Nicole Foss: Notes from videos, radio shows, newsletters

FSN Top Interviews 2010: Nicole Foss & Richard Russell at Financial Sense.

Rural areas will be the first to lose access to electricity,with  less priority than cities in a deflation, plus there’s no money to build up the grid, which has to be done first before you can build other power generation facilities. Also, nuclear and all other alt Energy has too low an EROEI (which means they are not profitable), so they are unlikely projects for investors in a credit crunch.

The cycle: Eventually oil prices go up, demand drops, oil prices fall, demand not enough to fix the oil infrastructure and increase oil production, people don’t have the money to buy it.  Oil price goes down, there’s a supply crunch.  At worst: resource wars.  At best: party to party (i.e. nation to nation contracts) to directly purchase oil by countries.  At some point, people won’t be able to get oil at any price

ASPO peak oil review May 30, 2011

“We need to start addressing the cause of our problems – the hierarchal structure of out political-economic system that we generally take as a given – rather than continue to focus in isolation on the many symptoms of this structure.

In my opinion, commodities (including oil, metals, agricultural commodities etc.) are in another speculative bubble, which I would expect to resolve as the last one did in 2008 – with a very sharp speculative reversal crashing prices in a matter of months. Bubbles form as positive feedback loops where the anticipation of higher prices in the future drives momentum chasing, creating a self-fulfilling prophecy in the relatively short term. Speculators jump on the bandwagon and drive prices far in excess of what would be justified by the fundamentals, then they take their profits, dump the sector and short it, creating a price crash (i.e. a self-fulfilling prophecy in the other direction). This financial gaming can overwhelm, and wreak havoc with, sectors of the real economy. We may or may not have seen the high for the year, but I think the high is not far off, and when the reversal comes I expect that high to stand for perhaps a few years.

As supply and demand become tight, what one typically sees is not a one-way price escalation, but an exaggerated boom and bust cycle with very high price volatility. We have seen this play out for the last several years. It is also part of the general topping process of the credit bubble, with moves in many markets governed by the general ebb and flow of confidence (and therefore liquidity), so that many prevailing trends (i.e. stocks, commodities, bond yields, the dollar etc) turn at similar times. Such a turn is rapidly approaching in my view, and with it will come a resumption of the credit crunch, but more powerful this time. A notable casualty could well be the European monetary union.

I would expect the speculative reversal to be the initial stage of finance impacting on energy prices. As we move into depression, the price crash should be followed by a dramatic weakening of aggregate demand, and therefore price support. Purchasing power will be falling due to credit contraction and spiking unemployment, undermining demand, which is not what you want, but what you can pay for. Even as prices fall, affordability is likely to get worse for most, as purchasing power may fall further (and perhaps faster) than price. I think we could see oil reach $20/barrel, but this would not be cheap oil for most people under depression conditions.

In my opinion, oil will bottom early in this depression. As depression leads to escalating conflict, I think resource wars will intensify. Conflict, and the lack of investment that depression would ensure, set up the conditions for a supply collapse down the line. In a few years I think low prices could give way to a veritable moon-shot, continuing the exaggerated boom and bust cycle. Against a backdrop of deflationary depression (i.e. the collapse of the global credit bubble, which is deflation by definition), this would render oil products completely unaffordable for many.

While I think the next few years will be remembered as a time of financial crisis, an energy crisis is clearly coming. Financial crisis can delay it, but at the cost of making it worse a few years later.”

June 6, 2011 KBOO community radio, Portland 90.7 FM

  • much less credit at high interest in future
  • those who “rescued” system after 2008 won’t look so good after next crash
  • more businesses laying people off
  • recession, then depression
  • the rate of growth needs to be larger than rate of debt
  • we’re going to have NEGATIVE growth. you never have a steady state economy, you either grow or don’t, and our system depends heavily on growth. Very significant rates of negative growth. government, business, people can’t service their debts.
  • we’ve outstripped the underlying real wealth, the collateral, taking on more debt makes it worse.
  • a lot of debt default, it’s a Ponzi economy, assets bid up thru speculation.
  • money supply declines, what do you do if you have no money? all is exchange of money, all the time.
  • barter, local currencies will be very difficult, and bottom up depending on where you are, not a government saying here’s a new currency

October 23, 2010 October 23 2010: Jim Puplava interviews Stoneleigh

This is only part of the interview, read it all at the link above

Jim Puplava:   I want to talk about a recent article you wrote about “Renewable Power? Not in Your Lifetime”, You don’t believe we’re going to see that in our life time in terms of replacing fossil fuels, do you?

