Islam's Last Gasp

As witnessed by my post of June 2008, I have been intending to write about this subject for some time now. The recent events in Iran makes this issue more pressing, but I am under no illusion that this is the start of a Muslim version of the fall of the iron curtain (although that would certainly be welcomed!) I am just reminded of a disappointing time exactly 20 years ago this month that I thought we were seeing the beginning of a revolution in China. Although the Tiananmen Square protests did not result in the toppling of a repressive regime as we hoped then, China has certainly changed in the intervening years, so a gradual liberalization is hopefully possible in the Muslim world as well.

The other preliminary issue that must be addressed is the frenetic Internet activity regarding Iran’s recent elections, which—by too many people—is being used as evidence that the protests in Tehran represent the majority of Iranian public opinion. While “citizen journalism” (blogging, twittering, posting pictures & video) is a valuable supplement to traditional media and intelligence sources, especially when those are restricted, we must remember that we are hearing from a self-selected group. By virtue of the fact that these people speak English, have Internet access, Twitter accounts, camera phones, etc. we must assume that they are richer, better educated, and more western-oriented than the average Iranian. I don’t want to discount the suffering evident from some of the gruesome photos and videos we have recently seen from Tehran, but there seems too much incestuous (think “re-tweeting”) and unverifiable hysteria circulating around the Internet lately, contributing nothing, just decreasing the “signal-to-noise ratio” of any intelligent discussion. And don't get me started on the useless, feel-good actions of changing your avatar to green and setting your time zone to GMT +3.5. Jack Shafer of Slate agrees.

Bogeymen
I must first address America’s perception of the Muslim world. Especially since 2001, we have been led to believe that radical Islam is a cancer spreading over the world much in the same way as the supposed scourge of Soviet-style communism was in the previous century. It seems we must always have a bogeyman—an enemy to unite us. With the fall of the iron curtain in 1989, we—especially as Americans—were somewhat confused regarding our place in the world; we were the proverbial dog who finally caught the automobile he had always been barking at. There was no longer the clear division between countries, leaders, and movements that were pro-communism (our enemies) and those that were anti-communist and therefore our friends (which had, incidentally made us strange bedfellows with some really questionable characters!) Thankfully—and of course I say this tongue in cheek—a new enemy arrived just in time: Islamo-fascism. Ironically our first major enemy, Saddam Hussein, was actually quite secular and we actually climbed in bed with the strictest Muslims around—Saudi Arabia—to fight him. But our worldview was not sufficiently polarized until that fateful day in September 2001. Then we were bombarded from all sides: political leaders, religious leaders, military friends and elderly aunts were all wringing their hands over the danger posed by radical Islam. Terrorist training camps in Afghanistan, refugee unrest in and around Israel, Al-Qaeda in Iraq, the rise of Islamic parties in Egypt and Turkey, and even riots in France and England all seemed to be conclusive proof of the grave threat we were under (besides, of course, the 3000 countrymen we lost on American soil that day.) A population already growing faster through natural means (greater birthrate) now was proselytizing and radicalizing moderate/cultural Muslims from Europe to Africa and even Southeast Asia! And best of all, we now had a man—with a very distinctive visage—to pin our fears and anger on: Osama Bin Laden.

A Power Shift
Despite the fact there are some young men falling under the influence of radical clerics and running off to madrasas and training camps to become terrorists—a few of which then actually will commit acts of terrorism—they represent a minuscule percentage of young Muslims in the world. In fact, I predict that the saber rattling and actual terrorist attacks we have witnessed in the last decade or so, are in fact the death-throes fundamentalist Islam. We generally don’t hear much about the vast majority of young people—and this is important because the median age of most predominately Muslim countries is in the teens to twenties—who actually yearn for, if not devour, western pop culture and all its accoutrements. It seems only natural then that as older religious and political leaders die off, we will see liberalism sweep over—or at least creep into—these young nations. Of course power being what it is, I am not naïve enough to think that anyone is going to willingly give up their control regardless of their age; these leaders still want to groom their young, like-minded lieutenants to eventually take the reigns of power and carry on the status quo. But with the advent of modern communications, health care, and education, combined with family structure intended for a bygone era (i.e. numerous children,) it will continuously become more difficult for them to retain this power. I really do believe that we will see a change in our lifetime…and certainly this not limited to the Muslim world; it has happened and will continue to happen all over the world; young people in even the remotest corners of the world are being exposed to most exciting aspects of what the west has to offer via satellite TV and the Internet (granted, often an unrealistic view.) The grip of their elders and their culture/traditions naturally weakens in this onslaught.

Response
I trust that I have stated my case sufficiently to demonstrate that we don’t need to send troops to instill freedom and democracy in these lands; in fact, it is quite evident from our failures over the last seven years in Iraq and Afghanistan that this cannot work, and is a terrible waste of billions of dollars and thousands of lives. It should be obvious that we needn’t do anything but foster social engagement; if we really want to spend billions to conquer al-Qaeda, the Taliban, et. al, let’s just distribute free satellite dishes, TVs, Internet routers, computers, and license MTV programming for Voice of America and similar propaganda outlets—we can just let Hollywood “degenerate” the young people of the Muslim world to our liking! I say this half-jokingly, but also half-serious; we really need to look at the long-term cost/benefit of any strategy. In the July 19-25, 2008 of The Economist, I found a perceptive article titled “How to win the war within Islam” that summarized the situation thusly: “In the long run, al-Qaeda will be defeated by Muslims, not foreigners.”

