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A mountain lake in British Columbia

economics102

Recycling is not enough

In this corner of the world recycling is almost universal.  Plastics, glass, metals, compost and drink containers are separated from the rest of the garbage.  Some people also take their own shopping bags to the supermarket.  The exceptions are that we have not mastered the technology of recycling energy and most of us continue to drive a lot

Unfortunately we are still experiencing environmental degradation, inflation and unemployment.  Recycling is not enough.  Its main function is to allow us to feel we are doing something. It allows us to ignore the real issues –  population levels and values.

I believe the most important way in to protect the environment is to reduce the number of people trying to live on this planet.  There are just too many people and I do not like the idea of saying some people should not have the same standard of living as others.  Who is to decide who gets shorted?

I also recognize it is a near impossibility as we cannot tell people not to have sex and not to have children.  What are the consequences of not taking action to reduce the population?  When the Europeans came to North America they brought with them some new diseases and close to 90 per cent of the native population died.  I understand there is some archaeological evidence that there was a similar population reduction in the Mediterranean some millenia ago.  If these precedents hold for us, then there is likely to be one hell of a stench.

We also need to get over our fear of death as so much energy and resources go into prolonging life.  Quite a few years ago The Economist reported that 80 per cent of health care spending is in the last six months of life.  I do not want to go into the 80 per cent and I hope that when my time comes I and those close to me will be able to accept it gracefully.

The other big challenge to protect  the environment deals with values many of which are a part of our committment to economic growth.

According to anthropologist James Suzman who recently published the book Affluence without Abundance, the most successful and long-lasting civilization was that of the Bushmen of the Kalahari desert.  These hunters and gatherers “worked” only ten to 15 hours a week.  As they relocated up to ten times a year they had little interest in material things and their society had high equality.  We cannot all go back to being hunters and gathers but we can choose some of their values and apply them to our daily lives.

If we really want to protect the environment then we should have fewer children, live in place, live a healthy lifestyle, have fewer and smaller toys, drive less, go easy on the travel and work as little as possible.  Recycling may make us feel we are doing something but it is not enough.

 

 

Trade, foreign exchange and big hamburgers

Foreign exchange and trade is hardly a sexy subject and it is one most of us would prefer not to think about. However, when people get excited about globalization or fear their jobs are threatened by trade, then we need to take it seriously.

Foreign exchange involves the financial transactions which go with trade with other countries.  Economics is a social activity and involves relationships even if some are very fleeting.  For any relationship to be satisfactory there needs to be a more or less equal two-way exchange.  This applies to trade with people from other countries.  Trade should be a two-way.

In analysing economic issues it is important to distinguish between physical transactions and financial transactions because sometimes the physical analysis gives a clearer picture than the financial analysis.  If this world had a perfect market economy each physical trade with a foreigner would be matched by a financial transaction.   Changes in prices would reflect changes in supply and demand and would be signals to producers to increase or decrease production or to even stop producing an item. This is true for domestic trade as well as international trade.

As exchange rates are based on supply and demand for currencies, financial only transactions distort the exchange rate and therefore distort prices. Not good.

An interesting approach to foreign exchange is the Big Mac index created by The Economist. I like this because it is based on a physical item, the big mac hamburger,  sold around the world.  If we had international perfect competition and everything were equal a big mac would cost the same in each currency.  The Economist compares the costs at current exchange rates to determine if a currency is over or under valued.

Obviously the world is not equal. Different countries have different values, different resources and different access to energy and mineral resources.

What happens if money is loaned or gifted from one country to another.  If the recipient uses the money to purchase goods or services from the first country, then the money becomes a part of the foreign exchange calculations.   If it is kept in foreign currency reserves,  it is removed from the money supply of the first country until it is used. If the money is exchanged and used to purchase local goods and services, it distorts the exchange rate.  If the money is kept and used to purchase local goods and services, it adds the second country’s money supply and subtracts from that of the first country.

Another complication is that a lot of people speculate about what will happen to the price of one currency in terms of another.  These transactions will be financial only in that they do not match exchanges of goods and services.  It could be that speculation smooths out fluctuations or they could distort prices.  It is hard to know as we do not know which transactions are speculative.  We do know that the volume of foreign exchange trades is massive. This writer suspects that if all financial transactions matched physical trades there would be little fluctuations in exchange rates as changes would take time.

This blogger has spent a lot of time and effort in trying to understand the economics of money, including a degree at the University of British Columbia.  Foreign exchange and trade are difficult probably because there are problems in the way in which we create money.  For more on this please get a free copy of my e-book Funny Money: Adapting to a Down Economy.  One of the problems is that our way of creating money gives some people a lot of power and control over others.  Vested interests are difficult to deal with.

 

 

 

 

 

Why the joke should not be impeached

The biggest problem now facing Americans is the emotional fears of those of them who elected the joke currently occupying the oval office.  Getting rid of Donald Trump by impeachment or otherwise will solve nothing and may be even worse.

We have to give Trump credit for having the brains to get himself elected.  He identified some of the emotional issues which are giving Americans nightmares and promised to deal with those issues. Emotional fears are  difficult to deal with and it is probable that his proposed solutions will not solve anything.  But at least he is trying and people appreciate that.

