Why Peak Oil Is Finally Here

By Ron Patterson

In this life nothing is certain. Therefore I am not declaring, absolutely, that we are at peak oil, only that it is a near certainty. But I am putting my reputation on the line in making the claim that the period, September 2014 through August 2015 will be the year of Peak Oil. Below are my reasons for making this claim.

First of all, Peak Oil is not a theory. The claim that Peak Oil is a theory is more than a little absurd. Fossil hydrocarbons were created from buried alga millions of years ago and they are finite in quantity. And as long as we keep extracting them in the millions of barrels per day, it is only common sense that one day we will reach a point where their extraction starts to decline. In fact most countries where oil is extracted are already in decline. So obviously if individual countries can experience peak oil then the world as a whole can also experience peak oil.

All charts below are in thousand barrels per day of Crude + Condensate with the last data point September 2014.

First I want to deal with the portion of the world that reached peak oil about four years ago, in January 2011. That is everywhere else in the world except the US and Canada. I am not saying that every country outside the US and Canada has reached peak oil, but combined they have reached peak oil.

Related: Bearishness Continues Among Oil Industry Experts

The world outside the United States and Canada has been on a bumpy plateau for ten years and now, even with that last September 2014 surge, is still 1,670,000 barrels below the peak of January 2011. However only a few countries are responsible for this plateau.

The bumpy plateau actually began back in 2005 where the peak was in July. Since then, outside the USA and Canada, there have been 15 countries with production increases and 21 countries with production declines. Here is a look at the 15 winners outside the US and Canada.

Dealing with the winners one at a time:

Iraq: The EIA has data only through September but Iraq has actually increased production by about 300 kbd to December. But word is they are slightly down in January. That puts Iraq up almost 1.5 million barrels per day since they started their massive infill drilling program in 2009. Iraq still has some upside potential but their downside risk now even greater.

Russia: Russia has peaked, even according to Russian analysts. They will decline only slightly in 2015 but their decline will accelerate after that.

Brazil: Brazil has some upside potential and a lot of downside potential. The finances of Petrobras are a damn mess. Moody’s has downgraded them to Baa3, just one notch above junk status and further downgrades are expected soon. To increase their pre-salt production much more will require a lot more borrowed money. That is not very likely.

Qatar: The EIA says Qatar C+C production increased by 598,000 barrels per day between July 2005 and September 2014. The OPEC Monthly Oil Market Report says their crude only production declined by 78,000 barrels per day during that time span. The chart above was made with EIA data which counts condensate as oil. OPEC reports only crude. On the chart below the EIA data is through September, the OPEC data is through December 2014.

The EIA says Qatar has increased condensate production from her massive natural gas fields. Qatar crude oil production is in decline and has been since 2008. Qatar crude will continue to decline and their condensate is likely at a peak also.

Angola: Angola peaked in 2009 and 2010 and is now in decline. However some of the decline is caused by political problems. Those problems will likely get worse.

Colombia: Colombia’s production has doubled in the last 8 years but they reached their peak in 2013 and have held almost flat for the last two years. Colombia has peaked and will decline, though that decline will likely be very slow. I have included Colombia in the chart below that shows four countries that have recently peaked.

Kazakhstan: Kazakhstan is at peak of currently producing fields. Production will likely decline until Kashagan comes on line sometime in 2017. This field that once promised to produce over a million barrels per day is now expected to barely produce 300,000 barrels per day… if it ever manages to come on line. But nothing spectacular is expected out of Kazakhstan, especially since its old fields are expected to start to decline soon.

China: China peaked in 2010 and has held pretty well steady since then. I expect China will start to decline soon.

Azerbaijan: Azerbaijan peaked in 2010 and has been in steady decline since.

UAE, Oman and Kuwait: All three of these Middle East countries have implemented massive infill drilling programs in the last decade or so. But all three have now peaked. These three nations, along with Colombia, show a beautiful increase in production then a rounding peak at the top.

These four countries are responsible for 1.5 million barrels per day of the increase since 2005. They have all four now peaked, or at least very near their peak.

