Economics

Collapse, you say? Part 3: Inputs and Outputs continued

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Published on The Easiest Person to Fool on September 29, 2020

Renewable Energy

 

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Kincardine's breakwall awash in the waves

This is the second half of a post that I cut in two because it was just too long (6000+ words). If you haven't read the first half yet, it would be a good idea to do so—what follows will make more sense that way.

That first half finished with a discussion of the problems with fossil fuels as an energy source for our civilization. It's last paragraph is repeated below. Today, we'll go on from there, looking at other inputs that are problematical for our civilization.

Energy, renewable sources

But, you may say, if fossil fuels are no good what about renewable energy sources? There are large amounts of energy available from sources like hydro, biomass, wind, solar and so forth. And they don't involve adding more CO2 to the atmosphere—even biomass is only adding CO2 that was recently taken out of the atmosphere and will be taken out again as more biomass grows. A great many people today believe that renewables can replace fossil fuels and solve both our surplus energy and climate change problems. In fact, it has become very unpopular to challenge that idea, but I am afraid I must do just that.

The problems with switching over to renewable energy sources can be divided into three areas.

  • the political will to do so
  • the economic means to do so
  • the technical feasibility of doing so

Political Will

It is clear that we will have to switch to renewable energy sources if we wish to become sustainable. But it is also clear that, as we'll see in a moment in the section on technical feasibility, renewable energy sources will not be able to support the level of growth and consumption that many of us are accustomed to, and they certainly won't be able to extend that level of prosperity to the poorer parts of the world.

For the overwhelming majority of people, lifestyle is not negotiable. And our current lifestyle demands continued growth and ever increasing prosperity—consumption, convenience, comfort and entertainment. I haven't noticed anyone rioting for the sort of austerity measures that I believe a switch away from fossil fuels would require. So, any plan that can't provide continued material progress is unlikely to be seriously considered, much less implemented. Yes, of course, I realize that we could change our lifestyle, and indeed circumstances may well force us to do so. My point is that most of us don't want to change the way we live, and will resist any attempt to get us to do so.

Plans like the "Green New Deal", which promise to create jobs and stimulate economic growth while switching over from fossil fuels to renewables, are intended to be more palatable. But there is good reason to think they are not economically or technically possible. And, if they were seriously undertaken, they might well make things worse, requiring the consumption of even more fossil fuels in the huge construction project that this switch over would require. This would mean further increases in the amount of CO2 in the atmosphere and would make climate change even worse, bringing about collapse even more quickly. Certainly not what the Green New Deal promises, but what it is likely to deliver.

The Economic Means

The surplus energy problem that I spoke of last time, and the resulting continued economic contraction that is going on, make it seem unlikely that we will have the wherewithal for such a major construction project in the years to come—we are looking at spending trillions of dollars building solar panels, windmills, storage facilities and an enhanced grid. Most of which will only make the surplus energy problem worse.

Technical Feasibility

For me, this is the real deciding factor. Let's consider the technical problems with renewable energy sources in general and then have a look at the issues with specific types of renewables. This will make it clear why I think a switchover to renewables is simply not doable, without drastic changes to our lifestyle.

The current fossil fuel infrastructure—coal mines, oil and gas wells, shipping, rail cars, pipelines, refineries, storage, distribution and retail facilities, and the equipment we have set up to use those fuels—is actually quite compact, owing to the concentrated nature of those fuels. They contain a lot of energy in a small, light package, and this has been the key to their success.

Renewables are more diffuse and require extensive infrastructure to gather and concentrate them to the point where they are useful. Already we are seeing what I call "energy sprawl" spreading across the countryside in the form of wind turbines and solar panels. But the amount of energy we are getting from this sprawl is tiny compared to our total energy use.

The renewable energy that is being proposed as a solution (wind and solar, mainly) comes largely in the form of electricity. Unfortunately, only about 20% of the energy we use today is used in the form of electricity. The rest is used directly in the form of refined fossil fuels to power transportation and to supply heat for industrial processes, space heating and so forth. The two biggest obstacles are electrifying heavy transportation (trucks and ships), and using renewable power to provide heat for manufacturing things like steel and concrete.

Switching over to renewables not only requires us to build huge amounts (5 times more than we currently have) of electrical generation, all of it powered by renewable energy sources, but also that we switch our transportation fleets and industrial infrastructure over to use electricity instead of fossil fuels as a power source.

This a big job that the "powers that be" don't really seem very interested in undertaking, and there are large chunks of it that we don't even know how to do as yet. I'll borrow a term from the nuclear industry here: "paper reactors". Solutions that so far only exist on paper have a tendency to take longer than predicted to implement, and cost a lot more money than expected. Time and money are two things that we don't have in great supply these days.

The power grid, which in most areas is just barely coping with peak loads, will also have to be beefed up by a factor of five to cope with the switch over to an all electric economy. But using the electricity from renewables presents some significant problems for the grid. Our civilization treats the power grid as an infinite source of energy which is available 24/7. In order to provide this, the grid needs energy sources that are "dispatchable". That is, energy sources can be turned on and off at will and ramped up and down as needed to cope with varying loads. This is usually done using a combination of coal, oil, natural gas and hydroelectricity, all of which are to some extent dispatchable.

But wind and solar are anything but dispatchable. The wind blows when it will, and there are often long periods without any wind at all over large geographic areas. The sun shines only during the day, except when there is cloud cover, and solar panels are often be covered with snow in the winter. None of these variations corresponds in any way to the normal variations in load that the grid experiences. In fact, to make even small amounts of intermittent renewable energy fit into the grid, highly dispatchable energy sources like combustion turbines (jet engines connected to generators, burning jet fuel) must be left spinning on standby, ready to compensate instantly when renewables falter.

This hardly makes the grid any "greener" at all. One solution would be to have a way of storing electrical power which could then be used to fill in when renewables let us down. Pumped storage of water is one alternative that is a mature technology. Water is pumped uphill to a reservoir when surplus power is available and then runs down hill through turbines to generate power when extra is needed. The problem is scalability—there are limited locations where reservoirs exists at the top a large change in elevation and near a supply of water. Batteries or compressed air on the scale that is needed here so far only exist on paper, and further development seems likely to run up against some fundamental physical limits.

Even if all these issues can be solved, we'd end up with a grid that is less resilient and more complex—more susceptible to failure.

It should also be noted that equipment like wind turbines, solar cells and batteries have a limited life. This poses two problems—when they wear out, they have to be replaced, and the old equipment has to been gotten rid of. Hopefully recycled, but more likely just disposed of.

A late addtion: Bev, one of my regular readers, pointed out in the comments below something that I had failed to make clear: while the energy from renewables is renewable, the equipment itself is built with largley non-renewable materials, and using up the quantity of materials we are talking about will no doubt lead to new resource depletion problems. It also takes fossil fuels to build, deliver, install, operate, maintain, repair and eventually decommision that equipment. Someday we may be able to power some of those steps with renewables, but initially and for the foreseable future, it's hard to see if there is really any net reduction in the use of fossil fuels when you look at the whole process.

And finally, even if all the technical problems could be solved, wind and solar do not have very good EROEIs, and would make our surplus energy problem even worse.

To bring this all home, let's take a look at the specific forms of renewable energy that we might turn to if we want to get off fossil fuels.

Power from biomass, basically firewood, is a very mature technology, and it has many advantages. While it is produced only during the growing season, it can be harvested and stored for use during winter. It is quite dispatchable and its EROEI is reasonably high, depending on how far it has to be hauled from the forest to where it is going to be used. Unfortunately, it is not highly scalable, since it competes with agriculture for land at a time when we are struggling to grow enough food for the world's growing population.

Hydroelectric power is another mature technology, with good dispatchability and a high EROEI. It is somewhat seasonal and it is not very scalable since most good locations are already in use. Developing the few remaining feasible locations would mean flooding large areas of land with environmental consequences that we should likely see as unacceptable.

Wind power is quite scalable, but intermittent and not dispatchable at all. It's EROEI is in the high teens, which is borderline for our needs, and probably lower if you take storage facilities into account.

Solar power is quite scalable, but intermittent and not dispatchable at all. It's EROEI is quite low, in the mid single digits, less if storage facilities are included in your calculations.

Nuclear fission power is not really a renewable since it relies on finite supplies of fissionable fuel. If a nuclear powered economy is to keep growing, it will run out of fuel in a surprisingly short time, even if spent fuel from the current generation of reactors can be processed for use in newer reactors. Nuclear has limited dispatchability, being best suited to supply base load. It has pretty good scalability, except that it takes a long time to build new nuclear plants, and we would need a lot of them to replace fossil fuels. We must also overcome many political and safety issues before starting to build more nukes. Lastly, the EROEI of nuclear is around 9, largely due to the complexity and safety features involved, so it only makes the surplus energy problem worse.

Nuclear fusion power isn't renewable either, though it's fuel is much more common than fissionables. But it is a "paper technology"— usable fusion reactors have been "just thirty years in the future" since the middle of the twentieth century, and will likely always be so. If we did somehow find the money to finish developing this technology, it would be very expensive to build, and its EROEI would likely be very low due to its high degree of complexity.

All in all, this is not an encouraging picture. You can see why I am so doubtful about switching from fossil fuels to renewables. One the one hand we desperately need to get off fossil fuels to get climate change under control. On the other hand we desperately need fossil fuels (or the elusive "something equivalent") to supply surplus energy to maintain our growing economy and the lifestyles it enables.

I have no confidence that we will even try to address this seemingly unresolvable conflict, and that is one more reason that I am expecting collapse.

Further, as the weighted average of the EROEIs of all a civilization's energy sources declines it is not just economic growth that suffers, but also the ability to maintain infrastructure. This includes the ability to build high tech equipment, including things like solar panels and wind turbines. At some point, as our industrial civilization continues to collapse, we will find ourselves restricted to low tech renewables and unable to maintain a large scale power grid. We'll be forced to drastically reduce our consumption of energy, and to adapt our use of energy to the intermittency of the sources, rather than the other way around.

So far I have only addressed the problems with energy inputs to our civilization, but there are other inputs that also present significant challenges.

The Ecosystem, and ecosystem services

Figure 2, from my last post

The circle enclosing industrial civilization in the diagram above is misleading in that it would tend to suggest there is a boundary separating civilization from the environment, when it is really just another part of the environment. I have use a dashed line, hoping to indicated that many things flow freely between our civilization and its environment. There is a whole category of such things—inputs to our civilization—that we are absolutely dependent upon. Often referred to as "ecosystem services", these inputs are things we tend not to be aware of, in much the same way as fish are not aware of water.

They include breathable air, potable water, a reliable climate and moderate weather, arable soil, grasslands, forests and the animals living on/in them, waters and the fisheries they provide, and so on. These things are available to us free of charge and we would simply could not do without them.

It is important to understand that the ecosystem can only supply its services at a certain maximum rate—its carrying capacity. If we use those services at a higher rate, the ecosystem suffers and that carrying capacity is reduced. Many of the waste outputs of our civilization can also damage the ecosphere, again reducing its carrying capacity. And we continue to convert nature into farms, roads and cities, yet again reducing its carrying capacity.

This has created the current situation where we are temporarily in "overshoot", using more than 100% of the planet's carrying capacity. We are able to do this because there is a certain amount of stored capacity within the system. Drawing on that capacity has lulled us into a false sense of security. But rest assured, the situation is temporary and shortly the damage to the ecosphere will become obvious, and its declining ability to support us will have disastrous consequences.

To put some numbers on this, in the early 1970s when The Limits to Growth was published, we were using about 85% of the planet's carrying capacity. There was, at that point, at least hypothetically, an opportunity to put the brakes on economic growth and start living sustainably. Of course, we did not do so and now we are using around 165% of that carrying capacity. If we bring the poorer part of the world up to a standard of living similar to that of the developed nations, it would take about 500% of that carrying capacity to support the human race. Many suggest we should do exactly that, as a matter of social and economic justice.

It is hard to disagree with that, in and of itself. But long before this happens, of course, the ecosphere will have collapsed and suffered a drastic decrease in its carrying capacity.

Three factors are involved in our impact on the ecosphere: population, affluence (consumption) and technology. This can be represented by the equation I=PAT.

Population and affluence are politically sensitive subjects, so many people have focused on using technology to reduce our footprint. This is known as "decoupling", since the aim is to decouple rising population and consumption from their effects on the ecosphere, to allow growth to continue without having harmful effects. It turns out decoupling has not yet even begun and is very unlikely to ever be achieved. It is largely a myth. Here are a couple of links (1, 2), to articles that go into this in detail.

In addition to promoting myths about decoupling, those who do not wish growth to stop quibble about exactly what the planet's carrying capacity actually is and just how far into overshoot we currently are. This accomplishes nothing, since whatever that carrying capacity actually is, continued exponential growth will quickly take us past it into overshoot.

So it would seem we should do something about population and/or affluence. Population is such a hot button issue that one can hardly discuss it in polite company. Understandably so, since reducing population must involve either reducing fertility or increasing the death rate. Indeed people have been accused of being "eco-fascists" because they see the need to reduce our population, and look to the most populous areas as the first place to take action. I think "eco-fascist" is a reasonable term, since the most populous areas are also the poorest places on the planet and our impact on the ecosystem is the product of both population and affluence. In the developed world our consumption is so high that even though we have far fewer people, our impact is much larger than that of the poorer parts of the world.

Figure 3

As this chart (Figure 3) shows, the richest 10% of the planet's population does close to 60% of the consumption. The richest 20% does over 75% of it (17.6+59=76.6). So, reducing consumption in the more affluent parts of the world would be a good start to coping with our problems because it would immediately take us out of overshoot and give us some breathing room to address the damage we've been doing to the ecosystem.

Figure 4

As this revised consumption chart (Figure 4) shows, if we could reduce our consumption by 50%, it would reduce our ecological impact down to 82.5% of the planet's carrying capacity, while actually increasing the consumption level of the lowest seven deciles of the population, and only reducing the consumption levels of the top three deciles. This would seem to satisfy our yearning for social and environmental justice and significantly delay, if not prevent, collapse. But since the most affluent people, those in the tenth decile, are also in control of the situation, it seems unlikely that we'll make a serious attempt to implement that solution unless we are forced to do so by events beyond our control that bear a strong resemblance to collapse.

You may say that our population problem exists because our capacity to provide food has increased and our capacity to reproduce has responded, not the other way around. I don't disagree, but I don't think it is very useful to point that out. Deliberately cutting back on food production and letting people starve in order to reduce our impact on the ecosystem is morally repugnant. It is also not particularly effective since the poor would be effected first and they are not the major contributors to our impact on the ecosystem.

It has also been observed that as countries get richer, their birthrate goes down. Extrapolating current trends (including continued development in the developing nations), the UN calculates that our population will top out around 10 billion late this century and then begin to decline. They would tell you that all we have do is hang on until then and all will be well. But again, I disagree. Long before our population reaches 10 billion, especially if nothing is done to reduce our rate of consumption, the ecosystem will collapse and its carrying capacity will crash down to a level that can support only a tiny fraction of our present population. I think 10 to 20% would be an optimistic prediction.

Overuse of Fossil Water

This post is already quite a bit longer than I usually aim for, and I have only covered what I see as the most urgent input and output issues. There are many other areas that I haven't begun to cover, and which I will have to leave for another day. But there is one more input issue that I just can't leave out, and that is the depletion of fossil water.

Many of the important agricultural areas around the world rely on irrigation, and water for that irrigation is pumped out of fossil aquifers. That is, underground reservoirs that took hundreds of thousands of years to accumulate. The current rate of use is many times greater than the current rate of replenishment, and it is only a matter of time, and not much time, until they run dry.

The consequences for agriculture will seriously debilitate our civilization's ability feed us.

Summing it all up

We have seen again and again, from the start to the finish of this post, and the previous one, that resource depletion of various sorts, and depletion of the sinks into which we dispose of our wastes, seriously threaten our civilization. Any one of these issues is enough, all on its own, to compromise that civilization's ability to provide us with the necessities of life. In other words, to bring about collapse. And many of them interact in ways that just make the situation worse.

But inputs and outputs are not the whole story. The interior workings of our civilization are replete with issues that threaten its ongoing survival. Next time, we'll have a close look at some of those issues.



Links to the rest of this series of posts, Collapse, you say?

 

Responding to Collapse, Part 17—Shortages of Money, Part 2

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Published on The Easiest Person to Fool on March 27, 2020

 
A high water level, wind, big waves and temperatures below freezing
combine to create ice sculptures along Lake Huron.
   

 

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I am writing this in late March of 2020 and it seems that hardly anyone else is writing anything that doesn't focus on the COVID-19 pandemic. A few posts back I said that shortages of electrical power, diesel fuel and money will be at the heart of the troubles that lie ahead for small remote communities as collapse progresses. I am interested in that sort of community because that is where I am recommending that you take refuge in order to ride out collapse, and where I have already taken refuge myself. I've covered electrical power and diesel fuel, and in my last post I covered the sort of money shortages that occur when you have money on deposit at the bank, or credit prearranged with them, but can't access it due to problems with the banking system.

Today, tempting as it is to talk at length about the pandemic, I'll be talking about the money shortages that occur when you have trouble earning enough money to live on because of problems with the economy. The end game is the demise of BAU and finding a sustainable replacement for it on a local scale. But between now and then there is a transitional state that is going to be pretty challenging for many of us.

To my way of thinking, the pandemic is going to result in a relatively small but very much regrettable loss of human life. To put that in context, I've been saying that the demise of industrial civilization that I expect to take place over the next few decades will result in the death of 80 to 90% of the human population. That's pretty horrific, I know, but it's the reality that we face and denying it will only make things worse.

For the majority those who survive the pandemic, its effect on the economy is going to be quite serious. As usual, I'm not expecting it to lead to a hard fast collapse over the next few months. Rather this will be one of those bumpy steps down that I have spoken about before, from which I expect we will recover to some extent. It will highlight the extreme fragility of our capitalistic economy, and serve to further weaken BAU. A lot of us will be learning more about what we can and can't get along without. Who knows, we may even see BAU weakened enough that local economies will have a chance to get started in some areas.

In any case, much of what I have to say today applies to hard times of any sort. And to get back to today's topic, as I said last time, the song says, "money makes the world go round", but I don't agree. Drawing from the writings of Dr. Tim Morgan on "surplus energy economics", I would say that it is energy that makes the world, or at least the economy, go round.

Energy and the economy

So, I've said that energy is what makes the economy function. How does that work? An economy is really a system for making and distributing the things that people need. And to be clear, those "things" do include data and information. The processes by which things are made require energy in the form of heat, mechanical energy and electricity. Without energy, nothing works. Economist Steve Keen is one of just a handful of economists worldwide who understand the essential role of energy in the economy. As he puts it: “Capital without energy is a sculpture and labour without energy is a corpse.”

In preindustrial economies heat came from firewood and mechanical energy came from muscles (human or animal) powered by food, and of course electrical technology hadn't yet been invented. (Yes, I'm leaving out power from falling water and moving air, but they played a relatively small part until more recent times. And I am aware that all these forms of energy ultimately come from sunlight.)

In an industrial economy most production is done by machines, and those machines are usually powered by some sort of energy other than human or animal muscle power. This became true only in the last few hundred years after engines driven by heat from burning fossil fuels were developed. Yes,. they could be powered by burning firewood, but it is interesting to note that they were invented in Britain only after that island was already pretty short of wood.

Because we use technology to access energy, people tend to think that technology produces energy. But just the opposite is true—technology uses energy. Even the technology we use to access energy uses some energy in the process. The energy that is left over is known as surplus energy, and that what really drives the economy. The term "Energy Returned on Energy Invested" quantifies this. Back in the day, for instance, it took about one barrel's worth of energy to get 100 barrels of oil out of an oil well, leaving 99 barrels of surplus energy for use in the economy. The EROEI was 100, calculated as 100 divided by 1. That was a very good EROEI, and resulted in a rapidly growing economy in the middle of the twentieth century.

In pre-industrial days, the process of converting sunlight into food (done by plants, and less directly by animals eating plants) and then food into muscle power, had an EROEI of around 5. And that is why pre-industrial economies grew very slowly and attained a limited degree of complexity compared to our modern industrial economies. To keep functioning, a modern industrial economy needs the average EROEI of its energy sources to be above 15 or so. When the average EROEI falls below that level, growth stops and eventually it becomes difficult to maintain the complexity of the system.

In the nineteenth and much of the twentieth century successful economies in what we now call the developed world were powered by fossil fuels with high EROEIs and they grew quickly. But since we picked the lowest hanging fossil fuel “fruit” first—the ones easiest to access and use—the EROEI of the remaining fossil energy sources has declined considerably and the rate of economic growth has declined with it. There are many alternatives to fossil fuels, but the ones most people are counting on (nuclear, solar, wind) all have low EROEIs, among other problems.

Because our present banking system is fueled by growth and almost all economic operations are mediated through the banks, even small reductions in growth have very negative effects on the economy. The reduced EROEI of our energy supplies has been causing economic contraction for quite some time now. Governments don't understand this and are puzzled that none of the remedies suggested by conventional economists seem to work. So they have adjusted the way they calculate inflation, CPI, employment and GDP statistics to make it seem that the economy is still growing, inflation is under control and there are jobs for everyone, when none of that is really true.

The situation is worsened by widening economic inequality. To use a pie analogy, where the pie represents all the wealth generated by the economy, the upper classes have always insisted on an ever growing slice of the pie. As long as the economy was growing, the amount of pie left for the rest of us could grow as well, though not so quickly as the share allotted to the wealthy. But once the economy started to contract, our share had to shrink faster that the economy itself was contracting if the upper class' share was to keep growing. And indeed this is what has happened.

Any society that works like this will experience growing inequality and all but the upper class will suffer greatly during economic contractions. The U.S. is certainly an example of this. Since the 1990s there has been little real growth—debt and investment bubbles have been used as a substitute for surplus energy to keep things "growing". Interest rates have been lowered so that the increased debt can be supported. Those with wealth have been hard pressed to find investments that give good returns. Many have turned to speculation in real estate and this has resulted in real estate bubbles in many cities.

The contracting economy has also meant businesses have had to streamline their operations to maintain their profitability. This has resulted not so much in outright unemployment, but rather in under-employment—part time, precarious jobs that won't support even a lone individual, much less a family. That, combined with the overheated real estate market, is making it very hard for working class people to find affordable accommodations. This is leading to homelessness for more and more people, with many who still have jobs being forced to live in their vehicles. And the prices of food, fuel and other necessities have also been going up, which only makes things that much worse.

In societies where progressive taxation is used to take some of the money accumulated by the rich and fund a social safety net, inequality is decreased and conditions are much better for those at the bottom. The negatives effects of homelessness both on society and on the homeless themselves can be significantly reduced by providing socially supported accommodations.

Let's be clear—I am not saying that it is possible to reverse the decay of BAU, but the trip down can be rendered much less unpleasant and more resources can be retained at the community and personal level for the adaptations that will be needed when BAU does eventually fail.

Coping in a contracting economy—deliberate descent

If anything, the contracting economy has been harder on small, rural communities than urban areas. Farming still continues but because less labour is involved these days, the farming community is smaller, and the business of providing services to farmers has declined as well. For the last several decades there has been a steady flow of young rural people to the cities in search of work, reducing the local population and causing the economy to shrink that much further.

If, as I've been suggesting, you've moved to a small, remote town, found a job in the local economy and rented a place to live, you may well find that the local economy is drying up around you, and your job is much less secure, if it still exists at all. There will be a temptation to move back to the city. Why, then, am I recommending small, remote communities?

Well, things aren't, and increasingly won't be, all that much better in the cities. And I believe that as collapse deepens and infrastructure and supply chains start falling apart more quickly, the cities will become a very much worse place to live while rural areas will have a chance to support themselves outside of BAU. And remote areas will be faced with less of a deluge of refugees from the cities than those rural areas immediately adjacent to the cities.

The trick is finding a way to support yourself during the transitional period. Setting up economic arrangements outside of BAU will be very hard to do until BAU has been drastically weakened—today it just provides too much competition. You want to avoid homelessness if at all possible, since it has some very debilitating effects—poor health and lowered life expectancy, along with the sapping of personal strength and the loss of any sort of a community of people with the resources to help you.

The key to avoiding destitution and homelessness is something called “deliberate descent', on which I wrote a series of posts a few years ago. John Michael Greer coined the phrase "collapse now and avoid the rush", and that is basically what I am talking about here—anticipating that the future holds a decline in your economic status, and taking voluntary steps to adapt to that before you are forced to.

Whether your resources consist of a job, a pension or personal investments, you will use part of your income for living expenses (keeping those as low as possible), some for paying down debts, and some for accumulating a reserve of cash and non-perishable emergency preparations. Always with the awareness that income based on BAU will eventually disappear, and may do so at any time and at a moment's notice. And finally, having taken care of yourself, it would be wise to invest in people who are less fortunate—more on that in a moment.

Unfortunately we are all being deluged with marketing efforts that attempt to convince us that we need a great many things. Most of those "needs" have only existed for a few years or decades at most and people got on just fine without them before that. So it is important to sort out your wants from your needs and concentrate on your needs when resources are limited. When it comes to material things, water, food, adequate clothing and a safe, warm, dry place to sleep are pretty much the short list. Of course, you may need some tools and equipment to acquire those things, but most of them can be made, borrowed or bought second hand.

It will still be necessary to maintain personal morale, and some small luxuries and entertainments may help. But non-material things, chiefly human relationships, are far effective at maintaining our morale, and in monetary terms, much less expensive. No single individual can hope to be completely self sufficient, but a community can come pretty close. And a close knit community can provide the sort of companionship and support that material toys simply can't. Independence and privacy are likely to be among the main casualties of the changes in life style that I am talking about, and that will be hard for many of us, especially old boomers like myself.

Rent, or taxes and upkeep on housing you own, will probably be the hardest part of BAU to get clear of and most of us will be paying them for quite some time yet. I think sharing housing with a group of people and pooling incomes to cover the cost is probably the way to go for many people. If you can find a way to set up an extended social unit that can maintain its integrity within BAU and generate enough income to pay taxes/rent and purchase what it can't produce (by gardening, hunting and so forth.), then the world should beat a path to your door. I notice younger people are being forced to try this, and are experiencing some degree of success, with which I am very impressed.

Eventually rural municipalities will have to admit to the realities of collapse and reduce both property taxes and services to match the realities of the situation. Land reform will also be needed, to take advantage of potentially productive land that has essentially been abandoned by owners who can't make a living farming it. This will be easier to do once housing developers are no longer interested, having realized that no one can afford the housing they would build on such property.

There is a role to play for an enlightened local government in organizing the response an area needs to mount when BAU withers to the point it can no longer provide the necessities, and in handling refugees from the city, but I haven't much faith in the kind of people who run for office in most municipalities. They tend not to be at all collapse aware and will most likely be caught unprepared and unwilling to change. More likely this will have to be done by small groups of people who are aware of what is going on and have planned ahead and made some preparations. I think the key is to realize that BAU's demise will be gradual, recognize the signs and start taking action at that point to get ahead of the curve of collapse.

I can think of a few different situations people may find themselves in during the coming years, and approaches suitable for those situations.

Retirees from the local area who (like me) have fairly decent pensions and already own a house will be in a good position until the pension fund runs into financial trouble, and our pension are discounted and finally disappear altogether. Indeed that is probably the way that BAU will first fail us. Fortunately, we know what's coming, we already know the area and have had lots of opportunity to established a network.

Retirees from the big cities, who have sold their city homes for several times the price of a house in a small town, can set themselves up in such a town with a fair chunk of cash left over to live on, especially if they are content to chose a fairly modest place for their new home. Investing that cash so that it doesn't disappear will be the big challenge for those folks, especially with the chaos we can expect to see in the financial sector.

Those who are still working to earn their living fall into several categories.

Some intrepid souls with a job in the city will elect to move to a small remote town and commute. This is expensive and involves a lot of personal wear and tear. Others are self employed in a way that is not location dependent, or have a job in the city but can do the work from home most of the time. All these situations make it possible to move without having to find a new job. This allows you to get to know your new community without making any irreversible commitments. Especially if you keep your place in the city and rent in your new town. Your city home can be rented out, or sublet if you are renting.

Skilled people—professionals, trades people, artisans and so forth— who can find paying jobs in the local economy are another significant group. Many areas have one or more large local industries that employ a significant number of people, and will continue to do so until the failing economy forces them to shut down. There's nothing wrong with working at a place like that as long as you realize it won't last forever and plan accordingly. In most areas there are also opportunities in health care, education, agriculture, trades and various sorts of services.

I wouldn't advise anyone to try setting up a new business in a contracting economy, even if your idea seems fool proof (to you), but some jobs are available and if you have the right skills, there will be people who have need of you. You just have to find an area where the opportunities match your abilities. And of course if you succeed in "deliberately descending", it will be easier to find a job with pay that matches your needs.

Then there are those who are less fortunate, who are working at a job that doesn't pay the bills, or have lost their job or their pensions or whose investments have evaporated in a market crash. Sadly there will be a great many more such folks as economic contraction becomes more intense. Many will find themselves homeless or at least tottering on the edge of it. And people in any of the categories above should keep in mind that they themselves may well become less fortunate at any moment.

Sadly, many folks have a picture of homeless people as human detritus and pretty much beyond help, as if poverty was some sort of moral failing. But, if this was ever true, it is becoming less so all the time as ordinary working class people find it more and more difficult to earn enough to provide the necessities of life, even if they can find a job. I think there are a great many people currently in dire straits who could do, or easily enough learn to do, the sort of work that will need to be done in a community trying to support itself when BAU can no longer do so. Many would be willing or perhaps even eager. What is needed is the organization to offer these people a job, and training as required, with the aim of relocalizing* and, rehumanizing* the local economy in order to cope with broken supply chains and energy infrastructure.

Initially these will be local people who left for the city and are now returning along with a few city folks who have read the writing on the wall and want to get out before things get worse. Eventually, it will get worse and then there will be refugees.

In any case these people will need a place to live and they won't have the resources to buy or even rent. Those with local connections will live with parents or friends. Others will come in a vehicle and live in it, at least at the start, and they will need parking and access to services—water, washrooms, showers and electrical power as long as it is available. For those with no local connection and no vehicle, camping may be an option in the summer (certainly not in the winter, where I live), but families with a spare room should be encouraged to welcome them and collect room and board once they are working. Any empty housing should not be allowed to sit idle as long as there are people without a place to stay. The local community may eventually have get together to build some very modest, low cost rental accommodation, even though resources will be very short.

