Archive for the 'Commerce' Category

Settling into a warmer future

December 23rd, 2009 — Wordman

It is pretty clear that the world has been warming up over the last 150 years. It doesn’t really matter if you just shoveled two feet of snow off your driveway (as I did). It also doesn’t matter whether you believe the temperature increase is caused by human activity or not. Nor does it really matter that 150 years is nothing on a geological time scale; chances are that these higher temperatures will reign for the majority of your remaining natural life.

Teams from the various governments of the world, most of which do believe that this warming is man made, nevertheless failed to take any meaningful action when they met in Copenhagen last week. Most are blasting this as a “failure”, a “disaster” or, at least, “disappointing”. Instead, though, it really should be viewed as exactly what it was: the result of a number of diverse, self-interested parties acting completely rationally. That no magical concord came out of this is totally unsurprising. Likewise, no such concord will come out of the next such meeting, nor the one after that.

In other words, get used to it being hotter.

So, how to best do that? People seem to assume that every aspect of global warming is automatically bad. This is certainly not the case. How best to take advantage of its advantages? And how best to minimize its disadvantages?

What follows suggests some advice on how to prosper in a hotter world. One caveat: it is tailored to people living in the United States. Some of it might happen to be applicable to those of you reading from other countries, but you’re on your own. Which brings us to the first point:

  1. Assume that nationalism will increase. As the ecosystem adjusts to higher temperatures, the status quo of resource allocation will change. In some places it will get better, in some places worse. Nations will want new sources for what they used to have, and will want to take advantage of and protect what they have gained. In the short term, interruption of existing systems and their rearrangement will result in a net decrease in whatever the system produces or manages. So, not only will nations be trying to rearrange the shares of the pie, the pie will be getting smaller. This will make many countries grumpy, insular and tribal.
  2. Budget more for food. The “shrinking pie” will be most noticeable in the area of food production. It will be shocked hard, and will take a while until people figure out what works the a higher temperature world. While some have thought a lot about preventing this, it will probably happen anyway. In addition to the shrinking pie, pushes for renewable energy will divert more of the river of corn that feeds America into fuel production. (Since it seems like corn is killing us, this may not be a bad thing.) All of this will conspire to raise food prices, which have already risen quite a bit. You might want to start looking for local food or start growing some of your own to offset the higher costs.
  3. Move slightly north. At a very loose approximation, if you want to stay living in the climate you grew up in, you’ll need to shift a few degrees of latitude toward the pole. If you stay where you are, it will get hotter. But north of you is already colder, so moving there as it also heats up will keep your average temperature the same. Obviously, climate is more complicated than this, so you need to allow for terrain and such, but the basic idea is that if you find your current location becoming unbearable, somewhere more palatable is probably not that far away.
  4. Move slightly inland. If you are living right on the beach, you might want to sell now. While the really alarming maps of sea levels rising turn out to be BS, no one is really that sure about how sea level change works. If you look at a bunch of different effects and guess a bit, you reach a reasonable estimate of a one meter rise in sea level by 2100. This would be pretty bad news in Asia and parts of Europe, but not so much the U.S., unless you live right on the beach. Or in Florida. And, I wouldn’t move back into New Orleans. But, in general, the map doesn’t change much for a one meter rise, so just moving back a bit from the coast should be sufficient.
  5. Don’t be overly concerned with species extinction. So far, billions of species have gone extinct (something like 99.9% percent of all species that have ever existed are no more). Hundreds of species (90% or which were never cataloged) will go extinct this year. One will probably be extinct by the time you finished reading this post. Naturally, this species probably will be something dull, like a plant, or ugly, like a beetle, so won’t get as much press as, say, a polar bear, but it’s dead just the same. Yet this has happened every day of your life and, somehow, the remaining 10 million species on the planet have soldiered on (even if we’ve only cataloged three out of every 20 of them). Now, one of the concerns about this hot spell is that, geologically speaking, the temperature change is quite rapid and it is the rapidity of the change that speeds extinction, not the change itself. The idea is that a change can be so fast than nature can’t keep up. For example, assume a forest 25 miles across lives in a “viability zone”, beyond which it’s plants cannot survive. North of the zone, it is too cold; to the south, too hot. Suppose this zone is slowly shifting north. This isn’t really a problem for the forest. Even though the plants don’t move, the forest can “migrate” is by spreading north with new seed, while letting the southern border die off. But, assume that this zone instantly, magically shifts 100 miles to the north. That forest (and the species that rely on it) is now screwed because it can’t keep up. Even if the rapid temperature rise shifts these zones faster than nature can keep up, however, one force probably will be able to work around this: man. You can bet, for example, that corn will “migrate” north as temperatures increase as fast as man can carry it. (Also, it turns out that the “shrinking forest” problem is not likely anyway, as plant populations expand in conditions where temperature and CO2 rise in tandem.)
  6. Have faith in science. Assuming CO2 really is killing the world, the worse it gets, the more likely (i.e. cost-effective) it will be that science can solve the problem. Imagine, for example, a magical machine that sucks in CO2 and uses energy from the sun to pull out the carbon atom, releasing O2 into the atmosphere and embedding the carbon in some fixed medium. With enough such machines, CO2 is reduced, life goes on. Considering that billions of these “magical machines” already exist (they are called “plants”), it’s not much of a stretch to guess that science will be able to replicate (and probably improve) this idea synthetically as artificial trees or some such.
  7. Assume environmentalists will rail against solutions that don’t involve environmentalism. Solutions like artificial trees are collectively known as geoengineering, and environmentalists generally tend to hate them. Sometimes, such as when the idea is particularly bad, this hatred makes sense (usually because there are some obvious unintended consequences). But some environmentalists, usually the most vocal, will reject even ideas that demonstrably meet the goals they claim to have, if the idea uses a method other than the one they are really pushing. As an example, even if the artificial tree concept was able to meet any arbitrary CO2 concentration goal for, say, three dollars, there would still be environmentalists shouting it down and saying that clearly we should instead be spending billions to prevent the evil corporations from producing CO2 in the first place. (Such objections would, among other things, ignore the notion that, once emitted, about half of the CO2 stays in the atmosphere for 40+ years, so even stopping all emissions wouldn’t have any effect for generations while, meanwhile, artificial trees could be removing that CO2 immediately.) Bank on furor like this happening and causing political strife. Also bank on the profit that will be realized by those that ignore it.
  8. Don’t count on science. Faith in science isn’t like faith in religion: it is only rewarded when it was warranted in the first place. Faith in something like artificial trees (which is basically just a chemistry problem that already has at least one known solution) shouldn’t be blindly extended to everything, especially when there is good reason to doubt that science can help. As an example, science appears to be reaching the limits of how much it can improve crop yields, not necessarily due to limits in science, but rather limits in photosynthesis. Likewise, sometimes even low-cost science that sounds like an interesting idea treats the symptom, not the disease, so leaves much of the problem unsolved. The message here: learn more science, so you can tell the difference.
  9. Avoid political goals that require global agreement or action. There will probably be a time when the whole planet will be able to agree on something enough to act mostly in unison, but you are unlikely to live to see that time. (Or, if you do, it will be because things have become so bad that there is no other choice, which is beyond the scope of this post.) Consequently, political action expended towards goals that require this will be more profitably spent elsewhere. As one example, if all of the money and effort currently expended in the U.S. in pursuit of some kind of global climate policy (something the U.S. does not and cannot control by itself) had instead been spent attempting to to rid the U.S. of its dependence on foreign oil (something the U.S. can control by itself), we would have gotten a lot more bang for the buck (and, ironically, would have likely reduced our CO2 emissions more than we did barking futilely up the global climate tree). This goes hand in hand with the point above about nationalism.
  10. Assure a supply of fresh water. This is harder than it sounds, and will become moreso. Whiskey’s for drinking, water’s for fighting. Since 20% of the world’s fresh water is in the Great Lakes, you might want to mosey that way. (And, hey, that’s probably north and inland from you as well.) While it isn’t one of the six drinks that changed history, water is about to be the seventh.
  11. Realize that climate change is not the only (or even the most important) issue. Many of the concerns mentioned above really come down to issues of resource scarcity, and population growth is likely to put much more stress on such resources than climate change will. Mostly likely, while climate change is reducing the supply of things like food and fresh water, population growth will be driving up demand at the same time. In fact, it may be small consolation to realize that all of the problems “caused” by climate change would probably be getting worse even if the temperature wasn’t rising, because the population is still increasing. So, enjoy the weather.

