Why We Should Build The Death Star

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In January 2012, Zero Hedge made a sarcastic proposal to boost US GDP by $852 quadrillion — building the Death Star, a fictional moon-sized space station from the Star Wars film series:

Building a massive space weapon is all very well, but you have to find the materials to build it with. It’s easy to say that “sure, the Death Star would be expensive” but is there actually enough iron in the Earth to make the first Death Star? Centives decided to find out.

We began by loo king at how big the Death Star is. The first one is reported to be 140km in diameter and it sure looks like it’s made of steel. But how much steel? We decided to model the Death Star as having a similar density in steel as a modern warship. After all, they’re both essentially floating weapons platforms so that seems reasonable.

Scaling up to the Death Star, this is about 1.08×1015 tonnes of steel. 1 with fifteen zeros.

Which seems like a colossal mass but we’ve calculated that from the iron in the earth, you could make just over 2 billion Death Stars. You see the Earth’s crust may have a limited amount of iron, but the core is mostly our favourite metal and is both very big and very dense, and it’s from here that most of our death-star iron would come.

But, before you go off to start building your apocalyptic weapon, do bear in mind two things. Firstly, the two billion death stars is mostly from the Earth’s core which we would all really rather you didn’t remove. And secondly, at today’s rate of steel production (1.3 billion tonnes annually), it would take 833,315 years to produce enough steel to begin work. So once someone notices what you’re up to, you have to fend them off for 800 millennia before you have a chance to fight back. In context, it takes under an hour to get the steel for HMS Illustrious.

Oh, and the cost of the steel alone? At 2012 prices, about $852,000,000,000,000,000. Or roughly 13,000 times the world’s GDP.

The point was one against fiscal stimulus — while it may be possible to boost GDP by any amount through government spending, there is no guarantee whatever that that government spending will do anything productive. After all the toil and effort of building a Death Star what is an economy left with? On the surface of things, a giant metallic orb in space and very little else. In Misesian terms, this would be seen as a massive misallocation of capital, resources, labour and technology, building something that nobody in the market demanded and which could be ostensibly used to oppress people (“do what we say or we’ll fire our laser cannon at you!”).

Yet, I am going to try to defend it. I think that building the Death Star, or something similar is a very good idea and would have massive beneficial economic effects for employment, output, science, technology and so forth. And furthermore, I think it is possible in the very, very long run for a government to build the Death Star or something similar of a smaller scale without misallocating any capital, labour, technology or resources whatever.

First, I think that right now humanity is sitting in dangerous territory. There are over seven billion of us, yet we are all concentrated on one ecosystem — the Earth, with one tiny totally-dependent off-planet colony (the International Space Station) that houses less than ten people at a time. Simply, in our current predicament we are incredibly exposed. A single mass viral pandemic, asteroid strike or other cataclysm could completely wipe our species out. With humanity spread throughout the solar system (and preferably, the galaxy and the universe) our species is far less fragile to random extinction events. The Death Star itself — a giant space weapon — would be a safeguard against a particular kind of cataclysmic risk, that of hostile alien attack. If there are other advanced lifeforms populating our universe, they may see life on Earth and especially humans as an existential threat. Having a large, powerful weapon like a Death Star could be a strong safeguard against our own destruction by other species.

Zero Hedge’s mock proposal is actually quite thin, only taking into account the resource cost of the steel, and not the cost of getting the steel into space, building a moon-sized steel satellite in space, presumably including the development of laser cannon technology, some kind of propulsion system, the feeding and housing of a large permanent crew including oxygen and water recycling facilities, hydroponics and artificial food technologies, a transport system to get people and things between the Earth and the Death Star, etc. Nor does it take into account the cost of the labour in employing scientists and technologists to develop and prototype the technologies, employing engineers to deploy the technology, and employing labourers or automated robots to produce components and parts and to assemble the finished article. Simply, the cost would far exceed even what Zero Hedge projects, possibly by many times over.

