By my analysis, we are not yet on the final path to recovery, and there are one or more financial 'breaks' coming in the future. Underlying structural weaknesses have not been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.
My work centers on figuring out which macro trends are in play and then helping people to adjust accordingly. Based on trends in fiscal and monetary policy, I began advising accumulation of gold and silver in 2003 and 2004. I shorted homebuilder stocks beginning in 2006 and ending in 2008. These were not 'great' calls; they were simply spotting trends in play, one beginning and one certain to end, and then taking appropriate actions based on those trends.
We happen to live in a non-linear world; a core concept of the Crash Course. But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way. In other words, linearly. The world does not always cooperate, and my concern rests on the observation that we still face the convergence of multiple trends, each of which alone has the power to permanently transform our economic landscape and standards of living.
Three such trends (out of the many I track) that will shape our immediate future are:
Individually, these worry me quite a bit; collectively, they have my full attention.
History suggests that instead of a nice smooth line heading either up or down, markets have a pronounced habit of jolting rather suddenly into a new orbit, either higher or lower. Social moods are steady for long periods, and then they shift. This is what we should train ourselves to expect.
No smooth lines between points A and B; instead, long periods of quiet, followed by short bursts of reformation and volatility. Periods of market equilibrium, followed by Minsky moments. In the language of the evolutionary biologist Stephen Jay Gould, we live in a system governed by the rules of "punctuated equilibrium."
Complex Systems
Our economy is a complex system. The key feature of such systems is that they are inherently unpredictable with respect to the timing and severity of specific events. For the uninitiated, they can look enormously fragile and prone to flying apart at any minute; for the seasoned observer, there is an appreciation that the immense inertia of the economic system will almost always delay and dampen the eventual adjustments.
Like everybody else, I have no idea exactly what's going to happen, or precisely when. Anybody who says they do know should be greeted with a furrowed brow and a frown of suspicion. As my long-time readers know, I prefer to assess the risks and then take steps to mitigate those risks based on likelihood and impact.
Which means that although we cannot predict the size (exactly how much) or the timing (precisely when) of economic shifts or world-changing events, we can certainly understand the risks and the dimensions of what might happen. Just as we cannot predict when an avalanche will release from steep slope, or even where or how big it will be, we can readily predict that constant snowfall coupled with the right temperature conditions will lead to an avalanche sooner or later, and more likely in this gully than that one. Given certain conditions, we might expect one that is larger or smaller than normal. Although we don't know exactly when or how much, we do know that when snow accumulates, so do the risks of more frequent and/or larger avalanches.
Such is the nature of complex systems. While inherently unpredictable, they can still be described. The most important description of any complex system is that it owes its order and complexity to the constant flow of energy through it. Complex systems require inputs. This is one way in which we can understand them.
Given this view, one easy "prediction" is that an economy without increasing energy flows running through it will stagnate. To take this further, an economy that is being starved of energy becomes simpler in the process -- meaning fewer jobs, less items produced, and a reduced capacity to support extraneous functions.
Accepting "What Is"
The most important part of this story is getting our minds to accept reality without our passionate beliefs interfering. By 'beliefs' I mean statements like these:
While each of these things might be true, they also might be false and therefore misleading, especially during periods of transition. Our job is to remain as dispassionate and logical as possible.
Let's now examine more closely the three main events that are converging -- Peak Oil, sovereign insolvency, and currency debasement -- using as much logic as we can muster.
Peak Oil
Peak Oil is now a matter of open inquiry and debate at the highest levels of industry and government. Recent reports by Lloyd's of London, the US Department of Defense, the UK industry taskforce on Peak Oil, Honda, and the German military are evidence of this. But when I say "debate," I am not referring to disagreement over whether or not Peak Oil is real, only when it will finally arrive. The emerging consensus is that oil demand will outstrip supplies "soon," within the next five years and maybe as soon as two. So the correct questions are no longer, "Is Peak Oil real?" and "Are governments aware?" but instead, "When will demand outstrip supply?" and "What implications does this have for me?"
