Ben Franklin’s Revenge



The past year and a half has seen the relentless unraveling of the post-Lehman recovery, the vaudeville act duct-taped and wired together on the ruins of shadow banking … taking the place of a reflective determination why ‘shadow banking’ is necessary in the first place.

Deflation, or rather, entropy has set up shop on our doorsteps. Call it ‘capital E’ entropy: the Golem we have created by way of our blithe and dithering squanderousness. Entropy cannot be bargained with, it can’t be reasoned with; it doesn’t feel pity or remorse … etc.

Entropy has put all the countries, the regions; all the economies under siege. All are struggling with credit market distortions to some degree, from the diminution of purchasing power to the greatest degree. An important and growing fraction struggles with the consequences of pointless wars and the resulting tides of migrants, other fractions are crushed by debts that can no longer be serviced out of cash flows. There is insolvency, inter-temporal contagion and more deflation in a vicious cycle.

Screen Shot 2016-02-23 at 12.55.57 PM

Along with the cycle is the frantic scramble for the next ‘solution’ … even as the only workable response to ‘less’ is stringent conservation. Purposefully doing without is never part of any conversation, it’s unpleasant, it does not offer a fabulous future or much in the way of hope …

There are endless attempts to escape consequences: to cash in, (cash out?); cries for bank bail-ins, increased austerity or the relaxation of it, more quantitative easing or less of it, negative interest rates or higher ones; always more loans adding to what we have in monstrous proportion, a mountain of claims looming over relentlessly diminished purchasing power. We are insolvent, in that purchasing power is the ‘currency’ which we must obtain in order to retire our debts.

limits-to-growth-forecast copy

Figure 1: The long meander to oblivion, this diagram from 1972 ‘Limits to Growth’, Meadows et al, illustrates what we are up against. The best the establishment can come up with is a non-sequitur:

It’s time to kill the $100 bill

… illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note. And he is equally correct in arguing that technology is obviating whatever need there may ever have been for high denomination notes in legal commerce.

Lawrence H. Summers, Washington Post

It’s hard to know whether to laugh or cry over the absurdity of it all. Absurdity of it allAbsurdity of it all.

Illegal money transfers have been made electronically, in their billion$ by HSBC and other giant banks. The largest recent single user of US currency is the US military. Summers conveniently ignores the greatest criminals are the bankers, who pay themselves, not with used, non-sequential $100 bills in brown paper bags, but with electronic bonuses.

Establishment economists such as Lawrence Summers can be excused for failing to understand ‘purchasing power’ the way it is described here at Economic Undertow. It isn’t taught at Harvard or any other school nor is it a part of an equilibrium economics curriculum. It tends to be understood as the amount of finished goods or services that can be gained in exchange for a unit of credit. More units = more goods = greater wealth. More valuable units also = more goods and wealth. The idea is to manipulate the number of units to access more goods and to prosper; manipulations haven’t been working lately and the economists have no idea why.

In Debtonomics, purchasing power is the relationship between resources and the ‘work’ needed to make resources available. Because resources DO the work as well as being made available BY the work, consuming resources also consumes our purchasing power at the same time. This mirrors what is observable in the real world and explains why adding ‘money’ hasn’t accomplished anything, we keep getting poorer all the time.

Resources and purchasing power are not the same but they may as well be, their relationship is unitary. One obtains or ‘purchases’ the other by way of the application of energy to displace matter over time: ‘power’. Each fraction of purchasing power represents an equal proportion of capital — resources — available to us. As capital vanishes into our machines, our purchasing power is irretrievably extinguished. With the passage of time- plus industrialization there is less of it. In Debtonomics, money is a derivative claim against purchasing power; so are labor, infrastructure, industrial production even the industries themselves. Changes to the particulars of the different claims such as numbers on a spreadsheet, technology, worker productivity or interest cost are irrelevant; when we run down our resources we are ruined regardless of how much ‘money’, or other industrial bits and pieces we have.

Summers’ argument is disingenuous; currency controls are not to thwart criminals but aim to prevent bank runs if- and when deposit rates turn negative. Runs destroy whatever system being run from, whether it is finance, currencies or banks. Summers’ proposal ‘works’ in the sense in that it traps depositors’ funds so a run becomes difficult, but it undermines depositors’ faith in the system at the same time, it is destructively counterproductive.

The establishment’s first instinct is to punish, to lash out and destroy. Our systems are built upon continuing, exponential monetization of waste. When punishment and devastation do not produce the desired outcome, we try harder, reaching for the succession of ever- larger hammers. After the $100 bill is turned to gristle, the $20 then the the $5 will meet the same fate. What’s left is change rounded up beneath the seat cushions. When that time arrives a nickel will be worth today’s $100, fatally undermining the well-crafted ‘policy proposal’ of the ex-Secretary of the Treasury and Director of the Mossavar Rahmani Center for Business and Government at Harvard University!

