Saturday 30 June 2012

Is the economy heading for hyperinflation or deflation and default.


With the economy in such a mess, it’s difficult not to spend some time trying to figure out what's likly to happen in the long turm. Our current Banking system, like most countries is based on the Fractional reserve system. This means that if the Central Banks lends out $100, then this can be expended into a maximum of $1,000 ($100+$90+81+$72.90+…=$1,000) worth of loans. All these loans which the Banks lend out normaly require the lender to add interest, so the amount the whole economy needs to pay back to the Banks ends up being a lot more than the original $1000 borrowed.. Where does the economy get all this extra money to pay for the interest on the loans? The answer appears to be that everyone need to borrow more to pay for it. At lot of economist and bloggers on the web take this to mean the money supply in the US and UK has to continually increase, so should therefor cause Hyperinflation in the long run. But I doubt that will happen for several reasons:

 (1). Most Banks are private companies, only interested in making a profit and will only lend to someone with a good credit rating, even if it’s the Government.
 (2). Both the US and UK import far more than we export, causing a flight of capital.
 (3). Automation allows companies to sack more workers and keep profits / invest abroad.
 (4) The effects of a stronger currency in the West is causing the offshoring and outsourcing of Jobs and in some cases companies are relocating abroad to countries like China and taking their wealth with them.
 (5) Higher house prices discourage first time buyers from lending and creates an enviroment where they need to save more for a deposit.
 (6) An older population is caussing more people to save for retirement.

All these examples, removes money from consumers and discourages them from buying consumer goods, which makes it more difficult for companies to generate profits and pay their debts. Although these trends do not appear to have effected peoples ability to get into debt over the last 50 years, when looking at the private debt to gdp ratio, which showsnear expotential growth in debt since the 1960s. I think this was mostly unsusanable, because much of this growth was due to a declining interbank lending rate, which allowed finance companies to borrow as much as the total they had done previously, by refinancing their old debts at a lower rate.


As the interbank landing rate had now droped to zero, this processes of refiancing will no longer be an option, which means the levels of private debt should continue to fall for some time to come. This has already happened in Japan, which lowered their Interest rates to zero in 1995, around the same time the levels of Private Debt in that country peaked as the graphs below illustrate:
Although a country with week exports like the US and UK, should in theory have a weaker currency, when a country is in a deflationary recession like Japan and Banks have difficulty providing loans, the supply of currency drops, which should in theory cause the currency to appreciate in value. This effect can then feed on its self, because as a currency appreciates, imports get cheaper and can compeat locally produced goods, increassing the flight of capital out of the country and making it more difficult for companies to profit from their exports. This then has other knock on effects, like lower wages, jobs losses and increased bankruptcy, which in turn reduces tax revenues for Governments and means they too are not be able to take on more debt. Japan now appears to be nearing the final stages of its 17 year fight with deflation, which looks like it might eventually result in the default of the goverments debt, caussing the collapse of the currency.Although Japan appears to have gone through a very long and slow decline, dropping to third place in the list of world largest economies. This doesn’t mean the UK and America will follow the same slow path because Japans exports have remained verry strong for past few decades and are only now starting to approached negative numbers:



The US Trade deficit by contrast is in the red to the tune of $600 billion annually. I guess the puzzle is why Japan, given its very strong exports was in deflation at all? One theory is that the Japanese, unlike most westerners, like to save their money and this tendency has been compounded by the higher proportion of older people saving for retirement.


Thursday 21 June 2012

The inevitable currency collapse

Is it possible to predict how bad things will get with the current bank and sovereign debt crises? If you look at the free market, this should have caused the value of currencies between all the different trading nations around the world over the last century or so to even out over time. In some ways I guess it has, for example when the Soviet Union collapsed and started to trade its currency - the Ruble on the open market, its value increased 300 fold, no doubt because of all the gas and oil Russia now exports to western countries. It now costs $2 for a cup of coffee in Russia instead of much less than a cent. But in other places things still have not changed, western currencies are still 10 times as expensive as those in places like China and India where people are lucky if they earn more than a $1 a day. The following map shows how much people earn in the different countries around the world:





The thing I don't understand is why the UK Pound is still so strong, when we import so much stuff and export so little? I think the answer might come from Iceland, whose currency increased tenfold between 2003 to 2007, as can been seen in this graph:


This appeared to happen because in 2003 two Icelandic banks were privatized. From 2003 to 2008 the Banks assets (Loans) increased 10 fold to an unprecedented level of around 10 times Iceland's GDP. Iceland's banks had over borrowed to buy expensive assets around the world which were worth a fraction of their price after the financial downturn. When a company borrows from a foreign country, this leads to capital inflow, which causes the currency to appreciate. This would appear to account for most of the increase and then decline in Iceland’s currency between 2003 & 2009.

