Searching For Wisdom Among The "Doomertainer" Jokers

[metalman]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

have to dig it up but somehere ej makes the case that the 1970s "oil embargo' was about opec shipping oil to the usa through intermediaries. plenty of oil but at high prices. today i find...

Gas jumps above $3.67, oil passes $126 on Venezuela concerns

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government. Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas. That appears to heighten the chances that the U.S. could impose sanctions on one of its biggest oil suppliers.

"If we put on sanctions, I'm sure Chavez would threaten to cut off our oil supply," said Phil Flynn, an analyst at Alaron Trading Corp. "Obviously that would have a major impact on oil prices."

Even if Chavez cut oil shipments to the U.S., Venezuelan oil would still make its way to the U.S. via middle men, who would buy it from Venezuela and resell it to the U.S., Flynn said. But that new layer in the supply chain would bump up costs.

--

he also made the point that "opec was blamed but the us had to print the money to pay for the oil" or something along those lines.

bang! we have a match. peak cheap oil means the usa has to print more money to pay for the oil, leading to inflation in the prices everything.

that's what ka-poom theory says, no? print money to cover the debt deflation but blame it on opec?

[Finster]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

I won't presume to speak for ka-poom theory, but some historical perspective is worth keeping in mind. In the 1960s a two decade bull market in stocks topped out. Going into the 1970s we had been going through a series of currency crises in which the US government found itself increasingly unable to exchange gold for dollars in the international market per Bretton Woods. It had been paying for the Vietnam-era guns and butter polices with inflation, and dollars were piling up overseas. Those currency crises finally culminated with the closing of the gold window in August of 1971. This was the final step in liberating the US monetary authorities from the gold shackles that periodically constrained them since the founding of the republic.

Within a few years, every one was talking about "oil depletion" as commodity prices soared. It reached mass hysteria proportions by the end of the decade. Finally, Paul Volcker at the Federal Reserve adminstered shock treatment to the inflation, hiking interest rates to 20%, putting on credit controls, and halting money supply growth. Within a few more years, "oil depletion" had been forgotten about, and by the 1990s we were talking about an "oil glut".

In the 1990s a two decade bull market in stocks topped out. The Greenspan Fed had been underwriting it with monetary expansion since the 1987 Crash. When the bubble finally burst in 2000-2002, several trillion dollars of paper stock market wealth evaporated. Many financial commentators worried openly about deflation, and even Ben Bernanke at the Federal Reserve authored a paper on how to deal with deflation. Greenspan responded to the threat by running Fed funds all the way down to 1% and holding them for a protracted period of time, and then only normalizing them in a series of well-telegraphed rate hikes, saying "...policy accommodation can be removed at a pace that is likely to be measured". This put an implicit ceiling on future Fed rate policy and encouraged credit market speculation. Money supply expanded rapidly and credit creation soared. In 2002, commodity prices began to rise in earnest. The government embarked on a guns-and-butter policy, and Americans borrowed and spent like never before. Dollars were piling up overseas.

By 2005, the "oil depletion" theme of the seventies had been revived under the name of "peak oil". Now, in 2008, it is again approaching a state of mass hysteria...

[jk]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

...

Folks, it looks like we are also going to have to cobble up a theory of Peak Cotton, Peak Copper, Peak Wheat, Peak Lead, Peak Cocoa, Peak Gold, Peak Orange Juice, Peak Pork Bellies ...

Because there is nothing special going on with the price of oil. Here is a chart that graphically shows the relationship between the oil price and the price of a basket of commodities. Rather than address the question of "How many dollars does it take to buy a barrel of oil", it asks the question "How many bales of cotton, pounds of copper, bushels of wheat ... etceteras does it take to buy a barrel or oil". Specifically, you are looking at the entire history of the oil price versus the DJAIG Spot Commodity index from inception through last quarter ... a logarithmic plot of the oil price divided by the DJAIG.

Oil As Priced In Real Stuff



Either that, or we could just step back for a minute and ask ourselves: What is the common denominator in all these prices?

