The notion that the United States, like a Phoenix from the ashes, will rise up to meet the "challenges" it faces is so wholly absurd that even New York Times columnist Thomas Friedman can hardly believe it.
I confess, I find it dispiriting to read the polls and see candidates, mostly Republicans, leading in various midterm races while promoting many of the very same ideas that got us into this mess. Am I hearing right?
[Lists his reasons why politics is irrelevant to what ails us. Mostly blames Republicans.]
... All that’s missing is any realistic diagnosis of where we are as a country and what we need to get back to sustainable growth. Actually, such a diagnosis has been done. A nonpartisan group of America’s most distinguished engineers, scientists, educators and industrialists unveiled just such a study in the midst of this campaign.
Here is the story: In 2005 our National Academies responded to a call from a bipartisan group of senators to recommend 10 actions the federal government could take to enhance science and technology so America could successfully compete in the 21st century. Their response was published in a study, spearheaded by the industrialist Norman Augustine, titled Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future.
The Gathering Storm report was updated last month, as Friedman describes—
“The subtitle, Rapidly Approaching Category 5, says it all,” noted Charles M. Vest, the former M.I.T. president. “The committee’s conclusion is that "in spite of the efforts of both those in government and the private sector, the outlook for America to compete for quality jobs has further deteriorated over the past five years.”
But I thought: “We’re number 1!”
“Here is a little dose of reality about where we actually rank today,” says Vest:
6th in global innovation-based competitiveness
40th in rate of change over the last decade
11th among industrialized nations in the fraction of 25- to 34-year-olds who have graduated from high school
16th in college completion rate
22nd in broadband Internet access
24th in life expectancy at birth
27th among developed nations in the proportion of college students receiving degrees in science or engineering
48th in quality of K-12 math and science education
29th in the number of mobile phones per 100 people
“This is not a pretty picture, and it cannot be wished away,” said Vest...
No, it's not a pretty picture. And for your information, Tom, we're not No. 1 anymore. We're No. 11 according to Newsweek, and even that ranking was a gross overestimate as I demonstrated in another post.
Some sensational websites like to post long lists of grim facts entitled "14 (or 17 or 22) Reasons Why Some Disaster Is Unavoidable." I usually shy away from such facile Doomer Porn, but since the highly esteemed authors (like former MIT president Charles Vest) of the Gathering Storm Revisited report can't resist temptation, I thought I would give you a taste of why they're worried. The lists below cover about 2/3rds of the factoids mentioned in the report.
As to Tom Friedman's point that our politics is completely irrelevant to America's lack of competitiveness, it's good to see Tom trying to get a handle on Reality—I know how difficult actual thought is for him, so imagine how hard it must be for Tom to fully grasp the Empire's Decline. One realization Tom might ponder is that the corrupt political campaigns we are currently witnessing are part and parcel of that Decline.
And now the factoids. Each has an accompanying footnote in the report text to indicate the source. My favorites are:
Forty-nine percent of United States adults do not know how long it takes for the Earth to revolve around the Sun.
United States consumers spend significantly more on potato chips than the government devotes to energy R&D.
I don't know about you, but after this past week I need some comic relief. And as far as music goes, comic relief can only mean one thing for me—Disco! First up is The Classic by the Bee Gees. There is no substitute.
After that we've got Monty Python's famous sketch about the American economy the legendary Norwegian Blue Parrot ("beautful plumage"). After the parrot, Lewis Black talks about bottled water. And we'll end with the wonderful scene where Chief Dan George goes to the mountain top to die in Little Big Man. To appreciate this clip, you need to know that when he refers to "human beings," he means all Native Americans, which explicitly does not include the White Man. George plays Old Lodge Skins (aka. Grandfather).
Disgusted by the human condition, Grandfather has laid himself down to die, but it starts to rain and he wakes up instead. After I read some of the comments on my peak oil post, Old Lodge Skins expresses exactly how I felt—
Old Lodge Skins: Am I still in this world?
Jack Crabb: Yes, Grandfather.
Old Lodge Skins: [groans] I was afraid of that. Well, sometimes the magic works. Sometimes, it doesn't.
Well, I thought, that's easy. Don't go to the polls! Of course, that's not what Mish meant
Are you going to vote? Before you make a decision, there are two videos I'd like you to watch. The Economist hosted its annual Buttonwood Gathering recently. Many of the world's most prominent economists attend this meeting. Tech Ticker's Aaron Task was there, and spoke with two "liberal" economists, Jeffrey Sachs and Joseph Stiglitz.
Both bewailed the current state of the Empire. Being liberals, they still believe that Improvement is possible, but in putting forth the case for action, they were forced to describe precisely why action must be taken. And in doing so, they both carefully made the Decline Of The Empire case. Sachs, who has always been the Eternal Optimist, brutally deconstructed our political system. It was refreshing to watch.
