Thursday's Open Thread
Posted by Heading Out on December 29, 2005 - 10:37am
Topic: Miscellaneous
Rain and fog mark warmer days in the North East, but the subjects are for you to choose.
Update [2005-12-29 10:18:52 by Super G]: Also, you can now access the "classic" TOD posts (pre-8/20/05) on this site at http://www.theoildrum.com/classic/. In addition, forwarding is enabled from the old Blog*Spot domain to this site. Enjoy!
I'm sure to hear from the "gold bugs", e.g., Francois posted on Sat Dec 03:
Before you can argue if we will have inflation or deflation you have to define how you are going to measure it. If you measure it in $$ then we are going to have inflation ... If you measure it in the price of gold - then we are going to have deflation - it is going to take less and less gold to buy the same stuff.
- so yes, "inflation" is relative to a chosen currency of reference - and a chosen "basket" of goods. The issue is people's savings and debts, which are in a specific currency. Moreover, will it cost more in the future to buy scarce resources (oil) in ANY currency that has not become even scarcer itself? Comments?
The issue of what happens to the money we spend on energy is a critical one that I think is very often overlooked.
If you build an electricity generating plant in the US that runs on fossil fuels, in very general terms you have a capital cost up front that gets swamped out by ongoing fuel costs over a period of years. If you're buying coal from within the US to run your plant, then the money very likely circulates within the US--the coal company pays its employees, buys equipment and supplies in the US, etc. If you're fueling your plant with natural gas imported from Canada or Mexico, then the fuel expense leaves the US system and is literally a drain on the economy. (In all cases the plant contruction and maintenance are (largely) US expenses.)
But if you build wind turbines, there's a higher initial cost/unit of electricity, but extremely low ongoing cost (basically just repair and maintenance, plus possibly land rent) since the fuel is free. If you buy US-made turbines, a very high percentage of the money should stay in the US.
You can find a lot more about the movement of money and how it interacts with inflation by Googling "velocity of money".
http://observer.guardian.co.uk/business/story/0,6903,1669717,00.html
Welcome to energy realpolitik.
All that theoretical work is very valuable and useful, but I suspect that this kind of "cultural change" will face a stubborn resistance.
Why do I have the feeling that we are not going to solve this problem but merely react to it?
Zugzwang!
Storm Warnings - James Conaway's experiences during Betsy and some thoughts on Katrina.
Up On the Farm - Some Nebraskans are bucking the grim corporate reaper - Gillian Klucas writes about Nebraska's law keeping out the agribusinesses and how some farmers using organic farming helps preserve small towns.
A monetary system dependent on growth
It's a concise explanation of why capitalism is a pyramid scheme. It has to keep growing, or it will collapse.
There's another explanation here.
a bunch of nonsense.
First, Capitalism itself is NOT dependent on
Growth. Growth and Decline are a fundamental
aspect of Capitalism. Growth or decline for that
matter is NOT a requirement. Capitalism is
a dynamic process in which goods, labor and
ownership are constantly exchanged in a free
and open marketplace. It has existed long
before 1776 and will exist long after 2005.
Second, From time to time governments get to be
too powerful and seek to control a society's
wealth to a great extent. All capitalistic
societies need some government involvement. However,
when the involvement is too onerous, problems
develop.
Third, Capitalism as currently practiced in
the United States is beginning to reach such a
level. Society has decided that it cannot
tolerate the down aspect of the capitalistic
business cycle - it only wants the up cycle!!
This has been occuring for more than 20 years
now. Thus, to the uninitiated, it appears that
Capitalism requires constant growth.
It doesn't!!, and it cannot provide only an up
cycle. The natural down cycles have been
suppressed by the machinations of the government.
When they can no longer maintain this control,
the system will 'Correct' and correct big!!
When this happens, it will seem like the end of
the world to some. But it won't be. It will
probably take a generation to restore normal
prosperity again. And because of Peak Oil, such
prosperity will pale in comparison to what
currently prevails.
Care to share that kool-aid? or at least whatever it was spiked with?
The argument advanced in favor of this point (as in the linked article) is that bank loans must be repaid with interest, hence the money supply must constantly grow. It's a simplistic argument and hardly worth rebutting. If anyone knows of a better one, let me know.
The rebuttal goes like this. A bank makes a loan for, say, $100 and wants to receive $110 in return. Let's suppose the loan is successfully repaid (I'll explain how this works in a moment). Now the bank has $110.
