I am not a Conservative in the traditional sense, but I recognise that there is waste when you add unnecessary webs of transactions to our economic system. The proliferation of government bureaucracy and the sprawling banking system have acted as parasites that consume wealth by, in the first case, taxing it, and in the second case, bleeding it off through making profits on new loans. If we are to overcome the many economic challenges modern society faces, then we must inevitably innovate and invent, since modern technology is undeniably insufficient to solve the age old impossibility of continued exponential growth on a finite planet. In theory, there are solutions that we don't know of yet, but if we hold ourselves back by refusing to unleash the market, then we will trap ourselves. For example, perfect economic equality is going to result in a situation where no one person has enough to make the investments in green infrastructure and capital that we will need to adapt to the coming energy and resource crunches. The last crunch was in something that is actually artificial. The credit crunch was odd because it was explained as a shortage of money to lend. This excuse preys upon people's ignorance of what "credit" actually is. If you are a bank and you want to issue a loan, you just invent it digitally. We should not mistake the financial crisis, for the real underlying crisis. It is impossible to have a shortage of something that is infinite. Banks can actually create as much money as they like. Of course they don't, because they would send inflation too high, which would defeat the value of the repayments they receive. The economic crisis is simply a cover up for the peaking of several natural resources. I overheard some people talking about how "nothing was making any money at the moment", but I promise you, they are wrong, the one thing that is doing spectacularly well in the current economic climate is commodities. Take a look at the price data for commodities on the BBC News Website, under Business -- Market Data, and you'll see what I am on about.
The government's should recognise that the value of a unit of money is determined by the other money in circulation. If it takes people a third of their incomes, people will be a third poorer, but if they simply printed the money, there would be no need for the misery of taxation, and the effect on people's earnings would be the same, although it would be impossible to progressively discriminate between people on different income levels. Contrary to what some say, this would not cause hyper inflation. Hyper inflation is uncontrollable, rapidly rising inflation, but if government's simply created all the money they need, this would allow the to spend the necessary money needed to remodel our economy. It would not cause inflation, it would simply depreciate the currency. There is a slight difference. Inflation is how prices correct themselves upwards when there is too much effective demand for the goods the economy produces, but if government's expanded the money supply, they would not increase prices on the whole, and they would also boost the affordability of exports for foreign consumers. This would be very useful, because if we are to undertake a second, Green industrial revolution, then it would enable us to encourage the world to purchase the new inventions.
There is a fundamental difference between economic growth and economic development. The debate is similar to the quantity or quality debate, and like most people, I would opt for the later. Most of us live ridiculously busy lives, doing completely unnecessary things just to fill time, because of some sort of externally imposed obligation. At work, we are expected to spend our time being "productive", but what is accepted as "productive" is quite the contrary these days. The loose attitude to what constitutes worthwhile work has lead to the tick box culture, where people sit around doing office jobs that serve next to no benefit to the economy. In fact, it would be more profitable in some cases to pay people to do nothing, because you wouldn't be paying for all the paper, the pointless phone-calls, and so on. Perhaps Mr. Osborne would like to consider this when he makes cuts to public services. You could simply continue to pay people their salaries without actually requiring them to work, the savings being made from what the consume when they work. In the past people produced a financial benefit to the economy when they worked, and whilst this often holds true today, in some cases, we have "consumer-workers", who cost more on top of their salary to employ.
Whilst I have often written of how society will really struggle in the coming years, I accept that there seems no reason to sit back and let it fail. If we are going to fail anyway, then we might as well do so fighting. I would rather see the productive sector of the economy innovate our way out of the coming crisis, rather than sit back idly. However, a few words of caution are unnecessary, otherwise we may be sorely disappointed if we cannot buck the bad. Some analysts point to the meltdown of 2008 as the end of growth, triggered by the tipping point at which hydro-carbon energy extraction peaked, with led to rising extraction costs for the materials we use to conduct "economic activities". It is all very well however to understand recent history, but we should now ask whether there is any light at the end of the tunnel.
In this months issue of BBC Focus, the flagship science and technology magazine, Stephen Baxter speculates about what the future might look like, or rather "looks ahead 100 years to our high-tech future". We should probably take any long-shot view with a pinch of salt, as remarkably, many of his ideas are highly similar to what people thought the year 2000 would look like, back in the 1970s. Anyway, we should at least investigate whether any of the solutions he proposes are feasible. However, Stephen goes from one predictable rehash of current technology to another. One of the wackiest ideas he proposes is strip mining for water on the moon, which would obviously consume enormous amounts of energy that we simply do not have, but like many futurologists, he fails to make this link. However, in his piece on energy, he talks about solar and wind power- existing technologies. I can tell you now, there are only certain materials which would can manufacture solar cells or wind turbines from. These range from metals such as steel, which will run out within 30 years, to plastic manufactured from oil which will run out in 40, to various other ingenious substitutes for these resources, which will of course also run out. There are simply limits to the maximum amount of manufactured "stuff" you can have standing at any one time. The only long term solution is to hope that population shrinks naturally so that per capita GDP continues to increase, to bring people out of poverty, even whilst the economy overall stabilises or contracts.