It doesn't really matter when the actual peak arrives; we can leave that to the ivory-tower types and those with a bent for analytical precision. What matters is when we hit "peak exports." My expectation is that once it becomes fashionable among nation-states to finally admit that Peak Oil is real and here to stay, one or more exporters will withhold some or all of their product "for future generations" or some other rationale (such as, "get a higher price"), which will rather suddenly create a price spiral the likes of which we have not yet seen.
What matters is an equal mixture of actual oil availability and market perception. As soon as the scarcity meme gets going, things will change very rapidly.
In short, it is time to accept that Peak Oil is real -- and plan accordingly.
Sovereign Insolvency
Once we accept the imminent arrival of Peak Oil, then the issue of sovereign insolvency jumps into the limelight. Why? Because the hopes and dreams of the architects of the financial rescue entirely rest upon the assumption that economic growth will resume. Without additional supplies of oil, such growth will not be possible; in fact, we'll be doing really, really well if we can prevent the economy from backsliding.
Virtually every single OECD country, due to outlandish pension and entitlement programs, has total debt and liability loads that Arnaud Mares (of Morgan Stanley) pointed out have resulted in a negative net worth for the governments of Germany, France, Portugal, the US, the UK, Spain, Ireland, and Greece. And not by just a little bit, but exceptionally so, ranging from more than 450% of GDP in the case of Germany on the 'low' end to well over 1,500% of GDP for Greece.
Such shortfalls cannot possibly be funded out of anything other than a very, very bright economic future. Something on the order of Industrial Age 2.0, fueled by some amazing new source of wealth. Logically, how likely is that? Even if we could magically remove the overhang of debt, what new technologies are on the horizon that could offer the prospect of a brand new economic revival of this magnitude? None that I am aware of.
In the US, the largest capital market and borrower, even the most optimistic budget estimates foresee another decade of crushing deficits that will grow the official deficit by some $9 trillion and the real (i.e., "accrual" or "unofficial") deficit by perhaps another $20 to $30 trillion, once we account for growth in liabilities. This is, without question, an unsustainable trend.
It's time to admit the obvious: Debts of these sorts cannot be serviced, now or in the future. Expanding them further with fingers firmly crossed in hopes of an enormous economic boom that will bail out the system is a fool's game. It is little different than doubling down after receiving a bad hand in poker.
The unpleasant implication of various governments going deeper into debt is that a string of sovereign defaults lies in the future. Due to their interconnected borrowings and lendings, one may topple the next like dominoes.
However, it is when we consider the impact of the widespread realization of Peak Oil on the story of growth that the whole idea of sovereign insolvency really assumes a much higher level of probability. More on that later.
For now we should accept that there's almost no chance of growing out from under these mountains of debts and other obligations. We must move our attention to the shape, timing, and the severity of the aftermath of the economic wreckage that will result from a series of sovereign defaults.
Currency Wars
We could trot out a lot of charts here, examine much of history, and make a very solid case that once a country breaches the 300% debt/liability to GDP ratio, there's no recovery, only a future containing some form of default (printing or outright).
In a recent post to my enrolled members, I wrote:
"The currency wars have begun, and the implications to world stability and wealth could not be more profound. Fortunately, all of my long-time enrolled members are prepared for this outcome, which we've been predicting here for some time.When pressed, the most predictable decision in all of history is to print, print, print. So I can't take credit for a 'prediction' that was just slightly bolder than 'predicting' which way a dropped anvil will travel; down or up?
The only problem is, widespread currency debasements will further destabilize an already rickety global financial system where tens of trillions of fiat dollars flow daily on the currency exchanges."
You can be nearly certain that every single country is seeking a path to a weaker relative currency. The problem is obvious: Everybody cannot simultaneously have a weaker currency. Nor can everybody have a positive trade balance.
If a country or government cannot grow its way out from under its obligations, then printing (a.k.a. currency debasement) takes on additional allure. It is the "easy way out" and has lots of political support in the home country. Besides the fact that it has already started, we should consider a global program of currency debasement to be a guaranteed feature of our economic future.
