Saturday Morning Essay: A Thermodynamic Interpretation of Bernanke's Experiment

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We emerge now from the world of the Very Small, the quantum field and the Copenhagen Interpretation of Ben Bernanke's mad experiment in money printing, up into the macro-world where conventional reality takes place.  Naturally, up here things are less interesting.  Up here, we fight vainly the old ennui.

Ben Bernanke has been printing money for four years.  His experiments are variations of what he calls "quantitative easing," which is an odd term.  It sounds like an obese man loosening his belt after a huge meal.  Euphemism, however, is critical in the field of fiat money.  It's all made up and it won't do to call things by logical names.  Indeed, one odd thing that has happened to my thinking over the last four years, and perhaps it has happened to yours, is that I now reflect on just what we mean by this term "money."  As the Shorty character (played by Danny DeVito) says in "Get Shorty," money is very important.  "That's why they call it money." 

It's not a good thing when people start thinking about what money is in a fiat currency system.  It's not helpful.  That's why the trillion dollar coin idea went nowhere.  It's as if we said, okay, we make it up, but we can't make it up that much. 

The thermodynamics of Bernanke's experiment are built on the assumption that extra energy can be added for free to the monetary system, in the form of counterfeiting, and then extracted from the system at the point where the free energy introduced into the system threatens to blow the machine apart in a process called "hyperinflation," or super-debasement of the currency.  Thus, it is not quite a perpetual motion machine, and the thermodynamic analysis, while cute, isn't going to allow itself to be carried off completely, to the consternation of your Pond Dweller. Nevertheless, the valiant effort was worth a shot, and it's a catchy blog post title, IISSM (if I say so myself - don't know if that one's in circulation).

I digress.  Returning to the Federal Reserve's H.4.1, discussed last time, we note a few important numbers.  http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab9.  First, we can see that the actual currency in circulation at the present time isn't all that much.  It's about $1.1 trillion (rounding off all numbers in this analysis).  The Fed's balance sheet (its monetary base) has hypertrophied through the various iterations of Bernanke's Experiments (QE 1, QE2, Operation Twist, and now QE4-evah) to right around $3.1 trillion.  This has occurred through the central bank's "purchases" of Treasuries and various forms of federally-insured housing debt (mortgage-backed securities [MBS] and Fannie/Freddie/FHA agency debt).  The Fed bought all this stuff mostly from "Primary Dealers," the insider group of banks and financial institutions (domestic and foreign) that are the main beneficiaries of Fed money printing. The purchases are noted as the "Reserve" account down at the bottom of the H.4.1, currently around $1.7 trillion.  At present the Fed is buying $4 billion every working day ($85 billion per month, or $1 trillion per year) and pumping this additional baksheesh into the gaping maw of the U.S. financial monster, already bloated on aerated money.  Thus, at the end of this year, the Fed's balance sheet will stand at about $4 trillion and the "excess reserves" of the financial community will clock in at around $2.7 trillion.

The "excess reserves" held by the PDs sit quietly as a computer entry on the Fed's books.  To encourage the banks to keep the money there, the Fed pays one quarter of one percent (.25%) interest on these accounts.  In theory, the $2.7 trillion in "excess reserves" can be withdrawn by the financial institutions which own them; that's why they're called "excess."  What would happen if all this money were withdrawn in a year and spent into the general economy?  Well, suddenly the currency in circulation would increase rather dramatically, wouldn't it?  From $1.1 trillion to about $3.8 trillion.  Suddenly, almost four times as much currency would be chasing roughly the same amount of goods and services in the economy. 

The Fed has a solution for that, of course.  Bernanke believes he has a solution for everything, which is why he's an academic.  His ideas only have to work in theory, and must pass muster with the Amen Chorus of Paul Krugman, Brad DeLong, Mark Thoma, Dean Baker and the other Cosmic Free Lunchers.  In the event that inflation picked up beyond the 2% "target range," began to get out of hand, in other words, The Bernank would throw the Machine into reverse.  All of those Treasuries and MBS holdings?  Bernanke would begin selling them into the general economy and absorb all of the excess money, bringing it back to the Fed where it could be effectively "killed."  The money injections would have served their salutary purpose of "pump priming," of creating the "wealth effect" that gets the economy moving again, gets people back to work, and the American Booboisie would go back to limitless Planning (parties) and Tanning, just like God wants them to.

