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

Posted on April 5, 2015 by Deirdre

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

The Land Dollar – how we came to offer this as an option

Posted on March 25, 2015 by Deirdre

The combination of allowing banks to create money interest bearing debt, together with a land tenure system that allows people to profit from rising land values have led to growing debt, a built-in growth imperative, inequality and a never ending series of boom-busts. Both the issues of land and money need to be addressed, especially in the light of the climate emergency and the growing inequality we live with.

In our search to design an economy that isn’t at war with the planet – one that doesn’t write in forced economic growth or widen the gap between rich and poor – we have opted to combine basic income, monetary reform, governance reform and tax reform (the latter closely related to land tenure reform). We want a world where everyone has a fair share of our common wealth. We want to replace the extractive model that is killing our habitat with one that is life-friendly.

While addressing these reforms together is a huge challenge, we know for our climate’s sake we must succeed. In reforming the system we know we can’t afford to shock the economy. So we need incremental change of some sort and must look to nature for guidance about design.

We realised early on that imposing a land tax alone was politically well nigh impossible, even at half a percent. Raising it to the a full land rental level would be just as hard. That sort of incremental change would not be possible.

Objections for instance to charging a full rent for monopoly use of land include:-

a. The banks would block it. They hold the power because they issue mortgages backed by land.
b. The public wouldn’t like it because the market value of their property would decline. This is unacceptable especially to those with big mortgages.
c. Property owners would argue they already pay rates and a mortgage so why should they have to pay a third time?

We realised early on that reforming the money system by spending money into existence to build infrastructure would result in rising land values for those with properties served by that infrastructure – be it rail, schools or ports. It would be difficult to control land inflation and therefore to halt the march to further inequality. The rich would also buy up patents and any natural monopoly they could get their hands on.

Funding a full Basic Income is also a considerable challenge. An extremely large sum is needed, even when the net public expenditure is calculated.

During the summer of 2001-12 Deirdre had had a series of Skype calls with a Cambridge academic, the late Dr Adrian Wrigley. His solution was for the Treasury to pay off the mortgage and for a full land rental to be paid. The property would then have a covenant on it requiring owners to pay a full land rental to Treasury. No rates would then be payable. If the property was sold, the next owner would still have to pay that rental.

We only wanted the land to be bought/paid for, not the whole mortgage, so we changed it to that.

We soon learnt that using the preferred “covenant” idea was hard to explain to the public so we reluctantly dropped it in favour of publicly owned leasehold land. However we started with a centralised model of public ownership and remained with that for almost 2 years. All the time we were a uneasy about land being owned by any agency of central government.

Adrian never talked of a parallel currency. It was our idea to have one. We thought the current system is so badly messed up we had to start again, and believe that this was also the way not to shock the economy.

We knew a lot of land is overvalued and although we recommended buying land at market value, we know this isn’t the total solution.

So we recommended designing a second parallel (and competing) national currency, and link it from the start to completely new tax laws. After all no public budget would ever stretch to paying for such a large quantity of land, no matter how slowly it was acquired. Treasury, not the Reserve Bank, would issue Treasury Notes to buy up land. We happily adopted Adrian’s excellent idea of having a Land Rental Index for each area and adjusting the rental each year accordingly. Only the land value needs assessing not the improvements, so that is easy. And you only need a sample of properties in each general area. Land rentals are valued each year and the index suitably adjusted.

Parity with the land dollar with NZ dollar became a hot topic of debate. After discussion we eventually said “issue it at par, redeem it at par and let it float in between.” The new currency would be valued by those who wanted to employ labour without tax or buy goods without sales tax.

The name of new currency changed many times – Tradeable Tax Credit, Treasury Note, Zeal and finally the Land Dollar. (We also went through a short stage of recommending Rates Vouchers for both Auckland and Christchurch.)

Then, in mid year 2014 we suddenly realised it didn’t have to be issued by Treasury at all. Eureka! It could be issued by Community Boards and the revenue could be shared by other levels of government and eventually flow to central Government. We said ‘turn the funding model upside down, replace centralisation with a model where decisions are made across the whole economy. Restore local democracy’. We gave a great deal of power to the local level of government – currency creation power, land buying power (compulsory where applicable), and revenue gathering power.

In this model the Community Board or its elected equivalent “owned” more and more land – a more politically acceptable solution. The local committee must have on it, by right, one or two representative from the local iwi or hapu grouping, who would have veto power over any decision to buy land, thus avoiding potentially sensitive land. Land would effectively go into a Community Land Trust. In this way land could be gradually taken out of the market place and the people who decide which land to choose would be answerable to the locals. (Adrian had hoped the land buying could all be done voluntarily to avoid legislation. Some will no doubt come in voluntarily)

A whole raft of tax laws applying to transactions using the new currency (the Land Dollar) would have to be passed right at the beginning. These would include all taxes on the rights to the use of natural monopolies. Natural monopolies are the rights to land, water, airwaves, minerals, fisheries, patents, domain names, hydro-electric power generation and supply, any public utility such as a port, airport or the monopolistic rights to reticulate wires, pipes, rails, roads and the like: the right to use water, air, land or the biosphere to absorb waste.

