Should Companies Be Owned by Their Workers?

 Freakonomics Radio asked this question last month.  They weren't sure.  But they thought it was interesting to interview Pete Stavros, a senior executive at private capital firm KKR.  Stavros observed that employee-owned companies were 2% more profitable than conventionally owned ones, and he convinced KKR to give a form of employee equity to some of their own companies.  Stavros seems sincere in his belief that he's found a win-win combination that benefits both the private equity firm and the employees, but if you think about it a bit more deeply, you discover that his pitch is an illusion.

When it institutes employee ownership, it gives employees shares in the company, which gives them a stake in the company's success.  The idea that owners must inevitably exploit their workers in order to maximize profits is deeply ingrained in the thinking of KKR's kind of capitalist, so much that they were surprised that workers with a stake in their company were more productive.  Communist Russian dictator Josef Stalin was also surprised, when he allowed families to farm small plots of land for their individual use, in addition to the faceless collective that the New Soviet Man would slave for, and the private farms were more productive.

But unlike the Stalin-era farmer, and unlike traditional Employee Stock Ownership Programs (ESOPs), the kind of ownership given to KKR workers is an illusion, not as good as profit sharing (profit sharing is also good, despite it not coming with any "ownership"), since it exposes the workers to capital losses as well as capital gains, and gives the true owners, the KKR managers, another way to blame the workers instead of themselves when purchased companies ultimately fail.

"Ownership" is real only when it includes control.  This would mean giving the employees a seat on the board of directors, and giving employee shares voting power for board seats in the same way that shares in conventional public companies come with the ability and responsibility to vote for board members.  You can bet the KKR would never go for such an arrangement.

The best form of employee ownership, even beyond ESOPs, is to become a fully owned employee co-op.  But even more than ESOPs, co-ops are complicated to set up, and their advantages may even be opposed by deep aspects of human psychology.  Investigating that will be another blog post.

Two great lies in financial policy

It's not a lie if everyone believes it, is it?

I'm still not sure which of these should be first.  They've both been distorting financial policies for decades.  They have so much history, that about all I can do here is name them.  If you can break out of the reality distortion field that sustains them, the fact that they're lies becomes self-evident.  It's tempting to call them "myths", because for many people they're articles of faith that must not be questioned.  But experts know, or should know, that they're empirical claims that can be falsified. And they have been.  Here's another try. An expanded version of this note is at Medium.

Lie No. 1: The proper rate of inflation is 2% annually.

Economists repeat this so often, it must be true. But historians at the New York Times and elsewhere have traced the history of the number back to a guy in New Zealand (an important guy in NZ at the time) who admitted that he just picked it because it seemed intuitively reasonable.  There's no theory to support this number. Two percent seems reasonable if you don't think too hard, so everyone goes with it.

If you look just a little bit deeper than "what everybody who's important is saying", you'll find that the US Federal Reserve Act, as amended in 1977, requires price stability, i.e. an inflation rate of 0%, not 2%.  Then you look at prices in the US, which have been controlled by the Federal Reserve system's policies, and see that the dollar has lost about 80% of its value since then.  That doesn't look like stability to me.

Lie No. 2: Public companies are required to maximize their short term investor returns.

This lie has been debunked many times, but tenaciously persists.  People complain about it all the time, but the alternative never seems to sink in.  I don't know why the competing soundbite is so slippery. Here's the truth: All companies are required to do whatever their owners specify (including public companies). If the owners want to give its assets away to charity, or run the company into the ground for political or competitive reasons, that's their prerogative.

Milton Friedman is most famously associated with the "shareholder value" dictum. In the most generous reading, this lie is predicated on a misunderstanding of how shareholders communicate with management.  If they can only communicate by buying or selling their shares, then the amount of information that owners can communicate to management is incredibly limited.  A purchase means "good work", and a sale means "you're doing something wrong".  That's it.  Exactly what is being done well or badly is impossible to communicate.

Yet anyone who's actually become an owner by purchasing stock knows that they have purchased more influence than this, both formally and informally. Shareholders choose members of a corporation's board of directors, who choose senior managers to execute their desires.  They also specifically influence company policies by voting on shareholder initiative statements.

