Political Risk in 2017-2018

In the UK, the conservatives it appears, will win a reduced majority to govern the UK and Brexit process. It is also clear that a loss or hung parliament  for the Conservatives will set the UK back a hundred years politically and economically in the confusion and discord it would sew.

There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.

So, the stakes are just as high as they were in June 2016. What was a ‘sure thing’ bet at the start of the election process has become marginal at a time when the consequences are high. The spontaneous ordering of the voting process may check politicians from being able to achieve their agenda at the expense of the national interest. What hubris by PM May who put personal agenda ahead of the national political interest.

This is typical of the problems found in liberal democracies. Liberal democracies around the world are dying. Voters are cynical of the promises and ability of politicians to achieve anything.

Flag - EU 12Ironically, the EU have hailed Macron’s victory as a sign that right wing populism has peaked and in remission. With no mirror for self reflection the EU elite are back at ‘business as usual’. “Nothing to look at here – move on”! They needed a Le Pen win to shock them into making real change. Macron’s victory has only deferred the inevitable by a year. Meanwhile, the political change that is sweeping the world at present will continue with German elections in October this year. Merkel it appears is set for a heavy defeat.

And in the USA the left wing is continuing its attempt to undermine President Trump and effectively ignore the rule of law. Left wing forces operating at every level of US media, government and politics are moving to impeach Trump. Meanwhile the silent majority that elected Trump are watching and waiting and growing angry.

The last time we saw his level of scale of political unrest was 1740 – 1785 culminating in the French Revolution. The rising tide of political unrest in the USA, UK and EU is polarized by left vs right as well as the elite vs the people. Remember, when political confidence falters, economic confidence falls soon after. This is what is happening now. As pressures continue to mount in the USA and EU there is increasing risk of civil strife breaking out.

The phase June 2017 to December 2018 remains a time of escalating risk. Over this 18 month time frame, what transpires will shape the world and its history for the next 12 years and set up the circumstances that will shape the rest of this century.

Late in the Cycle

You know where we are in the business cycle when you start receiving calls about multi-level marketing schemes or offshore stock brokers call to offer a “trade of a life-time”. Maybe its a property deal in outback Australia, or opportunities to profit with 30-35% gains. This kind of behaviour merely reflects the emerging ebullience of social mood. Its the start of the lemming rush that occurs at or near a top. It is a confirming indicator and a useful signal that it’s getting ready time to get off the “escalator”.Monitoring social mood can indicate where we are in the business cycle. This type of unsolicited business activity – the hawking of schemes, stock market investments, too good to miss business opportunities always comes just before the top of a business cycle. You can be assured we don’t see stock spruikers at or near the bottom of a market. Instead at the low, nobody will want to talk about these special investment opportunities. By that time, sentiment will have reached an extreme opposite and become extremely negative to all forms of opportunity.

So if you’ve heard from someone wanting to show you an investment opportunity or a new multi-level marketing product beware. Its not the opportunity that matters, its the timing of the call that’s telling you everything you need to know.  

US stocks to rally. Wait for It!

Since mid March 2017, US stock indices have been moving sideways in a slow meandering phase. There’s more to go before this phase completes. This sets up a pattern or determinacy that leads to a clear outcome and conclusion.

You can expect the market to continue consolidating and moving sideways burning time. Its frustrating and slow. A balance of forces has emerged on the back of the so called ‘Trump Rally’. Volume and activity will continue to shrink. We don’t expect the DJIA to go below its 20553 lows (18/05/17). At some stage over the next 2 to 8 weeks stock markets will explode on the back of a ‘surprise’ news announcement.

The coming stock advance will be swift and carry the DJIA 750 to 2000 points (S&P500 150 to 400 points) higher on high volume and bullish sentiment. Suitable targets put the DJIA at 21560 to 22800. Once the rally gets underway we might be able to sharpen our targets.

Our patterning also calls for a complete retracement of the rally. Anticipate on completion of the advance, a rapid pullback on the DJIA to at least 20553 (S&P 2352). The thrust and pullback will catch a lot of people by surprise.

The move up should complete the advance sequence from the March 2009 lows. The nature of what follows will determine if this is also The End of the Long Game 2009-2018.

 

 

US Presidential Election Prediction

Its clear we are in a cycle of increasing political chaos and uncertainty. This is continuing to escalate. Its happening in liberal democratic countries. National elections are due in these countries (Germandonald-trumpy, France 2017), UK (2018). We can anticipate major upheavals along with the US. We are seeing the death throes of the liberal democratic tradition. Worsening economic inequality, the self interest of political elites, political coverups, politicians unable to deliver on their promises, vote rigging, dodgy economics, disenfranchised voters, unaccountable rogue police are just some of the issues to be seen in newspapers and television. Democracy, a human system, like all systems before, is failing.

Next US President

Given the increasing political chaos we anticipate Donald Trump will be elected as the 45th US President of the United States of America. Between now and November we should see a marked swing towards Trump. Viewing the US situation through the lens of cycles analysis we step beyond the character and reputation of US Presidential nominees to see the fabric of a society and economy being eroded through self interest.This process has been underway for over 5 decades.TruHillary Clinton imagesmp’s election should be seen as the response to a disenfranchised electorate. That’s both within the parties and without. Its an  increasingly angry social mood. Voters are angry and one of their few options is to respond at the ballot. Electoral horror at the status quo has emerged with a dual society – the haves and have nots, cronyism, hidden interests, corporatism, the endless wars, spurious economics, indebtedness………..

Like Brexit and many of the problems we are witnessing nightly in the news (EU refugee crisis, police and citizen shootings, etc), many crises have been manufactured by governments themselves.

We witness the unfolding political, social and economic drama of the USA and by extension the global stage since the US ascended to become the global hegemon after WWII. Most people acknowledge things have gone terribly wrong over the last 20 years but nobody knows what to do. There is little or no confidence in the political class, or their technocrat advisors, government institutions, the economy and society at large. We anticipate the continuing breakdown of the status quo an Trump’s election to the presidency is merely a reflection of the zeitgeist of our time. Yet this is perfectly understandable when you step back from the noise of daily media and observe the cycles of history evolving before our eyes.

History Repeating

An historical example of a time when a large scale breakdown of society occurred on this scale was during the phase 1740-1792 leading to the French Revolution. This time however, with globalization, it spans over many countries. At that time we saw increasing political instability with its attendant corruption, economic decay and the polarization of the people against the political elites (king and government). It’s happened many times before as any student of history will testify, is happening now and will happen again as humans consistently fail to learn from their past.

Understanding Cyclic History

We are witnessing in our lifetime the completion of large scale cycles of human endeavor and activity with the attendant dislocation and reallocation of social, economic and political activity and resources. An understanding of the broad brush strokes economically, socially and politically may serve to enhance your perspective on what emerges next. The scale of forces at work in liberal and democratic societies and economies is so huge that the current drama is taking decades to unfold.

This is the topping and completion process of an economic cycle that has been going on for around 224 years. By the time this top and the ensuing drama is finished, it may well have spanned generations of people. On a historical note, we are witnessing the completion of the growth phase of the industrial revolution cycle that began around 1783-5.

And so what does Trump have to do with economic cycles?

The current political chaos will continue to intensify and this will give way eventually into economic chaos. The impending signs  for that economic chaos are clearly to be seen and once again it centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Trump has nothing to do with these economic cycles. He merely reflects the zeitgeist of the times. Like someone surfing a wave, they ride the wave for a period of time then disappear into the footnotes of history. Trump has often appeared at major tops of economic cycles in the last 30 years in US history. Its not surprising then he has reappeared surfing the zeitgeist wave as the US completes the topping phase of this huge cycle of human endeavor.

