Fire (Social)

Economics, oil, nuclear and the price of a house

I love economics. I never studied it formally, but have aways been fascinated by the immense complexity of the discipline, and the even more immense amount of nonsense written by experts. When the rand was in freefall from 2001, according to the columns gracing Business Report and Business Day it was certainly due to Zimbabwe, Mbeki, HIV/Aids. I remember a day the rand shot up dramatically, beginning its 3-year performance as one of the world’s top-performing currencies. It was a day of a particular deteriation in Zimbabwe.

Economics is portrayed as a science in the popular media, something exact and predictable, truisms are bandied about such as low inflation leads to lower interest rates and higher growth. But it’s far from that. Human behaviour with regards to money is governed by desire. I won’t say greed, and perpetuate the myth of the evil top-hatted capitalist out to screw everyone. Nor need, which it certainly isn’t. Simply put, people’s, organisation and countries desire for greater wealth.

Some people do this blindly, such as the classic investor in the stock market, who’s quite happy to be investing in weapons, oil, diamonds, anything else causing misery in the world, as long as they get a good return.

Other’s may do this slightly more consciously, perhaps investing in some sort of socially responsible fund, which now make up all of half a percent of the South African investment market.

Some do it half-heartedly, preferring to blow their earnings on a R43000 plasma TV so they can play Pet Shop Boys DVD’s at parties. Other’s sacrifice, putting every last cent away just in case, and end up dying with huge surpluses and nothing to show for it. And everything in between. The point is that economics is not a hard science, rather a social science, influenced by people’s behaviour, which is anything but rational, and self-adapting. People who fall for stock market cons where someone discovered the pattern that will predict the future behaviour definitively fail to realise that it cannot repeat itself this way. The cycle is in at least 4 dimensions, not the two the salespeople will brandish to show that now is the time to give them your money.

Nevertheless, I enjoy the infinite variety. I find the Talent Exchange a great mini-experiment, and a good, small-scale way to get my head around some of the concepts.

I met an economist recently at a party. I call him an economist although I can’t recall exactly what he did, something or other for a large investment company. Whatever it was, he surrounds himself with numbers all day long, and with people who do the same, and attempt to create monetary wealth, so I would call him an expert in the field.

We chatted about all sorts of things, but a few elements stood out. We both agreed that many make their wealth by being contrarian. When the hordes are buying IT shares, start thinking about selling. When the hordes are selling property, look at buying. I’ve bumbled into both of these lessons before. In a misguided effort to support my industry, I bought some IT unit trusts. They collapsed as dot bomb took hold and the rand plummetted. The company then tried to recoup their losses by investing in overseas, especially US, IT shares. The rand shot up, and they lost a fortune again. I happened to check my portfolio at this time, not having been aware that they’d moved overseas, and was horrified to realise I was putting my money into Microsoft. So I sold the lot, and ended up with less than a quarter of what I’d started with.

A friend convinced me to get into property. We bought a house that was, to my mind, quite expensive, but he dragged me kicking and screaming into the deal. 4 years later it was worth 3 times as much.

Like most things, it was pure luck. I can hardly claim any sort of great skill. I was cautious, I researched, but the dramatic increase was completely unexpected.

So, what did we talk about? He believed the vast increases in property prices will slow down. I think so too. He had bought lots of property in Cape Town’s northern suburbs, as he believed the southern suburbs were overpriced. It didn’t really matter – everything shot up.

As always I ended up talking about future energy development. The oil price will continue to increase. He didn’t think it would hit U$100, but he agreed it would continue to rise overall (temporary dips notwithstanding). It’s a resource that’s running dry, demand is still increasing. It cannot but end.

As an alternative energy source, he suggested nuclear, something even beginning to attract environmentalists, as a less obviously noxious source of energy than fossil fuels. To me, nuclear is lunacy – humans don’t have a way to dispose of or even store high level nuclear waste. The stuff remains deadly for thousands of years. The economist said that uranium has gone from $7 (per what I don’t know, doesn’t really matter) to over $30. Nuclear had lost momentum with Chernobyl etc, but now with the Kyoto protocol countries are being forced to cut back on fossil fuels, and nuclear has the inside edge again, being as it is from the same old-style grand central planning school of solution making. I’m still the optimist who believes renewables can compete with the same level of subsidisation, and the solution will be small scale. Most households can easily cut their electricity consumption by two thirds with no inconvenience. Solar panels on roofs can reduce the dependency on a central supplier. There’s no need for vast new nuclear plants.

Interestingly, the economist said that there will be a shortage of uranium until at least 2007, as it takes a while for production to ramp up, and most exploitation of the resources had been on hold until recently. The increase in the price of uranium will apparently not have too much effect on the overall price of nuclear energy, as uranium makes up less than 5% of the total cost. However, he did hint that uranium is in short supply. I’ve subsuquently found that there’s only 50 years of low cost reserves left. If nuclear is to handle an increasing proportion of energy generation, this won’t last long. Higher cost reserves can be exploited, and I don’t know how much of these are available. The cost as I mentioned before isn’t really that important, although it all helps to support the argument for renewables. They can only get cheaper.

About this time other guests at the party were becoming worried we weren’t having enough fun, and hauled the economist off to dance to the Pet Shop Boys before the plasma TV, while I got into a conversation about heroin addiction with someone else.