Some Other People Do Some Other Things
Some Other People Do Some Other Things by James Howard Kunstler
An almighty bafflement befogs the nation as the first full business week of 2020 commences and events pile up like smashed vehicles on a weather-blinded highway. Before we even smoked that Iranian bird on the Baghdad airport tarmac, something ominous was tingling away in the financial markets, in fact, has been since way back in September. Perhaps one-in-100,000 Americans has the dimmest clue as to what the repo mechanism stands for in banking circles, but it has been flashing red for months, with klaxons blaring for those who maybe missed the red flashes.
The repo market represents trillions of dollars in overnight lending in which bonds (or other “assets”) are used as collateral for ultra-short-term loans between large banks. Theoretically, this flow of supposedly secured lending acts as mere background lubricant for the engine of finance, like the motor oil circulating in your Ford F-150. You don’t notice it until it’s not there, and then all of a sudden you’re throwing rods and sucking valves, and the darn vehicle is a smoldering goner in the breakdown lane.
The strange action on the repo scene suggests that some big banks are in big trouble, and probably because the “innovative investments” they’ve engineered — as a substitute for the true purposes of capital, such as enabling production of real goods at a profit — are proving once again to be little more than swindles and frauds, like last time. Things like interest rate swaps and credit default “insurance.” Have your eyes glazed over yet? The bottom line is an impressive potential for losses to go critical, multiply daisy-chain style, cascade wildly, and then start wrecking real things — like the supply lines to your supermarket.
When you cut through all the esoteric crap, what’s likely behind all that is the dynamic of a failing affordable global energy supply. Yes, really. It’s not working to run the global economy anymore, so we resort to swindles and frauds instead. That must seem crazy to Americans especially, who look at our all-time record oil production of nearly 13 million barrels-a-day now and behold the blue sky of “energy independence” as far as the eye can see. The trouble is, it’s a hologram of a mirage of a Ponzi scheme. Suffice it to say that shale oil just doesn’t make any money and all the other regular oil around the world is harder and harder to get to. A lot of that other oil is in the Middle East.
So, a lot depends on what happens in the Middle East, easily the most politically mixed-up and confused region in the world — though central Africa may have it beat for sheer horrifying chaos. In general, we tolerate all that confusion as long as the oil keeps flowing to world markets, enabling the flows of everything else. But any hint of an interruption sends humanity and all its signaling systems — such as financial markets — into a psychotic fugue. Which is what we’re approaching now.
The financial markets know that a lot less new investment will flow into shale oil from now on, since it was a lousy investment the past ten years, despite all the admirable techno-virtuosity behind it, and that before long the mighty shale oil bell curve will turn down, and everything economic with it. Folks who make foreign policy and military plans may sense this too, perhaps dimly. But then they confront the additional mystifying calculus of all those moiling parties in the Middle East jockeying for position and advantage as the oil-hungry big dogs of the world desperately try to figure how to keep those oil flows going their way.