Aug 302012
 August 30, 2012  Posted by at 10:02 pm Finance Comments Off on A Big Bad Brick Wall

Jack Delano Model airplanes decorate the ceiling of the train concourses at Union Station in Chicago, Illinois 1943

As America settles in for a three month long across-all-media screening of Dumb and Dumber, Europeans are setting up for a valiant effort to put up an even more mind-boggling spectacle. Competition is healthy, right? The world of finance hangs on ex-Goldman Sachs vice chairman and managing director Mario Draghi's lips almost as much as it sucks up to Ben Bernanke's Jackson Hole. Central bankers become ever more important simply because in the absence of honest profits they are the only source of money left standing. If you can't make it, fake it.

That this money will need to be paid for at some point in time doesn't seem to be a concern for anyone anymore, or at least it's not addressed. As far as politicians, bankers and media are concerned, it could come from somewhere anywhere they don't care. They're all convinced they won't be the ones who have to foot the bill, and the way things are going they're probably right.

Draghi and Bernanke have been anointed with the power to dole out trillions of dollars and euros more, and they'll hand it to whoever's bought the best seats in the house, claiming straight-faced that it's the only way to save the US, the eurozone, the economy and the planet itself.

Since nothing serious is to be expected from the US while the election circus is in town and no-one can seemingly get enough of the fake trapeze acts on the menu, well, unless a real hurricane or a real war blows the cheaters and liars out of their tents, we might as well focus on Europe, that other Goldman Sachs subsidiary.

Right wing career civil servant and present Spanish PM Mariano Rajoy, along with Italian career technocrat and non-elected PM Mario Monti, are attempting to bully the rest of Europe into bailing out their failed economies and banks. And on the surface this may sort of seem to work. But they are, if you look closer, trying to juggle and keep in the air far too many outsize hot potatoes at the same time.

Of course, they are trying at the same same time to solve this issue by, with Draghi's approval, throwing as many of these big hot potatoes as they can into the hands of Angela Merkel, the German Parliament and other EU political bigwigs whose deficits have yet to be exposed.

In order to have any shot at doing this, though, they need to do as much or more cheating as all the American election circus trapeze act "artists" put together. And that's not easy: there are still numbers out there that don't lie. They run a very real risk of being found out, a risk far bigger than their US counterparts, who can rely on much larger, more intricate and more sophisticated curtains and smokescreens. And besides, if you tell an Italian or Spanish farmer that he's not in Kansas anymore, he wouldn't have a clue what you're talking about. Europe is more into Hansel and Gretel. A no less perfect metaphor, granted.

And really, all it takes is to go through a bunch of news articles, pick out some details, and you know why all that time and money in Europe is wasted. It's over. Project Europe is over . The only reason why that's not acknowledged is the same old same old: banks and their debts. All the US and EU made men would rather impoverish the people than open the bank vaults. That's in fact and of course why they have risen to the position of made men: they're proven useful servants to the Dons.

That's just simply the way that technocrats and (ex-)Goldman Sachs employees think. It's not as if they have to fear – or so they reason – for their own property, their own families. They are – or feel – secure, and that makes a huge difference when it comes to deciding what to do in these matters.

If Draghi or Monti or Rajoy or Bernanke or Merkel or Obama would be under the impression, let alone have the knowledge, that their plans and decisions would negatively – to a significant degree – affect their own accumulated wealth, whatever that may be, there is not one iota of doubt in anyone's mind, including their own, that those plans and decisions would be dramatically different.

If not opening the bank vaults, and exposing the debts hidden within, would mean they themselves and their children and grandchildren would end up in situations similar to those of the people hardest hit by the austerity measures that cripple the Greek and Spanish economies, where young people have no chance of finding jobs, or those in American cities hardest hit by foreclosures and unemployment, they would simply open those vaults. Well, if they were handed the keys and had the chance to do so, that is.

On the other hand, chances are that they wouldn't be in their present positions if they had either the inclination or the power to do that. After all, you don’t become president of the Fed or the ECB if you don't like banks or bankers. And you don't work your way up to German Chancellor or President of the USA if you don't know the rules of the game. In return for obeying those rules, you know – or expect – that you will be safe, and so will your families. It’s what all made men do.

It's a trade off. One that, first, comes at the expense of those who don't have that sort of "protection" (dare we say mindset?!), and second, guarantees that those without that protection will never have any realistic shot at a fair representation in their alleged democratic systems. In that sense, Europe and America are one and the same.

Nothing we will see in the coming months will provide any real solutions to what ails either the American or European economies. There are no politicians left in positions that make any difference at all who are where they are to serve the best interests of the people they are supposedly representing. And central bankers, of course, represent no people at all; they represent industries and special interests, under the guise of being independent.

This is an issue that goes much deeper than elections or bailouts. It's not just system wide, it's system deep too. There's a virtually non-contested notion that what's good for the financial industry is good for societies as a whole, a notion that holds across entire nations, their financial and political systems and their media. And that notion is just plain and simply nonsense. But what does that matter if you manage to have everyone believe it who has any voice and any working neuron left?

Our genetically defined primal tendency is to seek instant gratification, not some hard to define long term view. The system we are part of, and are witnessing today, is ideally set up for that tendency, and that's no coincidence. We have discovered the economic – perhaps even societal – system that suits our primal brains most. What more could we wish for?

Who needs a functioning frontal cortex when you have real housewives to be had? We sit behind our ever wider screens eating our ever more instant food in our ever less affordable homes provided for with our ever less secure jobs and tell ourselves we're doing good and tomorrow will be even better. That's what we've been told to do and think, after all. So it must be good and it must be true.

There's nothing like sitting in a well heated home and having a well heated processed meal in front of a 40-inch screen that beams up smart looking people saying they have it all under control and they will make it all better, to make those nagging and debilitating fears in the back of our heads go away. Until tomorrow. But then, tomorrow will be even better. That's what we've been told, and that's what we're genetically predisposed to believe in. We are not prepared in any sense for the fact that at some point we may and must hit a big bad brick wall.

Which is exactly why we will hit it.


Aug 272012
 August 27, 2012  Posted by at 3:19 pm Finance Comments Off on The Global Demise of Pension Plans

We have been saying for a long time that anyone in the western world who's 10-15 years away from collecting their first pension payments, shouldn't expect to get much, if anything, when the time comes. This is because, obviously, the economy has deteriorated as much as it has. It's also because, in essence, pensions plans are the ultimate Ponzi schemes.

What doesn't help are the central bank and government policies that are in fashion today that are based on pushing interest rates about as low as they can get.

The reactions to all this are interesting in their range of variation. Last week I picked up an article (more on that later) that made me refer back to a series of bookmarks I had made over the past month or so. Here are a few quotes that, when put together, paint the picture pretty accurately; you add up the details and numbers and you get an idea of what's going on. Not necessarily for the faint of heart. First, Michael Aneiro for Barron's:

Top Pension Fund Sends a Warning

The California Public Employees' Retirement System, the nation's biggest public pension fund at $233 billion, reported a mere 1% return on its investments in its fiscal year ended June 30. Earlier this year, in an attempted acknowledgment of today's realities, Calpers had lowered its discount rate–an actuarial figure determining the amount that must be invested now to meet future payout needs—for the first time in a decade, to 7.5% from 7.75%. That represents combined assumptions of a 2.75% rate of inflation and a 4.75% rate of return.

Needless to say, a 1% annual return didn't come close to hitting any of those figures and doesn't engender confidence in the assumptions of institutional or individual investors alike. Calpers was quick to note that its 20-year investment return is still 7.7% and that the past year was challenging for everyone. But Calpers is a bellwether, and other systems are expected to report similarly disappointing returns, necessitating higher annual contributions in the years ahead to meet funding needs.

Later in the week, S&P Dow Jones Indices said that the underfunding of S&P 500 companies' defined-benefit pensions had reached a record $354.7 billion at the end of 2011, more than $100 billion above 2010's deficit. The organization reported that funding levels at the end of 2011 ran around 75%, on average, and that future contributions will constitute a "material expense" for many companies.

Fitch Ratings later released its own study of 230 U.S. companies with defined-benefit pension plans and found that median funding had dropped to 74.4% in 2011 from 78.5% in 2010, and that corporate pension assets grew just 2.9% in 2011 amid sluggish returns and a 6% decline in contributions.

This is not pretty. What we see is hugely unrealistic annual return assumptions combined with equally huge underfunding. Both ends burning. More from Marc Lifsher at the Los Angeles Times:

Pension funds seriously underfunded, studies find

Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies.

In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices.

Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low.

The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

"The American dream of a golden retirement for baby boomers is quickly dissipating," Silverblatt said. "Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.

"For many baby boomers it may already be too late to safely build up assets, outside of working longer or living more frugally in retirement."

While the cost of retirement is out of reach for many older workers and growing more expensive for younger ones, it's becoming less of a burden for employers, according to the report issued Tuesday.

Employers are paying less into pension funds despite the fact that company cash levels remain near record highs and cash flows are at an all-time high," Silverblatt said.

Meanwhile in the public sector, a separate pension-related report by the national State Budget Crisis Task Force warned that public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.

There's no consensus on the amount by which pensions funds are underfunded. According to Reuters' Jilian Mincer, the funding shortfall may be as high as $4.6 trillion (2011 numbers).

Public pension funds to face calls to set realistic targets

Public pension funds are expected to report poor annual returns in the coming weeks, results that are likely to increase calls for more realistic retirement promises for teachers, police officers and other public workers.

At least three of the nation's largest U.S. public pension funds have already announced returns of between 1% and 1.8%, far below the 8% that large funds have typically targeted.

The fund's targets have been "unrealistic," said Michael Lewitt, a portfolio manager at Cumberland Advisors in Sarasota, Florida. "They've been fooling themselves because there is no realistic case they can make that." [..]

Low returns will further aggravate funding shortfalls for hundreds of pension plans, adding to pressure on cities, counties and states that are already facing lower tax revenue and rising costs.

The vast majority of states have cut pension benefits or increased contributions from workers, or are trying to.

"Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future," said Bob Williams, president of free-market think-tank State Budget Solutions, in Washington. "Without government action, states, counties, cities and towns all over America will go bankrupt," he said. [..]

Major public pensions typically assume an average return of about 8%, but the median annual return in 2011 for large pension funds was roughly half that amount, 4.4%, according to data provided to Reuters by Callan Associates.

Median returns were only 3.2% for the last five years and 6% for the last 10. Before the 2007-09 recession, market performance was often above the 8% assumptions. Average returns for the last 20 or 25 years as a whole still reach that level. But with losses in 2008 and 2009 and uneven returns since then, analysts say pension funds should adjust to what seems to be a new reality. [..]

The funding status of public pensions has dramatically slipped over the last decade. Barely more than half were fully funded in 2010. At the end of that year, the gap between public sector assets and retirement obligations had grown to $766 billion, according to a report by the Pew Center on the States.

Ratings agency Moody's Investors Service calculated this month that if it used a 5.5% discount rate, a rate closer to the way private corporations value their pensions, it "would nearly triple fiscal 2010 reported actuarial accrued liability" for the 50 states and rated local governments to $2.2 trillion.

Other estimates put the shortfall even higher. State Budget Solutions estimated it in a recent study at $4.6 trillion as of 2011.

In San Francisco, they don't mince words, writes Heather Knight at SFGate:

More bad news for San Francisco’s city pension fund

A preliminary report of how the city’s pension fund performed in the fiscal year 2011-12, which ended June 30, shows it earned a meager 1.6% — far below the assumed rate of return of 7.5%. For a fund currently worth $15.3 billion, that’s a big difference.

"This is even worse than anyone predicted," said Public Defender Jeff Adachi, who offered a competing, failed pension reform measure that would have raised more money through employee contributions. "If this was a movie, it would be a disaster movie called ‘Pension Armageddon.’"

Canada, which faces similar problems ("massive shortfalls"), despite an ostensibly far better performing economy (how on earth does that add up?), apparently takes a somewhat different approach than the US, where, essentially, the favorite approach is moving the goalposts, which "lets companies use a 25-year average of the discount rate rather than two years".

You don't have to be a genius to see that the – financial – world was a totally different place 25 years ago than it is today. So using 25 year old stats to calculate today's required pension funding rates is a highly risky affair. If you find two years too short a period, you can go for 5 years, perhaps, I can see an argument being made for that. But 25? That looks like a desperate attempt at a cover-up more than a serious effort to find accurate accountancy methods.

Well, Canada resists such desperation. So far, at least, and despite strong opposition, that wants a sweet deal like the US gets. Louise Egan and Susan Taylor for Reuters:

Ottawa shrugs off pleas for pension fund relief amid massive shortfalls

Canada is taking a different tack than Washington on the thorny issue of helping companies fund their widening pension gaps, shrugging off corporate pleas for relief even as the United States lets businesses slash their contributions.

A frightening prospect for workers, retirees and companies, yawning pension deficits have gone from arcane accounting entries to front page news on fears that massive shortfalls could even cause some corporations to fail.

As a growing number of employers look to roll back benefits to the alarm of unions, others are pouring cash into their pensions funds only to see the hole get deeper.

Canada is not unique, and as in the United States, generous public sector pensions are a hot-button issue. But the federal government is taking a more hands-off stance than U.S. President Barack Obama, who signed a bill last month that changes how companies calculate what they must contribute to their pension funds, effectively allowing them to pay less.[..]

Softening the rules implies letting plans stay underfunded for longer, a risk financially prudent Ottawa may be reluctant to accept. After all, the country’s conservative banking culture helped it survive the global financial crisis better than most.

As in other countries, the scope of the Canadian problem is huge. 90% of the roughly 400 defined-benefit pension plans overseen by Canada’s federal regulator are underfunded, meaning they cannot meet their liabilities should their plans be wound up today, as is required by law. [..]

Historically, Canada has preferred relief measures such as lengthening amortization periods. Permanent rule changes in 2010 let companies average their solvency ratios over a three-year period instead of one, so that a sudden bad year doesn’t force them to make big cash infusions.

But some critics say it is dancing around the real problem – the very low "discount rate" used to assess a plan’s solvency, which is the focus of the recent measures in the U.S., Denmark and Sweden. This rate, based on long-term government bonds, helps actuaries judge how much assets will earn over time.

Companies complain the rate has never been lower and artificially inflates a plan’s deficit. The lower the discount rate, the bigger the deficit. Air Canada’s chief financial officer, Michael Rousseau, told analysts on a recent conference call that a 1.5% or 2% rise in the rate would eliminate more than $3-billion from the airline’s deficit.

That wishful thinking effectively became reality last month, not for Canadian companies but for their U.S. competitors. The new law there lets companies use a 25-year average of the discount rate rather than two years.

In Europe, Denmark and Sweden have tinkered with how the discount rate is used and the United Kingdom is thinking of following in their footsteps. [..]

Bob Farmer, who represents 250,000 pensioners as president of the Canadian Federation of Pensioners, says softer rules for companies mean bigger risks for workers. Tough luck about the low yields, he says. "That happens to be the world we’re living in." [..]

"The biggest social issue in the next 10 years is going to be pensions," said Rick Robertson, associate professor at the Richard Ivey School of Business, part of the University of Western Ontario. "What do I tell the 64-year-old person who may not have a chance to rebound if the company doesn’t succeed. Who’s my duty to? There’s no easy answer."

Whereas in Japan, with the world's fastest ageing population, the world's biggest pension fund has taken a dramatic route: selling off assets. It hopes to make up for this by moving into riskier assets. That's of course a big gamble no matter how you look at it. Monami Yui and Yumi Ikeda at Bloomberg:

World’s Biggest Pension Fund Sells JGBs To Cover Payouts

"Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash," said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). "To boost returns, we may have to consider investing in new assets beyond conventional ones," he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

Now, remember that the level of funding for US public pension plans has fallen as low as 70% or thereabouts. And that brings me to the article from last week which made me return to the pension topic.

In the Netherlands, pension funds are by law required to maintain a 105% funding level. And there is little enthusiasm for changing this. Right after the autumn 2008 crisis peak, some leeway was provided by the government, but only for a short period. Now, there are other steps being taken:

Civil service pension fund ABP may cut pay outs by up to 15%

One of the biggest pension funds in the world, the Dutch civil service fund ABP, may have to cut pensions next year and again in two years time in order to keep its finances in order, the Volkskrant reports on Wednesday.

The paper bases its claim on confidential documents from the pension fund, which covers some three million workers and pensioners.

The current method of calculating pension funds’ coverage ratio – the amount of assets needed to meet pension obligations – could mean ‘reductions mount up to between 10% and 15%’, the document states.

The fund has already agreed to cut pensions by 0.5% next year. However, talks are under way between ministers and the central bank on changing the way interest rates used to determine the coverage ratio is calculated.

The document also states that if nothing is done to change the calculations, premiums for 17 big funds could rise by 28.5%.

