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  • gregor: ignoring energy - the hollow keynesian/austrian debate

    Hollow Men of Economics

    July 2, 2010

    Left unaddressed during the past 3 years in most of the debates between economists has been the problem of energy. The reason is simple: post-war economists don’t do energy, except as an ever-expanding resource that the credit system and technology makes available. For the post-war economist, the supply curve of energy–save for brief lags–is always coming back into rough equilibrium with the economy. Accordingly, the ongoing dispute between Keynesians and Austrians (or Austerians if you like) is exceedingly boring in this regard. As late as 2008, for example, economist Paul Krugman was at least an infrastructure-and-engineering Keynesian. However, Paul quickly converted to becoming just a throw lots of money at the existing system Keynesian. The hollow nature of Krugman’s debate with Niall Ferguson meanwhile comes via their shared belief that the system will self-organize, if you follow their respective prescriptions. They are indeed the inheritors of Adam Smith. However, neither allowing the economy to deflate further from here via austerity, nor throwing more debt-marked stimulus will solve the present day problem. For the United States, along with the rest of the developed world, has reached a boundary in energy.



    Only an economist could wonder in their leisure now, whether energy played a significant role in our current crisis. Indeed the public remarks of Ben Bernanke on the matter of energy, during the 2005-2010 period, were at least as clueless as his embarrassing commentary on the historic bubble in housing and credit. As the nation’s chief economist, Bernanke saw no problem with credit, with derivatives, with the fast inflation in housing prices, or with energy prices. And as an American economist, he was not alone.

    As state’s see their budgets collapse and start a new round of layoffs, we should consider the fact that house price inflation masked the lack of wage growth in the United States. And now that house prices continue their descent for a 5th year, American workers are more fully exposed to the decade-long march higher in energy costs. They can experience this individually through energy prices, or more generally through the overall energy cost to the economy. Hence, the chart above.

    Unlike many who were either shocked or angered at the ridiculous paper released by Richmond Fed Economist Kartik Athreya, Economic is Hard, I was delighted. For, the paper confirms that at the Federal Reserve, just as in the post-war economics profession, competency has been replaced with authority. Indeed, this was in fact Athreya’s central point: that only a PhD in economics conferred the proper access to discuss economic issues. The most beautiful rebuttal came from Ambrose Evans-Pritchard, who made a point dear to me and one that I have made for years: economics is a social science, not a science. In other words, economists are working down here, alongside the rest of us humanists. History, literature, psychology, and anthropology to mention a few disciplines are all equally competitive fields of knowledge to understand the system of behavior known as an economy. Accordingly, it behooves post-war economists to dislodge themselves of the view that their discipline neatly explains energy and energy supply. Lose the attitude. The problem of energy limits awaits you.


    http://gregor.us/oil/hollow-men-of-e...=Google+Reader

  • #2
    Re: gregor: ignoring energy - the hollow keynesian/austrian debate

    Very nice find JK!

    It's been about energy for a very long time, but the big red flag came almost 40 years ago. We may show concern over FIRE, but oil has burned bright and hot for a long time now.

    This article emphasizes the main difference I have with Krugman. Even last night on Charlie Rose, Krugman implied it doesn't matter how the government spends the money, as long as they create demand. As I expressed elsewhere, large deficit spending on Alt-E creates jobs, keeps dollars in the U.S., and gets us quicker to the inevitable non oil based economy.

    The recessions of the 70's and early 80's followed oil shocks, and even the crash of 2008 followed a run up in oil prices. iTulips Peak Cheap Oil theory expects a series of recessions caused by oil price shocks. I'm beginning to wonder if the world wide austerity policies, along with the decline in purchasing power of many people and companies, could cause an Oil price shock at a much lower price than what we expect ($80?).

    Comment


    • #3
      Re: gregor: ignoring energy - the hollow keynesian/austrian debate

      it is remarkable that oil never went below about $67 [iirc] during the panic in early '09, during the deepest recession since the '30s. and here we are, with a very very slow global economy, and oil bouncing between $70 and $80. imagine what it would cost if the economy showed much growth. i am also very curious about the graph in gregor's piece, specifically wondering what the '09 and '10 numbers are going to look like.

