The Precariat , Trump and cheap-to-extract Energy

When job figures in the US came out in early November 2016 the unemployment rate was 4.9 percent and hardly anyone worried. For economists a 5% unemployment rate is a really good figure. But remember the new definition of who is employed? Employment in most developed nations these days is "at least one hour of work done in the past week by a person aged 16 or older". So the "employed" includes all those who lack job security, and those with intermittent employment or underemployment and the resultant precarious existence.

This is what the Democrats missed. There is many a commentator who has observed that the urban privileged are completely out of touch with those who experience the worry of a day to day precarious existence, always uncertain whether they can pay their bills. This is the precariat. Professor Guy Standing, in a book published well before Brexit and Trump's election warned that the rapid growth of the precariat is producing instabilities in society. He warns it is a dangerous class because it is internally divided, leading to the villainisation of migrants and other vulnerable groups. And, lacking agency, its members may be susceptible to the siren calls of political extremism.

Something familiar there? While they might not call it the precariat, Bernie Sanders, Donald Trump and Nigel Farage all appeal to this group. So while the question is legitimate, the solutions of Trump and Farage are wrong, wrong, wrong.

The tragedy is that just as politicians miss the precariat, economists miss energy. And strangely they are related. Here is how:

Oil is a remarkably dense energy source with one barrel of oil supplanting eleven years of human labour. Graph its use with the rise in GDP and they are in complete lockstep. The economy as it is currently structured is utterly dependent on growing supplies of cheap to extract energy. Only a fool would deny it is extremely unwise to build an economic system that relies on ever growing expansion in oil supply. In real terms energy supply is already on the decline due to the expanding internal energy requirements of the oil industry.

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The cost of oil exploration and extraction is rising and with it debt

Actuary Gail Tverberg writes that peak oil didn’t play out as expected because we didn’t factor in the financing of the oil industry. As the cheap-to-extract oil ran low, the cost of extracting non-conventional oil grew higher. This meant the firms had to go into more debt in the form of bank debt, bonds and derivatives. Eventually the debt overwhelms the oil companies and the layoffs begin. In order to pay interest on all their debt, indebted firms have had to keep wages low. The same happens for all firms that extract commodities, because they all require cheap-to-extract energy. The last step is that these low wages reduce the general demand for goods.

Nicole Foss points out that if demand collapses, the money supply declines and a deflationary spiral begins that few notice. 18 months after the decline in oil prices started, by February 2016 Bloomberg Business reported there had been 250,000 oil jobs lost and apparently each of these jobs supports over three basic wage jobs.

Tverberg says, "Why is the price of oil so low now? In fact, why are all commodity prices so low? I see the problem as being an affordability issue that has been hidden by a growing debt bubble. As this debt bubble has expanded, it has kept the sales prices of commodities up with the cost of extraction, even though wages have not been rising as fast as commodity prices since about the year 2000. Now many countries are cutting back on the rate of debt growth because debt/GDP ratios are becoming unreasonably high, and because the productivity of additional debt is falling."

So the drop in oil prices leads us to an underlying problem. The world is reaching the limit of its debt expansion. This is what is called Debt Deflation.

So even though we are living in a time of energy constraints, our blinkers don't allow us to see that. Risk analyst David Korowicz wryly observes,"The irony is that people may rarely notice they are living under energy constraints. Energy retraction from the global economy can be achieved by production declines or collapses in demand, though as we have seen, they are deeply inter-related. We may experience energy use collapse not as an energy constraint, but as a systemic banking collapse and vanished purchasing power."

So here is the source of the vanished purchasing power of the precariat. In a post election blog energy analyst Richard Heinberg observes that the problems won't go away when Trump is elected. In the face of the door being closed to national action on climate change, build community resilience is his message. "The most promising responses to our twenty-first century crises are showing up at the community level anyway. It’s in towns and cities across the nation, and across the world, where practical people are being forced to grapple with weird weather, rising seas, an unstable economy, and a fraying national political fabric."

None of these arguments will be known to the incoming president, though some advisors may try to educate him.Good luck to them. He is an anti-science president. If he slaps tarriffs on as he has promised, purchasing power will decline still further and accelerate the already active deflationary spiral.

trump-digs-coal

Trump's attitude to women seems the same as his attitude to the environment – if it's there, it is there for my use. Coal stocks soared on his election and renewables dropped. However, oil stocks didn't rise much, possibly a sign that reality of constraints are already priced into the market. 

