The Voice of Reason

Until recently, I would have recommended that everyone put the maximum contribution into their retirement plans and choose an index fund like the S&P500 to minimize risk and excessive fees. However, things have changed and it is now clear that there are many problems with this strategy – both from an individual and societal standpoint.

Risk has been transferred to ordinary citizens

A fixed pension (defined benefit) that is indexed for inflation is ideal for any retiree. Employers fear them for exactly the same reason – they have to fund them and assume the enormous risk. Unfortunately, most large companies have not even come close to funding their plans sufficiently, many get slashed in bankruptcy and governments have colluded with industry to allow them to grossly underfund their plans by allowing them to use unrealistically high growth predictions. The problem is not just limited to industry, many state and local governmental funds have also been raided to cover budget shortfalls and/or are grossly underfunded. It is quite likely that if everyone was honest and the risks properly analyzed, no such pensions would be promised because the cost of providing someone a pension of say, 60% of their income indexed to inflation for perhaps 30 years of retirement and funded from tiny payroll deductions is preposterous.

These plans also provide vast sums in employee contributions to the financial giants like Vanguard and AIG VALIC to parasitize with fees and has created a steady market for purchasing stocks of all kinds. This coupled with disincentives such as early withdrawal penalties have created a massive and lucrative windfall for the financial industry. Given the power of this lobby group to influence government policy, this shouldn’t be surprising. It would be interesting to know how many people put in enough to get the maximum employer match from their 401K (which is a good idea) while simultaneously carrying credit card debt at 18% or more (which generally makes it a bad idea).

Some of the rules, such as early withdrawal penalties are just plain nasty. People that need to cash in their funds are often those that can least afford the arbitrary penalties. It does however benefit the financial industry by minimizing outflows. Shifting the taxation to later years (at withdrawal) when the income tax rate is unknown further adds to the uncertainty. Given that inflation could push everyone into the highest tax brackets and that there will be pressure to increase taxes to pay for unfunded social programs, the tax rate at retirement is a serious concern.

This new pension (defined contribution) model is unworkable for the following reasons.

1. There is no way the average person can save enough in these plans to possibly cover a comfortable retirement, nor do they have any realistic notion of what their monthly pension income might amount to.
2. Any monies earned (a few hundred a month for most people) are likely to be deducted from government social security payments as part of means tested welfare. If governments are to fulfill their promises to retirees, there are only a few options: a) print the money to pay them and let inflation devalue it (likely) b) reduce benefits which is unlikely because retirees vote c) increase taxes substantially (likely)
3. It forces individuals to plan (e.g. spend as little as possible) for worst case scenarios, such as living to their late 90s because they have no idea how long they will live. Pooling the risk makes more sense which can certainly be done by purchasing an annuity. Purchasing an insurance product has its own risk — such as bankruptcy of the insurer and the introduction of another profit making parasite.
4. The majority of citizens cannot possibly be expected to understand the risks involved.

Short of working until you are near death or disabled, how could you possible determine the proper mix of investments required to build a sufficient retirement income when:

1. Ratings agencies rate corporations as a “buy” or “investment grade” with great 1 year targets (perhaps several dollars) all the way down to penny stock status and through bankruptcy. I had recent experience with this, watching this behavior as the company BearingPoint rode its way down to bankruptcy. There is a great deal of collusion between the ratings industry and the financial industry.
2. Governments are free to print fiat currency and cause massive devaluation of your savings.
3. After a major depression like plunge your investments could take decades to recover.
4. Bonds can default. The CPI, GDP and employment figures are blatantly manipulated by government. If you have any doubts at the level of deception here, get a subscription to shadowstats. It will both enlighten you and sicken you.

Even if this wasn’t a problem, there is still the problem of where people can get sufficient money to invest given the tendency for the cost of living to rise to the breaking point leaving nothing left over. If pension contributions were mandatory deductions then consumer prices would have to come down to the new breaking point.

