Iran succeeds in reducing birth rate without coercion

Posted on May 4, 2014 by

How Iran Became One of the World’s Most Futuristic Countries 

May 2, 2014  Annalee Newitz

In Iran, during the 1980s conflict with Iraq, the Ayatollah Khomeini instituted new government regulations that encouraged women to have as many children as they could to build a “Twenty Million Man Army.” As a result, Iran’s population grew from 37 million people in 1979, to 50 million in 1986. This was, according to journalist Alan Weisman, “the highest rate of population increase the world had ever seen.”

Weisman, the author of The World Without Us, writes about Iran’s incredible growth in his recent book about overpopulation, called Countdown. By the end of the 1980s, government workers in Iran’s budget office realized that the nation was headed for a major economic crisis, not to mention a resource crisis. The booming population was set to outstrip the country’s resources. But after a series of secret meetings with the Ayatollah, a group of demographers, budget experts, and the health minister managed to convince their leader that something needed to be done, and it had to be done fast. Related from amazon Countdown: Our Last, Best Hope for a Future on Earth?

They needed to bring Iran’s population back down to manageable levels. And so, after the war ended in 1988, the Ayatollah gave his blessing to Iran’s Ministry of Health to set up a family planning program that would revolutionize his country.

It started with a slogan: “One is good. Two is enough.” This became the rallying cry in mosques, and in the many family planning clinics set up by the Ministry of Health. Workers with the Ministry, many of them women, were dispatched to every city in Iran, as well as even the tiniest villages. They had one mandate, which was to offer free contraception — from condoms to sterilization procedures — to any person who wanted them.

Nobody was forced to use contraceptives, nor were there any limits placed on how many children people could have. But women flocked to the health care workers. Battered by the war, facing economic hardships, most women opted to be sterilized after having two children. Others wanted to continue their educations after being exposed to the family planning classes offered in local healthcare centers. More and more women learned to read, and more went off to college. By 2012, 96 percent of women in Iran could read — up from about 33 percent in 1975. And at least a third of government workers were women.

Best of all, the population growth had reversed. In 2000, Iran’s birthrate reached replacement levels of 2.1 children per woman. In 2012, the average woman had 1.7 children. After checking on these numbers using an independent group of demographers, the UN was so impressed that Iran’s health minister was awarded a United Nations Population Award.

Even when a new government regime came to power in Iran, and tried to roll back these healthcare policies, the population numbers continued to drop down to sustainable levels. Too many women had become educated and entered the workforce — it was impossible to restart the policies that led to the baby explosion of the 1980s.

Regardless of what happens next, we have evidence that in one generation, a large and religious country like Iran was able to lower its rate of population growth tremendously. And it was accomplished using one, simple technology: Contraception. That, coupled with family planning education, reversed their runaway population growth.

If we want to avoid an environmental crisis by lowering the world’s population, we now have good evidence that it can be done without coercion. All we have to do is make contraception freely available to anyone who wants it. That may prove to be a lot cheaper in the long run than trying to find those 30 terawatts of power year after year.

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Exporting Natural Gas from America

Posted on May 3, 2014 by

We don’t have the natural gas to export as you can see in Shale Oil and Gas Will Not Save Us.

Nonetheless, it looks like we may be exporting it.

Matt Simmons, a financier of very large energy projects thinks that LNG is a good way to go bankrupt. He said that “The cost to produce and distribute LNG is so high that to make LNG work in any sort of financial reality, you would need a 25- or 30-year guaranteed supply. And then you can amortize it over 25 or 30 years. If you’re going on a spot supply, you’ve got to write it off over 10 years and then you’ll need $40 per million BTU to make the economics work. The other thing is that about 35% of the hydrocarbon value gets chewed up in the process of cryogenically freezing natural gas, transporting it, and then re-gassing it.”

Ugo Bardi writes in his book “How the Quest for Mineral Wealth Is Plundering the Planet” The problem is that storing natural gas requires heavy, expensive pressurized vessels, and transporting it requires complex and expensive infrastructure. On land gas is transported through a network of pipelines. To travel by sea, gas must undergo cryogenic liquefaction to obtain a sufficiently high-energy-density liquid (liquefied natural gas, or LNG) for transportation in special refrigerated tankers. These methods are far from being satisfactory: pipelines cannot cross oceans, and cryogenic transportation is expensive. So gas remains mainly a regional resource, and it makes little sense to speak of a global production peak for gas in the same way we would for oil.

De Aenlle, C. Oct 7, 2014. One key to exports: Liquid Gas. New York Times.

The Energy Department forecasts shipments abroad of liquefied natural gas equivalent to two trillion cubic feet by 2020, roughly 7 percent of expected domestic production.

There are various benefits to shrinking gas in an expansive way. One refrigeration unit, called a train, costs $2 billion or more. But as a plant installs more trains (so called because they are narrow and tend to be arranged sequentially), they become cheaper because the high cost of planning, engineering and construction is spread out over more units, and supplies can be sourced cheaper in larger quantities. The cost to build other parts of liquefaction facilities — storage tanks, jetties where ships are loaded, the initial planning, site preparation and so forth — is also spread out.

The compressors that liquefy gas run on gas themselves. A decade ago, about 70 percent of the energy used in the process was lost through heat dissipating into the air, now it’s about 60%.

Cobb, Kurt. Apr 15 2012 by Resource Insights, The dumbest guys in the room: Is Cheniere Energy a contrarian indicator for natural gas? 

The 100-year claim of natural gas supplies derives from an industry estimate of total resources, a significant portion of which will never turn into actual reserves. There is no evidence to suggest that all these resources will be both technically recoverable and economically profitable.

Proven U.S. reserves amount to only 11.5 years of consumption at 2010 rates. If we include proven and probable reserves, the number is 22 years, hardly a figure that inspires confidence that there will be adequate supplies available for export in the coming decades. In the same linked piece author Art Berman, a petroleum geologist and consultant who has carefully studied the state data for U.S. natural gas production, concludes that all major natural gas producing areas except Louisiana appear to be peaking in their rate of production. These include “Texas, Louisiana, Wyoming, Oklahoma, Gulf of Mexico Outer Continental Shelf, and New Mexico [which] account for roughly 75% of U.S. natural gas supply and, therefore, provide a useful proxy for total U.S gas production.”

It is worth quoting Berman at length to get the flavor of his analysis:

For several years, we have been asked to believe that less is more, that more oil and gas can be produced from shale than was produced from better reservoirs over the past century. We have been told more recently that the U.S. has enough natural gas to last for 100 years. We have been presented with an improbable business model that has no barriers to entry except access to capital, that provides a source of cheap and abundant gas, and that somehow also allows for great profit. Despite three decades of experience with tight sandstone and coal-bed methane production that yielded low-margin returns and less supply than originally advertised, we are expected to believe that poorer-quality shale reservoirs will somehow provide superior returns and make the U.S. energy independent. Shale gas advocates point to the large volumes of produced gas and the participation of major oil companies in the plays as indications of success. But advocates rarely address details about profitability and they never mention failed wells.

Shale gas plays are an important and permanent part of our energy future. We need the gas because there are fewer remaining plays in the U.S. that have the potential to meet demand. A careful review of the facts, however, casts doubt on the extent to which shale plays can meet supply expectations except at much higher prices.

The entire piece should be required reading for anyone involved in energy policy or who is thinking about investing in anything related to natural gas. The upshot for investors is that natural gas prices are likely to recover much sooner than most analysts are predicting. Gas rig counts in North America tumbled from 906 during the first week of November to 624 last week. This is the lowest number of gas rigs deployed since 2002. As the count continues to fall, new production capacity will slip in the face of a 32 percent annual production decline rate. That’s not a typo.

The U.S. must now replace one-third of its natural gas production capacity each year just to stay even. Shale gas wells contribute to much of the problem with a first-year decline averaging 65 percent and a two-year decline rate around 80 percent.

The rotary drills will only return to the shale gas fields when prices reach levels that are actually profitable which Berman estimates to be at least $4 per mcf for existing plays and up to $9 per mcf for some new ones. What this implies is much slower growth in supplies, something anticipated by the U.S. Energy Information Administration in its 2012 Annual Energy Outlook which projects that natural gas production will rise from 24.2 trillion cubic feet (tcf) in 2011 to 27.7 tcf in 2035, hardly a bonanza. Still, the EIA buys into the idea that the United States will become a net exporter of gas in 2021.

But Berman is skeptical believing that shale gas supplies will prove so challenging to extract that the country will find itself importing natural gas for a long time to come. If that’s so, then we can look at Cheniere’s decision to build natural gas export terminals as the perfect contrarian sign that U.S. natural gas prices are nearing their lows and will rise in the years to come.

The U.S. Congress and federal regulators may yet rue the day that they approved natural gas export terminals. Since such terminals typically enter into multi-decade contracts to ensure that they can recoup their costs, natural gas may be going out of the country just when domestic supplies are needed the most.

Cheniere expects its liquefaction plant, which liquefies natural gas by cooling it to -260 degrees F, to start operating in 2015. If that year marks the beginning of a sustained climb in U.S. natural gas prices brought on by increasing strains on domestic supplies, Cheniere will retain its usefulness as a contrary indicator. Increasingly expensive domestic gas may then result in small profit margins or even losses for exporters such as Cheniere. Between now and then, however, the hype surrounding U.S. natural gas supplies and LNG exports may help enrich a few Cheniere investors who are savvy enough to cash out before reality catches up with the company’s stock price.

