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Posts Tagged ‘OWS’

by Matt Taibbi
December 22, 2011
Rolling Stone

 

It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.

True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.

But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.

Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:

“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:

“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.

Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:

Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.

“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”

Finally, there is this from Blackstone CEO Steven Schwartzman:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”

There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.

But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lacking “skin in the game.” This incredible statement gets right to the heart of why these people suck.

Why? It’s not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.

It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.

The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).

So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.  

But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You’ve got it all riding on how well America works.

You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you’d better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.

And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.

The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.

An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.

But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.

Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.

Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once called “Obama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.

And in 2008, in that moonlighting capacity, he helped orchestrate a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?

Dimon, incidentally, is another one of those bankers who’s complaining now about the unfair criticism. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” he recently said, at an investor’s conference.

Hmm. Is Dimon right? Do people hate him just because he’s rich and successful? That really would be unfair. Maybe we should ask the people of Jefferson County, Alabama, what they think.

That particular locality is now in bankruptcy proceedings primarily because Dimon’s bank, Chase, used middlemen to bribe local officials – literally bribe, with cash and watches and new suits – to sign on to a series of onerous interest-rate swap deals that vastly expanded the county’s debt burden.

Essentially, Jamie Dimon handed Birmingham, Alabama a Chase credit card and then bribed its local officials to run up a gigantic balance, leaving future residents and those residents’ children with the bill. As a result, the citizens of Jefferson County will now be making payments to Chase until the end of time.

Do you think Jamie Dimon would have done that deal if he lived in Jefferson County? Put it this way: if he was trying to support two kids on $30,000 a year, and lived in a Birmingham neighborhood full of people in the same boat, would he sign off on a deal that jacked up everyone’s sewer bills 400% for the next thirty years?

Doubtful. But then again, people like Jamie Dimon aren’t really citizens of any country. They live in their own gated archipelago, and the rest of the world is a dumping ground.

Just look at how banks like Chase behaved in Greece, for example.

Having seen how well interest-rate swaps worked for Jefferson County, Alabama, Chase “helped” countries like Greece and Italy mask their debt problems for years by selling a similar series of swaps to those governments. The bank then turned around and worked with banks like Goldman, Sachs (who were also major purveyors of those swap deals) to create a thing called the iTraxx SovX Western Europe index, which allowed investors to bet against Greek debt.

In other words, banks like Chase and Goldman knowingly larded up the nation of Greece with a crippling future debt burden, then turned around and helped the world bet against Greek debt.

Does a citizen of Greece do that deal? Forget that: does a human being do that deal?

Operations like the Greek swap/short index maneuver were easy money for banks like Goldman and Chase – hell, it’s a no-lose play, like cutting a car’s brake lines and then betting on the driver to crash – but they helped create the monstrous European debt problem that this very minute is threatening to send the entire world economy into collapse, which would result in who knows what horrors. At minimum, millions might lose their jobs and benefits and homes. Millions more will be ruined financially.

But why should Chase and Goldman care what happens to those people? Do they have any skin in that game?

Of course not. We’re talking about banks that not only didn’t warn the citizens of Greece about their future debt disaster, they actively traded on that information, to make money for themselves.

People like Dimon, and Schwarzman, and John Paulson, and all of the rest of them who think the “imbeciles” on the streets are simply full of reasonless class anger, they don’t get it. Nobody hates them for being successful. And not that this needs repeating, but nobody even minds that they are rich.

What makes people furious is that they have stopped being citizens.

Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.

But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.

Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.

But these people don’t have shame. What they have, in the place where most of us have shame, are extra sets of balls. Just listen to Cooperman, the former Goldman exec from that country club in Boca. According to Cooperman, the rich do contribute to society:

Capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas…”

Unbelievable. Merry Christmas, bankers. And good luck getting that message out.

Read the entire article HERE.

by Matt Taibbi
November 10, 10:07 AM ET
Rolling Stone

Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.

The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.

This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.

This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.

Goldman, in the Abacus case, got fined $550 million. In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.

“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”

Rakoff of course is right – the settlement is nuts. If you take Citi’s $160 million profit on the deal into consideration, what we’re talking about then is a $125 million fine for causing $700 million in damages. That, and no admission of wrongdoing.

Just imagine a mugger who steals $70 from some lady’s wallet being sentenced to walk free after paying back twelve bucks. Magritte himself could not devise a more surreal take on criminal justice.

It gets worse. Over the last decade, Citi has repeatedly been caught committing a variety of offenses, and time after time the bank has been dragged into court and slapped with injunctions demanding that they refrain from ever engaging the same practices ever again. Over and over again, they’ve completely blown off the injunctions, with no consequences from the state – which does nothing except issue new (soon-to-be-ignored-again) injunctions.

In this current case, this particular unit at Citi had already been slapped with two different SEC cease-and-desist orders barring it from violating certain securities laws. Here’s a summary from Bloomberg:

The commission already had two cease-and-desist orders in place against the same Citigroup unit, barring future violations of the same section of the securities laws that the company now stands accused of breaking again. One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.

The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst-research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

But the SEC avoided the issue of the 2003 injunction by charging Citi with a different type of fraud. But, as Bloomberg points out, it probably wouldn’t have mattered much if they had accused Citi of violating the 2003 injunction, since the bank had already done that once and not been punished for it:

In December 2008, the SEC for the second time accused Citigroup of breaking the same section of the law covered by the 2003 injunction, over its sales of so-called auction-rate securities. Instead of trying to enforce the existing court order, the SEC got yet another one barring the same kinds of fraud violations in the future.