Sadly, it is likely that population will not shrink naturally, but instead quite brutally. As oil and gas become too expensive (they won't actually run out- but it will feel like it) then we will have a death of intensive mechanised agriculture. Firstly ammonia is the basic feedstock for most farmed plants, but this is manufactured from natural gas. Crops are planted, sprayed with water, harvested, distributed, packaged, and so on, by machines that run on oil and sometimes "bio-fuels" (which are grown from the ground using oil anyway, and according to some studies actually give a lower energy return than that invested meaning that when you use 1 barrel of "bio-oil" you actually use more than 1 of normal oil anyway). However, we can adapt to lower food yields if we simply distribute what we have better. This is probably not going to happen with the current state of the world though. A recent article on the BBC news website celebrated £40m of UK aid as part of a package to poorer countries. To most people, something like £40m is a wonderfully large amount of money, but it is actually less than 1/100,000th of what the nation earns each year. Another factoid to ponder is that there are 10 calories of hydrocarbon energy in every calorie of real food we consume. We are going to have to adapt very quickly as oil production hits the downside of the mountain, otherwise food production would also collapse. Most people simply attach oil to consumer luxuries such as Sports Utility Vehicles, but when people see the empty shelves in the supermarket, the shortage will really hit home.
Monday 27 December 2010
Sunday 26 December 2010
Shortages (might) be on the way!!!
Most businesses and households can cope with one off financial pressures, so many economists, trained on the empirical truths of the good years do not fret too much at a 2.5% rise in the rate of VAT. I would suggest that this is because we usually dismiss such challenges since they have, in the past, not hit at the same time as other challenges, but today, things are different. The cost of oil is above 5.5% of GDP, floating at a dangerous 6.7%. From past evidence, it would seem that if the oil price ever drifts above 5.5%, we enter a recession within a year. In 2008, it hit 9%, the highest ever share of GDP. Obviously when you are spending so much of the national income on a fuel, you have less to spend on the things that actually use the fuel, so consumption becomes impractical, and the economy shrinks to correct the disequilibrium of the complementary demand between the fuel and the end product. With creeping inflation, above average earning rises, the incoming austerity measures such as the VAT hike and public spending cuts, this economy could be in for a very hard time.
It struck me today that we are so dependant on supermarkets for many everyday "essentials" that we would be in a lot of trouble if one of the big four were to go under, particularly the old stalwarts, Tesco's and Sainsbury's. I'm not suggesting that either will go bankrupt, to the contrary, I believe those particular chains are in a healthy financial state, but with the prospect of 1000 firms going under in the next month due to lacklustre consumer demand, we should realise that some stores, from some companies will close. Many people, particularly the elderly, depend on local convenience stores for their shopping, so if problems such as inflation got out of hand, we would be far less able to cope as a society than we would have been in the past. If we are entering an era of stagflation, it will be unlike the 70's episode, because back then, people bought their "supplies" from a much more diverse range of sources. Suburban culture was not so prevalent as it is today.
Some stores, especially the warehouse size out of town supermarkets than sprang up in the 80s and 90s, act as "bastions" for consumers nearby, so what would happen, for instance, if one was closed. Firstly, many have petrol stations attached, so we could presume that this would go as well, which would reduce petrol availability, further cementing regional monopolies, allowing filling operators to increase their prices. People would drive further to a different supermarket. Because they would drive further they would buy more petrol, so they would have less money for food anyway. An influx of shoppers from one "bastion" to another will lead to empty shelves in the short term. It takes months to undertake complete refurbishments or extensions of existing stores, which would be necessary if there were big changes in the market like store closures, so in the short term, we can be sure that there would be food shortages and higher prices if any of the big supermarket's had to shut any, let alone all of their stores.
In the last few days, I have heard worrying news of petrol shortages. Whilst reports such as this can be expected when there is heavy snow, most of it has now cleared. What is now causing the problem is that the country's cars started running low during the snow, and there is still a backlog of consumers who need to refill. This has been badly exacerbated by a Christmas rush, as people head away to their friends and relatives for the festive season. You can expect to pay £1.249 for unleaded right now. The problem is, the price too has shot up in recent weeks, in some places by 5 pence or more. This has for some reason increase demand- people are almost certainly being sensible and expecting the price to shoot further upwards, either that or they fear more snow. For most people, a penny or two more on the litre is far from a nightmare, but along with Osborne's austerity package, the fairness of which more and more people doubt, inflation and cuts may collude to create an economic nightmare.
Remember 2008, empty stores such as Zavvi, Borders, and Woolworths gave us an "entertainment drought", giving HMV an even stronger grip on the market. HMV itself is now struggling even more, as sales disappear to the internet, ground controlled by giants such as Amazon, and Play amongst others. You can only take things away from the high street for so long though, until you get a previously bustling shopping district spiralling into becoming a ghost town. This is a well recognised geographical and economic phenomenon. As shops close, consumers find it less appealing to go out, so sales drop further, and others go under, until the area becomes increasingly empty, or increasing dominated by very few brands, which is never healthy.
Trends suggest that the end of materialistic consumerism, typified by actually going out to buy products, is over, and we are seeing more and more virtual consumerism. It may be environmentally sound when people stop going out to buy SUVs, and instead opt for the video game, where they can drive a digital one, purchased as an internet download, but this shift will create challenges, most notably, in the way people are employed. It only takes a few web geeks to run a website, and a warehouse full of carefully designed robots, to sell people something in the new virtual world. A growing number of experts believe that "virtual consumerism" may be a solution to the negative environmental externalities of traditional capitalism, however, if this leads to less employment, we mustn't let those who are left out fall by the wayside by cutting benefits. We must recognise the full employment is no longer necessary or even efficient in a modern, more sustainable society, so we must react accordingly, by a more equitable distribution of income through higher taxes and benefits, that some elitists call "socialism". If innovation is socialism, then socialism must be good. Just because the old ways of doing things are profitable, this benefit is largely irrelevant if the profits remain controlled by the top 1%. According the Green Economics Institute, the top decile of the population earns 59% of GDP. This is an utterly unacceptable social failure that would not be accepted in any other system. If economists continue in their inability to accept and deal with the fact that things change, and sometimes new truths are not heresy but simply wisdom, then they are an undeniably discredited and morally bankrupt race.
