Your Money is not Safe in an FDIC Insured Bank Account

Below are 3 articles about why the FDIC can’t actually protect your money at banks

Ellen Brown. July 5, 2013 Think Your Money is Safe in an Insured Bank Account? Think Again.

A trend to shift responsibility for bank losses onto blameless depositors lets banks gamble away your money.

The EU can mandate that governments arrange for deposit insurance, but if funding is inadequate to cover a systemic collapse, taxpayers will again be on the hook; and if they are unwilling or unable to cover the losses (as occurred in Cyprus and Iceland), we’re back to the unprotected deposits and routine bank failures and bank runs of the 19th century.

In the US, deposit insurance faces similar funding problems.

As of June 30, 2011, the FDIC deposit insurance fund had a balance of only $3.9 billion to provide loss protection on $6.54 trillion of insured deposits. That means every $10,000 in deposits was protected by only $6 in reserves.

The FDIC fund could borrow from the Treasury, but the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivatives activities; and these would be the likely trigger of a 2008-style collapse.

Derivatives claims have “super-priority” in bankruptcy, meaning they take before all other claims. In the event of a major derivatives bust at JPMorgan Chase or Bank of America, both of which hold derivatives with notional values exceeding $70 trillion, the collateral is liable to be gone before either the FDIC or the other “secured” depositors (including state and local governments) get to the front of the line. (See here and here.)

Who Should Pay

Who should bear the loss in the event of systemic collapse? The choices currently on the table are limited to taxpayers and bank creditors, including the largest class of creditor, the depositors. Imposing the losses on the profligate banks themselves would be more equitable, but if they have gambled away the money, they simply won’t have the funds. The rules need to be changed so that they cannot gamble the money away.

With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses.  If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions.

The Nationalization Option

Nationalization of bankrupt, systemically-important banks is not a new idea. It was done very successfully, for example, in Norway and Sweden in the 1990s. But having the government clean up the books and then sell the bank back to the private sector is an inadequate solution. Economist Michael Hudson maintains:

Real nationalization occurs when governments act in the public interest to take over private property. . . . Nationalizing the banks along these lines would mean that the government would supply the nation’s credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today’s commercial bank lending policies.

Anne Sibert proposes another solution along those lines. Rather than imposing losses on either the taxpayers or the depositors, they could be absorbed by the central bank, which would have the power to simply write them off. As lender of last resort, the central bank (the ECB or the Federal Reserve) can create money with computer entries, without drawing it from elsewhere or paying it back to anyone.

That solution would allow the depositors to keep their deposits and would save the taxpayers from having to pay for a banking crisis they did not create. But there would remain the problem of “moral hazard” – the temptation of banks to take even greater risks when they know they can dodge responsibility for them. That problem could be avoided, however, by making the banks public utilities, mandated to operate in the public interest. And if they had been public utilities in the first place, the problems of bail-outs, bail-ins, and banking crises might have been averted altogether.

How Safe is My FDIC-Insured Bank Account?

2008. Chris Martenson.  marketoracle.co.uk

Your bank account may not be as safe as you think. Taking a deeper look at the legal details and the financial depth of the FDIC reveals several troubling details that call into question how the FDIC would fare during a true banking crisis. Bur first we probably should understand bit more about the FDIC.

What is the FDIC?   Wikipedia on the FDIC :  The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF). The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor.

Accounts at different banks are insured separately. One person could keep $100,000 in accounts at two separate banks and be insured for a total of $200,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) can be considered separately for the $100,000 insurance limit. The Federal Deposit Insurance Reform Act raised the amount of insurance for an Individual Retirement Account to $250,000.

The two most common methods employed by FDIC in cases of insolvency or illiquidity are the:

Payoff Method in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank.

Purchase and Assumption Method in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank’s loans (assets).

If your bank gets in trouble, the FDIC will ride in and either pay off your account (up to $100k), or sell your bank off to another bank. Under normal circumstances, a bank failure should not impact you in the least. But these are not normal times. We might reasonably ask how the FDIC would respond during a major banking crisis. After all, this is our money we’re talking about. Faith and hope are great at weddings and sporting events, but they should not form the basis of our strategy for handling our finances.

How many bank failures could the FDIC handle at once?

When we take a look at the financials of the FDIC there is a line item called “Fund as a Percentage of Insured Deposits (Reserve Ratio) of 1.22%.  

The 1.22% Reserve Ratio means that for every dollar in your bank account, the FDIC has 1.22 cents “in reserve” ready to cover your potential losses.

My note: Where will the other 98.78 cents come from?

Consider the collapse of Bear Stearns. In order to assume that bank, JP Morgan asked for, and received, a special waiver from the Federal Reserve to keep $400 billion of suspect of Bear Stearn’s assets off the books of JPM. While JPM may have been padding the books a little bit here, due to the uncertainty of how bad the wreckage might turn out to be, $400 billion dwarfs the $52 billion reserves of the FDIC.

If one medium-large bank collapse could wipe out the FDIC by a factor of nearly 8, what do you suppose would happen if there were multiple, simultaneous bank failures? At this point, my guess would be that Congress would be sorely tempted to borrow additional funds to remedy the situation, but I worry that hardship and losses might result while the laws were amended and sufficient funding avenues identified. So how many bank failures could the FDIC endure? The data suggests slightly fewer than one big one.

I thought the FDIC has full faith and credit backing by the US treasury?

Actually, no, it does not. The language in Section 14 of the FDIC Act is clear and unambiguous (emphasis mine):

(a) BORROWING FROM TREASURY.– The Corporation is authorized to borrow from the Treasury, and the Secretary of the Treasury is authorized and directed to loan to the Corporation on such terms as may be fixed by the Corporation and the Secretary, such funds as in the judgment of the Board of Directors of the Corporation are from time to time required for insurance purposes, not exceeding in the aggregate $30,000,000,000 outstanding at any one time, subject to the approval of the Secretary of the Treasury: Provided, That the rate of interest to be charged in connection with any loan made pursuant to this subsection shall not be less than an amount determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.

Now that’s pretty interesting. First,  any additional money from the federal government is not a guarantee, but rather a loan, which will only be made subject to the approval of the Secretary of the Treasury. Further, that the loan is to be made at “current market yields.” What do you suppose would happen to US Treasury yields during a true emergency? I can imagine a few scenarios where they might skyrocket, and this would serve to compound the difficulty of keeping the FDIC fund solvent.

How long does the FDIC have to repay me if things go bad?

Here things get murky. We turn to Section 11 of the act and find this (emphasis mine):

(f) PAYMENT OF INSURED DEPOSITS.– (1) IN GENERAL.–In case of the liquidation of, or other closing or winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible , subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor.

That only says “as soon as possible” and sets absolutely no time limit or maximum. Taken to the extreme, it might be impossible for the FDIC to ever make depositors whole again, and this is one of dozens of such “outs” that exist in the document. Remember, this act was written in 1933 when money was gold, times were uncertain, and government lawyers were exceedingly careful to avoid locking the government into any possible financial black holes.

And the FDIC Act is very clear to spell out that the only insurance funds available to depositors are those that exist within the fund itself:  (f)(1)(A) all payments made pursuant to this section on account of a closed Bank Insurance Fund member shall be made only from the Bank Insurance Fund 

So, if the fund runs dry, there isn’t another possible source of funds that can be legally tapped without changing this wording. And that would take – wait for it – an act of Congress.

Surely Congress would appropriate the necessary funds to keep the FDIC solvent?

Here your guess is as good as mine. I would personally expect the US Congress to do everything in its power to the keep the FDIC well funded, especially during an emergency. I would not fault their desire here. But I can also think of a few scenarios or circumstances under which their ability could be taken away. For example:

  • If the banking crisis came at the same time as an interest rate spike and general funding emergency
  • If we were at war with Iran and things were not going well
  • If China suddenly started dumping their Treasury holdings in the opening gambit of an economic war

Other articles about the solvency of the FDIC

Rolfe Winkler. March 2, 2009  FDIC: $19 billion now backs over $4.8 trillion

 

Ellen Brown.  April 9, 2013. Winner Takes All: The Super-priority Status of Derivatives

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. According to Wikipedia:

In most legal systems, . . . the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. When too many creditors come for their money at once, the result can be a run on the banks and bank failure.

The New Zealand OBR said the creditors had all enjoyed a return on their investments and had freely accepted the risk, but most people would be surprised to learn that too. What return do you get from a bank on a deposit account these days? And isn’t your deposit protected against risk by FDIC deposit insurance?

That situation could be looming even now in the United States.  As Gretchen Morgenson warned in a recent article on the 307-page Senate report detailing last year’s $6.2 billion trading fiasco at JPMorganChase: “Be afraid.”  The report resoundingly disproves the premise that the Dodd-Frank legislation has made our system safe from the reckless banking activities that brought the economy to its knees in 2008. Writes Morgenson:

JPMorgan . . . Is the largest derivatives dealer in the world. Trillions of dollars in such instruments sit on its and other big banks’ balance sheets. The ease with which the bank hid losses and fiddled with valuations should be a major concern to investors.

Pam Martens observed in a March 18th article that JPMorgan was gambling in the stock market with depositor funds. She writes, “trading stocks with customers’ savings deposits – that truly has the ring of the excesses of 1929 . . . .”

The large institutional banks not only could fail; they are likely to fail.  When the derivative scheme collapses and the US government refuses a bailout, JPMorgan could be giving its depositors’ accounts sizeable “haircuts” along guidelines established by the BIS and Reserve Bank of New Zealand.

Why Derivatives Threaten Your Bank Account

The big risk behind all this is the massive $230 trillion derivatives boondoggle managed by US banks. Derivatives are sold as a kind of insurance for managing profits and risk; but as Satyajit Das points out in Extreme Money, they actually increase risk to the system as a whole.

In the US after the Glass-Steagall Act was implemented in 1933, a bank could not gamble with depositor funds for its own account; but in 1999, that barrier was removed. Recent congressional investigations have revealed that in the biggest derivative banks, JPMorgan and Bank of America, massive commingling has occurred between their depository arms and their unregulated and highly vulnerable derivatives arms. Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.

The tab for the 2008 bailout was $700 billion in taxpayer funds, and that was just to start. Another $700 billion disaster could easily wipe out all the money in the FDIC insurance fund, which has only about $25 billion in it.  Both JPMorgan and Bank of America have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. According to an article on Bloomberg in November 2011, Bank of America’s holding company then had almost $75 trillion in derivatives, and 71% were held in its depository arm; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. Those whole mega-sums are not actually at risk, but the cash calculated to be at risk from derivatives from all sources is at least $12 trillion; and JPM is the biggest player, with 30% of the market.

It used to be that the government would backstop the FDIC if it ran out of money. But section 716 of the Dodd Frank Act now precludes the payment of further taxpayer funds to bail out a bank from a bad derivatives gamble. As summarized in a letter from Americans for Financial Reform quoted by Yves Smith:

Section 716 bans taxpayer bailouts of a broad range of derivatives dealing and speculative derivatives activities. Section 716 does not in any way limit the swaps activities which banks or other financial institutions may engage in. It simply prohibits public support for such activities.

There will be no more $700 billion taxpayer bailouts. So where will the banks get the money in the next crisis? It seems the plan has just been revealed in the new bail-in policies.

All Depositors, Secured and Unsecured, May Be at Risk

The bail-in policy for the US and UK is set forth in a document put out jointly by the Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) in December 2012, titled Resolving Globally Active, Systemically Important, Financial Institutions.

In an April 4th article in Financial Sense, John Butler points out that the directive does not explicitly refer to “depositors.”  It refers only to “unsecured creditors.”  But the effective meaning of the term, says Butler, is belied by the fact that the FDIC has been put on the job. The FDIC has direct responsibility only for depositors, not for the bondholders who are wholesale non-depositor sources of bank credit. Butler comments:

Do you see the sleight-of-hand at work here? Under the guise of protecting taxpayers, depositors of failing institutions are to be arbitrarily, de-facto subordinated to interbank claims, when in fact they are legally senior to those claims!

. . . [C]onsider the brutal, unjust irony of the entire proposal. Remember, its stated purpose is to solve the problem revealed in 2008, namely the existence of insolvent TBTF institutions that were “highly leveraged and complex, with numerous and dispersed financial operations, extensive off-balance-sheet activities, and opaque financial statements.” Yet what is being proposed is a framework sacrificing depositors in order to maintain precisely this complex, opaque, leverage-laden financial edifice!

If you believe that what has happened recently in Cyprus is unlikely to happen elsewhere, think again. Economic policy officials in the US, UK and other countries are preparing for it. Remember, someone has to pay. Will it be you? If you are a depositor, the answer is yes.

The FDIC was set up to ensure the safety of deposits. Now it, it seems, its function will be the confiscation of deposits to save Wall Street. In the only mention of “depositors” in the FDIC-BOE directive as it pertains to US policy, paragraph 47 says that “the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” But protected with what? As with MF Global, the pot will already have been gambled away. From whom will the bank get it back? Not the derivatives claimants, who are first in line to be paid; not the taxpayers, since Congress has sealed the vault; not the FDIC insurance fund, which has a paltry $25 billion in it. As long as the derivatives counterparties have super-priority status, the claims of all other parties are in jeopardy.

