Theft By Other Means II: When the State Steals Property, Is It Not Theft

The Elites of the Savior State are making up their declining tax revenues via grabbing private property under the guise of "punishing criminals." Sounds good until the criminal is you and your crime was unpaid traffic fines.

One key feature of Third World Kleptocracies/Police States is illegal search and seizure. Read the story below for an example on American soil. The propaganda is that "rogue elements" are to blame (naturally) but the reality is that the State (central government) has increasingly extended its kleptocratic powers to seize private property essentially at whim.

As noted in my entries linked below, "unpaid traffic fines" can be grounds for seizure in some locales.

"Legalizing" search and seizure is a simulacrum of justice and democracy. The original justification for seizure-of-ill-gotten-assets was the Federal RICO statutes from the 1960s Racketeer Influenced and Corrupt Organizations Act (wikipedia).

Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes-- 27 federal crimes and 8 state crimes--within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $250,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity."

RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.

The entire concept was intended as a weapon against organized crime. With RICO, a criminal gang which had extorted millions of dollars and purchased property with the money would find the property seized, and those who had been extorted could file claims against the gangsters.

So far so good--the State steps in to protect "the little guy" from parasitic criminal gangs.

But that original intent has slipped the bounds of justice and democracy, and now local governments and authorities feel free to seize property for an absurd range of "crimes" which have nothing to do with large, secretive, extremely wealthy organized crime gangs.

Here is the context for the discussion:

Og my gosh, we're short of money here! Go stripmine some citizens with no power or political juice. And make it snappy!

Correspondent David C. reports on the outrageous abuse of search and seizure in Minnesota.

I read your two related articles on "debt prisons" "Upholding the Law" or Simply Theft by Other Means? (October 28, 2009) and When the Savior State Becomes the Enemy of the People (October 30, 2009) and "Criminalizing Poverty For Profit." They were an interesting way to look at driving fines.

On a related subject, here in Minnesota we've had some big problems with corrupt cops. The Metro Gang Strike Force was created to go after criminal gangs, but ironically this year we found out that they were a criminal gang! The police were taking property and cash for personal use or to fund the strikeforce after budget cuts.

Lawmakers hear how forfeiture laws work in theory, in reality:

After hearing hours of testimony Thursday about how state forfeiture laws are supposed to work, many legislators had vanished by the time two citizens spoke of their problems after police seized their property.

One of them was Terrance Frelix Sr., 34, of Minneapolis. He and a business partner owned some properties and were running behind on a mortgage in 2006, Frelix testified at a hearing. His partner borrowed $4,000 and had just given Frelix the money when a Metro Gang Strike Force officer took them in for questioning.

Police released them without charging them with a crime. The strike force later informed Frelix they were forfeiting the cash and Frelix's truck.

Frelix had been outside his vehicle when police swooped in and — unbeknownst to him, he said — a relative was smoking a marijuana joint inside. Police said the small amount of marijuana was the reason they were forfeiting the property.

Frelix went to court but hasn't gotten his property back. He said he's still out the $4,000, plus $3,500 in attorney's fees. His truck is gone, along with the property management equipment inside.

"Even to this day, I'm still frustrated," he said after Thursday's hearing.

Earlier in the hearing, legislators had been walked through flow charts and other documents explaining how the state's forfeiture laws work.

After hearing Frelix's account, Sen. Ron Latz, DFL-St. Louis Park, said the information about what was happening on the streets was"nowhere near what happens on the flow chart." Thursday marked the fourth joint legislative committee hearing held in the wake of the Metro Gang Strike Force's demise.

An independent review of the now-defunct strike force, released in August, found some officers seized money and property from people never accused of a crime, then took the property for personal use. The FBI is investigating.

David C. commentary continued:

A State law allows the police to seize property from suspects without getting a warrant and without charging them with a crime. This seems very unfair to me if not unconstitutional, what happened to the Fourth amendment?

Also, people challenging seizures in civil court waive protections against self-incrimination, exposing themselves to charges. One guy lost his house even though he wasn't charged with a crime! Gang Force seizures prompt look at law: A defense lawyer points to unfairness, potential for abuse at legislative hearing prompted by Metro Gang Strike Force actions

A state law allowing police acting on their own to seize property from suspects -- often without getting warrants -- is unfair and should be overhauled, defense attorneys told legislators Thursday.

"This creates a potential for abuse," said lawyer Howard Bass. "There's no checks and balances."

Bass said the government should have to prove the property was related to a crime and deserved to be seized. Currently, property can be forfeited in an administrative procedure unless the owner demands a court hearing within 60 days of its seizure.

And the court process is complicated. Property owners need to serve proper notice on the police agency and follow court rules of civil procedure and discovery.

Sometimes people who have not been charged with a crime don't challenge seizures because it would cost more in attorney fees than the property is worth, said Tom Plunkett, an attorney with the Minnesota Association of Criminal Defense Lawyers.

Also, people challenging seizures in civil court waive protections against self-incrimination, exposing themselves to charges.

Adrian Ramiraz testified that the Strike Force seized his house in Crystal in 2008, though he, too, wasn't charged. He said he hasn't been able to recover it.

David C. commentary continued:

Perhaps in the future you may want to write about declining tax base and how government uses seizures primarily to fund itself instead of fighting crime. It seems to me that the police shouldn't be allowed to seize things as this corrupts their mission of fighting crime to going after money. Allowing a judge to order seizures would be better, but then one could also argue that even this is unfair if there are two drug dealers and their cars are seized and one car is worth $50,000 and the other one worth $10,000, one could argue that they got unequal punishment.

Thank you, David, for bringing a critically important issue to our attention. We might ask how did seizure of property become construed as the State's right, justified under the broad justification of "punishment"? Since when did smoking a $4 marijuana cigarette become grounds for seizure of $4,000 of private property which is essential to one's livelihood (a truck)?

