Sunday, August 26, 2018

America's Declining Prosperity

                                                                                                written 18 Aug 2018
                                                                                                published 25 August 2018

            On August 8th, UDJ syndicated columnist Robert Samuelson reported on the downward mobility in America.  While 90% of people born in the 1940s financially exceeded their parents, only 61% of those born in the '70s, and 50% of those born in the '80s accomplished this.  He blames poorer schools, income inequity, weak housing construction, inadequate innovation, and over-regulation.  However, I believe these are all symptoms of four systemic changes; population growth, peak empire, peak oil, and climate change.
            Population in America has more than doubled from 144M when I was born in 1947, to 326M today, and global population has more than tripled.  This increase, the most rapid in human history, has depleted easily accessed resources, increasing scarcity and prices.  
            Second, economic empires of exclusive gain, in conflict with the reality of holism, have an arc of rise, peak, and decline.  Following WWII, America was the only intact manufacturing economy, with the most developed oil infrastructure, and we ruled the planet. From 1945 to 1972, Americans had access to the best the world offered, and the middle class, with strong unions, expanded and flourished.
            The rest of the world eventually rebuilt their manufacturing capacity with more efficient technology, and challenged American economic supremacy.  At great cost, we fought two major wars, one to a stalemate and the other to defeat.  In 1972, our empire peaked.  We had to abandon the dollar convertibility to gold to avoid bankruptcy, and we lost control of the price of oil because domestic oil production peaked.  
             America shifted from lending money, to being the largest borrower on the planet. Increasing interest on the debt and relentless tax reduction for the wealthy, meant less money for education, producing poorer citizens.  Corporate efforts crushed unions, resulted in stagnant wages and accelerated wealth inequity.  Declining value of the dollar created a series of fiscal crashes for the first time in decades, further concentrating wealth at the top, and impoverishing the middle class.  Seeking higher rates of return, money was invested overseas, and reduced domestic manufacturing caused loss of high wage employment.
            Third, economies run on money, but civilization runs on energy, which today is primarily oil.  The most important measure of any energy source is the energy surplus available beyond what is required to produce that energy, the Energy Return On Energy Invested (EROEI).  It is this surplus that powers our civilization, currently so energy intensive it requires an EROEI greater than 20:1. 
            When the oil age began, a new well in a major field would geyser oil into the sky, and produced for decades, creating an EROEI up to 100:1.  But most of the large global fields have been developed, peaked, and are now declining, so new fields are more difficult "unconventional" oil (very deep water, tar sands, and hydraulic fracking), which require more energy to produce, reducing global EROEI to 19:1.  Shale oil, which has been vigorously developed in the US, has an EROEI of about 4:1 because the wells are expensive to drill and deplete in less than a decade.  The current American fracking boom began about a decade ago, and the industry has lost more than $250B so far.
            Fourth, climate change is eroding prosperity.  As the planet heats, we are seeing more extreme weather events, particularly drought and flooding, which will continue to worsen.  As I write this, there are over 100 large fires burning in the US, 15 in California, which spends more than $440M annually fighting a year-round fire season.  In the US, the 2017 insurance costs for rebuilding after firestorms and floods exceeded $300B, and this year is hotter.  This doesn't include the adverse impact on food production, which is beginning to cause scarcity and higher prices.  Rising sea levels are also raising costs.  Miami is spending more than $400M to protect against a 3' rise in their downtown area.  Real estate prices are beginning to drop on shorefront properties vulnerable to sea level rise.
            These systemic changes will crash our civilization if we fail to redefine prosperity as more than material accumulation.  The pursuit of happiness is in our Constitution, but the hoarders of money have confused wealth with happiness, and we are a poorer nation as a result.

Saturday, August 18, 2018

PG&E's Liability For Fire Damages

                                                                                                written 12 Aug 2018
                                                                                                published 18 August 2018

