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If You Don’t Trust the Fed, Here’s an Inside View That Confirms Your Worst Suspicions | CYNICONOMICS

If You Don’t Trust the Fed, Here’s an Inside View That Confirms Your Worst Suspicions | CYNICONOMICS.

If You Don’t Trust the Fed, Here’s an Inside View That Confirms Your Worst Suspicions

Posted on December 11, 2013 by ffwiley

Earlier this year the notion that the Fed might modestly taper its purchases drove significant upheaval across financial markets. This episode should engender humility on all sides. It should also correct the misimpression that QE is anything other than an untested, incomplete experiment.

– Former FOMC Governor Kevin Warsh, writing in the Wall Street Journal on November 13.

If I may paraphrase a sainted figure for many of my colleagues, John Maynard Keynes: If the members of the FOMC could manage to get themselves to once again be thought of as humble, competent people on the level of dentists, that would be splendid. I would argue that the time to reassume a more humble central banker persona is upon us.

– Dallas Fed President Richard Fisher, speaking in Chicago on December 9.

I fault the Fed for its lack of intellectual leadership on the economy and, in particular, Bernanke’s lack of forthrightness about the limits of the Fed’s ability to address slow growth and fiscal disequilibrium.

– Former St. Louis Fed President William Poole, speaking in Washington D.C. on March 7.

Does anyone else see a common theme?

Last month, we offered a plain language translation of the Warsh op-ed, because we thought it was too carefully worded and left readers wondering what he really wanted to say. Translation wasn’t necessary for Fisher’s speech, which contained a clear no-confidence vote in the Fed’s QE program. Poole’s comment was from a seminar question-and-answer session earlier this year, but it reached our inbox only last week in a transcript published in the latest Financial Analysts Journal. The Q&A was attached to an article that I’ll discuss here, because it makes claims we haven’t heard from others with FOMC experience.

Here’s an example:

Ben Bernanke talks a lot about risk management and the tradeoff between benefits and costs; he maintains that the need to balance these two issues justifies proceeding with the current policy. But Bernanke does not discuss the risk of political intervention in Fed policy despite numerous examples of the Fed giving in to political pressure and waiting too long to change its policy, which results in a detrimental outcome for the economy.

Essentially, pressure on the Fed will come from inside the government and may not be very visible; it may be limited to a few op-ed articles from the housing lobby. [FFW – presumably, Poole intended “it” to refer to the visible part of the pressure.] The true amount of political pressure will be largely hidden.

Poole is more or less saying that we have no idea what’s truly behind the Fed’s decisions. But he doesn’t stop there. He’s willing to make a prediction that you wouldn’t expect from an establishment economist:

[T]he real issue is the politics of monetary policy … I believe that the Fed will not successfully resist the political winds that buffet it. I am not a political expert or a political analyst by trade. My qualification for speaking on this topic is that I have followed the interactions between monetary policy and politics for a very long time. As with all things political, the politics of the Fed means that realities often fail to match outward appearances … I believe the Fed is likely to overdo its current QE policy of purchasing $45 billion of Treasuries and $40 billion of MBSs per month.

So there you have it: a 10-year FOMC veteran wants us to know that central banking isn’t all about the latest hot research on the wonders of unconventional measures.  On the contrary, monetary policy is no different than other types of policymaking; it’s guided by hidden political forces.

If you don’t mind our saying so, we feel a bit vindicated. Our very first Fed post ten months ago included the following:

As for the flip-flop [the Fed’s commitment to lifting the stock market through QE so shortly after claiming no responsibility for stock prices in recent bubbles], it’s easy to find a logical explanation. The banks want QE. Influential political and economic leaders want QE. Therefore, the path of least resistance is to give them QE. On the other hand, market manipulation to prick the Internet and housing bubbles would have been widely unpopular. Therefore, policymakers rejected the idea that they should manipulate markets and prick bubbles. No one likes to be unpopular.

More generally, QE seems to me to be explained by Bernanke (and his colleagues) being unable to sit still. This is natural behavior when you have to continually justify decisions. It’s not easy to explain to Congress, the media or public why you’re doing nothing but waiting for past policies to work. It won’t be long before people portray you as weak and indecisive and tell you to “Get to work, Mr. Chairman.” But once you start implementing new policies, especially if they’re in a direction that’s expedient for everyone in the short-term, then those criticisms go away. They’re replaced by adjectives like bold and proactive. And who doesn’t want to be known as bold and proactive?

We haven’t returned to this theme often, partly because it can’t be tested like we can test the Fed’s economic beliefs. Regular readers know that we do quite a lot of empirical work. We try our best to follow David Hume’s maxim that: “A wise man, therefore, proportions his belief to the evidence.”

As we see it, the Fed’s economic beliefs are proportioned more closely to political factors than real-life evidence. You might replace Hume with Upton Sinclair, who said “it is difficult to get a man to understand something when his salary depends on him not understanding it.”

In other words, politics and personal incentives are a huge part of the picture, and not just in central banking but in the economics profession more generally.

The theories underpinning current policies, which have built up over the last 80 years or so, can’t be properly understood without thinking through the motivations behind key developments. Some of the motivational factors are obvious, while others are more subtle, but I won’t clutter this post with our musings on the hidden drivers in economics. Detlev Schlichter offered a nice summary in his book, Paper Money Collapse:

It would be naïve to simply assume that the exalted position of [mainstream economic] theories in present debate is the result of their superiority in the realm of pure sciences. This is not meant as a conspiracy theory in the sense that professional economists are being hired specifically to develop useful theories for the privileged money producers in order to portray their money printing as universally beneficial. But it would be equally wrong to assume that the battle for ideas is fought only by dispassionate and objective truth-seekers in ivory towers and that only the best theories are handed down to the decision makers in the real world, and that therefore whatever forms the basis of current mainstream discussion must be the best and most accurate theory available. No science operates in a vacuum. The social sciences in particular are often influenced in terms of their focus and method of inquiry by larger cultural and intellectual trends in society. This is probably more readily accepted in the other major social science, history. What questions research asks of the historical record, what areas of inquiry are deemed most pressing and how historians go about historical analysis is often shaped by factors that lie outside the field of science proper and that reflect broader social and political forces.

