Monday, July 30, 2012

Climate change & the frozen “global village”

            I got the idea to write this article when I read about Nobel Prize winner and economist Paul Krugman, arguing for the existence of climate change recently.  As I finished reading the article, it hit me.  Paul Krugman is arguing about the existence of climate change?  Should not the job of such a renowned economist be to propose solutions to such problems?  I have to admit that it is hard to do so for many reasons, including the force with which the deniers are arguing against it.  There is also the other reason, which is that it is not easy to come up with a viable solution to this problem.  Any solution would require major changes to be implemented, and people would not want to hear about such drastic change, especially since for many, their day to day life is not all that bad at the moment, so why would they want change?  Even many who are down on their luck are fiercely opposed to major changes, because the last thing they want is a chance of major upheaval, which might blow their chances at re-joining the ranks of the consumer, which they still believe is in the cards for them.  The environmental movement has not helped matters in the past decades by proposing unrealistic and harmful actions of voluntary self sacrifice, which end up harming the actors trying to do right more than it helps with environmental issues.  The Kyoto fiasco is all one needs to look at, in order to understand the misguided mindset of environmentalists.  So the end result is that someone with such prestige as Nobel winner Paul Krugman, who has the attention of the western world, is stuck talking about the existence of climate change, rather than talking about much needed solutions.

For those who want to read more on data:

            Given the tragic drought in parts of the northern hemisphere, climate change once again is something that will become a hot topic of discussion.  Environmentalists will point to the situation and say “told you so”, which is a bad approach, given that severe droughts have happened before, and there was little to connect human activity to it, since it often happened before the industrial revolution.  On the other side, there are the people who for various reasons want to deny the existence of climate change, and every time we get sub-normal temperatures they will claim, climate change is just “hot air”.  The graph above, which is a compilation of average global temperatures, averaged by decade, shows us that the overall trend is up.  In the past 100 years, average temperatures turned .8 Celsius warmer.  Furthermore, as the graph shows, we just wrapped up four straight decades of increasing temperatures, and the start of this current decade is not encouraging either.

            So going beyond the petty discussions of short term seasonal or yearly trends that really are quite irrelevant, since temperatures will fluctuate within a trend, there is no way to honestly deny that climate change is not happening.  The only real question is whether this is a natural trend, or whether it is the result of our economic activities.  That is where there is the claim that more scientific evidence is needed, which is an argument that can be carried on indefinitely.

            I want people to consider the problem from a slightly different angle.  I want people to ask themselves, whether we have to be 100% convinced that this is man made?  What if the chances that it is man made are 90, 80, 70…or 10%?  Should we not still stop to pause?  Given that this year we have a chance to see what weather patterns that may not accommodate our needs, such as the drought we are going through can do to our collective human wellbeing, I think that we should not be so eager to promote any idea that has any chance of being harmful to the natural balance.  Just contemplate for a moment the repercussions if let us say, the current drought would become more or less permanent.  Would it even matter in the long run if there would be some potentially beneficial side-effects, such as moving the agricultural line further towards the north and south poles?  We have to remember that farmers in Nebraska or Iowa will be unlikely to move to Canada in order to claim virgin land that thanks to climate change might have potential as farmland sometime in the future.  These people are farmers, not nomads.  If excessive drought conditions will drive them to abandon their current farming operations, they or their children will give it up and become urban dwellers.  That will leave humanity in dire conditions.   

            The argument that supports doing business as usual, tends to argue that doing something about this is expensive, and disruptive to the economy, so unless we are 100% sure that it is human made, we should not do anything.  A great argument, because like I said, there is probably no way to make such an argument in regards to the human factor involved in climate change, that will not have a scientific counter argument.  So in effect, what is being proposed by those who oppose any moves to deal with climate change is that we should not do anything under any circumstance.  When it comes to science, there are still people literally arguing that the earth is flat.  So, if we haven’t been able to put an end to that argument, what chance is there that we can achieve 100% consensus on climate change?

            I should also point out the fact that it is increasingly hard to make the argument that striving for sustainability harms the economy, because ignoring it is already more of a drag on the global economy than the price we would have to pay for a more sustainable future.  Resource scarcity is at this point probably the biggest drag on economic growth.  Food prices rose by 150% since 2000 according to the World Food Council, while the price of petroleum rose by about 500%.  By comparison, global GDP per capita has increased by only about 50% since then, which means that we cannot keep up with such a fast rise in commodity prices, which can only lead to demand destruction for either the commodities that are now more expensive, or for other products.  This consideration should be enough to put an end to the growth versus sustainability debate, because it is now a false choice.

