Alternatives to Gold?

Image taken from Wikipedia article about Maslow's hierarchy of needs

The phrase "gold bubble" returns over 41 million hits on Google. There are websites, blogs, articles, analyses, videos and whatever devoted to covering the big question whether Gold is in a bubble or not. If it is, when will this bubble pop, and if it is not then how high can its price possibly go? Clearly it is a topic of great importance to very many people and not what I'd like to write about here. This post is about the role Gold is playing and why do we really need it, or do we really need it?
Looking at Maslow's hierarchy of needs, arranged as a pyramid (above), it is obvious that Gold plays no role in satisfying any of our fundamental needs, whether the most basic ones or the higher aims. We can not breathe Gold, we can not eat it, and we can not drink it. Despite being perceived as sexy, Gold can not satisfy us sexually. It can not keep us warm, and it can not aid us in excretion. Nor can it provide us with any of the higher levels of needs such as Safety, Love and belonging, Esteem, or Self-actualization. All we can conclude from this is that Gold is completely useless in the context of satisfying our needs.
Or is it?
It's also clear that Gold, obviously behaving as medium of exchange and storage of wealth as of late again, gives us the opportunity to purchase any of these items; we can use Gold to satisfy our needs indirectly. When the world changes as it always does, Gold is supposed to maintain its value, enabling us to sustain ourselves in the future.
When changes around us are caused by scarcity of resources (Peak Oil, rare earths), weather patterns (Global Warming), or economy (credit bubble, unemployment), Gold, by maintaining its value, will help us overcome the difficult times.
But, again, what we really need is not Gold but the meeting of our needs as defined by Maslow's pyramid above. If there were other a ways to secure the resources to meeting our needs, Gold would have no particular value.
The alternatives to Gold, as can be concluded from this logic, are housing structures located away from harm's way such as flooding, and constructed to withstand adverse weather such as tornadoes. One of Gold's alternatives is also domestic, localized food production that would not rely on external factors such as fuel for transportation or cheap labor from Mexico. Another alternative to Gold would be durable clothing that does not wear quickly or shoes that last many years of usage.
There are many alternatives to Gold if we stop viewing it as a speculative commodity and start viewing it as a storage of wealth and medium of exchange. And when we start doing that we realize that the real alternatives to Gold are embedded into lower levels of Maslow's hierarchy of needs.

Are Jobs Inevitable?

Cartoon from http://www.glasbergen.com/job-interview-cartoons/

Listening to politicians, it sounds like job creation is the number one priority. Both in the USA as well as in the EU. The logic goes that everyone should have jobs and earn income so that they can spend the money in economy and collectively make economies grow again. Growing economies then allow banks to recapitalize, bad loans become good ones, uncertainties and insecurities will vanish, everything becomes as before again.
But let's stop and think about it a bit. Despite politicians thinking that people need jobs - do people actually need jobs?
In a Capitalistic society, via specialization, different people have different roles to fill. Some work in manufacturing, some in service business, some in the government. Supposedly they all contribute with something and by selling the products of their labor, they benefit from the productivity of others while giving them the excess productivity of their own labor. As a result, everyone supposedly wins, and the society as a whole becomes a busy ant-hill, everyone busy laboring with no time to stop and think about it all.
In such an ant-hill, specialization and exchange of production is facilitated by the usage of money. Product or service is exchanged for money, another product or service can be purchased for the money, person's labor gets compensated with money, and person can buy everything necessary to sustain themselves for that money.
But what is it that we really need to sustain ourselves? Definitely it is not money as money is just the medium of exchange for which we buy the sustenance. So money is not what we need but we need food, shelter, clothing, energy, furniture etc. And once the major items such as a home or furniture have been acquired, what remains is mostly food and energy.
Let's repeat this again: we need jobs to buy food and energy to sustain ourselves. And for other things if we want those other things. So what if there was a way to secure food without having to go to work to earn money? So that we would not need to go to the stores in order to buy food? Food that is shipped to us from big factory farms half way across the world?
What if there was local food readily available, in our own backyards?
If that was possible, the traditional pyramid structure in food production and society's setup would be eliminated. People would not need jobs to live, and to live well, perhaps much better than when having jobs that require commuting 10 hours a day and meeting their families only at bedtime? A huge layer of dead weight would be cut out of the picture. A huge amount of scarce energy resources would no longer be needed. People would have all that time available to think about their lives, and to actually enjoy their lives.
Or, in other words, we need backyard food production in order to not need the jobs that are not available anyway, as the ever-expanding economic model clearly can no longer be sustained anyway. We need backyard food production so that we could actually enjoy our lives and exit the misery of having the jobs that are being sold to us as a number one priority.

