G E B W E B

Here’s a great documentary: The Corporation. It should be well worth your time.

Here are some things you can do to ease your load on the environment:

1. Drive less
2. Fly less (I’m a sinner on this one, though…)
3. Wear a sweater instead of turning up the heat
4. Use a clothesline instead of a dryer
5. Carry your own shopping bags
6. Avoid bottled water and over packaged products
7. Cancel cable TV (really, it’s complete junk)
8. Change to energy efficient light bulbs and turn off the lights you don’t need
9. Recycle your trash
10. Buy local

Aside from the obvious positive effect this has on the environment, it will make you healthier and save you money. Now, you’ve probably heard these suggestions a million times, so if you’re still reading, you likely care about the environment and wonder if there is something else that you can do. You didn’t think I would write a post with a bunch of old, off-the-shelf actions that you already knew of, did you?

Provided you have money in the bank, which you should have, since you’ve been saving money on the above actions, the most effective thing you can do is simple: Withdraw it.

The money in the bank is not just sitting there. It is continuously fueling someone else’s consumption and causing environmental mischief around the world. The bank takes your deposit and lends it to some schmuck, let’s call him Joe, who wants to buy something, say a car. Joe then takes the money and gives it to the seller of that car. The seller, James, deposits the money in the bank. Both you and James think you own the money in the bank now, but which one is it? The answer: The fastest one of you. Of course, you will have to outrun many others as well, since the bank takes James’ deposit and lends it to Jill, who hands that money over to Jack, who puts it in another bank and so it goes on.

The only thing that limits this monetary game of musical chairs, is the fraction of each deposit the bank is required by law to hold as a reserve. If the reserve requirement is 10%, then the bank can only lend 90% of your money to Joe. The total amount of money that can be created is 0.9 + 0.9^2 + 0.9^3 + … = 1/(1-0.9) - 1 = 9. That is, 9x the original amount. So while you may think you’re saving the environment by your frugal lifestyle, your savings account is hard at work wrecking environmental damage to the tune of 9x the amount you put in there.

Well, 9x is a very conservative measure. In the USA, the reserve requirement for checking accounts is 10%. The reserve requirement for savings accounts is 3%. So if you want to earn some small amount of interest on your money, it is wrecking damage to the tune of thirty-two times the amount you put in there. There are 32 James out there who think they own the same money you put into the bank. There are 32 Joes out there who are buying Hummers, constructing McMansions or are otherwise living beyond their means, courtesy of your nimbleness.

In most of Europe, the reserve requirement is 2% for checking and savings accounts. You get 50x the wasteful spending. If this makes you feel sick, let’s look at this system in another way: It’s a giant amplifier for your voice. By taking your money out of the bank, you also force all the Joes and Jills out there to live within their means and adapt the same frugal ways that the environment so craves. You destroy the wealth of the James and Jacks out there who sell crap that you (and they) can easily live without. The same excessive leverage that fueled this consumerist monster, is also making it extremely vulnerable: If only 1% of deposit holders in Europe did this, half of the credit-based over-consumption would stop.

Where do you store money if not in a bank? Well, you can put it in the bank’s safe deposit boxes. There exists a popular misconception that this is somehow illegal. It is not, as long as you report it on your tax return. The banks, earning most of their money on the crazy money expansion they do, are not particularly happy to store cash in their boxes (conflict of interest, anyone?). They usually have a clause that you may not store cash in the box in the lease agreement. This does not matter, because the bank does not have the private key to the box, and they don’t want to know what is in your box anyways. If you have very large sums, you can get a safe instead.

With the cash safely stored in a vault, enjoy your new fifty times greener conscience. Your hard-earned savings are no longer speeding around cutting down rainforests, enabling fifty Jills to drive gas-guzzlers or buying already filthy-rich CEOs palaces, yachts and learjets.

Maybe the weak US dollar can explain the recent increase in the price of oil? If this is the case, then the price of oil measured in a stronger currency, such as for instance the euro, should remain roughly the same.

Let’s have a look at it:

From January 1, 2007 to May 1, 2008, the price of oil is up a stunning 86% in dollars. In the same period, the price rose 57%, measured in euros. From this we can deduce two things. First, the weak dollar is clearly an accomplice in the matter. However, we need to find another explanation for the remaining 57% increase measured in euros.

The biggest villain is still at large!

I have to admit it: I’m a speculator. I own shares in the United States Oil Fund (USO). I even own call options on USO. Needless to say, I have made a nice return so far.

You have probably heard that speculators are driving the price of oil up.  It’s all over the news. The recent run-ups have nothing to do with fundamentals, it’s all speculation, they say. And it’s not hard to believe. Oil is seen as a safe haven, a hedge against inflation and an ever sinking dollar. Crowds of investors are even buying oil merely a speculative play, in hopes of parabolic price-increases.