Saudi Arabia: Saudi has brought their last mothballed field on line, Manifa. Now they have none. Saudi is producing flat out. They might, with great effort, produce a few more barrels per day, but basically they are at peak right now.

And a look at the 21 losers.

I have changed the negative numbers to absolute numbers in order to make it easier to read. But basically these are the nations that have peaked and are now in decline. A couple, Iran and Libya, because of political problems, have declined a lot more than they would have without that conflict. However neither is likely to recover very soon. And even when they do, it will be to a point lower than they were before their problems. Syria and Sudan, including South Sudan, and Yemen are others that will not recover in this decade, or until long after we are on the down-slope of peak oil.

That brings us to the US and Canada.

The USA and Canada are responsible for about 120% of the increase in world oil production since 2005, even though they did not begin their grand ascent until 2009. Canada’s over 400,000 bpd increase in September is responsible for that last spike upward. But can this continue?

In a word… no. The gain has been almost all LTO and oil sands. And low prices are killing both. If prices stay low both Canada and the USA will begin to decline by the second half of this year. But even if prices return to the $70 to $80 range, (it is not likely they are going higher than that), their production will still not increase fast enough to offset the decline in the rest of the world.

Related: U.S. Crude Inventories Reach Highest Levels Since 1982

But what about those massive reserves still in the ground? Many say we have not yet produced half the URR, the Ultimate Recoverable reserves, and until we are at least that half-way point, we cannot be at peak oil. Well, there are a few really serious problems with that logic. First, what is meant by the word “recoverable”? And at what price? Let’s look at really important chart.

The 2014 data point on the chart below is the average January through November.

Here is a chart of Historical Crude Oil Prices. The average price, the blue line, is the average price of oil for that year. The orange line is the average price from 1946 to any point on that line. For instance the average price of oil for the 34 years from 1946 through 1973 was $23.68. And that is in today’s dollars. From 1946 through 1973 oil companies were getting an average of $23.68 a barrel for their oil, and they were making a pile of money at that price. Today, the price is more than twice that amount, and many of them are losing a pile of money.

So let’s get back to reserves. The reserves produced in 1973 and prior years were very profitable at less than $24 a barrel. Then all hell broke loose in the Middle East and prices skyrocketed. Then for the next dozen years oil companies made windfall profits. But in 1986 oil prices came down to normal. Between 1986 and 2002 oil prices averaged $30.42 a barrel. (Not shown on the chart.) Even at that price oil companies still made huge profits. But today they are losing money at $50 a barrel.

The problem is with those “reserves”. Today’s reserves are just not the same as those earlier reserves. All the good cheap stuff has already been sucked up. We are now left with dregs at the bottom of the barrel. All today’s new oil is harder to find, depletes a whole lot faster, and costs many times as much to produce. None of the cheap stuff is left except in a few old super giant fields that are undergoing infill drilling like there is no tomorrow.

Once again, we are at peak oil right now. The peak will straddle the 2014 and 2015 time line. 2016 will be the first full post peak calendar year. It really doesn’t matter how many barrels of oil are left in the ground. The point is we will never again pull it out of the ground at the same rate we are pulling it out right now.

See the original article >>

Bad News For World Economy That No One Wants To Hear

By Kurt Cobb

Reading the general run of financial headlines might lead one to believe that price declines in those commodities which are highly sensitive to economic conditions such as iron ore, copper, oil, natural gas, coal, and lumber are good on their face.

Obviously, the declines aren't good for those who sell these commodities. But, those of us who buy these commodities in the form of cars, houses, utility bills and other products and services ought to be helping the world economy as we buy more stuff with the freed up income.

As true as that may be, these commodity price declines also signal something else: exceptional weakness in the world economy. It is no secret that economic growth in Europe has been stalled for some time and is now receding. The European Union's confrontation with Russia over the Ukraine conflict and the resulting tit-for-tat economic sanctions levied by both sides are only worsening the economic climate.

Russia has been hit by the double whammy of oil price declines and sanctions which are probably sending the country into recession. And now the new anti-austerity government in Greece seems to be pushing Europe headlong into another Euro crisis as worries about Greek debt default spread.

