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    John Michael Greer

    Tom Whipple notes that oil prices are slipping into the very high $80s, and that the Kingdom of Saudi Arabia is OK with prices in the $90s perhaps even the $100s. As always, Saudi oil minister Prince Ali al-Naimi maintains that the Saudis can increase production whenever necessary, but a lot of people don't believe they really have the excess capacity anymore. I suspect they have a lot of heavy, sour crude - more costly to refine - and that they know there will be buyers for it someday. And even if they have plenty of light, sweet crude, the erosion of the dollar is as much to blame for increasing prices as scarcity of oil.

    There's nothing new about Jim Kunstler predicting imminent doom. He's gotten so good at it. In this case he cites John Michael Greer, who presented at the ASPO conference, and often makes a lot of sense to me, and also cites the continuing effects of oversold mortgages. With everything costing more and more, but no return of jobs, I consider the current climate to be stagflation. A lot of economic gurus insist that our wealthy corporate masters will do anything to avoid hyperinflation because then their hard-won money becomes worthless, so I've expected either a long run of this stagflation, or perhaps deflation. Greer, however, thinks that the recent $600 Billion dollar debt we are taking on is a clear sign that hyperstagflation is imminent.

    James Kunstler: Pre Post-Mortem

    I like the formulation of John Michael Greer that we're about to see something called hyperstagflation, which would amount to sharply rising prices in an economy going nowhere fast. But if it's based on anything like the stagflation of the 1970s, that journey also ends in an inflationary fiasco, and logically some hyper version of it, which would kill the US government as we know it. Much as I loiter in the precincts of thought experiment, I don't really relish that outcome. But, sadly, we seem to be in one of those times when events outrun personalities and their meager abilities to react.

    It's been my contention for weeks now that criminal mischief on the mortgage scene - all those lost, doctored, forged, robo-signed documents - will slow foreclosures (and even plain vanilla transactions) to the extent that the real estate market will choke on un-sellable property, leading to suffocation of the big banks and ultimately generalized thrombosis of the system.

    John Michael Greer: The Preponderance of the Small

    Many of my readers will have heard the calm and sanitized announcement this evening that the Federal Reserve Board will be buying $600 billion of US federal debt over the next seven months. I’m not sure how many of my readers have noted that this is the amount of debt the US government expects to issue over the next seven months. I’m even less sure how many of my readers have noticed that the Fed will be paying for these purchases by exercising its legal right to produce US dollars out of thin air. In other words, the United States is now printing money to pay its bills.

    There may be an example somewhere in the long history of finance when a country has done this without facing catastrophic economic consequences in the fairly near term, but I don’t happen to know of one. Once a country starts covering its debts by way of the printing press, the collapse of its currency and its economy is pretty much a foregone conclusion. The exact way in which the consequences come due varies from case to case; the hyperinflation made famous by Weimar Germany and, more recently, Zimbabwe is only one of the options, and there are good reasons to think that this isn’t the most likely outcome just at the moment.

    My own guess, for what it’s worth, is that we’re headed into a state of affairs that might as well be called hyperstagflation: the economy and money supply both contract, but the demand for dollars drops faster than the supply as holders of dollar-denominated assets scramble to cash in their dollars for anything that might preserve a fraction of their paper value. As in the stagflation of the Seventies, but much more drastically, prices go up while employment goes down until the economy shudders to a halt.

    Now of course that’s far from the only possibility; we could see a straightforward deflationary collapse; we could also see increasingly reckless use of the printing press overwhelm the contraction of the money supply altogether and tip us into old-fashioned hyperinflation. What we won’t see for very much longer, though, is what currently passes for business as usual. I suspect a great many people in the financial community are aware of that – a supposition that gains some support from recent reports that corporate insiders in a range of industries are selling off their shares of their own companies’ stock at a record pace. I suspect the rest of us will become aware of it, too, as we approach the kind of economic, social, and (inevitably) political disruptions that people later describe in hushed tones to their grandchildren.




    Thanks for recommending these pieces.

