Today, we have bad news and good news. The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.
The bad news: It will be much worse than that. On Monday, the Dow rose another 43 points. Gold seems to be working its way back to the $1,200 level, where it feels most comfortable.
“A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.
Newspaper from October 24 1929, a.k.a. “Black Thursday” – at this point, the panic had just begun with the market losing 11% in one day. On the next two trading days (Friday and Saturday – at the time, the market was open on Saturdays) the market rebounded slightly, then came “Black Monday” and “Black Tuesday”, which erased all doubt about the seriousness of the situation
Old People Are Dead Wood
First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US. As we’ve described many times, as people get older, they change. They stop producing and begin consuming.
They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.
Nor are they the green and growing timber of a healthy economy; instead, they become dead wood. There’s nothing wrong with growing old.
There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes – except for the undertakers.
Mr. Hislop is looking forward to booming business
Photo credit: State Library of Queensland
The Cure for Debt? More Debt!
Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.
By 2007, US consumers reached what was probably “peak debt.” That is, they couldn’t continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.
The feds reacted, as they always do… inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.
Central banks created more money and credit – trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending.
Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.
In order to revive the credit creation machinery, the Fed has monetized incredible amounts of debt, via Saint Louis Federal Reserve Research. With the end of QE 3, its balance sheet has begun to subtly decline … click to enlarge.
The Cronies Are in Control
Third, the developed economies have been zombified. The US, for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country – Canada – even makes the top 10.
How to get ahead in the world of today….
Cartoon by Stahler
Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.
Leading industries – heavily controlled and regulated, including defense, education, health and finance – are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.
Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.
How it all works in crony heaven – until it doesn’t anymore – via bastiatinstitute.org
The Solution Begins When Markets Crack
Typically, these problems – too much debt, too many zombies, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.
Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Legendary asset manager Bill Gross comments:
“When does our credit-based financial system sputter/break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.”
When that happens, problems begin to take care of themselves, in one of two ways…
A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.
Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade. Either way, the slate is wiped clean and a new cycle can begin. But what rag will clean the slate now? Stay tuned…
You knew there would eventually be a picture of the living dead.
BobInget on Wed, 6th May 2015 9:27 am
Once $100. oil is the norm, (this summer) employment in the energy arena will flourish.
More to the point, we get carried, kicking and screaming into more and more natural gas , solar and wind applications. When oil gets a little more ‘comfortable’ over $75. renewable energy ‘suddenly’ comes back to popularity.
Transportation, agriculture, energy, three horses
hitched together pulling humanities carriage.
Everyone now believes that.
A forth element, water, namely water shortages
will be another prime ,mover for the energy sector
for the coming years. Why?
Desalination, never mind the method, requires
lots of fuel. Wind (turbines) and solar combines with natural gas (feed stock) can provide all that energy.
Natural gas, wind, PV solar, the old and ‘new’ horses on the team.
Desal water needs to be transported. Steel and plastics will be needed. Both have big energy components. Obviously, labor (jobs) figures in.
Pipeline jobs are endless. Most existing gas and urban water pipes are old and leaky. More material and jobs.
We can find the money if we quit trying to ‘find oil’
with HellFire Missiles.
BobInget on Wed, 6th May 2015 9:37 am
Bullish EIA report:
Summary of Weekly Petroleum Data for the Week Ending May 1, 2015
U.S. crude oil refinery inputs averaged over 16.3 million barrels per day during the week
ending May 1, 2015, 247,000 barrels per day more than the previous week’s average.
Refineries operated at 93.0% of their operable capacity last week. Gasoline production
decreased last week, averaging about 9.2 million barrels per day. Distillate fuel
production increased last week, averaging 5.0 million barrels per day.
U.S. crude oil imports averaged over 6.5 million barrels per day last week, down by
905,000 barrels per day from the previous week. Over the last four weeks, crude oil
imports averaged over 7.2 million barrels per day, 5.0% below the same four-week period
last year. Total motor gasoline imports (including both finished gasoline and gasoline
blending components) last week averaged 626,000 barrels per day. Distillate fuel imports
averaged 112,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
Reserve) decreased by 3.9 million barrels from the previous week. At 487.0 million
barrels, U.S. crude oil inventories are at the highest level for this time of year in at least
the last 80 years.
Total motor gasoline inventories increased by 0.4 million barrels last
week, and are above the upper limit of the average range. Finished gasoline inventories
decreased while blending components inventories increased last week. Distillate fuel
inventories increased by 1.5 million barrels last week and are in the middle of the average
range for this time of year. Propane/propylene inventories rose 1.8 million barrels last
week and are well above the upper limit of the average range. Total commercial
petroleum inventories increased by 6.6 million barrels last week.
Total products supplied over the last four-week period averaged 19.0 million barrels per
day, up by 2.8% from the same period last year. Over the last four weeks, motor gasoline
product supplied averaged 9.0 million barrels per day, up by 3.9% from the same period
last year. Distillate fuel product supplied averaged 3.9 million barrels per day over the
last four weeks, down by 4.3% from the same period last year. Jet fuel product supplied
is up 12.4% compared to the same four-week period last year.
penury on Wed, 6th May 2015 9:51 am
Article sounds like a doomers dream scenario. I am certain that all of the events depicted could occur, however, I am also convinced that it can be totally different. The statement “Old people are dead wood” is interesting. Anyone for the “blue pill?”
