By George Mobus on 26 May 2009 in Question Everything
http://questioneverything.typepad.com
image above:Detail of “Don Quixote“ tilting at windmills by Gustave Doré, 1863. From Wikipedia.
The government is putting several trillions of dollars into the economy in an attempt to restart the borrow-spend-consume business as usual. Never mind that most of that money is borrowed (American citizens are loathe to pay taxes that would help pay for what they want done). Well, actually, we should mind a lot about that. But we are bailing out the automakers on the theory that once they start selling cars again they will pay us back. We are bailing out the banks and trying to get buyers to take the bad assets in hopes that one day they turn into good assets.
We're not doing much for the common worker out of a job, but that might come too if we can ever figure out what sorts of jobs we can create out of whole cloth. According to Keynesian theory these bailouts ought to do the trick and we'll be back on track. Two years from now when we are playing our favorite tunes on the newest iPodTM we'll just remember the worst economic downturn since the 1930s as an unpleasant reminder to watch for market bubbles and greedy crooks. And then we'll just go on consuming our hearts out.
But what happens if the plan doesn't work? I know. I've heard that there are green shoots here and there, glimmers of hope. Things aren't getting bad quite as fast as they were a month ago — that is if you look in the right direction and ignore the other signs. All of that liquidity (printed money) that is being pumped into the financial system should be easing up credit. So why aren't people splurging on borrowing to have that new flat panel humongous TV? The number of home sales were not as bad as previous months, but of course they are the ones being bought at auction, the foreclosures. The average house price is still heading south.
Let's be generous and call it a PLAN. Even if it does succeed in easing the rate of economic decline a bit, for a while, I suspect that the fundamentals I'm looking at will trump everything else and we will see the long term trend as down, down, down. What I want to know is what do Geithner and Summers have as a backup plan? What happens when the treasury is empty, the stimulus has run its course, and the banks are still stuck with tons of toxic assets? Then what? You usually don't go into battle without a backup plan.
Let's think about a likely scenario. The automakers fail to pull out of bankruptcy. Even so thousands of auto workers are going to lose their jobs. And then thousands more parts and services workers will lose their jobs. There are already dire warnings of many industries downsizing in the coming months. In an 'ordinary' recession joblessness is a trailing indicator, sort of the last measurable that starts to climb when the economy recovers. But this is no ordinary recession.
Once workers in the primary sectors, manufacturing (what is left of it), financial and insurance services, and so on, start losing their jobs they stop being consumers. They stop buying. Now, all of a sudden you have closures of retail and distributors. Service sector jobs start dropping like flies in DDT. We reach unemployment numbers reminiscent of the worst of the Great Depression. All of those people who don't work can't buy stuff, which is how our economy is supposed to work. You work for a wage, you buy stuff that other people make or sell and they are working for their wages. Some of them even buy your stuff so you can keep on selling. Then, all at once, nobody is buying. The consumer based economy is over, gone, kaput.
And in the meantime the US has gone bankrupt. Americans don't buy from foreign companies who have to lay off their workers. The foreign governments aren't happy about it and call their loans. Except there is nothing to call. Maybe we printed lots of money, but it is worthless paper. Nothing is backing it but an empty promise.
The globalization merry-go-round comes to a screeching halt.
If that were the end of the story we might imagine that, OK, this is the Greater Depression and someday, maybe in a couple of decades, we will finally pull out of it. Consumer confidence will return (BTW: whenever economists can't explain why consumers aren't buying they chalk it up to consumers not having confidence in the economy — if only they would change their attitudes everything would be hunky dory) and the free market economy will start churning away again. But that isn't the end of the story.
This bears repeating and repeating until someone upstairs finally gets it. The economy runs on energy flow. That's it, plain and simple. And right now we are running out of usable energy. The only currency that matters is the units of usable energy directed at producing and delivering food and other necessities. The only 'money' that matters is that which can be traded in for heating and clothing and housing, all of which require quite a lot of energy to produce. Energy, not credit, not cash money, not any other kind of unit of value, is the stuff that everybody needs to survive. Just stop eating (food is your body's energy) and you will die. Eat less than you need to keep going and you will starve eventually. That is exactly the same for our society as a whole. Our economy eats fossil fuels with a little help from nuclear, hydroelectric, and a smattering of alternative sources. If there is less to eat then the economy starves.
