The following article by investment guru Bill Bonner may not be in line with the opinion of New Silk Strategies. However, it probably is. Foreword by Vince Dhimos.
Bill underscores what I keep saying: neither party has even the slightest desire to grow the US economy, or even less, to make America great again. But you can’t blame any president for the mess the world is in. Presidents don’t make the important decisions, the Establishment does, and there is no such thing as a government of the people, by the people and for the people. I have posted a list here of the goon squad that runs the US.
What I like about Bill Bonner is that he is honest and not beholden to any political party or ideology. That may make it tough for him to get his own show on CNN or Fox News but it will endear him to the 1% who think for themselves and see the imminent derailment of America. To the Establishment, seeing it is not the sin, saying you see it is unpardonable. Just ask Julian Assange.
Ms. Warren pretends to be smart, well-informed, and sophisticated. She believes she is on top of the issues, at home in university coffee shops, and at ease with the cognoscenti, literati, and transgenderati.
In the Next Crisis, Both Warren and Trump Will Push Towards More Inflation
By Bill Bonner October 7, 2019
YOUGHAL, IRELAND – We saw last week that we are doomed. So, we continue our jolly inspection of what doom will look like.
In short, we are in an Inflate-or-Die trap. No one wants to face the music and admit that the economy has been phonied up with fake money, unpayable debt, and falsified prices. Nobody wants to go through the pain and humiliation of rehab.
So what’s the alternative? Inflation – more debt, more phony prices, and more fake money.
For the last 30 years, the Federal Reserve added money via underpriced short-term loans. Speculators, banks, and insiders took the money and used it to run up stock and bond prices.
The rich got much richer; the poor stayed poor. Almost no one complained, because they were told that the “wealth effect” was making us all better off.
Donald Trump even believes that the stock market is the measure of his success.
What is really at work, though, is the old fashioned “debt effect.” Businesses, consumers, and the government go further and further into debt, borrowing at ultra-low rates from the future in order to live high on the hog in the present.
But there are limits. Time, for example. You can’t stretch it. You can’t fake it. You can’t counterfeit it.
During the first 80 years of the last century, total debt averaged about 1.5 times GDP. That’s another way of saying we learned that we could afford to borrow a day and a half’s future output for every day of output in the present. And not more.
But then, after 1980, total debt increased to over $73 trillion – or 3.5 times GDP.
That extra debt – more than $40 trillion above and beyond the traditional 1.5/1 relationship, representing $1.7 billion hours of future work at today’s average wage – is a debt that can’t be collected…
And no one has any intention of paying it off.
Now, we are approaching a new stage.
With Biden tainted by Ukraine… and Bernie by age and infirmity… Elizabeth Warren is the likely Democrat nominee.
History always seems to bring forth the leaders it needs. Another way to put this is our old dictum: People always seem to think what they need to think when they need to think it.
When a nation is young and growing, people want little government. They are busy with their own lives… building their own businesses… and creating their own prosperity. Leaders generally stay out of the way, believing that a government governs best when it governs least.
But then, when the nation is big enough to throw its weight around, it turns to Roosevelts, Wilsons, and Johnsons, who are willing to stretch… enter wars of no importance… and undertake guns-and-butter spending programs that undermine the real economy.
Later, on the rocky downslope of empire, people just want to hold on to what they’ve got. And the nation needs a leader worthy of a Fin de Bubble catastrophe.
It needs a real numbskull – like Dubya, Trump, or Warren – who, with no sense of history or humility, will drive the nation into bankruptcy and despair.
Stairway to Hell
Ms. Warren pretends to be smart, well-informed, and sophisticated. She believes she is on top of the issues, at home in university coffee shops, and at ease with the cognoscenti, literati, and transgenderati.
Mr. Trump, on the other hand, is a pro-wrestling fan… a tough, street-smart hustler who doesn’t pay his bills, doesn’t read books, and doesn’t think he needs to study issues in depth. He trusts TV and his instincts, knows how to work a crowd, and thinks you win by making someone else lose.
But when push comes to shove in the next crisis, both Warren and Trump will push in the same direction: towards more inflation.
Mr. Trump has already taken the lead in what we believe will be the next step down on the dank, dark stairway to Hell. He increased federal spending by $185 billion per year. That’s four times more than the Clintons and twice as much as Obama.
The money went right into the Swamp – particularly the Northern Virginia, military-industrial lowlands.
Meanwhile, the combination of spending increases and tax cuts caused an explosion in U.S. debt. In the third quarter of this year, for example, the feds added debt at a rate of more than $2 trillion per year.
This is happening at the tail end of a boom – that is, just when it’s not supposed to happen.
Here at the Diary, we have no truck with Keynesian meddling. But if you’re trying to offset the business cycle, you have to at least try to do it right, increasing spending in a slump… and decreasing spending in a boom.
The Trump team did it backwards. It cut taxes and increased spending while the going was still good. Which raises the question: What will it do when the going is not good?
That is what we’re going to find out. And here, Dear Reader, this is one tiny part of the future where we think we can see what is coming down the pike.
Imagine that the next crisis arrives… with stocks cut in half and unemployment headed towards 10%.
Imagine trillions of dollars’ worth of corporate bond defaults and a big rush to sign up for food stamps and unemployment comp.
Imagine all the lonely eyes turning to the White House: “Help us… Heal us…”
And then, imagine what Team Trump or Team Warren will do. Will they follow in the footsteps of Team Harding, which in the 1920-21 crisis raised interest rates and cut spending? (The downturn was over in 18 months.)
Oh… stop it… Dear Reader… the thought is so bizarre, so out of sync with modern illusions… so staggeringly obvious, correct, and true… it’s triggering our circuit breakers… The lights are flickering…
No candidate – neither Republican nor Democrat – is proposing to return to honest money, market-set price signals, and balanced budgets. Those artifacts of an earlier nation (when America really was great) have long been discarded.
Now, we have a president who thinks he knows better than the market where interest rates should be…
…and a leading lady on the Democrat side who thinks the whole economy can be marshalled to correct the world’s injustices… as she sees them.
Forgive student debt, tax the rich, raise Social Security benefits, enact Medicare for All, enter a $2 trillion Green Manufacturing deal… etc. etc. – and that is just the beginning. She has 48 plans, including:
Ultra-Millionaire Tax, Leveling the Playing Field for America’s Family Farmers, A New Farm Economy, Our Military Can Help Lead the Fight in Combating Climate Change, Affordable Higher Education for All, A New Approach to Trade, Empowering Workers Through Accountable Capitalism, Tackling the Climate Crisis Head-On, Comprehensive Debt Relief to Puerto Rico, 100% Clean Energy for America, Fighting for an Accessible & Inclusive America, Expanding Social Security, Accelerating the Transition to Clean Energy, Leading in Green Manufacturing, Health Care Is a Basic Human Right, Defend & Create American Jobs, Safe and Affordable Housing, Universal Child Care, among others…
Some say Ms. Warren is “unelectable.” But they said that about Mr. Trump too. Too bad they weren’t right about both.
Below is our translation of an article from RIA Novosti with commentary by Vince Dhimos.
Before noting who the author was, I knew this article had to be by Ivan Danilov, the most insightful writer on the RIA staff.
As you read the article you might have the uneasy feeling that the Chinese economy is doomed by the draconian measures threatened by the Trump administration. However, if you are following closely the moves of the administration and the counter-moves of the Chinese, you will note that China always has an answer. One of the first was to slap heavy tariffs on soybean imports from the US. Then the Chinese broke their promise to Trump and stopped buying US LNG.
But a look at the massive Chinese projects that are unfolding before our Western eyes, shows that dedollarization was the goal all along. The Belt and Road initiative laid the groundwork by facilitating trade between China and the rest of the world. Yuan clearing centres set up by China all over Europe and Asia facilitated the exchange. The AIIB (Asian Infrastructure Investment Bank) made it attractive for trading partners to use the yuan in their trade. The Shanghai gold exchange enabled traders around the world to acquire physical gold in yuan (in contrast to Western paper gold exchanges, whose customers never see the metal. Is it even there?). The Shanghai crude futures market is setting a new oil benchmark and again, is trading in yuan. The futures are convertible into gold, an option only Shanghai’s traders, including global ones, have available. All of these offerings could have been initiated in the West, but Western pols and central bankers prefer the printing press to real economics. This is why they are losing ground. You’d think the US would wake up and realize that China now holds some potentially winning cards and that if they were smart, they’d join them instead of fighting them.
