Wednesday, October 20, 2010

Quote of the Day: China Should Worry, Not Us

From the always-insightful Scott Grannis today:

"The Chinese sell us mountains of cheap goods, then turn around and invest most of the proceeds (equivalent to our trade deficit with China) in U.S. Treasury securities. We get the goods, and we get to keep the money. Then we devalue the dollar, and they lose on their investment. Why we would want them to stop doing this is beyond me, though if I were a Chinese citizen, I would be furious with my government for directing such massive quantities of my country's export earnings to Treasuries.

The central bank of China has no need to further increase its already-massive reserves; instead, the government should be relaxing capital constraints, allowing Chinese citizens more freedom to save and invest abroad in the types of vehicles with which they feel most comfortable. China's workforce is aging daily, and like Japan a few decades ago, China's economy cannot accommodate all the savings of the Chinese people—they are essentially forced to save overseas.

Contrary to what you read in the press—which mistakenly believes that our large trade deficit with China is something we need to worry about—China is the one that needs to worry, not us."

82 Comments:

At 10/20/2010 1:42 PM, Blogger Benjamin said...

This is one reason why there is a chronic global glut of capital. China cannot absorb the savings of its people, and neither can Japan.

 
At 10/20/2010 4:05 PM, Blogger JMG said...

Should this trend continue, the XXI century will witness something entirely new: the 1st superpower will go on believing it can continue being the first superpower, whilst having a weaker industrial basis than the 2nd superpower, which is also the biggest creditor of the so-called 1st superpower. I believe this is what in English is called a conundrum.

 
At 10/20/2010 4:48 PM, Blogger wonderfulforhisage said...

Perhaps China is thinking long term, by that I mean as much a 50yrs. This is culturally normal in China but not in the West.

Say China wants to become the dominant player in the World, long term - as the USA has been for the past 70+ years.

Perhaps destroying the economies of the West by trade dumping might be a means to that end.

The West should protect itself by insisting on a floating exchange rate or failing that by imposing very hefty import duties.

 
At 10/20/2010 6:39 PM, Blogger Jet Beagle said...

"Perhaps destroying the economies of the West by trade dumping might be a means to that end."

What evidence can you possibly provide to support the assertion that China is " destroying the economies of the West by trade dumping"?

 
At 10/20/2010 9:15 PM, Blogger juandos said...

Ditto JB's question...

Gotta wonder though if we as a nation aren't taxing and regulating away a large and wealth generating piece of our industrial base...

 
At 10/20/2010 9:40 PM, Blogger bdceci01 said...

China could sell its US debt and use the cash to buy all of the assets of Vanguard. The could buy gold, real estate, stocks, corporate bonds in the US, China, Europe etc. They have converted savings into US government securities. Because of high taxes and high regulation we are poorer. The answer is to cancel corporate taxes for domestic manufacturing.

 
At 10/21/2010 2:45 AM, Blogger Matthew said...

This is childish stuff. Everyone knows that the point of trade is to import, and it is fun to receive goods in return for bits of paper. But to pretend that there isn't another side to it is ostrich-in-the-sand stuff. And the devaluation thing - so are you happy that the US takes a continual position of devaluing its currency? Is there any chance of elevating the debate just a little?

 
At 10/21/2010 9:26 AM, Blogger Jet Beagle said...

Matthew: " But to pretend that there isn't another side to it is ostrich-in-the-sand stuff."

But what is that other side, Matthew? I think it's that some non-Americans are choosing to invest for the future the dollars they gain from trade rather than use those dollars to consume today. What is "ostrich-in-the-sand" about claiming such investment is not a crisis?

If you are arguing that federal government deficit spending - the federal budget deficit - is a cause for alarm, I think almost everyone will agree with you. But you seem to be arguing that we are in crisis because the Chinese governmet rather than American investors are purchasing that federal debt. I don't think it matters who buys that debt. It's existence of the debt and not the location of the lender which is the crisis.

 
At 10/21/2010 9:43 AM, Blogger morganovich said...

benji-

do you really think that china's ability to absorb savings is more of an issue that incredibly low US interest rates dragging most of the world into negative real interest rates?

the reason we have a glut of capital is that most of the developing world is being paid to borrow money.

you seem to be on both sides of a lot of arguments benny. you complain of a chronic glut of capital, then argue for low rates and QE. so make up your mind.

you can't have QE while reducing liquidity.

 
At 10/21/2010 11:18 AM, Blogger Buddy R Pacifico said...

ngThe U.S. should worry very much. There was a post on the Output Gap for the U.S. recently and that anemic growth of less then 2% will widen the Gap substantially.

When manufacturing moves away from the U.S. it is much more then manufacturing plants. There are all the associated sub-contracters such as machine shops and engineering firms. The U.S. has lost much critical mass, or key clusters, in manufacturing .

These Clusters are now thrivinng in China. Clusters take a lot of time, investment and training to establish. There is smugness and arrogance towards manufacturing but it is really against the whole of design/build on many levels -- resulting enormous loss of prosperity .

 
At 10/21/2010 12:16 PM, Blogger NormanB said...

A devalued dollar (whatever the heck that means) isn't need to screw the Chinese. They are already being screwed when they buy our Treasuries with their currency that is worth two times what it is going for.

Make it simple: China's undervalued currency allows them to export but it also makes their imports on the inverse that much more expensive Treasuries, oil, etc). Our economists just don't have a model to show the deterioration of China's balance sheet which is the mirror image of their trade and capital surpluses.

 
At 10/21/2010 12:28 PM, Blogger morganovich said...

buddy-

i disagree completely.

manufacturing always has and ever shall an only moderately profitable industry. there are a few exceptions in high tech, but mostly, it's a terrible business. there was a 20 year golden era after ww2 when this was mitigated, but those days are gone.

almost none of the most successful us companies do their own manufacturing and most of our big chronic failures and subsidy/bailout hogs are manufacturing firms.

is apple failing because they don't make their own products?

could many of our big manufacturers (big 3 auto, boeing, etc) exist without subsidies and cyclical bailouts?

i really don't understand the fascination with manufacturing. it's the least profitable part of the product cycle and the one most cyclically sensitive. combine that with the capx costs, and it's a terrible business.

i'd never want to do it.

we rarely even look at manufacturing firms (if you don't count drugs and bio chemical firms) for our investment portfolio because they simply never produce the kinds of returns we want.

 
At 10/21/2010 12:55 PM, Blogger QT said...

morganovich,

Well articulated rebuttal to the oft repeated mantra "if you don't manufacture your own goods, your economy is doomed".

 
At 10/21/2010 1:30 PM, Blogger Buddy R Pacifico said...

"we rarely even look at manufacturing"

You would not look at manufacturing for investing because it has been decimated. Nucor, a very innovative company, is very concerned about trade issues that unfairly hurt U.S. manufacturers.

People that make and create things are at least as valuable as those that manipulate money.

 
At 10/21/2010 2:21 PM, Blogger juandos said...

"manufacturing always has and ever shall an only moderately profitable industry. there are a few exceptions in high tech, but mostly, it's a terrible business"...

Hmmm morganovich, let me ask you this, 'manufacturing always was and shall ever be a moderately profitable industry' apply even before the advent of our country excessivly regulating and taxing our industrial base or afterwards with the advent of the EPA?

From the Business Insider for what its worth: 19 Facts About The Deindustrialization Of America That Will Make You Weep

I'll grant you its a rather tabloid like article...

Still though morgaovich your point does have some merit if this blog posting is at all credible: If an iPhone was made in North America, it would probably cost $5000

None the less I like QT think you posted a good comment...

 
At 10/21/2010 3:49 PM, Blogger morganovich said...

buddy-

that's a very odd reframing of the argument.

this is not about the value of people, it's about whether a business can make a profit.

the point is that manufacturing business don't make a good return on capital.

design and sales are much more profitable parts of the product cycle.

apples makes virtually all the profit on an ipone. the guys who actually build it have razor thin margins and the people who actually build them earn less than someone flipping big macs in the US.

why is that a good business?

juandos-

yes, that was all true before the EPA too. manufacturing jobs paid better than agricultural jobs, so that is where the economy went. but in 1880, a manufacturing job was still not a way out of the middle class. in many cases, it would not even get you into the middle class.

the US has a strong mythology around manufacturing jobs because of the post ww2 period in which we had the only industrial base in the world. massive demand and no competition led to outsized profits (and paychecks), but it was always going to be transitory. once the rest of the world came back on line, that golden age ended. it's not coming back.

those 20-25 years were the only period in which an assembly line worker was ever paid enough to buy a house and put his kids in private schools. what we are seeing now is just a return to normalcy (exacerbated by negative real interest rates and a capital glut).

manufacturing can only take you so far, then you have to do something else to keep getting richer.

even manufacturing and export dynamos like germany would be one of the poorest states in the US on a purchasing power parity basis.