Moreover, ever since mankind began writing its histories they have served political ends. History frequently provides a narrative for the polity that gives it a sense of identity or purpose, whether this is justified or not, and the dominant interpretations of history can be powerful influences on present politics. Similarly, certain economic theories have become to dominate debate on economic issues because they fit the zeitgeist and specific political ideologies. This is not to say that economics cannot be a pure, objective science. It certainly can and should be. Whether theories are correct or not must be decided by scientific inquiry and debate, and not in the arena of politics and public opinion. But it is certainly true that many economists do depend for their livelihoods on politics and public opinion, and that they cannot operate independently of them.

Schlichter is one of many authors and bloggers willing to discuss the awkward realities lurking behind economic theory and central banking. But these ideas are considered taboo by most mainstream media outlets. They’re not discussed in establishment venues or spoken by establishment figures.

Or so I thought.

Poole’s refreshingly honest take on the Fed’s inner workings – from someone who truly knows what goes on behind the curtains – is more than welcome.

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The IMF wants you to pay 71% income tax

The IMF wants you to pay 71% income tax.

Tax

December 12, 2013 
Sovereign Valley Farm, Chile

The IMF just dropped another bombshell.

After it recently suggested a “one-off capital levy” – a one-time tax on private wealth as an exceptional measure to restore debt sustainability across insolvent countries – it has now called for “revenue-maximizing top income tax rates”.

The IMF’s team of monkeys has been working around the clock on this one, figuring that developed nations can increase their overall tax revenue by increasing tax rates.

They’ve singled out the US, suggesting that the US government could maximize its tax revenue by increasing tax brackets to as high as 71%.

Coming from one of the grand wizards of the global financial system, this might be the clearest sign yet that the whole house of cards is dangerously close to being swept away.

Think about it– solvent governments with healthy economies don’t go looking to steal 71% of people’s wealth. They’re raising this point because these governments are desperate. And flat broke.

The ratio of public debt to GDP across advanced economies will reach a historic peak of 110% next year, compared to 75% in 2007.

That’s a staggering increase. Most of the ‘wealithest’ nations in the West now have to borrow money just to pay interest on the money they’ve already borrowed.

This is why we can only expect more financial repression from desperate governments and established institutions.

This means more onerous taxation. More regulation. More controls over credit and capital flows.

And that’s only the financial aspect; the deterioration of our freedom and liberty will continue at an accelerated pace.

Can a person still be considered “free” when 71% of what s/he earns is taken away at the point of a gun by a bankrupt, bullying government? Or are you merely a serf then, existing only to feed the system?

This is why we often stress having a global outlook and considering all options that are on the table.

Because the other side of the coin is that while some countries are tightening the screws and making life more difficult, others are taking a different approach.

Whether out of necessity or because they recognize the trend, many nations around the world are launching new programs to attract international talent and capital.

I’ve mentioned a few of these already– economic citizenship programs in places like Cyprus, Malta, and Antigua (I met a lot of these programs’ principals at a recent global citizenship conference that I spoke at in Miami).

[Note to Premium Members: you’ll receive the details and contact information for the Antigua program today.]

Then there are places like Chile and Colombia which have great programs for entrepreneurs and investors. Other places like Georgia and Panama have opened their doors to nearly all foreigners for residency.

Bottom line– there are options. Some countries are really great places to hold money. Others are great to do business. Others are great places to reside.

The era we’re living in– that of global communications and modern transport– means that you can live in one place, your money can live somewhere else, and you can generate your income in a third location.

Your savings and livelihood need not be enslaved by corrupt politicians bent on stealing your wealth… all to keep their destructive party going just a little bit longer.

The world can truly be your playground. You just need to know the rules of the game.

 

Seymour Hersh Says Obama Lied About Syrian Gas Attack

Seymour Hersh Says Obama Lied About Syrian Gas Attack.

Welcome to our world, Seymour.  Better late than never…

Pulitzer Prize-winning journalist Seymour Hersh has dropped yet another bombshell allegation: President Obama wasn’t honest with the American people when he blamed Syrian President Bashar al-Assad for a sarin-gas attack in that killed hundreds of civilians.

In early September, Secretary of State John Kerry said the United States had proof that the nerve-gas attack was made on Assad’s orders. “We know the Assad regime was responsible,” President Obama told the nation in an address days after this revelation, which he said pushed him over the “red line” in considering military intervention.

But in a long story published Sunday for the London Review of Books, Hersh — best known for his exposés on the cover-ups of the My Lai Massacre and of Abu Ghraib – said the administration “cherry-picked intelligence,” citing conversations with intelligence and military officials.

A former senior intelligence official told me that the Obama administration had altered the available information – in terms of its timing and sequence – to enable the president and his advisers to make intelligence retrieved days after the attack look as if it had been picked up and analysed in real time, as the attack was happening. The distortion, he said, reminded him of the 1964 Gulf of Tonkin incident, when the Johnson administration reversed the sequence of National Security Agency intercepts to justify one of the early bombings of North Vietnam. The same official said there was immense frustration inside the military and intelligence bureaucracy: ‘The guys are throwing their hands in the air and saying, “How can we help this guy” – Obama – “when he and his cronies in the White House make up the intelligence as they go along?”’

Here’s what Hersh alleges:

The administration buried intelligence on the fundamentalist group/rebel group al-Nusra. It was seen, Hersh says, as an alarming threat by May, with the U.S. being aware of al-Nusra member able to make and use sarin, and yet the group – associated with the rebel opposition in Syria – was never considered a suspect in the sarin attacks. Hersh refers to a top-secret June cable sent to the deputy director of the Defense Intelligence Agency that said al-Nusra could acquire and use sarin. But the Office of the Director of National Intelligence and the Office of the Defense Intelligence Agency could not find the document in question, even when given its specific codes.

READ MORE HERE:

http://news.yahoo.com/seymour-hersh-alleges-obama-administration-lied-syria-gas-204437397.html

 

Why Is Homeland Security Taking Control of Local Police?

Why Is Homeland Security Taking Control of Local Police?.

A key plank of the Obama administration platform seems to be the conversion of the local police into a fifth branch of the U.S. armed forces.