            A few months ago, the CalFire verdict came back that PG&E equipment was responsible for most of the October fires in Northern California.  The same laws that give the company right to take private property they want, requires the company to pay for losses caused by their operations.  Current law requires these costs be borne by shareholders, not ratepayers.  Before the fires were even cool, PG&E started lobbying to have that obligation changed, claiming that the possible $10B loss could force the company into bankruptcy, because the $30B company carried only $800M in insurance.  Another PG&E proposed solution is state supported bonds, which will increase rates as well as cost the taxpayers.  Bad planning on PG&E's part becomes a rate payer problem, if the legislature can be convinced.  If the public is to bear the costs of these losses, it is worth examining what we get for this payment.  
            PG&E is one of the largest investor owned utilities in the country, one of three in the state.  They have a monopoly in the area they serve, regulated by the Public Utility Commission (PUC), which has historically sided with the company, setting a guaranteed rate of return on investment.  As a private corporation, their mission is maximum return for shareholders, which includes reducing costs on maintenance and overhead, like insurance.
            The only alternative is publically owned power systems, which serve 25% of California.  Los Angeles, Sacramento, San Francisco, and an additional 44 smaller towns, including Ukiah, have municipal power systems.  In Ukiah, we pay less than 2/3 the rate PG&E charges for the same amount of power, one of the benefits of socialized electricity.  Public ownership shifts the economic goals from maximizing fiscal profit for the shareholders, to improving service quality for the ratepayer/owners, by infrastructure investment for resilience and reliability, and living wages for local employees.
            Capitalism generates profits for a few, but socializes losses to everyone whenever it gets into trouble.  From a holistic perspective, this illusion of exclusive gain is a foolish denial of the fundamental reality that all parts are connected and need nourishment for the system to thrive.  We have been so programed to "fear" socialism, that we ignore all the ways that socialized systems make sense, particularly in monopoly systems, where the theory of competitive advantage fails.  
            Capitalist monopolies have to be regulated to protect against the inherent greed of the system, but regulatory capture, where the companies buy or influence the regulators, is a well know failure.  Socialized monopolies, being run by humans, are still subject to misuse, but there are additional checks and balances.  The board members are locally elected, and subject to comment and vote. By living where the system operates, they experience the quality of the service in a way that absentee shareholders do not.
            PG&E survived bankruptcy in 2001, but it is not to anyone's advantage to have it happen again due to fire costs.  Under pressure from environmentalists, PG&E is a major player in the shift to more renewable energy and storage, as the state addresses climate change, and further investment in this direction would be at risk in a bankruptcy.  However, we should consider alternatives to just sticking rate payers with the bill. If they, or the state taxpayers, are expected to cover costs when things go wrong, they should also expect an equity share in the company to benefit when things are working.
            If the taxpayers are billed, then some form of public-private consortium would have to be worked out, with state appointed members serving on the board, and regular payments to the state general fund as profit sharing.  If the rate payers are billed, then they should have voting representatives serve on the board to protect their interests in reliable, affordable service, with profit sharing in the form of reduced costs.
            There is also the alternative of outright confiscation of the power system, as the state has an interest in keeping power flowing as an economic necessity. If PG&E is so badly managed that they can't responsibly provide this necessary service, then the people have no choice.  Capitalism is not a divine decree, it is just one way of organizing an economy.

Sunday, August 12, 2018

Considering A Local Currency

                                                                                                written 4 Aug 2018
                                                                                               published 11 August 2018

            Money's function is facilitating commercial exchange within the community.  The abundance or scarcity of dollars, due to national or global events, can radically disrupt that function in our local economy.  Globalized finance has released an ocean of money, racing around the globe seeking the best fractional return on investment.  Money washes into a local or national economy, disrupting the previous economic stability, only to rush out again chasing new opportunities, leaving economic wreckage behind, as in the 1997 Asian financial crisis.
            No matter how money comes into our community, the longer it stays local, the more robust our economy.  It is well documented that shopping locally stimulates the local economy by slowing the "wealth leakage" rate.  A 2003 study by The Institute for Local Self-Reliance found that 55% of money spent at a local independent store immediately leaves, and the remaining 45% stays as secondary spending to support the local economy.  At a big box store, 86% leaves immediately, something to watch now that CostCo is open.  100% of online shopping leaves.  
            Some countries have made efforts to insulate their economy from such wealth leakage.  In 1936, responding to the Depression, Swiss businesses started the WIR Bank, as a credit alternative to the Swiss Franc.  This currency was not valid outside the country, so the wealth value in the system stayed in the national economy.  The intention was to increase sales and profits of the participating businesses through interest free credit, encouraging members to buy and sell within the group as much as possible.  Starting with 16 members, they had grown to 62,000 participating businesses by 2005. 
            Individual communities have established alternative currencies as well.  The oldest active system in the US is "Ithaca Hours", in Ithaca, New York, established in 1991, currently involving over 500 businesses.  Within the last 20 years, as the Transition movement has grown, more communities have begun to create alternative currencies to reduce wealth leakage, stimulate local shopping, and provide resilience to financial turbulence.  While many have failed, Wikipedia shows 20 local currencies still active in the US.  
            An alternative currency, Ukiah Hours, was proposed here around 2001, but seems to have died as a result of burnout of the core group.  When I lived in Port Townsend, Washington, the local currency effort was a time barter system, where members traded time at equal value.  Transactions were recorded digitally, and there was no physical currency.  The membership never got above 150, as most of the services offered for trade were peripheral to the core economic needs of the community.  While the Port Townsend Transition movement is still very active, the alternative currency effort seems to have died.  
            To be useful, an alternative currency should facilitate acquiring the basic needs of life in a community: water, food, power, and sanitation.  Imagine the City of Ukiah and the Ukiah Co-Op teaming up to establish a local currency which would be honored by these two initial participants.  The City provides water, sewer, trash disposal, and electricity, and the Co-Op provides food.  The unit of exchange could be pegged to a specific quantity of goods, say kilowatts and carrots, as a hedge against inflation.  Call it a Kilowatt-Carrot, or KC for short.  People could buy into the KC system, or, with recipient's approval, the City and the Co-Op could spend KC's into the economy as a credit for specific goods.  
            Even this little closed system would be viable, as it serves real needs. Local businesses would be encouraged to participate in this enforced local shopping, since the KC have zero wealth leakage.  Businesses could pay City taxes with KC's, and employees might take partial payment with KC's.  As with the Swiss WIR Bank, as more businesses participated in the KC system, they would have incentive to buy local themselves.  As more businesses participate, people living outside Ukiah would have reason to join as well, even if they don't get the primary City services.
            Obviously, there are a lot of details to cover before such a system could function, but the opportunity is there, and the fundamental need for economic resilience is going to get more important as the global debt bubble heads toward its logical conclusion.

