*Currency Wars*

by on November 21, 2011 at 6:25 pm in Books, Economics, History | Permalink

The author is James Rickards and the subtitle is The Making of the Next Global Crisis.  This book is rapidly proving influential, though you will not see it reviewed in all of the major mainstream outlets.  The so-called “Right” is walking away from “1990s WSJ Op-Ed CPI bias what’s so bad about poverty anyway?” narrative and looking for alternatives.  This is one of them, excerpt:

In sum, Chaisson shows how highly complex systems such as civilizations require exponentially greater energy inputs to grow, while Tainter shows how those civilizations come to produce negative outputs in exchange for the inputs and eventually collapse.  Money serves as an input-output measure applicable to a Chaisson model because it is a form of stored energy.  Capital and currency markets are powerful complex systems nested within the larger Tainter model of civilization.  As society becomes more complex, it requires exponentially greater amounts of money for support.  At some point productivity and taxation can no longer sustain society, and elites attempt to cheat the input process with credit, leverage, debasement and other forms of pseudomoney that facilitate rent seeking over production.  These methods work for a brief period before the illusion of debt-fueled pseudogrowth is overtaken by the reality of lost wealth amid growing income inequality.

I don’t understand the monetary theory lying behind this claim, nor do I agree with the fascination with gold.  The more important point is that if you dismiss this book as “unlikely to be influential” you are not in touch with the broader intellectual currents of our time.

1 Tom Church November 21, 2011 at 6:32 pm

Prof. Cowen,

What stock do you put in the Boskin Commission? Do you believe the CPI overstates inflation?

Meyer and Sullivan took a lot of flak for reducing the estimated CPI bias from their thirty-year study of trends in income and consumption poverty. If the CPI truly does overstate inflation, they’re one of the few authors I’ve encountered who calibrated their measurements properly and thus deserve praise. But if it doesn’t, then they’re being too optimistic. Should authors factor in overstated inflation?

2 JWatts November 21, 2011 at 6:46 pm

“In sum, Chaisson shows how highly complex systems such as civilizations require exponentially greater energy inputs to grow”

Chaisson shows that current industrialized countries consume on the order of 4.5 kW per person and that technologist countries (United States, Canada, Bahrain, and Qatar) consume about 12kW per person and that astronauts consume roughly 60kW per naut. If all of humanity were to reach the level of astronauts we would actually heat up the Earth’s surface temperature. This would be unfortunate.

Of course, the odds of that seem pretty remote. we don’t have that much fuel for one and there’s not that much in space to attract a substantial portion of 7 billion people for another.

3 Peter Schaeffer November 21, 2011 at 9:03 pm

“In sum, Chaisson shows how highly complex systems such as civilizations require exponentially greater energy inputs to grow”

Really?

From “Per capita energy consumption has declined in the United States” (http://knowledgeproblem.com/2010/05/17/per-capita-energy-consumption-has-declined-in-the-united-states/)

“A few moments on the internet turns up data from the U.S. Energy Information Administration on per capita energy use: per capita energy use was 332 million BTU in the United States in 1981, 327 million BTU in 2008, and 310 million BTU in 2009.”

See also “http://epb.lbl.gov/homepages/rick_diamond/LBNL55011-trends.pdf” (Changing Trends: A Brief History of the US Household Consumption of
Energy, Water, Food, Beverages and Tobacco). U.S. per-capita energy consumption hasn’t grown since the 1960s.

4 Law Schools Lie November 22, 2011 at 1:43 am

That would be a much more convincing set of statistics if our heavy industry and dirty work hadn’t been shipped to the Third World.

5 Peter Schaeffer November 22, 2011 at 10:33 pm

LSL,

i would agree that the U.S. is a net importer of energy via trade. Not just oil, gas, and coal imports. Those are obvious. The U.S. is also a net importer of energy via manufactured goods and (presumably) services. However, the question is how much does this change the overall picture.

One source “ENERGY CONTENT OF WORLD TRADE” (http://www.edf.org/sites/default/files/11297_Energy-Content-of-World-Trade.pdf) suggests that the U.S. was net importing 1.32 MBD of oil equivalent via trade in 2000.

U.S. oil consumption was 19.699 MBD in 2000 and total U.S. energy consumption was 50.87 MBD (on an oil equivalent basis). Adding 1.32 MBD via embedded energy increases total energy consumption by 2.56%. Not much really.

See http://www.eia.gov/totalenergy/data/annual/ for all of the general energy statistics.

