Sunday, February 01, 2009
Lightering our way to abundance
Lightering is the process of transferring oil cargo between vessels of largely different sizes and is undertaken as many port facilities cannot accept ocean-faring tankers of the size of oil transports.
--Wikipedia
An old Wall Street shibboleth says that nobody rings a bell at the top. To prove the point, even as oil and other commodities were making blistering new highs on a daily basis last year, few people saw the carnage that was to come in those markets as the year progressed.
But the same cannot always be said at the bottom of a market. Quite often, there are many bells ringing. It's just that by the time a bottom arrives investors are usually too exhausted, too nervous or too broke even to care. And, it's true that the price of any commodity or stock can trace out a bottom for a very long time, longer than most people have patience, especially if they've already been burned in a crash. And so, the bells can go on ringing for years until they just seem like background noise.
Still, I am willing to take a stab at what may turn out to be a fool's errand and suggest that crude oil prices have bottomed out. My signal? The image of oil supertankers cruising aimlessly for weeks near many of the world's ports waiting for someone to purchase their cargoes. And, when someone finally does, the supertanker is obliged to lighter oil onto another smaller ship because the buyer only wants a portion of what's in the hold. When all the supertankers are full, the next step will simply be to spill oil on the ground at the point of extraction. But since this is an unlikely outcome, I suspect that oil producers will scale back production because they have to. The transit system and the storage system are now overflowing.
Of course, demand for oil could drop even further if the world economy continues to shrink. But at some point there will be a bedrock level below which oil consumption cannot fall or the lights will go out on civilization itself.
There is, in fact, one other promising sign of a bottom, and that's the move by oil companies and Wall Street firms to secure tankers in which to store oil in order to play the contango in the oil market. By leasing a tanker and filling it with oil purchased at the current low price while simultaneously selling it on the futures market for delivery later this year at a significantly higher price, they can generate considerable profit--enough to pay for the costs of storage on the high seas and take home handsome paychecks to boot.
The smart money is saying that oil won't remain this cheap much longer or that the prices on long-dated futures contracts will collapse. Either way the oil companies and investment bankers make money. But, even though the bottom may be in, it could take a long time for oil prices to move considerably higher.
What is disturbing about the entire tableau is the false impression it leaves that oil is an abundant resource. People are led to believe that if we can hardly find storage for all of the oil, it must be available to us in such quantities that we have few worries for the foreseeable future. But nothing could be further from the truth.
Oil is a commodity that unlike coal or copper is difficult and expensive to store. It's a flammable liquid capable of exceptional environment damage that must be carefully sequestered in special tanks with berms around them to prevent the spread of a leak or of a fire; or, it must be put in hugely expensive double-hulled tankers. Although it can be transported by truck as can coal and copper, it is most often transported by pipeline since this is quite a bit cheaper. The upshot is that you can't store oil just anywhere, and the storage space that is available is quite limited compared to its production. U. S. inventories last week stood at just 23.6 days of supply. And, this is at a time when storage facilities are chock full of the stuff.
Our existing oil infrastructure is pulling petroleum out of the ground at a rate that is currently faster than we can use it. This makes for a temporary glut and in no way mitigates the long-term problems we face with declining petroleum supplies. But we are now treating oil, not as the world's key commodity, a commodity upon which our very way of life depends, but as a plaything for investors to game for temporary profits. It's all part of the mentality that resources are interchangeable, that all of them can be replaced with enough ingenuity and investment whenever we need to without disruption to our lives, and that we have no cause to worry about the colossal waste of finite oil resources that is being fostered by low oil prices.
In the face of the worst economic downturn since the 1930s, the current focus of policymakers is understandably to restart world economic growth. And, many experts have pointed out that low oil prices and low energy prices in general are a plus for this purpose. They give energy consumers the equivalent of a huge tax cut.
But as those in the oil industry already know, low prices will lead to a reduction of new supply in the future, a reduction that could cripple any attempts to restart economic growth. And, failure to provide adequate supplies of the world's most essential fuel will not only stifle growth, but also impede attempts to create the renewable energy economy that we will need as oil supplies decline due to geologic constraints. We need the energy from fossil fuels and especially from oil to help make the next energy transition. That calls for a massive change of direction for energy investment that simply cannot take place in an environment of low energy prices.
The implication is that we now need to put a floor under fossil fuel prices so as not to discourage the development of alternatives. That means new taxes, but ones that could be offset with reductions elsewhere. We need to discourage what we don't want, namely, wasteful use of fossil fuels, and thereby encourage what we do want, namely, carbon-free energy technology.
And, although you couldn't tell it by this week's reports from the high seas, there is no way we are going to lighter our way to abundance.
Tuesday, January 27, 2009
Over the cliff for natural gas in North America?
My latest column on Scitizen entitled "Over the cliff for natural gas in North America?" has now been posted. Here is the teaser:
Is natural gas production in North America headed for a cliff? No one can know for sure; but all signs point down......Read more
Sunday, January 25, 2009
Peak oil investment verities
Like many other verities in the investment world, peak oil investment verities have turned out to be anything but. Investment newsletter writer and author Jim Grant likes to say that knowledge in the sciences is cumulative, but knowledge in finance is cyclical.
And, so it has been with the general run of so-called peak oil investment strategies. Their heavy reliance on energy-linked investments made them a boon to all who followed them at first. But in the last six months such investments have suffered catastrophic reversals. The underlying cause, of course, was a devastating and unprecedented swoon in prices for oil, natural gas, and coal. Even uranium prices came down sharply, but this occurred somewhat earlier. Not surprisingly, the share prices of alternative energy companies, which rely on high prices for conventional fuels in order to remain competitive, followed the price of these fuels down sharply as well.
Even a stalwart of some peak oil portfolios, gold, managed to decline in the face of an obvious crackup in the world financial system. Everything seemed to be going down at once. The cause, in part, was that those who borrowed huge sums to gamble in the markets (mostly hedge funds and investment banks) had to sell at any price to pay back their loans before their investment portfolios completely vaporized. Selling begat more selling begat more selling. And with the selling, confidence in the financial system ebbed. The fundamental cause, however, was a swiftly declining economy, finally toppling under the burden of massive debt that individuals, companies and governments are increasingly unable to pay back.
This is not to say that some individuals who take peak oil seriously have not done well with their investments. But their strategies had to have been different from simply holding energy-related investments for the long run. The expectation for many peak oil investors had been that energy prices would rise more or less continuously due to increasing demand and constrained supply. That has not worked out as planned. Lately, economic contraction has led to declining demand which has had more influence on energy prices than any perceived constraint on production. But, of course, this doesn't mean that energy-laden investment portfolios might not prosper from this point on; no one can know for sure.
