Monetary Policy and Weaseling Out of Debt
Posted by Gail the Actuary on August 28, 2007 - 3:00pm
This is some correspondence between me and an an individual known here as Shunyata. Shunyata is an individual who is involved with managing financial derivatives. Shunyata's education and careers have spanned several disciplines, including actuarial science, statistics, mechanical engineering, and financial engineering. These have given him a breadth of perspective on the world's financial situation.
Dear Shunyata,
Some of the financial things I have been reading lately are downright alarming.
I keep seeing comments by people concerned that other countries will cut off the US debt spigot.
One concern is the huge amount of sliced and diced debt that has been sold around the world with very questionable assets behind it.
Another is the US Balance of Payments:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/21...
A third issue is the extent to which countries are unhappy about the US overstepping bounds militarily.
Any thoughts?
Sincerely,
Gail
Dear Gail,
At the risk of sharing too much opinion, I will speak frankly about my perspective. Of course these are entirely my PERSONAL opinions.
The current prosperity of the US is the same prosperity seen in a person with a large home loan, a large car loan, and a mountain of credit card debt. He's living lavishly and living at the mercy of his creditors. The US is VERY affluent and has a LOT of debt. And taking the Machiavellian view, the US likes spending other people's money and has no wish balance its accounts if it can borrow without genuinely repaying.
How do interest bearing loans get repaid? There are three ways:
1. Devote your future productivity to repaying principal and interest (this is painful and no one wants to think about this).
2. Expand your monetary wealth through efficiency gain (exceedingly difficult) or converting your assets to cash (e.g. pumping oil out of the ground or consuming other endowments).
3. Inflate your way out of debt (more on this, and this scares me the most).
A huge amount of our expanding economy (and hence easy debt repayment) has come from consumption of our natural endowments. You only need to look at the correlation between energy consumption and GDP, both across time and across nations, to see that we have been relying heavily on 'spending the inheritance'. This realization will slowly dawn on us, although not voluntarily, and we will modify our behavior accordingly whether we like it or not. There is a nice graphic comparing a photo of the dark side of earth from space with a map coded for per capita GDP. It shows electric lights (energy consumption) line up exactly with per capita GDP!
The inflation angle is more insidious because we are talking about monetary policy. So long as people think they NEED dollars, the US can print as many as they like and in effect simply print money to pay off its debts. In the '70s we went off the gold standard (so that a dollar's value is based in demand for dollars rather than intrinsic value) and negotiated with the Saudis to trade physical protection from hostile neighbors for an agreement to conduct all oil transactions in dollars. What a coup! Now everyone who needs oil needs dollars and we are all too happy to provide them. (There is evidence/conjecture that dropping the gold standard and establishing dollar-denominated oil was a deliberate, coordinated plan.) Rising oil prices are our friend because we can print more money to pay off our debts and at the same time mitigate the US impact of rising oil prices. After all, there are more dollars floating around to buy it! Why do you think the economy hasn't been crushed by $70 oil and $3 gasoline?
This coup is threatened from several fronts:
1. Economically competing countries like China hold vast reserves of these dollars we have been printing. They are also wise to the fact that their dollar reserves are being eroded away by the day as we print more dollars. (The Saudis are also well aware of this. They are are effectively only getting$50/bbl thanks to the diluted dollar.) They have begun selling their dollars thereby reducing the global demand for dollars and our ability to inflate our way out of debt. Heaven help us if we ever really annoy them. They could destroy our country over night by flooding the world with dollars - more certainly than a nuclear strike! In fact, China has leaked military documents to this effect!
2. Several countries are moving to euro-denominated oil bourses - further eroding demand for dollars. The first Iraq invasion was within a few months of Saddam moving to set up just such a bourse. Iran launched one earlier this year. Unfortunately I'd say a US military reaction is within the realm of likelihood, if not outright probable.
3. The rest of the world is becoming concerned that our currency (and ability to purchase goods or repay debt) could collapse catastrophically. You see comments from various central banks to this effect, although very obliquely.
The net impact is that the dollar has been hemmoraging furiously for the last year or so. The US and Canadian dollars are virtually one-to-one now! So far this has been an orderly and tame development. But the currency markets are wanton and can move catastrophically with lightning speed. And if our currency collapses we will have no time to even think of a response. Instantly we will lose all global purchasing power and all ability to borrow.
If we are running out of resource endowments and we can't inflate our way out of debt, our only recourse is to tighten our belt and divert our productivity from leisure (and hopefully not subsistence as well) and apply it to debt repayment. I fear interesting times lie ahead.
Regards,
Shunyata
What do you think? My note doesn't mention other issues like the tight oil supply. This is the opinion of one individual. Does this make sense to you? Are there some happy endings that might come out of all of this?
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Shunyata,
Thanks for your comments! Anything you would like to add? For example, any ideas about how the derivative market will be able to handle the increased volatility we have been seeing lately? Another example--are there any recent things in the market that stand out to you?
I do want to comment on the ability of the derivatives market to cover the dislocation and volatility that is already arising. Derivatives are strange beasts and commodity derivatives especially so. These instruments do not necessarily behave as one expects and a large influx of naive players (desperate to cover their risks in an exploding market) can easily change the nature of the game to everyone's detriment. I want to carefully think through how I present these ideas, however, and it will be a few days before I can respond.
- Shunyata
Why not put some math behind this discussion? These arguments are largely rhetorical and essentially moot unless you can show a mathematical progression to a Ponzi collapse or stabilization. It may not in fact be possible to show this mathematically, but somebody really should try. TOD is renowned for this kind of thinking, and it is the sure-fire way we can get some fresh and new insight.
"Empire of Debt" puts math to it. The problem with putting math to it is that you start to find out that the real numbers have been hiding behind the facade of sanity in the markets.
As long as we keep the argument rhetorical, we don't have to think about how bad it really is. Just like oil and food production.
Thanks, I see that this is a book by Bill Bonner. I will try to check it out.
This pitiful war in Iraq has increased military spending to levels similar to what was done during WWII in terms of percentage of GDP. It would be better to leave the Iraqis alone. Before Bush went making false accusations and guns blazing fire saying, "Bring them on." They had more peace, less torture, and integrated neighborhoods. A war of aggression is not a good return on investment for there might be hell to pay afterward.
There was once a balanced budget and it is time to try to get the government to be more responsible instead of some out of control leviathon going shopping and hiring more bloated beaurocrats on borrowed credit. In such times it is good to have some savings and paid for assets.
U.S. military spending is 3.7% of its GDP. In WWII, U.S. military spending peaked at 37.8% of GDP:
http://en.wikipedia.org/wiki/Military_budget_of_the_United_States
Nasguy,
Back in those days the US had a lock on manufacturing, now it has a lock on debt. That 3.7% GDP as well has greater leverage when the US is fighting a dirty war rather than one considered by the populous as morally right and noble.
Really how does the GDP then compare to the GDP now? Hurricane Katrina and putting the obese on life support is considered plus in the ledger book of GDP.
As well, I can't even begin to imagine what life would be like in the US if that 3.7% rose to 37.8 % ... maybe pretty good, with full employment and personal savings rising until the oil ran out and the world left a smoking ruin.
Remember, the liars are keeping the "war on terrorism" off-budget. The official budget is $500 billion, the war budget is over $100 billion, and parts of military obligations are hidden in the Department of Energy and the Department of Veterans Affairs - both of which will explode.
Finally, there's the vast amount of extra deficit spending over the decades from the military, which have been turned into permanent interest-bearing debt. And interest rates are heading up again. Figure it'll soon be $300 billion a year in added interest payments?
So this puts us at the levels of the Cold War, against an opponent so puny that it would be invisible against the mighty Soviet war machine that also turned out to be largely a fraud.
Unless what we're really paying for is the empire of bases in 130 countries that mostly pre-dated 9/11. Why didn't we close those down to concentrate on what "really" matters?
Good stuff Shunyata. Nice connection between money and resources, most people overlook this obvious starting point, and this is because once the unaccoutable fiat world has had enough effected deployment of time to let the rot work its destructive majik into minds, then with a generation or two we tend to get the outcome we ultimately deserve....we shall indeed see if something for nothing can be fiatfully imposed for much longer, lest infinium.
Shunyata also gave a slight mention of the defunct gold standard, which shows a bit of eco courage. The greater wandering masses and boob-tubed trained populace of this nation relates any mention of Au as a shiny yellow relic of the past. It has become associated with bad taste in jewelry and false teethy villains. That perspective of thought is not entirely incorrect concerning the properties of the physical usefulness of the metal despite the relative scarcity. BUT, the real worth and objective of Au (or any commodity untamperable and scarce) concerning the medium of money and its fiat issuers is this; currency has to be accountable, and good mediums of exchange should instill a storable worth of labor in the process. (also backed by the same physics) To do this requires discipline. The fiat dilemma revolves around anything that comes up (ethanol, and easy no pay til next Tuesday 2009 mortgages for example) and can invoke the false credit power in this opposites of true progress. Once again, this is because fiat begets nothing but more fiat. Fiat only understands itself and it really matters not if the journey is worthwhile or if it remedies any so-called problem in progress. In the silly unchecked quants, thus it is only concerned with replication of itself and the false progress is just another blind wave in it's wake.
An example of a blind wave would be people who extrapolate deeply into fiat money charts with greater hopes of discerning the next wave. (fiat profit economics)
Unbacked fiat backs itself up under the guise of progress, yet it can not understand much beyond itself (capitalism built on unbacked fiat - issued under the finite petro dollarium lately) Endorsements run the fiat mill of progress and the subsequent bullshit politics to sustain this hologram of unsustainable "Don't look beyond my feet attitude". Any solutions, however bright or bleak, first have to weather this multi-tierd fiat cobbled web of nonsense. This of course MUST happen before any reality runs out/dry.
Gold is/was a worthwhile check against the forces of unaccounted money/society dillution. There is no glimmer of sound currency without some scarcity behind it.
There is no worth of labored gains or store of value when there is no contents or rules to the medium of trade.
The markets are selling the real to cover up this fakery.
Unaccountable fiat always tends to destroy real curves of learned resourcefulness with easy comfort marketeeeeeering.
In very simplistic terms it could be summed up as this; Why bother when "bother" is cheaply given away.? Cheap has become our Ceaser, so, cheap we shall give back.
The fedgodz only purpose is to take care of the biggie bankerias first, hence that "look thee other way" mentality with Citi and BoA. The babelin' media heads are very much certain that if only enough liquid fiat nothingness can continually be injected, then all will be well, and infinite charades can inflatingly resume the proper derivements on thee said ongoing entitled enhancements....lolol. Sorry, It is quite a true sentiment though. (bullshit begetting more bullshit) I am not the least bit convinced. Sooner or later,(and sooner with depleting resouces) this great green fiat bean counter/grinder/blender/heli-chopper of ongoing somethings for nothings will indeed sputter itself into a long emergency Kunstler like puke. And as so far as increased globalization to the rescue goes....How do we get things to become more globalized with less available liquid energy mobility propelling it across the folded bounds with an increasingly worthless unbacked fiat medium of exchange?
All of the psychobabble fiat twisted and regurgitated Hegelian, Kant, Marxist, Keynesian economic logical triads won't change squat in this mammonized globalized world once the pilot lights begin to flicker. I really fear that we have become beyond complacent in our cheap easy indebtful creditized world to make real advances into replacement of this energy that allowed it. Yet I also believe we will change attitudes abruptly once the truth smacks us upside the alternative overmarketed head.
Long time reader of this fine thread, and me thinks 98% of thee entire governmental body of representitives could/should be replaced with the quality of thinkers from the drum :o)
So we should go back to the Gilded Age, when the entire gold-based economic system was so horribly rigged in favor of the rich that the bottom of the business cycle, then called "panics", would literally destroy the lives of the poor? So that cycle after cycle, a ratcheting effect put more and more wealth in the hands of the few?
You want to go back to the past because you expect to be one of the property-owning gangsters. If I were a poor renter in your tenement, your blessed deflation would cause my wages to collapse faster than my rent. Then your privatized coal companies would hike their prices in the winter, wiping out my savings. Then I would be in debtor's prison, no different than a privatized slave.
And then, sir, I would join a radical movement to blow your brains out. As millions of victims of hard-money capitalism did all over the world. Don't say "look at how bad that turned out" - they were STARVING right then, with no time for reasonable alternatives. Not that your predecessors ever came up with any besides moving West and murdering redskins to steal their land.
So don't bring back a past in which I would die or kill rather than endure. Isn't it interesting that with fiat currency or with a gold standard, the rich always find a way to get everything for themselves?
I should point out to both you and to RealMichigan that the past may not be relevant to the future. The nineteenth century was in a mode of exponential, FF-driven industrial growth. A stable money supply would actually be (and often was) deflationary in such circumstances. Of course, the gold supply was not always stable, as one gold rush after another would pump massive amounts of gold into the money supply. Thus, wild swings of inflation and deflation would occur. And yes, there were people ready to make the most of the opportunities that each swing presented, to the detriment of the more vulnerable members of society.
What we are facing in the future will be an inevitable, unavoidable, and unprecedented long-term economic decline, hopefully leveling off into a permanently sustainable zero-growth economy.
In a zero-growth sustainable economy, what you want is a stable money supply. Both inflation and deflation send misleading signals, and result in wrong economic decisions being made and resources being misallocated and wasted. In a zero-growth economy, nothing could be more harmful. Efficient use of resources becomes all-important, and a stable monetary value becomes essential to facilitate this.
In theory, I suppose that a gold standard could provide such a stable money supply. However, that assumes that we are all done with gold mining, and that none will be used up and lost. It also assumes that there are never any trade imbalances between any countries, and that there are no currency speculators. Those seem like big assumptions. It would seem to me that a better approach would be to simply fix the money supply at a specified amount and don't let it increase or decrease. This in turn would suggest that there would be little, if any, room for fractional reserve banking in a steady-state economy. Eliminate that, and a competently managed fiat currency would probably do the job just fine.
Sounds like a muslim economy.
For good reason, no doubt. They still have remnants of the stead-state economy of the ancient world.
The exception is that there can be and actually should be interest charged for money borrowed. In a steady-state, zero-growth economy, all assets must be used efficiently, and that means that all assets must have a rental value. That includes money. Interest is just the name we apply to the rent we charge for the use of money. If any asset has no rent charged for its use, then that asset is considered to be "free", and can be used or abused to one's heart's content. A zero-growth economy can't afford that, because it can't afford to replace assets that are wasted.
Muslim Banks do not engage in Usury. Sharia Law prohibits charging/paying interest. There is also an injunction against excessive risk taking. (probably as that would be considered gambling)
http://www.metimes.com/storyview.php?StoryID=20061129-083353-2138r
http://www.misysbanking.com/files/file5375_Islamic%20banking%20flyer%20P...
It is pretty much Don Sailorman position also. As an economy illiterate, I think this is an amazing statement by its simplicity and from an ethical standpoint.
Those nations that hold enough dollar reserves to cripple the US would likewise be crippled by such a move. China needs the US market to keep its population employed. Saudi Arabia needs protection now as much as they ever have. That's one reassuring angle on what is a scary subject. If the US sinks, the world will sink too.
It might be interesting to imagine what steps a foreign nation would take to insulate itself from a dollar crash, and then look if anyone is taking those steps.