It struck me today that we are so dependant on supermarkets for many everyday "essentials" that we would be in a lot of trouble if one of the big four were to go under, particularly the old stalwarts, Tesco's and Sainsbury's. I'm not suggesting that either will go bankrupt, to the contrary, I believe those particular chains are in a healthy financial state, but with the prospect of 1000 firms going under in the next month due to lacklustre consumer demand, we should realise that some stores, from some companies will close. Many people, particularly the elderly, depend on local convenience stores for their shopping, so if problems such as inflation got out of hand, we would be far less able to cope as a society than we would have been in the past. If we are entering an era of stagflation, it will be unlike the 70's episode, because back then, people bought their "supplies" from a much more diverse range of sources. Suburban culture was not so prevalent as it is today.
Some stores, especially the warehouse size out of town supermarkets than sprang up in the 80s and 90s, act as "bastions" for consumers nearby, so what would happen, for instance, if one was closed. Firstly, many have petrol stations attached, so we could presume that this would go as well, which would reduce petrol availability, further cementing regional monopolies, allowing filling operators to increase their prices. People would drive further to a different supermarket. Because they would drive further they would buy more petrol, so they would have less money for food anyway. An influx of shoppers from one "bastion" to another will lead to empty shelves in the short term. It takes months to undertake complete refurbishments or extensions of existing stores, which would be necessary if there were big changes in the market like store closures, so in the short term, we can be sure that there would be food shortages and higher prices if any of the big supermarket's had to shut any, let alone all of their stores.
In the last few days, I have heard worrying news of petrol shortages. Whilst reports such as this can be expected when there is heavy snow, most of it has now cleared. What is now causing the problem is that the country's cars started running low during the snow, and there is still a backlog of consumers who need to refill. This has been badly exacerbated by a Christmas rush, as people head away to their friends and relatives for the festive season. You can expect to pay £1.249 for unleaded right now. The problem is, the price too has shot up in recent weeks, in some places by 5 pence or more. This has for some reason increase demand- people are almost certainly being sensible and expecting the price to shoot further upwards, either that or they fear more snow. For most people, a penny or two more on the litre is far from a nightmare, but along with Osborne's austerity package, the fairness of which more and more people doubt, inflation and cuts may collude to create an economic nightmare.
Remember 2008, empty stores such as Zavvi, Borders, and Woolworths gave us an "entertainment drought", giving HMV an even stronger grip on the market. HMV itself is now struggling even more, as sales disappear to the internet, ground controlled by giants such as Amazon, and Play amongst others. You can only take things away from the high street for so long though, until you get a previously bustling shopping district spiralling into becoming a ghost town. This is a well recognised geographical and economic phenomenon. As shops close, consumers find it less appealing to go out, so sales drop further, and others go under, until the area becomes increasingly empty, or increasing dominated by very few brands, which is never healthy.
Trends suggest that the end of materialistic consumerism, typified by actually going out to buy products, is over, and we are seeing more and more virtual consumerism. It may be environmentally sound when people stop going out to buy SUVs, and instead opt for the video game, where they can drive a digital one, purchased as an internet download, but this shift will create challenges, most notably, in the way people are employed. It only takes a few web geeks to run a website, and a warehouse full of carefully designed robots, to sell people something in the new virtual world. A growing number of experts believe that "virtual consumerism" may be a solution to the negative environmental externalities of traditional capitalism, however, if this leads to less employment, we mustn't let those who are left out fall by the wayside by cutting benefits. We must recognise the full employment is no longer necessary or even efficient in a modern, more sustainable society, so we must react accordingly, by a more equitable distribution of income through higher taxes and benefits, that some elitists call "socialism". If innovation is socialism, then socialism must be good. Just because the old ways of doing things are profitable, this benefit is largely irrelevant if the profits remain controlled by the top 1%. According the Green Economics Institute, the top decile of the population earns 59% of GDP. This is an utterly unacceptable social failure that would not be accepted in any other system. If economists continue in their inability to accept and deal with the fact that things change, and sometimes new truths are not heresy but simply wisdom, then they are an undeniably discredited and morally bankrupt race.
Wednesday 22 December 2010
What is an economy?
In Margaret Thatcher's day, Britain became a leader in the service industry. As we de-industrialized, instead of selling goods, we started to sell our skills and expertise to the world. We still have industry, mainly in high-tech sectors such as pharmaceuticals and computer parts. However, if we think about what services do- they simply serve the other part of the economy, the "physical economy". For example, a legal firm may add to gross domestic product, but it is only possible if there are businesses in the "real" part of the economy, or the global economy for it to serve. You can't have a world economy based on the service industries, because there comes a point where you would simply have one legal firm giving advice to another, and so on. It is widely accepted by economists that the world depends on the "real" economy, the manufacturing/agriculture sector. If you look at everything around you, it was built by the real economy, the fake sector of the economy, services, can only provide the veneer on the finished product. Even things like health care need resources- it depends on a ready supply of chemicals and equipment to treat the sick. Notwithstanding, the medical professionals - clinicians - still need to eat for example, so you see where it goes. In order to have an "economy" you must have manufacturing, even if some countries/regions of the world can specialize, rightfully so, in services, the world as a whole still depends on industrial breadbaskets. Today these are China and India, and as they develop, and employment shifts from tertiary to secondary and primary industries, we may come to depend more on other countries for industrial produce. This substitution effect can only work for a while, so ultimately, in order to grow an economy, you require industry.
