“Clean” Coal and Sludge

When we talk about “clean” coal, it is a relative term. All coal produces heavy pollutants and atmospheric carbon by the ton when it burns in a power plant. “Clean” coal produces more atmospheric carbon and less heavy pollutants because of the way it has been washed before burning. The trouble, of course, is what happens to the water and detergents that are left over from the washing process. This is an unsolved problem every bit as vexing as nuclear waste.

The by-product of washing coal after it is mined is an acid and highly toxic solution called coal slurry, though it is better described as sludge after some of the water has evaporated away. Mining companies fill whole valleys with lakes of coal slurry, held behind dams that aren’t built to the usual engineering standards of an earthen dam. The inevitable result is a long series of well-documented disasters as these dams break. Usually, of course, the dams hold, and the sludge eventually dries and forms a relatively stable, though still highly toxic, solid.

It is a horrendous answer to the problem of coal sludge, but it is the best we know of. Coal slurry is too acid to be held in tanks, acid enough to eventually destroy any tank used to contain it. Sometimes coal slurry is dumped back into coal mines, where it seeps into the ground water and may destroy all underground water supplies in the local area. That is a problem so costly that regulators are talking about completely banning this approach. Known industrial techniques for drying coal slurry release much of the acid and toxic minerals into the atmosphere, largely defeating the purpose of washing coal in the first place.

All known techniques to handle coal sludge safely are hugely expensive. There are similar problems with the other local by-product of coal, the coal ash that results when coal is burned. Coal ash holds most of the same poisonous materials found in coal sludge (though in quite different proportions). Coal ash should be buried, but often is dumped into the same reservoirs that hold coal sludge. If we took the trouble to handle coal sludge and coal ash safely, coal would no longer be a “cheap” fuel, but would be more expensive than oil as a source of electricity. That’s why we live with the risks associated with artificial lakes filled with the toxic by-products of coal.

In truth, coal-based electricity has been more expensive than oil all along. It is less expensive to electricity users only because many of the costs have been shifted onto the community at large. In the long run, we have no choice but to make the transition from coal to less costly sources of energy.

Wall Street vs. Sesame Street

For a few minutes in last night’s presidential debate, the two candidates were discussing the financial reform law. It was a moment that highlighted all that is wrong with the American political system: the incumbent trumpeting the very timid reforms as an important accomplishment, the challenger declaring it a disaster and vowing to repeal parts of it without appearing to understand either the parts he would repeal or the parts he would leave standing. Neither Obama nor Romney seems to have figured out that the current economic circumstances are different from what we saw in the 1970s and 1980s, so they are not really qualified to pontificate on the state of the national economy in the first place, but to make matters worse, their thoughts were so abstract it was hard to say what any of it really meant. It was painful to watch.

Romney is not a numbers guy and easily confuses millions, billions, and trillions, a point that struck home when he proclaimed, with more conviction than anything else he said all evening, that he would balance the budget by canceling Sesame Street. For those not familiar with it, Sesame Street is almost the longest-running program on U.S. television, a low-budget early education program that combines live action, animation, and some iconic puppets, including a large yellow bird called Big Bird. “I love Big Bird,” Romney said, as he hastened to add, in so many words, that sometimes you have to kill the ones you love.

The non sequitur of confusing the scale of a TV show budget with that of the federal budget took Twitter by storm and was the most discussed topic from the debate for the remaining hour of the debate and afterward.

Romney supporters worried about all the attention Sesame Street was getting. “Seriously? You guys are talking about a TV show?” But it was that moment that best symbolized the debate. Most of what the candidates said on taxes, jobs, and banking regulation was vague and, in Romney’s case, contradictory, but Romney was clear, specific, and passionate when he talked about firing Big Bird. It was the moment that stood out.

Romney likes to frame issues in terms of stark choices, and whether he meant to or not, he introduced just such a split in the debate. You have to choose between Wall Street and Sesame Street, he told voters — and there was no question that Romney assumed voters would support his decision to throw a few new favors in Wall Street’s direction while he simultaneously demolished Sesame Street.

I am not so sure that was a good political calculation on Romney’s part. First, he vowed that if he is elected, you will never see Big Bird again. But a television show does not last for nearly half a century without having its fans, and it is easy to imagine a few million voters asking themselves if they really want to vote to kill off some of their (or their children’s) favorite TV characters.

Second, the specific focus on an educational program seems to indicate a belief that early childhood education, and by extension all education, is too unimportant a matter for the government to be involved with. Many voters will disagree with Romney’s priorities in this area.

Third, the United States is prosperous enough to have both Wall Street and Sesame Street. The last half-century of our history is proof that it can be done. When Romney sets up a choice between Wall Street and Sesame Street, it is a false choice. It is a reasonable answer to say that you want to have both. Even if voters accept the premise that they have to choose, I am not so sure that a majority would choose Wall Street over Sesame Street as readily as Romney did.

