Chris Martenson PhD
Chris Martenson PhD
By my analysis,we are not yet on the final path to recovery, and there are one or morefinancial 'breaks' coming in the future. Underlying structuralweaknesses have not been resolved, and the kick-the-can-down-the-roadplan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events willunfold much more rapidly than most people expect.
My work centerson figuring out which macro trends are in play and then helping peopleto adjust accordingly. Based on trends in fiscal and monetary policy, Ibegan advising accumulation of gold and silver in 2003 and 2004. Ishorted homebuilder stocks beginning in 2006 and ending in 2008. Thesewere not 'great' calls; they were simply spotting trends in play, onebeginning and one certain to end, and then taking appropriate actionsbased on those trends.
We happen tolive in a non-linear world; a core concept of the Crash Course. But far too many people expect events to unfold in a more or lessorderly manner, with plenty of time to adjust along the way. In otherwords, linearly. The world does not always cooperate, and my concernrests on the observation that we still face the convergence of multipletrends, each of which alone has the power to permanentlytransform our economic landscape and standards of living.
Three suchtrends (out of the many I track) that will shape our immediate futureare:
- Peak Oil
- Sovereign insolvency
- Currency debasement
History suggeststhat instead of a nice smooth line heading either up or down, marketshave a pronounced habit of jolting rather suddenly into a new orbit,either higher or lower. Social moods are steady for long periods, andthen they shift. This is what we should train ourselves to expect.
No smooth linesbetween points A and B; instead, long periods of quiet, followed byshort bursts of reformation and volatility. Periods of marketequilibrium, followed by Minsky moments. In the language of the evolutionary biologist Stephen Jay Gould, we livein a system governed by the rules of "punctuated equilibrium."
ComplexSystemsOur economy is acomplex system. The key feature of such systems is that they areinherently unpredictable with respect to the timing and severity ofspecific events. For the uninitiated, they can look enormously fragileand prone to flying apart at any minute; for the seasoned observer,there is an appreciation that the immense inertia of the economic systemwill almost always delay and dampen the eventual adjustments.
Like everybodyelse, I have no idea exactly what's going to happen, or precisely when. Anybody who says they do know should be greeted with afurrowed brow and a frown of suspicion. As my long-time readers know, Iprefer to assess the risks and then take steps to mitigate those risksbased on likelihood and impact.
Which means thatalthough we cannot predict the size (exactly howmuch) or the timing (precisely when) ofeconomic shifts or world-changing events, we can certainly understandthe risks and the dimensions of what mighthappen. Just as we cannot predict when an avalanche will release fromsteep slope, or even where or how big it will be, we can readily predictthat constant snowfall coupled with the right temperature conditionswill lead to an avalanche sooner or later, and more likely in this gullythan that one. Given certain conditions, we might expect one that islarger or smaller than normal. Although we don't know exactly when orhow much, we do know that when snow accumulates, so do the risks of morefrequent and/or larger avalanches.
Such is thenature of complex systems. While inherently unpredictable, they canstill be described. The most important description of any complexsystem is that it owes its order and complexity to the constant flow ofenergy through it. Complex systems require inputs. This is one way inwhich we can understand them.
Given this view,one easy "prediction" is that an economy without increasing energyflows running through it will stagnate. To take this further, aneconomy that is being starved of energy becomes simpler in the process -meaning fewer jobs, less items produced, and a reduced capacity tosupport extraneous functions.
Accepting"What Is"The mostimportant part of this story is getting our minds to accept realitywithout our passionate beliefs interfering. By 'beliefs' I meanstatements like these:
- "Things always get better and are never as bad as theyseem."
- "If Peak Oil were 'real,' I would be hearing about it frommy trusted sources."
- "Dwelling on the negative is self-fulfilling."
Let's nowexamine more closely the three main events that are converging - PeakOil, sovereign insolvency, and currency debasement - using as much logicas we can muster.
PeakOilPeak Oil is now amatter of open inquiry and debate at the highest levels of industry andgovernment. Recent reports by Lloyd's of London, the US Department ofDefense, the UK industry taskforce on Peak Oil, Honda, and the Germanmilitary are evidence of this. But when I say "debate," I am notreferring to disagreement over whether or not Peak Oil is real, onlywhen it will finally arrive. The emerging consensus is that oil demandwill outstrip supplies "soon," within the next five years and maybe assoon as two. So the correct questions are no longer, "Is Peak Oilreal?" and "Are governments aware?" but instead, "When will demandoutstrip supply?" and "What implications does this have for me?"
It doesn'treally matter when the actual peak arrives; we can leave that to theivory-tower types and those with a bent for analytical precision. Whatmatters is when we hit "peak exports." My expectation is that once itbecomes fashionable among nation-states to finally admit that Peak Oilis real and here to stay, one or more exporters will withhold some orall of their product "for future generations" or some other rationale(such as, "get a higher price"), which will rather suddenly create aprice spiral the likes of which we have not yet seen.
What matters isan equal mixture of actual oil availability and market perception. Assoon as the scarcity meme gets going, things will change very rapidly.
In short, it istime to accept that Peak Oil is real - and plan accordingly.
