Peak Airplane Speed

10 03 2017

Having just flown over 5000km (return) to visit my family for my recent retirement milestone, I was attracted to this story… and I have to say that while everyone else in the plane takes the experience for granted, it never ceases to amaze me when it takes off that we are able (still..?) to do this.

Recently, a story surfaced on Facebook that had me in stitches…:

Airbus is looking to a future faster than the speed of sound as it filed another patent intended to help aircraft fly supersonically.

Details have emerged of a (sic) application filed in the US by the pan-European aerospace company for a design of a spaceplane capable of taking off and landing like a normal aircraft but able to fly at supersonic speeds at altitudes “of at least 100 kilometres”.

Even funnier, it was illustrated with the following image……

Image result for patented supersonic airbus

Just look at that thing…….. it doesn’t even look like it can fly, way too fat for its wings, almost a cartoon of an airplane actually. And I doubt any plane manufacturer has ever taken out a patent for an entire plane. Bits of planes, for sure, but a whole plane..? Which goes to show you can’t believe anything you read in the Telegraph, though mind you, it seems quite a few other media outlets were also taken in…… there’s a hilarious video by some unknown Indian man demonstrating how little he knows about aerodynamics there too.

Even if this were serious, it would never fly, because it takes years to develop projects like this, and I doubt that plane manufacturers are not aware of our energy predicaments, even if they son’t say so publicly.

Then along comes this latest article from Ugo Bardi……

So, it is true: planes fly slower nowadays! The video, above, shows that plane trips are today more than 10% longer than they were in the 1960s and 1970s for the same distance. Airlines, it seems, attained their “peak speed” during those decades.

Clearly, airlines have optimized the performance of their planes to minimize costs. But they were surely optimizing their business practices also before the peak and, at that time, the results they obtained must have been different. The change took place when they started using the current oil prices for their models and they found that they had to slow down. You see in the chart below what happened to the oil market after 1970. (Brent oil prices, corrected for inflation, source)

It is remarkable how things change. Do you remember the hype of the 1950s and 1960s? The people who opposed the building of supersonic passenger planes were considered to be against humankind’s manifest destiny. Speed had to increase because it had always been doing so and technology would have provided us with the means to continue moving faster.

Rising oil prices dealt a death blow to that attitude. The supersonic Concorde was a flying mistake that was built nevertheless (a manifestation of French Grandeur). Fortunately, other weird ideas didn’t make it, such as the sub-orbital plane that should have shot passengers from Paris to New York in less than one hour.

If this story tells us something is that, in the fight between technological progress and oil depletion, oil depletion normally wins. Airlines are especially fuel-hungry and they have no alternatives to liquid fuels. So, despite all the best technologies, the only way for them to cope with higher oil prices was to slow down planes, it was as simple as that.

Even slower planes, though, still need liquid fuels that are manufactured from oil. We may go back to propeller planes for even better efficiency, but the problem remains: no oil, no planes, at least not the kind of planes that allow normal people to fly, something that, nowadays, looks like an obvious feature of our life. But, as I said before, things change!

 





The implications of collapsing ERoEI

25 01 2017

Judging by the relatively low level of interest the past few articles published here regarding the collapse of fossil fuel ERoEI (along with PV’s) have attracted, I can only conclude that most people just don’t get it……. How can I possibly fix this……?

When I first started ‘campaigning’ on the issue of Peak Oil way back in 2000 or so, 2020 seemed like a veoileroeiry long way away. I still thought at the time that renewables would ‘save us’, or at the very least that energy efficiency would be taken up on a massive scale. None of those things happened.

Way back then, I gave many public powerpoint presentations, foolishly thinking that, presented with the facts, (NOT alternative facts like we have today…) people would wake up to themselves. I even foolishly believed that the Australian Greens would take this up as a major issue, because after all the ‘solutions’ to Peak Oil also happen to be the ‘solutions’ for Climate Change. Now you know why I have turned into such a cynic.

In that presentation, there was one important slide, shown above. It is indelible in my memory.

I’ve now come across a very similar chart, except this one has dates on it….. and 2020 no longer seems very far away at all….

COLLAPSING ERoEI IN ONE CHART

peakeroei

I have selected three years; 2017, in red; 2020 in black; 2025 in green.

Each year has two lines. One for how much energy is being extracted, and the lower one of the same colour shows the net energy available from that extraction. The ‘missing’ energy, lost to crashing ERoEI, is the difference between the two lines of the same colour….  Already, in 2017, we probably only have the amount of energy that was available mid 1980.

By 2020 (which I happen to believe will be crunch time), net energy available is roughly equal to what we had in ~1975.

By 2025, we will be down to 1950 levels………

It doesn’t matter whether I’m out by 1, 2, 5, or even 10 years (which I very much doubt). The point is, the global economy will have shrunk dramatically by then. It simply cannot grow without energy, more and more of it every year in fact. Without growth, the entire money system will have collapsed, and it’s anyone’s guess how many banks will be left standing. Or governments for that matter, the electorate has recently proven itself to be very very fickle……

Why this isn’t mainstream news beggars belief….

Good luck.





Peak Uranium by Ugo Bardi

12 01 2017

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THIS should get Eclipse all stirred up……..

[ This is an extract of Ugo Bardi’s must read “Extracted”.  Many well-meaning citizens favor nuclear power because it doesn’t emit greenhouse gases.  The problem is that the Achilles heel of civilization is our dependency on trucks of all kinds, which run on diesel fuel because diesel engines transformed our civilization by their ability to do heavy work better than steam, gasoline, or any other engine on earth.  Trucks are required to keep the supply chains going that every person and business on earth depend on, as well as mining, tractors/harvesters, road & other construction trucks, logging etc.  Since trucks can’t run on electricity, anything that generates electricity is not a solution, nor is it likely that the electric grid can ever be 100% renewable (read “When trucks stop running”, this can’t be explained in a sound-bite).

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

Bardi, Ugo. 2014. Extracted: How the Quest for Mineral Wealth Is Plundering the Planet. Chelsea Green Publishing.

Although there is a rebirth of interest in nuclear energy, there is still a basic problem: uranium is a mineral resource that exists in finite amounts.

Even as early as the 1950s it was clear that the known uranium resources were not sufficient to fuel the “atomic age” for a period longer than a few decades.

That gave rise to the idea of “breeding” fissile plutonium fuel from the more abundant, non-fissile isotope 238 of uranium. It was a very ambitious idea: fuel the industrial system with an element that doesn’t exist in measurable amounts on Earth but would be created by humans expressly for their own purposes. The concept gave rise to dreams of a plutonium-based economy. This ambitious plan was never really put into practice, though, at least not in the form that was envisioned in the 1950s and ’60s.Several attempts were made to build breeder reactors in the 1970s, but the technology was found to be expensive, difficult to manage, and prone to failure. Besides, it posed unsolvable strategic problems in terms of the proliferation of fissile materials that could be used to build atomic weapons. The idea was thoroughly abandoned in the 1970s, when the US Senate enacted a law that forbade the reprocessing of spent nuclear fuel. 47

A similar fate was encountered by another idea that involved “breeding” a nuclear fuel from a naturally existing element—thorium. The concept involved transforming the 232 isotope of thorium into the fissile 233 isotope of uranium, which then could be used as fuel for a nuclear reactor (or for nuclear warheads). 48 The idea was discussed at length during the heydays of the nuclear industry, and it is still discussed today; but so far, nothing has come out of it and the nuclear industry is still based on mineral uranium as fuel.

Today, the production of uranium from mines is insufficient to fuel the existing nuclear reactors. The gap between supply and demand for mineral uranium has been as large as almost 50 percent in the period between 1995 and 2005, but it has been gradually reduced during the past few years.

The U.S. minded 370,000 metric tons the past 50 years, peaking in 1981 at 17,000 tons/year.  Europe peaked in the 1990s after extracting 460,000 tons.  Today nearly all of the 21,000 ton/year needed to keep European nuclear plants operating is imported.

The European mining cycle allows us to determine how much of the originally estimated uranium reserves could be extracted versus what actually happened before it cost too much to continue. Remarkably in all countries where mining has stopped it did so at well below initial estimates (50 to 70%). Therefore it’s likely ultimate production in South Africa and the United States can be predicted as well.

The Soviet Union and Canada each mined 450,000 tons. By 2010 global cumulative production was 2.5 million tons.  Of this, 2 million tons has been used, and the military had most of the remaining half a million tons.

