The Connection Between Oil Prices, Debt Levels, and Interest Rates

If oil is “just another commodity,” then there shouldn’t be any connection between oil prices, debt levels, interest rates, and total rates of return. But there clearly is a connection.

On one hand, spikes in oil prices are connected with recessions. According to economist James Hamilton, ten out of eleven post-World War II recessions have been associated with spikes in oil prices. There also is a logical reason for oil prices spikes to be associated with recession: oil is used in making and transporting food, and in commuting to work. These are necessities for most people. If these costs rise, there is a need to cut back on non-essential goods, leading to layoffs in discretionary sectors, and thus recession.

On the other hand, the manipulation of interest rates and the addition of governmental debt (by spending more than is collected in tax dollars) are the primary ways of “fixing” recession. According to Keynesian economics, output is strongly influenced by aggregate demand–in other words, total spending in the economy. Any approach that can increase total spending–either more debt, or more affordable debt will increase economic output.

What is the Direct Connection Between Increased Debt and Oil Prices?

The economy doesn’t just grow by itself (contrary to the belief of many economists). It grows because affordable energy products allow raw materials to be transformed into finished products. Increased debt helps energy products become more affordable.

Figure 1.

Figure 1.

Without debt, not a very large share of the total population could afford a car or a new home. In fact, most businesses could not afford new factories, without debt. The price of commodities of all sorts would drop off dramatically without the availability of debt, because there would be less demand for the commodities that are used to make goods.

With commodities, such as oil or copper, there is a two way pull:

  1. The amount it costs to extract the oil or copper (including taxes, shipping costs, and other indirect costs), and
  2. The selling price for the commodity. The selling price reflects the customers’ ability to pay for the product, based on wages and debt availability. It also reflects other issues, such as the availability of cheaper substitutes.

The availability of increased cheap debt tends to pull oil (and copper and other commodity) prices high enough that businesses find it profitable to extract these commodities. This is why Keynesian economics tends to work–at least historically. When oil prices dropped to the low $30s barrel in 2008, the issue was very much a “decrease in debt outstanding” problem–taking place even before the Lehman bankruptcy–as I will show in later charts.

Figure 2. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

Figure 2. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

The peak in oil prices took place in July 2008. When we look at US mortgage amounts outstanding, we find that home mortgage debt hit a peak on March 31, 2008, and very slightly declined by June 30, 2008. The bankruptcy of Lehman Brothers did not take place until September 15, 2008. A further decline in the amount of home mortgages outstanding occurred from that point on, partly because of declining sales prices and partly because commercial organizations bought homes to rent them out.

Figure 3. US home mortgage debt, based on Federal Reserve Z.1 data

Figure 3. US home mortgage debt, based on Federal Reserve Z.1 data

When we look at consumer credit outstanding, we find that consumer credit outstanding hit a maximum on July 31, 2008, and began declining by August 31, 2008. (Consumer credit is available monthly, while mortgage debt is available only quarterly. Some definitional change regarding consumer credit must have taken place as of December 31, 2010, to cause the jump in amounts in the graph.)

FIgure 4. Consumer Credit Outstanding based on Federal Reserve Data. Student Loan data was available only for 12/31/2008 and subsequent. Prior amounts were estimated.

FIgure 4. Consumer Credit Outstanding based on Federal Reserve Data. Student Loan data was available only for 12/31/2008 and subsequent. Prior amounts were estimated.

When student loans are excluded, consumer credit outstanding (including such items as credit card debt and auto loans) is still not back up to the July 31, 2008 level today (Figure 4).

I have not shown commercial and financial debt, but they decreased as well, with somewhat later peak dates, coinciding more with the Leyman collapse. In my view, the spending of individual citizens is primary. When their spending falls, it quickly ripples through to business and government accounts. We see this affect slightly later.

The Federal Government quickly stepped in with more spending (funded by debt), as shown in Figure 5, below.

Figure 5. U S publicly held federal government debt, based on Federal Reserve data.

Figure 5. U S publicly held federal government debt, based on Federal Reserve data.

If we combine all United States debt (Figure 6, below), including both government and non-government, it becomes clear that the rate of increase in debt slowed markedly in 2008 and subsequent years.

Figure 6. US debt, excluding  debt which is owed to governmental agencies such as the Social Security Administration. Amounts based on Federal Reserve Z.1 data.

