Global economics and finances - impacts

[JimD]

The noose ever tightens.  The global power game will certainly continue.  The West, driven by the US empire and its never ending thirst for additional markets, resources, power, and the ability to dictate events, must continue its slow constriction of those not within its sphere of influence.  The need for growth is relentless.  Russia long ago ceased to be a significant strategic threat, but its rise under Putin to a place of global prominence once again allows the hawks of the governing class to continue to maneuver against them.  Due to our current economic arrangements and interdependence with China they are eliminated as a target for major competition.  That leaves only Russia. 

Russia is only strong right now because of the demand for fossil fuels and the high price they can get for them.  They are charging the Europeans very high rates and are financially completely dependent on that continuing.  Therefore we (the US/EU) are planning on doing the Russians as much damage as we can.  Ergo the attempt to force pipelines through Syria to lessen the ability of the Russians to charge high prices.  The Russians are successfully stymying that effort and it now looks likely that Assad will survive for some time to come.  But if we can force the issue with Ukraine perhaps it is possible to create a country that can be controlled to the extent concessions can be forced from the Russians.  A very large percentage of their pipelines transit Ukraine.   Or perhaps the Ukrainians can charge high transit fees from the Russians and partially offset the cost to the west of bailing out their economy while at the same time bleeding money from the Russians.  Something or anything as long as the end result worsens the Russians position and betters ours.

As time goes on there is less and less slack in the global system and the room for maneuvering decreases.  A little desperation creeps into everyone's thinking and the chance of miscalculation grows.  Eventually something will go wrong in a big way.     

[Shared Humanity]

I have always taken exception with the term "sustainable growth". The root cause of the problem we are facing is driven by our growth system. You simply cannot grow yourself out of a problem caused by growth.

Thought I would link to an article which looks at sustainable de-growth. I may not agree  with everything said but I do believe the  conversation we should be having worldwide is how to implement a sustainable de-growth system.

http://simplicityinstitute.org/wp-content/uploads/2011/04/FrugalAbundance1SimplicityInstitute.pdf

[Shared Humanity]

I thought I would post a single photo taken from space that shows, in stark contrast, the effects of the growth system when compared to a country that has avoided being included in our growth system. If a typical picture is worth a thousand words, this one is worth millions.

This is not intended as an endorsement of this particular nation that has avoided being absorbed, post WWII, into the growth system which exploded in neighboring countries. But if you think about what this one image says about energy consumption, carbon footprint, environmental degradation etc. then we can begin to question where we are and where we need to go.

This is a picture of South Korea, North Korea and portions of China. South Korea can be seen in the lower right of the photo. China can be seen in the upper left. North Korea is in the center of the photo.

[JimD]

SH!!

Advocating degrowth and living like NK?  Buddy the black helicopters are going to be coming for you. We have reeducation...err..detention camps you know.

[Shared Humanity]

As a follow up, I would like to provide some simple data that compares South Korea and North Korea. I will also ask two questions to trigger some conversation.

Question 1: Do you think that an enlightened liberal Democratic form of governance , instead of the brutal autocratic form that exists today, could provide North Korea, in its current state of economic development, a high quality of life? To expand on this, if such a nation were to have been prescient enough post WWII to have seen the foolishness of perpetual growth and instead had built a nation designed to deliver real non materialistic quality of life, could North Koreans now find themselves in a sort of utopia compared to the environmentally degraded state of developed nations?

Here is information regarding population densities by nation.

http://en.wikipedia.org/wiki/List_of_sovereign_states_and_dependent_territories_by_population_density

Question 2: What might these differences in densities suggest regarding the carrying  population of a human civilization that is no longer wedded to the growth system?

[Shared Humanity]

SH!!

Advocating degrowth and living like NK?  Buddy the black helicopters are going to be coming for you. We have reeducation...err..detention camps you know.

I hope this is snark.  Knowing you through your posts, I suspect it is. I qualified my post on the picture by saying I do not endorse North Korea. I leave that for Dennis Rodman. 

[JimD]

OK, I'll be good.

Re question 1.   You need to define for the purpose of the discussion "a high quality of life".

Re question 2.  Very hard to come up with but population density is not a good metric compared to population density per arable land.  Note Chad and Libya which have very low densities due to very large amounts of useless sand dunes.  It really boils down to whether there is enough land and water to grow enough food to be self sufficient in it.

[Neven]

Re question 1.   You need to define for the purpose of the discussion "a high quality of life".

Yes, this would be very interesting! Basic necessities + plenty of leisure time? And as a junkie, I would say Internet.

[Shared Humanity]

OK, I'll be good.

Re question 1.   You need to define for the purpose of the discussion "a high quality of life".

Re question 2.  Very hard to come up with but population density is not a good metric compared to population density per arable land.  Note Chad and Libya which have very low densities due to very large amounts of useless sand dunes.  It really boils down to whether there is enough land and water to grow enough food to be self sufficient in it.

Exactly. I was hoping to trigger thought about "quality of life" I would imagine we don't mean turning away from technology. We would still have the finest health care, exceptional education, ample shelter, food and clothing and leisure, lots of it.

[JimD]

It would seem that a quality of life which includes

We would still have the finest health care, exceptional education, ample shelter, food and clothing and leisure, lots of it.

is incompatible with a capitalistic economic system.  As is implied in your wording of question 1.  Even our somewhat socialistic capitalist versions in use today.  It is not clear to me that a liberal  democratic system (I am assuming that you mean liberal in the modern political sense and not Liberal in the pre-FDR economic sense?) can exist in the majority of cultures on the planet. 

For a large mass of people to operate an economic system which provides the quality of life listed above would require that the winner take all foundation of capitalism be abandoned and those individuals (of which there are multitudes in some cultures), who think completely from the "me" perspective and abhor the "we" perspective, be managed by group control dynamics.  A very difficult prospect.  Cultures like that found in the mainstream US populace would violently oppose such a change. All dominant cultures as typified by those developed in Europe over the last few hundred years have a strong track record of going out of their way to crush native cultures which were living under thought and governmental systems which were amenable to your quality of life.  How does our ideal manage to maintain its existence in a world full of such predators.

