Money trees are magical; energy trees are not

9 08 2018

Another excellent post from the Consciousness of Sheep……..  a bit anglo-centric, but easily applies to anywhere not least Australia.

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Equating money with wealth is among the most dangerous delusions currently afflicting humanity.

This is, perhaps, understandable given that so few people now have access to money in the quantities needed to improve their lives.

Government, meanwhile, effectively lies when it points to the various pots of money that it has allocated to this or that infrastructure, entitlement or service.  This is mendacious because money from central government is allocated as a block grant to local government and other public bodies.  In total, these public bodies lack the income to fund their legal responsibilities.  As a result, money that was theoretically allocated to provide for such things as mental health beds, fixing potholes and a host of other discretionary activities is actually deployed in firefighting the collapse of mandatory services like child welfare or social care for the elderly.

The solution to this for many in the political sphere is to loosen the purse strings.  Quite correctly, they identify the central flaw in the pronouncements of duplicitous politicians like Theresa May and Phillip Hammond; who tell us that “there isn’t a magic money tree.”  Because… well… actually, yes there is.  It’s called the Bank of England.  And were politicians to instruct it to do so, it can spirit into existence as much new currency as it likes.

The conventional way in which central banks spirit money into existence is via the issuance of government debt.  Government issues a bond (called a Gilt-Edged Security in the UK) which is auctioned to a closed group of banks and financial institutions.  The central bank then spirits new money into existence and uses it to buy these bonds back.  That new money then enters the economy via the financial sector.

This, of course, is no more than tradition.  There is nothing to prevent the central bank from conjuring new money out of thin air and then distributing it directly into the bank accounts of every citizen.  Indeed, this is one of the points made by those who favour some form of Universal Basic Income as an alternative to the UK’s overly bureaucratic and increasingly ineffective social security system.  The reason that money is not created in this way is simply that channelling it through the banking and financial system favours the wealthy and powerful at the expense of the wider population.

Midway between the current practice of handing new money to the already wealthy – who get to enjoy it before inflation devalues it – and channelling it directly to the people, is the proposed creation of a national investment bank.  Whereas feeding new money to the already wealthy serves only to inflate asset bubbles in unproductive areas like property, fine art and collectibles, an investment bank could provide funding for national infrastructure development.  This, in turn, would provide new jobs as well as enhancing the productivity of the economy as a whole.

The only requirement of any of these forms of currency creation is that the government removes sufficient money from the economy through taxation to prevent inflation running out of control.  Herein, however, is the problem that has vexed governments down the ages.  Exactly how much money does the government need to remove from the economy to prevent inflation?

The current practice of giving new money to the already wealthy requires very little government action.  The central bank practice of raising interest rates is considered sufficient.  This is because, like taxes, debt repayment is a means of removing currency from the economy.  Just as banks create new currency when they make loans, so currency is destroyed when loans are repaid.  When the interest rate rises, an additional proportion of the currency in circulation has to be destroyed in order to pay the higher charge.

Once governments start moving new currency directly into the economy – either through investment banks or direct transfers to people’s bank accounts – taxation has to be adjusted accordingly in order to prevent the money supply growing too high and causing inflation.

The problem is that just as central banks cause financial crises by raising interest rates beyond the point where creditors begin to default; governments have a habit of causing crises by allowing too much new currency to be created.  It is all too easy for politicians – who need to get re-elected – to promise new investments in popular services – without thinking about the impact of that new spending on the broader economy.  In the 1970s, the impact of this kind of currency creation was so great that governments around the world handed control of their money supply to the banking sector; and passed legislation and entered into treaties (like Maastricht) that forbid direct government money printing (states are permitted to bail out banks, but not businesses or citizens).

