Yeah, just forget about paying any debts or providing jobs, food, clothing and shelter for the coming 3 billion more...minimum.

I apologize in advance if this topic has been covered in this now lengthy thread. Monte's TOC on page 1 helped, but my searches didn't detect a discussion of where new bubbles can spin-off from the current economy. This WaPo article got me thinking.

WaPo Grant article



The Fed appears to be between a rock and a hard place. Energy inputs peaked in 1970, and the US has been inflating the money supply ever since. We coasted along OK with inflating the money supply until about 1995, in part due to our status as the reserve currency for oil which gives us the ability to siphon resources from other countries, like a leech. But now the tank is empty, and the producers have been shuttled off to Asia, and the consumers have consumed everything they could. Now that the whole world is peaking, and debts/imbalances are increasing greatly, the lack of growth leads to a huge need for the entropy/excess in the money/information to spin-off into bubbles. First the tech bubble, and now housing/credit derivatives, which looks like it's going to be at Cat 5 hurricane. The fed is going to have to get really creative to be able to spin off all this excess heat in the money circuit. I know it makes more sense to just let it deflate as gently as possible. But politics has always gotten in the way of good sense, and the Fed will prop and prop until they can prop no more. Where to next? If they can't find someplace for all the extra money they're printing to go, it's going to be like pushing on a string. Is this the endgame for our fiat system, or is there enough of a plateau in world energy to inspire one more world-wide bubble in something? And if so, what is that something?

By the way, I appreciate the most recent discussion on this thread about Hubbert and inflation/prices. Some lightbulbs went off there, thanks.

Yes, what "flight to quality" in a big way is there left to ponder/plunder?

Growth is going to come kicking and screaming out of any door.

Stagflation, deflation, and then hyper-inflation?

There is one bigger bubble left - inflation of all prices, that is hyperinflation.

This could be caused intentionally to resolve the latest series of economic problems, or initiated by the collapse of the US dollar in foreign exchange terms.

In the former case, the dollar could collapse in purchasing power, yet retain some semblance of exchanges rate value.

Most Americans believe – wrongly – that the rise in energy prices is just a symptom of inflation. While the rise in energy prices has much to do with excess money creation and US current account deficits approaching $1 trillion per year, demand destruction most likely will occur in the first world through energy prices rising faster than that of most other goods and services.

I was really hoping that we had some time before hyperinflation happens. The long-term outcome seems pretty clear, but short-term unintended consequences and manipulations are hard to wrap one's brain around. Our leaders have about four choices here; drop rates and trash the dollar; or raise rates, and trash the middle class; or print/borrow money. Fourth choice is to balance the budget and achieve a steady state or a stable-but-declining economy...right.

Some folks on the Prudent Bear forum have been trying to predict the government response to the current credit problem. While Rasputin tends to take extreme stances and estimations, some of the ideas that he has posted reasonate as things the government might back themselves into. Trying to keep the party going a little longer with some of these steps would lead us right into hyperinflation toot sweet.

Bearchat-Responses to Housing Bust-Ras



These ideas make my hair stand on end. Maybe the final bubble will just be a party for all--graft and money handed out everywhere to vaporize further in the housing bust.

Energy is the next bubble. Use the same financial games of derivatives to ramp it up.

Smith-Financialization of Oil

Doesn't the term "bubble" suggest pricing out of line with fundamentals? I can't see that happening to any great extent with oil. That's not to say that people won't try to make money from the increased volatility of course.

Commodities are always driven by supply & demand fundamentals. When the hedge funds forgot that important lesson last year they got burned. Not only did crude decline from $78.40 to $49.80 (-36.5%), but their negative roll (contango) from the long-only side (ETFs) meant their losses were amplified by the cost of carry (say $1.00-1.50 per month on average or $12-18 per barrel per year). In other words the paper longs got punished.

The people who throw around terms like financial derivatives usually do not even understand what they are talking about. What futures & options? Simply calls & puts on the underlying. Leverage? Used to amplify those bets. It increases the profits from successfully betting in the right direction. It also magnifies the losses when they are wrong. 10X or 100X. It does not matter. You still have to get the direction right. And that comes back to the physical market and getting the supply & demand correct.

Last year there was $100 billion(+) invested in long only funds (like DBs ETF & GSCI). Well, we know they lost money. A lot. So much for paper driving the physical market!

