Links 9/1/09


  1. ndk

    Fantastic writing by Adler. I’ve just got to highlight one of his points here:

    The Fed and Treasury have set up a scam over the past year to make it look as if there’s still money, but what they have actually done is to transfer risk from the private sector to the public sector, in other words us, current and future generations of US taxpayers.

    I’m an avowed Keynesian heretic, a disbeliever in the power of fiscal deficits, monetization, or the combination of the two to do anything to spur private sector growth in a world with negative equilibrium real interest rates. I also don’t believe in multipliers. This heresy springs largely from a slavish devotion to things like “empirical evidence”.

    Fine, so far as it goes. But as Adler points out, whether or not stimulus does indeed work, if it does work, it could only do so by further indebting the government to the financial industry. That can only damage the tenuous separation of powers between our Executive, Legislative, and Corporate branches of government.

    Thus, Keynesian stimulus is a win-win for both that fabled top 1% and the financial industry. And Keynes himself was notoriously elitist. I wonder at the correlations here –or between Mankiw’s slavish devotions to tax cuts, or Krugman’s slavish devotions to social programs, for that matter. Macro is much less fun and interesting when it exists only as a recourse for defense of personal opinion.

    The only real recourse the Government and people have against this is, ironically, the cruelest tax: inflation, and seigniorage. And with our modern financial system, even that probably doesn’t work.

    Oh well. As Lou Jiwei said, while the music is playing, or something like that…

  2. attempter

    The Adler piece is excellent on the mechanisms of organized crime.

    I’ll just add the Peak Oilers to his litany of the prognosticators who called the bubble crash.

    Peak Oil predicts that once global supply peaks (which it has, having been at 85-87 million barrels per day on what we call the “bumpy plateau” since 2005), prices will show extreme volatility, through a combination of extreme price sensitivity to small changes in supply and demand, and great vulnerability to the effects of speculation. Thus the 2008 spike to $147/barrel was an expression of this volatility, although the ratio of fundamentals:speculation which proximately caused it is still in dispute.

    In turn the real economy and even more the financialized meta-economy which bloats out of it are are dependent upon cheap, plentiful oil to keep “growth” briskly growing and debt serviced. So when high gas prices were clobbering suburbanized Americans three ways, as consumers, as commuters, and as mortgage-holders at the mercy of interest rates, at the same time that ARMs were resetting for reasons endemic to the bubble itself, the result was the predicted crash.

    More fundamentally, the housing bubble arose out of and exacerbated suburban sprawl itself. Peak Oilers recognize this sprawl as in itself fundamentally unsustainable, completely dependent as it is on cheap, plentiful oil.

    So a bubble based on sprawl is doubly unsustainable, both in itself (since any bubble must collapse of its own pressure once there’s no longer enough capital to pump into it) and fundamentally, since oil is no longer reliably cheap and plentiful.

  3. bob

    That Vanity Fair story on Paulson could be gold. The source is 15 hours of taped interviews with Paulson over his career as Treasury Secretary.

    From the Paulson piece, on being nominated to be Treasury Secretary-

    “Paulson laughed when he remembered calling Lloyd Blankfein to tell him that he’d be taking the Treasury job after all, and that Blankfein in turn would take over as head of Goldman Sachs. “I think I surprised and delighted him,” Paulson said. He “thought it was great for the country—and for him.””

  4. fresno dan

    I agree with NDK and Attempter – the Alder piece is wonderful. My favorite:
    So now we have transferred trillions of bad debt, some of it completely worthless paper, on to the books of the Fed and the Federal Government. What can the outcome possibly be? Ultimately default? Devaluation? Hyperinflation? Slow motion economic collapse such as that which is currently under way? Even finally the collapse of government and society? Anything is possible, given how insane these policies are and how clueless our policy makers have been and continue to be.

