Nicole Foss
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I realize it can be hard to find the big picture amid the huge amount of information that’s accumulated in five years. What we need to do is to sort out the primers to make them more organized and searchable. We may be able to find the time to do this over Christmas. Time is always a challenge however when there are only two people to do such things. I would very much like for the site to be more welcoming. Hopefully the new DVDs, which should be available very soon, will fill that role.
I have a great deal of patience with newbies and am happy to explain our worldview or point to specific primers (like Inflation Deflated for instance). I have less patience with people who have commented over a number of years, as alan has, and still quibble over our use of basic definitions. Essentially, there is a limit to how many times we can go through the same loop, knowing perfectly well it will achieve nothing, especially when it happens on more than one thread simultaneously.
It is not TAE that has co-opted the term inflation. We are simply using the traditional definition, and the one it clearly make sense to use if one wants to actually understand what is going on. Many others use the same definition for the same reason. The alternative is confusion that leads to widespread ignorance as to the situation we are facing. It is that ignorance we are trying to combat. The definition underpinning discussions here will remain the same. This particular discussion is, however, over.
We seem to be seeing a buy-the-rumour-sell-the-news scenario unfolding. The markets mean business and are signalling a new round of contraction dead ahead. Obama is in the hot seat for the next four years, and there’ll be no honeymoon period this time. Sadly for him I think his whole second term will be a disaster from start to finish. I don’t blame him for it, because that would be pointless. Anyone elected in his place would have done the same and would now be facing the same fate.
alan2102,
You are perpetuating, and indeed amplifying, confusion unnecessarily. Our definition of inflation and deflation is not nearly as odd as you make it sound. It is in fact the traditional definition, and is quoted by one of your sources (although the source also hedges its bets in a confusing way):
http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money. Synonyms: price rises, increase, price increases, rise.
This source points out that changes in the money supply are the cause, and price changes are the effect. We do point out our definition regularly, and our readers understand that that definition underpins discussion here. We have also explained regularly why we use this definition.
The apparent paradox of deflation is that even as prices fall, things become less affordable for most (with the exception of those who have preserved capital as liquidity). We have been pointing out that things that people use would be getting less affordable. You seem to be suggesting that this will happen at higher nominal prices, while we are saying it will happen at lower nominal prices. The important point is the affordability.
You say that prices have risen for many years. Of course they have, as we have been in an inflationary credit hyper-expansion for 30 years, and prices generally follow changes in the money supply. Prices have, however, fallen where international wage arbitrage has been a major factor, such as for electronics, which illustrates other price drivers at work. (And where nominal prices fall despite inflation, real prices are going through the floor.) These confounding factors are one reason we use our clear and precise definition of inflation. To do otherwise takes all the explanatory and predictive value out of the concept, which suits the powers that be perfectly well by the way. They don’t really want people to understand the system.
As the deflationary dynamic picks up momentum, we will see nominal prices fall. We anticipate trend changes here, rather than just describing existing trends. Watch and see over the next few years.
I could have wired up most essential loads to run on DC, then I wouldn’t have needed an inverter. Those are a weak link, with a much shorter lifespan than solar panels. You can get fridges, freezers, lighting, well pumps etc that run DC.
PV is essentially a transition to a much lower energy lifestyle that may involve little or no electric power, depending on where you live of course. In rural areas you end up having what you can produce yourself for as long as you can keep it going. In more concentrated areas, centralized services are more likely to last longer. In places like that a battery back up is probably more important than PV, as it would allow people to power essential loads when they need to, whether mains power is available or not.
Whomever is elected, they will likely come to regret it mightily. This has to be one of the biggest poisoned chalices there ever was. As Ilargi said, unless Diebold fraud is a significant factor, Obama should win handily. The odds of him finishing a second term politically (or perhaps physically) unscathed are not that high though. It won’t really matter who ends up in that chair. The policies are likely to be much the same and the chair-holder will be blamed for their failure. Politics is nothing more than prole-feed and misinfotainment. We only have the illusion of democracy, and it has been this way for a long time.
alan2102,
I did not say solar was not useful. What I said was that it does not work as a large scale component of grid systems that lack very large amounts of storage or very flexible back up plant or sufficient baseload generation. It is scaling up that does not work. It is our current business as usual model that cannot be maintained, and that will have to change.
