Why Clean Energy Can’t Exist on its Own

To listen to President Obama, you would think that clean energy is our next salvation. But clean energy can’t exist on its own. Clean energy options should more properly be called “fossil fuel extenders”. They only work within a system that has fossil fuels.

We can’t make solar PV panels or wind turbines without fossil fuels, and we can’t move them to their new sites and install them without fossil fuels. Many solar panels are made in China, and wind turbines often include overseas components (or are made overseas). If grid tied solar PV is installed without back-up batteries, it won’t work when the grid isn’t working.

Even corn ethanol is a fossil fuel extender. Corn is planted, harvested and transported using vehicles that use oil, and of course the finished product is mixed with petroleum products. Fertilizer and pesticides and herbicides also use petrochemicals, and ethanol plants are usually powered with natural gas or coal.

Wind turbines are only about 2% of US electrical production, and solar PV is well under 1%. Why aren’t school children and adults told about where our electricity comes from? The biggest source is coal, followed by natural gas. Nuclear is a very close third after natural gas.

Figure 1. US electric generation since 1970 in Btus, based on EIA data

Our electrical system needs oil, too. Most of the workers get to work in cars; maintenance of transmission lines needs to be done using vehicles; replacement parts need be transported using vehicles powered by oil; oil is needed for lubrication.

Even if we had an abundant supply of electricity from wind and solar, that electricity wouldn’t run today’s cars, trucks, airplanes, and boats. They run on petroleum products, except for a very few electrical powered vehicles. The electrical vehicles we are looking to use to replace current vehicles use lithium, which is an imported product (requiring oil for transport). Sources are limited, and leave us open to some of the same issues of supply interruption as oil.

More important than taking about clean energy is talking about using less fossil fuel energy, especially petroleum products, through buying smaller vehicles, carpooling and using public transportation. Saving electricity or natural gas through insulation and sealing cracks is helpful too, but doesn’t help our liquid fuel problem.

Taxing oil companies is a popular subject, but it is worthwhile thinking this through. Will doing this reduce the amount of oil that they pump, because fields that were at one time economic, are no longer economic? An example that is often given is all of the stripper wells that we have in the United States. They are typically owned by very small companies or individuals, rather than big oil companies. Together, they pump something like 900,000 barrels of oil a day out of the 5.5 million barrels a day of oil we are now pumping. These wells would likely not be profitable with higher taxes. They would just be closed. There are no doubt fields that big companies have in production that are marginal as well. Higher taxes might very well push the oil companies to close them.

Why not just import more? One issue is whether we really can. Imports have been declining since 2005, because world oil supply has remained flat, and because of more competition from China, India, and the oil exporting countries. It is nice to think that OPEC will supply more oil if we need it, but there is little evidence they can really raise their production by several million barrels of oil a day. Despite their promises, they haven’t done so to date, now or back in 2008, when prices were very high.

Whether we like it our not, we need petroleum products. If we don’t have them, we need to plan for a very different world. Rather than talking about clean energy, perhaps it would be worthwhile talking about what the world would look like with much less, or no, petroleum products. We have had an abundance of fossil fuel products in the last 200 years, but this will not continue forever.

Another thing we need to do is think through is what our economic system would look like with less oil. The oil intensity of the US economy has been declining by a shade over 2% per year. Even if this rate of improvement continues, we cannot expect the US economy to keep growing, if oil consumption (including imports) declines by a greater percentage, roughly 2% a year. Declines of greater than 2% a year in oil consumption seem quite possible–we experienced them in the recent recession. We need to think through what we need to do to change our economy, so that it can handle year to year declines in both oil consumption and economic growth.

President Obama, why don’t you start talking straight to the American people? Start telling the story as it is. Quit sugar coating the “clean energy” story. There is a very significant chance our oil imports will continue to decline from their 2005 peak in the near future, and we really haven’t prepared for this eventuality. There aren’t easy answers, but telling the truth would be a start in the right direction.

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By. Gail Tverberg

Oil and Food Prices

Several years ago National Geographic magazine published an article on oil that included a stunning photo of mature steer and the barrels of oil needed to grow an animal to that size. I recently went looking for that picture, found it, and post it here because it hasn’t lost its impact or relevance one bit.

Here’s the caption that accompanies that photo:

Weighing in at 1,250 pounds (567 kilograms), Marina Wilson’s champion steer Grandview Rebel is ready for auction at a county fair in Maryland. Raising this steer has taken an agricultural investment equal to 283 gallons (1,071 liters) of oil, represented here by the red drums. That includes everything from fertilizers on cornfields to the diesel that runs machinery on the farm. Overall, it takes three-quarters of a gallon of oil to produce a pound of beef.

Yowza! Three quarters of a gallon of oil to produce a pound of beef. At $4.00 per gallon, this implies the cost of a pound of beef includes $3.00 worth of oil.