While the basic thesis of peak oil (and peak natural gas, coal and uranium for that matter) remains intact, its timing and exact effects continue to be elusive. Peak oil can still rightly qualify as a so-called "black swan event." The term, introduced to the public by former hedge fund manager and author Nassim Nicholas Taleb in his book "The Black Swan," denotes an unexpected and rare event of high impact which few people anticipate. It is precisely because few people anticipate it that is has high impact, and peak oil, though it is a better known concept today, remains poorly understood or unknown to the great majority of people on the planet.
The myriad factors that are leading us toward peak oil are not visible to any one observer. We can calculate, we can hypothesize, and we can prognosticate; but we cannot know for certain the date of its arrival or its ultimate effects on society and the markets. There will always be a gap between what we think we know and what we actually know.
The action in the investment markets ought to be a lesson for all those trying to envision what will happen in any complex system, especially one as complex as human society. Our powers of prediction are weak. We need to keep an open mind and observe carefully.
This doesn't mean we shouldn't try to plan or prepare or even invest. Humans are planning animals. But what they are really good at is improvisation. That's why careful attention to what is right before us rather than what we imagine for the future is of critical importance. The kick in the pants that all those who followed the peak oil investment paradigm received last year (including me to a minor degree) is a reminder that we ought not to allow our fantasies of the future to dominate our every action in the here and now.
And, so it has been with the general run of so-called peak oil investment strategies. Their heavy reliance on energy-linked investments made them a boon to all who followed them at first. But in the last six months such investments have suffered catastrophic reversals. The underlying cause, of course, was a devastating and unprecedented swoon in prices for oil, natural gas, and coal. Even uranium prices came down sharply, but this occurred somewhat earlier. Not surprisingly, the share prices of alternative energy companies, which rely on high prices for conventional fuels in order to remain competitive, followed the price of these fuels down sharply as well.
Even a stalwart of some peak oil portfolios, gold, managed to decline in the face of an obvious crackup in the world financial system. Everything seemed to be going down at once. The cause, in part, was that those who borrowed huge sums to gamble in the markets (mostly hedge funds and investment banks) had to sell at any price to pay back their loans before their investment portfolios completely vaporized. Selling begat more selling begat more selling. And with the selling, confidence in the financial system ebbed. The fundamental cause, however, was a swiftly declining economy, finally toppling under the burden of massive debt that individuals, companies and governments are increasingly unable to pay back.
This is not to say that some individuals who take peak oil seriously have not done well with their investments. But their strategies had to have been different from simply holding energy-related investments for the long run. The expectation for many peak oil investors had been that energy prices would rise more or less continuously due to increasing demand and constrained supply. That has not worked out as planned. Lately, economic contraction has led to declining demand which has had more influence on energy prices than any perceived constraint on production. But, of course, this doesn't mean that energy-laden investment portfolios might not prosper from this point on; no one can know for sure.
While the basic thesis of peak oil (and peak natural gas, coal and uranium for that matter) remains intact, its timing and exact effects continue to be elusive. Peak oil can still rightly qualify as a so-called "black swan event." The term, introduced to the public by former hedge fund manager and author Nassim Nicholas Taleb in his book "The Black Swan," denotes an unexpected and rare event of high impact which few people anticipate. It is precisely because few people anticipate it that is has high impact, and peak oil, though it is a better known concept today, remains poorly understood or unknown to the great majority of people on the planet.
The myriad factors that are leading us toward peak oil are not visible to any one observer. We can calculate, we can hypothesize, and we can prognosticate; but we cannot know for certain the date of its arrival or its ultimate effects on society and the markets. There will always be a gap between what we think we know and what we actually know.
The action in the investment markets ought to be a lesson for all those trying to envision what will happen in any complex system, especially one as complex as human society. Our powers of prediction are weak. We need to keep an open mind and observe carefully.
This doesn't mean we shouldn't try to plan or prepare or even invest. Humans are planning animals. But what they are really good at is improvisation. That's why careful attention to what is right before us rather than what we imagine for the future is of critical importance. The kick in the pants that all those who followed the peak oil investment paradigm received last year (including me to a minor degree) is a reminder that we ought not to allow our fantasies of the future to dominate our every action in the here and now.
Sunday, January 18, 2009
The price illusion
The Institute for Energy Research (IER) emailed me last week to warn me about the Obama administration's "green jobs" plan. The press release said that the plan would increase energy prices and actually cause total employment to decline. Furthermore, the release stated, renewable energy production has "stagnated" for the past 15 years, contradicting claims of vigorous growth.
The organization's assertions rely on a series of omissions. The first one the IER admits. It leaves out wind generation to claim that renewable energy growth has stagnated. Second, whether a massive government-led green energy program would lead to employment declines depends entirely on the assertion that money will be siphoned away from the nonrenewable energy sector of the economy. That now seems unlikely given the huge slack in the world economy and given that the plan is expected to be largely financed through deficit spending. But perhaps the most egregious omission is the failure to understand what market prices don't include in their signals to the economy and society.
For the IER, which dedicates itself to "free-market energy and environmental policy" and "private property rights," the struggling fossil fuel industry has succeeded entirely through ingenuity and pluck. The "scholars" (as they are called) at the IER seem to know nothing of the free work nature has conducted over the past few hundred million years in creating those fuels. Thus, the fossil fuel industry produces exactly nothing, but rather extracts the bounty of nature's work and delivers it to society. This is not an inconsiderable labor. But it amounts to privatizing the profits derived from the work of nature, while socializing the costs of using fossil fuels through such effects as global warming and toxic spills. (Here I should say that I do not think that this is a problem peculiar to the fossil fuel industry, but rather endemic in modern capitalism. However, the excuse that "everyone is doing it" should not shield the industry from reprobation.)
The price of fossil fuels (and especially recent prices) reflect virtually none of this reality; so perhaps the reason the people at the IER call themselves scholars is that their obsession with price renders them devoid of any practical understanding of the facts and frees them to focus on entirely theoretical matters just like the scholastic philosophers of old.
However, to focus entirely on the price of various fuels without contemplating their long-term sustainability, their environmental side effects, and their effects on the political and economic structure of world society is the equivalent of killing all but your favorite child so you can direct all your attention to him or her.