Whatever the details, investing some time and money in creating jobs and making a place to live for such folks will eventually pay off very well, as BAU fades away and the new local economy rises to take its place. Experience has shown that in emergencies people do come together to do what is needed.


That just about wraps up this series on responding to collapse. It would be good to have a closer look at the sort of community that I think you'll get when you do what I've been recommending here, but I'm beginning to think fiction might be a better vehicle for getting that across.

I've been blogging here for just over eight years now and I still have ideas for a few more posts, but at some point in the near future I may try to write some fictional stories about the kind of situations I've been talking about in this series of posts. Sometimes stories can be very effective at getting across ideas. Providing, of course, that I am up to the writing challenge. We'll see.


*Relocalization and rehumanization are words you won't find in the dictionary, at least not in the sense I mean them here. Relocalization refers to bring back to a community the part of its economy that was centralized during the industrialization of our society and producing locally what is needed locally. Rehumanization means that many of the tasks that have been automated over the last couple of centuries will once more be done by human muscles, hands and minds.

The word conservation is often used together with those two terms, and in this context means using less in order to get by with what can be produced locally. Thanks to John Michael Greer for expressing these ideas so clearly in his blog, The Archdruid Report.

Responding to Collapse, Part 16: Shortages of Money, Part 1

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Published on The Easiest Person to Fool on March 3, 2020

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A few posts back I said that shortages of electrical power, diesel fuel and money will be at the heart of the troubles that lie ahead for small remote communities as collapse progresses. I am interested in that sort of community because that is where I am recommending that you take refuge in order to ride out collapse (and where I have already taken refuge). I've covered electrical power in parts 10 to 14 of this series and diesel fuel in part 15, so that leaves money for this post and the next one.

We'll be looking at shortages of money from two angles here. First, in this post, shortages that occur when you have money on deposit at the bank, or credit prearranged with the bank, but can't access it due to problems with the banking system. Second, in the next post, shortages that occur when you have trouble earning enough money to live on because of problems with the economy.

The song says, "money makes the world go round". You could certainly be forgiven for believing that, especially given the increased commodification of everything that has been going on, and the growth of the financial sector of the economy in the last few decades. I don't agree, though. Drawing from the writings of Dr. Tim Morgan on "surplus energy economics", I would say that it is energy that makes the world, or at least the economy, go round.

We'll get back to the role of energy in the economy in my next post, but first let's look at money itself. Money is really just a system of tokens we use as a medium of exchange, a unit of account, and a store of value.

Conventional economists tell stories about how before money was invented, people had to barter for what they needed but couldn't produce for themselves, and this was very inconvenient. In fact, as an anthropologist would tell you, barter was used only on those rare occasions when they were trading with strangers, and often with the intent of gaining a (possibly unfair) advantage. They were strangers, after all.

Most people usually dealt only with people they knew and didn't want to cheat. In small groups (less that Dunbar's number) there was no need of money since people just did what was needed, didn't attempt to keep precise accounts it, and accumulated little of value to store. This was primitive communism which worked on the principle of "from each according to their ability and to each according to their needs."

As people began to live in larger groups, it proved useful to have some way of keeping track of transactions with people outside one's immediate group. I'm not going to go into the historical details here (read Graeber's book if you are interested), but eventually we arrived at the system we use now.

Today money is created when a bank loans it out as debt. The main thing about money created as debt is that it can increase flexibly as the economy grows, where money based on precious metals is limited by the scarcity of those metals. In order to make a profit, which is after all the reason for their existence, banks insist that those loans have to be paid back with interest. This means that the economy must continually grow in order to cover that interest. As long as the economy is growing, this system works quite well. Indeed that is why we adopted it, to accommodate the growth stimulated by fossil fuel energy.

Only a tiny fraction of money ever exists as coinage or bank notes—mostly it just consists of entries in the banks' accounting software. Coinage confuses the issue of what money really is, since coins at least appear to be made of precious metals. Many people believe that money based on precious metals (gold, silver) has some real value, because of their rarity and the difficult of mining them. They call our modern debt based money “fiat currency” because its value is based solely on your confidence in it. I disagree. Take gold as an example—it has some limited industrial use because of its low electrical resistance and high corrosion resistance, but its current high market value is based almost entirely on what people think it is worth. In fact all money is an abstraction and its value is based only on what value people agree to give it.

Indeed the financial sector of the economy is largely based on trading in money itself as well as stocks, bonds, and derivatives. Much of the so called wealth in the world is based on these things, and their value is almost entirely based on public confidence in them. If the confidence evaporates, so does the wealth.

I would define wealth as an enforceable claim of ownership on things with real value, or an enforceable claim on future productivity, yours or someone else's. The value of money in the bank or investments, is based on a claim on future productivity, and if that productivity decreases, so does the value of your claim on it. And, of course, if your claims become un-enforceable, as they might if the financial sector or society itself experience disruption, your "wealth" is worth nothing.

In the last few decades the switch over from primitive communism to modern neoliberal capitalism has been just about completed. The idea of an "immediate group" has largely disappeared, much to our loss, and money mediates almost all relationships, even to some extent within nuclear families. This means that we are very much dependent on the systems which provide us with money, and via that money, the necessities of life.

Today most of us access the cash we have on deposit at a bank via an automatic teller machine (ATM) or less commonly via a human teller at the local bricks and mortar office of our bank. And more and more we use debit cards to eliminate actual cash altogether, accessing our bank deposits directly at point of sale terminals. Many of us also have credit cards allowing us to access credit up to a prearranged limit at ATMs or point of sale terminals. Some of us, who are undertaking rennovation projects or operate small businesses for instance, have arranged lines of credit at the bank, at much lower interest rates than credit cards. This form of credit is usually accessed via cheques or online transfers.

But having cash on deposit or prearranged credit is no good if you can't access it. Ready access to money relies on infrastructure that can fail quite easily. A local grid failure or damage to communications cables can knock out ATMs, point of sale terminals and the banks themselves—you may have noticed that, when you are dealing directly with a human teller, they are making entries in a computer while dispensing or receiving cash. Cash itself has to be delivered regularly to both ATMs and banks and shortages of diesel fuel or storms closing the highways can stop those deliveries.

Financial crashes, recessions or depressions can cause banks to fail and take your money down a financial black hole with them. And during such crises the banks who don't fail get very cautious in their dealings with each other and the public. This is like throwing sand in the gears of the economy, and makes the situation worse. In such an event, you can except that your access to credit will dry up and that even your access to cash on deposit will be limited, since the banks will be concerned about nervous people deciding to withdraw all their money, in what is known as a "run on the bank". The banks, of course, don't have enough cash on hand to cover all the deposits that people have made, and would likely limit you to taking out only a few hundred dollar a week, at most.

The simplest preparation for these sort of problems is having a chunk of cash on hand, enough to see you through a few days or weeks at the worst. And having a stock of food and other essentials on hand so you don't need so much money to spend in times when the banking system isn't working.

A lot of people seem to think that a long term failure of the financial sector would be the end of the world, or at least of the economy, and believe that it is the form that collapse will take. But remember an economy is just a system in which the things people need are made and exchanged. Among small numbers of people who know each other (or can quickly come to know each other), and certainly in emergencies, it is quite possible for such activity to continue without anyone keeping track of it. The thing, of course, is to have close to hand the resources from which to make what is needed. In large population centres, once shipments stop, this quickly becomes difficult. In small agricultural communities, it need not be so much of a problem.

In communities of more than a couple of hundred people, it would be useful to print and issue a local currency and set up accounting systems separate from the no longer functioning banks. The idea that we can't get by without banks irks me—they currently have a monopoly on the services they provide and on which we depend—and they make a generous profit in that business. If they can no longer do their job, then we should feel free to replace them as needed.

As my regular readers know, I believe that collapse is actually something that happens quite slowly, has been going on for the last 50 years or so, and will be continuing for years or probably decades to come. But, when it comes to money, I can see why many people seem to have their hearts set on a fast collapse. Such a collapse would be much harder, of course, but at least your creditors, landlords, etc. would be collapsing with you and wouldn't be able to come after you for what you owe them. Leaving you free to concentrate on the business of survival.

In a slow collapse there will be a period of time (already started, actually) when the banks and landlords still want their pound of flesh, but many people no longer have jobs, or good enough jobs, to pay them.

That will be the subject of my next post.

As I have been writing this post, the corona virus, COVID-19, has been spreading over the world. I've done a fair bit of reading on it recently, and I am getting disgusted with the amount of fear, uncertainty and doubt (FUD) that is being spread around by people who stand to gain by attracting more visitors to their websites. This is uncertainly not conducive to an intelligent response.

This a new disease and there is much we do not yet know about it, much that we will only know after the dust has settled. I think this sort of uncertainty is going to be characteristic of many of the challenges we will face as collapse deepens. My hope is that this blog will be conducive to a calm and constructive response to such challenges. Here are a few links that I hope will help when it comes to responding to COVID-19:

That last link is behind a paywall, so I'm including a link with advice to help you get past paywalls in general.. Just part of my anarcho-communist approach to life.


Links to the rest of this series of posts, Preparing for (Responding to) Collapse:

How Rich are you? What is your Class? Where do you fit in the Wealth Distribution of Global Resources?

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Published on The Doomstead Diner March 24, 2019

 

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Inside the Diner we are having our regular debate on what it means to be "Poor", "Middle Class" or Rich?  Diners have the full variety of opinions on this, which usually suit their own perception of themselves and how they want others to perceive them.  Is there a way to cut through this variety of opinion to come to some reasonable definition of what any of these terms actually MEAN?  It often seems quite hopeless getting any agreement on this between the Diners, but in doing some research on the topic yesterday, I ran across a great website which has a Calculator allowing you to place yourself in the Global Ranking of Rich People on Earth.

I started doing this research after watching a video recommended by another Diner, a TED talk given by a Scandinavian Sociologist Harald Eia concerned with the topic of "Where in the World is it easiest to get RICH?"

Harald came up with the result that you stand the best chance of getting rich in the Social Democracies of places like Norway, Sweden, Denmark and Iceland.  He came up with this result by looking at the number of people with a net worth of $30M or better per capita by country.  This is something of a surprise to people who buy into Capitalist doctrine that High Taxes and the Social Welfare State are a drain on their incomes, but not much of a surprise to me because I already knew there were tons of filthy rich people in Scandinavia.

Now, the first problem here is defining "Rich" as $30M or better.  At this "watermark" (the speaker's terminology) there are only around 180K people globally.  That is out of 7.5B!  It works out to 0.0024% of the Global Population.  Do we really only define "Rich" people as being not just members of the 1%, but you gotta be in the top .0024% ?  That is a pretty stiff requirement to consider somebody rich, IMHO.  You know the rich people in your neighborhood by the carz they drive, the McMansions they live in, the restaurants they frequent and how often they take expensive vacations.

The second major issue with his methodology is it defines your Wealth by your Net Assets, not by your income.  To me, your wealth is not defined by what your total assets are, but rather how much disposable income you have in any given week/month/year to play with after you cover your rent, your car payment, your communications bill, your food, your fuel, etc.  So for me, wealth is more defined by Income than Net Assets.

I began to wonder what the situatioin was for people who were below that Stratospheric figure of $30M?  Was there a way to find out where the people with a Net Worth of $10M stood?  $3M? $1M? $100K? etc.  As it turns out, THERE IS!  You can find out on the Global Rich List calculator, and not only by Net Assets but by Income also!

So, I took 3 Hypothetical People and gave them some numbers to plug in to the calculator, and got the results for them.  Here they are below:

 

1- Fixed Income Frank

Frank is living on his Social Security and small Pension after working in various Middle Class jobs making the Median Salary for the time for 40 years.  He rents an apartment, has a couple of old carz and has a small Nest Egg to carry him through emergencies.  Here are Frank's Global Numbers:

 

 

Professional Pete:

Pete works in IT as a website developer for a local corporation.  He has worked up to a middle management position working for this corporation for over 20 years.  He grosses around $80K/year and he takes home about $60K after taxes, utilities, insurance etc.

 

 

 

Biz Owner Bill

Bill owns an Auto Repair and Body Shop biz in Springfield, MO as well as a couple of smaller ancillary biznesses, an Auto Zone franchise and an interest in the local NASCAR Dirt Racing Track.  He was born to Dirt Poor sodbusters in the Ozarks and bootstrapped himself up like Horatio Algier to become a Bizness Leader in his community.  He complains all the time about his onerous tax burden when out drinking with his buddies.

 

 

 

Now, as you can see, even if you are at the lower end of  relatively poor people in the FSoA living on a fixed pension and Social Security, relative to the rest of the Global population you are still doing quite well, Inside the top 7% in terms of Assets and 2% in terms of Income.  The cost of living is also quite different in Amerika than in say Mexico, so by itself this doesn't tell you how Rich or Poor you are for an Amerikan living in Amerika.  If you go ex-Pat, your status can change drasticlly of course.

So in order to get a good idea where these Asset and Income levels put you at relative to the rest of Amerikans, you have to drill down and isolate just this portion of the table.  Below is how our 3 hypothetical subjects rank out relative to each other.  Fixed Income Frank is in RED, Professional Pete is in PURPLE and Biz Owner Bill is in GREEN.  Assets calibrated from 8% on down in .2% increments, Income from 3% on down in .05% increments.

 

 

Based on the above chart, it becomes quite easy to determine who is Rich and who is Poor in Amerika.  Middle Class is a bit more difficult to peg, and can differ markedly depending whether you are looking at Assets or Income.

Where do you fit in the Wealth Distribution curve for the World and for your country?  Do the numbers match your self-perception and self-identification?  How do you think this skewed Wealth Distribution can be rectified, or does it even need to be rectified?  Do you think Capitalism or Socialism is the better system to distribute diminishing Total Wealth on a resource depleted planet?  Do you have an alternative to suggest rather than one of these choices?  Come join us Inside the Diner to discuss thes important questions as the Collapse of Industrial Civilization bears down upon us all.

 

 

 

Collapse Something or Other …

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Published on the Economic Undertow on December 25, 2018

 

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The Christmas present nobody wants sits under the tree: a worldwide finance crisis along with an establishment that appears to be coming apart at the seams.

The status quo is unraveling from all sides, at the top especially, where managers cannot conceal their panic:

 

 

 

Oops!

“Every banker knows that if he must prove he is worthy of credit, however good might be his arguments, in fact his credit is gone.”

— Walter Bagehot

 

The government marshals its forces of borrowing in order to prop up the lenders as per usual. Yet, the lenders have been propped up for years. The bosses demand lower lending rates even as these same rates are at- or below historical lows. What more can be done and to what end? The rates and props deployed during and after prior crises have contributed to the immediate peril as well as everything that has led up to it. There is no cure to be had in additional doses of the same poison that currently looks to kill us.

By questioning whether lenders are worthy of credit the Secretary sinks his own battleship: “Every banker knows …” well, perhaps not. He inadvertently reveals truths: that lenders are vital but are also vulnerable. Vital in that our economy does not pay its own way, it cannot. The industrial economy is reductive rather than productive: its primary ‘good’ is entropy. Business relies on the continuing increase of bank money to draw future resource capital toward the present. Without the lenders and the credit they provide the modern, industrial economy stalls then comes undone. If our economy could meet its own expenses out of cash flow it would do so. What the Secretary admits without doing so directly is our economy cannot afford itself.

That we cannot afford our economy is its immediate vulnerability. Asymmetries within the lending regime such as maturity mismatches make it fragile. The regime depends on a marginal agent or class of agents that sets conditions for all the others. Keynes notwithstanding, a certain level of borrowing restraint, something short of universal borrowing has little affect on the system as a whole. But, some percentage of economic agents must borrow with a fraction of that borrowing deployed to service and retire existing debts. Small leaks- or water over the top of a dike will not damage it but one small leak too many will wash the dike away. In the same way, a small percentage of non-performing loans or defaults is tolerable to the system, a portion of lender reserves and equity is set aside to resolve these as they appear. Then, there is one default too many for whatever reason … this is disaster! The ‘capital’ structure of the lender is upset; this calls into scrutiny the capitalization of all other lenders that are similarly situated. Uncertainty is rapid and corrosive, given time it widens into a self-amplifying spiral of insolvency. This is what occurred in 1929 and 2008 and what looks to be underway right this minute.

Compounding the problem, the marginal borrower is impossible to identify or for immediate institutional convenience is disregarded. The tiny leak with the potential to destroy the dike can be one of any (very large) number. Globalization has rendered the marginal agent opaque; official denial and central bank happy talk permits known problems to fester. The marginal borrower can be an individual or a firm, or a class like Chinese peer-to-peer lenders, Italian footwear manufacturers or Spanish residential real estate speculators and the banks that supply these with funds. Eventually, all of them together become marginal. Structured finance operates outside the reach of policy makers at the same time are tightly bound to all the others by way of swaps, corresponding- and exchange lenders, counterparty agreements, derivatives-based hedges and money markets. Like a flood, marginality propagates outward, with the ‘new’ marginal borrowers becoming major banks, dark money pools, bond- and derivatives market makers, national governments and foreign exchange. In any event, agents cannot be compelled to borrow and in a crisis refuse to do so. Insolvent, zombie-like walking dead firms which continue to borrow/lend in the aggregate are lethal to the regime: they can only offer the (fraudulent) appearance of a cure while delaying the inevitable reckoning. Accounts cannot be overdrawn indefinitely, it is impossible to borrow out of debt. “If something cannot go on forever, it will stop,” says economist Herbert Stein. No amount of marginal borrowers can rescue a system that is foundationally bankrupt.

… this is after hundreds of trillion$ have been borrowed around the world already. The simple fact of the trillions suggests the managers are inept and perhaps insane. Our debts have grown beyond human scale, even the billionaires all together cannot hope to retire them, in fact their borrowings have contributed significantly to the total. Along with their managers, these stupendous debts fade to irrelevance in the practical sense; they can never be repaid. They are empty claims against resources that have long since been converted into useless waste. Machines that are dependent upon credit for their very existence cannot repay, certainly not labor which is feeble; which is otherwise depreciated, subordinated and oversupplied.

This is all part of the current crisis, it may indeed be its entirety. Whether the markets are repricing (in)competence, (in)solvency, systemic bankruptcy or perhaps all of the above; it is too soon to tell.

Figure 1: What is our over-extracted world worth? The underlying problem is resource stripping and its consequences. If that is being priced in right now we are in big trouble. Chart by TFC Charts (click on for big). The current crisis could not be predicted as was the oil price plunge in 2014, but it was inevitable nevertheless. Our economy requires cheap oil to run but the cheaper oil is exhausted, what remains is unaffordable. Low cost credit has offered the (fraudulent) appearance of a cure … but it has only delayed the inevitable reckoning.

A few years ago, the oil price that triggered crises was over $100 per barrel. We have been creeping toward a crisis for the past several months at $80 per barrel. Time and waste leave us less wealthy than we pretend to be …

Figure 2: Compare the likely crisis price suggested a few months ago. We clearly cannot afford $75 oil, higher prices are out of reach. At the same time, the drillers cannot stay in business selling their product below cost. What is common = access to credit which turns out to be the means by which resources are allocated. The customers are broke.

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Some Inconvenient Truths About Collapse Economics

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Published on The Doomstead Diner on September 2, 2018

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One of the first collapse pundits I ever read was Chris Martenson, way back before he turned his site into pay-for-view. I read The Crash Course, and took it to heart, like a lot of doomers. I know there are people who check in here who hold Chris in high regard. I do too, but my continued experience with collapse since 2010 when I started prepping has led me to some conclusions about typical collapse planning advice that I want to write about.

And I'm not just singling out Chris, who is a sincere, smart guy who gets it right about a whole lot of things. What I want to get to has to do, not with what happens AFTER the SHTF and BAU ends, but to WHAT happens between NOW, today, and THEN, whenever THEN turns out to be. It applies to each and every one of several collapse pundits whom I've read who all agree on one or two or three important issues.

One issue is the automatic knee-jerk assumption that everyone is better off if they're debt free.

Another other issue is that the best hedge against an uncertain future is to buy and hold gold (and/or silver), to the exclusion of any other wealth preservation strategy.

A third issue is that you need to sell your house and move to some "redoubt" or doomstead.

All of these ideas make enough sense that they tend to be accepted as gospel in the doomer community. But like most things in life, the truth is complicated, and and this kind of approach, which I'll call Collapse Financial Planning for Dummies, is an oversimplification, and it contains some seriously bad thinking.

The prevailing paradigm in the collapse community is that all debt is bad (assumably because debt-based money is evil) and that those who carry much of any debt will somehow all be swept away when BAU ends and nobody has income anymore to pay their bills, etc, etc.

Houses will be worthless because they'll be abandoned when the die-off comes and JIT delivery ends and the only people left standing will be people living on rural doomsteads.

And the only assets worth holding are preps, gold, silver, and farmland.

Over and over, I've read well-meaning and supposedly well informed people who claim expertise, say these things. If you read the collapse blogosphere, it's everywhere, and the people who were saying it 8 years ago are still saying it.

I have some real problems with this. People who traded in their 401K's and bought gold and/or silver in order to save their bacon about the time I started prepping, at the beginning of 2011, should look carefully at their feet to look for bullet holes.

Gold was about 1400 bucks an oz at the end of 2010. Now it's about $1200. The S&P on the other hand, has tripled. Are stocks in a bubble? Hell, yeah. But they still tripled in dollar value. That's money you could have used to buy a lot of fucking preps, folks.

Preps are important, and I believe in preps and tools and solar panels, and having a plot of land for food gardens and maybe subsistence farming (which is not easy if you aren't born into it, unfortunately). But all that costs money. I don't apologize for making money. People who claim not to care about money are either naive or lying, or they should enter the monastery, because they belong there.

Hell, it's not easy for people who were born into farming to subsistence farm, but it's doable. For most people it's a total fantasy. It takes skillz, baby. Mad skillz.

This last year I started to see stories about people who took this good advice several years back and went off-grid. Now they're coming back. Maybe not to suburbia, but closer to work and stores and civilization. Off-grid living is HARD and it has it's own problem set….and so far, working people are mostly still working, even if their standard of living isn't great.

I'm not knocking gold.

I own some gold and more silver. It's a nice insurance policy, if you can afford it.

It insures you against one thing…..total currency collapse. It's done, over the last eight years, exactly what it's supposed to do, which is hold some value. Over historical time, it has a good track record for holding value when many things lose their value, particularly fiat currency, stocks, bonds and ETF's and other "paper" financial instruments. But over the short term, it's value against fiat currencies varies quite a lot. Ouch!

And I'm not knocking freedom from debt. But freedom from debt is more valuable when debt is expensive than when debt is dirt cheap. We've been through eight years of crazy cheap debt. In 2015 I got two new mortgages for 4.5%. it sounded high, until I looked at the historical record. Pre-2008 crash, the last time mortgage interest was that low was 1949.

And there is debt and there is debt.

Debt incurred for cheap consumer shit that ends up in the trash is always bad, no matter how cheap it is. But debt that helps you acquire a tangible asset, especially one that might be an inflation hedge or (gasp) a good investment, doesn't rate the same scorn.

Debt incurred to make a cash flow investment is "just bizness". If the numbers work, and the deal makes money, and the risk is not high, WTF not?

If you had grown up somewhere like Mexico, where you can't even get a mortgage to build your own house, you might have more appreciation for the benefits of carrying a little debt. The median home price here is lower than Portland or Seattle or anywhere in California, but but it's still $300K. Try saving 300K to buy a house. You might live long enough to move in when you're 60, unless of course, prices keep going up with inflation.

And not a single pundit ever mentions that if you are somebody with a high income, that being debt free has enormous negative tax consequences in this country. Probably this is because most of the respected pundits never had any real money in the first place to have to pay taxes on.

You don't write about things that are completely outside your sphere of knowledge. We have a system that was set up to favor debtors. It's not a stable system, that's true….and if you have a mountain of debt when the music stops on this little game of musical chairs, you'll get wiped out. That's the true part. But it  is NOT the ONLY part you need to understand.

Sorry. That's the real truth.

We have a system set up to FORCE people into stocks and bonds. Because that's what the government wants (because Wall street tells them to want it). What I mean is that the tax consequences of NOT doing it are not insignificant. It costs you money, and the more money you make, the more money it costs you to go against the flow.

All 401K'S and IRA's and various other pensions are designed to steer you into stocks and bonds. There is some leeway, you can hold gold in an IRA. But forget the minutiae. Basically the government gives you tax breaks to make financial decisions that they want you to make. They have a carrot and a stick, and they use both to get what they want.

You literally have to decide if fighting them is worth it. Sometimes it is. Sometimes, though, it makes sense to understand where you can get ahead by participating, to some degree, in the "sanctioned" investments that have been set up primarily to benefit the rich.

I got out of the stock market in 2010 or so, because I believed all the doomer hype. I could have bought the five or six most stupid, popular stocks at that time and made BANK over the last 8 years, but I didn't. Instead I sold my Whole Foods in 2010, and then watched it split again and then watched it get bought out by Amazon. Yeah. Great move there.

I made some money trading last year, which I wrote about here. But I've mostly stayed out of stocks all these years  because I viewed stocks as an unstable bubble that would pop, and I still do. That much is 100% right. But when I see a short term opportunity, I'm willing to take it. I made 90K last year trading pot stocks. I paid my taxes, paid some debts, and finally, last month, I bought another rent house. I roll the profits back in.

I'm not saying the world is economically stable, that collapse isn't coming, or that you should be bullish on stocks now, which is madness. But while gold was drifting around and ending up slightly lower, clueless idiots made a lot of money in equities. Just dumb luck, to some degree. But more so because the markets are manipulated, and they went with the flow instead of going contrarian.

The point IS that my risk averseness cost me money. I did not come out ahead by taking the advice of Chris Martenson and the other collapse gurus…or by taking the advice of any of the dozens of well-respected goldbugs out there. To the degree I followed their advice, I lost money, and I missed opportunities to make money.

I also lost some money through my own stupidity. But I learned from that. People should learn from their mistakes, and I learned a few things the hard way, especially about leverage, which almost nobody understands…..outside of the world of professional trading. You can read about using leverage, but losing your ass teaches you the most. Trust me on that.

But I digress. Back to the subjects at hand.

The most important thing to understand about saving and investing is to get WHY it is necessary in the first place. Do you know? Think about it for a minute and pick an answer now…don't read ahead until you do. (Don't peek.)

Okay.

If you had to think about it….that's a problem. You should know. The reason is simple. One day you will be old and unable to work and you will likely still want to eat, have a bed and a roof over your head, and a few amenities to make your life comfortable.

If you don't think you need that, or you know you don't, then save yourself a lot of effort, because saving money and investing the right way is HARD. It requires discipline and a willingness to delay gratification. It requires making good decisions and then staying the course over a long, long time. It requires the ability to change course, but more times than not it takes the confidence to NOT change course at every bend in the road.

I save and invest, not so much for me, but for my beloved. Women often outlive their husbands now by decades, and the moment I croak, my dear wife will be out of a job, since she works for me. She will have to retire at that moment, or at least within weeks or months.

That's responsibility. I have a responsibility to take care of another person besides me. And I take that seriously. So I have damn good reasons to save and invest, other than adding zeroes to my fat-ass bank account. I do what I do because I don't want my old age or that of my wife to really suck. For me, that's reason enough. You have to figure that part out for yourself.

Younger people look ahead and see collapse and tend to think none of this matters for them. Because….why bother, if the end of the world is a few months or a few years away? All I can say is that I was young, not that long ago. And now I'm on the verge of old age. Are you so sure that collapse is going to wipe the slate clean that you want to risk being wrong? Do your feel lucky…er..or is it do you feel unlucky?

I don't know the future, but I know everyone who was writing about collapse in 2010 got it wrong in the short run. EVERYONE.

This is NOT intended to make anybody do what I'm doing. I won't write about what I do in depth, because that isn't my purpose.I just think people need to have a PLAN.

I'd say that I have Plan A which is aimed at my belief that I might possibly be old enough not to be able to work before TSHTF. My plan is aimed at making my day job optional by 7 years from now. That isn't young. It's 70 years old. I might work longer. There is nothing particularly magic about retiring.

But ….just for example…….I mostly buy a certain class of real estate now. I do that for several reasons.

1. It's tax advantaged.

One year (I think it was four years ago now)  I paid 240K in income tax. It was nearly double what I had planned for…. I had to struggle to pay it. I wasn't planning on that. I had to use up almost all of my cash savings I had at the time. My problem was that I had paid off a lot of debt, owed very little, and had put my home and my lake cottage on a 15 year mortgage and thereby lost a couple of big mortgage interest deductions. Also, my kids were no longer dependents. I never intend to do that again. I now have lots of mortgage interest and expense items related to investments. My taxes have come way down. Taxes matter, if you make a lot of money.

2. My houses (modest single family homes only) flow cash. Positive cash flow is essential to make the kind of deals I like work.

That means I get monthly  income. Rent. Enough to pay the debt and the maintenance and the insurance and a little more. Cash flow is absolutely FAR superior to any kind of "flipping" or buying anything on the premise that price will automatically go up. Prices often go down, not just up. Cash flow buys your dinner whether prices are up or down.

Rents can go down, sure. That's why you have to either pay a huge down payment (well advised) or have enough savings to cover shortfalls (or both). You do have to plan these days for deflationary events. I expect one within two years, and perhaps as soon as next month. Life is uncertain. Don't get over-leveraged. That's what makes people go broke. Borrow a little money…what you need, not as much as you possibly can. Pick one mortgage at a time and pay it off. I own two properties outright now, and the rest have 40-50% equity.

3. I borrowed all the money I owe at or below the current real inflation rate (which I expect to go higher). And (this is important) I locked in some stupid low rate loans for 30 years. And houses are still a reasonable inflation hedge at this time, meaning that they appreciate faster than the inflation rate over the long haul. That can change. But it's been true and it still is true, in my market area, since 1990. 

I know all the doom and gloom scenarios. I read Harry Dent. I read Jim Kunstler. But by the time TSHTF, my loans are likely to be paid. If you own it, you only HAVE to pay the taxes. I started a long time ago. But…if the Fed crashes the markets and they drop interest rates AGAIN down to the 3 to 4% level, I'm probably a buyer again. That could easily happen. It's at least as likely over the short term as is a sudden end to western civilization.

