Comment: The large, and increasing, amount of personal debt held in the UK does not mean we are headed for economic disaster, but combined with a potential recession, high and increasing interest rates and forecasts for higher inflation, particularly relating to energy and food, and bloated house prices, we are surely in for rough times ahead.

Article: The scale of Britain's personal debt mountain has come into sharp focus with new research showing a record number of households are facing serious debt repayment problems, and that Britons owe more money than the entire economy can generate in a year.

They coincided with a warning from mortgage lender Nationwide that house prices are set to fall sharply back into line with wage inflation next year, as the credit crunch pushes up interest rates for families around the UK.

With America already facing a severe potential consumer downturn, the research from a variety of sources is the latest reminder that Britain's overstretched households remain one of the most vulnerable parts of the economy.

Research from accountants Grant Thornton shows that the total stock of consumer debt owed by British families is larger than Britain's gross domestic product (GDP). Bank of England figures show that Britain's consumer debt stands at £1,345bn - higher than the size of Britain's annual output of £1,330bn, according to the Office for National Statistics.

According to comparable figures from the Treasury, the landmark moment when debt exceeded GDP took place last year. Stephen Gifford, chief economist at Grant Thornton, said: "Britain's huge level of consumer debt is symptomatic of the country's well-established 'buy-now, pay-later' culture. We can no longer generate enough yearly GDP to cover the amount we owe and need next year's income to cover this year's debts."

The calculations illustrate how fast Britain's debt levels have grown in comparison with its economic output. According to the National Institute of Economic and Social Research, the ratio of household debt to personal income is 1.62 in the UK, compared with 1.42 in the US, 1.36 in Japan and 1.09 in Germany...

1b/ Brace yourself for the insolvency crunch (The Telegraph, Thu 23 Aug)

http://blogs.telegraph.co.uk/business/ambrosevanspritchard/august07/marketmayhem.htm

Article: Yes, investors are jumping back into the stock markets, hoping this is just another routine shake-out - much like February 2007, or May 2006 - before the rally resumes. The `buy-on-dips’ orthodoxy dies hard.

And yes, speculators have renewed their leveraged bets on the yen and Swiss franc carry trades, borrowing cheap in Tokyo and Zurich to play global assets. The core belief is that nothing has really changed, that the world economy is still in rude good health.

Be very careful. Interest rates in Europe and Asia are that much higher now, with delayed effects starting to bite hard. Japan’s economy has stalled to 0.1pc growth in Q2; the euro-zone has slowed to 0.3pc; and China’s refusal to import (by currency manipulation) makes it a drain on world demand. Above all, the credit bubble that perpetuated the rally of the last eighteen months beyond its natural life has definitively burst.

Credit spreads on the iTraxx Crossover (a good barometer of corporate bonds) have ballooned 180 basis points since February. The cost of borrowing for most firms in Europe and North America has jumped from circa 6.5pc to 8.3pc, if they can get it.

... Why? Because trust had collapsed to such a degree that players with a lot of cash no longer believed it safe to leave wealth in bank accounts, or the money market funds of brokerage companies - (exposed as they are to short-term commercial paper and subprime CDOs). This did not occur after 9/11, or in the heat of the October 1987 crash. Nor did was there such a banking panic in October 1929. (it hit in August 1931). If you think this is of no importance, or that this will pass swiftly, you have a strong nerve.

... The belief that Europe would somehow be insulated has been tested over the last two weeks. Two German banks have required bail-outs on subprime bets – Sachsen LB for Eu 17.3bn, IKB for Eu 8.1bn.

Alexander Stuhlmann, boss of WestLB, confessed that the German banking system was in a "not uncritical situation". Jochen Sanio, head of the German regulator BaFin, said a few days earlier that the country faced the worst banking crisis 1931.

Hence the continued actions of the European Central Bank, which has quietly injected 85bn euros in extra liquidity so far this week, almost as much as it did on the first day of emergency stimulus in early August.

... To clarify: the ECB allotted an extra Eu 45bn extra through a `weekly refi’ on Tuesday; and then Eu 40bn in a 3-month offer on Wednesday to stop the short-term commercial paper market seizing up.

What we know is that 146 banks bid for loans on Wednesday, some clearly in such distress that they were willing to pay up to 5pc interest – a full 1pc above the ECB’s benchmark rate.

Just like the dotcom bust: when the US sneezes, Europe catches… you know the rest.

