The Skeptical Optimist

The second law of thermodynamics isn't all it's cracked up to be

I've had some pushback on the article about Purdue's breakthrough in hydrogen generation technology using an alloy of aluminum and gallium to generate hydrogen from water.  Several emailers since then have cited the undeniable fact that it takes more energy to make (and refresh) the aluminum alloy than the alloy-plus-water will subsequently yield for propelling our automobiles.  In short: "Steve, it's a net loser of energy, and don't forget: you can't repeal the second law of thermodynamics*." 

I keep hearing the argument that such-and-so process is a "net energy loser."  The typical fallacy in that argument is that not all energy is useful to humankind.  It clarifies things for me when I mentally separate "energy" into at least two categories: useful and not-useful.  [Note: "unexploited energy" might be better terminology than "not-useful energy," but I'll stick with the latter for this article.] 

An isolated waterfall in the Canadian Rockies is a lot of energy, but left alone, it's not very useful to residents of Manhattan.  On the other hand, a hydroelectric generator on that same waterfall, if used to help make ten million aluminum-gallium bricks, transforms the waterfall's energy into something extremely useful for ten million vehicle drivers in Manhattan. 

When not-useful energy is affordably transformed into useful energy, you and I shouldn't care if the second law of thermodynamics is impossible to violate.  We should be happy to use not-useful energy in order to make useful energy.  A barrel of oil a mile below ground inside the arctic circle isn't much use to me, but 13 gallons of gasoline at the station a mile south of my house is very useful to me.  Likewise, 5000 kilowatt-hours of potential energy in a Canadian river isn't much use to me, but 400 kWh of electric generating potential in an aluminum-gallium brick for my car would be very useful to me. 

So, when I think of the not-useful energy as merely an input to the production process for useful energy, it makes the Purdue discovery look very promising.  In fact, the solar and wind crowd should be thinking the same way; aluminum-gallium bricks just might be a way to convert not-useful coastal winds and not-useful Mojave sunshine into useful vehicle-miles for residents of Minneapolis. 

Why I'm doubtful about corn ethanol
This dichotomy (useful versus not-useful energy), by the way, helps to illustrate one reason why I'm highly skeptical of the corn ethanol idea.  (The distorting effects of government subsidies is another reason.)  Many have questioned whether ethanol production is a net energy loser—a question that sounds deceptively similar to the aluminum question above.  But there's a big difference: ethanol requires a large input of useful energy (gasoline and diesel) to produce, and that changes the equation in a big way.  The question is whether it takes more useful energy to make ethanol from corn than the useful energy ethanol delivers.  (It's similar to the "energy breakeven" issue for nuclear fusion reactors.)   

Come to think of it, one way to find out more quickly whether corn ethanol is a useful-energy loser might be to ask farm-belt politicians the following question: 

Would you support a federal law mandating the use of unsubsidized ethanol fuel only (instead of gasoline or diesel) in the production of ethanol?  Why or why not?

While we're waiting for that answer, I'll still be pulling for ultrabatteries, ultracapacitors, or aluminim-gallium bricks.  If you spot anything else I should be keeping an eye on as a potential gasoline-free, diesel-free method of powering personal automobiles, let me know. 

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End note:

* The second law of thermodynamics says that our universe [the only "closed system" of which I am aware] is always progressing towards a higher and higher state of disorder—aka "entropy."  It's a process that is unstoppable and irreversible.  I learned that thirty-seven years ago in professor Charlie Brown's thermodynamics class at Purdue, and after all that time, the second law still holds true today, surprisingly enough. 

Although I agree that repealing the second law is out of the question, I also know that creating the illusion that the second law is in fact being broken is most certainly not out of the question.  It happens all the time.  The emergence of life is a prime example of more and more order emerging from chaos; the emergence of economies as complex-adaptive systems, as Eric Beinhocker explained in his excellent book, is another example.  Those aren't general defeats of the second law, but they are definitely "local defeats" of entropy.  Houdini never really sawed a woman in half, he just made it look that way; similarly, the emergence of living organisms and complex economies don't violate the second law; it just looks that way from our local point of view. 

USA GDP Growth, Q2 2007: revised upwards

As expected, economic growth for the second quarter was revised upwards in today's release.  Not reflected in the Q2 numbers, of course, are any effects the recent turmoil in the money markets might have on aggregate growth.  The fundamental business indicators are still mostly positive, but the bears are predicting that the housing slowdown will translate into a drag on consumption, the largest component of GDP.  We won't know for another few months, because the GDP number is a rear-view mirror indicator of where we'e been. 