Trump and friends can huff and puff and invent new sanctions and declare all the trade wars they want. But East is East and West is West and, so far the impression is that Kipling was right: never the twain shall meet.
“... China’s obvious reciprocal move will be a massive listing on European exchanges, as well as issuing bonds in euros, francs or yuan, which, in turn, will only accelerate the process of de-dollarizing the global financial system and creating a global financial infrastructure that is not dependent on Washington’s whims.”
“It’s even better: our Chinese partners saw the seriousness of the intentions of American opponents and realized that the latter could make good this threat at any time, which means it’s time to work more actively on the dedollarization of world finances, which will certainly be a positive development from the standpoint of Russian economic interests.”
Finally, I would remind the reader that the anti-China shenanigans are not about Trump. The US Establishment is solidly behind him, including Democratic pols like Sen. Chuck Schumer, who said of the trade wars: “Trump hit the nail on the head.”
But none of the pols cheering on the trade wars are economists. Real economists have been warning that trade wars have no winners.
America is preparing a terrible punishment for China
Sept 30, 2019
The Donald Trump administration is preparing a nightmarish financial execution for Beijing, one rumour of which led to a drop in stock prices of leading Chinese companies and a decrease in their total capitalization by billions of dollars. But after the panic calmed down a bit, experts all over the world are wondering if the United States will suffer more than China if Washington really takes an extraordinary measure and cuts off access of Chinese companies and borrowers to their stock markets.
The Reuters news agency explains the essence of the White House’s plans: “three sources familiar with the situation said Friday that President Donald Trump’s administration is considering delisting Chinese companies from US stock exchanges, which would lead to a radical escalation of trade tension between the US and China. According to two sources, the move would be part of a broader effort to curb US investment in Chinese companies.”
The result of the information feed was not long in coming: the shares of Chinese companies that are traded in the United States began to fall. For example, the shares of e-commerce giant Alibaba (the owner of the well-known AliExpress service) fell by more than five percent, erasing over $20 billion of market capitalization in one day.
Similar drops were recorded in the shares of other well-known companies: JD.com securities fell almost six percent, Baidu - 3.67%. But the point here is not so much in the tens of billions of dollars of lost market capitalization, but in the fact that if the aggressive plans, are realized, as reported by the sources of the American agencies Reuters and Bloomberg, the United States is actually going to do the same with the Chinese economy as they tried to do with the Russian one after 2014. Moreover, without the introduction of any analogue of the "Crimean sanctions," but just like that. Although, perhaps, some restrictions "for suppressing democratic protests in Hong Kong" will be used as a political cover.
It must be emphasized that the media are writing about involves a double blow to Chinese business and the economy as a whole. We are talking about the intention to deprive the company of the opportunity to borrow money (through the issuance of bonds) from American investors and raise equity (through IPO or listing) on state stock exchanges. This really resembles the anti-Russian measures of past years. The difference is that there was an attempt to strangle Russian corporations via difficulties in accessing foreign bank loans and offering bonds, but they are attacking the Chinese using bonds and shares on exchanges in the USA, because this is one of their main methods of attracting foreign currency funds.
In addition to forced delisting, plans are reported for limiting regulatory investment in American companies, funds (especially pension funds), and other investors in Chinese firms. This is necessary so that, for example, an investment fund, deprived of the opportunity to buy shares of fast-growing and attractive companies on the New York Stock Exchange, will not open a stock account in Hong Kong or Frankfurt and will not buy forbidden shares there.
This drastic measure is probably connected with a serious scandal (which went unnoticed in the mainstream media) that erupted after it turned out that the American state pension fund responsible for paying military and veteran pensions, it turns out, is investing money in Chinese companies. Moreover, at least three of these companies are under official US sanctions.
Many investments of this kind are related to the specifics of modern financial markets. The most popular class of investment funds is so-called passive funds, which do not select instruments for investment themselves, but invest solely in accordance with the composition of special indices - such “baskets” of stocks or bonds that meet certain criteria.
There are several reputable companies in the world – compilers of indexes (index providers), which are guided by funds that manage a trillion dollars in total. As soon as one of them (MSCI, S&P Dow Jones Indices, FTSE and so on) includes some securities in its indices, investment funds immediately buy them, because they are obliged to do this on the basis of their own statutory documents.
As a result, as soon as Chinese stocks or bonds of specific companies become quite attractive and liquid, they are included in indices, and overseas (and international) investment funds are obliged to buy them, which cannot but make the Donald Trump administration angry. It is to block this mechanism that official Washington (according to media reports) is developing regulatory restrictions on US portfolio investment in Chinese securities. They are likely to apply to investment funds and to companies that compile investment indices.
The most common estimate of the total capitalization of 156 Chinese companies trading on US exchanges is $ 1.2 trillion. And according to the former head of the macroeconomic analysis department at Societe General Bank Lawrence MacDonald, the total “lost demand” in the even the the relevant securities are excluded from the Bloomberg Barclays Credit Index and MSCI will be $ 1.6 trillion over four years.
It may seem that the Trump team has found another vulnerable point in the Chinese economy, which will be extremely painful if struck, without any special risks for the United States. However, this is not entirely true, for the damage will be far from one-sided.
American (and European) investors choose Chinese financial instruments not out of love for Beijing or because they have to. In the context of negative interest rates in the European Union and ultra-low rates in the USA (Trump is also demanding the introduction of negative dollar rates), you can find high-yield investments, especially for pension funds, in the most risky corners of Western financial markets (hence the popularity of so-called junk bonds among investors from companies with low credit ratings and dubious prospects for yields), or in markets such as China or Russia. It was not for nothing that shares of Chinese companies were in the portfolio of the pension fund of the US military, and Russian bonds were found in the portfolio of the pension fund of civil servants in California
This means that forced patriotism by the Trump administration is unlikely to meet investor understanding. They will seek (and find) options to circumvent the relevant restrictions. Among the simplest ways are simply to buy stocks or investment units of specially created European or Asian (but not Chinese) buffer companies or buffer funds that actually harbour Chinese securities within them, like in a Russian matryoshka doll.
Moreover, China’s obvious reciprocal move will be a massive listing on European exchanges, as well as issuing bonds in euros, francs or yuan, which, in turn, will only accelerate the process of de-dollarizing the global financial system and creating a global financial infrastructure that is not dependent on Washington’s whims.
Probably precisely because of the US Treasury’s awareness of the gravity of the above consequences, it decided to officially declare that such radical measures are not planned “so far.”
What’s even better, our Chinese partners saw the seriousness of the American opponents’ intentions and realized that the latter could make good this threat at any time, which means it’s time to work more actively on the dedollarization of world finances, which will certainly be a positive development from the standpoint of Russian economic interests.
I will ascend above the heights of the clouds; I will be like the most High.
Our translation below is from RIA Novosti, with commentary by Vince Dhimos.
Shale oil supporters said that America could become the no. 1 oil producer in the world. Turns out they were right. Trump said shale oil could reduce US unemployment. Turns out he was right too. The catch is that this shale pipe dream has hit a wall of solid rock. Thanks to shale's built-in geological features, ie, the need for fracking and the low shelf life of shale wells, it inherently fails to make money for its investors – like investing in Treasuries, who relied on the rocket science of quantitative easing. Investors in both are therefore pulling out. And the government, which tried giving shale investors tax breaks, even tax credits, will ultimately have to admit it’s simply been betting on the wrong horse.
American elites have a systemic problem: They believe in the zero-sum game wherein hurting your competitor is somehow tantamount to success. By contrast, China believes in the win-win game wherein making others rich gives you rich clients, and only rich clients can make you rich in turn. Pretty elementary, but US politicians and economic ideologues prefer Rube Goldberg solutions. Tant pis pour eux.
