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Page added on November 17, 2014
Kunstler: The Instability Express
T he mentally-challenged kibitzers “out there” — in the hills and hollows of the commentary universe, cable news, the blogosphere, and the pathetic vestige of newspaperdom — are all jumping up and down in a rapture over cheap gasoline prices. Overlay on this picture the fairy tale of coming US energy independence, stir in the approach of winter in the North Dakota shale oil fields, put an early November polar vortex cherry on top, and you have quite a recipe for smashed expectations.
Plummeting oil prices are a symptom of terrible mounting instabilities in the world. After years of stagnation, complacency, and official pretense, the linked matrix of systems we depend on for running our techno-industrial society is shaking itself to pieces. American officials either don’t understand what they’re seeing, or don’t want you to know what they see. The tensions between energy, money, and economy have entered a new phase of destructive unwind.
The global economy has caught the equivalent of financial Ebola: deflation, which is the recognition that debts can’t be repaid, obligations can’t be met, and contracts won’t be honored. Credit evaporates and actual business declines steeply as a result of all those things. Who wants to send a cargo ship of aluminum ore to Guangzhou if nobody shows up at the dock with a certified check to pay for it? Financial Ebola means that the connective tissues of trade start to dissolve, and pretty soon blood starts dribbling out of national economies.
One way this expresses itself is the violent rise and fall of comparative currency values. The Japanese yen and the euro go down, the dollar goes up. It happens in a few months, which is quickly in the world of money. Foolish US cheerleaders suppose that the rising dollar is like the rising score of an NFL football team on any given Sunday. “We’re numbah one!” It’s just not like that. The global economy is not some stupid football contest.
When currencies change value quickly, as has happened since the past summer, big banks get into big trouble. Their revenue streams are pegged to so-called “carry trades” in which big blobs of money are borrowed in one currency and used to place bets in other currencies. When currency values change radically, carry trades blow up. So do so-called “derivatives” such as bets on interest rate differentials. When the sums of money involved are grotesquely large, the parties involved discover that they never had any ability to pay off their losing bet. It was all pretense. In fact, the chance that the bet might go bad never figured into their calculations. The net result of all that foolish irresponsibility is that banks find themselves in a position of being unable to trust each other on virtually any transaction.
When that happens, the flow of credit, a.k.a. “liquidity,” dries up and you have a bona fide financial crisis. Nobody can pay anybody else. Nobody trusts anybody. Fortunes are lost. Elephants stomp around in distress, then keel over and die, and a lot of “little people” get crushed in the dusty ground.
The happy dance about low gasoline pump prices featured on Fox News, combined with the awful instability in currency markets, will cut a swathe of destruction through the shale oil “miracle.” That industry has been relying on high yield “junk” financing to perform its relentless drilling-and-fracking operations — imperative due to the extremely rapid depletion rate of shale oil wells. Across the board, shale oil production has not been a profitable venture since it was ramped up around 2006. Below $80 a barrel, chasing profit only becomes more difficult for those who couldn’t make a profit at $100. A lot of those junk bond “investments” are about to become worthless, and the “investment community” will lose its appetite for any more of it. That will leave the US government as the investor of last resort. Expect that to be the object of the next round of Quantitative Easing. The ultimate destination of these shenanigans will be the sovereign debt crisis of 2015.
24 Comments on "Kunstler: The Instability Express"
Northwest Resident on Mon, 17th Nov 2014 7:17 pm
“American officials either don’t understand what they’re seeing, or don’t want you to know what they see.”
Answer: Don’t want you to know what they see.
“It was all pretense.”
Just buying time.
Makati1 on Mon, 17th Nov 2014 7:22 pm
Sounds like JHK has painted a pretty complete picture of current events in the real world of money and energy. I think we will wake up someday and BAU will be over. Not gradually, but quickly. The ATMs will be off-line and the bank doors locked and probably surrounded by armored vehicles and troops in riot gear. At least in the US.
I spend about 4-5 hours everyday trying to follow events in the hot spots of the world. It is impossible. Too many places and too much happening too fast. I get only an overview of it all. I can only say that nothing would surprise me: from the breakup of the EU to the collapse of the USD, to World War 3 and a mushroom cloud on the horizon.
Well, maybe not that one. There would be no reason to nuke Manila or any of the Ps as there is no threat here since the US has no bases. Everywhere else is well over the horizon.