I have sympathy for working-class stiffs who typically bear the brunt of these "legal extortions" by Kleptocratic States Masquerading as Democracies. I have worked in everything from construction to plantations to quantitative stock market research in my 40+ years of labor, and many of the guys I hired in my building days had served time for absurd drug convictions. One very sweet-natured young man with Native American blood had served time for manslaughter because he happened to be on the premises where a buddy of his OD'ed on smack and Lord-know-what.

Unless you've been protected from streetside reality, you know how it works:the upper-middle class kid (son of an attorney, local business magnate, politico, etc.) gets busted for possession or maybe even low-level dealing. His Dad shows up with big legal firepower and springs him from jail. Charges are either dropped or downgraded to misdemeanor charges so they can be expunged from the record after a few months of probation. The rich kid's car is not seized because there would be Heck to pay.

The experience of the working-class kid is entirely different. For all intents and purposes, he resides in a Third World police state in which authorities have few limits. The non-"fortunate son" kid finds himself in jail and no one to spring for bail, and he's facing felony charges with a long prison sentence.

The D.A. smells an easy felony conviction which looks good on his/her record so a trumped-up plea bargain is presented--we'll cut your sentence to "only" X years if you rat out your pals, etc. The poor kid's cash and beater vehicle are seized, and he serves hard time for a "crime" which earned the rich kid a few uncomfortable hours in jail and court, and a wrist-slap probation.

If I sound bitter, it's because I am. I have plenty of cops in my family and circle of friends, and it's usually not the cops--it's the system. One young man who worked for me got busted on some trumped-up "dealing" charge and his response was to push his car up to 90 miles an hour on a deserted road and then drive off a cliff. He died rather than do long jail time for a trivial "crime" a rich kid would have skated past in one meeting with The Powers That Be.

Just as ominously, correspondent J.P.B. reports that private firms with State-approved authority are wielding Police State technology and tactics to pursue their "job" of repossessing vehicles.

Wanted to give you an update corollary. In today's Columbus DispatchBusiness section, page D6, is an article "Repossessions slowing down, but agents adapt." It is a wire article picked up from the Chicago Tribune, and it discusses repo men using optical character recogniton cameras to read license plates and store the info in a database. Very interesting.

Indeed. The State's strategy is clear: criminalize all sorts of behaviors like not paying traffic fines and then use that "criminality" as the phony justification for illegal search and seizure.

If you're not afraid of the State, you should be.

Permanent link: Theft By Other Means II: When the State Steals Property, Is It Not Theft?

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Healthcare "Reform": the State and Plutocracy Stripmine the Middle Class (Again)

Healthcare" a.k.a. sickcare is not about health at all, it's about profit and power. The State and the sickcare cartels have partnered to transfer more of the nation's wealth to their Power Elites.

One of the primary themes of Survival+ is that the State and the Plutocracy are partners, and their joint goal is to divert an ever-greater share of the nation's income into their own pockets.

From the Survival+ point of view, all the ideological positions on "healthcare" which are being sold like commodities are laughably detached from reality. "Healthcare reform" has nothing to do with either socialism or capitalism. Socialism is the Veterans Administration system (owned lock, stock and barrel by the government and run by the government) which offers remarkably cost-effective if basic care to millions of vets, and capitalism is cash-only clinics like those offered in Mexico, India and Thailand and in some Wal-Mart walk-in clinics.

The entire "healthcare reform" enterprise is not about providing care to all--that is the sales pitch. It is about milking the entire populace so more of the national income is transferred to the "healthcare" cartels and State (central government) Elites.

Here are the three key realities which are not addressed by "healthcare reform":

1. The "healthcare" cartel (and thus its partner the State) is not interested in health because health is horribly unprofitable. People who eat well and are mentally and physically fit have no need for costly procedures, treatments, tests and pharmaceuticals, hence they cannot generate revenues or profits.

Managing diseases is what's profitable, so the system is oriented not at prevention or nurturing health but at enabling chronic disease which is very profitably managed with pharmaceutcals, surgeries, etc.

2. Once the connection between service and customer is broken and the money to pay for all products and services is printed or borrowed in essentially unlimited quantities, ontologically (inherently) there are no possible price controls. This is why an elderly gent like my friend's father can enter the hospital with a non-life threating issue (gallstone), receive treatment which didn't really resolve his health issue and then Medicare is billed $120,000 for one week of "care" regardless of the efficacy.

When the service is "free" (that is, payment is borrowed/printed in unlimited quantities), then the cost of care will necessarily push up to the ultimate limit of the system's ability to pay. Medicare and Medicaid already exceed the Pentagon's budget, and they are growing three times faster than the long-term trend rate of the U.S. economy.

3. There is no "fair" way to ration care; the U.S. simply rations it by essentially random "legal lottery" payouts/jackpots/penalties and other regulatory means. The bottom line is "healthcare for all" without limits is unaffordable everywhere--it is simply more unaffordable in the U.S. system. The wealthy in rationed-care systems simply opt out and go buy "unrationed care" elsewhere, cash on the barrelhead.

The dirty little secret of supposedly "model" State healthcare plans in Europe and Japan is that they are running up against the limits of what those economies can afford. If you disagree, go ask the State finance ministries of France, the U.K., Germany and Japan for their 10 and 20-year projections of national healthcare costs.

No nation can increase healthcare spending 6% while its underlying economy grows 2%. In a mere 8 years, healthcare costs will rise over 50% while the GDP will rise (at best) 15-20%. That is the essence of unsustainability.