So what does the policy say now?

Our party wants to restore the concept of sharing the values of the commons, have a money system that doesn’t build in increasing debt and the need for competitive behaviour. We want to distribute the rent from use of the commons to all NZ citizens over one year old as a regular Citizens Dividend.

A new national currency the Land Dollar is to be slowly spent into existence at Community Board level to buy up land. No rates would be payable for those whose land is community owned. A local land committee would give local hapu/iwi veto power over decisions as some land may be sensitive even after Treaty settlements. The rent from the land would be shared with other levels of Government and as a Citizens Dividend – using participatory budgeting as there would be many simultaneous claims. Inflation would be controlled by a network of committees at different levels working with Treasury and Reserve Bank.

Transactions using the land dollar would attract no income tax, GST or corporate tax. But a whole set of different taxes is needed. This is because it must not be spent to plunder the earth, deplete resources, subtract from the social or cultural capital or pollute the water, air or biosphere. That means a full carbon tax for example.

For any currency to be effective as a means of exchange there has to be a circulation incentive built in. Adrian Wrigley suggested that rather than having a financial penalty built in for hoarding as recommended by Silvio Gesell, to make it easier each note should be issued with an expiry date.

The electronic version when received by Treasury would be refreshed and redated before issuing it as a Citizens Dividend. All citizens would receive it. Where there were dependents, the designated carer would receive it, thus changing the economic status of carers. In time this dividend would rise to a basic income, allowing a huge range of inventions and options for people who have been in unsatisfying jobs but have a passion or a hobby they want to pursue. Entrpreneurism would flourish – much needed in a post carbon age.

There are many unresolved issues. The property owner that has land bought with the new currency will have $100,000 plus to spend. Trades with the land dollar will not attract GST, income tax or company tax. We need actual examples, but believe a lot of it will be spent on labour to upgrade their homes or on the development of their small business.

We invite alternative solutions
This policy has been derived by discussing with a range of people at and between meetings and it has been largely driven by Deirdre, who has received feedback from meetings in Christchurch, Otaki, Wellington, Motueka, and two at huis held by the Living Economies Educational Trust hui. We are also aware there are some big issues we have not yet tackled, like the issue of Maori land. Our solution, we emphasise, is one solution. If you have another, please let us know!!
April 2015

The Tree issue in Titirangi is an example of why land should move to public ownership

Posted on March 12, 2015 by Deirdre

The architects who own the two Titirangi sections with the precious kauri and rimu trees on them should have their land bought by the Local Board and the rent should be reduced because of the restrictions they suffer in building, according to the New Economics Party.

Spokesperson Deirdre Kent said the tree issue in Titirangi is a graphic example of why land ownership should progressively move into public ownership. Local Boards should have power to create a second national currency to buy up community land. And if the use of the land is restricted because of historic building, conservation of trees or building height limits, the rent should be reduced as the part of the land already serves a public purpose.

The land rent should be in lieu of rates and the revenue shared by other levels of government.
She said if the Auckland Council (preferably the Local Board if it had the power) buys this land destined for low cost housing there will be four beneficial outcomes:
1. The trees can be saved
2. the housing produced will be genuinely low cost because the cost of the land will not be included into the cost of the housing
3. the citizens Auckland will enjoy a dividend from the land rental in perpetuity
4. The citizens of New Zealand will enjoy a more bouyant economy as lower cost of housing results in lower mortgage payments therefore less interest payments and less bank profits streaming across the Tasman to Australia.
“The financing of land purchase on a large scale is eminently possible. It is only political will that is needed to create a second national currency that can be spent into existence through land purchase by councils,” said Ms Kent

For further comment phone Deirdre Kent 06 364 7779 or 021 728 852

What has Precinct Properties buying public land to do with hungry children in our schools?

Posted on February 25, 2015 by Deirdre

Anyone notice that 20-22% of schoolchildren in New Zealand are hungry every day? What has this to do with the recent sale by Auckland Council of the most valuable property in the country to a private company, Precinct Properties?

Well, plenty. Let me explain. If Mayor Len Brown had played Monopoly enough as a kid he would know that the way to get rich is to buy properties. Well, read “buy land” actually. When a representative of Precinct Properties spoke on National radio tonight he was open when he said, “Our emphasis is on owning land freehold” Of course. “Freehold” means “free of rent”. How nice.