Trump’s ability to ride the social mood of the time we believe will help him to take the presidency. Whether he will have the power to change the status quo, like Obama who promised major change yet found himself caught in the entrenched self interest of Congress, Wall Street, Big Pharma and the military. Trump may well ride the last vestiges of prosperity in this cycle. Given the growing political and economic storm Trump may well find himself the target of assassination attempts in the next four years. He will be remembered as the President that reigned at the time the US and world peaked in economic activity for many decades to come.

Whether we have a few more months or years of twilight before the downside comes home to roost, suffice to say, from now on we can expect increasingly tough times punctuated by phases of optimism. The current political chaos will continue to intensify and this will give way into economic chaos. The impending signs  for that economic chaos are already clearly seen and once again it the focus centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Will people in future times learn from our mistakes and mistakes of the past? We think not.

Why Globalization Reaches Limits

Gail Tverberg writes:

We have been living in a world of rapid globalization, but this is not a condition that we can expect to continue indefinitely.

Figure 1. Ratio of Imported Goods and Services to GDP. Based in FRED data for IMPGS.

Figure 1. Ratio of Imported Goods and Services to GDP. Based in FRED data for IMPGS.

Each time imported goods and services start to surge as a percentage of GDP, these imports seem to be cut back, generally in a recession. The rising cost of the imports seems to have an adverse impact on the economy. (The imports I am showing are gross imports, rather than imports net of exports. I am using gross imports, because US exports tend to be of a different nature than US imports. US imports include many labor-intensive products, while exports tend to be goods such as agricultural goods and movie films that do not require much US labor.)

Recently, US imports seem to be down. Part of this reflects the impact of surging US oil production, and because of this, a declining need for oil imports. Figure 2 shows the impact of removing oil imports from the amounts shown on Figure 1.

Figure 2. Total US Imports of Goods and Services, and this total excluding crude oil imports, both as a ratio to GDP. Crude oil imports from https://www.census.gov/foreign-trade/statistics/historical/petr.pdf

Figure 2. Total US Imports of Goods and Services, and this total excluding crude oil imports, both as a ratio to GDP. Crude oil imports from https://www.census.gov/foreign-trade/statistics/historical/petr.pdf

If we look at the years from 2008 to the present, there was clearly a big dip in imports at the time of the Great Recession. Apart from that dip, US imports have barely kept up with GDP growth since 2008.

Let’s think about the situation from the point of view of developing nations, wanting to increase the amount of goods they sell to the US. As long as US imports were growing rapidly, then the demand for the goods and services these developing nations were trying to sell would be growing rapidly. But once US imports flattened out as a percentage of GDP, then it became much harder for developing nations to “grow” their exports to the US.

I have not done an extensive analysis outside the US, but based on the recent slow economic growth patterns for Japan and Europe, I would expect that import growth for these areas to be slowing as well. If fact, data from the World Trade Organization for Japan, France, Italy, Sweden, Spain, and the United Kingdom seem to show a recent slowdown in imported goods for these countries as well.

If this lack of demand growth by a number of industrialized countries continues, it will tend to seriously slow export growth for developing countries.

Where Does Demand For Imports Come From?

Many of the goods and services we import have an adverse impact on US wages. For example, if we import clothing, toys, and furniture, these imports directly remove US jobs making similar goods here. Similarly, programming jobs and call center jobs outsourced to lower cost nations reduce the number of jobs available in the US. When US oil prices rose in the 1970s, we started importing compact cars from Japan. Substituting Japanese-made cars for American-made cars also led to a loss of US jobs.

Even if a job isn’t directly lost, the competition with low wage nations tends to hold down wages. Over time, US wages have tended to fall as a percentage of GDP.

Figure 3. Ratio of US Wages and Salaries to GDP, based on information of the US Bureau of Economic Analysis.

Figure 3. Ratio of US Wages and Salaries to GDP, based on information of the US Bureau of Economic Analysis.

Another phenomenon that has tended to occur is greater disparity of wages. Partly this disparity represents wage pressure on individuals doing jobs that could easily be outsourced to a lower-wage country. Also, executive salaries tend to rise, as companies become more international in scope. As a result, earnings for the top 10% have tended to increase since 1981, while wages for the bottom 90% have stagnated.

Figure 4. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes.

Figure 4. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes. “Real income” is inflation-adjusted income.

If wages of most workers are lagging behind, how is it possible to afford increased imports? I would argue that what has happened in practice is greater and greater use of debt. If wages of American workers had been rising rapidly, perhaps these higher wages could have enabled workers to afford the increased quantity of imported goods. With wages lagging behind, growing debt has been used as a way of affording imported goods and services.

Inasmuch as the US dollar was the world’s reserve currency, this increase in debt did not have a seriously adverse impact on the economy. In fact, back when oil prices were higher than they are today, petrodollar recycling helped maintain demand for US Treasuries as the US borrowed increasing amounts of money to purchase oil and other goods. This process helped keep borrowing costs low for the US.

Figure 5. US Increase in Debt as Ratio to GDP and US imports as Ratio to GDP. Both from FRED data: TSMDO and IMPGS.

Figure 5. US Increase in Debt as Ratio to GDP and US imports as Ratio to GDP. Both from FRED data: TSMDO and IMPGS.

The problem, however, is that at some point it becomes impossible to raise the debt level further. The ratio of debt to GDP becomes unmanageable. Consumers, because their wages have been held down by competition with wages around the world, cannot afford to keep adding more debt. Businesses find that slow wage growth in the US holds down demand. Because of this slow growth in the demand, businesses don’t need much additional debt to expand their businesses either.

Commodity Prices Are Extremely Sensitive to Lack of Demand

Commodities, by their nature, are things we use a lot of. It is usually difficult to store very much of these commodities. As a result, it is easy for supply and demand to get out of balance. Because of this, prices swing widely.

Demand is really a measure of affordability. If wages are lagging behind, then an increase in debt (for example, to buy a new house or a new car) can substitute for a lack of savings from wages. Unfortunately, such increases in debt have not been happening recently. We saw in Figure 5, above, that recent growth in US debt is lagging behind. If very many countries find themselves with wages rising slowly, and debt is not rising much either, then it is easy for commodity demand to fall behind supply. In such a case, prices of commodities will tend to fall behind the cost of production–exactly the problem the world has been experiencing recently. The problem started as early as 2012, but has been especially bad in the past year.

The way the governments of several countries have tried to fix stagnating economic growth is through a program called Quantitative Easing (QE). This program produces very low interest rates. Unfortunately, QE doesn’t really work as intended for commodities. QE tends to increase the supply of commodities, but it does not increase the demand for commodities.

The reason QE increases the supply of commodities is because yield-starved investors are willing to pour large amounts of capital into projects, in the hope that commodity prices will rise high enough that investments will be profitable–in other words, that investments in shares of stock will be profitable and also that debt can be repaid with interest. A major example of this push for production after QE started in 2008 is the rapid growth in US “liquids” production, thanks in large part to extraction from shale formations.

Figure 6. US oil and other liquids production, based on EIA data. Available data is through November, but amount shown is estimate of full year.

Figure 6. US oil and other liquids production, based on EIA data. Available data is through November, but amount shown is estimate of full year.

As we saw in Figure 5, the ultra-low interest rates have not been successful in encouraging new debt in general. These low rates also haven’t been successful in increasing US capital expenditures (Figure 7). In fact, even with all of the recent shale investment, capital investment remains low relative to what we would expect based on past investment patterns.

