Is our civilization about to collapse? Not yet.

“Not yet.”    This concept applies in first aid and it would be prudent to apply it when evaluating the numerous threats currently facing our civilization.

This may have been the most important concept I  learned when I took an industrial first aid course some years ago. The course was focused on an examination and the instructor repeatedly told us, if the examiner asks if a seriously injured  patient requires immediate transport to hospital the appropriate answer could be “not yet.”    This recognizes that the patient’s condition could deteriorate and requires constant monitoring.

We know from experience that when people have been injured they sometimes die and first aid people know that some of their patients need to arrive at a hospital within an hour.  When dealing with civilizations this is not quite so obvious unless one looks at history over several millenia.

There are numerous threats to our civilization including overpopulation, climate warming, agricultural collapse, resource depletion, nuclear war or an electromagnetic pulse from the sun which could fry all computer chips

Some people take these threats seriously and others dismiss them.  A favorite argument is that predictions have not come true therefore they are invalid.   For example, look at this put down of  Paul Ehrlich for his overpopulation prediction.  Just because a prediction doesn’t come true in a time frame does not mean it is invalid.  Sometimes predictions do not take everything into account.  For example higher prices for resources increase the supply of those resources as more difficult deposits become available.  One needs to monitor the continuing supply of resources and the consequences of the higher prices.

Sometimes people have difficulty with things they don’t want to hear and one’s hearing may depend upon the color of hat one is wearing.  A person with a good job that appears secure may find it more difficult to accept negative predictions than a person who is without a job and in danger of becoming homeless.

Through the millenia all previous civilizations have collapsed.  Is our’s going to be the first to survive forever?  Perhaps ignorance is bliss and we should ignore the warning signs.  On the other hand if we say “not yet” then we can monitor the situation and plan how we will cope if it does get worse.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

What caused the financial collapse?

Here are four causes of the financial crisis not based on conventional economic wisdom:  the way in which we our economy creates money, the using up of the most accessible energy and mineral resources, the greed of most of us and imprudent or fraudulent banking practices which allow bankers to make excessive profits.

For a more conventional explanation see this article in The Economist.

We all use money and many people are very good at “making” money but very few understand its function and how it is created.  As gold and other items have traditionally been used as money we treat it as a commodity with some value of its own.  But money is a tool to facilitate the exchange of goods and services.  It is a token of purchasing power.  It is important that we have just the right amount of money to use otherwise we have inflation (too much money for the transactions we want) or deflation (not enough).

The money we use results from fractional reserve banking in which banks are required to keep a percentage of their deposits as reserves.  How this works is explained in the essay “LETS go to market: Dealing with the crisis” on this weblog.  It is complex but I find it  easy to understand.

Our money supply is based on loans made by banks and upon which they charge interest. For this system to work there must be a continuously increasing supply of money which sort of works so long as the economy is growing.  However, even a slowdown can cause problems because we need the right amount of money for the number of economic transactions.   I think this is a Ponzi scheme and therefore it is bound to collapse.  Periodic financial crises are built into the way we create money.  This is one of the causes of the current crisis.  When the U.S. mortgage bubble burst the money supply and the financial system collapsed.

There are two sides to the economic equation.  One side deals with the financial and the other with the physical goods that provide us with food, shelter, clothing. transportation and toys.

Since the industrial revolution we have been living in unprecedented increasing prosperity.  However there is some evidence that since the 1970s the growth of this prosperity has been slowing down and maybe even declining.  My theory to explain this is that we have used up the most easily accessible of the energy and mineral resources and it now takes more energy to recover what is left.  To use jargon, the marginal costs have increased.  This is bound to affect standards of living as more effort must be applied to resource extraction and less to other things.  This is background to the financial crisis.

Wall Street bankers are the kings of greed who got their riches partly be being in the right place at the right time.  They also make good scapegoats.

A scapegoat is somebody you blame for the consequences of your own weaknesses.  Most if not all of us have some greed and this was a factor in the financial crisis.  Before and since the crisis many people wanted the most they could get.  This includes the savers and investors who wanted the greatest returns to the poorer people who wanted housing they couldn’t afford.  Every time I go to the ATM machine or actually enter the bank I am reminded the financial industry is still appealing to the greed of its customers.

