David Pimentel: Last orders please … room is running out at the global dinner table

Last orders please … room is running out at the global dinner table

by Dr David Pimentel, professor of ecology and agricultural science at Cornell University, New York, Sydney Morning Herald, 12/07/2002, p 11, edited transcript of two speeches given in Australia, July, 2002.

With the world’s population jumping by 250,000 every day, argues David Pimentel, firm action is needed quickly.

I’ve been trying to save the world for the past 50 years and I’m not doing too good a job. The problems are getting worse.

The freedom to reproduce is creating problems for other freedoms: from poverty, from disease, from malnutrition and from environmental problems.  And it has an impact on our democratic freedoms, because each new person in a democracy dilutes our vote and our views.

Trying to limit population growth will have a significant impact on social structure and the economy. However, allowing the population to continue to grow will have significantly more social and environmental impacts.

Each day, about 250,000 people are added to the 6 billion who exist. Yet the availability of natural resources food, fresh water, quality soil, energy and biodiversity are being degraded and depleted. The world’s population is more than 6.2 billion. It doubled during the past 45 years, and is projected to double again within 50 years.

 

Even now, as the human population continues to increase and expand its activities, including transport systems and urbanisation, vital cropland is being lost to production. The growing shortage of cropland is one of the underlying causes of worldwide food shortages and poverty.

 

Globally, the annual loss of land to urbanization and highways ranges from 10 million to 35 million hectares (about 1 per cent) a year, half from cropland. As a result, the average per capita cropland, worldwide, has diminished to about a quarter of a hectare, or about half the amount needed to provide diverse food supplies similar to those enjoyed in the US and Europe.

Worldwide, more than 10 million hectares of productive arable land are degraded and abandoned each year. To compensate, about 10 million hectares  of new land must be put into production each year, most coming from the world’s forest areas. This urgent need to feed people accounts for more than 60% of the deforestation occurring worldwide.

As well, per capita fresh water supplies are declining. Water demands far exceed supplies in nearly 80 nations. For instance in China, more than 300 cities suffer from inadequate water supplies, and the problem is intensifying as the population increases.

Water and fossil fuel supplies are emerging as a major constraint on food production, too.

If all people are to be fed adequately and equitably, we must have a gradual transition to a global population of 2 billion. A population policy ensuring that each couple produces an average of only 1.5 children would be necessary. If this were implemented, more than 100 years would be required to make the adjustment.

 

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The congressional report on “The Financial Crisis” and what happened

The Financial Crisis Inquiry Report. Final Report of the national Commission on the Causes of the Financial and Economic Crisis in the United States

2011. Phil Angelides Chairman, Brooksley Born Commissioner, Senator Bob Graham Commissioner, etc.

This is the best written, easy to understand explanation of how the financial crisis happened I’ve read. To explain how the crisis happened, you’ll also learn a lot about the history of our financial system, as well as very good explanations of what derivatives, subprime mortgages, collateralized debt obligations, and the other financial instruments of destruction.    

CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION

This financial crisis was avoidable

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags.

The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk.

Widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets

The sentries were not at their posts, in no small part due to the widely accepted faith in the self- correcting nature of the markets and the ability of financial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor

We do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not. In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles.

As the report will show, the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products. It did not surprise the Commission that an industry of such wealth and power would exert pressure on policy makers and regulators. From 1999 to 2008, the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions. What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.

Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis

There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding.

large investment banks and bank holding companies focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products.

The CEO of Citigroup told the Commission that a $40 billion position in highly rated mortgage securities would “not in any way have excited my attention,” and the co- head of Citigroup’s investment bank said he spent “a small fraction of 1%” of his time on those securities. In this instance, too big to fail meant too big to manage.

Financial institutions and credit rating agencies embraced mathematical models as reliable predictors of risks, replacing judgment in too many instances. Too often, risk management became risk justification

Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences. Often, those systems encouraged the big bet—where the payoff on the upside could be huge and the down- side limited. This was the case up and down the line—from the corporate boardroom to the mortgage broker on the street.

Our examination revealed stunning instances of governance breakdowns and irresponsibility. You will read, among other things, about AIG senior management’s ignorance of the terms and risks of the company’s $79 billion derivatives exposure to mortgage-related securities; Fannie Mae’s quest for bigger market share, profits, and bonuses, which led it to ramp up its exposure to risky loans and securities as the housing market was peaking; and the costly surprise when Merrill Lynch’s top management realized that the company held $55 billion in “super-senior” and supposedly “super-safe” mortgage-related securities that resulted in billions of dollars in losses.

a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.

In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly. For example the five major investment banks—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with extraordinarily thin capital. By one measure, their leverage ratios were as high as 40 to 1, meaning for every $40 in assets, there was only $1 in capital to cover losses. Less than a 3% drop in asset values could wipe out a firm. To make matters worse, much of their borrowing was short-term, in the overnight market—meaning the borrowing had to be renewed each and every day. For example, at the end of 2007, Bear Stearns had $12 billion in equity and $384 billion in liabilities and was borrowing as much as $70 billion in the overnight market.

The leverage was often hidden—in derivatives positions, in off-balance-sheet entities, and through “window dressing” of financial reports available to the investing public.

The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of 2007, Fannie’s and Freddie’s combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1.

Financial firms were not alone in the borrowing spree: from 2001 to 2007, national mortgage debt almost doubled, and the amount of mortgage debt per house- hold rose more than 63% from $149,500 while wages were stagnant. When the housing downturn hit, heavily indebted financial firms and families alike were walloped.

Within the financial system, the dangers of this debt were magnified because transparency was not required or desired. Massive, short-term borrowing, combined with obligations unseen by others in the market, heightened the chances the system could rapidly unravel. In the early part of the 20th century, we erected a series of protections—the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations—to provide a bulwark against the panics that had regularly plagued America’s banking system in the 19th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system—opaque and laden with short-term debt—that rivaled the size of the traditional banking system. Key components of the market—for example, the multi-trillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives—were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards.

The government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.

Key policy makers—the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York—who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008. Other agencies were also behind the curve. They were hampered because they did not have a clear grasp of the financial system they were charged with overseeing, particularly as it had evolved in the years leading up to the crisis. This was in no small measure due to the lack of transparency in key markets. They thought risk had been diversified when, in fact, it had been concentrated. Time and again, from the spring of 2007 on, policy makers and regulators were caught off guard as the contagion spread, responding on an ad hoc basis with specific programs to put fingers in the dike. There was no comprehensive and strategic plan for containment, because they lacked a full understanding of the risks and interconnections in the financial markets.

There was a systemic breakdown in accountability and ethics

As has been the case in past speculative booms and busts—we witnessed an erosion of standards of responsibility and ethics that exacerbated the financial crisis. This was not universal, but these breaches stretched from the ground level to the corporate suites. They resulted not only in significant financial consequences but also in damage to the trust of investors, businesses, and the public in the financial system.

The percentage of borrowers who defaulted on their mortgages within just a matter of months after taking a loan nearly doubled from the summer of 2006 to late 2007. This data indicates they likely took out mortgages that they never had the capacity or intention to pay. You will read about mortgage brokers who were paid “yield spread premiums” by lenders to put borrowers into higher-cost loans so they would get bigger fees, of- ten never disclosed to borrowers. The report catalogs the rising incidence of mort- gage fraud, which flourished in an environment of collapsing lending standards and lax regulation. The number of suspicious activity reports—reports of possible financial crimes filed by depository banks and their affiliates—related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $112 billion.

collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.

When housing prices fell and mortgage borrowers defaulted, the lights began to dim on Wall Street. This report catalogs the corrosion of mortgage-lending standards and the securitization pipeline that transported toxic mortgages from neighborhoods across America to investors around the globe. These trends were not secret. As irresponsible lending, including predatory and fraudulent practices, became more prevalent, the Federal Reserve and other regulators and authorities heard warnings from many quarters. Yet the Federal Reserve neglected its mission “to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.” The Office of the Comptroller of the Currency and the Office of Thrift Supervision, caught up in turf wars, preempted state regulators from reining in abuses.

over-the-counter derivatives contributed significantly to this crisis. The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis. From financial firms to corporations, to farmers, and to investors, derivatives have been used to hedge against, or speculate on, changes in prices, rates, or indices or even on events such as the potential defaults on debts. Yet, without any oversight, OTC derivatives rapidly spiraled out of control and out of sight, growing to $673 trillion in notional amount. This report explains the uncontrolled leverage; lack of transparency, capital, and collateral requirements; speculation; interconnections among firms; and concentrations of risk in this market.

OTC derivatives contributed to the crisis in three significant ways. First, one type of derivative—credit default swaps (CDS)—fueled the mortgage securitization pipeline. CDS were sold to investors to protect against the default or decline in value of mortgage-related securities backed by risky loans. Companies sold protection—to the tune of $79 billion, in AIG’s case—to investors in these newfangled mortgage securities, helping to launch and expand the market and, in turn, to further fuel the housing bubble.

Second, CDS were essential to the creation of synthetic CDOs. These synthetic CDOs were merely bets on the performance of real mortgage-related securities. They amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and helped spread them throughout the financial system. Goldman Sachs alone packaged and sold $73 billion in synthetic CDOs from 2004 to 2007.

Finally, when the housing bubble popped and crisis followed, derivatives were in the center of the storm. AIG, which had not been required to put aside capital re- serves as a cushion for the protection it was selling, was bailed out when it could not meet its obligations. The government ultimately committed more than $180 billion because of concerns that AIG’s collapse would trigger cascading losses throughout the global financial system. In addition, the existence of millions of derivatives con- tracts of all types between systemically important financial institutions—unseen and unknown in this unregulated market—added to uncertainty and escalated panic, helping to precipitate government assistance to those institutions.

The failures of credit rating agencies were essential cogs in the wheel of financial destruction

The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar. From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A. This compares with six private-sector companies in the United States that carried this coveted rating in early 2010. In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every working day. The results were disastrous: 83% of the mortgage securities rated triple-A that year ultimately were downgraded. You will also read about the forces at work behind the breakdowns at Moody’s, including the flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight. And you will see that without the active participation of the rating agencies, the market for mortgage-related securities could not have been what it became.

How the Shadow Banking system arose

For most of the 20th century, banks and thrifts accepted deposits and loaned that money to home buyers or businesses. Before the Depression, these institutions were vulnerable to runs, when reports or merely rumors that a bank was in trouble spurred depositors to demand their cash. If the run was widespread, the bank might not have enough cash on hand to meet depositors’ demands: runs were common be- fore the Civil War and then occurred in 1873, 1884, 1890, 1893, 1896, and 1907. To stabilize financial markets, Congress created the Federal Reserve System in 1913, which acted as the lender of last resort to banks.

But the creation of the Fed was not enough to avert bank runs and sharp contractions in the financial markets in the 1920s and 1930s. So in 1933 Congress passed the Glass-Steagall Act, which, among other changes, established the Federal Deposit Insurance Corporation. The FDIC insured bank deposits. Depositors no longer needed to worry about being first in line at a troubled bank’s door. And if banks were short of cash, they could now borrow from the Federal Reserve, even when they could borrow nowhere else. The Fed, acting as lender of last resort, would ensure that banks would not fail simply from a lack of liquidity.

With these backstops in place, Congress restricted banks’ activities to discourage them from taking excessive risks, another move intended to help prevent bank fail- ures, with taxpayer dollars now at risk. Furthermore, Congress let the Federal Reserve cap interest rates that banks and thrifts—also known as savings and loans, or S&Ls— could pay depositors. This rule, known as Regulation Q, was also intended to keep institutions safe by ensuring that competition for deposits did not get out of hand

The system was stable as long as interest rates remained relatively steady, which they did during the first two decades after World War II. Beginning in the late-1960s, however, inflation started to increase, pushing up interest rates.

