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Heinberg: A Back-Row Seat at the Collapse Revue
Richard Heinberg, Post Carbon Institute
Suddenly everyone in Federal agencies that oversee the economy seems to have gotten religion. SEC chairman Chris Cox, who until this very month never saw a banking or finance regulation he liked, said in congressional testimony yesterday that “voluntary regulation does not work.” And former Fed chairman Alan Greenspan told Congress today that he is “shocked” at the breakdown in US credit markets and admitted that he was “partially” wrong to resist regulation of some securities.
One has to marvel at the prescience and wisdom of these men. Even though others were warning—as long ago as 2005—that the booming housing and mortgage sector was a bubble and that the derivatives market was a $550 trillion house of cards, Greenspan told congress that “this crisis . . . has turned out to be much broader than anything I could have imagined.” Well, it’s time to start exercising that imagination of yours, Mr. Greenspan. It’s going to require a substantial stretch to envision just bad this really could get.
The unwinding of the credit crisis is, by itself, scary enough. Companies big and small are finding it tough to access funds to meet payrolls. Police and fire departments are running out of cash. The world’s biggest car companies are on life support. The dollar is rising in value—not because anyone has faith in the US economy, but because other currencies are shedding confidence even faster. Chinese factories are closing by the thousands. Store shelves in Russia are bare. And we are still in the early stages of the de-leveraging process.
The actions of national governments and the central banks to shore up the credit market have constituted an effort to establish a floor below which the credit markets cannot fall further. Whether these efforts will be successful we shall discover soon enough.
However, the deeper Peak Everything crisis effectively establishes an ever-descending ceiling above which a recovery can never rise. …
(23 October 2008)
Oil, House Prices, Credit? Three parts of the same story
Phil Hart, The Oil Drum: ANZ
The long forgotten ‘oil crisis’ of just a few months ago has been replaced by a full blown ‘credit crisis’ – related events that represent the unravelling of half a century of unsustainable trends in oil consumption and debt. These two ingredients have been used in a special ‘compound growth formula’ to finance the construction of suburbia and fuel the (un)happy residents on their long journey to work and home again via the shopping mall, so they could spend more than their earnings on stuff to put beside the TV and inside the microwave oven.
Environmentalists have tried to teach economists a thing or two about sustainability over recent years, largely without success. However, even within the narrow world view of economists, the trends in credit growth could be clearly seen to be unsustainable (unless your name is Alan ‘I made a mistake’ Greenspan). That oil consumption could not grow forever comes as no surprise to a global community aware of ‘peak oil’, but the inevitability of oil depletion will remain hidden from economists; lost as it will be in a crisis of their own making.
The Growing Gap: Oil Imports
This is a global crisis, but the US dollar is our global currency, so the story centers on that country. Exhibit A is the growing gap since 1950 between domestic oil production in the United States and oil consumption.
… Global oil supplies have been all but flat for the last three years. With China and the oil producing countries still increasing their share of the pie, first the poorest and then even OECD nations were forced to reduce their consumption the only way the market knows – higher prices.
So consumers started driving less because global oil supply simply could not meet everyone’s expectations. Next the value of their house fell. Finally they found the bank wouldn’t (couldn’t) lend them anymore money, so they stopped shopping as well. That was the last straw, as there is nothing that strikes fear into the heart of an economist more than the sight of a consumer who has stopped shopping.
Oil, House Prices, Credit? It’s all part of the same story.
(26 October 2008)
Oil Prices – A Little More of the Story
Gail Tverberg, The Oil Drum
A few days ago, I wrote a post titled Why Are Oil (and Gasoline) Prices So Low? Since then, OPEC has voted to cut oil production 1.5 million barrels a day. In spite of this, the price of oil is about 5% lower. The purpose of this post is to add an update, with a little more of the story about why the price of oil is dropping more than some of us would expect.
One of the issues I mentioned in that story was
4. Rising value of the dollar
I noted in that post that the price of oil seems to drop as the price of the dollar rises against currencies such as the Euro. As I delve into the question more, I am starting to learn more about why the value of the dollar has recently been rising. It seems that the rising value of the dollar is tied to a combination of things–one is the flight to the US dollar for safety, another is the unwind of the carry trade, and a third is margin calls on hedge funds and other borrowers. The rising level of the dollar because of these issues seems to be a major contributor to the recent decline in oil prices.
… So what are the big risks that the cash is fleeing from?
One seems to be the fact that the emerging markets are “tanking”. Their stock markets are down by 50% or more from values earlier this year. Investment dollars are fleeing these struggling markets to the relative safety of the US dollar.
Another risk is that the European banks seem to have lent heavily to the emerging markets. According to this U. K. Telegraph article, these debts are now likely to become a huge problem for European banks.
… On November 15, there will be a G20 Summit meeting in Washington to deal with the financial crisis.
In the meantime, we can expect a lot of volatility in financial markets. The fluctuating value of the dollar is likely to continue to flow through to affect the price of oil. There are clearly supply and demand issues as well, but the volatility in the financial markets is likely to hide what would be “normal” trends.
(26 October 2008)
Many world stock markets now off 50% or more from peaks
Tom Petruno, Los Angeles Times (blog)
… even though America is the source of the credit debacle that is ravaging the global financial system, many foreign markets — both developed and emerging — are faring much worse than Wall Street.
I tallied up how much some major and minor markets have fallen from their recent highs, most of which were reached in the second half of 2007.
Here’s a sampling (not meant to be all-inclusive):
Markets down more than 70%: Vietnam (-70.5%), Peru (-73.2%), Ireland (-73.4%), Russia (-73.9%), Iceland (-88.7%).
Markets down between 60% and 70%: Hong Kong (-60.1%), Poland (-62.6%), China (-69.8%).
Markets down between 50% and 60%: South Korea (-54.5%), Italy (-55.2%), Egypt (-56.9%), Brazil (-57.2%), Japan (-58.1%), Singapore (-58.2%), Turkey (-58.5%), India (-58.3%).
Markets down between 40% and 50%: Great Britain (-42.3%), Australia (-43.3%), U.S.-S&P 500 (-44.0%), Spain (-46.4%), Germany (-47.0%), Mexico (-48.3%).
Note that, for U.S. investors who own foreign stocks, the losses in many cases are worse because the dollar has rallied against most foreign currencies in recent months. A strong dollar means stocks denominated in foreign currencies have even less value when translated into dollars.
(24 October 2008)
