Dear Friends,

To me, the whole message of the below is clear.

We are over reliant on mono-crops and petroleum supplies that make mono-cropping productive.

But maybe the end of mono-cropping is not a bad thing. Maybe 98% of us that are not involved in agriculture at all should be happy at the coming food crisis. And maybe the 2% that feed the rest of us would like to begin an experiement with a more natural way of harvesting crops than the current standard of mono-cropping with petroleum chemicals and petroleum energy.

Every change has opportunity, Big Change = Big opportunity. Isn't that right Noah?

Also... The glass is half full, but half full of what? Information is everywhere but where is the wisdom to apply knowledge? Pretty rare. So we are left to be our own guru, our own leader. Not a bad idea given the alternative.

Cheers,
Tate



================

The Famine Of 2009
Stranded Wind

Last week I received a very concerned call from South Dakota farmer and agronomist Bryan Lutter. "Neal, we're out of propane!" I figured this was personal distress – he and his family farm over three square miles of land and I know this has been a tough year for many people. He promptly corrected my misconception when I tried to console him. "No, everybody is out, all three grain elevators, we can't get fuel for the bins, and we're coming in real wet this year."

There are equally dramatic issues due to the bankruptcy of Verasun and the apparent insolvency of the nation's largest private crop insurance program. Payments that would have come in June or July of a normal year are still not dispersed at the end of November and this has grim implications for next year's crop.

I started digging into the details and unless I'm badly mistaken people are going to be starving in 2009 over causes and conditions being set down right now. It's a complex, interlocking issue, and I hope I've done a good job explaining it below the fold ...

(I just submitted my personal story and a vision for the nation at change.gov - you can see my vision for this problem here.)

Stranded Wind's diary

The Dakotas have faced fuel restrictions for at least the last two years. They're at the far end of the pipeline network and after complete outages in 2007 everyone orders their diesel well in advance. Vehicle tanks are kept fuller and the on farm tanks are not allowed to run low. Gasoline supply dynamics have changed as well; British Petroleum shuttered three hundred stations in the area, citing the high cost of trucking fuel to the locations from the pipeline terminals.

This year propane is in short supply. Rural homes in that part of the world are heated with propane and the grain elevator and on farm drying require it to bring corn moisture down for storage. There is no sense that homes will go cold this year, at least not due to supply issues; the grain drying season is a short period of intense usage that will draw to an end within the next week. Pray to whatever higher power you recognize that the unheard of figure of 18% of the crop still in the field is brought in before the snow flies.

The Dakotas were very wet this year and the corn is coming in at 22% moisture. A more usual number would be 18% and for long term storage it must be dried to 14% to avoid spoilage. That doubling in the moisture reduction needed, an 8% drop instead of 4%, pretty much doubles the amount of propane used. Right now the harvest is at a dead stop. What can be dried has been and what is left can't even be combined without the fuel to make it ready for storage; it would all just spoil in the bin if put up wet.

I wondered if this was a spot problem in that particular part of South Dakota, but Bryan said it was widespread – he'd talked to farmers as far away as St. Louis and they were reporting similar issues. I made a few calls to try to figure out how broad the problem was. I ended up talking to Rollin Tiefenthaler at fuel dealer Al's Corner in Carroll, Iowa about the issue.

The Iowa crop comes matures earlier and is brought in earlier, so that is done, but he confirms that propane is being trucked long distances because local terminals have outages. They did have one farmer's cooperative run out of propane and they scrambled to get them enough, but in general it wasn't a problem. These are plains cooperatives, operations with thirty employees, dozens of vehicles, and tens of millions of dollars in inventory and commodities under management, so one running out of fuel is a problem that would affect a whole county.

Diesel has been a bigger concern for them – instead of the thirty mile drive to the Magellan pipeline terminal in Milford they're running as far as Des Moines or Omaha, each about two hours away, and the added time and cost for running more trucks is eating them alive.

The die has already been cast in the Dakotas, they'll either get the crop in or they won't. If they don't and it winters in the field they not only lose 40% of the yield on that ground they lose 20% of next year's yield in soy beans. The corn makes an excellent snow fence, trapping drifts six feet high, and they're slow to clear in the spring. The farmers have to wait until it's dry enough to plant before they can finish bringing in the corn crop, then they plant their soy, and that delay cuts into the growing degree days available for the soy beans and thusly we see the yield drop.

A few of you might not be from farm state and thusly won't know the normal work flow. The corn crop is still partially in the field, but the soy beans are already done. Soy matures and dries earlier, so it gets tended first. There would never been an instance of soy being left to overwinter just based on crop timing and I don't think the small, thin stocks with relatively fragile pods would prove to be terribly durable under snow banks.

I wrote earlier about the famine potential we face due to the underfertilization of the wheat crop. Wheat that gets enough ammonia is 14% protein, if it is unfertilized closer to 8%, and that 43% reduction in total plant protein is going to cause unimaginable suffering in places like Egypt, where half of the population gets subsidized bread. Global end of season per capita wheat stocks have been about seventy pounds my entire life, except the last three years where they've dropped to only forty pounds. One mistake in this area and one of the four horsemen gets loose, certainly dragging his brothers along behind. That mistake may already have been made in the lack of wheat fertilization this fall.

The fall nitrogen fertilizer application has been 10% of the norm. A typical year would see 50% put on in the fall and 50% in the spring. During fertilizer application season the 3,100 mile national ammonia pipeline network runs flat out and the far points on the network experience low flow both fall and spring. If they try to jam 90% of the fertilization into a period of time when the system can only flow a little more than half of the need much of our cropland will go without in the spring of 2009.

Finances as much as weather are the issue with regards to fertilization this fall. Crop prices have fallen to half of what they were, ammonia prices have dropped but ammonia suppliers here, receiving 75% of their supply from overseas, still have product in their storage tanks purchase at the historical highs last spring and summer.

When farmers plant they record the acreage and they purchase crop insurance - $20 to $40 an acre depending on the crop. If they have a failure they file a claim, an adjustor contacts them, and they get a check to cover the deficit. Some of this runs through the U.S. Department of Agriculture and some of it is through private insurers.

My conversations with farmers earlier this week lead me to believe that the largest private insurer, Des Moines Iowa's Rain and Hail Agricultural Insurance may be insolvent. Flooding claims from this spring were filed and payments would have typically been received by the end of June or beginning of July. It's now the end of November and payments are not being dispersed. Individual farmers are told there was something wrong with their paperwork, but this is nonsense – some of these guys have been farming thirty years and they all didn't forget how to fill out a simple form all at the same time. Iowa did have its second five hundred year flood in a decade and a half this spring which certainly has something to do with the situation, but I suspect Wall Street's sticky fingers got hold of Rain & Hail's assets, just as they've done to every pension fund and state run municipal investment pool.

So, we're already facing what Bryan Lutter calls "the mother of all fertilizer shortages" next spring and on top of that local banks won't lend to farmers.

The local bank was quite willing to lend to a farmer on a crop despite the weather related risks just like they'd lend on a car despite the driving risks. So long as the asset was insured the risk was deemed manageable. There were sure to be losses here and there, but they'd be administrative hassles associated with well known risks. If the auto insurance companies were viewed as untrustworthy no one would be getting a car without 100% down at the dealership and the same rule is now in effect for farmers.

Farmers without financing can't afford nitrogen fertilizer at $1,000 a ton, which translates to $100 an acre at current application rates. They won't be paying $300 for a bag of 80,000 hybrid corn kernels, again a $100 per acre expense. The average farm size in Iowa is four hundred acres and planting to harvesting would run about $120,000.

This looks incredibly bad. Bryan and I are both puzzled as to why the mainstream media isn't covering this. Perhaps the need to sell Christmas season advertising trumps the need for the public to know about the troubles that are brewing.

This is already 1,600 words and I haven't even touched Verasun. Executive summary? The nation's second largest ethanol maker took corn from farmers, went bankrupt without paying many of them, and a whole lot of family farms are going to be foreclosed upon in short order if something isn't done.

