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Oil And The Global Slowdown - It's Time For Central Banks To Admit They Failed
Submitted by Chris Martenson via Peak Prosperity,
The world economy is slowing down and the authorities are fretting.
[ZH - Do you see a pattern here?
]
Japan, Italy, and Greece are all in recession. China is slowing down according to official statistics, and even more according to whispered accounts.
Germany, France and the Netherlands are all at stall speed.
According to the BLS, the United States is doing just great at nearly 4% growth for two straight quarters, but you wouldn't know that either from the quality of the few jobs being created (which is low) or from consumer spending (also low).
The worry, as always, has nothing to do with the central banks' concern for you, your job, your children, the actual prices you pay, wealth equality, or the future, and everything to do with the simple fact that the stability of the banking system absolutely depends on a steady stream of new loans.
The problem, as always, is that we have a monetary system that is either expanding or collapsing. It has no steady state.
Either money and credit are expanding and the banks are relatively happy or the banks are collapsing and demanding taxpayer bailouts. It's really that stark. We are being driven by our system of money, we serve it not the other way around, which is a tragedy of both epic and comic proportions.
I guess with the binary choices of growth or collapse before them it only makes sense for the current crop of central bankers to do whatever it takes to keep that system limping along, er growing, for as long as possible.
In 2008 and 2009, net credit creation was only slightly negative, but that was enough to very nearly cause the entire system of money and banking in the developed world to collapse.
Now after the most heroic period of interest rates forced to zero (ZIRP) and below (NIRP in Europe) and the grandest experiment with money printing in global history, credit growth is somewhat back on track but not enough to ease the banker worries or to justify their actions.
So the bankers continue to pump, jawbone, and panic at every slight downturn in financial market prices because that's all they have left in the world upon which they can hang their reputations.
The actual economy, the one that lives on Main Street, never really bounced back fully, at least not compared to past recoveries. Growth, jobs and incomes all were anemic compared to prior recoveries. Investment in new capital was and remains dead in the water.
Bad Ideas Repeated
Left unsaid by practically everyone, always, is that it was never a very good idea in the first place to weld our perceptions of adequate economic growth to a scheme that relied upon continuously compounding debt at a faster pace than economic growth.
We did this for so many decades in a row that everyone forgot to question whether it made sense to do this.
It did not, but too many decades had passed for anyone to remember another time.
So when the crisis came, which was rooted in too much debt, there were no sane voices in the central banks or halls of government power saying, hey you know what? That wasn't such a good idea. Perhaps we should pay off our past debts and then take on new credit at a pace no faster than our growth in income.
Instead, there was a blind adherence to the prior policy of fostering rapid credit creation, not because it made any particular sense at all, least of all math sense, but simply because that’s how things had always been done.
Well, not ‘always’ but at least during the past 4 decades when everybody in power was learning about how things are done.
Looking forward, not only does it not make sense to attempt to increase debt faster than income, it makes no sense to continuously compound debts and other claims on real wealth because resources are not infinite.
Whether it's now, or in ten years, or in a hundred, sooner or later the economy of 'stuff' cannot grow any more simply because there won't be enough land, ore bodies, or energy to do do so.
Just because a lot of powerful people are ignoring something does not make it go away. Bad ideas are still bad ideas whether they are being ignored by even the most important people, or not.
Central Follies
The world’s central banks have been given a lot of leeway as they’ve done what they can to stimulate more economic growth. Leaving aside the impossibility of sustainable exponential growth in a finite system, how have the central banks done?
How would we score their efforts so far?
Well, if you are in the Eurozone or Japan, the answer has to be ‘poorly.’ Trillions have been spent, government deficits, enabled by central bank printing, have exploded and yet growth of the sort that could justify these efforts has not returned.
Massive new debts and no improved means of paying them back. Why people will spurn a company that engages in such obviously poor financial and management practices but give a free pass to nations and central banks that do the same thing is a mystery to me.
If the past efforts have not yielded the expected results then what will even more of the same efforts brings us except a bit more time before an even larger financial accident?
Those in charge always arrive at the same conclusion, which is to even more of the very things that have already not worked.
Given the macroeconomic data as we have it, there's nothing that would rationally or logically support the prices we see for equities and bonds we currently see.