 

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Other booklists

Posted on May 2, 2014 by

The Biophysical Economics Policy Center booklist from 1926 to present

Books

John Howe

  • Astyk, S. (2008) “Depletion and Abundance, Life On the New Home Front.”
  • Bartlett, A. (2004) “The Essential Exponential, For the Future of Our Planet.”
  • Bligh, J. (2004) “The Fatal Inheritance.”
  • Brown, L. (2008) “Plan B 3.0, Mobilizing To Save Civilization.”
  • Brown, L.(2011) “World on Edge, How to Prevent Environmental and Economic Collapse.”
  • Bardi, U. (2011) “The Limits To Growth Revisited.”
  • Berry, W. (1977) “The Unsettling of America, Culture and Agriculture.”
  • Boughey, A. (1976) “Strategy for Survival, An Exploration of the Limits to Further Population and Industrial Growth.”
  • Baker, C. (2009) “Sacred Demise, Walking the Spiritual Path of Ind. Civilization’s Collapse.”
  • Campbell, C. (1997) “The Coming Oil Crisis.”
  • Campbell, C. (2003) “The Essence of Oil& Gas Depletion.”
  • Catton, W. (1982) “Overshoot, The Ecological Basis of Revolutionary Change.”
  • Carroll, J. (1997) “The Greening of Faith, God, the Environment, and the Good Life.”
  • Carr-Saunders, A. (1922) “The Population Problem, A Study in Human Evolution.”
  • Cipolla, C. (1978) “The Economic History of World Population.”
  • Cohen, J. (1995) “How Many People Can the Earth Support”?
  • Cobb, K. (2010) “Prelude, A Novel About Secrets, Treachery, and the Arrival of Peak Oil.”
  • Cooke, R. (2007) “Detensive Nation, Redefining the Role Government.”
  • Cribb, J. (2010) “The Coming Famine, the Global Food Crisis and What We Can Do.”
  • Czech, B. (2000) “Fuel for a Runaway Train, Errant Economists, Shameful Spenders, and a Plan To Stop Them All.”
  • Daly, H. (1996) “Beyond Growth.”
  • Deffeyes, K. (2001) “Hubbert’s Peak, The Impending World Oil Shortage.”
  • Deffeyes, K. (2005) “Beyond Oil, The View From Hubbert’s Peak.”
  • Deffeyes, K. (2010) “When Oil Peaked.”
  • Diamond, J. (2005) “Collapse, How Societies Choose to Fail or Succeed.”
  • Dawkins, R. (2006) “The Selfish Gene, 30th Anniversary edition.”
  • Douthwaite, R. (1992) “The Growth Illusion, How Economic Growth has Enriched the Few, Impoverished the Many, and Endangered the Planet.”
  • Douthwaite, R. (2011) “Fleeing Vesuvius, Overcoming the Risks of Economic and Environmental Collapse.”
  • Erlich, P. (1971) “The Population Bomb.”
  • Fletcher, S. (2011) “Bottled Lightning, Super Batteries, Electric Cars, and the New Lithium Economy.”
  • Gelbspan, R. (2004) “Boiling Point.”
  • Grant, L. (2000) “Too Many People, The Case for Reversing Growth).
  • Grant, L.(2005) “The Collapsing Bubble, Growth and Fossil Energy.”
  • Greer, J. (2008) “The Long Descent.”
  • Greer, J. (2009) “The Ecotechnic Future, Envisioning a Post-Peak World.”
  • Grover, J. (1991) “Beyond Oil, the Threat to Food and Fuel.”
  • Hardin. G. (1993) “Living Within Limits, Ecology, Economics, and Population Taboos.”
  • Hardin, G (1998) “The Ostrich Factor, Our Population Myopia.”
  • Hartmann, T. (1998) “The Last Hours of Ancient Sunlight.”
  • Heinberg, R. (2004) “Power Down, Options and Actions for a Post-Carbon World.”
  • Heinberg, R. (2005) “The Party’s Over, Oil, War, and the Fate of Industrial Societies.”
  • Heinberg, R. (2007) “Peak Everything, Waking Up to the Century of Declines.”
  • Heinberg, R. (2006) “The Oil Depletion Protocol, a Plan to Avert Oil Wars, Terrorism, and Economic Collapse.”
  • Heinberg, R. (2010) “Post Carbon Reader, Managing the 21st Century’s Crisis.”
  • Heinberg, R. (2011) “The End of Growth, Adapting to Our New Economic Reality.”
  • Hopkins, R. (2008) “The Transition Handbook, From Oil Dependency to Local Resil.”)
  • Howe, J. (2006) “The End of Fossil Energy, and Last Chance for Survival.” (3rd Ed.)
  • Kunstler, J. (2005) “The Long Emergency, Surviving the Converging Catastrophes of the Twenty-First Century.”
  • Laslo, E. (2006) “Global Survival, the Challenges and its Implications for Thinking and Acting.”
  • Magdoff, F. (2010) “Agriculture and Food in Crisis, Conflict, Resistance, and Renewal.”
  • Malthus, T. (1798) “An Essay on the Principle of Population.”
  • Martinson, C. (2011) “The Crash Course, The Unsustainable Future of the Economy, Energy, and Environment.”
  • Mesarovic, M. (1974) “Mankind at the Turning Point, the Second Report to the Club of Rome.”
  • McKibbon, W. (1998) “Maybe One, a Personal and Environmental Argument for Single-Child Families.”
  • Meadows, D. (1972) “The Limits to Growth.”
  • Meadows, D. (2004) “Limits To Growth, The 30-Year Update.”
  • Orlov, D. (2008) “Reinventing Collapse, The Soviet Example and American Prospects.”
  • Pimentel, D. (1996) “Food, Energy, and Society.”
  • Pfeiffer, D. (2003) “The End of the Oil Age.”
  • Ponting, C. (1991) “ A Green History Of the World”
  • Roberts, P. (2009) “The End of Food.”
  • Roberts, P. (2004) “The End of Oil, On the Edge of a Perilous New World.”
  • Romm, J. (2004) “The Hype About Hydrogen.”
  • Rothkrug, P. (1991) “Mending The Earth, A World For Our Grandchildren.”
  • Ruppert, M. (2009) “Collapse, The Crisis of Energy and Money in a Post Peak Oil World.”
  • Seidel, P. (1998) “Invisible Walls, Why We Ignore the Damage We Inflict on the Planet.”
  • Simmons, M. (2005) “Twilight in the Desert, the Coming Saudi Oil Shock and the World Economy.”
  • Scheer, H. (1999) “The Solar Economy, Renewable Energy for a Sustainable Global Future.”
  • Smil, V (1999) “Energies, an Illustrated Guide to the Biosphere and Civilization.”
  • Smil, V. (2005) “Energy At The Crossroads.”
  • Stanton, W. (2003) “The Rapid Growth Of Human Populations.”
  • Tainter, J. (1988) “The Collapse of Complex Societies.”
  • Weeks, J. (2005) “Population, an Introduction to Concepts and Issues.”
  • Wilkinson, R.(1973) “Poverty and Progress.”
  • Wilson, E. (2002) “The Future of Life.”
  • Young, L. (1968) “Population in Perspective.”
  • Youngquist, W. (1997) “Geodestinies, the Inevitable Control of Earth Resources Over Nations and Individuals.”
Posted in Other Lists | Comments Off on Other booklists

Chinese Economy Hits the Wall

Posted on May 2, 2014 by

June 10, 2012 The Macroeconomics of Chinese kleptocracy

by John at Bronte Capital
China is a kleptocracy of a scale never seen before in human history. This post aims to explain how  this wave of theft is financed, what makes it sustainable and what will make it fail.  The macroeconomic effects of the Chinese kleptocracy and the massive fixed-currency crisis in Europe are the dominant macroeconomic drivers of the global economy.

China is a kleptocracy — a country ruled by thieves

(a) The children and relatives of CPC Central Committee members are amongst the beneficiaries of the wave of stock fraud in the US,(b) The response to the wave of stock fraud in the US and Hong Kong has not been to crack down on the perpetrators of the stock fraud (to make markets work better). It has been to make Chinese statutory accounts less available to make it harder to detect stock fraud.

(c) When given direct evidence of fraudulent accounts in the US filed by a large company with CPC family members as beneficiaries or management a big 4 audit firm will (possibly at the risk to their global franchise) sign the accounts knowing full well that they are fraudulent. The auditors (including and arguably especially the big four) are co-opted for the benefit of Chinese kleptocrats.

This however is only the beginning of Chinese fraud. China is a mafia state – and Bo Xilai is just a recent public manifestation. If you want a good guide to the Chinese kleptocracy – including the crimes of Bo Xilai well before they made the international press look at this speech by John Garnaut to the US China Institute.

