Off the keyboards of Monsta666 & A. G. Gelbert
Discuss this article at the Favourite Dishes Table inside the Diner
Often I hear argument that if we deploy various renewable energy solutions then our modern industrial society can transition to a sustainable society. While many of these renewable solutions do indeed provide better outcomes than the current fossil fuel paradigm they will not – on their own – make our economy any more sustainable. The reason this is the case is because of the issue of perpetual economic growth that our economy demands which is largely (but not solely) driven by our debt based currency system. Until this fundamental issue of growth is tackled then achieving sustainability becomes an impossible task.
In the dialogue below is an exchange between me and fellow Diner and moderator agelbert who is one of the strongest advocates we have in the Diner in renewable energy solutions. Just to be clear, even though I do not see renewable energy as the ultimate solution to providing a sustainable environment this is NOT an argument against renewable energy. Moreover, I am of the belief that a technological solution is possible in the process of reverse engineering into a sustainable economy provided the technology is deployed in a sensible manner and is managed properly. For this reason I do support agelbert and his endeavours to getting the word out on the renewable story. However what I think is equally significant with the message agelbert projects is one of HOPE.
His zeal, commitment and pleasant nature offers people hope and in a world that faces so many challenges, some of which could well be fatal, hope is a powerful force on society and its effects cannot be neglected. One only needs to look at the incidents in Greece with people succumbing to drugs or crime in Egypt to see what happens when people lose hope. It is our duty as Diners to offer people hope and not go full doom Guy McPherson style. We must fight until the bitter end in offering a better tomorrow for future generations. We cannot save everyone but we must to strive to save as many as we can!
For this reason we must offer hope to people for without hope there is only anger and when people get angry they become worse than unproductive; they become positively destructive. So because of this agelbert offers a good service in a similar vain to Eustace Conway by offering an alternative living arrangement to Business As Usual (BAU). All such efforts must be supported and I encourage Diners to do the same. On this note by hitting the Donate button for the Diner you will be supporting the SUN project which is another attempt in escaping the trap that is BAU.
Anyhow, I am digressing here and to back to the original topic on hand I will post this debate me and agelbert had about how to create a sustainable economy in this planet:
JMG has a better handle on the most probable future in the next 50 years or so but I think he engages in hyperbole by classifying all of us techno-weenies as technology clinging denialists who don’t understand the laws of thermodynamics (I.E. he WRONGLY claims we need too much energy just to build the renewable infrastructure so it just can’t be done, won’t be done, the Archdruid has spoken and us chillen need to cut our losses and flush toilets and get with the program of getting used to having less beer and goodies).
I certainly agree with him that the rationalizations bordering on gymnastic pretzel logic that come from people when their predicted apocalyptic imminent scenarios don’t materialize on schedule is worthy of ridicule. Humans have an awful time letting go of ownership bias, whether it be a thing no longer worth what they thought it was, or an idea or a prediction that didn’t pan out.
Clever fellows like JMG try to sound like they are above it all dispassionately observing the poor slobs tied to faddish ideas, religions, pro-environment mantras, new age predictions or whatever. He’s NOT.
As a matter of fact, he is making the very mistake that he accuses others of. He sees any hybrid approach to solving our energy problem by combining a limited amount of fossil fuels with renewable energy technology during a transition phase as impossible.
I must disagree with this. I can certainly agree that renewable infrastructure does have its benefits and should be more aggressively pursued but I think we must recognise that renewables are not sustainable on a BAU basis. What we have to understand is BAU is based on a debt-based currency system and these currencies can only remain viable under the condition of perpetual growth. Perpetual growth is impossible unless we have infinite resources, infinite energy and bottomless sinks where pollution can be contained. To most people it is pretty self-evident we do not have infinite resources but on the matter of energy we must remember that infinite energy is only possible if the laws of thermodynamics are violated.
It is this requirement of perpetual growth that makes any energy platform (even the illuminatti’s wet dream of fusion energy) unsustainable as you will either reach limits in the amount of resources available, energy or the amount of pollution produced. Growth will end due to one of these stocks becoming a limiting factor. In other words growth is limited under the principle of Liebig’s law of minimum which states that total production is limited by the factor that is in most limited supply in the production process. This may either be resources, energy or pollution and so all these factors must be considered and managed if we wish to maintain a sustainable society. This is a basic fact and we must STRESS that the first law of sustainability is this:
Growth in population and/or growth in the rates of consumption CANNOT BE SUSTAINED!
Until we address the issue of economic growth and the continued rise of consumption then all talk about sustainability is futile. Alternate energy systems such as renewable energy are only viable if they do not operate under the paradigm of constant growth. Now this isn’t an argument against renewable energy and I agree with you they must be pushed but I do think a big part of this sustainability debate must centre on the fact that economic growth must end.
At the end of the day we need to recognise that our economic and environmental crises are – at their core – the result of man’s behaviour on planet Earth. Until we change our behavioural patterns then all technology does is postpone the day of reckoning. I say this because humans have a predisposition to increasing their population and consuming their resources as quickly as possible as they wish to pursue more prosperous lifestyles. This disposition towards population growth coupled with increased consumption of resources results in humans utilising technology and energy as an enabler of resources. As more sophisticated technology is developed; the resource base available to man increases; this increase in available resources allows a rise in living standards. Now if man simply stopped population growth and material standards at a certain level then they could enjoy the increased productivity this new technology would bring. Unfortunately it never works out that way because as living conditions improve human population increases until people live at a subsistence level at this new technological level.
The best example I can offer of this phenomenon at work would be the green revolution. The green revolution caused food production to rise rapidly resulting in food prices declining rapidly. This cheap food enabled human population to grow rapidly, so much so that man has become dependent on this unsustainable food production system at even a subsistence level in many places across the globe. In fact if current populations continue to rise and people move towards a more resource consumptive diet i.e. eating more meat that requires more resources to produce then even this system cannot even sustain future populations at a subsistence level. This creates pressure in developing another “technical solution” such as GM food or some other monstrosity. Even if we assume this technical solution could deliver its promised returns and had no blowback (I know this is never the case but for arguments let us suppose this is the case). What would happen then? Populations and consumption would just rise again until we hit the limits of this new technical solution.
This pressure of population and consumption rises creates the need for technical solutions and because of this nothing really changes if taken on a long-term basis. We are on a constant hamster wheel to hell unless we change the way we behave. Man has a behavioural problem and NOT a technical problem. If we want to develop a manifesto that is truly sustainable we need to include some part that addresses population control and control of consumption. Doesn’t necessarily have to be direct eugenic style of population control nor do we have to set real limits to consumption. You can limit consumption by rewarding society in ways other than increasing material consumption. Some means of population is required and I would be interested in reading how the Japanese maintained their relative steady state economy during the Edo period where population was maintained around 30 million people for hundreds of years. This move towards a steady state economy that recognised the need to preserve the environment never gained traction in the “enlightened” European countries hence the push for empire building and later fossil fuel solutions to keep the hamster wheel spinning faster and faster to support growing populations/consumption patterns. Off course greed and other vices made all these issues worse. And the pigs and parasites have made things immeasurably worse and they must be punished accordingly.
No kidding! When did I say it NEEDED to be sustained? Population growth is going tits up ALL OVER THE PLANET! Check the stats. The top priority is to clean up the environment while getting off fossil fuels. Dealing with population pressures is secondary and, as I just mentioned, is less of a problem in numerical projections every year. If you want to get all flustered about how many humans there are, well go right ahead but SHOW ME SOME FACTS!
Whilst I would agree you never said BAU needed to be sustained; in fact I believe you are actually an advocate of ending BAU like me. However the reason I did mention this point was because I feel you do not stress the fact that business as usual can only work on the basis of continued growth. I feel this point really needs to be HAMMERED home if sustainability is the name of the game. In fact by stressing the madness of BAU with it requirements for constant economic growth and the inevitable end-points this mindless pursuit would entail (such as resource collapse, environmental catastrophe and global bankruptcy) people will become more agreeable to alternate means of living which can include renewable energy systems as you advocate. When promoting a sustainable lifestyle we got to understand that renewables by themselves are not going to deliver a sustainable lifestyle if the growth side of the equation is not tackled. What we need to do is address this aspect but that does not mean renewable energy cannot be part of the package.
But you wanted facts so let me offer you some. The rate of human population growth is indeed declining as you say but that does mean population is declining. It is still increasing but the rate of increase is decreasing. If we are to believe the figures provided by the UN Population Fund then world population will hit 9 billion by 2043. Like you have already alluded to the time to reach each successive billion from here on out will rise with the next rise of 1 billion taking 14 years while the one after that will take 18 years followed by 40 years for the final billion. So according to the UN world population should peak at just over 10 billion souls. I have ENORMOUS doubts this will actually transpire but those are the figures the UN currently projects. In any case though the fact of the matter is human population is still increasing so the problem is getting worse.
Looking at your article you open with the following sentence:
Why the 1% is responsible for more than 80% of humanity’s carbon footprint and why Homo sapiens is doomed unless the 1% lead the way in a sustainable life style.
While this sentence is true this fact does not cover the whole issue here and there are several problems with it. As I mentioned in my previous post there will be several potential limiting factors that will make further economic growth impossible. The example you highlight represents mainly C02 emissions which as we all know is a pollutant. Increasing pollution will wreck the environment and if it is severe enough will cause irreversible damage and will limit economic growth. However we need to remember that consumption of resources is also increasing at an exponential rate and I would figure these consumption rates are not the primary result of what the 1% consume. After all there is only so much a person may eat or drink. Posted below are rates of consumption of food and water. However look up the consumption of fish and other various commodities and all these will exhibit exponential growth and are likely to continue posting exponential if the economy does not collapse.
On top of these resource depletion issues the other problem comes from the implicit assumption that if we somehow eliminated the 1% who committed the 80% of the emissions then we would reduce carbon emissions by 80%. This is unlikely to happen as a new 1% (the Orkin Men perhaps?) would takeover. Why would this happen you say? This is because one of the emergent properties of our economic systems is to reward people who can maximise their consumption of resources. If you are clever and can find a means of extracting more resources then you will be given a good paycheck. In addition to this we need to remember money buys you not only POWER but STATUS also. If a person has lots of money they are deemed to be a “successful” member of society and people will look favourably upon you and tend to ignore mistakes, character flaws more easily and may even ignore FATAL defects if you are rich enough. Just ask Corzine for proof of this! You see this all the time with the most powerful and successful getting away with murder. All these factors act as powerful social cues that provide strong positive reinforcement to pursuing a lifestyle that maximises consumption as such behaviour is actively rewarded from a financial, social AND mating standpoint. Considering one of the primary objectives of all animals is to reproduce then this effect cannot really be understated. I feel even in your article you hinted at this point (please correct if I have misinterpreted something here):
The chimps engage in rather brutal wars with other chimp tribes where the victors set about to kill and eat very young chimps of the vanquished tribe. This is clearly a strategy to gain some evolutionary advantage by killing off the offspring of the competition.
I repeat, excessive aggression or same sex sexual activity as a dominance display is a downside to the “strong sex drive” successful evolutionary characteristic.
This “downside”, when combined with a large brain capable of advanced tool making, can cause the destruction of other species through rampant predation and poisoning of life form resources in the biosphere.
I would agree with these points and would also agree with the viewpoint that our increased sized brains have meant we have exploited our environment to an extent no other animal has been capable off and in a way our evolution has lead us into a bit of a dead end. I also agree with the bit you mention how more complex organisms tend to be less resilient as they tend to sacrifice resilience for increased efficiency in a particular environment. If the parameters of the environment were to change sufficiently then the organism’s capability to survive will decline more rapidly than a simpler more resilient life form like the bacteria you describe. This I feel only applies on a species level however as it is possible for there to be complex ecosystems that is highly resilient. This is possible because complex ecosystems can consist of a complex web or interdependent organisms that forms a very resilient network of animals so we must be specific on what level we are talking about when bringing up the efficiency/resilience debate.
Going back to my earlier point though, the big issue we have with the current BAU system is the destructive behavioural patterns that it actively promotes namely excessive consumption. If we wish for people to lower per capita energy consumption more rapidly we need to devise a means where lower capita is rewarded and status can be conferred through means other than greater material consumption. Mating can offer a strong incentive to a certain pattern of behaviour and this picture demonstrates a good example of this:
Why the dimorphism in the pheasants? It takes more energy to maintain a larger body; you become more conspicuous and obvious to predators with those bright colours. On top of that escape will become more difficult from an energy prospective as not only is there more mass to move but it is likely the pheasant will have run that bit further to escape the notice of predators. All these evolutionary costs are acceptable however because the result is more mating. If animals can change their composition by this degree on the basis of increased mating opportunities then imagine what we can do if we rewarded people with status by developing the right habits! Got any ideas how to go about this? I don’t think this point can be understated, BAU rewards destructive behaviours and if we want sustainability we need to tackle this issue otherwise there will always be a 1% to take over the last one.
Look what the biologist in Africa has discovered and PROVED! Desertification can ONLY be prevented by INCREASING THE SIZE OF THE HERDS MASSIVELY! ??? Can you handle that? This is exactly the opposite of what science had always believed!.:icon_scratch: It’s there in my channel. The man is an eminent authority on the environment. You can reject his counterintuitive FACTS but they are still going to be facts. :icon_mrgreen:
Is there a lesson there for human populations? Maybe, maybe not, but it does make you think.
This is the case that the biologist killed the elephants but unfortunately the study was flawed because they missed an even bigger ELEPHANT in the room which was man being the main culprit. Was this due to overpopulation or due to the excessive consumption lifestyles of pigmen wishing to gain more profit? This could be a matter of contention however what cannot be disputed is that man has been creating the larger deserts by either farming the land too extensively or through excessive emissions of various pollutants most likely C02 and other greenhouse gases.
Just to avoid arguments, lets say you are right about the population issue, can you get past that for a moment to consider the viability of a techno-fix? THAT’S my main beef with JMG. I know you want us to “reduce” ourselves because our carbon footprint is “unsustainable”. I’ve already dropped mine considerably for over 20 years! Tell me how many miles YOU drive each year and how many square feet YOUR house has (I drive less than 1,200 miles a YEAR and live in 980 sq, ft.).
First of all, congrats on reducing your C02 emissions! Good work and keep up the good fight! As for me, I don’t personally own a car so my mileage in terms of actual driving is flat out zero. However I do get lifts and the miles travelled in those journeys would probably amount to something like 1,200 miles per year. Reason for not driving is I am not going to spend lots of money financing an automobile. In addition to that I would have to pay around $9 for one gallon of gas not to mention over $3000 dollars a year on insurance for owning the said car. With my limited income this investment makes little sense so I depend on public transport and other good old fashioned walking. My worst C02 emissions likely come from the fact I travel on a plane about 2 or 3 times a year.
Back to your question however: I do think that the human population has to drop considerably especially if we consider the blowback that will come from climate change and the likely other environmental disasters that are to come such as nuclear meltdowns due to a breakdown of JIT supply lines. Because of these unpredictable events it is hard to determine what population will be sustainable exactly. It will not be 7 billion however especially when the rate of fossil fuel extraction declines.
As I said in my previous post; technology enables humans to increase their resource base by increasing productivity. By applying renewable energy systems the carrying capacity of humans can be increased so renewables can help. However it is hard again to say what the carrying capacity will be. You see, in my eyes total consumption rates is a product of population and per capita consumption. If you wish people to have a higher standard of living then the carrying capacity of society must be lower. If you want to increase carrying capacity then you must sacrifice per capita consumption. These sorts of decisions can only really be made on a local and not global level.
If a society wishes to work on a sustainable basis then they must decide what balance they require in terms of optimal population size and per capita consumption. On this note I don’t think it makes sense to maximise population as I feel it is more important to focus on QUALITY and NOT quantity of life (BAU and various religions seem to promote the latter). To me, quality and happiness of the people in the community is the thing we must strive to maximise and to do this we need to insure that nearly all people in society can meet their basic needs comfortably i.e. living comfortably above the subsistence level. It should be noted that on a general historical basis in the absence of rigorous checks on population there will be a tendency for the population to rise until most members can only survive on a subsistence level given the current level of technology deployed. To maximise happiness it is my personal opinion that populations must be kept below this natural limit. I can understand perfectly well if our views on this are matter are different as it is a highly contentious issue. I imagine the final decision made would vary quite markedly for each community.
Saying all that you don’t want population to be too low as that will mean that the amount of per capita consumption will become too great and too high an income will make people more susceptible to greed, other vices not to mention unequal power issues between different local communities which will pose a threat to maintaining a sustainable economy over a larger region. As always there needs to be a balance and what you deem as optimal will vary so I think it is impossible to give an exact figure. I do hope you see where I am coming from in this however. Again though, carbon emissions are only part of the story here as we need to consider resources, pollutants and energy as separate components when considering issues of sustainability. To achieve a truly sustainable economy all these components need to be addressed and we cannot simply put our focus on pollution.
From the Keyboard of Surly1
Originally published on the Doomstead Diner on May 12, 2013
Discuss this article here in the Diner Forum.
Plenty of doom and doom-related happenings on the domestic and international front this week, so let’s go right to the videotape:
Across the pond in Greece, where Question Mark and the Austerians are administering the same sort of save-the-rich economic policies that plutocrats like Pete Peterson so dearly wants to bring to the FSA, youth unemployment has reached a staggering 60 per cent.
While the overall unemployment rate rose to 27 percent, according to statistics service data released on Thursday, joblessness among those aged between 15 and 24 jumped to 64.2 percent in February from 59.3 percent in January. Youth unemployment was 54.1 percent in March 2012.
“It is by far the highest youth unemployment rate in the euro zone, highlighting the difficulties young people face in entering the labor market despite government incentives to create jobs,” said economist Nikos Magginas at National Bank.
Athens has lowered the minimum monthly wage for those under 25 years by 32 percent to about 500 euros to entice hiring.
Note that last succulent little datapoint, and keep it in your pocket when the solons in DC look up from Benghazi! BENGHAZI!! BENGHAZI!!!!!!!!! long enough to recommend a lowering of the minimum wage, or pass a bill to eliminate overtime wage payments.
As our friend Joe P. posted earlier in the week, researchers have once again discovered the glaringly obvious, a link between racism and stupidity. Whouda thunk it?
Findings taken from numerous research projects strongly indicate that prejudice, racism and intolerance are more likely to be present in individuals with greater cognitive rigidity, less cognitive flexibility and lower integrative complexity.Despite their important implications for interpersonal behaviors and relations, cognitive abilities have been largely ignored as explanations of prejudice.
We proposed and tested mediation models in which lower cognitive ability predicts greater prejudice, an effect mediated through the endorsement of right-wing ideologies (social conservatism, right-wing authoritarianism) and low levels of contact with out-groups. In an analysis of two large-scale, nationally representative United Kingdom data sets (N = 15,874), we found that lower general intelligence (g) in childhood predicts greater racism in adulthood, and this effect was largely mediated via conservative ideology.
A secondary analysis of a U.S. data set confirmed a predictive effect of poor abstract-reasoning skills on antihomosexual prejudice, a relation partially mediated by both authoritarianism and low levels of intergroup contact. All analyses controlled for education and socioeconomic status.
Original here. This is well known by those in power, who have thoughtfully provided these people their own reality-free 24-hour Cable News Network.
“If voting changed anything they would make it illegal”
Although I am a pretty political creature, I tend to eschew politics on the Diner blog. The reasons for that are that there is a time and place for everything, and secondly, I share the apparent presupposition of most Diners that electoral politics is a sham and dumb show conducted every four years to keep we muppets amused. With that in mind as background, I proudly ginned up the following segue, citing as additional evidence of mass stupidity the reelection of Terry Sanford in South Carolina this week. South Carolina has been the crazy uncle living in the attic of American politics ever since, oh, say 1859. But it never trotted out its stuff more aggressively than it did this week, and elevating the serial philanderer, trespasser, liar, adulterer, and misuser of state funds to noble office. Proof positive that debating cardboard cutouts of Nancy Pelosi in. the absence of having anything to say for yourself is really all you need to be elected in South Carolina. This person says it best, the unvarnished, unpolished, wholly unedited letter from a mad-as-shit South Carolinian:
Dear Fellow South Carolinians of the First District,
What the fuck are you people thinking? Mark Sanford, really? Way to keep us in the running, as the shitass craziest state of the nation. One more fuck-up like this and we’ll surpass even Florida — home of child killers, cannibals and roach eaters! The “Palmetto State”, my ass. I think the “Facepalm State” is becoming increasingly more accurate here.
I have to hand it to you though–go big or go home, right? On the same ballot where you elected Mark Sanford, that two-timing turd, you also voted–by a majority of 65%, no less–to protect the sanctity of marriage from scary gay people. Why shart quietly when you can shit the whole bed, am I right? The irony is intoxicating and it makes me puke.
We all know that South Carolina is a conservative bastion–no Democrat has won here in 30 years. Elizabeth Colbert Busch had the qualifications, ran a strong campaign and was leading Sanford in the polls late into the campaign. Realizing that Sanford couldn’t beat Colbert Busch, one-on-one, he had to invoke the name of that Satanist Minx, Nancy Pelosi as the straw man to gain traction. And with all of the cognitive skills of Pavlov’s dogs, you clownfuckers fell for it.
Where is the outrage of 1998, when the Clinton administration was nearly tanked over a blow job? And who was leading the charge in the furor against Clinton’s infidelity back then? None other than fucking white Grimace, himself, Newt Gingrich–you know, that other adulterous goat diddler that you elected as Republican presidential nominee last year.
So what gives, South Carolina? Is this insanity a cry for help or is it, more likely, a stunt for more attention? Were we paying too much attention to Mississippi again? You’re like the pretty blonde with the dazzling smile that boils the pet rabbit at the first hint of rejection.
And don’t pretend like this recent spate of cray-cray is a fluke, either. We also have you to thank for Joe “You lie!” Wilson, and racist hypocrite Strom Thurmond who fathered a child with his parents’ 16 year old black housekeeper. “There’s not enough troops in the army to force the Southern people to break down segregation and admit the Nigra race into our theaters, into our swimming pools, into our homes, and into our churches” But you’re totally down with porking them ain’t ya, eh, Strom?
There is much to love about South Carolina: the food, the gentility of its people, the mellifluous accent, and we can certainly appreciate colorful characters. We dig eccentricity! But hypocrisy is unbecoming, and so is stupidity in the face of facts.
Too bad Congressman-elect Sanford won’t be able to luxuriate in the after-glow of his win. He’ll be tied up in court defending the charge of trespassing onto his ex-wife’s property. I wonder if he’ll repay the state of South Carolina the money he used for his Argentinian booty call. Surely he will because he’s all about “family values” and responsible government spending.
I just snorted mint julep through my nose! You know what, First District? All y’all can kiss my motherfucking ass– that’s right, all y’all ignorant motherfuckers!!
A Formerly Proud South Carolinian
A truly well done rant. Wish I had said that.
As the journalists would say, “add stupidity.” We offer up this article on the overreach of law enforcement. Free Lilly-May Allen!!!
A girl aged ten was told by police that she could be arrested for causing criminal damage – over a game of hopscotch.
Lilly-May Allen was playing with a friend on a grid she had chalked on the pavement in front of her home when a marked police van pulled up.
An officer warned the girls that using chalk on the pavement was criminal damage and they could be arrested for it, before driving off.
But the girls did not understand what they had done wrong and Lilly-May is now reluctant to play outside, according to her father.
After Lilly-May told her parents about the incident, they called the police to clarify the law, but officers refused to confirm whether drawing a hopscotch grid in chalk on the pavement was an offence – even though it washes away in the rain.
The girl’s father, Bob Allen, 51, who runs his own karaoke business, said: ‘The policeman said to her that what she had done was criminal damage and she could be arrested. He then drove off.
‘She didn’t come into the house for a while and didn’t tell us straight away because she thought I was going to tell her off for being naughty.
‘She couldn’t even remember what the policeman had told her it was – only criminal something.’
He added: ‘She is only ten and didn’t know what she had done wrong.
‘I rang up the police and asked if chalking up a hopscotch grid was an offence and they wouldn’t say yes or no and said it was a grey area.
‘I’m angry and upset and if it was against the law then the policeman should have knocked on our door and said something.’
Mr Allen, who lives in a three-bedroom semi-detached home in Ramsgate, Kent, said the incident on Monday had knocked his daughter’s confidence about playing outside.
As as long as we’re piling on the gobshites in what is rapidly becoming the “stupidity” edition of The Week That Was in Doom, let us turn to that gift which keeps on giving, Sen. James Imhofe (R-Saturn):
“The Obama Administration’s cover up of Benghazi is the greatest conspiracy of all time, even greater than the Protocols of the Elders of Zion, which happens to be totally true by the way.”
All this in a week where the Heritage Foundation managed to put out a factually laughable report attributing trillions of dollars to the future costs of immigration. The fact that the report was a tissue of bad assumptions lashed together by a proven bigot seemed to be no impediment.
James DeMint resigned from the Senate (as a representative of South Carolina) some months ago — so he could get a big pay raise to be the head of the conservative Heritage Foundation.
What better place to be rewarded with seven-figures at a think tank, when this is your big thought:
DeMint said if someone is openly homosexual, they shouldn’t be teaching in the classroom and he holds the same position on an unmarried woman who’s sleeping with her boyfriend — she shouldn’t be in the classroom.
Naturally as head of the Heritage Foundation, DeMint used his first big project — critiquing immigration reform to keep those big “ideas” flowing.
One of the co-authors of the Heritage Study claming immigration reform would add $6.3 trillion to the deficit, Jason Richwine, advocated barring immigrants from entering the United States based on their IQ in 2009.
Really getting their Confederate Dollars’ worth the Heritage Foundation.
Yesterday I posted about how former Senator, freak, and current Heritage Foundation President Jim DeMint managed to put out a factually laughable immigrant bashing report put together in large part by a bigot.
But the bigot, Jason Redwine, is so much, so very much more:
The Heritage Foundation’s Jason Richwine, who co-authored the think tank’s study claiming immigration reform will cost trillions of dollars, contributed two articles to a “nationalist” website about Hispanic incarceration rates, Yahoo News reported Thursday. Richwine came under fire after the Washington Post reported Wednesday that his Harvard dissertation argued Hispanics have lower IQs than Caucasians and that the United States should screen immigrants based on their IQ scores.
Meanwhile in reality, which is NOT a whiter shade of pale:
A record seven-in-ten (69%) Hispanic high school graduates in the class of 2012 enrolled in college that fall, two percentage points higher than the rate (67%) among their white counterparts, according to a Pew Research Center analysis of new data from the U.S. Census Bureau.
Looks like it is time for resign again Jim DeMint.
South Carolina again. Caveat emptor.
In other doom-related news this week, the Center for Food Safety has caught the FDA admitting that chicken meat contains arsenic. Skip the chicken when taking mom to Sunday afternoon dinner for Mother’s Day today.
Attorneys at Center for Food Safety (CFS) filed a lawsuit on behalf of CFS, the Institute for Agriculture and Trade Policy (IATP) and seven other U.S. food safety, agriculture, public health and environmental groups to compel the Food and Drug Administration (FDA) to respond to the groups’ three year-old petition which calls for immediate withdrawal of FDA’s approval of arsenic-containing compounds as feed additives for food animals. Filed the same day Consumer Reports released an alarming study on antibiotic resistance in turkey, the lawsuit highlights yet another gaping hole in FDA oversight of animal feed additives.
Arsenic is commonly added to poultry feed for the FDA-approved purposes of inducing faster weight gain on less feed, and creating the perceived appearance of a healthy color in meat from chickens, turkeys and hogs. Yet new studies increasingly link these practices to serious human health problems.
. . .
“FDA leadership is asleep at the switch, if not turning a blind eye to public health,” said David Wallinga, MD, a physician with the IATP. “Seven years ago, IATP blew the whistle on FDA’s indifference to arsenic being needlessly fed to chickens and turkeys. More than a decade ago, we sounded the alarm on how FDA let the routine feeding of drugs to chickens and turkeys help ensure that Americans would eat meat often contaminated with bacteria resistant to multiple antibiotics. We are filing suit because nothing much has changed.”
Some years ago I read a biography of Rasputin, who reportedly dosed himself with arsenic every day as a preventative against assassination. Rasputin was astute enough to realize that his proximity to the Czarina placed him in mortal danger from opportunists in the Czar’s court. In the fullness of time, they did indeed assassinate Rasputin, but he shrugged off the initial doses of poison like after dinner brandy. Disposing of Rasputin required the assassins to shoot him multiple times, wrap him in chains and throw his body into the river. I offer this anecdote in the hopes that regular dosings of arsenic will have a similar salutary effect for those of us who dine regularly at the Doomsday Diner. Bon appetit!
Elsewhere, in a thoughtful and detailed look at the excesses of the FSA Security State, Peter Van Buren writing for Tom dispatch describes appalling detail just how deep the Washington rabbit hole really goes with respect to whistleblowers. A truly Kafkaesque tale.
Robert MacLean is a former air marshal fired for an act of whistle-blowing. He has continued to fight over seven long years for what once would have passed as simple justice: getting his job back. His is an all-too-twenty-first-century story of the extraordinary lengths to which the U.S. government is willing to go to thwart whistle-blowers.
First, the government retroactively classified a previously unclassified text message to justify firing MacLean. Then it invoked arcane civil service procedures, including an “interlocutory appeal” to thwart him and, in the process, enjoyed the approval of various courts and bureaucratic boards apparently willing to stamp as “legal” anything the government could make up in its own interest.
And yet here’s the miracle at the heart of this tale: MacLean refused to quit, when ordinary mortals would have thrown in the towel. Now, with a recent semi-victory, he may not only have given himself a shot at getting his old job back, but also create a precedent for future federal whistle-blowers. In the post-9/11 world, people like Robert MacLean show us how deep the Washington rabbit hole really goes.
