Category: World Affairs

On the Wealth of Citizens: An EU Perspective

Those Who Study History

 

The UK voted to leave the EU yesterday.

What’s really going on?

In an industrialized world with abundant resources citizens typically prosper in economies of all sizes.

As populations rise faster than finite resources, the growth rate of per-capita resources slows and eventually must decline. Over time it becomes more difficult to increase the wealth of citizens. In a resource constrained world there are two methods available to grow the wealth of citizens: efficiency and debt.

The first method available to grow the wealth of citizens is to increase the efficiency of producing and using resources. We have done an excellent job of improving efficiency:

  • We optimized the type of energy we use for each application such as using coal and hydro instead of oil to generate electricity, and using oil instead of coal or horses for transportation.
  • We learned how to squeeze oil from sand and rock, how to drill for oil in mile deep oceans, and how to mine coal from the surface with giant machines.
  • We optimized our machines such as switching to lighter fuel-efficient cars, using heat pumps, and abandoning supersonic air travel.
  • We learned how to convert oil and natural gas into cheap and durable materials like plastic.
  • We used electronics and computers to more efficiently control just about everything.
  • We optimized communication with the internet and cell phones.
  • We reduced waste such as insulating our homes.
  • We recycled energy intensive materials such as aluminum cans.
  • We optimized the productivity of our arable land with Haber-Bosch factories that convert natural gas into nitrogen fertilizer, by replacing horses and rain with diesel powered tractors and pumped irrigation, and by growing mono-crops.
  • We optimized the cost of calories by manufacturing high-fructose corn syrup and vegetable oils, and by operating concentrated animal feeding operations.
  • We optimized the harvest of our oceans with powerful ships that net and scrape everything.
  • We optimized the efficiency of global trade with agreements between many countries.
  • We optimized manufacturing by moving it to locations with the lowest labor and energy costs, and the fewest pollution regulations.
  • We optimized shipping with standard containers and ships and trucks to carry them.
  • We optimized distribution to consumers with Walmart and Amazon.

The laws of thermodynamics and the cost of technology and transport mandate a limit to efficiency gains. We are approaching the limits to efficiency improvement.

The second method available to grow the wealth of citizens is to borrow resources from the future. This amazing trick is done with debt. Cash and credit behave the same when spent. Credit however commits us to produce wealth in the future to repay it. This future wealth represents yet to be produced resources. Hence debt’s magic of letting us spend future resources now.

We started using debt in the 80’s to support the wealth of citizens and total debt has grown exponentially since. There are limits to how much debt can be carried by a citizen or government. Money available for living equals income minus interest payments plus any change in debt plus any change in savings.

The combination of stagnating or falling income due to declining per-capita resources and/or rising interest payments eventually imposes a limit on the total debt an individual or government can carry. There are three methods for extending this limit on debt.

The first method for extending debt is to increase the size of economic organizations. Size matters to debt. The larger an economy is the more internal and external resources it can control, the more taxes it can collect, the larger military it can afford, the more confidence and fear it can inspire, and as a consequence, the more credit it can generate. A good example is the USA and the privileges it enjoys from having the world’s reserve currency.

As the wealth of citizens became increasingly dependent on debt there was pressure to increase the size of economic organizations. This in large part explains the formation of the EU. The majority of European countries were keen to join the EU because it promised them access to more debt. Imagine, for example, how much debt and purchasing power an independent Italy with its own currency could have compared to today as a member of the EU.

The second method for extending debt is to reduce the interest rate. We have steadily reduced the interest rate since the early 90’s. We reached the limit of 0% shortly after the 2008 crisis and the interest rate has remained at 0% for an unprecedented 90 months. Some countries are experimenting with negative interest rates however it seems unlikely that this technique will work without dramatic and improbable changes to the rules of money and banking.

The third and final method for extending debt is to print and give money to citizens and/or governments. Most countries have not yet used this method because it reduces confidence in a currency and risks hyperinflation that destroys wealth and can cause war as happened with Germany after WWI. There will be a strong temptation to try this method in the future because it can work well for a period of time. For example, it took 10 years for hyperinflation to take hold after money printing started in Zimbabwe. A politician forced to choose between riots now and hyperinflation 10 years later might well choose to print money.