I could pay most of my debt off in full now if I needed to, but I don't…because I don't want to, and I don't need to do that. If you borrow below the real inflation rate (which has been possible for the last several years, until very recently) and the property appreciation keeps up with inflation, then the interest ultimately costs you NOTHING.

I don't go by the inflation rate the government quotes. It's higher, believe it. I expect to pay my loan off with dollars far cheaper than today's dollars. Dollar dropping? Good! Let the son-of-a-bitch fall.

I fear a precipitously RISING dollar, because it's a signal of a deflationary event on the horizon. Anybody who wants deflation must not own any inflated assets. And almost ALL assets are inflated these days. Bubbles do pop. Be prepared for that. But it's a thing to plan for, not a thing to keep you from making any plan at all..

If you have nothing, you have nothing to lose. But most people are HURT by deflation, no matter what level they're at. But I am well hedged for inflation and deflation. I can weather most any financial storm now.

Don't drink the Collapse Kool-Aid. Nobody knows the future with certainty. Plan A, I retire comfortably. Plan B, I subsistence farm as best I can. I can't control collapse, but I can, at least to some degree, control my own destiny.

The collapse pundits only ever see a need for Plan B. the older you are, the more you need a Plan A, in my book.

It's been almost 8 years since I started prepping, and BAU is still happening. I don't know how long it will last…but I don't have to pray for collapse to feel good about my own future.

 

Death of a Mall Man

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Published on the Doomstead Diner on January 7, 2018

 

Discuss this article at the Economics Table inside the Diner

Death of a Salesman was written by Arthur Miller in 1947, and is widely considered one of the greatest plays of the 20th Century.  It's a play about broken dreams and the lifetime failure of the protagonist, Willy Loman.  It's a sad and depressing play about the failure of the American Dream which doesn't seem too odd now, but this play was written in 1947, right after the end of WWII and at the beginning of the grand explosion into suburban housing, car mania and endless consumerism we live in today.  Some folks hitched a ride on the great bandwagon of prosperity that came with this expansion, but many did not and ended up much like Willy Loman did.

http://i2.cdn.turner.com/money/dam/assets/171010194133-sears-store-closing-780x439.jpg Nonetheless, despite the fact that the Great Consumer Culture never really was the great success it was made out to be, the illusion continued to be sold from the 1950s onward, right up today with the online retail giants of Amazon and Alibaba.  The illusion is falling away though now, most significantly in the form of Mall closures all around the country.  The "Anchor" stores of large retailers like Macy's, Sears and JC Penney are all downsizing as fast as they can to avoid Bankruptcy, with new store closures announced on a monthly if not weekly basis.  This will not of course avoid bankruptcy in the end, but it does drag it out and delay it, in some cases long enough for Vultures like Eddie Lampert to strip mine the rotting hulk for whatever assets are still left.

Although folks just a decade or two younger than myself may not believe this, there once was a time here in Amerika before Malls dotted the landscape and before rampant consumerism became the cultural religion.  When I first returned from Brazil in the late 1960s, there were no Malls at all.  The consumerism in those days was happening in the Department Stores like Macy's, which were the first outlets for all the merchandise being produced in the aftermath of WWII.  In fact you can say the whole "Black Friday" sales gimmick was kicked off by Macy's with their Thanksgiving Day Parade in New York.  The Media of the era backed this up with films like "Miracle on 34th Street", with Edmund Gwynn playing a Macy's Santa and the young Natalie Wood playing a little girl who really BELIEVED in Santa Claus.  The film was a completely shameless promotion of the lifestyle being sold, complete with the perfect Suburban House being handed by Santa Claus to Natalie and her parents at the end of the film

http://club.berkovich-zametki.com/wp-content/uploads/2017/05/image20.jpg For the Millenials who like to drop in and blame the Boomers for the rampant consumer culture we have now, catch the date on "Miracle on 34th Street", it was produced in 1947 also, the same year Arthur Miller wrote Death of a Salesman.  Sense a little cognitive dissonance here?  Which narrative do you WANT to buy into?  Most people want to believe in Santa Claus, the dark side of reality is not so pleasant. In any event, this all predates the arrival of the Boomers on the scene, they were just starting to be born in 1947 and did not have a whole lot of control over the direction the culture was being pointed by those who stood to make a profit off of this type of wasteful living.  It in facts predates even the Greatest Generation, the parents of the Boomers who returned from WWII to buy suburban tract housing just being built on the GI Bill.  You can see the beginnings of this as early as the late 1800s with the first Sears Catalogs for buying by mail order.  Sears was at one time before its long downhill slide the Amazon & Alibaba of its era rolled into one .

As I mentioned, when I returned to the FSoA from Brasil in the late 1960s there were no malls to speak of, and really this was true right through the 1970s, although I think they started to put them up at the end of the decade.  The oil crisis of the early 70s was over, the Dollar was freed from the Gold standard and credit was flowing out fast and furious to the well connected.  The first mall I remember going to was called I think the Galleria,and that was in the early 1980s.  It seemed pretty impressive to me back then, although I know compared to some of the monstrosities built later it was probably pretty small.

The malls quickly developed their own culture, particularly among the teenagers of the time and Mall Rats were born.  Generally high school age with some of the older ones sporting their own carz to haul themselves and a few friends to the Mall parking lot, it was a place to gather, smoke weed and try to pickup girls if you were a male.  I was a little too old for this scene at the time, but I observed it as I walked around and window shopped all the great merchandise all in one place.

The malls had their heyday from the mid 1980s until the late 1990s and are the best example of the conspicuous consumption mania that dominated this period.  More credit flowed out to build more malls, and more new roads to get to the malls which were usually pretty far out from a city center because that was the only places you could get enough land at a cheap enough price to build one.  This spelt the death knell for many shopping districts in the small to medium size cities and they began to wither and decay.

You can look at this period as the "blow off top" of the Amerikan Retail market which began with Sears in the late 1800s.  There was just a ton of STUFF being sold in these places and there was always something new and cool you just HAD to have, especially if you were a teenager.  How were people AFFORDING all this great new stuff though?

The building mania of roads, malls and subdivisions provided many jobs in construction at a pretty good wage through the 80s and 90s, so there was some money flowing out into the suburban consumer's bank accounts, but overall it was stagnating pretty significantly.  Most of the money being spent at these malls was still more debt, now Credit Card debt as Visa and Mastercard vastly expanded the number of people they would offer credit to and the computer and communication systems evolved to become all automated.  "For everything you ever wanted but could not afford, there's VISA".

https://waunafcu.org/blog/wp-content/uploads/VISA-shoppingbag-Adproof-Final2-1024x1024.jpg Everybody got a Visa card in those years, even college students with no income.  Even if you were the rare person who could fog a mirror but did not qualify for a bank issued card, you could get store issued credit cards from all the major retailers, Sears, Macy's, etc.  You could stack your wallet full of them, and it just seemed like Free Money.  Small monthly payments at first, but the buying every time you went to the mall became habitual.  Those small bills got bigger and bigger, and there were more of them coming in every month.  Your total monthly bill was now more than you had discretionary cash to cover.  By the time you graduated college, between the credit card bills and the student loan bills, there was no money left to pay rent with, even if you found a job.  It was back to Mom's basement for the next decade while you tried to pay off the bills.

Mom & Dad also got addicted to the credit cards and shop till you drop at the mall, and they weren't making any more money either.   For them though, the Banksters came up with another solution to ever increasing household debt, the HELOC loans.  The equity built up over years living in a McMansion was refinanced, all the bills consolidated at a lower monthly payment and Mom & Dad were free to spend again!  Unfortunately this backfired for many in 2008 when the sub-prime Real Estate market went tits up and many of these McMansions went underwater.  Dad, an aging Middle Manager somewhere got laid off, the McMansion got foreclosed on and this was another formerly middle class family reduced to abject poverty.  All the equity in the home had been burned up at the Mall, and now besides not having a home to live in they still had the accumulated debt on the refinanced mortgages, which were now recourse loans the banks could continue to hound them for.

Although the process started before the 2008 Financial Crisis, the process of store closures in these mega retail palaces vastly accelerated at this time.  People simply had neither the income nor the credit necessary to keep up the Shop till you Drop lifestyle.  Teenagers no longer got a car on their 16th Birthday as a de riguer gift from Mom & Dad, now they got a smart phone instead.  Instead of gatheirng together at the Mall to socialize, they instead spent their time on Social Media.   If they did have any money to buy some electronic toy or fashionable article of clothing, they did it online with the smart phone, not at the shops in the mall.  Once the big retailers closed their doors in a given Mall, foot traffic decreased exponentially and the smaller shops and food courts that depended on that traffic began to shutter their doors also.  Many of those Malls built in the 80s & 90s are now empty and rotting hulks, awaiting demolition if the township they are in can find the money to demolish them.  Many more will close this year, and in the years to follow.  This model for the culture is finished, although a few places still hang on as the local employees hope for a miracle turn around to save their jobs.

https://s-i.huffpost.com/gadgets/slideshows/347062/slide_347062_3671582_free.jpg

The motivation to write this article came from an article I read published by WaPo on New Year's Day 2018, First, this town lost its Macy’s. Then Sears. Now, all eyes were on J.C. Penney.  The article is too long to paste in its entirety, but there are a few interesting observations made I would like to reflect on.

First let's look at the location of this Mall and the economics of the neighborhood.

There were four days until Christmas, and this customer had decided against shopping online to come to a real store and talk to real people. To Barbara, that meant she had to provide something he couldn’t get from clicking buttons on a computer. Could the Internet assure the customer that he was making the right choice? Could it praise him for being a thoughtful husband? Could it make sure that he was getting the best possible deal?

That was what Barbara could offer at the last remaining department store in the only mall in Hermitage, a city of 16,000 in Western Pennsylvania. J.C. Penney used to be one of three anchor stores at the Shenango Valley Mall. Then, one day last March, both Sears and Macy’s shut down, becoming two of the more than 500 department stores that closed across the country in 2017. Headlines have called the shrinking of these American staples the “retail apocalypse.” In Hermitage, employees called it “the funeral,” because of the way it sounded as customers lined up to make their final purchases. “I’m so sorry,” they said. “I’m in shock.” “What are you going to do?” “What am I going to do?”

What might have been just a sign of the times in a bigger city was a life-changing and economy-altering loss for Hermitage, the kind of place too far from anywhere to be considered a suburb, but too developed to be considered rural or to attract visitors with small-town charm. The closest thing Hermitage has to a downtown is the intersection where its mall sits, surrounded by McDonald’s, Walgreens and Dunkin’ Donuts. The biggest buildings down the road are Kohl’s, Kmart and Walmart. The retail industry is the third-largest employer in town, just behind health care and manufacturing.

So where is Hermitage?  Let's look at  the map.

As you can see, Hermitage sits about dead center between two "major metros", Cleveland and Pittsburgh, on what used to be some of the best farmland in the world.  Somewhere along the way, probably in the 70s-80s this area was developed as a suburban bedroom community for those cities, as well as the more minor metro areas of Youngstown and Akron.  However, even by the 80s all these towns were in decline in the heart of the Rust Belt.

The neighborhood has no "charm" like an old New England town or an old town along the Mississippi River that got left behind when the interstate highways were built, so it doesn't even have that going for it.  It never developed any real economy outside the service economy for the locals of medical care, restaurants and retail.  With retail going down the toilet, there's not much left there in the way of local employment, and it's not like you can drive to Cleveland to find a high paying job either.   What is left to drive the economy there?  Aging Boomers who are collecting Social Security and Pensions about covers it.

Next let us look at the Demographics demonstrated in this article.  The main focus is on a Jewelry Salesperson who got her job for the Christmas Season, Barbara Cake.

Barbara Cake shows watches to customers at the J.C. Penney jewelry counter. (Dustin Franz for The Washington Post)

But come November, J.C. Penney was still open, and the most important season in retail was about to begin. Sharon Loughner, the general manager, was confident that the rush of holiday customers was on its way and, with little choice of where to go, that they would be coming to her store. She would need more workers to do all the extra fetching, folding, stacking and selling, and so she put out a call for seasonal employees.

Among the parade of well-qualified applicants from Hermitage and towns nearby came Barbara, a 67-year-old woman who seemed to represent all that retail used to be. She was impeccably dressed for her interview. She planned to wear a pantsuit each day. She talked about catering to the customer’s every need. She addressed everyone, no matter their age, as “sir” or “ma’am.”

For J.C. Penney to succeed, it needed employees like Barbara, whose necklace and bracelet, Sharon noticed, coordinated perfectly with her outfit. Sharon thought of the department where the sale of a single item could equal a dozen sweaters in ­revenue.

“How would you like,” she asked Barbara, “to work behind the jewelry counter?”

Wait a minute…since when has a 67 year old retiree been the ideal retail saleswoman?  Back in my younger days, the department store sales people were all in their 20s or 30s the most.  If you weren't out of sales on the floor level and into management or working as a buyer for the store by the time you were 40 you were a complete LOSER.  Now you have aging retirees lining up for these positions which pay barely over minimum wage, and they need to meet their daily quotas too!  Great way to spend your retirement years!  Barbara needs to do this so she can save up enough money to buy Iphones for her Grandkids.

Barbara accepted, not thinking about the arthritis in her hands that would make it hard to work the small clasps, the plantar fasciitis in her right foot that would act up if she stood for hours, the reading glasses she would need to see the small numbers on the price tags. She had been an executive secretary for 30 years, and now, a few years into her retirement, had done the math on her savings, her mortgage payment and her grandchildren's Christmas gifts and decided it was time to return to work.

The job at J.C. Penney was guaranteed only until the new year, but if she worked hard enough, she thought, they might keep her on. As a “sales associate,” she would be expected to sell about $1,500 worth of merchandise a day and would bring home $8.50 an hour, before tax.

She studied up on diamond ratings and learned to lock the jewelry counter’s glass cases to help prevent shoplifting. She learned not to ask if customers had J.C. Penney credit cards, but to assume that they did, so they would feel like they should. “And that will be on your Penney’s card, sir?” She survived Black Friday, perfecting her response to unhappy customers: a hand over her bedazzled brooch and a sincere apology. “I’m sorry, ma’am, we don’t have the Fitbit here.”

It's all so pathetic and sad, particularly considering the people immersed in this decaying culture have no understanding of why it is occuring or why their hopes and dreams that things will improve in the future will not come to pass.  We're not looking at a "cyclical downturn" here, this is a structural problem with capitalism and the energy intensive economy it was built on.  To paraphrase Bruce Springsteen, "The jobs at the Hermitage Mall are going boys, and they ain't never comin' back".

 

Now Main Street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain't coming back
To your hometown

The jobs that were available to provide money to BUY goods in the retail economy over the last couple of decades were jobs that where the work was SELLING the goods, like Barbara Cake is still trying to do in the Hermitage JCPenney Jewelry department.   The jobs actually MANUFACTURING these goods disappeared in the decades before that and were offshored to places like China, India & Mexico, where labor could be purchased at a much cheaper price.  So there wasn't much left in the way of remunerative work besides becoming a part of the retail/service economy already.

Paradoxically, while by the numbers retail sales have been climbing back out of the sewer since the Great Recession of 2008-10, retail jobs have been decreasing at the same time.  Steve Hansen on Global Economic Intersection recently covered this phenomenon in his article, Death of Retail Employment Growth.

Pundits continue to rejoice in the improving retail sales pointing to an improving economy. But consider this: inflation adjusted retail sales per capita is barely at the levels seen before the Great Recession (blue line in graph below).

The per capital retail spending curve roughly approximates median household income (red line in graph above). Most of the middle and lower classes spend all they make. My point is that retail sales is limited by population and their income.

However, the noteworthy aspect of retail is the contraction of the retail workforce (red line in graph below) all while inflation adjusted retail sales(blue line in graph below) continues to expand into record territory.

Another way to look at the data in the graph above is the rate of year-over-year growth where the difference is more apparent.

Many blame the shakeup on Amazon's AMZN (U.S.: Nasdaq) presence in the retail marketplace. Of course, their e-commerce model coupled with their automation / robotics adoption is putting pricing pressures on the entire retail industry.

While there has been much play in the Newz about automation coming to Driving in the form of self-driving Carz & Trux that will eliminate millions of driving jobs in the Taxi and Trucking industries, in reality the retail industry is much more amenable to automation than driving is, and frankly I am surprised this hasn't gone further, faster.  Most of the Grunt level jobs in retail, be it stocking shelves or running a cash register are extremely repetitive and they exist in a controlled small environment, unlike carz on the road.  Robotic Pallet Jacks could easily negotiate the aisles and stock the shelves and self-checkout scanning kiosks already exist in most of the larger food stores and superstores like Walmart.  So even forgetting for a moment about the transition to online retail through Amazon and Alibaba, any surviving Brick & Mortar stores have a lower potential number of retail jobs that would be available.  1 clerk can monitor 10 self-checkout kiosks instead of 10 clerks on individual registers.  That's a 90% reduction in jobs right there!

https://cdn.vox-cdn.com/thumbor/ze0FolfHxbTeCgUAHNz_VYbIqfI=/0x508:4425x3827/1200x800/filters:focal(0x508:4425x3827)/cdn.vox-cdn.com/uploads/chorus_image/image/47195816/automat-grand-central-1.0.0.jpg I can also envision a system where you have to swipe your card and pay for an item even before you take it off the shelf.  This is the way the old "Automats" used to work, where you had to drop your quarters into the slot to get the door to open and take out your Tuna Fish Sandwich. There actually was one of these places still functioning on 14th Street in NYC in the 1970s  when I went to High School in the neighborhood, although they had their heyday in the 1940s to 1960s. Vending machines were the succesor to that. You already have kiosks in the airports for Best Buy where you can swipe your card and get a new Bluetooth Headset for your Smart Phone if you forgot it in the rush to get to the airport.  I can easily see entire aisles in the store with these type of kiosks instead of regular shelves.

There is just about no job in the retail industry that couldn't be easily roboticized, and if BAU were to continue long enough I would certainly expect this to occur.  It is however all extremely energy intensive and very complex, and besides that it still depends on the consumers having MONEY to buy the shit in the kiosks!  Where are they going to get this money?  This sector of the economy is about the last one with jobs left for J6P, what is left after those disappear?

At his point you need to start talking about the UBI, or Universal Basic Income.  Nice idea in principle, but in practice if you pass out a fixed amount of money for people to spend, you ALSO need to control the PRICES for the items they buy with this money, at least the essentials like food, housing, transportation, communications and health care.  Without price controls, the providers of these goods & services will keep raising their prices to the maximum the market will bear, leaving everyone just as impoverished as they were to start with!

http://i.dailymail.co.uk/i/pix/2014/09/26/article-2767973-218A203900000578-783_634x461.jpg Fortunately (or unfortunately, depending on how you look at it), I don't expect BAU to last long enough to see all retail and all transportation of goods to be roboticized to any significant degree.  Retail is shutting down already too fast for this to occur.  As I write this article, both Macy's and Sears announced new Store Closures and employee layoffs, in the case of Macy's numbering around 5000 new folks on the Unemployment lines.  Both of these corporations have long been destined for Bankruptcy, and you wish somebody would put them out of their misery already.  Like a lame horse, watching the suffering dragged out is quite unpleasant.

For myself, watching this aspect of our Industrial Consumer Culture head inexorably toward its inevitable death is quite similar to my visit to the Boeing Museum of Flight, where the development of the aircraft industry is celebrated.  There I suffered Cognitive Dissonance between my knowledge of how the aviation industry has expanded warfare and made it more deadly on the mass scale, and my admiration for the technological prowess involved in building these machines.

In this case, while the overall Consumer Culture disgusts me, I admired the architecture and sheer SIZE of these malls when they first went up, and I LIKED having all those stores in one place to walk around to and at least window shop.  At the time I was quite unaware of DOOM and how unsustainable the whole model was, it seemed like this was the mark of a successful society and economic system.  After all, here in the FSoA we were shopping at STOCKED Malls, while the Soviets over in the USSR were lining up just to buy food at the grocery store!   Capitalism was SUCCESSFUL!  Communism was a FAILURE!

There was a certain amount of truth to that also, looked at in terms of Instant Gratification.  What the system was doing though was mortgaging out the future, with the expectation of an infinitely growing economy, which is of course impossible in a Finite World.  Capitalism was a fabulous model for burning through resources at the fastest possible rate, meanwhile creating waste and pollution at previously unimaginable levels.  One trip to the dump or the "landfill" in your neighborhood should be enough to convince anyone with functional brain cells the model is not sustainable.

https://media.nbcchicago.com/images/652*489/120709+landfill.jpg

So where do we go from here?  For a time, Amazon & Alibaba and other online retail will replace the Brick & Mortar retailers, but they also are limited in their lifespan and will last an even shorter period of time than the malls did, which if you count it from the very beginning in 1980 or so to say 2020 was 40 years.  From my POV, the online model gets max 10 years from now, but that is only assuming there isn't a collapse of the Monetary System or a major Thermonuclear War.  Even without those cataclysmic events though, if the consumers are not being issued out enough credit to buy the merchanidse, it just won't sell.  An ever decreasing percentage of the population has access to such credit, generally issued out in the form of wages.  Without a UBI or something similar to keep the commerce going, it's finished.  As mentioned above though, UBI has its own set of problems, and besides that the political and financial Elite are not predisposed to handing out Free Money to anyone but themselves.  If all else is failing though, it may be undertaken and work for a short period of time.

What comes after this is anybody's guess, although it is likely to be a much more local system utilizing direct barter rather than money.  Also nearly certain at this point is an enormous reduction in the global population as the overall syatem of money and trade fails in ever larger circles beyond just the retail goods sold in malls.  In fact in many of the poorer countries, large segments of the population are already being priced out of affording food, which leads to increasing political destabilization in those countries.  Some quite large countries like Iran and North Korea can be included here, and these countries have means to strike out militarily if existentially threatened by food shortages, which seems likely.

Until this does turn into an armed conflict though, the best the local in any neighborhood can do is to try and develop some Food Security with long lasting foods in storage or means to grow your own, or both.  If you have lived inside it for a lifetime as I have, don't feel too guilty about mourning the demise of the Malls and all the great stuff they were selling for the last 40 years.  It was a dream, a hallucination, a mirage sold to all of us by those who stood to make an enormous profit from it and live richer than any King, Pharoah or Emperor from the past.  Unfortunately with such dreams, you eventually do wake up from them, and reality sets back in.  Then you gotta deal with that.

Shades of 1928

TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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Published on the Economic Undertow on December 7, 2017

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Discuss this article at the Economics Table inside the Diner

 

Led by these mighty knights of the automobile industry,
the steel industry, the radio industry… and finally joined
in despair, by many professional traders who, after much
sack-cloth and ashes, had caught the vision of progress,
the Coolidge market had gone forward like the phalanxes of Cyrus,
parasang upon parasang and again parasang upon parasang …

 

 

 

 

— Prof. Amos Dice, from ‘The Great Crash’ John Kenneth Galbraith

 

 

 

Since 2009, Americans have been privileged to participate’ in one of the great Wall Street bull runs in history. It is the longest other than the rally from October, 1990 until March of 2000. There have been other great runs; none quite so bizarre as ours considering the economy of much of the world is coming apart at the seams. Credit the banks and their ability to make magic, to lend enormously into the void, to deny reality.

Figure 1: Dow bull markets compared, Notice the little green line that goes up and down precipitously – the Roaring Twenties: (Schaeffers Research).

Bull markets are both psalms and proverbs of the progress narrative; they are driven by ruthless Ayn Randian ‘innovators’ and risk-taking ‘entrepreneurs’ who become rich by dint of their genius, producing gadgets heretofore only imagined, items revealed in the fullness of time to be indispensible.

The car industry is central to this narrative, its products and dependencies were the ‘tech story’ of the 1920s, as smartphones, and Bitcoin are today. Like today’s gadgets, the auto was disruptive: cars were fun to play with and conferred status on the owners. Driving challenged operators as there were multiple ways for the things to murder- strand or otherwise embarrass those who were unlucky or not paying attention. The challenge was part of the fun: industrial workers generally served the needs of their employers, they were slaves to the machines. Cars worked the other way ’round: the machines answered the desires of the operators, the interactivity between the two was a novelty.

More practically, cars offered an alternative to the grip of railroad monopolies and from the, uh … ‘languidity’ of shoe leather, horse-drawn carriages and steamships. It also promised to transform what up to that point had been an unending liability — distance — into an massively valuable asset. Talk about progress: America was a big country that was largely ‘underutilized’. The auto would convert scruffy backlands and hard-scrabble farms into valuable suburban developments; the farther away they were the greater need for auto ‘tech’! Adding more suburbs meant adding more automobiles. The more automobiles, the more areas to be set aside to accommodate them. Needless to say, the money-making potential of this process appeared to be without limit.

For the car industry, its rise was universally virtuous, coinciding as it did with Wall Street finance, the rise of media and marketing, of oil extraction and processing; of industry itself: steel and radio, heavy manufacturing and construction, tool-and-die making, foundry, precision machinery and materials handling equipment along with incremental automation. Along with millions of new cars, thousands of destinations were needed along with new paved roads to knit them together: all of this offered the promise of millions of new jobs. Also, service stations, refineries, pipelines, terminals and ports: electricity would be needed to power these things, money was needed to pay; in advance, on the barrel-head, borrowed at six percent or better.

During the ’20s, government was oblivious; the freshly elected Hoover regime of 1928 was like all others before or since: a prosperity government. The idea behind modern politics is that the various publics (and their bosses) are entitled as a birthright to live beyond their means. It was and is the responsibility of government to provide … or else a new collection of big-business lackeys government would be installed.

Part of governments’ responsibility is to make necessary resources available to business cartels at the lowest possible cost. Politicians were expected to lightly manage the prosperity that resulted; making certain that those at the bottom of the economic food chain were not over-supplied. The expression of this idea can be found in every kind of government including the dictatorships, republics and monarchies, constitutional and otherwise: all of these are prosperity governments. The various politics functioned more or less because there were always more resources to exploit: apparent resource growth and accompanying gross domestic product was able to race ahead of populations and their advertising- driven expectations.

In 1928, both government and industry were eager to genuflect in the direction of self-serving pieties. The tried-and-true (antiquated) ideologies of gold standard, ‘sound money’ and laissez faire non-interference in private sector affairs were universally embraced. Regulation was an anathema, government borrowing during peacetime was frowned upon, neither of these conformed to the ‘small government’ orthodoxy of the time. Regulation would only stifle innovation. Public sector borrowing could only crowd out private borrowers and starve businesses of funds. Yet, even as the car- and related industries expanded explosively using borrowed money, borrowing at the consumer level — top line business revenue, cash flow — was faltering. Deprived customers, the ‘little fish’ at the bottom of the economic food chain were unable or unwilling to borrow to service and retire the industries’ heavy debts.

The American middle class at the time was enthusiastic but too small to carry the burden assigned to it. Most of America’s 120- or so millions were small farmers or laborers providing services related to agriculture. Returns were meager; farmers swept up relatively inexpensive, durable Fords and retired their horse carts, by doing so they removed themselves from both cart- and car markets. Non-union industrial, service, extraction labor tended to be ‘wage repressed’; only a few could afford to buy a car. Accounting, management, retail, marketing, clerical and other ‘white collar’ employment was paid well enough but represented a modest fraction of the workforce. They filled the big cities’ close in ‘trolley suburbs’; they were not inclined to buy second or third houses … or second and third cars. By the start of the Hoover period, the markets were on their way to becoming saturated. Demand for goods started to decline and then commodity prices. Instead of the once-certain returns from industry, there was a more general turn toward speculation financed with debt ‘on the margin’.

“Mitchell asserts stocks are sound; Banker, Sailing From Europe, Says He Sees No Signs of Wall Street Slump. Predicts more mergers, declares Movement Will Continue With “Fusion of a Number of Big Banking Groups.”

— New York Times. October 16, 1929

 

 

 

By October, 1929, the government had made itself irrelevant almost by habit; business was left to its own devices. Managers appreciated this but did not grasp the consequences: they were marching purposefully into a pit of their own making, there to remain until the rise of a more ‘innovative’, ‘entrepreneurial’ government in Hitler’s Germany … and the world’s necessary response to it.

Dow crosses 24,000 mark as banks climb, techs rebound

 

 

 

 

(Reuters) – The blue-chip Dow Jones index raced past the 24,000 mark for the first time on Thursday, propelled by further gains for bank stocks and a recovery in technology shares.

The 30-member index has crossed four similar 1,000-point milestones this year on the back of strong corporate earnings, robust economic data and hopes that President Donald Trump’s tax plan would make headway.

 

 

 

Today, the government purposefully aims to do the same thing, to become irrelevant, to shrink itself until it can be drowned in a bathtub; to give free rein to gamblers without heed, to do so in order to answer obsolete ideological concerns. How can this end well? Speculation by nature escapes all bounds, taking on a life of its own. In the late ’20s there was a speculation frenzy in stocks and real estate. Now it’s bonds, stocks, real estate, art … the ‘everything bubble’. The consequences are not grasped: the fact of out-of-control speculation indicates the economy of physical goods and services is kaput: there is no more ‘real economy’: it’s gambling or nothing.

Stock prices have reached “what looks like a permanently high plateau,” Irving Fisher, Yale economist told members of the Purchasing Agents Association at its monthly dinner meeting at the Building Exchange Club, 2 Park Avenue, last night.

 

 

 

 

After discussing the rise in stock values during the past two years, Mr. Fisher declared realized and prospective increases in earnings, to a very large extent, had justified this rise, adding that “time will tell whether the increase will continue sufficiently to justify the present high level. I expect that it will.”

— New York Times, October 16, 1929

 

 

 

Now as then, bank money flows like a river into speculative assets driving up prices without any change to the nature of the assets themselves. These loans are basically unsecured. Giant firms borrow to buy their own shares, removing them from the float of those publicly available. The resulting scarcity premium is added to ‘fundamental’ share prices. There is nothing else to justify the increase; a market manipulation that has little- or nothing to do with firms’ returns.