(dr perry has had excellent posts on this in the past)

manufacturing is better than agriculture, but it's not a way to generate the kind of wealth we have in the US now.

 
At 10/21/2010 5:10 PM, Blogger morganovich said...

another way to look at the manufacturing issue is this:

is the US economy worse off for the loss of all the farming jobs? did it cause less growth or food shortages?

why would manufacturing be different?

did you make you own TV? are you worse off for it?

was it made in your town? is the town worse off?

what about county or state?

why is the national boundary the only one we seem to care about?

are the big manufacturing town like detroit the rich part of america?

is that what we want to emulate?

i think you'll find that the rich parts of the country are the parts without manufacturing.

if this is so, why should we assume that rich countries will be the ones with manufacturing?

the reason a cardiovascular surgeon or a roofer don't make their own shoes is that they have a more productive use of their time and are better off buying them. why should this trend not be true of most americans as well?

you don't need to manufacture things to create value.

the guy who built the touch screen for the iphone added a lot less value than the guy who designed the software interface.

adding value is how you get rich,
actually doing the assembly isn't.

 
At 10/21/2010 5:12 PM, Blogger Buddy R Pacifico said...

morganovich, U.S. manufacturer to invest $8 billion dollars in their U.S. plants. This particular manufacturer has well paid employees and expensive fabrication facilities. It is to bad you look askance at manufacturers because Intel has been quite rewarding to investors.

 
At 10/21/2010 5:39 PM, Blogger juandos said...

"massive demand and no competition led to outsized profits (and paychecks), but it was always going to be transitory. once the rest of the world came back on line, that golden age ended. it's not coming back"...

Hmmm, nice explanation morganovich...

Makes sense the more I think about...

Back in the early seventies I made a bet from an education point of view (I was putting a personal stake in adhesives) that Uncle Sam was going to release space to the private companies for manufacturing exotics that couldn't be made in a gravity well...

Obviously that never happened...

"is the US economy worse off for the loss of all the farming jobs?"...

Overall no, but regionally many places haven't recovered...

"did you make you own TV?"...

Well yes I did as a matter of fact...

Hallicrafter's kits were very cool...:-)

"was it made in your town? is the town worse off?"...

Yes and yes and we're all worse off for it since Laredo now basically subsists on federal handouts...

Again its regional but overall I get your point...

"adding value is how you get rich, actually doing the assembly isn't."...

Excellent point M...

Thanks...

 
At 10/21/2010 6:10 PM, Blogger JMG said...

I'm always puzzled by discussions between economists or people with training or expertise in finances: they'll choose some indicators meeting their political beliefs (which they have, like everyone else) and systematically disregard other indicators which don't fit. To me, any discussion about richness or poverty of a country and the importance or irrelevancy of having or not having an industrial basis has to take into consideration the external debt and its evolution, on record and predictable. Arguing that when the debt is unbelievably huge that's as much a problem to the debtor as to the creditor, and that therefore some solution will be found that is not detrimental to the debtor is ludicrous: regardless of how many sophisticated monetary reasons illustrating the point can be aligned, the conclusion defies history and logic. Those are two disciplines a bit safer than merely economics.

 
At 10/21/2010 6:55 PM, Blogger Jet Beagle said...

JMG,

Not sure what point you are making. I think most economists agree that the federal debt of the United States is a significant problem. But the location of the lenders - whether they are "external", as you refer to China, I presume - doesn't really matter, does it?

Actually, in periods of growth, having foreigners who are willing to purchase U.S. government debt should work to keep interest rates low for non-government debt. In periods of growth, private borrowers should realize lower interest rates than they would if China were unwilling to purchase U.S. government debt.

Please explain why the geographic location of the lenders to Uncle Sam is important.

 
At 10/21/2010 7:10 PM, Blogger morganovich said...

jet-

actually, one could certainly argue (as was the original basis for the blog) that having an external creditor is better.

if we either default or horribly devalue the currency in which the debt is denominated, wouldn't you rather have someone else holding the bag?

i also can;t really figure out what JMG is arguing. JMG, what does industrial base have to do with debt? mostly, industrial bases are a source of debt that often does not get paid back. compare aaple or microsoft to the big 3 automakers and you'll see what i mean.

so i'm really not sure what you were trying to argue.

 
At 10/21/2010 7:21 PM, Blogger morganovich said...

buddy-

intel is the one exception, but note how few people are involved in their manufacturing.

it's also a little bit of a mixed case, because, if you pull their financial statements apart, you can see how little they make on the actual fabs. that's a brutally expensive business to be in. all the profit comes from the intellectual property.

it's knowing how to design their chips that creates the value. they admit this at every investment conference. they'd love to not be in the fab business, but no one can guarantee them the volumes they need at the process and geometries and their IP is much too valuable to let TSMC or UMC see.

intel is really a design business with some fabs because no one else can do it. it's a unique company in the semiconductor space. that said, they have much lower margins than a lot of the fables semi guys.

a good counter example is micron. because making DRAM is a low IP content business, they struggle to keep returns to capital positive across a complete business cycle. every time there's a downturn, they hemorrhage money for years at a time.

the same is true of all the disk drive guys, except that they don't even break even.

so, you are really making my point for me: manufacturing is only a good business if you are making something with high intellectual property content, because that is the only thing that creates value.

porsche can make money making cars for this reason, while Chrysler cannot.

it's the IP where the value resides, not the putting it together.

assembling iphones may be a great option compared to being a chinese agricultural serf, but even compared to working at mcdonalds in the US, it's a crummy job with low value add. (as can be seen by relative pay)

 
At 10/21/2010 8:49 PM, Blogger QT said...

Morganovich,

the US has a strong mythology around manufacturing jobs because of the post ww2 period in which we had the only industrial base in the world. massive demand and no competition led to outsized profits (and paychecks), but it was always going to be transitory. once the rest of the world came back on line, that golden age ended. it's not coming back.

Excellent point..one tends to forget the historical context. Can recall in Accounting 101 learning that manufacturing with its high capital costs had very low ROI with the exception of the software industry...a CD in a box that sells for several hundred dollars is as good as it gets.

Juandos,

You made your own TV? Whoa! Amazing!

JMG,

Discussions of the riches of a country and the industrial base seem to have little connection with government debt. Government activity does not create the wealth of the country.

 
At 10/21/2010 9:29 PM, Blogger VangelV said...

Why we would want them to stop doing this is beyond me, though if I were a Chinese citizen, I would be furious with my government for directing such massive quantities of my country's export earnings to Treasuries.

While I agree in part, there is method to the madness. When I brought up a similar observation to a Chinese economist at a banquet almost a decade ago, he said that the government was hoping to attract as much capital as possible before the end game. By the time USTs collapsed the Chinese government was hoping to have built a great deal of infrastructure and attracted a lot of productive capital to the country.

The Chinese argue that is productive capital, not holding of treasuries or consumption that generate wealth for a society. When the USD loses its reserve status China will rise relative to the US and the standard of living between the two nations will narrow substantially.

I find it amazing that supposedly competent economists can argue that consumption is hard and that the world needs American consumption to be healthy. That makes absolutely no sense because other people are just as capable of consuming as Americans are. In fact, they should be consuming more than Americans because they have real savings while Americans have been running a tab for a very long period of time.

 
At 10/21/2010 9:33 PM, Blogger VangelV said...

"China's workforce is aging daily, and like Japan a few decades ago, China's economy cannot accommodate all the savings of the Chinese people—they are essentially forced to save overseas."

Sadly, many Chinese have gambled away their savings by 'investing' in empty buildings all over the country. What they need to do is to use more traditional and less speculative vehicles for their savings.

Contrary to what you read in the press—which mistakenly believes that our large trade deficit with China is something we need to worry about—China is the one that needs to worry, not us.

I disagree. When the USD collapses the Chinese will still have all that infrastructure and productive capital. What will the US have again?

 
At 10/21/2010 9:34 PM, Blogger VangelV said...

This is one reason why there is a chronic global glut of capital. China cannot absorb the savings of its people, and neither can Japan.

Glut? Have you ever driven down one of your roads? Or over a typical American bridge?

 
At 10/21/2010 10:23 PM, Blogger Hydra said...

You morons are rich.

You don't have to manufacture anything to create value. But whoever gains from the value you make is going to want to go buy something, and usually that means something manufactured, including agricultural goods.

Most of the work that needs done consists of picking something up and moving it.

All of the rest of the bean counting, money shuffling, and futures selling is just a niche market which depends on people making things very efficiently. We can do that because we use machines that depend on concentrated energy sources.

We have been using energy sources concentrated for us in nature. Eventually we will have to collect and concentrate our own energy and this is going to make bean counting at the top a lot less lucrative.