As an aside, I leave the reader with a question to ponder about the dark side of debt. What will happen if the depletion of finite resources and climate change prevents us from producing the future resources our debts commit us to? The answer to this question explains why I frequently call for reduced public debt.

In summary, a resource constrained world has two methods for supporting the wealth of citizens, efficiency and debt, and as explained above, we are already at fundamental limits for both efficiency and debt.

What must happen next, and what is already starting to happen, is that the wealth of citizens will decrease. This will create social unrest, and given our genetic denial and the difficulty of understanding our complex world, citizens will seek someone to blame.

Yesterday UK citizens blamed the EU. Because most UK citizens do not understand the underlying forces that are causing their hardship they probably have made things worse for themselves, at least in the short-term. Longer term, when there is insufficient affordable oil to support long distance trade, all communities will have to re-localize to survive.

Other independence movements within Europe are building momentum for similar reasons. A primary message of Donald Trump is that “others” are to blame for the hardship of US citizens.

A recurring theme on this blog is that some form of civilization collapse is inevitable and not too many years away. If the majority of citizens do not understand and/or deny what is going on the collapse will be much worse than it needs to be.

We still have sufficient resources to prepare a softer landing zone.

The first step is an adult conversation about what’s really going on.

A Deadly Recipe: One Part Ignorance, One Part Denial

I’ve been paying a little more attention these days to what the main stream media thinks is going on.

They report on government data that says the economy has recovered from the 2008 crisis. They also report on the rise of Trump that indicates many citizens are struggling and angry.

They know that incomes have stagnated while life’s expenses continue to rise but they have no clue what is causing this.

They don’t even have an intelligent theory.

On other important matters obvious to anyone that cares to look such as the climate spiraling out of control, the 6th great extinction of species, and human overshoot starting to bite in some of the weaker countries, they say nothing.

It’s quite amazing.

It seems likely we will collapse with most people having no idea what is causing their pain.

One part ignorance and one part genetic denial is a deadly recipe for war and civil unrest.

By The New York Times: Venezuela Drifts Into New Territory: Hunger, Blackouts and Government Shutdown

The collapse of Venezuela continues.

“The economic situation of this country is collapse,” Pablo Parada, a law student, who was participating last week in a hunger strike in front of the O.A.S. office in Caracas. “There are people who go hungry now.”

http://www.nytimes.com/2016/05/28/world/americas/venezuela-economic-government-collapse.html?_r=1&referer=http:/m.facebook.com/

Notice that this New York Times article has no clue about the underlying causes of Venezuela’s problem. It does not even mention that their population has grown by more than 6 times since 1950.

We observe problems, deny overshoot, and blame something easy like corrupt politicians that doesn’t require us to make lifestyle changes.

Rinse and repeat to the bottom.

I wrote more about this here.

On Noam Chomsky and Requiem for the American Dream

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In my younger years I was a fan of Noam Chomsky. It’s been quite a while since I reviewed any of his work so tonight I watched the 2015 documentary Requiem for an American Dream. This is apparently Chomsky’s last documentary and is a compilation of interviews filmed over the last 4 years.

Chomsky has a brilliant mind with an encyclopedic memory for history.

He discussed some of the problems facing society including falling incomes for the lower and middle classes, a growing wealth gap between the 0.5% super rich and everyone else, the influence of wealth on elections and public policy, the financialization of the economy, loss of manufacturing jobs, and the decline of social programs.

His message in summary was that the lower classes do not have enough money and power, and the upper classes have too much money and power.

Chomsky is an excellent example of how someone who lacks an understanding of the relationship between energy and wealth, energy and complex systems, the mathematics of our debt based monetary system, and evolved human behavior will draw incorrect conclusions about the cause of problems and what should be done in response.

All of the problems he is concerned about are an expected outcome of economic growth fueled by depleting non-renewable energy. No one is to blame.

Chomsky thinks we should redistribute wealth from the rich to the poor. If he had a good understanding of overshoot he would know that this solution will make things worse. It’s true that we should reduce the gap between rich and poor to avoid social unrest, but the correct way to accomplish this is to confiscate wealth from the rich and bury it.