The credit flood increases because it must; how else to meet the credit-driven high prices? Going forward, there is no other choice but to lend and to do so without restraint. Industrial business is fundamentally non-productive: it exhausts its capital and ‘manufactures’ entropy as its sole product. Neither the exertions of human labor or the application of new machines can hope to retire industrial debt. Only more loans can do this: lending must continue to expand or the entire enterprise falls off the cliff: ‘once on the debt treadmill it is impossible to step off’ …

While not all land speculating met with success, most investors in the beginning stages of the Florida Land Boom made a profit selling the land to others. An elderly man in Pinellas County was committed to a sanitarium by his sons for spending his life savings of $1,700 on a piece of Pinellas property. When the value of the land reached $300,000 in 1925, the man’s lawyer got him released to sue his children.

 

 

 

 

— Florida History

 

 

 

Fool me once … fool me over and over again! Even if lending continues without hesitation or restraint, it cannot do so forever as service costs are compounding, at some point marginal lending capacity is directed to debt service: the true ‘Minsky Moment’.

Moas now puts the line in the sand at $20,000 for the split-adjusted price when the new year hits. Looking at how things have gone so far for Moas, a month is a long time, and perhaps $20,000 will be broken before that time.

 

 

 

 

Tom Lee, rather conservatively, set a Bitcoin growth of 40 percent to happen by the middle of 2018. His prediction put him at $11,500. That prediction was made a week ago, and in that time Bitcoin topped at around $11,300.

Max Keiser has a much more bullish view, but over a longer time frame as the host of Russia Today’s Keiser Report believes that $100,000 Bitcoin is an eventuality.

— Coin Telegraph, 2017

 

 

 

 

Excess credit inflates the cost of new bitcoins which are basically math puzzles requiring increasingly expensive computing power to solve. Interesting … but to what end? The entire enterprise is the red-headed stepchild of unrestrained leverage: without bank credit, the gambling component and higher ‘bubble’ prices, bitcoin transactions and the infrastructure that supports them would be unaffordable. Like the incestuous/harmonious circular relationship between automobile and suburb, the relation between leverage and the ‘pseudo-currency’ is virtuously self-amplifying … up to a point: more bitcoins => higher prices => more bitcoins. In the end, the regime self-defeating because of the exogenous credit (and electricity) requirements. More suburbs => more cars => more sub … oops! More suburbs means older ones cannot generate the revenue needed to maintain them. More cars means it’s impossible to get anywhere because of the traffic!

The cryptocurrencies are Ponzi schemes, little different from those erected by Clarence Hatry and the ‘Match King’ Ivar Kreuger in the 1920’s. The term ‘currency’ here is simply a narrative flourish intended to shill the Ponzi as ‘innovative’. As with all other schemes of this sort the great majority of suckers who ‘invest’ in cryptos will lose everything, like those who invested in Goldman-Sachs’ Shenandoah- and Blue Ridge Corporations just before the crash:

Most exciting of all were the holding companies and the investment trusts [in the very late 1920s]. Both were companies formed to invest in other companies. And the companies in which they invested, invested in yet other companies that, in turn, invested in yet others. The layers could be five or ten deep. Along the way bonds and preferred stock were sold. The resulting interest payments and preferred dividends took some of the earnings of the ultimate operating company; the remaining earnings came cascading back to the common stock still held by the promoters. Or this happened as long as the dividends of the ultimate companies were good and rising. When these fell, the bond interest and preferred stock soaked up all the revenues and more. Nothing was left to go upstream; the stock in the investment trusts and holding companies then went, often in a week, from wonderful to worthless. It was an eventuality that almost no one had foreseen.

 

 

 

 

— ‘The Age of Uncertainty’, John Kenneth Galbraith

 

 

 

Nothing lasts forever, particularly bull markets. Hyman Minsky observed periods of prosperity and accompanying bull markets carry with them the seeds of their own destruction. Certainly after almost ten years of credit floods and manipulations the seeds are ripened.

If you see a Swiss banker jump out a window, jump after him. There’s surely money in it.

— Voltaire

 

 

 

Just don’t jump out unless it’s close to the ground, good advice that’s rarely followed. Both manias and crashes are expressions of the ‘Paradox of Thrift’, a condition that ordinarily prohibits one-way markets — one where all are buyers or all sellers (or all are thrifty). One-way markets cannot exist for long without severe consequences. A market where all participants are buyers means a market that is ultimately deprived of them. Everyone who is willing to buy expensive bitcoins, tract houses, Leonardo paintings, Manhattan penthouses, Tesla shares has done so: no one remains able to ‘buy from the buyers’. A market where all are thrifty is one where money is ‘saved’ out of circulation so that day-to-day business becomes impossible. A speculators’ market unravels when the supply of free-spenders is used up, then all are forced by conditions to become sellers at once …

Over time, citizens have been made over into ‘consumers’, investors have been forced into becoming speculators: this is the paradox of non-thrift. Americans are forced into penury on account of it, there is too much ‘stuff’ too much quasi-businesslike nonsense; goods have been over-consumed leaving markets that are saturated. As during 1928, businesses cannot endure periods when there is no consumption and they fail, the outcome is the same as too much thrift. Instead of a shortage of currency, there is the shortage of timely demand.

Unknown photographer, crowd outside the New York Stock Exchange building during Black Thursday, 1929.

Q: How would you describe the economy?

 

A: It is a system that allows a select few to borrow immense fortunes. The rest of us; you, me, everyone else, repay the debts.

Q: That’s it?

A: That’s it.

Donald Trump’s tax plan may not be perfect but its timing is: The world’s powers have just wrapped up their central banks’ Quantitative Easing giveaway to tycoons and corporations that began in 2009. Now the tycoons look to government with upturned fluttering hearts. In any case there is little but obligations for those at the bottom of the economic ladder. An unhappy consequence of QE was the oil price crash of 2014. As in 1928 the little guys lacked the credit to bid up the price of fuel. Without high prices, oil drillers were, and still are, underwater.

Tycoons and corporations have taken on more than debt than the rest — and their children — can ever hope to repay. Without credit access to those at the bottom of ladder, the tycoons must retire their own loans. By doing so they become non-tycoons just like everyone else. Thrift — whether it’s intentional or not — denies the tycoons funds, they are ruined by their own creditors, the creditors are likewise ruined. This is happening right now, behind the speculative razzle-dazzle; the steady pauperization of those at the bottom. The rise in asset prices offers a false impression, or more likely, gives a warning …

The only market indicator that matters, the price of gasoline: $2.50 per gallon is affordable for most Americans, over $3.50 and ‘problems’ start to appear in various world credit- and currency markets as they did in 2008. A worrying sign is the nearly three dollar price jump for premium gas, the kind required for luxury- and high performance cars. No wonder owners of these cars are begging for a tax cut.

Keeping Up Appearances

TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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Published on the Economic Undertow on October 18, 2017

Discuss this article at the Economics Table inside the Diner

 

As the US stock market reaches new all-time highs day after day after day, people ask, “When is your decline going to start? You promised!”

They are gracious, they leave out the, “you fucking idiot!” part.

When indeed is the ‘Big One’? Prognosticators announce impending catastrophe and it never happens. Prophets of doom are pilloried … the deflationary collapse never takes place. Instead there are the Pollyannas: “The good times are here, forever. You lost! Get over it!”

The overabundance of good times is certainly why every year thousands of ordinary suburbanites are overdosing on heroin: they obviously can’t stand all the winning! It turns out too much of a good (any)thing is toxic; more success and half the people in the country will be shooting Narcan into the other half. Meanwhile, ‘Brand X’ prognosticators are accused of crying wolf too often. Good grief! The wolf-criers are necessary because they create the ‘Wall of Worry’ that all bull markets must climb in order to reach new highs. Here is irony at work: we are murdering ourselves by way of our prosperity at the same time there is nothing we can do- or are willing to try in order to save ourselves from it!

Predicting out the future is … well, you know. The US government spends hundreds of billions of dollars to gather intelligence to predict … just about anything. There are a thousand different bureaus, agencies, organizations, one-man shops, Silicon Valley startups; also satellites, spy ships, aircraft, torture chambers, radio- and Internet intercepts: there are snoops, informants, analysts; the world is crawling with spies. None of above were aware the Soviet Union was about to come undone, they were unaware even as the collapse was taking place! None of these agencies foresaw the ‘Arab Spring’. They were caught with their pants down by every one of the various oil crises even as these were telegraphed by conditions on the ground well in advance. Analysts missed the fracking ‘revolution’, a forty-year old technology by the time it was finally deployed. Analysts missed the massive post-80s industrial revolution in China; they skipped school prior to the rise of #ISIS even though they had a hand in its creation. The analysts, bosses, money managers and central bankers missed one finance crisis after the other, they also didn’t recognize the tsunamis of excess credit that preceded each and every one of them. The word we look for here is ‘hard’. If it was easy to see into the future, everyone would do it and future would never happen, it would be predictable, like the past. Nothing would ever change. Predictability, permanence and stability … In a sense, the inability to predict serves our immediate interests. Predictability suggests ‘civilization’. We don’t want that.

We also don’t want a crash, that includes everybody in- and out of finance. Everybody wants to keep their jobs or get better ones, they want to keep their yachts and private jets, bonuses and stock options: we all have bills to pay. Even a modest decline in asset prices would mean collateral damage, (the) over-leveraged banks would be rendered insolvent. A 1931-style banking crisis would be devastatingly worse; managers are determined to do whatever it takes to prevent one. They’ve had almost ten years of practice as well as vast resources that can be brought to bear: key men are propped everywhere, there are bailouts. Moral hazard is infinite, real interest rates are negative. Banks effectively pay their largest clients to borrow — businesses, governments and tycoons. The statisticians lie, the media lies, economists are clueless and then they lie. Companies use cheap money to repurchase their own shares = these are Ponzi schemes. Manufacturers stuff inventory channels. Loans are extended to any- and all life forms that can draw breath. Because wars are good for business there are wars. Because depredation of nature is good for business our world and everything in it is … degraded. Because the economy is built around endless business expansion, there it is. If real expansion isn’t possible because of natural resource constraints, there is the fake expansion. We have become extraordinarily good at kicking the can, at keeping up appearances. This is why there is no crash today … we’ll worry about tomorrow when it comes. We predict the static condition of endless growth and by doing so we create it. The outcome is the bizarre, twilight ‘anti-civilization’- overly medicated world we have stuck ourselves with because we have given ourselves no other choice.

Figure 1: US GDP since the end of World War Two (Chart by Fred, click for big): Just as nobody correctly predicted collapse, nobody predicted our prosperity! Who in 1950 could have possibly guessed?

Looking at this chart it would be safe to predict national income would continue going forward as it has in the past. Yet, for most of human history the line was flat or changed very slightly, tracking the rise- and fall of human population. It summed up what resources (capital) could be accessed with muscle- and animal power, plus water, wind and firewood. As it is, everything below the blue line represents the total natural capital converted into waste by industrial America over the past 80 years = the ‘liability’ side of the GDP balance sheet. This is capital that can never be accessed a second time. The implication is there is are limits and that they are closer than they were 80 years ago. What the chart cannot indicate is how much capital remains accessible or how long it might take to exhaust it. As such, national income is an inadequate forecasting tool.

During the 82-year period on this chart there have been eleven recessions, added together these amounted to a total of 35 quarters, eight-and-a-half years of downturns. This means the US economy experiences declining growth about ten percent of the time with incidences being for the most part relatively brief, less than a year. Past performance suggests the next eighty year period will be similar with the economy being in recession about ten percent of the time. This isn’t set in stone: countries such as Australia and Netherlands have been able to avoid recessions for long periods; 25 years and more. An argument can be made that no obvious reasons exist why the US cannot do the same.

American recessions have tended to follow the credit cycle; periods of expansion followed by inventory buildup then fire sales. Credit is expanding now but this only feeds the illusions, (Andy Xie):

The mistaken stimulus (bank lending) has the unintended consequences of dissipating real wealth and increasing inequality. American household net worth is at an all-time high of five times GDP, significantly higher than the bubble peaks of 4.1 times in 2000 and 4.7 in 2007, and far higher than the historical norm of three times GDP. On the ­other hand, US capital formation has stagnated for decades. The outlandish paper wealth is just the same asset at ever higher prices.

Banks simply trade each others’ securities back and forth using self-generated credit, all the while pretending the process means something. As long as the banks can preserve the illusion of solvency the process can run on indefinitely: Dow 45,000,000.

Maybe not: the end comes when debt service costs consume total borrowing capacity; a ‘Minsky Moment’; what occurred in Argentina and Greece and is underway in Venezuela.

The end comes when finance players are perceived as insolvent in the way of Walter Bagehot:

 

“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone … “

This is what happened to Lehman Brothers in 2008: they were considered insolvent despite the protestations and proofs offered by the company, they could neither borrow nor lend, their credit was gone. And because Lehman was in most ways ‘like’ all the other money-center banks, it’s failure reflected on the others, their credit was gone as well.

The outcome was a bailout by the government and Federal Reserve: funds were handed over to the banks no questions asked, funds borrowed from the exact same banks that were bailed out! Outrageous … there was nowhere else the funds could have come from: the $700 billion dollars demanded by Treasury Secretary Hank Paulson in September of 2008, “Now or Never”- plus the tens of trillion$ offered afterward by Bernanke! Both government and Fed held their noses and ignored the widespreading rot and criminality. There was grumbling from the public but soon enough they followed the ‘lead’ of their betters, and why not? The alternative was a smashing depression that nobody wanted. Over time, the banks were seen to survive, executive bonuses remained intact: fakery succeeded and perceptions changed. A handful of companies were sacrificed, others nationalized or gobbled up by other firms. Meanwhile, ‘Green Shoots’: the sub-$40 oil prices of 2009 allowed the consumers to jump back into their SUVs and start shopping again, leading everyone to the point, “When is your decline going to start?” When, indeed …

Keep in mind, the Lehman debacle was part of a crisis that only a handful were able to foresee. Here is a proven forecasting tool, the Economic Undertow ‘Triangle of Doom™’:

Figure 2: Triangle d’ Doom, (by TFC Charts, click on for big): The descending trend line suggests the real credit capacity is shrinking. In 2008, the high price was $147 per barrel. By 2014 the triggering price could only reach $115 … there was insufficient credit to allow end users to bid past that price! All else being equal, the price high-enough to cause a credit event this year would be about $90 per barrel. If the price was that high, everyone would be feeling it including traders on Wall Street. The current price range of $40 – $60 per barrel represents a significant discount. It’s high enough to constrains consumption to some degree — by historical standards $50/ is high — but it’s not high enough to walk the system off the plank.

The smallish crash in the energy sector is why we haven’t had the giant crashes everywhere else. Even as low prices hammered drillers and fuel speculators, they saved the rest of the economy and boosted the stock markets! The drillers are further underwater than ever but this does not matter as they were underwater at the higher prices, they simply borrow more. Their job is to keep bankruptcy at bay each day as it comes … while looking for tomorrow to take care of itself.

The question next is how long would it take for declining credit sufficiency to cause the current fuel price to be ‘too high’?

Figure 3: The Triangle of Doom Extended (click on for big); this is a better representation of the trend line than Figure 2 which does not include the highest price point in 2008. Extending the line suggests a few more years of ‘cheap-ish’ fuel before even that price is unaffordable and the fuel regime collapses: roughly 2022. It could be a bit farther out or there could be another fuel price collapse. Should the Minsky Moment arrive or a major bank fail, the crisis would occur sooner.

Creditworthiness is an analog for available resource capital. As capital is exhausted, a greater proportion of what remains must be deployed to extract and consume what little remains. At some point this process itself … becomes unaffordable. Even now, end users’ credit access is up for grabs. Moral hazard, low interest costs and current monetary policy shift credit away from customers toward their vendors, tycoons and finance itself. As the customers are ’emptied out’ and fall by the wayside support for those who depend on them and their flow of credit evaporates: over the longer term, tricks used to keep up appearances cannot substitute for top line revenues and actual solvency.

… and It’s called ‘progress’.

In the ‘old days’ civilizations were local. One could fail ‘over here’ even as others survived ‘around the corner’. Our industrial waste-based economy is global; universality brings all resources including crude oil within our grasp. Regardless of the markets, resource exhaustion is ongoing, this is the background story: it must be paid attention to. Everything else we do is part of the fooling ourselves process.

The goods offered by now-obsolete civilizations were permanence and stability. These are not really goods at all but rather moral virtues representing the ascendance of human ambition to an idiosyncratic upper limit of physical and mental development. Periods of high civilizations were considered to be ‘golden ages’ and for good reason. The narrative was one of humans emerging from animalistic savagery and barbarism, evolving to the point of imagining themselves possessed of the characteristics of gods. Reaching this near-godlike state was meant to be permanent; why not? If not actual gods how about the next best thing? The dynamic was virtue — civic and otherwise — leading to its attainment set in granite; ‘how to’ could only be earned with mastery and sustained effort. The means to virtue was self discipline, creativity and imagination. The civilized were certainly not paupers but it did not matter; the civilized whole was always greater than the sum of individual components.

Fast forward; godliness has been reduced one of a long line of frauds and sales-pitches, replaced by consumer goods and the banal processes to emit them. Virtue to- permanence is the antithesis of economic growth. Permanence means no markets for (new) smartphones, ‘e-cars’ or tract houses every other year or so, it also means nobody cares whether they have these things or not. Social media gadgetry, Sheetrock and plastic junk are offered up as aspirational, but these are meaning-free counterfeits, available to anyone with a charge card. In the place of civilization we have ‘the’ economy: it permits us to buy, to speculate, cannibalize, burn and waste and to borrow. Economy doesn’t allow us to ‘create our way out of the box’ — any box. Creativity gets in the way of the buying and the borrowing needed for the economic throughput regime to continue. Economy exalts mediocrity, sameness, loss of identity and transience, all in the service of fashion as the highest and most comforting (non-) virtues. The standards industrial economy set for itself are minuscule, the bar is always low, stumbling over it is easy, the costs, so far, are low. At the same time, the inability to stumble is never enough to undo the project. In this way mediocrity ‘normalizes’ or recalibrates the meaning of success in all the different ways to serves itself … to the point where half the people are busy reviving the corpses of the other half.

Mediocrity is itself an industrial product like (canned) pleasure and the ‘good jobs’ that never materialize. The physical products of industry are clichés rendered as such by design, they are the containers- or bearers of mediocrity. The mediocratic status of the products reinforces that of the enterprise that extrudes them like turds from the endless furnaces, pit mines and assembly lines. (False) hope — marketing — propels the process, the promise of something better, of a slightly less mediocre tomorrow. No wonder we are in a state of clinical depression: it’s “gimme the dope or get me out of here”! By jettisoning civilization we have left ourselves with nothing to reach for, we are stranded in the twilight, half-men, no longer godlike but not quite devils, either. We have become nothings, we are the sour taste inside our own mouths.

Growth has become the only permissible revolution against the status quo. ‘Old stuff’ is never good enough except with the added ‘nostalgia premium’. The imperative is always more, everything ‘more’ must be new. All else is subject to ‘creative destruction’. Even as these old things are proven useful, they ‘stand in the way of progress’ so out they go! Where does that leave us? Waiting for our chance at the Narcan.

Mismodelling Human Beings

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Published on Credo Economics on July 21, 2017

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“rational economic men” in love, politics and everyday life

This chapter explores the assumptions about human nature on which mainstream economics is based. The description of “rational economic man” ignores most psychological and psychotherapy understandings of people.

Key to the conceptual confidence trick are assumptions about what people in general are like. It is all based on an implicit modelling of human beings. Certain types of behaviour (the type that allows economists to model people and markets) are called “rational”. Now, you might think that this description of people is meant by economists to be applicable only to economic and market activities. Certainly this was the point of view of one of the founders of the famous Chicago school of economics, Frank Knight. Although committed to the alleged virtues of the market, Knight was not naive about how far you could take economic analysis. In his book Risk, Uncertainty and Profit he concluded that economics only applied to the satisfaction of wants, and that this business of satisfying wants by no means accounted for all of human activity. Indeed Knight questioned how far one could go with a “scienti c treatment” of human activity and wrote of his own views:

In his views on this subject the writer is very much an irrationalist. In his view the whole interpretation of life as activity directed towards securing anything considered as really wanted, is highly artificial and unreal. (Backhouse, 2002, p. 204)

Some contemporary economists of the Chicago school don’t see it this way. If people are calculating their individual self interest in their economic dealings why should one assume that they do not do the same thing in their political, their social and their interpersonal dealings? Should we not also assume that government ocials are calculating their interests too? At the very least, why should contact between business and government not lead to a cosy relationship, particularly if people can leave government posts and get lucrative jobs with industry? What about bribes and kickbacks from business for special favours?

As I argued earlier, we can take the idea from Anaïs Nin that we do not see things as they are – we see things as we are. There is likely to be a loop in which a theory which describes how people are assumed to be, when powerfully propagated in textbooks as “social science”, will have an influence on how people behave. With economics we have a theory which argues that if people just look after their own interest that’s OK because “an invisible hand” described by wizard intellectuals delivers an approximation to an optimal allocation of resources. Under the influence of a view like this, concern about what is in a wider interest is not likely to blossom. It is unlikely to figure as a motivation or concern. As individualists people will look no further than themselves. They do not need to look further than themselves because the “invisible hand” will do the rest.

It is quite logical to believe that if people are actually like this then their attitude to the community and to the state will be framed in the same terms. Such people, customers of the state, rather than citizens and members of communities, will then have an interest in getting the best deal from the state to pursue their own individual agendas.

the context of Keynesian economics

When I studied economics at the end of the 1960s, the textbooks, for example by Paul A Samuelson, pictured a world where the state was essentially benevolent and independent from business. A democratic process determined what policies the state would adopt and economists were the technical advisers making clear what the policy options were. There was an implied idea that governments, politicians and public offcials would regulate markets without being contaminated by the self-interest motivation of those markets. The idea that the state could be captured by business interests while the majority of the people were effectively excluded from real influence was not expressed in the textbooks.

At that time, at the end of the 1960s, experience of the depression and then of the war had left an effect on public consciousness, including the consciousness of the elite itself – and it left its mark on economics. Fighting the war had been a massive common project which was collectively transforming. The values of British people shifted as a result of the equalising effect of the Second World War – rationing, conscription, the abolition of first class carriages in trains, evacuation and sharing bomb shelters. Military outlays as a per cent of national income in the UK went from 15% of national income in 1939 to 44% in 1940 to 53% in 1941 and as high as 55% in 1943. (Harrison (ed), 1998) After the war, the sense of what could be done when people worked together and decided what was a priority was quite different and there was a collective rejection of the idea of returning to the politics and economics of the 1930s. (Addison, 1975)

This was the context in which the welfare state and Keynesian economics was adopted. The allocation of resources mobilised for, and by, the state was something that a majority of ordinary people believed in. The mood was little different in the United States too, albeit that the US, having won the war, went straight into the cold war, involvement in Korea and the anti-communist hysteria of McCarthyism. Nevertheless there was a different context for textbooks like that of Paul Samuelson.

But by the late 1960s things were beginning to change again. Young people like myself took the welfare state for granted and chafed under the authoritarian paternalism of the elite. These conditions created the basis for a valid questioning of the disinterestedness of the state and its o cials. This idea evolved into “the new left ” but also towards the political right. A very different analysis to that of Samuelson in regard to the relationship between business and the state took hold in economics.

the rise of the chicago school

The idea that the state could be, and was captured by interest groups was valid. The hostility to the communist planned economy, the personal libertarianism born in cynicism about the paternalism and corruption of officials, as well as by backlashes against politicians, officials and the state, led to the growth of fervent market fundamentalism spearheaded by economists at Chicago University. Their ideal was to go all the way and for the state to be driven out of market activity to the maximum extent possible.

Milton Friedman and Arnold Harberger welcome the boys to class at the Chicago school of Economics. https://www.flickr.com/photos/donkeyhotey/4396155916/ https://creativecommons.org/licenses/by-sa/2.0/
Milton Friedman and Arnold Harberger welcome the boys to class at the chicago school of Economics.
https://www.flickr.com/photos/donkeyhotey/4396155916/ https://creativecommons.org/licenses/by-sa/2.0/

To a new generation of Chicago economists, the rational utility calculating individual was a description that could be applied to the understanding of all human behaviour, not just that in the market place.

For example, to Gary Becker at Chicago, racism is a preference choice of who you want to live near and who an employer might want to employ. Note, Becker did not see himself as endorsing or condemning – he merely saw himself explaining and drawing out the consequences.

The model of “rational economic behaviour” was used by Becker and another theorist, Richard Posner, to explain “love”, marriage and prostitution in a utilitarian framework. Marriage is a relationship involving “reciprocal service provision” which saves on the transaction costs like pricing each “service” that a couple provide for each other, as in removing the need to keep accounts for these services. In this way of thinking prostitution is, by contrast, thought of as a “spot” sexual transaction where it is “more efficient” to pay for the service in money.

The same approach is used by Becker to explain crime. Most people don’t steal because it would not be profitable but in the life circumstances of criminals, the rational maximisation of costs and bene ts of crime does make it pay. This is another form of the redistribution of income in the same broad category as government welfare programmes. (Nelson R. H., 2001, pp. 166-189)

The trouble with this view is that it is at best tautologically true in a sense that is banal. People do things because they want to and thus, they must get satisfaction or utility from doing and deciding what they do. However, it makes little sense of the many actions taken by people where they are con icted; where they act in ways that involve self-sacrifice for moral reasons; where there is genuine anguish about their difficult decisions and where they do things because they think they ought to, not because it gives them any satisfaction at all. They act altruistically, get depressed, act out of compassion, and do crazy things. None of these fit into the model.

a faulty view of humanity

As Kalle Lasn puts it, in the book Meme Wars: The Creative Destruction of Neoclassical Economics “Neoclassical economics has achieved its coherence as a science by amputating most of human nature.” (Lasn, 2012)

This amputation is done on the assumption that unless some internal measure of happiness or freedom from pain – utility – acts as a common yardstick, it is not possible for human beings to evaluate between options and make their choices. However, as philosopher Alan Holland points out:

Happiness is not a homogenous item, but a mosaic of heterogeneous elements. There is just no common substance – no utility – by which to compare, for example, the suffering experienced by an experimental animal with the understanding gained by the experiment. Nor is this a point about moral reasons only but about reasons generally. The determined egoist, confronting a chocolate bar that will ruin his or her waistline, will soon find that he or she has to decide between vanity and greed, and will just as surely fail to find an appropriate value in terms of which to compare the alternatives. Self-interest is not such a value as it is as heterogeneous an objective as happiness. (Holland, 2002, p. 27)

As the example of Britain after World War II shows, values shift according to social, economic and political conditions. This alone makes nonsense of the idea that people are driven by personal utility calculations in the manner described by neoclassical economists.

Rather, psychologists have looked at what motivates people all around the world in different cultures and have come up with a more complex picture. Decades of research and hundreds of cross-cultural studies have identified consistently occurring human values which can be grouped into ten broad categories: universalism, benevolence, tradition, conformity, security, power, achievement, hedonism, stimulation and self-direction. (PIRC, 2011, pp. 12-20)

Each of us is motivated by all 10 of the value categories, albeit to varying degrees – and the ten groups of values can be divided along two major axes:

1. Self-enhancement (based on the pursuit of personal status and success) as opposed to self-transcendence (generally concerned with the well-being of others)
2. Openness to change (centred on independence and readiness for change) as opposed to conservation values (not referring to environmental or nature conservation, but to “order, self- restriction, preservation of the past and resistance to change”) (PIRC, 2011, p. 17)

Mainstream economists have identified a part of what motivates people but mislead because they have too narrow a view. The values that economists describe as motivating people are best described as “extrinsic”. Values that are centred on external approval and rewards e.g. wealth, material success, concern about image, social status, prestige, social power and authority. However, people are motivated by intrinsic motivations too. One of the themes of this book is to show that we get a clearer picture of reality when we describe actions and economic consequences arising from different starting motivations – some of which are anti-social and some of which are pro-social.

Navigating 21st Century Hopelessness

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Published on The Doomstead Diner July 16, 2017

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Is our techno-industrial way of life fundamentally benevolent?  Is it advisable to continue perpetuating a civilization that is predicated by non-renewable fossil energy sources as well as unsustainable rates of renewable resource extraction?  Our civilization requires an ever growing GDP to be considered healthy.  This is a measure of production in terms of consumption.  Our literal benchmark for the health of our society is based on how much we can consume in a year as a nation.  The reason for this is to create monetary profit for the individuals of this society whom have shares in the corporations controlling this production.  The actual physical wealth of the world is subjugated to the tune of dollars and cents.  To make this pathway possible it requires a proletariat class willing to sell their lives for an hourly rate.  This hourly rate is the lowest possible rate so as to not reduce the profit that’s stolen from the resources of the Earth and the energies of its peoples.  This hourly rate is about making money and not about stewardship of any kind.  It does not have to be like this, but that is a delusory sentiment based on idealism. 

The road to ruin for our species began with agriculture.  Before agriculture emerged there was no need for money, and so it did not exist.  Agriculture allows for civilization which requires money to function.  With the creation of money we stratify into economic classes of people.  Once money is created life becomes about servicing this need for monetary acquisition.  Before money life is about engaging with nature to acquire food, fuel, fiber, medicine and shelter.  In aggregate these actions create a healthy human culture.  Agriculture allows for money and removes the limiting factors for our numbers.  Before agriculture the limiting factor is the amount of food that can be sustainably hunted and gathered.  The hunter/gatherer life is mostly nomadic as we follow the animals and plants through the seasons which define their lifecycles.  Our lives are imbued with rich somatic meaning as we engage with the body of nature.  We are from this Earth, and we inhabit it as a corporeal being made of the elements.  We evolved both physically and spiritually within the framework of our physical Earth.  Our health depends on engaging with nature to create life and its meaning.  The fall from paradise began with domestication which is nothing less than the taming of wild nature.  Domestication is tandem to agriculture and literally creates civilization.  What is being civilized if not the opposite of wild?  The two are anathema to one another. 

Agriculture means that we stop moving around.  It means that we domesticate ourselves as well as the wild beasts of nature.  It sets up the conditions that allows for a great competition between us and nature.  All of a sudden our culture becomes one of domination and control rather than harmony.  Being rooted in one place we begin building monuments to hubris.  We get bored and invent competition.  We stockpile food and create war and plague.  We set up the conditions for disease and famine and warfare (although nomadic people still do occasionally fight with opposing tribes).  We argue and debate and create inequality amongst our people.  Life becomes a struggle to create meaning and avoid boredom.  Eventually, as we move further and further from our natural origin, habitat, and culture the enchantment of being evaporates. We are left with a driving urge to consume to fill this void of meaning that emerges due to our domestication.  Time continues forward and our habits create technologies to service convenience.  We become lazy and our bodies grow fat with our sedentary nature which arises from our domesticated captivity.  No longer do we need our bodies for anything more than acquiring money.  We then want pleasure to fend off boredom and meaninglessness.  Life is no longer about dancing in the wild where we are from and where we return to.  Civilization is nothing more than something to do in the great illusion that we create for ourselves.  This is the way that it is.  The Matrix was born with the first surplus of cereal grain. 

