A Drop of Rain

Another good one, an interview with Kevin Phillips, author of Bad Money: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM.

Like the previous links, this one is somewhat refreshing, because the author is an ex-Nixon White House person, who I think fairly accurately notes the serious problems with both the Democratic and Republican parties in the USA.

BILL MOYERS: So you have it — for this disaster has bipartisan parentage.

KEVIN PHILLIPS: Absolutely.

BILL MOYERS: But yet you say it’s come to an end. You say there’ll be no pretense any longer that the financial system is supreme.

KEVIN PHILLIPS: Oh, there may be a pretense in some quarters. I mean, obviously people who were doing the bailouts are saying how important it is that we don’t rock or endanger the financial system. Some would say to the contrary that the best thing we could do would be to put its failings out there and let the making cure it.

Like so many he sees things fairly clearly, but also, sadly understands that it is now too late. The bubble has to burst, and pumping in hundreds of billions of dollars to keep it inflated, and to keep debt holders buying more, is just not going do anything but make it worse.

Read this recent article about the roots of our new economic collapse.

I’m not going to paraphrase this, it’s an excellent analysis and historical overview.

These events are not a short term bump on the road, but the culmination of the decision a generation ago to use paper to buy oil, to inflate that paper by allowing those at the very highest reaches of a social elite to engage in a “race to the top” with the suppliers of oil. This system was accepted by both parties, and it created a neo-liberal era where any restriction to creating paper wealth had to be removed. This was not a matter of left or right, everyone was a neo-conservative, and every one was a neo-liberal.

Who said it’s all bad news? Globalization was always a totally false construct, built on a foundation of dirt cheap oil prices (around $10 a barrel until only 10 years or so ago), caused by a very temporary global oil glut.

So to see a story about globalization already collapsing at oil prices around 120 a barrel current really makes my day a bit more cheerful. Read on to see how rising oil prices are already impacting the US locally as well.

To summarize some other postings here, ship bunker oil, fuel oil, is from what I can gather basically Number 6 distillate, the heaviest, crappiest stuff, left over after they refine out gasoline, diesel, heating oil, and jet fuel. Read this nice overview in wikipedia if you want to learn the specifics. Check out this sample of current Los Angeles bunker fuel prices.

Noting there that all categories of bunker fuel prices are rising right along with crude oil futures, the following article now should be fairly easy to understand:

The rising price of oil is making international trade of heavy cargo prohibitively expensive, and acting as an incentive for importers to find products such as steel closer to home, new research by CIBC World Markets shows.
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If oil prices continue to rise, the soaring cost of global transport will act like a major tariff barrier and lead to a substantial slow down in international trade, they argue.

“Globalization is reversible,” they state.
High oil prices will hurt trade, report says, Globe and Mail, May 27, 2008

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Well, I’d say the mainstream media’s main sources are all stumbling towards a part of the first step of realization. Seeing Kunstler featured in the Washington Post editorial pages is a pretty good sign in my opinion, although it’s a bit late, since from what I can see, we are now starting to bump our way down the back end of the global oil production peak.

The public, and especially the mainstream media, misunderstands the “peak oil” story. It’s not about running out of oil. It’s about the instabilities that will shake the complex systems of daily life as soon as the global demand for oil exceeds the global supply.
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As the world passes the all-time oil production high and watches as the price of a barrel of oil busts another record, as it did last week, these systems will run into trouble. Instability in one sector will bleed into another. Shocks to the oil markets will hurt trucking, which will slow commerce and food distribution, manufacturing and the tourist industry in a chain of cascading effects. Problems in finance will squeeze any enterprise that requires capital, including oil exploration and production, as well as government spending. These systems are all interrelated. They all face a crisis. What’s more, the stress induced by the failure of these systems will only increase the wishful thinking across our nation.

And that’s the worst part of our quandary: the American public’s narrow focus on keeping all our cars running at any cost. Even the environmental community is hung up on this. The Rocky Mountain Institute has been pushing for the development of a “Hypercar” for years — inadvertently promoting the idea that we really don’t need to change.
GRAND DELUSION
Wake Up, America. We’re Driving Toward Disaster, May 25, 2008

Kunstler took good advantage of this opportunity, and I’m glad that the Washington Post is printing this story.
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Admit it, you read the news, Wall Street sits poised on the edge, but somehow it hasn’t collapsed yet. Why? It took me a while to realize the answer, and I found an article today while checking out some new news sources, Business Intelligence - Middle East in this case. I’d suspected this was the case, and the following article shows it fairly clearly.

Sovereign funds from the Middle East and Asia were also highly active in providing more than US$43 billion in capital to Wall Street banks starved of funds during the credit crisis that erupted last Summer.

Sovereign wealth funds - JPMorgan Chase catalogued 50 of them - are pools of money derived from official surpluses, such as foreign reserves, commodity revenues or fiscal sources. Profits from the funds are meant for the benefit of a particular nation’s future generations.

A steady and deep source of capital for many private equity firms and hedge funds will likely be welcome news, especially since many private investors have become more risk averse lately.

The report also cites talk that sovereign funds may provide private equity with debt financing for leveraged buyout deals, replacing bank financing, which dried up in the face of the crisis.
BI-ME and Reuters, 22-05-2008

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See how it unravels? The industries that rely on the balance between what they can pay for fuel and what consumers can pay for the end product are going to feel the oil peak prices first, and will fail first. Trucking is probably one of these industries as well, by the way, only it is not as discretionary as air travel so it should survive for longer in a recognizable form.

The cost of protecting airline bonds from default soared and bond prices plunged as oil reached a record $135 a barrel, stoking concern that carriers will run out of cash as jet-fuel prices surge.
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A 94 percent increase in the price of jet fuel the past year may push some airlines into bankruptcy, Soleil Securities Corp. analyst James M. Higgins said yesterday.

