“Straight Talk” features thinking from notable minds that the ChrisMartenson.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 10 Asset Management, The Berkeley centre for Innovative Financial Technology, and other companies and venture capital firms. He tweets tirelessly via @pkedrosky.
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 organisation 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 behavioural and lifestyle problem than anything else. We must want to change our behaviours such that small innovations at the margin can help us. Waiting for massive innovations to save us from our energy profligacy is innovation infantilism.