Saturday, April 30, 2011

US tobacco firms win Missouri hospitals case

Hospitals had alleged that firms misrepresented the health effects of smoking.
Six major US tobacco companies have defeated a lawsuit by hospitals seeking compensation for treating patients with smoking-related illnesses. Thirty-seven hospitals in the state of Missouri had claimed cigarette companies delivered an "unreasonably dangerous" product.
They sought more than $455m (£272m) reimbursement for treating uninsured smokers who had not paid for care. The hospitals treat many destitute, non-paying patients. They said medical ethics required them to treat people in need, regardless of their ability to pay.In the case, the hospitals claimed that tobacco companies manipulated the nicotine content in cigarettes and misrepresented the health effects of smoking.
But a jury in St Louis rejected their claim.
"The jury agreed with Philip Morris USA that ordinary cigarettes are not negligently designed or defective," said Murray Garnick of Philip Morris.An official from Lorillard, another company in the case, said: "Compelling evidence was presented to the jury, including testimony from hospital witnesses, that confirmed the hospitals were not financially damaged as they asserted."

Friday, April 29, 2011

Essay by Jermey Grantham


The purpose of this, my second (and much longer) piece on resource limitations, is to persuade investors with an interest in the long term to change their whole frame of reference: to recognize that we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common. (Previously, I had promised to update you when we had new data. Well, after a lot of grinding, this is our first comprehensive look at some of this data.)

Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources. The quicker we do this, the lower the cost will be. Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels. A lower population would help. Just to start you off, I offer Exhibit 1: the world’s population growth. X marks the spot where Malthus wrote his defining work. Y marks my entry into the world. What a surge in population has occurred since then! Such compound growth cannot continue with finite resources. Along the way, you are certain to have a paradigm shift. And, increasingly, it looks like this is it!

Malthus and Hydrocarbons

Malthus’ writing in 1798 was accurate in describing the past – the whole multi-million year development of our species. For the past 150,000 years or so, our species has lived, pushed up to the very limits of the available food supply. A good rainy season, and food is plentiful and births are plentiful. A few tough years, and the population shrinks way back. It seems likely, in fact, that our species came close to extinction at least once and perhaps several times. This complete link between population and food supply was noted by Malthus, who also noticed that we have been blessed, or cursed, like most other mammals, with a hugely redundant ability to breed. When bamboo blooms in parts of India every 30 years or so, it produces a huge increase in protein, and the rat population – even more blessed than we in this respect – apparently explodes to many times its normal population; then as the bamboo’s protein bounty is exhausted, the rat population implodes again, but not before exhibiting a great determination to stay alive, reflected in the pillaging of the neighboring villages of everything edible. What hydrocarbons are doing to us is very similar. For a small window of time, about 250 years (starting, ironically, just in time to make Malthus’ predictions based on the past look ridiculously pessimistic), from 1800 to, say, 2050, hydrocarbons partially removed the barriers to rapid population growth, wealth, and scientific progress. World population will have shot up from 1 to at least 8, and possibly 11, billion in this window, and the average per capita income in developed countries has already increased perhaps a hundred-fold (from $400 a year to $40,000). Give or take.

As I wrote three years ago, this growth process accelerated as time passed. Britain, leading the charge, doubled her wealth in a then unheard of 100 years. Germany, starting later, did it in 80 years, and so on until Japan in the 20th century doubled in 20 years, followed by South Korea in 15. But Japan had only 80 million people and South Korea 20 million back then. Starting quite recently, say, as the Japanese surge ended 21 years ago, China, with nearly 1.3 billion people today, started to double every 10 years, or even less. India was soon to join the charge and now, officially, 2.5 billion people in just these two countries – 2.5 times the planet’s entire population in Malthus’ time – have been growing their GDP at a level last year of over 8%. This, together with a broad-based acceleration of growth in smaller, developing countries has changed the world. In no way is this effect more profound than on the demand for resources. If I am right in this assumption, then when our finite resources are on their downward slope, the hydrocarbon-fed population will be left far above its sustainable level; that is, far beyond the Earth’s carrying capacity. How we deal with this unsustainable surge in demand and not just “peak oil,” but “peak everything,” is going to be the greatest challenge facing our species. But whether we rise to the occasion or not, there will be some great fortunes made along the way in finite resources and resource efficiency, and it would be sensible to participate.

Finite Resources

Take a minute to reflect on how remarkable these finite resources are! In a sense, hydrocarbons did not have to exist. On a trivially different planet, this incredible, dense store of the sun’s energy and millions of years’ worth of compressed, decayed vegetable and animal matter would not exist. And as for metals, many are scarce throughout the universe and became our inheritance only through the death throes of other large stars. Intergalactic mining does not appear in so many science fiction novels for nothing. These are truly rare elements, ultimately precious, which, with a few exceptions like gold, are used up by us and their remnants scattered more or less uselessly around. Scavenging refuse pits will no doubt be a feature of the next century if we are lucky enough to still be in one piece. And what an irony if we turned this inheritance into a curse by having our use of it alter the way the environment fits together. After millions of years of trial and error, it had found a stable and admirable balance, which we are dramatically disturbing.

To realize how threatening it would be to start to run out of cheap hydrocarbons before we have a renewable replacement technology, we have only to imagine a world without them. In 17th and 18th century Holland and Britain, there were small pockets of considerable wealth, commercial success, and technological progress. Western Europe was just beginning to build canals, a huge step forward in transportation productivity that would last 200 years and leave some canals that are still in use today. With Newton, Leibniz, and many others, science, by past standards, was leaping forward. Before the world came to owe much to hydrocarbons, Florence Nightingale – a great statistician, by the way – convinced the establishment that cleanliness would save lives. Clipper ships were soon models of presteam technology. A great power like Britain could muster the amazing resources to engage in multiple foreign wars around the globe (not quite winning all of them!), and all without hydrocarbons or even steam power. Population worldwide, though, was one-seventh of today’s population, and life expectancy was in the thirties.

But there was a near fatal flaw in that world: a looming lack of wood. It was necessary for producing the charcoal used in making steel, which in turn was critical to improving machinery – a key to progress. (It is now estimated that all of China’s wood production could not even produce 5% of its current steel output!) The wealth of Holland and Britain in particular depended on wooden sailing ships with tall, straight masts to the extent that access to suitable wood was a major item in foreign policy and foreign wars. Even more important, wood was also pretty much the sole producer of energy in Western Europe. Not surprisingly, a growing population and growing wealth put intolerable strains on the natural forests, which were quickly disappearing in Western Europe, especially in England, and had already been decimated in North Africa and the Near East. Wood availability was probably the most limiting factor on economic growth in the world and, in a hydrocarbonless world, the planet would have hurtled to a nearly treeless state. Science, which depended on the wealth and the surpluses that hydrocarbons permitted, would have proceeded at a much slower speed, perhaps as little as a third of its actual progress. Thus, from 1800 until today science might have advanced to only 1870 levels, and, even then, advances in medicine might have exceeded our ability to feed the growing population. And one thing is nearly certain: in such a world, we would either have developed the discipline to stay within our ability to grow and protect our tree supply, or we would eventually have pulled an Easter Island, cutting down the last trees and then watching, first, our quality of life decline and then, eventually, our population implode. Given our current inability to show discipline in the use of scarce resources, I would not have held my breath waiting for a good outcome in that alternative universe.

But in the real world, we do have hydrocarbons and other finite resources, and most of our current welfare, technology, and population size depends on that fact. Slowly running out of these resources will be painful enough. Running out abruptly and being ill-prepared would be disastrous.

The Great Paradigm Shift: from Declining Prices…

The history of pricing for commodities has been an incredibly helpful one for the economic progress of our species: in general, prices have declined steadily for all of the last century. We have created an equal-weighted index of the most important 33 commodities. This is not designed to show their importance to the economy, but simply to show the average price trend of important commodities as a class. The index shown in Exhibit 2 starts 110 years ago and trends steadily downward, in apparent defiance of the ultimately limited nature of these resources. The average price falls by 1.2% a year after inflation adjustment to its low point in 2002. Just imagine what this 102-year decline of 1.2% compounded has done to our increased wealth and well-being. Despite digging deeper holes to mine lower grade ores, and despite using the best land first, and the best of everything else for that matter, the prices fell by an average of over 70% in real terms. The undeniable law of diminishing returns was overcome by technological progress – a real testimonial to human inventiveness and ingenuity.

But the decline in price was not a natural law. It simply reflected that in this particular period, with our particular balance of supply and demand, the increasing marginal cost of, say, 2.0% a year was overcome by even larger increases in annual productivity of 3.2%. But this was just a historical accident. Marginal rates could have risen faster; productivity could have risen more slowly. In those relationships we have been lucky. Above all, demand could have risen faster, and it is here, recently, that our luck has begun to run out.

… to Rising Prices

Just as we began to see at least the potential for peak oil and a rapid decline in the quality of some of our resources, we had the explosion of demand from China and India and the rest of the developing world. Here, the key differences from the past were, as mentioned, the sheer scale of China and India and the unprecedented growth rates of developing countries in total. This acceleration of growth affected global demand quite suddenly. Prior to 1995, there was (remarkably, seen through today’s eyes) no difference in aggregate growth between the developing world and the developed world. And, for the last several years now, growth has been 3 to 1 in their favor!

