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The Economic Dreamtime Comes Of Age

Politics / US Economy Sep 17, 2012 - 03:42 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleFor at least 4 years, hundreds of commentators have analyzed and predicted "the slow train wreck" of the global economy. Advice they give ranges from buying gold to not spending extravagantly, avoiding the "home equity trap" of buying apartments or houses, avoiding the stock market and staying mobile. What we have instead of the train wreck is “anticipation management” by the markets and a predictable and constant, "reassuring" talk up of the general economy and its so-called resilience by mainstream financial media, from Bloomberg and the Economist, to the WSJ and FT. Their game is to tell us there is no end in sight for spinning out the party.

Train wreck spotters are forced to wait for the wheels to fall off the economy, for a black swan event, or to sit back and watch existing markets trending towards dysfunctional inability to either create or manage wealth and assets, and destroy themselves. Some of the train spotters are even forced to abandon their analysis and salute Helicopter Ben Bernanke and his European lookalikes, and admit that the great correction isn’t coming.

Belief in the staus quo, however mutated it has become since about 2008, is above all logic free and has no need of any kind of rational analysis. Soldiering along, talking up and talking down asset values is in any case the real game of "market participants" since modern paper-and-confidence asset trading started, with its first ever modern market collapse in the early 1720s. Conviction that we are moving to a worst-case predicament is only downsider speculation, isn't that so?

If we dip into WSJ, FT or Economist editorials their ability to present today's financial and economic rout as New Normal is breathtaking: starting with interest rates, which are now rigorously set at nearly zero, this can be compared with a previous "life crisis of capitalism" in the early 1980s. At the time, in January 1980, US Fed funds were at around 17.2% per year; by January 2011 they were at 0.2% per year, but that is (new) normal.

Called Hyper Keynesian economic "management" by some, papering over the cracks with trillions of dollars and euros of "free money" has become so predictable that it is normal. Starkly and curiously, there is seemingly no inflation surge, as if the world was out to lunch, forever. Since 2008 and taking the US Fed, Europe's ECB and national central banks, Japan's BOJ and not forgetting either China, India, Russia and other big players, the global economy's total output for years ahead has been hocked, but that is new normal.

This four-year feel-good spate of money printing, described by some as political and financial "no choice' has repeatedly hit the political and financial buffers, crash test style. Taking the extreme European debtor nation crisis, which in fact includes a lot more states than the PIIGS, present so-called political initiatives intend to extend and repeat the papering over process right across Europe. Only in extremis and last resort, obviously called a black swan event, will it be admitted that a loss of collateral at continental scale cannot be repaired with more debt. What happens is not possible to forecast, despite all the attempts, for one reason because this finality is described as "impossible".

The real problems facing "the growth model" of the world economy are so massive and so numerous it is not worth listing them - and the business friendly, government friendly financial press makes a point of not listing them. Already very well known and menacing in the OECD countries, especially those with the fastest ageing populations including Japan, Germany, Italy the problem of "Who pays the pensions of retiring generations?" is spreading out from the OECD group much faster than we care to think about. One result is the new thing of literally working until you die, if you can find a job.

Certainly an age-old "market slayer", rising food prices are back on our shrinking menus, but for so many reasons it is again not worth listing them. These range far and wide, from applying "just in time" inventory management to food, speculating on every conceivable food good (called "commodity"), to distressing encroachments of the real world in the shape of drought, salination, pesticide resistance, loss of farmland to cities and roads, high oil prices and what have you. What we have is higher food prices, and when food prices rise, financial and equity markets fall.

New normal is uninterested in such olde tyme harbingers of disaster, and anyway world harvests could be better next year, because they will have problems being worse - only excepting rice. The insulating and distancing role of the Dreamtime Economy is sometimes used by employable new normal financial journalists to talk down these ancient threats. They will say that food spending, by country, is usually a low double digit percentage bite out of household incomes, and is dwarfed by things like rental and mortgage payments. And due to zero-interest money, real estate prices can still, even today, in some countries, be further levered (and leveraged) upward thanks to the overleveraged and parasitic financial system remaining at all time solidly insolvent. As long as the middle classes, if they still exist, keep playing the home price inflation spiral things can bump along a while longer. God willing.

In fact Ben Bermanke willing. The flood of free money from Ben and his acolytes in almost every nation on earth (possibly excepting North Korea where food is a real problem), has in much less than 5 years transformed the global economy into the Dreamtime Economy populated by zombies, who are proud of their status - the media tells us. Based on the Australian aboriginal Dreamtime, where existing and present generations attribute everything to the work of science-fiction Ancestors whose behavior is always inscrutable, the new normal economy uses the same strange and perverse logic to tell us that all we have to do is wait.

