Posted by: graemebird | October 30, 2008

Monetized Liquified-Coal: Simple Production Analogy

 

MARK THORNTON/SKYSCRAPER INDEX/WHY THIS ALL IS IMPORTANT.

“There is a new record setting skyscraper in the making in the United Arab Emirates. The Skyscraper Indexpredicts economic depression and/or stock market collapses to occur prior to the completion of the skyscraper. Maybe the economic damage will be confined to the UAE.”

So said Mark Thornton at the Mises blog right about the exact time when things began unravelling. This was in August 2007.

Now its important that we get this 100% backed multi-commodity money on the go. Or else these really big investments cannot be expected to go ahead year in year out. We will see why it is that these huge skyscrapers spell the beginning of the depression (not in this thread, but once I’ve been able to explain my thinking on this monetary system fully). And we will also see why the monetary system that I’m talking about could never run into these sort of problems and that therefore some of these mega-investments that could put us right ahead of the pack will be doable.

THE PROPOSED BRETTON WOODS MONETARY SYSTEM OF LEGENDARY INVESTOR; BENJAMIN GRAHAM.

Prior to the appalling Bretton Woods system being locked in a number of proposals were put about. Keynes in a rare show of good sense at first was attracted to a very good monetary system proposed by Benjamin Graham. But it appears that his inflationist side, or the Americans, got the better of him, because Benjamin Grahams system is not the system we wound up with.

And in the end Grahams system was probably impractical. Anything that requires international agreement ought to be shunned on first principals. And since it appears that his monetary system required government input and investment it may be a good thing that we didn’t adopt it. But nonetheless it is a fascinating idea. And so it is worth looking into and seeing how close it is to what I’m after.

A Commodity-Reserve Currency

Benjamin Graham also proposed the adoption of a commodity-reserve currency”.  This would work effectively like a Gold Standard, except that backing up currency would not be that single volatile commodity, gold, but rather an entire basket of commodities. 

Gold and money fluctuate in their purchasing power of staple commodities.   The “gold reserves” which previously determined the supply of money in the Gold Standard would be replaced with the very   “commodity reserves” of the ever-normal granary, thus anchoring the money supply to real purchasing power, impervious to political manipulation (as in the modern system) and far more stable than a single commodity (as in the Gold Standard).”

Now for starters a gold standard isn’t what is volatile. It is ponzi-pyramiding on top of the gold which creates the instability.  Although if at first you had to price the gold sky-high to allow it to take over your money supply then there could be quite a bit of instability early on.

My concern is not instability with having gold and silver. My concern is that we ought to have some other commodities at high levels of storage also, to avoid any sort of roadblock to massive investment and high rates of growth. To avoid any sorts of roadblocks like the curse of the record-breaking skyscraper, that Mark Thornton was talking about. Where the building of a new record-breaking skyscraper winds up predicting the next recession.

And the other thing about it is that I wouldn’t want gold and silver to be priced so high that they are no longer used in industrial production. I don’t think monetization ought to cost us so much. I think monetization ought to simply stop the price from falling below its upper-mid-range. Not that it should push the commodity to new record prices.

For these reasons I’m claiming that we need more than just gold and silver to take up the full volume of our money supply at 100% backing.  And digitization means that we may be able to monetize commodities that are not thought to be readily portable.

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We want to look at two very simple factory scenarios to see the place of stored commodities and especially stored monetized commodities in the production process. How the existence of such storage can make the productive power of the economy awesomely more effective. Monetized commodities would be a situation where any outstanding claims to commodities that are commonly traded are 100% backed by these commodities IN STORAGE and where the markets were orderly enough such that when you went to the shops you were quite happy to buy goods from out of your commodity holdings. That is to say you were quite happy to hand over your debit card, draw the funds from out of your commodity holdings (lets say AMMONIA just for one example) and for a trade to immediately go from out of your ammonia holdings into silver then the silver change hands with the shop-keeper to pay for your consumer goods purchases.

Now obviously this would never be the case if the markets were highly erratic or if there was even the smell of asset pyramiding. If you thought the price of your ammonia could have plunged since the last time you looked and silvers price could have skyrocketed you would not be using your commodity holdings as cash in this way. For such a setup to work there could never be any possibility of anything but 100% backing.

Before going into the first simplified factory scenario let me explain what I mean by Just-In-Time manufacturing and Just-ahead-of-time manufacturing. Well you would know what Just-In-Time meant. But the variant of it I have is this Just-ahead-of-time. Or comfortably ahead of time. Because just-in-time is a very hard ask. Just in time is where you have no inventories at any stage of the production process. No inventories and your work-in-progress is pretty much always on the move. The materials are supposed to flow like a river.