In reality, the oil is used for illustrative purposes only. The energy in the food systems comes from many sources, such as natural gas for fertilizer and drying grains, and the electric grid for almost everything. Broadly, however, industrial energy sources tend to have correlated prices and oil is considered the lynch pin since it is involved in the transportation of all goods, including energy inputs.

Given the heavy use of oil in the food system wouldn’t you expect oil and food prices to correlate? Well they certainly do.

The above graph comes from the web site of Paul Chefurka and derives from easy to get, publicly available data from the UN Food and Agriculture Organization and the US Energy Information Agency.

The Broad Context

While the price correlation is stunning, the big picture is even more interesting. Let’s look at this again from an energy perspective by comparing the energy content of one pound of meat with the 3/4 gallon of oil that goes into it. 3/4 gallons of oil is equivalent to 0.11 Giga Joules (GJ) of energy. A pound of meat averages about 1000 kilo calories, which equals a measly 0.0042 GJ.

Twenty six (26) units of fossil fuel energy goes into producing one (1) unit of food energy in the form of beef.

Agriculture was created as the primary way civilizations harness the energy that allows them to do work. Now, however, agriculture is simply another fossil fuel conversion system. While these fuels provide us with tremendous labor efficiency, we can no longer say we have an energy efficient way to make food since food production is now an energy sink.

Given the volatile and generally rising trends in energy costs, I believe we are in a transition between two periods. For the past several decades, fossil fuels could be counted on as readily available and cheap, which is what built the system we have. These non-renewable stocks have depleted to the point where we may no longer get the historic rates of flow we’ve depended on. Look ahead a bit then, and an advantage goes to systems that build renewable stocks and capture and convert renewable flows of energy.

In simple terms, this defines the need for sustainable agriculture. The renewable stocks we need to build include fertile topsoil. And the flows come from what plants, animals, fungi and microbes do with soil, water and sunlight.

Well, that’s the big picture. And if you want to learn the details of how this is done then this blog will be a worthwhile read.

Preparing for Life in a Peak Oil World

We know that peak oil will be here soon, and we feel like we should be doing something. But what? It is frustrating to know where to start. In this chapter, we will discuss a few ideas about what we as individuals can do.

1. What will the first few years after peak oil be like?

It is hard to know for certain, but a reasonable guess is that the impact will be like a major recession or depression. Many people will be laid off from work.

Gasoline is likely to be very expensive ($10 a gallon or more) and may not be available, except in limited quantities after waiting in line for a long time. Fewer goods of all types will be available in stores. Imports from third-world countries are likely to be especially unavailable, because of the impact of the oil shortage on their economies.

Gasoline prices may not rise as high as $10 gallon; the problem may be that at lower prices than $10 gallon, oil prices send the economy into recession. There may actually be a glut of oil supply because of recession or depression, because many cannot afford the high priced oil. For example, state highway departments cannot afford high priced asphalt. This is related to low "energy return on energy invested". If the goods and services made with oil aren't great enough to justify its high price, high oil price can be expected to send the economy into recession. Countries that use a lot of oil for purposes other than creating new goods and services are likely to be especially vulnerable to recession.

Money may not have the same value as previously–opinion is divided as to whether deflation or rampant inflation will be a problem. Investments, even those previously considered safe, are likely to lose value. Things we take for granted–like bottled water, fast food restaurants, and dry cleaners–may disappear fairly quickly. Electricity may become less reliable, with more frequent outages. Airplane tickets are likely to be extremely expensive, or only available with a special permit based on need.

2. If a scenario like this is coming, what can a person do now?

Here are a few ideas:

• Visit family and friends now, especially those at a distance. This may be more difficult to do in the future.

• Learn to know your neighbors. It is likely that you will need each other’s help more in the future.

• If you live by yourself, consider moving in with friends or relatives. In tough times, it is better to have others to rely on. It is also likely to be a lot cheaper.

• Buy a bicycle that you can use as alternate transportation, if the need arises.

• Start walking or jogging for exercise. Get yourself in good enough physical condition that you could walk a few miles if you needed to.

• Take care of your physical health. If you need dental work or new glasses, get them. Don’t put off immunizations and other preventive medicine. These may be more difficult to get, or more expensive, later.

• Move to a walkable neighborhood. If it seems likely that you will be able to keep your job, move closer to your job.

• Trade in your car for one with better mileage. If you have a SUV, you can probably sell it at a better price now than in the future.

• If you have two cars powered by gasoline, consider trading one for a diesel-powered vehicle. That way, if gasoline (or diesel) is not available, you will still have one car you can drive.

• Make sure that you have at least a two-week supply of food and water, if there is some sort of supply disruption. It is always good to have some extra for an emergency–the likelihood of one arising is greater now.

• Keep reasonable supplies of things you may need in an emergency–good walking shoes, boots, coats, rain wear, blankets, flashlights and batteries (or wind-up flashlights).

