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Page added on September 27, 2012
4 “Imminent” Crises We’ve Forgotten About
“Risk is what’s left over when you think you’ve thought of everything.”
— Carl Richards
The world is full of risks. There’s no shortage of them today: Deficits are enormous, Europe is cracking, and pension funds are underfunded. These are serious risks. Some will turn into crises.
But we love to exaggerate and extrapolate. Nine times out of 10, the biggest risk isn’t what’s making headlines. Risk is the anonymous lurker no one’s prepared for. Rarely will what’s popular to worry about turn into a crisis — at least, anytime soon. There’s a half-serious rule of thumb that once Newsweek puts a warning on its cover, the risk has already passed. Things change, and there’s no better way to prove it than surveying the graveyard of past crisis warnings.
Here are four from the past few years.
2008: Peak oil
For as long as we’ve been drilling oil, we’ve been worried that we’re about to run out of it. In 1914, the U.S. Bureau of Mines predicted American oil reserves would be depleted in 10 years. In 1939, the official prediction was 12 more years before the wells ran dry. In 1951, the Department of Interior warned that we only had 13 years left.
Peak oil fears popped up again around 2007 and took off in 2008. “Before long $100-a-barrel oil will be regarded as ‘the good old days,'” energy analyst Robert Hirsch said that year. The world wasn’t prepared for a peak in oil output. “There is no good news. Nobody is really doing anything,” he warned.
The fear was nearly universal. “Wake Up, America. We’re Driving Toward Disaster,” wrote The Washington Post. Salon, among countless others, warned of “peak oil — that moment when supply stops growing and begins to decline, while demand continues to chug along.” Alexey Miller, CEO of Gazprom, the world’s biggest energy company, warned oil would hit $250 a barrel in “the foreseeable future.”
Four years later, world oil output is at an all-time high, and oil prices are down 40%. U.S. oil production is the highest it’s been in 14 years, rising consistently for the first time in decades. Adjusted for average hourly wage growth, gas prices today are nearly identical to where they were six years ago. In 2008, the International Energy Information Agency predicted world oil demand would be 96 million barrels per day in 2012. Now, the U.S. Energy Information Administration puts that number closer to 89 million barrels per day. Global oil supply was 3 million barrels per day higher last quarter than it was in 2008.
Hirsch warned that nobody was taking action to solve the energy problem. But they were. Fracking technology has led to a boost in production. Vehicle miles driven has dropped, and average gas mileage has jumped as consumers favor more efficient cars. People adapted — quite well — to what looked like an inescapable catastrophe. They usually do.
2010, 2011: Double-dip recession imminent
The last recession officially ended in the summer of 2009 (though it’s an irrelevant distinction for millions still left unemployed). Ever since, there’s been a race among analysts to call the next recession’s arrival.
This began in earnest in mid-2010. “Economist Nouriel Roubini says the much feared double-dip recession has already arrived,” one headline wrote that year. “Don’t Fear Double Dip, It’s Already Here,” read another.
By summer 2011, people had forgotten those false alarms and were ready for another round. “Time to Say It: Double Dip May Be Happening” warned The New York Times. “10 signs the double-dip recession has begun,” wrote MSNBC. “Back toward a US double-dip,” said the Financial Times.
Wrong, wrong, and wrong again.
In hindsight, I think too many held the idea that any slowdown in economic growth meant a new recession was imminent. Worse, they assumed a new recession would bring calamity akin to 2008.
Neither is a good assumption. Even during expansions, growth ebbs and flows all the time. It’s never a straight line up. Just as with stocks, periods of economic volatility are perfectly normal and usually don’t signal anything other than noise. And in hindsight, much of what looked like a sharp slowdown last summer disappeared as economic numbers were later revised upward. Forget predicting the future; we don’t even know what happened in the past.
There will be more recessions — many more — and their risks shouldn’t be underestimated. But as a group, we tend to overestimate their frequency and effects, particularly today, with the wounds from 2008 still fresh. What’s the saying? “Economists have predicted nine of the last five recessions.”
2011: The death cross means a market crash awaits
Last August, the Dow (INDEX: ^DJI) triggered a technical indicator called the “death cross,” when its 50-day moving average crossed below its 200-day moving average.
Already gripped with fear of another leg down (double-dip!), traders, journalists, and pundits turned bearish with zeal. The death cross, many claimed, was a surefire sign that stocks were poised for big losses.
“‘Dead Cross’ Triggered — Look Out Below Large Caps,” wrote CNBC. “Stock Market’s Death Cross Looking More Deadly This Time,” warned one analyst. “Is There Life After the DJIA Death Cross?” another obnoxiously asked.
It went on for a good week straight. The death cross, we heard, foretold impending doom.
