Friday, August 28, 2015

Trump's immigration proposal would not cause a 6% loss in GDP as claimed.

Note:  This is the first of two articles I intend to write on immigration.  The second article will focus on the EU refugee crisis, with a focus on the unethical aspects of current EU policy towards the humanitarian crisis in the Middle East.

A lot has been made about the costs involved in Donald Trump's proposal to deport all illegal immigrants and keep them out.  The big headline number of almost a trillion dollars has been cited by many news outlets as well as politicians.  I personally think that it is a very inflated number, but it is not the detail I want to take issue with.  It is the assumed cost to US GDP of as much as 6% which I find to be exaggerated and outright disingenuous.

The argument is based on the simple calculation that illegal immigrants make up over 6% of the total workforce, therefore their absence would cause a resulting loss in economic activity proportional to the loss in the workforce, thus the drop in GDP.

The calculation neglects to adjust for the resulting rise in wages and increase in worker participation, right where it is needed the most, among the working poor.  Incomes among the bottom 40% of households have in fact stagnated in past years, even when not adjusting to inflation.

 Data source:  US Census Bureau.

When adjusting for inflation, real household income for the lowest 20% of earners are down by about 13% compared with the year 2000.  I am certain that a resulting rise in wages due to a shortage of foreign illegal workers would encourage more discouraged workers to re-join the workforce.  The higher wages would also allow many more households to consume more, which would also resolve one of the biggest drags on the economy today, namely a lack of demand, which makes up over 2/3 of the economy.  Some tax contributions would also result from more legal workers in the workforce, therefore, it would also benefit the government budget.  Not to mention the reduced costs of assistance programs as a result of people on the lower-end of the income scale earning more, thus needing less help.

Now, we have to be honest here and admit to the fact that even a resulting rise in the lower-end of wages will not fill all the vacant positions that would be left behind by the removal of over 6% of the current total US workforce.  There are certain jobs that would not be attractive to the average American, even if it would offer more money than it currently offers to an illegal worker.  But there is a solution to that, called a temporary work visa program.  It should be a visa for non-qualified work, and it should be made easy to obtain, needing nothing more than proof on the part of the employers that they made a reasonable effort to fill the position with a legal US resident, but there were no takers, as well as a criminal record check on behalf of the would-be foreign employee.  This would allow employers to fill any voids in labor needs, as well as for the government to take a rightful share in income taxes.  This plan would have the added benefit of providing some labor elasticity in the economy, filling the void with temporary workers when there is high demand, while allowing those visas to expire when labor demand is slack.

I don't believe that even many of the illegal immigrants who currently reside in the US would find the concept of a work visa unappealing.  Sure, it would mean having to perhaps pay some income tax. At the same time, they would enjoy the benefit of being legal, thus subject to current labor protection laws.  Not to mention the fact that they would no longer have to constantly worry about being apprehended and deported at any moment.  It would also give the US authorities the opportunity to weed out criminal elements attempting to reside in the US, because the few bad apples would no longer have the opportunity to hide among the masses of people simply looking to exchange their sweat and toil for some wages that they can use to support themselves and their families.  The reason I think many illegal immigrants would like this aspect is because it would lessen the stigma attached to coming to the US to work, because it would remove suspicions of wrong doing and give people fewer excuses to stereotype and associate them with the drug smugglers and other unwanted elements.

Donald Trump's proposal on immigration, as it seems to be the case with most other subjects he touches on, lacks on details, therefore there is to my knowledge no comprehensive proposal, which would include my idea of the work visa for instance.  But he does claim to be a good manager, and as such, I am sure that if he were to ever get into the position of being responsible for making decisions on immigration policy, he would see the need to expand on his idea and not just do what his campaign suggests and nothing more.  Bottom line; there are ways to deal with the illegal immigration issue.  And it does not have to result in economic and fiscal Armageddon as much of the mainstream media tried to portray it.

Friday, May 29, 2015

Viktor Orban: The Tyrant Who Rules A Free Country

I am certain that most people who consume news media on a regular basis have come across the occasional story which jumped out as factually incorrect, or distorted.   Political speeches are full of these inaccuracies as well.  What makes the story of Hungary and its Prime Minister Viktor Orban different is that in this case there is a definite pattern of willful disinformation, which transcends borders as well as political and ideological inclination.  It is to be found in the Western mainstream media, as well as among political elites.

The intensity and duration of this wide-spread campaign of disinformation is also something that sets this apart.  It started five years ago, almost as soon as Viktor Orban became prime-minister.  At first, there was a media barrage using quotes made by distinguished Hungarian citizens who declared that Hungary was turned into an autocracy, which were combined with valid examples of measures which to some extent did curtail media freedom, or the separation of powers of the state.  Then came political attacks mounted mainly by the EU left, such as the Tavares report, which singled out Hungary as a state which gravely violates media freedom standards and human rights.  It was voted in the EU parliament largely along ideological lines, but with a few members of parliament on the right joining in with the left.

Since then, there were countless meetings in the EU on the state of Hungary’s democracy.  There was even a recent one in the US, where the Republican Party pushed back, pointing out that Hungary is being singled out, even though it is no different from other EU and NATO members such as Romania and Bulgaria.  This pushback was in fact a rare occurrence, which had nothing to do with any sense of fairness, but rather a desire to expose flawed policies pursued by the current US presidency.  After all, the argument is correct, because Romania and Bulgaria along with other EU members such as Greece and Croatia do in fact score bellow Hungary when it comes to media freedom and other relevant measures.

Freedomhouse ranks Hungary as a free country, although one would not know it from the constant barrage of claims that state otherwise.  Ironically, one can find these claims even in a place like Romania, among political elites and in its mainstream media outlets, despite that Romania ranks lower than Hungary on a number of critical measures, including media freedom.  This leaves us with the dilemma of trying to understand the source of the constant campaign against Hungary’s current Prime Minister.  He has been labeled a fascist dictator by high-ranking political elites such as Senator John McCain and compared to Musolini, Putin and other genuine past and current authoritarian figures in the Western mainstream media.  Paul Krugman has made it a point to give a platform to Kim Lane Scheppele, which has been on a personal crusade against Hungary’s current government, even going as far as denouncing the state of US democracy, simply because there was some Republican pushback on this issue at a recent sub-committee hearing.  She started a recent article by saying “Usually, I write about the dismal state of Hungarian democracy.   But today, I will write about the dismal state of American democracy.”  As I said, it transcends borders, political ideology and it endures, despite the obvious disconnect from Hungary’s reality.

There are of course some legitimate factors which we can point to as a trigger of the “Viktator” campaign.  First and foremost, some of the measures taken by the current Orban Government are in fact a step back in terms of overall freedom and democracy, although the trend is yet to cause Hungary to be an outlier, as I pointed out.  Then there is the fact that he tends to be overly outspoken.  For instance, he made a speech in Romania pointing out that more authoritarian states such as Turkey, Russia and China have had more economic success lately, avoiding the stagnation that has gripped the Western world, and especially the EU.  The media and Western elites automatically jumped to attack him, which should be expected given that Orban in fact questioned the viability of our Western foundational principles.  It is very probable that many of our elected elites in fact think about these things on occasion; after all, when things do go wrong as they did economically speaking, especially in the EU, which has seen zero yearly economic growth on average since 2007, inevitably questions and doubts arise.  Problem with Orban has been that he doesn’t only think them but also voices them.

