In 1998, the Brent crude price of a barrel of oil fell to 12.8 dollars – its lowest price since 1976. By 2000, it had risen to its highest price – $28.4 – since 1984, beginning the period of oil price volatility which has persisted to this day. After briefly falling back to $24.45 in 2001, the oil price began to rise remorselessly, reaching $54.45 in 2005 – the year global conventional oil production peaked and, coincidentally, the year the UK became a net importer of oil and gas.
As households and businesses have discovered to their cost over the past 12 months, an increase in the price of oil results in a general increase in prices across the economy. While this may look like monetary inflation, and while it may persist for months and even years, in the end, rising oil prices – and, indeed, energy prices in general – have a far greater deflationary impact on the economy in the longer term. This is because the rising cost of energy obliges businesses and households to restructure their spending – removing as much discretionary spending as required to balance the rising cost of energy. Businesses which are unable to pass costs on without driving down consumer demand eventually go bust, and newly unemployed households are obliged to shred their previous spending to an absolute minimum. This destroys even more economic demand, causing even more businesses to fail and even more workers to be laid off… until, eventually, demand for oil falls below supply once more and the price of oil – and energy in general falls back once more.
In the early 2000s, the key economic question was, what should central banks do? The myth, put about by Alan Greenspan and perpetuated by Ben Bernanke, was that the central bankers had become “the masters of the universe” – using the power of the overnight interest rate to destroy the previous cycles of boom and bust. Using the power bestowed upon them by Saint Paul Volcker, the central bankers had ushered in a “Great Moderation” which these pesky oil price increases threatened to undermine. And so, they did what Saint Paul would have done. From 2006, they began to raise interest rates in the belief that this would force prices to fall.
In the absence of any new oil production though, the Brent oil price just kept on rising… $54.38 in 2006, $72.52 in 2007, and $96.99 in 2008 – rising to a high of $147.50 in July of that year. These price increases were enough, in and of themselves, to plunge the global economy into a major recession. The central banks – whose primary purpose is to protect the banking and financial corporations – in attempting to slay the oil price dragon with the alchemy of higher interest rates, turned a major economic downturn into an existential crisis.
The big lie – which persists to this day – is that in 2008 the banks experienced a “liquidity crisis.” That is, the banks claimed to have plenty of valuable assets with which to meet their obligations. However, a loss of confidence had placed unexpected demands on them so that, while they could pay their way eventually, they couldn’t pay their way today. A colloquial analogy here would be someone borrowing £10 from a friend to tide them over until they get paid at the end of the week. The reality though, was the banks were more like a friend who borrows £10 but forgets to mention that they got fired and there will not be a pay packet at the end of the week after all.
The entire western banking and financial system was sat on top of a mountain of securitised debt which, in practice was worthless. And the reason it had become worthless was not or at least not primarily, as the popular myth would have it, that banks had loaned currency recklessly, but that the combined shock of higher energy prices and higher interest rates had driven masses of previously good mortgages and business loans into worthless paper. Theoretically, the securities which were based on these debts, and from which the banks drew their profits, were insured in the so-called shadow banking sector. But insurance is based on normal conditions not major crises, so that while insurance might have covered relatively small amounts of bad debt prior to 2006, it was wholly inadequate in the growing crisis engulfing the banks. By 2008, banking insiders knew full well that they – and their competitors – were sat on mounds of junk paper and that without careful management the entire sector might collapse like a row of dominoes. Crucially, interbank trading began to freeze up. This was the so-called “credit crunch” in which the wider public were threatened with banks shutting up their branches, taking down their websites and disconnecting the network of ATMs.
The reason the big lie was necessary was that it paved the way for the disaster capitalism which came next. Had the banks admitted that they were bankrupt, the correct state response would have been to allow them to fail. And insofar as the banking infrastructure remained socially necessary, then the state ought to have nationalised and recapitalised it – something which could have been done in a matter of days. Instead, by pretending this was a liquidity crisis, the banks persuaded states and central banks to pump new, publicly borrowed currency into the banks to replace the worthless paper assets they were sat on.
This fed directly into the recession which followed, as governments cut spending and raised taxes to offset the currency they had pumped into bankrupt banks. In the worst cases in Europe, where states like Greece and Portugal had given up their sovereign currencies, ordinary people were driven into penury so that wealthy bankers could suck on the corporate welfare teat of quantitative easing and negative real interest rates.
The biggest irony perhaps is that while the 2008 shock caused the price of oil to fall to $61.52, the relief was temporary. Globally, demand for oil continued to outstrip supply so that by 2011 it was back up to $111.26 – reaching a high of $125.89 in April of that year. It was only the arrival of the once-and-done US shale oil bubble which brought some economic relief between 2014 and 2017. Nevertheless, the period between the Crash and the Covid was one of an attritional see-sawing between prices too low for producers but too high for consumers:
For the broader economy, this resulted in de facto depression – although official growth rates of less than one percent avoided the need for anyone to admit it – in the periods when oil prices were too high for consumers, punctuated by small periods of anaemic respite when the price of oil fell to a point where some discretionary spending growth could occur. During the period, real incomes continued to slowly decline, while the energy death spiral and the retail apocalypse slowly ground down the discretionary sectors of the economy. And this gradual restructuring of the western economies might well have continued into the mid-2020s and possibly into the 2030s had it not been for the collective insanity of the ruling technocracy and an increasingly incompetent political class.
Just as it turns out that none of the environmentalist technocrats behind the Great New Green Reset bothered to ask the physicists and engineers whether it was possible to run their fourth industrial revolution without fossil fuels, so it turns out that the public health technocrats saw no need to ask industrialists and logistics experts what might happen if they locked down the economy and disrupted the world’s just-in-time supply chains. Nor, apparently, did the warmongering neocons in the Biden administration and the EU bureaucracy bother to ask whether economies still reeling from the 2008 crash and shattered by two years of lockdown could cope with the voluntary embargoing of the fuels and commodities they depend upon.
