This is a re-run of a post written at the end of last year, with a few added comments (in italics).
An argument that has been regularly put to use on my doom-n-gloom diaries about the economy, the dollar or the oil situation is that I've been predicting some of these things (like a recession, or a housing slowdown) for so long that they are bound to happen at some point and thus my prognoses have little value. As the old joke goes, "economists have predicted 9 of the last 4 recessions"...
I went through some of my earlier diaries - those from early 2005 - as well as others from other bloggers, to look at what I had written then, and (pat, pat on the shoulder) I'm pleased to say that they were quite on target, and provide a decent explanation of what's been happening in recent months.
So to those that say: "who could have predicted this?", I'll respond quite directly: we did, on the blogs; and quite well, including the 'what' AND the 'how', if not quite the 'when.'
There have been 3 main predictions in my diaries: the increase in the price of oil (which lead to my Countdown to $100 oil series, now replaced by the Countdown to $200 oil series), the coming housing bubble crash (and more generally the financial asset bubble, which I used to cover under the Bubbles Greenspan label, and now call the Anglo Disease), and the fall in the dollar.
In the early days, I started with a description of the imbalances (whcih the bulls were dismissing), and the reasons why I thought some of the resulting then-going-strong trends that the bulls were bragging about (asset price increases, housing going strong, economic growth) were unsustainable, and were likely to revert sharply in the near future. I also flagged some trends that were already happening then (the fall of the dollar, the rise in oil prices) and put them in that context, suggesting that these had not yet run their course.
The next phase was to provide deeper explanations for all of this. On the oil front, it was the theory of peak oil (or, at least, the idea that supply was struggling to keep up with demand); on the dollar and housing front, the Greenspan Bubbles - ie insanely cheap money provided by the Fed and other central banks and fuelling a debt binge.
And, underpinning all this, a more comprehensive theory, which I labelled the "Anglo Disease" (as a nod to the well-known "Dutch Disease") which tried to link all the above phenomena, and explain how they were all really driven by explicit policy choices underpinned by a comprehensive, pervasise ideology, that of neo-liberalism, or, as it should really be called, neofeudalism, whose main symptoms are a massive increase in inequality and a breakdown in solidarity (the poor, like the rich, have what they deserve).
I'm focusing on my own diaries, but I want to flag again that I wrote many times on the basis of information or insights gleaned in other diaries, or in comments, and have often felt to be some sort of de facto spokesperson of the community of smart bloggers that looked at these issues and discussed them before everybody else.
Countdown to $100 oil
I'll start with oil and energy, as this is still the topic I'm most closely associated with. When I first started writing on the blogs, oil had just reached the unheard, and then-scary level of $50 per barrel. Peak oil theories, long known only by a small handful of people (which did not include me), were beginning to be discussed in more widely read books or in occasional mainstream media articles. But these were easily dismissed, and the spike in oil prices was seen as just that - a spike, which would recede as the temporary or irrational factors keeping prices high disappeared.
We all know how that turned out:
Via FreeCharts.com
I'm leaving this old graph (which is only 6 months old) to point out how quickly we have moved to higher prices. $100 oil would be used today as proof positive that this was a bubble all along, and that markets are "self-correcting", given that it would take a 25% drop in prices to get there... a more up-to-date graph can be seen here.
In March 2005, a few months before starting the Countdown diaries, I wrote: Oil prices at record highs - speculation to blame?, with the following factors listed as explaining the oil price increases:
- the OPEC has gotten its shit together in recent years (...) and they have been a lot more effective in maintaining their discipline in the market,
- they have been helped by the faster than expected increase in demand in the past two years, fuelled by record worldwide growth (...) which has brought spare production capacity to its lowest levels in many years. The absence of that safety cushion makes that any temporary technical or political problem in the oil chain becomes a major event on the oil market (...)
- the instability premium caused by 9/11 and fuelled by Bush's wars has never been higher. (...) The US is not a force for stability today, and it has a price in the oil market;
- (...) Big Oil is running out of places where to invest: the country that have the reserves do not welcome them - and they are unable or unwilling to invest in increased production capacity themselves.
(...) There is not enough oil to provide for China's needs. Don't blame speculators, it's just that they notice these things before us.
Nothing of what happened in the past 3 years requires changing a line of this diagnosis: this is a demand driven price increase, supplies are tight, and Western oil majors are increasingly kept out of oil-rich countries, which show no desire or no ability to increase production. In fact, the most significant fact in that period is that production has essentially been flat throughout, as this graph from the Oil Drum shows:
And the result, of course is that, the trend has continued to be upwards, despite the loud crowing on the business-as-usual crowd whenever prices did dip for a (usually short) while. While the headline WTI index did not quite reach $100 (it briefly touched $99.29), it's been above $90 for the past 2 months, with no more apparent consequences on our economic behavior or our energy policies than when $50 was reached 3 years before. Which only means that the policy changes required grow bigger as time goes by. But people will not be able to say they were not warned.
It was all on the blogs 3 years ago.
