Sunday, April 25, 2010

Power Grid or Bars on the Cell of our Imagination?

Please see the comment from Jan de Dood attached to the end of this post and added April 27, 2010

Ever since the run up to Copenhagen, I have been intrigued by the degree to which those who seem to care about the climate have seemed to be oblivious to the madness that has spoiled it. The madness to which I refer is the fact that a meta-challenge underpinning the havoc we’re wreaking on the environment is our terribly unimaginative view of efficiency. We use electricity because our appliances require it. We don’t stop to ask whether taking a fuel from the ground or sky and using it to heat water to create a pressure gradient to drive a turbine to put a variable charge into a copper wire to run over great distances to get to our homes so that we can use a compressor to create a pressure gradient so that we can chill our beverage makes as much sense as our consensus illusion wishes it would. We don’t ask how much copper has to mined from how many lands dispossessing how many people so that we can have a more efficient power grid that reduces carbon emissions by 20%. We don’t consider whether Prometheus’ theft of fire means that we always need combustion for locomotion.

While we continue to focus on climate change and CO2, we are missing the elephant in the room. Our commitment to electricity (an addiction that goes unspoken) is something that not only leads to the pollution problems we have, but is the “drug trade” that supports resource extraction, capital market inefficiency and a host of other ills. In the graphic below, you see that based on mechanical inefficiency ALONE, just to run a refrigerator, we have to over-supply 188% of the power requirement just to get to the outlet to run the compressor.

And this analysis pays NO attention to the fact that the steel, water or land contamination, water use, transmission metals (copper, etc) all are MISSING from this equation. If we didn’t have our copper addiction (the syringe for our electricity heroin), the South American, Mongolian, Chinese, North American and African environmental carnage would be defused. Our best estimates (when we include land, water, metals, etc.) suggest that a refrigerator actually requires over 500% energy inefficiency which could be largely deconstructed if we engineered devices which create mechanical compressing functions rather than running an electric compressor. In short, by asking the wrong question and diagnosing the wrong disease, we wind up frustrated in solutions which don’t achieve their objectives.

Second, the analysis above masks the fact that the 500% inefficiency supplies the “investment” inventory for those who promote debt and equity models – both of which lead to resource asymmetry and injustice. Think about it. If we didn’t support the metals and fossil fuel (commodity), the refining, shipping (equity and private debt resulting in over 30% of the S&P value), transmission and utilities (public debt and equity), we wouldn’t have much of the frictional resource waste of capital but we’d also have resource abundance to distribute in other fashion. So when we suggest “climate equity, bonds, or other structures” what we’re really saying is that we will replace the idol of production or consumption, but we’ll leave the inefficiencies (actual and capital) unaddressed. In short, unless we confront the currency of the drug trade, we’ll just be swapping dose but the addiction and resulting injustice will flourish.

Therefore, we need to consider whether we can “solve” anything if we ignore the inventory / supply of capital products which make mandatory the preservation of obsolescence avoidance behaviors which destroy the environment. We need to engage in a dialogue about the degree to which promoting bonds, equity, tax-credits, etc, simply replaces one dealer for another. In an interest to elevate our dialogue around a change of climate of our consciousness, should we consider modes of value creation which are linked to incentivizing fruitful production with a warm embrace to obsolescence in favor of our compromise capital systems which preserve incumbencies of injustice and scarcity? If not, our addiction and the consequence thereof remains unaltered.

And when we consider that our electricity addiction is a symptom of a deeper condition – an illusion of the control of “power” in a world from which we’ve detached ourselves from the empowerment of a unified ecosystem of living dynamism – we realize that the 60Hz hum is a mantra that simply drowns out deeper contemplation. In my next post, I’ll suggest a few ideas about trust, fear and risk which live at the heart of the illusion. So, stay tuned…

The Following is a Comment by Jan de Dood and was too big for the Comment field...

Dear All,

This weekend I had some time to think about the document which David attached in his invitation to the Dialogue about “The Elephant in the room” or Electricity addiction. I must say that I was aware that we were not very efficient in many ways, but had not seen this kind of figures before and it is quite eye-opening. Looking at the pictures that were in the document, especially the one called The Cost of Our Electricity Addiction, I tried to place it in the context of my thoughts about the transformation of the world we are living in. Although this can be already known by some of you in one way or another, I feel I have to share this with you.