In the 1970s, Merrill Lynch, Fidelity, Vanguard, and others persuaded consumers and businesses to abandon banks and thrifts for higher returns.

These funds differed from bank and thrift deposits in one important respect: they were not protected by FDIC deposit insurance. Nevertheless, consumers liked the higher interest rates, and the stature of the funds’ sponsors reassured them. The fund sponsors implicitly promised to maintain the full ?? net asset value of a share. The funds would not “break the buck,” in Wall Street terms. Even without FDIC insurance, then, depositors considered these funds almost as safe as deposits in a bank or thrift. Business boomed, and so was born a key player in the shadow banking industry, the less-regulated market for capital that was growing up beside the traditional banking system. Assets in money market mutual funds jumped from $3 billion in 1977 to $1.8 trillion in 2000.

To maintain their edge over the insured banks and thrifts, the money market funds needed safe, high-quality assets to invest in, especially “commercial paper”, i.e. loans to corporations, and repo (see page 60 for details).

The new parallel banking system—with commercial paper and repo providing cheaper financing, and money market funds providing better returns for consumers and institutional investors—had a crucial catch: its popularity came at the expense of the banks and thrifts. Some regulators viewed this development with growing alarm. According to Alan Blinder, the vice chairman of the Federal Reserve said, “We were concerned as bank regulators with the eroding competitive position of banks, which of course would threaten ultimately their safety and soundness, due to the competition they were getting from a variety of nonbanks—and these were mainly Wall Street firms, that were taking deposits from them, and getting into the loan business to some extent. So, yeah, it was a concern; you could see a downward trend in the share of banking assets to financial assets.

Banks argued that their problems stemmed from the Glass-Steagall Act. Glass-Steagall strictly limited commercial banks’ participation in the securities markets, in part to end the practices of the 1920s, when banks sold highly speculative securities to depositors.

Bank supervisors monitored banks’ leverage—their assets relative to equity— because excessive leverage endangered a bank. Leverage, used by nearly every financial institution, amplifies returns. For example, if an investor uses $100 of his own money to purchase a security that increases in value by 10%, he earns $10. However, if he borrows another $900 and invests 10 times as much ($1,000), the same 10% increase in value yields a profit of $100, double his out-of-pocket investment. If the investment sours, though, leverage magnifies the loss just as much.

If you’re interested in reading more about why and how the shadow banking system got into problems, see pages 62 through 66.  And then continue onwards into the giant mess of derivatives and all the other corruption referred to in the conclusions section above.

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Republicans have righteous minds? Really? Book review of the “Righteous Mind”

Preface. Although I liked this book, I found other books on far better and more profound.

Garcia and Shermer deal with humanity as a species (Tomasello too, but he is hard to read and repetitious, find a book review), and Gelfand from the standpoint of culture. After all, the conservative tendency to hate change and settle on fixed, unchangeable points of view, and liking to be told what to do, are tendencies that go all the way back to the beginning of our species.  Conniff’s book is hilarious as he studies the rich from a scientific point of view.

  • Garcia, H. 2019. Sex, Power, and Partisanship. How evolutionary science makes sense of our political divide.  Prometheus.
  • M. Shermer. The Science of Good & Evil. Why People Cheat, Gossip, Care, Share, and follow the golden rule
  • Gelfand M (2018) Rule Makers, Rule Breakers: How Tight and Loose Cultures Wire Our World. Scribner.
  • R. Conniff. The Natural History of the Rich: A Field Guide
  • Wrangham R (2019) The Goodness Paradox: The Strange Relationship Between Virtue and Violence in Human Evolution
  • Tomasello M (2019) Becoming Human: A theory of ontogeny.

Book reviews. To some extent what is said about American Republicans applies to all conservative minds past and future

And other posts in the categories of politics here and religion here.

Alice Friedemann  www.energyskeptic.com Women in ecology  author of 2021 Life After Fossil Fuels: A Reality Check on Alternative Energy best price here; 2015 When Trucks Stop Running: Energy and the Future of Transportation”, Barriers to Making Algal Biofuels, & “Crunch! Whole Grain Artisan Chips and Crackers”.  Podcasts: Crazy Town, Collapse Chronicles, Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity

***

Jonathan Haidt. 2013. The Righteous Mind: Why Good People Are Divided by Politics and Religion.

Haidt states his reasons for writing this book as

  • To understand why we are so easily divided into hostile groups, each one certain of its righteousness.
  • To show why human nature is intrinsically moralistic, critical, and judgmental.
  • Our obsession with righteousness is part of our evolution, and enables us to cooperate in groups from tribes to nations, unlike any other animal on earth.
  • But we’re also doomed to conflict. Which is fine, it keeps competing ideas in balance
  • We reason morally to strategically argue for ourselves, to justify our actions, defend our group – not find the truth out
  • To change how you think about morality, politics, religion, and each other, whether you’re liberal or conservative, secular or religious.

This book is one of several I’ve read lately on cognitive bias.  Daniel Kahneman’s book “Thinking Fast and Slow” is one of the best introductions to this topic, Chris Mooney’s book “The Republican Brain” the most fun (see my review from April 2013), and this book the best description of how we’re ruled by the 99% of mental processes that occur outside of our conscious awareness.

Another central premise is that humans have six basic moral spheres, and which ones you subscribe to predict a lot about whether you have a liberal or conservative mind (as these terms mean in America).  Haidt is not writing just about democrats and republicans in America like Mooney is in “Republican Brain”, but seeks to make this idea of liberal and conservative mind a more universal concept across cultures and history.

In evolutionary terms, there’s our individual “selfish” nature, as well as a “higher” moral nature to cooperate with others in our group, fostering altruism and heroism within the group (as well as war and genocide towards other groups).  Darwin predicted that the most cohesive groups would triumph over groups of selfish individuals.

Haidt thinks that religion probably evolved to help bind groups together in communities that shared the same morals.  And once you join a group (such as the Democrats or Republicans), you become blind to the alternative moral worlds.

Haidt is a liberal who is interested in applying this understanding to helping Democrats win political elections.  He believes that democratic candidates don’t appeal enough to people’s moral values, unlike Republicans who know exactly how to push those buttons in the electorate.

Haidt has extensively studied thousands of responses to questionaires at his website and come up with six kinds of basic morals that apply to any human society:

  • Concern about harm and suffering
  • Fairness and injustice
  • Liberty
  • Loyalty
  • Authority
  • Sanctity

A key argument of his is that some liberals are “blind” to some of these morals, that it’s as if they can only taste sweet and salty substances, while conservatives can taste all of these.  When I’ve heard him interviewed on radio shows, I did not get it, but reading this book helps since he offers many examples.  If you can’t understand this point, then you won’t be able to understand your own righteous mind because it’s essential to realize that morality differs within societies.

The United States and Western Europe are extraordinary and unique in history because they’re oriented around individual rights, not communities.  They’ve done away with the rules that you’ll find in all other societies on earth – rules that anthropologists call “purity” and “pollution” – by which he means taboos about what you can eat, how boys become men, the large percentage of the Hebrew Bible devoted to “food, menstruation ,sex, skin, and handling of corpses”.

Societies above all must be ordered and stable, and there are only so many ways of doing this.  By far the majority now and in the past have put the needs of groups and institutions above individual rights.

Much of what Haidt writes about is how Westerners can see certain situations as permissible, but most other societies see the same situations as completely and unalterably wrong, because social conventions are moral issues, so violating them is wrong even if now one is harmed.   For example, if widows aren’t allowed to eat fish in India but one does, in America we would side with her as an individual, she should be able to eat anything she wants and cultures that prevent that are wrong since no one was harmed.  But in India, Hindus believe that fish is a “hot” food that will stimulate a widow’s sexual appetite, leading to sex with another man, which will offend the spirit of her dead husband and prevent her from reincarnating at a higher level.

Since trying to help liberals understand where conservatives are coming from is such a large part of his book, here are some cross-cultural examples between India & America:

Both Indians and Americans agree are wrong:

  • While walking, a man saw a dog sleeping on the road. He walked up to it and kicked it.
  •  A father said to his son, “If you do well on the exam, I will buy you a pen.” The son did well on the exam, but the father did not give him anything.

Americans: wrong    Indians: acceptable

  • A young married woman went alone to see a movie without informing her husband. When she returned home her husband said, “If you do it again, I will beat you black and blue.” She did it again; he beat her black and blue. (Judge the husband.)
  • A man had a married son and a married daughter. After his death his son claimed most of the property. His daughter got little. (Judge the son.)

Americans: acceptable   Indians: wrong

  • In a family, a twenty-five-year-old son addresses his father by his first name.
  • A woman cooked rice and wanted to eat with her husband and his elder brother. Then she ate with them. (Judge the woman.)

To further test this theory of differences in morality, Haidt made up stories where no one was harmed but that offended peoples sense of disgust and disrespect (such as a family eating a dog, but no one saw them do it).  Haidt found it interesting that the way in which the 38% who insisted wrong had been done did this by inventing victims.  When challenged, they said they knew it was wrong but couldn’t think of a reason why.

They were reasoning not to find the truth but to justify their emotional reactions.

To Haidt, this implies morality doesn’t come from reasoning.  It comes from what culture you grow up in through social learning and some innateness. The range of moral issues is unusually narrow in Western individualistic cultures.  More social cultures have broad moral domains that encompass many more aspects of life, with a lot more rules.  We’re all born to be righteous, but we learn what to be righteous about.

Haidt calls it the western philosophy of worshiping reason and denying the passions the rationalist delusion.  Because once a group considers something sacred, they’re almost cult-like in their inability to think clearly about it anymore.

Further proof of our emotional basis for reasoning came from patients with brain damage in the prefrontal cortex who hadn’t lost any IQ or moral reasoning, but felt almost no emotions.  This led to alienation from friends and family, and an inability to make decisions, and when they did, often foolish ones.   We need emotional feelings to help us make conscious choices, otherwise all options seem equally good.  Reasoning requires passion, and passion is the master, not reasoning.  When passion goes away, we don’t cope well anymore.

We don’t reason about our moral choices but to convince others we were right to make that choice.

Emotions used to be thought of as visceral but gradually scientists discovered they were full of cognition as well.  Emotions first decide whether what just happened helped or hindered your goal and prepares you to respond. So if the event was hearing someone running up behind you in the dark, your nervous system is instantly fired up to fight or flee, your heart pounds, and your pupils widen to be better able to see what’s going on.

The vast majority of your emotions aren’t as dramatic, they’re so subtle you wouldn’t think of them as emotions.  But watch yourself closely the next time you’re driving and  you’ll hear flashes of annoyance at other drivers, the same as you read the newspaper.

The hundreds of effortless judgments and decisions we make every day might better be labeled intuitions than emotions, with only a few intuitions growing into fully felt emotions.

A summary of what Haidt has to say in his own words is that he calls reasoning the rider, and automatic processes, including emotion, intuition, and all forms of “seeing-that” the elephant.  “I chose an elephant rather than a horse because elephants are so much bigger—and smarter—than horses. Automatic processes run the human mind, just as they have been running animal minds for 500 million years, so they’re very good at what they do, like software that has been improved through thousands of product cycles. When human beings evolved the capacity for language and reasoning at some point in the last million years, the brain did not rewire itself to hand over the reins to a new and inexperienced charioteer. Rather, the rider (language-based reasoning) evolved because it did something useful for the elephant. The rider can do several useful things. It can see further into the future (because we can examine alternative scenarios in our heads) and therefore it can help the elephant make better decisions in the present. It can learn new skills and master new technologies, which can be deployed to help the elephant reach its goals and sidestep disasters. And, most important, the rider acts as the spokesman for the elephant, even though it doesn’t necessarily know what the elephant is really thinking. The rider is skilled at fabricating post hoc explanations for whatever the elephant has just done, and it is good at finding reasons to justify whatever the elephant wants to do next. Once human beings developed language and began to use it to gossip about each other, it became extremely valuable for elephants to carry around on their backs a full-time public relations firm”.