References
Below is a chart listing the median age (meaning half of the population is younger than this age) in selected, predominately Muslim countries (by comparison, the US is 36.7 and EU countries are all within a couple of years of 40!)

Country	Median Age
Afghanistan	17.6
Egypt	24.8
Gaza Strip	17.4
Iran	27.0
Iraq	20.4
Jordan	24.3
Libya	23.9
Morocco	25.0
Pakistan	20.8
Saudi Arabia	21.6
Syria	21.7
Turkey	27.7

- CIA factbook accessed 24 June 2009

Further Reading
Interesting books about young Muslims:

• Muhajababes 25-year old author Allegra Stratton talks to other her age across Middle East
• Heavy Metal Islam by Mark LeVine; youth embracing western music in failed societies
• Lipstick Jihad by Azadeh Moaveni; teenagers being teenagers even under the watchful eye of morality police

A Tale of Two Tragedies

This might just get me in more trouble, but here goes...

A few days ago two young Bulgarki, in effect, chided me for being an insensitive boor in the face of tragedies affecting people I don’t personally know. I will argue that—at least when it comes to discussions of policy—we absolutely need the cold, hard calculation that only a disinterested third party can make.

This past week we witnessed two transportation-related catastrophes: on May 28th an old bus likely suffering from faulty brakes, plowed through a crowd of pedestrians near Yambol, Bulgaria killing 17 and injuring another 20. Then—of course—on the first of June, Air France 447 went down over the South Atlantic Ocean taking all 228 people aboard to a watery grave. While the numbers differ by an order of magnitude, the tragic loss is the same for the surviving friends and family whose lives were lost. Besides the grief they share, there must certainly be some anger and outrage over the fact that their loved ones’ lives were cut short. Everyone realizes that nothing can bring these people back, but I am sure each one of the victims' families would love to see measures taken to prevent another such incidents in the future, so at least their loved one did not die in vain…and certainly we should thoroughly investigate these accidents to determine the cause and possible changes in equipment or procedures that would prevent such an accident in the future. However—and this is where the cold, calculating third party comes in—it is necessary to determine the cost/benefit of any changes. For example, a $100,000 per plane retrofit may actually not be justified for an issue that occurs once in a million flights. This may sound callous, but in the larger scheme of things, it might be justified since this kind of money could be spent elsewhere, potentially save many more lives per dollar/euro or whatever metric you wish to use.

What is really ironic in this past week's accidents is the (probable) response: French and international officials will spend a million plus Euros on an extremely thorough investigation resulting in recommendations that will likely cost even more to implement, for what is likely a very rare confluence of event that caused this airliner to crash into the ocean. (Already they have issued a warning about the possible faulty airspeed indicators.) On the other hand, Bulgarian officials will likely go through the motions of a cursory investigation, whose results will be rubber-stamped and forever filed away in some obscure archive. Just like in the rest of Eastern Europe, auto, tuck, and bus drivers will continue to obtain their drivers licenses through bribes, vehicle inspections will continue to be a joke, and Bulgaria will continue to be one of the EU’s leader in highway deaths.

What really irks me though, is that all this seems acceptable to the general public! While air travel continues to be the safest method of travel (per passenger mile/km)—because we feel in control behind the wheel of our own vehicles—we accept and even insist on onerous restrictions and other measures to ostensibly make air travel safer [seriously, how am I going to make a bomb with a full-sized container of toothpaste or shampoo?!], yet we balk at any invasion of the supposed sanctity of our own vehicles, such as the reasonable expectation that you shouldn't use your mobile phone while driving. Probably the wisest use of any transportation safety budget would be to retrofit all automobiles with 5-point, racing-style seatbelts and issuing (and insisting on the use of) helmets for all auto passengers; just in the US, this would dramatically cut into the 40,000 plus deaths that occur on the roads every year! Of course the public would never accept this, so we spend more money on other issues that—in the end—save fewer lives.

Likewise, our opinion of the importance of any heath or safety issue is directly proportional to how “closed to home” the issue or incident hits. We are much more concerned if someone has been in affected in: our family, among our friends, then friends of friends, and finally the celebrities’ lives we follow. Instead we should look at the broad picture: what are the biggest killers and what are the most cost effective methods our governments can effectively implement to save live regardless familiarity, race, nationality, etc.

Mark Twain's War Prayer

I think it is appropriate, on this Sunday before Memorial Day, when—in churches all across the United States—living and fallen soldiers are venerated for their actions in "fighting for our freedom," that I republish this often overlooked short story by America's favorite author.

The War Prayer

It was a time of great and exalting excitement. The country was up in arms, the war was on, in every breast burned the holy fire of patriotism; the drums were beating, the bands playing, the toy pistols popping, the bunched firecrackers hissing and spluttering; on every hand and far down the receding and fading spread of roofs and balconies a fluttering wilderness of flags flashed in the sun; daily the young volunteers marched down the wide avenue gay and fine in their new uniforms, the proud fathers and mothers and sisters and sweethearts cheering them with voices choked with happy emotion as they swung by; nightly the packed mass meetings listened, panting, to patriot oratory which stirred the deepest deeps of their hearts, and which they interrupted at briefest intervals with cyclones of applause, the tears running down their cheeks the while; in the churches the pastors preached devotion to flag and country, and invoked the God of Battles beseeching His aid in our good cause in outpourings of fervid eloquence which moved every listener. It was indeed a glad and gracious time, and the half dozen rash spirits that ventured to disapprove of the war and cast a doubt upon its righteousness straightway got such a stern and angry warning that for their personal safety's sake they quickly shrank out of sight and offended no more in that way.