But those investors have little influence over the price of oil, because of the way oil is traded. Oil, unlike gold, is not a commodity which is traded directly. You buy contracts for delivery of oil at a specific place and time. The contracts settle at a specific date, at which time you have to take physical delivery of the oil. The current oil price quoted by most media is the June 2008 contract. It settles on May 20. If you’re a speculator, that means you have a few days left to sell your contract.

In order to drive the price up, you need to strangle supply or increase demand. There is no way the speculators can do this. They can get a free ride up along with the price, but they do not affect the settlement price, unless they refuse to sell by the expiry date. One contract is 1000 barrels, so unless you have an enormous basement, this is not a scenario you’d want. In fact, I’d be pretty desperate to sell at any price as expiry closes in.

The only real customers of the oil are the refiners. If they refuse to buy oil at the prices demanded by the speculators, the speculators will surely cave. The reason they don’t have to is that actual demand for oil is high enough that all contracts are bought by refiners.

To sum it all up: No speculator is taking oil out of the market and storing it up for later in some giant tank farm somewhere. It’s the drivers who are driving, literally, the price of oil up. I am biking the price of oil down.

Why am I doing this? The average American is using close to 25 barrels of oil per year (Wikipedia), either directly or indirectly through their lifestyle. That sums up to 1950 barrels over the average life expectancy of 78 years. The good news is that you only need two contracts to cover this. The bad news is that those two contracts are trading at more than $125 000 each. In practice you are shorting a huge amount of oil, and have taken 6 digit losses already. Oil was $60 last year. When I started monitoring it back in 2004, it was because it had broken up above $40, and this made me worried. I’m merely buying protection, and at the same time cutting my own oil costs, because I’m too wimpy to keep shorting my own lifestyle.

The question is: Do you feel lucky?

Someone put consumerism like this: Buying things you don’t need, with money you don’t have, to impress people you don’t like.

There are at least three inconsistencies in the above description.The current Credit Crunch brings one to attention: Buying with money you don’t have. If you’re buying a house, then you’re quite the exception if you can cough up the necessary money without getting a mortgage first.

This is where it all starts, at the bank (or mortgage broker). You state your income, your assets, and your credit history is investigated. In the end, you get a loan. This is all fine, if you can pay. Now consider Mrs. Sue B. Prime. The bank is unsure if her income can support the loan, but it also thinks the market value of the house she wants to buy will continue to rise. Since the loan is backed by the house, the bank decides to approve her mortgage.

Behind the scenes (at least to Mrs. Sue B. Prime), the mortgage is resold (to bigger banks, hedge funds, etc.) and the bank gets the cash it needs to keep selling mortgages.

All is well until the day Sue can’t pay anymore. If Sue can’t pay, the bank will take over the house, and sell it to cover the amount Sue owes. Problem is, the house prices where Sue lives are going down, and the bank has to sell the house at a loss. Actually, the loss is passed on to the investor who bought the mortgage from Sue’s bank. The investor is now getting nervous about his other mortgage investments, and stops buying mortgages (or demands a lower price, to cover the risk). End of story is that Sue’s original lender can’t keep lending (or even goes into bankruptcy because of the losses). Sue herself might also have to file for personal bankruptcy, since she can’t pay back the amount owed, even when the house is sold.

But it doesn’t stop here. As the number of foreclosures increases, the property prices keep sinking. There are now too many homes for sale. And because the mortgage banks can’t raise investment money for risky loans, fewer people are approved for mortgages, which means even fewer buyers. The prices continues to spiral downwards.

This not only affects new buyers and those buyers who can’t make their payments. Even rock solid home-owners who have a job, lose their equity, since their house loses market value. For instance, it used to be common to get a car-loan or boat-loan with the equity of the house as security. This may no longer work for some.

When a lot of consumers lose equity like this, it triggers lower discretionary spending. This affects the economy as a hole. Producers like GM are struggling with lower car-sales. Wal-mart sees lower consumer sales. Eventually more people in these affected businesses lose their jobs, and this lowers spending even more.

Is this bad? It is obviously bad for the people who lose their homes and have to spend years paying down debt. I don’t envy any of those, especially with the new bankruptcy laws. The lenders will also take a loss from people defaulting on their debts. These companies pushing risky loans had it coming. They knew the risk. The traders who bought these assets have also rediscovered risk, but it is part of the game. Those who lose their income because of the trickle down effects have much more reason to be mad at the banks and mortgage traders. They did nothing wrong.

The overwhelming majority of people will be affected relatively little. Sure, a lot of us must spend a tiny bit less than we’re used to from last year, but it will not affect quality of life much. It may even cause us to be a bit more conscious of what we buy (i.e less buying things you don’t need). This is certainly not a bad thing for the environment. I’m also under the impression that wealth is largely relative when all basic needs are addressed, so you might feel just as rich. Neither you nor your neighbor can afford that huge monster SUV. So less impressing people you don’t like.

Even so, it is likely that we’re in for some dark months in the stock market.