Take Action

The instant the Obama administration and the 111th Congress take their seats, before anything is done about Detroit, before anything is done about pension funds caught up in Wall Street's massive fraud, yes, even before they touch universal health care SOMETHING has to be done to protect our agriculture system from the volatility flowing from Wall Street's death contortions. This won't be a giveaway – it'll be a genuine investment with known risks and known returns for products that will experience ongoing demand. We, as a nation must provide our farmers with a fair, stable financing and insurance system or we're all going to pay a terrible price.

If you're not in an agricultural state and you see something come up about a plan to address these issues please take the time to call or write your delegation members and let them know that you realize how important this is, even though it doesn't directly affect your state.

My Personal Action

Perhaps this is the first time you've ever noticed my work. I'm the executive director for the Stranded Wind Initiative, an organization founded to develop local uses for renewable energy in places that don't have transmission lines available. A few months back a small group of the volunteers from SWI formed Third Mode Energy, a commercial venture aimed at building renewable ammonia fertilizer plants. We're working on projects in New York, Iowa, South Dakota, Indiana, and I think one is going to start in Ohio. We're looking for about fifteen more sites nationally and we need local leaders to take these projects in hand. We're going to be producing a package of information on this for legislators and media figures active in environmental and economic issues which will be ready in the first few days of January, with the intent of getting some of that stimulus money directed at local, renewable ammonia production.

If your town is down and hurting we might just have a partial solution to the need for jobs and energy. We've got a group for more detailed discussion on Kossacks Networking.

If you look here you will see an article from last spring - our first attempt at plant development for renewable ammonia. That one didn't go but we learned a lot and the story should give you a sense of the renewable fertilizer, greenhouse produce, and other good things that come from such development.

If you look here you will see an article I did on wheat fertilization on The Cutting Edge News.

UPDATE:

I've received the usual class of complaints about my dairy: You're trying to start a panic! You're totally not right about the facts! Etc, etc, etc. My only answer to this would be to point out the diary I did regarding Iceland's crash ... which called that one five months ahead of the real thing. Or all of the other stuff I've picked up from The Oil Drum or The Automatic Earth and written about well in advance of the Meat Stick Media(tm) picking up the story. I have a nice quick reference page with my first 192 diaries on it so you can flip through the titles on one screen if you'd care to go looking ...

I've received the usual suggestions about how our large scale grain production should be done organically. I have no ideological opposition to this and in fact I'm generally vegetarian and eat organic as much as I can lay my hands on it. The problem is that none of the proponents can describe to me what it would look like to cultivate an entire square mile in that fashion, let alone defining a plan that would allow a neat conversion of all of the forty to fifty thousand square miles of the state of Iowa to such methods. It's an admirable concept, but it doesn't seem executable. I do not at all accept that it's "big agriculture" keeping the farmers down. If there was a way to get similar yields without paying $100/acre for fertilizer and another $100/acre for seed the typical Iowa farmer with his 400 acres would be busy stuff an extra $80,000 a year into the bank. This is not the case today.

Kossack cordgrass is going to be disappeared to Guantanamo or worse for speaking the truth. Let's wish he or she a fond farewell:

Real news, useful news that could predict the future is no longer in the MSM, precisely because hedge fund managers and people like that make money on the future. Knowing what is going to happen in the future is money in the bank. The more people who know the future, the less money the investor will make.

Here is an article from The Grand Forks Herald about the propane shortage.

And here is a direct quote regarding the wheat fertilization. The set of numbers indicate a fertilizer with 18% nitrogen, 46% phosphorus, and in this case no potassium. The source was Bryan Lutter, my agronomist friend in South Dakota. I redacted the farmer's name because I don't have permission to publish it.

Neal,

It's very frustrating there is not enough news on the lack of news surrounding the under-fertilization of USA wheat. Example, NAME REDACTED is a large farmer in New Underwood, SD. He normally uses 5 semi loads of MAP (18-46-0) in the fall for his wheat. He used just 1 this year. The wheat is in the ground, and the die cast.

He explained his reasoning for reduced use very well. The extra yield boost costs too much. It's actually cheaper to simply buy the extra bushels which the fertilizer would provide.

Bryan

UPDATED UPDATE:

Giving credit where credit is due, none of the work we've done this year to set our fertilizer industry on a renewable footing would have happened without the assistance of Jerome a Paris, who provided advice on the path we're taking.

The guy behind our plant designs, Kossack nb41 is a member of Energize America 2020 and Kossack A. Siegel introduced us.

I'd have died last spring without the timely assistance of Alan from Big Easy over at The Oil Drum. Seriously, dead and buried.

Dr. John Holbrook and Dr. Norm Olson invited us to appear at the fifth annual ammonia fuel network conference and they've otherwise been a tremendous resource for us as we've tried to set our nitrogen fertilizer business on a renewable footing. I should also point at that ammonia powered truck that was driven from Detroit to San Francisco last year - the first bank deposit I ever made for work in this area came from NH3car.com.

Market Correction (and empire, and ecology, and population)

Now the market is finally showing some reality that we were predicting long ago.

The shell game is coming to a close.

Printing won't help us now.

Market manipulations won't last long if they work at all.

Now we have to pay for the fact that we don't make things anymore and nobody wants our paper any more. The US as a global empire of currency and military might is waning and will indeed fall as fell Rome, Egypt, Babylon, Azteks, and others.

The fall is soon and that is not the end, but the beginning of pains to come. We still have to confront our energy depencency, ecological trashing of biodiversity, population overshoot and criminal elite that rule over us and have ruled over us for centuries at least if not longer.

So, the news is coming out on the economy... finally.... a long way to go from here...

Cheers, Tate

==========================

The Global Economic Crisis - Bad and Worsening

by Stephen Lendman
Monday, 8 December 2008
Economics professor Richard Wolff states that recurring crises and chronic instability come with capitalism, and only "social change to a non-capitalist class structure" will bring relief and stability.

In a new article, economics professor Richard Wolff explains the current crisis in Marxian terms. It "emerged from the workings of the capitalist class structure. Capitalism's history displays repeated boom-bust cycles punctuated by bubbles. They range unpredictably from local, shallow and short to global, deep and long." Clearly we're now in one of the latter and potentially the worst ever.

Wolff states that recurring crises and chronic instability come with capitalism, and only "social change to a non-capitalist class structure" will bring relief and stability. He explains how we got here:

since the mid-1970s, real wages haven't kept up with inflation;
"computerization of production displaced workers;"
production and service jobs (including high-paying ones) have been offshored to low-wage countries; and
"capitalists end(ed) the historic (1820 - 1970) rise of US wages" in real terms.
In capitalist class structures, each capitalist is better off the more surplus is exploited from employees. The last 30 years realized capitalists' wildest dreams."
It gets worse. They increased productivity through technology and pressuring workers - to work harder for less pay and fewer benefits. "In Marxian terms, the surpluses extracted by capitalist employers - the difference between the value added by labor and the value paid to the laborer - rose. In capitalist class structures, each capitalist is better off the more surplus is exploited from employees. The last 30 years realized capitalists' wildest dreams."

Marx indeed was right, and his reward has been to be unfairly maligned. He explained capitalism's destructive contradictions and condemned the "free market" as anarchic and ungovernable. It alienates the masses by preventing the creation of a humane society. It produces class struggle between "haves" and "have-nots," the bourgeoisie (capitalists) and proletariat (workers). It exploits the many so a few can profit.

He predicted what's clear today. Over time, competition produces a handful of winners in the form of powerful monopolies or oligopolies controlling nearly all production, commerce and finance. Exploitation increases. Successive crises erupt, and ultimately abused workers react - according to Marx with an inevitable socialist revolution because a system this inequitable can't endure, so it won't.

Wolff explains more in his incisive analysis and in discussion on-air with this writer. "Stagnant wages traumatized (workers and destabilized families) accustomed to rising consumption afforded by rising wages." As a result, more family members work, put in longer hours on their jobs, assumed unmanageable debt to keep spending, have exhausted its limits, are now defaulting on their obligations, and so are corporations in as much or greater trouble.