You need manufacturing SOMEWHERE as a base for everything else.

 
At 10/21/2010 10:45 PM, Blogger Hydra said...

How many of you are not involved in manufacturing, directly or indirectly?

Maybe some of you are three or four degrees of freedom removed. Juandos is in airlines so he moves people and things related to manufacturing, using things that are manufactured.

Those of you who create value without manufacfuring use ma ufactured products every day.

The people who make your lives possible are the people making and growing things.

 
At 10/22/2010 3:13 AM, Blogger Jet Beagle said...

Hydra,

You appear to want to classify all goods produced as "something manufactured". That's not how statistics are compiled, of course. You only muddy the discussion by mixing the terms "manufacturing" and "goods produced". Mining (including coal, petroleum, and shale), construction, and agriculture are important comnponents of the goods producing sector. Those parts of the U.S. goods producing sector are still important, and still providing more wealth to the U.S. than they did a few decades ago.

U.S. manufacturing output - the value added from manufacturing operations physically located in the U.S. - is much, much higher than it was a few decades ago.

So why are you seeming to argue that the U.S. is in some sort of crisis because we purchase goods from ovcerseas? If you believe that goods production is the key element to a nation's economic success - not an argument I believe, by the way - then what forms the basis for your concern about the U.S. economy?

 
At 10/22/2010 6:27 AM, Blogger juandos said...

Looking at the comments further on towards the bottom of the list this morning I note some that struck me as interesting from hydra, jet, vangeIV, and morganovich of course...

Well the outfit called Citizens Against Government Waste recently released this commercial (one minute long) regarding the Chinese and our economic relationship with them: Chinese Professor

Have any of you seen it? If so what's your opinion of it...

 
At 10/22/2010 6:58 AM, Blogger JMG said...

Jet and Morganovitch:
Boiling down and simplifying the assumptions behind this discussion, I read them as follows: i) It is stupid to someone living in the States purchasing some goods produced locally whilst the very same products can be imported for a lower price from, say, China; ii) The real value of products dwelves on the conception and design, not on the product itself; that's why the actual producer earns little whilst the big profit goes to the owner of the brand; iii) Manufacturing is relatively easy, it can be done anywhere; creating and innovating are the real rewarding activities, and therefore the ones that should be pursued.
My objections are: i) Relations between nations are not the same as relations within the same nation, for quite often they have implicit a competition for supremacy inherent in the way our societies have evolved. This is even truer when we talk about nations having the size, and potential, of being superpowers. And if one adds to this the fact that we are talking of two nations with a quite different (and incompatible) set of values, then ignoring this aspect is, well, a bit over-simplifying; ii) There is a culture that evolves within organizations, consisting of small add-ups of know-how, efficiency and innovation. Separating conception (in laboratories, universities, etc.) from manufacturing is a dangerous path. Of course if you move your factories abroad there isn't really a separation because they are merely one flight away. But that's only true to the extent that the local authorities allow you to be at the helm, which they won't as soon as you become expendable; iii) If one particular manufacturing facility disappears, because it goes bust, there isn't any real - much to the contrary - downturn to it to the extent it is replaced by someone more competitive, efficient or effective. But what is true for individual organizations is not true for industrial sectors. Once the capability of acting in one particular field disappears - say producing motor-cars, for instance - it will hardly be recovered, for the knowledge, time, resources and know-how required to have an industrial field in the first place cannot be at pace with the facility of destruction.
I don't expect economists to incorporate in their models this kind of considerations - they don't fit. And I'm well aware that anyone with a scientific background tends to despise politics, a dirty business anyway. But politics have always been a part of human societies - and will remain so.

 
At 10/22/2010 7:00 AM, Blogger JMG said...

Jet and Morganovitch:
Boiling down and simplifying the assumptions behind this discussion, I read them as follows: i) It is stupid to someone living in the States purchasing some goods produced locally whilst the very same products can be imported for a lower price from, say, China; ii) The real value of products dwelves on the conception and design, not on the product itself; that's why the actual producer earns little whilst the big profit goes to the owner of the brand; iii) Manufacturing is relatively easy, it can be done anywhere; creating and innovating are the real rewarding activities, and therefore the ones that should be pursued. (continues)

 
At 10/22/2010 7:00 AM, Blogger JMG said...

My objections are: i) Relations between nations are not the same as relations within the same nation, for quite often they have implicit a competition for supremacy inherent in the way our societies have evolved. This is even truer when we talk about nations having the size, and potential, of being superpowers. And if one adds to this the fact that we are talking of two nations with a quite different (and incompatible) set of values, then ignoring this aspect is, well, a bit over-simplifying; ii) There is a culture that evolves within organizations, consisting of small add-ups of know-how, efficiency and innovation. Separating conception (in laboratories, universities, etc.) from manufacturing is a dangerous path. Of course if you move your factories abroad there isn't really a separation because they are merely one flight away. But that's only true to the extent that the local authorities allow you to be at the helm, which they won't as soon as you become expendable; iii) If one particular manufacturing facility disappears, because it goes bust, there isn't any real - much to the contrary - downturn to it to the extent it is replaced by someone more competitive, efficient or effective. But what is true for individual organizations is not true for industrial sectors. Once the capability of acting in one particular field disappears - say producing motor-cars, for instance - it will hardly be recovered, for the knowledge, time, resources and know-how required to have an industrial field in the first place cannot be at pace with the facility of destruction.
I don't expect economists to incorporate in their models this kind of considerations - they don't fit. And I'm well aware that anyone with a scientific background tends to despise politics, a dirty business anyway. But politics have always been a part of human societies - and will remain so.

 
At 10/22/2010 7:01 AM, Blogger JMG said...

My objections are: i) Relations between nations are not the same as relations within the same nation, for quite often they have implicit a competition for supremacy inherent in the way our societies have evolved. This is even truer when we talk about nations having the size, and potential, of being superpowers. And if one adds to this the fact that we are talking of two nations with a quite different (and incompatible) set of values, then ignoring this aspect is, well, a bit over-simplifying; ii) There is a culture that evolves within organizations, consisting of small add-ups of know-how, efficiency and innovation. Separating conception (in laboratories, universities, etc.) from manufacturing is a dangerous path. Of course if you move your factories abroad there isn't really a separation because they are merely one flight away. But that's only true to the extent that the local authorities allow you to be at the helm, which they won't as soon as you become expendable; iii) If one particular manufacturing facility disappears, because it goes bust, there isn't any real - much to the contrary - downturn to it to the extent it is replaced by someone more competitive, efficient or effective. But what is true for individual organizations is not true for industrial sectors. Once the capability of acting in one particular field disappears - say producing motor-cars, for instance - it will hardly be recovered, for the knowledge, time, resources and know-how required to have an industrial field in the first place cannot be at pace with the facility of destruction. (continues)

 
At 10/22/2010 7:01 AM, Blogger JMG said...

I don't expect economists to incorporate in their models this kind of considerations - they don't fit. And I'm well aware that anyone with a scientific background tends to despise politics, a dirty business anyway. But politics have always been a part of human societies - and will remain so.

 
At 10/22/2010 7:11 AM, Blogger juandos said...

"But politics have always been a part of human societies - and will remain so"...

Personally I think this is a salient point and explains why Keynesian economics exists...

 
At 10/22/2010 8:18 AM, Blogger VangelV said...

You morons are rich.

Usually morons don't become rich. They earn their money by seeing something that others do not or by simply working harder and smarter than the average person.

You don't have to manufacture anything to create value. But whoever gains from the value you make is going to want to go buy something, and usually that means something manufactured, including agricultural goods.

So what is the problem with making something that others want to purchase at a price that they are willing to pay?

Most of the work that needs done consists of picking something up and moving it.

Very simplistic. There are many countries that have plenty of labour to pick up and move stuff but few of them are good at making stuff.

All of the rest of the bean counting, money shuffling, and futures selling is just a niche market which depends on people making things very efficiently. We can do that because we use machines that depend on concentrated energy sources.

Again a bit simplistic but you have made the point so let us move on.

We have been using energy sources concentrated for us in nature. Eventually we will have to collect and concentrate our own energy and this is going to make bean counting at the top a lot less lucrative.

The lucrative 'bean counting' is only made possible by the dysfunctional monetary system that is being used. Eventually that system will fall apart and many of the friction fees that make the financial players rich will go away. But that is a subject for another post.

You need manufacturing SOMEWHERE as a base for everything else.

You just lost me. After making some coherent points you come to a conclusion that does not lead anywhere.

 
At 10/22/2010 8:20 AM, Blogger VangelV said...

The people who make your lives possible are the people making and growing things.

Do not discount the contribution of others in the system. We are so rich now because we live in a system that takes advantage of the division of labour.

 
At 10/22/2010 8:23 AM, Blogger VangelV said...

