Thursday, October 30, 2008

Farmer in Chief

Here is the counterpoint to yesterday's post, Nutrients for Life. "Farmer in Chief" is an open letter to our next President, written by Michael Pollan, the author of In Defense of Food. He outlines his vision for modifying American agricultural policy to positively influence three of our most pressing issues. No doubt you have heard the presidential candidates debate over how to solve our dependence on foreign energy, our health care system and the specter of global climate change. Since agriculture is such a cornerstone of our society, the author asserts that changes could provide positive results in all three of these issues.

Whenever farmers clear land for crops and till the soil, large quantities of carbon are released into the air. But the 20th-century industrialization of agriculture has increased the amount of greenhouse gases emitted by the food system by an order of magnitude; chemical fertilizers (made from natural gas), pesticides (made from petroleum), farm machinery, modern food processing and packaging and transportation have together transformed a system that in 1940 produced 2.3 calories of food energy for every calorie of fossil-fuel energy it used into one that now takes 10 calories of fossil-fuel energy to produce a single calorie of modern supermarket food. Put another way, when we eat from the industrial-food system, we are eating oil and spewing greenhouse gases. This state of affairs appears all the more absurd when you recall that every calorie we eat is ultimately the product of photosynthesis — a process based on making food energy from sunshine. There is hope and possibility in that simple fact.
The author outlines his ideas for improvement, which all involve major shifts in agriculture policy. I've included excerpts here, but please read the entire article.

Step 1, Resolarizing the American Farm:
What happens in the field influences every other link of the food chain on up to our meals — if we grow monocultures of corn and soy, we will find the products of processed corn and soy on our plates. Fortunately for your initiative, the federal government has enormous leverage in determining exactly what happens on the 830 million acres of American crop and pasture land.

Your challenge is to take control of this vast federal machinery and use it to drive a transition to a new solar-food economy, starting on the farm. Right now, the government actively discourages the farmers it subsidizes from growing healthful, fresh food: farmers receiving crop subsidies are prohibited from growing “specialty crops” — farm-bill speak for fruits and vegetables. (This rule was the price exacted by California and Florida produce growers in exchange for going along with subsidies for commodity crops.) Commodity farmers should instead be encouraged to grow as many different crops — including animals — as possible. Why? Because the greater the diversity of crops on a farm, the less the need for both fertilizers and pesticides.

It will be argued that sun-food agriculture will generally yield less food than fossil-fuel agriculture. This is debatable. The key question you must be prepared to answer is simply this: Can the sort of sustainable agriculture you’re proposing feed the world?

There are a couple of ways to answer this question. The simplest and most honest answer is that we don’t know, because we haven’t tried. But in the same way we now need to learn how to run an industrial economy without cheap fossil fuel, we have no choice but to find out whether sustainable agriculture can produce enough food.

The second point to bear in mind is that yield isn’t everything — and growing high-yield commodities is not quite the same thing as growing food. Much of what we’re growing today is not directly eaten as food but processed into low-quality calories of fat and sugar. As the world epidemic of diet-related chronic disease has demonstrated, the sheer quantity of calories that a food system produces improves health only up to a point, but after that, quality and diversity are probably more important. We can expect that a food system that produces somewhat less food but of a higher quality will produce healthier populations.
Step 2, Regionalizing the Food System:

For your sun-food agenda to succeed, it will have to do a lot more than alter what happens on the farm. The government could help seed a thousand new polyculture farmers in every county in Iowa, but they would promptly fail if the grain elevator remained the only buyer in town and corn and beans were the only crops it would take. Resolarizing the food system means building the infrastructure for a regional food economy — one that can support diversified farming and, by shortening the food chain, reduce the amount of fossil fuel in the American diet.

A decentralized food system offers a great many other benefits as well. Food eaten closer to where it is grown will be fresher and require less processing, making it more nutritious. Whatever may be lost in efficiency by localizing food production is gained in resilience: regional food systems can better withstand all kinds of shocks. When a single factory is grinding 20 million hamburger patties in a week or washing 25 million servings of salad, a single terrorist armed with a canister of toxins can, at a stroke, poison millions. Such a system is equally susceptible to accidental contamination: the bigger and more global the trade in food, the more vulnerable the system is to catastrophe. The best way to protect our food system against such threats is obvious: decentralize it.
Step 3, Rebuilding America's Food Culture:
In the end, shifting the American diet from a foundation of imported fossil fuel to local sunshine will require changes in our daily lives, which by now are deeply implicated in the economy and culture of fast, cheap and easy food. Making available more healthful and more sustainable food does not guarantee it will be eaten, much less appreciated or enjoyed. We need to use all the tools at our disposal — not just federal policy and public education but the president’s bully pulpit and the example of the first family’s own dinner table — to promote a new culture of food that can undergird your sun-food agenda.