            So now to turn to those who support action on climate change.  I feel bad that I have to point the finger and say that, what they believe in is the right course of action is completely wrong, but it has to be done for our own good.  The environmental movement rightly gets hammered for proposing ideas that hurt the local economy that accepts them.  Investing in expensive projects that do not create an economic advantage over competitors, but to the contrary these projects saddle the voluntary goodwill actors with increased costs of doing business, such as more expensive energy, or a more expensive environment for doing business, due to need to adhere and prove the adherence to stricter environmental rules through documentation, hurts those who are willing.

            So why are environmentalists proposing such flawed policy?  It is simple really; they were whipped many times in their effort to get the world to act together, by the irresistible lure of gaining an edge through non-collaboration, over those who would comply with responsible development.  Thus humanity failed to hold hands and sing “coombaya”, to the disappointment of those believing that all that needed to be done was to spread the news about the horror that awaits us in the absence of action to prevent catastrophe.  Most environmentalists find it impossible to live with this disappointment, so instead they either continue foolishly to work towards “waking up” the world to the need for global action, or they work on a local level to pressure governments and corporations to accept voluntary sacrifices of competitiveness, which like I said, results in nothing more than harm to the actors who give in to this pressure.  In the absence of realistic proposals, that may be less idealistic, but more likely to have a chance for implementation, the world is left with no chance whatsoever to tackle this and any other global sustainability problem.

            So, this is the reality of the world warming, while the “global village” is frozen and paralyzed.  This paralysis cannot only be blamed on the interests working to undermine any attempt at action, but also on the inability of the environmental movement to admit that more “education of the masses” is not what is needed, but a re-orientation of the core of the movement towards more feasible solutions.  So perhaps Mr. Krugman should focus more on proposing solutions to having to overcome the flaw in trying to achieve global consensus, given that non-participation is currently a strategic advantage over economic competitors.  Perhaps he should support a standardized global trade tariff, designed to involve everyone, whether they want to be part of it or not, to promote sustainability.  Or perhaps, he can do even better.

Monday, July 23, 2012

Ethics of ethanol amid US drought:

            About seven years ago, as it was starting to sink in that conventional petroleum production has reached stagnation, while we continue to rely on an expanding supply of transport fuels, the movement of peak oil, trying to bring awareness of this impending challenge for humanity and its well being, all the sudden gained the attention of the mainstream.  Books like “Twilight in the Desert” by Mathew Simmons became bestsellers.  Governments and corporations re-adjusted their view of the world to reflect this reality.  There were still many however who said all along that it was nonsense to worry so much about it (peak oil), because through a combination of increasing efficiency as well as new extractive technologies and sources of energy coming online as a result of the higher prices triggered by the end of cheap sources of petroleum, will bring alternative sources of transport energy online.  Faith in the market is what these people were banking on.

Note:  Data sourced from the EIA[i].  It shows the growing gap between conventional and unconventional sources of oil.  Of note should be the plateau that developed since 2005 in conventional crude, while there is only a temporary plateau in the total liquids supply, followed by another leg up, which can be attributed to the effect of the market in response to the stagnation in crude oil.

            The magic of the market is strong indeed.  Seven years after conventional crude oil production worldwide stagnated; we are yet to witness the economic collapse that the peak oil community predicted would happen.  Things are certainly not all rosy.  I believe that the world economy will never be the same again as a result of the event of conventional crude production stagnation.  It nevertheless seems that the opponents of the market underestimated its power. 

            The market is not all powerful of course.  It cannot be the solution to everything. Dealing with global climate change for instance has to be a policy solution, because it is not within the competence of the market.  The market can deal with its effects, but cannot work to prevent it.  Markets need price signals to react, and there is no natural price signal to prevent climate change and other environmental problems.  In the case of resource scarcity, it becomes a classical case of product substitution, triggered by price signals.  So, for instance, if the price of coal becomes much higher than it would be to use natural gas for power generation, the market will substitute, or complement in the case of rising demand.

            A similar situation happened to some extent with conventional oil.  After production stagnated, ethanol, unconventional oil, and natural gas complemented the use of conventional oil in order to accommodate rising demand.  The higher price also led to an increase in conventional sources that became exploitable, which might even have the effect of pushing conventional crude on a higher production plateau.

The argument of the market worshipers goes that if and when conventional oil will go from the current stagnation to eventual decline, unconventional sources will complement and substitute to allow us to continue on our merry way.  I should point out however that if we are to compare the finite nature of our planet with the finite nature of moves available to a player in a chess game, the market in effect is taking us through a losing game of chess, where every move is one of these resource substitutions, that sometimes come with a cost, not unlike the often necessary sacrifice of a piece or strategic position, in order to prolong the chess game.  With every sacrifice or compromise to avoid complete disaster or check mate, the chances of winning become less.

