The Ponzi-Plus Plan

     To paraphrase the late and great old war-horse of the senate, Everett Dirkson of Illinois (1896 - 1969), a trillion here, a trillion there, sooner or later you're talking about real money. Except in the case of the Great Bail-out of 2008, maybe it's more like... sooner or later your money is no longer real.
     What we're seeing in this fiasco, among other things, is a lesson in the diminishing returns of technology. This is a train wreck of investment vehicles so complex that they could only be created with the aid of computers. The result is that hardly anyone -- perhaps even nobody in or out of Wall Street -- really understands what they represent. In fact, this alphabet soup of engineered securities -- CDOs, CDSs, MBSs, SIVs, etc -- was cooked up from a recipe of Ponzi algorithms. They were designed to be mathematically indecipherable, except by computers, in an alternative universe of model-making that bore only a superficial relation to the real world. That was their dirty secret. And the dirty secret of the Great Bail-out is that, in the real world, we will never be able to discover the actual trading value of these things at any number above zero. This is why they are called "toxic."
     The big effort of Mr. Paulson and his working group has been to ram through legislation that at all costs avoids any attempt to place a reality-based value on this bad debt. He managed it by holding a gun to Congress's collective head, telling them in plain English that a genuine "work-out" of these "toxic" investments would set in motion a fatal cascade of credit default swaps which would leave the entire banking landscape a smoldering wasteland -- with the result that virtually every retirement account and pension fund would go up in a vapor, the Federal Reserve and the FDIC would melt away to twin piles of goo, scores of millions of lives would be ruined, and the USA would be left a basket case among nations, making us envy even the fate of Haiti and Zimbabwe. Talk like that might prompt a congress-person to do any fool thing.
     The question, of course, is what happens now, after this morning's scheduled vote on the Great Bail-out package. Last night, I would have predicted a brief bounce in the stock markets of a week-or-so duration. This morning, at eight o'clock, I'm not so sure of that anymore, but I suppose we shall see. Beyond a week-or-so, I expect the Great Bail-out to fail rather quickly in its main mission: to stabilize the banking system and calm the markets. The process of negotiating the package has given off an odor something like medieval scholasticism -- a method much like the creation of Ponzi finance itself, in which layers of tortured interpolation rendered theological concepts so abstruse that all the prayer of all the monks and nuns ever conceived within the walls of the Vatican would not avail to reveal their mysteries. The object, of course, was to reinforce the essential mystery of religion, just as the object in Ponzi finance was to reinforce the mystery of engineered securities.
      What the mainstream is truly missing here en masse is that another tsunami is building right behind the finance fiasco, and that it will render moot the whole reeking cargo of schemes and wishes that comprises the Great Bail-out. I am speaking of the global oil problem. In fact, the problems in banking and money currently roaring in the center ring of the world circus, can be described categorically as a product of the oil problem -- since oil is the primary resource of industrial economies and therefore the motive force behind our ability to generate "wealth." Without reliable and ever-growing supplies of oil, there is no industrial growth, and without industrial growth things like capital investment instruments lose their legitimacy. That is why the Frankenstein family of Ponzi securities was invented in the first place -- to compensate for the demise of industrial growth by creating wealth out of... nothing!
     The looming oil problem entails a swirl of factors that will aggravate and accelerate our social, economic, and political struggles. These factors will mutually reinforce the instabilities that they set into motion. For instance, the new oil nationalism is undermining the traditional operation of oil markets as we've known them since the mid-20th century. In turn, oil nationalism will aggravate the oil export crisis, which will starve the oil importers -- the USA being the chief victim. Finally, there is the remorseless base-line condition of Peak Oil itself, meaning that we are at point where world oil demand permanently outstrips world oil supply no matter if the USA falls on its ass economically or not. What remains beyond this is a desperate contest among the oil importers -- America, Europe, China, Japan, India -- for control of the world's remaining oil resources.
      The fantasies about alternative energy currently wafting across the American media-scape will not "solve" this problem, much as we wish they might. We'll try everything in a quixotic effort to sustain the unsustainable (that is, the happy motoring consumer society), but we will be disappointed by the results. I try to remind readers that the very concept of "solutions" does not apply in this situation, since it implies that we can keep running things in America just the way we are running them now, only by means other than oil. The truth, in my view, is that we have to run things very differently now, at different scales than the ones we're used to -- but we are too invested in our behavior of the past to move forward. This is certainly unfortunate, because we have everything to gain by letting go of our old habits and obsolete wishes.
      It's odd to watch the talking heads on CNBC this morning, parsing endlessly over the latest minutiae of the latest deal for CitiGroup to land on Wachovia like a giant amoeba and begin the gruesome process of digesting its innards. The TV heads are just like the medieval monks trying to explicate the labanotation of x-number of angels dancing on the head of the pin. Religion really is the only metaphor left to discuss the epochal disaster underway right now, because God alone knows where this will take us.
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My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

Comments

[Cymon Dendu]

"The fantasies about alternative energy currently wafting across the American media-scape will not "solve" this problem, much as we wish they might."

