The Risk Economy

      My new novel of the post-oil future, World Made By Hand, is available at all booksellers.
____________________________________

    

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

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

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

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

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

     While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations. But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the US economy.
     One feature of the risk economy is the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.

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

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

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

     Personally, I doubt that it can go on more than a few more months. The velocity of everything is going up past the "red line" where things really fly apart. The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away, and when the pink slip appears in the pay envelope. Meanwhile all the higher-end banking shenanigans will only debase the dollar and make it more difficult for people already in distress to buy gasoline and food.

     If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal. In any case, I think we will have a way different sense of ourselves as a society by the time the election comes.

   

Comments

[Uncle Remus]

Bowie and Lennox - Under Pressure

http://youtube.com/watch?v=0VLS-P9m0BM&feature=related

[Uncle Remus]

"No, we’re not exempt."

Damn.

[asoka]

Even though I understand next to nothing about macroeconomics, this week's post actually made sense... a credit to your writing skill.

I do wonder about this line though: "Personally, I doubt that it can go on more than a few more months."

Does that mean TSHTF before the presidential elections? We are, indeed, blessed to live in interesting times.

[tipping point]

Hey Dr D- Let me start by saying that I completely respect you but I have to say that I think uphatshit (or whatever he goes by) does have a point somewhat.
What does JHK do to get people educated and involved in combatting potential issues related to PO as opposed to the nationwide tours he goes on to promote his own books? It's cool with me as everyone needs to make a buck and I enjoy the interactions that go on here but this does seem to be more of a commercial enterprise(even though to his credit there are no ads on typepad) than an educational one

[theroachman1]

Posted by: upnatpishtim | May 04, 2008 at 07:08 PM

LOL!!!

This is one of those Amerikans with there heads stuck so deap in the sand they might as well be sniffing for oil sand deposits.

[theroachman1]

Just because we are running out of gas I find nothing wrong with promoting the message. There is no way anyone who wants to spread the word of the Worlds current precarious circumstance can escape the current travel options in the US. What is JHZ going to take the Zephyr from the Rocky Mountain Institute Conference last month back to Chicago? Who as a week to spend on a train?

Maybe he needs a few people who travel via less fast ways? Or a whole blog set up of a group of people who post their wide ranging experiences? A farmer a addicted traveler or/and a train buff? That might balance out what he does currently.

[asoka]

OVERKILL AND SHORT SHRIFT

"Among the many other important issues overshadowed by the good reverend is a legitimate dispute between the presidential candidates over a proposed gasoline tax holiday, to run through the summer. Hillary Clinton and John McCain favor this dopey, irresponsible proposal, which would save individual motorists a grand total of $28, but which would result in $9 billion in lost tax revenues, much of it targeted for infrastructure needs.

(Senator Clinton says she would recoup the losses with a windfall profits tax on oil companies. Don't hold your breath.)

No one with a serious understanding of the nation's energy needs supports this foolishness. Senators Clinton and McCain have been assailed by editorial writers on the left and the right for pandering. Mayor Michael Bloomberg of New York City was stinging in his criticism, calling the proposal "about the dumbest thing" he'd heard in a long time.

"Obama was right on this one, and McCain and Clinton were wrong," said Mr. Bloomberg. "The last thing we need to do is to encourage people to drive more and to take away the monies we need for infrastructure in this country."

The point here is that this was a tailor-made opening for the press to push the candidates hard on a phenomenally important question: What should we be doing in the short and long term about U.S. energy requirements?

Another issue: Economists were exhaling Friday because we only lost 20,000 jobs in April. After all, we lost 81,000 in March. Nevermind that we need to be creating millions of jobs if we're ever going to get our economic house in order. With credit cards maxed out, real estate prices falling and enormous amounts of home equity already drained, a good job is the only legitimate way to put real money into the hands of cash-strapped families.

Americans are hurting on the jobs front. Those who are employed are working fewer hours and for less pay. Some sectors are crippled by unemployment. There are big-city neighborhoods in which the real jobless rate of young African-Americans is 80 percent or higher.

Do the candidates have concrete strategies for engaging these problems? Could we hear about them? Explore them? Critique them?

Are we in the news media going to be serious about this election, or is it really going to be all about Wright and race all the time?

Most of the electorate understands that the U.S. is in sorry shape, which is why more than 80 percent of poll respondents say we're on the wrong track. The Rev. Jeremiah Wright has nothing to do with any of that. The idea that his nonsense may shape the outcome of this election is both tragic and absurd."
--Bob Herbert, New York Times, May 3, 2008

[tipping point]

@Roachman1-
There's nothing wrong with spreading the 'word' But this blog is an exercise in ego stroking, not changing the current situation or informing the world of peak oil. When I hear that JHK has set up a non profit foundation for education and mitigation of problems associated with peak oil, I'll believe that he isn't just an old windbag looking to make a buck.

