The Automatic Earth: interview with Stoneleigh on deflation

[picasso moon]

Xenopus posted this in the Jobs thread, i offered to let him post it first as a separate thread, he hasn't, so i'm doing it.
http://theautomaticearth.blogspot.com/2009/10/october-30-2009-interview-with.html
Interview is by Euan Means of The Oil Drum Europe, Stoneleigh used to be editor of TOD Canada. Hard hitting, makes a strong case for a deflationary collapse, with energy prices falling in the short term but then surging as the lack of investment in projects which could have cushioned the downslope of the Hubbert curve and the much steeper net energy curve means the cushion will not be there. ".. we should be in for the largest economic contraction for at least several hundred years, and it will be global."  Home prices to fall at least 90%!.  Lots of graphs and charts, i know LATOC people love those.
I have some contentions with it. The biggest one is with the sentence "There was plenty of everything [-in regards to the 1930s-] except money, and without money, one cannot connect buyers and sellers." So Bernanke was right, if you had just flooded the place with money, everything would have been OK? Like all analyses which accept the existing economic system (ie capitalism) as a given, this one sees the problem in circulation, and hence the financial system. She sees money as "the lubricant of the economic engine, and without enough of it that engine will seize up, as it did in the 1930s." As if the engine itself is/was OK, and simply lacking enough lubricant. Any car-savvy teen could tell you that if an engine throws a rod, adding more lubricant is useless. The problem is in the "engine", more precisely in the relations of production and the accumulation process, but to acknowledge this is to acknowledge that capitalism is inherently crisis-prone and more and more so as it has aged.
And will all the problems she points out, she still sees prospects of a recovery by possibly the middle or end of the 2010s. Eh? Was there ever a recovery in the 1930s? The biggest energy crisis of human history won't matter? The growing disruption of the climate won't matter? Running out of water won't matter? She makes no sense whatsoever with this.
But well worthwhile the read.

[yikes!]

fantastic piece by the awesome stoneleigh

[teotwawkian]

Seriously dystopian. Right out of the von Mises playbook (on credit contraction).

We all wish that life were so predictable.

Odds are supreme that things will be convoluted, muddy, and diffficult to read, except in retrospect.

One thing has always stuck in my craw regarding Stoneleigh: she never hedges. No percentage plays. Just a straight-out sleight-o-hand prediction of future fact.

Never seen that happen before. Never seen anyone call it 100% more than a day or two in advance. Years in advance - well that is a turkey shoot. One wrong turn and everything else is dust. Makes me grab a grain of salt when reading it.

Food for thought. Things won't play out as we expect. Though I'm with her dystopian view in spirit.

[anarchist]

good article! really backs up the deflation camp.

[Bill Hicks]

Seriously dystopian. Right out of the von Mises playbook (on credit contraction).

We all wish that life were so predictable.

Odds are supreme that things will be convoluted, muddy, and diffficult to read, except in retrospect.

One thing has always stuck in my craw regarding Stoneleigh: she never hedges. No percentage plays. Just a straight-out sleight-o-hand prediction of future fact.

Never seen that happen before. Never seen anyone call it 100% more than a day or two in advance. Years in advance - well that is a turkey shoot. One wrong turn and everything else is dust. Makes me grab a grain of salt when reading it.

Food for thought. Things won't play out as we expect. Though I'm with her dystopian view in spirit.

Don't be too dismissive.  As she indicates in the article, it will be sloppy no matter what.  Essentials will be getting MORE expenive, for example, so to the newly unemployed it won't FEEL like deflation.

If you think about it, how many flat screen teevees will be selling in five years compared with 2005-2007?  Not many, and those that do will be DEEPLY discounted to reflect nearly non-existant demand.  

[beamofthewave]

I think she and Ilargi are just great and I just wish I had some money to do more of the preps they recommend.  The things I have gotten on their advice like the Berkey water filter, I feel pretty good about.  It does make sense though, who wants trash like a big screen TV, what use is that when you are being forclosed on because you lost your job?  The only things that matter are food and water and clothing for the season and that is it and that is all I am buying from now on, the rest is BS and less than useless, I am so annoyed with all these articles blaming the consumer because they wont buy anything anymore.  So many people are losing their jobs and that is what they are blaming the lack of recovery on. Incredible.

