Rosy Predictions of Declining Natural Gas Prices Ignores the Long Term

May 27, 2014

In the wake of the recent Russian-Chinese natural gas deal, there have been any number of rosy predictions regarding declining prices. Consider this story over at oilprice.com:

“How The Russia-China Gas Deal Hurts U.S. Liquid Natural Gas Industry”

There are far too many hedge words in this piece to become comfortable with it:

“For example, China has long been seen as a massive consumer of liquefied natural gas (LNG) – gas that is turned to liquid form and transported by super-chilled container ships. The deal with Russia could curb quite a bit of that projected demand.”

“This could dampen the demand – and ultimately the price for – LNG from the United States.”

“The Russia-China deal may change that.”

“the most expensive LNG projects may no longer be profitable.”

But despite the similar sounding headline over at Bloomberg,

“Russia-China Deal to Damp LNG Prices as Output Rises”

towards the end of the story, the substantive counterpoints to the rosy outlook for lower prices emerges:

“‘This deal results in a slight reduction in the rate of growth in LNG imports but nothing that is going to keep anyone awake at night in Doha,’ (Tony Regan, energy consultant at Tri-Zen International, Singapore) said by e-mail. ‘The deal could actually lead to a call for yet more LNG. With Russian supply now booked, it will give the planners comfort to keep building out the domestic gas market and then we are likely to see them calling for more supply -– more LNG, more piped gas from Central Asia.’”

“Japan and South Korea, the world’s two largest buyers of contract LNG, will face tighter supplies by 2025, according to Gavin Thompson, head of Asia gas and power research at Wood Mackenzie Ltd. The Russia-China pipeline deal won’t give the Japanese or Korean buyers leverage in near-term LNG negotiations because they already have enough contracted supply through the start of the next decade,”

I find it more than a coincidence that the Russia-China 10-years-in-the-making gas deal was sealed in the aftermath of the Ukraine situation. Putin didn’t give up anything, and the Chinese were served their epiphany on a cold platter, realizing what the future of pricing held for natural gas.

Pricing control over the eastern EU pipeline has been tightened (helping Russia gain pricing control here will boost natural gas prices for Europe, thus justifying the necessary U.S. energy company infrastructure investment for exporting LNG to Europe) and China has Russia’s western pipeline booked, LNG prices may drop in the short term, but in the long term have nowhere to go but up, especially for Japan, Korea, Europe and, by transitive properties, the United States (U.S. natural gas suppliers will eventually get their wish in Congress and have export restrictions dropped, effectively siphoning off U.S. supplies for foreign markets and allowing prices to rise in the U.S. despite the widespread use of fracking used to remove natural gas).

Centralizing control over natural gas sources has one major advantage: pricing power for suppliers.

And as one energy industry generates a price rise, so will suppliers raise prices for other mainstream energy sources. Forget the nonsense you learned in economics class about consumers having a choice and substituting lower-cost alternatives. Now you are studying real-world economics, with heavily centralized energy sources limiting choices and raising prices.

* Questioning the idea of a U.S.-Russian alliance? Consider this tidbit from Bloomberg’s recent story, “Ukraine Crisis Drives a Quiet Lobbying Boom in U.S.“: 

“Exxon has drilling rights to 11.4 million net acres (46,134 square kilometers) in Russia, it’s biggest single cache of drilling rights outside the U.S. The company also is planning Arctic drilling in an alliance with state-owned OAO Rosneft.”

The lobbying has been, as the headline suggests, “quiet,” since U.S. corporations do not wish a) the illusion to be broken and thus publicly reveal the close ties between them and Russia, nor b) to tamper with the charade of “strong” U.S. foreign policy against Russia. And despite its optimism regarding the decline in natural gas prices, oilprice.com peeled back additional information on the U.S.-Russian alliance.