It's the perfect crime.  Counterfeiting which does no harm and in fact restores the country to economic health.  Isn't it?  We must once again depart on a cliff-hanger note.  It seems apt for a Saturday morning.  Little Nell (the American economy) is tied to the railroad tracks, Simon Legree (hyperinflation), is nyah-nyah-nyahing while stroking his long black mustaches, the train is bearing down, and Ben Bernanke, looking not a whole lot like Sergeant Preston of the Yukon, is riding to the rescue.  I may be conflating a bunch of cartoons with a bunch of comic books.  But you get the idea. Will he arrive in time?  Tune in next time and see.

The Quantum Physics of Bernanke's Experiment

True, I've developed an unnatural obsession with the U.S. monetary system.  I admit this; however, I'm not the only one. I see it among numerous others who have been drawn into this field of inquiry, writers who keep going farther and farther down the Rabbit Hole of unreality that is the fiat currency world.  I think of it as a discipline akin to quantum physics:  the same sense of pervasive paradox and counter-intuitive, nonsensical phenomena.  Except, of course, that the U.S. monetary system does not exist "spontaneously" in the real world.  We made it up, and it's a Barnum & Bailey world, as phony as it can be.

I watched Ben Bernanke testify for a while yesterday morning before a Senate Banking Committee.  This itself, of course, is kind of a weird thing to do.  I noticed that even the Senators were getting a little better at handling the nuances, the strange little ins and outs and what-have-yous (as Dude Lebowski would say) of the relationship among the Federal Reserve, the Treasury and the U.S. money supply.  Not that they actually understand all of this: these are American politicians, after all.

The Chairman was taking some heat from Senator Robert Corker of Tennessee on these very topics yesterday.  Bob seems to be a Tea Party type, with that sense of omni-directional, poorly-focused rage against, well, everything, that seems to typify this "movement."  One curious aspect of this Politics of Resentment is that it's always been the Tea Party, and not the Democrats, who have led the fight against Too Big to Fail, against TARP and the sequential bailouts, and the financial oligopolies who hold the national government as another asset on their books.  The Democrats are fine with all that. Bernanke is the nominal leader of the financial cartel, the head honcho of the "public-private" combine known as the Federal Reserve System, and Bernanke is the Democrats' guy.

Although, nominally, Bernanke is a Republican appointed by George W. Bush.  As I said, this is all suffused with the aura of the quantum physical world. Anyway, the hot topic du jour is the "unwind" of the Fed's balance sheet, that bloated financial document showing just north of $3 trillion in assets, consisting mostly of Treauries ($1.7 trillion) and mortgage-backed securities (MBS - just over $1 trillion), and a smattering of other things.  This is an arcane subject, certainly, and it is premised on the idea that interest rates, at some future, undetermined date, will go up, and then the Fed is going to be presented with some difficult problems vis-a-vis its balance sheet.  To wit, the balance sheet assets of the Fed are "interest rate sensitive."  The Treasuries on the balance sheet in particular have a face value that is inverse to the interest rates generally prevailing in the economy; since the Fed has labored mightily to force interest rates down across the board, the Treasuries on its balance sheet (all $1.7 trillion of them) have a low yield, historically speaking.  Who would buy these bonds from the Federal Reserve on the open market if Treasury rates available in regular auctions are significantly higher?  Wouldn't the Fed have to discount its Treasuries heavily in order to sell them to the public?  This is the heavy question.  Thus, the Fed, having made up the money to buy these $1.7 trillion in bonds out of thin air, would "lose" money when it sells the bonds to the public measured as the difference between the (positive) amount it receives on their discounted value and zero, the amount the Fed actually paid. We should all be lucky enough to sustain such losses.  This is the big problem that Corker was presenting to Bernanke.

The contraption the Fed is running goes sort of like this: in 2007, before the Great Recession hit (or, you might say, before the fundamental weakness in the American economy was revealed), the Fed's balance sheet stood at $869 billion, and almost all of it was Treasuries.  The is was the "monetary base" of the U.S. money supply.  The banks in the Federal Reserve system held only nominal "reserves" on the balance sheet.  Everything was hunky-dory.

Then all Hell broke loose.  The housing bubble burst, the stock market tanked, unemployment skyrocketed.  Riding to the rescue was the Fed and U.S. Marshal Wyatt Earp, disguised as a mild-mannered, bald, bearded academic from the Princeton Economics Department.  A student of the Great Depression and the Japanese "Lost Decades," Gentle Ben was presented with a chance to try out his somewhat unconventional monetary ideas: to wit, he would hallucinate money, buy up everything in sight, and singlehandedly prevent the overvalued assets of the American market place from deflating in value.  The Fed's efforts are reflected in its current H.4.1 statement (I told you I'd gone off the deep end). http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab9.

