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Gold, Infinite Debt, and the Problem of Capital Storage: Has The Hotelling Moment Arrived?
Posted by nate hagens on March 9, 2011 - 11:37am
The following is a guest post from Gregor Macdonald, adapted from his website Gregor.us.
One of the reasons that gold retains its competitiveness as a capital-storage unit is the rather slow and plodding rate at which supply is brought to market. Since 1900, compound annual growth of world gold production comes in at 1.163%. That particular rate is below the growth rate for a number of other natural resources. But in particular: it’s well below the rate of credit production–the “resource” which now plagues the developed world. Indeed, the over-production of credit the past twenty-five years has once again driven capital back into hard assets such as gold. This brings up an intriguing subject: the conversion of resources into financial capital, and the conversion of financial capital back into resources. First, let’s take a look at a century of gold production. | see: World Gold Production in Metric Tons 1900 – 2009.
From 1980 -2000 global gold production grew at a strong, compound annual growth rate (CAGR) of 3.836%. But that was after a very slow production rate for forty years, between 1940 and 1980. In the past decade global production of gold has not only slowed again but fallen steadily, with a notable uptick in 2009 as the decline temporarily reversed. Indeed, since the new millennium, the story of gold will be familiar to those who have watched oil: as prices steadily rose, supply growth fell.
The migration of capital, between the world of natural resources and the world of finance, has been addressed by any number of thinkers, one of the more compelling being Harold Hotelling. Writing in the Journal of Political Economy in 1931, Hotelling proposed that a rational producer of resources would only be inclined to extract and sell that resource if the investment opportunities available with the capital proceeds were greater than simply leaving that resource to appreciate in the ground. So, given Hotelling’s theory of resource extraction, what has happened to gold production since the year 2000? Does the chart reflect geological and cost limits to increasing gold production, even as the price rose from $250.00 to $1000.00 per ounce? Or, has there been some moderate yet gathering decision on the part of global gold producers to extract gold more slowly? After all, why extract gold to merely convert gold into paper currency, beyond the need to pay for the cost of production and provide, say, a dividend to shareholders? In other words, at the rate at which the price has been rising, why hurry to extract the gold?
These same questions have long been asked in the world of energy extraction as well. Why did global oil production advance so quickly into late 2003 as the oil price was rising towards the high 30′s, only to peak out for the past six years as price skyrocketed? We must assume that oil producers in the West, governed mostly by for-profit enterprises, were doing everything possible to lift production. The conclusion is rather easy: they couldn’t lift production, even with a doubling of price. But in contrast to BP, Shell, Exxon, Total, Chevron, and Conoco, what about the NOCs–the National Oil Companies? Is it possible they were inclined to apply some form of scarcity rent, holding back production slightly? Echoing statements made at least twice last decade, King Abdullah of Saudi Arabia repeated himself last Summer when he remarked about future Saudi oil production: “I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors God willing.” | see: Global Crude Oil Supply 2002 – 2010 in mbpd (updated through November 2010)
As lovely and reasonable a view offered by Hotelling in his The Economics of Exhaustible Resources, there is little evidence that oil producers are any more rational than individuals. The history of global oil production would appear to be governed more by geology, than any future projections of how to best invest oil revenues. North Sea oil was largely extracted in the cheap oil era, and peaked as oil prices began to take off earlier last decade. This was also true for Indonesia, and of course several decades before with the United States. Indeed, the bulk of world oil production was sold too cheaply. I discussed this phenomenon in my 2009 piece, The Fate of An Oil Exporter. By contrast, one of the few modern states that has spoken openly about husbanding scarce energy resources is Brazil. President Lula declared in 2009, as Brazil changed its resources policy that year, that the country’s new offshore discoveries were a “passport to the future.” Misunderstood by right-leaning commentary at the time as a form of resource-nationalism, Lula’s remarks were instead very much in the Hotelling vein. “We don’t have the right to take the money we’re going to get with this oil and waste it,” Lula remarked. But Brazil has been an exception.
Given that both gold and oil production are now either flat or falling, what should a producer of these two commodities do with the proceeds of their sales? Let’s again consider the insurmountable problem at hand. Western economies and especially the United States have been on a credit binge for decades. When that bubble burst in 2008, punctured in large part by rising energy prices, the response from OECD governments was to create more credit. In Eric Zencey’s terrific New York Time’s essay on Frederick Soddy, which captured the views of the 1921 Nobel Laureate, the connection between debt limits and energy supply was made plain for a general readership:
Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.
Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.
To Soddy’s point on the problem of infinitely created debt, let’s take a look at 60 years of debt growth in the United States. | see: Total Credit Market Debt Owed 1940 – 2010 (updated through December 2010).
As the United States has now (long) embarked on a massive dollar devaluation program, in part to bust the CNY-USD peg, but mostly to mitigate the next leg down in real-estate and debt deflation, we should consider how resource extractors might behave in such an environment. Two obvious possibilities are as follows. First, oil producers rather than chasing higher prices in dollar-terms might start to demand full or partial payment in gold. Meanwhile, gold producers might consider banking some of their capital not in cash, but also in gold. And yes, both oil and gold producers could simply leave more of the stuff in the ground. What may become more clear is that, beyond the need for operational cash, turning excess production of resources into paper currency will increasingly become, per Hotelling, a losing proposition.
Data Sources:
USGS Historical Statistics for Mineral and Material Commodities in the United States (includes global data).
Gold, Infinite Debt, and the Problem of Capital Storage: Has The Hotelling Moment Arrived?
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Gold, Infinite Debt, and the Problem of Capital Storage: Has The Hotelling Moment Arrived?
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What an odd view of the world. Although you mentioned that oil production doesn't follow "Hotelling" at all, you didn't mention why. I would suggest that it's simply that Hotell wuz rong.
The reason that oil folks produce oil through good times and bad is the same reason that folks who make giant anchor chain keep making anchor chain and Port-a-Potty makers continue to make Port-a-pottys is because it's what they do--it's what they know. Sure, in modern times some mega corp. will put their money into commodities or ETFs or DOT-COMs or whatever, but most businesses stick with what they know.
It is thru that the NOCs only have to operate as a quasi-business, so ROI, dividends, cash flow, EBITA and so on, while not irrelevant, do not need to be driven by the same metrics as IOCs. So yes, it's true that Saudi has made several important discoveries if scattered press reports, the grapevine and Yamani and Abdullah statements to that effect are true. Beyond that, the only "redirection of capital," even by the NOCs, seems to be foot-dragging on drilling/investment as a way of OPEC quota compliance, especially by Venezuela.
Mostly, there simply isn't any evidence of any economic theory actually working in the last 30 years.
When Reagan nearly tripled the federal deficit and more than tripled the annual debt, I thought for certain that inflation would raise its ugly head. But Volker was successful in breaking inflation via massive unemployment (first started under Carter), and even when government spending and size grew under Reagan, inflation remained low. But surely inflation had to come back under H.W. Bush, who again doubled both the annual deficit and the national debt. Again, no significant inflation.
But surly when G.W. Bush turned a $4 trillion surplus into an $8 trillion debt, with massive government growth in spending and size, inflation must come roaring back, right? Rong!
Now under Obama, again, massive growth in spending and deficits MUST result in rampant inflation, right?
The truth seems to be that nobody knows. But since 1932, when the U.S. went off the gold standard, it's been a pure faith proposition. And that's what Bernake is counting on: pure faith, confidence. And he might just get it. The right paradigm in MHO lies more in Black Swans shaking (or bolstering) confidence in unexpected, dramatic ways. The asset bubbles that form and bust--from DOT-bombs to Mortgage Backed Securities (and CDOs) to Whatever Bubble Comes Next--I doubt that it'll be in keeping with economic theory from the 1930s.
Interesting article,
Perryeh
Perryeh,
I agree with your idea about prevention of inflation somewhat. Indeed more and more "debt" was made to cover the lack of growth in production. But these debts cannot stack eachother indefinetely. I am quite certain that one day there will be no more "belief in the relief efforts", and creating more debt and with that more promises will simply not work. You say that there have been many of these schemes made to prevent inflation from rising. But what prevents this one moment from being the last scheme?
And going on in that line of thinking, why would this moment not be the one moment for the hotelling theory to work? Possibly, and probably, not "cashing in" on resources because of the major bust coming up seems like a reasonable bet.
Perryeh has it pegged correctly.
Hotelling suggested a very naive theory. The idea of discounting is most often applied when studying how drug addicts will reason about getting their next fix. That is the problem with potential riches: what idiot is going to let some resource lay fallow in the ground when the possibility of immense riches awaits them? It's the same theory as a drug fix.
So does that rule really tell us much, or is this another indication that economics is not about studying scarcity but about studying the exploitation of resources to maximize profit?
WHT, call me dumb, but I don't understand what you mean.
I have a bit more elaboration elsewhere in this thread. I don't know what you mean when you say I don't know what you mean.
Or else read the link.
There is a key ambiguity in the idea of owning "a finite resource". It can, in theory, mean two things. Either you own a finite amount of some infinite resource, or you own a finite share of a finite resource.
In practice, the world has acted as if mine-owners own a finite share of an infinite resource. When in that situation, you say to yourself, "I've got my capital tied up here, so I want the best return I can get on it as quickly as I can, so I'll mine it at the fastest rate my capital equipment will allow". When the you realise that the resource itself is finite (and won't be replaced by something better & cheaper before it runs out), your thinking changes. You say, "Why should I sell cheap today when I can sell dear tomorrow? And if somebody undercuts me and steals my market, the more fool them, since tomorrow they'll have less themselves and I'll be able to sell even dearer".
Certainly, people will admit in abstract that certain resources are finite, but the ubiquity of technological progress has encouraged people to assume that "Well, X may eventually run out in theory, but we'll find something even better than X before we get near that point". With oil, this is demonstrably not the case, so some actors in the market are starting to think in terms of the coming scarcity. Some, but not yet all. And, of course, rational players in the market who have twigged to Peak Oil (and gone long on reserves) don't want everyone else to do so, since the more oil is consumed today, the more expensive it will be in the years to come.
Adam Smith had a wonderful fable about the "hidden hand" of the market ensuring that people's greed ensured that they'd do the right thing by others. The fable had certain assumptions. One of them, the relevant one in this context, is the assumption that everyone had all the relevant information. When that assumption doesn't hold, however, the "hidden hand" rewards people who do things that are very wrong indeed. Or, in the famously (but doubtfully) reputed words of P.T. Barnum, "There's a sucker born every minute". So a "rational" Peak Oil investor wouldn't discourage cornucopian illusions.
So Hotelling had his theory back in 1931, and it has taken 80 years for a degree of discounting rationale to come true for oil?
Yes, that's true. And there's another factor at work, too. Keeping your resource back from the market in the hope of higher prices tomorrow only makes sense if the resource will still be yours tomorrow. In Australia & most other industrialised countries of which I am aware, mining & drilling licences are issued on a "use it or lose it" basis. Governments have disapproved of hoarding reserves and wanted them brought to market ASAP. Companies that just sit on reserves, therefore, are in danger of having their permits revoked and re-issued to a competitor. This happened in Australia a few years ago with a large bauxite deposit.
The assumption behind th "use it or lose it" policy is cornucopian & may take some time to be rooted out by reality. The National Oil Companies in the Third World are better able to follow Hotelling's logic.
Bauxite -> Aluminum.
Big deal.
Just telling it like it is.
No ... Aluminium. Webster got it wrong, so all Americans now do.
Just telling it like it is.
How can dropping an extra vowel ever be wrong?
It's just another example of America acting unilaterally, and ultimately causing more confusion in the world for no real benefit, in the same way as not using metric.
Interesting history of the spelling is here;
http://www.worldwidewords.org/articles/aluminium.htm
Seems the discoverer, Sir Humphrey Davy, did call it "aluminum" at one point but the decided the real name should be "aluminium", which was adopted by the rest of the world, though Webster had already put the wrong spelling in his dictionary. And so Americans used it, just taking what they were told at face value, instead of verifying the facts - just as well the American people never let anything like that happen these days!
I had heard long ago that what is being called the American spelling was a trade marked spelling, the trade mark being owned by the precursor of Alcoa. My source was, I think, a teacher in middle school. I remembered it because I had already learned the such factoids were often featured in quizzes. Now at age 78, I still don't know if it is actually true.
uhmmm...I was kidding, mostly. On the one hand, this is really unimportant. OTOH, simpler spellings really are a good idea. I had a friend in high school who named his magazine "ghoti", pronounced "fish".....
English weights and measures didn't come from the US, and came long before metric. Further, it's certainly useful to have a consistent base (10) in all of the weights and measures, but the base that was more or less used by English measures (12) is a heck of a lot more useful.
We're clear that language is arbitrary, not "real", or "right", right?
No question about where the English units came from, it's just that everyone else has already adopted the better system.. In almost any technology you can name, most countries adopt the better systems when they are ready - think digital cellphones and tv. Yet with Metric, the US persists in using an archaic system, that, while perfectly useable for everyday length and weight measurement, is unwieldy and cumbersome for engineering and scientific use. It is an unneccesssary encumbrance on those working in such areas, and is a factor in the lower level of science/engineering competence in the general public - if the measurement system is too complicated to understand, people just give up and leave it to the experts, just like the tax system.
Ask someone to calculate the energy in a moving mass or the power of a falling stream of water - in metric it's a piece of cake, but in imperial units, how do you convert mass and speed into btu's? You can;t do it by reasoning, you have to look it up somewhere - thus it discourages people from trying to work it out for themselves, where as with metric, since it is an integrated system, you can work out the answer from first principles.
But how is base 12 more useful than base 10? It may be easier for dividing into fractions, but that is an unwieldly system in itself, and encouragages rounding errors. In the digital age, base 10 is the way to go, though even the Romans worked that one out 2k years ago.
In almost any technology you can name, most countries adopt the better systems when they are ready - think digital cellphones and tv.
I hope you're right. By that logic, the world should move to PHEVs, EREVs and EVs very, very quickly.
the US persists in using an archaic system...unwieldy and cumbersome for engineering and scientific use. It is an unneccesssary encumbrance on those working in such areas
True. I'm not suggesting that sticking with english units is a good idea, overall - just that they deserve more respect than they often get from metric-philes.
is a factor in the lower level of science/engineering competence in the general public
That's an interesting thought. I seriously doubt that it's a major factor - things like cultural anti-intellectualism are far, far more important. Still, it probably contributes a bit.
But how is base 12 more useful than base 10? It may be easier for dividing into fractions
A simple example: think how annoying it would be if there were 10 hours in the day, and we had to divide the day into three shifts of 3.3333333333 hours. 24 hours convert to 8 hours per shift quite nicely.
Another example of the daily usefulness of english units: volumes are base 2. There are 2^7 ounces in a gallon. That's very, very useful for daily use, and far closer in spirit to "the digital age" than is base 10.
Again, a standard base is very, very useful, but let's not kid ourselves - they could have chosen something far more useful than base 10 (which is, after all, based on the number of fingers...). Their choice of base 10 is a classic example of traditional use overpowering a better idea.
Finally, if you like the simplification of SI units, than surely you agree that aluminum is better than aluminium?
I hope you're right. By that logic, the world should move to PHEVs, EREVs and EVs very, very quickly.
The key words there were "when they are ready", and by they, I mean the technologies. I don;t think EV's are ready yet - or perhaps people are not yet ready to adjust their expectations of their vehicles.
just that they deserve more respect than they often get from metric-philes.