So why the hell would I think that committing to spend vastly more than global GDP on a single project that nobody in the market is demanding is a good idea? Have I completely lost my mind, and any concept of sound economics that I once had? Well, on a potentially infinite timeline, such a huge figure (let’s say the necessary figure is ten times what Zero Hedge estimated, which could still be rather low in my honest opinion) pales into insignificance as we go further along the timeline. Building the Death Star is not currently a short term project that could be done to boost GDP in a single year to make up an output gap, deploy idle capital or reduce unemployment. In fact even if we committed to building the Death Star today, it is highly unlikely that we would actually even begin work on it in the next 100 or even 200 years. There would be vast technological, social and organisational challenges ahead before we could even begin to think seriously about commencing production. What we would begin work on are challenges far more modest and far closer to our present capabilities — sending a human to Mars, setting up a permanent base on the moon, setting up a permanent base on Mars, and developing technologies for those purposes — specifically multi-use lifters, a space elevator, improved solar energy collection and storage, improved nuclear batteries, improved 3-D printing technologies, higher energy particle accelerators, space mining technologies, robots, machine learning, computing, life support systems and things as mundane as increased science and science education spending.

Those kinds of tasks are much, much, much lower cost than actually committing to building the Death Star in one go, and can relatively easily be funded from presently idle resources (thus not misallocating any resources) as measured by the output gap which currently sits at around $856 billion (5.8% of potential GDP). The United States (alongside like-minded countries with similarly large output gaps) could fund a manned mission to Mars ($6 billion), build a new high energy particle accelerator ($12 billion), give ten-thousand million-dollar basic research grants ($10 billion), build a base on the Moon ($35 billion) and invest $20 billion more in science education for less than 10% of the current output gap. Better still, NASA and space-related spending historically has a relatively high multiplier of at least $2 (and possibly as much as $14 for certain projects, as well as a multiplier of 2.8 jobs for every job directly created) of extra economic activity generated per dollar spent. Given that space-spending yields new technologies like global positioning systems, satellite broadcasting, 3-D printers and memory foam that lead to new products, this is unsurprising. It also means that such spending is likely to get the economy back to full employment more quickly. Once this round of projects is completed, we will have a better idea of where we need to go technologically to be able to build a Death Star. The next time the economy has a negative output gap and unemployment, a new series of large-scale projects can commence. Eventually, with the growth of technology, automation and knowledge, a project on the scale of the Death Star may become not only economically viable but a valuable contribution to human capacity.

Many free market purists will wonder what the point of all of this is. Didn’t the Soviet economy collapse under the weight of huge misallocation of capital to large-scale grandiose projects that nobody wanted? What about all the projects that could have been undertaken by the free market in the absence of such a grandiose project?  My answer to this is twofold — first of all, I am only proposing deploying idle resources that the market has chosen to allow to sit idle and unproductive for a long time. Second, there are some projects that are actually important but which are not currently viable in the market. Space technology is probably the most obvious example. While I greatly admire the new generation of space entrepreneurs, and while I concede that long-term space colonisation will be undertaken be private individuals and groups (in the manner of the Pilgrim Fathers who colonised America — people seeking the ability to live by their own rules, instead of those of established Earth-based jurisdictions) the private space industry is still a long way behind where states were forty or fifty years ago. The Apollo program that put human beings on the Moon has still not been matched by private enterprise.

Ultimately, the Death Star itself is far beyond current human capacities, and far beyond the capacity of the idle capital, labour and resources that we have the option of using up through public initiatives. This I must concede. But, as a super-long-term goal, the capacity to build such things is what our civilisation ought to aspire to. And getting to such super-long-term objectives requires investment and investigation today.

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Global Trade Fragility

Yesterday I got my new iPad.

Yeah, I bought one like millions of other suckers. Apple can take my dollars and recycle them buying treasury bills and so partially fund, at least for a short while, America’s debt.

