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Revisiting an April 2007 Forecast Regarding The Connection Between Peak Oil and the Collapse of the Monetary System
Posted by Gail the Actuary on October 13, 2008 - 10:25am
It is not a coincidence that just as we are hitting peak oil, world monetary systems seem to be edging toward collapse. Monetary systems are debt based, and depend on growth to continue. Resources are finite, and we are reaching limitations on them. Many of us have predicted that monetary systems may collapse, either as we approach peak oil, or shortly after peak oil. I have talked about the connection between peak oil and monetary system collapse in a number of posts. In this post, I reprint relevant sections from one of my earliest TOD posts, written in April 2007.
Back on April 30, 2007, Prof. Goose posted an article I had written called Our World Is Finite: Is This a Problem? as a guest post. In that article, I talked about the fact that we are reaching limitations on resources of many kinds, and that whenever we try to overcome one kind of resource limitation with a substitute, such as corn ethanol for gasoline, we run into other resource limitations. This is a where I saw things going, back in that early post.
By the way, I do not claim originality in predicting the connection between peak oil and collapse of the monetary system. Collin Campbell also predicted such a collapse as early as 2006. This video by Collin Campbell is from October 2007.
This is the section from my April 2007 post dealing with monetary collapse, and also the conclusion section from the same post:
What if we don't find technological solutions?
We can't know for sure what will happen, but these are some hypotheses:
1. Initially, higher prices for energy and food items and a major recession.
If the supply of oil lags behind demand, we can expect rising prices for oil and gasoline and possibly other types of energy. Prices for food may also rise, because oil is used in the production and transportation of food. Recession is likely to follow, because people will cut down on their purchases of discretionary items, so as to be able to afford the necessities. Layoffs will follow. People laid off will find it difficult to pay mortgages and other debt, so banks and other creditors will find themselves in increasing financial difficulty.
2. Longer term, a decline in economic activity.
With fewer resources, economic activity is likely to decline. We will need to find replacements for many products in a relatively short time frame — heating fuel, transportation fuel, plastics, synthetic fabrics, fertilizer (currently made from natural gas), and asphalt, among other things. Living standards are likely to drop, because we don’t have infinite resources for replacing all the things that are declining in availability.
A graphic representation of how this might happen is shown in Figure 3. Real gross domestic product (GDP) gives a measure of how much goods and services the United States is producing in a year, in constant (year 2000) dollars. The "Fitted" line in Figure 3 shows the expected growth in real GDP, if growth continues as in the past. Scenarios 1 and 2 show two examples of how limitations on oil and natural gas might impact future real GDP. Scenario 1 shows a fairly rapid decline, starting very soon. Scenario 2 shows a slower decline, starting in 2020. If the downturn is still several years away, we have longer to plan, and a better chance that the decline will be more gradual.
3. Transportation difficulties and electrical outages.
Since transportation generally uses petroleum products for fuel, a reduction in the amount of oil available is likely to cause transportation difficulties. These difficulties may extend to all forms of transportation--automobile, trucks, airplanes, boats, and railroads, to the extent that fuel is unavailable due to shortages, cost, or rationing.
If natural gas supplies decline, electrical outages are likely, especially during high-use times of the year. Electrical outages may also result from interruption of transportation of other fuel, such as coal, to power plants, because of petrolum shortages. Outages may be one time events, or may be planned outages at certain times of the day, to compensate for an inadeqacy in the fuel supply.
4. Possible collapse of the monetary system.
This is perhaps the biggest single issue, and the most difficult to understand.
There is a huge amount of debt in the world today. When loans were made, the expectation of the lenders was that the economy would continue to grow as in the past--that is like the "Fitted" line in Figure 3 above. If this continued growth occurred, people, on average, would be a little better off financially when the time came to pay off their loans than they were when the loans were taken out, so they would have a reasonable chance of paying off the loans with interest. Corporations would continue to grow, and because of this continued growth, most would be able to pay off their debt with interest.
What happens if a scenario like that shown as Scenario 1 or Scenario 2 on Figure 3 occurs? When it comes time to repay the loans, people and corporations will be on average, worse off, rather than better off, than when they took them out. It is likely that many people will be unemployed, and cannot pay back their debt. Companies manufacturing goods that are no longer in demand are likely to be bankrupt, and thus will be unable to repay their debt. Organizations holding this debt, such as banks, insurance companies, and pension funds will find themselves in financial difficulty, because of the many defaults on the loans that are the assets of these organizations.
Two possible outcomes of widespread defaults come to mind. One is that there is so much debt that cannot be repaid that banks, insurance companies, and in fact the whole monetary system fails. The other alternative is that the government guarantees all the debt, so that the institutions do not fail. The latter approach would likely lead to hyper-inflation.
In either event, people and businesses would lose their savings, because money either wouid either be no longer available (first approach), or would be worth very little due to inflation (second approach). In either event, foreign countries would be unlikely to accept our currency in trade. Simple transactions, such as purchasing food or paying an employee, would become very difficult. Eventually, some approach would likely be found to circumvent these difficulties--perhaps a more barter-based approach--but this would be a huge change from our current system.
5. Failure of economic assumptions to hold.
We have been raised in a world where supply and demand are generally in balance. An increase in demand results in a greater price, which in turn leads to a greater supply. If the particular item isn’t available, substitution is generally available.
Once we reach geological limits, these basic principles seem much less likely to hold. An increase in energy demand isn't likely to translate into greater supply. Distribution of the limited available supply seems likely to reflect considerations other than price, such as rationing and long-term alliances. There may also be military conflict over available supplies.
6. Changed emphasis to more local production.
Two factors are likely to encourage local production and discourage international trade. One is the higher cost and/or unavailability of fuels used for transportation. The other is difficulty with the monetary system--either hyper-inflation or complete failure of the system. If there are monetary system problems, other countries are likely to want actual goods in trade, rather than IOUs or money. This requirement is likely to greatly reduce the amount of trade with foreign countries.
Food production is likely to be more localized, since this insures a continuous supply, and reduces the amount of fuel needed for transportation. If there are problems with shortages, people may choose to have gardens, so as to grow a few of the foods they need themselves.
7. Reduced emphasis on debt.
Once it is clear that future production is likely to be less than current production, as in either Scenario 1 or Scenario 2 of Figure 3, it will be very difficult to find any lender willing to provide long term loans, since if the loan is paid back at all, it is likely to be paid back in money that is worth very much less than it was at the time the loan was taken out.
If governments still have debt at this point, they will find it difficult to sell new bonds to replace the ones that mature. Businesses desiring to build new plants may find it necessary to accumulate resources for new plants in advance of their construction. Mortgages may not be available for prospective home owners, either.
8. Reduced emphasis on insurance and pensions.
If there are difficulties with the monetary system, insurance companies and pension plans will be among the hardest hit, since thy take in funds and invest them, and pay benefits later.
It is possible that a limited form of Social Security coverage may continue, but this is by no means certain. If a high level of inflation occurs (see point 4 above), benefits that have been promised to date will be worth very little. If a new monetary system is in place, it will be up to the government at that time to determine the level of benefits. Because total goods and services will be lower in the future (Figure 3 above), benefits to retirees will almost certainly be lower as well.
9. More people will perform manual labor.
As the amount of oil and natural gas becomes less available, more work will need to be done by hand, since the fuels to run machines will be less available. In order to encourage people to take jobs involving manual labor, manual labor will pay better in relationship to desk jobs. Because food is such ain important commodity, farming may be particularly highly valued, and may pay especially well.
10. Resource wars and migration conflicts.
If there is is an inadequate amount of a resource (water, oil, natural gas, or food), countries may fight over the limited supplies that are available. Conflicts are likely to spring up regarding areas where resources are plentiful.
Alternatively, people may choose to migrate from an area if resources become less abundant--for example, migration may occur if water supplies dry up, or if land is flooded due to global warming, or if declining oil supplies limit transportation. Receiving areas may not welcome the newcomers, leading to more conflict.
11. Changes in family relationships.
Families are likely to see more of each other, because of reduced transportation availability. Families may work more closely together, tending gardens and running small family businesses. Co-operation may be more highly valued by society. Divorce rates may decline.
12. Eventual population decline.
The food supply produced in the world today is many times greater than the food supply 100 years ago, before oil and natural gas were used in tilling crops, pumping water for irrigation, making fertilizer and pesticides, and transporting food to market. As oil and natural gas become less available, the food supply is likely to decline. Eventually, world population is also likely to decline, reflecting the lower food supply.
Conclusion
We cannot know exactly what the future will hold, if technology is not able to overcome the many issues associated with a finite world, including declining oil and natural gas supply, decreasing fresh water supply, and climate change. Whatever changes occur are likely to differ from location to location, as the world activity becomes more localized.
We tend to think of governments as fairly stable, but these too may change. Countries may subdivide into smaller units. Some have even suggested that groups of states may break away from the United States.
Educational institutions will most likely change. Fewer students will probably attend colleges and universities, and the subjects of interest will likely change. The sciences and agriculture or permaculture are likely to be topics of interest. More students may want to live on campus, if transportation is a problem. Adult education may become more important, as people seek to develop skills for a changing world.
Businesses will also change. Local businesses will become more important, while multinational companies recede in importance. Manufacturing will become less important, and recycling will become more important. Providing necessities will get top priority, while nice-to-have items will not sell well. Barter, or a new monetary system that substitutes for barter, may be the way business is done.
People may choose to live closer to work, or may work at home, so as to minimize costs associated with commuting. Some people may choose to live with relatives or friends, so as to save on utility costs. Eventually, many homes in undesirable locations may be left empty, and the parts of these unoccupied homes that can be used elsewhere will be recycled.
The next 50 years will certainly be interesting ones. Perhaps, with technological advances, some of the potential problems can be avoided. But we will need to work hard, starting now, to develop ways to work around the problems which seem to be ahead.
Revisiting an April 2007 Forecast Regarding The Connection Between Peak Oil and the Collapse of the Monetary System
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Revisiting an April 2007 Forecast Regarding The Connection Between Peak Oil and the Collapse of the Monetary System
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An interesting BBC blog article on what future banking might look like.
http://www.bbc.co.uk/blogs/newsnight/paulmason/2008/10/dawn_breaks_on_a_...
In short, we could be looking at a state controlled and regulated utility with an emphasis on social responsibility.
Some other excerpts from Paul Mason's blog:
Actually, we are on a runaway train barreling straight toward default.
This jumped out at me this morning:
http://us.ft.com/ftgateway/superpage.ft?news_id=fto101320080512035866
This is right out of Walter Bagehot's Victorian era rulebook for dealing with money panics and lending crises; 'lend and lend freely'.
Markets sometimes become seized with panic in which case all depositors to a bank or banks demand their deposits simultaneously, believing the bank will fail and only the first to arrive at the bank will be able to reclaim their money. A bank in this situation can either close or restrict redumptions and ultimately fail ... or, it can obtain funds from a central bank, a 'lender of last resort' turning over capital - assets such as loans made by the bank - temporarily as collateral to central bank and using funds it borrows upon that collateral to satisfy redemption demands, convincing depositors that there are adequate funds for all and that both the last and the first can have the same access to their money.
The idea is that conditions leading to the mass redemptions are transient and that when the panic subsides, the depositors will either cease demanding their money or will return funds that actually were withdrawn during the panic. Then, the subscribing bank will return the money borrowed from the central bank which will then return the collateral. While the central bank will lend vast (printed) sums to quell the panic, the sums will be returned in the end and the central bank will even earn some interest income. There will be no permanent damage to either banks' balance sheet.
The supposition is the that bank collateral is truly valuable, yet is undervalued by the depositors who would rather have cash. In other words, a crisis in confidence in the bank and markets ... and a liquidity problem. The Fed and other central bnnks have painted our current situation as a liquidity problem from its beginning, last summer. Since then, almost a trillion and a half dollars (in various currencies) have been loaned into the financial system by the lenders of last resort, accepting as collateral every sort of loan ... all this to little effect. Why?
Because this isn't a money panic, per se, the collateral that the banks are turning over to the central banks in exchange for liquidity isn't 'temporarily undervalued', it is actually worthless. Instead of the cycle where liquidity is exchanged for undervalued collateral for a short period, these assets are simply being dumped on the Treasury. The central bank cannot return them back to the subscribing banks, because the banks are going out of business, instead! The result is a dumping of garbage on the Treasury. The injection of liquidity is actually the massive exponential expansion of Fed's balance sheet, and US government debt, with an even greater expansion to come.
Now, our govenment risks exposure to the dollar- denominated currency and interest rate swaps 'markets', which value is $450 trillion ... if one percent of this is an 'unfunded liability' that finds its way onto the Fed's books. Can the Fed print $4.5 trillion with a straight face? Can it add that to the trillions in liabilities it has already accumulated?
There are all sorts of liability time bombs lurking within the 'collateral' being accepted by the lenders of last resort. This collateral is toxic for all the reasons listed in the article! Our real, sustainable production cannot support the structure of loans that has been built by hedge funds and banks upon it.
How this can avoid creating a money panic in US creditors is hard to imagine. Debt is rapidly becoming impossible for human tazpayers to repay. Who will be the lender of last resort to inject liquidity into the largest insolvent bank in history, the Federal Reserve System? Saudi Arabia? China? Are they stupid enough?
They have problems of their own and simply not enough cash! If these 'wealth centers' start printing and lending, they will rapidly become insolvent, themselves!
Another factor is energy awareness is factoring into economic considerations that did not exist a few years ago:
http://www.latimes.com/news/opinion/commentary/la-oe-keaton13-2008oct13,...
Without a (rapid) change in strategy and a reflection that our situation is not a 'temporary' money panic, the US will default in less than a year.
I thought it'd be useful to repost a previous comment.
For a clearer understanding, it helps to decouple the monetary system and the banking system and look at the options for each. Below are the possible combinations in the form:
Monetary system; Banking system; stability; historicity
1. Gold standard; 100% reserve banking (or usually no banking); stable; historical (first)
2. Gold standard; fractional reserve banking; unstable (no bullion lender of last resort); historical (1694 in England - around 1930 everywhere)
3. Fiat money; fractional reserve banking; stable (as long as central bank is willing to print currency as needed); historical (since around 1930 everywhere)
4. Fiat money; 100% reserve banking; stable; theoretical (Simons 1934 and Fisher 1935).
Heretofore, I refer to system 1 as pure precious metals-based (actually, silver has a longer and richer monetary history than gold), and to systems 2, 3 and 4 as "soft" (should be "funny money" in gold bugs's jargon).
Of note, the biblical prohibition of interest:
Ex 22:24 - "If you lend money to one of your poor neighbors among my people, you shall not act like an extortioner toward him by demanding interest from him"
Lev 25:37 - "You are to lend him neither money at interest nor food at a profit."
