higher labor safety standards. There are plenty of Reds and they do not have much leverage in their political system. Most importantly China can liberalize their financial system while still practicing protectionists industrial policy. What China needs to grow is a switch to domestic consumption and that will take a lot more imported oil. China wants to make this transition. China wants the Triffin dilemma to lower the cost of their oil imports. They are ready to let lower wage countries perform more of the low skill labor while China raises their standard of living and switches from surplus to deficit on trade. China will be smart about what it choses to import though unlike the US. The US was smart about making the rich even richer until they controlled the media and even the political system. The Chinese government would want to avoid that embrace.]


Reply Thursday, August 13, 2015 at 04:44 AM


Lafayette said...


WAKEY, WAKEY …

From Forbes : {Technically, the news that many rich people in China have personal ties to China's top leaders is not really news anymore. Nor is it news that many rich Chinese have placed their assets in offshore accounts or even that many rich people in China get that way through peddling influence or corruption.

After all, the top 50 members of China's National People's Congress boast a combined wealth of $94.7 billion, making their American congressional cousins across the Pacific—whose top 50 members are worth only $1.6 billion—look positively poverty stricken. The link between politics and money in China is well-established.*}

And we thought that Uncle Sam had a problem with too many plutocrats fixing policy from the top?

Wakey, wakey. The sun rises in the east … !

*From here: http://www.forbes.com/sites/elizabetheconomy/2014/01/28/the-political-plight-of-chinas-wealthy/

Reply Thursday, August 13, 2015 at 08:25 AM


anne said in reply to Lafayette...


After all, the top 50 members of China's National People's Congress boast a combined wealth of $94.7 billion...

[ Not that the crazed viciousness directed against the Chinese will stop, but it is not conceivable that Forbes could know this. ]


Reply Thursday, August 13, 2015 at 08:43 AM


Lafayette said in reply to anne...


Anne, don't be naive.

I have seen this figure confirmed by Chinese, in China, on TV reports here in France. In fact, the reportage was done by some very brave Germans who would not dare set foot again in China.

The report was very well done, in that it interviewed dissenters in hiding as well as those who had been in jail. It even went to the backwaters of large cities and out into the countryside.

In fact, I heard quotes for the position of regional leadership that are bantered about and even well-known. Meaning this: The corruption is so wide-spread that those in command are no longer even hiding it.

I cannot imagine how they (the reporters) got away with it, because the Political Police go right down to the village level. You cannot believe what's going in China from abroad.

But when it implodes, and it WILL implode, the economic earthquake caused is going to be enormous ...


Reply Thursday, August 13, 2015 at 09:02 AM


anne said in reply to Lafayette...


"In fact, the reportage was done by some very brave ------- who would not dare set foot again in China."

Rubbish, though no doubt self-sacrificing and bravely gathered rubbish, but what is now all important through the West is the destroying of China.


Reply Thursday, August 13, 2015 at 09:14 AM


pgl said in reply to anne...


How is reporting that a few people have gotten very rich destroying China? You are paranoid here.


Reply Thursday, August 13, 2015 at 09:23 AM


anne said in reply to anne...


"After all, the top 50 members of China's National People's Congress boast a combined wealth of $94.7 billion..."

"In fact, the reportage was done by some very brave ------- who would not dare set foot again in China."

Rubbish, though no doubt self-sacrificing and bravely gathered rubbish, but what is now all important through the West is the destroying of China. What is being reported cannot conceivably be known and is simply making up stuff with the intent of destroying China.


Reply Thursday, August 13, 2015 at 09:36 AM


kthomas said in reply to Lafayette...


Mao is turning in his grave at Ludicrous Speed.


Im enjoying the hell out of this.


Reply Thursday, August 13, 2015 at 10:31 AM


Lafayette said in reply to kthomas...


Witnessing what is happening in China from afar is a privilege.

They are flocking to France this summer because French "style" is highly prized. And what do they find here ... gangs of Romanian pick-pockets.

They are a decent people, the Chinese, but haven't the slightest sense of "individualism". Quite unlike Americans, who have little sense of "solidarity".

So, the Chinese are easy to manipulate. And they ARE being manipulated by a corrupt caste-system that has replaced the iron-fist of communist rule.

These billionaires are "communists" in sheep-clothing - they are no different from Putin's kleptocrats ...


Reply Thursday, August 13, 2015 at 11:55 AM


Lafayette said in reply to Lafayette...


NICE MONEY IF YOU CAN GET ... AND YOU CAN GET IT, IF YOU TRY

{... whose top 50 members are worth only $1.6 billion}

Only? That's more than a cool $300M each on average.

Now who the hell "needs" 300M dollars ... ?


Reply Thursday, August 13, 2015 at 08:56 AM


am said in reply to Lafayette...


How do they define a billion. If it is 1000 million then 50 into 1.5 billion is 30 million.


Reply Thursday, August 13, 2015 at 09:20 AM


pgl said in reply to am...


$94.7 billion collectively. Almost $1.9 billion per person. I know - Forbes needs better writers. But the DONALD would still call these rich dudes "light weights". When they each have $10 billion, then he'll be nice to them.


Reply Thursday, August 13, 2015 at 09:28 AM


am said in reply to pgl...


My comment was about the US combined wealth. Laf says it works out at 300million each for the top 50 but if a billion is 1000 million then he should have said 30million each. All rounded down, of course. I think there are different definitions of a billion which is why I asked the question in the first comment.

Reply Thursday, August 13, 2015 at 09:39 AM


Lafayette said in reply to am...


Your right, it's ONLY $30M. That changes EVERYTHING, doesn't it!

Dammit, where's that delete button when you need it ... ;^)


Reply Thursday, August 13, 2015 at 09:38 AM


pgl said in reply to Lafayette...


I thought the figure was $94.7 billion. Now it is $1.6 billion? Let's get the accounting straight. BTW - $300 million is what the DONALD spends in just a couple of months.


Reply Thursday, August 13, 2015 at 09:24 AM


pgl said in reply to pgl...


"the top 50 members of China's National People's Congress boast a combined wealth of $94.7 billion, making their American congressional cousins across the Pacific—whose top 50 members are worth only $1.6 billion".

Oh wait - I get this story. Sort of. But 94.7/50 is a bit more than 1.6. Right?


Reply Thursday, August 13, 2015 at 09:26 AM


pgl said in reply to pgl...


Oh good grief - the original story reads:

"MANY Americans grumble about the wealth of their politicians. An annual survey released this month by CQ Roll Call, part of The Economist Group, showed that the median net worth of all Congressmen was $440,000, compared with American household net worth of around $70,000. Indeed, the 50 richest members of Congress hold a staggering $1.6 billion. But that's nothing compared with China. The wealthiest 50 delegates to the National People's Congress (NPC), China's rubber-stamp parliament, control $94.7 billion, according to the Hurun Report's latest rich list. That's about 60 times more than their American confrères. Darrell Issa, a Republican from California, is the richest man in Congress, with $355m. But that is pocket money compared with the riches of Zong Qinghou, an NPC delegate and boss of Hangzhou Wahaha Group, a drinks-maker, whose wealth totals almost $19 billion (including assets distributed to family members). Americans might not take much succour in being trumped by China, but it certainly brings new meaning to the idea that the seat of political power is called the capital."

Better writing. The DONALD is still laughing at this as he is worth $10 billion but he has decided that Zong Qingjou is not a light weight.


Reply Thursday, August 13, 2015 at 09:32 AM


Lafayette said in reply to pgl...


Does the exact number really matter? Nobody knows for sure what the real figure is, so its's just an estimate for the moment.

I quoted that figure from Forbes ...

If any division is of - mea culpa, mea culpa, mea maxima culpa ...


Reply Thursday, August 13, 2015 at 09:44 AM


pgl said in reply to Lafayette...


One of these dudes has raked in $19 billion? Damn - what did he give away to make that?

And notice - any story on China that says anything other than their growth rate is the highest in a long time sends Anne off in another one of her tantrums. Just sad.


Reply Thursday, August 13, 2015 at 09:53 AM


pgl said...


China's real exchange rate has doubled over the past 20 years:

https://research.stlouisfed.org/fred2/series/RBCNBIS

Krugman notes this fact and writes:

http://krugman.blogs.nytimes.com/2015/08/13/china-2015-is-not-china-2010/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

"It's true that China's real exchange rate has trended upward for a long time, and that this didn't lead to a loss of competitiveness until recently — mainly because of Balassa-Samuelson and other effects of rising productivity. But with Chinese growth slowing and the pace of appreciation rising — and with rising competition from other emerging markets — the past five years almost surely have brought a major reduction in competitiveness. It's perfectly consistent to believe that China was destructively undervalued in 2010 but overvalued now."

We used to lecture the Chinese on alleged currency manipulation but maybe we should stop lest we become clowns like the DONALD!

Reply Thursday, August 13, 2015 at 08:41 AM


am said...


http://www.afr.com/markets/chinas-central-bank-moves-to-calm-markets-20150813-giy9w9

A good Aussie report on the new Chinese policy. Basically the peg has a range for the day's trading. The value at close of business is then the new starting peg the next day. Hence the devaluation each day this week.


Reply Thursday, August 13, 2015 at 10:28 AM


am said in reply to am...


http://www.afr.com/markets/currencies/hockey-backs-china-central-bank-moves-to-calm-markets-20150813-giyihc
The Aussies seem to like what is happening with the yuan.


Reply Thursday, August 13, 2015 at 10:37 AM


pgl said in reply to am...

"China's central bank said it would keep the exchange rate at a "reasonable" and stable level at a press conference on Thursday".

In other words, pegged at a different level than earlier but still pegged. I say this because Matty Boy Bot thought this meant floating. OK - the Boy Bot gets everything wrong.

john c. halasz said...

Umm... the "advantage" of having a reserve currency is that one can borrow cheap and long and then invest at much higher returns elsewhere, especially abroad. Why does PK miss that, instead focusing on the trivial seigniorage? Of course, that's not an advantage for the economy as a whole necessarily, just for certain factions of the elite, but should macroeconomic abstraction blind one to the different interests in play?

Peter K. said in reply to john c. halasz...

The carry trade?

"and then invest at much higher returns elsewhere,"

And then pull it out in a panic as they did during the East Asian crisis in the late 90s and the European periphery's debt crisis recently.

or with subprime and mortgage-backed securities with the housing bubbble.


[Aug 15, 2015]Are Automakers About To Hit The Panic Button

Zero Hedge

To sum up...

The only way automakers are making sales is by lowering credit standards to truly mind-numbing levels.... that cannot last.

China's economic collapse has crushed forecasts for the automakers.

Inventories are already at record highs.

And July saw a massive surge in producton.

What comes next is simple... a production slump - just ask The Atlanta Fed.

Save_America1st

Ummmmm....remember this, folks????

http://www.zerohedge.com/news/2014-05-16/where-worlds-unsold-cars-go-die

I think I know a way how they can take care of excess car inventory:

http://www.zerohedge.com/news/2015-08-13/one-way-china-deals-its-massive...

pods

If they start making cars that are simply cars again, I will buy a new one.

Not ones with wifi and bluetooth and ways to tell your friends when you just jacked off in a traffic jam without taking your hands off the wheel.

Just make a damn car. I only need AC. That's it. I will put in my own stereo if needed and I dont even need power windows or locks.

$30-50k for a car? Does it run on angel tears? Was it made with Cecil mane plush seats?

Maybe they should spend more time on finding out how to make shit that doesn't break in 4 years.

If they can re-master an ignition switch then we will talk.

pods


Hitlery_4_Dictator

I have heated seats in my 2003 king ranch...IMHO - 2003 should have been the year to stop adding electronics and more complex bullshit

ConanTheLibertarian

Indeed. I like to work on cars as a hobby but I refuse to work on cars made after 2000. After that it's not fun anymore.

Tinfoil Hat

Still driving the $14k kia rio from off the lot in 2007. manual transmission, windows, locks. Hatchback and folding seats to hold lots of stuff. Perfect little people/stuff mover. It took a while to detach my sense of self worth from the instantly depreciating financial liability that is an automobile, but I must say I'm glad for it now. Costs about $120/month to run all in. It blows my mind when the young guys I work with are financing $40-50k cars and trucks dropping $8-900/month between payments and insurance.

separating "self" from "stuff" seems to be a pretty big step to sound personal financials.

AGuy

"Tellin you man, I've become pretty accustomed to Audi interiors and handling."

Audi's are high maintenance and break a lot. Everyone I know that owns an Audi had nothing but problems.

For the most part, cars have replaced boats. Cars have become a hole in the road that you pour money into. Your better off buying a $25K import and upgrade the interior (replace cloth seat with leather for about $1K) and pocket the $10K to $15K difference. Generally Americans by luxury imports to impress other people and to give themselves a bit of self-importance and feed their narrasism.

"American cars - at least the recent ones I've driven"

American car manufacturers produced decent cars in the 1990s and early 2000s, after about 2003-2004, it all started rolling down hill, but the prices went up. With GM, your risk your life (recall the Ignition probably that caused the death of more than 100 people).

[Aug 15, 2015] Paul Krugman Bungling g's Stock Markets

Aug 14, 2015 | Economist's View

kthomas said in reply to Mitch...

...As for this particular article from PK, its garbage. Completely subjective, and repeating much of what most of us know. He does it rarely, thank God, but nobody is perfect and he can be allowed an occasiional rant.

Im far more interested in his opinions on Fed response.

sanjait said...

This is concerning, because it's amateurish behavior for a national government. China is essentially acting like the London Whale - throwing money at the market in a vain attempt to avoid having asset prices shift, hoping beyond reason that the market will just favorably make it's own adjustments sometime in the future.

Paine said in reply to sanjait...

What ? Amateurish ? How can you know the underlying plan here? I certainly don't

And I made my living for a while analyzing currency markets

Sanjait said in reply to Paine ...

They are trying to arrest market movements, and it's amateurish because it's a strategy doomed to fail.

I suppose it's always possible that someone's apparently dumb actions are actually part of an intelligent 12-dimensional chess strategy that is not apparent to outsiders ... but I'm pretty comfortable that's not the case when we are talking about China's attempts to prop up the stock market.

nikbez said in reply to Sanjait ...

You are incredibly naïve if you think there was no geopolitical play in using the bubble Chinese created to crash Chinese market.

I wonder what was the role in all this of vampire squid and friends

anne said in reply to sanjait...

There is no reason to think Chinese policy makers are trying to set stock market prices as opposed to dampen market movements. Hong Kong authorities were able to dampen market movements during the Asian currency crisis by buying shares in the Hong Kong index. Similarly, Malaysia employed capital controls limiting flows of money from stock sales from be taken out of the country.

sanjait said in reply to anne...

Even if it's merely dampening market movements, which is totally plausible, its an extremely stupid thing to do.

It tells every investor in the market that the national government is providing a backstop on their losses. In the very short term this reduces market volatility but in the less short run it just encourages leveraging up and reduced risk premia, which increase market volatility. Even on that measure it's a dumb and amateurish move.

And that's putting aside the fairly obvious fact that the state is covering the losses of wealthy private investors with this move, enacting a form of post facto lemon socialism.

If Hong Kong did the same thing, it was dumb for them too.

Malaysia (or any other country) implementing capital controls is definitively *not* the same thing.

Eric Blair said in reply to sanjait...

PK himself does not take this position. In fact the 1998 Malaysia currency controls were imposed after Malaysia's leader read a Krugman column in Fortune suggesting exactly that. So far as I know, though, he has never spelled out exactly where "slap in the face" ends and "post facto lemon socialism" begins.

nikbez said in reply to Eric Blair...

Eric,

all free market fundamentalists are "true believers". They can't be influenced by arguments.

Eric Blair said in reply to sanjait...

PK himself does not take this position. In fact the 1998 Malaysia currency controls were imposed after Malaysia's leader read a Krugman column in Fortune suggesting exactly that. So far as I know, though, he has never spelled out exactly where "slap in the face" ends and "post facto lemon socialism" begins.

RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron...

Wealth breeds greed. Greed breeds elitism. Elitism breeds isolation. Isolation breeds ignorance.

"Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men." Lord Acton

anne said in reply to sanjait...

Suggested by Branko Milanovic:

http://www.marketwatch.com/story/heres-the-map-of-the-world-if-size-was-determined-by-market-cap-2015-08-12?link=MW_home_latest_news

August 14, 2015

Here's the map of the world, if size were determined by market cap
In billions of dollars, the world according to free-float stock market capitalization.
By STEVE GOLDSTEIN

D.C. BUREAU CHIEF

Bank of America Merrill Lynch this month published a report transforming many of their investment themes into maps.

One of note is what the world would look like if sized by market capitalization.

The U.S. is still looking like the U.S. — and Japan is pretty hefty — but where did China go? And how is Hong Kong bigger than the mainland?

Some readers have noted that China looks unusually small — that's because the methodology here is to use MSCI's numbers. The index provider still keeps out the so-called A-shares * from inclusion in its indexes, for reasons including capital mobility. Were the A-shares included, even after the rout in that country, the market cap of China would swell by tenfold.

Russia, on this map, is basically the size of Finland. (A country that reportedly Vladimir Putin has designs for, though that's a story for another day.)

The U.S. market capitalization is $19.8 trillion, or 52% of world market cap, which the brokerage says is the highest since the 1980s.

Russia, for what it's worth, is the largest country by area.

* http://www.investopedia.com/terms/a/a-shares.asp

Shares in mainland China-based companies that trade on Chinese stock exchanges such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange. A-shares are generally only available for purchase by mainland citizens; foreign investment is only allowed through a tightly-regulated structure known as the Qualified Foreign Institutional Investor (QFII) system.

sanjait said in reply to anne...

Not sure what the point is ... but ok.

So it seems China's equities market is dominated, in market cap terms, by shares that are limited to domestic purchasers. This indicates they have significant capital restrictions on foreign ownership of companies.

But I didn't think that fact was in dispute, nor that they have other significant capital restrictions, nor that capital restrictions themselves are necessarily stupid policy.

Dan Kervick said...

"The response of the Chinese authorities was remarkable: They pulled out all the stops to support the market — suspending trading in many stocks, banning short-selling, pushing large investors to buy, and instructing graduating economics students to chant "Revive A-shares, benefit the people." "

"All of this has stabilized the market for the time being. But it is at the cost of tying China's credibility to its ability to keep stock prices from ever falling. And the Chinese economy still needs more support."

I don't understand this. China did not act to "keep stock prices from ever falling." They acted to put a floor under a very precipitous decline.

Clearly China has a mixed economy that relies on a heavier degree of political management than the US economy, and has a more flexible, less doctrinaire reliance on "the market thing". They also don't like political drama, and are willing to intervene when the changes underway produce more volatility than they want.

Paine said in reply to Dan Kervick...

Managing equity markets is relatively novel state craft

Bonds are another matter
And forex yet a third
Not to mention land lots

Socializing markets is a state activity we are learning

China right now is operating at the knowledge frontier practically speaking

It's amazing to watch political economist reflexes here


Most are giddy


The earths joblings benighted by a socially constructed black out
Cant see what's at stake

pgl said in reply to Paine ...

"Managing equity markets is relatively novel state craft".

Maybe but CEOs have been doing this in the US for decades. Yep - we mastered this game by privatizing corporate corruption.

anne said in reply to Paine ...

China right now is operating at the knowledge frontier practically speaking

[ Really, really important. China has for decades used direct, specific market sector controls in generating and smoothing growth.

A sharp increase in international oil prices is not taken as a general problem, but a problem in agricultural communities where the cost of fuel can be a significant problem during planting and harvest time, so the Chinese have at times directly lowered the price of oil for rural China. However, such market interference should not work since a low price for oil in rural China should mean oil flowing to urban China. China has made price discrimination work however, work without bottlenecks. ]

Paine said in reply to anne...

It's interesting and pgl gets this nicely

It's okay tautly to manipulate markets if you're an oligopoly corporation

God forbid if you're the sovereign

Dan Kervick said in reply to Paine ...

"Managing equity markets is relatively novel state craft."

Agreed, but the principle isn't that much different. China recently began encouraging ordinary households to invest in their smallish stock market. That's part of the plan for long-term "capital deepening" and development that doesn't rely so much on state-fostered credit and bubbles. Perhaps they concluded now is not the time for some kind of Chinese Black Friday.

Paine said in reply to Dan Kervick...

Agreed

However I'd prefer the state just keep relying on its own credit mill
And yuan mine

It's cost less

As to households

Private Savings give them a limited extra freedom

Fine

In fact a universal comprehensive social transfer system cradle to grave
Could make private savings a luxury product
Which it ought to be
Providing a safe place to store purchasing power is enough once the state creates a complete transfer system .

Paine said in reply to Paine ...

This private holding of equities is vey dangerous if it becomes wide spread enough
And horns into pensions etc


pgl said in reply to Dan Kervick...

So you think all this fuss is an overreaction. OK. I said the fuss over that tiny change in the exchange rate peg was much ado about nothing.

Dan Kervick said in reply to pgl...

Yes, I think it's probably an overreaction. The issue is, what if the devaluation doesn't stop, but China continues to expose the exchange to market forces, and market forces push the yuan down?

This will make confused capitalist heads explode across the United States! The devaluation will be bad for the US, but will be a result of the Chinese practicing US-beloved market principles.

The politicians and pundits will then have to come up with some conspiracy theory to explain how the commies are manipulating the markets that are driving down the currency, so that they can keep calling the Chinese "manipulators".

pgl said in reply to Dan Kervick...

"This will make confused capitalist heads explode across the United States! The devaluation will be bad for the US, but will be a result of the Chinese practicing US-beloved market principles."

I'm all for heads exploding. But is the yuan really overvalued. Krugman's latest says maybe not. If it is not overvalued, maybe their devaluation is on the same order of the devaluation of the Euro. In fact, Bernanke noted that the German trade surplus is much more of a problem than the shrinking Chinese trade surplus.


Paine said in reply to pgl...

PK countered that that peg shift pre staged more peg shifts and the regime change in policy would change expectations of forex marketeers

Gist

The market players now expect major moves down and will validate any such plan. On his other hand the marketeers will hammer at any floor

pgl said in reply to Paine ...

He is Dornbusch's student so the overshooting model rules his brain. Which in my view is a good thing.

Dan Kervick said in reply to EMichael...

Well, this criticism would make sense coming from some Austrian defender of pure free markets. But it's coming from people who don't think interest rates in the credit market should be set by the market, but should be guided and targeted by deliberate central bank policy that prevents them from going where the market otherwise wants to push them.

Paine said in reply to Dan Kervick...

Dan god bless u

You think past the paper barriers . Exactly. The present progressive mind is only slightly liberated from the iron dictatorship
Of capitalist dominated markets

... ... ...

EMichael said in reply to Paine ...

Gotta' tell you, I can't figure out how you think it is possible that China is not being run by "an iron dictatorship Of capitalist dominated markets"

Only difference is in the number of people in that "special" group.