Is a culture based upon the ways of operating common to indigenous tribes compatible with all of your ideal quality of life requirements?

     

[OldLeatherneck]

Re question 1.   You need to define for the purpose of the discussion "a high quality of life".

Yes, this would be very interesting! Basic necessities + plenty of leisure time? And as a junkie, I would say Internet.

Answering these questions will have a significant impact on determining the true carrying capacity of the earth.  Imagine how happy the citizens of North Korea would be to have their standard of living improved by a mere 2 orders of magnitude improvement.  Also for a minute, imagine how enraged the average American would be if their standard of living were to be reduced by 3 or 4 orders of magnitude.  NOTE: The Americans would still be far better off!

When the term "quality of life" is used, I tend to think that it implies something more than having just a dwelling, basic sanitation and minimal nutrition.  For life to have some "quality" there must be certain levels of individual freedom(s).

The ultimate carrying capacity of the earth, depends on multiple factors:

1.  Peak global population when collapse begins.
2.  The availability of essential finite resources (post-collapse).
3.  The habitability of the earth's ecosystems (post-collapse).
4.  Remaining infrastructure and technological base (post-collapse).
5.  Minimum "standards of living" and quality of life" acceptable to the remaining societies.

I think the above statements reinforce what JimD has previously stated that we need the collapse to occur sooner rather than later.  The longer that collapse is delayed will only mean that the resulting societies will be rebuilding with fewer resources in a far more hostile climate regime.

Unfortunately, I believe that the vast majority of the world's governments are going to use all of their power to maintain BAU as long as possible.

[ccgwebmaster]

How does our ideal manage to maintain its existence in a world full of such predators.

Wait for said predators to largely consume themselves in an orgy of consuming destruction as resources become too limiting for the existing paradigm to run on the existing scale. Then rise from the ashes with the new paradigm and ruthlessly slaughter all societies encountered that still conform to the old paradigm (self defence, not only of the then present but also the future). If one felt nice you could try to re-educate them, but I'm not sure history lends itself to that - there is a risk the ideas would move the other way and contaminate the ideal.

Imagine how different the world might have been if the peoples who had lived in sustainable and relatively environmentally friendly manners had steadfastly rebuffed attempts to colonise their nations - instead of letting the invaders reach a critical mass whereby they could wipe out the natives? Or to speculate a little further - if those peoples living in that way had aggressively exported their lifestyle into the rest of the world during the thousands of years that they enjoyed social coherence? (ie they had a lot more time in which to try to achieve such a goal than the shorter lived societies that overconsumed and collapsed). Of course, I can't claim such a world would have known anything like current technological progress - these are mostly just idle thoughts waiting to form into a coherent concept.

[Shared Humanity]

It would seem that a quality of life which includes

We would still have the finest health care, exceptional education, ample shelter, food and clothing and leisure, lots of it.

is incompatible with a capitalistic economic system.  As is implied in your wording of question 1.  Even our somewhat socialistic capitalist versions in use today.  It is not clear to me that a liberal  democratic system (I am assuming that you mean liberal in the modern political sense and not Liberal in the pre-FDR economic sense?) can exist in the majority of cultures on the planet. 

For a large mass of people to operate an economic system which provides the quality of life listed above would require that the winner take all foundation of capitalism be abandoned and those individuals (of which there are multitudes in some cultures), who think completely from the "me" perspective and abhor the "we" perspective, be managed by group control dynamics.  A very difficult prospect.  Cultures like that found in the mainstream US populace would violently oppose such a change. All dominant cultures as typified by those developed in Europe over the last few hundred years have a strong track record of going out of their way to crush native cultures which were living under thought and governmental systems which were amenable to your quality of life.  How does our ideal manage to maintain its existence in a world full of such predators.

Is a culture based upon the ways of operating common to indigenous tribes compatible with all of your ideal quality of life requirements?

   

All valid observations and/or questions.  Obviously buried in the question is my belief  that the capitalistic economic system is inconsistent with our continued healthy relationship with the planet. We simply cannot continue to pursue unlimited wealth, as currently defined, and expect to have human civilization survive. We need to redefine "quality of life".

[Shared Humanity]

We would still have the finest health care, exceptional education, ample shelter, food and clothing and leisure, lots of it.

Is a culture based upon the ways of operating common to indigenous tribes compatible with all of your ideal quality of life requirements?

   

I do not believe and am not suggesting that we need to embrace a hunter gatherer way of living. It is ludicrous to say this is needed. I would expect that all of the progress we have made, technology, science, medicine, humanities and the arts would continue to enrich modern human civilization.

I am simply stating the obvious. We can no longer pursue a limitless materialistic culture and expect to survive. This is simple fact. The picture was posted because it captures the absolutely pervasive nature of the growth system which drives us. Both Koreas were in a virtually identical place at the end of WWII. One has had the growth system transform its way of living. The web of light is simply a dramatic way of showing how it has affected every aspect of its culture in less than 60 years. North Korea has not, for unfortunate reasons, followed the same path. The diverged paths have resulted in stark differences in a very short space of time. The growth system, delivering exponential change, will quadruple those differences in the next 60 years if they continue on their separate paths. This is unsustainable.


And don't suggest that North Korea was doomed to its current state of deprivation because they did not destroy their environment in the endless pursuit of growth. Their deprivation is due to a brutal autocratic regime. There is a middle ground. My hypothetical question was intended to start a discussion about what this middle ground might look like. This discussion is needed if we are to find a way out of this conundrum. The question was not intended to kick off another round of hand wringing and commiserating about the hopeless situation we are in.

[JimD]

SH

I was in a hurry when I wrote my post and left the wrong impression.

I did not mean to suggest we need to go back to a hunter-gather lifestyle.  That is impossible again due to the degradation of the Earth by civilization.  Just too much damage and it would also require shrinking population to about 1 billion.

