The String Economy…
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 9, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
After five years of ‘The Great Financial Crisis’ there is a sense of relief as Christmas approaches. There is nervous talk by central bankers and economists, but also hope of ‘recovery’and a following new period of prosperity … tomorrow.
It’s always tomorrow: where this recovery is going to come from or what will drive it nobody really knows, It is just taken on faith that a recovery is certain to arrive because recoveries have always arrived in the past. “Why not?” the economists ask, “It’s never different this time!”
The sense of security is misleading and unsettling. We are like a person wearing a sweater with a thread caught on something, we are walking away … Pulling the string does not blow up the sweater or cause it to crash. The sweater diminishes without our being too much aware of it. There is little drama, only a Great Unraveling. Instead of a strong economy, we have a string economy, the pulling of which is invisible to economists.
(Unknown photographer) Fairy-tale palaces for the well-to-do in the Paris of the Midwest, on Alfred Street in Brush Park in Detroit in 1881. It was all a fantastic dream, a stage-set for Victorian manners and unimaginable prosperity without end, a gilded age, the product of the settlement of the far West, of the overreaching railroads and steamships … and of millions of highly skilled immigrants from Europe.
Brush Park was a psychedelic dream-scape of hundreds of extravagant, gilded mansions, with hundreds more throughout the city: not so much an idea but an escape from the necessity of having to think about anything at all. It was as if the prosperity wasn’t real but needed physical manifestations, each more outlandish than the next … to reassure those with the most that most was indeed what they had.
What the most have today is an irksome and uncertain non-crisis, a fake. Relief resides entirely in the form of central bank credit. These banks offer trillions in low-cost loans to both governments and the finance industry so that these establishments might dodge the consequences of the gigantic debts they have already taken on. There is no gilded palace on Alfred Street for this debt for it must squirreled away out of sight. Managers hope that ordinary citizens will ignore the creaking colossus until it is safe to set it loose again, debt giving rise to still more debt against a renewed backdrop of ‘growth’.
The only gain from the central bank lending/hiding strategy is a reduction of the interest cost and an escape from accountability. Both the reduction and the escape are temporary: the banking sector receives the benefits of interest reduction while the costs are shifted to the citizens. Escape keeps finance scoundrels out of jail until the statute of limitation expires. Nothing is done to reduce the overall debt burden, indeed nothing can be done! Modernity and industry both require a constant increase of debt and cannot tolerate any decrease. ‘Growth’ is a measure of the increase in debt and therefor a measure of wealth! Without the general increase of wealth it is impossible for tycoons to gain more beyond what they already have. In a debt-constrained world, one tycoon can only gain when other tycoons lose. It is a pitiless world indeed that sets one tycoon against the others.
Any increase in debt must take place in the private sector because wealth cannot exist unless it can be extracted at great pain from the citizens. This is because money, wealth and debt are all interchangeable claims against the non-tycoons’ vanishingly small allotment of time. A tycoon can always obtain more money but no human can gain more time: for wealth to have meaning it must be worth what is dear to everyone, not just tycoons! To be a tycoon is to have a great surplus of others’ time.
Debt repayments must therefor be extracted from the public, the higher the cost to the public the more useful/satisfying wealth is for the tycoon … being a sadistic libertine is a characteristic which enables an individual to become a tycoon in the first place.
Sadly, the private sector is unable to increase its supply of debt as there is already too much debt for ordinary economic activity to manage properly. Enter the central banks, which lend in the place of the private sector. Inflationists cry that this is horrible, like beating a dog with a curtain rod … Having the central banks or the government write checks to tycoons simply will not do, it’s bad manners, the payments do not represent wealth, in fact do not represent anything. The certainly do not represent anyone’s time.
This concern is misplaced for two reasons. One is because lending to tycoons is what central banks do constantly: lending-plus-sadism is how tycoons get to be that way. Second, because the absence of real money is considered to be temporary. With the loans offered by the central banks, there is certain to be more private sector credit made available … tomorrow.
There is no inflation because the central banks do not really replace the private sector, they only fake it. Whatever amounts of credit the central bank offers is less than what is retired or destroyed by private sector deleveraging. Even as the central banks’ expand their balance sheets, the private sectors’ balance sheets contract … without the efforts of the central banks there is no credit to be had with dire consequences all around!
