27 thoughts on “Monday Message Board

  1. Two media items particualarly attracted my attention in the last few days. One was the Age article of the A$ carry trade.


    The other was an ABC screened (I think) documentary on Modern Art. I did not catch the beginning or end of this item but saw enough to get the drift. The basic theme (to me) was the modern art bubble and the manipulation of prices. Much of the art product was risible.

    The connection of the pieces is the theme of unprofitable speculation as opposed to productive investment. The ills of the financial world are far from cured. In fact, I think we are just seeing a further inflation of the bubble in some sectors.

    A common symptom at the end of an age is the insanity of the orgy of indulgence of the elite; their disconnection from the concrete realities heralding the collapse of their order. We should be engineering a new sustainable energy system and seeking to save what remains of the biosphere. Instead, we slip further into financial madness and end of age decadence.

  2. There was an interesting article in the Age on the ongoing negotiations between the Government and Coalition on the CPRS. Of particular concern is the proposal for the CPRS to have ten years of specified caps, followed by ten years of upper and lower bounds for the target (gateways). This could potentially lock in bad targets for twenty years. Interestingly, Australia’s negotiators have been looking at ways to create flexibility to increase the level of ambition of an international agreement, this wouldn’t fit in very well with the Coalition’s amendment. I’ve written more on this on my blog.

  3. What’s new at Left Focus?

    The Australian Labor Party has a radical past – argues labour movement activist, Geoff Drechsler – and that example deserves attention by interested progressive activists today. Drechsler focuses especially on the ‘socialisation units’: which challenged capitalism at the hight of the Great Depression. Discussion of this history – and Drechsler’s insights – are welcome at the Left Focus blog.

    for more details see:


  4. Ikonoclast’s unprofitable speculation versus productive investment might be said to have got a run today in both the Australian and the SMH with the coastal erosion threat and insurers going AWOL. Nothing quite concentrates the mind than the very real possibility of the next king tide or storm surge…
    This quite domestic issue could have the effect of returning climate change to number one in the polls.

  5. While I tend to be pro-market, this article is very interesting and there is a lot of speculation on the AUD.

    Brazil’s tax is a good idea because capital controls do not work for a small, open country and hurt in the long-run.

    However, there are always bubbles. In Europe, governments have caused bubbles in renewable energy in Spain and Germany.

    Sustainable investments – taking long-term risks for long-term returns is what is required rather than government sponsored greed or individual greed masquerading as investment.

  6. The current bank loans system is a way for the government to outsource the creation of money. Banks (or in Australia ADI’s) are given the privilege of writing promissory notes that say they are backed by the government. In return for this privilege banks are required to make sure the promissory notes are honoured i.e. loans are repaid. To ensure this happens and to make sure banks do not write too many promissory notes banks are regulated with fractional reserve limits and with capital adequacy requirements. The Reserve Bank tries to control the amount of money created through the setting of interest rates.

    Unfortunately the system also allows the making of loans backed by other loans. This in turn leads to the debt spiral and to the rise of asset bubbles. (Asset bubbles arise because finance is cheaper to buy an existing asset than it is to build a new more efficient asset)

    That is, the system while designed to limit the amount of government promissory notes (money) in fact has the opposite effect so that we now have sloshing around the world trillions of dollars of debt which can’t be spent (lent out) because banks have to keep reserves to cover their debt!!! Similarly we find it relatively expensive to build new assets that will lead to efficiencies and so we keep the old.

    Another solution to the outsourcing of money creation is to use another approach. One way is to give zero interest loans to people who promise to use the money created with the loan to build a productive asset that will return more money than it cost to build.

    Here is a talk I gave last Saturday that shows how to do this for the generation of renewable energy. This will result in a guaranteed way to reduce ghg emissions with lower energy prices.

    Please make sure you get through to the compliance slide as that is the key to making the system work. What this system will do is to make it more attractive to give zero interest loans (banks will make money from transactions with no risk to them) than it is to give loans on top of other loans. Over time this will unwind the debt pyramid.

    I am taking this proposal to bankers and would welcome any comments – particularly ones that say why it will not work – so that I can see if it is necessary to adjust the approach.