It's a familiar story. "Bust followed bubble followed boom, once again" - but this time it's a whopper. As Wolff explains:

"The key point (is) since the mid-1970s, US corporate boards of directors took three interconnected steps" that got us to today. "They effectively froze workers' real wages, (cut benefits), extracted much more surplus from their increasingly productive workers, and....distributed (it in) cumulatively unsustainable" ways. This type system is "fundamentally crisis prone" and unworkable.

Wolff proposes a socially responsible one that is. He wonders if policy debates today will "ignore or deny (the) class structural basis" of today's crisis. If so, are we condemned to keep repeating this boom and bust cycle "with all the personal, familial, political, economic and cultural losses they inflict" - and in the end see capitalism fail anyway as it will.

A Systemic Crisis That's Bad and Worsening
Exhibit A - On December 5, Market Watch.com headlined the bad news: "Payrolls plunge by stunning 533,000 in November." The alternate household survey showed a 673,000 decline. According to the Labor Department, it's the steepest job loss in 34 years, and even greater ones may be coming for an extended period as the systemic crisis worsens.

Only three other times in the past 58 years have payrolls shrunk by over 500,000 in a month. Since January, a reported 1.9 million jobs have been lost, but the real toll is far higher, and the worst is still ahead.

Dean Baker of the Center for Economic and Policy Research said the latest data brought the three-month job loss to 1,256,000, the largest three-month toll since the period ending February 1975 although losses in years like 1949 and 1958 were larger relative to the size of the labor force. Manufacturing and construction have been hardest and longest hit, but of late the service sector has been "imploding," according to research firm MKM chief economist Michael Darda. He added: "As the service sector goes, so goes the US economy."

Economist John Williams runs the "Shadow Government Statistics" web site and explains how government data are manipulated, corrupted and unreliable to make them look better than they are. Along with much more analysis, he reverse-engineers GDP, inflation and employment for more accurate readings and a truer picture of economic health.

According to the Bureau of Labor Statistics (BLS), the unemployment rate rose from 6.5% to 6.7%, and September and October job losses were revised sharply higher by 199,000. Over the past three months, payrolls have shrunk by an average of 419,000 per month compared to 82,000 a month early in the year. In addition, total hours worked fell 0.9% in November, the drop is 2% for the last three months for the sharpest three-month decline in any period since the data's 1964 inception, and the average workweek fell to a record-low 33.5 hours. In addition, so-called "underemployed" temporary and involuntary part-time workers hit a 12.5% rate, up sharply from 11.7% in October.

According to Moody's economist Ryan Sweet: "The labor market capsized in November." We're "seeing a very broad-based decline in payrolls" as all sectors were affected except education, health services and government. The crisis is clearly deepening - before large expected auto industry and supplier layoffs even with a Washington bailout.

The Labor Department report masks the true gravity of the jobs picture that Williams shows on his site. BLS calculates it by business and household surveys, produces a monthly employment report, and states in a section titled Reliability of the Estimates: "The confidence level for the monthly change in total employment is on the order of plus or minus 430,000 jobs."

The report plays other numbers games as well. In recent ones, more jobs are imputed for new firms than in the same months last year. A "birth/death model is also manipulated to color the picture brighter (at 143,000 for the September - November period compared to 117,000 for the same three months last year), anyone working an hour or more in the current period is considered employed, and interviewees aren't asked if they're unemployed.

Uncounted as unemployed are many people without jobs wanting work, many of whom are long-term unemployed who gave up after months of fruitless trying. Also omitted are part-time workers who prefer full-time employment. To find the true unemployment rate, Williams adds what BLS leaves out, and through November reports unemployment at 16.5%!
Uncalculated are many people without jobs wanting work, many of whom are long-term unemployed who gave up after months of fruitless trying. Also omitted are part-time workers who prefer full-time employment. BLS plays a cynical numbers game and presents an unreliable employment picture. It's way more dismal than it reports so it hides it.

Williams corrects it by including what BLS leaves out, and through November reports unemployment at 16.5% or more than double the manipulated government data. In addition, he calculates the November job loss at around 873,000 or nearly two-thirds greater than the flawed BLS numbers.

He does the same thing with GDP, the real value of goods and services produced. When adjusted for his higher inflation calculation, it's lower than official reports. More inflation means higher prices, not increased output, but Washington tries to hide it. Williams' data showed a negative GDP reading in 2000, and it remained there except for briefly turning positive in early 2004. Through Q 3, he has it at over - 3% and falling, and at the rate it's happening, it should be considerably below that reading by Q 4 and way below official figures that barely acknowledge a deepening recession.

And it's happening at a time wages are declining, benefits are being lost, a record number of Americans use food stamps (31.5 million, up 17% from a year ago), homelessness and poverty are rising, and only a third of laid off workers are eligible for jobless benefits that even when gotten can't support a family.

The Latest Data Confirm the Grimmest Forecasts
Besides unemployment, it's all grim, worsening, and what JVB's chief economist William Sullivan calls "economic nuclear winter" with most reported numbers the worst in years or decades for - production, the service sector, retail sales, consumer spending, capital expenditures, housing, durable goods orders, construction, factory orders, virtually every economic report in an endless dismal stream all pointing precipitously down. Economist and business professor Peter Morici told the Wall Street Journal that "the threat of a widespread depression is now real and present."

The latest reported percentage of mortgage holder delinquencies is more proof. It hit a record 6.99%, according to the Mortgage Bankers Association ( MBA). The number of mortgages somewhere in the foreclosure process also reached a new high as home prices and demand are falling and greater numbers of owners are being pressured given mounting job losses in a weakening economy. Subprime mortgage holders are in the most trouble with more than 20% of them (for the first time) seriously delinquent in Q 3.

The MBA also reported a record 1.35 million foreclosed homes in Q 3, or a 76% increase from the same 2007 period. MBA's chief economist Jay Brinkmann stated: "We have not gone into past recessions with the housing market as weak as it is now, so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past." The report is based on 45.5 million mortgages, about 85% of the total number of first mortgages nationwide.

The latest retailers report is also weak. It shows "a Crisis in All Aisles," according to the Washington Post, as "shoppers stow credit cards" and retailers posted their worst November sales in over 30 years. They were down 2.7% compared with the same month last year, the second consecutive negative month, according to the International Council of Shopping Centers.

A recent Citi Investment Research (CIR) analysis sees at least a 5% consumer spending decline during the holiday season due to tighter consumer credit. According to CIR economist Kimberly Greenberger, "The bottom line is that consumers are genuinely concerned about their personal financial health and they are cutting back voluntarily." A Consumer Reports survey also showed that more than half of shoppers plan to rely less on credit this Christmas.

Overall, the economy is contracting at the sharpest rate since the 1930s, and before it's over may surpass the worst of those Depression years no matter how manipulative the camouflage. We're in unchartered territory, conditions are very grave, and their affect on many millions will be hugely destructive.

The toll showed up in the latest Business Roundtable's quarterly CEO Economic Outlook Index. It took its biggest ever drop to 16.5. It stood at 78.8 in Q 3, and it's lowest ever previous reading was 49.3 in Q 1 2003. Anything below 50 indicates contraction.

Budget Crises Are Impacting Cities and States Nationwide
According to the Center on Budget and Policy Priorities, "states are facing a great fiscal crisis." At least 41 have shortfalls in their budgets for this and/or next year, and the numbers are huge. For FY 2009, it's around $77 billion and likely to rise as conditions worsen. Municipal governments are as bad or worse off at about $100 billion or more in the red. It impacts all services including essential ones for the needy, and their numbers will rise going forward.

California is often a bellwether for the nation and not a good sign for what's coming. On December 1, governor Schwarzenegger declared a fiscal emergency, cited a $28 billion shortfall, and compared the state's condition to an accident victim bleeding to death. He wants an austerity budget to deal with it at a time such a measure will worsen it. It's an ongoing state problem, now aggravated by the deepening crisis, and according to one report, unless huge budget cuts are passed, California may run out of money by February or March 2009.

All sorts of draconian measures are proposed with bipartisan support except that Republicans want stiffer ones - cuts in education, health care, and help for the needy; regressive sales and other tax increases; less environmental protection; thousands of state employee layoffs; and tax breaks for business as "economic stimulus."

