The Europeans move forward with Carbon Taxes and Costly Carbon Dioxide Capture Facilities

Posted by PITHOCRATES - February 25th, 2012

Week in Review

To save the climate the DECC plans to kill the trees.  And economies (see Government files plans to build carbon capture plants by Karolin Schaps and Gerard Wynn posted 2/24/2012 on Reuters).

Calling for proposals for a wide range of engineering projects for CCS, including construction of a power plant, gas storage and pipelines, the Department for Energy and Climate Change’s (DECC) notice of contract was published in the European Union’s official journal.

“DECC’s current intention is for the projects to start demonstrating the carbon dioxide capture, transport and storage by 2016-2020,” the document said.

Interestingly, carbon dioxide (CO2) is what makes the trees grow.  And pretty much anything green that grows.  So as they pull this CO2 out of the atmosphere the trees will have less CO2 to breathe than they have now.  Poor trees.  Even the people that are supposedly trying to protect them are killing them.

The government cancelled plans to fund a CCS demonstration project in October as costs spiralled higher than expected, leaving CCS developers concerned about where the 1 billion pounds ($1.59 billion) set aside by the government for a CCS pilot project would end up…

The European Union plans to raise money soon through the sale of 300 million carbon permits called EU Allowances (EUAs) to fund CCS or renewable energy projects through its New Entrant Reserve 300 (NER300) programme…

DECC also said in the notice document that it expected CCS projects could be built without government support from the early 2020s onwards as its power market reform proposals to reward low-carbon electricity production will allow CCS to compete with other technologies. ($1 = 0.6306 British pounds).

First the government will support them by taxing everyone.  Then the market will fund these by taxing businesses (by making them buy carbon permits allowing them to emit carbon which will be nothing more than carbon taxes).  And raising prices for everyone that buys from these businesses.  But will this happen in China?  India?  Brazil?  Or any of the other export countries?  Probably not.  Meaning their trees won’t be the only thing they’ll be killing.  They’ll be killing their economies, too.

So if they’re going to kill their trees and their economies why are they doing it?  I refer you to the European sovereign debt crisis.  These governments need lots of money to support their burgeoning social democracies.  And they can’t see anything beyond these new taxes they hope to collect.  And I say ‘hope’ because the resulting fall in economic activity from these new taxes will decline tax revenue overall.  Giving them nowhere near what they hope to collect in the end.

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Scientists even Consider Albert Einstein may have been wrong yet Global Warming is a Scientific Fact

Posted by PITHOCRATES - February 25th, 2012

Week in Review

Was the man who gave us ‘energy equals mass times the speed of light squared’ (E=MC2) wrong?  Albert Einstein?  Well, we’re not sure.  But the point is just that.  Even his genius is still being questioned and subjected to rigorous scientific experimentation.  Because that’s what science is.  And what science does (see Was Einstein wrong – or was the cable loose? by Bob Evans in Geneva and Kate Kelland in London posted 2/22/2012 on Reuters).

The world of science was upended last year when an experiment appeared to show one of Einstein’s fundamental theories was wrong – but now the lab behind it says the result could have been caused by a loose cable.

Physicists at the CERN laboratory near Geneva appeared to contradict Albert Einstein last year when they reported that sub-atomic particles called neutrinos could travel fractions of a second faster than light…

Gillies confirmed that a flaw in the GPS system was now suspected as a possible cause for the surprising reading. Further testing was needed before any definite conclusions could be reached, he added.

The faster-than-light finding was recorded when 15,000 neutrino beams were pumped over three years from CERN to an underground Italian laboratory at Gran Sasso near Rome.

The speed of light is approximately 671 miles per hour.  So that’s some exacting science that may have detected something traveling fractions of a second faster than 671 miles per hour.  Even a cop couldn’t measure that ‘excessive’ speed with a radar gun.  To determine whether this excessive speed was a mistake due to a loose cable could take another 3 years of testing.  Just to make sure.  That’s one thing about particle physics.  Being ‘close enough’ or having a ‘consensus’ just doesn’t cut it.  Even when it comes to Albert Einstein.

You know where else ‘close enough’ and ‘consensus’ doesn’t cut it?  In all science except the ‘science’ of global warming.  The only ‘science’ where consensus can make something a scientific fact.

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The Decommissioned Tevatron helps to show Difference between Real Science and Global Warming Science

Posted by PITHOCRATES - February 25th, 2012

Week in Review

Scientist are still pouring over the data from the decommissioned Tevatron for the existence of the ever elusive Higgs boson (see ‘Interesting’ Higgs Boson Result to be Announced by Ian O’Neill posted 2/18/2012 on Discovery News).

However, this signal is just a hint; not a discovery, yet. Roser has said that the March announcement will hinge on a “three-sigma” event. This is physics talk for the certainty that the signal is real. A “three-sigma” signal means there is still a 0.1 percent chance that the signal is noise or some statistical anomaly.

The statistical likelihood of the LHC signal being “real” stands at an unofficial 4.3 sigma (from the combined results gathered from the ATLAS and CMS detectors) — meaning there is a 99.996 percent chance the signal is real (and a 0.004 percent chance it’s noise).