      Comment


      • #4
        Re: gregor: ignoring energy - the hollow keynesian/austrian debate

        Originally posted by jk View Post
        it is remarkable that oil never went below about $67 [iirc] during the panic in early '09, during the deepest recession since the '30s. and here we are, with a very very slow global economy, and oil bouncing between $70 and $80. imagine what it would cost if the economy showed much growth. i am also very curious about the graph in gregor's piece, specifically wondering what the '09 and '10 numbers are going to look like.
        If oil, priced in US Dollars, collapses then the Federal Reserve and Uncle Ben are going to be losing a lot of sleep...for it means that their reflation policies are failing. Nobody wants high $US denominated oil prices more than Bernanke.

        Comment


        • #5
          Re: gregor: ignoring energy - the hollow keynesian/austrian debate

          Originally posted by GRG55 View Post
          If oil, priced in US Dollars, collapses then the Federal Reserve and Uncle Ben are going to be losing a lot of sleep...for it means that their reflation policies are failing. Nobody wants high $US denominated oil prices more than Bernanke.
          I'm afraid I'm not following this, low oil prices would certainly allow consumers to spend on other consumer items?

          Comment


          • #6
            Re: gregor: ignoring energy - the hollow keynesian/austrian debate

            Originally posted by toastie
            I'm afraid I'm not following this, low oil prices would certainly allow consumers to spend on other consumer items?
            low oil prices will only occur if there's a global depression.

            Originally posted by GRG55 View Post
            If oil, priced in US Dollars, collapses then the Federal Reserve and Uncle Ben are going to be losing a lot of sleep...for it means that their reflation policies are failing. Nobody wants high $US denominated oil prices more than Bernanke.
            be careful what you wish for, eh?

            Comment


            • #7
              Re: gregor: ignoring energy - the hollow keynesian/austrian debate

              Originally posted by Gregor
              neither allowing the economy to deflate further from here via austerity[Ferguson], nor throwing more debt-marked stimulus will solve the present day problem[Krugman].
              A lot of what I happen to read focuses on what should be done now with regard for the US economy/unemployment/recovery from recession/debt bubble. Gregor summarizes the two arguments: stimulus or austerity and says neither is correct.

              So what is the best answer? It will surprise me if I find the best answer on itulip, but why not give it a try.
              Jim 69 y/o

              "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

              Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

              Good judgement comes from experience; experience comes from bad judgement. Unknown.

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              • #8
                Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                Originally posted by Jim Nickerson View Post
                A lot of what I happen to read focuses on what should be done now with regard for the US economy/unemployment/recovery from recession/debt bubble. Gregor summarizes the two arguments: stimulus or austerity and says neither is correct.

                So what is the best answer? It will surprise me if I find the best answer on itulip, but why not give it a try.
                There is no best answer, just worse options.

                I think mankind has a degree of arrogance. We attribute too much of industrial civilization's rise to mankind's ingenuity, and not enough on the practically free and abundant energy source that got us here these past 100 years. Technology, without the energy to run it, is but a diagram on a blackboard. The cost of energy determines the availability of any given technology.

                I would also like to mention that the cost of oil is much greater than we see. We have never factored in the costs of Gulf War I and the subsequent war on terror wars - Afghanistan and Gulf War II, as well as the costs of maintaining a military presence in the middle east to ensure a supply of cheap oil for the global economy. These costs have yet to be realized due to a fantasy based fiat debt model of petrodollar recycling. If or when that system collapses... the average consumer will better understand contemporary oil's true cost.

                Comment


                • #9
                  Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                  Supply constraint= bad if oil prices are low BECAUSE exploration and production costs rising as supply diminishes = RAPID onset of Oil Supply Shock due to a collapse in production.

                  Think of it this way. If Prices fall too much, current and incipient production is no longer profitable CAUSING a rapid decrease in supply which then correspondingly leads to a Very large price spike (due to the remaining demand being inelastic, e.g. Ka-POOM applied to peak oil)

                  Make sense?

