The Value Crisis …

Titian ‘Sisyphus’

Most of the discussion and policy actions regarding the economy focus on credit excess/shortages. People speak of a ‘credit crisis’, ‘credit crunch’ or ‘finance crisis’. More fundamentally, we are at the beginning of a ‘value crisis’.

“Step right up, ladies and gentlemen, The Great Value Crisis” is right over here! It sounds like an advertisement rather than an analog to The Great Depression: The ‘GVC’ Shopping Network.

What is a house really worth? What is the value of a house in one location compared to that of another in a different – perhaps farther out – location? Is the value of a house its investment worth or is it shelter? What is a car really worth, not just any particular car but the whole idea of using a car? Up until a few years ago the fundamental value relationship of houses, cars, etc. was more or less fixed. The aggregate was worth a great deal if only by default; comparison to the value assigned to the inputs responsible for making them available. Great fortunes were made turning near- worthless capital inputs into valuable tract houses, freeways, stores, cars and parking lots.

All of these things are obviously worth a lot. Why would anyone question?

The value of any good by itself (house, car, oil, dollar) must be measured against the value of the productive work required to bring that good to a market. To make this judgement one must first define what ‘work’ is, some activity that provides a return, hopefully greater than the total of the input costs.

Plant a garden, pull the weeds, thin the crops, battle the bugs and the return is food for a year for X number of people. Same with an item imported from China; materials are acquired and shipped to China, a factory built, labor engaged at some wage, equipment put to use by the workers who make – then package and ship – the items gaining a return in the promise of future production from the importer. This promise is in the form of money, credit usable in the importing country. Work is the activity that generates the return from capital.

Without work the value of capital by itself is zero.

While the value calculus is the measure of the cost of labor/capital against the ability to service that cost plus a profit – the greater question is what are the overall social values of such a system, particularly as manifested in today’s commercial/consumption economies?

What uncovers the final or return- enhancing final price for any good is marginal utility, the propensity of a customer to choose one good or another or to not purchase at all. This is an outcome of marketing, the effective relative marginal utilities of different placement strategies determines success or failure for a product; consider how Apple iPads are marketed. Marketing allows Apple a premium over similar computers that production costs themselves would not indicate.

In the bizarro, hyperbolic ‘Andy Warhol Universe’ we have created for ourselves ‘work’ is as ambiguous as a drag queen; 70% of our economy is consumption; the step intermediate to deposit of goods/services into a landfill/or the atmosphere. An overlap of 30% of our economy is finance, which results in money stripped from the many and redirected toward the few in finance (robbery).

An outcome is the revulsion away from consumption spending and an impulse to throttle finance. Says Roger Lowenstein of the New York Times magazine:

Last month, my wife and I refinanced our mortgage. Though the rate was lower and we could have afforded more debt, we paid down a chunk of the balance. Don’t ask me why — it just felt better to owe less money. Time was, such thrift would have been hailed as patriotic. Now it threatens the economic recovery. Less borrowing means less to spend.

Suppose everybody did this? Well, it turns out, everybody has. Eschewing trips to the mall, Americans are paying off credit-card balances and home-equity lines. Despite low rates, mortgage demand has plummeted.

Some people have no choice but to pare their debts (indeed, some are being foreclosed on). For others, call it morning-after sobriety or late-blooming prudence. Losing income tends to bring on a case of the nerves, and half of American workers have suffered a job loss or a cut in hours or wages over the past 30 months. And, need we add, people’s stock portfolios are not what they were.

The economic term is “deleveraging”; it means that, as opposed to the normal state of affairs, in which, each quarter, people borrow more money and banks issue more loans, credit in the economy is shrinking. Remarkably, this deleveraging has been going on for nearly two years. Ordinary Americans are behaving just as the banks they love to excoriate — having, formerly, assumed too much risk, they are going into hibernation. If credit, in the words of the writer James Grant, is money of the mind, people have become psychologically indisposed to minting it.


Compared to the grand scale but marginally remunerative activity of finance and consumption, the value of the crude oil that propels these things is increasing. The reason for this value increase is relative oil scarcity; we have used up and wasted all the crude that was easy to access. The value shift is the outcome in the supply/demand dynamic; demand bids up the value of what crude is available. All of a sudden, input costs matter.