China has huge underlying economic growth from moving peasants into the modern economy

Every economy that has moved peasants to an export-orientated manufacturing economy has had rapid economic growth. Great Britain industrialized at about 1% a year.  Later economies (eg Japan, Malaysia, Thailand, Korea) went faster. As a general rule the later you industrialized the faster you went – as the ease of copying went up. In the globalized internet age copying foreign manufacturing techniques and seeking global markets is easier than ever – so China is growing faster than any prior economy.  This fast economic growth – which would happen in a more open economy – is creating the fuel for the Chinese kleptocracy.

The one-child policy drives massive savings rates

The other key fuel for kleptocracy is a copious supply of domestic savings to loot. The reason Chinese savings levels are so high is the one-child policy. Longevity in China is increasing rapidly and the one-child policy results in a grandchild potentially having four grandparents to look after. The “four grandparent policy” means the elderly cannot expect to be looked after in old age.  Nor can the elderly rely on a welfare state to look after them. There is no welfare state.So the Chinese save. Unless they save they will starve in old age. This has driven savings levels sometimes north of 50% of GDP. Asian savings rates have been high through all the key industrializations (Japan, Korea, Singapore etc). However Chinese savings rates are over double other Asian savings rates – this is the highest savings rate in history and the main cause is the one-child policy.

Low and middle income Chinese have very limited savings options

The Chinese lower income and middle class people have extremely limited savings options. There are capital controls and they cannot take their money out of the country.  So they can’t invest in any foreign assets.  Their local share market is unbelievably corrupt. I have looked at many Chinese stocks listed in Shanghai and corruption levels are similar to Chinese stocks listed in New York. Expect fraud.What Chinese are left with is bank deposits, life insurance accounts and (maybe) apartments.

Bank deposits and life insurance as a savings mechanism in China

Bank deposits rates are regulated. You can’t get much different from 1% in a bank deposit. Life insurance contracts (a huge savings mechanism) are just rebadged bank deposits – attractive because the regulated rate is slightly higher.This is a lousy savings mechanism because inflation has been between 6-8%. At almost all times (except during the height of the GFC) the inflation rate has been higher – often substantially higher – than the regulated bank deposit (or life insurance contract) rate.

In other words real returns for bank accounts are consistently negative – sometimes sharply negative.  You might ask why people save with sharply negative returns. But then you are not facing starvation in your old age because of the “four grandparent policy”. Moreover because of the underlying economic growth (moving peasants into a manufacturing economy) there are increasing quantities of these savings every year. This is the critical point – the negative return to copious and increasing Chinese bank deposits drives a surprising amount of the global economy and makes sense of many things inside and outside China.

The Chinese property market as a savings mechanism

Chinese people have very few savings mechanisms. The major ones (bank deposits and their life-insurance contract twins) have sharp and consistently negative real returns.  Beyond that they have property.Bank deposits have sometimes 5% negative returns. If you got 1% negative returns from  property – well – you would be doing well. Buying an empty apartment and leaving it empty will do fine provided you can sell the property at some stage in the future. It is commonplace amongst Western investors to view the see-through apartment buildings of China as insane. And they may be a poor use of capital. But from the perspective of the investors they look better than bank deposits.

Negative returns on bank deposits and the Chinese kleptocracy

Most Chinese savings are not invested in see-through apartment buildings. Bank deposits still dominate. The Chinese banks are the finest deposit franchises in human history. They can borrow huge amounts at ex-ante negative real returns.And those deposits are mostly lent to State Owned enterprises.  The SOEs are the center of the Chinese kleptocracy. If you manage your way up the Communist Party of China and you play your politics really well may wind up senior in some State Owned Enterprise. This is your opportunity to loot on a scale unprecedented in human history.

Us Westerners see the skimming arrangements. If you want to sell something to the Chinese SOE you don’t sell it to them. You sell it to an intermediate company who sell it in China. From the Western perspective you pay a few percent for access. From the Chinese perspective – this is just a gentle form of looting.

And it is not the only one. The SOEs are looted every way until Tuesday. The Business insider article on the spending at Harbin Pharmaceutical is just a start. The palace pictured in Business Insider would make Louis XIV of France (the Sun King) proud. This palace shows the scale (and maybe the lack of taste) of the Chinese kleptocracy.

A normal business – especially a State Owned dinosaur run by bureaucrats – would collapse under this scale of looting. But here is the key: the Chinese SOEs are financed at negative real rates.   A business – even a badly run business – can stand a lot of looting if it is (a) large and (b) funded at negative real rates.   Those negative real rates are only possibly because there are copious bank deposits available at negative real rates to State controlled banks.

The cost of funds in China and the willingness to hold foreign bonds

The Chinese Government (and the banks are part of the government even though they are listed) has access to seemingly unlimited bank deposits at negative real costs.   When you have copious funds at a negative cost a lot of investments that look stupid under some circumstances suddenly look sensible. US Treasuries look just fine. Don’t think the Chinese are going to stop holding Treasuries. The Treasuries yield far more than they pay the peasants. The Chinese make a positive arbitrage on holding low rate US bonds.

Monetary threats to the Chinese establishment

The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese.There are two core threats to this system – one widely discussed – one undiscussed.

Inflation (widely discussed) is known to produce riots and demonstrations in China – and is considered by Westerners to be bad news for the Chinese establishment. And there are good reasons why the Chinese riot with inflation – the poor who save because they are going to starve – get their savings taken away from them.

But ultimately the Chinese establishment like inflation – it is what enables their thievery to be financed.

The more serious threat is deflation – or even inflation at rates of 1-3%. If inflation is too low then the SOEs – the center of the Chinese kleptocratic establishment will not generate enough real profit to sustain the level of looting. These businesses can be looted at a negative real funding rate of 5 percent. A positive real funding rate – well that is a completely different story.

The real threat to the Chinese establishment is that the inflation rate is falling – getting very near to the 1-3 percent range.

Low Chinese inflation rates will mean reasonable returns on savings for Chinese lower and middle income savers. Good news for peasants perhaps.

But that changing division of the spoils of economic progress will destroy the Chinese establishment (an establishment that relies on a peculiar and arguably unfair division of the spoils). The SOEs will not be able to pay positive real returns to support that new division of spoils. The peasants can only receive positive real returns if the SOEs can pay them – and paying them is inconsistent with looting.

If the SOEs cannot pay then the banks are in deep trouble too.

All because the inflation rate is dropping. Maybe they can stop it dropping. The Chinese establishment has a vested interest in getting the inflation rate up in China. Because if they don’t all hell will break loose.

Unless the Chinese can get the inflation rate up expect a revolution.

Chinese government debt

A financial crisis in China could be another reason for the market to change direction. Even after the recent surge in local government debt, China’s total government debt is a modest 53% of gross domestic product. Still, the central bank’s efforts to contain the explosive growth of the shadow-banking system may not work. The leap in short-term rates to 30% in June could be a warning sign (Gary Shilling: How to prepare your portfolio for the next market shock. March 11, 2014. Bloomberg news).

Other articles
Oct 26, 2012 Brother Wristwatch and Grandpa Wen: Chinese Kleptocracy.  Evan Osnos.  the New Yorker

Problem no. 1: slowing growth. From Reuters:China Growth May Dip Below 7%: Government Adviser

Problem no. 2: falling inflation. From Zarathustra at Also Sprach Analyst:China’s inflation fell to 3.0% yoy in May 2012

Problem no. 3: liquidity. Zarathustra again:Credit Suisse: China is in a liquidity trap

Problem no. 4: money supply. And there we get to our definition of inflation: as shrinking money supply and velocity of money. Ambrose Evans-Pritchard: Global slump alert as world money contracts

 

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California Shale Oil & Gas

Posted on May 2, 2014 by

US officials cut estimate of recoverable Monterey Shale oil by 96%

Sahagun, L. May 21, 2014. Los Angeles Times.

Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national “black gold mine” of petroleum.

Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.

The new estimate, expected to be released publicly next month, is a blow to the nation’s oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.

The Monterey Shale formation contains about two-thirds of the nation’s shale oil reserves. It had been seen as an enormous bonanza, reducing the nation’s need for foreign oil imports through the use of the latest in extraction techniques, including acid treatments, horizontal drilling and fracking.

The energy agency said the earlier estimate of recoverable oil, issued in 2011 by an independent firm under contract with the government, broadly assumed that deposits in the Monterey Shale formation were as easily recoverable as those found in shale formations elsewhere.

Major oil companies have expressed doubts for years about recovering much of the oil.

The problem lies with the geology of the Monterey Shale. Unlike heavily fracked shale deposits in North Dakota and Texas, which are relatively even and layered like a cake, Monterey Shale has been folded and shattered by seismic activity, with the oil found at deeper strata.

Geologists have long known that the rich deposits existed but they were not thought recoverable until the price of oil rose and the industry developed acidization, which eats away rocks, and fracking, the process of injecting millions of gallons of water laced with sand and chemicals deep underground to crack shale formations.

The new analysis from the Energy Information Administration was based, in part, on a review of the output from wells where the new techniques were used.

“From the information we’ve been able to gather, we’ve not seen evidence that oil extraction in this area is very productive using techniques like fracking,” said John Staub, a petroleum exploration and production analyst who led the energy agency’s research.

“Our oil production estimates combined with a dearth of knowledge about geological differences among the oil fields led to erroneous predictions and estimates,” Staub said.


Sep 22, 2013. Oil Firms Seek to Unlock Big California Field Geology is a challenge in the Monterey Shale. Wall Street Journal.