The reasons why nothing is extreme enough to trigger a regime-changing crisis is that all crises are no crises. Real estate and rental prices are now low enough to trigger massive under-utilisation of housebuilding and construction capacity but are not high enough to produce either a massive surge of homelessness or a collapse in sales because "real estate casino" players are waiting for the next double digit jump in annual average prices, which isnt coming. Oil prices despite the baloney are not high enough to trigger any massive growth of trade deficits for importer countries or harm the automobile industry anymore than its own self-infliated damage is already doing, and "low carbon" has almost fallen off the teleprompters and out of the speeches of leading politicians. Austerity plans are of course all the rage, but apart from making poorer persons poorer and raising unemployment they are designed to not actually repair national balance sheets "and restore trust", or unleash a wave of popular rage leading to political regime change and debt default.

The Dreamtime Economy, deluged in free money and drowing with debt, can almost instantly turn what could or should have been a crisis solution - into another crisis. Mr Obama of the USA, for as long as he remains president, has used triumphal talk about the cheap gas revolution, and rising US shale oil production as the new way ahead to reindustrialize America and get himself reelected.  In fact the US shale gas revolution is ruining its energy producers who borrowed to the hilt and surged into the shale gas circus, massively inflating gas-related asset prices of all kinds but not expecting US natural gas prices would fall by about 85% since 2006. That was not expected! Today their only hope is to keep oil prices high, to pay for their gas-burned fingers.

The US now has oil at around $100 a barrel, and natural gas at a barrel equivalent price of about $17.

What could be more squeaky clean and "transparent" for energy pricing, than that? The energy crisis effect inside the economy has now taken a radically different track: government friendly financial media has as yet to tell us all about it, but since there is free money we can suppose the negative fallout on Big Energy fortunes can be papered over, sooner or later. For the Dreamtime Economy the result is even better, due to it now being possible to do anything with energy prices. US gas prices could for example double without anybody noticing, and Asian or European importers of natural gas at 5 times the US prices could see a halving of their gas prices, without anybody noticing.

To be sure, nothing beats an olde tyme geopolitical crisis, for example a Middle East and Muslim type crisis which would push oil prices much higher, but apart from this being almost by definition a short-term crisis, and good for brokers and traders, its main role would be a diversionary tactic "to keep the public occupied" with other things. More serious for "the financial community", without a nicely timed geopolitical crisis oil can only drift lower as energy alternatives to oil expand at a radical rate, oil-exporting nations open the taps to fund their welfare states and their own borrowing, and oil demand falls as the global economy glides ever further into recession.

In a slow motion train wreck it is only logical that we get slow motion panic. The same applies in fact to geopolitics: days after the Libyan killing of a US ambassador and staff members, nobody is too sure, and few are concerned as to what Obama-style "leadership" is doing, or can do about this crisis. In the Dreamtime Economy money goes on pouring into the US led by China’s purchase of T-bonds, despite their near zero interest rates, and equity plays on now radically deflated US real estate assets are a ray of hope for dreamers. Called "safe haven" investing and applying even to European PIIGS debt buying, the self-delusionary role of these capital flights of fantasy is hard to exaggerate - but things are worse elsewhere, the financial press crows.

Despite it revealing that the Asian Locomotive is in deep trouble, shown by a flurry of economic and financial statistics coming out of China and India, we are told that it is good and healthy that the "emerging middle classes" of China and India are in a big hurry to get their money out of the country, shifting their wealth and buying foreign passports for themselves and their children. Likewise in Europe, revealed by the actions of Cash People like France's Bernard Arnault to buy his way out of France and become a Belgian (like Johnny Hallyday), there are trillions of euros of “old money” in Europe actively seeking an alternative to the euro. Gold can only gain, but the market is small and easily imploded by central banks and political powerbrokers, making US, European and Japanese government debt and real estate the safe haven - that they are not.

Keeping the Dreamtime Status Quo on the tracks is the name of the game. Political response to encourage this is now fine tuned to the challenge, with the daily promises as phantom as the assets dangled in front of the noses of anybody with cash, including borrowed cash. The net result is "the system" is mined out and fragilized every day a little bit more, while the surface sheen of stability can play on: no crisis. To be sure the magic word is "confidence", that is faith.

The dreamtime becomes meantime but the one-way march of economic, financial, political and social fragility is impossible to stop. The wishlist set by "rational persons" for a sustainable life features low cost living within at least semi-responsible and accountable political systems not completely corrupted by vested interests prone to unpredictable and massive change. This is becoming a rare thing on the world stage, only partly offset by building a network of friends, family, associates and social capital. The rising threats of sharp and capricious change of the financial, political, environmental context, unpredictable changes - usually rises - in the price of basic necessities starting with food, energy and water, and the sudden eruption of social strife and conflict have stacked the "wild cards" so high that we have to concede a point to the No Worry school: despite the storm clouds, nothing is happening at the eye of the storm.

This is hailed by them as a triumph of good management. We know that is not the case, but we also have no choice but to wait.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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