            A case in point is the complement of oil with ethanol.  This is something we should be paying particular attention to, given the continuing drought in the US, where corn ethanol has become a significant component of liquid fuel production.  132 billion kilograms of corn was used in 2011 to produce over 12 billion gallons of ethanol according to EIA data[ii].  A kilogram of corn contains about 1000 calories, which means that about 250 million people could have been fed by allocating the corn or the land used to grow corn during the entire year of 2011 to feeding those people.  There are currently about a billion people suffering severe malnourishment on the planet.

            It is increasingly clear that this current year will see a reduction in the corn crop in the US, and there is little hope of making up for the caloric loss from other sources.  The USDA estimated last week that about 12% of the corn harvest for this year will be lost due to current drought conditions.  The drought is continuing as of this week in most of the affected areas, so it could even get worse.

            Now the inevitable question arises:  Will the loss of the corn supply be soaked up by a decline in ethanol production, or will we expect people to go on less food?  The market response as well as policy that mandates ethanol to be blended in gasoline, suggests that the latter will be the case.  The loss, by the way can be as high as 2.9 billion bushels (73.7 billion kilograms) compared to the initial USDA estimate for this year’s US crop.

            If the loss of the corn crop will be soaked up by the ethanol industry, ethanol production in the US will drop by half.  That is equivalent to .5 mb/d, or about .6% of the world’s liquid fuel production.  With demand for transport fuels still growing despite the sluggish economy, as well as the tensions with Iran, this amount of liquid fuels is actually highly relevant.

If the loss is soaked up by people, the loss is equivalent to about 125 million people’s caloric needs for a year.  We should not forget also that corn is not the only crop affected, and there is also a drought in parts of Europe, including in Russia, where wheat production will most likely be down about 10% from a year ago.  There are also increasing worries of bad news coming out of Ukraine on grain yields.  To put things into perspective, the world grain council data shows that the shortage of grains in the 2010/11 period, which led to the food crisis that sparked the revolutions in the Middle East, was about 34 million tons.  The shortages of grains for this season, if we are to add up the expected losses from only the US and Russia, could add up to a shortfall that is more than twice as large at least (up to 90 million tons according to latest reports)[iii].

            It is hard to predict how the market for food will cause this to play out, but one thing that can be certain is that with the withdrawal of such a large quantity of caloric input from the global food supply, millions will actually starve to death somewhere, because after all, the solution of the market is demand destruction.  It is true that some of the loss will be soaked up by a possible decline in meat consumption, and a reduction in waste as a result of the higher price of food, but still, it is undeniable that demand destruction through starvation will be a part of the market solution.


            At this point, there is little that can be done to prevent the coming food price spike.  Ethanol plants will continue their production.  We will continue eating meat in accordance with our ability to pa for it.  Food waste at the retail level will continue.  Food waste at the personal level can be helped, and I urge everyone who reads this, to become more conscious of the need to manage their fridge and kitchen in a manner that will not lead to food being thrown away.

            There is nothing we can do about the current weather.  Climate change may be real, but it will take decades for any action on our part to be noticed.  We should start doing something about it now, so a few decades from now; we will not be faced with even worse conditions.  My suggestion for the best approach to encouraging global sustainability through standardizing global trade tariffs and tailor the tariffs in a way that will encourage sustainability is perhaps by far the best way forward.  I certainly did not come across any viable alternative proposal thus far, aside from idealistic calls to voluntary action, which never, ever yielded tangible results, even when an entire region was mobilized into action as was the case of Europe in the last few decades.

            Some say that every crisis is an opportunity to change and fix things.  There is little doubt now that there is an impending food crisis on the horizon.  I hope that the best thing that can come out of it is a realization that we need to take global sustainability very seriously now, and we need a solution.  A global mechanism that helps promote sustainability through conditioning tariff levels on the ability to produce with as little of an environmental footprint as possible, is the only way we can slowly move away from our current path of increasing human and environmental tragedy.


[ii]A bushel of corn yields about 2.3 gallons of ethanol.  A bushel is equal to 25.4 kilograms.
EIA data:

International Grains Council report on July 2, estimating a 9 million ton shortfall in supply compared with demand.

Russia grain production after the July, 2 report by the International grains council, which added over 10 million tons more to the shortfall.

USDA reduction of US corn crop estimate after July, 2 report by the International Grains Council, which could add as much as another 70 million tons to the shortfall..

Monday, July 16, 2012

Sustainable deficits and debts.

            Sustainability is usually a term associated with environmental issues, but on the political right, government spending sustainability is what the elites and their supporters care about.  I care about sustainability of all sorts, and while most of my work has been focused on environmental and commodity availability issues, I will now turn my attention to the concerns of the right leaning masses and elites.

            Most right leaning politicians tell us that we must cut spending if we are to have a sustainable fiscal future.  They warn that the current trajectory of government borrowing is unsustainable, and we need to cut spending, shrink the public sector and let the private sector take over. I figure there is no western country more appropriate at the moment to use as an example of what effect this would have than the United States.  With deficit spending in the 8% of GDP range, and no meaningful measures implemented yet, it is a place where this is certainly a very hot topic of political argument.