Hundreds of thousands of pensioners are likely to get smaller pay-outs next year because pension funds have been hit by lower interest rates and the economic downturn.

There is no need to explain how tough it will be for many people to see 15% cut off their fixed income. And that will be just the beginning. Some pensions plans may temporarily do better if and when they're allowed to invest in risk(ier) assets, but just as many will do worse for that exact same reason. Changing coverage ratio calculations is not a magic wand; it's just another layer of creative accounting, and we've already got plenty of that.

For younger generations, which over a broad range have lower income jobs, if they have any, seeing pension plan premiums rise 28%, and then some more and so on, will become unacceptable, fast. They will soon figure out that the chances they will ever get any pension decades from now are close to zero. So they’ll ask themselves why they should pay any premiums, from the pretty dismal wages they make in the first place.

Over the next few years, this is a battle that will play out in our societies, and it will have no winners. We need to be very careful not to let it tear those societies apart. In a world where just about everyone has to settle for much less than they have or thought they would have, that will not be easy. Realistic accounting standards would be a good first step, but they will also be very painful. It will be very tempting to hide reality for as long as we can, in the same way we already do with issues ranging from Greece to real estate prices to bank losses to derivatives to our own personal debts.

The best, or even only, advice for those of us who belong to younger generations is: don't count on getting a pension when you reach retirement age. It’ll probably have been moved to age 85 or over by the time you get there anyway.

This is not something that can or will be fixed overnight. It was doomed from the moment baby boomers started producing the number of children they have. It simply hasn't been enough to keep the pension Ponzi going. And those baby boomers, with far too few children to provide for their pensions, have only just started to retire now, as the plans are already in such disarray. I'm sure you can see where this will lead.


Aug 252012
 August 25, 2012  Posted by at 1:25 pm Finance Comments Off on Dear Angela, It’s Time To Do The Right Thing

Image: Ilargi, The Automatic Earth

Dear Angela,

You know, it's sort of funny that just as I started to write this letter, I read about a plan (yours?) for a possible temporary Greece exit from the eurozone.

Germany May Ask Greece To Exit The Euro 'Temporarily'

Market News International is reporting that the German Finance Ministry may ask Greece to exit the euro "temporarily" while it straightens out its finances. From MNI, citing unnamed "senior eurozone officials" as sources:

The officials said that in the view of German Finance Ministry officials mulling the plan, it is now the most likely scenario. But it is not a done deal. There is strong opposition to such a plan among some key European officials, and no decision is likely at least until the end of the year.

“It is another working scenario which is not new but has emerged in the past month as the most likely outcome for the German finance ministry,” one of the officials said. “There is a team under [German Finance Minister] Wolfgang Schaeuble that believes Greece’s public finances will need many years to return to acceptable levels.”

“It all comes down to the fact that Greece will need a third loan. Even if everyone denies it, we all know it’s unavoidable,” this official said. But because of rising political pressure in Germany and other core Eurozone countries, “this decision will be delayed as much as possible.” He added that, “the hawkish team of the German finance ministry believes that since Greece will need more money, it would be better given as a bridge loan to facilitate a temporary exit.”

The official noted: “It would be better received politically within Germany, the Netherlands, Finland and other countries like Slovakia and Estonia if the new loan were sold as the final one and tied to a Greek exit from the Eurozone, which would be regarded as punishment.”

Perhaps even funnier is this report in the Independent :

Barack Obama asks eurozone to keep Greece in until after election day

Representatives from the International Monetary Fund, the European Central Bank and the European Commission are due to arrive in Athens next month to assess Greece's reform efforts.

They are expected to report in time for an 8 October meeting of eurozone finance ministers which will decide on whether to disburse Greece's next €31bn aid tranche, promised under the terms of the bailout for the country.

American officials are understood to be worried that if they decide Greece has not done enough to meet its deficit targets and withhold the money, it would automatically trigger Greece's exit from the eurozone weeks before the Presidential election on 6 November.

They are urging eurozone Governments to hold off from taking any drastic action before then – fearing that the resulting market destabilisation could damage President Obama's re-election prospects. European leaders are thought to be sympathetic to the lobbying fearing that, under pressure from his party in Congress, Mitt Romney would be a more isolationist president than Mr Obama.

Yeah, we get it, we all understand that Obama, like you, would rather see everything appear quiet and papered over (when's your next election again?). What we don't get is why US elections should rain down on the Greek people. It's after all not as if major changes are to be expected across the pond.

Though, admittedly, it is a nice touch that Europe's conservatives, like yourself, would probably rather see Obama stay on in his job than be replaced with a fellow conservative. And that none of that should really surprise anybody. A very substantial part of Europe by now, for good or for bad, sees American politics as a two bit sequel to One Flew Over the Cuckoo's Nest anyway. You for one certainly do.

A temporary Grexit? Hmm. Greece is bankrupt many times over. We know that it will need more money, a third loan, fourth loan, rinse, repeat. By now the amounts borrowed guarantee it will never be able to pay back everything, no matter how many islands and monuments it sells. Moreover, Greek economic numbers consistently come in "worse than expected". Not worse than you or I expected, of course, but then we both know better, just worse than the official version that's fed to the media who feed it to the public, no questions asked.

Samaras told you this week that Greece needs more time. He wants another additional two years to fulfill all of the troika demands. And again, Angela, you and I know better. Greece is in no position to meet the demands, not now and not in two years. Or ten, for that matter.

There's a good article today in your own – German – Spiegel magazine, and I'm sure you're aware of it, on the depths of Greek austerity. It painfully paints the picture of where the limits are to what the Greek people can reasonably be expected to suffer.

Athens Shows Its Commitment to Austerity

[..] … calls for more time to implement austerity measures in Greece have already met with resistance in a broad section of the German government. "Europe and the euro cannot be allowed to fail because people refuse to implement reforms," Economics Minister Philipp Rösler told SPIEGEL ONLINE on Sunday. And the accusation being heard in the run-up to Samaras' important meeting with German Chancellor Angela Merkel is that the Greeks are exactly these kinds of reform refuseniks.

However, the reality is much different. Measured according to GDP, the Greeks are clearly making much deeper cuts than all other crisis-hit countries in the euro zone. This was recently confirmed by a study from the central bank of Ireland, which itself has a reputation as a model cost-cutter.

The report finds that, since 2010, Greece has responded to pressure from the European Union and the International Monetary Fund by slashing expenditures and raising taxes worth the equivalent of 20 percent of GDP — which represents the most brutal belt-tightening program in the history of the EU. This achievement is particularly noteworthy given the fact that it has taken place in the midst of a severe recession.

Given these circumstances, why do there continue to be doubts about the seriousness of the Greeks' efforts? On the one hand, this results from the fact that, despite all the cuts, Greece's debt burden will continue to grow if its economy doesn't grow as well. On the other hand, media reports about phantom retirees or bureaucratic chaos continue to create the impression that ongoing waste in other areas will negate all of the successful belt-tightening efforts. [..]

[..] … the prime minister has made clear that he has recognized the problem. And that's already more than one can say about most of his predecessors.

In addition, concrete measures have been agreed to under Samaras — first and foremost a further austerity package worth €11.5 billion that the prime minister pushed through despite resistance from the opposition. "Greece is bleeding," the German tabloid Bild wrote in a headline ahead of Samaras' visit to Germany. During the past three years, quality of life has dropped by 30 percent and pensioners have lost one-fifth of their monthly benefits.

One can't really claim that Greece under Samaras hasn't been economizing enough. But have the efforts also been successful? Will Samaras succeed in modernizing the Greek state and, especially, the country's ailing political culture? It is still too early to answer these questions. After all, the man has only been in office for two months.

And yes, I know, Angela, there's a troika report coming up soon that you want to wait for. And of course there's the September 12 decision by your constitutional court on the legality of the European bailout funds, which might throw a real cold shower on things (also on September 12, Holland has parliamentary decisions, which could shake up the whole discussion). And then there's another EU meeting on October 8, and what's 6 weeks in the grand scheme of things after all?!

Undoubtedly there are more meetings and more dates and more reports that you could wait for, no shortage of politically perfectly acceptable schemes to hide yourself behind.

But it's time for you to recognize in public that it's not worth waiting for, none if it, my dear Angela. And here's why.

In another Spiegel piece, philosopher André Glucksmann puts a big painful finger exactly where it hurts most:

A Dark Vision of the Future of Europe

The European Union came together to oppose three evils: the memory of Hitler, the Holocaust, racism and extreme nationalism; Soviet communism in the Cold War; and, finally, colonialism, which some countries in the European community had to painfully abandon. These three evils gave rise to a common understanding of democracy, a civilizing central theme of Europe.

SPIEGEL: Is a new, unifying challenge what's missing today?

Glucksmann: It wouldn't be hard to find if Europe didn't act so heedlessly. In the early 1950s, the core of the union was the establishment of the European Coal and Steel Community (ECSC), the first supranational economic alliance in the area of heavy industry; (it was) Lorraine and the Ruhr area, the ECSC as a means of preventing war. As everyone knows, the counterpart today would be a European energy union.

Instead, Germany decided to embark on its transition to renewable energy on its own, ignoring the European dimension. Everyone is negotiating individually with Russia for oil and gas, Germany signed an agreement to build the Baltic Sea pipeline despite the resistance of Poland and Ukraine, and Italy is involved in the South Stream pipeline through the Black Sea.

SPIEGEL: So each country is pursuing its own interests amid changing alliances and bilateral agreements that ignore the spirit of the European Union?

Glucksmann: (This is a) grim example of cacophony because it shows that the member states are no longer willing and able to form a united front against external threats and Europe's challenges in the globalized world. This touches on the nerve of the European civilization project, in which each person is supposed to be able to live for himself, and with which, however, everyone wants to survive together.

And it makes things easy for Russia under (President Vladimir) Putin. Despite all the weakness of that giant of natural resources, its capacity to cause damage remains considerable and is something its president likes to use. Recklessness and forgetfulness create the conditions for new catastrophes in both the economy and politics.

Glucksmann is oh-so right. The damage has already been done. Even after 60 years, the great unified Europe is not unified at all; it allows Putin to play its separate parts against each other. And again, that's not a big surprise to you and I, is it Angela? You may meet with newly-fangled French president Hollande as often as you can, but your heart's no longer in it, you're just going through the motions.

And that is A. BAD. IDEA. Because this is, of all times, the time of times to stand up and show what you're made of.

Dear Angela, you need to stop playing the waiting game, for the sake and the grace of Greece. A temporary Greek exit from the Eurozone or the EMU doesn't solve any of the major issues involved. And you know it.

The Greek economy can't possibly start growing again in any meaningful way as long as it's part of the Eurozone. It faces 25% overall unemployment, and 50% youth unemployment. It faces a European economic situation that is extremely weak and highly volatile at best. And it faces a world economy that is hardly any better. A Greece inside the eurozone has no chance to return to growth, not for a very long time.

And all these plans for the ECB to put limits on sovereign bond yields, or the new one just announced, a "band" of limits (markets are shooting up as we speak), come on, Angela, are you really willing to explain to your people what price they would potentially face for that? And by the way, is there any real difference between imposing those limits and banning shorts?

Are we supposed to believe that Mario Draghi wants to instill confidence in the markets with a "tool" that invites the markets to play the ECB into buying more bonds than it can afford?

What Greece really needs is for its people to be able to afford to buy locally produced goods, life's essentials, basic necessities, at a much lower price than they are available for now. And for foreigners to have the same advantage for both what can be exported and what can be enjoyed within the country. That cannot and will not happen as long as Greece is in the Eurozone. Neither will getting rid of their pseudo-feudal ownership class.

The right thing to do for Germany, and Holland and Finland and whoever else can, and is willing to, contribute, is to allow and accommodate for Greece to make the painful transition to renewed independence. Germany has much to gain, indeed immeasurably much, from being seen as the country that is lending an active helping hand in this process, specifically aimed at alleviating the present and future suffering of the Greek people. In other words: Put your money where it counts. If and when, alternatively, Germany is perceived as the country that broke Greece's back, there is immeasurably much to lose.

But yes, that means you will need to put aside the interests of your own banks and industries for the time being; they won't like it, it will cost them dearly. Allowing Greece to go its own separate way will entail an ginormous amount of debt restructuring, even if it's only such a small country; the global web is intricately intertwined.

And then there's the ever present evil genie of contagion. What will happen to Spain and Italy and Portugal once you create a way out for Greece? And what will happen if you don't?

You know what, dear Angela? I don't think it's all that hard, really. I think that you need to do for them what you will do for Greece: allow them to depart with grace. The dangers if you don't are simply too grand, you would risk too much turmoil on the continent. Instead, doing what is right for Greece can then allow you to write the manual for how to handle the way out for the rest of the weaker EU nations.

Please think about it, Angela: continuing on the present path of, basically, attempting to keep bratwurst and tzatziki together in the same food group, carries the huge risk for you, personally, of being blamed, for the rest of your life, for being directly responsible for the blood in the streets of Athens and Barcelona and the frontiers of Macedonia and the Basque regions. Just to name a few examples.

Whereas doing the right thing can lift you up in history as a leader with true courage and vision, as that rare politician who didn't just look at short term political gain. All the money spent on trying to keep Greece in the eurozone only serves to hide its financial reality. It would be far better spent on providing the country with a cushion to break its inevitable fall.

It's time for you to show how smart you really are, Angela. If you don't do the right thing you risk opening a huge continent-wide cesspit of hatred and blame, and throwing your own people into it along with the rest of Europe.


Aug 222012
 August 22, 2012  Posted by at 12:13 pm Finance Comments Off on What Happened To The Debt?

Alright, OK, so we have new sorts of relative highs in European and US stock markets, even as we keep a w(e)ary eye on Shanghai's new lows. The western highs seem to have a lot to do with all kinds of expectations of ECB sovereign bond purchases and/or cooling German resistance against them.

All this is accompanied by a rising Euro, and that little detail is far more puzzling than is generally acknowledged. Because there is only one reason for the ECB, with perhaps Angela Merkel and the Bundesbank chiming in, to even consider such measures as more – PIIGS – bond buying, that are tremendously unpopular among a broad swath of Europeans. That reason is that the PIIGS countries, and Greece, Spain and Italy in particular, are doing much worse than anyone wishes to admit in public.

Thus, we have a substantial part of the Eurozone sinking deeper fast than anyone will tell you, while at the same time the currency they use is rising. A rise based on expectations of other Eurozone nations, notably Germany, basically putting up the health of their own economies as collateral to inspire confidence in ECB sovereign bond purchases. Now, you can play this game for a while, no reason to doubt that. But I would personally think we've finished playing out that particular "while" a long time ago and running. Whatever remains now is but a wager. As in: the entire Eurozone has turned into a casino.

If we, and they, the ECB, Germany, Holland, Finland on the one hand, and Monti, Rajoy and Samaras on the other, want to play these moves AND have a shred of credibility left once they're done (and I know what you're saying: will they ever be done?), we and they will need in the end to be able to answer this one simple question. Which they will never ask, we will have to do that for them. That question is: Where's The Debt? Or maybe more accurately: What Happened To The Debt?.

If a party, be they an individual, a company or a sovereign nation, carries so much debt that it is vulnerable to attacks by the likes of bond markets (or bailiffs in the case of individuals), a handout or bailout will never suffice to abolish the threat for very long, unless it is provided on the condition that the debt that led to the threat in the first place is restructured. That is to say, creditors take a haircut on what is owed to them.

Handing over money to these creditors without that haircut doesn't even begin to solve the issue. It just – hopefully – keeps them quiet for a little while, but then they'll be back, because they're still owed money. Yeah, think Tony Soprano.

In the case of Europe, the EU's national governments, Germany's first of all, refuse to tackle the debt issue, when it comes to Italy and Spain, because it would threaten their own respective banks. And probably their pension funds too. The highly needed haircuts that would come with the highly needed debt restructuring, would threaten to expose the very real very dire situation that these banks are in. And that in turn would risk setting off a domino avalanche that would risk bringing down international – including American – banks as well.

And so the one question that makes any true sense to ask, is never asked.

In the case of Spain, it has become abundantly clear lately that there is no clear distinction to be made between bank debt and sovereign debt. Hence, an ECB bond buying program would be beneficial to Spanish banks too. If only because they own so much of the stuff, something they were coaxed into doing by the ECB schemes that allowed, nay pressed, them to borrow on the cheap to buy their own sovereign debt. Rajoy even suggested using the remainder of the €100 billion bank bailout for sovereign debt. Which is quite plainly illegal, but who's counting?

If you would add Spanish sovereign debt to Spanish bank debt, you would come up with a number that nobody in the whole wide world wishes to address (and so they don't).

Which is why we see Mario Draghi et al "invent" clever schemes to buy Spanish bonds even though that's not the ECB's mandate at all.