Figure 6. US debt, excluding debt which is owed to governmental agencies such as the Social Security Administration. Amounts based on Federal Reserve Z.1 data.

Without this increasing debt, oil prices dropped to less than one-fourth of their maximum values (Figure 2). Prices of other energy products–even uranium–dropped as well. Somehow the high prices of oil that occurred in early 2008 had turned off the “pump” of ever-increasing debt that had previously held up commodity prices.

Oil Prices and Interest Rates–the Two Big Factors Affecting Discretionary Income

If oil prices spike, clearly discretionary income falls, for reasons described above. If interest rates spike, suddenly goods that are bought with credit (such as automobiles, homes, and new factories) become more expensive. Thus, a spike in interest rates will tend to adversely affect discretionary income as well. If the Federal Reserve wants to counter high oil prices (which continue to affect discretionary income adversely for the long term), it needs to keep interest rates low. Hence, the attempts to keep interest rates low for the long term.

The primary approach to keeping interest rates low has been Quantitative Easing (QE).US QE was begun in late 2008 and has been kept in place since. Other major countries are also using QE to keep interest rates down. The hope is that with very low interest rates the economies can somehow recover.

QE Doesn’t Really Work, Because it Doesn’t Fix Wages, Which are the Underlying Problem

When oil prices are high, wages tend to stagnate (Figure 7, below).

Figure 7. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

Figure 7. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

The reason why wages tend to stagnate when oil prices are high has to do with the adverse impact high oil prices have on the economy. Consumers cut back on discretionary spending. This leads to a loss of jobs in discretionary sectors. Also, labor is one of the biggest costs most businesses have. If profits are squeezed by high oil prices, the logical response if to try to reduce wages in response. One way is to outsource production to a lower-wage country. Another is to mechanize the process more, thereby slightly increasing fuel usage but significantly decreasing wage costs.

Instead of going to individuals as wages, the money from QE seems to go to speculators, who use it to bid up stock prices and land prices. The money from QE also tends to hold home prices up, because some homes are purchase by speculators. The money from QE also helps encourage investment in marginal enterprises, such as in shale gas drilling. As a recent Bloomberg, described the situation, Shale Drillers Feast on Junk Debt to Stay on Treadmill.

What Really Pumps Up the Economy is a Rising Supply of Cheap Oil

One piece of evidence supporting the view that a rising supply of cheap oil pumps up the economy is the rising average wages seen in Figure 7 (above) during periods when oil prices are low. Another piece of evidence that this is the case is the close correlation between oil consumption (and energy consumption in general) and inflation-adjusted GDP (Figure 8, below).

Figure 8. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

Figure 8. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

When there is an inadequate supply of oil, it affects GDP growth. This happens because there is no inexpensive, quick way of switching away from oil. We need oil for very many uses, including transport, agriculture, and construction. In the late 70s and early 80s, we tried to switch away from oil as much as possible. Now the low-hanging fruit for making such a switch are mostly gone.

The spike in oil prices signaled that something had changed dramatically. We could no longer count on a rising supply of cheap oil to pump up the economy. People’s job opportunities were dropping. They found it necessary to cut back on debt. Either that, or creditors cut off credit availability. One way or another, citizens started using less debt.

World Oil Supply

World oil supply is growing only very slowly, as illustrated in Figure 9. While we hear much about the growth in oil from shale formations in the US, this is mostly acting to offset falling production elsewhere.

7. Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy.

Figure 9. Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy.

It is this lack of growth in oil supply together with the high price of oil that is holding back world economic growth. As stated previously, very low interest rates are needed to even maintain the level of economic growth we have now.

The Difference Between and Growing and Shrinking World Economy for Repaying Debt

In a growing economy, it is possible to repay debt with interest. But once an economy flattens, it is much harder to repay debt.

Figure 10. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 10. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

It is likely that it is this problem that underlies the difficulty economies have in increasing their indebtedness. Very low interest rates can help, but ultimately, if the economy is not expanding, debt doesn’t work well. Wages are not growing in inflation-adjusted terms, and because of this, it is not possible for citizens to take on much more debt. Increased student debt gets in the way of buying homes using mortgages later.

The Unfortunate Oil Price Problem We Have Now

The problem we have now is that a rising supply of cheap oil is no longer possible. Most of the cheap-to-extract oil is already gone.

