The Truth About The Economy
The World economy in the 20th century was built on credit. Paying the interest required constant growth which in turn required cheap oil. The real problem is that cheap oil is gone. What none of the politicians is telling us is that we are going to have at best a steady state economy. That’s why QE3 won’t work. Jeff Rubin explains.
The Fed’s aim to stir the economy by printing more money is off the mark. Certainly boosting the money supply will have an affect, but it won’t be on domestic spending, as hoped, but on exports. Ben Bernanke’s explicit promise to keep interest rates at record low levels until at least 2015 will further devalue the US dollar, thereby boosting the competitiveness of American exporters. That will be helpful, but keep in mind that exports are a relatively small component of the US economy. The Fed would need to see truly phenomenal trade gains to achieve the results it seeks for GDP growth, let alone employment gains.
It’s an unlikely scenario given today’s weakening global economic environment. Moreover, the resulting currency appreciation against the US dollar among America’s major trading partners will only exacerbate their own economic problems, while also dampening their appetite for American-made goods.
So what’s the harm in the Fed trying? Inflation is the traditional argument against central banks turning on the printing presses. Whether widespread price increases will take hold this time around remains to be seen. There is, however, at least one price that another round of quantitative easing is bound to send higher—the cost of oil.
Since oil prices are denominated in US dollars, the lower the value of the greenback, the higher the price of oil.What’s more, any policy that is seen to boost economic growth is immediately bullish for oil prices. Note the knee jerk reaction for oil prices following the Fed’s policy announcement last week. The price of Brent crude, the de facto world price, hit a four-month high, while the price of West Texas Intermediate was pushed near $100 a barrel.
While it’s true that we are finding new reserves, deep water, tar sands and fracking shale none of this is cheap to develop and recover. Rubin again:
We can’t grow our economies without burning more oil, but the growth we seek will eventually push the price of the fuel out of our economy’s reach. That, in a nutshell, is the quandary central banks are now facing. Unfortunately for the Fed, it’s about to learn once again that no amount of monetary stimulus is going to change that basic constraint on economic growth.
So when a politician of any party tells you they are going to bring back “the good old days” don’t believe them.
Cross posted at Middle Earth Journal
Share This
Unless we make a nationwide government supported solar energy drive. We got out of the Depression with government spending; maybe we can do it again. Between extensive solar development, excellence in education goals, and complete transportation and electric grid revamping, maybe we can do it again.
@ The_Ohioan
The old economy depends on cheap liquid fuel (oil). Solar, wind etc will give us an economy but not the high growth economy we have come to expect. The problem is transportation. Their is no substitute for liquid fuels for transportation. The only exception might be rail. Railroads are basically electric already and GE is working on a battery tender to replace the diesel tender. The tenders could be switched at charging stations. For autos and trucks the battery technology is not there and in the opinion of many may never be. We have some nasty laws of physics problems.
Sure would be nice if at some point in our development as a culture we would come to realize that endless growth is not a longterm solution. Learning to live sustainably and responsibly while fairly sharing the load is the worthy goal. This will never happen unless we become better educated as a society and force our political leaders to step up and do their jobs.
Well, I knew there was a catch; otherwise we’d be doing it right? I mean tearing up all the old railroad tracks, and subsidizing oil exploration and extraction (and now natural gas) wasn’t done for nothing was it? It’s not like we have oodles of oil off the coastal areas to tide us over during a transition. And we will probably never have a big enough battery to use on all the trucks big enough to carry what could be carried by rail, if we hadn’t torn up all the tracks. And using smaller electric trucks to get products from the railroads, if we had them, to the factory or store is probably a fantasy.
One of the biggest problems is a lot of those old railroad tracks are now owned by private companies – who are still using them to transport materials in and products out. One ran right behind my house in Ohio to a local chemical plant.
I’m sorry, driving a Prius, which I fill with gasoline once a month, has probably set me completely on the wrong track.
Not quite, Ron. It’s true that the old economy was designed that way and inertia and vested interests aren’t very interested in changing it any time soon. But what we could do is expand and improve the grid so that wind power from the plains, solar from the desert southwest and geothermal from the areas near Yellowstone and other places where it is economically viable can all be combined with newer and safer nuclear technology such as thorium reactors for electrical energy. Also, why hasn’t anyone built a true hybrid? A true hybrid, IMO, would consist of electric engines with range boosted by a small turbine that could be powered by anything from gasoline to natural gas that would charge the batteries on the go if the charge drops below a certain level. There are other answers to transportation other than liquid fuels if we only thought about it more, IMO.
JS, yes the thorium reactors should be integrated into the grid, not so sure solar is that good as they hit their rated output only part of the time. I can’t find the citation, but it said that the 250MW plan really only averages 13% or 30 or so MW, equivalent to a standard gas plant.
