Sharon Astyk blames the global financial mess on rising food prices and our desperate efforts to replace oil: Peeling the Onion: What's Behind the Financial Mess?

If you want a pat answer to what has caused the financial crisis that is reverberating around the world, and now threatening the derivatives market, we've got one. Nearly everyone - in the mainstream media and outside it, tells the same story - that the crisis was caused by the unravelling of the housing market, particularly the US housing market.  And if you ask what's behind that, well, we're told there was a bubble.  And if you ask what was behind the bursting of the bubble, well - it is turtles all the way down.

I'm going to suggest that if you peel off the layers of the financial crisis, we're going to find some pretty basic things.  And one of the basic things is, well, food.  It seems sort of anti-climactic, I think, if you are a pundit, to talk about the cost of rice and soybean oil as part of the root problem of such a massive financial crisis, but I suspect we'll find it there.  And underneath the food, I think we'll find oil.

Astyk asserts that, "the majority of farmers, builders and factory workers use some machinery, but the primary engine of production is human work." With some training, she continues, a subsistence farm worker can become an a very productive industrial worker. A great deal of education, however, is required to produce white collar workers. "The money is in the new workers." she writes, meaning that these converted subsistence workers are a real bargain for the companies that employ them, and ultimately a great source of wealth for the industrialized world.

But with the rising cost of food:

 The new workers, and the lubrication they provide in the global money system are being systematically impoverished, and what money they do spend goes to an increasingly narrow band of companies - instead of spreading the money around, money goes for very basic things - mostly food, and mostly basic foods.  And the farmers who make the basic foods mostly send that money back to a very small number of companies - the ones that produce oil and the ones that produce fertilizer - many of them located in the same countries and places.

... And what is the root cause of the high price of food?  Well, the single biggest factor, according to a number of studies, including the UN studies, has been the move to food based biofuels.  So if we peel back the onion one more layer, what we find is that one of the major factors slowing the economy has been, well, oil.  The rush to biofuels is a response to tightening oil supplies and rising costs, and the aggregate effect has been to push up food prices all over the world, while doing pretty much nothing to increase energy security, reduce greenhouse gasses or do much of anything else useful.

I'm no economist, and I don't pretend to be.  But I wonder, when we peel back the layers of the onion later, and look at the history of this Depression, I wonder if we'll see that in fact, what happened was that we squeezed out the lifeblood of the very thing we'd built our economy upon - new workers/consumers who could be counted on to grow the economy outwards and upwards.  We could have foreseen this - but we chose not to - we chose, as we struggled to keep our lifestyle intact on the backs of the world's poor, not to see that we stand on their backs, and it is people...all the way down.  In killing them, we killed ourselves. It may be that besides the tragedy of starving millions of poor people, we may also have brought down our own system, simply because we did not see, did not realize that the poor matter more to us than we like to admit.

"We have met the enemy and he is us" - Pogo

ASPO-USA, the Association for the Study of Peak Oil & Gas, is having a conference in Sacramento. The Oil Drum has been posting daily summaries:

The next speaker was  Matt Simmons whom I have heard on numerous occasions, but who this time talked into a silence as intense as any I have heard. He scared the audience in a way I have not seen before, perhaps because we were all much more willing to believe this time, given his record from the past.

He noted at the beginning of his talk that there are 150 miles of unit trains leave Wyoming every day. (Ed note – a 1-mile unit train contains 110 rail cars of 100 tons of coal each.) He talked about the elements of risk that we have now forgotten how to apply. He noted that we have forgotten how savage a collapse can be, or how fast it can occur. (Enron unfolded in 7 days. The events of the last week showed how even faster collapse can come now). The delays in bringing oil production on line from the recent hurricanes will only underline this point.

As a result places are running out of gasoline (Ed note the two folk next to me at the table were from Atlanta and Tennessee and neither town had any gas stations left with fuel, as far as they knew). The South is going to have to cope with a growing shortage until more of the infrastructure comes back on line, and that may be weeks into the future. This will get worse if all motorists suddenly start topping up their tanks, since this will sensibly empty the floating reserve that is the volume moving through the system at the moment. This will, in turn, remove confidence in the system, which will make the situation worse. The heating oil situation for the North East is only going to get worse in this scenario. And there is no data on how close to a collapse we currently are. And the collapse could well be a disaster equivalent to that of Gustav/Ike squared.

He noted that contrary to the solutions for the financial world there is no insurance policy that can help with Peak Oil. The paradigm is changing and sadly the world is still Energy Illiterate.