That could mean not just the “unsecured creditors” but the “secured creditors,” including state and local governments. Local governments keep a significant portion of their revenues in Wall Street banks because smaller local banks lack the capacity to handle their complex business. In the US, banks taking deposits of public funds are required to pledge collateral against any funds exceeding the deposit insurance limit of $250,000. But derivative claims are also secured with collateral, and they have super-priority over all other claimants, including other secured creditors. The vault may be empty by the time local government officials get to the teller’s window. Main Street will again have been plundered by Wall Street.

Super-priority Status for Derivatives Increases Rather than Decreases Risk 

Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:

. . . [D]erivatives counterparties, . . . unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

. . . [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel agrees. He calls the Dodd-Frank policy approach “corporatism” – a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.

Undergirding this approach is what Skeel calls “the Lehman myth,” which blames the 2008 banking collapse on the decision to allow Lehman Brothers to fail. Skeel counters that the Lehman bankruptcy was actually orderly, and the derivatives were unwound relatively quickly. Rather than preventing the Lehman collapse, the bankruptcy exemption for derivatives may have helped precipitate it.  When the bank appeared to be on shaky ground, the derivatives players all rushed to put in their claims, in a run on the collateral before it ran out. Skeel says the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.

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Deflation : The meltdown was far more like the crash of 1873 than the 1929 Great Depression

The Real Great Depression. The depression of 1929 is the wrong model for the current economic crisis.

10-17-2008. Scott Nelson.   The Chronicle of Higher Education.

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany’s inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls “the real Great Depression.” She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis. The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris.

Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871.

By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis.

The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates.

This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track.

Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble.

When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth.

For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries.

Carnegie and Rockefeller bought out their competitors at fire-sale prices [my note: this is why cash is king in a deflation, very few people have money]. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, “economic organization crumbled with some primeval upheaval.” Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms “tramp” and “bum,” both indirect references to former soldiers, became commonplace American terms.

Relief rolls exploded in major cities, with 25% unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York’s Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked workmen exchanged gunfire with the “Coal and Iron Police,” a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.

In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst. The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times.

2007: Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.)

As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves. If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)

The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way. In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.

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James Howard Kunstler 2007 Predictions: many came true

Kunstler (and many others) saw the immense corruption on Wall Street and the housing bubble years before it popped.  He is also one of the few who saw it would be deflationary and understands how the financial system and energy crisis are linked.  Above all, he is a hoot to read. I’ve shortened the 3 pieces below, to read the full articles, select the links (and then scroll down).

Kunstler, James Howard. Jan 1, 2007. Forecast For the Year Ahead. Kunstler.com

Finance has been trending away from economic reality since the Ronald Reagan era on an accelerating basis. By this I mean the role of finance no longer represents sets of mechanisms and institutions designed to raise legitimate capital for investment in legitimate productive activities. Finance is now an end in itself, essentially a racket. The capital is no longer capital, i.e. genuine wealth accumulated from previous productive activities. Now it is jive-capital: notional “wealth” spun out of activities that are fundamentally not productive — for instance, sub-prime mortgages bundled into tradable securities. In reality, the mortgages backing these securities are contracts for repayment of huge loans made on hazardous terms by shifty means to people with poor prospects for making their payments for assets (suburban houses made of vinyl and glue) that are, in any case, fated to lose much of their nominal value, becoming worth less than the obligations yet due on them, and rapidly so.

The sub-prime loans were made in the first place because the contracting institutions (banks) could pass off the risks associated with these jive contracts by off-loading them to larger institutions such as the government sponsored enterprises Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) which are largely exempt from regulatory oversight and hence could buy up whatever cockamamie paper contracts they felt like buying and convert them into bonds, certificates said to represent future earnings. (Not.)

These mortgage backed securities were only one species of engineered abstract financial “instruments” among many orders of incomprehensibly abstract mutant financial “products” (derivatives, credit default swaps) and procedures (carry trade, leveraged buyouts,) based on the fundamental unreality that it is possible to get something for nothing.

The inertia part of the story is that this collective hallucination (that jive-capital was real) was sustained through 2006 by the sheer massive weight and flow of jive capital and its ability to elude scrutiny by countless chimerical conversions from one abstruse form to another — from loan, to bond, to bet, to position, to Christmas bonus. . . . The final result, though, was a nation with an increasingly impoverished middle class, a bankrupt public treasury, and all remaining wealth (notional or residual) creamed off by a racketeering upper crust of logrolling insiders who, for the moment, could convert their dollars into multiple mansions, private jet planes, and sky boxes at the gladiatorial combats du jour.

The rest of the US economy was increasingly composed of a suburban development hyper-boom that amounted to little more overall than a colossal mis-investment in a living arrangement with no future (and the irreparable destruction of the remaining US landscape). The building-and-selling of suburban houses and the ancillary accessorizing of them with collector highways, strip malls, and big box stores, fast food huts, and all the jobs associated with constructing, lending, evaluating, selling, servicing, and staffing these things, along with additional rackets like home equity withdrawal refinancing to keep the cash registers ringing in the Wal-Marts and Home Depots — these were the activities supposedly keeping the “regular” (i.e. lumpenprole) economy chugging along. If you subtracted all this “housing bubble” activity from the rest of this economy since 2001 there was very little left besides, hair-styling, fried chicken, and open heart surgery.

Yet, marvelous to relate, the whole toxic, entropy-laden, creaking, reeking cargo of shit-and-deceit that comprised this system just managed to keep rolling along for another year without collapsing under its own stinking, fantastically stupid weight.

But it brings us to a crucial final angle on the story-as-a-whole, which is that the stresses, distortions, and perversities we see in the financial markets and the economy are largely attributable to the peculiar circumstances of Peak Oil, namely, a grinding background reality that this point of the world’s highest-ever petroleum production represents the final blow off of an economy that really has no future, an economy in which typical industrial growth is no longer possible. And if this growth, this ceaseless expansion of everything is no longer possible, if instead we enter a wholesale global contraction of available energy, of industrial activity, and expectation of future activity, why then the markers used to signify the expectation of growth (at least the retention of wealth) — currencies, stock certificates, bonds, derivative contracts, mortgages — all these things lose their legitimacy and finally their value. That is the fundamental underlying reality in Peak Oil’s relation to our modern economies in general and to the finance sector that is supposed to serve it.

Looking Ahead

I will be so bold to say that I called the housing crash correctly last year, though the worst symptoms are slow to present for technical reasons. There’s no question that the action on the real estate scene changed drastically in mid-year. The implosion of this mighty structure of fraud, folly, and misinvestment so far has taken place in such breathtaking slow-motion that its victims have not really felt the pain from the falling bricks yet. By late summer, buyers started evaporating. Real estate signs planted in lawns last June are still sitting there on New Years. Prices have come down a bit in many markets, including most of the hotties such as Florida, Phoenix, Las Vegas, San Diego, and Boston. But the buyers are still not bidding. Meanwhile, the sellers have dug in, determined to get something at least close to their wished-for inflated prices, egged on by their representatives, the realtors. This mutually reinforcing psychology cannot hold indefinitely. Many of these sellers don’t have the luxury to wait around forever. Some have had to move to other houses in other places because of job changes, and are stuck paying two mortgages. Many are stuck with “creative” mortgages that all the evil ingenuity of the human mind conjured in recent years to enable the feckless to live above their means — adjustable rate, payment optional, no money down contracts that suckered buyers into booby-trapped obligations whose initial low-interest terms lured them in and are now set to blow up in their faces as terms automatically re-set upwards to higher rates and “optional” deferred payments get backloaded onto the principal, putting the mortgage holders so far underwater on their contracts that a tour of the Titanic would feel like a day at the beach.

The trouble is, when both the sellers and their agents decide to get with the reality program and lower their prices, they will only stimulate a massive death spiral of house price deflation as buyers see the numbers go lower and hold out longer in the expectation that prices will go down even further. That would, of course, put more sellers into gross distress and lead them either to dump their properties or enter the cold waters of default and foreclosure.  

Add to this that the late stages of the hyper-boom caused so much “product” to be brought onto the market by the “production home builders” that there now exists an unprecedented oversupply of exactly the kind of crappy suburban houses (in all price ranges) that are bound to lose value going just a little bit forward. Foreclosures will only add more to the oversupply. In the subprime mortgage niche, defaults are officially reported to be running at 20 percent. Foreclosures are trailing because the process is so awkward, and many have not yet shown up in the housing markets

As the music stops in the lending rackets, liquidity in the form of mortgage backed securities and other sources of hallucinated “money” will dry up, and will start to make itself felt in all the other arenas and regions that “money” has been migrating to. Jobs associated with house-building and all those ancillary enterprises — big box shopping, chain restaurant revenues, car sales — will disappear and incomes with them. Many home sales in past decade were made to people benefiting directly from the housing bubble. (The sheer number of real estate agents in America more than doubled since 2001.) This evaporation of both credit and incomes will impact the so-called “consumer economy”, said to make up 70% of the total US economy. In other words, the term “depression” might be applicable as this economy lurches into actual contraction of more than a few percentage points.

This scenario suggests that earnings in corporations listed on the public stock exchanges — the companies that elude acquisition by “private equity” — would necessarily see severe drops in earnings, and therefore in stock value. While many commentators view the rise in the Dow as just another symptom of inflation — asset inflation — the activity in these assets — companies making, doing, and selling things — must be reported on a quarterly basis. And if that activity is trending strongly downward, then stock prices will trend down.

The Energy Predicament

Oil ended 2006 roughly where it began, at just over $60 a barrel. This reassured the public that all talk about Peak Oil was hysterical blather from a lunatic fringe. It was reinforced by publication of the mendacious Cambridge Energy Research Associates (CERA) report issued this fall — a tragic document put out by a giant public relations firm representing the oil industry — with the mission of staving off windfall profits taxes and other regulatory moves that a true resource emergency might recommend.

But beyond this debate, in the background, another ominous trend can account for the stalling of oil prices in 2006 — totally unrecognized by the public and ignored by the news media: prices on the oil futures market leveled off because the Third World has effectively dropped out of bidding for it — and using it. They cannot afford it at $60-a-barrel. The Third World has entered an era of energy destitution and it is manifesting in symptoms such as local resource wars, genocides, falling life expectancies, and in many places a near-total unraveling of the sociopolitical order. American mall-walkers and theme park visitors are oblivious to this tragic process, but it is perhaps the major reason why we are not now suffering from $100-per-barrel (or greater) oil prices (with the consequent unraveling of our sociopolitical and economic order).

The major trend on the oil scene the past 12 months is the apparent inability of the world to lift total production above 85 million barrels a day — with demand now rising above that line. It is unclear how much more demand destruction will come out of the Third World before bidding intensifies between the developed nations. One commentator in particular, Dallas geologist Jeffrey Brown –a frequent contributor on the web’s best oil debate site, TheOilDrum.com — is advancing the idea that we are entering an oil export crisis that will presage a more general permanent world-wide oil emergency. Brown holds that the major oil exporting nations are using so much of their own product, because of rising populations, that their net exports are falling at an alarming rate, perhaps as much as 9 percent annually. This trend combines with general depletion rates now said to be around 3 percent a year.

The question of total oil reserves around the world remains somewhat murky, but Brown, Kenneth Deffeyes of Princeton, and others using a straightforward mathematical model, have stated that the world is roughly at the same point in all-time production as the Lower-48 United States was at in 1970, when America passed its all-time production peak. We know for certain that three of the four super giant oil fields (Daqing in China; Cantarell in Mexico; Burgan in Kuwait) are past peak and there is plenty of evidence that the greatest of them all, 50-year-old Ghawar in Saudi Arabia is not only past peak but perhaps “crashing” into a super-steep decline.

Discovery of new oil to replace the production from declining fields remains paltry. Chevron announced it’s “Jack” discovery in the deepwater Gulf of Mexico with great fanfare this year, but neither conclusively demonstrated that all the wished-for oil was down there (between 3 and 15 billion barrels, Chevron said) or that they could get it out of there in a way that made sense economically, since the oil was extraordinarily deep and difficult to lift up.

Meanwhile, companies developing tar sand production in Alberta announced that their costs of production were rising substantially, while a reckoning lay ahead as to how much of Canada’s fast-disappearing natural gas reserves will be squandered in melting tar. The oil shale project is going nowhere. American corporate farmers have entered into a racket with congress to subsidize ethanol production from corn and biodiesel fuel from soybeans. The American public remains ignorant of the tragic futility of this project, which depends on oil-and-gas “inputs” to keep the crop yields up and ultimately is a net energy “loser.” As the world crosses into the uncharted territory of “The Long Emergency,” Americans will find themselves having to choose between eating food and making fuel to keep the car engines running.