In addition, for the second time since the Great Depression, California may pay vendors with IOUs. In a December 1 letter to legislative leaders, State Finance Director Mike Genest said the state "will begin delaying payments or pay in registered warrants in March" unless an $11.2 billion deficit is closed or reduced. After approving its budget less than three months ago, California is fast running out of money - and so are dozens of other states.

Schwarzenegger warned that warrants may have to be used as a promise to pay (with 5% interest based on state law) because credit markets are tight, and it's getting too costly to borrow. Controller John Chiang said state cash reserves will decline to $882 million by February and will be a negative $1.9 billion by March. Tax collections have been hammered the result of the collapsing real estate market and the nation's third highest unemployment rate at 8.2%. Chiang summed up the problem by stating: "We're just barely hanging on right now" and need major help immediately.

State budget crises was the central theme of the December 2 National Governors Association meeting at which Obama was asked for federal aid to offset up to a $180 billion shortfall over the next two fiscal years. He offered help but made no promises beyond saying he'll propose a massive stimulus package that he hopes to sign soon after taking office. "Make no mistake," he said, "these are difficult times, and we're going to have to make hard choices in the months ahead. I won't stand here and tell you that you'll like all the decisions I make. You probably won't."

Neither will auto workers as Congress and the Big Three conspire against them along with UAW boss Ron Gettelfinger who earlier sold them out. On December 5, The New York Times headlined: "Democrats Set to Offer Loans to Carmakers." The leadership said they'll "provide a short-term rescue plan" and expect to vote on it shortly in a special session.

AP reported that it will amount to about $15 billion in loans while The Times said details aren't available "but senior congressional aides said that it would include billions of dollars in short-term loans," enough to last until Obama takes office. After that, further aid will likely be in stages as a way to extort maximum rank and file concessions and signal what's ahead for all working Americans - sacrifice, austerity, lower wages, fewer benefits, and the continued erosion of their living standards, now accelerating during the systemic crisis.

What's good for General Motors, as they say, is bad for its workers, and here's what they'll face:

plant closures as the industry significantly downsizes;
tens of thousands of permanent layoffs;
greatly reduced wages and benefits - well beyond what they earlier sacrificed; last year the UAW leadership sold out the membership by accepting a "transformational" agreement; it slashed wages in half to $14 an hour, established a two-tiered wage and benefit arrangement (for new and current workers), cut health benefits and pensions, and let the Big Three off the hook entirely for their retirees' health care;
a likely government trusteeship with power to revoke union contracts for huge new concessions; Gettelfinger signaled he's willing; the UAW leadership (and other union bosses) care more about their status, high pay, and special perks, not the protection of union jobs, their pay, and benefits;
an accelerated dumping of higher-paid senior workers to be replaced by lower-paid new ones; and
an overall hostile environment for powerless workers forced to give up generations of hard won gains, accept pitiful little, or get nothing at all.
Over the past five years, UAW ranks have shrunk from 305,000 to 139,000 through plant closures, buyouts and early retirements. General Motors now announced that it will close another 11 North American plants and eliminate staff in them. Ford and Chrysler have their own plans along with suppliers that will shrink in numbers and size.

The Threat of Future Deflation
Most economists see deflation (not disinflation) as more stubborn and harder to correct than inflation. It also may lead to depression. A textbook definition runs along the lines of falling prices, usually from a lack of money or credit, but it's also caused by less spending, either personal, government or by business in the form of investment. Serious side effects follow - rising unemployment and falling GDP (output) with the danger of a persistent downward spiral.

Ambrose Evans-Pritchard considers the prospect in his latest December 6 article titled: "Deflation virus is moving policy test beyond the 1930s extremes" (with a response showing) the frontiers of monetary policy being pushed to limits that may now test (the) viability of paper currencies and modern central banking."

Nations are hurtling toward zero interest rates "so what next if the credit markets (won't) thaw?" Think Japan's lost decade even though (so far) depression has been avoided.

But Japan is one country. Today's problem is global, so if depression is coming "we are all going down together." No deus ex machina will save the day, including from China that's very dependent on foreign markets.

Fed chairman Bernanke calls his solution a "technology....a printing press, that (can) produce as many US dollars as (we) wish at essentially no cost." Is he right or wrong? "The world's fate now hangs" on his judgment during a "far more serious (crisis) than the Great Depression," according to Michel Chossudovsky. All measures undertaken so far haven't worked, and in his judgment, "contribute to a further process of destabilization of the financial architecture."

Evans-Pritchard is also worried. "Once the killer (deflation) virus becomes lodged in the system, it leads to a self-reinforcing debt trap - the real burden of mortgages rises, year after year, house prices fall, year after year. The noose tightens until you choke. Subtly, it shifts wealth from workers to bondholders. It is a reactionary poison. Ultimately, it leads to civic revolt. Democracies do not tolerate such social upheaval for long. They change the rules."

Bernanke claims the Fed can "expand the menu of assets that it buys" and thus never run out of tools. It may or may not work but at what price. Perhaps short-term relief for much greater trouble ahead - either a deflationary or hyperinflationary collapse.

In late November, Nobel laureate Robert Mundell and others warned that without an immediate reversal of Fed and Treasury policies, America faces disaster ahead. Bernanke himself warned in a 2002 speech: "The best way to get out of trouble is not to get into it in the first place." Nonetheless, he cheerled "Greenspan's easy-money stupidities from 2003 - 2006, (then himself contributed to) debt debauchery."

Evans-Prichard thinks his monetary blitzkrieg "greatly reduce(s) the likelihood of a catastrophe." He also says: "History will judge."

Henry Kaufman on the Root of Today's Crisis and How It Will Change the Way America Does Business
Now age 81, Kaufman is a highly regarded economist once nicknamed "Dr. Doom" for his interest rate forecasts during the 1970s and early 1980s. He formerly was a Salomon Brothers managing director and executive committee member before heading his own firm, Henry Kaufman & Company. He recently addressed a group of international bankers on today's crisis and followed up with a Wall Street Journal op-ed.

The current crisis is different, and at its root is decades of ballooning debt. Especially since 2000, nonfinancial debt outpaced nominal GDP growth by nearly $8 trillion, or more than double the 1990s gap.
He explained that "There have been more than a dozen financial crises since the end of World War II. The aftermath of each was transitory, and markets rebounded rather quickly." The current crisis is different, and at its root is decades of ballooning debt. Especially since 2000, nonfinancial debt outpaced nominal GDP growth by nearly $8 trillion, or more than double the 1990s gap.

While debt rose, savings shrank, but buying power stayed resilient through credit card availability, mortgage refinancings, and no shortage of willing lenders. From 1960 to 1990, nonfinancial debt grew at around 1.5 times nominal GDP growth while savings averaged about 9% yearly. From 1991 to 2000, debt outpaced GDP by 1.8 times and savings declined to 4.7%.

Since 2000, however, borrowing soared twice as fast as GDP, a housing bubble resulted, households got maxed out on credit, while savings shrunk to around 1.4% and more recently to zero. Kaufman believes that to regain our economic health, we have to kick our addiction to debt and start saving again.

He also cited what he calls the most profound long-term effect of the credit crisis - the radical financial industry concentration to a dominant 15 firms holding over half of the nation's nonfinancial debt (held by households, nonfinancial companies and government). "These are the very firms that played a central role in creating debt on an unprecedented scale through a process of massive securitization via complex new credit instruments (and that) pushed for legal structures that made many aspects of the financial market opaque."

Kaufman says these giants "will limit any chance for the US to move toward greater economic democracy" because they're riddled with conflicts of interests from their multiple roles "in securities underwriting, in lending and investing, in the making of secondary markets, and in the management of other people's money. Through their global reach, (they also) transmit financial contagion even more quickly (and) when the current crisis abates, the pricing power of these huge financial conglomerates will grow significantly, at the expense of borrowers and lenders."

