domingo, abril 26, 2015

SAVE OUR SOILS / PROJECT SYNDICATE

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Save our Soils
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Barbara Unmüssig
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APR 22, 2015

Erosion soil construction site

BERLIN – The United Nations has declared 2015 to be the International Year of Soils, and April 19-23 marks this year’s Global Soil Week. Such events, though not exactly glamorous, do not receive nearly the amount of attention they deserve.
 
Intact soils are an invaluable and irreplaceable resource, one that performs myriad functions in achieving the international community’s main development and environmental goals. And now they are in urgent need of protection.
 
Healthy soils are crucial to human nutrition and the fight against hunger. We rely on them not only for food production, but also to create new drinking water. They help to regulate Earth’s climate, storing more carbon than all of the world’s forests combined (only the oceans are a larger carbon sink), and are essential to maintaining biodiversity: a handful of fertile soil contains more microorganisms than there are humans on the planet. Two-thirds of Earth’s species live beneath its surface.
 
But erosion and contamination are placing soils under severe stress. Worldwide, 24 billion tons of fertile soil is lost annually, partly owing to the growth of cities and infrastructure. In Germany alone, construction projects claim an average of more than 75 hectares per day.

Inappropriate agricultural practices are also to blame: the liberal use of synthetic fertilizer, for example, decimates organisms inhabiting the soil and changes its structure. It takes millennia for fertile topsoil to form; in many places, a cloudburst is now all it takes to wash it away.
 
At the same time, global demand for food, fodder, and biomass for fuels is growing, in turn driving up the value of land – a fact that has not escaped international investors’ attention.

According to a World Bank estimate, 10-30% of arable land worldwide – land that would be used by millions of smallholders, pastoralists, and indigenous people – has been affected by large-scale investment.
 
The struggle to secure land rights for individuals and communities has thus become a matter of survival in much of the world. Access to land is one of the key determinants of hunger, and it is even more unequally distributed than income. Some 20% of households affected by hunger are landless, and 50% of food-stressed households are smallholder families.
 
In Europe, we have long since outgrown our domestic agricultural land, so now we “import” it on a grand scale from the global South. Just producing the fodder needed to cover the European Union’s meat consumption requires an area of agricultural land in Brazil the size of the United Kingdom. If every human ate as much meat as the average EU citizen, 80% of the world’s arable land would have to be dedicated to producing it, compared to 33% currently.

And let us be clear: given that 100 calories of fodder produce at most 30 calories of meat, using fertile land for this purpose is sheer waste.
 
This trend will be exacerbated to the extent that the “green growth” that many governments are promising relies on biofuels to replace fossil fuels like oil and coal. Biofuels do not benefit the climate nearly as much as wind or solar energy systems, yielding only one-tenth the energy per square meter. As a result, the biofuel requirements contained in the EU’s 2030 Framework for Climate and Energy would need a further 70 million hectares of land – an area larger than France.
 
Protecting soils need not undermine prosperity. On the contrary, sustainable soil-protection practices can actually boost agricultural yields – especially those of smallholders. Crop diversification, recycling, and soil cover can all contribute to living, fertile, and active soil capable of optimal water management.
 
One approach, so-called agro-ecology, is based on small farmers’ traditional knowledge and experience, making it readily adaptable to local conditions. A study of agro-ecological farming practices by Jules Pretty in 2006 examined 286 sustainable agricultural projects in 57 countries and concluded that yields had increased an average of 79%.
 
Despite the proven success of such methods, the use of synthetic fertilizers has increased by a factor of more than five over the past 50 years, and many African governments spend up to 60% of their agricultural budgets to subsidize them. Particularly in tropical environments, such products lead to the destruction of the topsoil and biodiversity loss (and the runoff is transported to the oceans, where it damages marine ecosystems). And, though their main component, nitrogen, could be produced biologically and sustainably, that would run counter to the interests of a handful of powerful fertilizer producers and distributors.
 
Policymakers must address the following question: How can poor people produce enough food to escape hunger and destitution in a manner that protects soils, mitigates climate change, and preserves biodiversity?
 