Now that we have established that industry is essential, we only need to understand that resources are finite, and that physical laws, such as entropy (everything slowly breaks down), and the law of diminishing returns, to realize that we can also not forever recycle our way out of trouble. Given that it is illogical that this finite economy will suddenly stop, it is ridiculous that everything will run out and break down all at once, we should expect world wide GDP to follow a bell curve, or something similar. Actually, this seems to be happening. From the beginning of modern industrial civilization, world GDP (income) grew year on year, as did population. GDP stopped in 2008, and shrunk quite dramatically, but population keeps on growing at 70 million a year. It seems we a trapped, we need to grow the economy to sustain per capita wealth, otherwise a burgeoning population will fight for an ever smaller cake as resources run scarce. Some people, myself included, have started to realize that what happened in 2008 may not be unusual in years to come. The extraction of any natural resource grows until no matter how much money is invested, it is impossible to extract any more that at peak, after which production enters terminal decline. Take oil, in each rig, you get to a point where the investment is greater than return, so even some resource lies in the ground, you cannot carry on production, because you would be losing money and resources, and resulting in a lower net production. As we approach the point where more wells "dry out" than new ones can be profitably brought on stream, production will fall and prices will rise exponentially. Problematically, the quicker economies grow, the more the problem exacerbates.
We can see, this actually happened in 2008, oil production had flatlined for 3 years, and prices started to creep up, hitting $150 in August. This proved to be the spark that kicked off the global economic crisis- remember the sub-prime mortgage troubles were actually in 2007, so they had not, contrary to what "experts" claim, proved to be the actual cause of the economic crisis. In 2009 and 2010, governments tried to throw financial solutions; more stimulus (spending), more debt, and money printing to solve a problem that had nothing to do with pieces of paper but everything to do with real resources in the ground. Unfortunately their efforts delivered mediocre results, at best offsetting some of the crisis by borrowing at interest against our future- of course all debts must eventually be paid back.
I suspect that what is happening is that government's have started to come to terms with reality, and are now realizing that the economic expansion which they had predicated economic policy upon was unrealistic. Now the are desperately trying to reduce aggregate demand in the economy, so as to prevent another oil shock. They call this "austerity", and their excuse usually goes along the lines of "we have a huge deficit that needs correcting". Of course, here is where their first mistake lies, but most people fall for it. In a national economy, it is not so much about your "profit", (surplus or deficit), because this is paid for by borrowing- creating money that must be repaid by future generations, rather "revenue" is the main concern, so actually, the best way to grow an economy, if growth is possible, is to lend lots of money, because money is actually "permission" to consume. The world leaders have may realized that there are limits to consumption, but they are being horribly dishonest is their austerity/conservation program, by not distributing the remaining wealth more equitably. They are preying on people's fears about a mythical financial crisis to rob them of what the real crisis might do anyway. The real crisis is actually a resource crisis, and people deserve to know.
Now that we have established that industry is essential, we only need to understand that resources are finite, and that physical laws, such as entropy (everything slowly breaks down), and the law of diminishing returns, to realize that we can also not forever recycle our way out of trouble. Given that it is illogical that this finite economy will suddenly stop, it is ridiculous that everything will run out and break down all at once, we should expect world wide GDP to follow a bell curve, or something similar. Actually, this seems to be happening. From the beginning of modern industrial civilization, world GDP (income) grew year on year, as did population. GDP stopped in 2008, and shrunk quite dramatically, but population keeps on growing at 70 million a year. It seems we a trapped, we need to grow the economy to sustain per capita wealth, otherwise a burgeoning population will fight for an ever smaller cake as resources run scarce. Some people, myself included, have started to realize that what happened in 2008 may not be unusual in years to come. The extraction of any natural resource grows until no matter how much money is invested, it is impossible to extract any more that at peak, after which production enters terminal decline. Take oil, in each rig, you get to a point where the investment is greater than return, so even some resource lies in the ground, you cannot carry on production, because you would be losing money and resources, and resulting in a lower net production. As we approach the point where more wells "dry out" than new ones can be profitably brought on stream, production will fall and prices will rise exponentially. Problematically, the quicker economies grow, the more the problem exacerbates.
We can see, this actually happened in 2008, oil production had flatlined for 3 years, and prices started to creep up, hitting $150 in August. This proved to be the spark that kicked off the global economic crisis- remember the sub-prime mortgage troubles were actually in 2007, so they had not, contrary to what "experts" claim, proved to be the actual cause of the economic crisis. In 2009 and 2010, governments tried to throw financial solutions; more stimulus (spending), more debt, and money printing to solve a problem that had nothing to do with pieces of paper but everything to do with real resources in the ground. Unfortunately their efforts delivered mediocre results, at best offsetting some of the crisis by borrowing at interest against our future- of course all debts must eventually be paid back.