It uses the $100 to make another such loan and retains the $10 as profit. The bank spends this $10 profit on its choice of items, such as beautiful decorations for the bank.
The point is that this $10 profit gets circulated back into the economy. And it is this addition of $10 to the total circulating money that ultimately allows the new $100 loan to be repaid with interest. Since there is $10 more circulating in the economy, the $110 can be repaid without anything having to change.
Then the cycle can repeat. The bank receives the $100 repayment plus the $10 profit, spends the $10 and loans out the $100 again. Meanwhile all other banks are doing the same things, making loans, receiving repayment and spending the profits to keep the money in circulation.
This, then, illustrates the fallacy in the myth that capitalism and banking requires constant growth to allow for the repayment of loans. In fact, loans can be repaid just fine with a stable money supply and economic base.
Capitalism does not depend for it's life on growth, however, a fiat money system featuring interest bearing debt creation does. We should separate the two issues.
The nineteenth century had a very stable money supply (gold) with zero (zilch) inflation. Capitalism thrived. (Of course, there were many boom/bust cycles, a symptom of uncontrolled capitalism, but the money system was not inherently a pyramid scheme as we have today.
Savings is the bedrock of market economies. It began with the first caveman setting aside food and other supplies so he had enough bonus time to not be scavenging every day. This bonus time let the caveman produce other things or find better ways to do certain things. But he had to have the savings to start. His choice when he had a surplus of food or other material was to have a wild party (like modern man) or to save it in order to use it more wisely.
Further, fiat money lets us postpone the savings into the future but you can't continue that Ponzi scheme forever. At some point some players in the game will opt out because they no longer believe that subsequent generations will flagellate themselves so badly to pay for your profligate spending today. When we reach that point, the entire fiat system crashes on its head and we'll see a demand for savings (real collateral) before loans are made on a wish and a whim.
In the meanwhile, the current system is a Ponzi scheme, enabled solely by the "full faith and credit" of the US government. And the current system is dependent on endless growth (but pure capitalism itself is not). As others have noted, this is not pure capitalism, just one particular variant of capitalism and as such it is subject to replacement by other variants as conditions change.
In the face of declining global resources, rising population, and continued inflation of the fiat currency of the day, I'd say you'd be wise to expect change.
The interest came from money already existing in the economy. When you pay interest as part of your car or house payment, you pay it with money which you saved or earned (i.e. money which already exists in the economy). Money doesn't need to be created specifically to pay a certain specific person's interest obligations. If you work for a bank, your salary gets paid from interest earned by the bank, and then you use that to pay the interest on your own mortgage, which the bank then pays to another employee, who uses it to pay interest on his mortgage etc. The selfsame money can pay off hundreds of people's interest debts. When you pay interest to a lender, the money doesn't disappear, it re-emerges into the economy and can then be used by somebody else. Which means that the selfsame $100 can pay off two people's interest debts -- $200 or more of interest can be paid off with the self-same $100 bill. That's the crux of the fallacy. It falsely assumes that a $100 bill can only be used once, to pay off one $100 debt, and then it can't be used anymore.
On the other hand, you could put your money into one of them newfangled banks which loans your money out at interest so they can pay you interest on your deposit. That's obviously a lot more attractive than a safety deposit bank where you have to pay the bank to keep your money. However, the minute they loan out your money, they create fiat money. You can see this clearly because: a) the person who borrowed your money has your money in his account, and b) nevertheless, you still have your money in your account.
So it's just a question of consumer choice. Do you want to eliminate fiat money and pay the bank to keep your savings? Or keep fiat money and get interest on your deposits? The choice is obvious, and that's why regular banks outcompete safety deposit boxes as a way to preserve savings. Fiat money is a better system for everybody. It eliminates the senseless waste of idle money in safety deposit boxes and people's mattresses.
Fiat money does not come from your local banks lending out your money to other people while "retaining" the same amount in your account. They have to keep a percent of TOTAL cash on hand, but if you, the depositer, and your friend, the borrower, were the only customers of the bank and you wanted your money while it was still on loan, the bank would be in a pickle because it (as a local bank) CANNOT create money. However, the Federal Reserve can, and fiat money is what happens when the government puts ink on paper and says it's worth something more than the ink and the paper.
We are so used to the capitalist system that we can't imagine life without it. But there is a reason why the ancient world thought lending money at interest was a terrible sin. And I think it boils down to the difference between a steady-state economy and a growing one. If the economy is not growing, the chances that the borrower will be able to repay the loan are not good.