Is there anything that can be done about this?  It seems to me that we are at the end of this failed experiment in hubris.  There is no harmony in domination and control and consumption.  There is only waste, disease, and poison by way of ecocide and genocide.  Our quest for the production of unlimited energy against the gradient of entropy has created cancer.    In the end we cannot dominate nature.  Aside from money the quest for domination  is the great fallacy of civilization.  We cannot think our way out of the limiting factors of ecology.  Our modern techno-industrial civilization will run out of the fossil blood that sustains it.  We will lose the capacity to safely maintain the nuclear power plants that liter the surface of the Earth.  They will spew out DNA damaging clouds of radioactivity as they have already begun doing.  The rain will become poisonous to life.  As we fight to continue this failing technotriumphalism we will continue increasing the CO2 in the atmosphere which will continue heating the human supporting biosphere.  Natural disasters will continue increasing in number and severity.  Our hubris has metastasized into a cancer that will shrink our settlements as the habitable regions atrophy.  Nothing is going to stop this process now.  All that remains is answering the question of what to do about this inevitability.  We have entered into the age of doom. 

There is no escaping this destiny that we have perpetuated.  The most unfortunate aspect about this hopelessness is that man cannot live without hope.  Hope makes life worth living.  Is hope itself a delusion?  What are we to hope for?  The nature of existence is a destiny with death.   The time we have between birth and death needs to be animated by meaning.  Meaning is derived from a harmony with all life.  Our civilization is marked by domination and control.  There is no harmony in control.  The great struggle is finally about the nature of life because life wants to live.  We must maintain ourselves within the boundary of our skin while we are here walking the Earth.  The overwhelming desire is to do this devoid of pain and misery.  The tragedy of man is to think that he can avoid his own nature by the creation of a technological utopia.  Life cannot be about domination and control, but that is what man forces it to be.  We are teetering in a suspended animation just before the moment of expiration.  We are flailing about in denial of this process of resolution.  Maturation as a species must culminate in an acceptance of suffering and death.  We must accept our temporary nature, stop struggling, and lie down in the great current of life.  We swim against this entropic process everyday as we participate in this civilization.  We collectively attempt to keep the center from flying apart under the pressures of our own technologically created centrifuge.  We struggle in vain against the pressures of physical dissolution.  We create illusions to fight against the natural process of becoming to fall apart. 

The first act was rife with physical struggle within the framework of existing in harmony with nature.  Hubris arose and we thought we could become gods using the power of physical manipulation.  We thought we could master the universe with our cleverness.  We are collectively a breaking wave, and nothing will stop the pull of gravity as we are recycled back into the void which we originally manifested from.    Idealism is nothing more than the ravings of a mental lunatic.  Idealism is a delusion that is born from the struggle to acquire more than we need.  Fighting against entropy is finally not worth it.  Yet this fight is what it means to inhabit a physical body. 

In the final analysis life must be about observing beauty.  Without beauty it is not worth living.  We have made a mess of this beautiful blue/green orb that’s floating about the universe.  We have partied our way to desolation.  Yet the Earth keeps spinning around in outer space in its dance with the sun that sustains us.  Every morning the sun reemerges to give us another day of life.  Our great challenge is to honor this life by creating beauty and not it’s opposite.  We have created a lot of ugliness.  Maybe the secret to this 21st century hopelessness is to learn how to make beauty out of malevolence.  Or maybe we should just stop struggling and accept the final act of misery which we have written for ourselves?  Or maybe we can simply embrace our collective ugliness with grace?  Without love and beauty this great struggle that is life is not worth it.  The greatest challenge that we face is learning to love and observe beauty even as love and beauty vanish under the oppression of our own collective delusions. 

The nature of a body is to act.  How are we to act?  We should act to minimize suffering for all sentient beings while honoring our bodily nature.  Every day is a new day to make the right decisions.   Yet every day requires a certain amount of money.  This is why my conclusion is that a lifestyle that requires no money is the only truly benevolent lifestyle.  That lifestyle is a fiction in this world we have created.  This world is quite literally hell on Earth.  Therefore we must learn to love and find whatever beauty we can while in hell.  We must not resist as we realize our ultimate destiny of assimilation with the machine we have created.  I’ve tried finding work arounds to the truth that life is suffering, but the only way to win is to let go, stop resisting, and accept the nature of this great delusion.  Manifestation is transience in action, and our resistance arises within that transience only to dissolve back into the void that is death.  All that is created within that resistance is more suffering.  Yet still we must act in the world, and how should we act when our actions only serve to create more suffering?  The heart of our civilization is the creation of suffering, and to participate only adds to this toll.  Not participating in this civilization can be our only spiritual redemption.  For the life of me, and my children, I cannot figure out how to not participate. 

Doughnut Economics

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Published on Cassandra's Legacy on June 17, 2017

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Doughnut Economics:a step forward, but not far enough


Doughnut Economics, by Kate Raworth (Chelsea Green, 2017) is an interesting book that goes in the right direction in the sense that it promotes a circular economy, But it leaves you with the impression that it missed that extra step that would have lead it to define the goal in the right way. Bridging the gap between standard economics and biophysical economics is still far away.

So, what is this "Doughnut" that gives the title to the book? Initially, I had imagined that it was supposed to be a sort of mandala representing the concept of circular economy. But that doesn't seem to be the case: circular mandalas often represent the cyclical movement of a wheel, but the doughnut doesn't (as, indeed, most doughnuts are not supposed to be used as wheels). Here is how it is represented in the book:
 


It is described as "a radically new compass for guiding humanity this century." Ambitious, to say the least, but how is that supposed to work, exactly? Maybe I am missing something, but I not sure I can understand why the numerous concepts appearing in the figure should be arranged in a "doughnut."

The problem with the doughnut is not so much understanding why it is shaped like a doughnut, but what it lacks. Look at the outer ring; you will see 10 sectors, all related to pollution: climate change, ocean acidification, chemical pollution, etc. Something is conspicuously missing and it is not a minor element of the overall picture. It is natural resources and, in particular, non-renewable resources (*)

Natural resources, their depletion, and the related concept of "overshoot" are not just missing from the doughnut, they go mostly unmentioned and unnoticed in the whole book. To give you an example, Raworth mentions only once the 1972 study "The Limits to Growth" that was the first to pinpoint the resource problem. In a discussion of less than than two pages, I think her position can be summarized by the following statements:

Mainstream economists were quick to deride the model's design on the basis that it underplayed the balancing feedback of the price mechanism in markets. If non renewable resources became scarce, they argued, prices would rise, triggering greater efficiency in their use, the wider use of substitutes, and exploration for new sources. But in dismissing World 3 and its implied limits to growth , they too quickly dismissed the role and the effect of what the 1970s model simply called pollution … World 3's modeling of pollution turned out to be prescient…. recent data … find that the global economy seems to be closely tracking its business-as-usual scenario.

As it is often the case in this book, Raworth's statements need some work to be interpreted because they are always nuanced; if not vague, as when she says one should be "agnostic" about economic growth (**). Here, the interpretation seems to be that The Limits to Growth may have been right, but only because it took into account pollution. Instead, its treatment of non-renewable natural resources was wrong because depletion can be completely neutralized by market factors. Raworth doesn't seem to realize that she is contradicting herself, here: if the "business as usual" scenario produced good results in terms of comparison with the real world's economy, it is because it contained depletion as a major constraint. World 3 could also be run in the hypothesis of infinite natural resources, with pollution the only constraint, but the results would not be the same.

That's the thread of the whole book: natural resources are not a problem; we should be worried only about pollution. Raworth doesn't link the concept of the circular economy to recovering non-renewable resources; she proposes only in relation to abating pollution, with the corollary that it also brings about also better social equality. This is not wrong; it is true that a cyclical "regenerative" economy would be able, in principle, to reduce or eliminate pollution. Still, it is curious how the question of mineral resources is so conspicuously missing in the book.

Kate Raworth is described in the book flap as a "renegade economist", but she still reasons like an economist. The idea that the price mechanism will make depletion always irrelevant is old and it goes back to the 1930s, when the so-called "functional model" was presented, stating exactly what Raworth describes. The idea is that market factors will always re-adjust the system and magically make depletion disappear. By now, the functional model is deeply entrenched in the standard economic thought and there seems to be no way to dislodge it from its preheminent position.

The interesting point is that not only economists tend to dismiss depletion as irrelevant. In recent times, the whole "environmental movement" or the "Greens" have taken exactly the same position. All the debate about climate change is normally based on the supposition that minerals, and in particular fossil fuels, will remain cheap and abundant for the current century. If this is the case, it makes sense to propose to spend untold amounts of money for carbon capture and sequestration (CCS) rather than for renewable energy. It goes without saying that, if this assumption turned out to be wrong, the whole exercise of CCS, if it were undertaken at the necessary scale, would turn out to be the greatest resource misplacement of resources in human history, possibly even worse than nuclear energy.

Why is that? As a puzzle, it is difficult to solve. In principle, resource depletion and its negative effects would seem to be easy to understand. Easier than the complex chain of physical factors that leads from the emission of greenhouse gases to disastrous events such as sea level rise, heat waves, hurricanes, and the like. Maybe it is just a question of the lifetime of memes. The meme of depletion started before that of climate change and it is now in its downward trend. Whatever the case, we seem to be locked in a view of the world that misses some fundamental elements of the situation. Where this special form of blindness will lead us is all to be seen. 

Getting back to Raworth's book, despite the criticism above I can also say that it is worth reading for its broad approach and the wealth of concepts it contains. Its discussion on how the science of economics came to be what it is nowadays is, alone, worth the price of the book. Although it misses part of the problem, it may open up new views for you.

(*) You may also have noticed that the concept of "overpopulation" is missing in the doughnut. On this point, Raworth maintains in the text that if people are given the possibility of having a life free of deprivation, they won't reproduce like rabbits – a concept on which I tend to be in agreement; even though its practical implementation in the current world's situation is problematic, to say the least.

(**) The idea of a "zero growth" or "steady state" society would seem to be a fundamental feature of a circular economy, but it is barely mentioned in the book

Using Energy to Extract Energy – the Dynamics of Depletion

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Published on FEASTA on June 21, 2017

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The “Limits to Growth Study” of 1972 was deeply controversial and criticised by many economists. Over 40 years later, it seems remarkably prophetic and on track in its predictions. The crucial concept of Energy Return on Energy Invested is explained and the flaws in neoclassical reasoning which EROI highlights.

The continued functioning of the energy system is a “hub interdependency” that has become essential to the management of the increasing complexity of our society. The energy input into the UK economy is about 50 to 70 times as great as what the labour force could generate if working full time only with the power of their muscles, fuelled up with food. It is fossil fuels, rfined to be used in vehicles and motors or converted into electricity that have created power inputs that makes possible the multiple round- about arrangements in a high complex economy. The other “hub interdependency” is a money and transactions systems for exchange which has to continue to function to make vast production and trade networks viable. Without payment systems nothing functions.

Yet, as I will show, both types of hub interdependencies could conceivably fail. The smooth running of the energy system is dependent on ample supplies of cheaply available fossil fuels. However, there has been a rising cost of extracting and refining oil, gas and coal. Quite soon there is likely to be an absolute decline in their availability. To this should be added the climatic consequences of burning more carbon based fuels. To make the situation even worse, if the economy gets into diffculty because of rising energy costs then so too will the financial system – which can then has a knock-on consequence for the money system. The two hub interdependencies could break down together.

“Solutions” put forward by the techno optimists almost always assume growing complexity and new uses for energy with an increased energy cost. But this begs the question- because the problem is the growing cost of energy and its polluting and climate changing consequences.

The “Limits to Growth” study of 1972 – and its 40 year after evaluation

It was a view similar to this that underpinned the methodology of a famous study from the early 1970s. A group called the Club of Rome decided to commission a group of system scientists at the Massachusetts Institute of Technology to explore how far economic growth would continue to be possible. Their research used a series of computer model runs based on various scenarios of the future. It was published in 1972 and produced an instant storm. Most economists were up in arms that their shibboleth, economic growth, had been challenged. (Meadows, Meadows, Randers, & BehrensIII, 1972)

This was because its message was that growth could continue for some time by running down “natural capital” (depletion) and degrading “ecological system services” (pollution) but that it could not go on forever. An analogy would be spending more than one earns. This is possible as long as one has savings to run down, or by running up debts payable in the future. However, a day of reckoning inevitably occurs. The MIT scientists ran a number of computer generated scenarios of the future including a “business as usual” projection, called the “standard run” which hit a global crisis in 2030.

It is now over 40 years since the original Limits to Growth study was published so it is legitimate to compare what was predicted in 1972 against what actually happened. This has now been done twice by Graham Turner who works at the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO). Turner did this with data for the rst 30 years and then for 40 years of data. His conclusion is as follows:

The Limits to Growth standard run scenario produced 40 years ago continues to align well with historical data that has been updated in this paper following a 30-year comparison by the author. The scenario results in collapse of the global economy and environment and subsequently, the population. Although the modelled fall in population occurs after about 2030 – with death rates reversing contemporary trends and rising from 2020 onward – the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. (Turner, 2012)

So what brings about the collapse? In the Limits to Growth model there are essentially two kinds of limiting restraints. On the one hand, limitations on resource inputs (materials and energy). On the other hand, waste/pollution restraints which degrade the ecological system and human society (particularly climate change).

Turner finds that, so far it, is the former rather than the latter that is the more important. What happens is that, as resources like fossil fuels deplete, they become more expensive to extract. More industrial output has to be set aside for the extraction process and less industrial output is available for other purposes.

With signficant capital subsequently going into resource extraction, there is insufficient available to fully replace degrading capital within the industrial sector itself. Consequently, despite heightened industrial activity attempting to satisfy multiple demands from all sectors and the population, actual industrial output per capita begins to fall precipitously, from about 2015, while pollution from the industrial activity continues to grow. The reduction of inputs to agriculture from industry, combined with pollution impacts on agricultural land, leads to a fall in agricultural yields and food produced per capita. Similarly, services (e.g., health and education) are not maintained due to insufficient capital and inputs.

Diminishing per capita supply of services and food cause a rise in the death rate from about 2020(and somewhat lower rise in the birth rate, due to reduced birth control options). The global population therefore falls, at about half a billion per decade, starting at about 2030. Following the collapse, the output of the World3 model for the standard run ( figure 1 to figure 3) shows that average living standards for the aggregate population (material wealth, food and services per capita) resemble those of the early 20th century. (Turner, 2012, p. 121)

Energy Return on Energy Invested

A similar analysis has been made by Hall and Klitgaard. They argue that to run a modern society it is necessary that the energy return on energy invested must be at least 15 to 1. To understand why this should be so consider the following diagram from a lecture by Hall. (Hall, 2012)

eroei

The diagram illustrates the idea of the energy return on energy invested. For every 100 Mega Joules of energy tapped in an oil flow from a well, 10 MJ are needed to tap the well, leaving 90 MJ. A narrow measure of energy returned on energy invested at the wellhead in this example would therefore be 100 to 10 or 10 to 1.

However, to get a fuller picture we have to extend this kind of analysis. Of the net energy at the wellhead, 90 MJ, some energy has to be used to refine the oil and produce the by-products, leaving only 63 MJ.

Then, to transport the refined product to its point of use takes another 5 MJ leaving 58MJ. But of course, the infrastructure of roads and transport also requires energy for construction and maintenance before any of the refined oil can be used to power a vehicle to go from A to B. By this final stage there is only 20.5 MJ of the original 100MJ left.

We now have to take into account that depletion means that, at well heads around the world, the energy to produce energy is increasing. It takes energy to prospect for oil and gas and if the wells are smaller and more difficult to tap because, for example, they are out at sea under a huge amount of rock. Then it will take more energy to get the oil out in the first place.

So, instead of requiring 10MJ to produce the 100 MJ, let us imagine that it now takes 20 MJ. At the other end of the chain there would thus, only be 10.5MJ – a dramatic reduction in petroleum available to society.

The concept of Energy Return on Energy Invested is a ratio in physical quantities and it helps us to understand the flaw in neoclassical economic reasoning that draws on the idea of “the invisible hand” and the price mechanism. In simplistic economic thinking, markets should have no problems coping with depletion because a depleting resource will become more expensive. As its price rises, so the argument goes, the search for new sources of energy and substitutes will be incentivised while people and companies will adapt their purchases to rising prices. For example, if it is the price of energy that is rising then this will incentivise greater energy efficiency. Basta! Problem solved…

Except the problem is not solved… there are two flaws in the reasoning. Firstly, if the price of energy rises then so too does the cost of extracting energy – because energy is needed to extract energy. There will be gas and oil wells in favourable locations which are relatively cheap to tap, and the rising energy price will mean that the companies that own these wells will make a lot of money. This is what economists call “rent”. However, there will be some wells that are “marginal” because the underlying geology and location are not so favourable. If energy prices rise at these locations then rising energy prices will also put up the energy costs of production. Indeed, when the energy returned on energy invested falls as low as 1 to 1, the increase in the costs of energy inputs will cancel out any gains in revenues from higher priced energy outputs. As is clear when the EROI is less than one, energy extraction will not be profitable at any price.

Secondly, energy prices cannot in any case rise beyond a certain point without crashing the economy. The market for energy is not like the market for cans of baked beans. Energy is necessary for virtually every activity in the economy, for all production and all services. The price of energy is a big deal – energy prices going up and down have a similar significance to interest rates going up or down. There are “macro-economic” consequences for the level of activity in the economy. Thus, in the words of one analyst, Chris Skrebowski, there is a rise in the price of oil, gas and coal at which:

the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time. (Skrebowski, 2011)

This kind of analysis has been further developed by Steven Kopits of the Douglas-Westwood consultancy. In a lecture to the Columbia University Center on Global Energy Policy in February of 2014, he explained how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in “conventional oil” production but has merely served to slow what would otherwise have been a faster decline.

More specifically, the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that amount, $3.5 trillion was spent on the “legacy” oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production, it fell by 1 million barrels a day. By way of comparison, investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.

The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies cannot cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening. Another story provides a better metaphor – that story is “Catch 22”. According to Kopits, the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel.

But it is these oil prices that drag down the economies of the OECD economies. For several years, however, there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)

Since the oil price is never “just right” it follows that it must oscillate between a price that is too high for macro-economic stability or too low to make it a paying proposition for high cost producers of oil (or gas) to invest in expanding production. In late 2014 we can see this drama at work. The faltering global economy has a lower demand for oil but OPEC, under the leadership of Saudi Arabia, have decided not to reduce oil production in order to keep oil prices from falling. On the contrary they want prices to fall. This is because they want to drive US shale oil and gas producers out of business.

The shale industry is described elsewhere in this book – suffice it here to refer to the claim of many commentators that the shale oil and gas boom in the United States is a bubble. A lot of money borrowed from Wall Street has been invested in the industry in anticipation of high profits but given the speed at which wells deplete it is doubtful whether many of the companies will be able to cover their debts. What has been possible so far has been largely because quantitative easing means capital for this industry has been made available with very low interest rates. There is a range of extraction production costs for different oil and gas wells and fields depending on the differing geology in different places. In some “sweet spots” the yield compared to cost is high but in a large number of cases the costs of production have been high and it is being said that it will be impossible to make money at the price to which oil has fallen ($65 in late 2014). This in turn could mean that companies funding their operations with junk bonds could find it difficult to service their debt. If interest rates rise the difficulty would become greater. Because the shale oil and gas sector has been so crucial to expansion in the USA then a large number of bankruptcies could have wider repercussions throughout the wider US and world economy.

Renewable Energy systems to the rescue?

Although it seems obvious that the depletion of fossil fuels can and should lead to the expansion of renewable energy systems like wind and solar power, we should beware of believing that renewable energy systems are a panacea that can rescue consumer society and its continued growth path. A very similar net energy analysis can, and ought to be done for the potential of renewable energy to match that already done for fossil fuels.

eroei-renewables

Before we get over-enthusiastic about the potential for renewable energy, we have to be aware of the need to subtract the energy costs particular to renewable energy systems from the gross energy that renewable energy systems generate. Not only must energy be used to manufacture and install the wind turbines, the solar panels and so on, but for a renewable based economy to be able to function, it must also devote energy to the creation of energy storage. This would allow for the fact that, when the wind and the sun are generating energy, is not necessarily the time when it is wanted.

Furthermore, the places where, for example, solar and wind potential are at this best – offshore for wind or in deserts without dust storms near the equator for solar – are usually a long distance from centres of use. Once again, a great deal of energy, materials and money must be spent getting the energy from where it is generated to where it will be used. For example, the “Energie Wende” (Energy Transformation) in Germany is involving huge effort, financial and energy costs, creating a transmission corridor to carry electricity from North Sea wind turbines down to Bavaria where the demand is greatest. Similarly, plans to develop concentrated solar power in North Africa for use in northern Europe which, if they ever come to anything, will require major investments in energy transmission. A further issue, connected to the requirement for energy storage, is the need for energy carriers which are not based on electricity. As before, conversions to put a current energy flux into a stored form, involve an energy cost.

Just as with fossil fuels, sources of renewable energy are of variable yield depending on local conditions: offshore wind is better than onshore for wind speed and wind reliability; there is more solar energy nearer the equator; some areas have less cloud cover; wave energy on the Atlantic coasts of the UK are much better than on other coastlines like those of the Irish Sea or North Sea. If we make a Ricardian assumption that best net yielding resources are developed first, then subsequent yields will be progressively inferior. In more conventional jargon – just as there are diminishing returns for fossil energy as fossil energy resources deplete, so there will eventually be diminishing returns for renewable energy systems. No doubt new technologies will partly buck this trend but the trend is there nonetheless. It is for reasons such as these that some energy experts are sceptical about the global potential of renewable energy to meet the energy demand of a growing economy. For example, two Australian academics at Monash University argue that world energy demand would grow to 1,000 EJ (EJ = 10 18 J) or more by 2050 if growth continued on the course of recent decades. Their analysis then looks at each renewable energy resource in turn, bearing in mind the energy costs of developing wind, solar, hydropower, biomass etc., taking into account diminishing returns, and bearing in mind too that climate change may limit the potential of renewable energy. (For example, river flow rates may change affecting hydropower). Their conclusion: “We nd that when the energy costs of energy are considered, it is unlikely that renewable energy can provide anywhere near a 1000 EJ by 2050.” (Moriarty & Honnery, 2012)

Now let’s put these insights back into a bigger picture of the future of the economy. In a presentation to the All Party Parliamentary Group on Peak Oil and Gas, Charles Hall showed a number of diagrams to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff. Some of the production is consumer goods, either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production i.e. investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems, more and more production must go into energy acquisition, infrastructure and maintenance. Less and less is available for consumption, and particularly for discretionary consumption.

hall

Whether the economy would evolve in this way can be questioned. As we have seen, the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices. However, the rest of the economy cannot actually pay this extra without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline would likely drag down the whole economy.

Over the last few years, central banks have had a policy of quantitative easing to try to keep interest rates low. The economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth, it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis and it will get a lot worse when oil production starts to fall more rapidly as a result of investment cut backs. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability, this is still a dead end and, at some point, people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why degrowth is needed.

Further ideas can be extrapolated from Hall’s way of presenting the end of the road for the growth economy. The only real option as a source for extra resources to be ploughed into changing the energy sector is from what Hall calls “discretionary consumption” aka luxury consumption. It would not be possible to take from “staples” without undermining the ability of ordinary people to survive day to day. Implicit here is a social justice agenda for the post growth – post carbon economy. Transferring resources out of the luxury consumption of the rich is a necessary part of the process of finding the wherewithal for energy conservation work and for developing renewable energy resources. These will be expensive and the resources cannot come from anywhere else than out of the consumption of the rich. It should be remembered too that the problems of depletion do not just apply to fossil energy extraction coal, oil and gas) but apply across all forms of mineral extraction. All minerals are depleted by use and that means the grade or ore declines over time. Projecting the consequences into the future ought to frighten the growth enthusiasts. To take in how industrial production can hit a brick wall of steeply rising costs, consider the following graph which shows the declining quality of ore grades mined in Australia.

mining-australia

As ores deplete there is a deterioration of ore grades. That means that more rock has to be shifted and processed to refine and extract the desired raw material, requiring more energy and leaving more wastes. This is occurring in parallel to the depletion in energy sources which means that more energy has to be used to extract a given quantity of energy and therefore, in turn, to extract from a given quantity of ore. Thus, the energy requirements to extract energy are rising at the very same time as the amount of energy required to extract given quantities of minerals are rising. More energy is needed just at the time that energy is itself becoming more expensive.

Now, on top of that, add to the picture the growing demand for minerals and materials if the economy is to grow.

At least there has been a recognition and acknowledgement in recent years that environmental problems exist. The problem is now somewhat different – the problem is the incredibly naive faith that markets and technology can solve all problems and keep on going. The main criticism of the limits to growth study was the claim that problems would be anticipated in forward markets and would then be made the subject of high tech innovation. In the next chapter, the destructive effects of these innovations is examined in more depth.

The Future Monetary Ecosystem

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Published on FEASTA on June 8, 2017

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Over the next generation or two, there will be increasingly visible turf wars between money-suppliers with four very different motivations. It’s not really a fair fight, but it isn’t as one-sided as it used to be.

The spoils

The general term for the benefit associated with the issuance of a currency is seigniorage. Historically, the term has been associated with the profit made by a government from issuing currency, especially the difference between the face value of coins and their production costs. At the risk of outraging pedants we can use the term more broadly to include a wide range of benefits accruing to the issuer.

The spoils may be in the form of direct financial benefit (like the interest charged on credit-money created ex-nihilo). Or they may be indirect, in the form of influence that can in due course be traded or cashed-in (for example preferentially allocating credit to favoured partners).

There is, however, a further dimension. Money congeals as wealth. The location of wealth signals the ‘revealed preferences’ of the underlying money-system. Sure, there’s luck, inheritance and sometimes energy, enterprise and hard work. But mainly there’s the money system.

The motivations

a) OneWorld. The cherished belief of a certain section of the international elites that governance is best left to those who know best (i.e. them), and that societal and economic diversity is somewhat of a nuisance, entailing the never-ending energy-sapping suppression of a series of hare-brained ‘alternatives’. If this seems like a conspiracy-too-far for you, feel free to skip this section but remember that just because you’re paranoid doesn’t mean you aren’t being persecuted.

This direction of travel can be portrayed as a natural extension of monetary scope – if money is ideally a universal lubricant of exchange, then the more universal the better. Focal points for monitoring progress of this ideation are: Bilderberg, the future of the euro, and (most importantly) the evolution of the SDR (Special Drawing Rights) [1,2], the IMF’s ‘international reserve asset‘.

b) National Sovereignty. The nation state is the traditional home of the fiat currency, and indeed gives those currencies their primary raison d’etre – the compulsory requirement to pay your taxes in them. Unfortunately national governments have had a well-documented history of abusing their money-issuance privilege – usually via the simple expedient of issuing tons of it before elections to create a feel-good effect; occasionally in more subtle ways.

The current arrangement of outsourcing money-as-credit creation to the banks is at the subtle end of the spectrum (see The Bank-State Bargain [3]). It obviates the need for governments to have to bother much with real national strategies (typically characterised as ‘picking winners’ rather than ‘sustaining the planet for future generations’). They can concentrate on tinkering.

It’s not quite as attractive as printing money and putting it straight into your own account, but the revolving doors arrrangement ensures that political apprenticeships can often be traded for corporate gravy. Put it into your mates’ accounts and wait for payback. The arrangement is underpinned by a sense of inmpotence as national governments race to the bottom (regulation, tax) in response to corporate threats of absenting themselves. TINA.

But this gradual diminution of sovereign influence does beg the question – can’t corporations do the money thing themselves and cut out the sovereign middle man.

c) Private Money. As is often said, anyone can create money – the problem is getting it accepted as payment. Private entities cannot coerce quite like a government, but they increasingly have huge market power that can be brought to bear if they think they can profit from operating a currency. They can use this power to construct unique value propositions. And are likely to do so.

The potential for the likes of Amazon, Facebook, Apple and Google to operate their own currencies has been given a boost by the cryptocurrency phenomenon. All are already actively looking at payment systems and it seems likely that the next generation competition for commercial banks will come primarily from out of sector. The crypto-angle has opened up the possibility of currencies that cannot easily be closed down by the state, as many of the successful alternative currrencies of the 1930s eventually were. Of course private for profit currencies are unlikely to make use of the fully distributed consensus model of Bitcoin, being more interested in permissioned blockchains with the gatekeepers being – yes Google, Facebook, Apple or Amazon. But the possibilities of the blockchain are encouraging disruptive thinking.

One starting point for initiatives in this area is Hayek’s writing on the denationalisation of money [4]. Hayek generally thought that competition was the answer to everything, and he saw money as no exception. He thought monetary policy to be ‘neither desirable nor possible’, and identified government as the major source of economic instability. And while his writing predates our current over-financialised economy, he certainly anticipated the ‘parasitic’ secondary activities that could attach themselves to a monetary monopoly and saw competing currencies as a solution to that.

So while Hayek’s for-profit currencies generally come from a very different political place than value-based Intentional Currencies [5] and today’s complementary currencies, they share the core belief that ‘A money deliberately controlled in supply by an agency whose self-interest forced it to satisfy the wishes of the users might be best.’

d) Peer-controlled money. It is difficult to title this section. The vision is similar to Hayek’s but the ‘wishes of the users’ are determined in a co-operative way and the money is controlled not by a for-profit ‘agency’ but by the users themselves through various forms of co-operative institutions and governance mechanisms (including platform co-ops). I have previously expressed dissatisfaction with the adjectives ‘alternative’, ‘complementary’ and ‘community’; and ‘intentional’ can include a for-profit motive if objectives are explicitly set out, as can ‘value-based’. It can be argued that this form of money is the purest because it is directly controlled by its users; by the people who give the currency value by accepting it in exchange.