Ask a Prius driver how much respect they give to a Suburban driver. Within the context of one quantity ,e.g. length, imperial units are fine, in and of themselves, but the crossover between quantities (mass, energy etc) is terrible. Metric was designed to work logically, and it does imperial units simply grew, independently, in their different areas, and are just not a good system for the technological age.
I seriously doubt that it's a major factor - things like cultural anti-intellectualism are far, far more important. Still, it probably contributes a bit.
I think it starts in high school, and yes, the desire to not want to be seen as a geek is a part of it. But when everyone actually has an understanding of basic physics (not just maths) I think they can make much better decisions on things like energy use. Ask a yr 11 student from China, Japan, Australia, almost any OECD country other than America, to calculate power available from a stream of water of 1L/s falling 100, or the energy required to get a 1 ton car moving at 100km/h and I'll bet the non Americans will more often give you the right answer.
There is also the issue that if you are educated in the imperial system, in a technical field, how competitive are you or your company if you are competing on an international project? Any US company working on anything in Asia, for example, has to deliver everything in metric. So there is additional time, training, potential for mistakes, etc that the American companies have to do, that the others don't. I know personally of one US water engineering company that was working on an irrigation water project in China, about 15yrs ago. They delivered their report in terms of acre-feet of water - the normal US unit. The rest of the world, of course, works in ML or GL (megalitres/gigalitres). The company concerned got kicked off the job for not showing any respect for the client and the way they worked. I think this summed up the attitude of the company concerned in general, but not putting ANY of their work into the units the client uses all the time is a good example.
A simple example: think how annoying it would be if there were 10 hours in the day, and we had to divide the day into three shifts of 3.3333333333 hours. 24 hours convert to 8 hours per shift quite nicely.
Well, if a day had ten hours, a the workday would likely be three to four of them. 8 hrs was just an arbitrary selection. Teachers work less, most shift workers work more, and self employed types more still. I don't think the length of an hour makes any difference. if we tried to get teachers to work 8 hrs because that is a round number, I don;t think they would do it.
Another example of the daily usefulness of english units: volumes are base 2. There are 2^7 ounces in a gallon. That's very, very useful for daily use, and far closer in spirit to "the digital age" than is base 10.
C'mon - walk onto the street and ask a few people what 2^7 ounces is -see how many know what the number is, or that it is a gallon. is it really that useful in everyday use - how often do you do a 2 to the power of calculation? How does it help you determine the energy requirement in lifting 2^5 ounces of water 100 feet?
Now, a base 2 number system would have it's advantages, but 10 is OK. That to me is a case where it doesn;t necessarily have to be the best system, but it is good enough, and the fact that everyone uses it s the biggest achievement.
As for simplification of units, I am all for the simplification of the system. I think the naming of units should respect the origins or the discoverer - we don't have the right to change the spelling of them. We wouldn;t change a Newton to a Nuton for the sake of saving a letter - though the texting generation might want to do that, assuming they know what Newton is...
I guess I'm just a traditionalist, but I did have both a high school physics teacher and a university engineering prof who gave excellent examples of where poor/conflicting choices of notation, units etc had caused confusion in various scientific/engineering areas. At least they agreed on the periodic table!
. I don;t think EV's are ready yet - or perhaps people are not yet ready to adjust their expectations of their vehicles.
Hybrids clearly are ready. PHEVs will be in months. EREVs are too. EVs? Yes, it's mostly cultural - very few people drive more than 75 miles per day. Which points out the importance of cultural barriers to change.
Ask a Prius driver how much respect
Again, we agree that moving to standard use of SI units are a good idea. OTOH, english units have a lot of good qualities - see below.
Ask a yr 11 student from China, Japan, Australia, almost any OECD country other than America, to calculate power available from a stream of water of 1L/s falling 100, or the energy required to get a 1 ton car moving at 100km/h and I'll bet the non Americans will more often give you the right answer.
Of course - very few high school students in the US have a good understanding of the physics. The ones that do also understand SI units.
if you are educated in the imperial system, in a technical field, how competitive are you?
Of course. OTOH, any good engineer or scientist in the US also knows SI units.
Well, if a day had ten hours, a the workday would likely be three to four of them.
There are many industries, like hospitals, that have to cover the 24 hour period. Three 8 hour shifts are the logical, universal solution.
C'mon - walk onto the street and ask a few people what 2^7 ounces is -see how many know what the number is, or that it is a gallon.
None will. That's not the point. If you have a gallon, you know that it consists of four quarts. If you need to divide a quantity in half or double it, it's easy. This goes from gallons to quarts to pints to cups to ounces to tablespoons (2 per ounce). This is extremely useful, as any cook will tell you.
I guess I'm just a traditionalist
And there's nothing wrong with that. My point: let's be respectful of our differences, instead of being judgemental about them. We can agree that the SI system is better than english units, and that simpler spellings (fewer syllables and silent letters) are better, without being disrespectful of those who hang on to different traditions.
I beg to differ. On weblogs like this or Energypulse or any other involving engineering (as opposed to physics or astronomy or any of the other sciences, which are universally done in SI even in the US), I can almost always immediately identify the posters from the US, as they all still use the antiquated bbls, btu, lbs, acre-feet etc. etc. instead of rational units, often it appears in deliberate attempts to confuse discussions (or is that just my frustration showing?). Oh well, at least we've finally gotten the stock markets to stop quoting in eighth's.
And who thought a base two number system was more efficient than base 10? We'd spend our entire lives counting digit positions on any numbers with any precision.
I didn't say they used english units for everything, I said they know them. And, of course, if you live in the US, most of your clients will use english units in their daily business.
For instance, farmers measure their land in acres, and rainfall in inches. If they need 6 inches of rain on 640* acres, that's...320 acre-feet. Kind've makes sense.
who thought a base two number system was more efficient than base 10?
As I said above, it's easy to use a base 2 system of units: one place is gallons, the next is quarts, the next is pints, the next place is cups, then ounces, then tablespoons....!
* 10 x 2^6
As I said above, it's easy to use a base 2 system of units: one place is gallons, the next is quarts, the next is pints, the next place is cups, then ounces, then tablespoons....!
That sure is a lot of different names for units of volume. You have to know how many tablespoons are in a pint or quart, you can't work it out unless you know the intermediate unit of ounces. And step above gallons and then the system stops...
But with litres, and the the standard prefixes of milli, mega and giga, as soon as you see the word you know exactly how many litres it means.
SI farmers, like my brother, measure land in hectares (100mx100m, one hundred hectares to a square km), and they know one mm of rain over a hectare is 10kL, and 100mm is one ML. ML are the standard units for water measurement in irrigation (- and one ML is about 0.81 ac-feet).
Then when you are looking at moving water through pipes or open channels, with flows in L/s, the conversion is very simple - the 100mm pipe carrying 10L/s will move 36,000L/hr, or 0.036ML/hr. It is also an easy calculation to then work out the water velocity in said pipe - V=Q/A, or V={0.01cu.m/s}/[0.1x0.1x3.142/4] = 1.33 m/s, which is below the nominal limit of 2m/s, where the friction loss becomes excessive.
Starting with acre feet, to get velocity in that same pipe (4") requires many more calculation steps - , you have to know how to convert acre feet into cubic feet, or cubic inches, to get the velocity. And if you are working in standard pipe units, of gpm, how many cubic inches are in a gallon (230.1)
When it gets this complicated, you tend to just turn to tables that someone else has already done, because working it out yourself just gets too complicated - the thinking, even at this low level, has been outsourced.
Now, there is nothing wrong with saving time by looking up pre-calculated standard results, but the problem comes when the person loses the ability to work it out themselves if they have to (e.g out in the field). Howe does the American farmer then work out how many hp of pump/engine is needed to lift their 320 acre feet by 100 ft over a one month period - it's an easy process in SI.
This sort of thing is why I am such a big proponent of SI - it encourages thinking and problem solving because the system makes it easy and intuitive to work with different quantities (volume, mass, energy etc). A classic example is what is the work out put of an engine that burns fuel at a certain rate. If the engine is 25% efficient, what is the mechanical power produced by burning 115,000 BTU of gasoline (one gallon) per hour? You have to know that one HP is 2559 BTU/hr to get a meaningful work unit, of 11.25 HP but in SI that fuel is 33.7kW and the work output will simply be 25% of that = 8.4kW.
Just as the reliability and serviceablility of an engine design can be improved by minimising the number of parts, so too for the measurement system - less parts = less chances for breakdowns.
Howe does the American farmer then work out how many hp of pump/engine is needed to lift their 320 acre feet by 100 ft over a one month period
like about anyone else he picks up the phone and calls his trusted supplier--with luck someone there knows or at least knows someone who can get back to him<?- )
There has a been a beauty to living in the most powerfull nation the earth has ever known while still using an incredibly ancient and arcane system of measurements that almost no one else on the planet understands. We weren't going to remain on top forever, we get blamed for everything that is wrong in the world so why not have a bit of fun with our measurements. We could afford it<?- ) for a while anyhow <?- (
like about anyone else he picks up the phone and calls his trusted supplier--with luck someone there knows or at least knows someone who can get back to him
Yes, he can't work it out for himself so has outsourced that thinking to a supplier. He runs the risk of someone trying to sell him an oversized pump/pipes etc. Not that this would ever actually happen in reality, but what if the parent company of the supplier has told its sales team to increase sales by "upselling" - trying to get the customers to buy bigger. The salesman wants to help the farmer, but his job is on the line for how much he sells, so whose interests come first? He ends up with an oversized pump that costs more and may not operate at its most efficient point. I see this all the time with pumps and boilers. The farmer does not know exactly what he needs and relies on the salesman to tell him - I wouldn't want to place the means by which I make my living solely in the hands of the salesman.
There has a been a beauty to living in the most powerfull nation the earth has ever known while still using an incredibly ancient and arcane system of measurements that almost no one else on the planet understands
Exactly - no one else understands, or uses it. while you may enjoy working in feet inches etc, consider the few remaining companies in America that make equipment and stuff. Try exporting a US made pump to a metric country (i.e. the rest of the world) - the receivng place will find that the pipe threads are different, all the bolt sizes and thread pitches are different, they need to have a complete set of imperial sized tools, and maintain a separate inventory of imperial sized bolts and parts. Sure sounds like a lot of effort, doesn;t it.
The aluminium smelter that I worked at in New Zealand for a time had a metric only policy, so when they were procuring new industrial equipment for a $1bn plant upgrade that was happening, how successful do you think American companies were in getting any supply contracts? The only one that did, had to make everything in metric, use al metric bolts and bolt patterns, etc, which cost them a lot,but not as much as all the other companies that were shut out.
Ditto for American cars - one of the reasons why hardly an are exported is that they are not metric. A fleet manager will have to have a whole separate inventory of imperial sized nuts and bolts etc. So the fleet manager will simply say its too much trouble.
So as the rest of the world moves on, America made stuff will find it increasingly difficult to gain acceptance worldwide. The American companies then have to make two lines of stuff, one domestic, and one for export, and if you are going to do that, you might as well locate your export line in the country that is, or is close to, the major export markets. And this is increasingly what American mfrs are doing - companies like GE and so on are doing well, because of all the stuff they make overseas, good for the shareholders, but too bad for the domestic factory workers. Of course, metric is not the only reason for this, and often is not even a major one, but it is just another factor stacked against the American companies, and one that wouldn;t exist if the country went metric.
Australia and NZ took their metric medicine decades ago and are much better off for it. Had they not, they would have been much more reliant on the US for supply of mfrd goods, and who wants to be in that situation, when you buy stuff from everywhere else in the world?
As for the beauty part, well it is in the eye of the beholder, and I can tell you how the service mechanic in any metric country views any piece of non-metric American equipment, and beauty is not one of the many words used to describe it.
It's a free country and the US can choose the measurement system it wants to use - staying with the one that everyone else has discarded just makes it that much harder to participate in the global economy.
And right now, I'd say the US needs help, not hindrances, to get its export economy going.
US mechanics have had to have both kinds of wreches to work on US 'made' cars for decades so it would be good to hurry the system along some, no argument there. Then again why do all these little countries like France and Germany insist on using their old languages instead of English, since they all had to learn the latter anyway--it just confuses people <?- )
On that note: Glad you guys who have to look at a picture of the queen on your currency had a bit of fun with the bone I threw you, remember to genuflect and bow--we don't have pictures of anyone on our money whom we have to bow to--just the money itself...
It's fun to razz you a little--yes we have to put all of our products on metric some day (sooner better than later).
But our economy is still larger than that of the entire commonwealth so the inertia is much greater than you might imagine. Still we only have to deal with 300 million people so it would seem to be easier to get us all on the same page than it would be if we had the 2 billion the commonwealth has--but I guess we haven't felt the pressing need to do it yet--irritating, eh<?- ). Interesting thing about gdp in Wikipedia--an IMF table in an article on worldwide gdp shows India'a in 2010 as $1.4 trillon, another article about the Commonwealth of Nations puts it at $3.6 trillion--quite a difference.
You can enjoy looking down on us primitive provincials using a backward system of measurements if it eases your complexes some <?- )Still it's been more fun than you might think--you'd have to have been here riding the crest of the wave your entire life to know. The baton looks like it's going to be passed so far west the next time that it will be in the East--the world turns.
Yair...but why did they stuff up the measurement system by using "centimeters"...all we need are millimeteres and meters.
A sheet of ply or sheet metal is 2400x1200 millimeters...simple,yes? It is maybe 2.4x1.2 meters but it is definately NOT 240x120 centimeters.
Not even that. A tad under 2.44 x 1.22 meters as the size is 8 x 4 feet :) I couldn't work out why my dimensions wouldn't match on some 6 meter lengths of steel, they were actually 20 feet :(
NAOM
If the US had dumped inches, gauge and a few other units and moved strictly to the engineer's scale a century or better ago construction would certainly have been much simpler. Except for the fact (and it is a big except for) that metric linear measurement folds so nicely into the other measurement categories metric has no advantage over a linear meaurement system that uses only feet and decimal 'fractions' thereof.
That sure is a lot of different names for units of volume.
Sure. I learned them at age four, and still remember them, along with truly obsolete measures like rods, chains, furlongs, leagues, etc.
A base 2 system is very useful for practical things.
This sort of thing is why I am such a big proponent of SI - it encourages thinking and problem solving because the system makes it easy and intuitive to work with different quantities (volume, mass, energy etc).
I agree. I think it's easy to overstate the effect: many people are simply uncomfortable with simple math, and easier units won't help; others are very comfortable with math, and more difficult units won't stop them. But...you've got a perfectly good point.
Let me say again: I agree that SI is better.
My point: english units have some virtues that are unappreciated, especially their use of base 2, base 3, base 12, etc. SI went with base 10 for historical reasons,
If you look at history, you get a better sense of just how irrational the choice of base 10 was. For instance, the French tried to impose a base 10 time and calendar system: 10 hours in the day, 10 days in the week. This was a bridge too far (especially because there's no way to decimalize 365.25 days per year), and it failed almost immediately.
Base 12 or 16 would have been a much more useful choice, but of course the cultural obstacles to that would have been far too large. But let's not kid ourselves about how "rational" metric units are.
Well, it seems like we are in agreement here - metric is better, though it is not perfect. The advantages come from the way the system was designed, but no question some things could be designed better.
As for the French and a 10 day week, well, they are French - they would probably have still only wanted a five day workweek!. They invented metric and it is possibly their single greatest contribution to the world - they just didn;t know when to stop.