Then why did the threat of dumping British pounds by the US in 1956 work? I'll tell you why - because the damage done to the US would have been minor in comparison to the damage we would have done to Britain and Britain knew this. Consequently they looked at the table and folded (withdrew from the Suez Canal).
If/when China can take less damage from dumping dollars than the US will take we have the same situation in reverse, with the US being the debt-ridden lackey waiting to be smacked around by a powerful creditor nation willing to risk short term economic pain to inflict their will upon us.
Learn from history or expect to repeat its mistakes.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
GZ-
This is correct, however the import substitution model was in vogue then, or rather, globalization was not as ubiquitous as it is now. If China beggars the US vis-a-vis dollar collapse, it would only be as a last resort, because they would lose their biggest market. So it may happen, but if it does it will be when we are deep at war -the uncertainty of such a strategy ascertains its not something that can be 'tested' easily - its either status quo or all-in. All-in would be nasty beyond belief for the capitalist system
Nate: IMHO, you guys are both looking at this situation from a very USA-centric point of view, i.e. "China is threatening". China has supported the USA economy by buying up a lot of the T-bills. Now China is saying we won't be doing this indefinitely, especially now that you are talking of us taking a 40% haircut on the balance we are holding. Obviously China would like to gradually diversify away from the dollar- there seems to be an assumption in the US media that China should carry the US permanently.
BrianT, you're right. It's short-sighted to anger one of our biggest lenders. China has every reason to continue to only allow a slow appreciation of their currency with respect to the US dollar. By tying their currency to a falling dollar China's exports to the US and other countries won't be threatened. What does threaten China's exports is a lack of quality control resulting from resource depletion. One example, leather gloves from China. It used to be you could use them a few times, now not even once. They produce more and more and by necessity use poorer and poorer quality materials due to resource limitations.
I expect foreign holdings of US dollars will provide a floor for the US stock market, after all, if other foreigners refuse to accept them, where else can you spend them for anything of value?
Americans keep saying the rest of the world can't let US sink.
But the alternatives aren't really pretty for non-American nations either:
1) Pay off all USA's debt through inflation they export to us
2) Keep up the fallacious view of a unipolar world and the problems it brings
3) Destroy our own economies (due to high inflation, tightly coupled dependence to US)
4) Lose the last bits of our remaining economic sovereignty
Remember, US is only 20% of world consumption these days.
The "rest of the world" (remember the rest of 6+ billion of us?) might just barely swim without you - at least for a while.
Not that we want, but maybe the alternative is even worse for us?
This seems to be very difficult for Americans to understand.
Personally I find it really sad that leaders of the great USA are willing to make others pay their debt instead of taking care of their own mess.
And, I'm sorry to say this, the majority of citizens aren't much better either.
Otherwise all Americans would be campaigning against war (against Iraq, against coming Iran war, against militarization of USA), against selling mis-rated securities to Chinese/Japanese/Brits and any attempts at inflating the debt away.
But that's not happening, is it?
But then again, I'm a citizen of a very small country with a budget surplus and among EU's tightest fiscal policies (which went through a really bad depression and came back stronger than ever), so what do I know.
It's tough to be at the top and try to remain an empire forever.
The oil market has held up the exchange rate of the dollar artificially until now. How long will that last? The Euro is starting to replace the dollar in the drug trade also. Ultimately we have to wonder what activities will be available to the United States after the "market clears" on the dollar. The debt is supposedly backed by the "faith and good will (future productivity)" of the people of the country. Since most have become consumers, making money based on trading each other's debts to perform services, what value will be available from the U.S. to the world economy if the dollar tanks? Back to the basics: food production, mining, manufacturing, technology. How well we can compete with the rest of the world that we worked so hard to sell our technology and education to is yet to be seen. The biggest difference from a competition standpoint IMO is that everyone else is willing to live with less junk in their homes and feels secure enough in their politics to let the government manage their commons for them.
Only us United Statesians are dumb enough to buy the junk made in China and call it "value" simply because the price is low, while fighting tooth and nail against useful government along with the fight against too much government (losing both battles due to lack of focus).
"Always Low Prices" philosophy has given us cheap food, bankrupt family farms, worldwide ethical conflicts, McDonald's coffee, and expensive cupholders to put it in. Meanwhile, the government wants to keep our expensive health insurance system (nothing to do with health care), saying "it is not as expensive as you think". Not as expensive as, maybe, an SUV full of diamonds!! (credit to "Funny Times")
As Reverand Billy puts it: "Can We Shop Enough for Africa?"
If China pulls the plug on the dollar, their history shows they can deal with the loss of business from the US the same way they always have: the people go back to the land. Unfortunately for the U.S., the land has been covered with McMansions and people who don't know what land looks like. The transition will come, but it will be much harder for us than for them.
I suspect that the rest of the world might be safer living with a greatly reduced U. S. The transition would be difficult, but you might hope for calm afterwards.
Your government is probably much more responsive to the opinions of its citizen than is ours. In many European countries (and some in other parts of the world as well), if a few tends of thousands take to the streets in a noisy protest, those leading the government quake in their shoes and change their policies.
It isn't like that here in the USA. Here, even protests of a million people get only passing media attention, and are ignored by government leaders. Letters, editorials, petitions, strikes, pickets -- none of it makes any real difference at all.
Even voting makes no real difference. The only votes that really count are the dollar votes that go into the campaign chests or pockets of the politicians, and those mostly come from big corporate interests. Even those don't matter all that much, because differences between political candidates in the US are trivial; in most European countries they could all find a comfortable home in your major center-right parties. There is no truly left wing in the US political scene, and hardly even any true centrist position from a global perspective.
That's the reason why you don't see huge numbers of Americans protesting. Back in the 1960s, many people were still quite naive and idealistic; it was also a different country back then, and activism actually could make a difference, eventually. It is a different country now, and people know it; they are no longer naive, and they know that it truly is a waste of time and effort to protest. Even worse, we know that with the way things are going, today's protester could be redefined as tomorrow's "enemy combatant", rounded up, and never heard from again.
Check out a Matt Taibbi collumn on the Alternet archive about the changes in protets.
Protests were potent in the 60s because the Administration feared them. Since then they have learned to let them be. Let them protest and on Monday they will go back to their day jobs.
And you also have a war protest filled with PETA signs, Rainbow Warriors, Civil Rights protestors...etc...too fractured.
Taibbi paints a picture of 20,000 protesters, all wearing white T-shirts and blue jeans, completely silent, advocating one message, streaming by the White House.
In other words, show them we can organize and stay disciplined in order to be effective (could carry over into using this power to advocate boycotts as well).
Oh for shitz sake, our entire political body sucks from thee teat of unbacked fiat looking for the next unbacked easy play/handout. Placed power fiat positioning. Doners line up to advance the parade. The grand parade is built upon an age/stage of infinite resources, and, once upon a time that began to vanish, thus it's collective suggestive mediated entitlements reverted to ever more talked up wardumbery and placed thee terror restricting outlooks at every possible outlet without ever forwarding the true causes.... Somehow this contractual weans from asskissed interests,(unbacked fiat) and the populace buys into the whole collective flocking greenspun lie. Why? Because that is what happens to a fiat engineered society of servicing the fastrack blipped-up bleeps and charterized squigglies depicting more blips and bleeped contiUnation of the only betterment in the forseeable future. Thus, WHAT = MORE of the same nonsense....Why would the bullshit artists' of this perpetual nothingness kvetchingly demand and jeopardize anything other than their own cherry picked ongoing trained/placed parasitical authority? I certainly would nominate the highest ordered accomplice to the headfedfiatgod to promote all of my fakery extending my fakery... Basicly, all of that nonsensical digital dumbfoundness quantifies the preceding procesessions, reflects itself, and, ultimately accomplishes more exported useful productivity elsewhere (cheap labor) with replacement of worth reliance on ever more useless unbacked fiat in the homelands return. (Ongoing issuance of debt for cheaper labor, which is a grave fiat cause in itself) I imagine it portends and serves the waning daze of infinite unchecked charades of globalized fiat quite swell.
I expect we shall indeed see how long those blips and bleeps are represented on the said fiat turntable timescale without the real deciding factor behind their fakery of bullshitted infinium petrol-dollarium monetarization. A rather brief inconsequential belch in my estimation. And, I can say this very truthfully because I realize what is truly behind those mediated curtains.
Pushing the string is rather fun fiat economix, but unfortunately it all ends up in a wadded mess with grand elected finger pointers trying to extract the last voter vestiages from the fiat knot.
And as far as thee commy commanders of China swinging the newly induced fiated liberated consumerism populace back into the ag fields....Nada. People don't monetarily backtrack very well once the shoveled mammon of fiat is tasted and takes hold of crap consuming minds- (Example us) Thee ungrowth inconvenience is a rather large adjustment from a mindset of sky is the limit back to basemental dirt subsistence. Nope, takes years to swing it generationally....Thus it will take an eventuality of more escalated resource wars. Stupid is what stupid believes, and stupidity can be accelerated by the power of ten once the establishment of honest money and accountability has been removed from the system. What type of institution would promote such an obvious outcome is a better question.
Life is going to get interesting one way or another.
Talk is cheap. Have said me peace, and it is more than time for me to close down my keyboarded personal piehole and open up the eyes and ears.
Enjoy the calm silence in between the drum beats ;O)
Hi Nate,
Enjoy your comments but in this I think possibly you are looking at China through capitalist eyeglasses rather than socialist ones.
I think that population is the problem that China sees as it's greatest threat. If she plays patty cake with capitalists it will be only for as long as it is useful. Devaluing the dollar I think would put a strain on playing that game and it would, if that devaluation went very far, be time for China to change partners or the game itself. China is large and not to long ago was a world in itself.
wideblacksky "Saudi Arabia needs protection now as much as they ever have." Ainst whom other than the USA does Saudi Arabia need protection? Israel?
wideblacksky: "If the US sinks, the world will sink too." The only country that will sink along with the US is Canada. The USA is not the world, and the rest of the world doesn't really need it, and would probably be better off without it.
-
James Gervais
Hope was the last evil to escape Pandora's box.
Yeah, the world can shrug off the loss of nearly 30% of the global GDP with no problems!
I swear where you do come up with this crap?
But that 30% of global GDP was funded by other peoples money. Now you are upset that the creditors may wish to have their capital back. Remember - you get to keep the fancy toaster. They just want their money.
Why is that Americans have such difficulty understanding capitalism?
Since Americans appear to believe they are entitled to a non-negotiable lifestyle which involves consumption of the worlds resources and expecting the rest of the world to pay for this consumption it may be useful to look at the data.
In the above quote "sell your stock" refers to foreign creditors repudiation of the USD. Visit the URL and scroll around for some interesting graphs.
Everyone has different stats....
I will continue to rely on the figure (flawed or not) the global finance sector works with: around 8.5 trillion. The rest of you can have fun throwing around outlandish figures that have no real bearing on reality. 862 trillion dollars ring a bell to anyone???
Ridiculous!
PartyGuy,
Shrug off 30% GDP??? Sorry the cost of your GDP with the wars involved makes little business sense for the rest of the world. Pick up your pink slip. You're fired.
So you're saying that America isn't ripping off the world for a living?
All I see is hard-working non-whites saving their meager money, which their central banks and corporations lend to the US, where we get to spend as we please without any consequences - or any plan to pay off our creditors. Would any pre-Reagan conservative have called that just or sane?
Would you mind explaining your thought process on how my statement was misconstrued in your head into your response? I mean, I never mentioned any of the topics you just brought up!
.....
I would like to write a paper on it.
These are the words of the person you're debunking:
"Since Americans appear to believe they are entitled to a non-negotiable lifestyle which involves consumption of the worlds resources and expecting the rest of the world to pay for this consumption..."
It sounds like you're refuting him in order to prove that everything is great, America will get away with living beyond its means, the world is either grateful for or trapped into accepting our vampirism.
And we've had 7 years of Rove-led coordination of government lies and stats to tell us that everything is great, America will get away with crimes, and the world is either grateful for or trapped into accepting it - all used as part of a long-term plan to create a police state. So no, I don't trust your stats accurately reflect our real condition, anymore than I would trust Leonid Brezhnev's as the USSR rotted from within.
My comment was ONLY that I use debt numbers that the rest of the world does, no the 40 trillion, 60 trillion, or 862 trillion figures commonly toted around here. You have put an entire arguments worth of words in my mouth...a TOD first I am sure!
Are you/they comparing US GDP to total US dollar denominated debt outstanding without adjusting for the fact that a lot of US dollar denominated debt goes for investment into foreign subsidiaries of US corporations or foreign subsidiaries of foreign corporations? And if you are making such an adjustment, can you give me your/their the percentages for:
1) US dollar domestic debt for US domestic investment?
2) US dollar domestic debt for foreign investment?
3) US dollar debt by foreign entity for US investment?
4) US dollar debt by foreign entity for foreign investment?
Thanks.
What you're looking for it's called the "The International Investment Position" which is the difference between what you owe to foreigners and what foreigners owe you. (in short, actually it's also about assets, cash or other stuff. Note that things like defaults and derivatives trading make it impossible to know actually who owes who how much.)
anyway, a few years ago US was down a couple of trillions (2.5 trillion in 2001), since then, considering the deficit it's running i think it got somewhat worse.
http://www.grantspub.com/articles/inflation/
What you aren't getting is that when the money isn't there, it's the creditors who are left holding the bag. And of course it turns out that most of the creditors have sold that debt on anyway, so now the global markets are basically rotten from the inside.
You think it's a coincidence that international markets are following the US markets in lockstep? Imagining that the US economy could sink without taking the global economy along with it strikes me as naive.
The international markets do tend to move up and down together, but it isn't clear who is in the lead and who is following? And it certainly isn't a lockstep at all. In fact, the US markets have lagged behind since 2002.
I think that the US economy will continue above water, with some effort. But in a major economic crisis I think other countries would save themselves by whatever means necessary, including dumping dollars.
"A[ga]inst whom other than the USA does Saudi Arabia need protection?"
Iran.
Saudi Arabia need protection from Saudi Arabia. Like the Buddhist who paid $20 for a $17 pizza and waited, only to be told that change must come from within, Saudi Arabia is waiting and waiting. The American pledge was to the House of Saud, not to the people in Saudi peninsula.
Ummm... maybe, but more likely against the underclass of Saudi Arabia itself, those who are not privileged to receive from the stream of oil money. It's not a democracy, it's a Kingdom that many muslims see as corrupt and addicted to the money and the power that comes from selling the oil. One of bin Laden's purported aims is to topple the Saudi monarchy.
"Ummm... maybe,..."
No, definitely. Without strong opposition in Iraq, Iran is well posed to become a regional hegemon.
"...but more likely against the underclass of Saudi Arabia itself, those who are not privileged to receive from the stream of oil money."
Yes, this is one of Saudi Arabia's many weaknesses.
"One of bin Laden's purported aims is to topple the Saudi monarchy."
Indeed, al Qaeda's primary aim, as stated in their various communications, is the toppling of what its members see as the corrupt governments of the Middle East. After all, those governments stand in the way of the new grand caliphate.
Yes, they would be crippled ... but if we're going to crap on their doorstep(s) by attacking Iran and cause that effect anyway why would they not do it?
The United States does not exist in a perfect vacuum populated on one side by our cruise missiles and on the other by soft targets. The irresponsible, bullying use of our military may have been the only politically acceptable course for the Bush administration, as they lack the sand to confront peak oil, but the effects are the same at the end of the day - we're neither trusted, nor respected, and now China demonstrates that we're not really to be feared all that much, either.