“I also wanted to capture the social nature of moral judgment. Moral talk serves a variety of strategic purposes such as managing your reputation, building alliances, and recruiting bystanders to support your side in the disputes that are so common in daily life. I wanted to go beyond the first judgments people make when they hear some juicy gossip or witness some surprising event. I wanted my model to capture the give-and-take, the round after round of discussion and argumentation that sometimes leads people to change their minds.”

“We make our first judgments rapidly, and we are dreadful at seeking out evidence that might disconfirm those initial judgments.  Friends can do for us what we cannot do for ourselves: they can challenge us, giving us reasons and arguments (link 3) that sometimes trigger new intuitions, thereby making it possible for us to change our minds. We occasionally do this when mulling a problem by ourselves, suddenly seeing things in a new light or from a new perspective”.

“Far more common than such private mind changing is social influence. Other people influence us constantly just by revealing that they like or dislike somebody. That form of influence is the social persuasion link. Many of us believe that we follow an inner moral compass, but the history of social psychology richly demonstrates that other people exert a powerful force, able to make cruelty seem acceptable and altruism seem embarrassing, without giving us any reasons or arguments.”

The social intuitionist model offers an explanation of why moral and political arguments are so frustrating: because moral reasons are the tail wagged by the intuitive dog. A dog’s tail wags to communicate. You can’t make a dog happy by forcibly wagging its tail. And you can’t change people’s minds by utterly refuting their arguments.

Since reasoning is not the source that either person gets his belief from then no logic which doesn’t speak to the emotions can get someone to change their mind.

In his classic book How to Win Friends and Influence People, Carnegie repeatedly urged readers to avoid direct confrontations. Instead he advised people to “begin in a friendly way,” to “smile,” to “be a good listener,” and to “never say ‘you’re wrong.’ ” The persuader’s goal should be to convey respect, warmth, and an openness to dialogue before stating one’s own case.  You might think his techniques are superficial and manipulative, appropriate only for salespeople. But Carnegie was in fact a brilliant moral psychologist who grasped one of the deepest truths about conflict. He used a quotation from Henry Ford to express it: “If there is any one secret of success it lies in the ability to get the other person’s point of view and see things from their angle as well as your own.”

It’s such an obvious point, yet few of us apply it in moral and political arguments because our righteous minds so readily shift into combat mode. The rider and the elephant work together smoothly to fend off attacks and lob rhetorical grenades of our own. The performance may impress our friends and show allies that we are committed members of the team, but no matter how good our logic, it’s not going to change the minds of our opponents if they are in combat mode too. If you really want to change someone’s mind on a moral or political matter, you’ll need to see things from that person’s angle as well as your own. And if you do truly see it the other person’s way—deeply and intuitively—you might even find your own mind opening in response. Empathy is an antidote to righteousness, although it’s very difficult to empathize across a moral divide.

Animals assess the world thousands of times a day to decide whether to approach or avoid something without reasoning about it. We do too, but these perceptions are so fleeting and subtle they don’t deserve the word emotion, they’re more like flashes of liking or disliking something the instant we see it.

So it makes sense that reasoning, which evolved later, is not the master and leader of our emotions, but merely a useful second check on reality that can override a bad emotional decision at times.  But most of the time we anticipate that our emotions are steering in a certain direction and ignore the other possibilities as our thoughts jump in to rationalize the emotion we’re feeling.

Experiments have shown we tend to like familiar things.  I’ve heard the music industry gets radio stations to sandwich a new song they want to turn into a hit between two popular familiar songs, in addition to playing the new song as often as possible.

This all operates at such fast speeds we’re often unaware of our biases.  Haidt writes that most people have negative associations with many social groups, such as black people, immigrants, obese people, and the elderly.

We also are biased positively towards pretty people.  We think they’re smarter and they’re more likely to be acquitted by a jury.

Here’s a scary experiment.  Hundreds of pairs of photos of winners and losers in senate and house elections were shown to people who were asked to pick out the face that looked the most competent.  It turned out that in real life, that’s the person who actually won the election two-thirds of the time.  Being attractive or likeable looking did not predict who won as well, so a judgment of competence wasn’t just based on a snap positive opinion.  Even when people only had one-tenth of a second to decide between photos, the results were the same.

Our brains work awfully fast.  Within a second of meeting someone, we’ve already made snap judgments about them.

Immorality makes people want to get clean. People who are asked to recall their own moral transgressions, or merely to copy by hand an account of someone else’s moral transgression, find themselves thinking about cleanliness more often, and wanting more strongly to cleanse themselves. They are more likely to select hand wipes and other cleaning products when given a choice of consumer products to take home with them after the experiment.

In one of the most bizarre demonstrations of this effect, Eric Helzer and David Pizarro asked students at Cornell University to fill out surveys about their political attitudes while standing near (or far from) a hand sanitizer dispenser. Those told to stand near the sanitizer became temporarily more conservative. Moral judgment is not a purely cerebral affair in which we weigh concerns about harm, rights, and justice. It’s a kind of rapid, automatic process more akin to the judgments animals make as they move through the world, feeling themselves drawn toward or away from various things. Moral judgment is mostly done by the elephant.

Roughly one in a hundred men (and many fewer women) are psychopaths. Most are not violent, but the ones who are commit nearly half of the most serious crimes, such as serial murder, serial rape, and the killing of police officers. Robert Hare, a leading researcher, defines psychopathy by two sets of features. There’s the unusual stuff that psychopaths do—impulsive antisocial behavior, beginning in childhood—and there are the moral emotions that psychopaths lack. They feel no compassion, guilt, shame, or even embarrassment, which makes it easy for them to lie, and to hurt family, friends, and animals. Psychopaths do have some emotions. When Hare asked one man if he ever felt his heart pound or stomach churn, he responded: “Of course! I’m not a robot. I really get pumped up when I have sex or when I get into a fight.” But psychopaths don’t show emotions that indicate that they care about other people. Psychopaths seem to live in a world of objects, some of which happen to walk around on two legs.

The ability to reason combined with a lack of moral emotions is dangerous. Psychopaths learn to say whatever gets them what they want. The serial killer Ted Bundy, for example, was a psychology major in college, where he volunteered on a crisis hotline. On those phone calls he learned how to speak to women and gain their trust. Then he raped, mutilated, and murdered at least thirty young women before being captured in 1978. Psychopathy does not appear to be caused by poor mothering or early trauma, or to have any other nurture-based explanation. It’s a genetically heritable condition that creates brains that are unmoved by the needs, suffering, or dignity of others. The elephant doesn’t respond with the slightest lean to the gravest injustice. The rider is perfectly normal—he does strategic reasoning quite well. But the rider’s job is to serve the elephant, not to act as a moral compass.

Infants as young as two months old will look longer at an event that surprises them than at an event they were expecting. If everything is a buzzing confusion, then everything should be equally surprising. But if the infant’s mind comes already wired to interpret events in certain ways, then infants can be surprised when the world violates their expectations.

Infants come equipped with innate abilities to understand their social world as well. They understand things like harming and helping.

By six months of age, infants are watching how people behave toward other people, and they are developing a preference for those who are nice rather than those who are mean. In other words, the elephant begins making something like moral judgments during infancy, long before language and reasoning arrive.

The results were clear and compelling. When people read stories involving personal harm, they showed greater activity in several regions of the brain related to emotional processing. Across many stories, the relative strength of these emotional reactions predicted the average moral judgment.

With few exceptions, the results tell a consistent story: the areas of the brain involved in emotional processing activate almost immediately, and high activity in these areas correlates with the kinds of moral judgments or decisions that people ultimately make.

In an article titled “The Secret Joke of Kant’s Soul,” Greene summed up what he and many others had found. Greene did not know what E. O. Wilson had said about philosophers consulting their “emotive centers” when he wrote the article, but his conclusion was the same as Wilson’s: We have strong feelings that tell us in clear and uncertain terms that some things simply cannot be done and that other things simply must be done. But it’s not obvious how to make sense of these feelings, and so we, with the help of some especially creative philosophers, make up a rationally appealing story [about rights]. This is a stunning example of consilience. Wilson had prophesied in 1975 that ethics would soon be “biologicized” and refounded as the interpretation of the activity of the “emotive centers” of the brain. When he made that prophecy he was going against the dominant views of his time. Psychologists such as Kohlberg said that the action in ethics was in reasoning, not emotion.

In the 33 years between the Wilson and Greene quotes, everything changed. Scientists in many fields began recognizing the power and intelligence of automatic processes, including emotion.

A slave is never supposed to question his master, but most of us can think of times when we questioned and revised our first intuitive judgment. The rider-and-elephant metaphor works well here. The rider evolved to serve the elephant, but it’s a dignified partnership, more like a lawyer serving a client than a slave serving a master. Good lawyers do what they can to help their clients, but they sometimes refuse to go along with requests. Perhaps the request is impossible (such as finding a reason to condemn Dan, the student council president—at least for most of the people in my hypnosis experiment). Perhaps the request is self-destructive (as when the elephant wants a third piece of cake, and the rider refuses to go along and find an excuse). The elephant is far more powerful than the rider, but it is not an absolute dictator. When does the elephant listen to reason? The main way that we change our minds on moral issues is by interacting with other people. We are terrible at seeking evidence that challenges our own beliefs, but other people do us this favor, just as we are quite good at finding errors in other people’s beliefs. When discussions are hostile, the odds of change are slight. The elephant leans away from the opponent, and the rider works frantically to rebut the opponent’s charges. But if there is affection, admiration, or a desire to please the other person, then the elephant leans toward that person and the rider tries to find the truth in the other person’s arguments. The elephant may not often change its direction in response to objections from its own rider, but it is easily steered by the mere presence of friendly elephants (that’s the social persuasion link in the social intuitionist model) or by good arguments given to it by the riders of those friendly elephants (that’s the reasoned persuasion link).

In other words, under normal circumstances the rider takes its cue from the elephant, just as a lawyer takes instructions from a client. But if you force the two to sit around and chat for a few minutes, the elephant actually opens up to advice from the rider and arguments from outside sources. Intuitions come first, and under normal circumstances they cause us to engage in socially strategic reasoning, but there are ways to make the relationship more of a two-way street.

Elephants rule, but they are neither dumb nor despotic. Intuitions can be shaped by reasoning, especially when reasons are embedded in a friendly conversation or an emotionally compelling novel, movie, or news story.

Why do we have this weird mental architecture? As hominid brains tripled in size over the last 5 million years, developing language and a vastly improved ability to reason, why did we evolve an inner lawyer, rather than an inner judge or scientist? Wouldn’t it have been most adaptive for our ancestors to figure out the truth, the real truth about who did what and why, rather than using all that brainpower just to find evidence in support of what they wanted to believe? That depends on which you think was more important for our ancestors’ survival: truth or reputation.

In this chapter I’ll show that reason is not fit to rule; it was designed to seek justification, not truth. I’ll show that Glaucon was right: people care a great deal more about appearance and reputation than about reality. In fact, I’ll praise Glaucon for the rest of the book as the guy who got it right—the guy who realized that the most important principle for designing an ethical society is to make sure that everyone’s reputation is on the line all the time, so that bad behavior will always bring bad consequences.

