Wednesday, August 15, 2007

Scrabbling Around For Plan B

Those of my readers who have been paying attention to the financial news over the last couple of weeks may have noticed a certain weakening of the ebullient smile Wall Street likes to paste on the world. Pundits and financiers who were announcing vast profits and crowing over new stock market records a month ago are adopting a noticeably different style as they try to explain why many billions of dollars invested in hedge funds and the like aren’t there any more. The baroque financial architecture of yet another economic new era has turned out to consist mostly of bubbles rather less tiny than the ones that Don Ho used to sing about, and the results, to put things charitably, have not been good.

The carnage began with mortgage companies, not so long ago the darlings of the financial press. Eighty-odd of them have imploded in the last few months as they discovered that if you loan money to people who can’t pay it back – who’d have thought? – they can’t pay it back. Next it was the turn of hedge funds that speculated in mortgage debt, with two Bear Sterns funds leading the rush to insolvency. In the last few days, problems have surfaced in the commercial paper market, as it turned out that several firms in that end of the financial industry also have a good deal of dubious mortgage debt on their books, and in quant funds –funds that speculate in stocks using computer programs – that got slammed to the mat when the stock market didn’t behave the way their models said it would.

Meanwhile, other sectors of the credit market are looking nervously over their shoulders at their own equivalents of what the mortgage industry has uncharitably but accurately termed “toxic waste” – huge volumes of loans made with little attention to their prospects for repayment, and then offloaded onto buyers around the world whose greed for an extra percentage point of interest kept them from noticing that gamblers don’t always win their bets. Short term credit tightened up so drastically last week that central banks around the world had to dump more than $200 billion into financial markets to stave off a credit panic. Where this is going is anyone’s guess, but at this point the chance of a serious recession is hard to dismiss.

All this is interesting enough in its own right. As J.K.Galbraith pointed out in his wry classic The Great Crash 1929 – required reading for anybody interested in the vagaries of economics, not to mention the funniest work of serious economic history ever written – economic panics offer an unequaled glimpse at the gaping chasm between expectation and reality that opens up when people think they can get something for nothing. It also has real implications for the future of industrial society, since resources flushed down the ratholes of subprime mortgages, speculative hedge funds, and the like will not be available to deal with the pressing needs of an oil-dependent civilization slowly discovering that it’s already on the far side of Hubbert’s peak. All these are relevant, but the spectacle of empty air opening up beneath yesterday’s speculative boom also does a fine job of pointing out one of the most pervasive bad habits of contemporary thought.

The subprime mortgage mess is a good place to start. For many years it’s been customary in the banking industry to justify giving mortgages to people who wouldn’t normally qualify for a home loan by charging them a higher interest rate than usual. The extra income from the interest compensated the bank for the losses from those borrowers who defaulted on their loans. So far, so good, but this extra fillip of interest attracted money from outside the banking industry, and banks found that they could package mortgages into “collateralized debt obligations” – CDOs, for short – and sell them for cash, offloading risk while pocketing the proceeds of the sales.

In a time of record low interest rates, the return on subprime CDOs looked good, so long as you didn’t think too hard about the risk of default. Banks soon figured out how to hide that risk even further by slicing up packages of mortgages into multiple “tranches” that, at least on paper, had different levels of risk. The process was pushed further along when companies bought tranches of different CDOs and reassembled them into new CDOs, with their own multiple tranches, which could then be bought and reassembled ad infinitum.

Beneath all these bells and whistles, though, was the same pool of mortgage loans to people who couldn’t qualify for an ordinary mortgage – a pool that became increasingly risky as profits from the CDO market lured banks and mortgage companies into handing out mortgages with less and less attention to the borrowers’ ability to pay. The bottom of the barrel was reached with what were called NINJA loans – no income, no job or assets – which combined a hefty interest rate on paper with a fair certainty that not one cent of the interest or principal would ever be repaid.