The fact that Orban has also been among the EU leaders, which went along with the confrontational approach towards Russia more hesitantly and again voiced support for pragmatism, urging the EU to keep in mind its economic interests, also provided more ammunition against Orban.  More comparisons surfaced, equating Orban with Putin, in an attempt to argue that Orban supports a softer line because he is as authoritarian as Putin, therefore there is a natural desire to associate with him.  At this point Orban became an obvious target for anti-Russia hawks, given the already well-established but false perception of Viktor Orban being a tyrant.  The fact that many EU political and business elites were never on board with the sanctions, did not prevent Hungary’s position from being singled out, despite the fact that it has been by no means the only voice of doubt in regards to current EU policy in this regard.

Summing up the situation, we can conclude that at the root of the five year old “Viktator” campaign, we have the vicious nature of Hungarian politics, with opposing parties willing to drag the reputation of Hungary down, at the expense of its interests, in the hope of indirectly tarnishing the reputation of the ruling party.  Orban can be said to have been guilty of it to some extent while his party was in opposition.  It seems the former ruling establishment has decided to raise it to a new level and there seems to be definite support on behalf of the Western ideological left for this campaign against Hungary’s current government.

There is of course another possible explanation for this seemingly bizarre situation where we have very strong, sustained rhetoric in regards to Hungary, which does not correspond to actual facts, yet it seems it never gets seriously challenged despite the factual deficiencies.  The fact that this campaign against Orban and his government started in the fall of 2010, when Hungary decided against renewing its IMF deal and going alone instead cannot be ignored.  It goes without saying that attacking Orban directly would have been inconvenient for any ideological camp.  On the right, they would have been seen as supporters of global finance, which since 2008 is equivalent to political suicide, especially on the right, which is already seen as being more pro-business.  On the left, which has been the most active in this bizarrely aggressive campaign, it would be even harder to justify.  Hungary’s current government is in fact the only one in the Western World to actually do more than just pay lip-service to the mass demands to let financial institutions share in the pain of the financial crisis.  Instead of implementing IMF-prescribed austerity measures which as we can see with Greece, not only it led to widespread misery but also failed to re-balance the economy, 

Hungary decided to plug fiscal holes through taxing the banks.  Hungary also decided to let the banks swallow some losses on the FX mortgage and other consumer loans on their books, in order to bring the consumer back to relative health.  Worst, of all from the perspective of global financial interests, Hungary emerged from being one of Europe’s economic basket cases at the beginning of the crisis in 2008, to becoming an example of relative economic stability.  The FX consumer loan pile problem, which was among the worst in Europe was largely solved, with the loans being converted to forints just before the Swiss Franc was allowed to appreciate, sending Global finances into turmoil and renewing worries of consumer defaults in central Europe, where many people still have franc-denominated debt.

Hungary’s debt/GDP ratio has been on a gradual declining trend, which is important given that it entered the 2008 crisis as the most indebted country in the region.  Economic growth has been significantly outpacing the EU average since 2013.  More importantly, this was all done without implementing significant new austerity measures since Orban’s government came to power in 2010, which spared Hungary’s population from even worse suffering than it had to endure in the past few years.

This is something that Mr. Krugman or President Obama most certainly cannot openly criticize, without some serious backlash from their base.  The right cannot openly criticize these measures either, because it would only reinforce the stereotype of the heartless ideology.  Nevertheless, it seems there has been a great deal of desire to denigrate Hungary and its government in the past years, so it seems the left and the right went along with the theory that if it is repeated often enough…..

Given that now we have major political parties elsewhere, such as in Poland advocating for similar measures taken in Hungary by the current government in regards to bank taxation and FX loan conversion, it is understandable why much discontent would be present among certain elites.  Perhaps the worst fear was that “Orbanomics” will actually show some results and others may be tempted to emulate those policies.  Regardless of what the reasons are for this huge discrepancy between facts and rhetoric on the situation in Hungary, which has been going on for five years now, there is one indisputable conclusion that we can draw, namely that the Western mainstream media and our elites are just as capable of disinformation, as the elites of societies we criticize for lack of freedom, such as Russia and China.  We should not take it for granted that we are always better informed than people living under authoritarian regimes.

Monday, April 20, 2015

Electric Vehicles Far From Being Able To Compete With The Internal Combustion Engine. It Will Not Act As Our Savior.

A niche market by definition is one which captures the interest of a number of people, but does not have mass-appeal. The global EV market is one such market. It is currently a market that needs a lot of financial support, with federal incentives in the US, for each electric vehicle sold at $7,500. For reference, Renault is offering some pretty decent ICE cars for sale in the price range of that subsidy, through its Dacia subsidiary. Some countries such as Norway and China are offering even greater subsidies. For instance, in China one can purchase a Denza and get up to $18,000 in subsidies.
Despite all this help that the EV is getting around the world, in 2014 they only accounted for .4% of all global car sales. What is worse, sales around the world are starting to show signs of stalling out.
Those who want to paint a positive picture of this situation will be tempted to point to the growth achieved year on year. Reality is however that we are looking at a definite slowdown in month on month growth. While I do believe that sales will eventually beat last year's record of 320,000 units, I don't think it will be by much. While for the past three years we have seen dramatic exponential growth in EV sales around the world, evidence is building of a significant slowdown in growth, and may even signal stagnation.
Early indications from Inside EV's suggest that in the first quarter of 2015 around 22,500 EV's were sold in the US. That is a drop of about 30% compared with the fourth quarter of 2014, and it barely matches the sales volume of the first quarter of 2014, or we might learn that sales will be even slightly lower once the final numbers will be in.
In the EU, the fourth quarter of 2014 saw a decline in sales compared to the fourth quarter of 2013.
Source: EV obsession.
This might not yet reflect a trend moving forward, but it by no means bodes well, especially if we consider the early signs of stagnation we are seeing from global sales this year. It seems that the EV niche market is reaching its limits, despite all the incentives offered by governments around the world.

Tesla is not the ICE slayer.

