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July 13, 2019 - Freedomain Radio - Stefan Molyneux
18:01
The Economic Collapse Warning Sign You Need To Know.
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Hi everybody this is Stefan Molyneux from Freedomain Radio.
So a little update on the economy.
Last year I put together one of my most popular presentations called there will be no economic recovery prepare yourself accordingly.
We'll put the link to that below and here is a very brief update mostly focusing on what's going on with oil prices.
So, people are saying, well, but the Dow is at an all-time high, stocks are doing great and so on, but so what?
Of course, when a rocket's engines fail, it keeps going up for a little bit and then it goes back down.
And in the fall of 2007, right before the recent Great Recession, The Dow was at an all-time high in October.
Unemployment was below 5%, but there was record margin debt on Wall Street.
Margin debt, of course, is the multiple of the obligations that you're taking on when buying or selling various financial instruments.
Since the crash in 07-08, 40% of America's wealth has been destroyed.
And how is the economy still floating along?
Because people have been basically backfilling losses in income and losses to inflation through debt so if you have a look at all of the debt a government business consumer and so on all of the debt in America since 2000 has more than doubled to over 57 trillion dollars which is a Really quite a lot.
That's almost four times the U.S.
economic output as a whole.
So when you are increasing debt, you are not floating.
You are simply deferring and exacerbating disaster.
Building debt to deal with a decaying economy is like taking heroin to fix a toothache.
I guess you'll feel better in the moment, but the rot only gets deeper.
Fifty million Americans now subsist on food stamps in states like Illinois.
Two people sign up for food stamps or food assistance for every one person who manages to land a job.
So, in the stock market, of course, price to earnings ratio.
So, companies make money and there's supposed to be some relationship to the price of the stock and the profitability of the company.
And there are some estimates that says it's more than double what it should be.
Margin debt, as we mentioned, hovering near record highs.
And the real economy fundamentally continues to fall apart.
Recently, of course, we found out that for the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.
That has been ceded to China, which itself is undergoing some significant economic slowdown.
Over the four-day Thanksgiving weekend, traditionally a time of high spending, not to mention high turkey murder for Americans, purchases, consumer purchases were down A crazy 11% simply from last year.
Retail is hugely hurting in the United States.
Of course, retail requires that consumers actually have money to spend.
And there's already more than a billion square feet of retail space sitting empty in the United States.
A billion square feet of retail space sitting empty.
This is not just because people have switched to online purchases, because online purchases have also taken hit of the recent shopping season.
According to some experts, up to half of all shopping malls in the United States may shut down within the next few decades.
The long-term trend for real household income since the year 2000 has been down, and these two things often go together.
When your income goes down, in order to maintain your lifestyle, because changing your lifestyle can be very expensive.
If the value of your house has gone down, you need to downsize.
Selling your house could Net you quite a loss.
And so people generally cross their fingers and borrow in the hopes that somehow the ship is going to magically turn around, which, when it's about three inches off the Arctic floor, a la Titanic, seems a tad unlikely.
Now, oil, of course, has come down catastrophically over the last little while, or positrophically, I guess, if you're on the right side of a derivatives contract.
But what's happened?
Well, America has now become the largest producer of oil in the world.
Yes, yes, larger than Saudi, America larger even than Canada.
So as the price of oil went up, it became profitable to do things like fracking and to extract oil from a shale.
The shale oil boom has been massive to the United States.
It actually, even more than Russia, more than Saudi Arabia, created millions of jobs.
And it's one of the main reasons why the percentage of Americans employed has remained somewhat stable, at least relative to the alternative.
And what's happened is OPEC, the Organization of Petroleum Exporting Countries, has kind of essentially declared a war on U.S.
shale oil producers, a price war.
So, global production of oil, about 75 million barrels a day.
The U.S.
has added about 4 million new barrels of crude oil per day.
That's quite a bit.
And OPEC, of course this cartel of oil producers, Saudi Arabia, Iran, Iraq, Venezuela.
They had a big meeting in Vienna on November 27th.
So before the gathering some people thought well maybe OPEC's going to cut back on their own oil production in order to prop up prices.
But there was quite a bit of bickering among the governments or the organizations involved and they did nothing.
This is perhaps because people are still, I guess, young enough or old enough to remember that in the 1980s when prices also fell, Saudi Arabia tried to cut back on production to prop them up And it didn't really matter.