So how did it turn out? The death cross allegedly meant large-cap stocks were about to plunge. Yet in the year since, they’ve returned nearly 30%. The only thing deadly about the death cross was being duped into believing it.
2005-2009: The dollar is about to plunge
The Federal Reserve has created a staggering amount of new money, and the federal government is running massive deficits. Someday, somehow, this will very likely set off what Warren Buffett called “an onslaught of inflation.”
Someday.
Until then, those who have heralded an impending collapse of the U.S. dollar and surge in inflation — and there have been many of them for many years — will continue to be humbled.
As best as I can tell, the collapse-of-the-dollar crowd peaked in 2009. I was once a member. As the Fed cranked up its printing machines, it seemed unthinkable that high inflation and a collapse of the dollar weren’t far behind. “Hyperinflationary Depression Remains Likely As Early As 2010” was the title of one widely read 2008 report, in which the author defined hyperinflation as when “the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency.”
Nothing even close has occurred. Inflation — that is, both the official CPI numbers and a privately calculated version compiled by MIT — have been tame for four years. The U.S. Dollar Index, which measures the dollar’s value against a basket of global currencies, traded for about 80 in 1990. By 1995 it traded for about 80. By 2005, it was 80. Today it trades for about — you guessed it — 80. There has been volatility all along, but the dollar’s value has held up against other global currencies for decades.
What happened? Two things dispelled the doomsday predictions. Many felt the dollar would be abandoned by global investors as the U.S. tipped into recession. In reality, the opposite was true, as other global economies, particularly Europe, were in far worse shape. The dollar, for all its faults, became the mark of safety. And the vast majority of the new money printed by the Fed never made it into the pipes of the economy, as banks had no appetite to lend, and consumers worked diligently to shed debt. Doomsayers have (so far) gotten the mechanics right but the consequences wrong.
Coming up next…
Oil production will eventually peak, we will experience more recessions, and inflation is a real risk. But the more something is in the headlines, the more prone it is to distortion, rhetoric, and overreaction. Real risks are almost never what everyone’s worried about. Quite the opposite, as Richards reminds us; they’re what no one is worried about.
16 Comments on "4 “Imminent” Crises We’ve Forgotten About"
BillT on Thu, 27th Sep 2012 2:45 pm
Just because something has not happened yet… It appears that fool.com is properly named.
1. We passed peak oil years ago. We passed peak energy before that. Growth is over.
2. We are in a depression, not a recession.
3. The real market has already crashed. Only a zombie ghost of the market exists today.
4. The dollar is already at Charmin level. Have you noticed inflation is in the double digits?
5. No mention of World War 3 which is impending.
Solarity on Thu, 27th Sep 2012 2:57 pm
The common belief (of the Federal Reserve, US Government and US citizenry) continues to be that money makes the economy grow. Eventually they will figure out that ENERGY FUELS GROWTH. Oil production has now flat-lined, but “the Federal Reserve is creating staggering amounts of new money.” For the first, growth of M2 money far exceeds the growth in energy resources. This means the petro-dollar is dead, and the result will be significant inflation.
Arthur on Thu, 27th Sep 2012 3:27 pm
There is now a new development going on: the drive to secession in the wake of financial default. The richer provinces of a political entity refuse to pay for the poorer ones. It looks like Spain is going to be the first to disintegrate, before the UK, Italy, Belgium, and finally the US.
http://tinyurl.com/cz46twx
Welch on Thu, 27th Sep 2012 5:29 pm
Have to say some good points were made. The doom and gloom around here gets a little excessive.
Sharpie on Thu, 27th Sep 2012 7:12 pm
Since early 1999 oil prices have jumped 1000%. How about your income?
Plantagenet on Thu, 27th Sep 2012 8:13 pm
Liars cherry pick their data…..and Fool.com is a liar.
Fool.com cherry picked the day of the highest oil price in 2008 to make the claim that prices are 40% lower now. But in actuality, the average oil price in 2012 is higher than in 2008. In fact, oil prices in 2012 are the highest in history
BillT on Fri, 28th Sep 2012 12:24 am
Arthur, I believe you are correct. Rather than uniting all of the world’s countries under one government, I think we will end up with many more ‘countries’ as the global system disintegrates. I wonder if this is what the elites had in mind? I don’t think so. Especially in the NAU. (North American Union for those of you who are new to reality news.)
gates outcast on Fri, 28th Sep 2012 2:00 am
As JHK states we are in contraction mode, every level of life will grow smaller. We may get peaceful cooperatives at county levels, or stuck with drug lords/gangs controlling certain areas with constant warfare over terrorities. I know that the Ron Paul crowd will miss the olde Federal Government.