I had an interesting chat with an acquaintance a few weeks ago. He mentioned his interest in Tesla (NASDAQ:TSLA) and how he would have liked to buy shares back when it went public in 2010. He did not, which is a shame because as we know, it would have made for a great investment back then. But what I found interesting about his reasoning behind his desire to invest in Tesla was that it was not entirely out of the desire to make money on it. He told me that he would have liked to buy some shares, because he would have liked to be part of it, because he believes in what the company is doing.
He is a tech enthusiast and I believe that it is that aspect of it that attracted him to the Tesla story. Tech enthusiasts love technological progress and revolutionary products. Environmentalists also love to see such progress as Tesla is promising. The thought of a company challenging the supremacy of the gas guzzler producers is very appealing indeed. It gives hope to the believers in human ingenuity as a way of solving our environmental and sustainability issues. It would also be a vindication of the government policies of support for the EV industry for which the environmental movement lobbied for. Tesla's own sales growth forecasts suggest that it is ready to become a major car manufacturer, with 500,000 yearly unit sales by 2020 and perhaps in the million unit yearly sales range by 2025.
But far from becoming a formidable competitor for the internal combustion engine, Tesla is so far not even in position to claim top spot in the global EV market. In fact, it is in fifth spot for this year so far.
Data source: EV-sales
I do believe Tesla will claim the top spot in the EV market eventually. In fact, it may even happen this year if the release of the model X will go smoothly. But, at the moment, it did not yet reach that objective and it is facing competition from companies which are best known for their conventional gasoline-powered technology. But even when it will reach the objective of becoming the top EV seller on this planet, it will still have to contend with the dominant technology, which in my opinion is too easily dismissed as yesterday's innovation by tech enthusiasts as well as environmentalists.

Range/Price ratio.

Range was always seen as an issue when evaluating the viability of EV's as an alternative to the ICE. One of the things that got people exited about Tesla, aside from the fact that it is a pure EV company, while the other car manufacturers are seen as simply going through the motions of satisfying various pressures to embrace EV's, has been Tesla's range. The model S has almost 300 miles maximum range per charge that drivers can rely on to get them around. That is as much as many ICE cars get on a tank of gas. Even the model 3, which is supposed to have mass appeal, due to its projected base price of $35,000, will still have a 200 mile range. Furthermore, Tesla is increasing the presence of its fast-charge stations in order to facilitate long-distance mobility for its cars.
It is beyond any doubt that EV range is an undisputed factor in meeting the challenge of taking on ICE domination on the roads, together with an extensive charging network, which needs to provide for fast charging. Tesla is meeting that prerequisite. It is however falling way short on challenging ICE technology on price. The model 3, which is scheduled to hit the market in 2017 will have a base price of $35,000, which on the surface seems reasonable. The average sale price of a car in the US last year was about $31,000. But, the real sale price of that model 3 will average more like $40,000 at the least once options will be included. Furthermore, it will be a compact car, which on average sells for significantly less, in the $20,000 range on average. Car buyers seem to be inclined to pay over $30,000 for SUV's and Trucks, as well as smaller luxury cars, but it remains to be seen whether they will go in large numbers for a $35,000 base price EV compact.
The model 3 battery will cost at least $10,000, assuming a price per kWh of $200, and a range of 200 miles, which suggests it will have a 50 kWh battery. So the battery alone will cost almost as much as many small conventional cars available in the US, EU and Chinese markets. In fact, one can purchase a decent-made Dacia Logan in Europe for about $10,000 these days. I have been ridiculed in the past for bringing up Tesla and Renault's Dacia subsidiary in the same article, but this is the reality of the price difference between ICE's and EV's. The ICE can allow car manufacturers the option of introducing decent cars on the market for sale in the $10,000 range. EV makers, cannot hope to provide a car with a decent 200 mile range for under $30,000 at the moment, and I think they will struggle to do so in the near to medium future as well.
I don't believe that many people are able to grasp the significance of the barrier that this price difference poses to EV's. I am not suggesting by any means that EV makers need to be able to provide a 200 mile range, $10,000 car in order to compete. But, the cheapest EV's with a decent range now cost about two to three times more than the cheapest decent cars available on the main car markets. If the age of the EV is to be ushered in, then the price gap needs to be reduced significantly and I do not foresee that this will be achieved within the next decade, which means that the EV will remain a relatively small niece product, which will continue to rely on significant government support to stay afloat.
As for Tesla's goal of becoming a mainstream carmaker in the next decade, the odds of making it seem very slim. The model 3 may enjoy significantly more success than the model S, or the upcoming model X, but looking at the global EV market and the ICE competition, there is not much to go on as evidence of competitiveness. While I think Tesla is a great company, with a potentially bright future, I also continue to believe that it is currently priced as if the breakthrough to over a million unit sales per year by 2025 has already happened. In other words, there is plenty of room for disappointment, therefore downside for the stock, with little room for upside in case that Tesla does meet its goals on time. The breakthrough into the mainstream car market may eventually happen, but it may take two or more decades for EV's to stand toe to toe with the ICE, with Tesla perhaps leading the way.

Tuesday, April 7, 2015

No Ministry Of Truth? No Problem! The Case Of The Persecution Of Valentina Lisitsa.

In Ukraine, they know how to deal with problems like her.  They introduced the Ministry of Truth back in December in order to deal with the likes of Valentina Lisitsa.  Forgive me for linking to a Russian news outlet for information about this ministry of truth, but the reality is that very few Western media outlets covered it, and even the few who did, such as the Guardian, reported on it, while simultaneously trying to downplay it.  Strange thing this is, given that Reporters Without Borders also condemned this repressive move.  But I guess in the end, they (the journalists who condemned it) probably found out that their employers were willing to turn them into reporters without jobs if they insisted too much on reporting on this topic.  Thus, few articles made it into the Western Mainstream media, and that is probably why most consumers of Western media outlets still believe the often repeated line that Ukraine is fighting for freedom and Western values.

I may have taken issue with this line or argument before, but I will do so no longer, because as the case of Valentina Lisitsa proves, Ukraine is indeed fighting for Western values.  No, we do not have ministries of truth yet, but in the past year, it has become clear that we are able to do without, and yet still achieve the same goals, while still maintaining the appearance of a free media.

The mainstream media & governments align on unified message.

No one can say for sure what is the mechanism that keeps the entire Western media establishment in line on this particular topic.  To anyone who by some accident came to the conclusion that the dominant story-line is biased to say the least, I think it is obvious by now that there is a force that is making sure that media outlets, be they on the left or right, do publish articles that are predominantly supportive and non-critical of the Ukrainian government, and at the same time very hostile towards Russia, or even the ethnic Russian minority in Ukraine and elsewhere and on occasion even hostile to historical minority rights in the region in general, as is the case with this article from The Economist. This article borders on incitement to hatred, given that it portrays minority group aspirations for the same rights enjoyed elsewhere in similar situations, in order to help prevent their assimilation, as a tool of evil, therefore risks giving nationalist majorities in the region more ammunition.  Yet, such reporting on the situation in Ukraine has become a commonly accepted practice.

What is not acceptable is to mention the fact that the main cause of the civil war in Ukraine is in fact the extreme nationalistic nature of the new Kiev elite and their supporters.  Valentina Lisitsa brought to the attention of her online audience the fact that the current Ukrainian Prime Minister Yatseniuk, called ethnic Russians in the East sub-human.  For this, and other statements off stage, she is now being denied the right to perform on stage in Toronto.  The media is catching on to the story, but every mainstream media outlet which reported on this so far, has already picked a side, by calling Valentina's statements about the Ukraine government and its actions "controversial".  Mind you, if it were not for Valentina, we would not be talking today about Ukraine's prime minister engaging in hate speech against a minority.  Interestingly, no Western media outlet seems to have caught on to the controversial aspect of someone whose government we are called to support in the West, making such hate-filled statements against an ethnic minority.  Would Canadian society accept Prime Minister Stephen Harper, calling the French minority in Canada sub-human?  Perhaps not!  That is why reporting on Ukraine's prime minister making such statements is not convenient, because we are looking to support a government policy that is supportive of the current Ukraine government, to the extent that it apparently cannot be subject to criticism.