Ez 18:8 -"if he does not lend at interest nor exact usury..."
was issued when the monetary system in effect was pure precious metals-based. And it applies only to that system, so that it is legitimate to earn interest from soft monetary systems. That's because the properties of the currency (the entity performing the functions of money) are fundamentally different between pure pm-based systems (where gold and silver have to be mined), and soft systems (where central banks can easily print bills and even more easily create their electronic equivalent).
Below I try to show that:
1. The existence of a widely available, RISK-FREE interest bearing investment requires a "soft" monetary system.
2. For that investment to also yield a REAL positive interest rate, real economic output must grow at that rate or higher.
To demonstrate the first point, let 's assume we have a pure gold system. How can some person or institution make a risk-free promise to anyone to pay them interest on the gold they initially lent (plus the principal at maturity)? By one of two ways:
a. The borrower has the power to exact ever increasing quantities of gold from subject/victim populations, i.e. to forever expand its share of the total bullion stock. Clearly that cannot last long.
b. If we assume the borrower's share of total bullion stocks to remain constant at most, which is plausible, then we need the total stock of monetary gold to grow exponentially at that rate or higher (which implies that the amount of gold mined each year must grow exponentially at the same rate too). Actually, the cumulative gold production did grow exponentially, only the rate was very low, as you can calculate from the data at page
http://www.gold-eagle.com/editorials_00/mbutler031900.html
Thus, the annual rate of growth of above-ground gold stocks was
0.11 % from 1200 BC to 600 BC and again from 300 BC to 500 AD (see the reason for the biblical prohibition of interest?),
0.05 % during the Middle Ages,
0.59 % during the XIX century, and
1.7 % on average during the XX century (actually it was 1.8 % 1900-1950, 1.6 % 1950-1975 and 1.5 % 1975-2000).
Adding silver to the picture changed the above percentages very little.
(As an aside, this shows that a pure pm-based monetary system would have been deflationary since the industrial revolution, most notably after WWII: during the period 1950-1975 world real GDP increased at a cumulative rate of 4.7%, while world total gold inventories rose at a cumulative rate of 1.6%, so that a pure gold-based monetary system would have caused an annual DEFLATION rate of 3%. In practice, that level of deflationary pressure would have directly prevented the occurrence of that economic growth rate. Which could have been actually good, but that's another story.)
As said, the above figures provide the ceiling for the interest that could be offered by a risk-free investment if a pure gold standard had been in place. BTW, 1.5 % leads to k = 1/67. Clearly, the correlation of higher rates of growth of above-ground gold stocks with higher energy use in the XIX and XX centuries is no coincidence, as modern mining is very energy intensive, which also means that, after Hubbert's Peak for oil, the annual growth rate is bound to get lower and lower.
In a fiat money system, on the other hand, the monetary stock can (and certainly does!) grow exponentially at any rate that suits the keepers of the printing press or its electronic equivalent, so the government can promise beyond any risk to anybody to return them any nominal interest rate below that.
Now comes the second point: how do you insure that the nominal interest earned (plus the returned principal) allows the lender to buy more REAL goods and services than the principal initially allowed them to, in a fashion of a certain annual real rate? By having the amount of available goods and services grow exponentially at a rate that fulfills:
(1 + yGR) = (1 + RIR) (1+MGR) / (1 + NIR)
where
yGR: real Net National Income Growth Rate (approx real GDP Growth Rate)
RIR: Real Interest Rate
MGR: Monetary stock Growth Rate
NIR: Nominal risk-free Interest Rate
Since MGR >= NIR as said above (to make the investment yielding NIR risk-free),
it follows that the real GDP growth rate must be >= the real interest rate.
(BTW, the last condition holds for any monetary system, hard or soft, and it comes from the Fisher Equation of the Quantity Theory of Money, M V = P y, assuming constant V. See below.)
The "good" news, then, is that after Hubbert's Peak, since real GDP Growth rates will become negative for a long time, so will real "risk-free" interest rates, and therefore there will be no financial incentive for clearcutting the forest.
Calculation of the real interest rate:
Again from the Fisher Equation of the Quantity Theory of Money:
M V = P y,
where we assume constant V.
P = M V / y
At t=0, let be:
y0 the real Net National Income (can be substituted by real GDP, since we will deal with its growth rate, which will not differ substantially)
M0 the monetary stock (M1 or M2 depending on country)
P0 the price level = M0 V / y0
Let's call Real Purchasing Power at t=0 what an initial amount A0 can buy:
RPP0 = A0 / P0 = A0 y0 / M0 V
Let that initial monetary amount A0 be invested in a risk-free vehicle that yields a nominal interest rate NIR.
At t=n, we have:
yn = y0 (1+yGR)exp(n)
Mn = M0 (1+MGR)exp(n)
Pn = Mn V / yn
An = A0 (1+NIR)exp(n)
where
yGR: real Net National Income Growth Rate (approx real GDP Growth Rate)
MGR: Monetary stock Growth Rate
How much can An buy at t=n?
RPPn = An / Pn = A0 (1+NIR)exp(n) y0 (1+yGR)exp(n) / [M0 (1+MGR)exp(n) V]
RPPn = RPP0 (1+NIR)exp(n) (1+yGR)exp(n) / (1+MGR)exp(n)
Now, you want RPP to grow at a certain annual Real Interest Rate, RIR, so:
RPPn = RPP0 (1+RIR)exp(n)
From the last two equations:
(1+RIR)exp(n) = (1+NIR)exp(n) (1+yGR)exp(n) / (1+MGR)exp(n)
Taking the nth root:
(1+RIR) = (1+yGR) (1+NIR) / (1+MGR)
As said above, for an investment vehicle that yields a nominal interest rate NIR to be risk-free, NIR has to be <= MGR (otherwise it needs to capture an ever greater share of the monetary stock).
That implies RIR <= yGR
Reposted article with reposting of old comments.
I guess we are "doomed to repeat it".
I am not sure if I have a good feel for how the money supply would have to act going forward.
It seems like the supply of goods and services could contract quite quickly and unpredictably going forward--a loss of credit availability could invoke Liebig's Law of the Minimum on some production chains. Loss of some segments of foreign trade could make it impossible for either the former exporter or the former importer to manufacture some goods that one of them might might previously have been able to manufacture. None of the relationships are linear. They all depend on Liebig's Law of the Minimum.
It would seem like a new currency wound need to divide up whatever is available at a point in time. Since the amount of goods and services available is likely to go down over time, it is hard to see how debt financing could used to a significant extent, especially if the downward steps are unpredictable. You talk about risk free interest rates becoming negative. This would certainly have the effect of discouraging lending.
It seems like one would almost need a monetary supply that decreases over time. Perhaps, money could be issued that is only good for one year, and expires. The amount of money issued each month could decline, as resources and expected output decline. People could not really "save" this money, but that is right. In a declining world, money cannot really be a store of value. A person would need to convert the money into some real goods or an investment in something like a factory. Real goods would tend to need maintenance, and thus would tend to have lower value over time. Factories, because they depend on inputs which are becoming less and less available, would tend to have short life spans.
It seems like the net result would be to encourage a very limited technology world, where everyone works, and produce mostly the outputs they themselves need. Perhaps governmental tax and spending plans could provide some investment.
Gail, the ultimate reason why the amount of goods available is likely to go down over time is Hubbert's Peak (for oil and other things). Therefore, even if the money supply was constant over time, as would be the case if gold was used, there would be inflation (same money, less goods). Of course, with today's fractional reserve banking, debt-based system, which requires the money supply to grow, there would be much higher inflation (after the current deleveraging process).
My personal position on the issue of monetary systems is not trying to get too imaginative. Precious metals-based monetary systems have been used for thousand of years. Remember that on the downward side of Hubbert's Peak complexity is a liability for a system. A pm-based monetary system with 100% reserve banking is simple and resilient. And it would satisfy your requirement of not really being a store of value in a declining world, for there would still be inflation as said above.
Besides, even if countries could use various fancy fiat money systems, to have a fair system for international trade, transactions between countries should be conducted using gold or at least a paper currency that could be redeemed for gold by foreign holders (as was the dollar till 1971). Only that kind of system would prevent a country from getting an unfair advantage, something for nothing, a "free lunch".
I think you are right about keeping the currency simple. If everyone knows that the currency will lose value over time, that may be good enough.
I'd be interested in your thoughts about demurrage/carry-tax economic systems?
From a recent comment of mine:
I think there are a great many benefits to such a system. Most notably that it is an inherently stable system (in a mathematical systems analysis sort of way), contrary to our current debt-based, positive compound interest, fractional reserve system. I think the tax-alternative and budget aspects are pretty promising too.
The implementation would be fairly simple and straight-forward; basically banks become tax collectors and pay the government a percentage of all their deposits. (Do you think that might inspire lending?)
To prevent a flight to cash, bill issues would have expiration dates (organized in overlapping issues), and the treasury would sell them at a premium to face value to account for the devaluation incurred up to the expiration date.
To prevent systemic shock, a gradual, well defined transition should take place, consisting of the following actions:
1. The demurrage rate should be gradually increased to its final value.
2. To allow fixed-rate interest bearing instruments to be unwound and re-negotiated gracefully, the money supply will be gradually increased to it's final per capita value. This would be necessarily inflationary (but at least predictably so). Specific actions to this effect:
2a. The treasury will cease to issue debt instruments. The national debt will cease to grow from day 1. All government spending will constitute new money, without any debt encumbrance.
2b. To further increase money supply, the treasury will begin buying back its debts at a measured pace.
2c. The government will meet its social security and medicare commitments (possibly renegotiated), infrastructure modernization, and hey, how about some energy programs?
3. To compensate for excessive money generation from the policies of #2 (esp 2c!), the bank reserve ratio will be increased, which will exert deflationary pressure.
4. At the end of the transition period, a mandatory balanced budget clause will become in effect. Government budgets must be payed by carry-fees during the same fiscal period. The financial system should now be national debt free, zero inflation, and stable even in zero or negative growth periods. Yay.
The biggest problem I see with this systems, is one of perception. People are used to seeing money as an asset, rather than a tool to facilitate commerce. The two views are contradictory as was the first point of my earlier comment. That and the big banks might not like it much... :-/
Eliminating the personal and corporate income tax might be a sufficient enticement though.
Let's see if we can get the same result using a precious metals-based monetary system with 100% reserve banking:
1. The money supply grows at the same rate than above-ground bullion stocks. Since after Hubbert's Peak the extraction rate of all minerals will decline, the rate of growth of the money supply will be very low, tending to zero.
2. For reasons amply discussed in TOD, population growth will also stop.
Thus, in the Steady-State scenario feasible after PO, a pm-based monetary system with 100% reserve banking would provide for a constant money supply per capita.
See also that deposits in 100% reserve banks not only do not yield interest (as those banks do not lend) but also experience a small demurrage from the fee the banks cover for their service, though that fee might not be proportional to the account balance (e.g. they might charge per transaction).
Now, why do I prefer this system to yours? As I said in other comment, for simplicy and resilience. Frankly, your system (particularly "Newly created money is distributed evenly to every person") is very good indeed, but with human nature as it is, I don't think it stands a chance, particularly for big countries. And sure enough, while your target system could be zero inflation even in negative growth periods, a gold-based system would cause some inflation during those periods (same coins, less goods). A bit of inflation, however, is not seen as bad by Gail and others.
You are also right in that the transition is important, and your steps might be useful also for the transition to a pm-based system.
Is your choice of gold because of its history in that role?
I have a huge problem with gold as currency. Not as an asset, but as currency. Gold is far too good to be a currency. Value dense, doesn't degrade, etc. When times got rough, I'd hold on to my gold, since at least it wouldn't disappear. If everyone did that there would be not any commerce, since no money would circulate.
Any currency already has an advantage over real goods and services due to its universality. Add on top, that currency is a good store of value, and ordinary goods should be seen at a big disadvantage in trade, since money in hand is surely more useful and safer than most anything for which you would trade it.
The first and foremost job of a currency is to circulate. I think the properties of a currency should encourage its circulation. A demurrage charge is designed for that very purpose. The longer you hold it, the greater your losses. The currency has now been knocked down a notch; to be more on par with real goods, not superior to them.
Now if you wish to buy gold with your currency, good, it will make a fine asset. But the currency will keep circulating, since the original owner of the gold will now have to find something to do with the currency.
Essentially, the paradigm shift is to stop perceiving money as an asset, and start seeing it as a shared resource. That's my take on it anyway.
I haven't really thought this through, but it seems to me that the total amount of money will have to go down from what is implied by all the debt and promises out there now. We are not going to be able to give everyone full social security and Medicare benefits, and keep the system solvent. Perhaps your renegotiation covers this. I am not sure how you would handle all of the derivatives. It seems like somehow the US government will have to pay off all its debt, and not issue new debt. This will be an interesting experience.
The other thing that comes to mind is that we are dealing with an international marketplace. Whatever system is used necessarily has to be simple, and probably pretty similar everywhere. I'm afraid this system would be too complicated to be used in villages in Africa. It would also be next to impossible to get everyone to agree on its details.
Because of these issues, I am not sure it would work in practice, but it does offer some interesting ideas.
Hi Gail, thanks for the reply. I'm not sure what you mean when you say that the money supply would have to decrease due to current debts.
I don't have any doubt that we could provide full retirement benefits, but I rather seriously doubt that we will want to. It is certainly a theoretical possibility that every working person in the United States could devote one half or more of their productive time to the care of our retired citizens. I don't think there are many non-retired persons that would like that idea.
Our current system is certainly more complex than the one I propose. I think the problem is that the concept is strange at first glance. But really, the concept is exceedingly simple: a tax on money. Is income tax more simple? Collecting sales tax at every point of sale? Which taxes incentivize strong commerce? Penalize making money, penalize participating in commerce, or penalize the interruption of commerce by withholding the medium of exchange?
I don't see why it would be any more complex for villagers in Africa to trade pieces of paper (or any other token) that have expiration dates as opposed to pieces of paper without expiration dates.
We are living in 'The Bad Loan Universe'.
In the good loan universe, loans are repaid and the 'money supply component' of lending disappears as a part of the process of repayment. In a well- managed fiat system there is never more credit issued than is demanded by productivity. Productivity in the good loan universe as measured in a transparent and equitable way. The rate of return or earnings on money lent is productive only as it produces value to the original borrower.
In the Bad Loan Universe, laundered credit is considered capital and the resulting inflation is considered productivity. Here, currency exchange is imbalanced and surpluses are loaned against creating even greater money supply and allowing even more bad loans, since there is always more currency than there are good investment opportunities. The flood of cheap money encourages consumption over investment. Loans eventually fall into arrears, consequently, they never disappear from the creditors' books. The money supply component created with each original loan remains. At the same time, the additional money supply component created to rescue the lenders from bankruptcy or to service the currency imbalances are added to the swelling total of unpayable loans. It's the worst of all possible universes; the money supply expands exponentially while the created credit always remains attached like a leach to the original lenders' balance sheets ... and their foolish successors'.
