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109 comments on DrumBeat: November 22, 2008
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109 comments on DrumBeat: November 22, 2008
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The Energy Bulletin pointed out this article: Nine Percent.
The article points out that oil production has risen by about 2 percent over the past century. However they point out that because they pushed the fields well beyond normal production limits, using secondary and tertiary recovery techniques to scour the formations, that the decline is likely to be closer to 9 percent.
Now I think that is way too steep. I believe the decline will be between 3 and 5 percent, beginning about five or so years after the peak, which is right now. But that is not the point I wish to make, or argue. Here is the statement from the essay that caught my attention:
In a debt based economy such as ours, as well as all the developed world, the economy must grow or collapse. If the economy does not grow then there is nothing to pay interest on all that debt. Also as the population is always growing the economy must grow just to keep full employment. So the economy simply cannot simply gradually shrink in step with the decline in oil production, it must either grow or collapse. And we are witnessing the first stages of collapse right now.
But you ain't seen nothing yet!
Ron Patterson
i dont want a job, i want a bailout.
So do the dying bees, the bats dropping from white-nose fungi, the frogs with deformities, the fish with lesions, the polar bears watching the ice recede, the shellfish having acidifed seawater dissolve their shells, the forests being strip-mined with no replanting...
Which would you rather see go extinct?
Big3: GM, Ford, Chrysler
BIG3: bees,bats,birds
not aimed at Elwoodelmore, just a general comment.
Totoneila:
And not to overlook our own species: the dying masses in the giant slums of the world, the detritus of an "expanding" economy that grows the market class and rejects and marginalizes everything and everyone else.
A couple of days ago I was upbraided for my "tedious" comments. I will continue to make them until I perceive a growth in justice while we try to expand our economy.
Of course, I would use the word "tendentious", not tedious.
sobering reality imho, for the earth to live in any way shape or form similar to what it has built up from the last major extinction event, most of us will have to die. yet we are all biologically programed to live and to fight to live.
step up everyone, take your seats! for the greatest show on earth you will ever see!
Ron you're right the tipping point can't be too far off.
National debt servce
The headline debt currently is 10 trillion (lots of other unfunded liabilities) and just the interest to service that may hit 600 billion for FY 2009. All the while the red continues with 'borrowing' to hit 1 trillion per year starting now. I think this is where Don Sailorman's 'monetization' comes in.
Estimates vary as to when debt service will exceed tax revenues. One thng I know for sure is that the removal of trillions of vapor dollars in the current meltdown will hasten that day. That and +20% unemployment.
OBTW that sound in the backgound was that of the traditional lenders wallets going shut as they fund their own 'stimulus' packages. Government fiscal response to 'spotfires' becomes rapidly ineffective. Katrina on steroids.
Got ELP?
Re USA debt, China appears to be the last remaining support for Obama's grand plans. Their is a rumour that Chinese automakers will take GM and Ford off the USA taxpayers' hands as the technology might be useful. It seems like a lifetime ago that China taking over American industry would be alarming, not it is a relief.
hadn't heard that one though Toyota had been mentioned due to sharing parts chains. They're gonna be smaller but how small and how many potentially unemployed will the solution keep working. Ideally there would be someway to get that 'relief' and get them building something useful in the bargain
But then is the FED coming to the rescue.
Who actually is owning the FED? Is that such a mystery?
In Europe and all over the world, the central banks are owned by the governments. Not so in the US! It seems to be private.
The Fed seems to be privately owned, and technically it is. However, in fact the Fed is a quaisigovernmental agency; it works in cooperation with the Treasury and never (in the past half century) at cross purposes with the Treasury Department.
Hence, we can be sure that the Fed will buy up any debt that the Treasury issues and wants the Fed to purchase. Congress created the Fed, and Congress could dissolve the Federal Reserve System or take away its powers. Thus the Fed is not going to get into a big conflict with Congress. With its power of creating money out of thin air the Fed can guarantee an orderly market in Treasury securities no matter if the deficit goes to two trillion or to four trillion dollars. Theoretically the Fed is an independent body that does not have to do what the President and the Congress desire, but for all intents and purposes the Fed is under governmental control, and the banks that own the Fed have no say in monetary policy or in who gets appointed the the Board of Governors of the Federal Reserve System.
Yes I believe that the Fed will do what is needed to have money flowing through the economy. However, patience is running thin. If there is a severe shortage of dollars in the US and World economies (and the evidence suggests that there is) then they need to move fast on quantitative easing (i.e. purchase of some treasury securities from the US treasury). A Fed governor did suggest that Thursday - now get moving.
I think that both the Fed and the Treasury are bailing as fast as they can. Note that the Fed cannot force lenders to lend, nor can it force borrowers to borrow. Pumping more money into a liquidity trap does not help.