Still, even if we focus just on price, one would barely know by reading the IER's report on the green jobs proposal that oil had recently swung from under $50 a barrel at the beginning of 2007 to almost $150 last July to under $40 today. Similar price swings have taken place in the natural gas and coal markets. Such volatility is usually a sign of a system in distress. And, such instability makes it difficult for governments, businesses and consumers to create long-term plans.
Moreover, the ultra-low fossil fuel prices of today are a product not of exploration success, but rather economic implosion which is killing energy demand at a colossal pace. These prices are not a sign of plenty, but the result in part of the huge stress of high energy prices on the world economy in the last few years--stress that ultimately helped to tip a fragile economy into the first debt deflation since The Great Depression.
And so, the prices we are seeing for fossil fuels are creating an illusion of plenty that masks the central issue of our time: How do we move from our nonrenewable energy economy to a renewable one and do it quickly enough to avoid a catastrophic and rapid decline in the total energy available to human society?
Why is a rapid decline possible? Because prices for finite resources almost always reflect the here and now rather than long-term supply prospects. Even though fossil fuels are finite, and we are much closer to the end of the fossil fuel age than we are to the beginning of it, fossil fuel prices reflect not their growing scarcity but their temporary oversupply. This an illusion of the first order, and one filled with perils of the most extreme kind.
The organization's assertions rely on a series of omissions. The first one the IER admits. It leaves out wind generation to claim that renewable energy growth has stagnated. Second, whether a massive government-led green energy program would lead to employment declines depends entirely on the assertion that money will be siphoned away from the nonrenewable energy sector of the economy. That now seems unlikely given the huge slack in the world economy and given that the plan is expected to be largely financed through deficit spending. But perhaps the most egregious omission is the failure to understand what market prices don't include in their signals to the economy and society.
For the IER, which dedicates itself to "free-market energy and environmental policy" and "private property rights," the struggling fossil fuel industry has succeeded entirely through ingenuity and pluck. The "scholars" (as they are called) at the IER seem to know nothing of the free work nature has conducted over the past few hundred million years in creating those fuels. Thus, the fossil fuel industry produces exactly nothing, but rather extracts the bounty of nature's work and delivers it to society. This is not an inconsiderable labor. But it amounts to privatizing the profits derived from the work of nature, while socializing the costs of using fossil fuels through such effects as global warming and toxic spills. (Here I should say that I do not think that this is a problem peculiar to the fossil fuel industry, but rather endemic in modern capitalism. However, the excuse that "everyone is doing it" should not shield the industry from reprobation.)
The price of fossil fuels (and especially recent prices) reflect virtually none of this reality; so perhaps the reason the people at the IER call themselves scholars is that their obsession with price renders them devoid of any practical understanding of the facts and frees them to focus on entirely theoretical matters just like the scholastic philosophers of old.
However, to focus entirely on the price of various fuels without contemplating their long-term sustainability, their environmental side effects, and their effects on the political and economic structure of world society is the equivalent of killing all but your favorite child so you can direct all your attention to him or her.
Still, even if we focus just on price, one would barely know by reading the IER's report on the green jobs proposal that oil had recently swung from under $50 a barrel at the beginning of 2007 to almost $150 last July to under $40 today. Similar price swings have taken place in the natural gas and coal markets. Such volatility is usually a sign of a system in distress. And, such instability makes it difficult for governments, businesses and consumers to create long-term plans.
Moreover, the ultra-low fossil fuel prices of today are a product not of exploration success, but rather economic implosion which is killing energy demand at a colossal pace. These prices are not a sign of plenty, but the result in part of the huge stress of high energy prices on the world economy in the last few years--stress that ultimately helped to tip a fragile economy into the first debt deflation since The Great Depression.
And so, the prices we are seeing for fossil fuels are creating an illusion of plenty that masks the central issue of our time: How do we move from our nonrenewable energy economy to a renewable one and do it quickly enough to avoid a catastrophic and rapid decline in the total energy available to human society?
Why is a rapid decline possible? Because prices for finite resources almost always reflect the here and now rather than long-term supply prospects. Even though fossil fuels are finite, and we are much closer to the end of the fossil fuel age than we are to the beginning of it, fossil fuel prices reflect not their growing scarcity but their temporary oversupply. This an illusion of the first order, and one filled with perils of the most extreme kind.
Sunday, January 11, 2009
Will energy show us that inflation and deflation can occur at the same time?
At the beginning of this decade investment advisor Marc Faber told incredulous investors that rising economic prosperity in Asia signalled the beginning of a new bull market in commodities, but would also have deflationary consequences for consumer prices. How could these inflationary and deflationary effects coincide? The answer has important implications for what is currently unfolding in the financial and commodity markets, and, in particular, the energy markets.
Before explaining why Faber believed such seemingly contradictory ideas, let's dispense with the technical monetary definitions of inflation and deflation. In their narrowest sense, inflation means an expanding money supply, and deflation means a contracting money supply. But whether the money supply is expanding or contracting, these definitions say nothing about where exactly that money goes. It is this question that concerned Faber, and it is in this context that he uses the words "inflation" and "deflation."
Most broadly, Faber wants to know whether money is chasing consumer goods and raw materials and thus pushing up what we normally call inflation as measured by the Consumer Price Index or whether it is chasing assets such as homes, equities, bonds, and even art. Policymakers and the general public normally favor the latter kind of inflation over the former. People feel richer as the value of their homes and stock portfolios rise and the cost of consumer goods remains stable or declines. More specifically, Faber wants to know which sectors of the economy are inflating, that is, receiving abnormal flows of money, and which are deflating, that is, experiencing a decline in money flows; to put it more simply, where are relative prices rising and where are they falling?
We should also mention the case in which the public and especially the investor class are clamoring for short-term government debt, bank deposits and money market accounts in an effort to shield their savings from losses. This occurs when we are either experiencing a transient panic or a generalized deflation in which money becomes more valuable as its supply contracts. That, of course, is what many believe is occurring now. There are many fans of asset inflation and even a few fans of raw material inflation--mining companies and farmers come to mind--but there are almost no fans of the generalized deflation we see today where the price of practically everything falls.
The fact that there is almost no political or economic constituency for generalized deflation is reflected in government and monetary policy around the world. Both types of policy have become highly expansive, and both are meant to get lending and economic activity growing again. Whether such policies will succeed at their aims or whether they are wise in their current form is a topic for another time. But it will be useful in the coming months to notice to which sectors of the economy money flows as the deflationary forces of the credit collapse and the inflationary forces of government fiscal and monetary policy collide.
