[LoneSnark]

I know your words are directed at MrBill, but if you do not mind I would like to attempt to address your questions.

$this->bbcode_second_pass_quote('', ' ')the talking heads were talking about how good it was that a lot of people showed up at the mall to buy a ton of stuff for Christmas, and that sales were up 3%...Then they went on to discuss how great of a season it'll be for investors if the pace keeps up. They said if it's good enough, it will lift our economy out of the "correction" it is currently enduring. Hmmmm....

[Duende]

Thanks for the explanation LoneSnark. I'm going to have to read about economics more I guess. Any good recommendations that aren't going to put me to sleep would be welcomed.

In the meantime, I'm going to try to bring this back to Peak Oil again.

LoneSnark wrote:
$this->bbcode_second_pass_quote('', 'I')f a company is properly allocating resources by turning low valued resources into high valued products or services then its profits will grow. The index, therefore, is an overall measure of how well the indexed companies are allocating resources.

[OneStepAtATime]

$this->bbcode_second_pass_quote('Duende', ' ') You know, this is silly. The more I think about it, the peak will usher in the recognition of massive limitations to our growth based economy.

[LoneSnark]

$this->bbcode_second_pass_quote('', 'T')he more I think about it, the peak will usher in the recognition of massive limitations to our growth based economy...But the growth based index just seems like a house of cards to me; it seems ethereal, and subject to great disruption when the peak occurs.

[MrBill]

Excellent posts! Thanks.

As LoneSnark explained prices are relative.

So if there is a given supply of 'available money' - however you want to define it - and a fixed supply of 'usable energy' then the price of energy in money is price X as the current demand reaches an equilibrium with available supply.

This in no way assumes supply is unlimited just because price X goes up. A common mistake. It means demand has risen relative to available supply.

This would be classic micro-economic theory. The problem or the accusation raised against such simplistic notions is 'that the world just does not work this way!' But adding in layers of complexity - millions of energy transactions between millions of individual consumers does not change the basic assumptions. It just makes predicting the resulting supply and demand equilibrium at price X or at new price 2X more difficult.

As LoneSnark mentioned, double the 'available money', but keep 'usable energy' the same and 'all things being equal' the nominal price of usuable energy will double. Not that twice the amount of usable energy will materialise out of nowhere. That is also why money is not a substitute for energy. Again a common mistake.

However, back in the real world - that people are so fond of speaking about - there are more variables than just money and a single good like energy. There are also, for example, Britney Spears CDs. You have now added another layer of complexity, but the assumptions remain the same.

Your 'available money' now has to be split between 'usable energy' and Britney Spears CDs. It is the consumer's choice. They can spend $20 filling-up with a tank of gas, or they can give that $20 to the music value-chain that produced, edited, printed, distributed and sold that CD for $20.

If you chose to buy a tank of gas then you get to use that energy. If you chose to buy a Britney Spears CD then you have literally given those amoung that music value-chain the money to buy that energy. You have not generated more 'available money' nor have you changed the amount of 'usable energy' that is available for consumption. They will be driving around in their Hummers and flashing the euros that they bought with your dollars, while I assume you will be happily at home listening to your newest Britney Spears’ CD.

That growth in the economy from producing CDs does not create any extra 'usable energy' just because it did help generate a profit in the music value-chain and therefore helped the economy to grow. Therefore, 'all things being equal' there will be less 'available energy' because they needed some of it to produce and distribute that CD, but also to cruise around in their Hummers. And the price of the available 'usable energy' should increase in price because a) some was used, and b) that growth in the economy added money supply and therefore increases 'available money' for the whole economy.

Had you just burned that tank of gas yourself to cruise up and down the boulevard or visit friends it would have produced 'some' growth in GDP stemming from the energy value-chain of exploring, drilling, extracting, transporting, refining and distributing gasoline, but in the end some of that net gain was destroyed when you burned the tank of gasoline without generating any new economic activity.

However, the economic activity generated from the music value-chain takes something for free - Britney Spears' voice - and adds in other free inputs - the labor of technicians and producers - with the small costs of printing a CD, and physically distributing it, then selling it for $20 retail, which includes all those direct and indirect costs, plus a margin that is their profit. That profit gets added to economic growth.

That is not to say that Britney Spears, or those technicians and producers, work for free, but labor is a free input the same as finding oil in the ground. There may be real costs associated with finding and extracting it, or turning it into a usable output, but the input itself is literally free. For example, I can decide to go to work today or I can decide to sleep all day. In other words I can choose to sell my labor or let it expire worthless. Or as they say, time keeps on ticking into the future. The same as 'unusable energy' is worthless until it is captured and then used or turned into something valuable.