The governments could issue currency without borrowing and use it to retire some of the debt. This would not add to the supply of money because retiring the debt would extinguish newly-issued currency at the same time. The governments so far have refused to do this. Bankers would object … as would the tycoons who desire to extract wealth from the workers’ bloodstreams, not from the government. The government could issue sufficient currency so that the supply of money expands enough for the tycoons to gain more of it. Having the government write checks to tycoons simply will not do, it’s bad manners, etcetera …
Meanwhile, the Establishment attempts to prop up key men everywhere around the world by any means necessary. Any institution that is deemed to be ‘systemically important’ is supported with the ordinary citizens’ credit … except for those things the same Establishment deems worthy of being blown up by drones or commandos. Non-key institutions such as Detroit and other American cities are abandoned to molder then collapse.
The citizens mutter, they are under a cloud that grows longer and darker with each pull of the string. Unemployment relentlessly increases, there are rumors of ‘austerity’ to be added onto the thermodynamic variety that emerges from diminished energy availability. The establishment has only one tactic: to add more debt, which has typically increased since the beginning of the industrial revolution. Debt has become non-productive, we have the unraveling sweater economy as a consequence … there needs to be another approach.
We are caught between what we want and what we need. We want it all, we feel entitled: we are like children. We cannot help ourselves. The yarn is pulled and the sweater becomes very small, the bottom is now at our armpits. We know there are steps that we must take … we must stop pulling the string … but we refuse to take them.
Alfred street in 1993 (Unknown photographer for City of Detroit). The house behind the car is the third house from the left in the top photo. Modern Detroit, a first-world slum:
Slums are a product of modernity just the same as automobiles and jet airplanes. They are economically segregated areas, places where society’s losers are swept. Modernity washes its hands of the slum-dwellers then moves onto other business … the creation of more slum dwellers. Slums are the end product of social Darwinism, the necessary ‘yin’ to business success ‘yang’.
More success = more slums. Failure of the process also = more slums. Modernity asserts that it eliminates poverty. Slums stand as evidence that modernity creates poverty. More modernity = more poverty.
As with Mumbai and Nairobi, so goes Detroit and other slum-cities, the product of- as well as destination for industrial prosperity.
Detroit was undone by the extraction of time from tens-of-millions of Americans by Detroit’s auto- and other business tycoons. At the end of the day, America had no time for Detroit. The stock market crash of 1929 and the following Depression ruined many of the old Detroit families. The manors were sold or divided into apartments or configured as rooming houses for auto workers. Others were demolished and replaced with cheaply built stores, shabby institutional buildings or parking lots. In 1935, the immense Brewster-Douglass public housing project for the ‘working poor’ was built at the far end of Alfred Street, just out of range of this photograph. War production saw the city filled with hundreds of thousands of job-seekers and factory workers who required housing. Many of these job-seekers were Negroes from the American south. Blacks were undesirables in nearly every Detroit neighborhood. As a consequence, housing was very expensive in neighborhoods where they were allowed to settle, much more so than for whites who could live anywhere in the city. Housing for blacks was also in far more advanced states of decay. Tension between races exploded in 1943 with a city-wide race riot that killed 34, with thousands arrested and soldiers patrolling the streets.
After the war, whites who could fled the city for the ballooning suburbs, a period of migration that lasted for decades. Cities are made and broken by flows of capital and human beings. Detroit originally grew and took form from the incoming tide of European immigrants who built in the manner and with the materials they were familiar. The craftsmen who built the fairy castles were replaced with unskilled agricultural workers looking to toil in the expanding automobile factories, these workers had no background or interest in city-building. They needed a paycheck, the city would take care of itself.
