An Old Rant

In response to another conversation:

I thought the original premise was about how the tech/labor debate related to the financial crisis. Not how tech undermined capital. (Though Krugman seems to have picked up on that in a way I probably don't understand). Capital has prospered because tech requires capital. Globalization and horizontal integration, necessary to the global enterprise, reduces the cost of capital. Why borrow and buy expensive machinery when cheap foreign labor can accomplish the same result? And if you were horizontally integrated, production being only one more enterprise component, you don't even have to capitalize a factory (production facility). Some foreign enterprise (perhaps with subsidized capital) will do that for you. It's the difference between scale (GM) and scaleable (Google/Facebook) - (I saw that somewhere else).

But horizontal integration has its limitations. It's easy enough to make accounting, advertising, production, etc., profit centers (out-sourcing). But what about R&D? "Innovation"? If you out-source it you don't own it. Those would always be cost centers. It would require some egg-head to build a "garage project" on his own. No help. No capital. That was my rant of long ago. And I suggested that the challenge was for the financial system to identify those worthy projects and fund them and make them available to the horizontal enterprise for production.

Boy was that dumb! Capital's job is to make credit available to credit worthy borrowers. Homeowners, Italians, Greeks, Spaniards, derivatives - make up your own lies. Whatever someone else will buy. Forget about actually trying to ascertain the enterprise value of an idea. Myopia.

And that, in a nutshell, is how tech/labor relates to subprime.

Sunnyside

I just uploaded a new photo album SUNNYSIDE

HERE

Cyclops

A comment from "Jay" (that's all I know) about one of our presidential candidates:


"I’m reminded of the remorseless Cyclops in Homer’s Odysseus. His monocular vision is a metaphor, he is unable to perceive depth, and his outlook on the world is strictly superficial, especially when it comes to the suffering of Odysseus’ sailors as he eats them. His hunger is the only thing that matters; he is unable to sympathize with anyone unless it is himself."

Why did the bursting of the US real estate bubble blow up the whole world?

I was asked and I have an answer. Maybe it's just one point of view and I know it's not a complete explanation. I have left things out, things which I don't understand. But I'm pretty sure of this as far as I can take it.

It was easy money, not just in the US, and “globalization”. I used to go on about how we, the IMF, World Bank, WTO, and other Washington Consensus surrogates, were relentless in our efforts to tear down the barriers to international capital flows while building fences to protect ourselves from imported labor. It seemed incongruous. It's not. It's a feature not a bug. Globalization, in the modern sense, is a euphemism for financialization - the domination of finanzkapital over individual and productive endeavors and the disregard for individual liberties and initiative. The minions of finanzkapital are the “big-shots”. A continually changing population of “elites” with temporary and shifting alliances and who's only motivation is to “stay on top”. Survivor, Wall Street.

But there are limitations. Island limitations. Finanzkapital, like other parasites, depends at it's root on having a food source - in this case savings from those productive endeavors. With the productive sector already tapped out, and everybody who depended on it, tapped out too (the business school euphemism is “saturated market”). What to do when the host can't support any more? Get aboard an alien vessel and go to... someplace else. Hey, China! They've been a basket case for 4000 years. Ready market! Well, as it turns out, not so ready. That plan had a chink in it. No demand. But their history makes them an easy sell and they can produce more cheaply than the host produces. And finanzkapital can “intermediate” the financial flows while cutting out the middle man - i.e. the host, the productive sector itself.

With demand saturated finishing off the host isn't as risky as it may seem. And especially so if you have an accomplice. And finanzkapital did. They only had to look through that revolving door to those public institutions; the Fed, the Treasury, their Congressional payroll. Voila. Stimulate demand. Easy money. Greenspan did it. The Europeans did it. Japan is a case study. China will do it. What could go wrong?