The signal failure of public debate in this country is embodied in our obsession with this particular theme — how to keep the cars running by other means at all costs. Everybody from the greenest enviros to the hoariest neoliberal free market pimps believe that this is the only thing we need to worry about or talk about. The truth, of course, is that we have to make other arrangements for virtually all the major activities of everyday life — farming, commerce, transport, settlement patterns — but we are so over-invested in our suburban infrastructure that we cannot face this reality.

The bottom line for oil in 2007: expect the bidding on the futures markets to regain intensity between the US, China, Europe, and Japan. A contracting US economy could take some demand out of the picture, but the sad truth is that we burn up most of the oil we use in cars, and American life is now so hopelessly based on incessant motoring that citizens cannot even go down to the unemployment office without driving. Geopolitical events can only make the oil supply situation worse and probably will. (See ahead.)

We are probably also in the early stages of a natural gas crisis in the US. [My comment: fracking delayed the gas crisis, but it’s clear from Bill Powers 2013 “Cold, Hungry, and In the Dark : Exploding the Natural Gas Myth” and Richard Heinberg’s “Snake Oil : How Fracking’s False Promise of Plenty Imperils Our Future” that the fracking bubble is likely to end as early as 2015 and as late as 2018].

Over the next decade, the gap between US demand for natural gas and dwindling supply may amount to one-and-a-half times the current equivalent of our oil imports. This is a staggering deficit. Natural gas is used for heating in more than half the houses in the US and accounts for just under 20% of our total electricity production. Domestic supply is crashing. We are drilling as fast as we can, with more and more rigs each year, just to keep up. To make matters worse, the means of gas delivery — through a vast web of pipeline networks around the nation — makes “just-in-time” delivery the norm and, tragically, also makes “just-in-time” pricing normal, too. Thus, gas prices are responding only to the shortest-term signals — for instance, unusually mild winter weather — rather than to the catastrophic long-term reserve picture. Finally, we are unlikely to solve our natural gas problems with imports for technical reasons having to do with the cost and difficulty of moving the stuff by means other than pipelines and for geopolitical reasons, namely that most of the remaining gas in the world is in Asia. Bottom line: we could enter a home heating and electricity production crisis anytime. Massive price increases are likely to be required in order to reduce demand to the level of available supplies. This will be one of the major factors in the disabling of suburbia — which is to say, normal American life.

Geopolitics

The Iraq misadventure has turned self-evidently into a fiasco and the American public is understandably losing the will to persevere there. Ditto Afghanistan. The overall trend is for dwindling American influence over events in the Middle East. Whether this is a good thing or a bad thing in the long run is not as important as the sheer fact that it is happening.

Iran has benefited from every American misstep and sign of weakness and is seeking to become the regional hegemon. Is it worth it to them just to be the Big Cheese in the region? Or is this just a sort of booby prize in a contest between religious sects? Iran’s current momentum is favorable toward this goal in the short term, but in the longer term Iran is faced with steeply depleting oil reserves and an exploding population that is growing restless under a now ossified regime of mullahs. Iran’s natural gas reserves are impressive, but they cannot rely on them indefinitely for both export income and running their own electrical grid. While their pursuit of atomic weapons may be for real, it is also a fact that Iran must make plans for producing electricity without using up absolutely all of its fossil fuel — and so their pursuit of atomic energy is not without practical necessity.

Shia influence, led by Iran, appears ascendant in the Middle East for the moment. Iraq is under Shia control (though Iraqi Shia are ethnically not Persian). Hezbollah is taking over Lebanon by degrees. Shia populations in Saudi Arabia are concentrated in the oil-producing area along the Persian Gulf. Iran and its Shia proxies appear avid to challenge Saudi Arabia’s leadership — and Arabia is, after all, the birthplace of Islam and the owner of its holiest shrines. What this boils down to is a collision between Saudi Arabia and Iran. However this plays out, in proxy wars or in direct conflict, it can only play havoc with Middle East oil production and export.

The players involved have the means to make enormous mischief if they want to. Any of them could take out a major oil installation with a jet plane and a suicide pilot, or missiles, or even with common small arms in a well-orchestrated operation. Doing so, of course, would so grievously damage the major importing nations that the global economy would seize up and effectively bring down the curtain on the industrial era. Other players currently lurking off-stage could make dramatic entrances in the year ahead — for instance, Pakistan, perhaps the most dangerous nation in the world, a country held together with scotch tape and baling wire, with the world’s biggest supply of angry Islamic maniacs and an arsenal of about twenty atomic bombs.

In short, the Middle East is rigged like a gargantuan booby trap, the biggest IED the world has ever seen. There are too many things that can go wrong, and countless possible combinations for Murphy’s Law to come into play. As bloody and horrible as events have been in the Islamic world through 2006 — including everything from the genocide in Darfur to the daily violence in Iraq and Afghanistan to the Hezbollah-Israel fight — things can obviously get worse. At the bottom of all this are the exploding populations in a part of the world that has historically possessed only meager resources for human existence. Now that the most special resource of all — abundant oil — is heading into depletion all that remains on the horizon is a long, grinding competition among more people for less of every other resource. My guess is that the Middle East will shut down politically before it shuts down geologically. The process is underway. The populations aren’t shrinking and the pressures are only getting worse. So I would predict greater disorder in the Middle East through 2007. The US may suffer a “double Dien Bien Phu” event of having to vacate both Iraq and Afghanistan at the same time.

Europe and Japan have been lurking quietly on the sidelines since the US was lured into the “War on Terror” in 2001. Japan imports 95% of its oil and gas. If those lifelines are severed, Japan is simply toast. The only question is whether they will take it lying down, or revisit other options like military adventure. Given their energy disadvantages, military adventuring seems unlikely this time around. Perhaps they just go medieval again and retreat into the comfortable romance of a Neo-Shogun island culture.

Europe has been coasting along letting America take all the heat in the Middle East. Europe’s own energy supply (the North Sea) is crashing. Only Russia has substantial supplies — though it, too, is past peak — and will probably continue making moves to use its oil leverage for political advantage. Britain has been the most feckless European nation, utterly ignoring its own energy crisis as North Sea oil and gas dwindles down to nothing. France can take a little comfort in getting 70% of its electric power from nukes — and the nations that maintain electric service will be the nations that remain civilized. Germany, Italy, and Spain are now at the mercy of their oil importers. They didn’t behave as foolishly as the US did; they didn’t destroy their public transit or their city centers or their local agriculture. But they still face great difficulties in reorganizing daily life to fit the requirements of the post-oil age.

China faces difficulties at least as awesome as the United States. They have zilch left for oil. Their ecological problems are worse, their political stability depends on an export economy that could fall apart in 2007 as WalMart shoppers spend fewer and less valuable dollars on things made in China’s factories. A hundred million unemployed factory workers might make things hairy for a central government that enjoys little true legitimacy. And there is always the chance that Chinese internal politics will return to the psychotic state of the mid-1960s if the stress is too great. What I wonder is when China might begin to go adventuring into former Soviet lands such as Kazakhstan in search of oil. Perhaps 2007 is the year that China turns aggressive.

US Politics

Elation ran through the body politic in November when the Republicans lost control of congress and the senate, and many state governments as well. But the Democrats have not shown any better understanding of the nation’s economic and energy predicaments than the Republicans have. The Democrats are equally lost in fantasies about running WalMart and the interstate highway system on corn instead of petroleum. The Democrats are every bit as invested in our suburban gross liabilities as the Republicans have been. One way or another, we will either have to get some revolution in party ideology or the American political system is going to fail. Unfortunately, instead of ideas and agendas for facing our real problems, the public remains lost in a political personality showcase that is just one facet of our absurd celebrity culture.

My prediction for 2007 is that American politics will become more delusional, more based on false hopes for salvaging our tragic misinvestments, and more disappointing.

I have stated many times on this blog that America faces a political readjustment of the kind not seen since the Civil War — though not with the same plot and themes. I also believe that the feckless complacency of our current behavior could lead to a situation here in which Americans will beg an authoritarian leadership to tell them what to do. Winston Churchill famously remarked that Americans could always be relied upon to do the right thing — after they had exhausted all the other possibilities. I hope we are not heading in that direction, but we are already romancing the “other possibilities” (like running WalMart on corn) instead of taking intelligent steps like fixing the railroads, or ending subsidies and incentives for suburban development, or slapping realistic taxes on gasoline.

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Jan 14, 2008  DISARRAY  by James Howard Kunstler

The dark tunnel that the U.S. economy has entered began to look more and more like a black hole recently, sucking in lives, fortunes, and prospects behind a Potemkin facade of orderly retreat put up by anyone in authority with a story to tell or an interest to protect – Fed chairman Bernanke, CNBC, The New York Times , the Bank of America… Events are now moving ahead of anything that personalities can do to control them.

The “housing bubble” implosion is broadly misunderstood. It’s not just the collapse of a market for a particular kind of commodity, it’s the end of the suburban pattern itself, the way of life it represents, and the entire economy connected with it. It’s the crack up of the system that America has invested most of its wealth in since 1950. It’s perhaps most tragic that the mis-investments only accelerated as the system reached its end, but it seems to be nature’s way that waves crest just before they break.

This wave is breaking into a sea-wall of disbelief. Nobody gets it. The psychological investment in what we think of as American reality is too great. The mainstream media doesn’t get it, and they can’t report it coherently. None of the candidates for president has begun to articulate an understanding of what we face: the suburban living arrangement is an experiment that has entered failure mode.

I maintain that all the “players” – from the bankers to the politicians to the editors to the ordinary citizens – will continue to not get it as the disarray accelerates and families and communities are blown apart by economic loss. Instead of beginning the tough process of making new arrangements for everyday life, we’ll take up a campaign to sustain the unsustainable old way of life at all costs.

A reader sent me a passel of recent clippings last week from the Atlanta Journal-Constitution . It contained one story after another about the perceived need to build more highways in order to maintain “economic growth” (and incidentally about the “foolishness” of public transit). I understood that to mean the need to keep the suburban development system going, since that has been the real main source of the Sunbelt’s prosperity the past 60-odd years. They cannot imagine an economy that is based on anything besides new subdivisions, freeway extensions, new car sales, and NASCAR spectacles. The Sunbelt, therefore, will be ground-zero for all the disappointment emanating from this cultural disaster, and probably also ground-zero for the political mischief that will ensue from lost fortunes and crushed hopes.

From time-to-time, I feel it’s necessary to remind readers what we can actually do in the face of this long emergency. Voters and candidates in the primary season have been hollering about “change” but I’m afraid the dirty secret of this campaign is that the American public doesn’t want to change its behavior at all. What it really wants is someone to promise them they can keep on doing what they’re used to doing: buying more stuff they can’t afford, eating more bad food that will kill them, and driving more miles than circumstances will allow.

We need to prepare for the end of the global economic relations that have characterized the final blow-off of the cheap energy era. The world is about to become wider again as nations get desperate over energy resources. This desperation is certain to generate conflict. We’ll have to make things in this country again, or we won’t have the most rudimentary household products.

Prepare psychologically for the destruction of a lot of fictitious “wealth” – and allow instruments and institutions based on fictitious wealth to fail, instead of attempting to keep them propped up on credit life-support. Like any other thing in our national life, finance has to return to a scale that is consistent with our circumstances – i.e., what reality will allow. That process is underway, anyway, whether the public is prepared for it or not. We will soon hear the sound of banks crashing all over the place. Get out of their way, if you can.

*** Prepare psychologically for a sociopolitical climate of anger, grievance, and resentment. A lot of individual citizens will find themselves short of resources in the years ahead. They will be very ticked off and seek to scapegoat and punish others. The United States is one of the few nations on earth that did not undergo a sociopolitical convulsion in the past hundred years. But despite what we tell ourselves about our specialness, we’re not immune to the forces that have driven other societies to extremes. The rise of the Nazis, the Soviet terror, the “cultural revolution,” the holocausts and genocides – these are all things that can happen to any people driven to desperation. ****
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May 5, 2008 The Risk Economy

As the West’s industrial regime sputters toward a cheap-energy-crackup conclusion, there have been attempts to recast what our economy is actually about, how to account for whatever wealth we manage to produce, and project what our society will actually be organized to do in the years ahead.

For a while in the 1990s, the idea was a “service economy,” kind of like the old fable of the town whose inhabitants made a living by taking in each other’s laundry — only in our case it was selling hamburgers to tourists on vacation from their jobs making hamburgers elsewhere, or something like that.

Then came the idea of the “information economy” in which making things of value would no longer matter, only the processing and deployment of information (sometimes misidentified as “knowledge”). This model seemed to suggest a yin-yang of software engineers who made up games like “Grand Theft Auto” serving the opposite cohort of people who bought and played the game. If nothing else, it certainly explained how lifetimes could be frittered away on stupid activities.

That illusion yielded to the housing bubble economy, which actually did produce a lot of things, but not necessarily of value — for instance, houses made of particle board and vinyl 38 miles outside of Sacramento. It was a tragic and manifold waste of resources, as well as an insult to the landscape. But the darker side of the housing bubble lay in the world of finance, where a vast empire of swindles was constructed to support the Potemkin facade of production homebuilding.