An interesting question with Trump is how committed he actually is to his own ideas, from the potentially sensible to the crazy.   He is a “top of the head” sort of a guy, who changes position and contradicts himself on exposure to new things (or simply because he finds himself in a new context). Is the Presidency just a vanity project for him, in which he will blow with any policy wind he encounters? His victory speech, and his abandonment of the “Lock her up” approach, suggested that.

At the worst, if his “vision” as expressed during the campaign carries through, the US (and to a lesser extent the world) are in for an appalling time – racist, misogynist, anti-environment, pro-individualist, pro-violence and so on. And if the Republican Party as a whole gets the bit between its teeth, the US Government will be gutted and corporates will simply finish their take over. At the best, there’s no doubt he has created more space for these sorts of behaviours at the fringes in the short term. In between, as seems more likely, the direction as a whole will probably be negative, but it’ll be muddled and maybe not so fast moving.

There are a few bright spots, less likelihood of a war with Russia and above all, an increased energy and commitment of climate change activists. Our lives depend on it. He has focussed our minds. There is no spare planet. Somehow we must find a way.

John Fullerton on the Regenerative Economy

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Occasionally you strike a book or long article that you really want to pay attention to. For me I have discovered John Fullerton's white paper called Regenerative Capitalism How Universal Principles and Patterns will Shape our New Economy. It is 120 pages long and very dense, dated April 2015.

I found Fullerton through watching a large part of After Fossil Fuels The New Economy, a filmed seminar from Oberlin College, Ohio held in early October. (Try 1 hour 5 mins into this particular section, as it is long) I was excited because here was someone saying what we have been saying. I knew that people rarely are the sole inventors of new ideas. He wrote we need to design an economy according to nature's principles. He knows that creativity and regenerative potential happens at the edges, a teaching from permaculture. He even quotes evolutionary biologist Elisabet Sahtouris.

He appeared with Juliet Schorr, a sociologist, former economist, who agreed with him yet reminded him that power and conflict must not be omitted and that one must not be attached too strongly to a metaphor.

When I looked at his acknowledgements I got quite excited. Here was a former JP Morgan banker listing Fritjof Capra, Janine Benyus, Hazel Henderson, David Korten, Thomas Berry, Buckminster Fuller, Jane Jacobs, Dana Meadows, EF Schumacher and Gar Alperovitz. Reading the text over the next few days I found he even knew a little of Bernard Lietaer and Elinor Ostrom and his scientific advisor is engineer Sally Goerner a student of flow and energy network sciences. She taught him about the optimum balance between efficiency and resilience. Goerner was a co-author with Bernard Lietaer in their Club of Rome book on Money and Sustainability.

Reading Charles Eisenstein's book Sacred Economics was punctuated for me with long pauses while I digested one amazing sentence after another. Fullerton had this same effect on me in that he was articulating ideas only half formed in my mind, and doing so with such eloquent language. Then again, because he is qualified in finance and business, I learnt from his perspective. People who have voluntarily opted out of Wall Street to think and read and explore new ideas are very precious to the new economy movement and Fullerton is one of these.

John Fullerton has outlined eight principles for what he calls a Regenerative Economy and has expanded them in his white paper. He says his experiences with regenerative entrepreneurs as well as his exploration of systems theory, biomimicry, ecology and the physics of flow networks has led him to this list. Briefly, an economy must be or must demonstrate:

1. In Right Relationship – realising we are part of an interconnected web of life.
2. Views Wealth Holistically – realising there are multiple forms of capital.
3. Innovative, Adaptive, Responsive. This applies to individuals, businesses, society, governments and is the way for maximum fitness. It means the end of rigid hierarchical systems that control today’s centralised states.
4. Empowered participation. Everyone matters and the health of any human economy is dependent on everyone’s unique contribution to the health of the whole.
5. Honours Community and Place. Diversity and richness are essential to system vitality. Each human community embodies a mosaic of traditions, beliefs and potentialities, each uniquely shaped by long-term pressures of geography, history, culture, environment and changing human needs.
6. Edge Effect Abundance. The most innovation and abundance of life happens at the edges of systems e.g where rivers meet the ocean.
7. Robust Circulatory Flow. "Just as human health depends on robust circulation of oxygen, nutrients etc, so too economic health depends on robust circulatory flows of money, information, waste, resources, goods and services to support exchange, flush toxins, and nourish every participant at every level of our human networks."
8. Seeks Balance. There is a delicate balance between resilience and efficiency. Small, diverse and flexible will lead to stagnation while big, efficient and focused will lead to collapse. There is a window of vitality half way.