[theroachman1]

"old windbag looking to make a buck."

Completely agree. But he does make a point and good one at that.

And heck people who agree with his basic premise need a place to stroke thier egos from time to time. (some more than others) Its good for the soul to communicate with people with similar ideas. I find I learn little to nothing if just engaging debates with people who disagree completely all the time or worse dumb myself down with engaging with trolls.

And more on the old cute thing is the fact I have young kids and thus a vested interest in making it though the tuff times ahead into a world hopefully that is much better off then the one the "old cute" envisions.

[Brandon]

Good to see you again Brandon. Haven't you got a more impassioned post for us? I have always enjoyed your posts, even on the occasion I don't know what the hell your saying.

Posted by: tipping point | May 04, 2008 at 08:30 PM

Nope, nothing more impassioned... I didn't realise people here actually appreciated hearing my whining... in that case:

I did experience the darkest day of my life on Friday... I quit the Zoloft a month and a half ago and thought I was doing fine... so on Wednesday I cut the dextroamphetamine as well... I don't like to be dependent on these things you see, as when oil is gone so are they... and when riots start, ditto. I discovered I am a slave to these chemicals. Within two days of quitting the amphetamines... I was deep in a depression. It's actually quite scary how one's entire outlook on the world can change so drastically and so quickly. No matter how hard I fough, everything appeared bleak and dark and dangerous. I was so depressed I didn't even think about suicide or crying or any of that cal. I just could not function like that, and the only thought in my mind was how long I could take it before I had to sign myself back into a mental ward of some sort to protect myself or for them to make me go to sleep. I even imagined up a scheme where I went in with a knife to my temple to force them to sedate me... it was so dark this world that is created when your dopamine and serotonin fall below an acceptable level... you cannot help but think negatively... dopamine is the "wanting" neurotransmitter, among other things. The reason I take the amphetamine in the first place is to give me some extra so that my mind can organise goals and execute executive functions... you know the way most people structure their lives. Without I have no goals and cannot keep a thought in my head for more than a few seconds. My thoughts are like butterflies and the extra dopamine is like a net for me to catch them and ponder them. Anyway, I'm simplifying some massive neuroscience here, and doubtless no one has the patient nor I the ability to explain it all.

So anyway, my friends and family found out because they could tell something was wrong. For christ's sake I sat out on the deck on the cloudy day for 2 hours just starring into space. They made me promise to start taking the Zoloft again (if certain people find out I stopped taking my medications they could take me off of disability)... and to take the dextroamphetamine... even if I don't want to... and

Its like the end of George Orwell's 1984 when Winston finally comes to the conclusion that he loves Big Brother. This is at least the third attempt I have made since October to break off from these medications... but it's become clear to me I am not stabilised and need them to think clearly... I wrote this in my meditations before the depression hit me on Friday:

"Wednesday 30 April 2008

I’ve made major progress in getting to the bottom of everything. Perhaps I will never learn this but what needs to be done is for me to love myself. That’s a large part of it. That one thing leads to a lot of other things. If I love myself, I will be able to love others. If I am able to love others, I will be able to acceptably seek the mutual love I so desperately crave and need. If I have that I will have a sense of stability and normalcy that has been missing for a long time.

I have been completely substance free for a month or more save for dextroamphetamine. I weaned myself off Zoloft and quit cannabis cold turkey. It wasn’t hard, what’s hard is continuing. I have been supplementing in a large way, especially with omega 3, B vitamins, and magnesium taurate, which was difficult to find.

A few weeks ago I began to make radical changes to my thought patterns. I immediately stopped any negative thought and forced it to become positive. It worked fabulously at first. This week has seen a relapse to the negative thought patterns that have had control of my life for as long as I can remember. Today saw a return once again to the “love myself and think positively” mantra that will aid my healing.

I have made many online friends in the past couple months. They have helped me in that I’ve practiced my new way with them.

My new way involves being bold and confident in myself and trusting my instincts. These things are discouraged subtly, if not outright by Watchtower indoctrination, and must be purged for any meaningful healing to take place. It is a huge relief to be free of all guilt, shame, and embarrassment involving one’s self. I have found cognitive behavioural therapy to be the greatest thing since sliced bread. It involves being mindful of each thought as its passing through and examining it for authenticity and accuracy. If it doesn’t meet those standards, it is discarded for the refuse it is. This is aided greatly by dextroamphetamine. I think I understand now how the stimulants assist me. They slow my thoughts down to the point where I’m able to do this consciously. Dextroamphetamine allows the frontal lobes of my brain to control the limbic system. This is intuitive: our emotions are reactions to our perception of stimulus and thoughts. Thoughts come first, emotional reaction comes later. Without frontal lobe stimulation my brain is more likely to bypass the frontal lobes in decision making. Therefore less consideration of my perceptions is involved and I will end up emoting things rather than reasoning through them. It is now easy to understand the reason for my emotional dysfunction without treatment. This appears to correlate to how I am only now beginning to understand how to stabilise.