[Stoneleigh]

Picasso Moon,

I have some contentions with it. The biggest one is with the sentence "There was plenty of everything [-in regards to the 1930s-] except money, and without money, one cannot connect buyers and sellers." So Bernanke was right, if you had just flooded the place with money, everything would have been OK? Like all analyses which accept the existing economic system (ie capitalism) as a given, this one sees the problem in circulation, and hence the financial system. She sees money as "the lubricant of the economic engine, and without enough of it that engine will seize up, as it did in the 1930s." As if the engine itself is/was OK, and simply lacking enough lubricant. Any car-savvy teen could tell you that if an engine throws a rod, adding more lubricant is useless. The problem is in the "engine", more precisely in the relations of production and the accumulation process, but to acknowledge this is to acknowledge that capitalism is inherently crisis-prone and more and more so as it has aged.

Bernanke is wrong. 'Printing' (debt monetization) would not have helped then and it will not help now. Periodic liquidity crunches have happened throughout history, no matter what has been used as money (see The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer). One cannot print out of the liquidity trap where real interest rates are high and cash is actively hoarded. Deflation will run its course, and that will take a long time as deflation and depression are mutually reinforcing. When it is over, then we could see hyperinflation, but that is years away at least.

Capitalism is a ponzi scheme, using leverage to steal from the future, and as such is built on booms and busts of varying sizes. (Market failure is not a bug, it's a feature.) This boom, driven by a once-in-a-planet's-lifetime energy subsidy was as big as they get. The bust will be of similar proportions.

It's not all the fault of our experiment with laissez faire though. Ultimately any human organizational system becomes rigid, schlerotic, hostage to vested interests and unreformable. Different systems rise, persist for a while, and fall. There is no such thing as a stable, sustainable human system. The pendulum swings in one direction then the other, always swinging too far. Now we seem to be headed for much greater central control, but that will be no better. I think it will repressive and punitive, and quite likely grounded in fire-and-brimstone religious extremism. That's what I find the most terrifying quite frankly.

And will all the problems she points out, she still sees prospects of a recovery by possibly the middle or end of the 2010s. Eh? Was there ever a recovery in the 1930s? The biggest energy crisis of human history won't matter? The growing disruption of the climate won't matter? Running out of water won't matter? She makes no sense whatsoever with this.

Not so - a rally after 2010, as all markets experience rallies at different degrees of trend all the time. I don't see a lasting bottom until at least 2015, and then only in the market, not the real economy, which always lags significantly. In the 1930s the market bottomed in 1932/3, but depression conditions lingered until WWII. And when I say 'lasting bottom', I just mean one that lasts longer than a few months, not a final bottom. That would be decades away, and in that time we should see the most disastrous century in human history.

I am expecting an enormous dieoff and widespread conflict, quite likely nuclear at some point. People who are starving will cut down everything that they can eat or burn, thereby actively degrading the remaining carrying capacity as they go down. Water shortages and/or water pollution will render many areas uninhabitable, leading to destabilizing migration. Fuel shortages will have the same effect in many areas. Climate effects are more difficult to predict, especially in terms of timeframe. While a dearth of economic activity will drop emissions (just like the Soviet collapse did), conflict will substitute to some extent. Of course nuclear war could lead to nuclear winter.

[RMG]

Stoneleigh, quit scaring me  . I read the piece on the interview, great stuff. One can read so much and see differing opinions, conclusions and forecasts - it can be quite confusing. The only thing I am absolutely sure about is our future will change dramatically - and not for the good. Very tough times are here as well as ahead.

[Doom2Spare]

I am expecting an enormous dieoff and widespread conflict, quite likely nuclear at some point. People who are starving will cut down everything that they can eat or burn, thereby actively degrading the remaining carrying capacity as they go down. Water shortages and/or water pollution will render many areas uninhabitable, leading to destabilizing migration. Fuel shortages will have the same effect in many areas. Climate effects are more difficult to predict, especially in terms of timeframe. While a dearth of economic activity will drop emissions (just like the Soviet collapse did), conflict will substitute to some extent. Of course nuclear war could lead to nuclear winter.

Good post.   