Medical Care Prices Are Rising Faster Than Overall Inflation (BusinessWeek)

The U.S. spent an estimated $2.4 trillion on health care in 2008, about 16.5% of gross domestic product and a 6% increase from a year earlier. Medical care prices are rising faster than overall inflation, and the burden on consumers continues to grow.

When everything is "free to all" then technologies and medications quickly reach marginal returns: yes, this drug is only effective in 15% of the case, and yes, it costs $10,000 a month, and might actually hurt some patients; but since the State is paying for everything, why not give it to everyone who might be helped? And if it's restricted, then isn't that rationed?

The "healthcare" cartels' goal is to carve off a greater share of national income for themselves. This isn't capitalism; it's monopoly capital-crony capitalism, the very opposite of free-market capitalism. The State's political class is a willing partner in this transfer of wealth to Elites because it welcomes the hundreds of millions of dollars in donations offered up by tort attorneys, Big Pharma, and all the other players milking the "healthcare" system for billions.

So who ultimately pays for "free" "sickcare"? The productive middle class and working poor. Healthcare which doesn't actually improve health but simply profitably manages chronic illnesses is in essence a stupendous tax on the productive class of the nation. The healthcare cartels are delighted that "healthcare" has climbed from 6% of GDP to 17%, and they will be delighted to see it rise to 20%, then 25% and 30%, until at some point it bankrupts the nation, as it most certainly will for the above reasons.

Until the State collapses in insolvency, "healthcare" acts as a giant machine which diverts money from the middle class and working poor into the coffers of the sickcare cartels and their State-Elites partners.

You want a system that works? Then depoliticize and de-cartel the system entirely. Jettison the entire sickcare system and revert to cash-only for every product and service, and offer a voluntary VA-type system which people can opt into if they choose to pay the insurance and co-payments (which VA does not have) and live with the defacto rationing of long waits and basic care which is limited by the budget alloted. There is no "entitlement," only whatever care which can be distributed for a given amount of money. Thus it's not the budget which can rise but the efficiency of the system in doing the most possible with a set sum of money.

This is the only sustainable way to provide care without bankrupting the nation.

These two systems--"pure socialism" and "pure free-market capitalism"--can co-exist quite amiably as long as people get to choose from a range of imperfect choices. If health were more profitable (to providers and to consumers) than managing disease, then entirely different choices and incentives would arise.

Permanent link: Healthcare "Reform": the State and Plutocracy Stripmine the Middle Class (Again)

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When Things Fall Apart

Two new books authored within the circle of oftwominds.com address the coming unraveling: one speculative fiction, the other an analysis of devolution and prosperity.

Let's start When Things Fall Apart by referencing the source:
(tip o' the tam to Nina)

THE SECOND COMING
by William Butler Yeats (1865-1939)

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Though the poem was penned in 1919, doesn't it speak presciently to our era, too? The falconer circling ever farther away from the voice of its master could be interpreted as a spiritual metaphor for a culture lost in self-absorption, self-medication, greed and resentful entitlement, or politically as a metaphor for a populace slipping away from the voices of the Founding Fathers' principles.

In a nation increasingly diverging into hackneyed, hardened ideological camps, clearly the center (common ground, common sense) is not holding.

Author Chris Sullins' book, Operation SERF, a strategic action thriller serialized here earlier this year, imagines a future U.S.A. which has split into warring factions, and a blood-dimmed tide is loosed.

Here is Chris's summary of the scenario/plot:

Operation SERF is a Strategic Action Thriller set in the Unites States of America in the year 2023. After many years of economic depression, a terrorist act fractures the country. The stage is set for another Civil War as three factions battle for control of the pieces. The story takes place in many areas across the country, but centers on one extended family caught between the struggles of the rival factions. The reader will glimpse into the minds of both the leaders of the factions as well as the common person and travel along with them. "Operation SERF" is Part 1 of a forthcoming 3 part series.

You can read the first sample chapters on the Operation SERF home page.

A few readers objected to the violence depicted in the book, and I sympathize with the general view that we as a culture are drenched in endless depictions of violence as "the answer" to whatever problem is at hand.

Yet the terrible reality is civil wars are often horrifically violent events, and we should understand that is one outcome of many should things truly fall apart.

I think Operation SERF is unique in a number of ways, all of which stem from Chris's deep knowledge of history, his unconventional skepticism of the status quo understanding of our situation and his experience in the U.S. Army on the ground in Iraq.

While on one level the book is entertaining, on another level it is a serious exploration of human nature, patterns of history and the political culture of our nation.

Chris has a deft descriptive touch, and the book reads like a multi-threaded mystery. If you start Chapter 1, I think you'll be hooked.

My own book Survival+: Structuring Prosperity for Yourself and the Nation, explains why devolution of the status quo is predictable and irreversible, and how we can create a new prosperity for ourselves and the nation.

While I am enthusiastic about the ideas presented in the book, I'll let others supply a bit of praise (ahem):

"I've been a big fan of Charles Hugh Smith's insights since the day I first stumbled across his Of Two Minds blog. InSurvival+, he sets out a thoughtful and provocative vision of our future that should not be missed." Michael J. Panzner, author of When Giants Fall and Financial Armageddon

"Charles Hugh Smith is the savviest blogger in the USA these strange days. Nobody puts out a consistently wiser, truer, better-written message, day after day, than CHS. His views on surviving the hardships we face in economy and society are of the highest value and could not be more timely or astute." James Howard Kunstler, author of The Long Emergency and World Made by Hand

"Charles Smith provides a balanced, thoughtful, and prescient view regarding the dilemmas facing our fragile economy. From the collapse in the housing market to the growing power of the banking sector, our economic landscape is changing. Mr. Smith’s credibility comes from years of work and unlike other prognosticators, he has been right. His illuminating arguments and insights provide readers a glimpse into the challenging world we will now enter." Dr. Housing Bubble

"Your book is truly a revolutionary act." Kenneth Robertson

OK, now that we got that over with--let's talk money. The exchange value of theSurvival+ book ($19.95) is approximately one meal for a family at a fast-food restaurant or two tickets to a first-run movie. The price of the ebook (downloadable) versions is $11.95 or about one standard cheese takeout pizza.

