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"What if your entire worldview was just because of near-zero interest rates?"

novum.substack.com

Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.

This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.

While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.

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All across economics there's way too much interest in the demand side, not nearly enough in supply-side economics.

In Australia, there's a proposal to put a price cap on domestically sold natural gas, which we are a major producer and exporter of. Because the Europeans don't want to buy Russian gas (and someone influential is blowing up pipelines in pursuit of this agenda), they've been sucking out the gas from the rest of the world. The Australian gas industry is unhappy with the pipe caps and threatens to withdraw investment. 'Greedy companies making super-profits' on one side and 'Soviet style planned economy, Venezuela' on the other.

But nobody, gas companies excepted, is thinking about how to produce more gas! No matter how we or anyone manipulates the prices or export control orders, we cannot legislate gas out of the ground. We should've been producing more gas from the get-go, approving projects for export and domestic consumption. That directly alleviates the core problem, which is a shortage of supply. We could have a simple, quick regulatory system for gas production. Instead we have a very slow, expensive system where various interest groups get to wage lawfare against development. And so we get less gas. House prices are similar, that's the NIMBY issue in a nutshell. Power prices are another issue, nobody wants to build any new coal plants due to climate targets and so the price of power rises continually. There are costs to producing gas, issues with basins getting contaminated and so on. But there are also costs to having a giant legal mess of regulation constraining development for 6 years on a single project. It doesn't take that long to drill gas wells. There's plenty of gas in the ground.

A good way to reduce inflation is to lower energy prices. Energy prices are included in just about everything else. Yet instead everyone is just focusing on reducing demand by raising mortgage repayments. It wasn't macro-economic reform that produced the industrial revolution, it wasn't central banks making steam engines and industry. It was actual technical development and the efficient allocation of capital that made people richer, something governments don't seem to appreciate. If they want to make the economy better, they need to do micro-economic reform to make it easier to generate wealth.

I think one cause of excessive amounts of capital rushing into financial schemes, apps and crypto is that the real world is chock full of regulations that make it too complicated to build anything. Want to build apartments, factories, railways, gas wells? You need permission, you need to consult stakeholders, you need to get environmental assessments, consult indigenous peoples, protect 'vulnerable' species, pass endless legal checks. If you want to make something in crypto, you can just get going, release your white paper, airdrop your tokens, get the software working. Now the cost of this is that there are a bunch of scams and shitcoins. But there is certainly no shortage of innovation, things happen quickly.

Near zero interest rates could have encouraged broad development across the whole of society. The US at least managed a fracking boom that is paying off nicely now. I think regulations channeled too much of this money into 'tech' and housing. Finance is a culture because much of industry has been crippled.

We should've been producing more gas from the get-go, approving projects for export and domestic consumption.

Is this feasible within a relevant time-window? Production today is not based on yesterday's decisions, but instead those decisions made 3, 5, and 10 years ago regarding regulatory, investment, and infrastructural resource allocation. Thus, decisions being made today about production infrastructure and investment shouldn't be based on today's needs for more/less gas, but on estimations of the need for gas in 3, 5, and 10 years. The price, on the other hand, reflects demand today, irrespective of future or past projections or investments. Thus, the two are far less related than one might ordinarily suppose. Insofar as they reflect a broad-based general trend in demand, yes, prices are a good spur to investment and future build-out. However, when there is a lag in build-out's ability to ramp up production in the short term, and the price spike is caused by a short-term or otherwise exceptionally unpredictable event like a natural disaster or war, then the price is likely not a good guide to what the future may require.

This is why it's reasonable to discuss price caps for this kind of black swan event; it's not the kind of thing that could reasonably have been anticipated within the timescales necessary to ramp production, and no action taken today is able to reduce the price through increasing supply within a reasonable timeframe (or even one that reasonably guarantees the black swan effect's will still be applicable at the end of the preparatory period). Thus, it's proper to take into account the societal effects of a sudden and unearned windfall profit vs the costs to the citizenry who see prices spike uncontrollably.