Welch on Mon, 17th Nov 2014 7:40 pm
I agree with some of what he has to say but Kunstler has been predicting collapse in the current year for a decade now. I’m not holding my breath… but eventually he may be right.
Plantagenet on Mon, 17th Nov 2014 7:49 pm
Actually, Kunstler has never predicted “collapse in the current year.” Kunstler uses the phrase “the Long Emergency” to describe the way he sees things playing out. Rather than a rapid collapse, Kunstler sees a long grinding downward spiral.
Davy on Mon, 17th Nov 2014 7:52 pm
Yea, welch the “doomers dilemma”. Corns just have to preach BAU. Us doomers have to preach an unknown. You made a good point that eventually we may be right.
I sure as hell hope I am just crazy and doom will happen down the road. I want people to laugh at me. I want to be a fool. I have no pride when it comes to death and destruction.
Northwest Resident on Mon, 17th Nov 2014 8:05 pm
Welch – I’m a newbie doomer, having only realized that our doom approacheth a little over a year ago. And I’ve been predicting that 2015 will be the year that serious BAU unwind starts to kick in ever since I read the 2010 J.O.E. (US Military strategic outlook) and they predicted energy shortages as soon as 2015, with associated dire security implications. I took that “as soon as 2015” phrase to mean, get your act together and be ready for 2015. I interpreted it as a well concealed “heads up”. The way things are standing in the world today is the worst it has ever been — debt, demand destruction, global hotspots, oil supply. It certainly seems to be on the verge of “violently unwinding”, as the Bank for International settlements warned just recently. I think Kunstler is safe in making a 2015 prediction. I totally expect some major, earth shaking events to hit us in 2015. And I’m not the only one. Like the article over on AutomaticEarth website said, 2014 is the last good year. So eat, drink and be merry this holiday season. Don’t get too complacent thinking that collapse has been predicted for so long that it must yet still be far enough out in the future to not have to be “too” concerned.
Perk Earl on Mon, 17th Nov 2014 8:12 pm
I’m with you on that Davy. I want all the math, logic, trends, physics to somehow be wrong. Let the magic, pixie-dust, wishes, hopes and prayers be more powerful, leaving us doomers to scratch our heads wondering what graph we got wrong. Let BAU reign on as low EROEI scrape the bottom of the barrel grime somehow accelerates our economy into hyper-drive.
This fantasy has been brought to you by a doomer on behalf of all corns.
Nony on Mon, 17th Nov 2014 8:37 pm
NWR:
You’re late to the party. These doomers have been talking it up since 2006 (see video).
https://www.youtube.com/watch?v=TWC6W1ctkMY
Northwest Resident on Mon, 17th Nov 2014 8:47 pm
Nony — All the failed predictions in the world don’t change where we are right now. I can see it now — Nony standing on the deck of the Titanic moments before impact, conversing with his fellow cornies, saying “Yeah, they’ve been predicting for ages that if ships motor through these waters too fast that they’ll hit an iceberg…”
kenberthiaume on Mon, 17th Nov 2014 8:49 pm
He’s just wrong about many things. Yeah shale isn’t profitable and never has been. All the accounting is a fraud. Just laughable.
His chart has the same shape as it did 10 years ago. Back then we were “well past peak” and prices would be soaring. Instead they’re sinking.
Yeah currency movements cause derivatives to “blow up”. Currencies move all the time…When is the blow up? Holding my breath.
Nony on Mon, 17th Nov 2014 8:50 pm
Watch the video. There’s a guy just like you, giving guys just like me warnings.
Northwest Resident on Mon, 17th Nov 2014 9:02 pm
kenberthiaume — Keep laughing while you can. The last laugh will be on you.
Not even industry insiders believe the shale oil “miracle”. It has been a giant scam perpetrated to keep the economy going for a little while longer. Don’t feel bad for falling for the scam, most people did. Review the facts, keep an open mind, and you’ll realize that the shale oil boom was never anything other than a Ponzi scheme destined to fail.