I suspect that what is happening is that government's have started to come to terms with reality, and are now realizing that the economic expansion which they had predicated economic policy upon was unrealistic. Now the are desperately trying to reduce aggregate demand in the economy, so as to prevent another oil shock. They call this "austerity", and their excuse usually goes along the lines of "we have a huge deficit that needs correcting". Of course, here is where their first mistake lies, but most people fall for it. In a national economy, it is not so much about your "profit", (surplus or deficit), because this is paid for by borrowing- creating money that must be repaid by future generations, rather "revenue" is the main concern, so actually, the best way to grow an economy, if growth is possible, is to lend lots of money, because money is actually "permission" to consume. The world leaders have may realized that there are limits to consumption, but they are being horribly dishonest is their austerity/conservation program, by not distributing the remaining wealth more equitably. They are preying on people's fears about a mythical financial crisis to rob them of what the real crisis might do anyway. The real crisis is actually a resource crisis, and people deserve to know.
Sunday 19 December 2010
The irrelevance of the news
When you read the news these days, what you get is pointless drivel. What they should be doing is providing a service, informing us about the challenges of tomorrow, and investigating the events of today, trying to explain why they are happening and what we could do. However, if you take a glance at any newspaper, or mainstream news website, what you will see is more of what you already know. If there is snow where you live, you may find out that there is also snow where somebody else lives, and what a surprise, the airports are shut, because you can't take of in snow and ice. They can keep the useful bits about travel in, and ditch the rest, because quite frankly, telling people it's snowing when they already know is such a waste of money. The "Royal Wedding" story has also created a huge buzz in the news recently, but I highly doubt that most people actually give a damn. Of course, there are the royalists, and the patriots, who believe that it is right and proper that two otherwise irrelevant aristocrats should get an enormous amount of recognition for getting married, as if this was important to anybody else.
It is rather cruel that we are forced to pay huge license fees to the BBC if we want to watch their news, and then they spend the money on covering stuff that isn't even news. If we want entertaining, then we can chose to pay for it on a case by case basis by purchasing whatever magazine etc that suites our interests. If the BBC need to make efficiency savings, which they are going to have to, they can start off by ditching the bulls**t.
Most people hold this preconceived idea, a paradigm, that journalists are fascinated by what they report, and they go to every length to make sure that their coverage is as rigorous and as intellectually ruthless as possible. Yet the reality couldn't be further from this cosy, idealistic interpretation of how the news is produced. I can say with some confidence - I have met countless individuals from the media industry, who after a few drinks at the dinner party tend to open up about what really goes on in the workplace - that many of them are actively disinterested in what they report. This is why they find it obligatory to find extreme stereotypes to portray what they need to cover, because it is the easiest way they can do their job. I have been interviewed countless times, yet I have always noticed that journalists are highly selective with their shorthand. They will cease writing when you drift off into anything that is too truthful to be entertaining, and resume as soon as the buzzwords and soundbites resume.
The truth is that if people actually knew the truth about how the world works, they would be deeply depressed. This is why I can understand it when the media actively ignore anybody who seeks to break their veil of misinformation. It is not a conspiracy that the news media fails in its most fundamental responsibilities, it is simply that the truth is so bad, nobody would ever stay in the job to publish it- so it gets ignored. That is why independent blogs like this are so important. I believe that it is only right to tell people about something when you know it, even when the truth is so outta whack, so sad.
If you think about the main stories that have dominated the headlines of the last year of so, we have had the Financial Crisis, the BP oil spill, the Eurozone Debt crisis, the Government Deficit, and so the list continues; but really, all these stories are just branches of one big crisis. If you haven't realized by now, our economy, and thus our society, is slowly breaking down. The media help the politicians in their quest to peddle utterly ridiculous excuses for each new cock up that happens, and when you know the facts, it is easy to understand that everything that has been reported about the economy recently is absolute bunkum, it's just all nonsense.
Firstly, anything to do with debt is dishonest. This can be explained with a simple understanding of what debt is. In the modern banking system, debt is not, contrary to popular understand, money that is lent. It is actually invented money, that it lent. If you think about how money is lent, it is obvious that no real paper money is required- at least hardly any. Nearly all newly created money (credit) is used digitally, think credit cards, cheques, overdrafts, not very much of this is ever turned back into paper. This is called fractional reserve banking. In the past, banks would actually lend out a fraction of there reserves, which had the effect of inflating the money supply. Therefore by regulating interest rates government's could control the affordability of new money (in fact REALLOCATED MONEY). Banks new that it was unlikely that everyone would want to withdraw cash at any one time, so they could lend out most of the money to generate a profit- interest (money that doesn't actually exist, so the rate of circulation must speed up to pay the banks- which is why credit drives growth). These days, since most money is virtual, banks just create it on top of existing cash reserves. There is no limit on how much banks can create. (In the UK the "reserve requirement" is 0%), although there are guidelines. So when you know that banks can simply create money, their is no such thing as a shortage of money to lend, because they don't actually lend money at all, they just generate virtual credits, which must be repayed with real money. This is where the problem arises, because eventually there will be demand for physical cash to pay off the debt. However, this is solved by extending more credit to pay of old debts, meaning that real money is never needed. The rampant expansion of credit is OK as long as the economy can keep growing so that all the new money has purchasing power. Obviously infinite economic growth is not possible, because resources are finite, so eventually it is inevitable that debtors will default on repayments- or the banks will simply have to keep lending even more money to pay of existing debt (a PONZI SCHEME in effect), even when the economy contracts, which leads to hyper inflation.
