$20/bbl Oil That No One Can Afford

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$20/bbl Oil That No One Can Afford

Another great read from Stoneleigh at TAE . Once again, her thoughts are the embodiment of my contrarian mindset (I think I might be in love....don't tell Mrs JAG).  Basically, its a discussion of the old argument "Peak Credit versus Peak Oil". See the article for the background on this conversation.

Stoneleigh: Let me try to resolve the apparent contradictions by answering some questions from a TAE reader:

Q: In 1933 there was a shortage of everything. Commerce had been dead for enough years - killed by gold- buggery - that there was shortages except for crops that were rotting in the fields (and petroleum that was wasted, according to Jeffrey Brown, who I believe.) No money meant no production = shortages = no commerce = no new money in the system in a self- reinforcing cycle....

....citizens hoarded paper dollars as they had hoarded specie. Paper dollars were still worth more than (pauperish) 1930's commerce.

Stoneleigh: Exactly. The lack of money led to shortages because without it one could not connect buyers with sellers, so production died. But not for want of raw materials. Farmers threw milk they couldn't sell in ditches while down the road people were starving. That is what I have been saying will happen again. 

Money is the lubricant in the economic engine. Trying to run an economy without it is like trying to drive your car with the oil light on. The vast majority of the effective money supply consists of credit, and deleveraging will take care of that. As for the small amount of money left, people will be hanging on to it with both hands because they won't know when they'll be able to earn any more. 

The fall in the velocity of money will aggravate credit collapse dreadfully. The result will be an unbelievably severe liquidity crunch, worse than the 1930s because the scale of the hangover is proportionate to the scale of the party that preceded it.

For a while it will look like we have surpluses, merely because production will be set to meet a level of aggregate demand that will no longer exist due to a collapse of purchasing power. Then production will disappear as well.

We tell people to make sure they have preserved capital as liquidity, as dollars (and other currencies) will indeed be worth a great deal in relation to available goods and services. Those who still have money will be the only ones with purchasing power.

Q: 1933 = Diff'rent times, less people, less demand and less production in (all) aggregates.

Stoneleigh: Quite so. This time there are far more people with far fewer skills and far higher expectations. Moving into the same kind of crunch scenario will hurt far more this time. This is why I tell people that they have to build relationships of trust now to carry them (hopefully) through hard times. I don't say this because it's any kind of guarantee of success, but because it's all they can do and one has to do something. The big picture can look so awful as to be paralysing, so people need to keep taking one step at a time. It's far better to do that than to lie down and die, or drink one's self to death as many Russians did after their smaller collapse.

Q: If we have $20 oil there will be no crisis, guaranteed. $20 oil and we have lots of credit/money expansion. Multipliers working and inflation/growth. We would have commerce. We would all be buying shit from (low- wage/cheap coal) China.

Stoneleigh: I disagree. I think we will see $20 oil, but only because of a massive fall in aggregate demand due to the evaporation of purchasing power. $20 oil will not be cheap oil. On the contrary, it will seem very expensive to most people. 

That is what deflation does - prices fall but purchasing power falls faster, making almost everything less affordable. As a much larger percentage of a much smaller money supply will be chasing the essentials, they will receive relative price support, meaning that their price will fall less than everything else, so the essentials will be the least affordable of all.

As with many things, demand collapse sets up a supply collapse and a resource grab, so we could see oil go from $20 to $500, if in fact there is any oil left on the open market at all by that point. Since oil IS hegemonic power in a very dangerous world, that may not be the case.

Prices can rise in a deflation if there is a sufficient shortage of a critical good (just as they can fall in inflationary times if there is a sufficient surplus or production costs are falling rapidly). If prices are rising in nominal terms, they are going through the roof in real terms against a backdrop of a collapsing money supply.

Q: Oil shortages (relative to credit- fueled demand) force an allocation regime on a 'super- size me' economic model of 'all of the above, please!'

Stoneleigh: By the time we have oil shortages, we won't have any credit-fueled demand because there will be no credit. First we lose the credit, which cripples purchasing power, then we lose demand (where demand is not "what you want", but "what you can pay for"). We'll have a temporary glut of oil, which will kill investment. 