                  Comment


                  • #10
                    Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                    Originally posted by Jim Nickerson View Post
                    A lot of what I happen to read focuses on what should be done now with regard for the US economy/unemployment/recovery from recession/debt bubble. Gregor summarizes the two arguments: stimulus or austerity and says neither is correct.

                    So what is the best answer? It will surprise me if I find the best answer on itulip, but why not give it a try.
                    Surprise?! Of course you'll find the best answers on iTulip, and there will be many and they will take many different forms.

                    Actually, it isn't that neither argument, stimulus and austerity is correct, it's that they both are correct, and its just a matter of how and when.

                    The immediate problem is we need demand in the economy (too many unemployed, underemployed and scared people). The next immediate problem is we need to get rid of the enormous debt. The next immediate problem is we have an economy which is critically dependent on cheap oil which has come to an end.

                    Take on all 3 problems at once. A large stimulus solely directed at Alt-E/conservation, partially payed for with a phased in fossil fuel tax over 7 years guaranteed to triple the cost of fossil fuels, with 1/3 going to debt reduction. And of course we will need a national call for sacrifice, which I thought we were going to get 1 1/2 years ago. Nothing short of a war effort will do.

                    Krugman had a very good idea last night, although probably not workable. He suggested the stimulus and Austerity be tied into one piece of legislation so that both were assured to happen. Now if you're going to just say the congress will never do it, they're all evil and in the pockets of banksters, and the government will just screw it up, then it's pointless to even try to have a discussion. Jim asked for a solution and I'm glad to put my normal solution up for attack.

                    But simply attacking ALT-E is not a solution, and any proposal that says we will simply find more fossil fuels, or uranium, is just fantasy wishfulness.

                    Comment


                    • #11
                      Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                      It's the chicken and egg paradox Jim. The answer is actually both, simultaneously, that's the answer.

                      You must allow credit contraction to take place (and allow the corresponding liquidation in asset prices and also realize the debt impairment, as bankrupcy proceeds we will get our debt restructuring through market forces as Hudson has detailed in one of his audio interviews with EJ on this very site) Think of this as FIRE deflation.

                      SIMULTANEOUSLY, we must provide bottom up stimulus. (I've talked about how to do this earlier, along how this would correct the entitlements disaster, see post below.). Cow said $1000 per adult, I think the absolute MIN is $1500 in guaranteed adult income to everyone, considering they could be paying for their own food ,rent, health care, etc. We loose the entitlement system, remember?). The key factor is that for some people this will be survivial money. But for people with good incomes/fiscal situations, this windfall provides a VERY necessary means of stimulating VC. All that would be required is a TRUSTWORTHY VEHICLE that would allow people to voluntarily contribute these (for them) excess funds for investment purposes. This Pool of funds would be substantial, and if it were given the proper tax incentives and a wise fund manager (EJ's idea comes to mind very quickly here), you get everything that you need.

                      Private bank credit needs to die, and be replaced with something akin to Milton Friedman's 100% reserves banking concept. All loans are EQUITY loans, not debt loans. The government regains it's role as liquidity provider to financial instituitions via direct currency emission, and the public also has a stake in providing liquidity due to their Guaranteed income. The public having excess funds which could be made available for deposit now has a real impact on economic development. These accounts need to be structured according to the Islamic Banking model, whereby you have two classes of deposits. On class is a non-interest bearing "demand deposit" account, a true checking. The other type is a true investment savings account with risk of loss AND a return tied to the actual perfomance of the underlying investments, not some guaranteed rate of return.

                      We need to employ George Soros' "covered bond model" to return the housing market to private sector funding once again, and eliminate the role of the state in supplying asset price support.

                      This needs to be done explicitly so that everyone understands the coheisive nature of the policy AND that this is the NEW FINANCIAL REALITY (new financial system).

                      There are a few other things you would need to fix.