Changing the food culture must begin with our children, and it must begin in the schools. Nearly a half-century ago, President Kennedy announced a national initiative to improve the physical fitness of American children. He did it by elevating the importance of physical education, pressing states to make it a requirement in public schools. We need to bring the same commitment to “edible education” — in Alice Waters’s phrase — by making lunch, in all its dimensions, a mandatory part of the curriculum. On the premise that eating well is a critically important life skill, we need to teach all primary-school students the basics of growing and cooking food and then enjoying it at shared meals.

The president should throw his support behind a new Victory Garden movement, this one seeking “victory” over three critical challenges we face today: high food prices, poor diets and a sedentary population. Eating from this, the shortest food chain of all, offers anyone with a patch of land a way to reduce their fossil-fuel consumption and help fight climate change. (We should offer grants to cities to build allotment gardens for people without access to land.) Just as important, Victory Gardens offer a way to enlist Americans, in body as well as mind, in the work of feeding themselves and changing the food system — something more ennobling, surely, than merely asking them to shop a little differently.

I don’t need to tell you that ripping out even a section of the White House lawn will be controversial: Americans love their lawns, and the South Lawn is one of the most beautiful in the country. But imagine all the energy, water and petrochemicals it takes to make it that way. (Even for the purposes of this memo, the White House would not disclose its lawn-care regimen.) Yet as deeply as Americans feel about their lawns, the agrarian ideal runs deeper still, and making this particular plot of American land productive, especially if the First Family gets out there and pulls weeds now and again, will provide an image even more stirring than that of a pretty lawn: the image of stewardship of the land, of self-reliance and of making the most of local sunlight to feed one’s family and community. The fact that surplus produce from the South Lawn Victory Garden (and there will be literally tons of it) will be offered to regional food banks will make its own eloquent statement.
Pollan is a good author, and makes his views seem quite easy to implement. I can see some major hurdles to these policy changes, however, and some minor quibbles with several of his points.

1. Economic troubles.

As money gets tight, food price increases will be hard to politically justify. It does not matter that food prices are at historic lows...perhaps the cheapest of any civilization, ever. People already started bitching about food increases this past is an American right, cheap food and fuel.

Large scale unemployment, however, may provide a large base of manpower for more labor-intensive agriculture. Perhaps many people get a first-hand look at what jobs migrant workers are currently "stealing" from the American public.

2. Farmers as "drivers".
Farming without fossil fuels — performing complex rotations of plants and animals and managing pests without petrochemicals — is labor intensive and takes more skill than merely “driving and spraying,” which is how corn-belt farmers describe what they do for a living.
I find this to be quite patronizing. I know no farmer who would honestly describe himself in such a way. I suspect the author did not pick up on the humility and self-deprication of his subject. Organic farming is more labor intensive, that point is well recieved. Adding more human capital to the agricultural system will be a challenge of its own. But to say it takes no skill to run a modern farm is ludicrous. It takes a decidedly different set of skills, and new organic skills will need to be learned and disemminated. As the average age of the American farmer increases, this will be more and more difficult. It will take a youth movement, and few people (young or old) today are interested in the arduous and capricious way of life found in agriculture.

3. Energy Calorie per Food Calorie.
...a system that in 1940 produced 2.3 calories of food energy for every calorie of fossil-fuel energy it used into one that now takes 10 calories of fossil-fuel energy to produce a single calorie of modern supermarket food...
Much of this certainly can be explained by the long distances that food now travels. The other factor is that millions of farmers have left the business and there are simply much less human calories at work. This has been supplanted by fossil fuels.

4. Supermarket for the World

Some opponents of organic agriculture point to the fact that we might not be able to maintain the huge outputs of food that we once did. I tend to subscribe to the notion that it is not our duty to feed the entire world. Many of his suggested policies may lower the amount of available food. For years, our subsidized grain has driven world prices down, not allowing indigenous people to economically farm. Now will be their chance. I also feel grain prices are a great geopolitical lever that we control. China has become quite reliant on us, importing more and more in the last few years. We must not neglect this as a bargaining tool.

