Chris: Is this theory still viable?

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johndaniels
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Chris: Is this theory still viable?

Chris:
Is this entire theory still viable with the undeniable deflation that happening today? What do you think is happening, and why? Will things go back to how you projected in the overall theory? Deflation and this dollar strength is the exact opposite of what your theory states should happen. Can you give us insight?
Thanks.

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JohnDaniels, The answer
JohnDaniels, The answer to your question is posted by Chris's analysis here: http://www.peakprosperity.com/fannie-and-freddie-nationalized-treasury-takes-ove
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Inflation, Deflation, and Money
First allow me to step outside this reply to say, excellent final summation Chris. Normally, I tend to talk only when I have complaints, but after beating you up a bit in the last two sections, I just wanted to say good work.

Now I'll attempt to handle this question in depth. Because, it, uh, amuses me to do so.

"Is this entire theory still viable with the undeniable deflation that happening today?"

It is first necessary, to recognize that inflation and deflation are symptoms, not a disease. Much like a fever, they are manifested because something deep down is wrong -- be it the out of control printing of cash, or the complete collapse of a banking system.

That is not to say that inflation, and deflation do not have effects in and of themselves, they most certainly do. To again leverage that analogy of a fever, yes a fever is caused by a disease... but should the fever get too high it'll kill you quite fine on its own.

That issue addressed, we must identify the three (de/in)flationary forces being experienced in this current situation:

* The printing of cash -- inflationary
* The destruction of debt -- deflationary
* loss of energy productivity -- special

We'll head down these one-by-one. But let us first take a pit stop to remember what money is.

Money is a promise:

To truly understand money, it is necessary to understand how money came about. For this, it is best to tell a story.

Imagine that you are a farmer living waaaaaaaayyyyyy back in Sumerian times. You are coming into the city with 5 bushels of wheat, and you need to purchase things. Unfortunately, there is no such thing as money. So you have to walk around the city trading various 'things' -- a jug of wine, some pottery, a womans dress -- until you have the 'things' that the person who has what you want: a cartfull of dung.

Obviously, this a cumbersome, labor intensive and mistake prone process. So, being a rather bright fellow you come up with an idea. Why not make little, circular clay objects that 'stand' for one of your bushel's of wheat.

Now, instead of porting wheat all around you can just hand out the 'coins'. In return, you promise to give a bushel of wheat for each coin. There, the story ends quite happily as long as the promise is met.

Printing cash:

But, we all know promises are made to be broken, and Printing cash is one of the sleazier ways of breaking a promise.

To extend our story, you, the farmer have bough '3' things for '1 coin' each. Suddenly, you realize that you need '7' more things which each cost '1/2' a bushel of wheat each. So, thinking you are quite bright, you 'make' 5 additional coins for a total of 10 coins floating around.

Alas, there are still only 5 bushel's of wheat, and as such each coin can only stand for 1/2 a bushel. Thus, the promise to the first three traders is broken.

This is exactly what printing cash is. It is an intentional increasing of the amount of 'coins' without regard to past promises. It is worth noting that printing cash is a special form of inflation, because there is no finite limit to the expansion of money through printing. You can, quite literally, denominate bills in scientific notation if it becomes necessary.

However, do not to forget the inheriant promise in a monetary system. Because, not long after money starts getting printed too fast, people suddenly start noticing they are being shorted their promise. As such, they start demanding that they at least still get their promise.

The problem with this is obvious. For each promise you meet, you have to break another one further. Since the number of goods is finite and unchanging -- even if your fiat currency is expanding infinitely -- it is possible to be caught in a catch-22, where each time you print money to pay one party, another party steps in and demands you pay them an increased amount to reflect the original underlying promise that money represents.

And that there is the root of all Hyper Inflation. A constant spiral of inflation which, by virtue of inflating the currency, intrinsically demands even more money be printed to meet newly increased obligations. Hyper inflation persists, expanding toward infinity until either all obligations are met, the economy collapses completely (due to too many 'goods' being removed by those previously paid), or remaining payment obligations are refused.

Understanding this kind of inflation is important, because the first sign of a hyper inflation senario is that the governing entity -- because only it can print cash -- gets too far into debt with other entities which can reasonably coerce it to pay.

