[MonteQuest]

The consumer spending that sustained the economy in the pre-crisis years isn't coming back because the housing bubble isn't coming back, period. Even as late as 2007, 80% of refinanced homes resulted in an equity withdrawal and that refi-ATM nonsense is over for good. If you bought a home during the run-up, you not only won’t ever see a profit but you won’t ever get back what you paid for it. That price was an illusion. And I think you could say the same thing about buying a house even now. The bottom in real estate is nowhere in sight. Even with a substantial down payment, I think many could see themselves upside down (owing more than the house is worth) in just a few months.

When many people were using their houses as ATMs, the savings rate dropped nearly to zero. In 2008, we have seen the savings rate ( % of disposable income saved) rise back above 1%, partly as a result of the rebate checks last spring and people hunkering down.

What do we do? We just have to have another spontaneous make-believe source of wealth or we are a screwed puppy. As Eric Janszen wrote in Harpers last February, “The bubble cycle has replaced the business cycle.”

In 1971, the U.S. ran its first trade deficit with gold-backed dollars. France, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars, had a hissy-fit and demanded payment in gold for the US securities it held. Nixon took the dollar off the gold standard to prevent a run on the US gold supply.

For those who don’t quite follow, I’ll use my Wimpy analogy. Wimpy, of course, was a character in the Popeye cartoon show. He had a jones for hamburgers and was noted for saying, “ I’ll gladly pay you Tuesday for a hamburger today.” So, let’s say this is Friday and you sell your hamburgers for $5. You give Wimpy his burger, and come Tuesday, Wimpy drops by and pays you the $5 he owes. However, over the weekend the value of the dollar drops 50%. While you did get your money, it was now only worth $2.50 in terms of purchasing power.

After 1975, the United States never posted a trade surplus again. Our era of manufacturing export dominance was over, save for debt and Disneyland. The new kid on the block was a “financial speculation” machine that promised to raise asset values without producing any real goods, as we had done during our manufacturing dominance. Some economists have opined that as much as 40% of recent GDP growth has been “financial speculation.”

After the tech stock bubble burst, sending $7 trillion in fictitious value back into the thin air from which it was created, something had to be done to counter that liquidity loss. Greenspan and the FED lowered interest rates to unheard of lows, sparking a $12 trillion dollar bubble funded by collateralized debt obligations (CDO’s) and other financial instruments whose value was supposedly secure, via a synergy of sorts, where the end product was less risk-laden, than the sum of its parts. One of the big reasons banks aren’t lending, especially to one another, is that no one knows the sums of those parts.

Ok, now we need $12 trillion. Where will that money come from?

Well, most of us here at peakoil.com see a huge future in renewable energy, but with oil at $35 bucks a barrel, it is going to take a lot of govt subsidy to blow that bubble.

As economist Paul Krugman wrote recently, “it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles.”

[ReverseEngineer]

After 1975, the United States never posted a trade surplus again. Our era of manufacturing export dominance was over, save for debt and Disneyland. The new kid on the block was a “financial speculation” machine that promised to raise asset values without producing any real goods, as we had done during our manufacturing dominance. Some economists have opined that as much as 40% of recent GDP growth has been “financial speculation.

Monte, the whole sytem of Asset Bubles and Debt as Money that underpins the Capitalist system has been analyzed out already, ad infinitum just it is so SEDUCTIVE as a system that people keep buying into the Ponzi scheme over and over again. I am sure you already have read most of this stuff, but review again what happenned at Bretton Woods. From Wiki:

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. This created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement.....
...The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the nineteenth century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizeable share of the world's known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe.
The only currency strong enough to meet the rising demands for international liquidity was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.

The architects of Bretton Woods were people like John Maynard Keynes and Harry Dexter White, Secretary of the Treasury under Roosevelt. FDR in some ways is considered a Hero for salvaging American Democracy, but he did it fundamentally by creating a disguised Fascist State. Control of ALL the instituitons and ALL the monetary systems of many countries all were subsumed here, and the post war period provided the opportunity to create many more bubbles, many "investment opportunities" all funded by debt, sieving value back to those who set up the system and backed it with their Gold. It worked for only so long as far as the US was concerned until we started becoming a net IMPORTER of Oil in the 70s under Richard Nixon. And so Nixon took us OFF the Gold standard at that time, because Gold was no longer sufficient as a definition of the crrencies and total wealth. It simply can't be, not when Capitalism postulates Perpetual Growth and Gold is in relatively fixed supply.

The period since then has simply been one of further bubbles created to shift around the debt and keep people BELIEVING in the preposterous idea of infinite growth in a world of finite resources. It simply HAD to crash eventually, as soon as the Growth Source of Oil became depleted enough you could not grow further without it. The intervening period since 1071 has been one of externalizing costs to the thrid world and basically sucking the life out of those countries, while Americans lived high off the Hog of Capitalist rape of the Earth, and of its poorest people.

