image above: Frame from an Uncle Scrooge McDuck comic by Walt Disney
A big chunk of the package was actually a bailout of the financial system, particularly banking, after the horrendous consequences of the sub-prime meltdown and housing bubble burst demonstrated how exposed that whole industry was. Banks of all kinds have failed and there are still a huge number of toxic assets on the books of too many remaining. The commercial real estate debt is still to be dealt with and with back-to-school sales down, Christmas orders down, and people, in general not spending, the retail business looks bleak.
What happens when the businesses that pay rents (and hence service the mortgages) on those commercial properties fail? There are already huge swaths of commercial office space empty. What will happen when the banks have to take back such properties? And all the while the government is writing checks to the banks to keep them solvent (money coming from government debt extension) banking executives are paying themselves huge bonuses for being so successful at staying afloat. Hey, why not? They deserve it don't they. Never mind that the purpose of saving the banking system, so they could make loans to keep business running, hasn't exactly panned out. Just keeping these toxic waste dumps afloat is cause for celebration.
Speaking of foreclosures, the number of homes going into foreclosures this year is expected to exceed last year's number, 1.4 million, by one estimate. The government was putting a big chunk of money into helping home owners (actually that term is an oxymoron isn't it!) through various non-bankruptcy restructuring of mortgage debt. Apparently that program is overwhelmed. Meanwhile job losses are still going up and even prime loan borrowers are being hit by loss of income.
Another big chunk of bailout went to GM and Chrysler (Ford apparently had been a bit more prudent and didn't need the help, for now). They both eventually went into bankruptcy/reorganization despite vociferous protestations not that long ago that doing so would destroy people's confidence in their ability to maintain, and hence kill future sales. My bet is that when the reality that the Volt is too expensive, too costly to maintain, and doesn't, in fact, get the equivalent of 230 miles to the gallon, that will not help consumer confidence one bit. Gasoline prices hover close to $3.00 a gallon in the US at present, and oil is still over $60.00 per barrel. That is applying significant pressure to the transportation sector. When consumers purchase cars these days, and that isn't often, they are still conscious of gas savings, meaning the car companies are selling lower profit-margin fuel efficient vehicles.
And 'Cash-for-Clunkers'? Every Democrat hails it as a huge success while every Republican despairs at the costs. It is a huge giveaway with the weak rationalization that it will help reduce CO2 emissions while at the same time boosting car sales. It may help a tiny fraction on both counts, but is probably insignificant compared with the massive scale of both problems. In the end, trying to reboot the car economy is possibly as big a waste of money as the bank bailout.
And what was this stimulus package/bailout supposed to do? Why restart the consumer economy and get it back into a growing state of course. The idea that a growing economy is the only healthy economy is so deeply entrenched in our neoclassical economic thinking that to consider any other situation, like a recession, is absolutely unacceptable. In fact the average pundit can't even imagine any other perspective. It's like a law of nature: Growth produces jobs; jobs mean people have good credit and can borrow money to buy stuff. The more they buy the more growth and more jobs created. And as long as the population is growing, we need more jobs. They buy cars and SUVs and trucks and bigger houses. All that stuff has to be produced and retailed and those jobs are reasonably paying. Everything goes up, up, up. And so everyone is happy. Which means they will look favorably on the politicians that were seen to be 'responsible' for helping the economy grow.
Of course protecting people's income is important. Job loss can be devastating to individual psyches and families. What makes it more harrowing is the fact that Americans have been very naughty about not saving and have been living way above their means for many years. Consequently there isn't a cushion in the bank to cover hard times. So many Americans, and many other citizens of developed nations that sought to live the party life, are deep in debt and either out of work or threatened by potential unemployment. At very least, the rest of us are faced with huge uncertainty about the stability of our own situations. Consumer confidence is way down. Consumers won't be doing much consuming in the near future. So we get back to where we started. If our economy depends so heavily on consumption and that isn't happening, how can the economy grow? It certainly looks like a downward spiral is in the offing just from the jobless situation alone.