The 365.25 days shows that nature does not follow an base system, and it doesn;t really matter. The second is the base unit of time, and as long as there is a standard definition of it, then we go from there, and there will be x seconds in a day
A second was originally defined as 1/86400 of a mean solar day, but this was not accurate enough, when you get into atomic measurements. The current definition is:
The second is the duration of 9 192 631 770 periods of the radiation corresponding to the transition between the two hyperfine levels of the ground state of the cesium 133 atom.
Certainly not decimalised there!
All the definitions, and their historical origins are at: http://physics.nist.gov/cuu/Units/current.html
The fundamental units always need some arbitrary definition, and a historical one, like the second, is fine - it is the derived units (force, energy, velocity etc) that work so well in metric.
Since America is trying to get more people into science and engineering, why not make life easier for them and ditch the system that is the worst to use in these fields.
Every mornin' at the mine you could see him arrive
He stood six foot six and weighed 2-45
Kinda broad at the shoulder and narrow at the hip
And everybody knew you didn't give no lip to Big John (Dean and Acuff)
just kinda hard to give that up
He stood a hundred ninety eight and weighed and weighed a hundred eleven
is okay but just doesn't have that get down and grab ya quality <?- )
could be why entertainment is one of the things we seem to do best
You are absolutely right that American students should be immersed in the metric system early on but we needn't give up our 'standard' system. After all most everyone else in the world must learn at least two languages, we Americans should be sharp enough to become proficient in two measurement systems since we only need know one language. Using the 'standard' system for our less formal social situations--which should include getting from here to there--gives at least the illusion of some distance from the devour all machine we have created.
we don't have the right to change the spelling of them
we have been locked into the most insane spelling system since the mass production of 19th century dictionaries. Language itself has been somewhat fixed by the printing press--the new media will make their own lasting marks in the realm
He stood a hundred ninety eight and weighed and weighed a hundred eleven
Well, you could say it as he stood one ninety eight, and weighed one - eleven.
But a great ballad, and we don;t have the right to change the words as originally written...
On the topic of two systems, when I was growing up in Australia in the 70's, learning only metric, my parents, who had grown up in imperial units, did find it a little hard to adjust, but that was decades and, when I asked them while back in Oz at Xmas, they said it was a good change, and they wouldn't want to go back. The only criticism is the sometimes unwieldly names, like hectopascals, decilitres etc. It is an engineers dream and a marketers/linguists nightmare!
Here in Canada, there are elements of both systems in use - particularly noticeable in the construction industry. It's not big deal, but I did notice how simpler it was in Oz when no one has to bother converting anything, measurements on any label are just written once. Here they are written in two sets of units in two languages - talk about a waste of space!
As for spelling, well, I think with new words you can choose the spelling, but the existing ones should have their spelling maintained. n We can and do use abbreviations, acronyms, etc, and the kids are inventing new ones daily, and that's fine - so did the early telegraph operators.
I'm not sure the printing press is entirely to blame - the words in Egyptian hieroglyphics or Roman Latin haven't changed spelling in thousands of years - they are, after all, set in stone.
Spelling does change when words migrate from one language/alphabet to another - there isn;t even agreement today on how to spell Ghaddafi/Qadaffi
Languages can and must evolve, but I don't see the rationale for changing spelling of long established words - and life would be easier if everyone could agree on standard spellings for them.
Language stopped evolving with the advent of dictionaries around the year 1650.
Look at the difference between middle english and Shakespeare's english!
And yet Shakespeare is still very understandable!
Well, you could say it as he stood one ninety eight, and weighed one - eleven.
maybe He stood two point 0 and weighed one-eleven would be a better translation.
As for spelling, well, I think with new words you can choose the spelling, but the existing ones should have their spelling maintained
I don't know I rather like some of the more varied spelling from the 18th century--we became lock step regimented when the upwardly mobile middle class all became locked into specific Oxford spellings, with only minimal across the ocean variations, to show they had good breeding. And talk of anachronisms--here we sit using kqwerty which was designed to slow the strokes down so the keys wouldn't jam up on the early typewriters. Legacy is a funny thing. Business may want efficiency but there are deep parts within us that loathe too much of it.
And that in a round about way brings us back to gold<?- )
And that in a round about way brings us back to gold
Only if someone brings up that gold is measured in troy ounces and is called ounces, thus a nod to even more non-metric units.
(unless the gold is in a small amount then you say milli grams.)
Only if
The amount of gold in vaults will have almost NO bearing on Japan's ability to regenerate. Legacy and inefficient are excellent terms to use when talking of wealth said to be stored in gold.
I'm, not so sure if it is inefficient - anyone who has has their wealth stored as gold cannot have the capital dissappear, ala Bernie Madoff, or the company go broke, or the bond issuer default, etc etc. You give up yield potential in return for security, and liquidity - i'd say it is one of the best ways to store wealth, but not necessarily the best way to grow wealth.
But these days when investors are often more concerned about return of capital, rather than return on capital, gold is not a bad bet.
Storing wealth in fat is efficient--in gold???? Because we haven't chopped it to its industrial value doesn't mean we won't do that in the future--legacy very much desribes gold. Since storing wealth is not particular efficient, (at least storing beyond seasonal and cyclical necessity) storing in a commodity that must be be converted to a useful storage medium like a bushel of grain or a barrel of oil is even less efficient than storing wealth in the latter.
Your right it's not a bad bet these days but if you are betting on gold you are still betting on some sort of BAU to keep gold valuable. So storing in gold merely indicates fear being stiffled by sloth (storing in gold is a completely unproductive activity). Heck of companions to keep for the little time we have here.
storing in a commodity that must be be converted to a useful storage medium like a bushel of grain or a barrel of oil is even less efficient than storing wealth in the latter.
But the "usefulness" of those commodities changes. Coal is not useful to anyone these days except a power station or steelworks. Uranium might be less useful now than it was a few days ago.
But gold has always been (effectively) useless, but has held its value as a currency over thousands of years. After the last major collapse of BAU (the Roman empire) into the Dark ages - the most valuable thing was still - gold. It has persisted as a currency for about 6000 years now - if we have a post collapse world, it is likely to emerge again as the only true currency.
Now, it is not a resource, like grain, oil or land, but viewed as currency it is one of the factors of production (land, labour, capital and enterprise/knowledge).
Gold has been a currency in every civilisation in history - i would not be willing to bet against that trend.
if we have a post collapse world, it is likely to emerge again as the only true currency
Don't forget silver. It's far more useful as a currency.
Are you really sufficiently worried about collapse to make a real investment into gold that you wouldn't do otherwise (for investment purposes)?
Not sure what makes it more useful as a currency, but agreed, it has a long history as one, and likely a future too.
No, I am not that worried about a real collapse - but I am worried about uncontrolled (not hyper) inflation. All these governments are printing money, and trying to devalue their currency against everyone else - a real race to the bottom. Those that have lots of cash are trying to find real things to invest in, be it gold, farmland, etc, which is driving up prices for those things. Despite what we may hear about official inflation rates, real inflation is happening - look at the prices of consumables (food, energy, commodities etc), and essential services (medicine) The only things going down are those in oversupply which is real estate values and lawyers rates, and discretionary luxury items (boats, vacations etc).
Price out some of these commodities in gold, not $, over the least decade or two, and you will see their intrinsic value has been flat or even declining slightly - it is the currency that is devaluing.
If I had money to invest, I would put about 20% into gold. The best result would be that the price of gold does not change - that means inflation is not happening. The worst result is if gold keeps going up, because that means everything else is going down.
Not sure what makes it more useful as a currency
It's less rare, so it's price is lower, and that means it's useful for much smaller transactions.
Plus, it was used for real currency very recently, so there are a lot of familiar coins (dimes, quarters, etc) that people will recognize.
Not that I think that hoarding silver is a good idea...just sayin...
All these governments are printing money
They're just trying to prevent deflation. Central banks are pretty committed against inflation - just look at the ECB raising rates.
Those that have lots of cash are trying to find real things to invest in, be it gold, farmland, etc, which is driving up prices for those things.
That's what the Chinese have always done - that's what caused the Opium wars.
real inflation is happening
You'll have to give me a really good argument to not accept the PCE/CPI. Sure, commodities are rising, but people in the OECD don't buy commodities directly. The CPI isn't even at 2% even including food and energy.
Price out some of these commodities in gold
That's the goldbug argument, and it's circular: gold is better than "fiat" because "fiat" is inflating, but it's only inflating when measured against...gold.
They're just trying to prevent deflation. Central banks are pretty committed against inflation
Personally, I'd be happy to see some deflation, I really don;t see why they are so worried about it. The conventional theory goes that people will put off buying stuff because prices will be lower in the future, but, really, how much can you put off into the future? You still have to buy food, fuel, pay the mortgage, insurance, health care etc etc. The prices of flat screen TV's have been deflating for as long as they have been around, and everyone knows that, but people have been buying...
It is only the discretionary things that people might put off, like a holiday, but even then, a family only gets one summer holiday per year, and if they can afford to take it, they probably will.
Of course, we have housing deflation right now, but that is really an oversupply cause by .. inflation!
That's what the Chinese have always done - that's what caused the Opium wars.
Can you expand on that? My understanding is the British essentially created the Opium Wars to regain the wealth being transferred to China by the tea trade. Hmm, could their be a parallel with the oil trade today...?
You'll have to give me a really good argument to not accept the PCE/CPI. Sure, commodities are rising, but people in the OECD don't buy commodities directly. The CPI isn't even at 2% even including food and energy.
Well, I'm not convinced the current basket of goods and services really reflects today's consumer spending - while it includes prices for "medical services" it does not include prices for "health insurance" and that has been very inflationary. Perhaps more importantly is that average non-government wages are falling, so the "affordability of living" is decreasing for many.
And, the CPI does not include government taxes (it does include some user fees for water, car rego etc). And in many cases, even when taxes have not gone up much, the services received for them have been decreasing, so I would call that inflationary, but the CPI does not pick that up.
That's the goldbug argument, and it's circular: gold is better than "fiat" because "fiat" is inflating, but it's only inflating when measured against...gold.
Well, don;t take my word for it;
At Royal Bank of Canada, we trade gold bullion off our foreign exchange desks rather than our commodity desks. Because that’s what it is – a global currency, the only one that is freely tradable and unencumbered by vast quantities of sovereign debt and prior obligations.
It is also the one investment and long-term store of value that cannot be adversely impacted by corrupt corporate management or incompetent politicians, each of which is in ample supply on a global basis.
Don’t measure the Dollar against the Euro, or the Euro against the Yen, but measure all paper currencies against gold, because that’s the ultimate test.
-- Tony Fell, Chairman, Royal Bank of Canada, February 2007
It is only the discretionary things that people might put off
I think durables, like vehicles and appliances, might be the most important thing. A big drop in car sales can really hurt the economy.
we have housing deflation right now, but that is really an oversupply cause by .. inflation!
We have a physical oversuppy: builders just built too many houses.
My understanding is the British essentially created the Opium Wars to regain the wealth being transferred to China by the tea trade. Hmm, could their be a parallel with the oil trade today...?
Absolutely. The Chinese created a currency crisis because they accepted payment for their exports in gold, but refused to allow imports to China. The opium trade was illegal, but it succeeded in circumventing the trade barriers, so that's what the British went with.
Something similar occurred in 2008 when the credit crunch stopped the flow of CDO's. In general now the Chinese are accumulating t-bills - the modern equivalent of gold. Fortunately, the supply of t-bills can be adjusted as needed.
while it includes prices for "medical services" it does not include prices for "health insurance" and that has been very inflationary
Interesting. I haven't heard before the idea that health insurance prices are rising faster then medical costs. Do you have more info? Keep in mind that the market for individual/small business coverage isn't representative of the overall market.
the CPI does not include government taxes (it does include some user fees for water, car rego etc).
For better or worse, overall taxation levels are falling.
Royal Bank of Canada
So, RBC is run by gold bugs? hmmm...well, we've certainly seen that banks can be as stupid as the rest of us.
The idea that gold can't be manipulated is highly unrealistic. The Spanish flooded the market in the Siglo de Oro, much to their long-term unhappiness.
The supply of gold is unrelated to the size of the economy - I really, really wouldn't want to see it used as a primary currency. That would cause endless recessions and depressions.
Is gold a good investment? Who knows? It certainly has its own risks. It depends entirely on the psychology of investors, so this is really a question of psychology, culture, fears about economic stability, etc, etc. If I were going to invest in a precious metal, I think I'd go with silver, which has appreciated much less than gold from historic levels.
I guess the question that seems most interesting to me is whether the rising price of gold tells us anything about the stability of "fiat" currency. It seems to me that the answer is no: it tells us much more about the psychology of those buying it: the Chinese have always been gold bugs, and now they have more money to buy it. The elites in oil exporting countries are looking at becoming fugitives, kicked out by their angry citizens - it makes sense they'd be buying easily portable, hard to trace assets.
I think durables, like vehicles and appliances, might be the most important thing. A big drop in car sales can really hurt the economy.
Well, sales of cars have already fallen off the cliff. I don't have official figures, but I suspect car prices have been fairly flat for a few years now - but sales fluctuated wildly for reasons totally unrelated to their price. Fuel inflation, and unemployment, will decrease car sales much more than a slightly declining CPI
And appliances - they have been deflating, in real terms, for decades. Given that so many of both cars and appliances are imported, I think a drop in sales of both is not a huge impact to the economy.
We have a physical oversuppy: builders just built too many houses.
Yes, they were betting on inflation, and people buying more houses than they can live in!
In general now the Chinese are accumulating t-bills - the modern equivalent of gold. Fortunately, the supply of t-bills can be adjusted as needed.
That is why t-bills are not quite the equivalent of gold. With the US pursuing devaluation, they are not truly stable. Mind you, China is being far more coy about their own currency manipulations - it's funny to see the US gov complaining about China manipulating currency and markets - pot calling the kettle black!
Interesting. I haven't heard before the idea that health insurance prices are rising faster then medical costs. Do you have more info?
No, I don't have hard info, just anecdotal evidence. Keep in mind, CPI is based on unit costs for services, and ignores whether or not more of those services are being used - which appears to be the case, especially with drugs. While individual/small health care may be representative of thew whole market, they they are the whole market to individuals and small business - those people then have less money for everything else. I did hear a story on NPR a year or so ago about Aetna health insurance struggling with increasing health insurance costs for its own staff!
For better or worse, overall taxation levels are falling. Taxation rates, or collections? - there is a big difference. Tax rates here have not changed, but collections have as people and companies are generally earning less.
Is gold a good investment?
No, it's a currency. if you are going to keep something under the mattress or in the cookie jar - are you better with paper money or gold? When you "cash out" investments, should you hold paper money or gold?
Now, buying shares in a gold company is an investment, but then you have all the normal risk factors of management etc.
the Chinese have always been gold bugs,
Keep in mind the Chinese invented fiat currency... Not surprisingly, this also led to the government "printing" money, and subsequent inflation...
Perhaps, if they have the longest history of fiat currency inflation, that is why they are gold bugs - they just don't trust their government, not even the government insiders trust it.
sales of cars have already fallen off the cliff.
They hit bottom, but have been recovering pretty well.
Given that so many of both cars and appliances are imported, I think a drop in sales of both is not a huge impact to the economy.
Cars are still more than 50% manufactured in the US, and the whole industry is about 10% of the US economy. Hamilton thinks that the psychological impact of the recent oil shock on car sales accounted for most of the depth of the recession.
With the US pursuing devaluation, they are not truly stable.