The final cause of the financial crisis is that bankers are smart enough to realize they can increase their margins and make huge profits by mismatching the terms of deposits and loans.  At the best this is imprudent.  It could even be fraud.

Bankers are financial intermediaries in that they collect deposits and make them into loans.  The difference in interest rates provide a margin which covers their expenses and provides some profits.  Prudent banking requires that the terms of the deposits and loans match.  Thus if a banker makes a loan for ten years then he should have on hand ten-year term deposits of the same amount.  Breaking this rule can be very dangerous and very profitable.

The reason for breaking the rule is that the longer the loan the greater the risk and therefore the higher the interest rate which will be charged on the loan and which must be paid to get deposits committed for the same time. A banker who finances a long-term loan with short-term deposits can increase his margin.  Prior to the financial crisis the banks were financing long-term mortgage loans with short-term deposits, some of the deposits were committed just for one day at a time.  This worked well when the economy was going well but when it became apparent there were problems the depositors became worried about their money and refused to roll them over.  As banks are required to only keep a fraction of their deposits on hand there was a limited number of depositors who could be refunded.

I think this should be considered fraud against the depositors or in this case the taxpayers who covered the losses.  It was necessary for the government to step in  because we would have lost even more of our money supply and that would have been disastrous.  The question which probably should not be asked: are bankers continuing to mismatch deposits and loans?

So there you have it, my list of four factors which contributed to the crisis.  All of these will be challenging to change.  Some ideas for change are in my essay “LETS go to market: Dealing with the economic crisis.”

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Why stimulus spending is a bad idea

Sadly, stimulus spending as an economic cure may make things even worse than they are.   It probably will not provide the results its promoters want although it will likely lead to a more egalitarian but poorer economy because there is a possibility it would lead to some heavy-duty inflation.

The ideal way to deal with the economic crisis requires  a major change in economic thinking and values starting with the way in which money is created.  Some ideas are in my essay “LETS go to market: dealing with the economic crisis.”  Of course this is not a realistic proposal. Its implementation would require a dictator with a strong and loyal military and this is contrary to my belief that decision-making should be made by individuals.

chovynz_Money_Bag_IconThat leaves austerity or stimulus.

The basic problem is that we have used up a big chunk of the easily accessible resource base.  There may be lots of energy and minerals left in  the surface  of the planet but they are so difficult and expensive to extract we cannot expect continued economic growth.

If this is a correct analysis then austerity will be forced upon us regardless of what we do.  The real challenge is to cope with austerity with a minimum of human suffering.   The problem with austerity as it is being promoted is the selfishness and meanness of those promoting it on the backs of people who are less fortunate.

But what about stimulus?  At least since Keynes, many economists have and continue to believe the way to get economic growth going is via government stimulus.

There is some evidence the depression of the 1930s was made worse because the banking authorities restricted the amount of money in the economy.   Once governments started spending (works and war) and the money supply was allowed to increase the depression came to an end.  This time  central  banks have been trying to stimulate the economy by creating more money to facilitate more economic activity.  It isn’t working  because the resource base won’t support more economic growth  although only a few people see that as the reason.

So what is likely to happen if the Keynesians get a turn at trying to solve the crisis.

There are two difficulties.

The first is that stimulus will be a transfer of purchasing power from those who now have it to others because the debts incurred will eventually be written off either by default or by inflation.  Cyprus isn’t the only country whose savers are likely to be hit.

The puzzle is why with all the quantitative easing and no matching growth in output we haven’t had inflation.  The answer:  there is anecdotal evidence that the banks and corporations are sitting on piles of cash presumably because they don’t  see profit opportunities.