Now my own variant of just-ahead-of-time is more like what you see at the Aldi’s checkout. Notice there incredibly long checkout conveyers. So the customer has heaps of time to unload his cargo on the checkout. So there is work-in-progress but the capital goods are such that the work in progress isn’t causing the usual inefficiencies. And the other factor is all the goods have these huge multiple barcodes making the checkout operator powerfully efficient. So your waiting time net of the time it takes for you to load your cargo on the checkout conveyer is really minimum. Queuing is less at Aldis than elsewhere for this reason.

This to me is analogous to what I mean when I talk about Just-Ahead-Of-Time manufacturing as opposed to Just In Time. Yes there will be an accumulation of work-in-progress at certain points but great care and investment will be made such that these accumulations of work-in-progress are in no way inefficient. Whereas in the usual case high levels of inventories and work-in-progress is horribly inefficient. We need a balance here.

 

Now the first simple factory setup for purposes of our analogy is a single conveyer-line in the shape of a very large semi-circle. So you have inwards goods. You have a series of processes occurring as these goods move along this conveyer, and then at the other end of the semi-circle you have dispatch.

For this analogy we have the conveyer moving at the same speed all the way along. Now just think about it. If the people at the beginning of the conveyer are not receiving “work”, adding their process to it, and passing it along, the whole line will fall into bludgery. And yet it is not plausible that the entire line will be such that they will all be working, without holdups and bottleknecks.

In the first instance the bias has to be in keeping the people early on in the process AHEAD OF THEIR GAME. But then again it must be remembered that there can be pile-ups at any part of this semi-circle which will slow production all the way back along the conveyer.

One way of dealing with the problems is to have the conveyer broken up into very many conveyers. And in so doing this, to enlarge the semi-circle. Then you have a series of mirrors and sensors that don’t allow the work to move forward until the item AHEAD OF IT has moved on from a prescribed point.

Then if the conveyer is truly massive you can easily monitor and smooth out the workflow. The reason you can do this is that WORK-IN-PROGRESS can pile up without incurring what we might term as warehousing-costs. Warehousing costs are like handling and re-handling. Rotating stock. All this sort of gear. The work-in-progress is making its way along the very long conveyer and we don’t have to carry extra tasks out on it just because it piles up a bit at certain stages.

Under this system we see that we have to move people from one work area to another if we perceive a bottleneck is forming. So you might have people JUMPING ACROSS to a different stage of production.

People jump across to a different stage of production. But still it is the case that in the first instance the earlier parts of the conveyer must be AHEAD OF THEIR GAME and sending resources across to later stages has to be thought of as a sort of afterthought.

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SECOND FACTORY SCENARIO.

This one is a little bit harder to visualize. But its important to try and visualize it in order to get what I’m driving at in terms of the overall analogy.

You have a third world bread manufacturing setup. Bread and cake mixes. Because its the third world there is a mixture of modern and ancient technology. They are only using one type of flour. And they have no vats. So all ingredients are brought in in bags. There is no flour pumped around in pipes.

In this factory they have a small ingredients weighing area on the ground floor. They have a large items rack. On the other side of the factory they have an old, slow, rickety lift. And near the lift they have small racking for the small ingredients that has been pre-weighed.

Because its the third world all the ingredients must go up to the 5th floor via this lift. And all ingredients are added into the mixer via the act of cutting the bags.

There is a bit of a setup area on the 5th floor where there is quite a bit of room to move things around. But there is not a great deal of room in the area where the bags are being cut.

Now overwhelmingly the most bags that are cut are bags of flour. And so at least one in two pallets going up the lift are pallets with bags of flour on them.

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What is the most inefficient way of getting all the ingredients up there. What is the MOST efficient “in theory”? And what will be the best compromise in practice? 

Well suppose you get your ingredients out of the truck. It goes to the big racks and gets piled up there. Then the small stuff is moving backwards and forwards to the pre-weigh area. Then when pre-weighed to the small racks by the lift. Then up the lift to the setup area. Then to the mixing area. You see the multiple handing. The number of times any given ingredient must be lifted up to a rack and taken down from a rack. People don’t realize how much the inefficiency piles up if there is all this work-in-progress. And particularly if everything is studiously handled under “LIFO” (last in first out) with a great level of inventories at all points of the materials handling.

