Bad news – 20 reasons why Depression 2 is just around the Corner – Good News from Carlota Parez is that it is part of a cycle which ends in a “golden age”

If you think we are going to escape another great depression I suggest you take a read of  Paul Farrell’s article at Market Watch titled “20 Reasons Global Debt Bomb explodes soon -which trigger will ignite Great Depression 11”

Yes, 20. And yes, any one can destroy your retirement because all 20 are inexorably linked, a house-of-cards, a circular firing squad destined to self-destruct, triggering the third great Wall Street meltdown of the 21st century, igniting the Great Depression II that George W. Bush, Ben Bernanke, Henry Paulson and now President Obama have simply delayed with their endless knee-jerk, debt-laden wars, stimulus bonanzas and bailouts.

So how do we make sense of this and what can we hope for after the meltdown?

One of the best pieces of analysis I have seen – and without a doubt the most positive – comes from Carlota Parez – Author of  Technological Revolutions and Financial Capital: The Dynamics of Bubbles and the Golden Age.

She has seen this all before – the financialisation of the economy, asset price inflation bubbles fuelled by speculative debt and ultimate crash – not once but 4 times since 1770. In her opinion we are half way through a 5th cycle that is following the same dynamics as the previous four cycles.

If she is right – and we have sufficient energy and an ecosystem to support us – we should emerge from this in what she calls a “golden age” of wealth redistribution off the fruits of the infrastructure investments made since 1971.

But we need the crash first and we will need to see re-regulation of finance and the end of the belief that the value of the stock market equates to economic growth. And by the by – for all of us in Australia who still believe that house prices will continue to go up for ever – and its somehow different here – she predicts that house prices will once again become affordable.

Apart from her though leadership interview, there is an excellent slide presentation of her ideas of the golden future of growth after the crisis at slideshare .

You can also listen to an mp3’s of her talks and videos – there are links to these at her website

Carlota Perez: The Thought Leader Interview

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The Common root causes of sickness in Bees and Humans – are we both headed towards the same early human caused extinction?

The BBC has an interesting article today that links the decline in bees in many countries to the decline in biodiversity. I agree with the article and have a further take on the subject.

Shock horror – bees are getting sick for exactly the same reasons as humans – they are eating a diet and getting stressed in ways that their systems weren’t evolved for – and the cause is the modern human environment, diet and lifestyle.

Just as we are increasingly eating a diet of processed sugars and carbohydrates – that come from fewer and fewer food sources so are the bees.

Note: Processed and reconstructed variations of corn and soy make up an increasing component of the diet of humans and animals, and this includes bees. One of the ironies is that bees have access to a more diverse diet in cities than they do in the country side – there is now more plant diversity in cities than in the modern farming countryside.

Bees no longer live in stable environments. The bee industry has been commercialised. Bees are now dragged all around the country in trucks to service different farms. This constant change and travel causes stress in much the same way as we humans are stressed by changing jobs, work environments and constant travel. And it should be no surprise that chronic stress weakens their immune systems in the same way as it does ours.

And, to supplement their bland diets and increased workloads, commercial bees are fed simple sugars in much the same way as we feed ourselves sweets, sugary drinks and coffee to keep ourselves going.

The problem for the bees, and poor humans, is that they don’t have choices like the well off humans do. Their environmental choices are set and limited by the environmental conditions created by the wealthy humans who own the businesses that create these environmental conditions and employ the less well off.

The bad news for the wealthy humans is that they are shooting themselves in the foot. If the bees die off the human species will die off too.

The downside of being at the top of the food chain is that we humans are dependent on the survival of the species lower down the food chain for our survival.

While the wealthy have the option of escaping climate change and environmental damage in the short run, by moving location and putting on the air con, the species on which our survival depends do not have this luxury.

99.9% of species that have been on this planet are extinct and we are now in the midst of the 6th great extinction. And this extinction is being caused by us humans.

Alan McCrindle

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One Structural systemic cause of the GFC – a shift of share ownership from individuals to institutions

I am a great believer that if you know how a system is structured you will be able to predict how it performs in different environmental conditions.