  7. @Ikonoclast
    Ikono – I agree about the orgy of indulgence of the elite. Today in Business Day (SMH) page 1 – there is another heading “Another day another shareholder revolt” over CEO executives remuneration. Its become an ordinary event every other day in company after company. Nothing is stopping the excessive remunerations, whilst the ACTU is pressuring Ken Henry to raise taxes on higher incomes. Of course he should. It should have been done long ago. If they arent willing to take action on executive remuneration in corporations, when large percentages of shareholders / unit holders are expressing loud dissatisfaction (and when their super is forcibly assigned to the financial markets by governments) there is only one other way and that is to apply higher tax on higher income groups and lower tax on lower income groups.

    The entire situation of executive remuneration has gone from the sublime to the insane. Execs working for unit holders or bleeding unit holders dry?

  8. I’m getting pretty sick of the blather coming out of the Liberals of late. Having spent years trying to discourage asylum seekers by presenting our detention centres as being only marginally better than Dachau or Belsen only to see the ALP make them slightly less like Dachau or Belsen, Stone, Bishop and Turnbull are now greeting the latest wave of boats as an opportunity for Nyah-Nyah-Nyah — we told yous … now the system is in chaos

    Now that would be defencible — if they would say how they were going to fix the problem, but of course, they’ve gone all squeamish about “kids behind razor wire” and promoting Australia as being the sort of place that is even more hazardous to your health than three weaks in a leaky boat on the high seas or a squalid camp in Indonesia or Malaysia or lving in Sri Lanka as a Tamil or in Afghanistan as anyone. No — they want an ‘inquiry’ which would find out what, exactly?

    Simple logic applies. If the “problem” the Indonesians and Malaysians have is stopping their asylum seekers from bribing their officials for the right to ride in some about to be scuttled fishing boat across in the direction of Australia, then plainly, if you’re a Liberal (never was a name a better candidate for misnomer) it’s the Indonesians we should turn to for policy guidance. Over there, according to Human Rights Watch, you get to drink from open wells with floaters on the top. You get beaten. Best of all, promotion by the UN precedes you. They tell everyone your country is a s**thole.

    I think today’s Liberals are way too coy. Their slogan should be bring the Indonesian solution here! and for camps that make those in Malaysia look like retirement villages!

    Either that or they should STFU.

  9. O2 I’m not an economist but the deficiency in that kind of analysis is that it is more-or-less equates the limited supply of fossil fuel with a limited supply of available energy. Fossil fuels are various burnable forms of carbon that have deposited slowly over (like) the last 300 million years, the bulk of which look like being used by humans in a wild period of (like) 100 years, at (like) 2 million times the production rate. Obviously this just can’t continue for very long. Currently, we (the world) gets about 80 to 90% of it’s energy from fossil fuels so running out is going to really shake things up, but it’s not an insurmountable problem. In another 50 years the energy sources we use will have to be different.

    On the other hand, the potential renewable energy resource of the planet is something of the order of 8000 times current usage. These figures are wobbly because there may be difficulties getting hold of every kilowatt but we only need a tiny bit of what’s most easily available to keep our high energy lifestyle going and let the world’s poor join in. While the cost of energy will go up, renewable energy technology is improving, and usage becomes more efficient, so this will be gradually resolved by ordinary economic forces. A lot of renewable energy options are already a good economic choices, or within cooee of being so.

    Of course, this doesn’t take into account of the impact of suddenly returning a few hundred million years of stored carbon into the environment which is (a) serious, and, (b) won’t solve itself by natural economic choices like the energy supply thing will. This requires a different kind of effort.

  10. O6, that was an interesting article but for years economists have been saying oil has peaked and then new oil reserves are found. According to the lastest Cuban reports, it is estimated that some 20 billion barrels of recoverable offshore oil lies in Cuban waters. And yes it is true that the cost of extracting oil has increased but for good reasons, companies drill deeper.