Here's this month's chart.

Purdue finds a better way to bust up water

Some very good news from Purdue University now requires that I give hydrogen-powered engines equal billing with ultrabatteries and ultracapacitors whenever I venture a guess as to which new technology might be the first to get us to oil independence day.   

Recent years' media hype about hydrogen fuel cell vehicles has typically focused on the sexy, silent-and-fast electric vehicle that emits only water from its tailpipe—while downplaying or even omitting the important question, But where will all that hydrogen come from?  Our gasoline production and distribution system took a hundred years and multi billions of dollars to build; how long and how much would it take to build one of those for hydrogen gas (which is far more uncooperative to make and move than gasoline is)? 

Too long and too much, that's what.  If sufficient quantities of hydrogen could not be produced very close to (or onboard) the car itself, the hydrogen-powered vehicle would turn out to be the 21st century version of those flying cars Tom Swift promised us fifty years ago, for which I'm still waiting. 

But the good news from Purdue changes the prospects dramatically: we just might be able to make an end run around the show-stopping need for massive hydrogen production and distribution infrastructure.  It's a way to split water into hydrogen and oxygen using an alloy of aluminum and gallium.  Electrolysis without (much) electricity.  Hydrogen on demand.  Goodbye gasoline.  [Go read the whole article here.]

In short, there just might be a powerful answer to the important question, But where will all that hydrogen come from?  The answer could be: My new car will manufacture it—as long as I remember to fill its tank up with water every so often. 

Obviously, there's a lot more for the scientists, engineers, entrepreneurs, and business managers to understand before we observers can safely turn this from a hope to a probability.  But I'm going to put hydrogen-powered vehicles back on my radar, up there with ultrabatteries and ultracapacitors.  Somebody could be getting very rich very soon from a breakthrough in one of those areas.  I hope so anyway... and I'm ready to contribute my fair share as soon as they've got something.   

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End note:
The QandO blog spotted the Purdue story yesterday; because that's my alma mater, I had to investigate further.  This, by the way, is the kind of university-spawned idea Paul Romer talks about in his interview with Russ Roberts; if you haven't listened to it yet, you're missing a treat. 

Required Listening: Roberts Interviews Romer

What a treat: Russ Roberts and Paul Romer, two of my favorite economists, talking to each other for 75 minutes about economic growth.  This one is definitely a keeper. 

Here's the synopsis at EconTalk, the website Roberts runs:

Paul Romer, Stanford University professor and Hoover Institution Senior Fellow talks with EconTalk host Russ Roberts about growth, China, innovation, and the role of human capital. Also discussed are ideas in creating growth, the idea that ideas allow for increasing returns, and intellectual property and how it should be treated. This 75 minute podcast is a wonderful introduction to thinking about what creates and sustains our standard of living in the modern world.

Every last minute of this is a must-listen for three types of people:

Group 1:  Those who agree with the basic theme that growth is overwhelmingly important to our future well-being;

Group 2:  Those who disagree with that basic theme; and...

Group 3:  All politicians. 

Group 1 will enjoy the podcast because these two guys are on the cutting edge of this topic, and know how to tell us about it in understandable language.  Group 2 should enjoy the podcast for a different reason: it clearly lays out the fundamental pro-growth arguments that they will presumably want to learn how to refute.  [I wish them lotsa luck, by the way; Romer is on everybody's short list for a Nobel prize, largely because of his work on this topic.]  Group 3 may or may not enjoy it, but will be forced to listen to it—if enough of us start asking them how they propose to enhance economic growth. 

Go to this page ("Romer on Growth").  You can either listen to it there by hitting the "Play Now" button, or download it for later listening on your iPod or Zune by hitting the "Download" button.  [I personally prefer the latter method, which allows me more mobility—but what really matters is that you listen to it, all of it, one way or the other.]

Uncle Sam, your banker, will see you now

Did Paul Craig Roberts mistakenly omit a comma when he scripted the title to his August 8 article, "Uncle Sam, Your Banker Will See You Now"?