As the chart below indicates there has been a fundamental shift in who owns shares in the USA over the last 50 years.

Prior to the start of financial deregulation – which really started with the removal of the constraints of the gold standard in 1971 -shares were predominantly owned by individuals.

There has been a large structural Shift in share ownership in the last 50 years

The majority of shares are now owned by institutions who hold them on behalf on individuals. These institutions compete with each other to deliver the highest returns. Performance is measured by the quarter and Funds managers are similarly rewarded for short term performance – but with zero claw back of performance pay if performance subsequently declines.

This leads to herd like behaviour by the institutional funds managers. If the market starts going up – like right now in December 2009 – they need to be in the rising market otherwise they will be left behind in the performance tables.

It does not matter if these funds managers know that the markets are overvalued and likely to collapse some time soon. If and when the markets collapse they will once again be able to claim deniability – “we couldn’t see it coming” will be the cry. Fund managers will point to the fact that all the other funds were doing the same – how can they be blamed for not seeing when they are doing the same as everyone else. There is safety in the herd.

If you want to know where high CEO pay came from, part of the answer lies in institutional share ownership.

As for the gambling behaviour of the Banks – this too took a jump when Investment banks shifted from partnership to public ownership. Who in their right mind would risk leveraging 40:1 with their own money?

And right now the situation is even worse. Banks like Goldmans are reporting big profits but these are coming only from trading. The same pattern is in the other banks. The only place they are making money is by high frequency trading – leveraged trading using other peoples money. This in itself is driving up the share market.

And when the markets crash and the banks suddenly look sick again it will be high street on the hook again to bail them out. They have now become too big to fail and they know it. They can do anything they want and get away with it.

And this is supposed to be Democracy.

Alan McCrindle

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A person or system that avoids making mistakes avoids learning

In today’s online Economist there is an article titled “Analysis Catalysis – Designers think that they can teach MBA’s and philanthropists a thing or two”.

While design or systems thinkers could try to teach MBA’s and philanthropists a thing or two it is unlikely that they will learn or act on it.

Why?

Well, why do we still have so many M&A’s when research shows that more than half of them destroy value? Could it be that the incentives for both CEO’s and Investment bankers reward this sort of short term activity irrespective of its long term efficacy?

On Balance research shows that M&A destroys Value more than it creates it

We live in a world where the systems that we use to measure the performance of our economy and our institutions is short term focused and reductive. For example, GDP increases when we destroy value. We destroy between $1.5 and $5 Trillion of forestry ecosystem services every year – more than the banks lost in the GFC – but none of this is factored into the way that we measure success.

There is little to no recognition of the inverse relationship between efficiency and resilience. As a result we run down our resilience and destroy our future prospects for short term efficiency gains. And that is what people go to business school to learn how to do – how to extract short term gains out of the system given the prevailing rules. In addition an MBA provides a badge that proves that they are compliant “in-the-box” thinkers that know these rules that define the box.

Systems thinking only really works when we factor in the unmeasured relationships and linkages between things that reductive analysis can’t objectively measure or ignores because it isn’t part of the prevailing “rule system”.

Systems or design thinking is therefore not only a qualitatively more complex and integrative way of seeing the world that of the dominant reductive scientific paradigm – but it also has neural correlates – the brain is wired differently. The neurons have more connections with each other.

Using the Keirsey interpretation of Myers Briggs Type Indicators  for example, Designers are “perceptive and Intuitive” types (ENTP or INTPs) who are comfortable with uncertainty and complexity . People who do MBA’s are more likely to be “judgement and intuitive (ENTJ or INTJ) or sensory types (ENSJ)“.

Systems thinkers are relative misfits in our modern world. Their world view is too complex and integrative to be valued by our dominant reductive measurement systems. While they might be able to come up with ways to save humanity from itself, these ideas will wither until society comes up with feedback systems that include the “hidden” linkages and support that the enlightenment world view is ignoring or destroying.