To help us understand how Faber thinks, let's return to his observation at the beginning of this decade about the future course of the world economy, an observation that turned out to be roughly correct. At the time Faber reasoned that as manufacturing vastly expanded in Asia and global trade ferried the cheap goods produced there throughout the world, consumer prices would remain stable or decline. Simultaneously, a bull market in raw materials would emerge as the supply of materials to feed those factories would lag behind demand after two decades of underinvestment in mining, energy, and agriculture. Thus, there would come to be a disconnect between the prices of consumer goods and the prices of the raw materials used to make them. In Faber's terminology, one sector would be deflating and the other inflating.
The simple lesson from this is that money chases scarcity. That's why some sectors of the economy can inflate while others deflate at the same time. The economy never uniformly inflates or deflates. Even the current economic contraction will be no exception. First, what is scarce and in demand by definition becomes more valuable as people bid against one another to have what little there is of a scarce but necessary resource. Second, people tend to hoard what is difficult to get, especially if it is essential to their livelihoods or their peace of mind, and this further increases its scarcity in the marketplace. Third, speculators noticing the trend plow money into the sector of the economy where prices are rising through such investments as stocks, bonds, commodities, real estate and derivative securities linked to these. This further pushes up the price. As Faber would say, the chosen sector is "inflating."
Now, what can be scarce or perceived as such is virtually anything: food, metals, equities (believe it or not), and even financial peace of mind. To obtain financial peace of mind investors most recently sold stocks, commodities and corporate bonds and bought government bonds. Faber would say that the government bond market is "inflating" though clearly we are moving through a period marked by generalized deflation.
What this means for the coming year is that all of the money currently being willed into existence by the central banks of the world in an effort to stimulate the world economy will be going somewhere.* Since scarcity is the key to determining where those who have access to that money might put it, it is worth considering what might be perceived as scarce. (Disclaimer: The following shouldn't be construed as investment advice. Use it as such at your own risk. My task lies elsewhere.)
Certainly, paper promises in the form of stocks and corporate and mortgaged-backed bonds don't seem scarce. The thrill of paper gains that made them seem so has vanished. And, the crooked dealings of so many corporate executives has made owning individual stocks look far more risky than it seemed in the past. With monumental issuance of government debt throughout the world on the horizon, it is hard to see how government bonds will continue to be regarded as scarce much longer even though they may offer peace of mind to their owners for now. And, the various paper derivatives of all these investments could probably supply the world with wallpaper for a thousand years if turned into actual certificates. Hardly scarce!
What may turn out to be truly scarce is energy. There is no Wall Street paper mill that can turn it out as it does various securities. It can only be obtained through skilled, energy-intensive and highly complex processes. Right now the precipitous drop in world demand for energy has pummelled energy prices. What is not so obvious is that low prices and contracting credit are leading to low investment in the oil and gas fields, in the coal fields and in alternative energy technologies and deployment.
Even while many factories may now stand idle, the oil pumps, the natural gas pipelines, and the coal trains are still working relentlessly around the clock to bring us the energy resources we need and are therefore depleting the existing reserves in the ground. Without enormous and continuous investment, the energy industry cannot hope to keep up with this scale of depletion. Already for the past three years, record high prices for oil failed to conjure any additional daily production capacity into existence. Oil production was just about flat for the entire period.
With the ultralow prices we are experiencing now, the necessary capital will simply not flow to the energy industry to replace the reserves we are depleting or invest in alternatives to replace finite fossil fuels which will all reach a peak some day (perhaps soon) and then decline. (Many say that world oil production peaked in July 2008 and may never rise to that level again because of a combination of geologic constraints and the drop in investment in new productive capacity.)
So, my candidate for a surprise comeback this year or next is energy, even if the economy as a whole deflates more or just limps along at this level. If it happens, policymakers and the public need to see it for what it is: a certain sign that we are close to the end of the fossil fuel era. Even with the very high energy prices of this decade, we have not been able to build up the large inventory of new fossil fuel discoveries that might have been expected. It is getting harder and harder to find, extract and refine the nonrenewable energy sources that the world economy relies on for 86 percent of its energy. When the ongoing decline in energy supply capacity unexpectedly crosses with energy demand, that fact will be made plain for all to see if they want to see it.
What is likely to happen, unfortunately, is that once demand rises to meet available capacity or capacity shrinks to meet demand, catapulting energy prices will choke off any economic recovery which will in turn cause energy prices to plummet all over again. The high volatility in the energy markets, cycling from deflation to inflation and back to deflation again will make it exceedingly difficult for the energy industry to invest aggressively in finding new supplies. That is a problem that cannot be solved by central bank money printing or government spending, but which requires serious changes in policy and society, something that now seems sadly delayed though it is arguably more important in the long run than the economic emergency which we currently face.
_______________________________________________________
*For those who say that it is possible that more money will disappear from the world economy through debt defaults than will be created by central banks, this will still not prevent some sectors of the economy from inflating though they may be fewer and inflate less as a group.
Before explaining why Faber believed such seemingly contradictory ideas, let's dispense with the technical monetary definitions of inflation and deflation. In their narrowest sense, inflation means an expanding money supply, and deflation means a contracting money supply. But whether the money supply is expanding or contracting, these definitions say nothing about where exactly that money goes. It is this question that concerned Faber, and it is in this context that he uses the words "inflation" and "deflation."
Most broadly, Faber wants to know whether money is chasing consumer goods and raw materials and thus pushing up what we normally call inflation as measured by the Consumer Price Index or whether it is chasing assets such as homes, equities, bonds, and even art. Policymakers and the general public normally favor the latter kind of inflation over the former. People feel richer as the value of their homes and stock portfolios rise and the cost of consumer goods remains stable or declines. More specifically, Faber wants to know which sectors of the economy are inflating, that is, receiving abnormal flows of money, and which are deflating, that is, experiencing a decline in money flows; to put it more simply, where are relative prices rising and where are they falling?
We should also mention the case in which the public and especially the investor class are clamoring for short-term government debt, bank deposits and money market accounts in an effort to shield their savings from losses. This occurs when we are either experiencing a transient panic or a generalized deflation in which money becomes more valuable as its supply contracts. That, of course, is what many believe is occurring now. There are many fans of asset inflation and even a few fans of raw material inflation--mining companies and farmers come to mind--but there are almost no fans of the generalized deflation we see today where the price of practically everything falls.
The fact that there is almost no political or economic constituency for generalized deflation is reflected in government and monetary policy around the world. Both types of policy have become highly expansive, and both are meant to get lending and economic activity growing again. Whether such policies will succeed at their aims or whether they are wise in their current form is a topic for another time. But it will be useful in the coming months to notice to which sectors of the economy money flows as the deflationary forces of the credit collapse and the inflationary forces of government fiscal and monetary policy collide.