So why are you seeming to argue that the U.S. is in some sort of crisis because we purchase goods from ovcerseas? If you believe that goods production is the key element to a nation's economic success - not an argument I believe, by the way - then what forms the basis for your concern about the U.S. economy?

An excellent question. I have had trouble following our friend's argument and have no idea where he really stands or the basis for his position.

 
At 10/22/2010 8:28 AM, Blogger VangelV said...

Well the outfit called Citizens Against Government Waste recently released this commercial (one minute long) regarding the Chinese and our economic relationship with them: Chinese Professor

Have any of you seen it? If so what's your opinion of it...


There is a lot of merit to the video and it makes a very valid point.

But it misses a more important point. The reason why the US is failing is because it turned its back on a more important principle; liberty. The only way to cut government waste is to have much less of it and by having decisions made by individuals who pay for them.

 
At 10/22/2010 8:30 AM, Blogger morganovich said...

jmg-
thanks for the clarification.

i must say however, that i don;t find your concerns persuasive.

first off, when is the last time anyone refused to sell us manufactured goods (other than military, and we make plenty of that)? it's just not a real concern. the people making them need us as much or more than we need them. even if someone did refuse to sell to us, there would be 100 other trading partners. there is just no realistic scenario by which we can't buy a dvd player that does not involve total world catastrophe.

second, i understand this "cluster" thinking about manufacturing, but i also find it totally unpersuasive. it's just the latest pop business idea. look at leading edge design companies like apple, B+O, PMC sierra, donna karan, etc. none of them make their own goods.

there are very few types of manufacturing that really benefit from clustering. (autos may be one) mostly, it's just a pop culture idea.

 
At 10/22/2010 8:41 AM, Blogger VangelV said...

My objections are: i) Relations between nations are not the same as relations within the same nation, for quite often they have implicit a competition for supremacy inherent in the way our societies have evolved. This is even truer when we talk about nations having the size, and potential, of being superpowers.

I think that you are barking up the wrong tree. When I buy a new guzheng for my son I do not trade with China but with the factory in Xi'an, Dalian, or Nanjing that made it. My government has no business punishing me by forcing me to pay a tariff and cannot justify meddling in what is a voluntary transaction.

And if one adds to this the fact that we are talking of two nations with a quite different (and incompatible) set of values, then ignoring this aspect is, well, a bit over-simplifying; ii) There is a culture that evolves within organizations, consisting of small add-ups of know-how, efficiency and innovation.

Nations don't have values. People do.

Separating conception (in laboratories, universities, etc.) from manufacturing is a dangerous path. Of course if you move your factories abroad there isn't really a separation because they are merely one flight away.

As you pointed out. The factories do not belong to your government but to the people that own them. There is no justification for forcing the owners to build in one particular place rather than another.

But that's only true to the extent that the local authorities allow you to be at the helm, which they won't as soon as you become expendable; iii) If one particular manufacturing facility disappears, because it goes bust, there isn't any real - much to the contrary - downturn to it to the extent it is replaced by someone more competitive, efficient or effective.

Again, what business is it of yours or mine what risks people take with their own capital?

Once the capability of acting in one particular field disappears - say producing motor-cars, for instance - it will hardly be recovered, for the knowledge, time, resources and know-how required to have an industrial field in the first place cannot be at pace with the facility of destruction.

I do not believe this to be true. An advanced society can easily use the newest technology to overcome problems that are faced by players in established industries. If you go to Africa you will see that more people have cell phones than land lines because it made sense to skip the use of obsolete and expensive technology.

I don't expect economists to incorporate in their models this kind of considerations - they don't fit. And I'm well aware that anyone with a scientific background tends to despise politics, a dirty business anyway. But politics have always been a part of human societies - and will remain so.

This part makes sense.

 
At 10/22/2010 8:44 AM, Blogger morganovich said...

hydra-

you comment is so wrong i'm having a difficult time even knowing where to start.

leaving aside your vitriolic class warfare, you just do not understand value.

why do you thing it's more valuable to snap pieces of plastic together and tighten a screw than say, provide sound tax advice, or perform open heart surgery, or provide an entertaining cabaret performance?

what you are missing is that huge productivity gains mean that all the good we need can be made by far fewer people. thus, we need less manufacturing as a % of workforce. it's not like the aggregate amount of US manufacturing is dropping. it keeps going up, just with fewer people doing it.

we ship the worst of the manufacturing jobs overseas because we mostly have better opportunities here. before this debt bust, unemployment was quite low. we are better off doing things that add more value and using that surplus to buy goods from people who don;t have better options.

look around the US. manufacturing jobs are not the ones that pay best. your fixating on manufacturing doesn't make any sense. you'll do better as a tax lawyer.

i'm also not saying we should get rid of it. some manufacturing jobs are good jobs. the market will tell you which, and we'll keep them, but favoring them over any other kind is just foolish. we wind up worse off for it.

there will always be plenty of stuff. it's easy to make stuff. so long as there is demand, it'll be met.

your energy arguments are silly and Malthusian. long before fossil fuels run out, we'll have switched to something else for cost reasons. it is pretty much impossible to actually run out. there is a ton of energy in our biosphere. sun, tides, waves, geothermal, biomass energy, nuclear, etc. there will always be energy. it may cost more (at first) but the rewards to figuring out how to get it cheaply are so high that much progress will be made.

energy prices are already high enough to drive massive investment in other sources. give it 20 years. something significant will come of it.

 
At 10/22/2010 9:03 AM, Blogger Jet Beagle said...

"But whoever gains from the value you make is going to want to go buy something, and usually that means something manufactured, including agricultural goods."

Not sure where you are going with your arguments, but this last statement is incorrect and misleading. In the first place, trying to include agricultural goods - milk, beef, wheat, timber, etc - with manufactured goods only adds great confusion to any economic discussion.

Consumers in the U.S. spend a few trillion dollars on services. This includes industries such as health care, education, restaurants, travel, recreation, entertainment, financial services, personal care, landscaping, real estate, government services, and much more. Your argument that people must use wealth to purchase manufactured goods is incorrect. Services - including financing - have for decades made up the majority of consumer direct and indirect purchases.

 
At 10/22/2010 9:05 AM, Blogger VangelV said...

first off, when is the last time anyone refused to sell us manufactured goods (other than military, and we make plenty of that)? it's just not a real concern. the people making them need us as much or more than we need them.

Trade implies an exchange where both sides obtain greater value. That cannot happen when all one side has to offer is a currency that it is trying to depreciate very quickly.

even if someone did refuse to sell to us, there would be 100 other trading partners. there is just no realistic scenario by which we can't buy a dvd player that does not involve total world catastrophe.

You have the same problem. To trade you have to offer value to other partners. When what you offer is a depreciating currency you will run into serious problems.

Why is it that you believe that consumption is hard but manufacturing is easy?

second, i understand this "cluster" thinking about manufacturing, but i also find it totally unpersuasive. it's just the latest pop business idea. look at leading edge design companies like apple, B+O, PMC sierra, donna karan, etc. none of them make their own goods.

I totally agree. The value for them is in design and marketing.

But keep in mind that their activities allow foreign workers to increase their standard of living and for foreign factories to accumulate capital that can be used to fund their own design activities. This is a great example of how trade makes everyone better off.

 
At 10/22/2010 9:15 AM, Blogger VangelV said...

i'm also not saying we should get rid of it. some manufacturing jobs are good jobs. the market will tell you which, and we'll keep them, but favoring them over any other kind is just foolish. we wind up worse off for it.

I suspect that our friend is just missing the benefit of the division of labour and has not really thought deeply enough about the subject to come up with a fully defensible opinion yet. Give him time.

there will always be plenty of stuff. it's easy to make stuff. so long as there is demand, it'll be met.

I have no idea why most people don't understand this.

your energy arguments are silly and Malthusian. long before fossil fuels run out, we'll have switched to something else for cost reasons.

I agree. But here is the problem. Between here and there is a large chunk of time that is necessary to make the transition. We are in no position to make it without a great deal of pain and capital. Once the peak is evident it is likely that the currency will take a huge hit as markets squeeze out marginal demand out of the system. Given the US debt levels, unfunded liabilities, and regulatory structure the barriers to an effective transition are huge. So while the Malthusians will be proven wrong again things may be a lot harsher than you believe.

it is pretty much impossible to actually run out. there is a ton of energy in our biosphere. sun, tides, waves, geothermal, biomass energy, nuclear, etc. there will always be energy. it may cost more (at first) but the rewards to figuring out how to get it cheaply are so high that much progress will be made.

As I wrote above, you need capital and a free market to develop viable alternatives. When you have a failing currency and a government that diverts resources into dead ends we are likely to run into very strong headwinds that may be very difficult to overcome.

energy prices are already high enough to drive massive investment in other sources. give it 20 years. something significant will come of it.