Money is not a direct substitute for energy, but if the price of labor falls relative to the price of energy then I can substitute more manual labor for expensive energy and vice versa. If labor becomes too expensive then I can substitute mechanization that requires more energy, but less labor. That in no way assumes that money, energy or labor are available in unlimited quantities. So substitution can only take place within the limits of available supply and no more.

However, available supply can be increased if relative prices change. But only up to the limit of total supply. I have one supply curve at price X, and another supply curve at 2X, but they need not be linear. That also does not mean that at 100X that I get 100 times supply. Supply may simply be limited and/or 'available money' may have increased faster than 'usable energy'.

So 'usable energy' will be subject to the natural laws of thermodynamics and Nature's limitations, whereas 'available money' is a relative concept as money supply can increase or contract. And the prices between land, labor, capital, and the technology or know-how to employ them efficiently, can change relative to one another and relative to 'usable energy'. In fact new technology can change the amount of 'usable energy' as well. So think of their relationship to one another as more of a snapshot in time rather than a continuous or absolute one.

Probably still too simplistic for the real world, but the concepts are the same even as we add more layers of complexity. That leads us to macro-economics.

The same applies to the stock market. A given amount of 'available money' to be allocated to all consumption and investment (future consumption). Investment is again allocated between non-financial investments (such as houses) and financial investments like equity, fixed income and derivatives. And investment in equity is allocated between domestic stocks, foreign stocks, indices and equity derivatives. Investment in domestic stocks is allocated between growth stocks, large cap stocks, small cap stocks, seasonals, defensive stocks, etc. And on it goes.

New layers of complexity, but ultimately allocating a fixed pot of money between current and future consumption. Capital and money markets act as a bridge between the two. Of course, the future means uncertainty, so some investments will provide a real return and others will destroy wealth. Or rather transfer it from the losers to the winners.

Why people are usually happy when the market goes up rather than down is - not because those who already sold now see that they could have made more money had they waited - but because the risks are usually asymmetrical. Not all those that make losses can afford them. So usually the small investor is happier when their investments rise. Whereas those that can afford the losses are either more diversified - so what loses money is offset by what makes money - or their time horizon is longer and they are confident that they will make ‘more’ money on their investments over time.

However, if you throw in peak oil resource depletion then not all investments will prove to be wise over time either. As we say in Marketing & Strategy is that it is just as important to know what not to do as to do something simply well. If you are investing in 'sunset industries' then you may see them as 'a cash cow', but over the long-term you should be diverting those excess profits into more sustainable investments because you see – or assume rather - that the future will be different than the past.

Hence investing into a period of resource depletion - or in a transition to a lower equilibrium - means you have to choose investments that either hold new promise or at least hold their value relative to other investments. In other words, if all financial investments go down by two-thirds, and yours only go down by one-third, then relative to other investors, you have preserved your wealth, and so your new level of wealth has twice the purchasing power as their new levels of wealth.

You may all be poorer than before because 'usable energy' fell more quickly than new technology could cope with the transition, but ultimately you would like you and your family's future to be relatively better off than average. And ideally you would like to preserve enough wealth to be able to buy what is for sale - food, clothing, shelter, heat - to provide for your needs.

Sometimes one invests to get rich, but a better long-term plan is to invest so you have the financial means - and skills - to deal with an uncertain future. Farmland may be a better long-term investment than a penthouse apartment. If wealth preservation is your goal.

I would say knowing how economics and physics work in the real world gives you insights into dealing with future uncertainty. But nothing in the future is certain! ; - )

[mididoctors]

http://www.energybulletin.net/37822.html

this story I found intriguing.

$this->bbcode_second_pass_quote('', ' ')There is a large and expanding economic literature that seeks to explain why the steep oil price rise since 2003 has not led to a recession. The common conclusion, arrived at by different models and analysis methods, is that the U.S. economy is now mostly immune to oil prices hikes and has been so since the mid-80's. Many peak oil proponents assume a simple model of the relation between oil supply or price shocks and economic performance. Economists have called into question some aspects of that model. Those studying peak oil need to make cogent responses to ensure that their view is taken seriously. It is beyond the scope of this column to do a detailed analysis, but it is possible to lay out some of the current debate and the issues that need to be addressed.

[mididoctors]

I think I will modify my view in so far as complicating it by the introduction of efficiency.

burning corn ethanol may increase the power consumption but the resultant drop in efficiency (the dreaded boundary condition EROEI problem) will give a false reading on the power meter as it where

peak energy etc.

Boris
London

[MrBill]

$this->bbcode_second_pass_quote('mididoctors', 'I') think I will modify my view in so far as complicating it by the introduction of efficiency.

burning corn ethanol may increase the power consumption but the resultant drop in efficiency (the dreaded boundary condition EROEI problem) will give a false reading on the power meter as it where

peak energy etc.

