Question time on the FM website, episode 2

Ask any question about geopolitics, broadly defined. We’ll attempt to answer it.   Links to other episodes appear below.

Questions received so far:

  1. What is the future for the Chinese currency (RMB) vs. the US dollar?
  2. Where do you see Peak Oil going in the near future?  Will the doomsters be wrong?
  3. Why is the US government debauching the dollar?  Are they taking Lenin’s advice?
  4. Is US intelligence taking an active part in undermining Europe’s stability in order to protect the US economy?
  5. Do any of the Republican candidates have the creativity and drive to get the US out of the current slow downward spiral?
  6. What about the the peer-reviewed literature predicting peak oil – such as that by Simmons, Deffeyes, Blanchard?
  7. Will the Saudi royal family rule be overthrown? And if it is overthrown, how might our special oil relationships change?
  8. Which presidential candidate either Republican or Democrat do you feel will be the best for leading this nation?

Previous episodes

Earlier episodes were big successes. My thanks to all who participated!

39 thoughts on “Question time on the FM website, episode 2

    1. The future of the RMB/USD will be determined by politics more than economics for the near and medium term futures. Those wired into senior levels of the CCP can make useful forecasts; so the rest of us can only guess. Beware those making confident forecasts; they’re probably feather merchantsn ( no matter what their titles and credentials).

      My guess: the Chinese government will continue to manage a gradual rise of RMB/USD — perhaps 5%/year — allowing Chinese businesses to adjust, to the benefit of both nations.

      Where is equilibrium? Perhaps up 1/3. Perhaps even more. That is difficult to estimate.

    2. All the time Chinese inflation runs ahead of the US the CNY is strengthening if it’s nominal rate remains pegged. If they go for full convertibility c2015 (as they seem to be hinting) then it would not surprise me to see it unpeg then fall (CNY being above fair value by then) however a lot of things can happen between now and then so their really is no obvious way to predict it. Keep an eye an the trade balance and Macau casinos (the major laundering route) for clues

    3. Chinese inflation > US inflation is equivalent to a rising RMD/USD. Another way to express this is that the pressures from a currency below equilibrium value (purchasing power parity is one way to measure this) get expressed by a combination of movement in currency and inflation.

      China has long benefited from an undervalued currency — resulting from their manipulation. The inevitable result: inflation. Which the PBoC now fights, while they let the RMB slowly rise. These dynamics shape much of China’s macroeconomics today. And not only China’s. China is rapidly losing US market share in low end manufactured goods (eg, toys, clothing, furniture, doorways). Hence their (largely successful) efforts to capture high growth emerging markets (eg, solar).

    1. The great Mitigations report by Robert Hirsh et al (2005) showed that estimates of geological peaking ranged from 1 – 20+ years in the future. Six years later we unfortunately know little more about world reserves. Of course those forecasts of geo peaking in <6 years were wrong (consumption is unchanged, but excess capacity is probably aprox 4 million b/day).

      Current estimates cluster in the 2-5 year range. Changes in economic growth and efficiency have surprisingly small effect on peaking over such a short time horizon.

      What comes after peaking will shape the world, as I discussed in a post earlier this week. How long a plateau? Fast or slow decline? Howvfast and effectively do governments respond? Other than China, major governments are doing little or nothing to prepare. Not even research (gathering data, building econometric and geological models) or planning. Future generations will say that we were stupid. And they will be correct.

    2. Your second question is about the doomsters.

      1. The moderate doomsters forecast a 10-20 year long recession or depression. That is possible from a combination of a rapid decline AND poor government response (slow, ineffective, or outright harmful).
      2. The extreme doomsters forecast the end of life as we know it, the end of civilization, or the end of humanity. During my entire adult life I have heard doomsters predict The End. Atomic or biological war. Pandemics, like AIDS. Pollution. Now peak oil. Humanity has proven itself adaptable and resilient, and I believe we will successfully manage tomorrow’s challenges. And their predictions about the effects of peak oil range from bogus to absurd.