Sunday morning came—next day the battalions would leave for the front; the church was filled; the volunteers were there, their young faces alight with martial dreams—visions of the stern advance, the gathering momentum, the rushing charge, the flashing sabers, the flight of the foe, the tumult, the enveloping smoke, the fierce pursuit, the surrender! Then home from the war, bronzed heroes, welcomed, adored, submerged in golden seas of glory! With the volunteers sat their dear ones, proud, happy, and envied by the neighbors and friends who had no sons and brothers to send forth to the field of honor, there to win for the flag, or, failing, die the noblest of noble deaths. The service proceeded; a war chapter from the Old Testament was read; the first prayer was said; it was followed by an organ burst that shook the building, and with one impulse the house rose, with glowing eyes and beating hearts, and poured out that tremendous invocation: God the all-terrible! Thou who ordainest! Thunder thy clarion and lightning thy sword!

Then came the "long" prayer. None could remember the like of it for passionate pleading and moving and beautiful language. The burden of its supplication was, that an ever-merciful and benignant Father of us all would watch over our noble young soldiers, and aid, comfort, and encourage them in their patriotic work; bless them, shield them in the day of battle and the hour of peril, bear them in His mighty hand, make them strong and confident, invincible in the bloody onset; help them to crush the foe, grant to them and to their flag and country imperishable honor and glory...

An aged stranger entered and moved with slow and noiseless step up the main aisle, his eyes fixed upon the minister, his long body clothed in a robe that reached to his feet, his head bare, his white hair descending in a frothy cataract to his shoulders, his seamy face unnaturally pale, pale even to ghastliness. With all eyes following him and wondering, he made his silent way; without pausing, he ascended to the preacher's side and stood there waiting. With shut lids the preacher, unconscious of his presence, continued with his moving prayer, and at last finished it with the words, uttered in fervent appeal, "Bless our arms, grant us the victory, O Lord our God, Father and Protector of our land and flag!"

The stranger touched his arm, motioned him to step aside—which the startled minister did—and took his place. During some moments he surveyed the spellbound audience with solemn eyes, in which burned an uncanny light; then in a deep voice he said:

"I come from the Throne—bearing a message from Almighty God!" The words smote the house with a shock; if the stranger perceived it he gave no attention. "He has heard the prayer of His servant your shepherd, and will grant it if such shall be your desire after I, His messenger, shall have explained to you its import—that is to say, its full import. For it is like unto many of the prayers of men, in that it asks for more than he who utters it is aware of—except he pause and think.

"God's servant and yours has prayed his prayer. Has he paused and taken thought? Is it one prayer? No, it is two—one uttered, the other not. Both have reached the ear of Him Who heareth all supplications, the spoken and the unspoken. Ponder this—keep it in mind. If you would beseech a blessing upon yourself, beware! lest without intent you invoke a curse upon a neighbor at the same time. If you pray for the blessing of rain upon your crop which needs it, by that act you are possibly praying for a curse upon some neighbor's crop which may not need rain and can be injured by it.

"You have heard your servant's prayer—the uttered part of it. I am commissioned of God to put into words the other part of it—that part which the pastor...and also you in your hearts—fervently prayed silently. And ignorantly and unthinkingly? God grant that it was so! You heard these words: 'Grant us the victory, O Lord our God!' That is sufficient. the whole of the uttered prayer is compact into those pregnant words. Elaborations were not necessary. When you have prayed for victory you have prayed for many unmentioned results which follow victory – must follow it, cannot help but follow it. Upon the listening spirit of God fell also the unspoken part of the prayer. He commandeth me to put it into words. Listen!

"O Lord our Father, our young patriots, idols of our hearts, go forth to battle—be Thou near them! With them—in spirit—we also go forth from the sweet peace of our beloved firesides to smite the foe. O Lord our God, help us to tear their soldiers to bloody shreds with our shells; help us to cover their smiling fields with the pale forms of their patriot dead; help us to drown the thunder of the guns with the shrieks of their wounded, writhing in pain; help us to lay waste their humble homes with a hurricane of fire; help us to wring the hearts of their unoffending widows with unavailing grief; help us to turn them out roofless with little children to wander unfriended the wastes of their desolated land in rags and hunger and thirst, sports of the sun flames of summer and the icy winds of winter, broken in spirit, worn with travail, imploring Thee for the refuge of the grave and denied it—for our sakes who adore Thee, Lord, blast their hopes, blight their lives, protract their bitter pilgrimage, make heavy their steps, water their way with their tears, stain the white snow with the blood of their wounded feet! We ask it, in the spirit of love, of Him Who is the Source of Love, and Who is the ever-faithful refuge and friend of all that are sore beset and seek His aid with humble and contrite hearts. Amen.

(After a pause.) "Ye have prayed it; if ye still desire it, speak! The messenger of the Most High waits!"

It was believed afterward that the man was a lunatic, because there was no sense in what he said.