Most Western governments were largely silent when the day after Yanukovic was ousted, the new government made it its number one priority, the very next day to repeal minority language rights.  In an impressive display of public-private partnership, which in my view proves that both are the same entity, the Western media was silent as well.  I myself learned about it because I speak Hungarian and Romanian fluently and Hungary and Romania were in fact the only countries in the EU, which took an attitude against this, because there is a significant ethnic Hungarian and Romanian ethnic minority in Ukraine.

Same thing happened when the Odessa massacre occurred.  Despite this being one of the most horrific hate crimes to have been committed on the European continent in the twenty first century, there was very little condemnation on behalf of Western governments, only some statements in regards to regret of the loss of life.  And to date, no Western media outlet has picked up on the fact that this remains a horrific hate crime that has been committed recently and to date there is little evidence of the Ukrainian government doing anything to bring those responsible to justice, which should not surprise us, given that the most likely perpetrators were members of the Right-Sector extremist movement, who are also supporters of the current government.  Given that Ukraine's Prime Minister apparently considers ethnic Russians to be sub-human, we should not expect justice to be done, but should we not expect our Western media to report on the nature of this government that the Western world is supposed to give unconditional backing to?

Valentina also mentioned the death and suffering caused by the civil war in the East, which apparently is also a highly controversial matter.  I am sure it would not be seen as such, if she would have followed the lead of the Western elites and would have placed the blame on Vladimir Putin, instead of pointing out the chauvinistic nature of Ukraine's current government.  One would think that at least some relatively marginal voices would be allowed to present the other side of this story, but as Valentina's case shows us, even this much deviation is not tolerated.  The Expat Ukrainian-Canadian community must have been very pleasantly surprised to learn that their lobby to punish Valentina Lisitsa for daring to point out inconvenient facts for which the current Kiev government would have probably had her arrested, was greeted favorably.  The Western Elite cannot afford to drop the charade and have her put in prison as they would do in Ukraine.  But, we do have another effective tool of persecution.  We can silence those who we deem to be spreading inconvenient messages by simply labeling them as "controversial", thus apparently justifying their persecution.

I guess there is some element of truth in Western media mainstream reporting.  Ukraine is in fact moving towards western ideals, they just don't know how to do it in a more sophisticated and stealthy manner.  They are still at the stage of using more blunt tools, such as the ministry or truth.

Wednesday, March 11, 2015

Ukraine Bailout Risks Putting IMF Credibility On The Line.

The IMF may not be the most loved international entity. While it can be credited for executing many sovereign rescues, more recently in Europe, where countries like Romania, Greece, Hungary and Ireland found it necessary to ask for IMF help, it is also known for producing much misery in the process. It is quite obvious if one follows the policies it pushes on the borrower, that the loan comes with a wish list made up by those who do the lending through the IMF. The interests of those who draft that wish list tend to be in contrast to the interests of the country that is being bailed out.

While its policies are much criticized, reality is that it has been an important ingredient in maintaining a degree of stability on the international sovereign debt markets. Bond investors know that there is an extra layer of protection provided by an entity that is willing to lend whenever investors decide to freeze out a sovereign entity out of the markets. This leads to lower perceived risk and it leads to lower interest rates. Lower interest rates allow governments to tax less, invest more, thus facilitating more global growth.

For this reason the bailout that is about to be offered to Ukraine should worry us. It is no secret that the IMF is making a political decision here and not one based on fundamental guidance. Ukraine's situation is such that it does not meet the preconditions that are usually demanded in order to guarantee to some extent a return of the investment made by IMF contributors. In fact, the situation there is so bad that in my view the loss of this bailout money is almost 100% guaranteed. I simply do not see how Ukraine will be able to pay this money back. What I do see, is a pattern developing which will push the IMF and other entities participating in this bailout to keep sending in more money in order to avoid a collapse, which will make the ultimate loss more severe.

In fact, this is more or less in part what is happening right now, given that last year's bailout proved to be insufficient. It will not be long before the current program will also be seen as inadequate. For one thing, the program is built on the assumption that Ukraine will be able to restructure its debt, pushing maturities further out and most likely getting bondholders to agree to a haircut. Such a deal is not guaranteed by any means. Aside from that, pushing the maturity out means that Ukraine would have to deal with those bonds just as they would be required to pay back the IMF-led bailout funds as well. The ability to do that would depend on Ukraine stabilizing and achieving a relatively healthy rate of economic growth, which has no chance of taking shape. There are simply too many obstacles in the way.
First of all, there is Ukraine's economic dependence on Russia. About a quarter of all Ukrainian exports were headed to its Eastern neighbor. 

Many of the goods it is exporting even now are intermediate components used in Russia's defense industry. Russia has already started the process of cutting its reliance on these goods. For Ukraine, it can mean a loss of well over a billion dollars per year in trade. Odds of being able to find new customers for its intermediate and finished defense products are not very high. Aside from this, Exports to Russia of all sorts of products totaled $17 billion per year before the crisis started (link). That will be equivalent of 17% of Ukraine's GDP this year. Most of this source of much-needed foreign currency and source of jobs for Ukrainians will in my opinion shrink dramatically in the coming years.

There are also Russian companies invested in Ukraine which are likely to gradually move away. Russia also announced in January that it wants to end its reliance on Ukraine as a gas transit route, which will deprive Ukraine of as much as $3.5 billion per year in transit income. I believe that this is also likely to happen by 2020, even if the EU will try to obstruct. If Russia fails to get gas to Europe via an alternate route such as through Turkey, it will simply work to divert some volumes to other markets, or perhaps make use of it internally.

One of last year's two gas deals with China involves exports of 30 Bcm (1 Tcf) per year from the same Western gas fields that currently provide gas to Europe. That is almost 40% of the volume that flows through Ukraine to the European market. In the event that the EU would find itself without the gas flowing through Ukraine, I believe it would consent to allowing for the Nord Stream pipeline from Russia to Germany to be used at full capacity, which would divert a further 20 Bcm of gas from the Ukraine transit pipeline. Russia should have no difficulty finding other uses for the remainder, or it might even consider slowing the pace of extraction from those fields, given that most of the domestic market is also being supplied from them.

War in the East: Damned if it continues, and damned if it does not.

The current ceasefire seems to be holding for now, but in all honesty, I personally have doubts that it will continue to hold for long. On one hand there are the Russia-backed rebels who see an opportunity to create a new state made up of ethnic Russian majority regions in the East. They currently control only a small portion of the Donbass region, so it is tempting for them to keep fighting. The Kiev government on the other hand may be tempted to find a military solution to the situation in the East, especially given the very loud and aggressive voices in the US, calling for an intensification of the conflict through weapon supplies to the Kiev government. These calls are in fact an incentive for Ukraine to undermine the ceasefire, because more and more people believe that the US will send weapons if the ceasefire collapses.

