The estimated value of debt

This financial crisis we have just started dealing with is not a surprise, nor was it unexpected.  And it isn’t over.  We are dealing with the consequences of our actions, the paybacks for the greed we all have been guilty of.  Sure, we believed that our homes were appreciating at astronomical rates, and why, of course we took our banker at face value when he said that it would wise to take out a home equity loan.  We wanted to have that money to play with.  We wanted to buy a nicer car to commute to work with, that boat that was on sale, or put in a pool.  Could we afford to do these things without borrowing money?  Not no.  Hell no.  We shoveled debt onto our heads like we were digging foxholes under fire.

What has all this economic activity created, all the money that we spent bought?  And how could so much of it just evaporate overnight?  People think about credit, but what about debt?  How many people think about the fact that most of the wealth that has been created in the last 20 years or so has been nothing more than numbers in computers, based upon the value of debt.  The more people owe you, the richer that you are.  People invest in debt, banks sell it, and nobody seems to want to pay it off.  What a wonderful concept; buy today what you cannot pay for until tomorrow, if you are lucky.

Did anyone figure in the effect of laying off millions of the highest paid consumers on the planet?  Is it really growth when you take jobs away from one group of people and give them to a different group?  Or is that just financial manipulation, to create wealth by cutting costs.  What happens when the cost that you cut is the buyer of your product?

Real wealth does not evaporate, it does not diminish in value, it is durable, and serves all the people.  Real wealth is roads, bridges, fiber optic cables, transmission lines.  How much real wealth has been created in the United States in the last 20 years?  And it is not creating new wealth to repair old roads, it is investing in what you already have.  So, we built a lot of buildings, but were they needed, or were they funding for a developer?

On every level, Americans have chosen to ignore the future, to resist real change, to accept that they were no better than anybody else.  Other people could ride trains and busses, we were going to drive.    So what if our new building doesn’t have any insulation.?  It is cheaper that way.  And the whole time, we have been insisting that everything is worth more.  Not because of any discernable reason, but just because we said so.

We have invested in trying to be wealthy enough to not have to work, not in making our futures better.  Now, we are paying for sitting on our butts.  We don’t create anything of value anymore, and we can’t even govern ourselves without borrowing money to do it.  Instead of spending money to develop the technologies needed to make a future possible, we have invested in moving production from America to some overseas country.  But we have not invested in giving Americans anything to do.  Normally, economic growth means that the leading countries improve their technology, and move from building one kind of product to one which is more complex, advanced, or somehow beyond the abilities of other producers.  Displacement happens as new industries replace old ones, and people have to learn new skills.

We veered off from advancing our technology, because it would have required a long-term investment, tying up our money for decades.  And we wanted to keep our technology to ourselves, so that no one else could use it against us.  In the 1960’s, during the administration of Richard Nixon, it was decided that the United States would not invest substantial resources into outer space.  The Apollo program would be cut, and no other manned exploration would be funded.  The military was going to handle space exploration, and only for the purpose of defense.

Since that time, the United States has spent more on cosmetics every year than has been spent on developing space manufacturing, mining, and processing.  Typical budgets for manned space exploration have amounted to a few brief missions every year, and nothing else.  The US would not have built a space station except because of pressure from its allies to contribute to one.

It is almost like we are committing suicide by starvation.  We give away all of our food, and do nothing to find more.  The world is fighting over a pie, each person wanting a bigger slice, and more people wanting slices all the time.  We need true growth, growth that results in wealth that will not evaporate.  The Earth is being used up, corrupted in our quest for wealth, while everything that we could possibly need exists somewhere in our Solar System.

Americans should be building space ships, working on space stations, or the Moon, doing work that produces tremendous value, so that they could bring home enough money to buy cars from Japan without having to borrow the money from China.  General Motors would be the worlds leading producer of launch vehicles, and Ford would be making deep space probes.  But we chose to be wealthy instead.

Scott P. Holman

2009/01/29

Cleaner coal?

Because the United States has large coal deposits, use of coal as a fuel for generating electricity has become widespread.  However, burning coal produces several waste products which are harmful to the environment, as well as large amounts of greenhouse gases, such as carbon dioxide.  However, the energy in coal can be liberated in other ways, including coal gasification.  By heating coal in an environment where there is little oxygen present, it is possible to produce a gas which can be used as a fuel, but with less  toxic waste products being emitted into the air when the gas is burned.