Instead, the cost of extraction keeps rising, but wages are not going up enough for people to afford the high cost of extracting oil (even with super-low interest rates). The unfortunate outcome is that oil prices are now too low for many producers. I described this in my post, Beginning of the End? Oil Companies Cut Back on Spending.

Because oil prices are too low for companies doing the extraction, we really need higher oil prices. But if oil prices are higher, they will put the country (and the world) back into recession. Interest rates are already very low–it is not possible to lower them further to offset higher oil costs. We are reaching the edge of how much central banks can do to hold economies together.

The Effect of Rising Interest Rates on the Economy

If it takes very low interest rates to offset the impact of high oil prices, it should be clear that rising interest rates, if they ever should occur, will have a disastrous effect on the economy. If interest rates should rise, they could be expected to have a number of adverse effects, pretty much simultaneously.

  • They make the monthly payments for a new home or new car higher, reducing the sales of both
  • They reduce the sales price of existing bonds (carried on the books of banks, pension funds, and insurance companies)
  • They likely will reduce stock market prices, because bonds will look like they will yield better in comparison.
  • Also, the country will be shifted into recession, and lower stock prices will result based on the apparently worse prospects of most companies.
  • The resale value of homes will likely drop, because fewer people will be in the market for  a move-up home.
  • The US government will need to pay higher interest on its debt, necessitating a rise in taxes, further pushing the country toward recession.
  • With higher taxes and more layoffs, there will be more defaults on debts of all kinds. Banks, insurance companies, and pension plans will be especially affected. Many will need to be bailed out, but it will be increasingly difficult to do so.

The Federal Reserve has said that it is in the process of scaling back the amount of debt it buys under QE. The expected effect of scaling back QE is that interest rates will rise, especially at with respect to longer-term debt. For a while, US interest rates did rise, and home sales dropped off.  But more recently in 2014 year to date, interest rates seem to be falling rather than rising. This is strange, since this is the period when the scaling back of QE is supposedly actually taking place, rather than just planned. It is possible that overseas transactions are distorting what is really happening.

Getting Out of this Mess

The substitution of debt for additional salary isn’t necessarily a very good one, even with very low interest rates. For example, the maximum length of new car loans has increased from five years to six years to seven years, allowing people to afford more expensive cars. The catch is that loans are “underwater” longer, and it becomes harder to buy a replacement car. So ultimately, buyers tend to keep their cars longer, reducing the demand for new cars. The problem isn’t entirely solved; to some extent it is just delayed.

It is hard to see a way out of our current predicament. The ability of consumers to pay higher prices for goods and services under normal circumstances requires higher wages. But if higher wages are not available, higher debt plus very low interest rates can “sort of” substitute. This cannot be a permanent solution, because there are too many things that will disturb this equilibrium.

As we have seen, rising interest rates will bring an end to our current equilibrium, by raising costs in many ways, without raising salaries. It will also reduce equity values and bond prices. A rise in the cost of extraction of oil, if it isn’t accompanied by high oil prices, will also put an end to our equilibrium, because oil producers will stop drilling the number of wells needed to keep production up.  If oil prices rise (regardless of reason), this will tend to put the economy into recession, leading to job loss and debt defaults.

The only way to keep things going a bit longer might be negative interest rates. But even this seems “iffy.” We truly live in interesting times.

This entry was posted in Financial Implications and tagged , , , by Gail Tverberg. Bookmark the permalink.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

586 thoughts on “The Connection Between Oil Prices, Debt Levels, and Interest Rates

  1. Finally some people in this world are showing some common sense. Some intelligent population control that makes sense for once.

    As I get older, I really think that make sense.

    Swiss group to allow assisted dying for elderly who are not terminally ill

    http://www.theguardian.com/society/2014/may/26/swiss-exit-assisted-suicide-elderly-not-terminally-ill

    A Swiss organisation that helps people take their own lives has voted to extend its services to elderly people who are not terminally ill.

    Exit added “suicide due to old age” to their statutes at an annual general meeting held over the weekend, allowing people suffering from psychological or physical problems associated with old age the choice to end their life.

    Assisted dying is legal in Switzerland and technically even a healthy young person could use such services. However, organisations involved in this work set their own internal requirements, which differ from group to group.