Another source gives a higher estimate of net U.S. energy imports. Of course, the date (2008) is later as well. See “Carbon cuts by developed countries cancelled out by imported goods” (http://www.guardian.co.uk/environment/datablog/2011/apr/28/carbon-emissions-imports-exports-trade)

This source suggests that the U.S. imported (net) 479.18 million tons (metric) of CO2 in 2008. Given that the U.S. directly emitted 5,866 million tons (metric) of CO2, embedded imports would raise this by 8.2%. Note that this is on a CO2 basis, not energy.

Adding 8.2% to U.S. energy consumption in 2009, raises it from 310 MMBTU per-capita to 335 MMBTU or roughly the same level as 1981. Given that per-capita GDP has risen significantly (61% from 1980 to 2009) we can see that the energy intensiveness of the economy has materially declined even allowing from embedded energy imports.

It should be noted that the 8.2% number is presumably real, but misleading. China is a notoriously poor energy consumer. In other words, the same manufactured goods require significantly less energy to produce in the U.S. versus China.

6 Steve W from Ford November 24, 2011 at 1:43 am

Do you contend that by Civilization the author meant the USA? I’d guess that we would all agree that the energy use per capita of “civilization” is increasing even if that of the US is declining a bit.

7 James Hass November 21, 2011 at 6:51 pm

Restating ibn Khaldun.

8 cthorm November 21, 2011 at 6:51 pm

“if you dismiss this book as “unlikely to be influential” you are not in touch with the broader intellectual currents of our time.”

By “broader intellectual currents of our time” do you mean abject paranoia, sensationalism and junk science? Because that is what comes to mind whenever I read some drivel about comparing civilization to a heat engine or other physics concept, as if the whole of human existence and activity is predestined because of the law of entropy. Hogwash.

9 Dan Dostal November 21, 2011 at 9:16 pm

I imagined you slam your fist on the table as I read “hogwash”. Us kids will get off your lawn, don’t worry.

10 Crenellations November 21, 2011 at 9:45 pm

Pshaw.

11 Tomas Talpa November 21, 2011 at 7:02 pm

“I don’t understand the monetary theory lying behind this claim, nor do I agree with the fascination with gold.”
I don’t want to put words into professor Cowen mouth, but is it possible to read this sentence in any other way then “I don’t understand it, but I do not agree with it”?

12 Ted M November 21, 2011 at 7:25 pm

“I have understood the monetary theory; it is dumb, but I am too polite to say so” is how I read it…in much the same way I might say I don’t understand the flat-earthers out there.

13 Matthew C. November 22, 2011 at 9:27 am

Yes, as opposed to the current monetary theory and system which is “not dumb” but just requires ZIRP forever, continuous bailouts, quantitative easing in ever larger quantities and secret 16 trillion dollar bailouts to TBTF banks as far as the eye can see. . .

14 david November 21, 2011 at 7:28 pm

You don’t have to understand something to disagree with it. Indeed, if you don’t understand something and agree with it, you’ve made a grievous error along the way: agreement requires full comprehension. Disagreement only requires observing some mistake in a crucial step of the argument; then the rest can be discarded.

15 tarbrush November 21, 2011 at 7:53 pm

“Disagreement only requires observing some mistake”

Disagreement can happen faster than rational thought.

16 JWatts November 21, 2011 at 8:00 pm

“agreement requires full comprehension. ”

Wow, that’s a really high standard. I’m assuming you don’t cast many votes or install much computer software, EULA’s and politicians being what they are.

17 King Cynic November 21, 2011 at 7:08 pm

Regrettably there is a big difference between “likely to be influential” (which this could be) and “deserves to be influential” (which this fails miserably at).

18 Highgamma November 21, 2011 at 7:09 pm

The statement, “At some point productivity and taxation can no longer sustain society, and elites attempt to cheat the input process with credit, leverage, debasement and other forms of pseudomoney that facilitate rent seeking over production.” sounds Marxist to me.

19 Will November 21, 2011 at 7:50 pm

I assume you’re writing that with a dismissive tone. But history seems to suggest Marx was a fairly accurate diagnostician and just over-extended himself into predicting the future.

Then again maybe you’re commenting on the cyclic nature of these matters. In which case, I advocate Buddhism.

20 Highgamma November 21, 2011 at 8:46 pm

Not dismissive at all. He predicted that the financial sector would grow as a % of GDP (not his words). I just find it interesting that “disaster economics” always seems to sound like Marx.