I have made it quite clear why transitioning to a fully renewable grid serving current demand reliably is physically impossible, especially considering the available time and money, both of which are very limited at this point. Besides, solar does not provide critical ancilliary services, without which one cannot run a power system (no spinning reserve, no voltage or frequency control, no black-start potential etc). Intermittent energy sources assume the parameters of the system. They do not set them. That must be done by dispatchable generation.
On a small scale solar is fine, although I wouldn’t go into debt to install it for obvious reasons. I wouldn’t grid connect it either. I have stand-alone solar with a battery back up myself, and I am very pleased with it. I do wish I had rewired for DC. Perhaps I will in the future. It isn’t a truly long term solution, as panels and inverters etc have a limited lifespan and at some point will no longer be able to be repaired or replaced. It’s a useful transitional technology though.
All kinds of things work at small scale that do not provide the potential to run industrial society at large scale. For instance, making ethanol from sugar beets on one’s own farm in order to run a tractor is workable in a way that large scale corn ethanol is not. Farmers used to set aside land to grow hay to feed their own horses, and it can work for tractors for as long as we continue to possess the ability to repair tractors.
alan2102 wrote: ” It is called “biflation” — a useful concept. Prices of food, fuel and most consumables goes up, while financial “assets”, real estate, luxury goods, etc., go down. I’ve put together a few notes about it, here: Inflation? Deflation? or Biflation?”
In my opinion, biflation is not at all a useful concept. It just muddies the waters. The dynamic you are pointing to is essentially what we have been predicting at TAE all along, but you are couching it in needlessly confusing terminology. To review our position, inflation and deflation are monetary phenomena. The money supply is either expanding or contracting. Price changes are lagging indicators of monetary expansion or contraction, but are also impacted by many other factors such as local scarcity or glut, international arbitrage, input availaiblity, transport potential etc. For these reasons, looking at prices alone is not very useful. It is more important to understand causes than to look at effects, particularly when those effects are subject to confounding factors. It is also more important to understand affordability (ie prices in real terms) than to look only at movements in nominal prices.
What we have said at TAE is that the money supply will contract substantially on the collapse of credit. Prices will follow to the downside, but as purchasing power will fall faster than price for most people, everything will become less affordable (ie prices will rise in real terms even as they fall in nominal terms). As a much larger percentage of a much smaller money supply starts chasing the essentials, they will receive relative price support and will therefore be much less affordable than everything else.
Of course the value of financial assets will fall further than essential real goods. These are the very credit instruments whose collapse in value is at the heart of deflation. Their value is virtual (ie excess claims to underlying real wealth), while goods hold real value. That doesn’t mean the price of real goods can’t fall in nominal terms though, at least for a while. Deflation is such a powerful force that it would be expected to cause all nominal prices to drop initially, albeit not all to the same extent.
Prices have risen during the rally as a lagging indicator of ‘heroic’ attempts at reflation. As such, prices tell you what has been happening, not what will happen. Focusing on the money supply, particularly on the perceived value of credit instruments, is the way to see trend changes as they occur. The consquences of the trend change will play out in the real economy later.
I fully expect the nominal price of essentials to bottom early in the coming depression. This has been part of TAE’s view for several years (see the 2010 version of A Century of Challenges). At first all prices fall, but over time, as essentials become scarcer and competition for them becomes fiercer, I would expect nominal prices to rise even in the face of continued deflationary depression. That would mean real prices going through the roof.
Keeping terminology clear is important to presenting a consistent argument that all discussion participants can understand. Otherwise we end up talking past each other and appearing to disagree while we are actually describing the same dynamic. Discussions here are based on monetary definitions of inflation and deflation. Biflation does not exist. Bifurcation of price movements does and is already part of our worldview.
JZ,
The herd is quite happy because we’re near the peak of the rally. Greed/optimism has been the driver for the last 3 years, be fear/pessimism will be the driver over the next few. It starts small but builds over time. I’m looking at where we’ve come from, where we’re going, and trying to anticipate trend changes.
