The Stockopalypse—Wall Street and the Peak of everything.
For several years now, I’ve been talking about some of these things to people. And inevitably, there’s some disbelief, so I have to forward links and articles and so forth. It’s a huge amount of information, and it doesn’t parse down easily. And some of what I’m talking about is shocking. James Howard Kunstler, author of THE LONG EMERGENCY, introduces his thesis with a quote from the great psychologist Carl Jung: “People cannot stand too much reality”.
So here’s the deal. There are three interlocking dilemmas for us carbon-based 46 chromosome primates to deal with. None of them are easily solved, and the solutions we choose to solve one problem will impact on the way we deal with the others. All three problems are pressing. None of them is SPECIFICALLY global warming, by the way—it’s not that I don’t think global warming is real (or even that I don’t think it’s a pressing issue); it’s just that the others will rock our world long before global warming bats clean-up.
And the recognition of these separate problems is not original with me. I owe a great deal to James Howard Kunstler, whose book
THE LONG EMERGENCY, laid out the energy dilemma. I also should credit Richard Heinberg’s book
THE PARTY’S OVER on the same subject, along with
POWER DOWN, a must-read book on dealing with the resetting of society in a post-carbon world. There’s Chris Martenson, who has a series of really illuminating documentaries on Youtube and more information on his website. He put together several hours of interlocking video to explain our dilemma. Mostly, all I did was find all of these sources and put them in one place.
This thing is pretty free of original thought (except for the idea that it belongs in one place). This is necessarily a three-part article. I was trying to put it together as one big, honkin’ essay and it was too long to deal with (it was trending into the 10,000 word arena). It also sort of drags too many divergent ideas into one place. This is the web, after all—if the slogging gets too rough, most surfers get distracted by the
angry chipmunk on Youtube.
Part I is the peak of oil and metal. The first (Peak Oil) is fairly well understood by a growing core of people I’d call ‘peak geeks’. I use this term affectionately--these are people who've been researching this arcane field for four or five years and can reel off statistics such as the Ghawar Oilfield's estimated vs actual total size. Some peak geeks have also taken up the cause of Peak Metal--the latter has only recently entered public consciousness, although it has apparently been discussed for years by people in engineering and commodities fields.
Part II is peak earth. This is tangentially related to global warming, but has more to do with the carrying capacity of the planet. Environmental degradation is a big issue, and it’s hard to see how the earth can carry all us web-enabled primates much longer. I’ll report on some of the ramifications that Part I has on the planet, and I’ll also look at some of the other, less-discussed parts of human population (such as the mounting evidence that 6.5 billion may be our peak no matter how we deal with over population).
The third section is peak money. The current economic crisis is surprising only to those who didn’t get suckered by the real-estate run-up. Several commentators have long pointed out that the demographic bulge called the Baby Boom would wreak havoc for the US with its added burdens on the Social Security and Medicare systems. What isn’t generally understood is the equally profound series of related changes that a large retired population would bring in the economy —especially when it comes to investments and consumer spending.
I’ve called this the Stockopalypse because the recent Wall Street/real estate meltdown is the focusing event. There’s some debate as I write this whether the recovery is around the corner (the ‘green shoots’ argument) or whether we’ve plateaued for the moment as other train wrecks wait offstage for their chance to bring mayhem. I’d like to be optimistic (I am after all looking for a day-job as I write this), but many of the people I’ve taken advice from are not sanguine about our chances of recovery to reality’s 2007 version.
So head for Part I.
Part I: Peak Oil, Peak Metal
For several years now, there have been a small number of commentators who’ve taken a contrarian position to the rah-rah, business-has-never-been-better attitude about the world. Even as stocks and houses were regularly accumulating ‘value’, these folks were speaking against the optimism. Beyond the mainstream contrarians such as
Paul Krugman, there were others such as
Max Keiser,
Michael Ruppert,
James Howard Kunstler and
Richard Heinberg who warned of dire consequences based on weaknesses in a business model that assumes constant, unrestrained growth. Simply put, these writers and thinkers have compellingly argued that there are ghosts in our machine, monkey-wrenches in our gears, and sand in our Vaseline.