Chomsky did not mention any of the problems resulting from human overshoot such as species extinction, resource depletion, pollution, climate change, ocean acidification, or tree die-off.

My respect for Chomsky has dropped a lot.

The UK: A State of unDenial?

A book titled Limits to Growth was published in 1972 by a group of respected scientists including two of my favorite thinkers, Dennis Meadows and Donella Meadows. They modeled a variety of scenarios and showed that industrial civilization would collapse some time before 2100 unless we proactively limited one or more aspects of human population and economic growth.

Limits to Growth generated a lot of passionate criticism. Sadly, most critics did not read or understand the book. There was, and still is, little or no rational discussion by citizens or their leaders about overshoot.

A 30 year update by the authors and several recent independent reviews have shown that we are tracking to one of the Limits to Growth scenarios called the standard model. The evidence is that the Limits to Growth predictions were accurate and we are probably on a path to collapse.

One compelling piece of evidence in support of Varki’s denial theory is that no country in the world, regardless of political or religious belief, is having a meaningful discussion about human overshoot, let alone taking steps to mitigate overshoot, despite overwhelming evidence that we are in serious trouble.

The UK may be a country trying to achieve a state of unDenial.

An all-party parliamentary group (APPG Limits to Growth) has been set up to encourage dialogue on limits to growth.

To seed the discussion APPG commissioned a report published in April 2016 titled “Limits Revisited: A Review of the Limits to Growth Debate”

The report is a quick read and other writers such as Nafeez Ahmed have already summarized it so I won’t repeat the details here. Instead I’ll comment on a few things I thought were important.

The authors are clearly concerned about creating a “happy story”.

Visions for prosperity which provide the capabilities for everyone to flourish, while society as a whole remains within the safe operating space of the planet, are clearly at a premium here. A number of such visions already exist. Developing and operationalising them is vital.

I suppose this is the reality of trying to influence two generations that have not known hardship. Time is short. I think we need more forthright honesty and less spin.

The authors understand the climate change threat but I saw no evidence that they understand how difficult it will be to reduce carbon emissions.

The authors understand that economic growth may be ending however I saw no evidence that they understand the implications of no-growth for our debt based monetary system.

The APPG has good intentions and they are breaking important new ground.

It will be interesting to see if they achieve anything.

Renewable vs. Fossil Energy: An Interesting Natural Experiment is Underway in Venezuela

There is an interesting natural experiment underway in Venezuela.

The Venezuelan grid is unable to keep up with demand and electricity shortages are starting to impact their economy.

The government is blaming a prolonged drought for reducing their hydro electricity capacity and have implemented a reduced work week for government workers and scheduled a 4 hour per day blackout to cut electricity consumption.

http://www.bloomberg.com/news/articles/2016-04-27/venezuela-declares-two-day-work-week-in-bid-to-save-electricity

Informed skeptics have shown there is no drought and that the government is blaming drought to cover up inadequate grid maintenance and upgrades.

http://euanmearns.com/more-revelations-on-venezuelas-drought-and-the-guri-dam/

I suspect that the grid maintenance and upgrade problems are caused by low oil prices. Oil accounts for a third of Venezuela’s GDP, 80% of exports, and more than 50% of government revenue. Venezuela claims to have the largest oil reserves in the world but most of these reserves are expensive to extract and uneconomic when prices are low as they are today.

http://www.wired.com/2016/04/venezuelas-economic-success-fueled-electricity-crisis/

It is impossible to maintain complex things when you are broke.

So what we have here is a country that generates over 70% of its electricity from renewable hydroelectric dams, yet their grid is failing because they lack the funds to properly maintain it, because most of their wealth comes from fossil energy that is now uneconomic to produce.

Hydro electricity has the best return on energy invested of all renewable energies. Venezuela’s grid is therefore as good as renewables get and much better than a grid built with solar panels and wind turbines.

This supports my view that it is impossible to have today’s consumption and wealth with 100% renewable energy.