Summers proposal would effectively shrink the supply of liquid funds, amplifying dollar preference, something else not taught at Harvard. This would rebound against the fuel supply system. Removing funds from the customer = less of a bid for fuel products and lower wellhead prices which strands the drillers; ultimately rendering the entire industry insolvent.

Everything Has To Be Perfect Forever!

Excluding the rates paid (charged) on reserves held by central banks, negative interest rates are largely a market phenomenon, they reflect a retreat out of risk; the ‘flight to safety’. They occur when there are more loanable funds available than there are low-risk investments that can absorb them. There does not have to be much of an excess of these funds for interest to fall negative; like the price of crude oil, rates emerge at the margin. Negative rates apply to securities which are considered ‘money-like’ such as sovereign debt. It is government bonds that offer negative returns.

mzm1

Figure 2: MZM money stock, (Fred). ‘Zero-maturity’ money is liquid funds in the economy (excluding time deposits/certificates of deposit). At the same time finance lends more funds into existence there are fewer destinations for them … they migrate into safe harbors such as bank deposits or credit equivalents.

MZM Velocity

Figure 3: MZM velocity has been declining for years, the reduced flow cancels out increases in the money stock. The bankers are pushing on a string, no wonder they are desperate.

Negative rates indicate the absence of good investments in the functioning, day-to-day economy; they are the imprints of deflation. Whether or not the central banks are in control or not, promoting deflation is not the bankers’ intent. Instead, it’s an unintended consequence of efforts to bail out private finance at public expense.

Central bank manipulation gives the illusion that risk has been ‘legislated out of existence’. This is dangerously false; risk is a First-Law cost associated with the surplus of debt. Increasing the surplus of loans spreads risk around or pushes it out of sight, but only for a little while. Exponentially increasing risk lurks beneath very low/negative rates like a tiger in the jungle. The performance of the loans depends on the ability of international deadbeats such as the Italian government to borrow endlessly into the future, for everything to be perfect forever! Risk springs out of hiding when supposed pristine borrowers stumble and the loans are marked to market as junk. Under the circumstances, losses to the hapless bond speculators and central banks are astronomical, bankrupting the entire banking system at one go!

Risk also manifests itself as increased operating expenses for businesses that lack assets to sell to the central banks. These added costs accelerate vulnerable firms’ drift towards insolvency which in turn torpedoes the firms’ lenders, stampeding investors’ toward government bonds and (perceived) safety. All of this makes the risks worse. Surplus-related costs also discount the overall worth of commerce relative to holding currency = more dollar preference. Intervention endangers through the back door the very enterprises the bosses are desperate to support …

Bringing Excess Claims into Alignment With Purchasing Power.

As the bosses vie to increase growth they undermine themselves by destroying resources. They tilt the balance toward increasing claims while purchasing power is cannibalized. Whatever pittances are gained in the immediate-term are at risk going forward as the overhang of claims increases. Alternatively, removing claims tilts the balance the other way: borrower defaults, debt write-offs; by hoarding money or confiscation = ‘Conservation by Other MeansTM‘.

Managers want low-cost money to keep their Vaudeville act running as long as possible, even as it has exhausted itself by every reckoning including its own. Forced credit expansion no longer stimulates business expansion or growth. More costly money would accurately price in the risk that is ballooning (out of sight) within the system.

Managers want their currencies to be cheap so they might increase goods exports and gain foreign exchange. Forex becomes collateral for domestic loans leading to the mercantile increase in ‘wealth’, (China). This strategy fails when all managers strive to export at the same time. The outcome is diminished trade overall and less Forex collateral, amplifying deflation in a vicious cycle. Currency depreciation is also counterproductive for credit providers such as Japan, the US and UK. When credit is a country’s only real product, depreciation represents a reduction of the country’s output. This is also ‘Conservation by Other MeanTM‘ as the credit provider cannot finance imports by ‘borrowing’ them with its own currency.

Managers also want money that is worth less than commerce so customers lack incentives to hold onto it. This is also dangerous as money can become so cheap that commerce becomes unaffordable, (Venezuela).

Diminished finance sector returns, or Net Interest on Margin (NIM)

 

Net Interest Margin

Figure 4: Because finance creates its own funds it has no need to borrow. Interest margin represents the narrowing spread between finance returns from loans to largest- and presumably most creditworthy borrowers and returns from lending overall. NIMs have been declining for decades along with velocity and are, ironically, the consequence of increased financialization and declining customer income. Reducing interest paid by the central banks on excess reserves narrows NIMs further, undoing the bailout effects of QE.