I say that last, because if the government cannot be forced to pay it is far more likely that it will outright refuse to do so prior to the full onset of a hyper inflation senario. As such, that '50 trillion dollars in Medicare and Social Security we owe ourselves' is not going to cause hyper inflation -- instead those counting on these services will instead be left out to dry. Of greater concern though, is all the debt the USA has sold to foreign nations.

Luckily, for the USA and not for China, the US possessing such ridiculous military might is in the perfect position to flat out refuse payments to foreign countries, if it came down to it. (Subsequently creating a global downturn of course... or worsening an already existing one)

Overall it is hardly necessary a full post-World-War-German-hyper-inflation senario be entered for the printing of money to cause plenty of discomfort. Even a 5% to 10% inflation rate is nasty enough in its own right. For this more minor inflation all the dangers are already at hand: Increasing obligations for the treasury, shrinking tax collection, high debt, and a global recession putting in danger the ability of the United States to finance future debt.

Debt:

The next target here is debt creation and destruction. As already discussed by Chris, this creates 'illusionary' cash. I'll go a bit further, because it is necessary to really understand a little more about what debt creation and destruction means.

If money is a promise debt is a future promise. As we already know, it is easy enough to get into trouble making promises right now, much less about the future. However, debt serves an incredibly useful function. It allows an individual to leverage future action in exchange for a thing now.

Indeed, you see a minor form of this when, as a new employee, you are hired by a company and then 'trained'. You are, in effect, going into debt with the company for the future promise that your labor will earn them more than the resources they expended.

Now, debt is an instrument that can expand in three dimensions. For the sake of discussion I'll call them: Breadth, Time, and Scale. Breadth being the expansion of the number of individuals in debt, that is: how many people are making a future promise in exchange for something now. Time and Scale go hand in hand, Time being how far out you've made the exchange -- a 30 year loan of course being 30 years -- and Scale being how how big that future promise is.

Each has finite limits. Everyone on Earth can promise the moon, the stars, and the skies at some undisclosed time prior to the end of the universe, but it aint goina to happen. We'll go through each, since finite limits of monetary debt was so recently touched upon by Chris.

Breadth is obviously limited by the number of humans on Earth. Sure, you could start giving out house loans to trees, birds, and spiders... but, they're never going keep up their end of the bargain. In reality, we can constrain breadth even further. Say to those with *cough* jobs, and incomes. Failure to obey this rule will, quite obviously, result in a failure to receive payment.

Alas, the US mortgage industry disagreed that Breadth had such 'limits'.

Time and Scale are similarly limited. You shouldn't give out debt larger then can be paid. In regards to time, limits on life space, and inevitably increasing unpredictability make the risk at a certain point unsustainable. Of all expansion these two are the most dangerous, because debt is a future promise and time and scale not only tend to expand together, but because time stretches things far out into the future not only risk increased, but the awareness of how horribly debt is over expanding is equally reduced.

The biggest and most unknowable risk, is that the future doesn't play out as planned. Say, because oil peaks, the economy recesses, then stagnates, before finally resuming growth at a potentially slower long term rate. In that case, I can only say, that a lot of future promises are going to be broken.

Now, as already mentioned in the crash course an artifact of debt creation is a form of, as I call it, 'illusionary inflation'. Consequently, when debt is destroyed the apparent money decreases. In the case, the money that disappeared is quite literally: future money. That is, when debt destruct -- there is less total debt in the economy -- the amount of 'future' being leveraged has decreased. In essence the amount of cash borrowed from the future vanishes as a result. This is a difficult notion to wrap one's head around, I understand, but that is pretty much what happens.

The important thing to note here is that because debt is the leveraging of time. It is in no way related to current productivity, existent goods, or the number of bills in circulation. Thus, the deflationary effects of debt destruction can happen simultaneously with the effects of pretty much any other inflationary or deflationary force, such as the printing of money.

Which is why I remind that inflation and deflation are symptoms not a disease. The destructive effect of future promises being broken still persists even if hyper inflation overwhelms the apparent nominal deflationary effect of the debt destruction. Promises don't unbreak themselves.

Of course, an inventive government could print money and give it to the banks to 'repay' them for the lost promise. But, that in reality, is just forcing the population as a whole to meet the obligation instead. Which will inevitably fail if the promises in aggregate could never be met in the first place.

Productivity Loss:

I listed this as a 'special' case, because productivity loss is, in all honesty, a loss in actual economic output. However, the economy being so ridiculously complex, it often takes time for the truth to make itself visible.

