Monday, July 9, 2012

The Ceiling.

            Whenever we witness an economic downturn, the obvious reaction of our elites is to try to jump start economic activity.  We need to do this, because the servicing of our current debts and future liabilities depends heavily on a growth trajectory that allows us to pay back what we owe with interest as well as to grow the real value of the savings in pension and other funds, in order to provide for those who cannot provide for themselves anymore.  We also have to accommodate a growing global middle class, as well as a growing global population overall, so we need to continue to deliver.

            Since 2007, we seem to be having a hard time getting back on to the path we need to be on if we are to continue on with the current models, instead of doing something drastic, such as changing the way we value growth, not only by quantity but the quality of it.  I argued in past articles that we entered a permanent phase of slowing growth, and the data so far is proving me right.  Year after year we hear the same old song about how things will get better in the next year or two, and yet that time is always pushed further ahead of us.  The “experts” always identify a financial reason, such as the Greek crisis, or the continuing housing slump.  Few people venture to look deeper into the reasons why our financial system is registering malfunction after malfunction.

Data source:  Index Mundi[i]

Data source:  US government stats[ii].

As the two graphs show, US monthly jobs data stabilized in a firm trend of growth (anemic, but positive), starting in the fall of 2010.  It took only four months after the jobs numbers stabilized for oil prices to go from $75 a barrel to over $100, and it stayed over that price for most of the time, except for the last few months, which is a result of the realization that the global economy is slowing, especially in Europe.  If we look carefully, since the jobs numbers stabilized, there were also two attempts at accelerating to a higher level.  One attempt started in late winter 2011, the other in early winter 2012.  Both events were accompanied by a response of oil prices higher, to over $110 a barrel, which seems to have stifled the recovery.  All this follows the great spike in 2007-08, when prices reached an all time high, and only came down after it was clear that we are facing a recession, the likes we have not seen since the 1930’s.


Data source:  EIA[iii]

            As one might expect, as soon as the price of oil spikes, as it did in the past few years, in response to any evidence that the global economy might have a pulse, the quick and easy explanation, which also happens to be very convenient, is that this is the effect of speculation, or as is in the case in the US, it is narrowed down to a domestic problem related to environmental and taxing policy, which causes oil production to be stunted.  As the above graph shows however, neither is an entirely accurate and honest explanation.  The speculators do indeed influence the price, but not more than does the supply/demand balance.  As we can see from the above visual, there have been three consecutive years of demand outstripping supply.  There are many factors involved in causing this to be the case, but US domestic policy probably comes in near the bottom, since the oil market is a global one, and nothing the US could have done can plug such a hole in supply.  For 2012, in the absence of major disruptions to production, we will likely be in supply/demand balance, given that IEA predicts an increase of .8 mb/d in demand, to 88.8 mb/d, and so far this year, production has been in that range as well.  It is possible that in the absence of robust economic growth, 2013, and even 2014 will turn out to be stable in terms of oil prices.  I do believe however that at some point during this current decade, prices will spike again, due to demand outgrowing supply.  The current trend we are witnessing of market balance will be only a short respite, not a new long term trend as the optimists will try to spin it.

Economic Effects:

            Many of the effects of the new era I believe we are living in will not be felt immediately.  If we look at one example, which I believe matters very much, which is the future of our pensions, we are in deep trouble, but the true effects will only be felt on a large scale, perhaps only decades from now.  New York’s mayor Bloomberg recently cautioned that we are expecting 7-8% returns on the public pension contributions made in the name of the future retirees, while we are in reality only looking at 2-3% returns at best.  This of course means that we are not saving enough to take care of our retirement needs.  On the other hand, if we were to solve this problem by increasing our savings rate, consumer spending would collapse and with it our ability to save, given that many families and individuals would take an earnings haircut.  So then we return to the original problem, which of course is that we are no longer growing at a fast enough pace to make the current system viable.

            Same reasoning can be applied to other aspects of our financial system.  We need the pace of growth to improve in order to keep up with debt servicing.  We need it in order to cope with the increase in population.  We need it in order to make it worth while for people to invest their money as opposed to keeping it under the mattress, or do what I did, which was park it in gold, and some silver.  We are currently putting our hopes in innovation, but in order to have innovation, we need investment capital to chase opportunities.  That will not happen once the forward momentum is stopped permanently.

Capitalist/Environmentalist alliance the only solution?

            Environmentalists and sustainability crusaders, as well as their capitalist opponents need to come to the realization that the only way forward for both, is an embrace of each other’s views.  As unpleasant and uncomfortable as it may seem for many to consider this prospect, never mind embracing it, people better get over it, because there is no other objective proposal that can meet our challenges.

            The capitalists need to come to terms with the finite world, and with a finite number of opportunities to substitute one resource for another.  All indications are that we are getting close to the point where the finite world will be in the way of further forward momentum.  There is only one logical way out of it, which is my suggestion of a standardized global trade tariff, based on a points system that reflects each country’s ability to produce a unit of GDP, per unit of environmental degradation incurred.  This should have the effect of promoting the durable economy once more, which is the opposite of what the market does.  This way, we can start producing more with less.  It is time for the worshipers of the market to admit that it cannot tackle all problems facing us, because sometimes price signals needed to go into a desired direction just aren’t there.

            The sustainability crusaders need to understand on their part that reducing consumption of our resources and the environment need not involve a reduction in the consumption of units of GDP.  In fact, any such attempt would come at a very high price to society.  A price that no one is willing to pay, thus we have the current willingness of the masses to ignore all the dire predictions that most environmentalists thought will be enough to sway opinion towards their view.

            My proposal for this global trade tariff is not a permanent solution to last humanity forever.  It is simply a way to reconcile our current competing needs of protecting the environment we live in and preserve finite resources, while maintaining financial stability through ensuring more room for growth, which we seem to be lacking at the moment.  At some point, we will have to find a way to end our addiction to growth, because let us face it, nothing is forever, and the world is not infinite.  If we don’t find a way, it will happen in an unmanaged manner, and it will be painful and tragic.  At this moment, there is no hope for humanity to tackle such a grave problem.  We lack the cultural maturity.

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