Unaffordable Houses

In New Zealand, house prices are rising at an uncomfortable rate, partly aided by a shortage of stock. Somewhere about the late 1980s a number of houses were built to “look desirable and be cheap”, but unfortunately they were built badly. Why? Because a nominal “Labour” party was hijacked by right-wingers who made the likes of Thatcher look almost left wing. Regulations were cut, the market ruled, and buildings are hard to tell how well made they are until some number of years later, when they started to fall to pieces. The consequence was that local government and a changed central government pushed out regulations, and with amendments, and from then on it became a bit of a nightmare to build. Further, Councils put restrictions on land use so developers began land banking, thus raising the price of available land to high levels. Prices rose dramatically, but houses were immediately bought because interest rates tumbled. I thought we might be unusual here, but I recently found an article in The Economist” on house prices. Apparently the New Zealand situation is occurring across most Western countries. Germany apparently has had an increase of 11% over the previous year, while South Korea and parts of China have had to tighten rules for buyers.

The Economist stated monetary policy is partly to blame. Cutting interest rates mean borrowers can afford bigger mortgages and others find it easier to manage existing loans. On the other hand obtaining the mortgage is far from easier as the banks are worried about the long-term effects of the virus. In America 60% of bank loan officers have tightened the requirements for borrowing. However, landlords are willing to pay more because the perceived return on other assets has fallen. That is why stock prices are rising, despite the fact that economies are in deep trouble. The quantitative easing is sending money into the economies, but too much is going to those who wish to invest rather than to those who want to buy consumables. Investing in new companies or new construction would be virtuous, but these guys want a quick effort-free result, in which case there is nowhere else for that money to go other than existing assets. Meanwhile the moderately richer people can liquidate some other assets, and particularly bank deposits, which now return very little and pay more for houses. Sorry, poor, but your rent will go up because these guys are not running a charity.

It should be noted that many governments claim that quantitative easing is not inflationary. Actually, it is, but we must recall relativity. It devalues the money relative to what would have happened had it not happened. Keynes would argue that is a highly desirable outcome, but only if the debt so generated is paid back when times improve.

Fiscal policy is also a problem. In a normal recession, people lose their jobs and as their income is insufficient, foreclosures drag house prices down, which leaves ex-homeowners with a blemish on their credit history, making further borrowing harder. Thus the supply of houses increases and the number of people able to get a mortgage falls, which leads to cheaper houses. However, this time the richer countries have preserved household incomes, at least for a while, through wage subsidies, furlough schemes and expanded welfare benefits. Apparently in the G7 countries, in the second quarter disposable incomes were $100 bn higher than before the pandemic. Go figure! A number of countries have also allowed borrowers to suspend or defer all or parts of their repayments, and some have even banned foreclosures. The governments are protecting those in debt, at the expense of those who save or are young.

There is also possibly a third factor: since it has now become desirable to work from home, many office workers are looking to buy a bigger home. This is not a bad thing regarding the poor, but it boosts the price statistics of larger houses. Accordingly, this creates an illusory aspect to house price increases, to add to the real increases elsewhere.Which raises the question, where to from here? Governments have to wind down the fiscal stimulus, and we can expect increasing unemployment to reduce demand, but supply may also decrease as investment for new houses becomes more difficult to obtain. Very low interest rates may lead to increased purchases, but it also leads to decreased savings, which means that other than printing money and inflating the economy, after the initial “sugar high” the investment needed to build new houses may dry up. As the Chinese curse reminds us, we are living in interesting times.

The Poor in a Democracy

One issue that is finally coming to public notice is the issue of inequality. When the virus started to make an impression, Jeff Bezos’ net wealth increased by tens of billions of dollars and that was effectively a free result of the increased significance of Amazon. Yes, Bezos did very well to set it up and he deserves a life of wealth, but that much? At the same time, a very large number of small businesses around the world were going bankrupt, workers were being fired, and in lands of plenty, very large numbers of people cannot afford a proper place to live, they struggle to buy enough food and electricity, and their children are hampered because they do not have the money to use internet technology for their learning. 

Let’s forget the virus. Before that, if the nation’s GDP went up, the lower incomes remained stationary; if there was a recession, the poor’s net wealth, if they had any, gets obliterated, and if they get sick they are in real trouble. The State makes policies that favour the rich, the bankers, and so on, and it is the poor who pay for it. How does this happen in a democracy? That it happens is shown by India, the world’s largest democracy. It is now a middle-income country, according to statistics, but it has the world’s largest number of extreme poor and the third largest number of billionaires.

