Serial Bubbles?

     Eric Janszen of iTuilip.com has made a splash in the mainstream media with his Harper's Magazine cover story on the "The Next Bubble." His thesis is that a new tidal wave of investment will shortly roll toward "infrastructure and alternative energy." By this Janszen means a revived nuclear power push, refurbishing highways, bridges, and tunnels, "high-speed rail," solar and wind power, and alternative liquid fuels. This coming boom, he says, would be driven by political fear about energy security.

      On the face of it, Janszen's proposition seems more promising and intelligent than the previous engineered boom in suburban houses. But it raises a lot of questions and flags.

     For one thing, the term "bubble" suggests something more like a financial Chinese fire drill than actual productive activity. It would be an excellent thing if Americans invested in a restored passenger rail system. But if it were merely a scheme for big banks to issue innovative new securities for gigantic fees without actually getting any trains running -- well that would be in the nature of just another old-fashioned swindle, as the bundling of mortgages into securitized debt paper has proven to be.

     In other words, does Janszen make a distinction between a boom and a "bubble?" He seems to understand that the previous two bubbles in dot-coms and houses were essentially frauds that generated imaginary wealth, which sooner later evaporated off the balance sheets and out of the financial system. A boom, it seems to me, is not the same as a "bubble." While perhaps wasteful and messy, booms at least produce something of value beyond the fees paid to bankers for arranging the deployment of capital. A boom that resulted in citizens being able to take a train from Boston to Albany would produce a substantial public good. The creation by Goldman Sachs of a company on paper that never accomplished anything would be something else. This, of course, leads to a deeper question as to whether the USA is actually a serious society or just a nation of hopeless, greedy clowns? Are we even capable anymore of distinguishing between purposeful activity and the art of the grift?

     This leads to a further consideration of where the capital for "the next bubble" supposedly comes from. Janszen doesn't account for the essentially bankrupt condition of the USA. The capital that was deployed and squandered in the previous two bubbles is not there anymore to be washed, rinsed, and recycled. It's gone. It was winkled out of hundreds of pension funds, millions of individual investors, and, in terms of eventual obligations, the federal government. There is a black hole of unresolved debt where that "capital" used to be.

      Janszen's idea seems to be that the new investment comes from simple credit reflation. I don't see how this is possible while the current bubble in housing remains only fractionally "worked out." It has a long way to unwind yet, and a lot of damage to do. It will bring down banks, insurance companies, hedge funds, municipal governments, and leave a lot of individuals impoverished, literally out in the cold. As long as trillions in losses remain concealed or unresolved, the basic system for deploying capital will remain paralyzed.

      I wonder if fixing all the infrastructure for happy motoring is not an exercise in futility and another layer of tragic misinvestment. After all, it's based on the assumption that we will still be running huge numbers of cars and trucks decades ahead, and I'm not convinced that this will be possible under any circumstances. The psychology of previous investment will exert a powerful pull to throw money at our highways. It might be more realistic to think of this as a triage process -- to ask ourselves how much of this stuff do we just let go of and which parts do we actually keep. Thousands of miles of suburban commercial strip highway six-laners may not be needed at that "level of service." What becomes of them? Do we run trains down the interstates? Surely, we don't want our bridges to crumble.

       By the same token, I wonder if our investments in alternative energy will prove to be chimerical -- things wished and hoped for but impossible to achieve. My own hunch is that our notions of scale are not consistent with what reality will permit in this field. I don't believe that we will build more than a few giant wind farm installations. Rather, I believe we'll discover that wind power is only really practical on the household or extremely local basis. Ditto solar. I also doubt that we will continue to get all the necessary exotic metals needed to fabricate the hardware for these things. Along similar lines, I believe our expectations for ethanol and bio-diesel fuel production will prove to be not only disappointing but destructive to the food production sector.

    All of which is to say that an investment campaign aimed at sustaining the unsustainable by other means would end in tears. Personally, I don't think there will be a "next bubble." I think we're out of bubbles and that our current mode of life in this nation is running out of time. We're facing such an array of potential instabilities that even assuming we continue to live in an orderly society may be too much. Like every other activity in our lives, finance, too, may be in for an epochal downscaling.

