European Inflation

Analysis of European inflation by Ophelie Gilbert.

The sovereign debt crisis in 2011-12 accentuated the downward trend in inflation for the Eurozone. In the aftermath, the core inflation of the Eurozone, which mostly reflects domestic inflation pressures, has declined as slack in the labour market jumped higher. Since 2013, the ongoing fall in international commodity prices has also caused the headline inflation rate to collapse, since this measure includes what economists call the volatile components: commodities and food. So the inflation rate that is prevailing today is not only about oil, but the result both of internal factors and the diffusion of global factors with many transmission channels. In 2015, core inflation even passed below 1%, which is a strong warning level for any central banker.
Why is a low inflation rate so critical? First, low inflation makes for less efficient central bank policy, as its means higher real interest rates. Second, low inflation becomes more troublesome if it is too low for too long, as it could result in a change in people’s expectations of future inflation. This could trigger a dangerous self-fulfilling loop if expectations are de-anchored, and it is very difficult to reverse disinflationary shocks – as shown in Japan
The European Central Bank (ECB) has – finally – implemented strong action to reflate the economy and stop the persistent decline in inflation, and seems to have had a particular focus on increasing the core rate. The ECB’s objective is for Consumer Price Index (CPI) inflation to be close to but below 2%, which was challenging throughout 2015.

2016 was supposed to be the year of the rebound for the headline inflation after the huge impact of the oil collapse on the 2015 inflation rate. The theory was that the negative base effects on energy prices would be removed from December onwards, and support a higher inflation rate next year. This remains true to an extent, however, once again, the oil price is playing the fool. The oil market is suffering from excess supply, and these imbalances need to be absorbed. Oil prices will remain the most important driving force for inflation, in both directions. The market is expecting a slight rebound of the oil price over next year, but if oil remains below $40 it will keep the headline inflation far from the ECB’s projection for 2016, and clearly it will again complicate the ECB’s job.

The ECB’s job is further complicated by the fact that economic growth in the Eurozone is actually on-going, firm and broad-based, and the fall in the oil price is very good news for consumer purchasing power. Nevertheless, consumer price inflation dynamics will be key to the ECB’s reaction function in 2016 in the Euro area.

Source: Allianz Global Investors

 

Figuring out the Value of Yuan

John Mauldin looks at the true value of Yuan and its impact.

Recent Chinese stock market volatility has had more to do with China’s currency than its stocks. Donald Trump and other politicians (yes, he is one) often assail Beijing for devaluing its currency and acquiring an unfair advantage.

First, the Chinese have actually been manipulating their currency upwards. While countries in the rest of the world have been letting their currencies devalue against the dollar, China has maintained an effective dollar peg until very recently. And then the “move” that seems to have everybody in a dither was only about 4%. To be fair, what really had the markets worried was that this move might presage an effective devaluation. And considering that China has watched the euro, the yen, and nearly every emerging-market currency drop anywhere from 30 to 50% against the yuan – a rather painful experience for its export sector – the Chinese have been quite patient.

Beijing think it can boost exports by manipulating its currency lower? I don’t think so. Remember how their business model works. Unlike, say, Saudi Arabia, China doesn’t simply extract resources from the ground and export them. Chinaimports raw materials, transforms them into finished goods in its factories, and then exports those goods. Their gain lies in the value added in the manufacturing process.

That means that China can’t grow exports without also growing imports. Pushing the yuan lower helps, but it’s a relatively inefficient tool for reducing the trade surplus.

Cheapening the currency has another consequence China doesn’t want. It makes imported products more expensive for Chinese consumers. The country’s abilities are growing fast, but it still depends on outside sources for many important goods. Making them cost more doesn’t help build the consumer-driven economy Beijing says it wants.

For those reasons and more, China Beige Book has a contrarian view on the Chinese currency. They believe Beijing wants the yuan to rise, not fall. So what is happening with all these interventions the Chinese authorities are making in the currency market?

The first point to remember is that the adjustments have all been quite small – far smaller than the hoopla suggests. For all the clamor that erupted last year, the yuan fell just over 4.5% against the dollar. That’s quite a lot if you are leveraged 10x, as currency traders often are, but for most merchants and consumers the change was hardly noticeable.

Recall all that happened in 2015. Aside from the stock market fireworks, China won acceptance of the yuan into the IMF’s reserve currency basket. It also watched the Federal Reserve finally make a first, tentative move toward higher rates and a correspondingly stronger dollar. If all that couldn’t crush the yuan, it’s not clear to me that anything will.

 

The second point is critical: China controls its currency by both central bank action and subtler tools. They have immense power to nudge the currency up or down. Tightening and loosening the controls is like turning a volume knob. They can crank the yuan up or turn it down.

Presently they are clamping down harder than usual in order to deter speculation. Much of this is happening under the radar, one business and industry at a time. Nevertheless, people are starting to feel the consequences.

Source: Mauldin Economics

 

 

 

Understanding the Chinese Transition

John Mauldin looks at the latest happenings in the Chinese Economy and their significance.

China Beige Book’s fourth-quarter report revealed a rude interruption to the positive “stable deceleration” trend. Their observers in cities all over that vast country reported weakness in every sector of the economy. Capital expenditures dropped sharply; there were signs of price deflation and labor market weakness; and both manufacturing and service activity slowed markedly.

That last point deserves some comment. China experts everywhere tell us the country is transitioning from manufacturing for export to supplying consumer-driven services. So if both manufacturing and service activity are slowing, is that transition still happening?

The answer might be “yes” if manufacturing were decelerating faster than services. For this purpose, relative growth is what counts. Unfortunately, manufacturing is slowing while service activity is not picking up all the slack. That’s not the combination we want to see.

Something else China Beige Book noticed last quarter: both business and consumer loan volume did not grow in response to lower interest rates. That’s an important change, and probably not a good one. It means monetary stimulus from Beijing can’t save the day this time. Leland thinks fiscal stimulus isn’t likely to help, either. Like other governments and their central banks, China is running out of economic ammunition.

One quarter doesn’t constitute a trend. Possibly some transitory factors depressed the Chinese economy the last few months, and it will soon resume its “stable deceleration” course. It is hard to imagine what those factors might have been, though. The data is so uniformly negative that it sure looks like something big must have changed.

What does this economic weakness say for Chinese stocks? Probably nothing. It should be clear to all that the Chinese stock market is completely unrelated to the Chinese economy. They don’t move together, nor do they move opposite each other. They have no consistent connection at all – or at least not one we can use to invest confidently. I went to Macau when I was in Hong Kong a few weeks ago, just to observe the fabled fervor with which the Chinese gamble. The place did indeed have a different “feel” than Las Vegas does. I’m not the only one to think that the Chinese stock market is just an outpost of Macau, but one in which leverage and monetary stimulus can overload the system.

Let me say that there are real companies with real value in China. But the rules on the ground, not to mention the accounting, make it a particularly treacherous market to invest more than your own “gambling money.”

Source: Mauldin Economics

JP Morgan to Leave UK if it Quits EU

JP Morgan, one of the leading banks in the world has threatened to quit UK if it decides to leave EU after the proposed referendum on the matter.

Jamie Dimon, the chairman and chief executive of JP Morgan, says his bank might quit the UK if Britain exits the European Union. “Britain’s been a great home for financial companies and it’s benefited London quite a bit. We’d like to stay there but if we can’t, we can’t,” he said in Davos, Switzerland and the World Economic Forum meetings.

The bank employs 19,000 people in Britain.

For JPMorgan, British membership in the EU is important since it provides the bank with “passporting” rules that allow it to do business across the 28-member bloc.

For the UK, membership is not as important. Overall trade does not require EU membership. Non-members such as Norway or Switzerland, trade with the EU makes up a bigger share of the total than it does for Britain.

Britain’s Prime Minister’s David Cameron hopes to  hold an EU referendum in June.

Source: EconomicPolicyJournal.com

Technology’s impact on Labor Market

James Manyika analyses the report of McKinsey Global Institute (MGI) and its impact on the Labor Market.

Digital America: A tale of the haves and have-mores, a new report from the McKinsey Global Institute (MGI), highlights the enormous gap as the leading sectors, companies, and individuals deploy technology in a way that leaves everyone else in the dust. The companies leading the charge are capturing market share, posting record profit growth, and even reshaping entire industries. Their competitors, by contrast, are struggling just to keep up. Workers with the most sophisticated digital skills are in high demand, and those in the most digitized industries enjoy wage growth that is twice the national average. But incomes have stagnated for the majority of US workers in other sectors.

There are huge opportunities ahead, but unsettling shifts could hit the labor market as digital technologies develop capabilities to automate more of the tasks humans are paid to do. You should check out the labor posters that should be in a common room. MGI research found that some 60 percent of occupations could have 30 percent or more of their activities automated. We estimate that automation could displace anywhere from 10 to 15 percent of US middle-skill jobs in the decade ahead.

As companies integrate these technologies, they will redefine roles and business processes. The United States will need to adapt its institutions and training pathways to help workers cope. While technology is causing this disruption, it can be part of the solution, too. Online talent platforms might be one of the keys to creating a labor market that can respond more dynamically to continually changing demand for new skills.

Companies, too, face more churn as digitization changes the dynamics in many industries. These shifts are empowering for entrepreneurs but anxiety-producing for established companies. The standard for what it means to be highly digitized today will be outdated tomorrow––and the digital leaders never stop streamlining and innovating.

For companies, this is a wake-up call. No organization can afford to sit still while industries transform around it.