So instead of leasing the land to a developer, the Auckland Council has sold 2 acres of the most valuable land in the country and thinks it has done a deal. But the “deal” is really Precinct Properties 100: Council 0. Precinct Properties knows it because they know the City Rail Link is about to start and the uplift in land value is theirs to capture – and other land owners near the hubs.

It is not news that land near rapid transit hubs will rise in value. When the Jubilee Line Extension was built in London in the late 1990s, it was discovered that the uplift in land values of properties within 1000 m of a hub was £13 billion. The cost of the extension was a mere £3.5 billion. Yes, that means private landowners get windfall gains from public expenditure. The public loses all round and windfall gains are all privately collected by “freehold” land “owners”. Nice. Thanks!

It’s not a coincidence the sale happened right now. Auckland Council was busting to start the link but delays were frustrating them. Imagine the Precinct Properties smooth talk to gullible Mayor Len Brown: “If you let us buy the QE11 Square we will build a wonderful new building and attract huge expansion in Auckland. It will also enable you to start the City Rail Link.” “Wonderful,” says Len. And he thinks: “Just what I want. People will remember me as the one who got the City Rail Link and did so much for the development of Auckland.”

Of course there will be development. The start of the rail link is just what landowners near the City Rail Link hubs are hanging out for.

Our party says we need more land in public ownership, not less. In fact there should be a law against selling public land. If the government or council want to have land utilised it should lease the land never sell it.

OK, that is at the moment dreaming, as all the momentum is exactly in the other direction.

But there is a partial and realistic solution – get land owners in the area to share part of their windfall gain with the council so the council can gradually pay off the loan to build the link. It can be done through targetted rates under the law. Targetted rates are used extensively by Wellington Regional Council and by almost every council. It is only a fraction of the windfall gains in land value that is targetted. And this is politically acceptable. People understand that they should share their gain with the public purse. If a landowner benefits from public spending they should pay higher rates. Spread over 20 years, it will pay a significant proportion of the cost of the City Rail Link. The Sydney Harbour Bridge and the Melbourne Rail Link were partially funded this way. The process is called Land Value Capture and it exists in various forms all over the world.

So what has this got to do with hungry children? Remember the Campbell Live recently showed that of one class of 28 Year 11 students at Decile 2 Kelson Girls College, 18 of them didn’t have lunch and ten came to school with no breakfast. 8 had no breakfast and no lunch. “Many students are needy. Their parents are really struggling to make ends meet,” said the school principal.

When people and businesses with the most valuable land (think central Auckland) have a windfall rise in land value, money that rightly belongs to the whole public flows into the coffers of the land “owners”. Businesses like Precinct Properties. The propaganda is that it is owned by mums and dads, yes very wealthy mums and dads, but mostly big investors like insurance companies and pension funds. Calculations earlier show that every year the public is deprived of something like $37 billion through the uplift in land values that occurs with development. A real estate agent last week told a friend in Howick that values there were rising by $15,000 a month and he could see no end to it.

Yet the “mums and dads” of the Year 11 students at Kelston Girls College are paying rates or rents and often catching buses to work two jobs. Mostly they will be renting. They won’t be getting any unearned windfall from the uplift in land values. That is how people get rich, not by working. Wherever you find a really rich person or company you will know they are landowners who have received unearned gains from rising land values.

Combining resource (including land) taxes, monetary reform and basic income is the political challenge of our time

Posted on February 10, 2015 by Deirdre

My name is Deirdre Kent and I am the co-founder and co-leader of the New Economics Party New Zealand.

We have been working for three years to try and design a new economic system which is going to work for all life on our planet and in our country. We have decided we need to bring together three different movements – the monetary reform movement, (including reforming the national currency and having a whole range of complementary currencies), the tax reform movement to move towards land and other resource taxes and away from income tax and sales tax, and thirdly the movement for a basic income, giving an unconditional, basic income to all people where paid work may not be available for all people.

So – how do we do this? Well you can’t actually do one thing then do another and then do another because everything is interconnected. So we have to think about it as a whole system. A whole system hyperconnected globally. And we are saying that you have to look at the two things which change the system most, where you get the greatest “bang for your buck” by tweaking it just a little bit. We are saying you have to change the money system and the tax system. Those are the two paradigms we have to change. Secondly we have to change the goal of an economy. The goal of an economy is not just ‘to grow’, which is impossible on a finite planet and we all know that. And now we have got climate change because we have been so foolish.

So pulling those three things together we decided we would end up leaving the current system alone. We have got a very bad tax system. Over 80% of our taxes are on labour, enterprise or sales. Nonsense! Those are things we want to encourage as long as the goods are the right sort for a post fossil fuel age. So that is a major change in our tax system.

Secondly we want to change the money system. How on earth do you do that when we are so dependent on banks and banks are so powerful? So we are saying leave the current system alone. It is going to fall over, it is going to decay. It’s unstable, we have got deflation coming, huge debt. Goodness knows what is going to fall over next and what is going to trigger the next Global Financial Crisis.

