Redesign the Paradigm

Water is essential for human survival.  It is considered a renewable resource but its limits are determined by the water cycles within a geographic location. Water availability is directly affected by population growth.  There are approx. 83 million people added to the earth each year. Many of these people are born into impoverished and population dense areas, which in turn, escalates the burden on that regions surrounding water supplies. There already exist many regions in the world where population levels have surpassed what can be sustained by the local water resources. Numerous geographical regions also have high population growth rates and barring natural disaster or famine these rates are expected to escalate.

Geo-political tension is developing between nations over fresh water supplies especially from rivers. Disputes over who has water rights are becoming more prevalent as countries upriver are using increasing amounts of water for their farming or hydroelectric power generation leaving less water for those countries downriver.  Even in regions or countries once considered abundant with water, problems exist due to declining water tables. This is occurring because increasing population centers are draining aquifers and ground water faster than precipitation or underground rivers can replace it. Fossilized aquifers are not  replenishable, once depleted that source is gone for good. Projected demand for water has already exceeded available supplies in many regions. Those countries most affected by water shortages (developed and undeveloped) are falling behind in their attempts to seriously address this problem.

There are other issues affecting water shortages. Water is being drained out of aquatic environments (i.e. the Everglades) at an increasing rate which affects not only ecosystems but the regions ability to replenish ground water supplies.  Pollution is contributing to reducing potable ground water rendering some underground sources unusable due to toxicity or increasing the filtration costs beyond economically viable levels. This is due predominantly to industrial dumping, farming, mining, landfills, etc. Developed countries have experienced some success in curtailing pollution due to regulation and new technology but the developing world with its large population growth and reduced economic resources is struggling.

Fresh water availability is what is critical to humanity as 97.5% of the earth’s water is salt water and 90% of the earth’s fresh water is frozen in Antarctica, Greenland and North Pole ice sheets. Most of the remaining fresh water is soil moisture, and very deep aquifers that would require considerable drilling costs. This leaves approximately 1% of fresh water available for human use and includes mountain glaciers, surface sources like lakes, rivers, and reservoirs, and underground shallow aquifer sources. This amount is also renewable through rain water and snowfall.

The U.S. is an example of a country that has done fairly well with fresh water conservation and increasing efficiencies in fresh water use. In 2005 the U.S. decreased fresh water consumption levels down to 349 billion gallons per day (bgal/day) or a 5% decrease over the past 25 years. Fresh water consumption of 268 bgal/day was pulled from surface sources and 79 bgal/day was removed from underground sources. Most of the rest of the world is experiencing increased demand for fresh water.  

Consumption levels for fresh water in the U.S. are as follows: 41% or 143 bgal/day of all fresh water went for thermoelectric power generation; almost that entire amount was from surface sources. Farming utilized 129 bgal/day or 37 percent of freshwater. This amount has decreased 5% over the past decade due to sprinkler system and micro irrigation advances but are expected to increase again as population growth overtakes irrigation efficiencies. Farming uses also account for 67% of all the ground water extracted. Public supply is at 45 bgal/day or 13% and includes water requirements for residential homes, commercial factories, and other business needs. Industry used almost 15 bgal/day or approximately 4%. This amount is also decreasing due to efficiencies mostly in the mining sector. These figures roughly reflect worldwide demand as well.

Populations will continue to increase world wide especially in poorer developing countries with high poverty with less access to education and birth control. Farming requirements necessary to feed these increasing populations will strain existing water supplies to their limits and require developed countries to increase their farming output to help mitigate famine and starvation. This will in turn increase their water demands. Ground and surface water pollution will continue to increase especially in regions where government regulation for pollution does not keep pace industrial and economic growth.

