Monday, December 13, 2010

"The next twenty years will be completely unlike the last twenty"

This is the first of six videos taking a total of 45 minutes to outline the ideas in Chris Martenson's "Crash Course". I don't agree with everything he says (for instance, he reduces "the environment" to "resources", making no mention of climate change or biodiversity decline) and some of the analysis is simplified (what do you expect in 45 minutes?), but this isn't a bad summary of the three interlocking crises on the horizon: economy, energy and ecology (I prefer the term ecology over "the environment").

I would love an economist to evaluate his analysis of debt and how money is created (which he skims over in this short version, but spends twenty minutes on in the full version, available here). This is the area with which I am least familiar and I have heard others characterise our money system in a similar way, but I wonder whether this is how experts would put it.


Toby said...

Thanks for the link Byron. I ended up listening to the whole series (but not the long version).

I'm not sure I agree with his "debt must exceed money because of interest" verdict. There are mechanisms which can push the balance the other way. For example, if an entity who owes a debt goes bankrupt, the debt can just suddenly disappear, but the money they originally borrowed is still in the system. (Or debt can be forgiven.)

Also his graphs that proved that debt was huge were all US/Euro, and didn't include China/Germany (surpluses).

I guess my naiive economic model for debt is the year 9 accounting mantra that "debit must match credit". If debt is owed by one country, another has it on their books as an asset.

Maybe I should listen to the long version on debt!

byron smith said...

Toby - Thanks for the feedback. The disappearance of debt through defaulting or forgiveness is an interesting question. Some commentators seem to be expecting this to occur on a large scale (and it already has during the recent financial crisis), and for that to be a Very Bad Thing, called deflation, in which the velocity of money drops and buyers cannot be connected with sellers because no one wants to let go of the money they are carrying.

I am an economic novice and don't pretend to understand such mysteries. I am currently trying to work out whether I need to invest more time and energy trying to.

I guess (one of) my fundamental question(s) is "does the current monetary system require economic growth to avoid seizing up in further credit crunches?"

Toby said...

The economy is also curious to me. I'm also tempted to call myself a novice. But given that I've had more formal education in economics than 95% of the population (maybe 99%?), perhaps I shouldn't expect those who govern us to be too far ahead of me. After all, they are often simply trying to get the vote of any 51% they can convince.

I'm still following up Martenson's series. He presents quite clearly, but appears to take some liberties to make his point. Compare the graph in to a much more helpful one of the same data here

I'll keep your key question in mind as I work through it. I presume you mean some kind of ever-increasing credit crunches? There have been credit crunches since before economics was invented, I don't think they in themselves are enough to talk as apocalyptically as Martenson: "the next 20 years will be very different".

byron smith said...

Thanks for the links and your reflections. I assume you are comparing the graph at 6:43 of the Martenson series? It does indeed look different to the one you link to. The peak in the depression is lower and the present higher in M's graph than in Kedrosky's. K's graph still backs up M's claim that current levels of debt are "completely without precedent", at least since the Great Depression (which may be quite a short time-span to consider, though our world is very significantly different to the pre-Depression one and comparisons become decreasingly relevant the further back one goes into economic history).

I presume you mean some kind of ever-increasing credit crunches? There have been credit crunches since before economics was invented, I don't think they in themselves are enough to talk as apocalyptically as Martenson: "the next 20 years will be very different".
Yes, credit crunches are nothing new. I think what is different is a matter of quantity, not quality. It is the scale of the debt that is novel, and the scale of the economies involved. Whether this makes things better (more resilience through a more complex system) or worse (further to fall and more lives and livelihoods at stake), I cannot tell.

In themselves, the debt stats may not be sufficient for Martenson's claim (which I put as the post title). However, my own impression of the three "E"s and their relative significance is the inverse of M's. That is, I think that ecology>energy>economy, even if chronologically they come the other way (i.e. another credit crisis before the energy crisis really bites, which in turn comes prior to the worst ecological outcomes). It is climate change, biodiversity loss, soil degradation and so on that are very likely to disrupt things on an epochal scale or larger.

My knowledge of the latter is also considerably stronger than the former (though I'm still very much an amateur ecologist).

byron smith said...

Banking and money creation: part one and two, which claims to debunk the kind of arguments used in videos like the one I posted.