The prices kept declining and Saudi Arabia just lost out on market share.
Now it's very tough for the OPEC countries to cut the price of oil.
And by the way, since I'm a big fan of the free market, it's kind of weird to think about governments raising and cutting prices, but that's the fascistic overlord non-free market that we currently struggle under.
But Significant amounts, of course, of these countries' budgets, the OPEC countries' budgets for government spending, come from profits that they make from the sale of oil.
And so when oil falls below a certain amount, they simply can't meet their budgets, which is what produces this huge amount of social unrest, to say the least.
So this is one reason why these governments wish to keep the price of oil high.
If you look at something someplace like Russia, Russia gets almost half of its budget from basically overhead tax, mafia-style pillaging on the sale of oil.
And Russia's growth has been pretty anemic.
It's forecasted just this year to do 0.4%, which is pretty bad.
And this is perhaps one reason why they're ginning up all these conflicts in places like the Ukraine.
So, of course, to pump oil directly out of the ground in places like Saudi Arabia and Kuwait, it's pretty cheap.
But it's more expensive, to say the least, to extract oil from shale formations in places like Texas and North Dakota.
So the whole point of letting the oil prices fall from the OPEC countries is to make the new U.S.
production of oil through fracking and shale unprofitable.
And so hopefully that they're hoping to push or allow the price of oil to fall to the point where these US shale producers in particular go out of business and then nobody wants to go back and reinvest in those businesses and that oil lies fallow and thus allows the oil prices to stabilize and continues to put the power of oil prices squarely in OPEC's hands.
So...
Other things that have contributed, of course, there's falling demand as the world economy continues to decay in China, in Europe, in Canada.
There was, of course, a civil war in Libya, which is a major oil producer.
Iraq was a mess and still remains a mess.
And the U.S.
and Europe slapped oil sanctions on Iran and squeezed out those countries' exports.
And these conflicts and sanctions took more than 3 million barrels a day off the market.
Now around September 2014, these things started to change.
Libya's oil industry began ejecting massive amounts of crude back into the world market.
And so as oil production has increased, both from America and from Libya and other places, oil demand in Asia and Europe has been weakening, particularly in China.
And Japan, which continues its zombie-like march into economic obsolescence as the result of, I think, 25 years of quantitative easing of money printing and massive subsidies and general government jury rigging with the economy, which should be passing a verdict of guilty of overstatism.
So this is one of the reasons, these are all the reasons that are contributing to this.
And we'll get into why the price of oil is not changing as much for the consumer and affecting other things like groceries in a moment.
But there's only been one other time in history when the price of crude oil has crashed by more than $40 in less than six months.
The last time this happened, yes, can you guess?
Can you guess?
Yes, you can.
Second half of 2008.
The beginning of that oil price crash preceded the great financial collapse.
It was a few months before the Great Financial Collapse occurred that the oil price crashed.
Another time that this happened in the mid-1980s is oil output from Alaska's North Slope and the North Sea came online.
This was about five to six million barrels a day.
OPEC also set off a price war to compete for market share.
The price of oil sank from around $40 to just under $10 a barrel by 1986.
So, the energy sector is being looked at, I guess, somewhat negatively, I would imagine, by a lot of investors.
The energy sector is about one-third of S&P's 500 CapEx, nearly 25% of all Combined CapEx and R&D spending.
And during the last time when there was a crash in a particular sector, of course that was the last high yield collapse.
It was around debt that was tied to the housing sector.
Citigroup lost 63% of its value in the following 60 days, and Bank of America's value was cut in half.
So, why has the price of your oil not gone down or the price of your gas or heating not gone down at the same rate?
Because there are these wonderful things called derivatives, also known as hedging.
And so, basically, you may have had these guys knock on your door and say, look, the price of gas for heating goes up and down a lot, but we'll lock you in for a particular price so you can be predictable.
And that's, of course, what has happened.
So, the people who make oil...
Oil, who produce oil, in order to get investment, in order to get money, in order to have lines of credit, they need to show to their lenders that they have a guaranteed price of their oil that is higher than the cost of production.
Because, you know, these vacillations can occur and they can be extremely dangerous.
And so they lock in, with financial institutions, the price of oil.
So that if oil goes down, they're fine.
Because, you know, let's say oil goes down to, I don't know, what is it at?