At the center of The Bad Loan Universe this successor dwells, that bloated, feverish black hole of zombie credit, 'The Federal Reserve Bank'. It swells with bad loans that never disappear, but requiring nevertheless more and more interest from the surrounding productive universes. The more bad loans it swallows, the more bad loans it propagates, since all loans that fall into its ambit become tainted by the ralationship and considered 'bad'. 'Sound' planets and nebulae become insolvent in a matter of days, weeks or ... hours, ss their borrowed collateral is rendered equally suspect as that actually within The Bad Loan Universe.
The story has an unhappy ending, I'm afraid ... so I won't tell it. You have to use your imagination.
A new universe of good loans will soon arise from the radioactive plasma left behind by the vaporization of The Bad Loan Universe. If its inhabitants are clever, it may have several different money supplies, that accurately measure and service the different social functions that will require finance. There should be a 'basis' money that values resources and rewards husbandry. A good loan universe would have a free exchange of different currencies while keeping enough separation between them so that problems with one don't infect the others. In the Niewe Good Loan Universe, currency imbalances are quickly rectified by entities buying and selling reserves and monitoring exchange rates, rather than lending against accumulated foreign currency reserves.
Finally, The Good Loan Universe will understand that money supply is only a tool and its misuse will rapidly cause the good lending environment to morph into another Bad Loan Universe.
You have some interesting insights there the Bad Loan Universe:
Unfortunately, I don't currently have any insights on how to get from where we are now to where we need to go ... without tremendous agony.
It doesn't help that the people in charge are living in a dreamworld.
Even a good plan will face tremendous obstacles and will be a race against the ecological time bombs.
Sorry to sound dumb but I lost you after the 3rd equation, any chance of some conclusions to your work. What's a loaf of bread going to cost me in 20 years...?
Nick.
Nick, these are the conclusions from the equations:
1. The existence of a widely available, RISK-FREE interest bearing investment requires a "soft" monetary system, meaning one where the monetary stock grows at a rate at least equal to the nominal risk-free interest rate.
2. For that investment to also yield a REAL positive interest rate, real economic output must grow at that rate or higher. After Hubbert's Peak, real GDP growth rates will be negative for a (hopefully not very long) time until eventually becoming zero (Daly's steady-state economy), and so will REAL "risk-free" interest rates.
I'm not sure I quite buy this notion of the inevitability of zero real interest rates in a zero-growth economy. In a zero-growth, steady-state economy, a high priority must be the minimization of waste. In order to minimize misallocation and waste of resouorces, every asset, including money, must have a rental value. Otherwise, that asset is "free"; when a resource is "free", that encourages wasteful use of that resource (as we have discovered over and over to our regret).
If people could think clearly they would realize that the asset was not really free: it takes as much pain to return the exact amount of money that you have borrowed when the total stock of money has remained constant, as to return the principal plus x% interest when the total stock of money has increased by x% during that period.
Besides, the perception of an asset being "free" would discourage lending as much as it would encourage borrowing.
This may be too radical an idea, but I am not sure money can be considered an asset (in the sense we think of an asset today) any more. It is something that facilitates transactions. It doesn't really work as a store of value any more, if the amount of money remains constant, but the amount of goods it can buy goes down over time. Anyone wanting to borrow money will have to pay for both the expected loss in value and a rental charge. It will be very difficult to find any investment opportunities with a high enough rate of return to justify such debt. For this reason, I see debt (except very short term debt) as pretty much dead if we have a declining economy.
There is a kind of entropy, degradation, decay, or depreciation inherent in most, if not all, non-organic assets. And, after a certain point, it is also inherent in all organic assets. Materials wear out, machines break down, living things age, food decays, energy is lost to heat during energy transfer.
In some cases the decay is measured in days or weeks, but in other cases it can be measured in centuries or millennia.
Money is the representation of the value in these assets, and of the energy needed to move them around.
So there is, and has always been, some inherent value-loss in the holding of money.
But if money could be viewed as an investment in an index fund of ALL available goods and services on the planet, the risk of value-loss ascribed to it is distributed across everything it represents.
You are right, but somehow all of our financial planners have missed the entropy part. The emphasis has been on all of the growth and reinvestment of profits.
There are alternatives to the lending/borrowing/interest model. For example, a good could be bought by the person with surplus funds and leased to the person without for a fixed period. The lease payments represent rent on the asset, presumably set at a rate that will enable the owner to recover his/her capital and depreciation plus enough extra to make it worth his while.
Another possible model, relevant in the business sector, is for those needing funds to sell equity stakes in exchange for a capital infusion, with the contributor of the capital then receiving compensation in the form of distribution of earnings plus possible capital appreciation.
Your analysis above needs to be informed by the fact that in a theoretical hard currency, 100% reserve system, these alternatives would continue to exist, and borrowers would have to offer a rate of interest sufficiently high as to make lending more attractive for those with surplus funds to invest than are these alternatives.
Your metaphysics sucks, keep everyone safe, stick to surfing. Has WisdomFromPakistan seen this bullshit.
Gail,
I agree and support your observations and conclusions. Fitting the puzzle pieces together in a way that provides a clear picture is no easy task. Thanks for your efforts and the efforts of everyone at TOD.
One issue that concerns me is changing life expectancies. Life expectancy in all countries will decline given the confluence of the above-mentioned issues. Check turn-of the-century life expectancy for your favorite retirement country, consider the likely reduction or complete lack of: rapid EMS transportation; modern medical procedures; medicines; follow-up care, extended care facilities and draw your own conclusion. Simple issues we’ve held at bay such as influenza, tuberculous, and heart disease will reduce the aging and infirm populations, decrease resultant burdens on U.S. Social Security and pension accounts and have profound impacts on economic, social and family issues.
I agree that life expectancies are likely to go down. I think heart disease is likely to go down as a cause because it is to a significant extent the result of our current lifestyles. Also, we may die off sooner because of other things, that used to be treatable.
I think there may be actually be more people with disabilities to care for. Some of the medical advances have been in the area of helping people recover from hip fractures, knee injuries, and amputations. If we are not able to do as many of these treatments, there may be more people needing help from caregivers.
There is overwhelming scientific evidence that basically all chronic diseases are caused by feeding our herbivorous biology animal foods and grease. Chronic diseases always skyrocket when animal foods are introduced, as is currently occuring in many Asian cities around the world, while of course those farmers eating simple rice and veggie diets, etc., keep their extremely low rates of chronic disease. The truth is 95% of the medical and drug industries are simply living off of the decadence of large intake of animal foods and junk food - once a more modest plant based diet returns these diseases will disappear once again except for in those who can still afford meat/dairy/junk food. For at least the first few years, most Americans' physical health will actually improve, as there bodies begin cleaning out accumulated waste products from all those cheescakes and big macs (and they start losing some of their enormous amounts of body fat). Trouble is, overpopulation will continue until its trajectory switches downward, as healthier, more modest diets will make people live longer and be more active sexually ;)
all chronic diseases.....?..there is no such evidence. Are some chronic diseases related to excess caloric consumption. Yes. Does lifespan increase with modest caloric restriction? Yes. At least in animal studies and likely in human subjects. There are a myriad of other factors beyond diet influencing the development of chronic diseases: genetics, environmental toxins, physical inactivity, nutrient and vitamin deficiency, pathogens etc. Simple answers to complex problems should be left to the Palins of the world. Hugh O MD
Oh, wonderful, another herbivore/carnivore debate!
We're omnivores, we've always been omnivores, we are descended/evolved from omnivores, we are adapted to be omnivores. Be a herbivore if you so choose, but that should be left a matter of individual choice. I take a rather dim view of those that would push everyone into the herbivore path whether they want to be there or not through some form of social engineering project, just as I take a dim view of most social engineering projects.
I think that Michael Polan has a good formula:
Eat (real, natural) food.
Not too much.
Mostly (but not entirely) plants.
"There is overwhelming scientific evidence that basically all chronic diseases are caused by feeding our herbivorous biology animal foods and grease."
The reality is almost the precise OPPOSITE of what you've stated. 99% of human evolution occurred before the advent of agriculture, and our bodies are attuned to a pre-agrarian, hunter-gatherer diet, not a vegan, carbohydrate/cereals-rich diet. The fact that Westerners today --unlike our ancestors-- consume enormous quantities of refined carbohydrates and sugars, and also suffer from skyrocketing rates of obesity and obesity-related disorders (adult-onset diabetes, hypertension, etc.), is no cooincidence.
http://en.wikipedia.org/wiki/Paleolithic_diet
http://jama.ama-assn.org/cgi/content/abstract/297/9/969
http://content.nejm.org/cgi/content/short/348/21/2082
I love my pigs. I make my own lard. Go to H*ll.
I'm with you mikeB. I too render my own lard and it is a thing of wonder. Ah! Fresh flour tortillas wrapped around pork carnitas!
"Trouble is, overpopulation will continue until its trajectory switches downward, as healthier, more modest diets will make people live longer and be more active sexually ;)"
Ahhh, the Dr. Strangelove solution..."say somewhat a ratio of 5 women to every man...these women of course chosen for their sexual attractiveness and young enough to procreate...sadly yes, we would have to abandon the traditional monogamous relationship, but it is a sacrifice we would have to be willing to make..."
I knew it! The great catastrophe will be a male paradise! Yee haa, bring it on! :-)
RC
Hi Gail,
Three-score and ten was the traditional allotment, which isn't all that bad, especially if the last years are spent under the care of family, which will probably be the case as families draw closer together to share resources, cut costs, and help each other with so many of the logistical obstacles that used to be handled by hiring strangers.
My wife and I (and our numerous siblings) are now caring for both of her folks full time, and my mother part time, and although it can be a little restricting in terms of time and freedom to travel it has overall been an emotionally rewarding experience that has strengthened our marriage.
There are unexpected rewards in the coming hard times, not the least of which is realizing that we need each other.
By the way, I admire the way you calmly direct attention to key issues here on TOD. Cold facts, warm heart.
Thanks! Good luck in taking care of your older family members. We have my father-in-law, age 90, in an assisted living center near us. If times get worse, he will probably come to live with us. (His older sister lived with us for two years before she died.) He would be more of a challenge. I expect many will be in the same boat.
Hi Gail. My partner and I moved in with Grandma so she can stay in her own home. She's in her 90's and very active, so she has a companion 24 hrs a day. My sister, who helps out a lot, is a single mom and a student. Grandma-care is her only source of income. My partner has a full time job. Today my uncle, who has power-of-attorney, told me that the balance on the Morgan Stanley account we've been living out of has gone negative so he has to sell some stocks. I know pretty much next to nothing about Grandma's finances, but hopefully we're not on a fast slippery slope here?
This doesn't sound good. You probably want to have a discussion with your uncle quickly. I suspect that it is going to be too expensive to hire a 24 hr a day companion for Grandma. Can uncle help out at all?
This kind of thing is going to put a lot of us in a bind, especially if things get worse. How does one deal with incontinent older folks, without adult disposable diapers? If old folks have problems chewing, how does one deal with this? How does one prevent them from wandering off, if they are confused but ambulatory?
Thanks. My sister will probably have to get a traditional job, which means I won't be getting very many breaks. Or maybe she could move in here too. All I really need money for is food, and I could sell or barter more of the cloth menstrual pads I make instead of giving them away. And I can make some for Grandma if she becomes incontinent. My biggest concern is being able to fill Grandma's prescriptions.
It is truly amazing to me how many people who can cite one environmental, resource and political catastrophe after another are then able with a straight face say "And on top of this the world will have 9 billion people by 2050."
Don't they understand that the 9 billion estimate is based on an assumption that the problems they just cited, which all appear nearly intractable and tend to be worsening, will largely be solved by 2050 in order for 9 billion people to be alive?
I dunno, is it really necessary to assume that the problems will be largely solved?
For now, it appears that in general, the more hellish the place, the faster the population grows. This suggests that one would have to assume a truly awesome collapse - awesome enough to render these discussions entirely futile and meaningless - to stop population growth.
Anything less, and population may actually grow faster. After all, it used to be necessary, and still is in the more hellish places, to produce the largest possible family in order to have any sort of chance once one grew too old to work. If we abolish (as per the wishes of some romantics upthread), or fail to sustain, societal arrangements such as 'assisted living' where they now exist, then there will soon be big-time blowback in family size and therefore population growth. Who knows, if we choose to go down that road, we might have fifteen billion souls living in utter misery by 2050 or 2060!
During the 20th century food (and energy to move it) has been cheap enough to give it away to people in the hellish places, thus permitting the continual expansion of population in places that would otherwise run into a food-limited population size no matter their demographic momentum.
I just don't see these unusual conditions holding going forward. I won't give a date, but would bet it comes well before 2050.
The other significant factor apart from cheap food has been improved health care, both in terms of sanitation and elimination of infectious diseases. In particular, reducing child mortality rate has had a huge effect on demographics and population growth.
So while food may become more expensive, the other factor is still there. I can't really see malnutrition having a significant effect on population in the short term, but disease is the wild card. A few pandemics would have a big impact on population, bigger than any other factor.
As ludicrous as increasing population sounds, I sometimes agree with you. Just look at the second decade of the last century, when western man was trying his hardest to shoot everyone, disease and epidemics ran unchecked, even in non combat areas, Asia was in the midst deadly droughts and famines, and disease transmission and medicinal knowledge were barley beyond blood letting. Yet still population climbed.
Then I add climate change.
Almost inevitably, when a given country transitions from a given economic state to a worse economic state, the birthrate goes down.
When war broke out in numerous regions from Vietnam to Afghanistan the birth rate either became or remained high.
What you are saying may have some basis where the standard of living was some way above subsistence, in the West in the 30's, the USSR when it broke up, etc., but at a lower level the natural animal response is to increase attempts at reproduction, although until the immediate famine or whatever is past reproduction may indeed be constrained, every effort is made to make up lost ground as soon as the pressure moderates at all- we would hardly have survived so long were that not the case.
Dave,
you know the more I study demographics, the more complicated it looks. There are numerous counter-examples to the so-called 'benign demographic transition' in which as people get wealthier, they have fewer children. On the other hand, as you note, sometimes in wartime the birthrate goes up.
When Cuba's Battista was thrown out, the birthrate in Cuba took an upsurge. Same in Egypt when the British were expelled. These upticks had nothing to do with wealth or poverty, people expected a better future. In nineteenth century US, there was a vast frontier and the birthrates were very high (large Petri dish to fill?)even though many 'pioneers' were extremely poor.
Looking at graphs of Total Fertility Rate, it is interesting to note that beginning with the onset of the 'green revolution' ca 1950, almost every region of the world began experiencing at least a gradual decline in TFR. This goes contrary to the standard doomer screed that has an increase in food supply leading inevitably to an increase in population.