The Battleground

We can indulge the late Mr Hayek a bit further by exploring the competitive landscape, both between and within currency models . If we plot on a matrix the reaction of an *established* money-type to an *emerging* (or re-emerging) money-type we can surface a wide range of conflictual issues, including the regulation of private currencies (b/c),acceptable units of account for national taxation (c/b), national debt slavery as political influence (a/b) and the use of currencies as weapons in financial wars (b/b). Interesting stuff but far too much for a short article.

What follows therefore is a summary of two key battleground issues affecting peer-controlled money, (which is a category of special interest to Feasta).

The Ultimate Potential of Shared Value (c/d)

The core idea behind Intentional Currencies [5] is that the value-set shared by the relevant user community should be made explicit and will act as a cohesive force as a currency and its governance institutions develop side by side. However experience with intentional communities in general leads us to be a little cautious not to overstate the power of this idea. All too often communities that on the face of it have strong shared values can fracture and fragment because of personality clashes and power trips. Against this background the ‘honest profit’ metric has its attractions, (as has hierarchical decision-making). Profit is a hard verifiable metric, reassuringly value-free. From this perspective old money provides a service for us – it enables economic interaction with people we dont want to break bread with. It absolves us from social interactions.

Thus if this group of money-systems is to scale and replicate sufficiently to become a central progressive economic and societal force, the evolution of thinking around shared value is a critical success factor. Somehow it has to translate integral fellow-feeling into pragmatic mechanisms for exchange and do so authoritatively but in a co-operative fashion.

Selectivity vs Universality (b/d)

A related issue is that the restricted scope of a value-led currency – the potential preferencing of certain transactions – prejudices the variety of the portfolio of goods and services that are available. The concepts of the Preferenced Domain [6] and the Deprecated Domain [7] are attempts to flesh out this line of thinking. It is possible there will need to be an Intermediate Domain where we are relatively neutral about some goods and services and want to find ways to include them to enrich the offering, but may not want to extend full community benefit to their providers.

Conclusions

Activists in the Peer-Controlled currency space will generally welcome an increasing diversity in the developing monetary ecosystem. Thus the exchange of ideas about how value-led currencies can develop should in itself be a key factor in their progress.

There is certainly a window of opportunity. Decision makers in the higher reaches of international financial institutions will be more concerned with the power relationship with national currencies, so peer-controlled money will be somewhat off radar for while. An ‘offgrid money’ mindset may be helpful. But the same window is open for private for-profit moneys, and multinationals are already fluent in international finance.

One factor working to close the window is the increasing appreciation of the significance of digital/ crypto currency which is already sensitising established international institutions to potentially disruptive developments. Whether more democratic user-controlled currencies can establish a secure foothold before they are re-challenged by a new breed of national/ international digital moneys remains to be seen. No doubt many of the ICOs [8] coming to market now will turn out to be Ponzi schemes, but some are already seeking to differentiate themselves via value-statements (as opposed to get-rich-quick statements) and there may well be one or two that show us the shape of the peer-controlled currencies of the future.

References

[1]: IMF Factsheet: Special Drawing Rights (SDR)
http://www.imf.org/external/np/exr/facts/sdr.htm
[2]: One World, One Bank, One Currency : Jim Rickards on the SDR
https://dailyreckoning.com/one-world-one-bank-one-currency/
[3]: The Bank-State Bargain : Graham Barnes. How commercial banks facilitate deniability, debt-peonage-management and financial warmongering in return for massive anti-capitalist subsidies.
http://www.zerohedge.com/news/2015-04-05/bank-state-bargain-breaking-basic-rules-capitalism
[4]: Denationalisation of Money: The Argument Refined. An Analysis of the Theory and Practice of Concurrent Currencies. F.A Hayek published by IEA in 1990 and reissued by The Mises Institute 2009
[5] Intentional Currencies : Graham Barnes
http://www.resilience.org/tag/intentionalcurrencies/
& Designing an Intentional Currency : Graham Barnes
http://www.feasta.org/2016/07/13/designing-an-intentional-currency/
[6] Designer Currencies and the Preferenced Domain : Graham Barnes
http://www.feasta.org/2013/11/19/designer-currencies-and-the-preferenced-domain/
[7] The Deprecated Domain: the pros and cons of designed exclusion : Graham Barnes
http://www.feasta.org/2014/07/10/the-deprecated-domain-the-pros-and-cons-of-designed-exclusion/
[8] Initial Coin Offerings
https://en.wikipedia.org/wiki/Initial_coin_offering

 

 

Economists as Priesthood

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Published on Credo Economics on May 22, 2017

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Economists as priesthood – a religion based on assumptions

Some of the ridiculous assumptions on which much of mainstream economics is constructed are explored in this chapter – for example the methodology that stresses individual decision- making, the assumption that decision-makers have the information that they need, the assumption of honesty, the default assumption of competition. (TEXT BOX: Labour market competition as an alternative to corporal punishment according to Hayek).

Today’s leading economic textbook writer, Greg Mankiw, has compared non-economists to “mere Muggles”, the ordinary people without magical powers described in the Harry Potter novels. His implication is that economists are “wizards”. (Mankiw, 2008)

Perhaps they are. However, people with magical abilities are not always to be trusted.

the conjuror - school of Hieronymous Bosch c1550 Public Domain image Wikimedia commons
the conjuror – school of Hieronymous Bosch c1550 Public Domain image Wikimedia commons

The ideas of the economists are important because they frame the way we understand the world, sometimes distracting us from understanding and living in the world in other ways. e economists claim that they describe the world as it is, rather than describing it as it should be, but there is an entire value system implicit in economics. It is implicit in their de nition of what it is to be “rational”. Implicitly, economists are making a truth claim about how human beings are, what makes them tick.

Unaware of the criticism of their model of rationality (or ignoring the criticism) it seems reasonable to economists to theorise human beings as if they act in a predictable way. Calculating their individual self-interest to maximise their utility and then acting accordingly. This makes possible a deterministic view of human action that allows economists to model markets as fundamentally positive social institutions which can solve virtually all problems.
In actual fact, economists are there as advocates for a particular kind of value system. They are not unlike priests whose job it is to argue that their beliefs should be guiding principles for life.

Some economists are well aware of this. Robert Nelson describes debates about economics as having a “theological character“. He worked as an economist in the US Department of the Interior with responsibility for the upkeep of national parks and landscapes in the USA:

If economists had any influence—which they sometimes did, if rarely decisive—it was seldom as literal “problem solvers”. Rather, the greatest influence of economists came through their defence of a set of values. Much of my own and other efforts of Interior (Ministry) economists were really to persuade others in the department to act in accordance with the economic value system, as compared with other competing priorities and sets of values also represented within the ranks of the department. (Nelson R. H., 2001, p. xiv)

Ridiculous assumptions

In other sciences ideas evolve by testing hypotheses against the facts. In economics what mostly happens is that simple models are created which have this kind of form:

Assuming human beings behave in a particular kind of way e.g. as consumers seeking to maximise their level of satisfaction through purchasing

And assuming their behaviour takes place in a particular set of conditions e.g. they are fully aware of all their consumption options available with their purchasing power

Then faced with a particular change in conditions it is possible to state how they will adapt, as well as to quantify this adaptation e.g. faced with a price change they will change how much that they buy by so much

This appears to be an exercise in logic rather like this – All men are mortal, Socrates is a man, therefore Socrates is mortal. The premises of this argument are things asserted to be true which in this case are that “all men are mortal” and that “Socrates is a man”. The conclusion that follows automatically is that Socrates is mortal. This conclusion does not really add any new information to the premises that have been proposed, it only draws out the consequence. In a sense, the conclusion is already contained in the premises.

In an apparently similar way the conclusions of economics follow from the starting points of their modelling analyses. However, the starting points of economic models are not premises asserted to be true but assumptions. These assumptions do not have a truth value status based on evidence but, on first impressions, appear to be plausible. (Bardsley, Cubitt, Loomes, Mo at, Starmer, & Sugden, 2010, p. Chtp5)

If many people do not realise that this is a fraud, it is partly because the mathematics, the symbols and the diagrams with which the models are expressed enable economists to distance themselves from ordinary people. Rather in the manner that speaking Latin enabled priests to put themselves above the common people.

Consider this proposition:

If Socrates is assumed to be a woman, and if all women are assumed to live forever, then it can be assumed that Socrates will be immortal.

It is obvious what is wrong with this proposition. Nevertheless, the falsity of economic propositions are not always so obvious. This is partly because some of the assumptions have a superficial plausibility and sometimes because the assumptions remain implicit, unstated and unexamined. The most important point here, however, is that there is no evidence for these assumptions. Read any economic textbook and you will find it rich in numerical examples that were made up by the author. They are neither taken from real life nor based on evidence. This is an ideal basis for a self-serving ideology in which this kind of “logic” can prove anything that is wanted according to the starting assumptions. Economics like this is not falsifiable because evidence is implicitly deemed to be unnecessary in the first place.

If you assume no problems at the start of the theory you will conclude that the economic world works without problems. For example, if, as was the case for many years, you assume that there are no problems in getting the information that you need to take economic decisions, then all the uncertainties, the dishonesty, the misinterpretation and the errors that take place in the real world disappear from the theory. The conclusions of models that do not draw on real world evidence are only as accurate as the assumptions they start with – no more and no less. A good deal of textbook economics is a description of what economists assume the world is like.

Even worse, the construction of models based on assumptions enables the imagination of a world akin to the one that Dr Pangloss believes he lives in. He is the character in Voltaire’s satire, Candide, who at every misfortune reassures everyone that all is for the best in the best of all possible worlds. Nothing will go wrong in the world of the mainstream economists because growth, technology, innovation, markets and entrepreneurial zeal together have the mechanisms for fixing all problems for ever. The message is perpetually upbeat and reassuring – which it can be when you construct a model of the world with assumptions that don’t include the problems.

Thus, markets are “efficient” and welfare outcomes are “optimal” when the starting assumptions contain none of the real life issues that would make them otherwise. In order to arrive at these optimal and efficient outcomes what is needed above all is “competition”. This is another very handy conclusion. It enables neoclassical economists to convince themselves and successive generations of students that, as long as the state minimises its involvement in markets, we live in this best of all possible worlds.

Competition is an idea which has many useful ideological functions. Instead of being a place of shambolic chaos, a competitive market is portrayed as having its own kind of order without a single big player – state or monopoly – needing to take all the decisions for overall coherence. With a set of assumptions that portrays this competitive market order as “optimal”, here is an argument that can be used as a default presumption against co-operation; against state regulations; against taxation; against trade union combination in the labour market. Competition is an idea that stands for general “freedom” from interference for powerful economic actors, against any limitation on their rights to act – and therefore for a general understanding of what “freedom” means for everyone else in society too. It can be used by those who are the strongest to prevent support for weakest, and generally in a self-celebratory way praising “success” as the result of “efficiency”.

But let’s look at some of the most common assumptions that underpin the key idea.

Methodological individualism

To take the first issue – in the textbooks, markets are places where there are lots of actors and, to get
a collective picture of what happens, you simply add up the actions of all the separate individuals. Of course, this does not rule out the idea that the separate individuals have previously influenced each other, but that is not what is explored. This is a version of what is called “methodological individualism” and there is no place in it for applying the insights of group psycho-dynamics. This is not because methodological individualists necessarily deny that the “preferences” that form people’s choices can be formed by social, interpersonal or community processes – it is rather because they take the “preferences” that give rise to choices as givens. They see themselves as modelling rational behaviour about what people will do with a pattern of preferences, a certain amount of purchasing power when faced with a set of prices. As economists, they are not concerned to delve further. In that sense, methodological individualism is a choice to ignore why people prefer and choose what they do. It is a choice to ignore and thus a choice to remain ignorant.

It is no wonder that, when criticising their teachers a few years ago, French economics students described neoclassical economics as “autistic”. Autism is a psychiatric disorder where a person is unable to recognise other people as people, as acting subjects. The autistic person is, thus, unable to form meaningful reciprocal relationships. Of course, in their private lives even neoclassical economists recognise that people act in groups in which they interact and have a reciprocal influence on each other – in families, in clubs, in associations, in societies, in crowds. A lot of what happens in markets is driven by crowd psychology. What is “fashion” if not a form of collective psychology? Arrangements made by producers try to influence and steer fashion processes which are only partly under their control.

When I go into supermarkets or department stores at the weekend it is full of families who are taking group decisions about purchasing. At other times, there are mothers who are taking decisions for partners and children. But that is not what most of the theories assume.

Ignoring ignorance – the myth of perfect information vs the thinking of the herd

Let’s look at another assumption. It is only in the last few decades that a new approach of “information economics” has evolved out of the recognition that access to information is crucial to decisions and market outcomes. Many of the textbooks from which today’s elite were taught assumed that markets had all the information that market actors needed. Indeed, some of the more elaborate models that “proved” the superiority of markets to allocate resources assumed that market actors had god like powers because they could make accurate assessments of the future too.

In fact the market is almost always shot through with a lack of information and/or information asymmetry. Perhaps in the world of Adam Smith’s small town butcher, baker and brewer, people could pick up gossip about their suppliers and even know them personally. But how does information work in a global market? How does it work with products made out of hundreds of components made out of hundreds of materials supplied by global supply chains? How does this work with meat products in the freezers of supermarkets? People buy what they think are beef products and are dependent on public health authorities to discover that they have been eating horse meat.

A very powerful reason why people have so much influence on each other lies in the absence of information and the uncertainty in which many economic decisions are taken. When you don’t know, you ask and/or you take your cues from other people.

Margaret Thatcher once famously said that “there is no such thing as society” which is one of those monumentally stupid things that powerful people can say and get away with because they are surrounded by sycophants. A very powerful person like Thatcher could doubt the existence of society because she had little need for the ideas and inluence of other people as she would have known that she was always right. By contrast mere mortals are influenced by others because we live in a world of uncertainty and inadequate information. Allowing ourselves to be in uenced by what others are doing and saying is a rough and ready way of coping with the information that we lack. Thus, we come to be influenced and swayed by social trends.

One cannot possibly understand the mentality of what are called “bubbles” in asset markets and speculation, except through collective psychology. Whether and how much of a commodity, or an asset, is purchased depends powerfully not just on current prices but on what people expect will happen to prices in the future. When they try to gure out what is likely to happen to future market valuations, perhaps the most powerful in uence of all is what other people are saying and thinking. Anyone who reads a newspaper like the Financial Times will be struck by the way it is full of reports which convey to the readers what the “market sentiment” is, that is, what others think will happen.
Up to a point, movements in market sentiment are exercises in self-ful lling prophecy. If a rise in price is taken to be indicative of an ongoing trend, which will lead to even higher prices later, then many traders will follow each other and be tempted to buy more now, before prices go higher. Possibly also to make money in the “rising market”. Perhaps speculators imagine that they can sell what they buy now on a rising price for an even higher price later. We have already seen how speculation drove up rising grain prices in the famines of India, taking food out of the mouths of the poor even in areas of good harvests.

Honesty and Dishonesty

Other, sharper, market actors seek to play these movements in a devious fashion. is brings us to
the third of our assumptions about why competitive markets deliver wonderful outcomes. It assumes that market players are honest when a lot are not. If people are only motivated by individualistically calculated self-interest why should they not resort to fraud and opportunism, to secrecy and misleading accounts of product quality?

This kind of duplicity affects what happens during speculative manias. For example, if you know that the shares of a company are going to lose value because you have insider information that a company or an industry is heading towards a big loss, if you have no commitment to the company or the industry, and if you no scruples, you will want to sell the shares at a high price before the truth gets out. So you might launch a PR campaign to hype the company or industry that you know is heading for a loss. at way you seek to create a rising market in order to offload your otherwise worthless shares on the people who get taken in. The game being played is to let other suckers take the losses.

That happened at the end of the subprime boom where bank traders sold what they referred to privately as “toxic waste” to unsuspecting customers as if these assets were of real value. A similar thing is happening at the time of writing in the gas fracking industry. All over the world, articles are appearing about the incredible potential for gas fracking. Meanwhile, industry insiders are pointing out the rapid depletion of the wells, the number of wells that come up dry and the high cost of drilling. If you believe the former narrative you put up money to enter the industry – and allow the insiders in the know to get out.

So here you have it. If we assume that most actors do not know what it going on and are able to influence each other, along with insiders who do have the best information acting as crooks trying to mislead and defraud other people, this gives us a far better fit for understanding what actually happens in markets. Instead, we have models which assume the reverse and this is what is taught to students.

Perfect competition

To be fair, neoclassical economists do get rather cross when businesses seek to accumulate monopoly power. is is paradoxical because competitive success leads to the weaker companies being driven out and/or taken over by the stronger ones thereby accumulating more monopoly power. Without competition the bracing Darwinist struggle between businesses does not deliver the benefits advertised in the textbooks, such as, cheaper products for all of us. For that reason some capitalist countries have “competition” policies and police against secret agreements between companies that “restrain trade” in favour of higher prices at the consumer’s expense. However, a closer examination of some of these policies often reveals that the intended result is the opposite of the stated one. As already mentioned, the ideology of competition through free trade is intended to clear the field for those companies in those countries that are already in the globally dominant position. It is about preventing competition emerging in the first place and consolidating global dominance. Throughout economic history the ideology of competition has been used to open up markets to the strongest market players and enable them to accumulate further market power. These are the players who will be most influential in political lobbying in the corridors of power. These are the very private sector players who will be influential in university departments of economics.


 

 

 

 

 

Text Box– Labour market competition as an alternative to corporal Punishment according to Hayek

Where neoclassical economists can be expected to get indignant if competition is limited is in the labour market. If workers form trade unions to create for themselves a countervailing power over and against their employer then economists are rarely sympathetic and almost always take the side of employers. Not many infants are born because their parents decided to do their bit to supply the future labour market. However, that does not excuse these infants, when they grow up, from their duty to compete in the labour market for work and take the going price. When there is full employment, this gives employees far too much “market power” for “optimality”. As Hayek puts it
in his book The Road to Serfdom, without unemployment, managers lose their ability to discipline workers and take on or lay off workers according to their plans.

“… there should be a place from which workers can be drawn, and when a worker is fired he should vanish from the job and from the payroll. In the absence of a free reservoir discipline cannot be maintained without corporal punishment, as with slave labour.” Quoted in (Smith & Max-Neef, 2011, p. 35)

Note the verb “should”… at the beginning of most textbooks there are usually little homilies that say economists describe the world as it is and not as it should be – but that’s not for Hayek. The labour market needs an alternative for corporal punishment if the workers is to be managed as an input to be used and disposed of as required. Workers are a means to the ends of employers.

At the risk of going off on a tangent, I cannot help but wonder what Hayek would have said about this famous principle from the philosopher Kant:

“Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end.” (Kant & (Tr.)Ellington, 1993, p. 30)

I’ve already claimed that human relationships are not the strong point of economists – neoclassical or Austrian. Hayek’s requirement for some kind of discipline derives as a self-fulfilling imperative from the mind-set of employers who use people merely as means, for example, as “factory hands”. If you treat and regard people only as means to your end is it surprising that their commitment to those ends is less than enthusiastic? Why should they feel committed? People do not take well to being used without consideration. It has a cost to their self-esteem, although, if one has no choice, if one is “disciplined” by unemployment, one may have to do it.

When you look at the world using economic concepts you are looking at the world as “snakes in suits” see it. They don’t get this idea that “human resources” are actually people with feelings and emotions. They don’t get the idea that most people are happy to co-operate with each other if they are treated with respect and their feelings acknowledged. This why they need alternatives to corporal punishment to maintain discipline and so they opt for unemployment to “create competition”. (In Britain the snakes are then disconcerted when they get a group of people who become long term unemployed. Rather than resort to corporal punishment for this group they intend to resort to psychological torture – making this group do completely futile time-wasting things for their benefits, like looking for employment when there is none).


Garbage hidden in mathematical formulas

I digress from the topic of unrealistic assumptions made by neoclassical and Austrian economists… If you assume away the real world in your model then the model will deliver a picture of ideal allocation outcomes – on the blackboard. Because the conclusions are arrived at in very sophisticated mathematics “mere Muggles” don’t understand the fraud that the wizards have perpetrated.

What “the mere Muggles” understand… or think they do… is a simplified version of the ideas of the wizards, or parts of these ideas. If the economists are akin to a priesthood who are trained in the theological details, then the mass of the general public are like a congregation who stitch together a vaguer and partial patchwork quilt of ideas from what they read in the newspapers, hear on the news, or perhaps pick up in books or even in introductory courses in economics. The more general “congregation” does not know all the ne details but knows bits that they adapt to their lives and local circumstances. is is what Richard B. Norgaard calls “economism”:

The mix of popular, political and policy mythology as well as practical beliefs that help us understand and rationalise the economy and how we live in it. People share some of those beliefs globally; other beliefs people adapt to fit particular national and regional situation; while yet others serve particular groups, including economists. (Norgaard, 2009, p. 80)

As Norgaard expresses it – a half of the global population is deeply immersed in the global economic system and like fish trying to grasp the nature of water, each of these individuals, playing their specialised roles, seeks to some degree or other to understand the bigger system of which they are a part. As the economy has become the window on which they see the world they use economism as “a set of beliefs constituting a secular religion guiding the remnants of our modern hopes for human progress: material, moral and scientific.” (Norgaard, 2009, p. 79)

John Maynard Keynes was, I believe, saying much the same thing when he wrote that:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. (Keynes 1936, p. XX)
What I am not saying here is that the priesthoods are supposed to have the correct version while the congregation more often have it wrong because of their simplifications and misunderstandings. It is more complicated than that. The mainstream theory always was “defunct” even in the form that is written out in difficult looking equations. You don’t need to understand the equations to understand that. You just need to examine the foundations of the subject. That said, the priesthood are a little more aware of the nuances in their theories.

Limits to Economic Growth

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Published on FEASTA on April 16, 2017

Discuss this article at the Economics Table inside the Diner

This lecture was presented at the University of Nottingham on April 4, 2017. Please click on the slides to enlarge them.

On April 3 in the Guardian there was an article about Christine Lagarde of the IMF concerned that the growth of productivity in many “developed countries” has been falling. There is a problem for the finance sector if growth falls away since additional income is needed for people to be able to service and repay their debts. Without growth the finance sector is destabilised and, indeed, it has been necessary to bring down interest rates to manage the situation.

But the problem is not only a practical one. Growth of production is central to the core ideology of the current economic system, to the idea of “development” and “progress”. It is central to the legitimacy of the people who run the global economy. Without it there is a legitimacy crisis.

 

Slide One

 

The idea of “progress” primarily emerged in what was called the European enlightenment of the 18th century and involved the idea that science and technology would enable the increase of material production and economic activity and it was this that made the “age of commerce” the highest point in human evolution. Basically technical progress and increased production was equivalent to moral progress because the chief problem facing humanity is want or “scarcity”.

 

The new heroes for humanity were now innovating entrepreneurs who risked money to back the production and marketing of machines that they had invented.

 

Slide Two

Graph by Krausman published by UNEP and available at: https://www.brookings.edu/blog/planetpolicy/2015/04/22/refocusing-earth-day-on-the-big-issues/

 

 

 

 

 

Graph by Krausman published by UNEP and available at:
https://www.brookings.edu/blog/planetpolicy/2015/04/22/refocusing-earth-day-on-the-big-issues/

 

 

 

 

 

At first production increased was not measured comprehensively. However from the post world war two period onwards it became the practice to keep national income accounts and to keep track of economic growth figures as the chief measure of “progress”.

Extraction. This form of development led to a massive increase in the volume and weight of materials extracted out of the planet – over time a greater proportion being construction materials, minerals and energy minerals.

Magnitude…. Recent research from the University of Leicester calculated the total mass of all the artifacts produced by human society – buildings, cars, computers – a large part of which is now rubble and waste in dumps. They found it to be 30 trillion tons. That represents a mass of more than 50 kilograms for every square metre of Earth’s surface.

By contrast, the total amount of living matter, including people, plants, animals, insects and bacteria is estimated to be around 4 trillion tons of carbon = about 9 trillion tons.

 

Slide Three

Source: Malcolm Slesser and Jane King Not by Money Alone. Economics as Nature Intended Jon Carpenter Publishing 2002

 

 

 

 

 

Source: Malcolm Slesser and Jane King Not by Money Alone. Economics as Nature Intended Jon Carpenter Publishing 2002

 

 

 

 

 

From the 19th century onwards artistic visions of the future saw it as being one in which lots of clever powered machines would become available to transport people and products, to produce goods and to generally make life easier. Indeed while text books of economics describe a world of land labour and capital – a different description would have been people using and guiding machines and infrastructures powered by a succession of energy carriers – coal, oil, gas, electricity.

 

Slide Four: Human output as a measuring rod – concept of energy slaves

One link to a collection of links and resources on the concept: http://energyskeptic.com/2014/energy-slaves/

 

 

 

 

 

One link to a collection of links and resources on the concept:
http://energyskeptic.com/2014/energy-slaves/

 

 

 

 

 

Energy slaves The result is a society dependent on ever increasing volumes of energy to power the machines and technical infrastructures. To put this in perspective we need some measurements and numbers. One way of measuring is by using the power capacity of the average human body as a unit of account. If we take an averagely healthy person and get them to peddle all day long on a peddle generator then they can, with their muscles, generate 3kWh a day – if they can stay awake for 24 hours. This would keep a light bulb lit all day.

The concept of energy slave was developed by Buckminster Fuller in the 1940s to describe how much human labour would be required to sustain a particular activity in the absence of fossil fuels. For example if would take 11 energy slaves to power a toaster. Thus since the average north american consumes 24 barrels of oil a year, and because a barrel of oil contains the energy equivalent of 8.6 years of human labour it would take 204 energy slaves to sustain an average US lifestyle and a 110 energy slaves to sustain an average Western European lifestyle.

Here’s another statistic to consider. If we were to try to power the (2012) internet with pedal-powered generators, each producing 70 watt of electric power, we would need 8.2 billion people pedalling in three shifts of eight hours for 365 days per year. (Electricity consumption of end-use devices is included in these numbers, so the pedallers can use their smartphones or laptops while on the job). 1,815 TWh equals three times the electricity supplied by all wind and solar energy plants in 2012, worldwide.”

 

Slide Five

 

The painting is by Lowry. On D H Lawrence: http://www.griseldaonline.it/temi/ecologia-dello-sguardo/lawrence-ecological-consciousness-pissarello.html

 

 

 

 

 

The painting is by Lowry.
On D H Lawrence:
http://www.griseldaonline.it/temi/ecologia-dello-sguardo/lawrence-ecological-consciousness-pissarello.html

 

 

 

 

 

Progress or a gilded index of ruin? Ideologists of right and left bought into the idea of progress as technological change but disagreed over issues of social justice, distribution and how and who should manage the process of change.

 

Nevertheless there were always some critics of industrialism itself and not everyone accepted the narrative that economic growth was per se some kind of moral good. For example 19th century thinks like John Stewart Mill saw the possibility that growth could become uneconomic, denied that bigger was necessarily better and foresaw a case for an eventual “steady state economy” while John Ruskin wrote about uneconomic growth as “A gilded index of far reaching ruin” and how increasing wealth often went together with what he called increasing “illth”. Artists and writers like D H Lawrence were appalled at the “tragedy of ugliness” brought about by industrialism.

Some critics later in the 20th century had another message. The challenged the very idea that growth would be able to continue – according to Kenneth Boulding – ‘Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.

 

Slide Six

The original book, The Limits to Growth, is available as a scanned document at: http://www.donellameadows.org/wp-content/userfiles/Limits-to-Growth-digital-scan-version.pdf Different model runs are on chapters 3 and 4 on different assumptions.

 

 

 

 

 

The original book, The Limits to Growth, is available as a scanned document at:
http://www.donellameadows.org/wp-content/userfiles/Limits-to-Growth-digital-scan-version.pdf
Different model runs are on chapters 3 and 4 on different assumptions.

 

 

 

 

 

Denied continued possibility of growth. In the early 1970s the famous Limits to Growth study was conducted by system scientists at the Massachusetts Institute of Technology under commission by a business group called the Club of Rome. The MIT group ran a computer model of the world economy in the world ecological system with basic variables being growing food and industrial output feeding a growing population. The growth of industrial production would however lead to increase pollution and wastes as well as to resource depletion. It would be these two processes that would feed back and eventually lead to a decline in both industrial and food production. Eventually the pollution and declining food and industrial production would lead to a increase in death rates and fall in birth rates.

Overshoot and collapse…. Unless anything was done there would be a period of overshoot and collapse. Production could grow at a rate that was unsustainable – that could not last, just as an individual or a company can spend more than its income by borrowing, by running down savings and by not fixing the roof – however that would lead, eventually to a collapse. So the global economy could grow at more than a sustainable rate but it would eventually lead to collapse.

Economists declare the study discredited. This study created fury among economists who declared the study discredited because, they argued, markets and technology would anticipate and solve any problems. But the LtG theorists had never denied that technological options were available and that alternative and substitute arrangements could be found. Their argument was that the alternative arrangements and technological options would themselves claim an increasing proportion of energy, material resources and time – in work-arounds and attempts at technical fixes. In the words of more recent authors there are technical alternatives but are they affordable in the context of keeping the rest of the economy going?

We will see that this is a serious problem for many purported solutions for ecological and environmental problems.

 

Slide Seven

The depletion diagram is of the Australian mining industry and used in my book Credo (Feasta Books 2015)

 

 

 

 

 

The depletion diagram is of the Australian mining industry and used in my book Credo (Feasta Books 2015)

 

 

 

 

 

So what is the evidence 45 years later? Let us look, first of all, at the dynamic of depletion. Resources are of different kinds – most biotic resources are renewable but they must not be taken at more than a sustainable rate. Trees that are cut down can regrow and fish that are taken out of the sea will breed – but not if the trees and fish are taken at too high a rate.

People who understand depletion rarely say resources are going to run out in any absolute sense – although biotic resources can be unsustainably harvested and drive species to extinction as is threated to various fish species.

With many mineral resources there is limited scope for any kind of renewal. They can often be re-used and recycled but that takes more energy and some of the resource will inevitably be lost. That means that with mineral resources what more normally happens is that lower and lower grade resources have to be used and this makes extraction more and more expensive. You can see this in the following chart of the grade of a variety of ores tapped in Australia.

