Wednesday, December 10, 2014

Today's Links

Multiple years of austerity have left consumers with altered views about spending. Almost 40 percent say they will probably never go back to their pre-recession approach to buying.




Oil Price:  Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.


In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently


1--Bill Moyers on The Lives of the Very Very Rich, naked capitalism


Now look at the top 1% and you see vast differences in the various strata, the layers. For example, this is from 2011 data (again slightly rounded):
  • Average income of Top 0.01% — $23,800,000
  • Average income of the rest of the Top 0.1% — $2,800,000
  • Average income of the rest of the Top 1% — $1,020,000
  • Average income of the rest of the Top 10% — $161,000
If you just looked at the top 1% as a whole, that huge gap between the 0.01% (the “1% of the 1%”) and everyone else really skews the averages. You have to look at the segments individually to see them properly.


2--Guest Post: Central Banks Create Deflation, Not Inflation, zero hedge


If there's one absolute truism we hear again and again, it's that central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generation the exact opposite: deflation.


The Federal Reserve and other central banks desperately want inflation, even though it destroys the purchasing power of paychecks and savings, for one reason:in a system based on phantom collateral supporting ever-increasing mountains of debt, the Prime Directive of central banks is to make it ever easier to service yesterday's debt.....


So now we understand why central banks are desperate for inflation: it's the only way to keep the Ponzi scheme of ever-expanding debt from collapsing in an era of stagnant wages. Since the vast majority of people aren't increasing their income, inflation is the only way to enable them to keep servicing their debts....


As my colleague Lee Adler explains, central bank easing and zero-interest rate policy (ZIRP) fuel over-capacity which leads to declining prices: deflation with a capital D. The current oil glut is a primary example of this dynamic: Why Oil Is Finally Declining, Which Could Lead to Disaster(Wall Street Examiner)
The central banks have been frustrated in their insane and misguided aim to increase inflation because QE and ZIRP actually foster the opposite of what central bankers expect. Central bankers and conomists think that to get inflation they only need to print more money, not recognizing that the inflation that does result from money printing, asset inflation, leads eventually to consumer goods deflation. ZIRP and QE cause malinvestment and overinvestment that leads to excess productive capacity.
 
That leads to overproduction and oversupply. Oversupply puts downward pressure on prices. That spurs a vicious cycle where the central banks print more money to try to create inflation. That puts more cash into the accounts of the leveraged speculating community and off we go again.
 
While ZIRP and QE encourage waves of excess speculation and malinvestment, they do so at the expense of investment in labor. Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumption goods.
 
That causes a vicious cycle in business where executives perpetually look for ways to shrink costs, exacerbating the economic decline of middle class working people. The "middle class" can increasingly no longer afford to buy the products of those who employ them. Thus we get the spectacle of things like WalMart holding charity food drives to benefit its workers, who are not paid enough money to feed their families.
 
The oil price experience is a perfect illustration of what happens when central banks promote over speculation in commodities and commodity production. A boom built on virtually free and unlimited financing becomes a ticking time bomb when the value of the collateral collapses.





3--On December 5th, it was “U.S. House Votes 98% to Donate U.S. Weapons to Ukraine; U.S. Public Is 67% Against. Is this Democracy?”
On December 6th, it was “Ukraine Receives New Weapons.”
On December 7th, it was “NATO Prepositions Weapons In Poland for Attack on Russia.”


4---1930's style depression?  zero hedge

Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expected to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said.

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained.


5--Washington’s Frozen War Against Russia, cp


In a speech to leading CEOs on December 3, Obama said the sanctions were intended to change Putin’s “mindset”, but didn’t think this would succeed. He is waiting for “the politics inside Russia” to “catch up with what’s happening in the economy, which is why we are going to continue to maintain that pressure.” This was another way of saying that stealing Russia’s natural gas market, forcing Europe to enact sanctions, and getting Washington’s bigoted stooges in Saudi Arabia to bring down petroleum prices by flooding the market, are all intended to make the Russian people blame Putin enough to get rid of him. Regime change, in short.


6--CIA torture and the crimes of the state, wsws


In her speech on the Senate floor Tuesday introducing the Intelligence Committee report, Senator Feinstein presented the torture program as an unfortunate and wrongheaded, if understandable, response to the 9/11 attacks and the need to wage the “war on terror.” This is a lie.
As the WSWS repeatedly warned, the phony war on terror was a criminal conspiracy to justify endless war abroad and a massive attack on democratic rights at home.


The CIA torture program itself was only an extreme expression of a break with bourgeois legality that characterizes every aspect of US policy. The theft of the 2000 election set the stage for the post-9/11 assault on democratic rights and creation of a police state-in-waiting, including Guantanamo Bay, the Patriot Act, the Homeland Security Department, the Northern Command, rendition, indefinite detention, drone assassinations and mass NSA spying.