I get upset with the tendency of people to regurgitate incorrect and facile conventional wisdom about demographics. Most people don't realize, for example, that Mexico's TFR is slightly higher than that of the US, i.e. if you throw a dart at a distribution curve of either country, there is an extremely high likelihood you will hit a family with 2 children.
Culture seems to play a large part in all this. But you have a high TFR in say, Pakistan, but a very low one in Iran. But if you were to look closer, you would see that Pakistan's TFR is dropping, even though the 'inertia' has their population still growing on into the future.
The only overriding common theme that is present in almost every country today is a dropping fertility rate. It may be too little too late, but I can't help but think that it is a common human population response to universal overcrowding, a theory which, once again, tends to go contrary to conventional doomer doctrine that has humans as well as other animals unable to voluntarily control their population.
But, hey, sometimes I'm a doomer, sometimes not. Today isn't looking quite as doomerish, hence the long reply.
Demographics has been pretty lousy at predicting individual country's rate of increase, but overall remarkably accurate about the world situation.
Unfortunately, it seems highly likely that that is about to change, as economic and energy discontinuities hit. My own feeling is that broadly in developed country's birth rates will plummet as the economy fails, just as it did in the 30's and in the Soviet Union and Eastern block.
The reverse seems most likely to hold true in much of the underdeveloped world, with progress to reduce birthrates stalling, but OTOH Malthusian factors seem likely to finally kick in, with increased mortality in many regions overcoming even an increasing birth rate, so my own median estimate is for a population of perhaps the same order as today, rather than increasing to around 9.5 billion in around 2050 as previous, non-peak aware projections indicated.
The enormous suffering and potential for conflict leading to far, far lower total numbers of survivors can barely be imagined.
As for doomer and non-doomer, when pronounced with the kind of absolute certainty as to the outcome of all these very complex trends, both at the extreme seem to me to vastly over-estimate how much we know, and indeed the predictability of the world.
This is an exaggeration of the knowledge behind whatever thesis the proponent holds, with a whole bunch of assumptions built in.
To take one current example, whether we get inflation or deflation from the present sutuation is one which the experts including Noble prize winners furiously disagree, and yet to make a successful prediction of the future many of us who are completely non-expert in the matter would have to get it spot on, and likewise for technology, where if, for instance, high altitude wind pans our prospects would radically change.
The notion that any of us knows all the factors so perfectly as to make a definitive projection for the future is ludicrous, and yet you would not guess that from many comments.
We do know a few things, like we are not going to have so much oil, but the consequences are pretty much a guessing game, and the best we can do is come up with some probabilities, with heavy provisos.
Things are not looking good though, it seems safe to say.
Jason,
I agree with you. Population is likely to drop sooner rather than later. The problems with lack of a good monetary system and defaults could greatly disrupt foreign trade. There are many, many other issues as well, including lack of fertilizer, inadequate fresh water for irrigation and other purposes, and climate change. In our weakened condition, it would be easy to see an epidemic wiping out quite a few people.
Gail
The good news is that if you are able to read this blog, then you are old enough to have already escaped most of the things that resulted in sky-high infant mortality and drove those average life expectancies down so low.
The instability of fractional reserve banking that I mentioned in my post above is due to the fact that, since most of the money deposited into the bank is not there, what holds the system together is trust, and when trust disappears the outcome can be described in technical terms by saying that M0, and M1, M2 and M3 tend to converge.
In there's no lender of last resort (which is the case with a precious metals-based monetary system, since gold and silver cannot be created at will), then M1..M3 converge DOWN to M0. That's what happened in the US in 1929-1932, and in Argentina in 2001, when their Central Bank could not create pesos due to the strict dollar peg (currency board).
If there's a lender of last resort (central bank in a fiat money environment) and it's willing to print whatever it takes, then it expands M0 to make it converge UP to M1, M2, and if necessary M3. That's what happened in Argentina after they broke from the currency board in January 2002, and what's happening now everywhere according to http://www.federalreserve.gov/newsevents/press/monetary/20081013a.htm
And as in Argentina 2002, it is natural and expected that people with savings will try to escape the currencies whose monetary base are being expanded so fast to harder currencies (in this case precious metals). Which, as I explained in this comment, is a good thing now.
Hey, guess who said "Gold in the hands of the public is an enemy of the state."
Long-term, is this likely to lead to hyperinflation?
That's what I want to know.
I visited some of the economics blogs this morning to see what the word is, and they seem to be split into two warring camps--the inflationists and the deflationists--both convinced of their rightness.
About the only insight to be gleaned from the economics blogs on this issue is that articulated by Jacques Barzun: "[T]he human intellect is imperialist."
I'm looking at Gold and its down. It never really got started even in the blind panic of last week. I'm starting to think all this Gold is a fiat currency substitute is bumkum and the only reason it rises is because people are genuinely getting wealthier and can afford more of a discretionary item on aggregate.
If that's the case after PO its going to tank back to $0 because no-one will want such a discretioanry item any more when there are better things to spend your money on like food and heating fuel...
Nick.
The reality of the status of something as money exists (just as vanishes) in the minds of the people involved. I.e., what enables an entity to function as money is the social acceptance of its role as medium of exchange, store of value and unit of account (or at least of one of those roles, usually store of value in that case). Money is a social psychological construction. It is within the minds of the members of a society (be it the world or a concentration camp) where a specific entity becomes a currency, where the main properties of the entity that prompt those members to reach such a consensus are:
- its perceived intrinsic usefulness
- its scarcity,
- its durability,
- its fungibility (which excludes e.g. diamonds)
Thus, gold and silver were real money worldwide for many centuries, cigarettes were real money in concentration camps, and dollars and euros are real money wordlwide today.
In exactly the same way, it is within the minds of the members of a society that an entity can cease being a currency. Thus, just as central bankers worldwide agreed to demonetize silver in the 1870's, whereupon the value of silver against gold fell by 60% during the next 30 years, and just as, after being freed from the concentration camp, non-smoking former interns stopped accepting cigarettes in exchange for anything, so it is entirely plausible that in the very near future - prompted by the (correct) perception that OECD Central Banks are making their printed papers less and less scarce - economic actors worldwide reach a new consensus whereby they agree to use gold as currency.
If those economic actors include Central Banks with huge reserves of OECD Central Banks' printed paper, the new equilibrium price for gold could be far higher than today's.
"Paper" and "physical" gold (and silver) are dislocating in their pricing and availability. Physical silver, for instance, is now very difficult to locate at the metals exchanges, if you can find them at all. Wait times of 10-14 weeks for delivery have now become common.
Additionally, the premium over spot has dramatically increased. Exchanges are charging upwards of $4.00 over spot for silver (100 oz bars), and significantly more for 10 oz bars and 1 oz rounds.
Actually, eBay has started to reflect the physical market quite well, with premiums for silver going at spot + $5 to $8 for 100 oz and 10 oz bars respectively.
Dispatch
the word I got from the coin dealer is supplies are tight and hard to get. the premium is going up and you need to get into the store when shipments arrive as they don't last.
Makes you wonder just WTF is going ?
It appears that various governments and bullion banks are intentionally making it harder and harder for individuals to buy physical gold. The US mint has stopped minting gold and silver coins. The German banks are saying they don’t have supply. Scotiabank says they are out. They are not banning people from owning gold, they are just making it very difficult to buy because they say they have nothing for sale.
In essence, this actions have the very same objective as the gold confiscation of 1933 and the London Gold Pool of the 1960's: to dissuade the public from fleeing fiat money towards precious metals as store of value. I explained the reason for that in this comment.
Sure enough, the wild card is whether a holder of a huge pile of OECD fiat money like the CB's of China or Russia is planning to diversify into gold. Just a little math:
China has 2T$e (dollar equivalents, since part of it are in euros, etc.).
Russia has 0.5T$e.
Suppose they want to exchange just 2% of that for gold per year. Pretty conservative.
2% of 2.5T$e = 50B$e
Currently world gold supply is 4000 tonnes per year, clearing at a price of 27M$ per ton (840$ per ounce), so world money flow into gold is 108B$e per year.
So, the moment a central bank with huge paper reserves starts to diversify into gold, game over. And what's really surprising is that 3 years ago a chief Morgan Stanley officer suggested China to do just that (find "Stephen L Jen").
If we divided all of the gold in the world among the 6.7 billion people, it seems like the amount would be pretty miniscule. How would one overcome such a shortage?
I've had a similar experience.
Economics? And they call it science.
Heads it's inflation.
Tails it's deflation.
Or possibly stagflation. Or maybe disinflation.
If in doubt, ask an economist.
Oops.
I forgot to add these scenarios:
hyperinflation / hyperdeflation / hyperstagflation.
Ask another economist.
Or the electricity goes off, and they lose your account. I don't know what that is.
Yea, but if they guess heads, and it comes up heads, you ought to hear them crow about how well their "science" works.
Don't get me wrong, I love the sort of observation and discussion that economists engage in as much as anybody. But when economists start calling themselves scientists they are just putting on airs, trying to cash in on the great prestige science and applied science (technology) have earned in our society.
The laboratory worker's imagination may frame a hundred notions and by experiment settle on one. An experiment is conducted under rigorous conditions; it follows a method; relies on others' most recent research, and is subject to review by peers. It can also be repeated by others with the same result, every single time.
With economists, however, there is no test of truth. They retain their hundred notions and utter them, letting them take their chance in the people's minds. The plausible, the picturesque, the longed for are taken as truths, influence conduct, and sometimes cause a great deal of damage, as we are seeing now.
Anything repeated often enough starts to sound true. If you add lots of people with fancy degrees saying the same thing, it adds to the effect.
Strange that no one seems to think we could be right in the middle, no deflation and no inflation! Is this not an option? Of course that may mean BAU!! Still have global warming.
I came across an article that made me think even odder things might happen... not sure how likely this scenario is, but it doesn't seem impossible to me given the strangeness of our financial system.
If Gold Hits $5K, Would You Sell?
Another article I read a while back - I can't remember where - suggested that we may see a split where cash in the financial system could seperate from paper cash, and be non-convertable, then one could experience hyper-inflation and the other deflation (or something like that).
Probably the article was this.
My personal view is be that the special collateral requirement for FR notes, if it exists, will be readily dropped if needed.
There was a link to an unusual Jim Pupluva interview posted yesterday. The interview is with Bud Burrell. He makes all kinds of allegations of wrongdoing in the financial world--things like the possibility that many of the depository receipts don't have any physical assets behind them, and that the financial markets have been infiltrated by organized crime.
It all sounds almost too bizarre to be true. Does anyone know anything about this?
This is a link to The Sanity Check, which he mentions in the interview.
That's Catherine Fitts's argument, no? And besides, what's the difference between much of what we see as corporate actions and organized crime? It seems largely nothing but social convention.
It may very well be. I have heard her talk and seen her website.
I watched Deep Capture by Patrick Byrne (which I think was mentioned in that interview), this explains the issue fairly well, and was convincing to me.
I think we may discover at some point (probably years away though) that there is a massive amount of counterfeit stocks, bonds, precious metals and other commodities at the heart of the financial system. I think this is one of the reasons they can't let a severe liquidation take place - it would expose too much criminal activity.
I listed to the movie. It is very convincing.
If I went back and listened to the Bud Burrell interview again, I might understand it better. The interview seemed to make additional allegations, going beyond what is in the Deep Capture movie.
Both the interview and the movie refer to the Deep Capture website. The website has an article talking about certain hedge funds trying to take down Bear Stearns, Lehmans, Washington Mutual, IndyMac, and others.
The movie makes is quite clear that it is not the shorting that is the problem. It is the fact that these folks do not borrow the shares that they are selling, and are using all of the phantom additional shares to artificially lower the price that is the problem. The hedge fund is able to reap profits. Some of the companies may have been weak to begin with, but the point the movie makes is that it shouldn't be up to the handful of manipulative hedge funds to decide which companies live and which die.
I might listen to the interview again myself, there was certainly plenty of information there.
These securities clearing depositories are very interesting entities. They are the DTCC, Euroclear and Clearstream. They all seem to have seen some controversy.
Yes, I think that was it.
The other possibility I suppose is that they become inconvertable, and the existing notes rise in value relative to the electronic credits. People may then hoard the notes, and use electronic credit first in making purchases, causing a massive shortage of cash (Gresham's Law). I'm not sure how many people don't have a credit card, but these people would be forced to use whatever cash they managed to get, whilst those with banks and credit cards would obviously spend their hyperinflating money first, before their cash gold.
It's certainly weird, and probably unlikely, but possible I suppose. I think we probably won't see an outcome that many expect.
The available data thus far remains heavily deflationary. Total losses of credit and asset values now number in the tens of trillions of dollars. Total cash injections into the system seem to be around $2 trillion so far (max estimate that I've been able to cobble together). So the trend remains deflationary.
Further, shoveling cash into bank coffers does nothing to reduce debt loads for consumers in the US and Europe, who currently both show debt loads at historical extremes. Simply put, even if they create more credit, consumers may not be able to take more credit (debt).
So before we can have a hyperinflationary situation, governments have to (a) increase the amount of cash they are injecting and (b) find a way to get consumers to begin borrowing again. This assumes some reasonable chance of paying said borrowings back or why bother lending if you can't make a profit? I do note that steps are being taken to allow governments to inject all sorts of "liquidity" (euphemism for more fiat cow manure) into the economy. But unless they can solve item (b) then they cannot get the system rolling again.
Hyperinflation is not an impossible outcome but it is very, very heavily weighted against thus far. Another possibility is waiting too long and seeing the economy essentially destroyed then trying to inflate out of that state.
Gail, I leave you with this quote from Thomas Jefferson:
I find adults today who cannot fathom the idea of no central bank yet this nation did quite well for many years of its history with Congress doing its appointed job - managing the budget and addressing monetary issues. The founding of the Federal Reserve will go down in history as one of the worst crimes against the people of the United States that has ever occurred.
I leave everyone with this CPI graph from 1800 forward:
(Click to see full size.)
Those little bumps we see from 1800-1913 were the financial panics that formation of the Federal Reserve was supposed to stop. That exponential curve from 1913 forward is the near-constant devaluation of the dollar, interrupted only by occasional deflations to steal more value back to the bankster class. That knee in the curve is when Nixon took us off the gold standard entirely.
Now you tell me, do we need a central bank at all if that is what we get? With friends like Paulson and Bernanke, we don't need enemies, do we?
