BAESI workshop 6 December 2008

5. The Black Swan: Global recession/depression

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Many strategies have been proposed to mitigate (“solve”) or adapt to the climatic and environmental changes we face. Most are possible with current technology. However, we face very difficult challenges.

Challenge #1: Energy
(consumption, production, & efficiency)

An enormously complex problem that not enough national leaders understand.
(or are willing to admit that they understand)

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2007 Energy Consumption

World x 1020 joules 5.25
(EJ)Power: 1 watt (W) = 1

= 525 exajoules
exa = 1018

joule/sec tera = 10 5.25 x 1020 J 13 = 1.66 x 10 W = 16.6 terawatts (TW) 7 3.154 x 10 sec
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1 year = 3.154 x 107 sec

USA
= 3.5 terawatts (TW) 1.11 x 1020 joules = 111 exajoules

U.S. energy use = 111 / 525 = 21% of global energy use U.S. population = 0.305B / 6.73B = 4.5% of global population
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U.S. consumption rate: 3. 5 terawatts = 11,500 watts / person Current U.S. population: 305 million “…shine your light in the darkness…”

The average American’s “energy footprint” is equivalent to ~115 100-watt light bulbs that are ALWAYS ON.
An unaided, healthy adult produces ~100 watts of power (output). Thus, an average American “exploits” ~115 “energy slaves.”

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Those energy slaves are dead or dying.

Modern complex societies, and humanity’s population boom of the last century, sprang from inexpensive, easy-to-find petroleum— our favorite “energy slaves.”

How will modern societies respond to a drop in the number of available energy slaves?

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Challenge #2: The economy

All mitigation and adaptation strategies rely on funding for R&D, investment capital, infrastructure changes, etc. Will our national finances be healthy enough to fund those strategies? We’re a wealthy country that could redirect funds as needed....right?

rns a l Lynch te Freddie Mac erril M S r an AIG s as eaF nie B therW hing Mae Bro ton M an utual Lehm
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We have entered a severe recession that may last for years, and may develop into a depression.
NASDAQ Dow Jones

It’s a global recession:
Switz UK France Germany

Japan

Australia

Brazil

Russia

India

China
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all charts for last 12 months; from bloomberg.com

Fractional-reserve banking
Banks keep on hand (“in reserve”) some fraction of the value of their bank notes and demand deposits. They invest the balance in “interest-earning assets” but still are obligated to pay all bank notes and demand deposits upon demand. This practice is ubiquitous in modern banking (world-wide).

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How fractional-reserve banking “works”
Someone deposits $100 cash in Bank A. If the fractional reserve is set at 20%, Bank A is required to keep only $20 on hand, and can lend out the other $80.

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currency, plus accounts at the central bank that can be exchanged for physical currency. M1: M0 + "checking" or "current" accounts M2: M1 + most savings accounts, money market accounts, and smalldenomination time deposits (CDs < $100,000). M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.

So money includes both currency and “paper money.” How much of it is paper money?

1998

2007 1 10

Total U.S. credit market debt as a % of GDP
350 350

total credit market debt $49.6 trillion = = 349.5% GDP $14.2 trillion
300
as of 3/31/2008

300

250

Pay it off? Text Default on it? “Print and pay” GLOBAL CREDIT CRUNCH
1925 1935 1945 1955 1965 1975 1985 1995 2005

250

200

200

150

150

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U.S. government • expenditure Marshall Plan

original cost
$13 billion $15 million $36 billion $153 billion $54 billion $32 billion (est.) $551 billion $111 billion $417 billion $288 billion

cost adjusted for inflation
$115 $217 $237 $256 $454 $500 $597 $698 $851 $3600 billion billion billion billion billion billion billion billion billion billion

Cost • Louisiana Purchase • Race to the Moon • S&L Crisis • Korean War • The New Deal • Invasion of Iraq • Vietnam War • NASA • World War II