This article originally ran in LinkedIn.

Trends shaping the Auto Industry

Paul Gao, Hans-Werner Kaas, Detlev Mohr, and Dominik Wee look at the trends shaping the auto industry.

Today’s economies are dramatically changing, triggered by development in emerging markets, the accelerated rise of new technologies, sustainability policies, and changing consumer preferences around ownership. Digitization, increasing automation, and new business models have revolutionized other industries, and automotive will be no exception. These forces are giving rise to four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity.

1. Driven by shared mobility, connectivity services, and feature upgrades, new business models could expand automotive revenue pools by about 30 percent, adding up to $1.5 trillion.

2. Despite a shift toward shared mobility, vehicle unit sales will continue to grow, but likely at a lower rate of about 2 percent per year.

3. Consumer mobility behavior is changing, leading to up to one out of ten cars sold in 2030 potentially being a shared vehicle and the subsequent rise of a market for fit-for-purpose mobility solutions.

4. City type will replace country or region as the most relevant segmentation dimension that determines mobility behavior and, thus, the speed and scope of the automotive revolution.

5. Once technological and regulatory issues have been resolved, up to 15 percent of new cars sold in 2030 could be fully autonomous.

6. Electrified vehicles are becoming viable and competitive; however, the speed of their adoption will vary strongly at the local level.

7. Within a more complex and diversified mobility-industry landscape, incumbent players will be forced to compete simultaneously on multiple fronts and cooperate with competitors.

8. New market entrants are expected to target initially only specific, economically attractive segments and activities along the value chain before potentially exploring further fields.

Automotive incumbents cannot predict the future of the industry with certainty. They can, however, make strategic moves now to shape the industry’s evolution. To get ahead of the inevitable disruption, incumbent players need to implement a four-pronged strategic approach:

Prepare for uncertainty.

Leverage partnerships.

Drive transformational change.

Reshape the value proposition.

Source:Auto Industry

 

Ethical Brands a hit with Younger Generation

In order to capture the imagination and attention of younger generation, brands now a days are increasingly looking to portray themselves as ethical. David Tyrrell analyses the latest research that points to this trend particularly among Beauty Brands.

Climate change, a term that certainly generates strong opinions, is looked at closely by younger generations as their partnership with the planet will extend longer than their parents and grandparents. Similarly, younger generations increasingly  seek out and support brands they perceive as ethical.

The term ethical can be defined as adhering to principles of what is “right” to do. Over half of US iGens and Millennials will purchase from ethical companies with 43% of iGens willing to spend more money on an ethical brand. Perhaps impacting the financials even more, 43% of the youngest generations actively promote ethical brands through social media in stark contrast to only 15% of Baby Boomers.

In an effort to appeal to younger, more ethically minded consumers, while showcasing initiatives to reduce their carbon footprint, skincare brands are spotlighting environmentally responsible approaches to create safe, high quality products. A leader in this area since its founding, Aveda tackles sustainability on many fronts that include using renewable energy (wind power), recyclable packaging, as well as using bioplastic alternatives derived from sugarcane when it can, in lieu of synthetics.

As we just passed the 1-degree C temperature increase for the planet, companies like L’Oréal and Unilever have joined in aggressively executing a multi-tier strategy to reduce their carbon footprints. This commitment across a variety of diverse interests continues to gain momentum as evidenced by the number of attendees at the 2015 Sustainable Innovation Forum. The forum brings together cross-sector representation including business, NGO and government to find ways to expand breadth of the “green economy.”

According to Mintel research, nearly two in five Millennials believe ethical and environmentally friendly are linked, compared to three in 10 Baby Boomers. Financial cost was often omitted from the environmental impact conversation in the past. Yet, that cannot be overlooked as nearly three in five US consumers purchase green to save money, suggesting that consumers view green as good, but exceedingly better when it is financially beneficial.

As pricing for green innovations becomes more palatable, the rate of adoption, and more notably an allegiance to green will evolve. Brands can take advantage by drawing attention to their usage of more popular, available, financially reasonable, clean energy alternatives that can sway consumer trial.

Source: Advocating the use of clean energy by Beauty Brands

 

 

Chinese Economy braced for a Reality Check

Valentin Schmid evaluates the Bank of America Report on the Chinese Economy.

The Chinese regime still has considerable power over the markets. After a 7 percent crash of the Shanghai Composite on January 4, it managed to reverseanother 3 percent drop on January 5.

So, in the very short term, all is well. In the long term and even in 2016, Bank of America sees big problems ahead for the Chinese economy. According to their analysts, the regime has to fight multiple battles at once and will ultimately lose to market forces.

“We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem,” states a report by Bank of America’s chief strategist David Cui.

The report points out that a spike in private sector debt almost inevitably leads to a financial crisis. China’s private debt to GDP ratio went up 75 percent between 2009 and 2014, bringing total debt-to-GDP to about 300 percent. Too much to sustain.

This is “a classic case of short-term stability breeding long-term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fallout will be,” Cui writes.

For the coming crisis, Cui believes China will probably have to devalue its currency, write off bad debts, recapitalize the banks, and reduce the debt burden with high inflation.

After the events of last August, and after the International Monetary Fund finally included China in its reserve currency basket, the regime completely abandoned the stable currency objective and let the yuan drift lower. The regime promises reform, and even follows through in some cases. But if push comes to shove, it resorts to central planning to mould the market according to its needs, with less and less success.

“It seems to us that the government’s policy options are rapidly narrowing-one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slowdown in economic growth is typically a prelude to financial sector instability,” writes Cui, and predicts the Shanghai Composite to drop by 27 percent in 2016.

Source: Bank of America Report

 

How will falling Oil Prices impact the Economy?

Gail Tverberg is a researcher on subjects related to energy and the economy and writes for OurFiniteWorld.com. Gail Tverberg raises an interesting question on the impact of falling Oil Prices on the growth of the economy. With popular perception being that the significant decline in oil prices will bring about a positive change in the growth of the economy but is that likely? Gail lays out the reasons as to why this might not be the case with the following reasons:

Reasons

1. Oil producers can’t really produce oil for $30 per barrel.

2. Oil producers really need prices that are higher than the technical extraction costs, making the situation even worse.

3. When oil prices drop very low, producers generally don’t stop producing.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.

Conclusion

Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

Source:Why oil under $30 per barrel is a major problem

And More Innovation

Portland is now powered by water pipes and flushing toilets

lucid energy, lucid, portland, water pipes, water, power, green power, green energy, hydro power

Portland residents can now generate green electricity simply by turning on their water taps and flushing their toilets. Fast Company reports that the Oregon city is using a state-of-the art system to capture energy from water flowing through the city’s pipelines. Small turbines installed inside the pipelines are turned by the flowing water, sending energy into a generator and off into the power grid.

lucid energy, lucid, portland, water pipes, water, power, green power, green energy, hydro power

“It’s pretty rare to find a new source of energy where there’s no environmental impact,” Gregg Semler told Fast Company. Semler is the chief executive officer of Lucid Energy, the Portland start-up behind the new system. “But this is inside a pipe, so no fish or endangered species are impacted. That’s what’s exciting.”

According to Semler, water utilities tend to use large amounts of electricity, so the new power generation system can help cut the cost of providing drinking water to cities. Utilities can decide whether to use the power for their own purposes, or sell the energy as a source of revenue.

“We have a project in Riverside, California, where they’re using it to power streetlights at night,” Semler notes. “During the day, when electricity prices are high, they can use it to offset some of their operating costs.”

As for Portland, one of its main water pipelines uses Lucid’s system to generate power, and though the system can’t make enough power for the whole city, the pipes can produce enough to run an individual building like a school or a library.

Unlike other forms of green power, like solar or wind, the Lucid system can produce power at any time of the day because the water is always flowing. The only hitch is that the turbines can only produce power where water is naturally flowing downward with gravity. Lucid’s pipes contain sensors that can monitor the quality of the water flowing through the pipes, making them more than just a power generating technology, which can be valuable just about anywhere.

Source: http://inhabitat.com/portlands-water-pipes-are-the-newest-source-of-clean-energy/

ABCT Modelling shows US economy vulnerable at present to shocks

Our Austrian Business Cycle Theory (ABCT) model indicates potential trouble ahead.

It appears the capital-consumption structure of the US economy is vulnerable to potential shocks with the risk of economic activity failing. For existing capital-consumption structures to be maintained, our modelling shows M2 non-seasonally adjusted money supply growth which is currently running at around 7.3% p.a. needs to be running at 10 – 10.5%. The massive M2 growth over the last 8 years may well have a created a trap for central bankers who have engaged in money printing activity to support the economy. To bend the analogy used to describe the effects of money printing, there is not enough “punch” coming to the party and whilst the party staggers on , the participants are at risk of getting a hangover.

We can conclude therefore that unless there is an increase in M2 NSA money supply growth, a high risk exists for capital structures to fall. Interest rate markets are moving in anticipation of US Federal Reserve interest rate policy adjustments later this year. This will impact stock markets and real estate markets affecting near term direction. Whether this is the start of a bigger cyclical downturn remains to be seen.

Small is beautiful. The Nano future is coming

Advances in nanotechnology will be a key enabler of technological advance in the next decade. The integration of information technology, biotechnology, materials sciences, and nanotechnology will generate a dramatic increase in innovation. Read this Alert to see how your personal and business life might be affected pretty soon.
What is changing?