He doesn't really address tax reform in a big way, or the need to share the rents though he appears to have read Peter Barnes. He approves of progressive taxation, financial transaction tax and wants aggressive inheritance taxes. So there is  more thinking to be done there. Like many others he probably conflates land with capital. Yes university teaching has been very successful in getting rid of land as a factor of production. Well done neoclassical economists – your strategy worked brilliantly. 

I think he would love to read Silvio Gesell's book The Natural Economic Order to learn about the design of naturally circulating money. That would set him thinking. And perhaps some of Lietaer's books, particularly where he describes how Gesell's ideas were put into practice in Dynastic Egypt, Central Middle Ages and in Great Depression towns in Europe.

Oh, and how he would love to read Reinventing Organisations by Frederic Laloux!

Deirdre Kent

@deirdrekent

Lessons from Singapore’s political economy

Marina Bay Financial Centre, Singapore

Marina Bay Financial Centre, Singapore

In his excellent TED talk, renowned inequality researcher Richard Wilkinson showed that of all OECD countries, Singapore had the worst inequality, ahead of Portugal, US, New Zealand, UK. Gini coefficients are the standard measure of income inequality. A score of 1 is the worst and 0 is the best. Because it is taken on the average not the median income, extremes of wealth will raise it.

I had always believed that Singapore was a model where there was little poverty and not much inequality. It is commonly cited as one of the more ‘georgist’ places in the world in terms of them shifting burdens on land, socialising its value and untaxing labour and capital.

But there are myths about the “Singaporean miracle”. In the absence of any constraint on the movement of global capital, any billionaire can set up residence and tap into the low tax regime. And they do. High net individuals and multinational corporations hide their wealth there. The tax benefits include a 20% top income tax, and a 17% top company tax. Even New Zealand has a billionaire living there – Richard Chandler.

We have insisted that both the land issue and money issue need to be addressed together, not separately, and Singapore is a clear example of what happens when you do one but not the other. The late Adrian Wrigley of the Systemic Fiscal Reform in Cambridge said, ‘If we just have resource taxes including land tax, where people pay for the privilege of monopolising their part of the commons, but have no monetary reform then money will concentrate with banks. Banks will row the economy between easy money and tight money causing booms and busts. They will put up interest rates for ‘riskier’ loans. They buy patents, radio spectrums, copyrights and trademarks.’ They bribe governments.

Whether Singapore, a country of 5.5 million, has done all this I don’t know, but it is a low tax regime and it certainly featured in the Panama Papers. It has even been labelled as a tax haven. For example, companies like TrustNet, now headquartered in Singapore, has branch offices in 16 other locations. It describes itself as a ‘one-stop shop,’ employing lawyers and accountants who help “high net worth” clients manage their money and business activities. The main product it sells is secrecy. It is easy to set up a company because only one shareholder and one director is needed. There is no need to disclose the beneficial owners of Singapore corporations to the authorities. Hopefully the international crackdown on tax sheltering will do something to change it, but given the nature of the tax regime in most countries, I can’t see much hope. They haven’t yet understood it is better to rely on land as a source of income, as land will not get up and walk away.

Big Australian mining companies have large workforces in Singapore. BHP has more staff there than its Melbourne headquarters. There are about 600 employees and 400 contractors in Singapore. Apart from being a marketing hub, it also has its business information systems based there. Rio Tinto employs more than 300 staff in Singapore. Companies such as Google, Apple, Microsoft, BHP Billiton and Rio Tinto have all admitted in hearings as part of the Senate inquiry into corporate tax avoidance that they are under audit by the ATO for their use of Singapore ‘marketing’ and ‘service’ hubs, where they route hundreds of millions of dollars of income.

So I wonder about Singapore. Could it be a perfect example of what Adrian warned? While 90% of the land is now government owned, the banks have too much power.

Singapore is not just banking hub, it is shadow banking hub. There are about 125 commercial banks in Singapore, only five of which are local. Although banks lend a lot of money into existence in Singapore and their loans go towards construction of capital, rather than simply bidding up the price of land (as we see in Auckland, for example), that is not all that banks do. They sell derivative contracts over the counter – bets on interest rates or other securities. Derivatives leverage up money creation up to 100 or more times. Trading in derivatives contracts happens round the clock. Singapore is a leading global commodities hub with 14,000 people employed and annual turnover of some US $1 trillion in the commodities sector.