Thank you, neocons, but your (dis)services are no longer required.
Actually, the world, especially China is coming to realize they are exporting hard assets for worthless US paper. They have been selling Sovereign Debt(borrowing) to make products to trade for nothing. On paper, the trade surplus looks good. In reality, they cannot spend that surplus in their own country without converting the US dollars into their own currency, causing the build is US dollar reserves. Now that they are coming to realize they are actually losing money(real wealth) rather than making it, there is a sea-change coming. Sure, the loss of liquidity resulting from stopping the exports will be temporarily painful for them, but better than bleeding to death for no reason. They can quickly convert their industry into providing for domestic needs. For the US it will be catastrophic. As with all scams, once it's discovered, those being scammed stop playing.
To make the trade surplus a little clearer. Say you are China and have a bag of gold coins. On the other side of the table is the US with a bag full of wooden nickles. Even if you are getting 10 wooden nickles for every gold coin you are still losing on the deal. Right now the world is just coming to realize they're just wooden nickles.
I think you need to take a broader perspective.
China's development was prompted largely by US foreign investment. US firms saw the far east in general as an export platform offering an educated and skilled workforce and low costs. Early entry into China also offered the future advantage of being able to sell to the Chinese internal market as it developed.
China benefited from a flow of capital and technology transfer to the point that I believe it is close to a take off point where they can continue to grow based on internal development. This is similar in some ways to the historical pattern of US development which commenced with trade then internalized and continued to grow with relatviely few connections to the international community.
I think there are many nations coming to the conclusion that the US centric international financial system favours the US to the deteriment of all other nation, and that the present world system will decline and be shaped into something else. That "something else" will serve to inhibit unilateral US action and counter the US tendency to reject international agreements at its whim.
For an interesting article on this topic see:
http://www.atimes.com/atimes/China/IH31Ad02.html
I do not ADVOCATE printing money to welsh on our debts. I do, however, think that abruptly and severely increasing rates of inflation are very likely as a response to the economic downturn that will be caused by Peak Oil.
Though I expect both fiscal and monetary policy to fail to restore economic growth, I think expansionary macropolicy will be tried on a huge scale--mainly because the U.S. government and the Fed don't have any other ideas to deal with the problems that will result from Peak Oil.
As I've said several times before, I think deflation is unlikely. (And by the way, deflation would be of no help in dealing with Peak Oil either. What is politically acceptable at this time does not include the measures that will be needed. I think much higher oil prices will change what is politically possible--though when and to what extent I hesitate even to guess.)
Deflation is judged by most to be "unlikely" and perhaps it is. However, it is what is most feared by the Fed, and they have taken huge -- and hugely risky -- steps to sidetrack it after the dot com bust, thus sparking the housing bubble.
However, notice that with the enormous expansion in money supply over the past half dozen years, and the enormous inflation in asset prices, there has been very little inflation in goods and services.
Now, imagine that a few trillion dollars in assets evaporate in a few weeks in a bond bust, and throw in a few trillion more in an accompanying equity bust. Then consider that the Fed would try to flood the market with liquidity, but what if nobody wants it? Remember, this liquidity is in the form of cheap loans, which have to be paid back. Most of those dumping assets are trying to raise cash to pay off debt, not add to the debt they already have.
This is why the Fed is terrified of a liquidity trap gaining too much momentum, because deflation, once started, is extremely difficult to counteract.
Also, keep in mind that the Fed's ability to lower rates is severely restrained by its need to keep the US dollar from collapsing. The current account deficit is a couple billion per day, and international markets are going to demand a higher rate. That is, if they are going to accept ANY rate to loan to the US. After being burned by "toxic financial waste" loaded into the bonds they already hold, why should they want to buy any more?
I think that the Fed is hamstrung, and deflation a very real possibility.
I think yours is the best explanation yet. It took me a few months of self asked questions about "Helicopter Ben" dropping money and you are 100% correct. The book keeping at the end of the day must balance. debt is the "helicopter" money and if nobody wants any.....
In the economist blogs I've been reading, the risk of deflation has been rearing it's ugly head with increasing frequency lately.
It used to be all about inflation, but now with the "market liquidity crunch -> credit liquidity crunch -> insolvency risk -> vix spike -> loan aversion" cycle starting to play out, the deflation risk (think Japan 1990s) is becoming more apparent.
However, I do want to discuss the "there has been very little inflation in goods and services."
That is only true, if one excludes most of the food, most of energy and housing living (ref: CPI or PCEPI).
I think for ordinary people PCEPI is not a very good measure of inflation, as recent years have demonstrated.
I also partially agree with the macroeconomists who say that sticking blindly to any type of cleaned "consumer inflation" measure control measures is foolhardy (of course central banks are doing more than just that, but that is the official line of defense). But I'm no economist, and don't play one online.
I do find interesting various comments that say if credit is not destroyed ("money" can be destroyed as it can be created), oil crunch continues and biofuel booms increases, then the risk of CPI (not to mention headline) inflation increases also.
I'm all for asset deflation and lowish CPI inflation myself.
Destruction of speculative credit without totally damaging the average joe.
But the question remains, is this even theoretically possible in the situation USA (and the 'rest of the world') now finds itself?
I have no idea.
Keep in mind that the usual signals wrt inflation are being confused by the impact of the run up of energy & food prices (and health care also factors in there). In a non-inflationary environment, increases in prices in these sectors would be offset by price decreases in all other sectors (including labor). We're used to thinking about inflation as a more generalized phenomenon, though, so when we see such a mixed bag we get confused.
The fact that wages and housing prices are only stagnant and not really falling to any appreciable extent tells me that there probably is a fairly substantial general rate of inflation underlying everything -- probably far higher than the "official rate", of Shadowstats.com is to be believed.
WNC,
The fact that wages and housing prices are only stagnant and not really falling to any appreciable extent tells me that there probably is a fairly substantial general rate of inflation underlying everything
CNN was on yesterday that housing prices were falling in all but three major cities. Seattle , Portland and I forget the third. I would say it is a matter of momentum.
Remember, this liquidity is in the form of cheap loans, which have to be paid back.
Yes, this is what the FED is currently doing. But have you thought for a moment what they will do if conventional liquidity injection does not work? What about monetizing the debt? I seriously expect them to start buying back US paper, creating cash out of the vacuum.
As for the dollar collapsing - not excluded, but they will make sure the operation is done slowly enough not to cause panic. Our creditors will be pissed off of course, but they have little choice but play the game while trying to minimize their losses... "It is our currency, but it is your problem". Does this ring a bell?
You got it Jim.
Also, keep in mind that the Fed's ability to lower rates is severely restrained by its need to keep the US dollar from collapsing.
It's the art of Removing the Pin from the Balloon Slowly
Deflation is where we are headed. ARM Reset Schedule at the turn of the next year (07-08) is going to be a killer.
MANY MANY MANY more forclosures to come. Debt will HAVE to be written Down/Off. Deflation of Asset Values (with pockets of asset inflation of specific items like milk...).
The shirt sleeve is caught in the cogs and there is NOTHING Benny can do about it.
Hyperinflation after that maybe.
Like the Diver doing a cannonball into the water, Water is initially sucked down with the diver(deflation) then a WHOOOSE up it goes into the air(hyperinflation).
Hey Samsara,
Have you anything one can look at about the ARM Reset Schedule?
I was talking to a hot dog vendor outside of the local Home
Depot yesterday and he looked a bit glum so asked if business had been not up to snuff lately. He replied that it had actually been quite robust. I went on to relate what J. Kunstler had mentioned in his latest, that the Fair food sales in the US were down.T he vendor then, without a pause in slapping mustard about, startled me by saying that, quote: "they have't seen anything yet wait till the ARM's reset"
So let me know more OK, I gotta be up to speed when I go for my next Hot Dog:)
BTW Jims statement The current account deficit is a couple billion per day, and international markets are going to demand a higher rate. That is, if they are going to accept ANY rate to loan to the US. After being burned by "toxic financial waste" loaded into the bonds they already hold, why should they want to buy any more? really makes the sort of sense to me that one can bank on.
------
EDIT, Here is an ARM graph with 6 ARM's.
http://www.bubbleinfo.com/journal/2007/8/22/interpreting-arm-reset-chart...
Prime ARM and sub prime ARM I can get along with but the other four ARM's are a mystery. Any one know what sort of weirdness they can get up to?
I used to work with mortgage backed securities (MBS) and back in 2000 I was terrified of the economy's exposure to ARM resets. (I also got called Mr. Rain on the Parade Deal Killer.) The bloodshed was postponed by the Fed rate cuts, but enventually the axe fell.
Every rate reset from here on out could be another ratchet of the Iron Boot. The Fed is backed into a corner: cut rates and use MBS to pump money into the US or maintain the dollar?
The pessimist could argue that the consumer who is repaying debt and purchasing basic subsistence (i.e. energy and food) will lose in either case and deflation is inevitable. All of the Enterprises that rely upon expanding production/consumption will fold as their capital evaporates or their demand base evaporates.
I doubt it will be as one sided as all of that but the transition away from grow-grow-grow will be unpleasant for the average consumer who really has no concept that they have done anything wrong. Of course this attitude has been cynically planted by those who profit from grow-grow-grow. There is no 'profit' in moderation and enjoying the roses.
- Shunyata
I think it is already clear that the Fed has decided to lower interest rates. I am just waiting for the other shoe to drop now - a major drop in the dollar exchange rates. They can't have it both ways, although they could have avoided the worst of both worlds by standing firm at 5.25%. I must confess that I thought that standing firm is what they would do, and am utterly surprised that they caved in this quick with lower rates.
US$ R.I.P.
Short term I think you are right, hyperinflation is likely in our future. Make sure you've got a good wheelbarrow to carry around the million dollar bills.
Long term, however, I see a major and permanent decline of the US economy as an inevitable consequence of peak oil plus numerous other problems. The US economy is unsustainable as is, and the hyperinflation will do nothing to help.
Once the US economy goes into long-term decline, though, then we may very well see a long deflationary period. Economic decline and deflation do tend to coincide, though not absolutely so.
Note that during the decline of the British Empire, the pound went from $5 to under $2. So to an outside observer, the pound was depreciating more than twice as fast as the dollar, even if it didn't show up in British inflation stats. During that period there were long recessions, one pretty much from the end of WW1 to the start of WW2, without ever having as severe a depression as the US. It used to be said that this lack of volatility was a sign of a senile economy.
So there are ways to greatly reduce the value of a country without it ever being called "hyperinflation".
The US can do that, but it can't exempt itself from the consequences. Hyperinflation of the US money supply will result in a massive decline in the exchange value of the US dollar. That will mean that we can afford to buy far less imported stuff, like oil. Which means that if we pull that particular trigger, the US had better be prepared to live within its means as a newly non-importing nation. I submit that we are patently not so prepared.
It also means that any US allies who depend on the dollar will likely seek to break that dollar connection:
If the Saudis cannot feed themselves due to the drop in the dollar do you honestly think they will support unilateral action by the US that threatens the dollar?
If the American people allow the madman in the Whitehouse to continue to act in violation of your own constitution do not expect any form of sympathy from any other citizens when your empire collapses under its own weight.
The Saudis can barter oil for wheat. It doesn`t matter if the exchange is denominated in dollars or monopoly money. Now whether the House of Sauds has a better option is a different issue. People who buy oil with stuff folks actually want to keep in their wallet.
RobertIn Kyoto
I haven`t escaped from reality. i have a daypass.
robert2734: "The Saudis can barter oil for wheat." But the bargaining is likely to become one sided against them rapidly. One must eat, but one doesn't need to go for a Sunday drive. Most farming equipment is diesel, and diesels will run on many oils.
-
James Gervais
Hope was the last evil to escape Pandora's box.
I keep thinking the USA has something more valuable than oil. Farmland and water. Our farmland is depleting but soo is their oil. If you think oil is tough to do without, try food. We waste so much energy, I think we can cut our oil usage in half without any serious lifestyle changes. In any case, only a military blockade which is an act of war by international law will prevent the Saudis from selling oil and buying wheat. Whether the deal is denominated in dollars, euros, monopoly money or shiny beads I can't say.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
ImSceptical, it would appear to me in todays 'civilisation' that oil IS food...
Nick.
The "arrangement" between the House of Saud and the Govt of the USA was that KSA would transact oil in USD and the USA would provide military protection to the House of Saud.
A move to a barter economy would break that agreement.
I don't see such a move as impossible but it does mean a rupture between the two parties.
To quote Darth Vader, "The Deal has been alterred" The Saudis have a trump card and we have a trump card. Let the dance begin. The only way the Saudis can starve while holding the world's largest reserve of producible oil is if someone blockades her. It would take massive idiots on both sides for the diplomacy to come to this and currently only one party is led by a massive idiot.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
You are assuming that Idiot is actually leading. I say he is a spokesman for something larger.
Critically thinking about these issues and coming to his own independent solution would literally blow his mind.
The media reassures us that the Arab monarchs are building an oil pipeline to prevent the evil Iranians from blackmailing them by blockading the Straits of Hormuz.
But has anyone mentioned that this pipeline might also stop the US Navy from blackmailing the Arabs by selectively blockading the Straits of Hormuz? Keep an eye on the route.
There are two solutions: Inflation or recession/deflation. I am trying to guess which, because my savings depend on it.
I am guessing the liklihood is inflation. They may try a controlled inflation scenario 15% per annum for example. This may threaten to be runaway and the only way to correct recession/deflation.
In that case I will buy hard goods. What should I buy? Gold? I was thinking of purchasing a mixed bag of useable goods -- rubber tires, bicycle tires, bicycle parts -- stuff that is generally always in demand and shares in resource companies -- oil etc (ones which just pump existing oil fields)
I am hoping for deflation -- this makes my cash position king.
doesnt deflation mean the US defaults on its loans and debts?
I think they will look out for themselves, and inflate..
Oil watcher named Ed
Check out Permian Basin Royalty Trust (PBT) and Sabine Royalty Trust. As of yesterday Permian Basin paid 11%, no debt as of yesterday (haven't checked today). Its a no production cost interest in wonderful old fields in the Permian Basin, they'll deplete, but are unlikely to get plugged out no matter what happens. If the price of oil drops by 50% you'll still get your money back and if it doubles or triples you'll do great. In the mean time, it pays monthly. Same way with Sabine, but I'm not as familiar with them, but Deffeye's site says that's his investment.
I am not a financial adviser or anything similar. Do your own research and check with your accountant as to your personal situation, but I personally think diversification is BS. I'm either going to be an absolute fool or a genius but I want out of the US dollar and that's a commodity. Bob Ebersole
I agree that diversifying out of the US$ is smart. I try to look at in in the context of a volatile future which appears to be on the horizon. In the past month the dollar has strengthened but the longer term trend for the past 5 years has been down.
I am always interested in other peoples opinions on this. Some diversification options I am aware of:
-oil trusts as you noted
-arable farmland
-investment grade diamonds
-gold bullion
-silver bullion
-select foreign currencies (swiss francs are my fave)
Regards,
Gunga
Don't neglect the possibility of a one-two punch: hyperinflation followed by decline/deflation. See my reply to Don S above.
It is a real challenge to navagate through the shoals with that one.
