POSTED: 29 JULY 2008 - 7:30am HST

Peak Global Economy

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A View from the Peak of the Global Economy

By Byron King on 25 July 2008 for Daily Reckoning -

The theme of this year's Agora Financial Investment Symposium is 'View From the Peak.' The title alludes to Peak Oil, as well as peak everything else.

We have 6.5 billion people on Earth, with more arriving every day. A fortunate few hundred million of us already live in the developed world. And now several billion other souls are working their way out of poverty, and that takes resources.

So the world demand for everything (energy, steel, cement, food, water, you name it) is rising. And that demand is bumping up against physical limits of resources and/or the ability of mankind to extract those resources. As the saying goes, 'Whoops!'

So the 'View From the Peak' analogy is also to mountain climbing. The most dangerous part of any mountain climb is not necessarily climbing uphill. It's often the descent.

On the way down, there is this sense that you understand the mountain, because you climbed it. But going down a mountain is quite a bit different than going up. So beware the false sense of understanding and security as things start to unwind.

On the energy front, we've seen several days of declining prices. Oil has led the way, falling from about $146 to $126. Coal and natural gas sold down, as well, as did many energy companies and service firms.

So we've seen quite a tumble, led by declining oil. But then again, oil had quite a run-up. I've said before that oil was climbing too far, too fast. And over the past few weeks, oil tested the $150 mark. But like Gen. Pickett at Gettysburg, this charge to $150 failed.

What seems pretty clear is that at $140, a lot of things in this world just don't work anymore. Airlines are, obviously, one business not built around highly priced oil. Worldwide, 24 airlines have gone bankrupt so far this year.

But there are other parts of the transport system, the food system and the economy that are cratering with the oil run-up.

Sure, a lot of things don't work well even with oil at $130, $120 or $110. But that's not the point. It seems that above $140, the developing world just stops developing. We saw pain at $100 and above. We were beginning to see true demand destruction above $140. So oil pulled back, and perhaps for a while.

I should add that the recent rally in financials pulled a lot of money out of oil.

Last week, the U.S. monetary authorities made a fateful decision. Rather than let Fannie Mae and Freddie Mac fail, or take these two horribly mismanaged firms over via receivership, the U.S. Fed and Treasury Department, essentially, nationalized the bad risks and socialized the losses. This is going to come back to haunt and hurt us, like a guy with a chain saw on Halloween night.

And despite the oil pullback, crude petroleum is still double the price of what it was just two years ago. So we are living with a 100% increase in the nominal oil price.

The oil run-up was not all just insatiable demand meeting flat supply. I've discussed this in other articles. The U.S. dollar has been mismanaged for decades, and thus we live in chronically inflationary times. And couple this with the horrid shenanigans of Wall Street and the overall U.S. banking system in this modern era. Ugh!

Remember how some people used to dismiss the fact that the U.S. was deindustrializing? Remember how some people used to praise the so- called 'service economy'? They would say things like, 'The U.S. capital markets are the most efficient in the world.'

To which we now reply, 'Oh, really?'

How could the U.S. banking and finance system ever have gotten so bad? Don't we have regulators who are supposed to look over the shoulders of the bankers? Don't they teach people how to be careful in business schools? Heck, here at Agora Financial, we've been writing about the looming implosion for several years. It's not like it was some state secret.

So now we are at the moment of decision. How many billions of dollars does the U.S. banking system have to lose? OK, how many tens of billions? Hundreds of billions? When you add in the toxic derivative instruments, it adds up to trillions of dollars. And it looks like the nation is on the hook for a lot of it.

Where can things go from here, what with all that worthless paper floating around?
At this stage, I can only re-emphasize that you ought to own some precious metals. Own gold or silver coins or bars, ETFs or small- or large-cap shares. But own something. It may well be the only way you can preserve your savings and purchasing power over the long haul.

see also:
Island Breath: Fannie Mae & Freddie Mac Mess 7/14/08
Island Breath: The Perfect $torm Approaches 6/28/08
Island Breath: Report from the Bank of Banks 6/28/08