Governments don’t worry about profits so if the money goes instead to governments for stimulus, it will be spent.  There will be more money chasing the same quantities of goods and services and prices are bound to go up.    Inflation provides an indiscriminate haircut to everyone with monetary savings or investments.  If it gets out of control a lot of people will lose their pensions or their fortunes.  It will solve the inequality about which many people have been worrying.  It would also be a neat revenge against those people who want austerity on the backs of poor people although a lot of innocent people would be hurt.

The second problem with stimulus is that if it succeeds in increasing the output of goods and services it will also use up more of the remaining mineral and energy resources and bring forward the timing of a major crash of civilization.  I would like the goal of economic policy to be to minimize overall  human suffering rather than to increase it.

I am not worried about an economic collapse for my own sake, but I do have six young grandchildren.   Perhaps we should post a job opening for a benevolent dictator.

The economic policy dilemma

An article in The Guardian calls upon the European Central Bank to drop its commitment to austerity and instead go for quantitative easing and inflation.

The problem is that either way some people, different people, perhaps even all of us  are going to suffer.

Austerity means some people are going to lose their jobs.  Inflation means that people with savings are going to see their savings eroded and possibly reduced to nothing.  Quantitative easing is intended to provide stimulus to economic activity.  However, if it is correct that the root cause of current economic problems is resource depletion, then this will only use even more resources and bring forward an even worse economic collapse.

I figure that as well as resource depletion we also have to deal with some serious problems in the way in which money is created.  A suggestion as to how to deal with these problems is given in the essay “LETS go to market: dealing with the economic crisis” on this weblog.

The recession scapegoat list

The economics editor of The Guardian has published a long list of the people he claimes are responsible for the recession.  The list includes many high and mighty  including for a former British prime minister, a former U.S. president,  and a couple of central bank bosses.

I don’t  like  the idea of defending these guys, nor do I like usuing people as scapegoats.  One should remember the Indian prayer that one should not criticize another until one has walked a mile in that person’s mocassins.

Most of the names on the list are those of people who are figureheads acting on behalf of the people below them, including most of us.  These people are subjected to lots of lobbying and don’t always have the ability to do what they want.

The recession has most likely been caused by resource depletion, or at least the depletion of those resources most easily accessible and for this most of us are to blame.  Most of us have wanted a good life with lots of things such as computers, nice homes and great holidays.  And we have demanded high returns on our investments and savings.

No doubt the people on the list have made mistakes and acted in the best interests of themselves and their friends.  But the rest of us should also carry some of the blame.

The Euro zone’s impossible dilemma

Some economist are worried that attempts to deal with the euro zone crisis are going to force Europe into a recession.  Here’s a link to one such forecast.

It’s a valid fear but one that applies to the whole planet rather than just Europe.  The probable cause of a world-wide recession is that we are using resources at a rate which is not sustainable.

If this is true then policy makers face an impossible dilemma.

Policies which lead to recession will hurt a lot of people and especially the poor.  In this case the line between rich and poor will likely be quite high.

The conventional wisdom is that to deal with a recession governments should spend to stimulate the economy even if they have to go massively into debt.

Stimulating the economy when there is resource depletion is going to deplete resources even faster and will bring forward a major crash.

A further complication is that the Euro zone financial crisis will likely lead to a sharp reduction in the money supply.  Without money the exchange of goods and services will be curtailed.

Resource depletion combined with a loss of money supply has the potential to be disastrous.  But it should leave a few resources for the survivors.

The biggest news story of the year

The Huffington Post asks what is the biggest Canadian news story of the year.  Here is my answer:

http://www.huffingtonpost.ca/2011/12/05/what-was-canadas-biggest-news-story-2011_n_1116964.html?ref=canada

The biggest news story of the year is the economic crisis which is being felt around the world.  It has been reflected in and overwhelming number of headlines.

The probable cause of the crisis is a depletion of resources.  Some people figure we are using resources at a rate that is 150 percent of a sustainable level.  This is showing up as a financial crisis.

A further problem is that as a financial crisis it threatens to wipe out a major chunk of the money supply as banks create money when they make loans.  This will further restrict our ability to exchange goods and services.

A lot of economists want to deal with the crisis with government stimulus spending.  However, if resource depletion is the root problem, then increasing our economic activity will make the crisis even worse.  The answer is to try to even out the pain of austerity.

