I want to pound home the “Oil export market” issue. The importing OECD nations - the U.S., Japan, Germany, and France, along with China – may only import Oil which exporting nations have exported in the first place. I know this sounds elementary, but this is a critical item that the markets are failing to reflect. The exporting nations are increasing their domestic consumption of Oil because their populations are increasing rapidly and those populations wish to live at the same standard of living that they see on American Television Programming – Air conditioning, appliances, cars, etc… If these exporting nations cannot increase total production of Oil more than the amount of the increase in domestic consumption it follows then that their exports decline. It is important to mention that the price of petroleum products to the citizens of the major exporters – Saudi Arabia, Iran, Abu Dhabi, and Venezuela – is a fraction of the world market price, leaving them little incentive to curtail consumption.
Now, superimpose this on a background of asset price and monetary deflation (CPI deflation has not appeared as yet. Our own Dr. Saif Lalani believes that if CPI deflation does not appear at the end of Q2 2009 it will never appear – as in, “if not now, when?”), economic contraction, and in the case of the U.S., the world’s largest Oil importer, increasing Oil inventories at the same time that imports have plummeted, and the illusion of a “Stress Test” by government officials that, in my opinion, used wildly overly optimistic assumptions, and a budget deficit that we feel will absolutely lead to a funding crisis for U.S. Treasuries, requiring debt monetization by the Federal Reserve, with, in our opinion, the result a currency crisis of biblical proportion.
The U.S. National Debt was $11.2 TRILLION (80% of GDP, the number that really matters) as of last week (and that number does not include the $5 Trillion of Fannie Mae and Freddie Mac debt that the U.S. is on the hook for nor the Social Security “Trust Fund”) with interest on the debt in 2008 totaling $412 Billion. The U.S. is increasing its debt by $1.84 Trillion in 2009 and the U.S. projects that the national debt will increase to 100% of GDP - $20 Trillion by 2015 (we wouldn’t be surprised by $24 - $28 Trillion, as we view the Obama administration’s assumptions as more “wishcasting” than forecasting), with INTEREST on the debt topping $1 Trillion.
Please consider this: Economic growth has averaged just under 3% for the past century. Once the National Debt reaches 100% (and we are well past 100% if you add it all up), the interest alone will compound at better (perhaps FAR better) than 5% per year. It follows then that it is impossible to grow our way out this, and if we increase taxes to pay the debt off, we will bring GDP to a negative - thereby only increasing the debt. It appears to us that there is only one way out. (I have searched and researched to see if anybody else has pointed this metric out - and have found none. Could it be that I am missing something? Miscalculating? Feel free to comment.)
Since there is simply not enough money in the world, at the moment, for this to occur it is our opinion that a massive devaluation of the U.S. $ is in the offing through the creation of money “out of thin air” by the Federal Reserve in order to pay for the debt.
That said, in the short term deflation could fool one into thinking that this is just hysteria and histrionics on the part of some. We think that the turn of events, when they come, will be so swift that no words here would be able to capture the “shock and awe” we feel we are in for.
The question of exactly "WHEN" this will happen is beyond my abilities, yet "when" is very important. If the funding crisis happens before the oil import crisis then certain outcomes in the commodity market will be different than if the funding crisis happens post oil import crisis.
To my mind, ONE THING IS A NEAR CERTAINTY - one day in the next 1,500 days your life savings is going to (mostly) evaporate.
Mentatt (at) yahoo (d0t) com
15 comments:
It seems to me that US population growth is 1% a year. So 1% economic growth is breaking even. According to Shadow Stats, the US has had only 3 quarters of growth(2004) in the last 9 years, while having 8% yearly inflation, and 10% or so unemployment.
As I drive around, it seems to be more commercial real estate for sale or rent.
that is the anecdotal evidence.
The empirical data says that this is real, here, and now. What is the rate of change? Drop dead or slow and grinding? That is the remaining question.
There ain't no "if" anymore, only "when".
Ok, my usual list of comments ...
1) The U.S. is using 20 million barrels of oil per day, and that so far is unlikely to increase by much. It's plateaued for awhile. I think we can all agree the problem isn't the U.S. It is the hundreds of millions of poor people out there who desperately want to be Americans, and drive Buicks and eat hamburgers like we do. The demand for oil, during our present little U.S.-led depression, however, has barely budged. It dropped a measley 8% at worst last year, and is now back to what it was before. We're horribly dependent on oil, but the amount the U.S. needs, isn't changing very much. The problem is overseas.