-Samuel Langhorne Clemens (November 30, 1835 – April 21, 1910)

Incidentally, this pervasive militaristic (and, quite frankly—heretical) patriotism is why I generally avoid church on Memorial Day, 4th of July, and Veteran's Day.

Devil's Advocate

As our economic woes deepen, everyone is eager to place blame at the feet of whatever nemesis his or her ideology deems fit. On the right, this entire downturn was precipitated by undisciplined and untrustworthy individuals getting sub-prime mortgages to buy homes outrageously out of their price range and then defaulting on said mortgages…triggering an avalanche that eventually lead us into the current credit crunch. Furthermore, many will claim that lenders were forced to do this because of federal “fair housing/lending” and “anti-redlining” regulations.

On the left, there is an agreement that sub-prime mortgages are at the heart of this mess, but blame is placed on the unscrupulous brokers who apparently tricked unsuspecting (and admittedly unsophisticated) homebuyers into taking risky loans just to make a quick commission, and on the “financial geniuses” who devised the now toxic “collateralized debt obligations” as well as other exotic derivatives. From this view, the whole of the rest of the cascade of events that has brought us to this point is entirely the fault of greedy (and by virtue of this unraveling—incompetent) executives, brokers, and associated “money-men.”

My view
I say there is enough blame to go around; we ALL contributed to this mess! Collectively and individually, as corporations, and governments—almost as a rule—we overextended ourselves in respect to debt; and from the most unsophisticated wage earner to the brightest minds working in the most prestigious investment firms, we all assumed that asset values, growth, and incomes would only go up. This crisis is finally the slap in the face that we all needed: we cannot borrow our way into prosperity! As the offspring of depression-era, immigrant parents, financial discipline and thriftiness was ground into me from an early age, so I have been aware of—and avoided at all costs—the trap of living beyond ones means. Never the less, I will not even hold myself blameless; I truly believe that all of us in the materialistic west have some culpability in this mess.

Reaction
No doubt, new government regulations addressing the problems that got us into this mess will be soon be put into effect; unfortunately, as backward-looking legislation, they will generally not address those issue that will eventually precipitate the next economic crisis. In fact, it is almost impossible to predict the future in this respect. The only thing we can hope for is that the laws our governments are creating will make the financial world a little more transparent; the bright light of transparency in the murky world of finance is the only reform that, in the long term, really ever works.

What I find disturbing though, is this “eat the rich” sentiment that lumps all executives and everyone in the financial industry together as greedy, incompetent, and useless. There is a disconcerting air of bolshevism in a lot of the rhetoric I’ve been hearing lately. Yes, a lot of the financial middlemen will rightly lose their jobs, and I admit that I feel a certain schadenfreude in seeing the business school colleagues who went into the finance specialty losing their lucrative positions. However it is naive to think that these functions are unnecessary and that “workers can control the means of production,” as the communist experiment of the last century disproved. We will always have executives and financiers who—by virtue of their extraordinary skills and intelligence—will demand and receive compensation commensurate with their abilities, just as highly skilled entertainers and athletes do without question.

The worst possible outcome would be the introduction of salary caps; they would most certainly be circumvented, further muddying the waters of the business and financial worlds—the opposite of what we want: transparency! Likewise, a ban on derivatives (which given the simplest definition—a bet on an underlying security—sounds like a good idea,) but would contribute more opaqueness, as these instruments would be reinvented in other forms. These exotic vehicles actually have a legitimate use: they hedge and balance other business transactions.

Bailouts
I am generally not in favour of “rescue packages” for private businesses, even large ones like General Motors that will effect dozens or hundreds of partners, thousands of employees, and maybe hundreds of thousands of others not directly employed by the company. I just have an aversion to anything that creates a distortion in the marketplace, be it subsidies, regulations, or taxes that affect one company or industry more severely than another (or, more perversely, prevents a business from entering a certain field/industry or—in the current situation—prevents it from failing/dissolving.)

That being said, I do understand why large financial institutions cannot be allowed to fail, as the resulting banking and credit crisis the would cause the entire economy grind to a screeching halt. Therefore the questions are: “how are bailout funds to be used” and “who decides how the money is used.” Specifically, whom do you trust more to “save” these firms: corporate executives—the rascals that caused (or at least contributed) the failure, or the rascals in Washington (or where ever your lawmakers/bureaucrats reside.) Quite frankly, I’m not sure of the answer myself.

Where does the money go?
On the most basic level, the problem with these troubled institutions is that their balance sheets were out of whack: their assets no longer equaled their liabilities, and therefore the government infused this money—fixing the problem. Now the question is: what happened to this bailout money? There aren’t little cubbyholes in the company’s treasury for general funds, bonus funds, electricity expenses, etc. it just become part of the company’s assets and is used in the same way that all the rest of its assets are used—fulfilling the company’s obligations to its stakeholders: investors, partners, employees, vendors, and yes—executives.

When you or I start a job, we generally negotiate or just accept a certain hourly wage or weekly to monthly salary plus a possibility of a bonus and benefits. At a certain level, these wages/salary become trivial compared to the prospect and promise of bonuses, stock options, golden parachutes, etc. Corporations must make these lucrative offers in order to hire & retain the best and brightest in the field, just as professional sports team have to offer star players multi-million dollar contracts. To those who are outraged at bonuses paid to executives at failing companies such as AIG, I ask: “where do you make the cutoff?” Imagine that you cut all bonuses and stock options for a CEO who earns a salary of $1 per year (actually very common), what is he to do? Furthermore, with this reputation, how do you expect to hire a new CEO in the future? Remember, in 1994, Ben & Jerry’s Ice Cream initially insisted that they would only pay their CEO seven times what the lowest paid employee made; despite their progressive credentials, they soon had to abandon this promise in order to find an individual of the caliber needed to guide what had become a large corporation.