What will life be like after the Bubbles? Very ugly, as we both well know. The whole system was a Ponzi Scheme set up after the Great Depression by Bernie Madoff's who literally Made Off with the Wealth of the entire world for an entire generation, and doomed us all to a very nasty next 300 years or so of die off and poverty. It might have been mitigated, but probably to do so it would have had to happen at the time of Bretton Woods with a different concept of a monetary system at that time. That did not happen because the people who constructed this monetary system were those who controlled the wealth of the world at THAT time, and they set it up to make sure they would STAY in control. And so they did, until the system they built collapsed under its own weight, as all Ponzi Schemes must. The real tragedy of course is that they sold an entire generation of people into the idea that Infinite Growth is possible through Capitalism. Its a Canard, always has been, but since it made some people VERY rich, they have perpetuated the myth as long as they could. Now it is DONE.

Reverse Engineer

[InToWishin]

Well, most of us here at peakoil.com see a huge future in renewable energy, but with oil at $35 bucks a barrel, it is going to take a lot of govt subsidy to blow that bubble.

So is this the only non-scam investment out there that you see?

[cube]

I once had a debate with someone in which my position was absolutely ironclad:
"The average person (aka most people) will NOT make money through investments. A person may get lucky for 1 year, maybe even for 5 years but in the long run they will NOT make money."
Another person disagreed with me and this was years ago before the stock market crashed.
At the time I honestly cannot say I made a sufficiently good argument to actually "win" the debate but that's perfectly fine with me.

[BlueGhostNo2]

Dunno cube, the average person in my friend circle doesn't play stocks only saves into a bank account. Now that person will make money through investing, what they won't do is gain value!

[Tanada]

Financial bubbles are nothing new, look up the Dutch Tulip Craze of the 17th Century if you don't want to take my word at face value.

LINK 1

Link 2

13,098 more leads here

[Quinny]

Never like West Ham and the fact their main song was never matched by results resulted in their Icelandic demise.

Apart from that Merry Xmas to all. Monte & RE have it right in my eyes.

Although some say the recent economic disasters have no link to Peak Oil, I believe they are the direct result of there being nowhere to go for the Capitalist growth ethic in a worls of 'Peak Resources'.

I fear the only bubble now will be in the shares of Funeral Directors

[patience]

I read somewhere that the only NEW wealth in the world is that produced by fishing, forestry, mining, and agriculture each year. If that be true, and there are to be no more bubbles, then the sum of those producers will be our "budget" in the future. With each of those 4 sectors having depletion issues, we have a declining income, the basis, I think of the case for dieoff.

Until rather recently, the basis of real wealth was the ownership of land. Serfs to work that land were always available. Do we have a case then, for a return to feudalism? Possibly with at least a few "freeholders", who will have to constantly battle TPTB to maintain their status.

[MonteQuest]

Well, most of us here at peakoil.com see a huge future in renewable energy, but with oil at $35 bucks a barrel, it is going to take a lot of govt subsidy to blow that bubble.

So is this the only non-scam investment out there that you see?

No, just one of the more likely.

Housing wasn't a scam investment, the hyperinflation via bogus financial instruments that created the fictitious wealth was. I expect to see the creation of another multi-trillion speculative bubble in renewable energy that, of course, will be used to increase share prices rather than “energy independence.”

We will see a new batch of "financial instruments"created to fund it all.

[MonteQuest]

If that be true, and there are to be no more bubbles, then the sum of those producers will be our "budget" in the future.

Or endless government bailouts.

[ReverseEngineer]

Until rather recently, the basis of real wealth was the ownership of land. Serfs to work that land were always available. Do we have a case then, for a return to feudalism? Possibly with at least a few "freeholders", who will have to constantly battle TPTB to maintain their status.

The land based slavery of Feudalism is one of the possible intermediary outcomes, particularly if you make the assumption we will Reverse Engineer our way back through similar economic structures on the way back down the ladder that were used on the way up. In the more near term however, it more looks like a battle between Fascism and Communism.

It is however fairly difficult to imagine how any political structure is going to hold together through such a long period of death as we are faced with in the coming years. Its one of my theories that we will fairly quickly devolve into tribal units concerned only with the area of land they inhabit and its defense. I think it would only be after the dieoff stabilized that there might be a coalscence into feudal style kingdoms.

As to "Freeholders", nobody is ever free save perhaps Robinson Crusoe. You always have obligations to others, your family of course that produced you and when you yourself reproduce. On the scale above that, you have obligations to the community that surrounds you. In large scale societies those obligations are codified and paid for in Taxes. Whether it is infrastructure building and maintenance, military protection, health care or social security and retirement, these are all obligations that every society has and takes on in one form or another. This is expressed in the old saw, "The only guarantees in life are Death and Taxes", with taxes representing your obligations to others.