Since I certainly don't know much about derivatives, you managed to stop this conversation cold. What I do know is alarming. Since this is not my area of expertise, I'm going to lean heavily here on some posts from others about derivatives. This blog helped some with a quote from Minsky

http://www.iimagazine.com/Article.aspx? ... onID=16672

"In economies where borrowing and lending exist," wrote Minsky in his 1975 book, John Maynard Keynes, "ingenuity goes into developing and introducing financial innovations. . . . Financing is often based upon an assumption 'that the existing state of affairs will continue indefinitely' [a quotation from Keynes]. . . . As a recovery approaches full employment, the current generation of economic soothsayers will proclaim that the business cycle has been banished from the land and a new era of permanent prosperity has been inaugurated. Debts can be taken on because the new policy instruments -- be it the Federal Reserve System or fiscal policy -- together with the greater sophistication of the economic scientists advising on policy assure that crises and debt deflations are now things of the past. But in truth neither the boom, nor the debt deflation, nor the stagnation, and certainly not a recovery or full-employment growth can continue indefinitely. Each state nurtures forces that lead to its own destruction."

but mostly what it did was to convince me that the criminals are in charge. And when the criminals are in charge in an entrepreneurial inflationary system, there are no limits...until the end comes. The criminals are trying to postpone the day of reckoning; everywhere you look, they're trying to change the rules to cover and delay. Patrick Byrne and the naked shorting expose, for example

http://www.financialsense.com/transcrip ... /0331.html

Or witness the changes in banking accounting instituted last month that are discussed in the thread below. The rant from machinehead alone is worth the price of admission. It made my day

http://boards.prudentbear.com/bbs_read. ... =A#M496178

In just about any sector of the U.S. economy, you can see manipulation of regulations, reporting, and illegal actions to postpone the pain. And I think that leverage does matter. And it sounds as though in many cases the leverage is more than 100x on some of this stuff. Garbage piled on top of more garbage.

http://nakedshorts.typepad.com/nakedsho ... tag_1.html

Leverage on an unstable base is like a house of cards. Like Per Bak and his sandpiles

http://www.safehaven.com/showarticle.cfm?id=7160&pv=1

Or a worse case, maybe just unsustainability and overshoot. All of this convinces me that our money system is done in this endgame.

Iaato wrote:


First of all, I am not a fan of Keynes. At all. I believe in balanced budgets, period. And I think that all future liabilities should be fully funded and accounted for, period. The hypnotic influence that some wacko economists like Keynes and Galbraithe have had on politicians has been powerful because deep down they want to believe they can tame the business cycle, and pander to voters at the same time.

And besides Keynes quote is a strawman in any case. I have never read anywhere a real businessman or a real banker ever saying for example, " "ingenuity goes into developing and introducing financial innovations. . . . Financing is often based upon an assumption 'that the existing state of affairs will continue indefinitely' [a quotation from Keynes]. . . . " Every trader worth his salt knows that markets go up and market go down. If they do not understand risk then the market will teach them.

I have read and heard ridiculous things about finance, economics and banking on the other hand from academics, journalists and other 'self-taught' experts who comment on financial markets. But they themselves rarely understand what they are talking about in any case. Like this " together with the greater sophistication of the economic scientists advising on policy assure that crises and debt deflations are now things of the past."

Quite often we reach periods in the financial cycle where it is simply very difficult to divine whether the immediate future will look like the immediate past or not? Like the US stock market at this particular junction in time. There is a case for the need for central bankers to raise rates and drain liquidity, but that may cause a recession. But stong international growth makes the case for higher rates to fight inflation. And even if the US Fed tightens rates and drains liquidity (the right thing to do in my opinion) that still does not stop the Japanese or the Chinese from replacing that liquidity and manipulating their own currencies to keep them weak against the US dollar for example. So without coordinated policy responses to address universal problems a comprehensive solution is usually elusive.

Iaato wrote:


I just love such sweeping statements! First of all you get the system you deserve and the system you vote for.

International accounting standards, the rules of an exchange, the enforceability of commercial contracts, etc. are all the infrastructure that is necessary to carry-on business. Finance is the art of matching cash flow needs to support businesses. Banking is the practice of intermediating between borrowers and lenders, savers and investors. The more developed and transparent this system is the better it works for everyone. The system breaks down when it is corrupted or interferred with. Usually by politicians.

