Have you noticed how expensive petrol is these days? It now costs over â‚¬100 to fill up an average family car. In Ussher’s Quay the other day, there was a tailback of cars because a petrol station decided to offer a cut-price deal on petrol.
Why is the price of fuel going up?
Lots of media coverage is focusing on the Straits of Hormuz and the sabre-rattling between Iran, America and Israel at a time when Syria burns in the background. We are told that old-fashioned supply problems can explain the price of oil. Then, last Thursday, the main oilman in Saudi Arabia told us to chill out there was loads of the stuff left and there wouldn’t be any supply problems. Of course, this is all playing out against a background where the proponents of ‘peak oil’ argue that the stuff is running out anyway.
But might there be another reason that petrol prices are so high? Is there anything else driving up the price of petrol at the pumps that could be closer to home?
The answer is yes. At the moment, the central banks of the world are responding to this mega-debt crisis and huge de-leveraging everywhere with lower and lower interest rates. Earlier this month, a report from the US Federal Reserve (www.federalreserve.gov) on the flow of funds in the US made for quite shocking reading if you are someone who worries about what central banks all around the world are doing.
The report reveals that the Fed bought 61 per cent of the net new debt the US government issued last year. Before the financial crisis, the Federal Reserve used to buy small amounts, but not the lion’s share of the US government’s debt. This is quantitative easing like we have never seen before.
One way of putting all this into context is to examine how much this is in terms of US total income. This is particularly important right now in order to ascertain whether the US recovery is real or temporary.
Net treasury debt amounts to 8.6 per cent of GDP. If 61 per cent of that figure is caused by printing money, it means that about 5.3 per cent of US economic output is now being driven by the Federal Reserve’s printing presses. This is reminiscent of Argentina in its 1980s heyday, and is extremely worrying.
The report also reveals that the US is more dependent on short-term funding than Ireland, Greece, Spain and Portugal. The average maturity of the US government’s debt was 62.8 months. That means the US has to rollover a whopping 71 per cent of its debt pile – $5.9 trillion worth – over the next five years.
Now, all this means that the US will have to keep interest rates very low, because the state simply can’t afford to raise them. This has huge ramifications for the central bank because only if it ignores inflation – which will come – can it carry on financing the government at these levels.
But it is not just the US at this carry-on. Interest rates everywhere are as near to zero as possible. The Bank of Japan, the Bank of England and the ECB are all at the same game. In China, they might be in the Year of the Dragon, but elsewhere we are in the Year of the Central Bank, during which the only action is what policy-makers are doing.
They are injecting as much liquidity as necessary to bail out the banks. Now, let’s get a handle on how much money we are talking about. Over the last three and a half years, Britain, Europe, Japan and the US have boosted their central bank balance sheets to $8.76 trillion and pumped that much new money into the banking system. This is more money than it cost to fight World War II, the first Gulf War, put a man on the moon and the entire African aid budget for the past 30 years – all put together.
The central banks have opened the discount window and taken in all sorts of collateral and in return given out this cash. Today, the balance sheet of the ECB is 30 per cent of GDP. The figure for the Federal Reserve is 17 per cent and the Bank of England 18 per cent.
This is an increase without historical precedent or parallel. Under these circumstances, we may say that the economy is “recovering”, as we have been hearing in the US, but it lacks real meaning because we are so awash with central bank cash and credit.
Now here’s the rub. One of the reasons the price of oil is going up is that the markets, buoyed up by all this money sloshing around, are buying oil. After all, why would you hold an asset that is being printed every day, like cash, when you can buy an asset which is running out, like oil? This is basic supply and demand.
Ultimately, all this free money will find its way into other assets and push up prices. This will be the return of inflation. The spike in oil is a leading indicator.
But here’s the problem. In normal times, the central banks would just take all the money out, via higher interest rates. But in the US, if the Fed stops buying US treasuries, who will take up the slack? This means that the Fed and the central government will be on a collision course because raising interest rates will cause the government’s budget to go haywire. Independent estimates suggest that an increase of 1 per cent in the average interest rate would add an extra $88 billion to the Treasury’s debt service payments in 2012 alone (www.zerohedge.com).
The financial markets know about this conflict at the heart of the US establishment. Therefore, this all reminds me of the Irish property market when, the more money that was pumped in, the more the “trapped bulls” who owned property used the new liquidity to justify the mad valuations and prices.
Yet, the more the bubble was blown up by new money, the more the crash became inevitable. When the US bond market blows, the European crisis will seem like a skirmish.
Hold on to your seats.
The New Punk Economics -Lesson 3 – is now out. See it on YouTube.