An intensification of the conflict would most likely lead to a greater degree and spread of the destruction, regardless of who would prevail. The arming of the Ukrainian army would give Russia the excuse needed to do so openly as well. This would most likely include the introduction of air power, which will allow the rebels to attack targets far from their current front line. All of this will make it very hard for Ukraine to maintain a viable economy. It would therefore be left with no other choice but to default on its debts, including the money owed to the IMF and other contributors.

While, the IMF itself declared that it wants to see an end to the hostilities in order to ensure that the Ukrainian situation is such that it will allow for re-payment, peace in the East may not necessarily be more beneficial. While the current conflict is causing an economic disruption to a significant part of Ukraine's economy, and is costing the Kiev government a significant amount of money, it also has some benefits from Kiev's point of view. It allows the government to continue to play the nationalist card and gives it a scapegoat for the increasingly harsh living standards many Ukrainians are experiencing.
Ukraine's minimum wage was about $150/month in 2013. It has now fallen to about $60/month due to the currency depreciation. It could fall further still, once the IMF deal is implemented and Ukraine's central bank allows the currency to weaken. It went down to as low as $40/month last month, when the local currency, the hryvnia experienced a sharp sell-off.

Aside from the low wages, there are pension cuts, government layoffs and the economy will most likely have a hard time functioning given the central bank's move to raise interest rates to 30% last month, which will lead to more layoffs and stagnated wages in the face of high inflation. The IMF also asked for energy subsidies to be removed, which will among other things increase the cost of household heating by almost 300%.

Up to now, the government did a pretty good job of appealing to the population's patriotic and nationalist sentiments, in order to deflect criticism in regards to the state of the economy. If the conflict in the East dies down however, it is hard to see how they will be able to continue to blame the state of the economy on the conflict and on Russia. The IMF-imposed austerity programs will be what people will be feeling directly, not the effects of war on their lives.

The government has so far done a decent job of preparing for this. It in fact installed tools of media control and laws which allow the state to go after anyone they deem to be inconvenient. The West will most likely be silent even as the Kiev government will resort to more and more repression in order to prevent a popular revolt. We already know this will be the case, because there was little reaction in the Western world, even as the Kiev government introduced media control laws in December, which seem quite repressive and extreme (link).

Having control of the media and the ability to detain people for things that would be seen as unjustified in most free and democratic states, should help prevent a mass revolt for a while. Increasing economic despair will however push people to revolt eventually, regardless of attempts by the government to keep a lid on it. What makes the situation particularly dangerous is the fact that there are many relatively independent militia groups currently fighting in the East on behalf of the government, which belong to groups that feel they were shut out from the reigns of power last year. These militias often display their new-Nazi allegiance openly as is the case with the Azov battalion which is currently one of the pillars of defense for the strategic city of Mariupol (link).

While these groups came in handy for the government in its quest to try to regain control of the rebel areas in the East, because these groups were in fact the only reliable fighting units at its disposal, given the lack of fighting spirit within the regular army, these groups may in the end prove to be more dangerous for the current government than for the ethnic Russian rebels. When the fighting will stop and people will gradually turn their anger at the government due to the economic situation, groups such as the Azov battalion and others will most likely seize the opportunity to try to install themselves into power.

Ukraine as a state lost its future the day after Yanukovic was ousted and the new government decided to make the repeal of historical minority rights its number one priority. That was the moment when they set their own house on fire and there is in my view little hope of going back. The IMF is pouring a lot of money into a country which no longer possesses the minimum level of social cohesion needed to keep it together. There are ethnic tensions, as well as social and ideological tensions, which are made even deeper by the Russia-West proxy fight for control of that country. In the end, there is a chance that Ukraine can be salvaged and saved from descending into failed state status. But this salvage may involve allowing for a complete write-off of all government debt in order to remove the extra burden, while the Ukrainian economy returns to viability. This of course will mean that the IMF will not get its money back either.


As is the case with all investments, contributors to the IMF fund expect to get their principal back, together with interest, as well as indirect benefits from the terms of the bailout. There are currently two states which have been bailed out in the past few years, which look increasingly unable to pay back the bailout funds. We know that Greece is unlikely to be able to avoid eventual default and the IMF will be part of that default. Ukraine is now the second candidate.

While most people who experienced the IMF recipe for a return to sovereign financial health will feel reason to rejoice if the fund takes a hard hit, the global economy will in fact end up more unstable as a result. Significant losses incurred on IMF loans will cause contributors to become more stingy with their contributions, leaving the IMF in a position of weakness when it comes to being able to secure the funds needed to execute a bailout. This in turn will mean that bond investors will feel less secure about the risk involved in investing in sovereign debt around the world, given that an extra layer of protection will be removed.

What this means is that even as the world is increasingly entering a period of low inflation, which is causing interest rates to also decline significantly around the world, there will be upward pressure on interest rates due to risk perceptions. The end-result will be a situation where inflation is relatively low and interest rates relatively high, which will make global debt more unsustainable This cannot but further hurt a global economy, which is already suffering from a very significant decline in growth rates since the beginning of the 2008 crisis.

Saturday, February 21, 2015

Ukraine: A Year Since Maidan

I stopped writing on my personal blog for a while, because I figured the volume of traffic is such that it will never make much difference.  I have to say that after following the mainstream media coverage of one particular event, namely the crisis in Ukraine, I realized that I was wrong to think that way.  It is true that my articles will never reach a very wide audience, but I have come to the conclusion that sadly the mainstream media, with its wide reach is now more likely to misinform than inform.  I think it is therefore up to sites such as my own to try to reach a few people and do a small part in trying to clear up many of the distortions that the consumer of information is bombarded with, to the point where people are made to believe whatever is in the interest of the sponsors of our main access sources of information, be it the media, or the people we elect and therefore believe that they represent our interests.

I will not pretend that what I have to offer here is free of bias.  I believe that anyone who makes such a claim is untrustworthy.  I do have bias in respect to the Ukraine conflict, and I think it has to do with my background, namely being a person born in Romania who is of Hungarian ethnicity.  I will therefore always feel sympathy towards the view of the ethnic Russian people living in Ukraine, especially given the hard-core nationalist nature of Ukraine's post-Yanukovic government, which saw it as its number one priority, the first day after they ousted him to repeal minority rights.  I have to admit that after such a move, there was never much hope of this new regime gaining much sympathy with me, given that I believe that respect for historical minorities and their right to avoid assimilation by the majority population should be a human right which should be observed everywhere.

Unfortunately, I doubt there are many people in the US government or the media who understand the very concept of a distinct ethnic and linguistic identity.  They most likely think of Russians as simply people who live in Russia and are Russian citizens.  Europe is however a place where a few hundred years ago a concept was born, which led to nation-states being formed, based on ethnic identity.  Unfortunately, borders were not necessarily always drawn in observance of this concept.  That is why I was born in Romania, and while I have Romanian citizenship, I consider myself to be of Hungarian ethnicity and to belong to Hungarian culture.  When there are certain transgressions that happen against the many ethnic Hungarians who live in neighboring countries, such as was the case in Slovakia, when the 2009 language law was passed, people in Hungary were understandably outraged, because they saw it as an attack on their ethnic kin.

