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317 comments on DrumBeat: July 6, 2006
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317 comments on DrumBeat: July 6, 2006
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In the middle we have to distinguish between companies that are merely "overvalued" (quite common) and companies that are running a true scam (somewhat less so).
I recall a computer add-on company of some kind (sound boards?) who was discovered to have taken massive numbers of returned and defective product, and stashed them in a warehouse ... trying to keep them off the books. They certainly veered into scam territory, who knows by what incremental path.
When the music stops, the ones who came in late - the ones at the bottom of the pyramid - are going to be screwed.
Of course this sounds strangely similar to our US Social Security system.
Does it correspond to other parts of our "system"?
What other parts are built on mis-information and fraud?
Seems to me that the Ponzi scheme idea is only partly true and only on a long time frame. Product is being delivered as long as we have the cheap energy for creating it. As cheap energy wanes off, the Ponzi component of the whole shebang gets larger because more is promised and less delivered.
It's really more of a 'Squander' scheme, with the empty promise of being able to squander endlessly into the future.
In the market 5K years ago:
Trader: I have these jars of excellent imported wine, I will sell them for just 6 coins.
Merchant: They smell like they're starting to go off to me. I'll be lucky to move them before they go sour. 3 coins.
Trader: Are you serious? I should take these to the palace, for they are truly suited for kings ... 5 coins.
Merchant: You know, the local stuff is getting much better. My customers are starting to prefer it. 4 coins.
... and so one.
If you ask me, they "analysts" on CNBC in the afternoon are just playing the role of "Trader," one (again) as old as civilization. They are putting the best possible face on their products.
We've actually decided (as a society) what constitutes a scam, and embodied that in a whole series of laws and institutions.
Some people want to throw that over and say it's all a scam ... while I think it's useful to distinguish from things that are merely overvalued or oversold.
Maybe we have enough generations history dealing with swarmy salesmen to develop neural countermeasures.
You do. I do. But advertising still has some sway with us. And a large fraction of society's neural countermeasures aren't nearly as well developed.
Heck, my university educated mother can't resist buying a new household product after a new round of advertising hits the television. And I don't think she's atypical.
Honestly, if it didn't work, do you think companies would spend billions on advertising? Check out No Logo by Naomi Klein.
"There ain't no peak oil, it's just them dang oil companies gouging us!"
While the Cuba powerdown is romanticised, an alternative situation can exist in the form of North Korea. Not good! As if Cuba wasn't bad enough, North Korea is a micro-case of America but with capitalism - only making things worse. Get ready for a looooong ride doooooooooooown! We are misappropiating resources to the military NOW. To be honest, I don't want to see that wreck from a cockpit!
Things will not be good during ANY "powerdown". It seems that a powerdown does require a "command economy" but the way it's done make a giant difference. Fidel did maneage a "powerdown" though admittedly not optimally. Much more likely our own powerdown will be way sub-optimal. Democracy, like capitalism takes a powerup case, so all bets are off.
It's no wonder why doomers love the oil peak topic! PO allows for doomers to have fun. It is up to us and people to remediate it like Y2K but it will be harder by far. Can PO be remediated? We will sure find out, most likely the hard way, as TSHTF.
BTW I keep putting "growth" in quotes because the only thing that truly grows is the throughput of nonrenewable resources and the destructive impact on the planetary environment. When economists learn to subtract as well as add, the externalized costs will show that the "growth" is a loss to most of us.
Growth for it's own sake is the ideology of the cancer cell.
Like Kenneth Boulding said, "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist."
While fossil fuels last they will provide (in combination with technology of the day) a "harvest" or "return" or "growth."
We like to point out that oil shale has the energy density of mere baked potatoes. Well, if there were a few billion tons of baked potatoes out there (even inedible) somebody would probably mine them too.
Ultimately, on the long timeline, we will be working with resources lower in energy density, but with a higher technological lever. It's science fiction to say, at that far distant point, what the outcome will be.
Then that's where we disagree. I don't think we'll be able to maintain our technological complexity on a diet of inedible baked potatoes.
And I think our past is a pretty good signpost of what our future will be like.
Can you tell me what the best shale technology will look like in 100 years?
It stikes me now that both "cornucopians" and "doomers" are making the same mistake and counting chickens. The cornucopians see infinite chickens, and the doomers see zero chickens.
;-), moderates wait until they hatch.
Shiny reflective surfaces (i.e. solar ovens) are a recent invention. But people in Africa love them, even though for many these things ("cookits" is what they call them) are the only modern trapping in their homes.
If that Kin Jong Il were to launch a 4-stage rocket with one and some boulders the would would take notice if in orbit like Sputnik. The boulders would serve only as added weight to prove he can do it. If he can launch a 500 pound (245Kg or so) payload into space he proves he can launch a 500 pound-weighing weapon -including nuclear - to any spot onto Earth. Not good. BTW the boulders if released serve as a road hazard to space shuttles :)
It is possible though not probable that Kim Jong Il launched that long range missle as a deliberate dud. By launching a known dud you get the rest of the world to think you're not up to the job yet - a bluff in reverse. That way, you get the diplomatic adavantage of not being a "full scale" danger BUT you wait until America is done with Iraq then you fire off an underground nuke PLUS put those boulders in orbit then America is militarily and diplomatically stuck. Any time you get a rocket to get 500 pounds into orbit you can get a nuke anywhere only if you aim good.
There is absolutely positively 100% certainty that there is no way to KNOW the future.