Human beings are the world champions of cooperation beyond kinship, and we do it in large part by creating systems of formal and informal accountability. We’re really good at holding others accountable for their actions, and we’re really skilled at navigating through a world in which others hold us accountable for our own. Phil Tetlock, a leading researcher in the study of accountability, defines accountability as the “explicit expectation that one will be called upon to justify one’s beliefs, feelings, or actions to others,” coupled with an expectation that people will reward or punish us based on how well we justify ourselves.8 When nobody is answerable to anybody, when slackers and cheaters go unpunished, everything falls apart.

We act like intuitive politicians striving to maintain appealing moral identities in front of our multiple constituencies.

In Tetlock’s research, subjects are asked to solve problems and make decisions. For example, they’re given information about a legal case and then asked to infer guilt or innocence. Some subjects are told that they’ll have to explain their decisions to someone else. Other subjects know that they won’t be held accountable by anyone. Tetlock found that when left to their own devices, people show the usual catalogue of errors, laziness, and reliance on gut feelings that has been documented in so much decision-making research. But when people know in advance that they’ll have to explain themselves, they think more systematically and self-critically. They are less likely to jump to premature conclusions and more likely to revise their beliefs in response to evidence.

Tetlock concludes that conscious reasoning is carried out largely for the purpose of persuasion, rather than discovery. But Tetlock adds that we are also trying to persuade ourselves. We want to believe the things we are about to say to others.

Our moral thinking is much more like a politician searching for votes than a scientist searching for truth.

Leary’s conclusion was that “the sociometer operates at a nonconscious and preattentive level to scan the social environment for any and all indications that one’s relational value is low or declining.”16 The sociometer is part of the elephant. Because appearing concerned about other people’s opinions makes us look weak, we (like politicians) often deny that we care about public opinion polls. But the fact is that we care a lot about what others think of us. The only people known to have no sociometer are psychopaths.

If you want to see post hoc reasoning in action, just watch the press secretary of a president or prime minister take questions from reporters. No matter how bad the policy, the secretary will find some way to praise or defend it. Reporters then challenge assertions and bring up contradictory quotes from the politician, or even quotes straight from the press secretary on previous days. Sometimes you’ll hear an awkward pause as the secretary searches for the right words, but what you’ll never hear is: “Hey, that’s a great point! Maybe we should rethink this policy.” Press secretaries can’t say that because they have no power to make or revise policy. They’re told what the policy is, and their job is to find evidence and arguments that will justify the policy to the public. And that’s one of the rider’s main jobs: to be the full-time in-house press secretary for the elephant.

“What about 35–37–39?” “Yes.” “OK, so the rule must be any series of numbers that rises by two?” “No.” People had little trouble generating new hypotheses about the rule, sometimes quite complex ones. But what they hardly ever did was to test their hypotheses by offering triplets that did not conform to their hypothesis. For example, proposing 2–4–5 (yes) and 2–4–3 (no) would have helped people zero in on the actual rule: any series of ascending numbers. Wason called this phenomenon the confirmation bias, the tendency to seek out and interpret new evidence in ways that confirm what you already think. People are quite good at challenging statements made by other people, but if it’s your belief, then it’s your possession—your child, almost—and you want to protect it, not challenge it and risk losing it.

Deanna Kuhn, a leading researcher of everyday reasoning, found evidence of the confirmation bias even when people solve a problem that is important for survival: knowing what foods make us sick. To bring this question into the lab she created sets of eight index cards, each of which showed a cartoon image of a child eating something—chocolate cake versus carrot cake, for example—and then showed what happened to the child afterward: the child is smiling, or else is frowning and looking sick. She showed the cards one at a time, to children and to adults, and asked them to say whether the “evidence” (the 8 cards) suggested that either kind of food makes kids sick. The kids as well as the adults usually started off with a hunch—in this case, that chocolate cake is the more likely culprit. They usually concluded that the evidence proved them right. Even when the cards showed a stronger association between carrot cake and sickness, people still pointed to the one or two cards with sick chocolate cake eaters as evidence for their theory, and they ignored the larger number of cards that incriminated carrot cake. As Kuhn puts it, people seemed to say to themselves: “Here is some evidence I can point to as supporting my theory, and therefore the theory is right.”

Perkins found that IQ was by far the biggest predictor of how well people argued, but it predicted only the number of my-side arguments. Smart people make really good lawyers and press secretaries, but they are no better than others at finding reasons on the other side. Perkins concluded that “people invest their IQ in buttressing their own case rather than in exploring the entire issue more fully and evenhandedly.”

Research on everyday reasoning offers little hope for moral rationalists. In the studies I’ve described, there is no self-interest at stake. When you ask people about strings of digits, cakes and illnesses, and school funding, people have rapid, automatic intuitive reactions. One side looks a bit more attractive than the other. The elephant leans, ever so slightly, and the rider gets right to work looking for supporting evidence—and invariably succeeds.

If thinking is confirmatory rather than exploratory in these dry and easy cases, then what chance is there that people will think in an open-minded, exploratory way when self-interest, social identity, and strong emotions make them want or even need to reach a preordained conclusion?

Many psychologists have studied the effects of having “plausible deniability.” In one such study, subjects performed a task and were then given a slip of paper and a verbal confirmation of how much they were to be paid. But when they took the slip to another room to get their money, the cashier misread one digit and handed them too much money. Only 20 percent spoke up and corrected the mistake. But the story changed when the cashier asked them if the payment was correct. In that case, 60 percent said no and returned the extra money. Being asked directly removes plausible deniability; it would take a direct lie to keep the money. As a result, people are three times more likely to be honest. You can’t predict who will return the money based on how people rate their own honesty, or how well they are able to give the high-minded answer on a moral dilemma of the sort used by Kohlberg. If the rider were in charge of ethical behavior, then there would be a big correlation between people’s moral reasoning and their moral behavior. But he’s not, so there isn’t.

When given the opportunity, many honest people will cheat. In fact, rather than finding that a few bad apples weighted the averages, we discovered that the majority of people cheated, and that they cheated just a little bit.

People didn’t try to get away with as much as they could. Rather, when Ariely gave them anything like the invisibility of the ring of Gyges, they cheated only up to the point where they themselves could no longer find a justification that would preserve their belief in their own honesty. The bottom line is that in lab experiments that give people invisibility combined with plausible deniability, most people cheat. The press secretary (also known as the inner lawyer)27 is so good at finding justifications that most of these cheaters leave the experiment as convinced of their own virtue as they were when they walked in.

The difference between can and must is the key to understanding the profound effects of self-interest on reasoning. It’s also the key to understanding many of the strangest beliefs—in UFO abductions, quack medical treatments, and conspiracy theories.

The social psychologist Tom Gilovich studies the cognitive mechanisms of strange beliefs. His simple formulation is that when we want to believe something, we ask ourselves, “Can I believe it?” Then (as Kuhn and Perkins found), we search for supporting evidence, and if we find even a single piece of pseudo-evidence, we can stop thinking. We now have permission to believe. We have a justification, in case anyone asks. In contrast, when we don’t want to believe something, we ask ourselves, “Must I believe it?” Then we search for contrary evidence, and if we find a single reason to doubt the claim, we can dismiss it. You only need one key to unlock the handcuffs of must. Psychologists now have file cabinets full of findings on “motivated reasoning,”29 showing the many tricks people use to reach the conclusions they want to reach. When subjects are told that an intelligence test gave them a low score, they choose to read articles criticizing (rather than supporting) the validity of IQ tests.30 When people read a (fictitious) scientific study that reports a link between caffeine consumption and breast cancer, women who are heavy coffee drinkers find more flaws in the study than do men and less caffeinated women.

If people can literally see what they want to see—given a bit of ambiguity—is it any wonder that scientific studies often fail to persuade the general public? Scientists are really good at finding flaws in studies that contradict their own views, but it sometimes happens that evidence accumulates across many studies to the point where scientists must change their minds. I’ve seen this happen in my colleagues (and myself) many times,34 and it’s part of the accountability system of science—you’d look foolish clinging to discredited theories. But for nonscientists, there is no such thing as a study you must believe. It’s always possible to question the methods, find an alternative interpretation of the data, or, if all else fails, question the honesty or ideology of the researchers.

And now that we all have access to search engines on our cell phones, we can call up a team of supportive scientists for almost any conclusion twenty-four hours a day. Whatever you want to believe about the causes of global warming or whether a fetus can feel pain, just Google your belief. You’ll find partisan websites summarizing and sometimes distorting relevant scientific studies. Science is a smorgasbord, and Google will guide you to the study that’s right for you.

Many political scientists used to assume that people vote selfishly, choosing the candidate or policy that will benefit them the most. But decades of research on public opinion have led to the conclusion that self-interest is a weak predictor of policy preferences. Parents of children in public school are not more supportive of government aid to schools than other citizens; young men subject to the draft are not more opposed to military escalation than men too old to be drafted; and people who lack health insurance are not more likely to support government-issued health insurance than people covered by insurance.

Rather, people care about their groups, whether those be racial, regional, religious, or political. The political scientist Don Kinder summarizes the findings like this: “In matters of public opinion, citizens seem to be asking themselves not ‘What’s in it for me?’ but rather ‘What’s in it for my group?’ Political opinions function as “badges of social membership.” They’re like the array of bumper stickers people put on their cars showing the political causes, universities, and sports teams they support. Our politics is groupish, not selfish.

Studies have documented the “attitude polarization” effect that happens when you give a single body of information to people with differing partisan leanings. Liberals and conservatives actually move further apart when they read about research on whether the death penalty deters crime, or when they rate the quality of arguments made by candidates in a presidential debate, or when they evaluate arguments about affirmative action or gun control.

The threatening information (their own candidate’s hypocrisy) immediately activated a network of emotion-related brain areas—areas associated with negative emotion and responses to punishment. The handcuffs (of “Must I believe it?”) hurt. Some of these areas are known to play a role in reasoning, but there was no increase in activity in the dorso-lateral prefrontal cortex (dlPFC). The dlPFC is the main area for cool reasoning tasks. Whatever thinking partisans were doing, it was not the kind of objective weighing or calculating that the dlPFC is known for. Once Westen released them from the threat, the ventral striatum started humming—that’s one of the brain’s major reward centers. All animal brains are designed to create flashes of pleasure when the animal does something important for its survival, and small pulses of the neurotransmitter dopamine in the ventral striatum (and a few other places) are where these good feelings are manufactured. Heroin and cocaine are addictive because they artificially trigger this dopamine response. Rats who can press a button to deliver electrical stimulation to their reward centers will continue pressing until they collapse from starvation. Westen found that partisans escaping from handcuffs (by thinking about the final slide, which restored their confidence in their candidate) got a little hit of that dopamine. And if this is true, then it would explain why extreme partisans are so stubborn, closed-minded, and committed to beliefs that often seem bizarre or paranoid. Like rats that cannot stop pressing a button, partisans may be simply unable to stop believing weird things. The partisan brain has been reinforced so many times for performing mental contortions that free it from unwanted beliefs. Extreme partisanship may be literally addictive.