Perhaps more disturbing is the entire concept of permanent growth. Eventually we need (or will have forced upon us) a sustainable society which obviously cannot be based on growth. There are limits to everything – crop yields, fresh water and energy. The great book “Stocks for the Long Run” proves conclusively that over the last 200 years, stocks have outperformed bonds and that the average stock return has been about 7% adjusted for inflation. To assume the future will be like the past is not a good idea. The population of the USA in 1830 was 12.8 million, by 1930 it was up to 123 million and today it is over 300 million. It is reasonable to assume that the average stock market growth rate is a function of population growth and that the historical average would have been lower without the availability of virtually unlimited resources. We should expect that the rate of population growth will decline and the historical stock market growth rate of 7% will also level off to zero. Since the interest rate chosen when calculating the growth of long term investments has a huge impact on the buildup of wealth over time — this is not to be taken lightly. Without constant growth, owning stock (and part of society) is no different than owning something else of value like gold, silver of a non-fiat currency.

Most retirement scenarios are based on the idea that growth will be providing most of the final value, which is Ponzi scheme thinking, and without it, you would have had to save far more.

There are some things that do make sense. These include:

1. Having zero debts. For example, you could liquidate your retirement plans and pay off your mortgage. The old arguments would have said this was crazy, especially if the mortgage rate is low and your investments are returning higher values. The new argument is that you need a place to live without the risk of being made homeless for failing to make payments. There is no way any sane person can sign a 30 year mortgage and believe that they will be able to keep a stable job for 30 years and an income that will never decline. It might make sense for a small mortgage, but makes no sense for a home that is expensive enough to require a high paying job, especially when the resale value of the house is a function of other people having high paying jobs and the availability of credit.
2. Acquiring a multitude of useful skills. If you have the cash, then buy what you want. If not then repair your old whatever, barter it for something else or do without.
3. Consider that you might be working intermittently or running a small business forever. This isn’t a bad thing – it keeps you mentally active.

This is in many ways, opting out of the status-quo and becoming self reliant. You are saying no to long term debt, credit cards, car payments, things you don’t need to survive, pension promises and social promises that can’t be kept and a host of other insanity and in doing so are taking care of yourself.

A few words of caution: Regulations complicate this mess. Many plans are protected in bankruptcy so if the situation was dire, you’d be best leaving them intact.

If you had asked me a few years ago about the future of the USA I would have told you the housing bubble will pop and that high energy prices would put an end to globalization; material and finished good transportation costs would negate offshore labor savings; and that we would have a fair bit of economic chaos.

I had no idea however at the level of economic corruption, the collusion between the highest levels of government, financial institutions like Goldman Sachs and the private “federal” reserve. This type of behavior is not new — many emerging economies have needed assistance from the International Monetary Fund because their corrupt regimes had destroyed the wealth of their nations. New to me was that the USA has many characteristics of banana republics.

The article The Quiet Coup is a must-read. It was written by Simon Johnson, a professor at MIT’s Sloan School of Management, and chief economist at the International Monetary Fund during 2007 and 2008. One of the most alarming, says a former chief economist of the international Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

Given how the AIG and bank bailouts seem to covering the losses of select, large financial institutions; that the secretive bailouts are engineered by former Wall Street elites who are very much part of the current and previous administrations - the financial oligarchy is nowhere close to being broken.

And this: “In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending.”

As if that isn’t depressing enough, the statistical indicators we have relied on to measure economic progress have been mutated by successive administrations as to become almost meaningless. Consider the CPI or consumer price index. We are often told that inflation is low yet we have seen vast increases in the cost of gas, housing, medical care and education. The official statistics redefine the equations to exclude items or substitute them for other goods with the sole purpose of arriving at the “statistic” that politicians want to hear. The graph below is a realistic look at CPI.

Anytime a country significantly increases the quantity of paper money in circulation without a corresponding increase in something “real” to back it up — the currency will begin to devalue. The chart below, M3 is estimated after 2006 because the Federal Reserve decided to discontinue reporting it. Their reasoning is here. M3 is M2 with the addition of large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. It is clear that “transparency” in federal finance is virtually nonexistent.

This brings me to the question — how do you take control back from a corrupt regime that has destroyed a nation’s wealth, has the highest incarceration rate in the world, a vast military complex and indistinguishable political parties?

I was cautiously optimistic when I heard President Obama’s initial remarks about the environment and energy dependence, but after reading the overview on the White House web site, I am rather dismayed.

Help create five million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future.