First and foremost among the unsung ghosts in the machine is the Peak Oil phenomenon. For those of you who weren’t paying attention heretofore, here’s the shorthand version. Almost none of what follows involves original thought on my part—the stories I relate here are captured in considerably more detail in James Howard Kunstler’s The Long Emergency and Richard Heinberg’s The Party’s Over: Oil, War and the Fate of Industrial Societies. There are primers (admittedly dry and somewhat technical) on the web at
http://www.oildrum.net and
http://www.aspo.org (the latter is the site for the Association for the Study of Peak Oil). If you’re not a reader, you can go online and order the seminal 2005 documentary
The End of Suburbia. Get out some popcorn and hide any sharp objects you have in easy reach. I’m just sayin’.
In 1956,
M. King Hubbert, one of America’s pre-eminent geologists, presented a paper at the American Petroleum institute. What Hubbert had done was study the way oil fields behaved over their lives—the cycle from discovery to exploitation to decline. Hubbert looked at wells that had stopped producing in places like Pennsylvania and Oklahoma and extrapolated their production. His finding: individual oilfields have a natural life cycle, and (therefore) the same was true of oil reserves worldwide. What Hubbert saw in the 1950’s was a leveling off of discoveries both in the US and worldwide. Based on these declining discoveries, Hubbert predicted that the US would reach peak oil production in 1971, and the world would peak in the 1990’s.
I need to explain here that 'Peak Oil' doesn't mean that we're out of oil. The best analogy I have is that 'Peak' means we've gotten all the low-hanging fruit, so to speak. The oil wells that I'm talking about are going to have oil in them until the planet burns up in a few billion years. The problem is that the oil that will be left after the peak is so hard to get out, we won't be able to extract it. Post-peak oil will also be of extremely low quality, full of sulfur and condensates, hard to process and hard to sell. Think of 'post-peak oil' as the really crappy candy in the bottom of the Hallowe'en bag that even your sister wouldn't eat.
Though Hubbert was not taken seriously by the oilmen, US oil production peaked at around 10 million barrels a day in 1971; after that, production tailed down even though new technology and increased exploration were in play. And even though US production has fallen to 60% of what we produced in 1971, our consumption of energy more than doubled, to 21 million barrels of oil and condensates a day by last year.
The arrival of the peak of oil for the whole world is a bone of contention—we didn’t peak in the 1990’s, but the recession after the oil ‘shocks’ of 1973 and 1980 scaled back world energy consumption dramatically for several years. There’s compelling evidence that the world reached the peak of oil production back in 2005-2006. We have never passed the peak production of about 84 million barrels a day, even though the price in this decade went from $20 a barrel to a high of $147 per barrel. Arguably, if the supply of oil were more fungible, we would’ve seen production go up at the top of the price spike. But the folks in charge of the big fields in Saudi Arabia and the Gulf of Mexico were not able to put out more product in order to take advantage of the price.
In fact, there’s considerable evidence that Saudi production is falling. It’s impossible to know this with certainty because the Saudis do not publish their production information. Matt Simmons, an oil company consultant (he was part of Cheney's Energy Task Force) and author of
Twilight in the Desert (2005), argues that the Saudis have peaked and will never be able to keep up their current production. There are four ‘giant’ oilfields in the world, each with at least 50 billion barrels of reserves— and evidence is that all of them are in decline (the fields are Ghawar, in Saudi Arabia; Cantarell, in the Gulf of Mexico; Burgan, in Kuwait; and Daqing in China. This will not be on the final).
New oil discoveries (“Drill baby, Drill” aside) will not offset the old fields that are declining because they’ve been tapped out. The ‘new’ fields being discovered are in places where it’s difficult to drill (such as
Chevron’s Jack 2 field, under a mile and a half of water and four miles of rock). The amounts of oil they have are relatively small compared with the need—Jack 2 might have 15 billion barrels, but only about half could be recovered --at current US consumption rates, this would only last a year. Most of what’s left of the world’s oil bounty is in places that are not politically inclined to help the West out of this jam. The places in Africa and Asia where oil is abundant seem to also be abundant with people who hate the US for its actions in the world. It won’t be an easy sell to get some wells set up for Exxon Mobil in these places.
As for the oil price run-up (and then collapse) in 2008, there was a not-insignificant group of speculators who bet that Peak Oil had arrived and the price would ultimately start to reflect competition for it among the industrial powers. Matt Simmons argued then (and continues to argue) that the day was coming when oil prices of $200/barrel would be looked on nostalgically. The speculators weren’t necessarily wrong, but they were premature—and in any case, they had to pull back their bets on Peak Oil when other investments started to flame out and they were called upon to meet their margin calls. Most people familiar with the industry and the issues are confident that the current price of oil will not stay low for very long. China is flush with dollars and needs energy—they will continue to bid up the price of oil. And India will produce its own automobile this year, the
Nano Tata. There’s no reason to assume that India’s energy needs will not also experience growth.