We quote the price of oil in dollars per barrel. We quote the price of cotton in dollars per bale. We quote the price of copper in dollars per pound. And this is the way all of the commodities in the DJAIG basket are priced in the calculation of the dollar denominated index.

If you want to know what is really going on with the price of oil in dollars, you have to look at the dollars. Here I've done the same thing with dollars as I did with oil in the above chart. Same time frame. Simply asked the question what is the value of the US dollar in terms of real stuff? This is just taking the question posed by the DJAIG and turning it around. Rather than asking how many dollars it takes to buy its basket of commodities, we ask how much commodities it takes to buy a dollar. Just take the reciprocal of the DJAIG Spot, plotted log.

We find that the value of the USD is simply falling off a cliff.

USD As Priced In Real Stuff



So either we must come up with an array of Peak X theories to explain the similar price action for all of these different physical commodities - or - we look to a single common denominator for the answer.

We report. You decide.

my problem in interpreting these charts is that oil/energy is a major input in the production of all the other goods you mention. furthermore, the djaig index is itself about 1/3 energy products.

[metalman]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

I won't presume to speak for ka-poom theory, but some historical perspective is worth keeping in mind. In the 1960s a two decade bull market in stocks topped out. Going into the 1970s we had been going through a series of currency crises in which the US government found itself increasingly unable to exchange gold for dollars in the international market per Bretton Woods. It had been paying for the Vietnam-era guns and butter polices with inflation, and dollars were piling up overseas. Those currency crises finally culminated with the closing of the gold window in August of 1971. This was the final step in liberating the US monetary authorities from the gold shackles that periodically constrained them since the founding of the republic.

Within a few years, every one was talking about "oil depletion" as commodity prices soared. It reached mass hysteria proportions by the end of the decade. Finally, Paul Volcker at the Federal Reserve adminstered shock treatment to the inflation, hiking interest rates to 20%, putting on credit controls, and halting money supply growth. Within a few more years, "oil depletion" had been forgotten about, and by the 1990s we were talking about an "oil glut".

In the 1990s a two decade bull market in stocks topped out. The Greenspan Fed had been underwriting it with monetary expansion since the 1987 Crash. When the bubble finally burst in 2000-2002, several trillion dollars of paper stock market wealth evaporated. Many financial commentators worried openly about deflation, and even Ben Bernanke at the Federal Reserve authored a paper on how to deal with deflation. Greenspan responded to the threat by running Fed funds all the way down to 1% and holding them for a protracted period of time, and then only normalizing them in a series of well-telegraphed rate hikes, saying "...policy accommodation can be removed at a pace that is likely to be measured". This put an implicit ceiling on future Fed rate policy and encouraged credit market speculation. Money supply expanded rapidly and credit creation soared. In 2002, commodity prices began to rise in earnest. The government embarked on a guns-and-butter policy, and Americans borrowed and spent like never before. Dollars were piling up overseas.

By 2005, the "oil depletion" theme of the seventies had been revived under the name of "peak oil". Now, in 2008, it is again approaching a state of mass hysteria...

the big diff is that opec can't seem to pump enough oil at $126, keep missing targets. debt/gdp and debt/household assets and income levels are way worse now than in 1980. even if volcker were still in the game, he can't play the same hand. oh, and there's this war on terra, and the middle east blowing up again. etc.

[Guest]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

It's very heartening to see this thread has not been pruned off with the other Lukester SPAM threads. Also heartening to see some "rational objections" finding their way into these pages on certain "universal theories of financ-driven reality".

The 100% reliability of the pure financial theory of all goods prices is meeting a gust of wind from the "outer world" here. Chip, chip, chip away - sooner or later the little chips poke through to a chink of daylight. Well it's "daylight" for some and "darkest night" for others - apparently there is no such thing as an objective reality we can all agree upon.

my problem in interpreting these charts is that oil/energy is a major input in the production of all the other goods you mention. furthermore, the djaig index is itself about 1/3 energy products.

