"Straight Talk" features thinking from notable minds that the PeakProsperity.com audience has indicated it wants to learn more about. Readers submit the questions they want addressed and our guests take their best crack at answering. The comments and opinions expressed by our guests are their own.
This week's Straight Talk contributor is Paul Kedrosky. Paul is an investor, writer, entrepreneur and editor of the widely-followed econoblog Infectious Greed. He is a prolific engine of commentary on the economy, the markets, and society - often looking through the lens of how technology serves (and dis-serves) all three. Paul is also a Senior Fellow at the Kaufman Foundation, an advisor to Ten Asset Management, The Berkeley Center for Innovative Financial Technology, and other companies and venture capital firms. He tweets tirelessly via @pkedrosky.
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1. You spend your time focusing on the intersection of entrepreneurship, innovation and the future of risk capital. From your vantage point, what are the most important trends you see right now to be driving – or threatening – the advancement of our society?
The list is endless. High on that list, however, is financialization: the absurd, uneconomic and disastrous distortions introduced into the U.S. economy by its overreliance on the financial sector. We are losing many of our best engineers, scientists, and others to the financial sector at precisely the time that we face some of the most difficult problems in history -- precisely the sorts of problems that these people could help us with, were they not too busy creating exotic financial instruments to trade with one another.
2. You have an unusual combination of expertise in both technology and macroeconomics. Are you more optimistic about technology’s promise to offer a brighter future, or pessimistic at the growing risks created by our economic dysfunction? Why?
At root, I am a reluctant pessimist. I want to believe in innovation and its possibilities, but I am more thoroughly convinced of entropy. Most of what of what we do merely creates local upticks in organization in an overall downward sloping curve. In that regard, technology is a bag of tricks that allows us to slow and even reverse the trend; sometimes globally, sometimes only locally, but always only temporarily and at increasing aggregate energy cost.
More than a century ago, we struck a rich vein of cheap energy, one that catalyzed the Industrial Revolution, the rise of the West, and much of what we call" modern society," with its many conveniences. Our current economic dysfunction is mostly a by-product of this brief entropic reversal as it reverses itself again. Having become over-attached to a way of life made possible by cheap energy, we are now economic diabetics whose bodies can no longer properly process sugars. In the absence of a pump, we die.
3. Fostering innovation and risk-taking has been a historic cornerstone of America’s economic success. Other countries now appear to be investing in innovation to a greater scale and degree. What’s your assessment of the state of US competition?
By most defensible measures, U.S. competitiveness has declined in recent years. To some degree this is unsurprising, a function of the rise of the rest of the world as much as of weakening U.S. competitiveness, in any Platonic sense. Having said that, and this isn’t saying much new, the willingness in this country to do the hard work of rebuilding is very low. One measure I point to in that regard is company creation rates in the U.S., with the pace at which new companies are formed here having flatlined for decades, as my colleague Dane Stangler and I have shown in a paper. Despite the huge increase in available risk capital, and despite visible entrepreneurial success among their peers, we are too tied to our debt pump to take action and help ourselves, economically speaking.
4. You spend a lot of time interacting with the investing community. How has the business of investing changed since the ’08 correction? How dramatically have the bailouts, low interest rates, etc., changed the game? Do you see any lessons learned? Are smarter risks being taken?
As the saw goes, in the short run we learn a little, in the medium term we learn a little, and in the long run we learn nothing. The answer to your question depends on the timeframe. We won’t immediately make the mistakes of 2008, but we are increasingly likely to make the mistakes of 1999, and even more likely to make the mistakes of the 1980s. There are pockets of better decisions being made, but financial fees introduce massive distortions, and given how difficult it is to make money investing, and how much more straightforward it is to make money from fees, these agent/principal distortions will always exist. To borrow from War Games, the only way to win is to not play.
5. Where do you think venture capital can best be put to use right now? What industries, if invested in today, offer the brightest promise of future return for both investors and society?
To a first approximation, venture capital only works in information technology. It accounts for the bulk of the capital invested and the bulk of the returns. In the absence of an IT sector for venture, there would not be a venture investing industry. Period. Yes, biotech has episodically generated returns, and clean tech may eventually – and innovations in both areas are hugely societally desirable – but the truth is that neither has the characteristics that make a sector suitable for heavy venture investment.
6. What are your thoughts on Peak Oil? Assuming you agree it’s a real risk, what is your answer to those who dismiss its importance, claiming “technology will save us”?
Peak Oil is a geologic fact. Anyone saying otherwise should be summarily dismissed, treated no differently than how we treat flat earthers or other deniers of reality. Peak Oil proponents fall into all sorts of traps in making the case, but their rhetorical errors are no refutation of the underlying case that fields deplete, flows slow, and newer fields are grotesquely more expensive than Ghawar and its ilk.
The trouble with promoters of technological innovation is that their arguments are seductive, socially desirable, and a kind of special pleading. We want to believe, we need to believe, so we ignore how unusual fossil fuels are, with their unique combination of energy density, portability, and cost. While we can move away from these fuels, it is more a behavioral and lifestyle problem than anything else. We must want to change our behaviors such that small innovations at the margin can help us. Waiting for massive innovations to save us from our energy profligacy is innovation infantilism.