What I meant to get across was that the 'methodology" of the practice of human government and focus would need to be along the lines of what typical indigenous peoples have used in the past.  That is where the focus of decision making is not oriented toward maximum individual freedom, sometimes to the great detriment of the group whole as we do now, but is rather oriented to continuing the smooth flow of living.  Little change and any change that is proposed is measured against its effect of the whole and the longevity of the group.  Those proposed changes which do not meet the high standard of being good for the whole and perceptually sustainable are rejected.  Violations of these decisions are dealt with harshly.

The trouble with this type of structure is that it is not competitive with the more predatory cultural practices that almost 100% of human cultures operate under today.  It is not that such a quality kind of life is not viable.  I was just reading this morning about an indigenous tribe in the Amazon which has largely succeeded in maintaining its old way of life.  To do this they have had to learn to operate in the political world of modern Brazil and also to resort to lethal violence at times.  They live in a fashion which is similar to the old days but with solar charging  batteries, tv, engine driven skiffs, etc.  But they are slowly losing the young people and in one more generation it will be gone.  Plus development is approaching and they will get pushed out eventually.

Do I think we could live the way they do (I mean here live by the above type of decision making process and by emphasizing the 'we' over the 'I') and have a healthy and good quality of life?  You bet.  If we planned to transition to a version of it with added technology to include some modern medicine and other appropriate technologies it could certainly be done.  If we chose that path to follow.  But we have to choose that path, we cannot force it.  Capitalism has to visibly fail and people have to choose to follow another path. 

[Shared Humanity]

Sorry JimD. I did not mean to get testy. I understand what you mean now. I do not believe this......

"Those proposed changes which do not meet the high standard of being good for the whole and perceptually sustainable are rejected.  Violations of these decisions are dealt with harshly."

This would suggest the implementation of a new way (more equitable manner) of organizing civilization will need to be from the top down. I would argue that there is no way that such a society can be created this way. This new method of organizing community must necessarily be built from the ground up, organically and locally first and then spreading into a diaspora of like minded communities.

[JimD]

SH,

This

"Those proposed changes which do not meet the high standard of being good for the whole and perceptually sustainable are rejected.  Violations of these decisions are dealt with harshly."

Was the common method of dealing with dissent from the group decisions.  If one persisted with doing something that the group banned the person was banished or even executed.  Indigenous cultures were not-nonviolent at all.

I agree with your latter point.  Organic growth of the 'ideal' life style has to start small and spread rather than our trying to implement it from the top down.  It is not that a top down implementation is impossible, but that it exceeds our basic capabilities in the real world.  But top down or bottom up enforcement will be required to control the basic 'I' 'me' selfish urges of the real barbarians.

[JimD]

Revised figures indicate US growth is lower than earlier estimates.  If the US economy, previously reported to be surging, is not actually growing fast then this will ripple across the world and impact the economies of  the developing world especially.

US "Fourth-quarter growth cut to 2.4 percent"

The U.S. government slashed its estimate for fourth-quarter growth as consumer spending and exports were less robust than initially thought, suggesting some loss of momentum heading into 2014.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said on Friday. That was down sharply from the 3.2 percent pace reported last month and the 4.1 percent logged in the third quarter....

...Consumer spending, which accounts for more than two-thirds of U.S. economic activity, contributed 1.73 percentage points to GDP growth, down from the previously reported 2.26 percentage points. As a result, final domestic demand was lowered two-tenths of a percentage point to a 1.2 percent rate.

The loss of momentum appears to have spilled over into in the first quarter of 2014, with an unusually cold winter weighing on retail sales, home building and sales, hiring and industrial production.

http://www.reuters.com/article/2014/02/28/us-usa-economy-idUSBREA1Q16020140228

[JimD]

Rome days away from bankruptcy

Eternal city warns it will go bust for the first time since it was destroyed by Nero....

....Marino said that buses may have to stop running as soon as Sunday because he only had 10 percent of the money required to pay for fuel in March.

He added: "With the money that we have in the budget right now, I can do repairs on each road in Rome every 52 years. That's not really maintenance."
 

http://www.telegraph.co.uk/news/worldnews/europe/italy/10666138/Rome-days-away-from-bankruptcy.html

[JimD]

Additional evidence that China is slowing and that options for keeping the growth bubble intact are shrinking.  Once again I point these events out to focus attention on the ability of individual (and the global aggregate) economies to execute green technologies and mitigate AGW effects.

http://www.bloomberg.com/news/2014-03-01/china-manufacturing-index-declines-to-lowest-in-eight-months.html

[JimD]

Turkey - digging a hole.

To see the problems of emerging markets look to Turkey

Not so long ago Turkey was the very symbol of the resurgence of emerging markets. Today it encapsulates their three most critical flaws: rising indebtedness, large current account deficits and stale political regimes......

Turkey is now on track to run a current account deficit of more than 5 per cent of GDP for its fifth straight year. This puts the country in a rare predicament. Since 1960, 15 large economies have run a current account deficit of this scale and duration. They include Poland and Norway in the 1970s, Brazil in the 1970s and 1980s, Thailand in the 1990s and Greece in the last decade.

Of these countries, 13 saw growth slow significantly over the subsequent five years, from a mean pace of 5.8 per cent to 3.2 per cent; and 11 suffered a currency crisis. If Turkey follows this path, its annual GDP growth will slow by half in the next five years, to barely 3 per cent. ‬‪For years, Turkey has relied heavily on outsiders to fund growth due to a host of factors, including its weak savings rate, its reliance on foreign sources of energy and raw materials, and its relatively backward export manufacturers.

http://www.ft.com/intl/cms/s/0/3eabb76e-a097-11e3-a72c-00144feab7de.html?siteedition=intl#axzz2usXgPUMh

[JimD]

A lot more info on China's increasingly tight financial situation is coming out.

The number of Chinese companies with debt double equity has surged since the global financial crisis, suggesting the first onshore bond default won’t be the last.

Publicly traded non-financial companies with debt-to-equity ratios exceeding 200 percent have jumped 57 percent to 256 from 163 in 2007, according to data compiled by Bloomberg on 4,111 corporates.
...

