The story this coming week, I think, will be how much the collapse of the Amaranth hedge fund may end up infecting other "playas" in the big leagues of finance. Hedge funds being what they are -- rackets using "leverage," or other people's promises to pay, to make bets on "spreads," or differentials in other people's bets on the price of things -- there are a lot of other people out there who might get sucked through the event horizon of one big fund's black hole of bad betting.
So far -- through the weekend of the 23rd and 24th -- the banks and other manipulators of capital have been successfully quarantined from the Amaranth infection. Sunday night, as I write, the business desk reporters are waddling back to the fridge for a second bowl of Chunky Monkey. Many of them will go to sleep in a few hours thinking that the price of gasoline is headed down further and all is right with the world. But the Amaranth fiasco has made about six (or is it eight?) billion of somebody's dollars disappear. Either those dollars have meaning, and those somebodies will suffer from the loss of them, and so will the people who the somebodies owe money to, or else the dollars will have had no meaning per se -- they may not have been dollars so much as IOUs denominated in dollars, or loans of bundles of IOUs, or promises of future loans of bundles of IOUs -- in which case their value as a medium of exchange will be perceived to be less than was previously assumed.
This is what comes of living in an economy of hallucinated finance instead of an economy of wealth-generating work. It all seems to add up until the old assumptions just don't add up, and then things break down.
This is the season when crashes like to happen. Perhaps it's something about the frost on the pumpkin, those premonitions of the dark and freezing nights ahead, that provoke hard-wired human brains to get real. When people get real and the basis of their currency looks more and more unreal, shit will happen. And unhappen.
Some commentators, such as Doug Noland, at Prudentbear.com, think that the liquidity game -- of evermore loans based on other loans based on promises to pay based on IOUs -- can keep this alternative universe of rackets going for a while longer. (At least that's what Doug said in an interview with Jim Puplava this weekend.)
Myself, I think something's gotta give. There are too many real things that are going wrong. A tapped out public with no savings. A glut of houses sinking the sprawl-meisters. Nobody buying cars. Balance of payments steadily worse. Overseas adventures failing. . . .
Despite temporary appearances, the energy predicament has not gone away. Worldwide oil production is on track to go down 3 percent in 2006. If it keeps on going that way, the 84.5 million barrels a day available to the world now will shrink to something like 50 million in 2015. Ultimately that will determine the fate of our economy and the financial infrastructure that is supposed to serve it.
A world of increasing energy scarcity will be a world that generates fewer things of value, less "wealth." All the paper "instruments" that represent our hopes that society is bound to produce more wealth will be discredited. This is a fundamental fact of peak oil, and perhaps the most implacable reality. Not only will there be less wealth, and fewer paper certificates that can be construed to represent wealth, but promises to pay back loans of putatively existing wealth will lose their credibility too. The long chains of promises to pay back this debt and that loan will be broken, and all the paper associated with those promises.
If, however, America could find some way to harness the energy in the smoke it blows up its own ass every day, we would never face an energy crisis. Wouldn't that be the day?
This article is from www.kunstler.com
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