Now the point is that if as is shown here, say with copper, the ore grade falls from a 25% to a 5% copper content then 5 times the energy has to be used to extract and smelt it – and it leaves 5 times the tailings. That becomes a problem if the cost of energy is high or if the economy cannot afford to pay more for the product.

 

Slide Eight

Depletion of Energy Minerals and Fracking – See my presentation to the Degrowth Conference, Budapest, September 2016 https://scriptum.degrowth.net/system/event_attachments/attachments/000/000/113/original/DegrowthandFrac king.pdf?1472027087

 

 

 

 

 

Depletion of Energy Minerals and Fracking – See my presentation to the Degrowth Conference, Budapest, September 2016
https://scriptum.degrowth.net/system/event_attachments/attachments/000/000/113/original/DegrowthandFrac king.pdf?1472027087

 

 

 

 

 

Fossil fuel depletion. This problem of having to use progressively inferior resources as depletion occurs is also especially true of fossil fuels because once they have been burned they cannot be re-cycled or re-used. Use of energy mineral resources involves an entropy change. The energy converted during use for human purposes is still there afterwards as heat but dissipated in the environment and no longer available for further use.

The depletion of non renewable energy resources makes it necessary to extract them from more sources that are more difficult, and expensive, to access. The greater resort to unconventional oil and gas – using fracking – is an example.

What you have in fracking or, more generally, the resort to so called “unconventional oil and gas” are technologies to extract fossil fuels from harder to access geological sources. When oil and gas is extracted from conventional wells it is being tapped from porous reservoir rock – the oil flows underground to the well and thus a single well can draw from a wide area. In unconventional wells the oil and gas is trapped in an impervious rock so it is necessary to create an artificial or engineered porosity. That involves a lot more use of energy, lot more work, a lot more wells, a lot more opportunity for accidents and things to go wrong and a lot more money cost too. Of course, the technology changes over time – with longer well lengths, bigger fracks and multi well pads. The fracking companies learn through experience. But this is still an expensive and limited resource that is resorted too because conventional wells are depleting.

That explains why unconventional gas is more expensive to extract and has struggled to make a profit. When oil and gas prices are low they do not cover these high costs and US oil and gas producers and many producers have made a loss. What keeps this show on the road is faith – belief that prices will recover and profits are possible

 

Slide Nine

Steffen et al “Planetary Boundaries” Science, Feb 2015 at: http://science.sciencemag.org/content/347/6223/1259855 Kevin Anderson “Duality in Climate Science” - about recognising unpalatable realities in climate science http://www.nature.com/ngeo/journal/v8/n12/full/ngeo2559.html Eriksen M et al “Plastic Pollution in the World's Oceans” PLOS One 2014 http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0111913

 

 

 

 

 

Steffen et al “Planetary Boundaries” Science, Feb 2015 at:
http://science.sciencemag.org/content/347/6223/1259855
Kevin Anderson “Duality in Climate Science” – about recognising unpalatable realities in climate science
http://www.nature.com/ngeo/journal/v8/n12/full/ngeo2559.html
Eriksen M et al “Plastic Pollution in the World’s Oceans” PLOS One 2014
http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0111913

 

 

 

 

 

Much discussion about the environment takes place as if the only problem is climate change and reducing carbon emissions. While climate change is a serious problem other pollutants and wastes are also serious problems – to the point of being describable as “planetary boundaries” which is is dangerous to cross. These are problems like ocean acidification, biodiversity collapse with pesticides killing many beneficial species like bees. In recent years there has also been a realisation that we have a major problem of pollution of the oceans – and also the atmosphere – from large amounts of plastic trash. This does not biodegrade but it does eventually break up into smaller and smaller pieces and is ingested by marine animals. The impact of plastic has now been documented on over 600 species.

As regards climate change the problem is not only caused by CO2 but also N2O caused by overuse of fertilisers, hydroflurocarbons and methane from rice paddies, land use change, cattle and from leakages during the operations of the global oil and gas industry.

Probably at 1.5 degrees C increase over pre-industrial runaway process – release of methane clathrates in arctic tundra and arctic seas – releasing methane

On current trends it looks likely that global temperature rises will be way above 2 degrees C compared to pre-industrial times. The likely result of this will be the melting of Antarctica and Greenland – the melting of Greenland alone will raise global sea level by 7 metres – or 21 feet which means flooding all the world major coastal cities and large areas of farm land – close to home we are talking of Hull and the Lincolnshire coastline going under the sea.

 

Slide Ten

 

 

 

 

 

Article by Mike Aucott and Charles Hall: Does a Change in Price of Fuel Affect GDP Growth? An Examination of the U.S. Data from 1950–2013 Energies, October 2014
https://www.researchgate.net/publication/270904271_Does_a_Change_in_Price_of_Fuel_Affect_GDP_Gro wth_An_Examination_of_the_US_Data_from_1950-2013

 

 

 

 

 

Both fossil fuel corporations and companies producing and promoting green technologies have developed and are promoting responses to depletion and pollution –there are technical fixes – but the key issues are whether these fixes are economically affordable for the rest of the economy plus whether they are acceptable to the public given what often turn out to be wider social, health and other concerns (so called externalities).

In recent years we have seen examples of “technical fixes” that have stalled and not got beyond the early phase of development – because the money cannot be found to develop them further. An example is carbon capture and storage.

All such fixes typically mean that energy costs more to supply – but because energy underpins all economic activity that is a serious matter. It takes money out of people’s pockets that they cannot then spend on other things. Studies have suggested that in the USA if the amount of national income spent on energy exceeds 5.5% the economy crashes.

To the extent that these costs are money ones the issue of unaffordability can be temporarily masked masked by debt where there is an expectation that the affordability problem is temporary. Debt can work in this way. Individuals, families, companies and government may assume that current difficulties and unaffordability is a temporary problem and the future will be brighter. For example companies may assume that technologies like fracking will improve and bring down extraction costs – or they may gamble that energy prices will rise in the future after all. So they borrow. This borrowing is helped by central banks keeping official interest rates low or even below zero.

 

Slide Eleven

 

 

 

 

 

Renewable Energy
Patrick Moriarty and Damon Honnery ‘Can Renewable Energy power the Future?’ Energy Policy 2016
http://www.academia.edu/22664620/Can_renewable_energy_power_the_future Our Renewable Future by Richard Heinberg and David Fridley, Island Press, 2016 – see: http://www.resilience.org/stories/2016-06-02/our-renewable-future-introduction/
Critique
http://www.resilience.org/stories/2017-02-14/questioning-our-renewable-future/
Critique by Ted Trainer http://energyskeptic.com/2015/tilting-at-windmills-spains-solar-pv/
– links to acrimonious discussions of Hall and Prieto's landmark analysis of Spanish solar voltaic industry

 

 

 

 

 

But what about renewables? Can they fill the gap left by depleting sources of fossil fuels – and can they do so without greenhouse gas emissions and accumulating wastes?

Composition of renewables. First of all we should note that nearly half of the global renewable energy supply is what is called “traditional biomass”. For example this will include firewood from rainforests and marginal land harvested by indigenous people or cow dung which is burned in India.

In addition to this quite a high proportion of so called “modern renewables” is biomass from plantations and agriculture grown as an energy crop – either for burning for heat, or for burning to generate electric power or for coverting into biofuels. Hydro power is next in size.

By contrast, what many people immediately think of when they think of renewables – solar voltaics or wind power – or even smaller tidal or wave energy – is very small indeed. It is growing incredibly rapidly but it has a very long way to go.

Will the growth of renewables be sufficient to sustain economic growth and sustain a consumer society? Some people think so. But among experts there is a huge gulf in opinion and the debate has sometimes been acrimonious.

On this there is a great gulf between what I would term the cornucopians and those who are more sceptical to the point of being described as doomers. The distance in estimates of future potential is really huge. A recent article in the journal “Energy Policy” pointed out that estimates of the global technical potential for renewables vary by up to two orders of magnitude – in other words the optimists think there is 100 times more available energy than the pessimists.

How do we account for these huge differences?

1. Counting energy costs – it is net energy that matters. Optimists often do not calculate the energy inputs needed to tap their renewable energy source. They give estimates of gross potential but net potential is what is needed. This is not just the energy cost of the solar panels and wind turbines but the costs of building the factories to built them, the cost of the transport and installation, the cost of maintenance, the energy cost of the administration – and being realistic about how long they will last.

2. Infrastructure costs Properly speaking the calculations should include additional energy inputs like those involved in (a) a need to extend grids and infrastructures – where the sun shines and the wind blows is not necessarily where you want the power that it generates – so connections must be built.

3. Costs of buffering intermittency…. To allow for the fact that one day the wind may be blowing north of you, the next day east of you, the next day south of you, and the next day west you may decide that to be reasonably sure that you can tap some wind energy you need to put turbines north, east south and west. But in this case your greater security of supply would be purchased by 4 times the capital cost compared to a single fossil fuel fed power station. (b) you may need your energy in the evening rather than midday when the sun is shining strongest so you put in battery storage – but what if the wind does not blow for several days? In the UK the solar energy coming in is 9 times more powerful in July compared to December when it is very dark – but you need more energy for heat in December – battery storage between July and December would be a hugely expensive undertaking.

4. When non electrical energy carriers are needed. Another point is that renewables that are electrical don’t answer your needs when you ultimately want heat, or a liquid fuel for vehicle transport. Yes, you can convert electricity into heat or into battery storage for vehicles or into hydrogen. However there are conversion losses when that happens. A further major consideration is that you not only have the costs of making, installing and connecting wind turbines or solar panels. There is also the cost of developing and manufacturing differently designed vehicles or heating systems that run on a different basis.

5. It is not just fossil fuel minerals where it is necessary to resort to progressively inferior sources. An anaologous problem besets renewable sources of energy too. After the best locations for wind speed, sun, water flow etc have been taken – to continuing expanding capacity it it necessary to resort to the inferior places with lower energy return yield next.  

6. Potential short supply for materials needed for the manufacture of some technologies – rare earths.

7. Some technologies give rise to emissions themselves – e.g. hydro power leads to increased methane emissions when vegetation is submerged. 

8. Climate change may lead to a decline in renewable energy yield and costs – eg changing rainfall impacting hydro power, climate change reducing biomass and wind and cloud cover impacting wind or solar – though that may be in either direction, wind speeds may be higher in a warmer world…

 

Slide Twelve

LtG Background to Current Conflicts Nafeez Mosaddeq Ahmed 'Failing States, Collapsing Systems. Biophysical Triggers of Political Violence' Springer Briefs in Energy, 2017 pp 49-52

 

 

 

 

 

Hopes re Negative Emissions:
James Hansen et al “Young People’s Burden. Requirement of Negative CO2 emissions” Earth System Dynamics Journal at:
http://www.earth-syst-dynam-discuss.net/esd-2016-42/
Also on negative emissions see:
http://www.nature.com/ngeo/journal/v8/n12/full/ngeo2559.html
Moriarty and Honnery “Review. Assessing the Climate Mitigation Potential of Biomass” in: http://www.aimspress.com/energy/2017/1/20

Land and Water Grabbing
https://www.researchgate.net/profile/Maria_Cristina_Rulli/publication/234040421_Global_land_and_water_ grabbing/links/5481de440cf2e5f7ceaa723d.pdf
Source of Africa map:
https://ejfood.blogspot.co.uk/2012/06/new-enclosures-africa.html

 

 

 

 

 

Bio-energy as renewable energy resource…. An important part of this whole debate relates to the role of bio-energy – wood that can be burned directly or other crops that can be turned into fuels. Biomass is a renewable energy source in that the ground on which it has been grown can be used again using the solar energy that proceeds the next harvest. Unlike wind or solar energy biomass is stored energy that can be combusted at a time of choice – so it does not have the problem of intermittency that wind and solar do. So there is a lot of hope that biomass – or bio-energy – can provide energy in forms that wind and solar cannot. Bio-energy has come to seen as a source for surface transport on sea and land – as well as a fuel for airplanes. On top of that some scientists see it as a feedstock to replace petroleum based chemicals and other materials.

BECCS….. There is even a hope that biomass and bioenergy can provide a carbon negative energy source – this is called BECCS. The argument goes plants take CO2 out of the atmosphere and embody it in their cellular structures. This returns to the atmosphere when they are burned and thus, so the argument, biomass based energy is carbon neutral. It then….supposedly….becomes a carbon negative energy form if burned in power stations specially equipped to take the CO2 out of the combustion gases, liquify them and then pump them underground for the next tens of thousands of years. All we need is to plant up an area one to three times the area of India to use for their fuel

But where is the land and the water to come from for all of these hopes? So where do we find the area?

Displacement of other land uses….. The point is that growing bio-energy crops will either displace food crops or crops used for fibres (clothing) or for building material – or alternatively it will involve displacing vegetation on what is called marginal ground and displacing communities who use that land but in a low impact way. In addition, “wild” areas like the rain forests have other important eco-system functions and cannot be cut down, ploughed up of converted into urban areas and flooded by dams without different kinds of negative consequences. When Brazil cuts down its rainforests it reduces rainfall and that has knock on consequences for its hydropower and for indigenous communities living in the forest…in their forest.

Generating food, fiber and other biomass-based products that people currently consume utilizes roughly 75% of the world’s vegetated land. Over 70% of the water withdrawn from rivers and aquifers is used by agriculture and fertiliser use has doubled the amount of reactive nitrogen in the world, leading to large-scale pollution of aquatic ecosystems, extensive algal blooms and bodies of waters with low levels of oxygen. Even so, agricultural and forestry practices have not, on balance, increased the total quantity of biomass production: they have merely transformed natural ecosystems to produce goods and services for human consumption. Humans cannot increase at will the global amount of biomass or the proportion of that they take.

Feeding the world in the future will be difficult enough already… A study by the University of Reading modelled scenarios for global food production and nutrition by mid century based on current technologies and inequality of access to food. The found that 31% of the global population would be at risk of malnourishment by 2050 with no climate change and 52% of the global population (an extra 1.7 billion people) were at risk of malnourishment when climate change is taken into account.

Not only is climate change negatively impacting harvests but there are also problems of depleting aquifers and soil erosion. Many pesticides are losing their effectiveness and there is competition for farm land from non agricultural uses like for urban building land. Depletion of oil and natural gas will make fertilisers more expensive and more difficult to supply.

Land and water grabbing……. The drive of corporations to develop bio-energy sources is in competition with food security in many countries. There is a corporate land and water grab across the entire world and much of this takes place to grow biofuels and biomass, particularly in Africa. Multinational corporations make deals with national governments and at the local level people find that land their families have been using for generations is taken away from them for “development”.

Is Bio-energy really carbon neutral? Although the growth of bioenergy crops absorbs carbon, using the land to grow bioenergy crops sacrifices the sequestration of carbon in land that is left to revert to forest. This foregone carbon sequestration, which is not considered in current GHG accounting related to bioenergy, may be substantial. For example, in the western Ukraine forest growth following abandonment of farmland resulted in a net carbon sink of almost one ton of carbon per hectare forest and year

 

Slide Thirteen

LtG Background to Current Conflicts Nafeez Mosaddeq Ahmed “Failing States, Collapsing Systems. Biophysical Triggers of Political Violence” Springer Briefs in Energy, 2017 pp 49-52

 

 

 

 

 

LtG Background to Current Conflicts
Nafeez Mosaddeq Ahmed “Failing States, Collapsing Systems. Biophysical Triggers of Political Violence” Springer Briefs in Energy, 2017 pp 49-52

 

 

 

 

 

So what does a LtG future look like? Of course everywhere will be different but we have some frightening examples. Let us take Syria for example.

Up until the mid 1990s Syria was a good example of “development” – there was growing oil production sold on the world market that gave the Syrian government revenues that it could use to subsidise food and fuel as well as spend on armaments.

After 1996 Syrian oil production began to fall and by 2010 was only one half its 1996 level. This had a drastic financial impact on the government and forced it to cut fuel subsidies.

2002- 2008 water resources dropped by a half due to waste and overuse. That was followed by a drought between 2007 and 2010 which was the worst on the instrumental record – widely judged by climate scientists to be the result of climate change. Tens of thousands of people – whole villages of Sunni cultivaters abandoned their homes in the countryside and moved into the cities like Aleppo, dominated by Alawite communities, leading to rising ethnic tensions. Between 2010 and 2011 the global price of wheat doubled. Assad was unable to maintain food subsidies because of falling oil revenues.

In the rising tensions outside powers have intervened with their own agendas – and those agendas have been rival oil and gas pipeline routes – either from Iran to Europe or from Qatar and Saudi Arabia to Europe. In this Russia has allied with Iran to defend the Assad regime and the US and UK are covertly allying with fundamentalist Sunni rebels to topple Assad and establish their own regime for their pipeline routes where there would be a role for Halliburton and Exxon.

In a number of other countries there has been a convergence of food, energy and water crises.

 

Slide Fourteen

Environmentalism of Poor and Environmental Justice http://www.ejolt.org/ and https://ejatlas.org/ Martinez Alier, et al “Trends in Social Metabolism and Environmental Conflict- a comparison between India and Latin America” chapter 9 in Gareth Dale et al (ed) “Green Growth” Zed Books 2016.

 

 

 

 

 

Environmentalism of Poor and Environmental Justice http://www.ejolt.org/ and https://ejatlas.org/
Martinez Alier, et al “Trends in Social Metabolism and Environmental Conflict- a comparison between India and Latin America” chapter 9 in Gareth Dale et al (ed) “Green Growth” Zed Books 2016.

 

 

 

 

 

Oppositional and resistance struggles against environmental impacts have occurred the world over. The latest in the global north is a movement against fracking that has sprung up internationally.

Conflicts about environment have also been documented and studied by academics – for example with the Environmental Justice Atlas which has details of about 1,000 environmental conflicts world wide – against land grabbing, against resource extraction, against toxic waste dumps and pollution processes, against deforestation and plantations including biofuel plantations. Although activists in the global north and global south are increasingly networked there are clear differences between movements in the global north and south.

Environmentalism of the Poor….Joan Martinez Alier refers to a Environmentalism of the Poor in the global south. In this case the poor are often defending the eco-system on which they rely for vital resources like firewood or food in a subsistence economy. Indigenous communities are often struggling to defend ancestral homes and sacred sites. For these communities the eco-system is more than a resource store. It is integral to their spirituality and cultural identity as a community rooted in a particular place occupied by their ancestors since time immemorial. The place does not belong to them but they belong to the place – nature is not a store of resources but part of their being. They have a kinship with the species of plants and animals. Nature is Pachamama – mother earth in a very real sense.

The data in the Env Justice Atlas shows that indigenous communities are playing a disproportionate role defending nature in India, South America and Africa.

Some parallel movements also exist in the Global North – like movements by the First Nations in Canada and the USA to defend their ancestral lands – as for example against oil and gas pipelines recently in Dakota with the high risk or leakage and spillage.

There is also an Environmental Justice Movement. Concern and influence by the wealthy in the global north ensures that polluting and toxic industries as well as waste dumps are located away from rich communities. They are sited near poor ones, often where ethnic communities live. It is such communities that will get sick from the toxins or from fracking and they have organised to defend themselves.

 

Slide Fifteen

 

 

 

 

 

Brian Davey “Credo. Economic Beliefs in a world in crisis” Feasta Books 2015 Chapters 40 and 49 Available for free download at www.credoeconomics.com
D’Alisa G., Demaria F and Kallis G. “Degrowth. A Vocabulary for a New Era” Routledge, 2015 http://transitionnetwork.org/
http://www.smart-csos.org/

 

 

 

 

 

Not all green activism is reactive and oppositional. There have been many pro-active and experimental projects on a small scale to pioneer and develop examples of green economy, green lifestyle and a complementary style of politics.

The words ecology and economy originate from a greek word oikos – the household – so effectively meaning the management of a household – many green pre-figurative experiments and projects are about the transformation of household, garden and wider neighbourhood to make them more self sufficient and efficient in providing for human needs.

In the last few decades typical projects like community gardens have sprung up all over the world – including in decaying urban areas and rust belts or in refugee camps.

Thousands of Eco-villages have been developed too – although one can argue that they are the normal way of living for countless thousands of communities in the global south, in the global north are intentionally established and often have multi-functional purposes – as therapeutic and mental health projects, as art projects and to experiment with ecological gardening and cultivation, the promotion

There are likewise community energy, community transport and cycling and recycling projects whose aim is to help their members participate practically in a green transition.

From isolated projects/struggles to a movement with a narrative for the future of society. Many activists have realised the need to network and make alliances and need for political representation to combat the way that the toxic economy uses the state to advance its own purposes and agenda. To combat this the green movement must be more than a collection of isolated struggles and projects but needs to come together as a movement with its own ideological narrative for the future of society. This has included challenging the desirability and critiquing the prospects for the growth economy. Many groups therefore share an overarching vision of the need for a Great Transition – and for “Degrowth”.

 

 

 

 

 

 

The Economy is like a Circus

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Published on the Our Finite World on April 17, 2017

Dicuss this article at the Economics Table inside the Diner

The economy is like a circus. It comes to town, and eventually it leaves town. We get paid in tickets to this circus. As long as the circus stays in town, we can use our tickets. Once the circus leaves town, we are pretty much out of luck.1

The reason the circus stays in town is because the economy stays in sufficient balance that the economy can go on. This is much like the way many other self-organized systems function. For example, our bodies continue to function as long as there are suitable balances in many different areas (oxygen, food, water, air pressure). Ecosystems continue to function as long as there is sufficient rain, adequate temperatures, and enough sunlight.

There are many different views as to what limits we reach in a finite world. Some people think we will “run out” of oil, or of energy products. Some think that the energy return will fall too low, as measured in some manner. I see the adequacy of the energy return as being very much tied to the financial system. Thus, the forecast by US Atlanta Fed GDPNow indicating that first quarter 2017 US GDP growth will only be 0.5% is likely to be a problem, assuming it is correct.

Our economy operates on economies of scale. Once we get too close to shrinking, or actually start shrinking, we reach a point where the economic circus starts to leave town. At some point, we will discover the circus is gone. The economy we thought we had, will have left us. If some people are survivors, they will need to pick up the pieces and start over with an entirely new system.

What the Economy Needs to Do to Keep Functioning

For our economy to continue functioning, a number of variables are important:

 

  • Prices of commodities – Prices cannot be too high for the consumer to afford goods made with them. They also cannot be too low for producers. If prices of oil and other commodities are too low for producers (as they are now), producers need to keep raising debt levels to stay in business. There is a risk that production will stop from lack of adequate new investment, or from the bankruptcy of producers.
  • Wages of non-elite workers – These wages need to be high enough so that workers can afford goods made with commodities, such as cars, homes and computers. These big purchases tend to use commodities even after they are made, adding to “demand” for commodities. If commodity prices such as oil are too low (as they are now), it is likely related to the inadequate wages of non-elite workers.
  • Mandatory payments required of non-elite workers, such as taxes, health care, and education – It is not just wages of non-elite workers that are important. So are required payments, such as payments for taxes, healthcare and education. Clearly, the lower these payments are for non-elite workers, the better the economy functions.
  • Interest rates – Low interest rates are helpful for some parts of the economy, while high interest rates are good for other parts. Low interest rates help create affordable monthly payments for goods such as homes and cars. If interest rates decline, the market prices of assets such as real estate, shares of stock, and bonds tend to rise. These rising values are of great benefit to owners of these assets, since they can sell these assets and use the proceeds to add to current consumption. Conversely, high interest rates are important to pension plans and to others depending on investment income. Banks have a problem if there is not a big enough “spread” between short and long interest rates.
  • Increase in debt – An increase in debt indirectly makes the economy “look” much better. Increasing debt acts to raise wages, since some of this growing debt adds to funds available for wages. The higher wages tend to increase demand for goods, and thus indirectly raise commodity prices. A virtuous circle starts, pushing up economic growth, provided an adequate quantity of very cheap energy products is available (under $20 barrel oil, for example) that can be used to make goods and services. Increased debt works less and less well, as the price of energy products increases.
  • Inflation rates – The higher the inflation rate, the easier it is to repay debt with interest, since most debt is not adjusted for inflation. Also, high inflation rates help keep prices of homes and other buildings from falling as they age, making the use of mortgages more feasible. If the price of a commodity, such as oil or coal, is high and then falls, debt based on the prior high value of the commodity is likely to become a problem.
  • Quantity of energy products affordable by economy – It takes energy products to produce goods and services. If the price of commodities is low, it is possible for buyers to purchase a large quantity of these products, even on a low budget. Current relatively low prices tend to help the economy, even if producers cannot afford to make adequate investment in new production with such low prices. Thus, today’s low energy prices make the economy look good for at a short time. Afterwards, the outlook is less rosy.

Ultimately, the issue at hand in determining whether the “circus will leave town” is whether non-elite workers are able to adequately make a living. We know from biology that the return on the labor of animals must be adequate (animals must be able to get enough food by walking, swimming, or flying) or their populations will collapse. The same thing is true for humans. We also know that prior civilizations that collapsed often had wage disparity problems. When this happened, non-elite workers were no longer able to pay adequate taxes. Their nutrition became poorer. They tended to become more susceptible to epidemics. These were things that pushed the economy toward collapse.

The goods and services that non-elite workers can buy with their wages represent the benefits of our fossil fuel powered energy system, as distributed to the most vulnerable workers in the system. Once these benefits start falling too low, the system can no longer function.

There are some indications that benefits are already too low for the economy to keep functioning in a “normal” manner. A major such indication is the fact that energy prices have remained far too low since mid-2014. It is becoming increasingly clear that there really is no oil price which is both high enough for producers and low enough for consumers. We may be living on “borrowed time,” using an increasing amount of debt to support energy producers.

Thus, world economic growth rates may already be too low to keep the world economy operating. Regulators who consider only the US do not seem to understand the world situation. Because of this, they can easily make moves that make the situation worse, rather than better. For example, they have already started raising interest rates and are planning to sell securities currently held by the Federal Reserve.

A Few Graphs Giving Hints of Our Problem

Economists have not understood what our problems really are, so they have tended to omit some important issues from their analyses. I put together a few graphs that might give a little insight as to what is happening.

Interest Paid by Households 

Interest paid by households is important because this money is transferred to banks, insurance companies, and pension plans. It leaves the households who paid this interest poorer. Buying goods using debt is convenient, but it has a cost involved.

BEA Table 7.11 shows a category called, “Interest Paid by Households.” If we compare this to BEA “Wages and Salaries,” we find the relationship shown in Figure 1. Admittedly this is not an exact comparison; there are some people who are not wage earners who are making interest payments, for example. I have not tried to offset “interest paid by households” against “interest received by households,” because the households benefiting from interest payments are likely very different households from those making interest payments. They are likely richer, and at a later stage in their lives.

 

 

Figure 1. US Household Interest Paid (from BEA Table 7.11 Interest Paid and Received by Sector and Legal Form of Organization) divided by Wages and Salaries from BEA Table 2.11, “Personal Income and its Disposition.”

The pattern might be described as follows:

  • A rapid run-up in interest payments that took place until about 1986
  • A general flattening, with new peak in 2007
  • A rapid fall starting in 2008

It seems to me that the pattern up to 1986 reflects the general run-up in consumer debt levels during this period. The amount of interest paid is also affected by interest rates, such as ten-year treasury rates.

 

 

Figure 2. US Federal Bonds 10 year interest rates. Graph produced by FRED (Federal Reserve Economic Data).

Interest rates started falling in 1981. These higher rates only gradually worked their way into the system because many people had bought houses earlier and were able to keep their existing mortgages at low interest rates. The amount of debt outstanding continued to rise, allowing the total amount of interest paid to continue to rise until 1986.

After 1986, rising debt amounts and falling interest rates came closer to offsetting each other (Figure 1). By 2008, the economy was in a severe recession. In order to help get out of the recession, interest rates were lowered through Quantitative Easing. These lower interest rates, besides helping the economy in general, helped oil prices gradually increase back to the $100+ per barrel price level that they needed to be profitable. Oil prices had temporarily dropped below $40 per barrel in December 2008.

Figure 1 shows that interest payments for several years amounted to about 12% of wages for households. Interest payments are now down to 8% of wages. Even at this level they are significant. They are likely higher than this for those with low wages and high debt. If interest rates rise significantly, the most vulnerable are likely to find their discretionary income reduced.

Rising Healthcare Costs 

Figure 3 shows a comparison of US healthcare costs to GDP and to wages. A huge increase in costs is evident in the 2001-2005 periods, and also in the 2008-2010 period, especially compared to wages.

 

 

Figure 3. US Healthcare costs as a percentage of GDP and as a percentage of wages. Healthcare costs from cms.gov. Wages and salaries and GDP from BEA.

The increase in healthcare costs since 2008 is one of the costs putting pressure on the economy, and leading to a need for lower interest rates.

The Affordable Care Act should be affecting amounts for the latest years, since the ACA started increasing the number of people with insurance starting about 2014.

 

 

Figure 4. Kaiser Family Foundation chart of percentages of non-elderly people without healthcare insurance, from this Source.

A person might wonder why 2014 and 2015 costs didn’t rise more, with so many more people added to the system. Perhaps care that was being given “free” by hospitals is now being charged back to patients. Or perhaps many of the people choosing to purchase coverage through the program were already insured elsewhere in the system, so were not really added to the healthcare system through the Affordable Care Act.

One very recent US healthcare change is the addition of an automatic penalty for not having healthcare insurance. This penalty began for tax year 2016, filed in the beginning of 2017. This provision particularly hurts young people, because rates are structured in such a way that the rates for young people subsidize the rates for older people. Thus, young people often find that buying health insurance is far more expensive than their out of pocket costs for health care would have been, without insurance.

Young people who are affected by this new requirement will find that they need to cut back on other expenditures (such as restaurant visits), if they are meet the requirements of the law–either buy healthcare insurance or pay the mandated penalty. This change will begin to adversely affect the economy in 2016. Bigger impacts are likely in early 2017, when taxes are filed.

Falling Wages Relative to GDP, and Rising Wage Disparity

The path to lower wages as a percentage of GDP has been a bumpy one. The general pattern is that when the economy is booming, wages tend to grow as a percentage of GDP. Recession tends to send wages down as a percentage of GDP. US wages seem to have increased somewhat since 2013, perhaps because the price of oil is down, and the US dollar has risen to a relatively high level. This is part of what allows some people to talk about the “tightening labor market,” and gives them confidence in the economy.

 

 

Figure 5. US wages and salaries divided by US GDP, based on BEA data.