                      Like income tax dies, corporate tax rate goes to 15%-25% on Net profit, period. VAT is the new funding mechanism with pre-refunds which would ensure that survival level consumption is not taxed. VAT must be apportioned to states to provide THEIR funding mechanism as well to replace their property, income and sales taxes.

                      A carbon tax as EJ describes is also a necessity, he has detailed it very well and I'm not going to repeat it here.

                      Property tax would have to be a national affair (with state revenue sharing, of course). It would only be re-indexed for owner-occupied housing when a sale takes place (so as to not place a confiscatory burden on "a man's castle". This ONLY applies to a single "Legal residence" not vacation or second, third, or fourth homes (these would be treated as "rentals" for all intents and purposes). For rental and commercial, the assesment would be indexed annually and whenever a sale takes place.

                      We would have to adopt the British model of "Loser Pays" for civil cases. That's the only legal reform we really need.

                      For the Criminal Justice system, tri state logic needs to apply (tri-state logic is optimal if you didn't already know). Three verdicts are possible Guilty, Not Guilty (double jeopardy applies), AND, NOT PROVEN (double jeopardy does not apply).

                      For Political reform, please see this (sorry FRED for the ZH link, it is necessary) and please observe the 100% fee on private campaign contributions (this is the "WINNER, WINNER, CHICKEN DINNER" of campaign finance reform).
                      http://www.zerohedge.com/article/gue...ix-politicians

                      And obviously we need to fix the international trade settlement sytem. Jim Rickards seems to have that figured out pretty well. National Currencies priced in gold, and exchanged on those terms, sums it up nicely.

                      Forgot to add that this of course requires that exising soveign debt is directly monetized, because we won't be selling sovereign debt any more now will we. We will have soverign currency emission, instead.

                      Finally, we are going to have to adopt what the Chinese have instituted with regard to unlimited currency convertiblity to gold and silver (all Precious metals actually). The round trip conversion from currency to PM and back generates no tax liability. Only in this way can people express a vote of "no confidence" in governmental policies or in the investment opportunities provided to them (IF, and I stress IF, that is the appropriate response, and sometimes, it is). Capital is free to protect itself if there is no productive use for it. This ensures that capital misallocation does not take place by providing a safe storage for capital to wait until the "time is right" to be put at risk for use as seed capital for productive investment. Capital owners MUST retain the right to determine when and if capital should be placed at risk based on the economic environment and future prospects for productive investment. (Not a problem for Alt-E Seeding, Whom ever does NOT SEE this as the next BIGGEST investment area for the next 3 decades is a complete and utter MORON).



                      Actually when you think about it, it is pretty simple. Obviously this needs to fleshed out quite a bit more, but hopefully you can gather the "gist" from these broad brush strokes that I'm painting as I type away here on my keyboard.

                      (When does the National Ignition Facility go on-line again?) ;)

                      Oh, yeah. ONE MORE THING. We should elect Pete "Toni" Braxton as President in 2016 or 2020

                      Originally posted by jtabeb View Post
                      "Returning to the wider debate about the system being not functional from my personal viewpoint, it is not only not functional; In my opinion, it absolutely prevents the ongoing establishment of a free society. That the present rules and investment mechanisms have created a feudal western civilisation, not unlike the worst examples from ancient history. By Western, I mean on both sides of the Pond. The US and Europe."

                      Yep, We are at that "John Galt Moment". More precisely, If I don't trust the economic system, and think I will only get screwed for my productive efforts, why in the hell would I want to set myself up as a wet nurse to a bunch of leaches? (Or if you prefer, do I WILLFULLY CHOOSE to continue to serve as an enabler for a drug addict?)

                      I think it all comes down to this. We all (I think all) want to save America but we don't want to be FIRE enablers (and their minions in the political and MSM class). What is MOST IMPORTANT (or should be IMHO) is taking care of our fellow Americans and making their collective lives better. But this places us in the untenable position of supporting the very thing that we are trying to eradicate or denying economic life blood to our fellow citizens. Great choice, right?