As others have written, there is nothing that can replace oil. Natural gas has already peaked in North America, and it’s extremely hard to transport it by tanker from overseas. Nuclear power could be ramped up, but there isn’t really enough uranium 235 to go ‘all-nuclear’ for more than a few decades. There’s plenty of coal, but it’s of a lower quality than what we’re used to, and it requires lots of energy to get out of the ground. Alternative forms of fossil fuel such as biomass or shale oil can’t be scaled up to what the world needs to run. Ethanol uses up almost as much energy to grow and refine as it produces when burned. Hydrogen isn’t so much a fuel as a fuel storage--you convert energy into hydrogen, losing some in the process-- and in any case isn't practical on a big scale. Remember the
Hindenburg? Do you want to be in an automobile full of hydrogen? Do you want to be on a highway next to a hydrogen tanker truck when it turns over?
Advanced windmills, solar panels and turbines can’t be built without significant inputs of certain rare metals. Their parts have a finite life and must be replaced--and since there will be less energy in the future, there's no guarantee we'll be able to maintain them down the road.
A side note: once liquid fuels are gone, so is commercial aviation. There’s nothing as portable and powerful as oil-derived gasoline and kerosene when it comes to running aircraft engines. We’re not going to convert to coal-fired 787’s (although if you hear of a test flight anytime soon, call me—I’d like to watch).
This brings me to our other peak crisis. We may be at the peak of certain metals. Copper and zinc are in short supply, with some metallurgists predicting an end of copper mining by 2037. Our newest electronic devices such as plasma displays and cell phones, use exotic minerals that aren’t common to begin with. Science fiction writer Robert Silverberg wrote about this phenomenon in
Asimov. Commodity prices for most metals have fallen as a result of the current economic crisis, but there are physical realities we’re bumping up against. Gallium, a metal that makes LCD displays and solar cells possible, is relatively rare in the first place, and not easy to find. Professor Armin Reller, a materials expert from the University of Augsburg, Germany estimates that the planet will be completely out of Gallium by 2017.
The British journal New Scientist declared in 2007:
"Take the metal gallium, which along with indium is used to make indium gallium arsenide. This is the semiconducting material at the heart of a new generation of solar cells that promise to be up to twice as efficient as conventional designs. Reserves of both metals are disputed, but in a recent report René Kleijn, a chemist at Leiden University in the Netherlands, concludes that current reserves "would not allow a substantial contribution of these cells" to the future supply of solar electricity. He estimates gallium and indium will probably contribute to less than 1 per cent of all future solar cells - a limitation imposed purely by a lack of raw material."
I bring up peak metal because the lack of certain metals is going to affect our remediation efforts on oil. Oil is still the biggest problem, but it’s important to understand the hole we’ve put ourselves in with everything else.
Unfortunately, most Americans think about oil only in terms of their cars. I'm sure it would be helpful if everyone in the US were driving itty bitty cars, but transitioning that way won't solve the problem--it takes upwards of 90 barrels of oil to build a new car in the first place, and the US would probably need to replace about 200 million cars to have a discernable effect on gas consumption. So... multiply 200 times 90, and remember that fractions round up... you get the picture, right? Replacing the current fleet of cars will not happen in a way that will help solve the problem. Even if you could change over to a total electric fleet, you still need to figure out how you're going to run the power plants to supply the electricity. And as for pollution, electric cars that get their power from a grid whose chief fuel source is coal are not a solution.
The other issue that most people forget when we talk about peak oil is that oil isn’t just the food for our cars and heating systems. Oil is virtually our food. In the US, we burn nine calories of fossil fuel for every single calorie of food we consume ("cheez doodles" are almost all energy). We use oil to grow our food (petroleum based fertilizers and pesticides). We can’t even GET our food without oil—James Kunstler and others have written about the American phenomenon of the ‘5,000 mile Caesar salad’ (the numbers on meat and especially fish are even worse—think of how far those fishing trawlers have to go to find king crab and salmon). The better part of the Green Revolution was based on increasing crop yields through applications of petroleum based additives—surely those crops won’t be planted properly, and yields may fall below those for the conventional crops the ‘green revolution’ seeds replaced. But that’s a slightly different story.
