I am not a professional economist, nor do I aspire to be one. I am what you might call “an interested and informed citizen” on the subject. To that end, I feel it is my duty to chime in on what I believe should be done given the present times of crisis, and also analyse and criticise what I see as the present sources of our suboptimal state. From this, I think it is valuable to postulate some scenarios. These scenarios are not along a continuum, as I feel continua posit an oppositional and dialectical approach to the problem that doesn’t “do enough”. If one thinks of a continuum like a number line from -infinity to + infinity, centred on zero, then you can think of my approach as a multitude or multiplicity of axia emanating from and continuing through zero, and also providing other zero points for a similar treatment.
That said, there are things I call “granularities” – irreducibles that cannot be broken down further. An example of an irreducible would the minimum caloric intake to healthily sustain a human. This value is a dependent variable on the particulars of a human, but these can be averaged into a fairly narrow range between roughly 1000 and 3000 calories – 50 isn’t nearly enough and 1,000,000 is far too much.
Now, granularities can be absolute, such as Planck’s limits, or they can be “false vacuums”, where a change in context, form, or practice collapses the granularity and it shrinks to a smaller value, and what once seemed as a fixed bottom value may serve as a new ceiling value.
So, we have a variety of continua and a number of granularities – and these operate over time in a variety of different and continuously evolving contexts or flows. For humans, these flows are regulated and delimited by language and communication - a product of our brain as its reductively composes models and ideas of sense data and its own operations in order to reproduce more brains.
At this point you are probably wondering where the hell I am going with this and what on this little green planet of clocks (thanks for the fish!) does any of this have to do with economics. Be patient.
The United States of America, an Empire of extra-ordinary power, has been experiencing economic difficulties, difficulties I predicted prior to the crash of September 2008, where, on the energyResources forum on 8 APR 08, I wrote:
If the non-borrowed reserves are reflecting borrowing money from the
TAF , when can they possible get back in the black on the h3 table?They have no reserves, and they’re borrowing Billions, they need to get
some profits rolling in order to get their Reserves back above zero.
But, if they’re borrowing money to keep afloat, and they’re sinking
because their source of income (debts and debtors) have gone sour and
can’t / won’t pay, then what exactly is the strategy to solvency?The only thing I can think of is for the TAF to actually become a debt
liquidation instrument, and literally dump billions into the system by
buying all the bad debt and then “burning the certificates”.
And that is EXACTLY what the US government did, they basically developed the TARP from the TAF model and did it to an extent above and beyond the call of duty to the point where the executives of the very corporations that sank the economy were able to walk away with huge cash bonuses.
While billions were supposed to be moved into the toxic accounts where they were to be effectively “burned” and removed from the economy and piled onto the national debt – in a stroke basically externalising the debt out of the banking sector and distributing it to the public – what happened is the debt still sits there, toxic as ever, and the trillions pumped into the system are now sitting there in bank reserves. As of July 18th 2010, the h3 report stated that the total nonborrowed reserves of all financial institutions in the USA stood at $1,027,487,000,000. Yes. Just over 1 trillion dollars. Now compare this to the h3 report in October 2008 when it was NEGATIVE $333,707,000,000.
It sits because of the record high unemployment rate
(the highest sustained since the Great Depression of the 1930s)
depressed housing prices
(that continue to descend in many places)
the enormous debt burden already carried by the average citizen
(also in record territory)
and the preference of people to deleverage themselves out of debt in a precarious job market.
(which is only common sense)
It sits in the banks because the model of stimulus has been to lower interest rates to permit greater lending. When people are up to their eyeballs in debt, they are unlikely to take on more debt, especially when unemployment is high and the sensible thing to do is to get out of debt.
Therefore, the way to give this trillion dollars velocity is to not give it to the banks, but to give people jobs so they will spend it. But this doesn’t jive from the position of the owners of the banks, as it runs counter to their business algorithm (lend > get paid > lend more).
One axial critique would be the obvious: this is simply brutal class warfare, where the ruling elite turns into a kleptocracy and loots the Treasury at the expense of the working classes. Given the evidence, this analysis is true enough as far as it goes, but there is farther to go, as there are other axia to grind here, and the above axial critique (certainly a kind of Marxian approach as one extrema of a Marxism vs. Capitalism axis) doesn’t really go far enough.