This is one of the central themes of Obama's campaign. Like others here I wonder why you support him, Jim.

[Zack S]

I was reading an article by Tom Wolfe in the NYT on Sunday and found this little gem. TS may really HTF tomorrow.

http://www.nytimes.com/2008/09/28/opinion/28wolfe.html?_r=1&scp=1&sq=tom%20wolfe%20master&st=cse&oref=slogin

Most hedge funds open up a crack on Sept. 30, Dec. 31, March 31 and June 30 to give investors the chance to “redeem” their investments, meaning take their money out. These moments are called gates, like a series of gates in a prison. The gate is the limit, the fixed percentage of your money, that the fund will allow you to take out at one time. Even with these strict caps on withdrawals, some funds may end up nothing but shells.

[david]

Jim,

You have been so right about so many things, I can't understand why you haven't been elevated to some lofty post, such as grand prophet of the United States.

Keep up the good work.

[ConservativeGreen]

Years ago, I worked for a .com company. This company had gotten a serious amount of money from a IPO, and in turn, was burning through that cash at an unbelievable rate.

In a state of panic, I asked my by Boss, the CIO, who was one of the smartest people who I had ever worked with, what the company should do. How do you stop the cash flowing out the door.

He said... You can't stop a cash burn, you can't bend a trend, the fire has to burn itself out.

We are witnessing an entire rain forest burn after it has flooded with gasoline by the people who created derivatives and stole trillions of dollars worth of assets.

Congress.. return the property to the people of the United States. Protect your assets, not the paper. Put in jail and seek restitution from those criminals who have perpetrated these acts.

The people of the United States of America will not allow this swindle to continue.

[Abrey]

Dear Jim: Still wondering when you will decide it is time to publish a collection of Clusterfuck Nation essays in book form for posterity. Reading your weekly essays gives me the feeling you are chronicling a Greek Tragedy, the decline and fall of a once-proud and powerful nation.

Abrey

[jim e]

"We'll try everything in a quixotic effort to sustain the unsustainable"

[LaughingAsRomeWasBurningDown]

Schlimmbesserung. Improvements that make things worse. Thanks Nudge for expanding my vocabulary, that one will come in handy a lot.

[LaughingAsRomeWasBurningDown]

Cymon, if not Obama, then drill-baby-drill McCain? Be serious.

[Empedocles]

Since Obama supports offshore drilling, shouldn't he receive the same criticism as McCain?

[Empedocles]

Plus, Obama supports the bailout too, but you never see the hypnotized Obama supporters mention that when railing against bailing out a bunch of crooks.

[LaughingAsRomeWasBurningDown]

Emped, sure. McCain still sucks the horse cock though, and ponder a bit on the possibility of a President Palin.

[robert magill]

Now that we are a nation of middlemen: what becomes of us if the center fails to hold?
Anon.

[LaughingAsRomeWasBurningDown]

Emped, Obama is the lesser of two evils. No one disputes that. McCain just seems like someone they tossed out there, ala Dole, since they figured they would lose anyway, and they are keeping the powder dry for '12 since they figure this economy/Iraq/energy etc. is a turded-up punchbowl situation for whoever wins the election this year.

[RomeWasntBurnedInADay]

Empedocles - I'm too stubborn to be hypnotized, but support Obama anyway. McCain loves military action too much (speaking of breaking the bank), and his choice of Palin shows just where he really stands on "putting country first."

[LaughingAsRomeWasBurningDown]

Rome Wasn't Burned in a Day? Then I guess that means even more laughing!

[Lost Horizon]

This post is great, dead spot on Jim.

You should get an award for this one:

Best Summation Ever of the Derivative Beast

"without industrial growth things like capital investment instruments lose their legitimacy. That is why the Frankenstein family of Ponzi securities was invented in the first place -- to compensate for the demise of industrial growth by creating wealth out of... nothing..."

King Henry 'Hankenstein' Paulson does not want to tell the public about the Derivative Beast, just Congress, he used it to scare the shit out of them, inducing 911-like nightmares of US financial entities jumping to their certain deaths from the top floors.

[west of the fields]

Jim I have been a fan for years.I am an architect,who has been building traditional architecture in one of the richest towns in the nation for years. My clients certainly know whats coming,they have created their compounds in small towns around the country,gentrified and insulated from the masses. These will become the american "green zones".I have also retreated to my hometown in pennsylvania,a small run down example of 19th century americana. most of these towns are perfectly placed within the only farming regions we have left. The remnants of these towns can be bought for a song, and most of the citizens,never enjoyed the boom years so their mind set is prepared for whats to come.

[RomeWasntBurnedInADay]

Laughing - Hope you don't mind the similarities--we use that phrase all the time in our house and it fits current events so well. And speaking of not being burned in a day--what happens when the American public, already po'd about the bailout, finds that it hasn't solved the problem??