California’s Monterey Shale formation is estimated to hold as much as two-thirds of the recoverable onshore shale-oil reserves in the U.S.’s lower 48 states, but there’s a catch: It is proving very hard to get.

Formed by upheaval of the earth, the Monterey holds an estimated 15.4 billion barrels of recoverable shale oil, or as much as five times the amount in North Dakota’s booming Bakken Field, according to 2011 estimates by the Department of Energy.

The problem is, the same forces that helped stockpile the oil have tucked it into layers of rock seemingly as impenetrable as another limiting factor: California’s famously rigid regulatory climate.

Fracking is more difficult to do in the Monterey because the formation is so jumbled, says Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis. That makes it hard to find large amounts of shale to frack, industry officials say.  “The technical challenges are such that it makes it more expensive to frack in California,” Ms. Jaffe says.

So far, there have been no production breakthroughs.

Chris Martenson:  The summary here is no surprise to me. Whereas the Bakken is a big, flat expanse, unsullied by geological forces over time, the Monterey is in seismically active California and has been stressed and bent and folded and heaved over millions and millions of years. When you are trying to frack oil and gas out of the earth, every fault works against you by bleeding your pressure away. Worse, some fractures connect to other features, complicating the practice of keeping fracking fluids away from water tables. So, for now, the best we can do is place the Monterey on the “maybe” list. But note that it’s certainly no slam-dunk, simple-as-plumbing operation like the earlier storied shale plays.

Andrews, Steve. 29 July 2013. Interview with Martin Payne—Is Peak Oil Dead? ASPO-USA Peak Oil Review.

Steve Andrews: I’ve heard that the Monterey field in California seems to be the one that’s the least ready to give up its very large oil-in-place resource. Do you read it that way?

Martin Payne: The Monterey gets brought up all the time because it has a huge in-the-ground number. It’s another question mark. There’s a good chance the clay content may be the issue. It gets back to the fact that to work, the rock in an unconventional play needs to break like a piece of glass; it needs to be that brittle to work really well. The presence of ductile clay in high percentages prevents that from happening. So with a high clay content you can’t create the necessary spiderweb network of fractures and microfractures to provide exit routes for the oil.

I liken it to a highway system: dirt roads feeding county roads, feeding state highways, feeding interstates that eventually go into 12-lane freeways when you get to downtown…where downtown is the wellbore. You can’t create that underground highway network unless the rock breaks well. I’m pretty sure that’s the problem with the Monterey.

The Conasauga is a quickly forgotten example of a shale gas play that didn’t live up to expectations. There were thousands of feet of low TOC rock, but the bottom line was that due to clay content there wasn’t a way to fracture and keep the rock sufficiently open in order to make the play economic. So even though the numbers were huge on an in-place basis—just like the Monterey, but in gas instead of oil—you couldn’t create the highway system, so it wouldn’t work.

 

Posted in Oil & Gas Fracked | Comments Off on California Shale Oil & Gas

Homer-Dixon Key findings on resources and war / violence

Posted on May 2, 2014 by

The Project on Environmental Scarcities, State Capacity, and Civil Violence

Key Findings

Abot 50 experts from 5 countries, developed a detailed set of conceptual tools for thinking about environmental scarcity and state capacity.

Environmental scarcity has 3 sources:

  1. reduced resource supply (from degradation or depletion)
  2. increased resource demand (from larger populations or higher per capita consumption)
  3. skewed resource distribution.

State capacity is a function of the state’s fiscal resources, political autonomy, legitimacy, internal coherence, and responsiveness (see Table 1 below).

This set of conceptual tools has allowed our researchers to identify links between rising environmental scarcity and declining state capacity. They have found 4 separate and often simultaneous effects:

  1. Environmental scarcities increase financial and political demands on the state. In addition, analysis of diverse cases — including those of South Africa, Pakistan, and the Philippines — shows that environmental scarcities expand marginal groups that need help from government by constraining rural economic development and by encouraging people to move into cities where they demand food, shelter, transport, energy, and jobs. In response, governments come under pressure to introduce subsidies of urban services; these subsidies drain revenues, distort prices, and cause misallocations of capital.
  2. Resource scarcities affect the state via their effects on elites. On one hand, scarcities can threaten the incomes of elites that depend on resource extraction. These elites often compete among themselves for shrinking resource rents; they may turn to the state for compensation, or they may act to block institutional reforms that would distribute more fairly the costs of rising scarcity. Scarcities can also aggravate competition among political elites that derive their power from rival political institutions. The management of such conflicts requires immense amounts of state attention, time, and money.On the other hand, environmental scarcities generate opportunities for powerful coalitions of elite members to capture windfall wealth. Scarcities can boost the economic power of small elite groups. As they become more powerful, these groups are increasingly able to ignore state dictates, shirk taxes on their greater wealth, and penetrate the state to make it do their bidding. In particular, they often lobby to change the property rights and other laws governing the use of scarce resources such as water, land, and forests. These groups have a great incentive to pursue such change: the state is usually able to generate large economic rents by expanding the range of permissible uses of resources and by granting monopolistic access to resources. In many societies, these rent-seeking elite groups influence the state through bribery, kickbacks, and other forms of corruption.
  3. Such predatory behavior by elites often evokes defensive reactions by weaker groups that directly depend on the resources in question. The struggle for resource control between powerful and weak groups, and among weak groups themselves, worsens social segmentation, which in turn debilitates civil society and erodes the trust-building processes that civil society promotes. The loss of trust, of information flows from society to the state, and of private implementation of state policies reduces the reach and responsiveness of the state at the local level. The state’s failure to meet local needs then depresses its legitimacy.
  4. If resource scarcity affects the economy’s general productivity, tax revenues to local and national governments can decline. Such a revenue decline hurts elites that benefit from state largesse and reduces the state’s capacity to meet the increased demands arising from environmental scarcity.

We see, therefore, that environmental scarcity can affect a number of the variables measuring state capacity. It can directly constrain a state’s fiscal resources, and by encouraging predatory behavior by elites, it can reduce state autonomy. Rivalry among political elites reduces coherence, and competition among groups over resources weakens civil society. The conjunction of these four changes, in turn, hinders state responsiveness by reducing its ability to supply social ingenuity in the form of efficient markets, clear property rights, and an effective judicial and police system. Environmental scarcity can also boost financial and political demands on the state and increase grievances of marginal groups. A widening gap between rising demands and state performance, in turn, erodes state legitimacy, further aggravates conflicts among elites, and sharpens disputes between the elites and the masses. As the state weakens, the social balance of power can shift in favor of groups challenging state authority.

In addition to the Case Studies below, there are other articles on this topic here.

Case Studies

Chiapas, Mexico. The rebellion of Zapatista insurgents in Chiapas, Mexico is a result, in part, of a classical process of ecological marginalization. Indigenous peasants were pushed into ecologically vulnerable highland and tropical forest areas; high population growth and land degradation in these areas in turn exacerbated the poverty that catalysed the insurgency. The Chiapas rebellion has had a monumental effect on Mexican economic stability. It has disrupted international investment and strained NAFTA. It is an example of the potentially large-scale social and economic impacts of population and ecological problems.

Gaza. The achievement of limited autonomy for Palestinians in Gaza and Jericho in 1993 engendered hope for peace in the Middle East, yet violence persists. In Gaza, water scarcity has clearly aggravated socio-economic conditions. These conditions, in turn, have contributed to the grievances behind ongoing violence against Israel and emerging tensions among Palestinians in Gaza.

Pakistan. With one of the highest population growth rates in Asia, widespread land degradation and water scarcity, stalled economic reform, and weak governmental authority in both the cities and countryside, Pakistan’s political stability is threatened. A radicalization of the Pakistani regime would have implications for stability throughout South Asia, especially in the context of the unending crisis in Kashmir, the nuclear dimension of Indo-Pakistani relations, and continued turmoil in Afghanistan and Central Asia.

Rwanda The recent catastrophe in Rwanda is of great concern to policymakers, and many analysts have suggested that demographic and ecological factors powerfully contributed to the violence. A report on Rwanda therefore examines whether rapid population growth and cropland scarcities helped cause the civil conflict. Although the report concludes that the country’s demographic and scarcity stresses were extreme, these pressures are best seen as factors aggravating, not directly causing, the country’s widespread ethnocide.

South Africa Although astonishing political changes have taken place recently in South Africa, many people do not realize that the country remains burdened by extreme land degradation in the former homelands. This resource scarcity and rapid population growth are driving large migrations of homeland residents into urban areas. Urban squatter settlements and townships are still experiencing high levels of ethnic violence exacerbated by this migration. South Africa’s move to democratic stability is therefore threatened by environmental and demographic pressures.