The latest line is that they do it to "stabilize the currency". Which is fine in itself, or so I guess, only we would like to know how long they would plan to stabilize it for (two weeks doesn't seem to cut it). And that issue is not addressed. Ever.

Hence, we are left to conclude that there is no effort to deal with the debt, there's not even an attempt to do it. Mario Draghi is merely trying to lift a corner of the magic flying finance carpet, so Spain can be allowed to sweep its true debt burden under it, out of our sight.

And a carpet can hide quite a bit of dead dust for quite some time, as you know if you've ever tried the approach. The thing about debt, though, is that it's not dead dust.

Debt lives. It's alive. It's almost organic. Debt festers and ferments under that carpet, it requires interest and principal payments, and it grows if these payments are not made.

Well, if you look at the real numbers, Spain can't even meet the interest payments anymore. And whether that's 6% or 7%+ is immaterial really. That's why it's in such a mess that Draghi feels he needs to come up with these rule and law bending and stretching schemes to begin with. If Spain had any chance at all of getting out from under its debt load on its own anytime soon, we wouldn't be talking about these ECB measures today at all.

But we are talking about them. And they lift financial markets. And as the Eurozone deteriorates, the euro – ironically – goes up.

Why? ¿Por qué? Because the markets think Germany et al will agree to join Mario Draghi's mind games and pay up to lower Spain's debt. As simple as that.

But Draghi has no solution for the Spanish debt, be it sovereign or bank debt. He just has that carpet to sweep the debt under.

Well, he perhaps has other options, like debt restructurings, defaults etc., but he's not addressing those. Mario is a servant of the banking industry. Just like any other central banker and government official in the western world.

There's no-one in sight who tries to balance the reality of the sovereign and financial sector debt with the ability of the people, the taxpayers, to pay for it. Which is why the Euro can be a hot item even as the countries that presently use it as their currency go down in flames. And their people go down with it.

Yes, there's money to be made in the markets. That's obvious when you look the numbers. But what would have to be at least as obvious is that none of it is based on anything fundamental.

This rally will implode upon itself.

Some of the big boys will have left in time, and made a killing. From the point of view of the people on the ground and in the street, however, it's not going to look all that great. They're mere pawns in a game that seeks to maximize profits off their backs.

And that will continue whatever Mario Draghi or Angela Merkel present in the way of grand plans. They may all look great, and the markets may react with yet another high of one kind or the other, but down the line there's still that one and only question that needs to be answered:

What Happened To The Debt?

Any plan that doesn't address that question directly is worth less than the digital paper it's written on. Any such plan won't solve a thing.

And that magic carpet that the likes of Mario Draghi are trying to sweep reality under? You know what? It's gruesomely expensive, but that's not all, the cost is not even the most important part. Here's what is: that carpet was bought on credit. And the collateral for that credit is the future of Europe's younger, even its unborn, generations. That's right, the generations that presently face 50% or so unemployment numbers.

Enjoy your rally. But do realize that you're trying to outsmart reality. It's hiding under a carpet, but it's no less real.


Image top: In a tradition that began in 1971, the main square of Brussels is covered in over 700,000 begonias flowers. From all-that-is-interesting.com


Aug 202012
 August 20, 2012  Posted by at 5:37 pm Finance Comments Off on The Chinese Data Speaks For Itself

The China bulls of the last few years are finding it more and more difficult to explain away the evidence for a “hard landing” in the near future. Their only remaining argument is that the country will avoid this dismal fate if a dozen different things go right in the global economy – i.e., the Eurozone crisis doesn’t get worse, financial markets don’t become any less stable, the Chinese real estate bubble doesn’t implode, direct foreign investment doesn’t contract any more, the export industry isn’t further crushed, etc.

Here’s the crux of the matter from Jamil Anderlini of the Financial Times:

Economists Weigh a Chinese Hard Landing


Some analysts believe the current slowdown is more structural than cyclical and even if the government wanted to it might not be able to do very much to spark a big rebound in growth.


“There is persuasive evidence to conclude that the Chinese economy is actually growing at just 4 or 5 per cent right now based on a composite of other indicators,” says Patrick Chovanec, a business professor at Tsinghua University in Beijing.


“Of China’s 9.2 per cent GDP growth in 2011, 5 percentage points came from investment which means that if China builds just as many roads, bridges, condos and villas as it built last year and no more it will knock five points of this year’s GDP growth. Growth is dependent on ever-rising levels of investment in an environment where that investment is not creating adequate returns.”

There obviously isn’t any concrete mathematical way to establish what China’s annual GDP will end up being, but the above inference is more than reasonable in a country where legitimate economic data is hard to come by. If it is even close to being accurate, then the Chinese economy and the Chinese people are in for a very rough ride. They are dealing with a structural collapse that can only be made worse with increased levels of reckless central planning, which is exactly what has been happening for the last few years.

While the central government has been issuing propaganda about their efforts to reduce the economy’s dependence on speculative real estate investment, their actual policies have led to increased speculation and rising home prices in almost 50 of the 70 cities tracked – twice as many as last month. These policies included two successive interest rate cuts and a subsidy to first-home buyers. The public attitude from Beijing has become increasingly schizophrenic as central authorities simply run out of ideas to balance economic growth with destructive speculation and price inflation.

They have the poweful property developers and investors on the one side telling them not to curb speculation too much, and everyone else telling them that they need to cool down the market before it turns into U.S. sub-prime on a much bigger scale. Who do you think they are ultimately going to listen to? The fact that the central government has been leaning heavily on China’s largest banks to increase lending and meet pre-determined targets tells us all we need to know. The top four banks extended twice as much credit during the first half of August as they did in the first half of July.

Yet, the diminishing returns on speculative debt are clearly starting to show within all sectors of the Chinese economy. The mish-mash of “stimulative” policies and property “restrictions” have simply kept prices high for short-term profits of investors while pushing affordability further out of reach of the average Chinese working family. And that is a recipe for disaster when the ponzi bubble finally collapses, which won’t be much longer now.

Economic expansion in the second quarter slowed to 7.6 per cent from the first quarter’s 8.1 per cent and at this pace the country appears set to post its lowest annual growth rate since 1999.


Even after Beijing cut interest rates for the first time in almost four years in early June and then cut them again less than a month later, virtually all economic indicators showed the slowdown continuing into July.


Industrial production, a key measure of manufacturing activity, grew 9.2 per cent in July from a year earlier, down from 9.5 per cent in June, while Chinese exports grew just 1 per cent from a year earlier after growing 11.3 per cent in June. New bank lending in July was also disappointing.


Some analysts are starting to contemplate what a Chinese “hard landing” would mean for the country and the rest of the world at a time when Europe is mired in crisis and the US economic engine is stuttering.


“A hard landing in China would look like the fourth quarter of 2008 and the first quarter of 2009 when exports collapsed, factories had no orders and migrant workers were laid off by the tens of millions,” says Wang Tao, an economist at UBS. “That hasn’t happened yet and probably won’t unless Europe falls apart or there’s a serious problem in the real estate market.”


Investment in real estate accounted for more than 13 per cent of China’s gross domestic product in the first half of the year and the sector has been a key growth driver for most of the past decade.


But forests of empty apartment blocks cover much of the country and land purchases for new residential housing were down 24.3 per cent in the first seven months from the same period a year earlier, suggesting future investment will not hold up.

The fact is that all of combined efforts of kleptocrats in the Chinese government have resulted in a very short-lived stabilization of the speculative economy, and now reality is coming back with a vengeance. Their best laid plans never stood a chance against the structurally unstable, debt-laden foundations of the global economy. It is truly an under-statement to say they are stuck between a rock and a hard place, and with China goes the last remaining shreds of credibility for the “global recovery” myth. The knock-on effects of China’s hard landing will echo throughout the world, and many sociopolitical powder kegs will ignite.

The impact of a Chinese hard landing would be devastating for commodity-exporting countries such as Australia, Brazil and Indonesia, which rely heavily on Chinese demand but it would also have less direct consequences.


“If China does have a hard landing it would have huge ramifications for global investor confidence and would create turmoil throughout global financial markets,” said Alistair Thornton, an economist at IHS Global Insight.


While China’s slowdown has so far been relatively mild, it has had a disproportionately large impact on corporate profits, especially for property developers and companies in real estate-related industries.


Sales of construction machinery have plummeted, dozens of small steel mills are cutting production and large state-owned mining and transport companies have reported losses for the first half of the year.

So what happens to the Chinese middle-class fantasy when the markets go haywire and the exports dry up and the corporations go bust, laying off tens of millions of already struggling workers in the process? As they say in Latin, res ipsa loquitur – “the thing speaks for itself”.

(image caption: Chinese migrant workers leave their factory construction site for a lunchbreak in Beijing on March 16, 2012. The official Chinese news agency Xinhua reported on around 1,000 migrant workers going on a rampage after the death of a worker at the hands of his employer on May 29, 2012.)

Aug 192012
 August 19, 2012  Posted by at 1:12 pm Energy 1 Response »

July 31: Indian national television reports on power outage (to a limited audience?!)

"So far as I am able to judge, nothing has been left undone, either by man or nature, to make India the most extraordinary country that the sun visits on his rounds. Nothing seems to have been forgotten, nothing overlooked."
Mark Twain, Following the Equator.

The enormous power cut recently seen in India, which affected perhaps 700 million people, serves to highlight the degree of the structural dependency we have built into our lives in the era of cheap energy.

Electricity is one of the most complex manifestations of our complex system and has come to be widely seen as a basic necessity. It enables many of our modern life support systems. Expectations have been raised, even in many of the slums of the world, that electricity will be available, at least some of the time. The lack of it, especially if that lack is sudden and unexpected, or prolonged, increasingly leads to social unrest.

It is instructive to contrast the extent of the dependency on electricity, and the expectations that surround it, in developing and developed economies. The way a blackout plays out in a place like India is quite different than a similar outage would be in a place where power supplies are far more reliable. The primary difference is one of resilience.

Power Generation and Infrastructure

The Indian blackout has been described as "an accident waiting to happen" by Suresh Prabhu, who ran India’s power ministry in the early 2000s. India's electricity sector faces many chronic challenges thanks to the rapid development of the country. It is highly dependent on coal for 70% of generation, and commonly experiences coal shortages:

The fuel shortage is acute when it comes to coal, which accounts for two-thirds of the country's power generation.

India has about 10 percent of the world's coal reserves but output by the near-monopoly Coal India has stagnated, importing coal is far more costly and a lack of rail capacity from ports has held up supplies. Many power plants have less than seven days' of coal stocks, a level seen as critical to continuous operation.

"Coal India has enough reserves. But evacuation (transportation) is the main problem," said a senior coal ministry official. He said Coal India had set aside $900 million to lay train tracks in the next five years but the railway ministry had not responded to the plan.


Generation is water dependent, and the delayed monsoon this year has exacerbated existing water scarcity, meaning less water for hydro power and for cooling other forms of generating capacity. Lack of cooling water could cause generation, notably nuclear plants, to be shut down. Temperatures have stayed higher than normal, increasing demand for space cooling at the same time.

The lack of rain has also increased the need for irrigation water for farming, meaning increased demand for the power to access and use groundwater. Power use by farmers is subsidized, hence there is little incentive for them to conserve. The effect on demand at times of low rainfall can therefore be considerable. Climate change is likely to accentuate the water problems in the future, as monsoons may be increasingly affected, the melting of glaciers in the Hindu Kush would also reduce surface water availability and heatwaves would increase evaporation.

The economic impact on state electric boards expected to supply subsidized demand to farmers and many others is considerable.

Perhaps the biggest challenge, though, is the health of decrepit distribution companies that depend on subsidies and face huge losses from low tariffs and rampant power theft. Together, they are now saddled with debt worth some $35 billion and are increasingly unable to pay for new supplies.

"Generation capacity will only get financed if the financiers feel that the generators are selling power to distributors who are financially capable of paying for it," Planning Commission deputy chairman Montek Singh Ahluwalia said recently in defense of a government plan to bail out the mostly state-owned distribution companies.

Populist-inclined state governments have made it difficult for distributors to set cost-reflective tariffs. However, with bank loans drying up, many distributors have been forced to raise tariffs sharply over the past six months.

Many of the state run electricity companies, which collectively lose $4.5 billion per year, are essentially bankrupt.

Supply, Demand and Unofficial Connections

Power infrastructure in India is not capable of providing the sufficient and reliable power supply that westerners take for granted. Some 300 million people have no access to electricity since the grid does not reach their areas.

While India ranks sixth in the world in terms of overall electricity production and consumption, its population of 1.2 billion means that per capita levels of electricity consumption remain low at just over 500 kWh per person per year, compared to more than 2,600 kWh in China and nearly 12,000 kWh in the United States.


Unlike in richer countries neither supply nor power quality can be reliably maintained:

Reliable operation of the large interconnected grids of North America and Europe is founded on established practices of tight frequency control and all control areas sticking to their respective interchange schedules. The grid frequency normally remains within +/- 0.03 Hz of the rated frequency, and any excursion beyond that is considered alarming. Utilities deviations from their schedules are minimal, and have to be made up in kind the next day. They are therefore not priced. Adequacy of generating capacity enables maintenance of requisite spinning and cold reserves at all times, for overcoming contingencies. In a regime with such discipline, all power plants must generate power according to the schedules decided by the concerned load dispatch centres, and pit-head and nuclear power plants can steadily operate at a substantially constant MW as per their respective schedule.

The situation, on each of the above counts, is very different in India. The peak-hour consumer demand far exceeds the available generating capacity. Capacity shortage is officially stated as around 15%. Load-shedding is a daily routine except in metropolitan cities and State capitals. Rural supplies are regularly rostered commonly and restricted to 8-12 hours a day in most States. State utilities, in their anxiety or compulsion to minimize load-shedding in their area, tend to overdraw power from the larger grid. Interchange schedules go for a toss, and frequency often plunges below the stipulated lower limits. As per a recent report, the frequency was below 49.2 Hz for about 25 % of the time during August 2009. On the other hand, industries and commercial establishments need back-up diesel generators for continued operation when power supply from the grid is cut-off or is curtailed (for a few hours every day), and domestic consumers have to bank on their own battery-backed "inverters" to get the basic amenities of light and fan round the clock.

Since deviation from drawal schedules of State utilities are inevitable and substantial, and cannot be returned in kind, they are priced. Utilities pay for overdrawal, and get paid for under-drawal at a frequency-linked rate, which goes up as frequency declines and goes down as frequency rises…

…Frequency is the most crucial parameter in the operation of an A.C. system. The rated frequency in India is 50.0 Hz. While the frequency should ideally be close to the rated frequency all the time, it has been a serious problem in India. There was a time it varied from below 48.0 Hz to above 52.0 Hz, even beyond its legally permissible limit of +/- 3%, i.e. from 48.5 Hz to 51.5 Hz as per Indian Electricity Rules, 1956…Frequency fluctuations are caused by load-generation imbalances in the system, and keep happening because consumer load keeps changing.

Poor power quality control has knock-on effects on equipment operation, including large-scale generation capacity. Equipment damage can, of course, further compromise supply and aggravate the effects of chronic fuel shortages. Crucially, nuclear plants do not function well in such an environment:

Nuclear power plants are particularly susceptible to frequency fluctuations. As frequency changes, the speed of the coolant pumps changes proportionately, and the coolant flow and consequently the temperature differential across the reactor also vary. The above temperature differential is a primary signal for reactor power control, and its variation gives a command for change of reactor power even when the reactor has been operating at the optimum level. This is turn causes unnecessary fluctuations of reactor power and undesirable wear of fuel rods, etc.

Demand often exceeds supply by 10%, hence rolling blackouts are a constant feature. Losses in the transmission and distribution systems are huge – 40-50% – thanks to decrepit infrastructure and extensive power theft. The power system (as with much of society) is plagued by corruption. This leads to great popular frustration:

Citizens could take to the streets if the blackouts continue, warned Harry Dhaul, director general of the Independent Power Producers Association of India, a non-governmental organisation that campaigns for improvement of the Indian power sector: "There will obviously be some agitation in urban areas, which have become very reliant on electricity … There could be riots; there could be protests."

At the beginning of July, repeated power cuts during a spell of 40C-plus heat prompted hundreds of residents to vandalize electricity substations in the new city of Gurgaon just outside Delhi. Rioters beat up energy company officials, holding some of them hostage and blocking roads in several parts of the city.

A large minority of those in the blackout zone have never been connected to any grid – just 16.4% of the 100 million people who live in the central-eastern state of Bihar have access to electricity, compared with 96.6% in Punjab in the west.