The 102 years to 2002 saw almost each individual commodity – both metals and agricultural – hit all-time lows. Only oil had clearly peeled off in 1974, a precursor of things to come. But since 2002, we have the most remarkable price rise, in real terms, ever recorded, and this, I believe, will go down in the history books. Exhibit 2 shows this watershed event. Until 20 years ago, there were no surprises at all in the sense that great unexpected events like World War I, World War II, and the double inflationary oil crises of 1974 and 1979 would cause prices to generally surge; and setbacks like the post-World War I depression and the Great Depression would cause prices to generally collapse.

Much as you might expect, except that it all took place around a downward trend. But in the 1990s, things started to act oddly. First, there was a remarkable decline for the 15 or so years to 2002. What description should be added to our exhibit? “The 1990’s Surge in Resource Productivity” might be one. Perhaps it was encouraged by the fall of the Soviet bloc. It was a very important but rather stealthy move, and certainly not one that was much remarked on in investment circles. It was as if lower prices were our divine right. And more to the point, what description do we put on the surge from 2002 until now? It is far bigger than the one caused by World War II, happily without World War III. My own suggestion would be “The Great Paradigm Shift.”

The primary cause of this change is not just the accelerated size and growth of China, but also its astonishingly high percentage of capital spending, which is over 50% of GDP, a level never before reached by any economy in history, and by a wide margin. Yes, it was aided and abetted by India and most other emerging countries, but still it is remarkable how large a percentage of some commodities China was taking by 2009. Exhibit 3 shows that among important non-agricultural commodities, China takes a relatively small fraction of the world’s oil, using a little over 10%, which is about in line with its share of GDP (adjusted for purchasing parity). The next lowest is nickel at 36%. The other eight, including cement, coal, and iron ore, rise to around an astonishing 50%! In agricultural commodities, the numbers are more varied and generally lower: 17% of the world’s wheat, 25% of the soybeans (thank Heaven for Brazil!) 28% of the rice, and 46% of the pigs. That’s a lot of pigs!

Optimists will answer that the situation that Exhibit 3 describes is at worst temporary, perhaps caused by too many institutions moving into commodities. The Monetary Maniacs may ascribe the entire move to low interest rates. Now, even I know that low rates can have a large effect, at least when combined with moral hazard, on the movement of stocks, but in the short term, there is no real world check on stock prices and they can be, and often are, psychologically flakey. But commodities are made and bought by serious professionals for whom today’s price is life and death. Realistic supply and demand really is the main influence.

Exhibit 4 shows how out of line with their previous declining trends most commodities are. We have stated this in terms of standard deviations, but for most of us, certainly including me, a probabilistic – 1-in-44-year event, etc. – is more comprehensible. GMO’s extended work on asset bubbles now covers 330 completed bubbles, including even quite minor ones. These bubbles have occurred only 30% or so more than would be expected in a perfectly random world. In a world where black swans are becoming very popular, this is quite a surprise.

Exhibit 4 is headed by iron ore. It has a 1 in 2.2 million chance that it is still on its original declining price trend. Now, with odds of over a million to one, I don’t believe the data. Except if it’s our own triple-checked data. Then I don’t believe the trend! The list continues: coal, copper, corn, and silver … a real cross section and all in hyper bubble territory if the old trends were still in force. And look at the whole list: twelve over 3-sigma, eleven others in 2-sigma territory (which we have always used as the definition of a bubble), four more on the cusp at 1.9, two more over 1.0, and three more up. Only four are down, three of which are insignificantly below long-term trend, and the single outlier is not even an economic good – it’s what could be called an economic “bad” – tobacco. This is an amazing picture and it is absolutely not a reflection of general investment euphoria. Global stocks are pricey but well within normal ranges, and housing is mixed. But commodities are collectively worse than equities (S&P 500) were in the U.S. in the tech bubble of 2000! If you believe that commodities are indeed on their old 100-year downward trend, then their current pricing is collectively vastly improbable. It is far more likely that for most commodities the trend has changed, just as it did for oil back in 1974, as we’ll see later.

Aware of the finite nature of our resources, a handful of economists had propounded several times in the past (but back in the 1970s in particular) the theory that our resources would soon run out and prices would rise steadily. Their work, however, was never supported by any early warning indicators (read: steadily rising prices) that, in fact, this running out was imminent. Quite the reverse. Prices continued to fall. The bears’ estimates of supply and demand were also quite wrong in that they continuously underestimated cheap supplies. But now, after more than another doubling in annual demand for the average commodity and with a 50% increase in population, it is the price signals that are noisy and the economists who are strangely quiet. Perhaps they have, like premature bears in a major bull market, lost their nerve.

Why So Little Fuss?

I believe that we are in the midst of one of the giant inflection points in economic history. This is likely the beginning of the end for the heroic growth spurt in population and wealth caused by what I think of as the Hydrocarbon Revolution rather than the Industrial Revolution. The unprecedented broad price rise would seem to confirm this. Three years ago I warned of “chain-linked” crises in commodities, which have come to pass, and all without a fully fledged oil crisis. Yet there is so little panicking, so little analysis even. I think this paradox exists because of some unusual human traits.

The Problem with Humans

As a product of hundreds of thousands, if not millions, of years of trial and error, it is perhaps not surprising that our species is excellent at many things. Bred to survive on the open savannah, we can run quite fast, throw quite accurately, and climb well enough. Above all, we have excellent spatial awareness and hand/eye coordination. We are often flexible and occasionally inventive.

For dealing with the modern world, we are not, however, particularly well-equipped. We don’t seem to deal well with long horizon issues and deferring gratification. Because we could not store food for over 99% of our species’ career and were totally concerned with staying alive this year and this week, this is not surprising. We are also innumerate. Our typical math skills seem quite undeveloped relative to our nuanced language skills. Again, communication was life and death, math was not. Have you not admired, as I have, the incredible average skill and, perhaps more importantly, the high minimum skill shown by our species in driving through heavy traffic? At what other activity does almost everyone perform so well? Just imagine what driving would be like if those driving skills, which reflect the requirements of our distant past, were replaced by our average math skills!

We also became an optimistic and overconfident species, which early on were characteristics that may have helped us to survive and today are reaffirmed consistently by the new breed of research behaviorists. And some branches of our culture today are more optimistic and overconfident than others. At the top of my list would be the U.S. and Australia. In a well-known recent international test,1 U.S. students came a rather sad 28/40 in math and a very mediocre eighteenth in language skills, but when asked at the end of the test how well they had done in math, they were right at the top of the confidence list. Conversely, the Hong Kongers, in the #1 spot for actual math skills, were averagely humble in their expectations.

Fortunately, optimism appears to be a real indicator of future success. A famous Harvard study in the 1930s found that optimistic students had more success in all aspects of their early life and, eventually, they even lived longer. Optimism likely has a lot to do with America’s commercial success. For example, we attempt far more ventures in new technologies like the internet than the more conservative Europeans and, not surprisingly, end up with more of the winners. But optimism has a downside. No one likes to hear bad news, but in my experience, no one hates it as passionately as the U.S. and Australia. Less optimistic Europeans and others are more open to gloomy talk. Tell a Brit you think they’re in a housing bubble, and you’ll have a discussion. Tell an Australian, and you’ll have World War III. Tell an American in 1999 that a terrible bust in growth stocks was coming, and he was likely to have told you that you had missed the point, that 65 times earnings was justified by the Internet and other dazzling technology, and, by the way, please stay out of my building in the future. This excessive optimism has also been stuck up my nose several times on climate change, where so many otherwise sensible people would much prefer an optimistic sound bite from Fox News than to listen to bad news, even when clearly realistic. I have heard several brilliant contrarian financial analysts, siding with climate skeptics, all for want of, say, 10 or 12 hours of their own serious analysis. My complete lack of success in stirring up interest in our resource problems has similarly impressed me: it was like dropping reports into a black hole. Finally, in desperation, we have ground a lot of data and, the more we grind, the worse, unfortunately, it looks.

Failure to Appreciate the Impossibility of Sustained Compound Growth

I briefly referred to our lack of numeracy as a species, and I would like to look at one aspect of this in greater detail: our inability to understand and internalize the effects of compound growth. This incapacity has played a large role in our willingness to ignore the effects of our compounding growth in demand on limited resources. Four years ago I was talking to a group of super quants, mostly PhDs in mathematics, about finance and the environment. I used the growth rate of the global economy back then – 4.5% for two years, back to back – and I argued that it was the growth rate to which we now aspired. To point to the ludicrous unsustainability of this compound growth I suggested that we imagine the Ancient Egyptians (an example I had offered in my July 2008 Letter) whose gods, pharaohs, language, and general culture lasted for well over 3,000 years. Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth. Now, these were trained mathematicians, so I teased them: “Come on, make a guess. Internalize the general idea. You know it’s a very big number.” And the answers came back: “Miles deep around the planet,” “No, it’s much bigger than that, from here to the moon.” Big quantities to be sure, but no one came close. In fact, not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 1057, a number so vast that it could not be squeezed into a billion of our Solar Systems. Go on, check it. If trained mathematicians get it so wrong, how can an ordinary specimen of Homo Sapiens have a clue? Well, he doesn’t. So, I then went on. “Let’s try 1% compound growth in either their wealth or their population,” (for comparison, 1% since Malthus’ time is less than the population growth in England). In 3,000 years the original population of Egypt – let’s say 3 million – would have been multiplied 9 trillion times! There would be nowhere to park the people, let alone the wealth. Even at a lowly 0.1% compound growth, their population or wealth would have multiplied by 20 times, or about 10 times more than actually happened. And this 0.1% rate is probably the highest compound growth that could be maintained for a few thousand years, and even that rate would sometimes break the system. The bottom line really, though, is that no compound growth can be sustainable. Yet, how far this reality is from the way we live today, with our unrealistic levels of expectations and, above all, the optimistic outcomes that are simply assumed by our leaders. Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions.