So to recap: a unit of Citigroup, having repeatedly violated the same laws and having repeatedly violated the SEC’s own cease-and-desist orders and injunctions, is dragged into court one more time for committing a massive fraud.

And what does the SEC do? It doesn’t even bring up Citi’s history of ignoring the SEC’s own order, slaps the bank with a fractional fine, refuses to target any individuals, allows the bank to walk away without an admission of wrongdoing, and puts a cherry on the top by describing the $160 million heist not as a crime, but as unintentional negligence.

BRING OUT THE SOFT CUSHIONS! The SEC gets rough with Citigroup.

Imagine a car thief who, when caught driving a stolen Lexus, tells the police he simply stepped into the wrong car and drove off by mistake. Now imagine he tells the same story when, two years later, he’s caught screaming over the GW bridge in a stolen Mercedes.

Then, two years after that, he’s caught on the Cross-Bronx Expressway blasting the stereo in a boosted 7-series BMW. Cops ask him for an explanation. “I must have gotten in the wrong car by mistake,” he says, shrugging. And the cops buy the story and send him home without a charge.

That’s roughly what we’re dealing with with this SEC action. To extend the metaphor just a little further – let’s say that BMW wasn’t even the only car he accidentally drove away that day, but the cops didn’t bother with the others. In the latest Citi case, the $700 million fraud was just one of many dicey CDOs marketed by that unit of Citi. But the SEC chose to address just that one case in its settlement.

Rakoff quite correctly took issue with all of this. From Jonathan Weil’s Bloomberg piece:

“What does the SEC do to maintain compliance?” Additionally, [Rakoff] asked: “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?” We’ll see if the SEC finds any.

Rakoff gained some notoriety a few years ago when he rejected as inadequate an SEC settlement with Bank of America, which was accused of misleading shareholders about the size of the bonuses paid out by Merrill Lynch, the investment bank BofA was in the process of acquiring. Rakoff dismissed the original $33 million fine as “half-baked justice,” although he eventually approved a $150 million fine.

The amazing thing about the wave of corruption that has overtaken the financial services industry is that most of it couldn’t happen without virtually every player at every level signing off on these deals. From the ratings agencies to the law firms to the accounting firms to the regulators to the bank executives themselves, everybody had to be on board in order for a lot of these fraud schemes to work.

Judges are a part of that picture, and too often, members of the bench sign off on dirty deals made between banks and regulators when the law says that such settlements must be “fair, reasonable, adequate and in the public interest.”

It’s great that Rakoff is behaving as any decent human being would and rejecting these disgusting settlements. But equally disturbing is the fact that more judges haven’t done the same thing. Are people with backbones really that rare?

by Tyler Durden
11/05/2011 22:49 -0500
ZeroHedge

Going back to the annals of brokeback Europe, we learn that gold after all is money, after the G-20 demanded that EFSF (of €1 trillion “stability fund” yet can’t raise €3 billion fame) be backstopped by none other than German gold. Per Reuters, “The Frankfurter Allgemeine Sonntagszeitung (FAS) reported that Bundesbank reserves — including foreign currency and gold — would be used to increase Germany’s contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion euros ($20 billion).” And who would be the recipient of said transfer? Why none other than the most insolvent of global hedge funds, the European Central Bank.

Also, in addition to gold, the ECB had set its eyes on that other “fake” currency that DSK had succeded in protecting throughout his tenure, all his other undoings aside, “The Welt am Sonntag newspaper, citing similar plans, said 15 billion euros would come from special drawing rights (SDR) that the Bundesbank holds.” Naturally, these discoveries prompted a prompt and furious rebuttal from the very top of German authorities: “Germany’s gold and foreign exchange reserves, which the Bundesbank administers, were not at any point up for discussion at the G20 summit in Cannes,” government spokesman Steffen Seibert said. The WSJ adds, “A plan to have the International Monetary Fund issue its special currency as a powerful weapon in Europe’s efforts to contain the widening euro-zone debt crisis was blocked by German Chancellor Angela Merkel, according to a report in a German newspaper.”

There are three observations to be made here: i) when it comes to rescuing insolvent countries, Germany is delighted to sacrifice euros at the altar of the 50-some year old PIIGS retirement age; ask for its gold however, and things get ugly; ii) the Eurozone, the ECB and the EFSF are dead broke, insolvent and/or have zero credibility in the capital markets, and they know it and iii) due to the joint and several nature of the ECB’s capital calls, while Germany may have had enough leverage to tell G-20 to shove it, the next countries in line, especially those which are already insolvent and will rely on the EFSF for their existence once the ECB’s SMP program is finished, may not be that lucky, and in exchange for remaining in the eurozone, the forfeit could well be their gold.

WSJ brings details on how German SDRs would be used as a temporary (temporary as in European financial short selling ban, and temporary reduction of initial margin to maintenance for everyone to appease MF Global clients) backstop for Europe:

The idea of using SDRs to fight financial contagion isn’t new. When the collapse of Lehman Brothers in 2008 unleashed a financial crisis, the G-20 in 2009 approved a $250 billion SDR allocation to help backstop efforts to fight the spread of the crisis.

 

The European Central Bank has been buying euro-zone bonds in an effort to keep borrowing costs of weakened members from exploding. But the ECB’s efforts are considered by some experts to be outside of its central mandate to maintain price stability. And the ECB has said that its special measures – buying euro-zone debt — should be temporary and limited in scope. That is another reason why some people are advocating the IMF play a greater role in propping up weakened euro-zone members and become the lender of last resort.