Related: Winners And Losers Of Low Gasoline Prices

Chinese economic growth appears to be faltering. And, that seems to be one of the direct causes of the broad-based commodities price decline. A fast growing China has previously created enormous demand for basic commodities needed to build out its infrastructure--commodities such as copper, iron ore and the petroleum products needed to run all the vehicles and machines essential to that build-out. Chinese demand for basic commodities has also increased as China's expanding wealth has allowed many more people there to own private automobiles and to enjoy other fruits of a spreading consumer society.

Economic distress for China seems to come when its hypercaffeinated annual growth rate falls below 7 percent where it seems to be heading now. Official Chinese statistics have long been suspect, so growth may already be below 7 percent. Lower growth makes it difficult for the country to provide work for all those who are leaving the countryside and streaming into the cities as China industrializes.

Commodity-exporting nations such as Canada, Brazil and Australia have taken a big hit on declining Chinese and world demand. But, their bourses seem surprisingly buoyant given the extent of the damage.

The commodity price declines aren't just confined to the industrial and energy commodities mentioned above. Food commodities have been swooning as well recently. Of course, food prices swing based on farm yields which have no necessary relation to the economy at a particular time. What is especially telling about the decline in the prices of foodstuffs is how broad-based it is.

Price declines affected wheat, corn, soybeans, and oats in part due to record harvests. Prices for cocoa declined due to rising harvests and falling demand. But, not every food commodity is experiencing increased harvests. Sugar production has actually declined in the last growing cycle. Yet, sugar prices fell. At the margin, it seems, people are buying less of what are essentially discretionary food commodities such as cocoa and sugar. Does that seem right if consumer buying power is being buoyed by cheaper industrial and energy commodities?

Stock and bond markets across the world are being levitated by central banks which have telegraphed to investors that the banks will react to practically any weakness in stocks or bonds. Of course, central banks don't much concern themselves with the prices of commodities because they cannot control them directly in the way they manipulate money and credit. That's why commodity prices right now are a much better barometer of the global economy than the world's stock markets.

One could say that the stock markets of the world disagree with the global commodity markets about the direction of the world economy. One could also say that the world's bond markets agree with the commodity markets. Low bond yields typically mean that investors expect inflation and economic growth to be low or even negative. High inflation and/or economic growth tend to cause investors to demand higher yields as credit availability tightens and as concern about inflation eroding bond returns rises.

It is especially telling that in the United States, where the U.S. Federal Reserve Bank ceased its government bond buying program last year (known as quantitative easing), that long-term government bonds returned almost 39 percent, much better than the U.S. stock market which registered a 12 percent gain in the S&P 500 index. With waning support from the U.S. central bank, government bonds were supposed to decline (and yields go up). Just the opposite happened--big time!

And as 2015 began, the consensus was that U.S. (and Canadian) interest rates would rise and thus bond prices would decline. Instead, long-dated U.S. governments--which are very sensitive to interest rate changes--spurted upward another 12 percent in January alone as yields plunged to record lows. This was in perfect concert with the continuing commodity rout suggesting that investors in these markets expect low or no economic growth in the year ahead.

Related: Russian Stimulus Plan ‘Just Talk’

Practically the entire investor class across the world believes that central banks now guarantee stock prices, and that the stock market therefore is a sure thing. Commodities and bonds, however, are telling a contrarian story. The obvious questions are: If central banks are omnipotent, then why didn't they prevent stock market crashes in 2001 and 2008? If it's different this time, what exactly will central banks do to prevent another crash? Can they really effectively lower interest rates which are already at zero in much of the world (and below zero in a few instances)? If central bank policy is so powerful, why haven't six years of the lowest interest rates in memory--and in the case of Great Britain since the beginning of central banking there in 1694--resulted in booming growth across the world?

Last week analyst Doug Noland of Credit Bubble Bulletin fame, summarized the situation this way:

To this point, mounting risks – financial, economic, geopolitical and the like – have been viewed as guaranteeing only greater injections of central bank liquidity.

