Wednesday, January 5, 2011

Will we fall off a cliff, or stumble down a slope?

This morning, the oil price reported at is $90.47, with the range for the twelve months being $66.50 - $90.47. It doesn't really matter which currency we use, or the oil market we watch, because it is the long term trend which tells the story. Oil is at historically high prices and there are no economic indicators which seem likely to place downward pressure on the market. The slow-down in the world wide economy is acting as a mild brake on consumption in some countries, but in the developing economies of China and India, the foot is still firmly on the gas pedal.

We know the age of cheap crude oil is over. We know demand is increasing. Therefore, we know that prices will continue to rise. That means the price of fuel for cars, trucks, aeroplanes, ships and tractors will continue to rise. The cost of generating electricity and heating the home will rise, where they are dependent upon oil. Railway locomotives will cost more to run, whether they are diesel or electric, so rail freight and passenger transport prices must rise. The cost of growing or mining primary products, transporting raw materials, manufacturing goods, transporting these to shops and even hauling them home is going to rise, with the rising price of oil multiplying the problem at every level.

As consumers, we will have to demand higher wages, in order to pay the increased price of everything we consume, which will, in turn, force prices up. Those dependent on welfare, or on fixed incomes, have been the first to suffer, as their ability to survive is steadily whittled away. In many cases, their incomes are increased each year in line with the official inflation rate, but this chapter of Dr. Chris Martenson's 'Crash Course' should make it clear that the official figures do not necessarily reflect reality. If Dr. Martenson is right, the poor, the weak, the huddled masses are being officially victimised. How does that make you feel? Remember what mass poverty did in revolutionary France, in revolutionary Russia, in Germany after the First World War. If you are not concerned about this, you are probably part of the problem.

We are in a time when the prosperous middle classes of developed economies are suffering from the US housing bubble and the global financial crisis. World economies are dependent upon these middle classes to consume the goods and services which contribute to growth. When they stop buying, the whole structure of international finance starts to crumble. We have seen this happening before our eyes in our nightly news and financial pages, but have we realised the full implications?

I think not. I think most of us are happy to stick our heads in the sand and trust that "they" will sort it out. The trouble is, "they" have lost control. "They" can only meet debt by going further into debt, adding fuel to the fire. "They" can only oil the wheels of commerce by printing more money, effectively devaluing every dollar you already own. If it were possible to get out of debt by borrowing more money, everyone would be doing it and many have tried to do it by using one credit card to pay another. It doesn't work for families and it doesn't work for countries. Sooner or later, no more credit will be available and debts will have to be repaid. When there is nothing in the piggy bank, the borrower will default and the value of the debt will evaporate.

This is the real danger we face: the collapse of wealth. The rising cost and increasing scarcity of crude oil is important to the equation, but oil will not be our downfall. Insupportable debt is what will write the epitaph to Western greed.

When it happens, it will either happen suddenly, with catastrophic results, or it will be a slow decay from robust youth to feeble old age. Personally, I expect debt defaults to start as a trickle and turn into an avalanche, which will cause the relatively rapid destruction of the world we have thought was stable and have taken for granted.

Where will you be when the avalanche comes?

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