The question is, with the UK Banks in debt to the tune of 600% of UK GDP who are they in debt to? At the height of the financial crisis, British banks borrowed more than a trillion U.S. dollars - that's 100% of our GDP and according to a few sources on the web most of the rest is in the form of foreign denominated loans. This means that should the EU collapse and the world enter another great depression our currency could potentially collapse by at least 6 fold just for starters, we would then have the problem of a sovereign default by our governments, the extra burden in lost revenue from EU exports and a sell off of the Pound on international currency exchanges. So it seems we would be lucky if the Pound still had as much value as the Indian rupee!

But then this raises some important questions, if the American Fed which lent out $12 Trillion to countries all around the world in the year 2008, including china has been causing currencies all around the world to appreciate, then what happens to the Dollar when all those countries like in Europe default on their debt? I guess you only need to look at Greece, where they say "if Greece defaults or restructures its debt, the single currency could trade as low as $1.10-$1.15", in other words any country defaulting on American debt will devalue the dollar. But then why do most countries prefer to borrow dollars? The dollar is known as the world's reserve currency because many countries prefer to hold dollars, like China, Japan and the OPEC Nations which have been storing trillions of dollars to prevent the Dollar from being devalued, this helps to keep their exports to America strong. But when you have other countries all around the world holding onto your currency, then to prevent a decline in the circulation of money called deflation and the consequence of a prolonged recession, it's necessary to lower interest rates and lend more money out to foreign countries to lower the value of that currency. It also makes more sense for foreign countries to borrow in Dollars when the interest rates are low, though now they have actually hit rock bottom at 0% and cannot get any lower. So it probably makes more sense to think of the Dollar, more on an international level, where they are getting the rest of the world into debt, than to think about the debt they have got their own people into as a single entity. Either way when both people, international corporations, the US government and other sovereign nations, have all got into too much debt and the Fed has run out of options like lowering interest rate to help everyone refinance their debt obligations, then its value should start to fall, once this happens it should trigger a sell off as China, Japan and OPEC try to avoid any further losses by selling the
trillions in Dollar Bonds they hold. There are reports that Chinese Banks are already hedging or betting against the Dollar to avoid the consiquences of the Dollar collapse.

As I said at the start, western currencies are 10 times as expensive as those in places like China and the OPEC nations which deliberately avoid converting Dollars to their own currencies to avoid their own currencies from appreciating which would weaken their exports relative to their competitors. There are reports of China buying oil from Iran with Gold and it dose makes sense that the country would try to avoid the appreciation of its currency by swapping those dollars directly into commodities such as Gold. Western nations on the other hand appear to embrace the high value of their currencies, buying lots of goods from Asia and producing or exporting very few goods. We forget that the Dollar only has value, because trillions are being held in reserve by foreign nations which allow other western nations to borrow from American and also enjoy living in the debt bubble. When it all implodes, it would seem inevitable that it should lose at least 10 times its value, putting an end to all those cheap imports.


Notice those countries with the most debt, also have the highest earnings:







Monday 11 June 2012

Industrialization of the home

The sci-fi movies of the future often include images of humanoid robots, vibrant megacities or post apocalyptic worlds. But while the real path to the future may have been completely over looked by the movie industry, one thing is for sure, with the monumental changes taking place in everything from the economy, energy, technology to globalization, the next 10-20 years probably won’t look anything like the last 100.

To get a sense of what effect these rapid changes will have on our near future, you first need to step back in time to the Industrial Revolution. At the very start of this revolution in the 1600s there was a dwindling supply of wood in England, which resulted in the increasing use of coal as fuel, up until that time there was little incentive to use coal because it was hard to extract, heavy to transport and required a special fireplace to burn. But then, once coal was in place as a common source of fuel, higher burning temperatures maid it relatively easy to smelt iron and produce new items like Cast iron kettles, along with another unforeseen by-product of the high temperatures - steam! In 1698 Thomas Savery was trying to pump water out of the coal mines, when he tried using steam to power a piston pump, this resulted in the development of the steam engine which powdered the Industrial Revolution, though it probably would not have happened if we had not chopped all the trees down! Which makes this is a great analogy for how quickly things can change once the world runs out of an important resource like oil!