Devaluation doesn't change the value of the dollar. It still buys the same amount in the US. A dollar represents a claim on the US economy.
CPI is based on unit costs for services, and ignores whether or not more of those services are being used - which appears to be the case, especially with drugs.
Yes. Hopefully, if people use more drugs, they get more benefit. Hopefully...
Taxation rates, or collections? - there is a big difference.
Rates have fallen in the US. That's the primary reason for the US budget deficit - tax cuts.
gold...it's a currency.
It's really not. You can go very, very few places and buy things with it. You can't buy a car with it, or a house, or groceries, or gasoline, or pay your taxes.
Hamilton thinks that the psychological impact of the recent oil shock on car sales accounted for most of the depth of the recession.
Really? It had nothing to do with overleveraged home buyers and a real estate bubble? Or the failure of dozens of banks, and the bankruptcies of untold business and rapidly increasing unemployment?
I don't think the car industry is that big of a deal, even for the US. But iof it is, then the US needs to do something, as oil shocks are likely to be part of the future.
Hopefully, if people use more drugs, they get more benefit. Hopefully...
Well, the drug companies certainly get more benefit, but I'm not sure the health of the people has matched the increasing volumes of spending on (prescription) drugs. How much Viagra and Cialis do people need? Should these be included in the CPI same as movie tickets?
Rates have fallen in the US. That's the primary reason for the US budget deficit - tax cuts.
I don;t study US tax rates very much - my understanding was that they had been stable for the last 10yrs, but maybe not. if the rates have been decreasing, and the deficit increasing, then I'd say the reason is not reducing spending in line with reducing taxes.
It's really not. You can go very, very few places and buy things with it. You can't buy a car with it, or a house, or groceries, or gasoline, or pay your taxes.
I disagree - it is the ultimate travellers cheque. You can go to any major city in the world, and find someone who will pay you close to the current world price for gold - same as i can travel with bunch of Australia $, and change them into the local currency in any country. It is like a currency that is not from any particular country, but in any country you can exchange it for that countries' currency. Yes, you can't use it to buy gasoline, but then, many gas stations won;t take a $100 bill either.
i think it meets the basic definition of a currency - something that has no value in and of itself, but can be exchanged for other things that do have value. The fact that you may need an intermediate like $ does not change this.
For the record, I did hear of a house in Sydney that was paid for in gold - apparently the tax dept was very interested in this. But then, this is in a city where, less than 200 years ago, the primary currency was rum - soldiers and police were paid in it and a hospital was built and paid for by rum! At the time it could not be counterfeited, and could not be "printed" by government, or anyone else - same characteristics as gold, though it could be consumed, of course...
Nobody has gone broke/suffered massive devaluation by holding gold for many decades - the same cannot be said of paper money.
It had nothing to do with overleveraged home buyers and a real estate bubble? Or the failure of dozens of banks, and the bankruptcies of untold business and rapidly increasing unemployment?
Actually, I kind've agree with you - I think it's easy to overestimate the impact of oil on car purchases. On the other hand, those factors you mention had their impact on the economy largely from a decline in consumer spending, and a major part of how that decline showed up was in cars.
iof it is, then the US needs to do something, as oil shocks are likely to be part of the future.
I strongly agree.
I'm not sure the health of the people has matched the increasing volumes of spending on (prescription) drugs. How much Viagra and Cialis do people need? Should these be included in the CPI same as movie tickets?
Sure. How is recreational sex not as good as recreational movie watching?
if the rates have been decreasing, and the deficit increasing, then I'd say the reason is not reducing spending in line with reducing taxes
The primary cause was tax cuts. Now, you could fix it by reducuing spending, but the logical solution is proper tax levels, with the major exception of military spending - have you looked at the increase in US military spending?
it is the ultimate travellers cheque.
Traveller's cheques can be spent in a grocery store - gold can't. Sure, it's fairly liquid in major cities, but it's definitely not a currency.
The fact that you may need an intermediate like $ does not change this.
It really does. Stamps, old coins, art, etc can all be sold in major cities, with varying broker commissions. That doesn't make them currency.
Nobody has gone broke/suffered massive devaluation by holding gold for many decades
Sure they have. There have been periods when gold's value plummeted for various reasons. You could make the same general statement about land, but that wouldn't be true either.
That's the bottom line argument against gold as having any value at all. There is simply NO reason except hope and blind faith, for gold to hold any relationship to currency in circulation, money supply, or any other feature of the modern world economy. The argument that gold should be the final measure of all value only makes sense for holders of gold. Gold-backed currency is a proposition of the wealthy and the miserly. For EVERYONE else, it is a loosing proposition without validity or merit, see (multivarious) weaknesses in propositions above. (1) gold supply increases in direct proportion to the market value of gold measured in fiat currencies, e.g. direct relationship to mining costs measured in fiat currencies, obviously therefore not with any absolute value. 2) gold is disproportionately held by citizens of economically backward societies, India, China, where the concepts of modern currency are late arrivals. 3) many others.)
Well, the word ran on gold back currencies until 1971, and it seemed to do fine - some would argue, better.
I kinda like a currency that is not at the mercy of the Government of the Day.
Look at Greece with Euro, they finally had to face up their hopeless mismanagement and corruption, instead of being able to take the easy way out and keep devaluing. For the central American countries that use the US dollar, they are in the same situation - they have to focus on real economic management.
You can't devalue your way to prosperity.
I care not that China, India etc hold lots of gold - they hold a disproportionate amount of rice producing farmland too - so what? I would suggest that where citizens hold gold instead of paper money, it means they do not trust their governments, and in the case of China and India and other backward countries, I can understand that. if I was in Zimbabwe I would definitely want to work in gold. If people in the US are starting to hold gold, i would see that as a sign of distrust of the US Government, though there appear to be other signs too.
You are correct in that gold is only valuable because (some) people perceive it as valuable - but it has an outstanding track record of remaining valuable. We'll see where $ are in another 1000 years...
Well, the word ran on gold back currencies until 1971, and it seemed to do fine
it ran very, very badly. There were repeated recessions and depressions caused by gold deflation.
If people in the US are starting to hold gold
Do we know that's the case?
Since storing wealth is not particular efficient, (at least storing beyond seasonal and cyclical necessity)
I noticed you didn't try and deal with my underlying statement about the efficiency of wealth storage in the first place. Nor my original point about the virtually non existant effect gold stored in vaults will have on Japan's regeneration.
You are merely adressing the 'faith' aspect of gold's value-it is virtually the same type faith required for any of the other currency/credit mediums we have today. I'd far rather put my faith in something that engaged much more of human potential. I guess you could sit in passive heated gold cored bunker if you like but its a heck a place to spend what little time we get.
Ok, so lets look at the efficiency of wealth storage. Store it as grain, and you have a limited shelf life, plus you need a large storage facility. Store it as farmland, and you have to look after it. Store it as steel - and it can rust. All wealth storage mediums have their own limitations, but the key thing is that anything physical needs a physical storage facility - gold needs less of that than almost anything else.
As for the conversion efficiency, yes there is a commission when you convert it to currency, but that is true of any other commodity too.
I am not saying that gold is a productive "investment" like operating a farm, producing electricity etc - I am saying that as a currency, it is far more resilient and stable than anything else. And as means of storing wealth, it is better than any other currency, and most commodities. Choose any other commodity and you making a bet on the future market for it. Gold has no market (for productive use) that is why it is such a stable currency.
if Japan wants to pay for reconstruction in gold, and i don;t think they will, I'm sure the contractors will be happy to take it.
if Japan wants to pay for reconstruction in gold, and i don;t think they will, I'm sure the contractors will be happy to take it.
That is the essence of my point--barring total collapse gold is almost totally superfluous to the business at hand. And of course with total collapse it might be equally superfluous--not looking to see how that plays though.
All wealth storage mediums have their own limitations, but the key thing is that anything physical needs a physical storage facility - gold needs less of that than almost anything else.
of course I qualified efficient storage temporally--enough to cover both
seasonal and cyclical necessity
So I will grant gold some value as a storage medium to help meet cyclical necessity--the cycle of that entails burning up the savings made during the productive portion of a persons life.
When viewed from that perspective in a world at its population limit storing in gold might be more attractive than storing your productive years in the upbringing of your children thus counting on a portion of their production to sustain your unproductive years. But storing in gold is quite a bit different than that--wealth stored in gold is removed from the economy (except for the pittance it take to maintain the storage--not a small pittance if that means maintaining your own security force--so this keeps getting more twisted) wealth stored in bringing up your children becomes the economy.
Gold is a legacy wealth storage medium--its value relies on faith, and its a funny kind of faith when you sit down and examine it. In the case of traders the faith is fully in the trading system and the convertibility of gold back and forth into currencies--the same currencies the traders have fled because of lack of faith. In the case of the hoarders the faith is a bit more convoluted--but mostly it's merely faith that gold will be valuable in the future because hundreds of generations of the dead thought it was valuable in the past.
When viewed from that perspective in a world at its population limit storing in gold might be more attractive than storing your productive years in the upbringing of your children thus counting on a portion of their production to sustain your unproductive years.
I would not suggest short changing your children in order to accumulate gold - though some probably do that to accumulate $, I am saying that as a currency, it has merits that fiat currencies do not.
I was going to say that the model of your children looking after you in old age has gone, in western countries, but actually that's not the case. At least, if you are a government employee it seems you can rely on everyones children (i.e. future taxpayers) to pay for your retirement, regardless of whether you have saved anything.
But storing in gold is quite a bit different than that--wealth stored in gold is removed from the economy (except for the pittance it take to maintain the storage--not a small pittance if that means maintaining your own security force--so this keeps getting more twisted) wealth stored in bringing up your children becomes the economy.
I'm not quite sure it is "removed" from the economy. As store of wealth, it can be used as collateral against borrowing (possibly the best collateral you can have). Banks that have gold deposit accounts can count the gold as part of their reserves for lending purposes.
Gold is a legacy wealth storage medium--its value relies on faith, and its a funny kind of faith when you sit down and examine it. In the case of traders the faith is fully in the trading system and the convertibility of gold back and forth into currencies--the same currencies the traders have fled because of lack of faith. In the case of the hoarders the faith is a bit more convoluted--but mostly it's merely faith that gold will be valuable in the future because hundreds of generations of the dead thought it was valuable in the past.
I think the word I would use is "confidence" rather than "faith", but in any case, yes it is based on peoples perception of its worth. But that is true of everything - it is only worth what someone is willing to pay for it. And, I would suggest that gold has the longest track record of anything, for being perceived as something worth paying for. Whether this should be the case is beside the point - gold as a currency has worked for all of human history, and I just can;t see anything changing that.
Doesn;t mean it;s the only currency of course, but I'll bet it is still around after many others have gone.
That is such an obvious appeal to emotions it has no place in any rational debate. The set of government employees, unionized or not, have relativly zero intersect with persons wasting resources due to superflous wealth. Yachts with helicopters onboard or with tender boats on davits more luxurious than any boat any teacher might hope to afford, lining the harbours of every Carribean tax haven. Those who argue that overpaid teachers are the core of the US financial difficulties are clearly simply those who a) hope to join the yacht owners or b) are too stupid to see reality.
That's a breath of fresh air in this world which has been so badly misrepresented by entities like Fox news and Koch brothers' think tanks.
The set of government employees, unionized or not, have relativly zero intersect with persons wasting resources due to superflous wealth.
Quite so. But they do have an interconnect with their next door neighbour, who, assuming they still have their ordinary private sector job, is paying the taxes that provide benefits to gov employees that the private employees (not capital owners) are unlikely to ever enjoy. Go to any country town in Canada, and the local government employees are probably, as a group, the best off - that is certainly the case where I live.
The way the super rich choose to spend their wealth is up to them - that has nothing to do with the average taxpayer - you or me.
If you are saying that these wealthy people have been able to game the system and avoid paying taxes, etc, that may well be true, and governments should be closing these loopholes - but that is not the fault of the average taxpayer.
But that does not alter the fact that many governments are spending more than their taxpayers can afford. I am not saying overpaid/overstaffed government employees are the only cause of this, but it is a factor.
When the union representing employees of the Cdn Dept of Veterans Affairs day they will not accept any staff reductions, period, even though the number and age of veterans they are servicing is rapidly decreasing, you have a perfect example of wasteful government spending. A job, even a government one, is being employed to perform some function - it is not an automatic meal ticket for life.
if I am not seeing the reality then please show me what I am missing.
benefits to gov employees that the private employees (not capital owners) are unlikely to ever enjoy.
That's true now, after the major industrial companies managed to break most unions. It didn't used to be the case.
In general, I haven't seen excessive pay or benefits for government employees, with one major exception: early retirement. Early retirement was a really bad idea, and it has hurt all of the organizations that gave it to their employees, from GM to the US armed forces.
The way the super rich choose to spend their wealth is up to them - that has nothing to do with the average taxpayer - you or me.
Their spending is their business, but not their income. Much of their income is related to government policies, many of which the wealthy have gamed.
If you are saying that these wealthy people have been able to game the system and avoid paying taxes, etc, that may well be true, and governments should be closing these loopholes - but that is not the fault of the average taxpayer.
It's not their fault - average taxpayers are the victims here - but it is their responsibility to do something about it.
But that does not alter the fact that many governments are spending more than their taxpayers can afford.
In the US, at least, governments are undertaxing, not overspending, with the major exception of the military and local jails/police. Unfortunately, those are the areas that never get cut.
I am not saying overpaid/overstaffed government employees are the only cause of this, but it is a factor.
I'd really like to see evidence of this.
When the union representing employees of the Cdn Dept of Veterans Affairs day they will not accept any staff reductions, period, even though the number and age of veterans they are servicing is rapidly decreasing, you have a perfect example of wasteful government spending
Sure. But that's an anecdote. Worse, often such anecdotes turn out to be wrong, like the McDonald's coffee lawsuit.
I was going to say that the model of your children looking after you in old age has gone, in western countries, but actually that's not the case. At least, if you are a government employee it seems you can rely on everyones children
"Say it isn't so, Joe!" (when the old red jacket said that to Biden during the VP debates I actually had to laugh). No doubt killing off the last big group of wage earners getting living wage in the west will set everything aright--the skew in wealth distribution will then far surpass even the 1920s levels it has now reached and all will be well.
Paul, you were using a far narrower view of investing in children than I had in mind. We have to leave them viable institutions and infrastructure that will serve them until they can build what will be needed to serve their children, and with luck we might even set them up with at least the core set of skills they need to carry out the task. If we can manage that sort of thing there might just be at least enough economy left for us to get part time jobs as Walmart greeters or McDonald's servers to supplement whatever might dribble our way from the likes of social security <?- ) We can't do any of that if untaxed wealth is hoarded in gold.
I think the word I would use is "confidence" rather than "faith",
That would be the politically correct Wall Street term. I'm sure the designers of Fukushima Daiichi had confidence there would never be a 9 a couple miles offshore. When talking of something as huge, complex and poorly understood but so heavily manipulated as the realm of currency, commodities and securities, faith is a far better word to decribe what keeps it functioning. I have confidence an army of players will always arise to try and game that realm.
Banks that have gold deposit accounts can count the gold as part of their reserves for lending purposes.
That's complicated M1, M2, and M3 + Federal reserve stuff. The idea isn't to store wealth but to create more money to circulate and draw interest on. Banks don't really store wealth, they circulate money and they circulate much more than is orignally deposited with them as they keep recirculating the the percentage of each deposit they lend out that gets redeposited and lent out again...that is a part of the much maligned fiat currency. Gold can still be part of this but I don't think it gets any special treatment from other money aside from its handling costs.