The lack of investment in new production, and lack of money for maintenance of existing equipment, and potential sabotage of existing equipment by those with nothing left to lose, set up a supply crunch. By that point very few have any purchasing power at all, and none of it credit-based, but governments and their militaries will be chasing down whatever is available for their own use (and hoarding where possible).

Q: Look around you ... everything you see, that you will see tomorrow and the next day ... what you eat and wear and sleep under ... the computer you write on ... is a product of cheap oil. Where would finance be without it?

Stoneleigh: There was a primitive derivatives market in Holland in the 1630s (at the time of the Tulipmania). Bubbles of 'financial innovation' (ie the rediscovery of leverage) do not depend on fossil fuels. They have happened time and time again in history and are a product of human nature. 

Energy, in one form or another, absolutely is a key driver of expansion, although one can build a ponzi scheme on surprisingly little of it because ponzi wealth is virtual wealth. It takes energy to build real things, but much less to build imaginary value.

Once a ponzi scheme has been created, it will collapse, as these structures are inherently self-limiting. Finance becomes a key driver to the downside, even where energy is still available.

Q: Maybe I'm wrong and maybe I'm an idiot but the confluence between you and I is where the US dollar becomes a proxy for crude oil rather than the proxy for commerce/business that was once upon a time leveraged from it.

Stoneleigh: I am not convinced we will see the dollar become a proxy for oil. I think the dollar will rise substantially as dollar-denominated debt deflates (creating demand for dollars), and people make a knee-jerk move into it on a flight to safety. However, I don't think this will last more than a year or two at most. 

I think we are headed into a chaotic currency regime where floating exchange rates are dropped, currency pegs instituted in an attempt to 'beggar they neighbour', and those currency pegs fail. I can't see any fiat currency coming that's being backed by hard goods, in that time. I can imagine a true hard currency down the road a few years, but I very much doubt it will be a currency that exists now.

Q: Nobody seems to have any idea what the hard dollar is going to do to them, their families, loved ones, dogs, goldfish, etc. Almost nobody alive has ever experienced hard currency. The deflationary power of the hard dollar is going to hit this country like the hammer of Thor. It's conservation by the back door.

Stoneleigh: Much of that will happen just by taking the credit out of the system, and if we do see a true resource-backed currency down the line, then it would be very much worse. It would amount to far more than conservation by the back-door though. It would be brutal deprivation with no regard for the most basic needs, let alone wants.

Q: Conservation isn't an issue unless there is something vital that needs conserving! It's not finance, Stoneleigh ... there is no limit to finance that is credit- based. There are only limits to finite natural capital!

Stoneleigh: There is a limit to credit expansion, as there is to every ponzi scheme. Eventually the debt created can no longer be serviced, the biggest sucker has been fleeced, expansion can no longer continue and we see the implosion of the structure, where the excess claims to underlying real wealth are messily and rapidly extinguished. The virtual wealth disappears. That is deflation.

Q: If cheap, accessible oil was available (still) it would be drilled, no?

Stoneleigh: It might well be left in the ground for later if there was already an excess of production relative to demand at the time.

Q: Take away oil and we have what we have ... a finance world without anything to leverage but rioting Greeks.

Stoneleigh: People have managed to leverage the darnedest things in human history. I'm not suggesting they do it in the absence of energy, but as I said before, the creation of virtual wealth through leverage takes much less energy than the creation of something real. Energy is required to fuel the necessary socioeconomic complexity of course, and it can be energy in many forms - food surpluses, wood or cheap/slave labour from colonies for instance. 

Fossil fuels have enabled the largest increase in socioeconomic complexity in history, and financial innovation is part of that. 

But finance is not purely a passive consequence. It is a key driver in its own right, especially during contractionary times, or maybe we should say: THE key driver both during Ponzi growth times and Ponzi contraction (collapse) times.

 

 

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Re: $20/bbl Oil That No One Can Afford

I kind of lean toward the deflationary camp now that i understand that every dollar of lending that is defaulted on takes 10 dollars out of the system.

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Re: $20/bbl Oil That No One Can Afford

Loved that post today too.  Stoneleigh gets it better than anyone in my book.

I particularly liked her recent comment regarding why she moved from writing on Oil  to write about credit/finance - - -alluding to the fact that the credit crisis will happen first, and therefore its more important and relevant to focus on that for the moment.