   

Comments

[StephenB]

I agree. The money simply isn't or won't be there anymore for any attempt to build out infrastructure or alternate energy on a large scale.

Having said that, I do think that there exists a chance that some $ scraps may flow into the solar electric stocks in the next year or two just the same.

Others are wondering the same: http://gristmill.grist.org/story/2008/1/25/161354/981?source=biz

[LaughingAsRomeWasBurningDown]

Why the obsession with the stock market? The stock market has always seemed like one big pyramid scheme to me, as long as there are suckers with the proper combination of greed and spare change, it will bubble right along

[bud4wiser]

JK writes: “This, of course, leads to a deeper question as to whether the USA is actually a serious society or just a nation of hopeless, greedy clowns?”

Yes, indeed JK. The crucial question of our times is whether or not any “adults” are available to lead America’s child-like population toward a mature realization regarding the consumption of fossil fuels.

My perspective suggests that there is little evidence that any social matriculation will come to pass. As the past fifteen years have revealed – our nation’s highest office was held first by a man of such maturity as to entertain a women with oral sexual relations.

In response to this president’s egregious behavior the American electorate chose an impudent buffoon for their next president basing their selection on the man’s claim of divine guidance and promises to run a government without revenue.

Clearly, both of these men’s action reflects the mentality of adolescent high school boys. A review of the “cheerleading” during the State of the Union address demonstrates that sophomoric behavior is not limited to the Executive branch of this government.

No, JK, as a society, America has never “grown up” – and through its electorate has demonstrated that it prefers adolescent leaders as well. I have little doubt that the American society will continue to be “conned” and continue to seek solutions with all the maturity and sobering reflection of a sixteen-year-old.

After all – bringing the car home with the gas- gauge of “E” – is the typical way –for teenage America…… Let someone else fill the tank.

[scott]

Bubbles, bubbles, toil and troubles... Yep, we are going to continue to put band-aids on our 22+ million barrel per day 50 state energy enabled interconnectedness way of doing things, all the while, available energy shrinks because more and more of conventional energy is allocated to produce alternative energy.

I am not optimistc that alternative energy will result in net energy gains because so much of their production is conventional energy intensive. Ramping up coal production for transportation fuels for example will require that we literally move mountains, build infrastructure such as new rail lines to move the coal, infrastructure to convert it to something an automobile can burn.

Yes, we will get a dotcom type money thrown at alternative energy that will make some individuals richer but will result in a poorer America in terms of net energy. Much of what we will implement will be misallocated toward maintaining centralized 50 state energy enabled interconnectedness where it would be far more beneficial if we would move toward the goal of decentralizing our high population density areas with self sufficiency in mind.

[LaughingAsRomeWasBurningDown]

little hand's on E, you can say that again. Sounds like TMBG:

It's just a full day's drive away
It's just a full day's drive away
It's just a full day's drive away
It's just a full day's drive away

We can't fly like birds in the air
We could walk but we'd never get there

It's just a full day's drive away
It's just a full day's drive away
It's just a full day's drive away
It's just a full day's drive away

Big hand's on 120
Little hand's on E

Hey Nyquil driver
It's Nyquil driving time
Hey Nyquil driver
Get outta my lane
Get outta my way

It's just a full day's drive away
It's just a full day's drive away
It's just a full day's drive away
It's just a full day's drive away

Hey Nyquil driver
It's Nyquil driving time
Hey Nyquil driver
Get outta my lane
Get outta my way
Get outta my way

Hey Nyquil driver
It's Nyquil driving time
Hey Nyquil driver
Get outta my lane
Get outta my way
Get outta my way

-- They Might Be Giants

[FARfetched]

I'm not sure that the distinction between boom and bubble, in this context, is that important. To get to a bubble, you must first have a boom — and a boom is where the benefits come in. Like the housing bubble was first a housing boom, and the dot-bomb was first a dot-boom, an alternate energy/infrastructure bubble must be preceded by a boom.

The boom part is what's important. The dot-boom employed thousands of people, not all gainfully, but those VC-flush folks went out and bought cars, houses, furniture, computers, networking gear, on and on, pulling up the reset of the economy with them. The housing boom also employed thousands of construction workers — whether grading out a former forest that will never become a gated community can be considered "gainful employment" is debatable, but those workers spent their wages too (or sent it to Central America, to be spent there) and lifted the surrounding economies.