Viscount St Albans,
I know the tendency will be to shoot the messenger, so to speak, but I couldn’t sleep at night if I didn’t warn people.
Variable81 wrote: “I think you are more self sufficient than me & my family by orders of magnitude, but it suddenly dawned on me that I’m saving all my cash for… I don’t know what? Obviously for food/water/energy to ride out the deflation, but surely there must be some things that you are not willing to pay the risk premium to own now but will be looking to pick up after prices collapse (unless you truly are 100% self-sufficient – if so, congrats). Just curious to know what those items/things/services might be and your reasoning behind it?”
My approach was a bit different – I bought things like land before the worst of the boom, so I didn’t overpay by too much. I sold a home in the UK, which was highly inflated and bought in Canada where prices were much lower, so I could buy a farm here and kit it out with renewable energy for significantly less than I got for selling my British home. I have no debt on it, so I only have to find the money for property taxes. Now I don’t have to care what it’s worth, because it isn’t going to be sold.
There are still things I want to do – insulation, hot water radiators, back up manual well pump etc, but these things should be affordable up front. At my place it is mostly a case of continuing to expand production and the ability to preserve food. The energy infrastructure is already in place, and has been for several years. No grid tie, because I did it for the energy supply, not for a government payout.
Pipefit,
The flight to quality will pick up momentum dramatically once the downtrend really reasserts itself. We haven’t seen anything yet. That will benefit the US for a while. It is currently the best looking horse at the glue factory, which will count for something for a while. Of course default is inevitable at some point down the line, for most if not all developed countries. Loss of confidence in all fiat currencies is also coming eventually, but not yet. That won’t happen in all places at once. When the euro falls, and countries revert to their former currencies after defaulting on their debts, I do expect their former currencies not to be repositories of confidence. In such places, the time gap between deflation (ie credit collapse) and hyperinflation (ie actual currency printing into plummeting confidence) could be quite short. In places like the US it will be much longer – probably a decade or so as an educated guess, given that deflation and depression form a mutually reinforcing downward spiral that takes many years to play out. Other countries lie in between timewise.
JZ wrote: “As long as the global CB’s continue to print in their various ways, prices can continue to rise, even in the face of deflationary forces. Anyone who argues against this fact has the price action of the last 3 plus years working against their argument. How much longer these inflationary events can persist is an open question. Given the austerian politics in Europe and the U.S. I’d wager we are getting close to the end of the line, however. Austerity is killing the golden goose in Europe. If that meme catches fire in the U.S. (fiscal cliff nonsense) then the tepid recovery here is all but over.”
The last three years years of rally have seen a temporary reflation. Prices rise during such periods, as a lagging indicator of the ‘heroic’ efforts made to prop up the money supply and keep the global ponzi scheme from crashing (yet). Prices in general may continue to rise for a while as the relation goes into reverse, since prices changes lag changes in the money supply. Prices will later follow to the downside though, virtually across the board. The essentials will receive relative price support however, as a larger percentage of a smaller money supply will be chasing them.
Several European countries have effectively gone over the cliff already, even though they are not yet formally in sovereign default. The dominos are falling one by one, and austerity will hasten the process. Austerity will spread elsewhere too.
What you see in the US is not a tepid recovery, but a temporary interlude of increasing confidence within a larger downtrend. That downtrend is very likely to resume soon. The US will continue to benefit from capital flight to safety from elsewhere, at least for a while. That will prop up the dollar and keep US interest rates lower than would otherwise have been (which doesn’t mean they can’t still rise).
Here’s an interesting comment from a member of the public to an article on wind power in the UK’s Daily Mail paper (not a high-brow news source, but an interesting reflection of popular sentiment). Assuming it’s accurate, it fits with what I wrote in the German context – that offshore wind turbines sometimes need to be run with diesel. Unfortuantely I can’t find any other online reference to the radio interview he mentions.
Daily Mail article comment: “There was a wind farm engineer that called into LBC on the radio this morning. He said that he shouldn’t be telling us this as it’s not meant to be public knowledge but the wind farms out at sea are powered by diesel engines! The reason for this is because if they stop then they can get damaged. He called them a complete waste of money. They also have to go out on boats to fill the wind farm engines with diesel. They use a massive amount of fossil fuels to keep them going. Defeating the purpose are not the words!”
