by Jerome a Paris
Sat Dec 29th, 2007 at 09:57:58 AM EST
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 today - those from early 2005 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), the coming housing bubble crash, 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:
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.
A year and a half ago, 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 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.
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 bas sign) show record declines.
It was all on the blogs 3 years ago.
After all that crowing, let's end with something somewhat anti-climatic: the dollar continued to weaken, but not, in fact, that much.
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 dvaluation 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
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 was posted earlier this month by a kossack, but I have lost the link - if anyone can point me to it, I'll give proper credit. Update: this came from Afferent Input and was flagged by kossack militant progressive. With thanks to Halcyon in the dKos comments.
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?
And now, some links:
Bubbles Greenspan (and debt) diaries
Alan Greenspan - zombie by rdf
Bubbles Greenspan: Mission Accomplished
Stiglitz: the 'mess' left by Greenspan
Credit Crunch - Act II
The M3 money supply: much ado about nothing? by Migeru
Bubbles Greenspan: Oops
The Chinese can weather an American recession. by BruceMcF
Bubbles and Balance by ChrisCook
Financial crash: blaming the victims
The Pyramid Scheme of CDOs by das monde
So they all knew it was a bubble, now?
Market meltdown caused by (who else) liberal media
Credit markets: "Don't panic", they beg
'Bubbles' Greenspan to blame for current market woes
Constant Fretting Doesn't Pay Off by wchurchill
Breaking: housing prices collapse
Dow hits new record of 13000, as US & world economies continue to grow by wchurchill
Housing bubble - 'reform' needed.
Good bankers need not care about systemic risk
Housing affordability by wchurchill
Stunning indictment of 'Bubbles' Greenspan in WSJ Op-Ed
Hyman Minsky on financial crises by das monde
Is Civilisation A Pyramid Scheme? by das monde
The Big Meltdown, Paul Krugman by wchurchill
Numbers and USA Mortgages by Laurent GUERBY
NOW the Fed worries about deficits
Runaway globalisation and the dollar
Bubble, bubble, when will you burst?
Dow Jones sets new all time high last week by wchurchill
Outbondadding bonddad : house market crash palooza
US housing to crash? by Colman
WSJ on Bush economy: when in hole, stop digging
US Housing Market Crash? Not yet, anyway by wchurchill
World economy: major bear suddenly turning optimistic
Not an energy diary - a debt diary
Dollar Dump: Central Banks reduce dollar reserves by LondonYank
Kaboom: Peak copper, superspike prices, oil and US debt
The Fed is eliminating the canary in the mine
That, which cannot go on forever, won't
UK conservative says it: financial capitalism is out of control
The Carry Trade: Borrowing from Yoshi to Pay Ahmad and Ping by LondonYank
The Profligate American Baby Boomers. by wchurchill
What Does the Trade Deficit Mean, and How Does it Affect Us? by Drew J Jones
Do Deficits Matter? Do the Deficit Disco! by Alexander G Rubio
The Economy's Not Looking Well by Drew J Jones
The Economist: anti Greenspan, but pro-Bush
Playing the economist - explaining why I was wrong last year
Bernanke faces tough year as he replaces 'Bubbles' Greenspan
If Greenspan Was The Maestro, We're All Doomed by Drew J Jones
Where is US growth coming from - and where is it going?
Eurozone interest rates thread
Enough With The Goldbug Preaching by Drew J Jones
Global Economy & Imbalances by wchurchill
Bernanke, inflation, China and the housing bubble
Why is the dollar so important, and what happens when it tanks? by Lud
Did Gordon Brown & the BoE Bitchslap Greenspan? by Drew J Jones
Greeting Greenspan Recession by das monde
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
You thought I was a pessimist? Not until you read this!
Greenspan 'it's a bubble' -- Krugman "he's a hack"
Countdown to 100$ oil (11) - it's Greenspan's fault!
Bubbles Greenspan gets TWO blowjobs in the FT
Is the US Housing Boom running out of Steam? by Alexander G Rubio
Europe also faces a financial bubble
Running out of options
US June Trade Deficit hits new High on surging Oil prices by Alexander G Rubio
America still "splurging on the credit card"
Housing bubble - Krugman and the Financial Times lay the case
'Bubbles' Greenspan gets more fan mail
'Bubbles' Greenspan RIP: US savings down to ... ZERO
UK bad debts rising
Dr Copper and Currency signals Conflict by Alexander G Rubio
Bubble bursts for UK
Chinese Currency move might be a long way off by Alexander G Rubio
Stephen Roach: Good Growth, Bad Growth by Alexander G Rubio
'Bubbles' Greenspan vs 'Conundrum' Greenspan
Housing (worldwide): the biggest bubble ever
A tale of two continents. Is 'Bubbles' Greenspan worth it?
Bubbles Greenspan - The hedge funds time bomb
Markets have already priced in a recession
Bubbles Greenspan - good news on the housing front
Bubbles Greenspan - so sez the Wall Street Journal
Greenspan's Bubbles: 'Too late to escape the consequences'
Scary financial story on CDOs - 'no one knows if they work'
Bull and Bears further apart than ever (w/ trade deficit)
Greenspan's bubbles. No - his 'monster' (says Morgan Stanley)
Greenspan's bubbles - more graphs
Greenspan's bubbles - a graph
The US - a finance-based economy on crack
Countdown Diaries (not including other energy-related diaries
Countdown to ?100 oil (54): OPEC ready to dump dollar?
Countdown to $100 oil (53) - Saudis happy with $100 oil
Countdown to $100 oil (52) - buying protection
Countdown to $100 oil (51) - we'll never see 100mbd
Countdown to $100 oil (50) - it's no longer 'oil', it's 'liquids'
Countdown to $100 oil (49) - peak oil and libertarians
Countdown to $100 oil (48) - 85, 86, 87, 88, ...
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact
Anglo Disease diaries
- The FT worries about the Anglo Disease by Jerome a Paris on December 10th, 2007
- Anglo Disease: Optimism and Dismay in the Narrative by Jerome a Paris on December 8th, 2007
- Anglo Disease: LQD - the Economist is worried by Jerome a Paris on December 1st, 2007
- Anglo Disease - early signs of hangover generate denial by Jerome a Paris on November 22nd, 2007
- Anglo Disease: Dollar Dump & Boom-n-Bust by Jerome a Paris on October 30th, 2007
- Anglo Disease: hangover in Manhattan by Migeru on October 15th, 2007
- Anglo Disease fever by Jerome a Paris on August 28th, 2007
- Anglo Disease - Fools and Bourses by ChrisCook on July 9th, 2007
- Anglo Disease watch (5) - just break the thermometer and all is well by Jerome a Paris on July 5th, 2007
- Anglo Disease watch (4) - No industry is vital - except finance by Jerome a Paris on July 4th, 2007
- The Anglo Disease (3) - an introduction for non-economists by Jerome a Paris on June 24th, 2007
- Anglo-Disease Sidelights (1): UK = Tax Haven by afew on June 22nd, 2007
- Anglo Disease (2) - Martin Wolf's take by Jerome a Paris on June 19th, 2007
- The Anglo Disease - Financiers worried about end of great bull run by Jerome a Paris on June 18th, 2007
- UK conservative says it: financial capitalism is out of control by Jerome a Paris on March 21st, 2006
- The Anglican Model, "Laissez-Faire" Capitalism & J.K. Galbraith by Drew J Jones on Dec 30th, 2005