A boom, left to run unchecked, becomes a bubble, and that's when Bad Things Happen. But before you get to that point, what Janszen describes would again employ thousands of people to build out that infrastructure, and to manufacture (and install) the solar panels and windmills. Sure, it would help the banks — unemployed people facing foreclosure would get jobs, negotiate new payment plans, and unwind their debt. At a certain point, they'll be back to buying cars, furniture, lawn mowers, etc. When the boom inevitably becomes a bubble and pops, those solar panels, windmills, and rebuilt infrastructure will still be functional.

Would it make a difference in the long run? Probably not, but it might give people a decade of breathing room to continue readjusting their priorities.

[Uncle Remus]

JHK, I think you have most of it right - except about no more bubbles. Bubbles is all we got - so that's what we are going to get.

I would agree that there is a distinction between booms and bubbles. There will be bubbles because no one is really interested in working or producing anything tangible - only "profits".

There are significant opportunities - real tangible opportunities - in altering the energy course of this country. Even if none of the significant issues of PO & GW weren't on the table, relying on what are essentially unfriendly nations for a significant portion of our energy is just bad policy and a recipe for disaster.

[asoka]

"My own hunch is that our notions of scale are not consistent with what reality will permit in this field."

I agree on this point. Regardless of how it eventually works out, the problems would be more malleable if we could only reduce population, and and thereby reduce a burgeoning population's increasing impacts in terms of resource depletion and environmental contamination.

[asoka]

Great post this week, Jim! One of your best. Consistently good production value. Making the meltdown visible before our very eyes.

[scott]

The problem with creating an alternative energy bubble like housing or dot com's is our inability to distinguish between energy profits and financial profits. First of all the problem is capacity for growth in energy and hence everything else since it requires energy to produce everything.

In creating a bubble, our government creates excess paper wealth by making debt available for in this case energy projects specifically coal for the most part because of it's abundance and convertability to transportation fuels.

We have reached a plateau in producing conventional energy at say 84 million barrels per day, I use that number because I don't know the actual number but it is irrelevant as limits are being imposed by it's plateaulng is what is important.

Creating a bubble in alternative energy will require massive new ENERGY EXPENSES that we do not have without reallocating energy as it is currently deployed. The dollar is depreciating, I believe, as an orderly method of allocating energy globally because of the targeted nature of oils pricing in dollars. Countries that would otherwise be inclined to keep their currencies weak so that their exports will be competitive are forced to allow their currencies to appreciate to compete in energy markets.

Creating more debt will no longer translate into growth because the real currency is energy not paper. The inference is that we can ramp up coal production and end up with energy gains? It will take vast amounts of conventional energy to get from here to there and we do not have it. Since wealth is distributed from the top down, I have the expectation that those on the bottom to take the energy reallocation hit first, then of course once the bottom falls out then the rest of the country will follow.

[Cymon Dendu]

I can take a train from Boston to Albany today. I suspect JHK already knows this. What is it about the current arrangement that he finds objectionable? (Full disclosure: I have never taken a train from Boston to Albany). Just a straight question. Discuss.

Cy

[XER]

bub·ble (bbl)
n.
1. A thin, usually spherical or hemispherical film of liquid filled with air or gas: a soap bubble.
2. A globular body of air or gas formed within a liquid: air bubbles rising to the surface.
3. A pocket formed in a solid by air or gas that is trapped, as during cooling or hardening.
4.
a. The act or process of forming bubbles.
b. A sound made by or as if by the forming and bursting of bubbles.
5. Something insubstantial, groundless, or ephemeral, especially:
a. A fantastic or impracticable idea or belief; an illusion: didn't want to burst the new volunteers' bubble.
b. A speculative scheme that comes to nothing: lost money in the real estate bubble.
6. Something light or effervescent: "Maconthough terribly distressedhad to fight down a bubble of laughter" Anne Tyler.
7. A usually transparent glass or plastic dome.
8. A protective, often isolating envelope or cover: "The Secret Service will talk of tightening protection, but no President wants to live in a bubble" Anthony Lewis.

boom 1 (bm)
v. boomed, boom·ing, booms
v.intr.
1. To make a deep, resonant sound.
2. To grow, develop, or progress rapidly; flourish: Business is booming.
v.tr.
1. To utter or give forth with a deep, resonant sound: a field commander booming out orders.
2. To cause to grow or flourish; boost.
n.
1. A deep resonant sound, as of an explosion.
2. A time of economic prosperity.
3. A sudden increase, as in popularity.