 

Speaking to reporters at the close of the Cannes summit, Merkel indicated that G-20 leaders agreed in principle that the IMF and EFSF could work together, but the summit could not agree on any specifics.

 

“We have an interesting process ahead of us and the discussion is not yet concluded,” she said.

Reuters brings more on the the logical German reaction to the EFSF and ECB’s extortion attempts:

“We know this plan and we reject it,” a Bundesbank spokesman said.

 

Seibert said several partners had raised the question in Cannes whether SDRs could be used to strengthen the EFSF but Germany had rejected this plan and discussions at Monday’s Eurogroup on Monday would not discuss this topic.

 

The newspapers had said the issue was taken off the agenda at the G20 following Bundesbank opposition but that it would be debated on Monday at a Eurogroup meeting of euro zone finance ministers.

Why will it be debated? Because when at first you don’t succeed, try, try again. Germany may be crossed off the list, but here is who is next in order of appearance. Sooner or later, Europe will stumble on that one “leader” whose gold is less valuable than their political stability, because after all, a “united”, “EMUed” Europe has the biggest MAD trump card of all.

Read the entire article HERE.

BY CRIS SHERIDAN
10/19/2011
Financial Sense

The Government Accountability Office (GAO) just released its findings from their second audit of the Federal Reserve revealing a well-established revolving door and numerous conflicts of interest between the Fed and top banking executives, most of whom sit on its board.

As revealed in The Sanders Report, which should probably be mandatory reading for the Occupy Wall Street movement, specific board members directly profited from removing restrictions or giving certain banks access to cheaper Fed loans while simultaneously holding stock in that company. Although such actions would’ve normally been restricted by the Fed’s own internal regulations to prohibit such obvious conflicts of interest, waivers were issued instead to certain individuals allowing them to maintain their financial relationships with companies like the most-beloved Goldman Sachs.

What is most troubling, however, aside from the numerous incidents cited in the report, is how completely non-transparent the Fed is when compared to other central banks around the globe. Here’s an astonishing list of examples from The Sanders Report mentioned above (emphasis mine):

The central bank in Australia prohibits its directors from working for or having a material financial interest in private financial companies located in its country. If such regulations were in place at the Fed, the CEO of JP Morgan Chase and many other bank executives would be prohibited from serving on the Fed’s board of directors. (See page 65 of GAO report)

The central bank in Canada requires its directors to disclose any potential conflicts of interest as soon as they are discovered; avoid or withdraw from participation in any real, potential, or apparent conflicts of interest; and cannot vote on any matters in which there is a conflict of interest. If these regulations existed at the Fed, Stephen Friedman would have been required to immediately resign from Goldman’s board, sell his Goldman stock, or resign from the Fed’s board of directors. Instead, Mr. Friedman was allowed to financially benefit from the increase in Goldman’s stock while it received approval from the Fed to become a bank holding company and received billions in emergency Fed loans. (See page 46 of GAO report)

The central bank in Canada also prohibits its directors from having affiliations with entities that perform clearing and settlement responsibilities in the financial services industry or serve as dealers in government securities. The Fed does not. These regulations would have prevented both Friedman and Dimon from serving on the Fed’s board of directors. (See page 46 of GAO report)

The directors of central banks in Australia, Canada, England and the European Union all have to disclose potential conflicts of interest and must disclose its conflict of interest policies on the internet. The Federal Reserve does not. (See page 47 and 49 of GAO report)

Unless you have time to read all 127 pages of the GAO release, I highly encourage you to read the 5 page Sanders Report instead. Given how ugly and incriminating this information is, the Fed should start thinking about some high-profile firings or, at least, putting together a top-notch public relations team…if they haven’t already.

If they don’t do something, expect to see protesters showing up at the Federal Reserve Bank in New York pretty soon (conveniently located down the street from Zuccotti Park at 33 Liberty Street).

By the way, for those of you who believe our banking institutions are the root of our financial problems, I pose to you the following questions:

Q: Which is the largest bank in the nation?
A: Our central bank, the Federal Reserve

Q: Who is primarily responsible for supervising and regulating the banking industry?
A: The Federal Reserve

Q: Who is reponsible for maintaining financial stability?
A: The Federal Reserve

Q: Who lowered interest rates to artificially low levels and helped foster a speculative housing bubble?
A: The Federal Reserve

Q: Who said on live television in 2005 that we weren’t in a housing bubble and that we wouldn’t see a recession? (click here for video)
A: Federal Reserve Chairman Ben Bernanke

(BTW, if you think that a housing bubble and market crash weren’t seen by others years earlier, click here)

Q: Who now bails out the banks with money printed out of thin air and raises the cost of living for everyday Americans?
A: The Federal Reserve

Of course, it wouldn’t be fair to blame the Federal Reserve for all our problems, but holding their feet to the fire to implement far greater transparency and a comprehensive elimination of various conflicts of interest with member banks is a good place to start.

Read the entire article HERE.

BY KEITH FITZ-GERALD
Chief Investment Strategist
Money Morning
October 12, 2011

Do you want to know the real reason banks aren’t lending and the PIIGS have control of the barnyard in Europe?

It’s because risk in the $600 trillion derivatives market isn’t evening out. To the contrary, it’s growing increasingly concentrated among a select few banks, especially here in the United States.

In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.

The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

Derivatives played a crucial role in bringing down the global economy, so you would think that the world’s top policymakers would have reined these things in by now – but they haven’t.

Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.

Think I’m exaggerating?

The notional value of the world’s derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.

The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.

Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.

Tick…Tick…Tick

To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.

Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.

A governmental default would panic already anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.

Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.