In general I'd agree with the analysis (nice to see someone else has seen the Chinese economic warfare docs). However given the unstable nature of the situation a key issue is when and why there is a breakout. A collapse in the dollar will obviously hurt the US. However it will also affect China, SA, etc. Its in their interest to control the circumstance to fit in with their long term aims - so what and when are these?
Note also: the US dollar will drop extremely fast. That also means oil costs will rise similarly fast. Forget the ever increasing oil price at +$10 etc., we are talking a doubling/tripling overnight. To maintain the US position somewhat, US resources will have to be sold off for real currency. Credit would be withdrawn, debt called in. Net effect is the oil taps being turned off with immediate effect and no piggy bank to raid. Migration timescales will be non-existent.
How would most people react if what was in their tanks was the last fuel they ever saw (at least that wasn't rationed for essential uses)?
I was at a speech by Steven Weber, a berkeley prof.
http://www.berkeley.edu/news/extras/experts/weber.html
Future Political Economy of China/US Global
His main points were that the US generates 85% of the world's debt and China is buying it up not for political reasons. China is allowing the US to buy on credit to enable its high GDP growth. High GDP growth is needed to maintain high unemployment which could triger unrest.
The US and China are in a symbiotic relationship of mutual financial dependence. Other countries are able to profit from it, because they know how both countries are locked in.
China cannot let the US economy tank.
Both countries would be damaged if this feedback cycle was damaged. Steven argues that China would be hurt more because of potential unrest, while the US would just be looking at a fairly deep recession.
http://www.nationalinterest.org/Article.aspx?id=15006
McKinsey global institute has performed an analysis of how much the US currency would have to depreciate to balance out the current accounts. (25-40%, depending on how much China appreciates the yuan)
http://advancednano.blogspot.com/2007/08/mckinsey-global-institute-analy...
The Canadian dollar became stronger than the US dollar at the end of the Vietnam war as well.
Most of the shift in currency has happened.
Look at the drop versus the Euro and C$.
Another way to handle the debt is to increase the interest rate, so that other domestic or international buyers step up.
I believe that China will appreciate the yuan and a relatively soft unwinding will be engineered. Other countries also would not profit if the US or China (the twin engines of global growth) were really screwed up. Other financial players (hedge funds, sovereign funds mostly middle eastern) will profit from the unwinding and drive it faster.
=============
http://advancednano.blogspot.com
Weber can be the second coming of Albert Einstein but as soon as you say Bezerkeley professor, I`m not going to bother to read the link.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
This is an attitude that I do not understand, fear of information from potentially opposing points of view. Not every Berkeley professor is a communist radical left winger. It would take you one to two minutes to assess his information. About as long as it took for you to write the post declaring your intention not to clickthrough.
I do not support the most of the left point of view or the doomers etc... but I am willing to read, discuss and engage.
He has advised foreign governments on managing their debt and financial policy(vis his role with the European Bank for Reconstruction and Development in London and with the State Dept).
I also do not agree with a lot of what Weber says but he has interesting ideas and in terms of world finance he has been closer to where real decisions are made (talking to those that run big corporations and countries).
He also has written extensively on open source
http://www.cioinsight.com/article2/0,1540,1835305,00.asp
http://globetrotter.berkeley.edu/faculty/Weber.html
His website
http://steveweber.typepad.com/steve_weber__politics_and/
===
http://advancednano.blogspot.com
I went to Berkeley, and I found the faculty to be fairly conservative. Remember, Berkeley was the home of the manhattan project, and their partnership with the DOE was instrumental in giving a civilian face to the nuclear weapons program.
Also, the Free Speech Movement in 1964 was started by Goldwater Supporters.
But those who fear the top public university in the world because of what happened on the campus a couple generations ago are hardly worth corresponding with.
U of C was instrumental in giving all our nuclear secrets to the Chinese. They don`t run Alamos any more.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
U of C was instrumental in giving all our nuclear secrets to the Chinese. They don`t run Alamos any more.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
How did the U of C end up managing Los Alamos? Just legacy from the days of the Cal-U-Tron?
And what do the failures of a different branch of the admistrative unit of the U of C have to do with the merits of the writing of a professor of economics?
The few times I have heard Berkeley economists speak they were staunch, unwavering neoclassical bad boys. Terrifying really. Macroeconomics without any connection to physical reality. Wore nice suits though.
With the exception of Prof. Paul Gray in EE every professor at Berzerkeley actually is a leftwing communist, terrorist sympathizing, raving lunatic. They will be fired if found out otherwise. I've read enough crap from there to know your link isn't worth my pay per yen.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
Robert-
Did you park in the Lot reserved for the Nobel Prize Winners?--
Actually, Livermore is still a UC project-- Best public university on earth,
if you are into critical thinking.
Why do you think the rest of the world fights for admission to UC?
Disclaimer: I'm a graduate of the UC system
Los Alamos is no longer a U of C project. I used to have a parking space on vandenberg air force base where I defended ourselves from our own nuclear warheads you gave to the Chinese. I had a need to know.
I was laid off because of the cost of the war like a thousand other people. Kim will nuke the west coast but not during this administration so the Bushies don`t care.
A bright high school student can design an atomic bomb but not one the Big Dong rocket can carry accross the Pacific. If I had time, Moore`s law is on my side. My rocket carries only electronics and his has to carry a critical mass of Uranium. You cost me the time I needed. I`m moving to Tucson next month. I hear the weather is nice in Berkeley this time of year. Eight million degrees with wind gusts up to a thousand miles an hour. Karma. Your actions come back to haunt you.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
I was laid off because of the cost of the war like a thousand other people. Kim will nuke the west coast but not during this administration so the Bushies don`t care.
1) Such would be the same case with Iran - so why the seeming to care so much about Iran?
2) The west coast present infrastructure has no long term future anyway - Cascadia Earthquake and the resulting Tsunami will make the Katrina/NEw Orleans interaction look like happy fun time.
http://www.crew.org/index.html
New York Infrastructure has no long term future. The next ice age a glacier will topple all the skyscrapers.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
You must know something really profound that the Nobel people overlooked while they awarded 44 Nobel prizes to Bezerkeley faculty and alumni. More than most other countries.
It's precisely that kind of prejudice that made it impossible for Americans to see the economic power of "Communist" China, or for the world to see that respectable, conservative white American businessmen were really a bunch of crooks, perverts and pyramid-schemers. And remember when it was just radical leftists warning that there would be catastrophic consequences from runaway consumption and greed?
China is not locked in. The rest of the world will be happy to consume chinese made goods, and to trade resource and power for them directly. The us is simply the middleman china is cutting out. "Waves On The River Of Mind"
China has two options. Either stop selling tickitack to wal-mart or accept dollars. That doesn`t mean she has to hold on to the dollars but propping up the dollar may be her least worse option. Saudi Arabia may also see getting $50 for a barrel of oil as least worse than being overrun by Irannians.
Once the US goes into a deep recession, everyone who makes a living making lead based toys, antifreeze toothpaste, pirating our movies, and plastic enhancer based pet food will be out of work. People who are out of work tend to march on the capital.
Owe the bank a thousand dollars and you have a problem. Ove China a trillion dollars and China has a problem. This may all end very badly, but nobody wants to pull the tablecloth out from under the house of cards.
Since nobody else is stupid enough to sell their birthright for tickitack, the USA market is the only game in town.
Can you comment on Japan seeking closer ties with India and the ASEAN nations? I see an anti-China NATO in the pacific as they expect USA to withdraw from the Eastern Pacific. Either due to higher priorities or strategic overstretch.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
Here is one angry citizen:
http://elainemeinelsupkis.typepad.com/money_matters/
"Rich financiers, foreigners taking over our industries and banking and the Republican Right wing all tapped into anti-tax sentiments and used it to enrich themselves, pile debts upon us and weaken our empire. They all did this out of pure, personal greed. And now we are owned by a very angry dragon in Asia."
Hakan: And a free pass for the 50% of the voters that supported these crooks.
BrianT: And a free pass for the 50% of the voters who didn't vote and the 25% that supported these crooks.
________
Exxon-Mobil CEO says that "the world’s oil would not run out in his lifetime". Means nothing... this guy doesn't buy green bananas.
George W. Bush - the choice of 26% of the eligible voters.
Since the participation rate in US elections is around 50% that means Bush is the choice of only 13% of the eligible electorate.
This figure clarifies why Rove was so eager to have the Justice Department prosecute "electoral fraud."
After Pearl Harbor, it took the US very little time to convert most of its civilian production over to weapons production. Don't think that the Chinese don't already have such plans in place for their own industry. Yes, the value of their US$ holdings may fall, but look at the industrial capacity that they have obtained.
I`m not expecting the Chinese to put large bets
on weapons production until 2050 or so. As long as our economy grows by 3% a year and theirs by 10% a year, they are not in any hurry. I`m not sure massive production of pet food and barbie dolls converts to military weapons very well. The US led the world in oil and steel.
The other factor to consider is SPATO. South Pacific treaty organization. As the US withdraws from the east pacific in strategic overstretch, the pacific rim countries will make other arrangements. After China throws her trillion dollars into the pot, Japan can call her bet. Population doesn't matter in air and naval warfare. Hitler and Napoleon can station 200 divisions on the Manche and it doesn't mean a thing.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
The Economist from this past January:
As I recall, the figures for concrete are similar. China makes a good deal more than cheap toys. They now lead the world in steel production.
I can't post my source, but the CEO of a large manufacturing company told me last month that everyone wants US steel right now because other countries steel is so low quality - he specifically said the Chinese steel quality has undergone degradation in recent years.
When we went hunting for offshore deepwater drillstring we favoured the Japanese over all other producers. You only have to go fishing for a couple of days before you come to appreciate the real thing.
Geez, could this be why so many new tools I am using break? Nuts shear off, handles bend and snap, etc. The potential maintenance/replacement costs of even the simplest devices scare me. It adds up fast.
Oh, and I don't body build like Matt Savinar. 38 years old, 160 lbs.
Then you are evidently unfamiliar with how the US transformed its civilian industries during WWII.
http://www.earth-policy.org/Books/PB/PBch11_ss3.htm
Right. I remember all that. Now, if we had some leadership, we could quit making plushmobiles and get on to solving solar energy, once and for all. would give people a purpose in life, just like they had then.
The goddam Bushites forget that people WANT to be useful and will sacrifice for a clearly articulated purpose, and feel good about it.
So what that my family had to get along with a 38 plymouth for those years. I got to learn how to fix that crappy thing. Gave me the background to respect a toyota.
The question is: can we retool from writing mortgages to manufacturing photo voltaic cells?
There are still people here who can think, who know and respect science, who can invent, create, put stuff together and make it work. They are not all dead--yet.
I am blaming the human condition on one thing- the confusion of money with worth.
Who needs independent thinking when we have the wiggly wobbly Glenn Beck head to guide us to the promised land?
Absolutely! All of the nice posts on EROEI make the point loud and clear. It can be very 'profitable' to destroy value.
- Shunyata
This is exactly the kind of thing that makes me think the doomers are simply extrapolating to zero past a point at which 'the gameplan changes'.
We can -with political will and action in the space of very short timeframe- convert factories to rush out PV/Wind/Wave/OTEC to supply electricity, SUVs to PHEVs, Gas input Wheat to local large scale closed loop aquaponics, etc, etc, etc.
Its the disturbance and pain caused during the transition phase that worries me. We have had the good times for so long that a generation has been bought up without knowing what its like to have a power cut (I can just remember and as a child it was fun as we all sat around with candles actually talking to each other! :o)
Nick.
You are right! Never underestimate the human spirit! I recall vividly the scenes of helpful citizens of New Orleans pulling together and stating that they would rise to their challenge. In just a few hours after the levies broke, the entire community self organized into a cooperative band and peacefully started the clean up and reconstruction of their city. There was no pandemonium, no disorder. There was no expectation of outside assistance. Everyone selflessly pitched in to contribute their part. Just like Bob the Builder, they rolled up their sleeves and said we can do it, yes we can! today I look with marvelous awe at the fine restoration of that once trouble city. it has only been 2 years. this shows just what we are capable of accomplishing when we want to.
That was Mobile Alabama
Was still far away, having evacuated following an advisory to do so?
Was regretting that they'd believed their government's assurances that the flood protection system was up to spec?
Was wondering why the drainage pump system was designed to require grid power?
Was finding out that their insurance covered damage due to hurricanes, but not damage due to flooding caused by a hurricane?
But we're missing the entire utility of modern infantry.
US-dominated societies contaminated by a whore mentality lack the guts to sacrifice their boys and girls in an infantry war. Because they no longer approve war to defend their freedom, but to protect their comforts.
So America could take over their foreign policy by offering the lives of its boys instead. Thus our bases in 130 nations. Except that as soon as something goes wrong, like Vietnam and Iraq, we've used up our supply of Lyndie Englands and Pat Tillmans for 30 years.
China, on the other hand, will never run out of infantry.
The future of war will increasingly be of governments against their own citizens, and rich governments against poor people with resources. It will be nasty street fighting, especially post-Peak. Casualties will be high. China will, as always, be there to supply the demand in exchange for influence. The ocean is no barrier to infantry if it is invited in by a host government.
China admits to holding $1.33 trillion in financial assets (i.e. dollars, others?).
China's direct Trade surplus with the US ~$300 billion (2007)
Interest earned (4.7% on 10 yr bond)= $62.51 billion
US taxes paid on interest = 0.00
Currency assets in 12 months = 1.33+0.0625+0.3 = $1.6925 t
It expands rapidly thereafter - one can play with several scenarios.
The only solution is for either the Fed to force down interest rates on treasury issued debt (by bidding on it first before foreign governments do); or to force foreign governments to pay US Income tax - If they want to buy US treasury debt.
1. With option (1) there is massive inflation
2. With option (2) tick-tacks may disappear from Wal Mart for a while, unless the foreign governments are willing to accept a lower interest rate.
Times are going to be interesting.
A few months ago I read somewhere, maybe Prudent Bear.com, that the Chinese had bought up hundreds of billions of dollars in mortgage backed securities.
This made perfect sense at the time. Not only was it deemed an excellent financial move, but it did double duty. All those new homes would be stocked with ample amounts of new, Chinese goods.
I wonder now, though, whether they are about to be sunk by these dud bonds.
Well even if they bought only subprime and Alt-A they are collecting ~7% on that money.
And remember that the Chinese are exempt from US taxes so they get the entire 7% compared to say a US investor who would be liable for Federal and State taxes on the interest.
Even if the default on the mortages is 7% (which is 2-3 times higher than the numbers that are mentioned in financial circles) - big deal they lost 1 years interest. And that assumes that there is no recovery in foreclosure and auction.
I believe that the Chinese are going to be quite comfortable and the rate of growth of their financial assets will exceed that of inflation by a nice margin for a long time to come (since they do not have to pay taxes).
Do people really think Iran is going to "overrun" anyone?
They haven't invaded another country in several hundred years, right?
KSA needs to worry about being overrun by their own people. Just like Iraq. Just like Egypt. Just like Pakistan.
Iran holds a strong position because these Kingdoms\Dictators are advocating policies that are detrimental to their own citizens. Iran supports the desires of these citizens. They don't need to invade anyone, just continue to stand up for opressed people, or at least spin it that way. Not a bad position to be in.
In place of belt tightening the US can continue on its militaristic path and occupy all global resource endowments. If it doesn't seek the direct occupation of such locations it can destroy them and leave them as failed states as a warning to any other population that might consider resistance.