But really, I bought one to enjoy the twilight of the miraculous system of global trade. An iPad is the cumulative culmination of millions of hours of work, as well as resources and manufacturing processes across the globe. It incorporates tellurium, indium, cobalt, gallium, and manganese mined in Africa. Neodymium mined in China. Plastics forged out of Saudi Crude. Aluminium mined in Brazil. Memory manufactured in Korea, semiconductors forged in Germany, glass made in the United States. And gallons and gallons of oil to ship all the resources and components around the world, ’til they are finally assembled in China, and shipped once again around the world to the consumer. And of course, that manufacturing process stands upon the shoulders of centuries of scientific research, and years of product development, testing, and marketing. It is a huge mesh of processes.

The iPad is an extreme example of the miracle of civilisation. There are less extreme ones. Take, for example, the hamburger. Hamburgers did not exist until the age of regional trade, and refrigeration. The ingredients in a hamburger were not in season at the same time. Cows were not slaughtered at the time when lettuce was harvested. Lettuce was not harvested at the same time tomatoes or onions were typically harvested. For thousands of years previous to this we ate seasonal concoctions, like turkey, yams and cranberries at thanksgiving, as well as smoked and cured foods all year round. In modernity, we have been able to use modern technology to bring about any combination of produce: from greenhouses, to air freighting, to refrigeration, and so on.

I look at the global trade system — which we here in the West rely upon for goods, resources, consumption, etc — and I see something akin to the problem with the financial system in 2006. We abandoned robust and aged local systems, local knowledge, artisanship, etc, in favour of a huge interconnected mesh of trade where all counter-parties are interdependent, and where one failure can break the entire system.

This is a beautiful age. We have truly allowed our imaginations to run wild.

But is it sustainable?

Paul Krugman notes:

The world economy was, to an extent never seen before, truly global. It was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in particular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. And this shared ideology did indeed lead to unprecedented transfers of Western capital and technology to emerging economies – transfers facilitated by the fact that everyone knew that any country that strayed from the path would be punished by financial crisis, and would soon be obliged to accept the harsh austerity prescribed by teams of Western technocrats.

The year, of course, was 1913.

So a truly global trade system has come crashing down before, and we bounced back pretty well from that. But it was a painful time. That particular collapse seems to have arisen from the complex and internecine system of warfare pacts binding great powers to the whims of smaller ones. When small powers went to war, the great powers were dragged in alongside. It was a hyper-fragile system where one small breakdown could trigger a much larger one, just like the problem that led to the present system of financial derivatives. If one counter-party fails, the whole system can be brought down.

Great powers are once again aligning themselves around smaller allies. China and Pakistan and perhaps Russia seem willing to back Iran, while the United States is reluctantly backing Israel.

But there is a new factor at play today: the service economy. While nations in 1913 were freely trading, and while the concept of comparative was widely known, no nation took interdependence to quite the extreme that so many nations have today. And many nations have taken this idea so far that without imported goods and energy, their internal economies might completely collapse, or at very best struggle with the adjustment from supranational back to local.

Here’s the situation in the United States:


And for the United States, this hasn’t been a two-way street. America is importing a lot more than she is exporting. In other words, America is now dependent on international trade.

Here’s the United States’ current account balance as a percentage of GDP, (in other words exports – imports as a percentage of GDP):

Simply international trade has become too big to fail.

The problem is, we know from history that the system of international trade can fail, and as we move deeper into the ’10s, there are a number of obvious threats emerging. The boneheaded answer from certain tenured professors and high-flying MBAs might be that the incentives to keeping the international trade system wide open (and cheap) are enough to force countries to co-operate. Tell that to Binyamin Netanyahu, who seems increasingly fixated on striking Iran, and forcing Iran to retaliate with a closure of the Strait of Hormuz. Tell that to Mitt Romney who seems ever-more intent on starting a trade war with China. Tell that to Barack Obama who — instead of pushing for the United States to mine its own deposits of rare earth minerals has run squealing to the WTO complaining of Chinese price manipulation.

This post is not a prediction. I am not necessarily predicting a breakdown in the global trade system, although there are surely many obvious dangers as well as hidden black swans. I am merely forecasting that the world is extremely fragile to one, and that the consequences to certain countries with a negative current account balance could be, shall we say, painful.