Alas, in many corporations, management has effective control of the board rather than vice versa. Board members are chosen by the CEO and then submissively ratified by the broader population of shareholders.

In addition, a vicious cycle of greed exists where sociopathic individuals whose goal is to accumulate more money regardless of the cost to others and to the society that enables their greed, consequently accumulate more financial power to acquire even more money even more rapidly.

Governments attempt to limit the destruction that this cycle causes by anti-monopoly laws and regulatory agencies and regulations intended to ensure that effective markets exist where multitudes of interests can contend and mutually damp each others' excesses.

In heavily financialized modern economies, most of the shares of public companies are owned by huge funds that are themselves public companies, and this distancing of ownership makes communication of corporate goals other than making more profit very difficult. 

Getting large, bureaucratic organizations to change their behavior requires organized efforts, slogans and acronyms. One set of important not-specifically-profit oriented goals has become known as ESG, for Environmental, Social, and Governance oriented investing.  A goal complex called DEI, for Diversity, Equity, and Inclusion, is following ESG as an investment strategy that looks beyond mere short term profit. Additional ways for companies to explicitly step away from the "profit is everything" philosophy are to become incorporated as a "benefit corporation" or certified as "B Corporation".  Curiously, as a non-profit organization B Lab, the company that administers B Corporation certification, is not itself certified as one.

So with organizations tracking and publicizing these measures the market should see how organizing for social benefit gives greater returns, and self-correct.  Easy, right?  Not if politicians get in the way. The conquest of the profit motive by social goals in both left and right wing politics will be the stuff of history for many years to come.

What would world civilization look like if the US collapses?

Doomers' worst nightmare: a sustainable mid-tech, high culture global civilization, plagued by endless failing genocides.

Civilization would survive just fine. But it might not be a robust high-tech 21st century civilization. That might actually be a good thing - it's hard to tell. 

I've written an essay explaining how I came to this conclusion.  Medium says it should take about 8 minutes to read.  But if that's too long for you, here's an extended summary.

The United States in early 2024 is in a political situation where collapse into a quasi civil war like "the troubles" in Ireland seems like a possibility.  Elected politicians in Texas are calling for military-aided defiance of Federal authorities, supported by governors of 25 other states.  But unlike the first US Civil War in the 1860s, there is no sign of the creation of large state armies to oppose the US Army, and the states themselves are internally divided to the point where a next war would be as much of a "war within the states" as a "war between the states".   Nobody in the Texas Legislature is proposing to fund the Texas Military Department to a level where it would pose more than symbolic opposition to Federal forces.  It's more likely that violent opposition to the United States would take the form of "stochastic terrorism" (I prefer the term "freelance terrorism") - bombings and random mass shootings. Whether these could become focused enough to target Federal buildings and political gatherings seems doubtful.

But it's interesting to imagine what might happen if the US went into a collapse as deep as the Great Depression of the 1920s, that somehow became permanent.

The global impact of US collapse would span five realms: general economic activity, social and cultural activity, geopolitics, technological development, and environmental stability.

The loss of the US as an economic force would severely but not seriously damage the global economy. The Dollar would lose its role as the world's reserve currency, and this would have a tremendous impact. The World Bank, the Euro, and the Chinese Renminbi are waiting to take over if the situation becomes intolerable, though.

Global culture would not be significantly affected. High culture of symphonic music, fine art, and fashion has always been ruled by Europe, and would stay that way. 

Geopolitically, the long-predicted end of the Pax Americana would finally be realized, though the Great Game of pre-WWI colonialism is gone forever, never to return.  The Mideast would continue to be the same mess of intra-Islamic jihadism that it's been since the end of the Ottoman Empire.  China's dominance in the Far East would finally be unquestionable.

Attacks on Taiwan would lead to a major technological setback, since the most powerful semiconductors are made there by TSMC. Software to use the computational power of those semiconductor devices might lose its creative momentum that originates in Silicon Valley, The tech giants are fully globalized and can easily migrate transactions and data from their already fortified datacenters to ones in less unstable areas.