It is refreshing to read about real science.  Have you ever heard of such skepticism in the ‘science’ of global warming?  No, you haven’t.  Because in real science a 0.004 percent chance of uncertainty is so large that they cannot draw any conclusion.  Whereas in global warming ‘science’ anything that has a 0.004 percent chance of being true is good enough to be an undisputed truth.  Funny, isn’t it?  The difference between real science and global warming ‘science’.

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Vancouver building Charging Stations for Electric Cars that aren’t there to use Them

Posted by PITHOCRATES - February 25th, 2012

Week in Review

Vancouver is going all in on electric cars.  Even when no one is buying them (see City to build 67 more electric car-charging stations by 2013-Vancouver by Tara Carman posted 2/23/2012 on the Vancouver Sun).

The City of Vancouver is taking an “if you build it, they will come” approach to electric vehicles, announcing an $800,000 pilot project to expand the number of charging stations in the city…

Less than one per cent of Canadians have purchased an electric vehicle, according to Brian Murphy, a senior man-ager at J.D. Power and Associates. One of the reasons is likely the price of the vehicles, which typically run more than $40,000, plus the $2,000 it costs to purchase and install a charging station in private homes…

Another discouraging factor about electric vehicles is “range anxiety” about having to take trips that are 200 kilometres or more, Murphy said. A full charge will take the Nissan Leaf, for example, about 160 kilometres, depending on the terrain and weather conditions.

The article includes a photo of a man in what appears to be a gas station for electric cars.  Happily plugged in.  And charging up his battery.  Luckily for him it appears to be a nice day.  It’s daylight.  And he’s not wearing a coat.  So he should have no problem standing there for 5 hours or so until his battery charges.

This is the dark side of range anxiety.  If you don’t make it back home on your charge you are stranded.  Because batteries don’t charge as fast as you can fill a tank with gasoline.

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Half of Americans don’t Pay Taxes but can Vote to Increase Taxes on those who Do

Posted by PITHOCRATES - February 25th, 2012

Week in Review

No one likes paying taxes.  For workers want to keep their hard earned money.  So it’s always been puzzling how the tax and spend politicians keep getting elected.  And keep raising our taxes.  Or is it (see HALF of Americans don’t pay income tax despite crippling government debt posted 2/22/2012 the Daily Mail)?

In 2009, just 50.5 per cent of Americans paid any income tax to the federal government – the lowest proportion in at least half a century…

In 1984, the middle of the Reagan era, 85 per cent of Americans paid federal income tax, meaning just 34.8million people did not…

The conjunction of fewer taxpayers with higher welfare payments has led to intense pressure on the public purse, with the national deficit running at $1.3trillion per year.

The Heritage Foundation argues that the reduction in the number of taxpayers will create an electorate dominated by non-taxpayers, who will always support higher taxes and spending because their own money is not at stake.

About half of all Americans pay no federal income tax.  No wonder they vote for the tax and spend politicians.  Because it’s not their hard-earned money that they are taxing spending.  It’s other people’s hard-earned money.

We keep hearing everyone say that the rich need to pay their fair share.  It would appear they are.  In fact, it appears that they are paying more than their fair share.  They have to be.  Because if half of all Americans aren’t paying any taxes the rich must be paying more than their fair share.  For they’re paying for those who aren’t paying their fair share.  Half of all Americans.

The thing that made Britain great was Parliament.  Representative government.  Having the people who paid the taxes have a say in how those taxes were spent.  It kept the Crown from spending those taxes irresponsibly.  Which greatly influenced the Founding Fathers.  Who made it difficult for the new federal government to spend irresponsibly.  Back at the Founding you had to have skin in the game to vote.  In other words, if you weren’t a taxpayer you didn’t vote.  Since then things changed.  Now people who don’t pay taxes can vote to spend other people’s money.  And when someone else is buying people rarely say ‘no’ to more government benefits.  No matter the consequences.  And those who pay no taxes have no problem increasing tax rates on those who do.

This road we’re on can only lead to one place.  The end of the country as we know it.  Much like the Greeks are experiencing right now.  Which in inevitable when people have a say in spending other people’s money.

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FT106: “You can’t have high paying jobs with generous benefits and low consumer prices.” -Old Pithy

Posted by PITHOCRATES - February 24th, 2012

Fundamental Truth

To give Workers High Wages and Generous Benefits a Business has to sell their Goods at High Prices 

The problem with politics is that voters don’t understand economics.  And they demonstrate this by demanding mutually exclusive things all of the time.  Where having one thing makes it impossible to have the other thing.  Like that old saying that goes like this.  You can’t have your cake and eat it, too.   You can have cake.  Or you can eat cake.  But you can’t have cake after eating it.  Because once you eat your cake it is gone.  And there is nothing to have.  These things, then, are mutually exclusive.  You can have one or the other.  But you can’t have both.

Now let’s transfer this train of thought to economics.  And to its most fundamental element.  The demand curve.  Which represents people in the economy.  Consumers.  And the stuff that they buy.  And at what prices they will buy the stuff that they buy.  Let’s take large flat-screen televisions.  The big ones.  Over 60 inches in size.  If they cost the price of a luxury car few consumers will buy them.  But if they only cost the price of a pack of gum consumers will buy them until they have one for every room in their house.  And consumers will buy various amounts at the prices in between.  But in general this one truth holds true.  People will buy more televisions as their prices fall.  And they will buy fewer televisions as their prices rise.  When we show this graphically by plotting how many televisions they sell at various prices we get a demand curve.

