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Published on Economic Undertow on September 18, 2014

Amount of military spending in the US relative to other discretionary amounts; chart from National Priorities dot org.

Discuss this article at the Economics Table inside the Diner

Resource-consuming infrastructure in the West and elsewhere among its imitators has been built assuming real sub-$20/barrel oil into perpetuity; infrastructure includes cars, suburbs, airlines, goods-imports, military, government, finance, insurance, freeways, retail, workplaces, etc. Any price above $20-30/barrel is too much to bear.

At the higher price, our precious ‘Empire of Junk’ is underwater, a liability rather than an asset. What makes up the ‘spread’ or difference between the modest amounts that cash flow is able to service and system costs is debt, currently hundreds of trillion$ of dollars worth …

“What is ultimately essential is, on the one hand, the quantity of them technically required for combination with a certain quantity of living labor, and, on the other, their suitability, i.e., not only good machinery, but also good raw and auxiliary materials. The rate of profit depends partly on the good quality of the raw material. Good material produces less waste. Less raw materials are then needed to absorb the same quantity of labor. Furthermore, the resistance to be overcome by the working machine is also less.”— Karl Marx; ‘Capital, Volume 3′, chapter 5;

Lately, world oil prices have been dropping, from $108/bbl to $98. USA price has fallen to near $90. Drillers need a plus-$100/barrel price to be able to afford to drill, this is the large problem that is facing both the drilling industry as well as the country as a whole.

Countries like Mexico and Russia depend almost entirely on petroleum sales so national costs are added to drilling costs, this means these countries require $120 or more per barrel to meet expenses. Ditto Saudi Arabia and Iran. The countries can (and do) sell for less and are able to drill however, other non-oil expenses are not met or the countries fall into deficit, meaning they must borrow from their overseas’ customers or do without. Other than the US and to some degree the UK, no major oil producer is a credit provider.

Since countries like Iran and Saudia don’t have any agriculture to speak of, there are grave dangers to all petroleum players, both drillers and consumers. If there is insufficient credit available to customers, there are less funds available to drillers; by way of this constraint, credit creation itself is adversely affected. Without credit, countries are unable to import agricultural goods which in turn leads to uprising and violence.

The national media promotes the viewpoint of ordinary American consumers who use cars constantly. For drivers, cheap gas is a birthright/necessity. From a system viewpoint, the entire fuel supply/consumption regime is stranded by high costs. Fuel supply is subject to ‘energy deflation’ where a scarcity premium (or ‘rent’) is added to the refinery price as a consequence of supply/demand: even as the nominal price declines, the scarcity premium increases faster so that the ‘real’ cost of fuel remains unaffordable. Currently, scarcity rent takes the form of diminished purchasing power, or rather, diminished claims against it. Diminished claims take the form of inability of customers to borrow or lenders’ unwillingness to offer loans and for wages/firm returns to decline relative to other costs. Within energy deflation, a barrel of oil might cost $5 or less … yet there are few- or any customers with money to afford it. The decline in ‘money’ (claims against purchasing power) is the increased scarcity premium!

This dynamic feeds on itself with affordability always a little out of reach even as the fuel price plummets … as customers become bankrupt so do the drillers which reduces fuel supply => renders more customers bankrupt => ruining drillers in a vicious cycle. This deflation phase is just now underway. The key is the observation that multiple wars in oil producing regions have not triggered reflexive marketplace fuel price increases, instead prices have swiftly declined. The customers both in US and elsewhere are going broke faster than reductions in fuel supply can affect marketplace dynamics, customers are bankrupted by the costs of their own cars and the wars fought to obtain for these cars the necessary inexpensive fuel.

Driving cars for the greatest part is non-remunerative, it’s simply waste for its own sake- plus the benefit of auto manufacturers. Multiply negative returns times one-billion (the number of motor vehicles in the world) and it becomes easy to see the global scale of our finance- and debt problems.

Likewise, the costs of the various US wars must be added to the cost of any fuels: the wars are in- and- of themselves futile and pointless, the only gains flow to corrupt military services provider-contractors and manufacturers. In this way the automobile segment of industrial economy is at economic odds versus its military dependency; the agenda of the one clashes with that of the other.

