Thursday, September 30, 2010

It Can Be Done: Part II

A few weeks ago I wrote about how fast Portugal developed its renewable energy sources (It Can Be Done, And Quickly) and referenced a NY Times article.  Today, another two articles caught my attention.

  • Canada Produces Strain of Algae for Fuel details how a company set up to produce Omega-3 food supplements in Halifax, Nova Scotia stumbled onto a strain of algae capable of producing up to sixty times more triacylglycerol oil (a biofuel base)  than similar micro-organisms.
  • Ancient Italian Town Has Wind at Its Back goes into how a small mountainous village in the center of Italy installed a few wind turbines and is now a net electricity producer, generating extra income for community purposes.
It is increasingly obvious that green/renewable energy is fast becoming a reality outside the U.S. , which is still stubbornly stuck in an energy Middle Age.  It's like Americans refuse to see past their own neck of the woods.  They are willfully blinded by the supply of cheap, but vastly inefficient, "timber" from their forest and cannot accept that "trees" are becoming scarcer and dearer in more ways than one.

Let's wake up and look things squarely in the eye: the only way to promote fast development of  renewable energy is to make it economically attractive via direct positive and negative incentives (guaranteed prices and taxation).  Everything else is wishful thinking and hot political air.

The second article says it well:

At the same time, the costs of renewable energy have been falling rapidly. And as in much of Europe, the lure of alternative power here was sweetened by feed-in tariffs — government guarantees to buy renewable electricity at an attractive set price from any company, city or household that produces it.

In the United States, where electricity is cheap and government policy has favored setting minimum standards for the percentage of energy produced from renewable sources rather than direct economic incentives like Europe’s feed-in tariffs, stimulating alternative energy has been only mildly successful. But in countries where energy from fossil fuels is naturally expensive — or rendered so because of a carbon tax — and there is money to be made, renewable energy quickly starts to flow, even in unlikely places like Tocco. 

Many will say that such policies and direct government interventions are not the way America does things, or that it makes no sense to raise energy prices and taxes during a crisis.  I strongly disagree.  We urgently need to look at alternative energy as a driver of growth, instead of as a drag.  As the world's biggest consumer of energy (see chart below), the United States can and should revamp its energy regime.

The sheer size of American energy consumption means that changing the outmoded energy infrastructure will take a long time to accomplish;  but that's is a good thing, it's a way to create millions of new jobs, technical know-how and investment spending, i.e. activity that will sustain the real economy for decades.

Notice how the renewable energy articles are ratcheting up to much bigger economies. It is  perhaps easy to dismiss developments in tiny Portugal (#37 by GDP) or Denmark (#31).  But Italy (#7) and Canada (#10) are the real deal, ladies and gentlemen.  If we continue to ignore such news, preferring instead to keep our heads in the sand, we will end up in the "Empires For Recycling" bin of history.  

Just ask the Athenians.  Or the Romans. Or the Brits.

Tuesday, September 28, 2010

The (Unholy) Trinity Of Money: Holy Smoke!

Money as religion?  Well, of course, since modern money is all about faith (lat. credo > credit) imposed by fiat (therefore, fiat currency).  Therefore, it strikes me as very funny that money exists in three concurrent states, just as Christianity has its own holy trinity to make up one god.  (If you are more scientifically oriented you may also draw a parallel with the triple point of water.)

Let's see:
  • Money is a medium of exchange for goods and services.  This function of money is the oldest and most important in our daily lives, at least for the vast majority of us (see further below why it's not so for everyone).  Money-as-go-between goes back thousands of years to Mesopotamia and is at least as major a human invention as the written word and the wheel.  It greatly facilitates the smooth functioning of the barter part of every economy, allowing for the formation of cohesive societies.  It really does not matter what "money" is, as long as everyone agrees to a common convention and it has an element of scarcity.  Cowrie shells, salt, stone tablets, precious metals.. all can and have been used as money in the past. This is the state of money that everyone understands, even a six-year old.  Let's call this the Father State.
  • Money is a storehouse of value.  This state came relatively quickly after money became widely accepted and circulated.  The Athenian silver owl was probably the world's first global reserve currency, right around the fifth century BC.  In this state, people accumulated money instead of valuable resources such as food, fuel, livestock or land.  They did so because money was easier to store (e.g. in a small strongbox instead of earthen jars full of wheat) and - very crucially - because they believed they could readily exchange it for valuable goods and services with minimal, if any, loss.  In simple terms, a silver coin minted by Athens was assumed and expected to always be exchangeable for a given quantity of wheat or timber, all other things equal.  This is when the concepts of inflation, seigniorage and debasement came into play, followed by monetary imperialism in the heyday of the Roman Empire.  Most people are familiar with this state of money, too, because they are still mentally stuck with popular images of vaults full of gold backing our money (it's not true).  Let's call this the Son State.
  • Money is an asset.  An asset is something that produces regular, periodic returns: a piece of land   tilled or grazed by animals, a herd of domesticated animals, equity in an operating business that produces valuable goods and services, etc.  However, the concept of money itself as  asset (i.e. debt which produces interest), was not widely accepted until quite recently.  In fact, the world's two major religions, Christianity and Islam, considered lending of money at interest a major sin (Islam still does, even if only in theory).  This is money's most pernicious and least understood state, completely ignored by the vast majority of people.  Therefore, let's call this the Holy Smoke! State.  (Aptly enough, water also has a vaporous state.)
I obviously don't have a problem with money's Father and Son states, but Holy Smoke! gives me the willies.  How could money possibly be an asset, for example a bond?