The average Chinese citizen has not seen a whole lot of the impressive Chinese gains these past decades.

Paine said in reply to EMichael...

You might want to look into gains at the level of Chinese wage workers since Deng reforms in 1979-80

EMichael said in reply to Dan Kervick...

Yeah, setting FED rates is almost exactly the same thing as what the Chinese are doing.

Meanwhile, I believe I can go into the archives here and find examples where you thought it made sense to let speculators have a "hard landing".

Dan Kervick said in reply to EMichael...

Speculators, yes. The general public, no.

Paine said in reply to EMichael...

Interesting you bring up speculators. Rough housing them is just what the PBC needs to do over the yuan

Will they ? What if he bastards have personal skin in the game ?

pgl said in reply to Dan Kervick...

"should be guided and targeted by deliberate central bank policy that prevents them from going where the market otherwise wants to push them".

WTF? Unless you are advocating having interest rates rise - this makes no sense. Interest rates are near zero. Letting them rise but invite another recession. Is that what you want?

Dan Kervick said in reply to pgl...

No. What I am saying is it is somewhat inconsistent for people who have no problem with US government price-setting in credit markets - which are a vast share of the US economy - to criticize the Chinese for interfering in the price mechanisms in other markets.

Paine said in reply to pgl...

You are suggesting the PBC run around plugging holes
When a comprehensive strategy for asset markets and land lot markets is in order here

Taxation your favorite gig
Must play a huge strategic role here

Paine said in reply to Paine ...

Or perhaps you feel like Mitterrand in the mid 80's
And maybe Syriza now
---I hope not ---

The Chinese communist politbureau should simply bow to he marketeers will
Abdicate power over asset markets.
And call for open elections

Paine said in reply to Paine ...

Castro brothers oughta cave similarly right

Julio said in reply to EMichael...

No, what's "more flexible" is being willing to try different methods not allowed by "the market thing".
If they stick to only one method, applied rigidly, then your criticism will apply.

Paine said in reply to Julio...

Excellent

pgl said in reply to EMichael...

Go over to DeLong's place where he was mocking Jeb! 4% and DONALD! 10% read Kervick's attack on the Solow growth model. About the dumbest rant I have ever seen in my life. And as Kervick tried to school Solow, I offered what I would suspect Solow would fire back.

Looking at changes in real GDP during the Great Depression as a measure of changes in potential GDP. Really stupid.

Dan Kervick said in reply to pgl...

I didn't really attack the Solow model. I implied that economists can't predict the impact of political decisions on growth rates or growth ceilings by using that model, since the predictions come from pumping numbers into the model that are extrapolations from current conditions.

The model contains an exogenous variable for "multifactor productivity". If multifactor productivity changes, then the steady state equilibrium changes along with the calculated growth path for getting there. And multifactor productivity is a factor that, while unpredictable, changes in response to innovation and investment in human capital.

It also treats the savings rate as an exogenous variable. But clearly states can increase the savings rate of their societies.

Clearly societies have experienced periods of dramatic economic progress in the past because of technological innovations or political interventions that would not have been predictable ahead of time from the Solow model.

The model has limited use in predicting growth paths for societies in which some important basic parameters stay the same (or change according to some simple quantitative rule). It loses applicability when applied to situations in which either private or public sector developments result in dramatic changes in the values of variables the model treats as exogenous.

Dan Kervick said in reply to pgl...

Right. But the Chinese did not at all prevent stock prices from "ever falling." Nor did they announce or commit to such a crazy policy. They announced a temporary measure to prevent them only from falling below a certain level. They applied some brakes - that's all.

It's not that much different than what we do in the US to prevent a automated trading "flash crash" from turning into a Black Friday market rout.

Paine said in reply to Dan Kervick...

Exactly. Except here the various market players ..inside players call the shots. Not the state

Sanjait said in reply to Dan Kervick...

It's not at all the same. A temporary trading halt is not the same as having state backed entities buy shares.

Neither is it similar to conventional monetary policy.

Your argument for these Chinese policies seems to consist of a long string of false equivalences such as these.

Dan Kervick said in reply to Sanjait ...

It's the same thing. Just two different mechanisms for getting out of a doom loop. You just think there is something evil or out of bounds about states intervening in market mechanisms. I say big deal. If a few giant market participants stepped in to buy up shares to stop a panicky selloff, people would say, "Thank, Citizen Moneybucks and Citizen Morgan for stopping this terrible panic." The state is just another public spirited and powerful agent with a stake in preventing instability.

As for "conventional monetary policy", I'll ask you to recall that QE is generally classified as "unconventional" monetary policy. Of course, what is conventional or unconventional depends only on what people are used to. Once upon a time, in the early 20th century, central bank open market purchases of all kinds were an unconventional emergency measure. Then people got used to them. Now large-scale asset purchases have probably moved into the conventional category. Some central banks have already been involved in buying and selling equities, and perhaps some day those interventions will be "conventional" as well.

It really doesn't matter, though, whether they are conventional or unconventional. The questions should be what the goals are, and how well they accomplish them.

Just because "the markets" decide they want to carry out some Mellonite liquidation of overvalued assets in a rapid, elephant stampede style doesn't mean it is good public policy to let it happen.

Peter K. said in reply to Dan Kervick...

I'm leaning towards John Cassidy's take, who suggests they're having a "Minsky moment."

"Underlying all of this is the fact that China is still dealing with the consequences of an enormous credit and real-estate bubble that has accompanied, and prolonged, the latter stages of the growth miracle. Between 2007 and 2014, total private debt in China rose from about a hundred per cent of G.D.P. to about a hundred and eighty per cent—a jump even larger than those seen in countries such as Ireland and Spain, which subsequently endured deep recessions. In 2010 alone, the amount of debt taken out by Chinese businesses and households jumped by about thirty-five per cent of G.D.P.

...

So far, however, the Chinese government, which enjoys the luxury of having relatively little debt of its own, plus enormous foreign currency reserves, has managed to avoid such a nasty outcome. By intervening in ways obvious and opaque, it has sought to substitute a managed deleveraging of the economy for a chaotic collapse. Until pretty recently, the consensus among economists and investors was that this policy was generally working. G.D.P. growth was falling, but not cratering. The Chinese shadow-banking system, which issued a lot of the dodgy credit, was shaky, but it hadn't collapsed. And China's stock market was soaring.

The events of the past months have prompted a reassessment of the true state of China's economy, and of the competence of its policy makers. In the aftermath of the effort to prop up the stock market, the Times' Paul Krugman said Chinese officials were demonstrating that they "have no idea what they are doing." This week's devaluation prompted more critical comments from Krugman, while, over at Bloomberg View, Justin Fox suggested that China might not have a master plan.

I think it probably does—the question is whether the plan will ultimately work. In seeking to deflate a huge credit bubble and rebalance the economy without subjecting China to an outright recession, the government in Beijing is seeking to defy the economic laws of gravity. That was never going to be easy."


sanjait said in reply to Peter K....

^^THIS

Peter describes the situation very well I think.

Basically, China is attempting to dance past its Minsky moment.

It would be like if the US decided in 2008, instead of buying MBS and its own bonds, to coerce state-backed investors into issuing more loans and buy equities. China is essentially doing what the obtuse free-market ideologues accused the US of doing with its various bailouts and monetary policy activities.

But these things aren't the same. China is actually trying to prevent the corrections, or at the very least slow them, not through macro policy but through purchase flows.

At best these policies will result in massive losses for the Beijing Whale. Perhaps some would argue it would be worth it to ensure macro stability, though I can think of a whole lot of other better ways to achieve that goal.

And at worst these policies will just delay or even exacerbate the inevitable corrections, and leave the state with fewer resources and weaker credibility to deal with the aftermath.

Dan Kervick said in reply to sanjait...

"...or at the very least slow them."

That's the ticket. Also, we need to remember that markets are stupid and herd-like some times, and the direction they decide to go isn't always smart. Maybe the full "correction" will never happen. Maybe it was partly based on an excessive fear that Chinese equities were overvalued that was just as irrational as the excessive exuberance that overvalued the equities in the first place.

EMichael said...

"The common theme in these wild policy swings is that China's leadership keeps imagining that it can order markets around, telling them what prices to reach."

But of course this is what China's leadership has done for decades. They ordered their economy around, and it should be no surprise that this is their reaction to the changing world.

Peter K. said...

http://www.cepr.net/blogs/beat-the-press/the-4-trillion-that-no-one-can-see

The $4 Trillion That No One Can See
by Dean Baker

Published: 14 August 2015

Economists and people who are write about the economy are not known for being especially astute when it comes to economic issues. After all, there were almost no people in this group who were able to see the $8 trillion housing bubble whose collapse sank the economy. More recently we have a substantial clique running around yelling that the robots will take all the jobs. This is at the same time that we continue to have most of the Washington elite types fretting that the retirement of the baby boomers will leave us without any workers. These concerns are 180 degrees opposite, sort of like complaining that the soup being too hot and too cold, but that's the sort of conceptual absurdities folks have come to expect from people who write about the economy.

The usually astute Catherine Rampell is one of the guilty parties today, telling readers that the recent drop in the value of the Chinese yuan is a response to the market, not the result of currency management by China's government. The problem in this story is that it ignores that China's central bank is holding more than $4 trillion of reserves, about $3 trillion more than would be expected for an economy of China's size. This stock of reserves has the effect of raising the value of the dollar and other reserve currencies against the yuan.

If that is not obvious, consider the analogous situation with the Federal Reserve Board and its holding of more than $3 trillion in assets as a result of it quantitative easing (QE) policy. Under this policy, the Fed bought up large amounts of government bonds and mortgage backed securities. The idea was that the Fed's purchases would drive up the price of these bonds and thereby directly lower long-term interest rates.

While the Fed's act of buying bonds almost certainly drove up bond prices and lowered interest rates (it is the same thing), the fact that the Fed continues to hold a huge amount of bonds means that bond prices are higher and interest rates are lower than they otherwise would be. If the Fed didn't hold this stock of $3 trillion of bonds, there would be a much greater supply in the market, which would lead to lower bond prices and higher interest rates. In other words, the Fed's QE policy is still putting downward pressure on interest rates, even though it is no longer in the process of buying bonds.

Applying this logic to China's holding of $3 trillion in excess foreign exchange reserves, if China did not hold these reserves then we would have another $3 trillion worth of foreign exchange floating around on world markets (most of it in dollars). This would lead a lower price of the dollar against other currencies, including the yuan if it was allowed to float freely.

So Rampell has missed the boat completely in telling readers that the downward movement in the yuan is the result of free market conditions. As long as China holds a huge amount of excess reserves it is still holding down the value of the yuan. This is just a market fluctuation, like a fall in long-term interest rates in the United States, against a backdrop of very large government intervention.

There is another item that Rampell gets badly wrong in this piece. She tells readers:

"There are a lot of Chinese policies that are unambiguously bad for American companies and workers, including disrespect for intellectual property rights, ..."

No, that one is wrong. Unless you happen to own lots of stock in Pfizer or Microsoft, you have no particular stake in China's disrespect for intellectual property," in fact you might be hurt if China respected it more. "Respect" in this context means paying more money for royalties and licensing fees. If China pays our software and drug companies more money for their patents and copyrights it means that it has less money for other products from the United States. Other things equal, the more money being paid to Pfizer and Merck, the lower the value of the yuan against the dollar. This means that people who work in steel and auto factories will find it harder to compete against the goods produced in China. It's hard to see why this is a good story for them.

In fact, since patents and copyrights are archaic and inefficient mechanisms for supporting innovation and creative work, most people in the United States might be better off if China were to ignore U.S. property claims in these areas. This could allow, for example, people suffering from cancer to get drugs in China that would cost $1,000 or even less, rather than the $100,000 plus charged for new cancer drugs protected by patent monopolies. Pushing a free market in this area would also eliminate the corruption associated with monopoly prices, such as efforts to mislead the public about the safety and effectiveness of drugs, which leads to bad health outcomes and sometimes death.

So it is not true that most workers in the United States should want to see China have more respect for the intellectual property claims of U.S. companies.

Peter K. said in reply to anne...

During the East Asian crisis of the late 90s, China sidestepped it via capital controls. Other east Asian countries had to go to the IMF and suffer structural adjustment programs. Look at what happened to Greece.

China's $4 trillion reserves means it probably won't ever have to go to the IMF.

anne said in reply to Peter K....

During the East Asian crisis of the late 90s, China sidestepped it via capital controls. Other east Asian countries had to go to the IMF and suffer structural adjustment programs. Look at what happened to Greece....

[ Importantly so. China has repeatedly adopted policy to directly control markets. Of course, Alan Greenspan as Chair of the Federal Reserve designed policy to directly control stock prices immediately after a decline in the market of nearly 23% on October 17, 1987. ]

Peter K. said in reply to anne...

These are all guesses but I think he sees the anti-democratic Communist elite as he sees the Republican leadership - not knowing what they are doing.

But I don't really understand the evidence for this. Like Cassidy writes, the Communist government is doing the best they can and they're in a tough position if they are having a Minsky moment.

Compare Ireland or Spain during the European debt crisis.

China has no public debt and trillions in foreign reserves. Spain didn't have much public debt had to follow the ECB tight monetary policy and suffer austerity in order to follow EU budgetary rules.

But Spain and Ireland suffered bad downturns with the people enduring the suffering. The Chinese leadership are worried that a downturn would spark a revolt and a demand for democratic reforms.

What do they have to worry about in a Minsky moment? A slowdown in growth and an outflow of capital that worsens the situation.

How would Krugman recommend they manage the slowdown?

Paine's system of transfers via a Social Security-like system? A better welfare state and safety net like Obamacare? Work-sharing and shorter hours like Germany which would minimize job loss?

Peter K. said in reply to Peter K....

Of course to be cynical one could say Krugman in insulating himself from red baiting - his opponents on the Right consider him to be a communist who loves government spending and debt - by heavily criticizing the Chinese Communists as being insufficiently pro-market.

Dan Kervick said in reply to Peter K....

That could be. Frankly I have had a difficult time figuring out exactly what PK has been arguing over the past few days, and his reaction seems very strong. The article in today's Links above does help clarify some of the thinks he's thinking about, economically and politically:

http://krugman.blogs.nytimes.com/2015/08/13/china-2015-is-not-china-2010/?_r=1

For years, US and other western economists have argued that the Chinese were artificially suppressing the value of their currency, and that this was hurting US exports and US employment. They argued that China should let the markets set the value of their currency, a policy change that would have lead to an appreciating yuan, increased domestic Chinese consumption of imports; boosted US, Japanese and European exports; decreased offshoring of production to China, etc.

In 2010, Krugman strongly argued something must be done about the Chinese currency-fixing:

http://www.nytimes.com/2010/03/15/opinion/15krugman.html

But by 2012, Krugman said the situation had changed, and that the political issue the Republicans were making out of the Chinese currency was bluster:

http://krugman.blogs.nytimes.com/2012/10/22/an-issue-whose-time-has-passed/

Since the Chinese have allowed the yuan to appreciate over the past few years, the markets now seem to think that the currency is overvalued, not undervalued. So a move to let currency markets set the exchange rate in 2015 might actually lead to a falling yuan, a reduction of Chinese imports, increased Chinese exports, increased attractiveness of offshoring production to China, etc.

This might tip the US back into recession. But Krugman - and many others - might be worried that people will then say, "Hey, we're having another lousy recession because the Chinese did the very thing Paul Krugman and other US economists have always said they should do: let the markets rule!"

Krugman initially responded that China isn't really letting the market set the exchange rate. It has only taken a weak half-measure ("bite of the cherry") in that direction. This raises the question: if the Chinese actually did move suddenly to a free float, would Krugman support it, even if the move caused a major shock to the US economy?

Krugman also points out, though, that liberals haven't been complaining about Chinese currency manipulation lately. Cynics might argue that Americans complain about currency manipulation if that manipulation happens to hurt them, and support it if that manipulation happens to help them.

Krugman has been in a variety of different places lately on currency issues:

The Swiss used to manipulate the franc and maintain a peg, and when they dropped it Krugman was very put out by it. In that case, he was pro-peg and anti-float.

The Greeks are part of the EZ, so their currency is pegged to their EZ partners. Krugman argued the Greeks should leave the Eurozone. In that case he was anti-peg and pro-float.

Now with China, it seems he was pro-float before, when floating would have helped the US, but not so much pro-float now, when floating could hurt the US.

I don't know what all of this amounts to, other than the fat that people are often going to be torn a bit between the general principles they support, other things being equal, and the short-term national interests they are concerned about in the the here and now.

Anyway, I think we need a lot more evidence before we can conclude the Chinese "don't know what they are doing." A country that has increased the GDP of a quarter of the world's population by 162% over ten years, while their developed world colleagues were languishing in stagnation, deserves the benefit of the doubt.

Paine said in reply to Peter K....

Right now the party thru the state must demonstrate the macro control of the system is in the hands of the party elite thru control of the commanding heights of the social production system

Ie credit and forex and even asset market price levels both paper and real

Ie land lots

Nothing prevents this demonstration from achieving ultimate success except a failure of determination

Paine said in reply to Paine ...

The party leaders are in uncharted waters here

And reflective dogma from a ivory tower new Keynesian is not of huge value

Hey pk is great
He's a terrier
After the right rat none better

But the terrier is not a useful police dog
Let alone Shepard of a wooly flock

kthomas said in reply to Paine ...

How pathetically optimistic.

Stop providing cover. They pigged out. Time to pay the piper.

Paine said in reply to kthomas...

You may mistake my point

The party leaders HAVE to decide to win this struggle
I'm certain they are not in harmony on this

What's at stake ?

The party abdicating control of the domestic economy

Paine said in reply to Paine ...

The venality of elite members of the party plays no role one way or other here

If indeed the very hold on state power depends on the eventual outcome

Right now the politbueau is poised either to vindicate the TINA parties of the planet

Or demonstrate there is another way

Paine said in reply to Paine ...

We share a value ..we Americans

We trust in periodic open popular elections to certify or to de certify state policy

Directly some times most often indirectly thru our elected agents

Here in china we have the enlightenment construct
The despot fully in command of progressive methods and goals for
Social development

Hobbes leviathan

Battle lines are drawn

The state versus the corporations

anne said in reply to Paine ...

"TINA" is an intolerable term, meant to make sure a reader has no understanding of what is being written.

Paine said in reply to anne...

Anne

Please
This term is in common currency now

Tina is
Like neo liberal A term that sumerizes a movements mind

There is no alternative to corporate capitalism

You are the last one to buy this big lie


sanjait said in reply to anne...

That seems hyperbolic, Anne.

Krugman was very explicitly commenting on the Communist Party ruling China, not all of its 1.4 billion people.

Not the same thing.

anne said in reply to sanjait...

The government of China indeed reflects the people of China, just as does the government of Japan or Australia. Western analysts tend to write as though the government in China were illicit or there by trickery but there is every reason to think the government generally reflects the collective thinking of Chinese people.

Issues are fought over, there are a range of dissidents but China has a stable political system. Writing as though a the Chinese government were unstable is a Western conceit that shows a lack of understanding of or possibly concern with Chinese history.

sanjait said in reply to anne...

"The government of China indeed reflects the people of China, just as does the government of Japan or Australia. "

I couldn't disagree more.

First, even in a democracy, the government is a highly imperfect reflection of the people and their will.

And China is not a democracy. It's a one-party state. That one party has to serve the people to an extent in order to hold power, but that certainly doesn't justify a claim that any criticism of the government is a criticism of the people.

anne said in reply to sanjait...

I repeatedly find analysts in the New York Times and the like writing as though the Chinese leadership were continually "panicky," continually insecure about the government in general and this is completely lacking in understanding. President Xi is as secure as is Prime Minister Abe or Cameron or President Hollande.

So when the Chinese government is criticized as though completely detached from the people of China, I know the analyst lacks understanding or simply wished the government of China gone.


anne said in reply to Paine ...

Imagine trying to use China as a warning about the limits on the state to regulate market outcomes
For assets, etc

And pretending or at least relying on tacit presumption
That state-owned enterprise debt is the twin of private for-profit corporate debt

kthomas said in reply to anne...

That last statement needs clarification. If I am an analyst, debt is debt. As an investor, I rely on accuracte data, not semantics.

Paine said in reply to kthomas...

Look the debt is held by some player
If it's not the State the state can buy it on the market out of its limitless mr mine

If it's a state enterprise no private profiteers benefit
Moral hazards exists but so do state prisons
Plenty of room in them
for fraudsters and looting managers of state enterprises

This is not easy to see if you refuse to understand qualitative differences

At the macro level
Debt swallowed by the state
Can vanish
The state can be a black hole for its own debt
And when we are talking about any real social production system
The only cost is lost better uses

Only arrogant fools can believe private banks in toto driven by profits
Reach better allocations then state credit systems
No theorem can definitively and generally prove this..or it's opposite really

Paine said in reply to Paine ...

China is running way below capacity

There's hundreds of millions of underutilized hands and minds

Any spending that adds one more shovel full of useful activity directly or indirectly
Has no REAl zero sum type cost

There is more likely zero crowding out of the otherwise done
Only one project scheme selected over another
Wise or unwise honest or corrupt
It trumps idleness
Policy quandary time lost is opportunity lost

Paine said in reply to Paine ...

This is absolutely a crucial insight
Without it
Keynes wrote in vain

anne said in reply to Paine ...

China is running way below capacity

There's hundreds of millions of underutilized hands and minds

Any spending that adds one more shovelful of useful activity directly or indirectly
Has no REAL zero-sum-type cost

anne said in reply to anne...

China is running way below capacity

There's hundreds of millions of underutilized hands and minds

[ Remember the vastness of China and advances made in basic industries, especially in agriculture, there are many young men and women who are capable but "underutilized." Advances in agricultural production, for a country that was traditionally rural, allow for different uses of many, many people. ]

kthomas said in reply to Paine ...

Now I really disagree. All evidence points or suggests massive over capacity. And obviously, low demand internally. They need to raise wages or start flat out buying more foreign goods, besides real estate. Instead, they have done the opposite.

The longer the Central Committee waits, the more severe the pain later on, we all know this.

Paine said in reply to kthomas...

The over capacity is precisely a partial result of inadequate imperfect mobilization

There's a nice passage somewhere in Keynes about building over capacity

Let this suffice

Over capacity in infra structure and urbal housing and office space etc today in inland china
Will soon be utilized as the wave of expansion radiates
Inwards from the coast

anne said in reply to Paine ...

At the macro level
Debt swallowed by the state
Can vanish
The state can be a black hole for its own debt
And when we are talking about any real social production system
The only cost is lost better uses

[ Nice. ]

kthomas said in reply to Paine ...

You may be right. And I do admire your optimism.

Paine said in reply to kthomas...