The most recent data available show that mineral uranium accounts now for about 80% of the demand. 49 The gap is filled by uranium recovered from the stockpiles of the military industry and from the dismantling of old nuclear warheads.

This turning of swords into plows is surely a good idea, but old nuclear weapons and military stocks are a finite resource and cannot be seen as a definitive solution to the problem of insufficient supply. With the present stasis in uranium demand, it is possible that the production gap will be closed in a decade or so by increased mineral production. However, prospects are uncertain, as explained in “The End of Cheap Uranium.” In particular, if nuclear energy were to see a worldwide expansion, it is hard to see how mineral production could satisfy the increasing uranium demand, given the gigantic investments that would be needed, which are unlikely to be possible in the present economically challenging times.

At the same time, the effects of the 2011 incident at the Fukushima nuclear power plant are likely to negatively affect the prospects of growth for nuclear energy production, and with the concomitant reduced demand for uranium, the surviving reactors may have sufficient fuel to remain in operation for several decades.

It’s true that there are large quantities of uranium in the Earth’s crust, but there are limited numbers of deposits that are concentrated enough to be profitably mined. If we tried to extract those less concentrated deposits, the mining process would require far more energy than the mined uranium could ultimately produce [negative EROI].

Modeling Future Uranium Supplies

Uranium supply and demand to 2030

 

Using historical data for countries and single mines, it is possible to create a model to project how much uranium will be extracted from existing reserves in the years to come. 54 The model is purely empirical and is based on the assumption that mining companies, when planning the extraction profile of a deposit, project their operations to coincide with the average lifetime of the expensive equipment and infrastructure it takes to mine uranium—about a decade.

Gradually the extraction becomes more expensive as some equipment has to be replaced and the least costly resources are mined. As a consequence, both extraction and profits decline. Eventually the company stops exploiting the deposit and the mine closes. The model depends on both geological and economic constraints, but the fact that it has turned out to be valid for so many past cases shows that it is a good approximation of reality.

This said, the model assumes the following points:

  • Mine operators plan to operate the mine at a nearly constant production level on the basis of detailed geological studies and to manage extraction so that the plateau can be sustained for approximately 10 years.
  • The total amount of extractable uranium is approximately the achieved (or planned) annual plateau value multiplied by 10.

Applying this model to well-documented mines in Canada and Australia, we arrive at amazingly correct results. For instance, in one case, the model predicted a total production of 319 ± 24 kilotons, which was very close to the 310 kilotons actually produced. So we can be reasonably confident that it can be applied to today’s larger currently operating and planned uranium mines. Considering that the achieved plateau production from past operations was usually smaller than the one planned, this model probably overestimates the future production.

Table 2 summarizes the model’s predictions for future uranium production, comparing those findings against forecasts from other groups and against two different potential future nuclear scenarios.

As you can see, the forecasts obtained by this model indicate substantial supply constraints in the coming decades—a considerably different picture from that presented by the other models, which predict larger supplies.

The WNA’s 2009 forecast differs from our model mainly by assuming that existing and future mines will have a lifetime of at least 20 years. As a result, the WNA predicts a production peak of 85 kilotons/year around the year 2025, about 10 years later than in the present model, followed by a steep decline to about 70 kilotons/year in 2030. Despite being relatively optimistic, the forecast by the WNA shows that the uranium production in 2030 would not be higher than it is now. In any case, the long deposit lifetime in the WNA model is inconsistent with the data from past uranium mines. The 2006 estimate from the EWG was based on the Red Book 2005 RAR (reasonably assured resources) and IR (inferred resources) numbers. The EWG calculated an upper production limit based on the assumption that extraction can be increased according to demand until half of the RAR or at most half of the sum of the RAR and IR resources are used. That led the group to estimate a production peak around the year 2025.

Assuming all planned uranium mines are opened, annual mining will increase from 54,000 tons/year to a maximum of 58 (+ or – 4) thousand tons/year in 2015. [ Bardi wrote this before 2013 and 2014 figures were known. 2013 was 59,673 (highest total) and 56,252 in 2014.]

Declining uranium production will make it impossible to obtain a significant increase in electrical power from nuclear plants in the coming decades.





More on the thermodynamic black hole…

12 10 2016

I recently wrote about the thermodynamic black hole; articles about ERoEI keep popping up in my in tray that truly baffle me…… As Alice Friedemann told Chris Martenson in the podcast I discussed in the aforementioned blog post, “everyone disagrees on what to leave in or out of their ERoEI analyses”….

I was pointed to another blog called Ramez Naam where the following was published…:

There’s a graph making rounds lately showing the comparative EROIs of different electricity production methods. (EROI is Energy Return On Investment – how much energy we get back if we spend 1 unit of energy. For solar this means – how much more energy does a solar panel generate in its lifetime than is used to create it?)

This EROI graph that is making the rounds is being used to claim that solar and wind can’t support an industrialized society like ours.

But its numbers are wildly different from the estimates produced by other peer-reviewed literature, and suffers from some rather extreme assumptions, as I’ll show.

Here’s the graph.

eroi-of-solar-wind-nuclear-coal-natural-gas-hydro-800x630

This graph is taken from Weißbach et al, Energy intensities, EROIs, and energy payback times of electricity generating power plants (pdf link). That paper finds an EROI of 4 for solar and 16 for wind, without storage, or 1.6 and 3.9, respectively, with storage. That is to say, it finds that for every unit of energy used to build solar panels, society ultimately gets back 4 units of energy. Solar panels, according to Weißbach, generate four times as much energy over their lifetimes as it takes to manufacture them.

Personally, I think these figures are a bit on the optimistic side, yet the author has a problem with them for being too low…!  Ramez Naam, who was born in Cairo, Egypt, and emigrated to the US at the age of 3 is a computer scientist, futurist, angel investor, and award-winning author, who also worked for Microsoft.  Enough said?  And what on Earth is an angel investor?

Anyhow, he further writes…:

Unfortunately, Weißbach also claims that an EROI of 7 is required to support a society like Europe. I find a number that high implausible for a number of reasons, but won’t address it here.

I’ll let others comment on the wind numbers. For solar, which I know better, this paper is an outlier. Looking at the bulk of the research, it’s more likely that solar panels, over their lifetime, generate 10-15 times as much energy as it takes to produce them and their associated hardware. That number may be as high as 25. And it’s rising over time.

I have seen others, like Susan Krumdieck claim that to keep our complex matrix going, an ERoEI of at least 10 is needed, so it’s interesting that Weißbach aims lower.

What I’d like to know is, how can anyone claim “ it’s rising over time.”?  Last time I looked, all renewables were entirely made using fossil fuels, and their ERoEI is plummeting…

Remember the “Twilight of the age of oil” series published here some time ago? One of the charts in that series of article resurfaced on another blog (through Zerohedge)……

The Coming Thermodynamic Oil Collapse Is Worse Than I Realized

Last week, I spoke with Bedford Hill of the Hills Group about their “Thermodynamic Oil Collapse” model.  What an interesting conversation it was.  Bedford Hill was the project manager of a group of engineers that put over 10,000 hours in designing their Thermodynamic Oil Collapse model.

Bedford told me that after they ran the model, the results were so shocking, they sat on the damn thing for two years before publishing.  I asked him did any of the engineers that worked on the model disagree with the results?  His answer was, “Not a single one disagreed.”

It has taken me some time to digest this new energy information as well understand the details by talking with Bedford Hill and Louis Arnoux of nGeni.  Again, I will be interviewing these gentlemen on this Thermodynamic Oil Collapse model and the implications shortly.

EROI levels

Anyone interested in reading the Hills Group work, you can go to their website, thehillsgroup.org, or check out their detailed report.

The rapidly falling EROI – Energy Returned On Invested is gutting the entire U.S. oil industry and economy.  Instead of the United States enjoying real fundamental growth based on increased energy consumption, we have turned to inflating electronic digits as an indication of our wealth.

As I explained in the beginning of the article, U.S. energy consumption has been flat for the past six years, while U.S. GDP has increased nearly 25%, as our supposed net worth has jumped 54%.  Again, this goes against any sound fundamental economic theory.  We have totally removed ourselves from reality.

While the Fed and Central Banks will continue to prop up the markets by printing money and buying bonds and stocks, they can’t print barrels of oil or energy BTU’s.