Figure 7. US Fixed Investment (Factories, Equipment, Schools, Roads) Excluding Consumer Durables as Ratio to GDP, based in US Bureau of Economic Analysis data.

Figure 7. US Fixed Investment (Factories, Equipment, Schools, Roads) Excluding Consumer Durables as Ratio to GDP, based in US Bureau of Economic Analysis data.

Instead, the low wages that result from globalization, without huge increases in debt, make it difficult to keep commodity prices up high enough. Workers, with low wages, delay starting their own households, so have no need for a separate apartment or house. They may also be able to share a vehicle with other family members. Because of the mismatch between supply and demand, commodity prices of many kinds have been falling. Oil prices, shown on Figure 9, have been down, but prices for coal, natural gas, and LNG are also down. Oil supply is up a little on a world basis, but not by an amount that would have been difficult to absorb in the 1960s and 1970s, when prices were much lower.

Figure 9. World oil production and price. Production is based on BP, plus author's estimate for 2016. Historical oil prices are calculated based on a higher than usual recent inflation rate, assuming Shadowstats' view of inflation is correct.

Figure 9. World oil production and price. Production is based on BP, plus author’s estimate for 2016. Historical oil prices are calculated based on a higher than usual recent inflation rate, assuming Shadowstats’ view of inflation is correct.

Developing Countries are Often Commodity Exporters 

Developing countries can be greatly affected if commodity prices are low, because they are often commodity exporters. One problem is obviously the cutback in wages, if it becomes necessary to reduce commodity production.  A second problem relates to the tax revenue that these exports generate. Without this revenue, it is often necessary to cut back funding for programs such as building roads and schools. This leads to even more job loss elsewhere in the economy. The combination of wage loss and tax loss may make it difficult to repay loans.

Obviously, if low commodity prices persist, this is another limit to globalization.

Conclusion

We have identified two different limits to globalization. One of them has to do with limits on the amount of goods and services that developed countries can absorb before those imports unduly disrupt local economies, either through job loss, or through more need for debt than the developed economies can handle. The other occurs because of the sensitivity of many developing nations have to low commodity prices, because they are exporters of these commodities.

Of course, there are other issues as well. China has discovered that if its coal is burned in great quantity, it is very polluting and a problem for this reason. China has begun to reduce its coal consumption, partly because of pollution issues.

Figure 10. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 10. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

There are many other limiting factors. Fresh water is a major problem, throughout much of the developing world. Adding more people and more industry makes the situation worse.

One problem with globalization is a long-term tendency to move manufacturing production to countries with ever-lower standards in many ways: ever-lower pollution controls, ever-lower safety standards for workers, and ever-lower wages and benefits for workers. This means that the world becomes an ever-worse place to work and live, and the workers in the system become less and less able to afford the output of the system. The lack of buyers for the output of the system makes it increasingly difficult to keep prices of commodities high enough to support their continued production.

The logical end point, even beyond globalization, is for automation and robots to perform nearly all production. Of course, if that happens, there will be no one to buy the output of the system. Won’t that be a problem?

Adequate wages are critical to making any system work. As the system has tended increasingly toward globalization, politicians have tended to focus more and more on the needs of businesses and governments, and less on the needs of workers. At some point, the lack of buyers for the output of the system will tend to bring the whole system down.

Thus, at some point, the trend toward globalization and automation must stop. We need buyers for the output from the system, and this is precisely the opposite of the direction in which the system is trending. If a way is not found to fix the system, it will ultimately collapse. At a minimum, the trend toward increasing imports will end–if it hasn’t already.

Source:  https://ourfiniteworld.com/2016/03/01/why-globalization-reaches-limits/

Crude Oil Lows?

We are still waiting confirmation that crude oil prices have completed their forecast lows. Notwithstanding one more low, potentially down to our target of US$12 per barrel, we anticipate the recovery of the oil market.

We expect oil prices to recover slowly, reaching as high as US$80 – $95 per barrel before entering a stagnating, equilibrium phase lasting many years and keeping oil prices in a long term trading range between US$30 per barrel and US$60 per barrel. Long term over supply will continue to keep this market under pressure despite the potential for geopolitical shocks occurring from time to time.

The coming oil price movement is typical of a commodity market that has been through a major boom and bust phase. Once we have confirmed the lows are in, we can more accurately define the next phase of the crude oil market.

High Risk Stock Market Situation

The US stock market has the potential for large, rapid falls over the next couple of weeks. As long as the DJIA stays above 11258 (SP500 1219.8) the market remains in a correction phase.

Completion of the selloff phase above 11258 (SP500 1219.8) would indicate a potential move to new highs over the next few years accompanied by stronger inflation and strong prospects for the US economy.Such a scenario has the potential to unfold with rising interest rates, a strong US dollar and a strong domestic US economy.

A breach of 11258 (SP500 1219.8) followed by a corrective rally would indicate a major bear market was unfolding and provide the momentum swing to take out the 2009 lows.

While this prediction is valid for the US stock market we see signs the US dollar will continue to strengthen over the course of 2016 leading to a potential top. The strengthening US dollar and rising interest rates will have bearish implications for the rest of the world economy where funds are being sucked from the periphery to the centre.

The power of population

Bernard Salt, Partner with KPMG writes:

The power of population
Australia is growing three times faster than China. That’s good for the economy.
The Australian economy may well be suffering from cut-backs in mining and manufacturing activity but this nation has a secret weapon. Our building and construction sector is underpinned by close to record rates of growth in population. The rise in numbers is depicted in our latest demographics infographic. It shows growth of close to 390,000 people per annum, up from around 220,000 per annum about a decade earlier.Australia's projected population and Australia's projected households
Australia’s projected population and Australia’s projected households
Based on these rates, Australia’s population is estimated to increase by 4.2 million people over the next decade. That means we are growing even faster than India and the United States, and three times faster than China.

Bernard Salt“Australia’s elevated and internationally significant rate of population growth will drive the demand for housing.” ~ Bernard Salt Partner in Charge, Demographics

People = jobs
Australia’s elevated and internationally significant rate of population growth will drive the demand for housing, for household formation and for housing finance. That translates into more jobs.

The capital cities are particularly well placed in this regard. Melbourne, Sydney and Perth have been all experiencing rapid expansion, their growth running at close to record rates.

In the year 2012-2013, Melbourne’s population jumped up by 95,000, with Sydney close behind at 81,000. Perth also saw a dramatic increase of 67,000 – although more recent data suggests that growth rates are slowing in the West.Fastest growing large cities 2012-2013
It is not surprising then that Sydney remains this nation’s biggest city with 4.8 million residents. It is followed closely by the faster-growing Melbourne at 4.3 million then Brisbane at 2.2 million.

Looking beyond our capitals
Yet our capital cities aren’t the whole story. In fact the biggest single market on the Australian continent is what might be termed the ‘Koala Conurbation’ with 5.5 million people connecting Sydney with Newcastle and Wollongong.

Melbourne-Geelong is also a heavy weight with 4.5 million people while South East Queensland – linking Brisbane, the Gold Coast, the Sunshine Coast and Toowoomba – packs some punch at 3.2 million. Perth tops out at barely 2 million.

The city vs suburbia
Our building and construction picture is more nuanced too. Building hotspots tell the two stories of Australia’s housing preferences: the inner city and suburbia.

Our figures show the top five spots for new residential housing unit approvals are relatively balanced between the city centres and inner city – such as the City of Melbourne and Sydney’s Mascot-Eastlakes – and the edge of suburbia in places like Perth’s Baldivis and Yanchep.

This may reflect the fact that families continue to dominate Australia’s households. While singles make up about a quarter of all households, families still lead at one in three.