The stimulus package might indeed be offering a brief respite to this downward trend. It may, indeed, be a large factor in slowing down the downward slide, giving hope that the bottom is near. But as massive seeming as it was, it was still a finite pulse injected into a strongly declining process, like taking a big breath and blowing into a balloon that has a big leak in it. You may get it to expand for a while, but the leak doesn't go away. Sooner or later the pulse's impact will be diluted by the fact that the jobless rate will remain high for some time to come. Sooner or latter the effect will wear off and we will resume our downward movement.
All that is happening is that there has been an injection of 'money' into the economy through various channels that has slowed the bleeding for a time. But what is money? The stuff is just an abstract token representing some amount of actual work that can be done. That is, it is supposed to represent the ability to do work (in the future). But in fact there is only one thing that is the basis for work and that is energy flow. It takes energy, in a special, available, form, to do economic work, produce and distribute products and services, even to repair buildings and infrastructure. Money is supposed to represent energy available to do work. But money is just an abstraction with no hard ties to the underlying energy flow. Governments and banks can virtually print more money than there is energy backing it, leading to the illusion that the economy is growing. Leading everyone to believe that things are going to be better — there is more money out there, right?
And here is the real crux of the problem we face. The money that is 'out there' is worth less and less actual work. We count ourselves rich when we have more money even as we become poorer from having less potential to get work done. But it is even worse than just a money-to-energy inflation (more money — debased currency — chasing fewer products/services is classic inflation). The net energy available to civilization for doing economic work is going down. That is, not only is there more money trying to represent some amount of energy and work, it is trying to do so at a time when there is a decreasing amount of energy to represent!
Where did all of this money come from if there isn't energy to back it? The answer, not simple in details but simple in principle: Financial instrument inventions assigned nominal values — pure abstractions of bets on bets — that the same financial geniuses booked as assets in expectation of future profits. "Oh, I will make a kazillion dollars in six months so lets count that as assets today!" Talk about irrational exuberance. However, I should point out that this is no different from home owners looking at the supposed market value of their houses going up while interest rates were going down and thinking, "Hey I'm getting rich on the investment in my house! What can I buy with the profits?" Based, of course, on the belief that the market will always go up.
So why do I say energy decline is the problem? For most of the history of our western economic engine, energy production has been rising faster than governments and banks could create the abstract stuff. Coupled with the golden age of technological advances and improvements in work process efficiencies, which got into full swing in the post-WWII years, the increase in total available energy flow is what has allowed our economies to grow so prodigiously. The physical fact of energy growth enabled growth in the 'real' economy, which in turn, allowed the expansion of the 'financial' economy into uncharted territories. At first the financial industry existed to grease the skids of the physical production economy. It provided capital aggregation (stocks and bonds) for investment in new ventures. It provided short-term financing where the borrowers were seemingly assured that their ability to pay back the principal with interest would improve in the future.
Then, for a variety of reasons, not the least of which had to do with people becoming convinced that growth would go on forever, the financial geniuses started gambling on short-term variations in perceived values of financial instruments. Then came hedging, first futures on agricultural commodities (made sense to hedge against weather as long as some sucker thought he knew better how crops would come out!), then more elaborate forms of betting on the betting itself.
Yet all of these schemes amounted to nothing more than creating debt against a presumed future of greater real wealth production. Unfortunately, no one was paying attention to how much debt money was being created in these second and tertiary derivative markets relative to the real wealth production. Everyone was booking future profits as if they were real. The volume of debt money relative to real underlying economic value simply spun out of control. And the 'Masters of the Universe' who created this faux value patted themselves on the back, their share holders patted them on the back, and everyone participating in this grand illusion went out and bought mansions and fast cars to show how successful they had been.
Meanwhile as oil and gas became increasingly hard to discover in convenient locations, more energy was poured into finding and drilling offshore and in other exotic places. The energy recovery operations were starting to take much more energy just to find the next increment of production growth. More oil, for example, was actually being recovered. But it was taking more energy to do it, meaning the net energy per increment was declining.
At first this was slight and not given much thought. What counted is that those North Sea and Gulf coast platforms were pumping more oil. The Saudis had to pump seawater into their fields to push out more oil, but, hey, it did mean more oil. It just took a bit more oil to do the pumping. Oh, and lets not forget that mountain top removal techniques were replacing underground mining in order to produce more coal per unit time. The problem is, those techniques take more oil (diesel fuel) to accomplish, or, in other words, more energy was required to get the next increment of coal as well.
