[poaecdotcom]

Nothing grows indefinitely in a finite system, not even debt!

Almost all (90%) of ‘money’ in existence today is debt (credit)[i]. This debt is created from thin air with every form of loan, from credit cards, through corporate debt to Treasury Notes. All this debt comes with an interest component that demands never ending growth in order to repay it. Again, the current monetary system REQUIRES that we have never ending economic growth.

It is one massive pyramid scheme because, if we ever stop growing, who is paying the interest?

Total U.S. debt has soared over the last 35 years:

total-debt.jpg

Debts are claims on future goods and services with interest and are essentially a bet that the future economy will be bigger than the present.

However:
The economy is the summation of all goods and services and these are produced from work.
High order energy is required for work.[ii]
Oil is the master high order energy resource powering 95% of transport in our trade based economic paradigm.[iii]

Therefore increasing debts are, in part, a bet that oil production will increase indefinitely.
But NOTHING grows indefinitely in a finite system!

global_C-C_jun14.png

World conventional oil production (blue) has been on a bumpy plateau since 2005.[iv]
And the economy, which is derived from work, from high order energy, to service that exponential debt, has been constrained by the bumpy plateau of conventional oil since 2005.

What happens when we can no longer service the growing debt with real economic growth?
The great recession happens. Without real growth, central banks desperately print money (more debt) by the trillions and hold interest rates close to zero (Q.E.), in an attempt to heist future growth and to ease the pain of the existing debt. But prescribing more debt to cure debt only digs the hole deeper and means that even more real growth is required (read: more work, more energy).

The world is now absolutely loaded up to the eyeballs with debt, after every sector and every asset class of the economy has been force fed to the point of glutinous bursting[v]. Newly printed debt produces less and less growth as credit intensity increases.[vi]


And what happens when the central banks policies cannot reduce interest rate further and the newly created debt does not increase real goods and services?
This is when deflation wins and this is where we are.[vii]
Without ongoing real growth, the exponential power of existing debt erodes the purchasing power of participants in the global economy. With fewer discretionary dollars to spend into the economy, a self-feeding loop of demand destruction ensues. Demand for real goods and services falls.

DeflationarySpiral-320x2311.jpg

Demand for commodities, the primary resources that produce the real goods and services of the economy, is now falling:

A recent zero-hedge article notes that commodities are now experiencing a “Depression-Level Collapse in Demand”[viii]
Bloomberg: “Iron Ore Slumps to Five-Year Low as China Slowdown Curbs Demand”[ix]
Sydney Morning Herald “Glencore, the world's fourth largest mining company and world's biggest commodity trader, will suspend its Australian coal business for three weeks "in a move never before seen in the Australian market, to avoid pumping tons into a heavily oversupplied market at depressed prices." [x]
Bloomberg: “Jiangxi Copper Profit Falls as Slowing China Growth Curbs Demand”[xi]
Fox: “IEA Cuts Demand Outlook, Oil Continues Drop”[xii]



Now back to the master commodity, oil.
Demand for oil, the primary energy component of the global economy, has always been highly correlated to GDP[xiii]:




In our economy of false signals, (Central Bank inflated stocks, a Quantitative Eased Bond Market, mind-numbingly exotic derivatives, quirky University of Michigan numbers, manipulated CPIs, arbitrary debt ceilings, smashed VIXs , etc. etc.) OIL is screaming the truth.

Price is falling because demand is falling because the real economy is contracting.

Deflation is coming and The Pyramid Scheme of Our Age is about to unravel.




When the oil tide recedes, prepare for the crash of the GREAT DEFLATION TSUMANI.








[i] http://en.wikipedia.org/wiki/Money_creation
[ii] http://en.wikipedia.org/wiki/Work_%28physics%29
[iii] http://www.ucsusa.org/clean_vehicles/wh ... JINxCvF-tY
[iv] http://www.resilience.org/stories/2014- ... ak-in-2005
[v] http://www.economist.com/content/global ... ock?page=7
[vi] http://www.bloombergview.com/articles/2 ... -something
[vii] http://www.peakprosperity.com/blog/8952 ... on-winning
[viii] http://www.zerohedge.com/news/2014-11-1 ... es-3-weeks
[ix] http://www.bloomberg.com/news/2014-12-1 ... emand.html
[x] http://www.smh.com.au/business/mining-a ... 1mhp2.html
[xi] http://www.bloomberg.com/news/2014-10-2 ... emand.html
[xii] http://www.foxbusiness.com/markets/2014 ... nues-drop/
[xiii] http://www.usfunds.com/investor-library ... JIR3CvF-tY

[poaecdotcom]

Peak oil and economic contraction!! I stopped blogging a while back now but keep an archive over at blogspot. Thanks for the feedback though.