Best Argument for Mass Surveillance Evolving Into Police State

May 8, 2014

And I probably broke some law using “Press This”…

http://www.washingtonsblog.com/2014/05/may-think-nothing-hide-still-breaking-laws-government-spying-discover-use.html

 

 

US Interstate Highways Will Privatize; More Toll Booths Arriving

May 6, 2014

After reading Yves Smith’s post on naked capitalism last week regarding the privatization of U.S. infrastructure, and remembering a news item from the Washington Post (link at No. 1, below), I am convinced that the privatization of the Interstate highway system in the U.S. is now underway.

The road to Interstate highway privatization:

1. Allow toll roads to be established on existing interstate highways.

2. Lease out the newly created toll roads to private concerns.

3. Raise tolls, cut maintenance, or a combination of both to maximize profits (note what is arriving in 2016 in this rate story).

4. Deflate commuters’ wallets: It’s a reasonably intuitive conjecture that Interstates serving large metropolitan areas, carrying the bulk of daily commuter traffic, will be the initial targets for toll booths.

And for added stimulus that will increase justification for this movement in the minds of the pro-privatization parties, a fire on the horizon helps.

But the benefits from toll-road privatization for the State of Indiana and its infrastructure are to be found where? So far, I have seen no evidence of how the privatization of infrastructure creates better outcomes.

I favor the decentralization of government, but I also remain a believer in the idea of public goods. There are some roles a national government should fill, and an interstate highway system is one of them. While rampant corruption and waste have become institutionalized in the government backing of infrastructure build out, I see no reason why the same wouldn’t unfold in the privatized backing of infrastructure build out.

Citizen oversight committees, populated particularly with experienced accountants, are needed to push back against stacked bidding and cost overrun processes.

How a citizen oversight committee is prevented from also coming under corrupt influences is the critical question here.

A Lion’s Standoff

April 23, 2014

Life’s little ironies…

“Go ahead… make my day.”

Ukraine and the Removal of U.S. Natural Gas Export Restrictions

April 15, 2014

On March 18, 2014 at 10:17 a.m., over at naked capitalism I commented on the Ukraine situation (and got clocked for it) thus:

Well, the U.S. gets a double win here, as eventually Europe will have to buy our natural gas exports (and we can legitimize our need to export), and what a great bargaining chip that becomes in forcing the EU to start agreeing to the U.S. terms on the trans-Atlantic trade agreement.

Damn, who thinks these things up in D.C.? Pure (evil) genius.

My point remains: A move to export natural gas doesn’t have to “make sense.” In her March 31, 2014 post at Our Finite World, “The Absurdity of US Natural Gas Exports,” Gail Tverberg does a great job of arguing her point against exports, but even she recognized why these efforts are moving forward:

“Why all of the natural gas exports, if we don’t have very much natural gas, and the shale gas portion (which is the only portion with much potential for growth) is so unprofitable? The reason for all of the exports is to pump up the prices shale gas producers can get for their gas. This comes partly by engineering higher US prices (by shipping an excessive portion overseas) and partly by trying to take advantage of higher prices in Europe and Japan.”

Her emphasis, not mine.

And right or wrong, the speculators seem to be onboard.

We have legal restrictions on natural gas exports in place, and the energy companies are leaning on Congress to remove those restrictions.

What better way to stir the we-need-natural-gas-export-restrictions-lifted pot than to find a bottleneck in the gas supply in a country that had a shaky political landscape (Ukraine), the help of which we could get those restrictions removed? Blunt force to remove those restrictions would not have played well with an American public that has grown accustomed to the we-need-energy meme.

Once those restrictions are removed, the carrot starts to look bigger for those trade agreements dangling over the Atlantic (TransAtlantic Free Trade Agreement, or TAFTA) and Pacific (Trans-Pacific Partnership, or TPP). Intransigent opposition to U.S. demands, from either side of those ponds, can quickly melt away when European and Asian political leaders are faced with populations growing cold over a harsh winter. Consider:

The crisis also is being used to promote a proposed trade deal, known as the Trans-Atlantic Trade and Investment Partnership, between the U.S. and 28-nation European Union.

“The recent developments in Ukraine only make it more clear why TTIP is important,” Froman said during a March 22 interview in Brussels.

(see “Ukrainian Crisis Not Wasted by Washington Lobbyists” link below for source of this quote).