    The move has been criticised by the Swiss Medical Association amid fears it will encourage suicide among the elderly. “We do not support the change of statutes by Exit. It gives us cause for concern because it cannot be ruled out that elderly healthy people could come under pressure of taking their own life,” said the association’s president, Dr Jürg Schlup.

    But Exit said that most people who would choose this option were already members of the organisation and had been looking into assisted dying for years.

    “Our members told us to get active on this subject. It was ripe for a decision,” Exit’s vice-president, Bernhard Sutter, said.

    “Assisted suicide is a lengthy process. Doctors must take tests and talk to patients for hours asking them to justify their motivations. Old patients feel they do not have the energy for all of this and it is also not so dignified.”

    The organisation confirmed that elderly people seeking their services would still have to go through comprehensive checks – but that medical tests would be less stringent than those required for younger people.

    Despite some backlash, Sutter said the medical profession was becoming more understanding.

    “Prescriptions for the [life-ending] medicine come most often from the family doctors,” he said. “That shows that the medical profession is more understanding now of what it means to go on like this.”

    The news follows a legal battle between Swiss prosecutors and a doctor who provided deadly medicine to a patient without examining him first. The doctor was acquitted by an appeal court in April for giving drugs to an 89-year-old patient with a serious bowel illness who wanted to end his life but refused to be examined.

    “It has to be OK for elderly people like him not to be put through the same tests again,” said Sutter. “This is what we mean – he shouldn’t have had to go through it all again.”

  2. “We are reaching the edge of how much central banks can do to hold economies together.”

    The central banks and easy credit have created the problem to begin with. Without this money expansion credit, the oil-related infrastructure would not have scaled up to this capacity in such a short period of time. In turn, it was the power in the oil that allowed for this unprecedented currency expansion through productivity gains. These two elements worked hand in hand to create a monstrous world-wide economic credit bubble and the accompanying unrealistic expectations.

    • Rick- Very well put. You just explained in a few sentences what people have been trying to say for so many years well, but no one I’ve heard has said it so simply.
      The central bankers know they are in a big bind better than anyone. They know the cure is a big (monster big) roll back on risk and credit across the globe, but they also know that to shut the valve would result be the darkest episode of chaos that humanity has ever seen.
      Seems like their only chance of threading the needle is to tighten down credit ever so slowly. So slow its hard to notice month by month. And prey that we can default on our debt in the most painless way for all- slowly grow inflation so that our debt service payments comes in the form of less valuable dollars. In order to make that work- the economy must be growing, and that is the quandary. How do you grow in the face of rising energy costs, diminishing returns on stimulus, and a massive hoard of people relying on the government for jobs and support (that money spent is a massive anchor on the ship trying to move forward).
      Most European countries are in far worse shape in this regard than the USA, but we are not too far off.
      I also think it more the politicians, than the bankers, who are driving this train off the bridge. Both parties here, and all in Europe.

    • I suppose in case IMF-BIS are going to relieve the Fed, thy would be able to leverage currencies until all central banks would be on QE. That’s the limit

          • It would seem there is a game plan here — as the crisis goes through stages worsening — various measures are deployed each time a collapse threatens… for instance at the end of 2012 the EU banking system was on the precipice — the Fed stepped in LTRO (around 1.5 trillion dollars!)… When things get really desperate in the EU (as they are) then QE comes onto the table… as it must.

            Every option on the menu of madness will exercised. And why not?

  3. I have long suspected the Fed is buying the stock market — but of course they cannot be seen to be directly involved in that i.e. secretly buying shares….

    Consider this:

    Another purpose of QE ZIRP >>> pump out cash at low interest to indirectly drive the stock market?

    Seems that is one reason stocks keep hitting records — companies are going into debt to buy back stocks with the cheap money http://www.zerohedge.com/news/2014-05-27/here-mystery-and-completely-indiscriminate-buyer-stocks-first-quarter

    If the easy money was not available — the companies wouldn’t likely be doing this —- so surely would the market crash

    Talk about massive manipulation of EVERYTHING. Another indication of the absolute desperation of the central banks — nothing is off the table – they will do anything to keep the hamster running.

    This is also an indicating that they know that when the hamster stops — civilization as we know it stops.