On the other hand, the Fed has been doing a fine and dandy job of lending to distressed banks and others, and the Fed is doing an admirable job of financing this year's one trillion dollar deficit. I expect them to do a wonderful job of financing next years two trillion dollar deficit and Obama's two-year stimulus package also. It is right to blame the Fed for the excessively easy monetary policy that fueled the increase in house prices, but I don't think the Fed is being at all tight now. When it makes mistakes these days the Fed tends to err on the side of excessive looseness of monetary policy, not on the side of tightness. Thus I expect inflation rather than deflation, despite a falling real GDP.
While conventional wisdom does blame low interest rates, IMO that blame lies elsewhere and should be ascribed to less politically correct actors. The bubble was caused by
(1) lax underwriting standards
(2) greed on part of Joe and Jane - they speculated wildly on real-estate and flipping was a path to riches and retirement
(3) Loan officers are human - and Joe and Jane (a) look like them and (2) often are nephews, nieces, cousins, neighbors, church members.... - so the loan gets made.
(4) Securitization played a role too -
(5) rampant fraud by mortgage originators (often mom and pop or one person operations)- who fraudulently mis-filled applications
(6) fraud by the local real estate community via inflated appraisals
(7) WS fixed income types who sold these securities because there was a market for them - and poor due diligence on part of buyers of those securities
----------------
I hope that you are right about the Fed.
I agree with your list of seven causes of the housing debacle. However, if the Fed had kept money tighter, the bubble would have been insignificantly small. Easy money which caused easy credit allowed the seven factors to grow mortgage debt and derivatives to monster proportions.
The main job of the Fed is to take away the punchbowl just when the party is starting to get fun. The Greenspan Fed failed miserably in that primary mission.
As I've mentioned elsewhere, I advcocate monetarism, which means a slow and gradual change in the money supply in accordance with long-term growth or decline in real GDP. With monetarism we would not need a central bank to control monetary policy.
One thing I have no idea of: When will the Fed recognize that our economy is on a path of long-term decline? It won't be soon. The Fed sees its primary objective as providing enough money and credit for the real GDP to grow at least 3% per year--a rate of growth in money and credit sufficient to stop unemployment rates from rising.
Not having studied economics professionally (except for one undergraduate course - Paul Samuelson's book and Henderson and Quandt on micro economic theory) I have not given much thought to monetarism. Does monetarism still work with China in the picture and currency that does not float?
I do not believe that the US economy is on a path of long term decline - and any decline is because of social reasons - the primary two IMO
(1) the country became incredibly wealthy and therefore has now become a country of whiners who want everything for little effort and
(2) the artificial strength of the dollar against several currencies has made consumerism go out of control because manufactured goods are so incredibly inexpensive. However the United States is still dynamic and capable of self renewal, and I think that the current election is one evidence of that. Similarly opposition to another blank check to the UAW is another. (I consider the whining culture and runaway union power as the two primary reasons for the decline in US manufacturing)
Getting the dollar down against some major currencies (Yuan, Euro, middle-eastern currencies) would help with many of the issues that we face, and reenergize American ingenuity.
In my opinion monetarism makes more sense than discretionary monetary policy does. The main problem with discretionary monetary policy is that it operates with long and unpredictable time lags--and thus tends to overshoot. For example, now the worry is about deflation, and the Fed pours money into the banking system to counteract deflationary tendencies and to prop up banks. But a year from now we're likely to have increasing inflation based on what the Fed is doing today.
I also used the Samuelson text and then the Henderson and Quandt book as a student. Later, when I was an instructor, I used the Samuelson text for many years and saw big changes in content as older ideas became discredited and new ones came into the foreground.
Declining oil production is going to cause a bleak future for the U.S., regardless of what monetary and fiscal policies are followed. It is highly questionable whether we will be able to make a successful transition away from oil--regardless of our technical ingenuity. Business as usual and politics as usual makes it hard to adapt to radical change.
Monetarism - OK - (IMO flexibility inherent in the current policy is a plus since the macro situation is dynamic)
I did not realize that Samuelson's text had changed in some fundamental fashion over the years - I will have to pick up a recent edition.
A lot has happened in economics since the first edition of Samuelson back in 1947 or '48. It is no longer a leading textbook. Just for fun, you might like to compare an edition from, say the 1970s with one of the recent editions. For macroeconomics, a good basic textbook is by Colander, but there are half a dozen others that are about as good. For microeconomics I like the text by Robert Frank. You can get old editions, only a few years out of date, for very little money.
I will check them out on Amazon. I took the course in the early 80s so that should be 11th or 12th edition - but the copy that I had was probably an earlier edition, likely from the 70s.
- What the Fed is doing is ruining its own balance sheet, swapping bad loans from banks (and whatnot) for 'Good' Treasury securities. Unlike a bank, which can go bankrupt and have the court wipe the debt away, the Fed has to make it all good, somehow. They are the Fed, after all, not some cheap bank ...