Boris
London

[efarmer]

I thoroughly enjoy Mr. Bill and Lonesnark since economics is a subject I know precious little about excepting supply and demand and cash is king. During the course of my adult life it seems that the freight train of Wall Street more or less stayed on top of the track of fundamentals. It appears to me now that with hedges, private investments banks, SIVs, and also the plethora of computerized robot transactions, it is a different animal altogether. I see a Wall Street "freight train" now that can leave the tracks temporarily on a whim, jump up vertically from the tracks to snatch a bonus check at year end, and otherwise appear to be "gamed" to a casual observer such as myself. Perhaps the street has always been a trained hound that fetches, speaks, and rolls over and plays dead, who knows. Would you weigh in with experience and logic on my man in the street sort of view?

[MrBill]

Well efarmer, I certainly would not defend Wall Street bonuses or NBA salaries for that matter.

Certainly the game is rigged by the insiders, but also perhaps inadvertently by regulators and lawmakers - under the motto, "you create the rules, and we'll game the system" as there is always the written law, and someone's interpretation of it, versus the spirit of the law, and someone's vested economic interest.

Who knows a company better than its senior management? Often they use financial markets to exit their 'trades' with or without inside help from investment bankers, but certainly there have been enough Enron's and Worldcom's to deny that there can and is temptation for self-enrichment on both sides.

But what about unintended consequences?

$this->bbcode_second_pass_quote('', ' ')RACE OR RISK?

Study after study show that minorities are more likely than whites to get subprime mortgages, which are high-cost loans made to people with poor credit. In its heyday earlier this decade, the subprime market was cheered as an avenue through which historically shut-out borrowers could get loans. That frequently meant minorities.

So long as home prices rose, the subprime market seemed a positive example of how to increase home ownership, but as the housing market weakened this year, many began to question whether the loans were fairly priced.

In September, the Federal Reserve released a study that found 52.8 percent of African-Americans got a high-cost home loan when they refinanced in 2006, compared to 37.7 percent of Latinos and just 25.7 percent of whites in the same year.

[Duende]

LoneSnark wrote:
$this->bbcode_second_pass_quote('', 'T')his is why economists nowadays no longer believe oil shocks induce recessions: they tend to be a wash, shifting wealth from consumers to businesses.

[whereagles]

That is basically the point, yes.

However, it is true that expensive oil tends to increase the cash flow poor --> rich. This is one of the reasons the rich/poor gap is increasing.

[MrBill]

$this->bbcode_second_pass_quote('whereagles', 'T')hat is basically the point, yes.

However, it is true that expensive oil tends to increase the cash flow poor --> rich. This is one of the reasons the rich/poor gap is increasing.

[Doly]

$this->bbcode_second_pass_quote('MrBill', '
')So although high commodity prices are a wealth transfer, and so do not destroy wealth or predict economic slowdowns per se...

[MrBill]

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', '
')So although high commodity prices are a wealth transfer, and so do not destroy wealth or predict economic slowdowns per se...

[whereagles]

I tend to agree. As long as the taps deliver, it doesn't matter how much it costs. If taps FAIL to deliver, then you'd have slowdown.

[LoneSnark]

$this->bbcode_second_pass_quote('', 'T')hirdly, the gains from free trade tend to assume that the exporter's currency will rise, while the importer's currency will decline. So that exports become net less competitive and imports become net less affordable. Then free trade should be self-righting. However, currency manipulation and capital controls can prevent that automatic mechanism from being effective. Then it breaks down and imbalances occur. That is why I often say you should not have unrestricted free trade, unless you also have fair trade.

[MrBill]

LoneSnark wrote:
$this->bbcode_second_pass_quote('', 'C')an you think of another way to enforce a peg than these three? It seems to me from looking at these three options there is no downside to the United States from China's behavior. We get low interest rates and cheap goods while the Chinese lose a crap-load of value.

[LoneSnark]

$this->bbcode_second_pass_quote('', 'F')rom a purely economical perspective that is fine 'because he can now find a job that pays more than $100.000' even though the person who replaced him makes substantially less, and their income may not cover a decent life, including paying for his home, his car, his family's healthcare, paying his taxes and saving for his retirement. In otherwords those costs are external. They are not included in the cost of the software.

[MrBill]

I do not have time to react fully today, but, no, I would reject the view that one job is better than the next, say in USA vs. China. However, I would suggest that 'some' jobs are better than others if they come with benefits for the worker that disappear when these jobs are then offshored.

Also, consider the company that invests in R&D that is then undersold by firms that make either generics or fakes. Ultimately, this is a race to the bottom as you have parasitic firms living off the past R&D expenditures of other firms while simultaneously discouraging these firms from investing R&D in the future. This reduces the incentive to innovate. In which case the one off gains to consumers of lower prices are just that - one off.