I continue to struggle with negative thought patterns. I hope to never reinitiate SSRI treatment. A couple friends have suggested I do so. I think it best I continue to fight as long as possible on my own. When it becomes clear that no progress is being made then logic dictates I return to them. Internal progress needs to be reflectively matched with external actions indicative of this progress.

Education is a cornerstone in my healing. It’s important I understand the concept of a developmental disorder. I’ll find the serenity that comes from recognising and accepting what I cannot change."

Anyway, Day Three of Zoloft and dextroamphetamine and I'm back to my normal self... the depression is gone such as it was... a clinical depression. I'm able to extract joy from things again and I do not have anhedonia or akathisia.

[scott]

Buffett Says Credit Crisis Ebbs for Wall Street Firms (Update4)

By Josh P. Hamilton and Betty

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeLirKvQi5jw&refer=worldwide

[tipping point]

Brandon- I'm glad to hear that cognitive behavioral therapy is working for you, in conjunction with your medication. I'm sure you feel you have tried just about everything. One bright spot is that you are young; continue the therapy, as intensively as possible, and consider meditation to supplement those "in between times"

[Uncle Remus]

"Buffett Says Credit Crisis Ebbs for Wall Street Firms"

Well, his clutch may be slipping.

[theroachman1]

Clutch slipping Ill say.

Buffet is known to be selling off all cash reserves in USD. So Buffet saying the crises is all better now? Seems kind of strange thing to say unless you wanted to prop up the USD to get people to by USD so you could sell more of it. Nice little set up if you ask me.

[scott]

"Decisions will eventually be made NOT to dump the properties on the market for sale. The concept of earning an income from rent will be recognized. The shareholders of FNM and FRD will benefit from a dividend earned from home rentals. Why sell in a depressed housing market when rents are on an upward trend?

The road to serfdom will involve the USGovt through its corrupt, insolvent, and revived mortgage apparatus to becoming the biggest national homeowners in the land. What an embarrassment! But watch for how the story is spun! If alive today, Thomas Jefferson would spit in the eye of the president, the Treasury Secretary, the USFed Chairman, the Congressional leaders, and any Wall Street CEO who crossed his path!!!"

http://www.gold-eagle.com/editorials_08/willie042308.html

Jim Willie CB makes some interesting forecasts and often is right. He also makes an assumption that as the U.S. economy contracts, gasoline stations will go belly up and close. I haven't considered that angle.

[theroachman1]

Will Hamilton feel guilty about killing Burr if he was alive today?

[scott]

It was the other way around

http://www.nps.gov/archive/jeff/lewisclark2/Circa1804/In1804/HeadlinesAaronBurrDuel.htm

[theroachman1]

opps

Thanks

realized my joke was backwards. Need another glass of wine then I will be even funnier (not likely)

That site is great thanks for posting it. And is a government site no less. The apocalypse may happen after all.

[tipping point]

Scott- many thanks for scaring the shit out of me as usual. I think I need to pull my 401(k) for reinvestment purposes (there are no commodity funds available in my group) Does anyone know if I can just roll it over to an IRA that has other investment vehicles without incurring tax hell?

[scott]

tipping point, So if the government is creating excess liquidity to spur economic growth by reflating the bubble economy and all that jazz then it stands to reason food and energy will see the biggest runups? I think everyone sees notable inflation for this summer because of the FED rate cuts.

[scott]

If you hit preview after typing something you can scroll through all of the comments even JR's that were censored.

[scott]

I guess I should have written *moderated* I'm fairly sure that JHK probably hates censorship as much as anyone.

[Holmes, I presume]

"This is one of those Amerikans with there heads stuck so deap in the sand they might as well be sniffing for oil sand deposits."

roachdude, you must be seriously hitting the bong -- recycling the "sniffing for oil sand" joke of yours from last week's thread. (No worries. Shamanic types, and those who can roll a decent joint, will be celebrated in Post-peak Times.)

[EEofDC]

I wanna be a shaman!!! I wanna be a shaman!!!

http://www.youtube.com/watch?v=dbI5K0AzNHI

[Nicholas Paredes]

After a while tangible goods are all that matters, and that includes real estate. The issue is having enough cash to ride the cycle with uncertain rentals. If nobody has cash, renting your apartment isn't really an option.

Inflation is about our only way out of this mess.

I wanna be a shaman too! Perhaps without the bourbon and ludes. OK, with the bourbon. Yoga teacher training may do the trick...