[Shaved Monkey]

Sydney Morning Herald “Glencore, the world's fourth largest mining company and world's biggest commodity trader, will suspend its Australian coal business for three weeks "in a move never before seen in the Australian market, to avoid pumping tons into a heavily oversupplied market at depressed prices."

I was listening to a finance show that was saying the a lot of miners where losing money but continued because it was a smaller loss than stopping the operation completely.
Because there was long term contracts with ports and rail and service companies,leases on plant and interest on borrowings, so to stop dead would cost heaps more than just continuing mining and selling at a loss, some revenue was better than none,the outgoings remained constant.

[Observerbrb]

"Nearly everyone believes that oil prices will trend higher and higher, allowing increasing amounts of oil to be extracted. This belief is based on the observation that the cost of extraction is trending higher and higher. If we are to continue to have oil, we will need to pay the ever-higher cost of extraction. Either that, or we will have to pay the high cost of some type of substitute, if one can be found. Perhaps such a substitute will be a bit less expensive than oil, but costs are still likely to be high, since substitutes to date are higher-priced than oil.

Even though this is conventional reasoning based on experience with many substances, it doesn’t work with oil. Part of the reasoning is right, though. It is indeed true that the cost of extracting oil is trending upward. We extracted the easy to extract oil, and thus “cheap” to extract oil, first and have been forced to move on to extracting oil that is much more expensive to extract. For example, extracting oil using fracking is expensive. So is extracting Brazil’s off-shore oil from under the salt layer.

There are also rising indirect costs of production. Middle Eastern oil exporting nations need high tax revenue in order to keep their populations pacified with programs that provide desalinated water, food, housing and other benefits. This can only be done though high taxes on oil exports. The need for these high taxes acts to increase the sales prices required by these countries–often over $100 barrel (Arab Petroleum Investment House 2013).

Even though the cost of extracting oil is increasing, the feedback loops that occur when oil prices actually do rise are such that oil prices tend to quickly fall back, if they actually do rise. We know this intuitively–in oil importing nations, deep recessions have been associated with big oil price spikes, such as occurred in the 1970s and in 2008. Economist James Hamilton has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes (Hamilton 2011). Hamilton also showed that the effects of the oil price spike were sufficient to cause the recession of that began in late 2007 (Hamilton 2009).

In this post, I will explore the reasons for these adverse feedback loops. I have discussed many of these issues previously in an academic paper I wrote that was published in the journal Energy, called “Oil Supply Limits and the Continuing Financial Crisis” (available here or here).

If I am indeed right about the path of oil prices being down, rather than up, the long-term direction of the economy is quite different from what most are imagining. Oil companies will find new production increasingly unprofitable, and will distribute funds back to shareholders, rather than invest them in unprofitable operations. In fact, some oil companies are already reporting lower profits (Straus and Reed 2013). Some oil companies will go bankrupt. As an example, the number two oil company in Brazil, OGX, recently filed for bankruptcy, because it could not profitably find and extract Brazil’s off-shore oil (Lorenzi and Blout 2013).

Oil companies will increasingly find that the huge amount of debt that they must amass in the hope of producing profits sometime in the future is not really sustainable. The Houston Chronicle reports that an E&Y survey of Oil and Gas Companies indicates that the percentage of companies that expect to decrease debt to capital ratios jumped to 48% in October 2013 from 31% a year ago (Eaton 2013). If companies with huge debt loads cut back production to the amount that their cash flow will sustain, oil extraction can be expected to fall–just as it can be expected to fall if oil and gas companies go bankrupt or give back investment funds to shareholders.

The downward path in oil production is likely to be steep, if oil prices do indeed drop. The economy depends on oil for many major functions, including most transportation, agriculture, and construction. Increasingly expensive to extract oil is a sign of diminishing returns. As we utilize more resources for extracting oil (oil, steel, water, human labor, capital, etc.), there will be fewer resources to invest in the rest of the economy, reducing its ability to grow. This lack of economic growth feeds back as low demand, bringing down the prices of commodities, including oil. It is because of this feedback loop that I believe that the path of oil prices is generally lower. This path is the opposite of what a naive reading of “supply and demand” curves from economics textbooks would suggest, and the opposite of what we need if the economy is to continue on its current path."

http://www.doomsteaddiner.net/blog/2013 ... ion-costs/

Spot on prediction from November 2013.

[Subjectivist]

The Deflation Trap, on a personal level it is the opposite of inflation; folks rightly believe their money will be worth more (not less, like inflation) in the future so they horde rather than spend it. That idea is difficult to conceptualize and personalize, to wrap my mind around it, having been brought up in a world of constant inflation.