First of all “Addiction to foreign oil” is a political statement. The number once source of imported oil is Canada and Canada is not a problem — the problem should be restated as “Addiction to Hydrocarbons” period. The source doesn’t matter. What matters is that we are totally dependent on non-renewable sources of cheap energy which will become increasingly expensive as they dwindle. Even our food crop yields are a dependent on the availability of natural gas as a feedstock for fertilizer.

Within 10 years save more oil than we currently import from the Middle East and Venezuela combined.

This sounds very ambitious, and the choice of countries is no accident.

Put 1 million Plug-In Hybrid cars — cars that can get up to 150 miles per gallon — on the road by 2015, cars that we will work to make sure are built here in America.
I hope this doesn’t foreshadow protectionism. The domestic auto industry will build cars in the USA, but if the Japanese hybrids are better or the Mercedes SMART diesel is what people need, then GM just needs to build a better product. Let there be competition.

Ensure 10 percent of our electricity comes from renewable sources by 2012, and 25 percent by 2025.
Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050.

Cap and Trade is a game for those with power to continue wasting resources while claiming to be green. It means that the rich get to exploit/squander. Reminds me of selling “height” in large cities. Someone with a 4 story building that could have been 40 floors, sells the other 36 floors for profit. They could have just limited the max height to something reasonable — factoring in parking and congestion. Perhaps the accounting games associated with cap and trade will be way the 80% is achieved.

Energy Plan Overview

Provide Short-term Relief to American Families

Crack Down on Excessive Energy Speculation.
What is excess? Perhaps go all the way and nationalize the oil industry, and manage the oil decline. Maybe it should not be free market because it is precious, non-renewable, and its decline and the simultaneous ascension of alternatives need to be carefully managed.

Swap Oil from the Strategic Petroleum Reserve to Cut Prices.
The reserve is just not that big. Prices are also too LOW. As long as gasoline is below $4/gallon, PV solar for homeowners is just not economical and requires subsidies. There is very little incentive to change our behavior until the era of cheap oil is gone forever”.

Create a New $7,000 Tax Credit for Purchasing Advanced Vehicles.
Not a good idea unless you can prove that this $7000 of tax money can’t be better spent elsewhere. For example, $7000 would purchase a lot of insulation for a home and improving a building’s thermal performance will save energy for many decades, vastly outlasting an electric car and its battery bank.

Establish a National Low Carbon Fuel Standard.
Carbon is the basis of all hydrocarbon fuels by definition, including coal, natural gas, bio-diesel, methane from sewage digestion, wood pellets, alcohol, corn cobs etc. Do they mean wind and solar? Even solar cells require energy to manufacture the cells and frames to mount them on roof tops (usually aluminum) and result in considerable CO2 emissions. There are complicated trade offs here that need to be analyzed. Any policy adopted that is developed in conjunction with the energy industry will likely be based on corporate damage control rather than one optimized for sustainability. After all, if you had a home that didn’t require heating oil or natural gas — how would this contribute to corporate profits?

A “Use it or Lose It” Approach to Existing Oil and Gas Leases.

Good. However, this is just speeding up the development of and eventual destruction of non-renewable resources and achieves nothing towards creating sustainability. In what way could this possibly help future generations of Americans?

Promote the Responsible Domestic Production of Oil and Natural Gas.
“Promote” is a weasel word. It isn’t good enough. Companies are motivated only by profit. Nationalize them if you want them to be altruistically motivated or “responsible”, otherwise expect them to work towards maximizing corporate profits.

Create Millions of New Green Jobs
Good luck. Better define Green while you are at it. Are we talking energy auditors, telecommuting jobs that eliminate the need for commute, sustainability scientists, bloggers trying to promote common sense, or something else?

Ensure 10 percent of Our Electricity Comes from Renewable Sources by 2012, and 25 percent by 2025.
I don’t think this can be done the way they are thinking which is likely a large increase in wind farms, but it is a worthwhile albeit pathetic goal. Worded the other way around, 75% non-renewable by 2025 doesn’t sound very good especially since this will be well after peak oil.

