Short summary of chicken little scenarios

[Theben]

As you all are no doubt aware, current times suck, economically. There's also been plenty of talk it's gonna get worse. I'd like peoples input into 3 of the most common scenarios I've heard floating around the intertubes these days. Oh, and what action I should take to avoid taking up residence in one of our wonderful new tent cities.

1. Greece is gonna default, and drag the eurozone down with it. This seems pretty much a given. From what I know, the debt markets have assigned 100% chance of eventual default and given up on Greece, even if the stock markets and governments haven't. Are there any options left open to avoid this? The only one I've heard of is if the U.S. loans $2 Trillion to ease investor confidence, but even that holds no guarantees and is likely to only stave off the inevitable.

Oh yeah, once Greece falls then the peripheral nations (Portugal, Ireland, etc.) will follow, likely taking France's banking sector with it.

2. Sometime in 2012 or 2013, the U.S. debt will be "unchained" and cause massive inflation in the U.S. Not hyperinflation (by definition), but still somewhere between 30%-100%, which is still enough to cripple the assets of anyone holding dollars. While some inflation seems likely, I personally doubt it will get over 7-8%. Mostly this idea is being floated by the End of America 2011 and AfterShock crowd. I unfortunately subjected myself to the "End of"... clip. Still a lot of what the guy drones on about has occurred already, and it's no secret the big boys are holding that extra $2 trillion in mostly overseas accounts.

3. Peak production/decline. Haven't read much into this yet, but basically for every 1% oil production declines, world GDP declines 1%. Since oil hit peak production in 2005, we're in for a long cycle of recessions interrupted by weak, short recoveries.

EDIT: Apparently the IMF wants $1.3 trillion atm to backstop European debt. Yay.

[giblets]

Haven't read much into this yet, but basically for every 1% oil production declines, world GDP declines 1%. .

That really doesn't make sense, unless oil production is being reduced in response to declining demand because of declining GDP.

[Theben]

http://www.sciencedirect.com/science/article/pii/S0301421507004922

[Ben Kenobi]

You're betting on inflation? The US is fighting off, unsuccessfully, a massive deflationary spiral. Decreasing demand will exacerbate many of the problems we are starting to see now.

I don't think the Eurozone is doomed yet. Their debt levels are simply not high enough to suggest this is the case. Greece or no Greece.

[giblets]

http://www.sciencedirect.com/science...01421507004922

Okay, I see they came up with this:

2.1. Numerical relationships

Using world GDP figures similar to those in Fig. 1, Deutsche Bank (DB) estimated the relationship between GDP growth and oil demand growth for the period 1995–2006 (Deutsche Bank, 2007):


Simply stated, oil demand growth was positively correlated with GDP growth, and an expanding world economy demanded was generally well provided with a growing supply of liquid hydrocarbon fuels and products.


History demonstrated that the opposite holds when world oil supplies are not sufficient to meet demand. In that circumstance, world oil shortages have acted as a drag on world GDP, as demonstrated in the Arab oil embargo of 1973 and the Iranian revolution of 1979. In both instances, oil shortages lead to recessions with significantly increased inflation, unemployment, and interest rates (Hirsch et al., 2005).


Estimates of the damage caused by past oil price disruptions vary, but impacts were significant. According to EIA (2000) “the oil shock of 1973 caused the US GDP to go to about 3% negative in 1975. The oil shock of 1979 caused roughly the same: −3% in GDP.” Elsewhere (EIA, Undated), EIA reported that the average gross supply shortfall during the 1973–74 oil embargo was 2.6 MM bpd, or 4.4% on an annualized basis. The average gross supply shortfall during the Iranian revolution was 3.5 MM bpd, or 5.4% on an annualized basis.


It is important to recognize that drawing long-term conclusions from this short-term data is chancy. Nevertheless, the two oil supply interruptions of the 1970s represent the only modern oil shortage experiences from which guidance for the future can be gleaned. From the foregoing:


For the Arab oil embargo:


For the Iranian revolution:


Thus, for these two episodes, a % GDP change/% oil change ratio of 0.6–0.7 for the US was evident. Comparing that range with the DB ratio of 2.5 for the world economic growth period of 1995–2006 and recognizing the approximate nature of these considerations, we conclude that a ratio of 1:1 is a reasonable approximation for a future circumstance where world oil shortages act as a drag on world GDP, i.e., numerical values ranging from 0.6 to 2.5 are of order of unity. A ratio of one-tenth would seem too small and a ratio of 10 would be too large. While greater accuracy would be desirable, this approximation is believed adequate for our analysis, since our final conclusions are not highly sensitive to this assumption.