The US polity has already accepted the abrogation of the constitution and the rejection of all international obligations. What was that line in 3 Days of the Condor? "They'll just want us to get it for them?"
The Homeland Security apparatus will hunt down anyone foolish enough to speak out against this outcome.
I can't see that belt tightening is going to happen any time soon, at least not voluntarily. People will just come up with ever-more creative ways to put off the day of reckoning, which means that the crash, when it comes, will be correspondingly harder. The Independent newspaper here in London reported on the growing phenomenon of "car-wrapping", selling advertising space on private cars, as a way of paying for fuel at $3/gallon. Of course, demanding greater fuel efficiency would be another way of cutting costs but people want to have their cake and eat it. And it's not just in America, here in the UK personal debt levels at £1,345 billion have just exceeded GDP (£1,330 billion) for the first time.
Yet another explanation for the first US-Iraq war. At the time, I had an Iraqi coworker that claimed that Kuwait was trying to destabilize Iraqi currency. Someone on TOD opined that Kuwait may have been oil drilling horizontally under the border. Now Shunyata offers the oil bourse theory.
Between all the rats leaving the White House and all the talk of attacking Iran, I have wondered if we are watching the waters recede before the tsunami instead of running for the high ground.
I was thinking the same thing about the rats jumping the White House ship. I am only speculating but I have this feeling that W and Cheney have some big plans for this fall. This fall will be crucial in seeing if SA and the rest of OPEC can increase output for any length of time. OPEC needs to boost output soon otherwise the drawdown on inventories will spark a price run up. What better way to mask that by stirring up more war in the Middle East.
"Are there some happy endings that might come out of all of this?"
How about "Nukes For Debt"? -- The U.S. dismantles a big percentage of its nuclear arsenal (and reprocesses the uranium) in exchange for a big chunk of canceled debt.
It would be cheaper and more profitable just to sell the weapons as weapons.
After all, if we don't, China will....
I think "nukes for debt" may play out a different way.
Wrong! -- the question presupposed "happy endings". Didn't your teachers tell you to read over questions carefully? :-)
Perhaps we could throw Taiwan into the deal.
Yes, but happy for who?
I never paid much attention to my teachers. But in this case, I was commenting on your comment, technically it was you who was answering the question.
Happy endings can be subjective. I'll see your Taiwan and raise you Florida.
This is a good overview. The only things I would add or change are these:
1. It is not just the US that is vulnerable -- it's the entire world capitalist order. The elites around the world are quaking in their boots -- I don't exclude the Chinese and Russians. China, for example, hates to see its hoard of T-bills eroding by the hour. But it greatly fears the consequences of a collapsing US market.
I sometimes joke that the solution to poverty is to put poor people further in debt, like tens of millions apiece. When Trump was on the ropes, the banks made sure he continued living well. The US is an extreme case of the Trump syndrome.
2. There is mention of the likelihood of war. I think it is extremely likely, the sole means that the US elite sees available to it to stave off collapse. The one industry we do have is the armaments industry, and price is no object when nations are at war. There is a huge vested interest in war, not victory, but war. War itself is victory for them.
3. War is difficult now because the economy hasn't collapsed. But when it does, more cannon fodder will become available. Why does any Iraqi sign up for the police or national guard? 60-70 pct unemployment is why.
I fear interesting times lie ahead. My sentiment exactly.
And how do you pay for all those armaments when your dollars are worthless and your citizens are dealing with economic recession / depression and therefore lack significant incomes?
The answer is that you nationalize the means of production. You give people jobs in accord with the latest 5 year plan. You publish the Washington Pravda to keep all informed. Thos who undermine the state will be deported to the Gulag; you will never know they have left or where they have gone. The Republicans will deliver to you a Communist state. And you will welcome this outcome and your military will defend it.
If you think this incredible then wake up. This is the path you are on.
I think they are more comfortable with fascism.
The war path is about at a dead end. The military is worn out, our finances are nearing bankruptcy, and Americans are sick of war. It's hard to imagine circumstances that would get the US back in the war mood anytime soon (like, a decade or two).
The Germans did not want war in the 30s. They liked the full employment achieved by the military buildup, but they did not want war. You are right, with the economy as it is today, war is difficult. But that's my point: the economy is about to take a dive (prediction, not a fact) and that will allow military recruiting. How is it that things got to where they are now in face of massive antiwar sentiment around the globe?
No, war is not impossible because of adverse public sentiment. Were it only so.
Try watching "Triumph of the Will," with all those massed wanna be soldiers doing the manual of arms with shovels (since the Versailles Treaty forbade a larger army). They weren't averse to a war to reclaim what they had lost. But also remember, a decade and a half had passed since WWI. IT's not like they were itching for war in 1921.
You're kidding, right?
A small nuke in a US city would pretty much let the pro-war gang do anything they wanted. Not difficult to arrange, no involved conspiracy needed, just see to it that a very-radical bunch of idiots happens to come into possession of a suitcase nuke.
Dear Jim, Your right of course, the army is worn out, but I'd question whether the airforce and the navy are worn out. The coming attack on Iran will be airforce/navy show. Currently we're on a hair-trigger for more war, a massive aerial blitz on Iran with perhaps ten thousand targets in the cross-hairs. What the consequences of such an attack will be are anyones guess. It's depressing subject; that we may be slipping and sliding towards something truly terrible, and that if the order is given the attack could begin in hours, stopping this thing, once the order is going to be next to impossible. I not optimistic Bush can be stopped in time. However, there are lots of clever people on TOD. Can Bush be stopped if he makes the decision to blitz Iran?
Not sure about the Air Force, but I think the Navy is overextended. I have friends in the Navy who were told they weren't going to Iraq, then that they'd only have to once, then that once they reached a certain rank, they wouldn't have to go again.
It's crap. One of them just left for his third tour of duty in Iraq. He's losing vacation time because they're so overworked they're not allowed to take any time off. He's a nuclear engineer with a graduate degree, and never expected to be riding around in a Humvee in Iraq, but they're putting him to work building civilian infrastructure like parking lots and schools.
Can Bush be stopped if he makes the decision to blitz Iran?
Not in your wildest dreams. He could pick up the phone right now and in 4 hours Iran is toast.
US to Attack Iran
"IRGC IED's are a casus belli for this administration. There will be an attack on Iran," Baer quoted an anonymous White House source as saying. "If this is going to happen, it is going to happen very quickly and it is going to surprise a lot of people."
http://www.spacewar.com/reports/Former_CIA_Officer_Says_US_Ready_To_Stri...
Study: US preparing 'massive' military attack against Iran
The United States has the capacity for and may be prepared to launch without warning a massive assault on Iranian uranium enrichment facilities, as well as government buildings and infrastructure, using long-range bombers and missiles, according to a new analysis.
http://rawstory.com//news/2007/Study_US_preparing_massive_military_attac...
davebygolly : And you know all this how?
-
James Gervais
Hope was the last evil to escape Pandora's box.
A lot of the facts come from the MSM. That the revenues from the war are humongous has been repeatedly reported on.That the US is the leader arms seller is also well-known and easy to verify. (Its military budget is also greater than the rest of the world's combined, but I don't mention that.) The Iraqi unemployment rate -- MSM also. As for China, their fears I deduce from the large number of rebellions in the countryside that they have forcibly put down. (MSM) Were unemployment to zoom, what direction would things go? Just a speculation in this case.
What else? Let me know.
"The one industry we do have is the armaments industry, and price is no object when nations are at war."
Even that has become something of a shell.
When I started doing defense work in 1984, all of the electronic components had to be USA made. Over the intervening 23 years, as our manufacturing base has moved offshore, the capacity to build these low level parts has gone with it. The requirement is still there, but like with an "American" car, the parts come in from the far east and flow through a US front company where they are screened then relabeled "Made in the USA".
All the Chinese really have to do to bring us to our knees is keep the container ships in port.
This article once again brings up the topic of oil bourses not denominated in dollars. There is no doubt that oil exporting countries hostile to the U.S. like to do this to annoy the U.S., but it really doesn't matter what currency is used to buy or sell the oil. How many dollars a country holds does matter, but the currency used for a particular transaction is not important - anyone can change dollars to any other major currency and back with no problem.
The article also says "the dollar has been hemorrhaging furiously for the last year or so." The dollar index has dropped from 85 to 81 over the last year. Now I am a person who thinks the large debt problem in the U.S. is a huge problem, but it seems like rhetorical excess to describe an annual drop from 85 to 81 as "hemorrhaging."
Yes, it should be noted that "currency as a weapon" cannot be played without injuring the aggressor as well. One could make a rather depressing argument that this cost is better than destroying property and life, and still spending billions anyway.
I'll grant that "hemorrhaging" is a bit hyperbolic, but if you look at exchange rates over the last several years you will find little to be sanguine about!
The Canadian dollar is up 40% against the US dollar over the last four years with the bulk of that move in the last two years.
As long as Canada sells her oil, gas, uranium, hydroelectricity, and water in dollars who cares what the exchange rate is? We now have hoards of Canadian shoppers spilling over the boarder so they exchange their loonies for weimardollars and immediately buy hard goods with it.
The yen is weakening against the dollar as the carry trade unravels. Nobody wants to pick up nickels in front of steam rollers any more.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
How many dollars a country holds does matter, but the currency used for a particular transaction is not important - anyone can change dollars to any other major currency and back with no problem.Why would you perform a transaction in one currency and then convert into another one? Doesn't make sense.
A euro-denominated bourse will reduce demand for dollars and siginificantly so.
Exchanging a currency is not that trivial. You need some time to buy the currency, use it to buy oil and (the seler) sell the currency again. Just that transaction may take days.
Also, since oil is marketed on US$, and the quotation of dollar varies with time, people don't simply buy dollars when needed, and sell after not needed anymore. They try to buy it cheap, and sell it expensive. That can increase the time people keep dollars with them to months.
Also, if you take into consideration that people don't like to keep those dollars "static" for that long, you can forsee the increase of dollar valuated debits.
You can immediately buy a derivative that shields you from the currency fluctuation. What the party assuming the fluctuation risk wants for it is a different issue. All hard currencies and the dollar are traded on the exchange markets in zillion dollar quantities. The market dwarves trade flows.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
Actually, I think the time for the transaction would be measured in seconds rather than days. Certainly the FOREX exchange can be made in seconds. The only sticking point occurs if the bourse changes the concentration of dollars people want to hold. For example, if I wanted to buy oil from a bourse that took Euros only, I'd change dollars to Euros, buy the oil and keep no Euros, because I can't use them here in Houston. If the seller on the bourse (Iran?) decided they wanted to keep Euros instead of the dollars they previously kept, then it would make a difference.
I have a few issues with this letter
This seems to imply that fossil fuels are responsible for high levels of economic activity. That's backwards - obviously, otherwise oil-rich Nigeria or Saudi Arabia would be giant economic success stories, and they clearly are not: instead they ship their oil to where economic development already has taken place.
I see this idea a lot here .... that economic development or population growth was driven by increasing oil consumption, and if oil consumption decreases, they must inevitably go backwards. It's the opposite way around: development increased demand for energy and oil was an easy way to satisfy that demand. But the development came first, and oil ramped up to handle it. Not vice-versa.
Where did that come from? $50/barrel normalized to what year? You can't just throw figures like that out there and not justify them. There has been inflation for a long time, so if you want to use oil to see the effects of monetary policy you need a baseline date with which to compare.
The Saudis are getting exactly what the price of oil is right now, in dollars. If those dollars buy less "stuff" in real terms I doubt they really care, the House of Saud already has enough to afford more or less whatever they want. Measuring inflation is very hard anyway.
Nuclear strikes actually do destroy stuff. Making the dollar worthless internationally means - worst case - the US would have to become more self sufficient, and pull some manufacturing back into the country. It doesn't imply with 100% certainty that everyone would die.
Anyway, as already pointed out elsewhere, the China/US relationship is a very complex one. Their economy is amazingly export driven. Chinese banks are themselves more or less defunt, foreign business is the only thing keeping their economy afloat. They have virtually no ability to create products themselves, they are still at the stage where they simply follow instructions from others. This is changing, but they have a LONG way to go. Piracy, reverse engineering and cloning is rampant in China because they don't have the ability to design the things they build from scratch. This is changing fast of course, but right now "Made By China" rather than "Made In China" is still a dream rather than a reality.
Yes, in theory they could wreck the US economy but killing their primary customer would be suicide for their leadership. It'd not only eliminate a huge export market but would scare off every other country as well. The only thing keeping a lid on widespread civil unrest in China is the amazingly fast economic development they are experiencing. Even if they somehow managed to topple Americas/Europes economies without killing their own, their markets would instantly stagnate as the supply of interesting new things to spend their money on dried up.
Note, I'm not American. But if I were Chinas leadership I'd think REALLY carefully before messing up the status quo.
Of course, the problem is that the US is the world's largest (and highly indebted) oil importer, at a time when the data are indicating a decline--which I think will be rapid--in world net oil export capacity.
Having said that, are there alternatives? Yes.
http://www.plano.gov/Departments/ParksandRecreation/Parks_Facilities/int...
http://www.amazon.com/gp/product/customer-images/0915276135/sr=1-1/qid=1...
This is a great book about the trolley days. Highly recommended. There is a great pic of Broadway in the Bronx in 1943 with not a single car in sight (as it happens was mainly because of rubber rationing,not gas)
Matt
Perhaps, but that hasn't stopped every major economy from doing it for decades.
The US, in particular, has been quite good at that - its productivity has improved at an average rate of 2.3% over the last 45 years, although only at 1.7% recently.
Coupled with a growing population, that's much of the reason the recent huge deficits have hardly changed the US's debt (as a fraction of GDP, which is the most sensible way to measure it).
Correlation does not equal causation.
And GDP growth can certainly happen with little or no energy consumption growth - witness Germany since reunification.
Because neither one is expensive. Europe's had, effectively, $200 oil for years, and hasn't collapsed yet.
When you look at what fraction of cost oil represents for virtually anything in a western country, it's very minor. Even for something like driving your personal car, the cost of gas (~$2,000/yr for 650 gal) is not that big compared to financing charges on the car, insurance, maintenance, parking (~$6,000/yr), and the time expended driving.
Expecting the economy to crumble when the cost of a car rises from $7,000/yr to $8,000/yr seems rather silly.
US Treasury reports for recent months still show similar rates of increase in foreign-held debt, despite modest rates of net sale by Japan and China, so it's not clear that there's a problem right now. Unless you have some evidence?
Evidence for this assertion? It seems very unlikely that it's more than hyperbole.
China has $400B of US debt, or about one year's worth of debt sales to the public at recent rates. If China decided to dump that, the US would need to substantially improve the yields on its debt offerings to get buyers in such a market. At some level of yield, though, it would find buyers, since US Treasury debt is seen as the gold standard of a stable and reliable investment - witness the recent flight to such instruments due to the credit crunch.
Of course, it's really rather a moot point, since such an action would most likely be far more economically damaging to China. Open economic warfare with the world's largest economy - which is how that would be interpreted - would not help China continue to attract foreign direct investment, crippling their economic growth.
More importantly, the massive exports of goods to the US would screech to a near-halt, thanks to a wave of anti-Chinese sentiment and tougher foreign credit, which would plunge China's economy into instant recession as $290B worth of export income - over 10% of its GDP - suddenly vanished. Internal unrest is already a problem in China, and a sudden, purely voluntary massive disruption of the economy would hardly please the stability-seeking Party leaders.
