Reality-Optional Economics

The total tonnage of economic malarkey being shoveled over the American public these days would make the late Dr. Joseph Goebbels (Nazi Minister of “Public Enlightenment and Propaganda”) turn green in his grave with envy. It’s a staggering phenomenon because little about it is conspiratorial; rather, it’s the consensual expression of a public that wants desperately to believe things that are untrue, and an economic leadership equally credulous, unmanned, and avid to furnish the necessary narratives that might preserve their jobs and perqs.

By “economic leadership” I mean the consortium of business executives, government officials, academic economists, and media disseminators -- and even some bloggers and financial advisers. Some of the latter may be “talking their book,” since they may manage other people’s money and need those other people to believe in the soundness of markets, true or not. And some of the former may be motivated by the fear that even a little erosion of trust in the system could lead to a collapse of the system basted together by little more than blind faith in currencies and dubious “innovative” instruments. But most of these characters are mainly just flat-out delusional.

Recently, John Mauldin predicted (on a recent Financial Sense podcast) that “…pretty soon we’re gonna be energy independent… a net energy exporter in the next three, four years.” This meme has been all over the web and the mainstream media since about 2011, emitted by commentators who haven’t noticed either the steep production declines in shale oil and gas wells or the supernatural flows of junk-derived capital for a drilling frenzy that distracts observers from the financial incongruities of the entire shale energy model (in which the word “profit” is absent).

Anyway, a week after Mauldin’s prediction, the US Energy Information Agency (EIA) published a 96% knocked-down revised estimate of recoverable oil from the Monterey/Santos shale formation, going from about 15.4 billion barrels to about 600 million (or about 30 days of US supply). That 15.4 billion represented about 64% of the EIA’s total for all the nation’s shale oil reserves, so one might expect at least a shock to the system of junk financing.

On the gas side, you have the stark fact that the first three big shale gas “plays” of the shale era (the Barnett, the Haynesville, and the Fayetteville) are now in decline or flat, leaving the Marcellus and Eagle Ford. What makes anyone think that the steep decline rates in the early plays won’t lead to the same fate for these two plays? (Answer: wishful thinking.) The Monterey shale play was going to gin up 2.8 million new jobs and boost California’s tax haul by about $25 billion. As Jim Hansen, publisher of The Master Resource Report pointed out:

Probably the most important lesson from this is that many of the distinctions between resources, reserves, technically recoverable reserves and so on are lost on the mass media, the public and most importantly government leadership. Headline numbers like 15.4 billion barrels and 2.8 million jobs are what set the agenda. Reality is much more nuanced, complicated and sometimes grossly different.

Yet there remains a number of other prominent cheerleaders of the “shale miracle.” The magisterial George Friedman of the geopolitical website, came on David McAlvaney’s weekly podcast touting the prospects of massive gas exports to Europe and Asia. Friedman characterized it as:

“…a technological revolution as dramatic as Silicon Valley was in introducing the microchip. All the assumptions about energy in the world have been turned on their heads. The United States is now a major producer. The problem is logistic. How do you get it from here to there.”

This is worse than a simplistic view of the situation. The shale gas industry has never been profitable at US prices seen since production ramped up bigtime around 2007. Currently it’s at $4.60/mmbtu, still well under an economically rational level, though it swooned near a miserable $2 just two years ago. So the export idea is that US can build out a massive new infrastructure of gas pipeline terminals to liquefy the gas and a fleet of expensive liquid gas tankers in order to ship gas to Europe and Asia, where demand has exploded, and the price is as high as $15/mmbtu. Okay, when and if the US has the ability to export all this gas (big if, considering the needed cap-ex), what happens to American customers who find themselves competing for this commodity with five billion Asians and Europeans? Do they just freeze in the dark?  Mr. Friedman apparently failed to notice the hemorrhaging of jobs and incomes among the disintegrating American middle class. I wonder if he thinks they can afford to run their furnaces at $15/mmbtu.           

Willful misunderstanding of the shale gas situation is just one of many examples of thought failure among the class of Americans who even pretend to think for a living. It cannot be due to a sheer lack of brain power (though who can say what the aggregate effect of food additives, off-gassing carpets, and other chemical insults might have had on recent American generations). We apparently just don’t like reality and seem to think we can turn it off, or switch to another channel or web address for a better buzz. This is surely true of the investing sector of the public, some of whom still read and occasionally experience activity that resembles thinking. But they switch the channel away from reality to Fox, Bloomberg, and CNBC for the excellent reason that their good fortune in rising rigged markets makes them feel immune from danger. The state and the central bank have declared unconditional ZIRP and QE, and the portfolios resound with the ka-ching of dividends and capital gains, so why worry… be happy!