First a short introduction of myself to give you some context of my remarks:
As some of you may know I am a risk manager within the financial world and a kind of Philosopher/thinker when it is concerning the Transformation and Future of our world. My work as a risk manager is done within the Rabobank, the cooperative bank based in the Netherlands. My function is Head of Risk Management for the Private banking division. My activities on the transformational issues have led to the publishing of a book, written in cooperation with a friend of my: Marieke de Vrij. The book is titled “ The Future of a Truly Stable Economic Order” (you can find more information at in the English section). At this moment I am mainly focused on transforming the Rabobank from within, and with that trying to influence the Dutch financial institutes and regulators. A long and lonesome road sometimes, but progress is (slowly) being made.

A short overview of my thoughts.

Crisis, what crisis?
Looking at the world today, we are faced with a lot of so called crises. There are five big crises where we focus on: a water crisis, a food crisis, an energy crisis, a financial crisis and a climate crisis. When we take a closer look at these five crises we can see that there is not only a connection between these crises, but there is also an order. This order is connected with the evolution of humankind.

The water crisis: Water is the basic element of life. Having a crisis here means humankind faces a crisis in the basis of its existence.

The food crisis: Food refers to maintenance and growth. Humankind faces a crisis in the ability to growth further in terms of evolution.

The energy crisis: Energy stands for dynamics and creativity. After humankind took the first two steps in its evolution it became creative in designing its way of live and existence. We now face the crisis of being the opposite. It looks like we are (not you ; ), but in general) not capable in bringing in new ways of living or working that can really change the world. We stick to the old paradigm.

The financial crisis: Finance and economies are about structure. After the process of creativity humankind felt the need for structure to keep pace with the processes and developments that this creativity had initialized. Now we see that we are not “in control” (quite a financial term isn´t it!) anymore. This is not only the case in financial structures, but also with social, political, ecological structures etc.

Then finally we face the climate crisis: Climate is about systems. We exist, we grow, we are creative, we create structure and then humankind became a system. And now we have a systemic humankind crisis.

In one of my essays, I called the overall crisis “the sixth crisis or the Consciousness crisis”. Humankind is at the end of an evolutionary step, and must be made ready to take the next step. This can only be accomplished if we are aware of what is going on and if we have an appropriate level of consciousness. All the mentioned five crises will attribute to the development of this consciousness.

So far the crises.

During the above mentioned process of developing consciousness there are two things very important. First we have to make visible what does not make sense, is weird, rare or whatever in the context of the way humankind is existing and has organized itself. By doing this we can make people think and get ready for the paradigm shift that humankind needs. Secondly, those who see the challenges in the current system and have the right mindset have to think about possible solutions, ways of doing things different or simply stop certain activities or change there attitude. This is necessary because when me make the transformation, we have to redecorate our social, ecological, economical system etc. (and we need new leaders!)

Going back to the Electricity addiction topic, it is certainly something that for many people (like me) is an eye-opener and something that does not make sense. And it indeed makes even lesser sense when we include land, water, metals etc. So it certainly fits with the things mentioned above and by bringing this in the open, it can make a big contribution to the change in consciousness.

The more challenging part is to look for a solution of this “drug trade”. I will make some comments on this hereafter, but of course this is only one possible direction of thinking.

When you see the process in the document David sent to us, you see a path from the oil platform to the refrigerator. The costs of this process are very divers, and even without the mentioned figures one can imagine that it is a very costly process. The reasons why this is so costly are also divers: we see a lot of processes to change the basic materials (oil and metals) to a new product. I am not a engineer, but I assume that in such a process you will have a waste of the original product and a waste and/or pollution of the sources you use to keep the process going (land, water, air, metals, minerals etc.). Furthermore we have a lot of transport costs.

When we are looking for a solution we can look to make the current process more efficient. This is a start, but it does not solve the real problem. It only mitigates it. I think it is quite clear that the solution can be found in reducing the pollution, material waste and the transport costs. This mean that we have to make the process of producing electricity more efficient by introducing new methods of producing. These methods must be more direct in terms of a simple process (maybe like solar, wind or gravitational energy) with as less waste and pollution as possible and we must combine this with the will and ability to produce the energy in the neighborhood of the user.

