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The Bubble Economy

The Bubble Economy: Is Sustainable Growth Possible?

Robert U. Ayres
Copyright Date: 2014
Published by: MIT Press
Pages: 392
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  • Book Info
    The Bubble Economy
    Book Description:

    The global economy has become increasingly, perhaps chronically, unstable. Since 2008, we have heard about the housing bubble, subprime mortgages, banks "too big to fail," financial regulation (or the lack of it), and the European debt crisis. Wall Street has discovered that it is more profitable to make money from other people's money than by investing in the real economy, which has limited access to capital--resulting in slow growth and rising inequality. What we haven't heard much about is the role of natural resources--energy in particular--as drivers of economic growth, or the connection of "global warming" to the economic crisis. InThe Bubble Economy, Robert Ayres--an economist and physicist--connects economic instability to the economics of energy. Ayres describes, among other things, the roots of our bubble economy (including the divergent influences of Senator Carter Glass--of the Glass-Steagall Law--and Ayn Rand); the role of energy in the economy, from the "oil shocks" of 1971 and 1981 through the Iraq wars; the early history of bubbles and busts; the end of Glass-Steagall; climate change; and the failures of austerity. Finally, Ayres offers a new approach to trigger economic growth. The rising price of fossil fuels (notwithstanding "fracking") suggests that renewable energy will become increasingly profitable. Ayres argues that government should redirect private savings and global finance away from home ownership and toward "de-carbonization"--investment in renewables and efficiency. Large-scale investment in sustainability will achieve a trifecta: lowering greenhouse gas emissions, stimulating innovation-based economic growth and employment, and offering long-term investment opportunities that do not depend on risky gambling strategies with derivatives.

    eISBN: 978-0-262-32393-2
    Subjects: Business, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xiv)
  4. Acknowledgments
    (pp. xv-xvi)
  5. 1 Background
    (pp. 1-48)

    Chapter 1 begins with a brief tribute to Senator Carter Glass, the man with fingerprints both on the creation of the Federal Reserve System and the Glass—Steagall law of 1933 that prevented commercial banks from engaging in trading and investment banking activities. This is followed by a brief look at the Russian émigré novelist and political theorist, Ayn Rand and her ideas. Ayn Rand is interesting both because she was the primary inspiration for modern libertarianism, as well as the chief mentor of Alan Greenspan as a young man and the chief inspiration of today’s Republican leadership.

    The rest...

  6. 2 On the Role(s) of Energy in the Economy
    (pp. 49-74)

    This chapter explains why the discovery of huge fossil energy resources (coal, petroleum, natural gas) kicked off the fastest period of technological innovation and economic growth in history. It turns out that those resource stocks have acted astechnology incubatorson a vast scale. The need for pumps to keep mines dry led to steam engines that, in turn, enabled railroads, metallurgy (iron, steel), steam boats, gas light, and steam turbines to make electricity. The discovery of petroleum in the mid-nineteenth century led on to internal combustion engines, autos, airplanes, plastics, and synthetic fibers. The substitution of machines for human...

  7. 3 A Brief History of Bubbles and Busts through 1933
    (pp. 75-106)

    This chapter is essentially economic history focused on the role of finance. It recounts the origin of the gold standard and some of the problems resulting. It recounts the development of trusts (and antitrust laws) followed by the creation of the US Federal Reserve system to provide a backstop against runs on the bank. It follows the post–WWI reparations negotiations, the German hyperinflation, the Dawes plan (and bonds), the creation of the Bank for International Settlements (BIS), the US stockmarket “bubble of 1928 to 1929 and its aftermath, the Great Depression, leading to the nationalization of gold and the...

  8. 4 Post–World War II
    (pp. 107-156)

    The post–WWII period starts with the Bretton Woods conference (1946), which established the US dollar as the world’s reserve currency. The dollar inflation caused by two wars (“guns and butter”) enabled the creation of OPEC and forced Nixon to close the “gold window.” Thereafter currencies floated. Then came the oil price “spike” of 1974 to 1975, establishing OPEC as the global “swing” supplier. The Iranian revolution followed along with a second oil price “spike.” The accumulation of “petrodollars” was loaned many countries to finance development, but the high US interest rates of 1980 to 1982 caused several bankruptcies. Starting...