In the case of oil, we currently see prices spike. As a result all goods dependent on oil or oil energy (just about everything), also increases in cost. This creates 'false inflation', that looks like inflation, feels like inflation, but is in actuality 'recession'.

In theory all prices should eventually normalize when the economy adjusts to a greater proportion of labor being distributed to an industry that once required less. Consequently drawing money away from other goods, and eventually forcing a deflationary price drop.

Putting it together:

To answer your question overall, it depends. There are number of unknowables at this point which make prediction hard.

The first is the scale of the credit crisis. We know debt was created into far too great a breadth: "No job, no income, no problem!" -- subprime is the core example of this. We also know that debt was created in too great a scale, as seen in the divergence of median housing costs versus median incomes -- and proven by the increasing numbers of prime foreclosures and deliquencies. What we dont know is how bad things are in the 'time' direction because that is highly dependent on how bad the economy gets. If the word 'depression' slips to your mind, then this is going to get massively and horribly worse.

The second is how much money the treasury is printing, and is going to print. We know the fed has been hawking loans on shoddy collateral, and if those go bad it'll all amount to printed money. We know it has taken Freddie and Fannie into its bossom. We know it is keeping the interest rate low. We can also suspect that many more loans could be made. The worst case senario however, is that USA can no longer get anyone to buy its debt which could mean lots and lots of money printed, or massive reductions in spending. Both have massive economic consequences.

Third, more massive spikes in the cost of basic goods could run rampant while mascaraing as inflation. Their ability to do so for extended times, however, will diminish if the economy recesses heavily and especially if debt is unwinding.

The overall answer is that, in the long run there will probably be inflation. There is not much possibility otherwise with the fed printing money, because everything else: debt, prices, has a tendency to seek a proper level in the long run. Overall deflation is, however, possible if debt is severely out of wack and monetary printing remains low.

In shorter periods, it is much more difficult to say. We could have inflation, deflation, and then more inflation. We could have deflation in some parts of the economy, while inflation in others. (we already are experiencing inflation in parts of the economy while deflation in others: housing for instance, is deflating). The government could change its play book, once, twice, and even thrice. This is especially true if new factors are introduced. For instance, if we were deflating and suddenly the government couldn't sell debt anymore we might abruptly flip around and inflate instead.

I doubt we'll see real crazy hyper inflation though. The key components are lacking: Massive debt to entities (especially external ones) which can coerce payment. We could see a minor version of it for periods though.

As for right now, I'd say the government is trending toward printing more and more money to try to buy its way out of this economic disaster. But, if this housing bubble runs all the way to 2012 or 2015 then you can bet your ass that the governments approach will be completely different. For better or worse.

Hmm, a lot longer than I intended.