Think of a predator hunting for scarce prey. The hunter uses up energy in the hunt. The hunt has to be so successful that it gets back all that it invested in the hunt plus additional energy to repair tissue damage, grow if not mature, and reproduce if possible. If the prey are scarce then the hunter needs to increase its range and time in the hunt. At some level of scarcity, the hunter simply cannot find enough food to sustain itself and it will starve, even though there are still prey out there in the territory!
Presumably what made humans so successful as hunters was that they always had a backup plan for when game got scarce. They were omnivores so they could eat a wide variety of plants and animals (even insects). And there was always the option of moving to a new territory. The key to exercising that latter option was recognizing in plenty of time that the game were getting scarcer and that triggered them implementing their backup plan. They moved on before it was too late.
But I haven't heard anything at all about a backup plan for what happens when our energy gets really scarce. I haven't heard anything mentioned about what to do if the stimulus package doesn't perform as advertised. There is some vague notion that we will invest in sustainable energy and create 'green' jobs that will stimulate and enliven our economy. Lots of optimistic talk, lots of speculation, lots of hope (especially in technology), but no real backup plan. For example once all that trillions of stimulus is gone where will we get the bucks to invest in that ethereal technology that will create all those green jobs? Do you suppose China is going to lend it to us?
Well, if you have been reading my blogs for a while you know I haven't been spending my time just complaining. I have been thinking a lot about what actions will need to be taken when we're broke and still need to fix the energy problem. I have given a lot of thought to governance and organization. I have a plan for how we can bootstrap our energy infrastructure to protect our ability to provide the basics. The plan is a triage. It won't go over well to a country of spoiled brats. It will involve considerable sacrifice and a lot of hard manual labor. It will also involve planned reduction in population over time and in the most humane ways possible. No one is going to like it! Which is why no politician would have the guts to promote it.
But we have shot our wad, as they say. We've invested in revitalizing a lost cause and we are going to be absolutely broke because of it. And without a backup plan there is going to be trouble in the streets. Only after a significant number of folk realize this will they be ready to open their minds to facts and reason. At least, let's hope so.
image above:Detail of “Don Quixote“ tilting at windmills by Gustave Doré, 1863. From Wikipedia.
The government is putting several trillions of dollars into the economy in an attempt to restart the borrow-spend-consume business as usual. Never mind that most of that money is borrowed (American citizens are loathe to pay taxes that would help pay for what they want done). Well, actually, we should mind a lot about that. But we are bailing out the automakers on the theory that once they start selling cars again they will pay us back. We are bailing out the banks and trying to get buyers to take the bad assets in hopes that one day they turn into good assets.
We're not doing much for the common worker out of a job, but that might come too if we can ever figure out what sorts of jobs we can create out of whole cloth. According to Keynesian theory these bailouts ought to do the trick and we'll be back on track. Two years from now when we are playing our favorite tunes on the newest iPodTM we'll just remember the worst economic downturn since the 1930s as an unpleasant reminder to watch for market bubbles and greedy crooks. And then we'll just go on consuming our hearts out.
But what happens if the plan doesn't work? I know. I've heard that there are green shoots here and there, glimmers of hope. Things aren't getting bad quite as fast as they were a month ago — that is if you look in the right direction and ignore the other signs. All of that liquidity (printed money) that is being pumped into the financial system should be easing up credit. So why aren't people splurging on borrowing to have that new flat panel humongous TV? The number of home sales were not as bad as previous months, but of course they are the ones being bought at auction, the foreclosures. The average house price is still heading south.
Let's be generous and call it a PLAN. Even if it does succeed in easing the rate of economic decline a bit, for a while, I suspect that the fundamentals I'm looking at will trump everything else and we will see the long term trend as down, down, down. What I want to know is what do Geithner and Summers have as a backup plan? What happens when the treasury is empty, the stimulus has run its course, and the banks are still stuck with tons of toxic assets? Then what? You usually don't go into battle without a backup plan.
Let's think about a likely scenario. The automakers fail to pull out of bankruptcy. Even so thousands of auto workers are going to lose their jobs. And then thousands more parts and services workers will lose their jobs. There are already dire warnings of many industries downsizing in the coming months. In an 'ordinary' recession joblessness is a trailing indicator, sort of the last measurable that starts to climb when the economy recovers. But this is no ordinary recession.