Now once you understand this, you begin to realize that the recent economic turmoil fits nicely into the predictions I have just made. Firstly, the Eurozone Crisis, and the sub prime mortgage crisis in the US are evidence of the "default" stage. In the Eurozone, we have not let credit collapse, we have opted for bailouts, which means more new money has been created. Notice that economic growth has also slowed, plus we are seeing a repeat of 2008 with the oil price- it is quickly shooting up again, and inflation is rising. A quick Google search will deliver countless stories to demonstrate any of the claims I have just made. The "growth in money supply" figure in the Eurozone is about 12%- which gives an indication of where inflation is headed in economic growth does not pick up. Inflation actually measures the relationship between effective demand and supply in the economy, so if demand falls as the economy contracts, the situation may not be so bad, but we may be trapped, because if growth does pick up, aggregate demand will rise, so we are likely to see higher inflation. Since inflation erodes the purchasing power of money, we are likely to become poorer.
Don't you think it is wrong that the news media didn't tell you about all of that? Get you letter paper out and start complaining.
It is rather cruel that we are forced to pay huge license fees to the BBC if we want to watch their news, and then they spend the money on covering stuff that isn't even news. If we want entertaining, then we can chose to pay for it on a case by case basis by purchasing whatever magazine etc that suites our interests. If the BBC need to make efficiency savings, which they are going to have to, they can start off by ditching the bulls**t.
Most people hold this preconceived idea, a paradigm, that journalists are fascinated by what they report, and they go to every length to make sure that their coverage is as rigorous and as intellectually ruthless as possible. Yet the reality couldn't be further from this cosy, idealistic interpretation of how the news is produced. I can say with some confidence - I have met countless individuals from the media industry, who after a few drinks at the dinner party tend to open up about what really goes on in the workplace - that many of them are actively disinterested in what they report. This is why they find it obligatory to find extreme stereotypes to portray what they need to cover, because it is the easiest way they can do their job. I have been interviewed countless times, yet I have always noticed that journalists are highly selective with their shorthand. They will cease writing when you drift off into anything that is too truthful to be entertaining, and resume as soon as the buzzwords and soundbites resume.
The truth is that if people actually knew the truth about how the world works, they would be deeply depressed. This is why I can understand it when the media actively ignore anybody who seeks to break their veil of misinformation. It is not a conspiracy that the news media fails in its most fundamental responsibilities, it is simply that the truth is so bad, nobody would ever stay in the job to publish it- so it gets ignored. That is why independent blogs like this are so important. I believe that it is only right to tell people about something when you know it, even when the truth is so outta whack, so sad.
If you think about the main stories that have dominated the headlines of the last year of so, we have had the Financial Crisis, the BP oil spill, the Eurozone Debt crisis, the Government Deficit, and so the list continues; but really, all these stories are just branches of one big crisis. If you haven't realized by now, our economy, and thus our society, is slowly breaking down. The media help the politicians in their quest to peddle utterly ridiculous excuses for each new cock up that happens, and when you know the facts, it is easy to understand that everything that has been reported about the economy recently is absolute bunkum, it's just all nonsense.
Firstly, anything to do with debt is dishonest. This can be explained with a simple understanding of what debt is. In the modern banking system, debt is not, contrary to popular understand, money that is lent. It is actually invented money, that it lent. If you think about how money is lent, it is obvious that no real paper money is required- at least hardly any. Nearly all newly created money (credit) is used digitally, think credit cards, cheques, overdrafts, not very much of this is ever turned back into paper. This is called fractional reserve banking. In the past, banks would actually lend out a fraction of there reserves, which had the effect of inflating the money supply. Therefore by regulating interest rates government's could control the affordability of new money (in fact REALLOCATED MONEY). Banks new that it was unlikely that everyone would want to withdraw cash at any one time, so they could lend out most of the money to generate a profit- interest (money that doesn't actually exist, so the rate of circulation must speed up to pay the banks- which is why credit drives growth). These days, since most money is virtual, banks just create it on top of existing cash reserves. There is no limit on how much banks can create. (In the UK the "reserve requirement" is 0%), although there are guidelines. So when you know that banks can simply create money, their is no such thing as a shortage of money to lend, because they don't actually lend money at all, they just generate virtual credits, which must be repayed with real money. This is where the problem arises, because eventually there will be demand for physical cash to pay off the debt. However, this is solved by extending more credit to pay of old debts, meaning that real money is never needed. The rampant expansion of credit is OK as long as the economy can keep growing so that all the new money has purchasing power. Obviously infinite economic growth is not possible, because resources are finite, so eventually it is inevitable that debtors will default on repayments- or the banks will simply have to keep lending even more money to pay of existing debt (a PONZI SCHEME in effect), even when the economy contracts, which leads to hyper inflation.
Now once you understand this, you begin to realize that the recent economic turmoil fits nicely into the predictions I have just made. Firstly, the Eurozone Crisis, and the sub prime mortgage crisis in the US are evidence of the "default" stage. In the Eurozone, we have not let credit collapse, we have opted for bailouts, which means more new money has been created. Notice that economic growth has also slowed, plus we are seeing a repeat of 2008 with the oil price- it is quickly shooting up again, and inflation is rising. A quick Google search will deliver countless stories to demonstrate any of the claims I have just made. The "growth in money supply" figure in the Eurozone is about 12%- which gives an indication of where inflation is headed in economic growth does not pick up. Inflation actually measures the relationship between effective demand and supply in the economy, so if demand falls as the economy contracts, the situation may not be so bad, but we may be trapped, because if growth does pick up, aggregate demand will rise, so we are likely to see higher inflation. Since inflation erodes the purchasing power of money, we are likely to become poorer.
