Monday, June 27, 2022

The Dewdrop World is a Dewdrop World, and yet, and yet..... The Ethereal Nature of Collapse


It is said that the Japanese poet Kobayashi Issa wrote this haiku upon the death of his daughter: "The dewdrop world is a dewdrop world, and yet, and yet......." (tsuyu no yo wa tsuyu no yo nagara sari nagara). It is poetry at its best: it hints at much more than it says. Here, I start from this poem about dew being an incorporeal thing to examine how another incorporeal thing, such as money, can affect us.

 
A few days ago, I was looking again at the presentation that Nathan John Hagens produced for the Earth Day of 2021. I had watched it when it appeared, but something made me return to it. It is a long story, but the point that remained in my mind is when Nate shows a graph with a clear "Seneca" shape for the global oil production curve. That is, something that grows slowly, then declines rapidly (at minute 38 of the presentation). Later, at minute 44, he shows a similar curve for the GDP. 

 
Nate attributes the slanting forward of the curve to financial effects. My first reaction to that was that financial tricks, in themselves, do not produce oil (and can't raise the GDP, either). How can a basically non-existing thing such as money, mainly numbers stored in computer memories, affect the real world in such a way?

But, rethinking the matter, I am not sure anymore that the financial world really is an ethereal and inconsequential thing. Maybe it is the opposite. As I learn more about more things, I am always surprised by what I discover. My latest epiphany came from a talk given by Fabio Vighi, who teaches at the University of Cardiff, about a correlation between the lockdowns of 2020 and the global financial situation and, in particular, of the "REPO" market (you can find his take at this link). 

I must confess that I had no idea of what the REPO was, not even that such a thing existed. Now, I know that it stands for "Repurchase Agreements" and I think I have some idea of how it is supposed to work. Basically, it is a market where financial operators can resupply with money by borrowing it. Where does that money come from? Typically, financial firms with large pools of cash do not want to let that money sit around, so they lend it to financial institutions, banks, at low interest rates. Then, the banks will use this money to fund short-term needs. The REPO market is a short-term thing.

I am far from having assimilated the obscure mechanisms operating inside the entrails of the REPO market, but this much I can understand: it determines the cost of money. Now, connect this concept with the real economy. The economy is made out of real things: resources, materials, equipment, goods, people, and more. And everything in the economy is subjected to depreciation (a name that economists use for the thing that physicists call entropy). If you want to fight depreciation (entropy) you must expend energy. (you can do that in an open system -- in closed ones, entropy always increases, but this is not the case for the economic system.) 

So, to keep the economy running, you need energy. In order to get energy, you need energy (you probably heard the concept of "energy return on energy invested", "EROI"). But, in order to get energy to be invested, our economic system is geared in such a way that you need that non-physical thing called "money."  No money, no investments. No investments in energy, no production of energy. 

What if there is no money? Energy is not produced. Then people become very poor, and many die. Incidentally, it also happens that the rich get richer, but that's another story. Apart from the rich, the poor slide down the downward step of the curve: the Seneca Cliff. I do think that Nate is right in his interpretation: the Seneca Cliff would arrive even independently of financial factors, but financial factors can make it steeper. Money doesn't create resources (as economists are fond to say). But it can direct more resources to exploitation, making it faster. That gives people the illusion that there is more of it. 

You see how everything is connected: our fate is determined by such mysterious things as the one called the "REPO market." Then, something horrible happened in 2019: a cash crunch caused the repo rate to soar — reaching as high as 10 percent intraday on Sept. 17. It pushed up the federal funds rate to levels much higher than it was supposed to be (between 2-2.25 percent) at the time.

The interesting thing about the story is Fabio Vighi's interpretation that the lockdowns of 2020 were the result of the attempt of the powers that be to cool the REPO market and avoid a financial Seneca Cliff. If this was their aim, they succeeded spectacularly.


Note how the REPO rate went down from the Spike of September 2019 to a very low, and apparently stable, level in 2021. So, Fabio Vighi's interpretation could make sense. But can it be true? Personally, I think it might well be the case, but it is also true that correlation does not mean causation and the spike disappeared much before the lockdowns. On the other hand, the powers that be may have been scared enough that they put into practice an emergency plan they had concocted long before. Whatever the case, they will never tell us the truth. 

The thing that doesn't cease to amaze me, though, is how it is possible that humans placed themselves to me so dependent on the thing called "money."  It is an ephemeral entity that has no physical consistency.  I can also understand that small disturbances in the repo (and other money) markets can ripple through the entire system. The physicists call this the "butterfly effect" and you know how small perturbations can send huge systems tumbling down to their doom. Money has no more consistency than the morning dew. And yet, and yet......