--
Steve
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The Collapse of Complex Societies
"What if our exponentially based economic and monetary systems are just an artifact of oil? What if all of our rich societal complexity and trillions of dollars of wealth and debt are simply an expression of surplus energy pumped from the ground?" - Chris Martenson. The Collapse of Complex Societies by Joseph Tainter(Author) Review by Chris Stolz May 29, 2004 Tainter's project here is to articulate his grand unifying theory to explain the strange and disturbing fact that every complex civilization the world has ever seen has collapsed. Tainter first elegantly disposes of the usual theories of social decline (disappearance of natural resources, invasions of barbarians, etc). He then lays out his theory of decline: as societies become more complex, the costs of meeting new challenges increase, until there comes a point where extra resources devoted to meeting new challenges produce diminishing and then negative returns. At this point, societies become less complex (they collapse into smaller societies). For Tainter, social problems are always (ultimately) a problem of recruiting enough energy to "fuel" the increasing social complexity which is necessary to solve ever-newer problems. Complexity, writes Tainter, describes a variety of characteristics in a number of societies. Some aspects of complexity include many differentiated social roles, a large class of administrators not involved in the production of primary resources, energy devoted to different kinds of communication, centralized government, etc. Societies become more complex in order to solve problems. Complexity, for Tainter, is quantifiable. Where, for example, the Cherokee natives of the U.S. had about 5,000 cultural artifacts (things ranging from recipes to tools to tents) which were integral to their culture, the Allied troops landing on the Normandy coast in 1944 had about 40,000. Herein, however, lies the rub. Since, as Tainter writes, the "number of challenges with which the Universe can confront a society is, for practical purposes, infinite," complex societies need to keep on increasing their level of complexity in order to survive new challenges. Tainter's thesis is that these "investments in aditional complexity" produce fewer and fewer returns with time, until eventually society cannot muster enough energy to fuel complexity. At this point, society collapses. Consider this example: A simple hunter-gatherer society with limited agriculture (i.e. garden plots) is faced with a problem, such as a seasonal drop in food production (or an invasion from its neighbours who have the same problem and are coming over for food). The bottom line is, this society faces an energy shortage. This society could respond to the food crisis by either voluntarily declining in numbers (die-off, and unlikely) or by increasing production. Most societies choose the latter. In order to increase production, this society will need to either expand territorially (invade somebody else) or increase agricultural production . In either case, this investment can pay off substantially in either increased access to already-produced food or increased food production. But the hunter-gatheres of the above example incur costs as they try to solve their food-shortage problem. If they conquer their neighbours, they have to garrison those territories, thus raising the cost of government. If they start agriculture on a larger or more intense scale in their own territories, they have to create a new class of citizens to man the farms, distribute and store the grain, and guard it from animals and invaders. In either case, the increases in access to energy (food) are offset somewhat by the increased cost of social complexity. But, as the society gets MORE complex to confront newer challenges, the returns on these increases in complexity diminish. Eventually, the costs of maintaining garrisons (as the Romans found) is so high that both home and occupied populations revolt, and welcome the invaders with their simpler way of life and their lower taxes. Or, agricultural challenges (a massive drought, or degradation of soils) are so great that the society cannot muster the energy reserves to deal with them. Tainter's book examines the Mayan, Chacoan and Roman collapses in terms of his theory of diminishing marginal returns on investments in complexity. This is the fascinating part of the book; the disturbing sections are Chapter Four and the final chapter. In Chapter 4, Tainter musters a massive array of statistics that show that modern society has been facing diminishing returns on investments in complexity. There is a very simple reason for this: we solve the easiest problems first. Take oil, for example. In 1950, spending the energy equivalent of one barrel of oil in searching for more oil yielded 100 barrels in discovered oil. In 2004, the world's five largest energy companies found less oil energy than they expended in looking for that energy. The per-dollar return on R&D investment has dropped for fifty years. In education, additional investments in programs, technology etc. no longer produce increases in outcomes. In short, industrial society is looking at steadily fewer returns on its investments in both non-human and human capital. When a new challenge comes, Tainter argues, society will eventually be unable to muster the necessary resources to deal with the crisis, and will revert-- in a painful and unhappy way-- to a much simpler way of life. In his final chapter, Tainter describes the modern world's "arms race of complexity" and makes some uncomfortable suggestions about our own future. (...). In an age where, for example, the U.S. invasion of Iraq has yielded net negative returns on investment even for the invaders (where's that cheap oil?), and where additional investments in education and health care in industrialised countries make no significant increases in outcomes, the historical focus of Tainter's work starts to become eerily prescient. The scary thing about this deeply thoughtful and thoroughly researched book is its contention that the future, for all our knowledge and technology, might be an awful lot like the past.
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Bottomless pit of printed money that erodes as its created
I understand overall your basic non-conclusion and uncertainty, yet overall belief that inflation is inevitable. The government itself needs inflation. However, this sure seems like a bottomless pit for the financials sector, which is now joined at the hip with our government. Deflation may become ruinous, and god forbid become a trade manipulation or leveraging tool for the Fed and their banking associates to use on our government. Same principles as the Great Depression. Remember, the fed has something of an "adversarial" (for lack of better term) relationship to our government; a lender/borrower relationship, which is not exactly a love nest. The Fed is a private organization and is not a US government entity. If they suspect a US government default: what lengths will they go to? Equate it to the relationship between the US and israel; both have common interests; but israel is a different country with different priorities than the US; namely their own. The financials are in trouble, big time. In the haste to survive, corruption is rampant. The government is going to have to buy ALL this crap now, because the american consumer will not because it wont make economic sense; where the government doesnt have that luxury (y'know; of being a rational investor). Liquidity is leaving the markets. All assets have bled over the past few weeks, where fundamentally one would expect some of them to run inverse to each other: Like stocks to gold/oil for example. The deflation lately seems broad and effecting every asset class. They all cry "we need housing to recover, then everything will be OK"... However, there are implied assumptions with the statement, "bottom in housing". The term was invented on wall street, as a correllation to stocks hitting bottom. One faulty assumption is that hitting a bottom means it will go up. I think with regards to housing; there may be a bottom but then followed by a multi year dirge of price stablization; doesn't mean housing is a buy when it hits bottom, and will surely be a non liquid, non flexible investment. With unemplyment ticking up, who can have much confidence in where they are and what they're doing? All the overbuilt suburbs and cheap rents, less qualified buyers, tighter lending (especially now after fannie freddy fix, if anything it HURTS a housing recovery!), more dinged credit reports, more inventory, prime loan defaults, etc..Not to mention all the added fees the banks have to pay when people dump their loser mortgages; property taxes, insurance, HOA's, etc.. In fact, owning is just a milder form of renting from the network of leeches (realtors, insurance, gov't taxes) that survive on unmovable assets. We are still in a negative equity expectation in housing, no reason to think it will recover or even bottom. The premium for owning is roughly 60% higher than renting. after this fanny freddy fix, consumer rates are going UP but fed rates going down. Spread will be severe. More non productive debt that will just plug holes and not benefit anyone but the banks, who will continue to bleed our governments resources (as enforced by our federal reserve masters). We are diging a hole that we may not get out of..counter intuitively dollar strength may in fact be the dollar collapse we've all expected. We still have to think all currencies will crash along with the dollar at some point; yet civilisation will continue because of government military strength. Bottomless pit of printed money that erodes as its created. Can the banks stay afloat until the bleeding stops? Even if they do survive, the future for banks and investment houses looks bleak. Far lower lending and sales volumes in housing, and 'dead in the water' housing prices clearly points to a prolonged, multi year housing slump. A mere run on the banks by x% of the baby boomers collapses them all. Seems like a rat race that the tax payers will get to pay for: with no overall benefit or productivity to the economy.
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what about the chinese
what about the chinese motivation to keep the yuan weak? wouldn't this also contribute to a dollar sustainment? without exports, china's economy is toast. Wouldnt that also insure treasuries are not dumped? Without the dump, theres nothing really to express the true dollar value as it relates to national debt and spending...is there? I'm starting to wonder if theres too much foundation under the dollar; and if this will be a multi year phenomenon...
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Robert Ayres, Professor
Robert Ayres, Professor Emeritus at the INSEAD business school in France, explains that eternal-growth economists make four erroneous assumptions: 1. Steady growth projected into the future is a fallacy. There are no examples in nature of exponential growth continuing indefinitely. 2. Traditional economic growth models rely on an unjustifiable simplification of human activity, and an ignorance of nature's laws and complexities. 3. Growth economists imagine abstract firms and consumers making optimum decisions with perfect information. None of this exists. Sovereign, monopolistic, and special interests direct decisions and foreclose valuable options. 4. The theory that capital, plus labour and technology, equals growth ignores nature's requirements and limits.
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Mutually Assured Economic Destruction