      For more information see:

      1. Peak Oil Doomsters debunked, end of civilization called off
      2. Let’s “hope and pray that Hirsch is wrong”, 10 January 2009
  1. In recent history, rosy estimates of large potential reserves have been wrong. All the easy oil has already been found and tapped. Several major regional supplies are declinging, such as the North Sea and US reserves. Roger Blanchard explains here (“Drill baby drill — a reality check“, Energy Bulletin, 28 December 2008) that “exaggerated claims of future US oil production potential prevent us from doing what is necessary to restructure our society to deal with a world that will have substantially less oil.”

    Further, Blanchard explains the global outlook here: “9 in 10 Americans blame Wall Street and Big Oil for spiking gas prices“, ThinkProgresss, 10 May 2011. I don’t want to cut and paste the entire dealie, but it is worth a careful read. Blanchard begins by stating:

    “A fundamental reason why the price of oil has been rising in recent years, which you certainly won’t hear from the media, is that global production has largely been flat. In 2005 global total liquid hydrocarbons (TLHs) production was 84.595 million barrels/day (mb/d) and in 2010 it was only 86.711 mb/d. That is a rise of only 2.50% over the course of 5 years. The production increase is actually deceptive because what has been increasing is largely natural gas liquids and ethanol production, both of which have much lower energy densities than crude oil.”

    And there is the German military’s very recent appraisal of peak oil here.

    1. While interesting, none of this gives anything like an answer to the questions being discussed. Is peaking in one year or twenty? How long will be the plateau? How fast the decline rate? How well will we adapt?

      Re: the German Army’s report
      I cannot imagine why anyone would think these reports (this is just one of many) about the military deserve any special attention. Military officiers have no relevant expertise in this field.

  2. Why is the US following Lenin’s advice and weakening the US dollar?

    “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency”

    1. This is a widespread concern. It is mostly wrong, on several levels.

      (1) Relying on Lenin for insight about free market systems is a category FAIL, showing confusion about the whole Marxist gig.

      (2) There is no record that Lenin said it.

      (3) The first mention of it is in Keynes The Economic Consequences of the Peace (1919). He is talking about inflation.

      Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

      Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

      Keynes was, as usual, prescient about the danger of inflation (and hyperinflation) in the years after WWI. But when the time came to repeg the British pound to gold, he saw that its pre-WWI value not longer matched the UK’s circumstances. But on 25 April 1925 Winston Churchill, Chancellor of the Exchequer, announced that Britain would return to the gold standard at the pre-war rate. This was a point of pride to British imperialists, and that pride led to fifty years of deindustrialization and currency crises. Eventually the pound hit a low in June 1976. Broke, Britain recieved at $3.9 B loan from the IMF, the largest ever IMF loan to that point. For more about this episode in history, see this presentation by Brad deLong (Prof Economics, Berkeley).

      Similarly our trade deficit shows that the US circumstances have changed, and the value of the US dollar is too high. We can change it by deflation — brutal and painful — or devaluation. If done right, slowly — allowing gradual adjustment.

  3. While Wall Street is increasingly multi-national or at least less nationally loyal than the past, do you think US intelligence plays an active part in undermining Euro stability to protect the US economy?

    Would we expect that Chinese interests operate covertly on Wall St/FED – not to undermine but actually mitigate our leaders craziness (protecting both out interests in spite of us).

  4. Do you think that any of the current slate of Republican candidates has the creativity and drive to get the US out of the current slow downward spiral?

    1. That’s a subtle question. Let’s back up a step. Are “creativity and drive” the qualities that distinguish successful from unsuccessful Presidents? There is probably an expert literature on this, with which I am totally unfamiliar — which should be consulted by anyone looking for a serious answer. But I’ll venture some thoughts.

      1. Most candidates running for President have great drive.
      2. Although Americans are ga-ga about creativity, it is not an essential quality for a President and perhaps not even relevant.
      3. We need a skilled and bold political engineer, one who undertstands the American people and has a feel for the tides of history. Like the Founders, Lincoln and FDR.
  5. Regarding Peak Oil:

    I see. So, because you are not familiar enough with the peer reviewed literature–such as Simmons, Deffeyes, Blanchard, plus the continually revised downward estimates of the EIA–all of us have to be in the “I don’t know what’s really going on with peak oil” phase or even the “We really don’t know anything about when peak oil will occur” phase.