Outcome

There is no overcoming entropy or declining purchasing power, only strategies to ameliorate the consequences and preserve resources/purchasing power for the future, along with some small component of institutional integrity. Managers fail to grasp the seriousness of our onrushing predicament: the destructive potential of declining resource availability/purchasing power is equal to- or greater than a nuclear exchange, the results are just as permanent. If managers aim to destroy this country, doing nothing- or more of the same is a good way to go about it! The establishment obsesses about money even as the real problem is a shortage of resources needed for our economy to produce the goods and services we expect. What needs to change are expectations. The money-system failures are symptoms of our resource shortfall, including declining petroleum prices and the widening circle of related industrial and finance insolvencies. Schemes that seek to maintain the status quo are certain to fail. Almost all of them are variations on the theme of bond-buying, dubious accounting and trickle down economics = robbery. Almost all of them depend upon central banks which have grounded themselves on their own policy contradictions. Absent change, financial accountability will enter through the back door as central bankers and the their private sector clients are engulfed by the system collapse taking place under their feet. One way or the other, finance claims will be brought into alignment with purchasing power. The hardest path is the annihilation of claims along with finance at the same time.

Thinking Outside the Banking Box.

One way to start down the road to voluntary alignment is to ‘buy down’ claims. The US government has the authority to produce money by itself, without borrowing; “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;” (the implication is that money is a tool of measurement.) Article 1, § 8, Constitution US, (Legal Information Institute, Cornell University).

US Note

— A $100 US Note, a late(st) model ‘Greenback’. Congress allowed the ‘float’ of $346,681,016 of these notes, however, they are out of circulation with the vast majority having been destroyed by the Treasury.

“If the Nation can issue a dollar bond it can issue a dollar bill.
The element that makes the bond good makes the bill good also. The
difference between the bond and the bill is that the bond lets the
money broker collect twice the amount of the bond and an additional 20%.
Whereas the currency, the honest sort provided by the Constitution pays
nobody but those who contribute in some useful way. It is absurd to say
our Country can issue bonds and cannot issue currency. Both are promises
to pay, but one fattens the usurer and the other helps the People.”

— Thomas Edison

Last Summer the Undertow examined the possibility of Greece issuing ‘greenback’ or non-liability fiat euro notes. Greece would use the euros to retire maturing debt and to facilitate internal exchange that was — and currently is — stifled by the overhang of debt and the accompanying demand for repayment. While note issue cannot ‘fix’ structural problems outright, it is possible to ease immediate monetary pressures and use the opportunity to put into effect a conservation plan, (get rid of the machines).

As in Greece, the purpose of US notes would be reduce the overhang of debt-claims and the accompanying demand for repayment funds; to bring claims and purchasing power into better alignment. Issued notes would retire maturing debt without requiring new debt to replace it. It’s a legal ‘cheat’, Bankers will object, but creeping system insolvency leaves them in no position to do anything but complain. By way of notes, debts are ‘repaid’ rather than haircut or defaulted upon; the third alternative is a crash or for funds to be forcibly extracted from the citizens and then a crash.

– The Treasury would issue zero-liability US credits — effectively ‘greenback’ dollars — as legal tender under current law or new legislation. Unlike the balance of our money supply, notes would simply be issued by the US Treasury rather than ‘borrowed into existence’ from finance.

– Government fiat has been issued for almost a millennium beginning in China. A notable example of sovereign issue money are Demand Notes first introduced during the Civil War by Edmund Dick Taylor. The notes were necessary because London bankers and their Philadelphia- and New York agents would not extend credit at reasonable rates to the Lincoln administration to fund the onrushing war against the southern separatists (Civil War).

– The notes would retire government obligations on a fixed schedule, for example, the current $19+ trillion$, to be retired over a period of 20 years. The notes could be applied against any liability that is a claim against circulating dollars.

– Payments would be made electronically, out of ‘thin air’, the same way loans are made by banks, as credits on borrowers’ accounts.

– Notes would be legal tender; to repay any debt, private or public everywhere dollars are made use of. Dollars are fungible: Larry Summers notwithstanding, each dollar is the same as all the others. Fiat issuance by the Treasury is the same as fiat issuance by a private sector bank. The difference is no liability to the government issue. The government can provide funds without digging itself deeper into the debt hole.

Loans are simply issued by banks as credits on a spreadsheet. ‘Bank money’ does not exist until a loan is made. The return from lending is the requirement on the part of the borrower to repay with money that is more costly to him than the loan is to the lender. Bank money costs the lender almost nothing to create as it requires only keyboard entries. The borrower must repay with circulating money; he cannot create repayment on his keyboard but must beg, steal or more likely borrow repayment- or have it borrowed by others in his name (government). Whereas interest cost tends to be a small fixed percentage of the principal payable over time, the expense of circulating money is determined by its availability in the marketplace, by supply and demand. When circulating money becomes scarce the real worth of repayment can be much greater than the nominal balance due, yet this is invariably when the demand to repay is fiercest, as during a margin call. If the loan is secured and the borrower cannot repay, he must surrender collateral along with other rights. These are always worth more than a keyboard entry.