Now we are in a strange period when those swindles are unwinding. The people who run the finance sector — the Wall Street investment banks, hedge funds and ratings agencies, the Federal Reserve, and the US Dept of the Treasury — in desperately trying to prevent the unwind, have rapidly ramped up another new economy based entirely on the buying and selling of risk. Risk, as a pure abstraction unconnected to any real capital activity, is all that’s left to buy and sell after all other plausibly practical vehicles for finance have failed.

While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations.

But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the US economy. One feature of the risk economy is the Federal Reserve’s new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world’s largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.

It’s a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket — no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their “out-to-lunch” signs on this long ago.

Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the US can’t be supported on debt anymore. The people of the US don’t produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something’s got to give — meaning something has to bring the US standard of living down to a level consistent with our declining actual wealth.

Everything else going on right now is a dodge. The Fed maneuvers, the “coordinated actions” of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios, the pretense that risk alone is a kind of fungible resource that can be endlessly traded to generate fees — all this fucking nonsense will only make the eventual unwinding much worse.

Personally, I doubt that it can go on more than a few more months. The velocity of everything is going up past the “red line” where things really fly apart. The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can’t be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away, and when the pink slip appears in the pay envelope.

 

 

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Civil Asset Forfeiture: across the nation authorities confiscate cash & homes of innocent people

Source: Ironside AM (2016) New report finds civil asset forfeiture most heavily burdens minorities and low-income communities. Civil Rights Law & Policy Blog.

Preface. Basically if you’re poor, your cash, car, home, and other property can be confiscated for no reason, with no proof of guilt, and you’ll never get it back.

I predict that the high level of corruption in the U.S. (and elsewhere) will make collapse faster and harsher than societies that are more community oriented.  I hope future historians look at this as a factor in how nations handled the energy crisis.

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The repo market was a key reason the meltdown happened

NY Fed’s Dudley Warns that “Firesales” Could Trigger Another Financial Crisis.  Still Broken Five Years Later

by Mike Whitney. Feb 21-23, 2014. Counterpunch.
“The repo market wasn’t just a part of the meltdown. It was the meltdown.”  – David Weidner, Wall Street Journal, May 29, 2013.

Ask your average guy-on-the-street ‘what caused the financial crisis’, and you’ll get a blank stare or a brusque “The housing bubble”. Even people who follow the news closely are usually sketchy on the details. They might add something about subprime mortgages or Lehman Brothers, but not much more.

Very few seem to know that the crisis began in a shadowy part of the financial system called repo, which is short for repurchase agreement.  In 2008, repo was ground zero, the epicenter of the meltdown. That’s where the bank run took place that froze the credit markets and sent the financial system into free fall.

Nothing has been done to fix the problems in repo, which means that we’re just as vulnerable today as we were five years ago when Lehman imploded and all hell broke loose.

Repo is a critical part of today’s financial architecture. It allows the banks to fund their long-term securities cheaply while giving lenders, like money markets, a place where they can park their money overnight and get a small return.  The entire repo market is roughly $4.5 trillion, although the more volatile tri-party repo market is around $1.6 trillion. (Note: That’s $1.6 trillion that’s rolled over every day.)

Repo works a lot like a pawn shop. You bring your rusty bike to E-Z-Pawn, and the guy behind the counter gives you 15 bucks.  That’s how repo works too, the only difference is that repo is a loan. The banks post collateral –mostly pools of mortgages (MBS) or US Treasuries– and get overnight loans from a cash-heavy lenders, like money markets, insurance companies or pension funds. Borrowers repay the loan with interest added to the original sum.

The problem that arose in 2008, and that will crop up again, was that the value of the underlying collateral (subprime MBS) was downgraded, forcing banks to take steep haircuts. (which means they couldn’t borrow as much on their collateral)

The bigger the haircuts, the less money the banks had to fund their securities, which forced them to sell assets to make up the difference.

THIS IS DEFLATIONARY: When banks and other financial institutions deleverage quickly, asset prices plunge and capital is wiped out, forcing the Fed to step in and backstop the system to prevent a full-blown meltdown.

And that’s exactly what the Fed did in 2008. It slashed rates to zero, set up myriad lending facilities and provided unlimited backing for both regulated and unregulated financial institutions. It was the biggest financial rescue operation of all time and it cost somewhere in the neighborhood of 12 to 13 trillion dollars in loans and other guarantees. Under the provisions of the Dodd Frank financial reforms, the Fed is forbidden from carrying out a similar bailout in the future, although you can bet-your-bippy that Yellen and Co. will bend the rules if there’s another catastrophe.

Fixing repo is not a left-right issue.

Among the people who follow these things, there is general agreement about what needs to be done to make the system safer. Even New York Fed President William C. Dudley –who’s no “liberal” by any stretch–admits that the system is broken.  In October, 2013, at a bank conference  Dudley opined, “Current reforms do not address the risk that a dealer’s loss of access to tri-party repo funding could precipitate destabilizing asset fire sales, whether by the dealer itself, or by the dealer’s creditors following a default.”  In other words, the chances of another 5-alarm fire sometime in the future are pretty darn good.

Dudley’s description of what happened during the acute phase of the crisis is also worth reviewing. He said:

“Higher margins on repo and increased collateral calls due to credit ratings downgrades reduced the quantity of assets that could be financed in repo markets and elsewhere, prompting further asset sales. As wholesale investors started to exit, this set in motion a bad dynamic—a fire sale of assets that cut into earnings and capital. This just increased the incentives of investors to run and for banks to hoard liquidity against the risk that they could themselves face a run. This downward spiral of fire sales and funding runs was a key feature of the financial crisis …”

And, that, dear reader, is a first-rate account of what happened in 2008 when panic gripped the markets and the dominoes started to tumble. Former Fed chairman Ben Bernanke’s version of events is also worth a look if only because he describes the crash in terms of what it really was, a modern day bank run. Here’s what he said:

“What was different about this crisis was that the institutional structure was different. It wasn’t banks and depositors. It was broker-dealers and repo markets. It was money market funds and commercial paper.”

While most analysts agree about the origins of the crisis and the type of changes that are needed to avoid a repeat,  the banks have blocked all attempts at reforming the system.

Why? Because the reforms would cost the banks more money, and they don’t want that. They’d rather put the entire system at risk, then cough up a little more dough to make repo safer. Here’s how the New York Fed summed it up in a paper titled “Shadow Bank Monitoring”:

“One clear motivation for inter-mediation outside of the traditional banking system is for private actors to evade regulation and taxes. … Regulation typically forces private actors to do something which they would otherwise not do: pay taxes to the official sector, disclose additional information to investors, or hold more capital against financial exposures. Financial activity which has been re-structured to avoid taxes, disclosure, and/or capital requirements, is referred to as arbitrage activity.” (“Shadow Bank Monitoring”, Federal Reserve Bank of New York Staff Reports, September, 2013)

That says it all, doesn’t it? They don’t want to pay taxes, they don’t want to hold capital against their collateral, and they want to continue to run their businesses in the shadows so nosy shareholders and regulators can’t see what the heck they’re up to. So, what else is new? The banks are running a crooked, black box operation, and they aim to keep it that way come hell or high water.

The banks can’t be reasoned with, that’s obvious from the position they’ve taken. They’ve put profits above everything, even the viability of the system. How can you reason with people like that?  Just get a load of what the New York Fed said on the matter:

“Intermediaries create liquidity in the shadow banking system by levering up the collateral value of their assets. However, the liquidity creation comes at the cost of financial fragility as fluctuations in uncertainty cause a flight to quality from shadow liabilities to safe assets. The collapse of shadow banking liquidity has real effects via the pricing of credit and generates prolonged slumps after adverse shocks.”

This sounds more complicated than it is. What the Fed is saying is: “Hey, guys, you’re creating all this fake money (credit) by loading up on leverage (borrowing), and that’s pushing us closer to another crisis.  Once the money markets figure out that all those nifty subprime CDOs you’ve been trading for overnight loans aren’t worth Jack-crap, then they’re going to cut you off at the knees and move into risk-free assets like US Treasuries. So why don’t you wise-the-hell-up, and start playing by the rules like everyone else so we don’t have to deal with another big, freaking meltdown.  Okay?”

The only way to fix repo is by backstopping collateral with more capital,  forcing all trading onto central clearing platforms (where regulators can see what’s going on), and regulating shadow banks like traditional, commercial banks.   The editors at Bloomberg said it best nearly a year ago. They said: ” If an entity engages in banking activity… it must register as a bank, with all the backstops and capital requirements that entails.”

If we’re not going to nationalize the banks and turn them into public utilities, which is what we should have done in 2009 when we had the chance, then we need to put safeguards in place to keep them from crashing the system every few years.

Regulate, Regulate, Regulate. That’s the ticket.

Stricter regulations could have prevented the last crisis, and stricter regulations can prevent the next one. It’s just a matter of finding the political will to get the job done.

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Nuclear Winter in China: Chinese Smog will lower food supplies

Scientists liken Chinese smog to ‘nuclear winter’

February 27, 2014.  by Kim Kyung-Hoon. Reuters.

Air pollution in parts of China is now so extreme it could lead to conditions similar to a nuclear winter,” scientists say. The smog that covers the country has become so thick it is impeding photosynthesis, potentially disrupting China’s food supply.

China’s pollution problem is reaching crisis point, with acrid smog covering six southern provinces for the past week. Over the last few days 19 cities have had levels of pollution drastically exceeding the World Health Organization’s (WHO) safety levels (20 times higher than safe levels: i.e. in Bejing 505 micrograms of particles per cubic meter, 25 or less is safe).

A recent experiment in Beijing showed a significant slowdown in photosynthesis –chili and tomato seeds usually take 20 days to sprout took over 2 months to grow into seedlings.

“They will be lucky to live at all. Now almost every farm is caught in a smog panic,” He Dongxian said, adding that the poor seedling quality would have a severe effect on agricultural output this year.

China’s smog problem has begun to affect its neighbors overseas. On Wednesday officials in Kumamoto prefecture in southwestern Japan issued a health warning to residents after a dramatic rise in air pollution levels. Authorities advised people to stay indoors and not to exercise outside. [Over a third of air pollution in California is coming from China as well].

Ministers from China, Japan and South Korea are set to meet in May to discuss ways to mitigate the rising levels of pollution in the region. China has been criticized by its neighbors for its excessive use of coal-burning power stations.
The toxic smog is having severe consequences, with aircraft being grounded across the country because of poor visibility, roads closing and a significant reduction in tourist numbers. An associate professor at China Agricultural University, He Dongxian, told the South China Morning Post that if these conditions continued, China will experience something akin to a “nuclear winter.

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Science: A Drier Future. Global Warming is likely to lead to overall drying of land surfaces.

A Drier Future. Global Warming is likely to lead to overall drying of land surfaces. Sherwood, S & Fu, Q. Science. 14 Feb 2014. Vol 343. pp 737-739

Global temperature increases affect the water cycle over land, but the nature of these changes remains difficult to predict. A key problem is to distinguish between droughts, which are regionally temporary extreme phenomena versus normal dryness. Average dryness depends on precipitation and how fast water evaporates. As the planet warms, global average rainfall increases, but so does evaporation. What is the likely net impact on average aridity?

Most studies of dryness focus on droughts rather than on the usual, background dryness that don’t take into consideration changes in available energy, air humidity, and wind speed that can exaggerate the trend toward more drought in a warming climate, which has undone past claims that drought is on the rise globally, and led to weaker claims about observed drought trends in the most recent Intergovernmental Panel on Climate Change report.

However, that does not mean that conditions will not get drier

The key factor causing drying is that land surfaces (and the air just above them) warm, on average, about 50% more than ocean surfaces. Enhanced warming of land surfaces relative to oceans occurs because continental air masses are drier than maritime ones, which in turn is a consequence of the limited availability of surface water.

The second factor ensuring drying is that water vapor content over land does not increase fast enough relative to the rapid warming there. This increases the aridity.

Positive feedback from soil moisture changes is not needed to explain enhanced land warming, but likely amplifies it in some regions.

The general trend toward a drier land surface appears to rest on relatively firm foundations. The predicted drying would be sufficient to shift large portions of the Earth to new, drier climate categories (although the richer atmospheric CO2 might mitigate the impact on some plants). The background drying is separate from, but may be compounded by, the expected trend toward more intermittent rainfall for a given mean rain rate.

As the above considerations show, focusing on changes in precipitation, as typical in high-profile climate reports, does not tell the whole story—or perhaps even the main story—of hydrological change. In particular, it obscures the fact that in a warmer climate, more rain is needed. Many regions will get more rain, but it appears that few will get enough to keep pace with the growing evaporative demand.

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PNAS: Abrupt Impacts of Climate Change: Anticipating Surprises

Abrupt Impacts of Climate Change: Anticipating Surprises. 2013. sponsored by the National Oceanic Atmospheric Administration, the National Science Foundation, and the U.S. Intelligence community.

