Wilder, Wealthy, and Wise

Dale: You know what the problem is? It’s a Ford. You know what Ford stands for? Fix It Again Tony.
Hank: Dale, that’s a Fiat.
–King of the Hill

If you have nasal congestion and want to blame the monetary system?  Sudafed®.

In 2020, we’re pretty proud of ourselves for making use of virtual reality.  We have students taking virtual classes while never leaving home.  We have virtual assistants.  Heck we even have virtual assistants for people that can’t spell, like that new one from Amazon®, Dislexa™.

As much as we think of virtual reality as a new concept, it’s not.  Much of life throughout recorded history has been conducted using virtual systems.  Some of them are common, like clubs.  You’re either in or you’re out.  The only thing that makes a difference is the virtual acceptance of others.  You were either a Roman Senator, or you weren’t.  You were a member of Legio XIII, or you weren’t.  You were a Roman citizen, or you weren’t.  Just because a virtual distinction of being in or out of a particular club has existed for thousands of years, don’t think that it doesn’t have significance.

The law is another virtual system.  In this case, it exists so we just don’t go killing each other willy-nilly in a never ending cycle of vengeance.  All that vengeance makes a great movie, but it’s pretty rough unless you have a lot of relatives.  But through the invention of law, a virtual system, revenge violence could be avoided.  We voluntarily gave up our right of vengeance to a virtual system so that we could have peace.

Another virtual system is religion.  The exception, of course, is if your religion allows you to draw a series of weird sigils and glyphs on the ground and chant a mysterious incantation dating from the time the Old Ones walked the Earth and make a blood sacrifice.  If you do that, I’ve heard it said you can summon my Ex-Wife.  Nothing virtual about her, and all you have to do to get rid of her is give her half of your stuff.  But most religions are virtual.  Faith itself is a concept that is virtual right on the label.  I’m not discounting religious experiences that people have, (having had profound ones myself) but the systems that are created are in large part virtual.

My relationship with my ex-wife is good.  She texted me the other day:  “Wish you were here.”  She was at a funeral.

What are some other virtual systems we make use of?  What about property lines, last will and testaments, corporations, and, gasp, even government?  These systems have been around for thousands of years, and in the case of religion, certainly longer than that.  But outside of religion, the biggest and oldest virtual reality system we interact with regularly is money.

Wait, what?  Money is virtual?

Yup.

Money has always been and will always be virtual.  “But what about gold, John Wilder?  Gold isn’t virtual!”

Sorry gold is gold, and it’s not worth a lot unless people are willing to trade you something for it.  Gold is just one way to represent it in such a way that it’s hard to fake and easy to divide.  Lots of things have been used as money, from the reasonable (like gold) to the silly (massive coins of copper).  One thing that surprised me in doing research for this post was that the oldest minted coins date only back to about 700 B.C., and were promptly left in car ashtrays all throughout the ancient world.

This coin weighs over thirty pounds, and was used by the Swedish in the 1700’s.  To buy popcorn and a Coke® at a movie, it would take sixty of these coins.  Thankfully, movies had yet to be invented.

There is historical evidence of using sea shells for money in Ancient Asia, Australia, Africa and Arabia and the Americas.  Why?  I’m assuming that was what the vending machines took, but I may be mistaken.  Or maybe it was only used in places that started with the letter ‘A’?  But, as you can see, money didn’t have to be gold, or even a coin.  Money is what we believe money is.

Why does money being a virtual system matter?

Systems based on physical laws like gravity and entropy and time and mass are what they are.  You can invent ways to “overcome” them, like an airplane, but as Chief Engineer Montgomery Scott taught us, “Ya canna change the laws o’ physics, Cap’n.”  The systems are what they are, and ceasing to believe in the system doesn’t change it.  You can’t click your heels to change dimensions and end up back in Oz or the Matrix®.

You heal cuts in the Matrix® by using Neo-sporin©.