Thanks Alex 🙂
I think energy demand will fall a long way as depression starts to bite. Later supply is likely to collapse, which would be a major cause of conflict. Resource wars are a given by 2030 IMO. They’ve already started, but depression might take some of the pressure off for a few years in between before things flare up again.
Wouter Drucker wrote: “All that riches never made us happy, as it never can. The Netherlands is one of the richest countries in the world. Out of 16,7 mil inhabitants, 1 mil are on anti depressants, .3 mil are alcoholic. The simple truth is that happiness comes from inside.”
Indeed riches to not buy happiness.
By the way, the Netherlands only thinks it is rich, in much the same way that Iceland and Ireland previously did. Borrowing a lot of money and buying things with leverage always ends badly. The bubble is beginning to burst there, and many expectations are going to be dashed. Many more people will be emotionally affected than are presently, as they will feel the rug has been pulled out from under their feet.
Jambo wrote: “Remember that 40% the worlds people are subsistance horticulturists. They could use things like solar hot water heaters and cookers. The root of most problems is bigness.”
Agreed. There are many small scale and simple ways to use renewable energy that can make a huge difference to people’s lives. The problem comes when we try to scale everything up to gargantuan, make it extremely complex and build in a structural dependency on that system always operating. We need to be far more modest in our expectations. You could say live simply, so that others may simply live.
A few people here (or several versions of the same person) have a touching faith in perpetual motions machines. They don’t exist. End of story.
I said: “No amount of political will can achieve the physically impossible”.
Roger Yates wrote: “This is a political statement. By physically impossible you mean that it is not possible to maintain our present profligate lifestyles with other than cheap fossil fuels. We will therefore need to change our expectations.That is a political task. Humanity has been through worse. It is doable. We really are able to get off the tiger’s back of consumerist growth and reorganising society in a sustainable way. You appear to take the present modal of profligacy as a given. I am disputing that.”
Roger, again I am forced to ask if you actually read what I wrote. It appears not. The point, which I made very clearly, is that our current expectations are the problem and that they will have to change. They will, but not in a planned transition to sustainability. There is no time for that, and human nature doesn’t work like that anyway. We will simply find we have much less and will have to make do in whatever way we can. Initially, it will be money in short supply, but that sets us up for an energy supply crunch down the line.
William wrote: “I like the deflationary position. I keep my job, make the same pay, and pay much less for consumer goods”
Where did you get that idea? Jobs will be lost en masse. Pay and benefits will be cut. Prices will fall, but purchasing power falls faster (due to lost jobs and lack of access to credit), so everything becomes less affordable even as prices come down. Deflation is not something to look forward to.
On your energy comment, there isn’t any low hanging fruit in Canada or elsewhere (in comparison with what we are used to anyway).
Roger Yates wrote: “This article is basically arguing that the present economic and political power structure is inviolable. Of course this is not true. It may be that people are not willing to challenge it. That is likely. But I think it is nonsense to suggest that, given our technical abilities and organisational scope, we cannot build a system of renewables, and quickly. Political and economic systems CAN be changed. All the material resources are in place. It is simply a question of will and organisation. To suggest that the present power structures cannot be changed, as if they were some natural force like gravity or entropy is risible. This whole issue can, and should be reduced to this kind of fundamental debate. All you are saying is that we are behaving like idiots. We already know that.”
I am left wondering if you read the article, since you raise a straw man argument. I have, in fact, argued that no amount of political will can achieve the physically impossible, no matter what kind of political system is in place. This would be true even if we were not facing financial upheaval and an economic depression. Since this is exactly what we are facing, the task is even more insurmountable.
Variable81,
Exactly. Either way the effective money supply will shrink, meaning either way is deflationary.
Steve Keen does not use the same definition of deflation that we do, which leads to confusion periodically. He uses the price definition.