This was the best summary of the 223 page National Academy of Sciences publication I could find.  The first report on abrupt climate change came out in 2002. It is sobering that one-fifth of all fossil fuels that have ever been burned happened since the 2002 report was released.

What surprises could climate change have in store for us?   Brad Plumer December 4, 2013  Washington Post

On Tuesday, the National Research Council published a brand new report, “Abrupt Impacts of Climate Change: Anticipating Surprises,” that lays out what scientists have learned since 2002 about the possibility of sudden climate shifts. There are still plenty of troubling uncertainties, but researchers have learned a fair bit.

The upshot? Earth is already seeing some abrupt changes, like the fast retreat of summer Arctic sea ice. There’s also a real risk that other rapid and drastic shifts could follow in the coming decades if the Earth keeps warming — including widespread plant and animal extinctions and the creation of large “dead zones” in the ocean.

On the flip side, other drastic changes “are now considered unlikely to occur this century.” That includes shifts in Atlantic ocean circulation patterns that could radically alter Europe’s climate, as hyped in the disaster flick “The Day After Tomorrow.” Also unlikely this century: Collapsing ice sheets in West Antarctica that would push sea levels up very quickly, as well as sudden methane eruptions from the Arctic that could heat the planet drastically. Those doomsday scenarios are left to future generations.

The authors do emphasize, however, that scientists still don’t fully understand all the different ways the Earth’s climate can change in short order. There are lots of unknowns here. “Some surprises in the climate system may be inevitable,” they conclude, “but with improved scientific monitoring and a better understanding of the climate system it could be possible to anticipate abrupt change before it occurs and reduce the potential consequences.”

Here’s a longer rundown of some of the abrupt changes the new National Research Council report explores, as well as how probable they are to occur this century (I’ve ordered them from most likely to least likely):

— Sharp increases in extinction rates. A recent study in Science found that the world is on track to warm much faster than it has in the past 65 million years. That could require some species to shift habitats at an unprecedented rate.

This concept is known as the “velocity of climate change,” and the map on the right shows two different estimates of how quickly species would have to shift in order to maintain the climates of their current habitats (assuming they needed to).

Some species will be able to keep up, others likely won’t: There’s only so far up a mountain that pikas can climb to stay cool, for instance. And coral reefs will have difficulty adapting if the oceans keep warming and become more acidic. Add it up, and it raises the prospect of extinctions for many species.

Likelihood this century: Moderate. When you toss in other pressures that many plant and animal species are facing — deforestation, for instance — the report concludes that a mass extinction event “could conceivably occur before the year 2100,” Coral reefs in particular get singled out here: “some models show a crash of coral reefs from climate change alone as early as 2060 under certain scenarios.”

However, the report adds that scientists still need to develop a better understanding of how many species will react to these shifting climates. “It is an open question whether the climatic tolerances of local populations can evolve fast enough to keep up with rapid climate change.”

The report also explores the possibility of an abrupt “collapse” of the Amazon rain forest due to a combination of climate change and deforestation (say, by creating a self-sustaining cycle of fires and dryness). The report concludes that some of these scenarios are “plausible,” but they’re still subject to much intense debate and are very difficult to model the likelihood.

— An abrupt decrease in ocean oxygen. Scientists expect the oxygen content of the ocean to decline as the world warms, due to various chemical and biological changes. And that raises a concern: In some parts of the ocean, it’s possible that this process could accelerate abruptly, creating large “oxygen minimum zones” that are virtually uninhabitable for fish and other organisms.

Likelihood this century: Moderate. Similar “dead zones” are already popping up in many coastal areas around the world, mainly caused by fertilizer run-off and improperly treated wastewater. When combined with other changes in the warming ocean, “the decrease in oxygen availability might become non-linear.”

— Destabilization of the West Antarctic ice sheet. The current scientific consensus is that the world will likely see between 0.4 and 1.2 meters of sea-level rise (1 to 4 feet) by century’s end, depending on how fast emissions rise. This assumes the oceans will expand as they warm and ice caps and glaciers melt at a predictable pace.

But what about surprises? The report notes that the West Antarctic Ice Sheet carries enough ice to raise sea levels by 3 to 4 meters (10 to 13 feet). Right now, that massive ice sheet looks stable. But the geological record that these sheets are capable of shifting very quickly, particularly at the boundary between sea ice and land ice.

“Locations where meltwater forms on the ice shelf surface can wedge open crevasses and cause ice-shelf disintegration—in some cases, very rapidly.”

— Carbon or methane “bombs” released from the Arctic. There’s a lot of carbon that’s locked in frozen permafrost at high latitudes. There’s also a lot of methane stored in the northern oceans, trapped in lattice-like structures known as clathrates. All told, there may be more carbon stored in permafrost and ocean hydrates than their are in known fossil-fuel reserves (Allen et al 2009, IPCC 2007)

So what if the Earth heated up enough that the permafrost melted, the oceans warmed, and these greenhouse gases suddenly got released into the atmosphere? That could, in theory, trigger an extremely large climate shift.

Likelihood this century: Low. A sudden massive release looks unlikely this century. The report concludes that as the Arctic warms, it will gradually release more carbon and methane into the atmosphere, which will “amplify” existing warming. But a very large release is unlikely to happen a short span, say, just one or two decades.

The report cautions, however, that “this conclusion is based on immature science and sparse monitoring capabilities.” Scientists still need better assessments of the long-term stability of those carbon stores. Not out of the clear yet. And the odds here also keep going up if the planet keeps warming after 2100.

— A chaotic disruption of Atlantic ocean circulation patterns. Ever wonder how Western Europe manages to stay relatively warm despite being so far north? Some scientists give partial credit to the Atlantic Meridional Overturning Circulation (AMOC), an ocean pattern that transports warm water into the North Atlantic and Nordic seas. The pattern also plays many other vital roles, like maintaining the ocean’s ability to absorb carbon from the atmosphere.

Back in the early 2000s, scientists raised the prospect of a nightmare climate scenario here. Paleoclimate evidence suggests that the AMOC has changed abruptly in the past due to an influx of cool melting freshwater.

So what if, say, Greenland’s ice sheets melted quickly enough to disrupt this circulation? Would we get a “The Day After Tomorrow” style scenario in Europe, where some coastal areas cool down very rapidly? (Some scientists have argued that a disruption in Atlantic ocean heat circulation may have led to such a cold spell roughly 12,900 years ago.)

Likelihood this century: Low. Fortunately, this doomsday scenario now seems unlikely anytime soon. Climate models broadly agree that an abrupt change to the AMOC “will not occur this century.” Greenland would have to melt at a far faster rate than even the worst-case scenarios. The report does suggest, however, that “it is important to keep a close watch on this system,” to understand both the impact of smaller changes and keep an eye on the remote possibility of big, drastic shifts.

==============================

Table S1 from the report (pp 29-32) summarizing the possibilities

Abrupt climate change Table S1 (1)Abrupt climate change Table S1 (2)Abrupt climate change Table S1 (3)Abrupt climate change Table S1 (4)

The implications for food, disease, infrastructure, national security, and much more are discussed as well.  Here are some more pieces I copied from the NAS paper before I gave up — it’s just too long to summarize.

Abrupt changes—which can occur over periods as short as decades, or even years—have been a natural part of the climate system throughout Earth’s history.  One such abrupt change was at the end of the Younger Dryas, a period of cold climatic conditions and drought in the north that occurred about 12,000 years ago. Following a millennium-long cold period, the Younger Dryas abruptly terminated in a few decades or less and is associated with the extinction of 72 percent of the large-bodied mammals in North America.

Abrupt Changes Already Underway

Some abrupt climate changes are already underway, including the rapid decline of Arctic sea ice over the past decade due to warmer polar temperatures. Impacts include disruptions in the marine food web, shifts in the habitats of some marine mammals, and erosion of lation systems of the ocean and atmosphere, changes in the extent of sea ice could cause shifts in climate and weather around the northern hemisphere. The Arctic is also a region of increasing economic importance for a diverse range of stakeholders, and reductions in Arctic sea ice will bring new legal and political challenges as navigation routes for commercial shipping open and marine access to the region increases for offshore oil and gas development, tourism, fishing and other activities.

Increases in Extinction Threat for Marine and Terrestrial Species

The rate of climate change now underway is probably as fast as any warming event in the past 65 million years, and it is projected that its pace over the next 30 to 80 years will continue to be faster and more intense. These rapidly changing conditions make survival difficult for many species. Biologically important climatic attributes—such as number of frost-free days, length and timing of growing seasons, and the frequency and intensity of extreme events (such as number of extremely hot days or severe storms)—are changing so rapidly that some species can neither move nor adapt fast enough

The distinct risks of climate change exacerbate other widely recognized and severe extinction pressures, especially habitat destruction, competition from invasive species, and unsustainable exploitation of species for economic gain, which have already elevated extinction rates to many times above background rates. If unchecked, habitat destruction, fragmentation, and over-exploitation, even without climate change, could result in a mass extinction within the next few centuries equivalent in magnitude to the one that wiped out the dinosaurs. With the ongoing pressures of climate change, comparable levels of extinction conceivably could occur before the year 2100; indeed, some models show a crash of coral reefs from climate change alone as early as 2060

Loss of a species is permanent and irreversible, and has both economic impacts and ethical implications. The economic impacts derive from loss of ecosystem services, revenue, and jobs, for example in the fishing, forestry, and ecotourism industries. Ethical implications include the permanent loss of irreplaceable species and ecosystems as the current generation’s legacy to the next generation.

Abrupt Changes of Unknown Probability

Destabilization of the West Antarctic Ice Sheet

Of greatest concern among the stocks of land ice are those glaciers whose bases are well below sea level, which includes most of West Antarctica, as well as smaller parts of East Antarctica and Greenland. These glaciers are sensitive to warming oceans, which help to thermally erode their base, as well as rising sea level, which helps to float the ice, further destabilizing them.   Locations where meltwater forms on the ice shelf surface can wedge open crevasses and cause ice-shelf disintegration—in some cases, very rapidly.

the Greenland ice sheet is not expected to destabilize rapidly within this century. However, a large part of the West Antarctic Ice Sheet (WAIS), representing 3–4 m (10 to 13 feet) of potential sea-level rise, is capable of flowing rapidly into deep ocean basins. Because the full suite of physical processes occurring where ice meets ocean is not included in comprehensive ice-sheet models, it remains possible that future rates of sea-level rise from the WAIS are underestimated, perhaps substantially. Because large uncertainties remain, the Committee judges an abrupt change in the WAIS within this century to be plausible, with an unknown although probably low probability.

Abrupt Changes Unlikely to Occur This Century

More recent research findings have shown that they may be less likely to occur within this century than previously considered possible. These include disruption to the Atlantic Meridional Overturning Circulation (AMOC) and potential abrupt changes of high-latitude methane sources (permafrost soil carbon and ocean methane hydrates). Although the Committee judges the likelihood of an abrupt change within this century to be low for these processes, should they occur even next century or beyond, there would likely be severe impacts.

Potential Abrupt Changes due to High-Latitude Methane

Large amounts of carbon are stored at high latitudes in potentially labile reservoirs such as permafrost soils and methane-containing ices called methane hydrate or clathrate, especially offshore in ocean marginal sediments. Owing to their sheer size, these carbon stocks have the potential to massively affect Earth’s climate should they somehow be released to the atmosphere. An abrupt release of methane is particularly worrisome because methane is many times more potent than carbon dioxide as a greenhouse gas over short time scales. Furthermore, methane is oxidized to carbon dioxide in the atmosphere, representing another carbon dioxide pathway from the biosphere to the atmosphere. According to current scientific understanding, Arctic carbon stores are poised to play a significant amplifying role in the century-scale buildup of carbon dioxide and methane in the atmosphere, but are unlikely to do so abruptly, i.e., on a timescale of one or a few decades. Although comforting, this conclusion is based on immature science and sparse monitoring capabilities. Basic research is required to assess the long-term stability of currently frozen Arctic and sub-Arctic soil stocks, and of the possibility of increasing the release of methane gas bubbles from currently frozen marine and terrestrial sediments, as temperatures rise.

Bark Beetle Outbreaks

Bark beetles are a natural part of forested ecosystems, and infestations are a regular force of natural change. In the last two decades, though, the bark beetle infestations that have occurred across large areas of North America have been the largest and most severe in recorded history, killing millions of trees across millions of hectares of forest from Alaska to southern California.  Climate change is thought to have played a significant role in these recent outbreaks by maintaining temperatures above a threshold that would normally lead to cold-induced mortality. In general, elevated temperatures in a warmer climate, particularly when there are consecutive warm years, can speed up reproductive cycles and increase the likelihood of outbreaks.

Climate is not the only stressor on the Earth system—other factors, including resource depletion and ever-growing human consumption and population, are exerting enormous pressure on nature’s and society’s resilience to sudden changes

infrastructure is built with certain expectations of useful life expectancy, but even gradual climate changes may trigger abrupt thresholds in their utility, such as rising sea levels surpassing sea walls or thawing permafrost destabilizing pipelines, buildings, and roads.