The peak is already with us. We do not face an energy problem but a liquid fuels problem. Debt levels are very high and the system is not very stable. While I think that the Malthusians are wrong we do not need to act as Panglossians either.

 
At 10/22/2010 9:26 AM, Blogger VangelV said...

Not sure where you are going with your arguments, but this last statement is incorrect and misleading. In the first place, trying to include agricultural goods - milk, beef, wheat, timber, etc - with manufactured goods only adds great confusion to any economic discussion.

I am having the same trouble understanding as you do but I suspect that our friend is lumping stuff that you make, mine, and grow together into a, 'real goods that you can touch,' pile. I also suspect that he is not as concerned with services because it is harder to import them.

 
At 10/22/2010 9:33 AM, Blogger Jet Beagle said...

"While I think that the Malthusians are wrong we do not need to act as Panglossians either.

I do not think it is naive to believe that a free market is by far the best means to solve problems of scarcity. If a need truly exists for alternate forms of energy - or for order of magnitude changes in energy consumption efficiency - a free market will solve that need. The absolute worst solution for meeting the problem of energy scarcity - if such a problem really exists - is for a government to try and solve it.

Are you proposing some means other than a free market for solving the energy scarcity problem you foresee?

 
At 10/22/2010 10:33 AM, Blogger morganovich said...

vangel-

your notions of value are antiquated. the design for the iphone is all the value, just making it and selling it to us provides nothing.

where are you getting this "all we have to offer is a currency" idea?

seems to me that most of the enabling IP for the high priced consumer electronics in the world comes from the US.

services and product development are more valuable that manufacturing which is mostly a rank commodity. how is it that you seem to feel that those things have no trade value when the opposite is so clearly demonstrated by our most successful companies?

you are also taking a very monolithic view of the US and it's energy. there is plenty of capital around for worthwhile projects, and energy will always make that list if the technology works. keep in mind that there are many ways to use less energy as well, and that trends toward efficiency are still in their infancy as well.

this will all be driven by the price of energy.

as i look at 40 years, energy is not a gating factor i fear. we have many, many options just with existing technology.

there are lots of ways to make biodeisel, so even liquid fuels can be produced.

the current "peak oil" issue is a false peak. using modern drilling in iraq, brazil, russia, venezeula, mexico, etc would break us out to new highs in short order. the issue is one of politics, not resource scarcity.

 
At 10/22/2010 10:36 AM, Blogger morganovich said...

also:

it gets easier every day to import services. sure, you can't hire a guy in china to mow your lawn, but you can get him to read your MRI (nighthawk etc are already doing this). you can get him to take your calls or do your taxes or plan your vacation or set up your corporation.

lots of services are easy to provide cross border.

i export my services.

it's very common.

 
At 10/22/2010 11:09 AM, Blogger VangelV said...

I do not think it is naive to believe that a free market is by far the best means to solve problems of scarcity.

You misunderstand my point. I am saying that we do not have a free market to channel investments and resources into viable solutions. Instead we have governments directing resources to areas that may not provide any viable solutions. Free markets do not provide ethanol subsidies or keep failed fuel cell makers alive for decades.

If a need truly exists for alternate forms of energy - or for order of magnitude changes in energy consumption efficiency - a free market will solve that need.

Right. But that is not what we have.

The absolute worst solution for meeting the problem of energy scarcity - if such a problem really exists - is for a government to try and solve it.

I agree. We need governments to step out of the way. My argument is that because governments do not get out of the way that we will have a much more difficult transition than we would have had under a free market system.

Are you proposing some means other than a free market for solving the energy scarcity problem you foresee?

Not at all. The free market will do fine. Do you know where to find it?

 
At 10/22/2010 11:31 AM, Blogger QT said...

Juandos,

Thanks for the link to the commercial...thought that one really connected with the ball.

 
At 10/22/2010 11:33 AM, Blogger VangelV said...

your notions of value are antiquated. the design for the iphone is all the value, just making it and selling it to us provides nothing.

I agree that there is more value in the design than in sticking parts together. But that does not mean that all those people who stick the parts together do not significantly improve their standard of living. Drive around the Chinese countryside some time and look at those large houses built by workers who made stuff for Nike, Columbia, or some contract assembler.

where are you getting this "all we have to offer is a currency" idea?

Reality. Although there is a healthy two way trade, much of the currency is not really used to buy all that much from the US. Instead it goes to buy debt instruments that promise to pay back more pieces of paper.

seems to me that most of the enabling IP for the high priced consumer electronics in the world comes from the US.

I have no problem with this statement. But it does not change the argument.

services and product development are more valuable that manufacturing which is mostly a rank commodity. how is it that you seem to feel that those things have no trade value when the opposite is so clearly demonstrated by our most successful companies?

I have no problem with the statement that design has value and when I look around Asia or Europe I see that others also believe that it does.

you are also taking a very monolithic view of the US and it's energy. there is plenty of capital around for worthwhile projects, and energy will always make that list if the technology works. keep in mind that there are many ways to use less energy as well, and that trends toward efficiency are still in their infancy as well.

Not at all. I recognize that the US was one of the great producers of coal, oil, and gas. I simply point out that it is now long past its 1970 production peak for oil and that at the current low natural gas prices most companies cannot make a profit. That means that we are going to have a problem going forward in replacing falling production from existing fields and that there is nothing to indicate that the production trend can be reversed.

this will all be driven by the price of energy.

Really? We saw oil go from $40 to $140 and a massive investment in production. But oil production did not go up materially and the 2005 peak was not exceeded in any meaningful way. The best that all that investment could do is keep production from decline.

 
At 10/22/2010 11:36 AM, Blogger VangelV said...

as i look at 40 years, energy is not a gating factor i fear. we have many, many options just with existing technology.

I think that you may need new glasses because you are not seeing the obvious.

You do not have many options. While we could substitute at the margin, our whole society has bee built on access to cheap oil. Alternatives will not help much at this point or any time in the next decade or so. The only thing that could help us for a decade or so is the use of natural gas as fuel for our vehicles. But that is not a long term solution unless we can solve some engineering problems and exploit methane hydrates.

there are lots of ways to make biodeisel, so even liquid fuels can be produced.

That is true. But today we buy oil at less per cup than your coffee at Starbucks or Tim Horton's. You can't do that with biodiesel. And if you look at the energy return on energy expended you will see that the math does not work very well for alternatives like biodiesel.

the current "peak oil" issue is a false peak. using modern drilling in iraq, brazil, russia, venezeula, mexico, etc would break us out to new highs in short order. the issue is one of politics, not resource scarcity.

You have no idea what you are talking about. Modern drilling has been used for decades. It has actually created some of our problems today because it extracted so much oil faster that production rates in depleting fields that used them are falling off a cliff.

 
At 10/22/2010 11:39 AM, Blogger VangelV said...

it gets easier every day to import services. sure, you can't hire a guy in china to mow your lawn, but you can get him to read your MRI (nighthawk etc are already doing this). you can get him to take your calls or do your taxes or plan your vacation or set up your corporation.

lots of services are easy to provide cross border.

i export my services.


I am with you and agree that high value services that require technical skills are very easy to export. But our friend is thinking in terms of employment and is not aware that such trade in services actually makes the US wealthier. He is probably thinking more of the jobs in the low value added service sector, which is not effected as much by trade.

 
At 10/22/2010 11:40 AM, Blogger QT said...

VangelV,

"I suspect that our friend is just missing the benefit of the division of labour and has not really thought deeply enough about the subject to come up with a fully defensible opinion yet. Give him time."

Hydra,

"You morons are rich."

Is a putdown more likely to persuade or retrench someone in their position? Lot of interesting points to consider on both sides. It's been fun.

 
At 10/22/2010 12:17 PM, Blogger morganovich said...

v-

you are missing the thrust of my argument:

first, i was talking about alternative energy. if you think that spike in oil price didn't drive a huge boom in investment in other kinds of energy, you weren't paying attention.

second, you are missing the issue in oil - it's politics, not resource scarcity that is driving down output. look at the big drops. iran, iraq, venezeula, russia, mexico - these are all politically driven, not reserves driven.

your argument about biodiesel needs a big qualifier, and that is the word "yet".

also, in real terms, oil is as cheap now as it was in the 60's, so where is your scarcity argument? it's just inflation/dollar debasement.

it's you who have no idea what you are talking about. if you think mexico, vz, iraq, and russia have over extraced their reserves, you are not looking at the numbers. the real problem is that they are not investing in keeping the fields productive or have shut down production entirely.

if the resource is going away, why have prices not gone up in real terms?

oil was $20 in 1951. inflation adjust that, and today's price is lower.

that hardly seems like a crisis.

 
At 10/22/2010 12:18 PM, Blogger morganovich said...

btw, i liked that, "if we're such morons, how did we get rich" comment.

that pretty much hits the nail on the head.