The means of accomplishing this goal is the doling out of millions of dollars from the Department of Homeland Security (DHS) to police departments and sheriffs’ offices around the country.

Cash-strapped local law enforcement gobbles up the federal “grants,” purchasing military-grade vehicles, weapons, ammunition, and surveillance technology that would make the National Security Agency (NSA) proud.

For a list of the largesse and an inventory of the incredible equipment it finances, we rely on local media reports.

The Journal News from Albany, New York reports:

To help local emergency preparedness capability, local governments and police departments across the state have received $80 million in grants, Gov. Andrew Cuomo announced today.

The grants help support and expand local government and police departments’ ability to respond and react to emergencies. The majority of funding is distributed through the $75 million annual state Division of Homeland Security and Emergency Services Statewide Interoperable Communications Grant, Gannett’s Ashley Hupfl reports.

According to the story, the DHS money will go to fund “Technical Rescue and Urban Search and Rescue, Bomb Squad Initiative, the Explosive Detection Canine Team Grant Program, and the Critical Infrastructure Grant Program.”

In San Juan, Texas, DHS money is buying the police department an intelligence-gathering robot. Local newspaper, The Monitor, reports:

The San Juan Police Department has added a robot named Raven to its crime fighting arsenal.

Raven was purchased in early November at a cost of $27,000, paid for with a grant from the Department of Homeland Security, said San Juan police Chief Juan Gonzalez.

“Raven is a great asset to our department,” Gonzalez said, referring to the black, shin-high, tank-like robot designed to enter hard-to-reach places. “He is equipped with a set of cameras, infrared cameras and audio equipment that gives us eyes and ears in difficult situations such as a hostage situation.”

While Raven has already been used to gather intelligence in a drug raid last month, San Juan police got a chance to fully interact with the robot in the days before Thanksgiving when the department ran a series of exercises to test the capabilities of Raven and of the Law Enforcement Emergency Regional Response Team, or LEERRT — the regional SWAT team based in San Juan.

The San Juan Police Department’s website looks more like an advertisement for an elite military unit rather than for the cops from a town of less than 36,000.

Apart from armored personnel vehicles and war-worthy weapons, perhaps the most popular item purchased with DHS grant money is facial recognition software.

San Diego State University’s Police Department is the proud new owner of this powerful surveillance technology. The school’s newspaper The Daily Aztec reports:

Facial recognition technology, previously limited to soldiers in Afghanistan and FBI agents, is now being used by civilian law enforcement agencies throughout San Diego County. According to documents acquired by the Electronic Frontier Foundation, a nonprofit focused on digital and privacy rights, the San Diego State Police Department is one of the agencies using this new technology. SDSUPD currently only has one officer in the program. However, he is the most active officer in the county, with more than 200 photos analyzed from January to October of this year.

The program to bring facial recognition technology to San Diego law enforcement is called TACIDS—short for Tactical Identification System. It’s a pilot program from the San Diego Association of Governments developed and purchased using grants from the federal government’s National Institute of Justice and the Department of Homeland Security, according to The Center for Investigative Reporting.

TACIDS works through Samsung tablets and Android smartphones that were distributed to specific officers (SDSUPD uses a tablet). Most of the 25 participating agencies were given one or two devices, although the sheriff’s department received the most with 64, while the San Diego and National City police departments received 27 and 26 respectively.

Notice that the story practically brags about the fact that a college police department is going to have gear more appropriate in the battlefield than on campus.

Maybe the author of the piece in The Daily Aztec is saying more than he meant to.

Is there a chance that the Department of Homeland Security is funneling all this money and materiel to local police to prepare them to quell popular uprisings? One expert thinks that may be the case.

Jim Fitzgerald worked for eight years as a vice and narcotics squad detective in Newark, New Jersey, before joining the staff of The John Birch Society. He is point man for the conservative organization’s “Support Your Local Police” initiative.

In an interview with The New American, Fitzgerald said there is “virtually no use” for the military-grade equipment being bought by local law enforcement with DHS grant money.

“The only reason to have this equipment is to use it,” Fitzgerald said, and it is likely it would be used against local citizens who have risen up and created some sort of civil disorder.

DHS, Fitzgerald believes, may be anticipating these riots and looks to them as a justification for the militarization of the police.

“They [DHS grants] are not good, not healthy, and not constitutional,” Fitzgerald adds.

The question that remains is how long citizens will accept the arming of their local police until they rise up in resistance and, as DHS probably has orchestrated, are targets of all the tactical weaponry, ammunition, and monitoring technology.

From license plate readers to facial recognition software, from surveillance cameras to cellphone signal trackers, the Department of Homeland Security is providing police with all the gadgets, hardware, and software necessary to keep everybody under surveillance, without the targeted public ever realizing that it’s the Capitol, not the cops, that are behind the monitoring.

Local police who participate in the program will have access to a shockingly broad array of personal information of citizens. Facial recognition technology, license plate readers, and stop light camera video feeds will all be funneled to a Regional Operations Intelligence Center where FBI, police, and DHS agents can watch the live feeds.

In fairness, most police chiefs and sheriffs are unaware of any larger, more sinister DHS program to foment riot as a pretext for quelling it.

But whether these lawmen realize it or not, when they accept federal gadgets and grants, they are surrendering their independence and their citizens’ civil liberties.

Perhaps the most important argument against the federalization of local police departments is that there is not a single syllable of the Constitution authorizing any such federal participation in law enforcement. If the power isn’t granted to the federal government in the Constitution, then authority over that area remains with the states and the people as described in the Tenth Amendment.

Self-serving bureaucrats inside the U.S. government are tirelessly trying to obliterate local police forces answerable to local citizens and promote the consolidation movement as a step toward federalization of law enforcement. These proponents of regional and national police forces desire nothing less than the eradication of all local police departments and sheriffs’ offices, the surrender of state and municipal sovereignty, and the conversion of police into federal security agents sworn not to protect and to serve their neighbors, but to protect the prerogatives of politicians.