            Putting ideologically motivated political arguments aside, coming from both sides, ranging from humanitarian issues, to issues of “laissez faire” freedom ideology, I want to concentrate instead on a technical aspect of debt management in the current economy, as it is.  When discussing debt and deficits, we should remember that the central federal government is not the only one engaged in accumulating it.  There are the local governments, individuals and companies.  This US debt, collectively ads up to $56 trillion and $3.8 trillion was paid in interest last year.  Of that $3.8 trillion, only 225 billion dollars paid in interest was spent last year by the federal government, on a debt load of 15.8 trillion dollars accumulated so far[i].  If we calculate the interest rate based on this fact, for federal government debt versus all other debt, the result is that while the federal government pays about 1.5% interest on debt currently, the rest of us pay about 9%.  It is this collective payment of interest and its forward evolution going forward that I want to focus on.  To do so, I assumed two different paths in US policy.  One where 8% deficits will continue, until 2020, and one where it is cut drastically to a 3% average for the rest of the decade.


In order to be able to calculate the effect of the two different paths, I have to keep certain factors constant.  I realize that there are many arguments that are made especially in our left/right ideological battle over what effect either path would have on these factors, and I want people to know that I am aware of them.

            Economic growth and inflation is the most important factor I will keep constant.  For the past few years they added up to about 4%, so I will assume that this will be the average for the rest of the decade.  I think that it is a very reasonable assumption to make, regardless of government policy, because it seems to be the actual potential for the US economy, given the global situation.  I actually believe that the decade starting from 2020, will see economic growth slow further from the current 2% range, while I have no clue what inflation will do, because a lot depends on fiscal and monetary policy.  I expressed my opinion and the reasons for having it on this issue in a previous article for those who are interested.

            As far as interest rates go, I will also leave them in a holding pattern, which once again is not such an unrealistic proposal.  The Federal Reserve will only move slightly, if at all in the next few years.  The bond vigilantes will not find their way to the US by 2020, because they still have many stopovers to go through.  Banks will not lend money any cheaper to individuals and companies, because the owners of capital are still spooked, so when they do lend money, they will ask for a risk premium.

            The last constant I want to hold for my calculation is the total debt to GDP ratio.  This once again, I think is not only convenient for the purposes of my forward projection to be made possible, but I think it is also another highly realistic scenario.  Policymakers cannot allow credit to shrink, while the markets will be reluctant to allow it to grow too much, so a steady situation is plausible, even though in past decades, the ratio has been in a fast expansion mode.  In this situation, total debt in US will be $77 trillion.

The results:

Assumption 1:  8% per year deficits.
Assumption 2:  3% per year deficits.

GDP (4% nominal growth)
Assumption 1: 8%
Assumption 2: 3%
$15.3 T
$16.0 T
$16.0 T
$15.9 T
$17.3 T
$16.5 T
$16.5 T
$18.6 T
$16.9 T
$17.2 T
$20.0 T
$17.5 T
$17.9 T
$21.4 T
$18.0 T
$18.6 T
$22.9 T
$18.6 T
$19.3 T
$24.4 T
$19.1 T
$20.1 T
$26.0 T
$19.7 T
$21.0 T
$27.7 T
$20.4 T
Interest 2020
$416 billion
$306 billion

            As we can see from the chart, the prudent thing to do at first glance, assuming that fiscal policy would not affect growth, is to go to a 3% deficit rate.  US government would pay over $100 billion less in interest and the debt to GDP ratio would once again go to under 100% by 2017.  The question arises however, what will happen to the total interest paid in the economy in these two different scenarios, given the assumed constants that I already mentioned?

Assumption 2 (3% deficits):  Total debt $77 T.  Federal Government debt $20.4 T.  Therefore total non-federal debt would be $56.6 T.

Total Interest: (56.6 x 9%) + (20.4 x 1.5%) = $5.39 T

Assumption 1 (8% deficits):  Total debt $77 T.  Federal Government debt $27.7 T.  Therefore total non-federal debt would be 49.3 T.

Total Interest:  (49.3 x 9%) + (27.7 x 1.5%) = $4.84 T

Interest as a percentage of GDP:

2012:  24.8%

Scenario 1:   23%
Scenario 2:   25.7%


As we can see, when it comes to total interest paid within the economy, the lower federal deficit scenario will actually lead to a higher level of interest paid, by a significant amount ($550 billion per year).  The percentage as a function of GDP will also rise, while in the high deficit scenario, it will go lower.

The effect on the economy in the 3% deficit scenario would be that it would starve both consumption and investment in non-banking and finance economic activity.  In effect, it would most likely lead to another round of financial deleveraging, most likely worse than the one we witnessed in 2008, because the current slow pace of economic growth is leading to more vulnerable individuals, families and businesses.