5. A Matter of Taste

The rise of the industrial food system was helped along by policies, but it rests on the simple fact that all people like to eat cheap, tasty, sweet, fatty and salty foods. This small, sticky fact will not go away, it is hard-wired in our DNA. It will be very hard to convince people to pay more for food that they do not prefer. However, the author brings up the pertinent point - this cheap, unhealthy food is being subsidized. Not only by farm subsidies for grain, but by our increasing health insurance premiums. If we remove these incentives and force people to pay the true cost, the decision calculus may begin to swing in a more healthy direction. The huge amount of political capital and will to do this may be simply unattainable, however.

All in all, there are some very interesting ideas contained in his letter. I believe that less reliance on huge agribusiness and heavier reliance on local small agriculture has many benefits. Whether we can make such a transition remains to be seen. The individual consumer now has more of a choice than ever; buy fresh, organic, local food and provide a market for these products. Don't eat fast food and prepackaged meals. Grow a garden. Small steps by large amounts of people can have huge impacts.

Read: Farmer in Chief


Wednesday, October 29, 2008

Nutrients for Life

I like to provide a wide range of viewpoints here at TOTC, and while I believe that organic methods are very important, there is something to be said for the sheer power of conventional agriculture. As farmland continues to dwindle, more and more people have to be fed from fewer and fewer acres. Proponents of organic agriculture claim that similar yields can be attain through organic methods - sometimes even higher. I find this very hard to believe.

I'll make no bones about it, the website I am featuring is a lobbyist group for the fertilizer industry. However, this is a side of the story that we don't often hear, and as I've said before, the average consumer has no idea how or where their food is produced, and seems to have little interest in finding out. This leaves a quite malleable populous, able to believe such gems as "Potash is chinese", "fertilizer can be pretty toxic because it is made from pesticides, it kills lots of stuff" and "mad-cow disease and E. coli is all happening from fertilizer". Things are never black and white, but the current prevailing thought is: fertilizer = bad. This site makes some serious points on why we should reconsider.

There is some obvious spin going on, but I found a lot of good information as well. Take a look:


Tuesday, October 28, 2008

20 city composite of housing prices and how each city compares

Interesting to see the changes (both extremes) for a lot of the cities. Detroit is a bit of an anomaly; they never really took off, but eventually hit the shitter.

The image is not from the article, just thought it was an interesting juxtaposition.


Monday, October 27, 2008

50 Years of Market Swings

Here's an interesting slide show of the S&P500 over the last half-century. One thing I noticed was the seemingly exponential growth starting in the '80s. One would have to wonder if this growth is real, or if it is at least partially an artifact of economic policies and demographics. Certainly such wealth can't be entirely a mirage, but if growth kept on a similar pace as the first 30 depicted years, we have a lot more "correcting" to do. As any prospectus worth its salt will tell you, "past performance is not an indicator of future success". It is comforting, however, to see that most declines are over in a few years and the market quickly rallies to new heights.


Sunday, October 26, 2008

Oil Producers Like High Prices

Perhaps the understatement of our young century, but it certainly is a great reason for us all to find alternatives to oil. It seems OPEC and other oil-rich nations have grown rather fond of high crude prices. As human nature goes, we normally spend every last dime we make...and these nations are no different. Now as oil prices decline, there are concerns that their 2009 budgets may be busted, and they are scrambling for ways to provide price support. Iraq, for instance, has said it needs $111 per barrel oil to balance next year's budget. Maybe we should tell them that I need $1.50 gas to balance my budget.

One thing I don't quite understand, if they lower production to keep the price up...won't the end result still be less money in their coffers? I can't really fault them for screwing us all over, but as I said, we need to find another way.


Saturday, October 25, 2008

Respect Your Elders

LAGOS (Reuters) - A father took his 20-year old son to an Islamic court in northern Nigeria for idleness, asking that he be sent to prison for refusing to engage in productive activities, state news agency NAN said on Friday.


Thursday, October 23, 2008

New OPEC for Natural Gas?

In this article, the prospect of a new Natural Gas cartel - dubbed by some as G-OPEC or OGEC - comprised of Russia, Iran and Qatar - is examined.

Russia, Iran and Qatar held talks in Tehran yesterday about forming a cartel for natural gas that would resemble the OPEC cartel for oil. But the structure of the natural gas business makes it unlikely that a gas OPEC would get off the ground anytime soon.
Western nations have been trying to diversify Natural Gas sources to alleviate such a concern, which has also been exacerbated by Russia's recent foray into Georgia.