Innovation

  • Older technologies will continue lateral ‘sidewise development’ into new markets and applications .
  • Current high-visibility investments and technology breakthroughs will be needed to realize the full potential of nanotechnology.
  • Technologies like nanotechnology will be used to establish a maintenance free environment (i.e. self -cleansing glass, self-repairing concrete).
  • Nanotechnology will produce new goods with new properties at a smaller scale that may use far less resources.

Health

  • Future uses of genetic data, software, and nanotechnology will help detect and treat disease at the genetic or molecular level.
  • Modern healthcare technologies and prevention strategies will have the potential to extend the life expectancy of people.
  • Molecular ‘robots’ could be designed to enter the body and eat plaque.
  • Nanotechnology will enable lives to be saved by digestible cameras and machines made from particles 50,000 times as small as a human hair.
  • Smart nano-materials will facilitate the development of textiles that detect biotoxins.

Business

  • The global market for nanotechnologies will reach $1 trillion or more within 20 years.
  • Progress in nanotechnology will depend heavily on R&D investments.
  • Robotics, synthetic biology, nanotechnology, and molecular manufacturing really will lead to an explosion of wealth and resource availability.
  • Printed electronics and electrics will be a $335 billion business in twenty years i.e. 2029
  • Bioscience, information technology, and nanotechnology will be applied to meet agricultural and food challenges.
  • There will be 400,000 jobs in the nanotech sector across the European Union this year.
  • Nanotechnology, 3D printing, smart materials and a new generation of composites will be a $1.3trn (£805.8bn) global manufacturing battleground this year.
  • In the coming future nanotechnology will certainly have a colossal effect on the ceramics, metals, polymers, and biomaterials industries.
Implications

Transformations

  • As personalized medicine becomes more affordable expect to see the coming of age for genomics, nanotechnology, robotics, and other innovations.
  • The use of nanotechnology could herald an ‘exciting’ breakthrough for patients with heart disease.
  • Nanotechnology could completely transform conventional economic activity from healthcare and renewable energy technology to food production.
  • Applications that are likely to be widely diffused in 2025 will combine different technologies such as biotechnology, nanotechnology, materials technology and information technology.
  • New applications and reinventions will trigger market take-off and shape further development of collaborative technologies for governance and policy modelling.
  • Nanotechnology is expected to have a major impact on sustainability in the near future.

Electronics

  • Nano- technology will enable different types of electronics.
  • Nanotechnology will allow chip manufacturers to continue upholding Moore’s Law.
  • Nanoscale piezoelectric materials could provide the lowest possible power consumption for on/off switches in MEMS and other types of electronic computing systems.
  • Relying on nano-sized robotics will eventually become commonplace.

Development

  • Advances in nanotechnology will require long time horizons and continued investments in materials, platforms, and applications across manufacturingindustries.
  • Expect the greater use of new materials with an emphasis on not just boosting performance but also improving efficiency.
  • Materials and nanotechnology will enable the development of new devices with unforeseen capabilities.
  • Nanotechnology will replace most current wearable technology.
  • Discoveries in nanotechnology will lead to unprecedented understanding and control over the fundamental building blocks of all physical things.
  • Nanotechnology could be used to help reduce battery weight and lighten other products.
  • The U.S. Air Force believes that nanotechnology will have a direct application for both flight and space travel.
  • Nanotechnologies will pave the way for developing hybrid energy solutions.
  • Nanotechnology could provide solutions for sensing.
  • Nanotechnology will also spawn new technologies for manipulating DNA.

Risks             

  • Biotechnology and nanotechnology will provide greater potential for destruction.

Learn more
To find the sources and more resources on Shaping Tomorrow about ‘The Future of Your Workplace’ some of which were used in this Trend Alert, Small is beautiful – Nano futures surround you, or ask us for a customised, in-depth GIST report on this or any other topic of interest to you.  Also, click here to find out how Shaping Tomorrow can help your organization rapidly assess and respond to these and other key issues affecting your business.

Source: http://www.shapingtomorrow.com/summary/insights/423760

Elon Musk makes the case that Tesla is a battery company first, and a carmaker second

tesla-musk-batteryNo wheels on this Tesla.(AP Photo/Ringo H.W. Chiu)

Tesla has started selling batteries that don’t have an expensive car attached. And CEO Elon Musk—the billionaire entrepreneur often compared to a superhero or a Bond villain—described a scenario in which they could potentially power much of the world.

Tesla’s new offering is called the Powerwall, a rechargeable lithium-ion battery that is designed to be mounted in a garage or on the side of a house. The device, the size of a small refrigerator, will be available in three to four months, at a price starting at $3,000 for 7 kilowatt hours (kWh). The Powerwall can store power from a home’s solar panels, or connect to the electrical grid, storing up electricity when rates are low and providing backup electricity supply in case of a blackout.

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Coming to a garage near you?(AP Photo/Ringo H.W. Chiu)

The sun is “this handy fusion reactor in the sky—you don’t have to do anything, it just works,” Musk said in a presentation. “The obvious problem with solar power is the sun does not shine at night.” (Musk, in addition to running Tesla and a rocket company, is also the chairman of Solar City, a solar panel installation business.)

Tesla is also taking aim at a bigger customers, selling 100 kWh batteries called Powerpacks to utilities and electricity-hungry companies like Amazon. Musk said Tesla is capable of “infinitely scaling” the units into a gigawatt hour-class installation, which could power a mid-sized town of about 100,000 people, or even build larger configurations.

The company’s consumer- and business-focused batteries will eventually be manufactured at the massive Gigafactory that Tesla is building in Nevada, where Tesla car batteries will also be made.

The truly grandiose scale of Musk’s ambition was revealed at the end of his presentation, when he described how many gigawatt hour class Powerpacks it would take to fulfill all of the world’s transport, electricity, and heating needs: about 2 billion.

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“Two…*billion*….Powerpacks.”

“I’m very tempted to do the billion thing,” joked Musk, who has often poked fun at his Dr. Evil-esque public image. “Let me restrain my hand.” (see the GIF, left.)

But Musk wasn’t joking when he said this: “Our goal here is to change the way the world uses energy at an extreme scale … This is something within the power of humanity to do. We have done these things before.”

Many are dubious that Tesla’s ambitions are achievable. As Quartz has reported, many of the company’s recent announcements seem to be designed to drive up its volatile stock, and Tesla’s path to profitability—it is currently targeting 2020—is a bumpy one if it cannot raise more capital from investors.

But grandiose ambitions have always been part of the Tesla pitch, and there is the chance that Musk’s bets could pay off.

“The goal is to change the world, starting with the automotive industry and closely followed by the power sector and then energy in general,” Bernstein analysts wrote shortly before the new battery business was announced. “Is that a realistic goal? Clearly it is not. But it is useful to remember that Elon Musk’s other business involves flying to Mars.”

Source: http://qz.com/395907/elon-musk-makes-the-case-that-tesla-is-a-battery-company-first-and-a-carmaker-second/

Australian Stock Market Direction

The failure of the ASX SP200 to make new all time highs at 6851.5 whilst US stocks are at all time highs is highlighting problems for the Australian economy and may even be the ‘canary in the coalmine’ for all stocks. This divergence reflects Australia’s national issues including lack of diversity in its production base. It reflects the ending of the mining boom along with the high demand for US dollars sucking cash from peripheral nations to the centre.

Currently battling resistance at 5900-6000 it would appear that any international downturn at this time will bring the ASX S&P 200 down towards our initial long term target of 2295 – 3075. We’ll reassess from there. However, for now there is a long way to get back to all time high territory. And this reveals the major weaknesses and restructuring needed in our economy. We can anticipate the ASX S&P 200 moving to the 6000 level over the next several weeks finishing the final stages of it’s upmove since 2009.

A case can be argued that the Reserve bank of Australia over extended its mandate to control inflation and unemployment during the commodity boom that came to an end in 2012-2014. By maintaining higher than needed interest rates the RBA at that time, funds were redirected to higher yielding investment opportunities in the mining sector at the expense of other, lower performing sectors such as housing. This put stress on banks, the mining industry and its supporting industrial base as oil and iron ore prices have fallen through the floor.calling into question the viability of many of the projects initiated in the last 7 years. This is the hubris of central bankers and politicians alike and what Nobel Prize winning economist FA Hayek called ‘the pretense of knowledge’.

Shortly we will see global stock markets completing their major tops. We believe our prediction for a major cyclical top spanning over 200 years is on target. We had projected this top occurring between 2015 – 2018. Indicators are now warning that this top is completing now. By late October we shall see front page headlines as financial markets capture people’s attention once again.

12 Emerging Trends that Everyone Missed at CES

Futurist Thomas Frey blogs :

Every year that I attend CES in Las Vegas I reach a point of sensory overload. It’s not just from all the people, lights, noise, and smells, but an overload of product strategies and emerging trends for the coming year.

With everything from R2D2 showing up outside the convention center, to meeting celebrities on the showroom floor, or coming face-to-face with a Paul Bunyan-sized electronic game-playing running shoe by Sketchers, or walking into a booth full of the coolest Chinese technologies ever made but not being able to talk to anyone because they don’t speak English, it’s not possible to describe all the sensations a person will experience at an event like this.

Everyone will experience CES in their own unique way, and the impressions they walk away with will help define their understanding of the world to come. Big time decisions are being made by the impressions made here.

As events go, it’s one of the largest in the world, attracting a record 170,000 people, including 45,000 from other countries. Out of 3,600 exhibitors, 375 of them were startups, with special attention being paid to them in an exhibit area called Eureka Park.