It’s a tragic fact of history that sometimes societies lose their bearings. They make terrible choices and bad things happen. It doesn’t have to take the form of a conspiracy, but rather a consensus -- that is, a simple agreement between people in charge (and the public subject to their rule) about where that society will direct its priorities and make its investments. Proof of this was the behavior of national leaders and the public in the aftermath of the 2008 financial crash. The system was hugely burdened by the debris of loans gone bad, a lot of it packaged into fraudulent bonds. The biggest banks in the nation were implicated in the creation of these frauds and left holding a lot of their own bad paper when the music stopped. Clearing the debris would have restored structural integrity to the banking system. Prosecuting financial criminals in the executive suites of the banks would have disincentivized racketeering and control fraud.

American leadership allowed neither restructuring or prosecution. Banks (except for Lehman Brothers, the unloved “fall guy”) were not only prevented from failing, they were stuffed with taxpayer bailout money, plugged into a new Federal Reserve carry-trade racket (ZIRP), given a green light on unlimited accounting fraud (FASB 157), and allowed to continue their old rackets in new ways, e.g. the new bundled rental payment bonds, “covenant-lite” junk bonds,  and new iterations of shady collateralized loan obligations. And, of course, not one bank executive was prosecuted (not to say jailed) for criminal shenanigans that cost the US economy $22 trillion according to the US General Accounting Office.

The public went along with all this to the degree that few of their political representatives were turned out of office, nor was any effective political resistance mounted besides two movements that proved to be weak and ineffectual: Occupy Wall Street and the Tea Party. (David Brat, who unseated House Majority Leader Eric Cantor in the recent Virginia primary, tried and failed to get backing from the Tea Party.)  President Obama, who first campaigned on “hope and change” in the very moment when Wall Street blew itself up, and did absolutely nothing to change the racket-riddled banking system afterward, was rewarded with re-election in 2012. The obvious conclusion is that America, from top to bottom, didn’t want to restructure anything about our national life — and still doesn’t. It wants to stay stuck where it is in a very perilous moment of history, and it has enlisted a laundry list of fallacious beliefs to support its “do nothing” spirit.

Here’s a roundup of the other items from the roster of delusions currently making the rounds.

  • We’ve entered a “manufacturing renaissance.”
  • The “Central Corridor” of the USA, running from Texas to Minnesota, will soon turn into a dynamic industrial powerhouse.
  • A revolution in higher education is underway that will produce a generation of super geniuses.
  • The US financial markets will dominate the world indefinitely.
  • Accelerating advancements in technology will ring in a new golden age of comfort, leisure, and security.
  • The USA has unmatched exceptional entrepreneurial spirit.

In Part 2: On The Fast Track To Crisis, we explore why each of these notions is untrue. Subscribing to them will leave us at least disappointed and at most woefully unprepared for the circumstances in store for our country.

Click here to read Part 2 of this report. (Free executive summary. Enrollment required for full access)

This is a companion discussion topic for the original entry at

Crony Capitalism combined with an artificially low discount rate and cost of capital are now driving the bus.  Using cheap money to buy back shares and pump dividends is the game.  The yield hunger and ZIRP oppression is pushing capital markets advice to this extreme.  In the Oil & Gas business this leads to a boom bust cycle as projects are not fully risked.  In other words, it all looks economic.
Commodity prices themselves are inflated as the cronies have taken control of lobby groups that fight pipeline expansion and more competitive pricing.  The printing of Dollars means that oil prices are generally inflated.  The greatest irony is that the environment is used as an excuse only when it benefits the crony.

Rising oilfield service costs have been absorbed so far but look for margins to now compress.  The accounting jiggery pokery is at all time highs so booked reserves are no doubt inflated.  Earnings???


Regardless of industry the 'free lunch' is now being served.  Men are greedy so until something actually breaks it's 'risk on'.  (and yes, it makes me puke when words come out of Obama's mouth)








I just ventured onto the page with the article Las Vegas In Dusty Trouble and what did I see in the ad column on the right side?!