Table 1: Indicators of State Capacity
Indicators of the State’s (or its Components’) Intrinsic Characteristics:
Human Capital The technical and managerial skill level of individuals within the state and its component parts.
Instrumental Rationality The ability of state’s components to gather and evaluate information relevant to their interests and to make reasoned decisions maximizing their utility. (Note that “utility” may be locally defined; i.e., it may reflect the narrow interests of the component and not the broader interests of the state or society.)
Coherence The degree to which the state’s components agree and act on shared ideological bases, objectives, and methods; also, the ability of these components to communicate and constructively debate ideas, information, and policies among themselves.
Resilience The state’s capacity to absorb sudden shocks, to adapt to longer-term changes in socio-economic conditions, and to sustainably resolve societal disputes without catastrophic breakdown. The opposite of “brittleness.”
Indicators of the Relations between the State (or its Components) and Society:
Autonomy The extent to which the state can act independently of external forces, both domestic and international, and coopt those that would alter or constrain its actions.
Fiscal Resources The financial capacity of the state or of a given component of the state. This capacity is a function of both current and reasonably feasible revenue streams as well as demands on that revenue.
Reach and Responsiveness The degree to which the state is successful in extending its ideology, socio-political structures, and administrative apparatus throughout society (both geographically, and into the socio-economic structures of civil society); the responsiveness of these structures and apparatus to the local needs of the society.
Legitimacy The strength of the state’s moral authority — the extent to which the populace obeys its commands out of a sense of allegiance and duty, rather than as a result of coercion or economic initiative.
Posted in 2) Overshoot, Caused by Scarce Resources, Collapsed & collapsing nations, Scientists, Stages of, Violence, War | Comments Off on Homer-Dixon Key findings on resources and war / violence

Cash is King in a deflation — but there are dangers

Posted on May 1, 2014 by

Risk 1: Capital controls

Restrictions on bank withdrawals (no ATM withdrawals, no bill payments, etc)

Restrictions on money market fund redemptions

Greater restrictions on retirement fund liquidations

Fixing an official exchange rate and criminalizing market rate transactions

Banning the conversion of domestic currency to foreign currency

Banning the movement of assets out of the country to foreign financial institutions

Barriers, restrictions, additional transaction costs imposed on foreigners seeking to deposit funds or make investments in safe havens

Forcing sovereign debt owners to accept longer maturities rather than principal repayment

Banning gold ownership

Reissuing the currency in a new form (an acute risk in Europe)

Restrictions on the size of cash transactions

Civil Asset Forfeiture is already happening

Risk 2: Being Taxed to Death on Real Estate, Stocks, Savings

What can you do?

There are no no-risk solutions, but different options will suit different people, depending on their circumstances. Some may choose to store assets in another jurisdiction or in another currency if those options are available, but losing control over assets abroad is a distinct possibility, as is difficulty in converting the currency chosen as a store of value back into something that will functions as cash at home.

Physical travel may become much more difficult as capital controls lead to border controls of other kinds. Holding assets close to home gives one the greatest degree of control, but with certain obvious risks attached. Typically, he who loses the least in a deflation is the winner, as there are no easy answers.

Legal niceties are very likely to go by the wayside as deleveraging proceeds and the global grab for scarce cash begins in earnest. Those who posses the power to grab assets left in harm’s way are very likely to do so, then possession will be nine tenths of the law.

Safe deposit boxes are not a secure option in the event of a bank run. If the bank’s doors are shut, the likelihood of being able to access a safe deposit box is vanishingly small. The odds of the contents remaining where they were left for long enough for the owners to be reunited with their property are also rather low. Even when there is no threat of an imminent bank run, financially-strapped central authorities may be minded to help themselves to the assets of others.

Moving money abroad to a safer haven is not the simple solution one might imagine either. Governments that could not stop the hemorrhage as it was happening are seeking to reverse the capital flight after the fact. Of course, such actions will only further inflame fear, while doing nothing to address the reason for capital flight. They will thus increase the impetus for capital to flee in any way that it can.

If you are able to get cash from the bank and hide it at home, that can be a problem too, as David  Böcking writes about in a June 18, 2012 article in Der Spiegel: Desperate Greeks Withdraw Money from Accounts  Many Greeks are emptying their bank accounts out of fear that the country may return to the drachma. But most of the money is not going abroad. Instead, individuals are storing cash in safe deposit boxes (there aren’t any more to be had at the banks, they’re all taken) or at home ( at least €50 billion)– leading to an increase in burglaries (700% in Crete, €50,000 in cash from a house of an old couple in Athens, etc… people are withdrawing hundreds of millions of euros from the banks every day. In May alone, outflows totaled €5 billion. According to official figures, €80 billion has been withdrawn since the start of the crisis…Greeks fear a currency reform such as banks closing to prevent further transfers into foreign accounts, or marking existing Euro bills with stamps that wouldn’t be valid in other countries and replaced with the drachma again.

Once fear is in the ascendancy, it is very difficult to combat. Governments and central banks simply do not have the control they think they do, and they do not understand the nature of battle they are engaged in. It is not a matter of restoring certain objective conditions. Central authorities are trying to fight the inexorable recognition that the magnitude of the debt that has resulted from our 30 year credit expansion dwarfs the wealth of the world, that the $70 trillion in G10 debt underpins some $700 trillion in derivatives.

That realization, and the natural reactions stemming from it, are the problem. As confidence evaporates, so does liquidity. Credit – the vast majority of the effective money supply – ceases to be equivalent to money. The resulting crash of the effective money supply is deflation by definition. This is what we have been predicting since the inception of theautomaticearth (TAE). This is how credit expansions always end – with the implosion of credit instruments that amount to no more than a pile of human promises that cannot be kept.

Why Safe deposit boxes aren’t safe
1) The State of California started taking money from safe deposit boxes that hadn’t been touched after just 1 year.  The requirement used to be 15 years of no contact with the bank, but California  lowered it to 7, then 5, tnen 3 and now just 1 year (Leamy).
2) England is opening safe deposit boxes looking for cash to see who might be a drug dealer (Edwards)
3) Nicole points out the government will just take the money it needs, i.e. In Greece and Italy, suddenly No ATM withdrawals allowed, no bill payments, nothing. You Just get locked out overnight.  In Greece, the government is pulling funds directly out of its citizens’ bank accounts from anyone suspected of being a tax cheat
4) The Greek government is trying to get money moved from greek banks to other countries back.
5) if your money is still in euros in Greece, if a return to drachmas, maybe you’ll have 50% of your money as it’s devalued in half

Weiss writes about what has happened in other countries when the financial system explodes: Brazil begged people to donate their gold and gold jewelry, confiscated everyone’s bank accounts by freezing them, and replaced their money with a far less valuable currency. In Russia, millions fell victim to crime and corruption, traffic tickets for no reason, smuggling, narcotics – criminals owned or controlled half of the countries private businesses. Banks closed their doors forever.  In all countries, unemployment can be up to 50%, with little government aid because there aren’t taxes to be collected, a downward spiral.

Weiss recommends that you 1) plan to live without SSN, Medicare, etc since we’re heading on a course where that won’t be there (i.e. unfunded liabilities), 2) Washington may no longer be able to bail out your bank or guarantee your deposits when skyrocketing loan defaults push it to the edge of the precipice 3) Ensure your family’s safety because police, fire, and emergency services will probably be hard to come by in many communities 4) If you live in a city, have a plan and a place to go if things become uncomfortable for you. 5) Make sure your bank is the safest you can find. 6) Build a wall of privacy around your finances. The central government will not be your friend, or state or local government either. 7) Others will try to seize your wealth, especially in a city or suburbs 8) Keep a low profile 9) Hide your assets.

 

Leamy, Elisabeth. 2012 Not-So-Safe-Deposit Boxes: States Seize Citizens’ Property to Balance Their Budgets. ABC News

“They figured the safety-deposit box was safer than keeping it under the mattress. In the case of a lot of citizens, they were wrong, weren’t they?”

California law used to say property was unclaimed if the rightful owner had had no contact with the business for 15 years. But during various state budget crises, the waiting period was reduced to seven years, and then five, and then three. Legislators even tried for one year. Why? Because the state wanted to use that free money…

…Some states keep their unclaimed property in a special trust fund and only tap into the interest they earn on it. But California dumps the money into the general fund — and spends it.

2) Governments may also decide that the contents of safe deposit boxes may constitute evidence of criminal activity, and reserve the right to assess the property stored, making the owners prove legitimacy. In a liquidity crunch, it is quite likely they will regard there being no legitimate reason for holding cash, and private gold ownership may be declared illegal. Both cash and gold could be subject to confiscation.

Edwards, Richard. 2012. Safety deposit box raids yield £1bn of drugs, cash and guns. The Telegraph.

Scotland Yard said that Met’s Specialist Crime Directorate raided seven properties: three safe depositories, an office and three residential addresses…

…”Operation Rize is a money laundering investigation and is entirely unprecedented, one of the largest of its kind ever undertaken in the UK,” he said. “In the past safety deposit boxes have been searched on an individual basis often resulting in the recovery of guns, drugs and cash. We believe that this operation has the potential to impact upon many layers of serious crime.”

The investigation has been running for two years and included intensive work with lawyers to ensure they were able to seize all of the boxes.

Members of the public who have innocently and legally stored their valuables were”inevitably” going to get swept up in the disruption, it was predicted.

Black, Simon. 2012.  It starts: the government’s plan to steal your money. Sovereign Man

European officials yesterday flat out admitted that they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe’s borderless Schengen area.

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawals, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being relieved of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system. European political leaders aim to put a tourniquet on this wound in the worst possible way.