The assumption has been that if markets falter, central bank liquidity can and will always hurl them higher than before. It seems there is no crisis too big that ever greater liquidity injections cannot solve it. That assumption is already being tested this year, and there are likely to be many more tests coming.

The rather precipitous, alarming and lockstep trends in bond yields and commodity prices in the last year suggest that we are likely to get some clarifying answers in 2015 to the questions listed above.

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The Housing Chart Which Refutes The Washington/Wall Street Recovery Myth

By Michael Snyder

Did you know that the rate of homeownership in the United States has fallen to a 20 year low?  Did you know that it has been falling consistently for an entire decade?  For the past couple of years, the economic optimists have been telling us that the economy has been getting better.  Well, if the economy really has been getting better, why does the homeownership rate keep going down?  Yes, the ultra-wealthy have received a temporary financial windfall thanks to the reckless money printing the Federal Reserve has been doing, but for most Americans economic conditions have not been improving.  This is clearly demonstrated by the housing chart that I am about to share with you.  If the economy really was healthy, more people would be getting good jobs and thus would be able to buy homes.  But instead, the homeownership rate has continued to plummet throughout the entire “Obama recovery”.  I think that this chart speaks for itself…

Of course this homeownership collapse began well before Barack Obama entered the White House.  Our economic problems are the result of decades of incredibly bad decisions.  But anyone that believes that things have “turned around” for the middle class under Barack Obama is just being delusional.

If the U.S. economy truly was in “good shape”, the percentage of Americans that own homes would not be at a 20 year low…

The U.S. homeownership rate fell to the lowest in more than two decades in the fourth quarter as many would-be buyers stayed on the sidelines, giving the rental market a boost.

The share of Americans who own their homes was 64 percent in the fourth quarter, down from 64.4 percent in the previous three months, the Census Bureau said in a report. The rate was at the lowest since the second quarter of 1994, data compiled by Bloomberg show.

Rising prices and a tight supply of lower-end listings have put homes out of reach for some entry-level buyers, who also face strict mortgage standards. The share of U.S. homebuyers making their first purchase dropped in 2014 to the lowest level in almost three decades, the National Association of Realtors reported last week.

And it appears that this trend is actually accelerating.  During 2014, the rate of homeownership plummeted by a total of 1.2 percentage points for the year.  That was the largest one year decline that has ever been measured.

So why is this happening?

Well, in order to buy a home you have got to have a good job, and good jobs are in very short supply these days.

Over the past decade, the quality of the jobs in our economy has steadily declined as good jobs have been replaced by low paying jobs.  In addition, government policies are absolutely murdering small business.  At this point, small business ownership in the U.S. is hovering near record lows.

This has resulted in millions of people falling out of the middle class, and it has contributed to the growing divide between the wealthy and the rest of the country.

If our economy was working the way that it should, the middle class would be thriving.

But instead, it is being systematically destroyed.  If you doubt this, I have some statistics that I would like to share with you.  The following facts come from my previous article entitled “The Death Of The American Dream In 22 Numbers“…

#1 The Obama administration tells us that 8.69 million Americans are “officially unemployed” and that 92.90 million Americans are considered to be “not in the labor force”.  That means that more than 101 million U.S. adults do not have a job right now.

#2 One recent survey discovered that 55 percent of Americans believe that the American Dream either never existed or that it no longer exists.

#3 Considering the fact that Obama is in the White House, it is somewhat surprising that 55 percent of all Republicans still believe in the American Dream, but only 33 percent of all Democrats do.

#4 After adjusting for inflation, median household income has fallen by nearly $5,000 since 2007.

#5 After adjusting for inflation, “the median wealth figure for middle-income families” fell from $78,000 in 1983 to $63,800 in 2013.

#6 At this point, 59 percent of Americans believe that “the American dream has become impossible for most people to achieve”.

You can read the rest of that article right here.

The group that has been hit the hardest by all of this has been young adults.

Back in 2005, the homeownership rate for households headed up by someone under the age of 35 was approximately 43 percent.

Today, it has declined to about 35 percent.