Production today is not based on yesterday's decisions, but instead those decisions made 3, 5, and 10 years ago regarding regulatory, investment, and infrastructural resource allocation.

Well yes, certainly. The Narrabri gas project I'm thinking about has been delayed for years now. Indeed, we're reaping the reward of regulatory decisions made years ago.

But imagine if you told Stalin in 1941 that production of T-34s and rifles was based on the previous Four Year Plan and couldn't easily be scaled... You wouldn't even get to the end of your sentence because you'd be whisked off to a factory in Siberia, working 12 hour days while the factory was built around you, sleeping in holes in the ground. I'm not asking for a Herculean effort, just an acceleration of gas production. The US started to gear up its armaments industry, giving them some kind of contract where they buy munitions at any price, just to speed things up. If you want more of something, you should try to offer some kind of incentive. If we're not going to whisk gas executives to a well-used interrogation room if they don't meet quotas, we should pay more for our energy. As long as there's no hoarding, we should stick with market economics and interfere via subsidies for consumers if necessary. We should allow gas companies to drill for gas and simplify all the red tape. I appreciate that there are stakeholders who will be affected by gas companies drilling near them. The rest of the country is being affected by high gas prices, along with the rest of the world! We are all stakeholders.

it's not the kind of thing that could reasonably have been anticipated within the timescales necessary to ramp production

We're 10 months into this war by now. Decision-makers should have been thinking about a gas shortage as soon as the Europeans decided to stop buying Russian gas. I believe they announced this in February. It really doesn't take that long to drill a gas well, 6 months maximum (onshore of course, but that's what I'm talking about). I could buy that there are problems getting the capital, piping, tools in the right places, connecting up the pipes. But we're not even at that stage, our government still wants yet more regulatory approvals before exploratory drilling can begin! This after demonizing the whole fossil fuels sector for years now, signalling that their time is over. If we had acted quickly to increase production in February, we would probably have more gas if not now than in 2023, when the effects will be felt most severely I believe.

Consider also that state governments are livid about price caps taking away some of their royalties, they want to reimbursed by the Commonwealth. There's no consistent application of the 'sudden and unearned windfall profit' mechanism. In my mind, people who are providing gas deserve it more than governments who are making it harder to extract.

But on the other hand, what does it matter whether we put price caps on or not? There's clearly no willingness to fix the root problems in the regulatory sector. We may as well take a Panadol and ignore our unbandaged wounds.

imagine if you told Stalin in 1941 that production of T-34s and rifles was based on the previous Four Year Plan and couldn't easily be scaled... You wouldn't even get to the end of your sentence because you'd be whisked off to a factory in Siberia, working 12 hour days while the factory was built around you, sleeping in holes in the ground.

Yes, and those T-34s were made to such shitty quality control standards that they often couldn't even get more than few dozen kilometers before breaking down (leading to more paranoid Stalin memos about imaginary "saboteurs"), and had truly horrendous loss-ratios against theoretically-inferior German equipment (crews killed by armor spalling/bursting due to improper heat treating, ammunition exploding in the barrel due to poor quality of either the casing or the gun itself, failure to include waterproofing so that all the electronics shorted whenever it rained/snowed/dewed heavily, failure to include optics to specification leading to crews not knowing where they were going or what they were shooting at, etc.). There's a reason why Russian armor crews - particularly T-34 crews - had such abysmal survival rates when compared against other allied (or even non-T-34-armed soviet) armored units. Rushing things under duress doesn't magically make them appear in the ways you'd want.

The US started to gear up its armaments industry, giving them some kind of contract where they buy munitions at any price, just to speed things up.

More to the point, the U.S. had a large reserve of literate and mechanically-trained workers, plus very large pre-existing civilian chemical and mechanical industries which could rapidly be converted to military production. Not quite the same situation as current gas-extraction regimes, where there is a limit on the supply and location of the relevant trained labor, as well as a lot of up-front capital costs necessary to the location, surveying, and ultimately tapping of new natural gas sources.