  4. New estimate of California shale oil….60% less than before that is recoverable:

    http://fcnp.com/2014/05/27/the-peak-oil-crisis-the-monterrey-shale-debacle/

    ast week the LA Times ran a story saying that the U.S. Energy Information Administration (EIA) is about to reduce “its” estimate of the amount of shale oil that can be recovered from the Monterrey Shale under California by 96 percent. This reduction cuts the estimate of producible shale oil in the U.S. by 60 percent.

  5. Ho Hum ……….

    Shakeout Threatens Shale Patch as Frackers Go for Broke

    http://www.bloomberg.com/news/2014-05-26/shakeout-threatens-shale-patch-as-frackers-go-for-broke.html

    The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

    Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

    “The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”

    • OM and shale players are indebted in dollars, while in the event of a devaluation of the dollar things could go very different. Shale industry would go down (cause they sell in USD within US market, and pay higher interests) although OM could do better (cause they may sell outside US and even in another currency if needed). Could such a devaluation even be seen as profitable to OM?

    • Anatomy of a bubble / ponzi scheme (or ponze as I like to refer to that)

      Irrational exuberance (otherwise known as mindless greed) causes people to pile into a ‘can’t miss’ investment opportunity

      This drives prices higher (even though there is no money being made — from what I understand the money being made in shale is from flipping the properties) creating even more excitement (kinda like 6 yr olds on a theme park ride – the higher it goes the more they scream yipeee!!!)

      At some point the facts get in the way of the fable — as in for every buck fifty in – you get a buck out…

      Some who were drinking the spiked kool aid start to think hmmm… that doesn’t make a lot of sense—- but hey — shares are going up — I’ll ignore that canary….and shovel more coal…

      Then another fact emerges — that one of the ‘big’ fields is not so big after all— as in 96% not bigger….

      Hmmmm…. you say — that doesn’t sound like 100 years of oil — and didn’t I read somewhere that recoverable reserves were being vastly exaggerated? but hey — shares are going up still…

      We all know how that ends — the early big money is cashing out on the little guys because the early money is run by guys who have been here before — they knew from day one this was a scam – and they are riding the wave…

    • “The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.”

      You mean the red queen syndrome runs into problems?! /sarc

      • Interguru, Paul, et al, Have you noticed lately that comments are really getting very “interesting”, “truthful”, “make sense” or even looked like many jumped out of The Matrix.

        Paul – the comments in Zerohedge is getting more sensible and reasonable as compared to 1 year ago where trolling is very frequent.

        Just can’t help feeling that the story is going to blow over to many sheeple and waking them up.

        As far as I am concern, the next financial crisis that can happen anytime will be an extinction level event. What we have done wrong in 2008 is now worse off and for some areas, it is orders of magnitude worse (especially credit related matters).

        • I am on a fair number of finance sites most days… and yes I am seeing more commentary indicating oil is the issue… and few are disputing this.

          I suppose that was to be expected…. we have been fed the green shoots line for years (in different forms) but when people see their is no recovery happening they begin to look for other reasons for this situation.

          Expensive oil has a viable story — the money tap opens in 2002 as oil spikes… the economy blows up just after 147 oil…. everyone knows expensive oil punishes growth — 100 buck oil is surely a problem (the problem)

          For the most part Zero Hedge continues to pound the drum of ‘stupid Fed — corrupt bankers – idiot leaders’

          They do run Gail’s stuff sometimes – and it is well-received — but there is a deluge of other stuff that tamps down the message.

          I see this as a good thing — if everyone starts to understand the problem — then the cart might get tipped (and people panic)

          I don’t think we are anywhere near that situation yet though — a few of the more thinking people are starting to question things — but the masses remain in their usual state of torpor — facebooking…. watching dancing with stars…

          The only way I see this changing is if the MSM were to post this stuff on their front pages — and Gail were to be invited to do the rounds of the big talk shows… I don’t think there is much chance of that…

          The masses will realize that the problem is bigger than they ever expected – but only when the symptoms of the disease manifest in the form of a massive economic collapse.

          And when that happens — unless there is a govt announcement that ‘this is permanent — and it is because of the end of cheap oil’ — most people will continue to believe that the bankers, politicians, etc… brought this upon them.

          They will go to their graves not understanding why this has happened.

          Doesn’t matter much – does it?

          A really smart guy I know (head of mensa in one country) mentioned the other day that he was watching a science program that indicated all the matter in the universe has been in circulation since the beginning of the universe — the matter in our bodies has been around since the beginning of time….