I assume a person votes only if he thinks something useful might come from it. And choosing the "lesser" of two evils doesn't count. Two evils are still two evils. There is no "lesser" when you're talking about our corrupt political system. Suppose you were given a choice to vote for Hitler or Stalin. You might say "Hitler killed 7 million people, but Stalin killed 20 million. I'll vote for Hitler!" The example is farfetched, but you get the point.
And now the interviews, first Sachs and then Stiglitz.
In yesterday's post Going For The Trifecta, I quoted an anonymous source about what the advance estimate for Gross Domestic Product (GDP) would be today. My source said—
I spoke yesterday with [so and so] of [well-known website] fame, and he firmly believes that the BEA targets the "consensus" media numbers in their "Advanced" report — eventually revising those to some peculiar version of reality at their leisure (recently up to 24 months later)...
Almost nailed it! The consensus was for 2.1% growth, and today the BEA announced that the economy grew—drum roll, please—2% in the 3rd quarter!
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.
The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the third quarter, based on more complete data, will be released on November 23, 2010.
I am not a conspiracy theorist, and usually dismiss the remarks of those who explain that things are screwed-up because They (unspecified) want it that way. There is always a better, more plausible explanation. Despite the efforts of Sigmund Freud, Carl Jung and other depth psychologists to tell people that there is an enormous unconscious part of the mind running most of the show, and that the conscious Ego sits like the visible tip of an iceberg on top of it, people continue to insist that they are in complete charge of what they say and do—these latter, of course, are often at variance with each other.
So while I do not posit a conscious conspiracy at the BEA to make the numbers match, it is what it is. The first downward revision of the politically expedient advance estimate should occur on November 23rd, three weeks after the election. However, the BEA may revise the growth rate downward to reflect "some peculiar version of reality" much later. Second quarter GDP started out at 2.4%, and finally settled in at 1.7% after a few months had passed. Read my post Government Statistics — The Awful Truth. Let's get a little bit deeper into the advance estimate—
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, federal government spending, and exports that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
There are two points of interest here for the aficionado of official goverment statistics. Regarding imports, which subtract from GDP if they exceed exports, we can now see another reason why Timmy Geithner is so threatened by America's large trade deficit. Being a political hack, Geithner necessarily sees the world through the lens of government economic indicators, which may or may not be favorable to the government he represents. If they are not, this is a political disaster. Whether positive indicators are actually reflecting improvements in people's lives is a secondary consideration.
It thus makes sense that Timmy would like to blame China for distorting the import/export balance and dragging down the GDP number, which is the Biggest Indicator of the "wisdom" of his economic policies. No wonder he's in such a rage.
And then there is the boost to GDP from Personal Consumption Expenditures (PCE), which are said to make up 70% of the real economy. I say "said to be" because PCE is a rather nebulous concept. For example, Medicare spending falls under PCE, and there are other atrocities as well. PCE is often conflated with "consumer spending" in general, or sometimes with the retail sales part of that spending.
Rick Davis of the Consumer Metrics Institute tracks online durable goods sales data in real time day after day. This gives us a good (though incomplete) measure of how much Americans are spending. From these data, Rick compiles a Daily Growth Index (DGI) to measure how the economy's doing. The graph below shows us where things stand now.
"The Consumer Metrics Institute's 91-day 'Trailing Quarter' Growth Index -vs- U.S. Department of Commerce's Quarterly GDP Growth Rates over past 4 years. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average." I updated this graph (pink line for Aug-Oct) to reflect today's advance GDP estimate.
You can easily see that whereas the DGI used to lead and reflect GDP, there is a large divergence between the two in 2010. In other words, spending on durable goods has fallen off a cliff, but GDP remains elevated. Imagine that! Rick's data is further validated in the Gallup polling data I presented in Our Economy Is A Bad Joke. Here are the spending numbers for those making less than $90,000 a year, which is about 88% of the population.
Spending by lower and middle income people fell significantly from July through September. Those are the 3rd quarter months. So much for the contribution to GDP of the consumer spending part of PCE.
This anemic spending data is hard to reconcile with the change in private inventories, which "added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change" according to the BEA. Look for that component of GDP to be revised downward in future releases.
Mark Twain referred to "lies, damned lies, and statistics." It's a shame he didn't live in the present, when the fine art of prevarication with statistics has been taken to new, unprecedented levels of sophistication.
Trifecta — A trifecta is a particular type of bet that is very difficult to win, but it yields very high returns. To successfully win a trifecta bet, you need to specify the horses that finish in the top three spots in the exact order in which they finish. So if the horse you selected to show (3rd) actually places (2nd), you don't win anything...