At the time these steam engines were being developed, most of the people from this time either learnt a craft or farmed the land, but then the steam engines enabled a few wealthy individuals to build steam powered factories which automated the textiles industry, other developments like the steam traction engines evolved into today’s tractors. The result of all this steam powered automations was the mass production of cheep goods and food, which the regular farmers and cottage industry folk could no longer compete with on price, which ment they were forced off the land and into working for the very few individuals who could afford to build these large factories and their machines. By the late 1800s this had resulted in the highest level of inequality, probably since Roman times and caused a number of wars like the Civil War in America. By the early 1900s, the efficiency with which the rich could use this industrial machinery to siphon their profits out of the economy caused a significant decline in the circulation of money, which at that time was based on gold. To solve this problem the British ordered all Gold coins to be exchanged for paper based money in the early 1900s, this enabled England to print a lot more money than they had in Gold. A similar event happened in America with the great depression, when Roosevelt in 1933 ordered all gold coins and gold certificates turned in for paper money, this move also help the US to spend their way out of the recession, building for example the Hoover dam and giving people the first unemployment benefits. 

Nearly 38 years later and in the background of increasing automation, something else with the potential to siphon money out of the economy appeared on the horizon – peak oil.  As predicted by M. King Hubbert in the mid 1950's US oil production peaked in 1971. This now meant Americas had to start importing oil. As America was still on the Gold Standard the effects of a US trade deficit with the oil rich nations could have cause a continual decline in the money supply and plunged the US into a prolonged depression. So it’s no strange coincidence that in the same year 1971 on August 15, President Richard Nixon took to the airwaves and announced the government was banning the conversion of dollars into gold and effectively abandoning of the gold standard. This now enabled the US Banks to “Print” as much money as was required to prevent any depletion of the domestic money supply by the import of oil from the oil rich nations. Unfortunately, increasing the money supply isn’t as simple as just printing more money, since someone else has to lend it, into existence. Which explains the continual decline in Interest rates since the 1980s, which coninsided with changes in policies to encurage more home ownership and Student loans.

Following on from the lower rates of money lending In the late 1980s, a 3rd factor started to accelerate the rate at which money began to drain from western economies, called globalization. This was encouraged by the removal of restrictions on the movement of money out of the uk by Margaret thatcher. The effects of globalization originally started with the hollowing out of manufacturing jobs, but as the technology improved the internet also helped with the second hollowing out of software and information technology jobs. The faster that money is lost from a local economy the faster it needs to be replaced; unfortunately, instead of increasing Taxes on the supper rich, fixing Tax loop holes or implementing a global financial transaction tax, the corrupt politicians have instead helped the Banking system lend out more and more money to plug the growing hole at the bottom of the economy. For example, in May 1997, Gordon Brown, as part of his “New world Order” gave control of interest rates to the Bank of England, which lowered the rates from a reasonable 7.5% to just 3% before the 2008 recession, rates are now down to just 0.5%. So instead of taxing the rich or the poor, new labour instead opted for the third way!

The lower interest rates adopted by the central banks of the developed nations during the past few decades, has been we are told to help the economy out of the bad times by helping the public and corporations to refinance old debts. But far from helping people to get out of debt, this has done just the opposite and help people get into more debt, causing for example the housing bubble in America which helped to trigger the 2008 Stock market crash. Now that interest rates are near 0% in most developed countries, the Central Banks will hardly be able to lower rates a second time, so the central banks will be, more or less powerless to stimulate the economy as we now head into the second dip of this great depression like a repeat of the 1930s. A number of people believe the US Government, will be able to avoid a repeat of the deflation seen in the 1930s by borrowing more and stimulating growth, this is partly why the Fed lowered interest rates so low, but the Goverments can only borrow so much money before they cannot borrow any more. Just look at all the credit ratings downgrades being given out to debt ridden countries like Greece and Spain, the Central Banks are private institutions and will not lend money to someone if the recipient doesn’t a have a good credit rating, even if they are the US Government! 

                 

But why would the Central Banks lower interest rates so low leading upto the crises, get everyone into levels of debts they could not afford to pay back and then not have any way to resolve the situation, surly this would be like committing suicide? To answer this question, you need to realize, there are three types of Bank:
  1.     Central Banks with the power to create money.
  2.     Commercial and Investments banks, such as Hedge funds.
  3.     The savings banks such as the building societies.
The Central banks who are able to lend them selves the money to buy up their own Bad debts in a processes called quantitative easing should be ok. It is the high risk commercial banks which will be in trouble, unable to collect debts they will end up bancrupt be brought out by the larger Banks which form the main core of the Central Banks, this will only help to strengthen the global organisations these central banks have created, like the international monetary fund (IMF). This is just what happened 83 years ago in the great depression when 9,146 banks failed and where taken over by the central bank, this would represent over 100% of the 7932 banks in existence today. 
    