The Next Boom

Having written about impossibility of endless growth within limited space, it's time to turn our attention to the next boom. No, we will not break the external limits to growth nor will we advocate suicide  by encouraging more consumption in the traditional sense. Instead, we'll look into morphing the current growth model, which is clearly hitting the walls of our test tube, into something sustainable, at least for a while longer.

As we saw, whereas the currently ending boom has been all about consuming more and more energy and other resources in order to make our daily lives ever more rewarding and comfortable, the accelerating consumption aspect is the part which can not continue for very much longer. Obviously Oil has become a scarce resource, we have started to run out of fresh water supplies, and financially, after the future weights of various iterations of TARPs, EFSFs and whatnots have been laid on our shoulders, we are being sucked dry of any remaining productive means. The signs of "no more" are limiting our prospects in every direction we look while our status quo has become to be defined by ever-accelerating growth in consumption. So how do you grow and evolve in a situation where the fundamental aspect defining the process - ever-increasing consumption of resources - is becoming impossible to continue? Where are we required to go in order to continue the process of growth and evolution without hitting the walls?

Our current model of operation across different fields of life has been mostly defined by a pyramid-like hierarchy, a vertically structured model. Something like this:

In a pyramid model, few at the top coordinate the many at the bottom. Information is passed from bottom to the top while orders (directives, laws, regulations, policies, etc.) are passed from top down.

This structure applies to most traditional organizations such as societies, governments, businesses, entire countries, and even families, at least the ones with clearly defined "heads". Similarly, the same structure, in different forms, usually applies to various processes such as agriculture, retailing, education, etc.

While this kind of structure has been serving us well while the limits to growth could be ignored, the dead weight of the pyramid structure is becoming increasingly apparent when walls of resource limitations are being hit. Perhaps we don't need so many middlemen in so many areas of life to "serve us" in the era of communications and technology? Perhaps there are simpler, leaner, more efficient ways to do things?

I will not go into specific areas in this post - these are topics for later writings. Here I'd simply like to introduce a different model that would allow a much leaner operation:

When information is organized to be always easily accessible, external rigid structures are not necessary to "manage" it for us; information management is done by the best experts at that - computers and technology. 

The leaner mode will allow us to avoid hitting the walls of our test-tube very hard in the immediate future by allowing us to eliminate waste of resources. And by this it will help to extend the growth phase within the limited resources available to us. By becoming leaner and more efficient, we will be buying more time for ourselves. It will not be a final solution to the eternal growing process, but we should have more time available to eventually break out of the test tube, when we are ready for that. Until breaking out of the limits, the leaner mode of operation will simply allow us to fit more of us into our test tube. Our test tube will not become bigger, but it will be populated more densely, comfortably.
So how does the leaner mode of operation apply to the "Next Boom" topic? Here's how - the next boom is all about increasing efficiency, integration of different systems, direct contact and communications leaving out complex bureaucracies, direct computerized voting systems for decision-making processes, etc. Contrary to the concept of economic growth, evolution towards the leaner mode will not necessarily mean increased GDP (market value of all final goods and services produced within a country in a given period). Rather, it means decreasing GDP while every unit of resources will go further. Sounds like deflation, the process dreaded by the current crop of politicians and economists, but within the concept of leaner operation, deflation via becoming more efficient has to become a rule. At least per capita basis.
Looking around us, this leaner mode of operation is clearly replacing the pyramid structures already, everywhere. Some examples are the latest trends in publishing - from large publishing houses towards self-publishing, from mass-manufacturing to 3D printing, from centralized to localized energy production using solar, wind, and other renewable resources efficiently, from industrial agriculture to local food production and marketing, from Central Banking to BitCoin-like monetary system disposing of central administrators, and many more.
Pyramids fight back, of course, as they do not want to loose their status quo's. Transformation process is never smooth. In order to build something new, old structure taking up its space is required to be disposed of. And all that is clearly happening everywhere around us already. More on these topics will be covered in this blog in near future.