The only good thing about an understanding of Peak Oil is that it clarifies some other recent changes in politics. If you accept Peak Oil as a given, then many other actions around the world come into focus. There’s an intense competition right now for the future oil that’s out there. China and Japan are as close to a shooting war as they’ve been in the last 60 years over undersea oil in the Sea of Japan. The Chinese are best friends with Iran right now because Iran has oil (though it’s in decline). The Chinese vetoed UN action on Darfur because they’ve signed agreements to buy oil from Sudan. Etc.
It also makes sense that the US is lacking in refining capacity. Remember last summer when our Congressional primates dragged the Big Oil executives into hearings on the fact that lack of refining capacity was partially at fault for the run-up in the price of gasoline? While there’s some truth to this, the Peak Geek folks understand the reasons and ramifications. If you’re in charge of, say, Exxon and you know that the oil on the planet is limited, why should you dump a few extra billions into building more refineries—especially if those refineries will be idle in as little as (say) five years?
The same is true of electrical generation. The blackout of 2003 was caused by a lack of generating capacity in North America that tripped breakers in two countries and left over a hundred million people in the dark (some for several days). The problem was that too many people needed electricity at the same time. To my knowledge, there has been no increase of electric generation in the US since 2003. Think about it a bit—if electric companies make their money by selling electricity, why wouldn’t they expand their generating capacity to sell more? Is it because they know there isn’t enough oil or natural gas to power these plants?
I was trying to figure out a pithy way to end this, but my best here is oy.
Part II: Peak Planet
In
Collapse, Jared Diamond writes about the violent demise of several ancient (and not-so-ancient) societies. His thesis is that those societies fell apart not only because of climate degradation and increase of population beyond the carrying capacity of the local terrain; in many cases they imploded because when the leaders of those societies were challenged by new problems arising from their successes, they didn’t think out of the box and confront the situation in ways that were effective. For example, the Easter Islanders chopped down all their trees on their island in order to build more stone figures to their gods rather than using the same wood building canoes to carry their hunters to places with food.
In Part I, I described Peak Oil and Peak Metal. These are somewhat esoteric, back-of-your-mind realizations that involve some left-brain activity. There’s a flow to the logic and you can agree or disagree, but it isn’t something that has an immediate, obvious physicality to it. Some of what follows is more up-front in terms of the ways the problems reveal themselves.
It is fairly difficult (at least for me) to not believe we’re at peak climate. A year ago on New Year’s Day, I took a lovely bicycle ride in Brooklyn, NY. And why not? It was 72 degrees outside. Whether you wish to attribute the climate change to human activities (such as the increase of C02 and other gasses resulting from fossil fuel use) or some other cause (some climate-change deniers are pointing at sunspots), there are changes going on with climate that are unprecedented in world history.
In Part I, I discussed the way that oil and other fossil fuels impact agriculture and food production. It’s useful to point out that the harnessing of the power of oil has increased the human population carrying capacity of the planet. In the thousand years between the fall of the Roman Empire and the Reformation, the population of Europe stayed almost the same. When there were increases in population over a few generations, they were quickly ‘fixed’ when climates turned hostile or locusts, rats or other pests intervened for their share of agricultural products. The black plague was a slate-wiper of epic proportions, and the loss of so many people changed the dynamic between lord and serf in Western Europe. But populations didn’t really start to increase geometrically until the industrial age.
Now we may be facing the problem of Peak Food. Climate changes (including droughts and lowered snowfalls) are reducing crop yields. The gradual loss of fossil fuel inputs from agriculture will lower crop yields. It’s useful to remember that much of what passes for arable land in the US is, as
Michael Ruppert put it, a sponge into which we pour natural gas and oil-based fertilizers. In the US, we plowed under some of our best land to make suburbia.
Oil and the availability of transport drives farming itself—over the past 30 years, organizations such as the IMF and WTO have initiated 'development' projects in poor nations in order to get said countries producing cash crops. Much of the arable land in some African countries is currently used to produce animal feed for American farmers. That relationship will end when the cost of shipping the feed exceeds its value. And finally, agriculture is driven by borrowed money—the farmer borrows from the bank to buy the seed and fertilizer, and this is the worst borrowing environment in the past seventy years.
We may have already had our best years for crop yields. There are reports that the world inventory of grains and vegetables such as soybeans have fallen to historic lows—no more than a few weeks of stock in some cases. There’s also evidence that environmental degradation has reduced the productive capacity of much of the world’s arable land. For example, the flooding that followed Hurricane Katrina in 2005 coated much of the land with runoff from chemical plants and oil refineries that lay at the mouth of the Mississippi. This is not unusual—the oil exploration and drilling in places like Colombia and Nigeria have destroyed valuable farmland and poisoned water. The Ukraine was the bread basket of Russia right up until that April morning in 1986 when the Chernobyl nuclear plant melted down. And finally (see Part I) the diverting of agricultural production into biofuel projects has caused massive price increases for many of the world's staple grains.