The Whistle Is Blown
MacLean joined the Federal Air Marshal Service (FAMS) in 2001 after stints with the Air Force and the Border Patrol. In July 2003, all marshals received a briefing about a possible hijacking plot. Soon after, the Transportation Safety Administration (TSA), which oversees FAMS, sent an unencrypted, open-air text message to the cell phones of the marshals cancelling several months of missions for cost-cutting reasons. MacLean became concerned that cancelling missions during a hijacking alert might create a dangerous situation for the flying public. He complained to his supervisor and to the Department of Homeland Security’s inspector general, but each responded that nothing could be done.
It was then that he decided to blow the whistle, hoping that public pressure might force the TSA to reinstate the marshals’ flights. So MacLean talked to a reporter, who broadcast a story criticizing the TSA’s decision and, after 11 members of Congress joined in the criticism, it reversed itself. At this point, MacLean had not been identified as the source of the leak and so carried on with his job.
A year later, he appeared on TV in disguise, criticizing the TSA dress code and its special boarding policies, which he believed allowed marshals to be easily identified by other passengers. This time, the TSA recognized his voice and began an investigation that revealed he had also released the 2003 text message. He was fired in April 2006. Although the agency had not labeled that message as “sensitive security information” (SSI) when it was sent in 2003, in August 2006, months after MacLean’s firing, it issued a retroactive order stating that the text’s content was indeed SSI.
A Whistleblower’s Catch-22
That disclosing the contents of an unclassified message could get someone fired for disclosing classified information is the sort of topsy-turvy situation which could only exist in the post-9/11 world of the American national security state.
The full story will reward the reader. Suffice it to say that at the same time Guantanamo now holds “86 prisoners who have been carefully vetted by the U.S. military, the FBI, the CIA, and so on, and found to have done nothing for which they could be charged or should be imprisoned and who have been cleared for release– there is no place to release them to, especially since the majority of them are Yemenis and President Obama has imposed a moratorium on transferring any prisoner to Yemen.”
Thus indefinite detention, which is constitutionally prohibited, and which should properly be anathema to the American justice system, is the legal legacy we are leaving our children and grandchildren. That relatively few Americans are aware of or care about this should be startling. “No charges, no trials, but never getting out of prison: that would once have been associated with the practices of a totalitarian state.”
“At the same time no one, not George W. Bush, Dick Cheney, Donald Rumsfeld, Condoleezza Rice, or other top officials involved in setting up such a global system of injustice, sweeping up the innocent with the guilty, and subjecting them to horrors without end (including now force-feeding) will ever be brought to justice in an American court, nor will anyone involved in the system of rendition, torture, or abuse.” The Obama legacy will be that of having institutionalized the worst anti-constitutional excesses of the Bush years, and having sold them with a charming, intelligent brown face. Had John McCain as President tried to do the same thing, liberals and fellow travelers would have stopped this country in its tracks. In 2008 people went to the ballot box to elect Obama as a repudiation of the Cheney-Bush regime. Upon leaving offoce Obama will not only have institutionalized the incursions of the Bill of Rights to which we most objected, but also having insured that no accountability will ever be visited upon the neocons who let us into a pointless, illegal, and immoral war.
And then Carl Herman, or whoever posts things up over at the estimable Washington’s Blog, wraps it all up in a ball for us in a post sure to appeal to doomers of all stripes with Why America Fell So Far … So Fast.
All Empires Crash Soon After They Reach Their Peak
Thomas Jefferson said, “Dissent is the highest form of patriotism.” And because I love my country, I frequently criticize America’s shortcomings in the hopes of making her better.
But the truth is that the United States is not unusual … it is just like all other empires which have hit their peak and then quickly crashed.
. . .
The indications are always the same:
- The financialization of the economy, moving from manufacturing to speculation;
- Very high levels of debt;
- Extreme economic inequality;
– And costly military overreaching.
. . .
PhD economist MarcFaber states:
How [am I] so sure about this final collapse?
Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.
[Quoting 18th century Scottish historian Alexander Fraser Tytler:] The average life span of the world’s greatest civilizations has been 200 years progressing from “bondage to spiritual faith … to great courage … to liberty … to abundance … to selfishness … to complacency … to apathy … to dependence and … back into bondage”
[Where is America in the cycle?] It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical “society cycle.” … The U.S. is somewhere between the phase where it moves “from complacency to apathy” and “from apathy to dependence.”
In other words, America’s rapid fall is not really that novel after all.
This article also cites Jared Diamond’s excellent book “Collapse”, whose conclusions I will not discuss here, is that will be the subject of another post that I had been planning for quite some time. The article over on Washington’s blog is quite good. Don’t miss it.
Closer to home, Tamerlan Tsarniev has reportedly been interred at a burial site in a Muslim cemetery outside of Richmond Virginia. You might well think the dead are dead, let them rest in peace, whatever their transgressions in this life.
The Virginia woman whose actions led to Boston Marathon bombing suspect Tamerlan Tsarnaev being buried about 30 miles north of her Richmond home said the angry backlash from local officials, some cemetery neighbors and online critics has been unpleasant, but she has no regrets.
“I can’t pretend it’s not difficult to be reviled and maligned,” Martha Mullen told The Associated Press in a telephone interview Friday. “But any time you can reach across the divide and work with people that are not like you, that’s what God calls us to do.”
Some of my neighbors think otherwise. A so-called “friend” opened up a thread on his Facebook page in criticism that allowed the butt-picking-finger-sniffing contingent to reveal its howling id. Stunning. As HL Mencken once observed, “No one ever went broke underestimating the intelligence of the American public.” The reflexive hysteria even manifests itself on the local Craigslist site. I found myself yesterday shopping for an old beater truck, which I could use to haul mulch for Contrary. Under the “rants and raves” section I found these offerings from my esteemed fellow citizens:
- That piece of shit deserves to be dug up and tossed in a trash pile like every other man, woman, and child that worships islam
- Now that we know he’s buried so close to here (a 2 hour drive), I know what I will do. I’m gonna eat me a big slab of pork baby back ribs and a laxative. Then I’m gonna drive up there, drop my pants and shit my bowels on his grave.
- people they brought that pig shit that bombed Boston to Virginia and secretly buried him on OUR SOIL!!!!!!!!
I say we start a petition to have him and every other muslim UNBURIED and thrown in the trash dump of any state EXCEPT Virginia
Muslims are pissed cause he wasn’t buried in the place he died in? fuck islam, fuck muslims, I’m pissed cause that pig shit is buried here in Va.
- its our new slogan Welcome to Virginia where we will handle other states garbage
All above (sic).
In closing, I offer you this piece of wisdom: never think it can’t get worse. It can, and will. Your neighbors will insist.
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on April 29, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
I have just returned from Spain, where we had to go at short notice to give a farewell kiss to our stranded asset. Yes, our farmhouse, which had been the focus of all my dreams and efforts a few years back, was finally released from legal limbo land and the keys handed over to the happy new owners. We got back around half of what it cost us to buy it and do it up, but speaking with other people in the same situation we know that we are among the lucky ones.
What a strange place Spain is! This truly is a country where dreams go to die. To the casual visitor it looks like an earthly paradise. The entire region was bursting forth with a trillion wildflowers on our visit, the air was scented with jasmine and orange blossom and the boughs of the lemon trees still hung heavy with fruit. A bumper wet winter had left the Sierra Nevada mountains with a deep snow pack – meaning happy times for farmers in the year ahead – and the local people were just as courteous, graceful, witty and family-oriented as they ever were.
These were among the reasons why, almost ten years ago, we had chosen to go and live there. The ruined house on the side of a fertile hillside had been converted into a small organic farm. Our kids were happy to sit in the shade of an almond tree with a rock and bash open almonds while I either worked on the land or went into the office where I was running a small ecologically-conscious newspaper that I had set up. Life was good.
Or at least it would have been if we hadn’t taken out a loan to renovate the property. In time that loan became an unbearable burden and our dreams slowly dissolved before our eyes as we found ourselves forced to return to work in Copenhagen and live in a government subsidised flat for five whole years. That wasn’t part of the plan.
And we were the lucky ones. Those who steadfastly refused to leave are now stranded. Most foreigners have left the area. Those who stubbornly refuse to lower the asking price of their houses are hit the worst because they can’t cut their losses and move on. Instead they exist in a shadowy half-world of penury, trying desperately to earn a euro here or there and doing anything they can to keep the wolf – or in this case the bank – from the door. The last thing they need is escapees like me parachuting in and pointing out how lovely the smell of orange blossom is in the spring air.
Those with families to support face an unpleasant decision. With all work having dried up many are finding that the only way to feed their families is by doing illegal things. ‘Such as?’ I asked my friend, who is still desperately clinging on in a legal way. ‘All sorts,’ she replied. Dope grows remarkably well in Andalucia.
Only those who can draw money from the currently still-functioning pension systems of northern Europe are faring better. Yet even that may not be a shortcut to safety as healthcare costs are climbing just as they themselves go into decline. The Spanish have a word for foreigners like that. They call them ‘soloistas’ or some such word – loners. People without family who rely on their money from other countries, their healthcare from far away and a cheap and functional system of airlines to take them wherever they need to access these services. Many of them sit in their jerry-built concrete shells by their swimming pools, drink in hand, and convince themselves that they are still living the good life – even though sterling has depreciated, food costs have rocketed and all of their friends have either been evicted or hot-tailed it back to the country they had said they despised before things started to go wrong. Just one more glass of sangria and everything will be okay again …
Spain is a strange place. It has been in a state of free fall collapse for several centuries. One of my favourite writers, Jan Morris, described the country’s fortunes as (paraphrased) ‘like a rock bouncing, bouncing, bouncing down a steep mountain, its descent every now and again arrested by a small outcrop.’ Here was a country that had a vast empire that was able to liquidate – quite literally – the wealth of an entire continent and bring it home. Five centuries later it was one of the most backward regions of the western world and an embarrassment to the EU. And then the money began to pour in.
The money was used to modernise the country in a kind of Spanish Great Leap Forward. It was all about catching up. Building. Building roads and airports and millions and millions homes that nobody really wanted. You want ten thousand euros? – I’ll lend you fifty! Peasant farmers who owned dry and dusty parcels of land in Almeria – land that would have been literally worthless, almost a curse on the family – suddenly found they could borrow thousands from the bank to buy boring equipment, pumps, plastic greenhouses and fertiliser. All of a sudden they were rich on selling tomatoes and lettuces – and all kinds of other tasteless pseudo foods – to the moneyed northern Europeans, and could afford to employ migrant Africans in bonded slave-like conditions. New pickup trucks and a house by a golf course were suddenly the order of the day. It was a boom alright.
I’m happy that the place where we had chosen to live – La Alpujarra – was considered too backward even for this kind of boom. The roads were too bendy. The people were too simple. The land was too steep and the streets of the local town were full of the dirtiest and most bedraggled kind of New Agers. Sophisticated people from Granada would come and visit in their thousands every weekend and bring with them loud music, iPhones and shiny fast cars. The locals secretly called them ‘aliens’ and kept their mouths shut as they were serving them in their restaurants and guest houses. I’m happy to say I was never called an alien. At least, not to my face.
But what of these urban sophisticates now? They are among the ones we see on the news reports, living on food handouts and protesting against the government. With their safety blanket pulled out, unemployment rocketing (said to have reached 6 million last week) and the country’s political (and royal) classes being steadily exposed as crooks and liars, things suddenly don’t look so rosy. It wasn’t supposed to be like this.
Not so for my erstwhile neighbours who, by and large, are getting along just fine with their fields and their small houses and appropriately sized vehicles. Fertlizer and pesticides had always been too expensive, so not that many people had got into the habit of using much of them. These folks had always said things were terrible even at the best of times. The country people of Andalucia haven’t forgotten that the region is prone to famines, genocide and an unstable climate. Listen to some proper flamenco and ask yourself if this comes from a land of happy upbeat people.
Driving back down the coastal highway on the way back to the airport it was impossible not to notice how empty it was. This was a Saturday mid-morning and a few years ago one would have expected it to be moderately busy. Now, we saw a car only every few minutes. It felt like the whole road was ours – and this was the widely ballyhooed mega motorway that was supposed to be a ‘ring of tarmac’ encircling the whole of Spain. Sadly uncompleted, like a broken necklace.
In the news today I read that a Spanish woman dowsed herself in petrol and walked into a bank. The bank had taken her house and her savings and everything else she owned. ‘You have taken everything from me!’ were the words she shouted before igniting the fuel. Such stories are increasingly common.
What next for such a country? There is a growing chorus calling for the debt to be abandoned – for the country to walk away from its obligations to the monolithic banks and finance organisations and to set themselves free again. There is, if the truth be told, no other option. Whether it goes smoothly or is done with explosives is the only question worth asking. Alas, Spain’s history, if it can be used as a guide, doesn’t bode well. I’d love for someone to tell me that I’m wrong on this, but I’m not sure I’d believe them.
But I hope that in this case the past is going to prove to be no guide to the future. Spain held out for so long against the Anglo model of capitalism. Petty local corruption, ironically, kept development at bay and ensured the system as a whole remained resilient. It was only the surging tidal wave of EU reforms that swept away the small scale municipal corruption and replaced it with respectable-looking TBTF corruption.
Bounce, bounce down that mountain.
Off the keyboard of Monsta666
Discuss this article at the Money Table inside the Diner
The terms below should prove useful in understanding the content of this article:
|Anchor/Reserve Currency – Is the currency that is most commonly held by foreign central banks as reserves and is most commonly used to settle accounts when trading for vital commodities such as food/oil etc.|
|Fixed Exchange Rate – Sometimes referred to as a pegged exchange rate. A fixed exchange rate means a currency is priced at fixed range to another currency most commonly the reserve currency. Fixed exchange rates offer price stability to exporters but this comes at the expense of the country being unable to alter its competitiveness, in terms of exports, on the world market. A fixed exchange rate also leaves the country open to speculative attack meaning the country’s central bank must defend its exchange rate using foreign reserves. Notable examples of a country failing to defend its exchange rate occurred in 1992 when the UK failed to defend its rate in what was to be later dubbed “Black Wednesday”.|
|Floating Exchange Rate – Is when a currency is openly allowed to be traded in the foreign exchange market. A floating exchange rate allows the currencies to become more or less competitive depending on market forces but comes at the expense of greater volatility in currency prices. This issue of volatility is problematic for less developed countries and it is this reason why they tend to favour fixed exchange rate policies.|
In part 2 and part 3 we established not only the basic mechanics of the monetary system but also that all major currencies are debt based. Moreover due to the component of interest the total level of debt will always exceed the money supply of an economy. It is this property that means that long-term stability can only be assured if there is continued growth in the money supply and for this growth to remain viable it requires that the growth in the overall economy i.e. wealth increases in lockstep. Since resources and ultimately wealth in the planet is finite it follows that the balance between money and wealth will eventually fall out of sync and we will be faced with a situation of too much money (hyperinflation) or too little money (deflation). This part of the money/wealth series will attempt to answer the question of what scenario is more likely.
It is perhaps logical to think that if the rate of wealth extraction (GDP) declines and money supply increases then the obvious conclusion would be that hyperinflation would be the inevitable end-point as the number of claims on wealth (money) would vastly exceed the amount of actual wealth available in the economy. While such a conclusion sounds plausible it is important to consider that hyperinflation is only a relative measurement. That is the value of the currency can only diminish relative to something else so when making such statements it should be made explicit what the currency is hyperinflating against. In light of this it is best to make a small detour by explaining the International Monetary System and the one remaining function of money that has been neglected up to this point which is:
Relative valuation mechanism: Money acts a means of putting a numeric value to every good or service in the economy.
While this function may seem patently obvious the act of adding numeric value to each good or service greatly facilitates trade. To understand why this is the case it is best to consider a situation where no money exists. In a less developed community with no money the main means of exchange would likely be barter. The issue with barter is exchange rates for each item must be made so if we had carrots, tuna and milk we would need to devise an exchange rate for each combination of item i.e. 5 carrots = 1 tuna, 1 tuna = 3 litres of milk, 1 litre of milk = 1 carrot. While this system of barter maybe possible with a low number of items once the number of goods or services on offer increases then it becomes exceedingly difficult to maintain valuations for all items as all the possible combinations for trade become staggering high even with a modest number of items to trade for.
This issue becomes especially problematic if the availability of some items is very volatile (say some items go in and out of season). Moreover if there is a large degree of trade taking place it will become necessary to keep a number of goods in reserve as some goods such as tuna would be more easily bartered for certain goods while in other circumstances carrots maybe needed to barter for other items.
As we can already see the system of barter is quite cumbersome and the costs of storing all those reserves and maintaining exchange rates for dozens maybe even hundreds of items for future trade create addition costs than can quickly become prohibitive. It is this reason why most communities – once reaching a sufficient size – develop a monetary system as money serves to add numerical value to all items in question eliminating the need for constant reserves and constant revaluation of exchange rates.
As it happens this system is not only useful on a national scale but is especially important when it comes to the matter of international trade where the reserve or anchor currency serves the same function of “money” as it does with a small community described above. For the same reasons mentioned above, it would be impractical for every exporting nation to trade their domestic currency in exchange for each nation it happened to import into. If this method of trade occurred then every nation would need large amounts of reserves of every currency it happened to trade with and this dynamic would suffer the same inefficiencies as highlighted earlier. To avoid this issue a reserve currency has been established and all nations settle the vast majority of international accounts using that reserve currency. As a result all major central banks hold this currency in their reserve (hence the name). If we look at the chart below we find that there has always been a reserve currency and this dynamic has occurred for hundreds of years:
Bretton Woods System
In 1944 when the US officially became the world’s reserve currency with the establishment of the Bretton Woods system as it was clearly the most creditworthy and powerful nation in the world as all its former rivals literally lay in ruin.
In this particular incarnation the reserve all other foreign nations had their currencies pegged to the dollar at a fixed exchange rate. The dollar could then be redeemed for gold and $35 was enough to acquire one troy ounce of gold. This dynamic would continue until August 1971 when Richard Nixon closed the gold window making the dollar a fiat currency.
So how do countries decide on which currency becomes the reserve currency of the world? Generally a currency gains reserve status if it is the currency that belongs to the largest and most creditworthy country in the planet.
While there are definite benefits to having a reserve currency there are clear weaknesses with this system. This weaknesses stems from the fact that if a reserve currency is decided upon then the demand for that currency rises significantly as not only is the currency used for domestic purposes but foreign nations will demand enormous quantities of this currency to settle international accounts. In fact in many cases these international settlements will not even directly involve the country that holds the reserve currency. This large demand creates a strong incentive for the nation holding the reserve currency to overspend and run large deficits so it can supply other nations with the necessary reserves (and liquidity) to allow them to trade. Indeed after only 15 years of the Bretton Woods system being established Robert Triffin made the following observation:
“If you choose a currency because it’s a strong credit, and then give the issuing nation a financial incentive to borrow and print money recklessly without penalty, eventually that currency won’t be the strongest credit anymore!” – Robert Triffin, 1959
This statement would later become known as Triffin’s dilemma. It was this overconsumption and the subsequent over-indebtedness caused by this consumption that ultimately led to the demise of the Bretton Woods system. Despite this demise however the dollar retained its status as the reserve currency of the world. So why did this happen? As stated earlier the chief reason for this system being implemented in the first place was it facilitated international trade by making it far more efficient so despite its obvious flaws, weaknesses and privileges it bestows to the nation holding the reserve currency the system was maintained for this reason. The other major reason for the dollar maintaining its reserve status was the simple fact that there were no viable alternatives that could supplant the dollar and this fact remains largely true even today.
As time went on another problem became apparent and it centred on large exporting nations such as Germany, Japan the OPEC nations and more recently China. The most obvious and perhaps logical action is to think that foreign nations who received dollars for their exported products would sell the dollars they received from their exports in exchange for local currency via their central banks. However if this actually happened then it would have terrible consequences for the export nations future competitiveness. This is because the act of selling dollars would not only cause the value of the dollar to decline; it would also cause their own local currency to appreciate in value relative to the dollar. If this continued then over the time the value of the exported goods would become more expensive and reduce the nation’s ability to export further products.
The solution to this problem was for the central banks of the exporting nations to hold onto the dollars it received from the exporting company and then issue those companies with newly printed money in their domestic currency. Over time however the amount of dollars these central banks held became substantial and so they invested those dollars back into the US economy with the most obvious target for this investment being US treasury bonds. By doing this the exporting nation avoided the problem of an appreciating currency. This dynamic however had the side-effect that an artificial demand for US bonds was created resulting in the rates the US pays for its debts being kept artificially low. This then encouraged the US to spend beyond its means even further as their lack of financial discipline was not punished with higher interest rates as would occur with other nations. This ability to go into debt without incurring any cost became known as exorbitant privilege and is an advantage that no other nation enjoys.
So why did the export nations such accept this dynamic for decades even though they knew the US was becoming increasingly over-indebted, less creditworthy and generally less financially stable? There are several reasons why this dynamic has persisted but one of the reasons could be the simple fact there was no real challenge to the US dollar. Other reasons would be the strength of the US military and influence in international diplomacy meant that many countries were frightened to not challenge the status quo.
Perhaps the most significant reason for the US retaining its reserve status however may lie in the fact the US insured that all oil is traded in dollars. The US clearly understood the benefits of this exorbitant privilege and wished to maintain it even after the demise of the Bretton Wood system. To achieve this they had to ensure that people had to use the dollars to obtain some vital resource and that resource was oil therefore by linking the dollar to oil the dollar gained petrodollar status. To insure petrodollar status however the US had to make an agreement with various Arab nations that if they kept trading their oil exports in dollars they would receive their “protection” from attack. The Arab states agreed to this agreement and have traded their exports in US dollars ever since. This agreement to trade in oil can offer a possible reason why the US waged a war against Iraq as it was said that Saddam Hussein wanted to trade Iraq’s oil exports in Euros and if successful this would have posed a clear threat to the US’s exorbitant privilege and general hegemony of the US dollar.
How is this related to the deflation/hyperinflation story?
So the question maybe asked why this detour was necessary in the first place. The reason it is important to understand the international monetary system is because by realising how the system operates we can begin to appreciate that the reserve or perhaps the more appropriate term: anchor currency is the currency which all other currencies base their value on.
Considering the anchor currency is the dollar then this means all other currencies gain most of their value by how they are valued relative to the dollar as the dollar acts as the lynch pin to the entire international monetary system. In other words, if the dollar were to hyperinflate then the international monetary system would have no benchmark for other currencies to base their value on and so it would be likely that other currencies would have to hyperinflate themselves to maintain relative valuations to the dollar or more likely global trade would collapse. To understand this phenomenon more easily it is best to offer a hypothetical example.
If we consider the dollar to hyperinflate then it must hyperinflate relative to something else. This would most likely be the Euro the Yen or a currency held by an OPEC member. It can be either one; it does not matter. If the dollar hyperinflated against the Euro then the competitiveness of the Eurozone exports would decline to roughly zero as anyone trading in dollars could not afford to buy them. This lack of competiveness may be obvious to see in terms of US customers being unable to afford Euros as the dollar would be worthless but why would it be bad news for trading with other countries? This is because a considerable amount of international trade is settled in dollars and if the dollars themselves are worthless why would the vast majority of exporters continue to accept payment? It is likely they would refuse payment and so trade would drop dramatically (it can be noted that such an event would be highly deflationary as a collapse of global trade would render many companies insolvent). Now the only way trade could continue to remain viable is if the Euro reduced the value of its own currency rapidly to maintain some parity to the hyperinflating dollar. By doing so its exports could remain competitive and exporters can gain some value from their dollar denominated exports although the rapidly changes are likely to bring about its own issues.
It is this property in the international monetary system that almost guarantees the dollar can only hyperinflate once all other major currencies have already done so. The only scenario that can prevent this from happening is if another currency replaces the dollar as the anchor currency. However this seems rather unlikely because most currencies have generally moved from a fixed exchange to a floating exchange rate. This movement is significant because in the past when more currencies had a fixed exchange rate they held more foreign currencies in case they needed to “defend” their currency to keep it within its fixed exchange rate. By not having a fixed rate then there is no such need to hold these reserves which results in the currency fluctuating over a wider range. This however makes it harder for currencies to move towards a new reserve currency as they need to build more reserves of the new future currency.
On this topic of reserves it is instructive to look at the distribution of currencies held in reserve to see what the most viable alternatives for a reserve currency are:
Foreign reserve figures obtained from the International Monetary Fund.
As we see the only other currency that could realistically supplant the US dollar is the Euro and as off 2011 just under 24% of all foreign reserves is held in Euros. It remains questionable however if the Euro will actually take over the dollar considering the on-going Euro crisis that is making foreign investors question the future stability of the Euro. Indeed many of the developing countries are shedding their reserves of Euro at a tune of $90 billion since 2011. If this trend continues, and it seems likely that it will, then it means the chances of the Euro gaining sufficient worldwide confidence to become the next reserve currencies are slim. If the Euro cannot displace the dollar and become the new reserve currency then it is unlikely any other currency will in the foreseeable future seeing as the next largest reserve currency is the Pound sterling which only makes up around 4% of the world’s reserve currency.
The other popular suggestion for a successor to the dollar is the Chinese Renminbi (RMB) however there are several issues China would need to address in making the RMB a viable contender to replacing the dollar. First it must allow the RMB to be fully convertible so investors can move money in and out of the country easily, second there needs to be greater access to its domestic stock/bond markets which foreigners are largely barred from taking part in. Once these barriers are removed then it can be viewed as a more serious contender but even then the Chinese would need to address the issue of a lack of RMB in the world market. To increase the amount of RMB outside of China it would need to run a trade and capital deficit (as the US did) which is a complete reverse of what policies China is currently undertaking. Due to these reasons it seems unlikely China could become the reserve currency in the foreseeable future. For more information on this matter it is recommended to read Patrick Chovanec’s article which summarises the issue quite nicely.
This all leads back to the situation that the most likely scenario is the dollar will maintain its hegemony over the world market and so because of this the chances of it hyperinflating will be low until the other major currencies collapse first. It is possible however that another major currency such as the Euro could hyperinflate and this collapse could cause the dollar to hyperinflate as the breakdown in the European banking system may trigger a collapse in the global trade rendering the dollar useless outside its domestic market.
Before drawing such conclusions however we must consider the inflationary and deflationary currently at work. On the one hand we have various central banks such as the Federal Reserve with their open ended $85 billion a month QE program and more recently the Bank of Japan following suit with their own $43 billion a month program. These programs have created some inflation but only in the assets market and have had a minimal impact on the general economy; this particular issue was addressed in part 2 of this series. The other possible inflationary forces would be in the case of underlying wealth in the economy declining while the overall money supply would increase thus creating a large inflationary force. This inflationary force has been the main driver of inflation in the general economy and as energy prices have risen so has the cost of producing goods/services.
Speaking of energy it is useful to note that in the build-up to the 2008 financial crisis the price of oil shot up to $147 a barrel and these high prices likely played a significant role in triggering the financial crisis that was highly deflationary. These deflationary forces occurred because a large number of bankruptcies meant that a large amount of the money supply was destroyed as debt had to be removed from the balance sheets of various banks. Mass layoffs reduced spending and these combination of factors caused not only the price of oil to collapse to $35 but it also caused large scale declines in various assets prices from real estate to stock and even bond valuations.
It seems likely that another run up in prices in food, energy and oil prices will likely trigger similar events in the future and unless the inflationary forces are stronger than this then the most likely scenario is for a deflationary end-point. This scenario does assume however that the various central banks will not resort to “naked printing” i.e. giving money directly to consumers to spend. Which is a big assumption to make and it is very possible that if a country’s sovereignty faces an existential crisis then it is very possible they may resort to measures such as naked printing or money printing directed towards large government projects that will prove highly inflationary. Moreover it is very possible for currencies other than the dollar to face imminent hyperinflation once the world markets lose confidence in the currencies viability.
In the story of hyperinflation/deflation it is important to note these terms are all relative. If a currency hyperinflates or deflates it always does so against some other currency. Moreover for an event such as hyperinflation to take place it requires that people can take their currency and transfer this money into something of perceived value; which will be some other stable currency. This explains why governments always add capital controls during periods of high to hyperinflation as it makes peoples’ job of moving their money that much harder thus reducing the rate of inflation.
To demonstrate this last point let us consider a recent case of a currency collapse. In the case of Zimbabwe in 2009 the people of Zimbabwe could transfer their wealth to an object of perceived value, in this case the dollar. In the event of a dollar collapse however it is difficult to envision such an option being available as the value of wealth held in dollars is not only much higher but the amount of currency (say Euros, gold etc) is unlikely to be available in sufficient quantities to hold all this perceived value. If people cannot transfer these dollars into any other asset then hyperinflation cannot take place. Seeing as a collapse of the dollar would also cause global trade to decline massively it becomes even harder to see how hyperinflation would take off as assets and currencies across the board would be affected. In other words there would be no place where wealth could be reliably stored and maintained (which was not the case in Zimbabwe). It should also be noted that if global trade were to collapse then there would be many bankruptcies and most significant bankruptcies of major international banks. As was hinted on in part 2 of this series many of these banking institutions hold derivatives that are worth hundreds of trillions of dollars. If these contracts were not honoured it will lead to a significant perhaps catastrophic deflationary event. In any case though even if the dollar hyperinflated then the value of the other currencies would quickly diminish as their profits from exports would quickly plunge to zero due to massive currency appreciation against the dollar.
The other possible “run” on the dollar could be into precious metals such as gold but even this is unlikely to create hyperinflation either as there is not enough gold to absorb all the lost value from the dollar. This issue becomes even more problematic if we consider that gold ownership is more concentrated than ownership over actual dollars. Moreover such runs are likely to be prevented either through high taxation of gold related transactions or outright confiscation of gold as happened during the Great Depression. In addition to all this if there is a collapse in global trade the amount of goods/services in circulation would greatly diminish so the amount of real wealth in the economy would drop while the amount of gold in circulation would remain the same. If the money supply (in this possible case gold) remains stable while real wealth drops then this will create inflation as the claims are not following the rates of shrinkage in the underlying economy.
With all that said a great deal of caution must be exercised. These matters are far from certain and it should be recognised that at best everything said is informed speculation. We also need to acknowledge there is a good probability that the government can bring in some monetary policy that is highly inflationary particularly if their very existence is under threat. Then there is always the possibility of a black swan event that can change the outcome of the world economy quite markedly.