The world is already starving for dollars - thus the swaps CM just discussed.  Last time this happened, massive deflation struck and gold went way down relative to the dollar.  Time will tell if this will happen again....my guess is yes.  Now that M3 is contracting violently, and M2 looks poised to go negative (wowowow)....I just dont think the printing presses and hocus pocus can work.  Its failed in Europe and its only been a week or two since they tried!

pushing the string has no effect. 

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Re: $20/bbl Oil That No One Can Afford

http://www.cnbc.com/id/37195213 Meredith has a pretty good record & she talks about credit crisis here. Watch the video on the link.

Investors Should Avoid Banks 'At All Costs': Meredith Whitney

Investors should "avoid financials at all costs, particularly in the banking sector" because the Senate's financial reform bill will end up restricting credit and hurt bank earnings, well-known banking analyst Meredith Whitney told CNBC.

cnbc.com
Meredith Whitney

"Politicians have proven far worse than our worst expectations," she said in an interview. "It could be very bad for banks."

Whitney cited two new credit card rules in the Senate bill as particularly onerous. One would force banks to comply with individual state caps on credit card interest rates. The other would regulate how much credit card issuers could charge merchants for using their cards.

The state caps on interest rates, she said, could make rates in one state lower than in another, causing banks not to lend in certain states.

"It's going to make accessing capital so difficult for pockets of the country," she said, particularly for small businesses that often depend on credit cards for funding.

In addition, the proposed rule on merchant charges—instead of benefiting consumers—will price community banks out of the market, Whitney said, restricting credit even more.

"Some of these regulatory proposals are going to make it so difficult for everyone involved that you'll see, I think, at least another $1.3 trillion (of credit) sucked out of the system," she said.

Instead of "jamming down last-minute regulations just to appear to be tough on banks," Whitney said, Congress should make it easier for small businesses to obtain credit.

Still, Whitney said European banks are in even worse shape than their US counterparts, and she would not invest in them "in a million years."

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Re: $20/bbl Oil That No One Can Afford

Man, I would of thought that this topic would have provoked more conversation around here. I guess you never know.

I'm thinking I should have titled the thread "I just got stopped by a cop and he told me that Mike Ruppert and Chris Martenson were crackpots!"

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Re: $20/bbl Oil That No One Can Afford

Maybe it's a good contrarian indicator for the deflationists that this thread seems unpopular. I lean towards the inflationary side in my investing, but I try to live like a deflationist (no debt, low expenses etc..). However, reading this well thought out article makes me a little uncomfortable in regard to my investments. I try not to avoid reading views that don't make me feel good about my choices. I would imagine it is easier for most people to make up their mind and read material that supports it. While I agree that it is possible that we see $20 oil, I think it is unlikely. My two main reasons for that is the decline rate for existing mature fields is staggering, and the governments of the world have shown what they are likely to do. Don't be shocked when they just start sending checks to everyone or they actually do a formal dollar devaluation. The below is from the IEA report put out in early 2009. Oil spills are probably not helping that extra investment. All the cheap oil is of the declining mature variety.  

Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

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Re: $20/bbl Oil That No One Can Afford

re: this thread & another thread which included links to a similar MP3 presentation:

Stoneleigh's assumption is that oil producers will pump to the max, especially if oil prices were to fall.  Her assumption is that oil producers have bills too.

She has also said that all of the major fields are going into rapid decline.

So what mechanism could cause oil prices to drop, even in the face of rapid decline?

Her answer is, 'A credit seizure.'

Remember that she said in 2008 we came within, maybe,  six hours of a total seizure. 

If there is another seizure that actually locks up trade & credit, there would be an automatic glut of oil at all production points.  

In a JIT distribution system, the glut at production could occur before the shortage at the point of consumption; not certainly, but possibly.  If this were to happen, oil prices could 'reset' to say, $20/bbl.

A month later, when fuel shortages start occurring, would oil prices rise?  "No."  No, because there would still be a credit seizure.  And oil could still be stuck at the point of production.

A credit seizure environment could cause a low-price reset for oil and everything else would would follow with a lower reset too. 

