From James Howard Kunstler
Thanks to Meca
The total tonnage of economic malarkey being shoveled over the American public these days would make the late Dr. Joseph Goebbels (Nazi Minister of “Public Enlightenment and Propaganda”) turn green in his grave with envy. It’s a staggering phenomenon because little about it is conspiratorial; rather, it’s the consensual expression of a public that wants desperately to believe things that are untrue, and an economic leadership equally credulous, unmanned, and avid to furnish the necessary narratives that might preserve their jobs and perqs.
By “economic leadership” I mean the consortium of business executives, government officials, academic economists, and media disseminators — and even some bloggers and financial advisers. Some of the latter may be “talking their book,” since they may manage other people’s money and need those other people to believe in the soundness of markets, true or not. And some of the former may be motivated by the fear that even a little erosion of trust in the system could lead to a collapse of the system basted together by little more than blind faith in currencies and dubious “innovative” instruments. But most of these characters are mainly just flat-out delusional.
Recently, John Mauldin predicted (on a recent Financial Sense podcast) that “…pretty soon we’re gonna be energy independent… a net energy exporter in the next three, four years.” This meme has been all over the web and the mainstream media since about 2011, emitted by commentators who haven’t noticed either the steep production declines in shale oil and gas wells or the supernatural flows of junk-derived capital for a drilling frenzy that distracts observers from the financial incongruities of the entire shale energy model (in which the word “profit” is absent).
Anyway, a week after Mauldin’s prediction, the US Energy Information Agency (EIA) published a 96% knocked-down revised estimate of recoverable oil from the Monterey/Santos shale formation, going from about 15.4 billion barrels to about 600 million (or about 30 days of US supply). That 15.4 billion represented about 64% of the EIA’s total for all the nation’s shale oil reserves, so one might expect at least a shock to the system of junk financing.
On the gas side, you have the stark fact that the first three big shale gas “plays” of the shale era (the Barnett, the Haynesville, and the Fayetteville) are now in decline or flat, leaving the Marcellus and Eagle Ford. What makes anyone think that the steep decline rates in the early plays won’t lead to the same fate for these two plays? (Answer: wishful thinking.) The Monterey shale play was going to gin up 2.8 million new jobs and boost California’s tax haul by about $25 billion. As Jim Hansen, publisher of The Master Resource Report pointed out:
Probably the most important lesson from this is that many of the distinctions between resources, reserves, technically recoverable reserves and so on are lost on the mass media, the public and most importantly government leadership. Headline numbers like 15.4 billion barrels and 2.8 million jobs are what set the agenda. Reality is much more nuanced, complicated and sometimes grossly different.
Yet there remains a number of other prominent cheerleaders of the “shale miracle.” The magisterial George Friedman of the geopolitical website Stratfors.com, came on David McAlvaney’s weekly podcast touting the prospects of massive gas exports to Europe and Asia. Friedman characterized it as:
“…a technological revolution as dramatic as Silicon Valley was in introducing the microchip. All the assumptions about energy in the world have been turned on their heads. The United States is now a major producer. The problem is logistic. How do you get it from here to there.”
This is worse than a simplistic view of the situation. The shale gas industry has never been profitable at US prices seen since production ramped up bigtime around 2007. Currently it’s at $4.60/mmbtu, still well under an economically rational level, though it swooned near a miserable $2 just two years ago. So the export idea is that US can build out a massive new infrastructure of gas pipeline terminals to liquefy the gas and a fleet of expensive liquid gas tankers in order to ship gas to Europe and Asia, where demand has exploded, and the price is as high as $15/mmbtu. Okay, when and if the US has the ability to export all this gas (big if, considering the needed cap-ex), what happens to American customers who find themselves competing for this commodity with five billion Asians and Europeans? Do they just freeze in the dark? Mr. Friedman apparently failed to notice the hemorrhaging of jobs and incomes among the disintegrating American middle class. I wonder if he thinks they can afford to run their furnaces at $15/mmbtu.