                      So what's the way out? I'm going to have to go with Andrew Jackson on this. We will have no gain until we take the pain (and END the Den of Vipers and Theives, err, the FED). And, most imporantly, that natural resource constraint clock just keeps on ticking away while Rome Burns. And, in this game, if you run out the clock, you don't win, you die (or revert back to a subsistence level of survival, which of course is impossible for most people in industrialized societies). So yeah a whole crap-load of people die. or as EJ positied, you just have a nice war which would, of course kill a bunch of people (with the added bonus of totally destroying the economy due to the combined effects of the energy price spike AND the diversion of supplies from commercial to military use). Win the War, destroy your Country and your Economy. Umm, yeah, me thinks this is a poor choice.

                      So THE CHOICE, THE ONLY CHOICE that does not result in our complete and utter self-imposed annihilation IS:

                      A. Some variation of this (Charter STATE BANKS in each and every state and use them to hold gov depository reciepts) With a 100% RESERVE requirement, I might add.
                      Andrew Jackson believed that the Second Bank of the United States was unconstitutional and that it posed a serious threat to the American economy and its democratic political institutions. Though its charter was not set to expire until 1836, BUS president Nicholas Biddle requested and received a congressional recharter in 1832. Jackson decided to veto the bill. Jackson escalated this so-called "Bank Andrew Jackson believed that the Second Bank of the United States was unconstitutional and that it posed a serious threat to the American economy and its democratic political institutions. Though its charter was not set to expire until 1836, BUS president Nicholas Biddle requested and received a congressional recharter in 1832. Jackson decided to veto the bill. Jackson escalated this so-called "Bank War" in 1833 when he removed federal government funds that were on deposit with the BUS and distributed them to loyal state banks. War" in 1833 when he removed federal government funds that were on deposit with the BUS and distributed them to loyal state banks.

                      B. Dump the entitlement system, the tax system and the bugetary process and move to a system where there is no private credit (loans of funds in my (or a bank's) possession, YES, credit created out of thin air, NO) and provide everyone with a guaranteed income. Have a consumption tax, and if Hudson is to believed, a property tax. You pay for services from the government (you can choose to spend your guaranteed income however responsibly or irresponsibly you wish). And of course you have to have some pre-refund mechanism on the consumption tax so that people who spend 100% of their income on necessities are not taxed on the privlage of living. If I were king for a day, I would open up the option of "PAID" volunteer work in comunities and schools etc. that is strictly in addition to you guaranteed income level, not a replacement or a net reduction. I love the idea that people can get paid for helping other people, so, Heck, I say "Make it happen".

                      Now all we have to do is crash the currency and the international monetary system and re-institute national currencies that are settled in gold for international trade transactions and we are in business!

                      (Of course this requires that all currencies are FREELY priced in gold instead of gold being priced in currencies) Hey, I can dream right? (As I see it, I'm free as long as I know I'm free, if I forget, well, then, I'm not) Note to self, "Always know I'm free".

                      Okay, good, moving on...

                      Then you get what's called "a self-sustaining recovery", but not before.


                      You know what the difference between us and a Horse is?

                      A horse that is dying of thirst will drink if you lead him to water. We won't
                      Last edited by jtabeb; 07-03-10, 07:53 PM. Reason: finished outline

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                      • #12
                        Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                        Originally posted by jk View Post
                        low oil prices will only occur if there's a global depression.


                        be careful what you wish for, eh?

                        as i understand, oil didn't collapse because opec slashed production?

                        Comment


                        • #13
                          Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                          Slashed? (Or was having severe production declines?)

                          The world may never know... How many licks it takes to get to the center of a toosie pop, but I think we will have our answer on Saudi Oil production declines shortly

                          Comment


                          • #14
                            Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                            Yes, the fully burdened cost of maintaining world oil production and distribution (inclusive of the Security that, we, the US, provide), not to mention environmental costs and health costs etc. would be SUBSTANTIALLY higher than is currently reflected in the "market price" of a barrel of oil. (like in the vicinity of $2500-$5000 a bbl). Makes alternatives VERY COST competitive, me thinks.

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                            • #15
                              Re: gregor: ignoring energy - the hollow keynesian/austrian debate

                              Who could have Know?

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