  9. 5 After the End of Glass–Steagall
    (pp. 157-202)

    The “” bubble was a fad, promoted by believers in the new, new digital age, who divided the world into those advanced “new economy” business thinkers who “get it” as opposed to those backward “old economy” business people who were still thinking in old ways. It was a celebration of the “information superhighway” and many of its uses.

    The technological drivers of the bubble were microprocessors (notably the Intel 8086) and the high-speed data interchange system among a number of major US universities that was initiated back in the 1970s. It was sponsored by the Advanced Research Program Agency (ARPA)...

  10. 6 The Role of Misbehavior
    (pp. 203-216)

    When the eurozone was created in 2001, the Greek Public Debt Management Agency, headed by Christoforos Sardelis, had a problem. Greece needed to reduce its debt to GDP ratio to pacify financial markets. Like Enron and WorldCom, and others, Sardelis decided to do this using an off-balance-sheet gimmick concocted by Goldman Sachs. It was based on a complex set of interest rate swaps that would look like a net zero to an accountant, thus masking the real debt. In short, the numbers were concocted out of thin air to convey the appearance of near-conformation with the 3 percent per annum...

  11. 7 Where Do We Stand Today?
    (pp. 217-258)

    When Ronald Reagan was elected, the federal debt amounted to 26 percent of the GDP. After he took office with a Republican majority in1981, he (and Congress) cut taxes and increased military spending dramatically (and unnecessarily), resulting in significant growth of the federal debt. When he left office, it was 41 percent of the US GDP (figure 7.1). The supply-siders who advised Reagan that tax reductions would pay for themselves were evidently quite wrong, although none of them has yet apologized or conceded any error.

    In 1986 Reagan signed a tax bill that cut the top income tax rate from...

  12. 8 A Policy Agenda for Stabilization
    (pp. 259-276)

    The first two industrial revolutions, in the eighteenth and nineteenth centuries, were based largely on extraction and transformation technologies that were introduced to exploit pockets of high quality natural resources, notably fossil fuels (coal and petroleum) but also metal ores and other minerals. The finite stores of high-quality natural resources in the earth, from freshwater, virgin forests, and fertile soil, to fossil fuels, are unevenly distributed. Some are fast being exhausted, while the renewable resources (like sunlight and wind) are generally much lower in quality and much more costly to exploit.¹ When petroleum, in particular, was first discovered in large...

  13. 9 Economic Growth
    (pp. 277-306)

    How can risk-spreading from the bankers to their customers or the taxpayers be reversed? Part of the answer must be to change the incentives. Two recent EU decisions may point the way forward. One is to allow the European Central Bank to deal directly with troubled banks, as the US Federal Reserve has been doing since 2009 (as illustrated by the monthly purchases of bonds, known as “qualitative easing” or QE). This transfers bank debt to the central bank, but not to the taxpayers, at least not directly.

    The other important EU decision was the agreement to “bail-in” bank creditors...

  14. 10 Concluding Thoughts on Bubbles and Energy
    (pp. 307-314)

    This book started from two sets of facts and several propositions. The first set of undoubted facts relates to the state of the world economic and financial system. The second set of facts relates to material and energy resources.

    As regards the first set of facts, I believe the global economy is increasingly unstable. The scope and magnitude of the potential instabilities is growing, partly due to economies of scale and partly to globalization. The negative externalities caused by asset bubbles, credit collapse, and debt defaults have increased enormously in scale and scope. Furthermore Wall Street has discovered that it...

  15. Appendix: Two More Digressions
    (pp. 315-328)
  16. Notes
    (pp. 329-336)
  17. References
    (pp. 337-350)
  18. Index
    (pp. 351-370)