“We now expect AMR [American Airlines] to have trouble avoiding bankruptcy by sometime in 2009,” Higgins wrote in a note to clients. “UAL [United Airlines] is too close to that possibility for our comfort,” and Continental is “close to our comfort threshold.”

Surging jet-fuel prices may help produce a record full-year loss for the largest U.S. airlines of $7.2 billion, JPMorgan Chase & Co. analyst Jamie Baker estimated this week. That estimate is 57 percent wider than Baker’s previous projection for the industry’s 2008 deficit.
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James May, president of the Air Transport Association, told reporters yesterday in Washington that major U.S. airlines face liquidation should capacity cuts and fare increases fail to cover rising fuel costs.
Bloomberg: Airline Default Risk Soars, Bonds Tumble on Record Oil Prices, May 22 2008

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The Geography of Nowhere

The Rise and Decline of America’s Manmade Landscape
James Howard Kunstler
Simon & Schuster, 1993

While I’ve read a few other of Kunstler’s books (The Long Emergency, Home From Nowhere), I hadn’t gotten around to reading his first major non-fiction work, The Geography of Nowhere until last week.

Some of you may not be familiar with Kunstler, who is fast becoming a major spokesman for the post peak, long emergency world that is already now becoming increasingly obvious. A good place to start is his blog, named, typically abrasive Kunstler, ClusterFuckNation. While his polemical style doesn’t always work, it’s usually not that far off target, and he’s proving himself to be right far too often to just dismiss his thoughts out of hand.

To get a sense of how he thinks, check out a recent (March, 2007) talk he gave at the San Francisco Commonwealth Club.

You can also read a transcript of a 2005 [Matt] Simmons-Kunstler interview. Matt Simmons is a well respected oil industry investor who wrote a seminal book on the coming decline of Saudi oil production (read it if you haven’t, it’s great) Twilight in the Desert. Simmons, like Kunstler, seems able to engage in critical thinking, and is able to look at reality without falling into fantasy, so it made some sense for them to do this interview together.

Overview

From the author’s own site:

my first non-fiction book on the tragic sprawlscape of cartoon architecture, junked cities, and ravaged countryside where we live and work. I argued that the mess we’ve made of our everyday environment was not merely the symptom of a troubled culture, but one of the primary causes of our troubles. “We created a landscape of scary places, and we became a nation of scary people.”

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Well, this one didn’t take long to start happening in real time. Yet another stinking mess the Republicans are leaving whoever replaces them. And don’t think you’ll see a single one of them take even a tiny bit of personal responsibility for systematically gutting the value of the formerly premiere global fiat currency. That talk of responsibility doesn’t actually ever apply to them, just to people they want to criticize.

The Japanese, who own $586.6 billion, or 12 percent of U.S. government debt, had their worst quarter in Treasuries this decade, losing 7 percent in the first three months of the year as the dollar fell to the lowest since 1995 versus the yen…
[...]
“It’s too early to say the dollar will stop falling,” said Masataka Horii, head of the investment team in Tokyo for the $53.1 billion Kokusai Global Sovereign Open, Asia’s biggest bond fund. “The U.S. economy will be slow for a while.”

Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the Treasury said April 15.

America relies on foreign investors, who own more than half the U.S. government debt outstanding, to finance a deficit that New York-based Goldman Sachs Group Inc. predicts will expand to a record $500 billion for the year ending Sept. 30, after a $163 billion gap last year. Without their support, long-term interest rates would be 0.9 percentage point higher, a 2006 Federal Reserve study found.
Dollar Slide Drives Budget as Japan Shuns Treasuries, Bloomberg

More after the fold. If the thought crosses your mind: if they don’t buy our debt, how will we run a government using deficit spending? crosses your mind, good for you, that means logic is starting to win the battle, finally.

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Check these out, the first is a good overview of the current finance sector driven, government linked, bubble driven economic system we are finding ourselves increasingly mired in.

The first is from a recent article in Harper’s Magazine:

A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.

( I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away.)

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Interesting article, Deflation In A Fiat Regime?, brought up some recent articles by Doug Noland of PrudentBear.com

• Setting the Backdrop for Stage Two
• The Meaning of Stage II

Update: Noland’s April 25, 2008 column:

I am at this point more convinced than ever that only a severe crisis will instigate the necessary adjustment to the distorted and imbalanced U.S. and global economies. One is then left with the disconcerting view that Stage II will lead our authorities to exhaust all policy measures in a futile attempt to sustain the unsustainable. The obvious question: how long does the lead up Crisis Stage II last? I would today guess a number of months, although I wouldn’t at all be surprised if it was rather short. What will be the impetus for Crisis Stage II? A spike in interest rates, a run from U.S. Treasury and agency debt, a disorderly drop in the dollar, another bout of derivative and Credit market implosion, or acute global financial tumult should be considered leading candidates based on Stage II ramifications. Or it could easily be something completely unexpected, perhaps even war.

From Noland’s April 18, 2008 column:

With crude hitting a record $117 today, there is every reason to expect that newly created global liquidity will further inflate energy, food, and commodity prices generally. The Goldman Sachs Commodities index has gained 21% already this year. But when it comes to Monetary Instability, our financial markets might just prove the unappreciated wildcard. When the Fed and Washington radically altered the rules of U.S. finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of “Stage one” arises a major short squeeze in the Credit, equities, and derivatives markets. And when it comes to contemplating the scope and ramifications of today’s “hedging” activities, we’re clearly in Uncharted Waters. It is not beyond reason that a disorderly unwind of “bearish” Credit market positions could incite a mini bout of liquidity, speculation, and Credit excess that exacerbates Global Monetary Instability - while Setting the Backdrop for Stage Two of the Crisis.