... I am endebted to Randall W.Forsyth from Barron’s for this delicious quote from a hedge-fund operator, recounting with disgust what happened this time in a letter to clients.

" 'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

"These CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt . . . until now. "

1c/ Shares Slump and Credit Crunch: Passing Peak Oil (Phil Hart, Fri 17 Aug)

http://philhart.com/shares_slump_and_credit_crunch

Comment: Phil Hart is a member of ASPO-Australia. These are his thoughts on the current financial crisis.

Article: Regular readers may be surprised to see me offer commentary on the financial markets, given my dim view of such factories of speculation and greed. This is no sideshow, however. The unfolding turmoil may eventually be seen as a historic event. Another turning point, the worldwide peak in oil production, is a key player in this unfolding drama, although its role goes unnoticed by most in the audience.

The Die is Cast

In the wake of the dot-com crash in 2000 and 11th September 2001, the US Federal Reserve began reducing interest rates to stimulate a weak economy. Between 2001 and 2004, interest rates were cut from above 6% to effectively zero. Debt became cheap.

But in 2004, the booming Asian economies pushed world oil demand up noticeably. The days of spare oil capacity in the Middle East were suddenly all but over, and oil prices headed up sharply. The Federal Reserve began to steadily raise interest rates; conventional medicine for the resulting inflation. That started the vicious cycle that is now beginning to unwind in a very unhappy fashion: ...

Who Sank the Boat

The barrel was loaded by greed; the belief that an economy could be sustained by growing debt. The fuse was lit by rising oil prices, in a world where supply could not match an economy that knew only how to expand.

The markets have managed to shrug off other significant scares over the last two years, but this time it looks to have gone too far. A recession in the US now seems inevitable, the effects of which will perhaps only slowly trickle around the world economy. A slowdown will helpfully reduce oil demand, taking the pressure off oil prices in the absence of other supply disruptions.

Eventually, the financial markets will pull themselves together again and the economy will turn itself around. Only then will we realise that peak oil was passed and there is no going back.

1d/ Financial crises: Lessons from history (BBC News, Sun 26 Aug)

http://news.bbc.co.uk/1/hi/business/6958091.stm

Comment: The BBC seem to (correctly) recognise the current problems with the financial markets as an ongoing crisis, and review earlier crises.

Article: The current market jitters are centred on disturbances in the world's credit markets. Worries about the viability of sub-prime mortgage lending have spread around the financial system, and the central banks have been forced to pump in billions of dollars to oil the wheels of lending.

But what happened in previous financial crises, and what are the lessons for today?

There have been a growing number of financial crises in the world, according to the International Monetary Fund (IMF).

Among the key lessons of previous major financial crises are:

Globalisation has increased the frequency and spread of financial crises, but not necessarily their severity

Early intervention by central banks is more effective in limiting their spread than later moves

It is difficult to tell at the time whether a financial crisis will have broader economic consequences

Regulators often cannot keep up with the pace of financial innovation that may trigger a crisis.

eg.

THE DOT.COM CRASH, 2000 …

LONG-TERM CAPITAL MANAGEMENT, 1998 …

THE CRASH OF 1987 …

US SAVINGS AND LOAN SCANDAL, 1985 …

THE CRASH OF 1929 …

OVEREND & GUERNEY, 1866; BARINGS, 1890 …

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2/ Opec File: Ready to Fill the Gap [but not for long] (Energy Intelligence [Energy Compass], Fri 24 Aug)

No link. From newsletter.

Comment: Interesting that Energy Intelligence has reached the same conclusion as Chris Skrebowski’s MegaProjects analysis and the IEA’s July 2007 Medium Term Oil Market Report. The global oil demand / supply balance should be ok to 2010, after that ?? Makes you wonder why so many people that should know better (Sir David King’s View on Peak Oil) are so laid back about the upcoming problems.

Article: With production growth elsewhere seen slowing to a dawdle, Opec faces a central role in meeting world oil demand increments in the coming years. So, can it meet the challenge? Analysis by Energy Intelligence suggests it will be a close race, but that extra capacity in Opec and non-Opec combined should be enough to meet demand through 2010. Beyond that, the balance is far less certain.

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3/ Harvest fears trigger rise in wheat prices (Financial Times, Fri 24 Aug)

http://search.ft.com/nonFtArticle?id=070824000655

Comment: Wheat prices at record high levels due to weather. There is a move to produce ethanol from wheat in the UK. Can they afford it at these prices?