• Take up hobbies that you will be able to continue in a low energy world, such as gardening, knitting, playing a musical instrument, bird watching, or playing cards with neighbors.

• Join a local sustainability group or “permaculture” group and start learning about sustainable gardening methods.

3. Do I need to do more than these things?

It really depends on how much worse things get, and how quickly. If major services like electricity and water remain in place for many years, and if gasoline and diesel remain reasonably available, then relatively simple steps will go a a long way.

Some steps that might be helpful to add once the crunch comes include:

• Join a carpool for work, or make arrangements to work at home. If public transportation is available, use it.

• Cut out unnecessary trips. Eat meals at home. Take your lunch to work. Walk or jog in your neighborhood rather than driving to the gym. Order from the internet or buy from stores you can walk to, rather than driving alone to stores.

• If you live a distance from shopping, consider forming a neighborhood carpool for grocery and other shopping. Do this for other trips as well, such as attending church. If closer alternatives are available, consider them instead.

• Plant a garden in your yard. Put in fruit or nut trees. Make a compost pile, and use it in your garden. Put to use what you learned in sustainability or permaculture groups.

• Meat, particularly beef, is likely to be very expensive. Learn to prepare meals using less meat. Make casseroles like your grandmother’s, making a small amount of meat go a long way. Or make soup using a little meat plus vegetables or beans.

• Use hand-me-down clothing for younger children. Or have a neighborhood garage sale, and trade clothing with others near you.

4. Should families continue to have two, three, or four children, as they often do today?

With the uncertainties ahead, it would be much better if families were very small–one child, or none at all. The world’s population has grown rapidly in the last 100 years. Part of the reason for growth is the fact that with oil and natural gas, it was possible to grow much more food than in the past. As we lose the use of these fossil fuels, it is likely that we will not be able to produce as much food as in the past, because of reduced ability to irrigate crops, and reduced availability of fertilizers, insecticides, and herbicides. In addition, manufactured goods of all types, including clothing and toys, are likely to be less available, with declining fossil fuel supply. Having smaller families will help fit the population to the available resources.

If couples have completed their families, it would probably be worthwhile for them to consider a permanent method of contraception, since birth control may be less available or more expensive.

5. Are there any reasons why steps such as those outlined in Question 3 might be too little to handle the problem?

Besides the decline in oil production, there are a number of other areas of concern. Hopefully, most of these will never happen, or if they do happen, will not occur for several years. If they do happen, greater measures than those outlined in Question 3 are likely to be needed.

• Collapse of the financial system. Our financial system needs growth to sustain it, so that loans can be paid back with interest. Once peak oil hits, growth will be gone. Economic growth may even be replaced with economic decline. It is not clear our financial system can handle this.

• Collapse of foreign trade. Many factors may come into play: The cost of transportation will be higher. Airline transport may not be available at all. Fewer goods are likely to be produced by the poorer countries of the world, because of power outages related to high oil prices. Rapid inflation/deflation may make monetary transactions more difficult.

• Rapid climate change. Recently, scientists have discovered that climate change can take place over a very short period of time–as little as a decade or two. Temperature and precipitation changes may cause crop failures, and may make some areas no longer arable. Sea levels may also rise.

• Failure of the electrical grid. The grid tends to be vulnerable to many kinds of problems–including deterioration due to poor maintenance, damage during storms, and attacks in times of civil unrest. Maintenance is currently very poor (grade of D) according to the “Report Card on America’s Infrastructure” by the American Society of Civil Engineers. If we cannot maintain the grid, and upgrade it for the new wind and solar capacity being added, we will all be in the dark.

• Water shortages. There are several issues–We are drawing down some aquifers at unsustainable rates, and these may be depleted. Climate change may reduce the amount of water available, by melting ice caps and changing storm patterns. City water and sewer systems require considerable energy inputs to continue functioning. If these are not provided, the systems will stop. Finally, systems must also be adequately maintained–something that is neglected currently.

• Road deterioration. If we don’t have roads, it doesn’t matter whether we have cars. In the future, asphalt (a petroleum product) is expected to become more and more expensive and less available. It is not clear whether recycling asphalt from lesser-used roads will overcome this difficulty.

• Decline in North American natural gas production. Natural gas is especially used for home heating, making plastics and making fertilizer. It is also used in electrical generation, particularly for extra load capacity when demand is high. Conventional natural gas is declining, and it is not clear that supply from other sources can make up the gap.

We now have shale gas and other unconventional making up the gap, but there are uncertainties how long it will stay with us.

• Inadequate mineral supplies. A number of minerals are becoming less avaialble, including copper (used in electric wiring), platinum (used in catalytic converters), phosphorous (used in fertilizer).

• Fighting over available supplies. This could happen at any level. Individuals with inadequate food or gasoline may begin using violence. Or there may be fighting among groups within a nation, or between nations.