We are saying you have to start a second national currency in parallel. But this one is designed differently. It is spent into existence at local level to buy land, and then the revenue stream from the land rental (which is quite significant) will be passed to higher levels of government and occasionally it is shared with the all citizens over a year old through a Citizens Dividend.

Right at the very start of this new currency we would pass a raft of new tax laws governing it. A full land tax, a full carbon tax and full mining tax. So it would be ruled by a different set of tax laws.

And this new economy would grow in an entirely different way. It would be a thriving dynamic economy for a post fossil fuel age.

Now we realise this is almost a preposterous proposal. And yet in Germany when they had a crisis in 1923 they set up a new national currency and it was backed by land. Ours is an improvement on theirs because we are putting it into existence without interest. It you allow the banks to create the money as interest bearing debt, then you are always going to have a growth imperative built in. It’s a mathematical certainty that you have to keep growing the money supply, and growing the economy and that causes a growth imperative leading to climate change.

And we have to stop it. We have to design an economy not dependent on a growth imperative and that is for the sake of our children.
So Germany successfully stalled their huge crisis in about a week. The farmers released their food for the towns and social unrest stopped.

Now we went through several stages and you can see that on our site. We went through the stages of covenants on land, we went through various names for the new currency. But on this site you will see plenty to read.

We ask you to join us in thinking and working to design a sustainable economic system.

We are going to have a conference on the last two days in May and the first day of June in New Zealand and we invite you to come. More information on the website soon.

So thank you very much and good luck!

Surpluses mean unemployment and deficits bring employment

Posted on January 19, 2015 by Deirdre

It’s a strange paradox. There is a professor of economics John T Harvey who writes a lot on the fallacy of “getting rid of the deficit.” It seems it is his mission in life to educate politicians that the government’s budget can’t be likened to a household budget and that it shouldn’t be a government’s aim to get a surplus. He writes in Forbes magazine on why you should learn to love the deficit.

But how little progress he is making! I don’t know if he has an equivalent academic in New Zealand, but Australian Professor Steve Keen who now works in UK is also doing his bit. Hs latest article last week was entitled Beware of Politicians Bearing Household Analogies. Then there is a Professor Randall Wray of the University of Missouri and Kansas City doing the same thing.

Despite the shortfall this year, Treasury still backs Mr English to pull the country into the black over the next few years – predicting a $565 million surplus in 2015/16 and $4.1 billion in 2018/19.

Russel Norman blamed it on 2010 tax cuts and the fact that the Govt borrowed $5b in 4 years.

Treasury’s predictions Budget time: $372 m
Election: $297m
Dec: $572 million

(To year to June 30, 2015)

L Randall Wray:
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household.

Surpluses cause a fall in your net assets. Deficits create private sector wealth while surpluses deplete it. If Government takes in $1000 taxes from private sector but doesn’t spend any of it and they had $100 of their own earnings, their total intake is $1100. The private sector has gone into debt of $1000. Government deficits create private sector wealth while govt surpluses drain it. Learn to love your deficit.

But in New Zealand, as in Australia and no doubt Canada and UK, politicians all believe in surpluses. Here’s the current petty interchange from our country.

On Dec 16 on Yahoo the headline was “Don’t blame deficit on tax cuts says English”

“The Government believes a surplus is achievable this financial year despite the Treasury’s latest forecast,” Mr English said.
“Previous forecasting rounds show the outlook can change significantly between the half-year update and the final accounts.”

Opposition parties were quick to describe the forecast as proof of a broken promise.
“Bill English’s face is redder than the crown accounts,” said Labour’s finance spokesman Grant Robertson.
“This is the political test he set himself, and he has failed… the government owes New Zealanders an apology.”

The Greens say National’s economic credibility is on the line and NZ First’s Winston Peters believes the government has been cooking the books for years.”

In Australia we see the headline “Australia budget deficit to hit $40.4 billion” with all the accompanying handwringing and blaming of the opposition. And it is the same in the UK.

New Zealand is in dire need of a professor of economics who makes it his (or her?)mission to educate our own politicians on the topic of deficits and surpluses.

And in an interview with Professor Steve Keen on the Greek issue, he said as one of the conditions of the loan, the Greeks run a surplus of 4.5%. That means you take 4 and a half percent of money out of the economy every year and Europe keeps asking why they can’t grow. That is cruel and ignorant. Tortuous terms. No wonder Yanis Varoufakis the new Greek Finance Minister would prefer to meet with politicians than the Troika. The Troika says they have to keep on going but it is obviously not working and causing a heap of pain.

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

Posted on December 15, 2014 by Deirdre

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.

The 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.

The New Economics Party

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