There lies the Rub…

So I ask…….. how can the ERoEI of anything, let alone solar power, go up, when the primary source of energy to do all those thing, mainly oil, is falling off a cliff?

But wait, there’s more…..   Geoff Chia sent me an email regarding an open letter he sent to the Doomstead Diner in which Louis Arnoux gets mentioned again….  Here’s what Geoff wrote…:

This open letter to The Zeitgeist Movement replaces an essay I originally promised to Diners, “Peak Oil Revisited Part 2: Why business as usual guarantees that global industrial collapse will be complete by 2030”. I have not had the time to elucidate all aspects of my argument in detail and Dr Louis Arnoux is probably doing a better job with his articles on this topic anyway. He is a true energy expert, I am merely a lay person trying to interpret the thoughts of the experts for the general public.

The other “Peak Oil Revisited” essay I promised, “Part 1b: Is an International Standardised Energy Dollar feasible?” has proved to be much more complicated than originally envisioned and is the lowest of my priorities at the moment. Even if an ISED is feasible it is unlikely to ever see the light of day for political reasons.

graph1-theelm-300x226As you know I ran sustainability meetings for doctors and scientists from 2006 to 2013. I note your Zeitgeist group is holding a meeting on sustainability on 10 September 2016. As a starting point for your discussion you may wish to display on your projection screen the letter I wrote earlier this year to “Doctors for the Environment Australia” . When I subsequently met with the Queensland DEA representative, Dr David King, he could not offer any factual or logical objections against my letter. His only comments were that although my views were consistent with those of many scientists, he felt he had to give DEA members “hope”. DEA are operating on the false hope they can fix rampant global warming which has now spiralled out of control. They have completely ignored more immediate energy and economic issues.

graph2-elm-over-netenergy-300x179Energy analyst Dr Louis Arnoux has informed me that world average1 EROI (energy return over invested, or to use the proper mathematical description for this ratio, energy return divided by energy invested) for petroleum fell below 10:1 a few years ago. Dr David Murphy’s figure for world average EROI of 17:1 for 2013 was an overestimate because Murphy himself wrote in his paper (published by the Royal Society) that his figure did not account for the energy costs of fuel refinement and transportation2.

graph3-net-energy-cliff-300x240According to other EROI luminaries, Drs Hall and Lambert3, a ratio of 10:1 is the minimum required for a complex industrial economy to function properly.

Some parts of the industrial world can continue to function at present because they have captured4 the few remaining high EROI (>10:1) sources for themselves. Others areas eg Southern Europe are losing or have lost access to such high net energy sources (“Hi-NES”)5, hence they are now deindustrialising and collapsing. The rest of the world will never industrialise. We have no significant liquid hydrocarbon replacements for conventional petroleum. Unconventional petroleum, with its woeful EROI of 3:1 or less, is an environmentally devastating scam and a stock market Ponzi scheme.

Decline in Hi-NES is the primary reason for the current global economic contraction6, a fact that conventional economists are too venal or too stupid to acknowledge. The present low price of oil is deeply misleading and is hiding the fact that oil has become less affordable/available for most people around the world due to demand destruction and deflation, temporarily freeing up more oil for “lucky” countries such as Australia.

Dr Jeffrey Brown’s export land model (ELM) shows that oil availability for oil importing countries will eventually fall off a cliff (see graph 1 from postpeakliving.com in which I have corrected a caption: the red line shows GROSS world oil production, which does NOT take into account the energy invested in that oil production. Hence the yellow circle is an overestimate of when zero oil will be available to oil importing countries). A more accurate curve on which to superimpose the ELM should be downslope of the Net Hubbert curve as shown in graph 2. Prior to me doing this, I do not believe anyone else has combined ELM and EROI concepts and it is high time someone did so.

A most vital concept to understanding why global industral societies will soon suddenly and catastrophically collapse, just as a teetering Jenga tower suddenly collapses, is the mathematical fact that the net energy available (= energy return minus energy invested) falls off a cliff when EROI declines to 5:1 (see graph 3).

Sudden catastrophic collapse is consistent with the view of Dr Ugo Bardi, one of the original “Limits to Growth” scientists, who calls this phenomenon the “Seneca cliff”. Dr Bardi is an incredibly smart scientist whose dire warnings over many years have been blithely ignored by all the stupid sheeple around him, hence he titled his blog “Cassandra’s Legacy”.

In human terms, plummeting EROI in the absence of any plan to transition to a post carbon lifestyle, will mean social breakdown, war, starvation7and mass die off on a monumental scale. No part of the world which depends on petroleum will be spared.

We can understand why TPTB promote false hopes for the future to the clueless sheeple, using extravagant bread and circuses like the Olympics. Such theatrics keep the herd distracted and subdued. Be assured that once the masses revolt, the drones will be deployed.

On the other hand, offering intelligent people false hope for the future is in my view deeply inappropriate, especially if useful measures can be taken right now to mitigate impending hardships. Unfortunately the window of opportunity is closing fast. What is your transition plan?

You may vehemently reject my warnings and choose to ignore this letter because everything seems “fine” to you now, however denial will not make a looming catastrophe magically disappear.

One of your previous speakers promoted manned space travel to Mars. How useful, do you think, is that sort of meeting?

Regards

Geoffrey Chia, August 2016

IF you like further homework, I found some most interesting links on that SRSrocco website, including videos called the Hidden Secrets of Money made by Mike Maloney who was interviewed by Chris Martenson, and another articles on the collapse of the USA through analysing  its disintegrating infrastructure…..

It’s raining here, still, and I may go to the Community House to watch the hidden secrets of money there before I run out of bandwidth……

Enjoy!

Geoff Chia’s footnotes

Footnotes:

  1. Global “average” EROI of below 10:1 at present means that most oil fields now yield EROI below 10:1 (eg perhaps only 8:1 or 6:1). However there are a few oil fields which continue to yield a high EROI (eg perhaps 20:1), oil fields which the vultures are now circling.

  2. Murphy DJ. 2014 The implications of the declining energy return on investment of oil production. Phil. Trans. R. Soc. A 372: 20130126.

  3. Lambert, Jessica G., Hall Charles A. S. et al. 2014. Energy, EROI and quality of life. Energy Policy 64:153–167 “There is evidence…that once payments for energy rise above a certain threshold at the national level (e.g. approximately 10 percent in the United States) that economic recessions follow. “

  4. Such capture can be accomplished by fair means (eg providing useful products to the oil vendors in exchange for their oil), or foul (eg the criminal protection racket known as the Petrodollar).

  5. Being starved of credit

  6. In China, intolerable pollution has been a major factor for their economic slowdown, as well as the marked reduction in overseas demand for their industrial output

  7. Mass agriculture is crucially dependent on petroleum (also natural gas)





Limits to growth: policies to steer the economy away from disaster

14 09 2016

Samuel Alexander, University of Melbourne

Samuel Alexander

If the rich nations in the world keep growing their economies by 2% each year and by 2050 the poorest nations catch up, the global economy of more than 9 billion people will be around 15 times larger than it is now, in terms of gross domestic product (GDP). If the global economy then grows by 3% to the end of the century, it will be 60 times larger than now.

The existing economy is already environmentally unsustainable. It is utterly implausible to think we can “decouple” economic growth from environmental impact so significantly, especially since recent decades of extraordinary technological advancement have only increased our impacts on the planet, not reduced them.

Moreover, if you asked politicians whether they’d rather have 4% growth than 3%, they’d all say yes. This makes the growth trajectory outlined above all the more absurd.

Others have shown why limitless growth is a recipe for disaster. I’ve argued that living in a degrowth economy would actually increase well-being, both socially and environmentally. But what would it take to get there?

In a new paper published by the Melbourne Sustainable Society Institute, I look at government policies that could facilitate a planned transition beyond growth – and I reflect on the huge obstacles lying in the way.

Measuring progress

First, we need to know what we’re aiming for.

It is now widely recognised that GDP – the monetary value of all goods and services produced in an economy – is a deeply flawed measure of progress.

GDP can be growing while our environment is being degraded, inequality is worsening, and social well-being is stagnant or falling. Better indicators of progress include the Genuine Progress Indicator (GPI), which accounts for a wide range of social, economic and environmental factors.

Cap resources and energy

Environmental impact is driven by demand for resources and energy. It is now clear that the planet cannot possibly support current or bigger populations if developing nations used the same amount of resources and energy as developed nations.