The Economist wrote a great piece titled “How to Change the System – in praise of Russ Ackoff” on the 3rd November 2009.

One of Russell’s key insights is that our schooling system – with its focus on avoiding mistakes – ensures that we minimise our chances of learning and being creative. After all we can’t learn from repeating what we already know. We learn from mistakes. A person or system that avoids making mistakes avoids learning.

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The “delusion” of scientific research

Have you noticed how often we see one story about science proving something just to have another story a few months later proving the opposite? What is going on? 

 

The big myth is that science produces accurate results – recent research by John  Ioannidis titled “Why Most Published Research Findings Are False” has demonstrated that the majority of scientific findings are wrong.

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“Old wives tales” developed and persisted because they had practical benefits over time, Dismiss them at your peril.

Then there is the myth of “scientific discovery”. How often do we hear the words “scientists discovered …..”

 

And in most cases this is as accurate as saying Columbus discovered America. What about the people who were living in America when he arrived there. 

 

Science is usually a follower rather than as discoverer

What most people have forgotten is that science is more of a process of trying to find out how existing processes work than discovering new processes. More often than not, science follows technology rather than the other way around.

Take for example the invention of the steam engine by James Watt. If James had believed in the science of the day it would never have been built and we would still be stuck in the dark ages. According to the laws of physics at that time his invention couldn’t work. But clearly it did. And that lead to the rewriting of the laws of thermodynamics by Carnot. 

We don’t say Carnot discovered the steam engine we say Watt’s did. So what has happened to our society that we now so often fall into the trap of crediting scientists for discovering something that already exists? Clearly the media has a role in this. The headline “science discovers ….” is likely to gain more attention than “scientists who were examining the existing phenomenon of X think that they have a way of understanding how it works. However this is only provisional and someone else may come up with a better approximation in the future”.

But it is more than the media. For we are now allowing people and businesses to patent nature.

This makes me so angry that I fantasise about teaching the limited world view that facilitates this process a lesson. My fantasy involves mirroring the process that is currently used to patent nature –   I research breathing and then patent it or some aspect of it. That way, everyone in the world would have to pay me for every breath they take. In my fantasy this would be unacceptable to the masses and it would lead to the recognition of the delusion and danger of the current system and its abolition.

It is impossible for science to be totally objective because it is performed by subjects

Many scientists and people believe that science is an absolute process – a study of “reality”. But exactly who is studying the reality and what are they using? People are doing the studying using their minds, their consciousness. They are using their cognition and this is subject to many different biases.

For example, David Sackett (1) identified 7 areas where experimental bias can occur and he documented 56 different possible types of bias in these areas.

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“Financial Depth” and sophistication or “diminishing Marginal returns” and Collapse

 

 

 

The thing about data is that it can made to say what ever you want it to say. A few weeks ago I read a quote to the effect – statistics is boring science fiction. It appealed to my sense of humour.

 

A few weeks ago I was looking through the latest report on Global Finance by the McKinsey Global Institute.- Mapping Global capital markets (the 5th edition).

In this report they present a concept they call the  “Map of Global Financial Depth”. Basically it is plot of per capita GDP of various countries versus the value of all the finance that was required to generate these GDPs (as a percentage of the GDP).

 

As their graphic indicates there appears to be a trend which they have called financial depth  – a mark of sophistication and modernity.

In essence, the data appears to be saying that countries with high per capita GDP can only achieve this with high financial depth. The very way that the graphic is presented, with a positive trend line that starts to increase vertically at the end, equated with a “mature” market, suggests that high “financial depth” is something to aspire to.

mckinsey-financial-depth-or-declining-productivity-of-debt

 

 

But hang on a moment. This data is saying something else too. It is saying that there are diminishing marginal economic returns.

 

 While Indonesian’s manage to generate one dollar of economic output with one dollar of finance for an annual per capita income of about $6.000 and the Czech’s generate $25,000 using $1.50 of finance to generate every dollar, modern economies require $4.50 of finance to generate every dollar of income.