    There is a way to know much more than claiming not to know enough to make a judgement here.

    Look at the flat flat production growth explained by Blanchard (and verified by the EIA). Then, look at the principle of Huubert’s Peak, which occurs in single wells, oil fields and regions.Finally, compare those production patterns to the pattern of total global production. See anything similar?

    By the way, Deffeyes picked the peak in 2005. Here’s a review of his book. And, don’t think the German army didn’t consult with experts in developing their report.

    1. Short answer: wrong on all counts.

      About the FM website

      There are 24 posts on the FM website about peak oil, part of the 51 discussing energy (listed on the Reference Page Peak Oil and Energy – FM articles). They cite a wide range of expert literature, listed on the Reference Page Peak oil and energy – studies and reports. They have been reposted or linked to by many energy-related websiets (Energy Bulliten, Peak Oil news, TOD, Oil Price). Now let’s explain some basics you appear to be unfamilar with.

      Peaking

      Oil production can peak for a time due to flat demand, deliberate underproduction (political peaking), or geological peaking. We have not hit geological peaking, as there is an estimated 4 million b/d of excess capacity. We have a demand plateau, just as we did in the previous price cycle during the 1979 – 1993 period. That was not geological peaking, nor is this. Which is why no major expert or institution has declared the arrival of peak oil.

      I have explained this in several posts:

      Oil prices rose from $1.80 in 1970 to $36.83 in 1980 (Arabian Light oil price, as posted at Ras Tanura). Reacting to that, global oil consumption peaked in 1979 at 66,048 million barrels/day, then dropped by 14% through 1983 — reaching the 1979 peak again only after 14 years, in 1993 (see the BP Statistical Review for details). During that period the global economy increased at roughly 3%, slightly below the post-WWII average (using IMF data). A fourteen percent decline in consumption!

      Military articles about peak oil

      My point was NOT that they did not consult experts. Rather that it is, in a broad sense, a secondary source. There are many fine works by experts and expert organizatons. There is no need to rely on military reports, which have a long history of using these to generate threats and boost their budgets. They are not a reliable source, IMO.

    2. “the peer reviewed literature {about peak oil} – such as Simmons, Deffeyes, Blanchard”

      This is a false statement, and quite revealing about the Peak Oil community (and the people who rely upon it for information).

      Simmons’ work was not-peer reviewed. Good thing too, since so much of it was bogus. Not just in the years-later-we-see-he-was-wrong, but in the at-the-time-obviously-wrong sense. That the Peak Oil community did not see this shows its dysfuntionality — the cause of its many many false predictions (e.g., the “cliff event” colllapse of US natural gas production). The predictions in his 2006 magnum opus have been proven false (or perhaps premature) — Twilght in the Desert – the Coming Saudi Oil Shock). For more about Simmons see these posts.

      Deffeyes has done much good work. His two books are IMO an excellent intro to the subject. But Google Scholar shows no peer-reviewed articles by him.

      Olivier J. Blanchard is a Prof Economics at MIT, and hence an expert on many peak-oil related issues. But he is not a geologist or petro engineer, and hence not a source of information about when peaking will occur. BTW, this paper of his is IMO important: “The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?”, Olivier J. Blanchard and,Jordi Gali, NBER, September 2007:

      We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.

    3. I’d like to add that while peer-reviewed literature is the best source for insight, one or a few articles cannot be taken as truth. You need dozens over the course of years to really start excepting them because of a couple things:

      1. Experiments are usually very limited in scope and cannot be extrapolated to the wider picture with great accuracy
      2. Peer review is the first step in verification. To be confident, the experiment and results need to be reproduced by another group.

      The smaller the scope of a project the easier it is to believe in the results. Large, global experiments are often difficult to draw accurate, repeatable results and are often easy to exaggerate.

