Meanwhile Back in the Sandbox...

[GRG55]

Re: Meanwhile Back in the Sandbox...

That is exactly my point.

The Western' oligarchs wants the above you are quoting jk, and will spare no expense to get it - including hundred of thousands civilians killed. That is why they are in MENA.

Now you are going around in circles Largo...

Either all means are being used towards the "control oil" end, or oil is but one means to a greater end.

Which is it? It cannot be both sir...

[EJ]

Re: Meanwhile Back in the Sandbox...

Bingo.

"It's all about controlling oil" is extraordinarily facile.

Superbly high quality discussion here, gentlemen. My two cents: to say US interests in the Middle East are about oil is like saying Moby Dick is a book about a whale.

While I'm here I thought I'd drop a few charts out of dozens from tomorrow's post where I attempt to decompose the meme-shaping by the financial oligarchy's media as represented in the fake debate about the debt ceiling.

Here's the problem being buried in the debt ceiling debate. The media, led by the Wall Street Journal, has raised the alarm about an impending US bond crisis if Congress and the White House do not capitulate to spending and tax cuts.

T-Bills on the Brink
Holders of First Treasurys Due After Aug. 2 Face Uncertainty

When Mark F. Travis bought a handful of Treasury bills back in February, he figured he had just bought the safest, most boring investment on the Street.

Almost six months later, that T-bill is among the most volatile in the stock-picker's portfolio.

Mr. Travis, president and chief executive of Intrepid Capital Funds, holds $38 million worth of the Treasury bill that matures Aug. 4. It is the first Treasury to mature after the Aug. 2 deadline for Washington to approve an increase to the government debt ceiling. After that time, the Obama administration has said, the government may start defaulting on its debts.

The story includes a graphic luridly titled "Race Against Time." It supposedly reveals an enormous jump in T-bill yields produced by holders who are selling in anticipation of an impending US debt default.

Looks quite dramatic.

Race against time? If this is the start of a bond crisis we're off to a slow start.

Race against time? If this is the start of a bond crisis we're off to a slow start. A real bond crisis looks like this. We are not even at step one.

Something is amiss in the popular imminent US default story. They bond market isn't buying it.

Here's my theory.

US politicians looked brilliant through most of the 30 years of the FIRE Economy when bond yields fell. Now that the year bull market in bonds is over, what next for growth?

The amount of new debt needed to produce a dollar of GDP growth as our economy is currently structured is indeed alarming.

But is out-of-control public debt-financed spending really the issue?

Often public debt as a percent of GDP is used to support the debt ceiling limit argument. No one is asking if public debt is a meaningful part of total debt.

It isn't. It's minor and shrinking in relation to total debt.

The real issue is that financial sector debt is up from 2% of total debt in 1952 to 37% today and public debt has become a political guarantee of financial sector debt.

The most likely motivation for the manufactured debt ceiling crisis is to justify a diversion of funds away from government expenditures that do not maintain financial sector credit growth to those that do.

More tomorrow.

[gnk]

Re: Meanwhile Back in the Sandbox...

Bingo.

"It's all about controlling oil" is extraordinarily facile.

Imagine a world where China was the dominant military and political player in the Middle East.

The Middle East has the most swing producers. The rest of the world has the most terminal decline producers. Middle East (Oil) relevance will only grow.

Furthermore, whoever controls the Middle East, and keeps it from blowing up, keeps reserve currency status and the exorbitant privilege that comes with it.

[LargoWinch]

Re: Meanwhile Back in the Sandbox...

The most likely motivation for the manufactured debt ceiling crisis is to justify a diversion of funds away from government expenditures that do not maintain financial sector credit growth to those that do.

More tomorrow.

Great post EJ.

I do have a question; what about debt to GDP? In their book "This Time Is Different: Eight Centuries of Financial Folly" Reinhart and Rogoff argues that the point of no return is when debt reach 100% of GDP?

Now, Hussman is making the case that the US - although having total Federal debt of close to 100% of GDP - that debt held by the public (outside of that held by Social Security and the Federal Reserve) amounts to about 60% of GDP.

Is he correct in assuming this? What if public debt indeed reach 100%, is that the point of no return?

[LargoWinch]

Re: Meanwhile Back in the Sandbox...

Now you are going around in circles Largo...

Either all means are being used towards the "control oil" end, or oil is but one means to a greater end.

Which is it? It cannot be both sir...

Maybe I am wrong, but I believe in the later; oil is but one means to a greater end.

For example, but not limited to, containing potential economic/military rivals such as China and Russia.