Signs of ill health/will

December 14th, 2009 — Wordman

Can anyone offer me a decent explanation of why, at this very moment, every major bank in the United States is offering a savings account with a higher interest rates than they give for certificates of deposit (CDs)? Go take a look. It makes no sense.

In a healthy economy, the CD should always have a higher rate. For those that don’t know, a certificate of deposit is a sort of “long term” savings account. The idea is that you deposit some amount in a bank for a fixed length of time (often three months, six months, or one to five years) and, in its simplest form, you are penalized if you withdraw from the CD account during this time period. The idea is that the bank has a guaranteed source of funds. This illiquidity is good for the bank, but inconvenient for you. To make this inconvenience worth your while, the bank should give you a higher rate.

But I can’t find any banks that are actually doing so, at least for CDs with a reasonable term length. Citibank, for example is advertising an “Ultimate Savings Account” with a rate of 1.01%. Meanwhile, their CD terms are much lower: 3-month 0.25%, 6-month 0.5%, 10-month 0.5%. At 12-months, you get the same rate as the savings account: 1.01%. Only at 18 months do they do better, and then not by much (1.1%). For three years, they’ll give you 1.5%. Other banks have much the same setup.

So, what the banks are saying with their behavior is that it is better for them if you have a savings account, rather than a CD with a term less than a year. (Or, put another way, they are saying “if you want a CD with a term less than a year, then we don’t really want your business”.) Why would this be? On the surface, it would seem that money locked in to them even for a short period would be better for them than money that can be withdrawn at any time. I can only think of a few possibilities this would not be so, most of which are unsatisfying:

  • Loss leader: Perhaps it isn’t that CD rates are too low, but that savings account rates are artificially high, with the idea that banks are inflating them to gain customers, with the intent of lowering the “teaser rate” drastically after some (short) period and hoping the customer doesn’t notice. It seems like if you make the assumption of classical economics that people are rational, this seems likely to fail. On the other hand, this classical assumption is almost always wrong, so maybe the bank knows they can get away with this kind of thing.
  • Overhead: It could be that the costs of offering, setting up and maintaining CD accounts are larger than they seem. For the current behavior to be rational, it would have to mean that only if a CD lives for 18 months does it become worth the extra effort for the bank, compared to a savings account. I find this hard to believe, but, on the other hand, about the only time I’ve talked with a human at a bank in the last few years was to do something with a CD, so maybe it’s true. If you look at the way various ladder strategies work, you can imagine that a higher cost for customer interaction is plausible.
  • Flexibility: Typically, rates of savings accounts are not fixed, while those of CDs are. This means that a bank that has lots of customers with savings accounts has a bit more flexibility than one where the customers all have CDs. That is, if things go bad, they can set the rate of the savings accounts to zero to control their costs, while the cost of the CDs would remain a constant drain. It seems to me that if this is really the reason, then these banks are in worse shape (or, at least, think they are) then we thought.
  • Contempt: It could just be that banks think their customers are too dumb to notice. Maybe they are even correct. For example, I opened a CD a number of years back at over 3%. As the term on this CD expired, I let it automatically renew. At some point during these renewals, the rate dwindled below 1%, yet I did not realize this until recently. I’d like to think not enough of the country is as dim as I was to make this a viable strategy for banks, but I’m probably wrong.

Maybe all of these ideas have some truth? Whatever the case, it is fairly baffling. I’d love to hear from someone who knows better.

Repeating incentive failures

November 30th, 2009 — Wordman

My Google news homepage tells me that the U.S. to increase pressure on mortgage industry. According to the article:

The Obama administration said Monday it will crack down on mortgage companies that are failing to do enough to help U.S. borrowers at risk of foreclosure, as part of a broad effort to ramp up participation in its mortgage assistance program. The Treasury Department said it will withhold payments from mortgage companies that aren’t doing enough to make the changes permanent.

I mention this just in case it wasn’t clear that the “Obama administration” has forgotten every economics class it ever took from people who know better.