It is the failure to understand or acknowledge this concept which is leading us down a path that is increasingly looking like it is taking us closer to a potential global-scale catastrophe, then we have been since perhaps the Cuban Missile Crisis.  If anyone doubts that things are now reaching such a danger point, think again.  US politicians are currently pandering to public opinion formed in large part thanks to very one-sided and outright unprofessional coverage of the Ukraine crisis for the past year and increasingly showing their tough guy or gal credentials by talking tough on arming Ukraine.  I think it will happen sooner or later, at which point we will have crossed the point of no return.

Russia's government will have only one option as an acceptable response which will save it from collapse and that is to provide full and open support to the ethnic Russian minority in Ukraine and that is exactly what it will do.  The end result will be a bloodbath fueled by a hardening of positions on both sides of this proxy war.

Missed opportunities to defuse the crisis.

We might all like to think that given the size of Russia's nuclear arsenal, as well as its very important role in global economic stability given its natural resources that it provides to the world, cooler heads will prevail and the best possible people are brought in to come up with a way out of this crisis.  I want to point to a list of missed opportunities since the day that Ukraine's corrupt president was ousted, which might have helped steer the situation in a different, less dangerous direction.  I honestly don't know whether these opportunists were missed on purpose due to certain desires to actually push for a crisis or due to incompetence, but in fact both possibilities point to incompetence in this case, because if anyone thinks that it is wise to escalate this thing, he/she must be a very incompetent person.

Repeal of minority rights.

The day after Yanukovic fled due to the violence on the streets, the Ukrainian parliament decided as its first act to repeal Ukraine's law on minority language rights, which allowed for the use of a minority language, alongside Ukraine's official language in areas historically inhabited by ethnic minorities.  Aside from EU members Romania and Hungary, which expressed concern in regards to the ethnic Hungarians and Romanians living in Ukraine having their basic rights violated by this move, there was a complete failure on behalf of the Western world to react firmly and swiftly to this event, which in my opinion did more than anything to lead to the present conflict we are dealing with today.  I believe that a very strong rebuke by the EU and the US of this move by Kiev's new nationalist government would have not only tempered Ukrainian nationalism but also would have given some reassurance to the large ethnic Russian minority that it will not be left at the mercy of the new nationalistic Kiev regime.  The move to repeal minority rights was vetoed later on, but only after the new Kiev government in effect realized that it managed to set its own house on fire.  By the time the move was vetoed, the East of Ukraine was firmly in the grips of revolt. The Western media tried to emphasize throughout this conflict that it was all because of Russian propaganda, which is an outright shameless lie, which was repeated over and over again by most mainstream outlets.  I am not denying that Russian propaganda played a role, but the main cause of the rebellion in the East was in fact the justified fear that Ukraine had a new government that was showing very obvious hostility towards them.  Not to mention that Ukraine's president which enjoyed overwhelming support in the East was ousted through undemocratic means by a nationalist mob, spearheaded by extreme right organizations such as Svoboda and Right Sector.

We should keep in mind that on the issue of historical minority rights, the EU has a terrible record of ignoring the issue and accepting some very harsh policies among some EU members as was the case with the 2009 Slovak Language Law, which imposed very harsh fines of as much a an average yearly salary (5,000 Euros) for not observing the rules of the law, which prohibited the use of any other language aside from Slovak in certain circumstances.

The EU has France as one of its founding members.  France refuses to even recognize the existence of historical minorities on its territory, therefore EU laws and regulations evolved over time in a manner that had to accommodate this policy.  This is why I believe that allowing countries such as Estonia to become members of the EU and NATO was a huge mistake, which endangers our very existence.  There is no telling when a nationalist trend will sweep that small nation and they will decide to mistreat the Russian minority which makes up a quarter of that country's population.  At that point, Russia will once again be put on the spot, because it cannot just ignore ethnic Russians being mistreated, while we are bound by treaty to defend Estonia.  In other words, the world has become hostage to Estonian nationalism potentially going a bit too far and causing ethnic tensions which would pit two nuclear powers against each other, with no way for either side to back down.  If this lack of foresight on behalf of our leadership does not worry the public, I don't really know what would do it at this point.

This is also one of the reasons I believe that Ukraine is not a good fit for EU or NATO membership, therefore the EU association agreement should have never been offered, which would have spared us all from this mess.

The Odessa massacre.

In May, there was a confrontation in the city of Odessa between pro Kiev activists and ethnic-Russians protesting against the new government and for autonomy for themselves.  The clashes ended with tragedy, where a group of ethnic Russians took refuge in a government building, which was torched most likely due to Molotov cocktails being thrown back and forth, leading to 39 people being burned to death.

Given that no one was ever brought to justice for this crime, even though it is quite obvious that extreme right-wing organizations are to blame, it is never too late to condemn at the very least Kiev's inaction in punishing this act of hate, which led to the death of so many people.  But to date, this crime & failure to bring those responsible to justice was never condemned by Western officials.

I encourage all who are capable of keeping an open mind to take a step back and realize what this would look like from the point of view of the ethnic Russian minority living in Ukraine.  The Kiev government did not punish anyone for this hate crime committed against them.  Kiev's western backers, likewise did not condemn this atrocity but in fact just kept going with more condemnation of Russia for its support of ethnic Russians in Ukraine.  I don't know of any propaganda message that Moscow could have ever possibly come up with which could have had a stronger effect in solidifying the opposition of ethnic Russians to being subjected to the new Ukraine government and its obviously not very sympathetic backers from the West, than these actions.

Kiev's military offensive in the East.

While the Western media and officials wasted no time in condemning former Ukrainian president Victor Yanukovic for using violence as a means to stay in power in the face of the challenge posed to his rule by a violent mob, no major criticism was ever attempted at Kiev's military offensive last summer.  Back then Kiev was going up against an insurgent force that was very obviously under-equipped, yet the government went ahead and deployed heavy weapons, including against civilian targets, causing much death and destruction in the mainly ethnic Russian East of the country.  I fail to see how people can expect to see an outcome where Ukraine can be one again, given the death, suffering and destruction that has occurred in the Donbas region in the past months.  It is like demanding and expecting a spouse to return to a household where much abuse has taken place.

If there is one thing we can be sure of and everyone should have understood from the outset is that Putin cannot afford to allow the separatists to be defeated militarily.  He will go as far as he has to in order to prevent that from happening.  The West tried to push Russia into abandoning their ethnic kin through sanctions and arguably through the suppression of oil prices, but as we can see, it is not happening and will not happen.  Any further attempts to do so will only lead to a further escalation of not only the war in Ukraine but also of the economic conflict, which the US might not feel directly at the moment but the EU sure does as it loses tens of billions of Euros worth of exports and billions worth of revenue in the tourism industry as Russians cho ose to stay home.

The Economic Pain.