In so many ways, CES sets the tone for the global economy, with tens of thousands of private meetings being conducted in the background forcing more deals to be cut in a shorter period of time than virtually any other event on the planet.

Walking across the exhibit floors is quite a mind-expanding experience. Since I tend to use a radically different set of lenses to experience this show, I walked away with some rather unusual perspectives.

For this reason I’d like to mention twelve of the trends that everyone seemed to have missed at CES.

CES in 1967

History of CES

The first CES was held in June 1967 in New York City. It was a spinoff from the Chicago Music Show, which until then had served as the main event for exhibiting consumer electronics. The event had 17,500 attendees and over 100 exhibitors; the kickoff speaker was Motorola chairman Bob Galvin.

Competing for a while with CES was and event known as COMDEX, a computer expo held at various locations in the Las Vegas Valley, each November from 1979 to 2003. In 2001, the show was sold to Key3Media, a spin-off of Ziff Davis. Reeling from the 2000 economic downturn, Key3Media went into a Chapter 11 in February 2003 making that years show the final chapter in COMDEX history.

As a result, the Consumer Electronics Show has consolidated both COMDEX audiences with their own to make it the standard bearer for new product launches in consumer technology.

12 Emerging Trends that Everyone Missed

It’s easy to report on all the new technology that made its debut at CES. However, the more interesting stories, at least in my mind, are the less obvious shifts in business that can be derived from reading between the lines.

After spending a few days digesting everything, here are a few key observations about the world ahead.

 

Empty casinos at CES

1.) Traditional Gambling Usurped by Video Games – Even though the gambling industry is trying to tell the world it’s fine, the numbers simply don’t add up. In its 2013 State of the States report, the American Gaming Association reported that 39% of people age 21-35 spent time in casinos, with 90% saying they planned to return. Around the same time, a survey of 3,000 young adults in 16 markets in the Northeast found that only 18% of those under 35 had visited a casino in the past year.

At CES, I walked through dozens of major casinos along the strip and never once did I see a casino operating at more than 15% capacity. The biggest event of all in Vegas and the number of empty seats could fill several giant football stadiums.

However there could be a light at the end of this tunnel of gloom. Since young people would much rather play fast-action rapidly-advancing video games, and gambling laws for slot machines and roulette tables haven’t changed much since the 1950s, the best option may be to build large video game tournament centers and allow people to bet on the action, similar to betting on college basketball.

If casino owners in Vegas were to pick up on this idea, and you heard it first here, major hotels throughout the city could be retrofitted into a video game tournament centers, where every major title from Call of Duty, to Middle Earth, Bayonetta, Wolfenstein, and Destiny would have annual competitions. Las Vegas could once again reclaim it’s position, only this time with a new kind of gambling that appeals in a huge way to today’s young people.

2.) Formation of the Underground Economy for Flying Drones – Flying drones are hot! With over 100 exhibitors at CES showing off the latest in drone tech and the FAA saying the whole industry needs to hold tight until sometime in 2017, the only direction this industry can possibly go is underground. 

Yeah, theres something very ironic about a highly visible industry involving flying objects creating an underground economy, but since the FAA doesn’t have an enforcement division, and since the operators will soon be miles away from where the machines are flying, it becomes a low risk crime.

That, coupled with a drone industry that is progressing at an exponential rate, while the FAA is still operating with a linear progression mindset, means that we’ll be seeing the equivalent of policemen blowing whistles running down the street trying to stop hyper jet drones flying at 2,000 mph in less than two years.

3.) First Generation Mood-Casters – The Internet of Things had a huge presence at CES as well as vendors offering every kind of Smart Home tech imaginable. The one thing both of these emerging industries has in common is their quest to make life more manageable for everyone.

But here’s the problem. Everyone is different.

So while giving people have access to 10,000 options for controlling the lights in their house or giving them streaming access to a million new songs, video games, or TV shows may sound appealing, all these decision points adds more stress to a person’s day, not less.

There is, however, a solution – Mood-Casting.

If every smart device were able to tap into the mood of people it came into contact with, it could easily make the decisions for them. The good news is that much of today’s wearable technology is giving off the signals necessary for these devices to instantly fine tune their decision-making processes.

For example, if a person walked into a room and the lighting was too harsh, sensors could read common stress indicators and keep making changes to the brightness, color, and intensity until it reached an optimal level.

Mood-Casters could be used to play the perfect music while working out, driving, or trying to relax. Every fire in a fireplace could be altered in both color and brilliance to match the desires of those nearby. Restaurants could adjust the smells in their dining rooms until they were optimized for guests on a moment by moment basis. (i.e. people may prefer a different smell while eating appetizers as opposed to eating dessert.)

Health tech everywhere at CES

4.) The Rise of the Healthcare Circumventionist – Healthcare is a hierarchical industry with doctors firmly entrenched on the top rung. It is also one of the world’s most lucrative industries. The entrepreneurial community knows this and has been plotting for years to find ways to tap into these revenue streams.

Doctors, in general, are not a big fan of the hundreds of medical devices coming out of the woodwork that are designed to circumvent their authority.

They’re even less of a fan of the big data analysts, who have never once studied medicine, that are telling them what to do.

In just a few years, many people will be switching from going in for a “medical checkup” to having a “health analytics screening.”

With hundreds of new entries into the emerging wearable tech industry coming out of the woodwork, in just a few years, most people will be able to make their own diagnosis before ever setting foot in the doctors office. The piece that entrepreneurs will have the greatest difficulty prying away from doctors is their ability to write prescriptions. But that too is destined to be undermined with technology work-arounds.

Have you met your virtual self?

5.) Becoming One with My Virtual Self – Every time I look at the Internet through the rectangular screen on my desk I wonder what it would be like to have a screen 10 times bigger. Better yet, what would it be like to eliminate the screen altogether.

In many ways, CES has been this ongoing competition to see which big industry player can cram the most TVs into their exhibit space in the most interesting fashion. Seeing more than a thousand 4K TVs integrated into one massive 40’ high video wall is impressive to say the least.

The days of “observer based” television is on the verge of being replaced with immersive VR, and eliminating the limitations of the viewing screen is only the first of 10,000 steps towards having the observer integrated into the entertainment experience.

Recent studies have shown that VR users can feel like they’re part of what’s happening just by being able to view they’re own hands. Viewable hands will lead to other viewable body parts, as well as friends, pets, and other non-real characters.

Just as 3D television is now loosing its annoying glasses, over time, virtual reality will loose the goggles and be blended into our real life experiences, with an entirely new genre’s of entertainment entering the fold.

6.) Smart Things Vs Smarter Things – In much the same way toy companies began giving a voice to every fuzzy and plastic creature in play land, companies are finding it increasingly easy to make intelligence the differentiator in virtually every new product.

With everything from connected toothbrushes, to smart heated insoles for your shoes, belts that automatically readjust themselves, and helmets that autocorrect their venting system to keep a person’s head cool, the Internet of Things is providing wireless intelligence and connectivity to everything we interact with.

At the heart of the Internet of Things is a micro sensor industry where every new kind of sensor will create an entire new industry, and the sensors themself are becoming exponentially cheaper, smaller, and more ubiquitous.

Projections show the world breaking the trillion sensor barrier in less than 10 years, and the 100 trillion sensor milestone around 20 years from now.

Sensors are meaningless if not connected to other parts of the “anatomy,” and that’s where MEMS (microelectronic mechanical systems), very small machines, come into play. MEMS are the devices that power everyday things like the Pebble Watch, smart light bulbs, and real-time blood-sugar monitors.

Even though the amount of “intelligence” being added to devices today is still primitive, the trend is towards a universe where devices become aware of changes made by other devices and respond accordingly.

Technologies like Intel’s button-sized Curie device is a step toward integrating far more processing power into wearable tech and its field of sensors.

All this integration is setting the stage for the emerging operating system battlefield.

The OS battles have already begun

7.) The Emerging Operating System Battlefield – In general terms, an operating system is the software operating in the background that manages hardware and software resources and provides a set of common services to make everything run better.

Today’s most common operating systems include Android, iOS, Linux, and Microsoft Windows. Each one has its own feature set that makes applications easier to build and more uniform.

The need for new types of operating systems became apparent when smartphones started entering the picture a decade ago.

As smart technology begins to enter nearly every field, the need for new operating systems has never been greater, and companies are racing to fill the void.

To give you some examples, the operating system for driverless cars will be distinct and different than the operating system for flying drones. At the same time we are seeing a need for separate operating systems for smart homes, the Internet of Things, wearable technology, health tech, learning tech, and robots.

Every unique operating system will have its own unique privacy and security issues, industry standards, language biases, and feature sets.

Those who control the rules of the game will have a huge advantage over everyone else. The OS wars are still in their infancy, and most of the winners will be decided over the next five years.

Portable 3D laser scanner from Z Corporation

8.) Molecular-Level Scanners to Drive Tomorrow’s 3D Printing Industry – The 3D printing world is gaining lots of attention, but often lost in the shadows is a rapidly developing scanning industries with capabilities few ever imagined.

Not only will future scanning technologies be able to scan shapes with nano-scale precision, they will be able to parse exacting details of materials used in every molecule-thick layer of the object being scanned.

This means that someone will eventually be able to scan a smartphone, and with a multi-material 3D printer, reproduce the entire device in exacting detail.

For bio-printing, this means a person that has their finger cut off can have a replacement one printed and surgically connected in a way that few, if any, will know the difference.