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

[Holmes, I presume]

"I don't believe that we will build more than a few giant wind farm installations." -- JHK

I disagree. So companies currently doing a brisk business providing wind energy hardware and their customers are just going to suddenly lose interest in such projects? Come on. It’s not as if this stuff is vaporware.

scott, I hear what you're saying about energy being the real currency. Even so, I think that wind-based power generation capacity will continue to grow for a significant number of years still before hard limits are encountered.

[FARfetched]

I have to agree with you here, Holmes. There are already "more than a few" giant wind farms operating already. And you don't really need giant wind farms; it's just a way for power companies to cling to their centralized distribution and stay relevant.

Like JHK said, we'll be better off setting up to produce energy locally — a windmill in every yard, solar panels on every roof — and use the giant wind farms to supply becalmed areas. This is part of the reconfiguration idea I push on occasion: reconfigure suburbia as the villages they were designed to mimic in the first place; reconfigure energy production to be highly localized. The latter is important for sustainability; if you have 3KW of capacity, you'll be careful to not exceed what you have.

[John]

You said:

"It would be an excellent thing if Americans invested in a restored passenger rail system. But if it were merely a scheme for big banks to issue innovative new securities for gigantic fees without actually getting any trains running."

Well, we've had that in the United Kingdom already. Under the privatisation of the public railways by the current Labour government about 10 years ago.

The long story cut short is that a bunch of private companies and their senior management are all making huge sums of money out it all now, but the service has not improved while the rail fares have increased substantially beyond the rate of inflation, and the government is powerless to act in case the conglomerates that now run the rail companies get annoyed and simply walk away from it all.

We have even had the privatised company running the physical rails themselves go bust, and the government had to bail them out and turn them into a 'not for profit' concern. It is all one big stinking mess.

Why privatise something that was already a fully public service, completely owned by the government itself? To make some quick money of course. The government sold off the railway as a set of franchises covering different regions, to make some quick money and avoid raising taxes in the short term. The claim was that private investment would improve standards and the level of service, while reducing costs and ticket fares.

Of course, the complete opposite is true. Railways are very expensive to run - lots of rolling stock, fuel, and employees. So the new franchisees did not want to invest in any new rolling stock unless there was a guaranteed return on the investment. So the government eventually gave in, and has guaranteed above inflation fare increases and pay offs if any franchise is terminated early.

Meanwhile the train companies are trying to be more efficient, which means running less trains and squeezing more people onto them. Peak time commuting is getting worse and more expensive, not better and cheaper.

Because the franchising is based on region, it actually means that each is actually a monopoly. There is no competition and no choice. You either get on the one train that goes through your station, or you don't.

As I said fares have gone up. Which means that all the profits are going into the parent companies, and into the back pockets of the senior directors. If it had been kept public all of this mess would have been avoided, and any profits through efficiency would have come back to the government which would have been able to lower taxes, or even the rail fares themselves.

And some of the parent companies are not even British, which means that the money is now leaving the country and never coming back. So the country is becoming poorer in a way, as these multi-national conglomerates buy up franchises and then bleed it for all the money they can.

The fares are incredibly expensive at peak times. Something like 10 pounds sterling for a journey that might cost me 5 pounds in petrol. Where is the efficiency in that? And if I want to take the family of four out for the day? Nearly £50 for an hours long journey by train, compared to £10 to £20 in petrol? No wonder no one uses the railways if they can avoid it.

John

[Dr.Doom]

The hope for serial bubbles lies in the hope for yet another one. Just one more for the road, barkeep. "Time" will be called when the grids start to wobble. Nothing stops industrial progress better than lack of reliable power. I used to think the end might come in one dramatic swoop, not unlike another 9-11, but it will much more likely be a series of little things affecting the power grids, themselves maxed out and then unable to keep up with the relentless growth in demand. I'm thinking Richard Duncan is a smart fella and has our number, is just about on target.