Saturday, August 4, 2018

The Global Debt Bomb

                                                                                                written 28 July 2018
                                                                                                published 4 August 2018

            I recently heard the sound track of Paul Grignon's 2006 video "Money As Debt" as a two-part podcast on TUC Radio (, which was very informative.
            Once societal commerce expanded beyond barter, symbolic money was created, with value maintained by consent of the community.  The first physical artifacts were eventually supplanted by paper, and today most money has no physical form, being digital records on hard drives.  To keep prices stable, the money supply must expand at the same pace as economic productivity.  Too little money slows commerce or causes collapse, like the Depression of 1929.  Too much money creates inflation, a different instability.  
            Our money is created out of nothing in two ways.  A small part is printed into existence by the government, but the vast majority is loaned into existence as debt to private banks.  The money the government creates is deposited in a private bank, which is allowed by law to create debt ten times the value of the deposit, usually secured by a real asset.  The borrower deposits this money in another bank, which must retain 10% on deposit as reserve, but can loan 90% as further debt.  This is known as fractional reserves, based on the assumption that few of the depositors will make claims on their deposits at any one time.  At each stage, the newly created money is deposited and loaned in a diminishing series, until the original deposit by the government has been expanded as debt obligation worth 100 times as much.  Our money is debt obligation.
            The bank loan creates the value of the loan principal, but interest charged as profit for the bank must be paid in addition to the principal.  The borrower is faced with the challenge of finding this extra money, which on long term loans, like mortgages, can be greater than the principal.  Since money is debt, the options are to take on more debt, or default on the loan, in which case the bank takes ownership of the asset securing the loan.
            Both options eventually threaten the stability of the whole system.  Since the borrowing option expands debt independent of actual economic growth, total indebtedness can eventually exceed the real worth of the entire society.  The default option means the banks exponentially accumulate control over a greater share of the net worth of the society.  While this serves the bankers, it impoverishes the society as a whole.  Interest-bearing debt-based money is a global phenomenon, so both these problems are now global as well.  In 2015, total global assets were valued at $250 trillion, and total global debt was $233 trillion, more than three times the annual global economic output, and increasing about $13 trillion a year.  The richest 8 people own as much as the poorest 50% of the planet.  In the US, the top 1% own 40% of the country's wealth.  Needless to say, this capitalist debt money system is unsustainable and a threat to our society.
            Even if we can unwind this precarious situation, are there any real alternatives?  Fortunately, the answer is yes, but vested interests will fight any change, until the current system crashes and needs a taxpayer bailout.  Again.
            An alternative to debt-created money is spending money into existence.  Since all money is created out of nothing, the government could create what is required to eliminate the national debt. It could fund massive infrastructure investments, employing people, and improving the quality of life for the entire society.  It could give money to everyone as a Universal Basic Income, without needs requirements.  People at the bottom of the economic pile spend their cash into the economy immediately, as opposed to the rich, who tend take it out of circulation as savings. If the money supply gets too large, taxation could trim the supply back.  All this money would be created without debt, or predatory interest.  Instead of giving created money to the private Federal Reserve, which loans it back to the government at interest, a government owned National Bank could be created, like the Bank of Canada.  Such radical solutions would creatively disrupt the current financial structure, which is headed toward chaotic collapse and depression.