Outcome
Regardless of what new regulations are enacted, we are seeing the end of the secretive back-room dealing-making that has characterized so much of the financial industry. Even if governments do nothing, the market will demand more transparency and lower costs (spreads) for financial transactions. The result will be higher returns for investors and less cost to borrowers, which of course means lower earnings for the businesses and individual that broker these transactions…and, of course, less of those high-paying financial-sector jobs.

More specifically, we will see a convergence of returns. We all know that riskier investments demand higher returns. This relationship is not punitive—it is not just to punish the reckless—it is to cover the inevitable losses that riskier investments entail. In the long-term everybody gets about the same return plus a premium proportionate with the volatility the investor must endure. What everyone has looked for was that elusive, safe investment with a higher than normal return. While there have always been a few of these, I predict that these “secret” investment will all but disappear, to the point at which we can finally say with certainty that the outliers on the risk to return graph are definitely scams (as should have been obvious with Madoff.)

The one bright spot for governments investing (and it is not just the US Federal government that is doing this) in private industry is that they are buying in at a low point; In a few years they will almost certainly have realized a substantial profit—at which time they should divest of these private concerns. It is a mistake to think that these bailouts are a gift from government to private industry; remember that Chrysler was bailed out in 1979, and by 1983 had totally repaid it 1.5 billion dollar loan to the government.

Opportunities
I find that, as individuals, this hand-wringing and finger-pointing is entirely useless; what does it help you or me to assign blame to this or that group, person, or ideology? In a time of turmoil such as now, it is prudent for a bright, young person to look around and ask, “where is this going, and where should I place myself to benefit from the inevitable changes ahead?” I really think now is the time to position oneself for the new business, regulatory, and financial climate that is coming upon us, and I am convinced that it will be characterized by more transparency—and therefore be more information-oriented, and consequently utilizing more information and communication technologies.

We have seen part of this technological revolution in finance on the personal investment front; we no longer call our broker to place a trade (from which he would take a percent or two in commission.) Instead we log on to our discount brokerage website and enter trades ourselves for a fixed $12-$15! Furthermore, on the NASDAQ stock exchange, there isn’t even a trading floor; it all takes place inside of computers. Yes, there are still brokers and market makers, but we’re definitely seeing the disintermediation of actual human beings transacting financial business. Likewise, we see that the computers of Experian, Equifax, and TransUnion (in communications with the computers of nearly all consumer credit providers) automatically determine an objective credit score for nearly every adult in America. Even loan origination (well, shopping at least) is being automated by sites such as LendingTree.com.

The ratings of corporate entities however, have long been suspect. With this crisis, we have confirmation that the stars and letter grades assigned to bonds, equities, and derivatives by the likes of Moody and MorningStar are worthless. So the obvious need is an objective system like that of the FICO (300-850) credit scores assigned individuals. I assume that someone like Dun & Bradstreet is ideally positioned to fill this need. Obviously you can’t as readily assign a single number to represent the fiscal health of a complex organization with all its divisions, subsidiaries, assets, investments, and liabilities, but together with governmental and market pressure for more transparency, I am convinced we will see the creation of one or more objective, independently audited corporate/financial rating service.

With the availability of all this data, the next obvious step is an electronic marketplace where businesses and investors can transact short and long-term lending directly without the packaging and interference of financier or their hefty commissions.

So, dear reader, if you agree with my predictions, how do you think an IT nerd with an MBA like me should position himself to catch this next wave? More specifically, where is this financial information revolution going to start—geographically and with what companies/groups? (Obviously I’m not talking about the existing and useless “financial news” industry that just speculates and rehashes earnings reports, annual reports & 10-Qs, nor the endless speculation of pundits.) I’m serious about this; I would appreciate any advice.

Do what you say

My parents taught me that it is better to say up front that you are not going to do something than to promise to do it and then not follow through. I use this common anecdote in explaining America's refusal to ratify the Kyoto Treaty to Europeans who brag—all high and mighty—about their commitment to reducing greenhouse gases (and, of course, imply that we—as a country—are the boorish, inconsiderate roommate of this planet.)

I've been following this issue for a while, watching as it has been becoming more and more apparent that the “first world” signatories to this treaty would not be able to live up to their promises. It seems that the EU—led by Germany—have almost totally backed out of their commitment; their “actual reductions might be as trivial as 4%” reports The Wall Street Journal.

So it looks like, collectively, we are the “good son” after all; when ask to step up to an impossible task, we simply said “sorry, we can't do it.”

I suppose the rebuttal would be: “at least Europe tried to make a difference,” to which I would ask did American business, innovators, and local government not try?

Oil Will NEVER Get Cheaper

The sting of higher fuel prices are probably nowhere more apparent than here in the southeast US where people drive more, earn less, and define themselves by the size of their pickup trucks and SUVs. Naturally, this distress has generated all kinds of strange theories on what’s causing these unprecedented fuel prices (actually, in constant dollar terms, we are only now returning to the elevated fuel costs of the 1970s.) Everyone from the lowly gas station attendant to Saudi oil sheik to the shadowy speculator have been a target of wrath from truck owners who have just spent $100 to fill up their tank. But what really is the cause of this increase?