This sounds simple, but I know it is not. It means we have to rethink the way we organized our society. This is not only necessary in the context of the topic of our dialogue, but also in terms of risk management. We have to reorganize the way we build systems and the way we connect these systems via structures . We need a more robust system to a) cope with the current and coming crises as a result of the transformation process and b) to have a solid basis to build a new world on. As I wrote in my book:

“The processes and developments stated above indicate that we have created an unmanageable and uncontrollable world full of uncertainties. A world full of high risks, due to the direct unsustainable connections and the intercorrelation between all (sub)systems. However, man wants to be in control, feel secure and enjoy life. This can be achieved by splitting up the large systems into many smaller systems. A problem in a controlled environment with limited external influences (whether internal or external) is more easily recognised, is usually less complex and is therefore easier to solve. To solve the problem of leverage, we must create smaller units, ending up with a sort of cell structure.

As already stated, deglobalization is on the rise. Countries will operate more independently, societies will become more communal, and nature will be spared more, and abused less.

The cell structure system enables the mutual connectivity of the cells. But these connections are sustainable and strong. Each cell, each structure and each system employs its qualities for the benefit of others. Not for monetary profits or reward, but on the basis of appreciation and mutual trust. None of this represents a step backwards. Although we have been talking about the disintegration of old structures, the new structures are being assembled at a higher level of consciousness and developed into the next phase of renewal.
Money will again become a means of exchange and not something against which we assess our personal value. We will become human again.”
(From: "The Future of a Truly Stable Economic Order by Jan de Dood and Marieke de Vrij)

Having written my first thoughts on this issue it is clear to me that it is an important issue on at least two levels. First because of the fact that it is producing a lot of waste and pollution that is affecting our environment in a not preferable way, and secondly because addressing this problem can help us to create more consciousness in this highly complex transformation we are going through as humankind.

Warmest regards, Jan

Monday, April 19, 2010

Abundant Enterprise: Beyond Corporations

A Renewal of Humanity’s Organization for Fruitful Engagement

The methods by which we organize our endeavors have profound implications on the consequences of our efforts. Often, by their frequency of use, we assume that certain practices and models are essential rather than consciously optional. Seldom is this consensus illusion more prominent than our practice of organizing human endeavors into Corporations. The corporation, animated to achieve “person” status in modern legal paradigms, is a legacy of an exploitative, colonial past and its use continues to stunt humanity’s potential. In fact, the first modern corporation was established by the monarchy of England on December 31, 1600 and became the foundation of the East India Company. Formed to shield individuals from accountability for their actions, these utilities of social control are optimized to:

Form legal barriers to engagement by means of licensure, registration, and regulation;

Form taxation mechanisms for the state to extract double tariffs, first from the endeavor and then from the beneficiaries thereof;

Form counter-parties for the purposes of limited liability agreements in the form of financing (debt and equity), contracts, and litigation; etc.; and,

Externalize accountability for decisions made out of expediency rather than integral interest.

As we awaken to our deep impulses to address human endeavors in a more integral fashion – often in pursuit of benefits which are not denominated in the creation or exchange of currency or surrogates of value (such as well-being, education, culture, knowledge, community engagement, ecological responsibility) – we see that the Corporation is no longer adequate to match outcome with mode.

A part of our work around manifesting the ancient futures of social evolution – consolidated under our Idigna program – we are working to increasingly adopt Abundant Enterprise as a means of organization of human endeavors. Abundant Enterprise can be characterized by the following core values:

Accountable Stewardship. All resources – natural, human, and energetic – are explicitly manifest by linking every part of a value chain to fruitful participation. For every resource used in an enterprise, its value is explicitly honored, its existence engaged in such a way to insure its replenishment, and its use includes all stakeholders in benefit sharing.

Responsible Engagement. All participants in the ecosystem of value creation are “stakeholders” without hierarchy. This means that every decision includes explicit consideration of the interests of all contributors. The land, resources, power, living things, all are engaged and the benefit from endeavors are shared with all. Profits, for example, from a product from the forest means that the forest “stakeholder” receives replenishment, not as philanthropy but as a return on investment.