Well, for starters, it's Ponzi like - pro cyclical. Paul Krugman called it Roadrunner Economics. Everything seems to go along just fine until even after things go over the cliff. Then somebody, maybe just somebody at Bear Stearns, looks down. And the rest, as they say, is history. Everybody must deleverage. And Europeans and Japanese were living in even greater bubbles (more highly leveraged) than we ourselves. Most especially problematic were the Europeans who were borrowing in a foreign currency (euro) and cannot depreciate its value. Interesting here too would be an historical discussion of how low Japanese rates didn't depreciate their currency but produced a “carry trade”. No time for that, I'm afraid.

How we got here is now only a curiosity. More important is where we're going. If debt isn't repayable - and the only way it can be repaid is for the economy to grow faster than an overfed (20% of economy & 40% of profits) finanzkapital sector consumes the productive resources that would pay for it - it won't be repaid. It must be written down. Or monetized which is to say the same thing.

We could write the bad debt down directly and show the losses, but that's a non-starter. It wipes out savings which might be used to rebuild and importantly it diminishes the influence of finanzkapital. Demand could be stimulated by fiscal measures. Roosevelt did that during the depression. Public demand could take up the slack caused by private deleveraging and public demand can be easily monetized. But, if the public sector were to grow, if we were likely to build public institutions, there is a chance that those institutions might “regulate” finanzkapital. Like it did at the end of the last depression. Oh, no! Also unacceptable. Krugman wants inflation. I don't see how that works. It also wipes out savings. Maybe it's just me.

Anyway, the choice we've made, and especially so in Europe, is austerity for the productive and public sectors (sometimes called internal devaluation); which represents a further reduction in demand. And monetization for finanzkapital. To finanzkapital new money looks just like savings. Incongruous? No, it's a feature not a bug.

But the alliance has shifted. Greenspan is no longer at the Fed. (Though Timmy is still at Treasury proving we have a way to go.) Still, the market sector of finanzkapital no longer has exactly the same interest as their former accomplice. They over-reached. Our Fed mouths the words that more monetization is on the table, but more money isn't necessary. Foreign demand is keeping US Treasury yields at record lows. The Fed doesn't have to lift a finger. In fact, there is really nothing at this point for the Fed to do. At the zero bound (0% interest) demand for money is by definition saturated. All further increase in money supply is funneled into speculation; the markets, more money chasing the same assets, creating more bubbles.

In my view the Fed is doing a pretty good job with its “stability mandate”; blow enough smoke to keep the markets from going short while hoping that by some miracle demand will pick up and not be cannibalized by those same markets. Bernanke has been telling the Congress this for months. But the Congress isn't going out on a limb. Talk about risk adverse. Or ignorance.

The struggle today is for dominance within that former finanzkapital alliance; the markets and their former accomplices the markets regulators which have been in their pockets for a long, long time. Right now the ball is in the European court. It's their turn. Germany has prevented a solution for too long. Europe will either monetize its debt or capital will flow out to dollar denominated assets (fungible!); which is happening as we speak - big time. Money is leaving Spain at 50% GDP/yr. (not all to dollars). Thursday, Mario Draghi of the ECB made an excuse to buy those sovereign bonds. Something that has been until now verboten for the central bank. Expect the markets to be skeptical. Nobody's going back into that water. But either way, if he does or if he doesn't, euros will flow to safer assets and dollar assets will get their share. Consequently equities are going up, but yields on sovereign debt haven't changed much. The euro zone has lost that fight. The ECB is the only buyer left. All euro zone debt must now be monetized. Mr. Market is happy.

The clear and present danger is that it may already be too late. If that were the case any further monetization may simply create the mother of all carry-trades. The markets have less to lose in a collapse than the rest of us. Just another day at the office. If stability were your mandate you should be aware of that.

On Emergency Power

Notice the double entender literary device in the title. How clever of me.

We were on emergency power. We had a storm “Like Nothing I've Ever Seen” and it put our lights out for 6 days - yes, it was worse other places – and we learned some things that I'll share. So, just in case somebody might see this and it will help them... all planning is “just in case”.