When we last had a 'gold backed dollar' there was never near enough gold in the system to back all the dollars if an attempt had been made to convert all dollars deposited into the system into gold at once. That is one reason the 'lie' of the gold or silver backed dollar finally went away. Precious little of the money in the system is actually in currency anyhow.
I'll bet it is still around after many others have gone.
Well it's gold--staying around is one of its biggest attributes, you seem to always be able to get it back from whatever you mix it with--and that will include currency. If we manage to keep putting along somehow gold will be needed more and more as manufacturing material--it just does some things very, very, very well. Decent mining deposits are getting tougher to come by--they are managing a whopping .95 grams of gold to the ton of ore about ten or twelve leagues north of my house--so gold's days wasting around in vaults as a currency backer seem numbered. I'm not going to hazard a prediction on the 'how many days.'
You might have noticed I worked a couple other old measurement units into that last paragraph--it's time to go back and give Jimmy Dean a listen. The 50 souls fighting those runaway reactors are all 'Big John' I am as with them in spirit as much as I can manage.
Then came the day at the bottom of the mine
When a timber cracked and men started cryin'
Miners were prayin' and hearts beat fast
And everybody thought that they'd breath their last cept John
Through the dust and the smoke of this man made hell
Walked a giant of a man that the miners knew well
Grabbed a saggin' timber and gave out with a groan
And like a giant oak tree he just stood there alone Big John
(Big John Big John) Big Bad John (Big John)
Unix sysadmins represent!
So what's happening to the inflation that QE ought to be causing?
It's being exported.
A new twist on neo-colonialism! Instead of stealing your natural resources, we'll send you our financial toxic waste.
The war that results won't be fought in minor N. African states though. It'll be when the world decides to pull ownership of reserve currency away from the US.
I am no economist.
As far as I can see, this concept of Hotelling is very rational in a relatively stable economic system. Unfortunately we are no longer in a remotely stable system. We have the OECD deep in debt and being squeezed on oil supply, with in the short to medium term is the lifeblood of economic activity. Less oil means economic contraction. That makes debt unpayable.
We are facing default or hyperinflation. Each member of the OECD will hit the crisis point at a different time, unless we hit a MENA style domino effect. Presented with this inevitability the clever money will get out of fiat currency and into non-perishable commodities or long term fixed assets. However, the controllers of most of the fiat money appear to be anything but rational. Fear and greed rule the roost. A few OPEC countries may be rich and stable enough to implement Hotelling. However, most are economic and social basket cases with rampant corruption, massive overpopulation and on the brink of anarchy.
Libya has just tipped over the edge.
It is too late to think about concepts like Hotelling on a national or international scale. It is time to act as rational individual and make personal preparations.
Yesterday I bought a more fuel efficient car. (literally less than half the fuel consumption). In a BAU world it will pay for itself in 4-6 years. In the future I expect it will make the difference between driving and walking far sooner than that.
My hunch on this effect was that the increase in global trade with the US having the benefit of being the reserve currency for the world was the cause for inflation not returning for Reagan and Bush. Think through this logically... A larger world economy requires more cash to operate. All things being equal, a 2% larger global economy will require at minimum a 2% increase in world money supply...anything less is deflationary. So the US in its role as world financial leader can take advantage of this to continue to deficit spend.
But what happens when world economic growth stagnates or another country's currency can take the place of a reserve currency? And what if foreign-owned paper dollars can't be turned into real products--say airplane companies, or golf courses, or US farmland? It is at that point when inflation comes back.
Most people worried about excess printing of money fail to take into account the distruction of money that is going on all the time.
For example, when the housing market collapsed the economy suffered huge losses not only in mortgage defaults but also in that the value of of unmortgaged housing also fell. These events sent huge sums to money heaven.
Accompanying this was the crash of the stock market. Again huge sums died and went to money heaven. The Fed resurrected the money and it was born again as bank reserves which banks are afraid to lend and which borrowers are afraid to borrow.
This is our predicament.
The myth of the exploding money supply:
http://seekingalpha.com/article/256913-on-the-myth-of-exploding-u-s-mone...
The gold price can hardly be related to lack of supply since nearly all the gold ever produced is still available. And the gold supply increases every year by the amount of annual production. The price of gold is related to fear, hoarding and golds inability to increase production to match economic growth even with its annual increase in supply.
Being unable to increase production to match the needs of increased population and economic growth is the main fault of "real" money. It guarantees poverty and worse for those who do not have it.
Governments can not create gold out of thin air. Some think this is all good, but it is not. Gold has it's faults.
Have you looked at the Fed's balance sheet? It looks like a hockey stick. Bernanke has created around $2 trillion dollars out of thin air. Initially the money was used to buy nearly worthless mortgage backed securities from insolvent banks. Now it is being used to buy treasury bonds in order to keep interest rates artificially low. The Fed already holds more treasury bonds than China.
The gold price is not related to production but to whether real interest rates are positive or negative. Right now the interest rates are being held artificially below the (real) rate of inflation because debtors cannot afford high interest rates. The bull market in gold will continue and the US $ will keep falling until interest rates are allowed to rise above the inflation rate.
Gold (& other hard assets bought with cash) is how you protect yourself from sovereign defaults and currency debasement.
The Fed already holds more treasury bonds than China.
Just an inkling that this activity is not so distant a cousin of the issuing of junk bonds Milken used to steal cash companies had set asside to cover pension funds.
The Fed buys around $2,000,000,000 of US treasury bonds every day of QE2 and money is not being created?
Credit (not money) that was created during the boom years then is "destroyed" due to economic misfortune leaves a vacuum in the economy because our economy says credit = money. The Fed is doing everything it can to fill the credit vacuum with money. But since the vaccuum left behind is not productive because the real assets backing the credit are devalued, the created money goes toward productive assets, creating price inflation in those assets due to the law of supply and demand. In this case, too much supply of money creates demand for higher prices of those assets.
DD
You are both right and wrong.
Gold would constrain us to living within our means. Given that we are far into overshoot, this means poverty.
I believe poverty now is better than the much worse poverty that will result from digging our hole deeper.
As has been pointed out many times before on this site, the reason Reagan
could run massive deficits for his War buildup without causing runaway
inflation is largely due to increases in supply with North Sea and Alaskan
oil coming on board and, ironically, decreases in demand some years after
Carter's auto fuel efficiency standards and first Energy Star ratings.
I believe that Carter's efforts reduced energy usage by something like 20%
in the 5 years after their implementation.
"Port-a-Potty makers continue to make Port-a-pottys is because it's what they do-"
But what do bankers do? They lend money (which is not theirs) at interest. If enough of them lend enough money at a high enough rate of return, they garner to themselves the entire "natural increase" of the real economy. But notice the "If" at the beginning of that last sentence. Until fairly recently (in the last several decades) the real world has been a fairly violent disorderly place. Bankers trying to do deals in Persia, or Arabia, could have their throats slit or their heads entirely removed. But now ... we are more civilized than that. Now there is no down side to irrational lending.
Soddy's mistake was in thinking that bankers were rational or would understand rational argument. Had the bankers understood his reasoning, they would have shut down the world economy much sooner.
What people miss about the 1980s-2008 is the tremendous "inflation" in asset prices; everything from government bonds to stocks to junk bonds to antiques.
Eventually culminating in LBO booms, followed by Nasdaq bubble, followed by housing.
So there has been massive inflation; it's just been all the "good" kind.
Financed by massive recycling of US Dollars from Asian workers and Saudi oil fields.
Also; commodity cycles exist, and bad government policy exist.
In gold terms, oil isnt up by much. In silver, it's actually down quite a bit.
A case can be made that we're not really watching the effects of Peak Oil so much as "money death".
Your facts are so far off base it's not even funny. For one thing we never had a $4 trillion surplus. From what hole in the ground did you dig that up? And your statements about inflation generally being low are completely "rong", because you clearly accept the propaganda definition of inflation at face value. Owner's equivalent rent (OER) is the largest component of the CPI, yet OER completely masked the effects of the housing bubble. In reality, real true inflation from 2000-2008 is best measured by the price of gold. Look at a 10 year gold chart and tell me inflation was low. The price of gold, oil, food, college tuition, home prices, health care costs... 90% of what the average person spends their money on.... NONE of it is counted in the CPI. It is all just made-up bull, and if you base your analysis on that made-up bull, then well it makes what you say a bunch of made-up bull also.
Another key consideration in deciding whether or not to extract resources is the ratio of maximum geological extraction to maximum extraction capacity.
It works like this:
Scenario 1:
If you are able extract your resource, at maximum capacity (let’s say for example capacity is limited by a pipeline) for another 30 years before resource limitations start to prevent extraction at full capacity then your decision on whether or not to extract at that maximum capacity is based on whether you believe the value of the resource will be higher in 30 years time than value you can get today multiplied by the return you believe that capital can earn elsewhere in the economy to the power of 30. This is equivalent to saying, it can be stored – but only for a 30 year term. Human ingenuity and progress is such that, historically, you would always have been better off extracting at the maximum rate in this scenario, and personally I believe that is still the case and will be for many more centuries at least.
Scenario 2:
If your resource is already depleted such that your actual extraction rate is below your maximum capacity (pipeline no longer fully utilised), then any resource you chose not to extract this year, can instead be extracted next year at a rate higher than would otherwise have been expected. This is a different equation all together – storage is year to year, day to day. Human progress on a daily/monthly/annual basis is very bumpy and there may be very good reasons to believe that the difference in value of the resource between one day/month/year and the next may well be higher than the return on investing the capital would have been.
Thus, resources which are closer to depletion are more likely to be stored underground than resources which are still in full production.
This is nothing more than the theory of discounting.
The wiki page on hyperbolic discounting has a neat derivation that explains the concept by invoking a double stochastic integration, leading to the result:
Discount = 1/(1+kt)
where t is the time delay of the reward and k describes the uncertainty.
This looks a lot like the odds function.
Probability = 1/(1+Odds)
So the kt factor serves as an odds function that the human brain subliminally processes when trying to make a decision based on a deferred award.
Someone found that in studies of discounting in which the subject got offered the decision to "I'll either give you 100 dollars, or we can flip a fair coin and I'll give you 300 dollars if it's heads, nothing otherwise", people tend to choose not to risk losing the hypothetical 100 dollars. The future rewards that they can get may not outweigh the immediate payoff. This also shows up in studies of drug addiction.
This essentially explains the heads/tails decision making because the person remains uncertain about whether they will actually receive the reward in the future. In this case, the odds favor the subject but the eventual payoff may never occur (i.e t = infinity). Obviously the professional gambler will expect that he can play the game several times and eventually beat the odds. But playing just the ONE time, the person offered the reward takes the easy route.
That explains why the hyperbolic discounting has such a wide probability spread, as it errs on the conservative side, and k gets established according to Bayesian observations of human behavior and not on the true odds.
I skipped including a full account of hyperbolic discounting in The Oil ConunDrum. I have it described here but thought that a simple model of greed works much better to model extraction impulses. I will likley stick it in an appendix in a future revision.
Hi, I don't really disagree with what you're saying but I think you somewhat miss the point, which is that partially depleted fields are more likely to be used for geological storage than non depleted fields.
I don't have oil examples but in gas there are loads of examples where this is true.
For instance Centrica use the heavily depleted Morecombe Bay field flexibly, only producing when gas prices are above a certain level (which they set and change according to their own outlook), or to balance supply and demand in the short term. It doesn't bother them to defer production because a Cbm left in the ground today can instead be produced as additional flow tomorrow.
In the Netherlands the Groningen gas complex is used even more aggressively with re-injection as well as deferred production.
On the other side of the coin, Gazprom gets very crotchety when buyers use the flexibility in their contracts to turn down volumes because they know that it represents multi-year deferred income. It's an often ignored reason for why they want to build new pipelines - to give them more flexibility in the produce/don't produce equation and give them more bargaining power.
The point is, as time goes by and the proportion of assets that are producing at depleted rates goes up, the more likely it will be that producers simply chose to defer production to the future if they don't like today's price. It's potentially a nasty multiplier effect that could exacerbate peak oil, unless producers can be made to believe that something else that will compete with their resource is on its way.
Natural gas is rate limited due to the pipeline infrastructure needed. Oil has been historically depleted as fast as it could be extracted and carted off somewhere. That is the greedy part of human nature.
Gas = rational non-greedy
Oil = greedy non-rational
Makes complete sense, err, I guess...
Gold also fits on this continuum.
Take an example of the "gold-rush" mentality in the old west. In any one strike region, extraction exponentially increased and then dropped suddenly. It was locally a very non-dispersed effect. After this period ended, the machines took over, slowly sifting the earth for the less easy pickings.
There was no Hotelling effect early on. The greed effect was way too strong. I have a section on this in The Oil Conundrum.
There is a great series on Discovery Channel about some guys abandoning their Oregon livelihoods (or lack thereof) to dig for Gold in Alaska on a Porcupine River claim. After an entire summer (the documentary so far), they obtained about 3 oz of flake and small nuggets at the cost of about $350K. The miners expect that they're going to do much better after the winter ends as the machinery is in-place and they've reached bedrock in a glory hole they've been digging which is said to be the bottom of an ancient waterfall where the gold supposedly is.
One interesting aspect is these guys are consuming diesel at a surprising rate to run the equipment that can shake and sift rocks extracting the flakes of gold from rock surfaces, etc.
Anyway, it's quite a bit different than it was when white-man first arrived on the beaches of Nome and could walk along the beach picking up thumb-sized nuggets (as James Michener put it in _Alaska_) that the natives had no use for.
Oddly, people buy warranties for relatively inexpensive devices. Sure, it's irritating when your TV dies in 1 year instead of 5, but you KNOW they price to make money, so over the long-haul you will tend to lose so they can win. I imagine the odds for that are heavily in their favor.
Somehow, people will buy lottery to gain a trivial chance of a large upside and buy warranties to avoid a modest chance of a modest downside.
Personally, I try to buy insurance only to cover small chances of major downsides, and an occasional lotto ticket if the payoff is huge. Never do I take appliance warranties or optional comprehensive car insurance on old cars.
I've always agreed with your position, but when my daughter achieved driving age, for some reason she chose to wait until 6 months after i'd removed the comprehensive insurance from cars (immediately after the bank loan was paid) to crash the cars and totally write them off. So add a second logical condition there, e.g. once your children no longer drive the vehicles LOL.
Read up on Tin Whiskers. The RoHS and other lead fears has led to excusable planned obsolescence.
see: http://nepp.nasa.gov/whisker/background/
Tin has plagued the electronics industry for ages. It is a huge atom that segregates to the surface, it migrates around leading to the whiskers, and it goes through phase transitions, gray and white, around room temp. I did my share of research trying to combine it in novel ways and only got marginal results. This behavior was almost predictable.
or optional comprehensive car insurance on old cars.
I've been battling that one lately--the old truck's value seems to hold around five figures, and the extra insurance (including collision) is a few hundred a year. Roads are icy six or seven months a year, moose can materialize out of thin air and larger chunks of likely future income are looking to be a smallish pile. Future discounting changes as your own perceived likely future changes.
Extended appliance warranties just have too bad of payback odds for me to buy into though--appliance live in a much more predictable environment which has other insurace covering much of weird chance type event.