From a very early age, we push our young people to go to college, and today more of them are getting secondary education than ever before.

But when they leave school, the “good jobs” that we promised them are often not there, and most of them end up entering the “real world” already loaded down with massive amounts of debt.

According to the Pew Research Center, close to four out of every ten households that are led by someone under the age of 40 are currently paying off student loan debt.

It is hard to believe, but total student loan debt in this country is now actually higher than total credit card debt.  At this point, student loan debt has reached a grand total of 1.2 trillion dollars, and that number has grown by an astounding 84 percent just since 2008.

If you are already burdened with tens of thousands (or in some cases hundreds of thousands) of dollars of debt when you get out of school and you can’t find a decent job, there is no way that you are going to be able to afford to buy a house.

So we have millions upon millions of young people that should be buying homes and starting families that are living with their parents instead.

Back in 1968, well over 50 percent of all Americans in the 18 to 31-year-old age bracket were already married and living on their own.

But today, that number is actually below 25 percent.  Instead, approximately 31 percent of all U.S. adults in the 18 to 34-year-old age bracket are currently living with their parents.

Something has fundamentally gone wrong.

Our economy is broken, and anyone that cannot see this is just being foolish.

So what is the solution?

See the original article >>

How Ominous Is This Long-Term S&P 500 Sell Signal?

by Dana Lyons

The other day, we wrote a post about one of the continuing longer-term positives in the market: the persistent new highs in the NYSE Advance-Decline Line. Today, we explore one of the recent long-term negative developments in the market. One of the most widely used indicators among market technicians is the Moving Average Convergence Divergence, or MACD. As the name implies, it is composed of various moving averages and is designed to measure the momentum of a stock or index. Since “price” is its only input, it can be applied to any time frame, from intraday to daily or weekly, etc. Today, we look at MACD from a long-term perspective: a monthly basis. The reason is that as of the end of January, the monthly MACD on the S&P 500 issued a “sell” signal. We took a peek at the indicator from a few different angles to see just how concerning this signal is.

First, sell signals are typically generated when the MACD line crosses below an indicator line, usually the 9-period moving average of the MACD. That is what we are using here. In this chart, you can see the monthly MACD sell signals for the past 20 years.

You can see that there were a few head fakes leading up to the signal in January 2000 that forewarned the loss of momentum and cyclical downturn in the market. The same thing occurred in July 2006 before a timely signal in 2007. No indicator is perfect and the MACD is no exception. It will issue sell signals before any major cyclical selloff; however, it will also issue false signals. Overall, here are the results from a couple different views following monthly MACD sell signals on the S&P 500 going back to 1955.

There have been 26 monthly MACD sell signals on the S&P 500 since 1955. The first column in the table measures the  returns following these signals until the MACD generated a buy signal (i.e., the MACD line crossed above the signal line). At an average gain of +3.9%, we see right off the bat that this sell signal is not a death knell for the market. Furthermore, 21 of the 26 sell signals actually resulted in a gain by the time the MACD issued a buy. Looking a bit further, all was not rosy, though. The average maximum loss, -8.8%, on a monthly closing basis following the sell signals actually did exceed the average maximum gain of +7.7%. So, although by the time the MACD gave a buy signal the S&P 500 was usually higher than at the time of the sell, there was typically some turbulence along the way.

We also listed the 2-year average maximum drawdowns and maximum gains following the signals. Considering these signals are based on monthly data, their relevance is longer-term in nature and thus a 2-year horizon may be most pertinent. As the table shows, while we found that the average drawdowns are a bit worse than those following all months, and the maximum gains slightly lower, there is no compelling statistical evidence from this data to scare investors out of the market.

The problem is while there have been some MACD sell signals that have led to horrific cyclical bear markets, most signals have been rather benign. The key is to identify those that are not head fakes. And although we did not do an exhaustive study into the intricacies of each signal, we did parse the data a bit in an effort to isolate some possible characteristics of those signals that were legitimate.

First, we broke the signals down based on the level of the Cyclically Adjusted Price/Earnings Ratio, or CAPE, at the time. We wanted to see if those signals generated when valuations were elevated proved more effective. With the CAPE currently sitting around 26, this seemed worthwhile to examine. This chart shows the signals occurring when the CAPE was above vs. below the 20 level.