Viscount St Albans,
It is a tug of war of two forces. Attempts to re-inflate the money supply are fighting a headwind in terms of the fall in the value of credit instruments and the disappearance of virtual value from the bubble years. Deflation is winning (ie the net effect is deflationary), but the extent to which it is winning varies. During the last three years there have been herculean efforts to keep the credit ponzi expanding, and it has made a difference, albeit at great cost. What little has been achieved has been a pyrrhic victory, as it has set us up for a greater fall in the coming years. The reflationary ammunition has been used up, and the headwind is about to get much stronger, so the net deflation is going to get much faster and more powerful.
Viscount St Albans,
Reflation is a temporary return to an inflationary mode within a larger deflationary trend – a rally in other words. No market ever moves in one direction. Confidence, and therefore liquidity, ebbs and flows.
Deflation does not mean the money supply is contracting all the time until it reaches bottom. It looks more like a jagged lightning bolt, with strong down period interrupted by weaker up periods to a recovery high, but not a new high. Deflation plays out as five steps down and three steps up (at all degrees of trend simultaneously). In other words, the pattern is fractal. The larger trend is down when rallies lead to lower highs and lower lows over a long period of time.
sonoran84,
Yes, many people buying gold are going to get burned. The spot price will fall a long way, but most people won’t get the spot price anyway. They’ll be desperate enough to sell their gold for a loaf of bread and half a dozen eggs at some point. Too many people buying gold are not taking care of more important things first, like holding to debt, holding liquidity (cash) and having some control over the essential of their own existence. Gold is an insurance policy to buy after you’ve done all that, and even then it’s no panacea. You can expect to have to sit on it for many years without having to rely on the value it represents, and it will not be safe to buy and sell it, perhaps for the rest of your life. Owning that concentrated a source of value has its price.
Pipefit,
Japan is not a good example of how deflation typically plays out. As Ilargi points out, they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world’s largest creditor when their bubble burst in 1989. This is clearly not our situation.
No one will be exporting their way out of a global economic depression. In contrast, exporters are going to feel the pain big time as their markets dry up. We can expect trade wars and protectionism to abound. Take note Germany, Scandinavia, Australia, New Zealand etc etc.
We have had the inflation, only instead of a currency hyperinflation, we experienced a 30 year credit hyper-expansion. Either one amounts to an expansion of money plus credit compared to available goods and services, and is therefore inflation. Credit is equivalent to money on the way up, but not on the way down. Credit loses ‘moneyness’ and credit infstruments are massively devalued in a great deleveraging. This is deflation by definition and it is already underway. Debt monetization is nothing in comparison with the scale of the excess claims to underlying real wealth that stand to be eliminated.
I agree that the currency of a deflating nation strengthens. This is exactly why we have been writing about the value of the US dollar increasing, which it has done. The bottom came in a long time ago, and despite the set backs that are an integral part of a fractal market, the trend is up, and will be for some time. That’s not to say it will be for the long term – far from it in fact – but for now that is the case. We have made it clear that cash is a short term bet (of the order of a few years), and that the longer term strategy is to move into hard goods at the point when one can reasonably afford to do so with no debt.
Some could do so now, while others would have to wait for prices to fall, as they inevitably do in a deflation, but not immediately. Price movements follow changes in the money supply. We have been in a counter-trend reflation since 2009, and prices have risen as a result. They may continue to do so for a while after the reflation is clearly over, but then the trend will reverse. Prices will fall, but purchasing power will fall faster, meaning that prices will rise in real terms for most people. Those who have preserved capital as liquidity will find their purchasing power enormously increased, but most other will lose purchasing power because they will have nop access to credit, highly unfavourable employment cirumstances, rising property taxes and very little actual money.
The fiat currency regime will eventually descend into chaos as beggar they neighbour devaluations become the norm, but not everyone can devalue at will or at once. The market will decide relative values for the next while. Money will go from where the fear is to where the fear is not. It will be leaving the European periphery, and increasingly the entire eurozone, and flooding into currencies like the USD, the Swiss franc, the Swedish krona, and temporarily the British pound. It doesn’t matter if the US is downgraded. Market participants will ignore the ratings agencies and vote with their feet on a kneejerk flight to safety.