The term "trifecta" is making its way into colloquial speech... and people are using it more generally to refer to any three successes. A student studying for final exams, for example, may say "I did well on my first two exams, and now I am going for the trifecta!"
As November approaches and the nights turn chillier, giving us our first glimpse of the coming winter, Americans with nothing to lose are going for the trifecta, to wit—
The BEA will unveil the advance estimate for Gross Domestic Product tomorrow morning. Our benevolent and caring government will try to maintain the statistical recovery myth. Of this, an anonymous friend tells me—
I spoke yesterday with [so and so] of [well-known website] fame, and he firmly believes that the BEA targets the "consensus" media numbers in their "Advanced" report — eventually revising those to some peculiar version of reality at their leisure (recently up to 24 months later). Add in some not-so-mild political ramifications this time around and you have a formula for "Consensus PLUS" numbers (2.3% to 2.7%).
Consensus PLUS! Sounds good to me. The consensus is for 2.1% growth (annualized rate).
On Tuesday (November 2nd) Americans will go to the polls to choose between Tweedledum and Tweedledee. The outcome of this momentous election will guarantee a political stalemate in the Congress until 2013. The gridlock will be accompanied by endless rhetorical flourishes and accusations because none of our elected representatives will actually be doing anything except collecting their paychecks and taking advantage of their generous benefit programs. The only "ordinary" Americans who will benefit greatly from all this nonsense are Jon Stewart and Stephen Colbert. In this context, this news item should be of interest—
Spending in this year's midterm election will approach $4 billion and "obliterate" the previous record, the nonpartisan Center for Responsive Politics said Wednesday.
The group, which has tracked money and politics at the federal level for 27 years, said total spending — by parties, candidates and independent groups — will be about $1 billion more than the previous midterm record, set in 2006...
Perhaps we could schedule some harmless but entertaining leisure activities for our soon-to-be restless elected representatives. For example, we could see how many of them can find Bolivia on a world map. [Hint: it's in South America.]
As Americans go to the polls, the FOMC will be kicking off its QE2 extravaganza. The consensus is that the Fed better not disappoint us—anything less than printing another $1,000,000,000,000 (trillion) may cause a setback in the markets.
By this time next week everything will have changed and yet everything will be the same, or much worse, depending on your outlook. I do recommend Grantham's article, which lists every reason why you should despise the Fed as he does. And it contains some useful stuff, like this graph—
Debt Does Not Create Growth! Annotated to reflect DOTE's view of when our Decline began
Tomorrow I'll kick off Trifecta Week with a commentary on the advanced GDP number. Keep your head high and your chin up.
On October 14, 2010, Aaron Task interviewed Chris Martenson at Yahoo's Tech Ticker (video below). Martenson, fresh off of attending ASPO-USA's annual peak oil conference, told Aaron that "conventional oil" peaked "around 2005." Aaron had no way to assess this statement, so he ran with it. It was then that I decided to write this post in a futile attempt to get everybody on the same page about future oil production.
IMHO, anybody with a vested interest in the world's future oil supply—that would be almost everybody on Earth—should read this post. Realistically, my expectations are somewhat lower
First things first. Conventional oil refers to crude oil plus lease condensate according to the Energy Information Agency (EIA). That's as good a definition as any, and I will use EIA data today. All liquids refers to conventional oil taken together with natural gas liquids, refinery gains and biofuels, but today I will stick with conventional oil. In July, 2010 the world produced 73.691 million barrels per day (b/d) of conventional oil. The all-liquids total for that month was 86.474 million b/d. You can see that conventional oil by far makes up the largest share of the total liquids supply. When I refer to just "oil" in the text below, I mean conventional oil as defined by the EIA.
Chris' claim that conventional oil peaked around 2005 is false. If anything, conventional oil production peaked in July, 2008 or the first half of 2008 (see the graph and caption below).
EIA data for conventional oil production, from Table 1.1d (xcel spreadsheet). The average world production through July stands at 73.426 million barrels per day in 2010. Oil production averaged 73.944 million barrels per day in the first 6 months of 2008 before the demand crash. Without the crash, which was obviously predictable given the price, 2008 would have been the peak year so far for conventional oil production.
The queston thus becomes: did world conventional oil production peak in mid-2008 or are we looking at a local maxima (high point) in production that may be surpassed in the future? To answer this question, we must first understand what this production graph is telling us.
During the "demand shock" that caused oil to spike to well over $100 dollars per barrel in 2008, world oil production actually declined year-over-year in 2006 and 2007 even as the price was rising. To a lot of us, this looked like an actual 2005 peak in the world's oil production. Conventional wisdom says that as prices rise in an environment of unrelenting demand, supply should increase as a result of new investment in production capacity. Prices had been rising since 2003. Where was the new supply that would rebalance prices? It wasn't there!