Despite the issue’s urgency, approaches like agro-ecological production are not being promoted to any serious extent anywhere. Events like the International Year of Soils and Global Soil Week offer an opportunity to change that – from the ground up.
 

China's New Investment Bank: A Premature Prophecy

By Mark Fleming-Williams

April 22, 2015 | 08:00 GMT


Former U.S. Treasury Secretary Lawrence Summers wrote on April 5 that this month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. His comments refer to the circumstances surrounding China's launch of a new venture, the Asian Infrastructure Investment Bank (AIIB). Wary of China's growing ambitions and influence, the United States had advised its allies not to join the institution, but many signed up anyway. The debacle was undoubtedly embarrassing for Washington, but even so, Summers' prophecy is a bit premature at this stage.

To understand why, one must first understand the basis of the United States' dominant economic position in the world. At the height of World War II, the heavily indebted United Kingdom signed the Lend-Lease deal, which handed over British naval bases to its American cousins in exchange for financial support. This act was akin to passing the military superpower baton, since it transferred control of the world's oceans to the United States. Then, three years later, in a slightly run-down hotel in New Hampshire, delegates from each of the major Allied nations spent three weeks at the Bretton Woods Conference, where they shaped the postwar economic order. What emerged from the summit was a monetary system that was based on the U.S. dollar and two new institutions: the International Monetary Fund, which would monitor trade flows, and the World Bank, which would help provide financing for developing nations.

Both were to be headquartered in Washington, and the United States effectively inherited the global economy. 

The U.S.-centric system functioned well for the next 25 years. The United States had emerged from the war with the world's strongest economy and, under the Marshall Plan, pumped money into the reconstruction of Europe. But in 1971, as the United States was entangled in a costly war in Vietnam, then-President Richard Nixon discovered that under the Bretton Woods system, he could pay for the war by printing more money and exporting the resulting inflation to the rest of the world. France pushed back, and a new fiat currency system that released the dollar from its explicit anchoring role was born, though it nevertheless retained its place as the dominant global currency.

For the United States, its position as the spider at the center of the web has turned out to be a mixed blessing. As the heir to what former French President Valery Giscard d'Estaing called the "exorbitant privilege" of controlling the world's reserve currency, the United States has become the number one consumer, running constant deficits and amassing ever-larger debt from its position as the global supplier of dollars.





Thus, the United States and the rest of the world have been locked in a symbiotic embrace for several decades, even as America's underlying fiscal position continues to deteriorate. But looking at its fiscal position alone misses the bigger picture.

Over the past few decades, the United States has retained its position at the head of the world's international monetary institutions. In 1966, a U.S. and Japanese regional version of the World Bank — the Asian Development Bank — was established and headquartered in Manila. That same year, Mao Zedong launched the Cultural Revolution, a political movement that paralyzed China and left it even less focused on international affairs than before. Despite the changes in China's global position that have since taken place, its presence in the institutions like the Asian Development Bank has not risen. (China only holds one-fifth of the combined U.S.-Japan voting share, and each of the bank's nine presidents has been Japanese.) Unsurprisingly, the bank has often been criticized for being too U.S.- and Japan-centric.

China: The Next United States?

China's arrival on the global scene could shake up the status quo. The growth model Beijing followed after undertaking economic reforms in 1978 was similar to those of postwar Japan and 21st-century Germany. By keeping internal costs low and running a large current account surplus, China has been able to accumulate a gigantic pool of savings (about $3.8 trillion). It is now in the middle of a great rebalancing, as the country tries to shift from a savings and investment model to one of consumption — in other words, to move toward becoming the next United States. From the perspective of America's allies, China is a giant country with a huge sum of money it might need help spending and is trying to become a vast new market of consumers. The similarities of its current position to the United States' own in 1944, when it too had a giant current account surplus, are clear. Whatever the reality of China's economic trajectory over the next decade, America's allies are orienting themselves around this idea.