You see, down deep Ben Bernanke is identical to his colleague at Princeton, Paul Krugman.  The U.S. monetary system, in some deep, fundamental way, isn't "real."  It's just like quantum physics - it's what we "observe" it to be.  It is money seen through the lens of the Copenhagen Paradigm.  The economy is not a "morality play" (Krugman's favorite phrase) and there is no need to suffer.  House prices can be reinflated, if you are ingenious enough and (this is huge) if you happen to be the issuer of the world's reserve currency.  Other countries tied to our system through globalization have to sit still for our shenanigans because everybody needs bucks in order to buy oil.  The stock market can be revived.  A "wealth effect" can be generated that will get everybody back to work, planning parties, tanning at the local salon.  Planning & tanning: just like the good ol' Consumer Economy!

And c'mon, admit it:  it's kinda worked, hasn't it?  Housing prices in California have gone up about 8% in the last year, and they're predicted to do the same in 2013.  That's more or less what was happening in the years leading up to 2006.  The stock market?  Need you ask?  To the moon, Alice!

This befuddles the moralistic tut-tutters.  There should be a steep price to pay for such unearned wealth -- shouldn't there?  You can't really sustain an economy just by tapping in long strings of zeroes on Bernanke's computer in the corner of his office.  Can you? 

Corker and the other Mad Hatters in the Tea Party are seething with rage as this genial, somewhat defensive, 1600-on-his-SATs Jewish guy (I was kidding when I said Kevin Phillips was smarter - no one is smarter than Bernanke) bats away their impotent questions with answers he's already thought through with more penetrating clarity than they have. 

Although, there might be one little teensy-weensy weakness in this whole situation.  One tiny point of metal fatigue in the Money Machine Contraption. Which I will take up next time.

Sometimes i think this way about climate change

This is what I think sometimes:  do we actually know what's going to happen but we've decided not to say it out loud?  I have had this suspicion for some time.  Indeed, the first time I read about this problem, the rise of CO2 levels in the atmosphere as measured by the Keeling instrumentation on Mauna Loa on the Big Island (this was in 1969), I recall saying to my brother, who's now a Distinguished Research Scientist at the Great Southwestern University, that this was probably the deal breaker.  Pollution might come and go, the threat of nuclear war could be handled by diplomacy, but a rise in baseline CO2 levels creating the greenhouse effect was too intricately involved with everything we do to sustain life on Earth to deal with effectively in the time remaining.

CO2 levels were only about 6% over pre-Industrial baselines at the time.  They are now about 35% and increasing.  The world is pumping more carbon dioxide into the atmosphere each year not only in increasing amounts but at an increasing rate.  Astonishing, but true.  From, as usual, the indispensable Gail Tverberg's blog, Our Finite World:

America's economists and national politicians, liberal and conservative alike, are arguing about ways to get the American consumer economy to grow again, to get people spending, to revive the American auto industry, to build the Keystone XL pipeline, to use Obama's "all of the above" energy policy including "clean coal," natural gas, oil, and, just to demonstrate his heart is in the right place, solar and wind power, too.  We're so proud of ourselves for reducing the amount of oil we import as we go after all of the domestic "tight" supplies of oil and natural gas, hammer and tong, or dredging up enormous quantities of, well, the Canadian province of Alberta in the mining of tar sands (bitumen). 

One of these days, however, we'll begin turning these trends around.  We're not certain when, but we realize AGW is a problem and we can't put it off forever.  Just as soon as the "recovery" is well under way and the unemployment rate is down we'll get right on it.  It would be a bad idea right now, but (we admit a little nervously) the disappearance of the Arctic sea ice in the summer, and the accelerating melting of most of the world's glaciers (which poses a threat to the essential water supplies of billions of the world's people) - yeah, have to admit: those do seem more like late-stage developments of global heating than the preliminary signs.  Those are the sorts of problems we should have been working to prevent 40 or 50 years ago, not using as a catalyst for planning action at some undetermined date in the remote future.


So I come back to the question: is it possible, given all this, that the world's elite academies of atmospheric science (MIT, Stanford, Scripps Oceanographic, Berkeley's alternative energy group at Lawrence Berkeley Lab), numerous European centers of study - that they actually know the die is cast?  I've said this before, but the most chilling comment I have ever heard came from Inez Fung, a leading climate science at Lawrence Berkeley, at a U.S. - China conference on climate change back in 2006 at Wheeler Auditorium.  Basically, Dr. Fung said that scientists who study climate change are "very, very worried."  They are "terrified" by the implications of what they're learning.