Then starting sometime in the 1970s another phenomenon started to be felt. The rate of increase in total world oil production volume started to tail off. We were still producing more oil overall, but the rate of increase in production was starting to show signs of reaching a peak, long predicted from both models of oil production and actual empirical evidence from US oil production. It is a simple physical fact that the extraction of any finite natural resource will eventually reach a point of diminishing returns just due to the physical constraints. It is actually related to the above phenomenon of requiring more energy to get at the harder to extract resource. Eventually there comes a time when it is simply not profitable to try to increase production. At that time production goes through a peak and then starts to decline.
The overall result is a decline in net energy available to the non-extraction industries and the general economy. Not only has the energy volume stopped growing, but has actually started to decline. This means, all other things being equal, that less work per unit time can be done; the real economy cannot continue to grow. At least not using the then current technologies and work processes. Adjustments needed to be made.
Very few people, like Jimmy Carter, for example, realized that diminishing energy flow through the whole economy was the problem. Because everyone else had become so used to thinking that that abstract stuff called money was a true measure of wealth, all they could see was declining profits or threats to such. It was a roundabout process, operating mostly through wage inflationary pressures coupled with profligate consumption. And there was the greed factor. People saw other people creating money and getting paid handsomely for it. Everyone wanted a piece of the action. Profits needed to not only be protected but inflated in order for executives to 'earn' huge salaries and bonuses.
So began an acceleration in trend to find the cheapest labor, and, not coincidentally, regions of the world that were more amenable to ignoring environmental external costs. Anything to lower costs and make greater profits. And while everyone was paying attention to the wonder that was western capitalism, giving credit to free markets and profit motive, the real driver of economic growth was petering out.
Energy flow has been in decline. Increases in technological improvements have been tailing off, especially in non-digital electronic technologies. Growth in alternative energy production has probably not kept pace with reductions in conventional fossil fuel-based net energy. In short, the economic rug was being pulled out from under us. Or, perhaps a better analogy is that the monetary house of cards was losing some of those cards at the base while no one noticed.
So here we are in mid 2009, net energy declining at an increasing rate and no one actually knowing by exactly how much (all of our estimates are based on models developed from first principles — since it's physics we're reasonably confident of the basic picture, but we don't actually know the specific numbers until more empirical work is done). No substantial investments are being made into alternatives to fossil fuels.
No one seems to realize that we are in a rear guard action. We have to make those investments just to try to compensate for the loss of net energy. We can't be worried about monetary profits in the usual sense. It isn't a question of whether or not alternatives compete in an open market against fossil fuels. We simply don't have any other options. We have to spend the money on alternatives and efficiency just to survive. Moreover, we will have to do some real sacrificing in terms of consumption. Discretionary spending at a time when we don't even know the magnitude of what we are facing is pure foolishness.
Our government, believing all the neoclassical economists' excuses for what went wrong, is pouring what remaining credit it can garner into trying to get everybody buying and consuming again. And nobody in power seems to have a clue that the real problem is that we are running out of the energy needed to produce real wealth. They honestly believe stories like needing to provide Wall Streeters with adequate incentives so that they fix the system with their 'expertise'. I don't really blame them for the fact that if they actually did get it, and told the populace the truth, and did the right things, they wouldn't get elected again. It is a completely no-win situation. You are damned either way you go.
What completely saddens me is to realize that there is a way to lessen the damage to civilization and be in a position to salvage some of our social fabric in the future even as our real wealth declines now, but we won't do it. It would take considerable sacrifice by all, not just the poor and middle class. Everyone would have to be ready to give up discretionary spending. Every new job would have to be geared toward food and energy production.
No more partying like there is no tomorrow. No more fast food nation. No more financial superstructure with faux money and faux profits. Everyone, including Wall Street bankers would have to grow food and work on essential infrastructure. In other words, we will all need to contribute to the REAL economy. And since there are too many people out there who are spoiled and 'entitled' it just won't happen. But what I think will happen is that those same people will insist on their entitlement to riches all the way to the grave. It will come down to survival of the fittest and knowing how to create a new sure-fire, can't lose financial instrument won't make anyone fit. By the way, those mansions in the Hamptons, not to mention the golf courses, have a lot of land that could be put into cultivation. If it's needed, of course.
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