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The rock and the hard place

Written By: - Date published: 10:53 am, May 7th, 2010 - 16 comments
Categories: Economy, energy - Tags: , ,

In the process of saving capitalism (again) from itself, governments around the world have taken on huge amounts of debt and some are running large deficits. Sovereign debt crises are popping up among countries that were being managed as if the good times would never end and now find their balance sheets over-stretched (fortunately, Labour paid down debt, rather than cutting taxes like Ireland did).

To avoid cascading sovereign debt crises, countries need economic growth that will boost their tax so they can start getting their books in order. But have you noticed how the first thing that happens when any good economics news comes along is the oil price shoots up?

From a low of US$35 at the depth of the crisis, oil has been hitting US$88 on the promise of a return to growth. And vice versa – bad news, like the social unrest in Greece over its austerity measures and the threat of more European debt downgrades, sees the oil price fall. It’s down to US$80 at present (which was an all-time record in 2005).

This tells me something important. Investors obviously think that any economic improvement will result in higher oil demand and that supply capacity is so tight that marginally higher demand justifies significant price rises. That is only getting tougher with supply capacity projected to start falling from 2012.

So, good economic news = higher oil prices.

But we’re close to the point where the price of oil tips economies into recession.

The Kuwaiti oil minister says that if oil goes above US$100 it will stall the global economic recovery. Others have put US$120 as the price that induces recession.

If growth is going to lead to another oil price-induced recession, already over-stretched governments are going to be called upon to borrow more, or let parts of the capitalist edifice collapse. So, sustained good economic news contains within it the seeds of its own destruction.

The rock of unsustainable public debt levels. The hard place of unsustainably high oil prices.

Is this the limit to growth?

16 comments on “The rock and the hard place”

  1. randal 1

    this generation is just as shortsighted and self centred as the rest.
    what is happening is the nature of capitalism and cannot be dispensed with.
    is this the limits to growth?
    who knows.
    did the tulip gamblers in holland think that when the market collapsed in the 17th century?
    while the myth is fostered that the consumer is king when the reality is most people are adventitious to the system then we wil keep blundering along as every man seeks to be king.

    • Lanthanide 1.1

      “this generation is just as shortsighted and self centred as the rest.”
      I disagree. This generation simply can’t do anything to improve the situation due to all the wealth being held by the decaying dinosaurs of the previous generations that don’t care if the world goes to hell in a handbasket because they’ll soon be dead.

      • Bored 1.1.1

        I think we might want to differ on who the selfishness are, I see the selfish “generation” as comprising everybody alive as opposed to the unborn.

        The decaying dinosaurs are however still very much present, even in the mindset of the young.

  2. freedom 2

    Watch Invisible Empire, (et al) it is very clear that there is nothing any of us can do but yell we know the truth. That may not be enough to quell the forest fires of Tyranny that are encircling this habitat called Earth, but it gives us a fighting chance to slow the spread of the main front.

    You can scream at the politicians but they are as helpless as we are. You can blame the banks, they are simply following orders from their bosses. You know in that little locked off part of yourself that truth is and always will be dangerous. That reality is very different from the illusory we are fed everyday. Unlock that truth and you will see there are countless places and situations where you can make a difference.

    The information is everywhere. Take five minutes and look in any direction you will see the falshing red lights of failure staring you in the face as we barrel along the twisted tracks of ignorance and complicity. All sensationalism aside, the Endgame of the Elite’s last centuries’ efforts are in play. What will be the final touchpaper is anybody’s guess, but it is being drawn closer to the match. Do nothing, and it is in your lifetime the autopsy of freedom will begin.

  3. Doug 3

    Not sure that the tulip analogy works, as unlike today and with petroleum, I don’t think 17th Century western civilization was running on tulip power (nice thought though).

  4. Bored 4

    I saw Lanthanides comments on open post today re the drop in share prices yesterday on the NY exchanges. Well spotted, I have watched their re inflation to around 40% more than their bottom price a year previously. What this indicates is that the money wished into existence and registered as public debt world wide to bail out banks etc has been speculatively wasted. Its all gone into the share market and fat bonuses to bankers, and it will evaporate just as quickly. Watch what happens to industrial returns, output and consumption when oil goes through $90 a barrel. Or if Europe has a default crisis triggered by Greece. then watch the markets.

    We the people will then be asked to take on more intergenerational debt. Kunstler might be right about the response, 1789 all over again.

  5. Nick C 5

    As short sighted as ever. Projected high oil prices create incentives to invest in alternatives for oil.

    • Bored 5.1

      Nick, that too might be equally myopic. Some things market economics cant deliver, for example markets cant deliver anything that breaks the laws of thermodynamics, nor can markets forever break the laws of mathematics with compound growth in a finite world.

      Then theres the other much touted great saviour of growth and progress, technology. That too cant break the laws of thermodynamics and create infinite energy.

      Interestingly incentives might be more designed to incent low energy production in contracting material conditions. Schumacher had quite a bit to say about this.

      I am not sure if we have yet reached the end to growth, my suspicion is that we will continue to grow some things that we (and markets) priorotise over others and allocate energy resource to. The rest will decline around them, which in itself need not be bad. Thats the challenge.

  6. emp 6

    what a stupid labour hack you are. Greece’s debt problem wasn’t caused by free markets. You are so ignorant. Socialist governments spent money they didn’t have. Just like cullen gave us five years of no growth in the tradable sector then a decade of deficits.

    [lprent: I’m pretty sure that Marty doesn’t even vote Labour from some things that he has said. He does tend to criticize my favorite party quite a bit. But that just indicates what a pathetic fool that you are for not investigating first.

    However you are one of the few old time dumbarse trolls that has been through here for a while. I’ll release you for the commentators to have a play with. They haven’t had any nice little prey to pounce on for a while. It will give them a sense of pleasant nostalgia.