The inflation of the 1970s is explained in economics textbooks as being the result of profligate governments playing fast and loose with their national economies.  The difficulty with that explanation, however, is that exactly the same money creation policies kick-started the greatest economic expansion the world has ever seen.  The post-war Marshall Aid programme which printed new dollars into existence in order to rebuild the shattered economies of Western Europe and Japan, together with the spending programme of Britain’s Labour government (which didn’t receive Marshall Aid), paved the way for the twenty-year boom 1953-73.  With western growth rates similar to those claimed by modern China, states using newly created currency to invest in and grow the economy became the economic orthodoxy for three decades.

If the supposed relationship between money printing and economic growth and crisis is beginning to sound like a false correlation to you, it is because it is.  It is what I refer to as “the Keynesian paradox.”

Having witnessed the austerity, depression and eventual rise of fascism in the aftermath of the First World War, economist John Maynard Keynes argued that the big mistake made in 1919 was for governments to return to the economic orthodoxy of the pre-war years.  This had resulted in austerity policies at home and the imposition of reparations on the defeated enemy.  What Keynes argued for was close to what the US delivered in 1945, when it realised its best protection against the Soviet Union was a prosperous, interconnected western bloc.

Keynes’ proposition was straightforward enough: if you give newly created money to a wealthy person, they will exchange it for some form of unproductive asset – a house, a piece of art, a vintage car, etc.  If, on the other hand, you give the same new money to a poor person, they will spend it all more or less immediately – on necessities like food, rent, fuel and clothing.  In this way, new currency distributed to the poor would quickly circulate around the economy; stimulating growth.

Keynes was correct in terms of money flows but wrong about growth.  Indeed, there was a period in European history – the years following the colonisation of the Americas – when a sudden influx of new money (in the form of the gold and silver shipped back to Spain) had exactly the opposite effect.  Without the influx of precious metals from the Americas, the Hapsburg Empire might have gone on to become the United States of Europe.  Instead, it experienced a prolonged and ruinous period of inflation that resulted in internal revolt and division.  In effect, the sudden influx of precious metals had the effect of devaluing the gold and silver (and money based upon it) already in circulation; manifesting as rapidly rising prices across the economy.

More recently, excessive money printing (in order to inflate away reparation debt) in Germany resulted in the runaway inflation of 1924 that helped propel Hitler and the Nazis onto the world stage.

This is the Keynesian Paradox.  An economic policy (Marshall Aid) that patently kick-started the largest economic boom in history, also created the inflation of the sixteenth century and the stagflation of the 1970s.

Might this suggest that there was some deeper factor common to sixteenth century Europe and the 1970s that was absent or opposite to conditions in the late 1940s?  What else happened in the 1970s?  The world experienced a major oil shock as US reserves were no longer sufficient to regulate global oil prices.  In the aftermath of the Second World War, global oil production grew exponentially; fuelling the boom.  That came to an end in 1973:

World oil production exponential-linear
Source: The Oil Drum/COS

In the period since 1973, oil production has continued to grow; but growth has been linear.  The result is that the rates of growth enjoyed in the west between 1953 and 1973 are never coming back.  Indeed, much of the oil we are adding to the mix today is expensive; giving it a much lower value to the economy than the oil being produced in the aftermath of the Second World War.

One of Keynes’ contemporaries – English Nobel Prize-winning chemist Frederick Soddy – understood this far better than Keynes:

“Still one point seemed lacking to account for the phenomenal outburst of activity that followed in the Western world the invention of the steam engine, for it could not be ascribed simply to the substitution of inanimate energy for animal labour. The ancients used the wind in navigation and drew upon water-power in rudimentary ways. The profound change that then occurred seemed to be rather due to the fact that, for the first time in history, men began to tap a large capital store of energy and ceased to be entirely dependent on the revenue of sunshine…

“Then came the odd thought about fuel considered as a capital store, out of the consumption of which our whole civilisation, in so far as it is modern, has been built. You cannot burn it and still have it, and once burnt there is no way, thermodynamically, of extracting perennial interest from it. Such mysteries are among the inexorable laws of economics rather than of physics. With the doctrine of evolution, the real Adam turns out to have been an animal, and with the doctrine of energy the real capitalist proves to be a plant. The flamboyant era through which we have been passing is due not to our own merits, but to our having inherited accumulations of solar energy from the carboniferous era, so that life for once has been able to live beyond its income. Had it but known it, it might have been a merrier age!”