By mid-2008, the "Great" recession was well underway—it began in the 4th quarter of 2007—and our economic woes were further accelerated by the surging oil price. The nominal price rose into the $140s in June and July, which is not a price for oil people can afford. As a result of the recession and the oil price, demand crashed. Thus, conventional oil production after July, 2008 reflects much diminished demand, not an inability to increase supply—OPEC slashed production dramatically. The world economy hit bottom in early 2009, and oil demand started to recover in mid-2009. You can see in the graph that oil demand is rising in 2010.
If one looks at conventional oil production on a yearly basis, 2005 is still the peak year in the EIA data. However, we can now see that concluding that oil's all-time production peak occurred "around" 2005 as Martenson said conflates supply with demand. I have found that this is a common mistake.
Let's get to the 64,000 dollar question: has conventional oil production peaked? The correct answer is most likely not. There are two unknowns preventing us from coming to any definitive conclusions about timing:
We don't know how the global economy is going to fare in the future. It certainly does look shaky. (I won't cover this today.)
We don't know exactly how much spare production capacity the world has to meet future demand if the world economy grows steadily in the next few years.
It is this second unknown that makes all the difference from a supply point of view. Oil production outside of OPEC (non-OPEC) has "peaked" in the sense that it has flat-lined. In fact, the EIA forecasts that total non-OPEC supply will fall by 240,000 b/d next year due to the inability of other non-OPEC producers to offset declines in Mexico and the North Sea. Generally speaking, we can depend on the assumption that non-OPEC production will never rise much—if at all—above its current level and is more likely to stay flat or decline as time goes on.
That is why the world looks to OPEC to solve its future oil supply needs. And here we run into a host of problems. The EIA estimates that OPEC's spare (unused) capacity is about 5 million b/d right now in 2010 (and this doesn't change in 2011). Any increase in demand requires that new supply be taken from this capacity. The main problem is that Saudi Arabia has almost all the spare capacity!
From John Williams' Why The Saudis Hold The Cards Right Now. "The US government EIA now estimates OPEC spare capacity at 4.96 million barrels per day. Only Saudi Arabia with 3.75 million b/d excess capacity has any significant power. Kuwait and UAE each have an estimated 300,000 b/d of spare capacity and Qatar has 260,000 b/d. With Saudi Arabia controlling 76% of the spare capacity the combined power (16%) of Kuwait, Qatar and UAE is barely enough to influence prices."
World policy-makers and analysts believe the Saudis do indeed have about 3.75 million b/d in spare production capacity. A small but vocal minority of "peakists" do not believe the Saudis have anything close to this much spare capacity. If they don't, oil production might as well have peaked in 2005. If they do, and we throw in Kuwait, the UAE and Qatar, the world is capable of producing as much as 78+ million barrels per day of conventional crude oil. Once the 860,000 b/d the other Persian Gulf countries have is exhausted, everything rides on the question of Saudi production capacity and intentions.
Well, you might say, of course the Saudis have what they claim. Or at least they have some large part of it. And I agree—I think OPEC's spare capacity is at least 2.5 million barrels per day at the low end, and may be as high as 3.5 million barrels per day at the high end. This range puts Saudi spare capacity at between 1.7 million and 2.7 million barrels per day. Theoretically, the world can produce as much as 77 million barrels per day.
On the other hand, those saying we've peaked like to point out that Saudi Arabia has never produced 10,000,000 barrels per day of conventional oil on an annual basis since 1970 (EIA data). And it's true. The most they've ever produced in any given month in the last 10 years was 9.7 million barrels per day in—you guessed it!—July of 2008. Thus the pessimists argue that Saudi capacity is largely a reflection of Saudi production. However, absence of evidence is not evidence of absence. This is another common fallacy.
The world has put all of its future oil production eggs in one risky basket—the Saudi basket. Turning the argument around, they've never produced more than 9.7 million barrels per day in any month in the last 10 years! And they finally reached that level when the oil price was over $140/barrel and the economic damage had already been done. Realistically, when push comes to shove in terms of global demand, how much oil is Saudi Arabia willing to produce? We really don't know. This is an extremely dangerous position for the world to be in.
A vaunted part of their large spare capacity now comes from the Khurais development which was put on-stream in mid-2009. This large field is supposedly standing by ready to produce 1.2 million barrels per day as needed. In order to achieve this output, the Saudis must pump millions of gallons of seawater from over a 100 miles away and inject it into the field to force the oil out. Khurais has little of the natural reservoir pressure that new (light) oil fields typically do. (Khurais was discovered about 50 years ago and produces light oil.) Has this field ever produced 1.2 million barrels per day? Well, no! I'm sure the Saudis did the required well tests, but as for turning this field up to full volume, and sustaining full production for months on end, that's never been done.