US Notes would give the Treasury the ability to make keyboard repayments, to pay lenders ‘in kind’. By doing so the Treasury would remove the currency drain on the private sector (cash demands against depositors).

– What makes up our supply of circulating money is the unpaid debts of others, funds that are ‘temporarily’ out of circulation, overseas (petrodollars) or hoarded. Money created by lending is extinguished when the loan is repaid. The net increase in circulating funds that results from note issue is zero.

– The Treasury can recapitalize banks directly a with note issue, rather than by bailing in unsecured creditors and depositors. The Treasury could act as ‘issuer of last resort’ in place of- or alongside the central bank. The Treasury can also make up account shortfalls in accounts of deleveraging derivative accounts:

Derivatives

Figure 6: US domestic derivative exposure (dollars) is over four times GDP, (FRED). Unforeseen changes in conditions affecting holders’ collateral position could create liabilities that are too large to meet with funds in hand. Central bank funds are loans lodged against the public. Derivatives shortfall could be made up in any amount with note issue, which would then become a liability tallied against the (criminal) speculators who let their derivatives positions get out of hand.

– Notes would be available in any amounts to plug liability holes until positions could be closed and accounts zeroed out.

– Note issue would re-balance the relationship between banks and sovereigns, the influence of the banking cartel would be reduced.

– Foreign exchange can be leveraged or merged with Note issue. Because the dollar is the primary reserve currency, Note issue would be very effective as a means of backup liquidity everywhere dollars are made use of.

– Lenders would not be able to hold the US or its citizens hostage by withholding funds.

– Notes would render mercantile leverage against Forex unnecessary – dollar depreciation.

– Any fiat regime would require stringent energy conservation as the external (overseas) flows of borrowed dollars to purchase fuel have bankrupted the country in the first place.

– The US and many other countries are in the same situation as hapless Greece. Our debts cannot be retired because our wasteful lifestyle does not provide the means for us to do so.

– Financialization is both incentive- and means to strip-mine our capital base. This regime falls apart under the weight of its own costs. As a necessary component of reform, financiers must be held accountable for their negligence. The present conditions cannot be endured much longer. If managers refuse to act, citizens will take matters into their own hands.

Copyright © 2016 Steve Ludlum

44 thoughts on “Ben Franklin’s Revenge

  1. Eeyores enigma

    I came to the conclusion a while back that the oligarchs, TPTB decided that limits to growth can easily be overcome simply by throwing more money at it. In other words everyone could afford a future of resource constraints if everyone is rich. We would then simply substitute where needed even if it meant synthesizing what is required out of sea water or mining asteroids. Its all doable right? Its just expensive as all hell.

    Truth is when I was young and consuming all the sic-fi novels I could lay my hands on, I pretty much felt the same way. Reality hit early but I still struggle with it, I still catch myself looking into the next big “disruptive” technology thinking that this might change everything.

  2. Volvo740...

    Just saw this ad that made me sad:

    “Subaru is partnering with Google to bring virtual field trips to schools across the nation. Subaru loves learning.”

    I can imagine the excitement in the 5 year old kids spending another hour in front of the screen.

  3. Eeyores enigma

    Wolf Richter – All my life I have not died therefore the chances of me dying in the future are nil.

    Sound logic?

  4. Eeyores enigma

    Steve – Excuse me if I missed it but do you have a diagram or some sort of visual for your first law?

    “Steve’s First Law of Economics: the costs of managing any surplus increase along with it until at some point costs exceed what the surplus is worth.”

    I think that it is key but it is a hard concept to grok yet alone try and explain to people.

    1. steve from virginia Post author

      Like purchasing power, The First Law evades quantitative measure. Surpluses: we see ‘half’ of them, what we want to see, (unless it’s a surplus of locusts). We don’t measure costs until the surplus begins to diminish, the diminution is the costs manifesting themselves.

      Costs also emerge outside the surplus itself. For instance, China’s surplus of foreign exchange requires a lot of management effort to maintain. This effort has large and growing costs: RMB depreciation, equities’ collapse, flight of funds = spending down the surplus to ‘defend’ RMB.

  5. Creedon

    Steve, is there going to come a time when the derivatives come due and create a crisis? I have been hearing about this for years, but nothing ever seems to happen. I don’t see why they can’t just be written off. Is there any kind of time frame for these bets by the banks with each other to be paid off? I have heard the value of the derivatives is secured at a level above the money that we have in the bank, so that in the event of a crises they can take our money to pay off their loss.

    1. steve from virginia Post author

      It will happen, it’s happened already with interest rate swaps on and off since 2008. Credit default swap never seem to pay off as managers fiddle with the meaning of ‘default’. Forex/currency swaps come and go as they are tied to (and hedge) individual overseas’ transactions.

      What happened w/ AIG is instructive b/c the run out of that company had little to do with a default but a routine repricing of collateral. AIG lacked the means to back up its positions, it felt such collateral would not be necessary.