In effect, the idea of risk had evaporated from the minds of the speculators. It’s understandable that banks and mortgage companies would stop worrying about risk once they learned to package their mortgages and sell them to other people. It’s less understandable that people who wanted to buy houses, to live in or (more and more often as the boom went on) to sell at a profit in a few months, lost track of the fact that if things went wrong they could be left with debts far beyond their ability to pay. It’s still less understandable that investors around the world would lose track of the fact that a high interest rate that never gets paid isn’t actually worth anything at all.

Still, the same myopia has appeared on cue in every previous speculative frenzy, too. Purchasers of subprime toxic waste can now join the long line of self-deluded gulls that reaches from the people in 1999 who bought stock in fly-by-night dotcom firms, all the way back to the people in 17th century Holland who spent hundreds of guilders buying single tulip bulbs on the assumption that they’d be able to sell them for even more in a few weeks. It’s an affliction endemic to market capitalism throughout its history, but it became pandemic in the last years of the 20th century and remains so today – and not just in the world of economic speculation.

It’s worth suggesting, in fact, that blindness to risk has become one of the most widespread mental habits in contemporary society. Plenty of examples could be cited, but one discussed many times in this blog – peak oil – belongs high on the list. All through the controversies about how much petroleum the world still has, how rapidly it’s being depleted, and whether or not it can be replaced by some other set of energy resources, one constant theme has been the refusal of most people outside the extreme “doomer” end of the peak community to notice that industrial civilization could end up in deep trouble if things go badly.

Those who argue that the world still contains ample supplies of oil that just haven’t been found yet, like those who insist that innovation will take care of the problem by pulling some currently unknown technological rabbit out of a hat just in time, tend to respond to such questions as “but what if you’re wrong?” in the same tone of irritated superiority as a Wall Street financier might have done a few months ago if asked what would happen if subprime defaults got out of hand. There’s an oddly incantatory quality to this nothing-can-go-wrong rhetoric, as though it will all work out fine just as long as everybody agrees it will.

As the long and sordid history of economic crises shows all too well, though, optimism is not always justified, and things that seem too good to be true generally are. Right now the world economy is reeling and shuddering because a great many otherwise intelligent people jumped to the conclusion that nothing could go wrong with a new set of moneymaking schemes that promised something for nothing. The similarities between this bit of delusion and the even more widespread faith that humanity can pump infinite amounts of cheap energy out of a finite planet leaves me wondering if the exponential expansion of industrial society over the last two centuries or so might be seen, in a certain sense, as the biggest speculative bubble of them all.

Speculative bubbles, after all, always launch themselves from a basis of fact. It was true in the 1990s that huge new fortunes were made on the Internet, and investments in computer firms during those years paid off spectacularly. It was true earlier in the present decade that a lot of Americans wanted homes of their own, and low interest rates and abundant capital from overseas made it possible for that desire to be met. Equally, it was true that the exploitation of coal, oil, and natural gas by way of an ever more sophisticated suite of technologies enabled the industrial societies of the West to enjoy the great-grandmother of all economic booms.

Just as every speculative binge eventually trips itself up on its own excessive optimism, in turn, industrial society ignored the well-timed warnings of oncoming resource depletion in the 1970s. The small but steady declines in oil production that have taken place over the last two years, despite sky-high oil prices and a flurry of well-drilling that has driven rig costs to record levels, may just turn out to be the equivalent of the rising default rates in subprime mortgages that started today’s economic landslide on its way. At the moment, industrial civilization is poised somewhere in the same period of eerie calm between the beginning of decline and the arrival of panic that comes late in the history of every speculative binge. In the example now unwinding around us, that period of calm ended a few weeks ago when Bear Sterns admitted that two of its billion-dollar hedge funds were no longer worth a cent. What will end the equivalent period in the trajectory of our civilization is still anybody’s guess, and it may still be years in the future.