The West has no direct lever to force China to change domestic policies. It could close its wallets today and China would hardly notice. China, on the other hand, has become the single biggest lender to the US Government, as Beijing works out what to do with the $US2 billion ($2.2 billion) in foreign exchange reserves it accumulates each day.

If China pulled those investments, American and world interest rates would soar and the financial crisis would become a global catastrophe.

Thankfully, that's not going to happen. To analysts such as Richard Rigby - the director of the Australian National University's China Institute, a former senior China analyst at the Office of National Assessments and a former consul-general in Shanghai - it's a financial version of the Mutually Assured Destruction doctrine that kept the nuclear superpowers, the US and the Soviet Union, at arms' length for so long.

Should China unload a large share of its U.S. securities holdings it would negatively affect the U.S. economy (in the short run), especially if a sharp depreciation of the dollar or a run on it by other foreign investors ensued. But suddenly selling off its U.S. investment holdings would cause financial losses for the Chinese government, and such shocks to the U.S. economy would hurt China’s economy as well. Thus both Treasury Secretary Paulson and the head of the Federal Reserve, Bernanke, see no threat of such political challenge to the US debt by China. As a “trading state,” dependent on US imports of its exports, China cannot risk any sudden action that could destabilize the US economy and trigger anti-China protectionism. Moreover, drops in the value of the US dollar decrease the value of China’s foreign exchange holdings.

