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Financial Monsters in tandem with peak oil 

by Alice Friedemann

The world's financial systems are very unstable, especially in the United States.
I believe there will be massive unemployment, inflation, wars, and depression as 
energy prices rise due to geological depletion and instability in the remaining 
oil-producing countries.
Increasing energy costs may be the pin that pops the financial bubbles.  
It will not appear to the average person to be the main cause, because 
pundits will write that the bubble was popped by inflation, which caused 
interest rates to go up, which made people with adjustable rate mortgages 
lose their homes, which brought down Fannie Mae, and so on.  Or that 
several large banks made derivate bets too large to cover and had to fold.
What you won't hear is that the main cause of inflation was the rising price 
of energy.  High energy prices make everything more expensive, because 
everything ultimately depends on energy to be manufactured and delivered.  
This leads to inflation.  You also won't hear that inflation was caused by 
fighting the war in Iraq to keep the oil flowing.  Wars have always been 
an inflationary force -- this war is no exception.  And this is a war that 
will keep going until the oil runs out.
Other tipping points that might pop the financial bubble are:
- the next act of terrorism
- SARS, avian flu
- hard landing of the Chinese economy (we're all so interconnected now)
In addition, the third world is on to us -- they've figured out how we've been 
rigging international markets to exploit their resources (for details, see Susan 
George's "Faith and Credit: The World Bank's
Secular Empire"). 
If you want to retire or buy your way out of the massive pain ahead, you need 
to know the nature of the financial monsters lurking out there so you can consider 
how to dodge the beasts.
As if we didn't have enough to worry about with Peak Oil coming, closer at hand 
is the general bad state of the financial markets, which are at a tipping point now.  
Energy shortages may be the trigger that knocks everything over.
- Warren Buffet believes that an explosion in derivatives contracts could create 
serious systemic risks - that derivatives are time bombs waiting to explode the 
economic system.
- Outstanding derivatives contracts - excluding those traded on exchanges such 
as the International Petroleum Exchange - are worth close to $85 trillion.
- Some derivatives contracts, Mr Buffett says, appear to have been devised by 
"madmen". He warns that derivatives can push companies onto a "spiral that can 
lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term 
Capital Management in 1998.
- Large amounts of risk have become concentrated in the hands of relatively few 
derivatives dealers ... which can trigger serious systemic problems
- Derivatives also pose a dangerous incentive for false accounting.   The profits and 
losses from derivates deals are booked straight away, even though no actual money 
changes hand. In many cases the real costs hit companies only many years later.
- This can result in nasty accounting errors. Some of them spring from "honest" 
optimism. But others are the result of "huge-scale fraud", and Mr Buffett points to 
the US energy market, which relied for most of its deals on derivatives trading and 
resulted in the collapse of Enron.
Federal Debt
Part I: The looming national benefit crisis By Dennis Cauchon and John Waggoner, 
The long-term economic health of the United States is threatened by $53 trillion in 
government debts and liabilities that start to come due in four years when baby 
boomers begin to retire. The "Greatest Generation" and its baby-boom children 
have promised themselves benefits unprecedented in size and scope. Many leading 
economists say that even the world's most prosperous economy cannot fulfill these 
promises without a crushing increase in taxes — and perhaps not even then.
A USA TODAY analysis found that the nation's hidden debt — Americans' 
obligation today as taxpayers — is more than five times the $9.5 trillion they 
owe on mortgages, car loans, credit cards and other personal debt.
This hidden debt equals $473,456 per household, dwarfing the $84,454 each 
household owes in personal debt.
Glass-Steagall act no longer in effect
After the 1929 market crash, the Glass-Steagall Act was enacted to keep banks 
doing the business of banks, and not getting into the stock market or insurance 
business.   This act has slowly been eroded to the point where it's non-existent.
Now you have banks doing everything, including gambling with energy derivatives.
Distribution of Wealth
The top 1% of the wealthy in this country own a hugely disporportionate amount 
of the wealth, which is one of the reasons people believe the 1929 crash was precipitated.

Fiat Currency not backed by anything real, like gold or oil
Subscribe to Daily Reckoning, read Bill Bonner's "Financial Reckoning Day".

