I recently attended a relaxed and informal meeting of learned and critical-thinking folks whom congregate now and again to discuss random subjects of interest. These gatherings are noted for their free-flowing nature, along with the disposal of a good volume of fine Bourbon which is conducive to that nature. The last meeting led the group to the topic of the Global Warming movement and why it exists.
To really understand the subject one has to get into some history...and we were fortunate to have a dabbler in "Paleo-Climatology" to help us. In this discipline, scientists have focused on the last BILLION years of the earth's history...that's a whole bunch of years. Evidence leads us to believe that climate cycles during this period lasted some 200 MILLION years each. During these climate swings, the planet would go from being a virtual ice-ball to being a semi-tropical paradise in which plants and animals thrived, and indeed evolved into giants.
The last period of tropical climate began to ebb some 70 MILLION years back during the Cenozoic period. The cooling trend that followed advanced in 3 major steps about 36 MILLION, 15 MILLION, and 3 MILLION years ago. That brings us to the last 1 MILLION years.
The vast majority of that time period found the planet locked securely in a series of small ice-ages, all subject to the overall 200 MILLION year cycle. Interestingly, global temperatures varied somewhat radically during this period. They went up...they went down...they went all around. Ice sheets receded, then advanced, then receded and advanced some more. The last major leap was about 11,600 years ago...a tiny drop in the bucket in time...and ended the worst of the last small ice-age abruptly. Planetary temperature went up better than 20 degrees F in about 50 years. It's an attribute to our egos as humans that we refer to that ice-age as the "great" ice-age...when in reality it was a minor blip within the 200 MILLION year cycle....but hey...our ancestors had to live through it so we think it significant.
The causes of all this jumping up and down in temperature are numerous and mainly theoretical. Scientists are pretty certain that plate tectonics play a major role in global climate, and as the continents have drifted, bumped, broken apart again, etc, these land masses affected not only planetary winds but ocean currents and "metamorphic degassing." In essence, there are hundreds of live volcanoes active at this time...all due to the fact that the earth's crust is flimsy and floating on the 99.9% of the plant which is still liquid rock. That thin, flaky, crust could break apart at any moment and everything on the surface would be vaporized...leaving no trace of our passing whatsoever.
Now you see why these conversations require Bourbon.
Other inputs include such juicy items of conversation as: weathering of silicates, organic carbon weathering, burial of organic carbons, and of course the cycles of solar output. Astrophysicists tend to put more emphasis on solar cycles and the earth's orbit; affected by cycles of precession, eccentricity, and obliquity. Geologists tend to emphasize plate tectonics.
Since that point some 11,600 years ago, the planet has gone through literally hundreds of mini-climate cycles. There was an overall cooling trend from about 1500 AD into the 1850's known as the "little ice age." Prior to that was a short warming trend with a high about 1000 AD. That time actually shows similar characteristics to our current climate. As a whole, scientists believe we will be emerging (hopefully) from a long cycle of ice-ages to a tropical state over the next 100 MILLION years. Obviously you shouldn't run right out and buy a new swim suit...a bit premature perhaps.
That brings us to the modern day and "the movement." Since the 1880's scientists have pondered planetary climate changes, and every decade or so one group or another has announced that the planet is either warming or cooling. The vagaries of weather, and regional climate cycles, have made it impossible to actually nail down where we are in any one particular mini-cycle...even with the technology available today.
Since the early part of the 20th Century however, climate change has become a political tool. An ironic note is that British Prime Minister Margaret Thatcher was the moving force behind the modern global warming movement. When she became PM one of her first moves was to create the Hadly Center for Climate Prediction in order to help create a "crisis" that would help her fight the National Union of Mineworkers as an opposing political powerhouse.
She had a number of related problems: the UK needed to have more nuclear plants in order to move forward with growing and modernizing nuclear forces. She also needed to break the union. Nuclear power was costing 4 times what coal power cost, so she needed something scary and emotional to support her push for nuclear power plants. She had the Hadly Center create a series of predictions showing climate warming, also claiming CO2 from human activity to be a major cause, and to issue a warning to start closing mines and building nuke plants.
Then the laws of unintended consequences stepped in. The potpourri of Marxist and Malthusian radicals throughout the world took note. If "global warming" could be used to fight unions and close coal mines, why couldn't it be used to bring down industry, business, and capitalism all together? No reason at all, of course.
Greenpeace jumped on board...commissioning a survey (1992) of 400 climatologists to prove that global warming was caused by industrial societies. Only 15 of the scientists even agreed there was global warming, so the study was swept aside. The movement seemed to be stuck in "park."