Both equities and bonds are priced to perfection, eagerly awaiting a world where high economic growth can justify their historically elevated prices.
Our view here at Peak Prosperity is that the days of rapid economic growth are behind us, and that if we do experience rapid growth again it is from much lower levels as we rebound from some major slump.
But to grow even more from here, even if that's just 4% annually across the globe implies that we'll find a way to fully double the entire world's consumption of resources in just the next 18 years.
That's the nature of compounding...even 4% growth means a 100% increase in just 18 years.
Because oil is the main engine of growth, and we know that even with 2.5 trillion dollars of additional spending over the past 9 years the world is producing roughly the same amount of oil as ever. Why? Because depletion of existing reserves is being matched by new production.
Unless investment in oil production really accelerates from here, new production will be swamped by existing declines.
In the US we know that even under the best of circumstances shale oil, the one and only engine of increased oil production growth, will peak in 2020.
But these are no longer the best of circumstances and oil is now priced well below the actual cost to get most of the shale oil out of the ground:

(Source)
As we can see in that chart, the only plays that are still viable at today's prices are the core areas of the Bakken and Eagleford plays, which should not surprise anybody. Those were the ones drilled first and hardest because they are the most economic.
Oil prices most recently peaked in the summer of 2014, and then began a slump that really picked up steam in October and now everybody is talking about it.
The fun thing about the shale companies is that they are incredibly nimble and very sensitive to prices. They can stop drilling at any time. As soon as they do, the peak of shale production will be measured within a month.
While they have not stopped drilling, the speed of the pullback is incredible and drilling permits dropped by a whopping 40% in November alone as compared to October:
New U.S. oil and gas well November permits tumble nearly 40 percent
(Reuters) - Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.
Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.
The pullback was a "very quick response" to U.S. crude prices, which settled on Tuesday at $66.88 CLc1, said Allen Gilmer, chief executive officer of Drilling Info.
New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota's Bakken shale.
The Permian Basin in West Texas and New Mexico showed a 38 percent decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28 percent and 29 percent, respectively, the data showed.
(Source)
I have to ask - 40% - is that a lot? Yes, it sure is. And in just one month.
Notice that the decline in permits was even quite pronounced in the core shale plays revealing that even within the Bakken and Eagleford there are operators who don't believe it makes economic sense to drill at these oil prices.
The shakeout that is coming to that industry is going to be quite pronounced and we're expecting some serious fireworks as investors wake up to the fact that sometimes defaults really do happen and losses are a part of this game....something the central bank liquidity injections have managed to mask and forestall for quite some time now.
The bottom line, though, is that without growth in oil economic growth is hard to achieve. I'll go further and say it's impossible to achieve, at least under the old paradigm of consumption based growth.
If oil prices do not recover and quickly, the US shale miracle will rapidly turn into a shale bust. The decline rates on these wells are ferocious. With that loss of production will go the entire narrative that says our energy predicament is safely off in the future and that we can safely ignore it for now.
And with the loss of that fantasy will go the sky-high valuations we currently see for stocks and bonds. After all, the operative question always should be what is the value of these stocks and bonds in a world without growth?
To me the answer is simple; a lot less.
Unfortunately nobody - and I mean nobody - in the any central bank is even remotely talking about or in any way displaying that they are even dimly aware of the role of energy in economic growth. To them it is all about the banks.
And the banks need growth like your body need oxygen. Sure, you can hold your breath for a minute or two, maybe longer with training, but after that things get dicey and quickly.
There are signs everywhere across the globe now that the central banks have failed to induce growth in the real economy, and have instead simply bought some time at the expense of pushing things even further into a zone of massive malinvestment, rank speculation, and badly inflated prices.
In short, we are now past the point where the next correction could be survived injury free. It's going to hurt.
In Part II: Central banks have lost, deflation is here, we look at the various global warning signs that slow growth has morphed into something more deadly to the banking system; deflation and recession. We'll discuss and review the basic commodities that are telling us far more than the distorted stock or bond prices ever could about the true state of global growth and future economic prospects.
Copper, oil, iron ore, coal, gold and silver are all telegraphing major economic weakness ahead. The next round of deflation will be absolutely punishing for financial markets and possibly even spark international conflicts given the raw state of diplomacy and east-west tensions.