The majority of people who live there find Singapore is an extremely attractive place to live and operate from. It is safe, clean, and green with superb infrastructure. The unemployment rate in Singapore is just 1.9% (June 2016), down from 6% in 1986. Bear in mind though, the definition ‘employed’ includes those employed part time, probably as little as an hour a week.

Unlike New Zealand they don’t have a Universal Superannuation. Many of Singapore’s elderly didn’t save enough while working, but they live longer. Some were born when there was no access to education. What’s more, the Singapore language policy marginalised many of them only able to speak languages other than Mandarin and English. While the cultural norm of caring for the elderly seems to have almost vanished, the government still argues that children should take care of their parents. Many elderly are on the government allowance of $450 a month, reliant on charity for food and health care. Living in tiny apartments as small as 30 square metres, they clean tables at hawker centres, collect cardboard for money, scrub apartment blocks or slog in the hot sun as security guards. Security guards and cleaners are among the worst paid.

In response, there is now a plethora of government assistance, making for growing administrative costs of welfare, when it would have been so much better to have shared their land rents with all their citizens in the first place.

So Singapore can only stop its own rent from being stolen by the global elite; it can't stop the global elite from setting up shop there and stealing the rent of other places. Local rent-sharing can only raise the local floor. But Singapore doesn’t do enough rent-sharing, hasn’t controlled its banking industry and doesn’t exist in isolation from the global capitalist economy. Hence its inequality.

So maybe we’ve seen only part of the equation. Taking land into public ownership stops private landowners from pocketing land rent, but it doesn't restore the universal individual right to share the land value. The Singapore government has built great infrastructure and housed almost all its people, but it could easily share the remaining public money with its citizens. The Citizens Dividend enables everyone to collect rent, rather than just landowners. But without democratising the budgeting process, ordinary people are not receiving their fair share.

Singapore has the highest per capita of millionaires of any country. One in six households are millionaire households. The mobility of capital and people across borders means that the borders of the country are constantly being crossed. So it is no good just having one country in the world with land owned by the government while billions of dollars slosh around the globe every hour.

Billionaires can sit in Singapore and draw rent from land in the rest of the world. Aetas Global Markets provides funds for commodities projects. Many international firms are sited in Singapore. Global Capital firms like Knight Frank invest on behalf of what they call Ultra High Net Worth Individuals (UHNWI) in property round the world. Genesis Global Capital appears to choose cities in the early stage of a property boom in Brazil and Germany. The Strait Times reports in March 2016 that the financial services sector is a key driver of Singapore’s growth.

Henry George defined poverty as the ‘fear of want’, the ‘relentless hell waiting beneath civilized society’. He believed that removing this fear would not only help the poor, but transform our culture and society.

Former Singapore resident Zbigniew Dumienski said, ‘The only group that I would consider as poor are the old people with no children. When they worked they didn't have to contribute towards any retirement scheme (CPF) and might not have accumulated enough money to enjoy a peaceful retirement. This is why you often see old people selling tissues or cleaning tables in Singapore. They do receive some support from the state though, plus many of them own their apartments. In fact, I've met income-poor people who would choose to live in a tent/on the streets so that they can live off renting their apartment to other people.’

The situation of the 870,000 foreign workers (Feb 2016) in Singapore is contentious. Many immigrants like the safety and enjoy the food. While it is good if your employer is fair, it is not so good if you are exploited. There are construction workers from India, Bangladesh, China and Nepal and maids from the Philippines, Myanmar and Indonesia who earn much less than an average Singaporean. Some live in dormitory ghettos provided by the government. Migrant workers are not given basic protections such as a minimum wage, standardised working hours and a right to unionise, so this puts a downward pressure on wages, raising inequality. There are reports of maids being ripped off by recruiters, and sometimes being beaten or raped. Live-in nannies are often on 24/7 standby and earn $5 an hour. If they have their passports stolen by their employers they can’t go home. However many eventually earn enough to take back home and live a life with more choices. With 40% of Singapore's inhabitants being foreigners by 2013, immigration is increasingly becoming a big political issue.

So despite the hope of eliminating poverty, the ugly side of global capitalism is becoming increasingly apparent.

Green Capitalism The God that Failed

Richard Smith, an economic historian, has written an amazing article which I have only just discovered, (thanks to the wonderful people on our Facebook group).

He comprehensively dismisses green capitalism, as recommended by people like Paul Hawken and Amory Lovins. He says green growth is a completely blind alley, a God that failed. You can't shop your way to sustainability.

