AMERICAN FUTURE

Yesterday, I put up a post of a man apparently relieving himself into his car’s gas tank. Having nothing better to think about (the eurozone crisis just goes on and on and on . . . ), my fertile (pun intended) mind came up with a great idea. An entrepreneur should start a pipeline company with both collecting and dispersal stations spread across the nation. People availing themselves of the collecting stations would be paid (based on the volume of their contributions) via PayPal accounts.

The best name for this company is obvious: URI-NATION.

Now, that’s recycling!

At the time, I didn’t think the conclusions reached in The Limits to Growth were wrong. The book was published on October 31, 1972.

Its authors were professors and lesser-lights at MIT’s Sloan School of Management.I was among the lowest of the lesser-lights, having been an MBA (actually, an MS) student at Sloan when the research that resulted in this book was being done.

The findings published in the book were arrived at by using a modeling technique called “Systems Dynamics (SD).” SD models problems as a set of feedback loops. It was developed by Jay Forrester, a renowned professor of electrical engineering at MIT. “Feedback” is, of course, a fundamental variable of all electronic devices. Forrester developed a computer program that represented these feedback loops as a set of differential equations and then solved them.

The world really is a set of feedback loops. Want an example? The crisis in the eurozone involves feedback among sovereign debt levels, bank solvency, sovereign credit ratings, bank credit ratings, interest rates, GDP growth rates and so on and so forth. Policy initiatives that directly effect one of these variables effect all of the others.

But the efficacy of Systems Dynamics, like that of any other modeling technique (for instance, econometrics) depends on the accuracy of the assumptions employed: for instance, the future rate of technological change. That’s where The Limits to Growth, with its unduly pessimistic conclusions, made its mistake.

All of this is a prelude to the following article from Business Week.

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Everything You Know About Peak Oil Is Wrong

We’re not running out of resources. Quite the contrary. And in our abundance lies a paradox

At some point in the coming months, the confrontation between the West and Iran over the Islamic republic’s nuclear program may reach a breaking point. Even assuming the two sides manage to avoid full-fledged military conflict, the crisis could still cause significant disruption to the world economy. An embargo against Iranian oil exports, or a move by Iran’s leaders to close the Straits of Hormuz—or both—could send the price of oil soaring and jeopardize the re-election hopes of leaders from Paris to Washington. And as happens with every oil crisis, pundits will insist that the pain we’re feeling is nothing compared to what it will be like when the world finally runs out of black gold.

We’ve been warned before. Four decades ago this year, five scientists from the Massachusetts Institute of Technology published an influential set of predictions regarding the sustainability of human progress. Titled Limits to Growth, their report suggested the world was heading toward economic collapse as it exhausted the natural resources, such as oil and copper, required for economic production. The report forecast that the world would run out of new gold in 2001 and petroleum by 2022, at the latest.

Over the intervening years, the threat of “peak oil” has stayed with us—the date when global petroleum production was to reach its supposed maximum, afterward and evermore to decline as dwindling reserves were tapped out. And the exhaustion of the world’s oil reserves was just the start. A host of other critical natural resources, from phosphorus to uranium, have been declared peaking or already peaked.

Forty years later, however, rereading Limits to Growth invokes a growing sense of irony. Far from being depleted, worldwide reserves of minerals continue to climb. New technologies suggest the dawn of U.S. energy independence. The biggest concern isn’t that the planet is running out of resources—it’s having too many for the planet’s own good.

Start with oil. In 1971, the Limits to Growth team forecast that the world’s supply would run out 10 years from today. And yet according to renowned oil analyst Daniel Yergin, technology advances and new discoveries have allowed oil reserves worldwide to keep growing. For every barrel of oil produced in the world from 2007 to 2009, 1.6 barrels of new reserves were added. The World Energy Council reports that global proven recoverable reserves of natural gas liquids and crude oil amounted to 1.2 trillion barrels in 2010. That’s enough to last another 38 years at current usage. Add in shale oil, and that’s an additional 4.8 trillion barrels, or a century and a half’s worth of supply at present usage rates. Tar sands, including some huge Canadian deposits, add perhaps 6 trillion barrels more.

We’re awash in more than oil. One British study from the 1930s predicted an acute global shortage of copper “within a generation.” Not so much. The U.S. Geological Survey estimates global land-based copper resources to be 3 billion tons or more—the equivalent of 185,000 years at current production. That’s almost double the estimate of resources from 11 years ago, which means the number may have further to climb. And when we do finally run out of land-based supplies, there are still the undersea sources to use up.