Keep in mind, shortages that result from fuel being unaffordable are permanent … shortages = a decrease in purchasing power, the attempt to add (money-credit) claims against purchasing power is pointless as these claims cannot increase it and are simply redundant, they add to credit costs and nothing else.

“The capitalist mode of production is generally, despite all its niggardliness, altogether too prodigal with its human material, just as, conversely, thanks to its method of distribution of products through commerce and manner of competition, it is very prodigal with its material means, and loses for society what it gains for the individual capitalist.”— Karl Marx; ‘Capital, Volume 3′, chapter 5;

Purchasing power is an economic term that can be hard to put a finger on, like ‘value’. Basically, purchasing power is the ability to gain goods in a market by exchange with other goods (or services). Going further, purchasing power is the ability to gain capital by way of exchange with the fruits of capital.

Purchasing power is therefor relationship between capital and the non-capital good(s) that are exchanged for it. Here, ‘capital’ is non-renewable resources, the basis of all production. One side of the trade is value (capital), the other is the measure of goods that are derived from capital (worth). Purchasing power is intertemporal (value is not directly interchangeable with worth) yet components are tightly bound by way of the exchange itself.

Intertemporality represents the difficulty in properly evaluating purchasing power. As the goods derived from capital are far removed from it in form and utility; there are marginal- and opportunity costs that are embedded within goods that do not exist within the capital. There is no utility, marginal or otherwise, that attaches to uranium, petroleum, topsoil, timber, fisheries, water or any other capital, only that which attaches toward their extraction and ‘use’.

The purchasing power interrelationship is always equivalent, that is, the amount and quality of the non-capital good offered is equivalent to the capital as determined by exchange. It is the exchange itself determines purchasing power and nothing else.

Where purchasing power is the first-order claim against capital, all forms of ‘money’ or secondary exchange media including specie, currency, swaps or options, private-sector money (stock shares), discountable bills, receivables, bonds and structured finance issues are derivative, surplus claims against purchasing power!

For example: when a country creates local currency against overseas (money) collateral the nominal rate of exchange is arbitrary. One unit of currency ‘A’ might be worth one unit of currency ‘B’ or five and a half units or a thousand … or vice-versa. It is purchasing power that is multiplied; that of the one currency being equivalent to that of the other at all times regardless of exchange rate. Purchasing power relationship is inelastic and tightly coupled by way of arbitrage; the simultaneous purchase or sale of common goods with both currencies, such as a third-party currency or petroleum.

It is in the interests of the trading- and investing partners to maintain exchange rate stability over time, so that nominal and real purchasing power are aligned. Countries and central banks attempt to do so by way of currency pegs, interventions or by adjusting interest rates. Purchasing power borrowed against foreign exchange is always constrained by collateral, it cannot be ‘adjusted’ by cheating because any imbalance between funds and purchasing power is exploited by arbitrageurs.

Because specie is a natural resource (gold or silver) those elements are somewhat of a special case, nevertheless, as metals are used as money specie becomes a claim against purchasing power no different from paper currency or ‘bank money’ created within a database. Specie’ liability is the cost to extract it from the ground- or separate it from its previous owner by force or otherwise and put it to the use of the state. Labor is also a derivative claim against purchasing power.

Purchasing power itself exists outside the reach of governments but derivative claims in the form of currency or binding contractual obligations exist to serve the interests of the state, the same way religion exists to serve the state. By use of these claims, authorities are able to ‘sell’ or cause to be sold ‘goods’ that cost nothing to make yet are able, due to the citizens’ evolving dependency upon them, to bring the greatest part of the public into a form of uninformed, semi-voluntary servitude/slavery.

The actions of finance and monetary authorities aim to increase claims against purchasing power; by doing so they seek to increase capital. Yet the multiplicity of claims is perverse; capital is not increased but exhausted more rapidly. As capital vanishes into furnaces and then the atmosphere, so does purchasing power: at the end of the day capital is gone, leaving behind fragments of purchasing power alongside mountains of worthless claims.

When claims cannot be perfected against (vanished) capital they are turned against other claims including labor, this extinguishes workers’ purchasing power (which takes the form of wages). The real cost is the difference between what labor would earn without the claims and what it actually earns with the claims in place. The difference aggregates toward the issuers of claims — finance — relieving at the same time the obligations of the banks’ clients — the tycoons who borrow from finance.



