Wednesday, December 17, 2014

The receding tide of oil price foreshadows the incoming DEFLATION TSUNAMI.

Contrary to the main stream message that all is well with our new oil supply glut, the falling price of oil exposes the current fragility of the global economy.

Nothing grows indefinitely in a finite system, not even debt!

Almost all (90%) of ‘money’ in existence today is debt (credit)[i]. This debt is created from thin air with every form of loan, from credit cards, through corporate debt to Treasury Notes. All this debt comes with an interest component that demands never ending growth in order to repay it. Again, the current monetary system REQUIRES that we have never ending economic growth.

It is one massive pyramid scheme because, if we ever stop growing, who is paying the interest?

Total U.S. debt has soared over the last 35 years:

Debts are claims on future goods and services with interest and are essentially a bet that the future economy will be bigger than the present.

However:

The economy is the summation of all goods and services and these are produced from work.

High order energy is required for work.[ii]

Oil is the master high order energy resource powering 95% of transport in our trade based economic paradigm.[iii]

Therefore increasing debts are, in part, a bet that oil production will increase indefinitely.

But NOTHING grows indefinitely in a finite system!

World conventional oil production (blue) has been on a bumpy plateau since 2005.[iv]

And the economy, which is derived from work, from high order energy, to service that exponential debt, has been constrained by the bumpy plateau of conventional oil since 2005.

What happens when we can no longer service the growing debt with real economic growth?

The great recession happens. Without real growth, central banks desperately print money (more debt) by the trillions and hold interest rates close to zero (Q.E.), in an attempt to heist future growth and to ease the pain of the existing debt. But prescribing more debt to cure debt only digs the hole deeper and means that even more real growth is required (read: more work, more energy).

The world is now absolutely loaded up to the eyeballs with debt, after every sector and every asset class of the economy has been force fed to the point of glutinous bursting[v]. Newly printed debt produces less and less growth as credit intensity increases.[vi]

And what happens when the central banks policies cannot reduce interest rate further and the newly created debt does not increase real goods and services?

This is when deflation wins and this is where we are.[vii]

Without ongoing real growth, the exponential power of existing debt erodes the purchasing power of participants in the global economy. With fewer discretionary dollars to spend into the economy, a self-feeding loop of demand destruction ensues. Demand for real goods and services falls.

Demand for commodities, the primary resources that produce the real goods and services of the economy, is now falling:

A recent zero-hedge article notes that commodities are now experiencing a “Depression-Level Collapse in Demand”[viii]

Bloomberg: “Iron Ore Slumps to Five-Year Low as China Slowdown Curbs Demand”[ix]

Sydney Morning Herald “Glencore, the world's fourth largest mining company and world's biggest commodity trader, will suspend its Australian coal business for three weeks "in a move never before seen in the Australian market, to avoid pumping tons into a heavily oversupplied market at depressed prices." [x]

Bloomberg: “Jiangxi Copper Profit Falls as Slowing China Growth Curbs Demand”[xi]

Fox: “IEA Cuts Demand Outlook, Oil Continues Drop”[xii]

Now back to the master commodity, oil.

Demand for oil, the primary energy component of the global economy, has always been highly correlated to GDP[xiii]:

In our economy of false signals, (Central Bank inflated stocks, a Quantitative Eased Bond Market, mind-numbingly exotic derivatives, quirky University of Michigan numbers, manipulated CPIs, arbitrary debt ceilings, smashed VIXs , etc. etc.) OIL is screaming the truth.

Price is falling because demand is falling because the real economy is contracting.

Deflation is coming and The Pyramid Scheme of Our Age is about to unravel.

When the oil tide recedes, prepare for the crash of the GREAT DEFLATION TSUMANI.