Relying on our immigrants
Ultimately, Australia’s economic prospects could well depend on immigration trends however – that is, if our tremendous growth rates are indeed our secret weapon.

In 2014, the first three quarters showed almost two-thirds of the country’s population growth came from net overseas migration. This shift is particularly significant when compared to around half over the previous four decades.

As long as immigration levels remain elevated, it may be that Australia has at least one sure-fire driver of demand for jobs.

Source: http://www.kpmg.com/au/en/beyond/new-thinking/pages/demographics-australia-population.aspx

October, October

An interesting month ahead for October should see a spike down in US stock markets. Potentially this will be the low of the sell off since the highs this year (DJIA 183350.46, SP500 2132.02). The nature of the rally from the lows will reflect on the the longer term trend and we will advise accordingly. If the move proves to be larger (breaching DJIA 11258.01, SP500 1219.80), it will indicate a major change of trend.

At the same time we anticipate gold will also spike up above US$1225 and further. These events may well be precipitated by some flash news. Rumors abound at present of European bank failures and the shock of this would certainly impact global financial markets.

We are currently updating our big picture The End of the Long Game 2009-2018 and will show how this juncture represents a pivotal time for global economies and financial markets.

The Great Sovereign Debt Crisis Coming Soon

Starting in Europe and reaching public consciousness when Japan implodes before engulfing the USA and remaining Liberal-Democratic nations.

The Great Sovereign Debt Crisis of the 21st Century is steadily gaining momentum. The forces of deflation have been steadily building since 2000 and the stage is set over the next 6-12 months where the reality of public plundering of the means of production comes home to roost. The weight of public and private debt, government regulation and leverage, fraudulent economics and fallacious political thinking that assumes that if you keep taking and spending other people’s money you will never ever run out!

Yet this is exactly what is happening. The politicians have borrowed to deliver on promises they were never going to be around to see delivered. They’ve debased the their currency and now we have reached the problem that there is so much debt in the world that the world does not have enough income to service that debt.

Historically its happened many times before of course and yet we never seem to learn. Empires grow and prosper, politicians make promises, governments and people borrow and everyone takes for granted the wealth that has been achieved until finally, it all collapses. History records the rise and fall of civilizations on exactly this premise. It’s always government and the self-seeking of leaders that cause civilizations to self-destruct.

While we observe the rise and fall of empires due to reasons of currency debasement or war, we can also observe that these are merely the mechanisms that cause the problems. Behind them lies the cyclic nature of humanity. Deep in the limbic system of the human brain reside deep impulses that play out at individual and aggregate levels.

We might look back at the Tulip Mania Bubble of the Dutch Golden Age (1634-1637) and wonder how people might have been so crazy as to invest in tulips. The Tulip Mania occurred on the back of a Europe-wide debasement of coins (1619-1622) used to finance war. Yet they did and future historians will look back at early 21st century share, commodity, real estate prices and wonder “how could they have been so blind?”TulipPricesDebasement of the currency has occurred this time by closing the link between gold and paper money and the massive printing of money that subsequently occurred. Each era brings the usual excuse “this time its different”. But the same debasing of money, the same political hubris, the same grasp for political power create the same drivers that cause the boom and the bust.

We watch at the moment the European debt drama playing out in Greece. Other nations sit on the edge of potential debt crises including Spain, Portugal, Italy, Puerto Rica and various cities of the US. This is just the beginning. Soon we shall see the debt crisis spreading to northern Europe, Japan, China and the US. Its about sovereign debt of course, the debt accumulated by generations of politicians spending other people’s money.SouthSeaIn Japan they experienced this in the early 1930’s when massive money printing operations inflated their economy. It resulted in the assassination of the Finance Minister and Prime Minister, the establishment of the military as the power brokers of Japanese politics and the beginnings of the build up for for WWII. That didn’t end well for the Japanese people.

Between 1740 and 1783, the French experienced it with the massive indebtedness of the monarchy, high taxes, high levels of regulation and cronyism led to the French Revolution, Napoleon and a final defeat in 1815.

Pax Romana followed a similar path where eventually the debasement of the currency and accumulated debt caused the empire to implode. To look at Pax Americana is to see an identical script unfolding. Massively unsustainable debt levels, vast militarization, endless monetary debasement, constitutional decay and subjugation of citizens by taxation, regulation and blatant spying signal, as it has in many previous civilizations, the demise of this short lived empire.

Using financial markets as a barometer we observe markets in major topping patterns, working out of main trends. The next 3-6 months will prove critical in determining if the Great Sovereign Debt Crisis has truly arrived or if there is still enough gas in the tank for one last sprint before the weight of debt, regulation and political hubris bring down the liberal – democratic nations of the world. dow-jones-100-year-historical-chart-2015-08-07Once again the cyclic nature of human egress and regress is playing out at individual and aggregate levels and from where we stand, major and minor cycles of human endeavor are changing direction. Crisis bring danger and opportunity for those so prepared.

At $200 Trillion The World’s Debt Cup Overfloweth

by Bloomberg Business

The world economy is still built on debt.

That’s the warning today from McKinsey & Co.’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain.

McKinsey sees little reason to think the trajectory of rising leverage will change any time soon.

Source: McKinsey

 Here are three areas of particular concern:

1. Debt is too high for either austerity or growth to cure

Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.

 Source: McKinsey

2. Households in some nations are still boosting debts

Eighty percent of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

Source: McKinsey

 3. China’s debt is rising rapidly

Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282 percent of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.

Source: McKinsey

via A World Overflowing With Debt – Bloomberg Business.

Source: http://davidstockmanscontracorner.com/at-200-trillion-the-worlds-debt-cup-overfloweth/

 

 

Era of Transparency & Accountability Beginning for Politicians

An era of transparency & accountability is beginning for politicians.

Very shortly the U.S. Congress will shortly vote to make Economic Impact Assessments (EIAs) a mandatory part of every executive rule or regulation passed with an annual economic impact of $100 million or more (REINS Act SR226 & HR 47).

Elsewhere the rise of right wing politics in the EU and UK is forcing scrutiny on politicians and bringing them to account. In many democracies it may become mandatory to attach economic impact assessment statements to each piece of legislation  If this trend reaches an extreme we will see calls to have politicians and government unable to raise any debt. given their track record however, maybe this is not such a bad thing.

The Australian state of Queensland election is also forcing the incumbent Premier Newman to adopt transparency and accountability principles. We anticipate transparency and accountability will become the new fashion for liberal democratic governments over the next 3-5 years.

The ‘political hubris bubble’ is finally beginning to burst. Social mood is swinging into action and voters are acting on their long held distrust of politicians. Firstly they exercised their democratic privilege to put several governments into ‘hung parliament’ balances (UK, USA Australia) and now they are beginning to hold them accountable. The days where politicians can promise, over-commit and overspend is coming to an end.

Energy and the Economy – Twelve Basic Principles

By Gail Tverberg

There is a standard view of energy and the economy that can briefly be summarized as follows: Economic growth can continue forever; we will learn to use less energy supplies; energy prices will rise; and the world will adapt. My view of how energy and the economy fit together is very different. It is based on the principle of reaching limits in a finite world. Let me explain the issues as I see them.