A recent article on democracy in the journal Science used water as an example of 

a resource in limited supply. Suppose there is just enough for everyone to drink and wash. Now the rich can pay for huge private swimming pools so they make political donations, they get their water, and the poor get rationed through water meters and charging. The costs are trivial for the rich, but the poor cannot pay for the cost of the meter and the bureaucracy associated with charging and have enough income left over to pay for children’s education. So why did this situation occur? Essentially because the politicians permit it. The simple answer would be to ban swimming pools, but the rich will never permit that, and their power lies in the fact they fund the politicians’ election programs. There may be sufficient voters to have the overall power, but they cannot organise that advantage.

Further, politicians and parties become weaker if information flows improve. One of the first things you find out about governments is they seldom come clear with what they are doing. Politicians make grandiose generalized statements that sound good, but seldom show what is really occurring with any accuracy. That comment is sparked by the fact that New Zealand is having an election soon, and one thing that happens is there are TV slots in which senior politicians are asked questions from the public. Very seldom is a question answered properly. If you think that is just New Zealand, consider the debate (??) between Trump and Biden last night. Trust me, the NZ debates shine very brightly compared with that chaotic fiasco.

Nevertheless, when the word inequality was raised here, it got swiftly deflected. A recent question related to the effect of low interest rates. Strictly speaking, our government has no say in these – they are set by the Reserve Bank, but nevertheless the argument produced was that lower interest rates means less is paid on mortgages, and hence the poor get the benefit of easier accommodation, with money left over to buy food, etc. 

Yeah, right! Lower interest rates tends to lead to an increase in house prices. First, those with money see less return on bank deposits so take the money to buy assets. Accordingly, you get a booming house market and stock markets have record highs, even though thanks to the virus, businesses are not necessarily doing better business. That means house prices rise, so anyone buying simply pays a similar fraction of their income to the bank in interest, but their capital debt is higher. Because house prices rise, rent rises. The poor have just as little money to spend, or even less, business does not turn over better, while the rich stock up on assets, and probably work out ways to get tax relief for them. Thus lower interest rates are yet again another way to transfer wealth from the poor to the rich. Those who have houses tend to benefit, but they are not the poor.

We also have parties promising lower taxes. The poor would get enough to buy the odd extra loaf of bread a week, while the rich get serious increases because these tax reductions tend to be proportional to the tax. Rent/housing costs increase and that extra loaf of bread is gobbled up by the bankers, plus a lot more. Worse, we have quantitative easing. Either that has to be paid back (and that will not be paid by the rich, even though they are the only ones to benefit) or it will inflate the currency, at which time again the poor lose because the rich have their wealth tied up in assets. If you don’t believe the rich don’t pay tax, see the recent fuss over a certain Donald Trump.So why do the poor put up with this? There seem to me to be two reasons. The first is the poor cannot get themselves organised. They tend to be the ones who don’t vote. They say no party cares about them, but if they are not going to turn up and vote, guess why the parties concentrate on those who will vote. Another interesting point is that parties that nominally favour the poor usually have politicians who are quite wealthy. Getting elected by the poor might be easy, but getting nominated for a party with any show is hideously difficult. Parties pick candidates that will be trouble-free. Donors must not be upset. Which ends up with getting politicians whose major skill lies in getting elected. Asking them then to do something creative, as opposed to doing what the lobbyists want, is too much. Asking for a conscience is just plain silly. It ain’t goin’ to happen any time soon.

We Need Facts, not Fake News

Some time ago I wrote a post entitled “Conspiracies and Fake News” (https://ianmillerblog.wordpress.com/2020/02/19/conspiracies-and-fake-news/) and needless to say, I have not succeeded in stopping it. However, it seems to me this is a real problem for changing public policy or getting people to comply with the new policy. To be effective, policy needs to be based on facts, not on what someone would like it to be or fears it might be, or worse, doesn’t even care but feels the need to be seen to say something. Recently, our TV news has had about four different quotes of President Trump saying New Zealand is in a crisis regarding COVID – 19. I don’t want to give the impression it is like Utopia here; it isn’t, and we have our problems but we have a population of five million and so far the total deaths come to 22. Take your own country and multiply that 22 by your population in millions and divide by five. I think you will find we are doing some things right, and our current problems are almost certainly because the quarantine restrictions for returning citizens were too kind. Most obeyed the rules, but there were a very small percentage who did not. Here, the policy did not recognize the fact that some people are totally irresponsible. A few days ago someone who knew he had the virus broke out and went to a local supermarket for something. You cannot run a quarantine like that, and that selfish oaf will have made things much worse for future entrants.