Advanced electric power technology would easily be able to fill in the gap caused by the loss of the US.

When it comes to transportation, the US is no longer the uncontested leader in technology, but only a participant in a close race. The US is losing its lead in aerospace technology.  The US is not even in the running for the lead in advanced railroad technology. Automobile and truck technology has long been a global competition, and the loss of US auto manufacturing would wound employment in Mexico and Canada, but not significantly elsewhere.

The environment continues to be destroyed at a rate exceeding its restoration regardless of the details of civilizational conflicts, although there are macrotrends that act to slow the rate of destruction. 

As long as the High Income countries (aside from the chaos-plagued US) continue to produce pollution-reducing solutions, as Low and Middle Income Countries graduate into the upper tier (and assuming that the World Bank and OECD don't move the dividing lines) their improving governance and economic incentives will lead them to reduce their emissions as well.

As we sum up the effects of US chaos in the five realms of global civilization beyond climate, it appears that short of a global thermonuclear war, the chief threats are related to reduction of silicon and lithium processing capability for computers, photovoltaic power sources and batteries.  These capabilities are concentrated in the Western Pacific, and it's essential that the rest of the world build up resiliency against disruptions there.

As long as environmental and climate deterioration can be reversed, the worst that might happen would be a reversion to the American lifestyle that was pervasive in the 1970s, before everyone had PCs and smartphones. With Total Electric Homes and electric cars in garages, this could be quite tolerable.

Subsidizing green mines could reduce bitcoin's environmental damage

As one of the largest consumers of electricity in the world, it is important to reduce the climate impact of bitcoin mining by incentivizing mine operators to reduce their use of fossil-fueled energy.  While it is still not the best and highest use of that energy, a bitcoin mine powered by dedicated solar, wind, hydro, or natural hydrogen sources does minimal harm to the atmosphere. Because their only product is small amounts of internet traffic and waste heat, mining datacenters can even be located near their power sources, eliminating the need for expensive, hard to approve long distance transmission lines.

Bitcoin investors and users are likely to be willing to pay a small premium for bitcoins and bitcoin transactions that promote environmentally sound mining practices. Bitcoin exchanges can deliver this premium to green and gold mines via the mining pools that they use, despite the untraceability of failed hash computations.  Exchanges can enhance their brands by working with mining pools to develop certification programs that validate the environmental impacts of the bitcoin mines that they work with.  These incentives will provide bitcoin mine operators with additional motivation to use renewable energy beyond those sources' steadily increasing cost advantage.

Green, Blue, Gray, and Gold bitcoin mines

But that doesn't leave carbon footprints of bitcoin mining totally unmanageable. A way to begin is to start tracking the environmental impact of each bitcoin mine.  Identifying and documenting the details of each mine is not really feasible, but we can take a lead from the hydrogen production industry, and identify three major categories of impact.  "Green mines" are mines that are powered exclusively by renewable energy. "Blue mines" are mines that may be powered by non-renewable sources, but which take the output of those sources and effectively mitigate their impact, most likely by sequestering the carbon dioxide those generators produce.  Those datacenters in the Permian Basin that consume excess natural gas to mine bitcoin are halfway to blue bitcoin, but they need to take their CO2 exhaust and pump it back into the ground.  The could even use that CO2 in its supercritical form for enhanced recovery of oil, but it would be an accounting nightmare to try to track the secondary CO2 produced by burning that oil.  Failing to disqualify enhanced recovery uses for a "blue mining" label would create a serious loophole in a labeling program.  Mining operations that use fossil electricity without carbon capture would be called "Gray mines".  Powering a bitcoin mine with electricity from geothermal sources or with geological natural hydrogen could even be called "gold mining".

Projects like the Cambridge Bitcoin Electricity Consumption Index that report the global energy consumption of bitcoin mining don't link individual mines to their energy consumption, but instead estimate the type of equipment that mines are likely to be using, with mine locations based on anonymized, voluntary reports from mining pools. They could enhance their environmental impact assessments by incorporating government data on regional power production mixes, and such estimates can affect individual mine managers' power sourcing decisions indirectly via their mining pools.

There's another version of this note on Medium with more context.