The argument that the money collected in interest will be a boost to investment is increasingly a hollow one.  The capital collected by those who collect interest will be re-invested, but not necessarily here.  Capital always chases the place with the highest return, and the US is just not it.

I know that this would not work forever, because eventually the bond vigilantes would come knocking on the door, and at that point things can get rather nasty, as countries like Greece found out recently.  The reality is however that in the absence of a plan to get back to the kind of growth needed to keep up with interest payments, the policy of cutting deficits before it is necessary to do so, is simply the wrong approach.

The right approach is to try to keep the economy afloat for the time needed to implement solutions meant to end global stagnation, and only once that is done, can cuts to government spending take place.  Unless that is done, the only realistic effect cutting deficits will have is to choke the economy, as we can see now after years of cuts implemented in stagnated countries in Europe such as Greece and Spain.

I continue to believe that the main obstacle to global growth is sustainability.  We need to get more value out of less, and that is the only way forward.  It is a complex problem, which we are lacking the institutional capacity to deal with.  But if we want to live is a complex society, we better culture up, and find the ability to deal with these complex problems, because in the absence of action soon, we will witness a readjustment to a more simple and brutal way of life, which will appropriately reflect our current cultural capacities, and we definitely don’t want that.


Note:  The numbers I used were true as of the month of July/2012.   

Monday, July 9, 2012

The Ceiling.

            Whenever we witness an economic downturn, the obvious reaction of our elites is to try to jump start economic activity.  We need to do this, because the servicing of our current debts and future liabilities depends heavily on a growth trajectory that allows us to pay back what we owe with interest as well as to grow the real value of the savings in pension and other funds, in order to provide for those who cannot provide for themselves anymore.  We also have to accommodate a growing global middle class, as well as a growing global population overall, so we need to continue to deliver.

            Since 2007, we seem to be having a hard time getting back on to the path we need to be on if we are to continue on with the current models, instead of doing something drastic, such as changing the way we value growth, not only by quantity but the quality of it.  I argued in past articles that we entered a permanent phase of slowing growth, and the data so far is proving me right.  Year after year we hear the same old song about how things will get better in the next year or two, and yet that time is always pushed further ahead of us.  The “experts” always identify a financial reason, such as the Greek crisis, or the continuing housing slump.  Few people venture to look deeper into the reasons why our financial system is registering malfunction after malfunction.

Data source:  Index Mundi[i]

Data source:  US government stats[ii].

As the two graphs show, US monthly jobs data stabilized in a firm trend of growth (anemic, but positive), starting in the fall of 2010.  It took only four months after the jobs numbers stabilized for oil prices to go from $75 a barrel to over $100, and it stayed over that price for most of the time, except for the last few months, which is a result of the realization that the global economy is slowing, especially in Europe.  If we look carefully, since the jobs numbers stabilized, there were also two attempts at accelerating to a higher level.  One attempt started in late winter 2011, the other in early winter 2012.  Both events were accompanied by a response of oil prices higher, to over $110 a barrel, which seems to have stifled the recovery.  All this follows the great spike in 2007-08, when prices reached an all time high, and only came down after it was clear that we are facing a recession, the likes we have not seen since the 1930’s.


Data source:  EIA[iii]

            As one might expect, as soon as the price of oil spikes, as it did in the past few years, in response to any evidence that the global economy might have a pulse, the quick and easy explanation, which also happens to be very convenient, is that this is the effect of speculation, or as is in the case in the US, it is narrowed down to a domestic problem related to environmental and taxing policy, which causes oil production to be stunted.  As the above graph shows however, neither is an entirely accurate and honest explanation.  The speculators do indeed influence the price, but not more than does the supply/demand balance.  As we can see from the above visual, there have been three consecutive years of demand outstripping supply.  There are many factors involved in causing this to be the case, but US domestic policy probably comes in near the bottom, since the oil market is a global one, and nothing the US could have done can plug such a hole in supply.  For 2012, in the absence of major disruptions to production, we will likely be in supply/demand balance, given that IEA predicts an increase of .8 mb/d in demand, to 88.8 mb/d, and so far this year, production has been in that range as well.  It is possible that in the absence of robust economic growth, 2013, and even 2014 will turn out to be stable in terms of oil prices.  I do believe however that at some point during this current decade, prices will spike again, due to demand outgrowing supply.  The current trend we are witnessing of market balance will be only a short respite, not a new long term trend as the optimists will try to spin it.