While Germany and Japan rattle their sabers and threaten a return to coal power, they do so mainly as a weak attempt to counter what they know will be a choice between a) doing an about-face and return to nuclear, or b) adopt a larger share of natural gas, to counter adding to greenhouse gases during the generation of electricity. By adopting natural gas, both Germany and Japan know that road runs through the U.S., but are – at this point – unwilling to admit it for fear of the inevitable: The U.S. using its gas supply as a bargaining chip in the ongoing trade negotiations mentioned above. While the U.S. government wouldn’t restrict the flow of natural gas to these countries, they certainly have the power to control export tariff levels on gas supplies.

UPDATE: As this Financial Times article underscores, Europe knows its options for natural gas sources are dwindling:

“Mr. Todiichuk said the potential for a new ‘gas war’ was pushing Ukraine – along with countries in the EU – to step up discussions on measures to diversify away from Russian gas.”

With slowing demand for energy due to a global economic anemia settling in, what better use of a synthetic crisis (Ukraine) to keep natural gas prices rising? Right now, with the widespread use of fracking, the U.S. is awash in natural gas, and energy companies want to get it off U.S. shores so that prices can rise, rather than falter. Never mind the transportation costs: If natural gas prices rise, the cost of developing the infrastructure to ship natural gas overseas will increasingly become a secondary, even tertiary, consideration.

Additional resources

This certainly adds credence to the argument that Ukraine simply became a pawn in a larger natural-resource pricing move: Ukrainian Crisis Not Wasted by Washington Lobbyists.

And there’s nothing like a crisis to keep the momentum of foreign energy companies (including the U.S.) moving towards the Drain of Spain: Foreign Frackers Now Find Comfort in Water-Hungry Spain. And Spain itself is running into trouble from its reliance on hydro-electric power, only adding to its eventual need for natural gas.

For those who find it unimaginable that stupidity runs rampant in the natural-gas sector consider this: Gas Carousel Making Spain Europe’s Biggest LNG Exporter. So do you think with this kind of mentality the LNG folks will really care if they ultimately drive up the price of doing business in the U.S.? They don’t get paid to be considerate. Besides, reflecting on the global scope of the natural-gas moves in play, it’s plain to see the powers-that-be in this sector intend to drive the prices upward on a global scale, thus not creating any cost disadvantage solely for American businesses.

A pot of gold at the end of an otherwise gray rainbow?

In the long-term, this manic drive to increase natural gas prices should spur other countries to develop alternative energy technologies, to remove themselves from the shackles of both U.S. and Russian natural gas. Perhaps, just perhaps, we’ll see the advent of a real paradigm buster with the creation of technologies that will finally make hydrogen a viable energy source, unleashing the potential of our universe’s most plentiful element.

 

Government Fleecing Shows Public Health System’s Failures

April 10, 2014

The latest round of fleecing-the-government has cropped up in the Medicare system.

What a surprise.

These newly minted millionaire doctors shows that the single-payer-system-is-Nirvana meme is nothing more than the tired flapping of gums by those who continue to believe that the Federal government can still manage its bloated bureaucracy,”if only….”

Whatever. Consider these top-of-mind failures from our Federal government. There are far more that I have forgotten:

  • SEC and other designated regulators failing to stop Wall Street banks selling crap collateralized debt obligations (those pools of mortgages that went south, the hangover from which we have yet to recover).
  • Entangling ourselves in a war we didn’t need to fight in Iraq, while taking our eyes off a war that we desperately needed to win over in the peace, i.e., Afghanistan.
  • The Bureau of Land Management, et. al., and the massive agency capture that took place, allowing oversight to look the other way while BP, et. al. built oil platforms out of Tinkertoys in the Gulf of Mexico.
  • The National Highway Traffic Safety Administration (NHTSA) whistling past the graves of those who died in GM automobiles.

Etc., etc., ad infinitum, ad nauseum.

“But wait,” you say as you attempt to register a complaint, “we have a private healthcare system that is already fleecing the government-cum-taxpayers.”