It seems clear enough that the world can produce at least another 2.5 million barrels of conventional oil per day beyond the 73.462 (monthly average) it has produced in 2010 (through July). The question becomes whether producing 75-76 million barrels could be sustained for any long period of time. The "natural" decline rate in Saudi Arabia's oil fields (taken as a whole) is about 8% per year. In order to mitigate this, they must constantly invest in field maintenance. Moreover, most of their mainstay producers, including the mighty Ghawar field (~5 million b/d capacity), are many decades old.
And then there is the trust issue. Clearly, the Saudis have exaggerated the size of their recoverable reserves as I demonstrated in OPEC Will Never Run Out Of Oil. Can we trust their spare capacity numbers?
Where do we stand? Peak oil does not mean the end of the world as we know it in the medium-term—the next 5 years or so depending on how the global economy fares—but in the longer term things don't look so good. Some say Iraq will increase its output by several million barrels per day in the next decade, but that's a very risky proposition.
Our utter dependence on the Kingdom of Saudi Arabia to meet our future supply needs poses a significant threat to the global economy. Moreover, it's a disgrace that the world has allowed such dangerous risks to pile up without adequate preparation for a future it was not hard to see coming.
It almost goes without saying that nobody is investing in the United States anymore. America is tapped out. Now that we're on the other side of the Housing Bubble, speculative money is flowing into emerging economies where growth rates are high and there's new damage to be done. A recent New York Timeseditorial explained the problem—
It seems premature to start worrying about the next financial crisis. Yet amid the current gloom, Wall Street is snapping up assets of the “emerging economies” that are growing faster and offer higher, more consistent returns. Financial regulators and policy makers in these countries need to pay close attention...
The Institute of International Finance, which lobbies for big banks, estimates that $825 billion will flow into developing countries this year, 42 percent more than in 2009. Investments in debt of emerging economies alone is expected to triple, to $272 billion.
While developing countries often benefit from foreign investments, huge inflows of capital complicate their macroeconomic management. They push up the value of their currency, boosting imports and slowing exports, and they promote fast credit expansion — which can cause inflation, inflate asset bubbles and usually leave a pile of bad loans. This money turns tail at the first sign of trouble, tipping countries into crisis.
Those are the dynamics behind Mexico’s 1994 “tequila crisis,” the 1997 Asian crisis, the 1998 Russian catastrophe, the 1999 Brazilian debacle and the 2002 Argentine collapse. The housing bubble that burst here in 2008 was painfully similar, with irrational investments and then a sudden flight.
One might go so far as to say that in chasing high, consistent returns on their money, Wall Street and other international centers of "Big Finance" specialize in exporting Bubbles and Inflation—that's what they do. Once some market is wrung dry, they move on to the next opportunity. Since all of this is done in the name of promoting economic development, which is the traditional (and necessary) province of Finance, it all appears to be on the up and up. Perfect!
Nevertheless, the emerging economies will not go belly up. A lot of the current investment will go toward raising standards of living. These countries will learn to defend themselves from Western predation.
This chart tracks the declining share of nominal gross domestic product of the U.S., Japan, Germany, the U.K., France, Italy and Canada against the rest of the world, with forecasts through 2015, based on data compiled by Bloomberg from the International Monetary Fund. The seven economies will generate less than 50 percent of global GDP by 2012, from about 70 percent in the mid-1980s. China’s output may surpass 10 percent of the world’s within two years, compared with 2 percent in 1987.
Bloomberg includes the necessary caveat—
“Emerging markets should incrementally outperform the developed world both in terms of economic growth and financial- market returns, at least for a while,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “The sustainability of their outperformance will depend on how they handle inflation and asset-bubble risks.”
China's GDP growth "slowed" to 9.6% in the third quarter, but their official inflation rate was 3.6% year-over-year. This was largely due to food prices, which rose 8% last month!
The government said the consumer price index, the broadest measure of inflation, rose 3.6 percent from the previous September. It was the highest rate in China since 2008, largely because of food prices, which rose 8 percent last month.
“Everything is expensive right now — food, especially the vegetables,” said Li Huijun, a 53-year-old hospital clerk, who complained as she shopped at Lianhua Supermarket in Shanghai that lettuce used to cost only 1 renminbi per 500 grams, or 15 cents for about a pound, but now costs about twice that amount. “And not to mention clothes, and shoes,” Ms. Li said. “They all went up, except my salary.”
Can you imagine if the inflation rate for food in the United States was 8% per month?
Bloomberg's projections of future economic performance are based on the IMF's latest World Economic Outlook October 2010, which is as fine a piece of bureaucratic analysis as you will likely ever see.