The exchange value of the Operation SERF book ($13.99) is equivalent to a single pizza with one topping, or a sandwich and drink at a downtown restaurant. The Kindle version ($7.99) is equivalent to two coffee drinks at Starbucks or a single matinee ticket to a movie.

Oddly enough, people seem to have no problem spending $10 or $20 on coffee or a fast-food meal or a 90-minute movie, but a $20 book is "too expensive." Say what? Is something that might change your understanding of our society and economy "too expensive" at a mere $20?

You don't need to wonder if the books are any good or if they're your cup of tea: you can read huge swaths of them for free right now on the Operation SERF home pageand the Survival+ home page. It doesn't get any easier than this.

Chris has a family to support; he's not rich. I am self-employed; neither of us are "fortunate son" trust-funders. We get a few bucks from the sale of each book. If you buy the books, you can pass them on to other readers when you're done with them. Heck, read them carefully (don't bend the spine) and you can wrap them up and give them as a gift come Christmas.

My buddy G.F.B. reckons my book will be perfect for swatting cockroaches in his kitchen. Talk about multi-purpose! What are you waiting for?

Permanent link: When Things Fall Apart

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We Are What We Do Every Day

Thoughts on the passing of my stock market mentor, Stewart Pillette.

My stock market mentor and former boss, Stewart J. Pillette, passed away late last month at the age of 71. I worked for Stew for only a year and a half, Spring 1997 to Autumn 1998, but in that brief period I learned a lot from him about the market and quantitative analysis and about being a good boss.

I titled this entry We Are What We Do Every Day because it is a simple but profound statement. Stew was positive every day, even when things were going badly. Being positive was what he did every day. He was enthusiastic about the market, his weekly golf and his family, and lived his mission credo: "Get it early, get it right and make a difference."

We had a complex technology-dependent system to maintain, and snafus were constant. Market data came in via a satellite feed into a Linux box, and various processing steps required DOS and Linux line commands. When it all worked, Stew would exclaim, "I love technology!" And when it fizzled, he would exclaim with equal force, "I hate technology!"

His family recounted that Stew had been drawn to the priesthood as a young man, but ended up choosing to be a stockbroker. He worked at Drexel and other big houses until he struck out on his own in his 50s.

His system was based on plotting the second derivative of the rate of change in stocks' price movements rather than massaging the prices themselves. This created charts similar to MACD (moving average convergence/divergence) in appearance.

One of my jobs was to assemble the data to backtest the system, which had never been done. (It was basically a two-person office at this time.) The system identified the change in trend correctly about 80% of the time-- about the best that any system can manage over the long-term. The other 20% of the signals failed, often because of some unexpected news which sank the stock.

Stew was the sort of boss who would surprise you with a bonus check for a $170 on a Friday after a long hard week, shake your hand and thank you for your work. That is how I discovered the power of gratitude and unpredictable bonuses.

As his son Justin noted at Stew's memorial service, Stew would disagree and defend his view, but in ways which always respected others.

I think Stew could have become a millionaire many times over with his system but by his own account he was an impulsive trader who was drawn to the goal of "hitting one out of the ballpark." We learn not just from others' best traits but also from their weaknesses, and since I share these traits with Stew--perhaps that was part of our bond--then becoming a disciplined trader is what I am striving to "do every day."

Stew loved the market and golf, and though I don't play golf it is my observation that the market and golf share the characteristic of being fundamentally impossible in the sense that there is no perfect golf game and no perfect trade. A good game and a good trade are satisfying; aiming for perfection in either guarantees disappointment.

Justin told a story at Stew's memorial service which encapsulated his daily approach to life. When it was storming outside and heavy rain pelted down, Stew would bundle his young son and daughter into rain slickers and take them outside to splash around in the puddles and glory in the rain and wind.

The typical parental approach, of course, would be to prevent the kids from going outside in such foul weather. Stew was an exceptional parent and Justin observed that many of his friends were jealous of his relationship with his Dad.

That is high praise indeed, and not something accomplished by occasional effort. It was what Stew did every day.

We miss you, Stew. You were a good man.

In memoriam: Stewart J. Pillette, 1938-2009.

Permanent link: We Are What We Do Every Day

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Is Oil "Cheap" When Priced in Euros or Gold?

Since fossil fuels are the essential commodity for modern civilization, reckoning their "cost" is critical.

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Fossil fuels can be regarded as "cheap" or costly, depending on the context.How much energy does it require to extract and process the oil and gas, and then clean up the toxic mess created by the extraction, processing and transport?

Yes, hydrocarbons are toxic. Perhaps that should be the initial context of calculating the "cost" of fossil fuels.

Frequent contributor Gene M. submitted this important article from Counterpunch.com: The Inflated Promise of Natural Gas (Counterpunch.com is asking readers for donations now lest they shrivel. I kicked in a few dollars, as we need an independent media so very desperately.)

It turns out the "happy story" presented in the mainstream media/propaganda stories listed here yesterday left out all the toxic bits of the "abundant cheap natural gas" bonanza. Here's a taste of what was not covered in the MSM:

Meanwhile, major fracturing-fluid manufacturers refuse to reveal their products’ ingredients. (Industry leader Halliburton maintains that to compel it to list the chemicals in its products would be an “unconstitutional taking” of its intellectual property.) Investigators have managed to identify many of compounds used in fluids, and many are toxic. Some, including benzene, formaldehyde, 1,4-dioxane, ethylene dioxide and nickel sulfate, are confirmed carcinogens.