How will things be different from the Great Depression this time? In the UK and America, Interest rates during the whole of the 1930s never dropped below 2%, they are now at 0% in America. Also, before the great depression, the levels of private debt never went above 250% in America or the UK, they are now above 500% in the UK! So not only are we more debt this time, but the ability of our central banks to stimulate economic growth are at an all time low. Another main difference between now and the great depression is the lack of a manufacturing and export industry, with most jobs being either in the financial sector or the service industry. This means once bank lending dries up, through the build up of too much debt in the system, then we will be full dependent on an extremely weak export industry as a source of revenue for the economy and since this is much weaker than during the great depression things could get very bad indeed, especially now that most of our oil and gas is now imported. Another big difference for the majority of the population is the much high percentage of people who no longer work on farms, which in the 1930s was around 20% of the population, while now the percentage is more like 1%. This is important, because it’s said that a lot of those who survived the great depression escape to the country to find food, with the majority of the 5 Million people (10% of the US Population) who died during that time having lived in the cities.  I think a lot of people do not believe this couldn’t happen now, but look at Greece which already has 30% of the shops boarded up and like Spain 50% of people under 30 without work, if people are not buying food from the shops in Greece, then what are they eating? With reports of children fainting in class from hunger, it’s not a lot. This isn’t something which has to happen in one instant; like the 1930s, it could take up to ten years of Austerity before it’s affecting almost everyone at every level of society.

One interesting aspect to the Austerity will be its effects on technology, the focus for example on shops and supermarkets; will be on reducing costs now more than ever, resulting in for example more self service checkouts and a much greater reliance on the internet. As a lot of this cost cutting will include the replacement of jobs which automated systems, this will only help to reinforce the effects of the depression. With access to funding, credit and consumer demand  at an all time low, the advantage for larger corporations in building large factories, which can churn out million of the same item at low cost, will be significantly reduced, especially as higher fule prices will make more centralized production less affordable. This suggest small start-ups or the self-employed will finally have an advantage, using everything from 3D Printers and the Internet to kick start a new industrial revolution, but will this result in a return to the cottage industry?

The problem with the idea of a cottage industry renaissance as it might be called, is this trend towards more local and small scale production, would also support more home-made goods. So the transformation could be more akin to a transfer of the factories into people’s own homes. But then what would this future look like? To get an idea you only need to look at what people actually need on a day to day basis? Electricity, Gas, Water, Food, Medicine, Soap, Washing up Liquid and other items required at a lower rate of production, such as cutlery, clothes, furniture, electronics and other home appliances. Then you have the services, such as the postal system, the internet and the banking system. Although it may not be technically possible or economical for all these things to become products of the industrialized home, it's worth going through them all to see how far technology could progress in this direction. It may also be worth pointing out that if the future does take this path, then it would no longer be just a great depression, because the fewer consumers were dependent on the global economy the fewer products the global corporations would be able to sell and the less people it would be able to employ. This would result in a self reinforcing cycle towards ever more self-sufficient lifestyles.

 
1. Electricity, this can be replaced by solar, today efficiency is 12-18% providing 4kW but 99% efficient solar printed on cheap paper is in the lab which could provide 20Kw - about 5 times more energy than most households ever use. The only problem here is energy storage for night time use, but solutions using unique materials involving carbon nanotubes or graphene are on the horizon such as Ultracapacitors with energy densities similar to Li-Ion car batteries. As these don’t have any electrolytes or chemical reaction taking place, they have virtually unlimited charging cycles and can charge up in an instant! The technology for doing this is also getting cheaper; a few companies have already started mass producing nanotubes and sheets of graphene.  I also expect the price to drop significantly, because unlike Lithium used in most electric car batteries today, Carbon is not in limited supply. 
   
2. Gas for cooking can be replaced by hydrogen from splitting water molecules, catalysers as efficient as plants now exists in the lab, no need for companies like British gas!
  
3. Water, dehumidification systems can produce around 50 litres per day, while another system I just read about uses a wind turbine to extract as much as 1000 Litres a day in the dessert using a condenser and refrigerant processes. When combined with Rain collection, water recycling, UV water sterilization, efficient filtration systems and 3D Printing technology to reduce costs - there might be no need to pay a water company for water!
   