A war between Iran and Israel or a war between North and South Korea are possible examples of black swan events. In the case of an Iran-Israel war oil pipelines could be destroyed creating such havoc in the oil markets that would likely cease to function making international trade very difficult. A lack of confidence in receiving goods/services could see large exporters dumping their dollar reserves in mass leading to the dollar hyperinflating.
Black Swan Event: A low probability high impact event. Such events often take people by surprise however it is actually quite rare for a true “black swan” event to occur as often the event can be accurately predicted years in advance if people scrutinise data thoroughly in an unbiased manner. The last commonly stated black swan event would be the 2008 financial crisis as claimed by various neoclassic economists.
Assuming such events do not transpire however it seems inconceivable that the dollar could hyperinflate unless the government decided to hand people open checks to consumers to spend as these please or started some major government project using printed money (as was the case in the American Civil War). Also while the fate of the dollar is not likely to result in immediate hyperinflation within the foreseeable future the same cannot be said of other currencies. This I suppose could be included as part of the exorbitant privilege that the US enjoys. However even here there is an important fact to take note and that is in recent years some other currencies have enjoyed this privilege albeit to lesser degree. The UK and Japan have enjoyed low interest payments (which are actually negative in real terms) in their bonds despite both economies experiencing high debt, high fiscal deficits, trade deficits AND low growth prospects. The reason this happens is because both these economies enjoy “safe haven” status due to the on-going Euro crisis. Once the crisis in the Euro is resolved then it remains to be seen how the pound or yen will fair. In the event of a major currency collapse (such as that of the Euro) then it is likely we see appreciation in the Yen, Sterling and most significantly the US dollar in the immediate after mass which is the opposite of a hyperinflation end-point.
 = Black Wednesday: The day that Britain went over the edge (The Telegraph)
 = Currency Composition of Official Foreign Exchange Reserves – COFER (IMF: PDF document)
 = Developing World: Euro Loses Attraction as Reserve Currency (SPIEGEL)
 = Zimbabwe abandons its currency (BBC)
 = Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument (Bank of International Settlements – pdf file)
 = Roosevelt’s gold confiscation: could it happen again? (The Telegraph)
 = QE4 Is Here: Bernanke Delivers $85B-A-Month Until Unemployment Falls Below 6.5% (Forbes)
 = Bank of Japan’s Haruhiko Kuroda in aggressive growth move (BBC)
Off the keyboard of Monsta666
Discuss this article at the Money Table inside the Diner
The terms below should help those unfamiliar with financial terms to understand how to read money supply graphs and what the various metrics are used when determining money supply:
|Transactional Deposit – Also known as a demand deposit account, checking account (US) or a current account (UK). These accounts are used to deposit and withdraw money easily as well as make payments to various other parties. The money in transaction accounts can be used as a medium of exchange.
|Savings Deposit – Are accounts that are used to accrue interest but cannot directly be used as a medium of exchange. To use the money held in a savings account it must first be transferred to a transactional account. Interest generated from savings accounts are subjected to taxes at source before it even enters the holders saving accounts. Tax deductions are income and not capital gain based.|
|Time Deposit – Also known as certificate of deposits (US) or bonds (UK). These operate in much the same manner as savings account except that the money is kept for a fixed term until it can be withdrawn. If money is withdrawn before the term has expired then a penalty will be charged. Time deposits are not subject to reserve requirements in the US.|
|M0 money supply (US) – Notes and coins in circulation.M0 money supply (UK) – Notes and coins in circulation plus the commercial bank deposits in the Bank of England. This metric is referred to as “narrow money”.
|M1 money supply (US) – M0 + money held in checking accounts.
|M2 money supply (US) – M1 + money held in savings accounts and small time deposits (under $100,000).|
|M3 money supply (US) – Broadest measure of money supply and is M2 + all time deposits and other large liquid assets. M3/M0 is the multiplier ratio.|
|M4 money supply (UK) – Equivalent to M3 money supply for US is referred to as “broad money”. M4/M0 is the multiplier ratio.|
In part two of this series the basic mechanics of how the monetary system works was explained. In part three of this money series we will go into the implications of having a debt-based currency speculating on how it was created as well as discussing the various advantages and disadvantages of using such a system.
To observant readers who read the second part you will notice that in all instances described money was created by some form of credit expansion. In other words all money that currently exists has been loaned into existence. As we know, all loans made carry an interest component and it is this interest that means that the money supply must always increase at an exponential rate to meet debt repayment obligations. It is this interest bearing component and the exponential rising money supply that acts as a large driver on why the economy must grow and grow at an exponential rate even if this economic growth comes at a detrimental cost such as environmental degradation, rising social inequality, loss of freedoms etc. as repayments must be made.
Another inherent property of the momentary system is that the amount of debt in the system is greater than the total money supply. If you notice with the example provided with the fractional reserve system all money was loaned to new customers what was not highlighted in that instance was the fact those loans carry interest. The same is also true for the quantitative easing; in those instances we can see that the total debt exceeds the money supply because if we include the interest on those loans then we need more money than currently exists. It is this property of the monetary system that means some existing debts (at least if we consider things on a total macro level) must be rolled over with new debts as it would be impossible to repay all the existing debts in their entirety with the current money supply. As a result the existing system can only be sustained if there is continued growth of the money supply and for the money supply to continue growing it requires that the underlying economy must also keep growing.
This need for constant economic growth comes because – as highlighted in the first part of this series – the claims on wealth (money) must roughly equal the amount wealth in the underlying economy. If the number of claims against actual wealth goes out of balance then the value of money diminishes as it no longer offers a reliable means of valuing wealth even on an exchange value basis. Indeed it is this lack of economic growth in the major advanced economies of the world that is the chief cause for the instability in the financial system. While there can be complex debates about the precise nature of why these events transpired and who is to blame it must be recognised that the inherent properties of the system means it can only maintain stable if there is continued growth in the economy. Unfortunately infinite growth is not possible as the amount of wealth (resources) in the planet is finite so at some point this basic reality must be confronted.
This leads us to the question of why such a system came into being in the first place. Why create a system that is so inherently unstable? Now what comes next – at least in terms of how the debt based currency was created – is informed speculation on my part so it must be taken with a pinch of salt. However we can be sure that this is the system that currently exists so we are only speculating about its creation and not its existence. With that in mind I will offer a number of explanations of why this system was established. One of the major reasons is probably as mundane as a basic ignorance of how the monetary system operates. This allows the money makers to create an insidious system with relatively little resistance. Second the desire to make a return on investment is so high that without proper regulation there is always an incentive over time to use any asset be it food, gold a house etc. as collateral for a loan and then gain an income through the interest accrued by those loans. If a person earns enough income through interest then there will be no need to labour (and generate actual wealth) for an income; you just live through the “rents” from the interest and you become part of the rentier class. If enough parties seek a return for their investments then over time money will often naturally evolve to become debt based to service those needs.
Perhaps the biggest driver for a debt based currency however is that debt provides the means to fight wars more effectively. As we know wars are expensive and as time has gone on wars have become increasingly expensive; so much so that merely taxing the populace was not enough to fund a war. As a result many countries eventually had to find other means of securing funds and this came through utilizing debt to increase military spending. After all it is often the side that spends the most becomes the winner. Furthermore it is the winner of the war that gets to dictate the terms of peace and this often involves passing on the debt and most important of all the interest to the losing state. This is what happened at the conclusion of World War I and explains why the loser, Germany, went bankrupt as it was forced into paying all the debts (from itself, Britain and France) accumulated during the war years.
Therefore in light of this it should not come as any surprise that the first ever government bond issued was made by the Bank of England in 1694 to raise funds for a war against France. If all the above is true then we can establish the motive of using this system and why it started but then even this explanation fails to answer the question why this system of bonds (and by extension debt servitude) persisted outside of the wars. Wouldn’t it make more sense if the government simply issued debt free money instead of having to pay interest on money it created? The reason why this system of debt likely persisted outside of war is because in many cases the people who fund wars are either rich domestic citizens or foreign investors both of which are likely to hold significant political clout. This relationship becomes even more telling if these investors are other national states especially if that national state is stronger than the debtor nation (examples of this abound between third world debtor states and first world creditor nations). It is because of those reasons that interest payments must be honoured or the country in question will be cut off from international markets.
Over the centuries these debt obligations have become even stronger. First as most countries moved away from monarchist rule to that of democratic governments this meant that debts accumulated through previous administrations never died. In the past when a king died his debt died with him but under a democratic arrangement all debts become that of the state and so debts never expire. This issue is highlighted in the case when a despotic regime is overthrown but the new government is still under obligation to payback old debts from the old regime; such debt is sometimes recognised as odious debt in international law.
This issue of debt repayments has become even more acute in today’s globalised economy as nations have become dependent on the global economy to provide its basic needs such as food, energy and basic goods. This dependence coupled with the strength of “foreign investors” who own the largest financial and corporate institutions means that states are beholden to their demands and can only function by staying in this globalised system as national states have, for the most part, lost their autonomy as they have lost their means of production for some vital resource and can only obtain them from other markets. This can lack of “production” even extends to money itself as states do not create money themselves as all money is essentially created by private institutions that governments must effectively pay a rent (interest) to use; this dependence in obtaining money (debt actually) means the relationship between state and private financial institutions has – over time – come to resemble more of a parent and child relationship than that where both counterparties wield equal power. This issue of dependence would explain why various EU nations have continued to accept the onerous bailout conditions despite the damage it does to the country’s economy, finances and political legitimacy. This control, through financial dependence, seems to be recognised by various financial elites most notably Mayer Amschel Rothschild who had this to say:
“Give me control of a nation’s money supply, and I care not who makes its laws” – Mayer Amschel Rothschild
In addition, as noted earlier; all money is created into existence through loans and since these loans are created out of “thin air” it does not cost the people who issue the loans anything. Because of this money can act as an instrument of wealth extraction due to the interest bearing component of all debts accumulated this system. This means so long as the person controls the money supply it is possible from them to extract wealth from people with no/limited money (or credit) who must not only labour to repay the principle on the loan but they must work that “bit extra” to pay off the interest on the debt. All that’s really required is that the loans issued are not invested too badly to allow someone to accumulate great wealth over time as effectively they will claim a small percentage of the entire countries production. If even this gain is 1% (it is likely higher than this) then through compound growth large numbers will be generated in a relatively modest timeframe. Thus another inherent property of this system is it acts as a form of wealth redistribution that sieves wealth from the bottom and takes it towards the top. It should come as no surprise then that during a period of large banking (and by extension credit expansion) that the level of inequality in society will rise appreciably. The video below describes the points raised quite well:
Note: While Damon explains the money side of the equation well he largely ignores the wealth side of the debate which concerns limited resources. Because of this oversight his theory of how the world banks will rule the world is likely to be false as the large institutions can only be maintained with abundant sources of energy.
Saying all that there are numerous advantages to this monetary system and these must be acknowledged. First of all as already established since the monetary system expands at an exponential rate this insures that the money supply can match the increase in the economy as both tend to expand at an exponential rate. It is important to recognise that the economy is expanding at an exponential rate and is not increasingly in a linear manner (which tends to be what we think intuitively). If we look at the production and consumption of various resources we can see this exponential growth more clearly:
For most of human history economic growth primarily came from expanding populations but in more recent years, economic expansion came about through increased worker productivity. It is commonly stated that this increase in productivity came through the use of machine but as explained in Energy part 1 this increase in productivity primarily comes from the arbitrage between expensive labour energy and cheap energy that derives from fossil fuels. In fact the difference in use and exchange value as described in part 1 of this series has been a huge source of wealth and is one of the instrumental factors in how the US has maintained hegemony over the global economy by not only being the reserve currency of the world but by directly tying their currency to that of oil thus forming the petro dollar. This issue will be described more fully in part 4 of this series.
In any case an exponentially increasing economy means more wealth enters the human economy (at the expense of the overall ecosystem) so for a money system to remain stable (in the sense of stable prices) then the claims on this wealth must increase in tandem. This balancing act between money supply and the real wealth of an economy is crucial because if this balance is not kept then we will either see inflation (too much money) or deflation (too little money). Therefore an exponentially rising money supply serves as a good platform in the sense it avoids deflation (a fall in prices) which is a perennial problem of capitalism as there is always the issue of overproduction or as it is sometimes described underconsumption or declining aggregate demand (which is the current issue facing economies since the financial crisis). To learn more about this particular matter it is advisable to read the Waste-Based series (here and here) as this is a topic in itself. It should be noted however that deflation also means that it becomes harder to pay debts which is another big reason why central banks strive to avoid deflation. In fact one of their chief objectives is to avoid deflation. Indeed Ben Bernanke, head of the Federal Reserve, has made a doctrine about avoiding deflation and had this to say about deflation:
“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an on-going basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress.” – Ben Bernanke, 2002
Another advantage that comes from a debt based monetary system is it reduces the issue of hoarding which is quite problematic in gold based or less developed monetary systems (such as those in Sudan). The dilemma that comes with saving is that money leaves the economy and until this money is spent it is left out of the money supply. If enough people save or hoard money (under the mattress perhaps) then it will mean insufficient amounts of money can be invested which will adversely affect the economy as growth will be severely curtailed. By offering interest to these savers there is an incentive for savers to give their money to the banks who then loan this money out to other users who will invest or spend it in the greater economy. A percentage of the interest gained from those loans is then passed back onto the saver and this is how the saver can accrue interest from their savings account. This method of incentivising savers through interest also has the beneficial effect that less savings must be held by the saver privately to meet on-going expenses thus reducing the cost of providing security in protecting and transporting this hoarded cash.
It is due to these advantages why this monetary system has persisted and can even explain why a fiat based system has even superseded the gold standard as the money supply can increase faster if it is fiat based and does not follow a gold standard. By doing so, this allows the relationship between a growing economy and growing money supply to be maintained for longer. Saying that, this was not the only reason for the departure from the gold standard and a large cause for leaving gold was to prevent the US losing its entire gold reserves which would eventually lead to it defaulting on its debt obligations. On this note of debt repayments it is important to understand and appreciate the mathematics of compounding growth.
Mathematics of compounding growth
We often here that the economy is growing annually by 1% or if we are lucky 2.0% and consider this growth rate rather benign and harmless at least from a resource depletion perspective but if we consider the matter more deeply we will find the basic arithmetic that comes from compound growth means that very large numbers can be generated by a modest number of doublings. Albert Bartlett in the video below describes this phenomenon succinctly:
To understand the significance of compound growth it is best to consider the amount of time it takes for a given quantity to double. The simple method in calculating this would be to apply the rule of 70 which has the advantage of being relatively easy to calculate mentally. In fact if any annual percentage is given (say for the rate of interest) then it is highly recommended you apply this mental calculation in your head to see how quickly it will reach its doubling time. To make a more precise calculation however the following formula should be applied:
Doubling time = In 2/ In (1+R)
r= Interest for example 1%=0.01
For the mathematically inclined the following
formula came from this equation:
FV = PV*(1+r)t
2 = 1 * (1+r)t
In 2 = In (1+r)t
In 2 / In (1+r) = t
where FV =Future Value , PV = Present Value, r= interest t =time
When using the rule of 70 or the formula shown above we will find that the doubling time is 70 years for 1% compound growth and this will decline to approximately 35 years for 2% compounding growth. What is most significant in this process is that after every double the total number of the new doubling amount will be greater than the sum of all the preceding growth. This phenomenon can be easily seen in the table below:
|Growing quantity||Cumulative total|
The significance of this chart is that as demonstrated earlier we live in an exponential world where various resources are consumed at an exponential rate (or needs to meet exponential growth rates) in tandem with economic and money supply growth. However as there are limits to growth due to resources being finite this dynamic of compound growth insures that the end point will be reached surprisingly quickly. In fact as we will find out many of the resources exhibit a bell type curve for its depletion profile and this is most notably the case for oil (see the peak oil article for more information on this). It is likely that when the most critical resource reaches the decline phase of the bell curve we will see issues with the monetary system as well as, on a fundamental level; it will not reflect the amount of wealth that is being extracted. Once this happens it is likely the claims of wealth will go out of sync and we will either experience deflation or hyperinflation as the monetary system can longer reflect reality of the actual wealth in our country.
We have a debt based currency system where the vast majority of all money creation comes from commercial banks and not the central banks. As a result it is primarily the commercially banks that will dictate what happens with the money supply. While the central banks can add reserves to these commercial banks this does not create new money for the general economy unless these banks decide to actually loan this money out. If that can happen then there would be an expansion of the money supply. Therefore much of the growth or possible destruction of money will come from the side of commercial banks and it is their activities we must monitor if we wish to determine how the monetary system will unfold.
Since all money is created out of interest bearing debt then it means our money supply increases at an exponential rate and can only survive by continued growth. This continued growth while clearly unsustainable has worked well however as the growth in the money supply has matched economic growth that also increases exponentially. However due to maths of compound growth it will become increasingly untenable for this dynamic to continue particularly if energy resources pass their peak in global production. When looking at the depletion profile of critical resources such as oil we find it follows a bell shaped curve:
If we observe the graph carefully we will notice that the first half of the bell shaped curve resembles the profile of an exponential curve and it is this property why the money supply could match increasing rates of consumption quite well for most of the 20th century and the early part of the 21th century. It is after this point of peak however where we will see a mismatch between our money supply and our overall economy. Since money is a claim on wealth if the monetary continues expanding despite a reduction in our economy then we would get high inflation to possible hyperinflation. If on the other hand money is destroyed (via bank defaults or excessive hoarding) caused by a contracting economy then we may get deflation but only if money is destroyed at a faster rate than a reduction in the overall economy.
In part four of this series we will explore the possibilities of this hyperinflation/deflation debate.
 = My life and work (pg. 179)
 = ‘Money: Whence it came, where it went’ (pg. 5)
 = Economics 12th Edition by Lipsey, R. G. and Chrystal, K. A. (2011) (Oxford University Press. pg. 455)
 = Banking Regulation of Uk and Us Financial Markets (pg. 83)
 =The Financial Crisis Inquiry Report: Official US government edition (pdf document: enter page 76 on pdf file is page 48 on actual report.)
 = Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument (Bank of International Settlements – pdf file)
 = GDP ranking (World Bank – pdf file)
 = Remarks by Governor Ben S. Bernanke (Federal Reserve Board)
 = National Economic Accounts (Bureau of Economic Analysis)
 = Tax on bank and building society accounts (HM Revenue & Customs)
Off the keyboard of RE
Published on the Doomstead Diner on April 2013
Discuss this article at the Frosbite Falls Daily Rant inside the Diner
As the Collapse marches its way around the world and both Sovereigns and Banks are “discovered” to be completely Insolvent and BROKE, the BIGGEST of Newzpeak inventions is the idea of “Recapitalization”. This sounds Technical and Capitalist enough that most J6Ps buy it without a PEEP, even when their own Deposit Money is stolen for the purpose of “Recapitalizing” a Bank which has just gone BK and lost everybody’s money!
If I go BK, does anybody Recapitalize ME? WTF do people accept the idea FAILING Banks who JUST lost EVERYBODY’s Money should be “Recapitalized”, with the SAME jackasses running the show who just lost everything?
What a fucking RACKET! Anytime you Go Broke in the Casino, you just “Recapitalize” and go out gambling AGAIN! You just gotta be close enough to the Nodes of Power at the Top of this Game to ALWAYS get “Recapitalized”, even when the whole SYSTEM goes Kaput!
Then there is the Nonsense of Splitting Failed Banks into a “Good Bank” with performing Assets and a “Bad Bank” with all the garbage. Who will Buy Stock in the “Bad Bank”? The Bad Bank is just a Newzpeak Euphimism for TAXPAYER LIABILITY. Da Goobermint gets the Bad Bank, the Illuminati get the Good Bank! There’s a Fair Deal for you! Privatize the Profits, Socialize the Losses in a NUTSHELL!
Next is the Dumbass idea of “Nationalizing” Failing Banks. WTF do I want to Nationalize a LOSER company? Put the whole NATION on the Hook for the bad debt of said Bank, that’s a GREAT IDEA! Why not just let the LOSER Bank go to the Great Beyond and start a NEW Bank on a National Level?
Why NOT is because of course everyone bought into the system, and if you let those Bad Banks go Belly Up, lotsa folks won’t get their Pension Checks. Hell, they won’t even get back their Savings or Checking Account Money nowadays!
Money is a SYSTEM people become dependent on, just like say having a Smart Phone. When I was a kid, you had a Phone at your house, that is how people could talk to you from far away, but you did have to be HOME to receive the call. “Answering Machines”, the precursor of Voicemail didn’t exist at the time. Those Cassette Driven Recorders didn’t emerge until I was well into my teens. Nowadays though, you simply can’t EXIST and be a part of the Techno-Economy without a Smart Phone, to not only keep you Hooked in to communication with your Workplace (why didn’t you pick up? we NEEDED you to come in and fix the Server Crash!), but of course also to Tweet to all the WORLD your latest 1 sentence declaration on Monetary Collapse! Even fucking Bill Gross of PIMPCO Tweets idiocy!
Somehow though,before Voicemail, before Answering Machines, before even the Fucking TELEPHONE was invented, society managed to function OK, to one extent or another. In my parents time when they were kids, though the Telephone had been invented, almost nobody even had a phone in their domicile. How did they “Call in Sick” to work in those days? Answer, they didn’t of course. Workplace made do, so-and-so isn’t here today. If SaS does this too often, he gets fired. Now though, you gotta answer the phone, concoct a REASON (my dog is having a mid-life crisis!) and show up next day with a note & diagnosis from the Canine Social Worker to explain yourself and your Dog’s emotional angst. LOL.
Dependent most of us are in the Industrial Economy on our Automobiles, and Cheap Fuel to push them down the Road to get us to Walmart to buy Everything at Low, Low Prices Every Day and to get to the Workplace or to get the Kids to Skule…etc. That is a tough dependency to BREAK, but NOTHING compared to breaking the dependency on the Monetary System. Removing yourself from this inside Industrialized Nations is for all intents & purposes quite impossible for most people, there isn’t any real Wilderness left to escape to and do Jeremiah Johnson. OK, up here in Alaska you can still sorta do it if you stay on the move all the time, but soon as you drop down a Cabin anywhere the Rangers will drop in on you. You certainly can’t start a COMMUNITY out in the Bush without Goobermint dropping in to regulate your lives. A LAW up here is if you have kids, your Domicile has to have Hot Water and Toilets. You can’t keep your kids if you live in TeePees and use the Great Outdoors as a Toilet like every other mammal does. Child Protective Services will drop in and take the kids and drop them into the Foster Care system. Which is a pretty good Racket also if you DO live in a McMansion with Hot Water, you get around $700/mo from the state for every kid you take in this way. The state does NOT however pay the Original/Biological Parents 700 Bananas/mo to maintain the kid. How fucking STUPID is this system?
The coming REALITY of course is that the State is FRESH OUT of Bananas. Amongst the FIRST Casualties of Banana Shortage will be the Pension Funds of J6P, first the Corporate Ones from BK companies, then the Municipal and State ones, finally the large Goobermint ones like Social Security. All these funds are already being raided to keep the failing banking system propped up with creative accounting tricks.
Sadly of course, JUST raiding Pension Funds isn’t sufficient to prop up a system which in Euotrashland is leveraged probably 100:1, and here is probably 50:1, though nobody KNOWS really because so much of the leveraging is in the Shadow Banking System of Derivatives. No, now they ALSO gotta “Haircut” the Depositors, who don’t REALLY own their Money as soon as they Deposit it in a Bank. Once deposited, the Bank is free to Legally Gamble it however they like, Pledge it as Collateral 10 times over in Rehypothections schemes, and it just ONE of those bets goes South and they get a Margin Call, you can say Bye-Bye to your Money.
So, due to insufficient Pension Funds and Deposits to STEAL here to make good on all the various BAD BETS of Filthy Rich Pigmen Banksters, after everything is STOLEN, what is asked for NEXT? RECAPITALIZATION!
Let me explain this concept to you in PLAIN ENGLISH. Somebody else can translate it into Kraut for our Kraut readers. The Chinese Readers are SOL since we have no Han Diners I am aware of at the moment, and the Chinese are TOAST anyhow. LOL.
The folks who Own the World run this system of Ownership through the TBTF Banks they Own. If the Bank goes Belly Up, they lose everything, money and Ownership, it all gets thrown into a big Bankruptcy Pool to be divied up and sold off to whoever still has some money, which really is about nobody.
What “recapitalizing” a Bank really is takes theoretical Future Tax Revenue from the Taxpayer and GIVES it to the Uber Rich, the VERY SAME PEOPLE who just LOST EVERYTHING to begin with! As I said at the beginning of this Rant, WHAT A RACKET! You can’t EVER go Broke, every time you lose your bets in a big CRASH of the monetary system you are running, you get J6P to “recapitalize” you because you so expertly handled his life savings last time.
In reality however, “Capital” is not Debt nor is it the Fiat Money representing that Debt nor is it even Piles of Gold stored in Basement Safes of Sovereigns, Illuminati or Small Time Zero Hedge Piglets either. Capital is the Resources of the Earth, Energy stores in particular in the form of Fossil Fuels through the Industrial Era. Through the process of the War Machine and the Legal System regulating Property Ownership, a small Cabal of People gained control over most of the important Resources of the Earth, Land to begin with, Energy stores in the form of Coal & Oil through the Industrial Era. Here in the FSoA, around the time Da Fed was chartered in 1913, this Cabal was probably around 150 Industrialists and Banksters, probably somewhat larger now though the ones who got in earliest on the Ponzi remain the most powerful ones here. In the FSoA,you can identify the Rockefellers, Astors, Vanderbilts, Morgans et al, the “Robber Barrons” of the 1800s as the main players. Part of a still larger Ponzi which goes back to the Collapse of the Roman Empire, same general Monetary System has been perpetuated throughout the millenia, though it took a Big Hit during the Dark Ages. Did not disappear though, it was mainly perpetuated under the auspices of the Holy Roman Catholic Church through the Dark Ages. This crowd mainly identified by the Rothschilds, Kuhns and Warburgs on the Banking end, and the Plantaganets, Hapsburghs et al on the Political End in Eurotrashland.
Why is it every time there is a Massive Monetary Crash (and this is not the first one by any means, they occur regularly every 80 years or so), the SAME people get “Recapitalized” by J6P to remain in what appears to be Perpetual Control over the Resources of the Earth, and the Political Systems which Goobern the life of J6P? The reason was probably best stated by Henry Ford, who went BK around 5 times on his way to becoming one of the world’s most “Wealthy” men:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
You see, probably 99% of people have ZERO understanding of how the Monetary Sytem works at ALL. They simply TRUST in it, and they don’t have smarts enough to separate and devise their own. In fact you DO have to be VERY SMART and CRAFTY to set up a Monetary system which will last any length of time at all, and even then you have to have Political Control over vast resources of the Earth to do it. Such has been the case for most of History, going right back as far as the Tower of Babel. Those IN CONTROL recruit and sift out people who can run such a system, Ben Bernanke and Mario Draghi are examples of that. “The Smartest Guys in the Room”. J6P can’t field anyone who holds a Candle to these guys, they ARE really smart, even if they are working from some really flawed basic principals.
So when a given iteration of the Monetary System fails, you get a buncha Wars as was the case in Eurotrashland from the collapse of the Roman Empire circa say 350AD or so, or WORLD WARS as was the case around 1900 to Present Day. WWII never ended, its just been pursued at a somewhat lower level regionally since Armistice was signed between the major powers of the Industrial Era.
Why do we get stuck with a NEW iteration of the same Bad Old System every time so far? Because when the Monetary System collapses, the SAME people are in control of the Military Apparatus. J6P has no control over that, he just ends up as Cannon Fodder fighting the battles as new alighnments and geopolitical and economic structures are refabricated. This leads MANY people to believe this will be the case in perpetuity, it is a Popular Meme amongst many Diners even. I have Ranted at length on numerous occassions why this is not so, but I STILL don’t have too many BELIEVERS on this subject. It’s hard to get people to understand Money to begin with, still harder to explain a Paradigm Shift of this nature.
You see, all reconstructions of this type of Monetary System depend on a SURPLUS of Capital,aka NATURAL RESOURCES. Mathematically speaking, you simply cannot reconstruct such a system in the absence of such resource, THAT is the Capital! It’s not the money, it’s not even the Gold. It is what those things REPRESENT, and when it is GONE, both represent nothing at all.
Are resources COMPLETELY gone? Of course they are not, but relative to current population size, they are in serious DEFICIT. You cannot get any REAL GROWTH out of this, no way no how, so you cannot pay any Interest. Thus you get ZIRP. Under ZIRP, Pensions, Equity Investment, everything FAILS. ZIRP is a KLUDGE to keep the system rolling another day, but it fails to bring return on investement, regardless of money printing to prop up markets. That is mainly just a redistribution of wealth mechanism, taking money from the Poor to Prop up investments of the Rich. All going south though, just the poor get hit first here this way.
The structure is bound to implode mathematically speaking, it doesn’t have basic energy support to keep it running. It CANNOT be rebooted in the absence of copious energy, or a massive population die off of Homo Sapiens. The latter is a likely outcome, but such a massive die off would deconstuct Global Power Structure, so you still don’t arrive at equilibrium this way. You’ll just get a lot of flux in the system as it re-equilibrates. I don’t think too many of the Pundits understand the equilibation dynamics, I am quite sure John Michael Greer doesn’t, nor Jimmy Kuntser. Dmitry Orlov to an extent. Steve from Virginia sorta gets it, but he traps himself in the 1700 Paradigm most of the time.
Anyhow, Recapitalization of Banks is COMPLETE garbage, and needs to be Politically Repudiated, which it will be. Unfortunate OUTCOME of that is most of the systems we take for granted will collapse, and and EXTRAORDINARY number of people will DIE. So it goes. You can’t make an Omellette without Breaking a Few Eggs.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on April 3, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
What is underway in this world right now is more of the same. It’s a song: ‘La la-la- la-la … more of the same!