Where to spend a billion dollars improving the world? Desalination tech R&D.

Updated at the end...

Conor Friedorsdorf has a columm in The Atlantic.  This week, he asked " Say you received $1 billion to spend on improving the world. How would you spend it? Why? "

My first reaction was "only a billion?"  That probably won't even get you a seat on the board of Twitter. It might take a hundred billion to buy out Mark Zuckerberg's privileged shares of Facebook.

How about making an impact on a major global public health issue?  In 2016 the Bill and Melinda Gates Foundation announced that they would be spending $4 billion through 2021 in the fight against malaria.  Their current commitment is apparently down to about $250 million per year.

For a mere billion dollars, you're going to need to spend the money on something that will have significant leverage.  For ongoing impact, the best thing would be not to spend the entire amount all at once, but to invest the billion, and harvest the income that it produces, while reserving enough to keep the principal growing at a slow rate. That income might be $100 million a year if you choose good investment managers.

Then target your gifts at subjects that will themselves provide leverage.  For $100 million a year, you can sponsor free broadband Starlink satellite internet for about 50,000 households.  That's almost exactly the number of households in the Navajo Nation counted by the 2010 census.  With an unemployment rate approaching 50% and a population that mostly resides in a desert landscape far from urbanized areas, often without electricity or running water, internet access will create a launchpad to education and job opportunities that are inaccessible today.

But improving the lives of a hundred thousand people or so is far from "improving the world".  We need even more leverage. This means investing in technology to improve the world, in order to lower its cost and make it available to people whose lifestyles are not yet improved to the levels that the rest of us enjoy.

The basics are, as usual:

0. Stable governments and economic systems.  It's hard to see how these can be achieved by spending money.

1. Clean water

2. Electricity

3. Communications technology. Over the long term, education enabled by widespread internet access can lead to improved government, until advanced social media algorithms enhance factionalism and social unrest.

The adjectives "affordable", and "universal" go along with each of these.  According to the World Bank, there are nearly 700 million people with incomes below $1.90 per day.  That $1 billion could give each of them a one-time gift of $1.42.  The huge number of radically poor people creates a serious challenge to any attempts to lower costs on the basics to the "affordable" level for the goal of "improving the world".  But if we don't work on it, we'll surely never achieve it.

Electricity is making great progress towards becoming "too cheap to meter".  If you put solar panels on the roof of your house, you've already got that unmetered power. Your panels feed into your house wiring on your side of the electric meter, and their power doesn't get metered unless your panels overproduce and you sell your excess back to the grid.  Global investment in solar and other renewable power sources is huge, and it's very difficult to find an aspect of it where an additional billion dollar investment would make a significant impact.

So consider access to clean water  While great progress has been made in improving this situation, in 2020 nearly 500 million people still did not have access to safe drinking water, according to WHO/UNICEF Joint Monitoring Programme (JMP) for Water Supply and Sanitation. In many places, installing a simple pumped well or capturing rainwater can solve their problem.  

However, water in desert and near-desert areas is not so easy to obtain. There are many coastal areas where the demand for water exceeds the supply, such as Southern California or the Middle East, and large-scale desalination systems are already in operation.  Even far from coastal areas where fresh well water is absent or depleted, there are often brackish aquifers that are unsuitable for drinking as they come out of the ground, but can be made drinkable with minor desalination.  Desalination of groundwater is already affordable in places as far inland as El Paso, Texas.  With cheap solar electricity abundant in sunny desert climates, the energy efficiency of desalination is not so much of a problem.

If there's no groundwater or rainfall available at all, it's tempting to look to air capture of the water vapor in the atmosphere.  In a few places in the world, it never actually rains, but local weather conditions produce foggy days with high humidity where condensation equipment might be already effective.  But in the deep desert with relative humidity in single digit percentages, it's necessary to process a lot of air in order to obtain a few liters per day of drinkable water.  With cheap solar panels, this might be affordable.

I would spend my hundreds of millions of income from that billion dollars in funding R&D towards lowering the cost of water processing.  The demand is insatiable and warming climates are making drought a new normal state.

 

Update

 

The Atlantic published Friedersdorf's summary of the comments he received. 