Hey ! I wish I were optimistic. The party leadership is poised to take he plunge into private profit guided development

The market will no longer be a mediator regulators filter and incentivized. It will be liberated. The state abdicating control to the corporations

Most crucially abdicating control of the commanding heights. Precisely where this present struggle is centered

BigBozat said in reply to Paine ...

Bravissimo!

am said...

They appear to have been taken completely by surprise by the market's predictable reaction; namely, the initial devaluation of the renminbi was ... a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi's value.

Above from the Prof K post. What was this all out effort. Did it use reserves in China. Any ideas. If using reserves does that show up in reduction in US bond purchases or sales of same. Higher coupon rates to come in US. Just asking, don't know. But surely a few days this week of minor devaluations couldn't knock much of a hole in China's big cash pot.

anne said in reply to am...

They appear to have been taken completely by surprise by the market's predictable reaction; namely, the initial devaluation of the renminbi was ... a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi's value....

[ No, China is different. China has for many years limited short term capital flows. The capital that a General Motors or a Boeing or a Proctor & Gamble or an Apple has in China is long term capital and will remain.

A critical aspect of Chinese development has been that if a company wants to sell in China, the company has to invest in China and invest in a technically advanced way.

The Chinese central bank can manage the relative value of Yuan just as adeptly as Secretary of Treasury Robert Rubin managed the value of the dollar, though reacting according to the actions of international currency traders. ]

Richard H. Serlin said...

China still has tons of great high return investment it can do. It doesn't have to throw money instead into big screen TVs and vacations. It's just the investment may not be so much in the classical infrastructure. They can still really invest in education and the health and welfare of their people for future human capital and production, and absolutely Heckman-style early human development investment. These things would stimulate the economy just as much as consumption with no lasting value, and be far better for the future.

anne said in reply to Richard H. Serlin...

China still has tons of great high return investment it can do. It doesn't have to throw money instead into big screen TVs and vacations. It's just the investment may not be so much in the classical infrastructure. They can still really invest in education, and the health and welfare of their people for future human capital and production, and absolutely Heckman-style * early human development investment. These things would stimulate the economy just as much as consumption with no lasting value, and be far better for the future.

* https://en.wikipedia.org/wiki/James_Heckman

[ Agreed, but hard infrastructure investment as well is not nearly done with. ]

pgl said in reply to Richard H. Serlin...

"China still has tons of great high return investment it can do. It doesn't have to throw money instead into big screen TVs and vacations."

The same could be said about the US. But then our political leaders are not that bold.

Richard H. Serlin said in reply to pgl...

Very very true. Heckman has a mountain of evidence, but personally, as a father, and thus constant reader on early human development and education, I see this more and more.

And obviously it's not symmetric, the more we vote Democratic, the more of this investment we'll have, instead of trillions in tax cuts for the rich.

chris herbert said...

China doesn't consider infrastructure funding as deficit. It has the reserves because the central bank keeps the net foreign reserves from exports, exchanging those reserves by pegging the exchange value by fiat and paying export companies in RMB. In effect the central bank pumps RMB into the Chinese economy by doing this. They do this because you can't do any commerce in China without exchanging your currency for RMB (actually this is the same as the dollar). My confusion comes from wondering why the Communist Party allowed the private debt to balloon--and to balloon in foreign currency? They don't really need the foreign capital--they have $4 trillion in dollar reserves. Anyway, I'm a little skeptical of claims that private debt in foreign currency is so large the flight of capital could be a problem.

chris herbert said...

In the past China used capital controls, and required all domestic banks to slow loan growth (including central bank lending for infrastructure)to dampen any inflation tendencies. Not interest rates. If the stock market plunges, devaluing the RMB to help exports makes some sense to me. What would also make sense is to pump money into the domestic economy; to increase infrastructure spending; to raise minimum incomes.

The real danger here, in my opinion, is the Beijing power structure most especially that of the military. China has never been shy about purging politicians and businessmen who become so rich they challenge the traditional power structure. They've done it many times, long before Communism even existed.

If that happens then the world economy will be seriously hit, unless the purge leaves the markets alone to the central bank and the technocrats, who from my view, have been doing a remarkable job of directing economic activity.

anne said in reply to chris herbert...

There has been a serious campaign against economic corruption since Xi became President in November 2012, there has been no slowing of the campaign as reflected even in the type of personal spending in China or the progressive limiting of spending on luxury goods.

sanjait said in reply to anne...

I was looking at some statistics recently about a marked decline in whiskey sales in China, after years of relatively rapid increases. This decline was attributed to crackdowns on corruption, which often took the form of state employees going out drinking at taxpayer expense.

This crackdown, of course, should be lauded.

anne said in reply to sanjait...

Gambling has been significantly reduced, especially high stakes gambling in Macao. Casino revenue has been falling for about 2 years. Purchases of cars have tended to Buicks at the high end, but away from showy models. Expensive gift giving has declined, as Tiffany and the like have reported....

Corporate influence peddling has been a target, by domestic and international corporations in China. There have just been several executive replacements at a couple of partly state-owned energy companies....

pgl said...

Bonus coverage. The start of Dan Kervick's dumbest rant ever (go to DeLong's place for the rest of this long winded rant):

""long-run steady-state growth path"???

Perhaps there is no such thing?

Economists are limiting our potential with their backward Ptolemaic ideas about steady states and equilibria, dampened further with input numbers extrapolated from decades of neoliberal capitalist stagnation.

In 1937, real GDP grew at a negative 3.3% rate. By 1939 it was plus 7.8%, and by 1941 in was 18.9%. And yet I wonder what kinds of fictional limits economists would have declared in 1937 regarding our potential if they had plugged some numbers into a Solow growth model."

I gave what Solow might have replied to him over at DeLong's place. But measuring changes in potential GDP by the change in actual GDP for one year when one is in the middle of a prolonged large output gap. This hits a new low in ultimate stupidity.

sanjait said in reply to pgl...

Well ... I'm not saying it makes sense, but as Krugman has pointed out, the IMF also calculates structural deficits in such a way that a crash in output automatically implies a decline in potential.

It's a recipe for self-fulfilling prophesy (when macro policy fails to be sufficiently stimulative, and then cyclical employment eventually turns structural...), and deeply wrong, but not unique apparently.

anne said...

About Chinese monetary policy, though we do not fully understand how monetary policy is employed through the country, policy changes are usually not meant to be generalized but rather are linked to specific credit and investment objectives.

A published loosening of Chinese monetary policy can be directed just at broadening and easing construction credit, even credit construction specifically only in interior provinces. Loosening monetary policy for construction can go along with tightening credit for stock purchases.

anne said in reply to anne...

Good grief, I just read on article about monetary policy in Brazil and realized how decidedly and importantly different monetary policy is in China. We need to study Chinese monetary policy, but it not different than monetary policy as we understand it.

anne said in reply to anne...

http://www.nytimes.com/2015/08/14/business/dealbook/in-good-times-or-bad-brazil-banks-profit.html

August 13, 2015

In Good Times or Bad, Brazil Banks Profit
By DAN HORCH

SÃO PAULO, Brazil — Political parties whose symbol is a red star tend to be unfavorable for bankers, but Brazil's ruling party has been a lucrative exception.

When the Workers' Party of former President Luiz Inácio Lula da Silva and current President Dilma Rousseff took power in 2003, it promised, and for many years delivered, a rising standard of living for the country's poor and working classes.

Yet the gains have been much more impressive for the nation's banking industry, even as the manufacturing sector has stagnated and the broader economy has ridden the ups and downs of global commodity prices. The combined annual profits of Brazil's four biggest banks have grown more than 850 percent to just over $20 billion, from $2.1 billion, in the 12 years of Workers' Party rule.

Even as a corruption scandal centered in the government-owned petroleum giant Petrobras has paralyzed important sectors of the economy, bank profits have kept growing.

Bank earnings made up more than half of the total profits for companies on the São Paulo stock exchange in both 2013 and 2014, according to the consulting firm Economatica. While the stock market is a poor reflection of Brazil's economy — agribusiness and carmakers are barely represented — bank profits were never above a quarter of the total all through the previous decade.

Brazil's largest and third-largest banks, Banco do Brasil and Caixa Econômica Federal, do not even have profit as their sole mandate. The government, which controls both, often obliges them to engage in less profitable operations as a public service.

The two giant private sector banks, Itaú and Bradesco, consistently earn returns on equity — a measure of the earnings a company can squeeze out of each dollar invested — of around 20 percent. Big banks in the United States usually manage only about half as much.

Government policies and economic trends have helped the banks here.

One is interest rates at levels so high that they would leave borrowers in most other countries speechless.

In the so-called non-earmarked or free credit market, which excludes government-subsidized loans for housing and infrastructure, Brazilian consumers pay on average 58.6 percent interest, and businesses pay 27.5 percent to borrow money.

Brazilian academics argue over the reasons for such high rates, but a history of high inflation, sharp currency fluctuations and large government budget deficits mean that the government itself must pay a steep price to borrow money.

The central bank's basic rate, which it pays on the local equivalent ofTreasury bills, is 14.25 percent.

Since banks can make good money by just buying government bonds, to take the effort and risk of actually making loans, they need an even greater profit.

They can often find it. The average spread — the difference between what banks pay to gain access to capital and what they charge to lend it out — is 30.7 percentage points in the free credit market.

Not all of that is profit. Taxes and regulatory costs are high, and the government just announced a plan to further increase taxes on bank profits. And default is a serious risk. Nearly 56 million Brazilians, more than a quarter of the country's population, have missed enough debt payments to be on the blacklist of Serasa Experian, a credit reporting bureau.

But the spreads are easily wide enough to compensate, especially when the economy is growing.

And when times are bad, the banks can look to the government.

Brazil's Treasury not only sells bonds that protect investors against inflation, as certain United States Treasury bonds do; it also offers bonds that increase their payouts when interest rates rise or the currency devalues.

When banks sense that the economy is about to deteriorate, they scale back their loans and migrate into these government-backed investments....

anne said in reply to anne...

http://www.cepr.net/publications/op-eds-columns/brazil-will-need-to-reverse-course-in-order-to-revive-economy

August 7, 2015

Brazil Will Need to Reverse Course In Order to Revive Economy
By Mark Weisbrot

Lula da Silva won the presidency of Brazil on his fourth attempt, in an overwhelming victory in October 2002. His Workers' Party (PT) ushered in a new era for the country's previously disenfranchised majority, with the economy from 2004 to 2010 more than doubling its rate of growth of the previous 23 years. Poverty declined by 55 percent and extreme poverty by 65 percent from 2003 to 2012. Unemployment hit record lows, the real (inflation adjusted) minimum wage doubled, and the gains from growth were more equally distributed than in previous decades.

A large majority of Brazilians are still vastly better off today than they were before the PT came to power. But the economy slowed sharply from 2011 to 2014, with GDP growth returning to the rates of the pre-PT era. Job creation in the formal sector — regular employment covered by taxes and legal benefits, as opposed to the underground economy — fell from an average of 1.46 million jobs annually for 2004 through 2010 to just 829,000 for 2011 to 2014 and just 152,000 in 2014. Economic growth was about zero last year and will turn negative this year.

Approval ratings for Lula's successor, Dilma Rousseff, have plummeted, and most of the news about Brazil is woefully pessimistic — corruption scandals, including one involving the state-run oil company, Petrobras; Standard and Poor's lowering its outlook for the country's bond rating after downgrading it to one notch above junk; the real falling about 35 percent against the U.S. dollar over the past year.

What went wrong? Many analysts have blamed external conditions. The growth of the world economy and trade plummeted after 2010, and the price of Brazil's commodity exports also fell. However, as Brazilian economists Franklin Serrano and Ricardo Summa explain in a new paper * on the slowdown, this is only a relatively small part of the story. Brazil's exports are not that big a part of its economy and didn't change that much — from 11.9 percent (2004 to 2010) to 11.3 percent (2011 to 2014).

The problem is that on top of the worsening external conditions, the government piled a series of policy decisions that weakened the economy. Beginning in February 2010, the Central Bank began to raise short-term interest rates, from 8.5 to 12.5 percent the following August, just as the economy was slowing. (This rate, called the Selic rate in Brazil, is analogous to the U.S. Federal Reserve's benchmark federal funds rate, which has remained at 0 to 0.25 percent since December 2008). The government tightened consumer credit, which had expanded considerably in the previous years. Some of these measures were reversed the next year, with interest rates coming back down, to 7.5 percent in October 2012, but the changes were too little and too late.

Then the government began another cycle of raising interest rates in April 2013, which has continued through last week, with the Selic rate at 14.25 percent — one of the highest in the world — in spite of the forecast recession for this year. Beginning in 2011, the government tightened its fiscal policy — for example, by cutting public investment by 18 percent in real terms.

Not surprisingly, these policy changes sent private investment and consumer spending plummeting. Although the government threw a lot of money at private investors in the form of tax breaks and public-private partnerships for infrastructure, most investors aren't attracted by an economy in which the growth of disposable income and consumer spending is plummeting.

Unfortunately, Brazil hasn't even gotten the benefit of lower inflation from the slowing economy: Its consumer price index is rising at a 9.25 percent annual rate. This is partly due to the fall in the real, which raises the price of imports, and a steep rise in government-set electricity prices. The increase in inflation has eroded real wages and has been seized on by the opposition, some of whom have called for Rousseff's impeachment — although there is no legal or constitutional basis for doing so.

How can Brazil get out of this mess? The private sector clearly cannot lead an economic recovery at this time, any more than it can in Greece. The government is going to have to create the climate for increased private investment and consumption the way it did before 2011, by increasing its spending, especially on public investment in badly needed infrastructure.

One way to free up money for this is to lower Brazil's debt service. The Brazilian government is spending more than 6 percent of its GDP — about 20 percent of its national budget — on net interest payments. This is one of the highest rates of debt service in the world. Even the International Monetary Fund has pointed out ** that this is "exceeding the typical volume of spending on education." There is absolutely no sane reason for this, and it is relatively easy to change by simply lowering the Selic rate to a level comparable to those of the rest of the Americas....

* http://www.cepr.net/documents/publications/Brazil-2015-08.pdf

** http://www.imf.org/external/pubs/ft/scr/2015/cr15121.pdf

anne said...

http://www.cepr.net/blogs/beat-the-press/because-oil-is-priced-in-euros-china-will-buy-less-oil-now-that-the-value-of-the-yuan-has-fallen

August 13, 2015

Because Oil Is Priced in Euros, China Will Buy Less Oil Now That the Value of the Yuan Has Fallen

Yes, I know, oil is priced in dollars, not euros, but it doesn't make one iota of difference. In an article on the meaning of the drop in the value of the yuan on people in the United States, USA Today told readers: *

"China, the world's second largest economy, consumes a lot of oil, second only to the U.S. However, oil prices are denominated in dollars, so a gutted yuan means China's purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products. That reduction in demand could lower prices, an upside for American drivers."

Everything in this paragraph would be equally true if oil was priced in euros. The Chinese currency is now worth less measured in dollars, euros, yen, or oil. The loss of purchasing power will lead China to buy less of everything that is produced abroad, including oil. The fact that oil is priced in dollars matters not at all.

As a practical matter, anyone hoping to get super cheap gas due to less demand from China is likely to be disappointed. If we assume that the 2 percent drop in the value of the yuan leads to 2 percent higher gas prices in China, and we assume an elasticity of demand of 0.3, then China's gas consumption will fall by roughly 0.6 percent as a result of the devaluation. This almost certainly has less impact on the demand for gas than even a one-year reduction in China's growth rate by 2 percentage points. If the devaluation and other stimulatory policies speed growth in China, then we may see increased rather than decreased demand for oil from China.

The piece also gets the story of U.S. companies manufacturing in China somewhat confused. It tells readers:

"Many U.S. companies do a considerable amount of their business abroad, either selling directly to Chinese consumers, manufacturing or via overseas units that produce income in the local currency. Apple, for example, relies on China to make its iPhone and iPad. A stronger dollar compared to the yuan means any income generated in China loses value as it is repatriated back to America."

Actually the impact is the opposite. The lower valued yuan increases the profits from manufacturing in China rather than the United States. Apple will likely still sell its iPhones and iPads at the same price in the United States and other countries, even though it now costs them less money to manufacture them because of the lower price of the yuan. This means greater profits.

This is an important point because the issue of currency values is often presented as one pitting the United States against China. That is not accurate. Many companies that manufacture in China or rely on importing low cost goods produced in China, like Walmart, have a real stake in keeping down the value of the yuan against the dollar. These powerful interests are a main reason that the United States has not made raising the value of the yuan a top priority in trade negotiations with China.

If it really was the case that the United States government considered it a top priority to raise the value of the yuan against the dollar, and was prepared to make concessions in other areas, like enforcement of Microsoft's copyrights and Pfizer's patents, then China would almost certainly have agreed to raise the value of the yuan by more than it has.

* http://www.usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/

-- Dean Baker

Jesse said in reply to anne...

I think this *might* be true if one disregards the fact that China has already negotiated major energy deals, including oil, that are settled in yuan and not dollars.

I posted this same comment at Dean's site when he first wrote this.

Am I the only one who is watching China closely? There are some very big changes in the world economy underway, particularly with regard to the long standing Bretton Woods II agreement as some have called it, and few are noticing them.

anne said in reply to Jesse...

I think this *might* be true if one disregards the fact that China has already negotiated major energy deals, including oil, that are settled in yuan and not dollars.

[ Right, right, China has negotiated a range of important long term oil and gas, and delivery, agreements this year. ]

Jesse said...

China should listen to Paul, and just mint up some 'trillion dollar Platinum coins' and forsake their tinkering with the economy.

Peter K. said in reply to Jesse...

The Fed should mint some trillion dollar coins if the Republicans try to shut down the government again this fall over funding Planned Parenthood.

David said...

I hold shares in Baidu, the Chinese google. It's down this year but up from 2 years ago. I suspect it's the same for most big cap stocks in China. I don't think China is doing this cause they're stupid, as it is routine for export countries to toy with their currency in Asia.

I think Chinese leadership is not scared, maybe, but worried. Manipulating a stock market is very risky in terms of capital flight. If you show investors the game is rigged only suckers will play that game. And eventually get burned. And that could lead to political unrest.

So really I think this is about politics and the grip on power. That's what's scary.

[Aug 12, 2015]The Macroeconomic Divide

"...Too much of macro is ideologically driven conjecture, or worse. None of it rises to the level of demonstrated reliability necessary to ethically inform decision-making. Confronting that reality and the limits of the profession's knowledge and ability, and reining-in it's obsession to intervene in things it doesn't actually understand except at a political level - that will permit the profession to at long last begin to honor its highest ethical duty ... 'First, do no harm.'"
Economist's View
Paul Krugman:
Trash Talk and the Macroeconomic Divide: ... In Lucas and Sargent, much is made of stagflation; the coexistence of inflation and high unemployment is their main, indeed pretty much only, piece of evidence that all of Keynesian economics is useless. That was wrong, but never mind; how did they respond in the face of strong evidence that their own approach didn't work?
Such evidence wasn't long in coming. In the early 1980s the Federal Reserve sharply tightened monetary policy; it did so openly, with much public discussion, and anyone who opened a newspaper should have been aware of what was happening. The clear implication of Lucas-type models was that such an announced, well-understood monetary change should have had no real effect, being reflected only in the price level.
In fact, however, there was a very severe recession — and a dramatic recovery once the Fed, again quite openly, shifted toward monetary expansion.
These events definitely showed that Lucas-type models were wrong, and also that anticipated monetary shocks have real effects. But there was no reconsideration on the part of the freshwater economists; my guess is that they were in part trapped by their earlier trash-talking. Instead, they plunged into real business cycle theory (which had no explanation for the obvious real effects of Fed policy) and shut themselves off from outside ideas. ...

RogerFox said...

Both sides in this macro cat-fight have succeeded in demolishing the credibility of their opponents, at the expense of being demolished themselves - meaning none of them are left standing in the eyes of anyone except their own partisan groupies, who are well-represented on this site. That's nothing but good.

Too much of macro is ideologically driven conjecture, or worse. None of it rises to the level of demonstrated reliability necessary to ethically inform decision-making. Confronting that reality and the limits of the profession's knowledge and ability, and reining-in it's obsession to intervene in things it doesn't actually understand except at a political level - that will permit the profession to at long last begin to honor its highest ethical duty ... 'First, do no harm.'

RC AKA Darryl, Ron said in reply to RogerFox...

Confronting that reality and the limits of the profession's knowledge and ability, and reining-in it's obsession to intervene in things it doesn't actually understand except at a political level - that will permit the profession to at long last begin to honor its highest ethical duty ... 'First, do no harm.'

[That is some pretty ironic BS that you are totin' around. The profession does a very good job of NOT intervening in things that any one with half a brain should understand. How on earth do you think the 2008 financial crisis ever even happened? Economists could not intervene because they had black swans squatting on their hands, particularly those economist like Greenspan and Bernanke that were actually in a position to do something to prevent the crisis. Krugman wrote some articles warning about the risk, but undersold his case even to himself. Only Mike Stathis (an investments adviser and trader - not an economist) formally warned (in America's Financial Apocalypse: How to Profit from the Next Great Depression. 2006. ISBN 978-0-9755776-5-3) of the full scope of the coming disaster and that formal warning came a bit late and was almost entirely ignored. Nouriel Roubini (a.k.a. Doctor Doom), who is an economist, ran Stathis a close second on getting it correct. Dean Baker, also an economist, was in there too. It was entirely ignored by Greenspan and Bernanke, although I believe they knew what was going to happen but would rather clean up the mess than stop the party and get blamed for the fallout.

After the crisis several economists recognized the scale of the necessary stimulus to get the economy back on track, but a world of idiots, some of whom you may know, precluded an adequate response to prevent prolonged high unemployment.

Are you a market trader or just a rich man's tool? Anything else would make you just a plain ol' fool.]

DrDick said in reply to RogerFox...

"Both sides in this macro cat-fight have succeeded in demolishing the credibility of their opponents"

You, on the other hand. never had any credibility to begin with.

"Confronting that reality and the limits of the profession's knowledge and ability, and reining-in it's obsession to intervene in things it doesn't actually understand except at a political level"

You might take your own advice, as it is evident that you know nothing about economics or policy.

Peter K. said in reply to RogerFox...

Partisan groupies? Nope. We're the objective ones in this discussion.

Mr. Fox has no criteria upon which to judge and measure things, so of course he has no basis to criticize.

"First do no harm." How can you tell that harm has been done when you don't believe in anything?

You automatically believe that taking no action and the sin of omission is the better choice? But you have no basis on which to make that assumption.

"First do no harm" when it comes to government policy is conservative propaganda.

Paine said in reply to RogerFox...

If rog refuses to entertain any notion of macro nautic efficacy

He. Has taken his position
And perhaps he ought to be left to
sit on it
as long as he likes

However

If he has a test of say Lerner's
fiscal injections model he'd like to propose
A test that if past would change is mind

> Paine said in reply to Paine ...