      The big problem w/ most of these over-the-counter instruments is nobody knows for sure what they represent, who the counterparties are, how large are the relative positions and how collection will occur in the event of a ‘problem’. I really doubt the government would allow banks to lodge derivative claims against deposits, mainly because it would not solve anything.

      What’s ironic about the entire mess is that any bailout would be borrowed from the exact same banks that are being bailed out! This is what happened in 2008-09. (Shakes head … )

  6. Tagio

    Thanks for the new article Steve, very illuminating.

    It would appear that the wheels cannot completely fall of of the bus as long as there is still dumb money out there mesmerized by the idea that they are buying in at the low and are going to make a killing, providing funds to keepthe lights on at the oilcos:
    “…investors have pumped a whopping $9.2 billion in new equity into energy companies year to date, the most since Bloomberg records began in 1999. Even the experts are stunned by this unprecedented glut in stupidity of managers of other people’s money: “Billions of dollars of dilutive equity continue to roll in with seemingly no end in sight,” Houston-based oil investment bank Tudor, Pickering, Holt & Co. said in a research note.”

    http://www.zerohedge.com/news/2016-03-02/frenzied-wall-street-buys-shale-equity-offering-record-pace-exxons-ceo-has-stark-war

  7. Tagio

    Creedon,
    A very intersting question, and I do not know enough about the derivatives market to answer. However, there are two main forms of derivatives, the interest rate swaps and credit default swaps. I don’t recall but I think that most derivatives are IRS. There would seem to be very little risk of IRS blowing up, because they are triggered by interest rate increases, which seem highly unlikely as the Central Banks control the interst rate curve. CDS are what blew up in 2008. These are the so-called “insurance policies” against default. I believe it is legally posible for a government to declare all of these void in the interest of national security based on a forece majeure event – major economic meltdown and the likely destruction of the major banks were these enforced. (The theory would be these CDS are perfectly legal and enforceable in a one-off event, but become unenforceable if an “unforeseeable” force majeure event occurs which basically threatens the entire economy , as to which no insurance can possibly insure, and which no person can reaonably believe would be insured. My recollection even though I can’t find articles about it now (down the memory hole) is that China did that in 2008 to save its banks.
    The more intersting question is whether the government will be able to do that before it is too late because that would mean voiding the winnings on the winning side of the derivative bets, and the winners have political clout and their puppets in Congress and at Treasury, etc. (Goldman during Lehman). The winners will be back at the Fed’s, Treasury’s and Congress’ door seeking handouts to make good on their claims.

    Another possiblity is to implement a “resolution trust” and require all CDS to be placed under a trustee to be netted to the extent possible and then deal with the remaining mess accordingly. If CDS were in a regular transparent market, this netting would normally be done via a clearing house but the banks have resisited this because it requires transparancy and interferes with the $$ making opportunities for writing reserve-free “insurance” policies.

    So a CDS implosion that triggers a banking metldown could be dealt with, but the difficult question is whether it would, with Big Winners chasing their Sugar Plum Fantasies of Wealth Beyond Imagination in a collapsed economy.

    1. steve from virginia Post author

      That graphic is obsolete. The Fed issued new versions:

      Federal Reserve Bank Saint Louis, All Sectors; Total Loans; Liability
      http://research.stlouisfed.org/fred2/series/ASTLL

      Federal Reserve Bank Saint Louis ,All Sectors; Total Debt Securities; Liability
      http://research.stlouisfed.org/fred2/series/ASTDSL

      You have to fiddle with them to get a graphic that resembles the late, lamented TCMDO.

      All the above leave out liabilities of one agency to others within the US government. They also leave out liabilities that aren’t traded but are nevertheless bona-fide obligations of either government (Social Security & Medicare) or private sector firms (presumed payments to health-care’ firms by way of ACA).

      When FRED came up with the new graphs it ‘discovered’ there was $2.7 trillion more on the pile than before.

      Coming to get your grandchildren.

  8. Ken Barrows

    Thanks for pointing out the liabilities left out. I wonder if the Fed’s liabilities are in there. After all, purchase an asset and create a credit for the counterparty.

    Seems like the sum of the two graphs equals the graph I presented. But, you’re right, the terminology has changed.

  9. Volvo740...

    Great article Steve!

    U3O8 just set a new 52 week low. http://www.uxc.com/review/uxcPrices.aspx CAPP Thermal coal is sitting at $42.

    I think Gail sees all energy sources go down together. Do you share her view, or do you think electricity could be somewhat more resilient since it’s not a global market (even thought the fuels are)? I could be wrong by it does not feel like utilities are lowering their electricity prices like the gas stations are. I guess fuels are just a part of their costs.

    Thanks!
    –J

    1. steve from virginia Post author

      When electrical utilities were deregulated, most of them split generation from distribution, with the ‘name’ utilities becoming distributors. Customers pay the utilities for the wire to their house, they generally have the choice of a number of ‘providers’ (the cheapest tending to be coal-fired generation).