The long-term picture for phosphate, vital for fertilizer production, is also reassuring, despite a price spike in 2008: Estimated global phosphate reserves climbed from 11 million tons in 1995 to 65 million tons in 2010—equal to 369 years of current production. The list goes on: Current resource estimates suggest it will take 347 years to run out of helium, 890 for beryllium, centuries for chromium, more than a millennium for lithium and strontium. And for those Americans worried about the price of makeup, resources of talc in the U.S. alone are enough to provide more than 1,000 years of supplies at current rates of domestic production.

If we keep on using more minerals, and we don’t do a better job of recycling them, and plans to mine the moon don’t work out, we’ll surely run out of supplies one day. But for pretty much every vital mineral resource, that day looks to be a long way off, which is great news for the world economy. Limits to Growth suggested the world would be on the verge of complete economic collapse around about now, with industrial output falling to its level of 1900 by the end of this century, as resources vital to sustaining a modern economy dried up. However dire today’s global financial crisis, we are nowhere near such a doomsday scenario.

What’s more, expanding resource reserves are great news for poor countries, home to many of the world’s recent mineral discoveries. A growing number of developing economies are likely to earn money from drilling and mining, following in the recent footsteps of countries such as Ghana (on the cusp of an oil boom) and Mongolia (ramping up its copper exports). Although development experts often invoke the “resource curse”—the idea that oil and mining industries predestine a country to dictatorship and poverty—recent analysis by the World Bank suggests the fear of the curse is overblown. “As one might intuitively expect,” the Bank reports, “greater natural resource wealth is associated with higher GDP per capita.”

Managing this planetary cornucopia will, however, present significant challenges. Were we to continue expanding our resource use at current rates, we may pollute our way to a denuded planet. Mining, drilling, and moving industrial commodities is a messy business—the Gulf of Mexico oil spill is just one example—to say nothing of the impact on climate change. The tar sands fields in Alberta, Canada, alone contain 1.7 trillion barrels of oil. That is equal to roughly a half century’s supply at current global oil use—and it’s an environmentalist’s nightmare to extract. Two tons of tar sands are needed to produce every barrel of oil. Getting the sludge-like stuff to the surface takes pumping steam into the tar beds, which in turn takes burning natural gas to heat the steam water. Tar sands oil, in other words, requires greenhouse gasses to produce and emits even more when it is consumed. That was a major reason why climate change activists lobbied so hard for the White House to shut down the Keystone XL pipeline from Alberta to the Gulf of Mexico.

And yet the world economy is becoming increasingly lightweight. Industries consume fewer mineral resources for each dollar of output. As much as two-thirds of global economic activity consists of outputs that don’t pollute or even weigh anything at all—things such as entertainment, education, finance, and health care. The services sectors’ share of global output climbed from 53 percent in 1970 to 71 percent in 2010, according to World Bank data. In part because of that, the amount of energy the planet needs to generate the same amount of wealth is declining.

That evolution may not be happening fast enough to stave off climate change, but it suggests the possibility that we can keep improving global living standards even while reining in our collective impact on the global environment. If we tax carbon emissions, provide financial incentives to preserve global forests, and better regulate mining and drilling to reduce spills and toxic waste, perhaps the global population can protect the planet without sacrificing the well-being of future generations.

There are still plenty of good reasons to conserve the world’s mineral resources—just as there are very good reasons to avoid another war in the Middle East. But fear that the resources will run out isn’t one of them.

In today’s FT, Gillian Tett contrasts how well American banks prepared for the possibility of a U.S. default last summer and how European banks are now preparing — or not preparing — for a break-up of the eurozone. The comparison isn’t reassuring.

Here’s what she says about the banks on this side of the pond:

Last summer, some of America’s largest banks secretly stocked their cash machines with the maximum possible supply of notes. The reason? In July 2011, the bankers feared that the US might be about to suffer a technical default, because Congress could not agree on measures to raise the debt ceiling.

So, they decided – after collective discussions – to keep those ATMs stuffed with greenbacks to ensure that consumers would never panic about running out of cash if that “worst-case” default scenario transpired.

In the first half of 2011, large banks such as JPMorgan and Bank of New York Mellon are thought to have each spent about $50m ensuring that their contracts were legally watertight in the event of a US default, and that repo deals and financial markets were continuing to function (along with those ATMs.)