 

Joe A. Wolverton, II, J.D. is a correspondent for The New American and travels frequently nationwide speaking on topics of nullification, the NDAA, and the surveillance state.  He is the host of The New American Review radio show that is simulcast on YouTube every Monday. Follow him on Twitter @TNAJoeWolverton and he can be reached at jwolverton@thenewamerican.com

Related articles:

Obama Flooding U.S. Streets With “Weapons of War” for Local Police

Local Police Increasingly Subordinate to Homeland Security Department

DHS Creates New Fusion Centers, Taking Control of Local Police

 

“Defying Gravity” – Counting Down To Japan’s D-Day In Two Charts | Zero Hedge

“Defying Gravity” – Counting Down To Japan’s D-Day In Two Charts | Zero Hedge.

While the distraction of Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ’s monetization of 70% of Japan’s gross issuance have all been a welcome diversion in a society still struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed.

One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” and which begins with the following pessimistic sentence: “Recent studies have shown that the Japanese debt situation is not sustainable.” Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.

Presenting the countdown to Japan’s D-Day.

Exhibit A.

The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan’s debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.

and Exhibit B.

Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.

The paradox, of course, is that should Japan’s economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.

In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt – without any real plan B – is because, all else equal, it has about 8 years before it’s all over.

Here is how the authors summarize the dead-end situation.

Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.

A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.

Finally, this is how the BOJ’s epic monetization was seen by the paper’s authors back in March 2012.

Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.

The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.

An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.

For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then…

Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis…. If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.

Ah… rational.

* * *

Appendix:

The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.

In Figure 6 , the authors calculate Japan’s debt’GDP over the next three decades using the following assumptions on the interest rate:

  • R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
  • R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
  • R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .

R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies

A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person…. The upper bound for the debt accumulation is reached by 2024 at the latest.

Full paper

 

International Bee Expert Speaks Out | A\J – Canada’s Environmental Voice

International Bee Expert Speaks Out | A\J – Canada’s Environmental Voice.

Urgent: The public comment period on actions to protect bees from neonicotinoids in Canada closes today!

Professor Dave Goulson is a UK biologist who specializes in bees. He has published over 200 scientific articles on the ecology of bees and other insects, and is the author of Bumblebees: Their behaviour, ecology and conservation (2010, Oxford University Press) and A Sting in the Tale (2013, Jonathan Cape), a popular science book about bumblebees.

In 2010 he was BBSRC “Social Innovator of the Year” and in 2013 he won the Marsh Award for Conservation Biology from the Zoological Society of London. In 2006 he founded the Bumblebee Conservation Trust, a charity devoted to reversing bumblebee declines.

We spoke to Goulson recently to get the scoop on all this buzz about neonicotinoids.

A\J: George Monbiot, who quotes your work in his blog, says that the EU ban is not comprehensive or meaningful – that only a few kinds of neonicotinoids will be banned and that the class of pesticides as a whole will continue to be used widely.
DG: It’s not a complete ban at all. It’s only two years, so it’s temporary, it applies only to seed dressing on flowering crops, so canola, corn, sunflowers, and only the drilling of seed-treated crops in the spring and summer when bees are flying because of the dust that’s created that leads to fairly swift death for bees.  It does not apply to foliar sprays on fruit and vegetables, garden use, or to seed dressings on winter wheat, which is a big crop in Europe that is drilled in the autumn. But lots of them will still be used and, given their persistence in soil, there will be lots swilling around. And even if there were a total ban for two years, because of their persistence I wouldn’t expect bee populations to be bouncing back as a result. It would take many years for these compounds to be removed from the soil.

A\J: My research on this issue indicates that bees are only one factor – that many other invertebrates and birds are threatened by these chemicals. Is part of the problem that services provided by bees can be fairly easily quantified in economic terms? Is this focus on bees at the expense of the bigger picture?
DG: I would agree completely. One of the reasons you highlight is that bees get all the attention because everyone understands that they are important, but fewer people understand the importance of worms, earwigs, etc.  The second thing is that beekeepers notice when their bees die. But wild organisms have no one to look after them and no one to notice if they are having problems. The first people to notice the effects of neonicotinoids were French beekeepers back in the 1990s. But there are lots of insects in the environment that we don’t want to be killed that are also being exposed.  This can be through build up in soil and water, and the pesticides can be drawn up by non-crop roots. There is every reason to suspect that the effects are much, much broader than just bees, be we have no good monitoring programs for these other organisms.

A\J: Do we have a handle on how effective neonics are at increasing crop yields? Can it be quantified?
DG: This is the most interesting thing of all. There is no doubt we need farming; we need to produce sufficient food efficiently. If these pesticides were vital to farming we might just have to accept bee kills. The irony is that there is no evidence that they are effective. Pest management in farming is not based on evidence; it’s not based on field trials. Recently there have been a few studies from the US on soybeans that found no effect on yields whatsoever. Farmers are paying good money for seed treatments that don’t benefit them in any way. There is a fundamental problem with the system, in my view, which is that most agronomic advice to farmers comes from people who work for agrichemical companies. So it’s hardly surprising that they are recommending farmers use lots of agrichemicals. And it seems as if some of the ones they are recommending aren’t doing anything. It might sound a bit crazy, but look at it this way – we all buy things that we don’t need all the time: cosmetics that don’t do anything, vitamin supplements that don’t do anything, and so on. We are all easily convinced to buy things we don’t need and farmers have no other source of information. They can’t choose not to use these chemicals anyway, because it’s impossible to get untreated seed at present, so they don’t even have a choice. They are forced to pay for something that doesn’t work, which I think is pretty outrageous and I think if farmers knew that, they might well be quite unhappy.

A\J: Are you saying that after getting their education, most agronomists end up working for agrichemical companies?
DG: I’m not an expert on the Canadian system, but I can tell you that in the UK, 80 per cent of agronomists work directly for agrichemical companies and I believe the situation is similar here.

A\J: If corn, soy and canola farmers are prevented from using neonics, what alternatives will they have? Will these be more harmful?
DG: The first response to this is whether they need an alternative at all. If these chemicals aren’t benefiting their yield, then clearly they don’t need to be replaced with anything. IF one makes the assumption that for someone, somewhere, neonics are providing some small benefit, although there’s no evidence for this, then farmers might want to use something else. They won’t go back to using organophosphates as they have been banned. It’s more likely that farmers might increase their use of pyrethroids slightly, which are being used currently anyway – most seeds treated with neonics are also sprayed with pyrethroids. So that’s the worst-case scenario. Now, pyrethroids do kill bees, they are an insecticide, but they do have a big advantage from a bee’s perspective in that they don’t persist in the environment for longer than a few days. So beekeepers can shut their hives or take them away for a few days, while neonics are in the environment 365 days a year.