From Plato through Kant and Kohlberg, many rationalists have asserted that the ability to reason well about ethical issues causes good behavior. They believe that reasoning is the royal road to moral truth, and they believe that people who reason well are more likely to act morally. But if that were the case, then moral philosophers—who reason about ethical principles all day long—should be more virtuous than other people. Are they? The philosopher Eric Schwitzgebel tried to find out. He used surveys and more surreptitious methods to measure how often moral philosophers give to charity, vote, call their mothers, donate blood, donate organs, clean up after themselves at philosophy conferences, and respond to emails purportedly from students. And in none of these ways are moral philosophers better than other philosophers or professors in other fields. Schwitzgebel even scrounged up the missing-book lists from dozens of libraries and found that academic books on ethics, which are presumably borrowed mostly by ethicists, are more likely to be stolen or just never returned than books in other areas of philosophy. In other words, expertise in moral reasoning does not seem to improve moral behavior, and it might even make it worse (perhaps by making the rider more skilled at post hoc justification). Schwitzgebel still has yet to find a single measure on which moral philosophers behave better than other philosophers. Anyone who values truth should stop worshipping reason. We all need to take a cold hard look at the evidence and see reasoning for what it is.

Most of the bizarre and depressing research findings make perfect sense once you see reasoning as having evolved not to help us find truth but to help us engage in arguments, persuasion, and manipulation in the context of discussions with other people. As they put it, “skilled arguers … are not after the truth but after arguments supporting their views.” This explains why the confirmation bias is so powerful, and so ineradicable. How hard could it be to teach students to look on the other side, to look for evidence against their favored view? Yet, in fact, it’s very hard, and nobody has yet found a way to do it. It’s hard because the confirmation bias is a built-in feature (of an argumentative mind), not a bug that can be removed (from a platonic mind). I’m not saying we should all stop reasoning and go with our gut feelings. Gut feelings are sometimes better guides than reasoning for making consumer choices and interpersonal judgments, but they are often disastrous as a basis for public policy, science, and law. Rather, what I’m saying is that we must be wary of any individual’s ability to reason.

In the same way, each individual reasoner is really good at one thing: finding evidence to support the position he or she already holds, usually for intuitive reasons. We should not expect individuals to produce good, open-minded, truth-seeking reasoning, particularly when self-interest or reputational concerns are in play. But if you put individuals together in the right way, such that some individuals can use their reasoning powers to disconfirm the claims of others, and all individuals feel some common bond or shared fate that allows them to interact civilly, you can create a group that ends up producing good reasoning as an emergent property of the social system. This is why it’s so important to have intellectual and ideological diversity within any group or institution whose goal is to find truth (such as an intelligence agency or a community of scientists) or to produce good public policy (such as a legislature or advisory board).

Miscellaneous insights of Haidt:

Religion.  “Groups create supernatural beings not to explain the universe but to order their societies”

Evolution of morality in children: For a long time moral psychology believed in rationalism, that kids figure out morality for themselves when their minds are ready and when they have the right kinds of experiences.  Piaget and others did experiments that showd children grew in their ability to understand an apply rules, resolve arguments that grew in sophistication as their minds matured.  Piaget thought kids learned morality by playing with other kids, not from adults or hard-wired genetically. Kohlberg and others slanted experiments by having a framework that was secular, questioning, and egalitarian – unintentionally with no hidden motivations, and Haidt sets out to prove that there is a lot more going on with the development of childhood morality.

More reading: 28 May 2012. Dan Jones. The argumentative ape: Why we’re wired to persuade. NewScientist.

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A financial crash would stop new oil production, sending us over the net energy cliff with a 10% decline rate per year

Gail Tverberg’s March 4, 2014 “Reasons for our Energy Predicament – an overview” gave me this sudden insight:

There is the potential for a sudden drop of 10 to 30% in oil production.  That magnitude of world-wide oil shocks would be too much for most nations to cope with, which could lead to a fast collapse.

Here’s how it could happen:

Gail states in this article that another FINANCIAL crash could cause a very steep drop in oil production, like the 10% drop in oil production per year when the Former Soviet Union collapsed.

If this happens when we’re also reaching the world-wide GEOLOGICAL decline rate of over 9% per year (IEA 2008), then there’s a 20% exponential potential drop in oil production per year (see Randy Udall & Steve Andrew’s “Peak oil: “It’s the flows, stupid!”).

Add in POLITICAL causes brought on by the oil shocks from the financial and geological factors, and you could easily have another 10% decline or more of oil production.
In addition to war and social unrest, there’s:

Reasons for our Energy Predicament – An Overview

March 4, 2014 by

Some key points Gail makes:

  • When the economy crashes the next time, oil prices will fall like last time too, perhaps in the low $30 range, and drilling will stop, that’s too low a price to make a profit (and this will be true of coal, natural gas, mining, etc., as well).  The Fed has few options left, they can’t keep lending trillions forever. 
  • An essential part of today’s economy is very long supply lines which allow very complex products to be made with supplies from all over the world. In the 2008 credit crisis  many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. If this problem can’t be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and a smaller world population.

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system.

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

 

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and services affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transport food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energy in 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30′s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply
  3. GDP growth
  4. Wage growth
  5.  Debt growth
  6. Growing government programs

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

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Credit Rating Agencies gave bad debt AAA ratings

How banks gamed the rating system from biz.yahoo.com April 2008 Triple-A Failure

Nothing sent the [credit ratings] agencies into high gear as much as the development of structured finance. As Wall Street bankers designed ever more securitized products — using mortgages, credit-card debt, car loans, corporate debt, every type of paper imaginable — the agencies became truly powerful.

In structured-credit vehicles like Subprime XYZ, the agencies played a much more pivotal role than they had with (conventional) bonds. According to Lewis Ranieri, the Salomon Brothers banker who was a pioneer in mortgage bonds, “The whole creation of mortgage securities was involved with a rating.

What the bankers in these deals are really doing is buying a bunch of I.O.U.’s and repackaging them in a different form. Something has to make the package worth — or seem to be worth — more that the sum of its parts, otherwise there would be no point in packaging such securities, nor would there be any profits from which to pay the bankers’ fees.

That something is the rating. Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.

The challenge to investment banks is to design securities that just meet the rating agencies’ tests. Risky mortgages serve their purpose; since the interest rate on them is higher, more money comes into the pool and is available for paying bond interest. But if the mortgages are too risky, Moody’s will object. Banks are adroit at working the system, and pools like Subprime XYZ are intentionally designed to include a layer of Baa bonds, or those just over the border. “Every agency has a model available to bankers that allows them to run the numbers until they get something they like and send it in for a rating,” a former Moody’s expert in securitization says. In other words, banks were gaming the system; according to Chris Flanagan, the subprime analyst at JPMorgan, “Gaming is the whole thing.

When a bank proposes a rating structure on a pool of debt, the rating agency will insist on a cushion of extra capital, known as an “enhancement.” The bank inevitably lobbies for a thin cushion (the thinner the capitalization, the fatter the bank’s profits). It’s up to the agency to make sure that the cushion is big enough to safeguard the bonds. The process involves extended consultations between the agency and its client. In short, obtaining a rating is a collaborative process.

The evidence on whether rating agencies bend to the bankers’ will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”

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Bernie Madoff

The Day the Earth Went Broke. 2008. Byron King   whiskeyandgunpowder.com

What if you woke up one day and there was a flying saucer sitting in the middle of Central Park? It would change your view of the world, if not the universe, right? At least that’s the idea behind the newly released remake of the classic 1951 film The Day the Earth Stood Still. And what if you went to bed one night and thought that you had money on account in a fine silk stocking firm? What if you believed that you and your family were well provided for? What if you were sure that you had made all the right choices and done all the prudent things? You saved your money. You placed it with a reputable outfit. You were in the bluest of blue chips. And you woke up the next morning and it was all gone? Poof. Vanished. You’re broke! It would change your world, right? Maybe your life would fall off a cliff. Your standard of living would crater.

Well, this is exactly what happened to a lot of people a few days ago. These unfortunate souls invested their funds with Bernard Madoff’s firm in New York. Apparently, Madoff (pronounced “made off”) was running what The New York Times said “may be the largest Ponzi scheme in history.” He may have wiped out as much as $50 billion of other people’s money. $50 billion. No typo. For about 48 years, Madoff took in people’s money and claimed to invest it through his proprietary “split-strike conversion.” What’s that? Actually, I’ve never heard of it. It’s some sort of investment hocus-pocus that promises something for nothing. But Madoff always claimed he was making solid returns, in good times and bad, of 8-12% per year. Like clockwork. Such a deal.

Madoff’s investment firm was not for just anybody. You had to be somebody to be part of this firm. You had to be invited to invest with Madoff. So at fine country clubs up and down the East Coast, people would politely mention that “I invest my money with Madoff.” And other people would say, “Oh? Can I invest with Madoff too?” Then maybe they would get a discrete solicitation in the mail offering the opportunity to open a modest account. Maybe. Or maybe they wouldn’t get that solicitation. And the people who were rejected wanted to know why. “So how come my money is no good with Madoff?” they would ask. And thus did the cachet grow. People wanted in. “Hey, tell me how I can invest with this guy?” was the topic at many a dinner of lobster Newburg or veal a l’Oscar. Over the years, thousands of people, firms, businesses, charities, pensions, hedge funds and even government entities placed money with Madoff. And Madoff took it. With pleasure.

It was all a swindle. Madoff was taking in the new money and paying it out to the previous investors. He had no real system of investing. Madoff just dabbled in the markets, making some money here and losing it there. He lived well. He owned a yacht. He attended fancy parties. He was a patron of the arts and charity. He contributed generously to politicians in the Democratic Party (Hillary Clinton, Chuck Schumer and Charles Rangel, among others, in recent federal campaign filings). He was polite and distinguished. He was a counselor to many a family, always good for wise advice about how to make the next right move in life.

Indeed, Madoff pretended for decades that things were all right. But things weren’t all right. Madoff and his firm just took money from one group of people and paid it to others. He sent out elaborate statements, documenting how well people’s accounts were doing. Yet in the process, Madoff lost billions of dollars. The funds vanished into money heaven. And Madoff did it all under the noses of auditors, lawyers, accountants, tax agencies, the Securities and Exchange Commission (SEC) and a host of other pretend regulators. In short, Madoff is a financial psychopath. He’s a money-murderer. He is to money management what Ted Bundy was to unsuspecting young women.

Along the way, a few people raised suspicions. They said things like, “No one can deliver those kinds of results year after year. It’s impossible.” But many other people didn’t want to believe anything was wrong. The final whistle didn’t blow until Madoff’s sons turned him in to the FBI last week. (The sons claimed that they “knew nothing” about the scam.) And according to press reports, Madoff confessed everything to the FBI arresting agent, saying, “There is no innocent explanation.” Many of Madoff’s clients are from the Jewish community. That was Madoff’s heritage, and thus did Jews form much of the clientele that Madoff cultivated. According to The Wall Street Journal, some Jewish investors called Mr. Madoff “the Jewish bond” because of his solid and predictable returns.

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Experts who aren’t worried about Inflation

Paul Krugman: The Inflation Obsession. March 2, 2014. New York Times.

[modified: both paraphrased and cut]

Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And, boy, are they discouraging reading because Fed officials come across as clueless about the gathering economic storm. What’s really striking is the extent to which they were obsessed with the wrong thing. The economy was plunging, yet all many people at the Fed wanted to talk about was inflation.

Matthew O’Brien at The Atlantic has done the math. In August 2008 there were 322 mentions of inflation, versus only 28 of unemployment and 19 of systemic risks or crises. In the meeting on Sept. 16, 2008 — the day after Lehman fell! — there were 129 mentions of inflation versus 26 mentions of unemployment and only four of systemic risks or crises.

Historians of the Great Depression have long marveled at the folly of policy discussion at the time. The Bank of England, faced with a devastating deflationary spiral, kept obsessing over the imagined threat of inflation.  It turns out that modern monetary officials facing financial crisis were just as obsessed with the wrong thing as their predecessors 3 generations before.

They failed to understand that printing money in a depressed economy isn’t inflationary.