You say that the US indicators are much closer to the hyperinflation set up than to deflation. I would disagree of course, for reasons Ilargi has explained (plummeting velocity of money for instance). I would also point out that the conditions you describe simply reflect the top of the rally. People extrapolate the trend of the last three years forward, but fail to anticipate trend changes. We are in one. Many markets have topped already (gold, silver, commodities, oil etc), and the rolling top of the last year or so is about to claim the American stock market as well.
The rollover in the markets will drag the real economy down with it, with a time lag, since the time constant for changes in the real economy is much longer than for the financial world where value is virtual. We are headed into the teeth of the Greatest Depression, or at least the most significant one since the fourteenth century.
Hyperinflation is simply not on the cards any time soon. The depression will proceed for many years before that becomes a serious risk, unless you live in the European periphery that is, where currency reissue is a very real risk in the relatively short term. In those currencies, loss of faith in New Drachmas, New Pesetas or New Lira is very likely, and the countries will be cut off from international debt financing, with hyperinflationary results. That is not the situation in the US at all, and won’t be for quite a long time. Eventually, when international debt financing is dead and buried, then printing will be a risk and a loss of faith in the erstwhile reserve currency could be expected.
In the meantime, debts defaults are going to skyrocket, each one doing its bit to destroy the value of credit instruments, and substract from the effective money supply. This is already underway, and the great asset grab has begun as a result. Witness the asset stripping of Greece for instance.
In Europe, endless bailouts of sovereigns and the well-connected are doing nothing to increase the money supply or the velocity of money. In contrast, the ineffectuality of governments is doing nothing more than feeding the cycle of fear by demonstrating their ineffectuality time after time. They are trying to over come contraction, but are fighting an irresistable headwind. It is not going to work. Europe is already in contraction, and as fear will be increasingly in the ascendancy, that will only get worse.
Government obligations will be shed right, left and centre (by governments of the right, left and centre) because they will have no choice. Yes, this will lead to anarchic unrest, and yes this will be met with a heavy-handed repressive response. Social polarization is very much on the cards – governments vs people, haves vs have-nots, natives vs immigrants, employers vs workers, unionized vs non-unionized, Us vs Them in general terms. This will not be pretty, to say the least. Just because it is a bad thing does not mean that it cannot happen, or that government, by their actions, can make any difference to the outcome.
Bailouts are never for the little guy. The creditors hold the political power and write the rules. They will not allow debtors off the hook. Instead of repayment in money, they will take people’s freedom instead, making debt slavery much more real than it is today. Debts will not be forgiven, but sold on to more aggressive debt collectors. This is already happening in the US, where debt collection is becoming increasingly unconscionable. Debts will only be effectively forgiven when people have nothing useful to repay, not even their labour. By then the middle classes will probably be living in latter day Hoovervilles, like the Villas Miserias populated by the formerly middle class Argentines.
Savers will have all the buying power, IF they have managed to get their savings away from dependence on the solvency of middle men. Otherwise they will likely disappear in a giant black hole of credit destruction, as yet more excess claims to underlying real wealth.
Bennot,
Germany, Holland and Finland are not in nearly as good a shape as they and others think they are. They are also accidents waiting to happen. Ilargi’s recent posts on Holland, for instance, make this very clear. These currently richer countries are not expecting to find themselves in Spain’s position, and when they do, it will come as a huge shock, and blame will be everywhere. Europe is coming unglued, and is going to go down in a sea of recriminations. It’s nothing short of tragic that the European project should end this way – fanning the flames of the animosity it was meant to consign to history as the psychology of expansion gives way to the psychology of contraction.
Adam Goodwin,
I doubt very much that Farage sees the UK’s own systemic ponzi fraud for what it is. I agree with his position on the fate of the euro, the mayhem that is likely to cause and the fact that further centralization in Europe will do much more harm that good, but his politics and mine are otherwise dissimilar. I would still like to talk to him, but I expect he would find reality as I see it quite threatening.
Pipefit,
We are in for several years of massive deleveraging, and the extinguishing of excess claims to underlying real wealth is deflation by definition. The debt monetization is not keeping pace with contraction even under relatively favourable circumstances, and those circumstances are coming to an end. ‘Printing’ will be facing an even bigger headwind soon enough. The risk of hyperinflation lies down the line, after the credit contraction has run its course. That is years away, unless of course you live in the European periphery, where the growing risk of currency re-issue could reduce the time between credit collapse and a classic currency hyperinflation considerably.