Take a look at this incredible painting by Quentin Matsys, "The Money Lender and His Wife." painted in 1514 and representing two burghers of Antwerp, the ancestors of the people who have been playing with the REPO market in modern times. Just like Issa's poem, this painting it hints at much more than it shows, but in the opposite way. Whereas Issa hints that the world is not real, here we see it as even too real. Reality is gold coins, much more important than the book of devotions that the wife of the banker should have been looking at, but she is not. Yet, the true value of those coins is all in the minds of people, by themselves they are not worth more than dew in the morning.




You can find Nate Hagen's 2021 posts at https://www.thegreatsimplification.com/
A more recent documentary is at this link: https://www.youtube.com/watch?v=g0w3GfW240M 







 

11 comments:

  1. Hello Ugo,
    I think that the best description of the imaginary nature of money is the book "Debt - the first 5000 years" by David Graeber.
    Credit was the original money, only much later currency arrives. Credit is trust, and trust is finicky. Trust and obligations between people is the foundation of society. However, most people do business these days with people they don't know, so trust is very low in the partner and currency is used instead.

    What I observed in September 2019 was that the ECB and the other central bankes started the money-printing machine again, after having been idle since January 2019, since the "crisis was over".
    https://www.ecb.europa.eu/mopo/implement/app/html/index.en.html

    Earlier this month, we heard about the end of the Euro. On 9 June, the ECB governing council decided to stop currency printing, but had to restart again on 15 June, less than a week later. They all blamed Italy this time, but the addiction to free money is deep all over the "rich" world.
    We seem to be set to repeat 1923, a century later.

    Money and currency appear as hard cash in times of war, when trust goes down. When peace returns, people build trust and start to share favors and credit again.

    The short-sighted act of debasing a currency is a way to take future wealth and use it now. It has been done again and again throughout history, and it does work. For a brief moment it shines. Like dew on a morning grass.

    Peace,
    Göran

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  2. I would love to have someone explain to me so that I can understand how money can cause an acceleration of oil production. To me, it is either a physical system run by physical principles or not. Money isn't some magic and can't pull anything from the future. Money, in my mind, can only make the system run at full efficiency or less so. Money does not break the laws of physics and is not a time machine.

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    Replies
    1. Debt by definition is a temporal reallocator of virtual demand from the future to the present. Reallocation of virtual demand to the present enables thermodynamically unprofitable processes to be economically profitable, thus temporarily frontloading oil demand, and skewing the curve.

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    2. Indeed, and also think what it does to population growth! Pulling people from the future into the present! A fertilizer of the human race if you will. Or a dish full of sugar for yeast.

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  3. Hello BJ,

    It is not an acceleration of oil production, but keeping production running (overproduction) even when demand drops due to increased prices. The shark fin is skewed into the future.

    I want to share a story from when I lived in Russia in the 1990s. There was no trust and all business was conducted with cash transactions upfront. No credit.
    This made all business go very, very slow. The "velocity" of money was low. A lot of money is stuck in inventory, and not much is available to use for the flow of goods and services. On the other hand - no overproduction.

    Compare this with "ordinary business situation" in the western world. When I worked in a multinational corporation, we typically paid our suppliers 6-9 months after delivery.
    Our customers in turn paid 1-3 months after they got delivery.
    This credit makes it possible to continue for months or years also when a company has run out of money. The smoothness of transactions and the trust that everyone will get paid eventually makes it easy to continue to overproduce if demand is dropping.
    The Seneca shape is a consequence of this decoupling. It is a delay in the coupled system.

    Or, to be more concrete, we use money and resources now that were supposed to be saved for later, e.g. money from pension funds etc. We plunder those funds to have a life of exuberance now.

    The real wealth comes from the resources, minerals and energy and fish that we pull out of Nature, and that drives the economy. Money is just a way of communicating who owns what and how much. When the relation to demand/biocapacity breaks down, we get "business cycles" of overproduction and recessions, and on a longer term rise and fall of civilisations. A good book on this topic is Charles A Hall's "Energy and the Wealth of Nations".