- The Fed and the Treasury are also taking on trillions in off-balance sheet liabilities, that will have to be paid for.
- The fundamental concept behind inflation is the counterparty will accept the devalued money and find some way to pass along that devaluation. Where this has happened, the counterparties have had no option but to accept the Weimar Marks, Argentine Pesos or Zimbabwe Dollars. The counterparties to dollar transactions have options, they can demand gold, for instance instead of American dollars. Additionally, many of these counterparties are lenders to us, they can refuse to lend further unless we give them 'good' money or some valuable good in return.
If the US monetizes, Saudi Arabia would stop lending. Why would they continue to do so a) knowing they aren't going to get paid and b) that they have something they can sell for value somewhere else?
In fact, the US is in borrowing trouble already; our big overseas lenders have finance problems of their own. Russia and China are burning through their reserves of foreign capital as fast as they can to stave off economic decline in their countries and Saudi Arabia is not as rich - at $50 a barrel of oil - as they were this past summer. Neither is Kuwait, even the UAE is cutting bank.
Finding the funds that we the people - and our government - need to finance day to day operations is going to get pretty interesting. The long bear market in bonds may be about over.
Nope I still don't get it.
How is issuing debt better than issuing currency?
Oh you mean that's handled by people like Paulson... or Geithner?
Monetary policy is decided by the Board of Governors of the Federal Reserve System. Theoretically, the Board of Governors are protected from political influence by their long (fourteen year) terms, but Congress is always hovering in the background, as is the Treasury with its needs to finance ever-expanding deficits.
Issuing debt isn't any "better" than issuing currency; it is just the way our fiscal and monetary policy work. When the federal government spends more than it takes in in tax revenue, then there is a deficit. These deficits need to be financed in an orderly fashion, and the Fed is always ready to gobble up more Treasury securities if nobody else wants them. However, you can see by the extremely low interest rate on Treasury bills and the rather low rates on Treasury bonds that plenty of people want to buy Treasury securities.
What the Fed is doing when it finances government deficits is to create money out of thin air to buy the Treasury securities. All this is legal. It seems a strange system, and it is--but it just evolved to be the way it is.
On U.S. currency is printed the motto, "In God we trust." I think that is misleading and blasphemous. God has nothing to do with creating money or seeing that it holds its value. An honest motto would be "In the Federal Reserve System we trust."
I trust the Federal Reserve System--to inflate the money supply as it has since 1913 to the extent that a dollar now is worth about what four or five cents was worth in 1913. What do I think the dollar will be worth in 2020? Much less than it is worth today.
It's been shown a number of times that the relationship between oil and the economy is a far cry from a 1:1 ratio. Excluding the current credit crisis, the global economy grew quite well between 2001 and 2007 when oil production was essentially flat. The relationship is far more colorful than the black and white picture that is occasionally painted.
I've found the best way to look at it is that the economy and oil are related on an order-of-magnitude basis, per Hirsch's view.
See my assessment of four different reports to see where that comes from:
Estimating the Economic Impacts of Peak Oil
http://www.postpeakliving.com/blog/aangel/estimating-economic-impacts-pe...
canopener - I am sure someone else will do a better job than I of saying this but...
Global economy growth from 2001 to 2007 was a virtual farce generated through "Financial Engineering" and is now in reversal which will wipe all that growth and then some off the planet.
I don't agree with that. USA economic growth most likely was such a farce, but the world economic growth is now dominated by the so called developing economies, often typified by the acronym BRIC (Brasil, Russia, India, China). The growth in those economies, as well as in middle eastern oil exporters was real. Now real growth, does not equate to sustainable growth. We are about to see how well the gains for these economies holds up to the collapse of the rich world Ponzi economy.
I don't deny that those countries economies grew but "I believe" (don't have the charts to prove it) that the virtual wealth that was created during that peroid, which is large enough to bring down whole countries, factors in at as a much higher percentage.
In regards to the "real" gains of these countries, they just like any and all who have any wealth to speak of, will do what ever they can to "protect their wealth".
In all the forums I read wealth protection is the bottom line issue. When ever I hear that phrase I can't help but visuallise
someone straddling a pile of gold holding an M16 and a knife in their teeth.
It seems humanity (americans?) will toss babies into the mouth of the beast before giving up their "hard earned gains".
We will see what the world does.
Cheers!
I don't pretend to know the exact relationship of oil extraction to GDP growth, but I don't think using just a few years of data establishes the relationship. Buying on credit can create nice GDP figures...for a while.
If peak has arrived and oil production will decline from here on out, will GDP continue to increase in the long run? I have my doubts.
Suburban/exurban land values are inversely related to gas prices (vis commuting costs).