VULNERABILITY OF U.S. COASTAL INFRASTRUCTURE TO RISING SEAS

• 39% of the population lives in coastal shoreline counties, by 2020 the percent will rise to 47%. Coastal counties contributed almost half of USA GDP in 2011 ($6.6 trillion dollars)

• 51 million: Total number of jobs in the coastal shoreline counties of the US in 2011.

• $2.8 trillion: Wages paid out to employees working at establishments in the coastal shoreline counties in 2011.

• 3: Global GDP rank (behind the United States and China) of the coastal shoreline counties, if considered an individual country.

• 446 persons/mi2: Average population density of the coastal watershed counties (excluding Alaska). Inland density averages 61 persons per square mile.

It’s likely sea level will rise at least by a meter by the end of the century.  For low lying metropolitan areas, such as Miami and San Francisco, such a rise could lead to significant flooding. These areas would be difficult to defend by dikes and dams, and such a large sea level rise would require responses ranging from potentially large and expensive engineering projects to partial or complete abandonment of now-valuable areas as critical infrastructure such as sewer systems, gas lines, and roads are disrupted, perhaps crossing tipping points for adaptation. Miami was founded little more than one century ago, and could face the possibility of sea level rise high enough to potentially threaten the city’s critical infrastructure in another century. In terms of modern expectations for the lifetime of a city’s infrastructure, this is abrupt.

If sometime in the coming centuries sea level should rise 20 to 25 m, as suggested for the Pliocene Epoch, 3 to 5 million years ago (see Figure 2.5), when CO2 is estimated to have had levels similar to today of roughly 400 parts per million, most of Delaware, the first State in the Union, would be under water without very large engineering projects (Figure B). In terms of the expected lifetime of a State, this could also qualify as abrupt.

A study of Earth’s climate history suggests the inevitability of “tipping points”— thresholds beyond which major and rapid changes occur when crossed—that lead to abrupt changes in the climate system. The history of climate on the planet—as read in archives such as tree rings, ocean sediments, and ice cores—is punctuated with large changes that occurred rapidly, over the course of decades to as little as a few years.

The current rate of carbon emissions is changing the climate system at an accelerating pace, making the chances of crossing tipping points all the more likely.

Surprises are inevitable. The question is whether surprises can be anticipated and reduced. That issue is addressed in this report.

Scientific research has already helped us reduce this uncertainty in two important cases; potential abrupt changes in ocean deep water formation and the release of carbon from frozen soils and ices in the polar regions were once of serious near-term concern are now understood to be less imminent, although still worrisome as slow changes over longer time horizons.

In contrast, the potential for abrupt changes in ecosystems, weather and climate extremes, and groundwater supplies critical for agriculture now seem more likely, severe, and imminent.

And the recognition that a gradually changing climate can push both natural systems, as well as human systems, across tipping points has grown over the past decade. This report addresses both abrupt climate changes in the physical climate system, and abrupt climate impacts that occur in human and natural systems from a steadily changing climate.

In addition to a changing climate, multiple other stressors are pushing natural and human systems toward their limits, and thus become more sensitive to small perturbations that can trigger large responses. Groundwater aquifers, for example, are being depleted in many parts of the world, including the southeast of the United States. Groundwater is critical for farmers to ride out droughts, and if that safety net reaches an abrupt end, the impact of droughts on the food supply will be even larger.

it is important to carefully catalog the assets at risk—societies cannot protect everything and will need to prioritize, and without an understanding of what could be lost, such as coastal infrastructure to rising seas, for example, intelligent decisions about what to protect first cannot be made.

Can all tipping points be foreseen? Probably not. Some will have no precursors, or may be triggered by naturally occurring variability in the climate system. Some will be difficult to detect, clearly visible only after they have been crossed and an abrupt change becomes inevitable. Imagine an early European explorer in North America, paddling a canoe on the swift river. This river happens to be named Niagara, but the paddler does not know that. As the paddler approaches the Falls, the roar of the water goes from faint to alarming, and the paddler desperately tries to make for shore. But the water is too swift, the tipping point has already been crossed, and the canoe—with the paddler—goes over the Falls.

Likelihood of Abrupt Changes in ocean oxygen levels

Changes in global ocean oxygen concentrations have the potential to be abrupt because of the threshold to anoxic conditions, under which the region becomes uninhabitable for aerobic organisms including fish and benthic organisms. Once this tipping point is reached in an area, anaerobic processes would be expected to dominate resulting in a likely increase in the production of the greenhouse gas N2O.

OMZs have also been intensified in many areas of the world’s coastal oceans by runoff of plant fertilizers from agriculture and incomplete wastewater treatment. These ‘dead zones’ have spread significantly since the middle of the last century and pose a threat to coastal marine ecosystems

Weather and Climate Extremes

Extreme weather and climate events are among the most deadly and costly natural disasters. For example, tropical cyclone Bhola in 1970 caused about 300,000-500,000 deaths in East Pakistan (Bangladesh today) and West Bengal of India.3,4 Hurricane Katrina caused more than 1,800 deaths and $96-$125 billion in damages to the Southeast U.S. in 2005. Worldwide, more than 115 million people are affected and more than 9,000 people are killed annually by floods, most of them in Asia (Figure 2.9 or see, for example, the Emergency Events Database5). Heat waves contributed to more than 70,000 deaths in Europe in 2003 (e.g., Robine et al., 2008) and more than 730 deaths and thousands of hospitalizations in Chicago in 1995 (Chicago Tribune, July 31, 1995; Centers for Disease Control and Prevention, 1995). Heat waves are one of the largest weather-related sources of mortality in the United States annually.6 According to data collected by the National Climate Data Center, there were 134 weather or climate disaster events with losses exceeding $1 billion each in the United States between 1980 and 2011, an average of more than four per year (Table 2.1). Floods, droughts and wildfires—events that appear to be changing in frequency and severity due to climate change—make up about a third of these and slightly more than a third of the dollar damages (adjusted to 2012 dollars). Droughts are particularly costly, comprising about 12 percent of the events by number, but about double that (23.8 percent) by total cost.

Abrupt Changes at High Latitudes

Potential Climate Surprises Due to High-Latitude Methane and Carbon Cycles

Interest in high-latitude methane and carbon cycles is motivated by the existence of very large stores of carbon (C), in potentially labile reservoirs of soil organic carbon in permafrost (frozen) soils and in methane-containing ices called methane hydrate or clathrate, especially offshore in ocean marginal sediments. Owing to their sheer size, these carbon stocks have potential to massively impact the Earth’s climate, should they somehow be released to the atmosphere. An abrupt release of methane (CH4) is particularly worrisome as it is many times more potent as a greenhouse gas than carbon dioxide (CO2) over short time scales. Furthermore, methane is oxidized to CO2 in the atmosphere representing another CO2 pathway from the biosphere to the atmosphere in addition to direct release of CO2 from aerobic decomposition of carbon-rich soils.

Permafrost

Frozen northern soils contain enough carbon to drive a powerful carbon cycle feedback to a warming climate. These stocks across large areas of Siberia comprise mainly an ice-rich, loess-like deposit averaging ~25 m deep, peatlands, and river delta deposits. Estimates of the total soil-carbon stock in permafrost in the Arctic range from 1,700–1,850 Gt C (Gt C = gigatons of carbon).

To put the Arctic soil carbon reservoir into perspective, the carbon it contains exceeds current estimates of the total carbon content of all living vegetation on Earth (approximately 650 Gt C), the atmosphere (730 Gt C, up from ~360 Gt C during the last ice age and 560 Gt C prior to industrialization), proved reserves of recoverable conventional oil and coal (about 145 Gt C and 632 Gt C, respectively), and even approaches geological estimates of all fossil fuels contained within the Earth (~1,500 – 5,000 Gt C). It represents more than two and a half centuries of our current rate of carbon release through fossil fuel burning and the production of cement (nearly 9 Gt C per year).

it is clear that the time scale for deep permafrost thaw is measured in centuries, not years. Furthermore, unlike methane hydrates (see below), the very large stocks of permafrost soil carbon (i.e., the 1,672 Gt C ) must first undergo anaerobic microbial fermentation to produce methane, itself a gradual decomposition process. There are no currently proposed mechanisms that could liberate a climatically significant amount of methane or CO2 from frozen permafrost soils within an abrupt time scale of a few years, and it appears gradual increases in carbon release from warming soils can be at least partially offset, owing to rising vegetation net primary productivity. Over a time scale of decades, however, a possible self-sustaining decomposition of Yedoma could occur before the end of this century (Khvorostyanov et al., 2008a, 2008b, 2008c). A related idea is the possibility of rising soil temperatures triggering a “compost bomb instability” —possibly including combustion—and a prime example of a rate-dependent tipping point. Such possibilities would represent a rapid breakdown of the Arctic’s very large soil carbon stocks and warrant further research. Even absent an abrupt or catastrophic mobilization of CO2 or methane from permafrost carbon stocks, it is important to recognize that Arctic emissions of these critical greenhouse gases are projected to increase gradually for many decades to centuries, thus helping to drive the global climate system more quickly towards other abrupt thresholds examined in this report.

Methane Hydrates in the Ocean

Under conditions of high pressure, high methane concentration, and low temperature, water and methane can combine to form icy solids known as methane hydrates or clathrates in ocean sediments. The methane derives from biological or thermal degradation of organic matter originally deposited on the sea floor. Although the overall rate of methane production in ocean sediments is fairly slow, over millions of years, substantial reservoirs of methane hydrate have accumulated in the world’s ocean margins. Throughout most of the world ocean, a water depth of about 700 m is required for hydrate stability. In the Arctic, due to colder-than-average water temperatures, only about 200 m of water depth is required, which increases the vulnerability of those methane hydrates to a warming Arctic Ocean. The Arctic is also a focus of concern because of the wide expanse of continental shelf (25 percent of the world’s total), much of which is still frozen owing to its exposure to the frigid atmosphere during lowered sea levels of the last glacial maximum.

The inventory of methane in ocean margin sediments is large but not well constrained, with a generally agreed upon range of 1,000-10,000 Gt C (Archer, 2007; Boswell, 2007; Boswell et al., 2012). One inventory places the total Arctic Ocean hydrates at about 1,600 Gt C by extrapolation of an estimate from Shakhova et al. (2010a) to the entire Arctic shelf region (Isaksen et al., 2011) (see Figure 2.12). The geothermal increase in temperature with depth in the sediment column restricts methane hydrate to within a few hundred meters thickness near the upper surface of the sediments (e.g., Davie and Buffett, 2001). Beneath this stability zone, a layer rich in methane bubbles is often seen in seismic reflection data, called a “bottom simulating reflector.” The areal extent of methane-rich sediments is fairly well known from seismic observations of this feature, but uncertainty in the concentration of methane in those sediments is very large, thus resulting in the large uncertainty in the global inventory of ocean-floor methane.

Potential response to a warming climate

Climate change has the potential to impact ocean methane hydrate deposits through changes in ocean water temperature near the sea bed, or variations in pressure associated with changing sea level. Of the two, temperature changes are thought to be most important, both during the last deglaciation and also in the future. Warming bottom waters in deeper parts of the ocean, where surface sediment is much colder than freezing and the hydrate stability zone is relatively thick, would not thaw hydrates near the sediment surface, but downward heat diffusion into the sediment column would thin the stability zone from below, causing basal hydrates to decompose, releasing gaseous methane. The time scale for this mechanism of hydrate thawing is on the order of centuries to millennia, limited by the rate of anthropogenic heat diffusion into the deep ocean and sediment column. Even on the Siberian continental margin, where water temperatures are colder than the global average, and where the sediment column retains the cold imprint from its exposure to the atmosphere during the last glacial time 20,000 years ago, any methane hydrate must be buried under at least 200 m of water or sediment. Bottom waters at depths of 50 or 100 m might warm relatively quickly with a collapse in sea ice cover, but it would take centuries for that heat to diffuse through the 100- 150 m of sediment column to the hydrate stability zone. Thus the release of 50 Gt C from the Siberian continental shelf in 10 years as postulated by Whiteman et al. (2013) is unlikely.

The proportion of this gas production that will reach the atmosphere as CH4 is likely to be small. To reach the atmosphere, the CH4 would have to avoid oxidization within the sediment column (a chemical trap) and re-freezing within the stability zone shallower in the sediment column (a cold trap). However, the hydrate stability zone thickness decreases to zero near the top of its depth range in the ocean, and an increase in water column temperature there could eliminate the stability zone entirely, potentially providing an easier pathway for methane to reach the sea floor. Episodic and explosive escapes of gaseous methane from the sediment column have been documented by kilometer-scale “wipeout zones” in seismic images, and pockmarks on the sea floor, called eruption craters. However, the processes responsible for these observations are too poorly understood to predict what fraction of deeper CH4 might be released through them.