To help us understand how Faber thinks, let's return to his observation at the beginning of this decade about the future course of the world economy, an observation that turned out to be roughly correct. At the time Faber reasoned that as manufacturing vastly expanded in Asia and global trade ferried the cheap goods produced there throughout the world, consumer prices would remain stable or decline. Simultaneously, a bull market in raw materials would emerge as the supply of materials to feed those factories would lag behind demand after two decades of underinvestment in mining, energy, and agriculture. Thus, there would come to be a disconnect between the prices of consumer goods and the prices of the raw materials used to make them. In Faber's terminology, one sector would be deflating and the other inflating.
The simple lesson from this is that money chases scarcity. That's why some sectors of the economy can inflate while others deflate at the same time. The economy never uniformly inflates or deflates. Even the current economic contraction will be no exception. First, what is scarce and in demand by definition becomes more valuable as people bid against one another to have what little there is of a scarce but necessary resource. Second, people tend to hoard what is difficult to get, especially if it is essential to their livelihoods or their peace of mind, and this further increases its scarcity in the marketplace. Third, speculators noticing the trend plow money into the sector of the economy where prices are rising through such investments as stocks, bonds, commodities, real estate and derivative securities linked to these. This further pushes up the price. As Faber would say, the chosen sector is "inflating."
Now, what can be scarce or perceived as such is virtually anything: food, metals, equities (believe it or not), and even financial peace of mind. To obtain financial peace of mind investors most recently sold stocks, commodities and corporate bonds and bought government bonds. Faber would say that the government bond market is "inflating" though clearly we are moving through a period marked by generalized deflation.
What this means for the coming year is that all of the money currently being willed into existence by the central banks of the world in an effort to stimulate the world economy will be going somewhere.* Since scarcity is the key to determining where those who have access to that money might put it, it is worth considering what might be perceived as scarce. (Disclaimer: The following shouldn't be construed as investment advice. Use it as such at your own risk. My task lies elsewhere.)
Certainly, paper promises in the form of stocks and corporate and mortgaged-backed bonds don't seem scarce. The thrill of paper gains that made them seem so has vanished. And, the crooked dealings of so many corporate executives has made owning individual stocks look far more risky than it seemed in the past. With monumental issuance of government debt throughout the world on the horizon, it is hard to see how government bonds will continue to be regarded as scarce much longer even though they may offer peace of mind to their owners for now. And, the various paper derivatives of all these investments could probably supply the world with wallpaper for a thousand years if turned into actual certificates. Hardly scarce!
What may turn out to be truly scarce is energy. There is no Wall Street paper mill that can turn it out as it does various securities. It can only be obtained through skilled, energy-intensive and highly complex processes. Right now the precipitous drop in world demand for energy has pummelled energy prices. What is not so obvious is that low prices and contracting credit are leading to low investment in the oil and gas fields, in the coal fields and in alternative energy technologies and deployment.
Even while many factories may now stand idle, the oil pumps, the natural gas pipelines, and the coal trains are still working relentlessly around the clock to bring us the energy resources we need and are therefore depleting the existing reserves in the ground. Without enormous and continuous investment, the energy industry cannot hope to keep up with this scale of depletion. Already for the past three years, record high prices for oil failed to conjure any additional daily production capacity into existence. Oil production was just about flat for the entire period.
With the ultralow prices we are experiencing now, the necessary capital will simply not flow to the energy industry to replace the reserves we are depleting or invest in alternatives to replace finite fossil fuels which will all reach a peak some day (perhaps soon) and then decline. (Many say that world oil production peaked in July 2008 and may never rise to that level again because of a combination of geologic constraints and the drop in investment in new productive capacity.)
So, my candidate for a surprise comeback this year or next is energy, even if the economy as a whole deflates more or just limps along at this level. If it happens, policymakers and the public need to see it for what it is: a certain sign that we are close to the end of the fossil fuel era. Even with the very high energy prices of this decade, we have not been able to build up the large inventory of new fossil fuel discoveries that might have been expected. It is getting harder and harder to find, extract and refine the nonrenewable energy sources that the world economy relies on for 86 percent of its energy. When the ongoing decline in energy supply capacity unexpectedly crosses with energy demand, that fact will be made plain for all to see if they want to see it.
What is likely to happen, unfortunately, is that once demand rises to meet available capacity or capacity shrinks to meet demand, catapulting energy prices will choke off any economic recovery which will in turn cause energy prices to plummet all over again. The high volatility in the energy markets, cycling from deflation to inflation and back to deflation again will make it exceedingly difficult for the energy industry to invest aggressively in finding new supplies. That is a problem that cannot be solved by central bank money printing or government spending, but which requires serious changes in policy and society, something that now seems sadly delayed though it is arguably more important in the long run than the economic emergency which we currently face.
_______________________________________________________
*For those who say that it is possible that more money will disappear from the world economy through debt defaults than will be created by central banks, this will still not prevent some sectors of the economy from inflating though they may be fewer and inflate less as a group.
Sunday, January 04, 2009
No second chance
It is the mission of nearly every mainstream economist to overcome the pessimism of those who study the natural world and who don't see how the human endeavor can continue on its current course of endless exponential economic growth. "Now, now," these economists will say to the natural scientists, "you are being alarmist just like many before you. Let the marketplace work its wonders and let economic prosperity come to all parts of the world and this will enable us with our newfound wealth to address the many environmental problems we need to face."
Such arguments seem like mere nonsense to any scientist who believes that endless economic growth is the cause of those problems. But the difference between these two camps may be less than it appears. Enlightened economists do acknowledge the need to treat the environment which sustains us with more care. The main issue appears to be timetables.
Most economists believe that we are not in any imminent danger of societal collapse. We have plenty of resources and the big problem of global warming can be solved by taxing or otherwise restricting the use of carbon-based fuels. New technologies will give us what we need, in time and affordably. It has always been thus. (Except when it hasn't. But one would have to know the history of civilizations that did succumb to resource degradation and scarcity, and most economists are very much concerned with the utterly now.)
To the scientist who worries about sustainability and perhaps more urgently about the availability of enough energy, particularly oil, to run our society, this leisurely attitude seems quite dangerous. Partly, this is because the cheap fossil fuel energy we now enjoy will be needed to build the next energy economy. If we as a global society wait until the last minute to begin building that new energy economy, we may not have enough fossil fuels to do it. Those fuels may decline faster than we can replace the energy we currently get from them. This is often referred to as the rate-of-conversion problem.