And that’s why banks are hoarding cash instead of lending it.

The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they’re doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.

What really scares me, though, is that the banks

think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000.

But haven’t we heard that before?

Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.

According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy – the countries most at risk of default. But they’ve lent $275.8 billion to French and German banks.

And undoubtedly bet trillions on the same debt.

There are three key takeaways here:

There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty – JPMorgan Chase & Co. (NYSE: JPM), BNP Paribas SA (PINK: BNPQY) or the National Bank of Greece (NYSE ADR: NBG) for example – let alone multiple failures.
That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they’ve already made.
And the fact that Wall Street believes it has the risks under control practically guarantees that it doesn’t.
Seems to me that the world’s central bankers and politicians should be less concerned about stimulating “demand” and more concerned about fixing derivatives before this $600 trillion time bomb goes off.

Read the entire article HERE.

BY STEVE ST. ANGELO
10/10/2011
Financial Sense

 

 

The world is about to peak in global silver production. This will not occur due to a lack of silver to mine, but rather as a result of the peaking of world energy resources, declining ore grades, and a falling Energy Returned On Invested – EROI.  The information below will describe a future world that very few have forecasted and even less are prepared.  This is an update to my previous article Peak Silver and Mining by a Falling EROI.  In my first article I stated that global silver production may peak in 2009 if we were to enter a worldwide depression.  We did not have the global depression as massive central bank printing and bailouts have thus far postponed the inevitable.

The world has entered a plateau of global oil production over the past 5-6 years.  A higher oil price has not brought on more supply to offset depletion rates from existing fields.  From the graphs above we see a correlation between global silver supply and oil production, especially in the latter part of the 20th century.  Up until the late 1800’s and early 1900’s the majority of energy used in mining silver came from human and animal labor.  It is truly amazing just how much silver was produced in the United States at this time without the use of oil and modern mining practices (information provided later in the article).  This all changed as global oil production as well as the technique of open-pit mining increased.

 

The 3 Big Energy Game Changers for Silver Mining

 

There are a number of some very large open-pit mining projects supplying silver that are forecasted to go into production within the next several years as well as others by the end of the decade.  It is astounding to see these 25-45 year extended forecasts by these mining companies without any consideration of what the energy environment will be like in 2015-2020 or later.  It seems like everyone in the sector assumes there will be ample supplies of energy at commercially viable prices.

 

This is where the trouble begins.  There are three negative energy game changers that will impact the mining industry going forward.  They are: (1) the Peaking of global oil production, (2) the Land Export Model and (3) the falling EROI – Energy Returned On Invested.  Of the three, I believe the falling EROI will be the most devastating.  Before explaining why this is the case, let’s take a look at each.

 

Peak Global Oil Production

 

According to JODI’s global oil production figures represented HERE in a post on theOilDrum.com, it looks like the global peak of convention crude/condensate and natural gas liquids took place in 2006:

 

 

Global oil production has increased steadily since the early 1980’s and has now been in a bumpy plateau for the past 5-6 years even with much higher oil prices.  It is true that there are more projects and oil fields slated to come online in the next several years, but much of the increase will be offset by depletion in existing fields.  To add insult to injury, the majority of oil that is exported throughout the world is being supplied by countries that are also increasing their own domestic oil consumption.  This is a double-edged sword for dependent oil importing nations— which leads us to the Export Land Model.

 

Export Land Model

 

The Export Land Model developed by geologist Jeffery Brown and others shows how oil- exporting countries suffer higher declines of exports due to increased domestic consumption.  As the nation increases its own oil consumption for their expanding economy, this causes exports to fall even greater than declines in oil production alone.  This becomes apparent when we look at what is taking place in Saudi Arabia.

 

 

In 1980, Saudi Arabia produced approximately the same amount of oil it is presently. However the kingdom is exporting 2+ mbd (million barrels a day) less oil.   The right side graph above reveals that as domestic consumption has increased (black line), exports have declined.  By 2020, Saudi Arabia’s domestic consumption is forecasted to reach 5.9 mbd of oil equivalent, including natural gas, which will decrease the country’s exports even further (Jadwa Investment’s “Saudi Arabia’s coming oil and Fiscal Challenge”).

 

If we add up all the other exporting oil countries and consider what the future percentage loss from this model might be, the drop in oil exports will be significant indeed.  Here we can see that the peaking of global oil production, plus the declining oil exports described above by the Export Land Model, puts a serious dent in the ability for future growth in the world economies.  If the world economies are unable to grow, neither will the supply of base metals and silver.

 

These two energy constraints are in themselves bad enough news for the global economy and the mining industry.  Unfortunately the third is by far the most devastating.  The falling EROI measures what amount of that oil will be available for market.  It is also described as the net energy that remains after production costs are considered.

 

The Falling EROI: Energy Returned on Invested

 

In my opinion, the EROI —Energy Returned On Invested— is by far the most important aspect confronting our economy, society and world at large.  Ironically, the EROI of oil and natural gas has been falling ever since man drilled his first well.

 

 

According to work done by Cutler Cleveland of Boston University, the EROI of U.S. oil andgas was 100/1 in 1930. It fell to 30/1 by 1970, and hit 11/1 by 2000.  Oil was so abundant during the 30’s in the States that it only took the cost of 1 barrel of oil to produce 100 barrels for market.  By 2000, it has declined nearly tenfold.

 

The graph on the right side shows the falling Global oil and gas EROI (by Gagnon, Hall & Brinker) to be 18/1 in 2006.  They plot with a solid black line that a possible 1:1 EROI projection may be by the mid 2030 decade.  As this EROI ratio continues to decline, it puts a huge stress on the world economies by increased energy costs while providing less net energy for the market.

