Peak Resources: debt

Showing posts with label debt. Show all posts

Economic growth as people know it, in terms of GDP, has stagnated and started to turn negative. Most reactions to the absence of growth have consisted in trying to get it back again as fast as possible, whatever the cost, further degrading the biosphere at an accelerated rate. We have seen low interest rates, debt expansion, bank bailouts, government stimulus, land-grabs, tax havens, fiscal austerity, and stock buybacks etc. Most of these things did nothing to increase the wellbeing of ordinary people but greatly profited the richest in society. The massive debt overhang from such policies have now become a burden on the real economy. All it did was to divert people's attention from the inconvenient truth that there will be less material goods and energy flows in the future, not more.

This massive wastefulness of resources comes at a time when we could have used those means to invest in benefitting projects like affordable housing, a basic income, low carbon infrastructure, ecologically sound agriculture, adaptation to climate change etc. Instead we have chosen to let the oceans contain more plastic than fish and species go extinct a thousand times faster than any time in the last 65 million years. The central bank and governments desperate policies after the 2008 financial crisis is the biggest failure in our time. When the next crisis hits, which could be very soon, there will be neither fiscal nor monetary room for manoeuvre.

In his latest paper Tim Jackson show how declining growth in the real economy caused by resource limitations has led to increasing economic inequality. A factor that greatly increases the instability of a society. The rising inequality that has haunted advanced economies over the last decade is a direct consequence of policy decisions trying to promote growth in a dying capitalistic society that cannot be supported by underlying fundamentals. All it has done is to redistribute wealth from the bottom to the top. The growth fetish has hindered ecological investments, reinforced inequality and exacerbated financial instability. The social and ecological prosperity that once was is being undone by this allegiance to growth at all costs.

As shown in the HANDY-model (2014), overexploitation of both nature and labour leads to a fast total collapse of society. Economic stratification is a symptom often found in many past collapsed societies and is an outcome of elite overconsumption in a society overshooting its ecological carrying capacity. Such a collapse often lead to inequality-induced famine, due to widespread poverty, that causes the loss of workers rather than a collapse of the ecological base itself. Elites consumption keeps growing until the society collapses.

This is a very ugly possibility. And it shows just how important issues of ecological degradation and inequality are for social stability. The fact that we see widespread resource/economic inequality indicate that we, some societies more than other but talking globally, are far gone in the process towards collapse.

However, in another paper by Jackson, there are post-growth scenarios that dont necessarily lead to increasing inequality. Jackson claims that it depends on three structural features of the economy: elasticity of substitution between labour and capital, the dynamics of the capital-to output ratio, and the behaviour of the savings rate. Under conditions more favourable to wage labour (than capital) measures like a tax on capital and a universal basic income can decrease inequality even as growth decline. However, these measures are insufficient to reduce inequality when institutions aggressively favour capital over labour.

Credit: Devfactory, CC-BY-SA 2.0

Another great systems theory based book on why nations fail is out. This time its academic, journalist and writer Nafeez Ahmed, who long wrote for the Guardian but now has his own crowdsourced news site (Insurge-intelligence), who has delivered the goods.

In his book, "Failing states, Collapsing systems: Biophysical Triggers of Political Violence", Nafeez presents the essential data on resource depletion, net energy decline, economic stagnation (debt bubble) and ties it nicely together with the acceleration of civil unrest around the globe. It's a big picture analysis of how the triple crises of energy, climate and food production impact societies around the world. A current example, according to Ahmed, of how these multiple stressors interact and can lead to systemic failure is war torn Syria.

Syrian oil production peaked in 1996 while population, and thus consumption, kept increasing. By 2008 the government, who relied on petrol money for maintaining the state budget, had to slash fuel subsidies which tripled the price of petrol and food almost overnight. A huge deal to anyone already spending almost half of their income on food. At the same time as an ongoing drought in the eastern part of Syria devastated harvests and drove people from the countryside into the cities. Yemen experienced a similar fate of depleting resources, peak oil, and the resulting high vulnerability to shocks. Based on these two cases it takes about 15 years for a country that experiences its peak in oil production before additional pressures, such as climate change, contribute to systemic failure.

