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The Market Ticker - Has The Balloon Gone Up?

The Market Ticker - 25 April 2015 - 11:00pm

What is the difference between an armed band of thugs and the police?

The latter conform with the law, including the 1st, 2nd, 4th and 5th Amendments.

The former do not; they come with guns drawn, take what they want, and demand your silence -- not as a civil right in a court of law but as a demand that they make clear will be enforced with those very same guns.

One of these groups ought to be given deference and respect.  The other ought to obtain neither, nor be safe anywhere from justice and retribution both before the laws of civil society and, if that fails, the laws of provenance.

Such it was in 1776 when entreaties to the laws of.......

(Click link to read more)

Categories: Economics

Inner Transition sans frontières!

Energy Bulletin - 25 April 2015 - 8:00pm

About a year ago I started hosting on line conversations for people involved with Inner Transition in different countries.

Categories: Peak oil news

QE = Debt Cancellation

The Daily Reckoning - 25 April 2015 - 8:06am

This post QE = Debt Cancellation appeared first on Daily Reckoning.

We return after yesterday’s, ahem, uplifting reckoning.

“So, basically,” wrote one reader after mulling over, “we’re screwed…

“More of the same to stay afloat — yay! Stagnation and suffering ahead — oh, boy!! Nothing could be better!! Yipee!!! I’m so glad — let me jump in front of this speeding train to celebrate…”

If you’re just tuning in, we’re two parts deep into our three-part conversation with Richard Duncan. In Part I, he outlined why he believes capitalism has died… and where that leaves us.

In Part II, yesterday, he went a step further to explain why QE4 and probably QE5 are necessary to stave off collapse. Don’t tell Congress… but Duncan explained that if Japan’s debt-to-GDP ratio was any indication, the U.S. has at least $17 trillion more in borrowing headroom.

After having 24 hours to chew on that fact, some of your fellow readers are finding Richard’s point of view… umm… hard to swallow.

“I just have to reply to your ‘deep thinker,’” wrote a second reader. “Austrian economists always like to refer to the three people on an island to demonstrate how resources are finite. Duncan’s idea is nothing more than I’ll pay you Tuesday for a hamburger today. Eventually, there are no more hamburgers and everyone goes hungry. This type of deep thinking is what caused the problem we have now.

“Substitute money printing for creditism and the brilliance of this line of thinking is reduced to its true essence. They are both the same. There are limited assets on the planet, and creating more credit cannot solve that problem.

“His eventual conclusion is the correct one, so bite the bullet, take the pain and deal with reality. Otherwise, this will end in a crisis of incredible proportions. We are simply living the crackup boom, and there are no grown-ups around to end the party.”

Our second reader may be right — no one really knows. But Richard, right or wrong, reaches a different conclusion. We think it’s at least worth considering.

“The question,” he cautioned in these pages on Oct. 24, 2014, “is not whether we are going to abandon capitalism and replace it with a different kind of economic system. We did that long ago. The question is: Are we going to allow the economic system now in place to collapse?”

He then outlined three distinct options for policymakers…

Option 1: The government could sharply reduce its spending. The result would be a New Great Depression. This is the least attractive option.

Option 2: The government could carry on doing what it does now — that is, the status quo, borrowing and spending to support consumption. This approach would sustain the economy for at least a decade. Then there would be a U.S. sovereign debt crisis, and the world would collapse into a New Great Depression. This option is preferable to Option 1, but far from ideal.

Option 3: The government could borrow and invest in a way that not only supports the economy but actually restructures it so as to restore its long-term viability. This option, rational investment, is the only one of the three with the potential to result in a happy ending. If government is invested in projects that will generate a high enough return to pay the interest on the debt, then it will support not only the economic structure now in place, but also a larger and more prosperous economy.

The part to remember, though, is that you can ignore Richard’s prescriptions if you don’t like them. They’re a moot point, anyway. We’re not crazy enough to debate policy — certainly not on a Friday.

Instead, we’re here to serve up analysis of what the Fed and Congress might do next and why and then figure out what the impact might be on your money and investments.

To that end, we find Richard’s descriptions of what may happen as a consequence of possible policy actions helpful. We hope you do too.

You’ll find the third part of our discussion, below…

Peter Coyne: Richard, when we left off yesterday you were talking about globalization and deflation. Mind picking up there?

Richard Duncan: Yes. You know, Pete, as I’ve said, the thing everyone should keep in mind is that we’re not starting from some sort of laissez-faire equilibrium state today. We have a massive global economic bubble and its natural tendency is to collapse into deflation.

The natural tendency is for this bubble to deflate and on top of that globalization is very deflationary. Today is not like the old days when we had a domestic economy where trade had to balance. Since the Bretton Woods System broke down in 1971, the U.S. has been able to run very big trade deficits. And so we no longer hit domestic bottlenecks. We can just buy as much as we want from the rest of the world.

That’s why we’ve been able to avoid inflation ever since we started running very large trade deficits. Now on the labor side of the global economy there are two billion people who live on less than $3.00 a day. That means we’re never going to get labor constraints within our lifetimes and probably not for several lifetimes.

In terms of industrial capacity, China has created so much industrial capacity across every imaginable industry that there is far, far too much of it and so product prices are falling. In China they’ve been falling every month for 36 months.

You’ve heard the statistic, no doubt, that during two years recently China expanded its — I think it was cement production — by as much as the U.S. did during the entire 20th century.

We have a big global credit bubble that would deflate if left to its own devices. It would deflate into a great depression like the 1930s. But policy members have been keeping it inflated — very successfully as we’ve been discussing.

They kept the horrific global credit bubble inflated through massive budget deficits and trillions of dollars of fiat money creation around the world. But just barely. Inflation rates are pretty much at zero now most places — at least in the developed western countries. So it looks like it’s more likely to deflate from here than to inflate.

Peter Coyne: When we spoke yesterday, you explained your raft analogy. I was wondering if the raft represents just one country in isolation or are you talking about the entire global economy. I ask, because even though QE has ended in the U.S., we still have QE in Japan… a new QE program in Europe… rate cuts from many other central banks. What’s the net effect?

Richard Duncan: With every analogy you can only take it so far. But I generally mean it’s global and it helps the global economy when several central banks are creating money very aggressively the way that the ECB and the Bank of Japan are doing at the moment. But of course it has a different impact on different parts of the world.

Peter Coyne: Can you elaborate on that?

Richard Duncan: Yes. Well clearly now that ECB is printing 60 trillion euros a month — that’s very aggressive. And Japan is equally aggressive and they’ve been at it now for two years. So in both of those cases, they’re actually printing the equivalent of and buying financial assets equivalent to twice the budget deficits of those countries, respectively. So they’re not only monetizing the debt, they’re monetizing it twice over in Japan and Europe.

Now it’s important to understand that QE is debt cancellation. And let me briefly spell out the details of what I mean by that.

The right now the way it works is, okay, the Fed has printed money and it’s accumulated $2.5 trillion of U.S. government bonds. And so the government has to pay interest on those bonds to the Fed and it does.