21 Dan Dostal November 21, 2011 at 9:18 pm

Only because it includes obviously malfunctioning capitalism I would think.

22 tarbrush November 22, 2011 at 6:04 am

Marx foretold that massive malfunctions are an inherent part of capitalism.

Also, the use of the credit system to transfer the west’s wealth from taxpayers to bankes/bondholders seems a new a novel update of what Marx called ‘primitive accumulation’.

23 dirk November 21, 2011 at 7:39 pm

It may become popular, but I’m not sure that jumping on a bandwagon is the same thing as “influential”. Sounds to me like another movie about vampires.

24 JL November 21, 2011 at 7:50 pm

Have you seen Roubini’s twitter feed today? He is, suffice it to say, not of the view that Rickards is worth reading.

25 tarbrush November 21, 2011 at 7:56 pm

Ha ha
“For study of Great Depression & Gold Standard read Winnie the Pooh rather than Rickards’ Currency Wars “

26 Vagabundus November 22, 2011 at 6:44 pm

Roubini has not read the book. The origin of their disagreement stems from a CNBC appearance.
http://video.cnbc.com/gallery/?video=1652514816

27 Peter Schaeffer November 23, 2011 at 2:59 am

V,

Thank you for the link. Watching the video was quite revealing. I loved the Rickards line about “deflation can be a very positive thing”. By contrast, Roubini argues “we need a nominal and real depreciation of the dollar” and accuses (correctly) of advocating “depression economics”.

It’s the debate we (and the world) have about the gold standard in the 1930s. One side (Rickards) advocated ever more radical deflation to stay on the gold standard. The other side believed that abandoning the gold standard would enable reflation and growth. Of course, they were right.

For reasons I have don’t fully understand, the gold standard has an undying grip on some people’s mind. Not the 19th century gold standard of course, but its modern incarnations in the form of the Euro or the fixed dollar / RMB exchange rate. This very weird idea of fixed exchange rates (or eliminating currencies in the case of the Euro) somehow appeals to cosmopolitan elites and austerians. Go figure.

28 Vagabundus November 23, 2011 at 7:11 pm

The Rickards’ contention is Churchill’s instance of returning the post WWI price of gold that caused the deflation. Churchill later said it was his greatest mistake.

29 8 November 21, 2011 at 8:01 pm

It’s just the marginal utility curve. Money debasement, debt increases, etc. are used to cover up the decline in productivity.

30 Master of None November 21, 2011 at 8:06 pm

I read that excerpt and think, “WE NEED LOTS MORE MONEY IN THE SYSTEM”

Does the “Right” read the same and come to a different conclusion, or are we all coming up Sumner?

31 8 November 21, 2011 at 8:08 pm

“We need lots more money in the system” is the response of elites who do not want to change the system.

32 TGGP November 21, 2011 at 11:03 pm

I am not an elite and I do want to change they system (abolish the Federal Reserve, break up the U.S into a minimum of 50 states and preferably city states, with minimal governments and possibly seasteads to spur experimentaiton/innovation in governance) and I agree with Sumner on monetary policy in the current situation.

33 8 November 22, 2011 at 1:45 am

On a global basis, the U.S. electorate qualifies as the elite.

34 Vagabundus November 22, 2011 at 6:47 pm

You haven’t read the book either. “WE NEED LOTS MORE MONEY IN THE SYSTEM” is the opposite reaction of what the author intends.

35 NAME REDACTED November 21, 2011 at 8:26 pm

The reason for gold is that its incredibly hard to inflate the supply.

36 Dan Dostal November 21, 2011 at 9:24 pm

Perhaps in the objective sense. But in an economic sense it’s relatively easy with enough purchasing power.

1. Purchase gold.
2. Horde gold until it is considered outside of the market and is removed from supply/demand.
3. Re-introduce the gold quickly, maybe even at undervalued prices.

This happened many times in the 19th century, though not necessarily with intent. The problem with gold is that people assume it’s value is based on the objective amount found on Earth’s surface. Instead it is a market like any other and obeys the subjective supply/demand of the people that make up the market. Or do you think the price of gold only rises because the Dollar is dropping?

