Week of September 21

More on the bubble...coal-to-liquids...oil shale...oxy-fuel combustion

Again our reporting, commentary, and analysis on the past week will be brief.

Obviously, the economic news, which is about as bad as it gets, overshadowed everything else. What I find astounding here is the degree of feigned consternation being expressed by various pundits. Nearly all of the investment journals to which I subscribe have been predicting precisely such a debacle for the past two years. Plainly put, all the fundamentals are really, really bad, and they have been for years. This is a kind of post Keynesian economy where instead of government spending priming the pump, you have bubbles, overvaluations, and easy credit creating temporary surges of business development and consumer spending, followed by increasingly serious declines.

Unfortunately, another round of credit CPR is unlikely to revive the corpse that is the American economy. You're not going to get another bubble inflated next quarter or the quarter after. Just ain't gonna happen.

I'm not going to attempt any further analysis here. There is no close analogy in the past to what is going on today. Sure, there have been prior bubbles, but what's unique about this one is the confluence of events. Oceanographers speak of what are known as rogue waves which occur suddenly far from shore. Wave cycles meet fortuitously and reinforce one another for an instant resulting in a single wave crest that is several times higher than the average wave height in the moments preceding. This results in a literal wall of water looming up over the hapless ship or boat operator in the rogue wave's path. Small boats, if skillfully handled, can pass over the wave with impunity, but ships will bury their bows or sterns in the face of the wave, and their pilots will see tons of water crashing over the decks. Rogue waves occasionally sink ships. They also sink economies.

The wave cycles here are a whopping trade deficit; inflationary spending and mounting budget deficits; declining employment; falling consumer confidence; the failure or near failure of some of the biggest financial institutions; a stock market crash; a wild, worldwide derivatives bubble; a fairly pervasive credit freeze; and the compromising of supposedly safe securities such as money market funds and government bonds. And what is worst of all is that it is all coming at once and coming fast.

During the turmoil of the nineteen thirties culminating in the Great Depression, the stock market crash occurred about ten months prior to a round of bank failures and to soaring unemployment and huge drops in both production and spending. The degree to which the two events were related is still a matter of debate among economic historians. Most believe that there is some kind of causal relationship, but absolutely convincing explanations have proved elusive.

And, interestingly, the economy then looked much stronger overall than it does now. Inflation was nearly nonexistent. The U.S. was the dominant manufacturing power and experiencing a heady growth in productivity as the burgeoning consumer culture of the time soaked up more and more manufacturing capacity. Consumer debt was low and individual savings were high. Furthermore, real incomes were ascending rapidly. The Federal budget was balanced, taxes were low, military spending was minimal, and the mood of the country on the eve of the troubles was ebullient. America was confident, prosperous, and generally pleased with itself. America was considered a very good place to do business.

Furthermore, the major American banks, headed by the almighty House of Morgan, had a history of behaving responsibly. The Morgans liked orderly markets, and they enforced order and market discipline ruthlessly for decades. J. P. Morgan would have destroyed any financier who even suggested something like securitized debt.

Of course, in nearly eighty years since, economists have identified many weaknesses in the boom economy of the twenties, weaknesses that seem causally connected to the Crash. Some of those weaknesses have reappeared in the current economy—an excess of leverage in investment, and the prevalence of derivatives, short sells, and the packaging of diverse funds into single financial instruments, but in truth the market of the late twenties looks a lot more like the market of the late nineties than it resembles the current economy. Just as the tech boom of the nineties was based on the manufacture of real objects, so was the boom of Roaring Twenties which saw a huge growth in consumer markets and the arrival of radio, airlines, and mass electrification. People in the twenties were over-investing in real growth industries just as they were in the nineties. But investment in securitized debt based on home mortgages? Using the money I've invested in my house as collateral in dangerous wagers from which I derive no benefit?

One shudders to think how Theodore Roosevelt would react to the present predicament were he to be resurrected. He'd probably haul out his elephant gun and start bagging bankers.

In any case, this dire situation will not be resolved quickly. In the meantime we must face the larger question of how to deflect blame.

Ranters on the Right have been casting about for scapegoats, and some have suggested homosexuals, undocumented Mexicans, and liberal Democrats in Congress. The last seem more promising than the others. The canard of the moment is that liberals forced banks to provide loans to unqualified applicants.