IntelliPillow

9.) Shapeshifting Smart Products – When I first saw the IntelliPillow, a shapeshifting sensor-driven pillow that automatically knows when you’re sleeping on your side or back and adjusts itself accordingly, it reminded me of the columns I wrote on smart shoes and smart car seats over a decade ago.

The three things that the human body interacts with the most in life are the chairs we sit in, the shoes we walk in, and the beds we sleep in. People will pay dearly for any technology that can optimize any of these three friction points.

Using sensors to monitor layers of pressure, and either expanding gels or air systems to compensate for the changing conditions, shapeshifting products are destined to be all the rage in the coming years.

Bang & Olufsen ‘BeoSound Moment’

10.) Touch-Responsive Surfaces – As I came across the Bang & Olufsen ‘BeoSound Moment’ device, I realized I was looking at the world’s first touch-sensitive wood interface.

Extending far beyond glass touch screens of the past, touchable wood opens the door for any number of other touch sensitive surfaces like rock, stone, tile, or even concrete.

But who says we need to confine our thinking to hard surfaces. Will we be creating touch-sensitive carpets, leather, clothing, and upholstery? The answer will soon be an unequivocal yes.

11.) 3D Printing Combined with Robots Paves the way for Large Scale 3D Sculpting & Design – When 3D printing goes mobile, it opens the door for an entirely new kind of design and architecture.

If we can imagine a 3D printer that drives over, refills its tank with material, drives back and precisely extrudes the material into place, you’ll begin to understand the potential here.

Now, consider 100 or 1,000 mobile printers, either mounted on ground based or flying drones, working in swarms to build an entire building. That day is not too far off.

Most large structures of the future will be built this way. This will include everything from cruise ships, to baseball stadiums, hospitals, bridges, skyscrapers, hotels, apartment complexes, and giant sculptures.

Gone are the days of constrained thinking. Tomorrow’s mobile 3D printer technology will unleash a world of creative possibilities unlike anything we’ve ever imagined.

12.) The Massive Growing Need for Micro Colleges – Every new technology creates a need for more training. Very often it ends up being niche learning that takes place in-house with existing employees. But we’re also seeing a growing refinement of industries driving the need for huge new talent pools that currently don’t exist.

Whether its virtual reality, specialized 3D scanning, 3D printing, mobile apps, Internet of Things, flying drones, or reputation management, the need for tech-savvy fast-to-adapt talent pools is growing, and growing quickly.

This is also an area where traditional colleges have missed the boat. Their attempt to put everything into a 2-year or 4-year framework has left the largest untapped opportunity ever for short-term full-immersion courses that help workers reboot their career.

The rapid growth in coding schools such as our own DaVinci Coders is only a tiny slice of a much larger Micro College pie that will get created over the coming years.

Final Thoughts

In the futurist world, trends are often based on loose signals derived from a few key data points and overlaid on some future timeline.

The trends I’ve described above are a combination of empirical evidence, past observations, industry research, and a fair amount of conjecture on my part.

In many cases, the 1+1=3 formula I use comes from a Situational Futuring technique I’ve been developing over the past few years.

There is great value in this line of thinking because it unlocks possibilities, and more importantly for both individuals and businesses, it can unlock key competitive advantages in a world where differentiation is always a hard fought battle.

As always, I‘d love to hear your thoughts. Please take a moment to weigh in on these and other topics that you find interesting.

Source: http://www.futuristspeaker.com/2015/01/12-emerging-trends-that-everyone-missed-at-ces/

Bureaucracy Must Die

2014NOV05-7
Gary Hamel writes for Harvard Business Review:

Almost 25 years ago in the pages of HBR, C.K. Prahalad and I urged managers to think in a different way about the building blocks of competitive success.  We argued that a business should be seen as a portfolio of “core competencies” as well as a portfolio of products.  By building and nurturing deep, hard-to-replicate skills, an organization could fatten margins and fuel growth.  While I still believe that distinctive capabilities are essential to distinctive performance, I have increasingly come to believe (as I argued in an earlier post) that even the most competent organizations also suffer from a clutch of core incompetencies. Businesses are, on average, far less adaptable, innovative, and inspiring than they could be and, increasingly, must be.

Most of us grew up in and around organizations that fit a common template. Strategy gets set at the top. Power trickles down. Big leaders appoint little leaders. Individuals compete for promotion. Compensation correlates with rank. Tasks are assigned. Managers assess performance. Rules tightly circumscribe discretion. This is the recipe for “bureaucracy,” the 150-year old mashup of military command structures and industrial engineering that constitutes the operating system for virtually every large-scale organization on the planet. It is the unchallenged tenets of bureaucracy that disable our organizations—that make them inertial, incremental and uninspiring.  To find a cure, we will have to reinvent the architecture and ideology of modern management — two topics that aren’t often discussed in boardrooms or business schools.

Architecture. Ask just about any anyone to draw a picture of their organization — be it a Catholic priest, a Google software engineer, a nurse in Britain’s National Health Service, a guard in Shanghai’s Hongkou Detention Center, or an account executive at Barclays Bank — and you’ll get the familiar rendering of lines-and-boxes. This isn’t a diagram of a network, a community, or an ecosystem — it’s the exoskeleton of bureaucracy; the pyramidal architecture of “command-and-control.” Based on the principles of unitary command and positional authority, it is simple, and scaleable. As one of humanity’s most enduring social structures, it is well-suited to a world in which change meanders rather than leaps. But in a hyperkinetic environment, it is a profound liability.

A formal hierarchy overweights experience and underweights new thinking, and in doing so perpetuates the past. It misallocates power, since promotions often go to the most politically astute rather than to the most prescient or productive. It discourages dissent and breeds sycophants. It makes it difficult for internal renegades to attract talent and cash, since resource allocation is controlled by executives whose emotional equity is invested in the past.

When the responsibility for setting strategy and direction is concentrated at the top of an organization, a few senior leaders become the gatekeepers of change. If they are unwilling to adapt and learn, the entire organization stalls. When a company misses the future, the fault invariably lies with a small cadre of seasoned executives who failed to write off their depreciating intellectual capital. As we learned with the Soviet Union, centralization is the enemy of resilience. You can’t endorse a top-down authority structure and be serious about enhancing adaptability, innovation, or engagement.

Ideology. Business people typically regard themselves as pragmatists, individuals who take pride in their commonsense utilitarianism. This is a conceit. Managers, no less than libertarians, feminists, environmental campaigners, and the devotees of Fox News, are shaped by their ideological biases. So what’s the ideology of bureaucrats? Controlism. Open any thesaurus and you’ll find that the primary synonym for the word “manage,” when used as verb, is “control.” “To manage” is “to control.”

Managers worship at the altar of conformance. That’s their calling—to ensure conformance to product specifications, work rules, deadlines, budgets, quality standards, and corporate policies. More than 60 years ago, Max Weber declared bureaucracy to be “the most rational known means of carrying out imperative control over human beings.” He was right. Bureaucracy is the technology of control. It is ideologically and practically opposed to disorder and irregularity. Problem is, in an age of discontinuity, it’s the irregular people with irregular ideas who create the irregular business models that generate the irregular returns.

In this environment, control is a necessary but far from sufficient prerequisite for success. Think of Intel and the extraordinary control it must exert over thousands of variables to produce its Haswell family of 14-nanometer processors. This operational triumph is tempered, though, by Intel’s failure to capitalize on the explosive growth of the market for mobile devices. More than 60% of the company’s revenue is still tied to personal computers, and less than 3% comes from the company’s unprofitable “Mobile & Communications” unit.

Unfettered controlism cripples organizational vitality.  Adaptability, whether in the biological or commercial realm, requires experimentation—and experiments are more likely to go wrong than right—a scary reality for those charged with excising inefficiencies.  Truly innovative ideas are, by definition, anomalous, and therefore likely to be viewed skeptically in a conformance-obsessed culture.  Engagement is also negatively correlated with control. Shrink an individual’s scope of authority, and you shrink their incentive to dream, imagine and contribute.  It’s absurd that an adult can make a decision to buy a $20,000 car, but at work can’t requisition a $200 office chair without the boss’s sign-off.

Make no mistake: control is important, as is alignment, discipline and accountability—but freedom is equally important. If an organization is going to outrun the future, individuals need the freedom to bend the rules, take risks, go around channels, launch experiments, and pursue their passions. Unfortunately, managers often see control and freedom as mutually exclusive—as ideological rivals like communism and capitalism, rather than as ideological complements like mercy and justice. As long as control is exalted at the expense of freedom, our organizations will remain incompetent at their core.

There’s no other way to put it: bureaucracy must die. We must find a way to reap the blessings of bureaucracy—precision, consistency, and predictability—while at the same time killing it. Bureaucracy, both architecturally and ideologically, is incompatible with the demands of the 21st century.

Some might argue that the biggest challenge facing contemporary business leaders is the undue prominence given to shareholder returns, or the fact that corporations have too long ignored their social responsibilities. These are indeed challenges, but they are neither as pervasive nor as problematic as the challenge of defeating bureaucracy.

First, only a minority of the world’s employees work in publicly-held corporations that are subject to the rigors and shortcomings of American-style capitalism. Bureaucracy, on the other hand, is universal.

