Feb 28 2009

Bank Bailouts Make Things Worse

Kal @ 10:42

There is an interesting and thoughtful article at The Oil Drum titled: Through the Looking Glass: Thoughts on the Financial System, Fertilizer Prices, and Our Food System. The author calls himself "Steve from Virginia." He lays out in great detail how he thinks pumping money into the banking system is both causing and accelerating deflation.

The main idea is that deflation has the effect of increasing the principle of a loan because the loan has to be repaid with more expensive dollars. The higher the rate of deflation and the longer the time period, the lower the chances that any given loan will be repaid. Under those circumstances no rational bank can lend, because the money they lend would be less and less likely to be repaid as deflation drives the borrowers deeper and deeper into debt.

Driving this entire process is a mysterious force called 'supply and demand'. When there is a large amount of currency (supply) relative to the smaller amount of goods or services (demand), prices for the goods and services increase. While this is happening, money never reaches the masses and workers who consequently cannot afford to buy the increasingly expensive goods. The businesses are unable to SELL the increasingly expensive goods; the businesses price themselves into Chapter 11.

Businesses either refuse the liquidity and risk insolvency or make use of the liquidity which drives up prices ... and risk insolvency! This 'Heads-I-Win-Tails-You-Lose' mechanism caused many bankruptcies during the Great Depression.

The Masters of the Bad Loan Universe call this liquefaction Re-inflating the Economy. They don't realize they can only inflate PARTS of the economy--the wrong parts. Here, liquidity simply spreads deflation farther and faster. 

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Category: Conventional Economics | Economics | Employment | Guaranteed Wage

Feb 27 2009

The Cow Theory of Economics and Accounting

Kal @ 14:00

John Carney at The Business Insider Clusterstock, gets a lot of mileage out of cows. On 5 February:

AIG Implodes: The Two Cows Version

"Still confused about how AIG lost its shirt by going into the securities lending business big time? We understand. It's terribly complex and full of words that make your eyes glaze over."

So we decided to break it down into the simplest terms Wall Street transactions can be explained: the two cows story.

You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.

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Category: Accounting | Conventional Economics | Economics

Feb 26 2009

Unemployment Or Redeployment?

Kal @ 23:49

The DOL reports on weekly unemployment insurance claims:

In the week ending Feb. 21, the advance figure for seasonally adjusted initial claims was 667,000, an increase of 36,000 from the previous week's revised figure of 631,000. The 4-week moving average was 639,000, an increase of 19,000 from the previous week's revised average of 620,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending Feb. 14 was 5,112,000, an increase of 114,000 from the preceding week's revised level of 4,998,000.

That is over 5,000,000 previously employed persons who have not yet given up on finding a job. Those who have given up are no longer counted.

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Category: Guaranteed Wage | Politics | Recession | Sustainability

Feb 26 2009

Power Shift 2009

Kal @ 10:14

This weekend in Washington, Feb 27th-Mar 2nd.

Power Shift '09

In the middle of our new administration's first 100 days, Power Shift 09 will bring 10,000 young people to Washington to hold our elected officials accountable for rebuilding our economy and reclaiming our future through bold climate and clean energy policy.

From February 27th to March 2nd, 2009 young people from across the country will converge on Washington D.C. to take a message of bold, comprehensive and immediate federal climate action to Capitol Hill. 

We will leverage the momentum we built locally through the Campus Climate Challenge, at our first national mobilization Power Shift 07, and our electoral engagement campaign Power Vote to pressure our political leaders to take the action our generation and our future demands.

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Category: Climate Change | Economics | Politics | Resource Depletion | Steady-State Economics | Sustainability

Feb 26 2009

A Zero-Emissions City in the Desert - With PRT No Less

Kal @ 09:22

Technology Review has an article about the massive solar project in Abu Dhabi. The renderings are pretty spectacular, I wonder if it will all work?  They have cut out cars entirely and replaced them with a Personal Rapid Transit (PRT) System.