A\J: One of our bloggers has suggested that it’s time to rethink they way we practice agriculture – that enormous monocultures are extremely hard on soil, water, wildlife and humans. Are you able to comment on that?
DG: I would say that modern agriculture is probably not sustainable in the long term globally. We are losing absurd amounts of soil from repeatedly plowing in parts of the world where winds or heavy rains can wash it away. We are using up underground aquifers in some of the more arid parts of the world; we have problems of salinization in some parts of the world. We are reducing the ability of the planet to produce food globally. We do need to rethink the ways we are producing food.

A\J: John Bennett of Sierra Club Canada has noted that western Canada hasn’t seen the same die off as we in eastern and central Canada have. He wonders if it might be the difference between corn and canola production. Do you have any insight on that?
DG: I don’t know the details on that, but I’ve heard the same arguments. Application of neonics on canola is much lower than on corn. But the problems for bees are not just pesticides. Bees have been suffering for many decades because there aren’t many flowers left. Modern farming doesn’t leave room for anything but the crop. This applies more to wild bees than to honeybees, but they’ve all undergone a 70-year decline due to lack of food. On top of that we’ve accidentally introduced disease and parasites, and now we’re poisoning them. It’s this combination of stressors that’s at the heart of the problem. Bees could cope with one of them, or maybe two, but if you throw three or more factors at them they get into trouble. So maybe there are fewer stressors in the west or they exist in different combination. It may also come down to the application rate of the pesticides. I have heard that this may be exaggerated, that western bees are not as healthy as they are made out to be, but I don’t have any figures on that.

A\J: Do you have a take away message for us?
DG: I’m always really keen to get people to not just talk about honeybees. Pollination is done by a whole load of different insects and they are all really important and all need looking after. Bees have their champions, but all organisms need to be protected.

You’ve got just enough time left to tell Health Canada’s Pest Management Regulatory Agency Publications Section what you think about a potential ban – comments are due today! Get the details here.

 

Diminishing Returns, Energy Return on Energy Invested, and Collapse | Our Finite World

Diminishing Returns, Energy Return on Energy Invested, and Collapse | Our Finite World.

What do diminishing returns, energy return on energy invested (EROI or EROEI), and collapse have to do with each other? Let me start by explaining the connection between Diminishing Returns and Collapse.

Diminishing Returns and Collapse

We know that historically, many economies that have collapsed were ones that have hit “diminishing returns” with respect to human labor–that is, new workers added less production than existing workers were producing (on average). For example, in an agricultural economy, available land might already have as many farmers as the land can optimally use. Adding more farmers might add a little more production–perhaps the new workers would keep weeds down a bit better. But the amount of additional food the new workers would produce would be less than what earlier workers were producing, on average. If new workers were paid on the basis of their additional food production, they would find that their wages dropped relative to those of the original farmers.

Lack of good paying jobs for everyone leads to a need for workarounds of various kinds. For example, swamp land might be drained to add more farmland, or irrigation ditches might be added to increase the amount produced per acre. Or the government might hire a larger army might to conquer more territory. Joseph Tainter (1990) talks about this need for workarounds as a need for greater “complexity.” In many cases, greater complexity translates to a need for more government services to handle the problems at hand.

Turchin and Nefedof (2009) in Secular Cycles took Tainter’s analysis a step further,  analyzing financial data relating to historical collapses of eight agricultural societies in operation between the years 30 B.C. E. and 1922 C. E.. Figure 1 shows my summary of the pattern they describe.

Figure 1. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

Figure 1. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

Typically, a civilization developed a new resource which increased food availability, such as clearing a large plot of land of trees so that crops could be planted, or irrigating an  existing plot of land. The economy tended to expand for well over 100 years, as the population grew in size to match the potential output of the new resource. Wages were relatively high.

Eventually, the civilization hit a period of stagflation, typically lasting 50 or 60 years, as the population hit the carrying capacity of the land, and as additional workers did not add proportionately more output. When this happened, the wages of common workers tended to stagnate or decrease, resulting in increased wage disparity. The price of food tended to spike. To counter these problems, the amount of government services rose, as did the amount of debt.

Ultimately, what brought the civilizations down was the inability of governments to collect enough taxes for expanded government services from the increasingly impoverished citizens. Other factors played a role as well–more resource wars, leading to more deaths; impoverished common workers not being able to afford an adequate diet, so plagues were more able to spread; overthrown or collapsing governments; and debt defaults. Populations tended to die off.  Such collapses took place over a long period, typically 20 to 50 years.

For those who are familiar with economic theory, the shape of the curve in Figure 1 is very similar to the production function mentioned in Two Views of our Current Economic and Energy Crisis. In fact, the three main phases are the same as well. The issue in both cases is diminishing returns ultimately leading to collapse.

There seems to be a parallel to the current world situation. The energy resource that we learned to develop this time is fossil fuels, starting with coal about 1800. World population was able to expand greatly because of additional food production permitted by fossil fuels and because of improvements in hygiene. A period of stagflation began in the 1970s, when we first encountered problems with US oil production and spiking oil prices.  Now, the question is whether we are approaching the Crisis Stage as described by Turchin and Nefedov.

Why Might an Economy Collapse?

Let’s think about how an economy operates. It is built up from many parts, over time. It includes one or more governments, together with the laws and regulations they pass and together with their financial systems. It includes businesses and consumers. It includes built infrastructure, such as roads and electricity transmission lines. It even includes traditions and customs, such as whether savings are held in gold jewelry or in banks, and whether farms are inherited by the oldest son. As each new business is formed, the owners make decisions based on the business environment at that time, including competing businesses, supporting businesses, and the number of customers available. Customers also make decisions on which product to buy, based on the choices available and the prices of these products.