Deploy the Cheapest, Cleanest, Fastest Energy Source – Energy Efficiency.
Good. However, efficiency is just reducing un-sustainability. We need to go all the way to passive solar homes and city planning to eliminate the need for much of the energy we waste. Programs like ENERGYSTAR do promote incremental reductions, but miss point that the day will come when we will have to walk, adjust schedules to the sunlight, and live off local energy sources. Promote common sense technologies like evaporative cooling. We have the technology to skip the incremental reductions and go straight to passive solar homes where heating and cooling is optional. Why fool around and waste time?

Weatherize One Million Homes Annually.
Why the word weatherize? The emphasis should be on solar passive homes that do not require supplemental energy to heat and cool. Insulation would have been a better word than “weatherize”. A more sophisticated phrase like “thermal performance of buildings” is what I want to hear. The EU is setting standards for this.

Develop and Deploy Clean Coal Technology.
This the work of lobbies and an industry marketing term. Clean Coal is an oxymoron, something that by definition cannot exist. Is Clean Sewage next?

Prioritize the Construction of the Alaska Natural Gas Pipeline.
So we can deplete our oil reserves there faster?

Reduce our Greenhouse Gas Emissions 80 Percent by 2050

That would require massive sequesterization. You could conceivably do this with large single-point polluters like power plants, but not for distributed sources. On the other hand, if our cities were redesigned, the existing housing stock bulldozed and replaced with passive solar homes, city planning eliminate most commuting, public transportation was expanded and electric cars were the norm — then maybe. However, I see no guts to take problems of this magnitude.

Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050.
More horse trading and accounting games.

Make the U.S. a Leader on Climate Change.
Good luck beating the Europeans. Meanwhile the USA will remain a major polluter, having led the pack in the squandering of non-renewable resources.

Ok, enough negativity. Here is what needs to be done:

1. Corporations report to shareholders, not citizens. Outlaw lobbying by corporations. The current situation amounts to institutionalized bribery.
2. Gather together scientists from all the disciplines as well as the social sciences and civil engineering. Figure out how we will live when the era of cheap hydrocarbons is over. Then put together a plan to get us there.
3. Use key performance indicators.
4. Spend vast sums on R&D, fund and task public universities with finding specific solutions (like designing appropriate homes for their geographic area), sponsor design competitions for solar passive homes (not just the Solar Decathlon).
5. Increase the cost of energy via taxation, but do not squander the revenues.
6. Make city planning mandatory.
7. Show leadership by making unpopular decisions when necessary.
8. Decision making techniques, critical thinking skills, and questioning the status quo should be part of all school curriculum. Redirect some of the military budget to teaching budgets.
9. Be prepared for a future when central government gives way to distributed government, with the organization and self similarity of a fractal — but that shall be the subject of another post.

End of Rant

This is a book for anyone who is interested in generating their own power from wind, or who wants to build a wind generator from scratch. The book starts off with the basics and explains what works and what does not work along with the theory and all the references you could want.

First the bad news: You need a tower, the tower may cost more than the generator, if you live in a city you may not be able to erect one, you can’t attach it to your roof, those fascinating looking vertical axis mills are poor performers, and you are going to have to do a lot of energy conservation if you plan on living off the output.

Now the good news: If you have ever dreamed of building one, this book provides the knowledge required to be successful. Even if you are an apartment dweller, it is a fascinating read. If this was a common book for school kids to write book reports on, there would be very few wind power scams. It might even inspire you to build a fully equipped workshop or to learn welding. This is the kind of book that needs to be donated to school libraries and science classrooms across the nation.

I was expecting to find that they used a commercial alternator — and was totally unprepared to see details on magnet placement, resin potting, coil winding, workshop safety, magnet handling safety — these people have been struggling with a myriad of trade-offs for years, building upon the designs and hard work of other pioneers; their current designs are indeed excellent pieces of low-tech engineering.

Finally, there is lots of humor here. Dog Haiku anyone? There are many excellent photos and diagrams, as well as some amusing ones. All in all, a worthy permanent reference for your bookshelf.

You can order a copy from OtherPower.

Homebrew Wind Power
A HANDS-ON GUIDE TO HARNESSING THE WIND
Dan Bartmann & Dan Fink
Foreword by Mick Sagrillo

ISBN: 978-0-9819201-0-8
Published by Buckville Publications LLC