Today I present a story in six charts. Entire books could be written about the complex interactions of money, oil and credit, but let's try to keep the story as simple as possible.

Here is the monetary base of the U.S. Notice the big ramp-up as the Federal Reserve responded to the global financial crisis with a flood of liquidity/expansion of base money supply.

Here is base money and the price of oil in U.S. dollars. Not a perfect correlation, as there are many inputs to the price of oil (geopolitics, currency fluctuations, etc.) but the correlation is still significant: when base money goes up, so does the price of oil.

Meanwhile, oil exports have topped out. Oil exporters are using more of their oil domestically, leaving less to export. This raises the specter of an imbalance of demand-supply, i.e. insufficient supply to meet demand. In that case, prices rise.

Bank credit has skyrocketed. Plenty of credit sloshing around the system. This curve looks exponential, i.e. unsustainable.

But ample credit doesn't necessarily lead to growth (as measured by gross domestic product). Here we see the diminishing returns of credit: credit soared from 1990 to 2008, while GDP growth drifted lower.

Bank assets have risen exponentially along with credit.

Bank assets have risen along with credit: this reflects the financialization of the U.S. economy. But a funny thing happens when oil supply tops out and base money expansion drives oil higher when priced in U.S. dollars: when the cost of oil rises, the economy stalls out.

Expanding base money pushes the price of oil up to stall speed, while expanding credit has a diminishing effect on the real economy. It does however handsomely boost bank assets.

My apologies for the lack of email response. I have been traveling for the past five days.

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.


Readers forum: DailyJava.net.



Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

---

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

---

NOTE: gifts/contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Helen S.C. ($5), for yet another most generous contribution to this site--I am greatly honored by your steadfast support and readership.

---

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Subscribers ($5/mo) and contributors of $50 or more this year will receive a weekly email of exclusive (though not necessarily coherent) musings and amusings.

At readers' request, there is also a $10/month option.

What subscribers are saying about the Musings (Musings samples here):

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Your readership is greatly appreciated with or without a donation.

---

For more on this subject and a wide array of other topics, please visit my weblog.

                                                           

All content, HTML coding, format design, design elements and images copyright © 2012 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this essay to your site, or printed a copy for your own use.

Terms of Service:
All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.