Twelve Basic Principles of Energy and the Economy

1. Economic models are no longer valid, as we start getting close to limits.

We live in a finite world. Because of this, the extraction of energy resources and of resources in general operates in a way that is not at all intuitive as we approach limits. Economists have put together models of how the economy can be expected to act based on how the economy acts when it is distant from limits. Unfortunately, these economic models are worse than useless as limits approach because modeled relationships no longer hold. For example:

(a) The assumption that oil prices will rise as the cost of extraction rises is not necessarily true. Instead, a finite world creates feedback loops that tend to keep oil prices too low because of its tight inter-connections with wages. We see this happening right now. The Telegraph reported recently, “Oil and gas company debt soars to danger levels to cover shortfall in cash.”

(b) The assumption that greater investment will lead to greater output becomes less and less true, as the easy to extract resources (including oil) become more depleted.

(c) The assumption that higher prices will lead to higher wages no longer holds, as the easy to extract resources (including oil) become more depleted.

(d) The assumption that substitution will be possible when there are shortages becomes less and less appropriate because of interconnections with the rest of the system. Particular problems include the huge investment required for such substitution, impacts on the financial system, and shortages developing simultaneously in many areas (oil, metals such as copper, rare earth metals, and fresh water, for example).

More information is available from my post, Why Standard Economic Models Don’t Work–Our Economy is a Network.

2. Energy and other physical resources are integral to the economy.

In order to make any type of goods suitable for human use, it takes resources of various sorts (often soil, water, wood, stones, metals, and/or petrochemicals), plus one or more forms of energy (human energy, animal energy, wind power, energy from flowing water, solar energy, burned wood or fossil fuels, and/or electricity).

Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.
Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.

3. As we approach limits, diminishing returns leads to growing inefficiency in production, rather than growing efficiency.

As we use resources of any sort, we use the easiest (and cheapest) to extract first. This leads to a situation of diminishing returns. In other words, as more resources are extracted, extraction becomes increasingly expensive in terms of resources required, including human and other energy requirements. These diminishing returns do not diminish in a continuous slow way. Instead, there tends to be a steep rise in costs after a long period of slowly increasing costs, as limits are approached.

Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.
Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

One example of such steeply rising costs is the sharply rising cost of oil extraction since 2000 (about 12% per year for “upstream costs”). Another is the steep rise in costs that occurs when a community finds it must use desalination to obtain fresh water because deeper wells no longer work. Another example involves metals extraction. As the quality of the metal ore drops, the amount of waste material rises slowly at first, and then rapidly escalates as metal concentrations approaches 0%, as in Figure 2.

The sharp shift in the cost of extraction wreaks havoc with economic models based on a long period of very slowly rising costs. In a period of slowly rising costs, technological advances can easily offset the underlying rise in extraction costs, leading to falling total costs. Once limits are approached, technological advances can no longer completely offset underlying cost increases. The inflation-adjusted cost of extraction starts rising. The economy, in effect, starts becoming less and less efficient. This is in sharp contrast to lower costs and thus apparently greater efficiency experienced in earlier periods.

4. Energy consumption is integral to “holding our own” against other species.

All species reproduce in greater numbers than need to replace their parents. Natural selection determines which ones survive. Humans are part of this competition as well.

In the past 100,000 years, humans have been able to “win” this competition by harnessing external energy of various types–first burned biomass to cook food and keep warm, later trained dogs to help in hunting. The amount of energy harnessed by humans has grown over the years. The types of energy harnessed include human slaves, energy from animals of various sorts, solar energy, wind energy, water energy, burned wood and fossil fuels, and electricity from various sources.

Human population has soared, especially since the time fossil fuels began to be used, about 1800.

Figure 3. World population based on data from "Atlas of World History," McEvedy and Jones, Penguin Reference Books, 1978  and Wikipedia-World Population.
Figure 3. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

Even now, human population continues to grow (Figure 4), although the percentage rate of growth has slowed.

http://gailtheactuary.files.wordpress.com/2013/04/population.png
Figure 4. World population split between US, EU-27, and Japan, and the Rest of the World.

Because the world is finite, the greater use of resources by humans leads to lesser availability of resources by other species. There is evidence that the Sixth Mass Extinction of species started back in the days of hunter-gatherers, as their ability to use of fire to burn biomass and ability to train dogs to assist them in the hunt for food gave them an advantage over other species.

Also, because of the tight coupling of human population with growing energy consumption historically, even back to hunter-gatherer days, it is doubtful that decoupling of energy consumption and population growth can fully take place. Energy consumption is needed for such diverse tasks as growing food, producing fresh water, controlling microbes, and transporting goods.

5. We depend on a fragile self-organized economy that cannot be easily replaced.

Individual humans acting on their own have very limited ability to extract and control resources, including energy resources. The only way such control can happen is through a self-organized economy that allows people, businesses, and governments to work together on common endeavors. Development of a self-organized economy started very early, as bands of hunter-gatherers learned to work together, perhaps over shared meals of cooked food. More complex economies grew up as additional functions were added. These economies have gradually merged together to form the huge international economy we have today, including international trade and international finance.

This networked economy has a tendency to grow, in part because human population tends to grow (Item 4 above), and in part because greater complexity is required to solve problems, as an economy grows. This networked economy gradually adds more businesses and consumers, each one making choices based on prices and regulations in place at the particular time.

Figure 5. Dome constructed using Leonardo Sticks
Figure 5. Dome constructed using Leonardo Sticks

This networked economy is fragile. It can grow, but it cannot easily shrink, because the economy is constantly optimized for the circumstances at the time. As new products are developed (such as cars), support for prior approaches (such as horses, buggies and buggy whips) disappears. Systems designed for the current level of usage, such as oil pipelines or Internet infrastructure, cannot easily be changed to accommodate a much lower level of usage. This is the reason why the economy is illustrated as interconnected but hollow inside.

Another reason that the economy cannot shrink is because of the large amount of debt in place. If the economy shrinks, the number of debt defaults will soar, and many banks and insurance companies will find themselves in financial difficulty. Lack of banking and insurance services will adversely affect both local and international trade.

6. Limits of a finite world exert many pressures simultaneously on an economy.

There a number of ways an economy can reach a situation of inadequate resources for its population. While all of these may not happen at once, the combination makes the result worse than it otherwise would be.

a. Diminishing returns (that is, rising production costs as depletion sets in) for resources such as fresh water, metals, and fossil fuels.

b. Declining soil quality due to erosion, loss of mineral content, or increased soil salinity due to poor irrigation practices.

c. Rising population relative to the amount of arable land, fresh water, forest resources, mineral resources, and other resources available.

d. A need to use an increasing share of resources to combat pollution, related to resource extraction and use.

e. A need to use an increasing share of resources to maintain built infrastructure, such as roads, pipelines, electric grids, and schools.

f. A need to use an increasing share of resources to support government activities to support an increasingly complex society.

g. Declining availability of food that is traditionally hunted (such as fish, monkeys, and elephants), because an increase in human population leads to over-hunting and loss of habitat for other species.

7. Our current problems are worryingly similar to the problems experienced by earlier civilizations before they collapsed.

In the past, there have been civilizations that were confined to a limited area that grew for a while, and then collapsed once resource availability declined or population outgrew resources. Such issues led to a situation of diminishing returns, similar to the problems we are experiencing today. We know from studies of these prior civilizations how diminishing returns manifested themselves. These include:

(a) Reduced job availability and lower wages, especially for new workers joining the workforce.

(b) Spiking food costs.

(c) Growing demands on governments for services, because of (a) and (b).

(d) Declining ability of governments to collect sufficient taxes from workers who are producing less and less (because of diminishing returns) and because of this, receiving lower wages.

(e) Increased reliance on debt.

(f) Increased likelihood of resource wars, as a group with inadequate resources tries to take resources from other groups.