Active Benefit. The beneficiaries of human endeavors are those who are actively creating value. Passive equity does not exist. From the creators of an enterprise impulse to all those who animate it, participation is intrinsic to benefit. Beneficiaries, including existing structures of civil society, are still entitled to their participation in the value created but attach only to those value exchanges for which they provide utility (eg. the State that mints and supports money can tax money).

Existing corporations can begin to transition to Abundant Enterprise models in a variety of approaches. However, each approach requires a long-term commitment to the departure from shielded accountability in the form of a corporation and deep engagement in the form of a network of value. Limited liability is replaced by full accountability and responsibility. Shareholders are replaced with engaged stakeholders (inclusive of all ecosystem elements). Investments and returns are simplified into fruitful stewardship. Profits are seen as means to distribute the value created by the enterprise back to the stakeholders. Wealth is seen as an ecosystem that is perpetual. The mode of engagement is through contract law and the formation of trusts or societies in which all active members are engaged.

Saturday, April 10, 2010

Cent of Fear

I was intrigued by the recent press around Renaissance Technologies, the ambitious quantitative trading fund run by the inscrutable Jim Simons. While numerous heuristic (meaning based on a series of empirical rules) quant platforms operate in the market, few have achieved the legendary status of Renaissance. Operating with an opacity characteristic of the engineers who create them, these funds buy and sell not based on performance of enterprises but on the trading behavior of the markets per se. Not surprisingly, Renaissance and some of its aspiring ilk, are well endowed with physicists, mathematicians and engineers with backgrounds in linguistics, encryption, intelligence and related unstructured data fields. Those who are interested in learning more about the man behind the legend will enjoy reading Jim’s work on topological quantum field theory.

Peter Brown and Robert Mercer, the two PhDs who have stepped in as co-CEOs of Renaissance have an interesting background. Both contributed to IBM’s natural language research effort before being spirited away to join Simons. Much of their work was on modeling the “next effect” in words – trying to rationalize what the next word in a communication sequence would be based on the pattern preceding the predicted. Simply put, their work on n-gram language models assumes that the words you’re reading are not random in their inclusion or order. Rather, they are perplexingly, predictable. They, perplexingly rather, are predictable. Predictable, they rather perplexingly, are. You may be missing my point. You see, language is an encoding process, an encryption if you will, which loads meaning not merely in words but also in word-order and context. Before Drs. Brown and Mercer could crack the real nut – how to handle metaphoric expression – they followed the sirens to a quant fund and started making money. And here’s why I find the three people’s stories interesting. Because their performance actually unveils a fundamental human limit – the “cent” of fear.

From Babylon in the 18th BCE, to 7th century CE Roman “benevolent societies” which offered to pay death benefits to “insured”, to today’s most advanced insurance enterprises an irony emerges from looking at Renaissance performance and what seems to be an improbable industry comparable. At their peak performance, they hit very similar limits of blended returns, between 35-40%. Why is it that death and automated trading both capitate their performance at 40%? I think that the answer is that we have a human constant that I would call the “Fear Premium”. Now some of you might prefer that I call it uncertainty but I don’t for a simple reason. The motivation that makes Renaissance money is the “n-gram” of the next predicted event. They have modeled a human response that they train machines to detect and trade accordingly. Insurers constantly push the margin on how much the market will pay for the perceived “control” of fundamentally uncontrollable events (like death). In both cases, the uncertainty is skewed and the skewness is around the fear of loss.

Ironically, as I’ve begun to look at this dynamic, I have come to observe the Fear Premium in numerous historical and present capital models. Over the coming weeks, I will be highlighting several of these. One of my favorite which must be mentioned is the Basel II reserve capital spread between “investment grade” credits and “junk” credits where the Fear Premium charged to banks for reserve capital is, you guessed, the same number.

At the core, what does this mean? I believe that Renaissance is not necessarily anything more than a canary in a coal mine. Equity and bond traders are letting a few people (and the number of beneficiaries appears to be shrinking as Brown and Mercer look to close the doors to more outside capital) take their money by behaving predictably. If equity and bond traders stepped away from their addiction to impulsive trading and actually began investing based on, God-forbid, actual analysis of corporations or bond issuers, the helium that is maintaining the illusion would dissipate and the game would be over. If we didn’t live in an era where dying in debt continues to justify the dizzying levels of life insurance that we buy, making sure your death doesn’t cost your loved ones would lose its cache and the Fear Premium would be exsanguinated. In short, being free from fear would put at least another 40% of money in your pocket. It would let you spend 40% more time with your family and friends. It would let you relieve 40% of your stress.