It's not only the Middle East. Many other countries, for example Mexico, are well on their way of having little to no extra oil to export for keeping their budget in balance or pay for subsidies that people depend on. And the counties who are still able to import some oil or have some mix of energy sources to depend on will be a target of immigrants looking to flee bankrupt and failing nations. Which in turn will fuel the nationalist sentiments and a grab for what's left, military interventions. Something we are already witnessing in Europe and the US.

For a summery version of the book, read "How global economic growth will drown in Trump's oil glut after 2018"

Heading for the next financial crisis?

When it comes to the topic of economics there are few trustworthy academics who know what they are talking about. However, an excellent one is prof. Steve Keen at Kingston University. He uses dynamic models and includes banks and credit/debt as key parameters to understanding financial crises. Something neoclassical economists totally ignore, which is ridiculous of course.

In one of Steve's latest blog posts, at debtdeflation.com, we find this interesting slide showing countries with rapid credit growth and accumulation of private sector debt since 2008. According to Keen these are the future debt-zombies, with a debt ratio of over 150% of GDP. Sweden (brown line) is among the worst of all countries and headed for a crisis. With private debt soaring to 237% of GDP and growing 15% of GDP per year it becomes clear that this is unsustainable and will have to end. Changes in the massive property bubble in Sweden will likely be a key indicator to the coming downturn. The new mortgage repayment requirements may function to slow down credit growth, and if so, most likely popping the bubble. We can't predict when the crash will happen but that it will happen is a sure thing.

Source: Steve Keen, presentation on growing private sector debt and financial crises

As for the US we can see in the chart below how credit growth picked back up again in 2010 after some deleveraging (2008-2009) but has once again started a downturn. A pattern similar to Japan's zombie-economy with rising and falling credit leading to recessions and ever more financial trickery from central banks.

Source: Steve Keen, presentation on inequality, debt and credit stagnation

This will affect the unemployment levels as, Keen shows in the chart below, there is a strong correlation between changes in credit and unemployment rates. More than 45 million Americans, about 20% of the population, are already on food stamps. According to shadowstats, real unemployment in America is at 23% as of May 2016, not 4.7% as the government claims. Not counting people who have stopped actively looking for a job, cherry picking data, is very dubious and has lead many mainstream media pundits to scratch their head as to "why so many americans are on food stamps?".

Because there is so much misinformation and propaganda regarding the true state of affairs most people will be surprised when the next crisis hits. They will be angry as to why politicians have not informed them of the dangers and will be even less happy when the government asks for more tax money to once again bail out the banks. But certain homogenous societies may still be stable despite such hardships, as is the case with Japan. While others may experience uprisings and mayhem.

Taking action to protect yourself and your community, getting out of debt, is all one can do at this point. Governments around the world are so blinded by their addiction to credit growth that they will do anything to keep the bubble going. Even if it only increases the income gap between the rich and the poor. Getting out of debt and investing in alternative energy sources and food production is the safer bet. And something we should all do to protect our families and future generations.

Coastal permafrost collapsing. Source: USGS Alaska Science Center

I have been away from blogging for a while but decided to try and pick it back up today. So much has happened this spring that I haven't been able to write about so I decided to pick out some key trends/headlines that I found most important.

1 - Civil war in Turkey!? Turkey houses some 2.6 million Syrian refugees, out of the more than 4.7 million Syrians who have fled their country’s civil war. Turkey is also currently engaged in the conflict in Syria fighting (US supported) Syrian kurds more than ISIS due to fears of escalating internal conflict. But the Turkish strategy backfired as three suicide bombings in three cities killed 150 people and shocked the nation. Experts now fear that the Turk-Kurd conflict inside Turkey could turn into a full blown civil war if hostilities keep increasing. Erdogan is supposed to have asked Obama to halt support to the Syrian kurds YPG which has close historic ties with the Turkish kurds, PKK. However, that has not happened since the YPG is fighting ISIS, and so the confusing war in Syria continues while another one is brewing in Turkey.