Those real systems we run into are required (for the most part) to make our entire Universe run in a way that allows living things to grow.  Change just a few terms, say, Pi=357, or Planck’s Constant=Pizza, and the Universe couldn’t have life at all.  And they behave in rational (though sometimes complex) ways:  it’s not like one out of twenty thousand times when you start a car all the gasoline doesn’t ignite at once blowing the car up, just because.  I mean, if you have dirt on the Clintons or are involved in certain, umm, families that might happen but otherwise it’s a statistical impossibility.  Real systems just don’t work that way.

But money?  We made it up, so it can do whatever we all collectively agree it will do.  And when our belief about those systems changes the entire economy can blow up in just a few days.

I don’t want to scare you, but bankers are messing with fundamental constraints on the monetary system all of the time in 2020.  From 1787 or so until August 15, 1971, the United States operated on some sort of standard based on gold.  The nice thing about gold was you couldn’t just print more of it.  On August 16, 1971, the United States left the gold standard and had a currency backed by – nothing.  Money was already a virtual invention, but Nixon went Full Mario Brothers™ on it.  If you’re a banker, calling someone who plays video games stuck in a fantasy is a bit of hypocrisy.

If you’re really rich, you can afford two-ply.

A currency backed by nothing is called “fiat” money, which is Italian for “Fix it again, Tony.”  No, wait, that’s a car.  “Fiat” in this context is from the Latin for “let there be” as in “let there be money.”  Since the United States dollar isn’t backed by gold anymore, it was just wished into existence.

Essentially, in 1971 the bankers exploited what a gamer would call a “cheat code.”  In a video game, a cheat code might make you invulnerable, or give you infinite ammunition.  That’s what this did – the printing of dollar bills was no longer constrained by how much gold the United States had.  It now had infinite money.

But physical systems like gravity have been around since the Universe began.  It’s well known, and people have been observing what gravity does since they were wearing saber-tooth tiger for evening wear and bathing once a lifetime whether they needed it or not.  Gravity is a real system, and we can’t game it or pop in a cheat code.  Because of that, it’s predictable – a black hole isn’t going to spring into existence for no particular reason the same way a cell phone won’t spontaneously assemble itself out of the spare silicon leftover from Kardashian butt surgery.

And the Universe would explode every twenty years.

Monetary systems don’t behave like gravity, they behave like a video game.  Bankers can change the rules at any time, and I mentioned that bankers can and do drop in cheat codes.  During the Great Corona Panic of 2020, they’re doing it weekly.  They can also reboot the system – that’s what every country ever has had to do to end the hyperinflation that seems to nearly always eventually follow the introduction of fiat currency systems.

And that’s the problem.  As much as economists would like to pretend that they know what happens when you apply cheat codes to the system, they really have no idea what will happen.  It’s like when Albanian lawyers who have an office next to the JCPenny® have a broken copier.  Oh, sure, they can take their hairy, greasy Albanian fingers and poke and prod the copier with their ballpoint pens, but it’s only going to fix the copier if they get miraculously lucky.  It’s far more likely that their grunting and pointing and prodding with only a dim understanding of what gears and rollers are will cause the copier to catastrophically fail.

One time I found our copier full of peanut butter, which is weird.  Normally it jams.

There’s nothing more pathetic than watching Albanian mall lawyers trying to fix a copier.  Unless it’s watching the Federal Reserve trying to fix the economy that’s crippled by debt by injecting more debt.  I mean, the Albanian mall lawyers can at least call a professional to fix the copier after they gum it up.

Who is the Fed going to call?

“I learned of a place where a man can be free.  Free to do what he wants to do.  Free to ketchup his eggs without being hassled by the man.” – Strong Bad

My father-in-law raised dwarf dairy cows for a while.  They gave condensed milk.

Almost everyone reading this post has lived a life of nearly unthinkable abundance.  Did we have everything when we wanted it?

No.

Did we sometimes go without?

Yes.

Did we have to make tough choices because our primary liquid assets included some string, an empty PEZ® dispenser, a coupon for 2 for 1 taquitos at Sven’s Taco Hub, three cases of returnable Coors Light® bottles and a bank account with $3.17 in it?

Yes, though I guess that might be suspiciously specific.