Well, you think, why can’t we just sell televisions at the price of a pack of gum?  More people will have televisions.  That’s good.  Because people just love watching television.  And television makers will make more televisions.  Creating more jobs.  And jobs are good.  Everyone says so.  So why not just sell televisions for the price of a pack of gum.  Well, I suppose if we pay the people who make these televisions a wage and benefit package closer to the price of a pack of gum, we could.  But who wants to work for a paycheck that can only buy a pack of gum?  Which brings us back to wanting mutually exclusive things.  To give workers high wages and generous benefits we have to sell goods at high prices.  Which is mutually exclusive to the low prices consumers demand.

Big Oil’s Exxon Mobil was not as profitable as GE and Apple in 2010

Yes, you can’t have low consumer prices and high pay and generous benefits.  Because, per the demand curve, higher prices mean fewer things sold.   And fewer things sold mean lower sales revenue.  And sales revenue pays for everything in a business.  Including wages and benefits.  Which means lower sales revenue means less money available to pay wages and benefits.  And any company that tries to pay high wages and provide generous benefits has to do one of two things.  Have a product they can sell a lot of at high prices.  Or go bankrupt.  Two of the Big Three Detroit automakers tried to do the former and failed.  So they went bankrupt.  And the government bailed them out.

So to pay employees well these companies need to be profitable.  Unlike the Big Three.  And to be profitable you have to have sales revenue large enough AND prices high enough to generate profits.  Profits so large that they can provide high wages and generous benefits.  Unlike the Big Three.  Because they couldn’t sell enough cars at high enough prices to pay those high union wages and generous union benefits.  But some companies have been profitable.  Including one corporation liberal Democrats love to hate.  Exxon Mobil (a member of a group liberal Democrats derisively call Big Oil).  One company that the current liberal Democrat administration loves and partners with in green energy technology.  General Electric.  And one corporation liberal Democrats just love period.  Until Steve Jobs died, at least.  Apple. 

In the fourth quarter of 2010, the profits for Exxon Mobil, GE and Apple were, respectively, $9.25 billion, $4.46 billion and $4.31 billion.  The first thing that jumps out at you is that Big Oil is making twice as much money as the corporations liberal Democrats love.  Which is why they hate them.  And why they love to bitch about high prices at the gas pump.  While at the same time they are rejoicing about those high prices.  Because those high gasoline prices help push their green energy agenda.  But these profit numbers are misleading.  Because they don’t factor in the cost of producing those profits.  And the most common way we do that is by dividing these profits by the sales revenue that generated them.  Giving us net profit margin.  When we do this for Exxon Mobil, GE and Apple we find their net profit margins on those profits were, respectively, 8.79%, 10.8% and 21.2%.  Of the three Big Oil is the least profitable.  And Apple is the most profitable.  In fact, nearly 2.5 times more profitable than Exxon Mobil.  But no one is demanding that the government step in and lower the price of Apple’s products.  Unlike they do with Big Oil.

The Government’s Regulatory and Compliance Costs increase the Price of Gasoline at the Pump

So why is Big Oil less profitable than those other businesses?  Well, for one, you can’t drill for American oil in China.  Like GE and Apple can build products in China.  And by working in the United States Big Oil is subject to massive regulatory and compliance costs.  And government regulates few things more than the oil industry.  The permitting process alone just to drill an exploratory well can take years for approval.  And millions of dollars.  It wasn’t like this when gas was cheap in America.  Before all of this regulation.  In the days when John D. Rockefeller was refining petroleum no one was complaining about high prices.  In fact, his competition complained about his low prices.  Prices they couldn’t match.  Asking for the government to investigate them for antitrust violations.  Which they did.  And busted up Standard Oil.  So they could sell their products at higher prices.  But when you can manufacture goods in China you can escape all of these regulatory and compliance costs.  And governmental insanity of protecting consumers by raising consumer prices.

Some may counter that the net profit percentage isn’t the important number.  But the dollar amount of their profits.  The same people who say we shouldn’t look at the dollar amount rich people pay in taxes.  But what they pay as a percentage of their income.  Which is an example of a double standard.  Determining how much profit is too much by one standard for Big Oil (dollars).  But determining by another standard how much rich people should pay in taxes (percentage).  It doesn’t make good sense.  But it makes good politics.  Especially when you have nothing but class warfare to rely on to win an election.

The attack on Big Oil is also irrational.  For Big Oil can do one thing that even GE and Apple can’t do.  Provide high wages and generous benefits to American workers.  Because American oil deposits can only be extracted in America.  By American workers.  If only government will cease their attack on Big Oil.  And allow people to drive gas guzzlers if they want to.  Let them fill up those tanks.  Increase the demand for gasoline.  If they did and we got rid of the anti-gasoline policies Big Oil will go after that oil and bring it to market to meet that demand.  Making it inexpensive and plentiful just like John D. Rockefeller did.  Before government stepped in to ‘protect’ consumers.  And added so many regulatory and compliance costs that has since jacked up the price at the pump so much that it is eating away an ever larger share of a family’s budget.  And ultimately reducing their standard of living.  Without even getting any high paying jobs with generous benefits in the bargain.  And if you ask me that’s a pretty sad job of protecting consumers.