The "happy story" is that the wells are miles deep and thus beyond ground water. But much of the water and chemicals pumped down a mile is returned to the surface and must be dealt with as industrial waste. So much for being "cheap."

Correspondent Daniel D. checked in with this eye-opening account:

Just read your post about oil and frac technology and thought I'd chime in with my two cents. In summer 2008 I was a student working for a woman in a McMansion neighborhood in the Dallas/Ft. Worth area. Ft. Worth (and much of Texas) is under the influence of natural gas co's who have recently developed a technique for drilling beneath urban areas. (We mounted a campaign to stop them from putting a well on the neighborhood's golf course and in the course of events discovered evidence indicating that some of the Homeowners' Association board members were probably on the take... But that's another story)

Back to your post: This stuff is anything but cheap OR safe. They have to buy mineral rights from every land-owner in an urban area or pay residents royalties -- not the same as dropping a pipe in a supergiant Saudi reserve. Neighborhoods caught on and learned that if they cooperated they could jack up their prices.

And the environmental damage is severe -- Parker County's water comes out of the tap ready to burn... videos on Youtube show news stories where the anchor lights a glass of tapwater on fire. As for the fraccing chemicals, they are conveniently labeled "proprietary" and so do not need to be disclosed to authorities. This stuff is not the way for us to go in the future, just an unnecessary extension of our energy past ...

Thank you, Gene and Daniel. The entire "natural gas is abundant, cheap and clean" story which is being hyped and propagated by the MSM is the purest propaganda, as it leaves out all the practical obstacles and the punishing costs of dealing with the toxins pumped out with the gas.

Just in straight money terms,let's extend our inquiry into the cost of oil by pricing it in non-U.S. dollar contexts: euros and gold. Frequent contributor B.C. generously provided this chart of oil priced in euros, adjusted for consumer price fluctuations (year 2000=100), plotted against the GDP of the Eurozone:

click on chart for a larger version in a new browser window

Strikingly, even when priced in euros, oil is rising in cost even as the Eurozone GDP languishes at recessionary levels. Many commentators believe that spikes in the cost of oil are the defining factors which trigger recessions. If this has any merit, we might ponder what effect the sharp rise in oil prices even in euros portends for the global economy.

I asked frequent contributor Harun I. for a chart of the oil/gold ratio, and he graciously submitted this chart:

click on chart for a larger version in a new browser window

Oil priced in dollars is in black, and the gold/oil ratio is in red. Many analysts state this ratio in terms of "one ounce of gold buys X barrels of oil."

When gold was around $300 an ounce and oil was about $15/barrel in the late 1990s, then one ounce of gold bought 20 barrels of oil. When oil spiked to $147/barrel and gold was approximately $900/oz, then one ounce of gold bought a mere 6 barrels of oil.

Now that gold is $1,090/oz and oil is about $80/barrel, then one ounce of gold buys about 13.5 barrels of oil--not much more than when oil was "cheap" in the 1990s.

In other words: as all currencies depreciate against gold, then the cost of oil priced in those currencies rises even as it remains constant when priced in gold. But like all commodities, gold and oil fluctuate in relative value as well.

So are oil and natural gas "cheap" or "expensive"? That depends on what they're priced in and who's paying the hidden costs of the vast industry which extracts, processes and transports these fossil fuels.

Lastly, we might place the value of gas and oil in this context: how much will we be willing to pay if and when they become scarce?

"Just remember... the 5th of November." Have a pleasant Guy Fawkes Day.

Permanent link: Is Oil "Cheap" When Priced in Euros or Gold?

iPod and iPhone owners: Read Survival+ on your iPod or iPhone by downloading the Kindle app and then buying the book from the Kindle store. Here's how.

Buy the complete Survival+ in print, ebook or Kindle ebook formats.
Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

You can also find my work on AOL's Daily Finance and Seeking Alpha.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, D.M.T. ($50), for your outrageously generous donation via mail to this site, and for your kind words of encouragement. I'd like to send you a copy of Survival+... I am greatly honored by your support and readership.

Oil to $20/barrel or $200/barrel?

If the U.S. dollar strengthens and the global economy weakens as government stimulus runs dry, oil could plummet in a massive "head-fake" to $20/barrel.

Survival+ is now available on amazon.com.

Any discussion of the price of oil must factor in the relative value of the petro-dollar, a.k.a. the U.S. dollar. If the dollar plummets in value against other major currencies and gold, then oil could double in nominal price even as it remained constant when priced in other currencies or gold.

Setting aside speculative positions, the other major factor in pricing oil is supply and demand. Recently, a spate of mainstream media article have heralded massive increases in supply in natural gas and oil.

America's Natural Gas Revolution (WSJ.com)

Betting Big on a Boom in Natural Gas (BusinessWeek)

In summer 2008 the U.S. and much of the rest of the world were consumed by talk of peak oil and natural gas and fears that high fuel prices would persist forever. Today analysts still worry about the oil supply but far less about natural gas. U.S. gas producers, capitalizing on a technological breakthrough, have in recent years unlocked an enormous volume of natural gas in the shale rock under Colorado, Oklahoma, Pennsylvania, Texas, and other states.

According to a July report by the Colorado School of Mines, the U.S. now holds 1,800 trillion cubic feet of natural gas, one third of it in shale, the equivalent of some 320 billion barrels of oil. That's more than Saudi Arabia's 264 billion barrels.

Whew--now that we have more fossil fuel than Saudi Arabia, I guess we have nothing more to worry about. Uh, count me skeptical. The technological breakthough is calling "fraccing" for hydraulic fracturing, a technique which has been around for decades.

Basically, water is used to fracture rock or shale, enabling the gas to seep to extraction wells. Chemicals pumped down the wells can also enhance recovery.