P.S. If TOD is not a finance site and doesn't "do" finance, why so many financial articles, especially lately? There is definitely a certain je ne sais quoi here that I find amusing. :P
Deflation will indeed be the end point. However, paper dollars will ultimately and perhaps shortly, go to zero, due to excessive money printing (e.g. Austrian economics inflation) and currency collapse. The idea that paper dollars will become more and more valuable is preposterous, in my opinion. The value of all assets will deflate, though things that are essential and desired will deflate the least. Thus, in relative terms essential things will do quite well. Best bets for the least deflation have to do with energy, food, water and a stable medium of exchange (e.g. hard currency). I see gold as the ultimate hard currency. Worst bets are all paper assets. This really is not that complicated.
Yes I guess it would be a rather peachy thing to have a stable medium of exchange otherwise whadda ya got to 'deflate' against? I think you mean price change and yes with more dollars,- that inflation of yours - chasing fewer goods you would have, as you say, 'the least deflation', one might even say negative 'deflation', oops I mean price change, don't I? Oh the confusion of it all , tell my mother I am in quandary, tell her to send me a case of beer. Some Austrian stuff and a couple of cases for my friend, he really needs it.
Because they cannot fathom the idea of a precious metals-based monetary system and much less of a 100% reserve banking system. They can only think of a fractional reserve banking system, which to be stable requires the existence of a lender of last resort (central bank) willing to print what it takes.
my 2 pennys from a man of low reasoning..
inflation or deflation is not purely the result of a absolute measure of money destruction or money printing...
if you increase the money supply but also increase energy supply/consumption in requisite amounts then the average cost per thing remains the same
if you increase the money supply at a rate greater than the rate you increase the requiste rate of consumption (energy if you like)you have inflation
conversely if the rate of money destruction is greater than the rate of energy supply destruction you have deflation..
OTOH if energy supply(net post eroei calcs) decreases at a requisite rate faster than money destruction you still get inflation
what those requisite rates are is an arcane mystery the market discovers...or infers
in of it self it does not signal anything fundemental without a comparative analysis of physical and other fundementals
Stretch out that time scale a bit, and you could paste first class postage stamps at their appropriate places on the time line. I personally find postage stamps to be convenient visual indicators of inflation. I am old enough to just remember being able to stick a three cent stamp on a letter. I also realize that when my parents were just old enough to remember, it was a two cent stamp.
US postage stamps do track inflation pretty well if this table is any indication:
US First Class Stamps vs.Inflation
Let's try a quantitative approach. You have two forces at play: the deflationary force of de-leveraging (margin calls) and the inflationary of monetary base expansion to supply the bank run. We can look at it using the definitions for Mx (which differ by country, I will use those from Switzerland:
M0 (Monetary base) = the money created by the central bank (CB) = banknote circulation + banks' sight deposits at the Central Bank
calling
C = banknote circulation, which can held by the public (Cp) or the banks (Cb)
Rb = reserves of banks at the CB
M0 = Cp + Cb + Rb
M1 = cash in circulation held by the public (Cp) plus sight deposits (checking accounts) held at banks (D1).
M1 = Cp + D1
M2 = M1 + savings deposits (D2)
M2 = Cp + D1 + D2
M3 = M2 + Time Deposits
M3 = Cp + D1 + D2 + TD
Currently there are two processes going on:
Margin call: the part of the public who is in debt, i.e. whose Cp, D1, D2 and/or TD comes from a bank loan, is asked to repay that debt. This process:
- leaves M0 unaffected, because notes just move from Cp into Cb.
- contracts M1 (by the debt repaid from Cp and D1)
- contracts M2 even more (by the debt repaid from Cp, D1 and D2)
- contracts M3 the most (by the debt repaid from Cp, D1, D2 and D3)
Bank run: the part of the public who is debt free wants to withdraw their money from the bank, or at least take it down the deposit chain into a checking account (D1). From the above definitions, we see that this process:
- leaves M3 unaffected, as money moves from (D1 + D2 + TD) into Cp, or from (D2 + TD) into D1
- increases M2 (by the money from TD into Cp or D1)
- increases M1 even more (by the money from (D2 + TD) into Cp or D1)
- and tends to increase M0 to the degree that the banks were leveraged, (or, if the run does not involve physical withdrawal, to the degree that the reserve requirements for D1 are greater than those for D2 and TD). That can be seen by comparing:
M3 = Cp + D
M0 = Cp + Cb + Rb
In a 100% reserve banking system, deposits = cash in banks + reserves of banks at the CB
D = Cb + Rb
and M0 would be unaffected.
In a fractional reserve banking system, D > Cb + Rb, therefore if the CB does not want the banks to fall, it lends them money into Rb, increasing M0. The money is then transferred into Cb as fast as it can be printed, and then goes into Cp when withdrawn.
So, to ascertain the net deflationary/inflationary effect, we must compare the contraction of M1 from the margin call process with the increase of M1 from the bank run process.
What's more, it may not make much sense to talk about inflation/deflation in general, as there can perfectly be deflation in some areas and inflation in others. E.g. the hedge funds receiving the margin call could have invested in long positions in agricultural futures, and the public withdrawing their money could want to buy gold and silver. Therefore you would have declining agricultural prices and soaring precious metals prices.
Moreover, remember the Fisher equation:
M V = P y
Thus far I was focusing on M, but V (velocity of circulation of money) can also change. If people want to hoard fiat money (lower V), the general price level (P) can decline even in the face of a net increase of M. Conversely, if people want to get rid of fiat money from their (correct) perception that is being dropped from helicopters (higher V), prices (at least of the assets into which the public shift their savings) can rise even in the face of a net decrease of M.
In the Argentina 2002 example, people were eager to exchange their pesos for dollars. So the exchange rate went from 1 to 4 (then back to 3) in a few months but most prices rose less, with the higher rises in those products that were internationally traded in dollar prices and could be readily exported (such as wheat and meat, so food prices rose the most). Today no goods are traded internationally in gold prices, so a rush into precious metals would not have a similar drag on prices. And anyway, in Argentina there was an inflationary bout, not sustained inflation: when the dollar exchange rate stabilized at 3 prices also did. (Sustained inflation came about three years later when the Arg government did not allow the peso to appreciate against the dollar, following the example of China instead of that of Brazil).
I take it you must work with this for a living. Most of us don't keep up with all of it. Thanks for your comments!
Margin call:
- contracts M1
- contracts M3 the most
Bank run:
- leaves M3 unaffected
- increases M1 even more
Therefore when both of these effects are ongoing (the first one decreasing M3 more than M1, and the second increasing M1 more than M3), there will be a strong driving force to make M1 equal to M3.
I think it is important to note that, even in the case where these two forces are roughly equal, resulting in neither inflation or deflation, there are potentially large changes in the structure of the market (ie. stagflation).
Would this mean that savings and time deposits go to 0 during strong stagflation, in which M3 would end up close to M1?!
I have no idea. I tell people that if the credit market stays seized up and confidence in the system is lost expect deflation. On the other hand, if the central banks keep ahead of the losses somehow and regain confidence then expect hyperinflation. In general, I tell people that either way, they should expect their purchasing power to decline dramatically.
Inflation: prices go up faster than your income.
Deflation: your income goes down faster than prices.
Plan accordingly.
I spoke to my congressman yesterday a one of his campaign events about this and he was generally promoting a "trust in the system" attitude. But in the end of his talk he told the story of a man he knows who's in his 80s and just lost his home to a fire. A newscaster had a camera in his face and said you must be devastated. No, the old man said. I am alive, have an appetite and there's some food over there, I am alright. The message from the congressman was solidly about regaining a perspective about what is important and rolling with the punches as we face really difficult times. What else could he do?
I wonder what qualifies as 'appropriate collateral'? Old Playboy magazines? 'Slightly used' condoms? Plastic grocery bags?
Like the second coming of Jesus Christ; "... suffer the bad collateral to come unto me. Come unto me! I shall keep it tendered until the end of days."
Praise God, indeed!
There was serious (fatal) capital flight in both cases. The gold was loaded onto ships and sent to England in the first instance and the Argentine foreign reserves vanished before the crisis, provoking it. Even in a metal- based monetary system a central bank can print at will, that's the problem with the daggone things. 'Gold standard' doesn't really mean anything.
A pure metal system would not work becass the bulk of the metal would never see circulation, the authority (Hitler) would always make sure that he had the lion's share of the metal. To do otherwise would cede control of the money to 'the mob', the masses of people (who would hoard it).
On one hand the central government could exert a 'corner' and hoard all the metal. There would be no circulation at all and a black market or scrip would emerge, rendering the government's 'metal money' worthless. If the government had a partial money monopoly, the hoarding of both the government (to preserve its fiscal authority) and the public (to have a store of some wealth outside of that authority) would also result in less and less circulation and a black 'paper' market. Placing all metal in circulation would result in a general debasement as there would be no central alternative store to 'proof' the funds in circulation (by circulating 'good' which would be always preferable to 'debased'. In every case an alternative fiat regime would emerge to challenge the metal regime.
The result has been a fiat regime superimposed upon a metal basis; a 'gold standard' of metal- backed paper money.
The problem with gold (other than it earns no return on itself as does paper money) is that once bought, it at some point must be sold. Otherwise, what productive reason exists to buy it in the first place? Speculation?
Speculation-as-production is what has gotten all of us into the mess we are in right now ...
When sold in an unbalanced environment, the sellers usually find themselves in far worse shape than they were when they bought. From paper money to gold to a can of beans ... doesn't sound like a good deal to me.
From paper emerges gold and to paper it must return. Ashes to ashes, dust to dust.
So there is no good solution?
In many ways to see what a post peak world looks like, one could possibly look at Africa, coming from Kenya myself and now living in Australia. I have been able to compare the two worlds within a world. A country such as kenya consumes 67,000 barrels of oil per day directly with a population of 33-39 Million people. It has no significant oil, coal or gas reserves, hence all surplus energy is imported.
Infrastructure while far from lofty western standards is present. The country can afford free primary and to some degree secondary education with the help of donor support, but there exists no large scale social security, medicare etc. as the informal sector of the economy makes up the vast majority of the working population. Living standards vary widely, with a small percentage of people being very very well off, a small but still significant middle class but more than 50% of the popn. lives below the poverty line and the vast majority live in rural areas carrying out subsistence agriculture. There is reportedly a 35-40% unemployment rate. Life expectancy is 20-25 years lower than in Australia but again varies widely with income distribution. Crime is more pervasive than OECD countries as well.
In a post peak world I would expect social inequality to increase, with living standards dropping sharply possibly. Currently the average Australian's income is about 25-30 times greater than the average kenyan at about 1700 dollars a day (PPP). I expect incomes to drop considerably in Australia and OECD countries as a result, with a resultant spike in crime to occur. Again many of the worst case scenarios that doomers talk about have happened somewhere in the world, unfortunately many in Africa. On a brighter note the average kenyan may be far more equipped to handle a post peak world as the majority already work the land, living standards never reached the lofty heights of the OECD, most agricultural farming is not energy intensive apart from hoticulture if I recall. And a post peak world doesn't necessarily mean a less happy world. I recall this article in forbes where the Maasai herdsmen were just about as satisfied and happy as the billionaire's of the world. :-)
Thanks for your on-the-ground comments. It is hard to imagine how we could "undo" the changes of the last 100 years. Most of us have little knowledge of agriculture. It is not even clear what crops would grow best where we live, since most of our food is imported from great distance. We have a huge distance to go, to try to be even moderately independent.
Gail, it's true that it will be extremely difficult to return to the soil, so to speak, and that it can't be done instantaneously and has to be done in stages, etc. But what other way out is there? There isn't any. The sooner we start to embark on it, the better off we'll be.
I'm a city slicker, Jersey City. The only way I get a green thumb is thru a bad infection. But my daughter lives on a farm/commune in the mountains of W Va. I know it's possible to live, and live well, on a teeny fraction of the resources the typical American consumes.
To precipitously pour millions of people into the countryside without any help would be a formula for disaster that Pol Pot might approve of. So it needs to be thought out, there needs to be training, experiment, staged assisted migration and setting up dense (must be or all is lost) agricultural (and light industrial) communities. But whatever hazards there are in this direction, it is the path that must taken.
Meanwhile, a great deal can be done with cities and suburbs to conserve energy and other resources. The existence of private cars in NYC is completely nuts. (In the longer term, I doubt that NYC can survive in anything remotely like its present form, and I don't say that happily.) The suburbs must contract and become denser, and employment must localize, etc.
Unfortunately, the fact that something must happen doesn't mean it will, at least not right away. We will undoubted take a detour through disaster before this happens.
I'd say Brahma and the kind of existence it inspired is pretty much a thing of the past, both in the USA and in India. Martin Luther King gave this insight on his trip to India in 1959, and we are all pretty familiar with the path India has embarked upon since then:
I have read Thoreau's literature several times. 4 to be exact. Each seperated by long intervals.
I was never left with the ideals that your comments portray.
Thoreau went to Walden 'to live simply'. He observed that the farmers worked and lived lives that we grindstones. Pretty much exactly as most of our middle class has become.
I can relate todays farmers very close to those farmers.
I found much in Thoreau to emulate and I do in large measure , as much as I can.
I also do not see any connnection with Eastern Oriental or otherwise philosophies.
In summary I think the review you quote is nonsense. Thoreau was a naturalist as well as a Transcendentalist.. but I don't recall he termed it as such. He was in love with nature.
We seem to despise nature and destroy it. Greed is our venue. Its killing our planet and leads to a life that is pretty much wasted.
This is what we now are seeing as reality sets in. The total failure of what Thoreau eschewed.
Airdale
Thoreau had rich friends who paid his taxes, bailed him out of jail, gave him money to live on between publishing income intervals, invited him to parties for him to entertain them. Other than that, his writtings are entertaining, but hardly a blueprint for sucessful rugged individualism or self sufficiency
any more so than "Green Eggs and Ham" is a cook book.
makes me wonder if the guy who drew stick figures on cave walls 1,000's of years ago were the lazy ones. Living off others kills. Me think we esteem the work of those who get by on the work of others. politicians, churches, Thoreau, cave painters.
;)
DownSouth,
It is interesting that just as I was reading your post, I was watching an interview with the newly announced Nobel Prize winner for economics, Paul Klugman
http://voanews.com/english/2008-10-13-voa21.cfm
His work has centered around the issues of economics of scale and global trade. He asked an interesting question..."why is there international trade?" He has referred in particular to the question of why a country that makes millions of cars imports cars!
"And his theories also explain why trade is dominated by countries with similar economic conditions and countries that trade in similar products. The committee said Sweden - which both imports and makes cars - is a case in point."
Here are a few comments by the Nobel Prize winner himself on the recent financial crisis:
http://money.cnn.com/2008/03/14/news/economy/krugman_subprime.fortune/?p...
So things are bad...but hey, there has to be a bit of release from all the pressure, life must go on...
http://money.cnn.com/2008/10/07/lifestyle/World_of_wonder_prasso.fortune...
Folks, we are bing played...
RC
It's scary how much has changed since last March when the Krugman interview was done.