On note related to the $100-300 coin flip WHT mentioned:
Several years back there was and end of the job check pool (won with poker hands made by adding pay stub numbers with some independently generated common number) where the buy in went from $20 (the high end of what I'd chance out of a weeks wages) to $100. There were about 20 people in to the pool. I wouldn't take the chance in the pool of 20, but afterwards, as most of the crew walked out the door with layoff slips I got the pool's winner to cut cards with me for the same $100. After the cut I walked out the door with an extra hundred and his winnings still looked healthy. I wouldn't have been too upset if I'd lost but I just wasn't going to go against 20:1 with $100.
Other factors of course factored in to my risking the $100 that way--I wanted to show the 19 who lost I wasn't afraid to risk my money. If I lost I was in the same boat as they were, the same guy got my hundred as theirs, but if I won I'd established my own niche in the take table. 50/50 chances made it almost all upside from that point of view. Just pointed this out to show how fluid human forward discounting is and how the matrix that determines the rate may not be all that readily fathomable.
Brilliant article, Gregor. The Hotelling aproach is actually so simple and logic, that I wonder that nobody seems to care about it. In fact, some seem to know this issue, but obviously don't want to make waves with it. For example the IEA wrote about this issue in one of their WEOs and referred to it in a following version in a footnote. But only they know why this basic issue never appeared in their executive summaries.
"I wonder that nobody seems to care about it."
Well, Soddy seem to care about this issue. The problem is that a lot of people make their living by inventing arguments that are intended to influence the thinking and behavior of others. These arguers, or as Socrates called them, Sophists, have a much shorter time horizon. They want to win an argument today so that the rich men who hired them to plead the case, will pay them and they can then eat this evening.
Why no one seems to care about it...let me try. I might be wrong as I am not an economist.
But the organizations that extract resources are huge and owned by many shareholders. These corporations can't shut down and just wait. They need cash flow so everyone can eat, buy clothes and buy aspirin and go to the movies.
The days of simplicity are over and the days of complexity are here. I don't have a cell phone and I get funny looks sometimes. Imagine someone with a gold mine giving up his cell phone while he waited for the price of gold to go up even more. No,no,no.
As for Hotelling, TOD commentor Sailorman said this the last time I brought up HH's name:
You can see the context here: http://www.theoildrum.com/node/7111#comment-742118
Sailorman's a non-PhD economist so he has some experience with the field.
IMO opinion, the reason you see Hotelling-like discounting at all in oil production, especially in the USA, is because of the rules surrounding making reserve estimates. The regulations force the oil types to be fairly certain on their reserve estimates before they can raise capital via Wall Street etc. It is therefore no wonder that the reserve growth follows the exact same hyperbolic curve as the hyperbolic discounting curve found in economic theory (see The Oil ConunDrum for lots of analysis). The rationale is now plainly obvious, oil will get extracted at the same rate at which our confidence at knowing the oil exists. This follows a hyperbolic growth rate.
This gives an alternate explanation for a Hotelling mechanism; it sits in the ground only due to uncertainty on whether it can get extracted.
Of course, many who read TOD apparently want "less theorizing", as Callahan pointed out elsewhere in the comment thread, so one can take it or leave it. But there you go.
I am 66 years old what are MY odds of spending any projected gains in 30 years by saving now - No Kids. Thats why Hoteling doesnt work L. Querin
You made me nearly laugh aloud. Excellent. Which of the economic theories factor in the average age of the decisionmakers? Typically old(er) people with very short time horizons.
From what I see around 90% of the human race has short time horizons, regardless of age. We wouldn't be here on TOD discussing the topics we do if this was not true.
DD
You may well put forth some rational argument with discounting and come to the conclusion that if you leave the stuff in the ground you could make more money later.
But does Hotelling take into account that leaving stuff for later introduces uncertainty. A sure buck today is definitely worth more than the chance of a buck tomorrow. Maybe it is even better than a good chance of a 2 bucks tomorrow. It all depends on the chance.
But since we are talking about profits in the future, and since as has been said, it is hard to make predictions, especially if the involve the future, there's definitely a tradeof between chances of gaining big in the future and a sure profit today.
Hotelling has my vote.
A long time ago I asked if the Saudis, having duplicate copies of every trinket on offer by our civilization, might not be playing "Last Man Standing".
Over here in Kambalda a nickel operation came across a very rich body of Gold. The management sealed it up saying, "This is our bank vault".
And they are naked capitalists.
It happens to even the most ideologically driven person.
They have moments of lucidity.
I personally have not read Hotelling in the original, or any objective article about his theory that goes into considerable detail including historical and contextual detail.
But when I was younger and a LOT SMARTER than I am now, I often thought that I knew a lot more than any number of well established experts in any number of fields because I knew of some contradictory evidence refuting SOME PORTION of SOMETHING such experts might have actually written.
Later on, I occasionally would run across the original work which seemed so flawed before;and upon studying it, I generally found that the authors were much less myopic and far better informed, and far better at reasoning and marshalling evidence, than I would ever have guessed.
I am no economist, but I took enough courses in the subject, and have read enough, to know that economic theories are generally presented as snapshots of reality, wherein one or two variables are under discussion, and everything else is considered to be held constant-ceretus parabus , iirc, is the term.
There is almost certainly nothing wrong with Hotelling's theory, if one will bother to take into account the limitations the author undoubtedly put into his original construction of it, rather than jumping to all sorts of uninformed wild conclusions based on misinformation or lack of information.
Those of us here who have studied Hubbert are well aware of claims that he drew certain conclusions which in fact he did not;and that his theory has held up well in terms of the geological model of the world which he used.
I expect that if I were to read Hotelling in the original, most of the objections to his theory presented here would collapse like sand castles in surf.
I doubt for instance that he ever claimed that resources such as gold would stay in the ground in the face of crucial short to midterm problems involving the viability of a business.
I doubt that anyone here can make an airtight case that the operators of any extractive industry, historically speaking, taking them as a group, have had any good reason , within the context of thier own business and intellectual models, to expect the value of resources in the ground to increase faster over the long term than the capital (to be had by extracting and selling short term) would increase if put into other productive assets.
And of course there is the concept of "noise" which usually seems to be considered to influence such discussions on the small scale;but noise, as I use the term here, can obscure or cause huge variations in expected or observed results.
An oil company with a field in an unstable country would have a powerful incentive to produce as fast as possible and get out before being driven out, Hotelling be damned.
But ANY GIVEN owner of a resource in a position to do so-an owner not constrained by the simple realities of day to day, year to year survival,need of cash, etc, who is doing his long term planning and for some reason decides that his stuff in the ground is going to be worth ENOUGH MORE in the future to offset his lost opportunites (buying other assets with proceeds from current day sales of the stuff in the ground) will very often leave the asset in the ground.
I have held onto assets expecting thier price to rise faster than other possible assets for which I could have, in effect, SWAPPED, by selling and buying..Most of us have done so, and continue to do so.
Does anybody here think that oil companies would spend megabucks to acquire reserves if the managers/OWNERS actually were to believe they could do BETTER, in the last analysis, in another type of investment?Flip the coin, and the obverse is that indeed, they would SELL RESERVES rather than buy more, if they believed that!.
The problem is probably not with the theory, but rather a lack of actual proper knowledge of it.
Sometimes a prophet is ahead of his time.
I run across some uninformed twit ridiculing Malthus at least once a week, and there are any nunber of professors out there who can readily demonstrate that Malthus was an idiot, right?
But just because MOST of us aren't starving TODAY doesn't mean some of us aren't; and it doesn't follow that most of us will not be starving tomorrow.
Of course we are not THOROUGHLY rational;the high discount rate IS very real, and in the end, most PEOPLE will do whatever brings the most short term satisfaction of course.
But the world is coming to,indeed has already arrived, at a point at which most assets are the property of corporations;and the owner/managers of such corporations are increasingly sophisticated in respect to thier OWN long term interests.
Hotelling added a very useful tool to our intellectual tool box, in terms of really understanding economics.But it is just another tool, not a magic wand.
One problem with Hotelling he doesn't seem to mention that energy is different than something totally worthless like gold.
(His equations are naturally fodder for oil numerologists.)
Of course economists don't believe in anything except money so you would expect that.
In reality things are different--countries go to war over energy but I doubt any countries would invade another over money. It would be ridiculously illogical--the creditor action has to result in the debtor more capable to paying off his debt. After WW2 the US gave Europe billions and much of it like UKs war debt was forgiven.
An exception might be the French occupation of the Ruhr in 1923 and even then they demanded WWI reparations in coal. The exercise resulted in a nation-wide campaign of passive resistance and an eventual French retreat.
I quiet like that one marjorian especially the bit about America forgiving UKs war debt.We didn't get any lend lease until we had sold off all our foreign asset off at fire sale prices. You sent a warship to pick up the last of the UK,s gold from South Africa 50 million pounds worth. By the way why do you think you had 60% of the worlds Gold reserves at the end of the war could some of that have come from the Bank of Englands Gold reserves that were shipped over too the Sun life Assurance building in Toronto you bet they were. By the way Lend lease was a two way street. Lend lease was very much a division of labour you did what you did best and we did what we did best. You built and paid for the ships and the guns, we paid for the barracks built the airfield for the American Airforce in England and on the continent you were building up your productive capital capacity we were consuming ours. In fact in the lend lease act machine tools were not on the list we had to pay for them cash. Do you know how much of your GNP went to Lend lease 1% do you know what percentage of our GNP went on Lend lease 15%. Did you know that Lend lease ended the day Japan surrendered and America demanded dollars in payment. We had to arrange a loan from you to get us over the next couple of years. I wont embarrass you by going into a few more details but I would like to know what we were doing paying off the last payment of the war loans in Sept, 2007 if America had been so generous and forgiving
I always thought we used those oceans to great effect that time--some of the same oceans Union Jack flagged enterprise had been using to milk the globe for a goodly time up to WWI. We just went and took the surplus milk you had warehoused as bricks of cheese (your choice was give it to us to Hitler)...too damn bad we squandered it. Don't recall your royal family gave up its extensive US holdings in the deal though.
'Neighbor, my garden hose cost me $15; you have to pay me $15 for it' …I don't want $15 — I want my garden hose back after the fire is over."--FDR
“There can be no reasoning with incendiary bombs.”--FDR
http://en.wikipedia.org/wiki/Lend-Lease
The first US aid(1940) was trading WWI 'Destroyers for Bases'(99 year leases--most bases were vacated by 1949) in Newfoundland,Bermuda and the Caribbean.
http://en.wikipedia.org/wiki/Destroyers_for_Bases_Agreement
http://en.wikipedia.org/wiki/Anglo-American_loan
So overall the loan principal of $31.4 x 10% + 4.3 billion was forgiven and just the 2% interest rate was paid totalling ~$7.5 billion in 2006.
A 2% 60 year loan for $7.5 billion would amount to ~$12.7 billion of principal and interest. That suggests that the principal of $4.3 billion Anglo-American 1946 loan was forgiven and the UK $7.5 was interest only on the post-war loan.
The Lend Lease was basically free but the interest on the Anglo American loan was not.
Nobody(except pro-Nazis)regrets collecting the UK war debt as Britain and Russia stood up to Hitler.
"Without American production the United Nations could never have won the war."- Josef Stalin
What bugs me in there is that instead of getting into it equally as eg. Canada and Australia, from the start, the US just sat back and waited. From here, it looked like the US elites thought it was a good idea to let its main rival for world domination at the time, Britain, ruin itself economically first before getting fully involved itself. If the US had gone to a full war footing at the start, like Canada, a) Japan would never have gotten into it (seemed possible to catch US sleeping at Pearl, but would never have made sense if US were fully mobilized. The Japanese dove politicians would have over-ridden the militarist generals). b) The German submarines could never have damaged Britain's supply system so badly if the US were in there from the start. c) Britain (and to a lesser extent Canada) wouldn't have come out of the much shorter war broke, and likely Germany would never have even involved Russia. The risk of the turn east would have been far too high with the US in from the start. Was Germany destroying Russia part of the plan? Probably, but we'll never get documentation.
And don't give me that "pacifist" crap. That was simply whipped up by the oligarchy to suit their ends. The US citizen has never demonstrated any tendancy to pacificism, before or since.
Was Germany destroying Russia part of the plan?
I'd say there's little question. For instance, Hitler was anti-semitic because he perceived jews as socialist, and allied with communism. The US wasn't going to get in early and prevent Germany attacking Russia - that would have ruined quite a lot of careful planning.
Japanese dove politicians
??
Maybe, just maybe the Emperor could have stopped it, but Japan was fully committed to it's "economic sphere" which include it's invasion of China, and the US was fully committed to stopping it - a war seems inevitable.
The US citizen has never demonstrated any tendancy to pacificism, before or since.
It's shown a very strong opposition to being cannon fodder. It's always been necessary to make the US look like the victim to whip up popular support, while making victory look like a cakewalk.
I think you are off base. There was no way anyone in the US could have expected that the Germans would have whipped the British so badly in 1940. Hitler was seen as an annoying joke for the Europeans to sort out. The US was still in economic doldrums. No one was thinking, "hey, lets wait this out and Britain and France, and maybe Russia, will be ruined and the US will rule the world." Not seriously. It took the attack on Pearl Harbor to shock the US into responding forcefully. It was only 18 about months from Dunkirk to Pearl Harbor. It was a relatively fast involvement in the war, all things considered. WWI took 3 years.
Australian and Canadian mobilization is not surprising given that their head of state is the Monarch of England.
And if you want to talk about revisionist history, if the British and French had been more generous at Versailles, Hitler never would have risen to power.
Canadian mobilization was definitely not automatic, simply because of a figurehead monarch. Canada won the right to make such decisions alone in WWI, and guarded it jealously. The (then) 33% french Canadian population was rabidly against mobilization, fearing another conscription as that which nearly destroyed Canada in WWI, no sympathy for France among them then, as well as being heavily influenced by the Catholic church based in Axis Italy, strongly anti-semitic, and much more prone to neutrality and more influential in Canada than any relative American constituency.
No, the US "chose" to sit that one out.
simplified:
the argument has some merit which is why we will never truly see a global peak as opposed to a localised one at least thats my WAG
hence plateau
which has been noted by a fair few posters here and elsewhere but not couched in these terms.
of course there needs to be a underlying geological constraint or conditions which help this mindset along... ie we have to be at the margins somewhat
In Saudi Arabia, there are the King's words, the acts of Saudi Aramco, and the extent of their oil resource. There is some relation between these, but perhaps not as much as some think.
One thing not mentioned is that Saudis are torn between the possibility that they are selling their oil (or inheritance) on the cheap, and the possibility that they might not sell it all before some other energy resource comes along to supplant it (or the unlikely case or a collective decision to stop burning it). So the message to the royal's subjects is "don't worry about our spending habits, we have plenty of oil left". They want the rest of the world to believe that too, but have to temper that enough so that we don't get upset with them not producing oil sufficiently fast to keep the price down. Hence their pronouncements during the price run-up a few years ago that they had no buyers.
Whatever their true reserves numbers are, the bulk of them are in depleted fields and the remaining are in scattered smaller fields that are much harder for a bloated entity like SA to deal with. But as long as everybody focuses on the stated total reserves figure, the kingdom reigns.
Don't forget the bolded bits.
The "value" of gold in the modern world has long puzzled me. I can see its uses in mideaval Europe, where a trader needed a compact portable means of carrying value on trading expeditions. But that "value" was effectively obsoleted by the Templars, who offered in stead "letters of credit" which (for a margin) could be purchased on one city-state and redeemed in another. The proposition was so lucrative that princes of church and state willingly resorted to drastic inhumanities against the Templars to gain control of it. Gold's only advantage over diamonds for the same purpose was the low cost of the expertise needed to establish its authenticity, again, an advantage which it has largely lost in the modern world.