6. Are there any reasons for optimism?

Yes. We know that people throughout the ages have gotten along successfully with far fewer resources than we have now, and with much less foreign trade. Financial systems have gotten into trouble in the past, and eventually new systems have replaced them. If nothing else, barter works.

We know that among the countries of the world, the United States, Canada, and Russia have reasonably good resource endowments in relation to their populations. They have fairly large amounts of land for crops, moderate rainfall, reasonable amounts of fossil fuels remaining, and populations that are not excessively large.

We also know that Cuba successfully made a transition from high oil usage to much lower oil usage, through the development of local gardens, increased public transit, and bicycles. A movie has been made about the Cuban experience.

7. What should we do, if we want to do more than described in Question 3?

Some web sites (such as Life After the Oil Crash and wtdwtshtf.com) advocate moving to a farming area, buying land and hand tools, and learning to farm without fossil fuels. Typically, an individual purchases an existing farmhouse and adds solar panels or a windmill. The web sites generally recommend storing up large supplies of food, clothing, medicine, tools, guns, and ammunition, and learning a wide range of skills. These sites also suggest storing some things (liquor, razor blades, aspirin, etc.) for purposes of barter.

This approach may work for a few people, but it has its drawbacks. Making such a big move is likely to be expensive, and will most likely involve leaving one’s job. The individual will be alone, so security may be a problem. The individual may be dependent on his or her own resources for most things, especially if the farm is in a remote location. If the weather is bad, crops may fail. Living on the edge of a small town may prevent some problems, but such a move would still be a major undertaking.

8. How about Ecovillages? What are they?

These are communities dedicated to the idea of sustainable living. These communities were set up in response to many issues facing the world, including global warming, resource depletion, and lifestyles that are not fulfilling. They were generally not formed with peak oil in mind.

Each ecovillage is different. Organizers often buy a large plot of land and lay out a plan for it. Individuals buy into the organization. Homes may be made from sustainable materials, such as bales of straw. Gardening is generally done using “permaculture”- a sustainable organic approach. Individuals may have assigned roles in the community.

The few ecovillages I investigated did not seem to truly be sustainable–they bought much of their food and clothing from outside, and made money by selling tours of their facilities. The ecovilliage approach could theoretically be expanded to provide self-sustaining post-peak oil communities, but would require some work. Some adventuresome readers may want to try this approach.

9. Is there a middle ground? What should be people be doing now, if they want to do more than outlined in Questions 2 and 3, but aren’t ready to immerse themselves in a new lifestyle?

As a middle ground, people need to start thinking seriously about how to maintain their own food and water security, and start taking steps in that direction.

Food security. We certainly hope our current system of agriculture will continue without interruption, but there is no guarantee of this. Our current method is very productive, but uses huge amounts of energy. If we can keep our current system going, its productivity would likely be higher than that of a large number of individual gardens. The concern is that eventually the current system may break down due to reduced oil supply and need to be supplemented. Vulnerabilities include:

• Making hybrid seed, and transporting it to farmers
• Getting diesel fuel to the farmers who need it
• Transporting food to processing centers by truck
• Creating processed food in energy-intensive factories
• Making boxes and other containers for food
• Transporting processed food to market

If diesel fuel is allocated by high price alone, farmers may not be able to afford fuel, and may drop out. Or truck drivers may not be able to get what they need.

It is in our best interest to have a back-up plan. The one most often suggested is growing gardens in our yards–even front yards. Another choice is encouraging local farms, so that transportation is less of an issue. It takes several years to get everything working well (new skills learned, fruit trees to reach maturity), so we need to start early.

One type of crop that is particularly important is grain, since grain provides a lot of calories and stores well. In some parts of the country, potatoes might be a good substitute. It would be good if people started planting grain in gardens in their yards. There is a lot to learn in order to do this, including learning which grains grow well, how much moisture and nutrients the grains need, and how to process them. If the grain that grows well is unfamiliar, like amaranth, there is also a need to learn how to use it in cooking.

Individuals (or local farms) should also begin growing other foods that grow well in their areas, including fruits and nuts, greens of various types, and other more traditional garden crops, including beans. For all types of gardening, non-hybrids seeds (sometimes called heirloom seeds) are probably best for several reasons:

• It makes storing seeds after harvest possible, and reduces dependence on hybrid seeds.

• There is less uniformity, so the harvest is spread over a longer period.

• The reduced uniformity also helps prevent crop failure in years with drought or excessive rain. Some seeds will not grow, but others will. (Hybrids are all or nothing.)

Imported foods are likely to shrink in supply more quickly than other foods. If you live in a country that is dependent on imported foods, you may want to consider moving elsewhere.

Water Security. Here, the largest issue is whether there is likely to be sufficient supply in your area. Another issue is whether there will be sufficient water for your garden, at appropriate times. A third issue is whether there will be disruptions in general, because of poor maintenance or because the process of treating fresh water (and sewage) is energy-intensive.