So, this is what I think is going on:
The USA is a giant empire flailing about trying to maintain its hegemony through military dominance, much like what Rome did in order to maintain energy flows at a positive rate of acquisition. Rome failed as its ability to acquire resources ran up against the laws of diminishing returns and had to encompass ever larger areas. As a given area requires (x) military presence, and area squares as it doubles, Rome was not able to properly police its borders, and within its realm, the energetic and mineral resources began to stretch thin and fail, given their methods of acquisition.
It’s a good thing they never really figured out coal or petroleum – otherwise we would have had an ecocidal apocalypse 1800 years ago…
So, faced with an inability to expand itself eastward due to the brutal weather in Russia and impoverished locals in the NE and the enormous Parthian empire to the SE, and hemmed in by the Sahara to the south and the Atlantic Ocean to the west, Rome had nowhere to go. It began to dilute (inflate) its currency. At the Empire’s peak in 117ce it was only 110 years from financial collapse.
The USA is in much the same position. It can’t conquer more energy, because:
a. it’s broke
b. global oil extraction is at or very near peak
Because the USA is broke, it can’t really buy its way out of trouble and because of the peaking of its critical resource, it doesn’t have the wherewithal to produce itself out of trouble.
The monetarists might argue – nonsense – just go into debt.
And what exactly is debt? Debt is a claim on future labour.
Even for the capitalist. The Capitalist borrows money and builds a factory. The money borrowed is paid back by the labour of the factory workers who create the wealth.
Even for the ordinary citizen. I want a car. I take out a loan. I work and pay back the loan. In essence, the loan is a claim on a portion of my labour.
Debt is a claim on future labour.
Labour is work plus resources. The resources are reducing. Combined with the fact that energy is the ability to perform work, and that energy production is basically flat, even though population continues to grow, the ability for the USA to do the work to produce the labour at a rate that can pay back the debt at interest is looking increasingly poor over time.
Therefore, the USA gov’t has a limited set of options:
1. dilute the currency through a significant but controlled inflation, making the debt “payable” with worth-less money.
2.expand employment through government work systems – employed people spend money, and there is PLENTY of crap that needs to be done (alternative energy systems, electrify the railway system, radically expand the electric railway system, bulldoze dead cities, massively insulate private homes and businesses, etc.)
3. radically restructure the financial engine of the country AND the gov’t.
4. Paper over the holes and hope something good happens.
5. Conquest.
6. Some combination of all of the above.
Very shortly the next debt tsunami is going to hit: commercial real estate notes who bought into the funky mortgage instruments is going to come due, and the Republicans, just as they did in 1936, are bleating about the debt. The disaster in the gulf is going to screw North American oil production for a good while. Right now there is a lot of oil simply being stored because the crappy economy has created demand destruction and reduced pressure on production. However, the summer sees increased demand for fuel. That will reduce the slack, and increase the demand, and when winter hits – the price will rise.
However, the price will not get stratospheric, or if it does, not for long. There’s a great article explaing why Here. In short, because oil is so strategic, the USA will sooner cajole / arm twist / invade the Middle East or Iran than let it hit $500 a barrel. The only problem with that is the USA is broke and can’t afford military adventures, and everything in the Middle East is so precarious thanks to the foolishness of the neocons and the Bush Junta, that any such action there would have catastrophic results – and it’s hardly the legacy the Obama administration would want to leave. Moreover, military action won’t increase the flow rate, or the total number of gigajoules of energy. At that point, like Rome, the USA will face the law of diminishing returns, and will have to do one of several things:
1. (My preferred solution) Renounce its Empire and focus on transitioning to a postcarbon future in a more mature, responsible, and adult manner.
2. (a very possible and likely solution) Hold onto its Empire resulting in a variety of easily predictable ranges of behaviour – all leading to a final collapse-
a. (a less likely, but very undesireable possibility) break into smaller states, many of them fascist, all of them a kind of neofeudalist economics.
b. (a much more likely and rather nasty outcome) hold the nation together but with a severe curtailment of traditional negative “freedoms” and immiseration of an expanded and poorer working class.
c. (and the old standby…) increase military adventures resulting in political and economic bankruptcy, leading to b.
Which do you think is likely? Which is preferred?
What do I see?
The Obama administration chickening out, again, and repeating the mistake of Roosevelt in 1936 and rolling on federal debt reduction. This will result in another recession on top of the one the USA is already in and culminate in what I call a spastic economy – as resources deplete, basics (food, energy) will increase in price – spurring inflation – but those things that are more subject to financialisation (mortgages) or economies of scale (consumer items) will drop in price – spurring deflation. This creates a spastic and sputtering economy, where by Xmas, we could see $4 for a loaf of bread and $3.50 a gallon of gas, but a former $400k McMansion auctioning for $100k…
Spastic.