As one can see, many of the signals during the secular bull market of the 1980’s-90’s occurred when the CAPE was subdued, i.e., less than 20. And the same more recently with the signal in September 2011. There were a few valid signals during the 1970’s secular bear market, however, that occurred without an elevated CAPE. Furthermore, the handful of signals in the mid-1990’s occurred with the CAPE above 20 (though, closer to 20 than the current 26) and we know the market exploded higher from that point. Breaking down these signals, we get the following results.

The returns following signals when the CAPE was above 20 were a little worse overall than the average of all signals. The return until the MACD buy signal was just 1.5% as opposed to almost 4% for all signals. Additionally, the max loss:gain until the buy signal was about 9:6 versus the 8:7 for all signals. The 2-year numbers were slightly worse for the drawdown and max gain, but not materially. All in all, the signals occurring alongside an elevated CAPE are a bit worse than normal, but again not a consistent marker of doom for the market.

Lastly, we cross-checked the monthly MACD sell signals versus the proximity of the S&P 500 to its long-term trend at the time of the signal. For “trend”, we are using a long-term exponential regression line spanning from 1871 to the present (see this post for some more background). We understand that this method is not perfect, but we feel it still portrays a reasonable view of the extent of which the market is “overbought” or “oversold”. At present, the S&P 500 is more overbought versus its long-term trend than at any time in history other than the 1998-2001 period. In this chart, we broke the signals down by those occurring while the market was more than or less than 10% above its long-term trend.

Though not perfect, this factor proved a little more effective in separating those legitimate sell signals from failed ones. Here are the results based on the above or below 10% overbought variable.

Average returns from MACD sell signal to buy signal when the S&P 500 was over 10% above its long-term trend were essentially flat at +0.3%. This contrasts with the average of all signals of nearly +4%. Furthermore, the average max loss versus max gain until the MACD buy signal approached 2:1. And looking out 2 years, the average max drawdown was -16.3%, almost double that of all months. On top of that, at +16.5%, the average max gain was basically no better than the average drawdown. Over a 60-year period that saw the average max 2-year gain triple that of the average drawdown, this is statistically significant.

The bottom line is that if you’re looking for the holy grail (and we don’t suggest you do), the MACD is not it. In fact, its monthly sell signals have been inconsistent to average, at best. That said, there have been several very timely signals which occurred very near the peaks of cyclical bull markets. The signals generated in 1969, 1973, 2000 and 2007 led to 2-year max loss:max gain ratios of -28:2, -41:1, -25:9 and -50:-5, respectively. More concerning are the conditions accompanying the recent monthly MACD sell signal. With a CAPE of 26 and the S&P 500 90% above its long-term trend, variables are in place which have led to the more effective MACD sell signals historically, i.e., worst losses. There certainly may be bigger concerns out there. However, this loss of momentum signaled by the MACD, in conjunction with those other concerns, is another unwelcomed development for a market as stretched as this one is.

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Why central bankers around the world have lost control

by Stephen Roach

Quantitative easing isn’t up to the task of restoring sustainable growth

NEW HAVEN, Conn — Predictably, the European Central Bank has joined the world’s other major monetary authorities in the greatest experiment in the history of central banking.

By now, the pattern is all too familiar. First, central banks take the conventional policy rate down to the dreaded “zero bound.” Facing continued economic weakness, but having run out of conventional tools, they then embrace the unconventional approach of quantitative easing (QE).

The theory behind this strategy is simple: Unable to cut the price of credit further, central banks shift their focus to expanding its quantity. The implicit argument is that this move from price to quantity adjustments is the functional equivalent of additional monetary-policy easing. Thus, even at the zero bound of nominal interest rates, it is argued, central banks still have weapons in their arsenal.

Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.

But are those weapons up to the task? For the ECB and the Bank of Japan, both of which are facing formidable downside risks to their economies and aggregate price levels, this is hardly an idle question. For the United States, where the ultimate consequences of QE remain to be seen, the answer is just as consequential.