With the collapse of the monetary system and the nation-state after that, you might not have any taxes to pay in money for a while, but the obligations will remain in place. To deny those obligations is to cut yourself off from your fellow man, and no man is an island.

Meditation XVII: No man is an island...

"All mankind is of one author, and is one volume; when one man dies, one chapter is not torn out of the book, but translated into a better language; and every chapter must be so translated...As therefore the bell that rings to a sermon, calls not upon the preacher only, but upon the congregation to come: so this bell calls us all: but how much more me, who am brought so near the door by this sickness....No man is an island, entire of itself...any man's death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee."

Reverse Engineer

[Ayoob]

I read somewhere that the only NEW wealth in the world is that produced by fishing, forestry, mining, and agriculture each year. If that be true, and there are to be no more bubbles, then the sum of those producers will be our "budget" in the future. With each of those 4 sectors having depletion issues, we have a declining income, the basis, I think of the case for dieoff.

Until rather recently, the basis of real wealth was the ownership of land. Serfs to work that land were always available. Do we have a case then, for a return to feudalism? Possibly with at least a few "freeholders", who will have to constantly battle TPTB to maintain their status.

It's mining, forestry, agriculture, and manufacturing. Fishing comes under mining or agriculture, depending on how you look at it. It's agriculture if it's done sustainably, mining if it's not.

[patience]

Fishing can be included in with another if you wish, but manufacturing doesn't create anything new-it only changes its' form, so it is a value-added activity. Same as making flour from wheat-the wheat is a new resource, the flour is only wheat that has been "value added". At least that's what my Econ teacher said.

The problem of budgetting remains, however we count the inputs, which are pretty much limited. It appears that we have pushed about far enough to find out where those limits are, so with that answered, the choices we haave are narrowed to what we will do with the little we have left? Let's hope that we deal with it wisely.

[patience]

Adding value to a commodity is a matter of adding energy to it in some way or other, so as we hit the limits of energy use, this too is constrained. I see the future being defined by how well we apply the energy we have available to us. From our track record as a society, this doesn't look too good. It's a paradigm change from, "how much energy CAN we add to make something most useful, over to, "how much energy MUST we add to make it useful." We have little experience at that, since energy has been so cheap for so long.

For myself, it means exploiting what renewable energy resources are available to me in the most economical means possible. The list is short. Direct passive solar heat, solar PV, wood for heat, small amounts of coal, and animal power are about it for our area. YMMV. The limits on these sources total dramatically less than what we commonly use now. I can live with this, but I question the ability of the masses to do so.

[ReverseEngineer]

For myself, it means exploiting what renewable energy resources are available to me in the most economical means possible. The list is short. Direct passive solar heat, solar PV, wood for heat, small amounts of coal, and animal power are about it for our area. YMMV. The limits on these sources total dramatically less than what we commonly use now. I can live with this, but I question the ability of the masses to do so.

The "masses" won't have to work out this problem. The masses will be dead.

The limited number of survivors wll have to work the problem out, and if the society doesn't completely devolve you might be able to hold onto some preps like PV panels. Invest in a Zombie Radar. Its your best protection.

Reverse Engineer

[InToWishin]

solar PV

How long does a solar panel have to run to return the amount of energy used to manufacture and distribute it to the end user? Can the average solar panel accomplish this within its MTTF?

[MonteQuest]

Yesterday, a friend of mine I was talking to about the next bubble, asked. " Why do we need another bubble, again?”

I responded, “Because the economy cannot grow fast enough in real terms to redeem the debt financial speculation in toxic assets created. That debt was financial instruments being traded, not the purchase of real goods and services.”

In other words, no one is willing to swap real present wealth for financial speculation debt even with a high return because that debt is worth much less.

The following is a quote from a summary of a seminar taught at MIT by M. King Hubbert in 1981:

“The world's present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin. The first of these two systems has been responsible for the spectacular rise, principally during the last two centuries, of the present industrial system and is essential for its continuance. The second, an inheritance from the pre-scientific past, operates by rules of its own having little in common with those of the matter-energy system. Nevertheless, the monetary system, by means of a loose coupling, exercises a general control over the matter-energy system upon which it is superimposed. Despite their inherent incompatibilities, these two systems during the last two centuries have had one fundamental characteristic in common, namely exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over. The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest. “

Debts have to be paid back out of future real growth, thus, the need for bubbles of financial speculation based upon ever more spurious “bundles of assets” to keep up the illusion we are growing richer.

There is no “market price” for these toxic assets and pricing them is, at best, a guess. That’s why banks won’t lend to each other; there is a repudiation of this unredeemable debt they all hold.

The FED will buy some of this toxic paper, and then sell it into the market place later to withdraw the excess liquidity once inflation gets underway.

Good luck with that move, Ben.