    4. I agree on all points. But the problem with peak oil goes deeper than that. There is little funding, so there is little research in the mainstream journals. What we get are books and articles operating outside the peer-reviewed system. Much of it circulating in the Peak Oil Community, most of which acts as cheer-leaders — with little criticism even of obviously daft analysis. Experts with strong track records — like Robert Hirsch, co-author of Mitigations — should be leading large multi-disciplinary teams of experts, gathering all the available data (now scattered widely), running sophisticated geological and econometric models. That would give us a sound basis to plan for peak oil. Instead they are calculating on the back of envelopes while priceless time runs out.

      For more about the state of peak oil research see:

      1. Poor peak oil research, more evidence of a serious problem with America’s vision, 5 May 2009
      2. If humanity is unprepared for Peak Oil, here are some of the guilty people, 11 May 2010
      3. A full list at the Reference Page Peak Oil and Energy – FM articles</li?
  6. how deep are the underground levels of the pentagon? is there a rough equivalence between a person’s knowledge of how deep those levels are and their security clearance?
    .
    .
    FM reply: A creative question! I have not a clue to either answer.

    1. I do believe the Princes will be overthrown in any foreseeable time frame (guessing). They were at risk during the 1983-2003 bear market in oil prices, but the resurgence of both oil prices and funo Islam has strengthen their hold on power.

      Al Qarda might have been a serious threat, but — guessing — their aggressive and effective response was one of the (perhaps the largest) factor defanging AQ. The US takes the credit, which suits the Princes well since AQ is popular among many elements of the Kingdom.

      For monarchies, every succession is an existential crises, about which we in the West can only guess at. That is the next potential danger, probably skipping a generation to new leaders — always difficult. And we know little about the policy preference of the grandkids.

    1. The difference between bad and worse is IMO than between good and better. I believe we have the former, not the latter.

      I voted for Romney in the 2008 primaries, and Obama in the election (as my posts from 2008 show, with expectations that Obama would be an empty suit, which he has met). I believe Romney now has abandoned his principals to gain the crazy Right’s support (much as Humphrey abandoned his in 1968). The other GOP candidates are worse.

      So it looks like we might have four more years of Mr. Empty Suit, the equivalent of Bush Jr’s fouth term. With the crazy Right howling about our foreign Islamic anarchist socialistic President. Another few more orbits around the drain for America.

      On the other hand, these are early days in the election, despite the news media’s mad eagerness to declare the election a done deal.

    1. I suggest skepticism when reading this. Mai Yamani is in essence an exiled aristocrat, and probably not representative of Saudi society. We do not know how much she even knows about the current beliefs of the various elements of the Saudi people. The restive Shiites living over the oil, but getting a small fraction of it’s income. The many Saudi fundamentalists?

      “The Saudi royals want to both resist and buy off these demands for political change. But the problem is that they do not grasp what their people are demanding.”

      Does she? Exiles get space in the western media if they mirror our views, which are not Saidu views.

  7. You bring up a good point about exiles (and/or English-speaking spokespersons) from Madame Chiang Kai-shek to Ahmed Chalabi mirroring our views and getting press. After all, we’ve gotten snookered and continue to get snookered.

    However, Yamani is probably still pretty plugged into the royals and she might be just right about Arab/Saudi youth, as that isn’t just sourced from one’s network but available for perusing online — by anyone.

    1. “However, Yamani is probably still pretty plugged into the royals and she might be just right about Arab/Saudi youth, as that isn’t just sourced from one’s network but available for perusing online …”

      This is probably not correct, for several reasons.

      (1) she m/b plugged into the princes. But she is explicity talking about wider Saudi society, not the aristocracy. And we have no reason to believe she knows much about the. A self-exiled princess who has adopted a foreign culture is among the least reliable sources about the masses back home.

      (2). Surfing the Internet is another way to become misinformed about current views.

