The End of an Era

Cultural, Economics, Premium POM

No More QE, Interest Rate Increases, Continued Deleveraging, and the Last Oil Sands Mega Project

By JC Collins

The world is changing and the last ones to wake up to this reality are confused westerners.  The endless predictions of inevitable collapse because of too much debt will recede into the pass along with other predictions of earth changes and Mayan catastrophes.

Debt itself is not so much of the problem as the ability to manage the debt burden.  Let’s be clear, debt is not good.  Debt is bad.  Debt is something which has to be changed at some point in the future. But what will replace our current debt based money creation system cannot be determined at this low point in macroeconomic history.

Perhaps future generations will devise a method of money creation which is based on growth and production, as opposed to borrowing on future production, which may or may not be realized. Theories abound on everything from new gold standards to crypto currencies, and the masses continue to forage and barter their time for meager distractions of Romanesque like forms of entertainment.

Americas Got Talent, but time will tell.

There are many who speculate and conclude that QE4 is coming and there is nothing the Federal Reserve can do about it.  The reasoning is that if the Fed doesn’t implement more money printing, which is not exactly what QE is (it’s more of a liquidity exchange), and raises interest rates, bubbles will begin to pop and all hell will break loose upon the plains of Bacon’s New Atlantis.

Perhaps the purpose all along has been to pop those bubbles.

The obvious nature of an expansion of the money supply is that eventually said money supply will also need to contract.  This is deleveraging as liquidity is leeched back out of the system and the universe begins the process of balancing the natural survival abilities of the roaming masses, which includes all classes and income brackets.

QE, the exchange of low liquidity assets for high liquidity assets, has achieved the monumental task of consolidating all low liquidity financial assets onto one nice balance sheet which can then be exchanged for more supra-sovereign liquidity in the form of SDR bonds.

The high liquidity assets which flooded the system, such as stock markets and energy bubbles, is now beginning to be sucked back out of the system and the great deleveraging will almost be complete.

Sure the stock markets will dramatically correct.  How can they not?  Sure, the shale oil revolution will end.  The absurd valuations of stocks such as Twitter, Amazon, and assorted other non-producing companies will shrink like Saran Wrap in a toaster oven.

But so what? Easy come, easy go. The warnings of greed in this world have been around since perplexed humans were scribbling their perplexities into clay tablets with pointed sticks.

None of us are innocent from the sin of greed.

In Canada we are likely experiencing the end of the oil sands era.  The existing mine sites will continue to produce but at reduced operating expenses.  The Suncor Fort Hills site will be the last of the oil sands mega projects which cost billions to construct.  That is if it doesn’t get cancelled and investors cut their losses while they still can.

The argument of oil valuations are varied and often opposing.  The catch is that the world needs GDP growth from all countries as the multilateral financial system becomes more fully implemented within the domestic macroprudential policies of member nations.  High oil costs cause slow GDP growth and promotes various bubbles as alternative methods to sustainable growth are developed, such as creating cheap money to fund expensive industries, like shale and oil sands.

Future growth will not be achieved with a large expansion of the money supply.  The money supply will expand based on the organic growth in production worldwide.

The difference is dramatic.

The pace at which alternative energies will come on stream will shock most people in the coming years.  Demand for energy will increase but new technologies will meet an ever increasing amount of this demand.  This process will only escalate and never slow down or retract.

Sure, there could be ups and downs in oil for years, but the risk to investors on high cost methods of production will be offset by higher returns from low cost fields in Iran, which will soon have sanctions lifted.

Iran will become something similar to the Wild West as western oil companies return to the lands which they were removed from decades ago.  Anyone who thinks companies like Royal Dutch Shell and Exxon Mobile will be investing in new oil sands mega projects over Iranian oil fields are simply deluding themselves.

The reduced reliance on the USD in the multilateral framework will also reduce Americas need for Canadian oil as petrodollar recycling becomes less important.  The need to recycle US dollars with oil and the inability of American oil companies to do business in Iran, has made the oil sands deposit attractive.

This dynamic and relationship is now changing.

The original assumptions on the Keystone Pipeline were based on higher oil prices and a continuation of American need for Canadian oil. In a world of reduced oil prices and waning petrodollar recycling, the need for extra pipeline capacity from the oil sands will not be required.

The political pressure on the oil sands industry is immense, and not just in the United States and Canada, but internationally as well.  Unfortunately the writing is on the wall and the great Canadian deleveraging is only now beginning.

Canadian housing valuations and household debt have exploded in recent years.  Most are in denial and the adjustment is going to hurt.

America is well ahead of Canada on matters such as these.

When the US Fed raises interest rates the corralled herd of high liquidity benefactors will feel the full force of the deleveraging event.  Nothing lasts forever.

The Iron Maiden song Run to the Hills continues to play in my mind as I envision the surprised herds of ravenous Morlocks roaming the barren fields of shattered dreams, seeking new tomorrows.

But people adjust.  We always do.

The debt-to-GDP ratio of the Unites States was higher after World War Two than it is now.  Sure, the actual debt amount may be higher, but so is population, and the percentage of that population in the workforce is greater.

In 1947 the debt-to-GDP ratio was around 116%.  The workforce mainly consisted of males and the population numbers were around 140,000,000.  Today the debt-to-GDP ratio is around 101%, with a population of around 319,000,000.

Thanks to such things as the feminist movement and changes to divorce laws, along with the male proclivity for pornography, and other forms of socioeconomic engineering, such as the CSI which we have previously discussed, the labor force participation rates have doubled as the family unit has been fragmented.

National debt in 1945 was $259 billion.  Today the national debt has exceeded $18 trillion. But when we consider the population growth, along with workforce participation, and the fact that the debt-to-GDP ratio is less today, the reality that the United States can grow its way out of this situation becomes a very real probability.  Especially as the USD depreciates and exports increase.

America’s Got Talent.

But don’t forget inflation.  When you measure the debt of yesteryear against the debt of today, and account for inflation, the impact of those debt numbers are even less dramatic.

Sovereign debt restructuring will help the transition for all countries as the world climbs out of the era of cheap money and horrendous debt.  Each region and country is at a different place along this path to recovery.  Some are near the end and others are only now just beginning.  And some are stuck just past the starting gate, such as Greece.

Turkey is near the end.

Great opportunities abound in the multilateral world of tomorrow.  The fear of absolute collapse and a Mad Max type world is a very powerful emotion and visual.  Humans have an innate ability to imagine the worse.  But our deepest fears are seldom realized.

That is the one constant which I can extrapolate from my own life.  Fear only fear.

As one era ends another begins.  – JC