Wednesday, May 18, 2016

Will Implosion of Commodity Bubbles Produce Another Global Financial Crisis?




Here are some preliminary thoughts about whether another global financial crisis is imminent. 

Within the US, bankruptcies are accelerating at an alarming rate among small and mid-size shale producers and their service companies with total defaults estimated by Fitch Ratings data at $26 billion as of May 2016, compared to $17.5 billion in defaults in 2015 (Ailworth and Gleason 2016). Corporate defaults are now at 2009 levels:

Erin Ailworth and Stephanie Gleason. 2016. Energy Bankruptcies Accelerate. The Wall Street Journal, May 17, 2016, B1
SandRidge Energy Inc., an early player in the American shale boom and onetime Wall Street darling, became the latest oil and gas company to file for bankruptcy Monday in what is becoming the largest wave of corporate restructuring since the financial crisis.

The Oklahoma City-based driller is the fifth energy company to file for bankruptcy in five days, part of an accelerating parade of defaults in a sector that has been struggling with low oil prices for more than 18 months.

Some 77 North American energy companies have now declared bankruptcy since the start of 2015, soon after oil prices collapsed from a peak of more than $100 a barrel and began weighing on balance sheets, according to Houston law firm Haynes and Boone, LLP.

This year 175 oil-and-gas producers around the world are in danger of declaring bankruptcy, and the situation is nearly as dire for another 160 companies, many in the US according to a report from Deloitte’s energy consultants.

Majia Here. SandRidge has a prearranged debt-restructuring plan with creditors stipulating $3.7 billion in debt for control of the company that will likely be approved in 2016. In 2015 SandRidge completed debt deals including $50 million equity-for-debt and $1.25 billion private offering of second-lien notes.

The creditors end up owning the company entirely after being stripped of debt. Wealth becomes more consolidated. Consolidated wealth leads to further crises and political instabilities.
 
The problem, stated generally, is there is too much centralized money and power organized around extractive logics and technologies. Extractive logics and technologies produce crises because they are non-sustainable politically, socially, and ecologically.

More concretely, the current commodity bust was driven by a range of factors:
  1.  De-regulation of commodities
  2. Global incorporation of local markets into global financial markets
  3. Development of sophisticated risk instruments (such as derivatives) and accelerated trading practices using computerized algorithms.
  4. Central Bank “Quantitative Easing” policies that distributed financial stimuli into the economies through the largest and most powerful financial institutions that shared a proven track record of fraud and corruption documented by federal investigators 
  5. 2007-2008 financial crisis and implosion of mortgage-backed financial instruments 
The collapse of the housing market and global financial crisis, coupled with bank bailouts and quantitative easing inflated commodity markets until over-production in a context of dampened global demand began deflating commodity bubbles, especially in oil. 


This financial chaos became apparent in 2015, as illustrated by this headline from The New York Times in December of 2016:

Clifford Krauss and Ian Austen. If It Owns a Well or a Mine, It’s Probably in Trouble. The New York Times, December 8, 2015 http://www.nytimes.com/2015/12/09/business/anglo-american-to-cut-85000-jobs-amid-commodity-slump.html?emc=edit_th_20151209&nl=todaysheadlines&nlid=32962000&_r=2#story-continues-1

The consequences of the commodity bust are difficult to anticipate fully but here are some likely scenarios:

  1. Further concentration of ownership in global commodities, especially energy
  2. Widespread effects on Main Street economies globally as energy and other commodity markets stagnate or collapse, leading to higher unemployment and depressed consumer demand
  3. More environmental catastrophes as clean-up costs for bankrupt companies are offloaded to communities
  4. Worsening social and political instability in export-oriented “developing” economies

It is more difficult to predict whether there will be another “financial panic” in the US because the federal government has been urging creditors to pursue these debt-for-equity swaps to mitigate against wholescale collapse of carbon economies in countries such as the US.

However, its clear that nations such as Venezuela are becoming extraordinarily depoliticized by the global commodity bust and the contagion effects for the global economy are difficult to predict, particularly in the context of the escalating Cold War.

Please see my latest book for details here:
 
 

6 comments:

  1. It's very scarey. The daiichi site appear to be lose more substantial stability too. Ground shifts fog emissions. Kunstler appears right. Things are getting dicey in this election cycle economically. I really cannot stand either frontrunner.

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  2. Since the last Depression the US has not had a successful business man as president. It has had its share of attorneys. Trump is certainly a significantly more competent person than Hilary and with a far better personality. And Trump is also far more likely to succeed at rebuilding the US than Sanders. He seems acceptable enough to me. It is not easy to name a really good president in the last one hundred plus years. We have to be realistic in this matter. No saint is going to come along, and who anyway would recognize such a person?

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    1. I weigh in with majority here William. Although I most often agree with your keen insights, I think Trump represents an alarming shift toward "race hatred."

      I've never seen so many confederate flags on the back of pick-up trucks in my life! They are suddenly appearing on trucks driven by young kids!

      Rule by promoting festering divisions within populations is an old strategy with proven effectiveness for fascistic powers.

      I don't trust anyone who deploys deliberately divisive strategies.

      I'm not saying I support Clinton, because I don't. But I am very concerned about the social effects of a Trump presidency.

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  3. Bla blah blah. A racist bigot misogynist for president who was probably the republican candidate all along. What a goof. Republicans lie so much they cannot tell the different nice between their own propaganda and truth.

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    1. Republicans always seem to conveniently forget that the IRS had no teeth until the predepression republican business man republicans like Calvin Coolidge and Herbert Hoover got laws signed so the IRS could enforce federal tax laws and created IRS FBI enforcement units. they enforced federal income tax laws against Al Capone and tried to do it against their political opponents like Franklyn Roosevelt.
      http://m.csmonitor.com/USA/Politics/DC-Decoder/2013/0517/Playing-the-IRS-card-Six-presidents-who-used-the-IRS-to-bash-political-foes/President-Calvin-Coolidge-R

      Republicans Calvin Coolidge and Herbert hoover were the two business men presidents that were most responsible for the great depression.

      Ronald Reagan was an outsider. He was kind of a business man. Certainly the business mans president. He successfully inflated the federal debt from a few billion to 7 trillion dollars during his tenure as president and caused a major stock market crash.

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  4. Some of the things trump says about minorities and women are reminiscent of Abe in japan and the policies of the ruling liberal democratic party there. Why would trump want to give more plutonium to a country that has had the greatest ongoing nuclear catastrophe in history and is doing so little about it. Abe ants to open more npps there and build more in spite of the rash of devastating earthquakes going on and the horrors of Fukushima. Madness I tell ya! Sheer madness pushed forward pomposity and arrogance.

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