Bruce Krasting On Capital Flight and Forced Repatriation

All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace”safe”. Capital flight is a perfectly logical consequence in today’s world. Barely a day passes where we are not reminded that nothing is safe any more. Not our currencies, not our equities, not our bonds and certainly not our banks/brokers.

In Greece there are many example where capital flight is undermining stability. The most obvious is the capital flight from the Greek banks that has taken place over the past few years. This flow of money is also perfectly logical. There are many risks of leaving money in a Greek bank:

•The Bank could default. The principal in the account is at risk. The guarantee (up to E100k) is from the government. What’s that worth?

•The government could default. The chaos that would follow would result in a freeze of all bank balances.

•The government could announce one morning that it was re-establishing the Drachma. This would mean that any Euros in a Greek bank would be automatically converted into Drachmas at the old official rate. The value of those Drachma would be worth half (or less) as a result of the immediate devaluation that would occur…

…A move is being made in Brussels to”force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost…

…If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal.

Posted in Money | Comments Off on Cash is King in a deflation — but there are dangers

How Companies Plunder and Profit From the Nest Eggs of American Work

Posted on May 1, 2014 by

Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers

By Ellen E. Schultz    Portfolio/Penguin 2011 216 pages, in hardcover and paperback

August 20, 2012. UE News – Summer 2012 issue

We already knew that employers are stealing workers’ pensions, and that they’ve doing it for more than 20 years. But in this well-researched and well-argued book Ellen Schultz, an award-winning investigative reporter for The Wall Street Journal, documents the complex ways in which they’ve been doing it, how they profit from these crimes, and how gaping loopholes in laws and regulations let them get away with it.

Interestingly for UE members, the first corporate leader Schultz mentions is Jeffrey Immelt, CEO of General Electric, recounting a speech he gave to investors in December 2010. Immelt told them that the GE pension “has been a drag for a decade,” and that to relieve itself of this financial burden, GE was going to keep future employees out of the pension. But Immelt’s presentation was fundamentally untrue, says Schultz – the company’s pension and retiree plans, huge and well-funded, “had contributed billions of dollars to the company’s bottom line over the past decade and a half”, and the company had not contributed a cent to the workers’ pension plan since 1987.

One of the ways GE made money from the pension fund was by selling chunks of it when it spun off a division of the company. For example, Schultz writes that when GE sold an aerospace unit to Martin Marietta in 1993, it transferred 30,000 employees and $1.2 billion in pension assets – $531 million more than was needed to cover the pension liabilities. But all that was included in the sale price, so “GE effectively got to put half a billion dollars from its pension plan into its pocket.”

With case studies involving some of the biggest names in corporate America, Schultz describes the elaborate schemes by which employers have gutted workers’ pension plans and retiree health care to finance downsizings, boost corporate profits and, in many cases, pay for the obscenely generous benefits of top managers and executives.

 

She describes how some companies have transformed their pensions into “cash-balance plans,” presented as a change that will benefit employees, when in fact cash-balance plans are a way to disguise retroactive pension cuts. A similar scheme called the “pension equity plan” also enables employers to cut workers’ pension benefits; the calculations are so complex that most employees don’t realize they’ve been fleeced until they’re about to retire. These and other innovative ways of robbing workers have been developed by what she calls “a new breed of benefits consultants” that emerged over the past two decades, who specialize in cutting retirement benefits for ordinary employees while boosting executive compensation.

The many complicated and sinister schemes to loot retirement benefits that Schultz describes can be depressing and mind- boggling to follow. She humanizes these stories by introducing us to individual retirees who were the victims of these plots, who struggled for months or years to even grasp what was happening to them. Some of these people fought back, in some cases achieving limited success, but often failing in a system of “benefits law” which the corporations have largely rigged in their own favor.

The book deals with the looting of pensions in the private, corporate sector. But in the final pages she says a few words about the developing crisis of public employee pension plans. The same consultants and financial firms who engineered the pillage of private pensions, she writes, are now playing “a non-starring role in the public pension debacle.” She adds:

“The scapegoat game continues. Corporate employers are still blaming aging workers, rising ‘legacy costs’ and ‘spiraling’ retiree health care costs for their financial woes – not their own actions that squandered billions of dollars in pension assets, their thinly-masked desire to convert benefits earned by and promised to retirees into profits for executives and shareholders, and their willingness to sacrifice retiree plans, and the well being of retirees, for short-term gains.

“In the public plan sector, the scapegoats are the public employees and retirees, who are beginning to have the haunted look of victims of the Salem witch hunts. The real culprits are the self-serving politicians and officials who passed the funding buck to future generations, the consulting firms that helped them do this, and the investment banks that conned local governments into investing taxpayer-funded pensions into risky, abusive investments. ”

What’s the answer? Schultz calls for tightening laws to stop many of the abuses she’s uncovered. “Pension law requires that the plan be managed for the ‘exclusive benefit’ of the participants, ” she writes, but the law “is like a toothless dog.” She wants “laws that make it tougher for companies to terminate their pensions to capture the surplus money,” and tightening of loopholes that enable corporate executives to divert the money in pension and retiree health plans.

While the reforms she proposes would help protect those workers and retirees who still have defined benefit pensions and retiree healthcare, they could not help the millions who have already lost these benefits. Because Schultz’s scope is limited to the past two or three decades, she does not look back to the origins of employer-based pensions, and therefore misses the underlying problem.

Social Security, as originally conceived by members of President Franklin Roosevelt’s Committee on Economic Security in 1934 and ’35, was intended to provide full retirement security as well as “all forms of social insurance” – health insurance, accident insurance, unemployment benefits, maternity benefits, etc. To get the original Social Security Act through Congress in 1935, Roosevelt scaled back these goals (National healthcare was left out of the bill, for example, and agricultural and domestic workers were excluded, which left out half of the African American workforce.) New Dealers planned to broaden the concept and coverage of Social Security in later amendments. But by the late ’30s life insurance companies, which devised and marketed pension plans to employers (then generally covering only high-paid managerial employees) had gained political traction for the idea of “supplementation. ” This was the notion that Social Security should provide only a minimal, subsistence retirement benefit, to be “supplemented” by employer pensions, savings and other income.

After World War II, with the failure of efforts to expand Social Security’s coverage of retirement and healthcare, unions turned, often reluctantly, to bargaining pensions and health insurance with employers. (An excellent history of these developments is Jennifer Klein’s 2003 book, For All These Rights: Business, Labor and the Shaping of America’s Public-Private Welfare State.

The system of employer-based pensions and health insurance “supplementing” Social Security was never complete – even in the boom years of the 1950s and ’60s, huge sections of the working class had no pensions or health coverage. In our time, we’re witnessing the collapse of that system, with healthcare becoming unaffordable even with insurance, and defined-benefit pensions rapidly disappearing. Retirement Heist is a very important indictment of corporate America’s looting of its workers’ retirement funds. It is further evidence that we need to return to the vision of 1935:

Retirement and healthcare are much too important to be entrusted to employers, and must instead be guaranteed by the federal government as human rights.

Excerpts

Siphon

In November 1999, a group of the nation’s leading pension experts met at the Labor Department in Washington to discuss a $250 billion problem. After eight years of double-digit returns, the pension plans at American corporations had more than a quarter of a trillion dollars in excess assets. Not a shortage of assets. Excess assets. At some companies, the surpluses had reached almost laughable levels: $25 billion at GE; $24 billion at Verizon; $20 billion at AT&T; $7 billion at IBM.

One might expect that such lush asset balances would be something to celebrate. Many employers hadn’t contributed a dime to the plans since the 1980s, yet they still had enough money to cover the pensions of all current and future retirees even if they lived to be 100. With so much money, the plans would cost the companies nothing for years to come. But employers weren’t celebrating. The money was burning a hole in their pockets.

————

Today the giant surpluses are gone: sold, traded, siphoned, diverted to creditors, used to finance executive pay, parachutes, and pensions. But you’d think the employers had nothing to do with it. Companies blame investment losses for their plight, as well as their aging workforces, union contracts, regulation, and global competition. But their funding problems were largely self-inflicted. Had they not siphoned off the assets, they would have had a cushion that could have withstood even the market crash that troughed in March 2009. Nonetheless, employers continue to lobby for more liberal rules that would enable them to withdraw more of the assets to pay other things. Meanwhile, their solution when funds run low remains the same: Cut pensions.

The Heist

In 1997, Cigna executives held a number of meetings to discuss their pension plan. At the time, the plan was overfunded, but executives weren’t satisfied and suggested cutting the pensions of 27,000 employees in an effort to boost the earnings they could report on their bottom line. The only problem? How to cut people’s pensions—especially those for long-tenure employees over forty—by 30 percent or more, without anyone noticing?
Cigna was just the latest of hundreds of large companies, including Boeing, Xerox, Georgia-Pacific, and Polaroid, that had already gone through this charade in the 1990s.

These companies had something in common: They all had large aging workforces—with tens of thousands of employees who had been on the job for twenty to thirty years. These workers were entering their peak earning years, and with traditional pensions that are calculated by multiplying years of service by one’s annual salary, their pensions were about to spike. With the leverage of traditional pension formulas, as much as half an employee’s pension could be earned in his final five years. In short, millions of workers were about to step onto the pension escalator. Financially, that wasn’t a problem. Companies, including Cigna, had set aside plenty of money to pay their pensions, so having a large cohort of aging workers didn’t put the companies in peril. ..