Over time, the economy gradually changes. Some parts of the economy gradually wither and are replaced by new parts of the system. For example, as the economy moved from using horses to cars for transportation, the number of buggy whip manufacturers decreased, as did the number of businesses raising horses for use as draft animals. Customs and laws gradually changed, to reflect the availability of automobiles rather than horses for transportation. In some cases, governments changed over time, as increased wealth allowed more generous social programs and wider alliances, such as the European Union and the World Trade Organization.

In the academic field of systems science, an economy can be described as a complex adaptive system. Other examples of complex adaptive systems include ecosystems, the biosphere, and all living organisms, including humans. Because of the way the economy is knit together, changes in one part of the system tend to affect other parts of the system. Also, because of the way the system is knit together, the system has certain requirements–requirements which are gradually changing over time–to keep the economy operating. If these requirements are not met, the economy may collapse, just as the eight economies studied by Turchin and Nefedov collapsed. In many ways such a collapse is analogous to an animal dying, or climate changing, when conditions are not right for the complex adaptive systems that they are part of.

Clearly one of the requirements that an economy has, is that it needs to be wealthy enough to afford the government services that it has agreed to. Scaling back those government services is one option, but when these services are really needed because citizens are getting poorer and finding it harder to find a good-paying job, this is hard to do. The other option, unfortunately, seems to be collapse.

The wealth of an economy is very much tied to the availability of cheap energy. A huge uplift is added to an economy when the (value added to society) by an energy resource such as oil greatly exceeds its (cost of production). Over time, the cost of production tends to rise, something measured by declining EROI. The uplift added by the difference between (value added to society) and (cost of production) is gradually lost. Some would hypothesize that the falling gap between (value added to society) and the (cost of production) can be compensated for by technology changes and improvements in energy efficiency, but this has not been proven.

Our Economy is Already in a Precarious Position

As I indicated in my most recent post, if a person computes average wages by dividing total US wages by total US population (not just those employed), the average wage has flattened in recent years as oil prices rose. Median wages (not shown on Figure 2) have actually fallen. This is the same phenomenon observed in the 1970s, when oil prices rose. This is precisely the phenomenon that is expected when there are diminishing returns to human labor, as described above.

Figure 2. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

Figure 2. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

The reason for the flattening wages is too complicated to describe fully in this post, so I will only mention a couple of points. When consumers are forced to spend more for oil for commuting and food, they have less to spend on discretionary spending. The result is layoffs in discretionary sectors, leading to lower wage growth. Also, goods produced with high-priced oil are less competitive in the world market, if sellers try to recoup their higher costs of production. As a result, fewer of the products are sold, leading to layoffs and thus lower average wages for the economy.

In the last section, I mentioned that the economy is a complex adaptive system. Because of this, the economy acts as if there are hidden laws underlying the system, parallel to the laws of thermodynamics underlying physical systems. If oil supplies are excessively high-priced, very few new jobs are formed, and those that are created don’t pay very well. The economy doesn’t grow much, but it does stay in balance with the high-priced oil that is available.

The Government’s Role in Fixing Low Wages and Slow Economic Growth

The government ends up being the part of the economy most affected by slow economic growth and low job formation. This happens because tax revenue is reduced at the same time that government programs to help the poor and unemployed need to grow. The current approach to fixing the economy is (1) deficit spending and (2) interest rates that are kept artificially low, partly through Quantitative Easing.

The problem with Quantitative Easing is that it is a temporary “band-aid.” Once it is stopped, interest rates are likely to rise disproportionately. (See the recent Wall Street Journal editorial,” Janet Yellen’s Greatest Challenge.”) Once this happens, the economy is likely to fall into severe recession. This happens because higher interest rates lead to higher monthly payments for such diverse items as cars, homes, and factories, leading to a cutback in demand. Oil production may fall, because the cost of production will rise (because of higher interest rates), while the amount consumers have to spend on oil will fall–quite possibly reducing oil prices.  If interest rates rise, the amount the government will need to collect in taxes will also rise, because interest on government debt will also rise.

So we are already sitting on the edge, waiting for something to push the economy over. The Affordable Care Act (“Obamacare”) may provide a push in that direction. Inability to pass a federal budget could provide a push as well.  So could a European Union collapse. Debt defaults are another potential problem because debt defaults are likely to increase dramatically, as economic growth shrinks, as discussed in the next section.

Debt is Major Part of our Current Precarious Financial Situation

If an economy is growing, it is easy to add debt. People find it easy to find and keep jobs, so they can pay back debt. Businesses and governments find that their operations are growing, so borrowing from the future, even with interest, “makes sense.”

It is as also easy to add debt if the economy is not growing, but there is an ample supply of cheap oil that can be extracted if increasing debt can be used to ramp up demand. For example, after World War II, it was possible to ramp up demand for automobiles and trucks by allowing purchasers to use debt to finance their purchases. When this increased debt led to increased oil consumption, it greatly benefited the economy, because the (value to society) was much greater than the (cost of extraction). Governments were able to tax oil extraction heavily, and were also able to build new roads  and other infrastructure with the cheap oil. The combination of new cars, trucks, and roads helped enable economic growth. With the economic growth that was enabled, paying back debt with interest was relatively easy.

The situation we are facing now is different. High oil prices–even in the $100 barrel range–tend to push the economy toward contraction, making debt hard to pay back. (This happens because we are borrowing from the future, and the amount available to repay debt in the future will be less rather than more.) The problem can be temporarily covered up with deficit spending and Quantitative Easing, but is not a long-term solution. If interest rates rise, there is likely to be a large increase in debt defaults.

The Role of Energy Return on Energy Invested (EROI or EROEI)

EROI is the ratio of energy output over energy input, a measure that was developed by Professor Charles Hall. To calculate this ratio, one takes all of the identifiable energy inputs at the well-head (or where the energy product is produced) and converts them to a common basis. EROI is then the ratio of the gross energy output to total energy inputs. Hall and his associates have shown that EROI of oil extraction has decreased in recent years (for example, Murphy 2013), meaning that we are using increasing amounts of energy of various kinds to produce oil.