There is more of the same thievery on the part of the establishment, everywhere in the world. There is more of the same poverty, there is more of the same denial … There is more of the same advertising for unlimited resources, more of the same consumer sales, more of the same real estate rebounds, more of the same freeway lane-miles added to more of the same freeways …
More of the same hollow, pointless ‘progress’.
More of the same, the management systems the world has relied upon since the end of World War Two are breaking down but more applications of the same failed management approaches are underway. To support more of the same failures there is more of the same moral hazard, more of the same credit provision, more of the same propaganda and lies. There is more of the same breakages with more of the same exponentially increasing consequences. There is more of the same corruption, more of the same outright pillage and bullying.
There more of the same indifference and refusal to face reality. There is more of the same flight out of banking deposits into risky currency traps even as there is more of the same flight into banking deposits! There is more of the same sense of foreboding, that there is no way out of the traps that we have built for ourselves, that the end of the ‘good old days’ is right around the corner. At the same time, there is more of the same begging/wishing for more of the same ‘good old days’.
With more of the same taking place right now, less of the same will certainly be a whole lot worse. Pray thee Lord for more of the same.
More or the same makes life easy for the analyst even as it makes it more difficult. More of the same becomes very hard to become outraged about. More of the same evil: how do Alex Jones or Yves Smith remain enraged at the highest pitch day after day about more of the same perfidy? The government will be just as conniving next year as it was ten years ago, the big Wall Street banks will still shove more of the same blood funnels seeking more of the same easy payoffs and more of the same bonuses. Who really cares?
The market can offer more of the same a lot longer than you can remain solvent!
At the same time, more of the same analysis becomes very simple: readers can turn to older articles to see how the same really was when it first emerged. It’s more of the same now! It can’t get any easier!
Singularity = self-writing analytical articles!
Unknown photographer: Dr. Edward Chapotin house and his medical practice next door in 1915, on Woodward Avenue @ Woodbridge Street, from the Burton Historical Collection, Detroit Public Library- University of Michigan. Note the streetcar tracks on Woodward. This business/residence was located within a few blocks of the Detroit River.
More of the same lurks on both sides of the political divide from Richard Alford by way of Yves Smith, (Naked Capitalism):
Richard Alford: Fed Policy – (more of the same) Old Wine in New Bottles
Yves here. This is an important post, in that it describes how the Fed, despite the unconventional look of some of its measures, is using more extreme variants of traditional policy approaches, and why that is not such a hot idea.One place where I quibble with Alford is in attributing the way Greenspan dropped short term rates dramatically in the early 1990s recession as driven by unemployment policy. At the time, there was considerable concern about the health and stability of banks in the US. It wasn’t just savings and loans that were hemorrhaging losses. Citibank nearly went under. Some major commercial banks in Texas and the Southwest had lent heavily to spec commercial real estate projects at just the wrong time. And although it was mainly foreign banks that hoovered up participations in LBO financings, like Campeau, that came a cropper, US financial firms had exposures as well. Greenspan’s driving short term rates to the floor created an extremely large spread between short and long term interest rates, enabling wounded banks to borrow short and lend long, and rebuild their capital bases out of artificially high profits.
Another quibble is at the very end, where Alford is correctly concerned about our sustained trade deficits, but also is unduly exercised about our fiscal deficits. They are in fact necessary and desirable as long as the business sector keeps net saving, which it did even in the years immediately preceding the crisis. If capitalists refuse to play their proper role and loot rather than dedicate resources to future growth, government has to step in. But as we are seeing now, what is unsustainable about this arrangement is the politics much more than the economics.
But Have We Seen It All Before?
For all their differences in perspective and emphasis, most of the opposing evaluations of the merits of Fed policy have one element in common: They all appear to be largely prisoners of a Phillips Curve mentality. Policy is set based only on the current levels of unemployment and inflation. Policymakers, economists and pundits do not look beyond near-term changes in unemployment and inflation when evaluate the risks and returns of alternative policy responses.
However, there may be a more troublesome risk attached to current monetary policy. The risk is that the current policy stance – low interest rates as well as QE- is reducing the probability of a return to self–sustaining economic growth … “
Alford is a very bright guy and he’s paid his dues within the money management ‘racket’. Yves = ditto. Nevertheless, it’s impossible to take either one seriously. What does ‘sustainable’ mean? More of the same tract houses? More of the same auto sales? More of the same insurance and finance? More of the same strip malls and Pizza Huts? More of the same F-35 fighter jets? More of the same coal mines, gas pipelines, VLCCs … how about more of the same airports? What is sustainable about any of this? How about those tens- of thousands of tombstone-like concrete towers in China? How many more-of-the-same vacant apartments are needed before the Chinese get to sustainability heaven?
How does everyone get there? There are seven billion of us meat-bags right now on Planet ‘E’ and only 15% have automobiles. Do we ‘arrive’ when 30% become automotive? How about 50%? Where do we put the 800 million or so extra cars? Where do we get the fuel for them? Does the US build another 55,000 mile interstate highway system to go along with the 55,000 mile system we already have? We cannot afford to fix our roads now! How is more of the same sustainable again?
‘Sustainable’ is gross abuse of the language. In order to ‘have’ our desired industrial goodies we must borrow. Our machines do not pay their own way. If they did there would be no debts as deploying machines would retire them. That they do not do so is self-evident. With thousands of millions of machines there is an exponential increase in debt required to assemble them and provide them with fuel. This is debt that even the entire world’s bloated finance establishment cannot provide.
Credit is a resource in the sense that it is a means to allocate other resources: with less of these other resources to allocate, adding credit becomes pointless and unaffordable. US recessions from 1970- onward were the result of fuel shortages- and price shocks including the current version. Even the modest credit demands of the earlier time periods … were breaking. Today’s high real credit requirements are destructive in and of themselves without the added blows of high fuel prices.
People must understand: the Glory Days are gone and never coming back … ! Santa Claus is not going to come down the chimney with some kind of industry … to take the human race by the hand and lead it into the Promised Land. Our collective future is binary: we are either joint-and severally destroyed by shortages and inability to adjust to them … or we escape destruction by the skin on our noses.
Watch what the plutocrats are doing right now! They know what’s going on because they can afford ‘intelligence’ and are ruthless enough to take advantage! They use the time remaining … to steal … then leave the rest of us to Mad Max.
It will take every single inner resource the human race possesses … clarity, honor, courage, perseverance, helpfulness, strength, wisdom … the willingness to endure tremendous suffering and hardship for decades and perhaps centuries … what is absent in popular culture particularly among finance analysts … it will take all of these things and more to escape our self-constructed annihilation.
Right now, this isn’t happening. There is too much fantasy thinking and denial about redistribution … what is there to redistribute, exactly? Deck chairs on the Titanic?
Here is another variation on the theme … from Bill Buckler @ ZeroHedge:
The Puppet Master – Government For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly, successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century – the time since World War One – to all but totally submerge that legacy in a new wave of government dependency.The old and tired phrase – “I’m from the government and I’m here to help you” – is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.
The great myth is that our industrial economy is ‘productive’, that it is saddled temporarily by parasitic governments (fascists) or bankers (socialists). Get rid of one or the other and the industrial economy will spread its wings and fly off to consumer good paradise, taking the American Worker along with it.
This is false: the product of industrial economies is waste. Because waste is not a good there are no organic returns for industrial activities. Instead, the cost of the activities must be met with credit. To provide the needed credit there are bankers, to service the debts there are governments.
That this is so is self-evident: if industry was productive — if there was any product at all other than waste — there would be no crisis and no debts. Any shortfalls would be met by deploying additional machines, which would pay for themselves, thereby retiring their own debts … and ours besides.
The intersection of Woodward Avenue and Woodbridge Street is long-gone, so are Doctor Chapotin’s restrained yet whimsical houses. All of them are replaced by the urban equivalent of the place-mat, the concrete pad and grassy area(s). Note the occasional tree.
Forsaken and bleak … the backdrop for a homicide, here is the adjacent 1 Civic Center Plaza. Perhaps Chernobyl is more soulless, then again … perhaps not.
Today, there are more and more machines, these do not pay anything. Instead these machines must be subsidized by robbing from savers, retirees, workers and business customers. Meanwhile, the world’s economies are burdened by hundreds of trillions of dollars worth of non-repayable debt … taken on to build and run the machines.
Without credit, there is no industry. Meanwhile, our precious fleet of machines strip-mines the world of credit along with resources. This stripping process is underway right now in Europe and elsewhere … coming soon to your town! (It’s already happened if you live in Detroit.)
The underlying cause is centuries’ long destruction of resource capital. The consequence is diminishing resource throughput, diminished capital with a large and increasing scarcity premium attached to it. There is simply no more (of the same) capital to waste affordably. What capital remains is too valuable: the cost of retiring debts is greater than the worth of debts themselves. Whether the managers admit it or not, the markets right now are pricing the true costs of waste beyond the reach of today’s wasters … also tomorrow’s.
Because ‘more of the same waste’ is a physical process, it doesn’t matter who manages it, Austrian or Marxist, neo-Liberal or Friedmanite, salt-water or fresh-water. All of them will fail. Regardless of who is in charge there will always be less.
Don’t let the common sense baffle you! It’s not that hard to figure out. If prosperity = waste, nobody can promise prosperity any longer.
The ONLY solution is stringent energy- and resource conservation. There is no other solution, only evasions: to do nothing or to attempt more of the same waste means conservation will occur ‘by other means’. See ‘Cyprus’ as the latest example.
Off the keyboard of Monsta666
Discuss this article at the Money Table inside the Diner
Below are a small set of terms that may prove useful for those unfamiliar with financial terminology:
|Bonds – A form of loan (or more correctly debt security) where the party who issues the bond is the borrower (debtor) while the party that purchases and holds the bond is the lender (creditor). A bond will pay interest usually on a quarterly or annual basis and this interest is called a coupon or yield. Nearly all bonds mature after an agreed period of time at which point the principle on the loan is fully repaid. There are some rare instances where a bond never matures.The most commonly traded bonds are local/state government bonds and corporate bonds. There are some hybrid bonds where the bonds can be redeemed for stocks in a company. Bonds tend to offer less returns than stock but the returns are more reliable as they tend to be less influenced by market conditions.|
|Stocks – Are a form of equity where a party owns a share (a fraction of ownership) in a company. Shareholders are often entitled to quarterly or yearly earnings through dividends. While the level of returns in stocks is generally higher, stocks carry greater risks as they are more subject to market conditions. Unlike bonds, stocks do not mature and remain outstanding indefinitely unless the company goes bankrupt or its ownership model changes significantly.|
|Derivatives – Are contracts that derive their value from some other asset. For example a long-term future contract for a food item derives its value by what the value of food is perceived to be in the future. The most widely known derivative contracts are futures, forwards, option and swaps. Traditionally such contracts were used by farmers as means of insuring they received stable prices for the food they sold throughout the year to protect themselves from food prices which fluctuated quite dramatically during the year. A stable price would aid a farmer when it came to planning their future income and outgoings. In more recent years energy companies have heavily used these contracts for similar reasons.A few years prior to the financial crisis the derivatives market increased dramatically as banks began trading heavily in Repurchasing agreements (Repo) which are basically formal contracts to roll over existing debts. Collateralised Debt Obligations (CDO) which is a form of loan where 100s even 1000s of mortgage loans are bundled together and sold to other parties. Finally there are Credit Default Swaps (CDS) which is basically a form of insurance to protect the lender in case a party fails to meet its debt repayments. The issue with CDS is that the owner of a CDS is under no obligation to buy the product they are insuring against which leads to the moral dilemma where they have an incentive to make the counterparty default. To offer an analogy it would be like owning fire insurance for my neighbour’s house. Since I do not own the property I am insuring against I would suffer no loss (financial or material) from its burning and would only gain profit if a fire were started by “accident”.|
|Hypothecation –The process where a borrower offers collateral to secure a debt. Thus the lender “hypothetically” controls the asset should the borrower default. A common form of hypothecation would be mortgages.|
|Re-hypothecation – Is the process where the creditor resells the loan that was secured by collateral by the borrower. To take the example used above; the bank will resell the mortgage that you are paying off to another party and then take the proceeds from that sale. As a result the new party holds “hypothetical” ownership to the collateral, in this case the house. At least that is the theory; sometimes due to how contracts were written ownership of the loan/property can become a matter of dispute.
“The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few.” – Henry Ford, 1922
In the first part of this series we explored the fundamental differences between wealth and money which described that at best; money is only a claim on wealth and is not wealth itself. In this second part we delve more into the actual mechanics of how our monetary system operates how it shapes our world and interacts with the underlying wealth that ultimately comes from the ecosystem.
Fractional reserve banking
It is perhaps one of the largest misconceptions that most of the money created in an economy comes from the central bank but this belief, even though it is promoted somewhat by various central bankers, is a false one. In fact most money creation occurs through commercial banks via the fractional reserve banking system. The system itself is largely counterintuitive in the sense that because the process generates money so easily it is rejected for being morally objectionable. Indeed this is exactly what John Kenneth Galbraith a former Economics professor in Harvard had to say about our monetary system:
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.” – John Kenneth Galbraith, (1975)
So what is the fractional reserve system? In essence it is the process of how banks lend out money that is a multiple of the amount of deposits (or reserves) held in their vaults hence the term fractional reserve as the reserve amount is only a fraction of the total money supply. To make this clearer it is best to offer a real life example of a working process of this system in action. Suppose we had a fractional reserve system with a 10% reserve requirement. In this scenario the amount of money in circulation will be ten times greater than the amount of deposits held. In other words 90% of the money created will come from commercial banks through bank loans while the original $100 came from the central bank. The process occurs because when a person deposits $100 into a bank the bank will loan 90% of this deposit out and retain the remaining 10% as reserve. However in this process of loaning money out the money supply has increased to $190 and not $100 as one may initially suspect. This is because the extra credit issued does not come from the account of the depositor as commonly thought but is in fact money created out of thin air. This process of loaning new money while retaining the 10% reserve amount will be repeated numerous times until eventually the amount of money in circulation will be ten times greater than the reserve amount, in this case $1000. If this process sounds a little complicated then it may prove useful to watch this video:
Note: While this video does explain the process of fractional reserve banking well caution must be exercised against its conclusions made against the Fed. The primary influence on money supply comes from the commercial banks and the fractional reserve system and not the central bank. It should also be known that the free banking era was marked with less financial stability than the post Fed period (1913+) as there was no lender of last resort.
As a note while the example described above may sound dramatic in reality the reserve requirements for countries such as the UK is lower than this as the Bank of England does not actually set compulsory reserve requirements and reserves have been cited as being as low as 2.1% as of 2010 of the total money supply. The table below illustrates how the money supply grows after the first person is given $100.
|Transaction No:||Amount deposited||Amount lent out||Reserves|
Who owns the depositors money?
A simple question with a surprising answer and one that should definitely be noted in the case of bank runs. When someone deposits money into a commercial bank the deposited money is no longer the property of the depositor as the ownership of that money is transferred to the bank. What happens is the depositor becomes an uninsured creditor to the bank and owns some bank equity/shares or bank stock that the bank is obliged to pay back with cash.While this may sound complicated what it really means is that if the bank went into a state of bankruptcy then the depositor is a mere uninsured creditor and unless their money is insured by the government which it will be (at least on paper) if the deposit is less than $/£100,000. If however the deposit is greater than this this amount then the depositor will be at the mercy of more senior creditors that will be paid first. It should finally be noted that the most senior creditors are the customers that deal with derivative contracts which is mostly conducted by the too big to fail banks. Seeing as the notional value of those contracts is $639 trillion as of June 2012 it becomes questionable how much money any creditor below those senior creditors will receive considering this amount is a multiple of the global economy which is valued at around $70 trillion
It is this fact why the banking system is inherently unstable because if people ever decided to withdraw their money in mass then the bank could not meet this demand as they do not have sufficient funds in their vaults.
The reason this system can remain viable however is because the banks know that people generally do not withdraw all their money at once. In fact they have found that if their reserves are sufficient to meet the demands of net withdrawals (that is deposits minus withdrawals) then they can remain solvent at least on an on-going basis. This last point is crucial because banks make most of their profits by loaning money so if a system can allow them to loan money by a multiple of the underlying value of deposits then it follows that their profits would increase by a multiple amount also. The important issue here is to match their reserve amount to that of net withdrawals and not total amount lent out (as commonly perceived). Banks must also make an assessment of the risks taken when extending credit as the capability of its lenders to payback loans issued by the bank will vary and if a bank can attract more creditworthy lenders then that will mean the bank’s capital (which is mostly loans) will be of higher quality.
Despite this safeguard and careful assessments of risk banks have gone bankrupt on a continual basis and this is especially true in a country without a central bank. The two main safeguards that are made against a bank run are interbank lending (notable examples include Federal Funds Rate, LIBOR and Euribor) where numerous banks can exchange loans to one another. These loans would serve to cover any surge in withdrawals that took an individual bank by surprise and would allow them to meet this extra demand until the situation returned to normal. It is only if withdrawals remained high for a protracted period of time or the problem was more systemic in nature that greater action would be warranted. The second and final line of defence against bank runs comes in the form of the central bank who acts as a lender of last resort.
While the central bank has numerous tools to mitigate a bank run (they can lower the reserve requirements for example) the most powerful way of protecting bank is to engage in open market operations, more specifically the purchasing of bonds by issuing credit to the commercial banks themselves. If a central bank lends out money they are increasing the reserves of the commercial banks which allows them to meet their lending obligations (which is often an issue when many loans are no longer repaid). There are two notable points to remember in all this, unlike what is commonly depicted in the media, quantitative easing is not direct money printing. The central bank loans money to its clients (the commercial banks) in exchange for financial assets. In most cases the assets in question are government loans more commonly known as government bonds (or gilts in the UK) however these assets can take other forms with the most notable example being Mortgage Backed Securities (MBS).
This exchange of financial assets while often overlooked forms a crucial role in maintaining financial stability. If a central bank actively buys financial products such as sovereign bonds or MBS they are creating artificial demand for these products. As a result two things will happen. First the book value of those loans rises which strengthens the balance sheet (remember loans are assets to banks). As the value of these assets or collateral rises then the ability to repay existing debts will rise. More crucial however is the fact that interest paid on those loans decline allowing banks and governments to make interest payments more easily.
In fact it is these purchases and the orchestrated nature of quantitative easing (the central banks often give ample warning before undergoing such programs) that undermine one of the central tenets of central banking. That is many of the advanced economies have laws in place that prevent central banks from lending directly to the treasury or directly funding a government deficit. These measures have been put in place to prevent this form of intervention leading to runaway inflation as this money creation does not go into the wages of government employees which would act as a huge driver of inflation (this would be the case if it were paid to the treasury directly).
The central banks across the world however have in effect circumvented this rule as the commercial bank buys the government bonds from the treasury who then turns around and sells those bonds (which are likely worthless without this money printing) to the central bank. This dynamic of buying and selling bonds or other financial instruments that are almost worthless to central banks is not limited to bonds and occurs with other financial assets. In effect the central bank is acting like the big “bad bank” and is the party that buys all the bad or “loser loans” from the commercial banks that either no else will buy or will not buy in sufficient quantities to make the loans valuable or even viable. However what is significant in these transfers is that the liabilities of the debt repayments shift from the commercial banking sector onto the taxpayer.
It is likely that this dynamic has allowed governments and banks to remain solvent as this demand for loans created by quantitative easing has been chiefly responsible for keeping interest rates down. If these programs were stopped or worse the interest rates set by the central bank were raised then the rise in interest rates would likely render many economies and banks insolvent. The fact that countries such as the US, UK and Japan run high fiscal deficits means that every year the interest rate threshold to remain solvent will need to decline year after year unless these deficits can be closed.
The second important point – which IS highlighted by the media – is the actual transfer of credit. It is often said that quantitative easing will lead to mass inflation as this “printed money” will be added to the commercial banks reserves and the banks will then lend this new money out to businesses and people creating a huge rise in the money supply via the fractional reserve system mentioned earlier, the so called money-multiplier effect. While this theory sounds plausible the reality is this has not been the case. If we look at the total money supply we find that despite unprecedented amounts of quantitative easing (in the case of the US $85 billion a month) the total money supply has been increasing at slower rate than prior to the financial crisis:
So why the lack of money growth? The reason for this is the banks see few opportunities to make a profit in lending so instead they hang onto the money. This lack of lending is also reflected by the fact the velocity of money; that is the measurement of how quickly money is exchanging hands has declined markedly since the 2008 crisis and has plateaued since around 2011:
Nominal interest rates: Typical rate you will see in the brochure of a bank when it advertises its interest rates.
Real interest rates: Nominal interest rate – Inflation
If real interest rates become negative it creates the perverse situation where it effectively costs money to save while it pays to loan money. This occurs because the rate of inflation exceeds the returns made through interest. When borrowing the opposite will be true. Negative real interest rates benefit highly indebted parties at the expense of savers.
Saying all that it would be a mistake to think the money is simply laying in the banks vaults doing nothing. A lot of this newly issued credit is invested and goes towards the stock market and other forms of speculation. In fact it is these cash injections that have likely fuelled the large amount of asset inflation in the form of rising stock prices. If we look at various stock indices such as the Dow Jones, FTSE 100 and other stock indices as these stock markets have seen significant increases despite poor performances in the general economy (in fact these stock indices are performing more strongly than stock markets in more buoyant economies such as China).
GDP figures obtained from the Bureau of Economic Analysis.
This is not the only reason for the stock markets to rise. Another side-effect of quantitative easing is that the artificial demand created for bonds will cause bond yields to decline, so much so that bonds no longer offer good returns for investors. As a result investors will be forced to invest their money in more risky products such as stocks due to the fact that bonds, savings accounts and real estate do not offer good enough returns to beat the current rate of inflation. This issue of low returns is particularly problematic for low-risk pension plans but it is this forced investment into stocks that has also contributed to the recent large gains in major stock markets across the world.
It is my belief that the two factors described above have been the chief reasons why we have witnessed large gains in the stock market. Both these reasons have stemmed from the process of quantitative easing either directly through money entering these markets or indirectly by forcing investors to leave the bond market due to lower returns caused by interventions in the bond market. To me it seems unlikely that the gains in the stock markets are the result of strong fundamentals in the underlying economy as low or negative growth in the economy cannot justify the gains we have seen in the stock market. It is this combination of gains in the bond and stock market that have been a boon for the government, banks and pension funds.
Most money in the monetary system is created by commercial banks and not central banks therefore the supply of money is largely determined by the activities commercial banks engage in. This statement is supported by the fact that despite the central banks intervention at an unprecedented scale through various programs of quantitative easing the total money supply is not only increasing more slowly but the velocity of money is (number of exchanges made with the money) decreasing also. This is due to the commercial banks lack of lending having a greater influence than what the central banks are doing. This leads us to the issue of inflation and deflation. While it is commonly cited that further rounds of quantitative easing will inevitably lead us to a hyperinflation end-point we must recognise that the lack of lending and more significant, increasing amounts of bankruptcies and austerity measures implemented will lead to deflationary pressures as austerity, defaults all cut spending which reduces the money supply.
At this present moment of time the inflationary pressures applied by the central banks just about equal the deflationary forces that exist in the main economy. It is this combination of inflation/deflation forces that will make the final end-point more complicated and nuanced than what people will generally expect. Please read part four of this series to find out more about this issue. For observant readers you will notice that all forms of money creation involved the use of loans thus the statement: all money is loaned into existence becomes true. In part 3 we will examine the implications of having a debt based monetary system.
 = My life and work (pg. 179)
 = ‘Money: Whence it came, where it went’ (pg. 5)
 = Economics 12th Edition by Lipsey, R. G. and Chrystal, K. A. (2011) (Oxford University Press. pg. 455)
 = Banking Regulation of Uk and Us Financial Markets (pg. 83)
 =The Financial Crisis Inquiry Report: Official US government edition (pdf document: enter page 76 on pdf file is page 48 on actual report.)
 = Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument (Bank of International Settlements – pdf file)
 = GDP ranking (World Bank – pdf file)
 = Remarks by Governor Ben S. Bernanke (Federal Reserve Board)
 = National Economic Accounts (Bureau of Economic Analysis)
Off the keyboard of Michael Snyder
Published on Economic Collapse on March 20, 2013
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Why is the global economy in so much trouble? How can so many people be so absolutely certain that the world financial system is going to crash? Well, the truth is that when you take a look at the cold, hard numbers it is not difficult to see why the global financial pyramid scheme is destined to fail. In the United States today, there is approximately 56 trillion dollars of total debt in our financial system, but there is only about 9 trillion dollars in our bank accounts. So you could take every single penny out of the banks, multiply it by six, and you still would not have enough money to pay off all of our debts. Overall, there is about 190 trillion dollars of total debt on the planet. But global GDP is only about 70 trillion dollars. And the total notional value of all derivatives around the globe is somewhere between 600 trillion and 1500 trillion dollars. So we have a gigantic problem on our hands. The global financial system is a very shaky house of cards that has been constructed on a foundation of debt, leverage and incredibly risky derivatives. We are living in the greatest financial bubble in world history, and it isn’t going to take much to topple the entire thing. And when it falls, it is going to be the largest financial disaster in the history of the planet.
The global financial system is more interconnected today than ever before, and a crisis at one major bank or in one area of the world can spread at lightning speed. As I wrote about yesterday, the entire European banking system is leveraged 26 to 1 at this point. A decline in asset values of just 4 percent would totally wipe out the equity of many of those banks, and once a financial panic begins we could potentially see major financial institutions start to go down like dominoes.
We got a small taste of what that is like back in 2008, and it is inevitable that it will happen again.
Anyone that would tell you that the current global financial system is sustainable does not know what they are talking about. Just look at the numbers that I have posted below.
The following is the global financial pyramid scheme by the numbers…
-$9,283,000,000,000 – The total amount of all bank deposits in the United States. The FDIC has just 25 billion dollars in the deposit insurance fund that is supposed to “guarantee” those deposits. In other words, the ratio of total bank deposits to insurance fund money is more than 371 to 1.
-$10,012,800,000,000 – The total amount of mortgage debt in the United States. As you can see, you could take every penny out of every bank account in America and it still would not cover it.
-$10,409,500,000,000 – The M2 money supply in the United States. This is probably the most commonly used measure of the total amount of money in the U.S. economy.
-$15,094,000,000,000 – U.S. GDP. It is a measure of all economic activity in the United States for a single year.
-$16,749,269,587,407.53 – The size of the U.S. national debt. It has grown by more than 10 trillion dollars over the past ten years.
-$32,000,000,000,000 – The total amount of money that the global elite have stashed in offshore banks (that we know about).
-$50,230,844,000,000 – The total amount of government debt in the world.
-$56,280,790,000,000 – The total amount of debt (government, corporate, consumer, etc.) in the U.S. financial system.
-$61,000,000,000,000 – The combined total assets of the 50 largest banks in the world.
-$70,000,000,000,000 – The approximate size of total world GDP.
-$190,000,000,000,000 – The approximate size of the total amount of debt in the entire world. It has nearly doubled in size over the past decade.
-$212,525,587,000,000 – According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States. But those banks only have total assets of about 8.9 trillion dollars combined. In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.
-$600,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives generally fall within this range. At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.
Are you starting to get the picture?
Every single day, the total amount of debt will continue to grow faster than the total amount of money until the day that this bubble bursts.
What we witnessed back in 2008 was just a little “hiccup” in the system. It caused the worst economic downturn since the Great Depression, but global financial authorities were able to get things stabilized.
Next time it won’t be so easy.
The next wave of the economic collapse is quickly approaching. A full-blown economic depression has already started in southern Europe. Unemployment is at record highs and economic activity is contracting rapidly.
The major offshore banking centers in Cyprus are on the verge of collapsing. It was just announced that they will now be closed until Tuesday, but nobody really knows for sure when they will be allowed to reopen. And there is already talk that when they do reopen that there will be strict limits on how much money people can take out.
And now the IMF is warning that the three biggest banks in Slovenia are failing and that a billion euros will be needed to bail them out.
The dominoes are starting to tumble, and the United States won’t be immune. In fact, the greatest financial problems that the United States has ever seen are on the horizon.
But you can just have faith that Ben Bernanke, Barack Obama and the U.S. Congress know exactly what they are doing and will be able to save us from the coming financial collapse if you want.
The mainstream media will provide you with all of the positive economic news that you could possibly want. They are giddy about the fact that the Dow keeps hitting all-time highs and they would have us all believe that we are in the midst of a robust economic recovery. You can listen to them if you want to.
But when you are tempted to believe that everything is going to be “okay” somehow, just go back and look at the numbers there were posted above one more time.
There is no way that the global financial pyramid scheme is going to be able to hold up for too much longer. At some point it is going to totally collapse. When that happens, will you be ready?
Off the keyboard of RE
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In his recent article The End of Technocracy and Zero Government, Steve from Virginia tracked the progress of the City of Detroit to the status of “Failed State”. Not just Detroit is in this situation of course, you see it progressing all over the world from Somalia, to Egypt to Greece…and not long to arrive in Italy or France either. Whose fault is this? Where does the BLAME lie for the failure of this model?
The ‘Blame the Victim’ Game in Detroit
In areas where technocracy has been installed such as Greece, both the initial conditions and the failure of the process is blamed on the inhabitants. Greeks are ‘corrupt tax-cheats and lazy’. Detroiters are ‘stupid, drug-crazed Negro savages bent on murder and destruction’, French are ‘near-communists and cowards’, Irish are ‘ugly … drunken child molesters’. The purpose of the blame game is distraction while retirement savings are stolen by the establishment. The elderly ‘deserve what they (don’t) get! The blame game hits the target by appearing to miss it.
In Detroit, the citizens didn’t chase retail stores away, they didn’t over-invest in the auto industry, they didn’t ghettoize the city with ill-conceived developments and a web of freeways, they didn’t pollute the city with lead, zinc, chromium, mercury, toxic petroleum-based chemicals, they didn’t sell the city out to billionaire developers.
The citizens didn’t pave the city over with parking lots or built thousands of monstrously ugly concrete box- buildings. Detroiters are being shot by criminals, being driven out by block busting and urban decay, losing what little property wealth they had, having already lost hundreds of thousands of jobs. Detroiters have been abandoned by their country not the other way around.