At this week’s meeting of the World Economic Forum, eurozone leaders have stressed their commitment to keeping the single currency intact. And the consensus among senior bankers is that the most likely scenario for the eurozone for the foreseeable future is continued muddling through. Hardly anyone, however, expects a truly positive “solution” soon, and most think that a break-up or exit scenario remains entirely possible. Accordingly, most large banks are now secretly preparing contingency plans – just in case.

This time, says Tett, some large banks may be spending far more than $50 million, since the task is dramatically more complex: they have to review the fine print of all legal contracts for any euro exit, and to ensure that financial market transactions are watertight, or at least hedged. Many large banks are also trying to make sure that their liabilities in peripheral countries are matched with assets inside the same country – rather than across the eurozone as a whole.

Here’s the crux of the matter:

In Europe today, however, it appears that there is little – or no – similarly collaborative move. Or if there is, it is so utterly secret that not even senior bankers know about it yet. On an individual level, most large banks insist they are well prepared (though many express concern that the exchanges or settlement systems seem less organised). But nobody appears to have spoken extensively to anyone else, far less to any central government group.

Why? One problem is that the banking landscape in Europe is far more fragmented than in America. Another is weak European banks are now too distracted, or cash-poor, to prepare for a vague risk. There is also a deep reluctance among some eurozone bankers to admit they are preparing for a worst case, which would risk undercutting their own politicians. And some bankers argue that if a truly serious crisis materialised (such as the exit of Italy, say) it would be so devastating and complex that planning would be pointless.

If you’d told me that I would someday agree with Coulter on anything — anything! — I would have told you that you were out of your mind.

But it’s happened. She prefers Romney to Gingrich. So do I.

Here’s some choice excerpts from her column at townhall.com:

To talk with Gingrich supporters is to enter a world where words have no meaning. They denounce Mitt Romney as a candidate being pushed on them by “the Establishment” — with “the Establishment” defined as anyone who supports Romney or doesn’t support Newt.

Newtons claim Romney is a “moderate,” and Gingrich the true conservative — a feat that can be accomplished only by refusing to believe anything Romney says … and also refusing to believe anything Gingrich says.

. . . without the federal government, Gingrich would be penniless. He has been in Washington since the ’70s, first as a congressman, then becoming a rich man on the basis of having been a congressman. Most egregiously, he took $1.6 million to shill for Freddie Mac, one of the two institutions directly responsible for the housing crash that caused the financial collapse. (Or one of three, if you consider Barney Frank an institution.)

To act as if Obamacare is the same thing as “Romneycare” is just a word game, on the order of acting like a “gun” has the same properties as a “gunny sack,” or “fire” is the same thing as a “firefly” . . . For those of you who still think Romneycare is the worst possible sin a Republican candidate could commit — even worse than taking money from Freddie Mac as it destroyed the economy — that doesn’t help Gingrich: He supported Romneycare . . .

Now here’s something (among many other things) I didn’t know and that might be useful to Obama’s re-election campaign: “the nation’s leading conservative think tank, The Heritage Foundation, helped draft Romneycare. Indeed, Bob Moffit, Heritage’s senior fellow on health care issues, can be seen in the picture of the bill-signing ceremony, standing proudly behind Romney.”

Child of the sixties that I am, my reactions to this revelation (at least for me) are can-you-dig-it and far-out.

More from Coulter on Gingrich and Romneycare:

But Gingrich did more than support Romneycare. As former senator Rick Santorum has pointed out, Gingrich supported a FEDERAL individual mandate to purchase health insurance from 1993 until five minutes ago — i.e., at least until a “Meet the Press” appearance just last May.

She sums things up this way:

In a world where words have meaning, Mitt Romney is not the “moderate” in this race. He is the most conservative candidate still standing, with the possible exception of Rick Santorum, who is bad on illegal immigration . . .

Romney is “moderate” only in demeanor — which is just another word game. His positions are more conservative than Gingrich’s, but he doesn’t scare people like Gingrich does. Ronald Reagan and Jesse Helms were moderate in demeanor, too. No one would call them political moderates.

Romney is the most electable candidate not only because it will be nearly impossible for the media to demonize this self-made Mormon square, devoted to his wife and church, but precisely because he is the most conservative candidate.

Conservatism is an electable quality. Hotheaded arrogance is neither conservative nor attractive to voters.

Ann, I agree: if we’re to have a Republican president, let it be Mitt, not Newt.

Is this the kiss of death for Gingrich? Could be.

Any comment by me would be superfluous.

“Gross inequality is not a new phenomenon, but the fact that this year’s survey respondents selected severe income inequality as the most likely global risk to manifest in the next 10 years suggests that concern about its consequences is growing.”