Second, most progressive leaders, like Apple’s Tim Cook or HCL Technologies’ retired CEO Vineet Nayar, already understand that the first priority of a business is to do something truly amazing for customers, that shareholder returns are but one measure of success, that short-term ROI calculations can’t be used to as the sole justification for strategic investments, and that, since corporate freedoms are socially negotiated, businesses must be responsive to the broader needs of the societies in which they operate. All this is becoming canonical among enlightened executives. Yes, work still needs to be done to better align CEO compensation with long-term value creation, but that work is already well underway. And while some CEOs still grumble that Anglo-Saxon investors are inherently short-term in their outlook, their argument breaks down the moment you realize that investors often happily award a fast-growing company a price-earnings multiple that is many times the market average.

Simply put, at this point in business history, the pay-off from reforming capitalism, while substantial, pales in comparison to the gains that could be reaped from creating organizations that are as fully capable as the people who work within them.

I meet few executives around the world who are champions of bureaucracy, but neither do I meet many who are actively pursuing an alternative. For too long we’ve been fiddling at the margins. We’ve flattened corporate hierarchies, but haven’t eliminated them. We’ve eulogized empowerment, but haven’t distributed executive authority. We’ve encouraged employees to speak up, but haven’t allowed them to set strategy. We’ve been advocates for innovation, but haven’t systematically dismantled the barriers that keep it marginalized. We’ve talked (endlessly) about the need for change, but haven’t taught employees how to be internal activists. We’ve denounced bureaucracy, but haven’t dethroned it; and now we must.

We have to face the fact that any change program that doesn’t address the architectural rigidities and ideological prejudices of bureaucracy won’t, in fact, change much at all. We need to remind ourselves that bureaucracy was an invention, and that whatever replaces it will also be an invention—a cluster of radically new management principles and processes that will help us take advantage of scale without becoming sclerotic, that will maximize efficiency without suffocating innovation, that will boost discipline without extinguishing freedom. We can cure the core incompetencies of the corporation—but only with a bold and concerted effort to pull bureaucracy up by its roots.

Source: https://hbr.org/2014/11/bureaucracy-must-die/

Energy and the Economy – Twelve Basic Principles

By Gail Tverberg

There is a standard view of energy and the economy that can briefly be summarized as follows: Economic growth can continue forever; we will learn to use less energy supplies; energy prices will rise; and the world will adapt. My view of how energy and the economy fit together is very different. It is based on the principle of reaching limits in a finite world. Let me explain the issues as I see them.

Twelve Basic Principles of Energy and the Economy

1. Economic models are no longer valid, as we start getting close to limits.

We live in a finite world. Because of this, the extraction of energy resources and of resources in general operates in a way that is not at all intuitive as we approach limits. Economists have put together models of how the economy can be expected to act based on how the economy acts when it is distant from limits. Unfortunately, these economic models are worse than useless as limits approach because modeled relationships no longer hold. For example:

(a) The assumption that oil prices will rise as the cost of extraction rises is not necessarily true. Instead, a finite world creates feedback loops that tend to keep oil prices too low because of its tight inter-connections with wages. We see this happening right now. The Telegraph reported recently, “Oil and gas company debt soars to danger levels to cover shortfall in cash.”

(b) The assumption that greater investment will lead to greater output becomes less and less true, as the easy to extract resources (including oil) become more depleted.

(c) The assumption that higher prices will lead to higher wages no longer holds, as the easy to extract resources (including oil) become more depleted.

(d) The assumption that substitution will be possible when there are shortages becomes less and less appropriate because of interconnections with the rest of the system. Particular problems include the huge investment required for such substitution, impacts on the financial system, and shortages developing simultaneously in many areas (oil, metals such as copper, rare earth metals, and fresh water, for example).

More information is available from my post, Why Standard Economic Models Don’t Work–Our Economy is a Network.

2. Energy and other physical resources are integral to the economy.

In order to make any type of goods suitable for human use, it takes resources of various sorts (often soil, water, wood, stones, metals, and/or petrochemicals), plus one or more forms of energy (human energy, animal energy, wind power, energy from flowing water, solar energy, burned wood or fossil fuels, and/or electricity). With solar energy being the most prominent one out of the lot, it also has helped in the emergence of companies like RENEW ENERGY, a leading manufacturer, which manufactures products that try to harness from the sun as much energy as they can.

Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.
Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.

3. As we approach limits, diminishing returns leads to growing inefficiency in production, rather than growing efficiency.

As we use resources of any sort, we use the easiest (and cheapest) to extract first. This leads to a situation of diminishing returns. In other words, as more resources are extracted, extraction becomes increasingly expensive in terms of resources required, including human and other energy requirements. These diminishing returns do not diminish in a continuous slow way. Instead, there tends to be a steep rise in costs after a long period of slowly increasing costs, as limits are approached.

Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.
Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

One example of such steeply rising costs is the sharply rising cost of oil extraction since 2000 (about 12% per year for “upstream costs”). Another is the steep rise in costs that occurs when a community finds it must use desalination to obtain fresh water because deeper wells no longer work. Another example involves metals extraction. As the quality of the metal ore drops, the amount of waste material rises slowly at first, and then rapidly escalates as metal concentrations approaches 0%, as in Figure 2.

The sharp shift in the cost of extraction wreaks havoc with economic models based on a long period of very slowly rising costs. In a period of slowly rising costs, technological advances can easily offset the underlying rise in extraction costs, leading to falling total costs. Once limits are approached, technological advances can no longer completely offset underlying cost increases. The inflation-adjusted cost of extraction starts rising. The economy, in effect, starts becoming less and less efficient. This is in sharp contrast to lower costs and thus apparently greater efficiency experienced in earlier periods.

4. Energy consumption is integral to “holding our own” against other species.

All species reproduce in greater numbers than need to replace their parents. Natural selection determines which ones survive. Humans are part of this competition as well.

In the past 100,000 years, humans have been able to “win” this competition by harnessing external energy of various types–first burned biomass to cook food and keep warm, later trained dogs to help in hunting. The amount of energy harnessed by humans has grown over the years. The types of energy harnessed include human slaves, energy from animals of various sorts, solar energy, wind energy, water energy, burned wood and fossil fuels, and electricity from various sources.

Human population has soared, especially since the time fossil fuels began to be used, about 1800.

Figure 3. World population based on data from "Atlas of World History," McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.
Figure 3. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

Even now, human population continues to grow (Figure 4), although the percentage rate of growth has slowed.

http://gailtheactuary.files.wordpress.com/2013/04/population.png
Figure 4. World population split between US, EU-27, and Japan, and the Rest of the World.

Because the world is finite, the greater use of resources by humans leads to lesser availability of resources by other species. There is evidence that the Sixth Mass Extinction of species started back in the days of hunter-gatherers, as their ability to use of fire to burn biomass and ability to train dogs to assist them in the hunt for food gave them an advantage over other species.

Also, because of the tight coupling of human population with growing energy consumption historically, even back to hunter-gatherer days, it is doubtful that decoupling of energy consumption and population growth can fully take place. Energy consumption is needed for such diverse tasks as growing food, producing fresh water, controlling microbes, and transporting goods.

5. We depend on a fragile self-organized economy that cannot be easily replaced.

Individual humans acting on their own have very limited ability to extract and control resources, including energy resources. The only way such control can happen is through a self-organized economy that allows people, businesses, and governments to work together on common endeavors. Development of a self-organized economy started very early, as bands of hunter-gatherers learned to work together, perhaps over shared meals of cooked food. More complex economies grew up as additional functions were added. These economies have gradually merged together to form the huge international economy we have today, including international trade and international finance.

This networked economy has a tendency to grow, in part because human population tends to grow (Item 4 above), and in part because greater complexity is required to solve problems, as an economy grows. This networked economy gradually adds more businesses and consumers, each one making choices based on prices and regulations in place at the particular time.

Figure 5. Dome constructed using Leonardo Sticks
Figure 5. Dome constructed using Leonardo Sticks

This networked economy is fragile. It can grow, but it cannot easily shrink, because the economy is constantly optimized for the circumstances at the time. As new products are developed (such as cars), support for prior approaches (such as horses, buggies and buggy whips) disappears. Systems designed for the current level of usage, such as oil pipelines or Internet infrastructure, cannot easily be changed to accommodate a much lower level of usage. This is the reason why the economy is illustrated as interconnected but hollow inside.

Another reason that the economy cannot shrink is because of the large amount of debt in place. If the economy shrinks, the number of debt defaults will soar, and many banks and insurance companies will find themselves in financial difficulty. Lack of banking and insurance services will adversely affect both local and international trade.

6. Limits of a finite world exert many pressures simultaneously on an economy.

There a number of ways an economy can reach a situation of inadequate resources for its population. While all of these may not happen at once, the combination makes the result worse than it otherwise would be.

a. Diminishing returns (that is, rising production costs as depletion sets in) for resources such as fresh water, metals, and fossil fuels.

b. Declining soil quality due to erosion, loss of mineral content, or increased soil salinity due to poor irrigation practices.

c. Rising population relative to the amount of arable land, fresh water, forest resources, mineral resources, and other resources available.

d. A need to use an increasing share of resources to combat pollution, related to resource extraction and use.

e. A need to use an increasing share of resources to maintain built infrastructure, such as roads, pipelines, electric grids, and schools.

f. A need to use an increasing share of resources to support government activities to support an increasingly complex society.

g. Declining availability of food that is traditionally hunted (such as fish, monkeys, and elephants), because an increase in human population leads to over-hunting and loss of habitat for other species.

7. Our current problems are worryingly similar to the problems experienced by earlier civilizations before they collapsed.