In order to help balance supply and demand, consumers are required to inform the power distributor of the proposed load. They are supposed to apply for, and pay for, permission to connect the new device, but since this can take a long time and be relatively expensive, the rule is often not observed:

Central Electricity Supply Utility of Orissa (CESU) officers said most of the disruptions are due to damages in the electrical circuits because of undisclosed load. For adding new electrical devices, one can apply to the area junior engineer of the power distributor by paying the security deposits. If one adds an AC using 1 kilo watt power, he would have to make a security deposit of Rs 432 and so on, Sinha explained…

…CESU sources estimated that the undeclared load has gone up by around 20 per cent in the past few days. "This is because hundreds of air-conditioners and air coolers were installed by people to get respite from the scorching heat. However, very few people had actually announced these additions," said CESU spokesman Golak Bihari Sahoo.


Electricity connections are financially out of reach of many, notably the many residents of India's teeming slums.

Sprawling industries and emerging urban lifestyles in Ahmedabad enfolds in itself a dark and morbid life of scarcity, filth and deprivation. Nearly 41 per cent of people in the city live in slums.

There are 792 slums spread all across the city. Migrants from Rajasthan, Maharashtra and Madhya Pradesh who come in search of a livelihood also live here. But the majority comprises scheduled castes and scheduled tribes. A good percentage of migrants from Bengal and Bangladesh is also seen…

…"We have to pay Rs 750 for the connection and an additional Rs 250 to fix the metre box. Every month we get a bill of Rs 150-200. We cannot afford to pay more than Rs 1,000 for a connection," said Gita Rabari, a slum-dweller of Baba Ramdev Nagar of Chandloda slums in Isanpur.

This does not necessarily mean that slum dwellers do not have electricity, but that 'unofficial' power connections are incredibly common.

A one-room slum hut next to the nahalla, the foetid, drainage canal which runs past the cremation pyres near Nizamuddin, costs about 500 rupees rent a month, usually paid to the local gangsters.

The slums around my place usually have electricity, illegal of course. Every electricity post is rigged with hundreds of wires leading down into the slum dwellings, and because of this illegal tapping (local garment shops and factories also do it) Delhi is cursed with power black-outs. Twice a day, for up to six hours at a time, in 111 degree [Fahrenheit] heat, my electricity goes. The poor suffer, while the rich in New Delhi crank up their noisy generators to charge their ceiling fans and fridges.


Power theft is not just an individual matter. It is also a means for small slum businesses to supplement their meagre income:

With nearly 25 per cent of the slums not having electricity, slum-dwellers have resorted to stealing it from those who have installed metres. There are also ‘dealers’ who illegally supply electricity to houses.

"My paan shop hardly provides me with any money. Therefore, I supply electricity to houses. I get the wire connections from an electricity metre in the neighborhood. Five to six houses can get electricity from one wire in just Rs 150," claimed Raju.

Power theft has become a way of life. It is simple, low cost, and makes an enormous difference to the quality of life of those at the base of the economic pyramid:

Electricity theft is also part of the problem, but simply identifying the problem as "theft"—as many do—rather than recognizing that people deserve access to electricity, minimizes the social and economic reasons that drive people to frustration to the point where they feel they have a right to steal power from the grid.

Despite massive loans, debt, and the poorest paying for the power with their land or their lives, one-third of India’s households do not have enough electricity to power a light bulb, according to last year’s census. And so they steal it. And in stealing it, they increase energy inefficiency, by often grounding the wire they have hooked up illegally to the grid in the soil, thereby losing more power.


In this June 13 file photo, an electrical linesman repairs cables in the middle of a spider web of illegal subsidiary wires around the main cables in Allahabad, India. Stealing of power is a frequent phenomenon in Indian towns. AP Photo by Rajesh Kumar Singh

With such strong incentives, it is no surprise that the practice is endemic:

How can you live on a few dollars a day? Well, it helps a little if your electricity is free. For slum dwellers in Rohini, a residential district in North West Delhi, power theft is almost a way of life. There's little or no effort to hide it, and the method is simplicity itself: just find the nearest overhead power cable, sling a metal hook over it, then run a wire from the hook to the home. The result: an illegal supply of free electricity that lasts until inspectors from the local power utility stage one of their periodic raids. And when that happens, people simply all wait for a few hours until the inspectors have gone before reconnecting.

The evidence for this is there for all to see. Across a main road from the slum is a line of pylons carrying mains electricity cables. As well as the thick wires they are supposed to be supporting, most of the pylons have dense tangles of other much smaller wires sprouting off in different directions. The proliferation of connections makes the pylons look a little like over-decorated Christmas trees.

These little wires run across the road siphoning off power from the transmission lines to homes and businesses located in the slum, which is a maze of little alleyways with children and animals running around. Most households here seem to have an illegal connection to the grid. In many instances there are several unauthorized connections – and on occasion a legal one as well…

…Although Delhi has been dubbed the power theft capital of the world, the situation in other parts of India is little better. There are no hard figures, but the best estimate is that somewhere between a third and half of the country's electricity supply is unpaid for. No other country suffers revenue losses on this scale.


It is not just the very poor who do not pay. Power theft is far more extensive than that. The inability, or unwillingness, to pay for supply means that improvements to the system are very difficult to finance.

Slum dwellers' unofficial hook-ups are the most visible sign of India's power theft crisis, but there are yet bigger problems dogging the country's energy sector. Meter tampering by middle class households seeking to pay less than they should costs still more, says Sangeta Robinson, an official with local utility North Delhi Power Limited, a subsidiary of energy giant Tata Power. And yet another huge loss – albeit one which no-one can quantify – is electricity theft by industrial enterprises.

Giresh Sant, who works for an NGO called Prayas campaigning for more efficient and accountable government, says the problem is one of corruption – and a vested electoral interest in turning a blind eye. No-one likes paying their utility bills, he says, so often politicians regard laxness about revenue collection as a vote-winner. And opportunities for personal enrichment through corruption related to industrial power theft have given them, as well as civil servants and utility officials, further incentives not to rock the boat.


The political aspect is most acute in rural areas, where the larger-scale farming operations are collectively influential:

At least 20% of India's power is consumed by farmers' irrigation systems. Frequently they either get free power or pay low set charges that bear no relation to the amount of electricity used. The powerful farmers' lobby is hard for politicians to ignore in country where a majority of the population still makes its living from agriculture.

The task of removing illegal connections often seems insurmountable:

A tired man with a thin mustache, Seth is one of the many people fighting block-by-block to clean up the system. It’s an unenviable task. If Sisyphus had been Indian, his sentence might have been to unsnarl the boulder-sized knots of wire that hang from every electric pole.

Many Indians have a long-standing reluctance to pay for power, dating back to the era when the state controlled nearly the entire economy, including the energy sector, and securing a legal power connection could take a lifetime.


Pervasive corruption acts as a barrier to change at every level of power system operation:

Corruption certainly has played a role in India’s power failures for decades. At every step in the supply chain, money is siphoned off, resulting in a shoddy system– from backup systems to warning systems to good cables. Currently, good cables intended for transmission get sold and shoddy materials put in their place.

It would be a herculean task to reform the power sector into anything remotely resembling what the developed world is used to.

Blackouts – Planned and Unplanned

The July 30th blackout appears to have begun in Agra, Uttar Pradesh. The transmission lines were apparently carrying twice the permitted load. When the Agra-Gwalior line went down, the effect was a cascade, with lines tripping one after the other.

The current prevailing theory is that the outage started with an internal failure in a power line in Agra, removing significant generating capacity from the grid. This event should have triggered an immediate order to all states on the grid to shed load, or intentionally reduce power delivery to their consumers. By the time this order was given, however, most other generators on the grid had already dropped frequency due to the load demand being greater than what they could generate. This happened as no regions shed load and the rest of the generators were struggling to cover for the lost power on the failed Agra line. Before anyone could react, the whole northern grid had collapsed.


The impact was considerable. People were trapped in the metro or stranded at stations, with electric trains unable to move and blocking the movement of diesel trains. Massive traffic jams formed in New Delhi as traffic lights went out. Electric crematoria ceased to function. Hundreds of miners were trapped underground. Water supply was heavily impacted. Some hospitals faced major difficulties in the following days:


Generators require fuel, which can be scarce during a blackout. The Wall Street Journal reported on Tuesday that at a major hospital in Gurgaon, the backup generators failed after prolonged use. This forced nurses to manually operate life-saving equipment such as ventilators for about 15 patients. "We were lucky that no lives were lost," a senior doctor said. "The generators came back up in about 20 minutes."

Out-patients also struggled:

Among those affected by the outage was 62-year-old Pramitha Devi, who was bidding to take the metro toward Ram Manohar Lohia hospital in New Delhi after her home dialysis machine was damaged by electricity fluctuations. A doctor who identified himself as R.C. Bhargava said the hospital’s generators had not been fully refueled since the July 30 grid collapse, leaving them with about two hours of electricity for the intensive care unit. "We have to make plans to shift critical patients to other hospitals," said Bhargava.

In India, the issue is not whether or not there will be blackouts. People know that there will be, often for several hours every day. They prepare for outages and take them in stride:

When I was growing up in Delhi, we were well accustomed to daily summer power outages, euphemistically called "load shedding." These blackouts were regularly scheduled every evening and often created an atmosphere of genial neighborly fun — people out on terraces enjoying cold drinks, talking with neighbors over walls, taking walks, kids playing in the street — and they didn’t seem particularly inconvenient. But all that was another time and a far cry from the catastrophic two-day power crisis that India experienced earlier this week.

The distinction that matters is between planned and unplanned outages. Planned outages are called rolling blackouts:

A rolling blackout, also referred to as load shedding, is an intentionally engineered electrical power shutdown where electricity delivery is stopped for non-overlapping periods of time over geographical regions. Rolling blackouts are a last-resort measure used by an electric utility company to avoid a total blackout of the power system. They are usually in response to a situation where the demand for electricity exceeds the power supply capability of the network. Rolling blackouts may be localized to a specific part of the electricity network or may be more widespread and affect entire countries and continents. Rolling blackouts generally result from two causes: insufficient generation capacity or inadequate transmission infrastructure to deliver sufficient power to the area where it is needed.

Rolling blackouts are a common or even a normal daily event in many developing countries where electricity generation capacity is underfunded or infrastructure is poorly managed. Rolling blackouts in developed countries are rare because demand is accurately forecasted, adequate infrastructure investment is scheduled and networks are well managed; such events are considered an unacceptable failure of planning and can cause significant political damage to responsible governments. In well managed under-capacity systems blackouts are scheduled in advance and advertised to allow people to work around them but in most cases they happen without warning, typically whenever the transmission frequency falls below the 'safe' limit.

Where outages are scheduled, people adjust their activities accordingly. However, unscheduled blackouts, or outages much longer than scheduled, cause public resentment. Disruption is tolerated, so long as it is organized disruption.

Unscheduled power outages are back to haunt citizens of Greater Hyderabad…

…"Central Power Distribution Company Limited (CPDCL) officials have suddenly started implementing three-hour power shutdowns without giving any schedule. We will be prepared for power cuts if the schedule is announced," A Chandrasekhar, an IT consultant and resident of Habsiguda, told TOI.

Several residents complain power cuts were beginning as early as 6 am. Office goers and students are being put to inconvenience, affecting their daily chores in the morning due to the outages.

"There was no power in my area for more than an hour in the morning. We were not prepared as the power cut starts at 9 am. With this, we could not fill our water tank and got delayed to office," ASR Murthy, an IT employee and resident of Srinagar Colony, said.

Potential solutions exist to the organizational problem, if not to the mismatch between electricity supply and demand.

"CPDCL has data of mobile phones of about 12 lakh [1.2 million] consumers in the city. They should at least inform citizens about power interruptions through SMSs on a day-to-day basis so that people can plan their chores accordingly," M Uday Kumar, a resident of Kushaiguda, said.

Indian businesses and household compensate for the inevitable power cuts with generators, fuel supplies, renewable generation and inverters, and battery banks for power storage. The elements of redundancy – alternative means to achieve the same essential function – have endowed the system with flexibility and resilience. It comes at a cost however, for the equipment and for expensive generator fuel. This provides business opportunities for those who facilitate independent generation:

Microtek, an Indian company that specializes in selling power backup inverters, claims to have 100 million "satisfied customers."

"Every year in the summer months demand peaks and there are power failures, so most middle-class families purchase an inverter. That's why we're in business," said Manoj Jain, vice president at Microtek.

To be able to afford this, one must be relatively wealthy. Otherwise, inconveniences and the discomfort of sweltering temperatures without cooling must be endured.

Ironically, the super-rich generally do not bother, as their power supplies are far more secure. They are therefore more exposed to large scale unplanned disruptions than the middle class.

In the centre of Delhi, one of the world's biggest, dirtiest, noisiest cities, is an island of calm. Here, government ministers live in vast, state-owned villas; judges, generals and senior bureaucrats walk their dogs across well-watered lawns as servants scrub their government cars; top politicians confer in compounds and the wives of unimaginably wealthy industrialists hold lunch parties catered by top chefs. You live here and visit India.

Last week, India visited this island in the shape of a giant power cut.

Such outages are a daily occurrence for the rest of the population – or at least the two-thirds of India's 1.2bn inhabitants who actually have any electricity supply. But they are not for India's elite. For the latter, power guarantees power. The bureaucrats in charge of Delhi's grids switch off the supply to hospitals before they plunge the homes of top politicians into darkness. But this time the lights did go off. And so the residents of the most upmarket parts of the city – so confident of their power supplies that they do not have generators – had to sit in the fetid monsoon temperatures of 35 degrees [Celsius] like everyone else.

Impact on Development and Obstacles to Improvement

The unreliability of electricity supply has a significant impact on economic development, as it decreases productivity and increases cost substantially. In addition to supplying back up power, companies may have to arrange alternate water supplies or alternate employee transportation.

There are often equipment compromises that have to be made, and this has knock-on effects on operations. Businesses are often equipped to cope with intermittent power, but are worried about competitiveness and investment.

Work making potato chip display racks at Jayraj Kumar's factory barely paused when much of India's power grid collapsed. The backup generators kicked in automatically and the electric saws, presses and welding machines kept running, just like they do during the five-hour power cuts the factory in suburban Delhi suffers nearly every day.

India's unreliable power system has forced businesses to create a workaround electricity system of noisy, dirty diesel generators that prepared them well when the world's worst blackout hit the country Tuesday. But the trouble has also vastly increased businesses's expenses, dragged down their productivity and hampered economic growth in the country. "Running a factory is very tough here," Kumar said…

…Kumar, 56, started his business turning metal wire into display racks 23 years ago with just three employees. Now his company, The Rhino, runs a factory of 200 workers that churns out 1,500 red racks a day for clients from PepsiCo to Nestle that are ubiquitous in markets across India.

When the company opened its new factory in this Delhi suburb three years ago, "we knew that power would be a problem," he said. "From the very first day, whenever we start an office or factory we immediately think of having a decent power backup," he said.

Behind the cavernous whitewashed factory, lined with workers operating spot welding machines and kicking up sparks as they saw through metal, stands a large, green 80 megawatt generator on a brick foundation. In a corner on the ground floor is another generator rigged with a truck ignition that starts with a belch of gray smoke. Nearby, two more generators are hooked up, and, taking no chances, Kumar bought a fifth one Wednesday.

The factory runs 16 hours a day, at least five of them on generator power, he said. This backup system comes at a huge price for Kumar's business. "Generators are meant for emergencies, they aren't meant for production purposes," he said.

Each generator costs 1 million rupees ($18,000) and has to be replaced every three years. The four full-time generator operators cost him another 1.2 million rupees ($21,600) in salaries. He pays 4 million rupees ($72,000) in diesel bills. In all, he estimates the generator power costs him 10 times as much per unit as the grid power and adds 20 percent to his overall costs.

And the fluctuating voltage from the generators wreaks havoc with his equipment. The welding and grinding machines work unpredictably on generator power, vastly slowing down production and reducing the quality of his racks. He is forced to pay an extra 6 million rupees ($108,000) to repair equipment the unstable voltage damages every year. "You cannot plan your production, your commitments are gone," Kumar said.

He must use the most basic, labor intensive machines, because generator power would destroy computerized equipment. When he tempted fate by importing two 5 million rupee ($90,000) machines that printed large format ads to adorn the racks, they both stopped working within a week, he said. He can't export his products because their quality is too low, but he can't get the machines that would make them better either, he said. With reliable power, he would instantly increase his output by 30 to 40 percent, he said.

His work in China has left him jealous of the infrastructure there. Smaller countries such as Vietnam and the Philippines have surpassed India and he laughed about a one-minute power outage he once experienced in Singapore that turned into a major news story.

The massive blackout has brought India's power supply problems to far greater attention:

While India created dubious history on Tuesday with the world's largest blackout, its $100-billion software and services sector managed to keep its lights and links with clients on by drawing power from diesel gensets. But not before India's image as a premier investment destination for technology was called into question by jittery clients worried about the ability of companies to provide uninterrupted services.

"The blackout has impacted the perception of India at a country level. India's image has taken a beating," said Som Mittal, president of IT trade body Nasscom.