Remember six months ago? The “Obama administration” doesn’t seem to. Remember when it seemed like all the banks were failing and screwed? Remember how that wasn’t actually true? How some banks were doing just fine, because they didn’t make stupid loans? Remember how those banks were given crappy ratings by the government due their fiscal responsibility? Oh… you don’t?

Well, consider Massachusetts bank East Bridgewater Savings. Back in March, when all the banks were going to hell, East Bridgewater Savings was doing fine:

Bad or delinquent loans?




Money set aside in 2008 for anticipated loan losses?


“We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

East Bridgewater Savings ended 2008 with $135 million in assets and deposits of $84 million.

The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts.

In other words, rather than do the “predatory lending” and “sub-prime” shenanigans that the government and media would lead us to believe caused all this trouble, this particular bank only made reasonable loans, and avoided the problems entirely. But, for its trouble, the FDIC “slapped East Bridgewater Savings with a rare ‘needs to improve’ rating after evaluating the bank under the Community Reinvestment Act.”

The CRA is a set of laws that have been revised over the past 30 years to “encourage” banks to lend to local, low- and moderate-income borrowers. Because East Bridgewater Savings judged that giving loans for large houses to low-income families was not worth the risk, the FDIC essentially published a statement saying they were a bad bank.

Now, it is unlikely that the banks pushing subprime loans did so to avoid this FDIC ranking; they probably would have done it anyway. But it certainly is not particularly useful that, should you want to manage risk correctly, the government will tell the world you are an idiot for doing so. It is a totally misdirected incentive.

This current push from the Obama administration works in a similar way, offering incentives to force exactly the wrong kind of behavior.

What’s missing in Saturn coverage

October 1st, 2009 — Wordman

A few months back, when General Motors could no longer escape its own incompetence, Saturn was put on the chopping block. It got an unexpected reprieve when Penske, an auto-parts maker, offered to buy it. The reprieve ran out today, when Penske backed out of the deal. So, now the press bids good riddance to Saturn in a number of eulogy-like stories.

All of these journalists seem to be missing a huge part of the story, though, with the kind of “don’t bother looking under the surface” reporting I can’t stand.

The AP story says:

Although GM and Penske reached a tentative agreement to sell the brand in June, the deal collapsed Wednesday after Penske was told by an unidentified manufacturer that its board had rejected a deal to make cars for the new Saturn.

And then… that’s it. Nothing. No information about who this “unidentified manufacturer” might have been, or why they didn’t want to deal. This is unfortunate on two counts: 1) it’s where the real story is and 2) it isn’t that difficult to figure out.

If you get your news from something other than traditional sources, you might have noticed a story still playing out around another tattered remnant of GM: Opel. In a probably increasingly common union of Canadian and Russian companies, Opel is about to be sold to Canadian car parts maker Magna and Russian bank Sberbank.

So what? Well, many people (including, evidently, all journalists) don’t realize that most of Saturn’s recent product line are just relabeled Opel models. This makes it extremely likely that the “unidentified manufacturer” who wouldn’t sell cars to Penske is Magna.

Given that they are both in the auto parts business, it might make sense at first glance why Magna wouldn’t want to help competitor Penske. But it gets more complicated as you think on it more. Why would Magna, who is just getting into the car business, pass up a huge (and highly loyal) built-in market for their new product by refusing to work with Saturn-under-Penske? I can only think of five possibilities:

  1. They are idiots. They have let hatred for a competitor blind them to a good opportunity. Maybe I’m optimistic, but I’d like to think that this isn’t the reason.
  2. They fear a long term merger. It seems to me the inevitable result of cooperation between Magna and Penske in Saturn would eventually result in a merger, hostile or otherwise. Magna may figure that they would be worse off for such a thing. I’m less sure of this reason, but it still smells wrong.
  3. They don’t care about the American market. As Opel is mostly a European brand, it may be that they have enough to handle without adding in the American market as well. This seems implausible, given that Penske would be doing all the work in America in this scenario, and also that Magna is a Canadian company.
  4. They consider the Saturn brand a liability. Read any of the previously linked eulogies of Saturn and most of them mention Saturns as being mediocre cars. It could be that Magna has convinced itself that pitching the Opel directly to America would work better for them. They could be right, but turning your back on millions of already loyal customers seems a might risky.
  5. They want Saturn for themselves. It could be that Magna was betting on exactly what happened: that if they didn’t deal, Penske would walk, leaving Saturn ripe for picking. Even if they only bought pieces of it (branding, customer databases, some dealerships), they would have a huge head start on penetrating the American market.