 

Have a look at this data presented in a slightly different format and for one country – the USA – over an extended time period. The reality of the diminishing marginal productivity of capital is very clear – moreover it is trending “downwards” rather the Mckinsey “upwards ” chart. And,  if you take the liberty of projecting the trend line over time we might find that as soon as 2014 we are in a position where additional capital actual starts to destroy the economy!!

 

 

Diminishing marginal productivity of debt - usa

Diminishing marginal productivity of debt - usa

 

 

 

 

The USA economy could start start shrinking as early as 2014

The USA economy could start start shrinking as early as 2014

 

 

 

 

And the problem with this is that it was this  phenomenon that caused the collapse of 24 complex societies in the past. Joseph Tainter studied the development and subsequent collapse of 24 complex societies and came to the conclusion that as they became more complex they required an increasing amount of energy to run. Unfortunately he noticed that in each case, there was a diminishing marginal energy return As the complexity of each society increased problems arose that required solutions that were increasingly complex and increasingly expensive . At the point where the energy return on the energy invested in new solutions dropped below zero the society collapsed.  

 

The key driver of human progress has been our capacity to harness energy. For example, some estimates suggest that our current modern western lifestyle requires the equivalent of 140 slaves per person – the rate for the USA today is around 300. We have only managed to achieve this through cheap, non-renewable, fossil fuels. It is no coincidence that the industrial revolution and our capacity to harness coal as an effective energy source occur at the same time. 

 

Where will this energy come from in the future?

 

human-enegy-use-over-time1

 

My take on this data is that it indicates how we are, and have been,  “consuming our future” in an unsustainable way.

Free-market capitalism may have finally collapsed. The question of how this is about to play out in global society is unclear but I am expecting substantial societal collapse as a consequence.

Anyone who believes that governments will be able to rescue the world from a depression has not understood the economics and the psychology of the situation.

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Inflation in Zimbabwe – winners and losers

Yesterday I was talking to an old friend of mine in Zimbabwe, a white guy who used to live next door to me. I asked him what life was like there and how inflation was effecting life.

 

Inflation: To the moon and back but a money spinner for the wealthy

 

When I left Zimbabwe, one Zimbabwe dollar was about equal to one US dollar. Apparently, at the current exchange rate, if you piled up all the one dollar Zimbabwe bills it would take to buy one US dollar on top of each other they would more than reach the moon and back!! 

 

For people like my father who get a government pension, the total annual amount is apparently not enough to buy one coffee a month.

 

But on the other hand there are people who are making big money out of inflation. He gave an example of a common friend who had borrowed the equivalent of US$300,000 for one year from a bank in Zimbabwe. Apparently the moment he got the money he managed to convert it into US dollars. When the time came to pay the money back at the end of the year it cost him the equivalent price of two coffees in US dollars. In other words he had made US$300,000 in one year for the price of two coffees and all he had done was borrow in Zimbabwe dollars, convert to US dollars and hold.

 

So who is losing out on this deal – the average person on the street who has their money in the bank. Yet another case of privatising the gains and socialising the loses. The Zimbabwean equivalent of a Wall street banker.

 

So if you think life is tough in Zimbabwe it is for many but for many others it is still the “good life”. If you simplistically measure the quality of life by the antiquity of the cars people drive then apparently Zimbabwe is doing better than New Zealand!

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Quiz: Are you a COMMUNIST or a CAPITALIST?

Quiz: Are you a Communist or a Capitalist?

 

To find out simply answer these questions.

 

1. Do you want fewer and fewer options as a consumer as small independent businesses and genuine free enterprise are marginalised or crushed?

 

2. Do you want the public to be at the mercy of a small cartel of unaccountable despots?

 

3. Do you want to be continuously assaulted by relentless propaganda?

 

4. Do you want your economic system to be doomed to end in failure?

 

If you answered YES to most or all of these questions then YES you are a communist or a capitalist.

 

If you like this sort of satire it is from a 4 part series titled Silly Money by Bremner, Bird and Fortune. Replays are available on Googlevideo

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High-speed broadband growth unsustainable: expert – Is “cloud computing” another securitisation delusion?