[Finster]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

my problem in interpreting these charts is that oil/energy is a major input in the production of all the other goods you mention. furthermore, the djaig index is itself about 1/3 energy products.

Both of these facts are correct. But if oil prices were really outpacing the rest, the chart should merely show a smaller increase, due to the oil/oil part diluting the other/oil part. There is still the remaining non-oil portion of input in the production of other goods and the 2/3 non-oil portion of the DJAIG whose effect is diminished by these facts, but not eliminated.

Yet the ending value in the chart is actually a tad lower than the beginning value. Over the entire available span of the DJAIG, there is no relative increase in oil at all. If we take some finite effect and reduce it even by 90%, there would still be something left. But we don't see anything left. Except perhaps for a slight decrease over a span of over seventeen years ...

Oil As Priced In Real Stuff

[jk]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

you're right, finster. point taken.

[GRG55]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

...

Folks, it looks like we are also going to have to cobble up a theory of Peak Cotton, Peak Copper, Peak Wheat, Peak Lead, Peak Cocoa, Peak Gold, Peak Orange Juice, Peak Pork Bellies ...

Because there is nothing special going on with the price of oil. Here is a chart that graphically shows the relationship between the oil price and the price of a basket of commodities. Rather than address the question of "How many dollars does it take to buy a barrel of oil", it asks the question "How many bales of cotton, pounds of copper, bushels of wheat ... etceteras does it take to buy a barrel or oil". Specifically, you are looking at the entire history of the oil price versus the DJAIG Spot Commodity index from inception through last quarter ... a logarithmic plot of the oil price divided by the DJAIG.

Oil As Priced In Real Stuff



Either that, or we could just step back for a minute and ask ourselves: What is the common denominator in all these prices?

We quote the price of oil in dollars per barrel. We quote the price of cotton in dollars per bale. We quote the price of copper in dollars per pound. And this is the way all of the commodities in the DJAIG basket are priced in the calculation of the dollar denominated index.

If you want to know what is really going on with the price of oil in dollars, you have to look at the dollars. Here I've done the same thing with dollars as I did with oil in the above chart. Same time frame. Simply asked the question what is the value of the US dollar in terms of real stuff? This is just taking the question posed by the DJAIG and turning it around. Rather than asking how many dollars it takes to buy its basket of commodities, we ask how much commodities it takes to buy a dollar. Just take the reciprocal of the DJAIG Spot, plotted log.

We find that the value of the USD is simply falling off a cliff.

USD As Priced In Real Stuff



So either we must come up with an array of Peak X theories to explain the similar price action for all of these different physical commodities - or - we look to a single common denominator for the answer.

We report. You decide.

The first chart merely confirms that, contrary to recent pronouncements from the press and blowhard DC politicians, over time the reality is we do not value oil any more or any less than other important [as deemed in the index] commodity inputs to our economy. Oil is a precious fluid upon which we are heavily dependent, but I don't see why it would be deemed more important than food or copper for electricity for example, so I do not understand why anyone would be surprised by the "flatline" in Finster's chart.

The second chart is interesting because we have been taught that over time the price of any commodity will always fall to its marginal cost of production; and that marginal cost itself is falling due to improved technology and extractive techniques. What appears to be happening today is that the marginal cost of producing some commodities, oil included, is no longer falling [even in inflation adjusted Dollars]...and may in fact be on the verge ofa period, of indeterminant duration, of rising in real terms.

It's way too early to tell if this is: 1) a permanent trend change (e.g. a future of constant, relentless energy and other shortages accompanied by endlessly skyrocketing prices as some, like J. H. Kunstler, are saying) or 2) another "decade-or-so-long" perturbation that "ends" when the historically reliable and always powerful combination of: improved technologies, conservation, substitution with new and cheaper alternatives, and aggregate behaviour change bring about a different, and possibly today unimaginable, "new equilibrium". Quite frankly we simply won't know for certain until we can look back, the way we are today able to look back more objectively on the inflation/disinflation cycle over the 30 years between 1971 and 2000.