He also commented, having talked with producers of the new gas wells being drilled in the various shale formations around the country, that this is close to, if not already at a point where the energy costs to sink the well are not returned by the gas recovered from it. Further in talking with Baker Hughes folk (the ones that track the wells that are drilled around the world), he found that those who thought depletion in old fields was less than 5% got no takers from his audience, 60% of the audience thought that depletion was between 6 and 8% and the remainder thought that it was in the range above 10%. (As noted earlier the assumed value is often taken as somewhere between 2 & 4% with TOD using around 4.5%). It was by far the most pessimistic that I have heard him give.

I haven't seen anything in the news about shortages being so widespread.

Paulson and Bernanke ratchet up the blackmail talk

Euro Peak Oiler Jerome a Paris links to this MSN video of Jim Jubak.

The theory here is that the Fed has destroyed its balance sheet by taking on increasingly large chunks of non performing assets (the "toxic waste" made from mortgage-backed securities and the like) in exchange for loans of "real" cash to banks that may still end up not repaying them.

It is effectively "broke." This is not what is supposed to happen to a central bank, which can print money without restriction, so let me explain what this means: it can no longer help the banks in a non-inflationary way. In order to take on more toxic collateral from the banks, it would need to actually print money, which would immediately be visible and would be seen as very inflationary. Instead, by getting government to take on more public debt, the impact is diluted in a much larger pool (public debt, rather than cash).

So this is a desperate gamble by Paulson and Bernanke to avoid the run on the dollar that would be triggered by direct cash creation.

Obviously, as the market shows (with the euro up by 6 cents since the plan was announced Thursday night, and gold and oil similarly massively up), worries about inflation have not quite been killed, but they have been kept to a manageable scale.

At this point, of course, the goal is to avoid a bigger crash before the election.

More and more people are speaking out against this bailout.

What Crisis? a.k.a. Creative Destruction Is The Beating Heart of Capitalism    (September 25, 2008)

The well-oiled propaganda machine that is the mainstream media would have you believe the world was mere moments away from complete financial Apocalypse last Friday. Yet here we are, a week later, and the world still exists. So we have to ask: what crisis?

It is instructive to remove ourselves from the breathless propaganda for a moment and refer back to the core of Capitalism with a Capital C: creative destruction. Yes, destruction, as in closing the doors, going bankrupt, folding, game over.

Let's be honest. This entire crisis is best summarized like this: players leveraged 30-to-1, bet big and lost. End of story. Nice try, pal, now clear out and let another player take your still-warm chair.

1. Banking and lending are essentially low-profit commodity businesses. Banks accept deposits, and then lend out the cash to qualified borrowers at an interest rate above what they pay on deposits. There is no magic in that, and the qualifying process is basically automated now so transaction costs are low.

How did Wall Street generate huge profits off an essentially low-profit commodity business? With huge leverage and 2+2=5 legerdemain/trickery. If you leverage $1 into $30 (yes, they all went for 30-1 leverage) and make 10 cents on a deal, thanks to leverage you made $3 instead of 10 cents--300% rather than 10%.

To mask the inevitable risk, then you have to present the "financial instruments" with a veneer of low risk, which the ratings agencies were pleased to provide for a fat fee. You also need to re-package the vanilla mortgages into instruments which enable you to charge huge fees, so you slice the low-yield mortgages into tranches which can be sold with hefty premiums. Then you sell derivatives (CDOs) based on the tranched mortgage-back securities, and you've effectively turned a commodity into a high-value "family" of instruments, the selling of which generates stupendous fees.

Now that the game is over, leverage has been shut down and the business has been forced back to a low-profit commodity model. Wall Street will not "come back" any more than the $100,000 condo in Florida will suddenly jump back to fetching $400,000. The outsized profits are gone, and the share of U.S. corporate profits will fall back to a much more modest slice--say, 1% rather than 4%:

4. There is no "crisis" in banking: well-managed banks like Wells Fargo which did not indulge in leverage and gambling are in fine fettle, ready and able to lend to qualified borrowers. A great number of banks which were managed prudently are quite solvent and in no need of bailouts.

Full article

Dmitry Orlov cuts to the bone:

Adieu, Stage 1 Collapse!

Speaking of peasants, everyone continues to repeat that the bailout is being financed by "the taxpayer," although it is unclear why our soon-to-be jobless and destitute taxpayer should be expected to cough up an extra trillion or more. The taxpayer may soon need a bailout too. If this mythical taxpayer actually tried to borrow her share of a trillion dollars against her future earnings, what sane person would want to give her that loan? Clearly, the gratuitous mention of the taxpayer is just a ruse designed to hide the rather obvious truth.

The bailout is actually going to be financed by foreign interests that hold US Dollar assets. Yes, the value of their holdings will go to zero, but they do not want this to happen suddenly. They wish to continue redeeming their US Dollar holdings for all manner of things of value, from capital equipment and intellectual property, which can be expatriated, to farmland and other means of production, which can be used in situ to grow food, mine ore, and so forth, which are then expatriated. There is some optimal function for this great unwinding, which will allow foreigners to expropriate the maximum amount of value in the minimum amount of time before their efforts to redeem their remaining US Dollar holdings stop paying for themselves in terms of the value of the available stuff.