Although the gasification process requires energy to work, proper gasification offers the possibility of a fuel which is cleaner than coal, and which can be burned immediately or stored for future use.  By burning some coal to produce the energy for the gasification, some existing coal generating plants can be used, especially ones in remote areas.  Or, coal could gasified during off-peak load periods, and burned as fuel when demand is high.

We are going to have to accept that energy costs are going to rise, irregardless of the fuel source.  Environmental concerns are beginning to outweigh economic gain for many people, and the resistance to burning large amounts of coal to produce energy is likely to rise.  By gasification, our coal resources could still be useful to us, while minimizing the environmental damage involved in using coal as a fuel.

The technology of coal gasification advanced significantly during the 1800’s, but the advent of natural gas and gasoline reduced the demand for synthetic gas to the point where the process of coal gasification was abandoned.  Applying modern technology and knowledge to the process would undoubtedly result in improvements, such as increasing the amount of energy contained in the synthetic gas, or reducing the waste products produced by the process.

Natural gas extraction has entered a new era, one which many people view with alarm, because the methods used threaten water supplies, and possibly could result in subsidence, land slips, or other deformation of the ground.  Without this new process, the United States is going to have to import large quantities of natural gas to keep up with demand.  Or, we might consider coal gasification as a way of meeting our demand for gas as a fuel.

A change is gonna come

Our world is changing, and their are some people who are so greedy that they are afraid of that change.  They fear that their empires will be wiped out, that their wealth will evaporate, that what they hold dear will be compromised.  Rather than embrace change, accept it as a way to improve things, they portray it as evil, avoidable, or the result of manipulation.  They insist that taking proactive action will only waste money, hamper economic activity, or erode our strength.

Currently, a United States senator is calling for a way to prevent the Environmental Protection Agency from doing what it was created to do: protect the American people from greed and stupidity.  There is no doubt that regulating greenhouse gases will have an impact on our lives, possibly causing costs of production and transportation to rise, and reducing the demand for fossil fuels.  Because this senator is from a state which is currently heavily dependent on the oil industry, it seems likely that her desire to hinder the EPA in issuing and enforcing regulations regarding greenhouse gases stems from her fears that her state will lose income.

One of the changes that is occurring in the world right now is that the United States is now competing with other countries for access to fossil fuels.  Previously, the US consumed more oil than the rest of the world combined, but that is no longer true.  So Alaska will always have a market for its oil.  (As I understand it, most Alaskan oil has been sold to Japan in the past anyway.)  As the Chinese and Indians expand their consumption of oil, the price will go up.  This will have a major impact on the US, but no one wants to admit that.

That we will be forced by economic conditions to change our way of life is repellent to us, for it implies that we are no longer wealthy or powerful.  But our wealth and power did not come from denying change, they are the result of Americans looking ahead, innovating, challenging beliefs.  We have an opportunity to reshape our society, to reinvent ourselves, but we instead are turning our backs on the future.  Change cannot be prevented, it can only be delayed.  And the more it is delayed, the less control we will have when the change finally takes place.

A new car

I want a car that doesn’t have any pistons, or valves, doesn’t have a crankshaft or a camshaft, and doesn’t need a catalytic converter.  What kind of car would this be?  A turbine-electric hybrid, which burns diesel fuel at least 95 percent efficiently.  A turbine engine doesn’t burn the fuel in little bursts, but continuously, which means that it burns cleaner.  Practically all automobiles today use the most inefficient kind of engine known to Man, the reciprocating type, where the pistons keep changing direction, and the fuel is exhausted when it is only partially burned.

Added to that inherent inefficiency is the fact that most cars are automatics, which means that a considerable amount of energy is lost in the torque converter, the device that allows the driver to stop without taking the car out of gear.  Adding together all the inefficiencies in the modern automobile, and you might as well pour three quarters of the gas that you buy right onto the ground, for all the good that it does you.

Why haven’t turbine engines been used in cars before?  Because they create their power in a very different way than a reciprocating engine.  A turbine spins at high speed, which makes it difficult to couple that energy to a drive line.  Previous attempts at turbine cars often used bulky, wasteful transmissions, or something equivalent to a torque converter.  But today, with computer control, we can use the turbine to generate electricity, which is then used to drive the wheels.