All this sounds fabulous--except for the practicalities which are glossed over.How do you collect gas flowing into hundreds of widely spaced wells? With a network of pipes. That isn't quite as easy or cheap as dropping a pipe into a supergiant Saudi reserve. So how much will it cost to tap these giant reserves of gas and feed the gas into existing networks of transport?

Exactly what chemicals are used? How much do they cost to pump down and extract? How do you get the water to the hundreds of wellheads?

And perhaps most remarkably absent from the happy news--how much of this new natural gas production will simply be offsetting declines in other mature fields?

Similar advances in oil recovery technologies promise another 100 years of oil--or so we are told here: Another Century of Oil? Getting More from Current Reserves (Scientific American October 2009; subscription required to read entire article online; visit your local library to read it for free)

Forecasts that global oil production will soon start to decline and that most oil will be gone within a few decades may be overly pessimistic.

The author predicts that by 2030, thanks to advanced technologies, wells will be able to extract half of the oil known to be underground, up from the current average of 35 percent.

Together with new discoveries, the increased productivity could make oil last at least another century.

Once again, the article (written by a global oil company executive) is heavy on promise and glowing hype and short on costs. Is all this fancy recovery technology free? If not, then how much does it add to the extraction cost of each barrel?

All this seems to suggest something which these articles avoid mentioning: there may be more fossil fuel that is recoverable, but it will no longer be cheap. None of these articles addressed the possibility that all this "new" production will simply offset declining production elsewhere, which means global production would simply stay constant rather than increase to match rising demand.

Also left unsaid is the trivial amounts of oil and gas being recovered from aging fields by the costly new technologies. The example cited in the article is a large field in California that was expected to be depleted year ago which still produces 80,000 barrels a day. That is good news, to be sure, but the extraction only makes sense if oil is over $50 a barrel, and 80,000 barrels is a drop in the bucket of the 20 million barrels the U.S. uses each day.

It would take dozens of such vast fields to replace the sagging production from supergiant fields in Mexico, the North Sea and the Mideast.

With prices elevated to the $80/barrel level, constant supply (at high prices) has created a global glut in oil and natural gas--there are literally no storage facilities available to store more gas and oil. This suggests that if the global economy resumes its deflationary spiral down next year, then a grand imbalance between supply and dwindling demand might cause oil to crash in price--unless the U.S. dollar declined concurrently.

As readers know, I am expecting the dollar to actually rise, which would exert downward pressure on the price of oil (in dollars, of course).

Correspondent B.C. was kind enough to submit this chart and commentary.The chart displays the price of oil adjusted to the CPI (consumer price index) in which 1974=100. In other words, the price is in constant dollars, not nominal dollars; the chart removes inflation from the picture. Thus if today's dollar is worth 33 cents in 1974 dollars, then today's $3 a gallon gasoline would be $1 in 1974 dollars.

click on chart for a larger version in a new browser window

Adjusted for inflation, we see oil at its recent nadir in 1999 had returned to the price levels of the late 1960s. The cost spike created by the 1980 Iraq-Iran war was actually higher in real terms than the spike last year to $147/brl.

Here is B.C.'s commentary on how the dollar's rise or fall could drastically alter the price of oil.

US dollar (USD) and CPI constant, the nominal price of oil would need to fall back to the $40s to reach the CPI- and USD-adjusted level where recessions bottomed and new reflationary growth cycles commenced since the '90s.

However, were the USD to rally back to the earlier cyclical high or to par, for example, coincident with another deflationary episode, the nominal price of oil would have to fall to the low to mid-$30s, to as low as the low to mid-$20s, to reach the adjusted recession low since the '90s and before the early to mid-'70s.

That the nominal price of oil has generally tracked nominal trend GDP growth adjusted for the USD, all else equal, oil in the $20s would not surprise me over the next 1-5 years, especially if we see another deflationary scare and stock market crash and economic collapse in China-Asia.

Thank you, B.C. If the dollar strengthens substantially, as many of us expect in the short-term, then oil would drop in nominal price for U.S. residents and increase for those paying for oil in other currencies.

If deflation and global recession were to take hold--that is, if all the quantitiative easing and borrw-and-spend pump-priming fails to ignite "organic" (real) growth, then the price of oil could be hit with two deflators: the rise of the petro-dollar (USD) and a supply which greatly exceeds falling demand.

I illustrated this "head-fake" drop in prices before the final arrival of Peak Cheap Oil in 2008:

Many other observers are similarly alive to the possibility that oil could drop in nominal dollars to $20/barrel in a deflationary "head-fake" and then rise to $200/barrel once supply fell below demand and the dollar resumed its decline in purchasing power.

Frequent contributor Cheryl A. submitted an excellent interview with oil analyst Stoneleigh on the Automatic Earth blog. Stoneleigh suggested that oil could fall to $20 and then subsequently rise to $500 per barrel once demand exceeds supply.

What we need to keep in mind is the relative value in nominal dollars. If the dollar were to suddenly lose 2/3 of its value against gold and other currencies, oil would suddenly cost $200/barrel to U.S. residents even as it remained constant to those buying oil with other curencies.

Inversely, if the dollar were to strengthen, oil could fall in half when priced in U.S. dollars and skyrocket when priced in other currencies.

The main point is simple: tracking the price of oil in constant (adjusted) dollars illuminates the real cost of oil in purchasing power.

Permanent link: Oil to $20/barrel or $200/barrel?

Apple iPod and iPhone owners: There is an Amazon Kindle app for iPhone which enables you to view the Kindle ebook on your iPod or iPhone--I will try to post links to the app once I locate them.