But at the end of every year, the Fed gives practically all of that money, all of its profits — which mostly come from the interest income on those bonds — the Fed gives all of its profits back to the government. So in other words, it’s essentially the same thing as the government paying interest to itself.

The government pays the Fed, which is really part of the government. The government pays interest to the Fed. The Fed takes that interest and gives it back to the government, effectively cancelling those bonds.

Last year the Fed gave $97 billion back to the government and that reduced the budget deficit last year by almost 20%. It would have been $600 billion instead of $500 billion.

Since 2008, the Fed has given the government half a trillion dollars in this way reducing the budget deficit by half a trillion dollars. So, as long as the Fed keep rolling those bonds over when they mature (as they are doing now) and so long as the Fed never sells those bonds, then the $2.5 trillion worth of government bonds that the Fed has acquired has been effectively cancelled.

This debt has no cost to the government. This is going on in the U.S. and also in the U.K. where the Bank of England has roughly 25% of all of U.K. government debt paying interest to itself, effectively cancelling that. ECB is now doing it as well.

But Japan is a particularly interesting case because in Japan, as you know, the Japanese government debt is something like 250% of GDP. At this stage, the Bank of Japan has now accumulated government debt equivalent to 50% of GDP. In other words, effectively they’re cancelling 20% of all of the Japanese government debt.

And it removed 50% of GDP out of the 250% of GDP in total. I think once you understand that QE is debt cancellation, it really makes sense of Japan’s very aggressive QE policy. Because they’re now buying up twice the budget deficit every year.

With every month that goes by, their percentage share of total government debt outstanding is growing. So in a few more years they’ll have 100% of government debt to GDP, and then 150% of government debt to GDP — if it goes on like this.

This is important because right now in Japan the interest rates are extremely low — 30 basis points on ten year Japanese government bonds.

People have always worried that if any sort of shock occurs and interest rates there go up say, by, 300 basis points to 3% then it would effectively create a fiscal crisis that the government may not be able to deal with.

But the greater the share of Japanese government bonds held by the Bank of Japan, the less likely such a crisis would be. That’s because no matter how high the interest rates go, the government — the ministry of finance — would have to pay interest on those bonds to the Bank of Japan but the Bank of Japan would just give all that money back to the government.

So the more the Bank of Japan acquires, the less government debt outstanding there actually is that the government has to worry about because the debt held by the BOJ has been effectively cancelled.

Peter Coyne: Okay. I’d like to turn to the liquidity gauge that you track. It’s a good indicator for asset prices. I’ve updated your work on it periodically since you and I met in Australia last year around this time. I believe, and correct me if I’m wrong, that the last time we talked about it, you had an estimate for a $200 billion liquidity drain in 2015?

Richard Duncan: Yes.

Peter Coyne: Is that still the case? And can you describe what that means?

Richard Duncan: Things have changed in two ways. There is still a drain in 2015 and as far as the eye can see into the future. Remember the liquidity gauge is quantitative easing plus the current account deficit. Today, there’s no more QE. So it’s just the current account deficit that is supplying liquidity while government borrowing is draining liquidity. Today, government borrowing is higher than the current account deficit unlike the 12 years from 1996 until 2008 or so.

So we’re seeing a liquidity drain. But it is necessary to adjust the numbers for two reasons. The first reason is oil.

We have had a very significant collapse in the price of oil. The U.S. is importing much fewer barrels of oil every year because it’s producing so much more domestically. On top of that the U.S. is exporting more and more petroleum related products. So both in volume terms and value terms, the “oil deficit”, if you want to call it that, is becoming significantly smaller. And that reduces the country’s current account deficit.

That supplies less liquidity to the U.S. economy and it makes the liquidity drain more negative. However, offsetting that you have a very strong dollar now which should make U.S. imports increase. That in turn should make U.S. exports decrease and make the current account deficit worse.

So these two factors are pulling in different directions. So I’m trying to recalculate what all of this will mean for the liquidity gauge. Overall, it’s still negative. But I think it’s not as negative as the last time we talked.

Peter Coyne: Okay, so it’s safe to assume that you think that the Fed increasing interest rates this year would be a very bad decision?

Richard Duncan: Yes, I find it odd that they’re still so aggressively talking about increasing interest rates, given how weak the U.S. economy seems to have become in the last few months.

You must have seen the Atlanta Fed’s GDPNow numbers?

Peter Coyne: I did.

Richard Duncan: At the beginning of February it was suggesting that the first quarter GDP should be growing at something like 2.4% and now it’s showing that it only grew by 0.1%. The numbers have been pretty bad across the board. Some of it may have been weather related.

But that really doesn’t explain what’s been going on in other areas. Maybe there was some impact from the west coast port strikes or work slowdowns, but that ended in the middle of February so that shouldn’t have such a lingering effect either.

Peter Coyne: What then, is a possible explanation for why they’re talking about a rate increase, given what you just told me?

Richard Duncan: You know it’s very hard to guess what they are thinking and it’s hard to know what they really do know. It’s hard to really know if they have the right understanding of the economy or not. Maybe they really believe that we don’t have a global bubble.

Maybe they think the economic imbalances have corrected. Perhaps they think the household sector has paid its debt down from $14 trillion to $13 trillion and now we’re all fine again even though household debt increased from $4 trillion in 1994 and even though wages aren’t going up.

Maybe they really think that we’re at the point where the economy can finally achieve self-sustaining growth by itself, whereas I don’t see it that way at all. Or, maybe with interest rates so low for so long they’re increasingly worried about asset bubbles forming that they would like to control.

It seems, given what we’ve talked about, that they want to talk up the value of the dollar relative to other currencies as if they want the U.S. current account deficit to become larger.

The bigger the current account deficit becomes, the more liquidity — more dollar liquidity it throws out into the global economy.

Also, when the U.S. current account becomes larger, it allows the exporting countries to export more every year. At the same time the money that the trade surplus countries receive gets recycled and sent back into the U.S. too. But right now the current account deficit has fallen to something like $400 billion last year.

And with oil — with the U.S. oil deficit becoming smaller and smaller, that suggests other factors being the same, the U.S. current account deficit should be shrinking, which means less global liquidity, fewer opportunities for other countries to export and a greater risk of a global economic crisis since the driver of global growth — the U.S. current account deficit — has gone into reverse. Maybe they’re afraid that the current account deficit is going to become so small that it will set off another phase of the global economic crisis.

And so if they can make the dollar go up a lot then that should cause the U.S. current account deficit to stop shrinking at least. It would shrink because of the fewer oil imports. But maybe if the dollar becomes very much more expensive that would prevent it from shrinking as much or even allow it to stabilize or perhaps even expand a little bit.

The IMF is forecasting that the U.S. current account deficit is going to be flat this year but then start growing again quite significantly over the next few years, but I don’t think it will.