Economic recovery continued to strengthen during the first half of 2010. Global activity expanded at an annual rate of about 5¼ percent––about ½ percent higher than anticipated in the July World Economic Outlook (WEO) Update. A surge in inventory and, lately, fixed investment accounted for a dramatic rise in manufacturing and global trade. Low consumer confidence and reduced household incomes and wealth are holding consumption down in many advanced economies. Growth in these economies reached only about 3½ percent during the first half of 2010...
The global recovery remains fragile, because strong policies to foster internal rebalancing of demand from public to private sources and external rebalancing from deficit to surplus economies are not yet in place. Global activity is forecast to expand by 4.8 percent in 2010 and 4.2 percent in 2011, broadly in line with earlier expectations, and downside risks continue to predominate. WEO projections are that output of emerging and developing economies will expand at rates of 7.1 and 6.4 percent, respectively, in 2010 and 2011. In advanced economies, however, growth is projected at only 2.7 and 2.2 percent, respectively, with some economies slowing noticeably during the second half of 2010 and the first half of 2011, followed by a re-acceleration of activity...
When the IMF says the global recovery is "fragile," they actually mean there's serious possibility that all hell could break loose anytime now. Output in the United States has slowed dramatically since May, Japan is struggling to stay above water, and the Eurozone is a debt time bomb. At the same time, growth in the emerging economies is subject to the inflation risks (in assets and commodities) described above.
I don't think it's at all "premature" to start worrying about the next financial crisis as the New York Times said above. All the pre-conditions for it are being layed out right now. There's always been a boom & bust cycle in emerging economy economic development. Why should this time be any different? Certainly you can count on Wall Street bloodsuckers investors push up asset values in the developing world and then, if they can, get out while the getting is good. As Ecclesiastes 1:9-10 says—
What has been will be again, what has been done will be done again; there is nothing new under the sun.
Is there anything of which one can say, "Look! This is something new"? It was here already, long ago; it was here before our time.
Nonetheless, at least in a strictly historical sense, there is something new under the sun. The economic power of the United States, Europe and Japan is waning, while the emerging economies (China, India, Brazil, etc.) grow stronger. The IMF's projections of near term future economic growth may be overly optimistic, and the developing world is still plagued by vampire investors, but the overall trend is clear. Just follow the money. The United States is washed up. Today's investment opportunities, and tomorrow's as well, are in the global East and South.
There's a "new" kind of class warfare being waged in in the United States, but you have to look very closely to find it. Perhaps "warfare" is the wrong word, for a war must have two sides in active opposition to each other, whereas this time around we only have two sides. This "warfare" is creating conditions that more and more resemble those of the late 19th century when America did not yet have an extensive Middle Class. Mark Twain dubbed this corrupt era the "Gilded Age."
The great egalitarian (socialist) movements of the 20th century are long gone. In the decades after the Great Depression and World War II, the Democrats assimilated some of the socialist agenda, which faded away during the Cold War. In the 1960s, Lyndon Johnson could still wage a war on poverty. When I was growing up, Democrats stood for labor unions and rights of working people. Republicans ... did not. For years and years, everybody understood that this was how things worked.
In 2010 no political party or faction represents working Americans. However, the wealthy are very well represented on both sides of political aisle because they have the ability to pay the bribes the politicians depend on for their election. Robert Reich has noted that campaign spending in this year's election is completely out of control. This is the first election (of many to come) taking place after the Supreme Court lifted restrictions on campaign donations—
Hundreds of millions of dollars are pouring into advertisements for and against candidates — without a trace of where the dollars are coming from. They’re laundered through a handful of groups. Fred Malek, whom you may remember as deputy director of Richard Nixon’s notorious Committee to Reelect the President (dubbed Creep in the Watergate scandal), is running one of them. Republican operative Karl Rove runs another. The U.S. Chamber of Commerce, a third.
The Supreme Court’s Citizens United vs. the Federal Election Commission made it possible. The Federal Election Commission says only 32 percent of groups paying for election ads are disclosing the names of their donors. By comparison, in the 2006 midterm, 97 percent disclosed; in 2008, almost half disclosed.
We’re back to the late 19th century when the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. The public never knew who was bribing whom.
Reich refers obliquely to the Gilded Age in his remarks. In our comtemporary version of late 19th century class conflict, the wealthy are quietly taking over the country without opposition, a trend which has been going on for 25 years. Not only does the public not know who is bribing the politicians, they are long past caring who is bribing them. They might care if some vocal political faction represented them, but none do. Here is a description of the actual Gilded Age—
During the "Gilded Age," every man was a potential Andrew Carnegie, and Americans who achieved wealth celebrated it as never before. In New York, the opera, the theatre, and lavish parties consumed the ruling class' leisure hours. Sherry's Restaurant hosted formal horseback dinners for the New York Riding Club. Mrs. Stuyvesant Fish once threw a dinner party to honor her dog who arrived sporting a $15,000 diamond collar.