"Shortage of petrol! It's enough to make one weep" - Erwin Johannes Eugen Rommel

[mmr]

Re: Meanwhile Back in the Sandbox...

If the intent of the recent spectacle was to stall the economy (which may have been slowing down on its own without any help), how would highlighting the amount of federal debt help to justify more financial sector subsidies?

The most effective means for the government to support the financial system has been, as you pointed out, through credit guarantees, most of which don't show up in official debt / GDP or expenditures. Between the FDIC ($4 trillion of guaranteed liabilities) and Fannie / Freddie / the FHLB system (another $6 trillion), the government already guarantees a good chunk of the financial sector's liabilities directly with fairly minimal actual cash expenditures. If one includes the various other asset classes where the Fed recently provided implied credit support (commercial paper, other asset-backed securities, etc.), there aren't too many financial liabilities left for the government to guarantee, unless they want to directly guarantee derivatives.

The government can't explicitly take on much more of the financial sector debt - the student lending sector was the exception, both because it's relatively small and has so far helped to offer "hope" to younger citizens in lieu of actual jobs.

Would you expect these government expenditures to take the form of guarantees or programs to prop up collateral values (e.g., cash for clunkers, mortgage subsidies, etc)? Or were you referring to an economic crash that would justify more Fed asset purchases, interest rate games, and higher inflation?

[patrikkorda]

Re: Meanwhile Back in the Sandbox...

Superbly high quality discussion here, gentlemen. My two cents: to say US interests in the Middle East are about oil is like saying Moby Dick is a book about a whale.

EJ, I am assuming that (1) most of the bureaucrats in Washington are Keynesians and (2) they take output gaps seriously. That being said, once FIRE debt deflation kicks in I am afraid the public sector will step in to fill the gap. Long story short, it seems like we are setting up for a big war.

http://www.youtube.com/watch?v=eXfOr...layer_embedded

[aaron]

Re: Meanwhile Back in the Sandbox...

EJ, I am assuming that (1) most of the bureaucrats in Washington are Keynesians and (2) they take output gaps seriously. That being said, once FIRE debt deflation kicks in I am afraid the public sector will step in to fill the gap. Long story short, it seems like we are setting up for a big war.

http://www.youtube.com/watch?v=eXfOr...layer_embedded

What if... the anti-war people started "winning" and the U.S. started to withdraw forces from the middle east, quickly.
After what I have seen in the Arab spring.. I think the place would fall apart. Inevitably, the "World's Oil", "our" oil, will get disrupted. American SUVers will demand we go back in there to help stabilize the world.

There is your big war. Hopefully it involves massive numbers of unmanned drones, provided by Europe, purchased from Americans (with Chinese parts). It is a virtuous circle, you see. We need oil. We can get it for you, but it will cost you. It would certainly help to hide Peak Oil. (it is all the terrorists!)

Or, the U.S. leaves. Dictators step down. Democracy unites all! Peace and love reigns. France, Germany, and Turkey all hold hands and provide peace and aid to the lands.

---------

[GRG55]

Re: Meanwhile Back in the Sandbox...

Imagine a world where China was the dominant military and political player in the Middle East.

The Middle East has the most swing producers. The rest of the world has the most terminal decline producers. Middle East (Oil) relevance will only grow.

Furthermore, whoever controls the Middle East, and keeps it from blowing up, keeps reserve currency status and the exorbitant privilege that comes with it.

The world has moved past the point where anybody can "control" the Middle East.

The Brits tried at a time when the world was a much simpler place...and ultimately failed. The USA has done an admirable job through most of the post-WWII period in the last century...but those days are over. Some of the Gulf States would love to exchange USA protection for Chinese protection - that way they wouldn't have to listen to lectures about democracy. China may get to try its hand, but not for a decade or two...and perhaps not even then [China's current ability to project military power is pretty well zilch - my "China is a Dragon-at-home and a Panda-outside-its-borders" analogy from another thread many months ago].

The "deliberate chaos" theory - a joint effort between the USA and Europe - makes more sense as time passes. Quick, somebody tell me the difference between the State Department run by Condolezza Rice and the one being run by Hillary Clinton? It's not about securing or controlling the oil directly...it's about making sure the rest of the world continues to be [highly?] motivated to buy "safe-haven" Treasuries and European sovereign bonds...

[gnk]

Re: Meanwhile Back in the Sandbox...

The world has moved past the point where anybody can "control" the Middle East.