Measures must be implemented world wide that:  

1. Conserve existing fresh water supplies while aligning population size to a regions water availability.  This may mean establishing population growth limits in some areas regardless of religious or cultural belief systems. Another possibility is redistributing some percentage of a population to more suitable regions, but this may create ethnic rivalries.
2. Create energy efficient and cost effective desalinization plants and pipeline infrastructure for large scale water distribution. This will be expensive and desalinization plants create their own set of problems beyond costs, but outside of transporting icebergs across large distances it is the only realistic solution available.
3. Generate legislation in both developed and undeveloped countries that addresses and limits industrial dumping processes. Another unpopular and expensive measure that will not likely be affordable to under developed countries and require the financial assistance of developed countries.

Failure to meet these requirements will result in decreased water availability, rationing, severe water shortages with decreased food production, and enough political tension to eventually result in regional wars over water. Water is one of the basic requirements of a civilization and more than one civilization has seen its demise due to sustained drought or a long term change in the ecosystem. Problems with limiting access are already upon us and will continue to grow. Sticking our collective heads in the sand and pretending the problem doesn’t exist or that there is still plenty of time to deal with it will put society’s in a reactive, self-preservation mode which generally triggers a reaction towards war to solve the immediate crisis. My conclusion is start funding and allocating resources now for long term, sustainable solutions or pay more money later for: escalating prices for water and the inevitable costs associated with war.

http://www.waterinfo.org/resources/water-facts

http://pubs.usgs.gov/circ/1344/

Financialization has become the goal of the large banking institutions. Risky intangible financial instruments in a deregulated environment have been the greatest source for generating investor wealth and have provided billions in fees and commissions to the financial sector. Wall Street elites are once more attempting to increase the levels of financialization despite what it has done to the real economy over the past few years or could do again.

All the while, U.S. citizens have continued to put their money in savings and checking accounts of the very banks and financial institutions that created the credit crisis and its associated problems. Personal income that once was used for capital by banks for lending to businesses or consumers instead flowed into exotic derivative instruments that were understood by only a few and benefited only a few. Those benefits include billion dollar incomes for top hedge fund managers, lucrative banking executive bonuses even after the US taxpayer bailed out their messes, and tens of billions of dollars to select financial institutions that were “too big to fail”. Much of the bailout money enabled those same institutions to buy distressed and bankrupt financial institutions (not worthy of TARP money) for pennies on the dollar.

Profits during the run-up of financialization not only went towards investors or bonuses but to an ever increasing army of lobbyists whose sole goal was to buy the proper Congressional support for deregulation. This process is occurring again with campaign contributions and lobbyist giveaways to both the republican and democrat parties to ensure that any significant regulation doesn’t become implemented.

Financialization in a recession lengthens the recession as investment dollars are kept away from domestic companies. Without necessary injections of capital from the banking industry for expansion or for general operations companies will falter due to a lack of cash flow. Banks then look at the poor credit rating of these companies and the bad economic environment and the companies are deemed too risky to lend to. Then the distressed company is forced to sell off assets, lay off employees, or even dissolve.

There are long term consequences of financialization in developed countries as well. Investment dollars are diverted away from the next generation of science and technology endeavors essential to the development of future industries, companies, and projects critical for real future economic growth and job creation in our information age. Mainstream manufacturing jobs will continue to be exported to developing countries due to globalization and trade treaties making it difficult for established developed countries to compete in their labor intensive markets. This requires developed countries to invest in innovation and develop technology oriented companies to fill in for the losses in manufacturing if developed countries hope to remain economically sustainable and globally competitive. This will be increasingly difficult as long term tangible economic growth is sacrificed for the short term profits and commissions provided by more investing in financial instruments.

To counter financialization and grow a sustainable economy we must:

1. Reform the political process so that thousands of appointed lobbyists and campaign contributions can’t buy deregulation.
2. Recreate regulation that limits access of financial institutions to “vanilla” easily monitored financial instruments for investing.
3. Reform the tax structure so that profits are taxed according to standard tax code practices and not just to the 15% capital gains tax.