Instead, big business ‘took care’ of the city. Beginning in 1908 came the machines: the city was steadily made over as an auto habitat. It didn’t take much: Detroit’s street plan was laid out before the automobile — the width of the streets and boulevards and vast spaces anticipated it. The distances were too great for walking, often there was no ‘place’ to walk to. Starting in the 1950s and 60s, the city was divided by superhighways. the Chrysler and Edsel Ford freeways were built north and east of Brush Park, flattening the commercial districts and cutting off neighborhood from the rest of the city … by 1970, after another race riot, the Brush Park neighborhood was abandoned to street criminals and drug addicts. The fairy palaces grew furry and gray with rot, they collapsed or were demolished one at a time, the housing projects were also abandoned then stripped. Today there are a couple of dozen occupied houses in this neighborhood, the rest is weed-covered vacant space dotted with gaping ruins and some low-quality replacement housing and commercial buildings.
Not just Detroit: the machines overran neighborhoods and commercial districts in cities all over the country, this happens to be Buffalo, New York (Atlantic) James Howard Kunstler calls this the suicide of Midwest American cities, instead it is inadvertent suburbanization. The post-auto density and the form of building within the cities is identical to that of the surrounding suburbs. Replacement construction in places like Brush Park is identical to that of the suburb: quickly constructed low-rise apartment complexes or ‘pods’ of identical, cheaply designed and built vinyl-sided shacks.
Brush Park- Alfred Street by way of Google. It is only a matter of time before these ‘new’ buildings go the way of their predecessors. There is no reason for anyone to care about them, any more than they did for the housing projects or the fairy palaces.
Nothing in the Brush Park neighborhood or the rest of the city was made to withstand the test of time, the appeal of the place was narrowly immediate and instant. There was no ‘greater place’ that the original neighborhood could be an indispensable part of. Detroit was a collection of unrelated buildings and occupation districts. The Park was created as a ghetto, a place of confinement for rich people who had no choice but to look at each others’ wealth every day and become bored with it. The vast endeavor could never be re-purposed into anything other than a self-referential institution, the same as an insane asylum or a water tower. There was nothing transcendent, every building was a single-function enterprise, created to mandate/channel behavior.
No doubt there are many who could rebuild the entirety of Brush Park as it was … as a museum piece. The Federal government could certainly do it for the cost of one mile of urban freeway. The fashion impulse that made the place possible 140 years ago no longer exists. Americans have nothing in the way of tools that would give such a project form other than nostalgia and wonder over building and design skills that were common in the late-nineteenth century but no longer exist. We don’t know how to create engaging urban spaces and we don’t know how to inhabit them. We have forgotten how to be Victorian merchants. We know how to get in our cars and drive.
Which is why we cling to the immediate present so desperately, we really don’t know how to do anything else. For us to learn is too dangerous because we don’t have the luxury of time, it has been stolen by the tycoons! By the time … we find out what danger we are in it will be to late to do anything about it.
Waste Based Society V: The fallacy of cutting waste
Off the keyboard of Monsta666
Discuss this article at the Energy Table inside the Diner
A prevailing viewpoint we often encounter in the mainstream media is the view that our current society is very wasteful with its use of resources and if we were more efficient then we can live an equitable life with a tiny fraction of resources consumed. This view is so prominent that it is quite commonly supported even in the doom blogosphere. However this belief that we can transition to an efficient waste free society without large scale economic and social implications is a wrong one.
While the first statement is correct; we do indeed live in a wasteful society what follows next is not so achievable under our current economic system. What people need to understand when making such statements of cutting “waste” is that all people employed produce either goods or services. If we wish to cut on wasteful production then we must cut the total amount of goods/services produced and since labour is involved in this said production then in effect by cutting on waste we are also cutting on jobs. After all, one man’s waste is another man’s job. That extra hot dog the average overweight American consumes (and does not need) is providing a job to some J6P albeit a poor paying job. While this is just one example it can extend too many occupations in our society.
Now cutting on jobs may be a necessary evil to saving the planet/future generations but one should fully consider the implications such actions would entail on the global economy. We live in an economy that requires infinite growth and one of the big drivers of this growth comes from our monetary system that is all debt based. To service this ever expanding debt load we must increase production even if this production is not needed. Indeed this need to continually expand production has caused the long-standing issue of overproduction.