Stoneleigh: Oh, absolutely not. It really is physically impossible. We aren’t going to have the money for one thing, because it’s not going to be very long until we realize that we are actually in a depression. People don’t build things in depressions, on the whole, so they live with the infrastructure that they have, and they make do. And it’s hard enough even to maintain what you have, let alone do any kind of enormous build out. A lot of renewable energy is intermittent, it’s mediated through electricity, it depends on the grid. The grid is not in a good state of repair, it’s been under invested in for a very long time. There would have to be an enormous amount of money ploughed into grids, merely for them to continue doing what they do now. And if you look at trying to plug a whole lot of renewable energy into the existing grid, you’re going to run into a lot of problems very quickly.

Renewable energy is very dispersed, it’s not concentrated, typically. There are places where you can have larger concentrations of it, but still it’s not going to be a large source of energy in comparison with say an enormous nuclear plant or coal plant or something like that. So you’re having to bring in this power from a lot of places; you’re going to have to have a lot of infrastructure for that. The problem with trying to run power backwards, down low voltage distribution lines, which is typically what you would have to do, if you are putting small amounts of power in very distributed places, the losses are proportional to the square of the current. The current is going to be high of the voltage is low; you’re going to find that the losses are very high when you do that. If you’re trying to carry power over long distances, you may actually find that not very much of it actually gets to where you need it, because there is enormous mismatch between renewable resource intensity, demand and grid capacity.

The feed in tariff program they introduced recently in Ontario, where I live, the grid capacity that was available was over-subscribed during the launch period. Anyone else who’s trying to bring on projects and there are an enormous number of them, could find themselves having to wait for grid build out. This could be years – the projects won’t survive that long. And by the time we get to the point where there could conceivably be the grid capacity, people are not going to be able to finance the projects, because we are moving into a credit crunch. So we are not looking at a scenario where we are suddenly going to invest enormous amounts of money in renewable energy. We don’t even have the productive capacity for wind turbines and solar panels and various other alternatives at this point. We would have to build the factories first, then we would have to build the renewable energy infrastructure, then we would have to plug it into the grid; we’d have to build the grid out.

The amount of money and the amount of time are absolutely staggering. And a lot of these technologies have a very low energy returned on energy invested anyway, so you are not talking about something where you can create an enormous surplus of energy beyond what you are having to put in to create the capacity in the first place. So net energy is a very important concept; if your energy returned on energy invested is maybe 3:1, you’re not producing much of a surplus beyond the energy you had to put in to build the infrastructure. So this is no panacea. I’m a tremendous fan of renewable energy, I have solar panels in my back field , but that helps me, it doesn’t run society and that really is the problem that we have. A lot of these things work tolerably well in niche applications, and they can help at a small scale, but you are not going to run an industrial society on them. That really is the problem.
Jim Puplava: Where does that leave the big cities then, because like here in California, I think the United States has about 20, a little over 20% of the world’s operating nuclear power plants. In India, China I believe has 20 power plants under construction, their goal is to have 90 by the end of the decade. What about nuclear power?

Stoneleigh: Nuclear power doesn’t have the most wonderful energy returned on energy invested, so it is a very expensive technology, not just in financial terms, but in energy terms, with everything in the life cycle from uranium mining to building the plants, and the regulations for nuclear safety require for instance, as the last time I looked, three separate mechanisms, each capable of shutting the system down and they must have no common parts, so that there are no common mode failures, because they do not want to have another Three Mile Island, or something worse. So all of that adds to the cost, both in financial terms and in energy terms. I think there are also going to be a lot of issues with waste, potentially.