Of all these, the last seems more likely to me. Which means the current reports of Saturn’s death may be exaggerated.


August 27th, 2009 — Wordman

The BBC World Service aired a 20 minute documentary recently called “Selling cheese to the Chinese”. The title makes it sound a bit like a puff piece, and it even starts a bit like one, but it isn’t. Bits of it have been rattling around in my head for the past few days. If you really want see the power if cheese or, more importantly, predict the future of China and the West, you should give this piece a serious listen to the end.

These five things stand out to me:

  1. Around five minutes in, a woman says “Even though we are in an economic crisis, we see an increase every single of week of Europeans landing here with their suitcases and a dream, and they want to make it.” Has the American dream moved to China already?
  2. “One seemingly innocuous comment surprises me… ‘Only very old people know about Chinese culture’, says one girl.” China has one of the longest lasting cultures on Earth, but the Communists more or less obliterated it from living memory. So the young now have no grounding in in the old ways. This is good and bad for the West, it seems to me. On the one hand, it means that making cultural in-roads into China will meet much less resistance from the youth of China, particularly the rising middle class. On the other hand, it also may mean that China’s historical insularity, which sometimes worked to its detriment on the world stage (and the West’s benefit), may be over. I suspect that the end result will be a much more intellectually agile China, and that will almost certainly mean a much more dominant China over the next century than I have been expecting.
  3. Around 15 minutes in: “The rise of McDonald’s in post-reform China was predicated on the demise of nation wide food rationing, but the consumption of cheese and wine will be more than that.” Instead, it will be the emergence of consumer choice driving a market, largely outside of government influence. In short: capitalism. Which means either Communism doesn’t have much longer in China or it will have to get even nastier.
  4. “People at my age spend all of their salary every month. People from my mom’s generation save as much as they could.” Not sure what to make of that. What do you think?
  5. “‘We trust foreign companies more than we trust local companies, because we have suffered a lot.’ It was a penny drop moment. Curious Jessie may have experimented with pricey Belgian chocolate, but the only European product this family buy regularly is a breakfast cereal…which they trust to be free from chemical additives.” This is probably a short term advantage for the West, but to compete against it, Chinese products will have to get safer, which will make them more expensive. It will also probably increase the standard of living in China, which will probably increase the cost of labor there. That is probably good for everyone, but will dampen China’s ascent slightly.

A fine mess

May 14th, 2009 — Wordman

The large fine levied on Intel by the EU for supposedly antitrust actions, coupled with the announcement that Obama administration foolishly intends to dust off the United State’s antitrust guns, begs a number of questions. For the moment, though, I’m only interested in two: where is this fine money supposed to be going? how much of it actually ends up there?

Naturally, like all fines from regulators or courts, actual payment will be mired by years of legislative wrangling and will probably end up being settled for some smaller number. But, according to Silicon Valley Mercury News, the EUR 1.06 billion fine “will have to be put into a bank account by Intel within the next three months and left there pending the outcome of its appeals.” A legal news site indicates, however, that “it was not reported who would control the bank account—Intel, or the European Commission. Nor was there any word as to who would own the interest earned from such a large sum of money sitting in an interest-bearing account.” It also doesn’t seem to be specified if there are any limits on which banks can be used. Can this be a US bank, for example, or does it need to be in the EU? Europe being Europe, I’m assuming that they will demand that the money be kept in a European bank.

In what looks like a FAQ on the decision, a site claiming to be “Europe’s leading independent online business information service about the European Union” says the following:

Does Intel have to pay the fine immediately?

The fine must be paid within three months of the date of notification of the Decision.

Where does the money go?

Once final judgment has been delivered in any appeals before the Court of First Instance (CFI) and the Court of Justice, the money goes into the EU’s central budget, thus reducing the contributions that Member States pay to the EU.

Does Intel have to pay the fine if it appeals to the European Court of First Instance (CFI)?