The economic expansion that Soddy correctly attributed to the fossilised sunlight locked up in coal deposits was to be multiplied a hundredfold by the oil-based expansion that followed the Second World War.  And indeed, had we known that it was oil rather than one or other version of politics or economics that was responsible for our brief period of prosperity, our age too might have been merrier.

In this, the sixteenth century Europeans might have had something to tell us; because they also experienced an energy crisis.  Given that this was a period when economies ran entirely on renewable energy, there is a corrective here too for those who imagine that returning to some pre-industrial idyll might be our salvation.  Sixteenth century Europeans chopped down their forests at a much faster rate than the trees could be regrown.  As historian Clive Ponting notes:

“A timber shortage was first noticed in Europe in specialised areas such as shipbuilding… In the 1580s when Philip II of Spain built the armada to sail against England and the Dutch had to import timber from Poland… Local sources of wood and charcoal were becoming exhausted – given the poor state of communications and the costs involved it was impossible to move supplies very far.  As early as 1560 the iron foundries of Slovakia were forced to cut back production as charcoal supplies began to dry up.  Thirty years later the bakers of Montpellier in the South of France had to cut down bushes to heat their ovens because there was no timber left in their town…”

Creating new currency – in this case the new precious metals from the Americas – into an economy that has outrun its energy supplies could only result in inflation because without sufficient energy there could be no economic growth.  Only when new sources of energy – in this case, coal from the Severn Valley – can be brought into production does the economy recover and a new round of economic growth begin.

When western states printed new currency into existence to rebuild their war-torn economies in the years after 1945, they did so while almost all of the planet’s oil deposits were still in the ground.  Much of the new currency was invested into economic activities that required oil for manufacture and/or transportation.  That, in turn, meant that a proportion of the new currency found its way into the accounts of the big oil companies; who used it to open up the vast oil reserves around the planet.  It was this cheap, abundant reserve of oil that allowed for massive currency creation without generating inflation.  It was precisely at the point when money creation overshot oil production that the inflation of the 1970s set in.

Fast-forward to the very different world of 2018: World production of “conventional” crude oil peaked in 2005.  The resulting inflation – followed by the inevitable interest rate rises – triggered the worst financial collapse in living memory.  Oil production is still, just about, increasing; but only at great expense.  Low quality and expensive oil from fracking, tar sands and ultra-deep water is keeping the economy going; but only at the cost of obliging us – businesses and households – to devote a greater part of our income to energy (either directly or through the energy embodied in the goods and services we purchase).

Unlike money trees, there is nothing magical about oil (which, a handful of electric cars aside, still powers almost all of our agricultural, industrial and transportation vehicles and machinery).  Even now, there is more oil beneath the ground than we have used so far.  But most of what is left is going to stay in the ground simply because it is too expensive (i.e. it requires too much energy) to extract.

Alternative energy sources do not really exist, other than by sleight of hand.  Most often, this is done simply by conflating electricity with energy.  But the crisis we face is primarily a liquid fuel crisis.  As such, the electrical energy generated by a wind turbine or a nuclear plant is irrelevant.  What has actually happened has nothing to do with ending our use of fossil fuels.  Rather, states around the world have turned to alternative fossil fuels – coal and gas – together with renewables and nuclear to free up the remaining extractable oil for use in industry, agriculture and transportation.  Oil consumption, however, continues to rise, because without it growth would end and the mountain of debt-based currency would collapse around our ears.