Cockney takes over
when I sez his
it comes out is

RogerFox said in reply to Paine ...

I don't have a dog in this fight - but I do know that it's dangerously irresponsible and unprofessional to offer advice, or act on it, unless there is adequate evidence to justify the opinion that the advice will not plausibly make the situation worse than it is otherwise destined to be. The compiled track record of all theories of macro demonstrate that none of them yet meet that test - and this ongoing internecine cat-fight has done much to reinforce that view IMO.

Academics need to understand what real economy people who give advice professionally know very well - that an idea or theory could well be right and beneficial isn't enough to justify acting on it without proper consideration to the consequences should the approach prove to be wrong. Candidly assessing down-side risks seems to be anathema to all academics - almost as if they regard the entire matter as some sort of affront to their dignity.

The Crash of '08 and the Crash of '29 both happened, with academic macro-mavens leading us straight into both of them - eyes wide shut. Better for everyone if they'd just kept their mouths shut too.

pgl:

"In the early 1980s the Federal Reserve sharply tightened monetary policy; it did so openly, with much public discussion, and anyone who opened a newspaper should have been aware of what was happening. The clear implication of Lucas-type models was that such an announced, well-understood monetary change should have had no real effect, being reflected only in the price level.In fact, however, there was a very severe recession — and a dramatic recovery once the Fed, again quite openly, shifted toward monetary expansion. These events definitely showed that Lucas-type models were wrong, and also that anticipated monetary shocks have real effects."

Note Krugman is referring to the 2nd Volcker monetary restraint which happened under Reagan's watch. Rusty needs to get his calendar out as he thinks this was all Carter. Actually Volcker was following the advise of JohnH. How did the early 1980's work out for workers?

Back in 1982/3 I heard some economist seriously saying that this recession was due to some notion that people still had high expected inflation. When I asked them WTF - they response was the Reagan deficits.

Yes macroeconomics confuses some people terribly. Look at a lot of the comments here for how confused some people get.

Paine said in reply to pgl...

Confused or partisan ?

Egmont Kakarot-Handtke said...

No divide
Comment on 'The Macroeconomic Divide'

Keynes's employment function was indeed incomplete (2012). So far, Lucas/Sargent had a point. But the NAIRU expectation-wish-wash was even worse. So far, Krugman has a point. The deeper reason is that economics not only has no valid employment theory but that it is a failed science.

Neither the loudspeakers of the profession nor the representative economists of the various schools have a clue about how the actual economy works. What unites the camps is scientific incompetence.*

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2012). Keynes's Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL http://ssrn.com/abstract=2130421

*For details see the cross-references
http://axecorg.blogspot.com/2015/07/incompetence-cross-references.html

[Aug 12, 2015] Unwavering Fealty to a Failed Theory

"...Looking beyond the rhetoric and individual policies, however, lies the Republican Party's major problem: unwavering fealty to trickle-down economics. Virtually all Republicans since Ronald Reagan was elected president have run on a platform of supply-side policies, and the 2016 election will be no different. But it should be, because there is now a growing recognition that trickle-down economics has failed...."
.
"...Republican economic "thinking" is akin to a religion. No deviation from the gospel is allowed or you become an apostate.
Like Huckabee, who is running for president, believes that the world (universe?) is only 6500 years old. "

.
"...Just as FDR laid out the solution in 1935: you start by paying workers to build productive assets that will earn the money needed to pay the workers."
Aug 12, 2015 | Economist's View
Bad economic theory (but good if you are rich) has trickled down to this cycle's Republican presidential candidates:
Unwavering Fealty to a Failed Theory, by David Madland, US News and World Report: With their first debate set for tonight, Republican candidates have been trying mightily to claim they can help address the economic problems most Americans face. ...

While Jeb Bush declared in February that "the opportunity gap is the defining issue of our time," more recently he's been forced to backtrack from his statement that Americans "need to work longer hours" in order to boost their incomes. Sen. Marco Rubio's argument that if the United States is to "remain an exceptional nation, we must close this gap in opportunity," rings a bit hollow next to his tax plan that disproportionately benefits the wealthy. Gov. Scott Walker says he wants to help families achieve the "American Dream," but thinks the minimum wage is "lame," has stripped the words "living wage" from state laws, and has attacked workers' right to join together to collectively bargain for better wages.

Looking beyond the rhetoric and individual policies, however, lies the Republican Party's major problem: unwavering fealty to trickle-down economics. Virtually all Republicans since Ronald Reagan was elected president have run on a platform of supply-side policies, and the 2016 election will be no different. But it should be, because there is now a growing recognition that trickle-down economics has failed....

Posted by Mark Thoma on Thursday, August 6, 2015 at 10:16 AM in Economics, Politics, Taxes | Permalink Comments (21)

pgl :

The following is exactly right. We should note that a few pretend progressives around here are praising Jeb! for this 4% proposal even if what Jeb! is really proposing is the same old Art Laffer lies:

"Looking beyond the rhetoric and individual policies, however, lies the Republican Party's major problem: unwavering fealty to trickle-down economics. Virtually all Republicans since Ronald Reagan was elected president have run on a platform of supply-side policies, and the 2016 election will be no different. But it should be, because there is now a growing recognition that trickle-down economics has failed due to the fact that it rests on a fundamentally flawed premise. Trickle-down economics, the misguided theory that has controlled economic policymaking for more than three decades, is built on the idea that high levels of economic inequality are good. Tax cuts for the rich and less regulation of business supposedly provide incentives for the wealthy to invest and work more. Enabling "job creators" to get richer helps us all, the theory goes. So the fact that the top 1 percent now take home a greater share of the nation's income than they ever have, while incomes for the typical household are lower than they were in 1989, is not a problem in this way of thinking. In the trickle-down mindset, these facts are seen as good for the economy."

mulp said in reply to JohnH...

I see you, JohnH are equally brainwashed or brain damaged by the dominant free lunch economics principles that avoids the TANSTAAFL nature of the dismal science.

You stated absolutely nothing as an alternative that works because you do not want to pay anything, but just want a free lunch.

Just as FDR laid out the solution in 1935: you start by paying workers to build productive assets that will earn the money needed to pay the workers.

Given government is putting people to work who the private sector will not pay, the way they get paid is with taxes and fees associated with the things they build.

Conservatives call it tax and spend, but its really invest and tax.

Republicans totally oppose the bill that Reagan spoke of glowingly in 1983 which hiked taxes 125% to pay to create probably a million jobs building transportation capital assets.

Obama picked up the conservative free lunch alternative to invest and tax: public private partnerships. But conservatives expecting free lunch political solutions realized it was just dismal science: corporations would be collecting tolls that are higher than taxes would be to pay for monopoly profits.

Taxes and fees need to be higher on everyone.

Sorry Bernie, TANSTAAFL - taxing the rich is not the solution.

djb :

so much of this seems to come from the impact of Milton Friedman

his academic papers may have be somewhat restrained, but when you see him on tape talking, he sounds just like any supply sider or right wing politician talking today

especially negative on any possibility of fiscal interventions, and ridicules the concept that interventions can improve aggregate demand and thus the economy

according to Keynes, Ricardo did not believe that inadequate aggregate demand was even possible

David :

I don't think the appeal of trickle down is based on econ or empirical evidence, and as such whether it fails or not is completely irrelevant to the right.

It is a perversion of identity politics as a moral prejudice. Rich people by dint of their wealth are superior and poor people are inferior and deserve their lot. Race is key here. Poor Southern whites on Medicaid and food stamps vote against their interest bc they're not those people.

It's always divide and conquer with the right.

Fred C. Dobbs

(This ought to be a prominent Dem issue,
but it isn't. Why is that? The GOPsters
will pervert it, make it about turning
1%ers into .01%ers)

Why the New Research on Mobility Matters:
An Economist's View http://nyti.ms/1F0ZQQb
via @UpshotNYT - Justin Wolfers - May 4

Hundreds of studies have demonstrated that the odds of economic success vary across neighborhoods. The far more difficult question is whether that's because neighborhoods nurture success (or failure), or whether they just attract those who would succeed (or fail) anyway.

A new study by the Harvard economists Raj Chetty and Nathaniel Hendren, when read in combination with an important study they wrote with Lawrence Katz, makes the most compelling case to date that good neighborhoods nurture success. ...

http://www.equality-of-opportunity.org/

http://www.equality-of-opportunity.org/images/nbhds_exec_summary.pdf

reason :

How about an alternative, bubble up economics. Money doesn't flow down - it flows UP. Spread money around and it will spent on things that companies owned by the wealthy produce, instead of concentrating on cutting costs, those companies can concentrate instead on increasing productivity and expanding production. The trick is that the market will pick the best producers, but the best producers of WHAT. Goods for everyman or trinkets for the wealthy.

gunste :

Republican economic "thinking" is akin to a religion. No deviation from the gospel is allowed or you become an apostate.
Like Huckabee, who is running for president, believes that the world (universe?) is only 6500 years old.

[Aug 09, 2015] The Link Between Oil Reserves and Oil Prices

Aug 05, 2015 | energytrendsinsider.com

Last December the Energy Information Administration (EIA) released its latest estimate of U.S. Crude Oil and Natural Gas Proved Reserves. Although natural gas reserves rose, the real story was crude oil reserves. The EIA reported that U.S. proved reserves of crude oil and lease condensate had increased for the fifth year in a row, and had exceeded 36 billion barrels for the first time since 1975:

fig_1

There are two reasons for this increase in proved reserves. The first is that despite >150 years of oil production in the U.S., new fields are still being discovered. In March 2015 the EIA released its update to the Top 100 U.S. Oil and Gas Fields as a supplement to the December report. This was the EIA's first update on the Top 100 fields since 2009. The most significant addition to the list was the Eagleville field (in the Eagle Ford Shale), which was only discovered in 2009 but is now the top producing oil field in the U.S. In addition to the Eagleville, there were 4 other fields in the Top 100 that were only discovered in 2009. Several others in the Top 100 were discovered in 2007 and 2008.

But the largest additions to reserves weren't via new discoveries at all. The largest reserves additions have been a result of rising oil prices, and this is a source of frequent misunderstanding on the topic on reserves.

An oil resource describes the total amount of oil in place, most of which typically can't be technically or economically recovered. For example, it is estimated that the Bakken Shale centered under North Dakota may contain several hundred billion barrels of oil (the resource). However, what is technically and economically recoverable in the Bakken may be less than 10 billion barrels. The portion that is technically AND economically recoverable is the proved reserve. Because of the requirement that the oil be economically recoverable, proved reserves are a function of oil prices and available technology.

Thus, as oil prices rise, oil resources that may have been discovered decades ago can be shifted into the category of proved reserves. Venezuela provides a perfect case study of this phenomenon. Venezuela has an enormous heavy oil resource in the Orinoco region of the country. But this oil is very expensive to extract. In 2003, Venezuela's proved oil reserves were only 77 billion barrels. At that time Saudi Arabia's reserves were tops in the world at 263 billion barrels.

After the past decade saw oil prices rise to above $100/barrel, more of Venezuela's heavy oil resource became economic to produce. Thus, by 2013 Venezuela's proved reserves were estimated to be tops in the world — 289 billion barrels. Saudi Arabia has now slipped to second with 266 billion barrels.

But that economic argument cuts both ways. Oil and gas resources that became proved reserves as prices rose will be declassified as proved reserves should lower prices render them uneconomical to produce. This is often the reason that companies have to write down proved reserves. It's not that a company believed there was oil or gas and found out later that there wasn't (although that of course also happens), it's generally because a period of depressed prices has rendered those proved reserves to be no longer economical. See the dip in gas reserves in 2012? That was caused by lower prices in 2012, which rebounded somewhat in 2013.

... ... ...

Because of the crash in oil prices, it is likely that many companies will have to write down their proved reserves — especially those in the PUD category. Thus, for the first time in several years, many companies — and indeed countries, including the U.S. — are likely to see a big drop in their proved reserves at year-end when they file their annual reports. I will discuss this in more detail in an upcoming article.

Note: This is a slightly edited version of an article that originally appeared in the Oil and Gas Monitor called Proved Oil Reserves the Real Story.

[Aug 09, 2015] Stephen Schork: The Commodity Crash Is A Canary In The Coal Mine For The Global Economy

"..."this drop in oil prices, this drop industrial metal prices, this is not good. It's a canary in the coal mine that something is not right in the global economy, and that is a concern for us all.""
.
"...On the supply side we are still producing. Regardless of what the oil bulls will tell you about the pullback in production, or the anticipated pullback in production, we have not yet seen it, and we will not see significant pullback I believe through the end of this year. So you marry those two facts together, fall in demand, strong production, i.e. I do think oil prices are headed below $40 a barrel in the latter half of this year. "
.
"...That can't be, because energy prices or commodity prices in general don't drive economic growth. Economic growth drives commodity prices."
.
"...So we have the rout in oil prices. We have the rout in copper prices, in aluminum prices. If we look at the industrial metals complex, that's now trading at lows not seen since the recession. We're looking at bellwethers such as Caterpillar, a bellwether of industrial production. That stock is trading again at a post-great recession low.
.
So there are a lot of telltales out there that this drop in oil prices, this drop industrial metal prices, this is not good. It's a canary in the coal mine that something is not right in the global economy, Pimm. And that is a concern for us all. "
Aug 09, 2015 | zerohedge.com

The best thing about the commodity crash relapse taking place so quickly after the last swoon - recall tha we have had two oil bear markets within 8 months - is that all those hollow chatterboxes and econo-tourists who swore that tumbling oil is "unambiguously good" and "great for the economy" (first and foremost Larry Kudlow and then proceeding with every single sellside strategist and economissed), have been laughed out of even CNBC's studio, and are nowhere to be found this time around because not only did all those promises of a surge in consumer spending never materialize (for reasons, or rather one reason which we explained extensively before), but the observent public still remembers all too well how countless 'experts' confusing cause (a gobal slowdown in the economy) with effect (crashing commodities).

Therefore, we were delighted when someone who actually understands the energy market for a change, The Schork Report's Stephen Schork, appeared on BBG's Pimm Fox yesterday to explain not only what the immediate future holds for both oil and gasoline prices, but why, when one actually gets cause and effect right, "this drop in oil prices, this drop industrial metal prices, this is not good. It's a canary in the coal mine that something is not right in the global economy, and that is a concern for us all."

The full interview is below, here are the key spot-on highlights, first about the futures of commodity prices :

... from a demand perspective on the seasonal front, it's August 7. We only have four more weeks left of summer driving, then the peak gasoline season is over. Then we head into the fall where the fall turnaround; that is the refinery maintenance season begins. So refineries will scale back in their crude oil purchases. So right now we are at the peak of the demand season. Demand is only going to fall between now and the end of the year.

On the supply side we are still producing. Regardless of what the oil bulls will tell you about the pullback in production, or the anticipated pullback in production, we have not yet seen it, and we will not see significant pullback I believe through the end of this year. So you marry those two facts together, fall in demand, strong production, i.e. I do think oil prices are headed below $40 a barrel in the latter half of this year.

Then a repeat of what we first explained in "It's Official: Americans Spent All Their "Gas Savings" On Obamacare"

FOX: All right. So, Stephen, let's say that gasoline ends up being around $2.00, $2.10 a gallon by the end of the year, that extra money that people are not spending on gasoline, going to go somewhere else?

SCHORK: Yes. It's going to go to a big government health care. Look, I spend $100 -- and I'm saving $100 a week at the pump, excuse me, $25 a week, $100 a month, but my health care premium went up $160 a month for my family. So I'm still diggings $60 in.

And so that's the big misnomer here, Pimm. People tend to think that this pullback at the pump is somehow good. No. It's a zero sum game because, yes, those dollars are being spent elsewhere, but those are not additional dollars being spent elsewhere. We're just moving the pieces around on the chessboard. We're not creating economic growth.

Putting it all together:

And this is the big concern because we keep on thinking that lower energy prices are somehow good for the economy. That can't be, because energy prices or commodity prices in general don't drive economic growth. Economic growth drives commodity prices.

So we have the rout in oil prices. We have the rout in copper prices, in aluminum prices. If we look at the industrial metals complex, that's now trading at lows not seen since the recession. We're looking at bellwethers such as Caterpillar, a bellwether of industrial production. That stock is trading again at a post-great recession low.

So there are a lot of telltales out there that this drop in oil prices, this drop industrial metal prices, this is not good. It's a canary in the coal mine that something is not right in the global economy, Pimm. And that is a concern for us all.

Full interview with Stephen Schork after the jump:

[Aug 08, 2015]Top 6 Myths Driving Oil Prices Down

"...The Saudis, as OPEC's largest producer and largest contributor to growth in 2015, have already stated that they will reduce output by 200,000-300,000 by summers end. "
OilPrice.com
"Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech."

Benjamin Franklin, Silence Dogood, The Busy-Body, and Early Writings

I start with that quote because once the media, as well as politicians for that matter, have no accountability for actions or words then liberty will dissolve. Over the last few weeks I have witnessed another litany of lies that the media insists on putting forth. They come in the form of statements presented as facts to sway opinion while others are opinions quoted by others. Either way, the bias in talking down oil prices, reinforcing the "glut" that is fueled in part by misleading EIA and IEA data, is readily apparent.

Earlier in the year I documented half a dozen media reports which turned out to be 100 percent false. Now I expose another half dozen in just the past few weeks. Prices remain unchanged as a result of the largest drop in production in a year, as well as a large inventory draw this week via the EIA. The very fact that prices haven't responded demonstrates my points. This comes despite the dollar index (UUP) over the last month remaining essentially flat while USO has fallen over 15 percent (so much for that relationship, except when the dollar rises right?)…

Related: A Reality Check For U.S. Natural Gas Ambitions

Even at the time of this article the dollar index is down 1 percent yet oil is down as well.

Here is a list of the latest lies:

  1. Iran Agreement to flood market. FALSE. OPEC has even stated that the natural 1.0 to 1.5 million barrels per day (MB/D) rise in demand in 2016 will more than offset any production rises in Iran which, contrary to earlier reports, won't come on line until early 2016. In addition, China will open up refining to third party, non-state-owned refineries which will reportedly add another 600,000 B/D in demand in 2016.
  2. Iran floating storage will flood market. FALSE. As initially reported in the media, it was Iranian oil floating in storage but it now turns out to be low grade condensate as stated by PIRA on Bloomberg a few weeks back and then supported by tankers attempting to move inventory to Asia. Later media reports corrected earlier ones that the storage is in fact condensate while failing to report on its grade.
  3. U.S. production resilient. FALSE. The latest EIA data refutes this as does data via EPS calls at Whiting Petroleum (WLL) & Hess Corporation (HES). Yes, some are increasing production such as Concho resources (CXO), but in the Bakken both companies confirm that 2H15 production will decline due to lower rigs and depletion. HES raised production for the year as a result of 1H15 production being higher than expected by some 5 percent. All in all, next week should see further production drops.
  4. U.S. Inventory resilient. FALSE. EIA data would have fallen last week by some 4MB as it did this week ex import surges and continues to be overstated by "adjustments" made to production that amount to millions of barrels in daily production.
  5. Cushing inventory fears revived. FALSE…see above.
  6. OPEC supply will continue. The Saudis, as OPEC's largest producer and largest contributor to growth in 2015, have already stated that they will reduce output by 200,000-300,000 by summers end. Yes true, OPEC as an entity won't formally announce a cut but isn't it misleading to report this?

... ... ...

I should note that WLL also refuted Goldman Sachs' call that, at $60, U.S. production and rig count increases would resume. Before the most recent fall in oil, that call admittedly looked true as rigs did rise and Pioneer Natural Resources (PXD) was reportedly going to add 2 rigs a month until early 2016.

WLL, however, finally drew a line in the sand as they stated on their EPS call that they would not add a rig until 4-6 months after oil remained at $60 or better. PXD, if they are smart, will follow suit and, I suspect, the oil industry has finally come to realize that the "Trillion Dollar Swindle" in oil is very real and normal supply and demand dynamics no longer apply. The law of diminishing returns in more supply is real thanks to media hype.

Lastly, I wish to emphasize that freedom of speech not only comes as the freedom to express yourself, as I am doing here now, as others have done freely in the media, presenting both bullish and bearish cases. However, the number of statements that have been proven false and not retracted, as well as the obvious bias should raise serious questions about the role of media in the current oil bust. Which industry will be under attack next?

Meanwhile, an industry which by simple math cannot generate free cash flow (FCF) on $100 oil is disintegrating before our eyes, with millions affected by the fallout. Targeting individuals has become a regular theme in the media but now it appears to have moved to certain industries.

Below demonstrates that even on $100 oil shale isn't self-sustainable on a FCF basis, never mind $50 oil.

Below is the estimated CF deficits for 2016 according to Jefferies with hedges:


(Click to enlarge)

How one on the sell side or media can argue for even lower oil to balance the market demonstrates the lack of detailed research and understanding of shale economics.

By Leonard Brecken of Oilprice.com

steve from virginia on July 31 2015 said:

- Oil prices are declining because oil product end users around the world are broke and cannot borrow. They cannot borrow b/c they are insolvent, they are insolvent b/c they cannot borrow.

- Oil prices are declining as a direct result of worldwide QE and other forms of easing. Easing shifts purchasing power proportionately to banks and large firms away from product end users. Without funds the end users cannot retire the drillers' expanding debts => drillers fall bankrupt.

- Oil prices are declining because using fuel does not offer any real returns, only vaporous 'utility' which is really pleasure. Oil is an indispensable form of capital, it has been squandered for 'thrills', we are now facing the consequences: end users who lack the means to support extraction efforts.

Keep in mind, ongoing fuel supply constraints (!) adversely affect end users faster than declining prices can subsidize them; this is a self-amplifying process. When it takes hold there is no escape from it; oil prices will decline to near-zero and the price will still be too high.

Joseph Castillo on August 01 2015 said:
Thank you for your insights, Leonard. No one seems to be noticing the production rollover here in Texas, nor the growing disparity between the Texas numbers and the EIA numbers and forecasts. Yesterday the market punished oil because of a very small increase in the rig count. Amazingly, the market completely missed that the EIA finally reported a significant drop (on the order of 150,000 bbls/day) for both their monthly volumes as well as their July 31st weekly numbers. At some point these facts will have to be recognized.

I am at a loss for how this goes unnoticed by the media and why "reputable" researchers at groups like Goldman-Sachs continue trumpeting the oil glut horn in direct conflict with the facts. Anyway, thanks for your work. It gives little guys like Bold Energy hope that we can survive.

Mike on August 02 2015 said:
Timothy. Your statement about demand growth is wrong. There has been significant demand growth and if you look at actual statistics you will see that.

I would not believe the fairy stories in Media news about demand though, because like most media stories at present, they seem to perpetuate a desired view rather than any effort to represent and true and honest account. .

Shakespit on August 03 2015 said:
Tone of article seems angry and strident, maybe desperate. How dare the media print anything that negatively affects oil pricing. The news stories are "myths," read "lies." Well surely if the stories are myths, reality will soon correct the price.