I was once invited to a monthly discussion held by a very diverse, very smart group, at which it slowly dawned on my jet-lagged brain that I was expected to contribute. So finally, in desperation, I gave my first-ever “running out of everything” harangue (off topic as usual). Not one solitary soul agreed. What they did agree on was that the human mind is – unlike resources – infinite and, consequently, the intellectual cavalry would always ride to the rescue. I was too tired to argue that the infinite brains present in Mayan civilization after Mayan civilization could not stop them from imploding as weather (mainly) moved against them. Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources. This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.

Hubbert’s Peak

Let’s start a more detailed discussion of commodities on by far the most important: oil. And let’s start with by far the largest user: the U.S. In 1956, King Hubbert, a Shell oil geologist, went through the production profile of every major U.S. oil field and concluded that, given the trend of new discoveries and the rate of run-off, U.S. oil production was likely to peak in around 1970. Of course, vested interests and vested optimism being what they are, his life was made a total misery by personal attacks – it was said that he wasn’t a patriot, that he was doing it all to enhance his own importance, and, above all, that he was an idiot. But he was right: U.S. production peaked in 1971! This, typically enough, did not stop the personal attacks. There is nothing more hateful in an opponent than his being right. In 1956, Hubbert also suggested that a global peak would be reached in “about 50 years,” but after OPEC formed in 1974 and prices jumped, he said it would probably smooth out production and extend the peak by about 10 years, or to 2016, give or take. Once again, this could be a remarkably accurate estimate!

The U.S. peak oil event of 1971 is important in rebutting today the same arguments that he faced in the 1960s. This time, these arguments are used against the idea that global oil is nearing its peak. The arguments back then were that technological genius, capitalist drive, and infinite engineering resourcefulness would always drive back the day of reckoning. But wasn’t the U.S. in the 1960s full of the most capitalist of spirits, Yankee know-how, and resourcefulness? Didn’t the U.S. have the great oil service companies, and weren’t there far more wells drilled here than anywhere? All true. But, still, production declined in 1971 and has slowly and pretty steadily declined ever since. Even if we miss the inherent impossibility of compound growth running into finite resources, how can we possibly think that our wonderful human attributes and industriousness will prevent the arrival of global peak oil when we have the U.S. example in front of us?

Exhibit 5 shows that global traditional onshore oil, in fact, peaked long ago in 1982, and that only much more expensive offshore drilling and tertiary recovery techniques allowed for even a modest increase in output, and that at much higher prices. Exhibit 6 shows that since 1983, every year (except one draw) less new conventional oil was found than was actually pumped!

Global Oil Prices, the First Paradigm Shift

We have seen how broad-based commodity prices declined to a trough from 2000-03. Oil however, was an exception and, given its approximate 50% weight by value, a very important exception. In 1974, it split off from other commodities, which continued to decline steeply. It was in 1974 that an oil cartel, OPEC, was formed. What better time could there be for a fast paradigm shift than during a cartel forming around a finite resource?

Exhibit 7, which may be familiar to you, was developed when the penny first dropped for me five years ago, and was soon after reproduced in the Sunday New York Times. It shows that for 100 years oil had a remarkably flat real price of around $16/barrel in today’s currency, even as all other commodities declined. It was always an exception in that sense. Oil has a volatile price series, which is not surprising given supply shocks, the difficulty of storage, and, above all, the very low price elasticity of demand in the short term. Normal volatility is, relative to trend, more than a double and less than a half, so that around the $16 trend we would normally expect to see price spikes above $32 and troughs below $8. Drawing in the dotted lines of 1 and 2 standard deviations, it can be seen that the series is well behaved: it should breach the 2-sigma line about 2.5 times up and 2.5 times down in a 100-year period (because 2-sigma events should occur every 44 years), and it does pretty much just that. It is also clear that this well-behaved $16 trend line was shifted quite abruptly to around $35/barrel in 1974, the year OPEC began. And OPEC began in a very hostile and aggressive mood, resulting in unusual solidarity among its members. Oil prices remained very volatile around this new higher trend, peaking in 1980 at almost $100 in today’s currency (confirming, to some degree, the new higher trend) and falling back to $16 in 1999.

Today, looking at the oil price series from about 2003, it seems likely that a second paradigm jump has occurred, to about $75 a barrel, another doubling. Around this new trend, a typical volatile oil range would be from over $150 to under $37. The validity of this guess will be revealed in, say, another 15 to 20 years. Stay tuned. There is, though, a different support to this price analysis, and that is cost analysis. We are not (yet, anyway) experts in oil costs, but as far as we are able to determine, the full cost of finding and delivering a major chunk of new oil today is about $70 to $80 a barrel. If true, this would make the idea of a second paradigm jump nearly certain.

The Great Paradigm Shift

So, oil caused my formerly impregnable faith in mean reversion to be broken. I had always admitted that paradigm shifts were theoretically possible, but I had finally met one nose to nose. It did two things. First, it set me to thinking about why this one felt so different to those false ones claimed in the past. Second, it opened my eyes to the probability that others would come along sooner or later.

The differences in this paradigm shift are obvious. All of the typical phantom paradigm shifts are optimistic. They often look more like justifications for high asset prices than serious arguments. They are also usually compromised by the source. It is simply much more profitable for the financial services business to have long bull markets that overrun and then crash quite quickly than it is to have stability. Imagine how little money would be made by us if the U.S. stock market rose by its dreary 1.8% a year adjusted for inflation, its trend since 1925. Volume would dry up, as would deals, and we’d die of boredom or get a different job. In short, beware a broker or a sell side “strategist” offering arguments as to why overpriced markets like today’s are actually cheap. Finally, the public in general appears to like things the way they are and always seems eager to embrace the idea of a new paradigm. The oil paradigm shift and the “running out of everything” argument is the exact opposite: it is very bad news and, like all very bad news, ordinary mortals and the bullishly-biased financial industry seriously want to disbelieve it or completely ignore it. (Just as is the case with climate warming and weather instability.) It is in this sense a classic contrarian argument despite being a paradigm shift.


On the second point – looking for other resources showing signs of a paradigm shift – the metals seemed the next most obvious place to start: they are finite, subject to demand that has been compounding (that is, more tonnage is needed each year), and, after use, are mostly worthless or severely reduced in value and expensive to recycle. Copper, near the top of the standard deviation list, has an oil-like tendency for the quality of the resource to decline and the cost of production to rise. Exhibit 8 shows that since 1994 one has to dig up an extra 50% of ore to get the same ton of copper.

And all of this 150% effort has to be done using energy at two to four times the former price. These phenomena of declining ore quality and rising extraction costs are repeated across most important metals. The price of all of these metals in response to rising costs and rising demand has risen far above the old declining trend, at least past the 1-in-44-year chance. (There is a possibility, I suppose, that some of the price moves are caused by a cartel-like effect between the few large “miners.” There just might have been some deliberate delays in expansion plans, which would have resulted in extra profits, but it seems unlikely that this possible influence would have caused much of the total price rises. These very high prices are compatible with such possibilities, but I am in no position to know the truth of it.) There also might be some hoarding by users or others, but given the extent of the price moves, it is statistically certain that hoarding could not come close to being the only effect here. Once again, the obvious primary influence is increased demand from developing countries, overwhelmingly led by China; and that we are dealing with a genuine and broad-based paradigm shift.

The highest percentage of any metal resource that China consumes is iron ore, at a barely comprehensible 47% of world consumption. Exhibit 9 shows the spectacular 100-year-long decline in iron ore prices, which, like so many other commodities, reach their 100-year low in or around 2002. Yet, iron ore hits its 110-year high a mere 8 years later! Now that’s what I call a paradigm shift! Mining is clearly moving out of its easy phase, and no one is trying to hide it. A new power in the mining world is Glencore (soon to be listed at a value of approximately $60 billion). Its CEO, Ivan Glasenberg, was quoted in the Financial Times on April 11, describing why his firm operates in the Congo and Zambia. “We took the nice, simple, easy stuff first from Australia, we took it from the U.S., we went to South America… Now we have to go to the more remote places.” That’s a pretty good description of an industry exiting the easy phase and entering the downward slope of permanently higher prices and higher risk.

Agricultural Commodities

Moving on to agriculture, the limitations are more hidden. We think of ourselves as having almost unlimited land up our sleeve, but this is misleading because the gap between first-rate and third-rate land can be multiples of output, and only Brazil, and perhaps the Ukraine, have really large potential increments of output. Elsewhere, available land is shrinking. For centuries, cities and towns have tended to be built not on hills or rocky land, but on prime agricultural land in river valleys. This has not helped. We have, though, had impressive productivity gains per acre in the past, and this has indeed helped a lot. But, sadly, these gains are decreasing. Exhibit 10 shows that at the end of the 1960s, average gains in global productivity stood at 3.5% per year. What an achievement it was to have maintained that kind of increase year after year. It is hardly surprising that the growth in productivity has declined.