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Oliver Cromwell, New Model Army, Charles II, the Restoration, British Army, Colonial Empire, Townshend Acts and the Boston Massacre

Posted by PITHOCRATES - February 23rd, 2012

Politics 101

The Restoration brought Charles II to the Throne and gave him a Standing Army

Before the English Civil War there were no standing armies in England.  During Medieval times everyone was a soldier.  A ‘citizen’ soldier.  Fighting in a part-time militia.  You answered your lord’s call “to arms.”  Fought.  Usually to protect your lord’s land from intruders.  Or to join a higher noble or king to fight an opposing noble or king.  But mostly you fought near your home.  And when you were done fighting you went back to your day job.  If you survived.  The sooner the better because there was usually a lot of work to do.  And family to take care of.  But this all changed during the English Civil War.  Thanks to Prince Rupert of the Rhine.  A dashing cavalier commander and veteran of some European fighting.  He brought his professional military skills to England.  And fought for his uncle, King Charles I, during the English Civil War.

His skill won a lot of battles for Charles I.  And impressed Oliver Cromwell.  Who was fighting for Parliament.  So impressed him that he copied from Prince Rupert.  And created the New Model Army.  A professional army.  Trained.  Well disciplined.  And paid.  That fought anywhere.  Ultimately winning the war for Parliament.  Then marching on London for back pay.  They held the power.  And installed Oliver Cromwell as Lord Protector of the new commonwealth (no monarchy or hereditary power).  Who used the New Model Army to keep the peace.  Rather brutally.  Especially in Ireland.  Where they had no family.  And had no problem in being brutal.

After Cromwell executed his father, Charles I, the Scots crowned Charles II king.  For Charles I was a Scott.  And they were none too pleased that the English killed him.  Charles marched south and tried to restore the monarchy.  Failed.  And Cromwell chased him all the way to France.  Where he lived during the English commonwealth.  In Louis XIV’s court.  An absolute monarchy.  The way it used to be in England.  Before Parliament.  And King Louis had something new.  A standing army.  Even in times of peace.  And the French people didn’t bitch about the costs.  Like Parliament did about every cost the royals incurred.  When Cromwell died his son inherited his office of Lord Protector.  So much for the elimination of heredity power.  But he was weak.  Couldn’t control the army.  And didn’t last.  Without a better option they talked to Charles II.  Who said he would offer some pardons if they made him king.  He would not seek any retribution for the killing of his dad.  And he’d pay the army.  And that fast England (and Scotland and Ireland) had a king again.  (The Restoration.)  And a standing army.

The British Subjects in North America did not have the same Rights as British Subjects in Great Britain

The British put that army to use during the 18th century.  Fighting a lot of wars.  In Europe.  And elsewhere.  With lots of soldiers serving garrison duty throughout the world to protect their colonial interests.  Costing a pretty penny.  The very reason why people don’t like standing armies.  They’re very costly.  In war.  As well as in peace.  Especially the peace that followed the Seven Years’ War (1756-1763).  Great Britain won a lot of colonial land from the French.  Particularly in North America.  Where French Quebec became British.  Giving the British nearly the entire North American continent.  Full of Native Americans none too happy with the outcome of the Seven Years’ War.  (Chief Pontiac of the Ottawa nearly threw the British out in 1763.)  Or their French Allies.  And the job of keeping the peace fell to the British Army.  Those infamous Red coats.

During the 18th century Great Britain was a constitutional monarchy with a representative government.  The king was still sovereign but he ruled with the consent of Parliament.  And their money.  During this time William Pitt the Elder, British Secretary of State, had built up a large and prosperous colonial empire.  Over this century the balance of power tilted away from Spain and France and towards Great Britain.  The Seven Years’ War in particular ended economically favorable for the British at the expense of the French.  This meant a lot of money for those in commerce.  Which made the taxpayers agreeable to some of these military costs.  But at the same time this last war left Great Britain broke and in debt.  Worse, she needed a larger military to garrison all that territory she had just won.  And those taxpayers, represented in Parliament, weren’t going to say yes to any more taxes.  Because they could.  In constitutional Great Britain there was no taxation without the consent of those British subjects taxed.  Well, for some of those British subjects.

The British subjects in North America did not have the same rights as British subjects in Great Britain.  The British Empire needed revenue.  And Parliament turned to the American colonies to collect it.  Without their consent.  Something not allowed by the Bill of Rights.  A 1689 act of English Parliament.  So the British Americans took some offense.  And then the anti-American legislation came.  The Sugar Act of 1764 taxing sugar.  The Quartering Act of 1765 forcing Americans to provide quarters for and to feed British troops.  The Stamp Act of 1765 taxing printed materials.  The Declaratory Act of 1766 which repealed the Stamp Act due to fierce opposition but made all laws passed by Parliament legal and binding in the colonies.  The Townshend Acts starting in 1767 which tried to make the taxes more palatable by taxing only imports.  They didn’t.  It also raised revenue for the British to pay judges and custom officials to keep them loyal to the distant Crown rather than the local populace.  The Commissioners of Customs Act of 1767 that established an administrative board to enforce these new acts.  Headquartered in Boston.  America’s leading port.  This caused a lot of resentment and open hostility to the Crown’s representatives in Boston.  To protect them and to maintain order the British occupied Boston in 1768.  Sending in the Red coats.