Let us see how these different timetables might affect world society.
For the economist failure to grow would condemn billions to poverty, disease and ignorance. (Never mind that billions are condemned to that under the current system; but this is only because, as the economist will tell us, we haven't gone far enough with the spread of global capitalism.) If enough of the poor become middle class, their societies will undergo what is called the demographic transition. Birth rates will fall and so will death rates, and the population will level out or at least grow much more slowly. (Never mind that the true impact on the biosphere comes from per capita consumption and pollution times population, not population alone. Greatly increasing per capita consumption while slowing or ending population growth will not necessarily solve any environmental problems.)
But the path offered by my hypothetical economist is one without recourse. Once we commit to it, there is no going back. If the economist turns out to be wrong about the availability of resources or about the severity and pace of climate change, then global society could very likely face a fatal blow from which it cannot recover. There may be no second chance.
Let's look at an alternate path. If instead global society works very hard in the short term to curtail resource use and economize on energy use in an effort to reduce the throughput of physical resources radically, we may be able to build a highly efficient global economy that gives us many of the same services we have now. (Remember, it is not goods per se that we want, but the services they provide. We may want a car, but we want it because it is a convenient form of transportation. We seek the service of transportation.)
If we as a global society choose this path, and then it turns out that the pessimists in the scientific community are wrong about the severity of climate change and the availability of resources--that is, climate change turns out to be a minor problem and resource availability is much greater than anticipated by the pessimists--if this is the case, then we could choose to resume economic growth and use more resources to support it. In short, we would have a second chance to achieve the growth which the enlightened economist deems as necessary for the salvation of the poor. But we would do it within the context of a highly efficient, low-polluting system that tries to achieve all desired goals with minimal resource usage.
It is the asymmetry of risk in these trajectories that ought to give growth-oriented economists pause. Perhaps the economists will say that the risks simply aren't there. But then the record of most economists in predicting anything, even the direction of markets and market economies about which they presume to have specialist knowledge, has been nothing sort of dismal. Furthermore, the economists can give us no warranty for our society if it collapses under the weight of resource depletion and climate change. Wouldn't the more prudent path be to ensure that we don't have to face that possibility? Is the imperative for growth so great that we should risk the annihilation of our society in order to achieve it?
Such arguments seem like mere nonsense to any scientist who believes that endless economic growth is the cause of those problems. But the difference between these two camps may be less than it appears. Enlightened economists do acknowledge the need to treat the environment which sustains us with more care. The main issue appears to be timetables.
Most economists believe that we are not in any imminent danger of societal collapse. We have plenty of resources and the big problem of global warming can be solved by taxing or otherwise restricting the use of carbon-based fuels. New technologies will give us what we need, in time and affordably. It has always been thus. (Except when it hasn't. But one would have to know the history of civilizations that did succumb to resource degradation and scarcity, and most economists are very much concerned with the utterly now.)
To the scientist who worries about sustainability and perhaps more urgently about the availability of enough energy, particularly oil, to run our society, this leisurely attitude seems quite dangerous. Partly, this is because the cheap fossil fuel energy we now enjoy will be needed to build the next energy economy. If we as a global society wait until the last minute to begin building that new energy economy, we may not have enough fossil fuels to do it. Those fuels may decline faster than we can replace the energy we currently get from them. This is often referred to as the rate-of-conversion problem.
Let us see how these different timetables might affect world society.
For the economist failure to grow would condemn billions to poverty, disease and ignorance. (Never mind that billions are condemned to that under the current system; but this is only because, as the economist will tell us, we haven't gone far enough with the spread of global capitalism.) If enough of the poor become middle class, their societies will undergo what is called the demographic transition. Birth rates will fall and so will death rates, and the population will level out or at least grow much more slowly. (Never mind that the true impact on the biosphere comes from per capita consumption and pollution times population, not population alone. Greatly increasing per capita consumption while slowing or ending population growth will not necessarily solve any environmental problems.)
But the path offered by my hypothetical economist is one without recourse. Once we commit to it, there is no going back. If the economist turns out to be wrong about the availability of resources or about the severity and pace of climate change, then global society could very likely face a fatal blow from which it cannot recover. There may be no second chance.
Let's look at an alternate path. If instead global society works very hard in the short term to curtail resource use and economize on energy use in an effort to reduce the throughput of physical resources radically, we may be able to build a highly efficient global economy that gives us many of the same services we have now. (Remember, it is not goods per se that we want, but the services they provide. We may want a car, but we want it because it is a convenient form of transportation. We seek the service of transportation.)
If we as a global society choose this path, and then it turns out that the pessimists in the scientific community are wrong about the severity of climate change and the availability of resources--that is, climate change turns out to be a minor problem and resource availability is much greater than anticipated by the pessimists--if this is the case, then we could choose to resume economic growth and use more resources to support it. In short, we would have a second chance to achieve the growth which the enlightened economist deems as necessary for the salvation of the poor. But we would do it within the context of a highly efficient, low-polluting system that tries to achieve all desired goals with minimal resource usage.
It is the asymmetry of risk in these trajectories that ought to give growth-oriented economists pause. Perhaps the economists will say that the risks simply aren't there. But then the record of most economists in predicting anything, even the direction of markets and market economies about which they presume to have specialist knowledge, has been nothing sort of dismal. Furthermore, the economists can give us no warranty for our society if it collapses under the weight of resource depletion and climate change. Wouldn't the more prudent path be to ensure that we don't have to face that possibility? Is the imperative for growth so great that we should risk the annihilation of our society in order to achieve it?
Tuesday, December 23, 2008
Energy and money
My latest column on Scitizen entitled "Energy and money" has now been posted. Here is the teaser:
Is energy merely another commodity among many in the modern industrial economy? Or is it the very basis of our financial and material life?
.....Read more
Sunday, December 21, 2008
Holiday break
The post below is my last one of this year. I'm taking a brief holiday break and expect to post a regular piece again on Sunday, January 4th. In the meantime, my latest column on Scitizen will be appearing shortly, and I'll provide a link to it when it is posted.
Uncertainty
To live in an uncertain world is one thing. To know it is altogether something else. In the last 30 years policymakers and then investors came to believe that the ups and downs in the economy and the financial markets were simply bumps along the road to long-term prosperity. In fact, declines were increasingly thought to be simply opportunities to double down and ultimately make more money.