(The author of this comment has a web log on economics at https://economics102.wordpress.com/)

How will overuse of resources show up in the economy?

On a number of occasions this web log has noted the Living Planet report and its claim that we are currently using 150 per cen of the resources that the planet will sustain.  If this is true, how is it going to affect the economy and how will we notice it?

It may be that the quantity theory of money can help us.  This theory states that

MV=PQ

Where
M is the amount of money in circulation
V is the velocity at which the money is exchanged in the economy
P is the prices at which goods and services change hands
Q is the quantity of goods and services produced.

If we are using resources faster than they can be replaced where will it show up in this equation?

The first place to look is on the PQ side.  As the demand for resources increases, and as resources become more difficult to extract or produce then we can expect prices to increase.

There may also be shortages or declines in some components of Q  some resources will be at or near depletion and many will require increasing amounts of energy to extract.  This again will cause an increase in prices.

On the other side of the equation velocity is difficult or impossible to  measure so we have to ignore it.  Money supply is also difficult to measure.  Definitions  usually start with cash in circullation and demand deposits in the banks known as M1.  However, other types of deposits are often added to M1 sot that we can have multiple defitions of money – your choice.  Money is created when the banks make loans and central banks try to control the total by purchasing or selling government bonds.

One thing is clear:  changes in the Q part of the equation are going to force changes on the other three variables.  If there are stressful or abrupt changes in Q, there will probably be turmoil in the financial side of the economy.  We probably need to evaluate what is happening to Q in physical rather than monetary terms.

We should also note that changes in M can affect production of goods and services. For example, what would happen to the North American food factory if a failure in the banking system were to prevent farmers from getting the loans to put chemicals on their crops?  Also a major drop in the money supply (such as probably happened with the housing crisis a couple of years ago would and did create turmoil in the economy.

So if we are using resources at a faster rate than they can be replaced how are we likely to notice it?  Overall there will probably be a steady rise in prices and a steady decline in living standards,  unless there is a huge major shock  to the system.  Also where there are localized shocks such as earthquakes, tsunamis  or an electro magnetic pulse from the sun (forecast for sometime in the next two or three years) we can expect major drops in local standards of living as people will find it difficult to recover.

As time passes, more and more people will be faced with a lower standard of living.  But people being people, some will prosper.  The rich will continue to get richer and the poor will continue to get poorer.

Wouldn’t life be nicer for everyone if we could go back to the golden years of prosperity?

Robonson Crusoe and resource depletion

The Libertarian Buddhist, another WordPress blogger, uses the example of Robinson Crusoe to show how saving can allow the time to make equipment which allows more saving and makes life easier in that he can more efficiently knock the coconuts off the trees.

It is an interesting argument although I have two concerns.

The first is that rather than working all the time Crusoe might want to and might be wise to take time to lay on the beach or create some art work or sing a song.

The second concern is that eventually he will knock down and eat all the coconuts and then he has a serious problem.

It could well be that current economic problems are because we are near that situation ourselves. We have been using up a lot of resources, some of which are non-renewable. As we use the resources which are easiest to harvest, it takes more time and energy to get what is left. With an ever-increasing population we may have a problem just as serious as the one facing Crusoe.

Small business aid bill

There are a couple of concerns about the American government’s small business aid bill (See article on The Huffington Post).

The first concern is that I believe subsidies should be given to consumers rather than producers because subsidies distort prices and they do nothing for those who don’t have the political clout it get them.

Creating money
The second concern is that this bill appears to assume current economic problems can be resolved by creating money. When banks make loans they create money and as the $30 billion will be “high powered money” and subject to a multiplier effect it is expected to result in $300 billion in new lending i.e. to increase the money supply by $300 billion.

Probably what is being called a credit crunch is in part a failure of the banks money creation role. It is also probably a reflection of non-monetary problems such as resource depletion. In either case it not clear that trying to create more money will accomplish much although politically it will be much easier than trying to change the way in which we create money coming to terms with fewer resources.

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