The answer is simple: an unprecedented increase in global demand. Prior to the last decade, the demand for fuel—and for other resources such as metals—was more or less directly related to the economies of developed, western countries. What has changed now is that the rest of the (developing) world is catching up with us. Countries formerly behind the iron curtain and throughout much of Asia, Africa, Latin America have been held back economically for decades (by corrupt and/or incompetent governments, I would argue.) Now we are seeing economic (even if not political) liberalization across the board—you can nearly count the exceptions on one hand, and even in those countries, like Cuba and North Korea, micro-enterprises are starting to flourish. Why is this happening? Because even neo-communists like Hugo Chavez and Evo Morales recognize, at least to some extent, that freer markets are the key to economic prosperity—which, incidentally is why we shouldn’t worry so much about the leftist resurgence in South America.

The economic, regulatory, and even cultural barriers that had prevented progress over so much of the developing world have been lifting in the last two decades. This freedom, in turn, has resulted in upward mobility in the population of these countries as businesses grow and trade increases. As these people—who are the majority of the 6 billion of us here on this planet—move into a sort of middle-class (by world standards at least) they begin to demand the same kind of goods that we in the west have been used to for generations: richer food, comfortable housing with modern fixtures and appliances, and even motor vehicles. [update: see this article in February 12, 2009 The Economist]

Granted, this global “middle class” cannot be compared to America’s middle class in terms of conspicuous consumption and outright waste. In fact, nobody could reasonably expect any country, industrialized, “transitioning,” or developing, to ever approach the wasteful level of energy use of Americans. However, even if the rest of the world begins to use just one-fourth of the level of resources per capita of Americans, we are looking at an incredible amount of increase in demand for everything that is mined, manufactured, and grown.

Consider Tata Motors of India; its new $2500 “Nano” 4-seater is in the price range of this emerging, third-world middle class. This means that, theoretically, there could soon be a billion (or even billions of) new cars on this planet! Compare this to the millions of cars that are sold in the west, and you will see why I think that high fuel prices are here to stay; demand has exploded, and will continue to grow at an exponential rate—a rate that supply will have a hard time to match. I realize that fuel prices have dipped back down a little in the last few months (and SUV owners are breathing a little easier,) but I am talking long-term trends here. I have yet to see anyone demonstrate how global supply of fuel or any other natural resources—for that matter—can possibly rise as fast as worldwide demand is ramping up. [2016 Update] Do-oh, I guess that I didn't have any idea about fracking in in 2008

When you look at the potential (and likely) rise in global consumption of almost any resource now, it is downright scary! Furthermore, this surge has just begun; when it comes to gasoline, California alone still uses more gasoline than any other country beside the US (Wired article.) This year, China is poised to overtake this one state in gasoline usage, but certainly not the entire US. This is both an indictment of our (and especially California’s) car culture (China has 1.1 billion inhabitants compared to California’s 36 million,) and an alarming preview of how much more of this particular resource we will needed in the future.

What is being proposed?

Everyone is looking for a silver bullet to solve this problem. There is a widespread assumption that some breakthrough is on the horizon that will save us from having to face difficult choices, and—on the fringes—there are those that think technologies are being purposely suppressed by incumbent energy companies and even governments. Whether we are talking about ethanol, bio-diesel, hydrogen fuel cells, electric cars, solar panels, or wind power, what is consistently overlooked—or perhaps omitted—are the facts regarding the lead-time for these technologies, the energy debt they require, and the simple physics that prevent some from ever becoming an effective solution.

Regardless of how revolutionary a new energy source or method of using energy more efficiently may be, it is practically impossible for such an invention to ease our energy crunch this year, or next, or even 4 years from now. Assuming you’ve invented a widget that would make all current cars twice as efficient, and it is so simple that it requires no further research and development; it would still take years to manufacture, distribute, and install this device. (Incidentally, I trust that you already know that ALL after-market gas-saving devices out here are total scams, the only way they can work is by placebo effect—you may subconsciously drive more carefully after installing one of these devices.)

Likewise, if solar panels finally crossed that magical tipping point of economic feasibility, we simply couldn’t make them fast enough to supply our energy needs because the very manufacture, transportation, and installation of these “energy saviors” would require several times more energy than they produce in a year—not to mention the all the aluminum, steel, copper, glass, silicon, and various other esoteric (and often toxic) materials used to produce solar panels. The same goes for wind power, despite this article’s assertion that offshore wind farms could produce all of America’s current electric needs, neither the article nor any of the comments below it address the energy and natural resource requirement of such a enormous project. Please don’t misunderstand me, I am not against alternative energy; I think it’s a shame that America lags Europe in this respect—places like Germany and Denmark already produce a significant percentage of their electricity by wind and solar. All that I’m saying is that this can’t happen overnight. [Update 6-Sept-08] Just found this article that show how urban wind turbines are actually bad for the environment!