(g) Eventual population decline. This occurred for two reasons: As wages dropped and needed taxes rose, workers found it increasingly difficult to obtain an adequate diet. As a result, they become more susceptible to epidemics and diseases. Greater involvement in resource wars also led to higher death rates.

When collapse came, it did not come all at once. Rather a long period of growth was succeeded by a period of stagnation, before a crisis period of several years took place.

Figure 6. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles.
Figure 6. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles.

We began an economic growth cycle back when we began using fossil fuels to a significant extent, starting about 1800. We began a stagflation period, at least in the industrialized economies, when oil prices began to spike in the 1970s. Less industrialized countries have been able to continue growth their growth pattern longer. Our situation is likely to differ from that of early civilizations, because early civilizations were not dependent on fossil fuels. Pre-collapse skills tended to be useful post-collapse, because there was no real change in energy sources. Loss of fossil fuels would considerably change the dynamic of the outcome, because most jobs would become obsolete.

Most models put together by economists assume that the conditions of the growth period, or the growth plus stagflation period, will continue forever. Such models miss turning points.

8. Modeling underlying the book Limits to Growth shows why depletion can be expected to lead to declining economic growth. It also shows why extracting all of the resources that seem to be available is likely to be impossible.

We also know from the analysis underlying the book The Limits to Growth (by Donella Meadows and others, published in 1972) that growing demand for resources because of Items listed as 6a to 6g above will take an increasingly large share of resources produced. This dynamic makes it very difficult to produce enough additional resources so that economic growth can continue. The authors report that the behavior mode of the modeled system is overshoot and collapse.

The 1972 analysis does not model the financial system, including debt and the repayment of debt with interest. The closest it comes to economic modeling is modeling industrial capital, which it describes as factories, machines, and other physical “stuff” needed to extract resources and produce goods. It finds that inability to produce enough industrial capital is likely to be a bottleneck far before resources in the ground are exhausted.

As an example in today’s world, there seems to be a huge amount of very heavy oil that can be steamed out of the ground in many places including Canada and Venezuela. (The existence of such heavy oil is one reason the ratio of oil reserves to oil production is high.) To actually get this oil out of the ground quickly would require a huge physical investment in a very short time frame. As a practical matter, we cannot ramp up all of the physical infrastructure needed (pipelines, steaming equipment, refining equipment) without badly cutting into the resources needed to “grow” the rest of the economy. A similar problem is likely to exist if we try to ramp up world oil and gas supply using fracking.

9. Our real concern should be collapse caused by reaching limits in many ways, not the slow decline reflected in a Hubbert Curve.

One reason for being concerned about collapse is the similarity of the problems our current economy is experiencing to those of prior economies that collapsed, as discussed in Item 7. Another reason for this concern is based on the observation from physics that an economy is a dissipative structure, just as a hurricanes is, and just as a human being is. Such dissipative structures have a finite lifetime.

Concern about future collapse is very different from concern that one or another resource will decline in a symmetric Hubbert curve. The view that resources such as oil will gradually decrease in availability once 50% of the resources have been extracted reflects a best-case scenario, where a perfect replacement (both cheap and abundant) replaces the item that is depleting, so that the economy is not affected. Hubbert illustrated the kind of situation he was envisioning with the following graphic:

Figure 7. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.
Figure 7. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

10. There is a tight link between both oil consumption and total energy consumption and world economic growth.

This tight link is evident from historical data:

Figure 8. A comparison of three year average growth in world real GDP (based on USDA values in $2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.
Figure 8. A comparison of three year average growth in world real GDP (based on USDA values in $2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.

The link between energy and the economy comes both from the supply side and the demand side.

With respect to supply, it takes energy of many types to make goods and services of all types. This is discussed in Item 2 above.

With respect to demand,

(a) People who earn good wages (indirectly through the making of goods and services with energy products) can afford to buy products using energy.

(b) Because consumers pay taxes and buy goods and services, growth in demand from adequate wages flows through to governments and businesses as well.

(c) Higher wages enable higher debt, and higher debt also acts to increase demand.

(d) Increased demand increases the price of the resources needed to make the product with higher demand, making more of such resources economic to extract.

11. We need a growing supply of cheap energy to maintain economic growth.

This can be seen several ways.

(a) Today, all countries compete in a world economy. If a country’s economy uses an expensive source of energy (say high-priced oil or renewables) it must compete with other countries that use cheaper fuel sources (such as coal). The high price of energy puts the country with high-cost energy at a severe competitive disadvantage, pushing the economy toward economic contraction.

(b) Part of the world’s energy consumption comes from “free” energy from the sun. This solar energy is not evenly distributed: the warm areas of the world get considerably more than the cold areas of the world. The cold areas of the world are forced to compensate for this lack of free solar energy by building more substantial buildings and heating them more. They are also more inclined to use “closed in” transportation vehicles that are more costly than say, walking or using a bicycle.

Back in pre-fossil fuel days, the warm areas of the world predominated in economic development. The cold areas of the world “surged ahead” when their own forests ran short of the wood needed to provide the heat-energy they needed, and they learned to use coal instead. The knowledge they gained about using coal for home-heating quickly transferred to the ability to use coal to provide heat for industrial purposes. Since the warm areas of the world were not yet industrialized, the coal-using countries of the North were able to surge ahead economically. The advantage of the cold industrialized countries grew as they learned to use oil and natural gas. But once oil and natural gas became expensive, and industrialization spread around the world, the warm countries regained their advantage.

(c) Wages, (non-human) energy costs, and financing costs are all major contributors to the cost of producing goods and services. When energy costs rise, the rise in energy costs puts pressure both on wages and on interest rates (since interest rates determine financing costs), because businesses need to keep the total cost of goods and services close to “flat,” if consumers are to afford them. This occurs because wages do not rise as energy prices rise. In fact, pressure to keep the total cost of goods low creates pressure to reduce wages when oil prices are high (perhaps by sending manufacturing to a lower-cost country), just as it adds pressure to keep interest rates low.

(d) If we look at historical US data, wages have tended to rise strongly (in inflation-adjusted terms) when oil prices were less than $40 to $50 barrel, but have tended to stagnate above that oil price range.

Figure 9. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.
Figure 9. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

12. Oil prices that are too low for producers should be a serious concern. Such low prices occur because oil becomes unaffordable. In the language of economists, oil demand drops too low.

A common belief is that our concern should be oil prices that are too high, and thus strangle the economy. A much bigger concern should be that oil prices will fall too low, discouraging investment. Such low oil prices also encourage civil unrest in oil exporting nations, because the governments of these nations depend on tax revenue that is available when oil prices are high to balance their budgets.

It can easily be seen that high oil prices strangle the economies of oil importers. The salaries of consumers go “less far” in buying basics such as food (which is raised and transported using oil) and transportation to work. Higher costs for basics causes consumers cut back on discretionary expenditures, such as buying new more expensive homes, buying new cars, and going out to restaurants. These cutbacks by consumers lead to job layoffs in discretionary sectors and to falling home prices. Debt defaults are likely to rise as well, because laid-off workers have difficulty paying their loans. Our experience in the 2007-2009 period shows that these impacts quickly lead to severe recession and a drop in oil prices.

The issue we are now seeing is the reverse–too low oil prices for oil producers, including oil exporters. These low oil prices are contributing to the unrest we see in the Middle East. Low oil prices also contribute to Russia’s belligerence, since it needs high oil revenues to maintain its budget.

Conclusion

We seem now to be at risk in many ways of entering into the collapse scenario experienced by many civilizations before us.

One of areas of risk is that interest rates will rise, as the Quantitative Easing and Zero Interest Rate Policies held in place since 2008 erode. These ultra-low interest rates are needed to keep products affordable, since the high cost of oil (relative to consumer salaries) has not really gone away.