Wednesday, October 22, 2008

Tiny Houses

As the economy slows, people are finding ways to downsize everything...


Friday, October 17, 2008

Biofuel's Effect on Grain Prices

Maybe ethanol isn't the only thing that can affect corn prices...

"When you have something come in like Lehman Brothers going bankrupt, then it influences your market. Those kind of things are impossible to build into your business plan," said Krug.

And unless prices go up, hard to make a profit.

In Nebraska, corn sold at around $3.50 a bushel Thursday.

Soybeans were at about $8.

Both prices are about half of what they were just a few months ago.


Thursday, October 16, 2008

Pump It Up

In response to the inevitability of our first black president, I will be using a several part installment to look at the behind-the-scenes of life on the campaign trail for our Prez and VP-to-be. First off, embracing black culture and his general over-whiteness, Joe Biden finds it only natural to rock out to...


Financial Reckoning Day

Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. William Bonner and Addison Wiggin. Recommended.

I will preface this book review with a disclaimer. The authors have an extensive website ( where you can read many articles with much of the same information as in the book. The authors could also be described as 'goldbugs', and many of the articles have a certain late-night-infomercial feel to them. That being said, I found the book to be very interesting and would like to share my thoughts and impressions with you. I highlight the book not for any investment advice - which is surprisingly almost non-existent - but as a history of the Crash of 2008, and other booms and busts throughout the ages.

In my view, Financial Reckoning Day is a history book. Written in 2003, it is a call of warning that our financial system is unsustainable. The authors set out to tell us why.

The first chapter accounts the boom years between Fukuyamas' "The End of History" and the dot-com collapse of 2001. The second chapter draws parallels between military exploits and financial cycles; both Napoleon and Hitler's ill-advised offensive maneuvers are shown related to bull and bear markets. Chapter Three is devoted to John Law, widely recognized as the father of fiat currency in the early 1700s. The fourth chapter gives us a case study 10 years prior to our own boom and bust - the Japanese. And the next chapter is purely devoted to the author's most culpable player - Alan Greenspan. Greenspan received years of accolades as the master of the world's financial markets, and now must share in the blame.

I found the remaining chapters to be the most interesting, as I feel they capture the true reasons for our current crisis. From these chapters I gleaned three main underlying factors: the wide ranging blame can be distilled into Failed Policies, Demographics and Human Nature.

Human Nature

Which of mankind's greatest achievements and failures cannot be attributed to factors of human nature? The fallibility of man allows us to do both unimaginable good but can lead us to unspeakable despair.

Greed is highlighted in nearly every financial article these days. While it is mostly used to describe evil CEOs and corporations, we must not forget the individual. Was not greed a factor in the unqualified homebuyer's decision to purchase a home he could not afford? How about the "flippers" and other investors that wanted to make a quick buck in the real estate market? If not only greed, perhaps it is vanity that has led the average American to spend every dollar they earn - and more.

Vanity is a nagging voice imploring us to "keep up with the Joneses". Certainly if they can afford new cars and European vacations, we can too. Heck, don't we deserve it? Vanity has also invaded our psyche - we are the smartest, most technologically advanced beings to ever walk the earth. We have solved so many of the world's problems...why should we think the economy cannot be tamed.

Another dangerous human characteristic is a crowd or mob mentality, also known as "groupthink". It can reduce a normally level-headed person to do amazingly illogical acts. As these groups begin to think the same thoughts, "irrational exuberance" can take hold. Investors throughout history have fallen prey to this phenomenon. The difference today? Global communication allows for the entire earth to have access to the same information. Every man can now be a part of every boom..and bust.


Perhaps one of the most frightening factors is the cold hard fact of demographics. As noted in this post, finance can be distilled down to one concept - old people lending money to young people. When there is an imbalance in demographics, there tends to be an imbalance in financial markets. As you may know, there was a global spike in births after the conclusion of World War II. The "boomers" get a whole chapter just to themselves. Four interesting statistics:

1. Average age of American baby boomers on January 1, 2001: 46
2. Average amount in retirement account: $50,000
3. Number of years at 6% growth to reach comfortable retirement income: 63 years
4. Amount in U.S. Social Security Trust Fund: $0
Besides the large effect that the aging population will have on Social Security and health care benefits, they will continue to exert an inherent downward pressure on both the housing and stock market. As people age, they stop working and earning - and begin selling. When there are more sellers than buyers, prices fall. The alternative is to continue working until later in life...which is an undesirable thought to most of us. However, as life expectancy has increased, does it not stand to reason that we would have to work longer as well?

