Capital and Money

Just a quick note of clarification. What is (financial) capital? And what is money? And which part of money is cash?

'Capital'
in this context means net worth - i.e. the difference between the assets of a bank and the liabilities of the bank. I appreciate this might be confusing since it is an entirely different definition than physical capital - factories and such like.

'Cash': more precisely, 'Monetary Base' or M0. Cash or deposits of the Bank of England that can be freely convertible into cash. I refer to 'monetary base' colloquially as 'cash', because that is what it is!

'Money':
'Broad money' or M3. This definition contains bank deposits as well as 'monetary base'. Bank deposits are liabilities on the banks to pay the depositor cash on demand. I refer to 'broad money' colloquially as 'money'. Tim Joslin calls deposits 'electronic money' as far as I am aware.

N.B. Banks have two requirements governing their operation: they must have enough cash and they must have enough capital in order to lend.

Simplifications

I have come to the following draft conclusions:
a) The banking system is short of capital and it can't get it from joe public when the future outlook (and government involvement) is so uncertain
b) The non-banking system is short of cash, and can't get that cash from the banks without getting into more debt.

The banking system can be recapitalized by creating New Banks (see earlier posts), not recapitalising the old banks.

The non-banking system can get more cash but how? Printing money and some non-house inflation might be a good option.

What does a carbon price mean??

What is a good carbon tax? Well a good start would be $100/tonne of CO2.
What does a carbon tax of $100/tonne CO2 (10c/kgCO2) actually mean??

Let's relate it to some other quantities:
Petrol has a 2.3kg of CO2/litre or 10.47kg CO2/gallon
So the tax adds 23c to a litre of petrol or $1.05 to a gallon of 'gas'

Crude oil has a carbon content of 0.43 metric tons CO2/barrel [http://www.epa.gov/grnpower/pubs/calcmeth.htm]. So the tax adds $43 per barrel of oil.

In electricity, the average carbon footprint is around 0.5kg CO2/kWh (0.4kg for gas 1.0kg for coal). So this tax adds 4c/kWh to gas electricity and about 10c/kWh to coal electricity.

How much revenue would this tax gather? If we each emit 20tonnes CO2 (US data) then this would make $2000 per person per year. This money could be spent by the government, used to reduce other taxes or used to reduce the government deficit. If that falls to 10tonnes, there would be $1000 per person per year.

If we say have a £50/tCO2 tax, this would at present make £500 per person, £500x60m=£30,000m=£30bn in total.

By comparison, here are the tax takes in 2006/7 (From http://www.hm-treasury.gov.uk/d/bud08_chapterc.pdf )
Income tax: £147.8bn NIC: £87.3bn VAT: £77.4bn Corporation tax £44.8bn

So a carbon tax at this level could replace approximately 40% of VAT.

A profitable supermarket versus a profitable bank

This post just follows up from the last where I compared a bank to a supermarket which retains it's earnings. There is an important difference between the two, which helps to clarify the point that has been made.

As far as I can see, the difference between an earnings retained Sainsburys (if excess profit-as-cash isn't given back to shareholders but retained, say in a vault) and the desert-island bank - is that Sainsburys sucks in cash; whereas the desert island bank has an outstanding /obligation to receive cash/ which may or not be covered by any 'real' cash existing in the system (it is conceivable that there is not enough cash & deposits in the system to substitute for cash). Bank deposits /can /substitute for cash (until all the deposits are used up) but in this thought-experiment world, there can be a retained obligation for the guy to supply something (cash) which he can't get from anywhere since it does not exist outside the banks and the central banks. In that case there will be large amount of unrequited demand for cash (the debt obligation).

There appears to be only a few ways that cash can be got into the non-bank system, to supply the outstanding obligation. The main options are if the cash in the bank or central bank is used to buy up real assets. Presumably if the bank(-owners) have market power then they would be able to enforce as low cash-price for the assets in exchange for the outstanding debts (in other words there will be a fall in asset prices). In other words, the removal of the outstanding debt obligation /does not have to be /in the form of a default; it could be that the bank invests in property directly; or that the earnings are distributed to shareholders, who themselves invest in property. However, the bankruptcy choice is /more likely/ if asset values fall (and if the decision rest primarily with the debtor) because bankruptcy transforms the obligation to hand over the now-low-value asset rather than a costly cash-obligation.

