Peak Money

November 12, 2007   
      The multi-dimensional meltdown underway in the finance sector illustrates perfectly how the complex systems we depend on start to wobble and fail as soon as peak oil establishes itself as a fact in the public imagination. Mainly what it shows is that we don't have to run out of oil -- or even come close to that -- before the trouble starts.  Just going over the peak and heading down the slippery slope of depletion is enough.  Peak oil, it turns out, is also peak money.  Or should we say, peak "money?"

      First of all, what is finance exactly?  I'd bet that a lot of people these days don't know, including many working in the financial "industry," as it has taken to calling itself.  Finance, until very recently, was the means by which investment was raised for useful economic activities and productive ventures -- in other words, the deployment of capital, which is to say accumulated wealth. Historically, this accumulated wealth was pretty meager.  There wasn't a whole lot to deploy and the deployment was controlled by a tiny handful of people statistically greater only than the number of Martians in the general population. They operated as families or clans, and everybody knew who they were: the Medici, the Rothschilds. Even the Roman Empire was a kind of financial Flintstones operation compared to what we see on CNBC these days. Not having the printing press, the Romans had to inflate their currency the old-fashioned way, by adding base metals to their gold coins.

      Finance in the 200-odd-year-long industrial era evolved step-by-step with the steady incremental rise of available cheap energy.  More to the point, the instruments associated with finance evolved in complexity with that rise in energy.  It was only about two-hundred years ago, in fact, that circulating banknotes or paper currencies evolved out of much cruder certificates that were little more than IOUs.  Once printed paper banknotes became established, and institutions created to regulate them, the invention of more abstract certificates became possible and we began to get things like stocks and bonds, traded publicly in bourses or exchanges, which represented amounts of money invested or loaned, but were not themselves "money."
 
      Much of this innovation occurred during the rise of the coal-powered economy of the 19th century. It accelerated with the oil-and-gas economy of the 20th century, up into the present time.  So, for about 150 years -- or roughly since the end of the American Civil War -- we've had a certain kind of regularized finance that enjoyed continual refinement.  Even in the face of cyclical traumas, like the Great Depression, currencies, stocks, and bonds retained their legitimacy if not always their face value.

      Russia was a bizarre exception.  Crawling out of the mud of medievalism relatively late in the game, Russia pretended to abjure capital while still faced with the need to deploy it in industry.  They solved this paradox conditionally by disqualifying the Russian public from participation in any part of the industrial economy except the hard work, and pretended to pay them in promises for "a brighter future," which never arrived as long as the Soviets remained in charge. (The Russian people repaid the system by only pretending to work.)

      In any case, finance for the purpose of deploying capital has prevailed as reality among people who use the implements of the dinner table, but something weird has happened to it in recent years.  It has entered a stage of grotesque, hypertrophic metastasis that now threatens the life of the industrial organism it evolved to serve.  Its current state can be understood in direct relation to the run-up to peak oil (peak fossil fuel energy, really, since coal and gas figure into it, too).  The oil age, we will soon discover, was an anomaly. Many of the things that seemed "normal" under its regime will turn out to have been rather special. And as the beginning of the end of the oil age becomes manifest, these special things are starting to self-destruct pretty spectacularly.

      For one thing, finance in the past twenty years has evolved from being an organ serving a larger organism to taking over the organism, becoming a kind of blind, raging dominating parasite on its former host.  Or to put it less hyperbolically, it has become an end in itself. That is what they mean when they say that the financial sector has been "driving" the economy.  A feature of this ghastly process has been the evolution of financial instruments into ever more abstract entities removed from reality-based productive activities.  Stocks and bonds were understood to represent direct investment in enterprise.  Sometimes the enterprise was a failure, and sometimes the people running it were swindlers, but no one doubted that common stock represented the hope for profit in a particular venture like making steel or selling laxative chemicals.  The new "creatively-innovated" financial "derivatives" of recent years are now so divorced from any real activities or product that often the people trafficking in them don't understand what they're supposed to represent.  I'd bet that more than half the people in the New York Stock exchange any given day could not explain  the meaning of a credit default swap if a Taliban were holding their oldest child over a window ledge across Wall Street.