[Since 2008 many still worry about] “the supposed threat of rising prices, despite being wrong again and again. If you spent the last 5 years watching CNBC, reading the Wall Street Journal, or  listening to prominent conservative economists, you lived in a constant state of alarm over runaway inflation, which was coming any day now. It never did.”

At a fundamental level, it’s political — obvious if you look at who the inflation obsessives are. Most conservatives are inflation obsessives, and nearly all inflation obsessives are conservative. Why?  It reflects the belief that the government should never seek to [help the public], because the private sector always knows best.

The flip side of this anti-government attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.

Finally, all this ties in with a predilection for acting tough and inflicting punishment whatever the economic conditions. The British journalist William Keegan once described this as “sado-monetarism,” and it’s very much alive today.  We used to marvel at the wrongheadedness of policy makers during the Great Depression. But when the Great Recession struck, and we were given a chance to do better, we ended up repeating all the same mistakes.

April 1, 2011. Comstock Partners There Still Is No Viable Solution To America’s Debt Crisis Businessinsider.com

Our feeling, as long-time readers will not be surprised to hear, is that this enormous debt will not be inflationary but deflationary instead.  If this is the case, the stock market is headed much lower and the economy will either go into a double-dip or have such a sluggish recovery that it will feel like one. There are the two main reasons we are so convinced that we will not be able to inflate or grow our way out of this mess.

1) the massive increase that QE1 and QE2 has generated in the monetary base has not been translated into anywhere near a commensurate rise in money supply (the so-called “money multiplier”).

2) the subdued rise in the money supply to date has not resulted in a big increase in GDP (the so-called “velocity of money”)-.

3) The loose fiscal policies cannot generate the borrowing and spending that is required to get the money supply up enough to drive the economy and inflation higher.

4) The velocity of money is also influenced by interest rates. When rates are low, people hold more money in cash. On the other hand, when rates are rising, they put more money in interest paying investments.  The low rates, as we have now, results in a “liquidity trap”, which is what Japan has also experienced over the past 21 years.

5) Another reason that makes us so convinced that the “debt situation” will be resolved by deflation and not inflation is the political environment that is currently sweeping the nation. The Republicans and Tea Party congressmen and governors that were recently elected ran on a platform of cutting government expenditures, cutting back on entitlement expenditures, and doing whatever possible to pay down the debt. The bipartisan “Debt Commission” that was sponsored by President Obama, came up with a number of austerity measures that would cut the deficit substantially over time. The big problem, however, is that any austerity program implemented now will only exacerbate the ongoing deleveraging of this debt and throw the economy into recession.

6) Another reason we believe the onerous debt incurred over the past 30 years will wind up with a painful deflationary bear market rather than inflation or hyper-inflation is the high cost of necessities such as food and energy is much more deflationary than inflationary. 

7) In order for easy fiscal and monetary policy to result in significant inflation there must be a transfer mechanism, and that mechanism is a rise in wages by an amount at least enough to enable consumers to pay the higher prices. That just doesn’t look as if it is going to happen.

Since wages have been static for years, the high cost of these necessities acts to reduce real disposable income. This, in turn, reduces what the average consumer can purchase with his or her disposable income. More money spent on energy and food simply means less money to spend elsewhere.

Unless we escape this “trap” there will be massive deleveraging by the sector that drove us into this mess. Household debt rose from 50% of GDP in the 1960s, 70s and 80s and eventually doubled to close to 100% of GDP presently. This debt will either be defaulted on, or paid down until we get back to the norm of around 50% of GDP again.  This will bring household debt down below $10 trillion from $13.5 trillion now.

Nov 15, 2009 DEFLATION Robert Prechter of “Conquer the Crash”

In 2008 when credit contracts, dollars disappeared, the dollar went up in value. Now market, gold, etc way up, but next downturn, dollar will go up even more in 2010 than 2008 crash.  At least for 5-7 years you’ll be able to buy a lot more stuff with the dollar.  deflation will rule. once we have enough defaults and stabiliziation, the system can start over, and anything can happen. Printing press, gold std, gold illegal — who knows.  But meanwhile the debt market is so huge, that only deflation is possible. unemployment will go way up. companies should cut salaries in half instead. you can profit, it’s the greatest opportunity in your life. be leveraged on the down side, though avg person isn’t a speculator and just wants to hang onto their money. So stick with treasuries only. downturn downside: more conflict, don’t be in the centers of this activity. People will sell stocks, won’t lend or borrow, politics gets polarized, real risks, angry at neighbors, states telling fed gov’t to back off on drug laws, etc.

Aug 12, 2008. 8 really, really scary predictions. Fortune spoke to eight of the market’s sharpest thinkers and what they had to say about the future is frightening.  CNN Money.

Nouriel Roubini, Known as Dr. Doom, the NYU economics professor saw the mortgage-related meltdown coming.

We are in the middle of a very severe recession that’s going to continue through all of 2009 – the worst U.S. recession in the past 50 years. It’s the bursting of a huge leveraged-up credit bubble. There’s no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it’s all reversing right now in a very, very massive way. At this point it’s not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we’re having a global recession and it’s becoming worse.

Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak – with a growth rate of 1% to 1.5% – that it’s going to feel like a recession. I see the unemployment rate peaking at around 9% by 2010. The value of homes has already fallen 25%. In my view, home prices are going to fall by another 15% before bottoming out in 2010.

For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It’s better to stay in things with low returns rather than to lose 50% of your wealth. You should preserve capital.

Jim Rogers. the commodities guru predicted two years ago that the credit bubble would devastate Wall Street.

We are in a period of forced liquidation, which has happened only eight or nine times in the past 150 years. The fact that it’s historic doesn’t make it any more fun, of course. But it is a pretty interesting time when there is forced selling of everything with no regard for facts or fundamentals at all.

Bill Bonner. Aug 6, 2007. thedailyreckoning.com 

[Written BEFORE the 2008 meltdown]

Bill Bonner argues for deflation.  He thinks the Fed is wrong about the risk of inflation. Here’s how he sees the crisis evolving:

  1. Liquidity dries up
  2. Lenders don’t want to lend
  3. Spenders don’t want to spend — they want to hang onto what they have.
  4. It’s a downward spiral, the more prices fall, the more consumers are reluctant to spend because they might get a better deal if they wait.  Basically, they turn Japanese and hoard money.
  5. Takeovers and leveraged buyouts came to a stop.

Bonner asks “What can the feds do?”  They can print more money, but how are they going to get it into the hands of people who will spread it around?  The Fed would prefer inflation – they’re already printing too much money.  But they won’t be able to inflate their way out of the economic crisis, because the Feds won’t be able to get the money into the hands of the people who need it most, so we’ll eventually end up with deflation. Once deflation kicks in, people won’t borrow because they’re not sure they can pay it back.  Prices fall, so money paid back on a loan is more valuable than the borrowed money.

Bonner says that Ben Bernacke, who is fully aware of the dangers, thinks the Fed can get around it with “a technology…called a printing press…”, and if need be drop dollars from helicopters to get money into circulation (this is why Bernacke is called “Helicopter Ben” at thedailyreckoning).  Of course Bonner says, Ben was being fanciful, the Fed won’t actually do this or the dollar would inflate faster than in Zimbabwe, where inflation is over 5,000% a year.

When Japan’s real estate and stock bubbles popped, everyone had a lot of savings, the country had a huge trade surplus, and there was no subprime lending problem.  But in America the average person is in debt.  Bonner asks “Can America afford a liquidity crunch…a credit contraction…a deflation? We don’t know…but if we were Ben Bernanke, we might want to make sure the printing presses and helicopters were in good running order.”

 

May 1, 2008. Investable Capital – And Why It Matters. By Karl Denninger.  The Market Ticker.   [Written BEFORE the 2008 meltdown]

Long article.  It ends with:  “Nothing goes in a straight line folks, but the inevitability of what is coming down the road is a simple matter of mathematics. Our politicians do not want to listen, but the fact remains that they created this Ponzi Scheme at the request of the banks and other financial institutions and were warned that it would turn out like this.  They ignored those warnings, and now that day is here.  I have several times warned people to raise cash. I still mean it – raise cash, and do it now. Use this “rally” to prepare, because at the moment you are in the eye of a hurricane – and the other side of the eyewall is coming.  Soon.”

Dec 9, 2008. Chris Martenson interview.

I’ve excerpted the part about how credit affects businesses

I think there’s probably a 50% change that we are going to see a banking holiday before this year is out. And the reason that this would happen is that everything is chaotic right now. And the banks actually, they may not even know if they are solvent themselves. But they certainly don’t know if their banking partners across the street are solvent. And so what that does is it causes the banks to not want to trade with each other. We’re seeing this already, the interbank lending rates are very high and there’s a lot of fear and banks aren’t even talking which each other in a good way around this right now. And so, if the banks really just stopped and the credit stopped, this is actually a pretty big blow to our style of economy, because we have a credit based economy.

What I mean by that is that even if your local store decides to order more food from a distributor, they’re going to do that on a credit basis of some kind. They’re going to place the order, no cash is going to go from one account to another. They might have 30, 60 days to make good on that. The distributor is doing the same sort of stuff with whoever they’re getting their product from. And all the time they are using the banks as a cash flow mechanism, as they operate on credit. If the credit goes away, and we don’t have a credit based economy any more, then we go back to a cash based economy. And we don’t have a cash based economy anymore. We could figure it out again, but trust me, it’s going to be a little bit weird for a while.

JB: Yeah, do the groceries still arrive to the store, does the power stay on, does payroll still get made?

CM: All of that, most of that is happening through credit mechanisms. We live in a just-in-time society where pretty much everything, from your medication, to your food, to your gasoline all arrive on a continuous rolling basis when it’s needed. If that credit mechanism breaks down, our system literally freezes up.   To prepare for a potential banking holiday, take some cash out of the bank, 1 to 3 months living expenses. Think about like in Katrina: Katrina hit and all of a sudden ATMs didn’t work and people weren’t taking checks and credit cards, the whole thing kind of didn’t work for a while. And so for people who had cash, you could still go out and conduct business. So part 1 is to get some money out of the banking system. Make sure you’ve got a really safe place to keep it if you choose that option.  Also make sure that whatever bank you’re with is the safest bank you can find.   I use three banks, none of them big nationals exposed to the derivative crisis. All of them are banks that are very highly rated by independent rating services. And of course, nobody should have a bank account with more than the FDIC limit on it at this point in time.

JB: Well, what about that, instead of just having stashes of money, you create some buffer in your food and your medical system at home?

CM: I think that’s just plain out prudent. It doesn’t cost that much and if you took somebody from 100 years ago and teleported them to today and showed them our system, they’d be aghast, because it would be unthinkable that you would ever go into October without knowing exactly where all your food was at that point in time.

 

 

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Nature : Hydrocarbons and the evolution of human culture

Hydrocarbons and the evolution of human culture

Charles Hall et al. 20 NOVEMBER 2003     NATURE. VOL 426

Most of the progress in human culture has required the exploitation of energy resources. About 100 years ago, the major source of energy shifted from recent solar to fossil hydrocarbons, including liquid and gaseous petroleum. Technology has generally led to a greater use of hydrocarbon fuels for most human activities, making civilization vulnerable to decreases in supply. At this time our knowledge is not sufficient for us to choose between the different estimates of, for example, resources of conventional oil.  

The history of human culture can be viewed as the progressive development of new energy sources and their associated conversion technologies. These developments have increased the comfort, longevity and affluence of humans, as well as their numbers. Most of these energy technologies rely on chemical bonds of hydrocarbons. Nature has favored the storage of solar energy in the hydrocarbon bonds of plants and animals, and human cultural evolution has exploited this hydrocarbon energy profitably.