Well what would be the most efficient setup if you didn’t have to keep everyone working all the time? If your workers were robots and you just switched them off when the work wasn’t there? And if your production schedule was not particularly challenging?

That would be this fabled just-in-time situation. You would wait till the truck showed up and plan for it to show up with the ingredients just when you need them. The flour would come off the truck and be taken all the way up, by-passing two different types of racking, and it would go all the way to the mixing area. 

The small stuff would show up in the smallest practical quantities, just at the right time. And you would take it to the pre-weigh area putting some residual in the big racks. You would have your labour so well sorted that they just make the pre-weighed batches up in time.

Now neither of these are going to work. So what is the best way in practice?

The best way is to always have some pallets of flour in the big racks. But as much as possible try to take the flour off the truck and take it directly to the setup area on the fifth floor. In practice you are likely to have incoming in an exposed area. So you are going to have to put many of them in the big racks right away.

Now there will be delays in the mixing process since they will have holdups downstairs where they are packing the mix off into yet more bags. So the idea in that case is to accumulate extra flour pallets in the setup area of the fifth floor. But as much as possible you are trying to take the flour all the way from the truck right up to the mixing area. Bypassing all the double handling. If there is quite a long holdup you will accumulate some of the small pre-weighed stuff in the setup area in the fifth floor. And if the holdup is for a real long time you will not avoid accumulating this work-in progress at the racking near the lift.

But by in large you are trying to take the gear directly all the way to the mixing area with double handling.

WHEN YOU GET MORE TIME you accumulate a few extras in the fifth-floor setup area. WHEN YOU ARE GETTING BEHIND you “borrow” one or two items from the setup area of the fifth floor.

Getting ahead or getting behind involves some level of inefficient double-handling. But its inevitable and you don’t let this stop you from taking a pallet of flour all the way from the truck to the mixing area where this is possible.

So what we have in practice is a sort of combination of just-in-time, and storage running in parallel with eachother. You aspire to just in time but you do have something in storage mid-way in the production process. You always have work done ahead of time to bail you out if you should get behind or get in trouble. And the system could not work if you didn’t have this. There would be delays, breakdowns in production.

Having a bunch of this gear in the 5th floor setup area is a bit like monetizing stored producer-goods commodities and particularly something like liquified-coal.

By analogy we would say that in the same way as we wanted the first set of people at the beginning of the conveyer to be “ahead of their game” we also want the extraction industries to be “ahead of their game”.

We don’t want these people to have their capital goods run down. We don’t want them to all go bust and their gear to rust.

Now how about people who make durable commodities that are sort of “utility” producer goods?

Well we want these people to be ahead of their game as well. We want them to have a lot of gear in storage nearby to all stages of the production process wherein their “utility” goods will wind up being imbedded.

If it so happens that this utility producer-good is amenable to monetization I say that it ought to be monetized. Because we cannot run an inefficient system with high levels of inventories. And its not plausible that we will succeed in just-in-time management all the way down the line. So what we are after is a sort of parallel way of doing things that stores up some of the crucial commodities but runs logistics in normal goods at something closer to just-in-time.

A few objections came up when I mentioned that it would be good if we monetized liquified coal. Like your poor granny would have to deal with half a dozen barrels showing up every pension day and how was she going to get them up the stairs.

But there is to be none of this multiple handling. It must be more like the system with the flour buildup on the 5th floor.

Its like there are three liquified coal trucks going along the highway into a small town every day. But every so often one turns off the road and the liquified coal is put into some sort of unused mine, it is recorded and monetized. And mostly it stays there. But every so often when the liquified-coal price gets too high then there is only one truck coming in a day from current supply and two trucks are “borrowing” the liquified coal from the coal bank. And when they pay it back they will pay it back with interest but under conditions where this gear is easier to get hold of.

So its not about multiple handling and moving heavy stuff hither and yon. One ought to be able to monetize a lot of this gear and INCREASE the efficiency of the production process. Not monetize this gear and lead to the inefficient movement of materials hither and yon.

More later.

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Responses

  1. “RBA unsure of what to do next;
    what can be done about the procyclicality of the financial system, a common cause of financial crises. It was agreed that policy-makers are unlikely to ever entirely overcome this problem, but many accepted that something should be done to limit it”

    Fucking hell. These people are just so ignorant. PROCYCLICALITY??????

    For fucksakes. You have a ponzi-scheme. If it is allowed to go ahead it will grow quickly then crash. But if it is protected and subsidised then it will obviously cycle.

    Can’t these fucking taxeaters get even the simplest things right?


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