We're 10 months into this war by now. Decision-makers should have been thinking about a gas shortage as soon as the Europeans decided to stop buying Russian gas.

Yes, they should have. But the flows remaining cut off for years was not a foregone conclusion, either at the beginning of the war nor even when the Europeans unilaterally decided to stop buying directly from the Russians, so there's at least some excuse for them not doing so. Moreover, bureaucracies do not move quickly, so even if all the relevant political decision-makers had been unified on the need to expedite additional drilling permits back in March, I bet you dollars to donuts they would have been significantly stymied by civil service obstruction. That, plus the ideological resistance to ramping up fossil fuels production in the face of "climate crisis" activists gluing themselves to things and making life miserable for constituent-services staffers makes the current situation not all that surprising.

Consider also that state governments are livid about price caps taking away some of their royalties, they want to reimbursed by the Commonwealth. There's no consistent application of the 'sudden and unearned windfall profit' mechanism.

I completely agree that prima facie reasonable policies can be implemented from selfish, greedy, or malign motives, put into place poorly, or actively twisted to harm the putative beneficiaries. This is not good, and is reason to be mad at the implementing government agency/ies.

But on the other hand, what does it matter whether we put price caps on or not? There's clearly no willingness to fix the root problems in the regulatory sector. We may as well take a Panadol and ignore our unbandaged wounds.

TBH....I can't disagree.

I suppose the T-34 issue is a matter of trade-offs. Reliability for throughput. The 1941 models were definitely poorly made, certainly, but they were at least there when they were most needed. At least the Russians had a card they could play, even if the Germans had the full deck of ground-air coordination, good training, veteran commanders, good NCOs and combined arms warfare... They needed to get all those things before they could start counter-attacking successfully and win the war.

I bet you dollars to donuts they would have been significantly stymied by civil service obstruction. That, plus the ideological resistance to ramping up fossil fuels production in the face of "climate crisis" activists gluing themselves to things and making life miserable for constituent-services staffers makes the current situation not all that surprising.

The Narribri gas project I was talking about seems to be in our version of the 'fast lane'. But the actual gas wells haven't yet been drilled! There are apparently a few more hurdles to overcome. As you say, the civil service is still obstructing it.

While this is a major win for the Narrabri project – on which Santos has already spent more than $1.5 billion over more than 10 years – it still faces major hurdles, including planning for a pipeline to get the gas to market.

https://12ft.io/proxy?q=https%3A%2F%2Fwww.afr.com%2Fcompanies%2Fenergy%2Fnarrabri-gas-project-cleared-by-native-title-tribunal-20221220-p5c7qk

The Narribri gas project pipeline has been designated 'critical infrastructure' as of December, 10 months late. They even managed to get the planning for the pipeline through, overcoming the native title issues in the tribunal. But 'critical infrastructure' doesn't exempt it from yet more environmental assessments:

https://www.dpie.nsw.gov.au/news-and-events/articles/2022/narrabri-gas-lateral-pipeline-declared-critical

Santos can now request assessment requirements to prepare an Environmental Impact Statement (EIS), which will be subject to extensive community consultation and a full environmental assessment.

What have they been doing for the last 10 years, if not environmental impact statements? It beggars belief that this is how we handle critical infrastructure! This project could supply half of NSW's gas needs, lowering prices considerably. We could then export more gas to our allies and make a lot of money in profits and tax revenues.

I agree with you completely about the civil service obstruction but the scale is just so egregious. Why haven't we learnt the lesson that spending 10+ years on regulatory nonsense isn't wise? Nobody is talking about this, not even on the right wing who is just ideologically against price caps as a knee-jerk reaction. There's just a debate about price-cap or no price-cap, how precisely we'll introduce the price cap. It's sucked all the oxygen out of the issue.