 

There has been so much misinformation put out by different organizations as to the amount of oil and natural gas reserves that it is has totally confused the investing community and the public.  Whenever I get into a debate about peak oil or oil reserves there is always someone who brings up the notion that the United States is sitting on trillions of barrels of shale oil.  This is  the subject of a whole other article, but to get to the point, shale oil as a savior of the inevitable United States (or World) Energy Crisis is a pipe dream.  Here are the three biggest lies propagated in the U.S. energy industry:

 

1. 1950’s – Nuclear energy…..too cheap to meter.
2. 2000’s – Shale Oil trillion+ barrels of U.S. reserves
3. 2000’s – Shale Gas 100 years worth of U.S. supply

 

To explain why there is a great deal of hype in shale oil and gas, take a look at the graph below.

 

 

Shale oil is much more expensive to extract than light sweet crude in Saudi Arabia.  Many say that increased technology will bring more oil to the market, but it does so at a lower EROI.  The lower the EROI, the less net energy is available for market.  With less net energy, there is less growth.

 

Furthermore the depletion rates of a typical shale well in the North Dakota Bakken Field are 75-80% by the second year.  Shale gas depletion is even worse, with fields reported from the Texas Barnett Field declining 60% in the first year.  The notion that the U.S. will be able to increase oil production significantly with shale oil turns out to be a red herring when you figure that these severe depletion rates make it impossible to do so.

 

Another nail in the coffin for shale oil is its low EROI.  The figures on the right side of the graph above show the different EROI ratios for conventional and nonconventional energy sources.  The only thing worse on the EROI scale than shale oil (5:1) is tar sands (2-4:1).  Why are these EROI ratios so important and ultimately devastating to the world economy and silver mining?  The next graph provides the answer.

 

 

As we can see from the left side of the global oil peak, everything is rosy; high EROI ratios with a majority of net energy already consumed by the world economies.  Once we slide over to the other side, the picture gets downright scary.  Even though there is a great deal of oil on the downward side of the peak, the majority of it gets consumed in the production of the energy itself.  Once it costs more to produce a barrel than you get in return, the game is over.

 

Unfortunately, there is more to it than that.  There is a minimum EROI that a modern society needs to sustain itself.  All the EROI ratios listed above are figured from the point the oil & gas comes out of the well.  We have to remember the oil & gas has to be transported and refined and the interstate-highway system and infrastructure has to been maintained.  All of these are costs that are subtracted out of that EROI ratio.  This is explained in detail by Charles Hall & David Murphy HERE.  The bare minimum a modern society needs is an EROI of 3:1….but if you want the luxuries of art, entertainment, medicine, education or etc; the ratio has to be higher still.

 

The graph above is one possible forecast of net energy.  The creator of the graph has produced another showing a more gradual slope of net energy.  I have had several conversations and email exchanges with other geologists and engineers who believe the graph presented above is a more realistic representation than the second.  I agree.

 

Peak Oil is Here Whether You Believe it or Not

 

Before we get into the silver part of the article, there is one more topic on energy that needs to be discussed.  There is continued debate about the Abiotic Theory of Oil as well as the blocking of oil drilling in certain areas of the United States by environmentalists.  The Abiotic Oil Theory states that oil fields are continuously being refilled, so there will be no peak oil.  Even though this might be true in some small cases as it pertains to methane, the amount is infinitesimal.

 

 

The list of countries presently past peak is long.  If we consider a good portion of these countries are in areas of the world that do not have much in the way of regulations or environmentalists, peak oil still took place.  It is true that there is still some oil in the U.S. being kept from the market by environmentalists and the government, but in the end….it doesn’t change the overall picture all that much.

 

Lastly, for those of you who believe the information above is controlled by the Illuminati, Bilderbergs or whomever and there is still plenty of oil in wells capped all over the country, there is nothing that can be written or said to change your mind.  As illustrated by the data, peak oil is here whether you believe it or not.

 

As the world is currently peaking in oil production, the United States passed its peak forty years ago in 1971.   The same can be said for overall silver production.  The U.S. extracted the majority of its high grade silver by the middle of the 20th century.  Today, the U.S. has to resort to mining a great deal more total ore to produce the same or less silver than it did years ago.   This process is occurring throughout the world.  In my first article (link provided at the top of this article) most of the information on ore grades came from Gavin Mudd and his work on the Australian mining industry as well as data on declining global gold ore grades.   To continue to understand this ongoing process, I choose to focus on the United States as the USGS – U.S. Geological Survey – has kept some very detailed records of historical mining activity in the States.

 

CASE STUDY: United States Past Silver Production and Falling Ore Grades

 

In the early days, miners and investors sought out the best quality and highest ore grades they could find.  The higher the ore grade, the higher the profit.  Today, there is a great deal of excitement when mining companies release drill results with higher ore grades than expected.  Yet, these same ore grades would have been embarrassing to the prospector and investor just 100 years ago.  How the passage of time makes us forget what life was like just a short while ago…

 

The majority of the top eight silver ore-producing states in the country peaked in annual silver production before the 1940’s.  Only Idaho and Nevada had higher peaks after 1950.