And every day, another 80 million barrels of oil are extracted and blown into the atmosphere.
Now, what does this have to do with granularities? It’s the granularities that create the asymmetries. The asymmetries create localised scarcities, and these scarcities are what propel capitalism, as one can only realise profits on scarcity – ubiquity is non-economic.
A granularity can be seen in Grain – only so much is grown in a year, and this was a bad year. Per capita grain production has been falling for years, and with global warming parching traditional grainaries like Russia, this has had a bad effect on prices for grain when such a staple is exposed to the vagaries of the marketplace.
Another granularity is how much debt a human being can carry. The actual amount of debt is not important – that value is arbitrarily large – it could be in the trillions per capita in 2010 dollars – the question is how a person can meet the monthly payment. The grain is that payment. Again, this is adjustable, but not infinitely so. This is the kind of game the USA gov’t has been playing since the disastrous Reagan Administration.
A quick peak at The US Debt Clock reveals that the US gov’t is in debt approximately (as of 10.24, 12 AUG 2010) $13,314,341,000,000. For those less familiar wit such large numbers, that is 13 trillion, 314 billion, 341 million dollars. So, lets do a little math, and pretend that the USA will (in the next few minutes) miraculously stop adding to the debt, forever, and will begin paying it down at the rate of 1 million dollars a day. Note: the US gov’t has rarely been able to stop increasing its debt load, and has never been able to actually pay down its debt for any sustained period of time. That aside, let’s figure out how long it will take the US gov’t to pay off its debt in 2010 dollars.
First we take the total debt (which I have rounded off to the nearest billion) of 13.314 trillion dollars, and we divide that by 1 million, because that’s how much we are going to pay per day. We get the result of 13,314,000. That is how many days it will take to pay off the debt. Now, a year consists of quite nearly 365.25 days (the .25 to account for leap year), so let’s divide that in, and we get 36,451.74 years. Now, we do lose a leap day every 100 years, so we will subtract 364 from that number (almost a year right there!) and we come to the number 36,086.74.
So, if we were able to stop the increase in debt this afternoon, and immediately began paying it off at the rate of $1 million a day, it would take 36,086.74 years. From today, that would be May 9th, in the year 38096. So, if personal debt could also be rolled into the future like that, then there would be no real debt problem. There would be a massive currency problem, but debt would cease to be a significant issue. Similar strategies are already on line in places like Japan with their 100 year mortgages. So, if one applies this concept, only stretches out the payment from 100 years to 36,086 years, at zero percent interest, the payment on a million dollar home would go from $833 a month to $2.30 a month. The debt for this would be passed down from generation to generation, but each generation could then do the same – just kick it down the road indefinitely with stupendously long term loan terms.
Who would get hurt in such a bizarre system?
The ruling class who own the banks. They would get nailed because they would see their gross receipts crash by many orders of magnitude.
Who would benefit from such a nonsensical dream?
Pretty much everyone else.
What is the blind spot even in this?
Non-economic granularities. Geologically determined structures, like resources and energy. No amount of debt will put more oil in the ground or make the sun shine brighter or increase the grain harvest or restore extinct species. We cannot repeal the second law of thermodynamics or buy our way around it.
Again, there is no solution: just mitigation.
The recent move by the Federal Reserve to buy treasury notes is a desperate and foolhardy attempt by the banking system to continue pulling money out of the working class. What they fail to understand is that you can’t get money from the working class if the working class isn’t working. If they want to reignite the consumer engine, they need to give people disposable income and a sense of job security. When people have a steady energy inflow they will naturally engage in behaviour to expend the excess. They will get fat, drive huge trucks, put men on Mars, entertain themselves into imbecility, declare war for the fun of it, build cities in the desert, vacation in the Antarctic or the Moon, etc. all depending on how much excess they have and how secure they feel about it.
People can feel secure as can be, but if they have almost no excess, you still get stagnation. People can have gobs of excess, but if they feel insecure, they’re still dodging bullets and not taking much advantage of the excess. With the peaking of resource extraction, the per capita excess can only reduce. The only solutions are to reduce need (conservation down to granularity), reduce per capita (which is a very sticky subject, worthy of its own post) or some conbination of both.
So, in conclusion I would suggest that the best route would be what I called for almost a year and a half ago. Either that or give everyone the same deal the government has and given them 36,000 years to pay off any and all debts.
updated 12 AUG 2010