Failed Policies

The frightening aspect of our situation is that 2 of the 3 factors I have listed have little to no solution. And while governments around the globe scramble for new policies, there is certainly the distinct possibility to actually do more harm than good.

The authors place most of the blame on Greenspan's policies; and fiat currency in general. As for fiat versus a commodity-based system, I do not have the background to have an informed opinion. From my limited research, there are positives and negatives to both systems - as with most things in life. While there are booms and busts in fiat currency systems, there have been similar 'panics' in gold, silver, and other commodity-based economies. The world seems to have adopted central bank guided fiat currencies, and I don't really see a shift away from that.

Much of the blame is then laid at the feet of Alan Greenspan. After the tech stock boom of the late 1990s, interest rates were slashed and kept low. This allowed for massive amounts of cheap money to flood into the real estate market. With easy and inexpensive money available to nearly anyone with a pen, home prices soared to unrealistic levels.

Other policies that fueled the fire were mandates to make home loans available to subprime borrowers. This was accomplished by a plethora of innovative new mortgages and the implicit backing of Fannie Mae and Freddie Mac by the federal government through the U.S. department of Housing and Urban Development. Fannie and Freddie were subsidized to take on more and more subprime debt, and the American public was more than willing to oblige.

Lack of government oversight is also blamed in the Crash of '08. There were, no doubt, cases of predatory lending. The process of purchasing a home is a daunting one and can easily be manipulated by the unscrupulous. Perhaps the most unregulated entity...the exotic derivatives market that has been likened to the world's largest casino. Credit Default Swaps, packaged as a way to hedge against risk, seem now more like insurance fraud. There will most likely be sweeping reform in this and other areas of the financial sector in the coming months.

As one can see, there is plenty of blame to share. I, too, have benefited and become somewhat entangled in the credit boom and subsequent bust. Now with the stock market plunging and other areas of the economy showing signs of deep recession, we can only hope we all can find a way to recover in an expedient fashion. As for "Surviving the Soft Depression" as the book claims, I found no hard advice. Basically, the authors suggest you sell stocks and buy gold, but it would seem too late for that. Anyone have a time machine?


Tuesday, October 14, 2008

Green Jobs Examined

Here is an interesting take on the "green jobs" sector that is referenced so much about in the presidential campaigns. It is from Energy Outlook...which I recommend quite highly.

All Those Green Jobs
A full-page ad appearing in today's New York Times, Wall Street Journal, and Washington Post reminded me of a topic I've meant to cover for some time. Frequently during this election campaign, including the primaries, we have heard candidates extol the employment benefits of a switch to renewable energy. In Tuesday night's debate, Senator Obama suggested a figure of "5 million new jobs" from clean energy, and Senator McCain also mentioned "millions of jobs" in this context. It sounds alluring. A rapidly-growing energy sector providing good jobs here in the US is just what the economy could use at the moment. But while recognizing the potential benefits, we should also examine these claims critically. What would 5 million green energy jobs imply about future US energy costs and competitiveness?

The ad in today's papers is entitled, "The Unshaken Pillar", and it describes the US energy sector as a solid foundation for the whole economy at a time of great uncertainty, emphasizing the need for improved energy efficiency and conservation, along with expanded production of both oil & gas and alternatives. Signed by the CEOs of Chevron, AEP, FedEx, and Dow Chemical, it cites employment as an example of the domestic energy industry's benefits. This suggests a basis for putting those hypothetical 5 million green jobs into perspective. As of last year, the US oil and gas industry employed 1,772,000 workers in all categories, spanning exploration & production, refining, transportation and distribution. Nor are they all engineers and highly-paid drilling specialists. Nearly half this figure was associated with employment in service stations. Collectively, these 1.8 million people produced, processed and delivered fuels carrying 33 quadrillion BTUs of energy, or "quads", to US consumers and businesses. That's a third of total US energy consumption and 46% of US energy production. On average, it equates to 18.6 billion BTUs per worker, or 3,100 barrels of oil equivalent each, annually.