A number of factors have rendered increasing supply problematic. Apart from the endemic corruption that complicates every transaction and adds cost at every turn, there has also been political infighting, with the power system used as a political football:

Lack of political will coupled with successive governments’ short sightedness has cost the country dearly in terms of implementing several projects. For example, in 2008, the energy infrastructure company Reliance had proposed to build an 8 gigawatt (GW) natural gas power plant. The political party in power at the time allowed the company to acquire the land in Dadri, Uttar Pradesh, for power plant construction after compensation was given to land owners and farmers. When the opposition party came into power in the next session, political rivalry triggered biases and this land was declared disputed. Reliance lost the case in Supreme Court and construction of the plant has now been shutdown. This plant could have been instrumental in reducing the daily power cuts utilities make in and around Uttar Pradesh.

In addition, higher costs are being imposed for access to land for the construction of new generation:

The interest rate on government land loans has increased from 9 percent in 2010 to 14.5 percent in 2011. This increase in land loan interest rates has made it less feasible for private firms to invest in power plants. Higher land costs increase the amount of initial capital needed, and the impact can be seen in the form of increased electricity costs and lower returns for utilities.

Troubled international relations also aggravate attempts to broaden fuel supply options and reduce fuel constraints:

India’s relations with certain neighboring countries have hindered the development of its power sector, as seen in the case of the Iran-Pakistan-India Pipeline. India has considered various proposals for international pipeline connections with other countries. One such scheme is the Iran-Pakistan-India (IPI) Pipeline, which has been under discussion since 1994. The plan calls for a roughly 1,700-mile, 5.4-Bcf/d (billion cubic feet per day) pipeline to run from the South Pars fields in Iran to the Indian state of Gujarat. While Iran is keen to export its abundant natural gas resources and India is in search of ways to meet its growing energy demand, a variety of economic and political issues have delayed the project agreement. Indian officials have made it clear that any import pipeline crossing Pakistan would need to be accompanied by a security guarantee from officials in Islamabad.

India's rapid growth rate – 8% per year in recent years – leads to projections that $300 billion will need to be spent on new generating capacity and new transmission and distribution infrastructure over the next 25 years in order to meet demand. Of course, given the impact of the global financial bubble bursting, those growth projections are highly unrealistic. However, capital scarcity in a period of economic depression is likely to mean investment drying up and problems becoming far worse before there may be any chance of improvement.

Attempting to Regularize Power System Operations

One area where some tentative progress is being made towards getting supply and demand more closely aligned, at least in places, is in addressing power theft. Despite the seemingly overwhelming scope of the problem, programmes of sticks and (at least a few) carrots are showing some signs of beginning to regularize operations. The 2003 Electricity Act specifically criminalized power theft for the first time, and established enforcement mechanisms including special courts and specialist police stations dedicated to tackling the issue. Monitoring systems are beginning to be built in order to provide for auditing and accounting of supply and demand, so that the scale of the problem can be quantified.

State authorities are increasingly attempting to target the impact of load shedding on the perpetrators of power theft, rather than using the blunt instrument of citywide rolling blackouts:

The state government will rationalize load-shedding by cutting power supply to those who do not pay their bills on time. At present, an entire city has to put up with power cuts because of a few defaulters. In the new system, consumers who pay their bills regularly will get power while those who default on payments will face cuts.

In the new system, consumers will be segregated feeder-wise. Normally, each feeder supplies power to 100 to 600 consumers. Those drawing power from a feeder with a distribution and commercial loss of 33% and above will face power cuts in cities. In case of rural areas, distribution and commercial losses of 37% and above will attract power cuts. This means that only a certain set of consumers within a city or a town will face power cuts while those in neighbouring areas will be spared.

Currently load-shedding is carried out on the basis of the group (A, B,C,D,E and F) a city or a town has been placed in depending on its distribution and commercial losses. The new system, by factoring in losses at the feeder-level, will see power cuts being affected at the micro level.

Villages where power theft is rampant are also being threatened with outages, despite the power of the rural lobby.

The Maharashtra State Electricity Board (MSEB) has decided to implement around 11 hours of load shedding in the villages of Sathpati, Umrole and Manor, which has reported a loss of over 50 per cent of power generated…

…Sathpati village is likely to be affected the most due to the load shedding as it is from here that fishermen export their catch. The fishing jetty has around 550 boats which depend on ice for storage of fish. Fishermen fear that lack of electricity will affect the manufacture of ice and storage of fish. The daily requirement of ice for the fishermen of the village is around 350 tonnes. With the fishing activity discontinued during monsoon, a large quantity of fish caught during the past week has been kept in cold storage for export. Fishermen are worried as load shedding may lead to rotting of the fish.

MSEB officials say that there are over 5,000 consumers in the three villages but most of them enjoy zero billing. Stolen power is used by the villagers to organize night cricket matches and other sports. Festivals and marriages also largely function on stolen electricity. The electricity board has already fined seven customers for power theft and recovered Rs 57,000 from them. The load shedding, say officials, will continue till the power theft is minimized.

The idea of privatization is gaining traction, on the grounds that this may improve management and lead to greater cash flow, which could fund improvements to the system. The two largest private power companies (Tata Power and Reliance Energy) have been given control of electricity supply in the Delhi area, and claim to have limited losses through a combination of pursuing legal action, 'educating people about the merits of paying for power', and offering small financial incentives.

Through dozens of power raids every week, among other strategies, they have managed to dramatically reduce theft in Delhi. BSES, the Reliance subsidiary that handles two-thirds of Delhi’s power, has sent more than 650 people to prison and booked more than 114,000 cases in special courts that handle only electricity cases. By the end of last year, BSES…..had cut theft from around 52 percent in 2002 to 28 percent. They want to bring that down to 10 percent.

Tata Power is offering slum-dwellers enough electricity for lights and a fan for a fixed price of 179 rupees ($4; £2.30) a month. This does not sound like much, but considering that it amounts to probably almost half the monthly rent for a person living in such an area, the cost is still very high relative to ability to pay.

International aid programmes are bringing some funding to bear on slum connections, but the scope of such projects could hardly be described as ambitious in comparison with the scale of the problem:

Reliance Infrastructure, the Global Partnership on Output-Based Aid (GPOBA), and other partners have launched a project to provide improved access to safe electricity supply to around 104,000 Indian slum dwellers. The GPOBA Improved Electricity Access to Indian Slum Dwellers project aims to provide up to 26,250 new and upgraded electricity connections for residents of the Shivajinagar slum in Mumbai. About 8,000-12,000 new connections and 5,000 upgraded connections are planned in a first phase expected to be completed by 2011.

Currently, many slum households in Mumbai do not have access to safe and reliable electricity. The challenge is that there is no support beyond the regulated point of supply (the metering point). Arrangements are informal and the lack of an institutional framework to support the financing of connections for the poorest leads to bottlenecks in connection investment. The relatively high upfront costs of the connection, which are estimated to be in the region of US$105 per connection, also act as a significant constraint.

Under the GPOBA scheme, households will pay less than half the connection cost, with GPOBA providing a one-off subsidy to make up the difference. Payment of 90 percent of this subsidy will be conditional upon independent verification of working connections and of six months’ supply and billing. The connection work (wiring from the meter to the house and internal wiring) will be carried out by licensed electricity contractors chosen directly by the customers. The scheme offers a framework not just for performance-based subsidies, but also for community awareness building, training of electricity contractors, and a check on quality of service to the hutment.

"The Mumbai slum electrification scheme presents an opportunity to understand how output-based aid can be used to supply basic services in areas beyond the regulated utilities’ responsibility," explains Mustafa Zakir Hussain, GPOBA and World Bank task manager for the project. The GPOBA project, financed through a US$1.65 million grant, forms a financing window in a larger Slum Electrification and Loss Reduction program, led by the US Agency for International Development (USAID) in cooperation with the International Copper Promotion Council (India) or ICPCI.

The project targets approximately 100,000 slum dwellers of the six million in Mumbai alone – over 50% of the population. At this rate, progress will not be rapid, and it will remain difficult to combat unofficial connections when legal ones are still expensive and can take months to arrange.

While government officials are trying to convince the illegal electricity suppliers to get metres provided by the municipal corporation, the slow process of getting electricity after filling up the application form puts off many.

"I had applied for electricity months back. I own a shop. They are asking us to pay Rs 3,600 to get a connection for commercial usage," said Bharat Thakore, a paan shop owner in Chandlodia slum.

"We are planning to appoint an individual from the slum itself who can take our applications in bulk and give them to the municipal corporation. This will fasten [hasten]the long awaited process of getting electricity. When we are ready for legal connections, we are being asked for more money," said Thakore.

Residents are typically not optimistic about the prospects for improvement:

Citizens of Gurgaon, often dubbed the millennium city, told NDTV that the power shortage and lack of water have been a major hit to the city.

What's more, the residents said that this isn't at all unusual for them. One male resident said on average they have 10 – 11 hour power cuts when they have to rely on generators and tankers to supply them with water. One resident said its was "hell to live" there, while another said "If you want a millennium city go to Hong Kong."

India's Power Future

India's power system problems are part of a much larger crisis of decrepit infrastructure, unable to be repaired thanks to lack of funds and lack of political will to tackle endemic corruption. Moving forward will be difficult, and, even without a looming global financial emergency, it would take decades to construct a power system recognizable in the developed world. By the time it could hypothetically have been accomplished, fuel shortages would have become far more acute than they are today, as the world would be well past the peak of the hydrocarbon age.

It seems that a modern grid serving the whole population reliably and seamlessly will remain a pipe-dream. The future of power in India is far more likely to involve something much less ambitious, but also arguably far more appropriate for an energy and capital constrained era rife with uncertainty and unrest. Given its complexity, the 'ideal' central station power grid will be difficult to maintain anywhere under such circumstances, very much including the developed world. Rather than aspiring to reach an unattainable goal, it may well be better to design a simpler and more decentralized system based on micro-grids, and designed to deliver basic needs, rather than wants. Decentralized systems may be less efficient, in that one sacrifices economies of scale, but they are also more resilient, and that will be critical.

Private power alternatives are likely to flourish to an even greater extent than they already do, at least where liquidity remains available, as power system problems become even more acute in the future. The industry is being unbundled, with generation, transmission and distribution being separated, as they have been in many places that have pursued liberalization of the industry. Generation in particular has seen increasing private investment, to the point where it accounts for about a quarter of capacity.

India has set its sights on renewables, with an ambitious target of 15% of energy requirements from renewable sources by 2020:

India’s Solar Mission aims to generate 20,000 MW of solar power and deploy 20 million solar lighting systems for rural areas by 2022. This tremendous scale-up is expected to drive down costs rapidly so as to achieve grid parity in that time frame. A key enabling policy for this is a Renewable Purchase Obligation (RPO) requiring state energy providers to buy a certain percentage of their energy from renewable sources, including a carve-out for solar specifically. There are also significant opportunities for improved energy efficiency.

One interesting application of solar photovoltaics is to use solar panels to cover irrigation channels for agriculture. This not only generates a significant quantity of electricity, but also reduces evaporation from the open channel, thereby easing water shortages. The potential benefits are considerable, although this remains a large-scale, top-down, expensive and technologically complex approach, which is unlikely to be the best means for India to proceed over the longer term. (See for instance this TED talk on the ancient art of water harvesting in India for an example of more appropriate traditional technology that is far more sustainable.)


This solar panel laid on the vast stretches of agricultural channels in Gujarat generates 1 MW of electricity per KM & prevents evaporation of 1 crore [10,000,000] litres of water every year

Many argue for a system of feed-in tariffs – premium payments for renewable power fed into the grid – which have been successful in delivering so much renewable generation in various European countries, notably Germany:

Ironically, one region that did well during the power crisis in India was Jodhpur, where, after a brief interruption, the windmills kept hospitals and households powered up while the rest of the country went black. Were the World Bank to have pushed a model, such as that successfully employed in Germany and other countries, where a "feed-in tariff"—a guaranteed rate of payment for energy fed into the national grid– for renewable energy had been put in place, small farmers and others in rural areas would be able to both provide power to the grid and earn money in doing so.

But instead, they foisted on the largest democracy a neoliberal model—where unions were busted, power was privatized, people were treated like pawns on a giant chess board, while they targeted the affluent and heavy industries first for energy delivery using some of the most environmentally destructive energy resources on the planet. The assumption: energy services would eventually trickle down to the poor. Nearly two decades later, after billions in investment, one-tenth of the world sits in the dark, the planet is rapidly heating up, and the only thing trickling down to the poor is contaminated water or, if they’re lucky, enough water to keep their parched crops alive.

While wind power can be very useful, it is not a panacea. While it may have helped in the recent blackout, and clearly helps at other times, dependency on intermittent power can also contribute to the problem of unscheduled load shedding when the energy source is not available:

K. Kathirmathiyon, secretary of Coimbatore Consumer Cause, says the problem of unscheduled power cut has arisen because the State is heavily dependent on wind power during the windy season. TANGEDCO officials say that on most of the days the load shedding in an area is according to a schedule, though it is not yet announced. There is no load shedding or it is for a shorter duration when the wind energy generation goes up.

Unfortunately, India is not Germany. The existing power hierarchy and the pervasive corruption would make implementing such a system very difficult. But more significantly, feed-in tariffs around the world are very likely to be cut back or abandoned in a global financial crisis, even in the locations where they have been very successful. In fact this is already occurring, as we discussed here at TAE in The Receding Horizons of Renewable Energy. This will leave people who have borrowed money in order to build large projects without the income stream needed to service the debt incurred to do it. Trusting government promises to pay for 20 years are risky at the best of times and in the least corrupt of places.

The other objection to this approach to utilizing renewable power is that the requirement to feed into expensive and complex infrastructure greatly reduces the energy returned on energy invested (EROEI) of what is already a low EROEI energy source. As with all such sources, the energy profit ratio is too low to sustain a society complex enough to produce them in the longer term. Renewable power is a misnomer, since the materials required to harvest it are not themselves renewable, and the ability to build and maintain the infrastructure depends heavily on the continued availability of high EROEI energy sources. However, it can be used to make a huge difference to people's lives, and it will make a larger difference for a longer time at much lower cost if it is implemented in such as way as to maximize the EROEI by minimizing the requirement for extraneous infrastructure.

Embracing a simpler future before being forced to do so by circumstance could allow a country like India to avoid a great deal of expense, keep to a human scale where much of the impact of corruption could perhaps be avoided and provide basic services for far more people. Unfortunately, this approach is highly unlikely. It feeds neither the demands of the wealthy for developed-world level electricity services, nor the appetite of the corruption machine for large-scale projects where funds can be spun off in the direction of the well connected. India is therefore likely to see greater attempts to improve service for those who can pay, and to remove service to those who cannot.

Some experts are more hopeful than in the past because a number of Indian officials have made politically difficult decisions in recent months to raise electricity prices. State governments in Tamil Nadu, West Bengal, Rajasthan and Punjab have moved to stem losses at public utilities that had been selling power for far less than it costs them to buy it. Besides providing more money to invest in additional supply, the higher prices for consumers and businesses should also help lower demand for power.

"I think everybody has realized that there are no free lunches," said Chandan Roy, a former director at India’s largest state-owned power producer, the National Thermal Power Corporation.

India Versus Developed Country Power Systems

Power systems in developed countries do not face the obstacles of fuel shortages, supply /demand imbalance and corruption faced in India. Despite aging infrastructure, and underinvestment that will store up problems in the future, the systems presently have sufficient integrity to allow for good control over power quality parameters. Equipment is not damaged by power surges or brownouts. Electricity supply is reliable and stable. This has been the case for so long, that it is taken utterly for granted. An indicator of just how reliable power supply has become was provided when a 1994 earthquake temporarily knocked out power in Los Angeles:

Now we have so much artificial light that after a 1994 earthquake knocked out power, some concerned residents of Los Angeles called the police to report a "giant, silvery cloud" in the sky above them. It was the Milky Way. They had never seen it before.

Very few provide for back ups, as these would almost always be seen as an unnecessary expense. Private safety margins are few, hence resilience of the larger system is much reduced. Rare interruptions to supply therefore cause difficulties, and can rapidly lead to public anger. Access to however much electricity one could want, whenever one might happen to want it, and at an affordable price is seen as an entitlement, or even as a basic human right. The structural dependency on electricity supply has increased to the point where it has become a life support system in many ways. Without it, the technology traps will close very quickly. Witness the effects of a 2011 incident in California:

"Electricity was primarily a luxury when the majority of our grid was built 50, 60 years ago. Most people didn’t require computers to do their jobs every day. They didn’t need the Internet access. IPhones didn’t need to be charged, and communication was all hard-wired, so you could still make a phone call when the electricity was out."…

…Schools closed, planes were grounded for hours, traffic lights went dark and gridlock followed. People were trapped on rides and in elevators at SeaWorld and Legoland. Pumps failed at water-treatment plants, flooding San Diego Bay with more than 2.5 million gallons of raw sewage and forcing beaches along the coast to close.