Desalination and water treatment was the solution offered by a couple of other writers as well.  Of the other suggestions, the ones that I liked best were concerned with strengthening the bottom of the food chain, by encouraging agricultural practices that enhance the soil, and by simply buying up tropical rainforests, removing them from the threat of clearcutting by exploiting capitalism against its more short-sighted impulses.  The latter is of course, exactly what the tropical programs of The Nature Conservancy do.

I thought that the suggestion to make profiting in any way from untrue speech unlawful, just like making false claims about material products is already illegal, was interesting.  It might be difficult to phrase such laws to prevent criminalization of fiction writing or even telling kids about Santa Claus, though.

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

The US Federal Reserve has released its long-awaited study of a digital dollar, exploring the pros and cons of the much-debated issue and soliciting public comment.

 Here's what I think, in the form of my comments on the 22 questions that paper requests feedback on.

CBDC Benefits, Risks, and Policy Considerations

1. What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper? 

Reports have characterized the discussion in this paper as "exhaustive".  I would characterize it as "comprehensive".  Much more detail remains to be elaborated.

 

2. Could some or all of the potential benefits of a CBDC be better achieved in a different way? 

The reasoning behind an intermediated CBDC is very unclear.  Why shouldn't the CBDC be fully disintermediated?  That is, individuals and institutions could deal directly with a new division of the Federal Reserve.

3. Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion? 

A CDBC would be likely to have a minor effect of increasing financial inclusion, unless it is implemented as an automatic service (with an opt-out feature) associated with registration for Social Security, tax refund, or other process involving government payments.

 

4. How might a U.S. CBDC affect the Federal Reserve’s ability to effectively implement monetary policy in the pursuit of its maximum-employment and price-stability goals?

 It would allow the Federal Reserve to manage the money supply by delivering "new money" directly to account holders, rather than having to use highly indirect means such as adjusting interest rates and rules on bank reserves.

 

5. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability? 

It would decrease the time-to-effect of monetary policy decisions, if the Federal Reserve would choose to act directly on CBDC accounts rather than adjust banking policies.  This would increase the bandwidth of fluctuations in monetary indicators, permitting volatility that is not measurable by existing means, and introducing new avenues for uncontrolled arbitrage, thereby reducing stability.

 

6. Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money? 

 It could drive certain financial intermediaries, such as Plaid, Inc. out of business, by providing a low-friction way to create new linkages between accounts in differing financial institutions.

It could make leveraged and weakly or non-collateralized stablecoins even more obviously untethered to their supposed underlying currency than they already are.

 

7. What tools could be considered to mitigate any adverse impact of CBDC on the financial sector? Would some of these tools diminish the potential benefits of a CBDC? 

The greatest advantages of a CBDC over conventional payment systems are its reduced risk and reduced costs relative to for-profit institutions, and relative to non-profit institutions due to its scale.

Reduced risk is intrinsic to the existence of a CBDC; it cannot be fully compensated for, but the development of insurance programs for loss and transaction failure beyond existing programs such as FDIC could make progress towards equalizing this advantage.

Transaction fees on CBDC activity would mitigate the threat to existing financial institutions due to its reduced cost. These fees would act as a source of income for the Federal Reserve, and help make CBDC operations self-funding.

 

8. If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments? 

 It is vitally important to preserve a means for users without smartphones or mobile computers to interact with the payment system. A single-purpose CBDC device available at no cost could fulfil this need.

 

9. How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC? 

In-person payments are in the process of evolving to become fully frictionless via biometric means such as face recognition, although serious security issues remain unresolved.  Wearable or implantable RFID authentication may be an important component of this.

Cross-border payments are being disrupted by stablecoins and other internet-based transfers; their future success remains unclear due to varying regulatory regimes in different nations.

 

10. How should decisions by other large economy nations to issue CBDCs influence the decision whether the United States should do so? 

 Any Federal Reserve CBDC must always be the most trusted, stable, and authoritative of any nation's CBDC.

 

11. Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper? 

Transparency of operations and open designs and design processes are a key method for reducing the risk of long-lasting defects in complex systems.
 