    Last night I ran across this related take in a blog entry by someone using a pseudonym that I know to be a retired investment banker. It might interest you because it runs along a similar vein but makes some different points:

    Note that he follows up with significant elaboration in comment replies @ 10:09am, 9:23pm, 7:56am (and some of the comments are quite good, too.)

    "Money is zero sum. Only energy (and innovation to the extent it can substitute or increase the efficiencies of the energy inputs) adds to growth."

    "Think of what the US could do with $600 billion spent on energy independence and alternative energy sources."

    Should probably add that Paul Krugman is not in agreement with much of what he says:

    Everyone hates quantitative easing....Clearly, Bernanke must be doing something right....

    though one should also note that he does say this there:

    2. Alternatively, governments can step in and spend while the private sector won’t.

    More here

    ...Right now everyone seems to believe that rising commodity prices are telling us to beware of inflation. I think that’s dead wrong. Partly that’s because the sticky prices are the ones to worry about. But it’s also worth having some perspective on commodity prices themselves....

    and here: a followup to my shibboleths post, I’m a bit shocked at the way so many people are treating US quantitative easing as somehow equivalent to Chinese currency manipulation.....

    The simple argument against the inflation-panic is that inflation can't happen unless the economy is operating at full capacity. In short, prices rise only if demand for goods and services rises AND the economy can't just produce more of the goods and services being demanded.

    And it isn't operating at full capacity with 10 percent unemployment and 17 percent underemployment. The only way that could be the case is if those 15 million people have all of a sudden become unemployable and/or underemployable. And only cranks are arguing that.

    The four basic laws of supply and demand are:

    1. If demand increases and supply remains unchanged then higher equilibrium price and quantity.
    2. If demand decreases and supply remains the same then lower equilibrium price and quantity.
    3. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity.
    4. If supply decreases and demand remains the same then higher equilibrium price and lower quantity.

    You've identified situation #1, but we have been living in situation #4 for everything but employment. We're in situation #2 for employment, which is why I call stagflation instead of inflation. Leveling off of the oil supply has led to higher oil prices and lower quantity, which leads to higher transportation and shipping prices, which leads to higher prices for just about everything, and lower sales quantity for just about everything - except jobs.

    So we may not get inflation, but stagflation, or hyperstagflation is also frightening.

    You're gonna need an argument for this bit: "we have been living in situation #4 for everything but employment."

    As far as i can see, we've got slack in at least housing and manufacturing and a bunch of services. Commodity prices are all over the place due to speculators. Oil - sure, we've probably not got much ability to increase supply. But that, imo, is an argument to FIND OUT what happens if the economy gets going and demand increases. If there is a serious constraint there, it just stimulates serious investment in alternative energy infrastructure and energy saving measures. It's all good.

    This 600 billion in QE2 isn't a 'sign' of anything, other than that money needs to circulate faster. If it sparks inflation, that's great. It means corporate america has gotten off its butt instead of just sitting on 2 trillion in cash. Inflation around 5-10 percent is probably what would be required to get around all the stickiness and have price signals actually do the work they are supposed to.

    To get to hyperinflation, you'd need some sort of story of price-wage vicious feedback cycles. And there is no such story here. There is just the one price - oil - rising relative to other prices as we hit the supply ceiling. Which is what should happen.

    Would it be better to fix the economy through fiscal and industrial policy? Of course, but those aren't options right now. This is all we've got at this point. And it is better than nothing.

    To a large extent, "housing, manufacturing and services," is employment, so slack there just supports my feeling that we're in stagflation. Everyone blames speculators when prices go up, but no one wonders how they make a living the rest of the time. There is speculation in commodities because nothing else seems likely to hold value, but knowledgable speculators make money by predicting whether prices rise or fall.

    If we invested that borrowed 600 billion in infrastructure, I'd be a fan, but ArtAppraiser's link has this:

    Then of course there is the fact that all this liquidity is supposed to wind up in the pockets of Americans, but it somehow does not. Through a mechanism called the carry trade, hedge funds and banks borrow super-cheap dollars and invest in Brazil, India, China, Australia and elsewhere because interest rates are so much higher in these countries. This is why Americans never see any of this money. The carry trade works well as long as the dollar deteriorates on the foreign exchange markets, which has been the case ever since the Fed announced it was thinking about QE2.