But governments began to make some calculations. If they could push for restrictions on US businesses, they could gain a competitive advantage in manufacturing and energy production. Thus was born an outburst of "protocols" and "treaties" meant publicly to control CO2 emissions while actually meant to handcuff the US and a handful of other industrial giants. A mass movement to fund academics who would "prove" global warming became a government tool to push the agenda. The movement took on a life of its own fueled by billions in grants. Universities made disagreement by academics punishable by firing. Government agencies sprang up to support the movement...and then to simply support their own funding.
Human beings, the psychologist in the group reminded us, have a strong penchant for controlling their lives through controlling their environment. Since the beginnings of the species, people have fallen for shamans and charlatans who promised to help them do so. Everything from throwing virgins into volcanoes (which he reminded us was a terrible waste of virgins...the Bourbon was kicking in by now) to selling us "carbon credits" could be pawned off on folks afraid of change. You just had to package the change as a "crisis."
As a result of such packaging, by numerous special interests and radical groups, the US has suspended a great number of industries and manufacturers. We have ended, or curtailed, most energy exploration and production, and spent billions upon billions of taxpayer dollars on wasteful studies and academic exercises. This orgy of "environmentalism" is largely traceable to an ongoing effort to crush the evils of modernity, take us back to the Malthusian dream of a pre-industrial society, "bring down" capitalism, and more recently to make a profit thru fear-mongering. The special interest groups pushing "Cap and Trade" and carbon credits are set up to make billions of dollars without actually doing or providing anything except paperwork...a scam of absolute brilliance.
I recounted to the group a speech given at a climate change conference. The speaker, a radical environmentalist, told the audience the best solution would be to reduce the world's population to 2 million "care takers" who would monitor and care for the planet. He received a standing ovation from half the folks in the hall...mainly college students.
These enthusiastic "idiots" obviously assumed they, and their families, would magically be among the 2 million superior humans who would be chosen to live while euthanizing the other 6 billion of us. I hated to tell them the 2 million survivors would be the best-armed, most psychotic and anti-social SOB's on the planet...and that neither they nor the speaker qualified. They also, quite obviously, weren't thinking about who would supply them with ipods and tennis shoes when productive folks were gone. It was a display of total, abject, stupidity.
So we have two histories to observe in accounting for the phenomenon known as the global warming movement; the geophysical history of the planet, and the political history of the movement and the associated movements that use it. Combined they give us a bottom line from which we can determine whether climate change is an issue we should concern ourselves with.
Things we now know:
1) The planet is constantly changing...will always change..and there is no "normal" condition.
2) Humans have a tendency to panic over matters of which they are completely ignorant...and then do foolish things like wasting virgins.
3) The planet could possibly warm, or cool, by a degree or two over the next hundred years. The average temperature at the south pole will remain about 70 degrees F below zero. Our great-great-great-great grandchildren will figure out how to deal with this "change" the same way we have dealt with it over the last 11,600 years.
4) If you want to lose sleep over something...worry about your job...worry about being one of the 6 billion who get euthanized...worry about the crust breaking up and getting vaporized by lava.
5) Good Bourbon is proof that God exists and loves us.
6) The global warming movement is made up of opportunists, anti-social radicals, and absolute nut-cases, all of whom use it to advance their whacked agendas...and that is why it really exists.
That should clear it up...let's have another shot of that Bourbon.
The Joys of Redistribution
Why, some of my students have asked me, is the idea of "redistribution of wealth" looked down on by economists as a whole? Isn't "justice" and "fairness" important? What could be wrong with that?
To get them to start thinking, rather than to simply quote economic laws, I tell a story...set up a scenario so to speak...using the village model.
Imagine a village of 100 families. Years back they began to come together, perhaps around a water source, and created their community. Every family produces something of value which they can trade with their neighbors, allowing a degree of specialization and efficiency.
Some of them are farmers...one family makes shoes...some weave clothing, and some make tools and farm implements. The village is in balance as long as each family creates enough product to trade for the amount of product they need from others.
Now we come to an important concept: the wealth of the village is the total of accrued production. In other words; every family is making "stuff" and growing "stuff" and a year's worth of that "stuff" is the annual gross domestic product of the village. Some of that stuff is consumed over the year, such as food, but some of it lasts for years or even decades. As long as everyone is producing as much, or more, than they consume, the wealth of the village grows. This growth in wealth benefits everyone in the village...it keeps prices down, and creates surpluses which are likely to be distributed to those who fall on hard times.
Now suppose we have two families whose chosen work is to grow chickens and eggs. There is a demand for both. Eggs are more quickly and more cheaply produced, as they don't have to be fed, matured, and slaughtered to be eaten. But they don't provide as much food value as a chicken either. Therefore, both families must calculate the best balance for production...how many eggs do they allow to hatch and grow into fryers? What mix would give them optimum profit?
This is a very normal business decision made every day by business owners world wide. Let's suppose family "A" elects to buy extra chicken feed and to allow 1000 eggs each year to be hatched and grown into chickens. They are taking a risk, and spending additional funds, on the gamble that they will make profit on the chickens despite the additional costs and the loss of income from the eggs.
Now let's suppose family "B" decides to concentrate on eggs and raise only 100 chickens. As it turns out, at year's end, family "A" has made the optimum decision and they are able to trade their combination of chickens and eggs for three times what family "B" is able to make on their chickens and eggs. So family "A" is suddenly more wealthy than family "B" as they have contributed more protein and more value to the village.
Members of family "B" are not happy...they are in the same business as family "A" but have made one-third the income. Grumblers in the village begin to promote the idea of "redistribution"...it's unfair, they say, that family "B" has worked in the same business as "A" but made so little comparative income. Eventually the grumblers convince the majority of people in the village to call for a new rule...and they force family "A" to give up some of their income to family "B" in a gesture of "redistributive justice."
So why is that wrong? It's not an ethical question...it's an economic one. Family "A" now has the same choice to make as they made the prior year. Do they spend extra money on feed...spend extra time for chickens to hatch and mature...slaughter the chickens...and take on all of that risk and expense if their profits are going to be taken from them?
Here's where Marxist style theories always fall apart...at the point where human nature steps in. People do not adhere to theories written in books...they act in their own self interest. Family "A" decides the risk isn't worth it...so they elect to grow only 100 chickens the next year. The result...they will make less income, but it won't be taken away from them so they'll break even. The village will not have the 900 chickens as a food source. They will have more eggs instead, but the market proved that the chickens provided more value and protein than eggs alone.
So the village is poorer...it loses wealth. An economist, or any experienced business owner, would not be surprised...but many neophytes are shocked by the news. "But why?" they ask. "The only thing that happened was some wealth was transferred from one family to another. How could that possibly result in everyone being worse off?"
The simple village model explains the "why" clearly and simply. The real world is more complex of course, but human nature, and the willingness to balance risk with possible reward, will always win out...in any culture...any time...any place. That's why the rules of economics are in place. And not just models, but history, proves them to be true.
To get them to start thinking, rather than to simply quote economic laws, I tell a story...set up a scenario so to speak...using the village model.
Imagine a village of 100 families. Years back they began to come together, perhaps around a water source, and created their community. Every family produces something of value which they can trade with their neighbors, allowing a degree of specialization and efficiency.
Some of them are farmers...one family makes shoes...some weave clothing, and some make tools and farm implements. The village is in balance as long as each family creates enough product to trade for the amount of product they need from others.
Now we come to an important concept: the wealth of the village is the total of accrued production. In other words; every family is making "stuff" and growing "stuff" and a year's worth of that "stuff" is the annual gross domestic product of the village. Some of that stuff is consumed over the year, such as food, but some of it lasts for years or even decades. As long as everyone is producing as much, or more, than they consume, the wealth of the village grows. This growth in wealth benefits everyone in the village...it keeps prices down, and creates surpluses which are likely to be distributed to those who fall on hard times.
Now suppose we have two families whose chosen work is to grow chickens and eggs. There is a demand for both. Eggs are more quickly and more cheaply produced, as they don't have to be fed, matured, and slaughtered to be eaten. But they don't provide as much food value as a chicken either. Therefore, both families must calculate the best balance for production...how many eggs do they allow to hatch and grow into fryers? What mix would give them optimum profit?
This is a very normal business decision made every day by business owners world wide. Let's suppose family "A" elects to buy extra chicken feed and to allow 1000 eggs each year to be hatched and grown into chickens. They are taking a risk, and spending additional funds, on the gamble that they will make profit on the chickens despite the additional costs and the loss of income from the eggs.
Now let's suppose family "B" decides to concentrate on eggs and raise only 100 chickens. As it turns out, at year's end, family "A" has made the optimum decision and they are able to trade their combination of chickens and eggs for three times what family "B" is able to make on their chickens and eggs. So family "A" is suddenly more wealthy than family "B" as they have contributed more protein and more value to the village.
Members of family "B" are not happy...they are in the same business as family "A" but have made one-third the income. Grumblers in the village begin to promote the idea of "redistribution"...it's unfair, they say, that family "B" has worked in the same business as "A" but made so little comparative income. Eventually the grumblers convince the majority of people in the village to call for a new rule...and they force family "A" to give up some of their income to family "B" in a gesture of "redistributive justice."
So why is that wrong? It's not an ethical question...it's an economic one. Family "A" now has the same choice to make as they made the prior year. Do they spend extra money on feed...spend extra time for chickens to hatch and mature...slaughter the chickens...and take on all of that risk and expense if their profits are going to be taken from them?
Here's where Marxist style theories always fall apart...at the point where human nature steps in. People do not adhere to theories written in books...they act in their own self interest. Family "A" decides the risk isn't worth it...so they elect to grow only 100 chickens the next year. The result...they will make less income, but it won't be taken away from them so they'll break even. The village will not have the 900 chickens as a food source. They will have more eggs instead, but the market proved that the chickens provided more value and protein than eggs alone.
So the village is poorer...it loses wealth. An economist, or any experienced business owner, would not be surprised...but many neophytes are shocked by the news. "But why?" they ask. "The only thing that happened was some wealth was transferred from one family to another. How could that possibly result in everyone being worse off?"
The simple village model explains the "why" clearly and simply. The real world is more complex of course, but human nature, and the willingness to balance risk with possible reward, will always win out...in any culture...any time...any place. That's why the rules of economics are in place. And not just models, but history, proves them to be true.
Making Sense of "Trillions"
I can remember when Presidents asked Congress to raise the national debt level by "millions of dollars"....and we all gasped, gulped, and swallowed the bitter pill. Little did we know we would look back at those times in envy.
Now we have the different branches of our federal government arguing over trillions of dollars. We've become so accustomed to the new magnitude that when someone mentions cutting a few billion dollars in waste, we tend to wonder why the bother...it's only a few billion.
It's all rather impossible to grasp actually, and so like frogs in a slowly warming pot we don't see disaster coming as the temperature of our debt gets hotter and hotter. To get a grasp on what all of the budget arguments actually mean let's break it all down into something we can understand and connect to...dollars per individual head of household.
Based on the US Census, we can make a nice round estimate of about 100,000,000 head of household working folk in the US for the next decade. That's easy to work with....a trillion dollars means $10,000 per taxpayer. It's much easier to picture what "trillion" means when it's broken down to our individual share.
Let's start by looking at current debt: long term debt first...it's the scariest...it's like your mortgage so to speak. At this time it's over 120 trillion dollars...or 1.2 million dollars for each wage earner. Of course you have an entire lifetime to pay this debt off...so what the heck. You can rest easy...unless of course you realize that this long-term debt is bound to grow. Your share is going to end up to be a lot more.
Short term debt, much like a credit card debt, is now over 15 trillion dollars. Oh good...that's only about $150,000 for your share....of course that's due this year...and it's on top of your annual payment on the long-term debt. Starting to get queasy yet?
Well breathe easy...the Republicans in congress are fighting for a reduction in expenses that will cut your share of the annual short-term debt...by nearly $1,000. That means your payment will only be $149,000. Oh hurrah, hurrah...
But wait...the Dems are furious and want to "compromise" with their more fiscally conservative bretheren. They are reminding us their compromise also cuts expenses...but after taking into account the differences in accounting jargon...their "cuts" come to only about $100.
Just so you keep this straight: your "mortgage" debt is $1,200,000....your "credit card" debt is $150,000...and congress is offering to reduce your overall debt by $100. Goodness sakes, joy almighty, and hallelujah...where do I sign up?
Obviously...we'd rather have our debt cut by $1,000...but would that save your family from bankruptcy and ruin? Not hardly! Remember...these numbers are not imaginary...this is not simply an exercise to help comprehend what the national debt argument is all about. This is money you ACTUALLY OWE! Of course you can pretend it's not real....
I've tried...doesn't seem to be helping.
Now we have the different branches of our federal government arguing over trillions of dollars. We've become so accustomed to the new magnitude that when someone mentions cutting a few billion dollars in waste, we tend to wonder why the bother...it's only a few billion.
It's all rather impossible to grasp actually, and so like frogs in a slowly warming pot we don't see disaster coming as the temperature of our debt gets hotter and hotter. To get a grasp on what all of the budget arguments actually mean let's break it all down into something we can understand and connect to...dollars per individual head of household.
Based on the US Census, we can make a nice round estimate of about 100,000,000 head of household working folk in the US for the next decade. That's easy to work with....a trillion dollars means $10,000 per taxpayer. It's much easier to picture what "trillion" means when it's broken down to our individual share.
Let's start by looking at current debt: long term debt first...it's the scariest...it's like your mortgage so to speak. At this time it's over 120 trillion dollars...or 1.2 million dollars for each wage earner. Of course you have an entire lifetime to pay this debt off...so what the heck. You can rest easy...unless of course you realize that this long-term debt is bound to grow. Your share is going to end up to be a lot more.
Short term debt, much like a credit card debt, is now over 15 trillion dollars. Oh good...that's only about $150,000 for your share....of course that's due this year...and it's on top of your annual payment on the long-term debt. Starting to get queasy yet?
Well breathe easy...the Republicans in congress are fighting for a reduction in expenses that will cut your share of the annual short-term debt...by nearly $1,000. That means your payment will only be $149,000. Oh hurrah, hurrah...
But wait...the Dems are furious and want to "compromise" with their more fiscally conservative bretheren. They are reminding us their compromise also cuts expenses...but after taking into account the differences in accounting jargon...their "cuts" come to only about $100.
Just so you keep this straight: your "mortgage" debt is $1,200,000....your "credit card" debt is $150,000...and congress is offering to reduce your overall debt by $100. Goodness sakes, joy almighty, and hallelujah...where do I sign up?
Obviously...we'd rather have our debt cut by $1,000...but would that save your family from bankruptcy and ruin? Not hardly! Remember...these numbers are not imaginary...this is not simply an exercise to help comprehend what the national debt argument is all about. This is money you ACTUALLY OWE! Of course you can pretend it's not real....
I've tried...doesn't seem to be helping.
Ignoring the Fundamentals
Production equals Wealth....Wealth equals Production.
Probably the most basic law of economics is the definition of wealth; that the combined production, investment, and savings of a nation is defined as being that nation's wealth.
Production begins with taking raw materials; by drilling, mining, or harvesting; then transporting, processing, distributing, and using in manufacturing those materials until they become products for consumption.
A simple example; someone pulls minerals out of the earth, someone moves them, someone extracts and purifies them, someone combines them to make a metal, then someone uses that metal to make something useful. Bingo...wealth has been created!
Every worker contributes something to the overall wealth of the nation. In early times a person could create wealth by, say, raising chickens. Then they could trade eggs or chickens to someone else for shoes or some other good. When it becomes awkward to trade a cow, for example, for a basket of eggs, the concept of money comes into being. Money is simply an artificial means of representing production in a handy to carry around and easy to spend manner.
As long as money represented chickens, cows, shoes, and other production...all was good. A person could earn more money by being more productive. As everyone became more productive, usually with the help of technology, more and more stuff became available and prices stabilized or dropped...with more stuff to share, everyone enjoyed growing prosperity and a higher standard of living. Such a deal!
But there's always a catch. As societies grow, production becomes stalled without a proper legal system to adjudicate disputes, or a system of transportation to move goods, or organized security against outside threats. The organizing of community solutions to these issues is called "government" and at basic levels this actually increases overall production. Thus the costs of government are absorbed by the increased productivity. The people who work in government can be paid by productive workers, what we call the private sector, because the money actually represents productive capacity. Therefore, all is still in balance.
This evolutionary process, however, always goes awry. Never in history has government stopped growing and leveled out at a point where added value equals increased productivity...never! It simply seems to fly in the face of human nature to stop growing government, no matter how obvious it is that it is a foolish thing to do.
So what happens....the amount of "money" has to change to meet the demands of the growing number of non-producing workers who want to purchase goods. Productivity increases as technology continues to increase capacity to produce, and a growing population increases the labor pool available for production, and so begins a balancing act. As long as money supply and productivity stay in balance everything appears to be okay to most folks. But this only encourages more government growth.
Eventually it all turns downhill...prices begin to go up as more purchasers with more money begin to bid for a constantly dwindling supply of goods. The people, and their leaders, have learned to ignore the fundamentals.
"Well heck," says some soothsayer..."we'll just become an information economy...we don't have to produce as much as we want to consume." But pretty soon folks realize they can't eat information, wear information, or live in information. Someone has to produce food, clothing, and housing.
So the next step...sell the information to some nation that will grow food and make stuff. For a short time, as long as that information has some value, this seems to work. At least it covers up the truth to those not paying attention.
Then, when the value of the information drops, the nation asks productive nations to accept "notes"...in affect they buy products on credit. If acceptable to the productive nation, the one with the too large government finds itself creating and growing an ever increasing debt cycle. The issue could be resolved of course...the borrower could simply stop borrowing and begin to push production...partly through pulling out all the stops, so to speak, and getting people to stop trading in information and start producing stuff. Partly through reducing the government work force and having those people get into production. If things go well, and spending discipline holds, the nation could work its way out of debt and begin growing wealth once again.
Unfortunately...this scenario hasn't happened as often as logic might lead one to believe. In fact, once nations reach a certain level of wealth some strange things begin to happen. Some of these strange happenings are universal, as documented by the historian Sir John Glubb in his paper "Fate of Empires." Whether the Greek empire, the Persian Empire, the Ancient Egyptians, or the Roman Empire...all successful civilizations eventually become self-loathing, self-absorbed, soft, spoiled, and end up committing cultural suicide. They are not brought down by invading barbarians...at least not until they have destroyed themselves from within.
There are key milestones each fading nation goes through; a loss of will to commit to warfare to protect themselves being one. The population reaches a point where they delude themselves into believing they are "superior" and "intellectual" and therefore morally above the making of war and taking of lives. This delusion defies logic and historical precedent...but it continues to take place. It is reminscent of the man who refuses to have anything to do with weaponry...even though he knows full well his family could helplessly fall victim to marauding criminals. He would "morally" prefer his family be slaughtered than to take up arms...seems unimaginable, but it is quite common in decaying societies.
Another delusion is the concept of cultural "guilt" for being successful. This drives populations to demand an end to productive activities...often times in the guise of protecting nature. Farm land goes fallow, mines close, oil wells are sealed...the spigot of all wealth production is turned off in a macabre acceptance of self destruction. Again, the delusion of being morally superior plays an important part.
The same moral delusion forms the basis of "group benevolence"...the concept that everyone must be cared for to the full extent of a nation's wealth. This leads to people choosing to become unproductive, then the treasury of the nation is drained until no one can be taken care of, including those who produce.
The end result; the people refuse to draw natural resources from around them, and refuse to produce the goods and services necessary to thrive. At the same time, they enrich politicians who promise to "share the wealth" with the people...even though there is no longer wealth to share. Eventually the people take to the streets...violence ensues...and the nation falls into tyranny. It is now inevitable that the nation will become easy pickings for an outside force.
Not that we should worry here in our warm, safe homes in our cozy western countries. All of that bad stuff only happens to civilizations past; that expanded government too much, who spend themselves into debt, and whose people become enamored of movie stars, phony politicians, and pop singers in place of military heroes, economists, and business leaders.
Certainly couldn't happen here...not in America!
Hey...I promise to keep my eyes and ears open and let you know if it does.
Probably the most basic law of economics is the definition of wealth; that the combined production, investment, and savings of a nation is defined as being that nation's wealth.
Production begins with taking raw materials; by drilling, mining, or harvesting; then transporting, processing, distributing, and using in manufacturing those materials until they become products for consumption.
A simple example; someone pulls minerals out of the earth, someone moves them, someone extracts and purifies them, someone combines them to make a metal, then someone uses that metal to make something useful. Bingo...wealth has been created!
Every worker contributes something to the overall wealth of the nation. In early times a person could create wealth by, say, raising chickens. Then they could trade eggs or chickens to someone else for shoes or some other good. When it becomes awkward to trade a cow, for example, for a basket of eggs, the concept of money comes into being. Money is simply an artificial means of representing production in a handy to carry around and easy to spend manner.
As long as money represented chickens, cows, shoes, and other production...all was good. A person could earn more money by being more productive. As everyone became more productive, usually with the help of technology, more and more stuff became available and prices stabilized or dropped...with more stuff to share, everyone enjoyed growing prosperity and a higher standard of living. Such a deal!
But there's always a catch. As societies grow, production becomes stalled without a proper legal system to adjudicate disputes, or a system of transportation to move goods, or organized security against outside threats. The organizing of community solutions to these issues is called "government" and at basic levels this actually increases overall production. Thus the costs of government are absorbed by the increased productivity. The people who work in government can be paid by productive workers, what we call the private sector, because the money actually represents productive capacity. Therefore, all is still in balance.
This evolutionary process, however, always goes awry. Never in history has government stopped growing and leveled out at a point where added value equals increased productivity...never! It simply seems to fly in the face of human nature to stop growing government, no matter how obvious it is that it is a foolish thing to do.
So what happens....the amount of "money" has to change to meet the demands of the growing number of non-producing workers who want to purchase goods. Productivity increases as technology continues to increase capacity to produce, and a growing population increases the labor pool available for production, and so begins a balancing act. As long as money supply and productivity stay in balance everything appears to be okay to most folks. But this only encourages more government growth.
Eventually it all turns downhill...prices begin to go up as more purchasers with more money begin to bid for a constantly dwindling supply of goods. The people, and their leaders, have learned to ignore the fundamentals.
"Well heck," says some soothsayer..."we'll just become an information economy...we don't have to produce as much as we want to consume." But pretty soon folks realize they can't eat information, wear information, or live in information. Someone has to produce food, clothing, and housing.
So the next step...sell the information to some nation that will grow food and make stuff. For a short time, as long as that information has some value, this seems to work. At least it covers up the truth to those not paying attention.
Then, when the value of the information drops, the nation asks productive nations to accept "notes"...in affect they buy products on credit. If acceptable to the productive nation, the one with the too large government finds itself creating and growing an ever increasing debt cycle. The issue could be resolved of course...the borrower could simply stop borrowing and begin to push production...partly through pulling out all the stops, so to speak, and getting people to stop trading in information and start producing stuff. Partly through reducing the government work force and having those people get into production. If things go well, and spending discipline holds, the nation could work its way out of debt and begin growing wealth once again.
Unfortunately...this scenario hasn't happened as often as logic might lead one to believe. In fact, once nations reach a certain level of wealth some strange things begin to happen. Some of these strange happenings are universal, as documented by the historian Sir John Glubb in his paper "Fate of Empires." Whether the Greek empire, the Persian Empire, the Ancient Egyptians, or the Roman Empire...all successful civilizations eventually become self-loathing, self-absorbed, soft, spoiled, and end up committing cultural suicide. They are not brought down by invading barbarians...at least not until they have destroyed themselves from within.
There are key milestones each fading nation goes through; a loss of will to commit to warfare to protect themselves being one. The population reaches a point where they delude themselves into believing they are "superior" and "intellectual" and therefore morally above the making of war and taking of lives. This delusion defies logic and historical precedent...but it continues to take place. It is reminscent of the man who refuses to have anything to do with weaponry...even though he knows full well his family could helplessly fall victim to marauding criminals. He would "morally" prefer his family be slaughtered than to take up arms...seems unimaginable, but it is quite common in decaying societies.
Another delusion is the concept of cultural "guilt" for being successful. This drives populations to demand an end to productive activities...often times in the guise of protecting nature. Farm land goes fallow, mines close, oil wells are sealed...the spigot of all wealth production is turned off in a macabre acceptance of self destruction. Again, the delusion of being morally superior plays an important part.
The same moral delusion forms the basis of "group benevolence"...the concept that everyone must be cared for to the full extent of a nation's wealth. This leads to people choosing to become unproductive, then the treasury of the nation is drained until no one can be taken care of, including those who produce.
The end result; the people refuse to draw natural resources from around them, and refuse to produce the goods and services necessary to thrive. At the same time, they enrich politicians who promise to "share the wealth" with the people...even though there is no longer wealth to share. Eventually the people take to the streets...violence ensues...and the nation falls into tyranny. It is now inevitable that the nation will become easy pickings for an outside force.
Not that we should worry here in our warm, safe homes in our cozy western countries. All of that bad stuff only happens to civilizations past; that expanded government too much, who spend themselves into debt, and whose people become enamored of movie stars, phony politicians, and pop singers in place of military heroes, economists, and business leaders.
Certainly couldn't happen here...not in America!
Hey...I promise to keep my eyes and ears open and let you know if it does.
Some Scary Numbers for the New Year
An interesting collection of statistics, indicators of future inflation, have been collected and printed below; along with the sources of those statistics.
Why, one may ask, are we concerned with forecasting the possibility of an inflationary cycle? There are a number of sound reasons. From a personal standpoint, we should consider how we invest our savings when inflationary or deflationary cycles are on the horizon. Inflation is simply a devaluation of currency, so normal savings, basically consisting of currency, will lose value...perhaps rapidly. On the other hand, investing in commodities, instead of currency, can pay off big.
Our business institutions must be able to plan and budget for the future; inflationary pressure will force them to adjust payroll, prices, and expenses. The very survival of the business may depend on how accurately they forecast and how quickly they adjust.
In extreme instances, such as what happened in Zimbabwe in recent years, currency becomes totally valueless and society returns to the barter system to survive. In more "normal" inflationary periods, the middle class simply loses its wealth slowly and steadily while lower income earners are completely crushed and forced into abject poverty. Wealth is no longer available for investment and production, so unemployment skyrockets and products become scarce, which quickly adds to the inflationary pressure (lack of goods increases price).
One might then ask, viewing the statistics below, why we are not yet seeing significant inflation already? We see that commodities are becoming more expensive rapidly...so why is it not obviously reflected in the retail markets?
Mainly we are currently being "saved" by businesses willing to liquidate inventory at past prices, and to hold down new pricing by laying off workers and increasing the work load of remaining workers without additional compensation. They are struggling to survive, and whether they make it or not, they end up dumping product onto the market at prices reflecting the costs of production from the past. If they do survive, however, and have to regenerate inventory at some point to keep surviving, they will discover that the price of materials is going up. No one in the supply chain can stay in business long by charging less than the cost of replacement...they have been trying to do so, but the end of such frugality is growing nigh.
Along with the pressures of rising commodities prices, we can see from the chart that employment in the public sector is growing and government spending is going up. These are both highly inflationary moves, both flood the market with currency while producing no goods to balance out the increase in money. The necessary increase in taxes takes additional currency from producers, which again reduces production and again increases the number of dollars chasing after a reduced volume of goods and services. This artificial increase in money supply, and reduction in products, drives costs up the demand curve...result...inflation.
So, not to sound alarmist, but all the science of economics tells us that without some dramatic changes in the market place, inflation is on the way. Take some time to consider your personal situation and plan ahead.
Why, one may ask, are we concerned with forecasting the possibility of an inflationary cycle? There are a number of sound reasons. From a personal standpoint, we should consider how we invest our savings when inflationary or deflationary cycles are on the horizon. Inflation is simply a devaluation of currency, so normal savings, basically consisting of currency, will lose value...perhaps rapidly. On the other hand, investing in commodities, instead of currency, can pay off big.
Our business institutions must be able to plan and budget for the future; inflationary pressure will force them to adjust payroll, prices, and expenses. The very survival of the business may depend on how accurately they forecast and how quickly they adjust.
In extreme instances, such as what happened in Zimbabwe in recent years, currency becomes totally valueless and society returns to the barter system to survive. In more "normal" inflationary periods, the middle class simply loses its wealth slowly and steadily while lower income earners are completely crushed and forced into abject poverty. Wealth is no longer available for investment and production, so unemployment skyrockets and products become scarce, which quickly adds to the inflationary pressure (lack of goods increases price).
One might then ask, viewing the statistics below, why we are not yet seeing significant inflation already? We see that commodities are becoming more expensive rapidly...so why is it not obviously reflected in the retail markets?
Mainly we are currently being "saved" by businesses willing to liquidate inventory at past prices, and to hold down new pricing by laying off workers and increasing the work load of remaining workers without additional compensation. They are struggling to survive, and whether they make it or not, they end up dumping product onto the market at prices reflecting the costs of production from the past. If they do survive, however, and have to regenerate inventory at some point to keep surviving, they will discover that the price of materials is going up. No one in the supply chain can stay in business long by charging less than the cost of replacement...they have been trying to do so, but the end of such frugality is growing nigh.
Along with the pressures of rising commodities prices, we can see from the chart that employment in the public sector is growing and government spending is going up. These are both highly inflationary moves, both flood the market with currency while producing no goods to balance out the increase in money. The necessary increase in taxes takes additional currency from producers, which again reduces production and again increases the number of dollars chasing after a reduced volume of goods and services. This artificial increase in money supply, and reduction in products, drives costs up the demand curve...result...inflation.
So, not to sound alarmist, but all the science of economics tells us that without some dramatic changes in the market place, inflation is on the way. Take some time to consider your personal situation and plan ahead.
Sources:
(1) U.S. Energy Information Administration; (2) Wall Street Journal; (3) Bureau of Labor Statistics; (4) Census Bureau; (5) USDA; (6) U.S. Dept. of Labor; (7) FHFA; (8) Standard & Poor's/Case-Shiller; (9) RealtyTrac; (10) Heritage Foundation and WSJ; (11) The Conference Board; (12) FDIC; (13) Federal Reserve; (14) U.S. TreasuryJanuary 2009 | January 2010 | % chg | Source | |
Avg. retail price/gallon gas in U.S. | $1.83 | $3.104 | 69.6% | 1 |
Crude oil, European Brent (barrel) | $43.48 | $99.02 | 127.7% | 2 |
Crude oil, West TX Inter. (barrel) | $38.74 | $91.38 | 135.9% | 2 |
Gold: London (per troy oz.) | $853.25 | $1,369.50 | 60.5% | 2 |
Corn, No.2 yellow, Central IL | $3.56 | $6.33 | 78.1% | 2 |
Soybeans, No. 1 yellow, IL | $9.66 | $13.75 | 42.3% | 2 |
Sugar, cane, raw, world, lb. fob | $13.37 | $35.39 | 164.7% | 2 |
Unemployment rate, non-farm, overall | 7.6% | 9.4% | 23.7% | 3 |
Unemployment rate, blacks | 12.6% | 15.8% | 25.4% | 3 |
Number of unemployed | 11,616,000 | 14,485,000 | 24.7% | 3 |
Number of fed. employees, ex. military (curr = 12/10 prelim) | 2,779,000 | 2,840,000 | 2.2% | 3 |
Real median household income (2008 v 2009) | $50,112 | $49,777 | -0.7% | 4 |
Number of food stamp recipients (curr = 10/10) | 31,983,716 | 43,200,878 | 35.1% | 5 |
Number of unemployment benefit recipients (curr = 12/10) | 7,526,598 | 9,193,838 | 22.2% | 6 |
Number of long-term unemployed | 2,600,000 | 6,400,000 | 146.2% | 3 |
Poverty rate, individuals (2008 v 2009) | 13.2% | 14.3% | 8.3% | 4 |
People in poverty in U.S. (2008 v 2009) | 39,800,000 | 43,600,000 | 9.5% | 4 |
U.S. rank in Economic Freedom World Rankings | 5 | 9 | n/a | 10 |
Present Situation Index (curr = 12/10) | 29.9 | 23.5 | -21.4% | 11 |
Failed banks (curr = 2010 + 2011 to date) | 140 | 164 | 17.1% | 12 |
U.S. dollar versus Japanese yen exchange rate | 89.76 | 82.03 | -8.6% | 2 |
U.S. money supply, M1, in billions (curr = 12/10 prelim) | 1,575.1 | 1,865.7 | 18.4% | 13 |
U.S. money supply, M2, in billions (curr = 12/10 prelim) | 8,310.9 | 8,852.3 | 6.5% | 13 |
National debt, in trillions | $10.627 | $14.052 | 32.2% | 14 |
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