Indeed we do, but it is not a free-market system, not even close, and those hypocritical pansies who pass as CEOs of healthcare insurance firms, who will thump their chests over our need for “free markets” are the very same ones who blocked a proposal during debates over the ACA that would have rescinded state-line barriers to selling healthcare insurance everywhere and anywhere. The management of HMOs and their ilk soiled their collective pants when faced with the red-hot prospect of having to release their grip on their state-bound oligarchies.

If you want to know what a real free-market healthcare system would look like, one that would drive the healthcare profiteers into the streets weeping, then you’ll have to glance at this.

There are countries that have single-payer systems, and they work well for those countries. Not perfectly, but well. Here in the U.S., however, we are saturated with a fleece-the-government culture. Infrastructure projects cost far more than they should, as do defense procurements, healthcare systems, airway traffic systems… the list goes on.

So what part of history leads any of us to believe our Federal government is fully capable of properly managing a single-payer healthcare system?

 

The Economic Metaphors of ‘All is Lost’

March 6, 2014

Now that the hub-bub of the Oscars is over, it’s an appropriate time to examine the metaphor-laden film, All is Lost. It was nominated for an Academy Award in sound editing (but ultimately taken by Gravity), but received little attention during Oscar season. I believe the economic metaphors were recognized by the elites, and they weren’t very interested in promoting All is Lost any more than necessary.

I must provide a spoiler alert, although the film is one of those “have-to-see-it” experiences. Having read summaries before seeing All is Lost, I held some trepidation about the film, wondering if a single cast member with a dialogue-less script (there is a short voice-over at the beginning) could really pull it off.

It works. As I said, you have to see it for yourself to believe such a sparse premise can keep your attention.

However, I do not plan to undertake a scene-by-scene analysis here. The broader strokes are discussed. I’ll leave it to the viewer to fill in the gaps. And forgive me if some of the descriptions show my lack of understanding the nomenclature. Having hailed from the Midwest doesn’t lend itself to a very full education of maritime knowledge.

The economic overtures are already at a start when we learn All is Lost was written and directed by J.C. Chandor, who garnered an Academy Award nomination for best original screenplay for Margin Call, an excellent film on Wall Street’s role in the Global Financial Crisis.

The film opens with a skipper (Robert Redford) sailing solo through the Sumatra Strait (Strait of Malacca) on a 39-foot Cal Yacht, a fiberglass-hull yacht mass produced from the Sixties through the Eighties. It is not a finely crafted, custom-made vessel lovingly assembled by hand.

On the face of it, we have to assume the solo sailing effort is part of a retiree’s bucket list. Sailing where, for what distance, is left to the imagination. It matters little, for what is about to unfold negates the necessity of explaining. Yet, we have to question the wisdom of undertaking such a voyage – no matter how short – once the gaps in the skipper’s knowledge are revealed.

The Sumatra Strait connects the Indian Ocean to the Pacific Ocean by way of the South China Sea. Other locations were also used for filming, including the Caribbean, but All is Lost opens with a screen graphic that places the waters as being the Sumatra Strait. Locating the scene is important, not only for our sense of curiosity but that this strait represents one of the most critical shipping lanes into and out of China.

The film opens showing the yacht aground on a floating shipping container (one imagines the shipping container must have went overboard during a storm, although in reality I cannot fathom this happening very often but then again, what do I know about oceanic shipping?). A corner of the container has punctured the hull. This occurred while the skipper was taking a nap below deck. Water is slowly sloshing through the hull, and gear is bumping around cabinets, which wakes the skipper. Surprisingly, we find that the yacht had been under sail at the time of the unmanned collision. Why was the skipper asleep?

Redford’s character seems to represent the American worker, who was “under full sail” when the American economy was fully functioning. Becoming complacent about the economic success around him, the American worker decided to take a nap without exercising caution (lowering the sails). He runs aground on the manufacturing capacity of China (the shipping container, marked in Chinese characters).