He describes scary scenarios for a four degrees global warming, notes the lack of progress on reducing emissions over two decades and concludes that there is something wrong with capitalism itself. "From Kyoto to Cancun, governments have all made it abundantly clear that they will not sacrifice growth today to save the planet tomorrow."

Cap and trade usually gets watered down. This is because there is such a huge range of occupations that negatively affected by it that the lobby opposing it is too broad and too powerful. The theory was nice. The cap was supposed to come down over time, but industry lobbyists in Germany badgered the government for higher caps and special exemptions of all sorts. "They warned of unemployment, threatened to pack up and leave Germany and so on.  In the end governments caved." So in the market solution – cap and trade – profits ended up with the polluters and traders.  He says even carbon taxes when implemented can never be set at high enough levels to make a difference. And it makes no difference if it is revenue neutral or not.

Smith writes,"But the problem is not just special interests, lobbyists and corruption. And courageous political leaders could not turn the situation around. Because that's not the problem. The problem is capitalism.....There is no way to cut CO2 emissions by anything like 90 percent without imposing drastic cuts across the board in industrial production. Because we live under capitalism, not socialism, no one is promising new jobs to all those coal miners, oil drillers, gas frackers, power plant operators, farmers and fertilizer manufacturers, loggers and builders, auto builders, truck drivers, airplane builders, airline pilots and crews and countless other occupations whose jobs would be at risk if fossil fuel use were really seriously curtailed."

This book reminded me of Naomi Klein's This Changes Everything in that it clearly states the problem is capitalism.

The article was written two years ago. During the last eighteen months the price of oil has declined 70% and now hundreds of thousands of oil workers have lost their jobs. Soup kitchens in Aberdeen are feeding former oil workers and tens of thousands of jobs continue to be lost in Alberta and North Dakota and Texas alone. In Nigeria 120,000 jobs have been lost. This month the New York Times put the global figure at 250,000 jobs lost. Meanwhile, and connected with this, the global economy is under severe threat of a complete meltdown, and central banks clamber to find yet another way to calm the markets, always by injecting more debt into the system.

So what answers does Smith come up with? He offers eco-socialism. A quick look at their website indicates they would nationalise the fossil fuel industry and the industries that are heavily based on them which means the auto industry, aircraft and airlines, petrochemicals, and so on.

So while it is wonderful to see Richard Smith facing the political realities of climate change, overconsumption, waste and pollution, there is another step or two he could take. He could ask, "And is there something structurally in the system that has demanded this incessant growth? Is growth written into the system? Which system? And if so can that be reformed?" Now Richard Smith may know this. I wonder if he also knows you have to transform the land tenure system if you change the money system, since the first reform demands the second. When you know about the money system you often wish you didn't – that you could put the genie back in the bottle, so to speak. The corporates, as TPP has shown us, are more powerful than ever before in history and that changes the political landscape and our strategies. Few centralised solutions are now politically possible.

In our movement we have been struggling for over four years to work out some politically viable solution to our massive global problems. Maybe nationalising all these industries doesn't get to the bottom of the problem. We need elegant, more lasting solutions.

Anyway his article is superb as far as it goes. He also has a book of that name.
http://www.worldeconomicsassociation.org/downloads/green-capitalism-the-god-that-failed/ is the e-book

And here’s a review of the book: http://www.truth-out.org/opinion/item/31959-book-review-green-capitalism-the-god-that-failed

Modernising the Georgist ‘doctrine’ without using the words “land value tax”

41bQo1jRHqL._BO2,204,203,200_PIsitb-sticker-v3-big,TopRight,0,-55_SX278_SY278_PIkin4,BottomRight,1,22_AA300_SH20_OU01_In Land a New Paradigm for a Thriving World, Martin Adams has spelled out his philosophy that no one should make a profit from owning land. He has carefully and thoughtfully reframed the Georgist ‘doctrine’ for a modern era and developed a clear new language. For example here is a classic sentence: ‘What most people don’t yet realise is that the value of land is best shared, and that whenever we profit from land we profit from society.”

Martin is no slave to doctrine and clearly thinks out the issues for himself. He sees the vision. “Once we being to share this value with one another, we have the opportunity to unleash a cultural, technological, ecological, and even spiritual renaissance that will liberate us in ways we can’t imagine.”

And – great news – Martin is no centralist. He understands that revenue must flow from the periphery to the centre, not the other way round. So he talks of land moving into a Community Land Trust and people then paying a Community Land Contribution. Some of the revenue stays local and the rest is passed upwards to other levels of government.