In previous sections, I have been discussing diminishing returns with respect to human labor. Oil and other energy products are forms of energy that we humans use to leverage our own human energy. So indirectly, diminishing returns with respect to the extraction of oil and other energy products, as measured by declining EROI, will be one portion of the diminishing returns with respect to human labor. In fact, declining EROI may be the single largest contributor to diminishing returns with respect to human labor. This will happen if, in fact, low EROI correlates with high oil price, and high oil prices leads to diminished wages (Figure 2). This may be the case, because David Murphy (2013) indicates that the relationship between EROI and the price of oil is in fact inverse, with oil prices rising rapidly at low EROI levels.

Contributors to Declining Return on Human Labor

Human labor is the most basic form of energy. We humans supplement our own energy with energy from many other sources. It is this combination of energy from many sources that is reflected in the productivity of humans. For example, we take it for granted that we will have tools made using fossil fuels and that we will have electricity to power computers. Before fossil fuels, humans supplemented their energy with energy from animals, burned biomass, wind, and flowing water.

What besides declining EROI of fossil fuels would lead to diminishing returns with respect to human labor? Clearly, the same problems that were problems years ago continue to be problems. For example, growing world population tends to lead to diminishing returns with respect to human labor, because resources such as arable land and fresh water are close to fixed. Greater world population means that on average, each gets person less. Oil production is not rising as rapidly as world population, so the quantity available per person tends to drop as world population rises.

Soil degradation is another issue, according to David Montgomery, in Dirt: The Erosion of Civilizations (2007). Declining quality of ores for metals is another issue. The ores that are cheapest to extract are extracted first. We later move on to poorer quality ores, and ores in less accessible locations. These require more oil and other fossil fuels for extraction, leaving less for other purposes.

There are other more-modern issues as well. Growing populations in areas where water is scarce lead to the need for desalination plants. These desalination plants use huge amounts of fossil fuel resources (oil in the case of Saudi Arabia) (Lee 2010), leaving less energy resources for other purposes.

Globalization is another issue. As the developing world uses more oil, less oil is available for the part of the world that historically has used more oil per capita. The countries with falling oil consumption tend to be the ones that recently have had the most problems with recession and job loss.

Figure 3. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 3. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

An indirect part of diminishing returns with respect to human labor has to do with what proportion of the citizens is actually able to find full-time work in the paid labor force, and whether the jobs available are actually using their training and abilities. The Bureau of Labor Statistics calculates increases in output per hour of paid labor. I would argue that this is not a broad enough measure. We really need a measure of output peravailable full-time worker.

Obviously, there are potential offsets. We hear much about technology improvements and increased efficiency offsetting whatever other problems may occur. To me, the real test of whether there is diminishing returns with respect to human labor is how wages are trending, especially median wages. If these are not keeping up with inflation, there is a problem.

Conclusion

We don’t often think about the return on human labor, and how the return on human labor could reach diminishing returns. In fact, human labor is the most basic source of energy we have. Stagnating wages and higher unemployment of the type experienced recently by the United States, much of Europe, and Japan look distressingly like diminishing returns to human labor.

Stagnation of wages is happening despite attempts by governments to prop up the economy using deficit spending, artificially low interest rates, and Quantitative Easing. Without these interventions, the results would likely be even worse. If QE is removed, or if interest rates rise on their own, there seems to be a distinct possibility that these countries will be reaching the “crisis” phase as described by Turchin and Nefedov.

Historical experience suggests that a major danger of diminishing returns to human labor is that governments costs will rise so high, and wages will drop so low, that it will be impossible for the government to collect enough taxes from wage-earners. In fact, there seems to be evidence we are already headed in this direction. Figure 4 (below) shows that  the US ratio of government spending to wages has been rising since 1929. Government receipts have leveled off in recent years.

Figure 4. Based on Table 2.1 and Table 3.1 of Bureau of Economic Analysis data. Government spending includes Federal, State, and Local programs.

Figure 4. Based on Table 2.1 and Table 3.1 of Bureau of Economic Analysis data. Government spending includes Federal, State, and Local programs.

Adding more health care services under the Affordable Care Act will only increase this trend toward growing government expenditures.

One issue is how the financial benefit of human labor (together with the energy sources leveraging this labor) is split among businesses, governments, and humans. Businesses have the most control in this. If an endeavor is not profitable, they can discontinue it. If cheaper labor is available elsewhere, they can cut hold down wages in countries with higher wages. They also have the option of increased mechanization. Humans and governments both tend to get shortchanged. As the overall return of the system reaches limits, wages of humans tend to stagnate. Governments find themselves with greater and greater costs, and more and more difficulty collecting funds from increasingly impoverished citizens.

Most authors of academic articles assume that the challenge we are facing is one that can be solved over the next, say, fifty years. They also seem to believe that the fixes required are simply small adjustments to our current economy. This assumption seems optimistic, if we are really approaching financial collapse.

If we are in fact near the crisis stage described by Turchin and Nefedov, we will need to do something much closer to “start over”. We need to build a new economy that will work, rather than just “tweak” the current one. New (or radically changed) government and financial systems will likely be needed–ones that are much less expensive for taxpayers to fund. We are also likely to need to cut back on basic services, including maintaining paved roads and repairing long-distance electricity transmission lines.

Because of these changes, whole new ways of doing things will be needed. EROI analyses that have been to date represent analyses of how our current system operates. If major changes are needed, their indications may no longer be relevant. We cannot simply go backward, because methods that worked in the past, such as using draft horses and buggy whips, will no longer be available without a long development period. We are truly facing an unprecedented situation–one that is very hard to prepare for.

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Hungry Planet: Consumption Around the Globe | International Business Degree Guide

Hungry Planet: Consumption Around the Globe | International Business Degree Guide.

Hungry Planet: Consumption Around the Globe

hungryplanet

 

200 Years Of Dollar Debasement | Zero Hedge

200 Years Of Dollar Debasement | Zero Hedge.

Everyone has seen the 100-year US Dollar destruction chart; so here is the 200-year… a century without The Fed and a century with… which would you prefer?

 

Via Ralph Dillon of Global Financial Data,

Newton’s 3rd law states: To every action there is always an equal and opposite reaction. Sounds pretty simple right?

Except in Government, where for every action, the reaction seems to produce catastrophic consequences for such action. Yet inexplicably, the answer these days to everything seems to be more Government intervention and meddling. You would think that at this point we would have learned from our prior mistakes. Yet the meddling goes on and on and on….because it works so well.