Not for nothing did I read some tens of thousands of pages of philosophy;-)
But there are two ways to make money in stocks - dividends and capital gains. On the surface it looks like dividends is the sustainable route and capital gains not. But the tax law favors capital gains. Companies can use stock buy-backs to turn profits into higher stock prices. So a company making a nice steady profit can still have a rising stock price even though the total value of outstanding shares is fixed. Toss in the occasional stock split - my guess is that profits can sustainably be returned as capital gains instead of dividends.
Somebody might suppose that profit itself is unsustainable. It gets a bit absurd though. Prigogine's notion of dissipative systems seems like a pretty good model for life. The game is just to tap into the flow of energy from the sun into deep outer space. As long as the sun shines, there is a flow of energy to tap. Sustainable enough for me.
Did you read Mike Hearn's contribution? It explains (among other things) why usury - charging interest - was such a grave sin in Biblical times, and why interest makes growth necessary.
Of course, a finite (and long-term constant) amount of energy from sunshine was captured each growing season to keep the biosphere operating. But there was no "investing" to be done, other than the zero-sum kind: whatever grass one animal ate was not available to others. We are heading towards that kind of world economy.
The whole argument about interest was about how to proscribe the sharing of investment risk. "Parners" presumably share both up and downside. "Lenders" do not. That's a social judgement about how to manage the underlying growth and risk.
You want to plant an orchard? Would you prefer a lender today over a parnter? Why?
IMO - no, it wasn't. The problem with interest was that it's "unearned income." It's money you get for not doing anything. You don't produce anything, or do any work. A steady-state economy can't support much of that.
Study the topic of "roundabout means of production" and you will begin to understand the logic of borrowing for business to make a profit. There is nothing wrong with that, so long as interest rates are reasonable.
What seems fundamental to me is that one can improve the productivity of the land through wise investment. This might be through planting seeds, or by building some system to save up rainfall to water the soil at a more measured pace, or by using some more efficient tools for harvesting, etc. Similarly, if one invests e.g. in better insulation, one can use less fuel to heat one's dwelling.
Then there is an interpersonal aspect to all this. Young folks won't have had time to have built up infrastructure. Old folks might have built up some beautiful infrastructure, but the joints are getting creaky and they don't have the physical strength and stamina anymore to get all the tasks done. So it seems natural enough to make a kind of deal - the old folks can partner up with the young folks. The young folks can use the infrastructure built up over the lifetime of the old folks to get lots of efficient farming done. The young folks can then share some of the harvest with the old folks.
We can use some of the surplus energy from one year to build up infrastructure to make our work more efficient next year, or at least to repair the infrastructure and maintain our efficiency.
Accounting goes back to the origins of agriculture. How exactly to negotiate and regulate these bargains interpersonally - if my accumulated surplus can make your work more efficient, sure seems like we can all share in the benefit, but how exactly to structure that sharing - I'm happy to let the economists model and analyze and optimize the various possibilities.
But I like to keep an eye on the fundamentals. If I put in the time to patch the broken pane in the window, I get a continuing reward in a more comfortable cabin, or I don't have to burn as much wood in my stove. There is an underlying reality that is not a mere fabrication of economists or politicians.
I predict strong deflationary headwinds as consumers and businesses try to unwind highly leveraged holdings.
Excerpt from Urban Survival:
"OBSERVATIONS ON CALIFORNIA HOUSING, JULY 2006
Why focus on California housing? Because it is a big deal - it represents some 25% of the dollar value of the US housing, or $7-8Tr.! Someone from North Carolina pointed out to me that the housing is doing great in NC, but it is no more than 1-2% of the dollar value of the US housing. A 20% drop in the price of California homes has the potential of taking the US and the world economy down with it because of the leverage, reckless lending practices, pioneered in Southern California, and the globalization of the financial system.
Just kidding. "quasi-ponzi" might be fair, but better IMO just to call a bubble a bubble.
http://www.financialsense.com/fsu/editorials/2006/0705d.html
I couldn't find the discussion at Urban Survival. Jas has been talking about Calif property prices for over a year at FSO and substantiating his comments with plenty of hard data, his posts there are easy enough to find but I'll make it real easy:
http://www.financialsense.com/fsu/editorials/jain/archive.html
If I recall right the GDP of California is about 7th in global terms if it were a separate country; since a significant real estate value decline there would probably have knock on effects in other US regions it is quite plausible that a 20% decline would be sufficient to precipitate significant upset in the global economy. When we are near the depths of the coming depression declines of 60%+ versus the peaks of last summer are plausible:
http://www.financialsense.com/fsu/editorials/2005/images/0501.gif
providing this economic system continues to function.
Of course, a significant population reduction also takes the upward pressure off property prices. I expect at least 20% of US residential property will be effectively free, in the financial sense, some time in the next 20 years. Even more positively: property taxes may well be much lower or even absent, as could utility bills be ;)
Of course, it may get much worse. BUt, previous sharp downturns have always in the past occurred when either a) interest rates went very high, or b) a recession arrived, or both. Neither are yet present. The fed looks to pause now, probably until late Nov, and the economy is still strong.
Current sales, unsold inventory, inventory / sales, data are all well out of kilter with the last 10 years' data, just waiting for the price dimension to properly catch up (that is, down).
The economy is still strong? In the sense that a basket case is waterproof, yes. If the GDP statistics were 'unfiddled' the US economy would be in recession already. Nonetheless the official US stats will show the US entering recession (growth less than 0% for a quarter) in 2006 Q4.
Fed pause now? Only if data over next month are dire, and they shouldn't be. 5.50% looks near certain at next (probably) or subsequent FOMC meeting. A desperate rate cut for Xmas is plausible.