The insistence on win-win is why President Xi has long been talking about lifting the Third World out of poverty. China’s non-stop growth – despite a cruel trade war – signals that he has always held the winning hand.
If the US had invested in the Chinese AIIB and the Belt and Road, they would be on the winning team. But like the Medieval Crusaders, who couldn't bring themselves to share the Middle East with the other two Abrahamic religions, the proud hegemon could not lower himself to be part of a team. He had to be the boss, all or nothing. It was his choice.
We had warned early, here and here, that this tragic fate of the shale oil industry was inevitable, and that no government intervention could prevent it. But Washington and Wall Street have an unbending preference for political solutions over science-based solutions.
The flip side of the boom: a wave of bankruptcies swept the American shale
May 18, 2019
MOSCOW, May 18 - RIA Novosti, Natalya Dembinskaya. The worst fears of US shale companies seem to be coming true: Weatherford, one of the leading providers of well drilling services, is preparing for bankruptcy proceedings. The next few smaller players are Halcon Resources and Alta Mesa Resources. Why expensive oil is not helping shale oil companies - RIA Novosti reports.
Oil production in the United States has reached a record 11.5 million barrels per day, thanks in large part to oil shale. But, as Bloomberg notes, the shale boom is only masking the problems of this market.
To maintain high production rates, operators need to drill more and more wells, and this requires enormous costs. But there is nowhere to get the money: tired of unprofitable projects, investors are losing interest in shale drillers. Last year, Wall Street invested half as much in the industry as in 2016.
“Thousands of shale wells drilled over the past five years pump less oil and gas than their owners promised investors,” The Wall Street Journal notes. “It makes you wonder: is shale drilling promising and profitable, as one would expect from the hopes of turning the USA into an oil superpower?”
As a result, the industry is flooded with a wave of bankruptcies. Weatherford International, an American oilfield services company, one of the leading providers of drilling services, said last week that it was preparing to sue for bankruptcy. And the leadership of two other oil and gas industry players, Halcon Resources and Alta Mesa Resources, questioned the ability of their companies to continue operations.
California Resources, an oil and natural gas exploration and production company, also had problems. Its bonds are traded with a yield typical of junk papers - ten percentage points higher than US Treasury bonds. Bristow Group, PHI, Jones Energy and Rex Energy are also burdened with debts and likewise face bankruptcy.
"These non-viable companies are revealing the flip side of the boom. Manufacturers with high costs and poor balance sheets do not really attract investors, who are more interested in making a profit than investing in the development of shale production, be it through debt or equity," says Bloomberg.
Expensive oil won’t save the day
Faced with a lack of investment, by the end of last year, shale producers entered an austerity regime, cutting the budget for the current year - for the first time in several years. Major miners, Centennial Resource Development, Diamondback Energy, and Parsley Energy, reduced planned spending by about 15 percent. Cost reductions were announced by more than a dozen oil companies.
The hopes of the industry were largely associated with the restoration of oil prices. Since December, WTI and Brent have risen in price by almost 40 percent - up to $60 and $70 per barrel, respectively.
However, observers note, this is not saving shale drillers. As Bloomberg Intelligence analyst Spencer Cutter points out, despite $60-70 oil, bankruptcy in the US energy sector will “increase” by the end of the year. [And that despite Trump’s illegal sanctions on anyone buying Iranian or Venezuelan oil!]
In the period of 2010-2014, the development of technology and high oil prices led to an explosive increase in investments in oil production in shale fields. But in 2015, black gold fell sharply, and the shale industry had to fight for survival. About a hundred manufacturers went bankrupt, owing a total of more than $70 billion.
Now the situation is repeating itself: shale drillers are cutting costs and growing debt (Weatherford's bankruptcy alone will add about eight billion dollars to total debt), and no new investments are expected in the sector.
For investors, shale companies turned out to be a "black sheep," according to FactSet, an international company specializing in the financial data market. Since 2007, the stock index of US oil shale producers has dropped 31 percent, even as the S&P 500 rose 80 percent.
Analysts point out that for ten years, the industry has not met expectations. According to Evercore ISI, a consulting firm, energy companies spent $280 billion more than they earned on oil and gas during this period.
Today, the proceeds from the sale of a quarter of shale oil produced in the United States are entirely used to pay interest on corporate borrowings. With the total debt of oil shale companies, the situation is even worse: it exceeded $300 billion, and nine billion barrels of oil must be produced to pay it off. This is almost as much as the shale oil extracted during the entire lifetime of the industry (about ten billion barrels).
Technology won't help
Experts also note that shale companies have been experimenting with various drilling methods for many years.
As oil scientist David Hughes explained to OilPrice, improving drilling methods has reduced costs and improved well efficiency, but has not led to a significant increase in oil production. "Technological progress does not change the fundamental characteristics of shale oil production, but only accelerates the life cycle from boom to recession," says Hughes.
Thus, in the shale industry, a drop in production is inevitable amidst a constant increase in costs. "It is a mistake to assume that oil shale production will grow forever on the basis of continuously improving technology: in the end, only geology determines the cost and amount of resources that can be extracted," the scientist warned.
In the following you will find our translation of another article from RIA Novosti with commentary by Vince Dhimos. I found a crude, completely unedited Google Translate rendition of this article on the internet, but could not bring myself to link to the atrocity.
America has long fallen off the cliff, using purely financial methods to cure economic ills. Somebody needs to tell the US elites that finance and economics are two separate animals. In a sense, Trump actually had the right idea when he focused on domestic oil and gas extraction as a way to make America stronger, though unfortunately, shale energy – which makes up the bulk of the US oil and gas industry – is an inherently unprofitable venture mostly because it requires an extravagantly expensive extraction method involving fracking and the well lives are so short that new wells must be drilled constantly, alas, before the previous well can provide substantial profits for the investors. Trump didn’t see fit to to due diligence and research the subject before foisting this economic solution on his country. So now the US is the biggest oil exporter in the world and offers more jobs than ever but the oil producers have nothing to show for it and are unlikely to keep investing.
As for the debt, that is an economic problem, but like the rest of the government and the Fed, Trump and the deep Establishment are using a purely financial tool, namely, devaluation of the dollar. And you think you are poor now? This solution is sort of like trying to repair an iPhone with a monkey wrench. It is very sad to watch the bunglers in government trying to solve problems with ideological means. After all, the notion that a broken economy can be fixed by bankers is nothing more than a fixed, immutable typically American ideology and, as wise people know, ideologies do not fix problems, they create them.
The real US debt is 18 times more than everyone thought. What will happen now?
Sept 11, 2019
The well-known American financial company AllianceBernstein conducted a study that revealed the true size of American public debt, and the results of this study shocked the relevant media. The US financial television channel CNBC has released special material on this subject under the heading "The real level of US debt can be 2,000% (of the size of the American. - Approx. Ed.) of the economy, the Wall Street report said."
The AllianceBernstein assessment attracts attention not only due to figures that the US media have called “shocking,” but also because this “debt diagnosis” was made by a very well-known financial institution. AllianceBernstein was founded by renowned economist and billionaire Zalman Haim Bernstein, and it now manages $586 billion of assets, which gives its forecasts serious extra weight.