And the warnings about speculation being a distraction from the real underlying issues rings as true today as it did 6 months ago. I know that many kossacks are persuaded that market manipulation is the real cause for the current price spikes, and I don't know anymore what to say to convince them otherwise. Just look at it this way: speculation is an altogether all-too-convenient excuse which allows to not ask tough questions about how our economy is run today, and what kind of infrastructure we're burdened with - or lacking. Believing in speculation means believing in prices that will fall back to "normal" levels. This is NOT going to happen. There is no "normal" when you're in an unprecedented situation, ie when the most convenient energy carrier ever is beginning to get scarce.
Bubbles Greenspan
A year and a half ago (two years now), Alan Greenspan left his job as Chairman of the Federal Reserve Bank under almost universal praise. The "Maestro" was lauded for his ability to steer the economy through various crises and to help create unprecedented prosperity, as evidenced in massively higher financial markets.
Only a few lonely voices were saying then that this apparently successful monetary policy was fundamentally flawed, based on inflating ever bigger bubbles to hide the mess of the previous one, until it would no longer be possible to hide the whole sorry thing and it would burst in a massive crisis. Those voices said that it was inevitable, and that the longer it took to get there, the worse it would be. They were mocked mercilessly.
Here are two graphs, one from the WSJ, one from the BBC, showing almost the same thing:
The housing bubble slowed down in late 2005 and collapsed completely this year. The debt bubble explosed quite unexpectedly and quite completely on August 7 this (last) year, when bankers, for some reason, had a "uh oh" moment and stopped lending altogether:
And guess what? This was all announced on the blogs, loooong in advance:
Greenspan's bubbles - more graphs (10 March 2005)
The second graph (...) shows that the increase in homebuilders's share prices (a proxy for the real estate market) is looking distinctly frothy.
What this means is that US consumers are spending real money based on the virtual increase in the value of their homes - after spending the real money based on the virtual increase in the value of their shares a few years back.
(...) consumption is not fuelled by a healthy economy, but by increasing debt.
(...) the number of homes available for sale is at record highs. Should demand slow down (because debt gets more expensive with increased interest rates), supply will be too plentiful, thus leading potentially to a nasty fall in prices - and makind all that "virtual" equity worthless - but nonetheless already spent.
Debt funding consumption...
Debt hiding the lack of real economic progress for most...
Increasing reliance on the housing and financial sectors for "growth"...
Massive overbuild underway...
All flagged 3 years ago.
The US - a finance-based economy on crack (17 February 2005)
- the huge fiscal and current account deficits;
- the very low interest rates that "do strange things to a highly deregulated financial system" and "fuel an increase in risk appetite and leverage"
- most of the assets of US financial institutions are not subject to the regulations that apply to banks
- a growing concentration of financial assets and liabilities
houselhold debt at a peak, both in absolute amounts (close to 10,000 billion $ - yes, that's billion) and in relative terms (120% of disposable income, as compared to 60% in the 70s and 80s);
- the phenomenal growth of unregulated hedge funds, which banks are desperate to finance (the "crack cocaine of global finance" quip above refers to prime brokerage for hedge funds, i.e. the services that banks provide to these funds to buy and sell shares - and finance the transactions)
(...) an amazingly high portion of these profits come from financial firms, who seem to be making these by taking advantage of very low interest rates to take growing risks, especially in lending to hedging funds and buying untested derivatives.
(...) the probability that a serious crisis could be triggered - and amplified by the financial system - is worringly high. Add in a financial sector in denial (we have big profits, why worry?), an administration oblivious to the situation and most likely unable to react, and you have a lot of ingredients for a "perfect storm".
Weakening of regulation...
Increasing risk raking...
with the impression that risk has been covered ("hedged") and that all is well...
Bankers are dangerous people (17 January 2005)
Loss of trust in a bank can always turn into a loss of trust in the banking system; insolvency or simply illiquidity (when it does not have enough cash at hand even though it has valuable, but not liquid, assets in its books) of a bank threatens all entities that have assets with that bank - depositors, corporate treasuries, other banks, etc...and that illiquidity can spread to otherwise healthy entities. The existence of such macro risks, called "systemic risk" has led governments to heavily intervene in the banking sector
(...)
the ironic thing is that the most sophisticated banks will be allowed to decide on their own how much capital they will put aside for each operation they do (of course, they will have to follow consistent rules that are supposed to be monitored by the regulators, but essentially, they will make their own allocations). Back to square one and the Venise merchant bankers trading on their good name alone
(...)
in the bond market, it is even worse, because the banks that structure the deal (define its parameters and negotiate them with the borrower) do not even keep the risk - they sell it all to the bond market. Once it's sold, they don't really care how it fares (especially as the restructuring teams are usually completely different form the initial structuring teams if there are any problems). and how do they sell their bonds? By having massive sales desks who work, for a good part, on their reputation
(...)
just because a banking crisis has not happened recently does not mean that it won't happen again. Bankers are really smart at finding new ways to lose money, especially when it's not theirs.