Whenever it comes, though, the central problem that will have to be faced then is the same problem that banks, mortgage companies, and the global economy are having to face right now. By ignoring the reality of risk, the money managers of the last few years left themselves with very few options once the economic situation changed in a way they hadn’t anticipated. In the same way, by ignoring the possibility that we may be running out of cheap abundant energy, modern industrial civilization could well be backing itself into a corner. Without preparations in place, or even a sense of what the options might be, we could all find ourselves desperately scrabbling around for a Plan B when the illusion of endless energy supplies pops around us like a bubble – speculative or otherwise.

22 comments:

LizM said...

Funny. "Tranche" is French for a slice of bacon. It makes it sound as though you're getting something that may look meagre, but is actually rich and satisfying. It's as though the word were put in place to ward off anticipated qualms about lack of substance.

"Tranche" is a nicer word than its English equivalent, "rasher", but the latter seems far more appropriate.

Danby said...

What's really ridiculous is that the meltdown was triggered by hedge funds losing money. Hedge funds are supposed to lose money in normal times. A hedge fund is a bet placed contrary to one's expectations, so that something can be salvaged even if you're wrong. The two critical properties of a hedge transaction are a high level of payout, which is directly opposed to the bulk of one's investment, and the expectation that the investment will be a loser.

Then again, I don't see how a mortgage pool can qualify for hedge status anyway. What's the investment whose loss means a sub-prime mortgage win? Without direct opposition, it's not a hedge. Toxic waste is a much better term for these things than hedge fund.

Financial systems are the least stable and most poorly operated systems of all.

FARfetched said...

I can answer one point: It’s less understandable that people who wanted to buy houses... lost track of the fact that if things went wrong they could be left with debts far beyond their ability to pay.

What did they have to lose? They had no equity in the house, and their payments didn't even cover the interest. The saying goes, "If you owe the bank a thousand dollars and can't pay it, you have a problem. If you owe the bank a million dollars and can't pay it, the bank has a problem."

I expect that when push comes to shove, the bagholders — excuse me, the owners of the CDOs — will re-negotiate a lot of those loans to keep homeowners in those houses and making payments. Writing down a loan is painful, but not as much as writing it off. Sure, they could foreclose, but they'd end up with a property they couldn't sell for anywhere near the value of the loan (plus the property taxes coming due in a few months, maintenance, and real estate commissions would be a further drain).

That's Plan B. A lot of false money evaporates, pain gets spread around pretty evenly, and the whole Rube Goldberg device churns back to life. Peak oil, at least for the next few years, simply means higher prices for gas in the US (and inflationary pressure on everything else that depends on oil, which is everything). Inflation could also provide some relief to homeowners, where they make payments with cheaper dollars (or sell out, or both).

Plan C is a moratorium on foreclosures. That would suck big-time for the financiers, but again they might prefer it to holding property (see above). If it comes to that, though, I expect things will get so scrambled that nobody will care who has the piece of paper that says "Title Deed" on it.

Jim said...

A tricky facet of these boom & bust cycles... I don't think there are any super-powerful or super-knowledgeable people that can somehow conrol or predict the exact path that these cycles take. But still, the general pattern is well enough known. Just as many folks are bankrupted by the crash, there are generally folks who manage to profit by it. Not all of this is luck. Maybe it's a bit like vultures at a battlefield.

Anyway, part of weathering these storms is just keeping one's own head above water. But another aspect is to stay aware of who has managed to position themselves to take advantage of the instability... it's like with Hurricane Katrina - the wind, then the water, then the looters and other folks prepared to threaten or use violence to steer the situation.

eboy said...

It is estimated (by exactly who, I don't recall ) that 1 in 4 U.S. dollars outside the U.S. is counterfeit.
This is deemed as being a part of the U.S.'s foreign hegemonistic or imperialistic desires.

One apparent problem with this plan is that I don't think Rupert Murdock owns all the foreign media.

So when 'Bloomberg news' reported the other day that the problem was 'contained' it may have fooled domestic consumers of this news but apparently foreign investors are aware of this game of musical chairs.