...Total debt of publicly traded non-financial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007. Some 63 companies have a debt-to-equity ratio exceeding 400 percent, compared to the average of 73 percent. In latest filings, 351 have negative ratios of earnings before interest, taxes, depreciation and amortization to interest expenses, while 409 have coverage of less than 1. Renewable energy, materials, household appliances and software companies dominate the rankings...

...“We’ve had trust defaults, we’ve had corporate defaults and we’ve had the currency weakening so there’s a whole bunch of indicators that say it’s getting worse in China,” 

http://www.bloomberg.com/news/2014-03-07/zombies-spreading-shows-chaori-default-just-start-china-credit.html

Chinese Bond Default Rattles Markets; Harbinger of More Credit Woes?

A corporate bond default should hardly be a headline dominating-event unless the default in question is of a particularly large concern, or is tightly coupled (as in could, Lehman-style, trigger more distress) or is a precursor of things to come. ...

...The China bears for years have pointed to China’s remarkable (or reckless) credit growth, with more and more companies looking like classic Minsky Ponzi units, dependent on new credit to meet existing obligations. A real determination by the authorities to tighten will put the entire Ponzi sector under pressure, and investors (and one expects the authorities too) don’t have a great handle on where the dead, or perhaps more accurately, zombie bodies lie. ...

...The post crisis loan growth in China, in tandem with visible signs that a meaningful proportion of it has little future economic value, has stoked worries that Chinese banks will soon be struggling with non-performing loans. .... and recall how Ernst and Young was basically bullied by the Chinese government into withdrawing a 2006 report that NPLs at Chinese banks were a stunning 46% of total assets of its four largest banks. Note estimates of the NPLs as a percent of total loans from that crisis vary widely, even excluding Ernst, from 20% to 40%).

http://www.nakedcapitalism.com/2014/03/chinese-bond-default-rattles-markets-harbinger-credit-woes.html

Some older articles.

http://globaleconomicanalysis.blogspot.com/2014/02/china-fooled-world-but-it-cannot-last.html
[/quote]

All bubbles pop eventually.

[Shared Humanity]

Anyone who has read my posts on the forum knows that I believe in the inevitability of the  destruction of our current growth system. The drivers will be primarily in the areas of finance as the logic of continued investment to achieve ongoing exponential growth breaks down. The breakdown will be forced on the system as we bump up against an increasingly larger number of limits imposed by the finite system (the planet) in which we operate. Think "peak anything" but think of how these "peak anythings", in the form of rapidly increasing investment costs and associated price increases disrupt the flow of goods and materials. These rapidly increasing costs will cause regions of the world to decouple from the growth system.

Here is a very interesting read regarding our shift to a "post-growth" economics. It is particularly useful in that it has a very large reference list.

http://www.postcarbonpathways.net.au/wp-content/uploads/2014/02/Post-Growth-Economics.pdf

[JimD]

China - Links on the current situation

http://www.macrobusiness.com.au/2014/03/chinese-bond-default-renews-hard-landing-fears/

http://www.macrobusiness.com.au/2014/03/china-default-special-ii-commodities-tumble/

http://www.businessinsider.com/chinese-market-march-10-2014-3

Environmental protection is expected to be one of top agenda items at the upcoming National People's Congress. This has caused many to shutter operations entirely and abandoned mills have been dubbed "zombie" mills.


But steel is also one of China's sectors burdened by excess capacity. And Stanway writes that many of the mills in Hebei are close to bankruptcy, as demand slows and the price of steel falls. He thinks these mills were bound to close anyway.

Zhang Yiqian at Global Times reports that this hasn't just meant a loss of jobs but a loss of savings for many villagers who put their savings into these mills. In some areas, China has tried to turn the abandoned land back into farms, but some are untenable for farming.

Dozens of "zombie" mills have popped up in and around Tangshan, an industrial city in China's Hebei province.

Asian markets tumble on weak Chinese economic data

http://www.bbc.com/news/business-26510500

http://www.macrobusiness.com.au/2014/03/dr-copper-ore-futures-gripped-by-panic-selling/

Additionally Japan's growth seems to be slowing.  There appears to be a significant drop off in commodity prices underway due to dropping Chinese demand and vast overcapacity (not to mention the vast excess of infrastructure they built to avoid the global recession coming home to roost).  Dropping commodity prices will ripple back to the suppliers like Australia and a number of the developing countries.  We are working on developing a global slowdown.

[JimD]

Hands down one of the best rants on capitalism and how it is going to kill us all if we don't overthrow it I have ever read.  And all wrapped around AGW.  Superb writing.

http://americablog.com/2014/03/whats-neoliberal-just-desserts-answer-climate-crisis-economy.html

[Shared Humanity]

Hands down one of the best rants on capitalism and how it is going to kill us all if we don't overthrow it I have ever read.  And all wrapped around AGW.  Superb writing.

http://americablog.com/2014/03/whats-neoliberal-just-desserts-answer-climate-crisis-economy.html

Thanks for the  link Jim. A great read. Provocative.

[JimD]

The 1% stripping Spain's national wealth.  This is what Ukraine is in for.

Round Two of the Global Financial Sector’s Takeover of Spain

When it comes to inheriting dodgy landlords, few people have it as bad as the tenants of a number of social housing projects in Spain. At the beginning of November 2013, thousands of social housing occupants, both in the capital and beyond, received letters notifying them that the government had sold their apartments. In many cases, their new landlord was a little-known, innocent-sounding investment fund called Cibeles.

But who does Cibeles belong to? Well, it didn’t take the tenants much digging to uncover the real owner of the investment fund, and by extension the houses they lived in. It was none other than Goldman Sachs, the dreaded reaper of Wall Street. Cibeles’ investors, meanwhile, include such household names from the hedge fund industry as George Soros and John Paulson....

However, what  happens once their contracts run out is somewhat less clear. According to the socialist MP Antonio Fernández Gordillo, once the investment funds’ obligations have run their course, in roughly two and a half years’ time, the companies could offload each property for up to 187,000 euros a piece [assuming, that is, Spain’s property market finally turns the corner -- a big f***ing "if"]. Whatever happens, the bank and its illustrious clients can expect a healthy return on their initial outlay of 67,000 euros per flat — especially given that, unlike Spanish residents, overseas investors like Goldman get to pay zero percent corporate income tax on their returns.