Netting Problem

It is August in a small town on the South Coast of France. Holiday season is in full swing, but it is raining so there is not too much business happening. Everyone is heavily in debt.
Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a €100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote in a hurry and rushes to his meat supplier to whom he owes €100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay €100 for pigs he purchased some time ago.
The farmer triumphantly gives the €100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she owed the hotel for her hourly room use to entertain clients. She places the €100 note on the reception counter.
At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his €100 back and departs.
There was neither income nor profit. But everyone no longer has any debt and the small townspeople look optimistically towards their future.

- story borrowed from http://emilie.hermit.net/content/recirculation-funds

The reasoning behind the ocean of derivatives and other financial obligations floating around in the world is that they mostly cancel each other out. That's the excuse because otherwise their amount (arguably some 20 times the total world economy) wouldn't make any sense. It's like adding up all €100 debts from the story above, and arriving at €400 in total debt, all canceled out by one ring of €100 transactions:

1. Hotel Owner's debt to Meat Supplier: €100
2. Meat Supplier's debt to Farmer: €100
3. Farmer's debt to Prostitute: €100
4. Prostitute's debt to Hotel Owner: €100

When €400 becomes €0 after canceling out all transactions, this is called netting. Everything is fine and supposedly there's nothing to worry about. A situation which can be illustrated like this:

Obligations cancel each other out thanks to netting, everyone involved is supposed to win by having their risks managed via a multitude of financial instruments as insurance.

Clearly everything is fine when all people involved have jobs, all loan payments are made on-time, sky is blue and grass is green, and this model is humming along as smoothly any well-oiled machinery. So let's introduce a Devil's Advocate and see what happens. Will the model continue working when the sky is no longer blue or grass is no longer green?
Let's see what happens with the above story when the Meat Supplier decides to take a trip to Greece instead of paying off his debt to the Farmer. Turns out that only €100 in debt gets canceled, leaving €300 still lurking around. And with no way to pay as the income was taken out of the netting universe.
In the world of modern finance, this is precisely the problem that the world is experiencing - failed institutions, failed countries, failed promises, and failed ways to fulfill the promises. Something like this:

Disappearance of a few participants in our formerly ideal circle makes collateral disappear and enormously increases the stress on the rest of the market participants. As the collateral disappears, remaining participants become suspect of not being able to meet their obligations.

So what do you do when the world-as-we-knew-it no longer seems to work? Will you tax the rest of the society to pay off Meat Supplier's debt to the Farmer? I guess in a truly altruistic or kleptocratic society this is possible, and if people decide that they want to subsidize Meat Supplier's vacation time or steal from others to subsidize that, they can do it.
But clearly things are very different when the same happens to the world of financial derivatives. Will the world's taxpayers be altruistic enough to pay off debts that could be measured on the scale of the World's GDP? Or if it's stolen from them forcefully via corruption, would it still be possible? Isn't it completely foolish to even think in that direction?
Or, the same question in other words: what should be the size of EFSF to make it work? 10% of the world's GDP? 20%? 50%? Is it even possible to know the answer to this question???