Economic Effects:

            Many of the effects of the new era I believe we are living in will not be felt immediately.  If we look at one example, which I believe matters very much, which is the future of our pensions, we are in deep trouble, but the true effects will only be felt on a large scale, perhaps only decades from now.  New York’s mayor Bloomberg recently cautioned that we are expecting 7-8% returns on the public pension contributions made in the name of the future retirees, while we are in reality only looking at 2-3% returns at best.  This of course means that we are not saving enough to take care of our retirement needs.  On the other hand, if we were to solve this problem by increasing our savings rate, consumer spending would collapse and with it our ability to save, given that many families and individuals would take an earnings haircut.  So then we return to the original problem, which of course is that we are no longer growing at a fast enough pace to make the current system viable.

            Same reasoning can be applied to other aspects of our financial system.  We need the pace of growth to improve in order to keep up with debt servicing.  We need it in order to cope with the increase in population.  We need it in order to make it worth while for people to invest their money as opposed to keeping it under the mattress, or do what I did, which was park it in gold, and some silver.  We are currently putting our hopes in innovation, but in order to have innovation, we need investment capital to chase opportunities.  That will not happen once the forward momentum is stopped permanently.

Capitalist/Environmentalist alliance the only solution?

            Environmentalists and sustainability crusaders, as well as their capitalist opponents need to come to the realization that the only way forward for both, is an embrace of each other’s views.  As unpleasant and uncomfortable as it may seem for many to consider this prospect, never mind embracing it, people better get over it, because there is no other objective proposal that can meet our challenges.

            The capitalists need to come to terms with the finite world, and with a finite number of opportunities to substitute one resource for another.  All indications are that we are getting close to the point where the finite world will be in the way of further forward momentum.  There is only one logical way out of it, which is my suggestion of a standardized global trade tariff, based on a points system that reflects each country’s ability to produce a unit of GDP, per unit of environmental degradation incurred.  This should have the effect of promoting the durable economy once more, which is the opposite of what the market does.  This way, we can start producing more with less.  It is time for the worshipers of the market to admit that it cannot tackle all problems facing us, because sometimes price signals needed to go into a desired direction just aren’t there.

            The sustainability crusaders need to understand on their part that reducing consumption of our resources and the environment need not involve a reduction in the consumption of units of GDP.  In fact, any such attempt would come at a very high price to society.  A price that no one is willing to pay, thus we have the current willingness of the masses to ignore all the dire predictions that most environmentalists thought will be enough to sway opinion towards their view.

            My proposal for this global trade tariff is not a permanent solution to last humanity forever.  It is simply a way to reconcile our current competing needs of protecting the environment we live in and preserve finite resources, while maintaining financial stability through ensuring more room for growth, which we seem to be lacking at the moment.  At some point, we will have to find a way to end our addiction to growth, because let us face it, nothing is forever, and the world is not infinite.  If we don’t find a way, it will happen in an unmanaged manner, and it will be painful and tragic.  At this moment, there is no hope for humanity to tackle such a grave problem.  We lack the cultural maturity.

Monday, July 2, 2012

Rio + 20 part 6 (the final one): The most important result the day the summit ended, Germany beat Greece 4-2.

            I was busy on June 22, trying to find out as much information as possible on the results of the summit, not so much because I expected a great result to come in the last minute, but simply because I made a decision months ago to do my best to bring the flaws of this summit to people’s attention..  When I started writing this monthly series on the summit in February, I stated clearly that I expect nothing more from it, than to expose humanity’s failure to address global problems, which increasingly matter since we live in a “global village”.  As I got really busy with researching the outcome of the event, I missed an opportunity to see a great soccer game unfold, which unlike the summit, did produce a result that was to my liking (hope Greek readers will not be offended, but I am a Germany fan).  I only managed to catch the final five minutes of this Euro 2012 quarterfinal.  One thing that I did realize as the game ended was that there was someone out there with a lot more common sense than I had.  As the celebrations of the German victory got underway, there was German Chancellor Angela Merkel, live in the stadium, celebrating.  Once again, she demonstrated her wisdom.

            Many people will jump to reproach her for being at the soccer game in Poland, rather than in Rio, but not I.  I believe she was absolutely right not to go.  If she would have gone, it would have made absolutely no difference.  There was never any hope of a meaningful agreement.  If she would have gone, she would have had a chance to listen to Bolivian president Evo Morales denounce any attempt to push for an agreement that would have involved a process of verification of environmental behavior.  He called it a new type of colonialism imposed on poor countries by the rich.  She could have also listened to the Indian and other delegations state that if there is to be any binding commitment for combating greenhouse gasses and sustainability, the “rich” countries should pick up the tab, even though they are not so rich anymore.  If I was the leader of Germany, I would not want to sit through that either.  Germany has one of the best records on doing its share on the environment in the past few decades.  It was all in vain however, because since the first summit two decades ago, China increased its greenhouse gas emissions by the equivalent of about three Germanys.  So needless to say that the economic sacrifice that Germany and others accepted voluntarily after the last summit, was an exercise in futility.