The global economy will be contracting soon due to depletion of non-renewable energy. Reliable electricity, including electricity from renewable sources, may be one of many casualties.

We would be wise to take control of the impending contraction and steer it in an optimal direction, rather than allowing a chaotic collapse to occur.

We need conservation, austerity, wealth gap reduction, and population reduction now.

Addendum…

Hyperinflation is the end game for a country that refuses to live within its means. Venezuela’s money printing is accelerating.

This Is The End: Venezuela Runs Out Of Money To Print New Money

Hyperinflation destroys the wealth of a country’s middle class which makes them very angry.

Hyperinflation is the reason Hitler got into power and is one of the reasons I advocate conservation and austerity.

It would have been easier for Venezuela had they not allowed their population to grow by more than 6 times from 5 million in 1950 to over 33 million today.

http://mazamascience.com/PopulationDatabrowser/index.html?country=VE&language=en

José Mujica

A reader brought to my attention José Mujica as an example of a rare and wise leader.

José Mujica, nicknamed Pepe Mujica, was President of Uruguay from 2010 to 2015. A former Tupamaros freedom fighter in the 60s and the 70s, he was detained, like a hostage by the dictatorship between 1973 and 1985. He advocates a philosophy of life focused on sobriety: learn to live with what is necessary and fairest.

Here is an excellent interview with Mujica:

A few quotes from the interview stood out for me:

Either you’re happy with very little, free of all that extra luggage, because you have happiness inside, or you don’t get anywhere! I am not advocating poverty. I am advocating sobriety.

But since we have invented a consumer society, the economy must constantly grow. If it fails to increase, it’s a tragedy. We have invented a mountain of superfluous needs. Shopping for new, discarding the old… That’s a waste of our lives!

When I buy something, when you buy something, you’re not paying money for it. You’re paying with the hours of life you had to spend earning that money. The difference is that life is one thing money can’t buy. Life only gets shorter. And it is pitiful to waste one’s life and freedom that way.

It is shameful that for 25 years, since the Kyoto Accords, we are still dragging our feet to take basic measures. It is shameful. Man may very well be the only animal capable of self-destruction. The is the dilemma facing us. I only hope that I am wrong.

Something is Afoot

Central bankers are holding emergency meetings.

http://wolfstreet.com/2016/04/12/what-in-the-worlds-going-on-with-banks-this-week-emergency-meetings-summits-crashing-eu-banks/

Just about every major banker and finance minister in the world is meeting in Washington, D.C., this week, following two rushed, secretive meetings of the Federal Reserve and another instantaneous and rare meeting between the Fed Chair and the president of the United States. These and other emergency bank meetings around the world cause one to wonder what is going down.

The IMF, which speaks truth a little more often than most, has issued a warning.

http://www.bbc.com/news/business-36035136

The financial stability report says there is “growing concern about a mutually reinforcing dynamic of weak growth and low inflation that could produce sustained economic and financial weakness”. The IMF is also concerned that in some countries inflation is too low.

Uncertainty about China’s economic performance is also a factor.

The IMF says if the outlook for economic growth and inflation were to deteriorate further there would be an increased risk of a loss of confidence and renewed bouts of financial market volatility (something the world experienced earlier this year).

Borrowing costs could then rise, especially for debtors perceived as more at risk of default.

The report continues: “In such circumstances, rising risk premiums may tighten financial conditions further, creating a pernicious feedback loop of fragile confidence, weaker growth, lower inflation, and rising debt burdens.”

This supports my theory that central banks do not have absolute control over interest rates. I expect rates will rise when citizens finally understand the risks.

Everything will blow up if rates rise.

Mr. Robot: What Is It About Society That Disappoints You?

A clip from the 1st episode of the 1st season of the TV series Mr. Robot.

 

By Süddeutsche Zeitung: Panama Papers: The Secrets of Dirty Money

A massive leak to and investigation by a leading German newspaper into global money laundering and tax evasion by political leaders, business leaders, and celebrities in many countries.

If this were led by US journalists it would probably be buried but the Germans seem to have some ethics left so this could get interesting.

http://panamapapers.sueddeutsche.de/articles/56febff0a1bb8d3c3495adf4/