Most of the methane gas that emerges from the sea floor dissolves in the water column and oxidizes to CO2 instead of reaching the atmosphere. Bubble plumes tend to dissolve on a height scale of tens of meters, although larger plumes, consisting of larger bubbles, do rise farther. However, even in the cold Arctic Ocean, methane hydrate is only stable below about 200 m water depth, making for an inefficient pathway to the atmosphere at best.

The highest oceanic methane fluxes to the atmosphere in the Arctic are probably in the coastal zone, associated with erosion of coastal permafrost. In this region and terrestrial lakes the methane flux to the atmosphere is strongly impacted by ice formation on the water surface, providing another mechanism for climate feedback.

A more abrupt way to transfer methane hydrate from the sediment column to the atmosphere is by way of a submarine landslide. Methane hydrate floats in seawater just as water ice floats, and it also has greater potential to reach the atmosphere than methane bubbles. The largest known submarine landslide (called Storegga) occurred ~8000 years ago, as documented in sediment deposits off Norway. The volume of sliding material multiplied by a reasonable hydrate fraction in the pore space yields a possible methane source of about 1 Gt C. The climatic impact of this quantity of methane would be comparable to that of a volcanic eruption (although warming rather than cooling). As such it would have a significant climate impact, but one that is likely to be smaller than that of the anthropogenic CO2 rise.

Over time scales of centuries and millennia, the ocean hydrate pool has the potential to be a significant amplifier of the anthropogenic fossil fuel carbon release. Because the chemistry of the ocean equilibrates with that of the atmosphere (on time scales of decades to centuries), methane oxidized to CO2 in the water column will eventually increase the atmospheric CO2 burden.

As with decomposing permafrost soils, such release of carbon from the ocean hydrate pool would represent a change to the Earth’s climate system that is irreversible over centuries to millennia. Modeling the response of ocean hydrates to climate change is in its infancy. The largest uncertainty is the concentration of methane hydrate, especially in the shallow sediment column near the sediment water interface.

In summary, the ocean methane hydrate pool has strong potential to amplify the human CO2 release from fossil fuel combustion over times scales of decades to centuries. While anthropogenic warming should accelerate the thawing of offshore permafrost via warming of Arctic Ocean shelf waters, this impact should be considered additive to a broader thawing trend that has been underway for thousands of years.

Impacts of Arctic Methane on Global Climate

Although attention is often focused on methane when considering a potential Arctic carbon release, because methane is a short-lived gas in the atmosphere (CH4 oxidizes to CO2 within about a decade), ultimately a methane problem is a CO2 problem. It does matter how rapidly methane is released, and the impacts of a spike versus chronic emissions are discussed in Box 2.4. As methane emissions from permafrost degradation will also be accompanied by larger fluxes of CO2, Arctic carbon stores clearly have the potential to be a significant amplifier to the human release of carbon.

Speculations about potential methane releases in the Arctic have ranged up to about 75 Gt C from the land and 50 Gt C from the ocean. A release of 50 Gt C methane from the Arctic to the atmosphere over 100 years would increase Arctic CH4 emissions by about a factor of 25, and would make the present-day permafrost area about two times more productive of CH4 on average as comes from wetlands today. Postulating such a methane release over a more abrupt 10-year time scale, the emission rates from present-day permafrost would have to exceed that from wetlands by a seemingly implausible factor of 20, supporting a longer century timescale for this process, and making methane emission from polar regions an unlikely candidate for a tipping point in the climate system.

Nonetheless, as can be seen in Box 2.4, releasing 50 Gt C of methane over 100 years would have a significant impact on Earth’s climate. The atmospheric CH4 concentration would roughly quadruple, with a resulting total radiative forcing from CH4 of about 3 Watts/m2. The magnitude of this forcing is comparable to that from doubling the atmospheric CO2 concentration, but the impact of the methane forcing would be strongly attenuated by its short duration.   As concluded above, an increase in Arctic CH4 emissions of more than a factor of 10 is required before it would begin to have a significant impact on Earth’s climate in the short term. Such a strong acceleration of methane degassing from the Arctic would result in measurably higher concentrations of methane in the high northern latitudes.

Summary

Arctic carbon stores are poised to play a significant amplifying role in the century time scale buildup of CO2 and methane in the atmosphere, but are unlikely to do so abruptly, on a time scale of one or a few decades. This conclusion is based on immature science, however, and a truly sparse monitoring capability

 

What is known about the likelihood and timing of abrupt changes in the climate system over decadal timescales?

• large, abrupt changes in ocean circulation and regional climate;

• reduced ice in the Arctic Ocean and permafrost regions;

• large-scale clathrate release;

• changes in ice sheets;

• large, rapid global sea-level rise;

• growing frequency and length of heat waves and droughts;

• effects on biological systems of permafrost/ground thawing (carbon cycle effects);

• phase changes such as cloud formation processes; and

• changes in weather patterns, such as changes in snowpack, increased frequency and magnitude of heavy rainfall events and floods, or changes in monsoon patterns and modes of interannual or decadal variability.

Posted in CO2 and Methane | 1 Comment

Pity Brazil’s Military Police. FEB. 19, 2014. Vanessa Barbara. New York Times.

Pity Brazil’s Military Police. FEB. 19, 2014.  Vanessa Barbara. New York Times.

  • In 2012, 1,890 Brazilians were killed by the police.
  • 351 occurred in São Paulo — 20% of all homicides.
  • Organized crime retaliated by killing 11 police officers and another 100 off-duty.
  • Police officers are 3 times more likely to be murdered than the average Brazilian.
  • 70 percent of Brazilians distrust the police — they have lost their legitimacy.

In São Paulo, lower ranked military police officers earn an annual salary of $15,248, including benefits and danger pay allowances. They work in 12-hour shifts, night and day, for an average of 42 hours a week. But only in theory. Officers claim the rules are often ignored, with extended overtime, short notice of scheduling changes and irregular or no lunch breaks. Some take on additional jobs to supplement their wages, not only as private security guards (which is illegal), but also in a program called “Atividade Delegada,” through which the city hires policemen in their spare time, offering the equivalent of $64 for eight extra hours patrolling the streets.

There are two main kinds of police in Brazil. The civilian police concentrate on criminal investigations, while the military police have the duty of maintaining public order and working to prevent crimes.

The military police are not part of the armed forces, and yet they operate according to military principles of rank and discipline. They cannot strike or unionize, and are subject to a military-style penal code (meaning transgressions at work can be treated as mutiny or treason, and officers are tried in a special court). They are prohibited from “revealing facts or documents that can discredit the police or disrupt hierarchy or discipline.

They also can’t openly disapprove of the acts of civilian authorities from the executive, legislative or judicial branches of government, and are forbidden to express their personal political opinions.

“I love my job, I really do,” one member of the military police recently told me. “But our work goes unrecognized. Our errors are scrutinized. We have fractions of a second to decide between accelerating or braking, shooting or retreating; either way we are blamed. He noted that police officers were sometimes the only agents of the state stationed in poor neighborhoods dominated by organized crime. “Everything is on us.

But their main complaint is the impunity of criminals. Many believe Brazil’s judicial institutions are too lenient and inefficient. Officers are tired of arresting the same suspects over and over.

According to Adilson Paes, a retired police lieutenant colonel who conducted a study on police brutality, some officers turn vigilante as a result. This was also the conclusion of an investigation into policing in Rio de Janeiro and São Paulo conducted by Human Rights Watch: Many deaths of civilians “resisting arrest” are in fact extrajudicial killings, the report found, and “some police officers are members of ‘death squads,”’ which are “responsible for hundreds of murders each year.

This often leads to a cycle of retribution between the police and organized crime. Just a month ago, in Campinas, a city 60 miles from São Paulo, a policeman was killed in front of his wife during a robbery; within a few hours, 12 people were found executed — apparently by the police, as revenge. And sometimes corrupt police officers themselves are involved in organized crime.

Lately, more Brazilians have been taking notice, as police brutality is increasingly directed against journalists and political protesters (many from the middle class), instead of just the same old black and poor citizens who live in favelas.

Posted in Crime, Gangs, Corrupt police, Private security | Comments Off on Pity Brazil’s Military Police. FEB. 19, 2014. Vanessa Barbara. New York Times.

Gail Tverberg advice on what to do

Below are 2 columns of advice from Gail Tverberg.

Feb 17, 2014. Reaching Limits to Growth: What Should our Response Be?

Oil limits seem to be pushing us toward a permanent downturn, including a crash in credit availability, loss of jobs, and even possible government collapse. In this process, we are likely to lose access to both fossil fuels and grid electricity. Supply chains will likely need to be very short, because of the lack of credit. This will lead to a need for the use of local materials.

The time-period is not entirely clear. Some countries, such as Greece and Syria, will be seeing these effects quite soon. Other countries may not see the full effects for perhaps ten or twenty years. What should our response be?

It seems to me that there are many different answers, depending on who we are and what our goals are. The various options are not mutually exclusive.

Option 1. Make the most of the time we have available.

If there are things that are important to you, do them now. If you have been meaning to reconnect ties with family members or old friends, now is the time to do it. If there are things you would like to accomplish that require today’s transportation and services, do them now. If you want to support local charities, now would be a good time to do it.

Appreciate what you have now. We have been privileged to live in a society where transportation is readily available and where most of us can live in homes that are comfortably heated and cooled. At the same time, we can still enjoy many of the benefits of nature—clear skies and plants and animals around us. Life expectancies in the past were generally 35 years or less. Most of us have already lived longer than we could have expected to live in the past.

Develop stronger relationships with family and community.  This is likely to be a difficult transition. It is likely to be helpful to have as many allies as possible in transition. It may be helpful to move closer to other family members. Another approach is to form or join community groups, such as a church group or a group interested in common goals. The ties a person can form are likely to be helpful regardless of what path lies ahead.

Option 2. Prepare at least a little for the future

Learn to bounce back from downturns.  When I was an editor at The Oil Drum, I was editor for a letter from a man who grew up in Kenya and returned there practically every year. He told that the people in Kenya were very happy, even though they had little material goods and mortality was high.  One thing he mentioned was that if things went wrong—the death of a child for example—people were able to mourn for a day, and then move on. They also rejoiced in things we take for granted, such as being able to obtain enough food for the current day.

Do what you can to improve your health. In the United States, we have been used to a combination of practices that lead to overweight: (1) much too large food portions, (2) much processed food including much sugar and (3) lack of exercise. If we can change our eating and exercise practices, it is likely that we can improve our health. If healthcare goes downhill, fixing our personal health somewhat protects us.

Learn what you can about first aid. Injuries are likely to be more of an issue, as we work outside more.

We will need some specialists as well. As long as we eat grains, we will need dentists. As long as babies are born, we will need helpers of some type–doctors or midwives.

If circumstances permit, plant a garden and fruit or nut trees. Eventually, all food production will need to be local. Getting from our current industrialized agricultural model to a model with local food production with little (if any) fossil fuel inputs is likely to be a difficult transition. One approach is to learn what local plants, animals, and insects are edible. Another is to attempt to grow your own. Doing the latter will generally require considerable learning about what plants grow in your area, approaches to building and maintaining soil fertility, methods of preventing erosion, and a variety of related topics.

Find alternative water supplies. We currently are dependent on a water supply chain that can be broken in a variety of ways—drought, loss of electricity, storm damage, or pollution problems. If the long-term water supply seems questionable, it may be helpful to move to another location, sooner rather than later. Alternatively, we can figure out how to bridge a gap in water supplies, such as through access to a creek or lake. For the very short-term, a water barrel of stored water might be helpful.

Figure out alternative cooking arrangements. We humans are dependent on cooking for purifying water, for allowing us to eat a wider variety of food, and for allowing us to obtain greater nutrition from the food we eat, without chewing literally half of the day. We now depend primarily on electricity or natural gas for cooking. Determine what alternative cooking arrangements can be made in your area, in the event current cooking arrangements become unavailable. An example might be an outdoor fireplace with locally gathered sticks for fuel, perhaps supplemented by a solar cooker with reflective sides.

Store up a little food to bridge a temporary supply interruption. We have troubles today with wind storms and snow storms. There are any number of other types of interruptions that could happen if businesses encounter credit problems that lead to supply chain interruptions. It doesn’t hurt to be prepared.

Option 3. Figure out what options might work for a few years for taking care of yourself and your family 

We have a lot of goods made with fossil fuels that probably will work for a while, but likely won’t be available for the long term. Examples include solar PV, batteries, power saws, electric pumps, electric fences, bicycles, light bulbs, and many other devices that we take for granted today. Of course, as soon as any part breaks and can’t be replaced, we are likely to be “up a creek, without a paddle.”

I expect that quite a few of the permaculture solutions and organic gardening solutions are temporary solutions. They work for now, but whether they will work for the long term is less clear. We are not going to be able to make and transport organic sprays for fruit for very long and irrigation systems will need to be very simple to be resilient. Plastic wears out and even metal tools will be hard to replace.