The skipper manages to pry the hull off the shipping container, but in the act of doing so one of the container’s doors opens. He swings the yacht around to retrieve his sea anchor (a part of separating the yacht from the container), but this allows him to see what was inside: Out floats hundreds of tennis shoes, expensive at retail, but an incredibly cheap product to make in China. The shoes symbolize the sizable profit margins that can be had by corporations offshoring jobs.

The skipper doesn’t have a choice: he must repair the hole in the hull if he has any hope of reaching harbor. While he does have a fiberglass repair kit on board, it isn’t large enough to properly lay up enough fiberglass cloth to withhold the rigors of sailing at sea. We see a shot of the final repair; it doesn’t look promising. It may well be that not only is the repair kit lacking enough material, so are the skipper’s skills at rendering the repair.

The American worker recognizes the severity and significance of the damage, but he simply doesn’t have the proper tools or skills to bring his vessel safely back to harbor for a more thorough repair.

The lack of skills is highlighted elsewhere.

The onboard electronics were severely damaged as a result of the accident. The laptop looks as soggy as bread dropped in water. The skipper is on his own, reduced to surviving by his knowledge and instinct. But the skipper lacks the knowledge – or possessed the knowledge at one time but since the computer has overtaken so many of the duties for him, he no longer retains the knowledge. The skipper is forced to pull out a book on navigation, with instructions on how to use the old-fashion sextant (analog computer) and night-time sky.

There is something disconcerting about seeing the skipper pull out this book during a crisis. Doesn’t he know this? Is this a matter of too little, too late?

In a parallel manner, the American worker has forgotten the basics as well, once known or, as with younger workers, probably never learned. The American worker no longer has to think, just do as he is instructed. Few bother to check the veracity of the data spewed forth from the spreadsheet; even fewer care. Awards are not in place for critical thinking. If the internal rate of return hits the magic number, then press the “go” button, no matter the real-world environment or potential for negative externalities.

It is simply easier to keep one’s head down and do whatever is minimally necessary to keep the paychecks coming in. Not only is initiative no longer awarded, it often leads one out the door. Managers do not tolerate well the knowledgeable underling who threatens his or her job.

The remainder of the film records a slow slide into oblivion, oscillating between bad choices made by the skipper (e.g., switching to a storm jib during a storm, or removing the boards on the hatch during a storm, etc.) and the threats completely out of his control, such as the storms themselves. Little by little, the yacht is reduced to a floating hulk. The skipper is eventually forced to abandoned the yacht for an emergency raft, before the yacht finally sinks below the waterline.

Likewise, the American worker experienced a similar slide into oblivion, wrought by poor choices and larger macro events seemingly out of his control.

The skipper comes close to being rescued, not once but twice by mammoth cargo ships navigating their way through the strait. In neither instance, however, does the crew on these ships spot our distressed sailor. The sense of impending doom rises in the viewer’s throat.

The cargo ships represent our globalized economy, with an endless stream of cheap goods shoved out of China and arriving in developed economies everywhere. The very size of the ships is staggering and when one attempts to calculate just how many goods are loaded on a single ship, it is overwhelming. To completely stagger our senses, how many of these ships leave China and Southeast Asia every day?

The captains of industry are metaphorically at the helm of these ships, too busy with shipping their cheap goods into retail stores to be bothered by some American worker struggling to stay afloat. They are so taken by the size of their operations that they cannot comprehend the disconnect between the tidal wave of goods being imported into America, and how the American worker will continue to pay for them once their incomes are diminished to subsistence levels.

In the end, the skipper becomes so desperate that when he sees a faint, distant light at night, he sets his raft on fire, hoping to attract attention. The material of the raft, however, is highly flammable and ignites into a conflagration in no time. We sense that by this point, the skipper doesn’t seem to care anymore; he has resigned himself to death.

With the last glimpse of the light we see, it doesn’t appear to move.

The skipper allows himself to sink, giving up the struggle.

At the very end, when all seems lost, he sees the shadow of a vessel overhead. He frantically swims up to the waterline.

An arm reaches in, and grabs him. He is saved.

A storybook ending, after all, but is it realistic? Will some unknown rescuer reach in at the last minute and save the American worker?