In fact, let me mention something that’s happening with global trade. In between December and February, U.S. imports fell by 9% which is really quite a dramatic drop. Imports had been growing and growing for decades. Then in 2009 they collapsed. By the end of 2010 they were pretty much back to where they were in 2008. So they had recovered all their lost ground.

But then, from about 2011 until a couple months ago, U.S. imports were pretty much flat. That is why the global economy has been so weak. U.S. imports used to drive everything. But now just over the last couple of months, U.S. imports have dropped 9% between December and February. It looks very traumatic on the chart.

Chinese exports last year only grew by 6% which is very weak for China. And China’s imports last year only grew by 0.5%. For the last four months, I think, China’s imports have been contracting at practically a double-digit rate.

So, it doesn’t matter how much China’s economy supposedly grows — at least it doesn’t from the rest of the world’s perspective. What matters is how much China’s imports increase every year. For China to act as a driver of global growth, China’s imports have to increase and right now they’re dropping at a double-digit rate.

China is the opposite engine of global growth. China’s abrupt economic slowdown is acting as a significant break on global economic growth.

Peter Coyne: This is why the Peoples Bank of China recently cut rates…

Richard Duncan: They’re trying to prop up the domestic economy, but that’s hard to do because it’s such an enormous bubble. Their whole growth model is in crisis.

They can’t have export-led growth because there’s no one left to export to. The U.S., Europe and Japan are all in crisis.

They can’t have investment driven growth either — why invest more when you have massive excess capacity of everything already?

World trade is growing by about 2% in volume terms when normally it grows between 5% and 10%. But if you put that in value terms measured in U.S. dollars, world trade is now down 11% year on year — far worse than the earlier recessions we had except for the great recession of 2009.

In value terms, world trade is collapsing. And remember, profits are measured in terms of values, not in terms of volumes. This explains why U.S. corporate profits fell last year and why they’re expected to fall in the first and the second quarter of this year.

One of the main reasons that world trade is collapsing is because commodity prices are crashing. That’s reflecting the fact that the global bubble is deflating. And that is because the Fed started tightening monetary policy 15 months ago.

Peter Coyne: We met last year soon after tapering began. Where do we stand now, versus what you were telling me then?

Richard Duncan: My outlook is the same in terms of I expected everything to slow down when QE ended and it has. Nothing drops in a straight line, though, we might get a bounce in second quarter GDP numbers.

Meanwhile, we now have a ten year U.S. government bond yield somewhere below 1.9% whereas of course 12 months ago everybody thought yields would be above 3% by now. It’s not impossible that the ten-year bond yield is going to keep moving lower and lower. I’m not saying that’s my projection but that is a possibility.

If the ten-year bond yield moves below 1.5%, then that should support the economy for longer and it should also support stock prices for longer. If it moves below 1%, even more so. And if it falls to 8 basis points like it is in Germany or even 30 basis points like it is in Japan, then the stock market could double from here and that would support the economy for some time into the future.

So much depends on what happens to the ten-year government bond yield. The Fed keeps talking about trying to make it go up. If they do, then the global bubble is going to sink much more quickly.

Then they’ll reverse and launch QE4. So, it may require a stock market sell off before the Fed reverses course and launches QE4. But if it starts to sell off they won’t wait long.

I think what happened in October when the stock market had its mini-crash is a good guide. It was down 10% and it looked like it was in complete panic mode until Fed president Bullard said on live Bloomberg TV that maybe the Fed should extend QE3 longer and not end it as it was scheduled to end at the end of October.

Before he finished the sentence, all the stocks had rebounded very amazingly. The market quickly recovered that 10% loss. But since QE has ended at the end of October, the stock market is more or less flat. Whereas during 2013 when the Fed created a trillion dollars and pumped it into financial markets, the S&P index went up 30%. And in 2014 when the Fed created $450 billion and pumped it into financial markets, the S&P went up 11%.

But now that QE has ended, the stock market is flat. I don’t think it’s going to remain flat — I think it’s going to correct unless the interest rates go very much lower, although the possibility of much lower interest rates can’t be ruled out.

Peter Coyne: So, inevitably the stock market is headed higher, even if it corrects — because the Fed will reverse and, if history is a guide, the stock market will go up in lock step with it?

Richard Duncan: I think that’s right. That’s how our government is managing the global economy. I’d just like for everyone to recognize that the economy is being managed. And I’d also like them to understand that if the government stops managing it will collapse into a great depression. If that occurs, a lot of people are going to suffer beyond anything they’ve imagined in their lives.

So they should think carefully before accepting all the anti-government intervention doom porn to which they are exposed. Isn’t that what you call it in The Daily Reckoning? Doom porn? I wanted to ask you that because it’s such a great phrase.

Peter Coyne: Heh… yep.

Richard Duncan: Yes, so, they should stop getting off on the doom porn and look at this realistically and understand that we don’t have a capitalist economy. It’s not the 19th century, it’s not the Wild West.

The government has been managing our economy since at least World War II. And they’ve mismanaged it, they’ve created a big bubble. Now they’re keeping the bubble inflated. If they let it deflate, millions of Americans will be hunting squirrels for a living.

Peter Coyne: That sounds pretty dire. But barring that depression, investors should stick with stocks and if they feel comfortable, buy on the correction?

Richard Duncan: It depends on their risk tolerance and their nerve. Passive investors could probably just stay in the market and ride out the correction and still be up a couple of years from now.

But, for active investors, I think it’s a better idea to be out of the stock market right now. Normally the rule of thumb is when the Fed is creating a lot of money and using it to buy a lot of financial assets, the financial assets go up. And when they stop, they go down.

So I think investors should do what the Fed does. When the Fed is buying, they should buy. And when the Fed is not buying they should be out of the markets and wait for a correction.

They should buy again when they see Janet Yellen approaching the microphone and her lips begin to form the letter Q, because when that happens stocks are going to skyrocket and everybody knows that and she knows that. That’s the way active investors should play it.

I think it’s very important for individuals who are concerned about investing their own money them to take an objective look at what is happening.

Whatever they think about government intervention and government budget deficits and quantitative easing, they may approve of it, or they probably disapprove of it, but it’s not going to stop. And the reality is that this isn’t capitalism.

This has evolved into something else. It is an economic system that still is managing to create economic growth, but in order to create growth, it requires government intervention on an unprecedented scale, and this government intervention is not going to stop.

And the average investor should not hope that it does stop because if it stops, the value of his assets will probably all evaporate, and his job will disappear.

So we need to be practical about this, and, therefore, in order to understand what’s going to happen to your investment portfolio, it’s very important to anticipate what the government is going to do next because we are on government life support.

Like it, hate it, this is just a reality. So there’s no point wishing it were some other way. We’re never going back to 19th century laissez-faire capitalism. That died in the world wars.

In World War II, the government took over complete control over the economy. They took over manufacturing, production, distribution, they controlled the prices. They even controlled the labor. When the war started, government spending increased by 900%.

That completely transferred the nature and structure of the U.S. economy, and it never returned to normal, and it’s never going to. So you may weep for capitalism or not, but that’s irrelevant. In order to know how to invest your money, you have to understand how the economic system works now.