Even as our individual economic conditions may have changed, we have lived in societies of amazing abundance.  At no point in history have so many people been fed to the point that, rather than having too little food, the main food-related problem in the world is that we’re too fat.  I can expect that this sort of conversation could have been had with most of our ancestors throughout history if we took them for dinner at a modern restaurant:

John Wilder:  “Hey, slow down!  You don’t want to get obese.”
Ancient Wilder Ancestor:  “Obese, what’s that?”
John Wilder:  “It’s where you eat too much food.”
Ancient Wilder Ancestor:  “Sounds great.  Let’s get obese.”

The Mrs. asked me to put ketchup on the shopping list, and now I can’t read any of it.

The modern grocery stores have suffered not from a lack of products, but have an amazing variety of choices.  In the ketchup section here in Modern Mayberry, there are no fewer than 21 different options (including different sizes) for ketchup.  It’s a literal wall of ketchup:  spicy, organic, no fructose, already mixed with mayo . . . the list goes on.  I looked it up – a good blogger always checks his sauces.

When I was growing up, there were just four choices if you wanted ketchup:  Hunts® or Heinz™, and you got to pick the little bottle or the big bottle.  That was it, and in my imagination the only people that would pick Hunts© ketchup were trolls that lived under bridges or that couldn’t afford the tasty goodness of Heinz®.  We can have so many choices because while the 1970’s Modern Mayberry was served by two small grocery stores, today it’s served by a Wal-Mart® that has a food section that’s nearly double in size to the grocery stores of the 1970’s.

We have an abundance of choices today.

And I thought it was just people’s data he was interested in.

What does the world look like in a world of shortages?  I think most people can’t even understand what a world like that might look like, but they are beginning to get glimpses.  The toilet paper shortage was so odd a start to COVID-19 shenanigans that it could have almost been written by a comedy writer for a humorous end of the world movie.  Me?  I hope that if the end of the world happens, it starts in Las Vegas, because, you know, maybe it will stay in Vegas?

The toilet paper shortage didn’t impact us, because we generally have an inventory of two or three months’ worth of toilet paper on hand at any given moment.  Why?  I don’t like to run out of things.  It’s the same reason I have spare ketchup in the pantry and a socket set and jumper cable in every car.  I don’t like to let inconveniences become emergencies.

But the prospect of running out of toilet paper became very real for millions of Americans.  And it showed many people for the first time what a shortage was.  It wasn’t like the brand of ketchup you wanted was too expensive, it was that there was no ketchup at all.  And no schedule of when there would be ketchup.  And a line of people panicking about ketchup and buying cases of ketchup because they had heard ketchup was in short supply.

I imagine that people who bought a lifetime supply of toilet paper during the shortage feel a bit silly.  But it’s really a great illustration about how the human mind works in periods of low information.  If everyone knew that the toilet paper supply network was robust, then there would never have been a shortage.  So, that was a short-term shortage caused by panic and lack of information.  I mean, it’s the 3-2-1 rule of New Preppers:  A three dollar first aid kit, two days’ worth of food, and one year’s worth of toilet paper.

But what about longer term issues?

Farmers have plowed vegetables back under into the soil because there was no way to get them to market.  People who have hens to produce eggs have destroyed hundreds of thousands of eggs at the same time my local Wal-Mart® was out of eggs.  Why?  They produced the eggs for the restaurant industry, and there wasn’t a way to package them for individual sales.  It’s like the inverse of communism:  there’s too much food and the system is performing too well.

Cows have hooves instead of feet.  They lactose.

Will that happen with cattle?  I don’t think people will slaughter cattle on a whim, but the entire system is now partially locked up because meat packing plants are shutting down because of the WuFlu.  But even that is a short term problem, since cattle that were going to go off to the feedlots to be prepped for the packing houses . . . aren’t.  This will result in beef prices going up (not enough packing plant capacity), then dropping (lots of cheap cows), and then going up again (cows that should have been put in the pipeline . . . weren’t).

Today my daughter, Alia S. Wilder called me.  She was spooked about beef.  “Should I be concerned?  Should I look for alternate sources of protein?  What should I do?  I saw row after row of empty shelves in the meat department.

