Are we turning the corner?

SUBHEAD: The winter solstice celebrates the return of the light. Is the feeble US economic recovery a sign of good times to come?  

By George Mobus on 21 December 2011 for Question Everything - (http://questioneverything.typepad.com/question_everything/2011/12/winter-solstice-are-we-turning-a-corner.html)


Image above: Smile like everything is OK.. From (http://psych-your-mind.blogspot.com/2011/04/smile-like-you-mean-it-emotion.html).
 
The economic news has seemed to be a little better of late, at least on the home front in the USA. The Eurozone crisis is still flaming, so markets are still unresolved. But a few numbers here in the US economy have given some people renewed hope that this so-called jobless recovery is happening. Is economic spring just around the corner?

The Winter Solstice is a celebration of the fact that from here on, the days will be getting longer. There will be more light each day. And for those of us who live in higher latitudes that is meaningful. I've heard a few comments to the effect that just like the solstice, we may have reached a turning point in the economy and each day there will be a little more “light”.

I don't think so. There are several things to remember about cycles like the seasons. Most of all they go round and round. There will be a Summer Solstice in June. The economy has its cycles too and the real question is, over the long run, is it a simple cycle, or is it a spiral? And if so, which way is it going.

West Texas Intermediate crude prices are still north of $90/barrel. Tapis and Brent have been running $100 plus for a long time. Many more traditional economists are finally coming to realize what the biophysical economists have been saying all along, that the price of oil has a direct impact on the direction of the economy in terms of GDP growth. High oil prices lead to a drag on the general economy in all sectors.

Today the only way governments have to appear to be countering this fact is to create more fiat money (e.g. quantitative easing) to make it seem as if there is more actual wealth available and GDP looks like it is still growing (albeit at a pathetic pace compared with what is considered robust!) They are hoping that sooner or later the whole thing will turn around, just like the Winter Solstice, and we will get back to the old normal of growth and “prosperity”. They are, of course, just aggravating the situation. The only time we might expect the price of oil to diminish is when the economy goes into a clear recession and demand goes down.

The ups and downs in the economy, reflected in the price of oil and the stock markets, reminds me of the preditor-prey population dynamics models based on the Lotka-Volterra equations. The equations describe two interacting populations that affect each other's sizes with time delays. One goes up, the other follows but as it does so it negatively impacts the size of the other, which then goes down and the other one follows. Rabbit populations expand; foxes eat rabbits and with more of them the fox population goes up accordingly; then there are more foxes and they eat more rabbits so the latter population declines; and the foxes go hungry. Something like that.

The price of oil, however, is only a symptom. It tends to reflect the fact that the net energy we get from what oils we are producing is going down. Right now there is a hubbub going on about how the US is awash in oil and natural gas. What the MSM doesn't mention, or fails to analyze, is the fact that this new oil is terribly expensive to harvest. In reality, it simply takes more energy to extract tar sand oil, or shale oil (and gas) than it did extracting conventional oil (and gas). Ergo, it is more expensive even if the supply seems to be going up. By the ordinary laws of standard economic theory, greater supply should push the price of a commodity down. Or, at least, it should not trend upward, as has been the case since 2005.

Of course, energy is not like any other commodities. The Second Law of Thermodynamics rules the day. So, as we are seeing, even if supplies (actually we refer to “potential supplies”, or proved reserves) seem to be up the “purchasing power” of our money with respect to real physical work goes down.

So, unfortunately, this seeming turn around is not like the Winter Solstice. There will come an effective Summer Solstice before anything like a Spring Equinox is seen in the economy. We're in a permanent winter! In other words we are on a downward spiral that will not halt until or unless we discover some incredible source of high power energy. The likelihood of that is looking slimmer every day. Meanwhile the population continues to grow, the wealthy continue to burn up resources at a phenomenal rate, the oil continues to decline in value, and the natives are growing restive. All you pagans out there had better get in touch with the spirits. See if you can convince them that the economy really ought to be more like the annual cycle we celebrate at this time of the year.

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