      The innovation of mutant financial "products" is a symptom of the "crack-up boom" that characterizes society's response to peak oil.  The main implication of peak oil for an industrial economy is that the 200-odd-year-long expectation for continued regular growth in combined energy-activity-and-productivity at roughly 3 to 7 percent a year under "normal" conditions -- that expectation is now toast.  Under the new regime of peak oil and its aftermath, regular energy depletion, society can expect no further industrial growth but only contraction, and all the certificates, instruments, and operations associated with the expectation for further industrial growth lose their legitimacy.  Seen in this light, one can then understand the temporary value of these mutant financial derivatives. They allowed participants to conceal the fact that these "investments" were not directed at productive enterprise.  They also provided a cohort of sharpies with "vehicles" for converting the leftovers of the industrial economy into assets for themselves -- a form of looting, really.  Hence, the employees of Bear Stearns, Goldman Sachs, and Merrill Lynch gave themselves $50-million Christmas bonuses for trafficking in these inscrutable non-productive financial gimmicks, and were able to acquire fifty-room Easthampton houses, Gulfstream jets, and impressionist paintings.

      Of course, the aftermath might not be so pretty for these guys, since the next thing they may acquire could be long prison sentences.  If they flee prosecution in their Gulfstream jets, they will not be able to take their Hamptons estates aboard with them. Those who remain may live to see mobs with flaming torches outside their windows, as in the "Frankenstein" movies of their suburban childhoods.  But this has yet to play out.

      For the moment it appears that we have entered the climax of the crack-up. The slick and inscrutable derivative vehicles infesting the ledgers of the investment banks, are now being systematically revealed as frauds of one kind or another, and, self-evidently lacking in worth.  The process now underway is gruesome.  The sheer dollar losses involved are almost as incomprehensible as the phony operations and instruments that they are derived from -- twelve billion here, nine billion there.  As the late Senator Everett Dirkson once quipped, "sooner or later you're talking about real money...."  Or are we?  Is it money or "money."   And if it's "money," what will become of it?  And of us? How will it allow us to live?

Comments

[Cedric J Krumpacker]

That there's a lot of froth in the financial services sector is undeniable. But Mr Kunstler's argument, I think, depends on how significant the froth is compared to the real economy of production and value-adding. I don't think it's obvious, or at any rate, proven, that the useless activities he talks about are a very high proportion of the US economy. Sure, there will be a correction, some decline in some asset values, and a shakeout of the Mickey Mouse activities. That's how markets evolve. I expect too, the price of oil will go up, as it gets more difficult to extract. Unfortunately (to my mind) the main victims will the those in the third world who depend on oil for fertilizer. The Gulfstream owners will hardly notice.

[Philski]

Post Apocalypse Art:

http://www.androidblues.com/gallery/roadtrip2.jpg

[Dave]

The youngsters (the 20 something to early 30 set) are starting to sense that something has really gone awry. They don't quite know what but one thing I do know for damn sure is this-when you tell them what it is they are at first anxious and frightened and then pissed off as hell that the flower power generation have left with a pile of shit to dispose of as show up at their door step for our entitlement hand outs. From where I sit they have very damn right to be pissed. We have symbolically, literally, and figuritively slit their throats. We went along and have been taking the bribe for fifty years even though it was pretty much known that the consumer papradise was a
dead end trap and thtre resources were running out. Yes a few of us tried to persuade the zombies to stop feasting but to no avail. The driving forces dictated that the lemming like rush continue to this sad end. Now ? Why along with the financial shitstorm now beginning we are going to have intergenerational conlficts that I think will get very, very ugly. Granny and Grandpa will be allowed to starve and freeze in their split levels and their SUV will be scavaged for parts and their starved corpses made into food for the worms (which really is good way for them to end)
Anyone for a quick on the Last Barrel Saloon let me know there is an extra seat next to Old Dr. Karma who only grumbles "Payback is a bitch !"

[Semanticleo]

In 1977 Barry Commoner wrote (The Politics of Energy) we must immediately begin developing alternative energy now because the remaining oil reserves would serve as the transitional medium for that sea-change.

Three decades later we still have NO rational energy policy and are probably fucked. But don't blame the politicos. It is "We, the People" who have the government we deserve.

[Movenonup]

Peak Money is getting ready to appear in the rear view mirror.

http://www.theglobeandmail.com/servlet/story/LAC.20071109.RKOZA09/TPStory/

"Nov. 15. FASB 157 comes into effect."

"Banks and dealers will have to either mark their Level 3 assets to market or write down their value."

"FASB says that starting Nov. 15, fair value at any given moment is the price you can sell the thing for, period. So now all the banks and dealers have to disclose how much of what's on their books is crap that there's no bid for, and write down the value to what it's really worth, which, in some cases, may be bupkes."