      Distributors have high fixed costs for maintenance and repair to their now-decrepit grids. The must also add capacity to new real estate developments. New wrinkle is the need for ‘smart grids’, ostensibly to support intermittent generation such as wind + solar but in reality to cope with added high-current demand that would accompany a substantive increase in the numbers of electric cars. All of this is costly which is why customer electric bills are not declining along with gasoline prices (which are obviously still too high for cash-strapped Americans).

      Generators have their own problems. Older coal plants represent sunk ‘capital’, money already spent when building costs were reasonable. Some legacy plants are 75 years old, they are no longer serviceable. EPA emissions standard has made new coal generation very costly so the older, obsolete plants are not replaced with newer coal plants. Another reason is ongoing decline in net electricity consumption overall.

      http://www.eia.gov/electricity/

      Why build new generation when it will sit idle?

      A coal-fired plant that cost $100 million in 1965 costs over a $1 billion today (or $15 billion if it is a nuke). Gas turbines are cheaper and meet emissions standards. However, these must be sited where there is available pipeline gas + water for cooling purposes and high voltage transmission mains (348- 548kv). The different specifications mean higher costs passed onto customers.

      Utilities struggle with renewables b/c the model does not support the top-down generation/distribution scheme that the companies have succeeded with. A homeowner with panels does not need the grid all the time. If enough homeowners go off the grid, there is insufficient cash flowing to utility to service its debts. At the same time, a fully-functioning grid is needed to supply electricity when the sun isn’t shining or the wind isn’t blowing.

      With a lot of electric cars there would be greater demand for power, at night when generators are usually not running. Running longer hours would be more ‘efficient’ but would represent greater maintenance and replacement costs for equipment. The load would be very heavy (like an industrial user) and intermittent (NOT like an industrial user). How to manage when supply is becoming more intermittent itself is difficult w/ a centralized system. Power provision is not a problem with ICE cars as a gallon of gas will sit just as happily in a tank underground as it will in a customer’s fuel tank. Electricity is different, it’s ‘there and gone’: use must be balanced (harmoniously) with supply as any mismatch will be fatal for all concerned (grid breakdown).

      1. ellenanderson

        Really enjoy this post and comments, Steve. I have been too busy to write much but I am hoping that my giant collection of spare change will become the basis for a local currency eventually.
        The electricity question is super interesting and I don’t know the answer. I am guessing that if the grid goes down all bets are off so the state governments will really devote resources (at least in the Northeast) to keeping them up. The response of the electric utilities to downed wires is fast. It must cost a fortune to keep those resources at the ready.
        My personal experience for what it is worth: I got rid of my oil furnace that ran all summer to provide hot water. I got rid of my expensive little parlor stove that burned propane. I put in a really well insulated hot water heater but I still expected my usage to increase. We have gone through the winter burning only wood in a masonry stove at one end of the house and a new Napoleon Cook stove at the other end. Burned no oil, burned no gas, was careful with hot water, cooked with wood instead of electricity and my kwh per month were cut nearly in half! That is in addition, of course, to no oil bill and no gas bill. I am stunned. Of course I am in a rural location with a lifetime worth of downed trees and trimmings. But I did get a couple of cheap little electric heaters just in case one small room needed to be heated fast. I imagine that city people could cut back on central heating and just heat one room.
        All of this implies that electric demand will increase but maybe not as fast as we think. Central heating is very wasteful. Plus the oil and propane companies are small businesses that must be getting killed under current conditions. I keep meaning to go down and apologize to my oil delivery man who I always enjoyed seeing when he came to deliver.
        So I think that the oil and propane businesses are actually pretty vulnerable and will fail before the big centralized electric utilities will.
        The big solar “farms” are total subsidy dumpsters. If individual homeowners want to try solar panels it is up to them but I don’t think it is worth the money unless you enjoy fooling with all of that stuff and don’t mind a shock or two.
        Conservation is the only way to go eventually. Keep saying it. Too bad the Tee Vee and carz crowd consider it to be a dirty word.

  10. Tagio

    Further to the question about a derivatives blow up, it looks like the Fed is forcing an unwind of some of the largest, most dangerous positiosn before they really blow up. Those who are or hope to be on the winning side will lose the prospect of untold riches, while banks still on the plus side in collecting the premiums will lose a source of revenue, but it looks like the plan is to force the positions to be terminated before they are allowed to really blow up. Likely some of the banks (cough, JP Morgan, cough) who are in a precarous position given current market conditions on their derivatives exposure got their “regulator” to change the rules to save their sorry asses.