What if we were to head it off by removing a percentage of the population prior/during this period.  I mean the ships going down, we all know it, why not throw a few million overboard to keep it afloat a little longer and possibly limp it back to port.

discussing it hear and would like to hear you thoughts.

http://www.doomers.us/forum2/index.php/topic,55808.0.html

[Xenopus]

I think it will repressive and punitive, and quite likely grounded in fire-and-brimstone religious extremism. That's what I find the most terrifying quite frankly.

Agreed. A Wall Street lawyer acquaintance of mine said last summer that the thing that scares him most is the tendency of Americans to elect/support lunatics when things get rough. (It is undoubtedly true of other countries, too. Think 1930s Germany.)

[ERR07]

Stoneleigh,

Can I interpreted this by saying: we have enough energy to keep our present day world going but we will throw it all away because of money.

[yikes!]

Picasso Moon,

I have some contentions with it. The biggest one is with the sentence "There was plenty of everything [-in regards to the 1930s-] except money, and without money, one cannot connect buyers and sellers." So Bernanke was right, if you had just flooded the place with money, everything would have been OK? Like all analyses which accept the existing economic system (ie capitalism) as a given, this one sees the problem in circulation, and hence the financial system. She sees money as "the lubricant of the economic engine, and without enough of it that engine will seize up, as it did in the 1930s." As if the engine itself is/was OK, and simply lacking enough lubricant. Any car-savvy teen could tell you that if an engine throws a rod, adding more lubricant is useless. The problem is in the "engine", more precisely in the relations of production and the accumulation process, but to acknowledge this is to acknowledge that capitalism is inherently crisis-prone and more and more so as it has aged.

Bernanke is wrong. 'Printing' (debt monetization) would not have helped then and it will not help now. Periodic liquidity crunches have happened throughout history, no matter what has been used as money (see The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer). One cannot print out of the liquidity trap where real interest rates are high and cash is actively hoarded. Deflation will run its course, and that will take a long time as deflation and depression are mutually reinforcing. When it is over, then we could see hyperinflation, but that is years away at least.

Capitalism is a ponzi scheme, using leverage to steal from the future, and as such is built on booms and busts of varying sizes. (Market failure is not a bug, it's a feature.) This boom, driven by a once-in-a-planet's-lifetime energy subsidy was as big as they get. The bust will be of similar proportions.

It's not all the fault of our experiment with laissez faire though. Ultimately any human organizational system becomes rigid, schlerotic, hostage to vested interests and unreformable. Different systems rise, persist for a while, and fall. There is no such thing as a stable, sustainable human system. The pendulum swings in one direction then the other, always swinging too far. Now we seem to be headed for much greater central control, but that will be no better. I think it will repressive and punitive, and quite likely grounded in fire-and-brimstone religious extremism. That's what I find the most terrifying quite frankly.

And will all the problems she points out, she still sees prospects of a recovery by possibly the middle or end of the 2010s. Eh? Was there ever a recovery in the 1930s? The biggest energy crisis of human history won't matter? The growing disruption of the climate won't matter? Running out of water won't matter? She makes no sense whatsoever with this.

Not so - a rally after 2010, as all markets experience rallies at different degrees of trend all the time. I don't see a lasting bottom until at least 2015, and then only in the market, not the real economy, which always lags significantly. In the 1930s the market bottomed in 1932/3, but depression conditions lingered until WWII. And when I say 'lasting bottom', I just mean one that lasts longer than a few months, not a final bottom. That would be decades away, and in that time we should see the most disastrous century in human history.

I am expecting an enormous dieoff and widespread conflict, quite likely nuclear at some point. People who are starving will cut down everything that they can eat or burn, thereby actively degrading the remaining carrying capacity as they go down. Water shortages and/or water pollution will render many areas uninhabitable, leading to destabilizing migration. Fuel shortages will have the same effect in many areas. Climate effects are more difficult to predict, especially in terms of timeframe. While a dearth of economic activity will drop emissions (just like the Soviet collapse did), conflict will substitute to some extent. Of course nuclear war could lead to nuclear winter.

Stoneleigh, thanks for the analysis, big fan!!

[feelingweird]

Just getting ready to read the entire article.

As to the poster regarding Von Mises and his philosophy. I have followed the Austrian model for over 10 years now and it has not been wrong once in seeing what's wrong with the current system. I have come to accept that the contemporary Austrian fixes for the economy are lacking BIG TIME, but the Austrian case as to why the Keynesian system(again the CONTEMPARY application of it) is going to collapse is powerful and correct.