The US spends hundreds of billions of dollars in Afghanistan, why not Detroit?
Why not Detroit? Basically because it’s burned out, polluted flotsam of the Age of Oil, and costs too much to clean up. Predatory Capitalism doesn’t clean up the messes it leaves behind, it moves on to make new messes elsewhere, always promising the inhabitants a “better standard of living”, which a few Elites get while the rest of the herd is left hung out to dry.
Steve isn’t the ONLY Blogger tracking Failed State development, John Ward also has been cateloguing the collapse of the Greek State, as well as numerous others in Europe.
Greece is the first country Russell has ever cut to emerging from developed market status, although given the state of the EU it seems highly unlikely it’ll be the last. The Russells haven’t considered doing the same to Spain and Italy just yet, the paper says, because ‘we haven’t seen the same degree of decline as we’ve observed in Greece’. The two conclusions I draw from that are first, Russell guys need to get out more; and second, the company has a lot to learn yet about Spanish accounting, and Italian reporting accuracy. Don’t forget, this latter is the country whose Hadron Collider scientists only six months ago got the speed of Light wrong.
But the main thing it is still hard for the casual observer to get his head round is what you are if you emerge, having once been developed. The vagueness, it seems to me, lies in the interim bit between the two states of Being. In 1936, Nazi Germany was a developed State led by a lunatic, which was then crushed to a pulp by British, American and Russian forces who’d become a tad concerned about the Fatherland’s wanderlust habit. The interim stage was the crushing thing. This is what’s missing from the Russell Investments analysis about recent Greek history.
Why does it progress in this fashion? Going back to November of 2011, I wrote an article titled Homo Collaboratus on Reverse Engineering looking at the progress toward failed State in Egypt. I am going to quote the article in full, since it is not accessible to non-members of Reverse Engineering.
Egypt is now in its 3rd Day of an increasingly Bloody “Revolution”, where all that the Military Repression has succeeded in doing is bringing still MORE “Protesters” back into the streets….AGAIN. You can see here how and why even having vast techno power against protest eventually does FAIL, because of the Power of Numbers.
What I read in one MSM report was a quote from one member of the Military Junta currently running Egypt, which was that all this mayhem would succeed in doing was “Destroying the State”. That is a paraphrase, but essentially was his analysis, and its also quite TRUE.
The Hodgepodge of People out there on the street throwing Rocks have NO CLUE on how to set up a WORKING Goobermint, and once you pile them all together inside any kind of Newly Elected Parliament the Bickering will start all over again, and whomsoever they Choose to lead any new Goobermint will be just as powerless to bring any equity to their economic system as the last Dimwit Power Seeker was.
It’s the road obviously to a FAILED STATE, like say Somalia or Zimbabwe already are. The old soviet Union also turned into a Failed State, but they recoallesced into the smaller States it was composed of and briefly have slowed the devolution there. However, Eastern Europe is now on the brink of catastrophic debt collapse, and eventually here you will also get Failed States in places like Hungary and all the Balkan States.
Failed Nation States will become the Norm here over time, rather than the Exception that they are now in places like Somalia and Zimbabwe. In each Failed Nation State, people are dropping down to the next level of Organization, Tribal Affiliation. This as I see it is the medium term result which will occur through all Nation States as smaller groups of people Herd together for Self-Preservation.
In places like Afghanistan where they are not all that long removed from their Tribal Affiliations, the Pashtuns will gather together again fairly naturally, but what of Lazarus? Lazarus in this case being the vast multicultural diaspora of people who came to live in the FSofA, who have no real “Traditional Tribe” here and who have lived for generations under the political system of the Nation
State? Can they, WILL THEY be able to form up Tribes for mutual Survival and Protection?
In my general POSITIVE Spin on this topic, I believe that they WILL in fact form up such Tribes SPONTANEOUSLY. My rationale for this is as follows.
Homo Sapiens demonstrates BOTH the traits of Predatory Animals and Herd Animals alternately, depending on circumstances. It’s likely one of the main reasons Homo Sapiens has been such a successful species overall, the adaptability to take on different survival paradigms dependent on circumstance. Real Herd Animals like Buffalo can never become Predators, and real Predators like Lions can never function as Herd Animals, but Homo Sapiens can function either way, pretty much equally successful either way also.
The circumstances we have been living under for the last few 1000 years is one of general Surplus in the environment, which Favored the Predatory paradigm. We have many Herd Homo Sapiens and a few Predators who live well by predating on most of the Herd. However, as the herd is Culled here, the Predators will die in greater numbers by percentage than the Herd does. If you look at any complex ecosystem with predators and prey, once the prey drops below a certain level the predators drop off a cliff. They essentially disappear. The “Ponzi” that is the Food Chain works from the Bottom Up, the Predators cannot be successful until the Prey is available in sufficient quantity to support them.
The Herding tendency in Homo Sapiens is evident any time the species is confronted by massive external stress. You see it whenever a Tornado Hits a Small town. All of a SUDDEN, people who otherwise simply can’t stand each other are all Pulling Together to dig others out of the Rubble. You see it in OWS. All of a sudden, generally Middle Class people become ACCEPTING of the long term Homeless in their midst, and they in fact LEARN from them strategies to handle living on the Street. Don’t drop your Tent onto the Ground, put it up on Pallets so you’re not losing Heat into the ground from your Sleeping Bag. Etc.
IMHO, OWS is the BEGINNING of a NEW TRIBAL Paradigm here in the FSofA, with those who are already off the cliff or close to it gathering together in HERDS for self-protection and SURVIVAL in the face of the Predators, exemplified by the Gestapo who Pepper Spray them and fire the Tear Gas Canisters at them.
MANY of the Herd will DIE here. But NOT as many by percentage as the Predators. The very ACT of Protest and Forming Up the Circle of the Herd is what will PROTECT the Herd in the end. They will lose many on the periphery. But they will also STAMPEDE the Predators.
In the end, they will almost all go to the Great Beyond. However, some of the herd will make it through, some of them will retreat into the Mountains, the Great Wall that GOD built to protect the Independent Souls of the World. The Predators will Die Off, and over time, the Herd will reproduce and RETURN from the Mountains to once again populate the Flatlands.
Where once again, if all goes as it has gone here so many times and in so many ecosystems, the predators will emerge once again. For Homo Sapiens however, who remain adaptable and who DO have the ability to LEARN, perhaps in the next go round we can make the LEAP to a new species, Homo Collaboratus, the first Species EVER to jump beyond the Predator and Prey paradigm. it is my great HOPE that those who do survive this latest incarnation of Armageddon will be the progenitors of Homo Collaboratus. Certainly, the incarnation of Homo Industrialis has been a Magnificent FAILURE here, and one we will not repeat again.
Sadly, I will not be around to see this from this side of the Great Divide, unless perhaps I do return in another corporeal incarnation. Even if that does not occur though, I’ll see it to be sure.
I’ll see it, and you, from the Other Side.
The progession to Failed State is inexorable, baked into the cake of the monetary system. Depending on the resources and technology available, it can expand itself for a few Centuries, perhaps a Millenia before it reaches the Growth limits. Although the Collapse is Gathering Steam now, it’s been underway a LONG time for anyone with their Eyes Open to see.
When I was in HS in NY Shity, the City was BROKE. The Subways were dilapidated, apartment complexes built in the 40s and 50s were Roach Motels. My Aunt and Uncle lived in an awful complex called Vanderveer in Brooklyn. Fortunately they lived on the 1st floor, because the elevators never worked. Nothing was ever maintained, and none of it ever paid for itself in terms of “increased productivity”. That was always just a euphimism for increased energy wastage.
The folks in charge of Credit Creation financed all of it through Debt, even JP Morgan didn’t have Gold enough in his Basement Safe to finance building the Railroads. He also sure was not going to pay Irish and Chinese Coolies in Gold either.
These folks have refinaced themselves innumerable times, back in the 70s about ALL the major Banking Houses should have gone broke from Bad Loans made to South America in the 5os and 60s, when my dad was in the Biz of making those loans. Financial Legerdermain kept it rolling, but it doesn’t work FOREVER.
You can’t create new Resources by issuing more credit. Without copious resources to waste, its pointless to issue more credit. The ONLY reason more Credit gets extended to Greece now is to keep the whole House of Cards floating another day. Nobody in their right mind can possibly believe Greece can ever pay its debts.
So, one by one they collapse, the Somalias, the Egypts, the Greeces and the Detroits. The Money Masters and the Political Class work together in a Kabuki Theatre, trying to manage the collapse by blaming the Victims while preserving their own wealth and status.
The fact the collapse is accelerating now makes it clear these folks cannot control it anymore. The last 40 years since the 1970s has been all about Financialism as a means of containment, but it is running out of steam. The old tricks just ain’t WORKING anymore.
All due respect to John Michael Greer and fans of the idea of a Slow “Boiling Frog” form of catabolic collapse notwithstanding, systems as complex as this one eventually reach a “tipping point”, beyond which they can no longer function. 5 years ago when I began writing on collapse topics, NOBODY ventured the opinion a European Nation like Greece or now also Italy and Spain would be on the cusp of Failed State status, with numbers like 50% Youth Unemployment and GDP figures dropping like a rock.
It may seem “slow” to you on the span of your life for it to take 5 years for Greece to descend from “functioning” industrial economy to FAILED STATE, but even on the scale of the industrial revolution as a whole that is mighty fast. If you figure the Industrialization of Greece began with the Marshall Plan in the aftermath of WWII, it took them about 60 years from 1945 to 2005 to reach the Zenith of Industrialism there, and it has just about ALL been undone in the last 5 years. Greek “factories” are not producing Jack Shit, if they ever did. About the only big Industry out of Greece was Shipping, and their Shipyards are Ghost Towns now, there is overcapacity of ships, international trade is collapsing and the Baltic Dry Index is so low you could hire a ship wit your Unmployment Check.
How long do we have HERE in the FSoA before it also is a Failed State? The takeover of Detroit by the State of Michigan is a Canary in the Coal Mine which should let you know the collapse has begun in earnest now here. Michigan itself is of course no more solvent than Detroit, so eventually will be “taken over by Da Federal Goobermint. Who will take them over? The Ferengi?
That the FSoA will devolve to a Failed State is not a hypothetical, it WILL occur, and based on the timelines already apparent in Europe, it will not take more than another decade to be apparent even to those Ostriches with their heads most deeply buried in the sand.
The fact though that it probably will take that long gives people in the FSofA aware of this a short Window of Time to prepare for it, and Reverse Engineer for themselves a non-industrial way of life. You have to get started NOW in Collaboration with others to make such a transition possible.
Homo Industrialis and Homo Predatorus is going the way of the Dinosaur. Only Homo Collaboratus and Homo Herdus can survive the Zero Point. Form your Tribe NOW! Circle the Wagons. Defend the weak and the innocent. STAMPEDE the PREDATORS.
Bring ON the POWER of NUMBERS. We are not Sheeple. We are BISON. In number, NOTHING can stop us. It is time now to STAMPEDE.
Off the keyboard of Gail Tverberg
Published on Our Finite World on March 1, 2013
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If an economy is growing, it is easy to add debt. The additional growth in future years provides money both to pay back the debt and to cover the additional interest. Promotions are common and layoffs are few, so a debt such as a mortgage can easily be repaid.
The situation is fairly different if the economy is contracting. It is hard to find sufficient money for repaying the debt itself, not to mention the additional interest. Layoffs and business closings make repaying loans much more difficult.
If an economy is in a steady state, with no growth, debt still causes a problem. While there is theoretically enough money to repay the debt, interest costs are a drag on the economy. Interest payments tend to move money from debtors (who tend to be less wealthy) to creditors (who tend to be more wealthy). If the economy is growing, growth provides at least some additional funds offset to this loss of funds to debtors. Without growth, interest payments (or fees instead of interest) are a drain on debtors. Changing from interest payments to fees does not materially affect the outcome.
Recently, the growth of most types of US debt has stalled (Figure 3, below). The major exception is governmental debt, which is still growing rapidly. The purpose of sequestration is to slightly slow this growth in US debt.
The growth in government debt occurs because of a mismatch between income and expenditures. There is a cutback in government revenue because high oil prices make some goods using oil unaffordable, causing a cutback in production, and hence employment. The government is affected because unemployed workers don’t pay much in taxes. Government expenditures are still high because many unemployed workers are still collecting benefits.
What can we expect going forward? Will the debt situation get even worse?
I think we can expect that from here, the debt situation will deteriorate. One issue is rising oil prices. While there seems to be a large supply of oil available, it is at ever-higher cost of extraction, because of diminishing returns. (This is even true of tight oil, such as from the Bakken.) Furthermore, I recently showed that not only do high oil prices adversely affect government finances, they also adversely affect wages.1
Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics
If wages are low, the temptation is for governments to try to create more “spendable income” by increasing debt. This can’t really fix the situation, however. The real issue is increasingly high oil prices, which adversely affect both government finances and wages. Adding debt adds yet more interest payments, adding a further burden to wage earners, and creating a need for payback in the future, when wages are even lower.
Ultimately (which may not be very long from now), the debt system appears likely to collapse. The Quantitative Easing (QE) which a number of governments are now using to hold down interest rates and make more funds available to lend cannot continue forever. While there are claims that QE is a bridge to “when growth returns,” it is seriously doubtful that economic growth will ever return. Inexpensive oil is simply too essential to today’s economy. As oil prices rise, wages fall, and demand for oil is further constrained. Falling wages also reduce demand for debt, as payback becomes more difficult.
How Household Debt Adds to Spendable Income
One thing readers may have not thought about is that it is the increase in debt that adds to a person’s (or company’s) spendable income. For example, taking out a car loan allows a person to buy a car. Paying back the loan over a period of years tends to reduce spendable income. If, in the aggregate, the amount of debt outstanding starts decreasing each year, spendable income is actually reduced below the level of wages, because in total, the balance is being reduced.
If we add the increase in household debt (mortgages, credit cards, student loans, car loans, etc.) to wages, this is the pattern we see historically. (The increase has been adjusted for inflation using CPI-Urban):
Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report. *2012 estimated based on partial year data.
The pattern is very much what we would expect, given what we know about recent debt patterns. The amount of debt rose rapidly in the early 2000s, when interest rates were lowered and lending standards relaxed. Some people bought new homes. Home prices escalated, with the higher demand. Many homeowners were able to refinance at lower interest rates. In the process, homeowners were able to “pull out” funds that they could use for any purpose they liked–fixing up the house, buying a new car, or going on a vacation.
By 2008, the party was over. In fact, the amount that was added through debt started decreasing in 2006 and 2007, after the Fed Reserve raised interest rates, in an attempt to choke back inflation caused by high oil prices. I talk about this in Oil Supply Limits and the Continuing Financial Crisis, available here or here.
Increased Government Debt Can Also Add to Spendable Income
In Figure 5, we added the increase in household debt to wages, to get an estimate of spendable income, adjusted for debt. Theoretically, at least part of the increase in government debt might also be added to spendable income, since it is often used (in leu of increased taxes) for programs that benefit citizens. (Some of the increased debt is used for things like bailing out banks, which is of questionable value in raising the spendable income of individuals, so perhaps not all of the increase in government debt should be added in estimating spendable income. Also, increased interest costs related to higher debt amounts would tend to have a dampening effect on spending, if interest rates are not continually dropping, as they have been under QE.)
If we add the increase in government debt (all kinds, including state and local) to the amounts shown in Figure 5, this is what we get:
Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, with changes adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.
How much did citizens really spend? The Bureau of Economic Analysis tells us that as well, as an item called Personal Consumption Expenditures. We sometimes hear that in the United States, personal consumption of goods and services makes up more than 70% of GDP. In fact, this percentage has been growing since about 1950.
Figure 7. Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis. *2012 estimated based on partial year data.
Strangely enough, wages excluding governmental wages have been falling as a percentage of GDP during the same period. How can wages be falling at the same time personal consumption is rising? I think that a large part of the answer may very well be “increasing debt.”
If we compare wages to personal consumption expenditures, we find that wages were about 2/3 of personal consumption expenditures at the beginning of the period graphed, but gradually fell to a lower and lower share of Personal Consumption Expenditures.3 If we add a line to Figure 6 showing 2/3 of personal consumption expenditures, the line comes out very close to where we might guess it would, if all of household debt increases, and part of government debt increases were acting to increase personal spending (Figure 8).
Figure 8. Same data shown on Figure 6, plus a line equal to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.
While there are too many variables to make this comparison exact, it does indicate that the increases in debt levels are of the right order of magnitude to explain what would otherwise be a very strange anomaly.
I might mention, too, that part of the reason that Personal Consumption Expenditures can be rising as a percentage of GDP is the fact that investment has been falling, as businesses move their manufacturing offshore, and as other changes take place. According to the American Society of Civil Engineers, we are allowing bridges, roads, and dams to deteriorate, and not adequately maintaining electrical transmission infrastructure. We are reaching limits on how far we can allow investment to drop, however. In fact, the time is coming when we will need to increase investment, or face loss of some of the infrastructure we take for granted.
Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis Table 5.1.
Where Do Debt Limits Put Us
Even if all debt limits were to do is erase the beneficial impact of debt increases, based on Figure 8, it appears that spendable income (or Personal Consumption Expenditures) would decrease by about 23%, to bring it back to might be expected based on wages.
In fact, reaching debt limits is likely be a messy affair, with some type of change (such as increasing rising interest rates as QE fails, or the US dollar losing its reserve currency status, or huge changes in the Eurozone) leading to changes that affect governments and currencies around the world. It seems likely that trade might be disrupted. Some governments might be replaced, and the debt of prior governments repudiated by the new governments. It is not clear what would happen to personal and corporate debt. In many countries, reform governments have redistributed land and other property. In such a circumstance, neither prior land ownership nor prior debt would have much meaning.
In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil. Oil is used almost exclusively as a transportation fuel and in many other applications as well (such as construction, farming, pharmaceutical manufacturing, and synthetic fabrics). Expensive oil is not really a substitute, and neither is intermittent electricity. We are reaching other limits as well. Perhaps the most pressing of these is availability of fresh water. Fresh water can be obtained by desalination, but expensive water is not really a substitute for cheap water, for the same reason that expensive oil is not really a substitute for cheap oil. See my post, Our Investment Sinkhole Problem.
The situation of reaching debt limits because of resource limits is a worrisome one, because it is hard to see a way to fix the situation. People often say that our debt problem arises because we have a financial system in which money is loaned into existence, and as a result, requires growth to pay back debt with interest. I am not sure that this is really the problem.
We have been used to a financial system that “works” in a growing economy. In such a system, it makes sense to take out loans on new business ventures. In such a system, money is also a store of value. In a shrinking economy, relationships change. Some loans will still “make sense,” but such loans will be a shrinking proportion of current loans, with long-term loans being especially vulnerable. Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.
Some have suggested that new local currencies will fix our problems. I am doubtful this will be the case. The problem may well be that all currencies start being more local in nature. What we may lose is interchangeability based on trust.
 As background for those who have not read my post The Connection of Depressed Wages to High Oil Prices and Limits to Growth, wages recently have been depressed, in part because fewer people are working. Figure 4 above, showing “Per Capita Non-Government Wages,” provides a measure of how wages have changed. This is calculated by taking wages for all US residents, subtracting wages of government workers, and dividing by the total US population (not just the number working). The average wage calculated in this manner is than adjusted to the 2012 price level based on the CPI-Urban price index. Government workers have been omitted because I am trying to get at the base from which other funding comes. Government wages are ultimately paid by taxes on workers in private companies.
The thing that is striking about Figure 4 is that a similar pattern occurs in the 1973 to 1983 period as the 2002 to 2012 period. Oil prices were high in both periods. (Figure 10, below). In fact, the vast majority of wage growth has occurred when oil prices were $30 or less in 2012$.
Figure 10. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 EIA Brent oil price data.
There are several reasons why rising oil prices can be expected to reduce the number of people working, or the hours they work:
(a) Discretionary sector layoffs. Consumers find that the price of food (which uses oil in its production and transport) and of commuting is rising. Prices of other goods are also rising. This forces consumers to cut back on discretionary spending. Employees in discretionary sectors get laid off, because of these impacts.
(b) General layoffs. Even outside discretionary sectors, employees may be laid off, if the cost of goods rises indirectly because of a rise in oil price. Often this will be because of higher transport cost, but it could because of another use of oil, such as by construction equipment, or as a raw material. With higher costs of delivered products, companies find that demand falls, if they raise prices sufficiently to maintain profit margins. (This falling demand occurs because some consumers can no longer afford their products.) Businesses find it necessary to scale back the size of their operations–lay off workers and close stores or other facilities. Alternatively, businesses can move operations to China or another low cost site of operation, to reduce costs, but this also leads to layoffs of US employees.
(c) Government layoffs. Eventually the government tax base is reduced, because of a smaller proportion of the population paying taxes. Governments also find a need to pay our more in direct costs–such as more for unemployment insurance, and more for asphalt (an oil product) for paving roads. Governments also find themselves laying off workers.
The effects outlined above can be mitigated to some extent by changes such as moving closer to work and more fuel efficient cars. But experience seems to suggest that even more what happens is that the effects shift from sector to sector over time, as businesses “fix” their problems, leaving them to with wage-earners and governments.
The high price oil situation was mostly resolved in the early 1980s, because other relatively inexpensive oil was available to drill, bringing the price down again. (The new price, at $30 barrel, was still 50% higher than the $20 barrel price prior to the crisis, though.) The availability of new low-priced supplies seems much less likely now, because we extracted the inexpensive-to-extract oil first. We are now reaching diminishing returns. While there seems to be plenty of oil available, it is high-priced oil. This is even true of the new “tight oil” supplies in the Bakken and several other areas.
 Government debt in this post refers to all types of government debt combined, including state and local debt. Within this debt, only debt classified as “Marketable” is included. As such, it does not include debt owed to the Social Security system (because contributions that were collected by the Social Security system were spent on something else, and are not available to pay Social Security recipients) or to other pre-funded government agencies. Such debt is a future liability, not affecting today’s spending, so I didn’t add it in. (The Federal Reserve Z1 report also does not include it.) There are, in fact, a huge number of government obligations that are not reflected, such as promises to bail out pension programs and FDIC coverage of bank accounts, because they are contingent in nature. Such programs can be expected to add to the problems we would have, if our debt system should fail.
 We would not expect non-government wages to equal Personal Consumption Expenditures, since for one thing, wages of non-government employees leave out expenditures by government employees. They also leave out various derivative amounts, such as expenditures by entrepreneurs, and expenditures of amounts that would be classified as rents and dividends. Changes in savings rates would also play a role.
Off the keyboard of Gail Tverberg
Published on Our Finite World on February 22, 2013
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Globalization seems to be looked on as an unmitigated “good” by economists. Unfortunately, economists seem to be guided by their badly flawed models; they miss real-world problems. In particular, they miss the point that the world is finite. We don’t have infinite resources, or unlimited ability to handle excess pollution. So we are setting up a “solution” that is at best temporary.
Economists also tend to look at results too narrowly–from the point of view of a business that can expand, or a worker who has plenty of money, even though these users are not typical. In real life, the business are facing increased competition, and the worker may be laid off because of greater competition.
The following is a list of reasons why globalization is not living up to what was promised, and is, in fact, a very major problem.
1. Globalization uses up finite resources more quickly. As an example, China joined the world trade organization in December 2001. In 2002, its coal use began rising rapidly (Figure 1, below).
In fact, there is also a huge increase in world coal consumption (Figure 2, below). India’s consumption is increasing as well, but from a smaller base.
2. Globalization increases world carbon dioxide emissions. If the world burns its coal more quickly, and does not cut back on other fossil fuel use, carbon dioxide emissions increase. Figure 3 shows how carbon dioxide emissions have increased, relative to what might have been expected, based on the trend line for the years prior to when the Kyoto protocol was adopted in 1997.
3. Globalization makes it virtually impossible for regulators in one country to foresee the worldwide implications of their actions. Actions which would seem to reduce emissions for an individual country may indirectly encourage world trade, ramp up manufacturing in coal-producing areas, and increase emissions over all. See my post Climate Change: Why Standard Fixes Don’t Work.
4. Globalization acts to increase world oil prices.
The world has undergone two sets of oil price spikes. The first one, in the 1973 to 1983 period, occurred after US oil supply began to decline in 1970 (Figure 4, above and Figure 5 below).
After 1983, it was possible to bring oil prices back to the $30 to $40 barrel range (in 2012$), compared to the $20 barrel price (in 2012$) available prior to 1970. This was partly done partly by ramping up oil production in the North Sea, Alaska and Mexico (sources which were already known), and partly by reducing consumption. The reduction in consumption was accomplished by cutting back oil use for electricity, and by encouraging the use of more fuel-efficient cars.
Now, since 2005, we have high oil prices back, but we have a much worse problem. The reason the problem is worse now is partly because oil supply is not growing very much, due to limits we are reaching, and partly because demand is exploding due to globalization.
If we look at world oil supply, it is virtually flat. The United States and Canada together provide the slight increase in world oil supply that has occurred since 2005. Otherwise, supply has been flat since 2005 (Figure 6, below). What looks like a huge increase in US oil production in 2012 in Figure 5 looks much less impressive, when viewed in the context of world oil production in Figure 6.
Part of our problem now is that with globalization, world oil demand is rising very rapidly. Chinese buyers purchased more cars in 2012 than did European buyers. Rapidly rising world demand, together with oil supply which is barely rising, pushes world prices upward. This time, there also is no possibility of a dip in world oil demand of the type that occurred in the early 1980s. Even if the West drops its oil consumption greatly, the East has sufficient pent-up demand that it will make use of any oil that is made available to the market.
Adding to our problem is the fact that we have already extracted most of the inexpensive to extract oil because the “easy” (and cheap) to extract oil was extracted first. Because of this, oil prices cannot decrease very much, without world supply dropping off. Instead, because of diminishing returns, needed price keeps ratcheting upward. The new “tight” oil that is acting to increase US supply is an example of expensive to produce oil–it can’t bring needed price relief.
5. Globalization transfers consumption of limited oil supply from developed countries to developing countries. If world oil supply isn’t growing by very much, and demand is growing rapidly in developing countries, oil to meet this rising demand must come from somewhere. The way this transfer takes place is through the mechanism of high oil prices. High oil prices are particularly a problem for major oil importing countries, such as the United States, many European countries, and Japan. Because oil is used in growing food and for commuting, a rise in oil price tends to lead to a cutback in discretionary spending, recession, and lower oil use in these countries. See my academic article, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here.
Developing countries are better able to use higher-priced oil than developed countries. In some cases (particularly in oil-producing countries) subsidies play a role. In addition, the shift of manufacturing to less developed countries increases the number of workers who can afford a motorcycle or car. Job loss plays a role in the loss of oil consumption from developed countries–see my post, Why is US Oil Consumption Lower? Better Gasoline Mileage? The real issue isn’t better mileage; one major issue is loss of jobs.
6. Globalization transfers jobs from developed countries to less developed countries. Globalization levels the playing field, in a way that makes it hard for developed countries to compete. A country with a lower cost structure (lower wages and benefits for workers, more inexpensive coal in its energy mix, and more lenient rules on pollution) is able to out-compete a typical OECD country. In the United States, the percentage of US citizen with jobs started dropping about the time China joined the World Trade Organization in 2001.
7. Globalization transfers investment spending from developed countries to less developed countries. If an investor has a chance to choose between a country with a competitive advantage and a country with a competitive disadvantage, which will the investor choose? A shift in investment shouldn’t be too surprising.
In the US, domestic investment was fairly steady as a percentage of National Income until the mid-1980s (Figure 9). In recent years, it has dropped off and is now close to consumption of assets (similar to depreciation, but includes other removal from service). The assets in question include all types of capital assets, including government-owned assets (schools, roads), business owned assets (factories, stores), and individual homes. A similar pattern applies to business investment viewed separately.
Part of the shift in the balance between investment and consumption of assets is rising consumption of assets. This would include early retirement of factories, among other things.
Even very low interest rates in recent years have not brought US investment back to earlier levels.
8. With the dollar as the world’s reserve currency, globalization leads to huge US balance of trade deficits and other imbalances.
With increased globalization and the rising price of oil since 2002, the US trade deficit has soared (Figure 10). Adding together amounts from Figure 10, the cumulative US deficit for the period 1980 through 2011 is $8.6 trillion. By the end of 2012, the cumulative deficit since 1980 is probably a little over 9 trillion.
A major reason for the large US trade deficit is the fact that the US dollar is the world’s “reserve currency.” While the mechanism is too complicated to explain here, the result is that the US can run deficits year after year, and the rest of the world will take their surpluses, and use it to buy US debt. With this arrangement, the rest of the world funds the United States’ continued overspending. It is fairly clear the system was not put together with the thought that it would work in a fully globalized world–it simply leads to too great an advantage for the United States relative to other countries. Erik Townsend recently wrote an article called Why Peak Oil Threatens the International Monetary System, in which he talks about the possibility of high oil prices bringing an end to the current arrangement.
At this point, high oil prices together with globalization have led to huge US deficit spending since 2008. This has occurred partly because a smaller portion of the population is working (and thus paying taxes), and partly because US spending for unemployment benefits and stimulus has risen. The result is a mismatch between government income and spending (Figure 11, below).
Thanks to the mismatch described in the last paragraph, the federal deficit in recent years has been far greater than the balance of payment deficit. As a result, some other source of funding for the additional US debt has been needed, in addition to what is provided by the reserve currency arrangement. The Federal Reserve has been using Quantitative Easing to buy up federal debt since late 2008. This has provided a buyer for additional debt and also keeps US interest rates low (hoping to attract some investment back to the US, and keeping US debt payments affordable). The current situation is unsustainable, however. Continued overspending and printing money to pay debt is not a long-term solution to huge imbalances among countries and lack of cheap oil–situations that do not “go away” by themselves.