          So he took that further — when we die…. the minerals in our bodies will end up in the soil — absorbed by plants – eaten by animals including people … in essence we will be completely recycled…

          Is this reincarnation?

          Someone is thinking very deep thoughts!!!

          • Politicians and newspapers persist in telling their audience that this can all be cured by the right policies – Left, Right, capitalist, anti-capitalist, anarchist, redistributionist, progressive, Green, you name it – and ignore the essence of the fix we are in.

            So most people will indeed never get at all, in so far as their minds are formed by this media circus.

            And I suppose one couldn’t actually run this story every day on the front page, as it’s not suitable material for the mass media of ‘communication’ (and trivial entertainment and prejudice-reinforcement) that constitute ‘the news’. It’s far too big a story.

            After all, once stated clearly, what is there to say? – it crushes everything else into comparative insignificance!

          • Many decades ago I discovered that the financial press and the business sections of the MSM were best place to find out what was really happening. Their readers are ‘important people’ who want to make investment decisions, and are less tolerant of bs. Of course we know it is far from perfect, but it is better than following the front pages.

            • I think that may have been the case — but in more recent times I think finance is as rife with propaganda as all other news sources.

              There’s a book called ‘Do you want to be right – or make money’ – I have never read it – but I suspect I know what it says….

              I think these days the way to make money is to get on a wave and ride it — ignore that the wave is certain to crash into the rocks — just make sure you get off before it does

              For instance – take the fracking wave — if you were to look into that — and I did — you would have from day one realized this was a joke.

              But a lot of money has been made out of this joke… by those who got in early — doesn’t matter if they believed the stories or not — as long as ENOUGH people believed…. that is how a bubble builds – that is how momentum increases…. (I will be right – but I did not ride the wave – so as the book says — I have made no money…)

              Look at the press — regurgitating this nonsense about the new Saudi Arabia — barely a peep about the fact that shale was not feasible – or at least likely a very short-lived phenomenon.

              So what you need to do as an investor is identify the next wave – get on it — and get off it in time.

              The difference between a good investor and a bad investor has is all about understanding that these waves (dotcom, housing 1 &2, bonds, fracking, etc…) are not fundamentally sound plays — they are artificial – they are pump and dump schemes….

              The good investor doesn’t believe the MSM – but understands the power of the MSM — the PR companies use the MSM on behalf of clients to pump — so if you can see that then why not get on a wave as it you see it building?

              The bad investor believes the MSM spin — they buy into the Saudi Arabia story — and they ride the wave every higher — and they never get off — of course they ultimately end up pounded into the rocks.

              There are those who disparage sites like Zero Hedge (sites that expose the spin – the lies) claiming ‘I never made a cent reading ZH’

              Of course if they only read ZH then they would not identify the waves — because the MSM has that role….

              But ZH is useful as an investor — because it can tell you when something is a wave — or when something is more along the lines of a fundamentally sound investment opportunity — and if you decide to ride a wave ZH a) can alert you to rocks ahead and b) knowing you are on a wave it can make you more vigilant in looking for canaries in the MSM…. see the recent Bloomberg articles on fracking for instance…

              ZH won’t make you money — but it sure as hell can assist you in not losing all the money you have made riding one of the endless waves that we have experienced in recent years.

          • “So he took that further — when we die…. the minerals in our bodies will end up in the soil — absorbed by plants – eaten by animals including people … in essence we will be completely recycled… Is this reincarnation? Someone is thinking very deep thoughts!!!”

            Hegel discusses this with his pantheistic monism. Being reveals itself as an Organism made up of all things. The opposites being/ becoming, one/ many, finite/ infinite, self/ other, eternal/ ephemeral, matter/ form and all the others are reconciled in the organic, changing Cosmos. There is one eternal substance to which we are a passing form but we are also the eternal matter. The matter (us) then takes on another form — yes it is like reincarnation but not all forms are living. Anyway we are all eternal (and ephemeral) because we are the one (living) substance.

        • Gail – a side question where you have expertise. When insurance companies set premiums for policies they take expected investment earnings into account. Now that we are at near zero interest rates it cuts their earnings. Is this threatening their existence?

          • Lower investment income means that premiums have to be higher.

            If there are defaults on bonds, that is what affects their existence. It may be that with very low returns, fewer people want to buy annuities, as well.