More to the point, the U.S. had a large reserve of literate and mechanically-trained workers, plus very large pre-existing civilian chemical and mechanical industries which could rapidly be converted to military production.

Oh I meant that right now the US is buying ammunition at whatever price, to refill arsenals depleted by their Ukraine aid. Not in WW2. There are certainly capital and skill problems but they're also rooted in the regulatory system. If you have to spend $1.5 billion on legal nonsense before you can drill, why leave capital here lying idle? I'd imagine the pipe manufacturers don't have much capacity either, for the same reasons. Much the same is happening with artillery shells, which are only produced by a single American factory IIRC.

I suppose the T-34 issue is a matter of trade-offs. Reliability for throughput. The 1941 models were definitely poorly made, certainly, but they were at least there when they were most needed. At least the Russians had a card they could play, even if the Germans had the full deck of ground-air coordination, good training, veteran commanders, good NCOs and combined arms warfare... They needed to get all those things before they could start counter-attacking successfully and win the war.

This is a common argument, but I'm not persuaded by it. Surely there was something else that everyone involved in making, driving, fueling, supplying, transporting, and fixing those crappy 1941-1943-vintage T-34s could have been doing which was more productive than throwing away their time, resources, and lives into machines that either broke down before ever facing the enemy, or promptly exploded upon entering combat. That was a lot of man-hours, steel, fuel, transport capacity, and food/supplies that just got wasted, bogging down all the other, actually productive things that were happening around them.

Bringing the metaphor back to the energy space, I would argue that streamlining new projects is only useful is they're done right. Do it wrong, and you're not just gonna have to deal with sloppy externalities down the line; the productivity of the well may also suffer, or the transportation infrastructure won't be right, or...[fill in the blank].

What have they been doing for the last 10 years, if not environmental impact statements? It beggars belief that this is how we handle critical infrastructure!

I'm a Californian. We have to deal with CEQA. I sympathize.

Why haven't we learnt the lesson that spending 10+ years on regulatory nonsense isn't wise?

Because no-one thinks in terms of "10+ years of regulatory nonsense"; they each think of individual discrete steps and safeguards, each of which have their own particular justification. "Oh of course you want an ecosystems expert to look at the hydrology report, because only they are best placed to know whether this well is likely to have downstream effects on habitat vital for any threatened or endangered aquatic species..." etc. ad nauseam. Each safeguard will have its own little list of sympathetic horribles associated with noncompliance, and its own constituency militating that any cuts made in the name of regulatory expediency should fall on someone else's department/subject matter. Each of these constituencies will care about their own little fief far more than the general public will care about the general issue of bureaucratic scleroticism and compliance costs, and so it will be rare that any of these requirements will be eliminated or even temporarily waived. It's the classic story about how motivated and organized minorities run circles around large, disorganized, unmotivated majority interests over and over and over.

Oh I meant that right now the US is buying ammunition at whatever price, to refill arsenals depleted by their Ukraine aid. . . . Much the same is happening with artillery shells, which are only produced by a single American factory IIRC.

Yeah, it's not that there isn't the will to try and ameliorate a shortage; its that no-one foresaw the sudden surge in expenditure coming, and so didn't bother to keep backup production available, so now the whole supply chain has to be stood up.

Were T-34s from '41 to '43 that bad? By 1942 they had simplified production costs a lot and fixed some of the awful ergonomics. I heard that the Soviets did the numbers and worked out that they didn't need to be too reliable because they'd be destroyed quickly by the Germans anyway. What else could they do? Make more anti-tank guns and heavy tanks? That might be a competitive build in Hearts of Iron IV but I'm sure there's a reason everyone tried to have a staple medium tank. There are places heavy tanks can't go, issues with German airpower destroying tanks regardless of their frontal armour... Most academics seem to agree that the T-34 was the best tank of the war as an all-rounder. They can't just base that on the T-34/85 (which was pretty good), the '76 was alright as well.