When the anti Yanukovic protests started in Kiev in the aftermath of his choice to pick Russia's offer over that of the EU, I am certain that the main driver of the protests was a desire by ordinary Ukrainians to take a path towards a better life.  Given that in 2013 Ukraine was the fifth poorest country on the continent, their desire for a new path is understandable.  Unfortunately, they failed to take into consideration the country's current economic ties.  Russia is Ukraine's biggest trading partner even now after a full year of conflict, with about a quarter of Ukraine's exports going to Russia and one third of imports coming from Russia as well.

Between the declining economic relationship with its main economic partner and the conflict with the ethnic Russian separatists in the East, Ukraine's economy has suffered huge damage in the past year.  The economy most likely shrunk by about 7.5% in 2014.  Worst of all, its currency the hryvnia is in complete free-fall.  It traded at around eight hryvnia to the dollar in 2013, while it is currently at twenty seven.  This means that the 1,200 hryvnia minimum monthly wage which was worth about $150 in 2013, is now worth just $45.  With inflation running in the 25% range and wages remaining stagnant, life which was already quite miserable before the Maidan revolution is now looking very bleak indeed.  Ukrainian wages now resemble something one might expect to see in most sub-Saharan African countries.

The country's economy is set to shrink to under $100 billion, compared to $178 billion in 2013 and GDP per capita will officially drop bellow the level of Europe's current poorest member Moldova, at just under $2,200 per capita, which is down from $3,900 in 2013.  Meanwhile, its debt/GDP ratio will go from 40% in 2013, to over 80% by the end of this year.  S&P which is where I got this data from, forecasts a relatively strong rebound in 2016, which should see 2015 as the low-point for Ukrainians, but personally, I doubt that will be the case.  Ukraine is set to tie itself to the EU economy, which is more or less in stagnation mode for almost a decade now, which means that demand for Ukrainian made goods will be limited, while Russia will continue to de-leverage its economy from its ties with Ukraine.

Just to offer an example, Gazprom's chief announced last month that it will end its reliance on Ukraine as a gas transit route one way or another within the next few years (link).  Ukraine currently receives about $3.5 billion in gas transit fees every year, which it will lose in just a few years.  There will be many other shocks coming Ukraine's way due to its diminishing ties with Russia.  In addition to that, there will be the shock therapy it will have enforced on it by the IMF in coming years, which it will be in no position to resist.  I believe that in the best-case scenario, it will take at least a generation for Ukrainians to once again enjoy the miserable living standards they had in 2013.

The EU & Russia

There has been much media coverage of the effects of this conflict on the Russian economy.  There is not much I can add to what has already been said, except perhaps point out that the main hit to Russia came from the lower oil prices, which may or may not be the result of Western actions meant to pressure Putin.  The price of oil cannot stay this low indefinitely, because it will eventually cause global shortages within the next few years as more and more companies opt to cut investment.  Reality is that many oil companies, especially in the shale oil and oil sands were not doing very well to begin with, even when oil was at $100/barrel.  If prices remain at current levels beyond this year, we are likely to start seeing massive defaults on the almost $200 billion that shale oil companies borrowed in the past five years or so.  So, while things may be tough for Russia right now and the pain might last into next year, Russia will survive and will recover.  Its leaders may even come away with some important lessons out of this and recognize that they need to start creating the environment needed to allow for honest private enterprise to develop and prosper within a less corrupt environment and with clear laws in place to govern business.

The EU may have only suffered minor economic pain thus far, but I believe it is the bigger loser in all this for the long-term.  The EU needed to have a strong relationship with Russia, because it needs its natural resources.  While all the talk lately has been about diversifying away from Russia, the reality is that the EU cannot do that at an affordable price.  There are simply no viable alternatives, while the current alternative sources, such as Norway and Netherlands are set to start declining.  The decline that is forecast for Holland alone by 2030, is equivalent to the loss of the 63 billion cubic meters that the EU was going to receive via South Stream before it obstructed it.  Norway's gas production will also decline significantly by 2030 as well.  The EU is therefore in no position to accept a significant decline in Russian gas imports.  Its only long-term alternative is to drastically increase LNG imports, which tends to be far more costly.  I think this is the last thing the EU, which failed to grow its economy since 2007 needs going forward.  It is obviously already un-competitive compared to other major competitors, so more expensive energy is not what it needs to settle for.

So was Maidan worth it for anyone?  We can no longer ask this of ordinary Ukrainians given measures such as the "Truth Ministry", which was introduced in December.  We have no way of knowing how they feel one year on.  I don't think the Russians are happy about it.  Westerners continue to be caught up in the spirit of hostility towards Russia, and are yet to see and feel many of the consequences as a result.  It seems we think it was worth it, but it is clearly the result of public opinion being formed by a very aggressive mainstream media campaign which wants to present things this way.  But, if we actually take the time to look at the consequences, there seems to be no winner in all of this.

Saturday, June 15, 2013

John Nash versus the environmental movement.

       A little-covered event took place a month ago.  CO2 concentrations in the air reached 400 ppm.  It is not good news for our planet and all its inhabitants.  From the moment measurements of CO2 concentrations in the environment started being taken in 1958, when CO2 concentrations were 315 ppm, till now, we added another 85 ppm, which is an increase of 27%, and CO2 concentrations increased by almost
45% since the industrial revolution began.  The worst part is that the rate at which we are increasing Carbon Dioxide concentration in the environment is actually speeding up, and so things will only get worse.

            In 1958, we were consuming less than half the petroleum we now consume.  Same thing goes for coal.  Natural gas was almost absent in our energy mix.  Some people expressed hope that at least the rate of increase in emissions will slow, given the current economic environment since the 2008 crisis, but the rate of emissions actually increased by over 10% since 2007 according to EIA data[i].  It is hard to say with certainty at what rate we will continue to increase the Carbon Dioxide concentration in our environment, and it is even harder to predict accurately the effects.  What we do know for a certainty, is that the next milestone, which will be 500 ppm, will be reached in just a few decades (around 2035 at current rates of emissions increase).  We will not be prepared to either prevent us from racing towards the next milestone, which will be 600 ppm, a thing that will most likely happen within my expected lifetime, nor will we be able to deal with any of the negative consequences.  We simply do not have the global institutional capacity to meet this potential threat to our lives.

The Obstacle:

            This month will mark one year since Rio + 20.  It was an event, meant as a follow-up to the original Rio summit in 1992, which was supposed to help change the unsustainable path of the global economy.  Some die-hard optimists left with the illusion that something did indeed happen at the summit.  In reality, it was an even more colossal failure than the first one.  The first one managed to convince a few nations to at the very least undertake the futile attempt at saving the world unilaterally, at the price of undermining their own economies, as is the case with Europe and its commitment to the Kyoto protocol.  The second one brought no new agreements of great relevance into place, aside from a few private companies such as Microsoft, pledging to go carbon neutral and some of the wealthier countries pledging some aid to the developing world, which is good, but it is not planet-saving good.  The fact that unlike the first summit, where most of the leaders of the relevant world attended, this time around, the leaders of countries such as the United States and Germany shunned it, says it all.  I just started publishing on my blog last year and I wrote an article each month leading up to the event, to try to warn as many people as possible about the impending failure (and the root of it), and then one more to sum up the results.  Through this exercise, I realized an important thing that I already suspected to be true.  It is not the global business elites or right-wing politicians who are our main obstacle to sustainable development; it is in fact the environmental movement and their idealistic and ideology-based platform, which is to blame.