I am no expert but have read energy news with interest since the first oil shock in 1973, I know that the statement that "...$100 oil shale isn't self-sustainable ..." is a joke. Shale oil certainly is very sustainable at $100 per barrel; a lot of shale is sustainable at $50, as are Canadian tar sands.

The cost floor for unconventional oil to be sustainable has been wildly exaggerated for several years. Not four months ago Shell's head of tar sands production in an NPR interview corrected a young-sounding reporterette, who was stating the tar sands production needed $70 a barrel to break even, to say that the actual break even point was $36 a barrel. A $36 a barrel price for most unconventional oil is about the break even point cited for decades in the literature -- I think I'll stick with that figure as my understanding as the sustainable floor for most unconventional oil. Cheer up, myths can only hurt for so long, then the market will catch up and make it all better! So don't you worry about a thing! Thank you!!


Andrew on August 03 2015 said:

Agree with Steve from Virginia. QE was the most blatant and convoluted blow at the laws of economics, supply and demand. By seeking to undermine the cyclical nature of the economy and save those who would have been justly taken down the Fed and the politicians have created huge distortions which will echo through the economy for years to come. They stopped the market from adjusting itself, rebalancing wealth distribution and asset values, removing inefficiencies and restoring consumers purchasing power.

How this tinkering (this word is obviously inadequate to describe the meddling, a wrench in the gears is more appropriate) will propagate through the system is anybody's guess. I suppose the stats perversion in the oil industry and its subsequent degradation so aptly described by the author is one of them. .

zorro6204 on August 03 2015 said:

Myths don't drive the oil markets, supply and demand does. And the facts are that in spite of the price drop, production is not falling. I'm hard pressed to find any companies guiding to lower production, and neither could these guys:

"Barclays said a group of 101 oil companies that it tracks, which cover around 40% of global oil production, show no slowdown in the pace of production growth in 2015. After growing by one million barrels a day in 2014, the companies plan to accelerate output growth to 1.4 million barrels a day this year and maintain that level into 2016." - WSJ .

Matt on August 03 2015 said:

What the large independents should've done (the majors never would. Heck, they may be behind this driving down of the price of oil so they can snatch up a CLR or someone cheap) is stack every rig. Not drill a darn well at all in 2015, pay all of their hands from cash flow,and reevaluate at year end. Most of us little guys have already done that.

Shakespit is correct. If production is truly declining, the market will correct itself even if it is being manipulated psychologically or otherwise. When a buyer needs physical oil and it's not so easy to come by, the price offered will go up.

[Aug 08, 2015] Don't Expect An Oil Price Rebound This Side Of 2017

"...with most market participants now resigned to at least another year of low oil prices, a lot of hope has gone out of the markets."
.
"...Second, firms will keep pumping in many cases until their wells run dry. Fortunately for oil investors, shale wells have a much faster decline rate than traditional wells. Shale wells decline at a rate of between 60 percent and 90 percent over the course of three years."
.
"...Rapid decline rates mean that U.S. oil production could begin declining as fewer and fewer new wells are drilled. But it will take time for production to come down sufficiently enough to support a major oil price rebound. Given that, investors need to focus on oil stocks that can get through the next two years on minimal (if any) profit, and they themselves need to be prepared to wait for a price rebound until 2017."

OilPrice.com

...firms have an incentive to produce now rather than waiting. Previously, some firms likely hoped that oil prices would spring back by the end of 2015 and that the firm's hedges could keep sales receipts high enough to avoid dealing with the dramatic fall in prices. But prices have not bounced back, and with most market participants now resigned to at least another year of low oil prices, a lot of hope has gone out of the markets.

... ... ...

This will take time though. First, many firms were propped up by their hedging programs. Those hedges are only just now starting to expire and exposing firms to the full depth of the oil price drop. Second, firms will keep pumping in many cases until their wells run dry. Fortunately for oil investors, shale wells have a much faster decline rate than traditional wells. Shale wells decline at a rate of between 60 percent and 90 percent over the course of three years.

Rapid decline rates mean that U.S. oil production could begin declining as fewer and fewer new wells are drilled. But it will take time for production to come down sufficiently enough to support a major oil price rebound. Given that, investors need to focus on oil stocks that can get through the next two years on minimal (if any) profit, and they themselves need to be prepared to wait for a price rebound until 2017.

By Michael McDonald for Oilprice.com

The elites not stupid: they need a crash to justify their draconian repressive and warmaking moves

bolasete, August 5, 2015 at 4:18 pm
daily i review articles on zerohedge, full of doom and gloom. unfortunately they are written by ron paul types, not even socialists, let alone communists. the way i see it a crash really is coming but the ones calling the shots are not stupid: they want a crash that will demand/justify their draconian repressive and warmaking moves.

(what i find amazing – given my slant – is the large number of smart, knowledgeable people who must understand yet go along with it, like your immortal cyborg comment: why aren't these people moving to tropical isles?) my point being that analysis of armageddon and calling to account the enemy is for the future.

ignore the provocateurs! he's not worth the increased bp of your pddynt.

[Aug 08, 2015] Global Oil Supply More Fragile Than You Think

"... the delay of 46 major oil and gas projects that have 20 billion barrels of oil equivalent in reserves mean that global production several years from now could be much lower than anticipated. Due to long lead times, decisions made today will impact the world's production profile towards the end of this decade and into the 2020s. It makes sense for companies to cut today, but collectively that could lead to much lower supplies in the future."
Aug 05, 2015 | Oilprice.com

Many oil companies had trimmed their budgets heading into 2015 to deal with lower oil prices. But the rebound in April and May to $60 per barrel from the mid-$40s suggested that the severe drop was merely temporary.

But the collapse of prices in July – owing to the Iran nuclear deal, an ongoing production surplus, and economic and financial concerns in Greece and China – have darkened the mood. Now a prevailing sense that oil prices may stay lower for longer has hit the markets.

Oil futures for delivery in December 2020 are currently trading $8 lower than they were at the beginning of this year even while immediate spot prices are $4 higher today. In other words, oil traders are now feeling much gloomier about oil prices several years out than they were at the beginning of 2015.

The growing acceptance that oil prices could stay lower for longer will kick off a fresh round of cuts in spending and workforces for the oil industry.

"It's a monumental challenge to offset the impact of a 50% drop in oil price," Fadel Gheit, an analyst with Oppenheimer & Co., told the WSJ. "The priorities have shifted completely. The priority now is to discontinue budget spending. The priority is to live within your means. Forget about growth. They are now in survival mode."

And many companies are also recalculating the oil price needed for new drilling projects to make financial sense. For example, according to the Wall Street Journal, BP is assuming an oil price of $60 per barrel moving forward. Royal Dutch Shell is a little more pessimistic, using $50 per barrel as their projection. For now, projects that need $100+ per barrel will be put on ice indefinitely. The oil majors have cancelled or delayed a combined $200 billion in new projects as they seek to rein in costs, according to Wood Mackenzie.

But the delay of 46 major oil and gas projects that have 20 billion barrels of oil equivalent in reserves mean that global production several years from now could be much lower than anticipated. Due to long lead times, decisions made today will impact the world's production profile towards the end of this decade and into the 2020s. It makes sense for companies to cut today, but collectively that could lead to much lower supplies in the future.

That is a problem because the oil majors were struggling to boost oil production even when oil prices were high. 2014 was one of the worst in over six decades for major new oil discoveries, even though oil prices were high for most of the year. Despite high levels of spending, exploration companies are simply finding fewer and fewer reserves of oil.

Shale production has surged in recent years, but it could be a fleeting phenomenon. Precipitous decline rates from shale wells mean that much of a well's lifetime production occurs within the first year or two. Moreover, after the best spots are drilled, the shale revolution could start to come to a close. The IEA predicts that U.S. shale will plateau and begin to decline in the 2020s. That means it would not be able to keep up with rising demand. Add in the fact that oil wells around the world suffer from natural decline rates on the order of 5 percent per year (with very wide variation), and it becomes clear that major new sources of oil will need to come online.

One other factor that could tighten oil markets over the long-term is the fact that Saudi Arabia has churned through much of its spare capacity. As one of the only countries that can ramp up latent oil capacity within just a few weeks, Saudi Arabia's spare capacity is crucial to world oil market stability.

Many energy analysts like to compare the current oil bust to the one that occurred in the 1980s. But one of the major differences between the two events is that, in addition to the glut of oil supplies in the 1980s, was the fact that Saudi Arabia dramatically reduced its output from 10 million barrels per day (mb/d) down to less than 4 mb/d in response. As a result, on top of the fact that the world was awash in oil throughout the 1980s and 1990s, there were also several million barrels per day of spare capacity sitting on the sidelines, meaning there was virtually no chance of a price spike for more than a decade.

That is no longer the case. Today OPEC has only 1.6 mb/d of spare capacity, the lowest level since before the 2008 financial crisis. So while Saudi Arabia is currently flooding the market with crude, it has exhausted its spare capacity, leaving few tools to come to the rescue in a pinch.

That brings us back to the large spending cuts the oil majors are undertaking. With spare capacity shot and major new sources of oil not coming online in a few years, the world may end up struggling to meet rising oil demand. That could cause oil prices to spike.

More Top Reads From Oilprice.com:
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1. Oil Guru Who Called 2014 Slump Sees a Return to $100 Crude Bloomberg
2. Oil Warning: The Crash Could Be the Worst in More Than 45 Years Bloomberg
3. Oil bulls' hope for quick price dip dimmed by 2020 crude under $70 Reuters
4. How Iran Impacts The Price and Supply of Oil Investopedia
5. Shell to Cut 6,500 Jobs as Profit Drops The Wall Street Journal

[Aug 08, 2015] The "petrodollar" is a pillar of American power

"...I would completely agree that the "petrodollar" is a pillar of American power but am frankly confused by what the essential mechanism of this is. To my mind to institute the petrodollar it is not sufficient to say that oil will be denominated in dollars or even sold only in dollars. The key is that the proceeds need to STAY in dollar assets. This was only achieved once Kissinger brokered Petro-dollar recycling, meaning that the dollars earned in this way would be recycled into treasury securities or used to purchase American weaponry or the engineering skills of the American firms that basically built the Kingdom as it now exists. This is what I was hinting at when I was talking about the circular nature of trade between currency blocs. No non-circular trade patterns can persist for long.
.
We emphasize different things. I suspect that the simple scale of the dollar value of trading of financial claims on things – trading in which London and New York are dominant – contributes more to the maintenance of the dollar reserve system than you are proposing. The upshot being that America's "debt" problem is actually a demonstration of its financial power. "

.
"..."The result was a depreciation of the dollar and other industrialized nations' currencies. Because oil was priced in dollars, oil producers' real income decreased. In September 1971, OPEC issued a joint communiqué stating that, from then on, they would price oil in terms of a fixed amount of gold."
.
So it seems that the oil sellers, seeing that their "real" income from selling oil was decreasing (they were selling oil at the same price in terms of dollars, but at a lower price in terms of gold), were determined not to let the depreciating dollar erase a big chunk of their earnings. I think this goes to show how deep is entrenched in the collective psyche the idea that gold is THE medium for storing wealth. Barbarous relic? I think not…
.
After all, value is a social construct and economic relations are social relations mediated through these things we call "commodities". Gold has proven itself to be a very good mediator of these social relations, not because some magical qualities, but because of obvious practical advantages. So, although its role is significantly smaller these days, I think it still retains the roles of "medium of last resort" and "measuring stick of wealth"."

james@wpc, August 4, 2015 at 11:35 pm

I had to start a new thread, Mark. Your first question – "does the fact that the USA's debt is more than 100% of its GDP not make it insolvent?"
I take it you are using the definition of insolvency being when an organizations liabilities exceed it's assets. The nation's GDP does not belong to the government and so cannot be seen as an asset of the govt. So the question, as framed, is not 'well English', speaking economically :) Perhaps you could rephrase it?

Insolvency can also be defined as an inability to meet current liabilities as they fall due which is a cash flow problem rather than an asset problem. A government that owns and controls its central bank cannot ever have a cash flow problem; that would be Iran, for instance, or Libya before Terror Inc was unleashed on it.

A govt that does not own and control its central bank cannot have a cash flow problem so long as its debt is denominated in its own national currency and the privately owned central bank continues to monetize the government's newly issued bond/treasury certificates; that is countries like the US and the UK.

A government that has its debt nominated in a foreign or external currency, such as Greece and other Euro zone countries, is in the position of any other business and can be declared insolvent and its assets sold up for the creditors. This situation with Greece was always going to come right from the beginning.

I don't follow what you are asking with your second question – "Would it, if there were a deliberate run on the dollar to drive it down and reduce its circulation, by refusing to use it as a medium of exchange?" Could you rephrase it also?

astabada, August 4, 2015 at 11:51 pm

@james, TimOwen

A government that has its debt nominated in a foreign or external currency, such as Greece and other Eurozone countries, is in the position of any other business and can be declared insolvent and its assets sold up for the creditors. This situation with Greece was always going to come right from the beginning.

Bang! I do not follow all of your points, but on this one I totally agree. To reconnect with what Tim was writing about Italy, the problem with Italy (and Greece) is that they both have:

  • – a currency which is grossly overvalued with respect to their economies (this makes import artificially easier than it should be, and export artificially harder)
  • – no control on what the value of that currency is (e.g. by devaluing its currency Italy could keep its products competitive in the past)

When did the Italian crisis start? Answer: when Italy pegged its currency to the future Euro, with the Maastrich Treaty.

marknesop, August 5, 2015 at 7:34 am

In the second question, I meant ""Would it (be insolvent), if there were a deliberate run on the dollar to drive it down and reduce its circulation, by refusing to use it as a medium of exchange?" That is, would a deliberate turning-away from the dollar put the USA in a position where it had to pay its debts and live within its means? And the answer is, not likely, because the government does not control the bank or own the money, although there is most definitely a very close relationship between the governors and the bankers. Still, there must be a relationship between the whole world using the dollar and U.S. power, because if there were not the U.S. would not attack a country on some made-up excuse as soon as it made noises about dropping the dollar. Unless that's just a crackpot conspiracy theory.

james@wpc, August 5, 2015 at 8:28 am

Thanks for the clarification, Mark. The US could well find itself in trouble and that is my expectation but "insolvent" is the wrong word to use.

First, the basics of the relationship between the Fed and the US Treasury dept. I think someone here (Tim?), about a year ago, spelt out the actual mechanics of it all but a rough Idea will suffice for our purposes. When the US govt wants to get more money, they have the Treasury Dept draw up treasury certificates which are essentially IOU's and hand them to the Fed. The Fed creates the credit to the value of the IOU's and places it in the US govt's a/c (at interest). The govt can then meet all future expenses including maturing loans with this money because all of the US's trade and loan contracts are written in US$.

There is no limit to the debt that the US can run up in this manner so there will always be money to meet commitments. So the US govt cannot become technically insolvent.

Crystal ball stuff now – the problem for the US govt (and the Fed) is that it is committed to printing ever more money at a time when the demand for it internationally is shrinking because the BRICS countries and others are avoiding using the US dollar when possible. This will lead to inflation for the dollar. In other words, it will lose value and make it less and less attractive for people, companies and govts to hold it and thus further decreasing demand. We now have a self fuelling downward spiral for the dollar.

The inflation happens because the US dollar is backed not only by the domestic GDP of the US but also by all the international trade that is conducted using the dollar. As the total amount of dollars in circulation increases and the demand decreases (because people are avoiding using it) we have more dollars to buy less goods (because sellers do not want US dollars for their goods) so the prices on the goods that are still available for US dollars will be bid upwards by the excess money over goods available causing the inflation. I have been very impressed how the FED/govt and Wall st generally have been able to stave off this inevitable inflation so far.

As for the US ever 'living within its means' that will only come when other trading partners en masse refuse to accept US dollars for their goods (incl military materiel). The US will then have to sell something tangible to raise the foreign currency (as most other countries now have to do) to buy Chinese clothing and uniforms and ammunition etc. They may not be able to pay for the military occupation in foreign countries using US dollars and so the Empire will start visibly shrinking.

If this happens, countries like israel and Saudi Arabia will be left high and dry and have to fend for themselves – and good luck with that! But psychopaths never say die so they just might pull something out of the hat other than a rabbit. We'll see soon enough, I think. You can see, though, that time is not on the side of the usual suspects.

I hope that answers your question adequately, Mark. If not, come on back to me!

Jen, August 5, 2015 at 3:52 pm

" … Still, there must be a relationship between the whole world using the dollar and U.S. power, because if there were not the U.S. would not attack a country on some made-up excuse as soon as it made noises about dropping the dollar. Unless that's just a crackpot conspiracy theory."

I mentioned earlier in this thread that in 2000, Iraqi President Saddam Hussein switched to trading oil for euros and then Iraq began conducting all its trade in euros. Not long afterwards, the euro appreciated in value, perhaps in part as a result of its use as a trading currency, and the value of Iraq's gold reserves also shot up as a result.
http://www.theguardian.com/business/2003/feb/16/iraq.theeuro

Iran and North Korea then switched to trading in euros. Next thing you know, all three countries became the New Axis of Evil.

If the world has to use the US dollar for trade, this means there will always be a demand from exporters and importers for US dollars and this keeps the value of the US dollar high relative to other currencies. To an extent this means that in a situation where all currencies are free-floating (that is, not subjected to any controls on their value or supply by governments in the countries where they are legal tender) and are completely subject to market supply and demand, the US dollar will not experience high and low extremes when its value against other currencies fluctuates. This keeps the US dollar's value high and steady.

The use of the US dollar as a world currency for trade was adopted during the Bretton Woods conference in the late 1940s just after the Second World War. At the time, the US was the pre-eminent manufacturing economy in the world and could dictate its terms to a ruined Europe. If the rest of the world were to catch up with the US in manufacturing and trading capability, then everyone needed to use US dollars to buy US goods, services and intellectual know-how in the form of patents, advice and training. Few people at the time foresaw what would happen to the US economy if the US dollar became the world's trading currency: the US economy would start to suffer persistent trade and balance of payment deficits and the US government would be unable to control the supply of US dollars. This is known as the Triffin Dilemma.

https://en.wikipedia.org/wiki/Triffin_dilemma

The British economist John Maynard Keynes who attended Bretton Woods was one of the few who knew – that was partly why he advocated for adopting an international trade currency (bancor) and an international clearing house for balance-of-payments surpluses and deficits – but as he was the representative of an exhausted and defeated empire, his ideas were given short shrift by the US attendees.

Tim Owen, August 5, 2015 at 8:22 pm

Posted this on earlier thread one page back before I saw this:

Here's where I think you, James and I agree: the reserve status of the dollar allows the U.S. to fund it's deficit at the expense of other countries.

Here's' where I think (?) we disagree:

  • my point is that the reserve status makes it possible for the U.S. to run persistent trade deficits but the ability to run a deficit is a virtue of all fiat systems. The fact that the reserve status of the dollar means those deficits can be much higher doesn't change the fact. Nor should it discredit deficit-spending by association.
  • I would completely agree that the "petrodollar" is a pillar of American power but am frankly confused by what the essential mechanism of this is. To my mind to institute the petrodollar it is not sufficient to say that oil will be denominated in dollars or even sold only in dollars. The key is that the proceeds need to STAY in dollar assets. This was only achieved once Kissinger brokered Petro-dollar recycling, meaning that the dollars earned in this way would be recycled into treasury securities or used to purchase American weaponry or the engineering skills of the American firms that basically built the Kingdom as it now exists. This is what I was hinting at when I was talking about the circular nature of trade between currency blocs. No non-circular trade patterns can persist for long.
  • We emphasize different things. I suspect that the simple scale of the dollar value of trading of financial claims on things – trading in which London and New York are dominant – contributes more to the maintenance of the dollar reserve system than you are proposing. The upshot being that America's "debt" problem is actually a demonstration of its financial power. *

Could it become it's greatest weakness? It's possible I suppose but I don't see this happening when western finance dwarfs the trading clout of its rivals. The system develops over time and, with time it gains scale and so momentum. In other words I'm suggesting that a dollar collapse is less likely than one might suppose.

*This was the point I was trying to make with the dollar as "safe haven" comments above. If the dollar zigs (strengthens) when your mental model of the world says it should zag (weaken) then this should really suggest that your model is missing some important part of the complex mechanism it is trying to simulate.

james@wpc, August 6, 2015 at 12:05 am

Tim, I'll quote your words back to you and insert some clarifying (for me) words to demonstrate my understanding and to see if it is the same as yours-

– my point is that the reserve status makes it possible for the U.S. to run persistent (international) trade deficits but the ability to run a (domestic budgetary) deficit is a virtue of all fiat systems. The fact that the reserve status of the dollar means those (international trade and domestic budgetary) deficits can be much higher doesn't change the fact. Nor should it discredit (domestic budgetary) deficit-spending by association."

The Bretton Woods agreement specified that the US would make gold available for purchase at an agreed fixed price. This condition was thought to inhibit the US from printing money to excess. But the Vietnam War came along and the US was printing money to pay for it. This extra money was not financing extra productive capacity or creating wealth. Quite the opposite, in fact. So we had an increasing supply of US dollars around the world but no commensurate extra production to absorb the extra dollars.

This is exactly what the French thought would happen and they started demanding gold for their US dollars. Eventually, the US had to stop selling gold now that it was greatly undervalued because the dollar was overvalued. So Nixon took the US dollar off the gold standard. Inflation ensued.

Something was needed to soak up the extra purchasing power of the extra US dollars sloshing around the world. This money was called "EuroDollars" at the time. Oil was the answer. The Saudis (at the behest of Wall St) and OPEC jacked up the price of oil by a factor of four (IIRC) and rapidly increased the demand for dollars and reversed the inflationary trend and the subsequent loss of value.

As Tim points out, the Saudis had to not only sell oil exclusively for US dollars but they had to deposit their surplus with New York banks. This way the banks won in three different ways. 1. they had overnight increased the international demand for US dollars and boosting its strength and prestige (perceptions are everything)
2. They had handed a fortune to the Saudis but by keeping the money in the NY banks, the bankers still controlled the Saudis
3. This surplus money was also kept out of other international banks and so could not be used by them to effectively compete with the NY banks and so kept those other banks under control as well and Wall St dominant.

Point 1 was the most important for the bankers, in my view. This created the petrodollar – a dollar that used to be covered by gold as well as international trade and the US domestic GDP. Then gold dropped out of the equation and was replaced with oil at a hugely inflated price.

At a bankers symposium during the eighties (I think from memory), the head of Citibank at the time, Walter Wriston, answered a question concerning what his bank would do if the Saudis wanted their money back. He replied blithely, "No problem. We'll write them a cheque!" His reply was met with dumbfounded silence which told me told me that most of the audience of bankers did not understand banking at that level. There should have been laughter because the money cannot escape the system. It can only get transferred from one bank to another and each bank is dependent on remaining in the system to keep operating.