And so I believe that in this new age of fiat paper money that credit growth drives economic growth. Liquidity determines the direction of asset prices, and the government attempts to control both credit growth and liquidity to ensure that the economy doesn’t collapse.

So in my work, which I publish in a video newsletter called Macro Watch, I analyze trends in credit growth, liquidity, and government policy to anticipate how they are going to impact asset prices and economic growth.

In this new age fiat money, it’s crucial to understand how the government is directing the economy and to anticipate what they’re going to do next, and that’s what investors need to learn how to do.

I believe this is what they will learn from subscribing to Macro Watch. By the way, I’m offering a 50% discount to the audience of The Daily Reckoning who subscribe. They can go to my website right here. Hit the subscribe button and it will ask you if you have a coupon. For a 50% discount, they should use the coupon code: daily. I hope your readers will check it out.

Peter Coyne: Thanks for spending the time to speak with me Richard. Hopefully, we’ll speak again soon.


Peter Coyne
for The Daily Reckoning

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics from every possible angle. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.

The post QE = Debt Cancellation appeared first on Daily Reckoning.

Categories: Economics

The Last Two Oil Crashes Show Peak Oil Is Real (USO) - Seeking Alpha

Peak Oil - Google - 25 April 2015 - 5:35am

The Last Two Oil Crashes Show Peak Oil Is Real (USO)
Seeking Alpha
One of the biggest arguments, normally used by proponents of owning oil stocks as core holdings, in the energy sector is "Peak Oil." For the unfamiliar, it is a theory forwarded first by M. King Hubbert in the 1950s regarding U.S. oil production ...

and more »

Anesthetics That Could Put Us Asleep Permanently

The Daily Reckoning - 25 April 2015 - 4:00am

This post Anesthetics That Could Put Us Asleep Permanently appeared first on Daily Reckoning.

Modern anesthesia makes critical operations possible that few humans could survive otherwise. But according to a new study published in the journal Geophysical Research Letters, some of the numbing agents we breathe may also be significant contributors to global warming.

Halogenated gases released as a result of putting people to sleep before surgery such as isoflurane, sevoflurane and desflurane are increasing in the atmosphere. And they are far more potent in their greenhouse potential than CO2. Desflurane, for example, is 2,500 times as powerful a greenhouse gas as CO2.

In the study’s abstract, the authors point out that the gasses “evaporate almost completely to the atmosphere.” And “from urban areas to the pristine Antarctic environment, we detect a rapid accumulation and ubiquitous presence.”

As anesthetics, they are remarkably expensive, so it may be surprising to discover that they are not recaptured by modern hospital equipment, but instead are allowed to escape.

Halothane, another very potent greenhouse anesthetic tracked in the study, has actually declined since 2000 as country after country has banned it because it damages the liver.

To a bright future,

Stephen Petranek
for The Daily Reckoning

Ed. Note: Get the top investment trends for 2015 in medicine and technology from the former head of the most popular science magazine in the world. Simply sign up for our Tomorrow in Review e-letter for FREE right here. Don’t miss out. Click here now to sign up for FREE.

The post Anesthetics That Could Put Us Asleep Permanently appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - Wired Is Right And You Damn Well Ought To Raise Hell

The Market Ticker - 25 April 2015 - 3:32am

Read this carefully folks, because it does not apply only to farmers...

IT’S OFFICIAL: JOHN Deere and General Motors want to eviscerate the notion of ownership. Sure, we pay for their vehicles. But we don’t own them. Not according to their corporate lawyers, anyway.

In a particularly spectacular display of corporate delusion, John Deere—the world’s largest agricultural machinery maker —told the Copyright Office that farmers don’t own their tractors. Because computer code snakes through the DNA of modern tractors, farmers receive “an implied license for the life of the vehicle to operate the vehicle.”

It’s John Deere’s tractor, folks. You’re just driving it.


(Click link to read more)

Categories: Economics

Is the Cheap Oil Trade Dead? Think Again…

The Daily Reckoning - 25 April 2015 - 2:09am

This post Is the Cheap Oil Trade Dead? Think Again… appeared first on Daily Reckoning.

Oil just jumped north of $58— its high for the year!

So is it time for you to pull the plug on the cheap oil trade? No way Jose. It’s just getting started…

And now you have another chance at double-digit gains trading the cheap oil theme. And don’t worry, if crude gains a few bucks from here it won’t sink this ship.

Look, we ain’t gonna see $100 oil anytime soon. That’s great news for businesses guzzling a lot of fuel. Operating costs are way down, which means higher profits. And higher stock prices. And yes, you can still find plenty of great opportunities to book profits as companies save money on fuel…

In February I highlighted the scorching performance of the Dow Jones Transportation Average. “It’s up a muscular 18% since the October bottom,” I wrote. “Compare that to the Industrials, which are up less than 12%.”

Airlines, freights, truckers and trains all went bananas, rocketing 20% higher in just six weeks…

It was a ridiculous rally. But it needed time to cool off. Airline stocks lost altitude after spikes in December and January. Railroads got derailed along the way because many make money transporting oil, which fell off dramatically.

As Ritholtz Wealth Management’s Michael Batnick explains, “I think it’s quite possible that the Transports pulled forward some returns, the old ‘too far too fast.’”

Exactly. Transports got ahead of themselves. Too far too fast.

That naturally made traders nervous. After all, transports sagged as the Dow Industrials were getting their act together earlier this year. But while everyone was looking elsewhere for trading opportunities the transports were setting up again. Just look at the extreme right side of the chart.

After going nowhere for the better part of the first quarter transports are on the move again.

You already were able to nail the perfect transportation trade this past winter: trucking.

Trucking stocks were King of the Transports. And your bet on powerhouse JB Hunt Transport Services Inc. (NASDAQ:JBHT) is rolling right now. As of yesterday, you’re up almost 8% on this trade.

And now the railroads are getting in on the action. These stocks couldn’t get out of the station this winter. But now they’re getting ready to roll…


Greg Guenthner
for The Daily Reckoning

P.S. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.

The post Is the Cheap Oil Trade Dead? Think Again… appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - And There It Is Folks.... (The Red Light Is ON)

The Market Ticker - 25 April 2015 - 1:43am

Oh my....

New orders for manufactured durable goods in March increased $9.3 billion or 4.0 percent to $240.2 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 1.4 percent February decrease. Excluding transportation, new orders decreased 0.2 percent. Excluding defense, new orders increased 2.6 percent.

Transportation equipment, also up two of the last three months, drove the increase, $9.5 billion or 13.5 percent to $80.3 billion.

The entire increase was driven by transportation, including aircraft.

Pay very careful attention right here ladies and gentlemen because this is.......

(Click link to read more)

Categories: Economics

The Market Ticker - Oh Look! Something Shiny!

The Market Ticker - 25 April 2015 - 1:25am

Earnings, earnings, what are those?