Survival+ is now available on amazon.com.
Buy the complete Survival+ in print or ebook formats.
Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

You can also find my work on AOL's Daily Finance and Seeking Alpha.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Susan M. ($5/month), for your exceedingly generous subscription to this site. I am greatly honored by your support and readership.

Oil to $20/barrel or $200/barrel?

If the U.S. dollar strengthens and the global economy weakens as government stimulus runs dry, oil could plummet in a massive "head-fake" to $20/barrel.

Survival+ is now available on amazon.com.

Any discussion of the price of oil must factor in the relative value of the petro-dollar, a.k.a. the U.S. dollar. If the dollar plummets in value against other major currencies and gold, then oil could double in nominal price even as it remained constant when priced in other currencies or gold.

Setting aside speculative positions, the other major factor in pricing oil is supply and demand. Recently, a spate of mainstream media article have heralded massive increases in supply in natural gas and oil.

America's Natural Gas Revolution (WSJ.com)

Betting Big on a Boom in Natural Gas (BusinessWeek)

In summer 2008 the U.S. and much of the rest of the world were consumed by talk of peak oil and natural gas and fears that high fuel prices would persist forever. Today analysts still worry about the oil supply but far less about natural gas. U.S. gas producers, capitalizing on a technological breakthrough, have in recent years unlocked an enormous volume of natural gas in the shale rock under Colorado, Oklahoma, Pennsylvania, Texas, and other states.

According to a July report by the Colorado School of Mines, the U.S. now holds 1,800 trillion cubic feet of natural gas, one third of it in shale, the equivalent of some 320 billion barrels of oil. That's more than Saudi Arabia's 264 billion barrels.

Whew--now that we have more fossil fuel than Saudi Arabia, I guess we have nothing more to worry about. Uh, count me skeptical. The technological breakthough is calling "fraccing" for hydraulic fracturing, a technique which has been around for decades.

Basically, water is used to fracture rock or shale, enabling the gas to seep to extraction wells. Chemicals pumped down the wells can also enhance recovery.

All this sounds fabulous--except for the practicalities which are glossed over.How do you collect gas flowing into hundreds of widely spaced wells? With a network of pipes. That isn't quite as easy or cheap as dropping a pipe into a supergiant Saudi reserve. So how much will it cost to tap these giant reserves of gas and feed the gas into existing networks of transport?

Exactly what chemicals are used? How much do they cost to pump down and extract? How do you get the water to the hundreds of wellheads?

And perhaps most remarkably absent from the happy news--how much of this new natural gas production will simply be offsetting declines in other mature fields?

Similar advances in oil recovery technologies promise another 100 years of oil--or so we are told here: Another Century of Oil? Getting More from Current Reserves (Scientific American October 2009; subscription required to read entire article online; visit your local library to read it for free)

Forecasts that global oil production will soon start to decline and that most oil will be gone within a few decades may be overly pessimistic.

The author predicts that by 2030, thanks to advanced technologies, wells will be able to extract half of the oil known to be underground, up from the current average of 35 percent.

Together with new discoveries, the increased productivity could make oil last at least another century.

Once again, the article (written by a global oil company executive) is heavy on promise and glowing hype and short on costs. Is all this fancy recovery technology free? If not, then how much does it add to the extraction cost of each barrel?

All this seems to suggest something which these articles avoid mentioning: there may be more fossil fuel that is recoverable, but it will no longer be cheap. None of these articles addressed the possibility that all this "new" production will simply offset declining production elsewhere, which means global production would simply stay constant rather than increase to match rising demand.

Also left unsaid is the trivial amounts of oil and gas being recovered from aging fields by the costly new technologies. The example cited in the article is a large field in California that was expected to be depleted year ago which still produces 80,000 barrels a day. That is good news, to be sure, but the extraction only makes sense if oil is over $50 a barrel, and 80,000 barrels is a drop in the bucket of the 20 million barrels the U.S. uses each day.

It would take dozens of such vast fields to replace the sagging production from supergiant fields in Mexico, the North Sea and the Mideast.

With prices elevated to the $80/barrel level, constant supply (at high prices) has created a global glut in oil and natural gas--there are literally no storage facilities available to store more gas and oil. This suggests that if the global economy resumes its deflationary spiral down next year, then a grand imbalance between supply and dwindling demand might cause oil to crash in price--unless the U.S. dollar declined concurrently.

As readers know, I am expecting the dollar to actually rise, which would exert downward pressure on the price of oil (in dollars, of course).

Correspondent B.C. was kind enough to submit this chart and commentary.The chart displays the price of oil adjusted to the CPI (consumer price index) in which 1974=100. In other words, the price is in constant dollars, not nominal dollars; the chart removes inflation from the picture. Thus if today's dollar is worth 33 cents in 1974 dollars, then today's $3 a gallon gasoline would be $1 in 1974 dollars.

click on chart for a larger version in a new browser window

Adjusted for inflation, we see oil at its recent nadir in 1999 had returned to the price levels of the late 1960s. The cost spike created by the 1980 Iraq-Iran war was actually higher in real terms than the spike last year to $147/brl.

Here is B.C.'s commentary on how the dollar's rise or fall could drastically alter the price of oil.

US dollar (USD) and CPI constant, the nominal price of oil would need to fall back to the $40s to reach the CPI- and USD-adjusted level where recessions bottomed and new reflationary growth cycles commenced since the '90s.

However, were the USD to rally back to the earlier cyclical high or to par, for example, coincident with another deflationary episode, the nominal price of oil would have to fall to the low to mid-$30s, to as low as the low to mid-$20s, to reach the adjusted recession low since the '90s and before the early to mid-'70s.

That the nominal price of oil has generally tracked nominal trend GDP growth adjusted for the USD, all else equal, oil in the $20s would not surprise me over the next 1-5 years, especially if we see another deflationary scare and stock market crash and economic collapse in China-Asia.