Transparency of linkage of CBDC deposits to other forms of dollars was not dicussed.  Processes and stakeholders for arriving at a technical design of a CBDC were not discussed.

 

12. How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity? 

 Privacy and traceability are intrinsically at odds.  As we have seen innumerable times, no software system can be guaranteed secure.  Privacy will inevitably be breached, if not by direct criminal hacking, then by insiders abusing authorized access.  Policies for authorized breaches of privacy should be documented in detail.

 

US HIPAA and EU GDPR regulations are a starting point but not sufficient.  It should be required that account holders be able to obtain the transitive closure of all transfers of PII between processors of CBDC funds from a small number of sources, yet not so small that documenting privacy boundaries itself leads to erosion of privacy.  This is as difficult problem.The Federal Reserve should create a program funding academic research in this topic as part of its studies of CBDC designs.  This program should include organizational design within its scope.

 

13. How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable? 

It should go without saying that the design and implementation of a CBDC must follow best practices in system security engineering and system development lifecycle (SDLC) processes. NIST Special Publication 800-160 may be a useful guide in designing these development processes.

In particular, all software and system designs for a CBDC must be open source, with well-funded "bug bounties", including development and operational tools such as compilers and load managers.  CBDC operations must have world-class system support and software distribution capabilities, including update QA and delivery.

14. Should a CBDC be legal tender? 

 If CBDC deposits are assets of the US Federal Reserve, denominated in dollars, they must be legal tender as comprehensively as physical dollars.

CBDC Design

15. Should a CBDC pay interest? If so, why and how? If not, why not? 

 Interest on CBDC accounts could be a valuable tool for managing the money supply. It can also make CBDC deposits resilient to inflation.

 

16. Should the amount of CBDC held by a single end-user be subject to quantity limits? 

 The Federal Reserve and Congress must determine the degree to which they wish to indemnify users against losses due to user errors, crimes, or errors by the system itself.  This amount must be less than an amount that would cause significant impact to the national and global financial system.

 

17. What types of firms should serve as intermediaries for CBDC? What should be the role and regulatory structure for these intermediaries? 

 I fail to see a real advantage to intermediating a CBDC, unless that intermediation consists of the creation of a new quasi-governmental agency to administer CBDC accounts.  While it provides a way to jump start CBDC administration, intermediation by existing institutions such as banks simply provides them with a new profit center with a lower risk profile, while adding little .

 

18. Should a CBDC have "offline" capabilities? If so, how might that be achieved? 

 Global and even nationwide cell phone and internet connectivity cannot be assumed, thus an offline mode is necessary for a national CBDC. Because distributed database integrity protocols such as two-phase commit are complex, CBDC accounts should need to implement only a simple "offline mode" protocol.
 

A simple offline mode would lock out online transactions and permit only a single device to implement offline transactions, with withdrawals limited to the account balance.  Exiting offline mode would replay the accumulated transactions into the online system as a batch process.

 

19. Should a CBDC be designed to maximize ease of use and acceptance at the point of sale? If so, how?

Accounts should be able to be provided with a debit card, with user-definable transaction limits and state of the art anti-fraud measures.

 

20. How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed? 

System to system access is typically authenticated via "API Keys" that are functionally equivalent to passwords.  While passwords have come to be regarded as inadequately secure, and a number of secure alternatives are in wide use, API keys persist due to lack of well-known alternatives.  The Federal Reserve may need to commission an agency such as NIST to organize the development and standardization of a secure system-to-system authentication protocol based on public key technology, incorporating standards for secure key management. 

21. How might future technological innovations affect design and policy choices related to CBDC? 

 Advances in quantum computing and cryptography could pose a serious threat to the confidentiality and integrity of CBDC transactions, not to mention all other financial transactions. The ability of state actors to access quantum and quantum-like computations significantly in advance of those publicly disclosed, and to use them to disrupt CBDC and other financial processes should not be discounted.

 

CDBC encryption and authentication algorithms and protocols should incorporate cryptographic agility properties in order to support timely implementation of cryptographic security advances as they become available.