This brings us back to the money question.  There is a growing belief that the solution to our problems will come in the form of a switch from austerity economics to an expansionary policy based on distributing newly created currency via investment banks and/or universal basic incomes.  This, however, is highly unlikely to succeed until or unless we find a means of massively increasing the energy available (at the point of use) to the economy to counteract the decline in affordable oil that is beginning to emerge (replacing unaffordable oil with unaffordable renewables doesn’t really count).

Politically, the demand for an end to austerity is becoming irresistible.  We already see its manifestation in Brexit, the election of Donald Trump and the rise of populist (right and left) parties across Europe.  Around the world, the people have put the elites on notice that they will no longer tolerate an economy in which a tiny handful of kleptocrats continue to accumulate wealth via a rigged financial system while everyone else sees their standard of living plummet.

The mistake, however, would be to assume that simply printing currency will solve the problem.  Without useable energy to back it up, new currency is worthless.  Its only role is to steal a fraction of all of the currency already in circulation.  This may have small benefits if channelled to ordinary people, since it will be the accumulated currency of the wealthy that is devalued the most – a kind of hidden tax.  But the ensuing price increases are far more likely to be experienced by those at the bottom of the income scale; as their ability to pay for necessities is rapidly eroded.

The crisis of our age, then, is not to pick the fruit of the magic money tree; but to discover the location of the magic energy tree whose fruit has fertilised the money tree for the past 250 years.  Sadly, that magic (fossilised sunlight) energy tree has shrivelled with age.  We may never see its like again.

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Are NEW Chinese buildings really FALLING DOWN?

16 07 2018

Years ago, I remember hearing Nicole Foss saying that those Chinese ghost towns we have all heard about were never built to last; they were built to be finished so the builders could get paid by the government, and to hell with durability……

Well you would not believe how bad it actually is……  and to think that China consumed more cement over a recent three year period than the US consumed during the entire 20th century, for results like this, is simply appalling…. and it’s fast looking like it was all wasted.

ChineseCementDemand2011-2013

Australia’s economy utterly relies on China’s, and China’s is not looking too good now, especially after you watch the video below……. Nicole wrote this way back in 2011..:

Vulnerable Commodity Exporters

Commodity exporting nations, which were insulated from the effects of the 2008 financial crisis by virtue of their ability to export into a huge commodity boom, are indeed feeling the impact of the trend change in commodity prices. All are uniquely vulnerable now. Not only are their export earnings falling and their currencies weakening substantially, but they and their industries had typically invested heavily in their own productive capacity, often with borrowed money. These leveraged investments now represent a substantial risk during this next phase of financial crisis. Canada, Australia, New Zealand, are all experiencing difficulties:

Known as the Kiwi, Aussie, and Loonie, respectively, all three have tumbled to six-year lows in recent sessions, with year-to-date losses of 10-15%. “Despite the fact that they have already fallen a long way, we expect them to weaken further,” said Capital Economists in a recent note. The three nations are large producers of commodities: energy is Canada’s top export, iron ore for Australia and dairy for New Zealand. Prices for all three commodities have declined significantly over the past year, worsening each country’s terms of trade and causing major currency adjustments.

China – Not Just Another BRIC in the Wall

More than anything, the story of both the phantom recovery and the blow-off phase of the commodity boom, has been a story of China. The Chinese boom has quite simply been an unprecedented blow-out the like of which the world has never seen before:

China has, for years now, become the engine of global growth. Its building sprees have kept afloat thousands of mines, its consumers have poured billions into the pockets of car manufacturers around the world, and its flush state-owned enterprises (SOEs) have become de facto bankers for energy, agricultural and other development in just about every country. China holds more U.S. Treasuries than any other nation outside the U.S. itself. It uses 46% of the world’s steel and 47% of the world’s copper. By 2010, its import- and export-oriented banks had surpassed the World Bank in lending to developed countries. In 2013, Chinese companies made $90-billion (U.S.) in non-financial overseas investments.

If China catches a cold, the rest of the world won’t be sneezing – it will be headed for the emergency room.

There’s more to read about this on the Automatic Earth here….. an old article, but more relevant than ever.