Whether we are discussing energy or food, history simply does not favour Kunstler's outcome (1). I think that is one of the points Finster is making, and I don't disagree [much to Lukester's dismay ;)].

Where Finster and I may diverge is that in the specific case of petroleum I am unconvinced of a facsimile of the '70s shortage/'90s glut, and expect the so-called new equilibrium for energy will include less petroleum, ultimately perhaps much less petroleum in the developed economies, if not for supply cost reasons, then due to a combination of supply security reasons plus public climate change/carbon emission/environmental policy influences [I am watching the evolution of the debate surrounding the Canadian oil sands. How that resolves may be an important indicator of which of these factors will dominate going forward.]

As I have said many times before, I flat disagree with those that believe there is an energy shortage. Mankind has energy available to it in extraordinary abundance. The difficulty is converting it to usable forms and delivering it to where people consume it. For example, Boone Picken's "wall of windmills" stretching from west Texas to Montana could certainly be constructed over time. But the users of that electricity are largely concentrated across the Rockies on the west coast, or across the nation on the east coast. Delivering the power is the real impracticality.

The doomsayers point out that current known techniques cannot solve these sorts of problems and therefore the future is everlastingly grim. Our resident alarmist, Lukester, berates some of us for our inability to describe the solutions of the future in the same exacting detail that he is able to forecast the looming problems (projecting from past and current trends of course). He forgets that the world of today could not have been imagined even a few short decades ago, much less in the 19th century:

I went to see [Cambridge mathematician] Professor Douglas Hartree, who had built the first differential analyzers in England and had more experience in using these very specialized computers than anyone else. He told me that, in his opinion, all the calculations that would ever be needed in this country could be done on the three digital computers which were then being built — one in Cambridge, one in Teddington, and one in Manchester. No one else, he said, would ever need machines of their own, or would be able to afford to buy them.

(quotation from an article by Lord Bowden; American Scientist vol 58 (1970) pp 43–53)

If (IMO...When) the next energy "crisis" hits, it will not be because of any real shortage of global energy. It will be entirely man-made, and exacerbated by the unintended consequences of foolish policy. Some things are timeless...

[jk]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

As I have said many times before, I flat disagree with those that believe there is an energy shortage. Mankind has energy available to it in extraordinary abundance. The difficulty is converting it to usable forms and delivering it to where people consume it.

this is equivalent to saying that there is an extraodinary abundance of food and no basis for hunger, if only we could each photosynthesize. i don't think you can talk about scarcity or abundance without consideration of cost and feasibility.

[GRG55]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

this is equivalent to saying that there is an extraodinary abundance of food and no basis for hunger, if only we could each photosynthesize. i don't think you can talk about scarcity or abundance without consideration of cost and feasibility.

I don't believe I have. The difficulty of converting energy to usable forms and delivering it to the places where people consume it is composed of many elements, of which cost and [currently] available feasible technologies are just two.

My point is that there is no shortage of energy in and of itself.

That there may not be, at present, feasible means to convert some forms of energy, or to convert it at an appropriate cost is not unique in our history. Nor should we assume that is a static situation that will persist indefinitely. History shows it has not, and I do not believe "this time is different".

But then again, maybe that is just my misguided and misplaced faith in our ability to innovate and solve our problems. In which case we should all pay closer attention to Kunstler.

[zmas28]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

Great post. Reflects my own opinions to a T.
The one thing I would question (and I don't know the answer) is whether oil is "special" or not in terms of price appreciation. This is because (a) the DJAIG itself contains almost a third of its weighting towards oil and gasoline, and (b) the cost of oil is probably a large part of the production of all the other commodities, such as mining and agriculture.

[EJ]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

I don't believe I have. The difficulty of converting energy to usable forms and delivering it to the places where people consume it is composed of many elements, of which cost and [currently] available feasible technologies are just two.

My point is that there is no shortage of energy in and of itself.

