The Return of Depression Economics

I’ve been reading “The Return of Depression Economics” by Paul Krugman.  It is an attempt to explain the financial crash of 2008 and why efforts by the Fed and Treasury were largely ineffective.

The book goes into the shadow banking system, the products created by investment banks that largely parallel the depositor banking system but avoids the regulatory aspects.  Paul makes the argument that the crash began as a currency crisis which precipitated a “run on the bank” of the shadow banking system.

He goes on to explain that most of the tools the Fed has are meant to shore up confidence in the depositor banking system. The shadow banking system is not at all backed by the Fed.  When the US Govt came up with special efforts, such as TARP and quantitative easing to add money into the economy, their efforts were thwarted by private investors pulling out money.

The author clearly explains that we are not heading into a depression. A lot of the monetary policy controls the Fed has become ineffective, we are exposed to the economic risks that existed during the era of the great depression.

Anyone interested in economics should read this book.  It provides an interesting explanation of what occurred in 2008.  It also lays out the risks we face in the current economy and those risks are largely not being addressed by the government.

Our Economy and Peak Oil

In 1956 Dr Hubbert developed a model to predict the point at which US oil would reach the peak output and begin to decline. His theory is referred to as “Peak Oil” or “Hubbert’s Peak Oil”. Hubbert predicted that domestic oil production would begin to decline between 1965 and 1970. US Domestic oil production peaked in 1970. Of course at the time everyone denied that it had peaked. To read more on peak oil on wikipedia: Hubbert Peak Oil

Even Dick Cheney, our beloved vice-president has acknowledged the problem of peak oil: Dick Cheney on Peak Oil

Researchers have taken his model and used it to estimate the world peak oil. Pessimistic estimates put world peak oil somewhere between 2008 and 2011. Optimistic estimates put world peak oil somewhere around 2020 and 2030.

Now think about this. Essentially we areeither just at peak oil or within 10 years we will be at that point. Our entire economy is based on oil, this includes more than heating our homes and transportation. It also include the manufacture of most plastics, cosmetics and polymers! The effort to move our economy to another energy source and to re-develop our manufacturing base will be an enormous effort!!

The high gas prices we see today are only the beginning. Gas will continue to fluctuate, we may even see $2 a gallon for a short period of time. However for the near term $3 to $4 a gallon will be more the norm. Add some more instability in the oil producing regions and $5 to $6 for a gallon of gas is possible.

What I find aggravating is the Politicians and Corporate America choose to remain blissfully ignorant of the pending problem. By the time they wake up to the problem, itwill be us, the individuals, who will be hurt.