So "China dumping the dollar" is only barely more realistic of a threat than "the bogeyman is under your bed".
Such as?
That one person has seen something he'd characterize as an oblique reference to the possibility of catastrophic collapse doesn't mean that's how most people would interpret it, or that that's what was intended.
Really? Let's check the US's major trading partners and see what "hemmoraging furiously" means:
Canada: down 5.3%
China: down 5.2%
Europe: down 6.6%
Japan: down 0.9%
So it's down about 5% on average. I'd call that more "bleeding slowly" than "hemmoraging furiously."
Given the size of American belts, that would barely be a hardship, and might be beneficial. Even metaphorically speaking.
I'm surprised "one guy's unsupported opinion" is being hailed while "findings from recent test implementations of published research" is being slammed as uninformative and biased.
Perhaps bias only counts if it's in the wrong direction.
Well said!
Yes, the US has seen immense PRODUCTIVITY gains, but I think you would be hard-pressed to call them EFFICIENCY gains. How exactly are all of those high-tech manufacturing processes, information technology infrastructure, etc. that drive our productivity produced, installed, and powered?
It is also important to understand that petrochemicals are far more than transportation fuel. They are also the raw material virtually everything you own. I'd like to see you produce a cell phone without petrochemical inputs.
By the way, I started out disclosing that my comments were largely opinion - an interpretation of loosely related observations. There was no mention of Facts of Nature!
- Shunyata
With less energy than the processes used previously; GDP-per-boe is 150% higher now than it was in 1950.
In fact, it has been increasing at a similar rate to productivity (~1.7% vs. 2.3% yearly), suggesting that the two may be linked.
True, but only barely. Transportation accounts for about 70% of oil consumption in the US (see link above), and most of the rest is used for industrial heating (look up the uses for LPG). The amount of petroleum used as feedstock is minimal - maybe 10% of the total consumed in the US.
And it was good of you to do so; more people need to follow your example and clearly delineate what are their opinions from what are known facts.
I'm not accusing you of claiming as fact things that are false; I'm saying that I don't agree with some of your opinions, and that available evidence appears to back me up.
Dear Pitt,
I would be very interested to dig into your assertions about energy efficiency. A large part of the phenomenon as you have framed it is because we have moved to an IT, service based economy.
It is difficult to measure, but how much energy are we importing (financed to boot) in the form of processed materials and services? On that basis, the rough analyses I have seen show that GDP/boe has been stagnant for 20-30 years and economic growth has been little more than the result of increased consumption.
- Shunyata
And 70% of that increased consumption was funded by cash withdrawals through mortgage refinancing. If that funding is no longer available then you have a collapse in demand followed by the sound of helicopters and falling banknotes followed by a falling dollar and increased import costs especially for FF which further impacts consumption. And so it goes.
Any comment on the role of FASB 133 in the halt in derivatives trading? Strikes me that this was less a liquidity crisis than a reluctance to trade as that trade would force a recognition of loss on the derivative.
Largely due to increasing manufacturing productivity meaning less people are needed to produce more goods - industrial production has doubled in the last 20 years, even while employment in the sector has fallen from about 17m to 14m.
Indeed, there are those who will argue, numerically, that "U.S. manufacturing is very healthy".
That would be surprising, considering that real world GDP is estimated to have more than doubled between 1980 and 2000, whereas world energy consumption went up by only 41%.
Without seeing the analyses you refer to, I can't really judge their reliability, but the information I've been able to find so far (above) leads me to regard them with a certain amount of skepticism.
But we've exported our honest goods-producing labor to China to make our economy less energy-intensive, and our pollution too. So what you're saying is that we're wonderful people because we found suckers to do our laboring and dying for us?
And in the meanwhile, has it ever occurred to you that the conversion of Americans into hustlers, financial-scammers, Pharisees, and (with the help of vast illegal alien labor) McMansion pushers is to blame for all the flaws of character that are gushing forth from recent Americans and so often condemned by conservatives? If there's no economic cost for this wickedness, should I be happy?
I believe the most common petrochemical is polyethylene which is made from ethylene which is made from ethanol. Does Mr Shunyata know of a way to make ethanol from sugar or corn?
Why is it easy for scientists and engineers to understand economics but so hard for economists to understand physical sciences and engineering?
Ethylene is produced by steam cracking light petrochemicals (the most coveted kind) in a refinery and has nothing to do with ethanol.
By the way, Mr. Shunyata is a mechanical engineer, understands physics quite well thank you, and has spent more than his fair share of time in chemical plants.
- Shunyata
My daughter is a chemist. I asked her about making ethylene from ethanol and she said it is quite simple. It is not done that way now because petroleum feedstocks have been cheaper than corn or sugar based ethanol. Just because something is made one way now doesn't mean it won't be done differently in the future.
I apoligise for calling you an economist. Please tell how an engineer became an authority we should respect on financial matters.
Thomas,
If you look back at the introduction, you will find that Shunyata has training in, and has worked in, more than one field. According to the introduction,
I met Shunyata though our common actuarial backgrounds.
The world is changing. Ethylene and polyethylene will soon be produced from Brazilian ethanol for Dow Chemical.
BTW, I understand that industrial ethanol is typically produced by hydration of ethylene (and this reaction goes both ways). There's a very strong connection between the two.
Edited for incorrect figure.
-----
U.S. Exchange Rate
on August 29, 2003
U.S $1.00 = CAN 1.3860
From Wood Gundy (CIBC)
U.S. Exchange Rate
on August 28, 2007
CAN $1.00 = U.S. .9438
From Yahoo
...and this without a popping housing bubble and a crispy credit crunch. Of course it has been a bad month too.
-----
Mary Maggins: "I wonder what will happen tomorrow Mr. McGarity!"
That's rather more than "the last year or so", is it not? Which was what the original claim was about, no?
Even taking your preferred date, we get annual exchange rate changes of:
Euro: down 5.5%
$CDN: down 6.4%
Renminbi: down 2.3%
Yen: down 0.4%
Average: down 3.7%
i.e., not particularly different than the last year's changes. The US dollar has been coasting slowly down, and doesn't appear to have substantially changed the rate at which it's doing so over the last few years (other than vs. China, but that was something the US wanted).
British Pound, 1914: $5
British Pound, 1945: $2.80
British Pound, 1980s: $2
Even while, as conservatives never fail to note, the $ was losing 95% of its value. Even while America was propping up this corrupt and hypocritical empire. Tell me why we aren't on the same road.
You mean, a road of massive economic growth that occurs even more quickly in an up-and-coming country than in the current top country? We almost certainly are - the renminbi is likely to appreciate quite a bit vs. the US dollar in the next 50 years.
And if the USA in 2100 is as much better off than the USA in 2007 as the Britain of 2007 is than the Britain of 1914, that would be a spectacular result. That China of 2100 might be even better off than the USA of 2100 is really neither here nor there.
(Of course, you're also sweeping under the rug two wars which had catastrophic effects on the British/European economy, wars so vast and terrible that only an idiot would compare them to Iraq.)
So then you're saying that losing our empire will be a good thing? Hang on while I report you to GOP/AIPAC thought control HQ. Americans would rather nuke the planet than accept the loss of domination that Britain suffered from 1918 to the Suez Crisis.
Since then Britain has been increasingly a puppet of the US and protected from the consequences of handing its empire over to the new imperialist. Yes, Britain was better off by 1956, but compared to the fantastic arrogance and racism of Edwardian promises of eternal supremacy, the English were disappointed, embittered, cynical, and horrified that a Europe far more devastated by war than Britain was rebuilding itself wealthier. They were not Britons anymore as it had been understood. Everything good that happened later could be credited to Europe pulling up a chastened Britain, not vice versa.
Now I would love to see that happen to America. But that would require one big country taking us on as a client state, while another bunch of neighboring, socialistic countries had a boom comparable to the European Community to bail us out. I don't like the list of available candidates - especially the ultra-wealthy China of 2100 that you disregard.
And I believe there are worse wars coming, because optimists like you will do nothing to stop them. We will get into more wars until we are broken because capitalist ideology (as in Victorian Europe) always degenerates into a Master Race-argument for empire. The Republicans, who get credit for all capitalist growth, intend to crush the world or destroy our Constitution trying. So any growth that happens your happy-scenario way will be applied to evil. Until we are as utterly ruined and angry at our leaders and even God Itself as the British were after the World Wars, we will be a mortal threat to man and nature. We are not chastened yet.
So it's pointless for you to say how much better off we will be when our currency is worth 1/2 a Euro - either the loss of our bully status will drive us insane like Germany, or make us somebody's poodles like the British. America as you know it will be gone the quiet way or the genocidal way.
What I'm saying is that your ridiculous analogy doesn't imply what you think it does.
Somehow I very much doubt that you know what other people think.
For example, you clearly don't know what I think.
And at this point I'm having grave doubts about my ability to understand your thought processes, not to mention the soundness of them.
But, hey, any time you want to provide some evidence to support your ranting, feel free.
evidence to support
Pitt alls yer gotta do is step outside those free market blinders to see that the world has become a toilet thanks to the inability of that market to deal with the real problems of the world ie pop growth and climate change. The invisible hand is not only invisible, it is non existent in anything other than acting like some berserker machine with only the aim of maximizing profit. I think merely the evidence of your eyes should be enough to show you that. But maybe that is not your concern in this debating society thread. 'Tear down those walls!!' quote the devil.
Isn't that essentially the definition of the "invisible hand"? Viz., the IH is a notional result of a large number of people acting as Rational Utility Maximizers (of their own self interest at others' expense). Note that humans don't really act that way in a number of situations which have been studied.
Capitalism attempts to make the collective greed of the populace act as a positive force through the action of markets, wherein successful products (which need not be tangible) succeed because they produce better outcomes in general. But this is an assumption! If it is not clear how to achieve the best outcome, then it won't tendentially occur. Capitalists accordingly put a great deal of effort into causing confusion in their favor; this goes by such names as "public relations" and "marketing".
The markets must have been quite free in the USSR, for pollution and environmental degradation to have become so bad there! (But this merely demonstrates the path of least resistance. The apparatchik and the CEO will cite different reasons for cutting corners, but they'll both cut them unless there are better reasons not to. Power attracts the corruptable.)
This is one place where it matters that humans freqently don't act to maximize utility rationally. We act on the bases of snap judgements from incomplete information. We are biased to project the recent past into the future. We are notoriously bad at estimating the probability of rare events.
The market cannot deal with population growth and climate change because people cannot deal with them. Solving there problems requires people to set aside their own self-interest to prevent severe problems for their descendants. The most relevant precedent I see is the history of the environmental movement, in which many notable disasters occured before public opinion turned such that regulations were made. In my opinion, this does not encourage optimism.
Summary: problems caused by the actions of a large majority of a society are not solvable by governmental change.
So are you saying that we're getting away with our whorehouse economy, or that we deserve to? I just want to know what your bias is regarding the justice of this monstrous system of the rich stealing from the poor.
I guess maybe just the usual neo-liberal one of maximize the freedom of the market and minimize the roll of the state... in other words foobah to the people and hoorah for the super rich...that is the 1/10th of the top percent. But then I could not really comment could I, as who knows what lurks in the hearts of men.
Here are some quibbles. I generally agree with the analysis and I'm in the inflate-our-way-out-of-the-problem-is-most-likely camp.
This neglects the other option; don't repay the loans. I think this is less likely than the other options, but it is a possibility that other people think is significant. I think it would be along the lines of an internal default if it were to happen. As in, "Citizens - you know those bonds and obligations we made to you? For the good of all they will be made good at half the face value. Foreigners - our obligations to you will be paid at face value." I think it's much more likely we'll continue to quietly inflate our way out of the problems.
I get a good laugh every time I see someone write or say this. People have no patience. It has only been a few years and I see signs of people being squeezed by their combined financial burdens all over the place. The 9th largest state economy is being toasted by these gas prices. They were probably a good part of what pushed the housing market over the edge. These prices are the biggest factor in the inflation increase of the past few years. I fail to see how increasing the money supply and shipping the extra off to oil exporters helps the US mitigate higher energy costs. Is this assuming the petrodollars all get invested back in the US? Or assuming that everyone is receiving a sufficient income increase to pay for the higher energy costs? I don't see either one.
http://en.wikipedia.org/wiki/Government_debt
This site focuses on economics and national debt but general feels that debt can be used to grow the economy.
http://www.optimist123.com/
From the optimist123, about how when you include private japanese citizens, japan holds more US federal debt than China.
==================
http://advancednano.blogspot.com
Another chart from the optimist123 (skeptical optimist), comparing public debt levels for different countries
His arguments are that if your salary keeps going up (like productivity and GDP growth) then you can safely afford a big mortgage (in the 40-80% range of your salary). For that matter people often have mortgages that are 500% of their salary.
==============
http://advancednano.blogspot.com
In before the shadow stats website arguments!
Speaking of which...
"Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year."
i.e., the shadow stats guy claims Americans have about half the purchasing power the government claims they do. Since median household income has increased by only about 10% in the last 15 years, he's saying that average Americans can only afford to buy 60% of what they could in the early 90's.
And yet, the spending of American households in different categories (food, housing, transportation, etc.) is virtually identical to what it was in those high-rolling 90's. But it's not like the difference has been made up by more two-income families - labor force participation is no higher than it was in 1990. Only a little can be explained by increased debt - the saving rate has declined by 7 percentage points.
So he's saying Americans can only afford 60% of what they could before, and have borrowed enough to push that up to 67%, but spending on different quantities has not changed in relative terms. Accordingly, Americans must - if he's right - be able to buy 33% less of everything.
A quick look around suggests they're not buying 33% less food.
So his claims don't track at all with observable reality. I don't see how the shadow stats guy has any credibility. I suppose saying what your audience wants to hear is more valuable for keeping 'em hooked, though - the guy does have subscriptions to keep selling, after all.
Pitt: Are you aware that there are more humans residing in the USA than in 1990? They all eat food. Also, not to speak for the guy, but he does not claim that inflation in the USA has been understated by an average 7% a year for the last 17 years (I am sure you are aware of that).
And your point is?
Food was about 17% of household spending in 1990, and about 16% in 2004, as per my link above. Whether there are more or less people is irrelevant to the fact that food is not a larger part of the household budget.
And neither did I claim that. What I did say was that he says the amount of understated inflation is enough to double the CPI, which I base on this:
"Social Security checks today would be about double had the various changes not been made. In like manner, anyone involved in commerce, who relies on receiving payments adjusted for the CPI, has been similarly damaged."
That figure tracks with a rough estimate from this graph, which claims that inflation was about 1% higher from 83-87, 2% higher from 88-91, 3% higher from 92-96, and 6% higher from 97-2007, for a cumulative CPI increase of about 130% over government figures.
So, yes, I'm well aware of that. Are you aware of the implications of the claims he makes, or have you just swallowed his numbers whole without thinking about them?
17% in 1990 and 16% in 2004. That doesn't include the big jump in fuel prices in the last 3 years.
I'm fairly certain an article several months ago expounded upon this belief, and showed that despite oil prices going up, the % of total income only increased by like 1% due to how oil is technically 'subsidized' in the US. Again that leaves us dead even.