Governments are advised to go out of their way to make sure that back-up systems in terms of medium-to-long-term food supply, fuel supply and medicine supply are in place so that the consequences of a breakdown in the system of global trade can be minimised.

This is an example of a process that the philosopher Nassim Taleb has called robustification.

Unfortunately, governments seem very busy doing other things, which are far less relevant to national security.

Nations ignore figures like Taleb — surely the Nietzsche of our homogenised and manufactured age — at their peril.

The Economist: “Be Afraid (Unless We Print a Lot More Money)”

While most readers of this blog will be convinced of (or at least open to) the idea that the global financial system is fundamentally broken, and either needs to fail or at the very least needs to undergo a radical transformationsome of us believe that the problem is basically a lack of demand, and that the entire solution lies in printing fuckloads of money, giving it to the people who brought us Solyndra, and hoping for the best.

From today’s issue of the Economist:

Lacking conviction and courage

In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.

The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.

The alternative view (as I have spelled out many times before) is that no amount of monetary policy without at the same time addressing the underlying real-world problems will solve the problems. Problems will just be kicked down the road, to re-emerge at a later date:

Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, the derivatives-industrial complex, and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…

Until we address the underlying problems, the market — in the long run — will keep crashing. And in the long run, we’re all dead. So that’s twice as bad. Junkiefication leads to junkification.

There was always the hope that kicking the can down the road might give us an opportunity to address those underlying problems. But it doesn’t seem like we have. Risk and leverage are greater than they were in 2008. Moral hazard is ready to rear its ugly head. The global trade structure is as fragile as ever. America is just as dependent on foreign energy and manufacturing. Deleveraging is proving costly and painful. Worst of all, many of the dangers inherent in the financial system have  now been transferred via bank bailouts to the sovereign level — like in Europe.

So no — the real reason to be afraid is not that policy-makers are not showing Bernanke’s famous Rooseveltian resolve. The real reason to be afraid is that what occurred after 2008 merely suppressed the symptoms of an underlying sickness.

They can’t. Only real reform — solving the underlying problems — can.

Who is Failing the 99%?

With predicaments like this, it’s clear something is going badly wrong.

But what’s worse than wrong?

As Einstein put it:

The definition of insanity is doing the same thing over and over again and expecting different results.

Many commentators, including much of the establishment, are advocating the same old solution: take more productive capital out of the economy in the form of taxes for the government to spend. As I pointed out yesterday, total government spending and unemployment are strongly correlated:

This is empirical evidence that increasing government spending does not necessarily decrease unemployment. But there’s something worse going on here.

While Obama might talk a good game on jobs, his record speaks not of job creation, but of massive tax breaks for corporations.

From the Daily Mail:

General Electric paid no tax at all in America last year and even managed to get a $3.2billion ‘rebate’ from the government.

The utilities giant allocated just 7.4 per cent of its $5.1billion U.S. profits in tax – around a third of what others companies its size are paying.

But through a complex series of measures GE, which is America’s largest company, will not even have to hand that over.

So where are all the jobs that these tax breaks were supposed to create?

Corporate profits have recovered from 2008 under Obama:

So in spite of all his pro-jobs rhetoric, all of that stimulus and all of that quantitative easing just hasn’t sparked a recovery for jobs.

Why?

As I wrote a few weeks ago:

The most annoying thing about the establishment’s ongoing obsession with maintaining the status quo, and supporting and bailing out older and larger companies?

Dinosaurs don’t create jobs.

According to the Economist, research funded by the Kauffman Foundation shows that between 1980 and 2005 all net new private-sector jobs in America were created by companies less than five years old. “Big firms destroy jobs to become more productive. Small firms need people to find opportunities to scale. That is why they create jobs,” says Carl Schramm, the foundation’s president.

And small business is being crowded out of the market by big government and its crony capitalist friends.