Another area of risk is an increase in debt defaults. One example occurs when student loan borrowers find it impossible to repay these loans on their meager wages. Another example is China with the financing of its big recent expansion by debt. A third example is the possibility that businesses extracting resources will find it impossible to repay loans with today’s (relatively) low commodity prices.

Another area of risk is natural disasters. It takes surpluses to deal with these disasters. As we reach limits, it becomes harder to mitigate the effects of a major hurricane or earthquake.

Clearly loss of oil production because of conflict in the Middle East or in other oil producing countries is a concern.

This list is by no means exhaustive. Many economies are “near the edge” now. Recent news is that Germany has slipped into recession as well as Japan. One economy failing is likely to pull others with it.
Related Notes
The unnecessary burden imposed by the UK’s “green” energy policy | Adam Smith InstituteThe unnecessary burden imposed by the UK’s “green” energy policy Written by George Layton| Wednesday 7 August 2013 Green was traditionally the colour of money, but with UK and EU energy policy, it is …
Ten reasons to be cheerful, part 2: Water | Adam Smith InstituteHomeBlogTen reasons to be cheerful, part 2: Water Ten reasons to be cheerful, part 2: Water Written by Dr Madsen Pirie| Tuesday 23 October 2012 Some people tell us that water scarcity might well be th…

Source: http://ourfiniteworld.com/2014/08/14/energy-and-the-economy-twelve-basic-principles/

India About to Hit the Sweet Spot

A combination of factors is bringing India to the “Sweet Spot’.url

A population of workers with an average age of around 35 combined with the arrival of a new government may be pulling Incredible India to where, at last, its population and vigor may carry it aloft. Like China in the early 80’s and 90’s, India has the potential to achieve rapid growth. But due to lack of political will, religious divisions, corruption, poverty, a massive overhang of the post-colonial era when Marxist-socialist solutions were the fashion and lack of capital, India’s progress has been slow.

The analogy is of an aircraft taking off. The back wheels are still on the ground but the nose has lifted up. This has been the case for some time with the deadweight of the various factors holding her back. This is about to change. Continue reading

Guess which empire came to an end today?

 Spanish Hapsburgs

In the early 16th century, a priest by the name of Fray Francisco de Ugalde remarked to his king that Spain was “el imperio en el que nunca se pone el sol”.

In other words, the sun never set on the Spanish Empire.

And by the 1500s with its vast lands across the Americas, Africa, Europe, Asia, and even the South Pacific, Spain (technically the House of Habsburg) had become the first truly global superpower.

The Empire’s status was so great that its silver coin (the real de ocho or piece of 8) was used around the world as a global reserve standard… including in the US colonies.

It didn’t last.

Like so many great empires that came before, Spain was beset by unsustainable spending, constant warfare, debilitating debt, and an inflated money supply.

By the mid 1500s, the Spanish government was spending 2/3 of its total tax revenue just to pay interest. Spain defaulted on its debt six times in the next century.

It finally came to an end on today’s date in 1643, exactly 371 years ago.

Historians can literally circle the date on a calendar that Spain ceased being Europe’s dominant superpower; it was the day that Spain lost the Battle of Rocroi, and effectively the Thirty Years War against France.

Just days before, a four-year old Louis XIV had ascended to the throne to become the King of France after the death of his father.

And during his whopping 72-year reign, France replaced Spain as the global superpower.

(To put this reign in context, the longest serving monarch alive today is King Bhumibol of Thailand, who at age 86 has served for 67 years. At age 88, Queen Elizabeth has served for 62 years.)

For more than a century, commerce, art, and technology flourished in France. And some of the greatest intellectual minds in history published their works during this period.

I remember being told as a West Point cadet that in the early days of the Academy in the 1800s, the only two classes were French and Mathematics, primarily because all of the great textbooks were written by French mathematicians.

France had public healthcare and free hospitals. Great monuments to their grandeur. Colonies around the world. An awe-inspiring military.

And their influence was so great that foreign governments from Russia to Prussia spoke French internally.

Needless to say, this didn’t last either.

And like the Spanish before them, France overspent, overexpanded, and overregulated. They waged excessive warfare, and they managed their affairs as if the good times would last forever.

By the 1780s, the French debt had grown so much that they were rapidly devaluing the currency and borrowing money just to pay interest on what they had already borrowed.

Sound familiar?

The US is in a similar position right now, along with most of the West (including… France and Spain again!)

Like an aging prize fighter, there is no nation that can permanently maintain its status as the dominant superpower. And certainly no nation that can defy universal economic truths.

Powerful nations believe they can borrow indefinitely and dilute their currencies without consequence.

This simply isn’t true. Wealth and power shift. The world’s reserve currency changes. It’s been happening for centuries, and this time is no different.

We are all witnessing this change unfold again. And this isn’t some wild assertion.

Objective data from the Bank for International Settlements and the International Monetary Fund all show a clear decline in the dollar’s share of global reserves.

chart2 1 Guess which empire came to an end today?The US government’s own data shows a net worth of minus $16.9 trillion, over 100% of GDP in the red.

And even in their most optimistic projections, the government tells us that growth in debt will outpace growth in tax revenue.

Day to day, it’s easy to ignore these trends. But from a big picture perspective, it couldn’t be more obvious.

Just like the Battle of Rocroi in 1643, or the storming of the Bastille in 1789, there will come a time when future historians circle a date on a calendar and say, “That was the day the United States ceased being the dominant superpower.”

Perhaps it’s happened already. Or perhaps it will occur in a war yet to be fought.

But if history, common sense, and truth are any guides, that reckoning is quickly approaching.

Source: http://www.sovereignman.com/expat/guess-which-empire-came-to-an-end-today-14439/

The End Long Game? 2009-2018

We have updated the main theme of the Emerging Events website. Click on the title to read how larger trends and cycles are moving to complete within the next few years and the implications this brings to to people and nations ……… Find it here: http://www.emergingevents.com/?p=2761 Continue reading

Of Course China Wants to Replace the U.S.

thediplomat_2014-02-03_13-29-21-386x257zachary-keck_q
If China becomes the world’s most powerful country, it won’t be satisfied being America’s number two.

Over at The Week, Think Progress’s Zack Beauchamp has a provocative piece arguing that “China is not replacing the United States as the global hegemon. And it never will.” Specifically, Beauchamp posits that “China faces too many internal problems and regional rivals to ever make a real play for global leadership. And even if Beijing could take the global leadership mantle soon, it wouldn’t. China wants to play inside the existing global order’s rules, not change them.

The piece is well-argued and certainly worth a read. In particular, Beauchamp does us a service in combating the myth of the inevitability of China’s rise. He usefully points out that China’s economy faces a multitude of challenges that may prevent it from reaching the potential many currently foresee. He also points out that China faces powerful neighbors that won’t stand by idly if Beijing seeks to construct a new regional order, much less a global one.

Still, on balance, I think Beauchamp’s piece does more to confuse than to inform. The first issue is that even though he discusses the regional balance of power in the piece, his overall argument is that China will not be capable of replacing the United States as the “global hegemon.” Unfortunately, there are many who would claim that America is a global hegemon. However, that argument is preposterous under any reasonable definition of hegemony. It is true that in the post-Cold War (if not earlier) the U.S. has been the only power capable of projecting military power in any region of the world. But this has not allowed it to dictate the regional order of every continent as it largely can in the Western Hemisphere.