9. Globalization tends to move taxation away from corporations, and onto individual citizens. Corporations have the ability to move to locations where the tax rate is lowest. Individual citizens have much less ability to make such a change. Also, with today’s lack of jobs, each community competes with other communities with respect to how many tax breaks it can give to prospective employers. When we look at the breakdown of US tax receipts (federal, state, and local combined) this is what we find:
The only portion that is entirely from corporations is corporate income taxes, shown in red. This has clearly shrunk by more than half. Part of the green layer (excise, sales, and property tax) is also from corporations, since truckers also pay excise tax on fuel they purchase, and businesses usually pay property taxes. It is clear, though, that the portion of revenue coming from personal income taxes and Social Security and Medicare funding (blue) has been rising.
I showed that high oil prices seem to lead to depressed US wages in my post, The Connection of Depressed Wages to High Oil Prices and Limits to Growth. If wages are low at the same time that wage-earners are being asked to shoulder an increasing share of rising government costs, this creates a mismatch that wage-earners are not really able to handle.
10. Globalization sets up a currency “race to the bottom,” with each country trying to get an export advantage by dropping the value of its currency.
Because of the competitive nature of the world economy, each country needs to sell its goods and services at as low a price as possible. This can be done in various ways–pay its workers lower wages; allow more pollution; use cheaper more polluting fuels; or debase the currency by Quantitative Easing (also known as “printing money,”) in the hope that this will produce inflation and lower the value of the currency relative to other currencies.
There is no way this race to the bottom can end well. Prices of imports become very high in a debased currency–this becomes a problem. In addition, the supply of money is increasingly out of balance with real goods and services. This produces asset bubbles, such as artificially high stock market prices, and artificially high bond prices (because the interest rates on bonds are so low). These assets bubbles lead to investment crashes. Also, if the printing ever stops (and perhaps even if it doesn’t), interest rates will rise, greatly raising cost to governments, corporations, and individual citizens.
11. Globalization encourages dependence on other countries for essential goods and services. With globalization, goods can often be obtained cheaply from elsewhere. A country may come to believe that there is no point in producing its own food or clothing. It becomes easy to depend on imports and specialize in something like financial services or high-priced medical care–services that are not as oil-dependent.
As long as the system stays together, this arrangement works, more or less. However, if the built-in instabilities in the system become too great, and the system stops working, there is suddenly a very large problem. Even if the dependence is not on food, but is instead on computers and replacement parts for machinery, there can still be a big problem if imports are interrupted.
12. Globalization ties countries together, so that if one country collapses, the collapse is likely to ripple through the system, pulling many other countries with it.
History includes many examples of civilizations that started from a small base, gradually grew to over-utilize their resource base, and then collapsed. We are now dealing with a world situation which is not too different. The big difference this time is that a large number of countries is involved, and these countries are increasingly interdependent. In my post 2013: Beginning of Long-Term Recession, I showed that there are significant parallels between financial dislocations now happening in the United States and the types of changes which happened in other societies, prior to collapse. My analysis was based on the model of collapse developed in the book Secular Cycles by Peter Turchin and Sergey Nefedov.
It is not just the United States that is in perilous financial condition. Many European countries and Japan are in similarly poor condition. The failure of one country has the potential to pull many others down, and with it much of the system. The only countries that remain safe are the ones that have not grown to depend on globalization–which is probably not many today–perhaps landlocked countries of Africa.
In the past, when one area collapsed, there was less interdependence. When one area collapsed, it was possible to let cropland “rest” and deforested areas regrow. With regeneration, and perhaps new technology, it was possible for a new civilization to grow in the same area later. If we are dealing with a world-wide collapse, it will be much more difficult to follow this model.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 19, 2012
You Know You’re In Trouble When ..
… the President lies on TV about energy:
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According to the president, the country has 100 years’ supply of natural gas … everyone knows this, even the president who is a square, the last to know everything. Right?
When a president mentions energy in any speech is a big red flag. The word energy from the president always has ‘problem’ lurking somewhere in the background: remember Jimmy Carter. The president suggests our problem is a matter of perception: this must be ‘the audacity of something-or-other’ that the ‘frantic urgency of nothing in particlar’ that have become part of the national conversation as a consequence of Mr. Obama’s presidency.
Frantic urgency to waste: keep in mind at all times that every single word and phrase of the president’s State of the Union Address is scrutinized and measured by flotillas of lawyers and professionals … and algorithms. The president does not write the speech, highly paid national security specialists … and algorithms … write the speech. Every word in the speech is there for a specific purpose. The president just didn’t blurt out by accident that the country has 100 years supply of natural gas: this misstatement was calibrated … by an algorithm.
The algorithm conveniently overlooked proven reserves or the rate of consumption, whether that rate would increase or decrease. For example, if we use no gas we have hundreds of thousands of years of supply. If the US had the same proven reserves as Saudi Arabia — or a bit better – we would have 13 years at the current rates of consumption.
Wiki — and the US EIA — gives the US about 9 trillion cubic meters of proven reserves.
At the current US rate of consumption, Russia, with six-times US reserves, would give us 80 years supply. Perhaps the president’s statement signals the upcoming invasion of Russia! The only way the US would get 100 years out of Russia’s massive reserves would be with stringent conservation! It would also mean no gas at all for Europe, the Baltic states, Belarus or Ukraine … or Russia itself.
Notice the map @ the right. Surprisingly out of focus on the high-definition TV, the map is overlapped with suggestive continent-sized giant, gassy bubbles. The map itself is made up of pink blobs giving the impression that America is bulging with natural gas … that a pin pricking the ground anywhere will cause the gas to flow. There are only a few areas in the country that are gas deposit free: the Eastern Seaboard, Minnesota, Nevada and the Pacific Northwest.
Notice the gas- and oil bearing formations. The map is misleading because there are only a few high-output hot spots within each mauvey-pink play. Other areas are not productive or deplete very rapidly. Once production is underway, the hoped-for vast resources generally turn out to be overstated. Gas or oil that cannot be retrieved may as well not exist.
The productivity of gas or oil wells follows a curve: for every hot spot a larger number of wells must be drilled that produce an average amount then rapidly deplete. There are also large numbers of dry holes. The technology that everyone raves about doesn’t make individual wells more productive but rather cuts the number of (costly) dry holes … technology such as ’3D seismic’ (reflection seismology).
The president never mentions cost: gaining gas from shale formations requires companies to drill far more wells than were required to extract from conventional hydrocarbon-bearing formations. He never mentions the customers ability to pay for the wells, nor does he mention the effects of drilling and hydrofracking everywhere in the country on the nation’s drinking water supply. He never mentions whether the water we have is enough … to extract the promised oil and gas.
It is the fact of the lie that is more important than the content or nature of the lie. It insists that within this government, nothing is true until it is officially denied.
You know you are in trouble when the president is not lying when he is lying.
The US actually is bubbling with natural gas, the president is right! The problem is the gas is dispersed and flows are intermittent and irretrievable. Methane gas leaks out of landfills, from marshes, from undersea clathrates, from melting permafrost, leaking around fracked wells and coal mines, it emerges from animal waste, from peat bogs … none of these are useful ‘reserves’ for the natural gas industry or its customers. Instead, the gas circles the globe in the atmosphere, contributing to climate change. Millions of cubic feet of gas are simply flared:
(TRC Solutions) Flaring natural gas from Bakken oil well. Funds are always available to lavish on waste, proper husbandry of capital and gaining the maximum return is unaffordable. Here is the perverse waste-based US energy policy made manifest: citizens and firms are given every incentive to burn through non-renewable natural resources as fast as possible. Flaring suggests that the world will come to an end if the associated oil is kept in the ground for a few more months until gas transmission infrastructure can be installed.
It also suggests there isn’t enough oil or gas to worry about, not enough to pay the bills.
You know you’re in trouble when corruption and influence peddling becomes so commonplace as to be invisible, the background noise behind ordinary business-as-usual.
Comes now another billionaire … to take his rightful place in the leadership cadre, as potential boss of the Department of Energy, (Washington Post):
Billionaire has unique role in official Washington: climate change radical
When Thomas Steyer — a San Francisco billionaire and major Democratic donor — discusses climate change, he feels as if one of two things is true: What he’s saying is blindingly obvious, or insane.
“I feel like the guy in the movie who goes into the diner and says, ‘There are zombies in the woods and they’re eating our children,’ ” Steyer said during a recent breakfast at the Georgetown Four Seasons, his first appointment in a day that included meetings with a senator, a White House confidant and other D.C. luminaries.
It’s a somewhat shocking statement for someone who’s in the running to succeed the cerebral Steven Chu as energy secretary. Granted, he’s a long shot — the leading contender is MIT professor Ernest Moniz, who served as the department’s undersecretary during the Clinton administration …
Unsurprising that leading nominee Moniz is a Clinton retread and nuclear industry whore. Recycled insiders from previous regimes has been a characteristic of the Obama administration … bet the rent on Moniz (Reuters).
Moniz, who was undersecretary at the Energy Department during the Clinton administration, is a familiar figure on Capitol Hill, where he has often talked to lawmakers about how abundant supplies of U.S. natural gas will gradually replace coal as a source of electricity. Moniz is director of MIT’s Energy Initiative, a research group that gets funding from industry heavyweights including BP, Chevron, and Saudi Aramco for academic work on projects aimed at reducing climate-changing greenhouse gases. (Reporting by Roberta Rampton and Jeff Mason; Editing by Paul Simao)
While Moniz is a tycoon enabler, Steyer is an actual tycoon. He offers more upside to Obama than the technocrat Moniz. With Steyer’s connections, Obama could wind up being somebody after he’s finished with his probationary period as president … Steyer might even capitalize an Obama hedge fund!
Steyer is taking on a more prominent public role. On Sunday, he spoke to a crowd that organizers estimated at 35,000, gathered on the Mall to call for a stronger national climate policy.“I’m not the first person you’d expect to be here today. I’m not a college professor and I don’t run an environmental organization,” he said. “For the last 30 years I’ve been a professional investor and I’ve been looking at billion-dollar investments for decades and I’m here to tell you one thing: The Keystone pipeline is not a good investment.” The move stems from an uncomfortable conclusion Steyer has reached: The incremental political victories he and others have been celebrating fall well short of what’s needed to avert catastrophic global warming. “If we can win every single battle and lose the war, then we’re doing something wrong,” he said, moments after consuming two mochas on the table before him.The simultaneous mocha-drinking is understandable: Steyer had arrived just hours before on the red-eye, which he chooses over a private jet to reduce his carbon footprint. He may have built one of the nation’s most successful hedge funds — Farallon Capital Management, named after the waters off San Francisco Bay teeming with great white sharks — but he’s not flashy.
It’s good to know billionaires are ordinary folks just like you and me … while at the same time inhabitants of the rarefied precincts of sacred money. As a consequence, star-struck Eilperin avoids shining any light into the dark corners of Steyer’s fund, (Wikipedia):
Tom Steyer founded Farallon in January 1986 with $15 million in seed capital. Previously, Steyer worked for San Francisco-based private equity firm Hellman & Friedman, as a risk arbitrage trader, under Robert Rubin, at Goldman Sachs and in Morgan Stanley’s corporate mergers and acquisitions department.
Rubin … Goldman-Sachs … take it back: Steyer is certainly equally qualified- if not more so than ‘Brand X’ candidate Moniz. In Washington, DC, where money talks, Steyer carries his own lobbyist around in his wallet.
Steyer knows coal because Farallon once owned the 2d largest coal-fired power plant in Indonesia! The following is from a report criticizing Steyer’s handling of university endowment funds (Amanda Ciafone, Working Group on Globalization and Culture, Yale University):
(Un)Fa(i)rallon in the Endowment:
Tracking Yale’s Global Capitalism In 2002, when Farallon purchased a 51% stake of Indonesia’s Bank Central Asia for $520 million dollars the fund could not avoid the high visibility of mainstream media attention. Bank Central Asia was the “crown jewel” of Indonesia’s banking sector with approximately $10 billion in assets and eight million customer accounts. In 1998, when the Asian financial crisis brought on by foreign investment and currency speculation brought Indonesia’s banks “to the brink of ruin,” the Indonesian government nationalized the bank, bailing it out and taking on its debtors by replacing unpaid loans with government bonds.In line with demands from the IMF, the sale of Bank Central Asia was seen as crucial to the overall success of the government’s privatization program: “international lenders and the IMF placed great emphasis on BCA’s divestment as a yardstick of economic reform, threatening to withhold financial aid if it was not completed.” Private investors could now buy an Asian bank on the cheap. Although it offered 25 rupiah a share less and has never run a bank, Farallon was chosen over other bidders. In fact, Farallon had won a huge asset for Yale and its other investors; for the $520 million it paid, it bought a bank predicted to earn $650 million in government interest payments a year for the next few years. In actuality, the Indonesian government was paying Farallon interest on its own bonds originally issued to save the bank that Farallon now owns.
Ciafone questions how non-Indonesian Farallon could buy the bank with both the lower bid and zero-experience in running a financial institution? It emerged that Farallon was well connected in Indonesia and could leverage its friends in high places (IMF) better than the other financiers.
Some of Farallon’s (Yale’s) money was invested in Paiton I, Indonesia’s first private power venture and “one of the most expensive power deals of the decade.” As the first private power project in the country the huge Paiton I coal burning power plant set the tone for subsequent private power ventures which “cut overpriced, politically influenced deals that undermined the Indonesian economy.” Although little is known about Farallon’s connection to the Paiton project, the financial press revealed that Farallon held a “controlling position in the $180 million [bond] issue” of Indonesia’s Paiton I plant. But much is known about the nature of the Paiton I project; three Wall Street Journal investigative articles detail the crony capitalism, price gauging, and environmental risks surrounding the plant in Indonesia.
It’s hard to say who would be worse as DOE Boss: captive insider Moniz or finance criminal Steyer. Both are creatures of the money-establishment: the end result is more of the current status-quo: lies and continuing incentives to waste, more theft from the citizens by tycoons. Regardless who whomever becomes DOE Boss, don’t expect any real change as to do so might adversely effect tycoons’ two-fisted lifestyles.
Meanwhile, you know you are in trouble when the Federal Reserve is lending $85 billion dollars to the Federal Government and the mortgage business every month.
It is both worrisome and suggestive that the central bank is such a large lender to the government. Are there no other lenders? This is a tremendous red flag: this sort of direct monetization suggests the government is a credit risk.
Is is also worrisome and suggestive when the Fed is lending billions every day to the mortgage industry. If the industry was solvent it would not need a continuing $40 billion-per-month bailout! At the same time, it is worrisome that the Fed is guaranteeing bank deposits. When the Fed accepts securities as collateral during open market operations such as ongoing Quantitative Easing (QE) it credits the banks with ‘excess’ reserves. These reserves are never deployed (into circulation) unless the banks’ balance sheets are collapsing … as when there are runs on the banks.
Does the Fed know something about the banks we should worry about?
You know you are in trouble when the inflation/deflation argument is still with us.
Deflation tends to be described as a change in prices for goods, a fall in the general price level or a contraction of credit and available money. Rather, deflation is where the cost of repayment of any debt is greater in real terms than the worth of the debt.
Current deflation is meaningless out of context of debt and energy. The world is running out of energy and has taken on $640 trillion$ in debt in order to run out of energy.
There is debt deflation when the cost of repaying a debt increases as the debt is repaid, because the act of repayment extinguishes currency. The scarcity premium of currency increases faster than the rate at which the debt(s) can be retired. In fact, debt repayments by 3d parties has the effect of rendering all debts unaffordably costly to repay. Read Irving Fisher’s paper on ‘Debt Deflation’ (1933).
Energy deflation occurs when energy becomes scarce and more expensive in real terms, there is a scarcity premium added to fuel that the customers cannot afford … fuel becomes too valuable to waste by driving tens of millions of useless cars in circles from gas station(s) to gas station(s).
Fuel is hoarded or unaffordable, so is money used to buy fuel. If currency is more useful to gain fuel than credit, there is no credit. The cycle is broken only when there is no fuel or no demand for it.
Economists are blind to the distinction between ledger loans (amounts noted on spreadsheets as due and payable) and circulating money.
Central banks offer ledger loans as do private sector lenders. The latter offer unsecured loans to customers. Ledger loans are credits made to borrowers’ accounts, funds thereto are simply ‘invented’. As the name implies, circulating money is loans that have changed hands to 3d (or more) parties in the marketplace where their worth is determined.
Banks’ offering unsecured loans is called ‘inflation’, demanding circulating money as repayment for unsecured loans is called ‘deflation’. Since most repayment is made by taking out greater loans, inflation tends to be a background condition. Unsecured loans represent economic ‘growth’ as their tally makes up the components of GDP.
Private sector lenders demand repayment in circulating money which is always in limited/finite supply. Borrowers cannot offer ledger repayments! They must earn, borrow or steal the funds demanded for repayment from others who then do not have the funds. Repayment reduces the amount of money in circulation which reduces GDP. When repayment demands exceed the amount of new loans there is a recession.
Clearly, offering more ledger credit — which costs very little — and gaining circulating money in return — which costs everything — is good business for lenders. Everyone is robbed whether they borrow or not because of the increased scarcity and cost of needed circulating money!
Central banks cannot make unsecured loans (loans in excess of collateral) therefor there is no such thing as central bank ‘money printing’. Because reserve banks have no capital structure — they are reserve banks after all — they cannot extend unsecured credit. Any central bank that offers unsecured loans is instantly and permanently insolvent!
This is not an Economic Undertow supposition but a condition like gravity. If ordinary commercial or depository banks are rendered insolvent by excess leverage and bad loans, a central bank which leverages itself while taking on the bad loans of its clients is ruined just the same as the other banks, for the same reason!
Under such circumstances, there is no effective lender of last resort, the only real collateral for all loans is currency on deposit. There are bank runs to redeem as much as possible … (as are underway in Europe and commencing in Japan).
The outcome of the discussion is delay in implementing reforms. Meanwhile, there is ongoing energy- and resource waste.
You know you are in trouble when your world burns 88.8 million barrels of petroleum per day … and is fantastically in debt by trillions of dollars!
That petroleum is gone forever. Another 88.8 million barrels will flush down the toilet tomorrow and another 88.8 million the day after … day after day after day!
and the day after that. What do we get in return for 88.8 million barrels per day? People laugh at the Medievals but they left behind some nice towns and useful buildings. What do we have to show … for the million barrels … burned up for nothing every single day for decades?
We have some used cars, some potholed ‘infrastructure’, millions of ugly buildings … we’re bankrupt.
In order to burn the 88.8 million barrels we’ve had to borrow billions of dollars from bankers and finance every day, as well, The total amount we owe to the financiers is $640 TRILLION dollars (Bank for International Settlements, PDF warning)!
Don’t listen to the soothing bromides of the analysts. Each swap noted on BIS ledgers cost someone real money, they hedge something real, the total system credit including that derived by way of foreign exchange.
We burn instead of holding onto our oil until someone can figure out something better to do with it. We rush to burn as much as possible as fast as possible. We want to burn it faster so that we can change some ‘indicators’ and allow tycoons, ‘entrepreneurs’ and ‘innovators’ to borrow some more.
We are like a family that has inherited a palace: we have burned all the furniture in order to keep warm now the furniture is gone we must burn the house. Well-dressed salesmen knock on the door offering efficient saws and furnaces to cut the house apart and burn it.
Madness … whatever is happening to us we deserve it.
Off the keyboard of RE
Published originally on The Burning Platform on December 24, 2010
Discuss this article at the Frostbite Falls Daily Rant table inside the Diner
Note from RE: This article was originally titled Christmas Musings on Money, since I published it on Christmas Eve of 2010. Since we are well past Christmas of 2012 and even further from Christmas 2013, I retitled the article for this publication.
I’m having a debate over on REVERSE ENGINEERING with Toby, who many of your may remember from Raging Debate and occasionally contributing to TBP1. Unlike my Christmas Poem, this is more in keeping with my verbose style. This sort of theoretical stuff doesn’t usually engender much real debate on TBP, so I have for the most part stopped submitting this kind of post here. However, perhaps the Christmas Spirit will inspire some critical thought on where the real source of our problems lie, which from my point of view is embedded in the nature of money and interest.
Now, most of us are aware that a strict reading of the Bible forbids Interest as Usury, although this definition has been manipulated quite a bit over time. The Bible isn’t fond of Money in general, but that hasn’t stopped generation after generation of people from using it either. You do have to ask yourself however just why it was that the writers of the Bible found so much wrong with Money, other than perhaps being informed by God that it was bad, which I will discount for the moment as a likely possibility.
First off, money has 3 Primary Functions.
1-It puts a Numerical Value on the Worth of any asset or service.
2-It provides a means of exchange as intermediary in Trading
3-It provides a Store of Wealth
Now, its at least theoretically possible to divide up these functions, but that hasn’t been the case since using money became prevalent in Biblical times. The result of the first 3 functions result in some subsidiary effects.
A-A division of classes of people between Haves and Have Nots
B-Creation of the Financial Intermediary Class, aka Banksters
C-Aggregate effects of amassed Wealth and the concept of “making money with money”. Call this proto-Capitalism if you will.
This post is mainly concerned with C, although I am sure I will drift off to discuss all the rest of the factors here as well. However, lets explore the concept of “making money with money”.
This is where charging Interest on Loans comes in. Without interest, there isn’t a monetary incentive to loan out money, so without it whatever you use as money will tend to aggregate up and disappear from circulation. Back we go to RE’s Island, where 100 people landed and found 10,000 Nuggets of Gold, which they decided to use as Money.
Over time, anybody who has control over the land and other productive assets will aggregate the money. So right off the bat, money is mainly about Power and Control, which Jesus wasn’t to big on. How does the Money get distributed back out in this situation? Only through Labor, which is the only thing someone who does not have power over the means of production has to trade for it. With many people competing for low skill jobs, this eventually leads to penury and a slave class, even if its not explicit slavery.
However, in the real world off the Island, back in the olden days there wasn’t One source of power and wealth, there were many, and they were all competing with each other. Gold became a very good Measure for aggregate Wealth and Power, because since its so rare, in order to keep accumulating more of it you must control more territory. This is where Debt comes in as it applies to the State.
A King holds say his Castle, some land surrounding it and his Treasury of Gold. He wants more Power and more Gold though, which is sitting over in a neighboring King’s Treasury. Unless he has amassed a fortune, chances are he is not going to have enough in the Treasury to pay all the soldiers he needs to capture the neighbor’s Gold. In fact, its mostly Kings who have a depleted Treasury who find it necessary to go after the Gold of the neighbor’s Treasury. So how does he fund this War? Through Debt obviously, thus was born the War Bonds.
Now, anyone anywhere with some Gold, even on the opposite side could go and buy Bonds, which garnered Interest. This makes them better than the Gold itself, because assuming the side you bought Bonds from wins, you get back more Gold than you loaned out. You make money with money this way.
As you can see, this is why the Debt market goes hand in hand with War Mongering. Going back to the very beginning of the use of money, loaning Gold to Sovereigns to fund wars of conquest brought the very best in the way of returns, generally much better returns than slow growth building schemes. This goes right back to the time of Rome, and almost certainly before that to Sumeria. Egyptian Pharoahs got themselves into a world of shit borrowing money from Roman Banksters.
So the “Market” which is discussed with such reverence by Capitalists has always been for the most part the Debt market that grew in response to the need Sovereigns had for funding wars of conquest. Gold came to represent a measure of that conquest, how much you actually were in control over. The only way the pile of Gold increased in size was to take it from others, once the easily mined up stuff in your own neighborhood was exhausted. Of course, much later the thermodynamic energy of Oil allowed for much more Gold to be mined up, but by this time having a pile of Gold wasn’t making you any richer, controlling factories and the Oil resource was what made you richer.
Around the time of the Enlightenment, the Debt market for Gold and War Mongering began to morph into the Debt Market we know as Capitalism. Now what holders of Gold and other assets bought were Equity shares in companies that they felt would grow in the Colonial and then Industrial era. Of course, a lot of Industrialization was centered around building a better War Machine of course. Almost all the seminal inventions from guns to trains to automobiles and trains all make an industrialized nation far more powerful than a non-industrialized one, so if you are bent on conquest, this is what you will invest your money in.
Now remember here, anybody who was doing this kind of investing throughout the ages had by some means acquired a fairly large pile of Gold to begin with. Inheritance, theft, and of course the occasional wise Saver and lucky Gold or Oil prospector. The common man up until very recently in western societies never had much surplus to “invest”, and really to make any significant income at all from investing at say an average yield of 5% you need quite a large pile hoarded up. Once hoarded though, assuming steady growth and not too many foolish investments over the years, it keeps compounding up ever bigger all the time.
So, going back here again to the Biblical times, its likely that the writers of the Bible were all well aware of how Money aggregates through interest, and its close relationship to War mongering. So they defined money and interest as Fundamental Evil. Of course, simply setting up a Religion wasn’t sufficient to stop the Juggernaut once the cat was let out of the Bag. Even the destruction of the Roman Empire never ended the use of and manipulation of Money by Power Seekers, although there were any number of periods through the Middle Ages where money was extremely scarce. You almost could define the Dark Ages by the lack of a functioning money in the western world.
By the 1500s, in places like Florence and Venice, wealth had consolidated once again, and again the process of issuing Credit on that is how the great exploratory voyages got funded. While risky, some of those Investments provided some awesome returns, .like for instance the Spanish who came in with the Kick Ass Mother Load of Gold of all time when they knocked down Montezuma. However, such a rapid influx of Gold into the Spanish economy quickly devalued it as Money, which is proof in and of itself that Gold doesn’t have a real intrinsic value, just a value based on relative scarcity and the choice to use it as money because of some of its basic properties, which are good from the Storage point of view.
Other Metals, and even Gold coins weren’t ever given their value by actual market conditions when used as coinage for currency, they were given their value by numbers stamped on the coin. Even today doing transactions in metal by weight would be about impossible, so for a coin to have value it had to have a Value stamped on it by the Sovereign. The people who really had control of the currency were of course the Coiners, the folks who ran the Mints. They had the power to debase currency just as Helicopter Ben does, by mixing in base metals. Where the real ability to control currency in metals came in was in how you could arbitrage the value of one metal against another and create artificial scarcities of Silver or Gold in a given neighborhood. If you control the Silver Mines, its easy enough to halt production, driving the relative price of Silver up. No wonder of course the House of Rothschild was a founding Stockholder of the Rio Tinto mining group, eh?
Anyhow, to return to the original thesis of this post, Interest results from using the dependence people have on Money for commerce. Once you control a sufficient amount of whatever the Money is, the entire rest of the society depends on that, INCLUDING the “Sovereign”. I put sovereign in quotations because no King or State is truly Sovereign if he or she does not control what Money is in his neighborhood. The general acceptance of Gold as Money going back to Biblical times has allowed for the Money Changers, the financiers of the world to become the real Sovereign here, and over time this has consolidated ever more, with of course the Final Push for a New World Order and One World Currency being the wet dream of the Illuminati. However, I think they came as close to that as we will ever see with the Dollar as World Reserve Currency, backed by the Thermodynamic Energy of Oil. In the process of that transition, I think the general acceptance as Gold as money became forever lost, although at least for a while here it may retain some of its properties as a store of value.
As this monetary system fails, more people will be forced into considering what Money really is as it becomes ever more scarce. All the currently Dead Broke Sovereigns of the world will have to consider their own Sovereignty and how to become unchained from the Money Masters, the International Banking Cartel that has dominated the world since the time of the Medici. Most if not all of them do not have enough Gold to coin up as money, and I think even Silver would be a challenge for many places. Besides that though, commerce in the sense we have engaged in it for these last 500 years cannot function without Credit, its just impossible to move tons of metals around all the time to settle accounts.
Demurrage money may well be a part of this mix in some places around the world. However, even negative interest may not be sufficient because this makes explicit that money isn’t a long term store of value, and that is one of the qualities people want most in money. To be sure, inflation serves the purpose of devaluing money anyhow, but at least in theory in a growth paradigm you can find areas to invest in which will bring you a return greater than the loss of value from inflation. In the Demurrage economy, will there be investments you can make which will return more than whatever the Demurrage rate is set at? If there are, this pretty much defeats the concept of demurrage, because it won’t keep the money circulating, rather it would be hoarded by investing in whatever non-monetary asset was growing in value, or at least maintaining value.
The simple example here would be Gold, if you assume Gold will retain its qualities as a store of value. Immediately upon earning your paycheck, paying your monthly bills and stocking your larder with food, you take whatever is left of your still 100% value recently issued bills and buy some Gold with it. You don’t save the demurrage money, you save the Gold instead. You still have the problem of Hoarding.
Of course, in the case of Gold, this is predicated on a few assumptions. First one is that Gold will retain its value, which in a shrinking economy it probably would not. As other more necessary items become more scarce, Gold would lose value relative to them. Besides that, you would have to be able to find somebody willing to sell you Gold for your Demmurrage Money, and that person would only do that if they themselves were in need of the DM to transact business. For the most part, I would think as long as Gold was holding value, it would be in a state of permanent backwardation, and unavailable to buy at any price.
Gold is just an example though, there are many other things which might be invested in, for instance Shares in Monsanto. Long as you figure Food is necessary and Monsanto will be providing the bulk of it, shares in such a company should hold value. So again, rather than hoarding by holding onto the monetary instrument itself, you hoard by using it to purchase other assets which you expect will not decrease in value as fast as the rate of demurrage.
The fundamental problem here lies in having excess earnings beyond what you need to live on, regardless of the monetary instrument. As soon as you have excess, you can find some means to hoard it, and of course like squirrels the Human Savers of the world always prepare for the Cold Winter by storing up their nuts and seeds. In aggregate, this is always taking money out of circulation, and always ends up with the effect of people who have a large pile loaning some of it out to needy people at interest, essentially preying on their desperation. So again you see on a Moral Level why the Bible has the injunction against Usury, though despite that injunction for so long as the world depends on money, desperate souls will always borrow and hoarders will always lend, in the effort to prosper from the need of another.