Article: Wheat prices soared to a record yesterday after Canada reduced its forecast for this year's harvest to 20.322m tonnes, down 19.6 per cent from last year, and significantly below market expectations.

In Chicago, CBOT September wheat rose 7½ cents to $7.26 a bushel. The more actively traded December contract gained 8¼ cents to $7.40 a bushel after hitting a record $7.54 early in the session. The previous record of $7.50 a bushel was set in 1996.

Yesterday, the International Grains Council reduced its forecast for this year's global wheat harvest to 607m tonnes from a previous estimate of 614m tonnes.

... Increases in British bread prices appear inevitable as the price of wheat has moved above £200 a tonne recently, double last year's level...

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4/ Argentine Industrial Output Growth Slowest in 5 Years (Update2) (Bloomberg, Fri 24 Aug)

http://www.bloomberg.com/apps/news?pid=20601068&sid=aHDLzYkDELis&refer=economy

Article: Argentine industrial output grew at the slowest pace in almost five years in July as energy shortages forced companies to cut back on operating hours.

Production last month made the smallest gain since November 2002, when the country was emerging from its worst financial crisis, rising 2.3 percent from the same period a year earlier. Output fell a seasonally adjusted 2.1 percent from June, the National Statistics Institute reported today in Buenos Aires after delaying release of the data by a day.

``This really shows that the industrial sector has been significantly affected by the energy crisis,'' said Alfredo Coutino, chief Latin American economist at Moody's Economy.com in West Chester, Pennsylvania. ``The crisis is taking a high toll on economic growth.''

Shortages of natural gas and electricity in June and July prompted the government to cut supplies to companies, slowing growth in South America's second biggest economy after an expansion of more than 8 percent annually since 2003. Steel production fell 26.2 percent from a year earlier while chemical and plastic production fell 3.3 percent over the same period, the institute reported...

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5/ Russia cuts oil supplies to Germany (Financial Times, Fr i24 Aug)

http://www.ft.com/cms/s/0/e9336464-523f-11dc-a7ab-0000779fd2ac.html

Article: Russia has made significant cuts to oil supplies sent to German refineries recently, rekindling concerns in Germany over the reliability of Russian energy supplies.

Lukoil, Russia’s second largest oil producer, on Friday acknowledged that supplies to Germany had been reduced by about one-third in July and August but refused to explain why the reduction had occurred.

Analysts said Lukoil’s decision not to provide previously contracted quantities of oil could be aimed at extracting higher prices from German refineries or be part of Lukoil’s efforts to acquire stakes in German and European refineries...

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6/ Tar Sands: The Oil Junkie's Last Fix, Part 1 (Energy and Capital, Fri 24 Aug)

http://www.energyandcapital.com/articles/oil+sands-tar-peak+oil/499

Comment: For further discussion of the article, see The Oil Drum version of the article.

Article: For this week's article, I collaborated with energy journalist Roel Mayer, a freelance writer on earth, energy and economy, based in Canada. Roel is a keen observer on energy, and the Canadian tar sands in particular, so he was a natural research partner for this short study on the state of oil production from tar sands.

He was also the one who coined "The Law of Receding Horizons." For those who missed my previous articles on receding horizons, it is a simple concept: as the cost of energy rises, the cost of everything else made with energy (like building materials) also rises. So an energy project which was expected to be profitable when energy costs were x amount higher than today, turns out to still be uneconomical when you get there.

And the tar sands of Alberta are shaping up to be the oil industry's poster child of this phenomenon. With oil well over $60 today, the low-grade sludge called bitumen that we recover from tar sand--actually more like a putty, at room temperature, which is why I refuse to use the whitewashing term "oil sands--should be highly profitable.

But paradoxically, the impending decline of global crude oil production, which is now coming clearly into view, has led to a mad rush to produce the tar sands. And this, in turn, has led to skyrocketing costs...such that now, the real "profit" in producing the tar sands seems to be in government tax breaks, not in actual profit on the resource itself.

In fact, the Canadian tar sands operations are facing a whole host of challenges, beyond economic--so much so, that one wonders why we try to harvest them at all.

But trying we are: according to the respected energy analytics firm Wood Mackenzie (WoodMac), about $117 billion is going to be spent on the tar sands by 2015.

Let's look at some of the challenges.

Cost Inflation ...

Finance ...

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