Hydrogen is being touted as the ultimate in alternative fuels for vehicles, since its only emission is water vapor. However, free hydrogen does not exist on earth; it only occurs in compounds with other elements: namely with oxygen, to form water; and with carbon to form various hydrocarbons. In order to isolate hydrogen from these compounds you have to use more energy than the hydrogen can ever produce, regardless of whether it is used in a combustion engine, fuel cell, or an entirely new, revolutionary technology. These are the laws of physics that simply can’t be broken (see this article.) Therefore, all hydrogen can ever be is a method of energy storage—just like a battery. This, in turn, would require even more clean electrical power generation than mentioned in the previous scenario in order to be a truly environmentally-friendly solution.

What can’t we do?

Obviously we cannot prevent the third world from developing. I use the word “cannot” in every sense of the word; it is nearly impossible to stop the “invisible hand” of the free market from expanding these economies, certainly any coercive action to keep the third world in its previously underdeveloped state would be unthinkably immoral, and even requiring—or just encouraging—policies that would mitigate the impacts that we have experienced in our development over the last century, seem incredibly hypocritical to third world populations that now want to “test out their new wheels!” In other words, I think we have no moral authority to prevent the third world from following the path we have already taken regardless of the economic and environmental outcomes.

What needs to be done?

Depending on your background and political biases, you likely lean towards either conservation or further development of existing supplies. Certainly everyone is for developing alternative energy sources—well except for those that feel their homes or properties will be directly or indirectly effected (interesting nutcases against wind turbines.) However, I think it is obvious that we need to do all of the above. Despite the manifestly evident need for conservation, no politician is going to propose this, since it reeks of weakness (remember Jimmy Carter’s “sweater speech”?) Thankfully, the market will take care of this…which brings me to my next point.

What will happen?

What will happen is that the market self-corrects. Naturally, as the demand for something increases, the price does as well—thereby tempering the demand while, at the same time, encouraging greater production of said resource and its substitutes (alternative energy in our case.) This is why it is so important that our leaders do nothing to distort the market. McCain and Clinton’s proposed gas tax holiday was just such a bone-headed idea: it would have softened the very necessary market signals that tell us, as consumers, to reign in our consumption and producers (including alternative energy upstarts) to ramp up production, exploration, research, and development. Likewise, incentives to produce ethanol from corn, which is horribly inefficient, has proven to be a boondoggle that nobody but Iowa corn growers benefit from.

The other option is to introduce a dizzying array of counter-balancing regulations, taxes, and subsidies: laws and incentives to force individual and industrial consumers to conserve artificially inexpensive resources plus incentives and outright subsidies to producers to increase production and develop new sources despite a price that is too low to make an economic case for such investments. These prohibitions and inducements would, of course, be gamed by all sides despite legions of bureaucrats to administer it all!

I have been planning to write and publish the post for some months now. What has happened in those intervening months seems to counter my thesis that fuel prices will remain high indefinitely. The reason that fuel prices have fallen (slightly) this summer is that demand has slumped—bringing about the concept of a “staycation” for instance, and production has risen—Canadian oil sands are now economically feasible for example. However, as I’ve said before, this is a temporary dip; the pent-up demand for fuel and other resources in the developing world will only continue to rise, negating the effect of all our conservation efforts. Furthermore, the higher cost producers require to maintain new sources such as marginal oil wells or oil sands means that we can never get back to the prices of the previous decades unless worldwide demand commensurately shrinks to that time as well, idling these more expensive resources. (Interesting CNN article about this)

We simply need to get it through our thick skulls that energy will never again be as cheap as it used to be. The recent rise in fuel prices is not an anomaly that will quickly pass; oil (and other natural resources) are indeed scarce enough to demand these prices (not to mention yet unknown cost of environmental impacts of using said resources.) We now need to reorganize our lives and communities to deal with this new reality. Ever the optimist, I actually think that—for the most part—we are learning this. For example, even the gearheads at Motor Trend are admiring compact, fuel efficient European cars.

[Update – March 2009] With gas still under $2/gallon, and no sight of a serious economic recovery in the near future (necessary for demand to rise,) one might think that I would want to retract this post. However, I stand by everything I have written here last year. I am confident that, in the long-term, I will be vindicated in saying this is just a temporary dip in the price of fuel. No one knows how long this recession will last, and even after a recovery there will be a surplus of oil that has been cached all around the world during this period of low demand. Never the less, I challenge anyone to claim the following is bad advice: “Do not allow your local car dealer to convince you that now is a good time to buy a gas-guzzling SUV or truck because gas prices are going to stay low. Within the service life of any new vehicle you buy now (let’s say around 5 years,) gas will rise back up to the $4-$5 per gallon range.”

[2016 Update] OK, I give up. I was wrong. Largely as a result of the fracking revolution, America suddenly has more oil than it needs. However, I still would not buy an SUV; regulatory pressure and long-suppressed uptick in resource demands from the developing world still loom in our future.

You can’t sing that, it’s my song!

I suppose the story is the same between young siblings and/or cousins in families across the world: a mother teaches her son or daughter a song, and the child takes ownership of the song to such an extent that you eventually hear something to the effect of: “You can’t sing that song, it’s my song!” when an older sibling (or cousin, or even uncle) provokes the little one by daring to sing his or her song.

It’s all very cute for small children, but we wouldn’t expect to see this kind of childish behavior among adults, and especially in the NGO world where everything is supposedly for the greater benefit of mankind. So it was with great interest that I read these recent articles about the explosion in commercial microfinance (positive and negative ) in BusinessWeek.