  5. Tim in Sugar Hill

    Re: Robert Reich piece: What’s missing is Leadership. It’s Obama’s job to provide it. Thus far, he has failed to do so. And it appears to me that he has no interest in Leading. He just tosses and idea out there and says “hey, guys, see what you can do with this.” And while the Republicans savage Health Care, Obama does more photo-ops for the cover of GQ.

    I’m thoroughly disgusted.


  6. One Red Shoe

    Reich’s piece only makes an oblique reference to the nature of the Democratic party being more like herding cats.

    I think there’s far less discipline in the Republican party as a whole. A narrow vocal majority that fear change are driving these issues forward, with the Republican party taking the credit.

    Obama’s administration would be better off crafting a bill that gets moderates from both parties to drive the health care issue forward and spurns the interests of Big Pharma.

  7. eric anderson

    one red shoe, I am not opposed to change. I do not fear change, in the abstract. I’m one of the uninsured. I believe the health care system (which is really a sickness care system) needs radical change. Unfortunately the House bill (and I presume the Senate is not radically different) really offers a power grab. Given how the government has handled the financial crisis, I can’t see why any sane person would predict positive changes from their meddling further in health care.

    I want change. Change that gets the federal government increasingly out of health care. I don’t fear that change at all.

    Also, I think you err greatly when you credit opposition to the health care bill to a “small vocal minority” of Republicans. The growing base of resistance to Obama’s agenda generally, and health care in particular, is not a Republican base. It is an American base. The GOP is practically toothless as far as I can tell. The independent and Republican voter is finding his voice, and may soon find his teeth.

  8. ronald

    Reich along with all the Democrats forgot to mention that they are the majority party. The filibuster rules are only rules and can be changed at anytime by the the majority party, clearly the Democrats have a lack of desire to make health care a priority and the blame game between the two major parties is all the media reports.

  9. Tim in Sugar Hill

    @ ronald: You’re quite correct that the Democrats are the majority. And I agree with Reich that the Democrats are undisciplined.

    However, I disagree with him that the Republicans have discipline. Call me crazy but I think the attacks on Health Care came from Big Pharma and Big Insurance. They are the ones who stand to lose hundreds of billions of dollars.

    What’s missing from Washington is Leadership from the White House. We all have to get over the fact that Obama is our (I have a) Dream President. He needs to be held accountable for his failure to lead and his cowardice in the face of attacks from Big Money. If we don’t hold his feet to the fire now, he will not be re-elected.

    How’s that for a dream deferred?


  10. Lee Adler

    I just got a response from the Forbes people. They, or at least the person responding, actually liked the article. LOL

    Go figure.

    A selection of the responses is supposed to appear on We’ll have to see if any of my article makes the cut, and if it does, how they spin or twist it. Should be interesting.

    Thanks to Yves for the link.

    I just posted another one.
    More Little Lies and Big Spin- Gains or Blips?

  11. joebhed

    Unfortunately the Pres is dead on health care for a lot of reasons, but the worst is on the cost.
    It was supposed to be funded by the revenues from the mistaken, if not insane, cap-and-trade carbon-balancing energy policy.
    There are good and bad reasons for that to fail and it will fail. So, where is Obama going to get the money?
    The threat of course is that any further government deficits will send the markets into a turmoil.
    And, into a turmoil they will go.
    With or without healthcare reform.
    The problem with the Dems is that they ARE just like the Repubs when it comes to understanding the money system.
    The people, the government and the national economy are all in the clutches of the debt-industry known as the fractional-reserve bankers.It can only be sustained by increasing the debts of the country.
    And if it is not sustained, it will destroy the American financial system, posing a certain threat to the currency and to the nation’s financial future.
    Now, we don’t want that to happen.
    And in order to mollify the debt-marketeers of the world, we can’t be having any more of this government largesse – like health care and a clean environment.
    “How Does It Feel?”.
    They’ve been writing the terms of economic development for most of the countries of the world, and now they are writing them for us.
    The debt-money system.
    The Chicago Plan for Monetary Reform.
    The Money System Common.