    *FED ISSUES PROPOSAL ON BANK INTERCONNECTEDNESS IN STATEMENT
    *FED TO PROPOSE BIG BANKS CAP CREDIT RISK TO EACHOTHER AT 15%
    *BANKS WITH $500 BLN OF ASSETS WOULD FACE 15% LIMIT UNDER RULE

    http://www.zerohedge.com/news/2016-03-04/stocks-tumble-after-fed-plans-too-big-fail-bank-counterparty-risk-cap

  11. Tagio

    Forgot to add, of course, FED’s rule may be insufficient, since it is based on net exposure, which assume each counterparty can perform so that net does not beocme gross.

  12. Creedon

    The central bank issues the credit to the government; the large banks get to receive interest on the credit issued.
    The more credit that is issued to the government, the less interest the big banks need to collect because they are collecting volume of bond yields rather than size of bond yields. They drop interest rates below zero because they think that it will help keep the whole ball game going. It still makes less than sense to me. The evolution of the process seems to lead to less and less interest on issued credit over time. The bottom line is that this is all total madness.

    1. steve from virginia Post author

      They don’t know what else to do.

      What they need to do is revamp … everything. Bosses believe they can make minor, marginal adjustments and get away with them, that the industrial regime is self-regulating.

      It’s tough when the people in charge of something important have no idea how it works.

  13. Ken Barrows

    I assume that the United States Notes would pay any US Treasury bondholder, individual or institutional. Would it be correct to say that future lending after the issuance of such Notes would probably be greatly reduced? Mind you, reduced lending and strict conservation go hand in hand. The solution, contrary to conventional wisdom, is fewer loans, not more.

    1. steve from virginia Post author

      The idea is to reduce debt and skip the messy crash.

      The Treasury would pay bondholders. It is POSSIBLE the banks might reduce lending significantly or go on strike (see Greece/Varoufakis). That’s why it makes sense not to try to kill off all the debt at once but over a period of time … as a way to ‘help’ the banks. You know … kill them off w/ kindness!

      Not to put too fine a point on it: Note issue is a kind of repudiation. This is because the repayment is not in the form the lender expects. The lender wants blood, the time of millions of workers. Instead, he receives exactly what he himself lent to the government borrower: a string of electrons in a row.

      Right now interest rates do not reflect any sort of market for risk. One reason for the ‘risk off’ stance is the bond-buying by central banks (lending against government collateral). If the Treasury could (should) offer a small premium, it would be a de-facto interest return. Slightly higher rates would not be the end of the world (although the derivatives markets might not like it very much … )

      If the government is so eager to crack down on something it should take aim at derivatives and leave the citizens alone.

  14. Creedon

    If I am understanding this article right; http://peakoil.com/publicpolicy/the-federal-reserves-shell-game The investment banks don’t actually lend money to the government. They just collect the interest. The actual transfer of credit to the government is an entry made on government ledgers. It is basically money supply expansion and inflation. It may be that individual investor actually buy the bonds. Correct me if I’m wrong. The actual transfer of money to the government is made to the government, by the government.

    1. steve from virginia Post author

      Investment banks create credit (bank money) and lend it to the government. The government does not create anything. It’s a borrower and has been since before there was an America, when the European colonies were founded. Almost all governments barrow or they steal. Some do both: Spain beginning in the 15th century for example. It’s a great business for bankers because the government can coerce its own citizens or those in other countries into retiring the loans: the banks can’t do that themselves. Government ends up being a collection agency for the banks.

      The idea of government to government loans is near to the truth … but not the government! When the Treasury bailed out the big banks post-Lehman (TARP) it had to borrow the money from the same banks it was bailing out!

      Money supply expansion is unsecured lending to private sector. Loans to governments result in securities that are considered to be ‘risk free’; these securities become collateral for the loans. Pricing of the securities in the so-called ‘marketplace’ validate the risk-free status of the securities.

      In reality, the central bank lends against the securities, overpaying for them (QE). The outcome is no real market or price discovery.

  15. Creedon

    The ECB is currently buying corporate debt. To cut to the chase, what all of this means is that the central banks are trying to keep BAU going a while longer and are in denial about resource depletion, over population and the other problems occurring in the world. To the point though, I find these central bank maneuvers infinitely confusing. If the ECB buys corporate bonds, are they releasing the corporations from the repayment of the debt or does the corporations now owe the debt to the central bank?

  16. Tagio

    Apprarently Central Bank love means never having to say you’re sorry. Have you ever heard of a CB declaring a default on any of its holdings? The Fed bought tons of crappy mortgage pool assets to bail out the banks back in 2008, have you seen any reports on how well those “investments” have done for the Fed? Buying by a CB is “deep sixing” the “asset,” as far as I can see. It’s the “out of sight, out of mind” technique for managing the economy, which CBs seem to believe is all just one big psy op.