Stock Market Overvalued
Historically, the P/E (Price to Earnings) Ratio of stocks has been 15. 
The last time I looked, the S&P was at 26, NASDAQ at 100
Wars are Inflationary
We are likely to bleed our finances to death until the oil runs out in the Middle 
East to keep the oil flowing.  This will be a huge drain on the economy.

Massive Corporate and Governmental Fraud
As those of you who saw the movie "The Corporation" know, corporations act as if they were psychopathic individuals.  The have no choice: the corporate charter states that they must do what will benefit the stockholder. So even if the CEO wants to save the environment, he can't if it will cost the shareholders any money.  And if breaking the law is cheaper than the fines that will result in the unlikely event a corporation is caught, then the odds are the law will be broken.
Enron was just the tip of the iceberg.  Read Joel Bakan's "The Corporation:
The Pathological Pursuit of Profit and Power" for details, and Marion Nestle's "Food Politics" for how corporations corrupt our governmental bodies. (There are many books on this....

Throughout most of human history, we lived on the earth's sustainable yield--the interest from its natural endowment. But now we are consuming the endowment itself. Our existing economic output is based in part on cutting trees faster than they grow, overgrazing rangelands and converting them into desert, overpumping aquifers, and draining rivers dry. On much of our cropland, soil erosion exceeds new soil formation--slowly depriving the land of its inherent fertility. We are taking fish from the ocean faster than they can reproduce.
"We are releasing carbon dioxide (CO2) into the atmosphere faster than the earth can absorb it, creating a greenhouse effect. Rising atmospheric CO2 levels promise a temperature rise during this century that could match that between the last Ice Age and the present," notes Brown in PLAN B, which was funded by the U.N. Population Fund.
Bubble economies are not new. American investors got an up-close view of one when the bubble in high-tech stocks burst in 2000 and the NASDAQ, an indicator of the value of these stocks, declined by some 75 percent. The Japanese had a similar experience in 1989 when the real estate bubble burst, depreciating stock and real estate assets by 60 percent. As a result of the bad-debt fallout and other effects of this collapse, the once dynamic Japanese economy has been dead in the water ever since.
The bursting of these two bubbles most directly affected people living in the industrial West and Japan. But if the bubble that is based on the overconsumption of the earth's natural capital bursts, it will affect the entire world.
Thus far the consequences of most excessive natural capital consumption, such as aquifer depletion, collapsing fisheries, and deforestation, have been local. But in sheer number and scale these events are now reaching a point where they may soon have a global effect. Food appears to be the economic sector most vulnerable to setbacks, largely because the impressive production gains of recent decades were partly based on overpumping and overplowing. Overpumping is historically recent because powerful diesel and electrically driven pumps have become widely available only during the last half-century or so. Aquifers are being overpumped in scores of countries, including China, India, and the United States, which together account for nearly half of the world grain harvest.
Overpumping creates a dangerous illusion of food security because it is a way of expanding current food production that virtually ensures a future drop in food production when the aquifer is depleted. In the past, the effects of aquifer depletion on food production were confined to less-populated countries, like Saudi Arabia, but now they are becoming visible in China.
After a remarkable expansion from 90 million tons in 1950 to its historical peak of 390 million tons in 1998, China's grain harvest dropped to 330 million tons in 2003. This drop of 60 million tons exceeds the grain harvest of Canada. Thus far China has offset the downturn by drawing on its vast stocks of grain. It can do this for perhaps another year or two, but then it will be forced to import massive quantities of grain.
Turning to the world market means turning to the United States, the world's largest grain exporter, presenting a potentially delicate geopolitical situation in which 1.3 billion Chinese consumers, with a $100-billion trade surplus with the United States, will be competing with U.S. consumers for U.S. grain, driving up food prices.
Water shortages, such as those in China, are becoming global, crossing national boundaries via the international grain trade. Countries facing water shortages often import water in the form of grain. Since it takes 1,000 tons of water to produce 1 ton of grain, this is the most efficient way to import water. Grain has become the currency with which countries balance their water books. Trading in grain futures is now in a sense trading in water futures.
Consumer Debt
