2022-23 Winter Link Review

Trying something short and new. Here are summaries and notes for two salient topics.

Mark Mills: The energy transition delusion: inescapable mineral realities

Summary

The mining sector cannot support the mineral demand to transition even the US from 4% renewables to 10% within 16 years, let alone to 100% by 2050.

Decreasing mineral quality, slow mine construction, high mineral demand, and other factors are conspiring to make the energy transition far slower and more expensive than publicly aware.

Notes

• World at 3% wind/solar production

  • $5 trillion USD in direct spending over 15 years

    • This does not include hidden costs due to mandates, inefficiencies, etc.

  • Will the cost per point decrease throughout the transition?

• The quantity of minerals per unit of power needed to transition is enormous

  • To produce an equivalent amount of energy with only the below

    • EV: >400% total increase

      • Copper >300%

    • Solar PV: >900% total

      • Copper >200%

    • Onshore wind: >800% total

      • Copper >150%

    • Offshore wind: >1800% total

      • Copper >1100%

• Mineral demand will increase by 2040

  • Max: Lithium demand expected to increase by 4000%

  • Min: Rare earths 700%

• Some minerals possess substitutes, but copper does not

  • Copper prices will continue to increase throughout 2020s as demand increases and supply shrinks

  • New mines require approx. 16 years from prospect to first output

• Mineral refinery market has extreme geopolitical implications

  • China dominates market with

    • Nickel: 35%

    • Lithium/Cobalt: 50-70%

    • Rare earths: 90%

  • Could have more influence over the future energy sector than OPEC

• Comparing EV & fossil fuel cars

  • Mineral cost of EVs is 2x

  • CO2 per car

    • EV with 1000 lb battery

      • 50% the size of a Tesla battery

    • Diesel vehicle

      • Higher emissions than gasoline vehicle

    • 1000 lb battery EV total emissions falls below diesel after 60,000 miles of driving

• Cost of mining is increasing

  • Energy consumption to extract ore from rock increases exponentially as ore grade decreases

  • Ore grades have been decreasing over the past 100 years

    • Ore grades are slipping down into exponentially high-extraction cost territory

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Dropping Money from Helicopters: Economist John Cochrane on Inflation

Summary

The Fiscal Theory of the Price Level states that government debt and the ability of the future government to pay it or pass it on are the determinants of inflation. This challenges the existing monetary theory which claims that inflation occurs when the monetary supply increases faster than the real value of goods and services.

This theory suggests that government liabilities will determine inflation in a fiat system. In a fiat system bonds and currency are stake in the government. Both are interpreted as debt of the government. The confidence of debt-holders in the government's willingness/ability to pay these debts will determine the price level. In low confidence environments, holding the debt is less fruitful than exchanging it for goods and services. In high confidence, holding the debt is worth the wait.

If true, inflation in the United States reflects a deterioration in the confidence of its economy and future. The solution to US inflation will come from fiscal policy, not monetary policy.

Notes

• The first chapters are on Google Books. Very helpful for understanding the relationships and logic.

• Monetary Theory of Inflation

  • Summary: Inflation created when monetary supply increases faster than the real value of goods/services

  • The government repurchasing bonds increases money supply, therefore inflation ought to ensue

• Fiscal Theory of Inflation

  • Government-centric definition

    • Treats the government as a unique agent in the economy

      • The government issues debt with which it can be paid or pay with

        • Money is short-term, non-interest paying government debt

        • Bonds are long-term, interest paying government debt

      • Public debt is stake in the federal government

        • Applicable to fiat currency systems

      • Government has liabilities: debt payments + spending

        • Tax revenue reduces money supply

        • If there is a surplus after liabilities, deflation

        • If there is a deficit after liabilities, inflation via

          • Print money

          • Issue bonds

        • If the market perceives government bonds as not payable or low paying

          • Bonds are sold off in favor of currency

          • Currency is invested privately or spent

        • The price level is informed by the expectation that debt will be repaid

          • If debt is expected to be repaid, good is X chunks of debt

          • If debt is not expected to be repaid, good is X+Y chunks of debt

Evidence

• The Fed does not control money supply, it sets interest rate targets

• Liquid assets have increased by magnitudes, yet inflation has not reflected this

  • Monetary theory predicts inflation as they can be used to spend

  • Fiscal theory interprets them as options that can be converted to pay the government

• 1980s inflation

  • Government enacted high real interest rates

    • Interest rates raise interest costs on the debt

• Latin America

• Inflation controls are ineffective as debt is regularly viewed as unpayable

• WW1

• Inflation was not solved by monetary tightening, but rather fiscal policies and guarantees

• Reparations

Complications

• Dependency on "expectations" is somewhat cyclical

• The idea of expectations can be abused to fill in any gaps of the theory

Quotes

"Raising tax rates is like going up a sand dune. Every time you take a step the base shrinks and you come back a little bit."