 

 

Colorado had the highest annual silver production of all 50 states with 25.8 million ounces produced in 1893, almost 120 years ago.  New Mexico peaked in 1885, Montana in 1892, California in 1921, Utah in 1925, and Arizona in 1937.  Even though Idaho had its true peak in 1966 at 19.8 million ounces, it surpassed its previous record by only 200,000 ounces, which occurred in 1937.  Nevada peaked late in the game due to two factors:  1) it has recently become the largest gold producer in the country currently, providing nearly 75% of nation’s gold.  (with gold mining comes by-product silver), and  2) due to the McCoy/Cove Mine, which single-handedly mined 11 of the 27.4 million ounces Nevada produced at its all time peak in 1997.

 

Not only did the McCoy/Cove Mine help Nevada to become the second-highest silver producer in U.S. history, it also accounted for 35% of all silver extracted from the state between 1987 and 2003.

 

 

The record silver production in Nevada as well as the McCoy/Cove mine are now gone.  In its last recorded year of production, the McCoy/Cove Mine produced 596 oz of silver in 2006.  That’s correct, a mere 596 oz (that year it was still producing some gold).  According to theMajor Mines of Nevada 2010 publication just released, Nevada only produced 7.3 million ounces of silver in 2010…a 70% decline in just 13 years from its peak.

 

From the late 1800’s to 1950’s the same eight states listed above produced the lion’s share of silver in the country.  Very few people who are asked will know which state was the largest producer at this time.  Most when asked will say Idaho, Utah or Colorado.  I was quite surprised to find out that Montana outperformed them all by producing 775 million ounces by 1950.

 

 

Montana produced the most silver in the country at this time due to the richness of copper in the state, where silver was a by-product.  According to the MONTANA MINING NEWS MINING JOURNAL dated 8/30/1930:

 

Anaconda Copper Mining Company is confining work at the Flathead Mine, near Kalispell, Montana, to development, because of the present metal prices, according to a reported statement by Jack Dugan, superintendent. Thirty men are employed in extracting 40 tons daily, of ore, said to average 50 ounces of silver, per ton.

 

This is an example of the kind of high grade ores they were pulling out of Montana back in 1930.  Impressive as it was, this was not the average.  To give you an idea of the difference of 75 years, Montana produced 9.3 million ounces of silver in 1935 at an average ore grade of 3.45 oz/ton.  In 2010 there were only two mines producing silver as a by-product of copper.  The larger producer is the only publicly traded company in Montana and it produced a little more than 1 million ounces of silver at an average ore grade of 0.87 oz/ton or a 75% decline.

 

The USGS provides Mineral Yearbooks for the states back until 1932.  One can imagine what the ore grades must have been in 1892 when Montana produced its most silver in one year at 19 million ounces.

 

Idaho:  the Largest Silver Producer in the Country’s History

 

The one state that sticks out like a sore thumb in the graph above is Idaho.  It is the only state that has produced over a billion ounces silver by 1990 with the majority of it after 1950.  Even with this significant production, Idaho wasn’t able to escape the negative aspects of falling ore grades.

 

In the late 1800’s and early 1900’s a larger percentage of silver came from a grade called “Dry and Siliceous Ore”.  During this time, between 40-50% of silver produced in the country came from this type of ore.  To give you an example in 1922, 46.8% of silver in the U.S. came from dry and siliceous ore.   The percentage dropped over the next decade— falling some years into the teens (especially during the 1930’s depression).  By 1935, it climbed back to 40%.

 

This is the sort of ore that primary silver mines are made of as it contains the most silver per ton.  Idaho had some of the richest dry and siliceous ore grades in the country.  The graph below represents how much this sort of ore grade has declined since the 1940’s.

 

 

The reason why this graph only shows data up until 1980 for Idaho and 1989 for the U.S. is due to the fact that information was withheld from the USGS due to proprietary reasons by the mining companies.  Furthermore, this is also true for individual state reporting of detailed silver statistics after 1990.  In the early days the states provided the USGS with so much information on gold and silver that many of the gold-silver reports were over 200-300 pages.  Today the Silver Yearbooks barely fill 15 pages.

 

To bridge the gap to the present day, we can look at what has taken place in the largest publicly traded mining company in the state.  Hecla’s Lucky Friday Mine in Idaho produced 3.3 million ounces in 2010 at an average ore grade of 10.25 oz per ton.  The chart below compares the difference from the same mine in 1965.

 

 

Here we can see that Hecla has only produced a little more than 100,000 ounces of silver than it did in 1965 but has to process almost double the amount of total ore.  This insidious decline of silver ore grades over the years seems subtle to the mining industry that is focused on quarterly results, but becomes an increasingly difficult problem now that the world suffers from peak oil and a falling EROI.

 

The United States:  Produced 25% of all Global Silver 1900-1950

 

When the U.S. was the Saudi Arabia of the world in oil production at the early and middle part of the 20th century, it was also the second-largest silver producer in the world behind Mexico.   Of the 10.5 billion ounces of silver produced by the world from 1900-1950, the United States accounted for 2.7 billion (or 26%) of the total amount.

 

 

This historical graph is relevant due to the fact that in next 60 years from 1951-2010 the U.S. only produced 2.58 billion ounces of silver… with significantly falling ore grades shown below.

 

 

The chart above represents total ore from mining gold, silver, copper, lead and zinc.  The majority of silver comes from base metal mining in which zinc/lead provides the highest percentage compared to copper and gold.  In 75 years, the total ore grade of silver has fallen nearly 92% while actual production has remained basically flat.  This is due to the fact that all base metal ore grades in the U.S. are falling as well.

 

For example, copper has shown a huge decrease in ore grade since the early 1900’s.  In 1906 the average ore grade for copper was 2.5%.  By 1935 the average copper ore grade had fallen to 1.89% and in 2009 the United States produced copper at 0.43% a ton.  This is a decline of 77%.