In the past, there have been civilizations that were confined to a limited area that grew for a while, and then collapsed once resource availability declined or population outgrew resources. Such issues led to a situation of diminishing returns, similar to the problems we are experiencing today. We know from studies of these prior civilizations how diminishing returns manifested themselves. These include:

(a) Reduced job availability and lower wages, especially for new workers joining the workforce.

(b) Spiking food costs.

(c) Growing demands on governments for services, because of (a) and (b).

(d) Declining ability of governments to collect sufficient taxes from workers who are producing less and less (because of diminishing returns) and because of this, receiving lower wages.

(e) Increased reliance on debt.

(f) Increased likelihood of resource wars, as a group with inadequate resources tries to take resources from other groups.

(g) Eventual population decline. This occurred for two reasons: As wages dropped and needed taxes rose, workers found it increasingly difficult to obtain an adequate diet. As a result, they become more susceptible to epidemics and diseases. Greater involvement in resource wars also led to higher death rates.

When collapse came, it did not come all at once. Rather a long period of growth was succeeded by a period of stagnation, before a crisis period of several years took place.

Figure 6. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles.
Figure 6. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles.

We began an economic growth cycle back when we began using fossil fuels to a significant extent, starting about 1800. We began a stagflation period, at least in the industrialized economies, when oil prices began to spike in the 1970s. Less industrialized countries have been able to continue growth their growth pattern longer. Our situation is likely to differ from that of early civilizations, because early civilizations were not dependent on fossil fuels. Pre-collapse skills tended to be useful post-collapse, because there was no real change in energy sources. Loss of fossil fuels would considerably change the dynamic of the outcome, because most jobs would become obsolete.

Most models put together by economists assume that the conditions of the growth period, or the growth plus stagflation period, will continue forever. Such models miss turning points.

8. Modeling underlying the book Limits to Growth shows why depletion can be expected to lead to declining economic growth. It also shows why extracting all of the resources that seem to be available is likely to be impossible.

We also know from the analysis underlying the book The Limits to Growth (by Donella Meadows and others, published in 1972) that growing demand for resources because of Items listed as 6a to 6g above will take an increasingly large share of resources produced. This dynamic makes it very difficult to produce enough additional resources so that economic growth can continue. The authors report that the behavior mode of the modeled system is overshoot and collapse.

The 1972 analysis does not model the financial system, including debt and the repayment of debt with interest. The closest it comes to economic modeling is modeling industrial capital, which it describes as factories, machines, and other physical “stuff” needed to extract resources and produce goods. It finds that inability to produce enough industrial capital is likely to be a bottleneck far before resources in the ground are exhausted.

As an example in today’s world, there seems to be a huge amount of very heavy oil that can be steamed out of the ground in many places including Canada and Venezuela. (The existence of such heavy oil is one reason the ratio of oil reserves to oil production is high.) To actually get this oil out of the ground quickly would require a huge physical investment in a very short time frame. As a practical matter, we cannot ramp up all of the physical infrastructure needed (pipelines, steaming equipment, refining equipment) without badly cutting into the resources needed to “grow” the rest of the economy. A similar problem is likely to exist if we try to ramp up world oil and gas supply using fracking.

9. Our real concern should be collapse caused by reaching limits in many ways, not the slow decline reflected in a Hubbert Curve.

One reason for being concerned about collapse is the similarity of the problems our current economy is experiencing to those of prior economies that collapsed, as discussed in Item 7. Another reason for this concern is based on the observation from physics that an economy is a dissipative structure, just as a hurricanes is, and just as a human being is. Such dissipative structures have a finite lifetime.

Concern about future collapse is very different from concern that one or another resource will decline in a symmetric Hubbert curve. The view that resources such as oil will gradually decrease in availability once 50% of the resources have been extracted reflects a best-case scenario, where a perfect replacement (both cheap and abundant) replaces the item that is depleting, so that the economy is not affected. Hubbert illustrated the kind of situation he was envisioning with the following graphic:

Figure 7. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.
Figure 7. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

10. There is a tight link between both oil consumption and total energy consumption and world economic growth.

This tight link is evident from historical data:

Figure 8. A comparison of three year average growth in world real GDP (based on USDA values in $2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.
Figure 8. A comparison of three year average growth in world real GDP (based on USDA values in $2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.

The link between energy and the economy comes both from the supply side and the demand side.

With respect to supply, it takes energy of many types to make goods and services of all types. This is discussed in Item 2 above.

With respect to demand,

(a) People who earn good wages (indirectly through the making of goods and services with energy products) can afford to buy products using energy.

(b) Because consumers pay taxes and buy goods and services, growth in demand from adequate wages flows through to governments and businesses as well.

(c) Higher wages enable higher debt, and higher debt also acts to increase demand.

(d) Increased demand increases the price of the resources needed to make the product with higher demand, making more of such resources economic to extract.

11. We need a growing supply of cheap energy to maintain economic growth.

This can be seen several ways.

(a) Today, all countries compete in a world economy. If a country’s economy uses an expensive source of energy (say high-priced oil or renewables) it must compete with other countries that use cheaper fuel sources (such as coal). The high price of energy puts the country with high-cost energy at a severe competitive disadvantage, pushing the economy toward economic contraction.

(b) Part of the world’s energy consumption comes from “free” energy from the sun. This solar energy is not evenly distributed: the warm areas of the world get considerably more than the cold areas of the world. The cold areas of the world are forced to compensate for this lack of free solar energy by building more substantial buildings and heating them more. They are also more inclined to use “closed in” transportation vehicles that are more costly than say, walking or using a bicycle.

Back in pre-fossil fuel days, the warm areas of the world predominated in economic development. The cold areas of the world “surged ahead” when their own forests ran short of the wood needed to provide the heat-energy they needed, and they learned to use coal instead. The knowledge they gained about using coal for home-heating quickly transferred to the ability to use coal to provide heat for industrial purposes. Since the warm areas of the world were not yet industrialized, the coal-using countries of the North were able to surge ahead economically. The advantage of the cold industrialized countries grew as they learned to use oil and natural gas. But once oil and natural gas became expensive, and industrialization spread around the world, the warm countries regained their advantage.

(c) Wages, (non-human) energy costs, and financing costs are all major contributors to the cost of producing goods and services. When energy costs rise, the rise in energy costs puts pressure both on wages and on interest rates (since interest rates determine financing costs), because businesses need to keep the total cost of goods and services close to “flat,” if consumers are to afford them. This occurs because wages do not rise as energy prices rise. In fact, pressure to keep the total cost of goods low creates pressure to reduce wages when oil prices are high (perhaps by sending manufacturing to a lower-cost country), just as it adds pressure to keep interest rates low.

(d) If we look at historical US data, wages have tended to rise strongly (in inflation-adjusted terms) when oil prices were less than $40 to $50 barrel, but have tended to stagnate above that oil price range.

Figure 9. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.
Figure 9. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

12. Oil prices that are too low for producers should be a serious concern. Such low prices occur because oil becomes unaffordable. In the language of economists, oil demand drops too low.

A common belief is that our concern should be oil prices that are too high, and thus strangle the economy. A much bigger concern should be that oil prices will fall too low, discouraging investment. Such low oil prices also encourage civil unrest in oil exporting nations, because the governments of these nations depend on tax revenue that is available when oil prices are high to balance their budgets.

It can easily be seen that high oil prices strangle the economies of oil importers. The salaries of consumers go “less far” in buying basics such as food (which is raised and transported using oil) and transportation to work. Higher costs for basics causes consumers cut back on discretionary expenditures, such as buying new more expensive homes, buying new cars, and going out to restaurants. These cutbacks by consumers lead to job layoffs in discretionary sectors and to falling home prices. Debt defaults are likely to rise as well, because laid-off workers have difficulty paying their loans. Our experience in the 2007-2009 period shows that these impacts quickly lead to severe recession and a drop in oil prices.

The issue we are now seeing is the reverse–too low oil prices for oil producers, including oil exporters. These low oil prices are contributing to the unrest we see in the Middle East. Low oil prices also contribute to Russia’s belligerence, since it needs high oil revenues to maintain its budget.

Conclusion

We seem now to be at risk in many ways of entering into the collapse scenario experienced by many civilizations before us.

One of areas of risk is that interest rates will rise, as the Quantitative Easing and Zero Interest Rate Policies held in place since 2008 erode. These ultra-low interest rates are needed to keep products affordable, since the high cost of oil (relative to consumer salaries) has not really gone away.

Another area of risk is an increase in debt defaults. One example occurs when student loan borrowers find it impossible to repay these loans on their meager wages. Another example is China with the financing of its big recent expansion by debt. A third example is the possibility that businesses extracting resources will find it impossible to repay loans with today’s (relatively) low commodity prices.

Another area of risk is natural disasters. It takes surpluses to deal with these disasters. As we reach limits, it becomes harder to mitigate the effects of a major hurricane or earthquake.

Clearly loss of oil production because of conflict in the Middle East or in other oil producing countries is a concern.

This list is by no means exhaustive. Many economies are “near the edge” now. Recent news is that Germany has slipped into recession as well as Japan. One economy failing is likely to pull others with it.
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Source: http://ourfiniteworld.com/2014/08/14/energy-and-the-economy-twelve-basic-principles/

Barclays Has The Best Explanation Yet Of How Solar Will Destroy America’s Electric Utilities

Silver lake coal plant

It’s been a good few decades for America’s electric utilities: As regulated monopolies, they face almost no competition and enjoy access to cheap credit.