Within the United States, the police, operating in close collaboration with the military and intelligence agencies, function ever more openly as an instrument of social and political repression. The “war on terror” is being brought home


7--Welcome To The Recovery: 40% of Americans Live Paycheck To Paycheck (Up From 30% In 2012), zero hedge


The slow start to the holiday shopping season underlines the findings of McKinsey’s latest Consumer Sentiment Survey....



Here are the salient findings from this year’s survey:

Our report in September 2012 showed that things were looking up for most Americans. Many aspects of consumer sentiment indicated marked improvement. Yet from there, things have either plateaued or gotten worse. Consumers are still worried about losing their jobs (39 percent in 2014), and 40 percent of the consumers we surveyed said they are coping with the challenge of living paycheck to paycheck, up from 31 percent in 2012.

The significant economic pressure that families earning less than $75,000 a year feel has caused many of them to make spending adjustments in order to make ends meet. Roughly 40 percent of these households say they are making changes, including cutting back and delaying purchases, as compared to 22 percent of those in households earning at least $150,000 a year. Americans at all income levels have yet to return to their pre-recession positive feelings about the country’s economy. Today just 23 percent say they are optimistic about the economy, down from 27 percent at the beginning of the recession in 2009.

While the number of consumers cutting back on spending has stabilized, Americans are still pinching pennies. Decreasing purchases of high-end brands and doing more one-stop shopping to reduce the number of trips are just as popular as they were last year, with 40 percent of consumers saying they have cut their spending over the past 12 months. An even bigger proportion of Americans (55 percent) say they continue to look for ways to save money, including paying more attention to prices, using coupons more often, shopping around to get the best deals, and buying more items in bulk.

Multiple years of austerity have left consumers with altered views about spending. Almost 40 percent say they will probably never go back to their pre-recession approach to buying. Twenty-nine percent say they now have new attitudes and values about spending, a figure that’s up from 17 percent in 2010. Another 24 percent claim that their opposition to increased spending is due to a change in their economic situation.


8---President Obama Praises "Patriotic" Torturers, Says USA "Greatest Force For Human Dignity The World Has Ever Seen", zero hedge


9---5 not-so-peaceful Obama actions since nabbing Nobel Prize, RT


10--There was a clear policy orchestrated at a high level within the [George W.] Bush administration, which allowed to commit systematic crimes and gross violations of international human rights law," from day one.”


The UN and prominent human rights groups have demanded justice for CIA torture victims, urging to prosecute the responsible US officials listed in the Senate’s report. The Justice Department says it will not pursue charges, even after seeing the report..


"As a matter of international law, the US is legally obliged to bring those responsible to justice," the UN's special rapporteur on counter-terrorism and human rights, Ben Emmerson, said in a statement issued in Geneva. "The US Attorney General is under a legal duty to bring criminal charges against those responsible.”
"It is now time to take action. The individuals responsible for the criminal conspiracy revealed in today's report must be brought to justice, and must face criminal penalties commensurate with the gravity of their crimes..


There was a clear policy orchestrated at a high level within the [George W.] Bush administration, which allowed to commit systematic crimes and gross violations of international human rights law," the UN official said.
Amnesty International also called for accountability, stressing that the report shows that the CIA was committing illegal acts “from day one.”


11--Ukraine must pay or default, RT


So far Ukraine is paying, and I hope they continue doing so,” said Medvedev.
“If they stop, they will suffer a potential default, which will have devastating consequences for the Ukrainian economy, which is already in a lamentable state.”


The Financial Times reported that Ukraine, which was allocated a $17 billion rescue package by the IMF in April, will now require a further $15 billion to stave off default, according to Fund officials.
The extra shortfall has been prompted by the severe contraction of GDP following the breakout of armed hostilities, and the collapse of trade with Russia, which has embargoed entire groups of Ukrainian goods. The secessionist eastern regions make up about 16 percent of the country’s GDP.
The country’s gold reserves have nearly halved since May, and its foreign currency stockpile has dropped from $16.3bn in May to a paltry $9bn.


Further aid may be hard to obtain from confidence-stricken European nations.
“It’s not going to be easy. There’s not that much money out there,” a senior official negotiating with the Ukrainian government told the Financial Times.


12---Iran's Rouhani also called the drop in prices "politically motivated" and a "conspiracy" , cnbc


Surging U.S. crude supplies, and OPEC's forecast of sharply lower demand for its output combined to drive oil futures sharply lower Wednesday, raising the stakes for $50-a-barrel oil before the end of the year.
Oil has cratered more than 42 percent from its June highs, as increased U.S. oil production added to world supplies and global demand slipped. West Texas Intermediate futures sank another 4.4 percent Wednesday to a fresh five-year low just shy of $61 per barrel, and Brent lost another 4 percent to $64.19 per barrel....