More in depth reading on this:

http://www.fasb.org/st/summary/stsum157.shtml

http://www.wannanetwork.com/discussion/showthread.php?p=29352

[Riddick]

I would not give up on "life" just yet. Being frightfully honest demands that anyone admit that no one has any real idea exactly where we are today in the PO curve. We have data and the reality of PO seen in individual production fields and areas such as the US, but globally, not yet. There is only anecdotal evidence derived from the collapse of the financial greed industry and the endless "buy in" by US consumers of an "ever greater" tomorrow through consumption.
I concur with Cedric that the impact of the housing and hedge fund meltdowns will largely hurt the most vulnerable as the rich always have ways to protect their asses in a society when most people will do about anything for the right price. Even paid in Kunstler's "money".
Is society unwinding? Probably so, there is no status quo in life, all is ultimately flux and transition. We simply refuse to see where we are in the process if we like the now and we hope for a higher return if we don't. Does this mean we stock up on "Mountain House", buy Hydra-shock ammo to power the .40 caliber and look for arable land? Actually, probably not bad ideas no matter what happens to society at large.
As a retired cop I have seen the good, bad, ugly, indifferent and everything in between. I laugh inside when I hear the local "survivalists" speak of weapons and homestead protection when their real jobs are engineering, retail management and government paper pushing. Ask real combat veterans or long time cops about fighting and weapons and life and death and you'll soon learn that the crap you dream of on the movies screen, plasma TVs and occasionally between the pages is pure fantasy.
If society implodes people we are all cooked, sooner or later. You can dream of a fantasy life thereafter but that is all it will be. I believe that we have years left in this meandering industrial complex we call the "West". Yes, prices will soar, joblessness will increase as will crime. I don't like it anymore then anyone else. Politicians will offer a new Messiah and as is always the case, nothing will change.
In the end is Kunstler's Long Emergency wrong? Of course not, it cannot be wrong because given sufficient time all things WILL come to an end. And human history has shown again and again that we don't do transitions well as a species.
So make your peace but we both know you'll still hit the grocery store and watch your TV, play your computer, Xbox, PS3 games and maybe even head to Starbucks. Stock up on the freeze dried goods and non-hybrid seeds, take out a homestead away from suburbia. Just remember deep down in the back of your brain that all of it, ALL of it, will fade to black. The question unanswered is exactly when.

[farmerhunt]

I'm not sure about this quote. Can anyone confirm?

"Unlimited growth is the logic of cancer" ---Edward Abbey??

[Semanticleo]

This is the closest thing I found...

"Cancer is distinctive and pathological precisely because it does not conform to this pattern, or recognize any limitations; the disease with—as well as of—hubris. Delighting in nothing but multiplication, cancer ends by destroying both its host and itself. The analogy to our modern planetary growth-devoted techno-industrial society (whether capitalist or socialist makes no difference) is complete and exact. Like cancer, expansionist industrialism believes in nothing but more expansionism. Growth equals power: power equals growth. Again like cancer, the process will self-destruct. Not, however, without human suffering, which will be great until a different kind of society based on a more stable adaptation to the earth’s thin skin is somewhat achieved.

http://www.orionmagazine.org/index.php/articles/article/173/

[PeakMoped]

Incomprehensible language is surely a sign of exclusivity. Exclusivity is surely a sign someone hording a scarce resource. I always wondered why economists, financial managers and lawyers spoke a different form of English than the one I learned growing up. Getting a degree in business, law, economics, etc. is, in essence, learning how to translate.

It angers me that there are real people out there who are making piles of money by perverting language, trading things that have no value.

Isn't that the most anti-capitalist thing you can do? To make a living without any real productive activity? But they're not just living... the condos, the jets, the Porche SUVs, mountains of cocaine, expensive call girls, etc. Lives more extravagant than the most successful conquistadors of the old world.

They cover it all up by calling the new era a "service economy". Yes, by 2020 90% of all US economic activity will be in "services".

It always bugged me that waiters and waitresses can easily make as much money as someone with a 4 year degree when all they do is carry the food from the kitchen to your table. Food that some latino picked and another latino cooked. But I suppose they're providing a service, eh?

The market is amoral. There was a very good, reliable system for satisfying the demand for slave labor here in the United States for 250 years.

[Nicholas Paredes]

A certain pragmatism seems to invade economic history, often making it worse rather than better. The runs on the banks some would argue, hastened the Depression when the fundamentals weren’t completely out of whack. The question is, how far out of whack are we?

My feeling is that too much saving, when rapid progressions of value are possible on historically low capital investment requirements, can be wasteful. The derivatives you speak of are economic hedges against catastrophe, which some have decided are vehicles for accumulation instead. Yes, we are not really in great financial condition, but how bad is it?

