That an economic train wreck will happen is, in my opinion, a certainty. Until a few weeks ago, I was still ranting and waving the flag and claiming we shouldn’t give-up. I was convinced that with the Tea Party movement and the great showing in the Mid-Term elections, that we still had a chance to turn things around. Recent events and more introspection have led me to believe the there is no way to avoid the train wreck. The only question remaining in my mind is whether it will be a slow motion train wreck or a high velocity train wreck. Let’s look at these two options in order.
A Slow Motion Economic Train Wreck:
Prior to the upheaval in North Africa and the Middle-East, the slow motion scenario was on track. The world-wide financial crisis of 2008 was only a precursor of what is coming due to left-wing fiscal policies and the monetary policies of the central banks.
Like many, I was encouraged by the Mid-Term elections and the new Tea Party conservatives elected to the House. The GOP promised to cut $100 billion from the spending for what remains of this fiscal year. Instead, the Tea Party conservatives had to fight with the establishment House Republicans to pass a bill to cut spending $61 billion. So far, the Senate Democrats are offering only $6 billion. Because neither party wants to be responsible for a government shut-down, the bill that is finally passed is likely to be significantly less than $$61 billion.
To the average American, $61 billion sounds like an enormous sum of money. But, in terms of Us Government spending and the debt, it is a drop in the ocean. Grant Davies of the What We Think and Why blog has a slide show that he borrowed from Downsizing the Federal Government. Org, a project of the CATO Institute. The slide show compares the proposed $61 billion in cuts to this year’s projections for total federal spending, the deficit, and interest on the debt. Please visit Grant’s blog and watch the slide show. It’s short, it’s clear and, it will impress you with how insignificant the proposed cuts are in the big picture.
Let me share some more data, as if it is needed, that puts the proposed cuts into perspective. These three snips come from the Downsizing blog linked above.
The Department of Housing and Urban Development funds public housing, provides rental vouchers, and subsidizes homeownership.The department will spend $63 billion in 2010, or about $530 for every U.S. household. It employs 9,500 workers and operates more than 110 subsidy programs.
The Department of Transportation subsidizes and regulates highways, airports, air traffic control, urban transit, and passenger rail.The department will spend $91 billion in 2010, or about $770 for every U.S. household. It employs 58,000 workers and operates 85 different subsidy programs.
The Department of Commerce subsidizes businesses, restricts foreign trade, and oversees the Census Bureau and Patent Office.The department will spend about $17 billion in 2010, or about $140 for every U.S. household. It employs 53,000 workers and operates more than 90 subsidy programs.
In my opinion, without a concerted bipartisan effort to bring our spending and debt under control, which is highly unlikely, the slow motion economic train wreck can not be avoided.
A High Velocity Economic Train Wreck
It’s no secret that the economies of the EU and the US are very fragile. It wouldn’t take much of an economic disaster to bring the world’s economies crashing down. A sharp raise in oil prices for example.
Oil prices and commodity prices in general have been raising since QE I and more since QE II. This increase in oil prices seem to be occurring in the absence of an increase in demand. In other words, speculation appears to have been the reason.
Then a few weeks ago, began the political upheaval in Tunisia, Egypt and Libya. We are also seeing rasing tensions Jordan, Syria, Iran, Iraq and Saudi Arabia. According to CNNMoney.com, oil prices in one month have gone from about $87 per barrel to just over $100. A week ago, oil prices flirted with $120 per barrel. Some experts explain that the high US inventories are helping to keep oil from going higher still.
The civil war raging in Libya has interrupted some of their production. Saudi Arabia says that they can make-up that short fall. Some analyst aren’t so sure. Ambrose Evans-Pritchard, writing for The Telegraph, says spare capacity is getting thin. Here are some excerpts from his article:
Goldman Sachs suspects that OPEC has been pumping far above its agreed quota since November and therefore cannot easily raise output much without cutting deep into global spare capacity.