October 3, 2003 Spending our way to disaster: The consumer debt bubble in the United States could make the stock bubble seem like nothing. By Justin Lahart NEW YORK (CNN/Money) - The American consumer has become deeply addicted to spending, running up ever higher levels of debt in order to live in a fashion that is beyond his means. And the world has become equally addicted to the consumer continuing to burn through cash.
It's a dangerous situation -- potentially a bubble that dwarfs even the U.S. asset bubble that burst in 2000 -- and it will be a challenge for policy-makers to keep it from ending badly.
Real Estate Bubble
Money & Investing: Home Sick  by A. Gary Shilling
Most people don't see housing as overblown, just benefiting from strong demand. Nevertheless, this is a classic bubble. You know that when investors believe there's no place else to go. The same argument was used for owning ridiculously overpriced stocks in the late 1990s. Another indication: Loads of folks are aboard. Home ownership rates for people under 25 leaped from 18% in 1997 to 23% in 2001.
Like any speculation, the housing bubble feeds on itself. Rising prices encourage new buyers to rush in before they go even higher. And higher prices allow homeowners to use their accumulated equity to buy costlier homes. Price jumps also encourage more leverage. A decade ago, the home equity of Americans with mortgages was 21% of their abodes' market price; continual refinancing and home equity lending have reduced it to 16%.
Credit Card Debt
Credit Card Debt Trap & Rising Interest Rates
THE PLASTIC TRAP  Soaring Interest Compounds Credit Card Pain for Millions By PATRICK McGEEHAN
When Ed Schwebel was whittling down his mound of credit card debt at an interest rate of 9.2 percent, the MBNA Corporation had a happy and profitable customer. But this summer, when MBNA suddenly doubled the rate on his account, Mr. Schwebel joined the growing ranks of irate cardholders stunned by lenders' harsh tactics.
To some cardholders and consumer advocates, credit card companies are acting like modern-day loan sharks, strong-arming their customers to pay more - with no legal limit on how much they can charge.
In eight years, the major card companies have increased the fee charged to cardholders for being even an hour late with a payment to $39, from $10 or less.
Duncan MacDonald, who, as a lawyer for Citibank was involved in its successful case for deregulation of fees before the United States Supreme Court in 1996, now says he fears that he helped to unleash a monster. Mr. MacDonald said federal bank regulators should investigate the fairness of universal default and some of the banks' harsh penalties.
Fannie Mae, Freddie mac
These are UN-INSURED agencies, and most money market funds, many mutual
funds, and other financial instruments have a substantial portion of their
holdings in these.  If these agencies fail to any extent when the housing
bubble pops, you may lose money.  See the two links below for more info.
- May 22, 2004  Financial Sense NewsHour Radio & Net Talk Show Presenting Catherine Austin Fitts w/ Jim Puplava Webcast. Catherine Austin Fitts was a former Assistant  Secretary of Housing-Federal Housing Commissioner in the first Bush Administration.
- New Agency Proposed to Oversee Freddie Mac and Fannie Mae
Pension fund looting
If your pension was converted to the cash balance system, you've probably lost a lot of money, more than you may realize.  Try to find people at work who were grandfathered in to get a sense of how much, and get the names of other people at work who might be interested in a class action law suit.  Then contact Lieff, Cabraser, Heimann, and Bernstein in SF.
SSN & Medicare underfunded
Nov. 24, 2003   The $44 Trillion Abyss from Fortune magazine  
Just How Much Is $44 Trillion? It's more than four times the GDP of the U.S. It would buy three Hummer H2s for every person in the U.S. Or it's about 1,500 times the personal fortune of Bill Gates.
Last fall Paul O'Neill, then Secretary of the Treasury, wanted a simple answer to a thorny question: How prepared was the nation today to pay all its future bills? Two government experts worked for months to calculate the answer. Their findings, which shocked even them, were never published—-the Bush administration made sure of that. The reason for the silence was that by the time the two researchers had completed their study, O'Neill had been thrown out of the Treasury and replaced by the more politically astute John Snow. No savvy administration power player would dare point out, right in the middle of tax-cut season, that there was a huge hole in the country's finances—-a $44 trillion hole.
How the expected budget shortfall of $44.2 trillion* breaks down
Source...............    Amount
Social Security...... $ 7.0 trillion
Medicare  ........... $36.6 trillion
Other................ $  .6 trillion

Weak Dollar
Because of everything above.
Alice Friedemann is a member of the (San Francisco) Bay Area Peak Oil discussion group that meets under the auspices of Post Carbon Institute.


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