Fourth, when Romney talked directly about “firing” Big Bird along with the debate’s moderator, Jim Lehrer, who anchors a news show that Romney would also cancel, it plays into the simplistic narrative that Romney’s whole career has been about cost-cutting in the form of job cuts. The fact that this was the one moment when Romney really sounded sure of himself does perhaps suggest that job cuts are the one thing he is actually good at.

Last night’s debate was Romney’s last chance to define himself and his candidacy to voters. This was something he had somehow failed to do in the primary season, at the convention, on his campaign web site, or in his attack ads. He could have said anything he wanted. What he chose to say is that he wants to fire Big Bird. And that, I am afraid, is likely to be remembered, subliminally at least, as the defining policy of his campaign.

Update: On Thursday, Obama noted Romney’s twisted Wall Street/Sesame Street dichotomy when he summarized Romney’s top financial policy priorities:

He’ll get rid of regulations on Wall Street — but he’s going to crack down on Sesame Street.

Currency Crisis and Tear Gas in Iran

Iran’s currency, the rial, has dropped sharply since last week. The central government is intervening to stabilize the currency. In Tehran, that means trouble in the streets and tear gas to try to disperse the crowds.

I have a hard time getting any reliable information on the currency dynamics involved. It is easy to find theories, including the president’s talk of the “psychological pressures” of an “economic war,” but among all the theories I have seen in the press, none ring true.

If the cause of the currency decline is not obvious, the solution is less so. The government is looking for answers out on the street. Police today stepped up pressure on shopkeepers to reopen shops closed because of fear of protests against rapidly rising prices, combined with the currency uncertainty itself. Some shops have reopened, but with thinner inventories than usual. Meanwhile, the government is trying to gain a greater degree of control over the currency-exchange process at the street level, where exchange rates have not always maintained any connection to the international markets in recent days.

My best guess is that the real problem in Iran is the growing gap between production and standard of living. Iran for decades has promoted population growth while harassing its economic base. Productivity has suffered, and production of food and consumer goods especially have not been keeping up with the growth in population. Even without knowing the specific mechanisms at work in the currency markets this week, they ultimately cannot be too far removed from the fundamental diverging trends in Iran’s economy.

The Quadrillion-Dollar Savings Crisis

The current state of the global economy is often referred to as a debt crisis, but in economics, there are two sides to every market. You can’t have chefs without farmers, or factories without workers, or trucks without roads. The other side of borrowing is lending, and the ultimate basis of lending is saving. The debt crisis, then, can also be seen as a crisis of saving.

This is the opposite of what common sense tells you. We always hear that people are not saving enough, and in a very real sense, on an individual level, that is true. But the larger problem is the amount of money people are trying to save. If everyone were to save as much as they wish they could, the global financial system would fail. Indeed, the point of failure is already uncomfortably close.

It is important to understand the proportions involved. In the United States, financial planners recommend, for those who have the financial means, a retirement fund of $3 million. That’s what it takes to maintain a prosperous, upper-middle-class, not-quite-wealthy lifestyle through retirement, allowing for the possibility that you may live as long as you can statistically expect to. The average American hopes, through some miracle, to be able to retire in this fashion. The average American would certainly save this kind of money if this could easily be done.

But it is economically impossible for everyone to save this much money. Soon there will be one third of a billion Americans. If everyone had a full retirement fund saved, the total savings would be one quadrillion dollars.

It is hard to explain the scale of $1 quadrillion. It is hard, first, because of the magnitude itself. In the United States, we have only recently learned to consider issues of $1 trillion without trembling. One quadrillion dollars is one thousand times that. But even when you understand the magnitude, one quadrillion dollars is hard to understand for a different and more fundamental reason.

To put the problem very plainly, there isn’t that much money. Not really, not in the sense of money that you can spend right now. The world is prepared to deliver not much more than $2 trillion in goods and services at any one time. That capacity sets the limits on the amount of real, active money there can be. There is possibly $2 trillion in real, spendable money worldwide. Any money in excess of this exists only because we aren’t all trying to spend it at once. The actual amount of money is considerably larger than this, an order of magnitude larger, but it is possible for that money to exist only because we are systematic, orderly, and predictable in the way we hold money before we spend it. Anything that interrupts that flow, then, can become a crisis of money. The more money that is saved, in proportion to the world’s productive capacity, the more easily such a crisis can occur.

So if there is only something like $2 trillion in real, spendable money, how can we ever save $1 quadrillion for our retirement? Well, we can’t. It is as simple and as stark as that. Worse, the more we save, the more top-heavy and fragile the financial system becomes. And then, anything that abruptly changes people’s view of money or otherwise shakes up the way people handle their money can create a crisis.