It's just a matter of borrowing from each other. If Citibank has the Saudi's money to cover their other loans, then this will be more profitable for them than having to borrow it from other banks. But it is not a system breaker if they do have to borrow it from other banks. That's what the system is for.

Jen, August 6, 2015 at 12:33 am

It would be interesting to know when the Saudis also started buying up weapons and military hardware from the US and the UK. If they began some time in the early / mid 1970s to buy such equipment, and it were possible to find out where the money was coming from, that would be another piece in a big puzzle that links the collapse of the Bretton Woods agreement, the Vietnam War, the 1973 oil crisis and subsequent decline in the US car manufacturing industry, the Yom Kippur War and maybe more besides.
https://en.wikipedia.org/wiki/1973_oil_crisis#End_of_the_Bretton_Woods_accord

James, thanks for the extra detail.

spartacus, August 6, 2015 at 1:45 am

Hello Jen! From the Wiki article you linked, I found this paragraph to be very interesting:

"The result was a depreciation of the dollar and other industrialized nations' currencies. Because oil was priced in dollars, oil producers' real income decreased. In September 1971, OPEC issued a joint communiqué stating that, from then on, they would price oil in terms of a fixed amount of gold."

So it seems that the oil sellers, seeing that their "real" income from selling oil was decreasing (they were selling oil at the same price in terms of dollars, but at a lower price in terms of gold), were determined not to let the depreciating dollar erase a big chunk of their earnings. I think this goes to show how deep is entrenched in the collective psyche the idea that gold is THE medium for storing wealth. Barbarous relic? I think not…

After all, value is a social construct and economic relations are social relations mediated through these things we call "commodities". Gold has proven itself to be a very good mediator of these social relations, not because some magical qualities, but because of obvious practical advantages. So, although its role is significantly smaller these days, I think it still retains the roles of "medium of last resort" and "measuring stick of wealth".

marknesop, August 6, 2015 at 9:42 am

The currency Gaddafi had moved to introduce was the gold dinar, an actual negotiable gold coin, and he proposed all African and Muslim nations accept only the dinar for oil. The sources speculating on this look a little tabloid-ey, but as with many such subjects, the mainstream press just never mentions it, as if deciding not to talk about it removes it from consideration as an issue.

Similarly, the disappearance of Libya's gold is easily explained – unscrupulous people, including Gaddafi himself, stole it. The guy who was planning to introduce a gold currency to Africa actually stole all the gold for himself, the tricky devil.

james@wpc , August 6, 2015 at 1:48 am

Jen, my recollection is that the Saudi's started buying armaments big-time during the seventies because I remember asking myself, "what's wrong with this picture?" Here is a supposed enemy of Israel buying huge amounts of military equipment, particularly fighter jets, from the country it has just imposed sanctions on, the US. Added to that, the US is THE big supporter of Israel and indeed, saved its bacon during the Yom Kippur war!

The money for the military hardware could only have come from the increased price of oil and looking back it is increasingly obvious that these sales were part of the original deal to increase the price of oil. It is part of the circular trading that Tim was talking about.

The petrol rationing exercises in the US and elsewhere are looking more and more like theatre to condition the punters that we have to pay more. The whole crisis was stage managed and nothing has changed in forty years!

marknesop, August 6, 2015 at 9:14 am

The USA has a similar arrangement with Israel, in which it transfers billions in foreign aid to this prosperous country and Israel then uses it to buy U.S. weapons and military equipment. It would be simpler to just gift them the military equipment, but that would look as if the USA was building a military ally to extend its own power – which it is – and the former way helps create the need for more dollars.

[Aug 08, 2015]How Russian energy giant Gazprom lost $300bn

"...If the costs [of shale oil] are true'ly low it would have reflected at the Pump. But it hasn't. Another flaw is how can oil pumped from deeper well ( Fracked Oil) is cheaper than conventional oil. It looks more like US flexing its muscles to subdue Russia. Besides its not Just Gazprom , shell, BP, Exxon , Gulf, Mobil etc also many of US vassal states are affected. It would be interesting to see how long this artificial price drop continue with zero benefit to the customers."
.
"...Since the Russians haven't rolled over the first time, the US is trying again. These days, the price of oil is determined by activity in the futures market impacting the spot price. Likewise, I expect for shares and wouldn't be surprised if someone is shorting the stock. Any oil and gas not pumped today is available to be pumped tomorrow - possibly at higher prices. Gazprom isn't going bankrupt. Neither are any of the other major oil companies."
.
"...Therefore, he said, "today there are no conditions under which all thought that if tomorrow Russia will cease to supply gas, this same gas would be supplied by Iran." "Our production is still far from this stage", - said the president."
.
"..."Competition should not be problematic, it should be healthy competition, should not do so to the profit only for the buyer, and the exporters suffering damage "."
.
"... Iran doesn't need anyone else to 'jump in', among the other things that the recent Security Council vote ending the Iran sanctions also enabled was the release of ~$150 billion that was held in foreign accounts."
.
"...Seems the author is a warrior in the camp of the unnamed competitor which would like to supply its liquid costly gas.I know one direction where his bid will be welcomed at any price but for free- Ukraine"
.
"...What is happening in the oil market is a very complicated process. Do not simplify the process of digestion by eating only the headlines. The headlines are not very high-calorie product, if you certainly do not pursue the goal to lose weight. Including lose money."
.
"...The Guardian has no idea what it is printing Fact's are not a requirement in there story's any more EG:: Like many oil-producing countries, Saudi had got used to an era of high oil prices. Kuwait and Abu Dhabi can live with crude at its current level: Saudi Arabia cannot. It requires an oil price of $106 a barrel to balance the books... Not $20"

...energy giants ExxonMobil and Petro China, Gazprom's financial contemporaries back in mid-2008, have remained top performers. Norway boosted its market share and overtook Russia as western Europe's top gas supplier over the 2014-2015 winter.

... ... ...

Russia is looking to channel gas through Turkey and adding two new lines to the Baltic Nord Stream network, transporting gas over the top of Europe.

The total costs of the projects, without taking into account overruns, will reach about $25.4bn.

Beyond the construction expenses, transit costs for North Stream appear to be significantly more expensive than through Ukraine. Experts estimate that in 2014 it cost Gazprom $43 to transport1,000 cubic metres via Nord Stream compared to $33 via Ukrainian. Factored over the tens of billions of cubic metres that Gazprom wants to send through the Baltic pipes, that's a mighty extra cost just to avoid Ukraine.


Willinilli 8 Aug 2015 02:36

Lazy, lazy, lazy journalism.. Even for a business /economics journalist .. Saudi Aramco has a much larger potential market cap..

Though to be fair, it was the original FT study that was lazy.. This is just uninformed churnalism..

annamarinja airman23 8 Aug 2015 09:09

Poor airman23. Have you ever heard about Dick Cheney? Have you ever looked at the Wolfowitz Doctrine? If not, then you are very much behind the nowadays understanding of fascism and fascists. On the other hand, you are such a concrete success of Mrs. Nuland-Kagan' (and likes) travails.


annamarinja -> psygone 8 Aug 2015 09:03

Fracking? Are you serious to monger this this barbaric technique that has spurred a mass movement in the US and Canada against the ecological dangers generated by fracking? Each and every of your posts is in line with MSM "reports." It seems that you value FauxNews above else.

yemrajesh -> psygone 8 Aug 2015 07:36

Difficult to say. If the costs are true'ly low it would have reflected at the Pump. But it hasn't. Another flaw is how can oil pumped from deeper well ( Fracked Oil) is cheaper than conventional oil. It looks more like US flexing its muscles to subdue Russia. Besides its not Just Gazprom , shell, BP, Exxon , Gulf, Mobil etc also many of US vassal states are affected. It would be interesting to see how long this artificial price drop continue with zero benefit to the customers.


Kaiama 8 Aug 2015 06:07

Since the Russians haven't rolled over the first time, the US is trying again. These days, the price of oil is determined by activity in the futures market impacting the spot price. Likewise, I expect for shares and wouldn't be surprised if someone is shorting the stock. Any oil and gas not pumped today is available to be pumped tomorrow - possibly at higher prices. Gazprom isn't going bankrupt. Neither are any of the other major oil companies.

AlbertEU -> alpamysh 7 Aug 2015 17:09

The crisis of one industry necessarily will hurt other sectors. Hard-hit banking sector, which is credited US shale industry. The effect can be like an avalanche. Especially if it is strengthened by additional steps. I think for anybody is not a secret the existence of a huge number of empty weight of the dollar, which is produced by running the printing press. Oil trade is in the dollar, which in turn keeps the volume of the empty weight of the dollar. Now imagine a situation where part of the oil market has not traded more in dollars. It is equally affected, the USA and Russia.

But there is one important detail. Russia has never in its history, was a rich country (if you count all the inhabitants of Russia, not individuals). In the country there is no cult of consumption. The traditional religions of Russia, that is, those that have always existed in Russia (Orthodox Christianity, Islam and Buddhism) did not contribute to the emergence of such a cult.

Orthodoxy says plainly that material wealth is not important for a man. Wealth is only supplied in addition to achieve the main goal in the life of an Orthodox Christian. Therefore, to be poor in Russia is not a problem. This is a normal way of life. Hence the stoic resistance to any hardship, challenges, wars and so on. Expectations of great social upheaval in Russia, caused by the lowering of the standard of living is a little naive. Russia used to run in the marathon. Who would have more strength, intelligence and endurance is a big question. Geopolitics is a very strange science...

airman23 7 Aug 2015 16:31

Ooops, It's just been announced that the U.S. is adding the Yuzhno-Kirinskoye oil and gas field that belongs to Gazprom to it's sanctions list. It looks like Gazprom is gonna loose even more money. This is certainly not what the Fuehrer had in mind when he started his imperialist war of conquest in Ukraine and illegally annexed Crimea. Unintended consequences to be sure but what comes around, goes around.

John Smith -> William_Diaz 7 Aug 2015 16:05

From Iranian president from October last year:

Therefore, he said, "today there are no conditions under which all thought that if tomorrow Russia will cease to supply gas, this same gas would be supplied by Iran." "Our production is still far from this stage", - said the president.

He also said that Iran is ready to cooperate with Russia in the gas sector. "For several years we have been making efforts that countries that export gas would be able to cooperate" - he recalled. - "Competition should not be problematic, it should be healthy competition, should not do so to the profit only for the buyer, and the exporters suffering damage ".

John Smith -> William_Diaz 7 Aug 2015 15:56

Your ignorance only, with whom do you think Iran will coordinate their actions?
Who brokered them a deal? Do you think Russians are stupid?
Turkey will be not just a transit country but a hub. The EU got to built they own pipeline if they want Russian gas in 2019. Turkey will set prices.

William_Diaz -> John Smith 7 Aug 2015 15:13

Your ignorance is astounding, lol. Iran doesn't need anyone else to 'jump in', among the other things that the recent Security Council vote ending the Iran sanctions also enabled was the release of ~$150 billion that was held in foreign accounts.

There is more than enough money available for domestic investment, including a natural gas pipeline to Europe.

Have a great day!

oleteo -> JanZamoyski 7 Aug 2015 14:23

When Russia responded at the sanctions by its sanctions in the agriculture I heard here the malevolent sneers there'd be a famine in Russia. Now the collapse of Gasprom, the failure of the deal with China. What a shame for The Guardian to become an yellow shit


oleteo 7 Aug 2015 14:12

Seems the author is a warrior in the camp of the unnamed competitor which would like to supply its liquid costly gas.I know one direction where his bid will be welcomed at any price but for free- Ukraine


AlbertEU 7 Aug 2015 12:59

To kill a competitor, had to endure their own pain. Are you sure that these actions will kill the Russian oil production instead of US shale oil? In this case, Saudi Arabia has nothing to lose by increasing oil production, the same does and lowering the price of Russian oil. Recently, the Crown Prince of Saudi Arabia visited Russia.

They have a lot of something talked with Putin. Russia, the USA, Iran, Saudi Arabia are competitors.

Over the past year the United States increased the number of purchased crude oil from Russia. Saudi Arabia's oil squeezed out of the US market by their own shale oil. If Saudi Arabia could bankrupt the US oil shale industry, it (Saudi Arabia) will regain US market.

What is happening in the oil market is a very complicated process. Do not simplify the process of digestion by eating only the headlines. The headlines are not very high-calorie product, if you certainly do not pursue the goal to lose weight. Including lose money.


Yankee_Liberal 7 Aug 2015 11:37

Putin has tried to shrug off the economic sanctions as no big deal, but the secret agreement between the West and Saudi Arabia to keep oil supplies high and gas prices low is really hurting Russia. Eventually the Russian people will realize that a lot of economic pain will go away when Putin goes and they start respecting their neighbors boundaries.


andydav 7 Aug 2015 11:18

The Guardian has no idea what it is printing Fact's are not a requirement in there story's any more EG:: Like many oil-producing countries, Saudi had got used to an era of high oil prices. Kuwait and Abu Dhabi can live with crude at its current level: Saudi Arabia cannot. It requires an oil price of $106 a barrel to balance the books... Not $20

[Aug 07, 2015]U.S. adds Russian oil field to sanctions list

U.S. Ambassador to the U.N. Samantha Power says Washington is very concerned about reports of a visit to Russia by Iran's Quds Force chief to Russia in breach of U.N. sanctions. Rough Cut (no reporter narration). Reported Russia visit by Iran military chief' "very concerning" to U.S.
yahoo.com

(Reuters) - The United States has added a Russian oil and gas field, the Yuzhno-Kirinskoye Field, to its list of energy sector sanctions prompted by Moscow's actions in Ukraine, drawing a prompt rebuke from the Kremlin on Friday.

The federal government said on Thursday the field, located in the Sea of Okhotsk of the Siberian coast and owned by Russia's leading gas producer Gazprom, contains substantial reserves of oil in addition to reserves of gas.

"The Yuzhno-Kirinskoye Field is being added to the Entity List because it is reported to contain substantial reserves of oil," according to a rule notice in the Federal Register.

A Kremlin spokesman criticized the move.

"Unfortunately, (this decision) further damages our bilateral relations," spokesman Dmitry Peskov told reporters.

Gazprom declined to comment.

Adding the field to the list means a license will be required for exports, re-exports or transfers of oil from that location, it said. The gas and condensate field was discovered in 2010, according to Gazprom.

Douglas Jacobson, an international trade lawyer in Washington, said the addition "represents a new arrow in the quiver of U.S. sanctions on Russia."

He said the addition means that no U.S. origin items or non-U.S. origin items containing more than 25 percent U.S. content can be exported or re-exported to the field without a Commerce Department license, which he said was not likely to be issued.

"This goes beyond the current Russia sanctions, which prohibit certain items to be exported to Russia when they are used directly or indirectly in the exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet)," Jacobsen said in an email.

The action builds on those taken since last year by the United States and the European Union after Russia's annexation of Crimea and its use of force in Ukraine.

Last week, the United States imposed additional Russia and Ukraine-related sanctions, adding associates of a billionaire Russian gas trader, Crimean port operators and former Ukrainian officials to its list of those it is penalizing in response to Russia's actions in Ukraine.

(Additional reporting by Yeganeh Torbati in Washington and Ekaterina Golubkova and Maria Tsvetkova in Moscow; Editing by Andrew Hay)

[Aug 06, 2015]US layoffs hit nearly 4-year high in July Challenger

UA wage are declining: Payroll taxes and related withholding are declining 8% in q1 of the last year, 6% in Q2 of the last year and only 2.5% in q3. 70K layof in oil industry were good paing jobs, almmost twise national average. Now they are gone and when they return is unclear.
finance.yahoo.com

U.S. job cuts soared to a nearly four-year high in July as the military announced plans to reduce troop and civilian workforce payrolls, according to outplacement consultancy Challenger, Gray & Christmas.

Employers based in the United States announced 105,696 layoffs last month, the first time monthly reductions exceeded 100,000 since September 2011. A year ago, U.S. companies announced plans to cut 46,887 jobs.

The Challenger report comes a day before the Labor Department's crucial July jobs report. A weak report would make it less likely for the Federal Reserve to announce its first interest rate increase in nine years at its September meeting.

July's reductions bring the year-to-date total to 393,368 cuts, a 34 percent increase from the period last year. The Army accounted for more than half of the total with 57,000 cuts expected over the next two years.

"When the military makes cuts, they tend to be deep," Challenger CEO John A. Challenger said in a statement. "With wars in Afghanistan and Iraq winding down and pressure to cut government spending, the military has been vulnerable to reductions."

The technology sector also contributed to July's announced job reductions, with computer and electronics companies announcing 18,891 layoffs in July.

Microsoft (NASDAQ: MSFT)'s decision to close its Nokia division resulted in 7,800 job losses, while Qualcomm (NASDAQ: QCOM) said it would hand out 4,500 pink slips. Intel (NASDAQ: INTC) also announced it would shed 3,180 jobs.

Read More

  • US private sector jobs fall short in July
  • More Army plans to cut 40,000 troops

[Aug 06, 2015] Crude Carnage Continues As Goldman Warns Storage Is Running Out

"... $58/bbl the 3-year forward oil price is at its lowest in a decade"
.
"...Not only has emerging market growth slowed, but any benefits from lower prices are mostly behind us now, as the benefits only last 6 to 9 months. "
.
"...The oil industry on average is not earning its cost of capital. The distinction between cash costs and total costs, also applies to 'well' versus 'company' returns. While the returns at the well can be economical at prices near $50/bbl, the returns for the company can be deeply underwater due to large-scale investments when prices were at $100/bbl. "
.
"...While the supply and demand for the barrels of oil will likely find a balance between now and sometime in 2016 with an increasing likelihood of this being driven by operational stress, this doesn't mean a sharp rebound in prices will occur quickly as so many other factors will likely weigh on prices. "
.
"... Iran has the potential to add 200 to 400 kb/d of production in 2016 and with significant investment far greater low-cost volumes in 2017 and beyond. Iran, like other OPEC countries, needs the revenues through volume. "
.
"...I can almost foresee a crude [production] liquidation throughout all non OPEC and OPEC nations"
Aug 06, 2015 | Zero Hedge

WTI Crude is back below $45 again this morning - pressing towards 2015 and cycle lows -after Goldman Sachs' Jeffrey Currie warns 'lower for longer' is here to stay, with price risk "substantially skewed to the downside." His reasoning are manifold, as detailed below, but overarching is oversupply (Saudi Arabia has a challenge in Asia as it battles to maintain mkt share, the Russians are coming, andother OPEC members want a bigger slice) and, even more crucially, storage is running out. As Currie concludes, this time it is different. Financial metrics for the oil industry are far worse.

As Goldman Sachs' Jeffrey Currie explains...

1)Although spot oil prices have only retraced to the lows of this winter, forward oil prices, commodity currencies and energy equities/credit (relative to the broad indices) have now all retraced to levels not seen since 2005, erasing a decade of gains. This creates a very different economic environment as the search for a new equilibrium resumes: financial stress is higher, operational stress as defined below is more extreme and costs have declined further due to more productivity gains, a substantially stronger dollar and sharp declines in other commodity prices. These differences reflect not only a further deterioration in fundamentals, but also the financial markets' decreasing confidence in a quick rebound in prices and a recognition that the rebalancing of supply and demand will likely prove to be far more difficult than what was previously priced into the market. This is all in line with our lower-for-longer view. While we maintain our near-term WTI target of $45/bbl, we want to emphasize that the risks remain substantially skewed to the downside, particularly as we enter the shoulder months this autumn.

2) In January, we argued that one of the key tenets of the New Oil Order was that capital is now the new margin of adjustment. As shale has dramatically reduced time-to-build (the time between when producers commit capital and when they get production) from several years to several months, oil prices now need to remain lower for longer to keep capital sidelined and allow the rebalancing process to occur uninterrupted. This spring's rally in prices did prove to be self-defeating. Not only did all the capital markets reopen as oil prices rose, but producers began to redeploy rigs and remained under hedged, which is a reflection that the industry simply had not faced enough pain to create real financial stress that would create change.

3)This time it is different. Financial metrics for the oil industry are far worse. Forward oil prices are c.10% lower (at $58/bbl the 3-year forward oil price is at its lowest in a decade). At the same time leverage for the industry is rising as hedge books are much lighter, with 2016 hedge ratios at 9% versus a five-year average of 25%. Energy equity markets relative to the equity indices are at the lowest level since 2005 and at 3-year lows on an absolute basis. Energy high yield as an OAS spread ratio has also pushed above December 2014 highs. Although financial stress is higher, it alone is still unlikely to create the rebalancing needed due to the unique market structure of the New Oil Order, sidelined capital and declining costs.

4) The market structure of the New Oil Order is unprecedented. In January we showed that high-quality producing assets were on average owned by weak balance sheets while strong balance sheets on average owned the lower-quality producing assets. In other words, the IOCs and some NOCs own most of the higher-cost production while E&Ps, particularly US E&Ps, own much of the lower-cost production. Historically, weak balance sheets typically owned high-cost assets and vice versa, creating a linear relationship between lower prices and financial stress, which historically led to more financially motivated supply cuts as prices dropped. Yes, we have seen some of the few companies with weak balance sheets and high-cost assets run into trouble and go into maintenance mode, but they are not sufficient to shift the market balance. In contrast, the weaker balance sheets with high-quality assets issued equity during the spring, when capital markets were open, to buy more longevity by reducing leverage by half a turn. On net, from a financial perspective, the adjustment process is now likely to take longer.

5) Logistical and storage constraints are also tighter this time. We have argued for decades now that modern energy markets mostly rebalance through operational stress. Operational stress is created when a surplus breaches logistical or storage capacity such that supply can no longer remain above demand. Although perceptions this past April were that the market was near operational stress, it is now far closer. We estimate that the industry has added c.170 million barrels of petroleum to crude and product storage tanks since January and c.50 million barrels to clean and dirty floating storage. With increased operational stress in the system versus six months ago, we now attach a substantially higher probability to this being the margin of adjustment than we did in January. While the probability of blowing out storage this autumn is higher, the market will need to balance or adjust before next spring's turnarounds.

6) Should the market breach logistical and storage capacity constraints, this would kill the storage arbitrage between spot and forward prices and create a significant flattening of the entire forward curve (though front timespreads would likely blowout initially). Historically, once storage capacity is breached across all crude and products, supply must be brought back below demand immediately. To create the rebalancing physical constraints create a collapse in spot prices below cash costs as supply is forced in line with demand (late 1998 is a good example), creating the birth of a new bull market. Breaching crude storage capacity alone is not sufficient, as it simply leads to an increase in refinery runs creating product where storage capacity is available, so both crude and product storage needs to be breached. Further, this only requires breaching capacity in one or two of the key product markets given constraints on refinery product yields. In the current market, the likely candidate is distillate as inventories, particularly outside of the US, are extremely high and margins are weak. As the curve flattens, long-dated oil prices historically have drifted down toward cash prices. As producers face increasing financial stress, covering operating costs and surviving becomes more important than future growth.

