JULY 12 2015
GREASE
I waited till the last minute to complete this week’s column: it seems that every day brings a new crisis and changed circumstances, at least that’s what I perceive happening. It now looks that Greek will exit. Turmoil is in the cards.
All week both Greece and China have constantly been in the news. Where since 2014 in Greece the stock market, or any market, has virtually disappeared, China’s stock market had a meteoric ride, doubling in return from June 2014 till June 2015. Some 230 million people there bought shares, borrowing from the piggybanks of father, mother, sister, brother, uncle, aunts, grandparents to benefit from that phenomenal money maker: the stock market. Many also took out loans from banks and other lending institutions. Then, in about a month’s time it lost 30 percent of the value. Panic. Savings wiped out. More about China later.
And then there is Greece.
If you were to read the title out loud it would sound like Greece, a country where Grease – unlawful money- took on a brand-new meaning. I have never been in Greece, but my wife and I spent a pleasant few weeks in Barcelona, when our youngest daughter lived there, enjoying her husband’s sabbatical there. It is in the same mild region as Greece.
Where Greece resembles Spain is that both have a relatively warm climate and a history of doing well with relatively little carbon energy. During my 16 years of schooling I was for 6 years subjected to classical Greek, Homer, Plato, Xenophon, his Anabasis and Katabasis. Then, while trying to make sense of all these mythical figures, I learned about its philosophy, literature and theatre, music and dance, science and technology, and art and architecture. Great History Greece has. Northern Europe, because of its cold climate, was not able to do very much in the fine arts until it added peat moss and coal as supplemental energy. Once these cheap supplemental energies were added, Northern Europe was able to industrialize, while Southern Europe lagged behind. If we are running into obstacles now with respect to fossil fuels, perhaps the advantage will again go back to people who live in warm enough climates that they can mostly live without supplemental energy. So perhaps the countries of antiquity may have the ultimate advantages when energy can no longer come from burning fossil fuel. I guess that’s why the Lord chose Israel and the Middle East for the birth place of his people.
The Greeks and the Spanish are different from their Northern neighbors, the German and the Dutch. It is not for nothing that the Spanish invented the word ‘siesta, that mid-day break in working because of the heat. The climate in these Southern Europe countries allows for growing a great variety of fruits and vegetables, the main diet for these people. Perhaps, and now I speculate, that’s the reason why they have been more prone to ‘grease’, to bribe and to be bribed. Also their money habits are different from its frugal Northern neighbors, who insist on absolute discipline there. Impossible.
Greece desperately wanted to become a member of the European Union and partake of its monetary system, but its financial history, their recurrent budget deficits did not qualify them. So they turned to the American money wizards, Goldman-Sachs, the top Grease suppliers in the world, where a smart English educated, Greek woman, devised a scheme that, at least on paper, made these deficits disappear. She earned hundreds of millions in the process. The Greeks paid this money juggler a lot of Grease, but it paid off: they were admitted to the exclusive club of the Euro countries, which enabled them to borrow cheaply, and all went well for a while until it went wrong. Now they are negotiating again, with France leading the Greek wing because a Grexit, Greece leaving the Euro, will expose France’s equally weak position. Will the Greeks agree to more, far more austerity and pension cutting measures? I doubt it. This week will tell. Prepare for more trouble.
Our own disappearing prosperity
Our entire life style in the whole- wide – Western- world is based on two fallacies: (1) cheap oil, somewhere between $20-$40 per barrel, and (2) Infinite growth. Both are now proven to be impossible.
True, oil is somewhat cheaper now, because demand has tanked, but don’t be fooled by the lower price: all the real cheap oil we used up, is gone forever, and the same applies to all minerals, as naturally, we always use up the easy-to-get stuff first. That is now long gone. Now the average barrel costs in excess of $70 to bring to the market. Tar-sand oil, fracking oil, and deep-sea oil really need $100 per barrel oil to earn the Big Oil Guys a decent return. So the danger now is that, since the oil price is too low to be profitable, we may yet see a shortage of oil.
Just as cheap oil, Infinite growth too is a pipe dream, even though politicians still mention it all the time. Watch any TV program where election is mentioned, and they all promise more growth. That’s why politics has become irrelevant. Basically all politicians are in the pockets of the money men, the now infamous 1 percent which include those who are at the top in the banking world.
These financial bodies have done well because they are too big to fail and the governments of Europe and America have helped them out when they were far too far extended by creating debt that now has become a tax-payers liability. If there are ever institutions saved by GREASE they are the banks.
Back to China.
Chinese troubles are likely to prove more important to markets in the near term than Greece. Chinese troubles are unfolding now, they are immediate, and they are vast. The Greek tragedy will continue to unravel but do so more slowly with fits and starts, via false hopes, humanitarian aid, misinformation, and political posturing. What China has in common with Greece is that both have immense debts. In economies that are stagnating and even shrinking, the one item that always is growing, because of added interest, is debt. All debt accumulates interest, some as low as 2 percent, most much higher, while growth today is often flat or negative. Greece borrowed and then some more, because the lenders were eager to give money to them. But there’s always a ‘but’. Debts must always be paid: either the borrower pays back, or the lender takes a cut. The entire Greek drama was about money, the desire for which is the root of all evil.