With respect to sufficient water in your area, if it looks like there is a problem (desert Southwest, for example), relocating now rather than later is probably a good idea. Transporting water is energy intensive, and new efforts at developing energy (like shale oil or more ethanol) are likely to make the water supply situation even worse.

With respect to water for gardening, consider a rainwater catchment system for your roof. Runoff water is saved in barrels, and can be used for irrigation in dry periods.

General disruptions of water supply are more difficult. Keep some bottled water on hand. You may also want to consider a tank for greater storage supply. Rainwater catchment can be used for drinking water, with the correct type of roofing (not asphalt shingles!) and proper treatment, but this is not generally legal in the United States.

10. What kind of investments should I be making?

A person’s first priority should be buying at least a little protection for a rainy day – some extra food and water, comfortable clothing, blankets and flashlights. I suggested two weeks worth in Question 2. If you have money and space, you may want to buy more.

Paying down debt is probably a good idea, if only for the peace of mind it brings. There are some possible scenarios where debt is not a problem (hyper-inflation but you keep your existing job and get a raise). In many other scenarios (deflation; job lay-offs; rising food and energy prices) debt is likely to be even harder to pay off than it is now.

Land for a garden is probably a good investment, as well as garden tools. You will want to invest in gardening equipment, some books on permaculture, and perhaps some heirloom seeds. You may also want to consider a rainwater catchment system, to collect water from your roof.

You may also want to invest in solar panels for your home. If you want round-the-clock solar energy, you will also need back-up batteries. Buying these is questionable–they tend to be very expensive, require lots of maintenance, and need to be replaced often.

There is a possibility that the financial system will run into difficulty in the not-too-distant future. Some ideas for investments that may protect against this are

• Treasury Inflation-Protected Securities (TIPS)
• Bank accounts protected by the FDIC
• Gold coins
• Silver coins

If you want to invest in the stock market, we know that there will be more and more drilling done for oil and gas done in the next few years, so companies making drilling equipment are likely to do well. Small independent oil and gas companies may also do well, doing “work-over” business. We know that there are likely to be shortages in some metals in the years ahead (copper, platinum, uranium), so shares in companies mining these types of metals may do well.

Investments in biofuels should be considered with caution. Most ethanol from corn appears to be heavily dependent on subsidies. If it should ever have to compete with other fuels on a level playing ground, it is likely to do poorly.

I would be cautious about buying insurance policies, except for short-term needs such as automobile coverage, homeowners coverage, and term life insurance. If we encounter a period of significant deflation, insurance companies are likely to fail, because bondholders cannot pay their debt. If we run into a period of rapid inflation, the life insurance or long term care coverage you buy may have very little real value when you come to use it.

11. Should I move to a different location?

There are many reasons you might want to consider moving to a different location:

• To find something less expensive. If times are going to be difficult, you do not want to be paying most of your income on a mortgage or rent.

• To be closer to friends or family, in the difficult times ahead.

• To share a house or apartment with friends or family.

• To be closer to work or public transportation.

• To be closer to a type of employment that you believe will have a better chance of continuing in the future.

• To have better fresh water supplies.

• To join a community with similar interests in sustainability.

• To leave a community that you feel may be prone to violence, in time of shortage.

There are disadvantages as well as advantages to moving to a new location. If many others are trying to move at the same time, you may not be welcome in the new community. You will likely not have friends and the support group you would have had in your prior location. Because of these issues, it is probably better to move sooner, rather than later, if you are going to move. If you balance the pluses and the minuses, it may be better to stay where you are.

12. We hear a lot about various things we can do to be “green”, like buying fluorescent light bulbs. Do these save oil?

Most of the “green” ideas you read about save energy of some kind, but not necessarily oil. Even so, they are still a good idea. If there is a shortage of one type of energy, it tends to affect other types of energy as well. Doing “green” things is also helpful from a global warming perspective.

Here are some green ideas besides using fluorescent light bulbs:

• Move to a smaller house or apartment.

• Insulate your house, and have it professionally sealed to keep out drafts.

• If any rooms are unused, do not heat and cool them.

• Keep your house warmer in summer, and cooler in winter.

• If you no longer need a big refrigerator, buy a smaller one. Be sure it is an “Energy Star” refrigerator.

• If you have more than one refrigerator, get rid of the extra(s). Refrigerators are a big source of energy use. For parties, use ice in a tub.

• Separate freezers are also big energy users. Consider doing without.

• Eat less meat. Also avoid highly processed foods and bottled water. All of these require large amounts of energy for production.

• Get power strips and turn off appliances that drain energy when not in use.

• Turn off lights that are not needed.

• Rewire lights into smaller “banks”, so you do not need to light up the whole basement when all you want is light in a small corner.

• Get a clothes line, so you do not need to use your clothes dryer.

• When cooking, use the microwave whenever possible.

• Reduce air travel to a minimum. Air travel results in a huge number of miles of travel with corresponding fuel use.

• Recycle whenever you can.