Thus, we find ourselves in a largely self-inflicted re-run of the energy and commodity price crisis which led to the crash in 2008. The Brent Crude price has rocketed from a low of $21.38 in March 2020 (reflecting the start of the lockdowns) to $120.43 at the beginning of June – in part reflecting the insanity of disconnecting Russian oil before any alternative has been secured, but in large part because world oil production peaked in November 2018 and is now running at some four million barrels per day less than it had been in 2019. Moreover, when the Chinese economy emerges from its lockdown, demand for oil is likely to drive prices far higher even as the oil industry struggles to maintain output.
The – largely unseen – compounding factor in 2022 concerns the tyranny of averages. Governments and central banks will respond to what they perceive as an inflationary crisis through lenses such as average wages and average profits, jobs created rather than hours worked. But largely as a consequence of the prior actions of governments and central banks, far too much of the currency they created has been handed over to a handful of corporations and an ever-smaller godzillionaire class, which so distort the data as to render it useless. At a time when a handful of businesses and individuals at the top have driven averages far higher than the median, central banks have very likely already repeated the error they made in the months prior to 2008. As analyst Stephanie Pomboy explains:
“The idea that the Fed can raise rates without precipitating a recession is rooted in a misapprehension about how strong the economy really was to begin with.
“When you take out the amount of money that was handed to consumers to spend, a different picture [emerges] about the inherent strength of the economy and the ability to withstand the stimulus withdrawal.
“One of the things the Fed and Wall Street have underestimated is the degree to which the strength of the economy that we saw in the last couple of years was entirely a function of the monetary and fiscal stimulus, which totaled roughly $10 trillion. We put $10 trillion into the economy, but GDP grew only $2.3 trillion. With inflation, you come up with $600 billion real growth.
“It’s sad how little actual increase in economic activity we got for all that stimulus.
“What we did get was a massive bubble in financial assets, which is now starting to deflate because we’re taking the stimulus away.”
This is important because most households and businesses spent their pandemic stimulus payments into the economy, where it disappeared almost immediately. This is due to a key difference from the 1970s, when people dealt mainly in cash, which might circulate through many hands before arriving back at a bank or a government tax office. Today this velocity of money is around one. That is, the currency is spent just once before being removed from the economy either as tax, a debt repayment or as a nominal cash reserve of one of the major corporations. It is likely that what remains of the various lockdown state support will have already gone to pay for rising energy, fuel, and food.
And so, just as happened from 2006, the central banks are raising interest rates in western economies which are significantly weaker than their average data sets suggest. Insofar as interest rate rises are intended to generate a recession in order to crush consumer demand out of the economy, technically, the central banks were spectacularly successful between 2006 and 2008… crushing the economy into a depression that it has never really recovered from. And, putting into practice Einstein’s maxim that “insanity is doing the same thing over and over and expecting a different result,” the central banks are once again raising interest rates into an economy that is already in recession. As Pomboy puts it:
“Most people are saying, ‘They’ll raise rates, and the economy will have this, sort of, soft landing. It will slow, and everything will be perfect.’ I think that expectation is just fantastical, to put it nicely.”
Even this appraisal of the situation may be optimistic. For while Pomboy acknowledges that the price of essentials like energy, fuel, and food will continue rising even as the wider economy unravels, there are both geopolitical and geological complications whose effects are not easily predicted. While, for example, rising oil prices are being blamed on the Russian invasion of Ukraine, and increasingly to US and EU “green energy” policies, the underlying absolute decline in oil production means that even with demand in freefall, supply may remain short. Moreover, despite claims to the contrary, Russia has yet to respond to western sanctions, and we might want to bear in mind that there is no law of physics which demands that Russia supply the western economies with oil and gas – or, indeed, food – just because our leaders have run us short of these essentials.
Even more worrying, although the establishment media has made light of it, is the move away from the dollar currency system by the 75 percent of the world’s states which didn’t disconnect themselves from Russian commodities. While it is doubtful that a new BRICS trading and currency system will replace the dollar system, this misses the point. All that is required to undermine the currencies and economies of the western states is that the US dollar lose its monopoly status, thereby removing our “exorbitant privilege” of being able to print currency out of thin air to pay for the imports we depend upon.
The monetary inflation that the central banks think they are fighting has mostly already gone. And the discretionary sectors of the economy that interest rate rises are meant to slow are already going backward. The problem being that businesses and households do not immediately drop into bankruptcy, but first go through largely invisible attempts at mitigation. Businesses across the economy will today be renegotiating their debts because neither they nor their banks benefits from bankruptcy. In the same way, households will be restructuring their spending, ending subscriptions, cutting back on general spending and borrowing out of desperation. The result is that on paper the economy looks to be far healthier than it actually is, so that when mitigation is no longer possible and firms go bust, workers are laid off in droves and household debt results in mass bankruptcy, the impact will be far worse than anyone inside the banking and political class expects.
But without any theoretical basis to allow them to distinguish real commodity inflation – shortages of inelastic commodities growing faster than the economy – from artificial monetary inflation – currency in circulation growing faster than the economy – the central banks can only make matters worse. Last time it was the banking and financial system which came close to meltdown. This time around, with the dollar system itself under pressure and no obvious source of new oil to bring down prices, it will be western states and currencies… and it doesn’t end well.
the prices in the chart are for Illinois Sweet Crude, which peaked at $168.75 in June 2008
As you made it to the end…
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