Willful misunderstanding of the shale gas situation is just one of many examples of thought failure among the class of Americans who even pretend to think for a living. It cannot be due to a sheer lack of brain power (though who can say what the aggregate effect of food additives, off-gassing carpets, and other chemical insults might have had on recent American generations). We apparently just don’t like reality and seem to think we can turn it off, or switch to another channel or web address for a better buzz. This is surely true of the investing sector of the public, some of whom still read and occasionally experience activity that resembles thinking. But they switch the channel away from reality to Fox, Bloomberg, and CNBC for the excellent reason that their good fortune in rising rigged markets makes them feel immune from danger. The state and the central bank have declared unconditional ZIRP and QE, and the portfolios resound with the ka-ching of dividends and capital gains, so why worry… be happy!
It’s a tragic fact of history that sometimes societies lose their bearings. They make terrible choices and bad things happen. It doesn’t have to take the form of a conspiracy, but rather a consensus — that is, a simple agreement between people in charge (and the public subject to their rule) about where that society will direct its priorities and make its investments. Proof of this was the behavior of national leaders and the public in the aftermath of the 2008 financial crash. The system was hugely burdened by the debris of loans gone bad, a lot of it packaged into fraudulent bonds. The biggest banks in the nation were implicated in the creation of these frauds and left holding a lot of their own bad paper when the music stopped. Clearing the debris would have restored structural integrity to the banking system. Prosecuting financial criminals in the executive suites of the banks would have disincentivized racketeering and control fraud.
American leadership allowed neither restructuring or prosecution. Banks (except for Lehman Brothers, the unloved “fall guy”) were not only prevented from failing, they were stuffed with taxpayer bailout money, plugged into a new Federal Reserve carry-trade racket (ZIRP), given a green light on unlimited accounting fraud (FASB 157), and allowed to continue their old rackets in new ways, e.g. the new bundled rental payment bonds, “covenant-lite” junk bonds, and new iterations of shady collateralized loan obligations. And, of course, not one bank executive was prosecuted (not to say jailed) for criminal shenanigans that cost the US economy $22 trillion according to the US General Accounting Office.
The public went along with all this to the degree that few of their political representatives were turned out of office, nor was any effective political resistance mounted besides two movements that proved to be weak and ineffectual: Occupy Wall Street and the Tea Party. (David Brat, who unseated House Majority Leader Eric Cantor in the recent Virginia primary, tried and failed to get backing from the Tea Party.) President Obama, who first campaigned on “hope and change” in the very moment when Wall Street blew itself up, and did absolutely nothing to change the racket-riddled banking system afterward, was rewarded with re-election in 2012. The obvious conclusion is that America, from top to bottom, didn’t want to restructure anything about our national life — and still doesn’t. It wants to stay stuck where it is in a very perilous moment of history, and it has enlisted a laundry list of fallacious beliefs to support its “do nothing” spirit.
Here’s a roundup of the other items from the roster of delusions currently making the rounds.
- We’ve entered a “manufacturing renaissance.”
- The “Central Corridor” of the USA, running from Texas to Minnesota, will soon turn into a dynamic industrial powerhouse.
- A revolution in higher education is underway that will produce a generation of super geniuses.
- The US financial markets will dominate the world indefinitely.
- Accelerating advancements in technology will ring in a new golden age of comfort, leisure, and security.
- The USA has unmatched exceptional entrepreneurial spirit.
On The Fast Track to Crisis
Until we prioritize truth over comfort
It is in the interest of healthy adults to remain sane, even when the powerful matrix of society is going crazy around them. I don’t think you can overstate the capacity of societies to go crazy.We still marvel at the murderous cruelty of Germany and Russia in the mid-20th century, the sickening slide into industrial barbarism, and the technical proficiency they achieved in pursuit of their lunatic ends. And what provoked those terrible journeys into collective madness? Isn’t it part of the horror that no explanation seems to suffice. They were both losers in the First World War. Boo hoo. Many societies sober up when they lose a war. Both opted for organized mass murder instead. Joseph Stalin summed up Russia’s collective psyche in that period when he said, “One death is a tragedy; a million deaths is a statistic.” The regime that promoted that particular view of the human condition lasted seventy years and then dissipated like a mere bad dream, an extremely fortunate outcome for Russia, and not so easy to account for, either.