It runs now at about one-third of the rate of increase of the 1960s. It is, at 1.25% a year, still an impressive rate, but the trend is clearly slowing while demand has not slowed and, if anything, has been accelerating. And how was this quite massive increase in productivity over the last 50 years maintained? By the even more rapid increase in the use of fertilizer. Exhibit 11 shows that fertilizer application per acre increased five-fold in the same period that the growth rate of productivity declined. This is a painful relationship, for there is a limit to the usefulness of yet more fertilizer, and as the productivity gains slow to 1%, it bumps into a similar-sized population growth. The increasing use of grain-intensive meat consumption puts further pressure on grain prices as does the regrettable use of corn in ethanol production. (A process that not only deprives us of food, but may not even be energy-positive!) These trends do not suggest much safety margin.

The fertilizer that we used is also part of our extremely finite resources. Potash and potassium are mined and, like all such reserves, the best have gone first. But the most important fertilizer has been nitrogen, and here, unusually, the outlook for the U.S. really is quite good for a few decades because nitrogen is derived mainly from natural gas. This resource is, of course, finite like all of the others, but with recent discoveries, the U.S. in particular is well-placed, especially if in future decades its use for fertilizer is given precedence.

More disturbing by far is the heavy use of oil in all other aspects of agricultural production and distribution. Of all the ways hydrocarbons have allowed us to travel fast in development and to travel beyond our sustainable limits, this is the most disturbing. Rather than our brains, we have used brute energy to boost production.

Water resources both above and below ground are also increasingly scarce and are beginning to bite. Even the subsoil continues to erode. Sooner or later, limitations must be realized and improved techniques such as no-till farming must be dramatically encouraged. We must protect what we have. It really is a crisis that begs for longer-term planning – longer than the typical horizons of corporate earnings or politicians. The bottom line is, as always, price, and the recent signals are clear. Exhibit 12 shows the real price movements of four critical agricultural commodities – wheat, rice, corn, and soybeans – in the last few years. Unlike many other commodities, these four are still way below their distant highs, but from their recent lows they have all doubled or tripled.

Bulls will argue that these agricultural commodities are traditional bubbles, based on euphoria and speculation, and are destined to move back to the pre-2002 prices. But ask yourselves what happens when the wheat harvest, for example, comes in. Only the millers and bakers (actually the grain traders who have them as clients) show up to buy. Harvard’s endowment doesn’t offer to take a million tons and store it in Harvard Yard (although my hero, Lord Keynes, is famously said to have once seriously considered stacking two months’ of Britain’s supply in Kings College Chapel!). The price is set by supply and demand, and storage is limited and expensive. All of the agricultural commodities also interact, so, if one were propped up in price, farmers on the margin would cut back on, say, soybeans and grow more wheat. For all of these commodities to move up together and by so much is way beyond the capabilities of speculators. The bottom line proof is that agricultural reserves are low – dangerously low. There is little room in that fact for there to be any substantial hoarding to exist.

Weather Instability and Price Rises

But there is one factor big enough, on rare occasions, to move all of the agricultural commodities together, and that is weather, particularly droughts and floods. I don’t think the weather instability has ever been as hostile in the last 100 years as it was in the last 12 months. If you were to read a one-paragraph summary of almost any agricultural commodity, you would see weather listed as one of the causes of the price rising. My sick joke is that Eastern Australia had average rainfall for the last seven years. The first six were the driest six years in the record books, and the seventh was feet deep in unprecedented floods. Such “average” rainfall makes farming difficult. It also makes investing in commodities difficult currently, for the weather this next 12 months is almost certain to be less bad than the last, and perhaps much less bad.

The Unusual Entry Risk Today in Commodity Investing: Weather …

For agricultural commodities, it is generally expected that prices will fall next year if the weather improves. Because global weather last year was, at least for farming, the worst in many decades, this seems like a good bet. The scientific evidence for climate change is, of course, overwhelming. A point of complete agreement among climate scientists is that the most dependable feature of the planet’s warming, other than the relentless increase in the parts per million of CO2 in the atmosphere, is climate instability. Well, folks, the last 12 months were a monster of instability, and almost all of it bad for farming. Skeptics who have little trouble rationalizing facts will have no trouble at all with weather, which, however dreadful, can never in one single year offer more than a very strong suggestion of long-term change.

Unfortunately, I am confident that we should be resigned to a high probability that extreme weather will be a feature of our collective future. But, if last year was typical, then we really are in for far more serious trouble than anyone expected. More likely, next year will be more accommodating and, quite possibly, just plain friendly. If it is, we will drown, not in rain, but in grain, for everyone is planting every single acre they can till. And why not? The current prices are either at a record, spent just a few weeks higher in 2008, or were last higher decades ago. The institutional and speculative money does not, in my opinion, drive the spot prices higher for reasons given earlier, but they do persistently move the more distant futures contracts up.

Traditionally, farmers had to bribe speculators to take some of the future price risk off of their hands. Now, Goldman Sachs and others have done such a good job of making the case for commodities as an attractive investment (on the old idea that investors were going to be paid for risk-taking), that the weight of money has pushed up the slope of the curve. This not only destroys the whole reason for investing in futures contracts in the first place, but, critically for this current argument, it lowers the cost to the farmers of laying off their price risk and thus enables, or at least encourages, them to plant more, as they have in spades. Ironically, institutional investing facilitates larger production and hence lower prices! Should both the sun shine and the rain rain at the right time and place, then we will have an absolutely record crop. This would be wonderful for the sadly reduced reserves, but potentially terrible for the spot price. (Although wheat might be an exception because the largest grower by far – China – is looking to be in very bad shape for its upcoming harvest.)

… and China

Quite separately, several of my smart colleagues agree with Jim Chanos that China’s structural imbalances will cause at least one wheel to come off of their economy within the next 12 months. This is painful when traveling at warp speed – 10% a year in GDP growth. The litany of problems is as follows:

a) An unprecedented rise in wages has reduced China’s competitive strength.

b) The remarkable 50% of GDP going into capital spending was partly the result of a heroic and desperate effort to keep the ship afloat as the Western banking system collapsed. It cannot be sustained, and much of the spending is likely to have been wasted: unnecessary airports, roads, and railroads and unoccupied high-rise apartments.

c) Debt levels have grown much too fast.

d) House prices are deep into bubble territory and there is an unknown, though likely large, quantity of bad loans.

You have heard it all better and in more detail from both Edward Chancellor and Jim Chanos. The significance here is that given China’s overwhelming influence on so many commodities, especially in terms of the percentage China represents of new growth in global demand, any general economic stutter in China can mean very big declines in some of their prices.

You can assess on your own the probabilities of a stumble in the next year or so. At the least, I would put it at 1 in 4, while some of my colleagues think the odds are much higher. If China stumbles or if the weather is better than expected, a probability I would put at, say, 80%, then commodity prices will decline a lot. But if both events occur together, it will very probably break the commodity markets en masse. Not unlike the financial collapse. That was a once in a lifetime opportunity as most markets crashed by over 50%, some much more, and then roared back. Modesty should prevent me from quoting from my own July 2008 Quarterly Letter, which covered the first crash. “The prices of commodities are likely to crack short term (see first section of this letter) but this will be just a tease. [Editor’s Note: the section referred to is titled “Meltdown! The Global Competence Crisis,” which discusses the aftermath of the global financial crisis.] In the next decade, the prices of all raw materials will be priced as just what they are, irreplaceable.” If the weather and China syndromes strike together, it will surely produce the second “once in a lifetime” event in three years. Institutional investors were too preoccupied staying afloat in early 2009 to have obsessed much about the first opportunity in commodities and, in any case, everything else was also down in price. A second commodity collapse in the next few years may also be psychologically hard to invest in for it will surely bring out the usual bullish argument: “There you are, its business as usual. There are plenty of raw materials, so don’t listen to the doomsayers.” Because it will have broad backing, this argument will be hard to resist, but should be.

Residual Speculation

Finally, there is some good, old-fashioned speculation, particularly in the few commodities that can be stored, like gold and others, which are costly per pound. I believe this is a small part of the total pressure on prices, and the same goes for low interest rates, but together they have also helped push up prices a little. Putting this speculation into context, we could say that: a) we have increasing, but still routine, speculation in commodities; b) this comes on top of the much more important effects of terrible weather; and c) most important of all, we have gone through a profound paradigm shift in almost all commodities, caused by a permanent shift in the underlying fundamentals.

The Creative Tension in Investing in Resources Today

As resource prices rise, the entire system loses in overall well-being, but the world is not without winners. Good land, in short supply, will rise in price, to the benefit of land owners. Technological progress in agriculture will add to the value of land holdings. Fertilizer resources – potash and potassium – will become particularly precious. Hydrocarbon reserves will, of course, also increase in value. In general, owners or controllers of all limited resources, certainly including water, will benefit. But everyone else will be worse off, and a constrained-resource world will increase in affluence per capita more slowly than it would have otherwise, and more slowly than in the past. Remember, this is not simply a recycling of income and wealth as it was when Saudi Arabia stopped some of its pumping for political reasons. Then, we paid a few extra billion and they put money in the bank for recycling. There was no net loss. But now when they pump the last of the cheapest $5/barrel of oil and we replace it with a $120/barrel from tortured Canadian Tar Sands, the cost differential is a deadweight loss. GDP accounting can make it look fine, and it certainly creates more jobs but, like a few thousand men digging a hole with teaspoons, it adds jobs but no incremental value compared to the original cheap oil.