Back in February, Orlov outlined his Peak Oil version of the Kubler-Ross progression towards death. We find ourselves on the precipice of Stage 1, which, recalling yesterday's contentious TPM debate, happens to be when credit stops being the lifeblood of the economy:


Stages of Collapse

Stage 1: Financial collapse. Faith in "business as usual" is lost. The future is no longer assumed resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.

Stage 2: Commercial collapse. Faith that "the market shall provide" is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.

Stage 3: Political collapse. Faith that "the government will take care of you" is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.

Stage 4: Social collapse. Faith that "your people will take care of you" is lost, as local social institutions, be they charities or other groups that rush in to fill the power vacuum run out of resources or fail through internal conflict.

Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for "kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity" (Turnbull, The Mountain People). Families disband and compete as individuals for scarce resources. The new motto becomes "May you die today so that I die tomorrow" (Solzhenitsyn, The Gulag Archipelago). There may even be some cannibalism.

Keep in mind that Orlov is no more Hari Seldon than I am. Time and chance happeneth to us all, so there are endless ways energy depletion might play out around the globe. The US might be the best place to be, or the worst place to be, although IMO Sudan seems like the worst right now.

Here comes $500 oil

Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?

"John McCain is energy illiterate," Simmons is saying. "He's just witless about this stuff. As a lifelong Republican, I'm supporting Obama." A dozen oil and gas men sitting around a conference table in Lafayette, La., chuckle nervously as he continues. "McCain says, 'Oh, we're going to wean ourselves off foreign oil in four years and build 45 nuclear plants by 2030.' He doesn't have a clue."

McCain's midsummer move to begin campaigning on a platform of more offshore drilling has only hardened Simmons's position. "What a hypocrite," says Simmons, who supported McCain's rival Mitt Romney in the primary - no surprise given Simmons's history with the Romney family. "Here's a man who for at least the past 15 years has strenuously, I mean strenuously, opposed offshore drilling. And now it's 'drill, drill, drill.' And he doesn't have any idea that we don't have any drilling rigs. Or that we don't have any idea of exactly where to drill." (As for McCain's running mate, Sarah Palin, Simmons says: "She's a very colorful person, but I don't think there's a scrap of evidence that she knows anything about energy.")

h/t Andrew Sullivan

Simmons is the only guy on TV that ever mentions that you need infrastructure - specifically, rigs that simply aren't available - to extract oil and gas from underground. Everyone else seems to think oil production is like falling off a log.

Crossposted at TMCPAC

Peak Oiler Nate Hagens offers a good summation of short-selling history, and some grave concerns about the recent changes eliminating short-selling.

No Naked Short Selling => No Short Selling at All => No Future Energy?

First of all, we simply CANNOT halt all short selling. The public (Hillary Clinton and Chuck Schumer) position is that short selling was the root cause for the demise of Bear Stearns and Lehman Brothers and why Morgan Stanley and Goldman are currently on the ropes. The truth is that SOME short sellers use unscrupulous methods to make short selling stocks a self-fulfilling prophecy, and thereby profit. The vast majority of short sellers however act as cleaner-fish, policing the stock market for crooked management, unethical practices and bad business models. I have been told that what is underway is a large scale witch hunt that in the next few weeks will show the public some 'very well known' names ending up in jail. But just as pursuing ethanol to wean us off of oil, and pursuing oil speculators to blame oil price rises on, eliminating ALL short sellers in order to punish a few bad eggs will have wide boundary unintended consequences. Instead of the normal knee-jerk scapegoat lynching, perhaps this time our leaders will look deeper for the real 'witch' responsible for the recent explosion in systemic risks and financial upheaval - whoever approved and subsequently encouraged the use of enormous leverage in the financial markets via scaling of investment banks assets and liabilities. Oh wait - that would be the same people looking for the witches..

Nate drily notes that oil prices are unlikely to go down without short selling, and worries that the bailout will dry up investment capital for alternative energy.

Update: Some late night calls and I understand all this is to really punish/eliminate 2-3 high profile hedge funds and after putting some egregious short sellers in jail, it will be back to BAU - but at what cost? While I was in the near term peaking camp due to accelerating costs of the marginal barrel (lower net energy), due to this debacle, Peak Oil is now a thing of the past. There will never be a year where we produce more oil than in 2008, (and if things fall fast, then 2008 still may not catch 2005). Energy and finance are critically linked. The deepening banking crisis now combined with apathy and reduced confidence in our financial system will evaporate any chance we had of offsetting oil depletion with new production and new technology. You can bank on it.

Cross-posted at TMCPAC