From an efficient-market continuous-market point of view, this is all nonsense.  But we keep seeing near-seizures and near-defaults.  The US isn't much different than Greece.  Who would bail out the US?  A US default is just the kind of thing that could cause a worldwide credit seizure resulting in wild price resets.

It is not Greece or the US that chooses the time and place to default.  It is the creditors.

In a low-price reset, existing debt would be crushing and a new wave of defaults would be automatic.

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Re: $20/bbl Oil That No One Can Afford

She is very articulate and presents a compelling argument. I have often wondered over the debate of credit/economy vs. oil/energy and which one will be the trigger. It gives a different prospective to Chris' saw tooth article from a number of months ago though the outcomes appear to be similar (also going back to here podcast).

Of course, her arguments are based on maintaining similar societal structures and my opinion is that we cannot exclude the outcomes from TPTB changing their approach or from society taking matters into it's own hands. Having more cash on hand and continuing to monitor the news (even on holiday) is becoming more and more key, the pieces seem to be moving into position in readiness for the next wave. If her scenario plays out, anyone with a lot of cash on hand could actually be very wealthy in that new reality, of course the middle classes who believe in the establishment could find themselves being significantly violated!!

.....and there was me hoping for a relaxing summer break!!.......

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Re: $20/bbl Oil That No One Can Afford

"I have often wondered over the debate of credit/economy vs. oil/energy"

The cool thing about Stoneleigh is that she separates credit/economy from oil/energy.

Chris Martenson's big contribution is: we live in an exponential world; one that was horizontal for millenia and now is going asymptotically vertical.

Of course, finance & interest (amortization) is also an exponential function.  

Carmen & Rogoff maintain that a 90% debt to GDP ratio is a sort of red line where default occurs.  The US is there, and most of the world is too.  Does that matter in an exponential world moving from horizontal to vertically asymptotic?

Does this "90%" also apply to currency, as in, "The dollar has lost 95% of its value since ~1907."?  The dollar is down 95% of its value because of credit expansion aka 'fractional reserve banking.'  As I understand it, monetization is inconsequential in the face of the amount of outstanding credit (debt).

Stoneleigh says she can separate finance/economy out from oil/energy because it has a shorter time frame.

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Re: $20/bbl Oil That No One Can Afford

Chris Martenson's big contribution is: we live in an exponential world; one that was horizontal for millenia and now is going asymptotically vertical.

Actually, I was hoping that my biggest contribution would be perceived as linking the exponential design and requirements of our economy (itself propelled by the requirements of debt-based money) to energy.

Where many falter in their views of the future is in assuming that declining oil simply means higher prices.  It's as if the price itself had meaning.  It really doesn't.

Our economy is a complex, open system and, as such, it requires constant throughputs of high net-energy flows in order to maintain that structure.  Money and prices are abstractions that exist and have meaning because, and only because, the economy is functioning.  But if we remove the energy pillar?  I would argue that our economy fails to function in a meaningful manner resulting in all sorts of havoc.  Measure those many gyrations in dollars if you want, but in terms of predictive power such price signals will be noisy and the equivalent of driving forward by looking in the rear-view mirror.

The predictive power for what the future holds lies in understanding the design of the system, its exponential nature, the role of energy in maintaining economic complexity, mixed with an appreciation for human nature (the tendency to pick the easy over the hard without regard to long-term consequences), and then tracking the important inputs.

Where I seriously depart from Stoneleigh is in her apparent assumption that money exists in fixed quantities like it did in the 1930's.  With QE, account sweeps, 10% of GDP deficits, and instant electronic money creation today is nothing like the 1930s and we need to hold open the view that perhaps things will follow a different path this time.  Even though all gold had been removed from public circulation, it was still the main backing for money within the banking system.  Thus, the deflationary forces of the 1930's had a physical weight behind them.

My main viewpoint, reinforced heavily these past couple of years by specific actions, is that deflation is such a deal-breaker that central banks and politicians will do everything necessary (or possible) to avoid that outcome.  In brief, what should happen is deflation but what might happen is either inflation or deflation.

At present oil is over $77/bbl which is a level that seems tame to us now but would have been a completely insane level to predict just 5 years ago.  Yet here we are.  Similarly you could not have gotten me to predict that the Fed would have blown out its balance sheet with a trillion and a quarter of MBS paper without any apparent effect on the dollar, but here we are.