This blogger thinks the fears are legitimate.  I believe the current economic turmoil is because we have used up the most easily accessible energy and mineral resources.  We are going to have to adapt to life without the abundance to which we have grown accustomed.  Most of us realize something not good is happening but we do not know what.  Many people are afraid.

One of the ways to deal with fear is to blame other people, especially people who are different.  Lots of people around the world, including Americans and Canadians, are doing this.  It is unfair and morally wrong but it is also natural to blame others for our problems. It is not only right-wing people who are afraid.  Bernie Saunders in the United States and Jeremy Corbyn in Britain have also attracted a lot of support with emotional appeals.

The best way to deal with these fears is to deal with the source problem.  However the problem is so serious and so difficult there is probably no solution.  We might be able to relieve things a little by changing our values, the way we create money and introducing a basic income plan.  These things would have to all be done at once and that is expecting a lot of human beings.

Another alternative might be to attack emotions with emotions and try to point out how people will themselves be hurt by blaming others.  Fighting fear with more fear could be dangerous.

Americans have very clear rules for replacing a president whose term is incomplete.  Whoever replaces him will be looking for support from the same people with the same emotions.  It might be better to have a joke in the Whitehouse rather than a serious far-right conservative.

The best way to deal with Donald Trump is to ignore him.

Brexit: the unilateral free trade option

 

As the British and the Europeans renegotiate the European Union following a British referendum a number of options are being considered.  What will not be considered is the option which would in the long term give the best standard of living – unilateral free trade.

For a long time this blogger has believed the best way to do free trade is for a country to do it on its own by removing all barriers to imports.  “Free trade” agreements are not free trade, they are negotiated trade.  To get the full benefits of the law of comparative advantage there must be no barriers to imports. There should be no import duties, no quotas and health and safety restrictions should be genuine rather than to restrict imports.

Unilateral free trade could easily be done by any country as each country has the right to control its imports.  This will leave them open to “dumping” or subsidies by trading partners.  If another country wants to subsidize our standard of living, then we should say, “Thank you very much”.

The case for free trade is based on the law of comparative advantage which says that two countries will be better off if they specialize in their most efficient production and trade even if one of the countries is more efficient in all trading items.  With our background we generally think of better off as meaning more economic growth but it could also mean more leisure time.  The law still applies.

There are two major problems with unilateral free traded – our  commitment to economic growth and the difficulty in making employment changes.

This blogger believes there will be little if any future economic growth because we have used up the easily accessible energy and mineral resources.  There are lots left on the surface of this planet but they are so difficult to extract they are mostly useless.  I also believe many people are aware of this economic uncertainty even if they do not understand what is happening.  This is probably behind the British vote for Brexit, the United States election of Donald Trump,  the increasing popularity of extreme left and right wing politicians and the rise of dictatorships around the world and a lot of other unpleasant developments.

The fear of losing one’s job is highly emotional and this is the second big problem with free trade.  Free trade means changes in production and this means some people will lose their jobs and have to find new employment.  The other side of this problem is that economic changes are a fact of life and will happen regardless of free trade.  We try to deal with changing market conditions with subsidies, import quotas, health and safety restrictions on imports and other trade restrictions. In the long term market forces usually win.

Under current economic conditions a lot of people are likely to lose their employment and a lot of people are going to suffer.  The challenge should be to facilitate the changes and reduce the suffering.  Most people are going to have to accept a lower standard of living.  This blogger believes the best way to adjust is to introduce a basic income plan.  For more discussion of this please see the rest of this weblog and my book Funny Money: Adapting to a Down Economy.

This guy believes the British and the Europeans would benefit if the British were to use the referendum as an opportunity for unilateral free trade.  I also would not want to be a part of the negotiating team as there is unlikely to be a consensus as to what degree of trade to negotiate.  There is so much fear, so many emotions and so many conflicting interests that it will be difficult to come up with something most people will be able to accept.  There is likely to be a lot of turmoil.

 

 

Retirement, the future and The Economist

The editors and writers of The Economist news magazine must be ageing and not seeing things too clearly.  That is my conclusion after reading their recent special report on the future of elderly people.  Another option is that my view of the future is incorrect.  The Economist is much more optimistic than I am, I hope they are correct.

I disagree with them on three issues – the future of the economy, the work ethic and financial issues.

Most of their readers probably have a vested interest in continued economic growth and to prosper the magazine needs to support this. And they do.

This blogger figures the current economic problems are related to energy and mineral resources.  We have used up the most accessible of these and those which are left take so much energy to extract they are worthless.  If this is correct the outlook for the future is rather grim.  We can anticipate a lot of human suffering as we have to adapt to a down economy.  So far retirees have largely been exempt from this but our time may be coming. Trump, Brexit, Saunders, Corbyn and Macron could all be symptoms of this problem.  Lots of people recognize something is not right but do not know what it is.