Driving a car does not feed anyone for any length of time or accomplish anything else particularly useful on its own account. It is the purchase of the car, the purchase of the gasoline, the purchase of the houses and other goods and the activities that must be done in addition to the use of the car that are the economic acts.

Using the car itself for the most part is playing a child’s game of ‘dumb machine operator’.

The bulk of our economy is little more than the metering of waste. This only makes sense when the input values – of what is being wasted – are near zero.

The car and all of its attendant infrastructure is a direct drain on our ‘work’ economies. This takes place even as we mis- invest further in the waste infrastructure – along with the attendent costs – all at the same time.

When the input costs of consumption are low, the money returns of the wasting process – the sale of cars, roads, gas, houses, etc.) have greater money value than does the pittance that oil costs. Each dollar under a cheap oil regime represents an amount of consumption; the dollar is a representative or proxy for the consumption process.

When oil inputs become more costly, the value of each unit of oil is greater than the returns on the consumption/waste that each unit leverages. Under a costly oil regime, each dollar becomes a representative or proxy for an amount of crude oil, this is a variation on Gresham’s Law where currency is always representative of that which holds the greatest rather than the least value (the bad drives out the good). Priced in oil, dollars are worth something. As a consequence, they are hoarded. This is not necessarily an economic act rather an outcome of human nature responding to incentives such as uncertainty.

Hoarding dollars ia a vicarious way to hoard crude oil. The fewer dollars in circulation means each dollar is worth more. The dollar is more desired by oil producers who will eventually accept nothing else but dollars (or some other currency, it does not have to be dollars). More currency is hoarded in a vicious and strongly amplifying cycle.

What is missing from most discussions about money and currency exchange is the qualitative money value; what the money can buy. What is measured instead is quantitative purchasing (or exchange) power, as if all currencies are equal with regard to what any particular currency can buy. Michael Hudson:


I write this letter to counteract some of the solutions that Western politicians are recommending for China to cope with its buildup of excess foreign-exchange reserves. Raising the renminbi’s exchange rate against the dollar will not cure the China-US payments imbalance. The dollar glut will continue, and so will the currency fluctuation among the dollar, euro and sterling, leaving no stable store of value. The cause of this instability is that each of these three currency areas has grown top-heavy with by debts in excess of the ability to pay.

What then should China should it do with its buildup of excess reserves, if not recycle its inflows into their bonds? Four possibilities have been suggested: (1) to revalue the renminbi, (2) to flood China’s economy with credit (as Japan did after the Plaza Accord of 1985), (3) to buy foreign resources and assets, and (4) to use excess dollars to buy back foreign investments in China, given US reluctance to permit Chinese investment in America’s own most promising economic sectors.

I explain below why China’s best course is to avoid accumulating further foreign exchange reserves. The most workable solution is to use its official reserves to buy back US and other foreign investments in China’s financial system and other key sectors. This policy will seem more natural as a response to an escalation of US protectionist moves to block Chinese imports or block China’s sovereign wealth funds from buying key US assets.

See what I mean? What are the ‘key US assets’? Currency value is more than just a mechanical affair. Indeed there is little or nothing within the United States that can be had with Chinese currency while just about everything made or available in China can be had with dollars. With dollars as proxies for US ‘work’ the holder carries a small piece of US commercial culture in his wallet; Hollywood, hot rods, rock and roll and ‘fashion’. Dollars are proxies for ‘freedom’, the Chinese yuan is a proxy for poison dog food.

The proxy value changes when work is devalued relative to that of work’s inputs. The value relationships shift alongside the changes in what the values themselves represent. As both inputs (strategic assets) and the currency that is proxy for them increase in value the work values plummet, the consequence is deflation.

Currency deflation is beneficial to oil producers who receive a lower nominal value but the same or greater real value in exchange for ever smaller amounts of crude oil. At some point there is insufficient oil available on markets to drive industrial commerce which collapses, which in turn increases real value further (pressing nominal values even lower) until there is no commerce that uses oil and the real value of oil then declines.

This is the point where work disappears and the oil capital becomes worthless.

Reduction in consumption is the expression of more valuable dollars. It is hard currency in action. So is repudiation of debt, selling debt at severe discounts to cash, closing of businesses (which do not earn returns anyway), increasing unemployment and drying up of available cash, eventually general destitution and the inability to fund any sort of complex initiative (such as electric cars). Every one of these things has been taking place – some for almost 10 years (declining real wages, unemployment and business failures) and continue unabated with no indication of any change.