Related to the above: we may also be at peak water. Fresh water is on the decline as well due to introduction of large-scale human populations in desert locations (hello, Phoenix Arizona and Las Vegas, Nevada). The melting of glaciers won’t help since the ice will be turned into sea water. The desalinization plants of the world also run on energy, and may not run at all when oil becomes harder to find. Even if the oil were available to do the conversions, there’s no water to desalinate in places like Nevada. If the snow seasons in those feeder places are permanently shortened, there isn’t enough water or potential water to feed the communities there. Take a look at a recent picture of
Lake Mead, which not only provides water for Vegas but also converts water power into electricity. If the water table continues to fall over the next few years, Lake Mead won’t provide either.
All of which leads to a final conclusion: we may be at peak population. It’s hard to see the planet supporting six billion humans without significant energy inputs. Human fertility may also take a hit from environmental degradation. And finally, with less oil we’re not going to be able to do some of the remedial things we used to do when populations got into trouble. We can’t send our friends in Iowa a few dozen truckloads of food when their local wheat crop gets eaten by wheat rust.
It appears pretty obvious that our situation in the short run would be helped by voluntary human depopulation. I remember this coming up when I was in High School, and thirty years later the act of bringing up this topic remains the quickest way to start a bar fight I know of. Various peoples take the urge to procreate as a divinely inspired responsibility. There’s also the issue of political power with a declining population—it simply isn’t possible to maintain one’s place at the table in a contentious place such as the Middle East if your particular ethnic or religious group is shrinking in size relative to your enemies. Even in those places where religion is not an issue and the population is fairly ethnically homogenous, people like making babies. My sense is that if the Chinese government (arguably one of the more authoritarian dictatorships in the modern world) couldn’t make the
‘one child per family’ thing stick, nobody can. Moreover, as the US and Europe have found with their ‘baby boom’ problems, a large population decline is demographically problematic—it’s already pitching generations against each other. Population control (to the degree that it’s needed) is a non-starter.
It’s also pretty clear that in a post-energy world, reality has its own population control plans for us. We won’t be able to make the medical interventions we’re used to. Unless we come up with some really inventive new form of energy, mass vaccinations and medical interventions are a thing of the past. If you have a chronic condition that requires you to refrigerate a medication, it isn’t going to happen. Ditto for the blood and tissue banks—transfusions are going to be handled the old fashioned way, with family members donating blood on the spot when one of their tribe is ill.
The high-tech means used to create new medications under the ‘biotech’ rubric are all going to be gone, probably in the next twenty years and certainly by the end of this century. It wasn’t all that long ago when infant and child mortality were in the 30-40% range. In seventeenth century Europe, a woman who wanted to see two children live to adulthood had to give birth some FIVE TIMES. While we have a much better idea of the causes and treatment of disease than we did 200 years ago, we’re going to have much less in the way of resources to combat early mortality.
I know almost all of this sounds cruel and this section lacks a lightness of touch. The ramifications of some of these things have run me plumb out of 'glib'. the idea that we'll have our population lowered by the fates rather than by our own hand is scary. And it makes me sad that we couldn't take appropriate action before the crisis came to this point. I was hoping for a happy little blog equivalent of the 'hand jive' to throw up here, but I'm toast.
Part III: The ‘Stockopalypse’
Still with me? Didja take a break to look at something fun on YouTube? Was it the
angry chipmunk series?
I enter this section with some trepidation. I'm not a Wall Street guy. The collected ideas here are not in line with what people with brokerage experience would say. On the other hand, the 'experts' haven't been right on things for a couple of years now. Don't invest your money on my advice. But I think if you can follow what I'm saying here, you can make your own decisions regarding the future.
This part is a little more esoteric. As I pointed out in parts I and II, these are the obvious limits on our physical environment. The evidence for Peak Oil and Peak Metal are pretty straightforward. The argument regarding planetary limits to food, water and population are obvious—the only things that have changed since
Malthus made his dire calculations are the impacts of environment and fossil fuel [ironically, in 2007 the New York Times declared
Malthusian theory dead on the grounds that industrialization and energy had changed the limits of what the earth can support]. But there are some man-made limitations we are going to bounce up against as well. This is not about Marxist theory (or Adam Smith, for that matter). For many years there have been activists who wanted the world’s economists to embrace the concept of ‘true cost accounting’.