2 - Extreme February Temperature Anomaly shows worrying signs of a potential non-linear response to continued global warming, but probably due to a strong El Niño. According to NASA scientists the average global temperature in February was about 0.5 degrees Celsius warmer than the previous record set in 1998 and 1.35 degrees above the 1951-80 average. The average global atmospheric CO2 level reached 402.59 ppm, according to NOAA. Vietnam, Zimbabwe and Fiji suffered major economic losses from February droughts and storms as reported by Wunderground.

3 - How the refugee crisis turned out to be a major preparedness crisis. A prime minister that was invisible when the crisis erupted. A director-general that played golf and ran marathons. Prognoses which were completely wrong, greatly underestimated the number of refugees. Total lack of coordination and pressing decisions that were put on hold. The Swedish government's handling of the refugee crisis has been a complete mess. Politicians kept denying the facts until there were no more beds, no more supplies and no willingness to comply. And so they had to change policy. On the 4th of January border patrol with ID-control between Denmark and Sweden was enforced, delaying all traffic with some 20-60 minutes every day. According to the Immigration Office some 81% of refugees lack any kind of identification papers when they arrive. It is still too early to tell the consequences of such major mismanagement of a country.

4 - The Panama Papers Scandal shows just how widespread and pervasive tax evasion and government corruption is at the moment, from prime ministers to global banks. The leaked 11.5 million files includes nearly 40 years of data (1977-2015) on offshore secrecy and and includes names of high-level politicians, such as the president of Argentina and Iceland's prime minister etc. I'm surprised there has not been a bigger outrage over this topic, but then again, maybe because it was somewhat expected in our grossly unequal society.

5 - Negative Interest Rates madness continues despite its ineffectiveness. The only thing that has changed here in Sweden in regards to this topic is that people are piling up ever more private debt, or going bankrupt, with a major increase among 18-25 year olds. The housing bubble is still going strong and our dear politicians are already backing on implementing harsher mortgage repayment requirements decided upon in 2015. Perhaps it's because they realize they might prick the bubble or the fact that so many now rely on an income generated by flipping property.

Brilliant economist Steve Keen writes in FORBES that Sweden rank as top 3 on highest risk for a debt crisis within the next one to three years. Looking at the graph below it becomes rather obvious that the current credit growth trend is unsustainable.

Source: Steve Keen, FORBES

6 - The Great Barrier Reef is currently undergoing the worst mass bleaching event on record, according to Australia's national coral bleaching taskforce. As a marine biodiversity hotspot this is a major threat to species conservation. Many corals will die, without them lots of species will lack a habitat and nursing ground for young ones. As such it's hard to ascertain the scale of devastation, even though the immediate effects already seem dire.

Source: Coral Reef Watch, NOAA

7 - Marine heat waves last longer and cover larger areas due to global warming (extra strong during El Niño years), devastating marine life. An example of such is "the Blob" that emerged off the Pacific Northwest in 2014. Sea life outside the US west coast has suffered greatly, with stranded sea lions, increase in whale deaths and entire beaches full of dead shrimp. Marine life has been hit hard by this double whammy.

8 - The American Election - it's just tragic. I'm so tired of reading about Trump I could puke. I can't imagine what would happen if Trump is elected and we have him and Putin trying to get along. Scary.

Global Economic Slowdown

The global economy is slowing down and central bankers are getting nervous. Japan, Italy and Greece are all in recession. China is slowing down according to official statistics. Germany, France, Netherlands, and Sweden are all at stall speed (around 1% GDP growth). The US is doing better according to official statistics, showing nearly 4% growth for the two last quarters, but alternative statistics shows numbers closer to 2%. The Federal Reserve ended QE in October, now there are few forces left providing extra liquidity to the world’s markets. Oil and precious metal prices have fallen dramatically.

Deflation seems to be winning and could lead to major problems for the financial sector in 2015, similarly to what happened in 2008 when oil prices crashed to $45/barrel from hitting a price spike of $140/barrel, too high for the global economy to handle, fuelling a spiral of defaults and negative net credit creation that nearly caused the entire banking system in the developed world to collapse. Major price oscillations in oil could be the new normal as we encounter depletion of easy and cheap oil resources. The global economy cannot handle too high oil prices, but too low oil prices could also have big impacts, especially on exporting countries and financial energy markets.