In short, the rules are constantly changing and while I too use historical parallels to help guide my thinking, there is simply too much that is brand new today to allow me to slip into a comfortable set of comparisons the 1930s.  So I'm trying to keep my beliefs at bay and let the data continue to shape my views on what is happening and why.

The best I can say at this point is that neither inflation nor deflation is winning the day.  Which means it could still go either way.  Which is why I still hold a hedge with a foot in each camp.

 

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Re: $20/bbl Oil That No One Can Afford

Thanks a lot for this response, Chris. I've been eagerly awaiting your opinion on Stoneleigh's views. I still struggle with much of this but I have to give you both the most credit for helping me grasp what I have so far.

From what I understand from Stoneleigh is that money isn't being printed but rather credit is being created (via bonds, fractional banking etc). From what I understand, you are saying that QE is not entirely the same as credit? Where does QE fit into a pyramid as illustrated?

Liquidity Pyramidimage source: http://www.citizeneconomists.com/blogs/wp-content/plugins/wp-o-matic/cac...

I have had a feeling that all the QE has only served to fill the holes created by defaults (vanishing money that didn't exist in the first place w/respect to physical goods), and of course line some pockets.

For now I have taken the same stance that this can go anywhich way as they change the rules at whim. I do however feel that it wouldn't take much to fall into such a great credit contraction.

Here is one of my biggest hurdles in understanding all this. If massive defaults ever do occur via governments...  How would defaults play out globally and how does it play out in the defaulted country? Wouldn't it come to a currency crisis in the host country and look like inflation there yet result in deflation elsewhere? Would massive defaults occured via corporations or consumers differ much from government defaults?

My apologies if I've missed some of these answers elsewhere. Any guidance is much appreciated.

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Re: $20/bbl Oil That No One Can Afford
cmartenson wrote:

I was hoping that my biggest contribution would be perceived as linking the exponential design and requirements of our economy (itself propelled by the requirements of debt-based money) to energy.

Where many falter in their views of the future is in assuming that declining oil simply means higher prices.  It's as if the price itself had meaning.  It really doesn't.

Our economy is a complex, open system and, as such, it requires constant throughputs of high net-energy flows in order to maintain that structure.  Money and prices are abstractions that exist and have meaning because, and only because, the economy is functioning.  But if we remove the energy pillar?  I would argue that our economy fails to function in a meaningful manner resulting in all sorts of havoc.  Measure those many gyrations in dollars if you want, but in terms of predictive power such price signals will be noisy and the equivalent of driving forward by looking in the rear-view mirror.

The predictive power for what the future holds lies in understanding the design of the system, its exponential nature, the role of energy in maintaining economic complexity, mixed with an appreciation for human nature (the tendency to pick the easy over the hard without regard to long-term consequences), and then tracking the important inputs.

Out on my limb I happily go...

If the energy pillar, as you described it, is removed, what is easiest, least havoc-making and most beneficial for the vast majority of humans?  A far more just, well-being-oriented economy than the one you described.  We get that, complete with a more life-affirming complexity, by putting in an energy pillar you haven't described:  one that is not so materialistic (fuels-dependent) and, thus, has regard for long-term consequences.  I'm speaking here for the whole person paradigm.  There's so much energy waiting in integration, balance and renewal of human beings.  Anyone can explore, discover and tap it.

We've only painted ourselves into a corner where we're diminished and things loom large.  Sooner or later we can choose to take a giant step to the expansive dry areas of space meant for us.

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Re: $20/bbl Oil That No One Can Afford

From what I understand from Stoneleigh is that money isn't being printed but rather credit is being created (via bonds, fractional banking etc). From what I understand, you are saying that QE is not entirely the same as credit? Where does QE fit into a pyramid as illustrated?

It fits into the second rung up from the bottom - the green zone.  Theoretically it could be withdrawn and therefore move up the pyramid, but in practice POMO money has never been withdrawn in any meaningful fashion.  So I predict this won't either, unless some heavy-duty circumstances force its withdrawal. 