“Are we going to be okay?”

Those were good questions, and if Alia is asking them, then you can bet millions of other people are, too.  Even though I feel that the meat shortages are (for now) a short term ripple of the Coronavirus Economy®, I sense that people are getting the idea that at least some of the short term shortages we’re seeing now will build into long term shortages.  Maybe not with toilet paper.  Maybe not (for now) with beef.  But people are worried that it will be real with something, and soon.  And we’re certainly not going to have a shortage of toilet paper jokes.

What happens when we have real shortages because the systems that we relied upon to create the fabulous wealth in the West are irreparably broken because of the economic strains we’ve put on them?

We can look back on a real case study:  Germany just after World War I.  At the end of World War I, Germany had collapsed like my cat Rory on the surface of a neutron star.  The Allied blockade had effectively starved the German people, and chaos was in the air.  Their royalty, Kaiser Wilhelm had given up the throne for the life of a carnival worker who ran the “guess your age and weight” booth.  A new government was formed, and became known as the Weimar Republic.

Go sightseeing in France they said.  Home by Christmas they said . . . .

In 1919, this government’s first job was to “negotiate” the Versailles Treaty.  In actuality, the treaty was dictated to the Germans, who had little leverage.  Their army had been disbanded, and the Allied food blockade stayed in place during the negotiations, so Germany was ready to sign anything, no matter how bad the conditions.

The conditions were bad – the German reparations required by the treaty were huge, more even than the $257 billion (equivalent in today’s dollars) they had actually paid by 1932.  One response was to set up a two-tiered currency system – one backed by gold, and one not backed by gold.  However, the war reparations payments set by the Versailles Treaty had to be backed by gold, so Germany couldn’t just print their way out of those payments.

But they could print their way into poverty.  They used the German marks not backed with gold to buy goods overseas.  The nice thing about that (if you were German) was that you could just print those marks.  Then?  Free stuff.

Until it wasn’t free stuff.  The impact was significant.  In 1921, $1 would buy you 150 German marks.  Two years later, that same $1 would buy you over 25 billion marks.  The result was perverse:  the Germans had no idea how to stop the hyperinflation.  People had become used to it and the government was worried that if they stopped hyperinflating the currency, then the whole system would collapse.

One story I heard was that a man had a wheelbarrow full of money he left outside a store.  When he got back, someone had stolen the wheelbarrow and left the money. 

Germany at that time was an odd place – the factories and farms still existed and all of the physical things required for production were there.  There was still food in the stores, but there was hunger and destitution everywhere:  money had ceased to be of value.  The nonsense of hyperinflation ceased when the adults took over the printing presses and sliced 12 zeroes off of the value of their paper currency.  Since the money was pretend in the first place, the number of zeros is like Beto O’Rourke’s political opinion in Oklahoma:  nearly irrelevant.

I don’t expect that we’ll have Weimar America, but then again the Germans didn’t expect hyperinflation (or the Spanish Inquisition) back in 1921.  Thankfully, we haven’t been through a loss in a devastating war and starvation and the collapse of our government.  But it’s entirely possible that whole categories of stores and even products will disappear.  It’s also entirely possible that the money printing we’re doing in such a big spurt will have a significant impact on prices, squeezing our economy and the world’s economies in ways that we can’t yet understand.

But what I really expect is that we’ll find out soon enough that we can’t print our way to abundance.  Whereas the physical world hasn’t changed much with COVID-19, the systems of companies and people that work together to create and distribute something as simple as a hot dog, hot dog bun, mustard and ketchup (yes, I’m one of those) have to work together with all of the harmony that communists imagine only comes from communism.  It takes thousands of people and a dozen companies to prepare such a simple feast.

Cast out this abomination!

Coordination of that type takes place naturally in a capitalist system that’s running well.  The hot dog maker doesn’t have to coordinate with the bun maker – bun makers make what they can sell, and then buy flour from flour mills.  Who buy wheat from farmers.  Who buy fertilizer . . . and you see I could keep this chain going forever.  The world is a web of interconnections.  When normally self-correcting systems are first deprived of money, then flooded with it, systems and signals break down.