Click here to access Part 2 of this report (free executive summary; enrollment required for full access)
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Failed? They're just getting started!
more to the point. I'd say that things have worked exceptionally well, for them.
Moar Woar!
A deflationary crash as predicted by John Exter of the Federal Reserve from excess money & debt creation:
Leads to bond then currency failure and soaring gold:
https://en.wikipedia.org/wiki/John_Exter
http://www.goldmoney.com/research/research-archive/a-banker-for-all-seasons-the-life-and-times-of-john-exter-champion-of-sound-money
http://www.goldmoney.com/research/research-archive/A-BANKER-FOR-ALL-SEASONS-PART-II
http://www.goldmoney.com/research/research-archive/a-banker-for-all-seasons-part-iii
Ka (deflation)
POOM (high inflation)
Theory
The theory that everything you need will increase in price, and everything you may have wanted at some point to buy with borrowed money will decrease in price (houses, cars, education, etc.)
The CBs know there is no way out. Since 2008 it's been all about grabbing as much as they can (cheap gold, for example) before it collapses. They've got their bunkers, hideaways, ranches, etc. all stocked up in remote parts of the world. When TSHFT they'll be on a private plane to Patagonia, while you'll be in the middle of an urban riot.
The good news?
You were right about the collapse!
Theft only improves the economic wellbeing of the thief.
And the police state. But I'm being redundant aren't I?
I agree, they prepared themselves ahead of the time that they are going to allow this thing to blow apart completely. TARP was merely a stop gap measure to bide time for the 1%er to ring fence all their bad investments and make a planned escape from the rigged markets. Weaponized Ebola is part of the facade of distraction they will utilize to escape detection when they finally bug out to Patagonia. By Q2 they will be boarding their respective planes and jetting off into 1%er paradise.
dup
Ask ten people at lunch the following three questions:
You will be lucky if you get one person in ten that can give a cogent answer on two of three questions, unless you are at Manny's Deli in Chicago, or Katz's on East Houston in NYC.
Yeah but, they could tell you who is fucking Kim Kardashian.
I thought Kim Kardashian was the Fed Head.
Nope. She's just famous for giving head.
I asked my coworker these three questions. The answers made no sense, so I paraphrased it for ya.
Who is the head of our Central Bank?
Ans: Biscuits
Excluding all other factors, what happens to the price of our lunch, or the value of the Dow Jones Industrial Average, if the value of the US Dollar goes down?
Ans: Ashton Kutcher (she likes Ashton Kutcher)
What is the current rate of inflation?
Ans: Candy Crush
Who says Americans are dumb?
I might reword question #3 to," What is the current rate of devaluation?"
For those of you that think the $usd is stong just look at the prices you pay for goods and services. (excluding the recent oil games)The $usd isn't strong every other currency is weakening.
You may get some correct answers from patrons at Canter's in LA.
Can you add cheese to my pastrami? Thanks.
< meh > that which cannot be sustained, won't be.
The real issue is the amount of consumable calories that are still required to simply maintain all the mouth-breathers on this rock...
hedge accordingly.
And become a goat bug? I dunno...
"....real issue is the amount of consumable calories......."
.
Like that's gonna happen.
Admitting failure, is that the same as sepukku?
yep, pretty much...
if the S&P is your most important measure of success...it's mission accomplished
If Industry Consolidation (hostile takeover by Strong Hands) is your most important measure of success... it's Mission Accomplished. Fixed it for you.
Looks to me that most Frackers (not in The Club) are being told... "You shall not pass!" the Liquidity and Solvency test that bridges Disaster and Safety in the caves of Moar-ea under Goldman Mountain.
Slight correction: The Greek economy grew in the third quarter. Probably a rigged result but I have a friend that keeps telling me that Greece is turning the corner.
In my view it's going to be a big f....ing corner.
"West behind falling ruble, oil prices - Russian spy chief"
per http://rt.com/news/211599-ruble-oil-sanctions-russia/
... Moscow is aware of US moves to oust Putin from power.
... Foreign investment funds are “taking part” in ruble speculation via intermediaries, Fradkov said. “Any speculation has specific schemes and the schemes have a number of participants.”