This crisis "will usher in profound and lasting structural, behavioral and regulatory changes," for better or worse, and he lists some important ones:

"international portfolio diversification has been undermined;" it failed to weather the test of the current crisis;
"risk modeling will lose popularity" - for options and other complex financial derivatives "that are useful for dynamic hedging under normal circumstances," but these don't exist now and won't going forward;
"financial concentration will gain even greater momentum and influence;" this is the "most profound long-term consequence of the current credit crisis; in the years ahead, the influence of these financial conglomerates will be overwhelming;"
"the end of an era of ballooning nonfinancial debt" that's been a key US economic growth driver for decades; this trend will continue for some time;
"US government borrowing will continue to swell, at least for a few years;"
"Americans will begin to save again;" and
"regulatory reform of financial markets (is coming and) will carry high stakes;" it will become a "major political contest" between "embedded interests."

Down but not out is his message, so when the current crisis ends, it will be business as usual for larger more dominant financial giants. Given the gravity of things, the prospect for global depression and near certainty that the crisis will be protracted and deep, his outlook will unfold in very troubled waters and won't at all serve the public interest.

Today's problem is survival at a time it's daunting for millions and impossible for too many others, while lawmakers, the Treasury and Fed give trillions to banksters who caused the whole mess and billions more to the auto giants and other troubled industries and companies while public America goes begging.

BACKWARDIZATION of preciouis metals - A new phenomenon coming into play...

You know, my friends, a roller-coaster lasts 2-minutes. We are basically on a multi-year roller coaster in slow motion. All of these indicators come by us and of course it is difficult to see the big picture because daily issues crowd out our steady view of the crash.

Well, here is just one more indicator: increase in gold and silver hoarding. Spot price, once a universal benchmark for price, is being increasingly ignored by the market.

Currency is always a central benchmark to fallow as a global empire dives down into corruption, chaos and collapse.

Cheers, Tate

-------------------------



Did December 2nd Mark the Beginning of the End for Paper Currencies?

George Washington’s Blog
Saturday, Dec 06, 2008

Professor Emeritus of Mathematics Antal E. Fekete says that December 2nd marked the beginning of the end for paper currencies and wealth based on such currencies:



“It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world.”



What’s he babbling on about?

Well, since at least 1972, the price of gold futures has been higher than the spot price of gold - a condition called “contango” by futures traders.

But on December 2nd, for pretty much the first time ever, the futures price went below the spot price - what futures traders call “backwardation” - and has stayed there for several days.

Fekete argues that this means that gold owners are hoarding their gold and simply won’t sell, because (1) they’re not confident that they’ll be able to buy it back in the future, and (2) they have lost all faith in paper currency. He writes:



“Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.

Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?

Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.”



PhD economist James Conrad confirms the backwardation of gold:



Things … are changing fast … the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.***

European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold***

Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.***

Huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.

Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as “backwardation”. Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia(BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.



Is Conrad correct that Bernanke wants to devalue the dollar against gold? If so, that would be very bullish for gold, and we should all buy. Bernanke has indicated in his speeches that he believes that devaluation of the dollar against gold by FDR was the principal thing which stopped deflation during the Great Depression. But FDR’s actions took place under a gold-backed currency, which no longer exists. So would devaluing the dollar against gold really work? Conrad has previously written, “with the economy heading toward collapse, the possibility of a return to some kind of gold or silver standard, is quite strong“. So apparently Conrad believes that Bernanke will soon face a situation not that different from FDR, and will take similar steps.

However, Bernanke himself has indicated that he thinks that a gold standard increases the risk and severity of depression:

The extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery.***

If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication.

So the devaluation argument may not be quite as strong as Conrad thinks.Caveat: The dollar will eventually crash. But it may go way up before it does crash. Why? Because the European banks lent huge amounts to emerging countries (much more than the U.S.), and borrowers are teetering on the edge of default. In addition, the European central banks have recently slashed interest rates, so investors may flee the Euro in the next couple of weeks. So be careful - the dollar may soar much higher for some time before it crashes.


Note: Backwardation in the gold market has only previously occurred due to very temporary glitches lasting a few hours at a time.

Dear ArkBuilders,

Everything is unfolding now, exactly as we predicted many years ago.

The pessimists from before are now the realists.

The optimists from before are shifting to the side of reality now that they hear more and more of the realist view on mainstream TV news.

Depression... Crash... Hyper-inflation... Police State....

Up next: oil-to-food related breakdown of industrial agrictulture and all of the predictable results that breakdowns of society include.

ArkBuilders were way, way ahead of the game but that doesn't meanwe get hit any easier. We have to continue to use this time to prepare.

Gold, gardens, guns.

Away from paper, away from global-industrial structures, back to family, community, barter systems. There is no big secret here. We were over-reliant on a dwindling resource and we are trending back financially, with food, with jobs, with lifestyle... as we were for millions of years pre-oil, so we will be again. Agrarian lifestyle, here we come!

Cheers, Tate



==================================



Peak Oil, Cars, and Depressions
by: Jim Kingsdale November 16, 2008 | about stocks: CBAK / HEV / OIL / SQM / USO

Jim Kingsdale
As the global economy heads into terra incognita and the stock market tries to prove it has seen the worst my thoughts, for whatever they are worth, are:

1. Some economic observers such as John Thain, the CEO of Merrill Lynch, and JC Penney’s CEO Mike Ullman are saying the current economy is comparable with the Great Depression. We need fiscal stimulus (since we’re nearly out of gas in terms of monetary stimulation potential). How much? If we’re going into a depression the quantity of fiscal stimulus needed to reinvigorate consumer spending on housing and discretionary items may be too great for any government to contemplate or have the courage to implement. Paul Krugman addressed this point on 11/14 and 11/10; he estimated that $600B of U.S. stimulus will be needed. Even if such stimulus were to be attempted once Obama is in charge, the time needed for it to be effective is so great that we are still in for at least 12 - 18 months of increasing weakness and thus probably 6 - 12 months away from a market bottom.

The next shoe to drop is clearly going to be car company re-organizations either within or outside the bankruptcy laws. I happen to agree with those who think the U.S. government should structure a sort of pre-packaged bankruptcy program with GM that combines management and systemic changes with sufficient financing to put the company on a sustainable course forward. The obvious question about that: who can be found to guide the company in a new sustainable direction? This issue may well be the first indication we will see of whether Obama is as smart as I hope he is and whether a new administration can actually make an important positive difference. I discuss this in more detail below.

2. With regard to energy:

A. Natural gas will be dead money unless the U.S. government decides to push NG-powered automobiles. That is a longshot but not impossible since apparently Rahm Emanuel is a fan of the concept.

B. All prior discussion of oil supply, demand, and pricing has been trumped by the economic sledgehammer that is killing the global economy. I still believe oil supplies will begin to peak in a few years. But the amount of oil used in the meantime will be far less than had previously been estimated and will result in a fair amount of spare capacity being generated. The additional spare capacity will be available to mitigate the early years of the eventual decline of old oil fields. So oil pricing may not recover rapidly as the previous megarprojects analysis suggested, more detail below.

I suspect that recent and future OPEC supply cuts will be unable to lift oil prices much or at all because market participants understand that oil withheld from the market by OPEC or Russia simply increases the amount of spare production capacity that exists. Greater spare production capacity is almost as much of a cause of lower oil prices as greater current supply is.

C. Meanwhile the present and continuing delay in new oil exploration and recovery projects will ultimately result in an even greater supply crunch once the global economy does recover, as numerous observers have recently opined. The timing of future oil shortages is uncertain; my guess is that it may begin in 2011 and become acute by 2014. The advent of economical and scalable oil substitutes like cellulosic ethanol, perhaps from algae, could be a game changer. But we won’t know that until we really, truly do know it, i.e. the timing and impact of new technologies are unknowable.

D. The transition to electrification of cars and substitution of trains for trucks that must ultimately occur will not begin around 2010 as I had thought. The delay is of course due to the lack of any economic incentives given low oil prices and the continuing high cost of battery technology. So investments based on plug-in hybrid electric cars will not be viable for some time. That would include battery companies like HEV and CBAK and “green electricity” investments. It also implies SQM’s lithium future could be delayed, but lithium is used in many other products and its demand will grow with the recovery of the global economy before it is used to power cars.