Don't you think it is wrong that the news media didn't tell you about all of that? Get you letter paper out and start complaining.
Tuesday 14 December 2010
Brown's dire predictions are too conservative
6 days ago former British PM Gordon Brown warned that unless swift action is taken, the Eurozone crisis will exacerbate in the new year. Another untold story is the oil price, which has recently been creeping up and up. A London based research team recently warned that oil production is about to peak. The phenomenon of "peak oil" is not unheard of, but it has had little coverage in the mainstream media, even though it has been known for decades. Essentially, there comes a point with any natural resource where production enters terminal decline as it become impossible to profitably keep expanding/ sustaining supply. Industry experts and insiders have described an important symptom of peak oil as "the bumpy plateau". This describes a climbing oil price, which when it reaches a certain point causes an economic crash, which destroys demand, and sinks the economy. The cycle repeats itself, over and over, until the economy has restructured itself so that it is not so dependent on the resource. Strikingly, the worldwide economic crash in the fall of 2008 occurred shortly after the oil price reached an all time high of $150 a barrel after climbing quickly in the previous months and years from more like $30 a barrel.
A debt crisis is caused when debtors struggle to repay, and in the case of European governments, this is due to a lack of growth in the economy, which has dampened tax revenues in the recession, leaving a deficit. The current monetary system works on an infinite growth paradigm, because debt (money) is created on the assumption that it will be invested in a profitable venture (housing, business, etc), but since all money is loaned into existence with interest, banks must expand the money supply to keep the economy liquid. This is easy in the good years, but in a recession, savers will draw on their existing bank reserves to get by, which has meant recently that there is not enough lending, which has driven up bond yields (interest rates on government debt). The concern is that there is no end in sight. Governments seem trapped because they must maintain economic growth, but cut the deficit at the same time, and there doesn't seem to be away to have austerity without taking the demand out the economy. The hope is that quantitative easing and low interest rates will stimulate a private sector led recovery to fill the gap, but this ignores the oil price. Oil plays such a fundamental part in our whole economy, it is used in transport, agriculture, the pharmaceutical and chemical industries, in the manufacture of plastics, resins, hardware, you name it. So a high wholesale price of oil can be very damaging to business. Consumers in the UK are insulated because most of the petrol/diesel price we pay at the pumps is tax, so we do not feel the pain so badly, but recently high food price inflation is probably due to the rising oil price because there is a lot of derived demand for oil from food. After the 2008 crash, the oil price also shot down, but now it is climbing again. It recently reached a high of $90 a barrel, and if it continues at its current rate we could end up in the same worrying situation in a year or so. Remarkably, everything that is happening in the markets today is exactly as the sustainability community has predicted. When the media claims that nobody could have predicted the 2008 crisis, they were wrong. When governments claim that growth is the solution to the current debt mess, they are also wrong, because in the short term, growth will only add to demand for oil, jack up the price, and crash the economy again. In the short term, what we need is a transition, but a transition to a less hydro-carbon intensive economy is going to take a long time, so we might well face another world economic crisis in the next two years.
In fact, I need to make a correction, of course, it was the Wall Street crash that occurred in autumn 2008, whereas the financial crisis itself had started long before, with the collapse of Northern Rock in 2007. What we have seen recently is other big banks needing bailouts, for example, Anglo Irish bank recently gave the Irish Government such a fiscal headache, they later needed a bailout from the EU and the IMF totally nearly E90billion. This could be the financial crisis of 07/08 starting to repeat itself. As for the oil price again, the world simply cannot cope with a price that is too high, because nearly every product and service that gives a value to the economy is dependent on oil. All projections for oil demand are misleading, for example, the International Energy Agency forecasts a roughly 30% increasing in demand over the next decade, mainly fueled by growth in developing nations. However, demand is not what we should be looking at. Of more relevance is supply. Whilst we may be able to buck the downward trend in crude production from more conventional reserves for a few years by exploiting tar sands and deep water reserves, these sources have a high investment/return ratio, so even if we can utilize them somewhat, they will only add to the price of oil. Currently, there remains a small gap (about 3 billion barrels above demand- which is 84 million a day) between supply and demand, but this will only erode quicker as economies grow, because the price would suggest that we can no longer expand supply whilst maintaining the same cost. Industry experts tend to agree that new types of oil can only offset the decline in old sources for six years at most. The next six years look to be economically turbulent as a result, so we should take Brown's advice and brace ourselves for another crisis in the new future. The difference is, it may be far worse than even he imagines.