Apparently their is some 1,000 trillion or one quadrillion dollars now in derivatives (if I have understood this correctly) 10 ^15 is a big number.

I guess when you've got a printing press then fiat currency is a real trick.

Thanks J.M.G. for the summary of the b.s.

I was selling real estate in the early 90's and remembered the soothesayers then playing
the tune 'don't worry, be happy'. I wonder if people ever realize that their 'advisors' almost never advocate a 'run for your life' prescription. No doubt this would be deemed 'irresponsable' but then what council do you pay your advisor for?

The soothesayers are mired their existence foretold. Always chasing, chasing fool's gold.

awlknottedup said...

The comment that the US may in some ways be just another bubble touched on some things I have been thinking about recently. The history of the US follows the history of cheap energy or rather the overuse of natural resources which appears on the surface to be cheap. The US was founded in the latter part of the 18th century, a time when Europe was just starting the Industrial Revolution. The US was able to grow with the financial boost of cheap labor and near unlimited resources. Our own cheap energy sources were the fall line, where the rivers in New England fell enough to provide significant water power and abundance of wood for fuel. Limitations in water power by the early 1800s seemed to restrict industrial development to the Fall Line, By the first third of the 19th century the high pressure steam engines of Oliver Evans coupled with the huge coal reserves allowed industrial development just about anywhere. Coal required rail lines to be moved economically and those in turn needed the High Pressure Steam Engine to operate economically. Coal was still heavy and bulky and economical deposits were mostly located in small areas. In the middle of the 19th century a really cheap and easily transported source of energy was found in huge qualities, oil. Oil made railroads, coal mines, industrial development cheap and here we are. A bubble formed with cheap oil is an integral part of the history and development of the United States

awlknottedup said...

Additional comments on the current financial activities. It is a liquidity crisis that could be followed by an insolvency crisis. That is what the banks are desperately fighting what could ultimately be a losing battle. With the tanking of loan portfolios caused by over leveraging, many found themselves unable to come up with more cash and more cash is what the system depends upon to run smoothly. Unable to come up with cash is what is causing the current problems and if left long enough could lead to an insolvency crisis. That is when institutions can no longer pay their obligations. The US Fed and in a significantly larger extent the European banks are injecting money into the system to prevent insolvency. But is this injection to prevent insolvency or is it to protect and hide bad investments? One very notable exception to the cash pumping is China.

This cash pumping will do little more than allow more money for more leveraging and speed up the spiral, whichever direction it is going. One real affect will be a significant increase in inflation. You can see that in the recent drops of the Euro against the Dollar as the new money finds its levels. This is almost a classic definition of inflation, too much money chasing too few goods. The huge injections (well over $300B) of cash are not for new cars or mines or whatever but is just money added to the ledger books. So more money with the same goods equals inflation and with an injection somewhere around 17% of the money supply you can see where it will go.

This is not to be confused with Peak Oil price increases. Peak Oil will raise the price of everything but it is a case of shortages, existing money chasing too few goods. Those price increases will affect everything but these are real price increases and real wages will not be able to cover it up.

Bill Pulliam said...

Financial markets are a bit like political movements in that their relationship to real, tangible economic and environmental forces is tenuous and complex. Markets will boom in times of scarcity and bust in times of plenty. Like politics, they reflect hopes, fears, and other psychological forces more than anything "real." Even the cost of oil is a function of supply and demand AND perception, fear, hope, and delusion.

Danby said...

We've already got our first bank run of the current crisis.

mpg4 said...

AKU, I agree that this is a liquidity crisis that threatens to become an insolvency crisis. I don't think there's an inflation risk in our future -- I think that ship has already sailed.

I don't recall this being discussed here yet, so I'd like to give some intro to the issues. Apologies to those who know all of this already.

A 'liquidity crisis' is when you have some assets, but you need cash *right now*, and you can't sell your assets right now.

You may have $50k or $100k in equity in your house, but if you're checking account is empty and your car breaks down, you have a liquidity crisis.