And the situation is worse than what I have laid out so far. It would take $1 quadrillion to fully finance the retirements of people in the United States. What about the rest of the world? For that matter, what about the sovereign wealth funds, billionaire-investors, and criminal enterprises? They all want to save money too. One way or another, the world is well on its way toward $1 quadrillion in savings, and there is no easy way around it. We can’t sort it out by making minor adjustments here and there. Suppose Americans voluntarily decided to live on the edge of poverty in our retirement years. That would reduce the U.S. retirement savings load only by a factor of about 8 from the imagined ideal. That adjustment is not nearly enough to bring retirement savings within the realm of real money.

So what are the consequences of the quadrillion-dollar retirement savings load? These are some of the more immediate, obvious, and colorful ones:

• Low interest rates. Currently, interest rates are near zero. You should not plan on them going up before you retire.
• A perpetual state of financial crisis. The savings load isn’t going away, so the financial crisis will not go away either.
• Savings wiped out. In theory, much of our $1 quadrillion in savings is insured or hedged in some fashion. But if the amount of real money in the world is only on the order of $2 trillion, how real can the insurance be? Given the leverage involved in the financial system, it is not hard to imagine an institutional crisis of a scale large enough to wipe away not just one retirement fund, but an entire country’s retirement savings.
• Price spikes and bouts of hyperinflation. A world that has $2 trillion in real money and close to $1 quadrillion in phantom money faces the risk of unpredictable shortages and price increases whenever people in large numbers try to convert their phantom money into real money. This can happen just because masses of people lose confidence in an institution or otherwise change their opinions of money in some way. Yet price spikes could reverse just as abruptly if opinions change again.
• New currency. A financial crisis on a large enough scale could wipe out a national government or render its money worthless. Yes, this could happen in your country too. There is a very real chance that the currency you use now will be abandoned in your lifetime.
• High prices for real estate and gold. People who cannot spend their “phantom” money in any useful way on goods and services will elect to spend some of it on unproductive but scarce resources that they hope will convey some privilege in the future. This kind of spending will drive up the prices of various assets, including real estate and precious metals, especially gold.

As far as I can tell, the quadrillion-dollar savings crisis is completely unavoidable. For two centuries, since the dawn of the industrial era, we have managed economic matters with the understanding that any problem in economics or finance could be overwhelmed by economic growth. This is the approach that has rescued the government-sponsored retirement systems up until the present, but no one really believes it can be pushed much farther. The savings crisis does not lend itself to this kind of thinking at all. Indeed, as individuals become more prosperous and shift their financial focus farther along the continuum from labor to savings, the savings crisis gets worse. But this is so counterintuitive that it may take a generation of ongoing financial turmoil, or an actual worldwide financial collapse, before leaders consider that a different solution is called for.

That solution, when it comes, will restructure things to put less pressure on the financial system. Our current consensus idea of retirement will have to give way, which also means our idea of work will have to change in a fundamental way.

On an individual level, what can we do? I wish I had more answers than I have. I can do little more than repeat the same advice I have offered for years. The ability to work, which essentially means staying in good health, is the most valuable thing you can have. Education is important. It is important to have friends.

There will be financial answers too, and I have some thoughts about what those might be, but it is perhaps a bit beyond me to try to spell them out here today. I must add, though, that no one should imagine that a financial collapse, if one should occur, would lead directly to an economic collapse. As long as most of us are able to work and we do not lose sight of what is needed to take care of each other, the economy will carry on.

Corduroys for Christmas 2012

I didn’t see them myself, but I heard reports of the holiday-season displays coming out of the boxes over the weekend. Today is October 1, the day when U.S. retailers traditionally begin showing Christmas-themed merchandise, even though they don’t expect sales to reach significant volume until after Election Day, which this year is November 6. One marketing theory that drives this strategy is that people get used to seeing the holiday merchandise before they start buying it.

I wish I could say this looks like a more favorable Christmas shopping season, but instead, at this point, it looks as if retailers are overconfident again this year. Some signs of this:

• The big product push for Christmas 2012: corduroys. Gap, Target, and others are betting that shoppers are so sick of practical clothing that they are ready to pay jeans-like prices for something childish, frivolous, and uncomfortable. They make it sound like a good theory.
• Larger seasonal hiring plans than in any of the last five years. Estimates and announcements at this stage aren’t necessarily accurate, but we may be looking at more than 1 million temporary retail jobs.
• Retail analysts are brushing off this year’s decline in consumer electronics, saying that lack of interest won’t carry over to the gift-giving season. Yet no one really knows why electronics have lost their shine, so there doesn’t seem to be a basis for predicting a sudden comeback.

I could go on, but — $100 million in corduroy inventories? It just doesn’t sound like this is retail’s comeback year.