    A cheaper dollar gets you more exports and more import substitution. Which adds up to more GDP. Which ... is what we want! More exports and more import substitution means a smaller trade deficit, which by definition reverses capital flows to an equal extent. THat's ALL GOOD. The more trade-partners like Germany and China bitch about it, the better it must be.

    I can't see the evidence for a significant carry-trade, especially since the banks are sitting on a trillion in excess reserves rather then lending it out to carry-traders. But even if there is one... what is the problem? It's the developing countries' problem insofar as they are worried about volatile capital flows. And they can just set up some capital controls to deal with that.

    As for 'where the money is going?', when there is this much slack in the economy, and the government isn't investing, we can't really expect the private sector to invest when there is no demand. You need to boost the demand first - in this case by import-substitution and exports - and then hope for a virtuous cycle of increased investment based on increased demand expectations.

    But, like I said, it's going to make a modest difference. I'm not a huge fan. But QE2 doesn't have any serious downside. (if commodity prices do go through the roof with the increased economic activity, that isn't an argument against QE2, it's an argument for serious structural investments in the economy to deal with great change in relative prices)

    Great comment.  The "beggar thy neighbor" chorus is singing right along with China and Germany, both of whom would very much like to maintain their current trade surpluses with the U.S.  It's funny - you don't hear the same people calling strategic trade imbalance a "beggar thy neighbor" policy.

    But, but... Sarah is really worried about QE2!

    Do you think she even knows what it means???

    To quote Boston, stagflation is more than a feeling.  We have the unemployment, but we don't have the inflation.

    Bought groceries lately?

    Don't speculators make money when prices go down by purchasing 100 insurance policies on the same asset and then nuking it?

    And more seriously; "#4" above indicates constant demand. I don't see how that's possible. Anecdotally, I've personally removed no small amount of annual consumption from the real economy (not by choice mind you) and to greater or lesser extents this seems typical of most folks I know. I sure don't know anyone spending MORE than they were in, say, 2007.

    Where is this consumption being made up?

    And also too. Also. Regarding AA's link. Fuck me! I hate bankers. Can we just get some *&#$&*@! old-fashioned protectionism going on around this joint?!?!?! And yeah, I hate the Fed even more than bankers ... the bankers are just doing what they are incentivized to do, the Fed is just screwing us left, right, up, down and sideways.

    "Don't speculators make money when prices go down by purchasing 100 insurance policies on the same asset and then nuking it?"

    - only if you can find a mark, like the old AIG financial products section. You have to be  very lucky, and your counterparts very stupid to pull it off. I don't see what in particular you're referring to here though...

    "And more seriously; "#4" above indicates constant demand. I don't see how that's possible. ...Where is this consumption being made up?"

    - Gross domestic product just is equivalent to aggregate demand. If GDP is flat, by definition demand is constant. Again I'm not sure what you're referring to...

    "Can we just get some *&#$&*@! old-fashioned protectionism going on around this joint?!?!?!"

    - Protectionism just leads to tit-for-tat. which hurts everyone. Dropping the dollar by pushing down interest rates through QE is something that China, for one, can't do much about since trying to maintain the current exchange rate will make their inflation rate explode. THey'll have to raise the exchange rate faster. As for Germany, they don't control the Euro at all. But in any case, it's not like it's an either-or propositoin. THis QE2 does some good. So just take it.

    Will bankers make some money off QE2? Yes, in the short-term - just like everyone holding Treasuries. The Fed bids their price up, and that increases the value of the 1.6 trillion in treasuries that the banks hold. Longer-term, the point of QE2 is to raise the inflation rate, which is however bad for banks. So it's probably unfair to say that this is done for them. Just look at all the finance types bitching like mad about this plan; that is something that makes me optimistic...

    Beyond that, the banks should be made to eat their losses on the delinquent mortgage loans. But that is a whole separate issue, where the Fed's handing and that of the government in general should be separately judged.

    p.s. KGB, just wanted to mention, great thread and comments on your 'three guys who get it'!