At that time he was predicting a 25% drop in residential real estate prices. I don't know what the latest stats are, but I think we're already about three-quarters of the way there and yet there is still no bottom in sight. It looks like before this is over maybe 20 to 25 million homeowners might be upside down on their mortgages. His $6 to $7 trillion estimate of how much residential real estate will lose in value now seems like it might prove optimistic, and the $1 trillion in corresponding bank losses certainly sounds low.
On top of that we now have the stock market rout. We're probably looking at combined residential real estate and equities looses of over $10 trillion. That's $86,000 for each of the 116,000 households in America!
Thank goodness the dollar is still standing, foreigners are still willing to buy it and foreigners are still willing to sell us the oil that we need but don't have.
We are totally dependent on and completely vulnerable to the whims of other countries. Just imagine the reality of our situation in juxtoposition to the ideals of "imperial self" and "rugged individualism" that form such an integral part our national character, and that became carnate in the person of George Bush. We have not been this humbled since the Great Depression.
I saw today where Nouriel Roubini is saying the bank losses from real estate will be closer to $3 trillion.
Since they've only written off $637 billion to date, they're only about 20 to 25% down the road in getting these losses written off.
No wonder the banks don't trust each other.
Now banks themselves are taking out liar loans.
I wonder how that will end up?
Bonk!
So we started out building the nation out of pocket.
Then we started using pooled capital.
Then credit.
If I’m not mistaken credit is a claim on future profit.
Then loans were given creating a claim on the future profit of the claim on the future profit and on and on. This combined with predatory M&A pulling out future profit from other wise healthy companies, all the supposed future profits of the world have been pocketed and /or offshored. “They” have already got it.
It all rides on the back of building something tangible using tangible resources.
The new Global religion - Technology - has allowed us to believe that the economy could make a leap of faith from the tangible to the virtual and we went on a Financial tear of epic proportions.
Then the constraints of life on a finite planet began to raise its hand, clear its throat and say “ah… excuse me”.
The Mother of all margin calls and it turns out that we are all mostly naked.
Myself, I don't believe there is a big correlation between the credit crisis and energy costs. The current problem began in 99 when the Glass-Speigel act (created in the 30's) was withdrawn and allowed banks to lend/borrow at unlimited ratios. The run up in bad mortgages..all came to a close. Don't kid yourself, these banks have been in a bad situation for years...a problem THIS big doesn't just start one day after the weekend.
What it does demonstrate is what could happen again if the real estate market meltdowns due to high energy prices. Perhaps, in a twisted way, it's a good thing this happened now. I think it'll push back peak oil a few years due to the coming recession.
As the old saw has it, predicting is hazardous, especially the future. But what's unfolding now, not the details, but the overall picture, was one of the easiest things ever to foresee. Just the run-up in house prices alone was enough to know there could be no good ending. But with a knowledge of peak oil, it became a slam dunk. Rising energy prices converted huge swaths of the US landscape into junk. (Similar stuff occurred in parts of Europe and elsewhere.) And compounding that, paper collateralized by this junk was sliced and diced and spread around the global financial system. A lot of this paper was (is) held by nations who export to us, and depend on those exports to hold up their own economic models. All of this was capped by miles-high complex leveraging.
Truly, no one, no matter how clever or fiendish, could have consciously designed a more explosive structure.
But, even so, denial and fantasy still reign. This is not the first crisis of capitalism, and it is in the nature of capitalism to have such crises. What's different this time is peak oil, peak energy. This time there is no resource future left to mortgage. We cannot grow our way out of this one.
Which means that we have to shrink our way out of it, meaning step-by-step return to the soil, which I take as a metaphor for a whole range of things which I won't repeat here.
Any solution that purports to save the American dream is sheer demagoguery. It cannot be done. While it is entirely true that the TPTB are trying to rescue their trillions and outmaneuver each other so as to come out on top, it also true that the average citizen cannot hope to see their current way of life maintained. This is the bitter truth the MSM and politicians are not talking about.
The trick is to find a path to the return-to-the-soil that allows everyone to survive without undue hardship. That's where resources need to be concentrated. That's the only way out that has chance of succeeding.
I also believe there is at least a section of the TPTB that foresaw some, maybe a lot of this. Cheney spoke of the coming energy shortages during his days at Halliburton. The Energy Task Force files are tightly guarded, but one thing that was pried out was a map of Iraqi oil fields. So the oil wars began early, and continue. Rather than prepare for retrenchment, the empire prepared for war. War is not working well in terms of cornering oil, but it works for the "defense" industry, until the wheels completely come off the cart. There is a huge vested interest here in maintaining the empire. That vested interest is going to do everything it can to prevent the retrenchment path from being taken. The collapse provides two diametrically opposed opportunities: one is retrench to sustainability, the other is to intensify war option. With millions thrown out of work and deprived of any means of survival, it is a foregone conclusion that the war option will be presented as the way out. That to me is the big danger now. And those who say we can simply grow our way out and have things return to normal will, perhaps unwittingly, grease the skids for this horrendous outcome.
Anyway, that's how I see things.
Yes. Some of TPTB saw peak oil coming. Irak and Georgia are oil wars. Iran is coming close to become one.
However the empire is broke. Going to war without money tends to make the economic wheels come off the cart after a while. You can distract the people with a war for some time, but you risk that people eventually end up wondering if their rulers are up to the task and go for the pitch forks. This creates opportunities for people that are not yet TPTB but aim to become so.
I bet Paulson went into that little gathering this last weekend and said " ok guys this is the skinny. Either you all pony up and play ball, MY rules or TSHTF in weeks if not days, including shroom clouds. Ya all got that?".
and IMO he would not be extorting (is that a word?)or streaching the truth by saying it.
("Truly, no one, no matter how clever or fiendish, could have consciously designed a more explosive structure.")
I can point to entire cabals of these animals, explain their mating rituals, migration habits, favored enviroments, social structures & group dynamics. They are largely parasitic and perform no symbiotic benefits to the hosts they prey on.
Many will reel and believe Ive said too much, or stated too harshly, in fact, Ive said too little and been far too lenient.
It seems to me that there are several additional issues.
1. Public funds are being used to shore up private companies without representation on the boards of those companies. I believe that at some point, the "public" will demand such representation. The result - the perfect fascist state.
2. Baring that, it is likely that the legitimacy of our supposed "democratic" government will be called into question so long as public funds are used without legal action against those who profited from greed.
3. Finally, I see a distinct possibility of the breakup of the US into either bioregions or geographic areas with common interests. In other words, secession on a national scale. Since the US is likely to default on its unpayable debts at some point and government services reduced, this will offer an opportunity for these regions to have a rationale for such a move - a move which would probably be supported by the pubic since they aren't getting anything from the Feds anyway.
Todd
You are probably right on all of those issues. I mentioned the possibility of the US breakup into smaller geographic areas in The Economic Impact of Peak Oil: Part 3 - What's Ahead?
hi Gail,
Thanks for the link. I have to admit I had forgotten that thread and I highly recommend it to others with views similar to mine.
Todd
RE your #1:
No need for "representation" - informants will do just fine. Boards will be told what to do, and expected to report on a regular basis. The informants will be there to make sure that what is reported is truthful.
Once we've gotten used to such a system in one sector, it will become very easy to extend it into all of the others. In such manner does a system seem to remain unchanged on the outside, but is totally transformed from within.
RE your #3:
IF the constitution remains in force (a very big if), then the USA will go the way of the USSR when it gets to the point that the federal government has outlived its purpose and is more costly to maintain than it is worth. The constitution contains the provisions for its own dissolution: 2/3 of states call for constitional convention; convention proposes amendment that effectively terminates the constition, dissolves the FedGov, distributes all assets and cedes all sovereignty back to the individual states; and said amendment is ratified by 3/4 of all state legislatures or state ratification conventions. The US congress, president, or supreme court don't even need to be involved, the entire process can go over their heads. (This provision was written into the constitution because that is how the Articles of Confederation were replaced, and the members of the constitutional convention wanted the states to have the same option to do it again if need be. This is why the Supremes would be powerless to throw up any roadblocks - there is a very strong precedent.)
If the need was urgent enough, the whole dissolution process could be concluded in a matter of months - a dizzyingly short time. I don't see this happening anytime soon. On the other hand, if things get bad enough quick enough, this could happen far sooner than anyone can now imagine.
The most amazing part is the huge mismanagement of the banking system in recent years. The collapse is greatly exacerbated because of this. What we see is not a normal recession coming. It is a full blown deflationary crisis. Even absent of peak oil, these things may take a decade before recovery.
I think there is a couple of question worth watching. First we see a decline in oil demand due to the crisis accompanied with a drop in oil prices. How long will this trend last? A few months? Or a decade? We all assumed that because our society is so accustomed to growth, oil would be the bottleneck and the economy would adapt to the limitations of oil production. But what if things play out differently? What if the severity of the recession would cause several years of decline in oil demand that drop faster than our ability to compensate the decline in oil production? Is such a scenario realistic?
The other question is what are the next cards to fall in the hour of cards? Wall street is down and Main street will follow during next year. Then what? I see two obvious vulnerable points. One is the US Treasury deficit, the other is the US trade deficit.
Without a healthy economy, the US will be unable to finance its imports. This means fewer cheap manufactured goods from China. It also means lower ability to import oil. Worldwide oil exports may end up crashing faster than the ELM predicts. This will amplify the recession (depression) and also amplify the reduction in oil demand in a powerful feed back loop.
Also the foreign capital that funds the US Treasury deficit depends on the confidence from foreigner that the US will pay its bills. How low the economy could go without this confidence wearing off? Anyway any foreign power able to keep the US funded also depends on the US economy for its own wealth. Funding may dry away simply because nobody has any money to lend.
The outcome of this would be the inability of the US to keep funding overseas wars. It is inability to keep the same strong presence and same diplomatic clout in the Middle East. It is inability to keep oil supplies secure.
Fast forward a decade or so in the future. The banking system collapse is completed. The rotten apples have vanished in bankruptcy. The US has repudiated its debt through inflation. The economy is in shambles but it is poised to start climbing up to prosperity again. This requires the government launching some infrastructure spending to break out of the liquidity trap. But doing so will increase energy demand.
The question is how much oil is left in the ground? This brings us back to the first question. How long can this crisis make the demand for oil decline faster that our ability to replace aging wells? Because if there is still some capacity available, the society will still have the ability to build nuclear, solar, wind etc energy plants. And since the consumption habits of the population have been forcefully reduced, that size of the infrastructure to replaced would have been scaled back. And since the economy needs an infrastructure initiative to recover, you get an opportunity to transition off oil.
We can imagine scenarios, but we need to watch the actual numbers. What is the impact of a depression and sustained reduction in demand on the various models?
It seems that central bank action led by UK, is going to avert deflation,and depression we may have inflation, and those foreclosed houses are going to be real bargains and easy to refinance with lower interest rates. The other alternative is to believe that families prefer to rent while they see house prices continue to rise over next 10years.
Look to see oil prices again above $120, and TOD discussions can go back to peak oil issues.
After the events of this weekend it appears to be the case that a successful tackling of the profound deflationary forces at work may occur.
So unlike in the 30's, we may release inflationary forces.
What keeps Governments from inflating their money supply is the collapse of their currencies, so the only way around this is to do as Brown appears to have managed to do, and persuade everyone to pump in vast amounts of liquidity - this even includes the Chinese, who seem to be going for a weak currency and exports, instead of a revalued currency.
This will have a number of effects, notably that those who are overleveraged in their houses and businesses will be bailed out, and that house prices for instance in the States and UK can return to a more reasonable ratio to earnings by the magic of inflation.
Perhaps from a bad starting position this is about the best that could have been hoped for, and as yet it is by no means a certainty.
One of the notable effects if this reading is right is that oil prices may shortly shoot up, absent the really major depression which would keep them down.
I view this as a positive development, as it will focus minds on one of the great challenges of the age, and also minimise destruction of investment in energy infrastructure.
It will likely lead to another leg in our roller-coaster recession and further devaluation of assets, with more charges on the groaning public purse though.
BTW, my nephew works in the UK Treasury, so it may all be his fault!
How do we know that? It is way too early to see the effect of these policies. AFAICT it may be just window dressing to maintain trust while behind the curtain there is no ability to execute on these promises.
To solve the deflationary pressure from the frozen credit market you need two things: 1) money to lend and 2) borrowers willing to borrow. It seems that governments are intent on doing no 1. But who will provide for no 2? Debt levels are at their high. People need to pay back before they borrow again. If the government wants to waive the debts with printed money, then the resulting inflation will kill the economy just as well.
PolR,
You a missing why there was a crisis, the interbank borrowing rate went so high because banks and companies could NOT borrow. If no one wanted to borrow, the rate would have declined to 0 basis points instead of increasing to 450.
Debt levels are always relative to interest rates, at 1% interest you can manage more debt than at 10% interest. The sub-prime crisis was because many mortgages went from 1-3% to 8-10% in a relatively short period.
Now that the commodity prices have declined interest rates can be lowered with reduced risk( still a lot)to inflation. There is a middle ground between depression due to deflation and hyperinflation; we have been living in it for 70 years, 1-3% annual inflation is not perfect but OK, allows adjustments to bubbles in time.
I have read plenty of financial blogs lately and I think my opinions are based on good information.
The interbank borrowing rate went high because the banks balance sheets are fairy tales and all banks know it. They are afraid to lend to each other because they don't know if they other bank will still be around the week after. It has nothing to do with the ability of banks and companies to borrow and everything to do with trust in the counterparty financials.
There was a spree of policy measures to beef up credit the recent years. People that shouldn't be given credit were still granted loans and mortgages, including some that lied on the loan request form. This is in part because CDOs and credit swap were used to switch the risks to other parties. The mortgage broker had no incentive to check the risk and a lot of incentive to pocket the commission. The purchaser of the CDOs and credit swaps just assumed the broker did his job and didn't check either.
The mortgage backed securities are busted and nobody knows how to price them. This is why the banks balance sheet are fairy tales. No one knows what the real numbers are. The CDOs and the the credit swaps put further burden and nobody knows how much they are worth or how a liabilities they are until the mortgage baked securities are solved. This increase the uncertainties on the banks balance sheets. This is why there is a crisis. And no retuning to lower interest rates will fix this. People are now aware of the risks and cannot return to a state of oblivion.
The Feds has responded to the crisis using hyper inflationary measures like printing hundred of billions of electronic money with no backing in the real economy and no other justification than it was expedient to keep the banking system afloat. On top of that the bail out will grow the already massive US government debt without knowledge of where the funds will come from. As a consequence the line between deflation and hyperinflation has become very thin in the sense it has become possible to argue convincingly both possibilities depending on which school of economy science you belong to. Economists disagrees on which way the economy will go. I haven't yet found one that thinks everything will balance out nicely.