4. Food. Most of the energy in the sun’s rays are within the visible wavelengths, which plants can't even use since they need UV Light, this means converting the energy from Visible light to UV rays with highly efficient LED Bulbs can enable a lot more plant growth than would be possible with direct sunlight, at the moment prices for these LED Bulbs are too expensive but prices are dropping and a few small companies have already gone into the production of vegetables in inner city arias, using LED Bulbs to grow vegetables for the local aria. Hydroponics also enables highly efficient use of water, reducing wastage to almost nothing, with 1kg of plant mass being produced for every kg of water. One good example is the Omega Garden system which involves rotating plants on a perforated wheel around a central bulb and underneath a nutrient solution of water. This carousel system yields five times the weight of plant mass per watt of conventional flat Hydroponics and can produce enough to feed one person or as much as a 450 square foot green house, in an aria just 2 meters by 2 meters. This is only possible because the plants grow both larger and 10 times faster than in their natural environment. The only real problem here is with the confined space of a home where the only efficient plants to grow would be those which are completely edible like cabbage. Crops such as wheat take up a lot of space with only the grains being edible, but even here the science of plant cell cultures might help, since the grains are a seed, which contain plant stem cells which have the potential to replicate indefinitely, given the right environment. Though it might not be necessary to use to cell cultures, some types of single celled plants like algae contain a lot of nutrients not found in vegetables like Iodine and Vitamin B12. Algae can also grow 20 to 30 times faster than food crops, some forms of algae are even composed of as much as 80% fat, useful for making anything from cooking oil, biodiesel, homemade soap or even biodegradable plastics at home.
   
4. Soap, with Electricity from Solar it becomes possible to make your own Soap using the readily available ingredients Salt and Oil. The processes for doing this involves passing an electric current through Salt water where the sodium chloride breaks down to form sodium hydroxide and chloride gas, this gas then bubbles out of the water to leave a solution of sodium hydroxide in water. If this liquid solution of sodium hydroxide is then mixed with oil such as could be obtained from Algae, then it will form Soap! In theory a small device could perform this process at home.
      
5. Biodiesel, as oil becomes increasingly expensive; it may become cheaper for people to "Grow" their own. Creating Biodiesel involves a process called transesterification which involves using caustic soda to accelerate a chemical reaction between alcohol and oil. To do this you heat uncooked vegetable oil which might be obtained from algae to around 130c, then with some eye protection and gloves, measure out ethanol at around 20% of the weight of the oil and caustic soda (Sodium Hydroxide) at just 1% of the weight of the oil being used. Then dissolve the Sodium Hydroxide into the ethanol, before adding this to the warm vegetable oil, after leaving this to cool for few hours a mixture of Biodiesel and glycerol is formed, the glycerol then separates out and sinks to the bottom of the container, forming a dark layer underneath the Biodiesel. Compressing Algae like olives, doesn’t just squeeze out all the oil, but also leaves behind fermentable carbohydrates which can be combined with yeast to form Ethanol, though it is best to use an Ethanol still, since ethanol can poison yeast and prevent all the carbohydrates from being converted to ethanol.
 
6. Plastic, according to the web, various starch based biodegradable plastics can be 3D printed. But how would you obtain lots of this at home? The first ingredient you need is obviously starch, since potatoes are around 95% starch, hydroponically grown potatoes could provide the first ingredient. Next you need glycerine which is formed when you make Biodiesel or Soap. By mixing and heating a solution of glycerol with starch and an acid like vinegar it creates a liquid plastic which can be formed into anything from plastic bags to bowls or cutlery.
        
7. 3D Printers continue to get cheaper, faster and more accurate with time; some can even combine as many as 60 different types of materials from metal, ceramics, plastics and rubber to create anything from cups, cutlery to items which require a combination of materials like a tooth brush or electronic circuits. Other possibilities include whole houses printed layer by layer.
  
8. Clothes, many 3D Printers are already using Nylon and a few people have also demonstrated the ability of 3D Printers to print a chainmail like cloth. Since the only difference between this and the actual fabric, is the resolution the gradual increase in resolution of 3D Printers over time should enable them to print clothes.

9. Postal system, quad copter are currently being tested as a possible solution to deliver everything from pizza to post using GPS navigation.
  
10. Internet - Wireless Hubs could form an alternative to the internet, rooting data through a global web of home based wireless rooters. In this system, P2P Software could replace the centralized search engines and other internet services like ebay and Facebook, by distributing the storing accross many different nodes. 
   
11. Money - A P2P Network implamenting a solution for the distribution of money without the need for banks has already been developed in the form of Bitcoin.