Historian in 2150: "we think these large pillars once were used as a base for giant windmills, perhaps to mill their grains. Over in the next county, we found even larger pillars lying on their sides. Apparently, these people were preparing for an even greater harvest when events caught up to them."

[irahan]

This nation, this world is obviously
toast in a very serious way. I know mankind has over and over "overcome" but I have serious doubts about this go-round. Its to larger and to toxic of a mess even if the world would stop now and agree to work together for sensible/workable solutions. I have trouble even trying to dream of a world that individuals have functional brain cells after living on this planet for 50 years.

Its time for the second coming of Christ....(no I'm not going preach)...but it seems like the only solution that will actually work to any degree before we set the nukes on each other.

Its going to get a lot worse before it gets worse. I have enjoyed my life (for the most part) and always appreciated the privileges this nation provided. I have seen much of this evaporate over the last several years and it is not going to magically reappear. I hope I am not here to witness what some have suggested but I'm afraid I just may have that unfortunate opportunity.

My bottle of ativan and my case of beer are always in stand-by. Good luck all and please be careful in the days ahead.

[Movenonup]

irahan,

Vodka is better because it will last indefinitely. Stockpile Vodka. Get midrange priced stuff. You can drink it, trade it, it will hold it's value better than gold. Beer loses its cheer in less than a year.

A toast, because we are toast! (Clink!).

[stvo]

Every second posting or so JHK tosses out a line about the need to get a wartime-style crash program going to restore passenger rail services.

I agree but caution Cluster Fuckers not to count on the 8 big freight railways for a lot of vision about the future. They shrugged off passenger service decades ago and their expertise with it is long, long gone. CN for example recently walked away from millions of dollars worth of commuter rail business in greater Toronto. So much for vision. The biggies like BNSF and UP are so deep into the corporate/Wal-Mart economy and the fossil fuel economy that they could not climb out even under the guidance of the late Sir Edmund Hilary. Container traffic is an enormous part of their business as is coal from Wyoming, auto-racks, the military. When clusterfuck nation starts to melt down the big railways will go with it rather than become our flexible, heroic, eco-friendly saviours.

Railways (we don't call them rail"roads" in Canada, sorry) are hamstrung by conservatism much the same way that military organizations can be. The internal tension between forces that advocate adapting and those that advocate tradition tend to favour the latter. According to their online annual report CN alone spends something like $800m dollars a year on diesel fuel. They are, I think, the number 7 railroad out of the big 8. That alone very much makes them wedded to things as they are. The dinosaur railways might want to suck up some gov't subsidies for some sexy fast trains here and there but they are not soon going into the type of sensible, down-to-earth, regional commuter rail needed post cheap oil.

Fancy fast trains are very, very expensive and few municipalities or regional or even state/provincial governments can cough up that kind of money. From what I have read those fancy fast trains are actually bad news for the environment. Their carbon footprint is roughly the same as for air travel over the same distances. (Got that from George Monbiot's site) Basically anything fast is pollutive and fuel intensive and costly. Millions of tons of energy-intensive concrete are needed for the ultra-straight tracks laid for fast trains. The technology in the locomotives is usually not that remarkable: gas turbines and powerful electric motors have been around a long time now. To get trains moving fast you build arrow-straight tracks between point A and point B. To do that you expropriate, expropriate, expropriate. The French TGVs obliterated farm land, wood lots, wetlands and historic sites in stunning quantities. Nothing was allowed to get in the way of a TGV route. With their top-down traditions European countries can impose that kind of planning.

What we need are not really those sexy disco trains, enjoyable as they may be to ride in. What we need post oil is beefed up regional networks of trains that stop often and serve a lot of people making local/regional trips, not serving smug executives or privileged tourists who feel a need to rip between cities at high speed. I could see us laying track on highway corridors and powering the trains with nuclear energy. If the shit really hits the fan I could even see a return to wood burning locomotives providing modest, low frequency service between cities on unsignalled, semi-abandoned freight lines.

