Musings Report #29 07-14-12 Where we are now
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Where we are now
If we step back from the day-to-day clutter of "news" (not to mention the real-world clutter--see From left Field link below), what is perhaps most striking is how little has actually changed in the past four years since the global economy was upended in Summer 2008. A few political powerful (and thus "indispensible") banks are still dominating State and central bank policies globally. The primary goal of this "extend and pretend" is to avoid writing down uncollectible debt, an essential process of credit-based capitalism.
Why? The "wealth" (phantom overvalued assets) represented by impaired debt is owned by vested interests that control the State's policies. Nothing of any substance has truly been reformed or fixed; what we have been treated to globally is a series of simulacra reforms and fixes intended to foster the illusion of progress even as they were designed to prop up the failed Status Quo benefitting vested interests.
Here are a few "obvious" observations:
-- The U.S. stock market is within 5% of its 4-years highs. Is this valuation supported by the recessionary global economy? If not, then what is supporting it? Corporate profits? Those have been driven higher by the weaker dollar. Now that the dollar has reversed and is trending higher, U.S. global-corporate profits are sagging. The dollar will be strengthening for a long time to come, which means corporate profits will be under pressure for a long time to come.
-- The "low hanging fruit" of cost-cutting, stimulus and brute-force Central Planning have all been plucked. Four years of extend-and-pretend have bought the Status Quo time but at a horrendous cost in new debt. The U.S. Federal external debt has almost doubled in four years. Does anyone seriously think this is sustainable?
-- North America has vast reserves of unconventional energy. Nice, but at what cost of extraction? Energy can be limitless, the issue is EROIE--energy returned on energy invested.
Where 1 barrel of oil invested in extraction/refining yielded 50 barrels in the good old days, now it's down to 5-to-1 or even 3-to-1. Higher energy costs are a drag on income and "growth."
What matters is not so much "peak oil" but "peak cheap oil."
-- As correspondent Bart D. (Australia) has observed, it doesn't matter how "cheap" energy might be in terms of price if your disposable income is falling to near-zero. Energy may be in abundance right now, but income/cash is getting scarce.
-- What seems to be increasingly in demand is liquidity (ability to move your money quickly and safely) and income streams. People think oil and gold are valuable, and they are intrinsically valuable, but when push comes to shove these are illiquid markets with either zero income (gold) or potentially huge losses (oil, if global demand continues cratering).
-- This global recession will be qualitatively and quantitatively much different from the 2008-09 recession because all the major trading nations and blocs have gone all-in on stimulus, lowering interest rates, money pumping, etc. There are no more tricks left to "stimulate" a debt-crushed global economy.
-- Very few understand China's economy. The Central Planners have much less power than imagined; the local governments are in much worse financial shape than imagined; the SOEs (state-owned enterprises) are more dominant and crippled than imagined; the reliance on overbuilding and overcapacity to create the illusion of growth is larger than imagined. Needless to say, PRC official statistics on "growth" are not to be taken as reflecting reality.
I have been surprised that global authorities managed four long years of "extend and pretend" with few consequences. But all that has really happened is failed institutions and policies have not been allowed to fail. Instead, the taxpayers have funded a "double-down" global bet that borrowing trillions of dollars and squandering it on the least efficient and most fraud-riddled sectors of the global economy would magically spark another round of quasi-sustainable leverage and debt expansion.
The experiment to stave off a reckoning with more of the same policies that created the crisis has failed. All that has been accomplished in four long years is to broaden and deepen the crisis and the cost of the "re-set." We are getting closer to the breakdown of "extend and pretend" strategies, and to the start of a multi-year "re-set." The global economy will probably stumble from one mismanaged crisis to another from late 2012 through mid-2015 as political and financial expediency fail at every level.
From Left Field
Beijing's Olympic Ruins: a physical metaphor for central planning and expediency in pursuit of PR glory (via Maoxian)
Is the Web Driving Us Mad? New research says the Internet can make us lonely and depressed—and may even create more extreme forms of mental illness
(file under, "why am I not surprised?")
A man sees his bank manager and says, "How do I start a small business?" The manager replies, "Start a large one and wait 6 months."
"The average man, who does not know what to do with his life, wants another one which will last forever." Anatole France
Thanks for reading--
charles