And who was it that undertook the rescue in the film?

We never see.

Who could it be?

The Irony of Our Focus on Income Inequality

February 26, 2014

The growing income inequality in the U.S. disturbs most Americans, as it should. Yet the irony is, focusing on materialistic-based equalities leads us away from rectifying income inequalities. In a sure-to-be controversial paper just posted on Scribd (free for the download), types of equalities are defined, and those that matter most are discussed. This paper concludes with the argument that Americans have it within their capacity to rectify income inequalities without waiting for a governmental response that will never arrive from our current political system.

Industrial Agriculture Castrating Sustainable Agriculture

February 25, 2014

For some time I have been at odds with fellow sustainable agriculture supporters over the seemingly singular obsession of the movement with Genetically Modified Organisms (GMO). GMO crops are hybrids on steroids, with the genes being manipulated in the lab rather than the old-fashion cross fertilization of plants.

GMO crops may indeed pose a real threat to human health, I’m not denying that possibility. But the problem with attacking GMO crops is the dearth of research out there that upholds our fear of GMOs. A nascent growth of research is emerging from Europe that starts to peel back the Secrets of GMO, since governments there fund the research. Here in the States, however, the state of GMO research is left wanting. Most U.S.-based research at the university level is funded by corporations or private organizations backed by corporations. The corporations that stand to profit from GMO crops represent a massive resource for university-research funding, so guess what the research findings reveal? Largely positive findings in favor of GMO crops.

Until a new model for funding university research is found, little ammunition will be found challenging GMO crops. Unfortunately, even if we see a precipitous rise in GMO research coming out of Europe that uncovers dangers in GMO crops, the very fact that the research emanated from Europe is enough for dark corners of power in the U.S. to launch a smear campaign against the results (which is precisely what happened to some GMO researchers in France, whose findings were less than flattering for GMO crops). “If the research comes from Europe,” the meme goes, “it can’t be trusted.” Never mind that these smear campaigns have yet to answer the very simple question, “Why can’t continental research be trusted?” It is enough that findings representing a challenge to the market power of U.S. corporations be eradicated in the quickest manner possible.

As a former sustainable farmer and and present advocate, there are two issues surrounding industrial agriculture that can be challenged, because the support for these arguments are in plain sight: 1) the erosion of topsoil thanks to the industrial practice of no till and the massive expansion of cropland under management by a single farm and 2) the largely uncovered story of Private Equity and Hedge Fund investment in farmland around the globe.

The erosion story will wait for another day; you can read a quick summary of the problem in Urban Redevelopment in Agriculture under the section, “Two Ills, One Remedy,” pp. 19-21.

As for the corporate consumption of farmland that challenges global food security, I uncovered this trend in 2011 while working on a paper for Worldwatch, a sustainability organization based in Washington D.C. Savills PLC, of London, openly promotes its investment fund in farmland, specifically known as InvestAg Savills. This fund pursues farmland acquisitions globally. The fund is active in the States, but also in Africa, a continent that has struggled with food security ever since colonialization.

Now a story has emerged tracing the threat to U.S. food security from Private Equity as well. The trend is growing.

The thinking behind this seemingly sudden interest in farmland-as-investment is simple. Since the Global Financial Crisis of 2008, investors quickly discovered that if stocks, money markets, Collateralized Mortgage Obligations and other derivatives could not be trusted as investments, then find a bottleneck, the place where inelastic demand exists, namely, food and energy. Food and energy are inelastic in their demand because people need to eat and people need energy. There is no slack, there are no other options.

This is why Wall Street hedge funds have jumped into commodity speculation with both feet, driving up food and energy prices beyond levels demanded by substantive supply issues (Hint: there are very few real supply issues; most of the “shortages” reported in the press originate from “analysts” who operate as mouthpieces for Wall Street, and the dutiful dogs-turned-journalists report these analyses in the news without substantiating the claims).

Of course, farmland is directly tied into our food chain, so this becomes just another investment in industries with inelastic demand. It also holds the added benefit of large tax loopholes since investment in farmland turns speculators into “producers.” The goose laying the golden eggs is suffering from diarrhea, and the rest of us are left without real eggs.