All this is true and there probably/most likely will be a day of reckoning at some point for the US, but the euro crisis will blow long before that happens and everyone will run to the comparative safety of treasuries, because of course they at least do have their own monetary policy and currency. I would rather have a devalued US$ or UKÂ£ than have a Euro that doesn’t really exist because it isn’t really backed up by one country with one treasury. Tell me this, if you are say Chinese and have 1 million Euro in a bank account… Read more »
The secret is ‘ house prices ‘ http://www.usatoday.com/USCP/PNI/Business/2012-02-11-APUSBernanke_ST_U.htm From the article “Low or negative equity creates additional problems for households,” Bernanke said. “It reduces financial flexibility: Homeowners who are underwater on their mortgages cannot tap home equity to pay for emergency health expenses or their children’s college educations.” I am by no means a economist but Ben’s plan seems to be to reinflate house prices and get people spending again . I have never understood people releasing equity in their homes . Is the who idea of paying off a mortgage , is that one day you will own the… Read more »
“this is all playing out against a background where the proponents of ‘peak oil’ argue that the stuff is running out anyway.” I would like to direct readers to Our Finite World blog for analysis on how flat line world oil supply charts are viewed as a greater factor than speculation in oil prices. http://ourfiniteworld.com/2012/03/05/why-high-oil-prices-are-now-affecting-europe-more-than-the-us/ http://ourfiniteworld.com/2012/02/26/why-oil-prices-are-so-high-production-shortfall-iran-concerns-and-low-interest-rates/ My own view is this bond bubble will burst in US and Europe. For most inflation or deflation will not matter it will be difficult to afford basic food and energy. Our psychological dependance on powerless central Irish government will be the greatest challenge.… Read more »
David this 61% of debt purchased by the Fed costs the treasury virtually nothing due to the tenacity of a Congressman of great foresight called Wright Patman. They just collect a nominal handling fee and refund interest to the Treasury. He was on the trail of the Fed in Jacksonian style and forced this out of them in the 60s. US currently exporting 480k barrels of refined petroleum per day formerly a long term importer. OPEC finished futures market and insiders now driving the price. Massive discoveries of oil in Eastern Med, off Cameroun & Stans. World floating on oil… Read more »
If Oil is a fossil fuel
and fossils turn in to fuel
and nature is always creating fossils
when do fossils decide not to turn in to fuel ? and is it a democratic process ?
David I watched your new video and then read this article. In your video you say that interest rates will rise and in the article you point out the fact that the US Fed cannot afford to raise interest rates as the debt repayments are now so large that a significant rise in rates would make even the interest payments unpayable never mind actually paying back some of this debt. In my view you are correct in the article as we are now at a worldwide debt saturation level where there is no intention of ever paying back any of… Read more »
A large % of this newly invented out of thin air currency will be digits into the criminal banking system databanks.
So cash currency irrigation perhaps will be lower than what the figures denote.
Also, there is a geo-political school of thought which insists that the price of oil is controlled by the embedded controllers running the stock exchanges front running the markets with super cooper computers under instruction from underground criminal corporate networks playing monopoly with vulnerable countries and their resources.
David, An email I have today sent to circa 50 close friends and relatives. Thoughts on the omission of ‘legal tender’ ‘promise to pay the bearer of’ on Euro notes? Keep up your stellar work. Mark. David McWilliams (much maligned by the ever incorrect Irish establishment and Irish mainstream media) has connected the dots in his latest Sunday Business Post article http://www.davidmcwilliams.ie/2012/04/02/america-the-worlds-largest-emerging-market McWilliams’ ‘hold on to your seats’ summation is very apt. In addition, his excellent video series Punk Economics-(Lesson 3) http://www.davidmcwilliams.ie/2012/03/30/punk-economics-lesson-3 clearly illustrates how central banks and technocrats are pulling the wool over the eyes of people. Simply put,… Read more »
+1 Continuously borrowing principle to repay principle + interest it terminal!
Is America saving it’s own il
Is America capable of bring down Europe
Is the euro worth the paper it’s printed on.
“The average maturity of the US government’s debt was 62.8 months. That means the US has to rollover a whopping 71 per cent of its debt pile — $5.9 trillion worth — over the next five years.”
Can you tell me how the 71 per cent is calculated here David (or anyone)?
could you please post a direct link to the FED report?
I’m largely persuaded that we are at Peak Oil and we can no longer get any ‘return on investment’ on increases in natural resource extraction.
We will collapse to a lower level of societal complexity, meaning we will return to more regionalised economies. This will occur over the next few decades.
Central bank currencies overprinting just exacerbates this larger developments.
Joseph Tainter, author of “the Collapse of Complex Societies” explains to Jim Puplava of Financial Sense News Hour:
no Feldstein fan here, not a bit, but… there ya go
I agree strongly with David here, what we are up to is massive, it could easily mean the collapse of the entire transatlantic financial system.
Lehman brothers was a storm in a water glass against that scenario, and this is the mother load of all storms.