Parliament sued for Peace after Cornwallis surrendered in Yorktown because the War had grown too Costly to Continue 

This was all very un-English.  Not since the days of the New Model Army had English subjects lived under the tyranny of a standing army.  A very costly standing army.  Paid for by all of those revenue acts.  So here they were.  British subjects.  Who lost centuries of hard-earned rights.  Some going back to Magna Carta in 1215.  While their British brethren were living under a constitutional monarchy in Great Britain.  Enjoying all of their rights.  Where life in North America was turning into an absolute monarchy.  Like their most hated enemy.  The French.

This all boiled over in Boston in 1770.  Beginning with a British sentry.  Some kid forced to stand guard among a hostile populace.  It started with a misunderstanding.  But the hatred of the British helped to escalate it.  Until a mob had gathered.  Taunting the sentry to fire his weapon.  British reinforcements arrived.  Someone struck and knocked down a private.  Who grabbed his weapon and fired.  Then other shots rang out.   Even though the commanding officer did not give the order to fire.  Killing 3.  And wounding 8.  The infamous Boston Massacre.  Patriot and future Founding Father John Adams actually represented the British in court.  Where they got a fair trial.  And the case Adams presented convinced a Boston jury to find most of those on trial not guilty.  Including the commanding officer.  Which was the last act of civility between these two British peoples.

Hostilities would only grow.  And within 5 years there would be a shooting war.  That would take 8 years before a peace would finally end it.  A war won, interestingly, not by a part-time militia.  But by a professional standing army.  That thing the Americans so hated.  But whose very existence prevented an American defeat.  Something General George Washington fully understood.  Who may have lost more battles than he won.  But he won the most important battle of them all.  Keeping that army in the field.  Until the point where Parliament said enough was enough.  Sinking ever further into debt they sued for peace after Cornwallis surrendered in Yorktown.  The war had simply grown too costly to continue.  And the taxpayers no longer gave their consent to continue to pay for it.

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Flint Tools, Levers, Wheels, Animal Power, Water Power, Wind Power, Steam Power, Electrical Power, Nuclear Power and Solar Power

Posted by PITHOCRATES - February 22nd, 2012

Technology 101

Man harnessed the Energy in Moving Water with a Water Wheel

When prehistoric man first chipped a piece of flint to make a sharp edge he learned something.  It made work easier.  And his life better.  This tool concentrated his energy into that sharp edge.  Increasing the amount of energy he could put to work.  Allowing him to skin an animal quickly and efficiently like never before.  Making better hides to protect him from the elements.  Yes, he said, this tool is good.  But in a somewhat less sophisticated manner of speech.

From that moment forward it has been man’s singular desire to improve on this first tool.  To find ways to concentrate energy and put it to work.  Levers allowed him to move heavier things.  Wheels allowed him to move heavier loads.  The block and tackle allowed him to lift or pull heavier weights.  Harnessing animals allowed him to do all of these things even better.  And we would use animal power for millennia.  Even today they still provide the primary source of power for some less developed countries.

But animals have their limitations.  They’re big, they eat, drink, pee and poop.  Which doesn’t make them an ideal source of power to turn a mill wheel.  A big wheel that grinds grain into flour.  It’s heavy.  But it doesn’t have to spin fast.  Just for long periods of time.  Then man had another moment like he did when he chipped a piece of flint.  He noticed in his environment that things moved.  The wind.  And the water in a river.  The wind could blow fast or slow.  Or not at all.  But the water flow was steady.  And reliable.  So man harnessed the energy in the moving water with a water wheel.  And connected it to his mill wheel via some belts and pulleys.  And where there was no water available he harnessed the less reliable wind.

The Steam Engine eliminated the Major Drawbacks of Water Power and Wind Power 

The water flowed day and night.  You didn’t have to feed it or clean up after it.  And a strong current had a lot of concentrated energy.  Which could do a lot of work.  Far more than a sharpened piece of flint.  Which was ideal for our first factories.  The water wheel shaft became a main drive shaft that drove other machines via belts and pulleys.  The main drive shaft ran the length of the factory.  Workers could operate machinery underneath it by engaging it to the main drive shaft through a belt and pulley.  Take a trip to the past and visit a working apple mill powered by a water wheel.  It’s fascinating.  And you’ll be able to enjoy some fresh donuts and hot cider.  During the harvest, of course.

While we built factories along rivers we used that other less reliable source of energy to cross oceans.  Wind power.  It wasn’t very reliable.  And it wasn’t very concentrated.  But it was the only way you could cross an ocean.  Which made it the best way to cross an ocean.  Sailors used everything on a sailing ship from the deck up to catch the wind and put it to work.  Masts, rigging and sails.  Which were costly.  Required a large crew.  And took up a lot of space and added a lot of weight.  Space and weight that displaced revenue-earning cargo.

The steam engine eliminated the major drawbacks of water power and wind power.  By replacing the water wheel with a steam engine we could build factories anywhere.  Not just on rivers.  And the steam engine let ships cross the oceans whenever they wanted to.  Even when the wind didn’t blow.  And more space was available for revenue-earning cargo.  When these ships reached land we transferred their cargoes to trains.  Pulled by steam locomotives.  That could carry this revenue-earning cargo across continents.   This was a huge step forward.  Boiling water by burning coal to make steam.  A highly concentrated energy source.  A little of it went a long way.  And did more work for us than ever.  Far more than a water wheel.  It increased the amount of work we could do so much that it kicked off the Industrial Revolution.