Gold's only absolute value in the modern world is its scarcity and relative uselessness. However, the graph above would appear to somewhat contradict the scarcity concept. It seems to me that a far more usefull means of storing value would be reliably productive farmland, a commodity which cannot be readily increased and which has far greater import. Gold may increase in value only as long as the wealthy have a perceived need for storing surplus value, but when it comes down to who eats and who doesn't in a world where food (or other basic means of survival) is short, its value is zero. Who would trade a secure fortress in a world of literal cut-throats for any amount of gold or certificates claiming centrally stored gold?
Is the increase in the "price" of gold (above the rate of deflation of the $US in which it is quoted) simply a measure of the relative proportion of the world economy controlled by the most wealthy few? Those with "surplus wealth"? I suspect so, and for them, I suspect that the MENA (Middle East North Africa) uprisings MAY portend a radical re-arrangement.
The "value" of gold in the modern world has long puzzled me.
It is a currency. A currency does not have intrinsic value but is a medium of exchange. Gold is better than paper currencies because its supply cannot be increased at will. The other advantage is that there is no risk of counter party default if you are holding physical gold. All paper assets are vulnerable to counter party default. Value of gold will never go to 0. All fiat currencies eventually go to zero. The US $ has already lost most of its value since 1913 when the Federal Reserve was created.
The disadvantage of gold is that it does not pay interest. So it only makes sense to invest in gold when real interest rates are negative.
But that "value" was effectively obsoleted by the Templars, who offered in stead "letters of credit" which (for a margin) could be purchased on one city-state and redeemed in another.
And those letters of credit were backed by what?
It seems to me that a far more usefull means of storing value would be reliably productive farmland, a commodity which cannot be readily increased and which has far greater import.
Yes, but farmland is not currency. You are not going to sell a small chunk of your farmland to pay college tuition or buy a car. Also, it is not portable and not everyone has the skills or temperament to do farming.
I agree with all you say, yet can find no realistic value for gold today in Canada. Am I wrong?
That depends on what the real (above inflation) interest rates are in Canada and how worried you are about C$ debasement. If the real interest rates are zero or negative I would buy some physical gold and gold & silver mining stocks.
Something we learn early in Canada is that decisions made in Canada have zero effect on the world stage. The inflation rate in Canada has no effect on the world price of gold or silver. It's a unique perspective that I think American cousins should start to take a lesson from.
Something we learn early in Canada is that decisions made in Canada have zero effect on the world stage. The inflation rate in Canada has no effect on the world price of gold or silver.
It has an effect on the price of gold or silver when measured in Canadian dollars.
Suppose you had a lot of gold.
Could you print money backed by your gold?
No, because it is illegal.
Gold is bought by speculators on the false theory that governments will need to buy gold to back their currencies.
Believers in this weird theory buy gold on speculation and are known as goldbugs.
Suppose you had a lot of gold.
Could you print money backed by your gold?
No, but I could trade it for $ and then use the $ to buy what I want. There has been a market for gold for the last 7000 years. So it is a reasonable assumption that there will always be a market for gold barring a wide spread catastrophe like nuclear war. In case of a wide spread catastrophe paper assets are not going to be of help anyway.
China, now the world's biggest gold producer, is buying massive amounts of gold. A week or so back, UBS published a report saying China imported 200 metric tonnes of gold in the first two months of this year, which suggests an astonishing and bullish restructuring of the physical market.
China understands that peak oil and climate change will mean that debt will never be repaid, that dollars are becoming funny money, and that they need to trade their piggy bank of funny money for in-ground resources like mines, oil supply contracts, farmland, gold, silver and other real assets.
This is a huge move going on right now in the world, yet many are ignorant of it.
China, now the world's biggest gold producer, is buying massive amounts of gold.
And the Royal Canadian Mint is fully prepared to sell Chinese consumers as much gold as they want to buy:
$150 Pure Gold Coin - Blessings of Strength (2010)
It's all about money, you know.
Could you print money backed by your gold? No, because it is illegal.
Maybe in your country it is. Your mileage may differ from our kilometrage.
22-Karat Gold Coin - SS Beaver (2011) $200 Canadian dollar gold coin.
(Your price approximately $1,071.47 USD - buy now while the US dollar is still worth something.)
If real interest rates were positive do you realize what would happen for:
1. The federal government (currently running a trillion and a half budget deficit)
2. The banking industry
3. The housing market
Catastrophe for all three. So positive real interest rates are not going to happen.
I understand. That is why we will have Quantitative Easing to infinity and hence the investment in gold.
Is it true that gold originates in the cores of stars? The concept is fascinating, but I haven't been able to find a good reference that describes it.
Cheers,
Jerry
All elements other than Hydrogen originate in the core of stars.
Right, but somewhere I thought I saw a blurb that said gold, being somewhat unusual with an odd number of protons, could only be formed in the kinds of heat and pressure found in a supernova, or the collision between neutron stars.
Cheers,
Jerry
I think your rule (could only be formed in the kinds of heat and pressure found in a supernova) applies to every element above iron in the periodic table.
That's interesting, do you have a reference?
I'm certainly no expert, but my understanding is that the heavier elements can form in the cores of stars because there is some sort of an "affinity" for even numbers of protons. Gold with 79 protons is something of an exception, therefore requiring exceptional circumstances.
I was just wondering if anyone has some good links, all I've been able to find are some anecdotal blurbs.
Cheers,
Jerry
Fusion gives off energy when lighter atoms combine to form heavier atoms. This process continues until eventually iron atoms are produced. When atoms heavier than iron are formed (by combining lighter atoms) energy is absorbed rather than radiated.
Try:
General
http://en.wikipedia.org/wiki/Stellar_nucleosynthesis
http://helios.gsfc.nasa.gov/nucleo.html#nucactys
Gold
http://apod.nasa.gov/apod/ap010405.html
Happy exploring!
I think you will find that after the big bang approximately 75% was hydrogen approximately 25% helium and bit of Lithium. Fred Hoyle did most of the work on nuclear synthesis in the early 50s, the greatest scientist not to get a Nobel prize. Not that they are worth much now well at least the peace prize first they give it to a group of terrorist Arafat Begin a Sadat which is bad enough and then they give it too a somebody on the strength of what he might do, it just shows the weak limp wishful thinking of the committee. The worlds gone mad.
Big Bang Nucleosynthesis or BBN produced Deuterium, isotopes of Helium and minute traces of Lithium and Beryllium. Basically 75:25 H:He, with 0.01% D...
The relative ratios place fairly strong constraints on the nature of the early universe....
Hmmm...
Well, either I must be the "dense" element here, or no one has given me a straight answer. Thanks all the same, but I guess it really doesn't, um, "matter".
Cheers,
Jerry
As someone who owns some gold stocks, Hotelling's theory strikes me as something that just doesn't represent the way mining companies think.
They way they actually decide whether to go into production on a deposit is, they do an economic analysis that shows whether by mining the deposit they can make a profit margin that is considered by the investment community to be attractive.
If they ever explicitly discuss considering the tradeoff of keeping the minerals in the ground, that would be an extremely rare thing to see. For one thing I think they feel they are sticking their necks out far enough to begin with to guesstimate what the price of the commodity will be over the period the mine will be running (typically 10 years or so), as well as costs of production such as the petroleum to fuel the mining trucks. Who can possibly guess at what those would be 20 or 30 years in the future?
And a point one person made I think is highly relevant as well, mining is what these guys do for a living, if they have a deposit that they can project will be profitable then they will mine it.
In a deep slump in commodities prices no doubt many prospective mines are shelved to the indefinite future, but because the economic analysis shows that under current market conditions they would be unprofitable.
I think if gold prices were the only factor, we would be seeing a substantial acceleration of gold production right now. But, peak gold gets in the way. The low hanging fruit has been picked and the deposits which remain to develop require far more capital expense and operating costs, so that there is not suddenly a big glut of highly profitable gold mine development opportunities out there despite the big runup in gold prices this decade. And one important point is that oil is a major cost factor in mining. I in fact avoid investing in companies that own low grade gold deposits partly because they could find themselves chasing their own tail, as gold prices rise but oil rises as fast or faster, the rising price of gold doesn't necessarily make their prospective mine any more profitable. Plus, there is the nice bonus that in my opinion mines that are questionable economically tend to be the ones that are most questionable ecologically as well. It is absurd to be using large quantities of precious fossil fuels to mine a metal whose only value is that it is a less ridiculous form of money than paper money. Even the high grade gold mines share that absurdity but at least they do so to a much lesser degree.
I think there is a significant difference between those who invest in gold mining operations, v.s. those who invest in actual physical gold or its proxies. By investing in mining companies, you are investing in an industrial process on the HOPE that the other sort of investor will stay in the market. That makes clear sense. What puzzles me is the other sort of investor, who buys actual gold. I can see it possibly in India, (where about 1/3 of the world's gold is sold) since their alternatives have in the past been quite prone to deliberately "taking the money and running", but that explanation seems to me to not apply worldwide. It seems to me that for an OECD investor buying gold is making a bet that in the OECD will implode economically at a pace faster than the storage and insurance costs of gold increase, IMHO a sucker bet. Of course, the view from Canada may differ from yours..
Hotelling's theory strikes me as something that just doesn't represent the way mining companies think
companies are not capable of thought. Of course individuals who do the company's thinking (board members) could be accumulating all the gold produced at low prices they can fit into their own portfolios. It would certainly be to their own personal advantages to have the company sell it to them on the cheap wouldn't it.
perhaps it doesn't matter what people actually think rather a concatenation of effects between geology, geopolitics and the market produces the same "keep it in the ground" effect.
broadly speaking I think that is story with C+C
when you try to look at the detail or categorize the mindset you end up holding the tail of the elephant and think you have a snake?
there are a multitude of forces keeping resources in the ground... and this is one of them
The natural turn of events will be storage of capital into other metals.
The system will maximize financial storage entropy (to coin a concept) in silver, Pd, Pt, et al. down to high grades of copper, rare earths, tin nickel and so forth.
There will be a shock with Gold clearly if supplies cannot match demand, but then pressure will come down on the other metals.
In thermodynamic systems, one could give each type of metal or commodity an energy level and the system heavily favors gold, but perhaps over time other energy levels (metals) will be more heavily invested to so that investors can continue to store capital.
Hope that makes sense. I think this is already happening.
Some metals have a lot of utility too so conversion to money may make more sense for rare earths for example.
There is a lot of economic jargon in the article and posts that really obscure the issue (a prime goal of academics who want us to think they know more than the average adult).
The reason gold is dug up and sold is the same reason any other natural resources are used - they (the person or corporation converting the resource to a salable commodity) want to be able to convert the resource to something that can serve as spendable wealth NOW. As Keynes so insightfully put it, we are all dead in the long run.
Of course, we now get back to the overall basis of capitalism as it relates to resource use - use as much as possible to make oneself and associated people comfortable and rich until the the whole pyramid scheme falls apart and poisons all the humans and many animals and plants on the planet.
The primary goal of people that try to malign academics is what again? Oh, there is no goal. Maybe you feel better afterwards I presume.
We are trying to understand the world. Are you saying you know more than others so discount everyone else by fiat? LMAO
It is best to talk about concepts rather than target whole groups of well-intentioned people with pejoratives.
I don't think exergy even follows the law of supply and demand. I am mulling over writting an article on the topic.
Re: Majorian's comment
"In reality things are different--countries go to war over energy but I doubt any countries would invade another over money. It would be ridiculously illogical--the creditor action has to result in the debtor more capable to paying off his debt. After WW2 the US gave Europe billions and much of it like UKs war debt was forgiven.
An exception might be the French occupation of the Ruhr in 1923 and even then they demanded WWI reparations in coal. The exercise resulted in a nation-wide campaign of passive resistance and an eventual French retreat."
Actually France demanded coal because Germany had intentionally inflated its currency making it virtually worthless. coal was a substitute for money. Spain's efforts and wars for an empire were largely about gold and silver. Spain got briefly wealthy then suffered from the hangover until the present. Most wars for plunder, the predominant motivation for pre-modern wars, were about trade goods and particularly gold and silver.
As for illogical - I think you mean reasonable. And what suggests that the actions of states or individuals making war are ever reasonable.
No. Germany refused to pay its war debt(some of it was assessed in timber) and France seized the Ruhr.
http://en.wikipedia.org/wiki/Occupation_of_the_Ruhr
Your theory about Spain going to wars to secure gold and silver
is unreasonable.
Mexico(1519) was conquered by 1521 and Peru conquered by 1549.
The Spanish used their American gold and silver to back a 100 year crusade to stamp out heretics, which turned out to be a total bust as an investment.
There was almost no gold in Europe. There were large silver mines in Saxony but they were largely exhausted before 1550.
http://mygeologypage.ucdavis.edu/cowen/~gel115/115ch7.html
Gregor cites USGS dataseries 140 as the source for the gold production plot. That dataseries also contains inflation-adjusted, annual prices which, when superimposed, enhance the storytelling possibilities.
Here is one presentation of the gold data from the US Minerals databrowser:
In Hoteling's view, periods of rising price and declining supply such as 2000-2008 should be expected if we posit "rational producers". But the other periods of falling gold production are not so easily explained.
Positing that some hypothetical producers act "rationally" also assumes that "rational" = "maximization of profit". This may be axiomatic for economists like Hoteling but is not true for everyone. Even if we allow that assumption to go unquestioned, my read of history is that the aggregate behavior of humans is anything but rational with respect to money or anything else.
But we don't need to guess and pontificate about the Hoteling hypothesis (i.e. resource hoarding) -- we have the data to see how often periods of declining production exist in the real-world, historical record.
Another chart type in the US Minerals databrowser plots production vs price, allowing us to see immediately those occasions when Hoteling's proposition might be in effect. In the plots below, the following movements can be seen:
The Hoteling scenario is #4 and, after one looks through historical data for a bunch of mineral commodities, is only seen in gold. (Sadly, this USGS dataset does not include fossil fuels.)
So Hoteling's proposition isn't even really testable at the global scale as there have been so few cases where production has declined globally. Yes, there may be a few individual "rational producers" who leave their commodity in the ground. But the aggregate behavior is generally to produce, produce, produce. (A theory that has been around since 1931 but is still not testable is, IMHO, not that useful.)
Occam's razor would suggest that we're going to have to look to other above- and below-ground factors to explain any decline in the production of gold, oil, potash or any other extractable resources.
Best hopes for more looking at data and less theorizing.
Jon
Given that aluminum production is almost entirely energy, (> 1/2 the cost of production of a ton of aluminum is electricity input, another significant fraction is carbon anodes comprised of petcoke + coal tar both of which are diverted from electricity generation, it would be safe to take the aluminum curve as an electrical energy curve.
So are copper and gold and potash feeling oil price pressure, where the degree of cost increase is related to the amount of fuel required to mine and process the ore?
Everything may re-adjust to reflect the commodities "true" value in terms of oil.
Of course Potash and Copper may be under heavy demand pressure too.
A very complex process for sure and no simple model could explain these crazy trajectories and their seemingly simultaneous upticks.
It smells intuitively like an underlying variable is pushing many commodities up together in synchrony.
Perhaps it is oil price spikes; maybe population/economic growth. (Which came first?)