How does an investor today handle the creative tension between brilliant long-term prospects and very high short-term risks? The frustrating but very accurate answer is: with great difficulty. For me personally it will be a great time to practice my new specialty of regret minimization. My foundation, for example, is taking a small position (say, one-quarter of my eventual target) in “stuff in the ground” and resource efficiency. Given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and I owned none of them, then I would have to throw myself under a bus. If prices continue to run away, then my small position will be a solace and I would then try to focus on the more reasonably priced – “left behind” – commodities. If on the other hand, more likely, they come down a lot, perhaps a lot lot, then I will grit my teeth and triple or quadruple my stake and look to own them forever. So, that’s the story.

The Position of the U.S….

The U.S. is, of course, very well-positioned to deal with the constraints. First, it starts rich, both in wealth and income per capita, and also in resources, particularly the two that in the long run will turn out to be the most precious: great agricultural land and a pretty good water supply. The U.S. is also well-endowed with hydrocarbons. Its substantial oil and gas reserves look likely to prove unexpectedly resilient, buoyed by improving skills at fracking and lateral drilling. And, by any standard, U.S. coal reserves are very large. All other countries should be so lucky. Second, we are the most profligate or wasteful developed country and this fact, paradoxically, becomes a great advantage. We in the U.S. can save resources by the billions of dollars and actually end up feeling better for it in the end, like someone suffering from obesity who succeeds with a new diet.

The slowing growth in working age population has reduced the GDP growth for all developed countries. Adding resource limitations is further reducing it. If our GDP in the U.S. grew 2% for the next 20 years, I think we would be doing very well. Dropping to 1.5% would not surprise me, nor would it be a disaster. In the past 28 years, we have increased our GDP by 3.0% per year with only a 0.9% increase in energy required. That is, we increased our energy efficiency by 2.1% without a decent energy policy and despite some very inefficient pockets like autos and residential housing. This would suggest that at a reduced 2% GDP growth rate, we might expect little or no incremental demand for energy, even without an improved effort. If in addition we halved our deficit in energy efficiency compared with Europe and Japan in the next 20 years, then our energy requirements might drop at 1.5% a year. Given the plentiful availability of low-hanging fruit in the U.S., this is achievable.

… as for the Rest

Other countries will not be so lucky. Almost all will suffer lower growth, but resource-rich countries will have a relative benefit as the terms of trade continue to move in their favor. Less obviously, those countries that are particularly energy efficient will also benefit. If the Japanese, for example, can produce over twice the GDP per unit of energy than the Chinese, then, other things being equal, the terms of trade will move in their favor as oil prices rise. At the bottom of the list, poor countries with few resources and little efficiency, which already use up to 50% of their income on the commodity “necessities,” will suffer. The irony that they suffered the most having used up the least will probably not make their misery less. Limited resources create a win-lose proposition quite unlike the win-win we are accustomed to in global trade. Theoretically, we all gain through global trade as China grows. But with limited resources, the faster they grow and the richer they get (and, particularly, the more meat rather than grain that they eat), the more commodity prices rise and the greater the squeeze on the poorer countries and the relatively poor in every country. It’s a gloomy topic. Suffice it to say that if we mean to avoid increased starvation and international instability, we will need global ingenuity and generosity on a scale hitherto unheard of.


The U.S. and every other country need a longer-term resource plan, especially for energy, and we need it now!(Shorter-term views on the market and investment recommendations will be posted shortly.)


(1) P.I.S.A. Test 2003, OECD.

(2) Edward Chancellor, “China's Red Flags,” GMO White Paper, March 23, 2010.

Disclaimer: The views expressed are the views of Jeremy Grantham through the period ending April 25, 2011, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

The cost of being poor: and infographic

Thursday, April 28, 2011

Asia’s rapid growth poses risk of overheating, IMF says

The IMF says there is a risk of a property bubble developing. Asia-Pacific will see robust growth but some economies risk overheating, the International Monetary Fund (IMF) has warned.
The IMF said it expects the region to grow by close to 7% in the next two years.
However, it added the rapid rate of growth may further fuel inflation.

A number of countries across the region are struggling to control prices which are making life difficult for millions of people.According to the IMF high food and fuel prices pushed the regional inflation rate to 4.5% in February. It said that central banks in the region may need to tighten their monetary policy if prices continue to rise. It added that more flexible currencies would help ease overheating risks.

It also said that it expected Japan's earthquake to have a "limited" impact on the rest of Asia but warned the situation was still uncertain.

'Pockets of overheating'

The report warned that some countries were at risk of overheating - when a prolonged period of rapid economic growth causes high levels of inflation and excess production that eventually hurt the economy and may cause a recession."Asia's rapid growth is accompanied by the emergence of pockets of overheating across the region in both goods and assets prices," the IMF said."In addition to higher policy rates, exchange rate flexibility is a key line of defense against overheating pressures," the report added.However, the IMF said that despite rising food and housing costs, it was premature to say that China's economy was actually overheating.
China has raised interest rates four times since October and the country's leaders have said that clamping down on inflation, which is at its highest level in more than two-and-a-half years, is their most important task this year.But while a stronger currency could help ease inflation by making imported goods such as oil cheaper, analysts say China is likely to let its tightly-controlled currency appreciate only gradually.

The IMF also warned that there was a risk of a property bubble developing in Hong Kong, although it noted that the government was taking steps to guard against this prospect.Hong Kong property prices have risen almost 10% this year and now beyond their 1997 peak but the market is expected to slow as the government makes more land available and as mortgage rates increase.

The Blue Economy

Below is an interesting link to the 'Blue Economy" which proposes that we go blue rather than green.

Wednesday, April 27, 2011

Greed is Not a Virtue

David Korten: Profit-centered market fundamentalism has become a national religion.

This is the fourteenth of a series of blogs based on excerpts adapted from the 2nd edition of Agenda for a New Economy: From Phantom Wealth to Real Wealth. I wrote Agenda to spur a national conversation on economic policy issues and options that are otherwise largely ignored. This blog series is intended to contribute to that conversation. —DK

We humans are living out an epic morality play. For millennia humanity’s most celebrated spiritual teachers have taught that society works best and we all enjoy our greatest joy and fulfillment when we share, cooperate, and are honest in our dealings with one another.

But for the past few decades, this truth has been aggressively challenged by a faith called market fundamentalism—an immoral and counter-factual economic ideology that has assumed the status of a modern state religion. Its believers worship the God of money. Stock exchanges and global banks are their temples. They proclaim that everyone does best when we each seek to maximize our individual financial gain without regard to the consequences for others. In the eyes of a market fundamentalist, to sacrifice profit for some presumed social or environmental good is immoral. The result is a public culture that proclaims greed is a virtue and sharing is a sin.

In the eyes of a market fundamentalist, to sacrifice profit for some presumed social or environmental good is immoral.Having established control of the institutions of the economy, media, education, government, and even religion, market fundamentalists initiated a global social experiment to test their theory. The results are now in.

The prophets of the older faith traditions were right. Our common future depends on rediscovering their truth and redefining our public culture and governing institutions accordingly. The following are some of the more visible elements of Wall Street’s global campaign of moral perversion.
It uses control of media outlets, advertising, and politicians to shape and spread a global culture of individualistic greed, material self-indulgence, ruthless competition, and moral irresponsibility.

Through the pursuit and celebration of financial gain at any cost, it provides role models for immoral behavior.

It undermines democracy and the legitimacy of government by buying politicians to do its bidding.

It uses student loan programs to get the best and brightest youth mired in debts they can repay only by selling themselves to jobs that serve Wall Street interests.

It buys up and monopolizes control of the world’s land and water resources in anticipation of extracting monopoly profits by charging what the market will bear as scarcity increases.

It uses its financial power and creative accounting skills to manipulate markets and obscure market signals, as when helping governments hide their debt or helping corporate CEOs hide their insider bets against the future of their own companies.

It buys the deeply discounted debt obligations of hapless underwater homeowners and countries on the open market and then demands full value payment from governments or philanthropists who step in to lend a helping hand to the afflicted.

It puts in place global rules requiring that if a government introduces regulations that prevent a foreign corporation from harming or killing people with its toxic products or discharges, the country’s government must compensate the corporation for the profits it estimates it will lose.

The seven life-serving virtues of humility, sharing, love, compassion, self-control, moderation, and passion are considered sins against the market.By capitalism’s perverse moral logic, if a person sells toxic assets by knowingly misrepresenting them as sound, the fault lies not with the misrepresentation of the seller, but rather with the lack of due diligence on the part of the overly trusting borrower. When the assets prove worthless and threaten both the solvency of both the seller and the borrower, the logic says the party responsible for the misrepresentation has a moral obligation to demand redress from the government, “Buy my toxic assets at face value and make me whole so that I return to my trade in toxic assets, or I will be forced to stop lending and crash the economy.”