With Nuclear Power our Quest to find more Concentrated Forms of Energy came to an End 

We replaced coal with oil in our ships and locomotives.  Because it was easier to transport.  Store.  And didn’t need people to shovel it into a boiler.  Oil burners were more efficient.  We even used it to generate a new source of power.  Electrical power.  We used it to boil water at electrical generating plants to spin turbines that turned electrical generators.  We could run pipelines to feed these plants.  Making the electricity they generated even more efficient.  And reliable.  Soon diesel engines replaced the oil burners in ships and trains.  Allowed trucks and buses to run where the trains didn’t.  And gasoline allowed people to go anywhere the trains and buses didn’t go.

The modern economy ran on petroleum.  And electricity.  We even returned to the water wheel to generate electricity.  By building dams to build huge reservoirs of water at elevations.  Creating huge headwater forces.  Concentrating more energy in water.  Which we funneled down to the lower elevation.  Making it flow through high-speed water turbines connected to electrical generators.  That spun far faster than their water wheel ancestors.  Producing huge amounts of reliable electrical power.  We even came up with a more reliable means to create electrical power.  With an even more concentrated fuel.  Fissile material gave us nuclear power.  During the oil shocks of the Seventies the Japanese made a policy change to expand their use of nuclear power.  To insulate them from future oil supply shocks.  Which it did.  While in America the movie The China Syndrome came out around the time of the incident at Three Mile Island.  And killed nuclear power in America.  (But as a consolation prize we disproved the idea of Keynesian stimulus.  When the government created massive inflation with Keynesian policy.  Printing money.  Which raised prices without providing any new economic activity.  Causing instead high inflation and high unemployment.  What we call stagflation.  The Japanese got a big Keynesian lesson about a decade later.  When their massive asset bubble began to deflate giving them their Lost Decade.)

And with nuclear power that quest to find more ways to make better and more efficient use of concentrated energy from that first day we used a flint tool came to an end.  Global warming alarmists are killing sensible sources of energy that have given us the modern world.  Even animal rights activists are fighting against one of the cleanest sources of power we’ve ever used.  Water power.  Because damming rivers harms ecosystems in the rivers we dam.  Instead political pressures have turned the hands of time backwards by using less concentrated and less efficient sources of energy.  Wind power.  And solar power.  Requiring far greater infrastructure installations to capture far less amounts of energy from these sources.  Power plants using wind power and solar power will require acres of land for windmills and solar panels.  And it will take many of these power plants to produce what a single power plant using coal, oil, natural gas or fissile material can generate.  Making power more costly than it ever has been.  Despite wind and sunshine being free.  And when the great civilizations become bankrupt chasing bankrupt energy policies we will return to a simpler world.  A world where we don’t make and use power.  Or machinery.  Much like our flint-tool using ancestors.  Albeit with a more sophisticated way of expressing ourselves.

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Versailles Treaty, Marshall Plan, Post-War Japan, MITI, Asian Tigers, Japan Inc., Asset Bubbles, Deflationary Spiral and Lost Decade

Posted by PITHOCRATES - February 21st, 2012

History 101

Douglas MacArthur brought some American Institutions into Japan and unleashed a lot of Human Capital

At the end of World War I the allies really screwed the Germans.  The Treaty of Versailles made for an impossible peace.  In a war that had no innocents the Allies heaped all blame onto Germany in the end.  And the bankrupt Allies wanted Germany to pay.  Placing impossible demands on the Germans.  Which could do nothing but bankrupt Germany.  Because, of course, to the victors go the spoils.  But such a policy doesn’t necessarily lead to a lasting peace.  And the peace following the war to end all wars wasn’t all that long lasting.  Worse, the peace was ended by a war that was worse than the war to end all wars.  World War II.  All because some corporal with delusions of grandeur held a grudge.

The Americans wouldn’t repeat the same mistake the Allies made after World War II.  Instead of another Versailles Treaty there was the Marshal Plan.  Instead of punishing the vanquished the Americans helped rebuild them.  The peace was so easy in Japan that the Japanese grew to admire their conqueror.  General Douglas MacArthur.  The easy peace proved to be a long lasting peace.  In fact the two big enemies of World War II became good friends and allies of the United States.  And strong industrial powers.  Their resulting economic prosperity fostered peace and stability in their countries.  And their surrounding regions.

MacArthur changed Japan.  Where once the people served the military the nation now served the people.  With a strong emphasis on education.  And not just for the boys.  For girls, too.  And men AND women got the right to vote in a representative government.   This was new.  It unleashed a lot of human capital.  Throw in a disciplined work force, low wages and a high domestic savings rate and this country was going places.  It quickly rebuilt its war-torn industries.  And produced a booming export market.  Helped in part by some protectionist policies.  And a lot of U.S. investment.  Especially during the Korean War.  Japan was back.  The Fifties were good.  And the Sixties were even better. 

By the End of the Seventies the Miracle was Over and Japan was just another First World Economy 

Helping along the way was the Ministry of International Trade and Industry (MITI).  The government agency that partnered with business.  Shut out imports.  Except the high-tech stuff.  Played with exchange rates.  Built up the old heavy industries (shipbuilding, electric power, coal, steel, chemicals, etc.).  And built a lot of infrastructure.  Sound familiar?  It’s very similar to the Chinese economic explosion.  All made possible by, of course, a disciplined workforce and low wages.