The certainty that we were living in stable times led some people to commit more and more of their wealth to investments rather than savings accounts. It led others to rack up huge amounts of debt believing that the good times could never end. The risk was not being in the market or not getting that house you really wanted. Likewise businesses found themselves in an environment of cheap finance. Why not lever up the company balance sheet and make even more money? Both consumers and businesses were abetted by banks and other lenders who used complex models to justify their wild expansion of lending. The models were said to be backtested and the risk properly hedged or offloaded onto investors. Investment ratings agencies seconded this thoughtless optimism with high ratings of questionable securities, ratings that in hindsight look like rampant grade inflation at a second-rate school trying to attract students. Numbers crunched on computers gave everyone a belief that profits were certain and that risk was negligible.
But, beware of those offering certainty. They probably have something to sell you, perhaps something you don't need and that may be dangerous to your health and prosperity. Former hedge fund manager and self-styled philosopher of uncertainty Nassim Nicholas Taleb has a rule of thumb: Don't trust any predictions from people who wear ties. He notes that bankers and financial economists almost universally wear ties to work. Those in the hard sciences such as physicists and chemists almost never do. Such scientists have a much better record of predicting the course of planets and the outcomes of chemical reactions than the bankers and economists do of predicting the trajectory of the economy or the markets.
But certainty sells, especially regarding those things about which we are most uncertain. The purveyors of research on the future would like to tell us (often but not always for a fee) that everything will be all right, especially if we let that purveyor (or his or her clients) make all the important personal and public policy decisions for us. (I probably should have put the word "research" in the previous sentence in ironic quotes since it is impossible to do research on the future.) Other purveyors might also tell us of dark days ahead for which they can sell us the certain and perfect defense. And, there is yet a third very small class of soothsayers who offer a message of gloom (without extracting a fee or at least a very large one) and without offering hope (at least that life will ever again be what passes for normal these days). I sometimes give this third class my attention since they tend to speak with less certitude, and they often pray that they are wrong.
A succession of developments has lifted the reputation of the few in this third class. The highest prices ever seen for oil were recorded in July this year. This was followed by the swiftest decline in the economy since the Great Depression. Nearly every market crashed making mincemeat of practically all investment advice even from those who ostensibly foresaw the crash and recommended investments that were supposed to go up in such a crash. Suddenly, those things which seemed so certain just 12 months ago are now quite shaky. What most people want to know is whether someone or something, perhaps the government, can restore certainty to our lives. But is that what we really need?
More than 50 years ago author and interpreter of Zen to the English-speaking world Alan Watts wrote a book entitled "The Wisdom of Insecurity." He made the case that feelings of certainty and security were just that, feelings. Our true and perpetual state as humans is that of uncertainty and insecurity. The world never stops changing and never stops unsettling our settled notions, at least if we pay careful attention to it.
And so, what's really necessary to feel certainty in one's life is to be oblivious to what is actually happening. For Watts a good life and a happy life, taken with all its sufferings, is one lived while paying attention. Recent events are forcing more of us to pay careful attention. But to pay attention is to feel more insecure and more uncertain. Still, instead of something to be avoided, insecurity is something to be embraced. It forces us to become more resourceful, to encounter the world as it is and to gain a measure of prudence that can serve us well when we are tempted to believe the optimistic hype of investment advisors, economists, politicians, or experts of any kind.
I find myself writing an odd sort of holiday message in this piece. When so many others are sending out words of comfort and joy and wishes for a happy new year, I am focused on getting in touch with life's inherent uncertainty and insecurity which in my view is the true cauldron of creativity in our lives. If you want to have a better year next year than you had this year, I offer no certain way to achieve it--only the insecurity and uncertainty that engender prudent and practical effort, which when we do it in concert with others can bring us the joy of working together on something worthwhile.
The certainty that we were living in stable times led some people to commit more and more of their wealth to investments rather than savings accounts. It led others to rack up huge amounts of debt believing that the good times could never end. The risk was not being in the market or not getting that house you really wanted. Likewise businesses found themselves in an environment of cheap finance. Why not lever up the company balance sheet and make even more money? Both consumers and businesses were abetted by banks and other lenders who used complex models to justify their wild expansion of lending. The models were said to be backtested and the risk properly hedged or offloaded onto investors. Investment ratings agencies seconded this thoughtless optimism with high ratings of questionable securities, ratings that in hindsight look like rampant grade inflation at a second-rate school trying to attract students. Numbers crunched on computers gave everyone a belief that profits were certain and that risk was negligible.
But, beware of those offering certainty. They probably have something to sell you, perhaps something you don't need and that may be dangerous to your health and prosperity. Former hedge fund manager and self-styled philosopher of uncertainty Nassim Nicholas Taleb has a rule of thumb: Don't trust any predictions from people who wear ties. He notes that bankers and financial economists almost universally wear ties to work. Those in the hard sciences such as physicists and chemists almost never do. Such scientists have a much better record of predicting the course of planets and the outcomes of chemical reactions than the bankers and economists do of predicting the trajectory of the economy or the markets.
But certainty sells, especially regarding those things about which we are most uncertain. The purveyors of research on the future would like to tell us (often but not always for a fee) that everything will be all right, especially if we let that purveyor (or his or her clients) make all the important personal and public policy decisions for us. (I probably should have put the word "research" in the previous sentence in ironic quotes since it is impossible to do research on the future.) Other purveyors might also tell us of dark days ahead for which they can sell us the certain and perfect defense. And, there is yet a third very small class of soothsayers who offer a message of gloom (without extracting a fee or at least a very large one) and without offering hope (at least that life will ever again be what passes for normal these days). I sometimes give this third class my attention since they tend to speak with less certitude, and they often pray that they are wrong.
A succession of developments has lifted the reputation of the few in this third class. The highest prices ever seen for oil were recorded in July this year. This was followed by the swiftest decline in the economy since the Great Depression. Nearly every market crashed making mincemeat of practically all investment advice even from those who ostensibly foresaw the crash and recommended investments that were supposed to go up in such a crash. Suddenly, those things which seemed so certain just 12 months ago are now quite shaky. What most people want to know is whether someone or something, perhaps the government, can restore certainty to our lives. But is that what we really need?
More than 50 years ago author and interpreter of Zen to the English-speaking world Alan Watts wrote a book entitled "The Wisdom of Insecurity." He made the case that feelings of certainty and security were just that, feelings. Our true and perpetual state as humans is that of uncertainty and insecurity. The world never stops changing and never stops unsettling our settled notions, at least if we pay careful attention to it.