    1. steve from virginia Post author

      Yours is a good point. The QE1 assets were likely troubled, mis-rated junk off-loaded on foreign banks during the mortgage fraud bubble. A significant percentage of that stuff was likely non-performing which was why the Fed bought it in the first place. Fed buying was political favor, to keep the overseas banks quiet. I haven’t seen any sign of a write off on any Fed report, only interest distributed back to the Treasury and happy talk. This means QE2 and QE3 were needed … to cover up/launder the losses associated w/ QE1.

      Meanwhile the QE1 junk would have been mostly short-term as mortgage defaults were likely concentrated in tranches sold overseas.

      Of course, none of this could reach the public, if it had the Fed would have come under enormous pressure … for all practical purpose the Fed would have disappeared … the Fed is only supposed to buy risk-free Treasuries and equivalents (agency paper like Freddie Mac/Fannie Mae bonds).

      This is hypothesis, it is likely no one will ever know the truth …

  17. Creedon

    http://www.zerohedge.com/news/2016-03-12/deutsche-bank-negative-rates-confirm-failure-globalization Sorry for putting up a zero hedge article as I would imagine everyone reads it already. This article, however does a good job of describing why interest rates are low; it is a liquidity trap, as money stuck in the liquidity trap grows the velocity of money down where we are declines. This is being described in by many people in many different ways. I think that Steve describes it as dollar preference. The money stuck in the liquidity trap will grow infinitely unless some fundamental policy is changed and as Steve says, the bosses don’t understand the process well enough to come up with solutions. Besides, the present system serves the bosses pretty well. Another article on zero hedge talks about the support for Sanders and Trump representing a turn against the establishment. The way things are going the turn against the establishment is going to go on for a while. Real solutions will probably have to come from the grass roots.

  18. Eeyores enigma

    Steve – This is a great presentation although it is in rapid french it is easy to pause and read. He is documenting physical facts of the predicament and supporting your position very well.

    “French engineer schools politicians on the physics of energy and resulting incidences on economics.”

    https://www.youtube.com/watch?v=Fb_GNIa2joE

  19. Ken Barrows

    Interesting. In discussing energy and economics, if you don’t start discussing numbers, you’re not discussing anything.

    1. steve from virginia Post author

      The entire industry is insolvent, nobody in the industry has the wit- or the courage to acknowledge it.

  20. Creedon

    The investment banks will always provide the credit to keep more oil on the market than the consumer can pay for. The limiting factor as the years go by will be that the consumer will be able to pay for less and less. Having tried recently to understand how the big banks operate, I have given up. I think that the world of the Central banks, Investment banks and governments has less and less to do with reality and that it can only become more unreal over time. In simple terms they create money on computers. People will try to say that there are laws that are followed. How would we know. The federal reserve can not be audited. I think that it is in their interest to keep oil on the market.

  21. Eeyores enigma

    Creedon – I don’t disagree but that does not make for a functioning economy or a functioning “modern” society for that matter. I believe that the limiting factor is peoples ability or inability to see a rosy enough of a future that they can project themselves into.

    More and more people are finding that harder to do so they take to the streets in greater numbers.

  22. Creedon

    I keep looking for the economy of the future. Can we maintain a modern world economy of bicycles and farmers markets. Can we maintain a modern world economy where we consume one quarter or one tenth of our current consumption. Does Venezuela represent our future. It is not a positive or rosy projection. Maybe the truth is that we will have to suffer 50 to 100 years of a world dysfunctional system before we can begin to build something more positive. I believe that the people as a whole get what they desire. Right now I would say, especially in America, they just want to hold onto what they have for as long as they can. Steve said once that we are still to close to the good old days. Some of us keep trying to step into a future that isn’t here yet.

  23. Manual Labour

    Steve,

    Your latest comments on Ron’s blog are brilliant. The audience appears hopeless there. They eat, sleep, and breath volume and nothing else.

    Maybe one day Dennis can explain how if the rate of growth in debt slows even slightly why the entire waste enterprise grinds to a halt in short order.

  24. peakperk

    Hear! Hear! on the last comment. I, who read both blogs was struck by the contrast too. A kind of left-brain, right-brain moment.
    I work in Civil Aviation, almost-entirely a waste-based enteprise. Hauling people from one country to another just to find that the residents in that far away place want to do the opposite, visit your country. Couldn’t they just write to each other instead:), make for a more peaceful world. But of course this would mean empty seats and a cargo that wasn’t properly subsidised, after all, isn’t that the point of the whole excise; to transfer the cost of cargo from the businesses to the hapless ‘tourist’? Isn’t this part of the ‘greater fool’ argument?
    Cargo is the uncivil part of civil-aviation, no one I work with ever mentions the word, it’s not part of what they conceive as the industry they’re in.
    When a bridge is built, and an airline is just a fancy bridge, some idiot has to be found to pay for its maintainence or, otherwise, business transacting on either side of it would have to pay the full cost. This would not only be an inconvenience it would be impossible! So build an amusement park or a marina(insert any typical tourist trap here) on the far side and have the civil population pay your upkeep.

    Please write the book, Steve.

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