  11. Jim @ 11, your post makes sense to me even though I have a ‘license’ to call myself an economist.

    O6 @7, I can’t speak for economists in general. However, the approach taken in the article you referenced makes much more sense to me than all the macro-economics talk. Macroeconomics, like accounting, identifies ‘value’ in terms of monetary values. People can’t eat money. People eat ‘food’ and food is a form of energy. I’d be most surprised if there aren’t people out there somewhere who are working on a theoretical model that has a suitable measure of energy as the universal unit of value. Its an exciting time. I don’t quite agree with the blanket criticism of neoclassical economics because this term covers approaches which fall in the ambit of the critique but also the Arrow-Debreu model, which, IMHO, is a framework that invites cooperation between natural scientists and economists. To illustrate, undergraduate textbook neo-classical economics talks about ‘goods’ and individuals choices, given a market. Debreu is much more precise. Debreu starts off with: a ‘commodity’ (state contingent commodity) is defined by its physical characteristics, time of availability, location of availability (and state of nature conditional upon which it is made available). The link between natural science (the “stuff”) and the institutional environment (eg a market) is made precise, rather than assumed as the only conceivable one. That is, the Arrow-Debreu methodology allows alternative institutional environments, without necessarily giving up individual choices altogether. I say this is helpful, even though the label neo-classical can be attached.

  12. Fran Barlow at #9.

    It seems to be one sided to just think that the Libs are behaving badly. Listening to Minister Stephen Smith on Lateline describe the need to off load the customs vessel instead of landing the refugees, as if the asylum seekers are mere cargo, was quite an insight – especially after the PM using the term illegals earlier this month.

    The Liberals may be hypocritical but at least they are prepared to consider the women and children and make the Labor Party do the same.- but when it comes down to it, the Liberals aren’t creating the debacle in the first place. It is an unedifying spectacle that the leadership in Australia is acting in a similar way to the government during the Tampa affair except this tie the refugees are on an Australian government ship. There is more than a whiff of hypocrisy on the Labor side too.

  13. @Jill Rush

    While I accept that my post was focused on the Liberals, this was reasonable. It is accepted on the left and even in some sections of the right (e.g. Paul Howes, Michael Danby, Bruce Baird, Malcolm Fraser) that the ALP has been behaving badly here. What is less well accepted in the FTA media/press is that the Liberals are simply xenophobic rock-throwing to get some kind of blip in the next opinion poll. Even though there is no alternative to Mr Empty to run the Liberals, he is still worried that if he doesn’t cover his right flank, or get a blip, he will go.

    In the end, it’s the Liberals who are shaping policy here and the ALP who is in damage control. Yes, the ALP is stupidly allowing this to happen, as they did over the Carbon Reconciliation and Accommodation Process and that is because they are always more sensitive to their right flank than their left, who are seen by them, after all, as voting prisoners.

    So it is in effect the Liberals who deserve the bulk of the odium. This is how our polity works.

  14. Ernestine says, “I’d be most surprised if there aren’t people out there somewhere who are working on a theoretical model that has a suitable measure of energy as the universal unit of value. ” I have suggested on this blog that the labour theory of value be replaced by an energy theory of value. I realise I would not be the first to propose this.

    Ernestine appears to agree with Jim on the energy issue; namely that carbon fuels are replaceable and that there is potentially plenty of renewable energy available. That may be so but there are a number of issues which might give us real trouble. I am not so sanguine about the transition being easy or even (fully) possible.

    Issue 1. Carbon and Hydrocarbon fuels are energy dense and (relatively) convenient to use. Our present system has exploited these characteristics. This system comprises a vast infrastructure of wells, mines, refineries, transports, machinery, roads, engines, turbines and so on. These represent a massive and long standing investment in cheap, easily available energy with a high EROEI (energy return on energy invested).

    Issue 2. The switch to renewables will entail moving (in most cases) to a situation of low EROEI. The “energy profit” will be slender and large fixed infratructures will need to built and maintained to harvest this slender energy profit.

    Issue 3. Many economic problems or challenges will flow from this situation. Large amounts of plant and infrastructure built for the old energy regime will need to be converted, scrapped, replaced etc. Large amounts of new plant and infrastructure will have to built to power the transition. Energy efficiency will become a big issue as Prof. Q. has said. With a slim energy profit, efficiency will be paramount. We will not be able to be profligate with energy as we are now. A key change (for example) may be that the average person will have a bicycle or maybe a very small electric car. Large hydrocarbon driven cars will be a rarity.

    Issue 4.

    Many of the natural resources needed to “bankroll” a transition to a renewable energy economy may themselves be in short supply and limit the transition. An example is the cadmium and rare earths required for advanced battery power and electronics.