Things went very well in Japan (and in China) during this emerging-economy phase.  But it is always easy to play catch-up.  For crony capitalism can work when playing catch-up.  When you’re not trying to reinvent the wheel.  But just trying to duplicate what others have already proven to work.  You can post remarkable GDP growth.  Especially when you have low wages for a strong export market.  But wages don’t always stay low, do they?  Because there is always another economy to emerge.  First it was the Japanese who worked for less than American workers.  Then it was the Mexicans.  Then the South Koreans.  The three other Asian Tigers (Hong Kong, Singapore and Taiwan).  China.  India.  Brazil.  Vietnam.  It just doesn’t end.  Which proves to be a problem for crony capitalism.  Which can work when economic systems are frozen in time.  But fails miserably in a dynamic economy.

But, alas, all emerging economies eventually emerge.  And mature.  By the end of the Seventies Japan had added automobiles and electronics to the mix.  But it couldn’t prevent the inevitable.  The miracle was over.  It was just another first world economy.  Competing with other first world economies.  Number two behind the Americans.  Very impressive.  But being more like the Americans meant the record growth days were over.  And it was time to settle for okay growth instead of fantastic growth.  But the Japanese government was tighter with business than it ever was.  In fact, corporate Japan was rather incestuous.  Corporations invested in other corporations.  Creating large vertical and horizontal conglomerates.  And the banks were right there, too.  Making questionable loans to corporations.  To feed Japan Inc.  To prop up this vast government/business machine.  With the government right behind the banks to bail them out if anyone got in trouble.    

Low Interest Rates caused Irrational Exuberance in the Stock and Real Estate Markets

As the Eighties dawned the service-oriented sector (wholesaling, retailing, finance, insurance, real estate, transportation, communications, etc.) grew.  As did government.  With a mature economy and loads of new jobs for highly educated college graduates consumption took off.  And led the economy in the Eighties.  Everyone was buying.  And investing.  Businesses were borrowing money at cheap rates and expanding capacity.  And buying stocks.  As was everyone.  Banks were approving just about any loan regardless of risk.  All that cheap money led to a boom in housing.  Stock and house prices soared.  As did debt.  It was Keynesian economics at its best.  Low interest rates encouraged massive consumption (which Keynesians absolutely love) and high investment.  Government was partnering with business and produced the best of all possible worlds.

But those stock prices were getting way too high.  As were those real estate prices.  And it was all financed with massive amounts of debt.  Massive bubbles financed by massive debt.  A big problem.  For those high prices weren’t based on value.  It was inflation.  Too much money in the economy.  Which raised prices.  And created a lot of irrational exuberance.  Causing people to bid up prices for stocks and real estate into the stratosphere.  Something Alan Greenspan would be saying a decade later during the dot-com boom in the United States.  Bubbles are bombs just waiting to go off.  And this one was a big one.  Before it got too big the government tried to disarm it.  By increasing interest rates. But it was too late.

We call it the business cycle.  The boom-bust cycle between good times and bad.  During the good times prices go up and supply rushes in to fill that demand.  Eventually too many people rush in and supply exceeds demand.  And prices then fall.  The recession part of the business cycle.  All normal and necessary in economics.  And the quicker this happens the less painful the recession will be.  But the higher you inflate prices the farther they must fall.  And the Japanese really inflated those prices.  So they had a long way to fall.  And fall they did.  For a decade.  And counting.  What the Japanese call their Lost Decade.  A deflationary spiral that may still be continuing to this day.

As asset prices fell out of the stratosphere they became worth less than the debt used to buy them.  (Sound familiar?  This is what happened in the Subprime Mortgage Crisis.)  Played hell with balance sheets throughout Japan Inc.  A lot of debt went bad.  And unpaid.  Causing a lot problems for banks.  As they injected capital into businesses too big to fail.  To help them service the debt used for their bad investments.  To keep them from defaulting on their loans.  Consumption fell, too.  Making all that corporate investment nothing but idle excess capacity.  The government tried to stop the deflation by lowering interest rates.  To stimulate some economic activity.  And a lot of inflation.  But the economy was in full freefall.  (Albeit a slow freefall.  Taking two decades and counting.)  Bringing supply and prices back in line with real demand.  Which no amount of cheap money was going to change.  Even loans at zero percent.

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Keynesian Economics

Posted by PITHOCRATES - February 20th, 2012

Economics 101

John Maynard Keynes said if the People aren’t Buying then the Government Should Be

Keynesian economics is pretty complex.  So is the CliffsNotes version.  So this will be the in-a-nutshell version.  Keynesian economics basically says, in a nut shell, that markets are stupid.  Because markets are full of stupid people.  If we leave people to buy and sell as they please we will continue to suffer recession after recession.  Because market failures give us the business cycle.  Which are nice on the boom side.  But suck on the bust side.  The recession side.  So smart people got together and said, “Hey, we’re smart people.  We can save these stupid people from themselves.  Just put a few of us smart people into government and give us control over the economy.  Do that and recessions will be a thing of the past.”

Well, that’s the kind of thing governments love to hear.  “Control over the economy?” they said.  “We would love to take control of the economy.  And we would love to control the stupid people, too.  Just tell us how to do it and our smart people will work with your smart people and we will make the world a better place.”  And John Maynard Keynes told them exactly what to do.  And by exactly I mean exactly.  He transformed economics into mathematical equations.  And they all pretty much centered on doing one thing.  Moving the demand curve.  (A downward sloping graph showing the relationship between prices and demand for stuff; higher the price the lower the demand and vice versa).