    Peace,
    Goran

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  4. Debt is the mechanism by which we feed the overshoot needed for a Seneca cliff. Of course debt and money are not physical, but they modify people’s behaviour, and in this case they push them (us) to run faster, in despair, in the direction they were already running. The direction that is leading us to the cliff, that would have otherwise been just a downslope.
    The plot Ugo shows is quite clear: almost gaussian without debt, Seneca with debt. We know well from Bardi’s lessons that it’s the overshoot’s fault. I was missing the classic sentence in this context: “whenever people is in trouble, we find a way to worsen the situation” (sorry for the inaccurate citing and not remembering the source. I’m sure I’ve read it in this blog a number of times.)
    Somehow it is even worst when people has debts. Debt takes away the possibility to shrink when shrinking would have been the wiser thing to do, so the only scape is to accelerate expansion.
    Goran mentioned Graeber’s book, “Debt”. Mee too, I was thinking about it while reading the article.
    I found it to be a too long and academic book for my focus to cope with. Which is a shame as it contains plenty of interesting ideas, historical clues and thinking. Still, I took a few things from it.
    Graeber links debt crisis and people trapped into debt with historical episodes of extreme plundering, kidnapping for slavery and cruelty. The list of examples he shows is very rich as everything in his book (too much for my guts to digest, sadly). He’s an anthropologists, so he doesn’t use terms as overshoot, instability, collapse or Lokta-Volterra. The kind of behaviour he describes as feeded by debt, though, looks very much the same as the foolish race forward we need to prepare a good collapse. For completeness and state-of-the-art sake I feel this things should be studied “together”, although I understand the intellectual effort to make such far fields talk to each other.
    After so much money printing there is now too much running into the finance, senselessly, causing enormous in-comprehensive consequences on real economy as it oscillates erratically. In terms of money units, finance is orders of magnitude higher than resources-based economy. It’s crazy and a big bug of our world economic system. We will need a lot of debt-cancellation (aka, destroying money, aka reducing finance power) if we want to reduce those overshoots. It doesn’t look like it’s something in the agenda right now.

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  5. The banks lost control of the rate of interest in 2019, and their is nothing the Fed fears more then that. Think of 2020 as the shock therapy the world needed for the banks to regain control. As of 2022 i think they've lost control again and the Fed raising rates rapidly is the response to create the illusion they're still in control.

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  6. Ugo,

    If you have not read this gentleman i think you'd enjoy him:

    https://surplusenergyeconomics.wordpress.com/2022/06/24/233-understanding-inflation/

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  7. Ugo,

    One last thing to consider with regards to all the financial aid the world got for a "pandemic"

    https://youtu.be/jdeRF5KiUm0

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  8. I am toying around with the idea that the problem is that we have too many layers of "symbols" of the economy around for our own good.

    From William Gibson: Pattern Recognition

    “we have no idea, now, of who or what the inhabitants of our future might be. In that sense, we have no future. Not in the sense that our grandparents had a future, or thought they did. Fully imagined cultural futures were the luxury of another day, one in which ‘now’ was of some greater duration. For us, of course, things can change so abruptly, so violently, so profoundly, that futures like our grandparents’ have insufficient ‘now’ to stand on. We have no future because our present is too volatile.” He smiles, a version of Tom Cruise with too many teeth, and longer, but still very white. “We have only risk management. The spinning of the given moment’s scenarios. Pattern recognition.”

    Cayce blinks.

    “Do we have a past, then?” Stonestreet asks.

    “History is a best-guess narrative about what happened and when,” Bigend says, his eyes narrowing. “Who did what to whom. With what. Who won. Who lost. Who mutated. Who became extinct.”

    “The future is there,” Cayce hears herself say, “looking back at us. Trying to make sense of the fiction we will have become. And from where they are, the past behind us will look nothing at all like the past we imagine behind us now.”

    When we try to draw parallels between the symbols we create and the realities of a physical world, we are doing the one thing that humans do: Seeking patterns, trying to tie together cause and effect and our own teleological goals

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  9. The Limits of Growth and plethora of similar - have been talking about a scripted Collapse..

    The real Collapse is when the script itself collapses...


    One cannot overestimate how strong the dynamics are playing out on the ground in the Middle East - these days - ushering the birth of new reality....

    The script intends to socialise the little remaining oil in the region with societies as far as Shanghai and America - Business As Usual and the Status Quo - since 1914 when Britain invaded Iraq, for the first time...

    The new emerging dynamics, on the other hand, are leading to shrinking the beneficiary-base of the little remaining oil...

    The Middle East is embarking today on a new phase in history - where national boarders are fading out, peace will be imposed on people by Physics - and no more theatrical Arab-Israeli conflict....

    The ammunitions in storage - worldwide - manufactured since 1945 - is assumed to be used soon - Iraq comes to mind again as a theatre - god forbid.

    All the energy put in the past in ammunitions and weapons - will be pointlessly unleased - when humans falsely think War will lengthen the age of fossil fuels - a bit.

    Wrong - it will make it even shorter....


    However, "Energy cannot be looted - or it turns a curse...."

    Wailing.

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