37 Max W November 21, 2011 at 11:18 pm

gold has been on a bull run for more than 10 years. until 2008, the demand for gold was mostly commodity investors seeking returns. but the fear of inflation has begun puling in the common folks. not to mention gold is outperforming stocks by 23% YTD. and if the ECB starts printing, i think its safe to assume the Germans will dive heavily into precious metals. the specter of Weimar Germany weighs heavily on their minds. i very much doubt theyll let themselves be caught unawares the second time around. combine that with the heavy investment by the people of all classes in China who are also desperately seeking safe havens for their wealth, and you have the makings of gold hitting $2500 per ozt easily. in fact, id be surprised if it doesnt break $2000 before the end of the year.

and im confused about your point on gold. what exactly is it? yes gold is a commodity. it was once used primarily in jewelry, but now utlized in industries as well, particularly electronics. the reason people are stocking up on gold is because they believe it will be re-monetized. i dont see how thats a far out idea.

38 Matthew C. November 22, 2011 at 10:06 am

Of course it is a far-out idea. It means that the free lunch provided by a government that spends in excess of 1/4 of GDP will be coming to an end, along with Wall Street’s 20% rake of profits and the entire “island ecosystem” of academia propped up by boundless largess from Washington directly and via the student loan debt peonage system. Is it any wonder that mainstream economists hate gold?!

39 Max W November 22, 2011 at 10:36 pm

i suspect economists as a whole hate the idea of precious metals as money because it makes their profession pretty much obsolete. if fiat currencies and central banks are both done away with, then the need for forecasters predicting government actions instantly vanishes. the choices governments have are hollowed done to just one – be honest about their financial situation.

unfortunately, as long as governments can tax, they will always be able to secure SOME form of credit in the market. there is no steadier stream of revenue than tax receipts.

40 Bill November 21, 2011 at 8:27 pm

Follow the Yellow Brick Road

Follow the Yellow Brick Road.

Next week you will recommend the Wizard of Oz.

41 Bill November 21, 2011 at 8:34 pm

By the way, this guy goes through scenarios like Putin demanding gold as payment, precipitating crises. Never asks what happens to Russia’s oil exports when that happens, but if you assume something and play a game from there on, without questioning the assumption, this is what you get.

42 Frank November 21, 2011 at 11:16 pm

Crazy, certifiably:

“As society becomes more complex, it requires exponentially greater amounts of money for support. At some point productivity and taxation can no longer sustain society, and elites attempt to cheat the input process with credit, leverage, debasement and other forms of pseudomoney that facilitate rent seeking over production.”

43 GlibFighter November 22, 2011 at 12:42 am

“The more important point is that if you dismiss this book as ‘unlikely to be influential’ you are not in touch with the broader intellectual currents of our time.” Umm, no. Gallup reported, close to the 200th anniversary of Darwin’s birth, that only 39% of Americans “believe in the theory of evolution.” By the standards that Tyler has set, someone who dismissed such cretinous thinking as nothing more than being reflective of (a large number of seriously) undeveloped minds would stand accused of being isolated from cutting-edge science.

44 Nigel November 22, 2011 at 5:20 am

“Money serves as an input-output measure applicable to a Chaisson model because it is a form of stored energy…”

The ‘broad intellectual currents of our time’ seem to require an ignorance of basic physics, along with evolution denial.

45 Matthew C. November 22, 2011 at 9:56 am

Apparently, mainstream economics believes that printing up more currency units far in excess of economic growth doesn’t cause inflation. I’ll take Rickards POV on that one over the intellectual decendants of Von Havenstein. . .

46 The Hat of the Three-Toed Man-Baby November 27, 2011 at 3:38 pm

“Mainstream” economics believes no such thing, you incredible retard.

47 anon November 22, 2011 at 9:51 am

Fix the government and both the monetary system and the study of monetary systems will fix themselves. Otherwise enjoy living in the age of mainstream crackpots (BTW, TC is a mainstream crack pot).

48 Matthew C. November 22, 2011 at 9:53 am

The “fascination with gold” is that it is a currency that can’t be devalued into oblivion by the printing press. . . Not complicated, really.

49 JWatts November 22, 2011 at 11:46 am

Exactly. While gold has numerous, well recognized flaws, for the most part it’s ability to store value is out of the reach of short sited politicians and bankers. It remains a poor investment in good economic times, but is a good investment when times are bad. And times are bad.

50 Mario November 22, 2011 at 3:46 pm

It is entirely possible to use gold as a store of value without using it as a currency. Better, in fact, because you aren’t simultaneously undermining the economy with rapid deflation. I think Tyler was referring to the instrumental use of gold, not gold as a commodity, when he disagreed.

51 JWatts November 22, 2011 at 11:47 am

Sorry, that should be “short sighted”

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