The physics of energy and resulting effects on economics

10 07 2018

Hat tip to one of the many commenters on DTM for pointing me to this excellent video…. I have featured Jean-Marc Jancovici’s work here before, but this one’s shorter, and even though it’s in French, English subtitles are available from the settings section on the toutube screen. Speaking of screens, one of the outstanding statements made in this video is that all electronics in the world that use screens in one way or another consume one third of the world’s electricity…….. Remember how the growth in renewables could not even keep up with the Internet’s growth?

If this doesn’t convince viewers that we have to change the way we do EVERYTHING, then nothing will….. and seeing as he’s presenting to politicians, let’s hope at least some of them will come out of this better informed……

Jean-Marc Jancovici, a French engineer schools politicians with a sobering lecture on the physics of energy and the effects on economics and climate change





Australia’s Debt Bomb….

29 06 2018

Last night on ABC TV News, during the financial report section, Philip Lasker dropped a bombshell that almost nobody noticed…..  It starts getting interesting about half way through the video clip below..:

http://www.abc.net.au/news/business/kohler-report/

Home lending almost accounts for 80% of the national economy. At first, I nearly fell off my chair…….  surely not?  But of course dear reader it all makes sense….  after all, the economy is measured in money throughput, and when that money is almost completely created as debt, of course the economy consists of debt…. and as more and more business no longer produces anything worthwhile, people are turning to borrowing to buy real estate, and, most likely, stocks too.

A housing downturn seems to have started, and it won’t take much to bring the whole house of cards down in a huge pile of worthless money.

How much longer can this keep going?  I hope long enough for me to get my house in order……  Please please can I have another 12 months….





China is in trouble….

12 06 2018

Between yesterday’s revelation of Saudi Arabia’s appointment with 2030 and now this, the global economy is looking ever more shaky….
Republished from MISES WIRE..
06/09/2018

Before we discuss the economic situation of China, a few words about China’s strongman, Xi Jinping. The “new Chinese emperor” has engineered a meteoric rise. He started off as simple rural laborer but is now the most powerful Chinese president since Deng Xiaoping. Such a career path requires strength, tact, and probably a dash of unscrupulousness. 

While the rulers of China have been able all along to hedge their plans over longer periods than their Western counterparts have, the new legal situation has extended this planning horizon even further.1 In comparison with those of Western economies, China’s countermeasures against the crisis in 2008 were significantly more drastic. While in the US the balance sheet total of the banking system increased by USD 4,000bn in the years after the global financial crisis, the balance sheet of the Chinese banking system expanded by USD 20,000bn in the same period. For reference: This is four times the Japanese GDP.

increm-China-1.png

The following chart shows the expansion of the bank balance sheet total as compared to economic output. Did the Chinese authorities assume excessive risks in fighting the crisis?

increm-China-2.png

Neither the fact that China’s bank balance sheets amount to more than 600% of GDP nor the fact that they have doubled in terms of percentage of GDP in the past several years suggests a healthy development. Our friends from Condor Capital expect NPL ratios51F to rise in China, which could translate into credit losses of USD 2,700 to 3,500bn for China’s banks, and this is under the assumption of no contagion (!). By comparison, the losses of the global banking system since the financial crisis have been almost moderate at USD 1,500bn

The most recent crisis does teach us, however, that the Chinese are prepared to take drastic measures if necessary. China fought the financial crisis by flooding the credit markets: 35% credit growth in one year on the basis of a classic Keynesian spending program is no small matter.

increm-China-3.png

Chinese money not only inflates a property bubble domestically but also around the globe (e.g. in Sydney and Vancouver). Further support for the global property markets is in question, given the measures China has recently launched. Due to financial problems, Chinese groups such as Anbang and HNA will have to swap the role of buyer for that of seller.