The first hints of the project are visible. A white wall stretches through the desert, like a chalk line on a dusty playing field. A bus with darkened windows stirs a low cloud, ferrying workers past a cluster of steel cranes, two portable drilling rigs, and a stand of concrete columns sprouting rust-colored rebar. A tall wire fence guards rows of solar panels mounted on concrete pads.

The construction is the start of a vast experiment, an attempt to create the world's first car-free, zero-carbon-dioxide-emissions, zero-waste city. Due to be completed in 2016, the city is the centerpiece of the Masdar Initiative, a $15 billion investment by the government of Abu Dhabi, which is part of the United Arab Emirates. The new development, being built on the outskirts of Abu Dhabi city, will run almost entirely on energy from the sun and will use just 20 percent as much power as a conventional city of similar size. Garbage will be sorted and recycled or used for compost; sewage will be processed into fuel. Concrete columns will lift the city seven meters off the ground, creating space underneath for a network of automated electric transports that will replace cars. Planners predict that the development will attract 1,500 clean-tech businesses, ranging from large international corporations to startups, and--eventually--some 50,000 residents.

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Category: Climate Change | Economics | PRT | Recession | Solar | Sustainability

Feb 22 2009

Conversation With Long Lost Relative Regarding Stimulus

Kal @ 16:23

Recently I responded to one relative's bulk email bemoaning the expense of the Stimulus Bill. Today I got an email from a relative on the distribution list who has been out of touch for years. He did not seem to be convinced by my comments. He is retired and is probably about 80 years old now. [Correction, he is 76 years old.] This is what he wrote:

Hi Surprised ? It's me LongLost.

Let us at least be fair and remember 9/11 and katrina and and we have been free of further 9/11's so far. I am appalled at the bail out and stimulus pkg and the one that is just around the corner. Gov't should have done nothing and let time fix it. All the extra money simply extends the time of recovery. Let's hit bottom and then recover.

But it is too late. I enjoyed hearing from you guys, let me hear back. 2/22/09 It is your money too and while your at it talk to your Ca. leaders, they could sure use help. LongLost

And this is my reply:

Well, yes it was a bit of a surprise. Last thing I heard from your gang was in 2004. And the last time I heard from you directly, I think your secretary was still doing your email. Are you well? How are you filling your time? Times change, eh? Say hello to your daughter et al. please.

I do not think you are old enough to remember the great depression first hand, but you must have heard how bad it was. It just kept getting worse until the New Deal came in. Are you really prepared to see thousands of people living (or dying) on the streets? I am not.

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Category: Economics | Politics | Resource Depletion | Steady-State Economics | Sustainability

Feb 21 2009

Can Americans Learn to Cooperate?

Kal @ 21:41

This is a post that appeared in The Oil Drum written by RogerK. It talks about the objective of achieving what I have called Steady-State Economics versus infinitely expanding economics.  It is kind of long and dense, but he explores a way of organizing society in a more just fashion. And it says very well some of the things I have been thinking.

The Anti-Economy: How the Pursuit of Private Fortunes is Destroying Community Wealth

Ever since I became aware that oil depletion was a near term problem I have devoted a considerable amount time and intellectual energy thinking about possible ways to structure an economic system so that it does not require constant growth for 'healthy' functioning. If human beings are going to be around on this planet for the long term then growth in resource consumption must to come to an end. I know, of course, that many regular readers of TOD believe that economic growth and growth in resource consumption can be decoupled, if not completely so, then at least sufficiently so that we can comfortably get richer for many decades into the future without mussing the hair of the biosphere. Of course given the fact that a highly respected biologist like E. O. Wilson estimates that species extinction rates have probably already risen to 1000 times prehuman levels, one could argue that we have already gone beyond the 'mussing' stage to the 'falling out in chunks' stage with respect to the state of health of the global coiffure. However, it is not my intention in this essay to try to prove that these optimistic assessments about the extendability of the economic status quo are false. I am simply going assume that a complete decoupling of economic growth from resource consumption is impossible, so that, sooner or later we must stop expanding our total economic output.