Financial resources must be concentrated back into the real economy. Financial institutions will need to have access to another round of exotic derivative investing if they expect to make the profits of the past, they cannot allow this to be curtailed through regulation. They will not willingly return to simple lending and basic banking. The short term profit motivation has led to such levels of greed that the entire economy has taken a back seat to profits. The process of financialization is already attempting to be reinstated in the U.S. and other developed countries that haven’t yet recovered from the current recession. The question remains to the middle classes, are you willing to linger in this recession to ensure that wealth generation and hording continues to grow amongst the financial elite?

http://www.levyinstitute.org/pubs/wp_525.pdf

http://en.wikipedia.org/wiki/Financialization

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

http://wallstreetwatch.org/soldoutreport.htm

Financialization refers to economic conditions where financial markets become the preferred system for investments rather than investing in the real economy. The goal is to create an economic system where any tangible or intangible form of work, product creation, or rendered service can be valuated as an exchangeable financial instrument. These financial instruments can be cash instruments (cash, transferable securities, or an agreed upon transfer of loans / deposits) or preferably a derivative instrument (financial instruments that are valuated based off the perceived value and characteristics of an original asset). Financialization is what has led to the financial crisis recently experienced by most of the industrialized world.

Financialization has gained a significant hold over the American and world economies. In 2008 the Gross Domestic product or GDP of the United States was 14.2 trillion dollars. This was the value of the total economic output derived from all finalized goods produced and services provided in the United States. World GDP was 60.6 trillion dollars. In 2008 the sum total of all traceable international derivative exchanges was 1200 trillion dollars. Note: Derivative exchanges did not require the total 1200 trillion dollars to be exchanged only an agreed upon percentage.

The process has had three outcomes:

1. Wall Street financial elites, with their influence over financial institutions and markets, have used profits to provide 3.4 billion dollars on 2900+ lobbyists (figures do not include lobbying at the State levels) and 1.7 billion dollars on direct campaign contributions over the past 10 years to remove regulation and elevate the importance of the financial sector above that of the real economy.
2. Money has been transferred out of the real economy and into the financial sector where banks, security firms, hedge funds, private equity groups, etc. make money by essentially shifting money around and speculating on future derived values of the aforementioned financial instruments. Generally nothing real or tangible is created.
3. An increase in income inequality and a stagnation of wages as wealth becomes concentrated in elite circles. The more complex and exotic the derivatives traded, the more monitoring agencies (Moody’s, Standard and Poor’s, etc.) have difficulty understanding how these risky instruments should be valuated. This lack of monitoring capability is actually preferred since it allows financial institutions to sell or broker without guideline restrictions. The greater the risk the higher the potential yield or return for the investor and the larger commission and fees charged by the financial institution. As more dollars and income flow into these lucrative unregulated markets less is available for the real economy which contributes to GDP and in turn job creation.

The final outcome of these measures is an economy that experiences a drawn out recession, over-indebtedness, and a reluctance to invest or lend in the less profitable real economy. As long as regulation can be avoided through political influence and derivatives instruments still remain available for trade these outcomes will continue.

This also leads to the matter of moral hazard where financial institutions that are “to big to fail” feel insulated from risk because of the possibility of additional government bailouts. This has resulted in banking executives who have not learned the lessons of their high risk decisions in a regulation free environment and are scrambling for the next run of exotic derivative investing. In addition, the remaining large financial institutions are already profitable again, most having paid back their TARP loans and the U.S. government has in many cases seen a return on its investment in the TARP program. This quick turnaround has led to cries for no regulation and the allowance of free markets for continued derivative instruments trading despite what it did to create a credit crisis and lead the U.S. and world economies into severe recession. Large banks and financial institutions have already unleashed their lobbyists and are providing the next round of campaign contributions to political parties to ensure favorable legislation.

This process is cannibalizing our real economy. The American economy is producing significantly less than 20 years ago. There is little if any long term benefit to the U.S. or world economies where societies are sacrificed for the profits associated with shuffling around financial assets and instruments. What we need to do to pull the US and world economies out of a potential long term recession is tangible investments in manufacturing, infrastructure development, innovation, and the development of new technology crucial to industrialized nations in the information age.

Ask yourselves, who is benefiting from the manipulation of financial markets with derivative investments? Are you?