    I’d suggest that you read the about and policy to avoid getting done for egregious behavioral errors that cause me to ban you. ]

    • freedom 6.1

      three little words to help your education
      ‘watch Invisible Empire’
      then try to read what you wrote with a straight face

    • Draco T Bastard 6.2

      emp, you’re obviously not keeping up with the times. Goldman Sachs helped Greece to fiddle the books and then sold them some “securities” that were designed to fail. There’s a reason Goldman Sachs are presently being done for fraud in the US.

      This should give some even better information (although I think Buchanan in that article is viewing the Greek Crisis through his ideology more than as a scientist).

    • nzfp 6.3

      emp,
      To add to Draco’s comments – you should also consider the role that speculators are playing in attacking Greek bonds. On the May 19th, 2009 American author Ellen H. Brown wrote an article titled “Time To Get Out The Wheelbarrows? Another Look At The Weimar Hyperinflation”. Brown argues that the Weimar republics 1921 and 1923 Hyper-Inflation was not caused by “seigniorage merely printing money”, but rather it was caused by speculators shorting the Weimar currency. Ellen writes:

      Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht’s 1967 book The Magic of Money, he “let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.’ What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

      Short selling is a technique used by investors to try to profit from an asset’s falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

      Greece is experiencing the same crisis as the Weimar republic. The UK is in a very similar Debt/GDP ratio to Greece as are many other European nations and US States. However, speculators are not currently attacking those other nations. Without speculators attacking Greece, there would have been no Greek debt crisis.

  7. nzfp 7

    While I don’t necessarily disagree with Marty’s analysis, I think it is important not to forget the role that speculators such as Goldman Sachs and JP Morgan have on the oil markets. On November 11 2009, Phillip Davis of online financial magazine Seeking Alpha, in an article titled “The Global Oil Scam: 50 Times Bigger than Madoff” reported that “$2.5 Trillion That’s the size of the global oil scam’. Davis goes on to state:

    It’s a number so large that, to put it in perspective, we will now begin measuring the damage done to the global economy in “Madoff Units’ ($50Bn rip-offs). $2.5Tn is 50 times the amount of money that Bernie Madoff scammed from investors in his lifetime, but it is less than the monthly excess price the global population is being manipulated into paying for a barrel of oil.

    Further reading of Davis’ article and we find that in 2000, Goldman Sachs (GS), Morgan Stanley (MS), BP (BP), Total (TOT), Shell (RDS.A), Deutsche Bank (DB) and Societe Generale (SCGLY.PK) founded the online commodities and futures marketplace “Intercontinental Exchange’ (ICE).

    Davis goes on to say “[b]efore ICE, the average American family spent 7% of their income on food and fuel. [2008], that number topped 20%. That’s 13% of the incomes of every man, woman and child in the United States of America, over $1Tn EVERY SINGLE YEAR, stolen through market manipulation’.

    The fraud was soo big, that on November 17 2009, Dan Jones of Oil&Gas magazine in an article titled “The $2.5 trillion global oil scam’ commented “[a]fter a Congressional investigation into energy trading in 2003, the ICE was found to be facilitating “round-trip’ trades. This is where one firm sells energy to another, and then the second firm sells the same amount of energy back to the first company, at the same time and at the exact same price’. Davis’ elaborates further in his “Seeking Alpha’ article stating that “[n]o commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. This is nothing more than a massive fraud, pure and simple.’

    Due to the manipulation of the oil market, in 2008 “Index speculators [had] stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years’.

    F. William Engdahl, author of “A Century of War: Anglo-American Oil Politics and the New World Order’ wrote on 2 May 2008 in an article titled “PERHAPS 60% OF TODAY’S OIL PRICE IS PURE SPECULATION’

    The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.

  8. freedom 8

    emp, you can write thousands of examples of expert analyses and references to the detailed workings of finance, though the bait is soggy you will grab the odd minnow with your focus on mid-levl banking. Sadly it allows the prize fish to continue to gorge on everything else. You have to cast your net a lot wider to catch the truths that are scuttling over the riverbeds of social illusion

    you have to ultimately realise the rules these people play by are written and enacted by a small group of conspiratorial individuals with very different goals than the ones they state publicly

    and by the way i also like books, people and walks on the beach

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    1 week ago
  • Is it time to further recognise those who serve in our military?
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  • Paving the way for a fully qualified early learning workforce
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  • Sport Recovery Package announced
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  • Major boost in support for caregivers and children
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  • Great Walks recovery on track for summer
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  • Māori – Government partnership gives whānau a new housing deal
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  • Keeping New Zealanders Safe In The Water
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  • Legal framework for COVID-19 Alert Level referred to select committee
    The COVID-19 Public Health Response Act 2020, which set a sound legal framework ahead of the move to Alert level 2, has been referred to a parliamentary select committee for review.  Attorney-General David Parker said the review of the operation of the COVID-19 specific law would be reported back to ...
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  • New Zealand condemns shocking attacks on hospital and funeral in Afghanistan
    Foreign Affairs Minister Winston Peters says New Zealand condemns the targeting of civilians in two terrorist attacks in Afghanistan earlier this week. “The terrorist attacks on a hospital in Kabul and a funeral in Nangarhar province are deeply shocking. The attacks were deliberate and heinous acts of extreme violence targeting ...
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  • Government to close tobacco tax loophole
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  • $62 million package to support families through the Family Court
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    2 weeks ago
  • Tailored help supports new type of job seeker – report
    The Government’s expanded services to support people into jobs will help an emerging cohort of New Zealanders impacted by COVID-19. The impacted group are relatively younger, have a proportionately low benefit history and have comparatively higher incomes than most who seek support, as captured in a report published today from ...
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