Problems with the global monetary system
Fan Gang, finance expert on the board of the People's Bank of China's monetary policy committee, sees significant problems with the international monetary order. He says it is unreasonable for other countries to expect any form of rapid currency revaluation from China vis a vis the US as this ignores problems in the US and the fact that the Chinese exchange rate has moved significantly against other major currencies. He believes that the current weakness of the US dollar makes any rapid jump to an ‘equilibrium exchange rate’ highly destabilizing.

He lists a number of risks of rapid revaluation:

*the para-normal impact on domestic employment due to China’s massive labor problems
*RMB(Renminbi) appreciation would not change US demand and thus the Sino-American current account deficit would merely shift to being that of another country
*the instability of the US dollar
*the sudden flow of ‘hot money’ that would follow an appreciation. China’s financial system is not yet strong enough to bear this risk.

The asymmetric nature of the current international order means that economically stronger countries’ currencies act as reserve currencies for economically weaker countries, argues Fan. There is an incentive for these ‘currency-makers’ to indulge in over-liquidity, with consequent risks of depreciation. ‘Currency-takers’ are then forced to absorb this depreciation through international political pressures, highlighting the need for better models of economic governance.
http://www.cctr.ust.hk/articles/pdf/WorkingPaper25_DZ_China_World.pdf
http://www.smh.com.au/articles/2008/08/08/1218139078207.html
http://eastasiaforum.org/2008/07/20/global-challenges-of-from-china%E2%8...

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Fed and the Government
... or leveraging tool for the Fed and their banking associates to use on our government.

While it is tempting to think of the Government being controlled and manipulated by the Fed, the Fed really has no such power. In the end the Fed is a Quasi-public-private entity that can, if the Government be so annoyed, squashed with impunity. The leadership of the Fed is quite aware of this fact and, as such, takes into great consideration the concerns of the current administration.

Sadly, this means that the systematic raping of the American public in favor of the larger banks which has been and is currently being carried out must, inheriantly, have the tacit approval of our Government. Don't let anyone fool you into thinking otherwise, because that's usually the first step an elected offical takes to get himself off the hook of what, in the end, is at least partially his fault.

where the government doesnt have that luxury

Actually, the government has the luxury of doing whatever it wants, consequences be damned. It could turn around next week and say: "You know what, I think we'll just trash all of Fannies and Freddies debt and then burn down that 11.4 months of houses. That oughta fix this whole housing crisis."

They wouldn't survive the next election of course, but the government could do this, if it was so inclined.

One faulty assumption is that hitting a bottom means it will go up. I think with regards to housing; there may be a bottom but then followed by a multi year dirge of price stablization; doesn't mean housing is a buy when it hits bottom, and will surely be a non liquid, non flexible investment.

I tend to lean toward the idea: "A crisis concerning an item bought, sold, and paid for over a period of 15-30 years, does not solve itself in any time period less a large fraction there of."

I'd go further and add, I do not believe that housing is, or ever should be an 'investment'. I'd further add that housing is and always has been 'non-liquid' and 'non-flexible'. It also is an item that should, in a sensible world deteriorate in value with time (Houses don't get 'better' as they get older. They start falling apart).

especially now after fannie freddy fix, if anything it HURTS a housing recovery!

I wouldn't say it hurts -- the damage has already been done -- but I seriously doubt it will help either. In all probability any money the Government pours into these institutions will, at this point, be inflationary. So, it is kind of like trying to dig a hole, when all the dirt you are tossing 'out' is falling right back in. A pointless waste of energy. The real danger here is that 'we' -- as a country -- will fool ourselves into thinking that everything is okay now, and nothing more needs done. Or worse, making stupid investments with the liquidity we have left.

We are diging a hole that we may not get out of..counter intuitively dollar strength may in fact be the dollar collapse we've all expected

Meh, I tend to believe that the dollar strengthening has more to do with our governments manipulation of statistics, which makes the USA economy look 'good' compared to Europe and Asia. Once that illusion is popped, I wouldn't be surprised to see the dollar crash. Probably not totally, mostly because America falling into a true depression would drag the whole damn world with it.

Even if they do survive, the future for banks and investment houses looks bleak.

What do you mean by 'future' here? Recall that after the Great Depression American entered an era of unprecedented prosperity and growth.