– World Economic Forum, “Global Risks 2012”

Reporting from the World Economic Forum in Davos, the FT’s Gillian Tett takes note of the unprecedented concern at the conference about growing income inequality. In “Income disparity tops list of concerns,” she says:

That is a striking turnround. Until this year the issue of inequality never appeared on the risk list at all, let alone topped it. In the past, Davos delegates have worried about the risks posed by “asset price collapse”, “oil price shock”, “natural resource shortages” or “banks”. But in Wednesday’s debates it became clear why income disparity now appears on the WEF list of concerns. Apart from the fact inequality has been thrust into the political debate in the US, UK and France, the question of social stability has leapt on to the agenda as a result of the Arab spring. Even before the delegates arrived, a report from the World Economic Forum showed that the risk Davos delegates believe is most likely to cause turmoil this year is “income disparity”.

From the report:

On an unprecedented scale around the world, there is a sense of receding hope for future prospects. Gallup polling data in 2011 reveal that, globally, people perceive their living standards to be falling, and they express diminishing confidence in the ability of their government to reverse this trend. Their discontent is exacerbated by the starkness of income disparities: the poorest half of the global population owns barely 1% of the global wealth, while the world’s top 1% owns close to half of the world’s assets.⁶. Figure 13 provides a global snapshot of inequality, while Figure 14 shows a rise in inequality across many developed economies.

Figure 13

[Note that the United States is second only to Mexico in income inequality among OECD countries]

Figure 14

This is the Session Summary of the debate to which Tett refers:

TIME Davos Debate on Capitalism

Wednesday 25 January

Is 20th-century capitalism failing 21st-century society?

In partnership with the World Economic Forum, Time magazine hosts this debate focusing on the uncertain future of capitalism.

Key Points

• Some critics of capitalism argue that growing income inequality and high unemployment indicate that the capitalist economic system has failed society and needs to be reformed.
• Others argue that income inequality is driven not by corporate power but by factors including technological development and the emergence of a highly interconnected global market.
• To make capitalism fair, focus should be on investing in education and promoting innovation and creativity.
• Young people, especially young entrepreneurs, can drive the transformation of capitalism so that it better serves the needs of society.

Synopsis

The financial and economic crisis that has roiled the world for more than three years unleashed a torrent of criticism against large financial institutions. They are irresponsible risk takers concerned only with maximizing profits, the detractors argued, adding that global banks enjoy unfair advantages because they are too big to fail or let fail. As unemployment, particularly among young people, has risen sharply, the debate over the role of the banks has widened. Growing income inequality in both developed and developing economies has raised questions about the dominance and power of corporations and how well businesses are meeting their social responsibilities.

Is 20th-century capitalism failing 21st-century society? Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC), Brussels; Global Agenda Council on Employment & Social Protection, thinks so. The business community “has lost its moral compass,” she reckoned. “We must redesign the model. We must reset it. Stop the greed. Unless employers and workers sit down with governments, the system will continue to fail.” Companies fight against increasing the minimum wage, even though doing so would only slightly reduce their profits, she asserted.

Other panellists disagreed with Burrow’s view that business lacks morals. “The business community has not lost its moral compass,” asserted David M. Rubenstein, Co-Founder and Managing Director, Carlyle Group, USA. “Capitalism may be the worst economic system except for any of the others.” Businesses do not think about ways to reduce wealth and jobs, he added. To ensure that capitalism is fair, focus on improving laws and regulations, investing in education and promoting innovation and creativity, Rubenstein advised.

Growing income inequality is fuelled not by bad corporate governance but by “far deeper forces”, including the development of technology, the emergence of a global market and the need for innovation, Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, Booth School of Business, University of Chicago, USA, explained. These forces are increasing the demand for skills and pushing pay higher. “These are not going to be affected by corporate governance,” Rajan told participants. “The right debate is about how we get the innovation and creativity we need.”

Ben J. Verwaayen, Chief Executive Officer, Alcatel-Lucent, France, and a World Economic Forum Foundation Board Member, concurred: “We need to talk about innovation, real sustainability and reforms – not about corporations and greed. It’s about decision-making. We suffer from nostalgia. We are not going back to the world that we knew. We have to go for transformation. We have to talk about job creation, not job security.”