But for me, the worst things are those who spout what can only be termed “fake news”. One lot of people, particularly young people, argue the virus is just like a mild cold. Well, fact check. Mild colds do not kill 800,000 people in a little over half a year. It is true that for the young it seems to be not very hazardous, but for the older people it is serious. Why? Here, understanding of causes might be desirable. Part of the reason may lie in angiotensin-converting enzymes, of which for the present there are two important ones: ACE1 and ACE2. These modulate the effects of angiotensin II (ANG II) that increases blood pressure and inflammation, which in turn leads to various tissue injury. The elderly tend to have more ANG II, which leads to higher blood pressure, etc. ACE2 mitigates the pathological effects of ANG II by breaking it down. However, ANG II does have useful effects, and so the body has ACE1, which leads to an increase in ANG II. If you are wondering where this is going, I apologise, but now to the virus, SARS-Cov-2; it binds to the ACE2 receptors as a way of getting into the cells and stops its action. As a result, ACE1 is busy stimulating ANG II, and too much of that leads to cell scarring, etc. As partial good news, ACE inhibitors, used to treat high blood pressure, block the activity of ACE1, and so may help stop the bad effects of the SARS virus. As to why the young are less affected, they seem to have fewer ACE sites. (The very young also have lower levels of androgens, which stimulate viral reproduction.) The reason I have gone on a little on this is because as you learn the facts, it becomes a little easier to see how this virus might be defeated. You win by logically applying true facts.

Another objection I have heard is the flu is worse, and I heard one assertion that in the 2018 season it killed 1.5 million. The CDC website says the figures are not yet in, but the biggest earlier figure was a little under 800,000 infected sufficiently to be hospitalized. On request for where the 1.5 million came from, no reply. It appears some figures are made up. Another figure that gets bandied around is the infection fatality rate. This is cited as extremely low. How? Because the number of infected are estimated. You can estimate anything you like! However, if the number of harmless infections and hence those with immunity were true, the virus problem would be over. It isn’t.

Some other bad news. First, masks don’t make much difference, then suddenly, yes they do and everyone should wear one. How did this situation arise? In the absence of tests, and hence facts, various people have expressed opinions. Here, you have to ask what you are trying to defend from. If you are trying to defend against coarse droplets any mask will do, but if you want to defend against an aerosol you need something more sophisticated, and it has to fit properly. On the other hand, a mask will not make the situation worse, so from mathematics if you don’t know, wear one and hope.Perhaps the worst news: vaccines are bad. Apparently someone made up the claim that vaccines have mercury in them, or aluminium nanoparticles. There are even claims that vaccines will contain nanobots that allow the authorities to keep track of you. The fact that these do not exist (application of energy conservation laws will indicate a minor problem with them) and if they did, someone in the vaccine business would object is no problem for these near paranoid rumourmongers. If someone knows that such pollutants occur, why don’t they take the samples to the authorities so the perpetrators will get long jail sentences. Oh, didn’t you know the government is out to get you? They are encouraging this to kill off citizens. That is the most ridiculous balderdash out. OK, Putin appears to have ordered specific attacks on people like the Skripals, but besides being incompetent, that is not general, and Western governments would not do that, and if they tried they would be exposed. However, it leaves the question, how can society survive if this sort of nonsense and non-critical thinking continues?

How We Got to Our Current Economic Problems

A little while ago, Nature (582, 461) ventured an item on our economic problem, and it is of interest to reflect on this. Most economic presentations, especially those that concern politicians, involve microeconomics: what happens to individual, families, businesses, etc. That is natural because that is where the votes lie, and to some extent it is what politicians can control. The main point of the Nature article revolved around macroeconomics, which involves cross-border capital flows, the role and behaviour of central bankers, the role of global financial markets, and the role of the US Federal Reserve, which, despite its grandiose name is actually not a government owned or controlled institution. The owners of the Federal Reserve are effectively members of the plutocratic class that own the economies.

In 1944, Franklin D Roosevelt decided to make some attempt at fixing the macroeconomic situation and he invited qualified experts to set up a useful system to form an international financial system that represented the needs of diverse geographical regions with diverse economies. Of considerable interest, bankers and financiers were barred, as Roosevelt did not trust them to put aside their own interests. FDR understood them very well. The result was the Bretton Woods system, named after where the procedures were devised. This arguably worked well, although I have little doubt it could be criticized.