We do not have a centralised waste repository. Nobody wants one anywhere near them. So storage is on site. And you tend to have nuclear material stored in what is effectively a swimming pool. You have to look after that for a long period of time. It’s going to produce heat and radio-activity for a long period of time. I think this could be a significant problem. There are also environmental issues as well. It simply requires vigilance over hundreds of years and human beings are not good at that. We don’t have a time horizon that long, so while we might be able to look after it for a certain period of time, what happens to it after that is really the question. And there are going to be safety issues. Nuclear power is not particularly compatible with social upheaval, to put it mildly.

Now when I was a research fellow, at the Oxford Institute for Energy Studies, and I was working on nuclear safety in eastern Europe, in the context of the Soviet collapse, looking at what happened to their nuclear power industry and how it actually operated. And so if you start adding in factors like not paying people, or paying them months late, and then people having to drive taxis, to moonlight as taxi drivers or vodka salesmen, and then people living lives that are not what they had hoped to live and that they’re not enjoying, so that they turn up to work drunk; this is what happens in the Soviet nuclear power industry.

And to add to that, the technology they used of course, they cut a lot of corners and they didn’t have the safety systems that we have, but the risks you take when you run a nuclear power plant in an environment where there’s nowhere near enough money, it’s hard to get spare parts, it’s hard to find the money to maintain the infrastructure, and you’ve got people working there, assuming you can afford to pay them; you’ve got people working there who may have to worry about where their next meal is coming from. Their minds might not be on the job, might not be on the task at hand. So you can create tremendous risks operating nuclear power plants under circumstances of social upheaval. You know, if it’s a question of do that or freeze in the dark, people will do it, but the risks will increase. And I think we need to be aware of that.

Jim Puplava: Nicole, there’s been studies, they’re coming out on almost a monthly basis now about Peak Oil. First of all, do you think most major governments; we started out our conversation by talking about New Zealand’s parliament, just issued a report out this month called ‘The Next Oil Shock’. Are governments aware of it, and if they are, what steps are they taking to prepare for this.

Stoneleigh: Governments are aware of it. Oil is effectively liquid hegemonic power. Governments are thinking that way now. But to express an opinion that is generally very unpopular with the Peak Oil people, I think the reason you’re seeing so many reports come out now, is because we are seeing a parabolic rise in the oil price, that I think does not reflect the situation at this point. Yes, oil will be scarce in the future, but I think right now we’re seeing prices get ahead of themselves because prices are set by perception not by reality. And we saw an enormous parabolic rise and then a crash in prices in 2008 into 2009. When oil was at $140 a barrel, I was trying to explain to the Peak Oil people that this was a speculative bubble; prices had got ahead of themselves and the next move was going to be very sharply down. My message is the same today. That I think we have seen a parabolic rise, I think we are seeing oil top, not just oil, but gold and agricultural commodities and stocks. I think we’re seeing a top. I think the next move will be down, but I think people are writing about, writing oil reports at the moment because commodities top on fear.

So there is a fear that shortages are in the short term. I would argue they’re actually not, because I think the effect of financial crisis is going to have a very significant affect on the way Peak Oil plays out. I think what’s actually very likely to happen, first you would see oil prices move into reverse on a reversal of speculation. The hot money has moved in, overwhelmed the indexes, made the profit, chased momentum and then it abandons the sector, when it’s wrung all the profit out of it in the short term. So I think speculation moving into reverse will be the beginning of oil prices falling. Then I think because we are moving into depression, we’re going to see a fall in demand. And what a fall in demand does, it undercuts price support even further. So you then see a tremendous fall in prices. If you have a scenario where the price is low but the costs are high because you are doing business in these very difficult areas, like the deep off-shore or maybe in the arctic in the future, if you are looking at a high cost structure and low prices, there’s no business case for that particular endeavor. So your demand collapse sets up a supply collapse, and then you have no investment in drilling and exploration and production.

You don’t even have the money to maintain your production infrastructure. And a lot of oil infrastructure is already not in a good state. It needs a lot of investment just to keep doing what it currently does. We’re not going to have that money and I think nobody’s going to be making investments in energy at a point where prices are low and there’s really no profitability in it. You could see oil prices fall to approximately the cost of the lowest cost producer. And given that some production costs will be falling, like labor costs for instance, in a depression, that lowest cost producer could be at a lower cost than the current lowest cost producer. So I think we have a scenario where initially oil prices fall, and not just oil but many other things: electricity and gas, simply because in a deflationary scenario, nobody has any money, so they can’t afford to buy the stuff, production is at the previous level of demand, the demand falls you have a temporary glut.