• Eliminate disposables as much as possible (coffee cups, napkins, plastic bags, etc.)

13. Should we be talking to our local government officials about these problems?

Yes! At the local level, there are many changes that would be helpful:

• Laws permitting people to put up clothes lines in their yards.

• Laws encouraging gardens to be grown, even in the front yards of homes.

• Laws permitting multiple occupancy of houses by unrelated individuals.

• New local public transportation plans, particularly ones that do not require large outlay of funds. For example, a plan that is more like a glorified car pool might work.

• Allocation of funds to study the best crops to be grown in the area, and the best cultivation methods, if energy supplies are much lower in the future.

It would also be helpful to make changes at higher levels of government, but these are beyond the scope of the discussion in this chapter.

By. Gail Tverberg

Zombie Money Kills Real People

There are a number of fallacies - or delusions, if you will- concerning our economies that are set to inflict enormous - in many cases lethal- damage in both our own rich lives and those of people elsewhere in the world who are far less well-off than we still are - for now. These fallacies are closely connected, which adds greatly to their insidiousness as well as the perverse influence they have both on ourselves, and on our awareness of what's happening around us. And whatever there may be that we can't change overnight, we can at least try to comprehend some issues, file them, and move on. Let’s do these first:

1. Recovery
   
2. Inflation
   
3. Food prices

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1: Recovery

There is no economic recovery, there hasn't been one in the past five years, and there won't be one for a very long time to come. Claiming that we are seeing a recovery today equals claiming that a society can borrow its way into recovery. I'm not going there, and I strongly advise you to not do it either.

There will be a Keynesian faction which clings to the theory that says it is indeed possible to borrow your way up, but that's a mere mirage, since it would require a surge in real productivity, i.e. outside of the service industry. Where and how have we increased production since the crisis started? Where have we created the great deal of additional value required to dig ourselves out of the hole? Obviously, nowhere. The vast majority of "jobs created" is in the service sector, while manufacturing today counts for less than 10% of US jobs. And no, flipping burgers does not create value.

For the US economy to recover for real, we would need to see hundreds of thousands of jobs created every month, on top of the 150-250,000 needed to just keep up with population growth. Not happening. It doesn't matter if the BLS says the unemployment rate went from 9.8% to 9.4% on 103,000 jobs created. If and when it issues numbers like that, the BLS itself ceases to matter. To wit, Zero Hedge reports: "Initial Claims Surge To 445K, Not Seasonally Adjusted Claims Surge By 191,686 To 770,413 In One Week".

What has happened that fools people into believing in a recovery are two things:

First, the US government and the Federal Reserve have injected more trillions of dollars into the system than anyone can keep track of. Moreover, they have done so only in those sectors that remain beyond the grasp of the average American. Which means that we see relative highs in the markets, as well as record or near record amounts paid out in bonuses on Wall Street, and at the same time there are record numbers of foreclosures and record or near record unemployment numbers.

While it's true that stock markets have been rising lately, how anyone can see that as proof of a recovery is beyond me. The idea that if you just make the rich richer, the rest will follow, is not even something I want to discuss anymore.

Second, any attempt to maintain what could be considered accounting standards, such as those that would apply to you and me, was given up long ago. The reason for this is that the trillions upon trillions of dollars that were taken away from you and your offspring, and handed to the main banks, would still not have been enough by any stretch of the imagination to keep up even the slightest appearance of solvency for these banks. It's important to let that sink in.

The untold trillions have been only sufficient to pay down the first "level" of debt the banks had accumulated, that part of the debt that could no longer be hidden from view. The rest of the debt, which is far greater than all the trillions handed out so far, remains in dark vaults, treated like some sort of state secrets that can’t be divulged for the next 50 or 100 years. The result is that hardly anyone realizes how big the debt is, and the losses are, and that bank stocks have actually been going up. This is how zombie money is created.

You, too, if you’re a gambling addict, could live for a while pretending you're rich, even after you’ve lost all you have and ten times more, provided you’re capable of hiding your lost wagers. Charles Ponzi and Bernie Madoff did it on their own for years; JPMorgan Chase and Bank of America do it with the full aiding and abetting from Washington, which uses your money to comply with whatever it is Dimon, Blankfein and Moynihan say is needed to stave off a collapse.

In other words, the economy may seem to be recovering, and the banking system may seem to have recovered, but the illusion has come at a gigantic price to the American (and European) societies, and in the end it will not make one iota of difference for the outcome. Then again, let's correct that: it will make a difference, but not - at all- in your favor: the multi-trillion dollar illusion will greatly enhance the misery and destitution on Main Street. All that money could have been used to mitigate and minimize the suffering of the herd; instead, it’s all gone to wolf packs and vampire squids. We’ll yet come to deeply regret this.