Thanks for the Nigel Farage video. He gets a lot of things right, although still seems to have faith in the larger system. It would be interesting to talk to him about the global financial ponzi system.
The most comprehensive EROEI research is being done by Charles Hall at SUNY. Anyone who would like to delve further into the specifics should look up the work of Charlie and his colleagues. Some of it appears at The Oil Drum, mostly published by David Murphy. David Hughes, a Canadian natural gas expert, has also looked into the issue in relation to gas supplies. Some of his work is available online.
The modern grid model is under threat due to cost and complexity, and smart grids will make the complexity vulnerability worse by at least an order of magnitude. The safety margins have been cut back because they cost money and no one really wants to pay. The infrastructure keeps getting older and the risks larger. The dependencies are thoroughly entrenched, and we can expect that extracting ourselves from them will be difficult, time-consuming and expensive.
IMO in the future electricity availability will be far less widespread than it is now, in all countries. I doubt the infrastructure in poorer areas will be maintained at all, so that service availability will retreat to richer enclaves. Fuel poverty will also increase substantially.
In India population will be a major problem. It is very far over carrying capacity, with less and less capability to maintain the existing population. Water will be a huge issue, and electricity supply problems will make that substantially worse, due to the reliance on pumping.
Other countries will find themselves sliding towards facing many of the same difficulties as the money supply dries up, infrastructure cannot be maintained and neither fuel for generation nor spare parts will be affordable. Russia faced this during the implosion of the Soviet Union.
At least India demonstrates that crappy infrastructure will function at some level for quite a long time. It also demonstrates the importance of comparing expectations with reality. Dashed expectations are very dangerous.
Golden Oxen,
Yes, look to interest rates for a clear picture of where the fear is and where the fear is not.
Capital Flight, Capital Controls, Capital Fear (https://theautomaticearth.com/Finance/capital-flight-capital-controls-capital-panic.html)
regionswork,
Mr Shiller’s article is recent. The 2008 quotes come from our own work in the TAE primers. The Shiller article is the one called Bubbles Without Markets.
I certainly don’t think we are facing a decline that will be in any way gradual or smooth. Fractals don’t work that way. The next decade should be one of initially rapid contraction followed by years of grinding depression. However, this should only be phase one of the unwinding of such a large bubble. I would expect the overall contraction to last for decades, as we have seen before when particularly large bubbles have burst. Large contractions typically demonstrate sharp falls interspersed with periods of (relative) recovery of varying lengths, some lasting many years. As always, markets spend more time in upward mode, as rises are driven by hope and greed, whereas declines are driven by fear. Fear is simply a sharper emotion.
G-minor,
I disagree with most of that article. The US dollar is in no danger. It bottomed more than a year ago and has quite a way to go still to the upside. The flight to safety is quite real. Under deflationary conditions, the real rate of interest is always higher than the nominal rate. Those low nominal rates exist because no one is asking for a higher risk premium. Investors are prioritizing capital preservation.
Yes, capital controls are coming. See my take on the issue here:
https://theautomaticearth.org/Finance/capital-flight-capital-controls-capital-panic.html
A lot of that ‘wealth’ is financial assets that constitute excess claims to underlying real wealth. Most of the supposed value is virtual and will disappear quickly in a credit collapse. It does nothing at all to weaken the deflationary case, in fact it is a symptom of exactly the problem we are facing.
Viscount St Albans,
I have no reason whatsoever to change my view of reality. Nothing I said hinges on the specifics of timing. I suggest you think about the implications of what I am predicting and prepare for a very different world rather than trying to game the system for a little extra profit. The prudent would be on the sidelines in cash already, and if they have their house in order early, so much the better for being able to sleep at night. We do not exist to make you money. If that is what you are looking for, feel free to look elsewhere.
Market timing is always probabilistic. Get over it.
We most certainly did see a rolling top. The trend change began in May 2011 and we have seen a series of tops in different markets since then.
Can you honestly not see the bright red flashing warning lights in the global economy? They are very clear to me.