Thus deleveraging will cause a fall in asset values and either
a) a settlement of the outstanding debt due to the banks or the shareholders of the bank physically buying real assets in exchange for cash
b) default and the exact same process taking place, except that the banks get less for their money

in the same way that in an upturn the reverse is true (leveraging is accompanied by increasing asset prices and low default rates).

I'm not sure of the real world relevance of this primordial example but it does perhaps emphasize that giving banks cash in exchange for assets will not solve the problem, because the key is the cash shortage in the real economy and not within the banks.

Is Banking A Ponzi Scheme?

A common argument* (to the effect that banking is a Ponzi scheme) is considered below**

[* Note: The argument considered is the one (imperfectly expressed) below. There may be other arguments claiming that banking in general, or in certain circumstances, is a Ponzi scheme, which may be true, but are not considered here.]

[** Second Note: I'm no longer sure that the argument is false. Although 'Ponzi scheme' is pretty imprecise word. The aspect I'm not sure about is that banks may have a monopoly over 'created' money and there may be the potential for a sort of 'short squeeze' on bank deposits/cash.]

When the rate of interest charged by banks on loans is greater than that charged on deposits, does banking constitute some sort of Ponzi scheme? Here is the argument:

Imagine a desert island consisting of one guy and a bank.

There is a certain amount of cash in a desert island economy (lets say £100) and it belongs to the bank. This is helpful because then the bank needs capital and liquidity to make loans and the guy wants some money. Let's say that banks need to have both capital (net assets) of £100 and liquidity (cash) of £100 in order to loan £1000 (both a liquidity requirement of 10% and a capital requirement of 10%).

So the bank on a desert island has £100 in cash. Through the wonders of fractional reserve electronic banking it can lend someone £1000 as an electronic deposit at an interest rate of (say) 10% per year. So long the guy doesn't want to withdraw this money in cash (aha the bank has only £100 in cash, so that would be impossible!) then the bank can create a deposit of £1000 and a outstanding loan of £1000. Let's say the deposit pays 5% per year from the bank to the guy and the loan pays 10% per year from the guy to the bank.

This guy is stupid and does nothing with his deposits. After a year, the deposit in the bank expands to £1050 and the loan outstanding amount expands to £1100.

The bank wants the principal plus interest back (£1100). But the guy has only £1050 of 'money' (deposits). In fact, since in our thought-experiment world, outside the bank there is only £1050 of money in total in the economy! So when all the debts are canceled by the deposits the bank is still owed £50. Money conservation (so the argument goes) implies that there is not enough money to pay back the bank, because amounts outstanding on the loan increase faster than outstanding amounts on the deposits!

Hence, banking requires an ever increasing amount of new money created to pay back the old.
So someone has to default. More debt is required to keep the thing going!! A Ponzi scheme!!

This is a very simple argument. However, is it true?

Is it true for any profitable institution? Say a supermarket? A supermarket makes profit - more money comes in than goes out. What does it do with the profit? Is it recycled, or do all the bank notes always end up with the supermarket? Usually the profit is either distributed to shareholders or kept as assets on the supermarket vault. Does any profitable institution eventually suck the whole economy dry of money? Or is that money usually given back to shareholders or used to buy real assets?

Is it the same with the bank? Can't the desert island bank just pay back it's shareholders, or buy some real estate. In this example, the profits from the rest of the economy are ploughed back to the bank, and the bank gets richer.

So in the original situation, the bank uses it's £50 profit to buy the guy's garage (in the open market), paying off his debt. Then there are no outstanding debts. Of course, since the bank made some profit at the small guys expense, the garage ownership got transferred from the small guy to the bank. The bank has ended up one garage richer and the guy has ended up one garage poorer. The bank makes the new asset cancel the existing debt obligation.