US Personal Debt
From TheStreet.com, the source for the data is cited as the Federal Reserve. Note that your source doesn't show that they spend virtually the same amount. It shows that people spend 1.2% less of their expenditures on food. At the same time, debt has increased substantially. That doesn't even touch on hedonic shifts - what if people are replacing wild-caught salmon with farmed catfish or factory-farm chicken? They aren't nutritionally as valuable, but they are much cheaper substitutes. Shadow stats would probably compare wild salmon to wild salmon, but the CPI is probably comparing wild salmon to ground turkey.
True - and even stronger evidence that consumer purchasing power has not eroded in the way shadowstats claims - but I figured simplicity in presentation was more important than quibbling over a single percentage point.
All the what-ifs in the world mean nothing without evidence to back them up.
Median real wage has increased 10% while saving rate has decreased from 7.6% to 0.6%, meaning spending should be 109.4%/92.4% = 118% of what it was in the early 90's in real terms. Taking into account the claim that the CPI is half its correct value, that gives a spending power of 118/2 = 59% of the early-90's value. In other words, things should - relatively speaking - take a portion of the household budget equal to 100/59 = 169% of what they did in the early 90's.
Instead, we find nothing more than a minor reshuffling of spending priorities, mostly characterized by precisely the same trends that have been apparent since 1950: food and clothes are getting cheaper, housing is getting more expensive, people are spending more on education.
i.e., no evidence at all that purchasing power has dropped by 40%.
In fact, it's almost certain that it hasn't. In 1990 it would cost you about $16,000 to buy a new car, which is about $25,000 in current money according to the CPI. Compare that to the average price for a new car of $28,000. That's 10% higher than the CPI-adjusted price, but the median wage has increased by 10% as well, making the cost of a new car a constant fraction of the median wage.
That's pretty much what the CPI predicts, and what shadowstats's inflated figure fails to predict.
You and he can make all the unsupported claims about wild salmon you want; none of it will be persuasive without evidence to back up your assertions that purchasing power has fallen so much.
But the shadow stats wouldn't lie to us, would they! Surely it couldn't be some arbitrary numbers thrown together! Surely the operator of the site doesn't have his own agenda! Oh god, my head will explode at this latest revelation!
You made several valid arguments, but this particular statement reveals a simple lack of awareness. It's not supposition to say that mass produced candy bars are smaller and taste significantly worse than they did 10 years ago. You can look at the label and check the weight and ingredient list. A $0.99 hamburger today is not the same as a $0.99 hamburger in 1990. Saying people are substituting ground turkey for wild salmon is an exaggeration, but it is not even remotely a stretch to say people are commonly substituting $1.99 per pound Chinese tilapia for the real thing. Real food, with naturally imbibed nutrients costs substantially more than processed chem-foods. Yet the public, at least in the US, has readily replaced real food with manufactured foodstuffs and therefore the price inflation of food has not been measured or noticed by the general public since it has been masked by a massive decline in quality.
Are you seriously trying to suggest that your views on how good candy bars taste is somehow objective??
If you have some evidence you'd like to share, please do so.
Until then, it might interest you to read some of the CPI's FAQ; I've linked to the question about collecting and reviewing prices:
"During each call or visit, the economic assistant collects price data on a specific good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price. If the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of 8 when they previously had been sold by the dozen) of the good or service since the last time prices had been collected, the economic assistant selects a new item or records the quality change in the current item."
In theory, at least, weight and quality changes such as the ones you suggest are explicitly checked for and taken into account when computing the CPI.
True, perhaps, in terms of what is being sold, but not in terms of what is being bought and used.
For example, I used to make meatloaf with 90%+ lean ground beef. Now I make it with half 80% lean ground beef and half ground pork or ground turkey. I used to eat beef maybe 3-4 times a week, now it is only about twice per week. I used to buy boneless chicken breasts, now I usually buy whole roasters. I used to eat fresh fish occasionally, now rarely. I used to buy bread at the supermarket, now I bake my own. And on it goes. I'm paying a little less for my cart full of groceries than I used to. But if I bought the same cart that I used to, I would be having to pay a LOT more -- and a lot more than what the CPI would suggest I should be paying.
Compelling as your tale may be, a single anecdote tells us virtually nothing about a statistic that is meant to represent the experiences of over 200 million people.
However, what you're saying actually sounds rather like what the CPI is saying, which is that ground chuck has gone up about 50% in the last 10 years.
Some prices do indeed go up faster than others (chicken has gone up half as much), and something like CPI is just an average.
I fully realise that anecdotal evidence proves nothing. My point was only that people's buying behavior does change in response to price changes. That presents a huge problem in trying to calculate the CPI. Stick with the same basket and that basket becomes increasinly detached from the reality of what people are actually buying. Change the basket to match what people are buying and you are no longer really measuring anything consistently, you are changing the measuring stick with each measurement. You end up with the gov't saying that people can still afford what they are buying because they are buying only what they can afford.
Once peak oil has a major impact on the economies of countries, it is not clear to me that any debt will continue to make sense. The efficiency gains Shunyata talks about in his first Point 2 will become an efficiency losses, as more and more steps that are now done by machine are again done by hand.
If real GDP starts declining, and everyone realizes it is likely to decline in the future, we have a major problem. The amount of real goods and services expected to be available in the future is then less than when a loan is made. Unless the borrower has a very unusual situation, the likelihood of default is very high. A reasonable banker would stop making loans.
I wonder what will happen to all this debt, if/when this happens.
Gail: If you go by the numbers at shadowstats, USA real GDP has been declining for quite a while without lending/borrowing seizing up (until the last month).
THe key issue is whether lenders realize it is declining, and is likely to continue to decline in the future. Once they realize the continual future decline, the lending business seems to be over.
Gail: I think what you are missing is that the financial economy of North America circa 2007 is what I would term an "absentee landlord" economy. There is almost no one watching over most invested capital with the prudence you anticipate. Currently there is a retreat from risk, but IMO you will be surprised how quickly risktaking returns. The reason for this is the layers of separation in place between the beneficiaries of risk taking and the persons damaged by risk taking (owners of capital). A lot of the large financial institutions are not run to maximize returns to the shareholders (who are so great in number their influence is nil) they are run to maximize return to upper management and their cronies. Likewise pension funds. Think about it: would ANY individual shareholder run JP Morgan like it is currently being run (at risk of possible collapse unless bailed out)? I seriously doubt it. Then why is it being run this way? Because that is the way to maximize return to the members of the club (not the shareholders).
OH didn't I call it! Everyones favorite 'my unofficial website is more official then everyone else's' argument has cropped up :P
In short, our entire financial structure is built on the premise of expanding economic activity. If we have reached the boundaries of our petri dish, expansion stops (at least for awhile) and the financial system is unlikely to survive.
We tend to see our financial system as a Universal Law rather than a choice. Read Ursula LeGuin's novel, "The Disposessed".
- Shunyata
The Dispossessed is a great read. I agree ever expanding growth is an unsustainable idea that is reaching the bounds of the petri dish. Great letter and resulting debate.
FWIW I vote fro inflation. I think we need LOTS of it to bring our money and things of real value back into balance. water, food, shelter, energy and nurturing community/family are WAY undervalued today. I anticipate these core essentials to account for much more of our time and money in the post-peak world.
The US government doesn't merely "print money" as others here have phrased it. Instead, the gov't delegates out the responsibility for real and ever increasing production.
Here's how it works:
1. US Gov't prints cash and IOU's at prime rate.
2. Banks accept cash and sign prime rate IOU's.
3. Banks print IOU's at above prime.
4. Real producers (i.e. farmers, miners, oil extractors) show up at the bank, sign the above-prime IOU's and take the cash.
5. Some time later, the real producers must come back with produced stuff that is valued (priced) at more than the total amount that has accumulated with compounding interest on those above-prime IOU's. Gov't and banks split the interest part of the booty. It is the delegated responsibility of the producers to actually produce all the real stuff. --Nobody pays Mother Nature back on principal let alone with compounding interest.
I really like your summary and your sign off:
If Don Sailorman is right (and I think he is) then most of that debt will have been hyperinflated away before the deflationary decline really hits high gear.
In sustainable, zero-growth economies (which is what we will have to level off into after the decline), you are right that there would be far less lending activity than at present. There might be a little. Interest would just be a form of rent; all assets, including money, must have a rental value to assure that they are used efficiently. In a zustainable, zero-growth economy, the efficient use of all resources becomes extremely important, because there will be no growth to produce more resources in the future. Living within one's means requires making the most of what one has.
Thus, I'm not quite sure that the economic decline means a reversal of efficiency. Efficiency will continue to carry a high premium. In fact, in a sustainable, zero-growth economy, making better use of a resource would be just about the only way to make life better in any measurable way.
That International Debt Thermometer chart misses some very salient points.
In terms of a future balance of payments across borders, shouldn't one consider both public and private debt? Either ultimately must be paid by inflation, exports, or the assets of the debtor nation. Also, it matters who owns the debt. The Japanese government, for example largely borrowed from their own citizens. Hence government debt essentially redistributes future income flows within the borders, rather than creating sapping burdens to external creditors on the generational scale.
I also (just) looked at the CIA World Factbook, and calculated some other ratios of interest (2006 data).
External Debt / GDP
United Kingdom 429.02%
France 183.02%
Germany 148.44%
Italy 111.45%
United States 76.47%
Canada 58.12%
Japan 36.68%
Korea, South 20.85%
Russia 16.46%
Mexico 15.52%
Saudi Arabia 12.94%
Brazil 10.66%
India 3.18%
China 3.00%
Iran 2.47%
Clearly this exaggerates the apparent indebtedness of the EU nations, for whom cross border product and capital flows form a greater proportion of their economy. How about this one:
External debt / Exports:
United Kingdom 1766.21%
United States 980.47%
France 706.33%
Italy 434.79%
Germany 344.57%
Japan 262.07%
Canada 169.06%
Brazil 128.36%
India 117.95%
Russia 90.49%
Korea, South 76.50%
Mexico 71.66%
China 31.38%
Iran 23.43%
Saudi Arabia 23.17%
Ie, the United States would have to devote nearly 10 years of ALL revenues from exports in order to settle its current debt to foreign creditors.
EDIT: These two ratios were calculated with some naivete from the available data at the CIA World Factbook, but some further research suggests the "professionals" also use them:
From Learning from Argentina's Crisis - FRBSF Economic Letter
The United State's external debt/exports ratio is twice as large as Argentina's on the eve of their 2001 debt crisis. Probably the only thing that has kept the US on the rails to date is the fact that the vast majority of this debt is denominated in its own currency.
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The sign of a truly educated man is to be deeply moved by statistics. - George Bernard Shaw
Debt to exports is only useful if you are trying to paint a bleak picture. It was used for Argentina because developing countries are large exporters and have foreign currency loans. The loans are expected to be serviced by export revenue.
US debt is in dollars, so the US does not need to earn foreign exchange to service it. The US also has a large domestic economy, so exports are inherently a small portion of GDP. it should be fairly obvious that all else held equal countries in which exports account for a large portion of GDP are going to look better on that metric than those that don't.
Thailand's exports are worth about 70% of GDP. So, I expect that they look great on the exports to debt ratio. However, what it really means is that the country's domestic economy is weak.
Looking at the above charts of debt, it would made common sense for UK/USA/France/Italy to try and inflate themselves away from debt.
Then again, Middle-East + RIC would NOT want that or would they?
Considering they have a lot of USD/EUR nominated assets and are practically debt-free.
What's it going to be?
With peak oil coming or here already, the oil producing states will not have to supply oil to the United States for US dollars. They will have other buyers with different currencies: Euros and/or Yen. We will have to either maintain a reasonably valued dollar or trade with other more valuable currencies. That is the fate of a really devalued dollar.
China, India, etc., would do very well to hedge their bets and expand into other markets beside the US. Global, diversified markets are a hedge against one customer going bankrupt. And, much has I hate to say it, I feel the United States is headed in that direction. We may think we will for ever be the biggest guy on the block but no country has ever done that before and I doubt will ever do it in the future.
One reader tells me that Shunyata is a core concept in Buddhism. It means emptiness.
I think Sunyata plans to be back to respond to comments some time this evening.
Sunyata changes some depending on the culture. It originally is Sanscrit, but is used in the teachings of Buddha. A better translation might be "voidness" or void, ie it is necessary to achieve Sunyata to achieve liberation from the cycle of existence ("Samsara", the name of another poster here) on the way to enlightenment.
What one calls Kuu in Japanese.
Might want to read the Book of Void (Book of Five Rings), Maybe it helps in understanding the triple somersaults on Wall Street. An act of faith. Trying to understand what they are doing presumes that you believe that they know what they are doing. :-)
Loans Officer: "Hear, O Sariputra, emptiness is form; form is just emptiness. Apart from form, emptiness is not; emptiness, form is not. Emptiness is that which is form, form is that which is emptiness. Just thus are perception, cognition, mental construction, and consciousness."
Twitchy Client: "Ummm... O.K.... I know my savings account is 'empty' right now, and my credit rating sort of 'is not' but does that mean you are going to approve our new mortgage?"
Loans Officer contemplates the beauty of the tea bowl...
And goes along with 9% over prime.
The Book of Five Rings is one of my all-time favorites. I was reading it to my son when he was only 6 years old. Ten years later and many reads since then it has become one of his most read books too.
Since you mentioned this classic book, I think the section from the Ground Book (appropriate for PO) is most relevant. On Timing in strategy, I think the nine broad principles that Musashi outlines should become part of the ELP lexicon. (for those without a copy close at hand I will lost them below with my $0.02 on how it applies to PO. :)
1. Do not think dishonestly (don't get all worked up about impending PO doomer talk, nor wish that PO will go away or might not impact you.)
2. The Way is in training (how do we really embrace ELP? By doing it! Over and over, in all our actions everyday.)
3. Become acquainted with every art (As Heinlein said: "Specialization is for insects." To survive PO we need to be renaissance men/women who can do many tasks: garden, bicycle, butcher, obtain clean water, build energy efficient houses, etc.)
4. Know the way of all professions (Realize that most statisticians/economists/politicians are full of hooey and that the lowly garbage collector just might be one of the most important people in the community. Realize that in post-PO, occupations/skills/careers all may have value but will be valued DIFFERENTLY.)
5. Distinguish between gain and loss in worldly matters. (Hey! This is on topic! This thread is trying to sort this out and it will have a lot of important consequences for all of us. Will it be inflation? Deflation? Will gold only be useful as for dental work??? Should I buy guns or solar cells? ;-))
6. Develop intuitive judgement and understanding for everything. (Post Peak will have you making decisions of real impact and we need to follow our gut and intuition. Where should I live? Should I change careers? What about my 401K - should I put it into different investments? Or should I have another beer and listen to my spouse who thinks this PO nonsense is a bunch of Y2K blogger hype???)
7. Perceive those things that cannot be seen. (Know when to act, and what is really of value. You will KNOW when we are post peak, and that you need to start changing your lifestyle.)
8. Pay attention to even trifles. (Details will make big differences. Subtle signs may give you warning of economic crashes or major changes in how your community is psychologically responding to PO changes.)
9. Do nothing which is of no use. (Long distance commutes to work come to mind. How about a lot of activities and possessions that might be valueless or worthless in PO? Will that extra large TV be as valuable as a cistern or PV panels on the roof ;-) )
My comments in parenthesis are off the top of my head, but I think the historical Musashi is pretty relevant to our current situation. Like samurai of old Japan, there will be a lot of displaced professionals wandering the country seeking their way...