What an investigating commission later called a "cascading and uncontrolled" shutdown became the most extensive power outage in California history.

This is a dangerous situation. The dependency is so much greater in western societies, that cascading system failure is a significant possibility if the grid were to experience a major disruption. Underinvestment is chronic, and this is storing up many challenges for a future when the money needed may not be available. As in India, no one wants to pay for the means to preserve the grid current capacities:

No one is taking care of the grid — the network of transmission lines, interconnectors and transformers that is essential to life as we know it; two, supply cannot keep up with demand; and three, rate-setting is a political rather than an economic process. It should not come as a shock, so to speak, that neglect, failure to prepare and playing politics with essentials should lead to disaster…

…No less than the American Society of Civil Engineers said in a report released in April that the grid could break down by 2020 unless investment in it is increased immediately by about one billion dollars a year. Why so much? Because, according to the report, more than two-thirds of the system’s transmission lines and power transformers are at least 25 years old, and 60 percent of the circuit breakers have been in use for more than 30 years.

Investment of the massive size required would require increased rates for electricity, and that simply is not going to happen in a political climate where people are not expected to have to pay for anything; not their government (no new taxes) not their wars (Iraq was "off the books") and certainly not their electricity. Despite being deregulated like many other aspects of economic life pursuant to the Reagan Revolution, electric utilities who raise their rates soon find that deregulation does not extend that far. In Maryland, when it was revealed that moving to market rates would cause Baltimore Gas and Electric to increase rates by 72 per cent, that was the end of deregulation.

In this, as in so many other areas of public life, we are like the ass starving to death because he is equidistant from two bales of hay and can’t decide which way to go. We either have to spend tons of money propping up the old system, or expend tons of effort and thought coming up with a new one. By refusing to do either, we drift faster and faster toward the precipice over which India has just tipped.

The estimated cost of grid renewal is huge:

The American Society of Civil Engineers (ASCE) calculated that an additional investment of $107,5 billion was needed by 2020 to keep the electrical infrastructure whole…

…The utilities walk a fine line between satisfying their customers and keeping their investors happy, with costly expenditures in infrastructure bound to hurt profitability unless public utility commissions allow rates to keep pace with investment…

…"By 2020, the cost of service interruptions will be $71,5 billion, or, if you break that down to households, $565 over that period," Andrew W. Herrmann, president of ASCE, said

As we move further into financial crisis with the bursting of the global credit bubble, it will become more and more difficult to fund infrastructure investment, and we are living on borrowed time as it is. We have already been coasting on past infrastructure investments for a long time. As India demonstrates, even truly decrepit infrastructure can function much of the time, so we are not yet at all close to risking any kind of permanent blackout scenario. However, India also demonstrates that compromised infrastructure does not deliver reliable power, and western economies have a much stronger dependency on constant power availability.

The central station model of electricity supply, with large power plants distant from demand feeding into a transmission grid, is under threat worldwide. In a capital and energy constrained environment, it will not be able to deliver what we have become accustomed to. The greater the extent of dependency, the greater we can expect the impact to be. We in the developed world, as in India, should consider looking to simpler, cheaper, more decentralized models. And we should be getting our expectations in line with what reality can hope to deliver. We are going to have to live within our means, and that will involve a much larger adjustment than most of us can currently imagine.


Aug 152012
 August 15, 2012  Posted by at 9:32 pm Finance Comments Off on 350 Greek Tragedies in Athens in June Alone

You know, we can write and read and research all we want, and till we're deep dark blue in the face, about Angela Merkel and Tim Geithner and Mario Draghi or Monti and Greek heroes Samaras and Venizelos, about what they say and do from day to day, driven by political pressure and mundane issues such as bond yields. And we will continue to write, read and research these things; that's not going to stop.

But as soon as any of us take a step back and try to see things from another perspective than that of the proverbial and iconic child with her nose pressed against the display window of the candy store, there's none of us with a grain of self-respect left who can maintain that what we see unfold is about Angela, Timothy and the Mario's. And that is what we will increasingly, and I mean all of us, need to add to our writing and reading: We will have failed miserably if we haven't paid attention to the people most affected by what rabbits the various leaderships decide to conjure up out of their high hats.

And not just because if misery in the streets reaches a critical mass, that will be where the direction of politics will be decided. It's not a macro picture. We ourselves are not a macro picture; we all of us live human micro lives. We therefore need to pay attention to the plight of the victims of the crisis, because they are people like us, because they can function as a mirror to who we are, and strive to be, and as a mirror for our futures. It is no use to be well-off yourself if you don't have a functioning society to be well-off in. And don't worry, I don't expect the majority of you to understand. I fully expect most people to hit the wall running.

Money has no value in and of itself; it derives that value from the world it rolls in. Take away that world, and you take away the value.

Yes, financial markets are doing relatively well, and if they don't, central banks will throw more of your cash at the banks. The problem is that they don't throw that cash at the people. Many of whom could really do with some. According to the present paradigm, banks are more important than people, and people, if I understand it well, can only be saved if banks are saved first (with the people's money). This paradigm is the sort of insanity only economists and bankers can come up with. The life of a person, whether rich or poor, is infinitely more important than the life of a bank. No contest. You would think.

What got me started on all of this is a great – great in its sadness – little tale from today's Spiegel, by Barbara Hardinghaus and Julia Amalia Heyer, on what happens with real people. Either we deal with issues such as this, or we don't. And if we don't, the issues will deal with us. Down the line, whatever happens to others happens to us too. We are after all social animals, that's not something we can alter at will. But we still try hard, don't we?

Wave of Suicides Shocks Greece

Greece has always had one of the lowest suicide rates in Europe, but its economic crisis has triggered a disturbing increase in the number of people killing themselves. Are the deaths the result of personal desperation or are people making a political statement with the only thing they have left to sacrifice?

On July 16, a businessman and father of three hanged himself in his shop on the island of Crete. A 49-year-old man from Patras was found by his son. He had also hanged himself. On July 25, a 79-year-old man on the southern Peloponnese peninsula hanged himself with a cable tied to an olive tree. On August 3, a 31-year-old man shot himself to death at his home near Olympia. On August 5, a 15-year-old boy hanged himself in Pieria. And, on August 6, a 60-year-old former footballer self-immolated in Chalcis.

These are also reports from Greece, reports that, at first glance, seem to have nothing to do with the economy. They come together to form a grim statistic, raising questions of what is triggering the suicides and whether the high incidence is merely a coincidence.

Or do people see suicide as a way out of the crisis that has taken hold of their country and their lives? Are they bowing out before things get even worse? Germany and the International Monetary Fund (IMF) are opposed to a new bailout package for Athens. The country faces a shortfall of at least €40 billion ($49 billion). Greece could very well be officially bankrupt by the fall.

Greece, a country whose Orthodox Church does not condone suicide, has always had one of the lowest suicide rates in Europe. But now, there were 350 suicide attempts and 50 deaths in Athens in June alone. Most of the suicides were among members of the middle class and, in many cases, the act itself was carried out in public, almost as if it were a theatrical performance.

Desperate for Dignity

On April 4, shortly after 9 a.m., a 77-year-old pharmacist shot himself to death on Syntagma Square in downtown Athens. Dimitris Christoulas, a short man, stood against one of the large trees on the square, held a pistol to his temple and pulled the trigger.

"My father was a political person, a fighter," says his daughter, Emmy Christoulas. Weeks after her father's death, she is sitting in her living room in Chalandri, a northern suburb of Athens. She is a slim 42-year-old wearing oversized jeans, her short black hair streaked with gray.

Her father was politically active, a member of the "We Won't Pay" movement. He repeatedly called for an international review of Greece's national debt because he was convinced that it wasn't the fault of the people. He had come to beleaguered downtown Athens every day last summer to take part in rallies and to lend a hand, usually in the Red Cross tent.

When he went to Syntagma Square for the last time, on April 4, he sent his daughter a text message consisting of one short sentence: "This is the end." Then he switched off his cell phone. "It was at exactly 8:31 a.m.," says Emmy, pulling a cigarillo from a crumpled pack. When she was unable to reach her father by phone after receiving the text message, she and two friends drove to his apartment.

She heard a news report on the radio that someone had shot and killed himself under a tree on Syntagma Square. "First the text message, and then that report," she says. "I was sure it was him."

Since her father's death, Emmy Christoulas has taken the subway to the square, nine stops from her apartment, many times. She visits the memorial to her father two or three times a week, usually in the evening. When she does, she stands a short distance away from the tree.

It's become quiet in the square, where a band is playing and the sound of guitar music is wafting through the warm air. Christoulas crosses her arms over her chest and looks at the people who stop at the memorial. It consists of wreaths and a few stuffed animals leaning against the tree, as well as notes pinned to the trunk. "Don't walk like a robot! Open your spirit!" one note written in red letters on a piece of cardboard reads. The lines that Dimitris Christoulas wrote in a suicide note are engraved into a marble plaque.

The government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid into for 35 years with no help from the state. I see no other solution than this dignified end to my life so that I don't find myself fishing through garbage cans for my sustenance.

The words "Dimitris' gesture cannot be repeated" are written on a piece of paper above the plaque. But his gesture is repeating itself on an almost daily basis. The newspaper Ta Nea describes the mood among Greeks as a "society on the verge of a nervous breakdown." [..]

On the morning of April 4, Dimitris Christoulas put on his light-colored trench coat, stuck his pistol in one pocket and the farewell letter in the other, and set out for the square, as he had done so many times before, and wrote the last text message to his daughter.

On the day after the memorial service for her father, Emmy Christoulas drove her father's body 13 hours to Bulgaria to have him cremated. The Greek Orthodox Church denies church burials to people who have committed suicide. Her father had left her the money for the trip. [..]

Nikiforos Angelopoulos, an Athens psychiatrist, has kept track of suicides and, with each new death, he has become more afraid. He tries to see each act as the failure of an individual, confused person. The 60-year-old did his doctoral dissertation on the subject of "hostility." Suicide is a disorder, he says, a form of hostility — a person's hostility against him- or herself. [..]

The 90-year-old woman who fell to her death from a rooftop terrace on Vathi Square jumped together with her son. But the truth is that she didn't jump at all. Her son pushed her. Then he waited three minutes and followed his mother. It was a 15-meter (49-foot) drop to the pavement below. His name was Anthony Perris, a musician and writer, a quiet, 60-year-old man.

The spot where he hit the ground is three kilometers from Syntagma Square, next to the building where he lived with his mother. Perris had cared for his mother, who had Alzheimer's and cancer, for 20 years. He took her for a short walk in the small park outside every day. On the evening before the suicide, he closed the blinds in the apartment. The next morning, he took his mother into the elevator and up to the roof terrace above the sixth floor.

Perris also left a suicide note, placing it on the kitchen table. "My life has become a constant tragedy," he wrote. He tried to sell his house, but no one had the money to buy it. He owned a house, a boat and a moped.

"What's the use of owning things when you don't have any money to buy food?" Perris asked in his suicide note.

Everything that the papers are saying about the rash of suicides is "misleading and dangerous," says Angelopoulos, the psychiatrist. People who commit suicide, he notes, are not political fighters, even if the public turns them into heroes.

The pharmacist who shot himself to death on Syntagma Square was a desperate individual, just like all the others, says Angelopoulos, who sounds a little desperate himself. He is fighting a lonely battle. All the same, the Greek Ministry for Health set up a suicide hotline a few weeks ago. Despite all the budget cuts and austerity measures, it feels the expense is justified. [..]

On the morning after our visit with Christoulas, the Athens police received another emergency call. A 61-year-old man has hanged himself from a tree on a hill in Aghios Philippos Park, not far from his house. He was a sailor who had recently lost his job. He had a wife, a son, a daughter and a dog. His body was removed by the afternoon, a few hours after his death.

The red-and-white strip of crime scene tape is still hanging between two trees, fluttering in the wind above the big city.

Photo top: Nikos Pilos / Der Spiegel

The man was Dimitris Christoulas, a 77-year-old pharmacist. Here, his daughter Emmy stands at the spot where he committed suicide. In his suicide note, he wrote: "The government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid into for 35 years with no help from the state. I see no other solution than this dignified end to my life so that I don't find myself fishing through garbage cans for my sustenance."


Aug 142012
 August 14, 2012  Posted by at 12:38 am Finance Comments Off on Kangaroos, Bananas and the Rule of Law

Kangaroo Court : An unfair, biased, or hasty judicial proceeding that ends in a harsh punishment; an unauthorized trial conducted by individuals who have taken the law into their own hands, such as those put on by vigilantes or prison inmates; a proceeding and its leaders who are considered sham, corrupt, and without regard for the law.

The concept of kangaroo court dates to the early nineteenth century. Scholars trace its origin to the historical practice of itinerant judges on the U.S. frontier. These roving judges were paid on the basis of how many trials they conducted, and in some instances their salary depended on the fines from the defendants they convicted. The term kangaroo court comes from the image of these judges hopping from place to place, guided less by concern for justice than by the desire to wrap up as many trials as the day allowed.

Banana Republic : In practice, a banana republic is a country operated as a commercial enterprise for private profit, effected by the collusion between the State and favoured monopolies, whereby the profits derived from private exploitation of public lands is private property, and the debts incurred are public responsibility. Such an imbalanced economy reduces the national currency to devalued paper-money, hence, the country is ineligible for international development-credit, and remains limited by the uneven economic development of town and country.[5]

Kleptocracy, government by thieves, features influential government employees exploiting their posts for personal gain (embezzlement, fraud, bribery, etc.), with the resultant government budget deficit repaid by the native working people who "earn money”, rather than “make money”. Because of foreign (corporate) manipulation, the kleptocratic government is unaccountable to its nation, the country’s private sector–public sector corruption operates the banana republic, thus, the national legislature usually are for sale, and function mostly as ceremonial government.

Rule of Law : In 1215, Archbishop Stephen Langton gathered the Barons in England and forced King John and future sovereigns and magistrates back under the rule of law, preserving ancient liberties by the Magna Carta in return for exacting taxes. This foundation for constitution was carried into the Constitution of the United States.

An early example of the phrase "rule of law" is found in a petition to James I of England in 1610, from the House of Commons:

Amongst many other points of happiness and freedom which your majesty's subjects of this kingdom have enjoyed under your royal progenitors, kings and queens of this realm, there is none which they have accounted more dear and precious than this, to be guided and governed by the certain rule of the law which giveth both to the head and members that which of right belongeth to them, and not by any uncertain or arbitrary form of government….[..]

Among the first modern authors to give the principle theoretical foundations was Samuel Rutherford in Lex, Rex (1644). The title is Latin for "the law is king" and reverses the traditional rex lex ("the king is the law").

Western media are enjoying predictable field days with a set of trials that are being held in the (formerly?!) communist countries Russia and China.

In Russia, the three members, all in their early twenties, of all female punkband Pussy Riot (two of whom are mothers of young children) have been imprisoned since early March and are presently on trial for reciting a "punk prayer" that contained the line "Virgin Mary, Banish Putin", during a performance in the Christ Savior cathedral in Moscow on February 21.

It's not entirely clear who was more offended, the Virgin or the President. What we know is that the Russian orthodox church called the "prayer" blasphemous and the court, under Article 213 in the Russian criminal code, accuses the three of "hooliganism motivated by religious hatred". The fact that the band added "The patriarch believes in Putin / Bastard, better believe in God" won't help their case.

They will be convicted on Friday, and risk up to 7 years in jail.

The Gu Kailai case in China has been going on about as long as the Pussy Riot one. The actual trial last week was semi-illegally held 1000 miles from both the scene of the crime and the defendant’s home. It lasted 7 hours. Gu, Bo Xilai's wife, was reported by Xinhua, the official Chinese news agency, as having confessed to killing a British citizen. One of the few things that seem certain is that the case has something to do with huge amounts of money being transferred abroad.

But Bo Xilai's status, popularity and following, prior to his "rendition". leaves room for much doubt about the real reason for his wife's trial. Reuters suggests it's all about the politburo cleansing the party ahead of this fall's "5th Generation" leadership change:

Bo was sacked as Chongqing boss in March and his wife was publicly accused of Heywood's murder in April, when Bo was also dumped from the Politburo and detained on an accusation he had violated party discipline – code for corruption, abuse of power and other misdeeds. Until then, Heywood's death had been attributed to a possible heart attack brought on by too much alcohol.

Chen Guangwu, a criminal defense attorney who has followed the Chongqing case closely, said he expected the verdicts against Gu and the four policemen to come in about two weeks.

"But they won't delay for too long, because this case is being heard in order to pave the way for dealing with Bo Xilai himself," said Chen, who is based in Shandong province. "This case is in part about testing the waters for that. That is, they will sentence her and see what reaction there is in society and public opinion."