Further, after a careful reading of the calculations and recommendations of these American financiers, it seems that the publication of this study is an element in preparing the public consciousness for the fact that “Bolivar can’t carry double” [see end of this paragraph for explanation] and that in order to save the American economy, it will be necessary to cut social support programs and other elements of a welfare society. Irony of Fate: Zalman Haim Bernstein himself spent several years of his life participating in the implementation of the Marshall Plan, a scheme of American investment in Western Europe to develop Western European economies and strengthen American influence in Europe in the context of competition with the USSR. But that was in the past, and today the company, founded by one of the participants in the Marshall Plan, is actively hinting that to save the American economy from debt gangrene, a scalpel or even a chainsaw will be needed, and it’s not the debt to the holders of American bonds that should be cut, but the American social guarantees. [The expression “Bolivar can’t carry double” comes from O’Henry’s short story “The Roads We Take.” Context: an attempt to mount 2 men on one horse named Bolivar]
CNBC reporters explain how AllianceBernstein calculated the real US government debt and why it is important: "AllianceBernstein developed a methodology for calculating (and received. Ed.) the result, ie, 1832 percent (of GDP. Ed.), to be precise, -- including not only traditional levels of government debt, such as bonds, but also financial debt in all its diversity, as well as future obligations for so-called (social) payment programs, such as Social Security, Medicare and state pensions. After this all comes together, a frightening picture emerges, but this picture requires nuances to understand. It is very important to realize that not all debt obligations are “carved in stone,” and it is important to know where the space for freedom of manoeuvre is found, especially in government programmes, which may be changed either by law or by accounting. "
Usually, with regard to the level of US government debt, a figure of $22.5 trillion is quoted, which is equivalent to about 106 percent of GDP. Supporters of the opinion that there is no problem with the US sovereign debt and no crisis looms, go even further and emphasize that the debt obligations that the US Treasury has to other state agencies and funds should be subtracted from this amount, and then we can talk about a debt of only 16.7 trillion dollars, or 78 percent of US GDP. The problem is that this view proceeds from the bizarre assumption that the obligations of the US Treasury to state institutions that pay pensions or medical care or various benefits need not be met, and those government bonds that are on the balance sheet of these institutions, and thanks to which they financed, can simply be "written off" with a stroke of the pen without any consequences.
AllianceBernstein chief economist Philipp Carlsson-Szlezak does not make such exceptions and takes into account all US obligations as a state, regardless of their form, when calculating the total debt of the United States, and therefore the picture is much worse – the total public debt (in all forms) works out to an incredible 388 trillion dollars.
However, the author of the study immediately rushes to reassure readers. "Although the picture is terrible, such figures do not prove that we are doomed or that a debt crisis is inevitable," writes Philipp Carlsson-Szlezak. And immediately he offers a potent solution: "A default on US treasury bonds would be catastrophic for the global economy – while changes in (social - Ed.) policy (albeit painful for those whose future payments are reduced) would hardly register on the economic horizon." [Notice how the super rich protect themselves and each other in the long run. This tendency of the elites to save their own skins at the expense of the rest is one very important reason why the income gap between rich and poor has grown like a cancer for the last 30 years, as shown here.]
Thus, in order to save investors in American treasury bonds, it is proposed to sacrifice American citizens, their benefits and pensions, which would allow us to comply with formal decencies and not undermine the investment community's confidence in American government bonds.
It should be noted that from a practical standpoint, this proposal contains one rational and one irrational consideration. The rational one is that a default on US bonds would indeed be a disaster for the American and even global financial markets, not to mention the fact that in this scenario the foreign exchange reserves of many central banks, a significant part of which are invested in US government bonds (Treasuries), will turn to dust overnight. It is logical that representatives of the financial sector of the American, and indeed the world economy will strongly resist this scenario.
By the way, even if Washington chooses default, Russia will be among the few countries not to suffer direct financial damage, because the Russian treasury portfolio has been sold in advance because of sanctions risks, although this will not free us from indirect the consequences of a hypothetical American default, from which the entire world financial system will suffer. But the irrational part of the AllianceBernstein proposal lies in the implicit belief that the deprivation of funding for social programs will not lead to dire political and economic consequences. No American politician, regardless of party or ideological affiliation, will agree to such a suicidal decision. The question arises: what then to do with these hundreds of trillions of dollars of debt? The answer can be found in the statements of President Donald Trump, who even before the election victory said that the US economy is one big "financial bubble" that constantly requires a weakening dollar. [I wrote about this here]. If the dollar is devalued greatly, it will be possible to pay off debts very easily, and though will not save the world financial system from crisis, and the American economy from deep depression, it will be possible to pretend that "Uncle Sam" always fulfils his social obligations and uprightly pays his debts. Judging by how actively China and Russia are both buying gold, there are enough people in the world who want to insure themselves against the consequences of this particular method to solve the American debt problem.
Economists tell us that no one ever wins a trade war, but it is safe to say that some of the losers lose more than others.
Today, Xinhua reports:
“Continuing the steady growth momentum, China's foreign trade of goods exceeded 20 trillion yuan (about 2.8 trillion U.S. dollars) from January to August, up 3.6 percent year on year, according to the latest figures by China's General Administration of Customs.” [my highlighting]
Meanwhile, the US Bureau of Economic Analysis reports:
Year-to-date, the goods and services deficit increased $28.2 billion, or 8.2 percent, from the same period in 2018. Exports decreased $3.4 billion or 0.2 percent. Imports increased $24.9 billion or 1.4 percent.
While there is some good news in the month-to-month data, the year-to-year data shows that, although no one ever wins a trade war, China is suffering less so far than the US, which most likely goes to show that 1) The Trump tariffs have not deterred Americans from buying necessary imports from China, and 2) China trades with many countries other than the US.
Xinhua also reports:
“China's trade with the Belt and Road countries totaled 5.83 trillion yuan for the January-August period, up 9.9 percent year on year.”
“China's exports to Russia grew by 11.5% in the first month of 2019 and exceeded $4.3 billion.”
The US deficit increased less in June over May but much of this owed to shale oil and gas exports, and that has a major drawback. The fact is, most shale oil investors have been losing their shirts and many have gotten out of the market, as we detailed here.
It is therefore hard to imagine that US shale oil will continue to fuel a further increase in US energy exports. And energy is the sector that Trump was counting on to make America great again.
This leaves a big question mark dangling above the euphoria over America’s future.
I keep reminding that no one ever got rich by making someone else poor. If the US had focused on developing massive projects of the magnitude of those developed by China and Russia, it could have made substantial contributions to its own economy and paid off a significant portion of its staggering debt. Instead it fritters away time and energy trying, in vain, to throw a spanner in the works of these two countries’ projects. If the US public had an inkling of the true big picture, they’d throw out the lot of their politicians, but instead, they practically worship many of them. They will pay the price for their naiveté.
I have not seen any commentary with this kind of focus anywhere in the West.
The ships have arrived: The West is trying to block the Northern Sea Route
5 Sept 2019
MOSCOW, Sep 5 - RIA Novosti, Alexander Lesnykh. In mid-August, one of the world's largest container carriers, the French company CMA CGM announced the abandonment of the Northern Sea Route. A little later, Norwegian Prime Minister Ine Marie Eriksen Søreide expressed concern about the environmental and economic aspects of this route and said an audit will be confucted. Is the West capable of blocking Russia’s strategic project? RIA Novosti reports.
Quiet and smooth
The large-capacity tanker Prospect Koroleva, owned by the Russian Sovcomflot, set sail from Murmansk on August 26 and delivered a cargo of crude oil to China in just a week.
“We were sailing at a speed of almost 13 knots, when I stood on the bridge and caught myself thinking: if you don’t look through the porthole, you can’t say that the ship is moving - there is no vibration, no noise, no exhaust from the pipe. There’s a clear sea behind us, a clear sky above us - and silence," shares the impressions of the captain of the voyage, ice adviser Vasily Ermakov.
Russian President Vladimir Putin and Indian Prime Minister Narendra Modi during a joint visit to the Zvezda shipbuilding complex in the city of Bolshoy Kamen.
There is nothing unusual in the transit of oil along the Northern Sea Route – it’s happened before. But before this voyage, not a single vessel had travelled the entire route exclusively on ecologically clean gas fuel.
The sailors of Sovcomflot have proven that the future of global commodity transport lies in the Arctic transport artery in Russian waters. According to Oleg Shishkin, the captain of Prospect Korolev, the passage through the NSR is almost a month shorter than the traditional route through the Suez Canal. And LNG reduces daily fuel consumption by 20% and carbon dioxide emissions into the atmosphere by almost a third.
The development of the NSR as a transport artery connecting Europe and Southeast Asia is one of the country's most important infrastructure tasks. The fact that in the coming years interest in the route will only increase is shown by the statistics of cargo shipments. At the end of August, the head of the directorate of the Northern Sea Route of the Rosatom state corporation Vyacheslav Ruksha announced that this year the cargo flow of the Northern Sea Route will grow by 45% - from 20 to 29 million tons.