Now let's say that the man is poor, with no garages or other assets to sell. In that case he goes bankrupt and defaults because he does not have anything to pay back the bank. The bank has to write off the asset and the bank loses the excess asset that it thought it had.

So what happens depends on whether there are assets to transfer in exchange for the debt. But there is no 'money conservation problem'. There is only a default problem if the poor guy has nothing to sell to the bank, in which case the poor chap is bust. Otherwise the bank gets more stuff (not money).


----------------------

Let's introduce growth into the economy.

Let's now say that the guy is a builder; he started off with one house with garage; however this time he does not just sit on his electronic money. This builder instead transfers £1000 in electronic money (deposits) to a brick supplier who supplies bricks and the builder builds a second house plus two sheds. He sells the second house (plus shed) to the brick supplier for £1050, leaving him with a second shed worth £50.

What is the financial situation?
The brick supplier starts with zero, and then received £1000 of deposits (in exchange for the bricks). This grows into £1050 of deposits (in the bank), and then is paid back to the builder leaving £0.

The builder starts with £0, gets a £1000 deposits from the bank in exchange for £1000 of debt. He pays £1000 of deposits to the brick supplier. After 1 year he receives £1050 of deposits back from the brick supplier. He then has £1050 of deposits and £1100 of debt. He uses the £1050 deposits to pay off £1050 of debt, leaving himself with £50 of debt (ie obligations to the bank). He then sells the second shed to the bank for £50 in cash. He deposits the £50 cash at the bank, paying off the deposit. The final situation is exactly the same as before, except that the bank now has a shed.

This is productive economic growth and is not a problem, albeit one where the product of the growth goes to the bank in exchange for finance.

There is no Ponzi scheme. There is a certain amount of financialization - transfer of assets to the financial sector, but no shortage of money.

The mistake is to see the obligations to the bank - and in particular the remaining obligation £50 to the bank as being a bit of 'negative money'. It is not. It is an obligation to the bank. This obligation can be paid back with any sort of asset, not necessarily a bank deposit or cash. The bank creates a net obligation to itself of £50 through it's hard-nosed practice of charging more interest on its loans than it donates on its deposit (and - we might add - it has a lot of sometimes free implicit government support). But it does not induce a money shortage. It just achieves, at the end, more of the assets in the economy to itself in exchange for being profitable.

Powering India from the Rajastan Desert

How much solar could be got from the Indian desert?

Well, the 'Great Indian Desert' is 200,000km2. [ http://en.wikipedia.org/wiki/Thar_Desert ]
Let's conservatively assume 10W/m2 (10MW/km2) http://www.withouthotair.com That makes 2000GW or 1kW for 2billion people. So India can power it's existing energy consumption from the Thar desert, even with 2billion people ; but it can't power an american (10kW/person) level of consumption from this source.

Powering China from the Gobi Desert

Just thought I'd do some calculations specifically about the Gobi desert.

[The tone of this post has changed slightly from "wow china has a lot of people" to "wow there's lots of space in the Gobi, we can power the world from up there"; to "wow it's bitingly cold up there".... :)]

The Gobi is Northerly, high up and is dry in Summer. It's cold and snow-laden in winter however. It has an area of around 500,000 square miles (1,300,000 square km). [Source: http://tinyurl.com/d2t37m ]

[ http://en.wikipedia.org/wiki/Gobi_desert ]
Can we do Solar here? The temperature in winter seems to be cold. Around -15 to -25 Celsius. There might be a problem with water pipes involved in Concentrated Solar Power freezing. Even the mean annual temperature seems to be quite low - around zero e.g. at Sivantse (-2.5C) or Ulaanbaatar (3C).

So it's not clear that we can do CSP on the Gobi plateau. Maybe we should ask a (Chinese) engineer? You could try using anti-freeze as a coolant but mirrors and pipes are probably going to be unpleasant and expensive to erect in biting -20C to -30C temperatures and strong Siberian winds.