That there may not be, at present, feasible means to convert some forms of energy, or to convert it at an appropriate cost is not unique in our history. Nor should we assume that is a static situation that will persist indefinitely. History shows it has not, and I do not believe "this time is different".

Last week as a sponsor of the UMass, Amherst annual Technology Innovation Challenge (TIC) a $50K business plan contest for entrepreneurial engineers developed jointly by the Engineering and Business schools, a group of six graduate and undergraduate groups presented business plans for their companies. The technologies ranged from a biotech to Internet. I have for years attended various MIT groups.

This is the forth year I have participated in the TIC. Two observations and one interesting fact: one, the level of sophistication of the participating students is stunning. Compared to where my pears were at their age, they are light years ahead. Two, the quality of the groups is rapidly improving. The interesting fact is that the dean of the Engineering school informed me that enrollment in the Engineering school increased last year from 250 to 300 and this year from 300 to 400. Perhaps students are getting the message: FIRE Economy is on the wane, the pool of rentier money and thus jobs to manage it is shrinking, while global competition for engineers is heating up. Paraphrasing Jim Rogers told the graduating class of Harvard Business school a few years ago, "If you are planning to go work in the financial services industry, you made a mistake. It's over. Go back to school and learn how to make something."

Within Engineering, energy is the fastest growing area. Had oil prices not been subsidized by the US military for 30 years, the cars we drive and everything about our transportation and energy infrastructure would be completely different. As I research my book I will help readers see what is in store now that the mother of invention, high energy costs, has finally and permanently been released.

[Finster]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

The second chart is interesting because we have been taught that over time the price of any commodity will always fall to its marginal cost of production; and that marginal cost itself is falling due to improved technology and extractive techniques. What appears to be happening today is that the marginal cost of producing some commodities, oil included, is no longer falling [even in inflation adjusted Dollars]...and may in fact be on the verge ofa period, of indeterminant duration, of rising in real terms...

In the second chart I was trying to shift the focus to a different commodity - the one whose value is the common denominator in the prices of all those other commodities. In stating the price of oil, we always invoke some currency - typically USD. As in "the price of oil is X dollars per barrel". There is both an oil unit and a currency unit. The same applies to the DJAIG. There are versions in several currencies, but the one used here is based on prices in US dollars. The raw data are, for example, dollars per bale of cotton, dollars per pound of copper, dollars per ounce of gold ... etceteras.

The point being that although we toss these numbers around in terms that focus our attention on the physical commodity (we speak of "the price of oil", the "price of copper", etceteras), there is another "silent" commodity inextricably tied up in the numbers we state. US dollars.

Taking your comment regarding the "marginal cost of production", can't we ask "What is the marginal cost of production of dollars?"? Since every price we are talking about here depends just as much on the value of the dollar commodity as the physical commodity (it's just the rate of exchange between them), perhaps the supply and demand factors for this commodity are just as relevant as those for each physical commodity to its price? And if the prices of all these physical commodities - as expressed in USD - are displaying a pronounced collective movement - perhaps the one common denominator in all these prices (dollars) is even the central, unifying factor?

To look at this question, in this second chart, we turn the price question on its head. What is the "price" of the USD in terms of a basket of physical commodities?

Considering that every price involved is but the exchange rate between some physical commodity and a monetary commodity, and that the rate of exchange is nothing but relative value (it's all relative!) are we not equally justified in saying that the price movement represents a change in the value of the monetary commodity as in saying it represents a change in the value of the physical commodity? And if a whole array of physical commodities are exhibiting similar price movement when expressed in one currency, are we not justified in concluding that it was the currency - and not the physical commodities - whose value changed?

That's exactly what I am saying. I am saying it makes far more sense to conclude that these commodities - real things of real utility - are not themselves engaging in wild increases in real value, but that the other, non-physical commodity that is the common element in every single one of their prices is the one that is engaging in wild decreases in value.

And that your own observation - that "the price of any commodity will always fall to its marginal cost of production" gives us a powerful clue as to why. After all, the marginal cost of production of dollars is practically nil ... and they seem to be headed in that direction perforce.