While the financial press raucously cheers on Spain’s illusory recovery, the next stage of the country’s crisis begins: the country’s transformation into a full-blown rentier society. Already tens of billions of euros of public funds have been squandered on keeping Spain’s last remaining banks afloat.

But that was just the beginning: now comes the real plunder, as the Spanish banks’ juiciest real estate assets are quietly transferred onto the books of the world’s largest financial institutions. Shopping malls, office buildings, industrial estates (for those with a voracious appetite for risk) and residential properties… all are being snatched up at bargain basement prices.

Of course, none of this is happening by accident. The pillage of Spain, as with that of Greece, is going according to a finely-tuned script...

Their short-term goal? To rip apart financial regulation across the planet. And long-term? Nothing less than the complete consolidation of financial power and wealth across the globe, a process that is unfolding and gathering pace right before our sleep-filled eyes.

They will do anything to keep their ROI at the appropriate levels.  Plunder!  Pirates! Rape and pillage! 

http://ragingbullshit.com/2014/03/11/round-two-of-the-global-financial-sectors-plunder-of-spain/

[JimD]

Further stumbles in China.  We have the 2nd company oriented towards renewables in danger of default on its bonds.  Plus the slowing economy there has now resulted in a crash in copper prices.  This, of course, hits a number of developing countries especially hard.

So what's going on in China that's got people on edge?

Well in addition to the economic weakness, and the weakening yuan, people are having jitters about a possible second bond default. (China had its first domestic corporate bond default last week when a solar company defaulted)...

To the media in Mainland China, the delisting of TBE bonds is not a big piece of news because TBE was already in a law suit on its other debt, and the “new energy” sector was in deep trouble anyway (as what we saw in Wuxi Suntech and Chaori). TBE is in the business of making power transmission equipment, but in recent years has heavily invested in the ill-fated new energy sector and has resulted in two straight years of loss with the loss in 2013 surging to RMB5.2bn.

http://www.businessinsider.com/morning-markets-march-12-2014-3

From an article in Nov 2013 when copper was already sinking.

I expect a severe bear market in copper prices to occur when China’s economic bubble ultimately pops, and it will cause significant damage to the emerging market economies that heavily rely on copper exports, particularly Peru, Chile, Zambia, and Congo. A bear market in copper prices will also contribute to the popping of the emerging markets bubble that I have been warning about. Other major copper producing countries that will be affected are the United States, China, Australia, Russia, Canada, and Mexico.

One of the places most likely to take a big hit with the dropping commodity prices is Australia.  They are in the middle of a giant property bubble and as they say "What goes up must come down." and this is just the kind of financial event to trigger a big fall. 

http://www.forbes.com/sites/jessecolombo/2013/11/13/if-this-chart-breaks-copper-and-copper-exporters-will-plunge/

[Anne]

Don't you think that copper is going into a sort of hog cycle? China can't afford to stockpile, ergo not buying, ergo prices go down... And then...

[JimD]

Anne

Sure it could work that way.  But then the exporters are going to receive a lot less money than they planned on. Negatively impacting their national finances.  Slowdown.  Or maybe the Chinese have plenty of copper already and they don't buy for a long time.  Then it gets ugly for the exporters.  There are lots of ways this could turn out, but it seems increasingly likely that a broad slowdown in the global economy is underway.  We will know for sure in a few months.

Some are thinking we are going to see deep slowdowns all over the world.  Many of the developing worlds economies are sinking and China appears on the verge of slowing way down.  Europe overall is struggling and the US is not doing anywhere near as well as our news media is trying to claim.  We have a prefect recipe for a broad recession.  This would have a big impact on the ability to promote any kind of real response to AGW and in many cases could reverse work on renewables and environmental protections. 

There seems to be good reason to think that over the next 30 years we will see repeats of the recent global financial crises.  Over and over again as we continually have to reset the system due to the increasing stress of declining EROEI, resources, AGW effects, etc.  It demonstrates just how difficult it would be to pay for converting industry away from fossil fuels even if we could get the political will to do so. 

[ccgwebmaster]

Some are thinking we are going to see deep slowdowns all over the world.  Many of the developing worlds economies are sinking and China appears on the verge of slowing way down.  Europe overall is struggling and the US is not doing anywhere near as well as our news media is trying to claim.  We have a prefect recipe for a broad recession.  This would have a big impact on the ability to promote any kind of real response to AGW and in many cases could reverse work on renewables and environmental protections. 

There seems to be good reason to think that over the next 30 years we will see repeats of the recent global financial crises.  Over and over again as we continually have to reset the system due to the increasing stress of declining EROEI, resources, AGW effects, etc.  It demonstrates just how difficult it would be to pay for converting industry away from fossil fuels even if we could get the political will to do so.

If I were to pick a buzzword here, I think it would be demand destruction.

As prices rise the feasibility of operating elements of modern civilisation (the more discretionary ones in terms of any given commodity) start to shrink. Those elements are then discarded and the price comes down again. The demand destruction in this case is essentially permanent as we are not going to magically have more resources and are hitting limits of all sorts now and in the foreseeable future.

We've seen it happen with oil having peaked already. The response to perpetually high prices for petrol/gas is that people try to combine trips more, look for more fuel efficient cars (or a way to not have a car), and so on. Those lifestyle changes tend to be permanent and to destroy that section of economic activity (which yes, is a potential driver of massive recessionary steps down as we are not tending to replace it with sustainable activity, nor changing our benchmark or system to get away from growth fixation).

I don't see why the same cannot happen with copper too?

The price of any commodity should follow the same pattern - it cannot arbitrarily keep inflating, as by doing so it is pressuring other areas of the economic market place (just as high gas/petrol prices cause poorer americans problems buying food).

I view this process are correlating with collapse, indeed acting in some measure as both a driver and a consequence.