Moreover, even if America really is a global hegemon, this would just make it more unlikely that any rising power could replace it as a global hegemon. After all, America’s primacy in the post-Cold War era was only made possible because no other great power existed.  Since China’s rise won’t stop the U.S. from being a great power, unless the two go to war and China wins, Beijing’s relative power will be far less than America’s at the end of the Cold War. And of course, America’s relative power will also be far less than what it enjoyed in 1991.

There are other issues with Beauchamp’s analysis of China’s relative power. For example, he notes that “one analysis suggests China’s GDP may not surpass America’s until the 2100s.” To begin with, while possible, this view seems to be decidedly in the minority among serious economists. Even if China’s economy crashes before 2018—around the time many believe China’s absolute GDP will surpass America’s—it still seems likely that it will find a more sustainable economic model before 80 years pass. And given that China has about four times as many people as the United States, it could easily surpass the U.S. in absolute GDP terms in less than 80 years.

But even if China’s economy doesn’t surpass the United States, this hardly suggests it won’t present a major strategic challenge to Washington. Consider that, according to Paul Kennedy , in 1938 Japan’s share of world manufacturing was just 3.8 percent while America’s was 28.7 percent and the U.K.’s was 9.2 percent. A year earlier, according to the same source, the U.S. national income was $68 billion while the British Empire’s was $22 billion. Japan’s, comparison, was just $4 billion. Yet, in the initial battles of the Pacific War Japan decisively defeated the U.S., England, and the Dutch across the region.

Similarly, the Soviet Union’s GDP was only ever about half as large as the United States, and many times much less than that. This doesn’t mean that America and its allies didn’t face a real strategic threat in the Soviet Union during the Cold War.

The more egregious part of Beauchamp’s case, however, is his contention that China does not seek to challenge the U.S.-led order. In his own words: “Even if this economic gloom and doom is wrong, and China really is destined for a prosperous future, there’s one simple reason China will never displace America as global leader: It doesn’t want to.

He goes on to explain: “China is content to let the United States and its allies keep the sea lanes open and free ride off of their efforts. A powerful China, in other words, would most likely to be happy to pursue its own interests inside the existing global order rather than supplanting it.

Beauchamp isn’t alone in holding this view, which has many faithful adherents in the West. In fact, not too long ago it was the running consensus in the United States, as well as the foundation of U.S. China policy in both the George W. Bush and the early Barack Obama administrations.

One place where this view has not been very popular is in China itself. Indeed, far from being happy to allow the U.S. Navy to keep its sea lanes open, Chinese leaders have been warning about their country’s “Malacca Dilemma” for over a decade now. They have also been actively trying to reduce America’s ability to cut off China’s energy and raw material imports. As they should be—it would be irresponsible for China’s leaders to allow their country’s economy to be at the mercy of a potential competitor if they have the realistic opportunity to allow China to secure its own shipping lanes. This is doubly true in light of the fact that the U.S. has been known to impose sanctions on many countries, including China itself after Tiananmen Square.

But the issue goes much deeper than that. In fact, it goes to the heart of the Chinese Communist Party’s legitimacy at home. At its core, the CCP’s claim to power is based on its ability to restore China to its past glory. Again, neither China nor its leaders have ever made any secret about this. For example, the CCP has always emphasized that it saved China from its “century of humiliation” at the hands of the Western and Japanese colonial powers.

Similarly, since coming to power in 2012, Xi Jinping has repeatedly stressed that, because of the CCP’s rule, the “great rejuvenation of the Chinese nation” is now within China’s grasp. As Zheng Wang points out , the term “rejuvenation is deeply rooted in Chinese history and the national experience.

Wang continues:

“As proud citizens of the ‘Middle Kingdom’ the Chinese feel a strong sense of chosenness and are extremely proud of their ancient and modern achievements. This pride is tempered, however, by the lasting trauma seared into the national conscious as a result of the country’s humiliating experiences at the hands of Western and Japanese imperialism. After suffering a humiliating decline in national strength and status, the Chinese people are unwavering in their commitment to return China to its natural state of glory, thereby achieving the Chinese Dream.

Thus, the CCP would lose all its legitimacy at home if it voluntarily subordinated China to the United States despite being the more powerful country. The CCP treasures its grip on power above all else, and therefore it should come as no surprise that it has already ruled out taking this risk.

Source:  http://thediplomat.com/2014/02/of-course-china-wants-to-replace-the-u-s/

Presenting the latest country to lose confidence in the dollar….

zimdollars

January 30, 2014
Sovereign Valley Farm, Chile

Zimbabwe. You remember those guys, right?

The country’s plight with its currency became world famous, the butt of untold jokes in economic circles. At its height, hyperinflation in Zimbabwe reached nearly 90 sextillion in 2008.

That’s a 9 with 22 zeros.

To put it in context, if you had 90 sextillion grains of sand, you could cover the entire surface of the earth all the way to the outmost layers of the atmosphere.

Then, in April 2009, the government effectively abandoned the Zimbabwe dollar. The US dollar became the official currency for all government transactions, and US dollars, British pounds sterling, euros, and South African rand became the most widely used tender in circulation.

I’ve traveled to Zimbabwe frequently; they have some of the best stories you could ever hear about standing in line at the banks with wheelbarrows, and using stacks of paper currency at home for toilet paper or furniture.

Given that Zimbabwe is literally THE poster child for hyperinflation over the last half-century, one cannot understate the irony of their latest announcement.

Just yesterday, the government there announced that the Chinese renminbi (among other currencies) will become legal tender in Zimbabwe.

This is big news. As we have discussed so many times in the past, the current fiscal and monetary antics in the United States are absolutely no different than what Zimbabwe employed several years ago.

Zimbabwe printed its currency in nearly infinite quantities. So has the United States. The only difference is that the US dollar is readily accepted around the world thanks to good ole’ American credibility that was built by previous generations.

But that credibility is rapidly deteriorating. And everywhere you look, there are obvious signs that the rest of the world is quickly moving on from the dollar.

Central banks around the world are stocking up on gold. Major powers like China and Russia are calling for a new reserve currency. And a number of nations (Zimbabwe is the latest) have already begun to use other currencies like the renminbi for international trade and central bank reserves.

It’s happening. And it’s one of those things that will play out like what Hemingway wrote about going bankrupt: gradually, then suddenly.

The dollar’s share of global reserves has slowly fallen from roughly 75% in 2001, to just over 60% today.

But the world will eventually reach a bifurcation point where investors, foreign governments, central banks, etc. panic and start rushing for the exits.

It’s something that could happen tomorrow. Or five years from now. No one knows. But rational, intelligent people shouldn’t be waiting around for it to happen.

I very strongly recommend that you take a portion of your savings and move them into real assets– precious metals and productive land are the most obvious. But even things like collectibles or nonperishable goods (like ammunition) would be preferable to US dollars.

Then there’s other currencies that you can hold. Right now, the Norwegian krone has the strongest fundamentals in the world as it is backed by the most solvent central bank on the planet.

The Hong Kong dollar is also an interesting option because it minimizes your downside currency risk while providing protection against the US dollar’s deterioration.

(Premium members: please refer to your SMC welcome guide for actionable information about holding Hong Kong dollars and Norwegian krone.)

by Simon Black

Source: http://www.sovereignman.com/trends/presenting-the-latest-country-to-lose-confidence-in-the-dollar-13439/

Stockmarket preditions for 2014

It appears stock markets are set to begin this year with a downward corrective phase that has potential to last into May or June. The second and third quarters of 2014 should be stronger.

Also note potential divergence for emerging markets and smaller markets with the larger markets of the US and Japan as QE programs for those countries suck surplus cash from emerging markets towards the boom QE fed markets.

We’ll update at the end of August.