[bart]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

...
And that your own observation - that "the price of any commodity will always fall to its marginal cost of production" gives us a powerful clue as to why. After all, the marginal cost of production of dollars is practically nil ... and they seem to be headed in that direction perforce.

I'll also add that the 80/20 rule applies, and in spades. Over a long enough period of time (decades), about 80% of the apparent gain in most items is just plain inflation.

[Guest]

Re: Searching For Wisdom Among The "Doomertainer" Jokers

I don't believe I have. ... My point is that there is no shortage of energy in and of itself. ... History shows ... I do not believe "this time is different". ... my misguided faith in our ability to innovate and solve our problems. In which case we should all pay closer attention to Kunstler.

... does not favour Kunstler's outcome ... much to Lukester's dismay ... The doomsayers ... Our resident alarmist ... Lukester, berates some of us for our inability to describe the solutions .

GRG55 - It would be much appreciated if you were to refrain from this type of cloyingly arch ascription to "doomsayers" and "Lukester" as being synonymous, or I shall feel entitled to employ cloyingly arch caricatures of your own positions, which as yet I do not. You certainly don't wish to have me representing your own views in caricature, do you? Caricature does not advance the synthesis of any new ideas here. I have not anywhere directly endorsed "Kunstler's Outcome" as you suggest. Please post a reference to that or leave off it.

A note on the clarity of definitions of what "technology" is or is not. You are acknowledging your continuing unwillingness to describe the "solutions of the future" in anything but the most approximate terms (that means "unspecified"). Your description of "vast energy resources still available" refers of course to hydrocarbons. We have oil at $125 and no one is unearthing hints of these vast reserves. As Finster argues regarding the price, maybe there is no impetus to really unearth these large new reserves because the real price of petroleum has gone nowhere, and oil producers lack the financial motivation to look hard enough? Multiple references to "technology" and "innovation" here allude to technology developed in the past whose entire function and innovation was to ever more efficiently capture hydrocarbon energy, and this is the same tightly delimited definition of "energy technology" going right back through the use of coal and wood - five or ten thousand years and more. It was all stored hydrocarbon energy.

Evidently when we invent a new paradigm freeing ourselves from the hydrocarbons which have shackled energy production for 5,000 - 50,000 years, we will have taken a quantum leap forward. We have nuclear, but what else are you talking about?

What technology has NOT embodied ever in this referenced past, in any substantive way was a technique to replace hydrocarbon energy with any equivalent BTU density from a non-hydrocarbon source. Kind of like a "speed of light" barrier in any conventional technologies, except nuclear. Your hopes for these escape routes from the box are therefore squarely centered on nuclear. Meanwhile there are some wishywashy definitions being employed here oblivious to the vast technological difference, between "technology" to exploit hydrocarbons, and "technology" producing the same BTU's out of a "nothing yet clearly specified" - (which is equivalent to saying "we don't really know what, yet").

It's all very well to lean heavily on expansive predictions that "history simply does not favor Kunstler's assertions", but sooner or later you types with this abundance of faith in mankind's potential, will need to visibly get your replacement technology show on the road. As asked before (unanswered) what is your "start date" and what is the technology you are pointing us to? When do we actually get to take a peek at the wizardry sitting like a genie in a bottle in some engineering lab?

As I research my book I will help readers see what is in store now that the mother of invention, high energy costs, has finally and permanently been released.

And last observation is in reference to EJ's mentioning "high energy costs" as being now permanently released, and thereby producing powerful inputs to invention in our approaching energy constrained future. I would note that Finster has been going to some lengths to point out that our energy costs are not in fact risen at all, but are merely part of the averaged up general price level. Purchasing power of units of that petroleum sold don't buy any more today according to his thesis than they did twenty years ago. That's the putative purchasing power by which all this creative engineering talent will be drawn into the energy field. EJ's permanently high real energy costs acknowledged are sparking innovation in energy research, and Finster's arguments are that real energy prices have gone nowhere in 30 years. But can we have both being valid at the same time?