Happy Motoring doesn't seem to be letting go without a fight. America seems willing to sponsor the gear fetishes, engineering skills and uniformed workforce deployed by the Pentagon but the same support for Amtrak is just viewed as a sick socialist pain-in-the-ass. Besides, according to the latest issue of Trains magazine the plant that built Amtrak's Acela trains has been shuttered for years. In Canada VIA rail does fairly well as a poor cousin federal agency with a modest mix of equipment, track rights and its subsidy has been steadily declining. Recently VIA was given some capital for service improvements. In many ways it typifies a Canadian mentality of modesty and make-do. Amtrak is much bigger and so its various botches scale up nicely but so do its sucesses.

Why oh why is Amtrak not able to give Americans the same pride kick that launching another stealth-configured aircraft carrier gives them? An expanding railway could be a great place for project managers, engineers, pork barrel politicos, urban planning consultants, weary air travellers, designers and engineers, purchasers, blue collar tradesmen and manufacturing workers: you name 'em, who wouldn't benefit?

Just don't count on the familiar names in rail to come up with this inspiring picture in the next few years.

Too bad, huh?

[XER]

stvo,

Thank you for that excellent post. Most of what I've read and learned on RR's checks out with what you say. I have little to no faith in any kind of meaningful innovation in the RR business what so ever.

I liked your statement on the Air Craft Carrier. The Air Craft Carrier of course is an obsolete weapon. It is only good for use against "Third world" peoples.

Using a CVA today is an act of terrorism. I hate them completely and want them all scrapped. Also, please keep in mind that the level of class hatred is so high in the US, that many would be offended to have to share transportation with others. The SUV is the CFFN'er version of the Army's main battle tank. It's all about the worship of wealth, status and power. Efficient train systems do not deliver the proper sacrament for the current religious practice of Consumerism. Americans in general seem to love things that kill and destroy. It makes them feel safe in our consumption of worthless shit. They don't have much interest in things that help human beings evolve and grow into persons.

America is a predator nation, and the CVA is a tool of the terrorist predator.

[Uncle Yarra]

Yes, well done stvo.
And JHK, you may be right, people will be too poor or too cautious to invest in leveraged/optioned carbon credits - but a 'real' industry? that will give returns in less time than it takes to hatch an ostrich egg or grow peanuts? Hey, this can never end!

[Anonymous Blowhard]

I'm not sure if the bubble/boom dichotomy is much more than a semantics argument, barring more rigid definitions of either. On the other hand, I suspect that even if the verbiage is malleable, JHK et al "get" what's important.

The comment about localized successes of whatever, solar/wind, trains, is an interesting one. It's something that I've wondered about for a while. What is the maximum size of a localized success, and at what time does that success spell doom? Once n capacity is attained n+m is suddenly "required" - without even commenting on the size of n in the first place.

Call me all doom & gloom, but I wonder if localized phenomenon may be, by their nature, short lived. Vaguely similar to how I'd suspect a newly discovered reserve would be sucked dry once TSHTF, attempts to maintain the status quo could make these a target of tremendous overuse & abuse - and anger/resentment/sabotage once/when that's not possible.

[jim]

Jim, you really do worry too much. You'll give yourself an ulcer.
Just repeat after me. Every thing will be fine, the market will come to the rescue.

By the way interesting article on biofuel research and progress in today's Sydney Morning Herald.
http://www.smh.com.au/news/environment/scientists-make-oil-grow-on-trees/2008/02/04/1202090322448.html

[Uncle Yarra]

jim, (not Jim)
I like the last line in the article,
"The report noted the subsidised cost of creating jobs in the Australian ethanol industry was already so high that "it would be cheaper to pay each worker average weekly earnings to do nothing".
Wasn't Johnny Howard's brother involved with the sugar industry?

[Holmes, I presume]

Laughing, as I remember, you posted an article re: Janszen and clean energy bubbles about a week ago. Stephen Leeb Ph.D and Glen Strathy, in "The Coming Economic Collapse", wrote in 1996 about big future profits in alternative energy. (I’m sure there are plenty of other examples that can be cited.)

It sounds like JHK is thinking that things will get so bad so fast that a clean energy bubble will not be possible. All I have to say here is that the United States does not, as of yet, operate in economic isolation, and until it does (which it won't) the odds of another bubble/boom happening within the next decade look reasonably good to me.

"The towels were so thick there I could hardly close my suitcase." -- Yogi Berra