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The Beast From The East, coal, gas and the UK

The Beast From The East, coal, gas and the UK

In late February 2018 high pressure over the North Atlantic and low pressure over the Mediterranean combined to generate a strong easterly airflow that brought Siberian temperatures to Western Europe, increasing heating demand to the point where there was a shortage of natural gas. The outcome was an increase in UK coal generation, partly because coal briefly became cheaper than gas as a source of electricity generation but mostly because the UK did not have enough gas in storage to fill both home heating and electricity generation needs. The UK, however, plans to shut down all its coal plants by 2025, and in this post I speculate as to what might have happened if they had all been shut down in 2018. The conclusion is that the UK would not have been able to cover peak load deficits during much of the cold period owing to inadequate gas supplies and installed gas capacity.

This post was prompted by the Drax Electric Insights Quarterly linked to by correspondent Ed T in Blowout Week 231. I had not come across this report before, but it provides a good summary of UK quarterly activity and I have plagiarized it where appropriate.

Figure 1 shows UK generation by source over the period between February 1 and March 31 2018, covering the Beast From the East cold periods. The generation data are five-minute Gridwatch values averaged into hourly intervals and the temperature data are daily means from the Met Office Central England temperature site:

Figure 1: UK hourly generation by source and mean daily Central England temperatures, February 1 to March 31 2018

Imports are plotted at the bottom because this is the only way I have found of displaying negative values (exports) on a stacked bar chart. Together with nuclear and biomass they provided reasonably stable baseload generation.

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Europe Is Awash With Oil Stored On Ships

Europe Is Awash With Oil Stored On Ships

shell North Sea

While many analysts and agencies have already called the end of the global oil glut, oil held in floating storage in Europe is at an at least 18-month-high, also due to the booming U.S. oil exports that have displaced some of the traditional crude oil routes in the world.

Oil in ships around European shores was 12.9 million barrels on average in May, accounting for 26 percent of all global floating storage, and more than Asia-Pacific’s 9.7 million barrels of oil stored, according to estimates by oil analytics company Vortexa, as carried by Reuters.

In the two preceding months, March and April, the share of oil in floating storage in Europe accounted for 10 percent of the global storage, compared to 40 percent stored in the Asia-Pacific region. But in May, the volumes of oil held in Europe—including in the Mediterranean—exceeded the oil held off the Asia Pacific coasts for the first time since at least early 2015, according to Vortexa.

Consultant Kpler has estimated that there are some 17 million barrels of oil stored on ships in northwest Europe—the highest since at least the beginning of 2016.

Soaring U.S. exports have upended some traditional buying patterns, as China, India, and Indonesia have purchased more U.S. crude at the expense of African crude grades from OPEC members Nigeria and Angola, and of some Middle Eastern crudes.

On the other hand, U.S. crude oil exports to Europe have also been rising lately, as U.S. oil is increasing in popularity with European refiners, often at the expense of oil cargoes from OPEC nations and Russia.

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The Eurozone’s Coming Debt Crisis

The Eurozone’s Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

The 19 eurozone countries have collectively saved 1.15 trillion euros in interest payments since 2008 due to ECB rate cuts and monetary policy interventions, according to Handelsblatt. A reduction in costs against the losses of pensioners and savers.

However, that illusion of savings and budget stability can rapidly disappear as most Eurozone countries face massive maturities in the 2018-2020 period and wasted precious years of quantitative easing without implementing strong structural reforms. Tax wedge rose for families and SMEs, while current spending by governments barely fell, competitiveness remained poor and a massive one trillion euro in non-performing loans raised doubts about the health of the European financial system.

 

The main eurozone economies face more than 2.1 trillion euro in maturities between 2018 and 2021. This, added to lower tax revenues due to the slowdown and rising spending from populist demands creates an enormous risk of a large debt crisis that no central bank will be able to contain. Absent of structural reforms, the eurozone faces a Japan-style stagnation or a debt crisis.

 

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Italian Politics: The Calm Before the Next Storm

Europe remains a potential source of angst for financial markets in the form of another existential crisis for the Eurozone. True, stock markets have relaxed over the past week in part because of relief that another Italian election has been avoided for now and in part because US dollar upward momentum has stalled (see following chart).US DOLLAR INDEX

US Dollar Index - June 2018

Source: Bloomberg

CONFLICT IN ITALY — WHEN WILL IT COME TO A BOIL?

The coalition government’s economic policies will likely conflict with the fiscal rules set by Brussels.

On Italy this is likely just the calm before the next storm given the Five Star and League coalition government’s economic policies are almost inevitably going to be in conflict with the fiscal rules set by Brussels — though the confrontation may take longer to come to a boil because of the presence of technocrats in the new government, a compromise required by Italian president Sergio Mattarella for the government to be formed on June 1.

There will also doubtless be hopes on the part of the political establishment that the differences in ideologies between the left of centre Five Star and the right-wing League will become evident in the everyday practice of trying to run a government resulting in due course in both ‘populist’ parties being discredited in the eyes of the electorate.