For those joining us late, a short primer is in order. Currently, all economic activity is counted as good, regardless of adverse outcomes. The day I went out to find that someone had smashed the windows out of my car was a GOOD day in conventional accounting—I had to lay out cash for new glass, my insurance company got involved (even though the problem wasn’t covered), the statistics for such crimes meant that insurance companies in Brooklyn could charge all car owners more money based on a higher likelihood of such crimes, etc. It’s ALL good as far as conventional accounting goes. I know it sounds crazy, but in our little village of
Anatevka…
The same accounting world-view is functioning at the macro economic level as well. Planes hit the World Trade Center? Break out the champagne! Oil tanker broke apart, damaging hundreds of miles of beaches? God is Good! Increased cancer rates put more people into radiation machines and has them spending more time and money on doctors? What could be bad! Etc.
But as activists point out, not all economic activity is good. Many human rights activists want to switch to what they term
‘true-cost accounting’, which measures the real costs of things like loss of quality of life, environmental degradation, social alienation and so forth. And what drives most of us true-cost accounting wonks crazy is that there’s no balancing of the externalities of good things. Which is a roundabout way of introducing the Big Problem at the end here. The Peak of Money.
The United States (and most of industrialized Europe) is probably at (or just past) Peak money. The US has its large baby boomer population that is transitioning from work to retirement. There are a number of things that do not augur well for this transition (not least of which is the fact that most people’s 401K’s have taken a huge hit since September 2008). But even under the best of circumstances, the retiree generation would have a profound effect on things like per-capita income and purchasing patterns. The most important demographic population group in the civilized world is now entering a time when they won’t be purchasing many cars or major appliances. So not only is the US at Peak Money/Peak Income; it is probably also at Peak Car Sales, Peak vehicle miles traveled, Peak number of households and Peak Shopping.
In fact, there’s a name for this—the ‘
age wave’. Based on theories developed by Harry Dent, an economics professional and Fortune 500 consultant, the US economy is peaking out between 2007 and 2009 (he made this prediction several years ago). He based his observation on the fact that consumer purchasing tends to peak for 50 year olds and then declines as people look toward retirement. Countries with different ‘baby boom’ profiles (Japan didn’t have a ‘baby boom’ after WWII—their highest birth rates were in the late 1930’s) have already passed the Age Wave and are struggling with sluggish purchasing. In Japan’s case, a good deal of the problem is also traced to their own real-estate bubble burst in the 1990’s.
But the US is more vulnerable than most of its European trading partners because most of its pension mechanisms are privatized. And now we’ve arrived at the Stockopalypse— the apocalyptic meltdown of the stock market and commercial banking and the arrival of Peak Finance. And the reason we had all these new products on Wall Street—everything from Structured Investment Vehicles to Mortgage Backed Securities and all the derivatives and hedge funds—has to do with Peak Finance. In the 1990s, the 401K came of age as companies bailed out of conventional pension plans. But even the most vociferous of Wall Street’s defenders had to readily admit that the market was ‘oversold’—the prices paid for quality stocks were clearly out of balance with the values.
Let’s take a hypothetical company, General Widgets. It’s been around for a very long time, it rarely makes the news, and it regularly pays an annual dividend of around $2 a share. It’s an excellent stock at $30 a share. The problem is that most people want a nice safe stock like General Widgets in their retirement portfolio—so (until the recent meltdown) the asking price was around $100 a share. At $100 a share, General Widgets is only returning 2% annually—if you want $20k/year in your portfolio, you’d have to own about a million dollars worth of General Widgets stock. If General Widgets makes new stock offerings, it will dilute their dividend. There’s no way to ‘clone’ General Widgets, but there’s also no way for lots of people to have shares without the stock being overvalued.
And therein lay the primary problem underneath the 401K business. There’s far too much money in the market right now as a result of the movement of the Baby Boom generation into 401K’s for conventional stocks to pay enough for people to retire. This created an unavoidable incentive for the Financial Masters of the Universe to create new products that were nothing more than speculative bets. The Mortgage Backed Security (MBS) is a prime example—it came along at just the right time for selling to the boomer generation. Label them AAA prime (regardless of whether the individual loans were dodgy—in any case, the folks putting together the tranches of loans hoped that the sheer number of loans plus the stratospheric run-up of real estate prices would obscure any problems with individual homeowners), and suddenly you have a product with an estimated 5-10% annual return—a perfect investment for boomers priced out of the ‘real’ stock market.
