BAESI workshop 6 December 2008

1. BAESI workshop 6 December 2008 5. The Black Swan: Global recession/depression

2. Many strategies have been proposed to mitigate (“solve”) or adapt to the climatic and environmental changes we face. Most are possible with current technology. However, we face very difficult challenges. Challenge #1: Energy (consumption, production, & efficiency) An enormously complex problem that not enough national leaders understand. (or are willing to admit that they understand)

3. USA U.S. energy use = 111 / 525 = 21% of global energy use 1.11 x 1020 joules = 111 exajoules = 3.5 terawatts (TW) 2007 Energy Consumption World exa = 1018 5.25 x 1020 joules = 525 exajoules (EJ) Power: 1 watt (W) = 1 joule/sec 1 year = 3.154 x 107 sec 5.25 x 1020 J tera = 1012 = 1.66 x 1013 W = 16.6 terawatts (TW) 3.154 x 107 sec U.S. population = 0.305B / 6.73B = 4.5% of global population

4. The average American’s “energy footprint” U.S. consumption rate: 3. 5 terawatts = 11,500 watts / person Current U.S. population: 305 million is equivalent to ~115 100-watt light bulbs that are ALWAYS ON. “…shine your light in the darkness…” An unaided, healthy adult produces ~100 watts of power (output). Thus, an average American “exploits” ~115 “energy slaves.”

5. Modern complex societies, and humanity’s population boom of the last century, sprang from inexpensive, easy-to-find petroleum—our favorite “energy slaves.” Those energy slaves are dead or dying. How will modern societies respond to a drop in the number of available energy slaves?

6. Merrill Lynch Bear Stearns Freddie Mac AIG Fannie Mae Lehman Brothers Washington Mutual Challenge #2: The economy All mitigation and adaptation strategies rely on funding for R&D, investment capital, infrastructure changes, etc. Will our national finances be healthy enough to fund those strategies? We’re a wealthy country that could redirect funds as needed....right?

7. It’s a global recession: NASDAQ Switz UK China Russia Brazil India Germany France Japan Australia Dow Jones all charts for last 12 months; from bloomberg.com We have entered a severe recession that may last for years, and may develop into a depression.

8. Fractional-reserve banking Banks keep on hand (“in reserve”) some fraction of the value of their bank notes and demand deposits. They invest the balance in “interest-earning assets” but still are obligated to pay all bank notes and demand deposits upon demand. This practice is ubiquitous in modern banking (world-wide).

9. How fractional-reserve banking “works” If the fractional reserve is set at 20%, Bank A is required to keep only $20 on hand, and can lend out the other $80. Someone deposits $100 cash in Bank A.

10. M0: The sum of all physical currency, plus accounts at the central bank that can be exchanged for physical currency. M1: M0 + "checking" or "current" accounts M2: M1 + most savings accounts, money market accounts, and small-denomination time deposits (CDs < $100,000). M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements. 2007 1998 So money includes both currency and “paper money.” How much of it is paper money? 1

11. Pay it off? $49.6 trillion total credit market debt 350 350 $14.2 trillion GDP 349.5% = = Default on it? as of 3/31/2008 300 300 “Print and pay” Total U.S. credit market debt as a % of GDP Text 250 250 200 200 GLOBAL CREDITCRUNCH 150 150 1925 1935 1945 1955 1965 1975 1985 1995 2005

12. • Bailout of banks and financial system (as of 28 Nov 08) $7.76 trillion TOTAL: $7.52 trillion U.S. government expenditure cost adjusted for inflation original cost • Marshall Plan Cost • Louisiana Purchase • Race to the Moon • S&L Crisis • Korean War • The New Deal • Invasion of Iraq • Vietnam War • NASA • World War II $13 billion $15 million $36 billion $153 billion $54 billion $32 billion (est.) $551 billion $111 billion $417 billion $288 billion $115 billion $217 billion $237 billion $256 billion $454 billion $500 billion $597 billion $698 billion $851 billion $3600 billion http://www.ritholtz.com/blog/2008/11/big-bailouts-bigger-bucks/ http://www.bloomberg.com/apps/data?pid=avimage&iid=i0YrUuvkygWs

13. Zimbabwe, 2006-2008 Weimar Republic, 1923 * 3,250,000% inflation/month * Prices doubled every 2 days * 100,000,000,000,000 Mark bill * Prices double every 17 days * 231,000,000% annual inflation * Currency redenominated in Aug 2008 by removing 10 zeroes! Deflation: A decrease in the price of goods and services, usually linked to a decline of money in circulation. “negative growth;” sworn enemy of the Fed Res Bank, Treasury, and FIRE sector Disinflation: A decline in the rate of inflation. Hyperinflation: Extreme inflation (minimally a 4-digit annual % rise); the currency becomes worthless. set stage for Nazi takeover

14. Recession, depression, and great depression all refer to a widespread, multi-month decline in real GDP, real income, employment, industrial production, and wholesale-retail sales. Recession: Peak-to-trough decline in real GDP ≤10%. Depression: Peak-to-trough decline in real GDP >10%. Great Depression: Peak-to-trough decline in real GDP >25%. Notes: 1. Prior to WWII, all such events were called depressions. The euphemism recession was applied after WWII to avoid memories of the Great Depression of the 1930s. 2. Everywhere on this page, real = inflation adjusted 3. GDP = consumption + gross investment + government spending + (exports − imports)

15. Aug–Oct 08: Sell-offs of paper assets and cash hoarding suggest deflation, but this is probably a disinflationary event. (“Ka-”) hyperinflation inflationary recession Poom Ka- disinflation Over-leveraging, credit stupidity, and obscene debt/GDP ratio almost guarantees hyperinflationary depression in our near future. (“Poom”). see iTulip.com for more on Ka-Poom etc.; also see http://www.shadowstats.com/article/292 U.S. has been in an inflationary recession since at least early 2008, probably since late 2006. Schematic graph of how events may unfold rate of inflation time

16. U.S. Population Distribution by Age, 1920–2005 U.S. Census Bureau statistics

17. Social Security? Medicare? Debt payoff? Asset selloff? http://www.census.gov/ipc/www/idbacc.html

18. The Baltic Dry Index (BDI) A number issued daily by the London-based Baltic Exchange an average of the Baltic Supramax, Panamax, and Capesize indices The Baltic asks brokers around the world how much it would cost to book various cargoes of raw materials on various routes—e.g., 150,000 tons of iron ore from Australia to China, or 1,000,000 tons of rice from Bangkok to Tokyo. Container ships carrying finished goods are intentionally excluded. The answers are melded into the BDI, which provides (1) the price of moving raw materials by sea, (2) an accurate barometer of the volume of global trade, and (3) a good “leading economic indicator” because consumption of raw materials of production such as coal, iron, oil, rice, and grain is a good predictor of future economic activity. Unlike stock and bond markets, payroll and unemployment figures, and GDP estimates, the BDI is not speculative: people don't book freighters unless they have cargo to move.

19. Baltic Dry Index (BDI) 10,000 5,000 2004 2000 2002 2004 1998–2002: not much variation

20. 684 / 11,973 = 5.7% On 21 May 2008, the BDI was 11,973 World trade is frozen. The BDI includes ships in three size classes Cape (too big for Panama Canal) Panamax (max size that fits in Panama Canal) Supramax (next smallest) The BDI does NOT include container ships (finished goods), and thus is a future economic indicator. 2 Dec 08

21. A few recommended sources Chris Martenson’s Crash Course www.chrismartenson.com The Oil Drum www.theoildrum.com Richard’s site (associated w/SJSU course) http://sjsugeology.org/sedlock/168.html