[RomeWasntBurnedInADay]

uh-oh - "another fire is starting in Europe" http://www.msnbc.msn.com/id/26938538/

[Weaseldog]

It's one thing to buy a little hamlet in a small town, it's another to keep it.

If the dollar dramatically loses it's value, will they pull a plow for food? are they cut throat enough to play the robber baron? Can they manage the small town politics well enough, to defeat the ruthless local with deep roots?

In small communities, the neighbors can steal you out of house and home in slow bites. Houses burn down easily.

They'd better be prepared to integrate with the locals.

This bailout will be simply driving a bigger, but shorter lived bubble, that will need a larger bailout. My tune has changed much on this since 1999. I'm becoming tired of being right about how post peak oil economics functions.

My mistake seems to be that I was optimistic. I thought this would take two years longer. But Bush, Greenspan, Bernanke and Paulson accelerated the schedule.

Obama and McCain both vote very much the same. Obama is simply the smarter liar.

Obama will lead us marching and fighting into the abyss. With McCain we'll careen out of control into the abyss. Which is better?

[bud4wiser]

___________________________
Non-Negotiable Technologies
-- JK posted: "What we're seeing in this fiasco, among other things, is a lesson in the diminishing returns of technology."

Yes indeed Jim, in every corner of this nation as well as most of the world "technology" is ultimately speeding up resource depletion and negating any implementation of sustainable cultural customs.

This is why I am personally supporting John McCain for president. John's positions on the usage and sales of nuclear as well as conventional weapons as a means to bring about sustainable levels of populations in non-believing or undemocratic nations is the reason for my support.

Only John McCain is passionate enough to bring about "real" change by the discharging of nuclear weapons as a means of sustaining America's "non-negotiable" way-of-life.

After effectively reducing petroleum consumption by eliminating world population by three or four billion, America will "thank" John McCain,and realize that it was the "right" thing to do.

You see Jim, eventually technology WILL solve those pesky "oil" problems....

In the meantime, party like its NOT February, 2009.......

[LaughingAsRomeWasBurningDown]

> what happens when the American public, already po'd about the bailout, finds that it hasn't solved the problem??

out here in Jesusland, E. TN area, folks seem to have equal amounts of anger and guns.

[Lost Horizon]

"..there is the remorseless base-line condition of Peak Oil itself, meaning that we are at point where world oil demand permanently outstrips world oil supply no matter if the USA falls on its ass economically or not. .."

This is what some have hinted at as 'decoupling' by the rest of the world from the US Consumer Credit Ediface. Many have pooh-pooh the notion as impossible, the US is 'too Vital' to world commerce!

Think again, the US can dive off the ledge from the 14th floor and hit the pavement and life in most parts of the world will get over it and adapt. It won't be easy, but most countries are used to getting by with Much Less than the spoiled rotten US public.

DuhMerica's only hope is to distract the rage of the unwashed masses as this last drama circles the porcelain bowl, is to start a war and blame this inevitable economic implosion on 'them foreigners'.

This 'plan' is already in place by the 'elite'. hahaha

There is no place for them to hide on the Planet Earth that won't be located. The Pirates of Wall St are now the "Honeypot". A big juicy prize. They think they can retreat to 'Green Zones" and wait it out.

All the banditos in the world are waiting to whack open this piñata.

hahaha

[ViewFromHere]

West of the Fields--

If your clients are looking for another safe haven-- take a look at this RFP for historic redevelopment in the rainfed, natural resource rich, isolated railroad town, with an an intact community on the Great Plain.
http://www.ortonville.net/rfp_2008.htm

[FARfetched]

«Last night, I would have predicted a brief bounce in the stock markets of a week-or-so duration. This morning, at eight o'clock, I'm not so sure of that anymore»

Yeah, I was guessing our $700B would buy a few months of relative stability until the next quarterly reports came out, but now I'm not sure it's going to buy several *days* worth. We're already DOWn 250-300 points as I type. I'm not sure if the sentiment is "too little, too late" or the market's reacting to the morning turmoil and pretending there's no bailout.

As far as the "global oil problem" goes, I suspect that the financial problems will trump it for a good while. My take on peak oil is that it's not really peak oil that's the problem — it's a matter of supply not meeting demand. While we're in a period of deep recession/depression/long panic, we're not going to be using as much of that goop. No job = no commute = not buying gas as often. I've often said, if we can deplete demand at least as fast as we can deplete supply, peak oil would be a non-issue. Of course, there's only so much demand we can destroy before other things start getting destroyed as well… everything needs to be rearranged, not just living arrangements; even if it's futile we need to make the effort.

And for the Monday read/post/run crowd, Episode 53 of FAR Future awaits you: http://farmanor.blogspot.com/2008/09/far-future-episode-53-sunrise-sunset.html