IOW: JPM, GS, Soros, etc are piling on.
p.s. Note to Beijing: If you think that yo're exempt from being attacked, because they Promised and Assured you, and told you that you'd have a seat at the Table, think again. Sauron does not share power, and your 'ancient wisdom' would be the "wisdom of Saruman". To use an analogy. If Russia falls, you're next and you're toast... You'll be using those USDs for kindling, when you're cut off from Russian oil and gas, and other resources.
Did the Russians screw up allowing the Ruble to float which would allow the westen banksters attack it... Sometimes I think Russia has a death wish..
CB's have built up a massive tax revenue stream to cover for lack of employment taxes.
sorry, any central bank "fretter" will be introduced to a tall building ... with open windows
Moar Nail Guns!
Sorry can't finish the article I've got to run...to serve my billionaire master
CBs will never admit it. They'll just print with greater amounts of fiat.
Instead of $85 billion/month, $125 billion/month or more.
Fixing a computer with a hammer. If that doesn't work just get a bigger hammer.
Puh-leaz! What is this? Sunday School for investors?
"Truth" is just another Commodity. To be used, longed, shorted, bought, sold, bartered, traded...
Time to grow the fuck up, goys, boys and girls.
p.s. I'm not suggesting that this is how the world 'ought' to be, but that this is how it IS. Red pill or Blue pill?
Gold set to end its 4th year down. #winning
hahahaha friday humor on zh!!!! does martenson believe his own bullshit anymore? this shmo has been preaching oil prices to the moon, oil shortages, gold and silver to the moon....he has been getting his ASS KICKED....he shouldve cashed in on his PM gains 6 six years ago. give me a break man. central banks failed? where?? how??? WHAT IS THE DOW AT TODAY?????? AND GOLD AND SILVER????
of course permits drop!!! DUH!! what should a company do when oil prices drop? its called LOGIC. they cut back!!! poor martenson doesnt get that shale can get by at $30 bbl after they have written off their initial field investments.
http://www.telegraph.co.uk/finance/oilprices/11263851/Saudis-risk-playin...
martenson get back into your pharma laboratory from whence you came. perhaps you can help fight ebola.
+1
Your comment was so spot on, that I had to repost it.
Oh, so you mean he has no experience in economics, law, politics, just the stuff on which he seems to be an expert.
I looked around for a moment today and everything looked...well...shitty. Not what I had grown accustomed to. Up too late.
his outlook has been so badly beaten to a pulp, he doesnt even "seem" to be an expert.
but do not fret, he will be right one day...in the future...some time soon.....any day now.....any day....hahahahaha
Sure fucks up "Peak Oil " fear thieroy ..
Ah, NO.
Peak Oil (production per day) has nothing to do with price.
(not a THEORY, an observed fact of single well production, whole field production, region production and world production)
Look at the graphs of oil discoveries, vs production
"........production per day has nothing to do with price......."
Discoveries by Volume PEAKED some 50 years ago......
Correct indeed........FACT, not Theory or Opinion......
"The problem, as always, is that we have a monetary system that is either expanding or collapsing. It has no steady state."
So true!! And so few comprehend this.
Sooo, in the last three - four months, all of a sudden, the oil prices go down by 40%. This in a time of a major boom according to the war monger fascists in DC.
Of course it has nothing to do with the battle between the western oligarchs and the eastern oligarchs. Or a nice low price of gas for our new nazi buddies in Ukraine or for that matter Europe itself.
Most everyone on this site agrees every market is rigged,,, but when it comes to oil. It's the bad/good economy. I am missing the logic...
I think its simple.
TPTB arent stupid. They know the economy sucks, worldwide, and one way to save it is to cut the oil price. Which they did. The Saudis dont care because the dollar has risen as the oil price has fallen, so net/net breakeven.
Coincidentally, the Rockefeller Fund sold ALL of their oil stocks about 6 months ago. You can find the Press Release on their website.
That a lower oil price also hurts Russia is just an added bonus.
+1 Loucleve
You pretty much summed it up.