As the industrial revolution took hold in the western economies and many industrial factories were built (using debt) it soon became apparent that more goods were being produced than what J6P needed or could even afford. To overcome this problem of overproduction the industry of advertising grew in earnest to generate new demand for unneeded items. It is should be noted that it is important these unneeded goods were sold because many of these new factories were built using credit so they needed to be fully utilised to pay back the debt WITH interest.
This dynamic of increasing production has created further issues however even with the aid of a large advertisement industry as demand for products has struggled to keep up with supply. The reason for this struggling demand comes from the fact that real income of households needs to rise in tandem with the increasing amount of goods produced. This issue of slow growth in real incomes became quite acute during the 1970’s oil crisis as this period marked the time that the average incomes in the US no longer rose significantly in real terms and have made up a smaller percent of total US GDP.
To compensate for this development a range of actions were deployed the two most notable being globalisation and easier access to credit. Globalisation allowed goods to be produced at a lower price as the main manufacturing bases were moved to cheaper regions were the cost of capital and labour was lower so the prices of goods sold would be lower and this would serve to prop up demand. The process of globalisation also had the benefit of increasing the numbers of potential consumers so while there was no longer great returns in the western world more countries were sucked into the debt machine and the costs could be spread over a wider base.
Obtaining credit was also made easier so J6P could still keep buying his cars and maintain his American lifestyle even though his wage was not going up and the cost of items were rising faster than his wages. Other more insidious methods to maintaining demand included such things as planned obsolesce. By having items designed to break after a set period of time J6P could no longer buy durable goods such as washing machine that would last for 20 years as they were designed to breakdown within a planned timeframe usually shortly after the warranty period. All these measures while effective, at least for a time, do not solve this problem of overproduction. It merely postpones the day of reckoning and due to the nature of credit expanding over time the problem is actually compounded (literally) when it is delayed.
What I have stated thus far maybe already widely known to people but it is important to realise the dynamic of why all this overproduction is necessary because in essence since nearly all major capital investments are financed by credit there is always a need to expand production to cover the interest on the loans. By cutting the waste in society what happens is all the capital currently being deployed will be underutilised and the loans this capital were backed by will no longer be honoured. This is likely to lead to large scale defaults and large unemployment.
The most notable example of capital investment that serves as the basic platform that makes most of our economic activities viable is that of basic infrastructure. This form of capital investment is most susceptible to the issues described above as nearly all major public works cannot be supported on their own merits and must therefore require finance to be sustained. This issue has been discussed previously in the diner and if you are interested in learning more about this subject please refer to the Large Public Works Projects series here, here and here.
Like most capital investments, major public infrastructure projects are financed by debt. Not only is ever increasing expansion credit a needed condition but as an extension to this fact is that the number of service users using the said infrastructure needs to increase or if the number of users do not increase then the average usage per customer has to rise. This increase of the amount of service user’s makes the infrastructure more viable as economies of scale can be achieved meaning the cost per unit production declines but more important is the fact the cost per user decreases.
This need for greater infrastructure usage does generate much wasteful economic activities and much is said about reducing such wasteful activities. After all how many articles have you read about reducing the amount of wasted water or electricity per customer? The issue with reducing demand is that while it can be a positive thing on an individual level on a more macro level it will lead to a more negative outcome as it would mean a drop in aggregate demand.
Since the infrastructure is financed by debt a decrease in aggregate demand would mean the overheads can no longer be covered and the price per user will have to rise. This last point is important because when it comes to covering costs “wasteful” activities cannot be discounted as unneeded. For example much of the telecommunications infrastructure achieves its low price because certain users using it frivolously for unneeded economic activities such as the child playing on a XBOX 360 using gigabytes of bandwidth. This unneeded activity allows the small business round the corner to enjoy cheaper prices. If you removed the wasteful user in this case then the costs imposed on the needed users would rise and their economic activities are less likely to remain viable. This is the big issue, as prices rise the user base will decline leading to more users being unable to afford using the infrastructure. If this process were to continue then the infrastructure would suffer tremendously as the same expensive overheads would still need to be paid but with fewer users. Even if such structures could remain intact they would begin suffering from diseconomies of scale; that is the costs per unit production would rise as the number of users decline. In short if the number of users decline sufficiently it is likely the whole project will lead to some kind of death spiral.