7) It is important to separate cash costs from total costs. As oil markets are substantially oversupplied by nearly every measure (see below), the need for new incremental capacity is limited at the margin. New incremental capacity requires prices above 'total' costs, defined as fixed (capex) plus variable/cash costs (opex). However, in an environment where the market only needs to produce from existing capacity, prices only need to cover variable/cash costs to keep existing capacity operating. And herein lies the paradox, for the high-cost, strong balance sheet producer, cash costs are $40-$45/bbl versus total costs closer to $75/bbl. In contrast, the low-cost, weak balance sheet producer faces cash costs near $20/bbl with total costs near $55/bbl. As the high-cost production is mostly oil sands and other costly to shut in conventional oil, the stronger balance sheet producers with this production will resist the costs of shutting in, leaving the easier-to-shut, lower-cost production held by the weaker balance sheets as the more likely candidate. This suggests the volatility and risks to the downside are significant. Furthermore, a stronger US dollar, productivity gains and other commodity price declines only creates more cost deflation, via the negative feedback loop, making cash costs a moving target to the downside.

8) Commodity and emerging market currencies have also erased a decade of gains, reflecting the significant macroeconomic imbalances many of these countries are facing, created in part by the sharp decline in all commodity prices. This not only impacts emerging market demand for oil, Latin American demand in particular, but also lowers the costs to produce oil and commodities in these countries. To illustrate the sensitivity of oil cash costs to the Brazilian real (BRL) and Canadian dollar (CAD), we find that a 10% move in BRL or CAD shifts cash costs by 3% and 5% respectively. The BRL and CAD have weakened year-to-date by 31% and 14% respectively. Further, as we argued late last year, 2015 supply growth in regions facing sharp currency depreciation have been revised up since March by the IEA: Brazil (+24 kb/d), North Sea (+65 kb/d) and Russia (+145 kb/d). It is important to emphasize that markets have never seen such a large appreciation in the US dollar at the same time they have seen such a large surplus in the oil market. While it is unprecedented in the current direction, the weakest US dollar ever recorded on a trade-weighted basis was when oil prices peaked above $147/bbl in July 2008. As we have emphasized in all of our research since 2013, it is the same macro forces working in reverse today that pushed markets to the highs during the previous decade. The crude market didn't go to $147/bbl on oil fundamentals alone, nor would it be collapsing like this on oil fundamentals alone.

9) Nonetheless, fundamentals are weaker today than in 1Q. Global supply is currently up 3.0 million b/d (and averaged up 3.2 million b/d over the past 12 months), driven in large part by a surge in low-cost production from Saudi Arabia, Iraq and Russia. The largest demand growth ever observed was in 2004 when China and the emerging markets kicked off the previous decade's commodity boom and drove a 3.15 million b/d demand growth number. In 2004 the emerging markets had clean balance sheets in strengthening currencies which reflected their good health. Today, that boom decade has been brought to a halt. These countries are facing large macro imbalances and debt. Not only has emerging market growth slowed, but any benefits from lower prices are mostly behind us now, as the benefits only last 6 to 9 months. We estimate that current oversupply is c.2.0 million b/d versus c.1.8 million b/d in 1H15.

10) The oil industry on average is not earning its cost of capital. The distinction between cash costs and total costs, also applies to 'well' versus 'company' returns. While the returns at the well can be economical at prices near $50/bbl, the returns for the company can be deeply underwater due to large-scale investments when prices were at $100/bbl. Even assuming an aggressive company decline rate of 25% over the past year, that would make 75% of the assets legacy production. While commodity markets don't care about legacy fixed costs, and only about today's cost to bring on a marginal barrel, potential equity and credit investors do care about those legacy costs and what they do to company long-run returns. In general, energy companies at present cannot earn their cost of capital over the long-term (defined as the past 50 years). Long-run returns are 10% versus a cost of capital of 12.5%. In other words, they are wealth-destroying propositions from the get go. The reason for this is the industry constantly invests in new capacity during the investment phase of the super cycle, i.e. high and rising prices, and brings on line this new capacity during the exploitation phase of the super cycle, i.e. low and declining prices.

11) While the supply and demand for the barrels of oil will likely find a balance between now and sometime in 2016 with an increasing likelihood of this being driven by operational stress, this doesn't mean a sharp rebound in prices will occur quickly as so many other factors will likely weigh on prices. Not only will the macro forces keep prices under pressure, but historically markets trade near cash costs until new incremental higher-cost capacity is needed (even the IEA has revised 2015 non-OPEC output growth from existing capacity up by 265 kb/d since March).

In addition, low-cost OPEC producers are likely to expand capacity now that they have pushed output to near max utilization. At the same time Iran has the potential to add 200 to 400 kb/d of production in 2016 and with significant investment far greater low-cost volumes in 2017 and beyond. Iran, like other OPEC countries, needs the revenues through volume.

Even Venezuela accepted another $5 billion last week from China to produce oil from older fields. Finally, the capital markets for energy need to be rebalanced through consolidation and capital restructuring. This takes time to achieve. In the previous cycle this took from 1986 to 1998 and ended with the creation of the super majors. Today we expect it to go more quickly, just as we erased a decade in the matter of months, but it will take time.

JustObserving

Goldman always talks their book. How many hundreds of billions worth of oil is Goldman short?

cn13

Goldman predicted $32/barrel crude oil earlier this year right before the market rallied higher by nearly 50% in just a few weeks.

Why would anyone listen to these crooks? They are the worst of the worst.

I Eat Your Dingos

ZH its not like you haven't reported on this several times! [sarc]

Wait for Goldman to catch up. I can almost foresee a crude [production] liquidation throughout all non OPEC and OPEC nations . I wonder how long US shale producers can holdout during this continued crude drop in WTI and Brent


[Aug 03, 2015] Freshwater's Wrong Turn

"... This reminds me of the "we create reality" stuff from the neo-cons. Maybe it's just more infection of Straussian "ethics" at UofC (see Shadia Drury).
Aug 2, 2015 | Economist's View

Paul Krugman follows up on Paul Romer's latest attack on "mathiness":

Freshwater's Wrong Turn (Wonkish): Paul Romer has been writing a series of posts on the problem he calls "mathiness", in which economists write down fairly hard-to-understand mathematical models accompanied by verbal claims that don't actually match what's going on in the math. Most recently, he has been recounting the pushback he's getting from freshwater macro types, who seem him as allying himself with evil people like me — whereas he sees them as having turned away from science toward a legalistic, adversarial form of pleading.
You can guess where I stand on this. But in his latest, he notes some of the freshwater types appealing to their glorious past, claiming that Robert Lucas in particular has a record of intellectual transparency that should insulate him from criticism now. PR replies that Lucas once was like that, but no longer, and asks what happened.
Well, I'm pretty sure I know the answer. ...

It's hard to do an extract capturing all the points, so you'll likely want to read the full post, but in summary:

So what happened to freshwater, I'd argue, is that a movement that started by doing interesting work was corrupted by its early hubris; the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems, and sent them off on the path Paul now finds so troubling.

Recent tweets, email, etc. in response to posts I've done on mathiness reinforce just how unwilling many are to confront their tribalism. In the past, I've blamed the problems in macro on, in part, the sociology within the profession (leading to a less than scientific approach to problems as each side plays the advocacy game) and nothing that has happened lately has altered that view.

Posted by Mark Thoma on Sunday, August 2, 2015 at 11:54 AM in Economics, Macroeconomics, Methodology | Permalink Comments (20)

pgl said...
When I first heard this Lucas island - also known as Friedman-Phelps - story about business cycles being driven by unanticipated inflation, it initially stuck me as interested. Then I thought about the fact that the Rational Expectations version would have trouble explaining why nominal shocks affect real events for more than a few months.

No - it did not take long to realize that this nice neat model could not explain the real world. But what we usually got back then is a large parade of statistical techniques that just confused matters even more.

At which I began to wonder what I was interested in macroeconomics in the first place.

eightnine2718281828mu5 said in reply to pgl...
---
the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems
---

iow, assigning a higher value to their accumulated research (reputation?) than it was actually worth.

sticky prices indeed.

RC AKA Darryl, Ron said in reply to eightnine2718281828mu5...
:<)

[For most of us then:]

"...Freedom's just another word for nothing left to lose
Nothing don't mean nothing honey, if it ain't free
Feeling good was easy, Lord, when he sang the blues
You know, feeling good was good enough for me
Good enough for me and my Bobby McGee..."
ARTIST: Kris Kristofferson
TITLE: Me and Bobby McGee

*

[For most of them then freedom is just a matter of low-regulation low-tax supply side economic policy. TO which end their statistics demand many degrees of "freedom" and they have taken increasingly more extensive "freedoms" with their theories ever since Uncle Milty taught us about "Capitalism and Freedom," why the initial conclusions reached by Keynes were all wrong, and why monetarism was sacred. (barf)

I remember the 1970's well. The terminal punctuation was Reagan's election in 1980. When I was drafted in 1969 I still retained some hope, although much diminished since MLK was murdered a year earlier. By the time I returned from Viet Nam it was just one slap in the face after another. All our (the social movement that happened alongside the hippies) hopes from the 60's were dashed. Blacks were to be "locked" into ghettos by public policy and the working class was to be sacrificed on the alter of corporatism one merger or outsource at a time. ]

anne said...

https://en.wikipedia.org/wiki/Real_business_cycle_theory

Real business cycle theory models (RBC theory) are a class of New classical macroeconomics models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and governments should therefore concentrate on long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.

anne said in reply to anne...
http://krugman.blogs.nytimes.com/2014/02/17/the-trouble-with-being-abstruse-slightly-wonkish/

February 17, 2014

The Trouble With Being Abstruse (Slightly Wonkish)
By Paul Krugman

Political scientists who write clearly for a broader audience are upset * with Nick Kristof ** for saying that political scientists no longer write for a broader audience. I'm not going to get into that fight. I do want to register one point, however: In my field there is indeed a problem with abstruseness, with the many academics who never even try to put their thoughts in plain language.

And what is the nature of that problem? It's not that laypeople don't understand what the academics are saying. It is, instead, that the academics themselves don't understand what they're saying.

Don't get me wrong: I like mathematical modeling. Mathematical modeling is a friend of mine. Math can be a powerful clarifying tool. So, in some cases, can jargon, which used right can both save time and add clarity to the discussion. If I talk about Dixit-Stiglitz preferences, or for that matter the zero lower bound, technically trained economists immediately know whereof I speak, where plain English would both take longer and leave room for misunderstanding.

But it's really important to step away from the math and drop the jargon every once in a while, and not just as a public service. Trying to explain what you're doing intuitively isn't just for the proles; it's an important way to check on yourself, to be sure that your story is at least halfway plausible.

Take real business cycle theory – I know it's a horse I beat a lot, but it's not dead, and it's a prime example within economics of what I have in mind. I still want to spend at least some time explaining that theory to my undergrads, so I've been looking for a simple, intuitive explanation by an RBC theorist of what's going on. And I haven't been able to find one!

I mean, I could do it myself. Strip the story down to basics – make it a steady-state model, not a growth model, and drop the capital accumulation; what you're left with is fluctuations in the marginal productivity of labor, which have a magnified impact on output because workers choose to work less when the technology is bad and more when the technology is good. As I've written before someplace, it's the story of a farmer who stays inside when it's raining and puts in extra hours when the sun is shining.

But the RBC theorists never seem to go there; it's right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don't realize (or at any rate don't admit to themselves) how fundamentally silly the whole thing sounds, how much it's at odds with lived experience.

I once talked to a theorist (not RBC, micro) who said that his criterion for serious economics was stuff that you can't explain to your mother. I would say that if you can't explain it to your mother, or at least to your non-economist friends, there's a good chance that you yourself don't really know what you're doing.

Math is good. Sometimes jargon is good, too. But plain language and simple intuition are important to keep you grounded.

* http://crookedtimber.org/2014/02/16/look-who-nick-kristofs-saving-now/

** http://www.nytimes.com/2014/02/16/opinion/sunday/kristof-professors-we-need-you.html

mulp said in reply to anne...
Freshwater economists, free lunch economists, speak very clearly.

Its too good to be true which makes everyone who wants a free lunch to believe it.

For example, free lunch economists say lower prices are achieved by lower wages, fewer workers, tax cuts, and higher profits, which creates wealth, and the unemployed and working poor spend more using money the will never pay back because of the wealth effect, with mathiness to backup their claims.

What they never do is put them all together like I have done so the words are revealed as nonsense and the math is 1+2-3 = 10 and thus obviously bogus.

Note fresh water economists NEVER state that consumer spending is driven by wage income, as in real wage income, not the income from capital gains which sorta lots like wages but is really rent seeking aka private tax on the savings of workers.

How can lower wages to get lower prices ever result in higher GDP without lots of debt that can never be repaid?

Lafayette said in reply to anne...
TO APE ONE ANOTHER

{PK: with the many academics who never even try to put their thoughts in plain language.}

Ha! I like that!

Tis True. How many times do we see the word "exogenous". Many. How often, "endogenous"? Never.

Anybody for a hard look at the "endogenous" factors causing economic cyclicity? How about the human ability to "ape" one another's consumer habits that builds patterns increasing in intensity - until the "bubble" bursts? ("Cyclicity"? Wow! Nice word? Hardly used! Here we go again!!!;^)

Like lemmings falling off a cliff - cyclic in nature but deadly in consequence.

DeDude said...
When your math is incompatible with the observations from the real world - its the math that's wrong. I don't have a 3 page formula, but just trust me on this one.
GeorgeK said...
You will find the answers to all your questions in this book
http://www.amazon.com/Wiser-Getting-Beyond-Groupthink-Smarter/dp/1422122999/ref=sr_1_1?s=books&ie=UTF8&qid=1438554831&sr=1-1&keywords=Group+think+getting+beyond

bakho said...

Science advances one funeral at a time. - Max Planck

They are too invested in their mistakes to accept criticism.
The next generation of economists will accept that they were wrong.

likbez said...
Before becoming columnist Krugman was mathiness practioner ;-)

reason said...

Anne
"That is, the level of national output necessarily maximizes expected utility"

We could stop right there. Clear nonsense. (You can always INCREASE utility by redistributing from rich to poor - at least with any sensible definition of utility.

See this discussion
http://crookedtimber.org/2015/07/24/utilitarianism-with-the-potentially-left-wing-bits-stripped-out/comment-page-2/

Egmont Kakarot-Handtke said...

Here it comes: the sexit
Comment on 'Freshwater's Wrong Turn'

There is political economics and theoretical economics. In political economics it suffices to tell a plausible story, in theoretical economics scientific standards are observed. Because economists since Adam Smith pursued these two hares simultaneously, coherence got eventually lost. As a result, economists never developed a theory about how the market economy works that satisfies the scientific criteria of material and formal consistency (Klant, 1994, p. 31).

Economics is a failed science. Therefore, Paul Romer is in for a second big surprise. Until now he thought: "As you would expect from an economist, the normative assertion in 'X is wrong because it undermines the scientific method' is based on what I thought would be a shared premise ..."

Now he learns: "In conversations with economists who are sympathetic to the freshwater economists ... it has become clear that freshwater economists do not share this premise. What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form 'we ought to behave like scientists'."

What is the difference between political and theoretical economics?

"A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent." (Haack, 1997, p. 1)

The fact of the matter is that theoretical economics has from the very beginning been hijacked by the agenda pushers of political economics. Smith and Mill were agenda pushers against feudalism. Marx and Keynes were agenda pushers and so were Hayek and Friedman. However, all these economists insisted that they were doing science. This has changed now: "... the evidence ... suggests that freshwater economists differ sharply from other economists."

The freshwater economists simply state the obvious, that is, that they are committed to politics and not to science. This marks the beginning of a voluntary scientific exit (sexit for short). What Romer has not yet realized is that most saltwater economists have to leave through the same door.

Egmont Kakarot-Handtke

References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_scientism_and_anti-science_in_the_age_of_preposterism.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

lagarita said...

This reminds me of the "we create reality" stuff from the neo-cons. Maybe it's just more infection of Straussian "ethics" at UofC (see Shadia Drury).

Lafayette said in reply to lagarita...

APART FROM BERNIE

{"we create reality"}

Their entire existence revolves around such vapid, empty simplisms because they have no theoretical substance to their politics. It is either their lack of intelligence or their selfish perfidy that reduces their theoretical foundation of political views.

They are hooked on the fallacy of wealth-creation as the sole credible goal/consequence of an economy. Piketty put that thought to shame in his work on Income Disparity, as did Domhoff on Wealth Disparity. The statistical facts (ie., the "numbers") could not be more clear.

What should bother us most is not only the generation of enormous wealth, and the influence it has on a moneyed electoral system, but the dynastic tendency of such riches. The Koch Bros are already the first generation - will we be contending with the political antics of second, or third, or fourth generations?

The last time historically that happened in Europe, called Inheritance Aristocracy, it all came apart in bloodshed.

And yet the better notion of Social Justice, which supposes that all humans are created with the equal right to fairness and equitability, has taken decades upon decades to come to the fore.

It is still no where near dominating political thought in America. Apart from Bernie, that is ...

Lafayette said...
LOOK IN THE MIRROR

{the braggadocio and trash-talking of the 1970s}

Of the 1970s?

This type is still the mainstay of American parlance, whether political or business or just blogging. The aggressiveness of the language employed knows no bounds.

The intent in commentary, whether verbal or written, whether political or otherwise, is overly combative and largely "ad hominem". The real subject of controversy is lost in the personalization of the rebuttals. The issues that largely determine the political consensus thus become secondary and confused.

Really 'n truly puerile ... like the children they were and they remain, particularly in politics. Propelled by one and only one goal - to win, win, win.

And without politics or politicians, what is a democracy? It's an autocracy. With them, its a manifested willfulness by a moneyed few to dominate electoral outcomes - and we are pawns in the game.

My point? As an electorate, the people we chose to represent us personify as well the kind of people we are. So, complaining about the politicos in LaLaLand on the Potomac is useless.

Seeking someone to blame? Look in the mirror ...

[Aug 02, 2015]Shale Gas Reality Check

Key Conclusions


•The EIA's Annual Energy Outlook 2015 is even more optimistic than the AEO2014, which we showed in Drilling Deeper suffered from a great deal of questionable optimism. The AEO2015 reference case projection of total shale gas production from 2014 through 2040 is 9%, or 36 tcf, greater than AEO2014. Cumulative production from the major plays in AEO2015, which account for 80% of this production, is 50% higher than Hughes's "Most Likely" case in Drilling Deeper, and the projected production rate in 2040 is 170% greater. In AEO2015, the EIA is counting much more on unnamed plays or ones—like the Utica Shale—that aren't as yet producing very much shale gas.


•The only way to meet projections for most of these plays would be for production to ramp up massively years from now. But because the best wells are drilled first, and decline rates are so steep, this means that the EIA is likely counting on new technologies that aren't yet proven or even developed.


•It's very difficult to see how unknown new technologies would be brought online, and be sufficient to overcome poorer and poorer quality drilling locations, without the price of natural gas going up well beyond what the EIA forecasts.


•As it has acknowledged, the EIA's track record in estimating resources and projecting future production and prices has historically been poor. Admittedly, forecasting such things is very challenging, especially as it relates to shifting economic and technological realities. But the below-ground fundamentals— the geology of these plays and how well they are understood—don't change wildly from year to year. And yet the AEO2015 and AEO2014 reference cases have major differences between them; production rates have been revised both down and up by amounts exceeding 40% in some plays.

Financial*/ /secular_stagnation. /energy. Fighting_russo*/

[Aug 02, 2015]Peak Oil Notes - July 30

The Turks have taken out after the Kurds again by intensive bombing of Kurdish military units in Turkey and Iraq. The Kurds have retaliated by blowing up the gas pipeline into Turkey from Iran and the line that was exporting oil from northern Iraq to the export terminal at Ceyhan, Turkey. The revival of open hostilities between Ankara and the Kurds almost certainly has many important ramifications for the future of the region.

Russia's economy has taken another a big hit from falling oil prices. The ruble was back above 60 to the dollar for a while on Tuesday before the government stepped in to stop the slide. If oil prices continue to fall, Moscow will be in a lot of economic trouble before the year is out.

Debt Slaves: 7 Out Of 10 Americans Believe That Debt "Is A Necessity In Their Lives"

07/30/2015 | zerohedge.com
Could you live without debt? Most Americans say that they cannot. According to a brand new Pew survey, approximately 7 out of every 10 Americans believe that "debt is a necessity in their lives", and approximately 8 out of every 10 Americans actually have debt right now. Most of us like to think that "someday" we will get out of the hole and quit being debt slaves, but very few of us ever actually accomplish this. That is because the entire system is designed to trap us in debt before we even get out into the "real world" and keep us in debt until we die. Sadly, most Americans don't even realize what is being done to them.

In America today, debt is considered to be just part of normal life. We go into debt to go to college, we go into debt to buy a vehicle, we go into debt to buy a home, and we are constantly using our credit cards to buy the things that we think we need.

As a result, this generation of Americans is absolutely swimming in debt. The following are some of the findings of the Pew survey that I mentioned above…

*"8 in 10 Americans have debt, with mortgages the most common liability."

*"Although younger generations of Americans are the most likely to have debt (89 percent of Gen Xers and 86 percent of millennials do), older generations are increasingly carrying debt into retirement."

*"7 in 10 Americans said debt is a necessity in their lives, even though they prefer not to have it."

Most of us wish that we didn't have any debt, but we have bought into the lie that it is a necessary part of life in America in the 21st century.

It has been estimated that 43 percent of all American households spend more money than they make each month, and U.S. households are more than 11 trillion dollars in debt at this point.

When it comes to government debt, that is easy for us to blame on someone else, but all of this household debt is undoubtedly something that we have done to ourselves.

It all starts at a very early age for most of us. When we are still in high school, we are endlessly told about how important a college education is. All of the authority figures in our lives insist that we should just try to get into the best school that we possibly can and to not even worry about how much it will cost.

So many of us go into staggering amounts of debt before we even get out into the working world. We had faith that the "good jobs" that were being promised to us would be there when we graduated.

Unfortunately, in this day and age those "good jobs" end up being a mirage more often than not.

But whether or not we can find a good job, we still have to pay off all that debt.

According to new data that was recently released, the total amount of student loan debt in the United States has risen to a grand total 1.2 trillion dollars. If you can believe it, that total has more than doubled over the past decade.

Right now, there are approximately 40 million Americans that are paying off student loan debt. For many of them, they will keep making payments on this debt until they are senior citizens.

Another way that they get you while you are still in school is with credit card debt.

I got my first credit card while I was in college, and nobody ever taught me about the potential dangers.

Today, the average U.S. household that has at least one credit card has approximately $15,950 in credit card debt.