A mere run on the banks by x% of the baby boomers collapses them all.

Not even during the Great Depression did all the banks get crushed. It is doubtful it happen now either, especially with the FDIC helping to hold the outright panic of 'ye old days back.

Seems like a rat race that the tax payers will get to pay for: with no overall benefit or productivity to the economy.

Look on the bright side. That's no different than the last 10 years. =)

--

Steve
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Connection of these comments with Natural Law - the alternate

Obviously, Robert Ayres has provided a segue into an arena that no one has tread but some have read (but not commented on).

I have tried to set down some of the natural history that I have observed as a practicing forester for the past 40 years in the other set of comments to this Chapter. I would like to know what if anything in those sets of comments are either unfounded or unclear. It is indeed difficult to make connections between something that can not be falsified and our money system. However there are some interesting parallels. One note that I find hard to explain is that foresters are frequently guilty of lying to themselves. For instance, they expect something that they do (in and to or with the forest) to result in some future condition that never materializes. There are many reasons for this to happen and to some extent they connect with the situation we find with the currency markets today.

  1. foresters are not trained well in many aspects of their craft - we put them out with no more than 6 years training and more frequently with only a BS and because of escalating costs of liability insurance they frequently have not had any field work where they could compare their expectation of value against the actual value of the products able to be derived from the trees they grew.
  2. foresters come from a variety of interest or prejudicial venues - industrial foresters work with the current value of trees, consulting foresters are landowner agents, public foresters are officers of the State.
  3. trees and forest land are mark to market assets or L3 type assets of limited liquidity. When one tries to suggest things to do in a forest to bring about a desired future condition, one is using curent money to produce value very far in the future - the values are unknowable and subject to considerable debate.
  4. the mechanisms that control the accumulation of useable product on or in a tree are not easily discussed anywhere in the community of landowners, foresters, loggers, industry owners, and financial / legal entities that control the flow of funds to this important section of our ecology.
  5. the time frames are so long that the current compounding culture has difficulty remaining engaged with the reality of the need to be sustainable. This fact has led to very unfortunate circumstances many of which are above. So it is a circular problem.
  6. land has an appreciation rate of its own and has been sufficient to spawn a group of asset trading companies with planning horizons well below the minimum needed for effective forest management and the rate of appreaction has been high enough to allow these shady practitioners to keep trees on the ground but squander the potential of their assets if they were well cared for.
  7. society has lost the ability to trade effort within a community by law - labor law and the IRS to mention a few.

So I am in sympathy with the asset managers who find themselves truly trying to be engaged making a living and helping others with liquidity for something we each could want and then finding that the market for the fruits of their efforts comes and goes. Forests are such an asset. On the other hand I have a mechanic who works part time for me who did closings throughout SNEW England and frequently was astonished by the levels of debt that the buyers were willing to assume. He was coached that the deals were necessary and none of his business - he should just close the sale. So we know in this region that there was enough blame to go around on both sides of the isle.

 

More optimistically, if we can control greed ??? there are some real beneficial tools available within the natural tool kit that can keep people busy close to home using some information that comes from both new sources and old sources. These comments should link to Chris's claim to the quality of life rather than the quantity of assets:

  1. One combination of these knowledge bases is the recent development of carbon-negative energy systems (CNE).  CNE is described at some length in other places - Pickens Plan for one (that T.B.Pickens has not yet endorsed unfortunately - we are working on that but could use some help).
  2. Another combines CNE with new understanding of tree physiology and the fact that the rural infrastructure of the USA was systematically destroyed by financial and business interests after WWII.  This leads to the tragic loss of community mentioned in 7 above.
  3. A third is an observation that there are many common knowledge issues that have remained outside the VC/IP/Academic study arena because they can not be enclosed in a patent application that will yield value to a small group of people but will routinely yield regular benefits to a widely disbursed population engaged in a sustainable activity.
  4. And fourth, our concentration of investment in military research has led to this global energy intensive culture at the expense of the sustainability. I have written elsewhere about the existence of "turning points" and the fact that "defense" has become the ability to throw energy packets at someone else before they throw them at you.

 

It is possible that we are at another "Truning Point" and that we must not miss the opportunity to do the right thing. We must understand sustainability and modify our signals to the next generation so that they can accept the facts that they must care for their own abilities to be sustainability in ways that we have not done for ourselves. Alan

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