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Re: $20/bbl Oil That No One Can Afford

Thanks to o2B (http://twobeerswithsteve.libsyn.com/index.php?post_id=629329), I recently became aware of Foss’s work and her excellent presentation, which in turn, drew me to this interesting thread (thank you JAG for starting it).  

 In particular, I found the follow comments by Chris of interest:

Where I seriously depart from Stoneleigh is in her apparent assumption that money exists in fixed quantities like it did in the 1930's.  With QE, account sweeps, 10% of GDP deficits, and instant electronic money creation today is nothing like the 1930s and we need to hold open the view that perhaps things will follow a different path this time.  Even though all gold had been removed from public circulation, it was still the main backing for money within the banking system.  Thus, the deflationary forces of the 1930's had a physical weight behind them.

My main viewpoint, reinforced heavily these past couple of years by specific actions, is that deflation is such a deal-breaker that central banks and politicians will do everything necessary (or possible) to avoid that outcome.  In brief, what should happen is deflation but what might happen is either inflation or deflation.

...

In short, the rules are constantly changing and while I too use historical parallels to help guide my thinking, there is simply too much that is brand new today to allow me to slip into a comfortable set of comparisons the 1930s.  So I'm trying to keep my beliefs at bay and let the data continue to shape my views on what is happening and why.

The best I can say at this point is that neither inflation nor deflation is winning the day.  Which means it could still go either way.  Which is why I still hold a hedge with a foot in each camp.

After reading this post, I became interested to see if I could find whether or not Foss has ever addressed the point, that unlike the 1930’s, today, gold is not backing money within the banking system.  This is certainly seems to be a major difference, and should give one pause when entertaining a deflation scenario. 

 After digging around for awhile, I did find an interesting exchange following a post about Foss’s “case for deflation” at The Oil Drum, in October 2009 (http://europe.theoildrum.com/node/5917). 

 I though that perhaps some here would also find it of interest.

 I summarize below a selection of excerpts from a lengthy exchange between Stoneleigh a “PMike”:   

PMike:

Printing money is impossible when money is tied to a hard commodity like gold, as it was prior to the 1930's in US. It is very easy otherwise. Note that deflation stopped dead in its tracks when Roosevelt made holding gold illegal; this was the effective end of the gold standard (1971 was just the final nail in the coffin). Also, Russia experienced severe hyperinflation during its crisis, NOT deflation. As did Argentina. The fact remains that deflation has never occurred in a pure fiat money regime. Ever.

Stoneleigh (citing Mike Shedlock: Deflation In A Fiat Regime?)

Assuming that there is agreement as to what inflation and deflation are, it is quite easy to refute the idea that deflation cannot occur in a fiat regime. Japan was in deflation for a decade.

However, some still argue that Japan never went through deflation. One basis for that argument is that "money supply" as measured by M1 or base money supply never contracted over a sustained period. The other argument is that prices as measured by the CPI never fell much. Those are flawed arguments (at least from an Austrian economist point of view) given the focus on consumer prices and money supply alone as opposed to money supply and credit.

Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed. Those are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark.

Yes, there was deflation in Japan. Furthermore, if deflation can happen in Japan, then there is no reason why it cannot happen in the US as well.

Stoneleigh

Japan experienced a massive credit bubble with a huge bad-debt burden in its banking system. Their currency initially appreciated, and then depreciated with the carry trade that fueled a global bubble of the same kind, only vastly larger.

We won't be paralleling the way the Japanese experience played out as we are debtors, not the creditors they were, and they had an intact global market to export to. They could string out their difficulties through exports and by building 4-lane highways from nowhere to nowhere. Japan has still not faced the underlying problems in its banking system and still has much further to fall. Nevertheless the Japan model is useful in explaining deflation in a fiat regime, stressing the critical role of credit.

Our experience will be more Argentine - rapid collapse where the rug is abruptly pulled out from under people's feet. We won't have an intact global system to cushion the fall though.

PMike

Stoneleigh, we need to consistent. Mish's definition is not the one you're using. It is not total money and credit, but total money and credit in relation to available goods and services. Like all meaningful metrics, it is a ratio.

Stoneleigh

That is also my definition, as I have said many times. I realize that the denominator will also be changing. As I have pointed out in relation to many things, I expect supply of goods and services initially to be excessive relative to much reduced demand. I then expect supply to collapse as parts cease to be available, trade collapses, businesses go under etc.