On this note - considering the implications of this process - and viewing the workers/population as a resource also - what about the impacts of demand destruction upon employment, and hence food affordability and social cohesion? (even in more affluent and better resource supported nations)

[Shared Humanity]

ccgwebmaster.......Great comment!

[JimD]

ccg

On this note - considering the implications of this process - and viewing the workers/population as a resource also - what about the impacts of demand destruction upon employment, and hence food affordability and social cohesion? (even in more affluent and better resource supported nations)

As my brother, who was one of the many architects of globalization, told me.  The purpose of globalization is to eventually turn labor into a commodity (labor arbitrage he called it).  So high unemployment is a feature not a bug as it allows corporations to force wages to the bottom and reduce their expenses.  People are just resources.  This bothered him not in the least.  Sweet.

[crandles]

As prices rise the feasibility of operating elements of modern civilisation (the more discretionary ones in terms of any given commodity) start to shrink. Those elements are then discarded and the price comes down again. The demand destruction in this case is essentially permanent as we are not going to magically have more resources and are hitting limits of all sorts now and in the foreseeable future.

The price come down again - but presumably still higher and not low enough to restart the discretionary processes. What might come down more is the price of labour as more people are made unemployed.

This should have the effect of starting more sustainable activities. e.g. some recycling may currently be uneconomic but with lower labour costs and higher material costs more recycling should become economic. Thus providing more materials for some of the discretionary processes.

[JimD]

The price come down again - but presumably still higher and not low enough to restart the discretionary processes. What might come down more is the price of labour as more people are made unemployed.

This should have the effect of starting more sustainable activities. e.g. some recycling may currently be uneconomic but with lower labour costs and higher material costs more recycling should become economic. Thus providing more materials for some of the discretionary processes.

Exactly.  We can be scavengers at the dump.  Hey a job is a job.

http://www.sdcitybeat.com/sandiego/article-5368-home-sweet-dump.html

[crandles]

As my brother, who was one of the many architects of globalization, told me.  The purpose of globalization is to eventually turn labor into a commodity (labor arbitrage he called it).  So high unemployment is a feature not a bug as it allows corporations to force wages to the bottom and reduce their expenses.  People are just resources.  This bothered him not in the least.  Sweet.

But should high unemployment be a feature not a bug, allowing people more leisure / quality family time?

Obviously it is better for social cohesion if nothing else, if lots of people have a small amount of work rather than some wealthy employed people without time and lots of unemployed people with no money to do anything.

Unfortunately companies would prefer a few effective people than have to train lots of employees, so it isn't easy to aim for lots of jobsharing

[JimD]

crandles

But the only way unemployed people in a capitalist economy who are unemployed can have the resources to have that leisure and quality family time is if the system bequeaths to each one a minimum set of resources which allows them to live a minimal but adequate lifestyle.  That is certainly not going to happen in a great n umber of places.  The US especially.  And as AGW and overpopulation dramatically restrict per capita resources over time I expect that the system will just let them starve.  Or help them starve.

http://www.thenation.com/article/178845/town-turned-poverty-prison-sentence

[Shared Humanity]

The price come down again - but presumably still higher and not low enough to restart the discretionary processes. What might come down more is the price of labour as more people are made unemployed.

This should have the effect of starting more sustainable activities. e.g. some recycling may currently be uneconomic but with lower labour costs and higher material costs more recycling should become economic. Thus providing more materials for some of the discretionary processes.

Exactly.  We can be scavengers at the dump.  Hey a job is a job.

http://www.sdcitybeat.com/sandiego/article-5368-home-sweet-dump.html

Wages in India are low enough that all garbage is scavenged for recyclables.  (see picture)

The industry is so large that the waste pickers are organizing.

http://globalrec.org/tag/alliance-of-indian-waste-pickers/

They also hold training classes for waste pickers. (see picture)

[JimD]

What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?

If you said a short list of commodities manipulated by the Too Big To Prosecute banks, you are probably right, but the answer we were looking for is that these are all the various, and increasingly more ridiculous, commodities that serve to make up the bulk of China's hot money flow (those flows into China which are not reflected in the current account flows or FDI) facilitating synthetic structures, also known as Chinese Commodity Funding Deals. ...

So what has changed since last May, in addition to the realization that virtually every hard asset is now being used by China to mask hot money inflows into the Chinese economy taking advantage of rate differentials between the Renminbi and the Dollar? Well, this time around China may finally be serious about normalizing its epic credit bubble, which as we pointed out before, added a ridiculous $1 trillion in bank assets in just the fourth quarter of 2013 alone. Specifically, as Goldman notes in a just released analysts on the future of CCDS, "the recent managed CNY depreciation is a signal that the government wants to increase FX volatility and reduce the hot money inflow pressure gradually."

In other words, the day when the Commodity Funding Deals finally end is fast approaching.

Copper plunged again today.

http://www.zerohedge.com/news/2014-03-18/what-common-theme-iron-ore-soybeans-palm-oil-rubber-zinc-aluminum-gold-copper-and-ni

A growing concern for the global economy is inflation.

 

We’ve recently detailed this issue for the US economy here and here.

 

Global Central Banks, concerned with a potential deflationary collapse, have allowed inflation to seep into the financial system. In developed nations like the US, this puts a squeeze on consumers. But in emerging markets like China, inflation is outright disastrous.

 

Nearly 40% of China lives off of $2 a day. Your average college graduate in China makes just $2,500 per year. In an economy such as this, a rise in prices in costs of living can be devastating for the population.
....

http://www.zerohedge.com/contributed/2014-03-18/signs-inflation-china%E2%80%A6-and-what-they-mean-markets

[Shared Humanity]

JimD.....

I actually believe we run the risk of suffering from inflation and deflation simultaneously. The deflation and inflation will appear in distinct ways in various regions of the planet. It will also occur simultaneously in single regions but affecting commodities ddifferrently. China has had an arguably overheated economy for a decade and inflation should result. The general "demand destruction" environment that the world wide economy is suffering will cause fairly widespread deflation as well.