In macroeconomics (i.e., the ‘big picture’ of the national economy), Keynes said all our troubles come from people not buying enough stuff.  That they aren’t consuming enough.  And when consumption falls we get recessions.  Because aggregate demand falls.  Aggregate demand being all the people put together in the economy out there demanding stuff to buy.  And this is where government steps in.  By picking up the slack in personal consumption.  Keynes said if the people aren’t buying then the government should be.  We call this spending ‘stimulus’.  Governments pass stimulus bills to shift the demand curve to the right.  A shift to the right means more demand and more economic activity.  Instead of less.  Do this and we avoid a recession.  Which the market would have entered if left to market forces.  But not anymore.  Not with smart people interfering with market forces.  And eliminating the recession side of the business cycle.

Keynesians prefer Deficit Spending and Playing with the Money Supply to Stimulate the Economy

Oh, it all sounds good.  Almost too good to be true.  And, as it turns out, it is too good to be true.  Because economics isn’t mathematical.  It’s not a set of equations.  It’s people entering into trades with each other.  And this is where Keynesian economics goes wrong.  People don’t enter into economic exchanges with each other to exchange money.  They only use money to make their economic exchanges easier.  Money is just a temporary storage of value.  Of their human capital.  Their personal talent that provides them business profits.  Investment profits.  Or a paycheck.  Money makes it easier to go shopping with the proceeds of your human capital.  So we don’t have to barter.  Exchange the things we make for the things we want.  Imagine a shoemaker trying to barter for a TV set.  By trading shoes for a TV.  Which won’t go well if the TV maker doesn’t want any shoes.  So you can see the limitation in the barter system.   But when the shoemaker uses money to buy a TV it doesn’t change the fundamental fact that he is still trading his shoemaking ability for that TV.  He’s just using money as a temporary storage of his shoemaking ability.

We are traders.  And we trade things.  Or services.  We trade value created by our human capital.  From skill we learned in school.  Or through experience.  Like working in a skilled trade under the guidance of a skilled journeyperson or master tradesperson.  This is economic activity.  Real economic activity.  People getting together to trade their human capital.  Or in Keynesian terms, on both sides of the equation for these economic exchanges is human capital.  Which is why demand-side economic stimulus doesn’t work.  Because it mistakes money for human capital.  One has value.  The other doesn’t.  And when you replace one side of the equation with something that doesn’t have value (i.e., money) you cannot exchange it for something that has value (human capital) without a loss somewhere else in the economy.  In other words to engage in economic exchanges you have to bring something to the table to trade.  Skill or ability.  Not just money.  If you bring someone else’s skill or ability (i.e., their earned money) to the table you’re not creating economic activity.  You’re just transferring economic activity to different people.  There is no net gain.  And no economic stimulus.

When government spends money to stimulate economic activity there are no new economic exchanges.  Because government spending is financed by tax revenue.  Wealth they pull out of the private sector so the public sector can spend it.  They take money from some who can’t spend it and give it to others who can now spend it.  The reduction in economic activity of the first group offsets the increase in economic activity in the second group.   So there is no net gain.  Keynesians understand this math.  Which is why they prefer deficit spending (new spending paid by borrowing rather than taxes).  And playing with the money supply.

The End Result of Government Stimulus is Higher Prices for the Same Level of Economic Activity

The reason we have recessions is because of sticky wages.  When the business cycle goes into recession all prices fall.  Except for one.  Wages.  Those sticky wages.  Because it is not easy giving people pay cuts.  Good employees may just leave and work for someone else for better pay.  So when a business can’t sell enough to maintain profitability they cut production.  And lay off workers.  Because they can’t reduce wages for everyone.  So a few people lose all of their wages.  Instead of all of the people losing all of their wages by a business doing nothing to maintain profitability.  And going out of business.

To prevent this unemployment Keynesian economics says to move the aggregate demand curve to the right.  In part by increasing government spending.  But paying for this spending with higher taxes on existing spenders is a problem.  It cancels out any new economic activity created by new spenders.  So this is where deficit spending and playing with the money supply come in.  The idea is if the government borrows money they can create economic activity.  Without causing an equal reduction in economic activity due to higher taxes.  And by playing with the money supply (i.e., interest rates) they can encourage people to borrow money to spend even if they had no prior intentions of doing so.  Hoping that low interest rates will encourage them to buy a house or a car.  (And incur dangerous levels of debt in the process).  But the fatal flaw in this is that it stimulates the money supply.  Not human capital.

This only pumps more money into the economy.  Inflates the money supply.  And depreciates the dollar.  Which increases prices.  Because a depreciated dollar can’t buy as much as it used to.  So whatever boost in economic activity we gain will soon be followed by an increase in prices.  Thus reducing economic activity.  Because of that demand curve.  That says higher prices decreases aggregate demand.  And decreases economic activity.  The end result is higher prices for the same level of economic activity.  Leaving us worse off in the long run.  If you ever heard a parent say when they were a kid you could buy a soda for a nickel this is the reason why.  Soda used to cost only a nickel.  Until all this Keynesian induced inflation shrunk the dollar and raised prices through the years.  Which is why that same soda now costs a dollar.

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