E. The exception to the above timing guesses is that whatever the Obama administration decides to do may make a difference. For example, if Obama decides to invest heavily in electrified light rail transport systems, that might create some viable investment concepts. Similarly, if he decides to push natural gas powered cars (a longshot), that would obviously put the gas producers into play. Ditto if he takes control of GM and pushes electric cars, perhaps in concert with the electric utility industry, which would like to see this happen. So we will have to wait to see how that unfolds.

3. I have changed my investment posture. I still think energy is a key trend going forward, but times have changed in various ways so the “EIS” Porfolio can no longer be purely an energy related portfolio

A. More cash is needed since the direction of the global economy is toward slowdown and since there is no way to know how long or how deep that process will go. I think 3 - 5 years of cash, at a minimum is prudent. For the non-cash part of the portfolio I want to shift into securities with defensive characteristics, so high-dividend stocks in recession-resistant fields such as mid-stream energy distributors and convertible bonds.

B. Peak oil is now universally understood and energy is no longer the investment secret it was when I started this website about 18 months ago. Energy is still important but when you have so much company in a given sector you can not be too focused on it. Also any investment tsunami, whether a macro-economic one such as peak oil or a social and/or technological tsunami such as manufactured homes or cable television in prior periods or more recently the internet, biotechnology, or demographic trends are all trumped by a global economic meltdown like the present one. At such times a growth oriented investment strategy will be killed. Therefore, in self-defense, I have decided that the “Energy Investment Strategies Portfolio” - a real portfolio that is important to my financial wellbeing and which I have displayed on this site - will need to become far more diversified.

4. I have taken down the information relating to the “EIS” portfolio since my web site is about the confluence of energy and investing and since the “EIS Portfolio” will no longer be illustrative of that concept. I could have split the portfolio into segments and continued to have one segment be devoted only to energy investments. But at times that portfolio might be very small, and frankly it would be more work than I am willing to undertake.

I intend to follow energy investing news closely and I will make note of specific investment ideas - and investing in general - in these occasional newsletters. I’ll report on how my investing concepts have fared, but not in great detail. So my site will continue to be a repository of information that I find potentially useful in keeping track of the energy markets and energy investments. It is essentially my own file cabinet which I make available to the public in exchange for any ideas or feedback that people care to share with me.

5. To the extent I was invested in the energy area, the month of October was one of underperformance in a very bad market The “EIS” portfolio (my worst performing account) was down 26% or 43% YTD. It is now largely in cash. I continue to own small quantities of stocks I have favored: SQM, RIG, DO, TBSI.

While the portfolio is positioned even more defensively as discussed above, I would note that some very sophisticated investors are now bullish. Moreover, a lot of charts have taken on very distinct “bottoming” characteristics over the past 45 days as exemplified by the S&P 500:



A different way to look at this chart: the past 45 days represent a “bounce” from a 45% market decline since last December, but the bounce has been sideways, not up, because this market is so weak that it can’t even go up on a bounce. The current 45-day range might then represent the half-way point in a total drop which would put this market in the category of the 1929 - 1930 decline.

One rule that has proven itself in spades during the present downturn is: “the trend is your friend.” That is the rule behind some people’s insistence on using trailing stops which take you out of a stock if it declines from its peak by a specific percentage. In some markets - 1975 - 1982 comes to mind - such a rule would have you getting whip-lashed constantly. But in this market it certainly would have helped immeasurably. My friend Harry Newton and the people who listen to his advice have benefited from following it.

6. I note that the Baltic Dry Index seems to be making a turn. Interesting.



Ramblings
Fitzgerald said the mark of intelligence is the ability to keep two contradictory truths in one’s mind simultaneously. If he were writing during these chaotic financial times Fitzgerald might say “multiple contradictory truths”, not just “two.”

Here are some of today’s contradictory truths:

- Many stocks seem very cheap in fundamental terms, certainly based on the “intrinsic earning power” that will pertain once global GDP growth recovers.

- But major segments of the U.S. economy are crumbling as reduced consumer spending and greater unemployment trends reinforce each other, thus destroying “intrinsic” corporate earning power.

- As income and asset values melt, investors are forced to sell stocks regardless of their “intrinsic value.”

- But all recessions eventually end.

- But the market can stay irrational longer than the investor can stay solvent.

- But there is a LOT of cash on the sidelines.

- But there is a LOT of fear among those who are still invested and a LOT further for the economy to fall before it begins to stabilize.

The upshot of these conflicting truths has been a huge amount of market volatility. The market climbs rapidly for a few days, convincing some on the sidelines with cash that the train is leaving the station so they need to get on to recover some of the losses they have already suffered. Then it takes violent downswings that eat up even more asset values. The market seems determined to destroy as much investment value as it can, a condition that will continue to exist … until it doesn’t. And when I say, “the market” I mean all stocks - because there has been no particular market segment that has done appreciably better or worse than another. It’s just the market.

Perhaps they won’t ring a bell at the bottom. But I keep thinking there may be a final capitulation, a huge sell-off to unheard of “bargain” levels marking a point of ultimate humility on the part of investors. That could be the signal of a bottom. On the other hand, the market may simply stop selling off, go into some extended trading range as it has over the past 45 days, and then gradually begin recovering.

If there is a capitulation, perhaps it will come when investors reject their underlying assumption of confidence. What confidence, you ask? I submit that most investors still hold onto the conceit that contemporary institutions are so much stronger and so much more skilled than were those of the Hoover-Roosevelt period that no Great Depression could occur again. That may or may not be true - only future events will tell us. We might or might not suffer another market like the ’30’s which ate up 90% of stock values at one point. But whether we do or not, I no longer think that such a possibility is out of the question. Here is one analysis that makes the case that conditions preceding our current downturn were worse than those that preceded the Depression.

Whether or not we do suffer a new Depression, investors may eventually come to agree with me that such a thing is a real possibility. If a significant number of investors reach that conclusion around the same time, we could see the ultimate capitulation of the market. That might mark the bottom.

What about Oil?
How naive I was to think that oil service companies would be immune to stock market weakness. They have been hurt as badly as any segment. If global economic weakness continues to deteriorate clearly some oil projects will continue for some time to be put on hold. That is already happening in Alberta. The IEA reports that it is happening throughout the world.

Clearly the amount of “spare” oil supply capacity - which was thought to be declining toward zero just months ago - is now growing rapidly as OPEC and now Russia begin to cut exports in order to control prices. My sense is that such efforts to keep oil prices high will ultimately fail; the price of oil will go lower - into the $50’s and possibly even the $40’s - until oil production itself is reduced based on pure economics, not on cartel actions. The reason: as mentioned above, every barrel of oil that is withheld from the market becomes one more barrel of “spare capacity” which also tends to reduce the price of oil.

A countervailing force is the decline rate of old oil fields which seems to be accelerating, particularly according to a recent IEA report saying old fields are declining at 6.7% per year. As the reduction in global GDP bottoms oil demand will reach a nadir and then it will begin to grow again. But the decline of older fields will exacerbate a new supply/demand scarcity, eating into the “spare” capacity much more rapidly than in prior recoveries. Much of the previously projected increase in production from new fields will be delayed by the present low prices for oil as discussed above. This is why numerous observers are now calling for much higher oil prices in the “out” years.

Analysts are debating whether speculation was behind the great rise in oil prices. I don’t think there is a definitive answer to that question. The way I’ve started to think about the problem is that there are only two conditions for the price of oil: plenty and scarcity. When there was plenty (prior to 2004, other than during the two 1970’s Middle East crises) the price was set at the marginal cost of production. When there was scarcity (after 2003), the price was set by the marginal rate at which required demand destruction would occur. But in both cases there is, was, and will be some speculation that can move the price temporarily around the fundamental requirements.

Right now we are in a period of plenty. Whatever the marginal cost of production may be is being discovered in part by speculators. The conditions that will change the world into a period of scarcity are discussed above.