Securitization as a force to take extra risks and dump them on (unsuspecting and/or imprudent and greedy) investors...
Banks left to their own devices to invent new products without supervision...
Greed, greed, greed everywhere...
When euphoria turns to fear, trust disappears, and transactions that made sense only if everybody believe in them suddenly start looking definitely shaky. And the result is supposedly ultra-safe AAA-rated securities ending up being dumped as "toxic waste" because people no longer know what they actually are worth. And these AAA securities are held by pension funds, local administrations and others who thought they were investing prudently money they had the care of.
(those AAA securities have now dropped to less than half of their original value - pretty impressive for ultra-safe securities, right?)
The financial world moved with incredibly brutality from endless and cheap liquidity to a mad scramble for cash as debt disappeared. The exact way the bubble was burst, and trust turned into revulsion could not have been predicted, but what triggered the crisis is exactly what was announced: unsustainably inflated values for various classes of assets, starting with US real estate and the insane loans that went with it, and that were repackaged, rebundled and releveraged into the markets, spreading the toxic waste far and wide. Everybody thought they were free of it (and their claims in that respect suggest that they knew from the start it was shitty stuff they were peddling), but somehow did not consider that their clients might not be, and would turn to them when the problems appeared...
And, of course, the housing crisis is no longer denied by anyone now, as prices (and number of sales, a bad sign) show record declines.
It was all on the blogs 3 years ago.
Dollar Dump
After all that crowing, let's end with something somewhat anti-climatic: the dollar continued to weaken, but not, in fact, that much.
okay, so we've moved yet further, to the 1.55-1.60$/euro we've been in for the past few weeks
Falling dollar, offshoring and the coming crunch (5 December 2004)
...[a] weaker currency has the following long term effects:
- oil producers, who currently get paid in dollars, are not happy with the continued erosion of the purchasing power of the dollars they get. They spend most of them in Europe, and thus need Euros. They thus expect their oil to at least keep its purchasing power in euros, which means that, if expressed in dollars, the price must go up as the dollar falls. The Europeans don't really care, because the price for them will stay constant in euros. Americans, who have big gas-guzzlers and do not have heavy taxes that could cushion these movements, will feel the increase very directly at the pump; as an absolutely non substitutable import, this will only increase the deficit with no chance of a reduction other than serious reduction in consumption, which will be a consequence of economic hardship rather than going for substitutes (public transport), which are totally unavailable for most Americans.
- holders of T-Bonds will need to be convinced to hold on to them - and to keep on buying more of them. The thing is that they are so little diversified tday that any move to change the balance of their reserves (inevitably towards the euro) has an immediate impact for the dollar, as we currently see - and for the interest rates required to keep them happy. Asian central banks may want to hold on longer than others, as they have the incentive of protecting their exports, but others (especially the oil producers of the Middle East and Russia) have growing incentives to bolt out before it gets worse. And Asians may decide on day that enough is enough, and you could have a real meltdown.
So far, the meltdown has not happened, although it is now openly disucssed in the mainstream media, for the very reasons I flagged above. The increase in oil prices (ie the devaluation of the dollar against oil) has happened, but not, so far, the revulsion of T-Bills owners. The oil windfall has sent so much money their way that they have, in effect, not have had the time to park it anywhere else but in T-Bills.
But the big story today is the threat of inflation trending up, which is essentially the same thing in a more diffuse manner (the dollar losing value against goods in general). The great unwinding of the big imbalances (budget deficit and trade deficit) has not yet happened, but it does have to.
And the dollar has kept on going down, not up
Anglo Disease
The one big crash which has NOT happened so far is on the equity markets. They have broken new records several times this year, and are not far from their highss. Many countries, especially in emerging markets, have seen spectacular gains.
So. Wrong predictions?
Maybe not. But the mirror of this other trend:
Note: this graph came from Afferent Input and was flagged by kossack militant progressive.
The big underlying trend of the past 25 years, and of the last 7 in particular, has been the increasing concentration of wealth in a very small number of hands - roughly the top 0.1% in the US and a few European countries. They have managed to essentially capture all income growth for themselves, leaving everybody else with stagnant real incomes.
In that context, plentiful and cheap debt was a simple way to distract people from their plight, by giving them a convenient way (and, when backed by house price increases, an apparently safe one) to continue on spending even without the requisite income, and thus to feel prosperous.
That was a deliberate con, pushing the ideology of greed, idolising financial markets and the stupendous profits they seems to generate (but, in fact, capture from others), and driving the economy to focus on only one thing: corporate profits, at the expense of everything else, in particular wages and workers' perks and rights.
Tax cuts for the rich, pork for corporate friends, anti-labor propaganda everywhere, and cheap debt for everybody to "pay" for it or sugarcoat it.
This is still under way. It was visible as a coherent plan 3 years ago, and it has only gone worse since. The Democratic candidates are talking about it today, a bit, but nowhere near enough to reverse 25 years of permanent lies.
It's been said on the blogs, but it needs to be said louder. Maybe our track record will speak for us now?