Ronin?
Replace the shinai with katana and a wakizashi and all the bullshit goes away. :-)
I find your attitude very cynical, musashi.
I have long been a student of the philosophy of the Shih Tzu and found it has brought great peace of mind.
http://en.wikipedia.org/wiki/Image:Shih_Tzu.jpg
RC
Ronin? Sure. Roving unemployed programmers and service workers....
The story goes that Mushashi put away his katana and only used shinai or wooden (bamboo) swords for his later battles. After that he stopped fighting. We wouldn't have the book of five rings if he had not put away his katana and replaced it with meditation and teaching.
Apparently he was in a position to do so. Are we?
A real samurai that followed Bushido wouldn't become ronin, other then technically for a very short time and until he did the right thing.
With a little sarcanol the parallel is valid.
Thanks for a nice summary of the current situation and possible future scenarios, although everyone may not agree with all the points.
Sorry for asking a personal question, but was the user name deliberately chosen? Shunyata means Emptiness in Sanskrit and in languages of India which have substantial Sanskrit vocabulary, so I was wondering ... :-)
In Buddhism, shunyata or 'emptiness' describes a state of understanding where one has a profound awareness of what is, devoid of one's beliefs and prior experience.
A scientist might express this as, "Nature is not confined by our ability to describe Her." and because of this understanding the scientist never takes himself too seriously and remains open to understanding reality in a different way.
I find this perspective helpful as I stare into the face of a world where all that I "know" threatens to evaporate.
Interested readers might want to find a copy of 'Sun of Wisdom' by Khenpo Tsultrim Gyamptso for an engaging introduction to the concept.
- Shunyata
"I find this perspective helpful as I stare into the face of a world where all that I "know" threatens to evaporate."
That seems to be a popular theme here...everything just evaporates....
All the airports, all the shipping ports, all the highways, all the houses, warehouses, stadiums, hotels, dams, nuclear plants, electric power generation capacity, on and on and on...the remaining gas, oil, timber, metals in the ground, all just in one fell swoop, like a really great "Twilight Zone" episode, all wealth, all engineering, all talant, all ability, all will....vanished!
Think about it.
RC
I've commented elsewhere on TOD that the value of renunciation may soon exceed the value of forgiveness.
I found your post very informative and I agree with you re: evaporation. As a mindfulness exercise I've begun considering the origins of any object I might happen to touch during my day to day activities. There is literally nothing we use that isn't dripping crude oil if you take the time to consider each for a moment.
Amen. That is one of my daily mediations... Grocery stores in particular bring these thoughts to me.
Hi Roger,
Any chnce you could perhaps clarify for the other posters ahead of me - are you being sarcastic here w. your paragraph that begins "All the airports..." - ?
There seems to be two contradictory concepts being embraced by most TOD'ers. One is that we will soon have a financial collapse in the United States. The second is that the price of oil will skyrocket.
If we do have a economic collapse in the United States, I can assure you, the price of oil will plummet. We consume 25 percent of the world's oil. Even now, OPEC is cutting production to shore up prices.
A much more likely outcome is that we have a choppy economy for a while, and oil stuggles to stay above $70 (helped by hedge fund speculators. Eventually, oil will drift down in the years ahead. Oil demand is very weak above $60 a barrel.
By the way, thanks to a cheaper dollar, exports are surging through the ports of Los Angeles and Long Beach. We have a long way to parity, but I would give it 20 years or so. The dollar is in long term decline. Labor rates going up all over the Far East. Big winners will be USA and Thailand.
I suspect we are working out way to a cleaner and more prosperous future. The PHEVs, and solar power, promise to radically improve the way we live, even while sharply curtailing fossil fuel consumption.
True, we consume 25% of the world's oil, yet, we're only 5% of the world's population. In the last 10 years, we have close to 1/2 of the world's population that has woken up to the Western lifestyle. Even if there is an economic collapse, I'm sure there are PLENTY of people that are willing to step up and fill our shoes. Even if only ~15% of India and China's populations live our lifestyle, the oil is in a major shortfall. This assumes that the other 85% of those countries is OK with living 18th and 19th century lifestyles (no), there is zero population growth in the world (no again) and the rest of the world keeps their oil consumption perfectly level. (strike three!)
My bet is that there is a leveling of standards of living. Other countries will continue to rise. They are just starting to consume energy. The price they are paying now is just the way it is, they're used to it. To us, it's 'expensive'. Our lifestyles will become smaller, and eventually, we'll meet in the middle.
In the end, an inflated dollar won't be a terrible thing. It will bring manufacturing jobs back home, and our trade balance will start coming back in our favor. Energy will become more expensive. In the short term it will be painful, but it will also teach us to be more efficient.
More likely, US$ hyperinflation will drive oil prices through the roof initially. Then, as the US economy goes into the tank and the US$ starts to deflate, oil prices will moderate. However, even though a declining US economy = demand destruction, it also means that there will be less investment capital for things like tertiary recovery, offshore, arctic, oil sands & oil shale, CTL, etc. So supply is likely to come up increasingly short as well. Thus the most likely plot for prices might be an "S" curve - a run up to a permanently high plateau.
Shunyata sounds a lot like the Taoist concept of P'U: the Uncarved Block.
My favorite book! the Tao of Pooh.
A word of caution. When you talk about all the diabolical plans of the present U.S. administration, you have to remember that the Texas cowboy will likley be replaced by a shrill old lady, and God only knows what path she will lead the U.S. down.
The witch from hell would pretty much guarantee Apocalypse.
Asian markets tumble after U.S. sell-off
http://news.yahoo.com/s/ap/20070829/ap_on_bi_ge/world_markets;_ylt=AmP5j...
Consumer Confidence Slips Amid Bad News
http://www.npr.org/templates/story/story.php?storyId=13992390&ft=1&f=3
I'll do a write-in vote for Barry Commoner.
Clinton: I did not have sex with that woman.
Craig: I did not have sex with that man.
You choose your poison: the lyin' left or the righteous right?
Somehow sex in the Oval Office seems more stately than cruising restrooms for hook-ups. Humans are wired to want sex as much as they need oxygen. Religion and ideology that denies this is doomed to failure...
It would be nice if we had the option "none of the above".
We do.
It's called not voting.
A lot of people exercise that option each election cycle.
And achieve nothing.
IMO while a poor substitute a vote against the larger evil is still worthwhile in the sense that maybe one gets a very small fraction of what one might want. Still better then nothing.
Perhaps the only way out is to say fu(* it and join the ex pat's.
The trouble is, TPTB interpret non-voting as apathy & implied consent. They add up the votes cast for them and the votes not cast at all and call it a "mandate".
IMHO, the only vote that is "wasted" is the vote that is not cast.
A better way to say "none of the above" is to vote for 3rd party candidates. Yes, they have no chance of winning, but if that is the case, why are the DemPublicans so anxious to remind us of that? Why should they care? Why expend so much effort in devious ways to keep third parties off the ballot if they have zero chance of winning?
Maybe it is because they know something that is never admitted in public: That voting is not so much about picking a winner as it is about registering or withholding the consent of the governed. Voting is about painting a thin veneer of legitimacy on what would otherwise obviously be mere organized thuggery. Votes for third parties bring into question the legitimacy of the status quo. No wonder both major parties are so anxious that you not consider -- or be allowed to consider -- other alternatives.
And what's the deal with the argument about a 3rd party candidate not having a chance of winning, anyway? Do people think they are buying a lottery ticket? The only votes that actually get a winning payoff are the dollar votes cast by big corporations into the candidate's campaign chests. Whoever wins an election, somebody always wins a jackpot, but it is never the voters. Why be instrumental in helping others enrich themselves at your expense? Since you have nothing to really gain by electing yet another DemPublican, what do you really have to lose by voting for a 3rd party candidate?
"But if we don't vote for party X, then party Y will win, and we can't have that because yada yada yada." News flash: The US has been governed spectacularly poorly for at least half a century now -- by both parties in turn. I can confidently predict that the US is going to continue to be governed even more poorly in the future, no matter which party wins a particular election. We are facing huge, systemic problems as a nation. Our government is inherently dysfunctional, and the duopoly of the two major parties has a very great deal to do with that. "Let's see, my doctor said I have to lose weight, so I can give up beer and continue to eat ice cream, or I can give up ice cream and continue to drink beer. Decisions, decisions. . ." How about trying something radical and unthinkable for a change, like NEITHER! If both are causing the problem, then continuing with one rather than the other does nothing about the problem.
Neither party is doing us anything but harm. They have no real solutions to our problems, for they ARE a big part of the problem.
Gail,
I think this is a misunderstanding. The deal with the Saoudi's is that they keep their excess wealth in dollars. So the oil money from all around the world is recycled back into the US and this allows the dollar to become the defacto standard. Plus it lowers the pressure on the US to reduce their spending. Please note that at that time, the US had a plus in their trade balance / current account, so this was not that important.
Second part is that by denominating in dollars, the oild price is independent of the exchange rate. That is very nice for companies & individuals, because now they can make more reliable forecasts for investments etc. Just as if the oil was coming from Texas.
The last part is to my opinion a little bit of luck for the US. At that time, the dollar was about the only large currency available. No euro's, no yens etc, so the choice was obvious.
The fact that you need dollars to buy oil is not true. You can change it back in a second
Richard is exactly correct and has explained this very well.
It isn't so much that you need dollars to buy oil, but that SOMEONE is going to eventually convert the transaction to dollars - perhaps the Saudis themselves. The net impact is the same however.
The Saudis are being squeezed by their complicity. The Chinese are cutting back on theirs. And other countries are avoiding dollars all together. The tide turns against us.
- Shunyata
My take is that we won't actually see the effects of Peak Oil in most of our lifetimes, at least not on the surface, that is, most of us, the great mass of the population, will see something else entirely. The crisis of Peak Oil will be onbserved and defined in another context.
My 'theory' is that, long before Peak Oil is opon us in the form of massive and permanent shortfalls in supply with all that that means; before that registers as a major problem we'll see enormous economic/social/political disruption on a global scale that apparently has only a tenuous link to Peak Oil.
Here and now, the problems we're having with the global market economy are paramount. The troubles in the financial system are slowly spreading in the real economy. So we could see, potentially, the mother of all recessions. A depression would obscure the problem of Peak Oil, and if the depression lasted long enough and was deep enough, Peak Oil would fade into insignifcance, we'd all have other, more pressing problems to worry about!
In a way Peak Oil is but one of a series of massive structural problems associated with socio/economic model we've chosen to live under, and changing that paradigm doesn't seem to be on the cards!
Whilst Peak Oil is looming on the horizon, like another shadowy figure none of us want to meet, but all of us fear; what currently scares me most is the prospect of economic meltdown and the threat of the coming attack on Iran leading us towards World War III.
I think that there is a possibility that what you say is true. We have so many financial issues that a financial collapse may ensue. This will greatly reduce demand for oil and create a whole new set of issues to worry about. If the collapse "takes out" much of the financial services industry, and causes the monetary system not to work, there could be a huge drop in imports/exports of all kinds (only barter-based would continue). This would cause countries to be forced to rely much more on their own resources - ouch!
In this kind of scenario, there will be a massive depression. Peak oil will not be an issue for many, many years.
Bingo.
I would just venture that the link with Peak Oil is not as indirect as it seems. Peak Oil will serve as a trigger... the invisible elephant in the room that will pop the bubble of all bubbles - the unchecked exponential growth our system is based upon.
Yes. We are at the edge of the petri dish--peak oil, peak natural gas in North America, pollution problems, climate change, fresh water shortages, topsoil decline, you name it. It is difficult to keep up growth in these circumstances, and our system needs growth to survive.
.
Shunyata puts a hard face on the tools that will be cutting up the economy. There doesn't seem to be any easy way out or around it. Another view I saw a few days ago is at http://newenergyandfuel.com/http:/newenergyandfuel/com/2007/08/22/it%e2%...
where the oil price is looked at as the prime driver. A very different take and it makes one pretty uneasy, too. I wonder where the investment dollars will come from to reduce total oil use if the economy gets tough. In an oil driven recession consumption should go down but will it? The price of oil should go down but will it? So how does one prepare for another oil price rise if the cause is US debt and all the other debt problems come home to roost about the same time. Its worth wondering about.
Hi Manager-BW,
Thanks for your comment.
re: "I wonder where the investment dollars will come from to reduce total oil use if the economy gets tough."
Exactly. This seems to be the crux of the issue, part two. When, where, how to begin?
Does this make sense to you?
Yes. For me, I 'figured it out' once I asked the question "why would anyone what American Dollars?"
For me, once I started to figure out an answer to that, all kinds of new questions get asked.
Are there some happy endings that might come out of all of this?
Once one charts a path that has people in positions of power willingly giving up that power, and 'the citizens' willing to exist "with less".
But given human nature and the ability of people in power "to squeeze others underneath them" so that they might maintain what they have a bit longer - I see no path to happiness for the masses.
http://www.tnr.com/doc.mhtml?i=20070827&s=judis082707
This just in from Jackson Hole, WY.
Bernanke: Welcome to the Tetons, Jean Claude!
Trichet: Don't give me that $*#& -- I know what Teton means.
Bernanke (smiling): I hear you and the Asians have bought of lot of sub-prime paper.
Trichet: Oh shut up, or we'll talk the Chinese into cutting you guys off.
Bernanke: You are apparently the debt "junk"-ies, not us.
Trichet: So who do you think will keep buying your effusive issuance?
Bernanke: "Effusive", I like that. Are you talking about our now highly desired Treasuries?
Trichet: That won't go on forever.
Bernanke: Don't you get it? Our buddies over in Japan will "yen-carry" until the Kobe cows come home.
Trichet: Oh %!&^# you!
Bernanke: There are two kinds of problems in the world, and this kind is not mine.
Trichet: How about a currency swap?
Bernanke: In need of some cash? It won't work.
Trichet: OK, how about a coordinated rate cut?
Bernanke: Is BOE on board?
Trichet: No. You English are a pain in the ass.
Bernanke: Talk to you after Sep 6. Enjoy the fishing!
The basics of the international economic and financial dilemma really are quite simple.
The current global monetary system is designed so that the international economy and financial markets can only thrive IF THE US IS ALLOWED TO LIVE WAY BEYOND ITS MEANS YEAR IN AND YEAR OUT.
Clearly this is unsustainable and a fundamental reworking of the international economic and financial order is just a matter of time (and probably not much time at that).
Re: “Economically competing countries like China hold vast reserves of these dollars… They could destroy our country over night by flooding the world with dollars - more certainly than a nuclear strike!”: Sordid scare-mongering. So China holds a bunch of T-bills. Big deal. Kinda like the early 1980s when the Japanese bought property in Midtown Manhattan — the crown jewel of world capitalism — and all of a sudden the Land of the Rising Sun was going to take over an unsuspecting United States. Apparently now we have to deny the Chinese a good time. C’mon, can’t players play?
If China — whose massive energy and pollution issues offer only U.S. opportunity — unloaded its debt it would harm itself far more than any fallout endured by the U.S. Fanciful indeed. Because, as we know in this global capitalistic world, self-interest is king.
So what would Confucius say about this blog post’s apocalyptic and crypto-racist rant about the Chinese and their T-bills? “He who speaks without modesty will find it difficult to make his words good.” JCS.