According to the May decree of Vladimir Putin, cargo shipments through the NSR by 2024 should reach 50 million tons per year. Ruksha notes that everything necessary for this is being done:
Under construction are the Arctic LNG - 2 liquefied natural gas complex, owned by Novatek (about 18 million tons of fuel per year), the VostokUgol cargo base in Taimyr, capable of shipping 20 million tons coal annually, and the oil companies of the Payakhskoye field, which will ensure the export of more than five million tons of oil.
Like any other Russian project aimed at developing international trade, the Northern Sea Route has its share of opponents abroad. In mid-August, according to Figaro, one of the world's largest container carriers, the French concern CMA CGM, has abandoned the Arctic routes, primarily the Northern Sea Route. Representatives of the company cited "concern for the environment," which greatly surprised the expert community.
"The logic is strange - if the ship goes the short way, it means less fuel is burned," explains Alexei Bezborodov, director general of the Infranews research agency, to RIA Novosti, recalling that CMA CGM will transfer all of its ships to environmentally friendly LNG in the coming years.
However, the French actions will not affect the cargo flow through the Northern Sea Route - after all, no one was counting on this company. And once the NSR becomes as familiar a route as that through the Suez Canal, the CMA CGM will still have to launch freight transport on Arctic waters - otherwise competitors will pass them by. For example, Danish Maersk, whose head back in June said that the company was exploring the possibilities of seasonal service on the Northern Sea Route.
Norway is against the NSR. A week ago, Prime Minister Ine Marie Eriksen Søreide said that official Oslo is concerned about the environmental and economic aspects of the NSR, adding that it needs to check the route for compliance with European standards.
In response, Vladimir Isupov, senior adviser to the Russian Embassy in Oslo, indicated that the infrastructure project is being developed exclusively in Russian territorial waters and Norway is only an outside observer.
The root of the problem
Many experts believe that the European assaults on the NSR are the result of Washington’s pressure. The fact is that the cheap and fast delivery of Russian liquefied natural gas via the Northern Sea Route to the countries of Southeast Asia puts an end to the Americans' desire to gain a foothold in this promising market. [Selling LNG to Asia, particularly China, was a pet dream of Donald Trump, who was generally focused on boosting the US economy with shale oil – now seen as a losing bet by most investors]
The fears of Washington strategists are more than justified: according to the International LNG Importers Group (GIIGNL), last year Russia shipped almost 13 million tons of LNG to the region, while the United States sent only 10.7 million.
For Washington, the situation is aggravated by the fact that Russia will provide liquefied gas not only to China, with whom Trump has quarrelled helplessly, but also to Japan, a key American partner in the region. Hiroshige Sako, the Minister of Economy, Trade and Industry, recognized the reality of this prospect ahead of the Eastern Economic Forum.
"A round table is planned within the framework of the forum at which representatives of business in Japan and Russia will discuss the development of the economy of the Far East, including routes along the Arctic Ocean, which is closely connected with the Arctic LNG-2 project," the Japanese official noted.
To ensure the growth of cargo flow along the Northern Sea Route, Russia is actively developing an atomic icebreaker fleet, which has no analogues in the world. Not later than May of next year, the Baltic Shipyard will launch the lead nuclear icebreaker of project 22220 Arctic. Two more such ships will be commissioned in 2021-2022.
In the long term – by 2030 – Rosatom plans to organize year-round navigation along the NSR. The government intends to allocate almost 130 billion rubles for the construction of the unique atomic icebreaker Leader with a capacity of 120 megawatts (for comparison, the capacity of the Arctic power plant is half that).
And last Wednesday, the Zvezda shipbuilding complex and the Korean company Samsung Heavy Industries Co. Ltd, as part of the V Eastern Economic Forum, announced the establishment of a joint venture to manage the construction processes on the Zvezda tankers for the Yamal-LNG project.
Vyacheslav Ruksha from Rosatom is sure that in a few years, cargo ships along the Northern Sea Route will be "running like trams."
The dog barks and the caravan goes
Our translation of an article from https://rueconomics.ru/406706-ekonomicheskii-forum-rossiya-afrika-opredelit-perspektivy-sovmestnykh-masshtabnykh-proektov follows with commentary and notes [in brackets] by Vince Dhimos.
The Russia-Africa economic forum will determine the prospects for joint large-scale projects
August 28, 2019
The holding of a full-fledged economic forum at the Russia-Africa summit in Sochi will give impetus to the development of relations between the Russian Federation and the whole continent. African expert Igor Gerasimov, Doctor of Historical Sciences and assistant professor at the Oriental Department of St. Petersburg State University, told FBA Economics Today about this.
The Roscongress Foundation has announced that an economic forum will be held on the side lines of the Russia-Africa summit, scheduled for October 23-24 in Sochi. The main topic of the forum - "Russia - Africa: revealing the potential of cooperation" - will form the basis of the plenary session. They will discuss the development of interaction between entrepreneurs of the Russian Federation and the countries of the "black continent," cooperation in the field of digitalization, nuclear technologies, humanitarian and social spheres. Agreements on joint projects will be concluded.
“Such a large-scale dialogue between Russia and countries of the whole continent has not happened since the collapse of the USSR,” the expert notes. “An event of this level is unprecedented and takes cooperation to a qualitatively new level. This will give a certain impetus to the relations of our country with many countries at once. We must admit "That Africa is a weakened continent and has a lot of problems. But its potential is huge – that is, for the future."
For example, in Africa there are a lot of production and product niches that Russian companies could fill. However, the entrepreneurs of the two countries do not know each other well and interact poorly. But there is a demand for Russian goods in Africa; we only need an adequate response from our side. For example, in Sudan, I occasionally hear that people would like to see our Kalina and other Lada cars there - in terms of price and quality, they compare favourably with other imported counterparts. This demand must be covered. "
More than 3 thousand representatives of African business, as well as heads of Russian companies and leading experts at the international level will take part in discussions of the business program of the Russia-Africa forum. The forum participants will discuss joint projects in the transport infrastructure and the oil and gas industry, as well as interaction of Russian and African banks. Potential projects that will be beneficial for both sides are now being worked out by experts of the two countries.
Key areas of cooperation will be discussed in the framework of three thematic tracks: "Developing Economic Relations", "Creating Joint Projects" and "Cooperation in the Humanitarian and Social Spheres." According to Roscongress, the business sessions of the forum will focus on business opportunities in Africa, security risks, prospects for economic development, digitalization, cooperation in the field of nuclear technology and improving the quality of life on the continent.
“The view that the upcoming summit could mark a new stage in Russian-African cooperation is justifiable. Africa is an economically attractive zone, and it is not in vain that China is actively working on the continent, increasing trade and launching joint projects. Russian companies need to feel the support of the state - this will increase the chances of success in cooperation. The highest-priority area, of course, is agriculture.
For example, Sudan can feed the entire Middle East with the crops that are grown there if large-scale agro-industrial production is established. Russia buys the same mangoes from Brazil, but Sudan is much closer, which means deliveries from there are more profitable. That is, our cooperation is quite realistic in terms of intensifying and focusing on the benefit of both parties. And there are hundreds, if not thousands, of such options for cooperation with the vast continent,” the specialist points out.
A separate block will be a youth program for student exchange, cultural events and other humanitarian contacts. In addition, one of the central topics will be the Russian industrial zone, which will operate in the economic zone of the Suez Canal of Egypt. Agreements on participation in the production project have already been signed by the first eight companies of the Russian Federation. The Russian industrial zone is expected to be launched at the end of 2020 - agricultural enterprises are being set up there. [The corresponding agreement was concluded some time ago but there is very little information on this in the Western press. The subject is well covered, however, in the Russian and Middle Eastern press and also to some extent in Chinese news outlets].
“It is difficult to overestimate the importance of developing cooperation between Russia and Africa: this is not only a promising sales market, but also a strategically important partnership in issues of scientific and technical cooperation, development of oil and gas projects, the agro-industrial complex and the Russian industrial zone. The Russia-Africa forum program covers the whole range of relevant issues of cooperation and growth points,” said presidential adviser Anton Kobyakov, responsible for organizing the forum.