A beautiful mind: (prisoner dilemma)

            Aside from the fact that the flavor of the summit was such that it is no longer in line with present day realities, such as the fact that I already mentioned that the so called “rich” countries are no longer so rich anymore, nor is the effect of unilateral sacrifice effective in any way, given the diminished role we play in the global economy, there were many other flaws with this summit, which made it not worth anyone’s time and effort to show up.  There was nothing on the table to reflect basic economic fact and theory.  Everything proposed depended on goodwill and self sacrifice for the greater good.  There will be few if any who will want to sign up for that, and basic economic theory tells us that it is the case.

            Most of us know about famous mathematician John Nash from the movie, “A beautiful mind”, which recounts his life.  In the field of economics he is known for a simple and straightforward mathematical assumption which is used to predict human behavior in relation to economic matters (The Nash Equilibrium).  His game theory, tells us about the “prisoner dilemma”.  It is an assumption that given two partners in crime being interrogated, the expectation should be that they will both collaborate, even though both not collaborating will benefit them more.  Reason is that each one of them will assume that the other one is spilling the beans in the other room, so cutting a deal that minimizes the punishment is a superior choice to not collaborating and thus facing the full weight of prosecution.

do not cooperate
do not cooperate

The numbers above represent years of prison time.  Each one has a choice between combinations 5, 0, or 0, 3.  In a Nash equilibrium situation, the 0, 3 is the logical one to pick for both prisoners.    

As we can see, from the diagram, the obvious superior choice for both suspects being interrogated is to try to cut a deal, by turning in the other partner in crime in.  Any other choice is illogical from an individual’s perspective, even though they could both benefit greatly by not cutting a deal, as the diagram shows, because they could both potentially walk free.

            The reason I brought this up is because in effect the Kyoto accord, as well as all other proposals that were on the table at this year’s summit had the flaw of parties gaining an advantage by not signing on, especially so, if other competitors do sign on to a deal.  So signing on to the deal went against the principle of the Nash equilibrium, therefore the expectation is that for those signing up, it was a losing proposition.  If we look at the effect this illogical move had on Europe’s economy, the Nash equilibrium theory has been proven to be correct.  Europe’s self sacrifice did not produce any positive results as I have shown in my March article on the summit, while the economic damage has been great, even though understated by official accounts.  The obvious benefactors were the ones who did not sign up, thus why would they sign on twenty years later?

The greatest tragedy:

            The summit itself may have been flawed and doomed to failure before it had a chance to get started, but that by itself is not the great tragedy in my view, event though I described this as humanity’s greatest failure, given our urgent need for adopting a global path for a more sustainable future.  The great tragedy is the culture of the environmental and human rights and dignity crusaders, which is deeply flawed and doomed to perpetual failure, unless they can find the maturity to abandon their childish idealism and political ideology and grow into a more pragmatic and reality respecting movement.  In the aftermath of the summit, I detected little evidence that this failure would trigger some inner soul searching.  The most common reaction to this failure has been to invoke claims that the summit actually succeeded, because some companies made a few pledges to look for ways to align their primary mission to maximize profit with the need to be environmentally conscious, and because the 50,000 or so participants at the summit, will now be energized to go back to their communities and make a difference in various ways.

            The ones, who admitted failure, took a first step in the right direction by doing so, and then they went ahead and ruined it by turning off the right path.  They are busy blaming the rich countries, or the poor countries.  They will blame the political right, or the corporations.  They blame the current financial crisis for diminishing appetite for action.  The one thing they do not blame, is the thing that is most responsible for failure.  At the original Rio summit as well as at this one, there were no viable proposals on the table, such as something that would pass a simple test of whether it would meet the requirements of the Nash equilibrium or not.  Two decades ago, the summit managed to find a few gullible actors to sign on to these flawed proposals, but they learned since then the hard way.  The ones who did not learn, are the ones who came up with these flawed proposals, and their supporters.  There is therefore little chance of ever getting a viable solution on the table.

What is next?

The first symptoms of our unsustainable path are here, and they are unmistakable.  Food prices rose by 150% in the last decade or so, according to UN stats.  Oil prices rose by about 500% during the same period.  Many other commodities are charting a more or less similar path.  Prices have moderated somewhat in the past half decade or so, thanks to the weak global recovery we are witnessing following the 2008 crash.  Any hint of robust recovery has been accompanied by equally robust increases in many vital commodity prices, causing the fragile recovery to stall out.  We have seen this process play out twice already in the past half decade, where oil prices spiked every time we got a little bit of positive data on the economy in 2011 and 2012.  In both cases, prices came down only after the damage was done, and demand once again weakened. It is clear therefore that the only way forward from here is one that includes a mechanism that will allow us to get more benefit, out of less.  The market does not do that, because the price signals it depends on create a reactionary response to this problem, while we need a proactive response that avoids the need of the market to react, since in every instance the market’s main reaction has been to depress the economy in order to depress demand for the spiking commodities.  Sadly, the longer we will beat our head against these constraints, we will become weaker and more tired, and therefore less able to solve the sustainability problem, which will continue to drain us, for as long as we continue to fail to acknowledge and deal with it.