 
At 10/22/2010 1:02 PM, Blogger VangelV said...

Hydra,

"You morons are rich."

Is a putdown more likely to persuade or retrench someone in their position? Lot of interesting points to consider on both sides. It's been fun.


You may be right. But some of us have been around a long time and seen the world from a different perspective. We can make the statement, "You morons are rich," to an average American and be entirely accurate because we see the wealth in the US from a different perspective. The average American lives in a bigger house than upper middle class Europeans. They drive more. They have more material things, access to better health care, cheaper food, etc., etc., etc. From that perspective we can give our friend the benefit of doubt until he makes a clear statement that he is a degenerate progressive who has no idea about economics or the real world.

 
At 10/22/2010 2:13 PM, Blogger VangelV said...

first, i was talking about alternative energy. if you think that spike in oil price didn't drive a huge boom in investment in other kinds of energy, you weren't paying attention.

But I was paying attention. What I saw was a government diversion of resources towards favoured alternative energy plays that made no economic sense. Ethanol was a net loser. Wind and solar require massive subsidies and still cannot provide anything in the way of relief other than in niche situations. I saw Spain, the UK, Germany, and Denmark blow their brains out by forcing consumers to pay more for energy and driving jobs elsewhere. I also saw regulatory pressures on nuclear, tar sands, coal, and other alternatives that make economic sense at this point in time.

second, you are missing the issue in oil - it's politics, not resource scarcity that is driving down output. look at the big drops. iran, iraq, venezeula, russia, mexico - these are all politically driven, not reserves driven

With all due respect, you have no clue what it is that you are talking about. None of the areas that you mention are on the right side of Hubbert's Peak. Their old fields are in steep decline and new production will do little to stem the decline.

As someone who has had many long talks with oil people from Mexico, Russia, and Iraq I can assure you that they were not stupid. Their governments spent billions trying to overcome geological problems. The problem is mathematical and geological, not political.

To keep production from falling you need more than four million barrels of new production that comes from new or reworked wells in older fields or from new fields. That is each and every year. Where will you find that production?

 
At 10/22/2010 2:13 PM, Blogger VangelV said...

your argument about biodiesel needs a big qualifier, and that is the word "yet".

Yes, it does. But we have been working on this problem for decades and have 'yet' to be successful. The issue is one of concentration of energy and the return of energy produced on energy expended. So far, biodiesel is a loser when compared to other sources.

also, in real terms, oil is as cheap now as it was in the 60's, so where is your scarcity argument? it's just inflation/dollar debasement.

Oil should have been significantly cheaper in the 1960s. The Texas Railroad Commissions was propping up prices by limiting production. When that approach ended as the TRC announced that all producers were free to market as much oil as possible (which signaled the peak for American production) the role of the TRC was taken on by OPEC, which copied the TRC charter and did what it could to control wold oil prices by the use of quotas. We are now at a point where there is so little spare capacity that OPEC is no longer needed to prop up prices. The only thing keeping prices from exploding is weak demand.

it's you who have no idea what you are talking about. if you think mexico, vz, iraq, and russia have over extraced their reserves, you are not looking at the numbers. the real problem is that they are not investing in keeping the fields productive or have shut down production entirely.

I am looking at the numbers. One of my pals was on a plane walking the Russian fields as soon as restrictions were first lifted. She was on the ground in Kazakhstan looking at the drill cores and flow data when the 'big' discovery was made. She has been with PEMEX officials and has been talking to my Iraqi friends about the fields in the southern parts of the country. We have talked to management employees at Saudi Aramco, ENOC and ADNOC. Nobody is talking about great new fields and rising production. Their biggest issues are water cuts, tertiary drives, and the inability to keep older fields operating as they used to. There is clearly a low level panic and after a long time of complacent acceptance of the party line, doubts about the reserve estimates.

All you need to do is to see what the EIA and IEA have finally admitted about depletion rates and to start connecting the dots. Iraqi oil production may rise for a while. (I hope it does because I have invested in production in the Kurdish area.) Western African production may rise. Brazilian oil production may rise. But Russia, Mexico, Venezuela, Iran, Kuwait, UAE, China, and Saudi Arabia have already seen their best days.

if the resource is going away, why have prices not gone up in real terms?

Because prices were artificially propped up by production quotas. Quotas are no longer necessary because the top production rate is a million barrels per day or so greater than the current rate.

oil was $20 in 1951. inflation adjust that, and today's price is lower.

Really? I am pretty certain that my commodity book was showing a $2.50 or so price for a barrel in 1950. You might want to take a look again because I think that you are trying to adjust for inflation twice.

 
At 10/22/2010 3:44 PM, Blogger morganovich said...

vangel-

i don't know where you are getting your info, but you don't understand oil and gas at all and are just making up this "declining resource" thing.

those fields are in decline from under investment, not resource depletion. how are we having a resource crunch when reserves are still going up (and don't even include lots on "non-conventional" reserves)

world total proven oil reserves were higher in 2009 than at any time in history and more than twice what they were in 1980.

look at the DOE numbers.

http://webcache.googleusercontent.com/search?q=cache:zV1447U4l4MJ:www.eia.doe.gov/pub/international/iealf/crudeoilreserves.xls+world+proven+reserves+oil+historical&cd=1&hl=en&ct=clnk&gl=us&client=firefox-a

we are not running out of oil.

vz, iraq, brazil, saudi arabia, kuwait, and iran are all at record reserve levels, as is the world as a whole.

hubbert and cambell and co make a great biz out of forecasting doom, but they sure seem to move their dates back a great deal.

bring iraqi production to pre war levels and there would be a glut.

we may be having issues on the inflation adjusted oil because i am not using the US cpi figures after 1982, but rather the old calculation (as calculated by SGS)

this adds a great deal of inflation that the official figures ignore. sorry, i should have mentioned that previously, i forgot that our asset model was defaulting to that dataset.

you are correct that using reported US cpi, oil was around $20/bbl in 1950 (in 2008 dollars).

however, using pre 1982 methodology, it was higher then than now. so i guess a great deal of this comes down to whose inflation numbers you believe.

 
At 10/22/2010 3:47 PM, Blogger morganovich said...

regarding alt energy, i wasn't thinking so much of the boondoggles into wind and solar so much as the improvements in technology. better photovoltaics, tidal, wave, geothermal, algal biodiesel, better batteries, pebble bed reactors, more efficient products, etc.

i'm not claiming we're there yet, we aren't. i'm just pointing out that real progress is occurring and will continue.

 
At 10/22/2010 3:48 PM, Blogger Ron H. said...

"energy prices are already high enough to drive massive investment in other sources. give it 20 years. something significant will come of it."

morganovich, could you expand on this a little? Perhaps I'm missing something, but as I see it, investments in other energy sources at this time for the most part involve massive taxpayer provided subsidies, and are driven more by politics than economics. Other than nuclear, none of the sources you mention seem viable as significant replacements for fossil fuel, and it seems we've decided that we just aren't going to have nuclear.

 
At 10/22/2010 7:31 PM, Blogger VangelV said...

i don't know where you are getting your info, but you don't understand oil and gas at all and are just making up this "declining resource" thing.

You seem to be totally clueless about the subject. After years of ignoring the problem about two years ago the IEA began to pay attention to the facts. I guess that you never got the memo.

Robert Hirsch wrote about the problem in 2005. He has put together a new book on the subject that you could learn a lot from.

If you don't believe the IEA or Hirsch you could look at the report issued by your Military earlier this year.

There are similar reports from New Zealand, and the UK, and Germany.

You can choose to stay ignorant of the data and the facts but some of us like to pay attention to things as they are.

 
At 10/22/2010 8:22 PM, Blogger VangelV said...

those fields are in decline from under investment, not resource depletion. how are we having a resource crunch when reserves are still going up (and don't even include lots on "non-conventional" reserves)

That is not true. The Russians, Saudis, Kuwaitis, Chinese, Mexicans, etc., have thrown a great deal of money into their aging fields without a great deal of success.

You seem to ignore the age of the major producing fields. Ghawar was discovered in Saudi Arabia in 1948 and began producing sixty years ago. The very high permeability carbonate reservoir rocks in North Ghawar have yielded a great deal of oil but peaked more than 30 years ago. The rocks in the rest of the formation are not nearly as good; Haradh-III is technically state of the art and part of the South Ghawar formation. Even with the most expensive technology the Saudis are not producing much more than 300,000 barrels per day even though they are injecting 500,0000 barrels per day of water into the formation. While the water cut has been reported to be low at around 10% (depending on where you get your numbers from) the fact that around 60% more wells have been drilled than planned might indicate that many of the MRC laterals have had to be shut off due to a high water cut.

