Is a Deflationary Collapse Guaranteed?

Over at The Automatic Earth, I was having a conversation with some folks about the price of oil in the April 27th Debt Rattle thread. My concern is that we are not facing a traditional recession/depression at all but rather are facing the leading edge of oncoming waves of scarcity driven by serious overpopulation. Because of that, I felt compelled to expand upon that dialog and it got large enough that I decided to do it here rather than as a reply there. Before I proceed further, if you don't understand the difference between prices rising due to scarcity and prices rising due to monetary inflation then please do not read further. I'm not going to answer basic questions about such things that you can get from multiple other sources on the net.

Now, to continue that conversation from TAE, let's take a look at what is really happening around the globe. At te current time, grain prices are through the roof. Some of this is due to speculation, some to trade barriers being erected (due to food security concerns), but a large fraction of this is due to shortage. We know that UG-99 is causing havoc with wheat in Africa and now the Middle East and it is expected to move into Asia proper this year. The planet has consumed more grains than it has produced for 7 of the last 8 years, reducing the 2000 grain surplus of 110 days global food supply to under 57 days global food supply. Regardless of deflationary pressures, this is going to produce upward pressure on prices (NOT inflation!!) due to shortages until shortages are alleviated.

Likewise, consider the price of gold, which has fallen by roughly 10% (slightly more) into the $890-$900 range. Gold is money and since the global monetary situation is deflationary, gold is sliding somewhat with it. This however will vary over time as people move from fiat currencies back into gold and silver. Which way will these two precious metals go? Beats me! The combined problems of deflation coupled with flight from fiat currency (upward pressure on gold prices) look completely unpredictable to me at this time thus I have zero interest in playing the gold market in any speculative manner.

However, look at oil. Oil remains on an upward trajectory. So long as any global technological civilization exists AND that civilization does not go to war with itself (regions against regions) then energy must continue to flow at some rate. Unless and until rationing sets in, so long as any open market in oil exists AND the global production continues to fall below growing demand we will see rising prices, even in a deflationary scenario.

To alter this we either need increased supply (which is not going to occur) or decreased demand. And despite the observations of the deflation watchers like Mish and others, there has as of yet been no deflationary crash. In other words, so long as the markets continue to ignore the crackup in the financial sector, oil cannot do anything but continue its general upward trend.

Now I agree that in the event of a 1929 style deflationary collapse we would see massive decrease in demand. But are we going to get that? Or are we going to muddle along for the next several years in some financial no-man's land?

Here's a point for people to ponder. The 2001 tech stock crackup was supposed to be "the big one" but the powers that be managed to hide that with a convenient "war on terror" and yet another bubble. Everyone betting on a deflationary collapse now is making the same assumptions but TPTB have proven remarkably resilient in their abilities to rape the planet and its population. Why do you think they won't get away with this again? We had already passed into the realm of fairy tale numbers back in the 2001 crash. This crash is just more fairy tale numbers. And they have a ready proxy waiting in the wings for the next bubble - carbon credits. Note that I am not a global warming denier, much to the contrary, I am quite a believer in global warming. But I don't think that these sorts of policies and actions are actually going to solve anything. Rather, these policies, like carbon credits are more akin to exploiting a legitimate crisis for gain by the elites.

Likewise, given that $750 trillion in derivatives debt was preposterous to begin with, yet we had it, I can clearly see the existing population buying into an even bigger bubble based on something else. Now I am not predicting this will occur but I am warning many of you that betting on a purely deflationary fast collapse ala 1929 is not a guaranteed bet. I fully intend to speculate in oil futures so long as it seems viable to me. And that is the decision that you must make - does such a speculative action seem viable to you at this time? No one can answer that for you except you. Right now global civilization is in no-man's land. Rational thought was abandoned long ago in favor of rationalizing thought. All that matters now is the race to some illusory goal and right before people reach it, the goalposts will be moved again. This technique has worked for a long time for the established families at the top of the world order and they won't abandon it now even in the face of global catastrophe.

As we continue to sink...

It's been a busy spring for me, both in watching the news and in my own preparations. I've added extensively to my raised bed gardens this year, to the point that we should have major harvests of several vegetables for the remainder of this year. We may be looking at canning as a result. Part of this is prompted by the huge run up in commodities prices, particularly grains, coupled with the many stories of grain producing nations beginning to cut exports and in some cases to halt exports entirely. The problem is spreading even to the US as the NY Sun reports Food Rationing Confronts Breadbasket of the World. One cheap thing you can do is begin buying extra bags of rice, beans, etc., and storing them inside a larger plastic bag and then that inside a sealable container. There are numerous articles on the net about such processes, along with advice about using dry ice or other methods to drive oxygen out of your containers before sealing it. Be sure to mark and date such containers and either use them or donate them to a food bank before the expiration date. Consider also tossing some hard-to-get items in that container as well, such as toilet paper, matches, sugar, coffee, tea, etc. If you build an inventory of such containers at a rate of 1 or 2 per month, in 6 months time you will have a respectable store of staples.

I am not going to go further into the many details of such activities but as I said previously, there are numerous sites on the web documenting such self-storage processes. You might also consider the Latter Day Saints church as a source, since they have advocated such levels of preparedness for members for decades. And no, I am not a member of the LDS, just noting that they represent one source for such things already vacuum packaged if you wish to go that way. You can also go the freeze-dried route with Mountain House, Nitro-Pak, and other such vendors.

The global oil situation continues in its roughly flat plateau of the last 4 years. A technical new C&C high was reached in February of this year, barely eclipsing the May 2005 high, but keen observers noted that this new high includes tar sands, which are in no way, shape, or form to be considered "crude" oil. So technically the old 2005 high still stands but even with this addition the difference is a mere 137,000 barrels per day. And given the error rate of these reports, a subsequent report may revise that back down anyway. Regardless, the oil plateau continues despite oil moving from $38 per barrel at the start of the plateau to $117 per barrel now. You would think a full trebling of price might get some demand response? But no, no demand response here! So much for abstract economics. Hello economics? Meet reality.

Another alarming trend is that of A Storehouse of Greenhouse Gases Is Opening in Siberia. Read that carefully. If you have not Googled hydrates then I suggest you do that. In the meanwhile let me describe oceanic hydrates as containing more estimated hydrocarbons than maybe 10 times the total conventional oil and natural gas deposits. And further, almost all of it is methane, a greenhouse gas (GHG) that is 20 times more potent at trapping heat than CO2. There have been events recorded in geologic history that strongly suggest prior mass extinctions are tied to massive releases of hydrates, which then basically toast the planet rapidly. Hydrate releases are not in the "predicted" warming scenarios even in this century, yet they are beginning now. Everything you read from the UN's IPCC report is watered down, deliberately so, in order to get approval of all the governments involved, especially the United States which has never really been honest about climate change. We can only guess at the reality of how bad it truly is since most of that information gets deliberately suppressed.

And of course there is the economic mess. Do not let the recent rally fool you. This was even predictable as the market, made up of humans, can only take so much bad news before they want to believe anything even remotely positive. However the bad news continues and will continue until all of this bad debt is written off, and that's going to take lots more pain and a few more years at least.

So here we are, 2008, facing gasoline over $3.50 per gallon at the very least, oil at $117, grains at record prices with even some nations halting exports so they can feed themselves, and the US still embroiled in a pointless, expensive war that is just going to lead to even more trouble. If you think things are bad now, you ain't seen nothin' yet.