It is no accident that the richest, most developed countries have the most transparent financial systems and legal infrastructure in place to protect commerce. The least developed, and most corrupt countries in the world, do not. And by the way, all social spending and wealth transfers are paid for by commerce not governments. No growth. No taxes. No taxes. No social programmes.

If there is criminal behavior then there are laws already in place to deal with fraud and theft. Again it is the countries that apply the law evenly that benefit the most from a fair, open and transparent system rather than the countries that have the laws in place, but enforcement is used as a discretionary weapon by the state against its opponents.

I always try to keep these conversations non-US centric because even though America may have the largest economy it is not the only country in the world. However, inevitably we seem to talk about the USA with all its defects as if it was representative of everything good and bad about markets, finance, banking, trade, government, monetary & fiscal policy, etc. It is not.

It is but one example from a smorgasboard of various market economies with social-democratic governments. Many countries try to emulate the best practices found in the US, while trying to curb some of its excesses.

I certainly have my own criticisms of the USA, like it running budget deficits and having huge unfunded future liabilities that are not even accounted for properly for example. Many other countries have been more successful at reining in government spending and running balanced budgets. It is not fair or even ingenious to blame markets or even bankers for public policy failures of politicians and the voters who elect them.

I have often thought that the root cause of many problems in the America is that it is two party system where there is a power sharing agreement instead of a true multi-party democracy where voters are offered real alternatives. That is a huge failing and of course it impacts how laws are drafted and why vested political interests are not willing to change.

But I guess any American that does not like their system of governance is perfectly free to give up their US passport and move to whatever country will accept them. I am only interested in how the USA affects the rest of the world. I could give a damn about America or Americans and how they run their own country. It is their problem. Well, I pretty much criticise all countries for one reason or another, so don't take it personally.

Iaato wrote:


What I see is politicians pandering to voters for example by trying to punish sub-prime lenders for extending credit to buy houses even though the US tax code is grossly skewed in favor of homeownership as part of the American dream.

But most of all I blame idiots that borrow hundreds of thousands of dollars to buy something they cannot afford and they are so lazy they cannot figure this out on their own. How many trees have been felled and gallons of ink spilled to write books about basic saving, investing and home buying? Are they really so stupid they cannot read a contract? If so, then they are too dumb to own a house.

I do not blame anyone who's job it is to sell something. They are just doing their job. We are bombarded every hour of everyday with marketing messages. We have all learned to say no. Those who cannot have a real problem. It is always my decision whether I buy or rent? Whether I buy a new car or not? Whether I can afford something or not? To blame the seller is very disingenius. The buyer is pleased when that house they bought goes up in value and they can take another home equity loan to finance yet more consumption.

The fact is that it is very difficult, no it is impossible, to protect stupid people from themselves. That others profit by being smarter than the next person is just obvious. It is not an insight.

I would not necessarily ask the question, Our Money System and Oil Depletion; Are they Compatible? I would rather ask, if stupid people cannot make well-informed, sensible decisions regarding their own personal well-being during an age of unprecedented wealth and abundance (the definition of peak oil) then how will they cope with a permanently contracting economy once energy becomes more expensive and less available? My guess, is not very well. Happy Easter.

No, I think most mainstream economists are totally deluded. Keynes is probably the worst. Economics separates humanity from the environment, and the core thesis is that humans don't need the environment, and that everything will keep growing. Infinite expansion and infinte fiat. If you are immersed in peak oil long enough, the inevitable conclusion is that humans can remain separate from their environment only temporarily, until the storages of energy run out. At that point, they must revert to a natural economy that exists within the environment rather than outside it. Humans are subsistent on the renewable energy resources within the environment once they run out of non-renewable fossil fuels. These fundamental principles pretty much contradict every premise that economics is based on.

http://www.holon.se/folke/worries/bibeh ... s_en.shtml



Sounds like you've had a rough couple of weeks.



Snork. Don't get me started there. Sometimes I wonder whether the fiscally irresponsible behaviors of our leaders have leaked/projected onto the consumers, or if the mass affluenza is just a symptom of excess energy at peak in an unsustainable system. Maybe it's mutually reinforcing permission for bad behavior. Or the sheeple are dumb enough to believe their leaders who say "Go shopping and it will help your country." The woman quoted below has totally bought into that premise.