From the floor, a critic of capitalism called for vision, not nostalgia. Old institutions and ways of thinking have to be disrupted, he said. A Global Shaper from Egypt said that it is important to establish platforms that allow young people to create jobs for themselves so they are not waiting for jobs to be created for them. “We absolutely need young entrepreneurs and they should be supported,” Burrow replied. But she cautioned against dismissing “the old industrial age”. Technology, especially innovations developed by skilled young people, will be needed to improve the way the “old” economy works, she remarked.

These days, many corporations and other organizations including the World Economic Forum are concerned about what young people are thinking and doing, Rubenstein observed. “Corporations recognize that change is coming from young people.” Noted Verwaayen: “You don’t have to wait for permission. Maybe in the past it was asking; today it’s just doing.”

Other Key Takeaways

Responding to the criticism that irresponsible lending contributed to the global financial crisis and that large banks enjoy unfair advantages, Brian T. Moynihan, Chief Executive Officer, Bank of America, USA, said that banks are global and large in size because they reflect the breadth and presence of their customers. “Our power, size and capabilities come from our clients. Our revenue is representative of the economic activity taking place. We are big because our clients are [global] and we support them.”

Contributors

Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC), Brussels; Global Agenda Council on Employment & Social Protection
Brian T. Moynihan, Chief Executive Officer, Bank of America, USA
Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, Booth School of Business, University of Chicago, USA
David M. Rubenstein, Co-Founder and Managing Director, Carlyle Group, USA
Ben J. Verwaayen, Chief Executive Officer, Alcatel-Lucent, France; Foundation Board Member

Well (as Ronald Reagan said on numerous occasions), it’s time for this blog to start focusing on American politics — a subject I’ve come close to ignoring since I started posting last June.

I’ll start with “Incoherent party, incoherent candidates” from the Economist, which hits the mark:

REPUBLICANS are clearly not too enthused about Mitt Romney. Nor are they wild for any of the alternatives . . .

Mitt Romney looks like a weak phony in this election campaign because he has to pretend to believe with all his heart in orthodox tea-party conservative positions that he transparently doesn’t really believe in. We know this because in the past, Mr Romney supported health-care reform including an individual mandate along the lines of the system he instituted in Massachusetts, essentially the same system as Obamacare. And in the past, he supported a cap-and-trade system for limiting greenhouse-gas emissions to address climate change. But at the time, both of those were orthodox Republican Party positions . . . There were very few established Republican politicians who hadn’t taken positions in the George W. Bush era (or the Newt Gingrich era!) that pose ideological problems for them in the tea-party era . . .

Republicans’ disenchantment with their current presidential candidates is not an incidental characteristic of this crop of candidates. It’s a structural feature of a contemporary Republican Party whose pieces don’t hang together. Pro-Iraq-war neoconservative Republicans cannot actually live with Ron Paul Republicans. Wall Street-hating anti-bail-out Republicans cannot actually live with Wall Street-working bail-out-receiving Republicans. Evangelical-conservative Republicans cannot actually live with libertarian, socially liberal Republicans. Deficit-slashing Republicans cannot live with tax-slashing Republicans. Medicare-cutting Republicans cannot live with Medicare-defending Republicans. These factions have been glued together over the past three years by the intensity of their partisan hatred for Barack Obama, and all of the underlying resentments that antipathy masks. Republicans have buried their differences by assaulting everything Mr Obama supports, and because Mr Obama is a pretty middle-of-the-road politician, that includes a whole lot of things that many Republicans used to support. They are disenchanted with their candidates because their candidates are incoherent, but their candidates are incoherent because the base is incoherent. If the GOP wins this election, the party’s leaders are going to be confronted with that incoherence pretty quickly.

Englishman Robert Skidelsky, author of the monumental three-volume biography of John Maynard Keynes, notes (correctly) that deficit reduction is the centerpiece of most governments’ current fiscal policy. The rationale, in his words (and correctly stated) is that

“A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.”

This very “plausible” narrative, he says, has five “major fallacies.” He makes some good points, but Skidelsky’s counter-narrative has at least two major fallacies:

• First, while the assumption that there is always an interest rate on sovereign debt that’s high enough to attract investors is — in theory, at least — true, he ignores the possibility — as we’ve seen in various eurozone countries — that the interest rate that equilibrates supply and demand may, with the passage of time, result in sovereign bankruptcy.
• Second, after admitting that sovereign default is “bad,” he says that “life after default goes on much as before.” This statement, offered without explanation or example, ranks rather high on the all-time list of heroic assumptions.

Here’s the narrative with which he disagrees. I’ve highlighted those parts with which I’m in agreement.

“First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.

Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.

Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.”