TOTAL: $7.52 trillion

• Bailout of banks and financial system (as of 28 Nov 08)

$7.76 trillion

http://www.ritholtz.com/blog/2008/11/big-bailouts-bigger-bucks/ http://www.bloomberg.com/apps/data?pid=avimage&iid=i0YrUuvkygWs 12

Deflation: A decrease in the price of goods and services, usually linked to a decline of money in circulation. “negative growth;” sworn enemy of the Fed Res Bank, Treasury, and FIRE sec Disinflation: A decline in the rate of inflation. Hyperinflation: Extreme Zimbabwe, 2006-2008 inflation (minimally a 4-digit annual % rise); the currency becomes worthless.
Weimar Republic, 1923 * 3,250,000% inflation/month * Prices doubled every 2 days * 100,000,000,000,000 Mark bill * Prices double every 17 days set stage for Nazi takeover * 231,000,000% annual inflation * Currency redenominated in Aug

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Recession, depression, and great depression all refer to a widespread, multi-month decline in real GDP, real income, employment, industrial production, and wholesale-retail sales. Recession: Peak-to-trough decline in real GDP ≤10%. Depression: Peak-to-trough decline in real GDP >10%. Great Depression: Peak-to-trough decline in real GDP >25%.
Notes: 1. Prior to WWII, all such events were called depressions. The euphemism recession was applied after WWII to avoid memories of the Great Depression of the 1930s. 2. Everywhere on this page, real = inflation adjusted 3. GDP = consumption + gross investment + government spending + (exports − imports)

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U.S. has been in an inflationary recession since at least early 2008, probably since late 2006. Aug–Oct 08: Sell-offs of paper assets and cash hoarding suggest deflation, but this is probably a disinflationary (“Ka-”) event.

rate of inflation

Schematic graph of how events may unfold

hyperinflation
nary flatio n ssion rece
Poom
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Ka

i

-

disinflation time

Over-leveraging, credit stupidity, and obscene debt/GDP (“Poom” ratio almost guarantees hyperinflationary depression in ). our near future.
see iTulip.com for more on Ka-Poom etc.; also see http://www.shadowstats.com/article/292

U.S. Population Distribution by Age, 1920–2005

U.S. Census Bureau statistics

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Social Security? Medicare? Debt payoff? Asset selloff?

http://www.census.gov/ipc/www/idbacc.html 17

A number issued daily by the London-based Baltic Exchange and Capesize indices an average of the Baltic Supramax, Panamax,
The Baltic asks brokers around the world how much it would cost to book various cargoes of raw materials on various routes—e.g., 150,000 tons of iron ore from Australia to China, or 1,000,000 tons of rice from Bangkok to Tokyo. Container ships carrying finished goods are intentionally excluded. The answers are melded into the BDI, which provides (1) the price of moving raw materials by sea, (2) an accurate barometer of the volume of global trade, and (3) a good “leading economic indicator” because consumption of raw materials of production such as coal, iron, oil, rice, and grain is a good predictor of future economic activity. Unlike stock and bond markets, payroll and unemployment figures, and GDP estimates, the BDI is not speculative: people don't book freighters unless they have cargo to move.
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The Baltic Dry Index (BDI)

Baltic Dry Index (BDI)
10,000

5,000

2004

2000

2002

2004

1998–2002: not much variation

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Cape (too big for Panama Canal)

The BDI includes ships in three size classes
Panamax (max size that fits in Panama Canal) Supramax (next smallest)

The BDI does NOT include container ships (finished goods), and thus is a future economic indicator.

2 Dec 08

On 21 May 2008, the BDI was 11,973 684 / 11,973 = 5.7% World trade is frozen.
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A few recommended sources
Chris Martenson’s Crash Course www.chrismartenson.com The Oil Drum www.theoildrum.com Richard’s site (associated w/SJSU course) http://sjsugeology.org/sedlock/168.html
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