There has been significant growth in wage disparity since about 1980, both in the US and in many other developed countries. Figure 6 shows some data for the US.

 

 

Figure 6. United States Income Distribution_1947-2007 in 2007$. The data source is “Table F-1. Income Limits for Each Fifth and Top 5 Percent of Families (All Races): 1947 to 2007”, U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. Graph is from Wikimedia Commons http://en.wikipedia.org/wiki/File:United_States_Income_Distribution_1947-2007.svg

As the economy becomes more “complex,” in other words, “specialized,” wage disparity tends to be more of a problem. Work that could previously be done by manual laborers is done by machinery, or is transferred to low wage countries. Many people lose their jobs, and have difficulty finding good-paying replacement jobs. All of this contributes to inadequate wages for non-elite workers.

Role of Inflation and Rising Commodity Prices in the Economy

We rarely stop to think how important inflation is to the economy. For example, if inflation is sufficiently high, it will slightly offset normal depreciation in values of homes and business properties. Thus, home and business property values will tend to slightly rise over time. If banks can count on values of structures rising, rather than falling, over time, lenders can assume that mortgage loans are fairly risk-free, because the lender can count on getting its money back through the sale of the property, if the mortgage-holder defaults.

This same principle holds when energy properties, such as coal mines and oil fields, are financed. As long as energy prices keep rising, there is a good chance loans can be repaid. Once energy prices fall, debt defaults become a problem. Oil exporting countries also find that the taxes they can collect fall significantly. As a result, energy-exporting countries are in a far worse economic position once energy prices fall. Exporters of other commodities, such as metals, have a similar problem if prices fall.

In the last two paragraphs, I mentioned the impact on lenders and governments of rising or falling prices. Owners of properties are also affected by rising or falling prices. If prices rise, these owners can sell their assets, and make a profit. In fact, these owners have often purchased their properties with debt. If the price of the property rises, but the amount of debt is unaffected by inflation, the owner of the property can often get a disproportionate benefit of the price rise. Of course, if the value of a property falls, the property-owner is disproportionately affected by the fall of the price.

We are so used to a rising-price scenario that we have little understanding of how a flat or falling price scenario might work.

To get a little idea of how much inflation has in the past been working through to asset prices in the United States, I looked at some information provided by the US Bureau of Economic Analysis. I compared these amounts to GDP, rather than asset prices, to get an idea of how much impact they have, relative to each current year’s activities (Figure 7). There is about $3 of assets of the types BEA analyzes for every dollar of GDP, so the impact, relative to GDP, is about three times as high it would be, relative to the asset prices themselves.

If this same relationship holds elsewhere, a person can see why a commodity-producing country might have a big problem, if the price of that commodity suddenly falls. There is huge “balance sheet” impact that doesn’t directly affect current GDP as reported (since GDP has to do with current goods and services produced). But it can have a major impact on the country, as it goes forward, because affected loans are much less likely to be repaid. Countries often try to be lenient with lenders, hoping that commodity prices will rise again. But if the drop in prices is permanent, countries must use more and more extreme measures to hide the problem of loans that have a low probability of repayment in a low-priced commodity environment. Eventually, these loans seem likely to default, if prices do not rise sufficiently. China and many commodity-exporting countries seem to be affected by this problem.

 

 

 

Figure 7. Changes to US Fixed Assets, based on BEA Table 5.10, Changes in Net Stocks of Produced Assets.

BEA shows three amounts of interest with respect to US assets (Figure 7):

  1. Inflation – Changes in asset values based on changes in the general price level
  2. Re-evaluation total – Changes to asset prices in particular; includes changes because assets are taken out of service because of disaster or because a business is no longer profitable. Note the spikes related to the housing bubble of the 2003-2006 period and the corresponding dip during the Great Recession of 2007-2009.
  3. Depreciation – Expected amount of new investment needed to offset “consumption of fixed capital.” This rate is quite high, (about 15.7% of GDP recently) because the asset base includes fairly rapidly depreciating assets, such as cars and computers, besides buildings of all types, and intellectual property such as computer programs.

The last year shown is 2015. Inflation (relative to GDP) was only 1.2%, and the re-evaluation total was only 0.3% of GDP. (Calculated as percentages of the assets involved, these inflation rates would be only a third of these amounts.) These low inflation rates make it very difficult to operate a debt-based economy. A shift from inflation to deflation would be a major problem. Unfortunately, it is very difficult to get much inflation, if the wages of non-elite workers remain very low.

Conclusion

We have kept our economy expanding through growing debt use and growing energy use. I described this process in my post, What has gone wrong with oil prices, debt, and GDP growth?

Now we seem to be reaching the end of the line. The economy is getting very close to shrinking. When this happens, we are getting close to economic collapse–the economic circus is starting to “leave town.”

People who think our only problem is “running out” and “high oil prices” don’t see the problems the economy is developing right now. These problems are much more subtle, but they can have a devastating effect. The Federal Reserve talks about inflation rates above 2% being too high, but inflation rates below 2% are at least equally problematic. Somehow, the debt system needs to keep operating for the whole system to work.

We are now at the point where the economy is decidedly unstable. Little things can affect it, like the Affordable Care Act requirement that uninsured people buy healthcare insurance, or pay a penalty. Low commodity prices make debt repayment more difficult in countries producing those commodities.

We should not be too surprised if the economic circus starts to leave town. There are simply too many pieces that are now unstable. The US Government is facing a shutdown in the near future, unless its debt ceiling can be raised and funding can be enacted. The world is depending on China for economic growth, but China’s debt is becoming unmanageably high. Japan’s debt is also unreasonably high. Oil exporters are becoming increasingly unstable, with continued low prices. We can find problems in almost every country of the world. It looks like it is only a matter of time, until one of these problems starts a downward spiral.

 

Note:

[1] Thanks to commenter “Lastcall” for this analogy.

 

Entrepreneurship in the Social and Solidarity Economy

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Published on Credo Economics on February 22, 2017

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Co-operatives have been described as freshwater fish in a saltwater environment. In the 1930s, the co-operative sector in many countries was very powerful but it was destroyed by fascist and communist regimes. What was it that the authoritarians found so threatening in co-operation? Alternative economic models like co-operatives and social enterprises are explored, together with the arrangements that can help sustain them, like co-operative federations and support networks. However, there are no panaceas – co-ops and social enterprises fail too.

As I have been at pains to point out, the role of the entrepreneur is an idealisation and there is not a simple picture. While a very large proportion of entrepreneurs are crooks, especially in elite positions, this is by no means true of everyone. For example, a book by Claudio Sanchez Bajo and Bruno Roelants shows that, during the economic problems of the last few years, co-operatives have had fewer problems. This is because there are less perverse incentives and co-operatives have less scope for control fraud by their managers because of the shared ownership, participative management and better integration with communities and other stakeholders.

Cooperatives tend to have a longer life than other types of enterprise, and thus, a higher level of entrepreneurial sustainability. In [one study], the rate of survival of cooperatives after three years was 75 percent, whereas it was only 48 percent for all enterprises… [and] after ten years, 44 percent of cooperatives were still in operation, whereas the ratio was only 20 percent for all enterprises. (Bajo & Roelants, Capital and the debt Trap. Learning from Co-operatives in the Global Crisis, 2011) (p. 109)

The fact is then, that entrepreneurs are of many different types, with many different motivations
and standard economic theory tells us almost nothing that would help to understand them. In a study based on 26 Czech and 45 British social enterprises, Nadia Johanisova finds that the most important success factor is motivation. The motivation of social entrepreneurs is not for money or fame but more for self-fulfilment, commitment to place where they have roots and an opportunity to make a difference. Johanisova comments:

This casts doubt on economic theory which assumes financial motivation to be the principal incentive for work….The social enterprises profiled in this report defy conventional economic wisdom in other ways as well: (1) by definition their remit stretches beyond the financial to the social and/or environmental, (2) they are need as well as market driven and may juggle diverse activities instead of specialising, (3) more than half do not particularly wish to grow beyond their current size… Yet they survive and sometimes thrive in an unforgiving environment. (Johanisova, 2005, p. 93)

Co-operatives would have been a lot further forward had not their gains been brutally repressed, particularly in the 1930s and 1940s, by the fascist and communist governments. In her book, Johanisova describes the incredible achievements of the Czechoslovak co-operative movement up to the 1930s. Over decades, small credit co-operatives in rural areas called Kampelika had become an important
part of village life. Despite the voluntary and amateur nature of the administration of the Kampelika, they were efficiently run and were able to eliminate rural usury, educate farmers about accounting and thrift, purchase farm machines for members, install scales in villages to check weights, plant trees and organise cultural events. They complemented other co-operatives i.e. marketing, processing, flour mills, distilleries and so on. They also played a major role in the development of an electric grid connecting 15,000 villages. (Johanisova, 2005, pp. 28-29)

The psychopaths strike back – what they find so threatening in co-operation

This entire movement then disappeared almost without trace because of the Nazis and then, subsequently, the communist regime. Pat Conaty and Michael Lewis draw on a book by Johnston Birchall to describe how similar set-backs occurred in other countries in the interwar period. In Italy, Mussolini seized the assets of 8000 Italian co-ops and took them over, killed leaders and burned shops. In Russia, Lenin repressed them but allowed them to revive before Stalin destroyed agricultural co- operatives (providing 65% of food provisions) in favour of forced collectivisation. Urban co-ops were then closed in 1935. In Germany, Hitler seized their assets and nationalised 1100 consumer co-ops, 21,000 credit unions, 4000 co-op savings banks and 7000 agricultural co-ops. In Austria, where one out of every 3 three households had been members of consumer co-operatives, Hitler’s invasion led to the leaders of the co-ops being replaced by fascists while their assets were seized and handed over to private business owners. In Spain, Franco arrested and killed many co-op leaders while many others took exile in Latin America. (Conaty & Lewis, 2012, pp. 220-221)

One may ask why this happened. One answer, when co-operative assets were seized and passed over to private owners, or to the fascists, was that the co-operatives had been too successful for the private economy and the real basis of economic power in society was being revealed – violence was being
used to re-stabilise the private sector. There is a deeper answer too. All entrepreneurial activity, all business activity, is based on an ethical and a value system, and that ethical and value system, whether consciously or not, implies a vision for society. As regards Czechoslovakia, the co-ops were a threat to the dictators – fascist and then communist – because they represented a self-organised society where people took decisions for themselves and were well-organized to do so.

A form of economic organisation and entrepreneurship that tries to embody and embed democratic principles implies a deeper form of political democracy too. Not least in the sense that co-operatives imply practical participation in economic decision-making by ordinary people who thereby develop skills for a genuinely participative political democracy. John Stewart Mill realized the implications when he wrote:

We do not learn to read or write, to ride or swim, by being merely told how to do it, but by doing it, so it is only by practicing popular government on a limited scale, that the people will ever learn to exercise it on a larger. (On Liberty)

This is why this movement has always been an anathema for autocrats who reserve for themselves alone the power to decide what they deem in the best interests of society. On the other hand, Mill’s insight helps to explain why generations of heretical economic thinkers and social philosophers have tried to revive the social justice tradition of the guilds, recreating the commons and an economics based on co- operation and community.

Alternative economic models in india

The attempt has been international – and not just confined to Europe or the Anglo Saxon world. Gandhi’s vision for economic development for an independent India was as a co-operative path promoting self-sufficiency and self-rule (Swaraj). In his vision, economic activity involved people “developing themselves”, including in a spiritual, self-transformative dimension. (Schroyer, 2009, pp. 82-85)

After Gandhi’s death in 1947, Vinoba Bhave and JP Narayan organized a Bhoodan (land gift) and then a Gramdam (village gift) movement because, without land, there was no way that the village poor in India could be self-sufficient and participate in economic life. The basic idea of both movements was therefore to urge large landlords to gift part of their land to the rural poor. Although significant acreage was donated, the movement ran up against the problem that the rural poor did not have enough money or access to low cost finance. When recipients of the land gifts borrowed, using the land as collateral, much was repossessed.

The village gift movement learned from the repossessions. The amended idea envisaged gifted land organized through village trusts to overcome the risk of repossession. Overall Bhoodan and Gramdan secured 5 million acres over 20 years. The idea spread internationally. Experiments like these inspired Martin Luther King and then a Community Land Trust movement in the United States and elsewhere. (Schroyer, 2009, p. 85) (Conaty & Lewis, 2012, p. 87)

Co-operatives and social enterprises today

At the present time, at least one billion people on the planet are members of co-operatives, though you would never know that from mainstream economic textbooks. In over 800 pages, Mankiw and Taylor’s economic textbooks never discuss co-operatives at all. They only mention “co-operation” as an economic phenomena that they consider is unlikely to happen but which does so occasionally nevertheless. If you are educated in Harvard where Mankiw teaches, you might never find out, therefore, that co-operatives employ more people than the multinationals and provide services to 3 billion people weekly. That is about 40% of people on the planet.

Co-operative federations and support networks

There are remarkable success stories. In the Basque country in Spain, the Mondragon Corporation
has evolved from small beginnings in 1956 to a business group with 80,000 employees, operating transnationally in finance, the manufacture of industrial goods, retail and knowledge – the latter being linked to the Co-operative University of Mondragon. Mondragon is a network that has evolved its own federated support institutions and infrastructure which is crucial to the success of the associated co- operative businesses.

The fact is, that for hundreds of years, and in our own time, huge numbers of people have tried to organise business on ethical, community focused and co-operative principles. However, they have operated in a hostile business environment. As Professor Jaroslav Vanek of Cornell University puts it:

If you go to a bank and ask for a loan to start a co-op, they will throw you out. Co-ops in the West are a bit like sea water fish in a freshwater pond. The capitalist world in the last 200 years has evolved its own institutions, instruments, political frameworks etc. There is no guarantee that another species could function if it had to depend on the same institutions. In capitalism, the power is embedded in the shares of common stock, a voting share. This has no meaning in economic democracy. Economic democracy needs its own institutions for one simple reason. Workers are not rich. Let’s face it, most working people in the world today are either poor or unemployed. They do not have the necessary capital to finance democratic enterprises. Hence, we need some instruments and institutions which make this possible. Why? Because we know that once democratic firms are organized, or even if they have all the elements of democratic principles, they work far better than capitalist enterprises. (Vanek, 1995)

However, while the Mondragon Corporation as a network is a powerful example of what is possible when communities and workers federate, it does have its problems. At the time of writing, Fagor, one of the largest of the Mondragon co-operatives, has had to file for protection against its creditors as it tries to re-organise. The co-operative Bank in the UK has also been in difficulties at the time of writing. It took over the Britannia Building Society that had too many bad debts.

It is therefore necessary to inject a note of caution into the discussion of co-operatives – and into thinking about the whole social economy.

There are no panaceas – co-ops and social enterprises fail too

Co-ops and social economy enterprises fail too. Nothing is eternal, conditions of uncertainty apply to co-ops too and poor decisions are taken by people no matter how ethical or community orientated they are. Nor are the motivating values and ethical systems that apply in co-ops and social economy enterprises always what they seem to be. One may think that the social entrepreneurs are motivated by the ideals of co-operation, the love of their fellow human beings and the environment, indeed they can loudly proclaim that they do. Yet, in practice you sometimes find people who are actually motivated to be seen to be virtuous – and a lot more virtuous than anyone else. These top dogs and leading experts in co-operation may turn out to be condescending micro-managers who always know what is in everyone else’s best interests. Now and then, unfortunately, one meets virtuous people who see themselves as so much better at co-operation than anyone else. Stated values may not align with realities when people
are lacking in self-awareness about their holier than thou stance. Such narcissists may be inclined to petulance and even vindictiveness if and when challenged – as can easily happen because they are such a pain to work with or under.

No organisational form, no ownership regime, is a cure all. It is impossible to design a system that will solve all problems. Karl Marx once wrote that we make our own history but not in conditions of our own choosing. Some of the conditions that may not be of our own choosing include the personalities of our colleagues and co-workers. As therapists will tell you, people’s personalities can be changed slowly – but it takes time. People need to want to change and they are rarely open to therapeutic suggestions from their colleagues.

Freshwater fish in a saltwater environment

Other conditions constraining organisations in the social and ecological economy are those kind
of institutional mismatches that Jaroslav Vanek refers to. It does not help that co-operatives, social enterprises and not for profit organisations exist in a market, institutional and cultural environment that is not set up for them. It is clear, for example, that the current difficulties of Fagor of Mondragon are related to the Eurozone financial crisis and the catastrophic economic conditions in Spain. (Written early 2014). These, in turn, were largely the result of real estate speculation pumped up by the Spanish banks, which are hardly the fault of Fagor, though it is now a victim of the fall out.
There is a deeper lesson here. Co-operatives and social economy organisations can be pulled down
in the collapse of the general economy. Indeed, the closer they are aligned with and integrated into the economic mainstream, the more likely this is to happen. Workers’ ownership and control will not prevent this happening on its own.

This brings me to the example of the John Lewis Partnership. This is the largest worker owned company and third largest private business in the UK with over 70,000 partners. It is sometimes held up as wonderful example to show how successful a trusteeship model for a business can be. For example,
by Lewis and Conaty in their book The Resilience Imperative (Conaty & Lewis, 2012, pp. 280-283) or by Marjorie Kelly in her book Owning our Future (Kelly, 2012, pp. 177-184). As with the Mondragon Corporation, the gains of the John Lewis Partnership are shared between the worker partners.

The Partnership has mechanisms to hold management accountable, to debate and suggest policies in a transparent and accountable system, while power is shared in a federated system of councils which Lewis and Conaty describe as “reminiscent of the guilds”. Like Mondragon, the Partnership has secured its growth through self-financing thereby avoiding the instability and speculation of the capital markets.

Yet for all of these successes, there is a tremendous paradox with the John Lewis Partnership. In an era of consumer capitalism where the economic system is banging up against the Limits to Growth and millions of people are groaning under unsustainable debts, the John Lewis Partnership runs a chain of stores that are veritable temples to consumerism. There is no doubt about it – the partners do sell these consumer goods very successfully, but are these purposes a contribution to sustainability and the future of humanity? According to Marjorie Kelly, the JLP are stepping up their environmental commitments. Under pressure from Greenpeace, the JLP recently backed down from a tie up between its associate company, Waitrose, and Shell. Despite this, the JLP focus on growth means that its carbon emissions are still growing in absolute terms.

In her book, Kelly describes asking someone from the JLP the very pertinent question: “How can a department store chain shift into a low-consumption, no growth economy?” and says of the person that she asked “He doesn’t have an answer. Maybe none of us do.” (Kelly, 2012, p. 184)

Indeed! The purpose of department stores simply does not match a future of energy descent and degrowth, whether they are owned by their staff or not.

Perhaps a better model for the future is provided in Italy, where there has been a 20 year explosive growth of co-operatives providing social services in ways that integrate the participation of disadvantaged groups. In 2013, these Italian co-operatives employed 360,000 paid workers including 40,000 people from disadvantaged groups, with over 31,000 volunteers. They now provide for almost
5 million people and have a turnover of 9 billion euros. These co-operatives also illustrate again the importance that has developed at Mondragon – a level of supportive “enterprise ecology” where there is co-operation among co-operatives – networks and an infrastructure shared between organisations with common values and purposes. (Conaty & Lewis, 2012, pp. 251-257)

The specific client focus of the Italian co-ops is relevant too. In an era of stagnation and even collapse in the so called “developed countries”, when a bulge of elderly people are reaching retirement and will have plenty of needs in their last years, in an era when many others are being thrown into unemployment, poverty and ill health, what the Italian co-operatives are doing will need to be a major direction for the social economy.

The central point is this – companies that focus solely on return on capital alone cannot do a number
of jobs, despite all the “invisible hand” clap-trap. The ethos of extrinsic motivations gives rise to types of enterprise culture that are antithetical to authentic care for people and places. Co-ops and social enterprises can be formed to work for intrinsic motivations, rather than for monetary rewards – but that does not mean, of course, that they can neglect attention to covering their costs. They are not necessarily profit focused if they are trying to make a surplus in what they do so as to ensure their long run financial stability.

Further, much more radical models exist which turn away from consumerism. Throughout Germany, one can find centres set up with equipped workshops which people can use to develop skills to make things DIY. There are also “repair centres” and networks so that people can give away or exchange used products, not to mention community gardens to grow your own food – all a little bit different from John Lewis and its associate organisation, upmarket supermarket Waitrose. (HEi, 2014) (Verbund Offener Werkstaetten (Association of Open Workshops), 2013)

You Owe $21,714

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Published on The Economic Collapse on March 12, 2017

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$21,714 For Every Man, Woman And Child In The World – This Global Debt Bomb Is Ready To Explode

According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars.  Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number.  If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.

So if you have a family of four, your family’s share of the global debt load would be $86,856.

Very few families could write a check for that amount today, and we also must remember that we live in some of the wealthiest areas on the globe.  Considering the fact that more than 3 billion people around the world live on two dollars a day or less, the truth is that about half the planet would not be capable of contributing toward the repayment of our 152 trillion dollar debt at all.  So they should probably be excluded from these calculations entirely, and that would mean that your family’s share of the debt would ultimately be far, far higher.

Of course global debt repayment will never actually be apportioned by family.  The reason why I am sharing this example is to show you that it is literally impossible for all of this debt to ever be repaid.

We are living during the greatest debt bubble in the history of the world, and our financial engineers have got to keep figuring out ways to keep it growing much faster than global GDP because if it ever stops growing it will burst and destroy the entire global financial system.

Bill Gross, one of the most highly respected financial minds on the entire planet, recently observed that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.

And he is precisely correct.  Everything might seem fine for a while, but one day we are going to hit the wrong bump at the wrong time and the whole thing is going to go KA-BOOM.

The financial crisis of 2008 represented an opportunity to learn from our mistakes, but instead we just papered over our errors and cranked up the global debt creation machine to levels never seen before.  Here is more from Bill Gross

My lesson continued but the crux of it was that in 2017, the global economy has created more credit relative to GDP than that at the beginning of 2008’s disaster. In the U.S., credit of $65 trillion is roughly 350% of annual GDP and the ratio is rising. In China, the ratio has more than doubled in the past decade to nearly 300%. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet. Over the same period, the U.S. and Europe only added $12 trillion each. Capitalism, with its adopted fractional reserve banking system, depends on credit expansion and the printing of additional reserves by central banks, which in turn are re-lent by private banks to create pizza stores, cell phones and a myriad of other products and business enterprises. But the credit creation has limits and the cost of credit (interest rates) must be carefully monitored so that borrowers (think subprime) can pay back the monthly servicing costs. If rates are too high (and credit as a % of GDP too high as well), then potential Lehman black swans can occur. On the other hand, if rates are too low (and credit as a % of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities.

There is always a price to be paid for going into debt.  It mystifies me that so many Americans seem to not understand this very basic principle.

On an individual level, you could live like a Trump (at least for a while) by getting a whole bunch of credit cards and maxing all of them out.

But eventually a day of reckoning would come.

The same thing happens on a national level.  In recent years we have seen examples in Greece, Cyprus, Zimbabwe, Venezuela and various other European nations.

Here in the United States, more than 9 trillion dollars was added to the national debt during the Obama years.  If we had not taken more than 9 trillion dollars of consumption and brought it into the present, we would most assuredly be in the midst of an epic economic depression right now.

Instead of taking our pain in the short-term, we have sold future generations of Americans as debt slaves, and if they get the chance someday they will look back and curse us for what we have done to them.

Many believe that Donald Trump can make short-term economic conditions even better than Obama did, but how in the world is he going to do that?

Is he going to borrow another 9 trillion dollars?

A big test is coming up.  A while back, Barack Obama and the Republican Congress colluded to suspend the debt ceiling until March 15th, 2017, and this week we are going to hit that deadline.

The U.S. Treasury will be able to implement “emergency measures” for a while, but if the debt ceiling is not raised the U.S. government will not be able to borrow more money and will run out of cash very quickly.  The following comes from David Stockman

The Treasury will likely be out of cash shortly after Memorial Day. That is, the White House will be in the mother of all debt ceiling battles before the Donald and his team even see it coming.

With just $66 billion on hand it is now going to run out of cash before even the bloody battle over Obamacare Lite now underway in the House has been completed. That means that there will not be even a glimmer of hope for the vaunted Trump tax cut stimulus and economic rebound on the horizon.

Trump is going to find it quite challenging to find the votes to raise the debt ceiling.  After everything that has happened, very few Democrats are willing to help Trump with anything, and many Republicans are absolutely against raising the debt ceiling without major spending cut concessions.

So we shall see what happens.

If the debt ceiling is not raised, it will almost certainly mean that a major political crisis and a severe economic downturn are imminent.

But if the debt ceiling is raised, it will mean that Donald Trump and the Republicans in Congress are willingly complicit in the destruction of this country’s long-term economic future.

When you go into debt there are consequences.

And when the greatest debt bubble in human history finally bursts, the consequences will be exceedingly severe.

The best that our leaders can do for now is to keep the bubble alive for as long as possible, because what comes after the bubble is gone will be absolutely unthinkable.

 

 

 

 

 

 

 

 

 

 

 

 

Crumbling Infrastructure

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Published on The Economic Collapse on February 16, 2017

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11 Deeply Alarming Facts About America’s Crumbling Infrastructure

 

 

 

 

 

No matter what your particular political perspective is, if there is one thing that virtually everyone in the United States can agree upon it is the fact that America’s infrastructure is crumbling.  Previous generations of Americans conquered an entire continent and erected the greatest system of infrastructure that the world had ever seen, but now thousands upon thousands of those extremely impressive infrastructure projects are decades old and in desperate need of repair or upgrading.  The near catastrophic failure of the Oroville Dam is a perfect example of what I am talking about.  We should be constructing the next generation of infrastructure projects for our children and our grandchildren, but instead we are in such sorry shape that we can’t even keep up with the maintenance and upkeep on the great infrastructure projects that have been handed down to us.

Once upon a time nobody on the entire planet could even come close to matching our infrastructure, but now our crumbling infrastructure has become a joke to much of the rest of the industrialized world.  Sadly, this is just another symptom of our long-term economic collapse.  We simply are not able to put as much of our money toward infrastructure as previous generations of Americans did, and as a result we have a giant mess on our hands.  The following are 11 deeply alarming facts about America’s crumbling infrastructure…

#1 According to the American Road and Transportation Builders Association, nearly 56,000 bridges in the United States are currently “structurally deficient”.  What makes that number even more chilling is the fact that vehicles cross those bridges a total of 185 million times a day.

#2 More than one out of every four bridges in the United States is more than 50 years old and “have never had major reconstruction work”.

#3 America does not have a single airport that is considered to be in the top 25 in the world.

#4 The average age of America’s dams is now 52 years.

#5 Not too long ago, the American Society of Civil Engineers gave the condition of America’s dams a “D” grade.

#6 Overall, the American Society of Civil Engineers said that the condition of America’s infrastructure as a whole only gets a “D+” grade.

#7 Congestion on our highways costs Americans approximately 101 billion dollars a year in wasted fuel and time.

#8 According to the U.S. Department of Transportation, over two-thirds of our roads are “in dire need of repair or upgrades”.

#9 In order to completely fix all of our roads and bridges, it would take approximately 808 billion dollars.

#10 Federal spending on infrastructure has decreased by 9 percent over the past decade.

#11 According to Bloomberg, it is being projected “that by 2025, shortfalls in infrastructure investment will subtract as much as $3.9 trillion from U.S. gross domestic product.”

The quality of our infrastructure affects all of our lives every single day.  For instance, we all simply take it for granted that safe, clean drinking water is going to come out of our taps, but recent events have shown that is not necessarily always going to be the case.

Just ask the residents of Flint, Michigan.

Water pipes, sewer systems and water treatment facilities all over the nation are aging and are in desperate need of repair.  Of course the exact same thing could be said about our power grid.  It was never intended to handle so many people, and on the hottest days of the summer the strain on the grid is very evident.

And of course the power grid is exceedingly vulnerable to an electromagnetic pulse event, and this is something that I covered in my book on getting prepared.  It has been projected that it would only cost a couple billion dollars to harden the grid against an EMP event, but our politicians refuse to spend the money.

Meanwhile, President Trump is completely correct when he says that our airports look like something that you would see in a third world country.  Most of our airports are at least several decades old, and they are definitely showing their age.

But things are even worse when you look at other systems of mass transit around the country.  While other nations such as Japan and China are investing huge amounts of money into high speed rail, we are doing next to nothing even though what we currently have is absolutely pathetic.

I could go on and talk about our ports, schools, waterways, parks, etc. but I think that you get the point.

President Trump’s instincts are right on the money when he says that he wants to spend a trillion dollars on infrastructure.  Without a doubt, we desperately need it.

The problem is that we are flat broke.

We are 20 trillion dollars in debt, and we are adding more than a trillion dollars to that total every year.

So where are we going to get the money?

It is easy for liberals to say that we should raise taxes, but how much more are you going to squeeze out of U.S. consumers?  Two-thirds of the country is living paycheck to paycheck, and we just learned that U.S. household debt has risen to a grand total of 12.58 trillion dollars.

Once upon a time, America was the wealthiest nation on the entire planet and we could afford to construct bold, new infrastructure projects from sea to shining sea.

But today we have the biggest mountain of debt in the history of the world and we can’t even afford to repair what we already have.

When I speak of our long-term economic collapse, this is precisely the sort of thing that I am talking about.  We have clearly been in decline for a very long time, and anyone that would suggest otherwise is simply not being honest with you.

 

Knarf plays the Doomer Blues

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And so it continues.JOWLink: https://thenewdaily.com.au/news/state/sa/2020/11/27/fires-heatwave-australia-november/Text: Fires ignite as sweltering heat moves across SE Australiasa bushfire emergencyThe CFS says the fire may pose a threat to pub...

Actually good to see it is being investigated. We have a pretty good rule of law here in Oz. Lots of other stuff gets ignored by authorities.Thats what bought WIKI leaks to the fore; collateral murder.JOW

Disbanding one troop of the SAS so far.. Will be a few war crimes charges laid from this. Pretty ordinary behavious; shooting un-armed civilians. Everything you are told as a grunt should tell you this is not legal. Has brought the whole SAS regiment i...

Quote from: Eddie on November 25, 2020, 05:47:46 PMFigured it was about time for you guys to be getting a little early winter. Well done.yup, luckily the new property is 700ft lower in elevation and 90 minutes south so t...

Figured it was about time for you guys to be getting a little early winter. Well done.

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