            The failure of the summit was mainly due to the same obstacle that guaranteed the failure of every other attempt to get a global framework in place to deal with sustainability issues.  The fact that it fails to register after all these decades of trying it their way, that it does not work, baffles and saddens me at the same time.  The basic formula that environmentalists use to approach this problem is convincing the world that urgent action is needed; therefore, everyone should get together and agree to do their part.  In trying to create this sense of urgency, they often tried to make an argument for urgent action, due to imminent danger.  This claim has not always been 100% truthful, giving ammunition to the opponents of such actions.  So, like I said, it is the environmentalists, not the perceived opponents who are the main obstacle

Here is why:

It is something I mentioned in my book, published already one and a half years ago, and it is proving to stay true with every passing day, because there is always evidence reinforcing it.  Environmentalists tend to have an opinion of being on average smarter and better informed than those they perceive as the obstacle to sustainability. In fact, on this one, they allow ideological points of view to relegate them to supporters of foolish, unviable solutions to our problems, while the ones who frame their own ideological view that we are already on a sustainable path, may be wrong in their view, but are right and logical in choosing to oppose environmentalist initiatives.

            What makes the environmentalist agenda so flawed and unviable is a rather simple concept, which we all act on, through our instincts as human beings, but it took a mathematician to describe.  I am referring to John Nash (known better to the masses from the movie: “A Beautiful Mind”), whose main contribution of relevance to our discussion is Game Theory.  It is a rather simple concept, which I really wish the environmental movement would bother to apply to its ideological agenda to make sure it is viable.

The basic concept:

Imagine two criminals working together, who are caught in the act.  The police do not have enough evidence to be certain they can convict them, so they put them in separate rooms and lean on them, in order to get them to testify against one-another.  If neither collaborates, chances are that they both walk.  If both of them make a deal, chances are that they will both get convicted and receive a reduced sentence.  If one talks, while the other does not, the one who does not collaborate ends up getting a full sentence, while the other one gets a reduced sentence.

Choices (do, do not snitch)
Collaborate (suspect2)
Do not (suspect 2)
Collaborate (suspect1)
3,3 years in prison
3,10 years in prison
Do not (suspect1)
10,3 years in prison
0,0 years in prison
Note:  given the combined choices, the most likely outcome will be three years in prison for each.

 In real life, the reason law enforcement relies on this practice is because it works, in other words, they know that they can make the partners in crime turn on each other, even though clearly the best choice for both is to not collaborate.  The catalyst that makes this possible is the desire to avoid the full sentence.  It is no different from our desire to get insurance.  We lose some money through the regular payments, and in fact, we tend to pay more for it than we will likely get back over a lifetime, because after all, insurance companies are profit-based institutions, so they will never pay out more than what they take in.  So, if we all refused to insure ourselves for health, natural disasters, and other calamities, collectively we would be better off, but we do not, because we do not want to end up being on the losing end, when a disaster does happen.

            Applying the same concept in reverse, because in the case of reducing emissions collaboration is in fact the potentially dangerous path, which may leave one or more parties holding the bag, we get the same “prisoner’s dilemma” which John Nash described.  In this case, however, we should replace criminals with countries, divided into developed and developing and years in prison with something more appropriate such as manufacturing jobs gained.  So, just like not collaborating would have brought the best result for the two criminals, in this case collaboration would most likely bring the best result, for we could still have growth and development, without the negative side effects of our unsustainable path.  No one collaborating, in this case means that we would keep going and initially benefit from exploiting the environment, until something will give, and we will eventually experience total collapse of the current world order, with terrible consequences for all.  One side collaborating, while the other side does not, in this case would mean that the side trying to mitigate the impending disaster would self-sacrifice itself, while the non-collaborative side would initially gain two-fold, while in the end, this route will still lead to eventual collapse, only perhaps somewhat later, because of the partial collapse of  the collaborating side of the global economy.

Choices (do, or do not unilaterally self-sacrifice)
Developing world (do)
Developing world (do not)
Developed world (do)
100, 100 (million jobs)
-50, 150 (million jobs)
Developed world (do not)
150, -50 (million jobs)
150,150 (million jobs)

Note:  Applying the Nash concept to this problem, in reality would lead to what will be the most likely scenario in the long-run, which is that neither side will self-sacrifice, because as I indicated, it would lead to most jobs created initially (not taking negative effects of unsustainable development into consideration.  As we can see, collaboration is not as enticing for either side, because it would mean losing out on the possibility of gaining an extra 50 million jobs, even though collectively it would lead to the second largest initial increase in collective gain, and it would be done responsibly, with fewer side-effects.  The environmental movement, through its call for voluntary self-sacrifice for the greater good, in fact advocates for the least attractive scenario, therefore their agenda is doomed.

            It is therefore understandable why the Rio + 20 summit failed miserably, and why most other such initiatives will fail as well in the future.  It is such a basic concept, yet through my experience over the past eighteen months, since I started writing articles and published my book, I found that even though no one can put up a relevant argument against it, everyone finds a way to reject it.  Based on face-to-face conversations I had about the problem, and my proposed alternative of implementing a standardized global trade tariff, designed to encourage sustainability uniformly around the world, with consequences in place for those who refuse to collaborate, I found that it is impossible to move people who care about this issue from their ideological line.  After carefully explaining the problem and the solution, I found that even though there was no counter-argument, eventually, after a while, the other parties found themselves facing some discomfort and a desire to move back to their ideological views.  I had responses, such as “yeah but if we don’t all do something, we will all be worse off, while doing something will benefit everyone”.  Thus they decided to simply ignore the very relevant “prisoner’s dilemma”, even though they fully understood it, in order to get back to their old convictions.  It was almost like a drug addict justifying one more hit.  It is a testament to how powerful and effective ideological indoctrination can really be.  We are fully ready, no matter how intelligent we are, to defend our line, even if we have to turn ourselves occasionally into mindless morons, and ignore the evident facts to the contrary.

            So, in the end, this is what it comes down to.  A fight to free people from their ideological indoctrination and it is unfortunately not the ones who oppose sustainable development who are the main target that needs to be re-programmed.  It is the message of the environmentalist movement that is sending people to the other side in droves.  It is one thing to tell a US factory worker that he/she should agree to sacrifice his/her own well-being and that of their families, for the greater good, even though even the most ignorant of them know that even if the US and Europe were to slash emissions by 50% in the next few decades, it would not be enough to offset the growth in emissions from the developing world.  They also know that cutting emissions aggressively here, makes emissions levels grow faster elsewhere, because of outsourcing.  It would be an entirely different thing, if one were to tell them that we should fight for a standardized global trade tariff that would end the outsourcing of jobs by firms looking for the place where they can maximize profit, because other countries allow for the maximum exploitation of the environment and their people that is possible, while putting the planet on a sustainable path.  Now, who could argue with that?  Unfortunately the environmentalists do.