But then you have this supply crunch that comes down the line; I think that’s when reality bites, so although the reports are being written now, because we are seeing a peak I would argue in oil prices, I think those reports are still incredibly important because oil is a long term prospect. And just because the price is going to fall in the short term doesn’t mean that we don’t need this information for the longer term, we absolutely do, and in the longer term, under conditions of supply collapse, you are very likely to see an enormous price spike, and a resource grab. Whether countries do that by sending in the tanks, or whether they send in the contract negotiators, and buy up all the production of a field, that tie it all up in bilateral contracts, either of those will take oil off the open market.

The open market is where you really have the price of oil, you can actually see oil lose fungibility. And under those circumstances it’s going to be very difficult for ordinary people to get access to any oil products at all. Even with oil at a low price, at the nadir of where I think prices are going, just because the price is low does not mean something will be cheap, because deflation drops purchasing power faster than prices. So even if oil were to fall to $20 a barrel, $20 a barrel is not cheap oil when you are in a depression; when nobody has any money. And if $20 a barrel is expensive, they move five years down the line to a supply collapse, and you’re looking at $500 a barrel, and that’s absolutely out of reach. So I think finance is going to rewrite the energy debate over the next five years, probably. And we’re going to see tremendous amounts of upheaval, that people who are coming at it purely from a Peak Oil perspective, from geology and engineering, are not seeing because they don’t understand finance, and the finance people typically don’t have enough background in the science of the energy production, you absolutely have to have both. And that’s very much what we try to do at The Automatic Earth. We are a Big Picture site; we’re integrating all the factors that people need to understand.

Jim Puplava: You know, Nicole, you hit upon something that really changed as a result of the oil embargo in the 70’s. The United States and Great Britain moved to create what I call the Virtual Oil Pool, where all of this oil was moved to the spot markets, so that for example in 2005, when Katrina and Rita hit the United States, and our refinery capacities were shut down, we could go into this Virtual Oil Pool, and have products show up on our shores within 30 days. But you talk about China. One thing that I have been watching that is alarming, that we’re seeing China, India and other countries start to lock up oil production in these long term contracts oil, if they give money to Brazil, or they give money to Venezuela, that is oil that is being taken off the global market. It’s not coming back. And I don’t know if many governments have woken up to this fact. But it seems to me, at least, the Chinese understand it, at least they seem to be reacting in a rational way, trying to lock up resources that could be scarce.

Stoneleigh: They are doing that, and they do it par excellence. And they have been doing it for a long time. I think we underestimate the Chinese at our peril. They have an enormous pile of dollars, and they are the party – as I was saying earlier, you can either send in the tanks or you can send in the contract negotiators – the Chinese send in the contract negotiators, tie it all up in bilateral contracts. They have this enormous pile of dollars, they know at some point that they will not be worth something, because all fiat currencies die in the end. They don’t die in the short term, and I’ve said elsewhere that I actually think the dollar could do well for a couple of years, but if you’re China and you’re sitting on a staggeringly large number of them, you can’t play games like timing. You just have to turn those dollars into hard assets as fast as you possibly can.

And it’s not just energy; they’re buying up farm land in Canada, and all sorts of things. And they’re not just taking ownership: they’re also sending people there, and taking it beyond ownership to de facto control, which is the sort of structure that’s likely to survive even when times are hard, when otherwise if you only had ownership, you might expect that to revert to the country that the asset is in, where possession can be nine tenths of the law. But you know if you have de facto control, because you have your people there and you’re managing it; the Chinese are absolutely going to be economically colonising large parts of the rest of the world. They are going to be tying up their energy supplies. Now I would argue that China is also in a massive bubble; they are going to take a major hit over the next few years, very much like America did at the dawn of the American century. That’s what the Depression was of the 1930’s: the set back at the dawn of the American century.