We live in a nice house. It's simple enough, but it's pretty well thought out. I have a recptacle on the outside where I can plug in a portable generator and a switched panel box that contains the emergency circuits, water well, heat (not electric), refrigeration, a few central electrical outlets. And it all works, It's simple. It's economical. It's perfect.

Except for this little refrigeration problem. I discovered to my dismay that these new EnergySaver appliances work by sipping a little electricity almost constantly. Like probably everybody else I looked at the bill at the end of the month and was never conscious of how long those units were running. It may be more efficient when on the grid and consumption is metered, but it works against you on generator power. You would rather have a larger cooling unit that was capable of working quickly then rest both the referation unit and the generator. As it was I was generating 5000w to run two 600w refrigerators and freezers and I had to run it almost constantly – about 18 hrs/day. That uses a lot of fuel; in my case gasoline. About 10 gal/day. It is neither convenient nor safe to store that much gasoline. You certainly don't want it in your garage. I keep it in a barn. And how do you keep it fresh? I would buy in the fall – the primary concern being both without electricity and snowbound – then use it up all summer long and replace it again the next fall. But the last two outages have been from summer storms. I went into this one under supplied. If I had not been able to get out I would have been up that creek.

Second, if you must run extension cords those little #16awg cords don't do it. Buy a big one. Plan on it. You would like to rap your freezer in extra insulation, but the owner's manuals tell you not to do that. If you had sufficient warning you could freeze big blocks of ice and just leave them there. The extra mass would be helpful. I know people in hurricane paths do that.

And last, it may also be that those little builder center generators aren't what you need. How easy are those to maintain? How long will they run before the brushes are gone? Can you replace them easily? Where do you get the parts? I have a small commercial unit, bought second-hand, and was fastidious about maintaining it. I tested it periodically, very diciplined. You have to be. When you need it you're going to use it hard. Hard! It has to be ready. Some repair parts should be kept on hand, sparkplugs, breaker points, fuses, some gaskets. And those people buying generators at the last minute? I went into this reasonably well prepared and there are a lot of things I need to work on.

I'll be looking into alternative fuels, propane and diesel, and looking for ways to solve that refrigeration problem.

Ideas are welcome. Please post them below.

Update: 16 Jul 12

I asked a salesman (not necessarily the best information, but it seemed a logical place to start) about freezer technology and he told me that even commercial units use the same design concepts and are different only in that they keep foods at a lower temperature. Then he started off, as we all do, about the lack of options because of the manufacturer's need to meet government mandated regulation.  And a reader sent me this link:

It didn't occur to me that the addition of methanol would make gasoline even harder to store.

Again, my problem is that because of the consumption pattern of EnergySaving refrigeration units I must run my generator almost constantly during an outage and and I don't have the ability to store gasoline in adequate quantities to be able to do that for more than just a few hours.

But the issue I wanted to address has to do with planning. The plan was faulty.

It's irrational for me to think that I'm going to be able to withstand an indefinite outage. If I could completely unplug from the grid I should just do that. So, from the outset I have to establish limits. What is, for me, a bad situation? How long should I anticipate that to last? What are the objectives? What can reasonably be done to minimize the consequences? And importantly, where is the point in which the plan falls apart?

From my example, the bad situation and objective was never about keeping the refrigeration units running. If that were the only criteria I would be money ahead to simply empty everything and replace it after every outage. But I can't draw water and I can't heat the house either and I have been snowbound as much as 8 days. Being unable to get out and unable to heat the house... that's a different problem.

The end of euro

Peter Boone & Simon Johnson on the end of the euro.

(this is going to leave a mark)

http://baselinescenario.com/2012/05/28/the-end-of-the-euro-a-survivors-guide/

Photos uploaded

Finally, an upload to Picasa:

https://picasaweb.google.com/110696413035939209828/CaminoDeSantiago02?authkey=Gv1sRgCLCZlKT2nL3JSQ