Realistically, 20% losses in urban real estate markets, the need for rapid rebuilding of infrastructure, should oil become an issue, and a dollar in need of repair, does not make for the end of the world. Some peoples’ worlds will suffer, but rarely does that punishment get applied to the deserving. The biggest issue in my mind is that a people unaccustomed to real work, will have to find a way to do real work.

As China stated, solid currencies may exist at the moment for their transfer of assets. Do you really think that, most other economies will not suffer wit the loss of an entire region of customers? And, will the twenty-somethings notice when they consider “our” lifestyles to be the ridiculous drive for greed at the expense of spending time with their friends and families?

[montysano]

I recently read an article, linked from Cryptogon, on the global value of derivative paper. If I get a chance, I'll try to go back and find the link.

The author, an economist, said that, in a world where global GDP is about $50T, he estimated the value of funny paper at $350T-$500T.

If myself personally, or the small business where I work, were leveraged at 7-10 times our annual revenue, we'd be sunk. Perhaps the analogy is not perfect, but still......

[FARfetched]

Separating Peak Money from Peak Oil for a moment, I don't see the former affecting normal people — or its effect would be background noise compared to the latter.

The things I predicted are coming to pass — some people walking away from mortgages, others are getting refi's at more favorable terms. When normal people have little or no equity to lose, they have far less to lose than those holding the bag I mean CDOs.

One thing I didn't see coming was how the bankruptcy bill is affecting the situation. Many people are finding it harder to walk away from their credit card debt than from their mortgages, so they're letting the house payment slide to pay their credit cards. The banks got what they wanted, and the rest of us can laugh while we watch them choke on it.

[Success Warrior]

Wall Street is already looking for the Fed to lower interest again in December. People are going to use our "money" by burning it in a fireplace to stay warm in January since it won't have enough value to pay the heating bill. An exageration, I know but between the deline in the value of the dollar and the decline in oil, people are going to feel the pressure.

[RJG]

"The Wit And Wisdom of Cancer", by Nina Paley

http://youtube.com/watch?v=PyexBlqFo-U

[asoka]

Whether called "financial instruments" or called "precious metals" like gold and silver, money is a psychological game.

None of it, none of it, not paper, not gold, has any value other than what people's psychological belief tells them it has.

Gold is a worthless metal found in the earth that is supposed to be "valuable". And then this paper is supposed to be "worth" an equivalent amount of gold. Sometimes the worthless paper is in the form of a certificate, sometimes in currency. Our illusion, our belief is that these things have worth, have value.

It is all nonsense. Insanity. And to think people work to get more money and fight over it!

It is really funny, this crazed obsession over something caled "money" or "gold", things with no intrinsic value.

[momofsix]

Edward Abbey quote: Growth for the sake of growth is the ideology of the cancer cell...from Hayduke Lives (I think).

[inquisitivemind22]

Hello,

I came across a piece of media from the early 1980s over the weekend that stated that the oil industry has 70 years left. Well, subtract 25 from that, and 45 years sounds about right. Yet, since oil is dollar denominated, its hard to say what oil would be doing if the dollar was strong. I heard on CNBC this morning that Rex Tillerson, (CEO of XOM) says he considers $20-$25 per barrel of oil to be due to the weak dollar. Who knows.
As per peak "money", I am still waiting for Dow 4000!

[Tangurena]

For one scary view on the Level 3 assets as a percentage of equity, take a look at this post:
http://www.rgemonitor.com/blog/roubini/224871

Citibank and Merill have the lowest exposure to Level 3 as a percentage, although they still have large exposures.

My estimate is that before this is all over, about $2 Trillion of paper "assets" will lose their value.

[bud4wiser]

JK - A fine essay indeed. The quote below summarizes fairly well the new - PO-aware-perspective our silly leadership and head-up-ass economists will have to embrace and purvey to the commoners.

Quote: [ “The main implication of peak oil for an industrial economy is that the 200-odd-year-long expectation for continued regular growth in combined energy-activity-and-productivity at roughly 3 to 7 percent a year under "normal" conditions -- that expectation is now toast.” ]

I find it remarkable, no maybe it’s actually pathetic, that the greatest portion of the residents of the United States are clueless about the natural resources and bounty of North America had how a unique set of circumstances fomented this nation into an unprecedented industrial, agricultural and military superpower.

And while the raping and pillaging of this continent’s resources continues unabated, soon, there will other “peak resource” contingencies to deal with. As fossil fuel harvesting grows ever more inefficient, many of the other core industrial activities will beget a new generation of even grosser inefficiencies. Ethanol’s production requires enormous amounts of water. The economy and scale of much of the nation’s agricultural business require huge volumes of petroleum.