2: Inflation

The fact that there’s all that zombie money around (or zombie credit, to be precise) leads many to believe the US witnesses inflation. Not true. First off, inflation is not the same as rising prices. Prices can rise because of different causes: scarcity, speculation and (real) inflation. And it’s important to be able to identify which of these causes is in play. If you call all price rises inflation, you lose the ability to distinguish between the causes, which means you lose a crucial analytical tool. There may be those who would like nothing better than for us to lose that tool, but it’s not smart to give in.

I know the media has force-fed the incorrect definition of inflation to the masses, and I know there are plenty of people who say rising prices is all they care about, not monetary theory. However, a clear view of causation is essential when it comes to defining your reaction to rising or falling prices, and prices that rise because of scarcity demand a totally different set of actions than those that do because of a rise in total supply of money and credit, combined with velocity of money, which is what inflation truly is.

The present, incorrect and force-fed "meaning" of inflation as all price rises no matter what their cause is, is relatively new. Rising prices used to be referred to as "(currency) devaluation". Not perfect, but way better than what we have now, where terms like “monetary inflation", "price inflation", "consumer inflation", "energy inflation" all the way down to "cookie inflation" fill the media.

Why is the distinction between the definitions important? Because today in the US both the money/credit supply and the velocity of money are falling (deflation), while some prices are rising, in particular those of food and energy. And no, you can't have deflation in one sector and inflation in the other. That really turns the whole debate into obscure nonsense. It's important that we can determine that if prices rise in times of deflation, the cause for those price rises must be something other than inflation.

In today's world, that something else is speculation. But not of the ordinary kind. What we have right now is zombie money speculation. The same unrecognized losses in the financial system that our governments cover up with criminally negligent accounting non-standards cause prices of oil and food to rise, since that's where the zombie money -inevitably- ends up. And it's not just the banks that invest zombie money, it's all of us.

If banks would have been forced to reveal their losses, the hammering of home prices would have been huge. Since this did not happen, a lot of people are still sitting pretty in their homes, which are way more overvalued -in free market terms- than just about anyone is ready to recognize. Also, if banks had revealed their losses, unemployment rates would have been far higher than they are today.

I know what many are thinking: maybe it's not such a bad idea to cover up those losses. But you're not seeing the whole picture. First, the cover-up has enabled the banks to access your money in order to pay down their debts. And second, zombie money is not the same as real money, as something that has been earned by adding real value. Zombie money is not real.

I read a piece at Zero Hedge the other day by a group that calls themselves the NIA, for National Inflation Association. But they don’t even know what inflation means. Hence their slogan: "Preparing Americans for Hyperinflation". Hey, if you can't define inflation, chances are you’ll miss the truth on hyperinflation too. Look, the US depends for its money and credit supply on international bond markets. Whenever Bernanke turns on his so-called "printing press", which in actual fact is an "additional credit" press, it's not as if free money is created. There‘s interest to be paid on all of it. And while interest rates may be low right now, it's not Bernanke who sets those rates, try as he might to make you think so.

If and when the bond markets decide that the risk on US debt rises enough -or too much-, they will decide what the interest rate is, not Bernanke, and not Geithner. Obviously, with every dollar printed, risk assessments will rise, and the outcome is inevitable: less appetite for US debt (don’t forget that there's plenty zombie money in the bond markets too), and higher rates. And only if and when the US no longer has access to international markets does the option of hyperinflation come into play. Now, I may be quite negative on the prospects for the US economy, but a full separation from global debt markets is a while away yet, and that means the prospect of hyperinflation is as well.

Preparing for hyperinflation is not just useless at this point in time, it's also damaging in that it makes people blind to the real problem: deflation. And before we get to hyperinflation, if we ever do, deflation will cause so much pain and grief and unrest and death, that the very thought of hyperinflation will come to be seen as a highly delusional non-issue.

So how long will the zombie money last? Can it last as long as Bernanke and Geithner and Obama and Dimon want it to? No, in fact, they're fighting a lost battle against time itself.

The zombie money has to disappear, and it will. It all starts and ends with US and European real estate, the one biggest investment of those of us living on Main Street, by far. US home prices have now fallen for 53 consecutive months, despite the fact that Fannie Mae and Freddie Mac buy up and guarantee near 100% of all mortgages, and despite the fact that the Fed has purchased huge swaths of the securities allegedly backed by these mortgages.

All those trillions "worth" of your money haven't been able to prevent that. And no amount of additional trillions will. Foreclosures are setting brand new records across the country, even as banks are ever more nervous about their paperwork, and their balance sheets. It doesn't matter how much money Washington throws at the issue, other than it’ll make you a whole lot poorer, for you’ll never see it back.

A further deterioration in home prices can't be prevented. Fannie and Freddie can’t buy 101% of mortgages; they're buying close to a 100% right now and prices still fall. Wal-Mart greeters, burger flippers and the rest of the great unwashed will not be allowed back into the housing market. There are over 10 million homes on the market, and perhaps twice that if you count all foreclosed properties that banks sit on (and the millions they won’t foreclose on), plus all those that people would like to sell but can't lest they go underwater. And the pool of potential buyers has shrunk with a vengeance since the 2005-6 "heydays". Huge increase in supply, huge decrease in demand; e all know where this will go.