Bo's downfall has stirred more public division than that of any other party leader for more than 30 years. To leftist supporters, Bo became a charismatic rallying figure for efforts to reimpose party control over dizzying and unequal market growth. But he made some powerful enemies among those who saw him as a dangerous opportunist who yearned to impose his harsh policies on the entire country.

Perhaps the most striking thing about both cases is the influence analysts claim public opinion has, an influence that depends to a large extent on the social media that help shape it. It's tempting to get the impression that neither Beijing nor Moscow have a full grip on, and understanding of, the new media. Their apparent beliefs that they can control Twitter as easily and in the same manner as they did radio and TV, could well come back to haunt them. Still, there can be little doubt that before that happens, and before they realize what has happened, they will resort to brutal violence.

As for Gu Kailai, for all we know she may well have killed Neil Heywood. But whether it's true or not, it's not easy to see that as the main reason for the trial. In a system as opaque as China's, people who can get away with skimming the system for hundreds of millions of dollars without being caught can probably also get away with murder, provided they have the right friends.

It's not hard to see why western media report so much on these cases. It's not just the elements of sex and danger, though these carry the story. What's even more important is that they paint a picture of a legal system elsewhere in the world that appears to function much worse than our own, that we can proudly and smugly proclaim to have much better systems. The problem with that, of course, is that we don't. The difference between us and the former communists countries is not about functioning vs non-functioning systems, it's about a difference in the way the systems don't function.

And we all know this. We're just not very eager to fully admit it to ourselves. We see only what we want to see. Even if the evidence is so prevalent all around us that it's impossible to escape.

Take a few examples from just the past week:

US drops investigations of Goldman Sachs

The US Justice Department announced Thursday evening it was ending a one-year criminal investigation and would not file charges against the giant Wall Street investment bank Goldman Sachs or any of its employees.

In April 2011, the Senate Permanent Subcommittee on Investigations released a voluminous report on the role of major banks, federal regulators and credit rating firms in the collapse of the subprime mortgage market and ensuing financial crash of September 2008.

Of the report’s 640 pages, 240 pages, or 40%, were devoted to a detailed examination of Goldman Sachs' deceptive practices in marketing mortgage-backed securities and collateralized debt obligations. The report alleged that Goldman bilked clients by selling them mortgage-backed securities without informing them that the bank itself was betting the investments would fail. [..]

In its statement released Thursday, the Justice Department said it had conducted “an exhaustive review of the report,” but concluded that “based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report.”

There is not a shred of credibility in this assertion. In the course of its investigation, the Senate Permanent Subcommittee on Investigations amassed 56 million pages of memos, documents, prospectuses and emails. The section of its report on Goldman Sachs gave chapter and verse, provided dates and named names, to meticulously document how the bank defrauded its clients by selling them mortgage securities while betting against the same investments, without telling them it was doing so.

“We are pleased that this matter is behind us,” a bank spokesman said Thursday of the Justice Department decision.

Also on Thursday, Goldman revealed in a regulatory filing that the Securities and Exchange Commission (SEC) had informed the bank it had ended a separate probe of a $1.3 billion subprime mortgage deal stemming from 2006, and had decided to take no action. This was an about-face by the SEC, which had notified the bank last February that it planned to pursue a civil action in relation to the Goldman security.

The SEC decision to drop the investigation comes as regulators are approaching a statute of limitations deadline for mortgage securities issued before 2007.

I really like that last line, don't you? US regulators need to do one thing and one thing only: hold off investigations and prosecutions long enough for the statute of limitations on any and all criminal activity involved to expire. Easy as pie. What do these guys get paid?

Ironically, US Attorney General Eric Holder, at around the same time he decided NOT to charge Goldman Sachs, made sure he took the time to go public and denounce the Sikh temple shooting as 'an act of terrorism, an act of hatred, a hate crime'. Dear Eric, always has time for the proper semantics. Especially when attention needs to be averted from elsewhere. Sure, maybe what Goldman did was not an act of terrorism. But not even a crime, Eric? Or are there other priorities in play here?

Five Senior Goldman Sachs Execs Gave $130K To 'Obama Victory Fund' WHILE Eric Holder Was Deciding Whether To File Criminal Charges

[The Government Accountability Institute] argues that the Obama administration’s decision to not go after Big Finance is due to senior DOJ leadership — Holder, Associate Attorney General Tom Perrelli, Associate Attorney General Tony West, Assistant Attorney General Lanny Breuer, Deputy Attorney General James Cole and Deputy Associate Attorney General Karol Mason — who “all came to the DOJ from prestigious white-collar defense firms where they represented the very financial institutions the DOJ is supposed to investigate.”

The report details how Holder and Breuer both came to the DOJ from Covington & Burling, a “top-tier Washington law firm” with a client list that includes financial firms like Wells Fargo, J.P. Morgan Chase, Bank of America, CitiBank, Deutsche Bank, Goldman Sachs, ING, Morgan Stanley, UBS and Wilmington Trust.

GAI said that President Obama’s decision to choose Holder, “a white-collar defense attorney from Covington,” as his attorney general, over a “more fiery prosecutor,” appears to have sent “a subtle signal to the financial community” that this administration isn’t going to actually do anything, despite the harsh words.

As one of many examples of where Holder’s DOJ could have gone after Wall Street but failed, GAI cites how Michigan Democratic Sen. Carl Levin “proposed that the DOJ criminally investigate Goldman Sachs for its handling of the Abacus 2007-AC1 transaction” in an April 2011 Senate Permanent Subcommittee on Investigations report.

In that 635-page report, Levin and his staff — who are Democrats — recommended that Holder’s DOJ investigate potential crimes committed. Levin’s subcommittee and the Federal Financial Crisis Inquiry Commission both made formal referrals to the DOJ for investigation – and Forbes magazine ran an article with the headline, “Criminal Charges Loom for Goldman Sachs After Scathing Report.”

Nothing happened. But, over the course of the rest of 2011, Obama went on a massive fundraising drive down Wall Street. “By the fall of 2011, Obama had collected more donations from Wall Street than any of the Republican candidates, and employees at Bain Capital had donated more than twice as much to Obama as they did to [Mitt] Romney, the firm’s founder,” GAI wrote in its report.

“In the weeks before and after the Senate report on Goldman Sachs, several Goldman executives and their families made contributions to Obama’s Victory Fund and related entities and some contributors maxed out at the largest individual donation allowed, $35,800.”

“Five senior Goldman Sachs executives wrote more than $130,000 in checks to the Obama Victory Fund,” GAI continued. “Two of these executives had never donated to Obama before and had previously only given small donations to individual candidates.”

But wouldn't you know, there are still, from time to time, guys turning up that haven't been initiated into the revolving door racket yet. Oh well, we have ways….

'Rogue' New York Regulator Benjamin Lawsky Sets Feds Scrambling In Standard Chartered Laundering Case

A little-known bank regulator from a newly formed New York agency might just shame federal regulators into getting tougher with the banks. Or he should, anyway.

The Wall Street Journal reported on Thursday that federal regulators are in talks with the New York State Department of Financial Services about negotiating a deal with British bank Standard Chartered, which has been accused of letting Iranian interests launder $250 billion over a course of years, in violation of U.S. sanctions.

This was an intriguing development in the case, because for the past 48 hours or so, these same federal regulators have been beside themselves with fury at the guy in charge of that same New York State Department of Financial Services, Benjamin Lawsky.

Now they're talking about joining forces with him. It's almost enough to make you hope that, if there is a penalty coming, it will be more than the usual wrist-slap.

"It's the state of New York leading the charge, with the Treasury Department falling behind," Notre Dame law professor Jimmy Gurule, a former Treasury official, told the Huffington Post. "Eventually I think Standard Chartered will be hit with a substantial criminal penalty, and then Treasury can say, 'Me, too.'"

Officials at the Treasury Department and Federal Reserve are reportedly outraged with Lawsky for going rogue and bringing a case against Standard Chartered, stealing the thunder from cases they claim they, too, were slowly developing. The regulators grumbled that they weren't notified of Lawsky's case, an unseemly faux pas that caused several monocles to fog up in horror. Just what you'd expect from a New Yorker whose agency has only been open since October 2011, who probably has ambitions to be like his mentor, New York Governor Andrew Cuomo.

More chillingly, federal regulators have been whispering to the press that Lawsky's case is full of holes, going so far as to adopt Standard Chartered's argument, that if there was any money-laundering happening in Standard Chartered branches — and it's not saying there was! — then said laundering amounted to only about $14 million or so. A pittance. Hardly worth noticing at all, really. [..]

Reuters points out that none other than Treasury chief Timothy Geithner may have a stake in the whole mess, because he was the head of the New York Federal Reserve, a key bank watchdog, for much of the time of the alleged money-laundering. Geithner is already criticized for being too close to banks, most recently because of his relative inaction during the Libor scandal. It would not help his image to find that banks were just willy nilly laundering money on his watch.

[..] if an individual was convicted of doing the sort of thing Standard Chartered is accused of doing, he would spend "two decades or more in the slammer," writes Eleazar David Melendez at the International Business Times.

"If you are taxpayer and you fail to pay taxes, you will go to jail," said former Treasury official Gurule. "If you are a banker and engage in undermining sanctions against Iran, nothing happens to you. It's mind-boggling."

So the modus operandi – or so one might be tempted to think – is to frustrate whoever would – foolishly – want to interfere with a scheme that evidently works like a charm. And then, a happy chosen few that rise above a certain critical mass can get invited to join the Kangaroo Banana party:

In Google's Privacy Settlement, Tech Giant Denies Liability (Again)

We'll pay your fine, but we won't admit we did anything wrong. Those are the terms Google agreed to in its record-breaking settlement with the Federal Trade Commission, which announced Thursday it had penalized Google for the second time in a year for violating privacy promises made to its users.

Google's failure to cop to any wrongdoing has sparked dissent within the FTC and outcry from privacy advocates, who call the settlement "woefully insufficient." While Google hasn't assumed liability for any transgressions, the explanations it has offered are troubling themselves.

First, some background: Google has agreed to pay a $22.5 million fine for violating a consent decree signed with the FTC and misrepresenting privacy settings to users of Apple's Safari browser. The FTC faulted Google for using "cookies" that tracked Safari users online, despite Google's assurances that it would not do so.

The FTC order states that the defendant, Google, "denies any violation of the FTC Order, any and all liability for the claims set forth in the Complaint, and all material allegations of the Complaint save for those regarding jurisdiction and venue." In a dissenting statement, FTC commissioner J. Thomas Rosch expressed concern that allowing the company to deny liability in these circumstances was "unprecedented" and could set a troubling example for other firms. [..]

Google has answered regulators' fingerpointing with what amounts to an "Oops, we didn't mean to." That's our personal information they're "oops-ing" with, and not just once or twice, either. Intentional or not, Google's string of privacy oversights, and disquieting attempts to explain them as "by accident," are cool comfort from a company we're supposed to trust with our emails, questions, contacts, and, increasingly, whereabouts. [..]

In Thursday's announcement, Google didn't go so far as to say that there weren't any cookies tracking user activity, or dispute facts laid out by the FTC, but seemed to dismiss the regulators for getting hung up over some technicalities.

Google's response when Stanford researcher Jonathan Mayer first noted the Safari breach essentially amounted to a "shucks, sorry, that wasn't supposed to happen." In a statement released in February of this year, Google blamed the presence of Google advertising cookies on a "functionality" in the Safari browser that activated them, adding that it "didn't anticipate that this would happen." [..]

Google has been embroiled in another public relations nightmare, with slip-ups seemingly at every turn, following its admission that its Street View team accidentally collected personal information, such as emails and passwords, via Wi-Fi networks.

First, Google told the world in 2010 that the Wi-Fi data free-for-all was "quite simply…a mistake," and pinned the "inadvertent" data collection on a single "engineer working on an experimental WiFi project." That engineer wrote some code that Google's mobile team later included in its software, though Google said the team didn't specifically intend to capture personal data. This effort to contain the problem by pointing fingers at one engineer only raises more questions about how carefully the company is considering the public's privacy. Do people often slip code into products without oversight? And no one took a look at this programmer's code?

Turns out a few people did. The FCC's investigation of the matter revealed that that lone engineer actually shared his work with the entire Google Street View team. And two years after promising to delete the data it collected by "mistake," Google has admitted to regulators in Europe that due to an "error," it still had some of that data in its possession.

Some use their stranglehold on their legal system to try to get rid of the world's Pussy Riots, the young people of every generation with the foolish bravery to stand up to oppression. Others use it to try to get rid of political rivals, a battle among – almost – equals. A story as old as civilization. And others still use their stranglehold on their specific laws to squeeze every last penny out of their people and their economies.

And we can philosophize until we're blue in the face about which situation is worse, but we need to stop thinking that there are legal systems left that have anything at all to do with the rule of law. And that they would happen to be ours. The rule of law used to be supposed to mean that everyone, big or small, rich or poor, should be treated the same. Used to. Don't time fly.

These days, we get fed the stories about Pussy Riot and we read about Gu Kailai, and we hardly manage to make the connection to ourselves. We're getting robbed blind and since no-one goes to jail, we presume it must be all legal. We're all in the same spot Pussy Riot are, we just don't have any idea we are, and we certainly don't have the guts the girls have. We're much more scared, and we're much more numbed by much more sophisticated and manipulative media. We are the sheep on the way to the slaughterhouse, not those three girls.

We all of us live in a banana republic of one sort or another: "a country operated as a commercial enterprise for private profit, effected by the collusion between the State and favoured monopolies". And we all risk ending up in a kangaroo court: An unfair, biased, or hasty judicial proceeding that ends in a harsh punishment . Only, in our system, it ends in no punishment at all for those in the right place. That's just as much kangaroo, though. Either the thing functions, or it's kangaroo. It's either the rule of law, or there might as well be no law at all. At present, there is no such thing as the rule of law in either Russia, China or the US. So let's stop fooling ourselves.

The main difference between us and the Pussy Riot girls is not that they are more oppressed; it's that they have balls, and we have none.

Collage top: Ilargi


Aug 102012
 August 10, 2012  Posted by at 5:29 pm Finance Comments Off on The Seductive Promises of Counterfeit CULTures


1909. "Mme. Diss-DeBarr," a.k.a. "the noted and notorious Ann O'Delia Dis Debar, of many aliases, a number of husbands and several prison terms," according to a 1909 article in the New York Times. The headline calls her an "ex-priestess of fake spiritualism." 8×10 glass negative, George Grantham Bain.

The word "counterfeit" is defined as "an imitation intended to be passed off fraudulently or deceptively as genuine". Some counterfeits are bad and easily detectable, while others are very convincing. I would argue that the structures of modern society have evolved into almost indistinguishable counterfeits. Of course, in terms of the economic and political cultures of human societies, there must be a genuine model encompassing virtuous qualities of humanity for there to be a counterfeit of that model. So what is the genuine model?

There is reasonable room to disagree on the specifics, but most people would generally agree that this model should embody the following virtues – caring/providing for others (selfless orientation), equal treatment, equal rights, equal opportunities, personal freedom, proportionate justice, economic security, social and political stability and universal peace ("the virtues"). These are lofty virtues that have never been perfectly attained, but they provide the framework of the goals which should guide our thoughts and actions.

We don't need to agree on exactly what should be done to achieve those goals in order to articulate some basic principles of what their counterfeits would look like. Using the general principles that follow (in no particular order), I believe we can look at a society or culture, and specifically at the promises of groups of people operating within them, and discern whether they are serving as counterfeits of the virtuous model we would all like to see in reality.

1) Maintains exclusive understanding of the virtues

2) Superficially in favor of the virtues

3) Slightly alters or puts conditions on the virtues using propaganda

4) Marginalizes those who are critical of their prescriptions

5) Promises seductive benefits to followers and delivers on many of those promises

You may have noticed that many of these principles apply to what we call "cults", or sects of religious culture that exalt virtuous ideals while using the above methods to deceive and control their members. This is very similar to what occurs in other "sects" of our society and cultures, such as economics/finance and politics. In fact, many of these counterfeit groups truly believe that they represent the genuine and virtuous model for society.

When I started writing this article, I had planned on picking and choosing several different examples of influential groups/organizations that embody counterfeit virtues – ones that we must continuously be on guard against. But, as fate would have it, Ilargi put up a recent post focusing on a near perfect example of such an entity – Eurodystopia: A Future Divided. In this post, he explained Freddy Heineken's vision for the nation states of Europe, or what he called "The United States of Europe, a Eurotopia".



Map: BMoreGeo.com

The general idea behind this vision was a "decentralization" of nation-states into autonomous regional units, combined with a simultaneous federalization of those units into a centralized Union – something akin to what we have with the 50 states of the United States. As explained by Peter Jan Margry in the quoted article, such a transition had already began to occur in the run-up to establishing the European Union, even though it never became a fully realized reality (yet).