So now besides having to somehow prevent hoarding to keep the money moving around, in order to do that you need to prevent people from earning or acquiring more on a regular basis than they need to live on, which of course smacks of Communism. In a small Tribal society for the tribe as a whole to survive, members of the tribe do this naturally. You don’t go out and hunt down more Buffalo than you actually need so you all can grow Obese on McBuffalo Burgers, you only take what you need and leave the rest grazing so there will be plenty next year. In a large society though, particularly one where the thermodynamic energy of Oil can provide seemingly endless quantities of food, few people feel the cultural imperative to limit their own consumption. Nor do most people feel naturally inclined to limit how much they will earn, rather since the society seems so plentiful the imperative is to go out and earn as much as you can, so you have the excess not only to hoard, but to live an extravagant lifestyle, with the McMansion and the Hummer in the driveway. Or better yet, the GulfstreamV Jet and the 400’ Yacht.
So, when I bring up Communism and bring up the idea that some means of controlling how much a person earns, you DO see how Central Control gets manifested here in trying to make any form of Money work. Capitalism is also a Central Control paradigm, its controlled by the “market makers” who are the TBTF Banks, and the BIS, which is the clearing house for international currency valuation. Is this strictly a limitation of my vision, because I am immersed in a Central Control paradigm to begin with? Perhaps that is part of the problem, but I do pride myself on my ability to think outside the box, so rather what I think is the case is that Central Control results organically from the aggregation of a large society. I am trying to think of any large system that doesn’t have a Central Control at the core, and from Banking to Transportation Networks to Computer Networks, I really cannot think of one. The Internet would come the closest I suppose, but even there you have the Nodes of the Routers, and the Central Control of the Protocols and the Language used for the communications. Imagine trying to make the internet function without agreed on address protocols, or having browsers function with many different codes used. Whoever controls the Java Script controls the net. Whoever controls the Search Engine controls the net. Once systems get very large, having a distributed control paradigm may be organically impossible. Not saying that is absolutely true, but there does not seem to be a human engineered system extant that exemplifies distributed control in a large system.
Now, in the Natural World, the opposite seems to be the case. Ecosystems are very large, they are very organized and balanced, yet there does not seem to be any Central Control. You can of course postulate that God is the Central Control for natural systems, but given that we cannot observe how God is controlling these systems from our reference point, you might try to mimic a Natural System with Money if you could Model it properly. Int his case, the Model would function in the role of God, but then whoever builds and tweaks the Model becomes your Central Controller. Big Brother if you will, or HAL 9000. I would be very hesitant in any event to put an AI program in control of a monetary sytem.
The best outcome I see as possible is rather than one single system, the breakup of the One to the Many results in many smaller redundant systems. If each of those systems is made small enough to be below the Critical Mass at which Central Control becomes necessay, then they can run by Distributed Control and Individual Responsibility. That size for Human Systems as I have written before I believe to Max Out at around 10,000 Human Souls. Is there some way to limit aggregations of people and Political Units to 10,000 souls? Historically there has not been since the Age of Agriculture began, large civilizations emerged with this technological development. So here again, I do not think we will achieve such small political units again (except in some very remote locations like where I live) until the Agricultural paradigm in the form it developed no longer functions. This is a ways off still I think, although overall the depletion of nutrients and the decreasing availability of water in many Ag lands might bring this along sooner than I expect likely.
If such a breakup doesn’t happen organically, might it be possible to legislate it into existence? This might be possible, but of course worldwide it would be very difficult if not impossible to enforce. Still, just the fact that mechanized armies will go the way of the Dinosaur means that modern means of maintaining control over large swaths of the Earth surface will become increasingly more difficult. It will be a while I think before another Mongol Horde utilizing Cavalry reasserts itself, and lessons of the past on how to limit the effectiveness of Calvary might prevent such an army from ever forming up again with so much power.
Anyhow, as usual I have drifted off somewhat from my original topic and ended up once again looking at my Crystal Ball and seeing a reversion to more simple technologies and a lower energy footprint overall for Homo Sapiens as the outcome here, assuming we do not self-extinguish before that comes to pass. I still have a hard time seeing how most of the technology we have that is dependent on the Thermodynamic Energy of Oil will persist long into the future, and I think that once most of that goes the way of the Dinosaur, the monetary structure will be the LEAST of our problems for quite some time to come.
In the short term, to prevent a descent into Mad Max, we must substitute some sort of Money, because big as this population is now, there just is no way its going to operate on Potlatch. Demurrage money is worth a try, despite the problems I identified above, and its certainly a more likely possibility than coining up metals. If it can at least slow the spin down and extend the die off over a few generations, this would be a worthwhile goal in and of itself. The other outcome here is just too horrible to contemplate, although I certainly do as is my Doomer nature.
One thing is for certain. The world of Tomorrow is not going to look ANYTHING like the world we have today in its structure. There must be and there will be vast changes here, because what we have constructed in our current systems is thoroughly unsustainable, and reaching the end of its working lifespan. The End of Humanity? Hopefully not. TEOTWAWKI? Most certainly.
Off the keyboard of RE
Published originally on the Doomstead Diner
Discuss this article at the Epicurean Delights Table inside the Diner
My good friend and Cross Posting Blogger here on the Diner Steve from Virginia published an article this week called Watch the Banks…. on his Blog Economic Undertow. It’s one of Steve’s trademarks to title many posts with three Periods after them….LOL. I cross posted the article here on the Diner yesterday. It touches on many themes explored here on the Diner with respect to the Creation of Money, and how Biznesses function in this economy, both Large & Small.
Indeed, watching the Banks is the KEY element in following the progress of the collapse. The “System of the World” as Neal Stephenson put it, the Monetary system we all depend on is run by a few Large Banking Houses, JP Morgan Chase, Bank of America, Goldman Sachs et al, and the Central Banks they control like the ECB, the BoJ, the BoE, the PBoC and of course Da Fed as well. All coordinated through the Bank for International Settlements Headquartered in Basel, Switzerland. The BEST way to follow the Collapse in Progress is to watch the machinations and currency manipulations being undertaken to keep this very large and complex stucture floating another day.
One of the Key Points Steve touches on in his article relates to the primacy of “Small Bizness” as an Economic Driver, in a sense making the postulate that Small Biz preceeds Big Biz in the development of an Economy. Does it REALLY though? As I see it, perhaps in the Dawn of History for Homo Sapiens Small Biz preceeded Big Biz, but since the development of large scale Agiculture around 8000 years ago, the opposite has been true, and the main economic drivers for this period were the large scale generally Slave Driven Ag enterprises and the War Machine they support and which supports it in a synergistic relationship.
Steve and I have already gone a few rounds in debating how this economy develops on Economic Undertow, I will include these posts as a preface to better grasp the global issues.
I don’t think any “small bizness” earns any “organic returns”, at least not while all biznesses operate under a failing currency structure.
Small Biz is essentially Parasitical off of Big Biz. If Big Biz borrows Capital to put up say a GM Auto Plant in Janesville, Doctors, Dentists, Property Sellers, Retailers and Restaraunters all open up small biz that sieve off the central source of money.
When the Big Factory shuts down, all the Small Bizmen go Broke too, even if they took out no Loans to grow the Biz. Customers with MONEY are no longer in the neighborhood buying their goods or bidding up the price of housing. Just the monthly overhead of the Restaraunt makes them insolvent.
Without Large Public Works feeding money at great scale out into the economy, the ancillary small biz all goes broke too. I wrote about this on the Diner in the Large Public Works Project series.
For the recent Generation in the Age of Oil, the BIG LPWP was the Interstate, and then the Shopping Malls and McMansions that built up around the Ring Roads.
Without such LPWPs, there is no way to distribute out centrally created “money” which has any value. There is nothing for Small Biz to sieve off.
It is unlikely we will create any new LPWP to replace the one built courtesy of the thermodynamic energy of fossil fuels over the last 3 centuries or so. In the absence, Money on the Grand Scale of International Finance will irretrievably FAIL.
Whether any more Local forms of Money can be substituted remains an Open Question.
RE, there is a big information gap before industrialization.
The Middle Ages were as prosperous as Roman period and succeeding modern periods, not for all at all times but the same can be said of the present. Americans live better than Kenyans, Venetians lived better than Saxons in England after William arrived. What mattered most in Europe was tide of war.
Post-Constantine, the wealth of the Western Roman Empire was directed toward the church and away from government and the private sector: this was a big reason for the decline then collapse of the empire. The church made itself the beneficiary of all estates without heirs or issue, over centuries it absorbed vast amounts of property from extinct estates. It became property recorder and mediator of disputes great and small, which gained it fees. The Western Roman government became unable to compete with the church as a business enterprise.
The militaristic Franks eventually absorbed and reorganzed Roman activities in Western Europe, trade was continuous from Asia to Spain, trade centers such as Genoa, Siena, Venice, Constantinople became rich.
The traders in the 8th century were wealthy and successful … as any number of ‘entrepreneurs’ today. They borrowed their fortunes and hived to costs onto their trading partners!
The Romans understood steam power but not plate glass or railroads. Franks understood printing but not moveable type or firearms. The Chinese understood rocketry but not airfoils. Information was hard to come by, in the West the church had a monopoly on education as well as on books. It took moveable type — and a series of bloody wars — to break the church’s information cartel.
The war periods inform the public imagination of European life, up until the rise of publicly available information in 15th century.
This is also when looted gold from the Western Hemisphere began to arrive on European shores by the shipload:
– It financed the renaissance,
– it triggered the largest, longest-duration bout of hyperinflation in history, over 100 years, over America, Europe and Asia,
– it financed the industrial revolution,
– it financed the rise of Netherlands and UK as naval powers to rival Spain,
– it also financed the 13 British colonies,
– it financed 2 centuries of religious wars in Europe which ended with the collapse of the papacy’s temporal power.
Spain ended up bankrupt, Portugal and Netherlands were severed from Spain, both France and Italy expelled entrenched foreign influences to become powerful nation-states, the Holy Roman Empire dissipated to reformulate itself over time as modern Germany … Ireland became a slave state of England, which itself endured a violent revolution and civil war to become a military power … the English civil war extended overseas to North America ending with the American Revolution, then a revolution against the French monarchy. Afterwards came Bonaparte. All of this and much more besides was paid for with Peruvian and Mexican gold (some Eastern European silver, too).
Between wars and recoveries there was a lot of room for enterprise. Both Europe, China and South Asia were wealthy, during the Middle Ages there was strong demand for consumer goods such as sumptuous clothing, carriages, villas and town houses, exotic foods, private botanical gardens and arboretums, paintings and sculpture, illuminated books, lavish public entertainments, theater productions, permanent installations such as public parks, fountains, bridges, stone-paved roads, elaborate structures such as enclosed markets and forums for public gatherings, gigantic cathedrals (filled in places with Roman articles), private galleys, teams of horses, livestock, etc. A common complaint was that people could not determine who was wealthy or a noble and who was not because the commoners wore the same or better clothing. All of these things were made by more or less small-scale craft level workshops, lots of them.
Any town would have stone-and brick masons, a quarry, a brick maker, a foundry, a tannery, a carpenter, a blacksmith, a tinker (make pots and pans), silver- and gold smiths, embroidery shops, tapestry weavers, yarn spinners, shoe-and boot makers, stable hands, street pavers, armorers, arborists, vintners and brewers, gardeners, window makers, musical instrument makers, cabinet makers, roofers, livestock tenders, butchers, barbers, etc. Regardless of ones’ station there was always something to do. Most did not have to toil incessantly, there were many holidays and feasts. The grim peasants in rags … Monty Python or Lord of the Rings.
Most towns in America or Europe do not have any of these things at all: we are dependent upon welfare and television … the poorest medieval town was more prosperous than any of our towns today!
Steve, you won’t get an argument from me that Medieval Towns were more self-sufficient than modern cities, of course they were. From an economic standpoint though, all those Craftsmen you revere so much STILL were parasites off the Big Biz of the era, which was mainly Ag and Warfare.
First off, the fact most goods and services were produced locally meant that commoners used little money at all, they bartered. If you needed the services of the local Quack to Bleed you due to contacting Plague, you paid him 2 chickens. If you Tanned nice skins, you traded them for a bushel of potatoes. etc.
The main way money got into the economy was from Soldiering and Plundering. The local Lord would conscript up promising to Pay in Silver, after they got back from stealing the silver from the next county over. Eventually of course they consolidated up to Kingships and incipient Nation-States of course, then went about ripping off Gold wholesale from the New World, leading to the inflationary period you spoke of. VERY Big Bizness there!
The other way money got distributed out was through the Holy Roman Catholic Chuch (the Mega-Corp of the Era) in the building of Cathedrals, the Large Public Works Projects of the era. This of course provided lots of work for Stone Masons, Carpenters, Stain Glass Window artists, etc. If your Community could get the HRCC to build a Cathedral in your nabe, it was a thriving little Metropolis. No Cathedral, you were a dirt poor backwater town.
As it further evolved, the Big Biz of Plundering via Tall Ships equipped with Cannon led to those next Massive Corps, the Brit and Dutch East India Companies. Said Big Biz of course provided tons of work for Shipwrights, Carpenters, Sail Makers, yadda yadda not to mention the guys forging the 20 pounder Cannon, which was NOT done in a small Blacksmith’s shop.
In the background of all of this of course were the Financiers, floating Stock Issues in Amsterdam and London, and in fact in 1692 when the BoE was chartered, they were pretty much Fresh Out of Gold, as the Spanish had nailed down the best Gold Theft locations and they got stuck with North America, which until the Railoads got built into the interior did not offer up much gold. They got their money for financing up their colonial adventures courtesy of Master of the Mint Sir Isaac Newton, and began to do well providing Letters of Marque to Pirates who would hit on the Spanish Cargo ships on the High Seas. Their Big Biz controlling the Sea Lanes with the Brit Navy brought in the money that all those local craftsmen used fo commerce.
In all cases going right back to Ancient Egypt and Mesopotamia, It was the Big Biz of Ag centrally controlled which got the Money going, and the Big Biz of Warfare which brought in the PMs to use for coinage. Large Public Works projects such as the Great Wall(s) of China, the Pyramids, Cathedrals et al were symbols of successful cultures running the Ag-War Economy. All the small craftsmen and small biz expanded to sieve off this economy. They don’t exist independent of it.
Various non-industrial employments in the 18th century:
A Treatise On Indigence: Exhibiting A General View Of The National Resources …
By Patrick Colquhoun
Professional soldiery was a tremendous burden to the state prior to Spanish gold which meant most militaries fielded militias, irregulars or mercenaries. Governments offered letters of marque to privateers to augment their navies.
Another list of medieval (pre-industrial) employments which saves me the effort of making one:
There was another list over on Guy McPherson’s web site but I can’t find it …
To the east of Bethnal Green (London) lies Globe Town, established from 1800 to provide for the expanding population of weavers around Bethnal Green attracted by improving prospects in silk weaving. The population of Bethnal Green trebled between 1801 and 1831, operating 20,000 looms in their own homes. By 1824, with restrictions on importation of French silks relaxed, up to half these looms became idle and prices were driven down. With many importing warehouses already established in the district, the abundance of cheap labor was turned to boot, furniture and clothing manufacture. Globe Town continued its expansion into the 1860s, long after the decline of the silk industry.
The 20,000 looms supported 20,000 households and employed at least that many along with suppliers to the trade, the makers of looms and the houses, the merchants and peddlers of silk goods. This was during periods when population in England was relatively small. Beside Bethnal Green there were other districts in London and in other cities and countries weaving all kinds of cloths … this took place over long periods of time … the citizens always require things to wear. The customers of a country’s goods were often overseas and there was a money trade in even the old Byzantine, Frankish and Roman issues. Before 1520 funds flowed from the East as the Venetians and other Italians traded with the Chinese, the Caliphates, the Turks and Mongols. Afterward the flow was from the West and there was no outbound trade: there was quickly too much money and nothing flowing out to balance it.
The customers of distributed production were pilfered by manufacturers with credit and steam-driven machines, ‘low prices’ and uniformity, the distributed producers working in their houses became little more than serfs.
“Professional soldiery was a tremendous burden to the state prior to Spanish gold which meant most militaries fielded militias, irregulars or mercenaries. Governments offered letters of marque to privateers to augment their navies. “-Steve
The great expense of the non-stop warfare in Europe didn’t prevent it from occurring and driving big bizness. It certainly bankrupted a few treasuries and indebted these Kings to the Banksters also.
The Medieval towns you talk about all grew up around Feudal Estates owned by the Nobility, the Pigmen of their time. Ag was the Energy Driver of this economy, and was Big Monopolized Bizness. War was the other Big Bizness, and there is a good reason those medieval castles had 5 foot thick stone walls around them with Moats, Drawbridges and Porticullises. The townees hadda run there every time some neighboring warlord needed to replenish the Treasury. They didn’t build those castles just for show.
“To the east of Bethnal Green (London) lies Globe Town, established from 1800 to provide for the expanding population of weavers around Bethnal Green attracted by improving prospects in silk weaving. The population of Bethnal Green trebled between 1801 and 1831, operating 20,000 looms in their own homes. ”
Steve,from 1803-1815 the Brits were fighting the Frogs in the Napoleonic Wars!! I’m sure the women were doing fine at home on the loom, but a whole lotta poor limeys were being Bayonetted in the French countryside.
If they weren’t conscripted to fight on French soil, they were being Press Ganged to serve as Gunners on the Frigates of Her Majesty’s Royal Navy, consisting mainly of Privateers aka Pirates, a VERY Big Bizness indeed.
Anyhow, I am all for distributed production over Industrial production, but said societies STILL were Central Control Ag-War societies, and the individual craftsmen sieved off of the surplus created by that society.
Anyhow, more tonight, I am just about done with a response article “Small Bizness in the Sea of Irredeemable Debt ” I’ll publish later tonight.
While just about everyone Loves to Hate Big Biz and Corporations, at least in the Heart of most Americans is a Reverance and Respect for the Small Bizman. The Plucky Guy who started with nothing, works for himself Independently and makes a Good Living, even if not getting Rich off of it.
There is the notion that the Small Bizman is the “Backbone of Amerika”, Small Bizmen “Built this Country” etc. Although this is a popular meme and one promulgated in the History Books and the MSM, and even on the pages of numerous Blogs, it is not the TRUTH by any stretch of the imagination.
In any country which runs a Centrally Controlled Monetary System, the plucky Small Bizman is just engaged in the process of trying to accumulate the Accepted Currency of the Nation-State. To Sell at a price higher than he buys at, to pay workers less than the total Value Added to the product so that there is some PROFIT to be made in the extant Currency, against which ALL things, both labor and resource are measured.
Where does this MONEY come from though? If you look at the Dollar for instance, prior to the end of the Revolutionay War separating the Colonies from Jolly Old England, there were ZERO Dollars in existence. War is finished, Founding Fathers get their OWN Printing Press, now Dollars EXIST!
In order to have REAL value of course, these Dollars have to Buy stuff in the real economy. The stuff is the products of the land, through farming, mining and logging to begin with. It gets more complicated as time goes by and more things are created, but even by itself this is enough to understand what goes on here in Money Creation. It is essentially coming from the total resources available to the Political Construct of the Nation-State that Rules over those resources. The Nation-State operates in Synergy with the Money Masters, Banking Houses established long ago which control all Trade and Valuation of any Currency a given Nation-State will create. This is done through Privatization of the Resource Base for any given country, as well as Privatization of the Industrial Infrastructure since the beginning of the Industrial Revolution.
The newly created dollars get valued against already extant currencies circulating in Europe, Brit “Sterling”, Frog Franks, Kraut Marks, whatever.
The main constraint any given country has in how much currency it can create depends on how the International market will value said currency. When just based on Resources it isn’t horrifically complicated, but once you factor in labor and trade of manufactured goods it gets VERY complicated.
Anyhow, what were only a few Dollars created in 1789 at the end of the Continental CONgress has morphed over the last 200+ years into TRILLIONS of them, and that is just what is listed on the Balance Sheet of Da Fed. Thing is, not JUST Da Fed can create new Dollars, anybody with a Big Enough Bank can do it too! They do it by creating Paper Contracts which have some Notional Worth attached, say a contract to pay off $1M if some company or Nation-State goes BK. These contacts are called Credit Default Swaps, or CDS. Said contract is now traded about as though it is worth $1M, or some fraction of that. It is more “Money” flowing around the notional economy of traders, though it never shows up in the real economy until somebody goes Belly Up, somebody ELSE has to Pay Off on that and then since they can’t because they don’t REALLY have enough to pay off it gets tacked onto the Taxpayer Balance Sheet. IOW, the way this shows up in the real economy in the end is as a LOSS, a BIG ONE.
To return here to our Friend & Hero the Small Bizman, the money this fellow is using to conduct Bizness is all subject to the grand pressures created in the International Money Markets. At any time if/when confidence is lost in a given currency, even the most Prudent Small Bizman can go OUTTA BIZ in an INSTANT.
Let’s take the example of our friends the Nipponese, who make their living converting Oil into Carz and Electronic Gadgets. Because the Demand is falling oveseas for their products, in order to remain “competitive” in the market the Nips want to Devalue their currency. Except if they do that, it will make the Oil Import necessary for production MORE expensive, so no matter how Efficient he is or How Low he can Go on Salaries or how many Robots he can substitute for Homo Sapiens Workers, he STILL will LOSE MONEY!
Every Small Bizman is going to be subject to the FACT that money on the Grand Scale is NOT being loaned out into the general economy. Why not? Because it no longer makes any SENSE for the folks in CONTROL of the resources to do so! The game NOW is to CUT OFF access to the resources, which occurs either by the currency not being distributed (deflation), or excessive currency being distributed (inflation). Either way, the Small Bizman is OUTTA BIZ.
The ONLY folks with access to the Money to keep on going here with this paradigm at the moment are those at the very TOP, closest to the Center of Money Creation. Since the Industrial Age began, this Center began in Venice under the Medici Banking Family, moved to Amsterdam and London, then to Wall Street and after that to Hong Kong, Singapore and Beijing. In the end of course, it will all collapse. The resources are no longer there to back it up. The debt cannot be collected anymore. It is IRREDEEMABLE Debt.
To try to simplify this, imagine the entire World Economy as the Big Island of Hawaii right after the first Catamaran rigged Sailing Canoe made it there from the Marquesa Islands around a Millenia Ago. The Island is the WHOLE ECONOMY, which the smart Navigator who piloted the Canoe claims as HIS OWN. The way he Distributes out HIS resources to everybody elso is to LOAN them Money to buy said resource. Which he does, with an Interest Charge attached of course, so that a percentage of the exploited resource he controls always flows back to him, keeping him (and his heirs) wealthy in perpetuity. The more of the resources that get exploited, the larger the population gets, the RICHER he gets!
He keeps floating out MORE credit endlessly so he can sell the resources of Hawaii to other Hawaiians and it works JUST GREAT until Hawaii is Chock FULL of People and FRESH OUT of resources. They have fished out the local waters and the Lagoons are stinking sewers filled up with Human Waste.
This of course did not occur in Hawaii because it was not a closed system, but something similar did occur on Rapa Nui (Easter Island), populated by the same extraordinary Polynesian Navigators who found the Big Island of Hawaii a good 500 years before Cook found it.
The entire Earth though IS a closed system, so no matter how much Credit you issue, if you no longer have resource to sell, the Credit is worthless. Creating more Dollars does not make more Cheap easy to pump up Oil available, and it doesn’t replenish the Ogalala aquifer either. When you are Out, you are OUT, nothing left to sell here.
In fact we are not COMPLETELY out of Oil or Water, but relative to the size of the population that ballooned up here through Rapid Exploitation of these resources, they are becoming scarce and so the Credit necessary to buy them is being Triaged off, most obviously in places like Greece and Spain, but really occuring everywhere now. It shows up here in the FSoA as 50M people on Food Stamps and an ever decreasing percentage of people participating in the Workforce, because just about ALL jobs are not productive of ANYTHING! You waste more energy getting to work each day in your SUV or even on the Subway than any “value” you add to the economy in ANY job in the Industrial Economy. All you do by participating in it is waste the energy of fossil fuels a bit faster.
In such an environment, the Small Bizman is the Individual Version of the Small Country like Greece. You get Triaged Off the Credit Bandwagon first here. You can’t make a profit, first because your customers ALSO are outta credit to buy your stuff; second because some TBTF Big Bizness still DOES have access to credit, so they can dump products on the market cheaper than it costs you the Small Bizman to make them and drive you outta biz! This of course has been the meme of Capitalism since the beginning of the Industrial Revolution at least, though it really does go back to the Dawn of Agriculture and Money.
At NO TIME in the last 8000 years or so has Small Biz been the Driver of Economics, only a Passenger in the Back Seat. The driver during the Ag Era was Big Ag utilizing Slave Labor and in the Industrial Era, Factories burning copious quantities of Fossil Fuels. Through BOTH eras, the Banksters controlling the flow of credit directed it in such a way to bring the maximum Benefits to themselves at the expense of everybody else, and Mother Earth as well.
Nothing lasts forever of course in a world of Finite Resources, and this paradigm is coming to a close. The only question remaning here is how long the Triaging of the Small Bizman and the Small Countries can go on before Billions of People with Nothing Left to Lose get very, VERY angry.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 2, 2013
Surreality is when the top story in the New York Times is about King Cakes but the idea is to not scare the horses. Informing the readership in plain English of our ongoing unraveling might provoke uncertainty … then panic … leading to questions about why we endure so many stupid managers everywhere in the world. At the very least, the stock market — which is now near all-time highs — might decline. People might then in theory put off buying a new car or a bigger house or not take on bigger loans. Best to roll out the pastries and downplay the Israeli air strike in Syria and the widening war there or the bank nationalization in Netherlands (Washington Post):
Dutch state nationalizes bank and insurer SNS Reaal NV, injects 2 billion euros in capital (Associated Press)
AMSTERDAM — The Netherlands nationalized its fourth-largest bank on Friday, injecting €2 billion ($2.7 billion) to recapitalize SNS Reaal NV and head off any chance of a messy collapse that would threaten the country’s already fragile economy and financial system.
The total cost to the Dutch government will be at least €3.7 billion, Finance Minister Jeroen Dijsselbloem told a press conference. That’s almost certainly enough to ensure that the Netherlands’ budget deficit in 2013 will be higher than the 3 percent allowed under EU rules, unless the Dutch Cabinet — which has already taken a series of unpopular tax hikes and spending cuts — comes up with further austerity measures.
“This isn’t what we wanted,” Dijsselbloem said. But he added that, without the nationalization, SNS “would have gone irrevocably bankrupt,” with potentially dire consequences.
Ah yes, dire consequences: secured (large) lenders to the bank would have lost some money. Much better for the ordinary citizens of Netherlands to take the billions in losses. The citizens haven’t even earned the money yet, they will never know what it is they have lost! Here is the latest innovative technology in action: the finance cost-morphing time machine. The establishment endlessly promises a high-tech utopia tomorrow. What it actually delivers is invisible public bankruptcy: money that is not earned tomorrow because it was diverted to a tycoon … yesterday.
High-tech time machine in operation, Pableaux Johnson (NYTimes)
Depositors and senior creditors (of SNS) won’t lose any money in the nationalization, the Finance Ministry said.
The closest the Dutch get to actual restructuring …
SNS shareholders will be wiped out, along with some junior creditors, including the state itself. SNS owed the government €800 million, including interest, left over from a 2008 bailout. Other junior creditors will lose around €1 billion, the ministry said. The three biggest Dutch banks, ING Groep NV, ABN Amro, and Rabobank will contribute a combined €1 billion to help save SNS — they are required to do so as under the same law by which the state guarantees their retail deposits. The nationalization shows the damage the crisis has wrought on the oversize Dutch financial sector and means that three of the five biggest banks in the country have now come under state control since the start of the crisis: ABN Amro was merged with the former Fortis and both were nationalized back in 2008. In addition, ING received several bailouts which have still not been fully repaid. Only Rabobank, a banking cooperative, has not yet needed state aid.
Big-bank shutdowns are historical indicators of greater finance system failures-to-come. This dynamic has been in force as recently as 2007 with the collapse of el cheap-o mortgage origination firms and two of Bear-Stearns’ hedge funds. The entire mortgage industry, shadow-banking and then Bear-Stearns itself all fell into the pit shortly thereafter. During the entire period there was a soaring stock market and soothing bromides from the establishment …
Attention must be paid to stumbling banks while the happy talk about ‘growth’ and ‘recovery’ is ignored.
The propping up of key-men works for modest periods only. Cures or resolutions must be put in the place of the props … since 1980 or so nothing has been done other than to entrench the status quo, expand credit and inflate serial asset price ‘bubbles’. Finance has not evolved, it has become an unchanging dead weight, a gigantic millstone around the corpse of modernity … ossified finance has become the final manifestation of ‘progress’. To support banks and the industrial welfare queens there are cheap loans offered by central banks, the laundering of assets, bailouts of businesses belonging to ‘special friends’ (owners) of corrupt government officials. All of this is accompanied by loud public proclamations of better times that are sure to come, tomorrow.
It is always tomorrow … when the positive outcomes are certain to emerge! As a fair exchange businessmen will poison the atmosphere and the ocean so that progress can take place. Meanwhile the key-men multiply like rabbits while the props diminish or crack under the strain.
There are banks and bank-like entities faltering in China, in Spain, as well as Italy, where the Banca Monte dei Paschi di Siena SpA is underwater due to self-dealing and looks ripe for failure. All of these situations have the potential to upend the economic applecart. Of course, there are the parallel political scandals in all of these countries including China. One must not overlook the Greek and Cyprus problems … or the foreign exchange ‘war’ that is underway between the US, the eurozone, China, Japan and Korea.
The term ‘Dutch’ can be replaced with the name of just about any country …
‘France is totally bankrupt’: French jobs minister Michel Sapin embarrasses Francois Hollande with shocking statement on state of the country’s economy …
Spain is shocked … shocked! The economy of France is a Ponzi scheme where the funds/capital of other countries is taken in exchange for empty promises … gambling and fashion have bankrupted the country, there is nothing left for France but to become Greece.