Consider: a government issues an interest-bearing bond denominated in fiat money.  Ignore the principal for a minute, let's just assume it keeps getting rolled over at maturity.  But what about the regular, periodic interest that asset-holders demand?  Where is that going to come from, huh?

We have become so accustomed to such illogical nonsense for so long that we have come to think of  money-as-asset as common sense, day-to-day reality.  But if we stop and really think things through we come to the inescapable conclusion that we are dealing with smoke and mirrors.  Holy Smoke! by golly!

I previously said there are people - a class of people, really - for whom money as a medium of exchange is not very important.  What I meant is that there is a small minority of wealthy rentiers of Holy Smoke!  for whom the other two "states" of money are almost entirely insignificant.  Another way of saying it comes from Wall Street's past: Gentlemen prefer bonds.

As things have developed lately it is this small minority that is calling the shots for everyone else, i.e. the finance tail is wagging the entire economic dog, now more than ever before.  The borrow-consume-grow economic model that was espoused - and is still espoused in the guise of government "bailouts" - led to such an explosion of debt world-wide that Holy Smoke! is now the only form of money that really matters, the state that calls the shots, if you want.

This is completely unprecedented in economic/monetary history.  It is even entirely wrong to compare today with the Great Depression and to attempt to draw parallels, examples, lessons or possible solutions from it.  This is a new reality, so new as to have become invisible to politicians and economists who operate under the principle that if you can't "see" it, it doesn't exist.  (To be fair, that's how most of us operate day-to-day, anyway.)

And here we are today,  just like the Easter Islanders refusing to accept that building ever more stone edifices to our own Holy Smoke! deity does not constitute a real solution.

Moai In Easter Island

    Sunday, September 26, 2010

    Default Is Class Warfare

    Many people believe that debt is more-or-less equally distributed across all social classes and therefore cancels out amongst them.  The example that is frequently, if totally erroneously, used is that Joe Janitor borrows money from Pete Policeman who has deposited his savings at a bank.  Unfortunately,  this type of financial reality only exists in the movies - for example in "It's A Wonderful Life"  with its Bailey Building and Loan Association.  In the film bankers are the good guys who try to create social justice and equality by lending to one and all, while an evil slumlord is trying to bring them down.

    However, "real" financial reality is much closer to a much older work of fiction: Dickens' "A Christmas Carol"  and the chasm separating Ebenezer Scrooge from Bob Cratchit.  That is to say, a small percentage of people (the "monied" class) hold as assets the debts of everyone else.

    With this is mind, I maintain that the assumption, service and ultimate default of debt is best analyzed  and understood not in terms of straight economics but as aspects of political and social science, at least where household and public debt is concerned (public debt being another form of personal debt, since it is assumed in the name of the people).  Straight economics - if there ever was such a thing - is completely inadequate to help us understand the dynamics involved, particularly when debt exceeds a certain percentage of income and becomes onerous.

    Most every politician and economist will forcefully say the same thing: default is equivalent to disaster.  Really?  Why?

    If the "bottom" 90% of the people owe their debts to the "top" 10% and can no longer generate enough earned income to service them and maintain a decent lifestyle, isn't default a great benefit to them?  Doesn't the destruction of debt - if properly handled, mind you - create social and economic justice for the vast majority of the people?  Or should the 90% keep slicing off pounds of flesh?

    Yes, default means that the top 10% will suffer a radical diminution to their accustomed living standards, but is this so bad?  To paraphrase: "Where Are The Peoples' Yachts?"

    So far in this crisis we have fought fire with more fire as our collective governments have forced the people to assume even more debt, purportedly to "salvage" the likes of AIG and Greece.  But it isn't them who are being "saved", of course, but their creditors.  How fair is that?

    One of these days "the people" will wake up and realize that properly managed debt default is far and away to their advantage but I am not holding my breath.  Social-political leaders and their media mouthpieces are default atavists - or, more precisely, are paid to be.

    Tuesday, September 14, 2010

    I'm Back. It's Nice To Be Missed

    It's always a great compliment to be missed (and not misplaced).

    My absence was caused by a combination of vacation (yes, Debra, it involved the love of my life, long walks along isolated sandy beaches, attempts at poetic expression and even a lovers' tiff or two), moving houses and a change of schools for the kids.  Now, that's what you call a killer combo - for blogs, anyway.

    I managed to get my Internet service up and running again last night, so here I am - if more than a bit behind on global economic goings-on.  Though I will catch up in the next couple of days, it's comforting to know that the world does not float on a bed of hot air emanating from yours truly.

    Till later...