PMike

With regards to money that flows through the consumer economy, one can argue that there really cannot be any money destruction. People's deposits--the liability side of the banking system's balance sheet, and the part of the money system that is used to pay for things--are almost entirely backstopped by the government, in one way or another.

Stoneleigh

Government promises will not be worth the paper they're written on. They're a smoke-and-mirrors confidence game intended to reassure people so that they won't make a rush for the exits. Unfortunately, bluffs like that get called in major bear markets. We are going to see bank runs, and the FDIC will be overwhelmed (in fact it arguably is already).

PMike

I don't trust the banking system with society's future, so I refuse, on moral grounds, to participate in their money game. I've chosen silver as my savings vehicle, because it represents embedded energy that I'm withdrawing from the economic system and storing in a vault; it is a very useful material for building all sorts of devices which I think society will need in its reconstruction, and one that I can readily get my hands on and store. Granted, it's not perfect, and buying silver leads to more silver mining, but it seems the best I can do for the short term.

Stoneleigh

I understand your position. Silver is not too bad a bet, as long as you don't need to depend on it in the short term (or you would be selling into a price collapse). Silver doesn't hold its value as well as gold during hard times, as more of its value is a function of its economic utility as an industrial metal. Both will fall in nominal terms initially, but silver will fall further. It will hold value over the long term though, and it could bottom early in the coming depression. Beware of confiscation though. That wouldn't stop you owning it, but it would make it much more difficult for you to trade it for other necessities. I would strongly suggest you hold at least several months worth of cash under your own control as well.

 

From this exchange,  I think I can extract the following three points:

 1) While unlike the 1930, money is no longer backed by gold, this does not make deflation impossible, as the case of Japan suggests.

 2)  Japan had access to all of the modern features of money creation (QE, account sweeps, instant electronic...) but nevertheless, deflation still occurred.  

 3) Stoneleigh also hedges.  She thinks that PMs will hold their value, but in the short term, thinks that you better have cash in hand (and not in the bank).  

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crash_watcher
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Re: $20/bbl Oil That No One Can Afford

perhaps some here would also find it of interest

and then again, perhaps not....

Here's another on-point comment from Foss (aka Stoneleigh) in response to a questioner in today's post at TAE (http://theautomaticearth.blogspot.com/):

BloggerStoneleigh said...

 

 

joelandsonia,

I follow Fleckenstein and another site called iTulip -- both of which are just as certain that the outcome will be inflationary because the Fed wants it that way. Don't fight the Fed they used to say.

Why do you think the Fed *can't* cause inflation if it wants?

Some people have way too much faith in the power of governments and central bankers to get what they want, as if they could wave a magic wand and make it happen. If that were so, why would there ever be financial crises?

The bond market has far more power than central authorities because it represents the power of the colective - power resulting from the aggregate sum of millions and millions of self-interested short-term decisions. When all those decisions are made in the same direction at the same time, the effect is unstoppable. That's why markets can crash no matter what kinds of doomed interventions may be employed.

In the case of money-printing, if a country tried that it would find its interest rate (set by the bond market) skyrocketing very quickly, which would precipitate a wave of debt default, which would be deflation by definition. There's no way out of deflation once a vast quantity of excess claims to underlying real wealth has been created, and we have created the largest such pool of virtual wealth in human history.

We do live in interesting times.  It is too close for me to have any conviction about whether inflation or deflation will occur.  Foss's presentation and writings have reinforced that lack of conviction on my part.  Therefore, I find it necessary to be equally prepared for both possibilities.  Thankfully, there are commonalities on what one can do to prepare for either case, as has been pointed out elsewhere by JAG.  (http://www.peakprosperity.com/forum/what-deflationist-campers-forgot-put...).

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JAG
Status: Diamond Member (Offline)
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Posts: 2492
Re: $20/bbl Oil That No One Can Afford

Thanks for the additional Stoneleigh commentary Crash....I appreciate you digging it up as I can never seem to get enough of it.

Best...Jeff

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joelandsonia
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Re: $20/bbl Oil That No One Can Afford
crash_watcher wrote:

perhaps some here would also find it of interest

and then again, perhaps not....