While the rich wore diamonds, many wore rags. In 1890, 11 million of the nation's 12 million families earned less than $1200 per year; of this group, the average annual income was $380, well below the poverty line. Rural Americans and new immigrants crowded into urban areas. Tenements spread across city landscapes, teeming with crime and filth. Americans had sewing machines, phonographs, skyscrapers, and even electric lights, yet most people labored in the shadow of poverty.
To those who worked in Carnegie's mills and in the nation's factories and sweatshops, the lives of the millionaires seemed immodest indeed. An economist in 1879 noted "a widespread feeling of unrest and brooding revolution." Violent strikes and riots wracked the nation through the turn of the century. The middle class whispered fearfully of "carnivals of revenge."
For immediate relief, the urban poor often turned to political machines. During the first years of the Gilded Age, Boss Tweed's Tammany Hall provided more services to the poor than any city government before it, although far more money went into Tweed's own pocket. Corruption extended to the highest levels of government. During Ulysses S. Grant's presidency, the president and his cabinet were implicated in the Credit Mobilier, the Gold Conspiracy, the Whiskey Ring, and the notorious Salary Grab.
I was reminded of all this by some recent articles and last night's 60 Minutes report The 99ers (video below). The income inequality data I've cited in the past has been updated to include 2008 tax returns—
The average income of the top 1 percent of households fell by 20 percent from 2007 to 2008, after adjusting for inflation, wiping out almost half of the gains this group achieved between 2002 and 2007 (see the graph below).
The average income of the bottom 90 percent of households fell 7 percent from 2007 to 2008, in inflation-adjusted dollars, the largest one-year drop for this group since 1938. The loss in 2008 more than wiped out the increase from 2002 to 2007, leaving the average income for the bottom 90 percent of households at its lowest level since 1996.
Income remained highly concentrated, with the top 1 percent of households receiving 21 percent of total income, which is somewhat below recent peaks but still among the highest percentages since the late 1920s.
The "Great" recession has wiped out the paltry incomes gains made by the lower 90% of Americans during the economic "expansion" made possible by the Housing Bubble. The top 1% took a hit, but Fed policy has insured that this reversal is only temporary. During the original Gilded Age there was little doubt about who was rich and who was not, but that has changed in the early 21st century. The first row below shows the actual distribution of the wealth, while the second row shows what Americans think the distribution of the wealth is. The third row illustrates what Americans view as an "ideal" distribution of the wealth.
The actual United States wealth distribution plotted against the estimated and ideal distributions across all respondents. Note: Because of their small percentage share of total wealth, both the “4th 20%” value (0.2%) and the “Bottom 20%” value (0.1%) are not visible in the “Actual” distribution. From Building a Better America – One Wealth Quintile at a Time by Michael I. Norton of the Harvard Business School and Dan Ariely of Duke University
As I've said before, I don't expect to see real class "warfare" in the United States anytime soon. However, that may change if living conditions for many more millions of Americans deteriorate as badly as I expect them to over the next decade. In the 60 Minutes video below, you will not find any revolutionaries. Instead, you'll see shocked, formerly Middle Class Americans trying to cope with the Awful Thing that just happened to them. For these 99ers who have maxed out their benefits, there is only the abyss unless caring people come to their aid.
Through an accident of plate tectonics and other developments over geological time, most of the world's remaining recoverable oil is situated around the Persian Gulf. This is unfortunate for us because we will thus never have a reasonable, universally agreed-upon estimate of the amount of oil left to produce. Let me explain.
Why talk about oil reserves at this point? Well, it seems that some Persian Gulf nations are now in a pissing contest over who has the most recoverable oil. Let's start with Kuwait—
KUWAIT CITY (AFP) – Kuwait has added at least 12 billion barrels of crude oil to its reserves, which are estimated at over 100 billion barrels, following a comprehensive study, a newspaper reported on Thursday.
Citing well-informed oil sources, Al-Jarida daily said the new oil was found in Greater Burgan, the world's second largest oilfield after Ghawar in Saudi Arabia, with reserves estimated at close to 70 billion barrels.
The sources told the paper that more reserves have been discovered at a number of other reservoirs following a comprehensive study, which will boost the Gulf state's reserves - the credibility of which has been questioned in the past.
I'll get to Kuwait's "credibility" in a moment. Calculating oil reserves is a very complicated business. There is always a great deal of uncertainty. I'm going to give you a grossly simplified "everything you need to know" explanation. First, there is an estimate of the original oil in place (OOIP). And then there is how much of that oil you expect to recover—this is called the recovery factor R. If we multiply these two terms, we get a number, usually measured in billion of barrels, representing a country's "proved" reserves. (I am really oversimplifying here, but it doesn't matter.) Let's call this number PR.