And our world of abundance goes with it unless we have those signals that prices and orders give.  I hate to promise this, but I am certain when I say that we haven’t even scratched the surface of the strange things we will see in the next few years.

But one thing I don’t think we’ll see in a year:  our previous world of limitless abundance and shelves filled with 21 different kinds and sizes of ketchup.   I mean, who even buys Hunts®?

“There has been too much violence.  Too much pain.  But I have an honorable compromise.  Just walk away.  Give me your pump, the oil, the gasoline, and the whole compound Just let me give you my crude oil and I’ll spare your lives.  Just walk away and we’ll give you a safe passageway in the wastelands.  Just walk away take the crude oil and there will be an end to the horror.” – The Road Warrior (Updated for 2020)

Did you see the new Mad Max® prequel?  It was playing on every channel last night.

Whiplash is coming.

Currently, like the rest of the economy, the energy industry is a mess.  It was just the energy industry’s turn.  First it was Gamestop®, and now it’s the industry that underpins every bit of modern society.  Our modern world is built on the premise that cheap, available energy will always be abundant.

How can we afford to have fresh lettuce and tomatoes in the middle of winter when there are none growing within a five hundred mile radius?  That depends on cheap energy to grow it, and cheap energy to transport it.  Cheap energy provides modern society the ability to use the weather of one continent to grow strawberries when it’s winter on another.  The miracle is that it allows this to be done at such a low cost that it’s affordable to nearly everyone in society to eat fresh strawberries in winter and for stoners to grow weed year round in the basement.

Energy is important, and probably the most important component of energy in our lives is crude oil.  I know that it will give Greta Thunberg the whiskey shakes, but oil is currently absolutely required to feed several billion people on this planet.  Beyond that, it provides luxuries that no king in history could have had to everyday people.  Want to see what the weather is on the other side of the planet?  Want to watch a celebrity 1500 miles (34°C) away in their 10,000 square foot (17 liter) summer home in a gated community virtue signal that #weareallinthistogether because their maid isn’t considered an “essential” employee and they’re suffering, too.

Seriously, it was in the newspaper that Greta had a cough and was certain she had COVID-19, but my diagnosis is that the symptoms were caused by an acute lack of having people write about her on a daily basis.

So, oil is important.  But the oil industry is currently collapsing.

How bad is it getting?  I filled up my tank on Monday, and was offered a complementary free oil well with my purchase.  I had to turn it down because I couldn’t afford how much money people wanted me to pay to take the oil from the well.  I’m joking, they actually offered me six oil wells.  But oil producers really had to pay to get people to take their oil last week.  This is a situation that’s unheard of in the history of, well, everything.

Economics is based on the study of scarcity of stuff, not on the overabundance of stuff.  And right now we have more crude oil than Bernie Sanders has houses.  Why?

Gasoline demand has plummeted.

This week we’re partying like it’s 1994, because that’s the last time that gasoline consumption was this low.  In 1994, the United States had a population of only 263 million, 80% of what it is today.  Remember 1994?  That was the year that Nancy Kerrigan got kneecapped by Tonya Harding’s buddy and O.J. Simpson was arrested after the Coronavirus of police chases, since the whole chase involved people you didn’t know dying and it dragged on forever, which both seem to be symptoms of COVID-19.

Hipsters had problems skating on lakes.  They wanted to do it before it was cool.

The oil market is so bad in April, 2020 that oil producers are shutting down existing wells.  Oil demand has dropped 29% in the last month, down from approximately 100 million barrels a day to only 71 million barrels a day.  71 million barrels a day is a number last seen when people were coming out of their Y2K bunkers to see if Skynet® crashed the world.  Spoiler alert:  if 2020 keeps going like it has been, I expect Y2K to actually happen sometime in June.  It’s been that rough of a year.