Conclusion (to Part I)
Three unsustainable trends or events have been identified here. They are not independent, but they are interlocked to a very high degree. At present I can find no support for the idea that the economy can expand like it has in the past without increasing energy flows, especially oil. All of the indications point to Peak Oil, or at least "peak exports," happening within five years.
At that point, it will become widely recognized that most sovereign debts and liabilities will not be able to be serviced by the miracle of economic growth. Pressures to ease the pain of the resulting financial turmoil and economic stagnation will grow, and currency debasement will prove to be the preferred policy tool of choice.
Instead of unfolding in a nice, linear, straightforward manner, these colliding events will happen quite rapidly and chaotically.
By mentally accepting that this proposition is not only possible, but probable, we are free to make different choices and take actions that can preserve and protect our wealth and mitigate our risks.
What changes in our actions and investment stances are prudent if we assume that Peak Oil, sovereign insolvency, and currency debasement are 'locks' for the future?
I explore these questions in greater depth in Part II of this report (enrollment required).
Follow Chris Martenson, Ph.D. on Twitter: www.twitter.com/chrismartenson
We don't read about his views on how the Fed manipulates the stock market through the Open Market Committee (aka The Plunge Protection Team.) We never hear him castigate Bernanke for flooding banks with trillions of our dollars to purchase their toxic assets and at the same time allow them to sit on the cash until he let's interest rates go up.
He would never tell his paying customers that we never needed a central bank. The one we have has been derilict in fulfilling its Chartered responsibilities of maintaining price stability and employment.
The cure all may not be getting rid of the Fed. It may be simple matter of controlling the Fed. Make it a public bank not a private bank. Until we do that we will have bubbles bursting and confetti currency.
He uses Rush Limbaugh terms on his web site Like "Bend Over" when he describes Democratic Politicians. David Walker is on his site also, "end Social Security is the only solution"
If you want to learn more about economics go to an unpaid Academic website like Economists View instead of a paid doomsday site trying to sell you products.
If we ever hope to be energy independent, we need to find another fuel for trucks and cars. If the Federal and State governments began buying only CNG and electric vehicles, the building of the necessary infrastructure would go a long way towards solving the jobs problem. Natural gas is not the perfect fuel, but it is half as dirty as it's competitors. We cannot keep doing the same things and expect change. By becoming energy independent, we keep $365 Billion dollars a year at home to be reinvested in the United States. The United States, the largest energy fuel importer on earth is going to become an energy economy and natural gas is going to get us there. There are millions of jobs in the energy bills. We can pass on cap and trade for a decade, if we make the coal fired plants switch to natural gas. Two companies, AEP and The Southern Companies, the two largest power companies in America, produce 68% of their power with coal, and are responsible for 2.5% of of the man made CO2 on Earth
Timing is the most critical part of any investment. i doubt he would be typing much if he bought gold in Jan 1980 and shorted homebuilders in 2001.
It reminds me of the saying, every dog has his day...
In the future we will likely look back at this article and laugh when oil is at $10 again and gold is at $250/oz.
information for people to consider as we plan for the future.
The confluence of events is being lost in the din of celebrity profiles
and politcal hijinx...we shall see who is listening.
A country is not a corporation, therefore it cannot have a negative net worth. Do you have any idea of the fair value of vast space of farmland in a world where the shit hits the fan? Now maybe the net worth would not look so bad after all, eh? Add to that the ineffable ability and experience of farm land savy and you have a production paring that has super value. We all know the fate of midas.
It was the infamous and sad walter wriston who stated that countries could not go bankrupt. Our best in brightness in his time.
Leverage is fine for insiders of the fixed financial game, but it is death for its victims. Indeed, if the truth were to be told, gold is now the speculative bubble that all the "smart boys" who are in the know will play to the disdain of the unsuspecting. And so goes the roller coaster of production. Over and over and over. In another 25 years this will happen again notwithstanding all the educated boys who will critisize it in its wake.