While the issue is most acute in basic infrastructure works the dynamic remains largely the same for any good produced; the wasteful demand cannot be dismissed as disregarding that demand not only leads to direct unemployment (people responsible for that production are laid off), it also means the cost borne on the remaining users who demand the product rises as the total costs are spread over fewer users. This then results in even less people who can afford buying the goods/services at this new higher price leading to even higher prices as there are even less users to support the cost of overheads. Thus this process leads to a destructive feedback loop developing that is likely to result in dire outcomes.
If we want to reduce wasteful activities we need to recognise a reduction in waste will lead to mass unemployment and large scale defaults since many assets are backed by the debt which would no longer be met if the factories were only working at low utilisation rates. Another important point to consider is that since much of the upper class hold assets in these factories a large scale default is going to hurt them disproportionately hard so it seems unlikely such reductions would be tolerated even if the lower classes could recognise the issue which is unlikely since their jobs depend on these wasteful activities.
An argument often made to make such investments more viable is to increase the efficiency of such capital so the cost per unit output is less even if the number of users or usage per user remains the same. Therefore as a result of this the reduced costs will be passed onto the consumer. While there are definite merits to this approach, which should be pursued, it must be noted that none of these actions will provide an ultimate solution to the problems faced.
The issue with greater efficiency in resource consumption actually lies in its perceived strength that is the lower cost in using the said item. For example if we can provide an infrastructure that produces electrical energy 5% more efficiently the cost per user will decrease. This decrease in costs will result in demand rising negating some of the efficiency gains made. This effect is known as a rebound effect and any increase in efficiencies will cause some kind of rebound effect. As a result of this one must be wary of any claims that suggest that all efficiency gains will result in the same reduction in total usage. It may still bring total demand down but it will always be more marginal than hoped on account of the rebound effect.
Indeed in some cases increase in efficiencies can actually result in greater resource consumption and these occurrences are known as the Jevons paradox. This issue of rebound effect and possible Jevons paradox is not a new topic; it was first in early 1865 and was covered in Jevons book: The Coal Question. It should be noted however this effect only applies if demand is highly elastic where demand rises disproportionally to price decreases. Thus this paradox is more likely to occur in competitive markets were small price differences can lead to significant gains in market share or the amount of users consuming the said commodity. This final point of expanding user bases should be considered in an expanding world of globalisation.
Inelastic Demand resulting in only the rebound effect
Elastic Demand Resulting in Jevon’s Paradox
There are also further issues with increase efficiencies and this issue of increasing efficiencies, like many other things, suffers from diminishing returns. That is over time the returns per unit investment declines and there will come a point that further gains will become prohibitively expensive and even if such expensive gains were pursued the return would be smaller. In other words there will be a limit to how much efficiency can be gained before it reaches some hard limits either from an economic standpoint (which is likely to come first) or a thermodynamic limit. After all it is impossible for us to have 100% efficiency!
The final issue, and one that is perhaps most pressing, is that most cases made for pursuing wide scale adoption of efficiency gains requires extensive use of credit. It is likely going forward that credit will become increasingly constrained so the amount of available credit necessary to fund aggressive efficiency projects will not be available. Without widespread credit the chances of rapid increase in efficiencies being developed are considerably less. This issue of a lack credit is often avoided or implicitly assumed by strong advocates of making things more efficient but it is an assumption that is likely to prove false.
In short while increasing efficiencies can buy some time and keep capital investments particularly basic infrastructure projects viable for a longer period of time there are limits to this process and increased efficiency cannot provide the ultimate solution. At some point efficiency gains will cease occurring in any meaningful level and due to the required need for further credit expansion those issues will have to addressed at some point even if efficiencies could be maximised which is unlikely considering that further credit is likely to become more limited going forward.
The other solution of outright demand destruction as commonly suggested will lead to very negative outcomes as explained above to the investments in question and more generally the global economy. What needs to be recognised is our current economic and monetary systems are not suitable for dealing with declines in demand or credit. They only function well in world of expanding demand and credit as this is how the system was designed for. If we wish to cut all waste then we need to devise a system that can operate under the condition of perpetual demand destruction.