I started wondering about that after I went down to my bank and took out a certificate of deposit.  Upon returning home, I reflected on that transaction.  I'd had a few dollars I'd rather earn interest on instead of stuffing them into a mattress, so I loaned them to the bank.  In return, I got a piece of paper that said the bank would pay me back with interest.  I was the lender, my bank was the borrower.  Everybody was happy. 

Moreover, that transaction was similar to all the times I'd gone down to that same bank over the years and purchased a United States Savings Bond.  Each time, I had a few dollars that I wanted to invest safely, and that Uncle Sam serendipitously wanted to borrow from me—so Uncle Sam traded me a piece of paper that said he'd eventually pay me back with 5% interest.  I was the lender; Uncle Sam was the borrower.  That was perfectly okay with me, because Uncle Sam is the ultimate bank for dollar transactions.  Everybody was happy. 

China, too, has been accumulating a few dollars they'd rather not stuff into a mattress.  China's government is like I am, in one respect: they wanted to invest some of their dollars in a safe, interest-bearing security.  By a fortunate coincidence for China, Uncle Sam wanted to borrow those dollars, too (in addition to mine).  So Uncle Sam traded China some pieces of paper that said he'd be happy to pay 5% interest for the privilege of borrowing those dollars.  China was the lender, Uncle Sam was the borrower.  That was perfectly okay with China, because Uncle Sam is the ultimate bank for dollar transactions.  Everybody was happy. 

Or almost everybody.  A few headline-writers now seem to think China owns us, and can have their way with us whenever they'd like.  Frankly, I don't get it.  Uncle Sam is the bank—i.e., the borrower.  China is the lender, the holder of that bank's certificates of deposit... or, one of the many holders, anyway.  If China, the buyer of Uncle Sam's CDs, now wants to sell them before they mature, they'll either find plenty of buyers at going rates (such as the British), or they'll have to take a loss by selling them at a discount.  That's the financial equivalent of shooting themselves in the foot.  That's why I don't get it.

If I were the lender (and, in fact, I am one of them, because I own several US Savings Bonds), I'd prefer to hold onto Uncle Sam's securities until they mature... then roll them over into new ones.  The rest of the world's lenders in the vast bond market still seem to think Uncle Sam's treasury securities are among the safest financial instruments on the planet; not only is the bond market correct in that assessment, but as long as the US economy remains healthy and growing, those securities will remain safe and secure.  Why would I want to reduce the value of my own treasury securities by dumping them?  And why would China? 

The only logical scenario I can think of for dumping my US securities would be if I saw some kind of ominous threat to the US economy—such as, come to think of it, the threat of a protectionist trade war.  Could that be what the article was hinting at by mentioning "the idiots in Washington"?  Could protectionist American politicians, instead of China, be the biggest threat to our economy, and therefore to the value of dollar-denominated securities that Uncle Sam, the banker, is issuing? 

I must admit, that is a threat; how sadly ironic that it's coming from our own politicians. 

Last week's "favorite quote" by Paul A. Samuelson bears repeating here: 

Protectionism breeds monopoly, crony capitalism, and sloth.  It does not achieve a happy and serene egalitarian society.

FQ.07.34: Favorite Quote for This Week

Protectionism breeds monopoly, crony capitalism, and sloth.  It does not achieve a happy and serene egalitarian society.
—Paul A. Samuelson

An $800 billion freebie, hidden in the national debt

Once a quarter, I like to update this pie chart showing who owns the national debt—mainly so you and I can keep our politicians honest.  I'll explain the $800 billion freebie below.  Click to enlarge.

Private sector owners of the debt
This time I added a breakout of the private sector's ownership: insurance companies, pension funds, and others.  Well hidden inside the private sector's portion (until now) is $800 billion of treasury securities that, in essence, is merely a token entry on the asset side of the Federal Reserve's balance sheet.  It's the cumulative result of the Fed's so-called money printing operations: the bonds purchased by the Fed from the public, using brand new money the Fed has the authority to create out of "thin air" (...to the unjustified horror of many). 

The Fed's inventory of these token bonds will only get bigger and bigger.  That's because our growing economy will forever (I hope) require more and more money injection—to prevent deflation as we produce more and more goods and services.  And here's the good part about that T-bond inventory: nobody will ever have to "pay it back."  [See end note for even more good news.] 