“The Russian side should take into account that there are many launched but unrealized projects with great potential in Africa. For example, at the confluence of the White and Blue Nile, the British in the late 1920s started a project for building several canals that would provide water and would significantly increase areas sown for cotton and cereals. Now the project can be revitalized - it is economically viable and very promising.
Africans need Russian enterprises in the food sector, including sugar processing, as well as mechanical engineering and energy projects. A large Russian company entering the market is capable of launching several projects in different areas at once - up to several dozen. If both sides are aware of the long-term prospects for cooperation, serious results will be obtained," concludes Igor Gerasimov.
Below is our translation of an article from RIA Novosti with commentary and notes [in brackets] by Vince Dhimos.
It was disturbing enough to see how ideological conservatism promoted the extraction of shale oil and gas by a process that all but guarantees economic failure. But now we see more of the results of Trump’s radical anti-China policies that have put most soybean farmers out of business, sabotaged the LNG deal with China and cost world stocks $5 trillion so far, according to Deutsche Bank. The losses mount up with Trump’s demand that Apple stop making iPhones in China. What he doesn’t seem to realize is the Chinese customers were a major share of the buyers’ market for iPhones and Apple computers and gadgets, and ordinary Chinese citizens are now boycotting Apple. Chinese are very smart and probably will not be back for more backstabs. Ever. Does anyone still remember when traditional conservatives insisted that the government must stay out of business and allow entrepreneurs to make important business decisions that affected their bottom line? Keeping government out of business was a major pillar of conservative thinking. Politicians who tried to interfere with “free market” capitalism were branded commies or socialists. Now, however, that pillar has been removed and replaced by a new one, namely, allowing Trump to make such decisions for the entrepreneurs. The rational for this upheaval is that Trump – who had, however, filed for bankruptcy 6 times before he entered politics – was a successful business man and perfectly suited for the job of telling US business managers how to run their show. Who better to manage the US economy than a billionaire entertainer?
Trump's new victim: Apple kicked out of China
Aug 23, 2019
MOSCOW, Aug 23 - RIA Novosti, Natalya Dembinskaya. iPhone sales are falling around the world, and the company itself has lost value: $962 billion, compared to $1.2 trillion at the end of 2018 [my highlighting]. In the context of an aggressive trade war between the USA and China, Apple is rapidly losing ground in one of its key markets – the Chinese are buying less and less smartphones, tablets and computers. Trump, meanwhile, seems to have prepared a new assault: he wants Apple to leave China and cut production. RIA Novosti reports on how one of the largest IT companies in Silicon Valley risks becoming a bargaining chip in the trade dispute between Washington and Beijing.
In the third quarter, Apple's profits fell 13 percent. In terms of revenue — the company earned nearly $ 54 billion — that's just one percent more than a year earlier. However, analysts were alarmed by something else: the revenue from iPhone sales, which traditionally was its main income source, fell significantly. It amounted to 25 billion dollars against 29.47 billion dollars a year earlier. For the first time since 2012, smartphone sales have brought the Apple company less than half of its revenue. Their annual sales volume for the quarter decreased by 12 percent.
One of the key reasons apple smartphone sales are plummeting is a significant decline in demand in China. The corporation is actually losing this key market.
After the scandal with Huawei, ordinary Chinese began to boycott the Apple devices. In addition, in December, a Chinese court decided to ban the company from selling seven iPhone models in China [so far, American media have been reporting the losses in the trade war based solely on the value lost by tariffs on imports. However, this loss falls outside that calculation and is huge]. The fact that Apple in China is in serious trouble became clear by the end of 2018: in the fourth quarter, sales of its smartphones there fell immediately by 20 percent.
The aggravation of the trade war bodes problems for the company. But Donald Trump earlier promised Apple CEO Tim Cook that the new duties to be imposed on Chinese goods will not affect the devices and accessories assembled in China by order of Apple.
In general, he kept his word. In August, the United States imposed ten percent duties (and since September they threaten to raise them to 25 percent) on Chinese imports worth $300 billion. But US trade mission decided to postpone the introduction of tariffs on smartphones, tablets, laptops and other gadgets until December 15.
However, Apple's management is no longer sure of anything. The other day, the head of the company Tim Cook met with Donald Trump and tried to explain to him that the introduction of duties on Chinese goods would adversely affect Apple’s competition with Samsung. As a result, the main competitor will get an advantage, because, unlike Apple products, the products of the South Korean company will not be taxed upon import to the United States.
As noted by Business Insider, in an attempt to reason with the head of the White House and warn him against escalating the trade war, Cook met Trump “five times a year”. “And there are signs that Cook’s open dialogue with Trump has benefited Apple. The company has already received a temporary reprieve from ten percent tariffs,” the publication said.
But on August 20, Trump suddenly declared: if he hadn’t helped companies like Apple, "they would have big problems." By "help", the head of the White House clearly meant a deferral of duties. According to him, the "help" that he renders, in particular, to Apple, "will last a very short time," and therefore they must do what they must – leave China.
The American president recalled that due to the transfer of production of foreign companies from China to other countries, China lost two billion dollars and almost two million jobs, and will lose even more.
Trump was dissatisfied with the fact that the corporation, as the American media reported, transferred the production of its professional Mac Pro computer workstation from the USA to the PRC. Therefore, according to him, now the American authorities "are not going to make any exceptions for it."
To protect American consumers from higher prices for their products, Apple itself was going to withdraw production from China - but only partially. As reported in June by the Nikkei Asian Review, the company is exploring the possibility of withdrawing from China from 15 to 30 percent of production capacity. And even this step, according to analysts, will cost her dearly – up to 15 percent of its revenues.
Trump is obsessed with the idea that corporation generally should produce all of its devices, and first of all the iPhone, in the United States. “Do not forget that Apple makes its products in China,” he said back in January. “I told Tim Cook: my friend, let’s make it in the USA.”
Observers shrug helplessly: the idea may not be bad, but it just does not take into account a number of logistical considerations and economic realities. First, US production will significantly increase manufacturing costs. And besides - where to get so many components for assembly outside of China?
For the Silicon Valley giant, this attitude of Trump’s does not bode well. According to the most conservative estimates, the transfer of production to the United States would cost the company $40 billion. After an unexpected “tariff” threat, Apple immediately lost $42 billion in market value. And, apparently, this is only the beginning.
Weak smartphone sales are already pulling the corporation's business down. It is trying to offset the declining interest in the iPhone with the continued growth of its digital services business. But, as analysts note, here it falls into a vicious cycle. The service sector that Apple is counting on and the sales of its other devices are directly related to how many customers will remain in the Apple ecosystem, and the latter depends on iPhone sales.
END OF TRANSLATION
VINCE ON QUORA: WHY DID TRUMP START A WAR WITH CHINA?
HOW THE TARIFFS AND SANCTIONS CAME BACK TO BITE THEIR MASTER
IF CHINA IS DOMINANT WORLD ECONOMY, WHY NOT IMITATE IT?
TRUMP’S ASSAULT ON SCIENCE AND TECHNOLOGY
CHINESE ECONOMIST EXAMINES IMPACT OF TRUMP TRADE WAR ON US ECONOMY
US ATTEMPTS TO SABOTAGE CHINA ARE A BOON TO RUSSIA
CHINA DECLARES PEOPLE’S WAR ON US ECONOMY
US SANCTIONS ON RUSSIAN ALUMINIUM BACKFIRED BIG TIME
In the following you will find our translation of a column from RIA Novosti with commentary and notes [in brackets] by Vince Dhimos. In a previous column/translation, I had said that the belief that shale oil would make the US energy-independent and the world’s no. one oil producer is one of the mainstays of American ideological conservatism. I must add to this that ideological conservatism is radically different from plain vanilla conservatism, the best example of which is found in today’s Russia, whose president once said in an interview that he has no ideology at all, just solves problems as they come. And solving problems with common sense and reason is the essence of true conservatism – a dying way of life in the US, though ideological conservatism still calls itself conservatism, and therein lies the confusion afflicting Americans and the attendant failures in economics and foreign and domestic policy. Experience teaches that ideologies do not solve problems, they create them. But the lesson is lost on most Americans. Meanwhile, America is losing the shale oil effort even though it can claim the title of no. one oil producer! That is really quite extraordinary to say the least, especially since the US is losing the “oil race” to none other than the non-ideological conservative Russia, where no fracking is necessary in the oil production process and the product is profitable. You can bet your boots the pragmatic President Putin would never bet on shale oil in his country unless the non-shale oil in his country and the rest of the world were almost depleted. What the US ideologues forgot, of course, in their zeal to drive their round peg of shale production into the square hole of market economics, was the cost factor that makes shale oil unprofitable at this point in time. In the broader sense, it is this failure – or shall we say inability – to ponder the whole picture that causes the US elites to fail in all areas, ie, war, military arms acquisitions, foreign policy, diplomacy and general economics.