A key event in the evolution of human society was the development of spear heads and knife blades, devices that allowed humans to exploit a much broader and larger animal-resource base for food and skins. Another was the harnessing of the energy in the hydrocarbon bonds of wood, using fire, which allowed humans to exploit even more food resources, to smelt metals and to bake ceramics. All these developments assisted humans in their exploitation of colder, more northerly ecosystems. The most important of these new energy-based technologies was agriculture, which redirected photosynthetic energy from natural to human food chains.

The principal energy sources of antiquity were all derived directly from the sun: human and animal muscle power, wood, flowing water and wind. About 300 years ago, the industrial revolution began with stationary wind-powered and water-powered technologies, which were essentially replaced by fossil hydrocarbons: coal in the nineteenth century, oil since the twentieth century, and now, increasingly, natural gas. The global use of hydrocarbons for fuel by humans has increased nearly 800-fold since 1750 and about 12-fold in the twentieth century.

Hydrocarbon-based energy is important for the three main areas of human development: economic, social and environmental (1). Both the popular and some scientific presses have suggested that we have entered a ‘post- industrial’ society, where computers and, more generally, human knowledge have replaced raw energy and materials in the generation of wealth. ‘Bottom-up analysis’, applied by engineers, physicists and some environmentalists, suggests that a substantial decoupling of energy and economic production is now underway (2). Nevertheless, there continues to be a strong connection between energy and economic activity for most industrialized (3) and developing economies (4)

Top-down macroeconomic analysis indicates that where there is a decline in the ratio of energy to gross domestic product in industrial nations, it is due principally to a shift to higher quality fuels, improvements in fuel efficiency driven by higher fossil fuel prices and structural changes in national economies (5). Energy prices have an important effect on almost every major aspect of macroeconomic performance, because energy is used directly and indirectly in the production of all goods and services. Both theoretical models and empirical analyses of economic growth suggest that a decrease in the rate of increase in energy availability will have serious impacts (6). For example, most US recessions after the second World War were preceded by rising oil prices, and there tends to be a negative correlation between oil price changes and both stock prices and returns (7) in countries that are net importers of oil and gas. Energy prices have also been key determinants of inflation and unemployment.

There is a strong correlation between per capita energy use and social indicators such as the UN’s Human Development Index. By contrast, the use of hydrocarbons to meet economic and social needs is a major driver of our most important environmental changes, including global climate change, acid deposition, urban smog and the release of many toxic materials. Increased access to energy also provided the means to deplete or destroy once-rich resource bases, from the megafaunal extinctions associated with each new invasion of spear-equipped humans, to the destruction of natural ecosystems and soils through, for example, over-fishing and intensive agriculture and other types of development. Such problems are exacerbated by the increase in human populations that each new technology has allowed, as well as the overdependence of societies on those once- abundant resources. Energy is a double-edged sword.

How long can we depend on oil?

At present, oil supplies about 40% (natural gas 25%) of the world’s non-solar energy, and most future assessments indicate that the demand for oil will increase substantially. What do we know about the future of oil? Predictions of impending oil shortages are as old as the industry itself, and the literature is full of arguments between ‘optimists’ and ‘pessimists’ about how much oil there is and what other resources might be available. There are four principal issues that we need to understand to assess the availability of oil, and, by extension, other hydrocarbons, for the future. We need to know: first, the quality of the reserves; second, the quantity of the reserve; third, the likely patterns of exploitation of the resource over time; and fourth, who gets, and who benefits from, the oil. All of these factors ultimately affect the economics of oil production and use.

Quality of petroleum

What we call oil is actually a large family of diverse hydrocarbons whose physical and chemical qualities reflect the different origins and, especially, different degrees of natural processing of these hydro-carbons (8). In general, humans have exploited the large reservoirs of shorter-chain ‘light’ oil resources first because larger reservoirs are easier to find and exploit, and lighter oils are more valuable and re quire less energy to extract and refine. Therefore, over time in mature regions, lower quality has often required the exploitation of increasingly small, deep, offshore and heavy resource. Progressive depletion also means that oil in older fields that once came to the surface through natural drive mechanisms, such as gas pressure, must now be extracted using energy-intensive secondary and enhanced technologies. Thus, technological progress is in a race with the depletion of higher-quality resources. Another aspect of the quality of an oil resource is that oil reserves are normally defined by their degree of certainty and their ease of extraction, classed as ‘proven’ , ‘probable’, ‘possible’ or ‘speculative’. In addition, there are unconventional resources such as heavy oil, deep-water oil, oil sands and shale oils that are very energy intensive to exploit.

Quantity of petroleum

Most estimates of the quantity of conventional oil resources remaining are based on ‘expert opinion’, which is the carefully considered opinion of geologists and others familiar with a particular region (Table 1). The ultimate recoverable resource (URR) is the total quantity of oil that will ever be produced, including the nearly 1 trillion barrels extracted to date. Recent estimates of URR for the world have tended to fall into two camps. Lower estimates come from several high-profile analysts with long histories in the oil industry. They suggest that the URR is no gr eater than about 2.3 trillion barrels, and may even be less (for example, ref. 9). A higher estimate of 3 trillion barrels is the middle estimate, and 4 trillion is the highest estimate, from the most recent study by the US Geological Survey (USGS) (10,11). About half of the roughly 1.4 trillion barrels that the USGS predicts remain to be discovered are from new discoveries and about half are from reserve growth. The latte r describes the process by which technical improvements and correction of earlier conservative estimates increase the projected recovery from existing fields. This relatively new addition to the USGS methodology is based on experience in the US and a few other well- documented regions. The new totals assume, essentially, that petroleum reserves everywhere in the world will be developed with the same level of technology, economic incentives and efficacy as in the US. Time will tell the extent to which these assumptions are realized.

Pattern of use over time

The best-known model of oil production was proposed by Marion King Hubbert, who proposed that the discovery, and production, of petroleum over time would follow a single-peaked, symmetric bell- shaped curve with a peak in production when 50% of the URR had been extracted. This hypothesis seems to have been based principally on Hubbert’s intuition, and it was not a bad guess as he famously predicted in 1956 that US oil production would peak in 1970, which in fact it did 12 . Hubbert also predicted that the US production of natural gas would peak in about 1980, which it did, although it has since shown signs of recovery. He also predicted that world oil production would peak in about 2000. There was a slight downturn in world production in 2000, but production in the first half of 2003 is running slightly above the rate in 2000.

In the past decade, a number of ‘neohubbertarians’ have made predictions about the timing of peak global production using several variations of Hubbert’s approach. Various forecasts of the year of the global peak have ranged from one predicted for 1989 (made in 1989) to many predicted for the first decade of the twenty-first century to one as late as 2030 (ref. 9). Their predictions begin with an a priori assumption about the volume of ultimately recoverable oil. Most of these studies assumed world URR volumes of roughly 2 trillion barrels and that oil production would peak when 50% of the ultimate resource had been extracted. In comparison, the USGS low estimate (which they state has a 95% probability of being exceeded) is 2.3 trillion barrels. One analysis fitted the left-hand side of Hubbert-type curves to data on actual production while constraining the total quantity under the curve to 2, 3 and 4 trillion barrels for world URR. The resultant peaks were predicted to occur from 2004 to 2030.

Other forecasts for world oil production do not rely on such curve-fitting techniques to make future projections and/or a priori assumptions about URR. According to the most recent forecast by the US Energy Information Agency (EIA) (2003), world oil supply in 2025 will exceed the 2001 level by 53% (ref. 13). The EIA reviewed five other world oil models and found that all of them predict that production will increase in the next two decades to around 100 million barrels per day, substantially more than the 77 million barrels per day produced in 2001. Several of these models rely on the new USGS estimates of URR for oil. It should be noted that almost all oil-supply forecasts for which we are able to examine the predictions against reality had a dismal track record, regardless of method. Most recent results of curve-fitting methods showed a consistent tendency to predict a peak within a few years, and then a decline, no matter when the predictions were made 14 . It is now a well-established fact that economic and institutional factors, as well as geology, were responsible for the US peak in production in 1970 (ref. 15), forces that are explicitly excluded from the curve-fitting models. Thus, the ability (or the luck) of Hubbert’s model (and its variants) to forecast production in the 48 lower states (that is, contiguous) accurately cannot necessarily be extrapolated to other regions. It is too early to tell.

Economic forecasts fare no better in explaining US oil production in the lower 48 states. In the period after the Second World War, oil production often increased as oil prices decreased, and viva versa (16), a behavior that is exactly the opposite of predictions of economic theory. Economic theory also assumes that oil prices will follow an ‘optimal’ path towards the choke price — the price at which demand for oil falls to zero and the market signals a seamless transition to substitutes. In fact, even if such a path exists, prices may not increase smoothly because empirical evidence indicates that producers respond differently to price increases than they do to price decreases 15 . Significant deviation from basic economic theory undermines the de facto policy for managing the depletion of conventional oil supplies — a belief that the competitive market will generate a smooth transition from oil. It also suggests the need for a greater degree of government intervention in the transition from oil than is currently envisaged by most policy makers.

Geography

Oil is used by all of the ~220 nations of the world, but significant amounts are produced by only about 42 countries, 38 of which export important amounts. This number is likely to change because of the depletion of the once-vast resources of North and South America, and owing to the increasing domestic use of oil by many of the exporters. The number of exporters outside the Middle East and the former Soviet Union will drop in the coming decades, perhaps sharply, which in turn will greatly reduce the supply diversity to the 180 or so importing nations 17 . Such an increase in reliance on West African, former Soviet Union and especially Persian Gulf oil has many strategic, economic and political implications.

Energy and political costs of getting oil

The future of oil supplies is normally analyzed in economic terms. But the economic terms are likely to be dependent on other costs. In earlier work we summarized the energy costs of obtaining US oil and other energy resources and found, in general, that the energy re turned on energy invested (EROI) tended to decline over time for all energy resources examined. This includes the energy cost of obtaining oil by trading (energy-requiring) goods and services for energy itself (18). For example, the EROI of oil in the US has decreased from a value of at least 100 to 1 for oil discoveries in the 1930s, to about 17 to 1 today for oil and gas extraction (Fig. 4). We are not aware of such estimates for other parts of the world, although we do know that both heavy oil in Venezuela and tar sands in Alberta re quire a very large part of the energy produced as well as substantial supplies of hydrogen from natural gas to make the oil fluid. The very low economic cost of finding or producing new oil supplies in the Arabian Peninsula implies that it has a very high EROI value, which in turn supports the probability that productivity will be concentrated there in future decades. Alternative liquid fuels such as ethanol from corn have a very low EROI. An EROI of much greater than 1 to 1 is needed to run a society, because energy is also required to make the machines that use the energy, feed, house, train and provide health care for necessary workers and so on.

No one who watches the news can fail to be aware of the importance of cultural and political differences between those nations that have the most oil and those that import it. How these factors will play out over the next few decades is extremely important but also impossible to predict. Most of the remaining oil reserves are in Southern Russia, the Middle East and North and West Africa, countries or regions with either Muslim governments or significant Muslim groups. For a long period, frustration and resentment has been building up among Muslim populations, not least because of their perception that the main Western powers have failed to generate even-handed policies to address the conflict in the Middle East over the past half-century. It also is the case that the huge revenues earned by the oil-exporting nations have been very unevenly distributed among their respective populations, adding to internal and external pressure to adopt a more equitable approach to human development. Suffice it to say that there will continue to be high risks of international and national terrorism, overthrow of existing governments and deliberate supply disruption in the years ahead. In addition, exporting nations may wish to keep their oil in the ground to maintain their target price range. Thus, there are considerable political and social uncertainties that could result in less oil being available than existing models predict.