Meanwhile, China — with its vast financial resources and plenty of regional projects upon which to spend them — found the regional institution through which it could funnel this money to be sewn up by the United States and its allies. Since the U.S. Congress has now spent five years determining whether China's voting rights in the IMF should be expanded to reflect its new economic clout, it made more sense for China to simply create its own institution rather than try and gain influence in the pre-existing Asian Development Bank. Thus the AIIB was born. 

This new institution, though not key to the economic futures of, say, Australia and the United Kingdom (two U.S. allies who signed on to the AIIB as founding members), nevertheless provides countries an opportunity to build a relationship with tomorrow's market giant. Each country that joined the AIIB calculated that the fraction of favor gained in Beijing through their participation was just enough justification to risk Washington's disapproval. This is indeed a significant moment, and it has been painted by some in the media as a challenge to the entire Bretton Woods system and a threat to the status quo.

But these events do not represent a tectonic shift on the order of 1944. For the Bretton Woods and Lend-Lease deals to take place, and for Britain to hand over the reins, two elements had to be in place: time and a major disruption. The size of the burgeoning superpower was not enough; the U.S. economy became the largest in the world in 1870, a full 74 years before the Bretton Woods conference, but British primacy continued. It took two world wars in which Britain faced an existential threat and Winston Churchill's declaration of total war in 1940 before the country's economic security reached a low enough ebb that Britain was willing to hand over its best cards in exchange for financial relief.

By contrast, the size of China's economy only surpassed that of the United States' in 2014, and it took an accounting magic trick — purchasing power parity, the adjustment of figures to reflect different relative costs in two different countries — to do so. And in terms of currency, the Chinese yuan has made great strides in the past two years, streaking from the 14th- to the fifth-most used in international payments. But the yuan still only has about a 2.2 percent share of international payments; it has a long way to go before it begins to truly challenge the U.S. dollar's 44.6 percent share. Also, the Chinese currency is not fully convertible, which is a major requirement for any possible reserve currency. The final reason we have not yet seen a Bretton Woods moment between the United States and China is that we have not seen a Lend-Lease deal. The United States maintains its control of the world's sea-lanes and thus has the ultimate decision-making power over global trade.

Without the onset of a massive disruption — you would know it if you saw it — this state of affairs is unlikely to change anytime soon.




The vehicle that drives the rise and fall of empires rests on big wheels, and it takes a strong force applied over an extended period of time before an entire revolution can take place. The agreements struck during World War II marked the culmination of a long process in which the United States rose and Britain weakened. China has indeed undergone a remarkable transformation over the past three decades, but it is not yet in a position to effectively challenge the pillars upon which the United States' global hegemony rests.

Debating the Confidence Fairy
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Robert Skidelsky
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APR 22, 2015

Fairy wings train tracks slump


LONDON – In 2011, the Nobel laureate economist Paul Krugman characterized conservative discourse on budget deficits in terms of “bond vigilantes” and the “confidence fairy.” Unless governments cut their deficits, the bond vigilantes will put the screws to them by forcing up interest rates. But if they do cut, the confidence fairy will reward them by stimulating private spending more than the cuts depress it.
 
Krugman thought the “bond vigilante” claim might be valid for a few countries, such as Greece, but argued that the “confidence fairy” was no less imaginary than the one that collects children’s teeth. Cutting a deficit in a slump could never cause a recovery. Political rhetoric can stop a good policy from being adopted, but it cannot stop it from succeeding. Above all, it cannot make a bad policy work.
 
I recently debated this point with Krugman at a New York Review of Books event. My argument was that adverse expectations could affect a policy’s results, not just the chances that it will be adopted. For example, if people thought that government borrowing was simply deferred taxation, they might save more to meet their expected future tax bill.
 
On reflection, I think I was wrong. The confidence factor affects government decision-making, but it does not affect the results of decisions. Except in extreme cases, confidence cannot cause a bad policy to have good results, and a lack of it cannot cause a good policy to have bad results, any more than jumping out of a window in the mistaken belief that humans can fly can offset the effect of gravity.
 