    I'm obviously missing something. You say GDP is flat. Which I don't doubt. At the same time the American consumer isn't spending. Certainly not to the extent they were previously. Intuitively I just assumed that would impact GDP in some way, no? What's filling the hole that one would expect to see in the economy from consumers spending less?

    And yeah, that "three guys" thread sparked a surprisingly interesting discussion for just a vid post.

    I don't have the numbers to hand, but I'd guess that consumption fell off a cliff in the beginning of '09, and then has stayed flat at that lower rate ever since. That said, consumption stabilized in good part due to the Stimulus which is now phasing out, so unless exports and import-substititution industries ramp up quickly, it's set for another drop.

    So, we've just accepted a new "normal" and are going right back to applying the same old math and methodology to the situation in crafting solutions?

    Hm. Sounds like someone's definition of insanity...

    I get the case for cynicism and frustration, and this is faaaar from being a 'solution' to much. But if it gets the real money supply back to something like normal, and it brings down the dollar and helps fix the trade imbalances, that is a - small - part of the solution. But it is a part of it, imo.

    Getting from too-close-to-deflation-by-half to stagflation seems like a strange transition. And it certainly isn't how we got to stagflation the one famous time in happened, in the 1970s.

    I haven't studied economics, but I think it goes like this:

    Prices are close to flat, inventories are being kept low, factory capacity is going unused, workers are out of work, and lacapital is being stored under the mattress.

    Should prices start to rise (because the demand for goods exceeds the existing supply), that unused capacity turns into a profit opportunity: the prices of goods have gone up, but you have the ability to make and sell more of those goods for the *old* prices, undercutting the competition. Instant market share! So you do that: hire a bunch of unemployed workers (who will work at the lowest reasonable wage for their job), or give your underemployed workers more hours, use the cash you've been stashing to hit that first, pretty cheap payroll, and add that extra shift to your factory (you know, the shift you stopped having in 2008). Bam! You're underselling the competition! And that creates downward prince pressure on them. Inflation averted.

    The inflation starts when you need to pay your workers more, because of the tight labor market, and you can't produce more goods without building two new expensive assembly lines, and you need to borrow the tool-up money at five percent. That's inflationary pressure. And we aren't anywhere close to that.

    And we can be reasonably sure that the issues are not structural because we aren't seeing wage spikes for skilled workers.

    BTW - I didn't get a chance to comment on your "No Center" post, but I did read it and really enjoyed it.  Your argument was sound, your examples were germane and the upshot - that you're either working from a model or not - needs to pounded much harder.  Krugman can't do it all alone.

    Thanks, DF.

    CPI says that inflation is only 1.1%, but if, like Shadowstats, you input the same accounting methodology used in the 70s, we have a real unemployment rate of 22% and an inflation rate of 8.5%. So we have purposely-obfuscated stagflation.

    Why would I believe Shadowstats?

    And not to be a jerk, but I bought groceries today. We certainly haven't had 8.5% inflation this year.

    From the comments:

    In the grocery stores that are close to me,

    -the price of beef has doubled in the last five years. I believe this is mostly because of food recalls due to industrial agriculture, not due to inflation. Chicken and pork have not risen much at all. Unfortunately, I prefer beef. Chicken is not a true substitute for beef.

    -the price of juice, salad vegetables, and fruit (with the exception of bananas) has doubled in the last five years as well.

    -coffee and tea has not quite doubled, but almost. Same with potatoes,onions, and carrots.

    -cream of wheat and oatmeal prices have increased in price by a factor of about four.

    These are almost every food I care about. Heavily processed foods and heavily subsidized foods, with the exception of beef, have remained about the same.
    Statistics may show a modest rise relative to inflation for food, but my grocery bill has doubled in the last five years.

    That's about where we stand, except we eat much more chicken than beef. We could save a lot by buying the processed and HFCS-sweetened stuff in the center aisles, but it gives us digestion problems.

    I don't care about anecdotal trips to the supermarket.  I care about data.  Why?  Because I can turn around and tell you that my grocery bill is essentially unchanged.  Where does that leave us?

    If you don't care what I think, don't read it.

    I didn't say I don't care what you think.  I said that anecdotes are not data.

    ...and glanced at without any attempt at the same! ;)

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