Cars Are the New Canaries
For many months I’ve been harping on the idea that consumers have little reason to buy a new car. Most purchases of new cars in recent years have really been made out of boredom or excess cash facilitated by easy credit, not out of a real need for transportation. Cars are now made to easily last for ten years, yet many people have gotten in the habit on replacing them every 2 - 4 years, aided by easy credit. But with a lot less spare cash around and the hierarchy of needs tending toward food and shelter rather than entertainment, people no longer buy cars so much out of boredom. And with new engine technologies on the drawing board and nearly in the showroom, there is a further reason to wait to see what comes next. To top it all off, the U.S. manufacturers do not make the best quality products available and their dealer networks SUCK.

Thus it was not hard for me to predict a while ago that two or three of the Big Three U.S. makers might be headed for bankruptcy. This is clearly a landmark in our journey through economic chaos. It will be interesting to see how the Obama folks and Congress handle the challenge. I tend to agree with those who favor letting the market mechanisms take their course. The U.S. car industry is not as vital as it once was. Foreign makers are increasingly doing their manufacturing in the U.S. And the legacy health and welfare contracts that hold down U.S. makers need to be changed.

But a simple hands-off posture toward a GM bankruptcy in the face of overwhelming consumer nervousness would help crash the economy further by giving people the idea that there is simply nobody in charge (which is the actual case, of course, but people don’t want to think that). In normal times a bankruptcy gives a company the opportunity to step back, refinance, and move in a better direction or slowly go out of business in an orderly fashion. Today’s economy, credit constriction, and the size of the auto industry make that option non-feasible for GM. Therefore I think the U.S. government needs to step up with financing and a new managerial structure to help the company come out of a bankruptcy. In other words, a government-assisted pre-packaged bankruptcy program.

Two months ago I wrote a piece called “Is GM Building a Dream Car or a Bankruptcy Case?” I stand by my conclusion that the only advantage that the Volt offers GM, and the only reason they have been spending millions to advertise the car, is as a social-benefit case for the U.S. to finance GM’s emergence from bankruptcy. I also continue to believe that GM could (but will not have the guts to) sell the Volt in small quantities during its initial productions runs (the only quantities that will be available) at rather high prices, say $39,000 per car, and there would be enough people who would buy them at that price, partly as a luxury curiosity and partly because it will be a really neat car with a lot of scarcity value. So I don’t think GM must lose a lot on the Volt. But GM’s unimaginative management can only see the car as a loss leader priced much lower. Are you listening, Mr. President-elect?

There is more about cars here from John Mauldin’s 11/7/08 email:

“I now drive a 4-year-old Cadillac Escalade (I am a Texan, after all!) and it has 65,000 miles. I have a friend with an identical car that has 270,000 miles on it, and it is still running fine. My car could easily last me another four years, as could the cars of many people who bought new ones in recent years.


Basically, automobile manufacturers, in their drive to sell as much as possible, “brought forward” future sales of cars and, as a side effect, put lots of still quite good used cars on the road. New car sales are likely to be depressed for some time. It is somewhat like the housing problem. There is just too much inventory on the road that will have to be worked through. When Detroit gives me a real reason to buy another car, like an electric-powered vehicle, I will. And a lot of Americans, with a need to save money for retirement, are going to feel the same way.”


Enough. Good luck to us all.

The Hyperinflationary Depression

The conclusion of this article says it all because every financial guru I respect... tens of them, all of the big ones that have credibility outside mainstream thinking say the same things about the dollary shifting into hyper-inflation...

The end result should not be confusing to anyone. In
simplified terms, the US is a country heavily dependent on foreign imports, yet
produces little the world really needs and owes an unplayably large amount of
debt. A hyperinflationary depressionis the only possible outcome.

Cheers, Tate

=========================

The Hyperinflationary Depression
Economics / Economic Depression
Nov 30, 2008 - 05:37 AM

By: Eric_deCarbonnel


Last June, Stephen Lendman published an article covering Walter "John" Williams's views on Future US Hyperinflation . These views are more relevant than ever today.

Walter “John” Williams thinks out of the box. He makes disquieting reading, but you won't find him in the mainstream.
…
Conditions today are hazardous. A major financial crisis precipitated them. Reckless policies caused it. It threatens the solvency of major banks and other financial institutions. It also hurts the greater economy. Solutions - massive liquidity injections, interest rate cuts and reckless deficit spending. Result - financial malpractice for a short-term fix. Consequences - “financial Armageddon” according to Williams.

M3 (the broadest money supply measure) growth is so high that the Fed no longer reports it. Economists like Williams do because it's crucial to know, and the data he reveals are disturbing - record M3 growth at a near 18% annual pace. Hyperinflationary seeds are now sown. Dollar valuation is falling, and at some point may accelerate when investors flee it for safer havens. The Fed again will respond. More debt will be monetized. It will build over time. Things will get worse and then be exacerbated when the government is less able to meet its obligations. “Therein lies the ultimate basis for the pending hyperinflation,” in Williams' judgment.

He believes it will morph into a hyperinflationary depression, then a “great depression.” And when it hits, it will be with “surprising speed.” Already disposable income is falling in a weakened economy in crisis. As things worsen, politicians get blamed, and Williams raises an interesting possibility. If conditions get bad enough, voters may respond with their feet, declare a pox on both major parties, and turn to a third alternative around 2010 or 2012. It happened before in our history. The Republican Party is Exhibit A. It was created in 1854 at a time Democrats and Whigs were the two dominant parties. Exit Whigs, and enter Republicans with Abraham Lincoln its first elected president in 1860.

Williams shows US inflation data going back to 1665. It was fairly stable up to the Fed's 1913 creation. It then began rising and accelerated post-WW II. Government calculations mask it. Alternative ones are more revealing and accurate. Except for minor price declines in 1944 and 1955, the US hasn't had a deflationary period since the 1930s. Abandoning the gold standard is why. It imposed monetary discipline. Roosevelt went off it in 1933. He had to. The banking system collapsed, money supply imploded, and economic stimulus was needed. It released the Fed to create money freely. Therein lies the problem, and it shows up in the numbers.

Current Fed Chairman Bernanke and Alan Greenspan are students of the Great Depression. “Helicopter Ben” especially vowed never again, and his actions prove it to a fault. He knows the risks and stated them in an earlier speech. He said:

“Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology called a printing press (now its electronic equivalent), that allows it to produce as many US dollars as it wishes.” By doing so, it “reduce(s) the value of a dollar in terms of goods and services” which raises their prices…. ”under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

So it has, according to Williams, and it caused a “slow-motion destruction of the US dollar's purchasing power” since 1933. It shows up in GAAP-based 2007 federal deficit figures - $4 trillion for the fiscal year, not the official $163 fiction reported. Williams estimates total outstanding federal obligations at $62.6 trillion. At least one other economist puts it over $80 trillion. There's no way to honor this debt level, so the “government effectively is bankrupt.” At that point, it has three choices - default, declare a moratorium, or repudiate the entire amount.

Sooner or later, markets will react. Holders of US debt already are balking, but so far modestly and quietly. Ahead, that may change if dollar valuations plunge. It will force the Fed's hand. Greater debt monetization will follow. Dollar valuations will sink further, and so forth in a progressive downward cycle to oblivion if Williams is right.

If conditions get severe enough, the Fed can create huge amounts of currency in a few days or weeks - enough to match the dollar's lost purchasing power in the last 75 years. Combine it with fiscal irresponsibility and imagine the consequences.

Official data alone today are reason for concern - soaring food and oil prices, the dollar near historic lows, money growth at an all-time high, and off-the-charts federal deficits and debt. The trend continues, and it shows up in gold prices - topping $1000, then retreating, but nearly certain to soar way above previous highs on its way to numbers not discussed in the mainstream - $2000 an ounce, $3000? Who knows. Williams sees it “setting new historic highs.”

In 1980, its price hit $850 an ounce. In CPI inflation-adjusted terms, around $2300 an ounce would match it today. But if the government hadn't cooked the CPI calculation, the number would be about $6250 an ounce. By that standard, gold today is cheap. It's way below its real 1980 top, and if inflation accelerates as Williams predicts, expect much higher prices as dollars keep deflating.

