The Oil Drum: Canada

We all know the world is finite. The number of atoms is finite, and these atoms combine to form a finite number of molecules. The mix of molecules may change over time, but in total, the number of molecules is also finite.

We also know that growth is central to our way of life. Businesses are expected to grow. Every day new businesses are formed and new products are developed. The world population is also growing, so all this adds up to a huge utilization of resources.

At some point, growth in resource utilization must collide with the fact that the world is finite. We have grown up thinking that the world is so large that limits will never be an issue. But now, we are starting to bump up against limits.

What are earth's limits? Are we reaching them?

ED Note by PG: Note that this is an updated version of an article that was run about six months ago. With all of the new folks (Welcome!) around, it seemed like a good time for an article like this. We appreciate your sharing this and all the work here at The Oil Drum with the people you care about.

An inflationary future is becoming conventional wisdom, but, as consensus takes time to develop, the stronger the consensus, the later it is in the trend. A consensus is a backward-looking phenomenon of little use - except as a general contrarian indicator - in detecting the inevitable discontinuities that can abruptly and painfully invalidate all one's assumptions.

We have lived through a long period of inflationary credit expansion, and regard it as normal, but credit expansion is a self-limiting condition. Credit bubbles are merely the rediscovery by a new generation of the powers of leverage (see for instance A Short History of Financial Euphoria by Galbraith, Manias, Panics and Crashes by Kindleberger or Financial Armageddon by Michael Panzner). Every credit bubble that ever existed has eventually deflated, and this one will be no different.

We have essentially already reached the limit of debt serviceability that brings an expansion to an end. We are already seeing the tightening of credit standards, the refusal of banks to lend to one another, the frozen commercial paper, the bank runs, the redefinition of what constitutes a store of value, the rejection of financial alchemy, the debt defaults that reduce the money supply, the falling prices in the housing market, the lack of confidence - which together unmistakably herald deflation. Central banks can do nothing more than paper over the cracks for a short time, at the cost of aggravating the eventual impact of deflation.

Time to Aim High?

I salute Wasik for pointing out the sham that the CPI is. However, it is because of the debasement of the dollar and distortions in the CPI that the Fed has practically forced risk down everyone's throat. But one must be cognizant of herding behavior that has nearly everyone thinking exactly like he is and the Fed wants. Aim high. Shoot for the moon. Do or die. You are losing money by saving. Buy assets. Only fools save. In the long term, stocks always go up.

The problem is that aiming high is synonymous with increasing risk. Up till now, risk taking has been rewarded. But what happens when everyone does the same thing? More to the point, what happens when everyone does the same thing for 20 years or longer? Eventually, risk gets so unappreciated that various asset classes go to the moon....

....Essentially, the same advice given for real estate (you cannot buy too much home, home prices always go up) is now being touted for stocks. There is an amazing belief in the Fed's ability right now to control the business cycle, as well as price stability. It's not warranted. At this stage of the cycle in a slowing economy, with rampant overcapacity, a tenuous job climate, and no real reason for businesses to expand, the odds are that aiming high is precisely the wrong thing to do.

We have been living in inflationary times, for as long as most of us can remember. The money supply keeps expanding and prices increase over time as a result. Central bankers have many tools at their disposal which they can use to tweak the economy – they can raise or lower interest rates, can control reserve requirements for fractional reserve banking and can inject liquidity into the banking system, among other things – and we have become used to thinking that they can prevent the kind of 'economic accidents' that previous episodes of excess have led to in the past. Especially in recent years – since the apparently successful containment of the dot com aftermath - we have acted as if risk were a thing of the past. Sliced, diced and spread around Wall Street and the rest of the global financial system, risk has seemed tamed, contained and controlled, until last week that is.

For years, industry insiders and so-called experts have proclaimed the virtues of slicing, dicing, and repackaging risk. They waxed on about how borrowers and savers, and society as a whole, could only benefit from such machinations. They suggested any sort of exposure could be disbursed and dissipated to the point where it essentially disappeared. Some even claimed that the crises of the past would no longer exist.

Yet amid the hype and assurances, few supporters spoke of the dark side of wanton and widespread risk-shifting. They didn’t seem — or want — to acknowledge that by combining complicated risks in unfamiliar and unnatural ways, the end result could be an uncontrollable monstrosity—one that eventually turned on its masters.
Nor did they heed the notion that by scattering risk into every nook and cranny of the global financial system, the vast web of overlapping linkages virtually guaranteed that serious problems in one sector, market, or country would trigger far-reaching shockwaves.

All of a sudden, markets are reeling around the world, deals are unraveling, the mainstream press is talking about a credit crunch and the world’s central bankers are injecting unprecedented amounts of liquidity to calm the markets. Risk has made a comeback, and in that environment the evident concern of the central bankers does not seem very reassuring.

Water concerns are emerging in North America as the world warms. The US wants a continental approach to water supply, but Canadians disagree. Meanwhile, in parts of England, there's "water, water everywhere, but not a drop to drink".

The 'true north' tries to be 'strong and clean', but can't seem to do a proper energy audit. Arctic gas pipelines move a step closer to reality. Power supply in Ontario tightens further, while Cameco discovers uranium in the soil. Can we harness tornado-power next?

The insatiable debt-monster of Wall street spreads from subprime to Alt-A, bond ratings spawn legal action, and Fannie Mae and Freddie Mac attempt a subprime bail-out. The savings rate stays negative south of the border, as Americans keep borrowing just to stay on the treadmill.

Oil pipeline accident causes spill in Burnaby, B.C.

The oil gushed for a reported 25 minutes before crews were able to staunch the flow.

"We had a vehicle hit an oil head," Cpl. Jane Baptista, of the Burnaby RCMP, told The Canadian Press on Tuesday.

"There was some oil spilled over the road. We have hazmat (hazardous materials) and Burnaby Fire Department on scene. Police have assisted with some evacuation of some residents there."....

....There are fears that a major environmental problem may be developing.

Local radio station News1130 reported that witnesses are described the scene as a "river of oil."