One of the few recent studies of the potential economic impacts of a severe, long-term decrease in world oil supplies was the Oil Shockwave simulation, which involved a number of retired senior government executives, assisted by Sanford Bernstein & Co. LLC. (Gates et al., 2005). The focus of their effort was the potential impacts of a severe oil shortage caused by massive terrorist attacks on world oil infrastructure, leading to significant, multi-year world oil shortages.


Among their conclusions was a forecast that a roughly 4% global shortfall in daily supply would result in an oil price increase of nearly a factor of three and a severe recession.


On the topic of the % GDP change/% oil change ratio, the IEA estimated “a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. Inflation would rise by half a percentage point and unemployment would also increase” (IEA, 2004).


If we assume the Oil Shockwave estimate of $160 per barrel, IMF's 0.4% GDP impact (recognizing that its use is out of the IMF-defined range), and a roughly $60 per barrel oil price, the $100 per barrel oil price increase (10 times the IMF $10 increase), we would calculate a 4% reduction in world GDP, which is in line with our unity ratio approximation.


On the basis of the foregoing, we adopt the following: (1) when world oil supply declines on a sustained basis, the resulting shortages will cause world oil prices to escalate and world GDP to decline, and (2) a sustained percentage decline in oil world supply will cause an approximately equal percentage decline in world GDP.

First they find that a larger economy demands more oil, and for with a 1% increase in income people demand .4% more oil. That's not surprising, because as people get richer they can afford to spend more on burning oil. But then they try to turn it around and say that this shows that a .4% change in oil consumption is responsible for a 1% change in income, which doesn't make sense to me.

They look at the effect that oil shocks in the 70s had. Of course, if an oil shock has a political cause that no one could have seen coming ahead of time and prepared for, it will have a much bigger impact because they will not have prepared for the higher oil prices. If the future declines in oil production are caused by something predictable like the fact that the amount of oil on earth is finite, then people have plenty of time to make adjustments.

So the range of values they came up with doesn't seem very reliable to me. Then they take IEA estimates of the effect of an oil price change to show that their estimate is in line with other people's estimates, but the model isn't necessarily designed for a gradual change in oil prices. A peak in oil production isn't going to be anywhere near as unanticipated as, say, a terrorist attack. So I don't buy this as an accurate estimate of the effect of a gradual decline in global oil production. While a sudden shock would suddenly create a need for a major reallocation of the economy's resources, creating a temporary spike in unemployment that causes a large decrease in output, a foreseeable decline in oil production can be met with a gradual reallocation of resources to fit new conditions and there's no reason why a spike in unemployment must happen.

edit: I'm tired right now and I think I'll go to sleep.

[Theben]

I didn't say the eurozone was doomed, just that it was gonna get 'dragged down'.

I forgot a 4th scenario, one mentioned by some billionare due who moved his family to Singapore ("I love the U.S. but it's time is over"). He mentioned a coming food shortage, stoked mainly by increased purchasing power of developing nations and the fact that fewer and fewer people are going into farming as an enterprise, causing a loss of supply at the same time of increased demand.

Personally I'd think if prices go up more people would be inclined to farm, in addition to as yet unforeseen advances in farming (urban vertical farming for one). I chalk this one up to the guy still being an irrational human even if he's got lots o' money.

[Theben]

You guys are about as useful as a chainsaw for a vasectomy.

[Aeson]

Who moves to Singapore (small densly populated island) from the US (still mostly open farmland where people are paid not to farm their land or to leave crops on the field) because they're expecting a world-wide food shortage?

[Aeson]

Who moves to Singapore from the US because they're expecting a world-wide food shortage?

[Dinner]

Portugal and Italy got down graded today. That should put more pressure on them.

[Kidlicious]

You just can't tell Theben. But I'm inclined towards the China bubble scanerio.

And a bit of inflation would be welcome.

[Theben]

Who moves to Singapore (small densly populated island) from the US (still mostly open farmland where people are paid not to farm their land or to leave crops on the field) because they're expecting a world-wide food shortage?

Billionaire people who don't expect to ever be in need. Can't you read?

[Theben]

You just can't tell Theben. But I'm inclined towards the China bubble scanerio.

While China has a housing bubble, I don't see that hurting the U.S. Some of China's problems (new rich want to move to the U.S./Europe for greater freedoms, cost of business increasing to the point of jobs repatriating) will be a boon here.

[Hauldren Collider]

You guys are about as useful as a chainsaw for a vasectomy.

I dunno about a vasectomy but that sounds like it could do a pretty good castration.

[giblets]

I dunno about a vasectomy but that sounds like it could do a pretty good castration.

Oh, I get it! Chainsaws cut off things. Ha ha ha.