Microlending (a.k.a. micro-loans) have been the bailiwick of non-governmental development organizations (NGOs); I would goes so far as to say they have been the single, most effective use of these organizations’ funds. Their funding, which can come from a number of public and private sources, is given with the explicit or implicit stipulation that they will be used to help needy people of the underdeveloped world. Prior to Muhammad Yunus’s revolutionary idea of making tiny—by our standards—loans to poverty-stricken entrepreneurs in the developing world, development funds were generally either given to the governments of these developing countries, or used by the in-country aid agencies.

Of course, direct payments to a 3^rd world government or its associates does about as much good to the suffering people of in their country as wiring the money directly into their leaders’ personal bank accounts, because that is where most of it ends up anyway. Assuming this is an unfairly harsh characterization, at the very least and by virtue of the underdeveloped state of their economy, the policies put in place by these governments (of course it is always the previous regime’s fault) demonstrate that, collectively, the government is horribly incompetent—therefore, a direct payment is throwing good money after bad.

On the other extreme, you can send in your own people to administer the disbursement of these funds, but regardless of how idealistic they are, if they are intelligent, competent and successful, they will need to be properly compensated and will require a nice home with western amenities, an office with air conditioning, and a Land Rover to negotiate the poor roads. Besides eating away a good portion of the funding—ultimately intended for the suffering population you are trying to help—this also causes a certain amount of resentment from local staff and the population in general.

Regardless of which method you choose, you will only be able to help a small number of individuals or businesses in any particular country. This is the simple reality of the situation: the need is great, but your budget is limited—even if you have the backing of someone like USAID (the US government) or UNDP (the UN.) This, in turn, creates “islands” of development aid. While these “islands” usually have a geographic characteristic (concentrated around the capital and other major cities) it more accurately describes the network of people that are “in” the development community; in other words, those that get the help do so because they know people, know how to fill out a grant application, etc. Those that are outside of this “island” have little chance of getting any help (either monetary or technical), and again this is regardless of the idealistic and egalitarian intent the program may have been set up with—this is just how it work; some get seconds before equally deserving entities get anything.

Returning to the topic of microfinance, this is generally a wonderfully effective use of development funds. The purpose of each loan is to create or expand the business of a desperately under-served entrepreneur/small businessman—giving them something, even if only a subsistence job, where before was absolutely nothing. In effect, each loan is a direct, targeted (albeit very small) aid package to an individual, family, or small business that would otherwise have no access to capital due to a total lack of credit history, collateral, or any other traditional way to demonstrate creditworthiness. Incredibly, micro-loans—as they’ve been administered—have a surprisingly high repayment rate. This means that as loans are paid back (and with interest) this money can be lent out again and again—eventually benefiting many more people than any other development program could do with the same amount of money. Microlending has deservedly become popular throughout the development community; even the smallest NGOs and religious organizations are getting into the game. Since you are already on the Internet, you can even surf on over to kiva.org and make you own micro-loan!

Naturally, financial institutions have woken up to this lucrative market, and entered the mix. Now some in the NGO world, especially Mr. Yunus, are crying “foul!” However, in practice, the high ideals of people who say that we should not make money from the poor in this way are simply limiting the opportunities of a vast population who are simply not “connected” enough to be one of the few, lucky ones who gets a loan from an NGO. Regardless of their intent—in my mind at least—they come out looking like the child who says, “you can’t sing my song” or, worse the hood who says, “hey, that’s my turf!” The whole purpose of micro-finance is to provide capital to previously underserved populations; now that traditional players are doing so, Mr. Yunus and the rest of the NGO community should pat itself on the back for making a real, effective change in the world instead of worrying about their own turf.

Granted, part of their complaint is that these for-profit entities charge too much interest, but as more commercial players enter the market, the interest rate will naturally settle to a level commensurate with the risk of such loans. We know from basic economics that the riskier an investment, the higher interest (or other form return) that will be expected. This risk/reward curve gets a little discontinuous at the extreme where defaults are very common, but let’s remember that even the slimiest payday lender is providing credit to someone who has no other alternatives.

Likewise, I am concerned about the Mexican big-box retailers mentioned in this article that are marketing the western “have it now, pay later” lifestyle that may cause more harm than good to these desperately poor people; but who am I to say that only I and my fellow middle-income earners of the world should be allowed to have these modern conveniences? In this regard, concerns about payday/title loan sharks in the US and questionable lenders in the developing world both result in a very paternalistic view of the “great unwashed masses” of the world—which I am willing to concede is sometimes warranted, but doesn’t have a place in discussions of a free market.

Déjà vu

This issue reminds me of a very similar complaint last year from Nicholas Negroponte of the One Laptop Per Child project. (WSJ article) He was whining that Intel, Microsoft, HP, et al were chipping away at his non-profit’s business after he and his brilliant team from MIT developed the versatile and inexpensive (although never quite reaching the promised $100 price point) XO computer for underprivileged children across the world. Again, he should have simply declared victory—these huge incumbent companies are now making low-cost computers to fill a previously underserved market: the developing world. Instead he questioned their motivations—namely that they were just temporarily lowering their prices to get the developing world hooked on the WinTel platform (instead of his open-source platform.)

Disclaimer: This is in no way an indictment of any organization that I have been associated with, rather it is a general observation of international development efforts that I've seen during my stint in this field and from my continued interest in this area since then.