With the contraction in business debt/investment salaries, employment, and available spending money also disappear. Yes disappear. With Deflation comes the end of the consumer economy. The Republicans are finally in heaven, a world of Great Personal Responsibility. And they and we will hate it. The only thing keeping the peace will be government rationing. A little bit of oil to spend each week. On what? Driving to bread lines? End of story. The future of the internet . . . mostly a government bulletin board announcing the weekly bread ration.

The problem as I see it is everyone alive today in America has always lived in an inflationary environment since 1913. What they expect to happen and what will actually happen is the difference between theory and practice.

Before inflation became a way of life the economy cycled back and forth on a mostly decades scale, four years of inflation followed by a neutral year, four years of deflation followed by a neutral year. Rinse, cycle, repeat. When the inflationary world falls apart there will be deflation, but it is unlikely to be anywhere as deep or persistent as the inflationary advocates say it will be. The only time we have gotten big deflationary since 1913 are when inflationary bubbles like the Dotcom deal or the Housing ATM scheme fell apart. Even in those pops after a few years inflation always resumed.

[Pops]

World conventional oil production (blue) has been on a bumpy plateau since 2005.[iv]
And the economy, which is derived from work, from high order energy, to service that exponential debt, has been constrained by the bumpy plateau of conventional oil since 2005.

This seems to be the crux of the argument but at least according to Wiki the world economy has not been constrained, it has averaged close to 4% growth since 2005.
http://en.wikipedia.org/wiki/Gross_worl ... ite_note-9

Personally I think increasing cell phone bills and cable TV rates and check cashing fees is not the true test of a growing economy, but, you gotta come up with more than mere assertions to make an argument for something like "the final spiral of economic armageddon is nigh" ...

[Pops]

I agree wholeheartedly, P.
Deflation, caused by falling surpluses, increasing conservation - read that "demand destruction", and just basically generalized economic shrinkage is the obvious outcome of declining energy supplies.

What I am disagreeing with is the current mantra that this glut is that event or even that deflation is apparent at all.

Supplies are rising, demand is growing (in the US there has been a big spike on lower fuel prices) and globally, except for the EU who embraced austerity rather than stimulus, economies are growing.

If anything the current climate should be the example of exactly the opposite of The End of the world as we know it.

[Pops]

Look at the link Pete. Or here is another
China isn't contracting, just growing slower.
Japan ain't busting out but not contracting
The US ain't going gangbusters either but not in the hole.

You can say all those measurements are jiggered and I won't be able to prove you wrong, but by the same token you are wrong for pronouncing the economy dead and deflating,
yet.

[Pops]

The one big thing that has constrained the economies these last few years is the virtual tax that a constantly high oil price represents - AAA says drivers saved 14 billion on fuel in 2014.

So in fact, what the receding oil price represents is a foreshadowing of inflation as economies heat up with cheaper fuel that expands other sectors of the economy that have been starved.

Maybe


Demand

https://www.iea.org/oilmarketreport/omr ... entreport/

[poaecdotcom]

Absent trillions of central bank stimulus (credit) there would be no 4% growth, that is simple math. The inflation vs deflation argument should be analysed in light of what other commodities are doing and the fact that all major economies are bursting with unprecedented levels of debt.

[Pops]

There would be no economy absent 4 years of stimulus, the EU is the example.

Other commodities and all economies are suffering from 4 years of the highest average oil prices since oil. If that idea has any validity at all it seems to me that a respite from oil prices right at the level toxic to economics as we know it will stimulate the economy, not depress it.

Again, not that too much debt is good or that deflation will not be the ultimate effect of PO; just that while oil production is rising and the economy is not deflating it is disingenuous to say the opposite.


BTW, my view is inflation is an integral part of the system, deflation is the ultimate enemy. Folks who talk about hyperinflation etc (Weimar - always) don't understand the system (or the Weimar example), it doesn't matter what a dollar was worth in 1910 or 2010 for that matter if you had it somewhere getting some interest.

[dolanbaker]

It's now official, Deflation has arrived!

http://www.bbc.com/news/business-30707644
Inflation in the eurozone has turned negative, official figures have shown, with prices in December 0.2% lower than the same month a year earlier.

The tip into deflation adds pressure on the European Central Bank (ECB) to take further action to stimulate the bloc's economy.

The bank's inflation target is below but close to 2%.

[poaecdotcom]

Q.E.D.


lol

[Pops]

back out energy and EU inflation is about 1%
Falling energy prices don't equal deflation

Considering EU wages are stable, core inflation continues about 1% and the money supply also continues to rise (the key measure of deflation and difference between deflation and dis-inflation) I'm thinking ...

not qed, not close.