From his description of how to prevent urban sprawl to his chapter on using farmland efficiently, Martin challenges us to think in a fresh way.

Thoughout this valuable little book Martin has steadfastly refused to use the word ‘tax’ , arguing it implies that the people being taxed have to part with something that belongs to them. “Land value taxes”, he says, “are still rooted in the paradigm of private land ownership.”

The questions arising from this book regarding the practicalities of some of his suggested solution remain to be tackled. Martin, being so honest and so curious, will no doubt ask more questions, talk to more people and develop more politically realistic solutions. It's monumental task. I have no doubt he will make an even bigger contribution in the future. Watch this space!

Charles Eisenstein, Thom Hartman and Peter Barnes don’t just recommend any book or call a book a ‘brilliant contribution’ or a ‘modern breakthrough’. Their reputations would be at stake if they did.

Available here

Bubble finance, junk energy bonds, oil derivatives being neglected by mainstream media

Those who still think the plummeting price of oil is a good thing for the economy are taken in by PR spin or the simple lack of coverage in the mainstream media. It is not about consumers having lower petrol prices and more in their pocket. It’s not even about the energy. It’s about the money, the financial structure of the oil industry, particularly for the wildly speculative ventures like shale oil extraction. Environmentalists will see low oil prices as bad news for climate change but they need also to look at the way these energy shale firms are financed and learn about things they don’t want to know about, like junk bonds, leveraged loans and derivatives. It causes more immediate pain and must be survived first.

WTI to 12 Dec 2014The relentless slide continues. As of Monday 15 December in New Zealand the price of WTI oil was $56.73, down over 47% since June this year.

Unfortunately in New Zealand we are being shielded from all this bad news. Bubble finance is not a sexy topic for a front page. During the last week the Dominion Post, national radio, Sunday Star Times had nothing, and a business programme on Radio Live on Sunday touched on everything but the junk energy bond issue or the derivative issue. The programme gave the impression the only place to invest was in shares, bonds or fixed interest. When the derivatives market is so enormous, this is a major omission. It’s not as though the media believe the public won’t be able to understand junk energy bonds or derivatives. The corporate owned media only gives us bad news when it is about crime.

OK let’s try and explain it.

There are four major risks of plummeting oil prices
. The first is the risk to junk energy bonds held by pension funds, mutual funds and governments. Second is the secondary oil market, including the risk associated with a variety of oil derivatives contracts held by big banks. The third is the social unrest in oil exporting countries like Venezuela, Russia. And a fourth is the ongoing and contagious decline in prices of a range of other commodities – iron ore, copper, milk powder. Let’s just deal with the first two, though the fourth one is dealt with in passing.

1. Junk energy bonds. What on earth are these, you might ask. They are the risky bonds that energy companies sell to help finance their operations. The bonds give you high returns but they are also high risk as they are unsecured loans. That risk-taking now comes home to roost. For a new venture now the bank will lend you less because the oil in the ground as their security is now worth less. In December 2014 the oil is worth only about half what it was six months ago. So you have to get more of your funding from junk bonds. You end up shelling out more in interest and what’s more you get less in revenue from the sale of your oil.

Michael Snyder says “The impact of lower oil prices has been felt directly by high yield energy bonds and since September they have posted a return of -11.2%. J P Morgan has warned that if oil prices stay at $60 a barrel for three years 40% of the junk bonds could be facing a default.”

Of course other companies finance themselves using junk bonds (as well as bank loans at a low interest rate and their own revenue stream). The energy sector accounts for over 17% of the high yield bond market (junk bonds) and when these are hammered apparently a stock market decline always follows. It’s not a small sector either. Analyst Wolf Richter says there are $210 billion of them.

So they have to sell more bonds. Unfortunately now fewer investors want to buy the risky bonds so that means the yields go up to make it more tempting for investors. As the debt markets dry up and profits fall due to cheaper oil, the funding gap widens.

It was all beautifully explained in October 2014 when oil prices were $85/barrel here

Who loses from this? The investors. And those employed in the oil industry as smaller or more indebted firms are less viable than others. And that is just the start.

But it isn’t only junk energy bonds being affected now. As the Financial Times told us on December 12,
“Investors are fleeing the US junk debt market as a selloff that started in low-rated energy bonds last month has now spread to the broad corporate debt market amid fears of a spike in default rates.” Woops, that wasn’t meant to happen.

2 Oil derivatives. Like other industries over the last few decades of financial wizardry, the oil industry has been financialised.