BobInget on Wed, 6th May 2015 9:52 am
IMO a 12.4% increase in jet fuel is a profound
economic indicator.
I always skip to the last paragraph dealing with consumption.
Next, I look at imports. What you all know, if you follow my posts, imports are falling for two reasons. Saudi Arabia, #1 reason, has stopped
with the ultra cheap, weaponized oil exports.
Note: Cold War is expensive. Hot wars, more so.
#2 Domestic producers were forced to economize.
Need, mother of inventions played her part well.
Watch rehiring commence. High paid oil and alternative energy jobs help create ALL The Other Jobs.
#3 For now, inventory numbers are meaningless.
Made so by speculation. NOT investments.
JuanP on Wed, 6th May 2015 10:21 am
“First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US.” This is a global phenomenon. The population in Uruguay has been getting older for more than half a century. Uruguay has been considered an old people country for decades. A consequence of reduced fertility and emigration. While people in countries that receive immigrants bitch about the competition for jobs, people in countries like Uruguay where young people emigrate in large numbers (about half of my generation and my parents generation emigrated emigrated) bitch about the fortune spent raising and educating people like me who then leave the country and spend the prime of their lives working and producing abroad. The ROI of Uruguay’s public education has to be horribly low because most Uruguayan migrants do not sent remittances back home.
justeunperdant on Wed, 6th May 2015 10:45 am
I like at how all these experts have a narrow view of the economical system. They all talk about economics but none talks about the collapse of the supply chain and how such a collapse could happen. For example, let says all the people in California have to move out because of the lack of water. This will shut down some manufacturing in Californian and could cause a collapse of the worldwide supply chain that in turn will collapse everything. Very easy to talk about debt, but not such much about how these different parts like, finance, manufacturing and climate work together. I am getting annoy of analysis of the economical system with graphs make from dubious manipulated data.
Davy on Wed, 6th May 2015 11:42 am
Bobby said once $100. Oil is the norm, (this summer) (cough cough).
apneaman on Wed, 6th May 2015 12:52 pm
Depression? Collapse of supply chains? What happens when the ocean’s collapse? There goes a few billion peoples protein source. What does Econ-101 say we will substitute for it? Maybe we will replace tune with boat people…yummy
////////////////////////////////////////////////////
Ocean Dead Zones Swirl Off Africa, Threatening Coastlines with Mass Fish Kills
“In total, more than 405 dead zones now occupy mostly coastal waters worldwide. Covering an area of 95,000 square miles and expanding, these anoxic regions threaten marine species directly through suffocation or indirectly through the growth of toxin-producing bacteria which thrive in low-oxygen environments.”
https://robertscribbler.wordpress.com/2015/05/05/ocean-dead-zones-swirl-off-africa-threatening-coastlines-with-mass-fish-kills/
Don on Wed, 6th May 2015 1:10 pm
This time it’s different. When Mr Yellen shuts the pump off, (http://www.cnbc.com/id/102653039), and bubble 2.0 meets the pin, the generation of millennials will step up and save us. They are hard workers, physically fit from those Michelle O lunches. They are smarter than tacks and will have cold fusion working in just a few short years. They’re good stewards of the environment because they watched “An Inconvenient Truth” in school. They have learned how to communicate more efficiently by relaxing language rules, like proper verb conjugation. Most of all they have real world skills like using Ipads, twittering, and googling stuff.
#ItzAlwayzDarkestB4ThaDawn
Outcast_Searcher on Wed, 6th May 2015 2:10 pm
Don, good (largely correct) comeback to the “old people are dead wood” blathering of the author (as though ANY large group of people is even close to monolithic in behavior or ability).
For credibility, if you’re going to (again properly) point out a groups’ grammatical sloppiness, calling Janet Yellen “Mr. Yellen”, you’re not doing yourself any favors unless I’m supposed to assume this is some sort of brilliantly intended snarkiness. (Sorry, but I don’t know you that well).
apneaman on Wed, 6th May 2015 2:24 pm
Don, sounds like their parents must be complete fucking idiots and losers.
Teach you children
https://www.youtube.com/watch?v=2vnYKRacKQc
justeunperdant on Wed, 6th May 2015 3:25 pm
I used to read Bill Bonner a while a ago until I realized that he is a financial adviser and probably a little scam artist like Gerald Celente.
I would like to read more about David Korowicz then some guys pushing is financial advisers blog.
David is the only one that has provided a good overview of the complexity of the system.
Cascading Complexity To Systemic Collapse: A Walk Thru “Society’s Equivalent Of A Heart Attack”
http://www.zerohedge.com/news/2013-10-05/cascading-complexity-systemic-collapse-walk-thru-societys-equivalent-heart-attack
Don on Wed, 6th May 2015 4:09 pm
Sorry Outcast, Yes it is a snarkiness thing, it wasn’t started by me. It’s just a common way of referring to Janet Yellen now. It is probably for a multitude of reasons, such as there is no discernable difference between her and Bernanke.
http://investir.ch/devfinale/wp-content/uploads/2014/02/beard.jpg
It was actually President Obama that started it, and somehow it stuck around.
http://blogs.marketwatch.com/capitolreport/2013/08/09/obamas-mr-yellen-flub-puts-a-nobel-economist-in-twitter-focus/