And so what of us in this new century, faced with the gravely serious problems of resource scarcity, ecocide, climate uncertainty, demographic stress, cultural breakdown, and financial bedlam? How do we process the distractions, false narratives, delusions, and deliberate lies that infect every endeavor in American society, and overcome them personally and in our communities?
First recognize that we have, alas, become a culture of rackets, both literally in the sense of dishonest schemes for obtaining money and in the broader psychological sense of people mindlessly following programmed behavior because its easier than being uncomfortably present with what’s really happening. All rackets, both economic and psychological have one thing in common: the wish to get something for nothing (wealth, peace of mind). This tends to translate into a general failure to recognize consequences — and, voila, you are in a society where anything goes and nothing matters. Being sane allows human beings to know the real price of what they seek and what they do, and then determine what matters.
I began this discussion with the shale hoodwink. Obviously, America wants to believe that shale oil will allow the permanent continuation of two related rackets: car dependency and consumerism — i.e. driving to WalMart forever. A week after the US EIA chopped down the technically recoverable shale oil reserve estimates by 64 percent, the International Energy Agency (IEA) chimed in with a report stating that the world would need $48 trillion in new investment over the next two decades to keep up world energy supplies. That’s capital above and beyond what is needed for all the other activities of the human race. What the report fails to connect is the reliance of capital formation on cheap energy (a thing of the past), and so it fails to arrive at the reality-based conclusion that the capital will not be there for us, and furthermore that the both available energy and capital will spiral downward, forcing extraordinary change and adjustment in human activities. The implications are profound, ranging from a much smaller global human population to lower standards of living and modes of economy that might seem medieval compared to life today. The upshot is whether we can remain civilized in that transition. Are you sane enough to make that journey successfully?
After the shale oil revolution (“energy independence!”), the next erroneous meme making the rounds is the nostalgic idea that America is rapidly re-industrializing: the touted “industrial renaissance” The fallacy at the center of this notion is that all the work will be done by robots. By the way, you can be sure that if America can roboticize its industrial output then so can China, or Germany, or Korea, or Brazil, or any other nation that makes things. In which case, who in the world would have the money to buy anything the robots make? In theory, most of the 7-plus billion people riding the planet now would be doing something other than producing goods. What might that be? Subsistence farming? By definition that leaves no surplus income for buying stuff. Or perhaps working as servants for the small minority of humans who are rich shareholders of the robot manufacturing companies? Wait, how will the shareholders get rich if nobody can buy what their companies make?
Might the non-farmers and non-servants become pornographers who swap their recorded fantasies with other people who have nothing better to do than create pornography? —that’s a bit like the old tale of the village economy based on each household taking in its neighbor’s laundry. I really don’t see how this works realistically. Then, of course, factor in the breakdown of supply chains for everything needed to run robotic factories — the coal or natural gas or diesel fuel, the metals (some rare), the plastics, the replacement parts for the robots, and the supply of borrowed money to continue operations. In short, the story is preposterous. If anything, we’re heading into an artisan craft economy of things made by hand, mostly of materials found and fabricated locally. Don’t even be too sure that the Internet will be there for you. It depends on absolutely reliable electric service.