 

The Falling EROI and Declining Ore Grades

 

On top of declining ore grades and adding insult to injury, is the falling EROI of energy.   When the U.S. and the world were tapping into high quality concentrated ore grades in the early years, they did so with the majority of human and animal labor.  This kind of labor was not only very efficient but it also utilizing a higher EROI.  The open-pit mining practices employed today are in fact quite the opposite….extracting metal at a much lower EROI.

 

For example, people today have this misguided opinion that modern farming is very efficient.  They see one farmer on a huge tractor working hundreds or thousands of acres of agricultural land.  They do not factor in all the energy it costs to plant, fertilize, harvest and process the crop.  This does not include all the energy and technology it takes to develop hybrid seeds, the manufacturing of the tractor and equipment as well as many other aspects that go into modern farming.  In reality, the pre-industrial farmer with horse and plow was extremely more efficient that his modern counterpart.

 

FOOD EROI’s

 

Hunter Gatherer = 10/1
Pre-Industrial farmer = 10/1
Modern high-tech farmer = 1/10

 

The pre-industrial farmer with horse and plow was able to produce 10 calories (of food) for market for every 1 calorie of energy (food) consumed by the operation.  Today, the modern farmer needs to consume 10 calories of energy to provide only 1 calorie of food for market.  If we consider this ratio, the modern farmer is 98.8% less efficient than the simple farmer with horse and plow.

 

The only reason why modern farming practices have been successful at this horrible rate of efficiency is due to the high EROI of energy over the past 100 years.  Now that the EROI is falling considerably, it is putting severe pressure on the agricultural industry.  This will also be true for the mining industry.

 

Base metals are extracted by either open-pit or underground mining.  Of the two, open-pit mines account for the larger percentage of metal produced in the world. (Surface Mining Methods and Equipment)  The technique of open-pit mining utilizes huge excavators and large haul trucks to move the ore from the mine.  There is a great deal of energy consumed in the development, manufacturing, maintenance and operation of these huge earth moving machines in the mining industry.

 

It is difficult to estimate an EROI ratio for open pit mining as the end product is metal and not energy.  That being said, a simple rule of thumb can be assumed if we take the negative EROI of modern farming as an example.  The larger and more complex the machine used in industry, the more inefficient its production as it pertains to the EROI.

 

Now that we understand the past and present EROI ratios in the agricultural sector, we can see why the early miners and prospectors were much more efficient in producing silver than the huge open-pit mining operations of today when we consider all the energy involved.  As the world’s energy sources start to decline in the future and the falling EROI destroys an ever increasing portion of the net energy available for market, the number of open-pit mines will decline as well.  As this process takes place, the peak in global mining will occur due the fact that human or animal labor cannot equal the extraction rate of diesel powered earth-moving machines.  What is taking place in the mining industry today is the WORST OF BOTH WORLDS… declining ore grades on top of a falling EROI of energy.

 

The Coming Global Depression:  Another Nail in the Coffin for Peak Silver

 

The world hasn’t suffered an economic depression for almost 80 years.  The Kondratieff-Wave analysts who study business cycles say we are now overdue for a depression.  Even though this is true, they are correct for the wrong reasons.  Business cycles have occurred because humans were able to constantly grow and expand their economies.  It was due to the 10/1 EROI of the pre-industrial farmers that enabled the rest of the economy to grow and flourish.  After several generations of booms, we had the busts.

 

As we moved into the modern-industrial economy cheap energy with a high EROI allowed the world economies to grow exponentially—allowing these business cycles to continue.  Today we are at the top Boom part of the cycle.  The big Bust and depression have been postponed due to the ability of central banks to print money and financial institutions to invent hundreds of trillions of dollars worth of derivatives to hedge overly inflated assets.  When the global depression finally arrives, we will never return to anything like we enjoyed before.  This bust will be the depression that ends all global depressions.

 

If we consider what took place during the last depression, base metal & silver mining activity fell off a cliff.  The interesting thing to note in the next two graphs below as global silver production declined, gold production actually increased.

 

 

 

Global silver production declined 38% from 1929 to 1932, whereas gold production actually increased 24% in these three years.  It took eight years before the world was able to increase silver production over its 1929 figure.  Gold on the other hand, increased its global production a staggering 80% during the same time.

 

This time will truly be different.  The world will not be able to increase its gold production anywhere near the percentage it did in the 1930’s.  There is a good chance that actual global gold production will decline as the supply chains break down disrupting the highly technical method of refining and processing gold.  Another reason may be due to its dependence on copper production as part of its supply.  When economies collapse, so does the demand for base metals such as copper, zinc and lead.  This is the reason why silver production suffers greater during a depression than gold.

 

 

Here we see just how much difference there is in the base metal mining percentage between gold and silver.  Zinc & Lead account for the larger portion of the base metal percentage of silver mining, whereas copper production provided 15% of all the gold produced in the world in 2010….or 75% of the base metal pie.

 

When the world’s central banks are unable to continue to prop up the global economies with money printing, economic growth will drop considerably.  China is starting to show signs of an economy heading into a brick wall.  Base metal production will decline significantly in the following years cutting back the production of silver as well.  If history is a good reference, the future global supply of silver can decline between 20-40%.

 

A Brief look at World Silver Production

 

Over the past decade global silver production has increased on average between 2-3% per year.  In 2010, according to the World Silver Survey, global silver production reached 735 million ounces of silver.   In the first half of 2011 some of the top silver-producing countries have increased their production while others have seen declines.   The top producing silver mine in the world, BHP Billiton’s Cannington, has seen its production decrease from 18.9 million oz in the first half of 2010 to only 15.5 million ounces in the first half of 2011 (an 18% decline).  Cannington — like all mines— suffers from falling ore grades.