The IMF has forecast a further doubling of total Chinese debt outstanding from USD 27,000bn in 2016 to USD 54,000bn in 2022. By comparison, in 2016 China’s GDP amounted to USD 11,200bn. This spells debt-induced growth at declining rates of marginal utility. From our point of view, this development – which we can also see in the West – is unsustainable.

increm-China-4.png

In its most recent report, “Credit Booms – Is China different?”, the IMF states that in 43 cases worldwide of strong credit growth (i.e. the ratio of credit to GDP grows more than 30% over five years), only five cases ended up without a significant slowdown or a financial crisis. The IMF also points out that no expansion of credit that started at a debt to GDP ratio above 100% of GDP ended well. It is worth noting that China has a high percentage of domestic as opposed to foreign debt, which definitely makes matters easier for the country. But the question is: Will it be different for China this time?

The 19th-century Opium Wars that China fought with England, which are deeply rooted within the collective memory of the Chinese people, are historical events that are of great importance in connection with the punitive tariffs imposed by the US, as they remain a fixed and integral part of the Chinese history curriculum in schools.2 If necessary, China could stir up anti-Western sentiment in order to implement measures that are hard on its own population, even if they are unpopular. The buck would of course stop with the Americans. Thus, the US could shoot itself in the foot with any escalation of the trade war, as we regard the ability to bear hardships and the cohesion of Chinese society as much stronger than those of the American society.

The demographic development of China is also worth a quick sidebar. The World Bank forecasts a population peak of 1.4bn for China in 2028. The decline in population that is predicted to set in around that time should proceed at a similar pace as the increase towards the peak.

increm-China-5.png

The fit-for-work population (aged 16 to 59) has been decreasing since 2012 and is expected to decline by almost 25% to 700mn by 2050. Thus China, much like the West, has the problem of an aging population.

increm-China-6.png

Conclusion

Unlike his Western competitors, China’s new strongman, Xi, can implement his long-term strategy in a targeted and gradual fashion. Xi explicitly underlined his goal of asserting China’s interests in the world by referring to military, economic, political, and diplomatic means in his speech at the National Congress in October 2017.3 He left no doubt that China was not willing to compromise in any shape or form with regard to its territorial integrity (N.B. Taiwan, Hong Kong, Tibet), and he issued point-blank threats against separatist tendencies.

However, the transformation of the economy could (intentionally or otherwise) cause economic distortions not only in China but globally. Recent years have been dominated by a massive expansion of credit. In fact, it is often said that China has blown the biggest credit bubble in history.

It seems, there are greater similarities between China and the US than may be visible at first glance. China builds real estate for a shrinking population, invests for an overindebted client (the US, which even insists on a drastic reduction of the bilateral trade deficit) and finances all this with money it does not have.4

  • 1.An analogy from the field of sports: The national sport of the USA is baseball; in China, it is Go. The approach to foreign politics is similar: The Americans are known for their short-term “hit and run” foreign policy, whereas the Chinese play the long game in their foreign policy and are very difficult to read in doing so.
  • 2.Recommended reading: The Opium Wars, by Julia Lovell
  • 3.http://www.bbc.com/news/world-asia-china-43466685
  • 4.A paraphrase of the famous quote from “Fight Club”: “We buy things we don’t need with money we don’t have to impress people we don’t like.”

Ronald-Peter Stöferle is managing partner and fund manager at Incrementum AG, Liechtenstein. He invests using the principles of the Austrian school of economics.





Days of Revolt: Junk Economics and the Future (2/2)

23 05 2018

In this episode of teleSUR’s Days of Revolt, Chris Hedges continues his discussion with UMKC economics professor Michael Hudson on his new book Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy

Part 1 is available here…..





Michael Hudson – How We Got to Junk Economics

23 05 2018

In this episode of Days of Revolt, Chris Hedges interviews Michael Hudson, UMKC economics professor and author of Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. In the first half of their conversation, Hedges and Hudson trace the history of classical economics and explore Marx’s interpretation of capitalism as exploitation. http://multimedia.telesurtv.net/v/day…

PART 2 is available here….