Guy McPherson, who writes the Nature Bats Last blog (indexed on the right), recently had this to say about climate change:

Let’s ignore the models for a moment and consider only the results of a single briefing to the United Nations Conference of the Parties in Copenhagen (COP15). Regulars in this space will recall COP15 as the climate-change meetings thrown under the bus by the Obama administration. A footnote on that long-forgotten briefing contains this statement:

“THE LONG-TERM SEA LEVEL THAT CORRESPONDS TO CURRENT CO2 CONCENTRATION IS ABOUT 23 METERS ABOVE TODAY’S LEVELS, AND THE TEMPERATURES WILL BE 6 DEGREES C OR MORE HIGHER. THESE ESTIMATES ARE BASED ON REAL LONG TERM CLIMATE RECORDS, NOT ON MODELS.”

In other words, Obama and others in his administration knew near-term extinction of humans was already guaranteed. Even before the dire feedbacks were reported by the scientific community, the Obama administration abandoned climate change as a significant issue because it knew we were done as early as 2009. Rather than shoulder the unenviable task of truth-teller, Obama did as his imperial higher-ups demanded: He lied about collapse, and he lied about climate change. And he still does.

 Kind of grabby, isn't it?  If you're playing along at home, 6 degrees C or more temperature increases and 80 feet rises in sea level, along with all of the other effects, are Game Over scenarios.

Climate change deniers tend to use a "conspiracy theory" argument to support their contention that the "liberal" scientific community is overplaying climate change as an issue in order to attract grant and research money, since the "alarmist" take on AGW is the "popular" one with the liberal media and so on and so forth.  (This is often the view among non-scientific global warming deniers.  The "scientific" deniers they cite to support their viewpoint very rarely actually deny AGW; on the contrary, such scientists [Freeman Dyson, Richard Linzen and others] admit that the atmosphere is warming and that humans are a principal cause, but claim the negative effects are overstated or that there are countervailing positive effects. This group, by the way, no longer includes Richard Muller, a Big Time Denier at Berkeley. http://www.sfgate.com/science/article/UC-climate-change-skeptic-changes-views-3748148.php  The Denier ranks are thinning; such apostacy! ).

Since I can theorize conspiratorially myself, I would posit a contrarian thesis: isn't it probable at this point that the real conspiracy of silence among the scientific community is manifested by the general absence of defeatism in their ranks?  See what I mean?  The argument that global warming is a made-up story by "liberal" scientists to attract funding is just getting kind of stupid at this point.  However, a "defeatist" attitude, if it became the general consensus (openly, I mean) among their ranks would lead to the same problem of de-funding (and loss of stature), and would have the awful permanence and irreversibility of being based on the truth, not a Bible Belt canard. 

Thus, it's better to talk about reducing carbon emissions 80% by 2050, or whatever.  It's better to be Al Gore and Laurie David and urge the world "to act now" to "avert" the worst consequences of climate change.  It's better if we all smile at each other and approve of each other's new Priuses - we're taking it seriously now!

This is what I'm trying to get at.  We don't like thinking any other way than  there has to be hope.  But (the largest "But" I've ever written):  Maybe there isn't any hope.  Maybe it's way, way too late.

Ye shall know the Truth, and the Truth shall set you free.  I hope more scientists break ranks and start laying it on the line if in fact we're past all "tipping points."  There are decisions to be made.  Should the present generation of child-bearing age who haven't had children procreate?  Would they be introducing their offspring right into the middle of the absolutely worst consequences of climate change as they reach their main years of life?

The facts are the facts, ma'am.  Carbon dioxide, methane, water vapor and the other greenhouse gases have a very long persistence in the atmosphere.  They are building up.  The thermal inertia of the ocean is beginning to yield up its latent heat to the atmosphere.  The great methane (a gas with perhaps 100 times the potency of CO2 as a greenhouse gas) blooms from the softening Alaskan and Siberian tundras are expanding exponentially.  China is opening a new coal-fired electrical plant every five days or so.  Does it make any difference what I, as an individual, do at this point?  Is an attempt at conservation or frugality simply a narcissistic expression of my projected self-importance (sort of like blogging)?  If I want a 409 horsepower vintage GTO, want to slam a CD into the player and crank up Ronnie & the Daytonas, should I just go the hell ahead and do it?

Wha-wha, uh wha uh wah uh wha!