This analysis derives from observing trends and postulating a dynamic that reproduces these results. The dynamic is peak oil (which on a dollar for dollar basis took place in 1998) along with accompanying increased currency/dollar value. Conventional wisdom suggests that (fiat) currencies are losing value; this is not supported by facts. If currencies (dollars) were losing value, both wages and prices prices would be increasing. ‘Money’ in many forms would be in widespread circulation, we would all feel ‘wealthy’ rather than hovering at the edge of anxious destitution. There would be monetary inflation, in other words.

Sez Paul Krugman:


If the Fed issues money, it will in fact just sit there. That’s what happens when you’re in a liquidity trap. And there’s also no question that right now, the proposition that the government can “create wealth by printing money”, which some other commenters call absurd, is the simple truth: deficit-financed government spending, paid for with either debt or newly created cash, will put resources that would otherwise be idle to work.

But we won’t always be in this situation — or at least I hope not!


Paul Krugman is a) right and b) terrified. He knows what is happening in the money ambit (but does not acknowledge the energy connection. (Economic not natural) resources are falling idle because the fuel to activate them costs too much in real terms).

A decline in nominal oil price represents an increase in real value expressed by an increasingly valuable dollar. Either the dollar loses value (prices rise and stay high) or dollar gains value (prices hold steady of decline). Either way, oil becomes more valuable, more so than the ‘work’ it does. In order for dollar prices to climb and remain high, wages must increase proportionately. In order for prices to fall, workers must be fired and wages must decline.

Guess what is taking place?

In the real world, workers are getting poorer and cannot afford high prices. The productive work that each wage earner represents is worth less … than the oil each worker requires to do the work.

There is no way out of the deflationary currency trap we have created for ourselves with our wasteful consumption. This outcome is the disappearance of industry and large scale commerce as the funds for these activities disappear. Any ‘alternative’ funding mechanism tradeable for crude oil will be hoarded as dollars are being hoarded today. Putting currency directly into the hands of consumers would be the same as a wage increase and cause an oil price spike that would crash the economy that relies on super- cheap fuels. After the spike the price would crash representing demand destruction – more business failures and unemployment. After an interval the currency/crude peg would be reestablished. Deflation would return with greater intensity.

The situation is identical to that during the early 1930’s when countries’ economies degraded into buying and selling currencies to obtain value which in that period was represented by gold. Now, value is represented by crude oil. The depression was ended by countries raising wages relative to capital and by abandoning gold pegs. The only way out of the ongoing economic/energy crisis is for nations to revalue labor upward – by increasing worker productive capacity, skill and capability – and by ‘going off oil’ as they went off gold 70+ years ago. This means the US must put people to work directly with small capital inputs, even at hand labor while at the same time cutting energy imports and becoming a net long- term oil exporter. This means a reduction in energy/oil consumption to less than 1/3 of current or -5 million barrels per day! (The 1973 embargo represented a -10% reduction).This means no cars, no consumption, no mass or industrial ‘scaled’ production or ‘moderistic’ Andy Warholism. We do this or it is done to us.

The alternative is to find and exploit the extra 4 or so excess Saudi Arabias needed to flood the oil market and drive real input prices down.

The absurdity of modernity is the desire to embrace real values – of any kind – when the only value the economy allows is obtaining wealth. Organic or ‘tribal’ values are incompatible with the mercenary ones. The latter are directed toward the immediate, the transient, the most wasteful and dishonest, which impute the ‘value’ of economic externalities to zero. We’ve spent decades sanctifying expedients as if they were worthy substitutes for restraint, discipline, justice or common sense.

Having sown the wind, we now reap the whirlwind …

3 thoughts on “The Value Crisis …

  1. Jb

    The American public will not do this willingly. Therefore, the US government/wall Street/mil-industrial complex will reduce our oil consumption by the 30% you describe by design. If they don't then a foreign entity will. The question is, how? The current economic contraction has only reduced consumption by about two million barrels per day. We have a long way to go.

  2. Jb

    Will the collapse of supply lines achieve this? Perhaps. Or war in the Middle East? Even quicker. For historical precedent, we need only look to domestic rationing in WWII. If you are suggesting that western civilation reverts quietly to a world made by hand, I'm all for it.

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