[JimD]

SH

You know a lot more about this than I do that is for certain.  My understanding is that when actual deflation kicks in it is difficult to stop, guaranteed to have major dislocations of the specific economy and will be a long term problem.  As in there is no easy fix and in our current global circumstances it will be very difficult for a place which has deflation kick in to get out of it.  What are your thoughts.

[Shared Humanity]

SH

You know a lot more about this than I do that is for certain.  My understanding is that when actual deflation kicks in it is difficult to stop, guaranteed to have major dislocations of the specific economy and will be a long term problem.  As in there is no easy fix and in our current global circumstances it will be very difficult for a place which has deflation kick in to get out of it.  What are your thoughts.

Widespread deflation is devastating. It feeds on itself in a way that can disrupt local, national and global economies for decades. One concurrent feature is demand destruction which has the effect of driving deflation which causes more demand destruction which, in turn, accelerates deflation. They are self reinforcing. This is due, in part, to the wealth effects of deflation. Asset prices drop precipitously (think of the U.S. housing bubble) which causes less wealthy individuals to cut back on consumption.

The financial panic which began in 2007 brought us precipitously close to a depression. (It would have been far worse than the 30's because the global economy is so much larger.) This is why western nations pulled out all of the stops to stabilize the banking system. It helped. It prevented a catastrophe but we are not out of the woods. Entire areas of the world economy are still in a state of dramatic demand destruction. Think Spain and Greece where unemployment is 30% or greater.

Why are we in a very dangerous state right now? There are really very few financial tools left to prevent another major shock. Interest rates across developed nations are still at historic lows. QE (Quantitative Easing) was a financial trick to flood the U.S. economy with money. This would normally result in inflation, even rampant inflation. Why hasn't it? Because the demand destruction is overwhelming the impact of easy money.

Another thing to consider is how "real" interest rates behave in a deflationary environment. A nominal rate of .01% is actually a far higher "real" interest rate if we are suffering a 2% annual deflation. This discourages investment and reinforces the tendency to not invest in an economic environment that is dominated by demand destruction. In this situation, lowering interest rates loses its ability to increase borrowing and investment. Flooding the market with easy money is a little like pushing on a string. The front of the string does not move. Only increasing demand can pull the string (the economy) forward.

U.S. corporations are sitting on record amounts of cash. There are simply no investments worth making. Individuals are doing the same thing as the U.S. housing market has hardly budged. Why would you buy a home when your expectation is that the value of the home will drop?

Who are the big losers in a deflationary environment? Debt holders! All of them. Think about the mountains of bank debt, government debt and personal debt out there. What should you do to protect yourself? Reduce your personal debt. Reduce your investment exposure to debt and equity instruments. Cash is king. Of course, if the opposite is the case, if we are heading towards a period of rampant inflation, do the exact opposite. Buy stuff, lot's of it. The inflating asset prices will make the debt your holding seem paltry in a very short time frame.

My bet is on deflation.

[JimD]

SH

Given this global financial environment you describe I am interested in your opinions on a couple of questions.

Do you think the declining EROEI of our energy sources over the last few decades materially contributes to getting us in this financial situation?  I am thinking that a lot of the easy economic growth was actually supported by the almost free wealth provided by fossil fuels and with an EROEI in perpetual decline there is little prospect for any meaningful fix to our structural economic problems.

In such a financial situation, assuming it is not going to get better and might well get worse, what would be the effect of actually trying to implement one of the proposed BAU fixes like converting the power generation system over to all renewables.  In a deflationary or stagnant economic situation with declining EROEI how would this play out?  Large capital expenditures are absolutely required to maintain sufficient infrastructure like existing power plants, roads, bridges, railroads, buildings, the military, and so on, or society fails to continue functioning.  If at the same time even larger capital expenditures are required to build out an entire replacement infrastructure for the fossil infrastructure what is likely to happen in economic/financial terms?

[Shared Humanity]

SH

Given this global financial environment you describe I am interested in your opinions on a couple of questions.

Do you think the declining EROEI of our energy sources over the last few decades materially contributes to getting us in this financial situation?  I am thinking that a lot of the easy economic growth was actually supported by the almost free wealth provided by fossil fuels and with an EROEI in perpetual decline there is little prospect for any meaningful fix to our structural economic problems.

In such a financial situation, assuming it is not going to get better and might well get worse, what would be the effect of actually trying to implement one of the proposed BAU fixes like converting the power generation system over to all renewables.  In a deflationary or stagnant economic situation with declining EROEI how would this play out?  Large capital expenditures are absolutely required to maintain sufficient infrastructure like existing power plants, roads, bridges, railroads, buildings, the military, and so on, or society fails to continue functioning.  If at the same time even larger capital expenditures are required to build out an entire replacement infrastructure for the fossil infrastructure what is likely to happen in economic/financial terms?

You are absolutely on the mark. EROEI is what drives growth. A portion of the profits are reinvested in order to produce more of what is being consumed. The growth system will sustain itself as long as there are opportunities to invest a portion of the profits that have adequate returns. Take the oil industry. 100 years ago, we could drill a well and it would gush a seemingly endless stream of highly profitable oil. We now need to pressurize wells in order to extract the stuff. We also are having to focus on unconventional sources (tar sands and fracking) which are even more expensive to extract and refine. There will be a point where no further extraction is worth the investment because the returns will not support the investment.

This is what I meant by structural issues for the larger global economy. The dilemma and the cause of the Great Depression was structural. There was not enough demand and consequently not enough investment opportunities to sustain the system. The system collapsed as a result. Capitalism worked its way out of this dilemma in the latter half of the 20th century by expanding its reach and absorbing most of the remaining world into the system. Investment opportunities with high EROEI moved overseas, first Japan, Taiwan and South Korea and followed by the rest of Asia, and it helped to sustain the system for the last 60 years, since WWII. This is what drove the rapid investments overseas. Unless we find other areas to exploit via investment (resource extraction doesn't count, it needs to have a consumer component as well to meet the demand side of the equation.)