Burgan was discovered in Kuwait in 1938 and began producing 62 years ago. It is producing around 20% less than its peak and the Kuwaitis have admitted that more reworking or new wells will not offset the depletion.

Kirkuk was discovered in Iraq in 1927 and has been producing since 1934. Many wells have been drilled in the field and a great deal of money has been spent by the Iraqis. While more spending might help a bit its peak is many years in its past.

Cantarell was found in 1976, began production in 1981, and has been using a nitrogen drive for more than a decade. Its production has fallen off a cliff even though PEMEX has spent billions in new investments.

You talk about any field and we'll take a look at the spending and production data. I doubt that you will find any that have been neglected as much as you are implying.

 
At 10/22/2010 8:25 PM, Blogger morganovich said...

ron-

i was speaking about investments into technology, not into boondoggle wind farms.

it's clear that the curves have not crossed yet allowing most forms of alternative energy to cost effectively replace fossil fuels.

my point is that they are getting better (though wind will never work) and that if they keep getting cheaper, at some point they will go mainstream.

 
At 10/22/2010 8:42 PM, Blogger morganovich said...

vangel-

you are confusing output and reserves.

output is down because russia, venezeula, mexico, iraq, and a number of african states have been under investing in their fields and milking them for short term profit.

did you even look at the proven reserves numbers?

even saudi and kuwaitt have reserves near all time highs.

worldwide, they have doubled in the last 30 years. that's not a sign of resource exhaustion.

read the EIA on the topic. they are estimating peak oil production is still 30 years out.

"In any event, the world production peak for conventionally reservoired crude is unlikely to be "right around the corner" as so many other estimators have been predicting. Our analysis shows that it will be closer to the middle of the 21st century than to its beginning. "

and this does not even take into account arctic drilling which is likely in the next decade or so.

proven reserves will continue to climb. that is simply incompatible with resource exhaustion.

using what is in my opinion (and if i recall yours as well as i seem to recall your being a fan of john williams and SGS) accurate inflation data, oils costs what it did in the 50's.

that is not compatible with resource exhaustion either.

you are just buying into scare stories from the same prognosticators who have been wrong since the 70's.

 
At 10/22/2010 8:49 PM, Blogger VangelV said...

world total proven oil reserves were higher in 2009 than at any time in history and more than twice what they were in 1980.

look at the DOE numbers.

http://webcache.googleusercontent.com/search?q=cache:zV1447U4l4MJ:www.eia.doe.gov/pub/international/iealf/crudeoilreserves.xls+world+proven+reserves+oil+historical&cd=1&hl=en&ct=clnk&gl=us&client=firefox-a


You seem to be unaware that all oil is not exactly the same and that reserve composition is very important to the debate.

We are talking about crude production levels. That means getting barrels out of the ground and using those barrels to make the fuel that we need.

Now if I wanted to be an ass I would point out to you that a barrel of light sweet produces more of the high-value products that we want (kerosene and gasoline) than a barrel of heavy oil, which produces more of low-value products like bunker oil and asphalt. That means that a decline in one barrel of light sweet needs to be replaced by more than a barrel of unconventional oil.

But I do not even need to get into that here even though the argument is valid. All I need to point out is that what matters is total production, not reserve recognition. Recognizing tar sands as new reserves won't help you get more barrels out of the ground because you have to mine tar sands and process them through very expensive facilities. (Yes, I am aware of in-situ developments so don't go there please because it will not make a difference and it is already factored into the projections.) Forecasts for
oil sand production come to between 4.5 and 5.5 Mb/d by 2020. Add to that the production estimated from that other great new resource, extra-heavy oil (Venezuela, Kuwait, Italy, Brazil, Vietnam) of 0.7 Mb/d and these reserves do not add much to production levels.

None of these new reserves can offset the depletion from those old fields that began production decades ago and are past their peak.

 
At 10/22/2010 8:57 PM, Blogger morganovich said...

under investment:

iraq:

http://www.asiantribune.com/news/2010/05/24/iraq%E2%80%99s-three-major-oilfields-produce-21-million-bpd-end-2010

iran:

http://findarticles.com/p/articles/mi_hb6478/is_22_67/ai_n29315474/pg_2/

problems from russian nationalization:

http://fpc.state.gov/documents/organization/58988.pdf

Venezuela:

http://energyoutlook.blogspot.com/2009_08_01_archive.html

 
At 10/22/2010 9:30 PM, Blogger VangelV said...

i was speaking about investments into technology, not into boondoggle wind farms.

What technology? We have subsidized fusion, fuel cells, biofuels, solar, wind, and all kids of other activities without any breakthroughs.

it's clear that the curves have not crossed yet allowing most forms of alternative energy to cost effectively replace fossil fuels.

It is clear that fossil fuels will dominate for a very long period of time and that we cannot rely on most of the alternative energy sources at this time.

my point is that they are getting better (though wind will never work) and that if they keep getting cheaper, at some point they will go mainstream.

Perhaps. But other than methane hydrates I see nothing that is very promising on the horizon. Without massive subsidies all of the technologies will only be viable for niche applications.

 
At 10/22/2010 10:06 PM, Blogger VangelV said...

you are confusing output and reserves.

No. You are. What matters is production capacity, not reserves because not all reserves can be produced at the same rates.

output is down because russia, venezeula, mexico, iraq, and a number of african states have been under investing in their fields and milking them for short term profit.

Nonsense. Oil output is down because most of the very productive giant fields reached their peaks a long time ago. You can spend a trillion dollars on Cantarell but you can't get much more of the oil out of it because Mexico already used a nitrogen drive to increase production and got the oil out faster than by conventional means.

did you even look at the proven reserves numbers?

Actually, yes I have. But unlike you I ask questions about how OPEC reserves could have doubled without drilling over a one year period and how they can stay at the same level for decades as just enough oil was magically found to offset production. Can you explain to me how Iran and Iraq could have doubled their reserves in a single year without drilling exploration wells while they were fighting a war against each other?

I also understand that not all reserves are the same. Stranded oil and gas is not useful for production purposes and heavy oil reserves that can produce at very limited levels are not all that useful for this discussion, which is about production levels, not reserves.

even saudi and kuwaitt have reserves near all time highs.

No they do not. Look at the reports from the 1980s and you can see that the reserve numbers are not to be trusted. Both countries have reached a production peak and are on the wrong side of Hubbert's Peak.

worldwide, they have doubled in the last 30 years. that's not a sign of resource exhaustion.

Heavy oil reserves were always there. They were simply reclassified and recognized. That does not change anything. I own shares in a company that still has a royalty on known reserves in the Arctic circle. Eventually they will be counted as new reserves of significant size but they will not add enough production to make a difference to global production. The tar sands were just recognized as a great resource but their contribution will still be minor. While the production should make shareholders like me happy as reserves last for more than 30 years the extra production will be tiny and won't even offset the annual decline in Cantarell.

read the EIA on the topic. they are estimating peak oil production is still 30 years out.

"In any event, the world production peak for conventionally reservoired crude is unlikely to be "right around the corner" as so many other estimators have been predicting. Our analysis shows that it will be closer to the middle of the 21st century than to its beginning."


The EIA? You mean the people who in 2000 predicted, "High oil price case: $28.04/barrel in 2020. Low oil price case: $14.90/barrel in 2020. Reference oil price case: $22.04/barrel in 2020." Why would you trust what they have to say when they use demand to project supply and accept the OPEC reported reserve numbers without question?

Isn't it ironic that you don't trust the BLS to provide you with historical inflation numbers but trust the EIA to make predictions about the future based on bogus reserve numbers and using a 2% depletion rate?

 
At 10/22/2010 10:07 PM, Blogger VangelV said...

and this does not even take into account arctic drilling which is likely in the next decade or so.

As I wrote, I already own a company that is sitting on reserves in the Arctic. It will not make a difference until Alaskan production drops enough to allow development of another pipeline system to take the oil and gas to market.

proven reserves will continue to climb. that is simply incompatible with resource exhaustion.

More nonsense. What matters is how much oil you can get out per day, not how many tons of frozen tar sand you have in reserves.

using what is in my opinion (and if i recall yours as well as i seem to recall your being a fan of john williams and SGS) accurate inflation data, oils costs what it did in the 50's.

No. Oil was $2.50 when the economy was booming. I do not believe that it equates to $80, which is the price only because of a major contraction. And if you don't trust the BLS why are you so trusting of the EIA?

that is not compatible with resource exhaustion either.

You are looking at accounting entries, not reality. Adding the tar sands to reserves now even though we have known about them for a century is an accounting trick, not reality. The new reserves were always there. Discoveries actually peaked more than half a century ago. Why don't you know that?

you are just buying into scare stories from the same prognosticators who have been wrong since the 70's.

No. The prediction in the 1970s, based on the available data was a peak between 1996 and 2020 or so. So far that prediction is looking very good.