SovereignInsolvencyOnce we acceptthe imminent arrival of Peak Oil, then the issue of sovereign insolvencyjumps into the limelight. Why? Because the hopes and dreams of thearchitects of the financial rescue entirely rest upon the assumptionthat economic growth will resume. Without additional supplies of oil,such growth will not be possible; in fact, we'll be doing really, reallywell if we can prevent the economy from backsliding.
Virtually everysingle OECD country, due to outlandish pension and entitlement programs,has total debt and liability loads that ArnaudMares (of Morgan Stanley) pointed out have resulted in a negativenet worth for the governments of Germany, France, Portugal, the US, theUK, Spain, Ireland, and Greece. And not by just a little bit, butexceptionally so, ranging from more than 450% of GDP in the case ofGermany on the 'low' end to well over 1,500% of GDP for Greece.
Such shortfallscannot possibly be funded out of anything other than a very, very brighteconomic future. Something on the order of Industrial Age 2.0, fueledby some amazing new source of wealth. Logically, how likely is that? Even if we could magically remove the overhang of debt, what newtechnologies are on the horizon that could offer the prospect of a brandnew economic revival of this magnitude? None that I am aware of.
In the US, thelargest capital market and borrower, even the most optimistic budgetestimates foresee another decade of crushing deficits that will grow theofficial deficit by some $9 trillion and the real (i.e., "accrual" or"unofficial") deficit by perhaps another $20 to $30 trillion, once weaccount for growth in liabilities. This is, without question, anunsustainable trend.
It's time toadmit the obvious: Debts of these sorts cannot be serviced, now or inthe future. Expanding them further with fingers firmly crossed in hopesof an enormous economic boom that will bail out the system is a fool'sgame. It is little different than doubling down after receiving a badhand in poker.
The unpleasantimplication of various governments going deeper into debt is that astring of sovereign defaults lies in the future. Due to theirinterconnected borrowings and lendings, one may topple the next likedominoes.
However, it iswhen we consider the impact of the widespread realization of Peak Oil onthe story of growth that the whole idea of sovereign insolvency reallyassumes a much higher level of probability. More on that later.
For now weshould accept that there's almost no chance of growing out from underthese mountains of debts and other obligations. We must move ourattention to the shape, timing, and the severity of the aftermath of theeconomic wreckage that will result from a series of sovereigndefaults.
CurrencyWarsWe could trotout a lot of charts here, examine much of history, and make a very solidcase that once a country breaches the 300% debt/liability to GDP ratio,there's no recovery, only a future containing some form of default(printing or outright).
In a recentpost to my enrolled members, I wrote:
The currency wars have begun, and the implications toworld stability and wealth could not be more profound. Fortunately, allof my long-time enrolled members are prepared for this outcome, whichwe've been predicting here for some time.
When pressed, the most predictable decision in all ofhistory is to print, print, print. So I can't take credit for a'prediction' that was just slightly bolder than 'predicting' which way adropped anvil will travel; down or up?
The only problem is, widespread currency debasements willfurther destabilize an already rickety global financial system wheretens of trillions of fiat dollars flow daily on the currency exchanges.You can benearly certain that every single country is seeking a path to a weakerrelative currency. The problem is obvious: Everybody cannotsimultaneously have a weaker currency. Nor can everybody have a positivetrade balance.
If a country orgovernment cannot grow its way out from under its obligations, thenprinting (a.k.a. currency debasement) takes on additional allure. It isthe "easy way out" and has lots of political support in the homecountry. Besides the fact that it has already started, we shouldconsider a global program of currency debasement to be a guaranteedfeature of our economic future.
Conclusion(to Part I)Threeunsustainable trends or events have been identified here. They are notindependent, but they are interlocked to a very high degree. At presentI can find no support for the idea that the economy can expand like ithas in the past without increasing energy flows, especially oil. All ofthe indications point to Peak Oil, or at least "peak exports,"happening within five years.
At that point,it will become widely recognized that most sovereign debts andliabilities will not be able to be serviced by the miracle of economicgrowth. Pressures to ease the pain of the resulting financial turmoiland economic stagnation will grow, and currency debasement will prove tobe the preferred policy tool of choice.
Instead ofunfolding in a nice, linear, straightforward manner, these collidingevents will happen quite rapidly and chaotically.
By mentallyaccepting that this proposition is not only possible, but probable, weare free to make different choices and take actions that can preserveand protect our wealth and mitigate our risks.
What changes inour actions and investment stances are prudent if we assume that PeakOil, sovereign insolvency, and currency debasement are 'locks' for thefuture?
I explore thesequestions in greater depth inPart II of this report
Dr. Chris Martenson isan independent economist and author of a popular website,ChrisMartenson.com. His Crash Course video series explores theintertwining significance of the "three E's" - the economy, energy, andenvironment and offers articulate, dynamic insight into the workings ofour monetary system.
Chris earned a PhD in neurotoxicology from Duke University,and an MBA from Cornell University. A fellow of the Post CarbonInstitute, Chris's work has appeared on PBS and been cited by theWashington Post. He is a contributor to SeekingAlpha.com.
Chris is an accomplished presenter who has offered the CrashCourse seminar all over the United States. The online course has beentranslated into several languages, and been viewed over 1.5 milliontimes. His website offers both daily free content as well as anewsletter service for enrolled members. His goal is to help as manypeople understand that we are in the midst of a profound economic shiftand that equally profound risks and opportunities lie in our future. Forthose that can see them coming, tremendous advantages exist.