Jeff Currie, the bank’s oil guru, said Saudi output had quietly crept up by 700,000 barrels a day (bpd) even before the Libyan supply shock.
Assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been “largely offset” by attrition in old fields.
“We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries,” he said.
What that means is that if the oil production from Libya is totally disrupted, the OPEC producers, including Saudi Arabia, could not make up the shortfall. So, instead of prices being driven by raising demand, they would be driven by a supply shortage. Oil prices and inflation would escalate dramatically.
In an earlier article by the same author, we learn more about the Saudi capacity to pick up any slack in production elsewhere. Here are some interesting excerpts from this earlier article:
Charles Robertson, an analyst at Renaissance Capital, said investors are very concerned about what might happen in Saudi Arabia’s oil rich Eastern Province, the home of the kingdom’s restless Shi’ite minority. The Saudis produce 11.6pc of world output, but a much higher share of exports.
“There is potential for serious tension, and not just among the Shia. High unemployment and the youth bulge means unrest could be country-wide. If Saudi Arabia or Iran are engulfed, we have a serious problem,” Mr Robertson said.
Nomura’s commodity team said oil prices risk vaulting to uncharted highs over coming weeks if chaos hits Algeria as well, reducing global spare capacity to the wafer-thin margins seen just before the first Gulf War.
We could see $220 a barrel should both Libya and Algeria halt oil production. We could be underestimating this as speculative activities were largely not present in 1990-1991,” said Michael Lo, the bank’s oil strategist.
It doesn’t take much of an imagination to foresee what would happen to Western Economies if oil gets anywhere close to $220 per barrel. The high velocity economic train wreck would take place. Here is another interesting excerpt from the same article:
Some analysts fear the underlying picture is worse that officially recognised, doubting Saudi claims of ample spare capacity. A Wikileaks cable cited comments by a geologist for the Saudi oil giant Aramco that the kingdom’s reserves had been overstated by 40pc. A second cable cited US diplomats asking whether the Saudis “any longer have the power to drive prices down for a prolonged period”.
Is a high velocity economic train wreck going to happen. It is certainly possible and every day that civil unrest continues in North Africa and the Middle-East, the probability increases.
Whether the economic train wreck occurs in slow motion or at ht high velocity. The result for governments of the developed world including China and more importantly for the worlds major investment banks and central banks will be disastrous. The banks and the leaders of government know all to well that the economic train wreck is coming. Their own policies are what will cause the train wreck. They will be ruined along with everybody else if they don’t do something. But what could they possibly do to save their worthless butts?
A War of Necessity
What follows is pure conjecture. It is my opinion and nothing else. I pray that I am wrong.
In my view, the world’s bankers know that the only thing that can save them and the other Powers That Be is a world war. I believe the bankers have convinced the appropriate world leaders that war is the only answer. Further, I believe the seeds of war have already been sown. The unrest in North Africa and the Middle-East has not happened by accident. These countries are not suddenly going to become peace-loving democracies. The PTB know that and are counting on that. The war will be for the control of oil. Without the free flow of oil from this region, the world as we know it can not exist.
One might ask, how can there be a world war if the civil unrest in the oil-producing countries is interrupted? It would be very hard to carry out a war without oil. My guess is that it has already been decided. China will enter the war on the side of the Muslim countries and will take control of the oil fields in say, Iran and some or all the Emirates. The Western Alliance will take control of Saudi Arabia and North Africa. Where Russia and India fall in my scenario I don’t know.
The war will not involve nuclear weapons. China will send their cannon fodder to die in the killing fields and the Western Alliance will do the same. No one will win. At the appropriate time a truce will be called and a peace agreement will be made. China and the Western Alliance will divide-up the world in their interest. The bankers will insist on a single world currency and a new world order will evolve. Nothing will ever be the same again.
This is a horrible vision of the future that I have. I pray that I am wrong. I’m afraid that I am right.