Replacing fossil fuels with batteries or fuel cells invokes serious performance penalties, limiting range and speed, as well as load carrying capacity.  But the main reason that engineers are trying to get around using fossil fuels is that they are expensive and dirty.  A turbine would enjoy far greater fuel economy than any possible reciprocating engine could, and will burn much cleaner.  Several hundred miles per gallon is quite feasible with a turbine-electric hybrid, without limiting speed or load carrying capacity.

Of course, we still will have to reduce fossil fuel use as they get more and more expensive, but we are not likely to find a way to continue to rely solely on the automobile as our primary means of transportation.  Public transportation, such as buses and trains, will eventually have to shoulder the majority of the passenger miles traveled in this country, but that does not mean that we will have to give up cars entirely.  They will just have to be far more efficient than what we have now.

No content!

There is a fundamental problem with the push to provide content, software, and data storage over the World Wide Web, as the Internet is actually called.  Does anybody think about what the Internet really is?  Who is paying for all the technology needed to make the Internet possible?  How is it possible for the things we do over the Internet to keep growing, expanding?  Are there limits to what the technology can do?  The ‘backbone’ of the Internet has a physical existence, with machinery which is expensive, must be maintained, and constantly must be replaced.  That machinery determines how fast data can be transferred from one place to another.

We tend to think of networks like the Internet the way that we think of a telephone network, but that is an inaccurate and misleading conception.  A telephone network establishes a connection between two places, a connection which is maintained until the connection is no longer needed, or is broken by something.  The Internet never creates a constant connection between two places, and the various parts of a movie, for instance, can be transferred via a bunch of different pathways while downloaded to your computer.  Instead of a dedicated, two-way connection, the Internet breaks communications up into little bundles, called ‘packets’, each one of which contains a tag which has the identification of the bundle, and where it is supposed to go.

These bundles leave their point of origin and enter the network, which figures out which direction they need to travel, and sends them on their way, one at a time.  The next intersection of the network looks at the tag, and decides which is the most direct route to the destination, at that moment, that is available, and not busy handling another bundle.  Then, it sends the bundle on its way.  The next bundle might go the same way, but it probably will end up going a different path.

Each intersection, or ‘hub’, can handle a certain amount of traffic.  Once it gets backed up, it starts refusing new packets.  It is an intersection which takes more than one cycle of the traffic lights to get through.  Each hub is rack of equipment somewhere, which is connected to the cables which are the pathways.  That rack of equipment allows the owner to access the Internet directly, without renting that access from somebody else.  In order to be able to handle the traffic going through the equipment, including the owner’s own, the owner must purchase bigger and faster machines when the data load increases.

In the past, it has been worth it to invest in this equipment, because the percentage of your own traffic that your equipment handled was high.  But as the amount of traffic around the Internet increases, that percentage goes down.  If you don’t buy faster and more powerful equipment, your own data takes a long time to move from your location to another, because your equipment is tied up moving bundles for other people.

Who is going to pay for all this new equipment?  Will it be the people generating the traffic going through it, or will it be the people who want to send their own data out?  We all want to have access to the wealth of information on the Internet, but were will the wealth come from to make that access possible?  One person downloading a movie will use as much of the Internet as thousands of people who are looking a web page.  So the people who look at web pages are going to have to pay more to be able to do so in order that other people can download movies.  Or we will end up not being able to use the Internet for anything.

The view from debtor’s prison.

Debt.  Credit.  Lenders and losers.  Somehow, the world economy has morphed from saving to buy to borrowing to buy.  Lending has been so lucrative that banks have made credit a normal way of doing business.  It wasn’t that long ago that state and local governments only borrowed money by selling bonds, companies sold stock to raise money, and individuals only borrowed from friends.  The one exception was the mortgage used to buy a home.

Partly as a result of banks desire to be able to loan out their money faster, we have seen the world economy severely damaged by excess credit.  Banks which wrote mortgages used to hold those loans themselves, having to wait until they were paid off before the money could be loaned out again.  Then, someone had the brilliant idea of having the banks sell the mortgages to another investor, so that the bank could then turn around and lend the money out again.