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Category: Conventional Economics | Politics | Resource Depletion | Steady-State Economics | Sustainability

Feb 20 2009

Catastrophic Fall in 2009 Global Food Production?

Kal @ 16:37

There is a really interesting piece in The Market Oracle written by Eric deCarbonnel wherein he points out that drought is hitting the bread baskets of the world.

After reading about the droughts in two major agricultural countries, China and Argentina, I decided to research the extent other food producing nations were also experiencing droughts. This project ended up taking a lot longer than I thought. 2009 looks to be a humanitarian disaster around much of the world
To understand the depth of the food Catastrophe that faces the world this year, consider the graphic below depicting countries by USD value of their agricultural output, as of 2006.

 Map showing normal rainfal, linkto source article[Click the image to see the more legible original.]

Now, consider the same graphic with the countries experiencing droughts highlighted.

 Map showing the same areas in drought, linkto source article[Click the image to see the more legible original.]

The countries that make up two thirds of the world's agricultural output are experiencing drought conditions. Whether you watch a video of the drought in China, Australia, Africa, South America, or the US , the scene will be the same: misery, ruined crop, and dying cattle.

The article goes on to analyze these areas one by one. His conclusion is that there will be a drastic (20-40%) drop in food production and that worldwide food stocks are dangerously low. The result, if he is correct, might be famine and starvation for a lot of the worlds poorer countries.

Tags:

Category: Economics | Resource Depletion | Sustainability

Feb 18 2009

Economic Point of View - The Answer Depends on Your POV

Kal @ 11:29

It all depends, it all depends, it all depends upon; it all depends upon your Point of View. I think that little refrain was learned on the school playground. It is even taught in one form or another in Economics 101. Everyone knows that a lot of things depend upon your point of view. Most of us ignore this knowledge and adopt the "one true" POV.

Conventional economics has its own One True Point Of View (OTPOV). Actually there are a whole series of them. People are economic units who will always act in their own self interest. Markets will adapt intelligently to changing conditions. The economy can continue to grow indefinitely. No doubt you can add to the list. It is this later one, the Continuously Growing Economy One True, that has led to most of our current problems. It is the one that got Jimmy Carter in trouble when he suggested there may be limits to growth, and along came Ronnie Reagan who helped us believe in our denial of reality (Morning in America), and in the process wupped Jimmy Carter's ass.

Now along comes "The new ecological accounting is variously called 'dynamic equilibrium', 'steady-state' or 'biophysical' economics".

In the 1970s, World Bank economist Herman Daly wrote Steady-State Economics to outline the future of ecological economics. Daly makes a distinction between 'sustainable growth', which is 'impossible', and 'sustainable development', which is natural. "The larger system is the biosphere and the subsystem is the human economy," says Daly. "We can develop qualitatively, but we cannot grow beyond the biosphere's limits."

These two diametrically opposed points of view can cause a good bit of confusion when considering priorities, as with the yesterday signed stimulus package.

On the one hand there is conventional economics, wherein getting the economy moving again by use of government spending is a good thing.

On the other hand there is Steady-State Economics, wherein much of what we have been doing should simply be discontinued and a new paradigm adopted. I wrote about this last week: Stimulus Bill Passes - Main Issues Not Addressed

Depending on my POV at the moment, the stimulus package was either: a), a good first step, or b), a monumentally stupid waste of additional resources on trying to prop up a failed system.

Sometimes I argue a case (often with myself) from one POV, sometimes from another. As a matter of convention on this blog, I will try to make that POV explicit.

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Category: Conventional Economics | Economics | Politics | Resource Depletion | Steady-State Economics

Feb 18 2009

Greenspan Backs Bank Nationalization

Kal @ 08:55

From the Financial Times. Lots of people think Greenspan is a big part of the reason the banks are in trouble. I guess it is at least a little to his credit that he is willing to deal with the aftermath.

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

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Category: Economics | Politics