Using (hopefully cold-resistant) photovoltaics might be a better plan.
[ http://www.withouthotair.com ]
Let's say (generously) they achieve 5W/m2 [Similar to Bavarian Solar Park]

Let's say that 1million square km can be used. Then the Gobi can provide 5,000GW. That's about one third of total world energy consumption and 5kW for 1 billion people.

But it's still a bit chilly up there. And PV is likely to be expensive, (remember you've got to pay for the systems integration, not just the panels).

What about wind? 2W/m2, (assume only 0.5 million square km - if it's mountainous or even hilly then the valleys are less useful), 1000GW = 1kW per person for a billion people. Maybe not the whole story, but a significant input to China's energy consumption. It's high up in UlanBator and very windy.

Surely therefore wind (cheap; can be done now) is the one to go for? Wind is notoriously intermittent but my guess is that the Gobi is big enough and continental wind currents reliable enough to give some assurity.

My conclusion from this post is:

a) If renewables are reasonably feasible on the Gobi then they could power a large fraction (wind) or all (solar) of China's energy consumption.
b) However, the economic costs and engineering difficulties in the Gobi should not be underestimated, specifically the Siberian conditions (freezing temperatures, biting winds, windchill in the -40s permafrost?).
c) Wind seems the best option (can deal with mountainous terrain without huge costs), and (by carpetting every hill and plateau in the Gobi) could make a contribution of about 1000GW to China's energy needs
d) If Solar is possible up there, then Solar can power all of China, but I'm sceptical about the total systems costs of doing so at present,

Is a 'Renewables Only' View US-Centric?

It will be difficult for China and India to live off their own renewables

David Mackay has written in detail about the question 'Can Britain live off its own renewables' in his new book (http://www.withouthotair.com).

The broad answer to this question is that to make an impact renewable energy sources need to be 'country sized' and Britain does not really have 'country sized' areas to devote to energy generation, except perhaps offshore in the Atlantic or in foreign far-flung deserts (and even then there remain formidable technical, political and economic barriers).

Renewable energy sources have a power density around 1-5Watts per square metre. To achieve 5000Watts per person requires1000-5000-square metres per person. To power the entire population requires 50,000-300,000km2 of land (between one fifth and all the land in Britain).

Here are some interesting figures for other countries:

Country__Population__Area (km2)_Density(km-2)_Land pp (m2)

UK_______60,776,238_____242,900___________246________4000
China_1,323,324,000___9,596,961___________138________7250
India_1,103,371,000___3,287,263___________336________3000
----------------------------------------------------------------
USA_____301,140,000___9,629,091____________31_______32000
World_6,733,164,238_148,940,000____________45_______22000


Broadly speaking, this suggests that it will be difficult for China and India to live off their own renewables. Asia is where the future of the global economy (and of future emissions growth) lies. Of course, we see that for US (and in the future for the world in total) this constraint is not as important; but this shouldn't distract us from the need to find a solution that can be adopted in Asia too.

This the view that renewables are the whole answer may be somewhat US centric.
For reasonably local alternatives to coal in USA, China and India it may be that 'renewables' may be only part of the answer. Achieving a cost of electricity lower than coal must be our number one objective, but fundamentally we need an energy source that will suit India and China too.

The joys of Open Office and Zotero! (but save in MS Word .doc format using bookmarks for Zotero references)

Just a quick update about my favorite formats to use!

I've previously posted about the joys of (free, open source, easy to use) OpenOffice Writer over the dreaded (expensive, commercial, horrible) Microsoft Word; and the joys of (free, open source, easy to use) Zotero over the dreaded (expensive, commercial, horrible) Endnote.

However, the .doc format is, however, ubiquitous and if you start passing round .odt people get upset. But you don't need to use Microsoft Word in order to save in Word format! Open Office can save in Microsoft Word format (and PDF, Latex and MediaWiki for that matter)! You can also still use Zotero.

The particular referencing convention I tend to use is Author-Date (Harvard Reference Format 1) which stores the references as Endnotes, and I format using Bookmarks. Bookmarks are the format for use in word documents.