DMyers on Fri, 28th Sep 2012 2:23 am
Gates, you are a bot. You’re implying Ron Paul is pro government, when precisely it is the opposite, as the record clearly shows. You can go to an internment camp is you wish, but I still prefer freedom,as Ron Paul has espoused.
Jessi on Fri, 28th Sep 2012 4:01 am
dmyers- u missed gates’ point. at that level of societal breakdown EVEN the ron paul crowd will miss the federal government.
Siddhartha on Fri, 28th Sep 2012 12:32 pm
What’s more likely is that at some point the 16 trillion in the red (with 50-60 trillion in the red unfunded liabilities) country (the US) will cease to be the global hegemon. Whether China rises peacefully or there’s a massive war(s) will impact greatly whether the US comes to resemble post-imperial England or post-imperial Rome.
Stephen on Sat, 29th Sep 2012 5:30 am
I predict we will experience HYPER DEFLATION of most goods (especially things that will not work when oil gets scarce). Some items that are absolutely necessary may experience inflation. However, if the power grid fails permanently, the entire banking/stock/bond/derivative market dies with it, not to mention all the machinery needed to run our mass marketing economy. This will force people to have only physical cash (and barter) to trade with.
If transportation also fails, this could turn the economy into an agrarian type economy fast. This would quickly lead to mass changes in land usage, zoning laws, etc, probably without government approval.
I doubt the rumored FEMA internment camp scenario would work, either. Just transporting the people to the camps and running the incerators would need lots of fossil fuels.
Kenz300 on Sat, 29th Sep 2012 2:47 pm
Oil companies and the oil producing countries love it when oil prices spike. They make huge windfall profits.
Every country needs to develop a plan to diversify its energy sources and types.
Generating local energy can also supply local jobs.
Biofuels can now be made from waste or trash. We can convert landfills into energy generators creating biofuels, energy and recycled raw materials for new products. Local energy and local jobs. There are a lot of landfills in every country that can become energy generators.
SOS on Sat, 29th Sep 2012 3:41 pm
Assumptions certainly arent facts. The author dealt with the historic facts.
The author has pointed out how foolish and easily people can be led, even admitting to being part of the hyper inflation crowd once. Besides what does it matter? The earth ends December 21st this year doesnt it?
Whoknows on Sun, 30th Sep 2012 12:15 am
When the price of oil fell heavily declined in late 2007 due to the debt crisis unraveling, investment in energy declined steeply. In fact, refining capability in Western nations such as Australia, the US, has seen severe contraction.
Right now we’re seeing a clear case of demand destruction coupled with higher degrees of volatility. This is, and will continue to, destroy much of the fossil fuel-based trucking network. A high employment rate, increase household indebtedness passed unsustainable levels, is required to just maintain stagflation.
The world isn’t going to end nor will humanity, SOS. Instead we’re going to see demand destruction and a steep decline. Nearly everyone, including the high saving and hyper productive Japanese, will not be able to retire. Most Ponzi schemes such a health insurance, pensions, et al are going to fall apart due to a demographics bubble.
The elderly population cannot continue to grow faster than other segments forever. That segment will have to be active and even if anti-aging technology were to be developed, it’d only be accessible to a small minority. The resources to maintain a highly sedentary, old, and obese population won’t b sustained.
I am guessing a strong hundred year decline. The Great Depression when it was unraveling didn’t appear to be a decline at that time. Peasants who migrated from Europe didn’t think the same, nor did ‘unfavorable’ races whose ability to immigrate and integrate was ridiculously restricted. Similarly, the real wage decline from the 70s, which economists claim was due to declining productivity growth. That and the complementary credit bubble which taken household indebtedness to historical levels isn’t viewed as a decline either.
Most in the West were experiencing decline for a while now. That is why liberalization drives have been going on since the 90s. Expect a steeper decline, but not enough to produce wide-sale revolutions. Has been happening since the 70s and we’re going to wishing that total collapse occurred instead. The authorities won’t be allowing that, though.
Whoknows on Sun, 30th Sep 2012 12:28 am
I should mention that increased energy scarcity is going to limit the ability for “change” to occur. All revolution, social changes, require the availability of CHEAP energy.
This unconventional fuel scam is merely designed to rope in investments. The capital making it possible is the huge credit infusions by the Central Banks. Capital, as credit, is disappearing and these ponzi-like energy exploration schemes are going to crash. Once that happens, expect extreme volatility, because we’ll only be able to use ESTABLISHED conventional stores.
The leading nations in the developing world are picking up a lot of debt to just maintain growth. Household debt in these nations are still low and thus they’ll be commanding the energy markets. Demand destruction in the West and demand growth in the third world: convergence. I wonder how climate change is going to fit….