TR should be fast tracked.
The point I was heading towards, dduck, is that a diverse system linked through a well designed smart grid is our best shot.
I am with Jim!
Jim
You are underestimating the importance of liquid fuel. Gasoline and diesel have an incredible advantage when it comes to weight vs energy over alternatives.
JS
That’s what I understood my hybrid was doing. When the wheels move anytime and when it’s going down grade, the gas engine shuts off the electric takes over. When the gas engine runs it’s charging the battery. It seems to be a constant on and off for both engines (or whatever they are). I get around 49 MPG and could get more if I concentrated on what I was doing, I’m sure.
JS, I got your point and agree.
Ohio, the price we may all pay will be when the old used batteries start piling up. Can they be replaced or do you just buy a new car.
dd
I assumed they would all go to that great battery resting place in the sky. But it’s a good question. Are these batteries harder to dispose of than others? Impossible to dispose of? Never thought about it. All I know is the Prius users I know will never have another brand, hold on to them as long as they can, and the Prius has one of the largest resale price of any car. My own car is a 2010 and the body seems to be some blend of metal and plastic – it may never even rust, as far as I know.
There are drawbacks, of course. The engine is so complicated that it is half the cost of the car, has a 7 year warranty and guaranteed road coverage because it has to be repaired by a certified technician. If it breaks down or is in an accident it has to be hauled however many miles it takes to get it to that techy. Not a car for the outback. Plus it’s low to the ground so high snow levels can be more of a problem than for SUVs or pickups.
Would I change it for another? Not on your life. But now I’m worried about those batteries…
Sustainability is going to be the 21st Century buzz word (either that or our civilization won’t have a 22nd Century). How to deal with batteries piling up? Change the mind-set that trash is the responsibility of the end user.
Wait, what???
Way back when (okay it was 1981), I was a budding young chemist (okay, I started undergrad, but still…) and helped my state pass the bottle bill. I also came up with a simple yet awesome idea to create a recycling economy: tax anything that is made from raw materials and any energy source obtained through unsustainable resources (btw, that would include nuclear energy…there is only so much uranium out there).
Specifics: the taxes would be set so that recycled material would be cheaper than stuff from raw materials. A while back, the NY Times Sunday edition used to use up something like 117,000 trees (for just that one day). Do you know how much paper you would get if the entire issue was recycled? About enough to save…wait for it…117,000 trees. Yeah, we have that ‘conservation of mass and energy’ thing going.
Currently we have a floating continent of plastic out in the central-northern Pacific. It has just about reached the same longitude as Hawaii. If that plastic were picked up and recycled (thus not even matching the plastic numbers), the resulting plastic is as tough as wood, and it won’t biodegrade! That means that making park benches, docks, rail road ties, lawn furniture and any number of other things out of it would be easy. Instead, the floating death-trap keeps getting bigger each year.
Reason why the idea would work: although it would be levied as a tax, one could simply claim that we are requiring the manufacturer/seller to prepay the disposal cost. Thus, if a manufacturer used recycled material, the previous manufacturer already paid that disposal cost, so no tax on recycled stuff. If a semi-independent agency were assigned to set the tax levels so that recycled materials were a little bit cheaper (but not overly burdensome) then congress could not get lobbied to change the tax rates. Thus: businesses themselves would be begging people to recycle (and empowering them to do so). Why? Because their own costs would go down if they bought the recycled stuff!
There is more that goes into all of this, but I hope that you can see where this is going.
Oh, and YES, I did send the idea to Reagan, Kennedy (my senator), Kerry and others. I still haven’t heard back yet. I’m kind of figuring that Kennedy and Reagan will answer before any current politician…
“Sustainability” is not only an environmental buzzword. It is an economic one.
There is no such thing as a limitless resource (except, perhaps, imagination & creativity). Any business model, whether it be a one-man consulting firm, an international conglomerate, or a national economy, needs to be built around the realities of scarce or potentially scarce resources and act accordingly.
Any entity who does not do that is inevitably doomed.
Are we running out of bucks in this economy. $16+ trillion in debt, says yes. Besides the blame game, what is Washington doing about it? Sustainability of our budget requires less bucks going out and more coming in.
Will Obama pull some small rabbits out of the hat? Can Mitt pull any rabbits out?
Meantime, the rabbits aren’t looking too worried.
dduck, only answer is to raise taxes. Cutting spending is nice but it can’t possibly get us to where we need without causing other collapses.
It’s a representative democracy. We sent these people to office. They made this debt crisis because they spent in a way that would make us elect them. WE are ultimately responsible for this mess, and we must suck it up, act like adults, and pay our debts.
Anything else is shirking our duty and looking for hatted rabbits.