7 Steps for Action

Toward a New Economy

Rather than turning again to increased global competition to mend our failing economy, we must instead steer our focus toward cooperation and equality.

Step back to take in the big picture, and it turns out Wall Street market fundamentalists have proclaimed the seven deadly sins of pride, greed, envy, anger, lust, gluttony, and sloth to be virtues. In turn they have proclaimed the seven life-serving virtues of humility, sharing, love, compassion, self-control, moderation, and passion to be sins against the market.
There is a widespread sense that with Wall Street’s apparent recovery, the window of opportunity for serious structural change has passed. Such a judgment, however, is premature. Far from closing, the window of opportunity for serious change continues to widen as public awareness of Wall Street corruption grows and true and appropriate moral outrage builds.

Most psychologically healthy adults recognize in their heart of hearts the moral perversion of the old economy, but may fear to speak up because so many experts—including even some religious leaders—continuously assure us in so many words that greed is good, even that God wants us to be financially rich and financial wealth is a mark of God’s favor.

If all who share a mature moral consciousness find the courage to speak the simple truth that greed is driving us to collective self-destruction and cooperation is essential to our common salvation, we can put the perversion behind us and secure the future of our children.

David Korten ( is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by and based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Ikea's Third World outsourcing adventure -- in the U.S.

Workers complain about labor conditions at the Swedish furniture maker's first American factory
By Andrew Leonard

AP/Carlos OsorioNathaniel Popper's doozy of a story in the Sunday Los Angeles Times detailing labor strife at Ikea's first American factory is getting a lot of attention in the blogosophere, and for good reason: It's chock full of globalization irony.

Ikea seems to be treating its American workers at a furniture plant in Danville, Virginia a good deal worse than it does its Swedish workers back at home. The workers are trying to unionize; in response Ikea has hired the famous union-busting-specializing law firm Jackson-Lewis. Nothing particularly out of the ordinary for American labor relations in the 21st century, but in Sweden, eyebrows are being raised.

The dust-up has garnered little attention in the U.S. But it's front-page news in Sweden, where much of the labor force is unionized and Ikea is a cherished institution. Per-Olaf Sjoo, the head of the Swedish union in Swedwood factories, said he was baffled by the friction in Danville. Ikea's code of conduct, known as IWAY, guarantees workers the right to organize and stipulates that all overtime be voluntary...

Laborers in Swedwood plants in Sweden produce bookcases and tables similar to those manufactured in Danville. The big difference is that the Europeans enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days -- eight of them on dates determined by the company.

What's more, as many as one-third of the workers at the Danville plant have been drawn from local temporary-staffing agencies. These workers receive even lower wages and no benefits, employees said.
Swedwood's Steen said the company is reducing the number of temps, but she acknowledged the pay gap between factories in Europe and the U.S. "That is related to the standard of living and general conditions in the different countries," Steen said.

Of course that's exactly the same line you hear when American outsourcers are justifying the low wages paid to employees on the assembly line in China or Mexico or Vietnam. Turns out, the United States isn't "exceptional" at all. To keep up with the challenge of foreign competition, our plan is to crack down on our own working class until our sweatshops are just as oppressive as any other developing nation's.Somehow, Sweden -- and other Northern European countries -- has managed to avoid heading down this same road. Must have something to do with the different "general conditions" that prevail there.

Virtualization, Cloud Computing to Dominate Interop

Interop Las Vegas will focus on virtualization, cloud computing, the impact of social technologies and smartphones on work, and much more.

By Jon Brodkin

Mon, April 18, 2011

Interop will hit Las Vegas May 8-12 as this important tech event celebrates its 25th anniversary. The impact of virtualization and cloud computing on the network will be explored in depth, and the conference will tackle how social technologies, smartphones and other mobile devices will affect the future of work. Two days of workshops and a CIO Boot Camp are on the agenda Sunday and Monday, and then special guest star Vint Cerf will kick off the main portion of the conference in the Tuesday morning keynotes.

Still deciding which sessions to attend? This guide will highlight some of the key events happening throughout the week.

Sunday, May 8 and Monday May 9

CIO Boot Camp 8:30 a.m. to 4:30 p.m. Sunday and Monday

Real-world CIOs will tell their "war stories" at this two-day boot camp to help fellow IT executives become better leaders while dealing with the reality that "IT folks have been under-funded and under-appreciated forever." Topics will include next generation leadership realities, managing social media, vendor management, green and sustainable IT, emerging technologies, IT innovation and business analytics. The overriding theme will be "informed, innovative and inspired personal leadership."

Boot Camp chairperson: Thornton May, Futurist, Executive Director and Dean, IT Leadership AcademySpeakers:Christopher R. Barber, Former Senior Vice President of Enterprise Strategy and CIO, WesCorpBruce Barnes, CIO Emeritus, Nationwide Financial ServicesAlan S. Cullop, CIO, Senior Vice President, The TriZetto GroupCheryl Smith, Principal, Smith & AssociatesDr. Robert Rennie, VP, Technology & CIO, Florida State College at Jacksonville

Enterprise Cloud Summit, and Virtualization Days 8:30 a.m. to 4:30 p.m. Sunday and Monday

With 40 sessions across two days, Interop's Enterprise Cloud Summit will look at design, data privacy, economics and real-world lessons related to cloud computing. Sunday's sessions will focus on public cloud services, while the private cloud will take the spotlight on day two. A virtualization summit will also take place both Sunday and Monday, focusing on virtualization as an enabler of private clouds, and the ability to deliver virtual desktops and applications to users anywhere.

Enterprise Cloud Summit chairperson:Alistair Croll, Principal AnalystBitCurrent, Virtualization Days chairperson and instructor:Barb Goldworm, President and Chief Analyst, FOCUS

Tuesday, May 10

Pick of the day:

8 a.m. Tuesday morning keynotes featuring Vint Cerf

Interop will start with a bang Tuesday morning with an all-star lineup of keynote speakers including none other than Vint Cerf, who helped create the Internet and is the Chief Internet Evangelist at Google (GOOG). Dan Lynch, who founded the Interop conference in 1986, will interview Cerf on stage. High-ranking executives from HP (HPQ), Citrix and Cisco will also make appearances.

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Keynote Speaker - Dave Donatelli, Executive VP and General Manager, Enterprise Servers, Storage and Networking, HPKeynote Speaker - Mark Templeton, President and CEO, Citrix SystemsKeynote Speaker - Rebecca J. Jacoby, Senior Vice President and CIO, Cisco Keynote Speaker - Vint Cerf, Vice President and Chief Internet Evangelist, GoogleKeynote Speaker - Dan Lynch, Entrepreneur, founder of Interop

10:15 a.m. Emerging architectures and tools for the social enterprise

Microsoft (MSFT) SharePoint has become a seemingly ubiquitous product for enterprise collaboration, but it is not a "panacea," nor is it the only game in town. This session will examine maturation in the Enterprise 2.0 technology market, current state-of-the-art social and collaboration technologies, and "how enterprises should plan for emerging trends and standards."

Speaker - Tony Byrne, President, Real Story Group

11:30 a.m. What is the impact of cloud computing on the network?

Although cloud computing and virtualization can make IT more efficient, your network still has to be rock solid. This session will look at new challenges posed by cloud-related technologies and methods to head off problems resulting from management tools and processes being focused on static, rather than dynamic resources. For example, the deployment of virtual switches "will potentially result in IT organizations having to manage hundreds of new switches from multiple vendors," and "today's WAN can't effectively support the dynamic movement of VMs nor cloud bursting."

Speaker - Jim Metzler, Vice President, Ashton Metzler & Associates

1 p.m. Tuesday afternoon keynotes

Microsoft's Windows Azure team and Juniper's fabric and switching group will discuss "the growth and future of IT," and the vendors' approaches to next-generation technologies.

Keynote Speaker - Zane Adam, General Manager of Azure and Middleware, Microsoft CorporationKeynote Speaker - David Yen, Executive Vice President and General Manager, Fabric and Switching Business Group (FSG), Juniper Networks (JNPR)

2:15 p.m. Future of work: the great debate

The proliferation of personally owned mobile devices and social technologies are changing the way employees do work, and IT must adapt as well. Unified communications, video, mobile and social networking are driving the shift today, "but their real value may still lie ahead as these technologies come together to truly redefine the work experience." Participants in this session will give their take on the future of work in the enterprise.

Panelist - Eric Krapf, Editor,, Co-Chair, Enterprise ConnectPanelist - Steve Wylie, General Manager, Enterprise 2.0 ConferencePanelist – John Bartlett, Voice Video and Data Application Performance, NetForecastPanelist - Craig Mathias, Principal, Farpoint Group

3:30 p.m. Virtualization security and compliance

Moving from physical to virtual infrastructure can create gaps in compliance, requiring new frameworks to secure virtual data centers and private clouds. This panel will discuss specific regulatory areas such as FISMA, DIACAP, PCI, HIPAA and SOX/GLBA, and examine how physical security constructs like "zones" can be applied to virtual infrastructure. The coupling of hypervisor security architectures with virtual machine introspection and automation to provide greater insight into security will also be on the agenda.