Demand can be reduced through efficiency gains (doing more with less), but these gains tend to be reinvested in more growth and consumption, rather than reducing impacts.

A post-growth economy would therefore need diminishing “resource caps” to achieve sustainability. These would aim to limit a nation’s consumption to a “fair share” of available resources. This in turn would stimulate efficiency, technological innovation and recycling, thereby minimising waste.

This means that a post-growth economy will need to produce and consume in far less resource-intensive ways, which will almost certainly mean reduced GDP. There will of course be scope to progress in other ways, such as increased leisure time and community engagement.

Work less, live more

Growth in GDP is often defended on the grounds that it is required to keep unemployment at manageable levels. So jobs will have to maintained in other ways.

Even though GDP has been growing quite consistently in recent decades, many Westerners, including Australians, still seem to be locked into a culture of overwork.

By reducing the average working week to 28 hours, a post-growth economy would share the available work among the working population. This would minimise or eliminate unemployment even in a non-growing or contracting economy.

Lower income would mean we would have less stuff, reducing environmental impact, but we would receive more freedom in exchange. Planned degrowth is therefore very different to unplanned recession.

Redirect public spending

Governments are the most significant player in any economy and have the most spending power. Taking limits to growth seriously will require a fundamental rethink of how public funds are invested and spent.

Among other things, this would include a swift divestment from the fossil fuel economy and reinvestment in renewable energy systems. But just as important is investing in efficiency and reducing energy demand through behaviour change. Obviously, it will be much easier to transition to 100% renewable energy if energy demand is a fraction of what it is today.

We could fund this transition by redirecting funds from military spending (climate change is, after all, a security threat), cutting fossil fuel subsidies and putting an adequate price on carbon.

Reform banking and finance

Banking and finance systems essentially have a “growth imperative” built into their structures. Money is loaned into existence by private banks as interest-bearing debt. Paying back the debt plus the interest requires an expansion of the monetary supply.

There is so much public and private debt today that the only way it could be paid back is via decades of continued growth.

So we need deep reform of banking and finance systems. We’d also need to cancel debt in some circumstances, especially in developing nations that are being suffocated by interest payments to rich world lenders.

The population question

Then there’s population. Many people assume that population growth will slow when the developing world gets rich, but to globalise affluence would be environmentally catastrophic. It is absolutely imperative therefore that nations around the world unite to confront the population challenge directly.

Population policies will inevitably be controversial but the world needs bold and equitable leadership on this issue, because current trends suggest we are heading for 11 billion by the end of this century.

Anyone who casually dismisses the idea that there is a limit to how many people Earth can support should be given a Petri dish with a swab of bacteria. Watch as the colony grows until it consumes all of the available nutrients or is poisoned by its own waste.

The first thing needed is a global fund that focuses on providing the education, empowerment and contraception required to minimise the estimated 87 million unintended pregnancies worldwide every year.

Eliminating poverty

The conventional path to poverty alleviation is the strategy of GDP growth, on the assumption that “a rising tide will lift all boats”. But, as I’ve argued, a rising tide will sink all boats.

Poverty alleviation must be achieved more directly, via redistribution of wealth and power, both nationally and internationally. In other words (and to change the metaphor), a post-growth economy would eliminate poverty not by baking an ever-larger pie (which isn’t working) but by sharing it differently.

The richest 62 people on the planet own more than the poorest half of humanity. Dwell on that for a moment, and then dare to tell me that redistribution is not an imperative of justice.

So what’s stopping us?

Despite these post-growth policy proposals seeming coherent, they face at least four huge obstacles – which may be insurmountable.

First, the paradigm of growth is deeply embedded in national governments, especially in the developed world. At the cultural level, the expectation of ever-increasing affluence is as strong as ever. I am not so deluded as to think otherwise.

Second, these policies would directly undermine the economic interests of the most powerful corporations and institutions in society, so fierce resistance should be expected.

Third, and perhaps most challenging, is that in a globalised world these policies would likely trigger either capital flight or economic collapse, or both. For example, how would the stock markets react to this policy agenda?

Finally, there is also a geopolitical risk in being first to adopt these policies. Reduced military spending, for instance, would reduce a nation’s relative power.

So if these “top-down” policies are unlikely to work, it would seem to follow that if a post-growth economy is to emerge, it may have to be driven into existence from below, with communities coming together to build the new economy at the grassroots level.

And if we face a future where the growth economy grows itself to death, which seems to be the most likely scenario, then building up local resilience and self-sufficiency now will prove to be time and energy well spent.

In the end, it is likely that only when a deep crisis arrives will an ethics of sufficiency come to inform our economic thinking and practice more broadly.

The Conversation

Samuel Alexander, Research fellow, Melbourne Sustainable Society Institute, University of Melbourne

This article was originally published on The Conversation. Read the original article.





Negative Interest Rates and the War on Cash (1)

5 09 2016

Nicole Foss, one of my gurus, has not written much since going on a world speaking tour. This article, split into a four part series by Raul Ilargi of the Automatic Earth where this was first posted because of its length, is so important it must be widely shared….. people must wake up to what the powers that be are up to in the vain attempt of keeping business as usual going in the increasingly obvious Limits to Growth wall we are approaching at very high speed…..

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nicolefoss

Nicole Foss

As momentum builds in the developing deflationary spiral, we are seeing increasingly desperate measures to keep the global credit ponzi scheme from its inevitable conclusion. Credit bubbles are dynamic — they must grow continually or implode — hence they require ever more money to be lent into existence. But that in turn requires a plethora of willing and able borrowers to maintain demand for new credit money, lenders who are not too risk-averse to make new loans, and (apparently effective) mechanisms for diluting risk to the point where it can (apparently safely) be ignored. As the peak of a credit bubble is reached, all these necessary factors first become problematic and then cease to be available at all. Past a certain point, there are hard limits to financial expansions, and the global economy is set to hit one imminently.

Borrowers are increasingly maxed out and afraid they will not be able to service existing loans, let alone new ones. Many families already have more than enough ‘stuff’ for their available storage capacity in any case, and are looking to downsize and simplify their cluttered lives. Many businesses are already struggling to sell goods and services, and so are unwilling to borrow in order to expand their activities. Without willingness to borrow, demand for new loans will fall substantially. As risk factors loom, lenders become far more risk-averse, often very quickly losing trust in the solvency of of their counterparties. As we saw in 2008, the transition from embracing risky prospects to avoiding them like the plague can be very rapid, changing the rules of the game very abruptly.

Mechanisms for spreading risk to the point of ‘dilution to nothingness’, such as securitization, seen as effective and reliable during monetary expansions, cease to be seen as such as expansion morphs into contraction. The securitized instruments previously created then cease to be perceived as holding value, leading to them being repriced at pennies on the dollar once price discovery occurs, and the destruction of that value is highly deflationary. The continued existence of risk becomes increasingly evident, and the realisation that that risk could be catastrophic begins to dawn.

Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road. Negative interest rates and the war on cash are symptoms of such a limit being reached. As confidence evaporates, so does liquidity. This is where we find ourselves at the moment — on the cusp of phase two of the credit crunch, sliding into the same unavoidable constellation of conditions we saw in 2008, but on a much larger scale.

From ZIRP to NIRP

Interest rates have remained at extremely low levels, hardly distinguishable from zero, for the several years. This zero interest rate policy (ZIRP) is a reflection of both the extreme complacency as to risk during the rise into the peak of a major bubble, and increasingly acute pressure to keep the credit mountain growing through constant stimulation of demand for borrowing. The resulting search for yield in a world of artificially stimulated over-borrowing has lead to an extraordinary array of malinvestment across many sectors of the real economy. Ever more excess capacity is being built in a world facing a severe retrenchment in aggregate demand. It is this that is termed ‘recovery’, but rather than a recovery, it is a form of double jeopardy — an intensification of previous failed strategies in the hope that a different outcome will result. This is, of course, one definition of insanity.

Now that financial crisis conditions are developing again, policies are being implemented which amount to an even greater intensification of the old strategy. In many locations, notably those perceived to be safe havens, the benchmark is moving from a zero interest rate policy to a negative interest rate policy (NIRP), initially for bank reserves, but potentially for business clients (for instance in Holland and the UK). Individual savers would be next in line. Punishing savers, while effectively encouraging banks to lend to weaker, and therefore riskier, borrowers, creates incentives for both borrowers and lenders to continue the very behaviour that set the stage for financial crisis in the first place, while punishing the kind of responsibility that might have prevented it.