Remember when housing debt was bundled up by the banks, securitised, divided into tranches according to risk, and sold off? It was to increase the profits of the banks. You just pass the risk on. The bonds are sold to unwary buyers who don’t realise the risk for massive losses. The whole process was enabled by rating agencies who rated junk bonds (the risky ones have high returns) as A++. A great movie explaining all this was The Inside Job.

Now we have version 2 of the same script. Instead of CDOs (Consolidated Debt Obligations) we have got CLOs (Consolidated Loan Obligations) – just a different name this time. It’s what is called ‘leveraged loans.’

The 6 largest ‘too big to fail’ banks control $3.9 trillion in commodity derivatives contracts. A large portion of this is in energy. And the big banks of the world are on the other end of derivative contracts.

One of the headlines of a tweet going round is “Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives”

There is nowhere to hide. As the entire global economy is dependent on the six biggest banks, we will all be affected, even in New Zealand.

The Oil Industry is not just any old industry
Writing on Zero Hedge in October when oil was $75/barrel, Michael Snyder explains the huge investment of the energy industry in both capital expenditure and R&D.

He quotes the Perryman group on the economic effects of the oil industry in US alone:
If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

The combination of junk bonds and financialisation
Putting these two first effects together, former Reagan budget chief David Stockman, in an analysis on his "ContraCorner" website Dec. 9, wrote: “The now-shaking high-yield debt bubble in energy is $500 billion — $300 billion in leveraged loans and $200 billion in junk bonds. This is the same estimate EIR has made in recent briefings, of one-quarter of the $2 trillion high-yield market being junk energy debt. In that junk energy debt market, interest rates have suddenly leaped, in the past 45 days, from about 4% higher than "investment grade" bonds, to 10% higher; that is, credit in that sector has disappeared, triggering the start of defaults of the highly leveraged shale companies and their big-oil sponsors.”

“In the larger, $2 trillion high-yield debt market as a whole, interest rates have also risen sharply, so far by 2-2.5%: i.e., contagion. Whether the debt collapse will be "mini", or maximum, may be determined in the markets for $20 trillion in commodity derivatives exposure.

“So now we come to the current screaming evidence of bubble finance—–the fact that upwards of $500 billion of junk bonds ($200B) and leveraged loans ($300 B) have surged into the US energy sector over the past decades—–and much of it into the shale oil and gas patch.

“An honest free market would have never delivered up even $50 billion wildly speculative ventures like shale oil extraction million of leveraged capital—let alone $500 billion— at less than 400bps over risk-free treasuries to.”

The simple fact is low oil prices kill millions of jobs. Falling oil prices are dangerous. While readers of mainstream media, listeners to radio and watchers of television remain in blissful ignorance of the nightmares that fund managers are living through, they will celebrate Christmas as though nothing had happened – and then ask later why nobody warned them.

The first Global Financial Crisis came on us with little apparent warning. The Queen was famously known to ask “ Why did nobody see this coming?”

For the last five years since QE, energy companies have received super cheap financing. Quantitative easing, where the Fed created trillions of dollars for banks, was a gift to the capital-intensive energy industry. Moreover job creation has been huge. Bloomberg reports Employment in support services for oil and gas operations has surged 70 percent since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34 percent.

It doesn’t matter whether the trigger for this fall was OPEC punishing the shale industry, falling demand in China, the end of QE or what it was. It was going to happen anyway and the trigger might have been anything. The whole pack of cards simply has to tumble. It’s a cauldron of death brought to the boil.

But many have seen it coming – Nicole Foss and Raul Ilargi Meijer of The Automatic Earth, Michael Snyder, Gail Tverberg, Jesse Colombo, Wolf Richter, Yves Smith are a few names that spring to mind. It’s just that haven’t been listened to yet. Whether is it the Tulip Bubble, the South Sea Bubble or the housing bubble of 2007, bubbles have a nasty habit of bursting.

Is there a future for Labour and what will happen if they move to the right?

The Labour Party, as they reflect on their biggest loss in 92 years, is struggling to come to terms with the consequences of being environmentalists. No self-respecting westerner these days would say they weren’t concerned about the deteriorating environment. The threat of global warming is a massive wake-up call. Even the Rockefeller Fund founded on oil has just divested from coal and tar sands. Politicians finally have to face reconciling protecting the environment with creating the fiscal and monetary conditions for a thriving economy.