So let's say that you have that much credit card debt and you are paying an annual interest rate of 17 percent. If you only pay the minimum payment each month, it will take you 229 months to pay your credit card off, and during that time you will have paid $13,505.82 in interest charges.

In other words, you will almost have paid twice as much for everything that you originally bought with your credit card by the time it is all said and done.

This is why banks love to give you credit cards. If they can get back nearly twice as much money as they originally give you, they get rich and you get poor.

Most of us get loaded down with even more debt when we go to buy a vehicle. Instead of saving up and getting what we can afford, many of us end up getting the largest loans that we can qualify for.

In a previous article, I discussed the fact that the average auto loan at signing in America today is approximately $27,000. In order to get the monthly payments down to a level where we can afford them, many of these auto loans are now being stretched out for six or seven years. In fact, the number of auto loans that exceed 72 months has hit at an all-time high of 29.5 percent.

It is the same thing with home loans.

In the old days, it was extremely rare for a mortgage to be stretched over 30 years, but today that is pretty much the standard.

Sadly, most people don't understand how much money this is costing them.

If you take out a $300,000 mortgage at 3.92 percent and stretch it over 30 years, you will end up paying back a grand total of $510,640.

In other words, you will pay for two houses by the time you are done.

Yes, we all need somewhere to live, and there are definitely negatives to renting as well. But it is very important that we all understand what is being done to us.

And I haven't even discussed one of the most insidious forms of debt yet.

Have you noticed that most doctors and most hospitals will never tell you how much something is going to cost in advance?

They get us when we are at our most vulnerable. When there is something wrong with us physically, we are often desperate to get help. So we don't ask too many questions and we just go along with whatever they say.

But then later we get the bill and we are often completely shocked by what they have charged us.

If you are completely unethical, it is a great business model. People that are extremely desperate and needy come to you and you don't even have to tell them how much your services are going to cost. And then once they leave, you send them an absolutely outrageous bill for whatever you feel like charging.

Frankly, I don't know how a lot of people working in the medical field live with themselves. In their extreme greed, they are ruining the lives of millions of ordinary American families.

One very disturbing study found that approximately 41 percent of all working age Americans either currently have medical bill problems or are paying off medical debt. And collection agencies seek to collect unpaid medical bills from about 30 million of us each and every year.

Most of us will spend our entire lives paying off debt.

That is why we are called debt slaves – our hard work makes others extremely wealthy.

ebworthen

All by design. The great lie is that you should "work hard and be responsible".

Yeah? Why? Because it feeds the beast in Wall Street and Washington? The bailouts and free money for the banks/corporations/insurers wiped that idea off the slate.

Give me sound money and start producing again while offering me interest on my savings and we can start talking about responsibility. The example set by Wall Street and Washington is that debt is good, so what the fuck do they expect regular folks to do, keep carrying their bags?

Fuck you assholes, to Hell and back on a bed of nails.

European American

I must confess. I declared bankruptcy back in the late 80's. Not proud of that time in my life but it was legal and it literally saved me. Since then, "If I can't buy that product/service with the cash in my wallet, then I wasn't suppose to have it." has been my philosophy for the last 25 years, and even though the State stills owns my real estate, more or less (various taxes), I'm basically free. Debt is a killer of ones mental, physical and emotional immune system. I highly recommend avoiding IT at all costs. Debit card is the only plastic money in my wallet, along with some fiat currency. My bank is the color of Gold and SIlver.

Ignorance is bliss

In General People are stupid

https://www.youtube.com/watch?v=k0he0cqHH20

yogibear

And people wonder how Hitler took over in Germany.

People in the US are now more gullible than the Germans in the 20's.

Tough to keep liberty.

All the US needs is a full-fledged tyrant.

Hugh G Rection

Speaking of gullible, take a look in the mirror.

http://thegreateststorynevertold.tv/

chrsn

Step one: stop tying in the quantity of your possessions with your self-worth. That shift in mindset alone will keep a lot of debt out of your life.

toady

This is one of the few topics around here that actually makes me feel good. 100% debt free for last ten years.

Paying off everything off ahead of time, cutting down the interest, was my primary goal for years.

Them damn bankers won't squeeze another penny out of me!

NoDebt

Welcome to the club. Been a member for about that long myself.

I knew I'd like the financial freedom. I knew I'd like how much money it saved me.

What it took a few years debt-free to understand was that in a world measured in debt, I would become invisible. I can not be viewed using their technology any more. I'm a steath bomber with glider wings and a zero coefficient of drag.

LightSpender

If the 100th monkey effect applies here, we will be part of an awakened populace that watches the ctrl+alt+del of USD and the resultant house of cards.

Korea98

As we know debt is not always a bad thing. Sometimes it is worth becoming an indentured servent for a payout later.

We take out a loan, or at least most of us, for a house. This helps us build up equity instead of wasting it all on rent every month. By retirement people should own their home outright and not have to pay rent during their retirement. Most smart people are even able to downsize and stick some money in their savings.

A large percentage of people take out a loan for school. We have all read articled of idiots getting a 4 year degree in women's studies at a fancy private school, having a loan of $120,000, and never being able to pay it off. But the smart people who go to school maybe a state school, for a degree that is marketable do better than those without a degree.

A reliable car can help us save time, thus money, getting to and from work and other places. The key buying something basic and reliable and not a brand new sports car.

I'm glad we have the ability to borrow money. It has helped me immensily in my own personal life. And I would say, I would be worse off without it.

Treason Season
NoDebt

Ugh. You all know my screen name, what it stands for and my opinions on debt. Posting up on this subject borders on the tedious for me, but for those who haven't heard it yet, here it is....

If you have a valid financial reason for going into debt, that is to say you have a well-considered goal for your debt exposure, debt is not necessarily bad. For instance, if you are going to be a professional photographer you might need to buy some cameras and photography equipment that will be necessary for you to exist in that world. You are INVESTING in yourself. Nothing wrong with using debt for that if you can't pay as you go straight out of pocket.

Further down the totem pole is something like buying a house. A collateralized obligation. One you have the USE of the asset while you pay it off. I'm less enthusiastic about this sort of stuff but if it's a necessity (like having a place to live) I can't fault you for doing it. BUT IT WILL NEVER MAKE YOU MORE PRODUCTIVE OR INCREASE YOUR EARNING POWER. You feeling me on this? The key here is to pay that bitch down as fast as possible and minimize your interest expense because it's a pure dead-weight loss to you.

ANYTHING else, you don't need to go into debt over. So just don't. Better to do without than go into debt over anything beyond this point.

There really are very few exceptions to these simple rules (unless you are a government in which case everything is an excuse to go into debt since you're just spending other people's money).

[Aug 01, 2015] Paul Romer: Freshwater Feedback on Mathiness

economistsview.typepad.com

More from Paul Romer:

Freshwater Feedback Part 1: "Everybody does it": You can boil my claim about mathiness down to two assertions:

1. Economist N did X.
2. X is wrong because it undermines the scientific method.

#1 is a positive assertion, a statement about "what is …"#2 is a normative assertion, a statement about "what ought …" As you would expect from an economist, the normative assertion in #2 is based on what I thought would be a shared premise: that the scientific method is a better way to determine what is true about economic activity than any alternative method, and that knowing what is true is valuable.

In conversations with economists who are sympathetic to the freshwater economists I singled out for criticism in my AEA paper on mathiness, it has become clear that freshwater economists do not share this premise. What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form "we ought to behave like scientists."

In a series of three posts that summarize what I have learned since publishing that paper, I will try to stick to positive assertions, that is assertions about the facts, concerning this difference between the premises that freshwater economists take for granted and the premises that I and other economists take for granted.

In my conversations, the freshwater sympathizers generally have not disagreed with my characterization of the facts in assertion #1–that specific freshwater economists did X. In their response, two themes recur:

a) Yes, but everybody does X; that is how the adversarial method works.
b) By selectively expressing disapproval of this behavior by the freshwater economists that you name, you, Paul, are doing something wrong because you are helping "those guys."

In the rest of this post, I'll address response a). In a subsequent post, I'll address response b). Then in a third post, I'll observe that in my AEA paper, I also criticized a paper by Piketty and Zucman, who are not freshwater economists. The response I heard back from them was very different from the response from the freshwater economists. In short, Piketty and Zucman disagreed with my statement that they did X, but they did not dispute my assertion that X would be wrong because it would be a violation of the scientific method.

Together, the evidence I summarize in these three posts suggests that freshwater economists differ sharply from other economists. This evidence strengthens my belief that the fundamental divide here is between the norms of political discourse and the norms of scientific discourse. Lawyers and politicians both engage in a version of the adversarial method, but they differ in another crucial way. In the suggestive terminology introduced by Jon Haidt in his book The Righteous Mind, lawyers are selfish, but politicians are groupish. What is distinctive about the freshwater economists is that their groupishness depends on a narrow definition of group that sharply separates them from all other economists. One unfortunate result of this narrow groupishness may be that the freshwater economists do not know the facts about how most economists actually behave. ...[continue]...

Posted by on Friday, July 31, 2015 at 03:33 PM in Economics, Methodology, Politics | Permalink Comments (9)

Gibbon said...

""a) Yes, but everybody does X; that is how the adversarial method works.""

This is how law works not science. The take away is the fresh water economists mission is not science, their mission is political.

RueTheDay said...
"What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form 'we ought to behave like scientists.' "

That's mind boggling. It's precisely how you end up with Ptolemaic Epicycles, Phlogiston Theory, Aether Theory, etc.

As Keynes said, "starting with a mistake, a remorseless logician can end up in Bedlam".

If economists are going to claim that theirs is an a prior method, with no need for empiricism, no need to attempt falsification, then they ought to abandon any pretense of relevance to the real world and certainly need to acknowledge they have no business providing policy prescriptions.

Fred Fnord said...

I think Romer is being rather too nice. It is clear that saltwater economists, however flawed (and oh lord are they ever), view their job as trying to find a way to describe and predict the behavior of economies in the real world. Thus, if you know something about your model which makes it useless for this job, then hiding it is not just underhanded but is ridiculous. Which is to say, 'the purpose of science [and economics] is to accurately describe the world so that we might come to understand it and manipulate it.'

Freshwater economists seem to think, as far as I can tell, that the purpose of science is to make neat widgets, and that any theory you come up with that seems reasonable and points to a possible way of making neat widgets is as good as any other, and you can just shove the universe into your mold and saw off all the bits that don't match.

The Bush administration had a quote about it: basically, 'you people on the left want to measure reality and figure out how to cope with it, whereas we on the right will just forge ahead and create it.' In other words, understanding is not required in order to achieve your goals. This is not true for any goal more complex than nailing two boards together, but it doesn't stop them from laying waste to everything, and then pointing at themselves, blinking, and saying, 'Who, ME?' every time you call them out at it.

RogerFox said...

Enthralling - but then cat fights among competing peddlers of different brands of snake-oil so often are.

Matt Young said...

Paul omer me this:
"The market clearing condition with a mark-up m ≥ 1 that could arise
from a tax or a monopoly markup is
pD = m pS,"

The m, it is a ratio, here he has it asn an ratio of prices. Make that ratio the set size in supply over the set size customers in demand. WSe get a mere change of variables. That ratio is compression,S/D= R, or an encoding of demand by supply, its inverse is a decoding of demand oer supply. Assume you are doing a probability transform in S and D.

We want F(S,D) = constant, we get a free constant in every theorem! Why is compession R= (S/D) and expansion a big deal? It tell us how accurate the agents make bipartitie graphs. So our free constant is a parameter to a probability distribution. The market must be a partitie graph adjusted in real time. That seems to be the deal, the endless desire to color everything red or blue. The probability distribution is the number of bipartite links that are short or surplus. Nature always makes two color separations. Unti they take Professor Higgs class.

Matt Young said in reply to Matt Young...

We can narrow our choices. Romer wants a mapping from R^2 -> R, so we make D^2 a parameter in some yet to be defined probability distribution, the the same for S^2. Also, restrict the choices on S and D to integers. Then ask what the distributions on S and D might look like.
Lee A. Arnold said...
I see three different things that might explain Paul Romer's basic complaint, and they are all going on, at once:

1. Many economists work within the individual-methodological assumption of "rationality", and thus believe that individual preferences are paramount. (Romer himself takes this assumption as the baseline in his approach to the question of how and why it is that innovation is adopted in some locations and not others.) Thus the economists who are less artful and subtle than he, are usually given to suppose that the best "natural" way to get to where we all want to be (collectively speaking), is by defending and promoting the "market system" against any and all hindrances or even alleviations by government institutions.

2. Political scientists have identified a pervasive social-cognitive bias, which combines individual risk perception with "in-group" validation, and which is intimately involved in individual emotions, preferences, and existential fears -- and to which about half the population, including about half of the economists, falls prey. It is prevalent on the political Left and Right, each in its own way, but because it is involved with justifications for the status quo of the economic system, the Right currently exhibits more outbursts, because that status quo is evidently not working for everybody, as once was advertised, and indeed most people perceive a crisis. This bias has very deep emotional and cognitive correlates, and so is not easy to get out of, even by psychotherapy. Here is a short collation of its characteristics, taken from solid research literature in political science:
http://crookedtimber.org/2014/07/17/condemned-by-history-crosspost/#comment-543475

3. Romer has already spoken against the following view, but this does not excuse us from its consideration: it is possible that the economy, being a complex system, is beyond complete description by mathematics or even by computer modeling. Or even beyond much useful partial description by math. (This would follow from formal limitations in mathematics as well as cognitive or epistemological limitations in human observers.) If that is so, it would lead us to the situation which we do in fact observe: where economic science, as presently formulated, never finds adequate solutions, and never finds agreed closure upon policy formulations. If this is the case, then we would expect that, for many economists, "behaving like scientists" will naturally segue to "political discourse" -- in pursuit of, or driven by, the imperatives in my #1 and #2.

DeDude said...

Excellent observations.

a) Is basically saying: "its OK to cheat if your "opponent" is doing it.
b) Makes the goal one of fighting the "opponents"

Both are turning economics into tribal warfare, and that is a bad idea.

The "fighting" in economics should be a "fight" to discover the truth (rather than to defend a specific narrative). In that "fight" there should be no "us" and "them" because we are all on the same team (of truth), and nobody should want to cheat, because cheating defeat the purpose.

[Jul 31, 2015] Dentists and Skin in the Game

"...Dental patients who live close to an international border form the majority of dental health travelers. US citizens living in Arizona, California, and Texas can easily cross the border into Mexico, an hour's drive can save them thousands of dollars in dental costs."
.
"...This tells you right away that health care can't be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can't just trust insurance companies either — they're not in business for their health, or yours."
.
"...I used to have dental insurance through work, and looked at the IEEE plan when I lost that, but decided to go cash instead. Have been on a cash basis for the last 10 years. Prefer it that way, insurance was always pretty much a wash."
.
"...By casting " routine expenses like visits "(prevention) as undesirable the racket decreases prevention thus increases the lucrative intervention. The surgery plus the pain for the victim. Look! Prevention is the most cost effective item that GGG can push at us."
Paul Krugman:

Dentists and Skin in the Game: Wonkblog has a post inspired by the dentist who paid a lot of money to shoot Cecil the lion, asking why he — and dentists in general — make so much money. Interesting stuff; I've never really thought about the economics of dental care.

But once you do focus on that issue, it turns out to have an important implication — namely, that the ruling theory behind conservative notions of health reform is completely wrong.

For many years conservatives have insisted that the problem with health costs is that we don't treat health care like an ordinary consumer good; people have insurance, which means that they don't have "skin in the game" that gives them an incentive to watch costs. So what we need is "consumer-driven" health care, in which insurers no longer pay for routine expenses like visits to the doctor's office, and in which everyone shops around for the best deals. ...

As it turns out, many fewer people have dental insurance than have general medical insurance; even where there is insurance, it typically leaves a lot of skin in the game. But dental costs have risen just as fast as overall health spending...

Posted by Mark Thoma on Thursday, July 30, 2015 at 10:41 AM in Economics, Health Care, Market Failure | Permalink Comments (17)

anne:
http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/

July 25, 2009

Why Markets Can't Cure Healthcare
By Paul Krugman

Judging both from comments on this blog and from some of my mail, a significant number of Americans believe that the answer to our health care problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory.

Not so. One of the most influential economic papers of the postwar era was Kenneth Arrow's "Uncertainty and the Welfare Economics of Health Care," * which demonstrated — decisively, I and many others believe — that health care can't be marketed like bread or TVs. Let me offer my own version of Arrow's argument.

There are two strongly distinctive aspects of health care. One is that you don't know when or whether you'll need care — but if you do, the care can be extremely expensive. The big bucks are in triple coronary bypass surgery, not routine visits to the doctor's office; and very, very few people can afford to pay major medical costs out of pocket.

This tells you right away that health care can't be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can't just trust insurance companies either — they're not in business for their health, or yours.

This problem is made worse by the fact that actually paying for your health care is a loss from an insurers' point of view — they actually refer to it as "medical costs." This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there's a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.

The second thing about health care is that it's complicated, and you can't rely on experience or comparison shopping. ("I hear they've got a real deal on stents over at St. Mary's!") That's why doctors are supposed to follow an ethical code, why we expect more from them than from bakers or grocery store owners.

You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don't trust them — they're profit-making institutions, and your treatment is their cost.

Between those two factors, health care just doesn't work as a standard market story.

All of this doesn't necessarily mean that socialized medicine, or even single-payer, is the only way to go. There are a number of successful healthcare systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn't work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.

* http://www.who.int/bulletin/volumes/82/2/PHCBP.pdf

pgl:
Krugman is right as far as he goes but he has buried the lead from this excellent discussion:

http://www.washingtonpost.com/news/wonkblog/wp/2015/07/29/why-dentists-are-so-darn-rich/

There is an American Dental Association just like there is an American Medical Association and their game is the same. Limit the competition to drive dentist salaries higher. Economists from Dean Baker to Greg Mankiw and Milton Friedman agree. End these cartels and allow competition for doctors and for dentists.

DrDick -> pgl...
That was my thought as well, and you can add the ABA to that list. The problem with all of those markets is that it is difficult to impossible for consumers to get accurate information on local prices and relative quality of services provided.
JohnH:
Horrified at outrageous dental expenses, I tried to find a cheaper dentist...unsuccessfully. They all charge the same. So much for competition in a free market. Somehow they rigged the market.

Worse, insurance companies pay far less for the same procedure than uninsured, so it is the uninsured who make dentists profitable.

pgl -> JohnH...
"Somehow they rigged the market". Yep - the American Dental Association is a lot like the American Medical Association. The WaPo blog was an excellent discussion.
anne -> JohnH...
Can dental insurance be bought, say through a professional organization or an AARP-like non-profit? AARP by the way enrolls adults at 50.
Observer -> anne...
Yes, here's an example from IEEE ...

http://www.ieeeinsurance.com/us/PersonalInsurance/DentalInsurancePlan.aspx

I used to have dental insurance through work, and looked at the IEEE plan when I lost that, but decided to go cash instead. Have been on a cash basis for the last 10 years. Prefer it that way, insurance was always pretty much a wash.

Very competitive market, lots of dentists running adds in my area.

My single practitioner dentist provides a ten percent cash discount, written quotes on any non-routine work, and calls that evening to follow up an any work beyond routine cleaning. Excellent service, on time, up to date technology, and I'd say the best managed medical provider office I've ever seen.

For routine medical care, its a great model, and I wish my other providers operated the same way.

anne -> Observer...
Nice description.
JohnH -> Observer...
Agree. Insurance is pretty much a wash. Anything not routine that you would want insured has big co-pays.
RC AKA Darryl, Ron -> JohnH...
"...insurance companies pay far less for the same procedure than uninsured, so it is the uninsured who make dentists profitable."

[That is certainly a big part of it. The family dentist does not make nearly so much per hour as any of the specialists, periodontist, endodontist, oral surgeon, or orthodontist. One dentist may run an office with up to a half dozen dental hygienists.]

bakho -> JohnH...
Dental patients who live close to an international border form the majority of dental health travelers. US citizens living in Arizona, California, and Texas can easily cross the border into Mexico, an hour's drive can save them thousands of dollars in dental costs. Canadians and US citizens along the East Coast, from Maine to Florida, are flocking to Costa Rica. The dental clinics of San José are only a short hop from Miami, and the dentistry is generally excellent, at costs 50-80 percent lower than those in the US. Three to check out in San José are Advance Dental Clinic, Nova Dental, and Meza Dental Clinic.
Europeans find similar advantages in hopping over to Hungary, where they are spoiled for choice among high-quality, low-cost dental clinics. Most people don't realize that Hungary boasts more dentists per capita than any other country, and some of the best and least expensive clinics are found in rural areas. For example, the small town of Mosonmagyaróvár near the Austrian border is home to more than 160 dental offices! While it's economical for Europeans to travel to Hungary for a dental checkup or a cleaning, most North Americans who travel to Hungary are looking for more extensive care, including cosmetic oral surgeries, full-mouth restorations, and implants. Such work can be had at less than half the US price, including travel and accommodations.

http://www.patientsbeyondborders.com/procedure/dentistry

JohnH -> bakho...
I have a friend who picks a Central American country and shows up unannounced at a dentist to have a root canal, etc. He can't afford US care and so far has had no problems. I'm not that adventurous.

Now he's cycling by himself in Cuba...

Whee Telephone:
"insurers no longer pay for routine expenses like visits"
~~Paul Krugman~

The *come on* from the prostitutes on 42nd street is mild, but the *come on* from the protection racket called "health insurance" is purified evil. Do you see the trap they set?

Obviously GGG can pay insurance racketeers for the preventive procedures or for the surgical intervention. Paying for prevention increase prevention utilization thus decreases demand for surgery. Got it?

By casting " routine expenses like visits "(prevention) as undesirable the racket decreases prevention thus increases the lucrative intervention. The surgery plus the pain for the victim. Look!

Prevention is the most cost effective item that GGG can push at us. By contrast, when GGG pays directly to surgeon what happens to supply/price/demand

? Do you see what happens? Doesn't increase resource. Doesn't decrease pain. Merely raises the price of surgery plus the wealth of the surgeon. Now do you see why all surgeons are Socialists, Communists, Democrats?

Think, My People!

Think!

Second Best:
Veblen theory of conspicuous consumption, dentists who pay to shoot lions like fish in a barrel mount them in their office to prove their manhood comes at a price they can afford.
Lyle:
For more expensive dental work dental tourism makes sense. If you can ID a good dentist in say Costa Rica you might get the trip and the dental work for the price of the dental work in the US. In particular for implants and the like. Unless the dental guild has rules against this. (How do dental prices in Europe compare and does European insurance include dental work?)

[Jul 31, 2015] Paul Krugman China's Naked Emperors

Jul 31, 2015 | Economist's View

What can we learn from the response of the Chinese government to the problems in China's stock market?: