Author: Nicole Foss

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The Special Relativity of Currencies

People often ask us which currency they should hold and whether or not we think the US dollar is about to plummet, so I thought it would be a good topic for a primer. Basically, the value of a currency can be looked at in two ways – relative to other currencies internationally and relative to goods and services domestically. It is the former that people are generally concerned about, but it should be the latter. Deflation is already outpacing the ability of central bankers and governments to ‘print money’ (monetize debt), and in a deflation, cash is king, relative to goods and services.

You need liquidity, and you need it in a form that will be accepted in your locality, whatever that currency is worth relative to others. As a fully liquid cash equivalent, you could also consider short term bonds (30-90 days) issued by your own government, as long as your government isn’t Zimbabwe or anywhere comparable.  Our horizons will contract drastically as we move towards a far more local world – a world where trading one currency for another might not be possible at all for most people. For most people, the time to think internationally is over. Credit expansion effectively shrank the world and turned it into a global village, but the world is about to get much larger again. Continue reading “The Special Relativity of Currencies”

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Welcome to the Gingerbread Hotel

Bailouts are NEVER for the little guy no matter what spin their proponents use to sell them to the public (who will be paying for them through their taxes). The role of the little guy in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there’s nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid ‘asset’ accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.

A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess – an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form – a combination of predators and all-too-willing prey that doesn’t understand the nature of the trap. Hansel and Gretel and the witch’s Gingerbread House comes to mind, minus the escape at the end. Continue reading “Welcome to the Gingerbread Hotel”

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War in the Labour Markets

The attempts on both sides of the US-Canadian border to bail out the auto industry are a taste of things to come for many other sectors. The cuts that unions will be required to agree to will be very significant, probably unacceptable to the membership, and ultimately will not be sufficient to save the companies in any case. Bailouts can postpone, but not prevent the recognition of losses that have already occurred.

In order to shed light on why the current situation will be so divisive, we return to an important distinction – that between nominal and real terms. During inflationary times (ie where the money supply is increasing relative to available goods and services), people do not notice their purchasing power being eroded, as they only see their pay in nominal terms. They collect their annual wage increases and almost never notice that inflation usually consumes that increase and then some. In real terms, the change in their purchasing power would be the increase minus inflation, where inflation is usually the larger factor, especially if the full effects of credit expansion are factored into the inflation figure rather than just the CPI. Continue reading “War in the Labour Markets”

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Energy, Finance and Hegemonic Power

The interface between finance and energy will prove to be the most important determinant of the way the Greater Depression we are rapidly moving toward will play out in practice. For those here who may be unaware of peak oil, the point is that global oil production appears to have reached a production peak that it will not be physically possible to exceed. Oil discoveries peaked decades ago and we have since been increasing production from large existing fields using ever more complicated and expensive technology, in order to supply increasing global demand from decreasing reserves.

The production peak does not mean that oil is imminently running out – in fact there is probably half of all the oil that ever existed still in the ground, but it is the expensive and relatively inaccessible half. We can no longer increase production and production will fall over time as we continue to use up reserves which are not being replaced by new discoveries. Although discoveries continue to be made, they are few and far between, and of much smaller size than the giant fields we have relied on for so long. As they are much more challenging to produce, they rely on high oil prices in order to remain commercially viable. Continue reading “Energy, Finance and Hegemonic Power”

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Markets and the Lemming Factor

In recent years, the prevailing financial orthodoxy has been that markets are efficient mechanisms for resource allocation based on the collective expression of rational human decision-making, the implication being that they are grounded in stabilising negative feedback. Markets have been seen as essentially dispassionate and objective arbiters of value, and their constant fluctuations as a random walk with no underlying pattern. It would follow therefore, that market timing would not be possible, and the best one could do would be to buy and hold a diversified group of equities chosen on the basis of perceived undervaluation. In my opinion, this model is simply delusional. As collective human endeavours, markets follow rules of collective, or herding, behaviour that are hardwired in us as they are in other mammals. Continue reading “Markets and the Lemming Factor”

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Inflation Deflated

There are many things we have discussed here frequently that come up as questions in the comments because we are attracting new readers all the time. I thought it would be a good time to answer those questions en masse, so that there would be a URL to point to if the same questions should come up again.

The basic point is that we here at TAE are expecting deflation. Although inflation and deflation are commonly thought of as descriptions of rising or falling prices, this is not the case. Inflation and deflation are monetary phenomena. The terms represent either an increase or a decrease, respectively, in the supply of money and credit relative to available goods and services. Rising prices are often a lagging indicator of an increase in the effective money supply, as falling prices are of a decrease. There is an important distinction to be made between nominal prices and real prices, however. Nominal prices can be misleading as they are not adjusted for changes in the money supply and so do not reflect affordability. Real prices, which are so adjusted, are a far more important measure. Continue reading “Inflation Deflated”

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From the Top of the Great Pyramid

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from The Crimson Permanent Assurance- Monty Python

Stoneleigh: Everyone has heard of pyramid, or Ponzi, schemes. In their simplest form they are short-lived deliberate frauds where a small number of existing members are paid from the buy-in of a larger number of newer members until the supply of newer members is exhausted, whereupon they collapse. Typically, the founders, and perhaps a few others who got in early and out before it was too late, end up making a lot of money at the expense of later entrants, who end up holding the empty bag. There are always many more losers than winners. What most do not realize, however, is that Ponzi dynamics are far more pervasive than people think. There are many human systems that ultimately rest on the buy-in of new entrants, and every one of them will ultimately meet the same fate, although it can take far longer for complex constructions than for simple pyramid frauds. Continue reading “From the Top of the Great Pyramid”

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The Resurgence of Risk – A Primer on the Developing Credit Crunch

 

We have been living in inflationary times, for as long as most of us can remember. The money supply keeps expanding and prices increase over time as a result. Central bankers have many tools at their disposal which they can use to tweak the economy – they can raise or lower interest rates, can control reserve requirements for fractional reserve banking and can inject liquidity into the banking system, among other things – and we have become used to thinking that they can prevent the kind of ‘economic accidents’ that previous episodes of excess have led to in the past. Especially in recent years – since the apparently successful containment of the dot com aftermath – we have acted as if risk were a thing of the past. Sliced, diced and spread around Wall Street and the rest of the global financial system, risk has seemed tamed, contained and controlled, until last week that is.

For years, industry insiders and so-called experts have proclaimed the virtues of slicing, dicing, and repackaging risk. They waxed on about how borrowers and savers, and society as a whole, could only benefit from such machinations. They suggested any sort of exposure could be disbursed and dissipated to the point where it essentially disappeared. Some even claimed that the crises of the past would no longer exist.

Yet amid the hype and assurances, few supporters spoke of the dark side of wanton and widespread risk-shifting. They didn’t seem — or want — to acknowledge that by combining complicated risks in unfamiliar and unnatural ways, the end result could be an uncontrollable monstrosity—one that eventually turned on its masters.
Nor did they heed the notion that by scattering risk into every nook and cranny of the global financial system, the vast web of overlapping linkages virtually guaranteed that serious problems in one sector, market, or country would trigger far-reaching shockwaves. Continue reading “The Resurgence of Risk – A Primer on the Developing Credit Crunch”

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Entropy and Empire

In his recent book The Upside of Down, a review of which can be found here, Thomas Homer-Dixon interpreted the development of the Roman Empire in terms of thermodynamics. The success of the empire depended on its ability to extract energy surpluses, in the form of food, from the imperial territories and concentrate them at the centre, where they enabled the development of a tremendous degree of organisational complexity. Without a large, and growing, hinterland to collect surpluses from, complexity on such as scale would not have been possible to establish and maintain.

But wherever the farms were located, they played a role in the Roman energy economy similar to that of solar battery chargers: they converted sunlight into a form of high-quality potential energy, especially fodder and grain, that was storable and transportable.The Romans then focused this energy – they used their food batteries, so to speak – to create a productive, resilient, and phenomenally complex system of public buildings, manufacturing facilities, housing, roads, aqueducts, and social organisation.

Continue reading “Entropy and Empire”

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Anaerobic Digestion (AD) in Ontario – A Regulatory Obstacle Course


Anaerobic Digester

The Ontario government has recently been emphasising its green credentials, particularly in relation to small-scale renewable generation, in the run up to a provincial election this fall. The Standard Offer Program (SOP – previously discussed here) is claimed to provide a framework for bringing a substantial array of new embedded generation on to the grid – generation based on different energy sources and varying widely in size. This is exactly what needs to happen if Ontario is to avoid a painful energy squeeze in the future, due in part to the approaching decline of natural gas supplies in North America. However, achieving it is proving to be far more difficult than one might reasonably expect. Continue reading “Anaerobic Digestion (AD) in Ontario – A Regulatory Obstacle Course”

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