Oil was last at $60 a barrel during the financial crisis, and analysts said $50 is now in sight. "That's not out of the question. It's happening faster than I thought it would happen. I was calling for $50 but I was envisioning that happening in February. The odds for an emergency (OPEC) meeting are going up," said John Kilduff, oil analyst at Again Capital.
The surprise build in U.S. supply was met by another increase in U.S. oil production to 9.1 million barrels a day, compared with 9.08 million barrels the week earlier.
"It seems like the market can't find a bottom yet," said Gene McGillian, analyst at Tradition Energy. "You still have long positions by money managers outnumbering shorts by about 1.5 to 1. We're whittling that down. We haven't finished that. Right now the market is in free fall status. ... It appears we're going to break $60 and get near the $50 mark." ....


Iran's Rouhani also called the drop in prices "politically motivated" and a "conspiracy" against the interests of the region. "Iran and people of the region will not forget such conspiracies, or in other words, treachery against the interests of the Muslim world," he was quoted as saying, during a Cabinet meeting.


13--Oil Price Tumbles After OPEC Releases 2015 Forecast, oil price


In fact this year’s price plunge hasn’t hurt just the weaker OPEC members. Bloomberg reports that oil prices now are too low for 10 of its 12 members to balance their governments’ budgets. The exceptions, the news agency reports, are Kuwait and Qatar. Saudi Arabia may be losing money on oil at the moment, the news agency says, but its treasury has nearly three-quarters of a trillion dollars in reserve.
What’s missing in this flurry of news, as of midday Dec. 10, is what OPEC plans to do about the balancing the oil glut with the expected stretch of lower demand. And the cartel’s next meeting to discuss production levels isn’t scheduled until June 5, 2015.


16---How The US Could Beat OPEC But Won’t, oil price


Back in 1975 then-Secretary of State Henry Kissinger proposed that the world's oil importers adopt a floor price for oil. The purpose was threefold: 1) encourage domestic oil production, 2) accelerate the development of alternative energy sources by making their price more competitive with oil and 3) encourage conservation of oil and oil-derived products such as gasoline and diesel fuel.
The easiest way to achieve the floor price, of course, would be to slap a sliding tariff on imported oil. The formula for such a tariff would be simple: The floor price minus the price of imported oil unless the price of imported oil equals or exceeds the floor price, in which case, the tariff would be zero. Imposing a tariff that keeps U.S. oil prices above, say, $100 per barrel would only return the domestic price of gasoline and other refined products to their level of just six months ago. Presumably, that wouldn't be much of a shock to consumers...


An oil tariff could actually garner considerable well-heeled, heavyweight political support from two unlikely bedfellows: the domestic oil industry and the renewable energy industry. The domestic oil industry, of course, would love a tariff because it protects the industry's high-cost deep shale deposits from the competition of cheap OPEC oil imports. The cartel's price suppression strategy specifically targets the high-cost hydraulic fracturing or fracking in deep shale deposits that has been largely responsible for the rise in U.S. oil production from a low of 5 million barrels per day (mbpd) in 2008 to 8.8 mbpd as of September this year.
The renewable energy industry might well join the oil industry in supporting such a tariff because a high oil price makes alternatives to oil more attractive....


The most likely course, however, is that no such tariff will be adopted. As a result America's oil industry will slip into a slump. The country will become more dependent on imports and oil in general. And, when oil prices rise again--as they surely will--the industry will go right back to fracking America's deep shale deposits at full speed without any additional environmental safeguards


17---Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic, oil price


With low oil prices, production may drop off rapidly......


After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out “too big to fail” banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1
Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.


Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.
If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.
Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.
The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar...


The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.
There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.
(Increasing debt is a big part of pumped up “demand” for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect).
QE doesn’t work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.
As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the “uplift” needed to keep oil prices high enough to cover production costs.....


QE allows financiers to disguise the growing mismatch between what it costs to produce commodities, and what customers can really afford. Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers’ lack of income is disguised by a continued growth in debt.
Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world’s ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.


Conclusion
There are really two different problems that a person can be concerned about:
1. Peak oil: the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.
2. Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.
In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.


Future Energy production

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.
Notes:
[1] There is of course insurance by the FDIC and the PBGC, but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn’t be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008. Insurance would seem to be available, but in practice, would not pay out much.


18--New Banking Rules: Cyprus-style Bail-ins to Take Deposits and Pensions, ellen brown

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