The sequence of events in the Great Recession that began in 2008 bears this out. At first, governments threw everything at it. This prevented the Great Recession from becoming Great Depression II. But, before the economy reached bottom, the stimulus was turned off, and austerity – accelerated liquidation of budget deficits, mainly by cuts in spending – became the order of the day.
 
Once winded political elites had recovered their breath, they began telling a story designed to preclude any further fiscal stimulus. The slump had been created by fiscal extravagance, they insisted, and therefore could be cured only by fiscal austerity. And not any old austerity: it was spending on the poor, not the rich, that had to be cut, because such spending was the real cause of the trouble.
 
Any Keynesian knows that cutting the deficit in a slump is bad policy. A slump, after all, is defined by a deficiency in total spending. To try to cure it by spending less is like trying to cure a sick person by bleeding.
 
So it was natural to ask economist/advocates of bleeding like Harvard’s Alberto Alesina and Kenneth Rogoff how they expected their cure to work. Their answer was that the belief that it would work – the confidence fairy – would ensure its success.
 
More precisely, Alesina argued that while bleeding on its own would worsen the patient’s condition, its beneficial impact on expectations would more than offset its debilitating effects. Buoyed by assurance of recovery, the half-dead patient would leap out of bed, start running, jumping, and eating normally, and would soon be restored to full vigor. The bleeding school produced some flaky evidence to show that this had happened in a few instances.
 
Conservatives who wanted to cut public spending for ideological reasons found the bond vigilante/confidence fairy story to be ideally suited to their purpose. Talking up previous fiscal extravagance made a bond-market attack on heavily indebted governments seem more plausible (and more likely); the confidence fairy promised to reward fiscal frugality by making the economy more productive.
 
With the help of professors like Alesina, conservative conviction could be turned into scientific prediction. And when Alesina’s cure failed to produce rapid recovery, there was an obvious excuse: it had not been applied with enough vigor to be “credible.”
 
The cure, such as it was, finally came about, years behind schedule, not through fiscal bleeding, but by massive monetary stimulus. When the groggy patient eventually staggered to its feet, the champions of fiscal bleeding triumphantly proclaimed that austerity had worked.
 
The moral of the tale is simple: Austerity in a slump does not work, for the reason that the medieval cure of bleeding a patient never worked: it enfeebles instead of strengthening.

Inserting the confidence fairy between the cause and effect of a policy does not change the logic of the policy; it simply obscures the logic for a time. Recovery may come about despite fiscal austerity, but never because of it.
 
Although Krugman invented his discourse for an American readership, it perfectly fits the British case as well. In his first budget in June 2010, Chancellor of the Exchequer George Osborne warned that “you can see in Greece an example of a country that didn’t face up to its problems, and that’s a fate I am determined to avoid.”
 
In presenting the United Kingdom’s 2015 budget in March, Osborne claimed that austerity had made Britain “walk tall” again. On May 7, that claim will be put to the test in the UK’s parliamentary election. British voters, still wobbly from Osborne’s medicine, can be forgiven if they decide that they should have stayed in bed.
 

Pascal’s Wager

Jared Dillian
Editor, The 10th Man

April 23, 2015


Do you believe in God?

Whoa, wait a minute, this is an investment newsletter, right?

Stay with me.

I’m an armchair philosopher, and I’ve always wished I’d had the opportunity to be a philosophy major, because I can navel gaze with the best of them. But since then, I’ve come to know some actual philosophy professors, and as it turns out, they tend to not get along with other philosophy professors, which makes departmental politics a little toxic.

I can’t remember exactly when it was that I learned about Pascal’s Wager. 17th-century French philosopher Blaise Pascal postulated that it is rational behavior to believe in God.

Why believe in something for which there is no evidence? The answer lies in decision theory.

If you believe in God and you’re right, you go to heaven. Let’s call this “infinite gain.”

If you believe in God and you’re wrong, the only thing you lose is whatever time you spent in church and/or money you donated. It’s a finite loss.