2) Poor people in oil-producing countries, like in Saudi Arabia and Iran, are still gonna be poor. Some may escape the slums, but the overwhelming majority won't, so don't worry too much about the ELM (export land model). The world has not declared a moratorium on poverty. Those nations aren't going to consume THAT much more. Poor people are still going to use horses and buckboards.
3) Deflation only in the short term? Mish says not. :) Matter of fact, with a generational shift going on and the biggest asset bubble (and accompanying debt to go with it) popping, Americans may be spending & comsuming a lot less for a very long time. Even with all the credit and currency headed our way .. people are just plain tired! I expect 30 years of spending downshifting.
4) S&P 500 eanrings (profits) have essentially dropped to zero -- that's a hundred year number. American commerce won't get out of this hole for a damn long time -- more deflation.
5) There may indeed be some "shock and awe," but as long as Netflix is open and American Idol keeps running, and the food stores stay open (my potatoes have already started to bud! No bought potatoes for three months this fall!), shock and awe will have the same effect as Iraqi shock and awe -- lots of noise signifying not very much.
Bureaucrat:
I admire and agree with much that Mish has to say.
Saif and I are working through this in a rather slow and methodical way, so bear with us.
Deflation will continue AND the funding crisis will happen - what that combination is called and what it will look like exactly I have no earthly idea at the moment.
The Math concept "e" or the exponential function is the controlling force in anything growing at a steady rate.
Will be posting more about this over the next couple of weeks.
Hi Bureaucrat!
Take a look at GDP growth for India, China, Venezuela, Saudi Arabia, etc. All are growing and using more oil. Their problem is our problem.
Right now, the economy is de-leveraging, and the Fed is not replacing the money that disappears through de-leveraging with "base money" at nearly the same rate YET. Let the Fed absorb the federal deficit for a few years (they may have to), and the inflation picture may change dramatically.
Regards,
Coal Guy
I think the demographics are an important factor in the ELM; most developing nations have a predominantly young population, many have an average age in the 20's. These young people are consumers and 'want' right now, in the same way as baby-boomers of America and Europe wanted in the 1960's and 70's. They have the next 30 years of wanting. Greg is right; if they are growing up in an oil-producing nation, they'll insist that the home-produced oil is used at home. And for them, it isn't costing what it would cost us (only opportunity cost for their government).
If you add to this the politics; South American producers prefering to deal with anyone but the USA, China doing deals all over the World to secure resources, and political insecurity in Russia, Nigeria and the Middle East, then if anything the ELM model underestimates the shift in the transfer of available oil away from the USA.
P.S. What would US growth have been WITHOUT oil?
They all yap about hating the USA, but we have all the money, so they will continue to sell us oil. Chavez knows it (we get almost all VZ exports now), Saudi Arabia knows it (2% of Saudi Arabia is immensely rich and 98% of it is immensely poor), Mexico knows it (50% of people there are dirt poor), and even Canada knows it. They will do business with us cause we, for the time being, are where the $$$ is.
(U.S. growth without oil would be like it was from 1750 to 1850. Crappy.)
(Oh, Hi Coal, or can I call you Carbon? :) )
Bureaucrat; what money?
Do you mean all those devaluing U.S. dollars that have no capital base?
Or all those shiny new dollars that'll sooner or later collapse the value of all dollars?
Or do you mean all the life-savings that China USED to lend you?
Seems to me you are not only living on borrowed money, but on borrowed time too!
>Do you mean all those devaluing U.S. dollars that have no capital base? <
Yes. Those dollars that will soon be unacceptable to oil exporters.
Of course, chinese yuan will be accepted in payment for oil exports. And dollars can possibly be exchanged for yuan at a very high exchange rate.
"To my mind, ONE THING IS A NEAR CERTAINTY - one day in the next 1,500 days your life savings is going to (mostly) evaporate"
DO you expect this for Europe and elsewhere or mainly America?
If the Dollar devalues vs the Euro and other currencies, will it not mean the value of savings in Euros will initially increase?
Or is that maybe where gold comes into play as a store of value, as all the Fiat currencies of the world begin a downtrend relative to real assets.
There are an incredible amount of scenarios that could play out..
oOOo:
I expect all central banks will increase their monetary base in the environment I foresee.
This is not to say that deflation cannot continue for another 6, 12, 24 months. I think that 24 months is on the outside, and that a Treasury funding crisis could begin as early as this September - with myriad unforeseeable and unintended consequences.
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