Here's another on-point comment from Foss (aka Stoneleigh) in response to a questioner in today's post at TAE (http://theautomaticearth.blogspot.com/):

BloggerStoneleigh said...



joelandsonia,

I follow Fleckenstein and another site called iTulip -- both of which are just as certain that the outcome will be inflationary because the Fed wants it that way. Don't fight the Fed they used to say.

Why do you think the Fed *can't* cause inflation if it wants?


Some people have way too much faith in the power of governments and central bankers to get what they want, as if they could wave a magic wand and make it happen. If that were so, why would there ever be financial crises?

The bond market has far more power than central authorities because it represents the power of the colective - power resulting from the aggregate sum of millions and millions of self-interested short-term decisions. When all those decisions are made in the same direction at the same time, the effect is unstoppable. That's why markets can crash no matter what kinds of doomed interventions may be employed.

In the case of money-printing, if a country tried that it would find its interest rate (set by the bond market) skyrocketing very quickly, which would precipitate a wave of debt default, which would be deflation by definition. There's no way out of deflation once a vast quantity of excess claims to underlying real wealth has been created, and we have created the largest such pool of virtual wealth in human history.

We do live in interesting times.  It is too close for me to have any conviction about whether inflation or deflation will occur.  Foss's presentation and writings have reinforced that lack of conviction on my part.  Therefore, I find it necessary to be equally prepared for both possibilities.  Thankfully, there are commonalities on what one can do to prepare for either case, as has been pointed out elsewhere by JAG.  (http://www.peakprosperity.com/forum/what-deflationist-campers-forgot-put...).

Hey!   That's *me*!! Cool

Guess I should have said I follow Chris's site as well!    Like you, I'm hedging both ways.   Very little debt, holding both cash, PMs and various stocks.   It is disturbing to see people who I respect make *very* convincing arguments either way.  Rosenberg, Mish and Stoneleigh are convinced deflation will occur.   Fleckenstein, iTulip and CM (correct me if I'm wrong) are just as convinced there will be no deflation -- [edit: I see that Chris is also hedging earlier in this thread].    Many people seem to believe we are in for another 2008 (but worse) which will finally lead to the presses entering ludicrous speed.

My head spins.

What scares me the most is either way it is going to end badly and there are so many people I know who are utterly unprepared.   This site has helped me somewhat for that -- I'm not only planning for my wife and I, but a potential influx of relatives.   

But a long ways to go yet.

crash_watcher's picture
crash_watcher
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Posts: 146
Re: $20/bbl Oil That No One Can Afford

Hey!   That's *me*!!

 Hey, joelandsonia, it was a good question, and I'm glad you asked Stoneleigh that—and that she took the time to answer!  

 It is disturbing to see people who I respect make *very* convincing arguments either way.

 Yes, I too continued to be amazed at how reasonable minds looking at the same data can come to different conclusion about whether we will have deflation or inflation first.  Even Stoneleigh expects that inflation will eventually occur, but she expects this to be years away—although I have not yet found in her writings the basis for expecting such an extended period of deflation:

 Stoneleigh: Most will see their basic expenses go through the roof in real terms (even as they fall in nominal terms), as they will have almost no access to goods and services, as a result of having no money or credit, and therefore no purchasing power. The very few who hold liquidity, and have been able to avoid losing it in a bank run, will find that their expenses will fall, but they will be a tiny minority. Monetary inflation is likely to be the scourge of the longer-term (ie many years hence), but it is not the scourge of the present or of the near future.

....

Stoneleigh: I can see inflation in the very long term (ie years away at least), but to say that it represents the real risk is not a position I agree with. Deflation on the scale we are facing is simply devastating. It is a force that essentially sweeps all before it. Those who emerge shell-shocked from a deflationary depression will then have to face hyperinflation, once the power of the bond market has been broken thanks to the collapse of the international debt financing model, but that is a very long way off.

http://theautomaticearth.blogspot.com/2009/07/july-8-2009-stoneleigh-and-aaron-krowne.html

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Farmer Brown
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Posts: 1503
Re: $20/bbl Oil That No One Can Afford

JAG - great find!  Thanks for posting.

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