In 1971 Richard Nixon dismantled that system and replaced it with, er, not much. A special place arose for the US dollar, which, because the US economy was so large that no single transaction would appear on the overall “balance sheet”, this was the only real currency that was considered to be stable. The idea was, if there were anything resembling an idea, let the market rule. A subsidiary idea was (although this was never openly stated) it gave a special position to the Federal Reserve, who could print what they felt like printing. The market is the proper place for fixing the price of things that are traded according to available supply and demand, and each of those is free of external constraints. The concept is, if something is in short supply, the price rises and new suppliers enter the market. However, if a cartel can control supply, say, as with OPEC in the 1970s, price rises get out of hand, but great profits are made by the cartel. Currencies can be open to manipulation. The very rich can withhold to raise the price and sell at huge profits when more is needed to settle other trading. You see a large number of very rich people who got that way by trading currencies, generally through inside knowledge of what is going on in the broader market. However, that trading does not create anything of value; it merely skims from those who do, so such trading is little better than a bunch of parasites who also precipitate the financial crises we seem to have gone through since 1971. Of course, on the other side of the argument, the value of a nation’s currency should not be set by politicians with other agendas, because long-term, only too many suffer.

This market rules system has led to much greater world trade, it has raised the living standards of many, but in the western world it has done this by permitting the very rich to become ridiculously more wealthy while punishing what we can loosely call the working class. Manufacturing has been shipped to the lowest cost labour, and the multinationals from a limited number of countries built manufacturing complexes, often with very little regard to the health of the local population. Pollution occurred at levels that would be totally unacceptable in the countries where the companies have headquarters. I recall driving through Cubatão, which is just inland from Santos in Brazil, one evening in the mid 1980s. One chemical plant was pouring out clouds of white stuff, which I provisionally guessed was phthalic anhydride. The health effects of this sort of pollution on the locals were terrible, there was no excuse for this, but because general safety and pollution control was absent, the product would be cheaper. So the net result was that a surprising amount of manufacturing fled the West to places that did not care, while workers in the West joined the unemployment queues.

Thus fortunes for the very rich increased dramatically, but at the expense of the not so rich, many of whom became the new poor. The real money was made by bankers, and as they grew richer, not by doing traditional banking but by selling financial “products”. After the 2007-2008 crisis, you might think things improved, but no, the world is still flooded with junk bonds, leveraged loans, and huge debt. You might have expected the US Federal Reserve to act responsibly and limit the potential for excess credit, but after 2009, why, no, they allowed the private credit market to expand to $US 9 trillion. Since a certain virus struck, the Federal Reserve has made a massive cash injection, but where has this gone? Largely to bail out what the Nature article calls “Monetary chicanery”. In short, the bankers pass go and again collect 200 billion.The question then is, can markets provide affordable health care, affordable housing, affordable higher education, security in times of crisis? I leave you to find your own answers, but I suspect the answer will often be no. Then there is the question, what will happen to all this created money? So far it is sitting harmlessly on ledgers, but what happens if enough of the rich decide to cash out at the same time? Who saves the poor, and the innocent? This is a system that needs fixing, but where do you find the fixers? Not from those who have the resources to fix it because they are the major beneficiaries.

The Recent Economy up to Covid-19

In the previous post I noted that Keynesian economics tended to fail because governments overlooked the second half of the prescription: when the going got strong, it was necessary to “pay back” the debt, or at least reduce the money supply. That results in politicians being party poopers, restraining the good times and what politician wants that with an election coming? The net result was with too much money floating around, we had the rather unexpected result of inflation coupled with stagnation/recession. More money would not solve that. Friedman had the answer, perhaps: stop government priming the economy and correct structural deficiencies. That was not followed either – Friedman had no more success than Keynes in getting politicians to behave. What resulted was the likes of Reagan reducing government expenditure, lowering taxes, and maintaining and expanding the government deficit. Then the US Federal Reserve set the tone by reducing the money supply, even though it knew that would send unemployment soaring. They simply did not care. Anything went in the name of “economic efficiency”. 

What was undefined was “efficiency.” To answer that we have to ask what is the purpose of the economy? To the bankers it seems to be to make nice profits for banks, but surely it is more than the keeping of tidy books. For some, it is to maximize wealth, especially for themselves. For some it is to generate the means of enabling people to live in a pleasant place and live alongside nature. For others it is to enable all people to get the best out of life. Under the new economics of Reagan and others, the emphasis was on the “basics”: get the government out of the economy because they don’t know what they are doing, focus on low and stable inflation, let the rich get richer, following which the wealth would trickle down. Except the evidence is, it didn’t.  Then when it became clear that squeezing the money supply, while it might have helped make the books tidier, was generating unemployment that was too great, so central banks switched to using interest rates as their primary tool. Which gets us to where the bankers are now. Interest rates have got to the point where depositing in banks is only good for security, as long as the bank does not go belly up.