It is likely that these hundred of billions will fall in a black hole without restarting the credit market because most would be borrowers are either already buried in debt or bankrupt and the liabilities from mortgage backed securities, CDOs and credit swaps dwarf the money that has been printed. This scenario means severe deflation with a possibility of a depression. But should the credit market unfreeze, then these billions would flood the market with massive inflationary pressure. There is also the US public debt. It is growing with no end in sight while the economy is headed toward a major recession. Without a strong economy to bring the funds to repay the debt, the most likely outcome is to follow the steps of late 20th century Argentina and this is economic collapse with hyperinflation. It is also possible that both scenarios play out one after another for the ingredients of both are present concurrently.
All that is required for a deflationary spiral is for the government to do nothing.
All that is required for hyperinflation is for the government to do something.
Review the news for the past month and consider which of the above is happening.
Dave
I hope he is keeping a diary. Some of his mates' stories as well.
He is a British official .
I would not ask - he would not tell - even to my brother!
All I know is that he runs into work, as opposed to catching the tube -which might be for various reasons - and he is not yet keeping goats in his central London flat.
I am doubtful about any "recovery". What I see is a leveling off - for now. Later there will be another slide downward, followed by another leveling off, and so on as we head down the stairsteps. We'll end up at a permanently lower, 3rd-world style economy, with a per-capita GDP of maybe 1/4 or so of present levels - if we're lucky. We simply won't have the resource base to support anything better than that. Contemplate Costa Rica today for an example of what we can hope for as a BEST CASE scenario for the future. Of course, things could end up much worse than that, but I'm trying to maintain just a bit of hopefulness.
PolR,
It is hard to know how this will all play out.
It seems to me that at least some of the short selling is related to all the margin calls that were being made. Sometimes oil futures were the easiest things to sell, even if that is not what caused the margin call.
Going forward, it is going to be difficult to have enough oil in excess of current demand to build very much infrastructure. I think one thing we have to be aware of is that any new infrastructure will have to be maintained as well, and this will take additional resources. The cost of wind turbines is not just the cost of the maintenance that will be needed in future years--including keeping roads built and maintained to the wind turbines, keeping big equipment maintained to transport new parts, and even keeping the long-distance transmission wires maintained.
It seems to me that we have to be aiming pretty low, and looking for energy sources that are truly low maintenance.
Maintenance, including the cost in oil, is one of the reasons that off-shore wind power does not seem very practical to me.
That goes on top of the cost of the build, which is much more than on-shore, and the degradation of equipment in that very corrosive and rough environment means that you would have substantial needs to get out to the turbines to effect repairs, as well as to the transmission lines.
It can be done, off shore oil rigs prove that, but you get an awful lot less power out of a turbine than an oil platform, so maintenance needs per GW go way up.
Agreed.
I still think these points need to be considered. Perhaps our data and modeling wizards can come up with something that help sort out the possible, the probable and the impossible.
The keywords that caught my attention are "current demand".
I am thinking more of whether we will have enough oil in excess of future demand as it will stand when we will be poised to get out of the current financial crisis. There is on TOD an implicit assumption that we need to build non-oil infrastructure to equate current oil demand and find this is near impossible. But what if this target is wrong? What if we should accept some downsizing in energy production and aim for a much smaller oil replacement footprint? This would surely ease the task.
For maintenance we need to factor that we will phase-out a lot of oil dependent infrastructure. We don't just augment, we replace and downsize. Maintenance requirements will follow. If this does not suffice, we can prioritize. We can focus on infrastructures that are strategic to our future and let go of the less important stuff.
When resources are scarce, the normal reaction is to try to do more with less. There is so much waste that we can go a long way with conservation before the standard of living takes a hit on something that really hurt. The problem is people don't conserve voluntarily. In a scenario where oil is the bottleneck, conservation will not generate enough excess capacity until attitudes change. But in a scenario where an economic crisis forces conservation above and beyond the natural reduction in production capacity, some excess capacity may remain for a while.
Gail your analysis of the current crisis is a contribution to our thinking on it. By pointing to the link between supply, energy prices, the cost of energy related scarcity and the current economic you seem to be hitting close to the mark. However your prognosis for the future are far more problematic. Your assumption that industrial civilization is domed by resource shortages is premature to say the least. In the first place the future of energy production is not nearly as limited as you would assume. Luke Weston has just published an assessment of the recoverable resources avaliable in the Earth's cruse for the production of nuclear energy.
http://enochthered.wordpress.com/2008/10/12/thermodynamics-stars-uranium...
Weston calculates that all of the human energy requirements can be supplied for a period of between four and five billion years by efficiently using global thorium and uranium supplies. Weston base his calculation on the production of 65,320 TWh of electricity per year. That is 4 times current world electrical demands. According to Weston, that prodigious amount of electricity can be produced by nuclear burning of 7750 tons of uranium or thorium per year in Molten Salt Reactors.
I would like to also point out that byproducts of this nuclear process would be the production through nuclear alchemy of many materials, the scarcity of which you foresee as jepordizing the future of civilization.
Over a generation ago, Alvin Weinberg and E.H. Goeller looked at this whole issue of scarcity and substitution and came up with very different conclusions from those you argue. They argued"
http://www.osti.gov/energycitations/servlets/purl/5045860-HVRCd7/5045860...
It is my contention that the choice between between the "catsatrophists" view and the "cornucopian" view is not simply about rationality. I perceive that no argument, no matter how rational or fact based will convince the "catastrophists" of the flawed nature of their doctrine. The choice is not simply about rationality, but rather about personalitry, with "cornucopian" standing in accord with the more optimistic views of the Enlightenment, and the "catastrophists" have adopted a sort of non-supernatural premilleniumism, with the future getting worse and worse and with no messiah in the offing. Such a view can give its holder little satisfaction, except the self satisfied belief that he or she is right, and that the holders of of other beliefs are mistaken. Gail there is certainly no strong rational case for such a dismal future as you lay out.
Unfortunately, while there are possibilities out there for new energy sources, it takes a lot of work and time to bring the new sources online. We may have run out the clock.
We can have the LFTR for 10 billion, less than the United States spend on imported oil for for a week. Another 10 billion to set up a factory, and then start churning them out. We can send a crew of unemployed guys to dig up thorium in Lemhi Pass, of course for a very modest sum of money a regular mine can be set up. The assured reserve will power the United States for 400 years, with another thousand years in the ground. The will dig up a lot of scarese resources - rare earths too - from the same mine.
While these points may be possible, they are not plausible unless a plan can be devised to fund and build the necessary facilities and infrastructure. Given the reticence to use nuclear power, the well-documented slide in technical education, and the massive costs and scales required the simple fact that it is technically possible means little by itself.
In fact, similar cases have been made for shale oil and methane hydrates, yet the physical reality has yet to manifest, and even for some well-funded cases such as corn ethanol and oil sand productions the processes have been slower, more expensive, and less successful than anticipated as unrecognized externalities and various receding horizons impact the programs.
In the end, it's not that the statements above are completely unreasonable -- they mention an asymptotic slide to a sustainable future. The slope and end value are of course the crux of the discussion, and whether the process exhibits and underdamped or overdamped response. Given the actions of this week I think a late start, massive undershoot, and inefficient results are the most likely, but that's just my opinion.
That's a valid point of view.
Another valid point of view is that it is very rational to think that we are going to use up our easy-to-mine resources before creating everything you say is possible. I would say that knowing where constraints lie is fundamental to almost any effective endeavor, whether you have to move an army across a plain or choose how to spend marketing dollars.
Given that, I assert that people who think other people aren't rational are operating in their own worldview and can't "see into" the other's worldview. Or, more accurately, they make no effort to see into it. The effort required is in temporarily suspending what one knows is true to try on a different idea. But people are notoriously poor in holding their views lightly -- we just like to be right all the time.
In my experience, it rarely has to do with rationality and everything to do with the difficulty of communicating across worldviews.
Said another way, just because you have a conclusion different than hers doesn't mean Gail isn't being rational.
From the CBS Website, praising The Economist magazine:
http://www.cbsnews.com/stories/2008/10/13/business/marketwatch/main45164...
"The Economist, however, stands apart. The magazine has climbed to the top of the heap because it's the smartest, wittiest and most urbane of the group. ... The brain trust believes that the public will pay a premium price for something that it considers to be a premium product. The Economist carries a hefty price tag of $6.99 an issue, but it offers no apologies while appreciating the loyalty of its "passionate, engaged" readers. "Once you've built a brand, you can put your prices up," Rossi said. The price of a single copy of a magazine "should be at the top of the range, not the bottom." ... "
Where's that $5/barrel flood of oil they were predicting?
The premium product doesn't have to make correct prediction, it seems.
Tail Wagging the Dog?
Oil production was flat for a few years. Why? Supply constrained due to peak oil? Or demand constrained due to price speculation?
Time will tell.
Tom Wipple/Peak Oil News/ASPO-USA emailed this today:
"From the Subprime Crisis to the Financial Meltdown, Peak Oil the Hidden Responsible"
http://www.ireport.com/docs/DOC-112467
Thanks Gail for raising the topic again. I don't think we'll ever see much press on this so it's very worthwhile to continue the debate. IMHO, as oil supply dwindles, banks will print/inflate the money supply.
I saw the article yesterday. The Colin Campbell video I linked to was given as a footnote in that article.
Gail,
I don't buy this thesis that high oil prices have been responsible for high interest rates that have caused sub-prime defaults.
The high growth rate in China has contributed to all commodities increasing in price, especially steel, copper,oil coal and nickel. Many of the other commodities, especially iron ore are never going to "peak", but these prices actually increased more than oil over this period.
Interest rates in US have been high for several years prior to the sub-prime crisis. It was only when sub-prime reset rates started to occur in significant numbers of mortgages that defaults began. You can see from SUV sales, vehicle miles that these did not start to decline until mid to late 2007, showing that even with gasoline prices having doubled to over $2/gallon, and high interest rates, households were not being stressed and home prices were not declining.
I do accept that we are at or have passed peak oil, but this doesn't mean we have to have a decline in GDP as long as other non-oil energy resources, especially the very large resources of wind, solar and nuclear are available and energy intensity of economies continues to decline.
I don't remember anyone saying anything about high interest rates being caused by high oil prices. I know I didn't.
The issue is the impact of energy prices and food prices on disposable income, as prices rise. Also, because of economic stagnation, people's incomes are not rising much either. The result is too little money left over to pay mortgages and other debt. Interest rates have nothing to do with it.
Gail,
Sorry, you are correct you didn't imply that high interest rates were caused by high oil prices( reading too many posts at once).
I can not accept that "Interest rates have nothing to do with it" , yes higher energy and food prices could have added extra stress, but the first expression of the sub-prime financial crisis was when significant numbers of home owners had mortgage interest rates ( and thus payments), re-set at 100 to 200% higher rates. This was only a small fraction of home owners but foreclosure forced sales has eroded prices.
I don't think there was a collapse in house prices in 1978-79 oil shock until interest rates were raised to 20%(to reduce inflation which was, in this case, directly caused by the oil price shock), by then oil prices had started to decline. There was not a financial meltdown because very few home owners had interest rates re-set, although credit card rates went up in states which did not regulated maximum rates.
I agree that interest rate resets will have an impact going forward. To date, interest rates have remained pretty reasonable, especially compared to the period around 1980, with the 20% interest rates.
It would be interesting to do a named poll, to see which of the posters at TOD feel that the financial meltdown is somehow a consequence of Peak Oil [or more generally resource depletion]. We get new posters who won't read "Limits to Growth", who think only optimism is relevant, who think Obama will save us, that scale is a pink bathtub ring, that Thermodynamics flatten your abs, that global economic collapse is the fault of yellow people, who cannot define "socialism", whatever. Maybe better, a profile where members could check off where they are on those various points. TOD is stuck in a rut and that might help advance the dialog.
cfm in Gray, ME
Come on, give the man some slack. Everyone has to be a new poster at least once in his life. When you encounter one that takes the trouble to come read us, just take the time to explain things. The issues discussed at TOD are complex and you can't expect people to be experts or even moderately knowledgeable after reading a single top post.
Of course everyone has to start somewhere. Still, being able to move the discussion farther would be good. Typically that's a function of knowing with whom it is one speaks - what they bring to table. They might have a lot in some areas and little in other. That's hard to figure out - over and over - in this very large and undifferentiated one-room schoolhouse for the blind and deaf.
cfm in Gray, ME
People come with different levels of understanding and different interests.
I have discovered that depending on what kind of article I write, I will get an almost completely different set of commenters. A lot of the oil people have no interest in or understanding of finance. Many of them won't read financial articles, no matter how many are up.
When I wrote some electricity articles, I discovered hundreds of commenters I had never heard from before.
We also have a number of people interested in new technology. They delight in articles with some complex new technology.
We also have the investors. They are primarily interested in seeing if they can get a "tip" that might help them in their choice of stocks to pick.
I don't really think that there is much we can do to get much understanding of the financial aspects of peak oil, other than poke away at the subject.
I probably should put together a list of all of the posts and magazine articles I have written on the subject, as well as the other TOD contributors.
Look here. I voted for Obama before I didn't vote against him. (Huh?)
Anyway, many of us Obama supporters out here fully understand that he can't be the white knight in shining armor come to save our shining shin dig on the hill. (Only McRonald Raygun, blessed be his hollow name, coulda, woulda and shoulda done that, but didn't.) On the other hand, I'm hoping Obama is young enough and agile minded enough (despite his system-washed Harvard brain) to understand what Roscoe is telling him when that Congressman Bartlett comes calling on the new President. Obama won't be sitting there staring at his navel and wondering when he can try his hand again at reading "My Pet Goat". He'll get up and do something. I don't have similar expectations for the "real" McCain. McCain is too obsessed with Old Glory and his own glory to wake up and smell the peak oil coffee. It's morning in America again; but this time it ain't pretty.
Q1) Do you feel that the financial meltdown is somehow a consequence of Peak Oil [or more generally resource depletion]?
Q2) Have you read "Limits to Growth"?
Q3) Do you think only optimism is relevant?
Q4) Do you think Obama will save us?
Q5) Do you think scale is a pink bathtub ring?
Q6) Do you think that Thermodynamics will flatten your abs?
Q7) Do you think that global economic collapse is the fault of yellow people?
Q8) Do you know how to define "socialism"?
Q9) Do you think TOD is stuck in a rut?
________________________________
A1: Yes. Average Joe can't pay mortgage and high fuel prices and high food prices. At some point, vapors from the trickled down golden showers rise up to hit uplifted noses of those doing the trickerling.
A2: No. But I stayed at a motel that gives me higher IQ.
A3: I'm a born again pessimist.
A4: Yes, more so than the real McPain.
A5: "Scale" is "sound" logic for my musical mind --to the 10^10 degree and beyond.
