Friday, December 22, 2006

Towards a New Economic Paradigm or,
Zeb Sees The Light (cont.)

...Burned by his foolish misallocation of borrowed money in a quest of capital gains, Zebediah realizes he needs income - money that comes from
making things as opposed to participating in the zero sum game of inflating and trading sardine cans...

The very first thing the US needs to do is to reduce consumption and increase saving in order to bring the personal savings ratio back to a respectable percentage of income. Domestic capital is the only way to create a solid, stable financial base from which to fund long-term fixed investment (as opposed to just portfolio investment). A natural corollary is a shift away from the current over-dependence on consumer spending (70% of GDP) towards more capital spending and investment.

But invest in what? Is there an industry that can create millions of new well-paid jobs to overcome the layoffs that will occur at the retailing and financial sectors? Yes, there is. What is more, this is an industry that we must invest in: non-fossil fuel energy.

I don't think I need to expand much on why this must happen, starting right away - just these few simple points:
  • If we don't, we will be paying foreign suppliers more and more money as our own oil runs out. Lose a lot, all the time. Until we run out of time.
  • If we don't, we will spend trillions on resource wars (Iraq...); and in the end the oil will run out anyway and we will be left with nothing. Lifeblood and money for a dry hole.
  • If we don't, the environment will eventually collapse from the greenhouse gases. Remember the dinosaurs.
Energy is life itself - it is not just another commodity and it is foolish to think that "free markets" will take care of energy availability just by themselves. Finance is notoriously short-sighted and prone to manipulation; signals from markets alone cannot be used for formulating policy - not for a world power like the US, anyway.

In the case of energy, policy must precede markets.

The US must first design and build a new energy regime and then apply free-market principles to its smooth operation. We must do so now before our massive Oil Era energy subsidy runs out, while we can still use available oil and gas to build solar panels, wind turbines, ocean thermal energy machines, hydrogen electrolysis plants, nuclear plants, whatever it takes.

This is a huge undertaking: it will give birth to a whole new complex of economic, social and geopolitical relationships. There will be enormous winners and losers, financially and politically. For example, the massive size of the US military-industrial complex created after WWII is necessary for one reason only: the securing of international sources and supply routes of oil. If the new energy regime is both domestic and decentralized (e.g. each house or community has its own solar panel arrays) the need for such a huge military vanishes. Lockheed will not be pleased.

Along with the losers, there will be winners creating millions of highly skilled jobs in design, manufacturing, installation and upkeep of new energy products and processes. New cars, buses, trains, even airplanes - all will need to be re-designed and re-engineered. Novel technology will be born, creating more new wealth based in satisfying real consumer needs, not marginal hedonistic ones.

But all this requires massive capital investment - trillions and trillions of dollars applied on a global scale over several decades. Just imagine how much money is already invested in the Oil Economy. A new energy regime will require several times more, if only because the capture and transformation of diffuse energy sources like solar and wind requires a larger infrastructure. The Second Law of Thermodynamics is immutable.

I had the opportunity to attend a lecture by Jeremy Rifkin (of hydrogen economy fame) some time ago and I asked him how much his vision would cost. "A lot" is all he would say, and that surprised me at first - until I realized that he was not being evasive or coy. There is simply no way to cost-out such an enormous undertaking in money terms; it is too complex and interrelated with every other facet of human life. Perhaps a better way to respond to this question is this: what is the price of life?

If the United States wishes to regain the economic and moral leadership of the world it must strive to create a New Economic Paradigm based on the creation of a sustainable energy regime. To do so it must first renounce the phoney economy of asset inflation and pointless consumerism. It must train, employ and adequately compensate real scientists and engineers instead of glorifying hedge fund managers and financial derivatives engineers.

...Zebediah is finally hopeful because he sees a way forward. But can he convince his alphabet friends? What must he do? What can he do? For that segment, as always,...

Stay Tuned!


  1. Hi Hellasious,
    I really enjoyed reading and looking at your facts on debt, the economy and the general state of things. While I agree with you on what should be done to turn things around, I am almost certain that won't be the way it will play out in the end.
    Politicians make ...well, policies and a lot of $$ at the side. Always have been, always will be. Now look at the main bread givers of the upper echelon of politicians. Big business; in particular oil, financial and military interests. You say we can vote them out? The problem is there's nobody else to vote in. They are all marionettes of big business, no exception. Nothing will change until we fall flat on our collective face. By that time it will be too late to make the investments necessary to implement the ideas you're talking about. (points 1-5 on 12-20-06)
    I also disagree with your statement that "we" can't inflate our way out of the debt.
    1. Most adjustable rate loans are capped at some finite rate, usually 10-15%. So some derivate traders might loose their shirt...big deal
    2. A massive recession will ensue six or half-dozen the other. If we’re going to have a 1930’s style recession we might as well wipe out our debt in the process.
    3. The almighty petro-dollar is already crumbling, like it or not. We are largely unable to control this development at present. Our global reputation is tarnished by debt and the destruction of our manufacturing base; international investors are already “diversifying”.
    4. We could pass laws that make it illegal for foreigner to acquire American assets. Some countries have such laws in place. Knowing our politicians, they’ll gladly have a going-out-of-business sale as long as they can make a buck on it.
    5. Money by the barrel baby, money by the barrel.

    Sorry to have a bit pessimistic outlook on things in the US of A. Other countries (Sweden and Germany for example) seem to have understood the signs of the time. We will hold on to our non-negotiable lifestyle till the bitter end.
    Just my 2 cents

  2. Thanks for your input Mike.

    Who knows how it will all play out..I just tell a fish story. Now, if there will be someone around to make them fishes multiply (along with some loaves) to feed the hungry...who knows ?-)

    Debt will be destroyed - that's for sure. Unfortunately, there is no silver bullet to both kill the debt and provide succor to the people. ALL choices will be bad. However, if we start right away on renouncing the phoney economy and replacing it with a real one we may have a chance to at least mitigate the worst effects. What is interesting to me about creating a new energy regime is that it combines both an energy/environmental aspect (overcoming peak oil and global warming) AND an economic one (provide economic impetus).

    Politicians could eventually do what voters want - IF the voters, as you said, threaten loudly enough to vote them out. And there's is the rub..can we change our national "wants" before we fall flat on out faces? I can only tell fish tales and hope.

    ...and keep those 2 cents. They are worth more already - who could have thunk it? A penny saved is..a penny point twenty seven earned.