Chart by St. Louis Fed (FRED): citizens wish to reclaim 1950’s purchasing power of the dollar-claim so that they might be able to purchase gasoline and other goods at 1950’s prices, not realizing that burning gasoline since the 1950s has eroded purchasing power … even as the worth of each claims against purchasing power has likewise been diluted. Even if the number of claims can be reduced, the purchasing power cannot be increased except by conserving capital, making gasoline unavailable. Purchasing power can never exceed underlying capital: think of it as the collateral component of purchasing power.

The three-way aspect of purchasing power must be kept in mind at all times:

Capital = Purchasing Power <=> Money claims against purchasing power.

Purchasing power is variable because any attempt at capital conservation, inadvertent or otherwise, increases purchasing power or at least diminishes it less quickly (which can appear as an increase). Currently, claims against purchasing power are relentlessly increasing so that conservation is offset by the effect of surplus claims.

Claims haven’t always expanded, they shrank during the 1930s Depression. Claims were in short supply due to debt-repayment mechanism (repaying debts-claims extinguishes them) as well as the unwillingness of citizens to part with their claims-in-hand (represented by currency). Purchasing power was extreme because of the quality and quantity of available (resource) capital, left untouched by diminution of demand/consumption. The Great Depression was an example of ‘conservation by other means’ ™. Because of the relative shortage of claims, America’s bulging purchasing power was not exercised or accessed: the country was both rich (excess purchasing power) and poor (absence of claims) at the same time!

In contrast, we are now poor and poorer at the same time: our mountain range of claims requires constant additions to meet service- plus surplus-management costs. Decreases in purchasing power render claims redundant, the bulk of our claims are either worthless or hopelessly diluted. At the same time, purchasing power itself is falling due to exhaustion of capital. There is little to compare the economics of the 1930s and the present time: we face the looming failure of the claims-mechanism as well as the onrushing shortage of capital.

Effective conservation would increase purchasing power but the increase in claims renders such efforts futile. Managers can regulate some of the claims but the private sector will ‘innovate’ replacements that can evade regulations. Because new claims carry the guise of virtue and salvation, there is a ready audience for them, a pool of users ready to use them to assault what remains of our capital.

Needed, a New Kind of Purchasing Power Ending the Claim Against Capital

The issue is the purchasing power relationship between capital/value and the products of it, as well as claims against that relationship. Business uses capital to leverage more claims against it: the capital-cannibalizing process becomes collateral for more claims => these become the means to extract of more capital => extraction becomes collateral for still more claims in a virtuous cycle. Fast forward to the present and more claims meets diminished capital returns, the purchasing power relationship has broken down.

Labor is the ultimate sink for nonredeemable capital claims. If capital cannot pay, then must labor do so. As a consequence, labor is bankrupted. It is far better if purchasing power becomes a claim against labor rather than the claim against capital. Not only would the exchange be more honest but claims would become real only when labor component of the purchase is properly priced. As labor produces less in quantity than industry/capital, it would be necessary to increase the price of those aspects of labor that add to the worth of goods: skill and creativity, utility. At the same time, capital claims directed against labor would be set aside: because our industrial output is the product of capital rather than labor we do not care whether labor is overburdened or not. Without the use of capital there is an incentive to make the best use of labor — rather than the least productive use of it. To do otherwise would be pointless.

Claims against labor/purchasing power would become appreciating assets; as up-skilling increases so would purchasing power. This increase would serve to extinguish obsolete capital claims over time. Even as capital diminishes, labor does not provided it is given the means to increase its ability. At the same time, labor claims would not be able to proliferate beyond the rate at which labor itself can increase. There is too much history of human labor and endeavor to expect the same kind of ‘growth’ that has been a part of the capital-destroying machine enterprise. Fewer claims would strand the tycoons, the useless rentiers and economic gate-keepers.

Americans have become so dulled-down by games, fast food, media and labor saving capital destroyers that we cannot imagine what an up-skilled citizenry would be like. As long as purchasing power is the first-order claim against fossil fuel waste we will never find out.