The problem, from the employers’ perspective, was that it would be a shame to pay out all that money in pensions when there were so many other useful ways it could be put to use for the benefit of the companies themselves.

Laying people off was one way to keep pension money in the plan. When people leave, their pensions stop growing, and if this happens just when employees’ pensions are poised to spike, all the better. In the 1990s, companies purged hundreds of thousands of middle-aged workers from the payrolls at telephone companies, aerospace and defense contractors, manufacturers, pharmaceutical companies, and other industries, reducing future pension outflows by billions of dollars.

Employers couldn’t lay off every middle-aged worker, of course, but there were other ways to slow the pension growth of those who remained. They could cut pensions, but there were certain constraints. Pension law prohibits employers from taking away pensions being paid out to retirees, and employers can’t rescind benefits its employees have locked in up to that point. But they can stop the growth, by freezing the plans, or slow it, by switching to a less generous formula.

That was the route Cigna took. The company estimated that the move would cut benefits of older workers by 40 percent or more, which meant that as much as $80 million that had been earmarked for their pensions would remain in the plan. The challenge was how to cut pensions without provoking an employee uprising. Pushing people off the pension escalator just when they’re about to lock in the fruits of their long tenure would be like telling a traveler that his nearly one million frequent flier miles were being rescinded—they weren’t going to like it.

Cigna’s solution to this communications challenge? Don’t tell employees. In September 1997, consulting firm Mercer signed a $200,000 consulting contract to prepare the written communication to Cigna employees, describing the changes without disclosing the negative effects. One of these was a benefits newsletter Cigna sent employees in November 1997, entitled “Introducing Your New Retirement Program.” On the front, “Message from CEO Bill Taylor” declared: “I am pleased to announce that on January 1, 1998, CIGNA will significantly enhance its retirement program.” “These enhancements will make our retirement program highly competitive.”

The newsletter told employees that “the new plan is designed to work well for both longer- and shorter-service employees,” provides “steadier benefit growth throughout [the employee’s] career,” and “build[s] benefits faster” than the old plan. “One advantage the company will not get from the retirement program changes is cost savings.” In formal pension documents it later distributed, Cigna reiterated that employees “will see growth in [their] total retirement benefits every year.”

The communications campaign was successful: Employees didn’t notice that their pensions were being frozen, and didn’t complain. “We’ve been able to avoid bad press,” noted Gerald Meyn, the vice president of employee benefits, in a memo three months after the pension change. “We have avoided any significant negative reaction from employees.” In the margins next to these statements, the head of Cigna’s human resources department, Donald M. Levinson, scribbled: “Neat!” and “Agree!” and “Better than expected outcome.”

When employees made individual inquiries, Cigna had an express policy of not providing information. “We continue to focus on NOT providing employees before and after samples of the pension plan changes,” an internal memo stresses. When employees called, the HR
staff, working with scripts, deflected them with statements like “Exact 02 comparisons are difficult.”

Cigna wasn’t the only company deceiving employees about their 04 pension cuts, and actuaries who helped implement these changes were concerned, because federal pension law requires employers to notify employees when their benefits are being cut. At an annual actuarial industry conference in New York later that year, the attendees discussed how to handle this dilemma. The recommendation: Pick your words carefully. The law “doesn’t require you to say, ‘We’re significantly lowering your benefit,’” noted Paul Strella, a lawyer with Mercer, which had advised Cigna when it implemented a cash-balance plan earlier that year. “All it says is, ‘Describe the amendment.’ So you describe the amendment.”

Kyle Brown, an actuary at Watson Wyatt, reiterated that point: “Since the [required notice] doesn’t have to include the words that ‘your rate of future-benefit accrual is being reduced,’ you don’t have to say those magic words. You just have to describe what is happening under the plan. . . . I wouldn’t put in those magic words.”

Just to make sure the message had sunk in, in December 1998, Cigna sent employees a fact sheet stating that the objectives for introducing the new pension plan were to:

  • Deliver adequate retirement income to Cigna employees
  • Improve the competitiveness of our benefits program and thus
    improve our ability to attract and retain top talent
  • Meet the changing needs of a more mobile employee workforce, and
    provide retirement benefits in a form that people can understand.

The letter went on to say that “Cigna has not reduced the overall amount it contributes for retirement benefits by introducing the new Plan, and the new Plan is not designed to save money.”

This was true, literally. Cigna had indeed not reduced the overall amounts it contributed for retirement benefits. It had lowered the benefits for older workers and increased benefits for younger workers (slightly) and for top executives (significantly). Looked at this way, the plan wasn’t designed to save money, just redistribute it.

The communications campaign was successful. Janice Amara, a longtime Cigna employee, didn’t learn that she had not actually been receiving any additional benefits until September 2000, when she ran into Cigna’s chief actuary, Mark Lynch, at a farewell party for two other Cigna employees. “Jan, you would be sick if you knew” how Cigna was calculating her pension, she recalled him telling her. “Frankly, I was sick when I heard this,” Amara said. Under Cigna’s new pension formula, Amara’s pension would effectively be frozen for ten years.

Posted in Ponzi Schemes | Tagged | Comments Off on How Companies Plunder and Profit From the Nest Eggs of American Work

Why Treasury Bills are likely to be safe for at least a few years

Posted on May 1, 2014 by

my comment: SHORT-TERM 4-week or 13-week treasury BILLS that is

Apr 19, 2012   Ilargi at the automaticearth.com

Mauldin: unproductive government debt is killing us. So we either make some big, tough collective decisions, and make them soon; or we come to the “bang point” documented by Reinhart and Rogoff, where the bond market no longer believes the US will pay its bills. Europe and Japan will get there before we do, but the writing is on the wall: we must get our national-deficit act together.

Ilargi: I don’t think Reinhart and Rogoff ‘s bang point is near for the US. There are many countries in line before the US to reach their bang point. But the issue of accumulating additional debt in order to make matters look better today in exchange for worse conditions tomorrow, stands. For every country. It’s madness that originates in the human talent for discounting the future.

It seems obvious that “the grinding halt” will be reached sooner in Greece, Spain, Italy, etc., than it will in America.

Selling Treasuries, therefore, will be easy for the US for a while to come. Increasingly easy even. A lot of money will be looking for a safe haven. America will be perceived as that safe haven, simply because it is the least worst option. The US dollar will rise substantially because of this, as well as the fact that most international debt is denominated in US dollars, which will greatly raise demand.

Talk of hyperinflation is, as a consequence of this, greatly exaggerated. The American government is as addicted to credit as any government is, and its continuing access to bond markets will make printing money a non-issue, since it would only serve to raise interest rates.

The US is in dire straits. Just not as dire as many other nations. For the moment.

Feb 2, 2012  Ilargi at theautomaticearth:

The Treasury Borrowing Advisory Committee has unanimously recommended that the Treasury officially allow investors to bid negative rates at bill auctions (see Treasury may let investors pay to lend to U.S. government for details).

We have now reached the stage where the return of capital, rather than return on capital, takes precedence over everything else.

So even if you lose some money on treasuries, it’s still a good deal, because as in 2008, all other assets than cash will drop EVEN MORE.

All of this, of course, is a way to extend the USD-based sovereign debt ponzi for a few more years, and will make the collapse that much more painful when it occurs. For now, though, everyone must pay the global Mafia Don protection money to stay safe from the credit contraction monster.

 

May 10, 2011   http://theautomaticearth.blogspot.com/

Ashvin Pandurangi: Jumping the Treasury Shark

By now, it is is painfully obvious that the U.S. economy is not going to “recover” and that its fiscal situation will continue to deteriorate over the next few years, at least to those of us who value being truthful to ourselves. This will happen regardless of how much chatter is generated by the politicians about “fiscal responsibility” and the importance of reducing the deficit, or an imminent “government shutdown”. That begs the question of what will actually happen to the U.S. treasury market and the dollar as a “store of value” during this time.

Treasuries and dollars are ultimately driven by the forces of supply and demand, just like all other ones. Their supply will be plentiful, as the federal government generates new credit to fund the increasing gap between tax revenues and spending, so the question is whether there will be enough demand to meet the supply. The answer to that question is not as simple as determining whether rational investors will maintain their confidence in the U.S. treasury market and place their limited capital at its feet.

Your average financial investors (individuals, asset managers) are, A, not rational, and B, not the only source of support of support for the market. The latter is clear enough from the fact that the Federal Reserve, a privately-owned institution with no actual reserves, is now the largest creditor of the federal government, as its treasury holdings surpassed those of China earlier this year.

The Fed (along with a few other central banks and the IMF) is merely a front for a cartel of major financial institutions that are primarily located in the U.S., Japan and Europe, as well as other multinational corporations that work with them to maintain their operations.

These institutions, unlike the average and irrational financial consumer, will not necessarily throw their support behind the treasury market out of panic or fear of a worsening global economy. If they choose to continue “investing” in U.S. treasuries, it will be a calculated decision that is based on what they believe is the best method of preserving their wealth and power.

It is obvious to even the mainstream financial world that the public bond markets of the EU (and possibly the UK) and Japan are not going to last much longer, so those investments are not really options at all.