I think what we’re looking at now is, from a Chinese perspective, is the set back at the dawn of the Chinese century. But I think they will continue to be the empire in the ascendancy. That is their trajectory at this point. Don’t expect the Chinese century to look like the American century because there’s not going to be anything like the energy to do it. But by saying they’re the empire in the ascendancy, I think there will come a point where they’re the most significant hegemonic power in a much more multi-polar, low energy world. But never-the-less, they are still the empire in the ascendancy. So I think we are going to see the same kind of fall in demand for oil that we are. I do think they will see a fall in demand as their economy takes an enormous hit. I don’t think it will be as big a fall as ours and I think it will recover faster. So, speaking to Jeffrey Brown, for instance at ASPO, he was pointing out that oil in the Depression, bottomed in 1931. I have said multiple times in various places, I think oil will bottom early in this Depression.

And one of the reasons for that is that I think demand will start to pick up again in places like China and India much more quickly than it will pick up for us. So I think what we’re looking at is the western developed countries actually losing out in comparison with the developing countries that are taking on this ’empire in the ascendancy’ role. I think they will come out of this with a much larger share of oil production tied up and oil is liquid hegemonic power. So I think we are looking at, over the very long term of a decade, at a shift in hegemonic power. But I don’t think that the US is going to take that lightly, by any stretch of the imagination. So I think there is going to be a great deal of upheaval. I think we’re also going to see a lot of very nasty proxy-wars in resource rich areas. This is the way the Great Powers typically play the Great Game. You know, they will pick a client-state, in a resource rich region, pump it full of guns, and then perhaps inflame some local hostilities, of which there are usually plenty to go around.

And then some of these areas go up in flames, and I’m certainly thinking this could happen in the Middle East, perhaps the Caspian, or the South China Sea, where there are going to be a number of parties, that are looking to secure supplies in the same area, and their areas of influence overlaps, the areas they claim, especially areas of the sea floor: sea floor claims are going to be a major problem going forward. These overlapping claims are going to be a source of conflict. And if you have conflicts between client-states, proxy-wars between client-states in resource rich regions, you could actually see quite a large amount of the resource that still exists being destroyed. Or at least if not the resource, then the infrastructure necessary to extract it; I mean very much like Sadam Hussein setting fire to the reservoirs in Kuwait, before he left. I think we could see a lot more of that. I think we could see a lot of instability in Saudi Arabia, where half the population is under 15; very radicalized young people, there’s not enough employment and they despise their own government. So I think you’re going to see a lot of upheaval in some of these places, very much aggravated by the Great Powers playing the Great Game of resource extraction. And I think we’re going to see a great deal of conflict over energy, among all manner of other resources going forward.

Jim Puplava: It’s almost Michael Klare’s contention: resource wars. Nicole, another thing that strikes me about is, you know, from the start of discovery of a new oil field, to the time you bring it into production is a long process. So as we move from Peak Oil to alternative forms of energy, whether it’s you know, trying to get the tar sands, whether… whatever it is, that we’re going to be doing this whole process, even if we start changing and electrifying our transportation fleet, all of this stuff takes decades. You know, if I look at your scenario, Nicole, I think of what I just watched on the History Channel: the Dark Ages.

Stoneleigh: It’s possible. I think we are looking at decades of upheaval. I think something less than the Dark Ages, because the Dark Ages were centuries of upheaval. I think we’re looking at decades. That’s what happened after the bursting of the South Sea Bubble, in 1722, that was the next largest bubble we’ve seen in human history and that was decades of upheaval culminating in a series of revolutions including yours. So I think we are looking at a long term structure. You know the point about the tar sands and various other things, the tar sands is not going to save anybody. There is no way you are getting 5 million barrels a day out of the tar sands, because you cannot scale it up. The energy returned on energy invested is extremely low, and essentially it’s an arbitrage between natural gas and syncrude. So the energy you’re putting in, in the form of natural gas, is not that much less than the energy you’re taking out in the form of liquid fuels. So yes, you are creating liquid fuel from gaseous fuel, but it’s really not an energy source.