  6. Kunstler, says the electric grid needs to be rebuilt. Why? If FF are on the way out and PV and wind are not going to cut it then why bother building new transmission towers? It seems to be the fad of the day. NYS just started REV (reforming the energy vision). Why is this fad showing itself now?

    • Because even the one’s we thought would never drink the koolaid are beginning to take sips.

    • People need to believe that something will save us. The theory has been that the electric grid, powered by PV and wind will save us. That story is ridiculous for many reasons–partly because we cannot maintain the grid for long, much less upgrade it as much as would be needed with intermittent renewables. Also, the cost would be far beyond what we can afford. Intermittent renewables are scaling up terribly slowly now.

      • Looks like they are scaling down….

        Solar – After Trillions of Subsidies and R&D and this is what we get?

        The German Solar Disaster: 21 Billion Euros Burned
        http://www.thegwpf.org/german-solar-disaster-21-billion-euros-burned/

        Spain’s disastrous attempt to replace fossil fuels with Solar Photovoltaics
        http://energyskeptic.com/2013/tilting-at-windmills-spains-solar-pv/

        So — we’ve got the slaves digging coal out of the ground using shovels that were scavenged from Walmart…. buckets as well…. they haul coal to the coal plant:

        Let’s have a look at the components of the grid http://media.nola.com/news_impact/photo/diagram-grid-091612-02jpg-12d905c093ebf263.jpg

        There must be thousands if not tens of thousands of high tech parts involved in the plant and grid… most of them no doubt crucial to the production and distribution of power…

        Probably none manufactured locally — likely very limited replacement parts in stock (just in time supply chain means very little in the way of back up) — so what do you do?

        No problem – call Germany – call Japan – call China…. oh right — no phones … because the electricity is offline – because one of the parts is busted of course…

        But let’s assume you can call the supplier – the supplier is not making these parts — because to make them they need sophisticated machinery – which also breaks – they need computers which need power — but the power is probably down there too — because if you break one key component down goes the grid…

        I could go on and on — how do the people get to work? — where will they get food from? — how do universities that are needed to provide engineers to maintain high tech systems continue to function?

        But I won’t go on and on – because the brilliant Mister Korowitz has done a comprehensive job of explaining what happens when a complex system breaks down – how things can quickly cascade through the system … see p 56 onwards http://www.feasta.org/wp-content/uploads/2012/06/Trade-Off1.pdf

        Cheap oil is the key to the complex civilizations that we have built. Nothing can replace it.

        Therefore I am afraid that this civilization is over. The only question is – what comes next. What does post industrial ‘civilization’ look like?

        • “I am afraid that this civilization is over. The only question is – what comes next. What does post industrial ‘civilization’ look like?”

          Come on, Paul, you’re a smart guy; use your imagination. Actually, all one has to do is glance @ a few charts that plot historical population and FF production/consumption to know where this all leads.

          So, global population drops back to the 500m range – only this time around, the survivors will have adapted to radiation poisoning spewing from 500+ reactors that have gone critical. Still, life goes on … perhaps.

          As to what will humanity do during the time lag between the end of petro-chemical farming & the first crop yields resulting from traditional manual labor, well, that’s why it might be best to live by the coast. You see, with vast salt making capability, there are trillions upon trillions of pounds of well fed meat the will be able to be salted and preserved for future use.

          Add to that the availability of untold amounts of fuel locked into the trillions of structures, and it becomes evident that survivors will become quiet adept at smoking and preserving all kinds of delicious salted, flavored and nutritious jerky.

          Future mythology will regale listeners with fantastic stories of a people who wore clothes, who could conjure water from the thin air (simply by holding their palms upright), and of magical sleds propelling them through fields, forests and the air above them.

          It’s the inability to accept this as humanity’s future condition that has global “leaders” frantically fighting for survival. Sort of reminds of terminal cancer patients searching madly for a solution, until they finally accept their fate and go about how to best meet the end.

          • Yes of course — a very horrible outcome is certain — it’s the specifics of what things look like that are less certain – is this an extinction event? I’ve not seen any studies that determine specifically what thousands of exploding nuclear fuel rods will do to the planet…

            “Sort of reminds of terminal cancer patients searching madly for a solution, until they finally accept their fate and go about how to best meet the end.”

            Excellent!