Risk is relative. During expansionary times, when risk perception is low almost across the board (despite actual risk steadily increasing), the risk premium that interest rates represent shows relatively little variation between different lenders, and little volatility. For instance, the interest rates on sovereign bonds across Europe, prior to financial crisis, were low and broadly similar for many years. In other words, credit spreads were very narrow during that time. Greece was able to borrow almost as easily and cheaply as Germany, as lenders bet that Europe’s strong economies would back the debt of its weaker parties. However, as collective psychology shifts from unity to fragmentation, risk perception increases dramatically, and risk distinctions of all kinds emerge, with widening credit spreads. We saw this happen in 2008, and it can be expected to be far more pronounced in the coming years, with credit spreads widening to record levels. Interest rate divergences create self-fulfilling prophecies as to relative default risk, against a backdrop of fear-driven high volatility.

Many risk distinctions can be made — government versus private debt, long versus short term, economic centre versus emerging markets, inside the European single currency versus outside, the European centre versus the troubled periphery, high grade bonds versus junk bonds etc. As the risk distinctions increase, the interest rate risk premiums diverge. Higher risk borrowers will pay higher premiums, in recognition of the higher default risk, but the higher premium raises the actual risk of default, leading to still higher premiums in a spiral of positive feedback. Increased risk perception thus drives actual risk, and may do so until the weak borrower is driven over the edge into insolvency. Similarly, borrowers perceived to be relative safe havens benefit from lower risk premiums, which in turn makes their debt burden easier to bear and lowers (or delays) their actual risk of default. This reduced risk of default is then reflected in even lower premiums. The risky become riskier and the relatively safe become relatively safer (which is not necessarily to say safe in absolute terms). Perception shapes reality, which feeds back into perception in a positive feedback loop.

 

The process of diverging risk perception is already underway, and it is generally the states seen as relatively safe where negative interest rates are being proposed or implemented. Negative rates are already in place for bank reserves held with the ECB and in a number of European states from 2012 onwards, notably Scandinavia and Switzerland. The desire for capital preservation has led to a willingness among those with capital to accept paying for the privilege of keeping it in ‘safe havens’. Note that perception of safety and actual safety are not equivalent. States at the peak of a bubble may appear to be at low risk, but in fact the opposite is true. At the peak of a bubble, there is nowhere to go but down, as Iceland and Ireland discovered in phase one of the financial crisis, and many others will discover as we move into phase two. For now, however, the perception of low risk is sufficient for a flight to safety into negative interest rate environments.

This situation serves a number of short term purposes for the states involved. Negative rates help to control destabilizing financial inflows at times when fear is increasingly driving large amounts of money across borders. A primary objective has been to reduce upward pressure on currencies outside the eurozone. The Swiss, Danish and Swedish currencies have all been experiencing currency appreciation, hence a desire to use negative interest rates to protect their exchange rate, and therefore the price of their exports, by encouraging foreigners to keep their money elsewhere. The Danish central bank’s sole mandate is to control the value of the currency against the euro. For a time, Switzerland pegged their currency directly to the euro, but found the cost of doing so to be prohibitive. For them, negative rates are a less costly attempt to weaken the currency without the need to defend a formal peg. In a world of competitive, beggar-thy-neighbour currency devaluations, negative interest rates are seen as a means to achieve or maintain an export advantage, and evidence of the growing currency war.

Negative rates are also intended to discourage saving and encourage both spending and investment. If savers must pay a penalty, spending or investment should, in theory, become more attractive propositions. The intention is to lead to more money actively circulating in the economy. Increasing the velocity of money in circulation should, in turn, provide price support in an environment where prices are flat to falling. (Mainstream commentators would describe this as as an attempt to increase ‘inflation’, by which they mean price increases, to the common target of 2%, but here at The Automatic Earth, we define inflation and deflation as an increase or decrease, respectively, in the money supply, not as an increase or decrease in prices.) The goal would be to stave off a scenario of falling prices where buyers would have an incentive to defer spending as they wait for lower prices in the future, starving the economy of circulating currency in the meantime. Expectations of falling prices create further downward price pressure, leading into a vicious circle of deepening economic depression. Preventing such expectations from taking hold in the first place is a major priority for central authorities.

Negative rates in the historical record are symptomatic of times of crisis when conventional policies have failed, and as such are rare. Their use is a measure of desperation:

First, a policy rate likely would be set to a negative value only when economic conditions are so weak that the central bank has previously reduced its policy rate to zero. Identifying creditworthy borrowers during such periods is unusually challenging. How strongly should banks during such a period be encouraged to expand lending?

However strongly banks are ‘encouraged’ to lend, willing borrowers and lenders are set to become‘endangered species’:

The goal of such rates is to force banks to lend their excess reserves. The assumption is that such lending will boost aggregate demand and help struggling economies recover. Using the same central bank logic as in 2008, the solution to a debt problem is to add on more debt. Yet, there is an old adage: you can bring a horse to water but you cannot make him drink! With the world economy sinking into recession, few banks have credit-worthy customers and many banks are having difficulties collecting on existing loans.
Italy’s non-performing loans have gone from about 5 percent in 2010 to over 15 percent today. The shale oil bust has left many US banks with over a trillion dollars of highly risky energy loans on their books. The very low interest rate environment in Japan and the EU has done little to spur demand in an environment full of malinvestments and growing government constraints.

Doing more of the same simply elevates the already enormous risk that a new financial crisis is right around the corner:

Banks rely on rates to make returns. As the former Bank of England rate-setter Charlie Bean has written in a recent paper for The Economic Journal, pension funds will struggle to make adequate returns, while fund managers will borrow a lot more to make profits. Mr Bean says: “All of this makes a leveraged ‘search for yield’ of the sort that marked the prelude to the crisis more likely.” This is not comforting but it is highly plausible: barely a decade on from the crash, we may be about to repeat it. This comes from tasking central bankers with keeping the world economy growing, even while governments have cut spending.

Experiences with Negative Interest Rates

The existing low interest rate environment has already caused asset price bubbles to inflate further, placing assets such as real estate ever more beyond the reach of ordinary people at the same time as hampering those same people attempting to build sufficient savings for a deposit. Negative interest rates provide an increased incentive for this to continue. In locations where the rates are already negative, the asset bubble effect has worsened. For instance, in Denmark negative interest rates have added considerable impetus to the housing bubble in Copenhagen, resulting in an ever larger pool over over-leveraged property owners exposed to the risks of a property price collapse and debt default:

Where do you invest your money when rates are below zero? The Danish experience says equities and the property market. The benchmark index of Denmark’s 20 most-traded stocks has soared more than 100 percent since the second quarter of 2012, which is just before the central bank resorted to negative rates. That’s more than twice the stock-price gains of the Stoxx Europe 600 and Dow Jones Industrial Average over the period. Danish house prices have jumped so much that Danske Bank A/S, Denmark’s biggest lender, says Copenhagen is fast becoming Scandinavia’s riskiest property market.

Considering that risky property markets are the norm in Scandinavia, Copenhagen represents an extreme situation:

“Property prices in Copenhagen have risen 40–60 percent since the middle of 2012, when the central bank first resorted to negative interest rates to defend the krone’s peg to the euro.”

This should come as no surprise: recall that there are documented cases where Danish borrowers are paid to take on debt and buy houses “In Denmark You Are Now Paid To Take Out A Mortgage”, so between rewarding debtors and punishing savers, this outcome is hardly shocking. Yet it is the negative rates that have made this unprecedented surge in home prices feel relatively benign on broader price levels, since the source of housing funds is not savings but cash, usually cash belonging to the bank.

 

The Swedish property market is similarly reaching for the sky. Like Japan at the peak of it’s bubble in the late 1980s, Sweden has intergenerational mortgages, with an average term of 140 years! Recent regulatory attempts to rein in the ballooning debt by reducing the maximum term to a ‘mere’ 105 years have been met with protest:

Swedish banks were quoted in the local press as opposing the move. “It isn’t good for the finances of households as it will make mortgages more expensive and the terms not as good. And it isn’t good for financial stability,” the head of Swedish Bankers’ Association was reported to say.