The “Central Corridor” thesis is another biggie these days. It was propagated by financial celebrity Meredith Whitney in her recent book, TheFate of the States. The idea is that the territory from Texas to Minnesota (formerly “the flyovers”) will become a new nirvana of corporate activity, mostly because they are removing tax burdens. She views this as a continuation of the current globalist economic regime, with all the global supply chains and markets intact. This is a misreading of the trend line. In reality, the global economy is degenerating into trade, currency, and resource wars. That will break supply and manufacturing chains, indeed, and turn the focus of the North American economy inward. But the action will not be a corporate fiesta in the central corridor and certainly not for tax incentive reasons. The action will be on the inland waterway system including the Hudson, St. Lawrence, Ohio, Mississippi/Missouri rivers and the Great Lakes. The substance of it will be trade in agricultural commodities, not E-cars or Play Stations. There is plenty of opportunity in this scenario, but not necessarily high tech or corporatist. It is building a truly post-industrial, re-localized, self-reliant, downscaled, artisan and agricultural economy. For many, this outcome must seem unthinkable. That’s why the wishfulness is so extreme.
The next delusion is the so-called revolution in (higher) education. Well, for any such revolution to commence, it will require the collapse of the current college racket, the collusion of government and corporate education to drive up costs and profits, and to burden every young adult in this society with unpayable debt. Everyone does not need a college education. In fact, many of the young people getting bachelors degrees today are not as intellectually equipped as an American who got an eighth-grade education in 1914. Go a little further back and peruse the letters of common soldiers in the Civil War and you will find greater literary skill than among MA candidates in the celebrated “creative writing” grad schools. The literacy of those long-ago generations derived not so much from formal education as from cultural tradition.
The overbuilt universities will surely choke and implode on their current financial model, but the bigger idea being touted is that “distance learning” on the Internet will replace the residential college model. That’s not a whole lot different from saying that any resourceful person could educate him/herself by going to the library and reading books. Now you can attend lectures on the Internet, engage in “mentoring,” and participate in a structured accreditation program from home. Sounds great, but the story leaves out a few things. What if the decrepit electric grid and the expensive energy problem get in the way of this scheme? What if there are not enough jobs in a contracting and radically changing economy to justify the churning out of “knowledge” workers? What if it turns out we need more small farmers and hired hands because the fragile, oil-and-gas dependent agri-biz model can no longer carry on? How will higher ed further their occupational opportunities (assuming they can read and write and do basic math in the first place)?
So, US financial markets will continue to dominate the world? “The best house in a bad neighborhood,” “cleanest shirt in the laundry bag,” and all that. For the moment a lot of loose “liquidity” is flowing into the US, but as this occurs something else interesting is going on: the automatic assumption that liquidity equals real wealth is withering. All paper financial instruments are becoming suspect as not representing what they purport to — currencies, equities, bonds, and especially “innovative” derivatives. It all boils down to notional wealth that could go up in a vapor the moment faith and trust evaporate. That could translate into accelerated inflation, a broad renunciation of debt, currency controls, bail-ins, confiscatory taxes, and a “magic moment” when the holders of all this paper discover that it’s not worth what it pretends to mean. In other words, that a lot of individuals, institutions, and sovereign nations are broke. At some point, the price discovery mechanism will resume functioning, and the discovery may be very sobering.
We’ll conclude with the nostrum that the exceptional entrepreneurial spirit of America will overcome all the obstacles of our present circumstances. Yes, the American experience had some very special elements in it. The vast resources of the continent were barely explored when the industrial era kicked off, and they proved to be a miraculous bonanza for the relatively small population here in the early days. Since 1800, we managed to use up enough oil, gas, anthracite, metal ores, topsoil, timber, and fossil fresh water to leave us in a pretty tight spot. People who came to this country in the 19th century enjoyed a banquet of possibilities, it is true, but now the population is much larger and the resources much sparser. Another thing we enjoyed above other nations was a firm sense of the rule of law, especially its basis in property and contract law, which meant that legal agreements were likely to be enforced. This was so much not the case elsewhere in the world that it made the USA seem a heaven-on-earth for doing business.
Somehow, in the past decade, we blew that, especially in the heart of the economy, banking and finance. In fact, it is rather disgraceful that the spokespeople of our culture gloat and yammer about the very thing that we have actually done the most damage to: trust in the good faith of the most fundamental American tradition — the idea that we really mean what we say and stand by it and have institutions that will enforce it.