Back in the 1960’s, many consumers had used up their savings, and they began to stop spending on unnecessary things.  In order to keep consumption up, a new financial instrument was created:  the credit card.  At first only available to those with the ability to pay off the balance each month, credit cards gradually found their way into the wallets of nearly every American.  Paying off the balance each month was no longer necessary, and often discouraged, as the lenders made more money on revolving balances.

Corporations climbed on board the credit train when they found selling stock inadequate to provide short term liquidity, such as making payroll.  They even began lending money to each other for short periods of time, creating what is known as commercial paper.  State governments saw this, and decided that borrowing to cover expenses while waiting for tax receipts to come in was a sound practice.

In less than 50 years, borrowing had changed from a dirty word to the accepted way of life.  Credit was widely available, to almost anyone, for a fee.  Saving became old fashioned, and consumption was getting higher all the time.  Bankers even encouraged people to borrow against the equity that they had built up in their home, so that the bankers could make even more money.  Its citizens too broke to lend it money, the federal government turned to other nations to borrow the money used to pay for weapons, wars, and welfare.

Now, we are waiting for consumer spending to resume to dig the economy out of the hole we are in.  The government is borrowing nearly as much money as the country makes each year, trying to keep the wheels turning.  Home owners are walking away from mortgages which are for much more than the homes are worth.  Bankruptcies and bank failures are happening faster and faster.  But everyone wants to believe that things will get back to the way that they were.

No where do you hear respected economists and academics calling for the tightening of credit, or for learning to live without it.  Credit has become so fundamental to our economy that people can’t imagine a world without it.  We had better start, because credit is not going to be easy to get for a long time.  How can a bank loan out money when it doesn’t know how much it has?  Many banks are carrying packages of mortgages which, if put on the market today, are worth about 25 cents on the dollar.  Writing off the value of those collateralized debt obligations, as they are known, would wipe out the bank, so they are holding on to them.  In the mean time, the solvency of the bank is questionable.

As the tidal wave of foreclosures engulfs us, those packages of mortgages are going to lose even more value, making credit even tighter.  The federal government has to borrow money to pay the holders of Treasury bills and notes when those instruments come due, which means that it is insolvent, surviving on the good will of China.  Many of the states are facing running out of money, and not being able to borrow more.

Welcome to Debtor’s Prison.

Are you fed up yet?

There are a lot more people who need work in this country than there are jobs, yet some of the jobs pay enough to employ hundreds of people, comfortably;  All across the country, people are realizing that they will never see any equity in their home, because the mortgage is worth so much more than the house is;  So many people are afraid of losing even a tiny percentage of their wealth that they are completely blocking any attempt to even begin the process of controlling greenhouse gas emissions;  The same greed has been applied to health care, where attempts to provide universal coverage have been seen as leading to cuts in the profitability of the health insurance industry;

Greed is pushing this country to the brink, pushing us over, and then throwing rocks at us as we fall.  What is going to happen when a bunch of homeowners who are underwater on their mortgages decide to walk away from the joke they used to call an investment?  Are we willing to push the health care system to complete collapse to avoid addressing the costs insurance add to it?  Are we willing to make people hungry, homeless, and armed?  The amount of bonuses that will be paid to the small contingent of Chase employees would cover the entire shortfall my state is looking at in the next year.  There is a disconnect here, as if there were different realities for people who are wealthy.

“I don’t have to work.  My money works for me.”  This is the answer I am sure many Americans would  to give to the question “What do you do for a living?”  “What kind of work does your money do?”  I would ask,   “Ponzi schemes?  Collateralized debt obligations?  Or have you invested in the health insurance industry?”

To work means to create wealth.  But there seems to be different kinds of wealth these days.  I can remember when wealth was things, buildings, roads, railroads, airplanes, that kind of stuff.  But now we think of wealth as the value of a stock, or the size of an account in a computer.

I think that people are getting angry, and that they are not going take too much more.  But I don’t think that they are going to march in the streets, or bomb buildings, or anything like that.  I think that they are just going give up, to sit down and say “I don’t know what to next.”  They have followed the rules, and have gotten burned, badly.  They have steadily lost everything that was important to them, as money has become the be-all and end-all in this country.  Greed has destroyed their savings, made the homes that they thought they were investing in worth less than the mortgage that they signed a few years ago, and shriveled their pay so that they are earning less than they were.

The heck with it.