You can solve a liquidity crisis by selling or borrowing against your assets -- in the case above, selling your house or getting a home equity loan. This is a perfectly reasonable thing to do and normally doesn't cause a problem.

The problem comes when lots of people have a liquidity crises at the same time. This causes two mutually reinforcing problems. First, people start hoarding cash to pay off their own liabilities. It's harder to get a loan. Second, lots of people are selling their assets, which causes prices to go down, also making it harder to get a loan.

This is where the Fed(eral Reserve Bank) comes in. They are the 'lender of last resort' -- they have unlimited cash, so they can lend when others can't or won't.

The core of the problem, as JMG said, is the amount of bad or dubious debt that's out there right now. All of that is 'money' that's already on the books.

To take an example: A person who purchased a house in 1997 for for $50k discovered in 2005 that their house was now worth $120k. So they got a home equity loan for $20k and (bought a car, renovated their kitchen, went on vacation, etc.).

Mortgage Equity Withdrawals (MEW) like the above have been at a very high level over the past few years.
Think 'using your house as an ATM'.

The risk in my mind now is of *de*flation, not inflation. When all of these asset values (it's not just home mortgages -- there's been a wave of leveraged buyouts (LBOs) recently using the same easy credit.) start to drop back more reasonable levels, the money that was created will be destroyed.

Our economy, for better or worse, is tuned for small, stable levels of inflation. Deflation is disasterous.

In this view, the Fed's behavior appears more reasonable. Letting asset prices crash would bleed off all of the excess value, but the downward momentum would drive prices below their correct level, causing further, uneccesary problems. By injecting cash -- and these are loans against high-quality assets, they don't conjure new assets out of thin air like the Treasury does -- they can try to aim for the 'correct' level the first time around.

The key words there are 'try', and 'correct'. It's pretty clear that Greenspan didn't tried too hard (or his target prices were too high) after the dotcom bust and injected too much cash -- which led to the current problem.

I believe that these markets have only just started to unwind -- I saw a prediction of a 20-30% 'haircut' the other day, and that seems reasonable to me. It's too early to tell if the Fed (and Treasury) are going to let this play out, or if they're going to pump the markets up again.

Joel said...

We may not see the real risks in life anymore, but we do see risk.

Perhaps blindness isn't the most appropriate metaphor...maybe "hallucination?" People are more afraid of terrorists than of choking to death, for instance.

yooper said...

I must agree with joel, "risk", is only a preception, but as he has suggested has real life consenquences.... That is life, you get up in the morning and go to work, sure you may be killed getting there, that's the risk you take "to live".

Surely, our captialistic society is built on risk. However, is that true anymore? I'm going to be so bold to suggest it is not. "They" cannot let it faulter,(so quickly), to bring it all crashing down. No, they are prolonging the anabolic cyclic.....

However, my agruement has been, how long can this go on? As long,(in time) that resources,(whatever you may call it), will allow, period.

Your body needs water within 48 hours, or you will die. It needs continous noursishment or, within a month you're dead. We're talking time/energy here. This is "real" time.....................

What happens, if the "Long Emerengecy" is interrupted in any way. What happens if you're "energy" does'nt arrive in "time"? Where is the "real risk" at now?. Who can say there won't be this interruption in time? That, my friends, is where the REAL risk lies.

Thanks, yooper

Weaseldog said...

I believe that the Fed does understand the economic cycles and generates them. The process moves assets into the hands of bankers.

For a simplified example...
1. Subprime Loan is made to a young newlywed couple with a baby on the way. Say, $200,000
1a. The banker knows full well they won't be able to match the interest increase on the ARM, but leads them to believe everything will be fine. "We're looking out for you."
1b. The $200,000 was created out of thin air, based on other debts held by the bank.