About $65 a barrel now?
Let's say it goes down to $50 a barrel.
Well, you might have locked it in at $90 or $100 a barrel for the whole of the next year.
In which case, you as a producer is making a fortune.
The person or the institution who lent you that money is basically going to eat their shorts with Tabasco.
There are five Wall Street banks that each have more than $40 trillion in exposure to derivatives.
Not just, of course, energy or oil derivatives, but each one of them.
$40 trillion.
The U.S.
national debt is only about $18 trillion.
So this is absolutely massive.
So energy stocks are taking a beating.
In recent years, almost every single time that what are called junk bonds or high-yield bonds, of which the energy is a substantial portion, in recent years, almost every single time these junk bonds have declined substantially, there have been notable stock corrections as well.
And energy companies now account, as we mentioned, for about 20% of the high-yield bond market.
And I won't get into more details.
We'll put all the sources of this too below.
Since the beginning of November, these bonds have been falling steadily.
So just for example, some energy companies say that they've hedged over three quarters of their output for 2015 all the way through to the end of next year.
Another one says two-thirds of its likely production is hedged, which means that it's guaranteed at a high price no matter what happens in the market.
So they're happy and doing well and make a lot of money.
On the other side, well, the financial institutions that sold them these derivatives contracts are going to get hurt and hit really hard.
So there's this belief that you can, you know, through hedging and so on, you can cancel out risk.
It is impossible.
To cancel out risk, all you can do is mask the risk or transfer it to others.
So if you have a house and you want fire insurance, let's say, if you buy fire insurance, it does not lower the chance of a fire.
It simply transfers the risk to the insurance company.
It doesn't magically, you know, create sprinklers that will eliminate all potential fires.
So insurance and derivatives, they do not eliminate risk.
They simply mask it or transfer it.
So, these banks, of course, are huge.
These banks that were deemed too big to fail, of course, they've gotten 37% larger since the last recession.
That's not good.
Five largest banks in the U.S.
are 42% of all the loans.
And the six largest banks control 67% of all banking assets.
Now, those banking assets include, tragically, you.
The taxpayer because right now as we speak lobbyists for the big Wall Street banks are pushing really really hard to include a provision in a bill designed the bills actually designed to keep the federal government funded past the imminent December 11th deadline and this provision which is jammed into this bill to keep government functioning Would allow big banks to trade derivatives through subsidiaries that are insured by the FDIC.
FDIC, Federal Deposit Insurance Corporation, was basically brought in after some bank failings earlier in the last century, which were the result of catastrophic Federal Reserve decisions that produced the 1929 exuberance and then the 13 or 14 year recession that culminated in World War II for America.
So when people lost money they wanted to go to the government to have their money returned to them.
And so this is generally, you know, you can't get your stock market portfolio, a stockbroker portfolio insured, but your savings account can be insured and this is common throughout the Western world.
And so the banks now want to be allowed to trade high-risk derivatives through subsidiaries that are federally insured.
So if there's some local bank that's a subsidiary of a larger bank, you put your money in there.
The whole point is to keep high-risk trading away from that bank.
But if they're allowed to have those banks trade high-risk financial instruments, then the risk of loss becomes, of course, much greater.
And then your personal savings could be wiped out.
And then the government has to step in with taxpayer money either directly or through debt or through the counterfeiting of monetary inflation.
They've got to come in and guarantee and pay you back your deposit.
So, this is another wonderful way that the banks get to privatize their profits.
If they make a lot of money, they get to keep it, and they get to socialize their losses.
In other words, if they lose a lot of money, then the taxpayers have to eat that cost.
So, they are potentially putting the taxpayer on the hook for staggering amounts of losses that could be caused by these risky contracts.
So this is the reality of the late-stage escalating fascism that is occurring, in which the last embers of the free market are perpetually peed on by the giant hosepipes of banking and financial and governmental institutions.
So you will pay through taxes, you will pay through inflation.
In other words, if you're a citizen or any dollar holder, you are likely to pay through the erosion of any kind of value.
And of course, Barack Obama was fundamentally elected initially because he got massive amounts of Donations from Wall Street, and he basically is, I would assume, in their pocket.
And it doesn't matter who comes in next.
The important thing to remember about the tattered and flaming economic remnants of the former republic is that it's not a two-party system.
It is a one-party system in America and throughout most of the Western world.
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