Forget About the G20 Ben Bernanke… We’ll Buy You A Big Mac

It is Friday, the G20 is in town, and we are less than 24 hours away from binging on Big Macs for a good cause, to support Ronald McDonald House Charities of Australia. For every Big Mac you buy tomorrow, one dollar will go to support seriously ill children and their families while they seek medical care. Though we have to admit the response to our Big Mac challenge has been regular and not Supersize, we will still be there at 1pm tomorrow in St. Kilda for lunch. We hope to see you then, and that means you too Ben Bernanke!

We read this morning that U.S. Federal Reserve Chairman Ben Bernanke is in town for the aforementioned gig the world’s finance ministers and top money shufflers. We are sure he’s busy. Nonetheless, we challenge him to a Big Mac eating contest tomorrow in St. Kilda at 1pm. What is the worst that can happen? A little waistline inflation never hurt anyone. And cutting pounds is healthier than cutting rates, so come on down Mr. Chairman.

A more serious and global matter, energy, is on the agenda at this weekend’s summit of finance leaders. Australia’s Treasurer Peter Costello had this to say yesterday, “If we have a fight to lock up oil resources, or if we don’t get enough investment in the oil-producing areas of the world, then demand is going to outstrip supply and we are going to have huge prices as we saw a couple of months ago, and this is going to affect every household in Australia.”

Poor timing for the Treasurer, as oil prices closed down four percent on Thursday to a one-year low of around $56 (for West Texas Intermediate.) But this does not make the Treasurer wrong. The energy problem doesn’t go away when oil and gas inventories in the States rise, or the weather in Boston is balmy. Nope. The energy crisis is here to stay, both as a reality of physics, and economic problem, and a political hot potato. Jim Kunstler explains in today’s essay Energy Independence and the New Congress.

We have no solutions here at the Old Factory. We’ve been trying to turn the radiator on all week, with no luck. But we have a vision of how we think things will play out globally. The public debate about climate change will capture all the headlines. Al Gore will still be a moron and still not have invented the Internet. But the investment story will be in companies that serve as a bridge from the hydrocarbon economy we’re in to the whatever economy comes next.

Just what that economy is, we really don’t know. We know it will be hard for the developing world (China and India) to find substitutes for fuel and energy that are as powerful, potent, and cheap as oil has been for the last fifty years. If there were such a substitute for oil, we suspect we’d already be using it. There isn’t. So what will come next?

Our research suggests it will be fuel cells that use hydrocarbons like oil and coal and natural gas as feedstocks, and can be used for generating electricity for distribution and possibly transportation.

Or, as folks at the Cleantech Blog put it, the energy future will include “fuel cells meshing with the current hydrocarbon infrastructure.” Is it a perfect solution no. But a recent post elaborates, “Admittedly, fuel cells that operate on hydrocarbons do produce some CO2 emissions. It’s not the utopian world offered by the promise of the hydrogen economy. But, if fuel cells can operate cost-effectively on plentiful and reasonably-priced fuels, they can at least reduce (if not eliminate) greenhouse gas emissions relative to conventional utilization of those fuels, and (if used in applications to replace internal combustion engines) can reduce demand for petroleum of increasingly vulnerable and uncertain supply. Half a loaf is better than none.”

When you’re hungry, any bread at all is welcome. “If fuel cells can make the big time in our hydrocarbon economy, it can significantly improve our energy/environmental situation while paving the way for the bigger prize that would be enabled by the longer-term emergence of a true hydrogen economy if/as the other pieces of the hydrogen puzzle (production, distribution, storage) get solved.”

We have our doubts about a real or “true” hydrogen economy. But we don’t have many doubts left about the economic viability of fuel cells. They represent the next big step in the evolution of how an industrial economy provides energy for itself. We’ll have more to say about in the coming weeks.

In the meantime, we were delighted to learn this morning that protesters against the G20 will be out in force this weekend. The Saturday gathering downtown near the Grand Hyatt in Melbourne is called, “The Carnival Beyond Capitalism.” It’s just what we needed, thousands of clowns to cheer us up.