In order to come up with a comparable productivity metric for renewable energy, we need to make some assumptions about how much this sector will produce when it reaches its anticipated employment of 5 million Americans. It must be a lot more than the 1% or so of electricity and 7% of gasoline currently supplied by wind, solar power and ethanol. If we combine the 36 billion gallons per year of biofuel targeted for 2022 under the federally-mandated Renewable Fuel Standard with the 20% of net electricity generation from wind by 2030 posited by a recent DOE study, as a proxy for all new renewable electricity, the total equates to roughly 14 quads per year. And that's giving the kilowatt-hours from renewable electricity the benefit of a gas-fired turbine heat rate, rather than the normal engineering conversion, which is 2/3 lower. The resulting productivity figure works out to 2.8 billion BTUs per green energy worker, or 470 barrels of oil equivalent per year.

On that basis, we should expect that the average energy productivity of this huge new renewable energy sector would only be about 15% of the productivity of the current oil and gas industry. To understand the implications of that for the economy and for US international competitiveness, we must translate these figures into dollars. If the average "green-collar" job envisioned by those emphasizing the employment benefits of renewable energy pays the current average US wage of $47,000 per year, then the result is an effective energy cost of $100 per barrel, before considering capital expenses--and renewable energy is still at least as capital-intensive as conventional energy. Using the above figures, the comparable calculated labor expense for oil & gas is around $15 per barrel.

There are many good reasons for the US to pursue renewable and other alternative energy technologies aggressively, including addressing climate change, improving our energy security, and reducing the influence of petro-authoritarian states. Adding good jobs would belong on this list, too, as long as we keep our eye on productivity. In order to remain competitive, we shouldn't desire the largest energy sector possible, but rather the smallest one that does the job of providing the clean energy needed by the rest of the economy, where the vast majority of the goods and services we consume are created. With that in mind, let's all hope that the 5 million green jobs we keep hearing about are merely another example of election-year pie-in-the-sky, and not a realistic estimate.


Thursday, October 9, 2008

Crash of 2008: Unexpected Consequences

As world financial markets continue their historic swoon, one can only wonder when and where we will find the bottom. One could also wonder what additional - perhaps unexpected - effects that a marginalized U.S. economy could produce. I am highlighting three articles that examine some sobering possibilities.

America's Nervous Breakdown

Even though the U.S. government rushed to restore trust, hundreds of billions of dollars in paper assets simply vanished. Friends and enemies abroad were unsure whether the irregular American heartbeat was a major coronary or a mere cardiac murmur. How strong — really — was the world’s greatest economy? Was this panic the tab for years of borrowing abroad for out-of-control consumer spending? Had America finally gone too far enriching dictators by buying energy that it either could not or would not produce itself? Had the chickens of lavishing rewards on Wall Street and Washington speculators rather than Main Street producers finally come home to roost?

Allies trust that the United States is the ultimate guarantor of free communication and commerce — and they want immediate reassurance that their old America will still be there. In contrast, opportunistic predators — such as rogue oil-rich regimes — suddenly sniff new openings.
The natural order of the world is chaos, not calm. Like it or not, for over a half-century the United States alone restrained nuclear bullies, kept the sea lanes free from outlaws, and corralled rogue nations. America alone could provide that deterrence because we produced a fourth of the world’s goods and services, and became the richest country in the history of civilization.

But the bill for years of massive borrowing for oil, for imported consumer goods, and for speculation has now has finally come due on Wall Street — and for the rest of us as well.

Should that heart of American financial power in New York falter — or even appear to falter — then eventually the sinews of the American military will likewise slacken. And then things could get ugly — real fast.
Hidden Behind Defense
At the end of this 60-year period, defense and entitlement spending had roughly traded places. This allowed the largest spending exercise in U.S. history to be absorbed without dramatic impact on the federal budget. That budget elasticity has now ended.

With declining defense spending gone and Baby Boomer retirements beginning in 2011, America confronts unmitigated and unleashed entitlement spending. According to the Congressional Budget Office, the three largest entitlement programs - Social Security, Medicare and Medicaid - alone will increase from 8.4 percent of GDP in 2007 to 25 percent in 2082.

Even this enormous increase to a quarter of U.S. economic output is built on the conservative assumption that "rates of spending growth in the Medicare and Medicaid programs would probably moderate to some degree" to below their past performance.

Russia Pushes Pact to Rival NATO
In a challenge to 60 years of U.S. leadership in Europe, Russia's president said Wednesday that America's financial crisis had diminished its power and called for a new security pact to rival NATO.

Medvedev proposed that European countries work with Russia to form a new trans-Atlantic organization in which the United States was no longer the dominant power.

His statements came as Russia takes a more aggressive stance against the West, especially following this summer's war in Georgia.

See related posts.