A6: Yes, and a Periodic Table will help keep me regular.
A7: What? I'm shocked. You mean it isn't all "their" fault?
A8: My mamma told me socialist is as socialist does. Hey buddy can you spare a bailout?
A9: No because this poll will levitate us out of the rut and onto a heightened plane of spiritual enlightenment.
Q1; Yes, But I believe it was pre-engineered similar to observing that water seeks the easiest course or its own level.
Q2; No, I also have never read Newtons law on gravity either, but accept it.
Q3: No, I am pessimistic when I wittness so much optimism.
Q4: No, But I am all but certain that McCain would doom us, besides, its a Hobson's choice.
Q5;No; Scale is what a union member works for, they pay just enough to keep him from quiting and he works just hard enough to keep them from firing him.
Q6; Depends on how cold the beer you drink is.
Q7; No, And even if it was, wouldnt we all get hungry for another collapse an hour later?
Q8; Yes, socialism is where the rich are supported by the poor. (American model)
Q9; Yes, the faster you dig, the sooner you get out of the rut, everyone on this hamster wheel knows that.
Dryki,
"We get new posters who won't read "Limits to Growth", who think only optimism is relevant"
If you are referring to the 1972 publication, I remember at the time this stimulated great debate, in media and on University campuses as we see here at TOD. People were not very familiar with computer simulations and the limitations of the assumption used in the World3 model. While some the specifics have turned out to be incorrect, the broad conclusions are still valid; IF population continues to grow exponentially we are doomed to have mass starvation and a population crash.
Since the world population is no longer projected to grow exponentially, but to level out at 8-9 Billion the broad conclusion are also not relevant; "growth" was referring "population" growth not GDP growth
The lessons from "Limits to growth" for today: make sure you assumptions are valid, for example a post "peak oil" decline could doom economies to collapse if "demand" is not reduced by substitution, conservation, improved efficiencies, reduced intensity of oil use per unit of GDP. IF demand is only reduced by economic collapse, the logic of peak oil is that collapse will occur.
The debate should be will the world be able to adapt fast enough to avoid economic collapse. One of the first signs of failure to adapt would be unsustainable oil prices. Even $147 per barrel($4/gallon) is clearly sustainable, considering that most countries have been paying $6-8/gallon for years. The US economy isn't going into recession because people couldn't get to work or shop or because food supplies were not being delivered. It has been primarily due to sub-prime mortgage defaults and the loss of confidence in the ability of banks to survive the losses.
If peak oil was the primary cause we should have seen a much bigger reduction in VMT, much higher gasoline prices, failure of the transport infrastructure, food left rotting in fields, empty roads, gasoline rationing or closed fuel outlets ie similar to 1979, but worse.
The increased oil price caused the fuel costs of commuters to rise, the cost of transportation of goods to rise, food prices to rise (aided by poor energy policy-ethanol from corn and demand from the east for better quality food. This resulted in inflation causing central banks to raise interest rates. The net result was a reduction or the turning negative of dicretionary income. At the same time demand for goods reduced hence pressure on employment. I contend it was this total effect of high oil prices that pushed the subprime morgages into default and led to the banking crisis, and recession
However lowering demand for oil leading to lower prices. If commercial activity rebounds then so will the oil price, then higher oil prices causing a fall in commercial activity - and we may get a yo-yo effect driven by oil prices rising and falling causing and being affected by the rise and fall of commercial activity.
The nature of the bailouts so far has been first to get the system moving but also to control the major components of the banking system (The guarantee of interbank lending has to be the strongest tool yet).
http://www.guardian.co.uk/business/2008/oct/13/creditcrunch-marketturmoil1
I personally believe that the economic contraction is due to the lack of growth in total energy input (work done) due to peak oil. I'm sure the governments are aware of this and have been employing tactics to avert any financial consequence for years. Hell, in my opinion climate change has been seriously oversold to reduce oil consumption (carbon emissions). Is it wrong of me to worry that we're moving slowly to a much more socialist society?
Inflation is a much better option for any government. The part-nationalisation of the banks and tend towards inflation is a worrying trend. It seems as though government will always try to solve the problem by obtaining a larger amount of control over the increasing variables. I would much prefer to see a deflationary scenario in which governments lose their strength and localization and sustainability truly becomes a reality.
The current financial solvency crisis provides a good insight into the risks posed to the world financial system from peak oil.
A simple summary of the current crisis is that a class of asset (residential property) was used as collateral for a large amount of debt. The debt was highly leveraged. Therefore, a small relative decline in the value of the asset caused a large drop in the value of the equity. In some cases, this caused insolvency.
Peak oil is likely to set off a similar causal chain, except that for the current crisis, the overvalued items were residential properties, whereas for peak oil, the primary overvalued items are businesses. The scale of the overvaluation in the later case is many times larger.
Although many folks like to point out that the post-peak production profile is likely to show a gradual decline (and I agree with them), this is hardly the point. As can be seen from the current crisis - the important factor is the degree of overvaluation. The difference in the implications for businesses between the BAU case and the peak oil case are massive, and this is a measure of the scale of overvaluation. In other words, the biggest reason to believe that peak oil will result in a large revaluation of businesses is because such a small proportion of the populace (those who trade stocks) include peak oil in their current valuations, instead relying on a BAU framework.
Yes, valuations that might have been appropriate at the base of the production curve make no sense as we round the top and head down the other side.
No oil == no work done == no business profits
It's difficult to justify the current valuations when most companies will struggle to survive, but die in the end as they are starved of energy.
Perhaps the struggle won't be too long and we'll see a credit freeze just like now. Why lend money for longer than an hour once we collectively know oil is declining? Lending for any appreciable amount of time becomes, well, pointless.
I see all sorts of linkages between the financial system and oil. Everything is about growth and accumulation -- how we accumulate oil and how we accumulate wealth. Some of the same equations I use in the Dispersive Discovery model can be applied to modeling income distribution of wage earners.
see http://mobjectivist.blogspot.com/2008/10/how-certain-people-get-rich.html
This is interesting because it gives insight as to how many people the investment system can handle given the magic of compounding investment growth. I have a conspiratorial idea that the P/E bubble that caused the bust in 2001-2003 is the main issue in controlling the stock market. Wall Street wants to desperately avoid of allowing Joe Six-Pack from accumulating any kind of wealth via the stock market and many of the games being played right now are to manipulate the smaller players to benefit the large ones.
That is, after all, how the big players make money in the market, off the losing investments of the smaller players. It's a zero-sum game with the bigger players controlling the rules and the information. Don't tell me they are clipping coupons.
cfm in Gray, ME
It seems like you get a lot of interesting relationships.
Women in high paid jobs often marry men in high paid jobs. On a combined basis, their disposable income is very high. Especially true for couples without children (including gay couples.)
People with disabilities have a great deal of trouble getting even a lower level job. They also have difficulty finding a spouse. They end up at the bottom end of the heap, especially if they try to maintain their own household.
Families with children often find themselves with too little time and too little money. On TOD, we seem to have many fewer readers in this category than other categories, because of the too little time aspect.
i hear this too often. i believe we'll take this phrase to our collective graves. we need to start cutting carbon emmisions now, need to find an alternative to oil now, need to recycle now. and nothing meaningful ever happens.
one day, it will be "there's nothing we can do now"
12. Eventual population decline.
The food supply produced in the world today is many times greater than the food supply 100 years ago, before oil and natural gas were used in tilling crops, pumping water for irrigation, making fertilizer and pesticides, and transporting food to market. As oil and natural gas become less available, the food supply is likely to decline. Eventually, world population is also likely to decline, reflecting the lower food supply.
<sarcasm>Well if that's the case then I think the Peak Oil crowd is totally in the right to be silent about population growth. It will all sort itself out in the end. In the meantime be sure to share your scarce and declining resources with your ever growing neighborhood.</sarcasm>
I wonder if this hasn’t already happened. At present I am having a closer look at the possible impact of resource supply on the economy. This is far from being finished, but here is a short, preliminary preview.
According to the online database of the U.S. Department of Labor Bureau of Labor Statistics the real average hourly earnings of the Americans have already peaked with the first oil crisis. There was a second increase since 1996, but since 2007 earnings are in decline.
This is a screenshot of the database output:
Total Private Average Hourly Earnings, 1982 Dollars - Seasonally Adjusted - CES0500000032
Is this productivity decline of the disappearing army of slaves called oil? At least there is an impressive similarity of the per capita earnings trends to the development of the worldwide oil production per capita, which also peaked during the first and second oil crisis:
And there was something else that peaked (accidentally?) during the past oil crises: According to a recent in the Financial Times Deutschland (American Way of Life in Danger) since this time the savings ratio (savings % of disposable income) (red line) declined, whereas the consumer net assets increased (black line, displayed as inver-ted scale!).
I wonder into which assets the consumers invested their savings. Was it into big cars and big houses?
With my last graph in this series I come back to my question if GDP hasn’t already declined:
In fact it is possible that it already has: Quite a few people think that the official US inflation data are not realistic, mainly due to two reasons:
1. In the US, frequently only the core inflation is used, which excludes volatile prive movements (e.g. food products and energy) (http://en.wikipedia.org/wiki/Core_inflation)
2. In the US, since the 80s the official inflation data were „adjusted“ using a „hedonic regression“. (http://en.wikipedia.org/wiki/Hedonic_regression ) In short, this shall acknowledge that in things like computer you get more value for your money than a few years ago. This seems to bear some logic, but it also appears that this „adjustment“ was applied excessively in the USA. (For example it is misleading to think that the doubling of compu-ter hard disk capacities within a few years means their value also has doubled for the entire market. This may be true for an internet provider, but not for your aunt who doesn’t need the entire disk capacity.) The initiative Shadow Government Statistics publishes re-adjusted versions of the official deflated inflation data.
According to their Shadow Government version the GDP Annual Growth not only peaked in 1984 (or even earlier) but went to recession mode from 1990…1992 and increasingly since 2000.
(Source: http://www.shadowstats.com/charts_republish#gdp)
Any surprise that some banks stumbled upon a bunch of non-performing loans?
(I am rather surprised about the euphemic English wording „non-performing“ – the German name for it is more blunt: faule Kredite - rotten credits.)
The Shadowstats data suggests essentially flat or declining GDP since 1990. Given that US population has continued to increase, that means that per-capita GDP has definitely been declining.
Keep your eye on per capita GDP and not just the aggregate figure.
Nice work. May I reference this or reproduce it (with proper attribution) for friends and family?
Why should a weblink to a site be prohibited in the WWW? Go ahead!
Drillo,
Thanks for all your graphs and insights.
You are right about the inflation rate being understated. The last time I looked, the GNP deflator being used to compute real GDP was only a bit over 2%, in a period when oil and food prices were rising rapidly. Ho! Ho! Ho!
It is interesting that the highest hourly income was about 1973, which would be just before the 1974-1975 oil crisis. After that, it seems like there were more and more women entering into the labor force. The income of the couple was higher than for the man alone previously. i remember seeing information showing that men's wages have been declining for a very long time--I wouldn't be surprised if it was since 1974.
Keep up the good work!
"hourly income":
The data of real wages in Germany I found of the last 10 years also have a downward trend. Or can it be that such data are only published from labour and trade union institutions, that may tend to see a "half empty glass" (just as people do when doing their taxes ;-)? I still don't look really behind this, but maybe someone else knows more.
I forgot to add the weblink to the Bureau of Labor Statistics site:
http://data.bls.gov/cgi-bin/surveymost
There you can draw your own statistics.
(BTW: You are damn lucky that you have a solid Freedom of Information Act in the US, which provides at least a bit of transparency. Such thing is unknown in Spain, where the bubble economy is now in free fall. Who will trust whom there?)
There really shouldnt be any debate over weather this current financial crisis is PO related. Sure you can be entertained by rhetorical gymnastics and semantics.
Of course its energy related and its abundantly obvious. The BAU folks are saying its a credit crisis but this doesnt seem to allow the square block to fit the round peg hole.
Intrest is the cost of money (credit), if credit is abundant and cheap, all things should natuarally become more expensive. All that credit chasing finite
supplies (Demand high, low supply = high cost).
Now credit is frozen, few buying with even cash, yet prices on average, are at historical average highs.
Housing is still outside the reach of most, (mortgage holders don't own the house) So now we have too few chasing that finite supply and the inventory just grew
...but only artificially.
Thats why the confusion. The financial sector would have been a perfect smoke screen, even without anyone
manipulating it. The economy has always been manipulated and always is used as a smoke screen, for every war, for every adventure of conquest, for every exploration or endeavor.
Its little wonder it works so well, or isnt so widely understood, its so perfect, thats why its so effective. Like a womens breasts too a mans attention.
Accepted and understood, but unfailing in rendering him stupified. Like a Siren on the rocks. Ask later, "What were you looking at or thinking"? and he has no answer. Before, during, after, no recollection of the time, events, conseqence.
We all might as well be counting carob pea pods or shells, to entranced to see whats going on around us.
The following article caught my eye this morning. It provides an interesting look at where the financial situation is going from here onwards – “Into further negative territory due to both deteriorating economic conditions and investor panic that seems to be resulting in daily escalated cash calls”. Other factors that are incorporated are the current US political situation (evident lack of knowledge), equity markets meltdown etc. It definitely is an interesting read - What More Can Be Said?
One comment from that post:
I would agree that people don't understand the extent of the cutbacks that will be needed.
gail
helluva a post - last april wow. let's hope u are not so prescient re electricity - unfortunately for us all, i think u are. let's hope we get a ways towards powering down first
re inflation/deflation :
i think we don't yet know if the 'car' bogged down in the ditch will get traction or not; if it does about time we get moving we get to speed into the next mudhole spinning our wheels wildly, getting stuck all over again!
with peak oil we didn't need that -not paid for car anyway!
By the way, the April 2007 post was really a summary of the non-actuarial pieces of an article I had written for Contingencies Magazine that was published by the American Academy of Actuaries about the same time. The article was the cover story of the May/June 2007 issue of Contingencies magazine. It can be found at Our Finite World: Implications for Actuaries
This article is a 'what came first the chicken or the egg' type inference. The inference is high prices for oil led to an economic downturn.
No. Greed superceded the understanding that if you let the dog up on the counch it will, meaning if you let greed dictate the terms of a loan for a property, then greed will determine zero background checks, zero income verification, zero credit worthiness and the result will be hundreds of billions of dollars of worthless paper, empty homes, shattered lives, etc. until all the banks that made those ill advised loans start to fold and the governments of the world have to ante up some more fake money to kick-start the financial system again.
Now greed has been slapped down into hubble pie, tougher than ever requirements have set in to get a loan, and the whole economic system is droning along at a snails pace causing fears of recession or worse.
We have to survive the tight money squeeze until things be back to normal. Not everything is about oil, just most.