To me, the really stunning figure is that oil demand dropped by nearly the combined production of every single OPEC nation.  Yup.  13 nations.  Think about that when you think about the ramifications of our current situation.  The economic output of entire nations is now no longer important.  How do you eat in Venezuela?  Even when oil was profitable you couldn’t find food in Venezuela, thanks to the miracle of socialism.  One positive note about socialism – if there is a socialist hell (and if I have to go to hell), I’ll sign up for that one instead of the capitalist one.  They probably have already run out of money to pay for heat.

But the oil situation is scary.  36 crude oil super tankers are lined up in the ocean, just lurking off the coast of California, right now.  They represent 20% of the world’s daily production, and they have absolutely no place to go.  And I expect it to get much, much worse.

See, I can make fun of the metric system using Star Wars™, too.  (H/T to Arthur (LINK) for the idea.)

If demand dropped that much, what about production?

In some cases, production is ongoing because oil producers will lose leases if they shut down.  In others, the concern is that shutting a producing oil field can damage the reservoir, forever trapping some oil that could have been recovered.  In yet other cases, the producers have done the calculation that some money coming in is better than none, although when you have to pay to get rid of the oil, you can’t really make that up in volume.

Drilling will soon come to a standstill for the fracked shale oil wells that have been entirely responsible for the oil production boost seen since 2008.  One thing about fracked wells:  you have to keep drilling to get the oil.  A typical fracked oil well can decrease as much as 65%-85% in the first year, but keeps producing at a lower level for a very long time.  This produces a very simple equation:  to keep producing oil, you have to keep drilling and fracking for it.

Fracking for oil is just like the Red Queen said to Alice in Alice in Wonderland’s sequel, Through the Looking-Glass as Alice asks why they’re running and not getting anywhere:

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Drilling will stop, so a lot of that 8 million barrel per day increase in US oil production since 2010 will evaporate.  Gone.  And it will take years of drilling to get back to that number.

See?  Now you can have an Irish accent, and describe our oil situation with just one phrase!

The oil demand collapse will last for years, and will be in tandem with the economy.  My bet?  At least five years, if not a decade.  A slowly moving economy doesn’t need as much fuel since you don’t have the money to drive, anyway.  And we were pretty fuel efficient in the past, after all, it only took Christopher Columbus three galleons to find the New World.

But what happens when things start to get better, people start to drive more, and economies around the world begin to try growing again?  All the drilling rigs are put up.  All the drillers are doing other things.  The companies that used to drill and frack the shale are gone.  The expertise that was won over a decade of drilling shale in Texas and the Dakotas?  Like a Kardashian’s dignity, it’ll all be gone.

That’s when we’ll face whiplash.

Just as the economies of the world start to wake up from the slumber of their economic coma, they will have to face a hard ceiling on energy production.  Oil production won’t keep pace with demand, and then the fun begins as oil prices skyrocket and strangle an economic recovery.  This will lower demand, and you have a nasty loop where the systems will cease to reinforce each other, and will instead fight each other.

I know people talk about alternative energy, but even now alternative energy plays as big a role in the world’s energy makeup as alternative rock.  Eliminate the disastrous and uneconomic use of ethanol for automotive fuel here in the United States, and alternative fuel use across the United States (including windmills) becomes minimal.

But Darth Vader® insists on using Castrol Siththetic™ Oil.

63% of the energy for electricity (in the United States) comes from fossil fuels.  Nuclear is in second place with 20%.  The only other sources worth mentioning are hydropower and wind, which each produce about 7%.  Transitioning to alternative energy is even harder than re-learning how to frack oil shale:  it will take decades and billions of dollars of sustained investment.  On top of that, alternative energy faces technical, economic, and environmental hurdles that make teaching a fashion model to read look simple.

We could try to blame this mess on COVID-19, but COVID-19 couldn’t crash a system that wasn’t already as fragile as Alec Baldwin’s ego in the first place.  The developed world’s economic, monetary, and credit systems were already broken.  COVID-19 just came along and gave them a nudge.  If it weren’t Coronavirus, it would have been something else, like too many people showing up with 30 items in the 12 items or less line at the supermarket.  Every year of the last decade has been that system living one more day on borrowed time as it danced near the edge of a cliff.

But for now:  anyone want a great deal on some crude oil wells?