And you know the real crying shame of all this?
Some day in the not-too-distant future, oil in the Middle East, Russia and Venezuela could become scarce and the higher prices generated as a result could make US shale oil profitable. But with all the current haste to pump it all out at zero profit, it could be almost all gone by then! America could have been truly energy-independent at that future time, and could have been great again. But for politics and ideological conservatism in the early part of the century when the time was not yet right. A chance has been lost forever.
The Price of Independence: Bankruptcy Wave sweeps over US oil Sector
Aug 21, 2019
MOSCOW, Aug 21 - RIA Novosti, Natalya Dembinskaya. While the United States is breaking records for oil production - nearly 12 million barrels a day, an increasing number of producers are threatened by bankruptcy. We are talking primarily about shale drilling, to which the market owes such a rapid rise. Already, demand growth has seriously slowed down, and by 2020 a huge glut is expected in the oil market. The price the industry will pay for current record results is reported by RIA Novosti.
Extracting more and more
Global oil demand, increasing at about 1.2 percent per year, is not keeping pace with production. Unsurprisingly: black gold production in the United States increased almost 12% year over the (from 10.96 to 12.45 million barrels a day), and in 2020 another 7.5% is expected - up to 13.39 million.
Twenty years ago, oil demand grew about three times faster than today. But increasing fuel efficiency and the slow-down in China's economic development have changed the situation. [Need I interject here that Trump’s own trade wars are the biggest factor in the slowdown in China that threatens his pet oil dream. Neither Trump nor the rest of the US government seem capable of looking at the whole picture and foreseeing the long-term consequences of their policies] Trump’s current desire to escalate the trade war with the PRC, the largest energy consumer, points to even further slowing.
This is especially critical for small shale companies. Shale wells are rapidly depleted. The people in the business say it is necessary to conduct it as if on the run: constantly drilling new wells in order to maintain production and maintain profitability. Because of this race, the shale industry sorely lacks money both for aggressive growth and for dividends to shareholders. The matter is complicated by the fact that oil prices fluctuate around $60 per barrel, while in the past it was over $75.
As the International Energy Agency (IEA) warned in May, despite the record shale activity, a new market shock awaits them. According to IEA estimates, by the beginning of 2020, the world oil market will face an excess of supply, comparable to that observed in 2014-2015: production will exceed demand by almost two million barrels a day.
OPEC efforts to contain production are not enough, IEA analysts say. That is, prices will continue to go down. This is bad news for shale projects, which are cost-effective, as a rule, at quotes of over $50 per barrel.
As John Hess, the head of one of the largest American shale companies Hess, said in March, with WTI oil prices around $57 per barrel, even a slight increase in the cost of borrowed funds would deprive many companies of their profits. To launch new projects, WTI quotes must be stable at around $60.
In 2010-2014, the development of technology and high oil prices led to an explosive increase in investment in oil production in shale fields. But in 2015, oil fell sharply and shale drillers had to fight for survival. In just one year, about a hundred manufacturers went bankrupt, owing a total of more than $70 billion.
According to the calculations of the American law firm Haynes and Boone, since 2015, 192 bankruptcies of oil producers with debts of more than 106 billion dollars and another 185 bankruptcies of oilfield services companies owed 65 billion have been registered. The reason is low energy prices amid a cyclical downturn in the economy, analysts said. [Not a good time for a trade war!]
Something similar is happening now. From April to June, the price of WTI fell by 23%. And the result was not long in coming: in May, Weatherford, one of the main providers of well drilling services, filed for bankruptcy. California Resources, an oil and natural gas exploration and production company, also had problems. Further, a number of small players, Bristow Group, PHI, Jones Energy and Rex Energy, also went bankrupt, burdened with debt.
However, what is happening on the market suggests that expensive oil from shale oil will not save the day. Despite waves of correction, since the beginning of the year, oil nevertheless added 20.7% in price. But the problems have not disappeared. In early August, a bankruptcy petition was filed by shale driller Halcon Resources. Concho Resources' profit fell 25 percent. Another shale producer, Whiting Petroleum, in an effort to deal with financial problems, announced a 30 percent layoff.
Investments could save the situation, but investors, it seems, have already turned their backs on shale projects.
"Investors from a number of producers with financial problems who suffered as a result of the price crisis of 2015 most likely lost hope that a rise in sale prices would be of help and improve the situation," Haynes and Boone said.
In ten years, the 40 largest industry representatives spent nearly 200 billion more than they earned. Thousands of wells in shale deposits pump much less oil and gas than investors promised. Last year, Wall Street invested half as much in the industry as in 2017. And the leading American investment bank Goldman Sachs warned that by 2025 shale will lose its economic significance: we are seeing "all the signs of depletion."
This is a constant problem. Production in shale deposits is rapidly declining, and the initial productivity is a thing of the past. Therefore, companies have to constantly drill new wells. And this is a huge additional cost.
Another reason for the decline in investment is environmental restrictions on drilling or on the switch to alternative fuels.
“Investors are worried that oil companies are spending money on things that are facing decline. And this is inevitable as electric cars and hybrid cars grow in popularity,” said David Katz, president of Matrix Asset Advisors, a New York-based investment company.
Over the past six years, the proportion of US oil and gas company shares in terms of value in the S&P 500 has declined from 8.7% to 4.6%. “Whenever they start drilling, billions go into the pipe. It's no wonder shale stocks are falling,” comments Steve Schlotterbeck, former CEO of EQT, the largest producer of natural gas.
In the context of a global glut, which is putting pressure on prices, shale is constantly losing money – it stays afloat only from the sale of assets and new borrowing.
For decades, the United States has dreamed of independence from foreign oil producers. This goal was achieved: oil companies are producing record volumes of crude oil and natural gas, and have taken the lead among exporters. However, as The New York Times notes, the price paid for it turns out to be too high.
Since its founding, New Silk Strategies has sought to show how ideologies are the downfall of the US and its allies. We pointed this out in our earliest columns, eg, here and here, because we saw the lack of common sense and rationality in both Washington and Wall Street as America’s most urgent problem, yet one that no politician or journalist has ever mentioned and that is therefore never raised as an issue in political campaigns. Meanwhile the evidence of how ideologies trump common sense in the US and the countries it infects with them is mounting up and the consequences promise to be catastrophic, including the imminent dethroning of the dollar.
So what do I mean by “ideology”?