Whether this statement will ultimately prove persuasive remains to be seen. Certainly some liberals urged that banks modify lending practices to extend home ownership, but I can't think of anyone advocating sub prime negative equity loans for that purpose. And the packaging and reselling of mortgages as securitized debt was entirely the invention of the financial industry. There's also the question of what attacks on pariah groups might accomplish. Blaming undocumented workers for trafficking in derivatives might be just too ludicrous to fly. It's like blaming Japanese Americans for street crime.

The usual suspects—welfare queens, gays, blacks, secular humanists, feminazis, left wing college professors, and war protesters just don't seem very plausible in this context. I suppose the Right could try to whip up an anti-Semitic frenzy, but the Religious Right and neo-cons would never go along with that. Clearly we've got to find somebody, but whom?

I promise I'll give the matter some more thought and arrive with a plausible scapegoat by the beginning of next week.


An outfit calling itself Industrial Info Resources just issued a report on coal-to-liquids commercialization in North America. They're citing investments to date of over $8 billion and over a half dozen facilities. Most of these will probably turn out to pre-commercial, however. Most analysts who've attempted to cost out plant construction believe that a 50,000 barrel per day facility, that is, a small commercial operation, would carry a capital cost of several billions of dollars.

Oil Shale

We haven't gotten much oil shale news of late, but there was an announcement of interest last week. Some Turkish researchers hit upon a way to improve electrical retorting. Generally the way that shale oil has been extracted from oil shale in the past has been to heat the crushed rock until the oil within flows free of the matrix. The heat is generally supplied by burning byproducts of the retorting process, namely, methane gas and char, which are derived from the raw resource, but it is also possible to retort the oil via electrical conductive heating. And, indeed, a number of companies already have technology in this area. The innovation of the Turkish researchers is simply to sprinkle iron filing amongst the rubble to make it more conductive.

Is this a breakthrough? I don't see that it changes the overall process economics that much. The real problem with oil shale is that the concentrations of oil within the rock are generally quite low—less than 50 gallons per ton in most cases. The poor economics result from the processor having to move a lot of rock to get a little oil.

Linde and Vattenfall Launch the World's First Oxy-fuel Combustion Plant

The Linde Group, one of the world's largest industrial gas companies, and the Vattenfall Energy Group, Europe's larges electrical utility, have announced the construction of an oxy-fuel combustion coal burning generator with carbon sequestration in Germany. In the oxy-fuel combustion coal is burned in an atmosphere of pure oxygen and carbon dioxide with no nitrogen. This results in a pure CO2 output and avoids the expensive process of having to separate carbon dioxide post combustion from a nitrogen laden exhaust stream. Oxy-fuel combustion is far less of a stretch than coal gasification, and permits the use of fairly ordinary coal fired generators, but up until now the economics have always been marginal due to the expense of producing pure oxygen on the front end. No word of how this particular problem has been attacked by the partners, but this could be an encouraging sign for the clean coal camp.

Financial fiasco fruition

Maybe you have some ancestors that were good stillers. Anybody can distill fermented sweets, and come up with something intoxicating. But to do so with artistic craftsmanship, to create a finished product that has the beauty of sculpture, to cut away the bad and leave the good, that is rare. So I say you have cut through the chaff, and have fermented and distilled the best, in fine form, your analysis of the latest fiasco. But you leave out the summation.

What is the reason, the purpose, of all this piratization of public debt?
Could it be on purpose? Was the former governor of Texas, son of a former president, decent looking, with a full head of hair, truly pushed forward into the presidency to serve the people's best interest? If not, then who's? Oil? I think it goes deeper than that. He is a bad business man, a blundering bankrupter. As another Texan governor said, "he was born with a silver foot in his mouth". But leap over the river of doubt, step out of the box, see Alice in the looking glass, and assume he was "hired" to bankrupt America.

The world changed when the Soviet Union went down. And metaphorically speaking, the second tower is about to fall. Who will benefit from this? What are the reasons, why would "they" do this? Maybe it's just the natural course of events, empires fall, the bigger they are, the harder they fall. But this little george cut more than a cherry tree down, and as we languor in our post civilization poverty and brown-out age, we really would like to have some truth in our 20/20 hindvision.