Moderator - Michael Dortch, Director of Research, FocusPanelist – Eric Chiu, President & Founder, HyTrustPanelist - Mike Wronski, VP Product Management, Reflex SystemsPanelist - Tamar Newberger, VP, Marketing at Catbird

25 “critical” things you need to know about Interop, Las Vegas

Wednesday, May 11

8:30 Wednesday morning keynotes

Data center executives from Avaya and Intel (INTC) will deliver the second-day keynotes, followed by a panel involving Rackspace, Citrix and Terremark. Given the companies involved, it's safe to say cloud computing, virtualization and the software and chip architectures needed to drive these technologies will be discussed.

Keynote Speaker - Steve Bandrowczak, Vice President and General Manager, Avaya Data SolutionsKeynote Speaker – Kirk Skaugen, Vice President and General Manager, Data Center Group, IntelKeynote Panelist – Andy Schroepfer, Vice President of Enterprise Strategy, RackspaceKeynote Panelist - Simon Crosby, CTO, Datacenter and Cloud Division, Citrix SystemsKeynote Panelist - Randy Rowland, Senior Vice President of Product Development, Terremark Worldwide

10:15 a.m. FCoE vs. iSCSI – making the choice

The debate over storage network protocols isn't so clear-cut as it once seemed, as "the notion that Fibre Channel is for data centers and iSCSI is for SMBs and workgroups is outdated." Improving LAN speed and the potential of lossless Ethernet make iSCSI a possible fit in the data center. This session will examine how factors like "current product set, future application demands, organizational skill-set and budget" will determine your choice of FCoE or iSCSI.

Speaker - Stephen Foskett, Community Organizer, Gestalt IT

Pick of the day:

11:30 a.m. How do we finally get to IPv6?

The IPv4 address space is running out, whether you like it or not, and the world's Web infrastructure has to be upgraded and tested to make the transition to IPv6 a success. This panel will identify steps enterprise IT organizations should take to prepare for IPv6, the steps ISPs and network hardware vendors must take, and present a status report on how the major vendors are doing.

Moderator - John Curran, President & CEO, ARINPanelist – Dimitri Desmidt, Technical Marketing Engineer, A10 NetworksPanelist - Martin Levy, Director IPv6 Strategy, Hurricane ElectricPanelist - John Sweeting, Chair, ARIN Advisory Council

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2 p.m. On-demand SLAs: cloud terms of service

The status of service-level agreements is one of the major sticking points preventing some enterprises from adopting cloud computing. While traditional computing products are location-specific, cloud networks can exist anywhere, making it difficult to ensure compliance and analyze risk. This session will provide an overview of U.S. and European laws, highlighting aspects of cloud computing that regulators might target.

Speaker - Nolan Goldberg, Attorney, Proskauer LLPSpeaker – David Snead, Attorney + Counselor, W. David Snead, P.C.

3:15 p.m. The real next generation network

The "next generation" of networks will be driven by dramatic shifts related to virtualization and cloud computing, and it's time to ask whether we should keep building networks the way we always have. Drawing on the latest information from researchers and lessons learned from leading cloud computing vendors, this panel will examine new approaches to designing networks that can build a "truly dynamic, virtualized data center."

Moderator - Jim Metzler, Vice President, Ashton Metzler & AssociatesPanelist - Martin Casado, Co-Founder and CTO, Nicira NetworksPanelist - Nick McKeown, Professor of Computer Science and Electrical Engineering, Stanford UniversityPanelist - Igor Gashinsky, Network Architect, YahooPanelist - Manish Muthal, Director, Strategic Planning, Networking Components Division, LSI (LSI)

3:30 p.m. Dissecting the three major threat vectors – insiders, industrialized, and advanced persistent threats

Virus and malware attacks are coming at the enterprise from all angles, from the rudimentary to the highly complex. Using research from McAfee Labs and the experiences of real customers, McAfee will "paint a clear picture of today's threat landscape" to illustrate the differences "between insiders, industrialized hackers, and advanced persistent threats." Session attendees will learn about attacker motives, attack vectors, and the countermeasures enterprises can take that don't rely on a specific vendor or product.

Speaker - Brian Contos, Director Global Security Strategy, McAfee

Thursday, May 12

9 a.m. Off the hook: Advances in wireless LAN technologies

Wireless LAN is constantly evolving with new standards, specifications and technologies. This session will explain important developments, discuss implications for enterprise network planning and operations, and offer a glimpse into "the farther-term future of the wireless LAN."

Moderator - Fanny Mlinarsky, President, OctoScope

10:15 a.m. Social networks and security – can you have both?

It's getting more and more difficult for businesses to block employees from accessing social networks. They're not only popular, but they provide important business benefits, yet also "unheard-of security risks." This session will detail the security and privacy troubles posed by social networks while showing how enterprises can use them effectively without putting security and data at risk.

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Speaker - Ben Rothke, Senior Security Consultant, British Telecom (BT)

11:30 a.m. The new age of WAN optimization

Deploying a WAN optimization controller yourself or obtaining one as part of a managed service aren't the only ways to handle "chatty protocols and the need to transmit large files" anymore. As the lineup of Interop sessions comes to a close, this panel will debate the pros and cons of various new WAN approaches, including software-as-a-service providers that offer network and application optimization functionality and WAN services with embedded optimization functionality.

Moderator - Jim Metzler, Vice President, Ashton Metzler & AssociatesPanelist - Mark Weiner, Senior Vice President of Marketing, VirtelaPanelist – Neil Cohen,, Senior Director of Product Marketing, Akamai TechnologiesPanelist - Tony Kourlas, Business Services Product Marketing, Alcatel-Lucent

Pick of the day

InteropNet tour and OpenFlow Lab

The InteropNet, the network that powers the Interop conference, is among the most impressive temporary computing networks in the world. The network is sponsored by Cisco, VMware (VMW), F5 Networks (FFIV), HP, McAfee and many others, and this year features an OpenFlow Lab to help attendees examine the emerging OpenFlow network standard.

Interop network experts will use OpenFlow to demonstrate "How to extend a single management domain across a physical and virtual switch infrastructure made up of devices from a variety of vendors … how to provide unique load balancing functionality … [and] how to create an intelligent network based QOS for VoIP in a converged network."

Engineer-led tours of the InteropNet will run for a half hour at both 11 a.m. and 1 p.m. Thursday, as well as several times each on Tuesday and Wednesday.

Tuesday, April 26, 2011

Soaring food prices to dent Asia's growth, ADB warns

Rising food and fuel costs have pushed up the cost of living in many Asian economies. Soaring food and fuel prices are threatening to derail growth in Asian economies, according to a report by the Asian Development Bank (ADB).The bank has warned that if food and fuel prices continue to surge, economic growth in the region could be reduced by up to 1.5% this year. According to the bank, domestic food prices have risen at an average of 10% in many Asian economies this year. Oil prices have also surged because of the crisis in the Middle East.The bank said that a combination of these two factors has been a major setback for growth in Asian economies.

Extreme poverty

"Left unchecked, the food crisis will badly undermine recent gains in poverty reduction made in Asia”
Changyong Rhee

Asian Development Bank

While Asian economies have emerged strong from the global financial crisis, the rising cost of living has become a big concern in the region. The ADB has warned that the recent surge in food price is threatening to push millions of Asians into extreme poverty.According to the bank's study a 10% rise in domestic food prices may result in almost 64m people being pushed into extreme poverty.According to the ADB's chief economist, Changyong Rhee, "for poor families in developing Asia, who already spend more than 60% of their income on food, higher prices further reduce their ability to pay for medical care and their children's education." "Left unchecked, the food crisis will badly undermine recent gains in poverty reduction made in Asia." he added.
Export bans
The bank also warned that food prices will remain volatile in the short term. It said that while there have been production shortfalls in some countries because of bad weather, prices have also been pushed up by other factors, such as the weakening US dollar and rising fuel costs.This has resulted in many countries imposing export bans on their produce, a practise that is not helping the cause, according to the bank.

"To avert this looming crisis it is important for countries to refrain from imposing export bans on food items, while strengthening social safety nets," said Dr. Rhee. "Efforts to stabilize food production should take centre stage, with greater investments in agricultural infrastructure to increase crop production and expand storage facilities,"Dr Rhee added that these measures will ensure that food produce is not wasted, thus helping to keep prices in check.

Monday, April 25, 2011

British Courts rule against Lloyds, RBS and Barclays

A  judge in a British court has ruled against the banks on all important issues in a recent case. And two judgements really mattered: first that the Financial Services Authority's principles governing the behaviour of financial firms are a proper basis for compensation awards; and that FSA rules based on those principles are necessary but not sufficient for judging whether financial firms engaged in mis-selling. Frankly if the banks had succeeded in proving otherwise, it would have been utterly disastrous for the whole system of consumer protection in the UK, both the existing system and the new one being erected by the government.

As it turns out, it is the implications of today's ruling for the banks that are serious. Unless they appeal they face having to make compensation payments of around £4bn to around two and a half million people (around a quarter of all PPI policies were allegedly mis-sold). The damage is greatest for the two banks in which we as taxpayers have big stakes, Lloyds and Royal Bank of Scotland - largely because they have the largest shares of the retail banking market. Lloyds faces the biggest bill: both it and RBS look as though they will have to pay compensation in excess of £1bn each.
That Lloyds and RBS appear to have done the most mis-selling in this instance will be seen by some as further evidence that their particularly powerful positions in retail banking is bad for the welfare of consumers - it will be taken as strengthening the argument of the Independent Commission on Banking that reinforcing competition is a priority. The tab for Barclays and HSBC will also be pretty steep - some hundreds of millions of pounds each. It is even more curious that they have fought and fought to limit their liability in the light of the two main examples of mis-selling identified by the FSA.