David you have a good handle on the next 3rd world nation Base comments Oil prices are going up or appear to be because fiat currencies are decling in value and oil is sold based on the US dollar pricing around the world. The valuation of the us currency foisted on the world is the basket of currencies of the US major trading partners. As all are also devaluing their currency it is like trying to see which boat is floating higher than the others as the tide goes out. They are all sinking. The oil price is a lot… Read more »
Good stuff David. Sobering reading What if the Saudi’s are bullshitting about their oil capacity and the FED does not have all the gold it claims it has? They just make it up as they go along Think about it – the FED is a private cartel of bankers and no-one knows who the real owners are. It is never audited so how can anyone possibly believe a word they say? When the FED speaks the world holds it’s breath as if listening to the word of god. Especially lazy commentators in the make believe world of main stream media… Read more »
You are going to love this one, the chaps at finance watch had made this cartoon, not as fancy as davids slick cartoonist, but well… not bad… not bad at all
We have to go into space: there are enough resources there to last forever. That, and nuclear power are the ONLY answers.
The fact is that there is now competition for oil, on a scale that never existed until now. We in Ireland are not efficient at our utilization of energy. We have a rail transport system that consists of three systems joined in a hodge-podge manner. Freight transport is an absolute disaster. And at the centre of it all, being accomodated to the detriment of the wider community, we have a super quango called CIE. It is a management disaster, having being used by countless politicians as a retirement home for pals, seeking comfortable directorships. And it has been getting sweet… Read more »
WIth such high oil prices, I am still amazed that the BRICS continue to present a viable proposition for durables and other physical commodities against what could be made locally. Input costs must be ricketing as QE starts to dominate and still no one is buying because they are scared. Not sure if we are factoring in the full ramifications for the speed with which things are starting to slow down. For me, the sooner Oil Peak becomes an insurmountable reality, the better – even if they put a ban on the stuff for burning (do not care how much… Read more »
on the topic of peak oil. that is a myth. every decade has peak oil. when the US president for example, who recently stated that the US has 2% of the world oil reserves that is a play on words. he is referring to oil they are allowed to drill and he has given the lowest number of permits in history. he is not referring to known discoveries. the only peak oil is a man made one, the last us refinery to be granted permission was over 20 years ago. you have a cartel limiting production in the mid east.… Read more »
Irish Times online edition today
Right, my reply to Aaron K above was culled here. Out of retrospective fear or laziness, or both, I don’t know which, David McW already posted above on it. I know enough about tort David, my points were honest and backed up. If any of you want a good laugh go to the the site AaronK mentioned as his source; http://www.veteranstoday.com/ The guy he quoted is here; http://www.veteranstoday.com/author/gordonduff/ Go read if you care. The site is full of paranoid opinion and little or no supporting fact. The Texan abandoned nuclear plot is particularly risible, its here; http://www.veteranstoday.com/2012/04/01/8th-anniversary-how-ghost-troop-stopped-a-bp-nuke/ This reflects on… Read more »
If you have not heard of the National Defense Authorization Act, you could do worse to get up to speed by reading Naomi Wolf’s project syndicate article here:
Economics & Accountancy LC
The figure comes from a study commissioned by the Association of Secondary Teachers Ireland ahead of their annual Easter conference.
The subjects most likely to be dropped are accounting, chemistry, physics and economics.
Hi David As US declines, China grows. golden rule. He who has the gold makes the rules Report by Jim Sinclair Dear Friends, This is why I do what I do in East Africa. April 2, 2012 China has been denigrated and looked down upon for decades — by Russia, Japan, the US and much of the world. It’s strange but true, but China possesses the greatest monetary reserves of any nation in the world. China is loaded with over a trillion dollars worth of US Treasuries plus hundreds of billions of US bonds and T-bills. The problem for China… Read more »
The forgotten Irish we elect the government to look after us,on the news Ireland is meeting it’s targets but at what cost to the Ireland we use to know,the whole fabric of Ireland is being torn to shreds. The section of society that’s doing ok against the section thats being thorn to bits and they say there’s more to come,there has to be some way to fight this. Yes in the past I like a lot of others earned good money but I was a spender and pumped the money back into this country,that seams to be a sad memory… Read more »
61% monetization of us bonds = insolvency =bankrupt but for QEnth From today Midas du Metropole http://www.lemetropolecafe.com And our Bill H lays out the big picture re the Fed and then what is coming for gold… Define “quality”. To all; I was writing a piece yesterday afternoon and noticed the “waterfall action” after the FOMC minutes were released. The piece was a revisiting to what I wrote back at the end of Feb. when the weekly MACD’s were setup to “crossover” (in the shares) to the upside. In fact, yesterday we were again setup for a crossover. This crossover was… Read more »
Regarding the confusion of what peak oil means – here’s an article from the financial times about the cost of oil production. Whilst here will always be oil, it will just cost too much.
And here’s another
I wonder if the resource wars which are already taking pace are partly due to the collapsing financial system, and when the game of monopoly is over whoever has a reliable source of energy will have currency
[…] David McWilliams (AE) is a brilliant Irish economist. He tried his best to warn his country & the world to watch out for the debt bubble. In the following essay he makes it clear that the money printing in the U.S. puts it in fine company among emerging markets. The Fed bought 61% of new debt issued last year. Treasury Bond issuance represented 8.6 per cent of GDP. “If 61 per cent of that figure is caused by printing money, it means that about 5.3 per cent of U.S. economic output is now being driven by the Federal Reserve’s… Read more »