In a new note, a Barclays team led by Y.C. Koh says the industry is finally be facing its day of reckoning, from a source many have long dismissed as an unviable pipedream: solar. Specifically, the threat is residential solar, people creating their own electricity.

To prove that the threat is real this time, Barclays is downgrading its Electric sector rating to Underweight from Market Weight “…The regulatory responses to the growing competitive threat from solar + storage may prove inadequate to address potential strains to the credit profiles of issuers in these states,” they write.

There are main two reasons why solar is finally for real, the group says. The first is that for more than a decade, there’s been a huge push from governments around the world, and at every level, to subsidise renewables. Bloomberg New Energy Finance (BNEF) estimates that the annual output of PV modules increased almost 30x in the past decade, from 1,000MW per year in 2005 to more than 30,000MW in 2013, Barclays notes. With that scale has come cheaper prices for panels.

Here’s what the cost curve looks like:

Solar cost curve

The second reason is the advent of cheap storage. For the past few years, homeowners have addressed renewables’ intermittency problem — the wind isn’t always blowing, the sun doesn’t always shine — by making a deal with her utility: she’ll continue to buy their electric power, but she gets to keep her solar panels running when she’s not home, and sell any excess power they generate back onto the grid. This is called net metering.

Net metering has been a boon for incentivizing rooftop solar adoption. But what if you could truly power up your home through a solar-charged battery, and only have to buy utility electricity in an emergency?

As recently as 2009, the all-in costs for such batteries would been as much as $US17,000. But with the expansion of electric vehicles, Barclays says the cost of storage has been falling rapidly, and now stands at about $US3,700. And it just so happens that the power required to operate an electric vehicle can power the average home for up to three days, Barclays notes, “potentially opening a new use in residential distributed generation systems.” Battery costs could come down even further if Elon Musk’s gigafactory launches, they add. Yesterday w

e discussed this idea in detail. Here’s the price decline chart:

Barclays battery costs

Barclays sees the solar + storage wave has the potential to spread beyond its roots in California and Arizona. Here is their timeline for when solar costs could reach parity in all 50 states:

Barclays solar

Cheap solar panels, combined with cheap storage, will spark a grid “defection spiral” that will pry away utilities’ grip on the power monopoly. In this scenario, early adopters begin leaving the grid, incrementally increasingutilities’ power costs rise — which further exacerbate the shift into solar and storage, and so on.We are already seeing evidence of step 1, as utilities have begun complaining that solar customers are causing electricity prices for non-solar users to go up.

This is maybe the most vivid description in the note of what solar will do to utilities:

we envision an electricity market where demand for grid power falls, peak hours shift (perhaps dramatically), and regulatory mechanisms need to be adjusted or overhauled to accommodate some utilities becoming the electricity generators of last resort. We expect the net effect to be higher grid power costs (thereby exacerbating the consumer shift to solar + storage), lower average credit quality for regulated utilities and unregulated power producers, and increased recognition of the long-term threat to grid power.

Whatever roadblocks utilities try to toss up — and there’s already been plenty of tossing in the states most vulnerable to solar, further evidence of the pressures they’re facing — it’s already too late, Barclays says:

We fully expect utilities and regulators to make a good faith effort to preserve the status quo “regulatory compact,” whereby the monopoly utility provides a safe and reliable service and regulators allow it to earn a reasonable low-risk return. However, we also expect them to be playing a constant game of catch-up as solar develops. The costs of solar and storage technologies are falling quickly and may fall even faster as higher demand builds additional scale. But the cost of distribution grids and thermally generated power are more likely to rise than to fall, in our view. As a result, regulators and utilities will be constantly trying to respond to a moving target, which is precisely the environment where slow-moving incumbents can fall behind.

It’s been a good run.

Source: http://www.businessinsider.com.au/barclays-downgrades-utilities-on-solar-threat-2014-5

The UK needs an emergency Budget full of shocks

There is no attitude more shameful and debilitating than defeatism, as Britain learnt at great cost in the 1970s, when managing decline became our crumbling establishment’s default strategy.

HM Revenue Customs document surrounded by pound coins
George Osborne needs to slash corporation tax to 11pc, just below the level levied in Ireland Photo: Alamy

Yet our present, increasingly fatalistic acceptance that the British economy is set for a lost decade of stagnant growth, falling real incomes and untold other humiliations is becoming eerily reminiscent of those bad old days.

Such thinking should be unacceptable. I become angry when I talk to unimaginative economists or cowardly politicians who believe that we are powerless to influence the economy and have therefore quietly resigned themselves to years of misery. Just because interest rates cannot be cut further and printing yet more money won’t work doesn’t mean that we should give up.

Austerity, when it comes to public spending, remains essential. But we should also be adopting, in parallel with spending cuts, the sort of radical, pro-growth supply-side tax reforms that have always worked wherever they have been tried. David Cameron has already successfully made one historic U-turn on Europe; he needs to perform another on the economy.

This doesn’t mean that he should jettison all Coalition policies – just that a dose of shock therapy is desperately required to jolt the UK back into growth. For that, an emergency Budget is required, together with a dramatic gear shift by the Chancellor, who needs to understand that the political and economic risks of doing nothing are now much larger than those of taking bold action.

A simple three-point plan would do the trick. First, and most radically, George Osborne needs to slash corporation tax to 11pc, just below the level levied in Ireland, which at 12.5pc is the lowest of our close competitors. It would be essential for such a sweeping, historic move to begin with the new tax year in April, in a blaze of publicity. The excitement this would generate, and the message it would convey, would transform Britain’s prospects.

The UK would suddenly become the most attractive location in which to conduct and base commercial activity; nobody would believe any longer that the UK is closed to business. It would end the row over tax avoidance, as multinationals would rush to base their operations in the UK, and it would create huge numbers of jobs. It would be a genuinely revolutionary policy, and one which would be surprisingly fiscally manageable. Corporation tax is expected to yield £38.9bn in 2013-14, with the rate set to fall to 23pc this April and to 21pc from 2014. On a worst-case scenario, which implausibly doesn’t assume any change in behaviour or any additional investment in the UK, slashing the tax to 11pc would reduce government revenues by around £20bn a year; the immediate pro-growth effect will almost certainly mean a smaller hit, even in the first year.

But merely slashing corporation tax is not enough. My second, immediate reform would be to abolish capital gains tax (CGT), currently levied at 28pc following one of Osborne’s early raids. This tax creates more economic damage and distortions for every pound it raises than almost any other. It is set to bring in £4.6bn next year, a relatively insignificant sum given its impact and the fact that the Government has been forced to introduce so many avoidance mechanisms – from Isas to Enterprise Investment Schemes – to mitigate its effects.

CGT depresses the returns to capital, thus reducing the incentive to invest at a time when we desperately need to encourage business expenditure and risk-taking. The main reason why so many firms are using the UK as a cash cow, shifting funds generated here to finance investments abroad, is because the returns to be made in Britain, especially in manufacturing, are too low. Eliminating capital gains tax and slashing corporation tax would help rectify that. Most City analysts would argue, quite correctly, that the value of a share is the net present value of its future expected dividends. But dividends are already taxed, as are profits – even under my proposed reforms – so also hitting capital gains with a levy is tantamount to triple-taxation, which is unfair as well as counter-productive.

Getting rid of CGT would deliver a major boost to the stock market, almost guaranteeing a double-digit increase in share prices. Investors, including pension funds, would enjoy huge windfalls; a buoyant market would make it easier for companies to raise equity, reducing their cost of finance and allowing them to grow, spend and create jobs.

Ditching CGT would also encourage property investors to put buy-to-let homes on the market: at present, many don’t want to sell because they would rather delay paying tax on any gains. Getting rid of this barrier would increase the supply of properties, helping first time buyers and bolstering economic activity. Britain did not tax capital gains until 1965 so scrapping the tax is hardy a leap in the dark; the only difficult bit is that its repeal would have to be accompanied by an explicit crackdown on avoidance, with clear guidelines to prevent people passing off income as capital gains. But even if some income tax receipts were to vanish as a result, it would be a price worth paying for the massive economic boost delivered in return.

The combined static hit to the Treasury from these two tax cuts would be about £25bn. I’m confident that the increase in investment and activity that would result from the enhanced incentives would significantly reduce this number even in the first year, by bolstering other taxes – but, even at face value, such a drop in receipts would be manageable. Nominal GDP will be £1.62 trillion next year; so the sweeping change I’m advocating would be worth just 1.5pc of national income at worst.

The Chancellor has already lost his grip on the public finances: the budget deficit is rising again, gilt yields are increasing, the pound is tumbling and Britain is likely to be stripped of its AAA-credit rating later this year. With the UK’s reputation for fiscal rectitude already in tatters, a deficit that ends up a little larger than previously thought, in return for stronger growth and a more competitive economy, would therefore be a price worth paying.

But, to reassure markets, and to make sure these supply-side reforms are not incorrectly perceived as a doomed Keynesian-style attempt at boosting demand by borrowing even more, the Chancellor’s spending cuts, currently pencilled in over a number of years, should be accelerated. Instead of cutting real spending by around 1pc in 2013-14, the Chancellor should aim for 1.5-2pc.

Managing decline should be anathema to any serious government, especially given that there is still all to play for. It is time for the Chancellor to jettison his fiscal conservatism and to embrace supply-side radicalism instead. He is likely to be pleasantly surprised by the results.

Allister Heath is editor of City AM

Source: http://www.telegraph.co.uk/finance/comment/9834764/The-UK-needs-an-emergency-Budget-full-of-shocks.html