Industry Doubts on Shale Gas Economics
“World’s Largest Uneconomic Field”
“A Herd Mentality” on Shale Gas
Shale Gas Inherently Unprofitable, Official Says
Shale Wells Not Economic, Chesapeake Geologist Says
Media Is Ignoring Costs, Investment Analyst Says
Financial Hype on Shale Gas Is Difficult to Understand
“Over the past six months, The New York Times reviewed thousands of pages of documents related to shale gas, including hundreds of industry e-mails, internal agency documents and reports by analysts. A selection of these documents is included here; names and identifying information have been redacted to protect the confidentiality of sources, many of whom were not authorized by their employers to communicate with The Times.”
http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4.html#document/p2
Stercusferi on Mon, 17th Nov 2014 10:34 pm
I used to like JHK until he went all homophobic Zionist.
Apneaman on Mon, 17th Nov 2014 10:41 pm
Speaking of Instability
The Coming Blackout Epidemic
http://motherboard.vice.com/read/the-coming-blackout-epidemic
Just because a general prediction, based on an irrefutable trend, has not come true does not make it false or less likely to happen. Bringing up some dead guys failed prediction date is the lowest form of argument. It’s right up there with contrarianism. Keep holding your breath Nony, maybe the universe will cave in and make all our problems disappear.
meld on Tue, 18th Nov 2014 2:03 am
It’s quite an interesting theory that doomers are in general just people very unhappy with their lives and want some kind of apocalypse to usher in a new world for them to live in as fast as possible. Whether that new world is the rapture, peak oil/climate change apocalypse or indeed that high tech singularity apocalypse where mankind is replaced by robots. It takes a wise man to sift through all these competing ideologies and see that the cycle of mankind is quite an obvious one. We are on a downslope now, it might take 50 years or 500 years, but we are heading towards neo feudalism and some centuries after that no doubt a 2nd renaissance
Perk Earl on Tue, 18th Nov 2014 2:49 am
“That will leave the US government as the investor of last resort. Expect that to be the object of the next round of Quantitative Easing.”
I agree and have been posting that idea a few times in recent weeks. However, keep in mind that O was slow to respond to the Gulf oil spill and ISIS. There is the danger that if some fiscal assistance does not come forward while oil price is low, LTO’s days will be numbered. Good luck lurching that colossus back into operation later.
Of course any assistance will only delay the final nail in the coffin, but all arrows point to some kind of special loan program. Let’s see how long O sits on his hands.
Davy on Tue, 18th Nov 2014 6:14 am
Meld, I find your point important about doomers. Doomers are more diverse than corns. Corns tend to be what is considered normal. They fit the mold. We know corns come in all shapes and sizes but in general they conform to society’s meme. Doomers on the other hand range all over the place from the rapture religious freaks, revolutionary intellectual types to lone wolf survivalists. Doomers have a definite identity issue because so many wacko’s are doomers.
I connect with the academic doomer. We study doom issues and practice prep as a risk management tool. I want nothing more than a way out of this doom storm coming. I am smart enough to see that things are not adding up so I doom and prep. I can’t figure out the corns that are not making any effort to prep. Prep is about change. When I was in the business world I had to sit through the stupid management training courses. I always remember the focus on how you have to adapt to change. For a corn that only works if it is a change to another BAU scenario. Corns cannot allow a change to another scenario i.e. BAUless.
I am a doomer and proud of it. I tell people upfront I am a doomer and prepper. I don’t hide it anymore. I do it with a confidence and lightness that takes the edge off. I tend to keep the subject shallow with the folks that are not capable of deeper understanding. Most here on this board can go there but many can’t. If the GP knew the extent of what is ahead they would poop their pants.
Academic and lifestyle dooming and prepping is about accepting reality and making necessary adjustments to survive change. When winter is coming you make changes. If a hurricane is coming you take action. Corns are lost in the meme of BAU with its human exceptionalism, wonders of knowledge, technology tricks, and the excitement of the markets. Corns lack the stoic personality trait to face death at the level of species. They may be personally ready but the thought of society ending is too far. In reality what must be done is the 5 stages of death at all levels from personal to society. It really comes down to acceptance of our mortality and our species potential for extinction. If you can go there and live it then you are on your way to being a doom.
Dredd on Tue, 18th Nov 2014 8:20 am
“That will leave the US government as the investor of last resort.”