The choice they face can be analogized to the choice faced by a middle-class entrepreneur with a relatively profitable business operation in his home country. Although the businessman may be getting anxious about the market for his products and his ability to continue generating revenues and profits, he is also very experienced at operating the company in its current environment, with his current clients and his traditional methods of conducting business.

The market for his products may indeed by on the verge of collapse, but he cannot be sure that a similar market in another artificially-created jurisdiction would be any healthier for his business. On top of that, his family and friends all live in the jurisdiction where the business currently operates, and the businessman is very familiar with his local clients and his community.

There is no guarantee that a smaller market in another community would even be able to accommodate the scale at which he is used to operating his business, or that new clients there would be able or willing to entertain his services. Ultimately, the physical, financial and psychological costs of such a dramatic switch do not appear to be worth the trouble for the businessman. He decides to simply continue running his local business and hoping or praying for the best possible outcome.

Are the major financial players, who hold trillions of their net worth in dollar-denominated debt-assets, any different from the hypothetical businessman above? Perhaps they have a degree of more flexibility in their decision-making process and significantly more resources to help them decide, but they are also slaves to tradition and the human tendency of sticking to what they know.

The debt-dollar markets (equity markets, commodity markets, real estate markets, bond markets), already systematically entrenched around the world, combined with the “full faith and credit” of the federal government and the Fed’s unrestricted license to generate credit with the push of a button, tilt the scales in favor of sticking it out with the U.S. treasury market and currency. There are certainly alternative courses of action at the disposal of the wealthiest institutions in the world, but they are all a far sight short of being attractive.

One alternative plan would be to begin dumping all of these debt-assets on some clueless investors and taxpayers (via government programs such as TARP) and use the freed up capital to invest in hard assets (land, gold, oil, grains, etc.) and/or perhaps in the “emerging markets” of India, Brazil, China, etc. Personally, if I somehow ended up in the wacky world of financial elites, where priority #1 is to protect ungodly amounts of wealth and political power during a global economic depression, then I would dismiss this alternative as soon as it was presented to me.

The plan would have numerous flaws, some of which are too complex to even predict, but my general line of thinking could be summed up by comparing a few statistics and conducting a simple analysis.

  • The global bond market was valued at $91 trillion as of 2009, and the U.S. treasury market accounts for almost 8% of that value. [1].
  • The “over-the-counter” derivatives market was notionally valued at $615 trillion as of 2009, with interest rate derivatives accounting for 70% of that value, and 32% of those being directly sensitive to the value of the U.S. dollar and rates on the U.S. treasury curve. [2].
  • The U.S. has the first and third-largest equity markets in the world, and they combine to have a market capitalization of about $15 trillion, which also equals the total capitalization of the other eight markets in the largest ten. [3].
  • About 5.3 billion troy ounces of gold have been mined in human history as of 2009, and gold is currently selling at record prices, for about $1450/oz.
  • There are less than 10 billion acres of arable land on Earth, and some of the most expensive farmland in the U.S. averaged about $2K/acre in 2006.[4],[5].

Average consumers of financial products in the developed world simply do not have enough capital to buy up a significant portion of the dollar-denominated debt-assets that the elites would like to dump, especially when those assets are “officially” marked as being much more valuable than they really are. Foreign governments, of course, can barely afford to finance their own operations, let alone pour additional funds into U.S. treasuries. The same is true of institutional asset managers (pension funds, mutual funds, etc.) who may have rebounded a bit of business activity since 2007-08, but are still teetering on the edge of destruction from quarter to quarter, not knowing whether they will record a profit or a digital suicide note when the next one comes around.

These institutions may be willing to aid the elites in transferring worthless mortgage and equity instruments to average workers and taxpayers through government directives, pension plans and mutual funds, but they simply do not have the free capital to do the same for U.S. treasuries. That is truly the limiting factor, as the U.S. treasury market and its sprawling derivatives contract extensions make the stock market look like a penny-ante game of Bingo at Uncle Sam’s Fiesta Rancho Casino.

Regular old investors or fund managers with modest stock portfolios and limited capitalization cannot absorb the behemoth treasury market at full value, or anything close to it. Even if they could, where would the elites take the dollars that they received in exchange? The exact same problems described above apply to farmers, miners, manufacturers, etc. who work, invest and deal in the markets for hard assets. Besides, there is no need to pay people for their gold, land or oil when you can just take it by brute military force.

And that’s really the beauty of the debt-dollar system for the financial elites. It is globally established and it comes with the implicit understanding that, if you buck the system, there will be a fiery dose of hell to pay. These elites have all the time and resources they need to abandon the current system and down-size from the Yukon Denali to the Ford Focus, but the word “sacrifice” isn’t a part of their vocabulary. Instead, they will fight hard to keep the system functioning in whatever form they can manage, as long as it remains at the same scale of operation.

They are not under the illusion that the U.S. treasury or currency market are sparkly diamonds in the rough, or even shined shit in the land of fool’s gold. Fundamentally, the dollar is no healthier than the euro and they know it. The choice, however, is whether to wholly abandon the treasury shell game between the federal government, the Fed and private banks or to keep a good thing going while it seems to be working. They are banking on the Fed’s monetary operations, political illusions (the appearance of two parties working towards reducing the deficit), panicked “flights to safety” and a little bit of luck to preserve the debt-dollar system until global markets “reset” and economies begin to grow once again.

Perhaps they will keep other options open, as lifeboats to hop into in the last second before the Treasury Titanic is fully submerged. The problem for them is that such backup options never really end up working out as planned, especially when time is not on the same side as you are. It is also a distinct possibility that, despite what anyone wants or plans, the treasury market will blow its lid sky high next month or the month after. Possible, but not very likely, given the current situation in global bond markets and the “full court press” that is being launched by the elites. Personally, I give the treasury market and the dollar at least a few more years before their shine truly wears off, and the fan has its way with them.

Posted in Investing advice, Money | Comments Off on Why Treasury Bills are likely to be safe for at least a few years

After a nation crashes it can’t afford oil, collapse happens FAST

Posted on May 1, 2014 by

Why fixing energy policy is so difficult

April 25, 2011 by

Everyone would like to fix the US energy policy, but doing so is almost impossible, in my view, because we need to be planning for a much bigger change than most people can even imagine.

It seems to me that our international financial system is at this point, inching closer and closer to collapse. It needs growth to operate. Now that world oil supplies are virtually flat, and China and India and oil exporters are getting more of the oil, the financial system can’t get enough growth momentum.

The US has applied various sleight of hand techniques to try to cover this problem (see my post What’s Behind US Budget Problems?), but at some time in the not too distant future, the techniques are going to stop working, and there is going to be a major financial crash, with debt defaults. This could happen when QE2 ends, or maybe QE3, QE4, or QE5. The timing may vary by country, with some countries holding out for a while longer.

The reason I point this out is because after such a crash, as far as I can see, everything is going to go downhill quickly. This is a graph of my view of one such scenario of oil supplies, if a country that imports all its oil undergoes such a collapse:

 

The point is that the oil consumption goes down very quickly, not over a period of many years, because the decline in supply is determined by something quite different from what oil is in the ground–it is determined by ability to pay for the oil.

A potential buyer can be cut off very quickly, if its credit is no good.

We have gotten used to the idea of being able to keep running a tab, but at some point, this whole process is likely to come to a halt–something that can’t go on forever, won’t. Some international trade may continue, especially when a country has goods to trade for oil (rather than an IOU), but the level of free trade we have now can’t be expected to continue indefinitely.

The problem I see with a collapse scenario is that a plan that uses less oil and tries to make it go farther really isn’t helpful. Thus, a gas tax, or cap-and-trade, or fuel-efficient cars, or more fossil fuel extenders like wind and solar PV really aren’t helpful.

Instead, we need to put our effort into figuring out how we would get along without fossil fuels and nuclear, rather than get along with less.

We may have some supply for a while, but if we do, we need to use it to help with the transition, not to expect such supply to continue forever.

This is the big problem I have with energy policies and transition plans–they assume we are planning for a slow decline, when it is likely that we will not have such a decline.

In the case of an oil producer rather than an oil importer, perhaps the situation is better, but even here, there is a question of how much will continue to be produced, if there is major political upheaval. We know that the USSR broke up at the time of its collapse. There would seem to be a substantial chance of that happening elsewhere.

Everyone would like to add new and more complex systems to help–for example, more wind with upgraded transmission systems, smart grids, and electric cars. As nice as these might seem, the new systems become more and more complex, and more dependent on everything working together exactly correctly. As we lose ability to import spare parts, they will become very difficult to maintain, and will likely collapse within a few years. While they seem appealing, I don’t think they will add very much for very long.

Moving to a new system will require a lot of other changes:

1. A different financial system, that is not dependent on debt and growth.
2. More even distribution of incomes. With much less wealth, it won’t make sense for a few to have such a disproportionate share.
3. More even distribution of land. Without fossil fuels, it will not be possible to farm nearly as large plots. This also goes with more even distribution of wealth.

Changes such as these would be very difficult to make within our current structure. But without making such changes as well, it is hard to see that the new system would work.

Posted in Gail Tverberg, Oil Shocks | Comments Off on After a nation crashes it can’t afford oil, collapse happens FAST