QE’s impact hinges on the “three Ts” of monetary policy: transmission (the channels by which monetary policy affects the real economy); traction (the responsiveness of economies to policy actions); and time consistency (the unwavering credibility of the authorities’ promise to reach specified targets like full employment and price stability).

Notwithstanding financial markets’ celebration of QE, not to mention the Federal Reserve’s hearty self-congratulation, an analysis based on the three Ts should give the ECB pause.

In terms of transmission, the Fed has focused on the so-called wealth effect.

First, the balance-sheet expansion of some $3.6 trillion since late 2008 — which far exceeded the $2.5 trillion in nominal gross domestic product growth over the QE period — boosted asset markets. It was assumed that the improvement in investors’ portfolio performance — reflected in a more than threefold rise in the S&P 500 SPX, +1.30%  from its crisis-induced low in March 2009 — would spur a burst of spending by increasingly wealthy consumers. The BOJ has used a similar justification for its own policy of quantitative and qualitative easing (QQE).

The ECB, however, will have a harder time making the case for wealth effects, largely because equity ownership by individuals (either direct or through their pension accounts) is far lower in Europe than in the U.S. or Japan. For Europe, monetary policy seems more likely to be transmitted through banks, as well as through the currency channel, as a weaker euro EURUSD, -0.01%  — it has fallen some 15% against the dollar over the last year — boosts exports.

The real sticking point for QE relates to traction. The U.S., where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point. In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered U.S. households when the property and credit bubbles burst.

Real consumption has grown slowly since the recession, despite massive quantitative easing by the Fed.

Indeed, annualized real consumption growth has averaged just 1.3% since early 2008. With the current recovery in real GDP on a trajectory of 2.3% annual growth — two percentage points below the norm of past cycles — it is tough to justify the widespread praise of QE.

Japan’s massive QQE campaign has faced similar traction problems. After expanding its balance sheet to nearly 60% of GDP — double the size of the Fed’s — the BOJ is finding that its campaign to end deflation is increasingly ineffective. Japan has lapsed back into recession, and the BOJ has just cut the inflation target for this year from 1.7% to 1%.

Finally, QE also disappoints in terms of time consistency.

The Fed has long qualified its post-QE normalization strategy with a host of data-dependent conditions pertaining to the state of the economy and/or inflation risks. Moreover, it is now relying on ambiguous adjectives to provide guidance to financial markets, having recently shifted from stating that it would maintain low rates for a “considerable” time to pledging to be “patient” in determining when to raise rates.

But it is the Swiss National Bank, which printed money to prevent excessive appreciation after pegging its currency to the euro CHFEUR, +0.31%   in 2011, that has thrust the sharpest dagger into QE’s heart. By unexpectedly abandoning the euro peg on Jan. 15 — just a month after reiterating a commitment to it — the once-disciplined SNB has run roughshod over the credibility requirements of time consistency.

With the SNB’s assets amounting to nearly 90% of Switzerland’s GDP, the reversal raises serious questions about both the limits and repercussions of open-ended QE. And it serves as a chilling reminder of the fundamental fragility of promises like that of ECB President Mario Draghi to do “whatever it takes” to save the euro.

In the QE era, monetary policy has lost any semblance of discipline and coherence.

As Draghi attempts to deliver on his nearly two-and-a-half-year-old commitment, the limits of his promise — like comparable assurances by the Fed and the BOJ — could become glaringly apparent. Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.

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Greece Just Blew Up The Empire's Death Star Of Debt

by Charles Hugh-Smith

The Greek Elites and kleptocrats are terrified of the discipline that leaving the euro will impose, but the general public should welcome the transition to an economy and society that has been freed from the shackles of Imperial debt and the kleptocracy that has bled the nation dry.

Although the financial media is blathering about negotiations and gamesmanship, the truth is Greece just blew up the Empire's Death Star of debt. There's nothing left to negotiate except the official admission that the Imperial Death Star of debt, the most fearsome threat in the galaxy, has been blown to smithereens.