7. What advice do you have to offer the average American (e.g. NOT a deep-pocketed investor) who is concerned about our economic future and wants to preserve wealth and quality of life?
I tell people to take a barbell posture to wealth and financial life. Most of your money should be in useful, uncorrelated assets, such as short- to medium-term government securities, agricultural property, etc. Unlike some, I also believe people need some exposure to equities, if only as partial insurance against inflation. At the other side of the barbell, however, it is important to have a few more speculative investments, ideally in yourself. Find things that have the potential to pay off at integer multiples, and use those at the margin to counterbalance a portfolio that is otherwise focused on security of assets.
Most people do the exact opposite, of course. They own few liquid assets, lots of illiquid assets (mostly in residential real estate), a few random equities, and virtually no investments in themselves. While this generates considerable fee income for Wall Street, its likelihood of meeting the financial objectives of our prototypical average investor is very low indeed.
8. You publish a tremendous number of posts and tweets every day, drawing observations and inspiration from an impressive wide array of sources. What subjects, sources and thinkers are most valuable to you in developing and maintaining your world view?
I try. I am, at core, a Popperian, someone always looking for their views to be falsified. In that spirit, as a disciple of Karl Popper, I am always looking for thoughtful, data-driven perspectives that shape my own, or, better yet, demonstrate that I’m wrong altogether. I treat certainty as a highly fragile thing, desirably so, and much of what I share is better thought of as working notes for others trying to do the same thing. As a result, it is unapologetically eclectic, compulsive, and impulsive. I have no constituency in mind, other than perhaps my own id.
In terms of sources, it is a mad collection of places, from blogs, to custom news feeds, to a plethora of Google alerts, mostly about scholarly publications, to Twitter. Turning to the last first, a tightly-controlled, curated list of people and sources on Twitter can turn an otherwise destructively noisy service into a useful feed from which I can infrequently and productively sample.
9. What question didn’t we ask, but should have? What’s your answer?
"Why do these things keep happening?" My answer comes from an essay I recently wrote for Edge:
When John Cabot came to the Grand Banks off Newfoundland in 1497 he was astonished at what he saw. Fish, so many fish — fish in numbers he could hardly comprehend. According to Farley Mowat, Cabot wrote that the waters were so "swarming with fish [that they] could be taken not only with a net but in baskets let down and [weighted] with a stone."
The fisheries boomed for five hundred years, but by 1992 it was all over. The Grand Banks cod fishery was destroyed, and the Canadian government was forced to close it entirely, putting 30,000 fishers out of work. It has never recovered.
What went wrong? Many things, from factory fishing to inadequate oversight, but much of it was aided and abetted by treating each step toward disaster as normal. The entire path, from plenitude to collapse, was taken as the status quo, right up until the fishery was essentially wiped out.
In 1995 fisheries scientist Daniel Pauly coined a phrase for this troubling ecological obliviousness — he called it "shifting baseline syndrome." Here is how Pauly first described the syndrome: "Each generation of fisheries scientists accepts as baseline the stock situation that occurred at the beginning of their careers, and uses this to evaluate changes. When the next generation starts its career, the stocks have further declined, but it is the stocks at that time that serve as a new baseline. The result obviously is a gradual shift of the baseline, a gradual accommodation of the creeping disappearance of resource species…"
It is blindness, stupidity, intergeneration data obliviousness. Most scientific disciplines have long timelines of data, but many ecological disciplines don't. We are forced to rely on second-hand and anecdotal information — we don't have enough data to know what is normal, so we convince ourselves that this is normal.
But it often isn't normal. Instead, it is a steadily and insidiously shifting baseline, no different than convincing ourselves that winters have always been this warm, or this snowy. Or convincing ourselves that there have always been this many deer in the forests of eastern North America. Or that current levels of energy consumption per capita in the developed world are normal. All of these are shifting baselines, where our data inadequacy, whether personal or scientific, provides dangerous cover for missing important longer-term changes in the world around us.
When you understand shifting baseline syndrome it forces you to continually ask what is normal. Is this? Was that? And, at least as importantly, it asks how we "know" that it's normal. Because, if it isn't, we need to stop shifting the baselines and do something about it before it's too late.
If you have not yet seen the other articles in this series, you can find them here:
- Straight Talk with Paul Kedrosky: Don't Depend on Technology To Save Us - 1.21.11
- Straight Talk with Tyler Durden: The U.S. Is Free-Falling Into Bankruptcy - 12.15.10
- Straight Talk with Charles Hugh Smith: Why The Status Quo is Unsustainable - 12.05.10
- Straight Talk with G. Edward Griffin: What's Coming Next Isn't Pretty - 11.29.10
- Straight Talk with James Howard Kunstler: The World is Going to Get Rounder and Bigger Again - 11.17.10
- Straight Talk with Steve Keen: It's All About the Debt - 11.09.10
- Straight Talk with Mike Shedlock (aka "Mish") - 10.26.10
Readers can submit their preferences for future Straight Talk participants, as well as questions to ask them, via the Straight Talk forum.
This is a companion discussion topic for the original entry at https://peakprosperity.com/straight-talk-with-paul-kedrosky-dont-count-on-technology-to-save-us-2/