Tuesday, October 7, 2008

America's First Biofuels Corridor

Interstate 65 is now America's first biofuels corridor. E85 Ethanol and B20 Biodiesel blends are available the entire length of the Interstate, from Gary, Indiana to Mobile, Alabama. A driver is now no more than a quarter-tank's drive from a fuel retailer carrying E85.


Monday, October 6, 2008

Crash of 2008: Credit Default Swaps, Part II

This article
sums up one of the underlying reasons for the financial troubles that the world is currently experiencing. As I noted in this post, derivatives - namely Credit Default Swaps (CDS) - have played a pivotal role in the global economy's dizzying expansion...and subsequent downfall. This article explains the scheme in more detail.

Around the world, banks must comply with what are known as Basel II regulations. These regulations determine how much capital a bank must maintain in reserve. The rules are based on the quality of the bank's loan book. The riskier the loans a bank owns, the more capital it must keep in reserve. Bank managers naturally seek to employ as much leverage as they can, especially when interest rates are low, to maximize profits. AIG appeared to offer banks a way to get around the Basel rules, via unregulated insurance contracts, known as credit default swaps.

Here's how it worked: Say you're a major European bank... You have a surplus of deposits, because in Europe people actually still bother to save money. You're looking for something to maximize the spread between what you must pay for deposits and what you're able to earn lending. You want it to be safe and reliable, but also pay the highest possible annual interest. You know you could buy a portfolio of high-yielding subprime mortgages. But doing so will limit the amount of leverage you can employ, which will limit returns.


Although AIG's credit default swaps were really insurance contracts, they weren't regulated. That meant AIG didn't have to put up any capital as collateral on its swaps, as long as it maintained a triple-A credit rating. There was no real capital cost to selling these swaps; there was no limit. And thanks to what's called "mark-to-market" accounting, AIG could book the profit from a five-year credit default swap as soon as the contract was sold, based on the expected default rate.


It was a fraud. AIG never any capital to back up the insurance it sold. And the profits it booked never materialized. The default rate on mortgage securities underwritten in 2005, 2006, and 2007 turned out to be multiples higher than expected. And they continue to increase. In some cases, the securities the banks claimed were triple A have ended up being worth less than $0.15 on the dollar.

Even so, it all worked for years. Banks leveraged deposits to the hilt. Wall Street packaged and sold dumb mortgages as securities. And AIG sold credit default swaps without bothering to collateralize the risk. An enormous amount of capital was created out of thin air and tossed into global real estate markets.


AIG's largest trading partner wasn't a nameless European bank. It was Goldman Sachs.

I'd wondered for years how Goldman avoided the kind of huge mortgage-related writedowns that plagued all the other investment banks. And now we know: Goldman hedged its exposure via credit default swaps with AIG. Sources inside Goldman say the company's exposure to AIG exceeded $20 billion, meaning the moment AIG was downgraded, Goldman had to begin marking down the value of its assets. And the moment AIG went bankrupt, Goldman lost $20 billion. Goldman immediately sought out Warren Buffett to raise $5 billion of additional capital, which also helped it raise another $5 billion via a public offering.

The collapse of the credit default swap market also meant the investment banks – all of them – had no way to borrow money, because no one would insure their obligations.

Now the only place for these institutions to get capital is the Federal Reserve. Unfortunately, very few folks believe that the recent $700B 'bailout' package will have the intended result. Markets around the globe fell decisively this Monday. One reason: perhaps there just isn't a way to replace the credit...

There's no way to replace this massive credit-building machine, which makes me very skeptical of the government's bailout plan. Quite simply, we can't replace the credit that existed in the world before September 15 because it didn't deserve to be there in the first place. While the government can, and certainly will, paper over the gaping holes left by this enormous credit collapse, it can't actually replace the trust and credit that existed... because it was a fraud.

And that leads me to believe the coming economic contraction will be longer and deeper than most people understand.
The author then gives some investment advice, which I am unsure of the impartiality or validity. I don't feel that this should detract from the explanation of the situation, however. There seem to be many people hawking gold these days - who knows if any drastic maneuvers are a good idea. Bottom line, we may be in for some rough times in the years ahead, and it may be a good time to seek professional investment advice.


Saturday, October 4, 2008

Prebiotics vs. Probiotics

I recently noticed the terms "probiotic" and "prebiotic" on yogurt packaging and advertisements. I had heard of probiotics before, and assumed them to be the "live and active cultures" that give yogurt its supposed health benefits. I was not 100% sure of this, however, and "prebiotic" was certainly a new one to me, so I decided to look them up. Here's what I found:


As I originally suspected, probiotics refer to a group of microorganisms - bacteria and yeasts - that have potential health benefits. They generally must be live organisms to be truly considered probiotic. A precise definition (and health benefits) are actually in debate in the medical and health community.