Have you ever considered the true cost of all of this intervention? Think about it. Since the creation of the Federal Reserve in 1913, we have been in perpetual warfare, we introduced the New Deal which birthed Government programs, we eliminated the gold standard, we flooded the market with massive credit expansion, we accumulated massive amounts of debt and have now seen the Government take over 20% of our economy through healthcare. As if all of the prior interventions were not enough, in just the last 5 years, we have had shovel ready, bank bailouts, trillion dollar stimulus, QE 1,2,3,4, operation twist, unemployment benefits extended, car bailouts and crony capitalism that threw good money after bad. What we have gotten is more of the same. More debt, more political posturing and the complete destruction of the dollar and the purchasing power of it. With it, no one is accountable. Not the Government, not the banks, not the private companies but the citizens whose burden it has become to fund all of this intervention.

With the backdrop of other Governement ventures like the USPS and Social Security Administration, what can possibly go wrong with our latest intervention Obamacare? Whether you are for or against it, you have to recognize that this is and will be the mother of all Government interventions. With a horrific rollout, low enthusiasm and a general public that is either unaware or just ignorant to what is truly coming down the pipe, we can only hope that this time it will be different. But consider, that for every word that defines Obamacare, there are 30 more words that enforce it. With 109 new regulations and counting, you have to wonder if this monstrosity of intervention will finally be the straw that breaks the proverbial camel’s back. It surely has the making for it because we have never seen anything like it.

Cost since 1913? Well, the dollar has lost nearly 90% of its value and the purchasing power of that dollar has been eroded considerably.

Below is a chart that demonstrates the destructive quality of Government intervention to 1819:

 

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Mexican Congress passes radical shake-up of oil industry | Business | Reuters

Mexican Congress passes radical shake-up of oil industry | Business | Reuters.

MEXICO CITY (Reuters) – Mexico’s Congress on Thursday overwhelmingly voted to open up the country’s oil and gas sector to private investment in the biggest overhaul of the industry since it was nationalized in 1938.

After a whirlwind final passage through Congress, President Enrique Pena Nieto’s bill will offer companies the chance to operate oil wells, commercialize crude and partner with state oil giant Pemex as Mexico seeks to revive flagging output.

Facing down accusations they were betraying their homeland to foreign oil majors, Mexico’s two biggest parties approved a series of changes to the constitution that could radically transform the fortunes of the world’s No. 10 oil producer.

At more than 10 billion barrels, Mexico has Latin America’s third-largest proven oil reserves after Venezuela and Brazil. It also has nearly 30 billion barrels of prospective resources in the country’s territorial deep waters of the Gulf of Mexico.

Pemex has struggled to exploit those reserves due to a lack of investment, a crippling tax burden and persistent allegations of corruption. Since peaking at 3.4 million barrels per day in 2004, Mexico’s crude output has fallen by more than a quarter.

Proponents of the reform argued Mexico would fall further behind its peers without finding new investors to help exploit its deep water and subterranean oil and shale reserves.

“Today, the name of the game is greater economic competitiveness,” Javier Trevino, a lawmaker in the ruling Institutional Revolutionary Party (PRI) on the lower house energy committee, said in a debate that went through the night.

END OF AN ERA?

Pena Nieto first presented his bill in August, and after weeks of negotiations with the center-right opposition National Action Party (PAN), the PRI unveiled a revised plan at the weekend in the Senate that was far more radical.

The new draft bore the stamp of the PAN, which had urged the government to offer companies full concessions at a time the president was only talking about profit-sharing contracts.

The revised bill did not go that far, but it opened up the prospect of production-sharing contracts and licenses, and both parties were keen to pass it this week.

Barely 24 hours had elapsed since Senate approval when PAN and PRI lower house deputies signed off on the reform, packed into a smaller chamber of the house after a group of left-wing Party of the Democratic Revolution (PRD) legislators tried to derail the reform by blocking access to the main floor.

Supported by the Green Party, a group allied to the PRI, lawmakers from the three parties gave final approval to the bill with 353 votes in favor and 134 against after rejecting a long list of objections to the bill argued by left-wing opponents.

Critics lamented the energy reform as an act of submission and the end of an era, tapping into the pride many Mexicans still feel over President Lazaro Cardenas’ move to expropriate foreign oil companies’ assets in 1938 and create Pemex.

“Today is a black day,” said Ricardo Monreal, a trenchant critic of the government and leader of the leftist Citizens’ Movement in the lower house. “More poverty for everyone, which has been the rule for Mexican privatizations.”

One leftist lawmaker stripped down to his underwear on the podium during the overnight debate, accusing the backers of the reform of leaving Mexico naked without its oil wealth.

OPENING THE DOOR

The floor of the lower house started to debate the bill just a few hours after it arrived from the Senate. In a swipe against the PRD and other left-wing lawmakers trying to derail the reform, legislators from the PRI, PAN and Green Party voted to bypass the committees usually consulted.

Following congressional approval, the constitutional changes must be ratified by a majority of the 32 regional assemblies in Mexico, most of which the PRI and the PAN control.

However, experts say the shake-up is some time away from yielding fruit, not least because the government must still draw up secondary legislation to implement the reform.

“They removed the lock from the door, but do you want to go through?” said Alberto Ramos, an economist at Goldman Sachs.

Seeking to lure billions of dollars to Mexico, the reform formally puts an end to Pemex’s monopoly in oil and gas and will offer companies the right to be paid in barrels of oil.

That is a big departure from the service contracts now on offer, in which firms are paid a fee and can recover costs.

But how lucrative the new regime will be is not yet clear.

“They still have to determine royalty rates and tax structures and national content requirements,” said Carlos Sole, an energy specialist with law firm Baker Botts in Houston.

“All that will determine the scope of potential investment,” he added. “But given Mexico’s market has been mostly closed to investment for so long, this is really a transformative change. The lion’s share of the excitement is on the upstream side.”

(Additional reporting by Gabriel Stargardter, Miguel Gutierrez, Ana Isabel Martinez, Tomas Sarmiento, Lizbeth Diaz, David Alire Garcia and Michael O’Boyle; Editing by Simon Gardner, Alden Bentley and Andrew Hay)

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