    We actually need a global transition plan. Some writers and theorists have proposed such “depletion protocols”. We need to pay much more attention to these issues.

  15. UQ press release.

    UQ Coal in the Commonwealth study: points to the future of coal in Australia
    Continued robust use of coal and broad deployment of clean coal technologies is crucial for Australia’s energy and economic future, according to a multi-disciplinary study released today by The University of Queensland (UQ): “Coal and the Commonwealth.”

    Coal has shaped Australia’s history and is essential to its prosperity, creating 20 percent of the nation’s mineral wealth, 81 percent of its electricity and the largest coal export platform in the world.

    The study is edited by UQ Professors Peter Knights and Michael Hood and presents findings of UQ experts from a number of disciplines including Mechanical and Mining Engineering, Chemical Engineering, History and Economics.

    Commissioned by Peabody Energy, the study analyses the historical, social and economic contribution of Australia’s coal and outlines the importance of Australia’s leadership in advancing carbon technologies.


    “In order to provide an alternative viewpoint in the current debate over the future of coal, this study sets out to explore the positive externalities associated with Australian coal.”

    Too much to ask for a comprehensive assessment of the externalities.

  16. @Roger Jones
    Roger – funded by Peabody Energy?? Include the negative externalities of Coal in the study?
    (and tell the truth? I dont think so…)

    About Peabody
    Peabody Energy Corp is the world’s largest private sector coal company. With products that fuel more than 10 percent of America’s electricity supply and three percent of global demand, the company is well positioned to meet growth from electricity generators and steelmakers worldwide.

    In 2006, Peabody Energy sold a record 225 million tonnes (248 million tons) of coal, generating revenues totalling US$5.3 billion.

    Another piece of biased propaganda about to hit the frog and toad.

  17. Thanks for all the helpful comments on ‘the economics of oil is different from that of other commodities’. Not referring to those who commented above, I think that economists from city states with low car dependency will see things differently from economists from car-addicted continental states, but almost no one is looking to a post-car economy, yet.
    Nor a post-carbon economy, as witness Peabody and its externalities.

  18. “In order to provide an alternative viewpoint in the current debate over the future of coal, this study sets out to explore the positive externalities associated with Australian coal.”

    I would have thought that the ‘positive externalities’ of coal is the thing that is measured, if not fully, then surely to a very large extent, by the profits made along the supply line. It seems to me somebody wants to disregard monetary prices and accounting profits altogether. Strange.

  19. When it comes to harnessing fusion power the standard joke is that “it’s always twenty years away”. The same joke suffices for the clean coal carbon sequestration solution. It’s always twenty years away.

    The reasons are different though. Harnessing fusion power presents stupendous technical difficulties and these have so far proven insuperable. To those who understand energy accounting, clean coal and carbon sequestration are simply energy non sequiturs; absurd propositions which do not follow logically in any way whatsoever from the “coal question”.

    To put it simply, the amount of energy required to sequester the CO2 is close to prohibitive. The EROEI (energy return on energy invested) is so poor after sequestration that it makes more sense to leave thermal coal in the ground and to pursue renewable energy projects.

    Once again I’ll use my “stupid or dishonest” rubric. People pushing clean coal are either stupid or dishonest.

  20. @Ikonoclast

    Indeed, Ikonoclast: Lenore Taylor in today’s business news noted the likelihood of CCS being economically viable before 2030 – the magic 20 years away, give or take – are not great. As for being technologically viable, I’m sure something illusory can be cobbled together in time for a nicely presented report on where a few hundred million of taxpayer dollars went. The more things change…

  21. Listen to 1:50-2:00. OPM – Other People’s Money.

    Until investment banks return to their merchant banking roots i.e. when they lose money, they individually lose rather than just the company, then this will always happen.

  22. When Treasury forecasts no reduction in coal fired power before 2033 and reductions in emissions thereafter based on rapid introduction of CCS I can only think Labor is as unwilling to face climate change as The Nationals. I’m sure that the sections of Government devoted to developing Australia’s mineral resources continue assisting the development of ever greater coal exports and do so confident that no carbon tax will impact those economically positive developments. I’m not sure which is worse, the open dismissal of climate change from the likes of Joyce or the meaningless mouthings of Labor to appease the concerns of voters whilst doing nothing.

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