 

22. Are there additional design principles that should be considered? Are there tradeoffs around any of the identified design principles, especially in trying to achieve the potential benefits of a CBDC? 

 In order to be useful to all citizens, CBDC applications and systems should be designed from the outset with accessibility and usability in mind. US coins and bills are notoriously difficult to distinguish, yet design improvements are nearly impossible to implement.  CBDC systems have an opportunity to avoid such errors. To advance financial inclusion, CBDC functions should be easy to learn by people inexperienced with financial systems and terminology and even with their supporting technologies such as phone apps and web pages.

To provide support for advanced uses, every CBDC operation should have a counterpart API, adhering to well-documented standards.

The Colonial Pipeline ransomware incident confirms why capitalism is so bad at risk management

Lest we forget, in early May, the largest pipeline in the Eastern US was shut down for a week because malicious software had been infiltrated into many of its administrative systems.  “In an abundance of caution”, the entire company was shut down, including the pipeline itself.  As of this writing, the full story has not emerged, but the most likely reason for the operational shutdown seems to be that although the control systems for the pipeline were fully isolated from the rest of the company’s network, and unaffected, the company’s billing systems were inoperative, and deliveries of gasoline could not be accounted for or charged for.

The consequences of the shutdown were quite serious. Deliveries of fuel to gas stations were halted, their tanks ran dry, and people throughout the Eastern US were unable to refuel their cars.  Stories of hoarding of gas in plastic bags began to circulate.

Lost in all the discussions of cyberattacks and the role of cryptocurrency in ransom payments was the fact that this pipeline represented a single point of failure in the national fuel supply chain. There was not enough spare capacity in the pipeline network to take up the slack if Colonial’s pipeline went out of service.

Tracing back to the root cause of this failure of network redundancy gets you to capitalism itself.  It’s a well known, but little remarked fact that left unregulated, free markets degenerate into a monopolistic state.  Superior profits lead to the ability to buy up competing firms, and established market dominance leads to predatory pricing that drives firms that are unwilling to sell themselves out of business.

In order to establish superior profits, firms optimize their operations for efficiency, at the expense of resilience.  This works fine when conditions are stable, but it leads to outsized consequences when external forces such as a cyberattack enter the picture.

If enough market participants are attacked often enough, the market ought to eventually identify a common set of attack characteristics and adopt defenses against them, but even under the best of circumstances adaptation may take an excessively long time.  If the attacks follow certain kinds of statistical distributions with “fat tails”, a long time may be forever.

Protecting the system itself is the role of government.  It will take government intervention to prevent this type of incident from reoccurring in the future.  The current US government doesn’t even seem capable of recognizing this type of problem.  And certain forms of government, notably “republicanism” tend to evolve into authoritarian modes that themselves are unstable, and unable to drive infrastructures and corporate evolutions towards resilient modes that can survive natural and malicious shocks.

Investing for a recession-proof, typical income retirement: What the experts won't tell you

I retired two years ago, and finally found time to think thoroughly about retirement finances. I was surprised by the conclusions that I ended up with. I thought that the conventional retirement planning advice was reasonably good. In reality, conventional retirement planning leaves out three critical factors: Inflation, management Fees, and Taxes.

I have two explanations for this: (a) retirement investment planning is all about compound growth over 20-50 year timespans. Reasoning about compound growth is really hard. And (b) management fees and taxes are opaque and complicated, and it's easier to just ignore them. Ignoring them turns out to be a big mistake.

So I wrote an article about my reasoning and its conclusions, and posted it on Medium, in three 10-minute chunks plus an appendix, at https://medium.com/@GMcKCypress/investing-for-a-recession-proof-typical-income-retirement-what-the-experts-wont-tell-you-d9f9bee8f126?source=friends_link&sk=370f0a97fb94f6fe13c40b9a63c3d893 Take a look, it may change your perspective.

Four key technologies to decarbonize our civilization

As the end of the year nears, it's traditionally time to take stock of progress on the big picture.

This isn't "..to save the world" - the planet will keep spinning no matter what we do.  Nor is it even "civilization" that needs to be saved.  There's little doubt that civilization will survive the climate/ecological crisis.  As long as there are sufficient ecosystem services to support agriculture, civilization of some sort can survive.  They weren't high-tech, but Babylonian and ancient Egyptian cultures were unquestionably civilized.