Under this scenario, the “US government cannot cover (its) existing obligations.” Annual federal deficits are “careening wildly out of control, averaging $4.6 trillion per year for the six years through 2007.” That's with all unfunded liabilities included like Social Security, Medicare, Medicaid, other social services, debt service and more.

Williams says things are so out of control that “if the government (raised taxes) to seize 100% of all wages, salaries and corporate profits, it still would (show) an annual deficit using GAAP accounting” methods. At the same time, “given current revenues, if it stopped (all) spending (including defense and homeland security) other than Social Security and Medicare obligations, the government still would (show) an annual deficit.” The hole is so deep, it's impossible to dig out, according to Williams.

But given political realities, officials spend whatever it takes to get elected and keep their jobs. That's besides foreign wars, limitless corporate subsidies and more. Things, however, won't improve. They'll worsen, and that for Williams spells hyperinflation ahead. It's happening “with the full knowledge of political Washington and the Federal Reserve.” It it weren't for the US's “special position,” our debt would likely be rated “below investment grade instead of triple-A.” Longer term bonds are especially risky. At some point, they'll lose their full value. They also risk default, and that's besides their loss in dollar terms.

It's just a matter of time before foreign investors get worried enough to act - buying fewer Treasuries down to none, then followed by redemptions. The Fed will have to compensate. Print more currency, and the problem deepens. Its value declines and inflation accelerates.

Trade policies worsen things. We're in a global race to the bottom. The once bedrock manufacturing base eroded. It's now 10% of the economy and falling. Services currently account for around 84% of it and rising. Jobs in all categories are being offshored to low-wage countries. Average inflation-adjusted wages keep declining. Real earnings are below their early 1970s peak. Living standards are falling. Consumer debt is rising to make up the shortfall. Savings are liquidated. Before the housing decline, mortgage refinancing helped when valuations rose. It meant taking on more debt. Fed policy encouraged it. Today's dilemma “is payback” for unsustainable bubble-creation policies. Recalling a relevant quote: “Things that can't go on forever won't.”

Bad policy caused enormous structural change, and trade deficits are part of it. They've “risen to the highest level for any country in history.” They're one more problem for a seriously over-extended economy. It places “the federal government and Federal Reserve in untenable positions, where they cannot easily or rapidly address the underlying problems, even if standard economic stimuli were available.”

Given the federal deficit and out-of-control spending, fiscal policy limits have been reached. The Fed's in the same bind. It can neither stimulate the economy or contain inflation. Rate cuts have done little. Saving the dollar may require raising them, but that won't “contain non-demand driven inflation.” It shows up in high food, energy, health care, and companies like Dow Chemical announcing on May 28 that it will raise prices across the board up to 20% to offset increased costs.

More cause for worry, and Williams anticipates depression. Hyperinflation will follow, and it will sink “the economy into a great depression.” It will halt commercial activity. The greater disparity in income, the more negative its consequences. “Extremes in income variance usually are followed by financial panics and economic depressions. US income variance today is higher” than in 1929 and “nearly double that of any other ‘advanced' economy.”

Federal bailouts have worsened things. Dollar creation exploded. Crisis has been pushed into the future. Its enormity will be far greater, and foreign investors will get stuck with a lot of it. When it arrives in strength, capital outflow will follow, and dollar valuation will plunge with it. Williams believes that “both central bank and major private investors know that the dollar is going to be a losing proposition. They either expect and/or hope that they can get of (it) in time to lock in their profits (or for central bankers) that they can forestall the ultimate global economic crisis” as long as possible.

Dollars are very vulnerable in this environment. If Treasuries are dumped, the Fed will monetize debt to make up the difference. Inflation will then accelerate, multi-trillion dollar deficits will worsen things, and a “self-feeding cycle of currency debasement and hyperinflation” will follow.

Cash as we know it will disappear. A barter system and black market will replace it or possible introduction of a new currency. Since most money today is electronic, not physical, chances of it adapting “are practically nil.” With hyperinflation, electronic commerce would completely shut down and economic collapse would follow. Gold and silver will be invaluable. Holders could exchange them for goods and services.

Physical goods will also be precious for survival and as a medium of exchange. Anything with a long shelf life may be stocked in advance, and providers of essential services could barter them for goods and other services. Forewarned is forearmed. Safety and liquidity are crucial. Anything retaining value is essential. Real estate, other currencies for example. Foreign equities and debt to a small degree because US financial assets hammering will spill everywhere.

With all that to deal with, consider another dilemma - the likelihood of painful political change, civil unrest, disruptive violence, and utter chaos. If Williams is right and hyperinflation arrives, Katie bar the door on what may follow. Revolutions are possible with three notable last century ones to consider - in Russia, Weimer Germany and Nationalist China. In each case, the old order ended, everything changed, but not for the good. How does Williams advise? Evaluate one's own circumstances, use common sense, and forewarned is forearmed. That will help, but hard times hurt everyone.

Hopefully they won't arrive, at least not full-blown as Williams predicts. But make no mistake. Excess has a price. The more of it the greater. America has an ocean of it. Sooner or later comes payback. “Things that can't go on forever won't.”

My reaction: Like Walter "John" Williams, I believe hyperinflation is imminent for the US. The current deflationary phase is ending. Our enormous trade deficits and reckless money creation guarantee that the next phase will be hyperinflation, and the trigger will be rising gold prices.

US Trade And Current Account Deficits

To put the US's international deficits into context, Here is an extract from an article by Alan Tonelson where he writes that the U.S. Trade Deficit Endangers the American Economy .

Measuring the deficit as a share of the whole economy is critical because it indicates how sustainable America's foreign debts are. Last fall, the Federal Reserve published a study showing that most countries run into major financial trouble when their overall international deficits hit four percent of gross domestic product. In other words, these countries' foreign creditors begin fearing that their debts have become so high that full repayment is no longer possible. And the creditors become much less willing to continue lending. Sometimes they cut off the credit supply altogether, and even start selling the assets they hold in the debtor country, including their stockpiles of its currency. And other creditors tend to follow suit. If you're curious about how this rush for the doors can end, take a look at the economic devastation in Argentina.

After hitting a record 6.6 percent of GDP, U.S. trade and current account deficits now stands around 5 percent of GDP, but it is about to turn significantly higher. US GDP is enormously dependent on consumer spending which is disappear due to collapsing consumer credit. Meanwhile, the US imports aren't likely to drop much as they are goods Americans can least afford to give up: cheap non-durable goods, oil, etc. Finally, exports are likely to fall rapidly because what little manufacturing the US has left is concentrated in durable goods, the sector most sensitive to economic slowdowns (also sector hit hardest during the great depression). So while the US's GDP and exports are going to shrink enormously, our reliance on imports won't shrink much at all. In fact, when the dollar's collapse pushes oil back over a $100 a barrel, the US trade and current account deficits will easily surpass 10%.

The terminal decline in US trade relations is visually depicted in the chart below from nowandfutures.com .



Reckless Money Creation

If there are any doubts about the US's intentions, the charts below from nowandfutures.com should make clear that the US is determined to prevent deflation by monetizing bad debt:



Same data, short term, different format



Gold set to Skyrocket

A break out in gold prices over $1000 will be the opening act of the depression's hyperinflationary phase. Already, precious metals are experiencing widespread physical shortages, and last week gold went into backwardation for three days. However, it is developments on the COMEX which will act as a catalyst to sent gold higher. Rising counterparty fears have caused open interest in gold futures to plummet from an all-time high of 593,000 in January to an astounding 276000 as of Friday. Investors want physical gold and aren't willing to settle for paper promises, which is why 8600 December contracts issued notices for delivery yesterday. If there are no default (big if), these deliveries will wipe out 31% of the COMEX's registered gold , sending prices soaring.

Conclusion

The end result should not be confusing to anyone. In simplified terms, the US is a country heavily dependent on foreign imports, yet produces little the world really needs and owes an unplayably large amount of debt. A hyperinflationary depressionis the only possible outcome.

By Eric deCarbonnel
http://www.marketskeptics.com