Comments: Zotero has an annoying habit of going back to Reference Marks when you click the set document preferences button. You need to ensure you stay on bookmarks if you do this. Zotero is fairly stable, but occasionally there are problems. It's best to backup your work regularly anyway.

What level of concern about climate change is justified? Part One.

This post is about the motivation for this blog. So it's an important post. Perhaps this post should have come at the start. Anyway, diving in... what are the key facts of the matter about climate change?

Firstly, we know there is an important natural greenhouse effect on Earth. The sun, which is hot (at an effective temperature of 5000C) emits electromagnetic radiation at a high energy (high frequency; low wavelength - mostly in the visible and ultra-violet spectra). The Earth, which is warm (about 14C) re-emits electromagnetic radiation mostly at low energies (in the infrared spectra). Some of this infra red radiation is absorbed by certain gases in the atmosphere (water vapour and carbon dioxide) and then re-radiated. Half of this re-radiating heat radiation goes back down to earth, leading to a higher equilibrium surface temperature. We can easily calculate what the temperature of the earth would be without greenhouse gases - about minus 15Celsius. So we know that the temperature of the Earth is about 30Celsius higher than it would otherwise be, due to the effect of these gases. It seems that water vapour and carbon dioxide are the two most important of these gases, although other gases such as methane are also important.

Water vapour is the most important component of the greenhouse effect, but the concentration of water vapour in the atmosphere depends on temperature. The second most important gas carbon dioxide had an atmospheric concentration of about 280 parts per million by volume (ppmv) before human industrialisation (and after the ice ages where it dropped to 180 ppmv).

The most basic climate model w0uld suggest that a 100% effective greenhouse would raise (absolute) temperatures by 2^(1/4) or about 20%*250K=50 Celsius. This can be compared to the observed temperature increase of about 30 Celsius.

Simple models (similar to those of Arrhenius) suggest that the doubling of carbon dioxide concentrations from 280 to 560ppmv would raise global average temperatures by approximately 5C. Complex (General Circulation) models, and an analysis of the forcings in the ice ages (see previous post) suggest an average temperature rise of 3C for a doubling of CO2 concentrations, but with a probability range between about 1.2C - 6C (although there is non-zero chance of temperature rises above the maximum in this range).

Whilst there are arguments why the temperature might be less than the 3C, there are also arguments why it might be higher than this. How do observations of the whole world compare?

Next post I will discuss the observational record and what the estimates of climate sensitivity mean for us.

The question of concern

To start with, I'll ask a question, one suggested by friend of mine:

Why be alarmed about climate change?

There is a question about this question. Is this the right question to ask? 'Alarmed' is an emotional word, imbued with connotations of panic. Even in the case of a major war; it is likely that public address announcments would ask us not to be alarmed, but instead to behave calmly and rationally. In other words, even in the event of a likely catastophe, alarm might be an inappropriate response. The argumentative strategy of the 'straw man' (or 'paper tiger') is to attack a opponent position which is falsely weak.

'Alarm' (or it's cognate 'alarmism') is also a word which is used as a group label in climate change debating circles and labels are notoriously divisive. So instead I'll ask a different question:

Why be concerned about climate change?

Now it's possible that my choice of words is also viewed as political and contentious. I could try to ask a purely scientific question. But I'm looking for a choice of words that hints at emotion (in the sense of moving someone) without being itself emotive.

However, I think the question could be contrued as being a leading one. So I could ask the question 'should we be concerned about climate change?'. This feels like it is a leading question in the direction of thew answer 'no'. It also has the contentious word 'should'. However, it is at least roughly neutral, but could be made more so by replacing 'should' by a question of 'justification'. So this is where I shall start my next discussion.

Is concern about climate change justified?

But this question could be answered 'of course - we should have some concern about climate change', but the level of concern would be a long way down the list of those concerns which are viewed as relevant. So perhaps a better question is:

What level of concern about climate change is justified?

I think this is a useful question. It's still emotional to some extent; using the word 'concern' is a personal rather than an objective measure; however 'justified' is an objective sounding word.