For me cloud computing looks like another securitisation folly.  And new research out of the University of Melbourne that shows that the current high speed broadband growth is unsustainable makes me think I am on the right track.

 

To date all I have heard is the positive side of the cloud computing story. 

 

The main argument is that Cloud computing is going to cost us less because of centralisation. For example when we run software as a service, instead of as individual programs on our computers, we will no longer have to worry about the costs involved with updating the software. It will all happen centrally. Moreover we will be able to share servers with others  –  the old economies of scale argument.

While I accept these arguments I disbelieve the thesis that cloud computing will be cheaper in the “long run” and when all “externalities” are included.

 Cloud computing involves an evolutionary step – evolution implies an increase in complexity and increased complexity costs more. The fact that it appears to be costing less tells me that the people who are adding up the costs have either done their sums incorrectly or they have excluded some costs.

 

So what costs could they have excluded?

 

Let me take a guess. I reckon that as cloud computing takes off, we will suddenly see costs increasing faster than people expected. There will also be additional costs that they never thought about.  And finally, they have excluded the costs of fixing the problem if, and when, there is a big collapse.

 

Cloud computing is like securitisation in that it increases vulnerability and risk to the recipient – it doesn’t reduce it.  If something goes wrong in the cloud, everyone connected to that cloud goes down. System resilience declines as centralisation increases.  And something like a collapse of a computer system will harm more than just the isolated computer system – as computers become more embedded in everyday processes the potential for an “isolated”  computer crash to have an impact on systems that were perceived to be “unrelated” increases.

 

I wonder if security costs have been considered effectivily. My thoughts are that as the volume of traffic in the “cloud” increases it will become increasingly vulnerable to being corrupted by a virus. This is especially true because of the “virtualisation” that much of the cloud is based on. With information flowing in and out of clouds from everywhere, there will have to be some virus check on the data . My intuition tells me that the relationship between this cost and traffic volume will be non linear and that for this reason costs will end up much higher than predicted.

 

Has the analysis included all the direct and indirect infrastructure that will be required to make cloud computing a reality or has this been takes as pre-existing? It looks like their may have been some false assumptions made about the ability of the existing infrastructure to deliver the bandwidth required for cloud computing. Research by scientists at the University of Melbourne say that the growth of the high speed broadband, on which the whole of cloud computing us dependant, is unsustainable. The only way for it to work is if more money is put into the infrastructure and use more energy.

 

This research, which shows that the growth in demand for high speed broadband services could make services slower, is to be presented at a Symposium on Sustainability and the Internet this week. 

The university’s Dr Kerry Hinton says it shows the growth of the internet is not sustainable.

“We’ll find that the network will actually grind to a halt, the reason being that the machines at the core of the internet that actually route the packets through the network, they can chew up more and more energy,” he said.

“We’re getting to the stage that the amount of energy they consume is so great that we can’t get the power into them and we can’t get the power out of these machines.

“If we plan carefully and start thinking ahead and making sure the technology we use is becoming more energy efficient, so we make the internet more sustainable, then we should be okay.

“But the key message is if we don’t plan ahead and start thinking what does this mean, and we continually roll out more and more services through the internet, that’s when the trouble will start.”

 

Beware of gods bearing false promises. The moral of the story is that if  something is more complex it will cost more. Joseph Tainter did a study of the collapse of 24 complex societies. These societies all collapsed for the same reason. They all reached a point where their demand for energy outstripped their capacity to supply it. We forget that economic progress is a function of per capita energy use. Every time these societies hit a new problem they solved it with a solution that was more complex that the problem. This drove the energy demand up.

How sustainable is our economic infrastructure? We have built a whole system on the basis of cheap energy from fossil fuels. What will happen when the price of energy increases? How much of what we do will be sustainable or even the best way to do something?

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What has the UNs idea of Sustainable cities and sub-prime got in common?

 

 

The Economist Magazine has an article titled Sub-prime with the subtitle: Greener thinking for the poorer cities.