As evolved as we pretend to be, it is ironic that in our present age, we still are gazelles on the savannah living with the certainty that there must be a lion out there somewhere. As evidenced by the recent nonsense that was marketed as “health care” debate in the U.S. (a harbinger of the love fest just around the corner in the U.K. and Australia), we had conservative Christians and political activists up in arms about – God forbid – the government caring for those less fortunate. I can’t wait for the first such activist group to waive their government authorized non-profit status, operate a homeless clinic in honor of their spiritual patriarch, and then talk about the irrelevance of government. You know why they won’t do that? Guess what the taxation rate would be on an activist group that didn’t have non-profit status… You guessed it, the Fear Premium.

Monday, April 5, 2010

Fools Gold


It is not by injustice, therefore, that you hold what you have taken, rather it is through your own human kindness that the citizens are allowed to keep whatever they do retain.

Yet I foresee that if we betake ourselves to the life of indolence and luxury, the life of the degenerate who think that labour is the worst of evils and freedom from toil the height of happiness, the day will come, and speedily, when we shall be unworthy of ourselves, and with the loss of honour will come the loss of wealth.

- Cyrus the Great in CYROPAEDIA by Xenophon

I am perplexed. As I read the Federal Flow of Funds data, I’m struck by what appears to be a simple irony. In the FY 2009, consumer spending and debt have shrunk significantly and persistently (debt down $112 billion in FY 2009). During the same period of time, Federal debt has continued to balloon ($1.4 trillion in FY 2009). At its peak in 2006, consumer credit – the engine of the consumption addicted economy – rose to a high of $1.17 trillion.

The past 4 quarters have seen commentators and politicians describe their assessment that the economy is showing signs of recovery. However, this propaganda is, well, just that, propaganda. Here’s why.

First, the only thing that is contributing to economic activity is the Federal government’s spending of borrowed funds. In the most inefficient means of stimulating the economy (tax incentives) the Federal government is spending other people’s money to stimulate the automotive, housing, and manufacturing sector. As I said for the past four years, if you removed the premium of Federal spending (particularly in the indirect support of the war efforts in Iraq and Afghanistan) leading to S&P profits in defense, aerospace, materials and energy, we were in a recession before the “banking crisis”. Our GDP during the Bush administration was inflated and it’s even more so today. However, even the most casual observer can see that the Federal government doesn’t get the same economic return on its dollar spent as did the American consumer.

Second, we’re still living in the illusory world of an antiquated employment statistic. The fact remains that we have a growing number of Americans who are contributing nothing to the economy. We have more people who are beyond the 12 to 15 week without a job window who are either not working at all or are working in temporary situations or are otherwise under-employed. In the most recent March data, under-employment is over 20% and unemployment (U6 Figures) is still around 16%. Simply, this means that over 1/3 of the American population is not contributing to the economy. This cannot and will not last.

The myth that this is acceptable because “productivity” is higher is – well – just that, a myth. We are not more productive. Just because those who are employed are working longer hours and their marginal production per employee appears to be growing, this statistic fails to capture the fact that we’re riding an artificial wave of “value” inflated, to a large extent, by Federal government wage premiums. With more of the labor force working longer hours for real-dollar less wages, the Bureau of Labor Statistics is, once again, contributing to the consensus illusion that we’re making progress. We’re not. Paying fewer people less does not create an economy, it stimulates the French Revolution.

Cyrus the Great had it right. The day has come, when our carelessness about productively engaging our society to focus on real value creation in lieu of phantasmal “service” and “knowledge” businesses that supported consensus illusions as we saw our consumer addiction dealers off-shore the manufacturing of our intoxicants, must be reckoned. We must once again find honor not in the acquired wealth from others but in the honor of productive engagement. We must celebrate the industry that creates rather than blindly waiting to be served by those from whom we’ve taken so much. The drug is wearing off and we need to see clearly that creativity and production, supported by ethical exchange of value, is not a whimsical aspiration but rather the only way into a future with living.