  12. scrappy

    Saying the Peak Oil crowd got it right is a great example of the cultlike revisionism that serves to protect its members from realistically evaluating their own delusions. The reason for the economic crash was financial hubris, not a supply crisis. Many peak oilers lost their shirts in 2008 because $200, $300, $500 never came–$33 did.

    Resource constraints are a real issue, but the fear-mongering and hyperbole that surrounds Peak Oil often leads to vast, unsupported leaps of logic, like saying the housing bubble was based on cheap oil. It was based on cheap/free money. Gasoline consumption was largely inelastic due to prices, and didn’t really get hit until people started losing their jobs.

    The reality is that 2005-2007 demand growth (for oil and many other commodities) was built on an illusory and unsustainable foundation of superheated Western consumption tied to Eastern mercantilism. Now we have huge amounts of spare capacity, big cost reductions that will reduce future hurdle rates, and anemic growth prospects for the next few years. Peak Oil has been and will continue to be a theory flawed by its refusal to incorporate nonlinear probabilities (ie. demand never adjusts). The vagueness about its timing (“someday”–it has been predicted many times over the last few decades) and its consequences (everything from high prices and volatility all the way up to Kunstler and co’s apocalyptic nightmares) are precisely what make it a seductive theoretical framework and a wholly useless practical one, especially where investments are concerned.

    That all said, it can be a useful policy bogeyman.

  13. attempter

    Scrappy, your reading comprehension appears poor, so you should go read my comment again (as well as anything else you’ve read by Peak Oilers).

    I specifically said we don’t know how much fundamentals were part of the proximate cause of the 2008 crash, but I did lay out a scenario for how it may have happened which is more specific than the usual “mortgage rates were bound to become unservicable sooner or later and they finally did”.

    But the main point is that Peak Oil provides the key to understanding why the debt/growth economic model is not sustainable, indeed how it was only on the platform of cheap plentiful oil that “growth” was ever able to exist in the first place.

    The reality is that 2005-2007 demand growth (for oil and many other commodities) was built on an illusory and unsustainable foundation of superheated Western consumption tied to Eastern mercantilism.

    That’s exactly what I said. And all the unsustainable superheated consumption was predicated on unsustainable consumption of oil.

    Now we have huge amounts of spare capacity.

    The temporary “spare capacity” which has opened up only on account of recession-driven demand destruction won’t last for long if the green shoots crowd is right and “recovery” beckons. Meanwhile over two dozen major oil projects have been cancelled or postponed on account of the credit crunch, while depletion of existing fields is accelerating. So if the economy recovers the way they say it will, then resurgent demand will run up against a supply ceiling within five years, and that’s when we’ll see the classical Peak Oil effect of demand trying to exceed supply.

    The vagueness about its timing (”someday”–it has been predicted many times over the last few decades) and its consequences (everything from high prices and volatility all the way up to Kunstler and co’s apocalyptic nightmares)

    Nothing vague at all:

    1. The plateau was widely predicted for mid-decade, and it came like clockwork: 2005.

    2. We predicted that once on the plateau prices would show great volatility within a general trend upward. Few predictions have been better confirmed.

    3. And now we predict: A. If recovery and resumed growth, then the true Peak Oil effect by 2015. B. If the green shoots are a pipe dream, then we may even have seen “peak demand”, in which case demand will stay depressed, oil projects will continue to be mothballed, depletion will accelerate, and this depletion will eventually exceed the rate of demand destruction. That would likely happen sometime over the next decade.

    Even the booster establishment IEA and EIA, with every new assessment, come down from their cornucopian ledges further and further, ever closer to becoming bona fide Peak Oilers themselves.

    BTW, the “someday” allegation is a flat-out lie. Peak Oilers were remarkably consistent in predicting mid-decade or even later, so those whose agenda runs counter simply make up out of thin air the allegation that there’ve been many forecasts of imminent Peak over the years. Simply false.

    As for investment tips, I can see how somebody who got burned by Goldman’s attempted oil price manipulation might be sore, but don’t blame the messenger. Few Peak Oilers offer investment advice, and I reckon the ones who do have at least as good a track record as anyone else.