I suppose I am arguing for the gas and assorted pipelines to be streamlined 'right' but is that really so hard? This is fairly old technology, we're the 5th largest gas exporter in the world. We ought to be capable of this. If we're not, we should aspire to be capable of this politically, legally and industrially. I think that you can and should streamline tank production in wartime, that we can and should have streamlined gas production.

It's the classic story about how motivated and organized minorities run circles around large, disorganized, unmotivated majority interests over and over and over.

True and sad, I suppose. We take these things too seriously. If there's a competition, you'd think Big Gas would be able to win. They have a big financial incentive.

Yeah, it's not that there isn't the will to try and ameliorate a shortage; its that no-one foresaw the sudden surge in expenditure coming,

Disturbing given the US has been writing all these strategic reports about the return of great power competition. Building up reserves of munitions is surely a good idea if you're worried about large-scale wars. What were they thinking? There are military planners whose whole job is to make sure things like this don't happen, that the US/NATO doesn't get caught off guard. I would've thought maintaining capacity for large scale production of munitions would be a no-brainer. NATO spends about 20x more than Russia on military spending, you'd think their arsenals would actually be larger, yet Ukraine alone was supplying about 10x more shells to Russia pre-2014 than America was producing overall, if this twitter fellow is to be believed.

https://twitter.com/spawnofKahn/status/1554705365383757824

Were T-34s from '41 to '43 that bad?

By late '42 they had mostly figured the biggest production problems out, but legacy issues (like massively over-heating the armor steel, which caused significant interior spalling on impact and a lot of needless crew-deaths, and the absolutely nightmarish gearbox which required significant force to even get into 3rd gear, and would frequently break gear levers on attempts to get into 4th) remained for years.

I heard that the Soviets did the numbers and worked out that they didn't need to be too reliable because they'd be destroyed quickly by the Germans anyway.

I mean, maybe? But given that a lot of the problems that went into T-34 production actually caused significant combat-losses before even making contact with the enemy (breakdowns, fuel problems, lack of spare parts, defective ammunition, etc.), and also significantly reduced the performance of the tank in combat (i.e. made it much more likely that their tanks would be destroyed by "inferior" opposition), I doubt it.

What else could they do?

Focus on logistics, and adequately supporting those numbers of well-functioning vehicles and units they had. That "Enemy at the Gates" meme that the Soviets didn't have enough guns to arm all their soldiers is false - they had oodles of materiel (admittedly, much of it outdated), but their logistics were so shit, and they were so myopically-focused on things which obviously looked good on paper (i.e. the number of soldiers, tanks, etc. in front-line units) that they completely failed to ensure that their soldiers and weapons at the front were able to actually fight. They were also getting thousands upon thousands of lend-lease tanks from the western allies, including many, many, many Shermans (called "Emcha" by Russian crews). So it's not like they were hurting for medium armor; they were just shit at designing and making it.

Every technician man-hour spent repairing shitty broken T-34 gearboxes could, and arguably should, have been spent fixing supply jeeps and rail systems. Every railway carriage ton dedicated to carrying badly-equipped T-34s to the front lines could have been used instead for food, water, ammunition, or other badly-needed supplies for existing front-line units. Etc., Etc.

If there's a competition, you'd think Big Gas would be able to win.

Interestingly, a lot of big gas companies are staffed by the same PMC urbanites staffing every other ESG enterprise out there. And those folks (plus all the good ESG folks in major lending institution) took one look at projected fossil fuel usage charts which were super-optimistic about the "green transition", noticed that demand would allegedly be tanking in the mid 2020s, and stopped funding new infrastructure/exploration efforts, which wouldn't have enough time to make back their investment until fossil fuels were (allegedly) obsolete. Amazing, I know. But seriously, investment dropped by like 30%.

NATO spends about 20x more than Russia on military spending, you'd think their arsenals would actually be larger

The Pentagon, which is the lion's share of that NATO spend, has never passed an audit, and after significant reform (and finding new ways to sweep things under the rug) still can only account for 39% of its assets. Shit's broken, yo.