First there were all those refusals to make payouts under the loan insurance plans to those who had a pre-existing medical condition - when it is clear that relevant customers had no idea that pre-existing medical conditions were grounds for non-payment. Second, it is a logical absurdity that the policies should have been sold by the banks to the self-employed, given that is impossible for a self-employed person to be made redundant. So what next? Well the banks could make those two and a half million victims of mis-selling wait another couple of years to be made whole by appealing to the Supreme Court.

Or they could take the view that the prospects of winning in any court are too slim to outweigh the potential for further damage to their respective public images from being seen to defy an unambiguous legal judgement that they let down millions of their customers. Unless of course they regard their reputations as so impaired that there's nothing left to lose from prevarication.

Friday, April 22, 2011

IMAX going big in emerging markets

With the rise of a growing middle class in emerging economies, particularly China and India, entertainment companies are adjusting their business models to tap into this growth. Richard Gelfond, CEO of IMAX, the operator of large-screen movie theatres, talks to BNN about his plans to benefit from the rise of consumers in the developing world.
“One problem is right now we’re exporting mostly North American films…so we’ve started to do local content,” he says. “For example in China, we’re now showing Chinese films in IMAX in China.”
Gelfond adds that once infrastructure is in place in emerging markets, the company will be better placed to expand its presence.

Thursday, April 21, 2011

General Electric profits increase and beat forecasts

General Electric's results for the quarter were ahead of expectations Continue reading the main story

Profits have surged at US conglomerate General Electric (GE), adding to the wave of corporations whose earnings have exceeded expectations. GE said net earnings had risen by 79% to $3.4bn (£2.01bn) for the first three months of 2011 from a year earlier. It also increased its dividend.Revenue rose 6% to $38.45bn, when many analysts had expected a decline for the quarter.
GE is seen as a bellwether for the US economy, given the breadth of its operations, which include a financial arm as well as industrial units.The profit growth was fuelled by growth in its healthcare and transport divisions, and net profits of $1.8bn at GE Capital. "As today's results show, GE has emerged from the recession a stronger, more competitive company," said GE chief executive Jeff Immelt. The dividend increase - by one cent to 15 cents - is the third in the past 12 months, and is effective from the third quarter of this year.

In addition, Apple, Intel, Nokia and McDonald's have all beat forecasts this week.

Wednesday, April 20, 2011

Finally! U.S. exec guilty in $3B mortgage fraud case

A jury on Tuesday convicted Lee Farkas on all 14 counts in a fraud scheme prosecutors said was of staggering proportions. A Virginia jury on Tuesday convicted the majority owner of what had been one of the largest U.S. mortgage companies on all 14 counts in a $3-billion fraud trial that officials have said is one of the most significant prosecutions to arise from the financial crisis. Prosecutors said Lee Farkas led a fraud scheme of staggering proportions as chairman of Florida-based Taylor Bean & Whitaker.

The fraud not only caused the company's 2009 collapse and the loss of jobs for its 2,000 workers, but also contributed to the collapse of Alabama-based Colonial Bank, the sixth-largest bank failure in U.S. history.The jury returned its verdict late Tuesday after more than a day of deliberations.

Colonial and two other major banks — Deutsche Bank and BNP Paribas — were cheated out of nearly $3 billion, prosecutors estimated. Farkas and his cohort — six of whom entered guilty pleas to related charges and testified against him at the two-week trial in U.S. District Court — also tried to fraudulently obtain more than $500 million in taxpayer-funded relief from the government's bank bailout program, the Troubled Assets Relief Program (TARP).

While TARP at one point gave conditional approval to a payment of roughly $550 million, ultimately neither Taylor Bean nor Colonial received any TARP money, and investigators from that office, along with the FBI and other agencies, helped uncover the fraud. Neil Barofsky, who recently resigned as TARP's special inspector general, has called the Farkas case "the most significant criminal prosecution to date rising out of the financial crisis." In a conference call Tuesday evening with reporters, the Justice Department's criminal division chief, Lanny Breuer, said Farkas was "one of the masterminds in one of the largest bank frauds in history" and that his misconduct "poured fuel on the fire of the financial crisis."

"TBW was a major, major player in this industry," perhaps the second largest in the country depending on how it is measured, Breuer said.  Farkas testified in his own defence at the trial and claimed he did nothing wrong. He claimed he was unfamiliar with details or knowledge of many aspects of the various fraud schemes, testimony prosecutors derided as incredible in their closing arguments.

Appeal planned

Farkas's lawyer, Bruce Rogow, said the six executives at Colonial and Taylor Bean who struck plea deals skewed their testimony to bolster the government's case in the hope of receiving lighter prison sentences for their co-operation. Rogow said Farkas and everyone else at Taylor Bean was working honestly and ethically to get control of its finances and perhaps could have done the job if the government hadn't essentially shut the company down when it raided company headquarters in 2009.
Rogow said late Tuesday he was disappointed in the verdict and plans to appeal.

"I had hoped the jury would have accepted our argument that the six people who pled guilty did so not because they felt they were guilty but because they wanted to minimize the sentences that the government threatened them with," Rogow said. U.S. District Judge Leonie Brinkema ordered marshals to take Farkas into custody immediately following the verdict, a relatively unusual step since most defendants are allowed to remain free until they are formally sentenced. Farkas will be sentenced July 1 and potentially could spend the rest of his life in prison. According to prosecutors, the fraud began in 2002, when Taylor Bean overdrew its main account with Colonial by several million dollars. Mid-level executives at Colonial agreed to transfer money into Taylor Bean's accounts at the end of each day to avoid generating overdraft notices, a process known as "sweeping."

As the hole grew to well over $100 million, Taylor Bean and a handful of Colonial executives concocted a scheme in which Taylor Bean sold hundreds of millions in worthless mortgages to Colonial, mortgages that had already been sold to other investors. More than $1 billion in such phony mortgages were eventually sold to Colonial, which listed them on its books and on its quarterly reports as legitimate assets, prosecutors alleged.
In a related scheme, Taylor Bean created a subsidiary called Ocala Funding that sold commercial paper — essentially glorified IOUs — to banks including Deutsche Bank and BNP Paribas. But prosecutors said the collateral that supposedly backed that commercial paper was worthless, and when Taylor Bean collapsed in 2009, the two banks lost roughly $1.5 billion.

Prosecutors said Farkas was motivated by greed and a lavish lifestyle that included a private jet, a seaplane, numerous houses including a home on Key West that he paid servants to hand wash with a sponge to prevent salt damage, a collection of several dozen classic cars and an executive dining room at company headquarters that served pheasant and caviar.

Farkas, 58, was charged with 14 counts of bank fraud, wire fraud, securities fraud and conspiracy.
Trial testimony revealed that the bankers at Colonial who worked with Farkas felt trapped as the hole in Taylor Bean's accounts grew exponentially. Cathie Kissick, a vice-president at Colonial who did not tell her superiors about the vast majority of Taylor Bean's problems, testified that she had little leverage over Farkas because of the trouble she would be in if the size of the hole in Taylor Bean's accounts was discovered.

Farkas exploited that leverage, telling a colleague: "If I owe you $100, I have a problem. If I owe you $1 million, you have a problem."

Tuesday, April 19, 2011

TAX reform needed

The few wealthiest Americans, who because of numerous loopholes in the tax code rarely end up paying the oft-quote top tax rate of 35 percent. The AP quotes one Columbia Business School professor who manages to pay only 1 percent of his six-figure income to the federal government. On average, the wealthiest Americans pay only 17 percent of their income in taxes, a dramatic decline from the 26 percent they paid in 1992.

In his speech last week, President Obama vowed to limit tax breaks, especially those for the wealthy. It's bound to be a political challenge as some of these breaks affect low and middle-income Americans, 45 percent of whom pay no federal income tax whatsoever. But The Daily Beast's John Avalon thinks the president stands to gain ground in the tax battle with a quick fix. Rather than compare Warren Buffett's income with those on the bottom rungs of the top tax bracket--an income of roughly $125,000 a year--Avalon thinks we should get reasonable about taxing the ultra rich:

A smarter option would be to recognize the increasing wealth disparity in America and adjust the top rate accordingly—raising it to $500,000 or even $1 million per year per household. This would match the Democrats’ “millionaires” rhetoric with reality. It would also be politically impossible for Republicans to oppose at a time when we need to pay down our deficit and our debt.

Along these lines, Treasury Secretary Tim Geithner let America know yesterday that we'd have to raise the debt limit. Geithner agrees that tax reform needs to be focused on closing loopholes for the wealthy in order to make a dent in the deficit. He told Christiane Amanpour:

Those benefits, even like the mortgage interest deduction that lets people have two homes, pretty expensive homes … if you target them on the most fortunate Americans, they can afford to take a little bit larger share of the burden. They can afford to do that, and it's the responsible thing to do for the economy.

Not that any of this news makes you more excited to pay your taxes.


Super rich see federal taxes drop dramatically, Stephen Ohlemacher, Associated Press

A Tax Reform Slam Dunk, John Avalon, The Daily Beas