A debt crisis is caused when debtors struggle to repay, and in the case of European governments, this is due to a lack of growth in the economy, which has dampened tax revenues in the recession, leaving a deficit. The current monetary system works on an infinite growth paradigm, because debt (money) is created on the assumption that it will be invested in a profitable venture (housing, business, etc), but since all money is loaned into existence with interest, banks must expand the money supply to keep the economy liquid. This is easy in the good years, but in a recession, savers will draw on their existing bank reserves to get by, which has meant recently that there is not enough lending, which has driven up bond yields (interest rates on government debt). The concern is that there is no end in sight. Governments seem trapped because they must maintain economic growth, but cut the deficit at the same time, and there doesn't seem to be away to have austerity without taking the demand out the economy. The hope is that quantitative easing and low interest rates will stimulate a private sector led recovery to fill the gap, but this ignores the oil price. Oil plays such a fundamental part in our whole economy, it is used in transport, agriculture, the pharmaceutical and chemical industries, in the manufacture of plastics, resins, hardware, you name it. So a high wholesale price of oil can be very damaging to business. Consumers in the UK are insulated because most of the petrol/diesel price we pay at the pumps is tax, so we do not feel the pain so badly, but recently high food price inflation is probably due to the rising oil price because there is a lot of derived demand for oil from food. After the 2008 crash, the oil price also shot down, but now it is climbing again. It recently reached a high of $90 a barrel, and if it continues at its current rate we could end up in the same worrying situation in a year or so. Remarkably, everything that is happening in the markets today is exactly as the sustainability community has predicted. When the media claims that nobody could have predicted the 2008 crisis, they were wrong. When governments claim that growth is the solution to the current debt mess, they are also wrong, because in the short term, growth will only add to demand for oil, jack up the price, and crash the economy again. In the short term, what we need is a transition, but a transition to a less hydro-carbon intensive economy is going to take a long time, so we might well face another world economic crisis in the next two years.
In fact, I need to make a correction, of course, it was the Wall Street crash that occurred in autumn 2008, whereas the financial crisis itself had started long before, with the collapse of Northern Rock in 2007. What we have seen recently is other big banks needing bailouts, for example, Anglo Irish bank recently gave the Irish Government such a fiscal headache, they later needed a bailout from the EU and the IMF totally nearly E90billion. This could be the financial crisis of 07/08 starting to repeat itself. As for the oil price again, the world simply cannot cope with a price that is too high, because nearly every product and service that gives a value to the economy is dependent on oil. All projections for oil demand are misleading, for example, the International Energy Agency forecasts a roughly 30% increasing in demand over the next decade, mainly fueled by growth in developing nations. However, demand is not what we should be looking at. Of more relevance is supply. Whilst we may be able to buck the downward trend in crude production from more conventional reserves for a few years by exploiting tar sands and deep water reserves, these sources have a high investment/return ratio, so even if we can utilize them somewhat, they will only add to the price of oil. Currently, there remains a small gap (about 3 billion barrels above demand- which is 84 million a day) between supply and demand, but this will only erode quicker as economies grow, because the price would suggest that we can no longer expand supply whilst maintaining the same cost. Industry experts tend to agree that new types of oil can only offset the decline in old sources for six years at most. The next six years look to be economically turbulent as a result, so we should take Brown's advice and brace ourselves for another crisis in the new future. The difference is, it may be far worse than even he imagines.
Wednesday 1 December 2010
Why both left and right are wrong...
Most people, when asked what they seek in life, would be more likely to answer "happiness" than "money". Ultimately, those who seek money do so because they believe it will make them happy, but if you aim for happiness anyway, what is the need to pursue it in such a narrow fashion. Strangely, politicians seem less concerned about "happiness" than growing the economy, and making us richer, whatever the consequences. Refreshingly the government promises to invest £2 million in a "happiness index" to measure people's happiness. However, they are sadly unlikely to improve happiness by driving up the very kind of inequalities that tear apart community, with their brutal, ruthless austerity package.
Economic growth essentially refers to a quicker rate of wealth consumption. Real wealth being the resources in our environment that we extract and manufacture into material goods. Those who aim for economic growth seek higher rates of consumption, but when you consider that per capita GDP in the UK is a perfectly comfortable $35,000 per year, we should ask ourselves, why grow? Why compete with poorer countries who are trying to develop, but cannot do so, because they cannot win against richer, more efficient economies, in the quest for material wealth.
The reason why our political elite is so keen on economic growth, is because it gives them an excuse not to improve equality, even though equality is necessary for a happy society. Instead of redistributing surplus wealth to those who are in need, the capitalist class seeks to provide for the poor only by growing the economy, even though this worsens our lack of resources. Economic growth has long been used as if it were an excuse for not tackling other social and economic problems. Growth will inevitably stop, as we will simply run out of the fossil-fuels and the resources which we depend on to drive consumption, but this will happen only after everything that the have nots once sought has disappeared for good, and inequality is firmly cemented as what you earn becomes less important than what you already own.
Economic growth essentially refers to a quicker rate of wealth consumption. Real wealth being the resources in our environment that we extract and manufacture into material goods. Those who aim for economic growth seek higher rates of consumption, but when you consider that per capita GDP in the UK is a perfectly comfortable $35,000 per year, we should ask ourselves, why grow? Why compete with poorer countries who are trying to develop, but cannot do so, because they cannot win against richer, more efficient economies, in the quest for material wealth.
The reason why our political elite is so keen on economic growth, is because it gives them an excuse not to improve equality, even though equality is necessary for a happy society. Instead of redistributing surplus wealth to those who are in need, the capitalist class seeks to provide for the poor only by growing the economy, even though this worsens our lack of resources. Economic growth has long been used as if it were an excuse for not tackling other social and economic problems. Growth will inevitably stop, as we will simply run out of the fossil-fuels and the resources which we depend on to drive consumption, but this will happen only after everything that the have nots once sought has disappeared for good, and inequality is firmly cemented as what you earn becomes less important than what you already own.
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