More importantly, both farmland investment and topsoil erosion are real issues, and the arguments can be backed with real findings. This is why the sustainable agriculture community needs to concentrate on these real and immediate dangers, instead of chasing tenuous issues that are difficult to substantiate at the moment. Start with the substantive issues, gain some credibility, then go after demands for objective research into GMO crops.

Right now, the sustainable ag movement is running in circles, making deep ruts that lead nowhere. Meanwhile, industrial agriculture is heading in the wrong direction, unfolding in insidious ways, and very few are blowing the whistle of warning. As long as industrial agriculture keeps sustainable agriculture mesmerized by the GMO debate, it succeeds in castrating the movement.

Addendum: The sustainable agricultural movement needs to increase its awareness of the growth in shills from industrial ag populating its ranks. For instance, there is a large group on LinkedIn associating itself with organics that is loaded with industrial ag shills, and other actions by this group leaves a question as to where its loyalties can be found.

The entire organic-food industry has become suspect, as the certification process places a large financial burden on small producers while clearly favoring large producers – owned by even larger food giants – who not only find it much easier to pay the fees, but can achieve organic certification with lax standards. True sustainable agriculture is far more demanding in its practices but since there are no legal standards to define sustainable ag, nor any concerted effort to educate the public on sustainable ag since legal standards do not exist, it keeps real knowledge from making its way to the public forum.

Seven Years and Still No Basis for Regrowth

February 18, 2014

From a December 10, 2008 post on the original, independent The Small “r” blog:

During a mid-career pursuit of graduate school, I wrote a paper in 2004 investigating Japan’s seemingly endless and entrenched recession that started in 1991. This led me to research the economic health of middle-class American households which, in turn, brought me to the Federal Reserve data that I highlight in this paper (see page 4). At first glance, I had to double-check the calculations I ran on the Excel spreadsheets downloaded from the Federal Reserve. I couldn’t believe the increase in debt loads, nor how our economy was still functioning.

Having this knowledge swirling inside my head – it was akin to having a broken leg, wherein you can never completely ignore the pain until it heals – a short, almost insignificant news story caught my attention in March of 2007. The New York Times headline read:

Authorities Investigate Big Lender

The story reported accounting irregularities at the New Century Financial Corporation, a large mortgage company that specialized in subprime mortgages. “The troubles at New Century are the latest sign of the deterioration in subprime lending,” the story related, “until recently the fastest-growing segment of the mortgage business.”

Could this be the beginning of the unraveling? In light of what I knew about household debt loads, I was convinced of it. Online searches revealed that news stories as early as December 2006 started to report subprime mortgage holders were beginning to struggle due to rate adjustments. Two [now eight - ed.] years later, we still haven’t seen the end of the de-leveraging process.

Addendum

The Federal Reserve’s mammoth Quantitative Easing programs were installed out of fear, and one fear only: At all costs, prevent deflation, which is what a de-leveraging process of households will incur unless prices can be artificially propped up. Witness the fate of Japan. The real healing has yet to begin; we have simply seen a very large bandage applied on the U.S. economy over the past few years.

We have little meaningful household income growth save for at the the upper five percentile, the Federal Reserve’s Quantitative Easing helped increase food and energy prices at a time when most households experienced stagnant or declining incomes (thus pulling even more money out of circulation from the middle class), and what growth has been eked out can be traced to the continued rise in household debt, which is now being called “good news” by Bank of America CEO Brian Moynihan… as does, incredulously, Shaila Dewan at The New York Times.

Bottom line: Nothing will be done about the U.S. economy, which is why neither presidential candidate in the 2012 presidential campaign discussed economic rebuilding programs but managed to create many diversions. The end game is to drive down labor costs as much as possible, while continuing to drive up consumer indebtedness as much as possible. If this sounds like a recipe for disaster, well, it is, but remains of little concern for the powers-that-be. They no longer care, for at the point of collapse they will have extracted the maximum possible profits from the system, leaving no money on the table.


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