    So even if Peakers haven’t generally been able to beat the market, that certainly doesn’t distinguish them form anybody else.

    Believe it or not, the truth of something has nothing to do with whether or not it can easily be rendered “practical, especially where investments are concerned.”

    (Though for what it’s worth, I’m not aware of any Peak Oiler who got stuck with a bunch of houses he was trying to flip. Everybody knew that wasn’t going to last, and we knew why.)

  14. Hugh

    Speculative bubbles in housing and oil both really took off in 2004. They were driven by the same financial dynamics. Housing burst first. This sent a lot of money into oil which then spiked and then crashed and burned. I am an adherent of Peak Oil. I believe we are already in a plateau period. I would note that most Peak Oilers put the peak in the 2015 area. So it came earlier than expcted. But I would note too that in most of the Peak Oil discussions I have seen. Peak Oilers are excellent on the physical side of the business but are surprisingly weak in understanding the market side. During last year’s spike they kept arguing it was all about supply and demand when such an explanation was absurd on its face.

    The bottomline for me is that Peak Oil exists, it’s here, it will in a few years have a major effect on price, but to date it has had almost none.

  15. scrappy

    attempter, I was referring to the general tripe that passes for logic among a large portion of the PO crowd. (Much of this logic states a premise must be true simply because it cannot be proven false.) I understood your regurgitated talking points perfectly.

    The correlation between economic growth and energy use does not lead to a simple causative conclusion.

    I’ve read no hard proof of accelerating global decline rates anywhere.

    What is the “true Peak Oil effect” you expect in 2015? I thought the peak hit in 2005?

    (not to mention that the NEW peak liquids production in 2008 from the EIA would have been even higher were it not for the rash of cancelled projects)

    I don’t have time to argue more, and I’d hate to see Yves’s blog polluted with our pithy back-and-forth, but rest assured you can find refutations of pretty much all your arguments at the excellent blog Peak Oil Debunked.

    And please don’t accuse me of lying. “Like clockwork???!!!” Hubbert predicted in 1974 that the peak would come in 1995. Deffeyes has called it several times since 2008. And before that… From Reason Magazine:

    Predictions of imminent catastrophic depletion are almost as old as the oil industry. An 1855 advertisement for Kier’s Rock Oil, a patent medicine whose key ingredient was petroleum bubbling up from salt wells near Pittsburgh, urged customers to buy soon before “this wonderful product is depleted from Nature’s laboratory.” The ad appeared four years before Pennsylvania’s first oil well was drilled. In 1919 David White of the U.S. Geological Survey (USGS) predicted that world oil production would peak in nine years. And in 1943 the Standard Oil geologist Wallace Pratt calculated that the world would ultimately produce 600 billion barrels of oil. (In fact, more than 1 trillion barrels of oil had been pumped by 2006.)During the 1970s, the Club of Rome report The Limits to Growth projected that, assuming consumption remained flat, all known oil reserves would be entirely consumed in just 31 years. With exponential growth in consumption, it added, all the known oil reserves would be consumed in 20 years. These dour predictions gained credibility when the Arab oil crisis of 1973 quadrupled prices from $3 to $12 per barrel (from $16 to $48 in 2006 dollars) and when the Iranian oil crisis more than doubled oil prices from $14 per barrel in 1978 to $35 per barrel by 1981 (from $45 to $98 in 2006 dollars).In response, the federal government imposed price controls on oil and gas in the 1970s and established fuel economy standards to encourage the sale of more efficient automobiles. The sense of doom did not dissolve. In 1979 Energy Secretary Schlesinger proclaimed, “The energy future is bleak and is likely to grow bleaker in the decade ahead.” The Global 2000 Report to President Carter, issued in 1980, predicted that the price of oil would rise by 50 percent, reaching $100 per barrel by 2000.

    PS I couldn’t care less about the investment theme except to warn the novices who might get suckered in by the next industry huckster that comes along.

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