What actually happened was that when the corporations noted that the government did not care about employment it fired its workers, thereby saving money on benefits, etc. and moved manufacturing to low wage countries. Basic manufacturing, like clothes, were exported to places like Indonesia or Bangla Desh, and more difficult manufacturing to China. That undoubtedly increased the wealth of the rich, but it sent the workers into low-paying jobs in the service industries. Meanwhile, there was a somewhat unrecognized crisis in the academic community, and in particular the physics community. Funding had dropped and we had a large number of highly educated unemployed. The physicists, in particular, were good at computer modeling, and they got jobs in banks to create new “financial products”. The banks made huge profits until about 2008. The problem with these “products”. which were sliced and diced debt, were based on the assumption that nothing significant could go wrong, but in the US, for political reasons, a huge number of houses were sold to people who had no hope of repaying the mortgages. Oops. 

We have sort of recovered from that, but the legacy is that thanks to COVID 19 the debt levels of so many countries is extraordinarily high, interest rates are ridiculously low they cannot go lower, so there is no incentive to save. Money goes into assets, which merely inflates the price of the assets. Stock at $100 is worth that if you can sell it for that, but at the end of a period of time, you have to look at the overall returns on investment. In a bubble, everyone makes money until the music stops, then the losses are concentrated on the then holders. COVID has forced the nervous investors to cash out and the stock market fell, but it is coming back because of the quantitative easing. So what happens when the quantitative easing stops and the bonds are cashed out?What is clear is that we cannot look to the past for ways to get out of this. We have to try something new, but what? If you look at our leaders, do any of them have a solution to what happens after quantitative easing? Or do they have their heads in the sand and assume that will be for another electoral cycle?

Will Pump-priming the Economy Help Post-Covid?

Because I operated a company that had the primary objective of developing technology for new businesses in the chemical arena, economics interested me. We can all be smart looking back, but what about now? What should we do about the economy during virus times? So what are some options? This will take more than one post, but first, what is the best example in history of getting out of trouble? What tools are available?

In 1936, John Maynard Keynes published “The General Theory of Employment, Interest and Money”, and when he did so, he should have known it worked for getting out of depression because when Adolf Hitler took over in Germany, the economy was in a mess, with horrendous unemployment and terrible wages for most of those actually employed. Hitler promised to fix things, and he did, by implementing the policies that Keynes was later to publish. By 1936 the German unemployment had essentially disappeared and Keynes would know that.  Hitler was to provide the world with horrors, but early on his economic policy was exactly what Germany needed.

Keynes’ approach was essentially that in a depression the state should provide money to prime the economy, and when better times arrived, pay it back. In my opinion, therein lay one flaw: when better times arrive, do politicians want to pay it back? Er, no. Better (at least for re-election chances) to leave it as debt and inflate it away. (Hitler never had the opportunity to pay it back, because he had other interests.) It is usual to say that Keynes’ economics collapsed in the 1970s with persistently high inflation and high unemployment. One could argue that at least part of the inflation was because the governments refused to pay back, and instead kept borrowing. I have no doubt the counter to that will be, look at now – there is no inflation, and governments are borrowing heavily. Maybe.

If following Keynes, does it matter what the money is spent on? In the German example, the money went on infrastructure, and on providing the expansion of industries for making things. There was an unintended consequence after the war: once the West Germans started to run their own economy they had another economic miracle. Thanks to Hitler’s apprentice schemes, there were a large number of highly skilled people required for manufacturing, and they had factories. The allies bombed cities but mainly left the factories alone. German manufacturing reached its highest point of the war in late 1944. As an example, they made ten times more fighters then than around the Battle of Britain. (That they had run out of skilled pilots was a separate issue.) 

Keynesian economics involved high taxes on the wealthy and some claim such tax rates prevent innovation and general expansion. In the US, from 1953 to 1964, the top tax rate was 90%, and it did not drop below 70% until about 1982. This period corresponded to the US being the most developed country in the world. The tax rates did not stifle anything. Of course, there were tax exemptions for money being sent in the desired direction, and that may well be a desirable aspect of taxation policy. The death of Keynesian economics was probably a consequence of Milton Friedman, as much as anything else. The stagflation in the late 1970s convinced politicians they could no longer spend their way out of a recession. An important observation of Friedman was that if policymakers stimulated without tackling the underlying structural deficiencies, they would fail. They did not and fail they did, but that was partly because the politicians had ceased to look at structural deficiencies. Friedman was correct regarding the problem, but that was because in detail Keynes’ obligations were overlooked. No more than half of the Keynes  prescription was implemented generally. So, where does that leave us? Is Keynes applicable now? In my opinion, the current attempts to spend our way out of virus difficulties won’t work because there are further problems that apply, but that is for a later post.

Energy from the Sea. A Difficult Environmental Choice.

If you have many problems and you are forced to do something, it makes sense to choose any option that solves more than one problem. So now, thanks to a certain virus, changes to our economic system will be forced on us, so why not do something about carbon emissions at the same time? The enthusiast will tell us science offers us a number of options, so let’s get on with it. The enthusiast trots out what supports his view, but what about what he does not say? Look at the following.

