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hatrack

(59,439 posts)
Sun Jul 29, 2012, 09:37 PM Jul 2012

SmartMoney (sic) Magazine: Fraud, Energy Bubbles & The Benefits Of Default

EDIT

It will thus come as no surprise that the cover story on the August 2012 issue of SmartMoney is "The Return of Fossil Fuels," and that it rehashes the latest clichés about vast new gas and oil reserves without raising any of the inconvenient questions that a competent practitioner of the lost art of journalism, should one be wakened from enchanted sleep by the touch of a 1940s radio microphone, would ask as a matter of course. The article trumpets the fact that America is importing less oil than last year, for example, without mentioning that this is because Americans are using less oil—unemployed people who’ve exhausted their 99 weeks of benefits don’t take many Sunday drives—and it babbles about natural gas for two largely fact-free pages without mentioning that claims about vast supplies far into the future rely on assumptions about the production decline rate from fracked shale gas wells that make professionals in the gas drilling industry snort beer out their noses.

All this, inevitably, is window dressing for suggestions about which stocks you should buy so you can cash in on the fracking boom. Last I heard, it was still illegal for journalists to take payola for pimping individual companies, or to speculate in the stocks they promote; still, I trust my readers will already have realized that one set of professional market players will get copies of the magazine the moment it hits the newsstand, snap up shares in the companies promoted in each issue, and dole them out at inflated prices to SmartMoney readers who get their magazines later, while another set of professional market players will take out short contracts on those same stocks as they peak, wait for the rush of buyers to crest and recede, and cash in on the inevitable losses. Those are among the ways the game is played—and if this suggests to you, dear reader, that the readers of SmartMoney are not going to get rich from shale gas by following this month’s tips, well, yes, that’s what it means.

This is business as usual in the financial industry, which has made a lucrative business out of extracting wealth from the investmentariat in various ways. This is part and parcel of the broader and even more lucrative business of extracting wealth from everywhere by every available means. The question that might be worth asking here, and is rarely asked anywhere, is whether the financial industry provides anything to the rest of the economy commensurate with its immense income and profits. Any economics textbook will tell you that companies raise capital by issuing stock, selling bonds, and engaging in a few other kinds of transactions in the financial markets, and that this plays a crucial role in enabling economic growth. Well and good; there are many other ways to do the same thing, but we’ll accept that this is the way modern industrial societies allot capital to new and expanding businesses. How much of the financial industry’s total paper value has anything to do with this service?

Let’s do some back of the envelope calculations. In 2010, the latest year for which I could find figures, the total value of bonds issued by nonfinancial businesses was $1.3 trillion, and the total net issuance of stock by all companies was $387 billion—that includes stock issued by financial businesses, but since this is a rough estimate we’ll let that pass. Total stock and bond issuance in 2010 to support the production of real goods and services was thus something less than $1.7 trillion; let’s double that figure, just to leave adequate room for other ways of raising capital that might otherwise slip through the cracks, for a very rough order-of-magnitude figure around $3.4 trillion.

EDIT

http://www.energybulletin.net/stories/2012-07-26/upside-default

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