“Amazon Web Services is a $5 billion business and still growing fast — in fact it’s accelerating,” said Jeff Bezos, founder and CEO of Amazon.com.

So, a billion and a quarter a quarter.  Hmmm.... $22.7 billion in sales, so this is..... 5%ish?  Wow, man, this is why the stock was up $25 after hours and more this morning before the bell?  Really?

But that's not really the problem.  No, the problem is that margins are contracting for cloud services -- in fact, by a lot on an annual comparison basis!

Why?  Competition.


(Click link to read more)

Categories: Economics

Resilient Urban Systems: Where We Stand Now and Where We Need to Go

Energy Bulletin - 25 April 2015 - 1:19am

This paper draws on case studies from across the globe to assess the current innovative approaches that cities are undertaking to make their infrastructure systems more resilient in order to better cope with future uncertainties.

Categories: Peak oil news

Oklahoma’s Clear Link Between Earthquakes and Energy Boom

Energy Bulletin - 25 April 2015 - 1:11am

Oklahoma geologist Todd Halihan talks about the stunning increase in earthquakes in Oklahoma and what can be done about it.

Categories: Peak oil news

On the Commodification of Human Discovery

Energy Bulletin - 25 April 2015 - 12:28am

Free Knowledge is a welcome survey of alarming impacts of IP law and also valuable introduction to some salutary alternatives.

Categories: Peak oil news

The Market Ticker - Booooooom! (Hitlery!)

The Market Ticker - 25 April 2015 - 12:15am

Put a fork in her, she's...

Becker said his company went from "a worthless shell company overnight -- became this ...huge uranium mining deal."

And then soon after that, Becker said, "Bill Clinton got a huge donation, $31 million from Frank Guistra to his charitable foundation, followed by a pledge to donate $100 million more."

Oh boy..... I had heard $2.5 million, plus $300k in speaking fees.  $31 million?!

If this gets tagged on Billary it's over; she's going to be lucky to avoid an indictment.

President?  Good lord folks, even if you're a Democrat you better not.......

(Click link to read more)

Categories: Economics

Tossing and Turning: Our Disturbed Soils and Troubled Sleep

Energy Bulletin - 25 April 2015 - 12:03am

Missing from our understanding has been how the deep dreams of the soil ultimately nourish our own, and how our reckless pattern of disturbing our soils eventually disrupts our ability to sleep as well as the capacity of our sleeping bodies to dream themselves anew.

Categories: Peak oil news

Our Renewable Future

Energy Bulletin - 25 April 2015 - 12:02am

How we use energy is as important as how we get it.

Categories: Peak oil news

Food Stamps Are Worth Double at These Michigan Farmers Markets—Helping Families and Local Businesses

Energy Bulletin - 24 April 2015 - 11:17pm

A program that helps low-income families and local farmers.

Categories: Peak oil news

A Community Resilience Take on The Great Transition

Energy Bulletin - 24 April 2015 - 9:50pm

A review of Bounding the Planetary Future: Why We Need a Great Transition.

Categories: Peak oil news

Resilience Roundup - Apr 24

Energy Bulletin - 24 April 2015 - 9:49pm

 Strategy of oil companies is doomed to failure.

Categories: Peak oil news

Sophy Banks on Inner Transition sans frontières!

Transition Culture - 24 April 2015 - 6:48pm

When I was a child there was an extraordinary show on the TV called Jeux Sans Frontières! (Games without borders!). In the early days of the European Union it brought together people from different countries to compete in ridiculous physical games involving huge inflatable cartoon characters, and a lot of people splashing around in jets of water. The ways we connect across our countries has moved on, I’m happy to say, and the amazing technology of the internet allows us to have rich, deep connections with people around the world without any need for travel or crazy made-up sports. 

About a year ago I started hosting on line conversations for people involved with Inner Transition in different countries. Three times a year we meet to share news of our activities, and talk about the challenges and interesting edges of the work. Most powerful for me has been simply to hear the different ways we experiment and the different challenges to those in England. We’ve heard from someone in Japan about how people are dealing with the fear and uncertainty of living with radioactivity after Fukushima; from someone in Spain, about the aftermath of economic collapse and from groups doing beautiful, connecting things like meetings in nature, for fun and for support. 

We have a gentle structure – for the first hour we just go round and hear from each person - what is happening to do with inner transition for you personally, in your initiative, and in the wider community or country? Sometimes this has taken us around the world, from Australia to Brazil via Japan, Europe, Canada and America! I have to remember that those in the southern hemisphere are in the opposite season, celebrating midsummer when I’m in the depth of winter. The go round is rich in details – people’s personal struggles, successes, joys – as well as the wider picture.

After a five minute break we take one or more shared questions or topics and discuss them – not trying to get any answers, or create any action, just hearing the different perspectives. 

I am always struck by the paradox of how different things are in different countries, cultures and languages, and, yet, how similar. In some cultures it is easier to include feelings in our conversations. In others it’s more acceptable to include some reference to a spiritual dimension. Some are very reluctant to include anything that is not totally rational or scientific. In some initiatives, Inner Transition is seen as foundational, in others it has been almost totally rejected. 

In every country that participates, I’ve heard reports of some places where there is a challenge or resistance to including inner work in meetings, activities or initiatives. I also know that in each of these countries, there is also a whole movement of “inner” going on - personal growth, spiritual practice, self development, communication and group tools to mention just a few. And people involved with these practices also want to be included in Transition, and have a very relevant skill set to making Transition work well.

So it’s a great opportunity to know that the challenge of integrating inner and outer is not a local phenomenon, or a result of poor communication or personal failure. It’s just how this industrialised modern culture works, that there is often a rift between our inner and outer lives, and putting them back together can be difficult. 

Here are a few highlights from the stories we collected over the last call in February 

In Japan, there have been workshops in the Work that Reconnects, and participants from this are stepping into facilitating Active Hope workshops. In addition, non-violent communication and art therapy workshops were offered to Transitioners last year.  These workshops helped participants to become aware of their patterns, needs, focus and an opportunity to learn the application of new patterns in a way to help them fulfil their intrinsic/innermost needs. And, at a national level, we are experimenting in our meetings with “sharing opportunities”. 

In France, there was an intense dialogue about words that can introduce the ideas of inner transition without alienating those who feel uncomfortable with the language. Someone in the group who finds the language challenging went through our material and underlined every word that was a problem. In the end we found words like:

  • Courage
  • Care for the children and grandchildren
  • Trust

No one can argue with that! 

In Portugal, they are adapting the UK One Year in Transition course for young people – there is a lot of interest because many young people see emigration as the only possibility so they are exploring how to include inner skills in the four weeks during the year when the group will come together. 

Would you like to be part of this conversation?

The next call will be in June 2015. It’s my intention to create a regular blog from the news and updates we share. 

We’re looking for more people to join this conversation – especially those who have some energy and time to give to building networks in their region or country, or linking into their national Transition organisation. 

You can join a wider group to share updates via email and documents, or be your national rep to join the live conversations. If there’s already a representative for your country perhaps you can share the workload of joining. Please get in touch for more information about how to take part. 