We plan on bringing our digital camera to take pictures of what is described as a “really really free market.” From the organizing group’s website we read, that, “You can take part in the Really Really Free Market (RRFM) at the Carnival by bringing along surplus items such as clothing, vegetables, books, plants, seeds, household items, art, or by providing massages, music, comedy, tarot card reading, sewing lessons, smiles, friendships, discussions, skill sharings, etc – and give them away to those who need them.”

Leaving aside the intriguing question of how all this surplus is created in the first place, we take inventory of items we might bring a long to exchange. We have a pocket full of furrowed brows and a whole warehouse full of pithy phrases, as well as lint, dust bunnies, and a receding hairline. But we wonder if anyone will find these things genuinely useful or will be willing to exchange their junk for our crap.

The explanation continues, “At a RRFM, nothing is for sale. People can take things that are on offer that they need. Help show what a community can look like based on dignity and deep, non-defensive caring for the fruits of the earth, without the divisiveness of profit nor exploiting people for surplus.”

Here we throw up our hands and drop the façade. We are pedantic by nature and love big words. But small words are better for small minds. We think the really really free market is really really stupid. We will use a big word to briefly explain: fungible.

According to the dictionary, a good is fungible if it is, “freely exchangeable for or replaceable by another of like nature or kind in the satisfaction of an obligation.” A fungible good is, “a commodity that is freely interchangeable with another in satisfying an obligation.”

Oil is fungible. So is gold. So is the dollar. Money itself is a commodity. Anything can be money as long as two parties agree on the value the medium of exchange—the money—represents.

So, we suppose tarot cards are fungible. But is a tarot card reading fungible? I can trade my words of wisdom for a tarot card reading. But I can’t trade my tarot card reading for a haircut, at least I’m pretty sure I can’t. Why would the barber accept my card reading in exchange for his hair styling services? He might. But given that my barber is a crafty immigrant from Russia, I doubt he would.

He would realize the truth in what Milton Friedman—may he rest in peace—once wrote, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” If you barter as a form of exchange, you certainly benefit. But where do you go from there? Can I trade my tarot card reading for a TV from China, vodka Russia, or a massage from Thailand?

If nothing has any price, how are we to determine its value? To you, a haircut might be worth one chicken. To a bald man, one chicken is dinner. The problem with barter as medium of exchange is that it limits the scope and complexity of transactions which people can engage in. Profit is an indication of surplus value. It means that not all services and skill are equal and its existence signals to participants in the market what people are willing to pay for a thing.

If you remove prices and profits, you remove the signals that communicate what value people place on goods and services. Without those signals, producers don’t know what to produce because they don’t know what people want or need. Without those signals, you get people trading garbage with each other as if it were really worth something, and because they aren’t really producing anything else, the assume that things magically get produced for trade.

Eventually, this creates real scarcity, as it did in Soviet Russia. Shelves go empty. Everything is centrally coordinated yet nothing gets produced efficiently, cheaply, and in abundance.

You get what you pay for. We suspect a lot of intellectual garbage will be free for the taking on Saturday in the form of clever signs and stylish t-shirts. In fact, making Che or CCCP t-shirts is probably not a bad idea. If we had thought of it sooner, we would have found a factory in China to print up several thousand t-shirts, had them Fed-exed over, and set up a stand on a street-corner to hawk them for five bucks. Then we’d have bought everyone in the crowd Big Macs. Feed a stomach, starve a brain! That’s about the only way any of the protests this weekend will come to any good, if these people eat at McDonald’s instead of breaking its windows.

Those who oppose the free market usually don’t understand it. It is a lot easier to have a party, smoke some weed, and dream of creating a world in which everyone has to do what you say. As Milton Friedman once wrote, “A major source of objection to a free economy is precisely that it gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”

This is why anti-globalisation protests have turned more and more violent at recent gatherings in Seattle and Mexico. The protesters have no real, viable economic alternative to present, although some of their grievances are probably just. Instead, these meetings have become excuses for unemployed radicals to break windows and deface public property and cost thousands of dollars in policing and security costs that could surely be better spent in some other way (or not spent at all and given back to tax payers!)

But we are becoming too earnest. We will sit back and enjoy the spectacle (and remember to duck.) We’ll post pictures on our website next week.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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