      1. Online one sees the views of the most vocal of the online community — which might be unrepresentative of the overall society.
      2. Surfing is just confirmation bias in action. People read websites that tend to match their worldview, and are ignorant of others. Ask someone reading Wired about the hottest websites among Evangelicals.
      3. Surfing is the opposite of polling. A small sample carefully designed to be representative gives a more accurate picture than hours of random surfing.
  8. In *every* statistical sampling, there’s bias. Just like you get a biased sampling of opinions on your site. Don’t forget that online sampling would have been an accurate portrayal of what culminated in Tahrir Square.

    Re Yamani, I don’t get the impression of an idle aristocrat in exile, but someone who seems to be serious about her work: {her website}

    In London, you certainly get plenty of idle aristocrats from various previously colonized lands, but she doesn’t seem to be the “type.”

    1. (1). I compared people drawing conclusions from impressions gathered from “the Internet.”. I don’t see the relevance of noting that scientific surveys have margins of error (which you call “bias”). The first has errors of radically larger magnitude than the latter.

      (2). What’s this about “idle” aristocrats? Are you responding by mistake here to a conversation held elsewhere? Nobody here said or even implied she is “idle.” Aristocrat is a class distinction and tells us nothing about the personal characteristics of individuals. Most stereotypes about class differences are bogus; all should be regarded skeptically.

  9. OK, another question: Will Pakistan fall to radical Islamists? And then will Pakistan’s nukes be used against us or our allies?

    1. That’s another of the big lies supporting the Af-Pak War. Like most of these lies, it is preposterous, but convinced people by convincing words from our geopolitical experts (most of whom know little about Pakistan).

      This particular fable has near-zero supporting evidence.

      Note: Pakistan’s nukes might be used against India (not exactly a US ally). That’s a low probability scenario, but low is > zero.

    1. Because it is asserted with near-zero supporting basis, in defiance of a large body of contrary evidence. For details see a few of the posts about Pakistan on the FM website:

      1. The US tells Pakistan to pick a side. Or else…
      2. Why are we fighting in Pakistan?, 14 May 2009
      3. Juan Cole describes A Century of Frenzy over the North-West Frontier, 27 September 2009
      4. Are we defending the Pakistan of our dreams, or the real thing?, 7 October 2009 — Esp see the poll (#3)

      More evidence: back in 2008-2009 our serious geopol experts warned that the jihadists were about to take Pakistan soon, sweeping down from the NW frontier. Two+ years later that story has died from the news. No evidence of this happening, and that lie no longer serves to support the war. So the war’s advocates move on to new stories, each in turn believed by the gullible American public.

  10. @ Fabius, I trust then A Q Khan wasn’t too much of problem for you?
    .
    .
    FM note: He refers to Abdul Qadeer Khan. From Britannica:

    Abdul Qadeer Khan, also known as A.Q. Khan (born April 1, 1936, Bhopal, India), Pakistani engineer, a key figure in Pakistan’s nuclear weapons program who was also involved for decades in a black market of nuclear technology and know-how whereby uranium-enrichment centrifuges, nuclear warhead designs, missiles, and expertise were sold or traded to Iran, North Korea, Libya, and possibly other countries.

    … In the early 1980s Pakistan acquired from China the blueprints of a nuclear weapon that used a uranium implosion design that the Chinese had successfully tested in 1966. It is generally believed that the Chinese tested a derivative design for the Pakistanis on May 26, 1990.

    Khan, having satisfied Pakistan’s needs for its own uranium weapon, began in the mid-1980s to create front companies in Dubayy, Malaysia, and elsewhere, and through these entities he covertly sold or traded centrifuges, components, designs, and expertise in an extensive black-market network. The customers included Iran, which went on to build a uranium-enrichment complex based on the Pakistani model. Khan visited North Korea at least 13 times and is suspected of having transferred enrichment technology to that country. (His laboratory also developed Pakistan’s Ghauri ballistic missile with help from the North Koreans.)

    … On Jan. 31, 2004, Khan was arrested for transferring nuclear technology to other countries.

    1. Is there some meaning to that statement, is it just dumb snark? Perhaps you believe that how to build nukes would remain a super-duper-secret — known only to the US, Russia, UK, France, China, Israel, and India?

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