"As early as the late 1960s, as a result of the European Communities, a process of growing regional autonomy had slowly got under way. The converging supranational and diverging national forces would, it was supposed, bring Europe more to its 'natural state', preserving the various regional identities. Because of regionalist tendencies the nation-state network was breaking down, and within various member states regions were gaining far-reaching autonomy."

Given the fractured economic and political situation in the Eurozone right now (which will only get much worse), as well as the predictable responses of disenchanted populations and desperate central authorities, it is quite likely that proposals for this Eurotopia will be renewed as a sort of last ditch effort. As Philib Ebels wrote in an article for the EU Observer – "But radical times call for radical measures. And the way things are going, I prefer utopia over dystopia" – and I'm sure many others feel the same way.

Can we really blame these Europeans for seeking a higher ideal that will divert them from the current unstable and agonizing path they are on? I certainly don't think that we can. Yet, we must also remember that what is promised to us by powerful groups is not always (almost never) what we end up getting. The charismatic politicians and officials who come to us in sheep's clothing will no doubt act as counterfeits of our idealistic virtues for society.

Maintains Exclusive Understanding of the Virtues



When the "compromise" of national decentralization in exchange for complete European federalization is proposed by ambitious leaders, they will claim that it is the ONLY solution to the current Eurozone financial crisis and all of the attendant social and political consequences. They will say that there is only one door to economic stability and security, as well as renewed peace and prosperity, and that they hold the key.

What's more is that they will be RIGHT in a limited sense. In the short-term, some sort of federalization scheme, i.e. debt pooling and centralized fiscal control, is the only thing that will keep the Eurozone intact. And the only way that is acceptable to both the Eurozone core and periphery is if some level of decentralization occurs to maintain "regional autonomy", even if it is largely symbolic.

Philip Ebels, as quoted in Ilargi's article, gives us a very matter-of-fact statement of the problem and solution:

"The European welfare state has multiple functions. It needs to protect its territory from outside, uphold the rule of law, provide healthcare, education, take care of the roads and the forests and – to a more or lesser degree – distribute wealth.


The problem is that each of those functions has its own optimal size and that, as the world continues to change, they continue to diverge. The result is not that the state does not work anymore – it just does not work very well. Like a pen as big as a broom or as small as a splinter – you might still be able to use it, but it is not very practical.


It is a trend that will continue as long as technology continues to progress. China and other rising giants will continue to rise; the ruled will continue to undermine their rulers. And then there will come a day – or has it come already? – that the European states of today do more harm than good [..]


Heineken called it "Eurotopia" – a contraction of Europe and utopia. He was well aware of the skepsis the idea would garner. But radical times call for radical measures. And the way things are going, I prefer utopia over dystopia."

Superficially in Favor of the Virtues



This aspect of any Eurotopia proposals/promises is pretty self-evident. As stated before, it is likely that many of the people involved in such a proposal will genuinely believe that they are leading their people, and the European people in general, to stability, peace, prosperity and personal freedom, as well as some modicum of equality over time. Margry comments on this notion of "revitalizing and reframing" Europe:

"Initially, as a hypothetical response to this, Heineken went public with his plan for a United States of Europe. This involved a union composed of 75 independent states, created on the basis of political, historical, linguistic, cultural and ethnic affinities and sensitivities. Taking cultural differences into account in precisely this way would strengthen Europe as an entity. Although nothing was ever done politically as a consequence of this idealistic proposal, the underlying analysis is not inconsistent with developments in the years that followed – on the contrary.


The proposed decentralization and federalizing of Europe on the basis of smaller geographic units proceeded from the central idea that it would prevent conflicts and promote stability and equality. This assumption was based, on the one hand, on the theory of the British historian C Northcote Parkinson that smaller national units could be less centralized, more efficient and therefore more stable, and, on the other hand, on the thesis of the Austrian sociologist Leopold Kohr (1957) that 'bigness is a problem'. In effect, both embroider [Denis] de Rougemont's initial preference for a regionalized, federalist Europe."

Slightly Alters or Puts Conditions on the Virtues using Propaganda



We have already seen that the initial condition placed on reaching any virtues of human society in Europe is the federalization of European nations and regions. While much of the analysis is correctly focused on the problems with centralization of authority and "bigness" (complexity at large scales), it is also clear that there is absolutely no political decentralization without some attendant centralization of key economic and political processes. The propaganda is captured well in this sentence from Margry:

"The converging supranational and diverging national forces would, it was supposed, bring Europe more to its 'natural state', preserving the various regional identities."

The idea here is that Europe must use two competing forces in order to attain a natural equilibrium point at which the virtues can be realized. Indeed, such an idea appeals to our superficial sense of "balance" and "fairness", just as it did to the somewhat skeptical founders of the United States who ultimately agreed on a Constitutional federation of the states. What the Americans living in these states were promised, though, was certainly not what they got over the course of decades and centuries.

Marginalizes Those who are Critical of Their Prescriptions



When these Eurotopian proposals are floated, there will certainly be people who are very critical. They will claim that the supposed decentralization of nation-states will be symbolic and ineffective at promoting local autonomy, while the federalization will predictably transfer more power to centralized institutions of governance and policy-making, including an unaccountable shadow executive. They will also say that the resources to back up such a federalization scheme simply do not exist, and that the scheme will only provide very short-term benefits before structural crises re-emerge.

No doubt they will point to the United States as a prime example of federalization gone awry, where the states lack any real sovereignty over their economic or social policy and the federal government has encroached into every sphere of the lives of individuals and local communities. They will also point out that the United States finds itself in an entirely unsustainable financial and fiscal situation, despite its ability to monetize sovereign debt and provide all types of monetary and structural support to the states.

These critics and their criticisms will be dealt with adeptly and harshly. They will be portrayed as the people who are resistant to any form of change and simply want to perpetuate the destructive status quo. Indeed, they may even be identified as shills of the powerful elites who are afraid of anything that may challenge their wealth, power and control. Every attempt will be made to convince the masses that anyone who is critical of Eurotopia is simply standing in the way of everything that is good and virtuous about European society.

Promises seductive benefits to followers and delivers on many of those promises



This counterfeit principle will be the cornerstone of any Eurotopian proposals. After all, there is really no way to convince the European population of a counterfeit system if that system does not really provide any measurable benefits to those people. Just like in many other parts of the developed world, we have a situation in which the European populations are already trained to expect a certain level of public protection and services.

As Philip Ebels notes, these traditional functions of the post-WW2 European state include protection of territory from external threats, upholding the rule of law (domestic justice), providing healthcare and education, maintaining public infrastructure and also distributing wealth in a somewhat equal manner. Some states have obviously been more effective than others at providing these benefits over time, but what's important now is that they all find themselves unable to continue with those provisions at the same scale and effectiveness as before.

That's where Eurotopia comes in – it will have to assure the European people that these things will continue and even expand over time, and it will also have to deliver some concrete examples of the benefits that Europeans can expect. Perhaps we will see proposals for a new continent-wide, universal healthcare program, or renewed efforts to construct inter-continental transportation infrastructure. Most importantly, people will have to see unemployment and debt burdens relieved to some extent before they are willing to commit themselves entirely to these "radical" visions.

When you think about it, these things can be somewhat easily achieved in the short-term. All that is required is for the ECB to commit itself to monetizing sovereign debt in its new Eurotopian role, and for Eurotopian authorities to give investors, speculators, corporations, etc. a reason to feel reassured about the Eurozone's financial situation. National politicians/officials will also have to play their parts in advocating and taking preliminary steps towards federalizing Europe, showing everyone that they are truly committed as well.

And when you think about it even more (perhaps too much), you start to wonder why any of this is such a bad thing. If the transition towards Eurotopia can actually provide some of the all-important virtues that we strive to achieve, and to a much greater extent than any of its alternatives (such as disorderly decentralization), then why should we fight it? Well, we must always remember that this mentality is exactly why the promises of counterfeit cultures are so seductive and effective, yet eventually become self-defeating and destructive.

In a way, they are starting from a fundamentally flawed premise – that the [short-term] ends justify the means. That it's OK to indulge ourselves in Utopian fantasies as long as we are provided some short-term relief from the struggles of everyday life. And while this article has focused on the situation in Europe, we will see similar counterfeit proposals all across the world, as the elite factions of global society run out of ways to placate the masses. There will be a few who remain critical all the way through, but I fear that the vast majority will be seduced by the counterfeit virtues of our global culture.

I won't claim that I have an exclusive understanding of how to achieve virtuous goals, but I will claim that there is no way these top-down centralization-disguised-as-decentralization schemes will work in the long-term. They will simply mask the structural financial, energy and environmental crises that continue to lurk beneath their thin veneers, and they will dangerously raise expectations and diminish local resiliency for the masses. The last few centuries of human history have been dominated by these types of clever counterfeits, so we must not expect to find the answers to our problems lying in there.

Aug 102012
 August 10, 2012  Posted by at 1:53 pm Finance Comments Off on Eurodystopia: A Future Divided

Just about everyone will recognize the family name. Fewer will be familiar with the man behind it. But Alfred (Freddy) Heineken was an interesting man regardless. Starting in 1941, he took over the family firm founded by his grandfather, bought back shares and never looked back. Freddy built the Heineken brand into one of the best marketed ones in the world for any product, and today, 10 years after his death, it is still in the very top of world breweries.

But Heineken didn't just think about beer. When the European Union was formed, he devoted time to letting his light shine on that project too (Heineken was a known Europhile). What he brought to the table was that, of course, he knew Europe well, from his own unique personal business experience. He oversaw, hands on, not just sales, but also marketing in all the different European languages and cultures.

Heineken didn't trust that the European Union would work the way it was proposed – and eventually organized -. According to him, if Europe were to be a success, it would have to be divided in far smaller units than the nation states that had been formed post-WWII.

It's reminiscent a little of Joel Garreau's "Nine Nations of North America", published in 1981. I don't know if Heineken knew the book, but given his overall curiosity and his wide array of contacts with business leaders, politicians and artists all over the world (Heineken was a very wealthy man), it wouldn't surprise me. Then again, his vision is based on completely different ideas than Garreau's.

For those who are not familiar with Garreau's work, here's a map of how he "envisioned" North America:


Garreau divided the continent into units that he thought would be most coherent from the point of view of culture, political ideals and economic interests. Interesting notions, and a good book to pick up.

Back to Heineken, who would have found Garreau's units far too sizeable for his liking. He was thinking along the lines of optimally manageable untis.

Immediately after the 1992 Maastricht Treaty saw European nations sign away the first real chunks of sovereignty, Freddy Heineken published his pamphlet The United States of Europe (A Eurotopia?), written with Dutch historians Henk Wesseling and Wim van den Doel. The underlying idea here is that the individual units (statelets) should have no more than 5-10 million inhabitants.

Philip Ebels revoked the idea in an article written for EU Observer last week:

For the United Statelets of Europe

[..] If the EU was considered a country, it would be seventh on the list of biggest countries and third on the list by population size. And, as officials in Brussels never tire of repeating, first on the list of biggest economies.

The time is [..] gone when people were ignorant and obedient. The time when they did not annoy their leaders with demands of transparency, efficiency, democracy and accountability.

Technological progress has always led to political turbulence, often at the expense of those in power. The Internet, just like the printing press before, gives people access to information and the power to create and distribute, undermining establishments everywhere – not only in the Arab world.

That is why states are doing what they need to accommodate an ever more demanding and emancipated people: decentralise. The UK, Germany, France, Spain, Italy: all have passed down powers over the last couple of decades. The closer the power, the more transparent, efficient, democratic and accountable it is.

Everything which has a function, one could argue, has an optimal size. A pen can be bigger or smaller, you still need to be able to use it. The European welfare state has multiple functions. It needs to protect its territory from outside, uphold the rule of law, provide healthcare, education, take care of the roads and the forests and – to a more or lesser degree – distribute wealth.

The problem is that each of those functions has its own optimal size and that, as the world continues to change, they continue to diverge. The result is not that the state does not work anymore – it just does not work very well. Like a pen as big as a broom or as small as a splinter – you might still be able to use it, but it is not very practical.

It is a trend that will continue as long as technology continues to progress. China and other rising giants will continue to rise; the ruled will continue to undermine their rulers. And then there will come a day – or has it come already? – that the European states of today do more harm than good [..]

Heineken called it "Eurotopia" – a contraction of Europe and utopia. He was well aware of the skepsis the idea would garner. But radical times call for radical measures. And the way things are going, I prefer utopia over dystopia.

Here's a nice version of Heineken's map:


Map: BMoreGeo.com

More background comes from Peter Jan Margry in 2008:

Memorialising Europe: Revitalising and Reframing a 'Christian' Continent

"(…) Heineken was convinced of the positive consequences of this process of the decay of centralism in favour of a Eurotopia as he called it. Immediately after the signing of the Maastricht Treaty in 1992 many were already afraid of a Europe that was becoming too large and too powerful, despite the fact that, as an antidote for this, a representational Committee of the Regions had been included in the Treaty in order to weaken these tendencies and, at the same time, answer the call for more regional autonomy.

Initially, as a hypothetical response to this, Heineken went public with his plan for a United States of Europe. This involved a union composed of 75 independent states, created on the basis of political, historical, linguistic, cultural and ethnic affinities and sensitivities. Taking cultural differences into account in precisely this way would strengthen Europe as an entity. Although nothing was ever done politically as a consequence of this idealistic proposal, the underlying analysis is not inconsistent with developments in the years that followed – on the contrary.

The proposed decentralization and federalizing of Europe on the basis of smaller geographic units proceeded from the central idea that it would prevent conflicts and promote stability and equality. This assumption was based, on the one hand, on the theory of the British historian C Northcote Parkinson that smaller national units could be less centralized, more efficient and therefore more stable, and, on the other hand, on the thesis of the Austrian sociologist Leopold Kohr (1957) that ‘bigness is a problem’. In effect, both embroider [Denis] de Rougemont’s initial preference for a regionalized, federalist Europe.

As early as the late 1960s, as a result of the European Communities, a process of growing regional autonomy had slowly got under way. The converging supranational and diverging national forces would, it was supposed, bring Europe more to its ‘natural state’, preserving the various regional identities. Because of regionalist tendencies the nation-state network was breaking down, and within various member states regions were gaining far-reaching autonomy.

According to an almost apodictic commentary in The Economist, if the logic for splitting up Czechoslovakia could be carried through, then there was all the more reason that the same should be done in Belgium, with its even greater language and economic divisions. Meanwhile, Spain fears the regional autonomy claimed by the Basques and Catalans, while France has to deal with a Corsican struggle for autonomy; similar claims are made by the Scots, Hungarian minorities throughout the Balkans, and so on."

So why all this attention for a billionaire beerbrewer's spare time activities? The answer lies in those last lines. "Spain fears the regional autonomy claimed by the Basques and Catalans, while France has to deal with a Corsican struggle for autonomy; similar claims are made by the Scots, Hungarian minorities throughout the Balkans, and so on."

The map of Heineken's utopia could quite feasibly serve as the blueprint for a dystopia. When the financial crisis starts to bite for real, and it will, count on it, it appears inevitable that nations and/or parts of nations begin preparing for independence. There are plenty of regions in Europe that hang on as parts of larger entities only for economic reasons. When these reasons no longer exist, appeals for separation will become louder.

It won't be a coherent movement, far from it. It will be chaotic. But there seems to be no way that certain regions will not fall prey to populists, nationalists, and in general the resurrection of age-old ideas that never disappeared, but that simply lay dormant under a thin veneer of riches.

Why would the Catalans or the Basques elect to continue to be a part of Spain, when the government in Madrid has nothing to offer but empty coffers? Why would they let others decide for them when that brings them no economic advantages? Any charismatic leader might convince them that they would be better off as a separate unit. And that leader might be right to boot.

Why should the Scots remain in the United Kingdom? And what might happen in for instance Galicia, Silesia, Moravia, regions that have seen many different rulers in recent history only? What ancient cultural, religious or other divides will rise to the surface all over again?

It is not at all imaginary that regions want (back) their independence. And neither is it that borders between regions will be contested, that people will be told that only warfare will be sufficient to show "those over there", who committed untold horrible if not unspeakable atrocities an untold number of years ago, that now is the time to avenge the ancestors who died to defend the land they now live on.

For obvious reasons, we call this scenario the Balkanization of Europe.

It will not develop exactly along the lines and borders that Freddy Heineken saw as desirable. But we may well one day think back of that map, and not for the reasons Heineken meant it for. I think along those lines on a regular basis when I see the likes of Monti, Draghi and Rajoy present their grandiose plans to save the union, and their place in it, far more costly than any can afford, as it's sinking ever deeper into its overwhelming debt morass.

Image Top: dreamslayerartworks.com