It’s important to remember that the 401K program was originally designed for the self-employed, which has never been more than a few percentage points of the American workforce. Each time Congress ‘fixed’ the 401K program to strengthen it, they also made such programs easier for companies to force on their employees. Most companies have bailed out of conventional pension plans and forced their employees into the Wall Street Casino. And most of the disenfranchised employees stand unsteadily at the entrance like the poor who get on the bus to the Atlantic City Casinos, holding their meager savings in a plastic cup with the casino’s name on it and hoping that they can game the slots and escape with enough money to retire.
This leads me to the implosion of real estate prices. If you paid attention to the above, you can see why there was great interest in changing the game when it came to home mortgages. Prior to the housing run-up, it was common for banks to hold onto the paper for home mortgages. The banks were (therefore) extremely strict about the qualifications for a mortgage. I remember many years ago when I was buying property for the first time-- I was forced to produce paperwork showing where my down-payment came from. This was probably true for most people.
But if you are a Wall Street person, there is a problem with mortgages residing in banks—it means that the mortgages (and values thereof) are just another positive or negative reason to buy the bank stock. If you can change the rules and buy up tranches of mortgages and bundle them, you have a completely different product. Historically, mortgage papers are a triple A investment, so rating the bundles as AAA was justified
I don’t want this to sound conspiratorial. I don’t think it was anybody’s goal initially to create bogus AAA bonds or sucker people buying these MBS bundles. It’s just that once there was a genuine need for lots of mortgage paper in order to create these bundled products (and once individual banks stopped holding onto the mortgages), the standards for who qualified for a mortgage got a little… fuzzy. Some of the firms now being charged for security fraud over the marketing of MBS’ were overly aggressive about qualifying anyone and everyone who had a pen and a pulse. Historically, such an attitude wasn’t wrong. For the previous century, it has been a truism that people pay off the house before they feed their kids. But because of the surge in housing demand precipitated by easy NINJA loans, there was a run-up in prices. People wanted to get into a house before the price went even crazier. That meant that even people with the best of intentions ended up buying houses that they could only afford with sub prime or alt-a loans. And even the responsible people who took conventional mortgages and had enough income to cover the house payment over-bought in an over-heated market. Or as the Ukrainian nuclear engineer said at Chernobyl, ‘oopsky’.
And finally housing started to crater. As
Paul Krugman of the New York Times (and others) have written, housing has historically been priced in line with median income. The run-up in pricing was only possible because mortgage money got cheap—mortgage rates and house prices are a yin-yang, zero-sum game. The corollary to this is the relatively flat housing prices of the late 1970’s, when conventional mortgages were running 10% or more. The house payment has to stay within a reasonable boundary for the median income of the buyer. How that shakes out is not the issue—ultimately, the median house price and the median family income will find a rendezvous. Based on where house prices are right now, there’s another 10-30% of ‘correction’. This will put a whole lot of mortgage backed paper under water.
And that mortgage-backed paper is spread all over the world. Teacher’s pension funds, Swedish municipalities, day traders… all of them have pieces of MBS paper and none of it is worth what they paid for it, much less the denomination it carries. So now we are at the point of ‘Stockocalypse’ when neither Wall Street itself nor any of its subsidiary of stock-related ‘products’ have any chance of delivering enough financial return for the boomers to retire.
Meanwhile, the baby boomers are aging and some significant portion will cash out over the next five to ten years, 401K plans or not. Many are not going to be able to continue working—many boomers are arriving at Social Security sicker and more stressed than their predecessors owing to longer hours and workweeks and more stressful jobs (thanks in part to technology tools like the Blackberry and internet-accessible job sites, many white-collar workers are functionally ‘on call’ 24 hours a day). Longer hours mean a much higher incidence of
hypertension, along with an increase of risk factors for heart disease and diabetes. We’re at least as unhealthy as the Greatest Generation folks that preceded us—and keep in mind that fewer of the Greatest Generation made it to retirement (or far past it) as smoking-related illnesses and war-related chronic conditions ‘thinned the herd’. Doctors can easily keep the children of ‘The Greatest Generation’ alive but can’t make sick people healthy. These people will be limping into the Medicare system in the next few years, and the bill will be astounding. We’re looking at 30-40 years of Peak Medicine at the exact time when it’s not going to be affordable for us as a society.