For our purposes, an ideology is simply any intellectual template that starts with an unproven premise and eventually attempts to implement a scheme based on said template in the real world with slick propaganda as though it were in fact proven settled science. Generally speaking, ideologies are belief systems, like religions, and they are deeply held by groups of people for whom they are the blest tie that binds. Anyone in the group who questions a tenet of the beliefs in question is typically smeared, shouted down, or otherwise punished for stepping out of line. The ideology (generally either left-wing or right-wing but sometimes religion-based) usually is supported by pseudo-intellectual arguments, which are held sacred by the group members. For example, conservatives will typically reject the idea of government-supported health care or attempts to narrow the income gap by declaring that such ideas were pursued in the Soviet Union and in Mao’s China, which were communist tyrannies where innocent citizens were often dragged out of their beds in the middle of the night by jack-booted soldiers and police and murdered or sent to rot in concentration camps. The implication was that if the US adopted a system of socialized health care or tried to eliminate poverty, America would certainly also become tyrannical and begin to persecute its own people – as if it did not already jail people like Assange and Manning on trumped up charges for telling the truth. Of course, these ideologues never explain the mechanism by which socialized health care or attempts to achieve social justice automatically usher in tyranny because, as stated, American conservatism (and also Neoliberalism) is a belief system rather than a rational set of ideas that might solve the pressing problems confronting the citizenry. The most famous failed ideologies have been Nazism and communism, which dominated world conflicts for the better part of the 20th Century, but today the dominant ones are (ultra)conservatism, (ultra)nationalism, Neoliberalism, corporatism (overlapping with libertarianism), which is in fact predatory capitalism controlled by a small clique but is presented as “free market” economics), Neonazism, White supremism, corporatism, American exceptionalism, “Christian” Zionism (which has virtually supplanted traditional Christianity), militarism, sexual orientationism, feminism, foreign interventionism, and others. The traditional Left is now virtually absent and there are no meaningful anti-war or anti-imperialist groups. Ron Paul was an exception but he was smeared as a nut by the Establishment. Tulsi Gabard is similarly being targeted for opposing the senseless wars. A constant feature is that ideologies are invariably taken as means of solving problems when in fact they do just the opposite, namely, create problems. No one ever seems to catch on to this key fact and its implications. Politicians and journalists are loathe to raise this issue because their jobs hinge on the defence of pet American ideologies. So nothing meaningful ever gets done.
Understanding the unique brand of US conservatism (as distinct from that of Europe, for example) – and the liberalism that slavishly copies it but pretends to be superior – is the key to understanding why the US has an unpayable $22 trillion debt and has spent most of the last 70 years at war with countries that have posed absolutely no threat to the American people, racking up this dizzying debt level to pay for extravagantly priced arms (as we showed here) and for foreign bases all over the globe. Indeed, a pillar of American conservatism has been the notion that America is exceptional and that US leaders are guided by the Almighty and must do God’s will in keeping peace by waging war after horrific war for opaque reasons no one can articulate. Another pillar of their faith, at least among Evangelicals, is that Israel, as the Holy Land, is at least as important to the American people as the Americans themselves, and that unless the US and Israel constantly harass and provoke Palestinians, and Shia Muslim countries, while of course blindly supporting the bloody Sunni Saudi dictatorship that supports them, then their security is threatened. The supporting slogan for this madness is freedom isn’t free. For this reason, America has so far always willingly fought leaders that the Israelis (in tandem with the Saudis) have designated as their enemies. Iran is now in the crosshairs but few have noticed that the same old pattern of patently contrived propaganda is being pursued to initiate yet another genocidal war. The fact that Trump keeps up a constant anti-Iran drumbeat makes the situation all the more dangerous because, by criticising the media as purveyors of “fake news,” he has diverted attention away from his own false pronouncements. After all, how could the campaigner against fake news be a fake himself?
Our translation below of a column from RIA Novosti is another example of how the US vainly attempts to solve economic problems with ideology.
Shortly after the 9-11 attacks in 2001, American pols sought ways to restore Americans’ confidence in their country. One of the focal points in this effort was the narrative that the Bakken basin in Montana and N. Dakota was a potential bonanza that could make the US energy independent and the world’s no. one oil producer. The narrative was hyped, particularly in the conservative media. When it was pointed out that this oil could only be extracted by an environmentally harmful fracking process, the cooler heads who warned about this were shouted down and condemned as “socialists” and “America haters.” Back then it occurred to no one that, in addition to being environmentally hostile, shale oil production may also be unprofitable.
The notion that Bakken would make America great became a rallying cry, so much so that the idea that shale oil might not be feasible never arose in the public discourse and investors were encouraged to sink their bottom dollars into US shale. “Drill baby, drill” became a rallying cry.
Shale oil thus became a pillar of conservative ideology, which drowned out rational discourse on the economics of shale plays. The hype drowned out common sense and billions have been lost so far as a result.
Now comes Donald Trump and takes this rallying point to its logical end. Again, those opposed are bad Americans and should look for another country. Even American dissidents born in Detroit should go “back where they came from.” But as is always the case everywhere, the rubber of ideology eventually meets the road of reality.
Donald is either a true believer or he is being driven by his own true-believing acolytes, who he knows are expecting him to keep going down the road of shale oil. Either way, shale oil production is being supported not by feasibility studies, as one might reasonably expect, but by the hyperpatriotic ideology of MAGA, which is looking more and more like a dry well.
Contrast this with Russia, where investments are made by experts on the basis of feasibility studies and voters have little or no influence on the technical decisions, because ordinary people don’t understand complex technology, and the Russians know they can trust their leaders to make the right decisions on their behalf. Putin was once asked what his ideology was and he answered that he had no ideology, just worked to solve problems as they arose.
What a concept!
Empty wells: when US oil fields run dry
MOSCOW, Aug 14 - RIA Novosti, Alexander Lesnykh. US oil production in early autumn will increase by 85 thousand barrels per day, predicts the Energy Information Administration (EIA). Moreover, the Permian basin, the largest shale field in the country, will account for most of the growth. Experts have calculated that at this rate the Americans will exhaust their oil reserves in ten years.
Pump to the last drop
The EIA expects that in September the US will produce 8.7 million barrels of oil per day. The Permian basin alone will provide 75 thousand additional barrels a day.
To achieve this result, the oil industry is counting on drilled, but not yet developed wells. This conclusion can be made based on the fact that in July the number of derricks at the country's fields decreased by ten percent – from 1078 to 969.
"American oil operators react quite quickly to price signals: the decline in oil quotes from October 2018 to January 2019 probably stimulated companies to save more, including on drilling leases," explains Vygon Cousulting consultant Ekaterina Kolobkova to RIA Novosti.
Indeed, there are still enough undeveloped oil wells in the United States to quickly increase production. Although, according to the oil and gas service company Baker Hughes, in July they decreased – from 8.6 to 8.2 thousand.
One of the factors holding back the increase in shale oil production in the Permian basin is the pipelines loaded to capacity. Next year, new oil pipelines to the coastal terminals should be operational. This will significantly increase exports, while OPEC countries will continue to artificially limit their own production, analysts at Citi Group say.
However, other experts, including those at Bank of America, doubt that the shale industry will be able to fully utilize the new oil transport capacities.
Wood Mackenzie, a consulting company, notes that for the long term, oil production in the Permian basin raises concerns: there is a marked increase in the volume of water pumped up with the oil. These are the first signs of depletion of deposits.
A recent report from the BP Statistical Review indicates that proven oil reserves in the United States have remained at 61.2 billion barrels over the past two years. For comparison, Russia has 106.2 billion, Iran has 155.6 billion, Saudi Arabia has 297.7 billion, and Venezuela has 303.3 billion.
If all reserves of American oil are recovered at once, they will satisfy global demand (36.5 billion barrels, according to the BP report) for only two years. And for its own needs the United States has enough - 7.5 billion barrels annually - for only eight years.
At the same time, the Americans are rapidly increasing production – by 16.6% last year alone (by 1.6% in Russia, by 3.3% in Saudi Arabia).
Goehring & Rozencwajg analysts say that peak oil production at three major US fields - ten million barrels per day - will be reached in eight years, after which production will quickly decline.
Billions to the wind
Moreover, this is only on condition that investor interest in shale oil suddenly increases. After all, the industry is developing primarily because American oil giants, such as Chevron and Exxon Mobil, are investing billions of dollars. So far, there are only losses from this, but investors have been promised that profits are about to materialize.
Alas, the promises are not coming true. According to Reuters, Quarterly Exxon earnings fell 21% year-on-year, net income in the second quarter fell to $0.73 per share ($3.13 billion), whereas in the same period in 2018 it was $0.92 per share (3.95 billion).
For ten years, the 40 largest representatives of the shale industry have invested $200 billion more in relevant projects than they have earned. Investors are refusing to finance the industry – last year shale workers received half the amount of funds compared to 2017.
“The industry has completely shattered investor confidence over the past ten years,” said Lee Tillman, general manager of the US oil and gas company Marathon Oil, the fourth largest oil producer in the country.
Shale assets are being disposed of. Thus, in February last year, the Australian BHP Billiton called the $20 billion investment in US shale plays “a big mistake” and announced the sale of assets, including in the Permian field.