An assessment from the US Energy Information Administration states the world will use 21,000 TWh of electricity in 2020. According to the International Energy Agency, the waves in the world’s oceans store about 80,000 TWh. Of course much of that is, well, out at sea, but they estimate about 4,000 TWh could be harvested. While that is less than 20% of what is needed, it is still a huge amount. They are a little coy on how this could be done, though. Wave power depends on wave height (the amplitude of the wave) and how fast the waves are moving (the phase velocity). One point is that waves usually move to the coast, and there are many parts of the world where there are usually waves of reasonable amplitude so an energy source is there.

Ocean currents also have power, and the oceans are really one giant heat engine. One estimate claimed that 0.1% of the power of the Gulf Stream running along the East Coast of the US would be equivalent to 150 nuclear power stations. Yes, but the obvious problem is the cross-sectional area of the Gulf Stream. Enormous amounts of energy may be present, but the water is moving fairly slowly, so a huge area has to be trapped to get that energy. 

It is simpler to extract energy from tides, if you can find appropriate places. If a partial dam can be put across a narrow river mouth that has broad low-lying ground behind it, quite significant flows can be generated for most of the day. Further, unlike solar and wind power, tides are very predictable. Tides vary in amplitude, with a record apparently going to the Bay of Fundy in Canada: 15 meters in height.

So why don’t we use these forms of energy? Waves and tides are guaranteed renewable and we do not have to do anything to generate them. A surprising fraction of the population lives close to the sea, so transmission costs for them would be straightforward. Similarly, tidal power works well even at low water speeds because compared with wind, water is much denser, and the equipment lasts longer. La Rance, in France, has been operational since 1966. They also do not take up valuable agricultural land. On the other hand, they disturb sea life. A number of fish appear to use the Earth’s magnetic field to navigate and nobody knows if EMF emissions have an effect on marine life. Turbine blades most certainly will. They also tend to be needed near cities, which means they disturb fishing boats and commercial ships.

There are basically two problems. One is engineering. The sea is not a very forgiving place, and when storms come, the water has serious power. The history of wave power is littered with washed up structures, smashed to pieces in storms. Apparently an underwater turbine was put in the Bay of Fundy, but it lasted less than a month. There is a second technical problem: how to make electricity? The usual way would be to move wire through a magnetic field, which is the usual form of a generator/dynamo. The issue here is salt water must be kept completely out, which is less than easy. Since waves go up and down, an alternative is to have some sort of float that mechanically transmits the energy to a generator on shore. That can be made to work on a small scale, but it is less desirable on a larger scale.The second problem is financial. Since history is littered with failed attempts, investors get wary, and perhaps rightly so. There may be huge energies present, but they are dispersed over huge areas, which means power densities are low, and the economics usually become unattractive. Further, while the environmentalists plead for something like this, inevitably it will be, “Somewhere else, please. Not in my line of sight.” So, my guess is this is not a practical solution now or anytime in the reasonable future other than for small specialized efforts.

After Lockdown, Now What?

A number of countries are emerging from lockdown and New Zealand is in the select group in which there are very few new cases, and indeed we have days in which no new cases are recorded. Now comes the damage. The Economist ran an article that summarized what happened in China following the release of lockdown. Rides on public transport are down by a third, restaurants have 40% fewer clients, and hotel stays are a third of normal. Bankruptcies may be up to 20%. People are still wary, either of the virus or their wallet.

It is one thing to open shops, but another thing to get people to go to them and buy stuff. If the disease is still around, while some will take the risk, many others will not, although on this front, in NZ shops initially had huge days. It is not totally bad for those shops that can last the distance because for many things provided people have the money, they will still buy the same amount, other than, perhaps luxury consumables. However, the question then is, will they still have money? Different countries will have different problems here. Apparently in Europe a fifth of the labor force are in special schemes where the state pays their wages, but that presumably, cannot go on indefinitely. In NZ, after a week following lockdown, the jury is still out. People are working, but are they becoming wary?

In New Zealand, the State offered wage assistance to companies that had their income reduced by 30% due to the lockdown, which was a lot, but a number of companies, including the airlines, shed a lot of staff because it was obvious they were not going to operate at anywhere near their previous level. Airlines create a rather unusual situation: pilots rightly earn a lot of money, so would they be prepared to share work with another pilot, each at half-pay? The company keeps pilots on its books for when things improve, and most importantly for the pilots, they keep their minimum required flying hours up to date. That approach won’t work for low-paid workers. But then airlines may not have much work anyway. Here, there has to be social distancing. The passengers may at last get reasonable leg room (Yay!) but either ticket prices increase sharply or the airline realizes there is no point in losing money with half-full planes through social distancing.  The simplest way to raise ticket prices is to cut out the “specials”, so designed to fill aircraft. If the expensive ones with a small markup still sell, the airline may remain viable. So what should the pilots do? The question then comes down to predicting the future.