That is a huge challenge. The Greens can talk all they like about ‘smart growth’ and a ‘green economy’ but unless they address the money system and stop the growth imperative at is source 'smart growth' will just continue to be nice rhetoric.

9115760Over the last few years we have noticed the Labour Party aligning itself more and more with the Greens. But in the last weeks of the campaign Labour leader David Cunliffe actually stole the Greens rhetoric. He said, “It's got to be a clean, green, smart, strong economy” (14 Sept, Stuff)

So while Labour has moved towards the Greens, for strategic purposes it had also to distance itself from them right at the beginning of the campaign. Doing the splits eh? Electoral realities dictated that it could no longer afford to align itself with a party who questioned every job creation initiative the National Government started. But there is a large faction in the Labour Party that wants expressways, deep sea oil drilling, mining in conservation areas and fracking – all for the sake of jobs.

But Labour’s resounding defeat in the 2014 election should really be seen in the international context. Labour Parties and Social Democrat parties are struggling all over the western world – in Australia, UK and Canada and even Sweden they are losing ground. Cunliffe hasn’t got it on his own. All social democrat parties are struggling to reconcile protection of the environment with the economy so voters just cast their lot with the conservatives who promise “economic growth” (no matter what kind of growth). IN the case of New Zealand you can add in a personable Prime Minister with the common touch, a Leader of the Opposition who is prone to lecture and the challenge is almost insuperable.

The price of West Texas oil on 23 Sept 2014 was $91.50 and Brent Crude was $97, due to falling demand. But it is costing $100 a barrel these days to produce “tight oil”, the sort that is costly and difficult to extract. As Richard Heinberg recently wrote “Extracting and delivering those resources at an affordable price is becoming a bigger challenge year by year.” We have the perfect storm of peak resources, climate change and economic instability and no Labour Party is has the facility to deal with them. Moreoever it is no good reminiscing about the great days of Micky Savage, Norman Kirk or David Lange. The Labour Party now has a huge leap to take to adapt to the real world of 2014.

While the Greens move towards the middle, the Labour Party probably has to move to the right for electoral purposes. With so many environmentalists in the party these days they are damned if they align with the Greens and damned if they don’t. The alternative is for the Greens to move over and let Labour occupy more of their territory.

The challenge requires much more than bandaid solutions of Kiwibuild, raising minimum wages and Working for Families. It requires the complete rethinking the political economy, one which works for a post fossil fuel age.

Over the last three years the New Economics Party has been doing this and we have come up with some proposals. We believe it requires a massive change to the tax system and fundamental currency reform so that we get public creation of money with strict inflation control. Furthermore it requires recognising we live in the age of automation so a Universal Basic Income must replace our welfare system. The Labour Party has been talking jobs, jobs and jobs. But it is more realistic to talk of having enough money and enough choices. Only a Basic Income will emancipate the welfare system, improve working conditions and provide a real incentive to work.

As Michael Bauwens, Founder of the p2p (peer to peer) Foundation said “any movement dependent on labour and the power of labour is futile, because labour is disappearing.” They are stuck in a Cold War narrative and have no stories for the future. The workforce has also been casualised as employees are made redundant. Many of them set up a small consultancy. The trend continues. Labour is bleeding and becoming freelanced.

Is the future 3D printers in microfactories in small towns ?

Is the future 3D printers in microfactories in small towns ?

There is another factor. According to economic historian Philip Mirowski the left doesn’t understand neoliberalism. When they don’t understand it, they underestimate the cleverness of their foe and simply cannot counter it. Neoliberalism has re-engineered society. We need to tackle Capital in a different way, by disempowering it through the empowerment of people. Through real democracy, through new technology allowing real people to own the means of energy and production. Maybe this is 3D printers in microfactories in small towns with a local bank. Many on the right will get on board with that.

Perhaps we have to write Labour off and accept they are not a movement of the future. Do they really have to move into National’s space to better “play the game”? Well, it’s not a game, it’s about survival and it’s about now. Fewer and fewer people will vote. Labour will be seen as a weak ineffectual version of National. And if the Greens continue to sing from Labour’s songbook, they’ll likely stay at 10% too. The more they try and portray themselves as CEOs the further they will lag behind the international Greens movement.

However, given the fact that the Labour Party is unlikely to adopt either the massive currency reform, tax reform and welfare reform required for a redesign of the political economy, it may either continue to thrash itself to death or stagger on as a less environmental party. Neither option is good. The challenges of the post fossil fuel age will indeed be very hard on social democracy parties with a proud history.

by Deirdre Kent and Aaron McLean