Figure 1: Charts of car sales here and there from the New York Times: sales nose-dive in Europe. Sales are dependent upon the constant addition of credit-plus central bank moral hazard … as these offer diminished returns there is nothing to support sales
Industrial production figures exclude construction, and reflect the change in each month from the average of 2006 figures. Car sales figures exclude light trucks, and are based on sales volumes in the United States and on registrations of new cars in Europe and Japan. They reflect the total for each 12-month period compared with the 2006 total. (Sources: Bloomberg, Haver Analytics, Ward’s Automotive, European Automobile Manufacturers’ Association)
Autos and other capital-extinguishing goods are collateral for our money, they are the tangible ‘products’ for- and by which we devour our pitiful remnants of real capital … We can continue to destroy capital only if we lie to ourselves about its nature. Currently, we insist that capital is money instead of resources. This is false: money is loans and nothing more. When capital is loans, there are insignificant consequences to its destruction. Old loans are easily replaced with new ones. Only when capital is something that must be dug out of the ground with great effort … does its fleeting existence within our state of affairs become an economic embarrassment … then an indictment.
Meanwhile, finance is losing its ability to paint capital destruction as ‘productive-appearing’ and to thereby prop it up. Here is the greatest key-man failure! The more effort expended to keep the current regime of capital destruction ‘growing’ the faster the costs accumulate … capital is extinguished with one hand while greater claims against the same capital are made with the other.
Figure 2: What sort of un-balanced sheet is this? Here are diminished returns made graphic … the declining productivity of US debt, as $300+ billion borrowed dollars ‘buys’ a $5 billion dollar decline in GDP (by Zero Hedge). This decline can be ignored as long as … the stock market keeps rising! (click on the image to see it in its entirety)
Meanwhile, from the ‘Let The Eat King Cake’ department … in China, (Patrick Chovanek):
What Causes Revolutions? A surprising number of people in China have been writing and talking about “revolution”. First came word, in November, that China’s new leaders have been advising their colleagues to read Alexis de Tocqueville’s classic book on the French Revolution, L’Ancien Régime et la Révolution (The Old Regime and the Revolution), which subsequently has shot to the top of China’s best seller lists. Just this past week, Chinese scholar Zhao Dinxing, a sociology professor at the University of Chicago, felt the need to publish an article (in Chinese) laying out the reasons China won’t have a revolution (you can read an English summary here). Minxin Pei, on the other hand, thinks it will.
This is like the German high command during the Barbarossa winter of 1941 re-reading Armand De Caulaincourt’s classic account of Napoleon’s doomed 1812 Russian campaign. Sentries that have frozen to death tend to focus the mind: so do the endless rounds of Chinese outrages and miscalculations. Doubts about China’s enterprise are growing … in China, where such doubts matter most.
What would a China revolution look like? Pundits offer a political story about the Communist Party but the problems are economic: the failure of Chinese business ‘success’. Any revolution would certainly take some form of public rejection of automobiles … otherwise there would be no real revolution at all. Such a radical change is unlikely at the moment … The Chinese love their cars … the passage of time and the ongoing bankruptcy of China will do the heavy lifting. The Revolution will come after China becomes Greece.
What must be watched are the banks which are saddled with US$ trillions of bad loans, mostly for ‘capital investment’ which in this case means redundant factories, showy-but-useless public infrastructure and property developments. None of these things can or do pay for themselves, they require endless rounds of new loans … the result being pyramiding debts. Amazingly, it has taken the Chinese only 20 years to reach the profound level of insolvency that has taken the West 400 years to achieve. It is hard to see the Chinese expanding their particular form of capital investment Ponzi scheme … and the accompanying smog … for another 20 years.
The Chinese are not the only folks struggling with air quality: the smog is worse in India … for many of the same reasons as China. The smog is also bad in Athens … Greeks are putting heating oil into their cars and heating their houses with stolen wood.
Figure 3: The chart looks like the Yen has weakened in lockstep with both the Euro and the Dollar. But when you look at the scale, you see that the Yen has lost 22% against the Euro, while it has only given up 13% versus the dollar. From this you might conclude that the logical next step is for the USDYEN to “catch up” to to what has happened with the EURYEN. This thinking takes you in the direction of USDYEN 100. But … the FX markets don’t work like that. If USDYEN moved to 100 while the EURYEN remained “stable” around 122, then the EURUSD rate HAS to fall to 1.22 (-9%).
Sorry, that’s not in the cards.
Depreciation from ¥80 to the dollar to ¥100 means a ‘Great Leap Upward’ in Japanese fuel prices because the country has no native sources of petroleum or other fuels. Japan beggars itself instead of its neighbors: whatever the country hopes to earn by exports is offset by the increased cost of the fuel it must import. At the same time, dollar-fuel prices are increasing because of ‘growth’ propaganda, moral hazard for petroleum ‘investors’ as well as threats of war in petroleum producing regions. With depreciation and higher producer costs the Japanese driver can look forward to paying a deflationary 30% or greater premium for fuel compared to the rest of the world. Certainly, here is conservation by other means!
The foregoing omits systemic risk to Japanese banking and finance which cannot be easily measured. The smallest error can have shattering consequences. For example, the Bank of Japan central bank can be perceived by the marketplace to be making unsecured loans … that is, loans in excess of collateral that it takes on as security. If this is so, the central bank is instantly insolvent … as are other Japanese banks and for the same reason: bad loans and excess leverage! Keep in mind, the only reason why a central bank would think of offering unsecured loans is if the country’s commercial banks are insolvent and unable to lend. The outcome is no effective lender of last resort to guarantee bank liabilities: a run occurs as depositors hustle to remove funds from a defunct system. In this light the recent months’ acquisitions of overseas companies by Japanese businesses is ominous.
There is also the issue whether Middle Eastern suppliers will accept a strongly depreciated yen or if they will demand another form or payment (dollars). The Japanese are playing with fire, looking for an easy, conventional approach that cannot possibly work as intended. Whatever the country attempts there are unintended consequences … which often cannot be discerned until after the attempts are made and it is too late to change course.
What the establishment in Japan fails to understand is the effort to accelerate consumption — either within the country or by trading partners — offers sharply diminished returns. This is because irretrievable capital is consumed instead of rapidly multiplying ‘money’. Because of consumption over the course of decades real capital has become more costly relative to the amounts that can be lent against the consumption process. When returns become negative … the country in question instantly enjoys a Greek-like national bankruptcy.
The bankruptcy is permanent, by the way … the only way for a Greece to become prosperous again is for another country to become more bankrupt than Greece is now.
This net-negative process may indeed be underway in Japan as what it exports must be imported first then subjected to entropy-creating industrial-commercial processes. Every process exacts a thermodynamic levy or ‘tax’, certainly export goods cost Japan more in energy losses than what Japan imports.
A country can make water flow uphill by pushing costs onto unwitting trading partners by way of foreign exchange and leverage against that partner’s account. Japan’s trade surplus — which has subsidized Japan for decades — is nothing more than faulty bookkeeping and overseas loans. Japan has pushed its energy costs onto its customers: the attempt at depreciation is an effort to restart the pushing process.
Meanwhile, all the other consuming countries in the world desire to depreciate their own currencies as well! More of Japan’s customers are broke, they cannot afford to subsidize Japan’s waste any more … or their own.
Certainly, there must be intelligent, perceptive analysts in France, America, China and Japan … however the power of habit and wishful thinking is very strong and the current lesson of Greece being played out on the public stage in real time … is ignored.
While countries beggar their trading partners, many of the same countries are bent on outright theft. War intensifies in the Middle East, in Africa, it stirs off the coast of revolutionary China … every place there is oil or oil consumption that can be ‘exported’ to countries such as the United States. The outcome is increased war premium (Bloomberg):
|Crude Oil (WTI)||USD/bbl.||97.97||+0.48||+0.49%||Mar 13||11:45:10|
|Crude Oil (Brent)||USD/bbl.||116.96||+1.42||+1.23%||Mar 13||11:45:16|
|RBOB Gasoline||USd/gal.||302.58||+2.21||+0.73%||Mar 13||17:15:00|
King cake is a New Orleans tradition served on Fat Tuesday before Mardi Gras. King cake by Sara, who clearly knows how to bake a good one! Any recipe will do as long as it includes sugar. A small plastic doll stuck into the cake after removal from the oven. Note: there are no such things as ‘clashing colors’ in New Orleans …
The survivors of the current state of affairs are those small businesses that do not require credit and can obtain organic returns. As for the others, let them eat king cake.
Off the keyboard of Gail Tverberg
Published on Our Finite World on January 17, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
A person might think from looking at news reports that our oil problems are gone, but oil prices are still high.
In fact, the new “tight oil” sources of oil which are supposed to grow in supply are still expensive to extract. If we expect to have more tight oil and more oil from other unconventional sources, we need to expect to continue to have high oil prices. The new oil may help supply somewhat, but the high cost of extraction is not likely to go away.
Why are high oil prices a problem?
1. It is not just oil prices that rise. The cost of food rises as well, partly because oil is used in many ways in growing and transporting food and partly because of the competition from biofuels for land, sending land prices up. The cost of shipping goods of all types rises, since oil is used in nearly all methods of transports. The cost of materials that are made from oil, such as asphalt and chemical products, also rises.
If the cost of oil rises, it tends to raise the cost of other fossil fuels. The cost of natural gas extraction tends to rises, since oil is used in natural gas drilling and in transporting water for fracking. Because of an over-supply of natural gas in the US, its sales price is temporarily less than the cost of production. This is not a sustainable situation. Higher oil costs also tend to raise the cost of transporting coal to the destination where it is used.
Figure 2 shows total energy costs as a percentage of two different bases: GDP and Wages.1 These costs are still near their high point in 2008, relative to these bases. Because oil is the largest source of energy, and the highest priced, it represents the majority of energy costs. GDP is the usual base of comparison, but I have chosen to show a comparison to wages as well. I do this because even if an increase in costs takes place in the government or business sector of the economy, most of the higher costs will eventually have to be paid for by individuals, through higher taxes or higher prices on goods or services.
2. High oil prices don’t go away, except in recession.
We extracted the easiest (and cheapest) to extract oil first. Even oil company executives say, “The easy oil is gone.” The oil that is available now tends to be expensive to extract because it is deep under the sea, or near the North Pole, or needs to be “fracked,” or is thick like paste, and needs to be melted. We haven’t discovered cheaper substitutes, either, even though we have been looking for years.
In fact, there is good reason to believe that the cost of oil extraction will continue to rise faster than the rate of inflation, because we are hitting a situation of “diminishing returns”. There is evidence that world oil production costs are increasing at about 9% per year (7% after backing about the effect of inflation). Oil prices paid by consumers will need to keep pace, if we expect increased extraction to take place. There is even evidence that sweet sports are extracted first in Bakken tight oil, causing the cost of this extraction to rise as well.
3. Salaries don’t increase to offset rising oil prices.
Most of us know from personal experience that salaries don’t rise with rising oil prices.
In fact, as oil prices have risen since 2000, wage growth has increasingly lagged GDP growth. Figure 3 shows the ratio of wages (using the same definition as in Figure 2) to GDP.
If salaries don’t rise, and prices of many types of goods and services do, something has to “give”. This disparity seems to be the reason for the continuing economic discomfort experienced in the past several years. For many consumers, the only solution is a long-term cut back in discretionary spending.
4. Spikes in oil prices tend to be associated with recessions.
Economist James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes.
When oil prices rise, consumers tend to cut back on discretionary spending, so as to have enough money for basics, such as food and gasoline for commuting. These cut-backs in spending lead to lay-offs in discretionary sectors of the economy, such as vacation travel and visits to restaurants. The lay-offs in these sectors lead to more cutbacks in spending, and to more debt defaults.
5. High oil prices don’t “recycle” well through the economy.
Theoretically, high oil prices might lead to more employment in the oil sector, and more purchases by these employees. In practice, this provides only a very partial offset to higher price. The oil sector is not a big employer, although with rising oil extraction costs and more US drilling, it is getting to be a larger employer. Oil importing countries find that much of their expenditures must go abroad. Even if these expenditures are recycled back as more US debt, this is not the same as more US salaries. Also, the United States government is reaching debt limits.
Even within oil exporting countries, high oil prices don’t necessarily recycle to other citizens well. A recent study shows that 2011 food price spikes helped trigger the Arab Spring. Since higher food prices are closely related to higher oil prices (and occurred at the same time), this is an example of poor recycling. As populations rise, the need to keep big populations properly fed and otherwise cared for gets to be more of an issue. Countries with high populations relative to exports, such as Iran, Nigeria, Russia, Sudan, and Venezuela would seem to have the most difficulty in providing needed goods to citizens.
6. Housing prices are adversely affected by high oil prices.
If a person is required to pay more for oil, food, and delivered goods of all sorts, less will be left over for discretionary spending. Buying a new home is one such type of discretionary expenditure.
US housing prices started to drop in mid 2006, according to data of the S&P Case Shiller home price index. This timing fits in well with when oil prices began to rise, based on Figure 1.
7. Business profitability is adversely affected by high oil prices.
Some businesses in discretionary sectors may close their doors completely. Others may lay off workers to get supply and demand back into balance.
8. The impact of high oil prices doesn’t “go away”.
Citizens’ discretionary income is permanently lower. Businesses that close when oil prices rise generally don’t re-open. In some cases, businesses that close may be replaced by companies in China or India, with lower operating costs. These lower operating costs indirectly reflect the fact that the companies use less oil, and the fact that their workers can be paid less, because the workers use less oil. This is a part of the reason why US employment levels remain low, and why we don’t see a big bounce-back in growth after the Great Recession. Figure 4 below shows the big shifts in oil consumption that have taken place.
A major part of the “fix” for high oil prices that does takes place is provided by the government. This takes the place in the form of unemployment benefits, stimulus programs, and artificially low interest rates.
Efficiency changes may provide some mitigation, as older less fuel-efficient cars are replaced with more fuel-efficient cars. Of course, if the more fuel-efficient cars are more expensive, part of the savings to consumers will be lost because of higher monthly payments for the replacement vehicles.
9. Government finances are especially affected by high oil prices.
With higher unemployment rates, governments are faced with paying more unemployment benefits and making more stimulus payments. If there have been many debt defaults (because of more unemployment or because of falling home prices), the government may also need to bail out banks. At the same time, taxes collected from citizens are lower, because of lower employment. A major reason (but not the only reason) for today’s debt problems of the governments of large oil importers, such as US, Japan, and much of Europe, is high oil prices.
Governments are also affected by the high cost of replacing infrastructure that was built when oil prices were much lower. For example, the cost of replacing asphalt roads is much higher. So is the cost of replacing bridges and buried underground pipelines. The only way these costs can be reduced is by doing less–going back to gravel roads, for example.
10. Higher oil prices reflect a need to focus a disproportionate share of investment and resource use inside the oil sector. This makes it increasingly difficult maintain growth within the oil sector, and acts to reduce growth rates outside the oil sector.
There is a close tie between energy consumption and economic activity because nearly all economic activity requires the use of some type of energy besides human labor. Oil is the single largest source of energy, and the most expensive. When we look at GDP growth for the world, it is closely aligned with growth in oil consumption and growth in energy consumption in general. In fact, changes in oil and energy growth seem to precede GDP growth, as might be expected if oil and energy use are a cause of world economic growth.
The current situation of needing increasing amounts of resources to extract oil is sometimes referred to one of declining Energy Return on Energy Invested (EROEI). Multiple problems are associated with declining EROEI, when cost levels are already high:
(a) It becomes increasingly difficult to keep scaling up oil industry investment because of limits on debt availability, when heavy investment is made up front, and returns are many years away. As an example, Petrobas in Brazil is running into this limit. Some US oil and gas producers are reaching debt limits as well.
(b) Greater use of oil within the industry leaves less for other sectors of the economy. Oil production has not been rising very quickly in recent years (Figure 6 below), so even a small increase by the industry can reduce net availability of oil to society. Some of this additional oil use is difficult to avoid. For example, if oil is located in a remote area, employees frequently need to live at great distance from the site and commute using oil-based means of transport.
(c) Declining EROEI puts pressure on other limited resources as well. For example, there can be water limits, when fracking is used, leading to conflicts with other use, such as agricultural use of water. Pollution can become an increasingly large problem as well.
(d) High oil investment cost can be expected to slow down new investment, and keep oil supply from rising as fast world demand rises. To the extent that oil is necessary for economic growth, this slowdown will tend to constrain growth in other economic sectors.
Airline Industry as an Example of Impacts on Discretionary Industries
High oil prices can be expected to cause discretionary sectors to shrink back in size. In many respects, the airline industry is the “canary in the coal mine,” showing how discretionary sectors can be forced to shrink.
In the case of commercial air lines, when oil prices are high, consumers have less money to spend on vacation travel, so demand for airline tickets falls. At the same time, the price of fuel to operate airplanes rises, making the cost of operating airplanes higher. Business travel is less affected, but still is affected to some extent, because some long-distance business travel is discretionary.
Airlines respond by consolidating and cutting back in whatever ways they can. Salaries of pilots and stewardesses are reduced. Pension plans are scaled back. New more fuel-efficient aircraft are purchased, and less fuel-efficient aircraft are phased out. Less profitable routes are closed. The industry still experiences bankruptcy after bankruptcy, and merger after merger. If oil prices stabilize for a while, this process stabilizes a bit, but doesn’t really stop. Eventually, the commercial airline industry may shrink to such an extent that necessary business flights become difficult.
There are many discretionary sectors besides the airline industry waiting in the wings to shrink. While oil prices have been high for several years, their effects have not yet been fully incorporated into discretionary sectors. This is the case because governments have been able to use deficit spending and artificially low interest rates to shield consumers from the “real” impacts of high-priced oil.
Governments are now finding that debt cannot be ramped up indefinitely. As taxes need to be raised and benefits decreased, and as interest rates are forced higher, consumers will again see discretionary income squeezed. New cutbacks are likely to hit additional discretionary sectors, such as restaurants, the “arts,” higher education, and medicine for the elderly.
It would be very helpful if new unconventional oil developments would fix the problem of high-cost oil, but it is difficult to see how they will. They are high-cost to develop and slow to ramp up. Governments are in such poor financial condition that they need taxes from wherever they can get them–revenue of oil and gas operators is a likely target. To the extent that unconventional oil and gas production does ramp up, my expectation is that it will be too little, too late, and too high-priced.
 Wages include private and government wages, proprietors’ income, and taxes paid by employers on behalf of employees. They do not include transfer payments, such as Social Security.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on January 23, 2013
The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).
Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.
A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.
What’s there not to like?
Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!
A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.
Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:
– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.
– The gross amount of incremental credit available is the amount
that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.
– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.
A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.
Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.
Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.
There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!
There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …
The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.
From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Figure 3: Post-1998, brutal new game, new mutually-assured-destruction theory!
Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.
– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.
– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:
Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.
A few more things to keep in mind as we descend into the net-energy rat hole:
– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.
– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):
The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran agroundon the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel. But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.
The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell seems unwilling to invest.
– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.
– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.
– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.
– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.
– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.
– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.
EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).
Off the Keyboard of RE
Discuss this article at the Economics Table inside the Diner
In order to resolve the BALLOONING problem of Student Debt Default, TPTB are rewriting the laws regarding how Student Loans are to be paid back, and how long it takes to finally get your debt accumulated for learning worthless information wiped off the books.
Based on the latest set of revivions to the Student Loan laws, there is now absolutely ZERO reason not to take out the biggest loans you possibly can get guaranteed by Da Goobermint to go to school and drink beer and bang coeds for as long as you possibly can.
In one fell swoop this solves the problem of Youth Unemployment and further Money Creation thru irredeemable debt. Da Goobermint nor Private Industry can figure out how to provide decent jobs for HS Grads, so instead they will now offer further loans you don’t have to pay back if you don’t get a job upon Graduation, if in fact you actually ever Graduate.
You can go get your BA, your Masters, your Ph.D, your MBA, your JD…that works up to around 16 years in Academia! Just keep taking out more Loans! Evenif you only get a job flipping burgers at Mickey Ds at the end of it (all those sheepskins will be REQUIRED for applying for the job of flipping burgers), most you gotta pay every month is $100 for 20 years, then you are Free & Clear!
Is this stupid or what? Of course it is, just provide the damn education for FREE, it would be cheaper that way. LOL. It doesn’t put more fictitious money on the Bank Balance sheets though if you do it that way.
The Higher Education meme has been the fallback principle since the beginning of the Industrial Era. Back when the FSofA first got settled, if you actually “schooled” past around 3rd Grade level and learned to Read and Write, that was a LOT. Many if not most people were illiterate, but if they had a patch of land to farm they did OK and could feed themselves and family.
Industrialization though brought all sorta new “Jobs”for people to do, which took not just knowing how to read and write, but Industry Specific Knowledge, which most often was Science and Math related. To get any of these Juicy Jobs, you hadda have quite a bit more than just knowing how to read and write and add sums.
So began the Warehousing and Sifting of the population through the High Schools, where in the early years you could learn Trades as well as Prepping for College and entry into the Upper Class, if you had the Brians to make the grade in such a track. In my era, the College Track was a highly limited one, and in NYC sieved into a few schools like Stuyvesant and Bronx High School of Science. Overall, while Industrial Jobs were still available here in the FSofA, Warehousing through HS and teaching some trades in them worked pretty good.
Come the Late 70s early 80s though, those good paying jobs on the production line of GM began getting offshored to Asia, so now EVEYBODY in HS hadda go on the “College Track” for a good paying job in IT, except of course first off you only need so many drone programmers and second off plenty-o-Chindians are capable of writing decent code also. The Capital flows toward any area the Labor is Cheapest, always in a Globalized economy.
The only high paying jobs that cannot be offshored really are the Gate kept professions in Law and Medicine, basically high end service economy jobs. So in the current economy, if you at least have smarts enough to make it thru a Nursing Program, you might still find a decent paying job. Chindians can’t dress Bed Sores over an Internet Medical Help Line.
In the decaying Industrial Economy, the “Jobs” such as they were are rapidly going to the Great Beyond. The excess population here in the FSofA is being encouraged to stay in school for ever longer periods of time in Warehousing, in theory learning great skills which will lead to High paying Jobs when they get out, but by the time they actually GRADUATE (if ever), those jobs won’t be there.
It is falling apart as model already, and this latest Kludge is just a means to prevent the TBTF Banks from having to write down the student loans they currently hold on their books. Right now, the fact that in 20 years an unpayable student loan will have to be written off doesn’t matter, they can trade the paper as though it actually has some real value.
For J6P here, or at least his kids, this is the Bailout you all have been waiting for. Take the Loans, you’ll never have to pay them back. It is IRREDEEMABLE DEBT. Go to school, stay in school as long as you can. Accumulate Sheepskins, ad as you accumulate, apply for some obs they qualify you for. At some point in the process, perhaps you are one of the Lucky Ones who actually GETS a job the Sheepskin qualifies you for! If not, no worries, the massive debt you accumulate here only has to be paid off on at $100/mo for the next 20 years if you manage to get a minimum wage job flipping burgers anyhow, and will be discharged after that. sooner too if you get a Goobermint Job, only 10 years there!
It is all just hilarious. Sadly, I probably can’t get any of the latest loans and will have to pay for my Nursing Ticket out of Pocket Change, but if you are broke right now and out of a job, APPLY TODAY to the University program of your choice and take out the Loans up the Ying-Yang!
Off the keyboard of Michael Snyder
Published on Economic Collapse on December 24, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Will this be the last normal holiday season that Americans ever experience? To many Americans, such a notion would be absolutely inconceivable. After all, in the affluent areas of the country restaurants and malls are absolutely packed. Beautiful holiday decorations are seemingly everywhere this time of the year and children all over the United States are breathlessly awaiting the arrival of Santa Claus. Even though poverty is exploding to unprecedented levels, most families will still have mountains of presents under their Christmas trees. Of course a whole lot of those presents were purchased with credit cards, but people don’t like to talk about that. It kind of spoils the illusion. Sadly, the truth is that our entire economy is a giant illusion. The extreme prosperity that we have been enjoying has been fueled by debt, and any future prosperity that we will experience is completely dependent on our ability to go into even more debt. The total amount of debt in our economy is almost 10 times largerthan it was just 30 years ago, but we don’t like to think about that too much. Most Americans are way too busy living the good life to be bothered with “doom and gloom”. Well, get ready to say goodbye to normal. As history has shown us, no financial bubble lasts forever, and time is rapidly running out for us.
You know that the hour is late when even mainstream news sources start publishing articles with titles such as this: “Will 2013 Mark the Beginning of American Decline?“
That article appeared on Bloomberg.com the other day, and it was written by Simon Johnson, a former chief economist at the International Monetary Fund. He is convinced that a day of reckoning is coming for U.S. government finances, and he seems resigned to the fact that we will not be ready when that day arrives…
“Sooner or later, it will be America’s turn to fall out of favor with investors and to see its own interest rates rise. It is hard to know when that day will come, or precisely what pressures the country will face.
Let me only venture one forecast: We will not be ready.”
Other analysts are far more pessimistic. For example, the following is what Gerald Celente said about the “bond bubble” during a recent interview with King World News…
Eric King: “Gerald, I wanted to take a look at this upcoming issue you have coming out. (In here it says,) ‘Bonds Away! The bond bomb is ready to explode … threatening to make the real estate and dot-com bubbles, and even the Great Recession, look like market corrections.’ Can you talk about that?”
Celente: “Yes. This piece is being penned by Dr. Paul Craig Roberts, the former Assistant Treasury Secretary under Ronald Reagan. And he is convinced that the bond bubble is about to burst. This cannot continue to go on the way it is. Everyone knows that the whole game is rigged, and so is this….”
“The whole game is rigged. It’s ready to go down, and Dr. Paul Craig Roberts believes it’s ‘Bonds Away’ in 2013 as the bond bubble explodes and brings about a financial disaster even worse than the Great Depression.”
Eric King: “He’s saying here it’s a road to financial collapse that we are going to head down when this thing bursts.”
Celente: “It is. Because the whole world is being propped up by these phony bonds and it’s going to collapse. It has to happen. Interest rates are going to start going up, and when they do the bond bubble explodes. You cannot keep interest rates at zero for this amount of time and expect anything other than disaster to follow.”
For much more on all this, you can listen to another excellent interview with Gerald Celente right here.
Our politicians just assume that we will be able to borrow trillions upon trillions of dollars far into the future at super low interest rates, but that is a very dangerous assumption.
As I noted the other day, the average rate of interest on U.S. government debt was 2.534 percent at the end of November. If that number just rose to where it was about a decade earlier we would be in a massive amount of trouble.
Back in the year 2000, the average rate of interest on U.S. government debt was 6.638 percent. If we were at that level today, the U.S. government would be paying out more than a trillion dollars a year just in interest on the national debt.
But our politicians just keep borrowing and spending as if we could do this forever.
From the time that George Washington was inaugurated (1789) to the time that George W. Bush was inaugurated (2001), the U.S. government accumulated about 5.7 trillion dollars of debt.
During the first four years of the Obama administration, the U.S. government accumulated about 5.7 trillion dollars of debt.
How can anyone support this kind of insanity?
You can see an excellent video demonstrating the vastness of our national debt right here. In the end, all of this debt will absolutely destroy the U.S. dollar, our economic system and the bright futures that our children and our grandchildren were supposed to have.
As if all of that was not enough to be concerned about, there is also the threat that Wall Street could implode at any time. Most Americans have no idea that Wall Street has been transformed into the largest casino in the history of the world. The “too big to fail” banks are the ringleaders, and the derivatives bubble hangs over our financial system like a “sword of Damocles” that could fall at virtually any moment.
Everything will remain fine as long as the spiral of derivatives that our bankers have constructed remains perfectly balanced. But if something happens and it becomes unbalanced and starts to collapse, the consequences could be unlike anything we have ever seen before.
A recent Zero Hedge article entitled “1000x Systemic Leverage: $600 Trillion In Gross Derivatives ‘Backed’ By $600 Billion In Collateral” detailed how there is barely any collateral backing up the hundreds of trillions of dollars of derivatives that are out there…
But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world’s combined GDP, because as the “derivative” name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled “Shadow Banking: Economics and Policy” where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.
Our entire economy has become a giant pyramid of debt, risk and leverage. At some point there is going to be a giant crash. When that happens, people are going to become very desperate.
When people become very desperate, they often accept “solutions” that they were not willing to consider previously.
We need to learn some lessons from history. This is exactly the kind of thing that happened back in the 1930s.
For example, an elderly woman named Kitty Werthmann is telling audiences what life was like in Austria back in the late 1930s…
“In 1938, Austria was in deep Depression. Nearly one-third of our workforce was unemployed. We had 25 percent inflation and 25 percent bank loan interest rates.”
“Farmers and business people were declaring bankruptcy daily. Young people were going from house to house begging for food. Not that they didn’t want to work; there simply weren’t any jobs.”
The Austrian people were really hurting and they were desperate for answers. When Hitler came to them with “solutions”, they were ready to embrace him with open arms…
“We looked to our neighbor on the north, Germany, where Hitler had been in power since 1933.” she recalls. “We had been told that they didn’t have unemployment or crime, and they had a high standard of living.”
“Nothing was ever said about persecution of any group – Jewish or otherwise. We were led to believe that everyone in Germany was happy. We wanted the same way of life in Austria. We were promised that a vote for Hitler would mean the end of unemployment and help for the family. Hitler also said that businesses would be assisted, and farmers would get their farms back.”"Ninety-eight percent of the population voted to annex Austria to Germany and have Hitler for our ruler.”
“We were overjoyed,” remembers Kitty, “and for three days we danced in the streets and had candlelight parades. The new government opened up big field kitchens and everyone was fed.”
Sadly, America is already starting to go down the same path in many ways. If you doubt this, you can read the rest of her account right here.
Right now, things are still relatively good in America. Yes, there are a whole host of economic numbers that look really bad, but what we are experiencing right now is nothing compared to the horrific economic pain that is coming.
When our economy finally crashes, nobody is going to be able to press a button and restore things to how they were previously. We will be told that we have to “adjust” and consider “new solutions” to our “new challenges”. Someday we will look back on the good life that we were enjoying in 2010, 2011 and 2012 and wish that we could go back to those days.
So enjoy the relative peacefulness and prosperity of these times while you still can. A horrific economic collapse is on the way, and once it strikes none of our lives will ever be the same.