2. Later, the bank ratchets up the interest rate. Loan goes into default.

3. Foreclosure occurs. The coupl have lost their down payment and money invested.

4. The bank now owns paper on a house. It has gotten a hard asset from money generated out of thin air.

5. The bank claims a $600,000 loss.

6. The bank gets a taxpayer funded bailout. Net profit from this adventure in scamming is $800,000

Anabolic Economics... I like that :)

I agree that the decline will mean an industrial contraction, with an increasing money supply, chasing a decreasing quantity of goods and services.

Right now, world energy production is essentially flat, if not in a mild decline. the liquidity that the Fed will pump into the market, will have nowhere to go. It will form a new bubble. Perhaps Bonds and T-Bills?

Like the last bubble, foreign interests will have the advantage of using the money first, before it is fully diluted. So with wages stagnant, oil and gas prices will rise, then milk and bread prices...

This is going to get exciting.

John Michael Greer said...

Thanks, all, for your comments! I spent most of the weekend out of town at a conference so didn't have the chance to respond to posts. Just a few comments:

Danby, the term "hedge fund" has mutated over the last decade or so to mean funds that hedge their own investments. The theory is that no matter what the market does, the investors make money, or at least don't lose much. The reality is that the models used by most hedge funds are a tissue of abstractions that only work during boom times -- thus the recent wave of meltdowns.

Farfetched, it'll be interesting to see how many home loans get renegotiated and how many end in foreclosure. This BBC news story mentions that foreclosures are way up this year, which doesn't really support your thesis.

Awlknottedup, excellent -- you've caught the central point of this post, which is that industrial society is itself a bubble driven by reckless extraction of nonrenewable resources.

mpg4 (and Awlknottedup), my own guess as far as the great inflation-deflation debate is that we'll see neither one in its pure form, but rather a kind of reverse stagflation in which prices climb because the supply of resources is contracting, while the economy also contracts due to the unraveling of today's hallucinatory finance schemes: a recession with rising prices, in other words. I know that's supposed to be impossible, but so was the stagflation of the '70s before it happened. Still, it's only a guess.

Weaseldog, I tend to be allergic to claims that Somebody manufactures business cycles for their own benefit -- a very old claim, one that has had a dizzying number of candidates for the Somebody in question, and one that I think misleads far more than it explains. Expect a post on this sort of thinking down the road a bit.

Weaseldog said...

Weaseldog, I tend to be allergic to claims that Somebody manufactures business cycles for their own benefit -- a very old claim, one that has had a dizzying number of candidates for the Somebody in question, and one that I think misleads far more than it explains. Expect a post on this sort of thinking down the road a bit.

I understand you reluctance. Its up there with thinking that someone would start a war and have millions of people killed for personal profit and glory.

I used to work in the bowels of brokerage house that was purchased by a major bank. I got to know the kind of people that are attracted to that kind of money. The Principles of that corporation were intelligent, greedy, bullying and completely self absorbed.

In other places I've worked I've seen similar trends. Big money is very attractive to people who feel no other emotion than pure greed. and the most intelligent and ruthless will rise to the top of these organizations.

The people I worked for would gladly torture to death their own family members for money. They bragged about people they had cheated and they actually got into fist fights in the conference room.

I've since turned down jobs working in finance after my experiences in the industry. I've rubbed elbows with CEOs and partners, and I haven't met one that I want to meet again.

I doubt that the Fed leadership has nicer people in it. It seems to me that the most intelligent, greedy and ruthless would rise to the top of the ranks there.

For this reason, I have no trouble at all believing that these people would set events in motion that would personally benefit them, while harming others. I've seen such things done before.

yooper said...

Hey weasel dog! Really like that, "Anabolic Economics"! Can't agree more! Thanks for coming to John's site!

Thanks, yooper

yooper said...

John, you've alluded to a civil war in "Adam's Story". Can I ask you what this civil war was about? People only fight if they think they'll gain something or protect what they already have. What do you think this might be?

Thanks, yooper

John Michael Greer said...