But in order to provide six or seven billion  people with a comfortable lifestyle in a globally warming climate, a lot has to change.  Here are a few of the ares on the critical path. If I had a few billion dollars to spend on R and D, these are the areas where I would direct it.

1. Solar and wind energy storage. From an ecosystem perspective, all economic value originates from "primary production" sources: energy, agriculture, and mining. Sustainable energy gets the bulk of the attention, as it should. In a large enough electrical grid, the wind is always blowing somewhere and the sun is always shining somewhere. But we don't have a global grid yet, so local utility-scale storage is a must have requirement. There are a lot of ways to store energy, they just need to be improved faster.
2. Cellulosic and algae-based biofuel. Battery powered airplanes are becoming more realistic than anyone could have imagined only a few years ago, but they will still be a partial solution. There's no battery technology on the horizon with the energy density of liquid hydrocarbons. But hydrogen, methane, and heavier hydrocarbons such as jet fuel can be produced from air or water, and not add more carbon to the atmosphere. They just need to become much less expensive.
3. Solar desalination of water. There's more water on the planet than about anything else, it's just too salty to grow food or to drink. If desalination cam become cheaper than doing without, options for where to live would become unimaginably larger.  And with warming climates causing desert areas to grow faster than rainy areas,, the need for water becomes continually more acute. The current best solution for solar desalination is reverse osmosis powered by solar energy.  This is very complicated, and correspondingly expensive. The leading alternative, solar thermal multi-stage flash distillation is nearly as complicated.  There don't seem to be any revolutionary improvements in sight, so getting the cost down to really low levels is likely to be a long struggle.
4. Carbon negative cement. Concrete, made of sand and rocky aggregate chunks bound together with cement, is the most widely used building material in the world. The cement is made by heating carbonate materials such as limestone in a kiln to temperatures around 2700 degrees Fahrenheit, and then pulverizing the resulting pellets into a fine powder. The heating is typically produced by burning hydrocarbons, and the chemical transformation  of the source material releases carbon dioxide as well. Replacing the heating fuel with hydrogen or biofuel or using electrical heating is straightforward, but changing the chemical process to be carbon neutral will require implementing a sealed process with carbon capture technology instead of venting and leaking the CO2 into the air, or changing the chemistry of cement manufacturing completely. The promise of a new cement chemistry is that it might be possible to make it carbon negative. There are many options for this that are being investigated -- which ones are the most scaleable and economical is not at all clear.

Putting it all together. It's often been said that humanity is conducting a huge, unplanned, uncontrolled experiment in transforming the ecology of the planet. We need to work systematically on bringing that experimet under control, deciding what we want the long-term, stable state to be of  global ecosystems and the global economic systems that have become the drivers of ecosystem changes. Yet beyond a few isolated centers of activity and the singular discipline of climate science, the scientific and research incentives and institutions are set up to support narrowly focused projects that rarely fit together in any coherent way. Expanding the narrow focus into disciplines of global ecologic and economic systems engineering research is of course incredibly difficult, but that only means that we need to start as soon as possible. The amount of time we have remaining to gain control over our future shortens with ever passing day.

Economics Does Not Lie -- sez you!

"The dismal science is at last a science—and the world is the beneficiary."

In this article at http://www.city-journal.org/2008/18_3_economics.html, Guy Sorman proposes 10 laws of economics that he believes qualify it as an authentic science. In his relentlessly pro-capitalist discussion, he fails to mention a important consequence of information asymmetry: Unrestricted markets destroy themselves. The rich get richer faster than the poor, because the rich can afford better advice on how to invest their money. Without strong regulation, this leads inevitably to monopoly or oligopoly in which the number of participants falls below that needed to function as a market. Stable pricing solutions do not exist when this kind of positive feedback occurs.

Of course there are as many rich fools who can't distinguish good advice from bad as there are poor fools, and there are a lot of fools giving investment advice, but not even the internet and exchange-traded funds have eliminated this asymmetry.