Think about this and add the fact we are bumping up against resource constraints, real hard limits to growth. These constraints are not just things like oil but more basic items like water, land and atmosphere. When you look at the entire system, it is fairly easy to get very pessimistic.

I believe the growth system will collapse before we can build out a sustainable infrastructure. The primary reason for this is the very logic of the system. The current built infrastructure means that the EROEI for further fossil fuel extraction is higher than trashing it and starting over. Having said this, all is not lost. Having the system crash does not mean we lose our technology. It simply means that the rationale for doing things will no longer be EROEI. We will still be highly motivated to do the things we need to do. The motivation will be existential instead of profits. I imagine that it will look like the world wide equivalent of the Marshall Plan which rebuilt war ravaged Europe. It was not done because it was profitable. It was done because it was necessary.

[ccgwebmaster]

But should high unemployment be a feature not a bug, allowing people more leisure / quality family time?

Certainly it would be nice - and to anyone with a mind for fairness and sensibility seems the right thing to do. We should all be more French... in that way.

Obviously it is better for social cohesion if nothing else, if lots of people have a small amount of work rather than some wealthy employed people without time and lots of unemployed people with no money to do anything.

Better for the people - sure - better for the government and corporations, no, not really.

If you have one chunk of your population struggling in desperate poverty and the other working flat out in fear of losing their job - I think you have pretty strong levers of control over both chunks. Give everyone enough to live on, and - dangerously - spare time in which to organise, reflect - and challenge the system - and they might be harder to control? The one tool a corporation has over a person to force them to work ever harder for less is fear - that they can easily be replaced by many other people.

In many ways that's the sad thing about the state of the world and the future we face - it could all have been avoided, and the solutions are in many instances just a question of basic justice and common sense. And yet - they are almost impossible to achieve, perhaps because by definition the wrong sort of people end up with the wealth and power...

[JimD]

SH

Interesting article in light of our discussion yesterday.  Warning it is pretty nasty.

http://www.nakedcapitalism.com/2014/03/mathew-d-rose-hello-european-deflation-good-bye-periphery.html

[JimD]

Morgan Stanley thinks China is on the verge of what for them would be a recession

...Based on our analysis, our baseline case is that China may slow from the current level of 7.7% Gross Domestic Product (GDP) growth to 5.0% over the next two years. A disorderly unwind could take Chinese growth down to 4% in a shorter time frame with potentially disastrous consequences for levered Chinese assets (banks, property) and the entire commodity supply chain (commodity stocks, equipment stocks, commodity-sensitive countries and their currencies)....

If that happens a lot of folks are going down with them.

Work by Nomura’s Chief China Economist indicates that more than half of Local Government Funding Vehicles, which borrow money on behalf of local governments to invest in infrastructure, have insufficient cash flows to pay interest or principal; the exact manifestation of Minsky’s Ponzi finance regime. Total local government debt adds up to RMB17.9 trillion (nearly $3 trillion) according to the latest, likely understated, national audit. In addition, estimates show that up to one third of all new borrowings are currently being used to roll over existing debt, and that interest payments on debt represent nearly 17% of Chinese GDP—a staggeringly large number (which excludes principal repayments) and which is nearly double the level that the U.S. reached in 2007. (Display 3)

Lots of other bad numbers.  Folks who export to China need to tighten their belts and hunkerdown. The EU and Japan are big ones for non-commodities.

China’s main imports are electromechanical products (43 percent of total imports). The country is also one of the biggest consumers of commodities in the world. Among commodities the biggest demand is for crude oil (12 percent of total imports), iron ore (5 percent), copper, aluminum and soybeans. China’s main import partners are: European Union, ASEAN, Japan, South Korea and Taiwan. Others include: Australia, South Africa and Brazil.

http://www.macrobusiness.com.au/2014/03/morgan-stanley-chinas-minksy-moment-is-here/

[Shared Humanity]

If generalized deflations sets in, (comprising most of the developed and developing world) asset and commodity prices (all forms with the possible exception of food) will retreat significantly. This will not be a uniform retreat but will be dependent on the underlying demand, which will be falling, for the specific asset or commodity. Commodities whose prices tend to be speculative in nature (think gold but other metals are also included) will suffer the most. One such speculative investment where prices are driven by emotions are equities.

Another effect of this deflation will be a gradual decoupling of the world economy. This occurred during the Great Depression as individual nations tried to protect themselves by setting up trade barriers and insulate themselves from the larger economy. The impact was actually to accelerate the deflation as demand fell further. The difference today is that trade represents a far larger component of domestic economies.

JimD....

Your article regarding China specifically addresses the risk that debt holders face in such an environment.

[ccgwebmaster]

Another effect of this deflation will be a gradual decoupling of the world economy. This occurred during the Great Depression as individual nations tried to protect themselves by setting up trade barriers and insulate themselves from the larger economy. The impact was actually to accelerate the deflation as demand fell further. The difference today is that trade represents a far larger component of domestic economies.

There are however real limits to how fast you can decouple from the world economy in most cases, given that both resources and processing thereof have tended to become specialised into regions - with long and potentially vulnerable supply chains interconnecting everything. That (in my view) is a key element to collapse (when it really starts to hit widely) having a much faster and wider effect than it otherwise would - the interconnectedness acts to transmit fragility by the same means it was used to transmit resources or processed goods.

There are limits to how fast (or even if...) you can decouple based upon both physical resource limits and where the supplies are located, but also in terms of unavailability of infrastructure and expertise - for instance as manufacturing has increasingly moved to China and that region - the expertise and infrastructure in other nations has gradually withered away.

It isn't an option to decouple to anything like the same extent it might have been at one point. You keep those routes open - or you make do without that particular dependency (sacrificing the most disposable things first of course - presumably trying to use the military to retain access to the least disposable things).

[JimD]

ccg

You make a good argument for the opposite of empire building and maintenance.  It is obviously going to be impossible to maintain that structure long term so what we should be doing is severing all of those global ties of which it is currently possible to do and deliberately choosing to reduce complexity.  If you know you are going to eventually fall it is better to get closer to the ground before you take the dive.