Capitalism is a great way of quickly exploiting new resources, as when the Americas were "discovered." It's not so great when resources are limited.
And that, I suspect, is why charging interest was so frowned upon in Biblical times. Interest is "unearned income." It's money you get for not working - not producing anything. It's a wealthy society that can afford to support people who don't work. Back then, people did not borrow money for luxuries, or to expand their businesses. In a steady-state economy, it makes no sense to do that. People only borrowed money if they were in desperate straits. Charging interest was not only exploitative, it was likely to drive the borrower into ruin. If he had reached the point where he had to borrow, then he could not afford to pay interest.
However, it is true that the economy must grow in order to function. The reason is this: without growth, increasing productivity will cause massive unemployment.
For example, consider the changes which occurred in U.S. agriculture since the Revolutionary War. The percentage of people working in farming decreased from around 95% or so to today's 2.5%. Those idled hands need jobs, and the only way to provide them is growth in total output of the agricultural sector, or net growth in other sectors.
So "technology (i.e. increasing productivity) makes growth necessary" is a more accurate way to describe the situation than "capitalism depends on growth". Technology is the culprit, not the monetary system.
Growth would not be necessary, even in a capitalist system, if there was no growth in population, or improvement of productivity. In fact, that was basically the steady-state economy which our ancestors lived in before technology changed the equation and made growth necessary.
Usury and Social Justice--Would a Bank Charge Jesus Usury? by Bishop Paul Peter But, please, read the whole thing. Just to get a traditional moral perspective on the question.... These are old questions.
Would Jesus, the greatest social justice advocate, be silent as others were victimized with such an oppressive financial burden?
This is silly. If you don't like the interest rate, don't borrow. People who voluntarily assume such burdens and sign on the dotted line are hardly "victims". Maybe victims of themselves...
People borrow at these usurious interest rates in order to make financial ends meet. Of course, this finally results in complete financial ruin especially given the latest update to the Bankruptcy Laws passed by our Congress and signed by our President.
But blaming the victim is and has been popular for some time now....
I suppose you yourself are doing just fine....
Rick
I think that I agree with you with the caveat that, if the real economy is not growing due to supply constraints, then the process you describe is an inflationary one (the money supply has increased by that $10, but if there are no more goods and services, then the value of money has to degrade correspondingly). In the equation MV = PQ, if Q gets fixed not to grow and M is growing anyway, then it's likely P that will take up the slack, right?
The "framing" power of economics psycho-talk is amazing.
Once we fall into the "frame" of pretending we are economists and we actually know what nonsense phrases like "The Economy" mean, we can further fool ourselves into believing this abstract thing is a human creature and that it experiences "growth" and decline. We can argue that there is a "real" economy and then there is a phony imposter who only pretends to swing the true "invisible hand".
Have you people gone nuts?
Why don't we invent an Invisible Oil Cow and discuss whether her milk output is growing or shrinking and whether her udders are "robust" or undergoing a "recessionary trend" with expectations of recovery?
My prediction for 2006 is that it will be a good year for our Invisible Oil Cow with moderate undulations in her production numbers followed by above average increases in productivity. Fundamentals indicate that our sacred cow will experience sound growth for the foreseeable future.
Uncontrolled trade and production pops up everywhere and upsets the big organisations planning and is often more efficient and competetive.
Such big organisations thrive when the need for capital to start a competitior is enourmous, when laws hinder competition or at best when they are well run enough to be too hard to outcompete. But those that are well run enough do probably not have the spare time or cash for toying with world domination.
How good this competition is varies between countries. The invisible hand is more or less agile depending on the law system, education, trust between people, etc. States in wisely run countries tries to uphold a system that encourages this competition since the only real stability is in constant change.
If old "lazy" money fight for old priviliges instead of investing in new entrepreneurs and sometimes new ideas you get stagnation and decline.
A sudden crash is probably the worst thing that can happen for old money or TPTB. A sudden crash is only good for the hungry, ruthless and lucky and this can be demonstrated in fairly recent european history. Any surviving asset is up for grabs if the crash is hard enough and any reasonable TPTB structure is not crash proof.
Link to the EIA "This Week in Petroleum" Report:
http://tonto.eia.doe.gov/oog/info/twip/twip.asp
Scroll down to the chart showing the crude oil inventories. The build in crude oil inventories would seem to be inconsistent with recent oil price increases, i.e, crude oil prices have been increasing as crude oil inventories increased.