 

I like the title “sub-prime” but for a different reason. And I would use the subtitle – “Shuffling deck chairs on the Titanic”.

 

The article talks about World Habitat Day which was marked by a prize rewarding smart urban planning. Habit is a United Nations’ organisation tasked with improving our urban fabric. In the next 20 years 2 billion people are going to move into cities from the land. That is equivalent to almost one third of the current global population.

 

human-enegy-use-over-time1

 

“It’s the equivalent of adding a Pittsburgh, Manchester, or a Hanoi to the planet every week,” says Michael Cohen of the New School in New York, one of a group of urbanisation experts gathered at Habitat’s headquarters in Nairobi recently to help the agency map out a plan to raise public awareness of a potentially grim future.

The group apparently had a problem agreeing what Habitat’s tentative campaign slogan of “sustainable urbanisation” meant. Apparently, one thought is to emphasise the positives of cities. They can be the solution instead of the end game. Properly managed they can slash emissions, grow knowledge and creativity, and haul billions of poor out of poverty. Really – raising people out of poverty? For how long? That is what the sub-prime housing market in the USA was supposed to do and for a while it looked like it was working – housing prices could keep on increasing for ever couldn’t they! House price multiples of 9 times median earnings were suddenly sustainable in the long term even though historically the sustainable ratio was more like three. 

 

When is humanity really going to wake up to the fact that it is running up an ecological debt – and probably has been doing so since the 1980’s.

 

wwf-humanities-ecological-f

 

“Sustainable cities?” – really. 1984 double speak – hire the spin doctor and create a music clip for MTV, recruit a Hollywood star and everyone will live happily ever after?.

 

It seems like these guys at the UN are smart enough to be able to identify the underlying facts about the nature of the demand of cities on our ecological support system but then fail to take the next step and identify the consequences.

 

From a big picture perspective, these new cities are the equivalent of the new housing stock created by the sub-prime lending in the USA. They are adding to an unsustainable debt burden to the planet that will eventually burst.

 

 Just like the sub-prime housing debt market in the USA was the straw the broke the camel’s back of an unsustainable global financial debt, the sub-prime ecological debt market, created by new cities, will be the straw the breaks the back of an unsustainable global ecological debt. People moving from the land to the cities will at least triple their energy consumption

 

The earth is heading for it’s Titanic iceberg moment. This time we have the data. We don’t need rocket science to work this one out. The mathematics is very simple. 

 

Consider this question. Imagine there is a pond with lilies growing in it. The surface area of the pond covered by the lilies doubles each day. The pond starts empty and is fully covered by the lilies on day 30. On what day is the pond half covered by lilies? The answer is day 29. In other words right up until day 29 everything looks fine and we still have a lot of room to play with. Then it all goes wrong very quickly.

 

We are not dealing with linear issues – moreover we don’t just have the one exponential issue –  we have multiple exponential growth factors combining with each other like population growth, energy consumption and per capita consumption on non renewable resources. We might well ask ourselves – if we use the lily in the pond model, what day are we on?

 

The powers that be – like this example of the UN – are smart enough to get the basic numbers right, this is not the issue. It is what happens to those numbers – how they are interpreted – that is the issue. Analysis will show that the global and national institutions that run the show have a world view that was shaped by past experience. This is normal. The problem though is that what we called “progress” and successful in the past, in a planet where the global human population was much smaller and only a small proportion of that enjoyed the benefits of that progress and success, has now turned into a problem which threatens our survival in this new environment.

 

As Einstein said – you can’t solve a problem with the same level of thinking that caused it. Progressive, enlightenment thinking, reductive science, competition, free-markets, democracy – these are belong to the world view or thinking that delivered us this personal freedom and economic growth that we take for granted and are even today fighting for. 

 

I don’t want to go back to an authoritarian or war lord past or live in a cave. So what is to be done?

 

Clearly we are finding it difficult to come to terms with the fact that our world view is inadequate. The first step is to acknowledge this and change our language. We need to stop calling free-markets a success and stop deluding ourselves that the growth of cities can be sustainable.

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