The Brits tried at a time when the world was a much simpler place...and ultimately failed. The USA has done an admirable job through most of the post-WWII period in the last century...but those days are over. Some of the Gulf States would love to exchange USA protection for Chinese protection - that way they wouldn't have to listen to lectures about democracy. China may get to try its hand, but not for a decade or two...and perhaps not even then [China's current ability to project military power is pretty well zilch - my "China is a Dragon-at-home and a Panda-outside-its-borders" analogy from another thread many months ago].

The "deliberate chaos" theory - a joint effort between the USA and Europe - makes more sense as time passes. Quick, somebody tell me the difference between the State Department run by Condolezza Rice and the one being run by Hillary Clinton? It's not about securing or controlling the oil directly...it's about making sure the rest of the world continues to be [highly?] motivated to buy "safe-haven" Treasuries and European sovereign bonds...

I guess "control" is a strong word for what I was trying to convey. What the US has is somewhere between "strong influence" and "control," and again, that changes with the country in question. There is a big difference between Iraq or Saudi Arabia, and Iran.

Nonetheless, there is a very strong relationship between energy and money. Whereas money is an abstraction, a concept used to facilitate trade, energy is the real deal, a tangible nonrenewable resource in high demand that fuels the industrialized civilization we know today. Combine the two in complex ways, and a system develops. From petrodollar recycling, to what you mention above: creating a "safe haven" investment - the two work together for those with the most power.

Now imagine if the US decided hey, we get most of our oil from North and Central America, let's forget the Middle East. Setting aside the many economic consequences of such an action, the geopolitical consequences to the Middle East would be catastrophic, IMO. Revolutions, invasions, tribal, ethnic, and religious warfare, etc, would flare up. The Middle East is inherently a powder keg with no foreign involvement necessary. Yet that oil must flow.

The world needs a policeman. And since there is no institution or country stronger or wealthier that could pay the policeman, the policeman needs to use mafia tactics to pay himself and make his job worthwhile - but even then, there are limits.

I remember Pres. Clinton once saying that the US is the world's most indispensable nation. This is what I think he was referring to. He was telling the rest of the world that we are the cop on the beat. Without us, chaos ensues.

[GRG55]

Re: Meanwhile Back in the Sandbox...

I guess "control" is a strong word for what I was trying to convey. What the US has is somewhere between "strong influence" and "control," and again, that changes with the country in question. There is a big difference between Iraq or Saudi Arabia, and Iran.

Nonetheless, there is a very strong relationship between energy and money. Whereas money is an abstraction, a concept used to facilitate trade, energy is the real deal, a tangible nonrenewable resource in high demand that fuels the industrialized civilization we know today. Combine the two in complex ways, and a system develops. From petrodollar recycling, to what you mention above: creating a "safe haven" investment - the two work together for those with the most power.

Now imagine if the US decided hey, we get most of our oil from North and Central America, let's forget the Middle East. Setting aside the many economic consequences of such an action, the geopolitical consequences to the Middle East would be catastrophic, IMO. Revolutions, invasions, tribal, ethnic, and religious warfare, etc, would flare up. The Middle East is inherently a powder keg with no foreign involvement necessary. Yet that oil must flow.

The world needs a policeman. And since there is no institution or country stronger or wealthier that could pay the policeman, the policeman needs to use mafia tactics to pay himself and make his job worthwhile - but even then, there are limits...

Hmmm. Tribalism, religious warfare, the overthrow of long standing kleptocratic dictators. Sounds like that's going on now...and your global policeman would seem to one of the instigators and active participants in some cases...

I remember Pres. Clinton once saying that the US is the world's most indispensable nation. This is what I think he was referring to. He was telling the rest of the world that we are the cop on the beat. Without us, chaos ensues.

I am certain you'll find quite a few folks in the Middle East, especially Iraqis, who think "with you, chaos ensues". I will admit that most of them probably wish their world could return to the days of the Clinton era, before the self-appointed global cop went rogue...

[gnk]

Re: Meanwhile Back in the Sandbox...

I'm not saying the US is always the best cop it could be. But I would rather live in a world where a cop exists in the middle east, than without one - and preferably, my cop and not someone else's. Note, I am not condoning all US actions in the Middle East. I'm just saying it could be worse, a lot worse. And lately, the "cop" is serving the interests of a few of its constituents more so than the greater system it ultimately relies on. To extend the analogy - the "cop" has a bad infestation of internal parasites that affects his judgement.

Historically speaking though, Pax (fill in the blank - Romana, Britannia, etc...) has always been a period of stability and technological advances, not for everyone, of course, but for most.

Life's a bitch when the world feels the need to determine the next "king of the hill," or if the world actively questions if the king still has what it takes. Either way, we call those global wars.