And so, what's really necessary to feel certainty in one's life is to be oblivious to what is actually happening. For Watts a good life and a happy life, taken with all its sufferings, is one lived while paying attention. Recent events are forcing more of us to pay careful attention. But to pay attention is to feel more insecure and more uncertain. Still, instead of something to be avoided, insecurity is something to be embraced. It forces us to become more resourceful, to encounter the world as it is and to gain a measure of prudence that can serve us well when we are tempted to believe the optimistic hype of investment advisors, economists, politicians, or experts of any kind.
I find myself writing an odd sort of holiday message in this piece. When so many others are sending out words of comfort and joy and wishes for a happy new year, I am focused on getting in touch with life's inherent uncertainty and insecurity which in my view is the true cauldron of creativity in our lives. If you want to have a better year next year than you had this year, I offer no certain way to achieve it--only the insecurity and uncertainty that engender prudent and practical effort, which when we do it in concert with others can bring us the joy of working together on something worthwhile.
Sunday, December 14, 2008
Energy and Ponzi schemes
The recent collapse of what is believed to be the largest Ponzi scheme ever says as much about what the public believes regarding wealth and the possibilities of infinite growth as it does about the scruples of investment managers. (In a Ponzi scheme, old investors are paid off using money from new investors. Exorbitantly high but fraudulent returns for the initial investors quickly attract new investors seeking the same high returns.)
In the absence of independent contrary information, unsuspecting investors will believe in Ponzi schemes as long as their returns are high. In the same way the public will put its faith in neoclassical economic theories which claim that perpetual economic growth is possible. What most investors and many Americans want is to get rich. Most recently they were led to believe that the stock market was a one-way ticket to wealth. While the stock market as a whole is not a Ponzi scheme, the companies on the exchanges are run on the basis of neoclassical economic assumptions about growth. When those assumptions are undermined, as is happening currently, investors and corporate leaders look for villains and bailouts rather than questioning the assumptions themselves.
In an effort to challenge those assumptions, systems ecologist and energy researcher Charlie Hall has long championed a biophysical approach to economics as an alternative to neoclassical economics which he likens to a Ponzi scheme. Why a Ponzi scheme? Each new wave of lending is made based on the faith that future flows of energy will increase sufficiently to create enough economic growth to pay off the new loans.
Theoretically, given no other resource constraints, this might work for a very long time if the energy were to come entirely from renewable resources. But such is not the case. The vast majority of current energy flows come from finite fossil fuels. That means that without drastic shifts in the sources of energy for society, there will be a day of reckoning, just as there is for every Ponzi scheme when not enough new investors are brought in to pay off the old ones.
(Some people think that day may have already arrived. They posit that oil supply constraints sent prices so high last summer that those high prices brought on a depression, one that will now cause massive debt defaults. They also believe that we may have no prospect of ever returning to sustained economic growth based on increasing supplies of fossil fuels.)
The lure of wealth is so great, however, that the dream will die hard. Even now middle-class investors are being told to hang on until growth returns. And, perhaps it will. But the dream of becoming wealthy remains problematic if unquestioned. First, not everyone can get rich. The idea that anybody can become wealthy is not the same as everybody becoming wealthy. Second, although fossil fuels have made possible enormous comforts for the middle-class and even many poor people, few of them would consider themselves wealthy. Wealth is a relative concept. To be wealthy is essentially to be able to pay other people to do many things for you that most people do for themselves. If everyone were to become wealthy, it would be meaningless since wealth always implies privilege, that is, inequality. If you still have to wash your own shirts, take out the garbage and drive yourself to work, you may be comfortable, but you won't necessarily consider yourself privileged.
The unreflective view of wealth--the confusion of wealth with money, the failure to see that feeling wealthy requires an underclass--masks attempts to explain the limits of wealth. Now that the expectations of perpetual financial gain are being dashed, there may be an opening to explain those limits. If the Ponzi-like scheme that animates our economic thinking can be exposed, it could help many to see, perhaps for the first time, that the source of wealth is not the financial markets or the banks, but rather the very earth, air and sea around us.
In the absence of independent contrary information, unsuspecting investors will believe in Ponzi schemes as long as their returns are high. In the same way the public will put its faith in neoclassical economic theories which claim that perpetual economic growth is possible. What most investors and many Americans want is to get rich. Most recently they were led to believe that the stock market was a one-way ticket to wealth. While the stock market as a whole is not a Ponzi scheme, the companies on the exchanges are run on the basis of neoclassical economic assumptions about growth. When those assumptions are undermined, as is happening currently, investors and corporate leaders look for villains and bailouts rather than questioning the assumptions themselves.
In an effort to challenge those assumptions, systems ecologist and energy researcher Charlie Hall has long championed a biophysical approach to economics as an alternative to neoclassical economics which he likens to a Ponzi scheme. Why a Ponzi scheme? Each new wave of lending is made based on the faith that future flows of energy will increase sufficiently to create enough economic growth to pay off the new loans.
Theoretically, given no other resource constraints, this might work for a very long time if the energy were to come entirely from renewable resources. But such is not the case. The vast majority of current energy flows come from finite fossil fuels. That means that without drastic shifts in the sources of energy for society, there will be a day of reckoning, just as there is for every Ponzi scheme when not enough new investors are brought in to pay off the old ones.
(Some people think that day may have already arrived. They posit that oil supply constraints sent prices so high last summer that those high prices brought on a depression, one that will now cause massive debt defaults. They also believe that we may have no prospect of ever returning to sustained economic growth based on increasing supplies of fossil fuels.)
The lure of wealth is so great, however, that the dream will die hard. Even now middle-class investors are being told to hang on until growth returns. And, perhaps it will. But the dream of becoming wealthy remains problematic if unquestioned. First, not everyone can get rich. The idea that anybody can become wealthy is not the same as everybody becoming wealthy. Second, although fossil fuels have made possible enormous comforts for the middle-class and even many poor people, few of them would consider themselves wealthy. Wealth is a relative concept. To be wealthy is essentially to be able to pay other people to do many things for you that most people do for themselves. If everyone were to become wealthy, it would be meaningless since wealth always implies privilege, that is, inequality. If you still have to wash your own shirts, take out the garbage and drive yourself to work, you may be comfortable, but you won't necessarily consider yourself privileged.
The unreflective view of wealth--the confusion of wealth with money, the failure to see that feeling wealthy requires an underclass--masks attempts to explain the limits of wealth. Now that the expectations of perpetual financial gain are being dashed, there may be an opening to explain those limits. If the Ponzi-like scheme that animates our economic thinking can be exposed, it could help many to see, perhaps for the first time, that the source of wealth is not the financial markets or the banks, but rather the very earth, air and sea around us.
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