Why Elizabeth Warren is Wrong

I’ll be clear:

I like Elizabeth Warren. While overseeing TARP as chair of the Congressional Oversight Panel, she made the following comments:

To restore some basic sanity to the financial system, we need two central changes: fix broken consumer-credit markets and end guarantees for the big players that threaten our entire economic system. If we get those two key parts right, we can still dial the rest of the regulation up and down as needed. But if we don’t get those two right, I think the game is over. I hate to sound alarmist, but that’s how I feel about this.

Of course this consumers-first approach made her unpopular with Geithner & the rest of the mob who hold as a precept that those very “big players” are the economy, and any threat to them is a threat to capitalism, America, and the universe.

And now — as candidate for Scott Brown’s Massachusetts Senate seat — she has blown-up over the internet:


Libertarians, very amusingly, responded with this:


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Hemingway on Krugman

Paul Krugman — surely the most (deliberately) provocative economist in the world — thinks we need more inflation.

Why?

From Paul Krugman:

Inflation hawks, including Paul Volcker in today’s NYT, often invoke the supposed lessons of history, to the effect that inflation is always harmful and always gets out of control.

But that’s a selective reading of history, and it skips the most relevant examples.

Early on in this crisis, I began wondering why the US didn’t relapse into the Great Depression after World War II. And there’s a good case that this had something to do with it:

The big rise in prices during and after WWII arguably did a lot to eliminate the debt overhang, making it possible for the economy to enter a sustained, non-inflationary boom.

So his reasoning is that inflation is necessary for debt elimination. And when it comes to debt elimination, (for once) I agree with him. But should that be done through inflation?

Absolutely not. If a debtor cannot afford its debts, there are two paths to debt-elimination:

  1. Admitting that the mountain of debt is immovable, and giving negotiated haircuts to creditors
  2. Inflating away the debt with money printing

The second option — which is effectively what Krugman is advocating — is incredibly risky. From the perspective of the consumer, inflation coupled with stagnant wages would be painful — and the potential for a hyper-inflationary spiral is downright dangerous. A far better option is giving consumers more options to default on or renegotiate their debts, including mortgages.

But from the perspective of the US Treasury, inflation would be far worse still. Why? Money printing is increasingly seen as a sign that foreign creditors need to get out of the dollar, and into harder assets. This would result in many foreign-held dollars flooding back to America, worsening the inflationary spiral.

From alt-market:

The private Federal Reserve has been quite careful in maintaining a veil of secrecy over the full extent of dollar saturation in foreign markets in order to hide the sheer volume of greenback devaluation and inflation they have created. If for some reason the reserves of dollars held overseas by investors and creditors were to come flooding back into the U.S., we would see a hyperinflationary spiral more destructive than any in recorded history.

Conversely, a straight-forward haircut would be painful in the short term, but would do far less than money printing to undermine the dollar in the medium term — and cause far less of a flood of dollars back into America. Creditors, particularly China, would be happier to see a short-term default stopping the printing presses and safeguarding the long-term purchasing power of the dollar than they would see the dollar constantly undermined.

So, in conclusion, default achieves debt elimination in a clean and relatively one-dimensional manner, while safeguarding the value of the currency. Inflating away the debt achieves the same thing in a more dangerous fashion, because it endangers the quality of the currency. The international ramifications of such a policy are unpredictable, especially given the fact that so much of America’s economic might is built on its ability to acquire resources and energy with dollars.

As Ernest Hemingway put it:

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

No — we don’t need more inflation. We need to pay down our debts in a timely and honest fashion, and if we can’t do that we need to default.

Of course, there is another aspect to this:

Krugman thinks weak demand is eating the American economy, and that money printing and a little inflation will provide enough of a boost to juice the economy into a stronger position. But weak demand is not the problem. The biggest problem is imperial overstretch.

9/11 — Ten Years On

The attacks of 9/11 were a horrendous deed.

What makes me angrier than 9/11? Making the mistake of occupying Iraq and Afghanistan. It’s exactly what the Salafis and Wahhabis want — an easy way of selling their poisonous narrative of eternal and irreconcilable conflict between Islam and the West. And it costs billions upon trillions of dollars.

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