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The Ponzi-Plus Plan by Jim Kunstler

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October 05, 2008 – Comments (2)

Jim Kunstler writes like no one else. He posts once a week and it is worth the time to read, whether you are a Bull or a Bear.

The Ponzi-Plus Plan by Jim Kunstler

Comment on current events by the author of "The Long Emergency" (also on www.kunstler.com)

    To paraphrase the late and great old war-horse of the senate, Everett Dirkson of Illinois (1896 - 1969), a trillion here, a trillion there, sooner or later you're talking about real money. Except in the case of the Great Bail-out of 2008, maybe it's more like... sooner or later your money is no longer real.
     What we're seeing in this fiasco, among other things, is a lesson in the diminishing returns of technology. This is a train wreck of investment vehicles so complex that they could only be created with the aid of computers. The result is that hardly anyone -- perhaps even nobody in or out of Wall Street -- really understands what they represent. In fact, this alphabet soup of engineered securities -- CDOs, CDSs, MBSs, SIVs, etc -- was cooked up from a recipe of Ponzi algorithms. They were designed to be mathematically indecipherable, except by computers, in an alternative universe of model-making that bore only a superficial relation to the real world. That was their dirty secret. And the dirty secret of the Great Bail-out is that, in the real world, we will never be able to discover the actual trading value of these things at any number above zero. This is why they are called "toxic."
     The big effort of Mr. Paulson and his working group has been to ram through legislation that at all costs avoids any attempt to place a reality-based value on this bad debt. He managed it by holding a gun to Congress's collective head, telling them in plain English that a genuine "work-out" of these "toxic" investments would set in motion a fatal cascade of credit default swaps which would leave the entire banking landscape a smoldering wasteland -- with the result that virtually every retirement account and pension fund would go up in a vapor, the Federal Reserve and the FDIC would melt away to twin piles of goo, scores of millions of lives would be ruined, and the USA would be left a basket case among nations, making us envy even the fate of Haiti and Zimbabwe. Talk like that might prompt a congress-person to do any fool thing.
     The question, of course, is what happens now, after this morning's scheduled vote on the Great Bail-out package. Last night, I would have predicted a brief bounce in the stock markets of a week-or-so duration. This morning, at eight o'clock, I'm not so sure of that anymore, but I suppose we shall see. Beyond a week-or-so, I expect the Great Bail-out to fail rather quickly in its main mission: to stabilize the banking system and calm the markets. The process of negotiating the package has given off an odor something like medieval scholasticism -- a method much like the creation of Ponzi finance itself, in which layers of tortured interpolation rendered theological concepts so abstruse that all the prayer of all the monks and nuns ever conceived within the walls of the Vatican would not avail to reveal their mysteries. The object, of course, was to reinforce the essential mystery of religion, just as the object in Ponzi finance was to reinforce the mystery of engineered securities.
      What the mainstream is truly missing here en masse is that another tsunami is building right behind the finance fiasco, and that it will render moot the whole reeking cargo of schemes and wishes that comprises the Great Bail-out. I am speaking of the global oil problem. In fact, the problems in banking and money currently roaring in the center ring of the world circus, can be described categorically as a product of the oil problem -- since oil is the primary resource of industrial economies and therefore the motive force behind our ability to generate "wealth." Without reliable and ever-growing supplies of oil, there is no industrial growth, and without industrial growth things like capital investment instruments lose their legitimacy. That is why the Frankenstein family of Ponzi securities was invented in the first place -- to compensate for the demise of industrial growth by creating wealth out of... nothing!
     The looming oil problem entails a swirl of factors that will aggravate and accelerate our social, economic, and political struggles. These factors will mutually reinforce the instabilities that they set into motion. For instance, the new oil nationalism is undermining the traditional operation of oil markets as we've known them since the mid-20th century. In turn, oil nationalism will aggravate the oil export crisis, which will starve the oil importers -- the USA being the chief victim. Finally, there is the remorseless base-line condition of Peak Oil itself, meaning that we are at point where world oil demand permanently outstrips world oil supply no matter if the USA falls on its ass economically or not. What remains beyond this is a desperate contest among the oil importers -- America, Europe, China, Japan, India -- for control of the world's remaining oil resources.
      The fantasies about alternative energy currently wafting across the American media-scape will not "solve" this problem, much as we wish they might. We'll try everything in a quixotic effort to sustain the unsustainable (that is, the happy motoring consumer society), but we will be disappointed by the results. I try to remind readers that the very concept of "solutions" does not apply in this situation, since it implies that we can keep running things in America just the way we are running them now, only by means other than oil. The truth, in my view, is that we have to run things very differently now, at different scales than the ones we're used to -- but we are too invested in our behavior of the past to move forward. This is certainly unfortunate, because we have everything to gain by letting go of our old habits and obsolete wishes.
      It's odd to watch the talking heads on CNBC this morning, parsing endlessly over the latest minutiae of the latest deal for CitiGroup to land on Wachovia like a giant amoeba and begin the gruesome process of digesting its innards. The TV heads are just like the medieval monks trying to explicate the labanotation of x-number of angels dancing on the head of the pin. Religion really is the only metaphor left to discuss the epochal disaster underway right now, because God alone knows where this will take us.
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My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

September 29, 2008

2 Comments – Post Your Own

#1) On October 05, 2008 at 11:48 PM, nuf2bdangrus (< 20) wrote:

Very well written.  Energy is the achilles heal of industrial and post industrial society.  Without it, we become agrarian, and not in a good way.

 

Ironically, the slowdown and the deleveraging is causing energy stocks to come past to "down to earth", and be thrown away.  I am focusing on energy compaines in 2 areas, first, mostly Canadian ir Brazil, and secondly, those with NG.  Alt energy will play a role, wind and solar, but that is a longer play.

 

Demon doug wrote, and I never forgot it.   "Oil isn't priced in dollars, dollars are priced in oil".

 

Nobody wants enrgy stocks right now, but I am accumulating drillers, equipment suppliers, oil sands, refiners, the whole gamut.  I hope to be smiling one day

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#2) On October 06, 2008 at 12:04 AM, lquadland10 (< 20) wrote:

I need your take on this.

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