However, as best that I can tell, no one tracks crude oil inventories on the basis of quality (light, sweet versus heavy, sour). I suspect that most of the build in inventories consists of heavy, sour crude, which would explain the huge gap between heavy, sour and light, sweet crude oil prices.
I'd like to see regular reports on gasoline an diesel inventories along side their wholesale prices.
Looking at world oil/liquid supply, here's another take:
In the four years from 2001 to 2005, total world supply grew (EIA stats) by 6.45 MBD, from 77.73 to 84.14 (using the average of the first three quarters)
Of that, 3.08 came from OPEC, and 2.86 from former USSR, leaving only .51 added from the rest of the world over the full 4 years.
The OPEC supply came from prior excess (choked-back) capacity. OPEC was claiming about 4.5 MBD excess before, now claims 1.5. In essence, their capacity to produce remained completely unchanged over the 4 years.
Frmr USSR production slowed its growth the last 1 1/2 years although it is increasing again somewhat. Frmr USSR growth was the only positive "surprise" in the recent oil era.
If OPEC had started the period with the current smaller surplus, demand would signif exceed supply today. Likewise if Frmr USSR hadn't been a big surprise, which is now leveling off.
Just another perspective on recent history. I know it skips many nuances, but I think the basic picture holds. This is why Mexican production decline is so important.
BTW, MMS figures today show no improvement over the past week in GOM oil production.
The battery electric hybrid, that sensational hip chic' idea fresh from our Japanese comrades and trading partners, ballyhoo'd by the Hollywood set, and the "end" of the American auto industry, is dead. Sure, the ones built to date will be around for some time to come, just as there are still a few Corvairs, but like the Corvairs air cooled engine, the hybrid battery electric will prove to be a technical dead end. There will be some more built, but like Tucker or Kaiser Frasier, they have taken the wrong fork in the road. THE HYBRID WILL SURVIVE, IT JUST WILL NOT BE A BATTERY ELECTRIC HYBRID.
http://www.epa.gov/otaq/technology/420f04019.pdf
An old idea comes back to life:
http://www.motherearthnews.com/library/1978_March_April/This_Car_Travels_75_Miles_on_a_Single_Gallon of_Gasoline
The technology:
http://www.nextenergy.org/industryservices/Hybrid__Hydraulics.asp
Do take the time to check out the animations of how it works, fascinating.
As a brief aside, check out the website in general, more fascination!
http://www.nextenergy.org/
The tinkers join the game:
http://seniordesign.engr.uidaho.edu/2004_2005/dumpsterdivers/index.htm
http://www.detnews.com/2005/autosinsider/0506/29/B08-231001.htm
What does all this mean? Simply this: It is now evident that the advances made in control systems by our Japanese comrades in the auto trade have opened up even better possibilities. They have also proven beyond a doubt that the hybrid idea is valid. But, they took the wrong fork with the electric hybrid, and married themselves to expensive, non-durable battteries.
The hydraulic hybrid will do with pressure, fluids, and a mature industry of trusted components everything the battery hybrid can do, and at a fraction of the cost:
>Regenerative braking-it's easy with hydraulics
>Stored power-cheaper by far, lighter in weight, and durable into the hundreds of thousands of miles with the hydraulics
>Acceleration-the hybrid push hits instantly, even better than straight gasoline or Diesel
>Deep discharge without damage to the storage system-The hydraulic can be discharged to 0% without shortening the life of any component, and do this over and over again, something even the best battery cannot hope for!
That last point is HUGE. Because the calcars group http://www.calcars.org have proven the validity of the "plug" or gridable hybrid as a great leap forward, held up by only this one big issue: The damage to the battery by repeated deep discharge and the high cost of the batteries being destroyed have stopped the idea from being endorsed by the industry.
With the hydraulic hybrid, the plug or grid based hybrid becomes real, and a revolution. With a small electric motor at the home (or even on the vehicle), the vehicle can be plugged in, and the hydraulic pump driven to charge the accumulators. The car would leave the home fully charged, every time, with the first around town miles WITHOUT gasoline/Diesel consumption. Every braking action would put the power back into the accumulators (regen braking), at anything except long range or high speeds, the hydraulic hybrid storage would drive the car or truck.
THE BATTERY ELECTRIC HYBRID IS DEAD, BUT DO NOT SHOW DISRESPECT. IT'S DEVELOPMENT GOT US TO WHERE WE ARE. And, it may give the American carmakers one last shot at getting back in the game. Will they let this too slip away, after developing it in the United States?