Without my Austrian education I would have never ended up here on a Peak Oil forum.

I look forward to reading the article. The author is already on my same page as he/she(not sure the gender of the author) as I have called for an ULTIMATE deflationary collapse. I was only hedging on when the Crack Up boom would show up, or whether the rise up to 14K on the DOW and the mania that surrounded it was the Crack UP boom.

I am now convinced that this is it, we are on a bumpy ride down to a complete Deflationary Burn Out of our economy akin to the 85 to 90% burnout we saw During the Great Depression. But couple this with the reality of Peak Oil and growing populations and you realize we don't have the 1950's to look forward.

FeelingWeird.

[feelingweird]

OK, just finished the article(still working on the comments).

Great analysis and goes nicely with my opinion of what's coming. I would love a critique of my analogy if StoneLeigh is still watching this thread. Oh and BTW could you tell Illari that I am sorry for the way I snapped at him/her as it was uncalled for. At the time I didn't realize that for the most part we were on the same page. Picasso I hope could vouch for my credentials on this board. I have been writing for over 3 1/2 years on this site and I am normally not that rude. I saw a "newb" and got a little superior and couple that with me being in a REALLY shitty mood and I went a little over the top.

So here is the simplistic analogy that I have used to educate many of the Non Financial people on this board. I spent years educating people here on the works of Von Mises and Rothbard. The people here have educated me on why so much of what they propose would not work in a real world, but they understand why the Austrian critique of the current system is SPOT on and has been a great guide for those that have listened.

I have been fighting the "hyper" inflationist on this board for years and I started calling for deflation as far back as the summer of 2007. On a few occasions I doubted my own beliefs but for the most part I have stuck to the deflationary spiral for over 2 years now.

And here is the visual I use to help people understand why. I envision the economy as a large bucket. Pouring into the top of the bucket is a constant flow of water(new credit creation) and out the bottom of the bucket is a hole where water pours out(credit destruction in the form of repayment and debt repudiation). In normal times of "stable markets" the bucket is 85 to 90% full. When stability is attained in the system(while it lasts) small adjustments to either the flow of new money(pouring in from the top) or the size of the hole in the bottom(credit destruction) can keep the water level stable.

But at some point the water level is disrupted. Maybe the person in charge of the flow of water decides that 85 to 90% is too low and that 95% should be the correct level so they turn on the spigot full blast and the level starts to quickly move up(inflation) and goes right past 95% and right to the edge of the bucket(even though they turned it off at 95%), so in a panic to keep the bucket from overflow(hyper inflation) they increase the hole in the bottom. But again they over react and water starts gushing out the bottom and drains the bucket to 80% full, they over react and turn the water back on full steam.

Now here is where a deflationary spiral gets started. The people who ULTIMATELY are responsible for creating the water that comes in the top of the bucket(NEW CREDIT creation) get scared. They see the bucket level jumping all over the place and they panic. SO they start taking water out of the bucket and they stop creating new water(paying off debt and not taking out new debt).

I'll stop the analogy here and finish my thoughts. The government just got through a period of MASSIVE debt(water) creation in the form of government spending and money creation to make up for the debt that the private sector isn't creating. They are SERIOUSLY CONSIDERING increasing the hole in the bottom of the bucket for they fear an inflationary rise in the bucket level(green shoots turning into giant plants, or people rushing out to buy things and create new debt).

They are making a HORRIFIC mistake if they go through with it, for there are no green shoots. Right now(in my opinion) there is a huge wave of panic coming where people are going to not only NOT create new debt but they are going to start taking water out of the bucket.

So you will have the Fed sopping up liquidity(by increasing the size of the hole in the bottom) and dialing back the new flow of debt(water) coming into the top of the bucket.

This will result in a Deflationary spiral that we will not be able to pull out of until it burns itself out.

FeelingWeird

[urbanfarmer]

. . .couple this with the reality of Peak Oil and growing populations and you realize we don't have the 1950's to look forward.


Ouch, that was down right doomy!  I guess I will give my poodle skirt and hoola hoops to charity then.  

That was an excellent analogy! Thanks for helping us visual learners understand the concept.