Herein lies the problem: most people will have choices, and those who more correctly accommodate themselves to whatever happens prosper. Those who make unfortunate choices, or worse, bad choices, will suffer. Governments also have choices, and they tend to be influenced by the next election, which in our case is this year. Propping up zombie companies is bad for the economy, but mass unemployment is bad for votes. What will happen? The pandemic will uncover some scabs in our society. Here, half of our deaths came from badly run rest homes. My guess is the biggest economic price will be paid by the poor, or the small business owner who is joining the poor. Furthermore, governments may still not be able to stem the downturn. In New Zealand, the Government announced a big spend-up in infrastructure, and shortly afterwards the biggest construction and civil engineering company shed 10% of its staff.

What happens to globalization? What most people do not realize is how interconnected the world economy is. As an example, Boeing assembles aircraft, but the parts come from a wide-ranging source. For a Rolls Royce motor, it too will depend on parts from a wide range of sources. If any of these sources break down because of the pandemic, there will be a problem. Equally, with a great reduction in international flights, maybe Boeing will stop buying when it can’t sell. Widespread unemployment could cascade out. Meanwhile, selected industries will clamour to their governments for bail-outs. There will be a cry for protectionism, without realizing how much “local” industry depends on elsewhere.The odd thing is, we now have a rather unique chance to shape the future. Can we do it sensibly? And what, really, is sensible? And how do you prevent the spoils, such as they are, going to the already super rich?

What to do with Waste Plastics

One of the great environmental problems of our time is waste plastics, and there are apparently huge volumes floating around in the oceans of the world. These would generally get there by people throwing them away, so in principle this problem is solved if we can stop that irresponsible attitude. I can already hear the, “Good luck with that,” response. Serious fines for offenders would help, as would more frequent proper rubbish disposal bins. But this raises the question, what should we do with waste plastics?

The first answer is it is unlikely there is a single answer because there are such a variety of plastics. Some, like polyester or polyethylene, can be reasonably easily recycled for low specification uses, but the problem here is there is a limit to how many plastic buckets, etc, can be sold. Technically, quite a high level of recycling can be achieved. Quite a while ago, during the first oil crisis, a client asked me to devise a means of recycling mixed coloured polyethylene so I devised a process that recovered a powder that could be used to make almost anything that virgin polyethylene could make, except maybe clear: there was always a slight beige colour from residual dyes etc that could not be got out, at least in a one-cycle process. Polyethylene degrades – you will all have seen it go brittle from sunlight. This shortens the chains and oxidizes parts and I was proud of this process because it got rid of all the degradation and short-chain material.

A pilot plant was built, then the process was abandoned.  The reason was the oil prices tumbled, and there was no way the process could make money, particularly since big multinationals appeared to be dumping polyethylene into New Zealand. Some manufacturers loved this, and were able to export all sorts of plastic things, at least for a while. Part of the reason the process would have lost money, of course, was that despite getting the raw material rather cheaply, the yield at the end was lower because of the loss of the degradation products, but the killer was getting rid of the degradation products. They could be burnt for process heat, but that would need a specially designed burner, and there would still be the pigment remains to be disposed of. Good idea, but could not compete with the oil industry.

Another possible process is pyrolysis. This came to my attention when I recently saw a paper in the latest copy of “Energy and Fuels” put out by the American Chemical Society. Polyethylene gives a mix of oil, gas and carbonaceous solid, but you can get almost 80% in the form of oil that could be directly used as a diesel fuel after distillation. There appear to be a fraction that boils too high for the diesel range, and gets waxy, but those who have recalled a recent post by me will see that it would do well in the heavier marine heavy fuel oil. The resultant oil has a mix of linear alkanes and terminal alkenes, and the fragmentation is such that the double bond prefers the smaller fragment. There is also some miscellaneous stuff resulting from the oxidative degradation. Polypropylene, however, showed a lot more oxygen, with a range of alcohols, esters and also acids in addition to highly branched hydrocarbons, however, almost 20% was the single compound 2,4-dimethyl-1-heptene. It would manage with the light ends as petrol, and the heavier ends contributing to diesel. 