Apart from stimulating further leverage in an already over-leveraged market, negative interest rates do not appear to be stimulating actual economic activity:

If negative rates don’t spur growth — Danish inflation since 2012 has been negligible and GDP growth anemic — what are they good for?….Danish businesses have barely increased their investments, adding less than 6 percent in the 12 quarters since Denmark’s policy rate turned negative for the first time. At a growth rate of 5 percent over the period, private consumption has been similarly muted. Why is that? Simply put, a weak economy makes interest rates a less powerful tool than central bankers would like.

“If you’re very busy worrying about the economy and your job, you don’t care very much what the exact rate is on your car loan,” says Torsten Slok, Deutsche Bank’s chief international economist in New York.

Fueling inequality and profligacy while punishing responsible behaviour is politically unpopular, and the consequences, when they eventually manifest, will be even more so. Unfortunately, at the peak of a bubble, it is only continued financial irresponsibility that can keep a credit expansion going and therefore keep the financial system from abruptly crashing. The only things keeping the system ‘running on fumes’ as it currently is, are financial sleight-of-hand, disingenuous bribery and outright fraud. The price to pay is that the systemic risks continue to grow, and with it the scale of the impacts that can be expected when the risk is eventually realised. Politicians desperately wish to avoid those consequences occurring in their term of office, hence they postpone the inevitable at any cost for as long as physically possible.

The Zero Lower Bound and the Problem of Physical Cash

Central bankers attempting to stimulate the circulation of money in the economy through the use of negative interest rates have a number of problems. For starters, setting a low official rate does not necessarily mean that low rates will prevail in the economy, particularly in times of crisis:

The experience of the global financial crisis taught us that the type of shocks which can drive policy interest rates to the lower bound are also shocks which produce severe impairments to the monetary policy transmission mechanism. Suppose, for example, that the interbank market freezes and prevents a smooth transmission of the policy interest rate throughout the banking sector and financial markets at large. In this case, any cut in the policy rate may be almost completely ineffective in terms of influencing the macroeconomy and prices.

This is exactly what we saw in 2008, when interbank lending seized up due to the collapse of confidence in the banking sector. We have not seen this happen again yet, but it inevitably will as crisis conditions resume, and when it does it will illustrate vividly the limits of central bank power to control financial parameters. At that point, interest rates are very likely to spike in practice, with banks not trusting each other to repay even very short term loans, since they know what toxic debt is on their own books and rationally assume their potential counterparties are no better. Widening credit spreads would also lead to much higher rates on any debt perceived to be risky, which, increasingly, would be all debt with the exception of government bonds in the jurisdictions perceived to be safest. Low rates on high grade debt would not translate into low rates economy-wide. Given the extent of private debt, and the consequent vulnerability to higher interest rates across the developed world, an interest rate spike following the NIRP period would be financially devastating.

The major issue with negative rates in the shorter term is the ability to escape from the banking system into physical cash. Instead of causing people to spend, a penalty on holding savings in a banks creates an incentive for them to withdraw their funds and hold cash under their own control, thereby avoiding both the penalty and the increasing risk associated with the banking system:

Western banking systems are highly illiquid, meaning that they have very low cash equivalents as a percentage of customer deposits….Solvency in many Western banking systems is also highly questionable, with many loaded up on the debts of their bankrupt governments. Banks also play clever accounting games to hide the true nature of their capital inadequacy. We live in a world where questionably solvent, highly illiquid banks are backed by under capitalized insurance funds like the FDIC, which in turn are backed by insolvent governments and borderline insolvent central banks. This is hardly a risk-free proposition. Yet your reward for taking the risk of holding your money in a precarious banking system is a rate of return that is substantially lower than the official rate of inflation.

In other words, negative rates encourage an arbitrage situation favouring cash. In an environment of few good investment opportunities, increasing recognition of risk and a rising level of fear, a desire for large scale cash withdrawal is highly plausible:

From a portfolio choice perspective, cash is, under normal circumstances, a strictly dominated asset, because it is subject to the same inflation risk as bonds but, in contrast to bonds, it yields zero return. It has also long been known that this relationship would be reversed if the return on bonds were negative. In that case, an investor would be certain of earning a profit by borrowing at negative rates and investing the proceedings in cash. Ignoring storage and transportation costs, there is therefore a zero lower bound (ZLB) on nominal interest rates.

Zero is the lower bound for nominal interest rates if one would want to avoid creating such an incentive structure, but in a contractionary environment, zero is not low enough to make borrowing and lending attractive. This is because, while the nominal rate might be zero, the real rate (the nominal rate minus negative inflation) can remain high, or perhaps very high, depending on how contractionary the financial landscape becomes. As Keynes observed, attempting to stimulate demand for money by lowering interest rates amounts to ‘pushing on a piece of string‘. Central authorities find themselves caught in the liquidity trap, where monetary policy ceases to be effective:

Many big economies are now experiencing ‘deflation’, where prices are falling. In the euro zone, for instance, the main interest rate is at 0.05% but the “real” (or adjusted for inflation) interest rate is considerably higher, at 0.65%, because euro-area inflation has dropped into negative territory at -0.6%. If deflation gets worse then real interest rates will rise even more, choking off recovery rather than giving it a lift.

If nominal rates are sufficiently negative to compensate for the contractionary environment, real rates could, in theory, be low enough to stimulate the velocity of money, but the more negative the nominal rate, the greater the incentive to withdraw physical cash. Hoarded cash would reduce, instead of increase, the velocity of money. In practice, lowering rates can be moderately reflationary, provided there remains sufficient economic optimism for people to see the move in a positive light. However, sending rates into negative territory at a time pessimism is dominant can easily be interpreted as a sign of desperation, and therefore as confirmation of a negative outlook. Under such circumstances, the incentives to regard the banking system as risky, to withdraw physical cash and to hoard it for a rainy day increase substantially. Not only does the money supply fail to grow, as new loans are not made, but the velocity of money falls as money is hoarded, thereby aggravating a deflationary spiral:

A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth. As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher. In today’s mercantilist, beggar-thy-neighbour world of global trade, a strong currency is a headwind to exports. Obviously, this is not the desired outcome of policymakers. But as central banks grasp for new, stimulative tools, they end up pushing on an ever-lengthening piece of string.

 

Japan has been in the economic doldrums, with pessimism dominant, for over 25 years, and the population has become highly sceptical of stimulation measures intended to lead to recovery. The negative interest rates introduced there (described as ‘economic kamikaze’) have had a very different effect than in Scandinavia, which is still more or less at the peak of its bubble and therefore much more optimistic. Unfortunately, lowering interest rates in times of collective pessimism has a poor record of acting to increase spending and stimulate the economy, as Japan has discovered since their bubble burst in 1989:

For about a quarter of a century the Japanese have proved to be fanatical savers, and no matter how low the Bank of Japan cuts rates, they simply cannot be persuaded to spend their money, or even invest it in the stock market. They fear losing their jobs; they fear a further fall in shares or property values; they have no confidence in the investment opportunities in front of them. So pathological has this psychology grown that they would rather see the value of their savings fall than spend the cash. That draining of confidence after the collapse of the 1980s “bubble” economy has depressed Japanese growth for decades.

Fear is a very sharp driver of behaviour — easily capable of over-riding incentives designed to promote spending and investment:

When people are fearful they tend to save; and when they become especially fearful then they save even more, even if the returns on their savings are extremely low. Much the same goes for businesses, and there are increasing reports of them “hoarding” their profits rather than reinvesting them in their business, such is the great “uncertainty” around the world economy. Brexit obviously only added to the fears and misgivings about the future.

Deflation is so difficult to overcome precisely because of its strong psychological component. When the balance of collective psychology tips from optimism, hope and greed to pessimism and fear, everything is perceived differently. Measures intended to restore confidence end up being interpreted as desperation, and therefore get little or no traction. As such initiatives fail, their failure becomes conformation of a negative bias, which increases the power of that bias, causing more stimulus initiatives to fail. The resulting positive feedback loop creates and maintains a vicious circle, both economically and socially:

There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money. We are already seeing this happen in Japan where citizens are clamouring for ¥10,000 bills (and home safes to store them in). People are taking their money out of the banking system to stuff it under their metaphorical mattresses. This may sound extreme, but whether paper money is stashed in home safes or moved into transaction substitutes or other stores of value like gold, the point is it’s not circulating in the economy. The empirical data support this view — the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.