Yes. In case of appeals to the CFI, it is normal practice that the fine is paid into a blocked bank account pending the final outcome of the appeals process. Any fine that is provisionally paid will produce interest based on the interest rate applied by the European Central Bank to its main refinancing operations. In exceptional circumstances, companies may be allowed to cover the amount of the fine by a bank guarantee at a higher interest rate.

What percentage of Intel’s turnover does the fine represent?

The fine represents 4.15 % of Intel’s turnover in 2008. This is less than half the allowable maximum, which is 10% of a company’s annual turnover.

This last bit means that the European Commission could have made this fine as high as EUR 2.55 billion, but somehow concluded that 1.06 billion was the proper amount for this offense.

So, what you have in this case is over a billion euro from an American company deposited into (probably) a European bank, but locked there until the appeals process is over. (Hey, what a coincidence! Just when European banks badly need large deposits that are unlikely to be withdrawn.) The interest seems to just accumulate there for the interim. Once the appeal is sorted out, it’s likely that at least some of the money in this account will be inserted into the European Union’s central budget, possibly with interest. Since this is a central fund, and not earmarked for anything specific, the EU can then use this money pretty much any way it likes. Here’s how they spent it last year:

EU central budget 2008

I can’t find a good source of information about what percentage of fines like these eventually get paid in reality, or how much grift there might be in the system. I’d love to hear about both.

A silver lining. Sort of.

January 3rd, 2009 — Wordman

Since hearing a lecture by Laurence Kotlikoff, author of The Coming Generational Storm, it’s been pretty clear to me that:

  1. The political future of the United States is going to be colored significantly by generational conflict, with the needs of the various generations pulling the country in very different directions.
  2. My generation, Generation X, is basically totally screwed in such a conflict because, among other things, we are flanked by generations that are much larger than us.

One battle in this generational war is almost certain to involve social security and other entitlements. In the coming years, the Baby Boomers will do what they have proven over and over again that they do best: look out for themselves. Amid anti-aging treatments and doses of viagra, a good number of them will scream like hell at any attempt to reform the current entitlement system to their detriment and support any change that helps them, regardless of the long term cost. In spite of the fact that any such reform would have needed to start years ago to really be effective, their massive voting clout will ensure that it doesn’t happen at all, even when entitlements start unraveling.

And unravel they will, all over Generation X. By the time the Boomers die off, Gen X will be ready to reap the rewards of the giant Ponzi scheme that is social security, right when it starts to collapse. They will try the same tricks that the Boomers did to get what they were told was coming, but it won’t matter: not only will the money be gone, but Generation Y will massively outvote Gen X, and see to it that whatever comes out of the wreckage will benefit themselves, at the expense of Gen X. (To add insult to injury, a lot of the “moral justification” for this will probably involve a sort of “guilt by association” with the selfishness of the Baby Boomers.)

So, what chance does Gen X really have? Well, its best bet is to engineer (or at least hope for) some situation that radically reduces the voting power of the Baby Boomers. One sure thing that would do this is a massive reduction in their population. Since the Boomers have repeatedly shown a willingness to do nearly anything to avoid unpleasantness, or even inconvenience, it might be possible to manipulate them into extinction. With the right ad campaign and marketing, we could probably make offing yourself for the benefit of the following generations “dying with dignity” cool enough that many would volunteer. An opening strike would be a campaign to eliminate laws against assisted suicide. If done right, we might even get some kind of trial Logan’s Run mandatory death law, that expires shortly after most of the Boomers.

None of this will happen, of course. So, if the Boomers themselves cannot be eliminated, the next best thing would be to severely reduce their spending power. They would still have the bodies to vote, but without a lot of cash, it may be possible to outspend them for political influence, even if their candidates get elected.

To do this, we’d need to generate some kind of economic situation where the Boomers are convinced to invest and save their earnings in certain ways and then, right when they retire, pull the rug out from under the markets to erode their investments. This is something of a “scorched earth” policy, as it would hurt everyone else as well, but Gen X would still have time to replenish their funds, while the Boomers’ sources of income would have dried up.

Engineering this would be a massive undertaking, but fortunately, it’s happening already. The silver lining of this whole economic downturn is that the massive market losses are eroding the wealth of the Boomers as we speak, right as they are starting to retire. This is especially true since many Boomers couldn’t afford to retire, even before the current downturn.

Gen X couldn’t have planned this better. And, to think; they called us slackers.