Weaseldog, my objections to efforts to find scapegoats for the business cycle isn't based on any notion that the guys running the Fed are morally superior to such things -- of course they're not. It's based on the recognition that at their level the game is played for the much headier currency of political power. Historically speaking, the sort of economic implosion that seems to be unfolding around us right now pretty much always turns into a disaster for the political status quo -- think of the generation or so after 1929, when Republicans couldn't win elections for dogcatcher in a very large section of the US.

That's why the last 20 years of US economic history -- since the 1987 crash -- has seen an increasingly desperate series of attempts to stop the business cycle in its tracks by any available means. One of the unanswered questions of the current situation is whether the Bernanke Fed will copy Greenspan's policies and flood the markets with more cheap credit, or whether they've recognized that they're just prolonging (and worsening) the inevitable crunch and are trying to manage a controlled descent. Either way it's going to be a wild ride. But again, I'll be discussing all this in a future post.

Yooper, there are at least a hundred reasons why civil war might break out in deindustrializing America; if you remember some of the wild talk from both sides of the Red State-Blue State divide right after the 2004 election, some of those may come to mind. Since these are fictional narratives, I haven't pursued which of the many possible causes actually launched the civil war.

Bill Pulliam said...

Wars are generally fought for the two interlinked goals of maintaining/expanding political control and the resource base. Even "holy" wars are usually more about politics and economics than anything else. Higher purposes (democracy, abolition of slavery, god's will, etc.) are just tagged on as a veneer to try to cover the ugly bits.

I can imagine a whole bunch of conflicts that could turn into shooting wars -- water, food, ethnicity, and language are some issues that leap to mind. Food, you might wonder? Well just imagine, in a time of hardship, if California decided to stop feeding all the rest of us and reserve its agricultural bounties for its own residents. You think the rest of the continent would take that lying down?

Danby said...

What's ironic about the fed trying to break the business cycle is that the very tools they use, i.e. fractional reserve banking and government management of the money supply, are the root cause of the business cycle.
No, that's not accurate, let me restate that, they intensify and deepen the swings of the business cycle.
Normally prices naturally increase and decrease. Price increases harm consumers and workers. Price deceases harm investors and lenders. By manipulating the money supply and credit markets, it's possible to avoid one or the other. Guess which one has almost never happened since the creation of the Federal Reserve.

yooper said...

Bill, you brang up are very interesting point. Up until now, I've only invisioned a very rapid collaspe, thus, no wars, no large scale orgainized efforts of anykind. No goverment, no elite, no lights, period. Within days a permanet blackout thoughtout North America.

As for you're thoughts about food grown in Calif. to be distributed locally...What about water? What about power? Does'nt Calif. have to import this? Here in Michigan and other Great Lake States, proposals are being drawn as fast as they can be voted into law, regarding this water.

You're point is very valid, I'll have to comtemplate this. It never occured to me before...thanks.

yooper

Weaseldog said...

JMG, Thank you for the welcome. I appreciate the points you make.

I think though, that we're in a new era, and that historical comparisons may not mean as much as they used to.

My concern is in that there is evidence that the 'Elites' have been aware of Peak Oil for a long time. We know that the Pentagon has been doing research into this for decades.

The aftermath of Peak Oil will wipe out the entire business model we are accustomed to, along with most of the planet's population.

If they know this, then they understand the rules of the downturn.

1. Pre-Peak, everyone can win. Energy and economic growth can lift many boats.
2. At peak, the nature of a zero sum game means that for their to be winners, losers must be created.
3. Events tend to drive everyone into a losing position. Winning may simply involve not losing ground, by consuming the resources of weaker parties.
4. Post-Oil, how long can you tread water?

Then again, since 1987, we've seen population growth outpace energy growth. the effects of this we've seen in the IMF's austerity measures in which they've forced many nations into poverty and prevented them from growing in energy consumption. This has allowed some nations to expand, in an effectively negative growth game.

In extreme situations, we've seen that people will resort to cannibalism. We see similar effects in business during recessionary periods. What happens in a depression, that never ends?