Physical cash under one’s own control is increasingly seen as one of the primary escape routes for ordinary people fearing the resumption of the 2008 liquidity crunch, and its popularity as a store of value is increasing steadily, with demand for cash rising more rapidly than GDP in a wide range of countries:

While cash’s use is in continual decline, claims that it is set to disappear entirely may be premature, according to the Bank of England….The Bank estimates that 21pc to 27pc of everyday transactions last year were in cash, down from between 34pc and 45pc at the turn of the millennium. Yet simultaneously the demand for banknotes has risen faster than the total amount of spending in the economy, a trend that has only become more pronounced since the mid-1990s. The same phenomenon has been seen internationally, in the US, eurozone, Australia and Canada….

….The prevalence of hoarding has also firmed up the demand for physical money. Hoarders are those who “choose to save their money in a safety deposit box, or under the mattress, or even buried in the garden, rather than placing it in a bank account”, the Bank said. At a time when savings rates have not turned negative, and deposits are guaranteed by the government, this kind of activity seems to defy economic theory. “For such action to be considered as rational, those that are hoarding cash must be gaining a non-financial benefit,” the Bank said. And that benefit must exceed the returns and security offered by putting that hoarded cash in a bank deposit account. A Bank survey conducted last year found that 18pc of people said they hoarded cash largely “to provide comfort against potential emergencies”.

This would suggest that a minimum of £3bn is hoarded in the UK, or around £345 a person. A government survey conducted in 2012 suggested that the total number might be higher, at £5bn….

…..But Bank staff believe that its survey results understate the extent of hoarding, as “the sensitivity of the subject” most likely affects the truthfulness of hoarders. “Based on anecdotal evidence, a small number of people are thought to hoard large values of cash.” The Bank said: “As an illustrative example, if one in every thousand adults in the United Kingdom were to hoard as much as £100,000, this would account for around £5bn — nearly 10pc of notes in circulation.” While there may be newer and more convenient methods of payment available, this strong preference for cash as a safety net means that it is likely to endure, unless steps are taken to discourage its use.

Part 2 is here





Eight Pitfalls in Evaluating Green Energy Solutions

4 07 2016

Does the recent climate accord between US and China mean that many countries will now forge ahead with renewables and other green solutions? I think that there are more pitfalls than many realize.

Pitfall 1. Green solutions tend to push us from one set of resources that are a problem today (fossil fuels) to other resources that are likely to be problems in the longer term.  

The name of the game is “kicking the can down the road a little.” In a finite world, we are reaching many limits besides fossil fuels:

  1. Soil quality–erosion of topsoil, depleted minerals, added salt
  2. Fresh water–depletion of aquifers that only replenish over thousands of years
  3. Deforestation–cutting down trees faster than they regrow
  4. Ore quality–depletion of high quality ores, leaving us with low quality ores
  5. Extinction of other species–as we build more structures and disturb more land, we remove habitat that other species use, or pollute it
  6. Pollution–many types: CO2, heavy metals, noise, smog, fine particles, radiation, etc.
  7. Arable land per person, as population continues to rise

The danger in almost every “solution” is that we simply transfer our problems from one area to another. Growing corn for ethanol can be a problem for soil quality (erosion of topsoil), fresh water (using water from aquifers in Nebraska, Colorado). If farmers switch to no-till farming to prevent the erosion issue, then great amounts of Round Up are often used, leading to loss of lives of other species.

Encouraging use of forest products because they are renewable can lead to loss of forest cover, as more trees are made into wood chips. There can even be a roundabout reason for loss of forest cover: if high-cost renewables indirectly make citizens poorer, citizens may save money on fuel by illegally cutting down trees.

High tech goods tend to use considerable quantities of rare minerals, many of which are quite polluting if they are released into the environment where we work or live. This is a problem both for extraction and for long-term disposal.

Pitfall 2. Green solutions that use rare minerals are likely not very scalable because of quantity limits and low recycling rates.  

Computers, which are the heart of many high-tech goods, use almost the entire periodic table of elements.

Figure 1. Slide by Alicia Valero showing that almost the entire periodic table of elements is used for computers.

When minerals are used in small quantities, especially when they are used in conjunction with many other minerals, they become virtually impossible to recycle. Experience indicates that less than 1% of specialty metals are recycled.

Figure 2. Slide by Alicia Valero showing recycling rates of elements.

Green technologies, including solar panels, wind turbines, and batteries, have pushed resource use toward minerals that were little exploited in the past. If we try to ramp up usage, current mines are likely to deplete rapidly. We will eventually need to add new mines in areas where resource quality is lower and concern about pollution is higher. Costs will be much higher in such mines, making devices using such minerals less affordable, rather than more affordable, in the long run.

Of course, a second issue in the scalability of these resources has to do with limits on oil supply. As ores of scarce minerals deplete, more rather than less oil will be needed for extraction. If oil is in short supply, obtaining this oil is also likely to be a problem, also inhibiting scalability of the scarce mineral extraction. The issue with respect to oil supply may not be high price; it may be low price, for reasons I will explain later in this post.

Pitfall 3. High-cost energy sources are the opposite of the “gift that keeps on giving.” Instead, they often represent the “subsidy that keeps on taking.”

Oil that was cheap to extract (say $20 barrel) was the true “gift that keeps on giving.” It made workers more efficient in their jobs, thereby contributing to efficiency gains. It made countries using the oil more able to create goods and services cheaply, thus helping them compete better against other countries. Wages tended to rise, as long at the price of oil stayed below $40 or $50 per barrel (Figure 3).

Figure 3. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

More workers joined the work force, as well. This was possible in part because fossil fuels made contraceptives available, reducing family size. Fossil fuels also made tools such as dishwashers, clothes washers, and clothes dryers available, reducing the hours needed in housework. Once oil became high-priced (that is, over $40 or $50 per barrel), its favorable impact on wage growth disappeared.

When we attempt to add new higher-cost sources of energy, whether they are high-cost oil or high-cost renewables, they present a drag on the economy for three reasons:

  1. Consumers tend to cut back on discretionary expenditures, because energy products (including food, which is made using oil and other energy products) are a necessity. These cutbacks feed back through the economy and lead to layoffs in discretionary sectors. If they are severe enough, they can lead to debt defaults as well, because laid-off workers have difficulty paying their bills.
  2.  An economy with high-priced sources of energy becomes less competitive in the world economy, competing with countries using less expensive sources of fuel. This tends to lead to lower employment in countries whose mix of energy is weighted toward high-priced fuels.
  3. With (1) and (2) happening, economic growth slows. There are fewer jobs and debt becomes harder to repay.

In some sense, the cost producing of an energy product is a measure of diminishing returns–that is, cost is a measure of the amount of resources that directly and indirectly or indirectly go into making that device or energy product, with higher cost reflecting increasing effort required to make an energy product. If more resources are used in producing high-cost energy products, fewer resources are available for the rest of the economy. Even if a country tries to hide this situation behind a subsidy, the problem comes back to bite the country. This issue underlies the reason that subsidies tend to “keeping on taking.”

The dollar amount of subsidies is also concerning. Currently, subsidies for renewables (before the multiplier effect) average at least $48 per barrel equivalent of oil.1 With the multiplier effect, the dollar amount of subsidies is likely more than the current cost of oil (about $80), and possibly even more than the peak cost of oil in 2008 (about $147). The subsidy (before multiplier effect) per metric ton of oil equivalent amounts to $351. This is far more than the charge for any carbon tax.

Pitfall 4. Green technology (including renewables) can only be add-ons to the fossil fuel system.

A major reason why green technology can only be add-ons to the fossil fuel system relates to Pitfalls 1 through 3. New devices, such as wind turbines, solar PV, and electric cars aren’t very scalable because of high required subsidies, depletion issues, pollution issues, and other limits that we don’t often think about.

A related reason is the fact that even if an energy product is “renewable,” it needs long-term maintenance. For example, a wind turbine needs replacement parts from around the world. These are not available without fossil fuels. Any electrical transmission system transporting wind or solar energy will need frequent repairs, also requiring fossil fuels, usually oil (for building roads and for operating repair trucks and helicopters).

Given the problems with scalability, there is no way that all current uses of fossil fuels can all be converted to run on renewables. According to BP data, in 2013 renewable energy (including biofuels and hydroelectric) amounted to only 9.4% of total energy use. Wind amounted to 1.1% of world energy use; solar amounted to 0.2% of world energy use.

Pitfall 5. We can’t expect oil prices to keep rising because of affordability issues.  