ITALIAN 10-YEAR GOVERNMENT BOND YIELD AND SPREAD OVER 10Y GERMAN BUND YIELD

Italian 10Y government bond yield and spread over 10Y German Bund Yield

Source: Bloomberg

THE ECB AND THE EUROSYSTEM — ITALY’S GREATEST CREDITOR

The other point to consider with an Italian populist government now in place is how the ECB will react in terms of the signals sent given that the ECB and the Eurosystem is the single largest holder of Italian government debt.

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Return of the Euro Crisis: Italy Quakes, Rest of the World Shakes and Merkel’s Empire Breaks

Return of the Euro Crisis: Italy Quakes, Rest of the World Shakes and Merkel’s Empire Breaks

Angela Merkel, emperor of the euro crisis zoneEurope’s many fault lines are spreading once again, bringing the endless euro crisis saga back in 3-D realism. Italy gained a new anti-establishment government last week, even as Spain elected a new Socialista government that could crack Catalonia off from the rest of Spain. All of Europe fell under Trumpian trade-war sanctions and threatened their own retaliation. And Germany’s most titanic bank got downgraded to the bottom of the junk-bond B-bin.

The Italian shakeup caused US bond prices to soar (yields to drop) in a flight of capital from European bonds, yet US stock investors took this invasion of troubles from foreign shores as good enough news to end the week on a positive note. The NASDAQ especially never looked happier, though financials feared contagion. As a result, the contrast between tech stocks and financials burst upward to its highest peak since the top of the dot-com frenzy:

S&P Tech stock reach levels comparable to the last tech crisis.

While Europe’s troubles apparently sounded like great news to US stock investors, the Italian crisis caused EU bank stocks in aggregate to take one of their largest avalanches in history, ending in a one-week cliffhanger at their lowest level in two-and-a-half years. Deutsche Bank, Germany’s titan of global finance, ended looking like the spawn twin of the Lehman Brothers:

Deutsche Bank alone could trigger more than just a euro crisis

Deutsche Bank appears to be leading the way into a full blown euro crisis like Lehman Bros did in the US financial crisis.

In one week, Europe with its impossible euromess moved back into position of being the world’s chief menace. The Eurozone is a house of cards with many exits, each with their own name, as I’ve written about frequently in the past, and it’s time to pay the never-ending euro crisis some attention once again.

Quitaly looks like next Brexit in everlasting euro crisis

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NATO Sabre Strike Exercise: Scaring Russia with Multiple War Games of Unparalleled Scale

NATO Sabre Strike Exercise: Scaring Russia with Multiple War Games of Unparalleled Scale

NATO Sabre Strike Exercise: Scaring Russia with Multiple War Games of Unparalleled Scale

This year, NATO has already organized about 100 exercises, 20 percent more compared to the same period in 2017. Saber Strike-2018, a large-scale US-led exercise involving 18,000 soldiers from 19 NATO members and partner nations, kicked off on June 3 to last till June 15. The scope of the exercise has been steadily expanding with every year. It was 11,000 troops in 2017, 9,000 in 2016, 6,000 in 2015, 4,700 in 2014 and 2,000 in 2013 – that’s how a relatively small drill turned into the regular deployment of substantial force in the proximity of Russia’s borders. Moscow expressed its concern about it at the NATO-Russia Council’s session held on May 31.

The annual multination training event organized every year since 2010 is being held across the training areas in Poland, Latvia, Lithuania and Estonia. Non-NATO countries taking part are Finland and Macedonia. Air assault landings are part of the scenario to hone the skills for launching offensive operations.

Sabre Strike is timed with Swift Response airborne drill in Latvia to culminate on June 8. It involves 800 paratroopers from US, Latvia, Lithuania, Israel and Poland.

There will be more exercises held in 2018 near Russia’s borders, including Trident Juncture, a really big one to take place in late October-early November to involve 35,000 troops from 30 nations along with 70 ships and about 130 aircraft and Anakonda organized by Poland in November. The latter will involve 100,000 servicemen, 5,000 vehicles, 150 aircraft and 45 warships. The scale is mind-boggling. One can imagine how much it costs! The Anakonda scenario includes preemptive strikes. If it’s not an open preparation for war than what is? US Army Chief of Staff Gen. Mark Milley believes it is. According to him, “Having large-scale NATO forces in the Baltic States and Poland, as well as the lack of transparency – we see serious preparation for a great war.” He knows what is talking about.

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The Pension Crisis Will Break Up the EU

The German public broadcast agency ARD is proposing structural changes. Due to the low-interest rates, the ECB has placed the agency in hard times with its pensions. Karola Wille, the director, has called for structural reform to reduce costs. The proposal centers on technological change to increase efficiency in the performance of its mandate. They are also looking at developing cross-media applications to modernize the agency.  The ARD is non-profit so the German government has to fund it. As the low-interest rates have undermined pensions throughout Europe, the governments will have to step up and bail them out. This is going to put tremendous pressure on the entire EU budget and austerity policy embedded within the single currency.