"Worry about yourself first. Collectively, consumers do need to continue spending to keep the economy on the move. But it's probably better for your own finances to shirk this responsibility for a while. Reign in spending and start paying off credit card balances and other bills in the biggest chunks possible."
Gaack!
Link


Yes, it is a very indulgent, coddled society we Americans live in. An orgy of fossil fuel excess, with bailouts for all bad behaviors. In my mind, it is all based on the expectation of forever growth. The sooner people can accept that we are turning down, forever, the better. We need a whole new science for how we let money inform our markets. Environmental economics would be a good start. Happy Easter to you, too.

Iaato wrote:


Damn, I hate it when the 'page size' gets distorted and I have to scroll all over the place just to read sentences. I would prefer it if graphs & charts had to be linked instead of displayed here on peak oil dot com. It just screws up the text.


In this case it looks like it is your long internet addresses instead of using the link button?
; - )

In any case, first of all, I am not an economist. So I put most economic theory in the round-basket with a lot of what comes out of academia in the first place. An over-simplification of the real world to say the least. That it is practiced by those who have very little direct contact to that real world just compounds that over-simplification.

But at its very fundamental economics is the study of scarcity not infinite growth or infinite fiat.

"Man's wants are unlimited. Man's resources are limited."

The problem is that our minds understand bi-lateral relationships much easier than multiple regressions. The standard two-dimensional chart or graph.

We can wrap our mind around 3-dimensional graphs, but once we start adding a 4th dimension, like time, then it gets harder to conceptualize and to model.

Add in thousands of real-world dependent and independent variables and most economic models quickly breakdown as they are only as good as their assumptions. Change the assumptions and you alter the outcome.

I am not a rocket scientist and I do not understand very much about the physics that puts satelites in orbit and then keeps them there. However, I use that technology everyday when I use my mobile phone or watch satelite TV.

So whereas the study of economics may be less than perfect it is the system of commerce that has developed organically over many thousands of years. Most of its basic tenents are tried and tested by time by billions of individual transactions, which were anything but divorced from the real world. They reflected it.

And some manmade experiments to fundamentally change how we view commerce like socialism or communism failed spectacularly.

Also misguided policies like for example keeping far too many people alive in regions of the world that cannot support them due to unfavorable environmental conditions. That is artificially imposing our will on the natural world. Not economics that is at fault. Economics is about the natural carrying capacity of a system and sustainable growth. That we perverse it for our own ends is the problem. Not objectively adding up the pluses and minuses and then making sound decisions based on the facts.

Does it make economic sense to build cities in deserts that are totally dependent on outside inputs of water and energy? No. So why do we do it? In part because we can. And in part because due to our own failing we have a hard time grasping the long-term implications of decisions made today. In other words our lack of economic understanding! ; - )

Clearly evident by what you write. Worse still you're not even much of a thinker, if you were born in Palestine you'd be a great candidate to send over the wall with a strap on vest.

Well depends which text book defines it as such doesn't it. But thats all "mostly" academic and "mostly" in the trash bin except for the bits you cherry pick to fit your world view. (ideology)


Thankfully mans needs are limited. Clean air, water, food, shelter and clothing.

And today we can enjoy the wants masquerading as needs it's a great time to be alive. We can measure our worth in society predominantly by the baubles we are able to acquire, house, furnishings, automobiles, accessories, clothing et el..

P.S. America is a socialist society, it taxes it's productive members and redistributes command style as opposed to the pure "invisible hand" approach. A pure capitalist society would have no taxes and limited govt. expenditure (amongst other things).

Considering the sheer volume of US GDP coming from the organized state sector it's hardly a candidate to be running around promulgating the virtues of capitalism.

Ahh Mr Bill so much for you to learn.

The ideological rhetoric heats up. *rolls eyes*

Socialism and communism provided the basics for their populations. Which is why EVERY country on earth is socialist taxing it's productive members and redistributing command style.

No one mentions capitalist style countries that are hell holes. Sure North Korea for example is a despicable place to live under communism but how good is a Hati or Guatemala (spelling?) Im sure its great if you own the means of production!

Debt based money system can be compatible for countries who can print more money (Russia, KSA, etc).

But it probably won't be possible for USA, unless it starts (finds a away) to default on it's foreign loans, after which foreign lending might turn out to be slightly tricky....