These cultures are thought to help out the naturally occurring microbes in your stomach and intestinally tract. They can be implemented after a round of antibiotics to restore the natural "gut flora" of one's body. Some use probiotic products to prevent and treat certain illnesses and support general wellness. One thing to keep in mind - there are a wide number of microorganisms that are considered probiotic; and effects found from one species or strain of probiotics do not necessarily hold true for others, or even for different preparations of the same species or strain.

Yes, El Guapo, I would say there are a plethora of sources for probiotics. The two main ways to introduce them into a diet are through supplements and food. Since I view supplements with a high sense of skepticism, I would most likely recommend sticking with real food. Also, the probiotics must be alive to work, so supplements must be refrigerated like food anyhow. Probiotic foods include the aforementioned yogurt, as well as fermented and unfermented milk, miso, tempeh, kiefer, and some juices and soy drinks. Some may find these selections rather unappealing; but given the wide range of choices, there should be something for everyone's palate.


And now for the question of the day - What are prebiotics? Quite simply, they are food for probiotics. Prebiotics are indigestible (to humans) substances that can stimulate the growth and vitality of the microorganisms in one's digestive tract. Prebiotics are normally classified as carbohydrates, and quite often a type of fiber.

Prebiotics can be found in grains - such as soybeans, oats, wheat, and barley. Inulin - group of naturally occurring polysaccharides - is another source, and it can be derived from jerusalem artichoke, jicima, chicory root, and yacon (yeah, I've never heard of that either). Inulin is becoming widespread as a food additive for its wide range of characteristics and applications. Not only does it have probiotic properties, it contains much less caloric energy than sugar, it ranges from bland to subtly sweet, and it can be used to replace sugar, fat, and flour.

Much like probiotics, prebiotics are not completely understood. Experts agree that adding them to one's diet is beneficial, but specific advice varies widely. Certain benefits include: intestinal regularity, increased mineral absorption, increased immune system response, and bowel pH adjustment. Be aware, however - a sudden increase in substaintial quantities of prebiotics have been shown to cause a temporary increase in gas, bloating and/or bowel movements. So take it easy - yikes.


Thursday, October 2, 2008

Global Trends 2025: Update

I thought I would provide an addendum to the post on Global Trends 2025, since I found a little additional related information.

First, here is the transcript of Thomas Fingar's speech, so you can read it for yourself.

Next, another National Intelligence Council Report, that outlines Six Technologies With Potential Impacts to U.S. Interests out to 2025:

- Biogerontechnology
- Energy Storage Materials
- Biofuels and Bio-Based Chemicals
- Clean Coal Technologies
- Service Robotics
- The Internet of Things

Several of these technologies could have direct effects on two of the main concerns of my blog - demographics and energy. These effects may not always be in our best interest.

Some highlights:
Biogerontechnology offers the means to accomplish control over and improvement in the human condition, and promises improvements in lifespan.

Nations will be challenged as a result of changing demographic structures, new psychologies, activity patterns of aging yet healthy citizens, and the resulting requirement to formulate new national economic and social policies .

Energy Storage technologies have the potential to disrupt the way energy is stored and distributed for use in transportation and portable devices.

Biofuels and bio-based chemicals production technologies have the only potential near-term capability to provide alternatives to conventional gasoline and diesel-fuel and petrochemical feedstocks.

A large-scale move to energy-efficient biofuels could increase US energy security and ease international competition for world oil supplies and reserves.

Clean coal technologies and an array of related technologies offer the potential to improve electrical generation efficiency, lower emissions of harmful pollutants, and provide fuels and chemical feedstocks from available coal resources.

The development and implementation of robots for elder-care applications, and the development of human-augmentation technologies, mean that robots could be working alongside humans in looking after and rehabilitating people. A change in domestic and social responsibilities and a change in domestic employment requirements could adversely affect lower income service-oriented workers.
Check out the link for the full report. Global Trends 2025: A Transformed World can be found here.

Other Global Trends Posts:
Global Trends 2025
Global Trends Update
Global Trends Update II
Globalization and the Crash of '08
Demographics of Discord
Timing is Everything
Winners and Losers in a Post-Petroleum World
Scarcity in the Midst of Plenty
Final Thoughts