Since 97% of the republicans in congress are deniers, Oil-Qaeda will continue to be the largest welfare queen (Agnotology: The Surge – 13). “Bail out the frackers” may be the upcoming mantra.
penury on Tue, 18th Nov 2014 12:32 pm
I am another who thought that the collapse would occur in 2008 however, I mis-judged the venality of the CBs, the developed nations of the world have accumulated more debts this century than in all previous centuries combind. We have sold our grand children into slavery, destitution and a poverty which is too extreme to explain. Meanwhile life at the ranch is wonderful daily highs in the stock market (resembling the highs in Colo) but, remember the last euphoria ended and this one shall also.
wake on Tue, 18th Nov 2014 4:32 pm
how is collapse better than central bank actions, whatever the negative impacts they may or may not eventually have?
penury on Tue, 18th Nov 2014 12:32 pm
I am another who thought that the collapse would occur in 2008 however, I mis-judged the venality of the CBs, the developed nations of the world have accumulated more debts this century than in all previous centuries combind. We have sold our grand children into slavery, destitution and a poverty which is too extreme to explain. Meanwhile life at the ranch is wonderful daily highs in the stock market (resembling the highs in Colo) but, remember the last euphoria ended and this one shall also.
wildbourgman on Tue, 18th Nov 2014 10:38 pm
Wake, the collapse is like taking the right medicine once you’ve gotten your self sick. The collapse is the cure, QE is like taking painkillers to mask the desease, the sooner you flush out the sickness the sooner the healing starts.
We have had way too much mal-investment at least back to the Dot-com days and we’ve never really been allowed to feel enough financial pain to make us change. You can’t bail out and reward abject failure and then expect the people that failed to not give you more of what you rewarded them for.
Northwest Resident on Wed, 19th Nov 2014 12:44 am
wildbourgman — I like your “medical” analogy. It kind of says it all. But flushing out that sickness is going to be a lot more painful than most people think. It can’t really be flushed out because it is a metastasizing cancer that has taken over the entire world body. It has grown so pervasive and so deep and so firmly attached itself that it can’t even be cut out. Really, the only way to kill it is to kill the patient. At least, that’s another way to look at it.
Davy on Wed, 19th Nov 2014 6:06 am
Wildman, I agree with your analogy in a different time but not the new normal. The prescription is correct but the age of the patient will no longer tolerate the medication. Debt levels have changed everything. BAU’s interconnectedness will ensure the weaker parts of the global system will propagate contagions because of counterparty risk. Too big to fail is present at every level because of this new normal. We are talking sovereigns, banks, and resource supply.
We maybe could have taken the medication directly after 08 if repression would have been immediately lifted once dangerous economic paralysis was averted. Instead an economic dynamic developed where bubbles were allowed to form at the expense of the productive economy IOW wealth transfer. Artificial growth, artificial liquidity, and artificial market fundamentals of risk and price. Market distortions are likely beyond recovery to historical. The economy is pointing to a break to a new balance. We are in uncharted water on where this break will reboot to.
We do know growth must be maintained at all cost with the size of the debt service across the board. The size of the leverage, the size of the risk positions, and finally the size of the sovereign deficits are at critical levels. So a flushing of the system is throwing the baby out with the bath water. The baby dies if left in the water. This is a situation where BAU cannot survive in its current new normal post 08 form. BAU can never return to its pre 08 form. The only alternative is a bifurcation to a new normal which almost certainly is a correction and a reboot at a lower level of economic activity.
Breaks never happen without consequences and unintended consequences IOW damage and destruction of economic infrastructure physical and ephemeral. Digital wealth almost certainly will be destroyed in significant quantities with the irrational levels in relation to the physical. This ephemeral digital destruction will destroy segments of the economy through demand and supply destruction. When economic activity drops bone is cut into. There is no way to know a reboot level and no way to know the break time. Yet, we can see the direction forming like a blood clot. The direction is pointing to incongruities that are not healthy.
Folks you are healthy are not healthy. There is a range of both but you cannot be both healthy and not healthy. You can be moving towards health or moving towards unhealthy but you are either unhealthy or healthy. The corns say we are moving towards better health but healthy. Dooms say we are unhealthy and moving towards organ failure with dialysis failing. How do you reconcile these views only time will tell.
Northwest Resident on Wed, 19th Nov 2014 10:15 am
“The collapse is the cure.”
“It’s only by bringing the economy down can you burst the bubble.” — Alan Greenspan, October 29 2014 in Wall Street Journal
“…throwing the baby out with the bath water…”
There is no way to escape the pain. Humanity has painted itself into a corner and there is no way out that does not involve pain and lots of it.