Why not?  Because the Fed's T-bond parking lot is a lot like that place in the Arizona desert where we park all those defunct military airplanes.  That's why I think of it as the "T-bond boneyard."  Others might like to think of it as an $800 billion freebie.  I don't care what we call it; the important point is, even if you know someone who thinks the $8.9 trillion federal debt is a problem, you can at least make them feel $800 billion happier about it.  Just explain the Fed's boneyard to them; they'll be all smiles after that.

Foreign owners of the debt
Anyway, the Chinese still don't own nearly as much of our federal debt as the Japanese do—and neither of those countries has been purchasing nearly as much as the British have.  Here's an idea: Maybe if the Chinese would sell their excess US treasury securities to the Brits, everybody (Chinese, Brits, American doom-peddlers) would be happier, and we could spend more time debating how best to grow the economy faster, and less time conjuring up nightmares about when the Chinese government might turn itself into a financial suicide bomber by dumping their US treasuries all at once. 

Dream on, Steve.

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End Notes:

Data sources
• US Treasury data (breakout of foreign holders)
• SIFMA summary of Federal Reserve data (breakout by institution)

For-what-it's-worth fact about paying back the debt:

The present value of paying back all of the debt principal is exactly equal to the present value of never paying back one penny of the principal (i.e., of paying interest forever and ever). 

Review: Sony Reader PRS-500

Don't buy it; save yourself $300+ and a big headache.  After wasting seven hours' worth of my time, most of it on hold waiting for Sony customer support people who ended up being no help whatsoever, I boxed it back up and returned it to Sony.

I had been looking forward to storing up to 80 books in their new-technology, hi-res ebook reader.  But not any more.

In theory, it interfaces with a Windows machine.  In practice, the Sony software ("Connect Reader") would not even run on my Sony Vaio notebook computer running the latest XP SP2 update, with 22GB free space on the hard drive.  [Note to self: Theory and practice frequently diverge.] 

I remain an optimist, however.  Specifically, I am optimistic that one of three things will happen: either (1) Sony will fix their software so that it works as advertised with Windows XP (on a Sony Vaio, no less); (2) Sony will write their software to interface with the OS X operating system; or (3) consumers will stay away from Sony products in sufficient numbers to drive Sony out of the business of wasting consumers' time and money. 

[One nice thing about running your own blog is the freedom to publish a warning like this every now and then, to help others avoid a time-wasting mistake.]

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End Note:

Not that I need help with this any more, but here is the error message that wouldn't go away no matter which Sony employee "helped" me or what I did to the boot.ini file based on stuff I found in the Microsoft knowledge base.  Click to enlarge—or, better yet, just wait for my next article later today, now that I have free time to work on it.  I'll be using my Mac.

 

Development pace accelerates for best anti-terrorist, anti-CO2 weapon

Now that the financial markets seem to be taking a short break from the hysteria, I've had some time to check for any new developments related to one of the very best anti-terror weapons on the horizon: ultra-high-capacity batteries and capacitors.  Good news: I found several items that tell me we just might be able to pull this off a lot sooner than I'd thought; see the several links at the end of this article. 

Why batteries are anti-terror weapons
If you missed my energy series, here's a summary of why ultra batteries or ultra capacitors would be a hugely valuable weapon in the terror war: (1) Money flows to the Islamic jihadists largely (and mostly indirectly) because of USA demand for such a large portion of the world's oil production.  (2) Half of the oil we need is due to the gasoline we consume.  (3) We wouldn't need all that gasoline if new technology paved the way to safe, affordable, ultra-high-capacity batteries or capacitors for our automobiles.  (4) If the USA didn't need all that gasoline, the world wouldn't need to buy nearly as much oil.  (5) If the world didn't need to purchase nearly as much oil... well, you can finish that thought. 

National security, national wealth, new jobs
The sooner we achieve the ultracapacitor breakthrough, the better for our national security, our homeland economy, and the demand for our exports.  At first, we could recharge our cars by plugging them into an electrical outlet during nonpeak nighttime hours, when our utilities have excess capacity.  After that, we'd need to build a few more (nuclear) power plants.  Subsequently, if and when affordable home- or locally-generated wind or solar power became economically viable, we could "fill up" our cars from those sources.  And we could accomplish all of that right here in North America. 