 
At 10/23/2010 12:52 PM, Blogger morganovich said...

vangel-

now you are just obfuscating.

reserves are up, particularly in the 3 places where productions has dropped off (iraq, venezeula, iran).

just get iraq back to 1990's output levels, and we'll be back at new highs. can you seriously be arging that the iranain and iraqi production declines are not being politically driven?

the fact that reserves keep going up means we are not into resource scarcity. sure, some are more expensive to produce, but that's why proven reserves are price based. this is the piece you are leaving out of your reserve growth argument. price goes up, more oil becomes economic to recover. it's not all well drilling. further, you make the argument about not drilling enough, which seems to bolster my case for under investment. your position here seems highly internally inconsistent.

and if you have not seen the advances in nuclear reactor design, biofuels, photovoltaics, and geothermal, then you simply are not looking. batteries are starting to come along as well, which will make a big difference.

your comment about why trust the EIA if i don't trust the BLS is just logical fallacy masquerading as argument. i don't trust the BLS because i can see the obvious, provable error in their CPI methodology. if you have such an issue with the reserves numbers, trot it out and let's evaluate it. whose reserve numbers are you using?

note: your peak oil guys have a worse track record than the EIA. campbell et al made this claim in the 7o's, 85, 91, 95, and on and on, moving the goal posts every time just like all the other malthusian hysterics.

using official CPI, oil in the early 50's was $20/bbl in 2008 dollars.

http://www.wtrg.com/prices.htm

if one accepts (as i do and as i believe i have seen you do, though correct me if i am wrong) that inflation since 1980 has been significantly under-reported, then that price goes up?

how much?

if it's underreported 3%, then oil was $48, if it's 4% then oil was $65 etc.

if you use the SGS series, you get a number statistically indistinguishable from current prices.

http://www.shadowstats.com/alternate_data/inflation-charts

do the math yourself.

the bus cost a nickel back in the 50's too...

 
At 10/23/2010 11:25 PM, Blogger VangelV said...

reserves are up, particularly in the 3 places where productions has dropped off (iraq, venezeula, iran).

Sorry but when reserves go up without drilling right after production quotas are based on some of reported reserves I don't buy the increases. How could Iran and Iraq double reserves while they were fighting a war at the time?

just get iraq back to 1990's output levels, and we'll be back at new highs. can you seriously be arging that the iranain and iraqi production declines are not being politically driven?

Iraqi oil fields were run very hard and there was damage done to the formation. Pushing them will do more damage and will not optimize the total amount that can be pulled out of the ground. I doubt that the producing companies will do that. And even if they could be pushed the increase will not be enough to offset depletion from existing fields.

And in case you have missed it, Iran is not exactly investing a great deal in its oil fields right now. By the time it will be in a position to do so, even if an increase is possible, it will come from a lower base and will need to offset a greater amount of depletion.

And your responses show that you have no idea about the subject. You don't actually need fake reported reserve numbers to figure out what is going on because all you need are accurate production numbers, which are easier to get.

Here is why you can't trust reserves. OPEC countries reported much higher reserves without drilling. But we can check the numbers by looking at the plot of the ratio of annual to cumulative production versus cumulative production. It shows that by 2004 Saudi Arabia had produced around 55-60% of its ultimate production. The plot suggests a major decline, not an increase in production.

I need to get some sleep so I will not address your other points until tomorrow.

 
At 10/24/2010 8:36 AM, Blogger VangelV said...

the fact that reserves keep going up means we are not into resource scarcity. sure, some are more expensive to produce, but that's why proven reserves are price based. this is the piece you are leaving out of your reserve growth argument. price goes up, more oil becomes economic to recover. it's not all well drilling. further, you make the argument about not drilling enough, which seems to bolster my case for under investment. your position here seems highly internally inconsistent.

But discoveries are not going up. They are not even keeping up with production. What you see and react to is an accounting entry that takes previously discovered oil like the tar sands and reclassifying it. Please note that OPEC does not remove its production from reserves and assumes that somehow there is a magic fairy that replenishes their reservoirs. How does any reasonable person explain these inconvenient straight lines, or the sudden near doubling of reserves within a four year period without any exploration programs drilling for oil?

and if you have not seen the advances in nuclear reactor design, biofuels, photovoltaics, and geothermal, then you simply are not looking. batteries are starting to come along as well, which will make a big difference.

Given that I invest in nuclear, I am aware of the advances. Nuclear is cheap, reliable, and safe.

Biofuels are not very good because the process that creates them uses up far too many resources, converts food to fuel, and produces a very low energy return on the energy invested.

Photovoltaics have a energy concentration problem. There is simply no solution there and so far the energy investment is higher than the energy return. This is why we need huge subsidies.

I also have invested in geothermal. It is not a solution because the application is limited to specific areas where geothermal targets exist.

Batteries have not really come along all that much. Most advances require the use of very valuable specialty metals that are in short supply. This is why most commercial applications use the older technology with the less efficient batteries that do not work well in extreme temperature environments. You are also missing the grid issue. Electric cars will not work because our ancient grids cannot handle the extra loads without massive investment. But in a post peak world there will be no savings to invest in a new grid.

You seem to have a very superficial view of the subject. While that may be fine if you want to make a few bucks speculating on alternative energy and the brains to sell out as others jump on the bandwagon, it is not useful if you want to discover real solutions. Let me note that I have not said that we have an energy problem. We have a liquid fuels problem. Most of the examples that you gave do not help us on that front.

 
At 10/24/2010 8:56 AM, Blogger VangelV said...

your comment about why trust the EIA if i don't trust the BLS is just logical fallacy masquerading as argument. i don't trust the BLS because i can see the obvious, provable error in their CPI methodology. if you have such an issue with the reserves numbers, trot it out and let's evaluate it. whose reserve numbers are you using?

I am certainly not relying on the EIA reserve numbers, which are not audited by anyone. I need no reserve numbers because all we need are the production numbers. As I wrote above, all you need to do is to plot the ratio of annual production to cumulative production against cumulative production and you get a plot that tells us about the ultimate recovery and about the depletion. Had you done any reading on the subject you would be aware of this fact. Production numbers are far more accurate and harder to hide.

By the way, it is clear that you want to believe because the problems with the reserve numbers are even more obvious than with the BLS numbers.

note: your peak oil guys have a worse track record than the EIA. campbell et al made this claim in the 7o's, 85, 91, 95, and on and on, moving the goal posts every time just like all the other malthusian hysterics.

Campbell relied on incomplete data. He never said that the peak would come in the 70s or 80s. Based on some of the data the earliest it could have come was around 1996 but if the data changed the peak could be pushed out to around 2020 or so. So far it is looking like the peak came in 2005. And let me note that the definitions keep changing. When we start to count ethanol and NGLs as oil it is obvious that you can add enough barrels to production to push out the peak two or three years. But even with those accounting games it is hard to hide reality.

 
At 10/24/2010 9:01 AM, Blogger VangelV said...

using official CPI, oil in the early 50's was $20/bbl in 2008 dollars.

So what we have is a booming economy, massive excess capacity, and a tightly controlled supply side of the market giving us a $20 a barrel price. Compare that to $100 at a time when excess capacity was very low and you see what the future will look like. You will see very high and rising prices and a much higher portion of income going to pay for our energy use.

 
At 10/24/2010 9:05 AM, Blogger VangelV said...

if one accepts (as i do and as i believe i have seen you do, though correct me if i am wrong) that inflation since 1980 has been significantly under-reported, then that price goes up?

how much?

if it's underreported 3%, then oil was $48, if it's 4% then oil was $65 etc.


I will accept this argument. But you are missing the other side of the argument. The TRC kept oil prices much higher than they would have been in a freer market because the capacity was huge in the 1950s. Given the data one could argue for oil at less than $1 without the artificial constraint on production. By 2007 demand was high enough to accept anything that the producers could pull out of the ground and the only way to ration demand was to have prices explode to the upside.

 
At 10/24/2010 11:05 AM, Blogger Bloggin' Brewskie said...

VangeIV,

Your endurance for marathon discussions never ceases to amaze me; you haven't lost your touch. Anyway, I just stumbled upon this, and have no interest in entering the discussion or even following it. Just for the record, I have read a few of your comments on this blog pertaining to the rise of China, the direction of the US, plus other subjects, and I liked what I read.

 
At 10/24/2010 12:49 PM, Blogger VangelV said...

Your endurance for marathon discussions never ceases to amaze me; you haven't lost your touch. Anyway, I just stumbled upon this, and have no interest in entering the discussion or even following it. Just for the record, I have read a few of your comments on this blog pertaining to the rise of China, the direction of the US, plus other subjects, and I liked what I read.

I am retired so I have lots of time to debate issues that I consider to be worthwhile and interesting.

 

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