In recent years The Economist has come up with a number of cute cures for the economic crisis.  This time we are going to save ourselves by getting people to work further into old age.  This commitment to the work ethic may be good for those whose fortunes and status depend upon getting other people to work for them but if the above analysis is correct increasing economic activity will use up more energy and resources and bring forward the timing of a complete economic collapse.  Rather than promoting the work ethic we need to be pushing a leisure ethic  in which people get their self identity from doing non economic things such as music, theatre, art or writing a weblog on economics. The Economist talks about a longevity dividend.  Should this dividend be more work or more leisure?

One of the features of money is that it gives a person control over resources.  Financial obligations left over from the era of prosperity mean some older people have a greater  command over current resources than the young.  Older people are going on luxury cruises in which a waiter from a third world country puts the pepper on their food while their grandchildren are struggling to find jobs and homes.  When the crisis hits pensions and other savings the cruise ship operators will be lobbying for the release from prison of a famous Italian captain so they can put him back to work.

This blogger tends to be pessimistic about the economic future.  I figure I was very lucky in the time and place in which I was born and have lived most of my life (1941 and western Canada).

Why debt is a huge problem

Generally accepted wisdom tells us that excessive debt is a serious problem although some people question why government debt to a central bank is problematic. After all what is wrong with one government agency owing money to another?  Why not just let the debt build up?

In this case the generally accepted wisdom is probably correct because debt is an important part of our money supply.   If we were to lose our money supply our economy would be in big trouble.

Money is a complex part of our economy and I suspect few people, including a lot of economists, really understand how it works.  Fractional reserve banking is complex but I have found it relative easy to understand.  I have explained it in the essay  LETS go to market: Dealing with the financial crisis on this weblog and there are numerous explanations that can be found with any search engine.  I encourage you to figure it out.

About 90 per cent of our money supply is based on the debt created in fractional reserve banking. This is a problem for three reasons.

The first is that the money supply needs to be flexible up and down.  The amount of money we need to facilitate the exchange of goods and services must be proportional to the quantity of goods and services we need to exchange.  I know economists like to model the economy on a least squares regression formula which gives an upwards line with a steady slope.  However, the reality is that the economy behaves like a fractal which means there are a series of ups and downs and more ups and downs within each trend. The amount of money needed varies with each up and down but fractional reserve money can only keep on increasing.  This sort of works when there is continuous economic growth but if growth slows or reverses, then there are problems.

The second problem with fractional reserve banking is that interest is charged on the debt created. This adds a purely financial demand for more money in that it is not needed for exchange of goods and services.  If all outstanding debts plus interest had to be repaid at the same time there would not be enough money in the economy. From time to time this feature of fractional reserve banking catches up with us and we call it a financial crisis.

The third problem is that when there is a financial crisis lots of people lose their savings.  The need to save for a rainy day, or retirement, is a part of our psyche and fully exploited by the marketing arm of the financial industry but there are three ways in which we can lose our savings: a financial crises, inflation or a major economic downturn. these are more likely when the economy is not growing or declining. With the current economic climate most of us would probably be better off to live for today and worry about tomorrow when that day comes.  The best way to secure one’s future is probably a market garden.

These are real problems and from time to time they cause havoc in the lives of most of us.  Therefore we are right to worry about excessive debt.  The good news is that there are other ways of creating money and the bad news is that money is such an emotional concept that most people are not prepared to consider other ideas.

One of the other ways of creating money is discussed in my ebook Funny Money: Adapting to a down economy which is available free from the link at the top of this weblog.

We tend to take money for granted so long as the economy is working but it is such an important concept that we would do well to try to understand it and make changes.  I cannot see that happening so in the meantime we should remember the advise of Shakespeare: Neither a lender nor a borrower be.

 

The theology of being good or mean

Do we need religion to tell us to be kind to others or do we need religion to give us permission to be selfish and inconsiderate of others?

This question follows from an article which outlines some of the scriptures used by some North Americans to justify policies which some of us might think are mean.

Shortly after leaving high school this guy came across a book called The Panchatantra which is part of the wisdom literature of ancient India.  One of the verses which has stayed with me through the years is:

Forget you prosings manifold,
the moral law is easily told,
to help your neighbour, that is good,
to hurt him, that is devilhood..

This simple verse is straight forward and one would think  it, or something similar, is all people need for moral guidance.  How ever , at least in our culture, some people follow it some of the time, some people ignore it all the time and some people follow it all (or most) of the time.

It would be interesting to know if this applies to all cultures or are there some in which all people follow the  principle all  the time.  To answer this one would probably have to spend several reincarnations doing field work in anthropology.

Reading the above article I note that almost all the scriptural references provide justification for being mean to others.  Could it be that if one wants to be selfish or nasty one needs divine assistance?  A lot of our economic culture is based on exploiting and taking advantage of other people.  If you are a part or nearly a part of the one percent your fortune and your status depend upon others working hard.

I think we should make a distinction between economic well-being and theological salvation.  It may be that we alone are responsible for our salvation, but people should not have to go hungry.

This blogger believes the technology which allows us to produce so much with so little effort should be a part of our collective inheritance.  The benefits should be shared equally rather than going to  few people.

Regardless of what Christian or other scriptures say, I think we should expect people to follow ancient Hindu moral law.

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