The cultural and political scene will not help either.  It would take nothing less than a book to explain to the average individual the connection between sustainability and growth from this point on.  The average individual is most likely to be moved by short slogans, no longer than a sentence or two, so needless to say that it is impossible to make people aware of the fact that the true reason society is falling apart is because we are unable to coordinate a global effort to get more out of limited and in some cases diminishing resources.  People will continue to believe that the choice remains between growth and the environment, when in fact the choice is the same.  We will either continue as we do, gradually losing the ability to provide to more and more people, or we will save both the economy and the environment by fighting to implement something bold and effective, such as the sustainability trade tariff I’ve been advocating.  Time is running out for us to attempt such a solution, because as the western countries continue to be stuck in stagnation mode or worse, our global weight is shrinking fast, and I just don’t see the next generation of global powers such as China taking the lead on this.

What to expect:

            To borrow a title from a Howard Kunstler book, this is indeed a long emergency.  Like I said from the beginning, the failure of the summit might be humanity’s greatest disaster, but most will not realize that this is the root of the problems that lie ahead.  We will get too busy dealing with the symptoms rather than solving the problem itself.  The market and human ingenuity will provide years of respite from the pain, for as long as we will still have spare resources to act.  At some point however we will become too drained, while the fixes will most often be only temporary acts that will serve to buy time.  Depending on political decisions and other factors, we could be looking at a crisis that in hindsight humanity will measure it as something that started in 2008, and ended in a complete failure three or four decades later.

            Throughout it all, there will be some countries and regions that will do better than others.  Economics is a lot about momentum, and at this point the western world, as well as many poor, dysfunctional states have no momentum.  On the other hand there are many developing countries that do have a lot of momentum, therefore greater potential to power through with less suffering.  We have seen this with the recent rise in commodity prices already, where countries such as China were better able to cope.

            For western society, at stake is survival.  We are already faced with brutal demographic issues.  The recent economic downturn has exacerbated the situation, because young people have been hit hard, and since many cannot find a way to earn a living, they will not start a family.  The canary in the mine in this case will be states at the edge of the western world, such as EU members Romania and Bulgaria.  In their case, a high outflow of young people looking to improve their lives is accelerating the process.  These states could provide for an example that the western world has not seen in its history, which is a complete collapse of a state due to demographic issues.  At some point, there will be too many dependents per worker to continue making it work.  Other western countries have the benefit of an inflow of migrants, but at some point, if the flow gets too heavy, then it becomes population and cultural replacement, rather than replenishment.  A recent study out of Vancouver, that now has an Asian majority, is proof of the fact that Vancouver no longer has a Canadian society, but rather a Chinese, East Indian and other Asian societies[i].  This is already the case, even though Asians actually only have a slim majority, and it is not by any means a majority formed by one ethnic entity.

            Aside from the demographic problem, there is the economic problem, which is a grave one, because we need more momentum to keep from choking on our debt, but momentum is hard to come by.  We also have a cultural and structural problem.  We are by no means used to harsh times, and our cultural norms prevent us from adapting.  For instance, there is an increasing trend of young people moving back to their parents place, but unlike other societies we are not used to forming multi-generational family homes, even though in many cases the houses are big enough to accommodate.  Our entire infrastructure is built and designed for times of plenty.  Those times are slowly but surely ending.

            All of this could be avoided.  The first step is for those who are aware of the need of a sustainable future to grow up, and see the flaws of their ideology.  Then perhaps we can finally win the political argument for taking action, since we would have a viable argument for a change.

            This is my final monthly article covering the run-up and the summit itself.  I hope I managed to help a few people see things from a slightly different perspective.  I don’t hold much hope for changing the greater situation, but the fact that my Rio articles had almost a thousand visits, means that it is more than I could have done through any other means at my disposal, even if only a small fraction of those who read at least one of the articles came away with a slightly changed view.  Even though the great summit has ended, I will continue to try to fight for a viable mechanism for global sustainability.  I think it is the responsibility of all to try to do this for our children, and humanity’s sake.

            I want to thank those who took an interest in my articles or even my book.  The volume of interest may not qualify as a great success story, but it has so far exceeded my expectations.  I hope people will continue to find my work interesting and worth their time.

Study found increasing barriers between ethnic societies, which in essence means loss of cohesion.  One has to think about these findings in a way that relates it to how our society functions.  For instance, as much as 9 out of 10 jobs are landed through “networking”, which is a nice way of saying nepotism.  Since in the Vancouver case, there is a growing rift between ethnic groups living there, it can in effect in time lead to an ethnic based caste society.