One of the less reported truisms of the past 20 years is that the Baby boomer’s children aren’t doing as well as their parents. Harvard Law professor Elizabeth Warren addressed this phenomenon in her book
The Two Income Trap and her lecture
The Coming Collapse of the Middle Class. Her thesis is that while family income went up by some 60-80% as a result of two fulltime salaries, the costs of maintaining a middle class life have more than doubled, with families having an extra eight years of education (between daycare and college) being added to the cost of launching their children into the middle class. Besides extended borrowing and bankruptcy, many of those beleaguered families are turning to their baby-boom parents. Slowly but surely, the boomers have been liquidating their own savings and retirement funds. Increasingly, there’s nothing left to sell. The individual familial failures are cascading through the entire economy.
So what are the fixes being tried? Currently, the Obama administration is trying to monetize debt—spinning the fed’s printing press and hoping that the foreigners already choking on American paper in the form of T-bills will come back for more. There comes a point when there’s a real risk of devaluation of the currency a la Weimar Germany. Although the US did much the same thing to buy our way out of the Depression and the debt from WWII, there were three big differences between then and now:
1) we had a manufacturing base back then;
2) we had oil back then; and
3) we weren't broke back then.
As they say on the TV ads for Slim-fast, ‘your results may vary’.
EPILOGUE: What’s the way out? Or, to be more precise, IS there a way out?
On the individual level, those of us old enough to have had a favorite Beatle need to make some serious plan B’s. A local CPA whose clientele consists of freelancers put this in perspective several years ago. “I ask my clients if they have enough to retire when they turn 65 and they answer that they don’t. So then the next question is ‘well, what are you going to do instead?’” If (after a serious assessment of your job prospects and what’s left of your savings and 401K) you realize that you will not be able to retire, then you need another plan. It includes getting healthy and working on new skills. Five extra hours of work a week (even if you’re eligible for OT) won’t get you a retirement plan—it will just make you tired and sick (or sicker if you’re already working long hours) and less able to think outside of your current employment box.
In addition to stripping out superfluous work, it’s time to rethink your possessions. Do you need the car? Do you need the car that’s as nice as your current one? Can you afford your living space? Can you afford to HEAT AND COOL your living space if/when energy costs ratchet up? Assuming you have a life partner, what economic advantages do you get from having a single breadwinner, and can you cut your costs so that this is feasible?
On the national level, one has to wonder why everyone on the US political scene is arguing for a return to ‘normalcy’. There needs to be a reset of our society to ‘reality 2.0’—a reality that bids adieu to recreational shopping, wretched excess and suburban sprawl. There will probably be full-scale class warfare as top earners are hit with increasing tax rates. The problem with the current stimulus plan (besides the fact that it doesn’t stimulate enough—employment will still be in the 10% range in a best-case scenario, and there are a centipedes’ wardrobe of shoes waiting to drop in the next few months as
Alt-A mortgages reset and
commercial real estate falls apart) is that the population left to pay the bill is going to be smaller, less prosperous, and hamstrung by other debts.
A number of writers have addressed this post-oil future. The oft-cited James Howard Kunstler has written a post-oil novel
World Made By Hand, where the survivors of the peak are living an existence closer to the 18th century than what just came. There’s been a large die-off as a result of influenza pandemics, and at least one major US city was nuked. There’s almost no contact with an outside world, because no one has the wherewithal to get from point A to B.
As previously mentioned, Richard Heinberg has addressed the problem in his book
Powerdown. His concern is that once everyone understands the problem, the last thing we can deal with is a war for what’s left of oil. In the best-case, federal and state governments let the big things go and local control and agriculture will rescue those who can work together. Heinberg’s book is strangely echoed in the only post-oil manual written so far. In Ireland, the
village of Kinsale wrote a power-down plan that deals with all aspects of the village life and how the adjustments will be made to a more rural society.
As for me, my biggest fear is that we’ll devolve into a society ripped apart and hamstrung by superstition and tribal rivalry, and much of the knowledge base we’ve built over the last few millennia will disappear. In
A World Lit Only By Fire, William Manchester writes about the way that knowledge was lost when Rome fell apart. Things as simple (and as important) as the Roman formula for concrete were lost (the only decent roads in 1500 were the ones left over from Roman times) Knowledge of engineering, animal husbandry and horticulture built up over 800 years disappeared from 500 to 1500 AD. it was a time of grinding poverty, easy death and anti-intellectualism enforced by a fearful and jealous church hierarchy.
Here's hoping we do better.