            • I remember way back in the 1970’s with “Mother Earth News” and “The Whole earth Catalog” among many others that envisioned a wonderful lifestyle that would live in harmony with the environment.
              The front covers of MEN are still a joy to view at a time when there was still hope the future would turn out differently. We humans, by our very nature, took what seemed the easier way out that was more “advanced”.

              Ed Abbey:
              “A true civilization, for me, embraces tolerance as one of its cardinal virtues: tolerance for free speech and differences of opinion among humans, and tolerance for other forms of life… bugs and plants and crocodiles and gorillas and coyotes and grizzly bears and eagles, and all of the other voiceless, defenseless things everywhere that are in our charge. Any true civilization must provide for those other life forms. And the only way to do that is to set aside extensive areas of the Earth where humans don’t interfere, where humans rarely even set foot.”
              It’s good for us to live on a planet of great diversity and variety. I think that a completely industrialized planet, a completely humanized planet would be intolerable. It would be a diminished life, as if the whole world were one great city. We’d lose the small-town way of life, the agrarian way of life, the farms, ranches, open spaces, forests, deserts, mountains and seashores. All of them would be completely taken over, devoured. That seems to be the direction in which we’re moving right now. And if we succeed with this mad project of trying to dominate the whole planet and reduce everything to an industrial culture, we’ll then turn on each other and start devouring one another even more vigorously and ferociously than we already are.

              http://www.rogerwendell.com/abbey.html

              Perhaps maybe a bit of untouched wildness will remain after the fall!
              We can only wish

        • Just a minor addendum, it need not be “electric grid” being down that causes supply chain to fail. Just a minor “no credit available” or any financial collapse will do that trick. A down electric grid (be it from solar flares, etc) is 1000% extinction level event (ELE) for human civilization.

          I just need 2 small explosive to have an ELE. First put one on a large super tanker and declare that one group of terrorist doing it and will continue to do so in future. Lloyds may not insure shippers anymore or put a very high premium which will make it very expensive to ship oil. With limited oil, financial world will go into tailspin and there goes the global trade. Your critical parts will not arrive by FedEx.

          So, the navy will escort a tanker? There are so many tankers and so many countries. You think Japan/China will not hijack the other tankers?

          If the first one does not work, put in another explosive on another tanker and that will guarantee the ELE.

          I am very much inclined to believe that just a small percentage loss of oil will cause many countries to “do what it takes” to scramble and secure their oil, of course at the expense of global trade and supply chain collapse.

          Our world has degenerated into this situation. I can confirm that if this happens in 1950s or 1970s, it will not be a problem (less globalization and less dependency on oil)

      • “People need to believe that something will save us. … That story is ridiculous for many reasons”

        I love some of the statements on this blog even if I do tend to place my own … in what the people come out with.

  7. Financial Storm Chasing With Blinders On: How The Fed Is Driving The Next Bust
    http://davidstockmanscontracorner.com/financial-storm-chasing-with-blinders-on-how-the-fed-is-driving-the-next-bust/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+PM+Monday

    Come on David — ask the question — the Fed can see the wall ahead — they are not blind or stupid — so why are they stepping on the gas?

    What are they running from that is so scary they are prepared to crash into the wall at 1000km per hour?

    • I notice Stockman says that the default rate on student loans that are in repayment status is in excess of 30%. I wonder if that includes those on slower repayment plans because their incomes are so low. It is a high figure, regardless. Not to mention the impact on family formation and on the buying of new homes.

    • Yep, Kensington and Chelsea where the global super-rich live (or at least buy) are among the most polluted areas of Britain.

    • Europe’s decision to “push” diesel has meant that gasoline prices have stayed lower for US buyers. This is one of the things that has helped the US stay afloat. We can thank Europe for their willingness to take on diesel pollution.

      • As I’m suffering from diesel-induced asthma, may I get one of those Purple Hearts -wounded in service of the USA? (No disrespect intended to those who have been wounded in service, of course).

    • If you are going to live in England then live somewhere high and west of any nearest industrial conglomerate. The air is good and the cr@p all tends to get blown east. The good areas tend to be built there. Just don’t tell everyone or they will have out their altimeters and prices will go even higher!

      • Quitollis

        From the UK pollution maps, the North and West look alright, and almost the whole of Scotland. Living in the ‘economic hub’ zones is a certain way to shorten one’s existence -unfortunately, that is where the work is at present.

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