Bringing Inner and Outer together for a stronger movement

I want to end this blog by honouring all of you that are working on this edge of bridging the inner and outer aspects of the transition we want to see, to a sustainable, thriving future for everyone. Sometimes it can feel easier to stay on one side or the other – at home in the personal or spiritual growth realm, learning or doing our practice with others who see the world in the same way and share the same language. Or staying with those who see the need for outer change and are comfortable with the digging, building, composing, and physical work, avoiding the touchy feely stuff! Bringing these together can be really challenging, but for me it is absolutely the integration of inner and outer which will make something which is far more powerful, more alive and more lasting. 

For more information about the Inner Transition International group email Sophy.  Inner Transition workshops are running this year in Sweden (April),  Portugal (May 9 – 10th), in Italy (probably July 4 – 5th) and UK (London in November, dates to be confirmed). Email for more details.  If you’d like to host an Inner Transition workshop or other event please get in touch.

Themes:  Inner Transition
Categories: TT news

We’ll Have QE4 and Probably QE5… or Else, Collapse

The Daily Reckoning - 24 April 2015 - 7:06am

This post We’ll Have QE4 and Probably QE5… or Else, Collapse appeared first on Daily Reckoning.

Imagine our surprise when our biggest heckler emailed us last night to say, “Yesterday’s Daily Reckoning was one of the best issues in years.”

We were concerned that if this particular reader was giving us thumbs up, it wasn’t a good sign… but then another reader named Mireille chimed in too, saying, “That was outstanding.”

If you missed it, we featured Part I of a conversation we had with our friend economist and author Richard Duncan.

His main point? Capitalism died long ago. Love it or hate it, he says, it doesn’t matter, that’s the way it is. Today, we have a system of creditism — wherein economic growth only follows credit growth. Put the Fed on a leash — God forbid, return to a gold standard — and the whole system comes crashing down. Scoff if you wish, Mr. Duncan is a deep thinker…

“The real tragedy,” added a third reader, “is that true, laissez faire capitalism never lived in this country — the only country in the world where it could have found safe haven. Then again, the average man on the street is a socialist at heart. If you don’t believe me, watch his/her antics at election time. They will be gravitating to the loudmouth snake oil salesman who promises them the most for least effort.”

“There’s one thing that I see missing in this discussion,” observed yet a fourth reader.

“Where does the credit come from? I never see people like Mr. Duncan acknowledge that this credit or money is created out of thin air by the central bank of the United States, which is nothing more than a consortium of the private banks.”

“This would be a really interesting conversation if you brought in G. Edward Griffin of The Creature From Jekyll Island fame,” he concluded. “Great information as always, guys!”

Muchas gracias. And we’ll add Griffin to the list of people to talk to in an upcoming reckoning. In the meantime, read on for Part II of my discussion with Richard Duncan.

We pick up where we left off yesterday. We’ll have Part III tomorrow, too, so be sure to read on. Each part builds on the previous one. After tomorrow, you should have an all-encompassing understanding of Richard’s point of view. From there, we’ll let you form your own opinion…

Peter Coyne: Richard, yesterday we were talking about how, under today’s fiat money system — what you call “creditism” — the U.S. trade deficit helped blow trade surplus countries into bubbles.

The dollars flowed into their economies and caused rapid deposit and credit growth along with an economic boom and then bust. Japan in the 80’s was one example. But those same trade deficits can affect the trade deficit countries, like the U.S., too, correct?

Richard Duncan: Yes, it’s also important to understand how these dollars that were thrown off into the global economy through the trade deficit actually boomeranged and came back into the United States and blew the U.S into an economic bubble as well. So let me discuss that now.

One way of thinking about this is every country’s balance of payments has to balance. In other words, when the United States has an $800 billion current account deficit as it did in 2006, it will also have $800 billion of capital inflow on what is called the capital and financial account.  (The current account deficit is similar to the trade deficit.)

The way to think about this is that, just like a family, the books have to balance one way or the other. If a family spends more than it earns, then it either has to borrow money or it has to sell something so that in the end it balances. It’s the same with the United States.

When we buy $800 billion worth of goods, then we have to borrow $800 billion to pay for them or sell $800 billion worth of something to pay for them. The current account deficit is exactly equal to the inflow of money coming into the United States.

We think a lot in the United States about how much paper money the Federal Reserve is creating, but the Fed is by no means alone in creating massive amounts of paper money. In fact, what we’ve seen is that the trade surplus countries like Japan in the 70’s and 80’s and more recently China, their central banks have been printing even more money in total than the Fed has done. So here’s an example.

Let’s talk about China because China has, by far, the largest trade surplus now with the United States. Last year, China’s trade surplus with the United States was 330 billion dollars. What that means is that Chinese exporters sell their goods in the US. They’re paid in dollars.

They take these dollars back to China, and they want to convert them into the local currency, the Chinese Yuan. But if they bought up $330 billion of Chinese Yuan, of course, the Yuan would appreciate very sharply. That would kill China’s export-led growth, their economy would stop growing and it would probably collapse.

To prevent that from happening, the central bank in China, the People’s Bank of China, the PBOC prints Yuan from thin air, just like the Fed does. Then it buys the $330 billion that came into China last year.

Whoever brings the money in gets to convert their money into Chinese Yuan, and they can do anything they want with it. But that money will sooner or later end up in the banking system in China. That will cause rapid deposit growth, and that will force rapid loan growth, and that will create the economic boom that turns into the bubble that turns into the depression.

The point here is the central bank ended up with an extra $330 billion US dollars last year by printing $330 billion dollars’ worth of Yuan. Now once they have this $330 billion US dollars they have a few choices. What are they going to do with it?

They could burn it… they could bury it under the Great Wall… or they could buy US dollar denominated assets with it.

It doesn’t do them any good to keep it in paper money. So, they want to buy US dollar denominated assets of one kind or the other. Being a central bank, they tend to be conservative. So they would really like to buy US government bonds because they’re considered to be the safest. The problem is that they’re not always enough US government bonds to go around.

Let’s think about 2006. That year, as I’ve said, the US current economy deficit was $800 billion dollars. Now that threw off $800 billion into the global economy, and those dollars were almost all accumulated by foreign central banks in the surplus countries in the manner I’ve just explained, through fiat money creation of their own. And they then wanted to reinvest the $800 billion into, preferably, US government bonds. But in 2006 the government’s budget deficit was only $200 billion, meaning the government only sold $200 billion of new bonds that year.

That means the foreign central banks could have bought every new Treasury bond that our government sold that year, and they still had another $600 billion that they had to invest somewhere else into US dollar denominated assets. Somewhere else like in Fannie and Freddie bonds or corporate bonds or stocks or bank deposits.

My point is, as long as our trade deficit is bigger than our government’s budget deficit, the trade deficit actually finances the budget deficit at very low interest rates, and the gap between the two, this extra money, has to go somewhere else.