How about we think of oil as food, just for the moment. Because fertilizer is made from it, farm machinery runs on it, food is transported with it,and pepole drive to the store to get it. So this low oil price is hurting Russia, how? only in the imediate time frame. What if russia shut off the oil supply to europe and the west? the price of oil will increase and they will hold onto their reserves ie... food. for a later date when the price is better. This increased price will again cause the price of oil to increase higher than the US will want to pay for it, and so food costs in the us will climb even more, and may cause another crash of the western worlds markets and riots in the US. Remember Russia has very little debt (# 2 for debt behind Suadi in the g20)
I think that no matter what, the US is going to become a third world country, They don't produce anything but war machines, they just consume, with ass wipe paper, that soon the world will no longer want, it is inevitable. then what. WWIII. That is probably what the US Gov will do because that is the only thing they know, WAR. Russia is not a little country that is eaily taken over.
Time will tell, but he who has the natural resources will prosper, and he he tries to purchase these resources with Sh*t paper loses.
"What if russia shut off the oil supply to europe and the west?"
Sounds OK and it would certainly have some of the consequences for the West that you describe. Until one realises that oil exports are a major revenue stream for the Russian treasury and without those revenues, Russia's budget goes to pieces.
"...he who has the natural resources will prosper"
Exactly. That explains why the West is doing its darndest to overthrow Putin and ultimately to parachute in a Western puppet, a-la Ukraine, who would sell out Russia to Western bankster interests. The West's modus operandi is well known and been used many times in the past. Its problem is that Russia is different and it won't work, hence the West's march to WWIII.
People in the West need to wake up and stop their criminal governments' madness.
Where has the dollar risen? It is more like the dollar is slipping slower than all the other fiats is all.
Oil is Rigged too. Remember the Reagan Miracle when he brought the price of gasoline down swiftly.
Plus I was following Oil & Gas Super Tankers 2008-2010... there were lots of purchases of Panamax or Supertankers or LNG Tankers... they sat full in port due to low demand in the Great Recession, Production was up, Supply was up, Demand was down... but the price stayed high from near $4 gal from Oct 2005 till just this year.
We'll all have been piles of dust long before any elite central bankster admits they did anything wrong.
"Given the macroeconomic data as we have it, there's nothing that would rationally or logically support the prices we see for equities and bonds we currently see"
Exactly. The central banks did not fail, the goal is just not what the author thinks it is.
" Left unsaid by practically everyone, always, is that it was never a very good idea in the first place to weld our perceptions of adequate economic growth to a scheme that relied upon continuously compounding debt at a faster pace than economic growth."
That about sums it up. Nowhere in our present model is there room for expanding job and wage growth, compounded with rising savings by workers to capitalise the entire system from a wealth creation base. This is old fashioned capitalism. A fundamentalist approach. Where capital comes from saving by a population spending a bit less then they earn, this capital feeds the growth engine through bank deposits. The real beauty of this earnings based capitalization is that a wealth creation base unlied the capital being loaned out for expansion. Workers with a good wage can both capitalise the system and also consume at a reasonable level. Todays race to the bottom job outlook leaves workers with no savings and little consuming power. I never believed the idea that driving wages down and down was economically viable, IF, we sought a broad based recovery. Of course todays system is a great recovery for the 1%. If that satisfies you, then todays model is a perfect world.
"Oops! We failed some folks." --The Fed.
Central banks NEVER fail as they don't work for YOU
http://newworldorderg20.wordpress.com/2014/11/04/western-sanctions-no-affect-on-russian-banking-international-business-revenues-still-going-up/
IMF HQ to be in Beijing
All roads lead to the SDR
http://newworldorderg20.wordpress.com/2014/11/02/australia-offered-top-role-in-chinas-infrastructure-bank/
Russian Bank Hires Two Former U.S. Senators
The 2008 CRASH has happened again, it's just not evident in the Stock Market indicies. Because the FED and Center Banks are propping it up with Futures pit buying. Just look at the BDI. http://investmenttools.com/futures/bdi_baltic_dry_index.htm
Dr. Albert Bartlett| Exponential Function
7% doubling faction.
One of my Wisest Professors.....RIP....
And a Man Well Worth listening to....
What happens when peak oil meets Schrodinger's cat? I'm starting to think that all the recent zombie memes are a metaphor for the global economy. A perpetual state of both dead and undead.
We've reached peak volatility on no volume. A true indicator of manipulation by a very few with lots of sway.
Let's not forget that everything is made of (or with) oil!
Forget gold; I'm buying cases of whiskey... and a horse.
I see a pattern. Those controlling the economy and the commentary on the economy are politicians. They lie and then they lie some more. There is no failure. There is only Zuul.