Maybe Superpowers act irresponsibly on the downslope of prosperity, maybe it's desperation, maybe stability breeds influential domestic sectors that interfere with the "greater good," maybe to paraphrase Joseph Tainter, complexity has its limits, and simplification always returns in an ugly way, or... a little of all of the above?

[LargoWinch]

Re: Meanwhile Back in the Sandbox...

I'm not saying the US is always the best cop it could be. But I would rather live in a world where a cop exists in the middle east, than without one - and preferably, my cop and not someone else's. Note, I am not condoning all US actions in the Middle East.

I respectfully disagree gnk.

Within the context of statism (i.e. if you accept the premise that there should be "countries" at all), then these ME countries should be allowed to do as they please - not our business. We have enough problems at home to keep us busy for decades without us having to spend our limited resources and spill blood in that region.

Worse still, we are a "selective cop"; a cop that decides to act - usually with overwhelming force - only when its interests and power is threaten. However if there is nothing for us we do precisely nothing (ex: Africa). Sounds more like a mafia cartel to me.

[gnk]

Re: Meanwhile Back in the Sandbox...

I respectfully disagree gnk.

Within the context of statism (i.e. if you accept the premise that there should be "countries" at all), then these ME countries should be allowed to do as they please - not our business. We have enough problems at home to keep us busy for decades without us having to spend our limited resources and spill blood in that region.

Worse still, we are a "selective cop"; a cop that decides to act - usually with overwhelming force - only when its interests and power is threaten. However if there is nothing for us we do precisely nothing (ex: Africa). Sounds more like a mafia cartel to me.

Look at the boundaries of Europe and Asia. You know how much blood was spilled in determining those boundaries? You know how often those boundaries were re-drawn, again, in blood?

Well guess what. The Middle East sits atop the largest easily accesible oil reserves in the world. You want them to go through their own regional wars in order to redraw the boundaries others, like Churchill drew?

We allow them to do that, and civilization, as we know it, ends.

I'm being a realist here folks, not a jingoist. It sucks to be them and yes, the cop could be doing a better job. But he's our cop. And don't think for a minute that if we let them do as they please that someone else, Russia or China, doesn't take over and then kiss your way of life goodbye. Power vacuums don't exist for too long.

You want to know what American Exceptionalism is? It's dominating everyone else. That's what it is. I live in Greece now, although I am a US citizen - born and raised in the US. I see what small countries go through, how their history is controlled by the superpower du jour, how it affects culture and living standards.

The average American would completely lose it if the free ride called Superpower status was abdicated.

It's a dog eat dog world. Either you're eating, or you're someone else's lunch. Ideally, it's best to be a free rider - and those do exist.

(Honestly, I feel sick to my stomach channeling Dick Cheney, but I respect that viewpoint more so than the idiots that believed in democratization or WMDs. Let's call it what it is.)

[LargoWinch]

Re: Meanwhile Back in the Sandbox...

Look at the boundaries of Europe and Asia. You know how much blood was spilled in determining those boundaries? You know how often those boundaries were re-drawn, again, in blood?

Well guess what. The Middle East sits atop the largest easily accesible oil reserves in the world. You want them to go through their own regional wars in order to redraw the boundaries others, like Churchill drew?

We allow them to do that, and civilization, as we know it, ends.

I'm being a realist here folks, not a jingoist. It sucks to be them and yes, the cop could be doing a better job. But he's our cop. And don't think for a minute that if we let them do as they please that someone else, Russia or China, doesn't take over and then kiss your way of life goodbye. Power vacuums don't exist for too long.

You want to know what American Exceptionalism is? It's dominating everyone else. That's what it is. I live in Greece now, although I am a US citizen - born and raised in the US. I see what small countries go through, how their history is controlled by the superpower du jour, how it affects culture and living standards.

The average American would completely lose it if the free ride called Superpower status was abdicated.

It's a dog eat dog world. Either you're eating, or you're someone else's lunch. Ideally, it's best to be a free rider - and those do exist.

(Honestly, I feel sick to my stomach channeling Dick Cheney, but I respect that viewpoint more so than the idiots that believed in democratization or WMDs. Let's call it what it is.)

You are making excellent points gnk and I agree that unfortunately, if the West leaves the ME, something worse could replace it (Incidently, it has been awhile since I have encountered a thread that is as emotionally charged as this one - its kinda like religion ).

My point was simply that the West is not a "cop" as this implies somewhat good things, but a mafia organization competing against other "mafia organizations" for control.

Perhaps I am an idealistic dreamer, but if the ME countries would be left alone at least they could suffer from their own mistakes and enjoy their successes, but with that much oil underneath their feet, I reckon that this is very unlikely to happen.