That extra money coming into the country is what blew the US into a bubble, and this went on for 13 years in a row, starting in 1996.

Peter Coyne: Can you explain what happened then?

Richard Duncan: Starting then, the trade deficit was bigger than the budget deficit, and it went on for 13 years until 2009. That gap between the trade deficit and the budget deficit, all that money made it very easy, for instance, for Fannie Mae and Freddie Mac to sell trillions of dollars worth of bonds, in exchange for which they obtained cash which they then used to buy trillions of dollars of mortgages. That pushed up the property market and created the asset price property bubble here.

This is how the US trade deficit boomerangs back and blows the US into a bubble. The money coming in to the United States has often been called, by Ben Bernanke in particular, a “global savings glut”. But this isn’t piggy bank type savings. This was not money that was sitting around just in someone’s backyard or their bank account.

This was newly created paper money, money created by central banks. You can measure this by looking at the total foreign exchange reserves. China now has four trillion dollars of foreign exchange reserves.

That means their central bank has created four trillion dollars of their own currency from thin air. Globally, there are now 12 trillion dollars of foreign exchange reserves. These have gone up ten trillion dollars just since the year 2000.

You can see this dwarfs the amount of paper money that even the Fed has created so far. Quantitative easing only adds up to something like $3.7 trillion, and you can throw in maybe a half a trillion more for the Bank of England and something over $1 trillion  for the Bank of Japan, but it’s this money creation that really explains why we have such a global bubble to start with.

More accurately, there are two parts to this process. First, the US trade deficit throws the dollars off into the global economy, and, secondly, the central banks in the surplus countries create enough fiat money to buy all the dollars and then pump them back into the US, and this is why we had a global economic bubble that popped in 2008.

None of this would have come about had we remained on a gold standard. Our trade would have remained in balance, and the rest of the world would have grown very much more slowly. The United States would have grown much more slowly because we wouldn’t have developed the housing price bubble and a stock market bubble and all the jobs that were related to that.

So this fiat money creation that allowed trade imbalances to occur has resulted in much more rapid economic growth than would have occurred under a gold standard in a capitalist economic system. That’s been great for decades up until 2008, but now the private sector, i.e. the household sector, is incapable of bearing more debt, and so that’s why we are on the verge of collapsing into a New Depression.

Peter Coyne: You talk about total credit as a specific measure to gauge how close we are to a collapse. Can you talk about that a little bit?

Richard Duncan: Total credit and total debt are two sides of the same coin. One person’s debt is another person’s asset, but what I mean by total credit is basically all the debt in the country — government debt, household sector debt, corporate debt, financial sector debt, and all the debt.

Total credit first past one trillion dollars in 1964 in the United States, and over the next 43 years, it expanded from one trillion to fifty trillion. This explosion of credit created our world. It made us all much more prosperous than we would have been otherwise.

The ratio of debt to GDP went from 150 percent in 1980 all the way up to 370 percent in 2007. So it’s easy to understand how rapid credit growth drives economic growth as long as credit’s expanding very rapidly and everyone gets a new credit card in the mail.

They go shopping, they spend a lot, this increases corporate profits, and the businesses hire more people, they expand their capacity, they build a new headquarters, and they even pay more taxes. Then the government has more money to spend. Meanwhile, asset prices keep inflating upward higher and higher, creating more collateral for the households to borrow against.

But the day always comes, as the Austrian economists remind us, when credit can’t expand any further. That’s when the Depression begins, and that’s what started to occur in 2008. That’s what would have occurred. We would have had a New Depression had the government not intervened. The government  then started borrowing and spending trillions of dollars every year, and that kept the total credit expanding.

Today we have a total credit base of $59 trillion. As I mentioned earlier, looking back between 1950 and 2008, every time total credit adjusted for inflation, grew by less than two percent, we had a recession, and the recession didn’t end until we had another very big surge of credit expansion.

Since 2008, though, credit hasn’t been expanding by two percent, and that’s why the economy’s been weak, and that’s why the Fed has felt it necessary to intervene by creating trillions of paper dollars and pumping that into the financial markets to cause the stock market to go up and property prices to reflate. At this point, the question is will credit ever begin to grow again enough to drive the economy because we now have such a large base, $59 trillion.

If we assume that the inflation rate is two percent, then we need total credit to grow by four percent so that total credit, adjusted for inflation, will hit this two percent “recession threshold” as I call it. Four percent of $59 trillion is $2.4 trillion of credit growth that we need this year just to stay out of recession.

Well, the government budget deficit this year, deficits coming down very rapidly. The government budget deficit will be $600. That means the government’s going to borrow $600 billion. Who’s going to borrow the other 1.9 trillion needed? Is it going to be the household sector? No.

Is it going to be Fannie Mae and Freddie Mac? No. The corporate sector? Well, the corporate sector has been borrowing quite a bit. Last year they expanded their debt by about $750 billion. Even if they do that again, that takes us part of the way there, but not to $2.4 trillion. You can see that none of these sectors is going to expand its debt enough to make total credit grow by two percent.

Creditism needs credit growth to survive, and without the credit growth, the system is going to collapse. The thing is, if it collapses into a New Depression, this is not going to be something that involves some pain for a year or two and then takes us back to some sort of laissez-faire Garden of Eden.

After a five-decade long, sixty-fold expansion of credit,if this credit bubble collapses now, we’re going to have an equally protracted crash, and it’s not going to be a matter of taking a little pain for a couple of years. It would involve such horrific consequences that, I think, it would be a replay of the 1930’s and the 1940’s, but this time with nuclear weapons involved.

So, yes, there would be a recovery. When Rome fell, there was a recovery, but it took a thousand years. So I don’t believe anyone alive today would still live long enough to see the recovery that would follow a New Depression now.

Peter Coyne: Is that really how bad the New Depression would be? Akin to the fall of Rome?

Richard Duncan: I think the best way to think about it is to consider what happened with the last Depression. After all the two occurred for the same reason. A fiat money credit bubble formed when we broke the link between dollars and gold both times.

What happened in the 1930s? International trade collapsed and the international banking system collapsed; 1/3 of all the U.S. banks failed.So people lost all of the savings they thought they had.

This time, without very aggressive government intervention to save the banks, in other words if we allow a laissez faire solution, then all the saving in the world would be destroyed and trade barriers would go up as they did in the 1930s. That would mean global trade would collapse. What would that mean for a country like China?

China’s economy is entirely dependent on exporting to the United States. If the United States stops taking China’s imports into the United States, China’s economy would not have a recession, it would implode. There would be starvation in the cities and in the countryside.

With the complete collapse of government revenues, the United States could no longer afford to maintain a string of military bases around the world so our global economic dominance would evaporate. We also couldn’t afford to continue paying Social Security or Medicare and so once again the old people in this country would be on the verge of starvation if not starving as they were in the 1930s and it would be more or less a collapse of civilization as we know it.

Unemployment would be at least 25 percent in this country and how would those people vote? They would vote for parties that promised to give them money and food. In other words, we would take a very hard turn to the left and that may be met with the response from the right that involved a military coup.