There are three fundamental points that need to be emphasized, mostly because they've been lost in handwringing, fearmongering and the ceaseless chatter of propaganda shills.

1. Impaired debt and defaults result from imprudent underwriting and lender incompetence/ greed. Since when did it become accepted policy to reward imprudent lending, incompetence and greed?

Classical Capitalism is very clear on what should happen to lenders who ignored risk management; they get destroyed. As imprudently issued loans default, the losses pile up and the lender become insolvent. At that point, Capitalism kicks in and the management is fired, the stock goes to zero, the lender's assets are auctioned off and the creditors are issued whatever remains after wages, taxes, accounts payable, etc. are paid.

There's nothing complicated about it: Capitalism requires the discipline of losses being taken by those responsible, the firing of incompetents and the destruction of imprudent lenders.

Yet somehow the dominant narrative has reversed this essential core of Capitalism into blaming the borrower for the losses.

Look, if someone offers to loan me a billion dollars with no collateral and no assessment of the risks that I might not be able to pay the interest or principal, then who's the fool? The idiot who wants to give me $1 billion without any risk assessment, or the borrower who takes the "free money" being offered?

Yes, no one should borrow money that they can't pay back, blah blah blah, but the primary fiduciary responsibility is on the lender to not offer loans to marginal borrowers and those at high risk of defaulting on their debts.

Yet the official line on debt is "the lenders are blameless, the borrowers are at fault and should pay." The borrowers were imprudent to take on debt they couldn't service, but it is the lenders who made the bad loans who are ultimately are at fault and who should suck all the losses.

Let's set aside the propaganda for a moment and get real: anyone with the slightest knowledge of Greek finances and the power structure of the Greek economy/society knew it was insanely risky to loan Greece billions of euros. No one can deny this, yet somehow the lenders deserve to be paid for their avarice, stupidity, incompetence and total disregard for the standards of prudent lending? No, they deserve to be destroyed--closed down and their assets auctioned off.

2. Greece will not be wiped out by leaving the euro currency--it will be freed to rebuilt itself with prudent fiscal management and policies that reward investment and penalize risky borrowing, speculation and corruption.

Here's the thing about Greece issuing its own fiat currency--it will force fiscal discipline in a way that the euro did not and could not. This is why the Greek Status Quo is quivering with fear--the gravy train of irresponsibility enabled by the euro is ending, and they are terrified of living within their means and having to face the discipline that the market will impose on the Greek fiat currency.

If there's one thing Greece needs more than anything, it's the discipline and the rewards of the market. Any nation that issues its own fiat currency has a choice: it can exercise fiscal prudence and enforce policies that reward entrepreneurism, prudent lending, savings, wise investments, fair taxation, etc., or it can try to prop up its bloated, corrupt kleptocracy by printing rivers of fiat money.

If it chooses the Dark Side and prints money in excess, it will soon drive the value of that currency to near-zero. The kleptocracy that hoped to benefit from money-printing is impoverished or forced to move their capital elsewhere.

In other words, Greece returning to being responsible for its own currency is a good thing. The new currency will be valued cheaply relative to other currencies at first, and this is also a good thing, as imports will be unaffordable for all but the wealthy (kiss BMW sales in Greece good-bye) and everything produced in Greece becomes a bargain globally.

This will attract capital seeking places where it can make a profit and is treated fairly, and it will enable Greece to rebuild its export sector and boost its substantial tourist trade.

The promise that marginal borrowers would be transformed into sterling-credit borrowers by adopting the euro was always a fantasy--and a painfully visible fantasy at that. Anyone with their eyes even partially open could see that the vast differences in productivity, credit, risk and culture between the eurozone nations made the euro unworkable from the start.

It was equally visible that the eurozone's inept policies and loose lending standards would obscure these fundamental differences until the damage would be too great to hide--which is exactly what transpired.

3. The hundreds of billions of euros in so-called bailouts did not help Greece--all they did was bail out imprudent lenders and Euroland Elites. Virtually none of these vast sums helped the Greek nation or its people; what little did stay in Greece flowed to the kleptocrats that continued to rule Greece.

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