Purchasing land for agriculture can perhaps be a partial solution for some individuals, with sufficient skills and tools. Ideally, a person will want to be part of a larger group of people using a larger piece of land, rather than a smaller group, using a smaller piece of land, because of the problem that occurs if one worker gets sick or injured. It may be helpful to have multiple non-contiguous pieces of land, to help even out impacts of bad weather and pests. Ideally, the land should be large enough so that part of the land can remain fallow, or be used for feeding animals, and can be rotated with crop-producing land.

Security is likely be a problem, especially if a single home is distant from other homes. Ideally, a family will be part of a larger group in order to provide security.

Other issues include inability to pay taxes and the government taking over property. Because of the many issues involved, any solution is, at best, temporary. Unfortunately, that may be the best we can do. As parts of the system fail, a local group may be able to support fewer people. Then the group will need to deal with how to handle this situation–everyone starve, or kick out a few members from the group, or attack another group, with the hope of obtaining control of their resources.

Option 4. Work on trying to solve the long-term problem.

There are many studies of how pre-industrial societies operated without fossil fuels and without electricity. For example, Jared Diamond gives his view of how some very early societies functioned in The World Until Yesterday. The Merchant of Prato by Iris Origo documents the life of one particular 14th century merchant, based on old letters and other documents.

Through studies of how past societies behaved, it might be possible for today’s people to develop a civilization that could be operated using only renewable resources of the types used in pre-industrial times, such as wood, water wheels, and sail boats. Such groups would probably not be able to use much metal or concrete because of the problem with deforestation when wood is used for energy-intensive operations. (Today’s so-called “renewables,” such as hydro-electric, wind turbines and solar PV require fossil fuels for manufacture and upkeep, so likely will not be available for very long.)  Heating of homes will need to be very limited as well, to prevent deforestation.

As a practical matter, the groups best equipped to make such a change are ones that have recently been hunter-gatherers and still have some memory of how they operated in the past. Perhaps some former hunter-gatherers could give instruction to others in sort of a reverse Peace Corps operation.

We do know some approaches that have been used in the past. Dogs have been used to help with herding animals, for hunting, and for warmth. Animals of various types have been used for transportation and for plowing. The downside is that animals require the use of a lot of land to produce the food needed for them to eat.

Traditional societies have used the giving of gifts and the requirement of reciprocal gift giving to increase the strength of relationships and as a substitute for our money-based financial system. With such an approach, a person gains status not by what he has, but by what he gives away.

Storytelling has been a way of passing on knowledge and entertainment for generations. Songs, games, and simple musical instruments are also part of many traditions. These are approaches that can be used in the future as well.

Option 5. Take steps toward getting population in line with likely long-term energy availability.

The world is now overfilled with people and with the many animals that people raise for food or as pets. Without fossil fuels and network electricity, we probably will not be able to feed more than a fraction of the current population of humans and domesticated animals.

Some steps we might take:

Keep family sizes small. Encourage one-child families. When a family pet dies, don’t replace it (or replace it with a smaller animal).

Eat much less meat. This could be started even now.

Option 6. Rearrange personal finances.

Paper investments are, in general, not going to be worth much, regardless of how we rearrange them, if resource availability drops greatly. Ultimately, paper investments allow us to buy goods available in the marketplace. But if there isn’t much to buy in the marketplace, they are likely to be much less helpful than we assume. Precious metals have the same difficulty–they can’t buy what is not available.

Purchasing land is theoretically better, but even land can be taken away from us by taxes or by appropriation. There is also a possibility that we may need to move, if conditions change, regardless of what property ownership conditions seem to be.

We need to learn to take each day as it comes. If we find that our bank accounts aren’t there, or that only a small fraction of the money can be withdrawn, or that the money is in the bank doesn’t buy much of anything, we need somehow to figure out a way around the situation. Very likely everyone else will be in the same boat. This is a major reason for working on substitute access to food and water supplies.

Option 7. Put more emphasis on relationships. 

Studies show that relationships are what bring happiness—not the accumulation of goods. Starting to work now on developing additional strong relationships would seem to be a worthwhile goal. In traditional societies, extended family relationships were very important.

Religions can teach us how we treat our neighbors and thus about relationships. A version of the Golden Rule (Do unto others as you would have then do unto you) is found in several major religions. Many readers of this blog have given up on religions as hopelessly out of date, instead choosing such “wisdom” as, “He who dies with the most toys wins.” In fact, this latter wisdom is clearly nonsense. We can expect our fossil-fuel based “toys” to lose their usefulness before our very eyes in the not too distant future. Ben Bernanke and Janet Yellen are not gods, even if we are told that they are all-powerful.

Another aspect of keeping good relationships is finding ways to mend broken relationships. One such approach is forgiveness. Another is through reconciliation procedures aimed at returning broken relationships to wholeness. Such procedures are common in small societies, according to Diamond (2012).

Option 8. Find ways to deal with the stresses of a likely downturn ahead.

As much as we would like to take one day at a time, oftentimes it is easy to worry, even though this does no good.

Even though we think we know that outcome of our current difficulties, we really do not. The universe has many physical laws. Ultimately, the source of all of these physical laws is not clear–is there a Supreme Being behind them? The story of natural selection is in many ways a miracle. The story of human existence represents more miracles—learning to control fire; learning to control our environment through agriculture; learning to modify our environment further through the use of fossil fuels. In my own personal life, I see a pattern of circumstances working together in ways I could never have expected.

We are not the first to go through hard times. Because of my background, I find myself comforted by many Biblical passages. I am sure other religions have other passages that are also helpful.

Yea, though I walk through the valley of the shadow of death, I will fear no evil, for though art with me. Thy rod and thy staff they comfort me. .  . Surely goodness and mercy will follow me all the days of my life. . . (Psalm 23: 4, 6)

. . . in all things God works for the good of those who love him . . . (Romans 8:28)

For me personally, more things have worked together for good than I would ever have dreamed possible. I will not rule out the possibility of this happening again in the future, regardless of what the external circumstances may look like.

Option 9. For those who are concerned about Climate Change

In my view, the changes we are encountering will bring a quick end to the use of fossil fuels. Thus, the concern that future fossil fuel use will cause rapid climate change is over-blown. If individuals would like to personally reduce their own fossil fuel use, I would suggest the following:

  • Stop eating meat now, especially that raised in our current industrial system.
  • Get rid of pets that are not providing support functions, such as hunting for food.
  • Spend less of your wages. With more of the money left in the bank or in paper investments, this money will lose value and thus will reduce spending on fossil fuel-based goods and services. (While theoretically this money could be lent out and reinvested, lack of credit availability will put an end to this practice.)
  • Use a bicycle for transport instead of a car, when possible. Or walk.
  • Purchase a more fuel efficient car, if you need to replace a current vehicle.
  • Turn down the heat in your home or apartment. Don’t use air conditioning.

I would suggest quitting your job as well, but if you quit your job, the job is likely to go to someone else, resulting in the same fossil fuel use for someone else.  Even stopping a business you own will not necessarily work, if another business will expand and take its place. If the business that ramps up is in a part of the world that uses coal as its primary fuel, stopping your local business may lead to an increase in world carbon dioxide emissions.

Gail Tverberg. 30 May 2013. Energy limits: Is there anything we can do? 

The energy limit we are running into is a cost limit. I would argue that neither the Republican or Democrat approach to solving the problem will really work.

The Republicans favor “Drill Baby Drill”. If the issue is that the price of oil extraction is too high, additional drilling doesn’t really fix the problem. At best, it gives us a little more expensive oil to add to the world’s supply. The Wall Street research firm Sanford Bernstein recently estimated that the non-Opec marginal cost of production rose to $104.50 a barrel in 2012, up more than 13 per cent from $92.30 a barrel in 2011.

US consumers still cannot afford to buy high-priced oil, even if we extract the oil ourselves. The countries that see rising oil consumption tend to be ones that can leverage its use better with cheaper fuels, particularly coal (Figure 1). See Why coal consumption keeps rising; what economists missed. The recent reduction in US oil usage is more related to young people not being able to afford to drive than it is to improved automobile efficiency. See my post, Why is gasoline mileage lower? Better gasoline mileage?

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world "all liquids" production amounts.

The Democrats favor subsidizing high-priced energy approaches that wouldn’t be competitive without such subsidies. Government debt is at 103% of GDP. It is hard to see that the government can afford such subsidies. Also, it is doubtful that the supposed carbon-saving benefit is really there, when all of the follow-on effects are included. Buying wind turbine parts, solar panels, and goods that use rare earth minerals (used in many high-tech goods, including electric cars and  wind turbines) helps to stimulate the Chinese economy, adding to their coal use. Furthermore, the higher taxes needed to pay for these subsidies reduces the spendable income of the common worker, pushing the country in the direction of recession.

So what do we do as an alternative, if neither the Republican or Democrat approach works? I would argue that we are dealing with a situation that is essentially unfixable. It can be expected to morph into a financial crash, for reasons I explained in How Resource Limits Lead to Financial Collapse. Thus, the issue we will need to mitigate will be debt defaults, loss of jobs, and possibly major changes to governments. If we are dealing with a financial crash, oil prices may in fact be lower, but people will still be unable to afford the oil because of other issues, such as lack of jobs or lack of access to money in their bank accounts.

Because neither political party can fix our problem, I expect that most of our responses will necessarily be individual, personal responses. These are a few ideas:

1. Get out of debt situations, if it is easy to do. 

There are a lot of people who own stocks on margin, or who own an expensive house with a big mortgage on it. Now, with prices of stocks and homes both higher, would be a good time to get out of both types of debt. Sell the stock or buy a less expensive house, without the mortgage.

Equities and home prices both seem to be inflated now, indirectly because of Quantitative Easing. Some recent analysis suggests that real (that is, inflation adjusted) interest rates are rising partly because inflation is falling.  The reason that inflation is falling is because oil prices are lower (Figure 2). Comparing the first four months of 2013 with the first four months of 2012, oil prices are about $9 per barrel lower. Oil prices are lower because of reduced demand due to economic contraction, especially in Europe.

Figure 2. Spot oil prices and actual refiners acquisition costs, based on EIA data.

In the past month, there has also been an uptick in interest rates (even apart from the declining inflation component). According to the Wall Street Journal, “Yields on the benchmark 10-year U.S. Treasury note now stand above 2.1%—still low by historic standards, but nearly half a percentage point higher than at the start of May.” Mortgage rates are also reported to be half a percentage point higher than they were six months ago.

There are a number of risks with rising real interest rates and falling inflation. One is that the higher interest rates will trigger lower stock prices and lower house prices. Another is that deflation will continue, making debt payback more difficult. If this happens, it is something that the Fed can’t handle with its monetary easing policy. Interest rates can go to zero, but not below. A third issue, especially if interest rates rise further, is the adverse impact on the US government financial situation.

2. Reduce your expectations about what investments can do for you.

Dmitry Orlov, who has had experience with the collapse of the Former Soviet Union, made the remark, “There are two kinds of investments: those that lose all their value at once, and those that lose value slowly.” Paper investments are a particular problem, because they can decline in value very quickly if conditions change. Even real estate can be a problem, though, because governments can take away what you thought you owned, or raise taxes to a level that you cannot afford. If you buy something and have to move, but cannot take the object with you, you will likely lose the value you invested. The only things that are really yours to keep (at least until your declining years) are skills that you learn.

3. Take up a hobby that will provide food for your family (planting a few fruit or nut trees, adding a garden, raising a few chickens, or learning to hunt/fish).

Taking up hobbies such as these provide several functions: They provide a diversion away from the problems of the day, and let you feel like you are doing something helpful. They may actually provide a cushioning effect, if there is a sharp downturn. Taking up such hobbies can provide a useful skill for the future. In some cases, it may make sense to purchase land for purposes such as these. If considering doing this, a person should take note of items (1) and (2) above. It takes quite a long time to get started, and you can’t take the improved land with you, if you have to leave.

4. Learn to appreciate nature, family, and simple joys that can’t easily be taken away. It is possible to be happy, regardless of circumstances. We can find many good things in every day. Obsessing over the future is not really helpful. Don’t tie your happiness to having more “stuff”; you are likely to be disappointed. Learn to sing happy songs, or how to play a musical instrument. Or memorize uplifting poetry or religious writings.

5. Build a network of friends. If things go downhill, we can’t expect to use a gun to ward off intruders, night and day. If nothing else, we will run out of ammunition. Over the long term, the approach that is likely to be successful is working together with other community members toward a common goal.

6. Learn new skills, if you are concerned about job loss. Try to think of what will be needed in a lower-energy world. People will always need dentists and midwives, regardless of how poor they are. Buggy whip manufacturers went out of business long ago. Maybe we will need them back!

7. If you want to develop larger-scale plans (such as for cities or regions), keep them cheap and easy to implement. Governments are already running short of funds to implement plans. Look for approaches that are inexpensive to put in place, such as car-sharing plans. Alternatives that worked years ago, such as boats and canals, might be considered as well.

8. Aim for a flexible approach to problems. We don’t know things will turn out. Water may be in very short supply in one part of the country. Or job opportunities may open up in a place far from home. Even more than in the past, we are likely to need to be able to change our plans on short notice.

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