Plus it exists in an extremely water constrained environment, where you’re simply not going to be able to continue doing what you do now in the tar sands for reasons of water scarcity, and of course the environmental impacts are staggeringly large as well. A number of other things don’t scale up; bio fuels have an incredibly low net energy: energy returned on energy invested. Some of them are less than one: in other words, if you create ethanol, you’re actually losing energy in the process of creating ethanol. This makes no sense whatsoever. And bio-diesel is slightly better. But a lot of these technologies absolutely do not scale up. And there is no way they can act as a substitute. There is no way that a United States, at its current level of demand could ever conceivably be energy self-sufficient; it is not physically possible.

What you can do, is drop your demand an awfully long way, all developed countries waste staggeringly large amounts of energy, and if demand was a lot more realistic, you would bring it back, much more in line with what you could hope to supply. This is how people who work in renewable energy constantly think; you drop demand, you supply what’s left at a much more realistic level and you’re very careful with what you use. But Business as Usual is not an option. Mr Cheney said, not so many years ago, that the American lifestyle is not negotiable, to which I would say that’s perfectly true because reality is not going to negotiate with you. It will dictate. And you cannot have what you currently have. Nobody will be able to. We’re going to be moving into a different scenario; it doesn’t have to be a dark age.

There’s a lot we can do, and there’s a lot we can do specially at a local level. Working together with people to build structures on a human scale that actually make sense.

Debt seems to be a large part of the problem. How large?

A massive debt bubble is the heart of the problem. It has been building for decades and is now far larger than any previous debt bubble in human history. Humanity periodically rediscovers leverage on a grand scale, after the lessons of the previous episode have mostly passed out of living memory. Expansions of credit and debt create the appearance of great wealth, but it is illusory (virtual). The obligations created are real though. People have expectations of being repaid, and they will not be, which will set up a grab for the underlying real wealth (collateral) which is nowhere near enough to go around. This is deflation, and its effects are very significant. Money will be scarce for a very long time.

Stoneleigh October 2009 

[Nicole doesn’t get the timing right on inflation below, but perhaps after the next downturn she’ll be right…]

The market will turn when confidence does, and I believe that will be soon. As I have said before, this will not lead to an imminent bond market dislocation. First I would expect a flight to safety and record low nominal interest rates. IMO a bond market dislocation, where rates shoot up into the double digits, is perhaps a year away, at an initial guess. When it happens it will be because everyone will be trying to borrow (this being a global crisis) and few of the very small number of parties still able to lend will wish to do so, due to tremendous (and entirely understandable) risk aversion.

The global economy is not a machine that can be directed with appropriate levers. It is a messy, subjective and thoroughly irrational human construct. Crowd psychology is the most important element to understand in predicting what it will do next. As stocks fall, we should see the US dollar rise, the Canadian dollar and the Euro fall, gold and silver fall, and oil fall. We should see nominal interest rates fall to record lows (perhaps even moderately negative nominal rates), although the on-going collapse of credit will mean high interest rates in real terms, so that the central bankers will still be ‘pushing on a string’. As bond yields fall, prices should rise.

A bond market dislocation (where interest rates spike up and government spending is slashed to the bone) comes further down the line. As to the limits placed on the Fed in regards to printing:

The bond market will prevent printing. Debt junkie economies are dependent on access to international debt financing, and that will not be available to nations that print. There will be far more nations trying to borrow than willing to lend, and that is a recipe for much higher rates (once the initial panic, flight to safety and record low rates are over).

All the Fed is doing is adding to the huge number of excess claims created by the credit hyper-expansion. The underlying real wealth pie is still the same size, but more and more mutually exclusive claims are being produced, and these surplus claims are destined to be extinguished en masse in a deflationary collapse.

??? how do you cash out? The Fed is granting these additional excess claims to the very people who were instrumental in causing the problem in the first place, and who are in the best position to know that claims to real wealth will only be worth anything if they are cashed in before the herd tries to cash in. Essentially, the claims of the public are being actively subverted to an even greater extent, as by the time they try to cash out there will be nothing left. The little guy never gets an even break. TAE agree with Chris that we are heading for a bond market dislocation and funding crisis.