Oh yeah, the environment, too
By the way, I almost forgot: A successful battery-or-capacitor breakthrough would also yield a pleasant side benefit for believers in the hypothesis that global warming is mainly caused by human CO2 emissions.  Judging from the headlines I see, that hypothesis seems to have gained a sizable constituency, mostly on the government-knows-best side of the spectrum.  [Personally, I'm on the fence, looking for compelling evidence and scientific-method arguments, from either side, that refute the opposing side's objections—but so far most of what I see are appeals to join one ideological bandwagon or the other.] 

No matter.  The ultra-battery will make that acrimonious debate laughably irrelevant—and the sooner that happens, the better, as far as I'm concerned.  Why?  Because the right ultrabattery could provide the entire world's population with a practical alternative to the internal combustion engine.  Imagine 100% of the world's car-driving population driving as many miles as they want, but emitting no CO2 at all from their vehicles—thanks to the new technology they imported or licensed (...from North America?).  Wouldn't that be a better solution than some kind of new law that merely held Americans (6% of the world's population) to a level near their current level of CO2 emission? 

In fact, now that I think about it, that's another reason I am so looking forward to a breakthrough in ultra batteries: an end to the partisan bickering about carbon dioxide emissions.  New technology saved the trees (...when coal replaced woodburning in England); new technology saved the whales (...when Colonel Edwin Drake discovered oil in Titusville, PA); new technology can also save us from the politically-charged CO2 debate.  Everybody would be a winner (...except, of course, those whose true agenda is politics, not science). 

I can hardly wait.  Bring on the batteries.

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[Caution: the articles below are encouraging, but so far they aren't mentioning the key statistic that will tell us if we're getting close to the goal of replacing the need for gasoline: energy density, usually expressed in kilowatt-hours per kilogram—"kwh/kg".  Gasoline stores energy equal to about 13 kwh/kg, for example.  If an ultrabattery or ultracapacitor could get halfway to that number, the future would suddenly begin looking very bright.] 

With that, here are some interesting articles from the last week or two:

• Ultracapacitor-assisted Toyota Supra wins endurance race.

• MIT's A123 Systems helping GM's electric car project.

• Paper/nanotube batteries made in a laboratory setting.

• Johnson Controls poised for battery breakthrough.

• Crazy, secretive company Eestor may (or may not) be onto something big.

Subprime mortgages, ice cream, and horse apples

A few countries are rich, and will get richer; many countries are poor, and will in all likelihood stay poor.  What factors correlate most significantly with a nation's ability to become wealthy and continue to grow wealthier? 

Eric Beinhocker calls it "Social Technology."  Citing recent work by William Easterly and Ross Levine, he says it includes at least five items worth remembering:

• property rights;
• rule of law;
• a well-organized banking system;
• economic transparency; and
• lack of corruption.

As he noted:

Even countries with few resources and incompetent governments did reasonably well if they had strong, well-developed Social Technologies.  On the flip side, no countries with poor Social Technologies performed well, no matter how well endowed they were with resources or how disciplined their macroeconomic policies were.  [from The Origin of Wealth, p. 261.] 

The USA's guardianship of those and other Social Technologies goes a long way to explaining its wealth.  But it's a big mistake to think we can't get better at it.  Recent actions in the monetary arena, to shore up liquidity in the banking system, suggest to me that better transparency is in order for the mortgage lending and derivative businesses. 

The problem is not so much that lenders loosened up their criteria enough to enable lower income families to purchase homes.  That, in theory and in aggregate, is supposedly a good development for those lower income folks.  The competent lenders took the extra risk into account when they priced the loans; the incompetent ones (and there seem to be many) deserve to go under; culling incompetent deadwood is a definite positive for the economy. 

Nor is the problem related to the size of the subprime default exposure.  Many point out that 14% of mortgages are subprime, and 14% of those might go into default.  That means that 1.96% (14%x14%) of mortgages could be subprime defaults.  Not a big number.

No, the real problem is the lack of transparency into batches of mortgages that were bundled and then sold as one big package.  How much of a risk is the whole package if the portion of risky subprimes is buried in the total?  Answer: It's hard to tell, because of the lack of economic transparency. 

Would you want to be a buyer when you can't gauge the risk of what you're buying?  Neither does anybody else, and that's why that market is hardly moving.  Sellers can't sell, because nobody wants to risk buying. 

Reminds me of what a wise old man told me two generations ago:

When you mix ice cream with horse apples, it doesn't make the ice cream taste better. 

Economic transparency is a social technology we should now be able to get better at in the mortgage lending and derivative business—now that we've learned a lesson the hard way.