China is 120 times bigger than Greece, and its debt problems are of that same magnitude. The country’s corporate and local government debt totals an extraordinary 289% of its GDP, which is the second largest in the world at about $16 Trillion, which makes its debt: $46 Trillions!!. The debt was taken on with the expectation that its economy would grow at a rapid 8-10 percent which had been the case in the past. Now the property market is depressed and overstocked, and confidence is fragile, making China as vulnerable as a china set. Once it drops it shatters. Also China’s regulations of the past – the one child policy, plus preference for male children – gives it the world’s most rapidly ageing population in the world. Add the unpaid bills for environmental damage and its health effects and the debts are staggering. Throw in Climate Change and the acute water shortage and failing crop yields, and the outlook for China is ominous. It is all too true that ‘How China goes, goes the world.’
Climate Change and World Hunger
Last week I heard on the news that Western North America, the USA and Canada, is suffering from drought, witness the scores of forest fires. It so happens that it is “out West” where the cereal crops are grown, signaling a shortage of wheat this year. Throw in the historic lack of water in California, the greens- basket of North America, coupled with trouble in the bread basket, and food inflation will enter the statistics.
When I survey the world scene, China, the Middle East, Southern Europe, the volatile weather with not enough water in the crop-growing areas and too much elsewhere, then there is a lot to worry about. Couple that with the unbelievably high debts everywhere, and global collapse cannot be ruled out.
How does collapse come about?
In his book The Five Stages of Collapse, Dmitri Orlov explains that finance will collapse first because it is a house of cards predicated on the assumption of perpetual growth. He also demonstrates, mathematically, that the cost of debt service will always outgrow the economy – something that we can all observe by looking at the ratios of debt to GDP across the world over the last three decades.
What happens next, Orlov explains, is that the collapse of finance is followed by the collapse of commerce. What Greece is showing us, however, is that these collapses are virtually simultaneous. If the banking system ceases to function, so do all commercial transactions, because the supply chain is severed in real time. How, without cash, can Greek businesses pay their staff, pay their suppliers or receive payment from customers? How, without tax income, can the state pay salaries or pensions? Would you, as a supplier, provide goods to a customer who you know has no access to money? Would you supply drugs to a hospital which cannot pay you for them? And, as a foreign supplier, would you export food or energy to a bankrupt customer? That’s why Greece agreed to a new deal this weekend, even though it Plebiscite -61 percent – voted the opposite.
Are we any different?
To be sure, Greeks and their governments have behaved fecklessly, but are we really much different? The Greeks may have been like poor men living like rich ones, but walk down any seemingly-prosperous street in the West, especially Britain, Canada or America and ask yourself quite how much debt is represented by the smart houses and expensive cars that you see there. The days when possessions indicated affluence are long gone, and the far greater likelihood today is that possessions indicate indebtedness. Look, next, at how much debt these governments have, how much they are still adding to their debt piles, and how much they have taken on in off-balance-sheet obligations such as public sector pension promises.
It’s all a house of cards. Our prosperity is a total sham. And it will come tumbling down. Are we prepared? Just consider the following.
During the Great Depression, the vast majority of American citizens were rural, farm-oriented people with survival skills far beyond the modern American, just as Greece still is today. It pays to be backwards. That’s how Russia survived after the 1989 change of regimes. “Prepping” – be ready for the worst – in those days was ingrained in our society. Today Canada’s population is 82 percent urban, with a dwindling number of farm-experienced North Americans and a vast wasteland occupied by urban and suburban citizens — many with few, if any, legitimate skill sets. During the Great Depression, millions of people died of starvation and general poverty, despite the incredible number of people with rural survival knowledge. What do you think would happen to our effeminate; overweight to obese; iPhone-addicted; lisping; limp-wristed; self-obsessed; Twitter-, texting-, video game-addled; La-Z-Boy-riding; overgrown-child culture in the event that another economic crisis even remotely similar were to occur? Yes, most of them would die, probably in a horrible fashion.
Think about it for a moment. An incredible subsection of us North Americans do not know how to feed ourselves, do not know how to kill an animal for meat, do not know how to grow crops, do not know how to repair any necessary items used for subsistence, do not know how to build anything useful, don’t even know how to prepare a meal from scratch. For most od us our only skills involve using the remote, play games on our electronic devices, and talk incessantly in our phones, our only manual skills involving fingering nonsensical text messages.
Once the debt crisis is at our doorsteps – and it cannot be postponed indefinitely – then all commerce will cease, all banks will close, all stores shut down and paralysis sets in.
The Bible teaches us that “The lust for money – grease – is the root of all evil”. Think about that.