We will eventually see a default. It is simply inevitable. You just can’t keep kicking the can down the road indefinitely. However, just because a default is inevitable does not mean it is imminent. A flight to safety is a knee-jerk reaction to threat. It is not a rational response and does not look at the reality of the dollar’s position. A rush to the dollar is something people will do on an emotional imperative, and it will push up the value of the dollar substantially. Betting on a dollar carry trade is therefore a sucker play – evidence of an imminent dollar bottom in fact.

The dollar should first rise and then collapse in value. I would expect the rising phase to last perhaps a year. When the collapse happens it will probably coincide with the coming bond market dislocation. However, the value of the dollar relative to other currencies will be much less important in practice than the value of cash in relation to available goods and services domestically.

And finally, one more point regarding the negative emotions we’ll have to deal with on this next leg down and on our need to focus:

The anger and recrimination that are coming this time will be something almost none of us have any experience with, and it will be terribly easy to be caught up in it. Don’t do it, as that kind of vengeful and punitive mindset will drain energy and resources from what you need to do to help yourself and your loved ones. Ultimately it fractures the trust that holds society together at a time when cohesiveness matters most. While this is inevitable at a national scale, it need not be at a very local level where a few individuals can make a difference.

summary of Oct 30, 2009 interview “The case for deflation”

SUMMARY: I think the market will fall hard (intervening short rallies notwithstanding) for perhaps 18 months. This was the length of the first leg down (October 2007-March 2009) and so represents a reasonable first guess at how long the next leg at the same degree of trend might last.

I think we will see falls of thousands of points in a series of cascades. I don’t see the markets reaching a lasting bottom until probably the middle of the next decade (2015), and even then I don’t expect it to be a final bottom. This has been the largest credit bubble in history, and the aftermath of a major bubble always undershoots where it began before any kind of recovery begins.

The aftermath of the last major mania – the South Sea Bubble in the 1720s – lasted decades and culminated in a series of revolutions. We are still relatively near the beginning of our own crisis, but already it compares with the Great Depression.

Although we could initially see a large glut in energy supply as demand falls off a cliff, this is likely to lead to supply collapse as investment dries up, hence I expect energy prices to bottom early in this depression.

Both financial and physical risks to energy exploration are likely to increase substantially in a destabilized and capital constrained world, and even maintaining existing assets could become very difficult. This is a recipe for much greater state involvement in ownership and exploitation of (probably deteriorating) energy assets, with increasing conflict over those assets as supply gets dramatically tighter with lack of investment.

As for gold, I expect it to fall initially as people sell not what they would like to, but what they can, in order to raise the cash they need for living expenses and debt servicing. Owning gold is likely to become illegal again (as it did in the Great Depression) in my opinion.

This wouldn’t necessarily stop you owning it, but would stop you trading it (at least without taking major risks) for other things you might need. Owning gold now therefore only makes sense if one is confident of being able to sit on it for a very long time, as it will hold its value over the long term as it has for thousands of years.

While there will be a huge surplus of labour, and the few who retain purchasing power will be able to hire anyone they want for very little, most people will have to do everything for themselves, as poor people have done throughout history and as most of the population of the world does now.

Not only will we lose access to the paid labour of others, but we will lose our virtual energy slaves as well. This will represent an enormous fall in the standard of living for the vast majority.

Whereas inflation can conceal a fall in purchasing power, so that people may not even realize it is happening, deflation brutally exposes it. Wages would have to fall just to keep purchasing power the same, but keeping it the same will not be an option for cash-strapped employers. In addition, with a large surplus of labour, workers will have no bargaining power.

This is a recipe for exploitation the like of which we have not seen for a very long time, but in the intervening adjustment period it is likely to lead first to war in the labor markets.

I would expect general strikes and a breakdown in the reliability of centralized services such as healthcare, education, power systems, water treatment, garbage (and snow) removal etc. This will be exacerbated by plunging tax revenues for all levels of government, which governments will try to compensate for by raising taxes, on anyone still capable of paying, to punitive levels. We would thus expect rapidly deteriorating services at much higher cost.

Many people are at risk of being eventually priced out of the market for goods and services, and particularly the essential ones, entirely.

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