An ad for TransCanada.


Yeah I know it's automated but the synchronism is startling.



The unbelievable denial of the Lemmings of Las Vegas as they march across their infinity pools of self-delusion that somehow, someone (anyone ELSE) will come up a solution to life WITHOUT WATER!
I watch with fascination

Excellent description of the lies we tell eachother.
Although I agree that so much of the discussion on any subject in the US today is a Gobbledigook of confusion based on no facts. But, hey it sure has attitude!

Yes we can keep deluding people into thinking that though they've seen a great transfer of wealth from themselves to the top eschelons of finance they will be winners too. (Don't get too angry with them guns, out there.) The trick is to get people to hope that if we just ride the wave with the elite, all that transferred wealth will come trickling down back to us.

I disagree that there aren't people working together to keep this casino going and set it up from the start. If you follow the trajectory of when globalism quietly subverted our laws from the Sherman anti-trust and wage and price controls on things necessary for living, you'll understand that academia, think tanks and political figures have all been very much a part of where we find ourselves.

I often bring up Naomi Klein's "Shock Doctrine, the Rise of Disaster Capitalism". When you read this book you understand that there is the 1-2 punch of hard military assault Neoconservatism(shock and awe) and the soft power of finance, global Neoliberalism.

Through this system they turned labor production and wage earinging/saving into a pall and then turned all things financial into the money maker. They tear down all countries into basket cases where they can re-form them into a new society without a public sector.—But big catch you have to be in the right position to gain.  …Dr. Michael Hudson refers to neoliberalism as a war by other means.

The idea of the later is to get a country into debt and then get the IMF to lend it money. Then the fun begins. First they are told to give up their social safety nets, and impose austerity. Then people with means come in to see what public holdings they want to buy. In the meantime they are told they have to buy an arsenal of weaponry made by US transnational privatized military companies.

I can go on and on, but I won't. It's a system and it's been furthered by both parties. You cannot elect anyone that doesn't continue this momentum from either side of the aisle.

We now have 3 fast-track international trade deals by Obama. TPP. TIPP and TISA. How will net neutrality factor in? If they don't corporatize it one way they'll do it another. All of these bills will make the banking system and transnational corporations more powerful than nations, who will not be able to protect the people from giant lawsuits if they dare to sue the companies.

I would say the fantasy game functions as a layer of delusion to hide all that is taking place. After all we don't want things to get messy till well, you know.


It's like I said and Hudson just said something very similar:
…The basic principle to bear in mind is that finance today is war by non-military means. The aim of getting a country in debt is to obtain its economic surplus, ending up with its property. The main property to obtain is that which can produce exports and generate foreign exchange. For Ukraine, this means mainly the Eastern manufacturing and mining companies, which presently are held in the hands of the oligarchs. For foreign investors, the problem is how to transfer these assets and their revenue into foreign hands – in an economy whose international payments are in chronic deficit as a result of the failed post-1991 restructuring. That is where the IMF comes in. …

It's a great article overall, but I have to disagree with the opening premise "It’s a staggering phenomenon because little about it is conspiratorial; rather, it’s the consensual expression of a public that wants desperately to believe things that are untrue, and an economic leadership equally credulous, unmanned, and avid to furnish the necessary narratives that might preserve their jobs and perqs."
I agree that the public wants to believe.  Many of the politicians are equally naive, and want to preserve their perqs.  However, the people in positions of real power do understand and are ruthlessly gaming the system for their own benefit.  The machinations of Goldman Sachs (just one example of many) are not simple mistakes.  They perpetrators know they are playing their customers and the public.  They know the current system is doomed and they are trying to milk it as long as they can.  They run wars in places like Iraq, Afghanistan and the Ukraine to get control over resources they know will be critical in the future.  They use disaster capitalism to gain control over countries.  They pass draconian police state laws to insure that when the public starts to wake up they can eliminate the dissenters.  The Occupy movement didn't "prove to be weak", it was gutted by concerted government action facilitated by their ability to spy on the movements organizers.

Some delusions sprout in the wild but many are planted and fed manure because somebody wants to harvest the fruit.

A big thanks and a nod to Peak Prosperity, Chris Martenson, and especially James H. Kunstler for this essay. We've honored it today on the Wall of Fame at Growth Bias Busted:
Dave Gardner
Director of the documentary
GrowthBusters: Hooked on Growth