Our need to reduce supply uncertainties

Many once-proud ancient cultures have collapsed, in part, because of their inability to maintain energy resources and societal complexity 19 . Our own civilization has become heavily dependent on enormous flows of cheap hydrocarbons, partly to compensate for other depleted resources (for example, fertilizers and long-range fishing boats), so it seems important to assess our main energy alternatives. Some of our most promising new oil fields have turned out to be very disappointing (20). If indeed we are approaching the oil scarcity that some predict, it is not reflected in price and few investments are being made at the scale required. An even greater problem may be that an increasing number of decision-makers sense that the market has resolved this issue before and will and should do so again, and also that government programs are too inefficient to resolve possible impending energy problems. We view this as a recipe for disaster, and it is enhanced by the failure of science to be used as fully as it should be. Thus, in 2003, the state of oil-supply modelling is in some ways no different than it was in Hubbert’s time; in other words, a wide range of opinion exists.

What can science do to help resolve this uncertainty? Our principal conclusion is that these critical issues could be and should be the province of open scientific analysis in visible meetings where ‘all sides’ attend and argue. This analysis should be informed by the peer-review process, statistical analysis, hypothesis-generating and testing, and so on, rather than by the experts one chooses. These issues should be the basis of open competitive government grant programs, graduate seminars and even undergraduate courses in universities, and our courses in economics should become at least as much about real biophysical resources, such as hydrocarbon reserves, as about market mechanisms. And we need to think much harder about the alternatives.

The future: other technologies

The world is not about to run out of hydrocarbons, and perhaps it is not going to run out of oil from unconventional sources any time soon. What will be difficult to obtain is cheap petroleum, because what is left is an enormous amount of low-grade hydrocarbons, which are likely to be much more expensive financially, energetically, politically and especially environmentally. As conventional oil becomes less important, society has a great opportunity to make investments in a different source of energy, one freeing us for the first time from our dependence on hydrocarbons.

There are a wide range of options and an equally wide range of opinions on the feasibility and desirability of each. Nuclear power faces formidable obstacles. Experience of the past several decades has shown that electricity from nuclear power plants is an expensive form of power when all public and private costs are considered. Nuclear power generates high-level radioactive wastes that remain hazardous for thousands of years and increases the likelihood of nuclear-weapon proliferation. These are high costs to impose on future generations. Even with improved reactor design, the safety of nuclear plants remains an important concern. Can these technological, economic, environmental and public safety problems be overcome? This remains an unanswered question

Renewable energies present a mixed bag of opportunities. Some have clear advantages over hydrocarbons in terms of economic viability, reliability, equitable access and environmental benefits. In favorable locations, wind power has a high EROI. The cost of photo- voltaic (solar electric) power has come down sharply, making it a viable alternative in areas without access to electricity grids. With proper attention to environmental concerns, biomass-based energy generation is competitive in some cases relative to conventional hydrocarbon-based energy generation. By contrast, liquid-fuel production from grain and solar thermal power has a relatively low EROI. Hydrogen is an energy carrier, not an energy source, but energy and environmental communities have shown enormous interest in its potential. Hydrogen generated from renewable energy sources or electricity-driven hydrolysis is currently expensive for most applications, but it merits further research and development.

Subsidies and externalities, social as well as environmental, affect energy markets. With few exceptions, these subsidies and externalities tilt the playing field towards conventional sources of energy. This presents a clear case for public-policy intervention that would encourage the research, development and adoption of renewable forms of energy. Policy intervention, in concert with ongoing private investment, will speed up the process of sorting the wheat from the chaff in the portfolio of feasible renewable energy technologies. It is time to think about possibilities other than the next cheapest hydro- carbons, if for no other reason than to protect our atmosphere, and for this task we must use all of our science, both natural science and social science, more intelligently than we have done so far.

doi:10.1038/nature02130

1. Munasinghe, M. The sustainomics trans-disciplinary meta-framework for making development more sustainable: applications to energy issues. Int. J. Sustain. Dev. 5,  125–182 (2002).

2. Interlaboratory Working Group. Scenarios for a Clean Energy Future <http://www.ornl.gov/ORNL/Energy_Eff/CEF.htm> (Lawrence Berkeley National Laboratory LBNL-44029, Berkeley, California, 2000

3. Hall, C. A. S., Lindenberger, D., Kummel, R., Kroeger, T. & Eichhorn, W. The need to reintegrate the natural sciences with economics. BioScience 51,  663–673 (2001).

4. Tharakan, P. J., Kroeger, T. & Hall, C. A. S. Twenty-five years of industrial development: a study of resource use rates and macro-efficiency indicators for five Asian countries. Environ. Sci. Policy 4,  319–332 (2001).

5. Kaufmann, R. K. The mechanisms for autonomous increases in energy efficiency: a cointegration analysis of the US energy/GDP ratio. Energy J.

6. Smulders, S. & de Nooij, M. The impact of energy conservation on technology and economic growth. Resource Energy Econ. 25,  59–79 (2003).

7. Sadorsky, P. Oil price shocks and stock market activity. Energy Econ. 21,  449–469 (1999).

8. Tissot, B. P. & Welt, D. H. Pe tr oleum Formation and Occurrence (Springer-Verlag, New York, 1978).

9. Campbell, C. J. & Laherrère, J. H. The end of cheap oil. Sci. Am. 278,  78–83 (1998).

10. United States Geological Survey (USGS) The World Petroleum Assessment 2000 <www.usgs.gov> (2003).

11. United States Geological Survey (USGS) United States Department of Long Term World Oil Supply <http://www.eia.doe.gov/pub/oil_gas/petrole um/presentations/2000/long_term_supply/ index.htm> (2000).

12. Hubbert, M. K. Energy Resources (Report to the Committee on Natural Resources) National Academy of Sciences, Washington DC, 1962).

13. Energy Information Administration, US Department of Energy. International Outlook 2003 . Report No . DOE/EIA-0484(2003), Table 16 at <http://www.eia.doe.gov/oiaf/ieo/oil.html> (2003).

14. Lynch, M. C. Forecasting oil supply: theory and practice. Q. Rev. Econ. Finance 42,  373–389 (2002).

15. Kaufmann, R. K. & Cleveland, C. J. Oil Production in the lower 48 states: economic, geological and institutional determinants. Energy J. 22,  27–49 (2001).

16. Kaufmann, R. K. Oil production in the lower 48 states: Reconciling curve fitting and econometric models. Res. Energy 13,  111–127 (1991).

17. Hallock, J., Tharkan, P., Hall, C., Jefferson, M. & Wu, W. Forecasting the availability and diversity of geography oil supplies. Energy

18. Cleveland, C. J., Costanza, R., Hall, C. A. S. & Kaufmann, R. Energy and the United States economy: a biophysical perspective. Science 225,  890–897 (1984).

19. Tainter, J. The Collapse of Complex Systems (Cambridge Univ. Press, Cambridge, 1988).

20. Cooper, C. & Pope, H. Dry wells belie hope for big Caspian reserves. Wall St ree t J . 12 October (1998).

21. Hakes. J. Long Term World Oil Supply: a Presentation Made to the American Association of Petroleum Geochemists, New Orleans, Louisiana <http:www.eia.doe.gov/pub/oil_gas/petroleum/ presentations/2000/long_term_supply/index.htm> (2000)

 

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New York Times : 401K, mutual fund, brokerage fees have cost you tens of thousands of dollars

Give Fees an Inch, and They’ll Take a Mile

March 1, 2014. Jeff Sommer. New York Times.

[I’ve shortened and paraphrased much of the article, go to the link above to see the full article. My comments are in brackets]

Investment expenses will cut your returns, shrink your nest egg and may prevent you from achieving your financial goals. The SEC shows you the impact in a bulletin for investors called “How Fees and Expenses Affect Your Investment Portfolio”.

An example in the SEC bulletin shows that you’d lose $40,000 over 20 years on a $100,000 investment that grew 4% per year with a 1% annual fee: A THIRD OF YOUR INVESTMENT.  And if it’s not tax-sheltered, the IRS will get additional money as well.

If your portfolio earned less than 4%, the impact will be even greater.

And many hedge funds, mutual funds, 401K, and brokerages charge more than 1% per year.  In fact, the average expense ratio fee on an actively managed mutual fund is 1.26% according to Morningstar.

And the expense ratio is not the ONLY fee — the actual amount could be much higher!  The S.E.C. encourages you to see what the additional fees might be in the prospectus:

Commissions. You will likely pay a commission when you buy or sell a stock through a financial professional.

MARKUPS That is the term used when a brokerage firm — strictly speaking, a “broker-dealer” — sells you securities that it is holding in inventory and charges you a price higher than the market price.

SALES LOADS These are charged by some mutual funds, and they come in many varieties. Front-end loads are assessed when you make an investment; back-end loads are charged when you sell it.

SURRENDER CHARGES These are imposed when you withdraw early from an investment in a variable annuity, which is another big subject in itself. The S.E.C. put out a separate bulletin on variable annuities recently, highlighting the complexity and the multilayered fee structure that are common for them.

Then there are additional, continuing fees and expenses.  Here are just 2 of them:

INVESTMENT ADVISORY FEES These are often charged by advisers and may be based on the amount of assets in a portfolio.

401(K) FEES On top of annual operating expenses for mutual funds and E.T.F.s, there are additional fees for 401(k)’s, expenses for operating and administering retirement plans, and they may be passed on to employees.

These fees aren’t simple or all-inclusive. You may be charged additional brokerage fees for not maintaining a minimum balance, as well as for account maintenance, account transfer, account inactivity, etc. “These fees may not always be obvious to you from your account statement or confirmation statement,” the S.E.C. warned. “You should obtain information about all the fees you are charged and why they are charged.”

You can’t avoid all fees, but you can pay less if you shop around.

To research brokers see Finra’s BrokerCheck service. For advisers registered with the S.E.C., you may use the agency’s Investment Adviser Public Disclosure website. [If you trust brokers, please read Belfort’s “Catching the Wolf of Wall Street: More Incredible True Stories of Fortunes, Schemes, Parties, and Prison” or see the movie based on this book “The Wolf of Wall Street”]

18,000 Mutual fund and E.T.F. annual fees can be researched at Finra’s Fund Analyzer a Finra website, the brokerage industry’s self-regulatory organization.

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New York Times: Global Bond Frenzy Raises Concerns

Global Bond Frenzy Raises Concerns

Feb 19, 2014. Landon Thomas. New York Times

Global bond investors have financed some of the most enormous projects ever taken on by emerging economies the past few years.

Now growth is faltering in many developing nations,  so economists and regulators are increasingly worried about the consequences of this borrowing frenzy and the risk that the mutual funds and hedge funds that have largely replaced more stable commercial banks as global financiers might all decide to rush for exits at the same time.

Fears remain that any panicky selling of Chinese, Russian or Brazilian bonds could turn into a financial rout.

Scott A. Mather, the head of global portfolio management at the mutual fund giant Pimco: “Many years of private sector credit growth have created serious vulnerabilities.”

Analysts point out unlike the Asian financial crisis in 1997 caused by government borrowing, this debt binge was funded largely by global bond investors and companies outside Asia.

The underlying problem, Mr. Mather said, is that bond investors with little or no experience in emerging markets piled in to pursue higher yields than they could get from safer government securities in the United States and elsewhere, snapping up the bond issues of companies with even riskier credit profiles.

The stampede has led to a so-called mirage of liquidity in which many investors may have been misled into thinking that selling the securities will be as easy as buying them was.

“The liquidity is much worse now than before the crisis,” Mr. Mather said.

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