It is this complex relationship of exponentially-growing industrial-inefficiencies that could, and most likely will eventually force a discussion and awareness of the finite capacity of the Earth for continuous economic expansion – let alone a discussion on the feasibility of continued population growth.

As you have mentioned so often, the key to surviving this cataclysmic economic/industrial contraction is in discovering and implementing as many energy consumption efficiencies as possible and curtailing any increasingly inefficient energy consumption policies as practical and possible. Alas, JK, neither of these strategies are broadly being cast.

In reflecting on the seeming infantile mindset of the American people and it’s leadership – I’ll have to consider that perhaps your references to the “villagers” outside the gates of their Hampton Estates may not be as far fetched as I previously thought.

Quote: [ “Those who remain may live to see mobs with flaming torches outside their windows, as in the "Frankenstein" movies of their suburban childhoods. But this has yet to play out.” ]

Your writing made me think about the effects of Peak Oil – good job, JK……….

[XER]

"Let them eat cake."

http://www.smh.com.au/ffximage/2004/10/09/bush_wideweb__430x326.jpg

[dale]

Reddick,
That is essentially the argument that I've been making here for awhile. Trends are easy to spot but tipping points are elusive.

JHK tends to look at things through the wrong end of the telescope, he forecasts the disease, then tries to make all the symptoms consistent with his diagnosis.

This is an economic event, first and foremost, any cause and effect relationship to PO is a feat of hyperbolic correlation. But then, Jim has been specializing in that sort of thing for a number of years without losing his audience, so why stop now?

Dave,
I could turn your argument around in a minute, blame it all on the XER generations refusal to get involved, take it to the streets, etc. Truth is, without the XER's guys like me in the Boomer population were outnumbered by the mind numbing corruption and misinformation campaign created by the various forces arrayed against us. Were all in this together, it ain't no generational thing and only immaturity would lead anyone to imagine it so.

[Chris Wren]

excellent post, once again. I think I knew we were in serious trouble about a year and a half ago when one of the ads showing in a movie theater here in Vancouver was for no-money-down, floating interest mortgages. The ad was clearly aimed at 20-something hipsters (hardly a demographic traditionally in a career position to take on a 25 year mortgage ) and relied very heavily on fear. Fear of getting left out. Fear of never being able to own a home, except if the acted now.

Personally, if the whole system comes toppling down and brings scumbag financiers and bankers down with it, part of me will be pleased. What's scary though, is the thought of how people will react in wealthy nations like Canada and America which have never known real hardship - and no, the "great" depression doesn't count. Compared to the chronic poverty in which most of the world has lived for decades, and which is coming to visit us, the great depression was an economic case of the sniffles.

[dale]

Moveonup,

BAHAHAHAH!!, My wife would be the first to admit "she looks it", for your information, and so would I, BTW.

I don't know how old you are, (or insecure), but as mature adults, my wife and I have a relationship that is not based on mutual deception. We tend to laugh at the discouraging effects of aging, it's better than trying to cover it up with surgery, ever increasing layers of makeup, or more youthful partners.

At the time, I was replying to a posted attack, speculating about my lifestyle and values, and I answered it as honestly as I could. I didn't, BTW, take it too personally. If that sort of honesty doesn't work for you, that's your problem.

People have been resisting change by insisting it was a "deterioration in morality" or some such, for a couple of thousand years. If I point out to you that fact, don't take it personally. if you don't cherish your ideas so completely, you won't get your feathers so ruffled when someone points out they are not exactly original. Not much around here is, and I include my own postings in that catagory.

[FARfetched]

Asoka, perception is truly what it's all about. However, the "specie" metals (those traditionally used in coinage, either pure or in alloy) also have properties highly useful in industrial contexts. Silver and copper are the best electrical conductors; gold is also a good conductor and doesn't tarnish or corrode.

Since 1974 or thereabouts, the US dollar can be said to be backed by oil -- but while the most ancient coins can be melted down for industrial use, once a barrel of oil is gone it's gone. The devaluation of the US dollar is a function of its backing resource becoming scarcer (in both relative, and very shortly real, terms).

[wisewebwoman]

Great post, JHK, an informative and erudite essay on the inevitable financial meltdown.
The greatest illusion of 'wealth' the world has ever known.
All seems karmic to me - being a firm believer and witness to personal karma over the years. Now we will see it on a global level. The Euros and the Yuans will remain dancing for quite a while, I suspect, and as there is not one remaining shred of goodwill left anywhere in the universe for the USA, there will be additional dancing on its sad and sorry grave.