If you don’t believe in God and you’re right, there is no God, you get to be smug. That is a finite gain.

If you don’t believe in God and you’re wrong, you go to hell. Let’s call this infinite loss.

Here it is in table format:


I think most people who understand decision theory will recognize this immediately. So yes, it is indeed rational—meaning in our best interest—to believe in God.

As it turns out, Pascal’s Wager is all over the place in markets.

Best example: Japan in 2012.

There’s this new prime minister, Abe, and this new Bank of Japan governor, Kuroda. They’re going to do this thing called Abenomics. They say they want to print trillions of yen to buy all kinds of assets, which is going to reflate the markets and devalue the currency.

Now ever since the crash of the early 1990s, Japan has had numerous plans to get out of deflation. Japan being Japan, not much changes there, and they end up just getting bogged down in bureaucracy. This has happened at least a dozen times in the last 20 years. So why believe them this time?

Table again:


Boy, did some people have to learn this the hard way. For the record, I’m still long the WisdomTree Japan Hedged Equity Fund (DXJ) and short the yen (JPY) 2.5 years later. I’m still in the trade because it’s the only trade in the markets that literally has infinite upside.


The people who were yelling at me that Japan was going to zero have a lot in common with the very vocal atheists you see on Facebook. They have an overwhelming desire to be right all the time. I don’t care if I’m right—I just want to make money!

The Nikkei went from 40,000 to 8,000. If it goes from 8,000 to 7,000, I make 12.5%. If it goes from 8,000 to 20,000 (which it just did), that’s a 150% gain. But some people like to say, “I told you so.” It’s worth more to them than money.

I will also point out that if you’re short, the most you can make is 100%, but if you’re long, there’s no limit to how much you can make. It’s hard work being a short investor. I wouldn’t run a dedicated short fund no matter how much you paid me. I’d rather pump gas.
 
Belief and the Black Box

I don’t think anybody really understands China. I think even the people who say they understand China don’t understand China.

How can you understand China? It’s a black box spitting out bogus economic statistics. 7% GDP? We all know they were in recession.

Two things you need to know about China:

  1. They are very capitalist. Way more than us. It’s the new land of opportunity. There are surveys showing this.
     
  2. They really want someone to organize society. The Chinese people just aren’t into spontaneous order.

This is a new thing in the 21st century. We’re learning that it’s possible to be capitalist in the context of a command-and-control government.

Now, as recently as 2008, I believed this would never work. Capitalism, I thought, was incompatible with planning. The Chinese went and borrowed a ton of money to build ghost cities they plan to move 300 million people into. If we tried this here in America, it would be a disaster. We can’t even build a subway line on Second Avenue.

So back in March 2013, that 60 Minutes piece on China’s ghost cities got investors really nervous—and ever since then, people have been waiting for the debt bomb to blow up.

But as I said, it’s a black box.

Everyone knows what happened next: the fake economic data started getting worse, commodities markets crashed, and people were speculating that China pulled forward demand for things like steel and iron ore 50 years.

But then, abruptly:


The market went up 20% in a matter of weeks. And then, in unison, the financial media said: It’s a bubble!

I found that odd. Usually when something goes up 20%, it’s not a bubble, especially in the context of the longer-term chart.


 
So remember, nobody understands China. It’s a black box. There’s no way to tell if it’s a bubble or not.

Pascal’s Wager again:


 
Needless to say, I’m long China A-shares, through the Market Vectors ChinaAMC A-Share ETF (PEK).

In general, there is more money to be made believing in things than not believing in things.

But aren’t we taught to be skeptical? What about Enron? Or Lehman?

There’s a time for that too, but trades like that always seem to happen in bear markets (because in bull markets, nobody asks the hard questions). So it’s situational.

I hate China. Absolutely hate it. I think it’s smoke and mirrors. It’s all going to blow up someday. But I look at the chart, and I change my mind.

China is fixed.

They’re going to pull it off.

Bull market again.

I love China.

I will believe pretty much whatever you want me to believe as long as I think I can make money off it.