The short answer is probably "No", at least for the data being presented. There are plenty of supply/demand/speculation reasons why prices went up that are probably much more important than the cost of fuel used in mining. Fuel costs will of course contribute but they are rarely the primary cause IMHO. (This may change going forward.)
I should also have mentioned in that these data end with the full year 2008. The dataseries has not be updated since. So the upticks we see in the very last point represent what happened in 2008, not 2010.
Still, I think this kind of presentation can help us better understand the connection between price and production quantities. I would like to see more people take a look at price/production curves.
It was reported in the UK farming press at the time, I was told, that the sudden rise in potash fertilizer price was because of US ethanol production. The sudden taking in of previous US set-aside land (previously subsidized not to be farmed)was anticipated by American traders who then secured a large enough part of world potash production. It took a while for potash mining to increase to meet demand. (It occurs to me to wonder whether potash producers were cautious about expanding production for a sudden increase in demand that might not be fully sustained over subsequent years?)
Say what you will about gold, ....
....its value depends on your timeline.
Both the production and price evolution charts seem to be saying that gold has peaked. Am I reading the data correctly?
Cheers,
Jerry
Yes.
Upon further investigation one learns that ore qualities are headed down at the same time that extraction costs are going up. We almost certainly have passed "Peak Gold".
Jon
I believe peak oil also affects other resources "peaks", as many times you can consider some low quality or very deep ore econmical (or not) depending on energy prices. Thus, if you had free fusion power you could just "blast that damn mountain away", melt it all in a huge furnace and take whatever ore you needed from the very bottom of it. while if you just had very expensive oil to power your mining equipment, you will probably just be able to scratch it a little before it becomes too expensive to continue.
I would hope to see fewer one-liners that add nothing to our understanding.
Face it, we have seen zero (0) theorizing when it comes to resource depletion issues. Show me one theory that assumes a statistical distribution of finite resources and a statistical rate of resource extraction worked out to any degree. I don't think you can. (well maybe one) So the fact that you ask for less theorizing makes no sense.
I think what you mean is that you want to see less pontificating by those that lack the motivation to do any of the hard work of formulating a statement of the economics and geological problems.
WHT,
I'm all for theorizing as long as it has to do with measurable phenomena and people actually test their theories by comparing the results with facts on the ground. Your work is a shining example of this and no insult was intended.
I'll rephrase my one-liner as: "I wish more people would test their theories against available data."
It still doesn't add anything to our understanding but a guy gets to have an opinion now and then. ;-)
Best regards,
Jon
Jon, And you set me up well because my jab is really intended at the entire oil establishment (industry plus academia) that has largely overlooked any of this analysis.
So when it comes to the fake analysis from the mainstream media, all we see is stuff like the GasBuddy who ends up reading the tea-leaves off of pump prices. The GasBuddy is purely data-driven and people end up following the ebb and flow of what amounts to noise.
Doesn't an anlysis of this sort need to factor in the very long lead times for expanding production?
Declining supply during a period of rising prices could be explained by underinvestment during a previous period of low prices.
Yes, this would certainly be appropriate. The only problem is determining what lead time to use for which mineral and to take into account changing lead times as a function of time. It quickly gets rather complex. In the plots above we've elected to "keep it simple".
In a comprehensive tool like the US Minerals databrowser the proper approach might be to include another plot type that lets users pick a lead time when they generate their plots. Then knowledgeable people could dial in the lead time they think is important for their mineral of interest. Interesting possibility.
Jon
Jon:
Re: decreasing ore grade – increasing costs
I had lunch recently with a South African mining CFO who told me that their cost of production was falling because they are processing tailings rather than virgin ore.
(Their) virgin ore has about 8gm/ton and after the first pass of processing there is about 2gm/ton left. As mining costs have increased - digging mineshafts is very expensive - they are now using a another process (not heap leaching, that is old technology) to process the tailings down to 0.8gm/ton. It is a relatively slow process but they have huge quantities of tailings.
Rgds
WeekendPeak
Something has changed in how money is regarded and used. An observation I made recently on DrumBeat:
Currency is increasingly being used for transactions only, otherwise wealth is stored in assets that are not connected to a currencies value. It seems "hotelling" is a natural way to conserve wealth that is being used by many people in many different ways. It is only when looking through an economic lens that it seems odd, in the natural world it is intuitive. Anyone who thinks the current economic system is broken and infected by a cancerous financial elite understands this and the necessity to keep their wealth out of the oligarchs corrupted system.
Currency is increasingly being used for transactions only, otherwise wealth is stored in assets that are not connected to a currencies value.
could you give me a few for instances
Nate
great post
I thought you were a bit of a ne'er do well - but I was wrong
(hows that for a backhanded compliment!)
I have been a member her for 4 years and 31 weeks. Far longer than most of the spring chickens posting here. A donkey lives a long time. None of you has seen a dead donkey. (with apologies to Animal Farm)
Hotelling is a red herring in the piece. The issue is resources as the mainspring of the economy. (Read The Great Wave)
Also the definition of money: I was always hamstrung by the 3 traditional bromides. Then i saw a quote by JP Morgan:
Mr. Morgan. Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.
Mr. Untermyer. Do you not know that the basis or banking all over the world is credit rather than gold?
Mr. Morgan. It is the basis of credit, but it is not the basis of money.
This is the key point: what creates money? what creates value?
Oil creates value
I clearly recall my parent's impressions of the 1930's. Are you that old? Quotes of JP Morgan's opinions of gold are like discussions of the relative efficiencies of freezers to the Inuit, curious but meaningless. And in the end, offensive? Perhaps an extension of that further curiosity of American thinking, e.g. that 50% of Americans (all republican voters) are among the top 1% of american income earners, or soon will be. Wierd.
Hey everyone,
So I know this has been debated before on the site, but one thing still doesn't make sense to me with regards to speculators in the market. So, if oil is at $105 today and gets driven to $115 by speculators during the month then we know that the spot price will be the level that the longs and shorts eventually settle at. In other words, someone ends up agreeing to take delivery of the physical after the speculators settle their bets and leave the market. But can't the speculators drive up the price and alter the level at which physical delivery is ultimately agreed upon? I know that the final price on settlement is the real price. There is no disputing that, but if he price is $105 at the beginning of the month and speculators jam it higher and force the physical delivery price higher then isn't that contributing to the problem?
Thanks in advance.
Ah – the speculators rear their head once again.
I assume that by speculators you mean people who buy futures? Well, for every futures contract bought one futures contract is sold. A speculator cannot buy a contract unless somebody else sells it. The net outstanding number of futures contracts (adding all the long positions and the short positions) is always zero.
To be sure, it is possible that a (long) futures contract is held to delivery and actually receives oil (in the case of WTI at a predesignated terminal in Cushing, OK).
However, to the best of my knowledge if you want to get delivery you have to be registered as a “hedger” rather than a “speculator”. If you simply open a futures account with your friendly neighbor commodity broker you’ll have a “speculator” designated account, and if you hold the contract (assuming you’re long) to delivery you will be closed out financially rather than physically.
That said, the amount of actual WTI produced is probably in the 300k – 400k bbls/day with perhaps 1.5 – 3mm bbl of total deliverable grades into the contract. Daily contract volume in WTI (CME+ICE) is in the 600k – 900k range, so at 1000bbl/contract that is 600 to 900 million barrels per day / 18 billion – 27 billion barrels per month with only one monthly physical settlement.
You decide how much influence speculators are likely to have – IMHO probably not very much but hey, what do I know.
Rgds
WeekendPeak
Thanks Weekend. I don't think you're entirely understanding my question. I trade futures so I guess I am one of these "speculators". I am able to go into the market and move the price if I really want to. For instance, in the overnight market it's rather easy to take out the asking prices and move prices. If there was an environment where inflation were expected to be quite high and supply was at risk of being removed from the markets (sound familiar?) it's not unreasonable to expect that the sells in the futures markets would fall off the board and the speculators would drive the price higher in an attempt to gain from this potential future price increase. So, for 29.99 days we have a whole bunch of people gambling over the price and forcing is higher or lower. Of course, on day 29.99 the gamblers all are out and we end up at a settlement price, but who is to say that this settlement price isn't entirely manipulated by the gamblers?
It's kind of like the housing market in 2005-2007. Speculators jammed the market prices higher. Were those price "real"? Yes. But were they in-line with underlying fundamentals? Not necessarily. We keep hearing that there is plenty of oil out there right now, but prices are surging....It all sounds too familiar.
I understand the technical argument that speculators play a small role, but I wonder if their gambling isn't adding a significantly larger premium to prices than most assume....
There is a big difference between futures trading and housing speculation. In futures speculation there is a very large ratio of bets placed versus settlements – a ratio of probably the 0.01% range.
In the housing market most bets placed were settled. Although sometimes a person would buy a condo and flip it before taking possession it was as far as I know the exception, not the rule. My guess is that the ratio of bets placed versus deliveries was probably in the 99%+ range.
The way to come to any real conclusions would be to look at actual delivery prices of crude versus the relevant futures prices on those delivery dates.
I would not know where to get that data…
Rgds
WP
Yeah, I understand the settlement point. But if the price is 100 today and gets driven up to 120 over the course of the month and all deliveries are settled at that 120 price then how can you confidently say that the 20 dollar price change was not at all due to speculation? I know that speculators might be driving the trading action, but how can you say that speculators aren't just forcing the new price change on those delivering?
I suggest you read up on game theory. One aspect of game theory is that when someone naively suggests that "I am able to go into the market and move the price if I really want to", someone else can make a claim to cancel that effect, and the result is that no one knows which way it will go.
Only settlements relating to futures contracts will be done at 120 - and that is only a few million barrels at most.
Crude sellers like Saudi Petroleum International, the Aramco trading arm, enter into contracts all the time (not just at the futures settlement date) and although they obviously will look at futures prices as a reference point it is likely not the price at which actual transactions settle.
First the crude will be assayed a number of times (tested for a number of variables such as organic chlorides, metals,, KOH, pour point etc). The details matter because the buyer (let's assume it is a refiner) has know the details in order for them to have a fair guess of the yield they get from a particular cargo, and therefor the price they can pay. Different runs from the same oil field can actually have slightly different properties, and therefore value (or lack thereof).Once the exact composition fo the cargo is determined hey will look at a reference basket of like crudes and then negotiate with the buyer as to price and loading date.
Additionally, every futures contract has a buyer and a seller - it is after all a zero sum game - and unless you can somehow determine whether the buyer or the seller is running the prices making any determination as to who is driving prices up/down is probably virtually impossible.
Rgds
WeekendPeak
Zero-sum game = a type of behavior outlined by game theory.
http://en.wikipedia.org/wiki/Game_theory#Zero-sum_and_non-zero-sum
The best you can do with game theory is enumerate all the states and let entropy or chance navigate through the trajectory. It turns into an exercise in probability and random walk, pretty much useless for making any money because everyone else has essentially the same tools at their disposal. Relatively easy to model the statistics though.
This is a great addition to TOD material. I've often wondered, just to myself, why we don't weight the value of the value of oil-in-ground very much. Of course, the reality is that we do to some degree, but there are also some real world non-idealities that I feel like could have had more addressing in the article
It's been sufficiently mentioned that a company's ROI shifts the equation toward near-term production, and inter-generational equity shifts it in the other direction. It's pretty clear that ROI is winning the battle in today's world. There is also the *fear* that alternative energies could pan out, or even the rational concept of a large national gas tax could be implemented. Either way, if you own an oil deposit, someone else just ate you lunch. Of course, this idea is preposterous to any informed about oil issues, and the opposite is quite likely true, meaning that the value of oil can shoot to the moon and people will sacrifice just about everything else they have of economic value to get it.
This may follow a hyperbolic decline (see The Oil Conundrum), which also mimics the hyperbolic discounting and hyperbolic reserve growth.
So the reservoir engineers are careful not to "overdraw" the source. That also plays a larger role than the Hotelling value of keeping it in the ground for conventional discounting purposes. They essentially want to get the maximum volume out.
Yes, the reservoir engineers manage the draw rate so that they minimize the amount that gets left in there, unrecoverable. But that doesn't paint the complete picture, the minimize it against what. In pretty much any case, drawing at a faster rate will reduce the total amount recoverable, so it's not about overdrawing or not overdrawing, although I recognize that at certain rates there could be a quick falloff, I don't know, I'm not a petroleum engineer.
The reservoir engineers only provide one side of the equation and then a business decision is made weighing that against other pressures that demand near-term revenue. Or at least this is how I assume the process works.
For the majority of oil extraction history prospectors pulled it out as fast as they could. So lots of that oil was basically squandered until relatively recently. This has changed as the oil has become that much more valuable.
Reply to theanphibian:
The gold miners do something similar. South African deep gold mines usually have access to several reefs at different levels. Some are richer than others. When gold prices are high they mine the poorer grades, and keep the higher grades for when gold prices are low. The effect is to maximize the total amount of gold mined.
Of course, we are talking of professional management and shareholders with a long-term view.
Someone might inherit a mine, or a rebel force might take one over, and decide to maximize short-term cash flow because they don't expect to be around for the long term, in which case they'd mine the best grades first.
Peak Gold, Peak Oil, and Peak Food are all connected to Peak Population.
When we reach equilibrium again prices will settle back some.
Right now, there are too many people and too little resources to maintain supply.
Its like 1,000 people in one local fast food restaurant trying to get thru it at the same time....
This is a bit off topic but to me very welcome news:
Sumitomo Corp and Kyoto University have jointly come up with a new sodium-based molten salt battery which is claimed to have twice the energy density of Lithium-ion batteries, at only 10% the material cost. They hope to bring it to market in 2015.
Molten salt battery technology has been around for decades, however a key constraint was the requirement of a high operating temperature, of around 300ºC and above. The new battery has a melting point of just 57ºC, and an operating temperature of 80ºC.
Piece of Cake!
Might be better in Drumbeat? A link:
http://www.ytwhw.com/2011/0304/New-Sumitomo-Electric-Battery-90-Cheaper-...
It's true, The Hotelling Moment has not yet arrived in any measurable way and there's strong indications, given human and cultural behavior, that it never will. Resource producers are more likely to mindlessly parrot each other's behavior; panic-sell their oil or hoard their oil based on fears; or simply become deeply dysfunctional in their resource management, than they are to start rationally maximizing for future investment risk. In other words, they are more often simply liquidators of their domestic resources. From a political standpoint, they likely care more about how to distribute proceeds among constituencies.
And yet, it's still worth pondering the risk that either producers begin to view their own resources very differently, or, that they begin to view paper currency differently. Indeed, it may not be Hotelling that will explain ultimately resource conservation, but rather, simply a growing awareness of paper currency's depleting value. If the rate at which paper currency loses purchasing power against the tools, labor, technology, and energy required to extract energy, begins to accelerate then resource producers may at least try currency diversification.
Finally, I see no competition between data and theory as was briefly suggested in the thread. Let's have lots of both because modeling behavior is hard if nigh impossible. Why I think there's merit in Hotelling is that at least he recognizes the threshold aspect of behavior, and I believe we have indeed seen such threshold-crossing behavior on a selected basis once oil markets tightened the last decade. I cited the example of Brazil, in the essay. But I would also point to the emergent awareness that we saw this past decade when an array of actors--from Russia, to Venezuela, to MEND--discovered they could move oil prices more reliably from the margin.
I favor the view that geology is dominant but I also am keenly interested in what humans have done--and will do--when they become aware that geology is dominant.
Thanks for all the great comments.
Best,
G
Gregor,
This article looked at the production of gold. Isn't the overall inventory of gold the more interesting question?