It’s not at all certain that democracy could survive this sort of new Depression and that’s why our government is so keen to make sure that that doesn’t happen. That’s why they’re going to continue supporting the economy with very large budget deficits when necessary and finance those deficits with quantitative easing when necessary.

Peter Coyne: That’s scary stuff. Your last point — about government’s doing whatever it takes to keep the system afloat — is a good segue into the “raft analogy” you’ve often told me about. Can you explain that for readers?

Richard Duncan: I think it’s very useful to think of the global economy as a big raft. But instead of being inflated with air it’s been inflated with credit. On top of the raft you have all of the asset classes; stocks, bonds, commodities including gold, plus you have the world’s population of 7 billion people.

The problem is,  the raft is now fundamentally defective. It is full of holes and the credit keeps leaking out (when people default on their debt). The natural tendency of the raft now is to sink and when it starts to sink, the stocks, property, commodities, gold all go down and the people start to get their feet wet.

Policy makers understand rightly that if the raft sinks it’s not going to be a matter of simply a stock market crash, people are going to die as they did in the 1930s. And so there’s only one possible policy response and that’s to pump in more credit. That’s what they’re doing through the large budgets and through the Fiat money creation, quantitative easing.

When they do that, the raft reflates and all the asset prices move up together and the people, once again, have their dry feet and are happy.

But then once they stop with the quantitative easing, with the liquidity injection, the credit starts leaking out the sides again and the raft starts to sink and so they have to repeat quantitative easing. We’ve had QE1, QE2, and QE3; when QE3 stops, we’ll have QE4 and probably QE5.

Now the reason why the raft is fundamentally defective is because at this stage of creditism, so much credit has been created globally that the income of the 7 billion on earth, at least as it’s currently divided, is not adequate to continue paying interest on all of the debt that they have borrowed and so they keep defaulting.

Whether it’s in Ireland, or Greece or the subprime disaster here, the banks in Japan or soon the banks in China, someone defaults and the credit leaks out and the raft starts to sink and the only way to respond to this is by pumping in more credit. And that’s why we’re on government life support. Take away the government life support and the world as you know it won’t be here.

Peter Coyne: Are there limits to how much credit can be pumped in? How many times can the raft deflate and be reflated before it sinks altogether?

Richard Duncan: It’s useful to think of this in terms of fiscal policy and monetary policy. At the moment, we’re very dependent on monetary policy because congress has decided to reduce the budget deficit very quickly. But a few years ago the budget deficit was $1.1 trillion.

This year it’s only going to be about only $500 billion — removing a great deal of fiscal stimulus from the world. As a result, that’s put a great deal of pressure on the Federal Reserve to pump up the raft by itself through fiat money creation. But it looks like there may be some limit as to how long the Fed can continue inflating the global economy just through paper money creation.

One ratio that I like to look at is called the “ratio of household sector net worth to personal

disposable income.” You can more or less think of this as a ratio of wealth to income.

Going back to 1950, this ratio of wealth to income has averaged about 525 percent. But during the NASDAQ bubble, when the wealth was inflated, it went to 616 percent. When that bubble popped, it went back to the normal average.

And then the during the property bubble of 2005 and 2006, it went all the way to a record high of 660 percent. When that popped, it went back to the average. But now because the Fed has pushed up asset prices and household sector net worth to $83 trillion, it has gone back to 640 percent.

That’s probably a warning signal to us that there is some limit as to how high or how long the Fed can keep driving the economy by itself. And that’s because wealth can only grow so much relative to income. Eventually, the asset prices, of homes, for instance, become so inflated that it becomes impossible for the people to earn enough income to pay the interest on the debt that they had to borrow to buy their home and they default. That’s when everything crashes.

So there may be a limit as to how long the Fed can keep driving the economy by itself. That takes us back to the fiscal side; how long could the government borrow and spend and drive the economy if it chose to do so? Here I think we need to look at Japan.

Japan has now been in crisis for 25 years. They had an enormous bubble. When that popped, Japan would have gone into a Great Depression but Japan’s government ran very large budget deficits year after year after year and they’ve taken their government debt from 60 percent of GDP in 1990 up to 250 percent now. This is how Japan has stayed out of a Depression.

What does that tell us about what the United States could do?

Well the U.S. government debt now is only 100% of GDP. Our GDP, the size of our economy, is $17 trillion. This suggests that the government could borrow and spend another $17 trillion before we even hit 200% government debt to GDP. That’s assuming that the economy doesn’t grow at all too.

Whereas, of course, if the government spent $17 trillion, the economy would grow by 10%  per year every year, meaning the ratio of government debt to GDP would never reach even 200%.

That means there’s almost no limit as to how long the government could go on borrowing and spending and supporting the economy through fiscal stimulus before it ran out of the ability to borrow and spend.

This seems so counter-intuitive. This must sound shocking to anyone reading this interview but the reason this is possible is because something completely new in the world is occurring simultaneously; something new and completely separate from what I’ve described so far.

Peter Coyne: What’s that?

Richard Duncan: The new thing is globalization and globalization is extremely deflationary. This deflationary pressure from globalization is completely offsetting all of the inflationary pressure resulting from this massive government borrowing and spending and this extraordinary fiat money creation by the Fed.

The reason globalization is so deflationary is because it’s driving down wage costs. Businesses no longer have to hire a worker in Michigan and pay that person $200 dollars a day to build a car. They’re going to hire that person in China and pay that person $10 dollars a day or in India and pay that person $5 dollars a day.  That means the cost of the next worker hired will be 95 percent less.

In other words, the marginal cost of your next employee will fall by 95 percent. This is extraordinarily deflationary. Nothing like this has ever occurred in human history before and this is the reason that we’ve been able to go on this long with our system of creditism. Otherwise, we would have already had very high rates of inflation and perhaps hyperinflation.

But at the moment the deflationary pressures from globalization are completely offsetting the inflationary pressures. This is creating what’s almost a nirvana-type moment where, as we have seen over the last 5 years, it is possible for our government to borrow and spend trillions of dollars and to finance it with trillions of dollars of fiat money creation without resulting in very high rates of inflation.

Peter Coyne: That’s a perfect cliffhanger to stop today. Tomorrow I want to pick up on this globalization and deflation theme.

But before we wrap up, I want to remind readers about your service again, because I personally find it very useful. It’s called MacroWatch. It’s a video newsletter you produce twice a month that analyzes trends in credit growth, liquidity and government policy in order to anticipate their impact on the financial markets.

While we publish this conversation in the Daily Reckoning, you’ve been good enough to extend a 50% discount to any of our readers who subscribe. To do so, readers can click here and use the coupon code: “daily”.

We’ll circle back with part III of our discussion tomorrow. Thanks again, Richard.


Peter Coyne
for The Daily Reckoning

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics from every possible angle. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.

The post We’ll Have QE4 and Probably QE5… or Else, Collapse appeared first on Daily Reckoning.

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