Polystyrene gave what corresponds more to a heavy oil, although 40% was actually styrene, which could be used to make more polystyrene. Importantly, the cetane rating for the oil from polyethylene was 73; for polypropylene, 61. Polystyrene oil was unsuitable for diesel, but if hydrogenated, the lower boiling cut would make a high octane petrol. The average pump diesel fuel has a cetane rating of about 50, and the higher the rating, the faster the engines can go, so pyrolysis of waste polyethylene and waste polypropylene will make an excellent diesel fuel, with the heavy ends going towards shipping.  However, the heavy ends of polystyrene would have to be dumped because they contain fluorinated material, presumably a consequence of additives, and you certainly do not want an exhaust stream rich in hydrogen fluoride. And here is the curse that plagues anything involving recycling: too many companies put in additives that will be impossible to remove, and which either prevent proper recycling or will have consequences that are at best highly unpleasant, while they offer no option for dealing with them.

How do we separate these plastics out? Fragment them, and stir in water. Polyethylene and polypropylene are the two plastics that float. Foam, of course, has to be omitted. So, will this end up being done? My guess is, not in the immediate future. In terms of economics, it cannot beat the entrenched oil industry, unless governments decide that cleaning up the environment is worth the effort.

Government bails them out, but then what?

In New Zealand, I am far from certain that anyone knows what to do when our lockdown ends. The economist thinks that the money supply will fix all things and reserve bank has done what it has not done before: embarked on quantitative easing, Many other governments have done the same and the world will be awash with money. Is this a solution? It is supposed to compensate for the lockdown Two questions: is the lockdown worth it, and is the money supply the answer? To the first question, here the answer appears to be so, if you value lives. After two weeks of lockdown, the number of new cases per day were clearly falling, and by Good Friday the number of new cases had dropped to almost a third of their peak. They continue to drop and the day before this post, there were only 20 new cases. However, if we look at the price, our Treasury Department has predicted the best case is something like 10% unemployment, and if the lockdown lasts significantly longer than the four weeks, unemployment may hit 26%.

To the second question, the jury is out. Around the world, Governments think yes. The US Congress has prepared a gigantic fiscal stimulus of $2 trillion, which is roughly 10% of GDP. Some European countries have made credit guarantees worth as much as 15% of GDP to stop a cascade of defaults. New Zealand is rather fortunate because its national debt was only about 28% of GDP prior to the virus. Some predict the stimulus may reach 22% of GDP, but it has room to move before reaching the heights of some other countries. However, it is far from clear that it will successfully prevent a raft of defaults.

First, defaults always happen. In the OECD about 8% of businesses go bust each year, while 10% of the workforce lose their jobs. Of course, since economies have been expanding there was an equal or greater creation of business and jobs before this virus. That won’t happen post virus. Take restaurants as an example. Restaurants closing down may well re-open under new management, without the old debt, and not so many workers. That may not happen post-virus because people under financial strain or fear that unemployment might be imminent will not eat out, and the tourists, who have to eat out, will not be here. Therein lies the problem. If people fear there will be a slump, there will be; such fear is self-fulfilling. 

There will be changes, and some may be guided by the virus problem. Some businesses will cut costs by specializing in home delivery, and they should be doing that now because first in that performs well probably wins. For manufacturing, the relief of the lockdown may well retain heavy restrictions, such as expecting people to devise a way for working so they remain two meters away from others. That requires significant investment to do this. Will it be worth it? It seriously raises costs, so will people buy the more expensive products? But will this happen? The basic problem for small business is that it is almost a waste of time planning until the government makes its future laws and regulations clear, and once stated, sticks to them. I have run a small business since 1986, and the one thing that has always made things difficult is a change of rules. You get to know how to operate in one set of rules, but when those change the small business has too many things for too few people to do, and a successful small business is light on management. The owner tends to do everything, and I found new regulations to be a complete pest.

Meanwhile, the governments of the world have some interesting choices. Historically, when governments intervene, they seldom let things go back to where they were. If governments get used to regulating, will they let go? If you prefer to leave it to market forces, will that lead to greater wealth for all? As I heard one man say on the radio today, those with money will be looking to buy up assets, i.e. company shares that have become somewhat undervalued. Unfortunately, while that makes some richer, it does nothing for the general public.All of which raises the question, what should they do? That depends on what is required to get out of the slump. The obvious answer is to start additional businesses to replace what has failed, but how do you do that? One of the things that is critically required is money, but while that is necessary, it is not sufficient.  Throwing money at such things is usually a waste. A business needs three basics: technology (more broadly, how to make whatever you are selling), the ability to sell whatever you are making, and management, which is essentially getting the best us of your money, staff, and other assets. Only a very moderate number of people are skilled in even one of those, very few can handle two, and nobody can cover all three well. This is why so many small businesses fail. And that raises the possibility that what governments need to do is to somehow bring the required people together. And that is something with which governments have no experience.