Oil price crash 2014

The price of Brent crude crashed to $61/barrel this week, its lowest since 2009. The speed of the drop, from $100/barrel in September, has caused many commentators to argue that central banks have lost the battle against deflation. Copper, oil, iron ore, coal, gold and silver are all showing signs of major economic weakness ahead.

The global economy needs oil for many purposes, for example to power transportation and produce food. If the oil price is too low, its not profitable to extract it. With low oil prices production may drop off rapidly. This can lead to a bunch of secondary effects. With low oil prices, it becomes increasingly difficult for expensive unconventional drilling operations (e.g. fracking, shale oil, tar sands) that are highly leveraged to pay back the loans they have taken out. Energy debt currently accounts for 16% of the US junk bond market, and the value of Venezuelan bonds recently fell substantially because of the high risk of default. Similarly, the Russian rouble has been in freefall which has driven up inflation, decreasing the Russian bank’s ability to pay off foreign debt.

The G20 plan

After the massive bank bailouts in 2008 there has been lots of discussions on how to change the system so new state bailouts won’t be needed. One proposal that has been discussed recently by the IMF and other institutions is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, this approach has been approved by the G20 at their meeting in Brisbane (November 16, 2014). If this is correct, ordinary peoples bank accounts and pension plans could be at risk already. Sweden is not a part of G20 so we should not be affected by this.

Deflation winning?

Falling oil prices tend to lead to a lower price for producing food and other goods. The net result tends to be deflation. Not all countries are affected equally, some experience this to a greater extent than others. Those countries experiencing deflation are likely to eventually get problems with debt defaults because. Investers could flee the country since they can’t make an adequate return and this usually tend to push currencies down, relative to other currencies. In Russia this is the case right now. Since the dollar has been rising rapidly, debt repayment is likely to be of greatest concern to those countries where substantial debt is denominated in US dollars but whose local currency has fallen in value. Countries with low currency prices such as Japan, parts of Europe, Brazil, Argentina and South Africa could find it expensive to import goods of all kinds. The Chinese yuan is closely tied to the dollar which makes Chinese exports more expensive and may be part of the reason why their economy has slowed down recently. However, China also have massive debts and a shadow banking system that could be huge. No one really knows since the Chinese aren't transparent with their accounting.

Oil production break even prices. Source: Energy tracker via FT

Limits to debt expansion

There are limits to the amount of debt that a government, or business can borrow. At some point, interest payments become so high that its difficult to cover other expenses. The way around this have been to lower interest rates to zero. The problem is that we have a monetary system that is either expanding or collapsing. It has no steady state. Increasing debt has been a big part in pumping up demand for commodities and ensuring some economic growth. But interest rates can only go so low and QE does not work in the long-term, mostly it just creates asset bubbles and risky investments. The oil price fall started almost at the same time as the FED ended QE3 in October this year (the crash in oil prices in 2008 was credit-related and prices only picked up after the US initiated its program of QE in November 2008).

Zero interest rates and QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of unaffordability of oil and other commodities. The problem is that we live in a finite world and we have reached a point where it has become more expensive to produce essential commodities. Wages don’t rise correspondingly, in most countries, because more and more labor is needed to provide less and less actual benefit. Workers find themselves becoming poorer in terms of what they can afford to buy. So even if prices for basic goods drop, fewer jobs and lower wages keep consumers from spending. Once commodity prices fall to levels that are affordable based on the income of consumers, they fall to levels that cut out a large share of production.

The timing of defaults and debt-related problems can take time. Low oil prices take a while to work their way through society. It is also possible that central bankers decide to take up another round of QE early in 2015, or that oil prices hit a low and start going back up. Limits to cheap energy could play out through lower oil prices as limits to growth in debt are reached and demand is destroyed. A collapse in oil production as a consequence of low oil prices could be much more severe for the global economy.

From growth to inequality and collapse

Collapsing systems