Economists tell us that if there are inadequate oil supplies there should be few problems:  higher prices will reduce demand, encourage more oil production, and encourage production of alternatives. Unfortunately, there is also a roundabout way that demand is reduced: wages tend to be affected by high oil prices, because high-priced oil tends to lead to less employment (Figure 3). With wages not rising much, the rate of growth of debt also tends to slow. The result is that products that use oil (such as cars) are less affordable, leading to less demand for oil. This seems to be the issue we are now encountering, with many young people unable to find good-paying jobs.

If oil prices decline, rather than rise, this creates a problem for renewables and other green alternatives, because needed subsidies are likely to rise rather than disappear.

The other issue with falling oil prices is that oil prices quickly become too low for producers. Producers cut back on new development, leading to a decrease in oil supply in a year or two. Renewables and the electric grid need oil for maintenance, so are likely to be affected as well. Related posts include Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply? and Oil Price Slide – No Good Way Out.

Pitfall 6. It is often difficult to get the finances for an electrical system that uses intermittent renewables to work out well.  

Intermittent renewables, such as electricity from wind, solar PV, and wave energy, tend to work acceptably well, in certain specialized cases:

  • When there is a lot of hydroelectricity nearby to offset shifts in intermittent renewable supply;
  • When the amount added is sufficient small that it has only a small impact on the grid;
  • When the cost of electricity from otherwise available sources, such as burning oil, is very high. This often happens on tropical islands. In such cases, the economy has already adjusted to very high-priced electricity.

Intermittent renewables can also work well supporting tasks that can be intermittent. For example, solar panels can work well for pumping water and for desalination, especially if the alternative is using diesel for fuel.

Where intermittent renewables tend not to work well is when

  1. Consumers and businesses expect to get a big credit for using electricity from intermittent renewables, but
  2. Electricity added to the grid by intermittent renewables leads to little cost savings for electricity providers.

For example, people with solar panels often expect “net metering,” a credit equal to the retail price of electricity for electricity sold to the electric grid. The benefit to electric grid is generally a lot less than the credit for net metering, because the utility still needs to maintain the transmission lines and do many of the functions that it did in the past, such as send out bills. In theory, the utility still should get paid for all of these functions, but doesn’t. Net metering gives way too much credit to those with solar panels, relative to the savings to the electric companies. This approach runs the risk of starving fossil fuel, nuclear, and grid portion of the system of needed revenue.

A similar problem can occur if an electric grid buys wind or solar energy on a preferential basis from commercial providers at wholesale rates in effect for that time of day. This practice tends to lead to a loss of profitability for fossil fuel-based providers of electricity. This is especially the case for natural gas “peaking plants” that normally operate for only a few hours a year, when electricity rates are very high.

Germany has been adding wind and solar, in an attempt to offset reductions in nuclear power production. Germany is now running into difficulty with its pricing approach for renewables. Some of its natural gas providers of electricity have threatened to shut down because they are not making adequate profits with the current pricing plan. Germany also finds itself using more cheap (but polluting) lignite coal, in an attempt to keep total electrical costs within a range customers can afford.

Pitfall 7. Adding intermittent renewables to the electric grid makes the operation of the grid more complex and more difficult to manage. We run the risk of more blackouts and eventual failure of the grid. 

In theory, we can change the electric grid in many ways at once. We can add intermittent renewables, “smart grids,” and “smart appliances” that turn on and off, depending on the needs of the electric grid. We can add the charging of electric automobiles as well. All of these changes add to the complexity of the system. They also increase the vulnerability of the system to hackers.

The usual assumption is that we can step up to the challenge–we can handle this increased complexity. A recent report by The Institution of Engineering and Technology in the UK on the Resilience of the Electricity Infrastructure questions whether this is the case. It says such changes, ” .  .  . vastly increase complexity and require a level of engineering coordination and integration that the current industry structure and market regime does not provide.” Perhaps the system can be changed so that more attention is focused on resilience, but incentives need to be changed to make resilience (and not profit) a top priority. It is doubtful this will happen.

The electric grid has been called the worlds ‘s largest and most complex machine. We “mess with it” at our own risk. Nafeez Ahmed recently published an article called The Coming Blackout Epidemic, discussing challenges grids are now facing. I have written about electric grid problems in the past myself: The US Electric Grid: Will it be Our Undoing?

Pitfall 8. A person needs to be very careful in looking at studies that claim to show favorable performance for intermittent renewables.  

Analysts often overestimate the benefits of wind and solar. Just this week a new report was published saying that the largest solar plant in the world is so far producing only half of the electricity originally anticipated since it opened in February 2014.

In my view, “standard” Energy Returned on Energy Invested (EROEI) and Life Cycle Analysis (LCA) calculations tend to overstate the benefits of intermittent renewables, because they do not include a “time variable,” and because they do not consider the effect of intermittency. More specialized studies that do include these variables show very concerning results. For example, Graham Palmer looks at the dynamic EROEI of solar PV, using batteries (replaced at eight year intervals) to mitigate intermittency.2 He did not include inverters–something that would be needed and would reduce the return further.

Figure 4. Graham Palmer's chart of Dynamic Energy Returned on Energy Invested from "Energy in Australia."

Palmer’s work indicates that because of the big energy investment initially required, the system is left in a deficit energy position for a very long time. The energy that is put into the system is not paid back until 25 years after the system is set up. After the full 30-year lifetime of the solar panel, the system returns 1.3 times the initial direct energy investment.

One further catch is that the energy used in the EROEI calculations includes only a list of direct energy inputs. The total energy required is much higher; it includes indirect inputs that are not directly measured as well as energy needed to provide necessary infrastructure, such as roads and schools. When these are considered, the minimum EROEI needs to be something like 10. Thus, the solar panel plus battery system modeled is really a net energy sink, rather than a net energy producer.  

Another study by Weissbach et al. looks at the impact of adjusting for intermittency. (This study, unlike Palmer’s, doesn’t attempt to adjust for timing differences.) It concludes, “The results show that nuclear, hydro, coal, and natural gas power systems . . . are one order of magnitude more effective than photovoltaics and wind power.”

Conclusion

It would be nice to have a way around limits in a finite world. Unfortunately, this is not possible in the long run. At best, green solutions can help us avoid limits for a little while longer.

The problem we have is that statements about green energy are often overly optimistic. Cost comparisons are often just plain wrong–for example, the supposed near grid parity of solar panels is an “apples to oranges” comparison. An electric utility cannot possibility credit a user with the full retail cost of electricity for the intermittent period it is available, without going broke. Similarly, it is easy to overpay for wind energy, if payments are made based on time-of-day wholesale electricity costs. We will continue to need our fossil-fueled balancing system for the electric grid indefinitely, so we need to continue to financially support this system.

There clearly are some green solutions that will work, at least until the resources needed to produce these solutions are exhausted or other limits are reached. For example, geothermal may be solutions in some locations. Hydroelectric, including “run of the stream” hydro, may be a solution in some locations. In all cases, a clear look at trade-offs needs to be done in advance. New devices, such as gravity powered lamps and solar thermal water heaters, may be helpful especially if they do not use resources in short supply and are not likely to cause pollution problems in the long run.

Expectations for wind and solar PV need to be reduced. Solar PV and offshore wind are both likely net energy sinks because of storage and balancing needs, if they are added to the electric grid in more than very small amounts. Onshore wind is less bad, but it needs to be evaluated closely in each particular location. The need for large subsidies should be a red flag that costs are likely to be high, both short and long term. Another consideration is that wind is likely to have a short lifespan if oil supplies are interrupted, because of its frequent need for replacement parts from around the world.

Some citizens who are concerned about the long-term viability of the electric grid will no doubt want to purchase their own solar systems with inverters and back-up batteries. I see no reason to discourage people who want to do this–the systems may prove to be of assistance to these citizens. But I see no reason to subsidize these purchases, except perhaps in areas (such as tropical islands) where this is the most cost-effective way of producing electric power.

Notes:

[1] In 2013, the total amount of subsidies for renewables was $121 billion according to the IEA. If we compare this to the amount of renewables (biofuels + other renewables) reported by BP, we find that the subsidy per barrel of oil equivalent in was $48 per barrel of oil equivalent. These amounts are likely understated, because BP biofuels include fuel that doesn’t require subsidies, such as waste sawdust burned for electricity.

[2] Palmer’s work is published in Energy in Australia: Peak Oil, Solar Power, and Asia’s Economic Growth, published by Springer in 2014. This book is part of Prof. Charles Hall’s “Briefs in Energy” series.