The PR term can be calculated over time t by the following formula:
PRt = ( new discoveriest ) plus ( reserves additionst ) minus ( oil producedt )
Kuwaits say they have discovered some new oil "pools" in Greater Burgan. Reserves additions come from the application of new technology which allows the producer country to increase its recovery factor R.
OK, now let's look at recent developments—
According to OPEC data, Kuwait holds the world's fifth largest crude reserves at 101.5 billion barrels after Saudi Arabia, Venezuela, Iran and Iraq [without the 12 billion to be added]
On October 4, neighboring Iraq announced a sharp rise of its crude reserves from 115 billion barrels to 143.1 billion barrels, overtaking Iran, OPEC's third largest member, in terms of reserves.
But a week later, Tehran also boosted its crude reserves, citing new discoveries, to 150.3 billion barrels from 138 billion barrels, reclaiming third place.
What's this? Are they just making this stuff up? And the answer is yes, they are. These reserves increases are called "political" in the sense that OPEC production quotas are based on a member's reserve base. But here's the kicker: OPEC reserves never go down, they either go up or stay the same.
From the EIA AEO 2006 edition. In 2006, OPEC claimed between 700 and 800 billion barrels.
For example, Saudi Arabia's proved reserves have been about 262 billion barrels (give or take a few billion) for years and years now. Miraculously, the amount of oil the Saudis discover or add as now technically recoverable just about equals the amount they produce year in and year out. No matter how much oil they produce, there's always at least that much left to produce! They accomplish this sleight-of-hand by raising their general recovery factor R. That number now stands at 70%, whereas the worldwide average is about 35%.
Thus we might reasonably conclude from the "official" numbers that the amount of oil left to produce in the Persian Gulf is effectively infinite. With these latest "additions" by Kuwait, Iraq and Iran, OPEC now has over 1,000,000,000,000 (trillion) barrels left to produce according to Ali Al-Naimi, Saudi Arabia's oil minister—
OPEC member countries now hold over 1 trillion barrels of crude oil reserves, having already produced 400 billion barrels since the Organization of the Petroleum Exporting Countries was founded 50 years ago, Saudi Arabian oil minister Ali Naimi said Tuesday.
"When it was founded, the members of the organization had around 300 billion barrels of oil reserves and in the last 50 years, has produced over 400 billion barrels," Naimi told a symposium marking the group's 50th anniversary.
"[OPEC] still has more than 1 trillion barrels, which places it in a unique position in terms of reserves to continue supplying petroleum to the world for several long years and to exploit these reserves for the benefit of future generations," he added.
It's quite amazing—Ali al-Naimi is bragging about OPEC's fraudulent reserves accounting! Seriously, Homo sapiens is about 200,000 years old in the fossil record. Is this the best we can do?
And what about those suspect Kuwaiti additions? Remember, the official OPEC data says they have 101.5 billion barrels left to produce plus another 12 billion more coming from new oil pools discovered at Greater Burgan—
Industry newsletter Petroleum Intelligence Weekly (PIW) however said in January 2006 that Kuwait's oil reserves stood at 48 billion barrels only, based on internal records seen by the newsletter.
The PIW report also claimed that Kuwait's fully proven reserves amounted to only 24.2 billion barrels.
At the time, Kuwaiti oil officials said the report was inaccurate and that it failed to take into account undeveloped reservoirs.
Who are you going to believe? Now, we could laugh all this off as a bad joke if it weren't for one niggling detail. These new bogus reserves from Iraq, Iran and Kuwait will very likely be added to the official totals used by the U.S. Energy Information Administration (EIA), the Paris-based International Energy Agency (IEA), and the semi-official numbers compiled yearly by British Petroleum and the Oil & Gas Journal. WTF! Yes, it's true—each of these sources simply adds to their global proved reserves tallies whatever numbers OPEC gives them. And the numbers OPEC gives them are not subject to independent audit. OPEC is free to use any estimate they want for each member nation.
So the next time these Persian Gulf countries don't answer the IEA's call on OPEC to produce more oil to prevent the price from getting into the stratosphere, as it did in mid-2008, you should remember that it's not for lack of oil—they've got over a trillion barrels now! And I'm sure there's more to come. OPEC will never run out of oil.
And you thought the global economy was screwed up.
Let's play some older music today. First up is jazz vocalist Johnny Hartman doing Billy Strayhorn's Lush Life. Hartman is accompanied by John Coltrane and McCoy Tyner, among others. After that, Ella Fitzgerald does September Song accompanied by pictures from Billie Wilder's film The Apartment. Finally, we've got the "Hoofer's Club" tap dance scene from Francis Ford Coppola's underrated 1984 movie The Cotton Club. Enjoy.
I confess, I find it dispiriting to read the polls and see candidates, mostly Republicans, leading in various midterm races while promoting many of the very same ideas that got us into this mess. Am I hearing right?