Once workers in the primary sectors, manufacturing (what is left of it), financial and insurance services, and so on, start losing their jobs they stop being consumers. They stop buying. Now, all of a sudden you have closures of retail and distributors. Service sector jobs start dropping like flies in DDT. We reach unemployment numbers reminiscent of the worst of the Great Depression. All of those people who don't work can't buy stuff, which is how our economy is supposed to work. You work for a wage, you buy stuff that other people make or sell and they are working for their wages. Some of them even buy your stuff so you can keep on selling. Then, all at once, nobody is buying. The consumer based economy is over, gone, kaput.
And in the meantime the US has gone bankrupt. Americans don't buy from foreign companies who have to lay off their workers. The foreign governments aren't happy about it and call their loans. Except there is nothing to call. Maybe we printed lots of money, but it is worthless paper. Nothing is backing it but an empty promise.
The globalization merry-go-round comes to a screeching halt.
If that were the end of the story we might imagine that, OK, this is the Greater Depression and someday, maybe in a couple of decades, we will finally pull out of it. Consumer confidence will return (BTW: whenever economists can't explain why consumers aren't buying they chalk it up to consumers not having confidence in the economy — if only they would change their attitudes everything would be hunky dory) and the free market economy will start churning away again. But that isn't the end of the story.
This bears repeating and repeating until someone upstairs finally gets it. The economy runs on energy flow. That's it, plain and simple. And right now we are running out of usable energy. The only currency that matters is the units of usable energy directed at producing and delivering food and other necessities. The only 'money' that matters is that which can be traded in for heating and clothing and housing, all of which require quite a lot of energy to produce. Energy, not credit, not cash money, not any other kind of unit of value, is the stuff that everybody needs to survive. Just stop eating (food is your body's energy) and you will die. Eat less than you need to keep going and you will starve eventually. That is exactly the same for our society as a whole. Our economy eats fossil fuels with a little help from nuclear, hydroelectric, and a smattering of alternative sources. If there is less to eat then the economy starves.
Think of a predator hunting for scarce prey. The hunter uses up energy in the hunt. The hunt has to be so successful that it gets back all that it invested in the hunt plus additional energy to repair tissue damage, grow if not mature, and reproduce if possible. If the prey are scarce then the hunter needs to increase its range and time in the hunt. At some level of scarcity, the hunter simply cannot find enough food to sustain itself and it will starve, even though there are still prey out there in the territory!
Presumably what made humans so successful as hunters was that they always had a backup plan for when game got scarce. They were omnivores so they could eat a wide variety of plants and animals (even insects). And there was always the option of moving to a new territory. The key to exercising that latter option was recognizing in plenty of time that the game were getting scarcer and that triggered them implementing their backup plan. They moved on before it was too late.
But I haven't heard anything at all about a backup plan for what happens when our energy gets really scarce. I haven't heard anything mentioned about what to do if the stimulus package doesn't perform as advertised. There is some vague notion that we will invest in sustainable energy and create 'green' jobs that will stimulate and enliven our economy. Lots of optimistic talk, lots of speculation, lots of hope (especially in technology), but no real backup plan. For example once all that trillions of stimulus is gone where will we get the bucks to invest in that ethereal technology that will create all those green jobs? Do you suppose China is going to lend it to us?
Well, if you have been reading my blogs for a while you know I haven't been spending my time just complaining. I have been thinking a lot about what actions will need to be taken when we're broke and still need to fix the energy problem. I have given a lot of thought to governance and organization. I have a plan for how we can bootstrap our energy infrastructure to protect our ability to provide the basics. The plan is a triage. It won't go over well to a country of spoiled brats. It will involve considerable sacrifice and a lot of hard manual labor. It will also involve planned reduction in population over time and in the most humane ways possible. No one is going to like it! Which is why no politician would have the guts to promote it.
But we have shot our wad, as they say. We've invested in revitalizing a lost cause and we are going to be absolutely broke because of it. And without a backup plan there is going to be trouble in the streets. Only after a significant number of folk realize this will they be ready to open their minds to facts and reason. At least, let's hope so.
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