Wednesday, February 27, 2008

Deneen Update

I have four midterms tomorrow, and reading Deneen and responding, as well as my other posts, is probably not the best use of my time, but I need the mental break and challenge.

Deneen is talking about stagflation, which I have been railing about for almost two months now. He, however, chalks it up to a fundamental flaw of the modern democratic-capitalist system, which is devoid of personal responsibility, or even the desire for personal responsibility.

He brings up the usual peak oil shenanigans.
closing at about $950 (and today jumping to $960); and oil yesterday closed above $100 bbl., a figure that we are likely to regard as the new bottom. During the day oil broke the $102 bbl. level, nearly reaching the all-time inflation-adjusted high of $103.76, reached in 1980 in the wake of the Iranian revolution and the OPEC oil embargo. We should notice that our flirtation with this all time high takes place in the backdrop of relative stability and peace on the international front: there are no major disruptions in the major oil producing areas and the world is on course to produce its current all-time high level of 87 million barrels a year. Quite simply, worldwide demand is absorbing every spare drop of oil, and there is considerable evidence that the major suppliers are unable to produce at levels above the current output, while also intimating that a number of the major fields - such as Cantarell in Mexico - are going into rapid and irreversible decline. All told, Mr. Market was telling us that things are going to continue to get more expensive and that we will have less wealth to afford them.

There are two sides to this. First, demand is up from almost everywhere, especially China and India. Second, although production may be on track for record production this year, going forward the increasing nationalization and mismanagement of oil companies will have an effect. This is priced into the value of oil.

I would point you to this article in The Economist.
"Oil keeps getting more expensive—but not because it is running out...Yet the fact that not enough oil is coming out of the ground does not mean not enough of it is there...The biggest impediment is political. Governments in almost all oil-rich countries, from Ecuador to Kazakhstan, are trying to win a greater share of the industry's bumper profits. That is natural enough, but they often deter private investment or exclude it altogether. The world's oil supply would increase markedly if Exxon Mobil and Royal Dutch Shell had freer access to Russia, Venezuela and Iran. In short, the world is facing not peak oil, but a pinnacle of nationalism."

Deneen then goes on to talk about stagflation.
The very solution to one particular and vicious problem will only contribute to an increase in the cost of goods, meaning that we will all pay the price - and a hefty one - for the foolish lending practices of our "trusts" and profligate choices of our fellow "consumers."

Actually, the effects of rising good costs impact you only to the extent that you spend. Therefore, the more profligate among us will be impacted the most. Taking the most extreme and unrealistic example, somebody who saves all their money is not effected by price increases at all.

As Aristotle told us long ago, democracy is properly understood as a form of self-rule, in which citizens rule and are ruled in turn. However, democracy easily devolves into a kind of contractual form of tyranny, in which - barring our opportunity to rule over everyone else - we rather embrace the notion that democracy is best defined as "doing as one likes." Democracy, that is, goes from being a demanding form of government calling for extensive civic virtues to a lax and tyrannically-inclined form of government in which what is desired above all is the absence of rule. We are now reaping the results of "doing as we like," and the paramount question of our time is whether liberal democracy will prove capable of surviving its own worst instincts.

Prices have an amazing effect. They spur and lower consumption of goods. At some point, higher prices will discourage consumption. People will consume less out of their own self-interest, not from some theoretical awareness of the Good or Virtue. The system will self-correct. It will be painful, but correcting the economy does not require moral fortitude.

The problem we are facing is from the desire to ameliorate suffering. The Fed lowered rates to spur an economy they thought was on the verge of collapse because of the housing crisis. I was far more sanguine about the effects, and felt that the drastic, emergency rate cut was dangerous and foolhardy. However, trying to avoid pain forever is a huge mistake. The Fed's policies may be representative of some sort of moral failure, ie the illusion that there can be no pain in the world, but I think the Feds took incorrect action out of ignorance of the actual economic milieu and misunderstanding of the consequences of their actions than an ethical or moral failing.


vital core said...

I would point you to this article in The Economist.
"Oil keeps getting more expensive—but not because it is running out...

Sheese. This is the same rag that predicted a coming world "awash in oil" back when oil was near $10/bbl. And yet you credit the predictions of the Economist? Why not look to somebody with a track record, like Simmons, a guy who in the heady days of $10 oil still predicted what we see today by looking at production data. We simply don't have the dicoveries.

Nobody knows exactly how much oil Saudi has. But: we do know that they are not replacing their current giants. We do know the world has been consuming more oil than finding since the '80s. We do know the cost of drilling is exploding due to lack of easy oil, without results. So it's not a bad guess we will look back at 2005 as the rough peak.

And oil is not some trivial commodity like bananas. It is the foundation of the entire modern economy. It won't be a trivial thing to conserve via high prices. This won't happen politically. Rather, we will see rationing and potentially even war. Oil feeds the wolf.

FLG said...

You can dismiss the Economist if you want, but I don't. Nevertheless, I am much more sanguine about the power of high prices to switch us off oil. It will be slow and painful, but it will happen. Everybody that a lack of tin back in the early 20th century was going to be the end of the world.

See my Jan 21st post called Deneen is talkin' silly again.

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