Thank you, B.C. If the dollar strengthens substantially, as many of us expect in the short-term, then oil would drop in nominal price for U.S. residents and increase for those paying for oil in other currencies.

If deflation and global recession were to take hold--that is, if all the quantitiative easing and borrw-and-spend pump-priming fails to ignite "organic" (real) growth, then the price of oil could be hit with two deflators: the rise of the petro-dollar (USD) and a supply which greatly exceeds falling demand.

I illustrated this "head-fake" drop in prices before the final arrival of Peak Cheap Oil in 2008:

Many other observers are similarly alive to the possibility that oil could drop in nominal dollars to $20/barrel in a deflationary "head-fake" and then rise to $200/barrel once supply fell below demand and the dollar resumed its decline in purchasing power.

Frequent contributor Cheryl A. submitted an excellent interview with oil analyst Stoneleigh at the Automatic Earth blog: Stoneleigh interview Stoneleigh suggested that oil could fall to $20 and then subsequently rise to $500 per barrel once demand exceeds supply.

What we need to keep in mind is the relative value in nominal dollars. If the dollar were to suddenly lose 2/3 of its value against gold and other currencies, oil would suddenly cost $200/barrel to U.S. residents even as it remained constant to those buying oil with other curencies.

Inversely, if the dollar were to strengthen, oil could fall in half when priced in U.S. dollars and skyrocket when priced in other currencies.

The main point is simple: tracking the price of oil in constant (adjusted) dollars illuminates the real cost of oil in purchasing power.

Permanent link: Oil to $20/barrel or $200/barrel?

Apple iPod and iPhone owners: There is an Amazon Kindle app for iPhone which enables you to view the Kindle ebook on your iPod or iPhone--I will try to post links to the app once I locate them.

Survival+ is now available on amazon.com.
Buy the complete Survival+ in print or ebook formats.
Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

You can also find my work on AOL's Daily Finance and Seeking Alpha.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Susan M. ($5/month), for your exceedingly generous subscription to this site. I am greatly honored by your support and readership.

The Complete Survival+ is Now Available

After a year of work, the complete Survival+ book is finally available. The free abridged version has also been substantially expanded.

After a year of insane effort, the complete Survival+: Structuring Prosperity for Yourself and the Nation is available in print, Kindle and ebook formats.

But wait: there's more!

The greatly expanded (85,300 words, 141 pages) free eBook is also now available in HTML Survival+ or PDF version: Survival+ (PDF))

Although a respected small publisher wanted the book for Fall 2010, I could not wait an entire year to distribute the book, so I published it through amazon.com's publishing arm, createspace.com for $19.95 and have also made it available as a Kindle ebook or Mobipocket ebook for $11.95.

The book will be available through amazon.com by November 15; until then, I have arranged a $4 discount for anyone who wishes to order it through createspace.com.

Instructions to order the print edition or ebook are available on the main Survival+ page.

Writing such a comprehensive book is capitalism in the purest form: a substantial investment is risked with no guaranteed return. Over 30,000 copies of the free version have been downloaded, and I encourage everyone who glanced at the first free edition to download the new enlarged free edition, which at 85,000 words is a full book in itself. (The complete book with "solutions" is 140,000 words.)

In the HTML version I added a table of contents with links so you can navigate to each chapter, and I added a "further reading" list of over 60 referenced titles to both the HTML and PDF versions.

I would be honored if you sent a link or copy of the free version to others who might be interested in not just surviving but prospering during the next 20 years of turmoil and transition.

As I have discussed with Richard Metzger of Dangerous Minds, all media is now expected to be free. Alas, I am a self-employed creator who does not draw a paycheck from academia, a think tank, the government or a corporation, and the $6 royalty I receive from the print edition and the $4 royalty I receive from the Kindle or Mobipocket ebook editions are an important exchange of value and recognition of the time, effort and experience which was required to put such a comprehensive overview into "only" 140,000 words.

Thus I feel mixed emotions about this day that I have labored toward unceasingly for more than a year; the necessity to awaken at 5 a.m. to create the time needed, the email unanswered, the update to "What's for Dinner at Your House?" languishing undone and a hundred other tradeoffs made to complete the book.

I am honored by the 30,000 free copies which are perhaps winding their way into the collective awareness that the status quo is fundamentally doomed and we will have to come up with new understandings and new structures. Survival+ was written to further that discussion.

As I wrote in the introduction:

My goal is to provide an integrated understanding of why the devolution and insolvency of the U.S. economy is not just a possibility but an inevitability. But rather than feel the despair experienced by the status quo at this prospect, I am energized by a new understanding of prosperity and security based on the founding principles of our nation. This understanding is beyond the tired boundaries of "liberal" and "conservative" or indeed, of any ideological labels.

Much of this analysis might be familiar to you, or it might be entirely alien. In either case, I hope to change your understanding of our nation and our world's potential for sustainable prosperity.

I do not claim to provide solutions or answers per se, but I do present a framework which arises from this analysis like water from a spring. If this book furthers our collective discussion on the coming transformation, I will consider it a success

Thank you, readers, for teaching me so much that I was able to writeSurvival+. I am proud of the work and hope you find it valuable.

I have ordered my first shipment, and will send a signed copy to all subscribers and any readers who were kind enough to donate $40 or more to the site who would like a copy.


I want to write a bit about oil/fossil fuels the next few days so stay tuned....

Permanent link: The Complete Survival+ is Now Available

You can also find my work on AOL's Daily Finance and Seeking Alpha.

Expanded free eBook now available: HTML: Survival+: Structuring Prosperity for Yourself and the Nation PDF version (85,300 words, 136 pages): Survival+)

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Gene B. ($5/month), for your extremely generous subscription to this site. I am greatly honored by your support and readership.