Now, take Fannie and Freddie out of this picture. What do you see? They’ll be taken out in some way, and at some time, and it won’t take years. I know what I see: the housing and mortgage situation in the US has turned into what I've always called the “Bulgaria model”, where you guarantee the mortgage on your neighbor's home, and he guarantees yours; anything goes as long as it's not the free market your politicians and media tell you about. And we know what happened to Bulgaria in the end, don't we?

I’m all for a society, a government, that takes care of the weakest in its midst. I’m all against a government that props up the strongest in its midst, in this case the bankers with bonuses larger in one year than the weaker among us can make in a lifetime, the same bankers who lost more money in bad wagers than the entire country can cough up, and still be economically viable. We’re fast becoming zombie societies.

But first we'll have to live through this:


3: Food prices

Let’s start with the news that the Tunisian president has fled his country, and the military's taken over, according to Al Jazeera. Mass protests are ongoing in Morocco and Algeria. The riots in Tunisia are not all about food prices, but they were certainly a substantial factor. And more, much more, of the same is on the horizon, in many different places. But food prices this time around are not rising because of widespread dramatic shortages, at least not so far. And Lester Brown, much as I like the man, has it completely wrong:

The Great Food Crisis of 2011

[..] whereas in years past, it's been weather that has caused a spike in commodities prices, now it's trends on both sides of the food supply/demand equation that are driving up prices. On the demand side, the culprits are population growth, rising affluence, and the use of grain to fuel cars. On the supply side: soil erosion, aquifer depletion, the loss of cropland to nonfarm uses, the diversion of irrigation water to cities, the plateauing of crop yields in agriculturally advanced countries, and -- due to climate change -- crop-withering heat waves and melting mountain glaciers and ice sheets.

In the same vein, the peak oil crowd fails to see what drives up oil prices today. Yes, long term trends affect prices to some extent. But no, Lester, you can't provide an accurate assessment of what’s happening if you don’t include the very obvious contribution of speculation, especially that which originates with zombie money. Ditto for oil prices.

Food prices are rising partly because, let’s not forget, China, unlike the US, does have inflation, with its money supply going through the roof. But much more than that they're rising because we have elected to kill off the principles of our own western economic systems, which were once supposed to be based on free market ideas, that dictate that success is rewarded and failure punished.

They have since come to resemble some kind of sophomore notion of Darwinianism, where the upper alpha rhino gets all the girls and the rest get none at all. And that in turn is supposed to pose as justice in human societies, whereas in reality it’s nothing but what happened in Bulgaria for decades.

The consequence is that the zombie money is now allowed to drive up food prices to levels which make sure that millions of people around the world will go hungry, and will revolt as a result of that. Blankfein, Dimon et al have long since realized that they can't maintain their velvet “God's work" thrones just by robbing Americans of all they're worth. Their losses are far too great. They need to have access to everyone's wealth all over the world.

And since oil and food are traded on international commodity markets, and they have gotten hold of all the money America is worth, and then some, they can play these markets as much as they want, whether it’s wheat or natural gas or gold. People like to claim that gold will rise as the US dollar becomes worth less, but they forget that it’s zombie money that has been buying gold, and that has thus lifted gold prices. Once daylight comes and the zombies are gone, there's only one way left to go for gold prices too.

So, once again, when will the zombie money see daylight?

This could be caused by any of a myriad of choices. We could force all banks to put foreclosed homes on the market, all at once. Or tell the same banks they have no right to foreclose on homes they have no perfect(ly legal) paper trail on. We could force all derivatives contracts out into the open. Or just the mortgage backed securities; that would do it. Provided we fold Fannie and Freddie, and not let the FHA or any of those guys take over.

As I wrote eons ago, even just closing down Fannie and Freddie for business one or two months would probably do the trick. China could wreck the US economy in 5 minutes simply by demanding to know what their purchases of Fannie and Freddie debt are worth (they have a lot of it). Or it could be a small country, maybe not Iceland, but surely Vietnam, or Belgium, or Denmark, insisting on knowing what that paper their banks and pension funds have so heavily invested in is really worth. MBS, or any other species of derivatives, the whole shebang only has a value attached to it by the grace of nobody trying to figure what that value is.

Is US housing debt, and the securities and derivatives based on that debt, a zombie, or a person? It may certainly seem confusing late at night. But then again, you can't have meaningful relationships with zombies, they're sort of one-dimensional. Funny how that resembles the person-rights US companies enjoy,

And frankly, does it really matter? What we know for sure is that the zombie money we elected to have flow through our financial systems is going to kill a lot of people this year. Want to plead innocence? How long do you think that excuse will be accepted?

Cue Tunisia.

Where our zombie money kills real people. Today.