 

 

In 2000, Canningtion mined 1.6 million tons of ore and produced 30 million ounces of silver at an average ore grade of 636 g/t.  By 2011, it mined 3.1 million tons of ore (or 92% more) just to produce an additional 5 million ounces than it did eleven years ago.  What is occurring at Cannington is typical of mines throughout the world.

 

If we take a look at global silver supply, only a handful of countries have increased their production significantly over the past several decades.  Out of all the countries listed in the graph below since 1985, China has had the largest percentage increase.  China increased its estimated production from only 2.5 million ounces in 1985 to 99 million oz (or +3,850%) by 2010.  The other countries that have increased their production in order of highest percentage are, Bolivia from 3.6 mil oz to 41 mil oz (+1,039%), Argentina from 2.1 mil oz to 20.6 mil oz (+880%), Chile from 16.6 mil oz to 41 mil oz (+147%), Peru from 58.2 mil oz to 116.1 mil oz (+100%), and finally Mexico from 73.2 mil oz to 128 mil oz (+75%), in the same time period.  Even though Mexico is the number one silver producer in the world, it had the lowest percentage increase of all six countries.  These countries account for 61% of all global silver supply.

 

 

Australia was not included in the graph for two reasons.  First, even though its production has increased 71% since 1985, its future growth is not forecasted to improve as much as the nations listed above.  Secondly, because of Australia’s western form of capitalistic government, it is least likely to deal with issues of political instability, threats of nationalization or protectionist policies such as those in South America, Mexico and China.

 

Argentina, Bolivia, Chile and Peru— which are located in South America— may suffer from the same type of policies that have plagued the resource industry in Venezuela.  Not only are Venezuela’s oil fields nationalized, in August of this year, President Hugo Chavez has also ordered the same for the gold mining industry.

 

In Mexico, billionaire Hugo Salinas Price has gained significant support in the country to reintroduce the Silver Libertad as legal tender to compete with the Peso for the Mexican people.  If this policy were to pass, a large percentage of Mexico’s silver production would be consumed by its own people to protect them from continued inflation.  Furthermore, the country suffers from a great deal of upheaval and violence from the drug wars which could lead to political instability possibly threatening the mining industry.

 

Lastly, over the past several years the world has felt the ramifications of China’s cutback of rare earth mineral exports.  China currently produces between 95-97% of the 17 rare earth minerals in the world.  Not only have prices of rare earth minerals increased substantially due to this monopolistic policy, it is also forcing foreign companies to move their facilities that manufacture end-user products in China.  These companies are also being requested by China to transfer valuable technology to other domestic companies so they can benefit from the knowledge.

 

This may also occur in exports of Chinese silver.   As global tensions increase due the continued disintegration of the world fiat currency system, China may decide to put a total ban on silver exports.  Even though Chinese exports have declined substantially (from 3,000 metric tons in 2005 to only 1,575 metric tons in 2009), there is a good possibility that they may turn off the silver spigot completely.

 

The countries listed above are enjoying the best records of increased silver production, but at the same time are some of the worst candidates for dependable future global supply.

 

Final Remarks and Conclusion

 

The world produced a record amount of silver in 2010.  Many analysts are forecasting a continued increase in global production for the next decade.  There are several factors that show why this will not be possible.

 

As the world peaks in global oil production and the net energy available for market continues to shrink due to the falling EROI (Energy Returned On Invested), of oil and natural gas, global economic growth will come to a screeching halt.  The falling EROI of energy is a one way street to the bottom.  Unconventional energy sources such as shale oil, shale gas and tar sands will not be able to stop this decline.

 

As global economic growth disintegrates so will the demand for base metals – which 70% of silver is a by-product.  On top of that, silver ore grades are relentlessly falling in mines throughout the world which takes an increasing amount of energy just to keep production flat.  If the mining industry tries to incorporate more human and animal labor to offset declining oil based energy in the future, it will do so only at much lower rates of production than today.  This is due to the fact that human or animal labor cannot match the extraction rate of diesel powered excavators or huge dump trucks when it comes to mining silver.

 

Then there is the negative effect of a global depression on the production of silver.  Presently the world has entered into tremendous chaos and economic turmoil.  Conditions are ripe for a complete disintegration of the financial markets, thus pushing the world over the edge into a new dark age of hyperinflationary depression.  In this sort of atmosphere, countries may resort to the nationalization of mines as well as other protectionist’s policies.

 

When the nails of the peak silver coffin are added up, the death of increasing future supply is close at hand.  The CEO’s and analysts in the mining industry are for the most part oblivious to these factors that will destroy their ability to make viable forecasts of future projects.  It amazes me to see professionals plan a huge open-pit mine with a 25-45 year economic plan without any consideration of what the energy environment will be like at that time.  For some strange reason, there is this false assumption that “If we build it, the energy will come.”

 

If the world enters a depression within the next year or two, this will certainly guarantee the global peak of silver production.  Why?  It won’t matter if the global economy recovers in the next decade, because the peaking of oil and the falling EROI of energy will have destroyed enough net energy to kill any attempt to bring global silver production back to the level it was before.

 

Lastly, anyone who is good at connecting the dots will realize the ramifications of this article go way beyond just the peaking of silver.  The falling EROI of energy will not only be a destroyer of precious net energy, but will also help bring down the largest empire in the world.  This will be the subject of a future article.

Read the entire article HERE.