We are looking at the same story being painted throughout Europe. The low-interest rate policy for nearly 10 years has not merely destroyed the bond market in Europe, it has undermined the pension system both privately and publicly. Indeed, adding to this crisis is the mandate that all pension funds hold some or the majority of their investments into government debt. The combination of these policies clashes with the ECB and the nightmare on the horizon and why Draghi can’t leave fast enough to avoid personal blame.

This crisis all stems from the structural design of the EU. They tried to be half pregnant with only a single currency and dictatorial control over member state budgets. The refusal to consolidate the debt emphasized the problem of the great disparities in cultures and the prevailing prejudices that exist through Europe between member states as well as within member states such as Bavaria v northern Germany or Spain v Catalonia, Scotland v Britain, Italy v Sicily, etc.. This prevailing prejudice is also why the bail-in policy was adopted.

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Staying the Course: the Long March of Middle East Destruction

Staying the Course: the Long March of Middle East Destruction

When falsely convicted Andy Dufresne bored a hole through the Shawshank prison wall over the course of two decades, narrator “Red” says that Andy always liked geology, and that geology, like digging through a prison wall with a rock hammer, is just a matter of “pressure and time.” It’s much the same when it comes to American imperialism. Particularly the conquest of the Middle East, one of the longest-running projects in the U.S. pantheon. Our 16 seasons in Afghanistan counts as our longest foreign engagement to date. Even those living in a self-imposed media bubble of New York Times, CNN, and NPR are fully cognizant of this imperial project. George Bush called it the “Long War.” It can’t been disguised, even by the miserable mainstream media, where deception is an art form unknown to the deceived. Still, the causes and conditions of that project are as yet unclear to the masses. Mostly because the MSM daily reminds us that although we are on the right side of history, we are surrounded by crackpot Arabs, socialist lunatics, irrational Chinese, African bandits, and splenetic Slavs. Our borders are forever under attack. We must be eternally vigilant to ward off the thief in the night. This script was prepared in the ashes of World War Two, when our national security planners gleefully recognized that all the European nations had destroyed themselves fighting fascists, and that America had emerged comparatively intact. Our magnanimous brain trust quickly put together a plan to get its hands on Middle East oil, maintain our outsized consumption, violently snuff out any socialist movements rising from the European rubble, and scare the living daylights out of the exhausted population with demented fables of communist infiltration. It would require a garrison state, where the majority of money was dumped into the bottomless pit of defense spending. More or less everything was accomplished as planned.

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Visa Goes Down in the UK, Chaos Ensues, Cash is Suddenly King

Visa Goes Down in the UK, Chaos Ensues, Cash is Suddenly King

War on Cash Suffers Setback.

For over 12 hours on Friday, shopping centers in the UK and other parts of Europe were plunged into chaos as millions of consumers were unable to use their Visa debit or credit cards at points of sale. The credit card company, which was finally able to restore normal service early Saturday morning, said it had no reason to believe the hardware failure was due to “any unauthorized access or malicious event”.

While the mayhem caused by the outage may have been short lived, it served as a stark reminder of the risks, both for consumers and retailers, of depending purely on cashless payments. In the UK, the chaos unleashed was particularly acute since it is one of the world’s most cashless economies, pipped to the post only by Canada and Sweden, as a recent study by industry analysts reported.

In 2017, cards overtook cash for retail payments in UK for the first time ever, according to figures from the British Retail Consortium. According to Visa, payment processing through its systems accounts for a staggering £1 in every £3 of all retail spending in the UK. Which is why, when those systems stopped working yesterday, the chaos was greater in the UK than almost anywhere else as cashless customers missed trains, were unable to fill up their cars, pay for their groceries, or even clear their bar tab — this was Friday, after all!

“There is never a good time for the payments system to go down but a Friday afternoon, when there is a flood of people leaving work, must be among the worst,” one banking industry source said. The only way for people to pay for stuff was with co-branded Mastercard cards, or hard cold cash. Luckily, Visa cards were still working at ATMs, although the queues were considerably longer than normal.

…click on the above link to read the rest of the article…

Weekly Commentary: Italian Drama

Weekly Commentary: Italian Drama

As I see it, cracks are opening in the greatest Bubble of all time. Serious fissures have developed in EM, Europe and China. Meanwhile, the stimulus-driven U.S. economic boom runs unabated. Global fragilities place downward pressure on U.S. market yields, while faltering Bubbles elsewhere stoke (self-reinforcing) outperformance – and speculative excess – within the U.S. equities market. The Fed faces a difficult challenge of weighing buoyant U.S. economic data and inflating asset prices against heightened global market fragilities.
Let’s begin with U.S. data. May non-farm payrolls increased a stronger-than-expected 223,000. The Unemployment Rate declined a tenth to 3.8%, matching the low going all the way back to 1969. Average hourly earnings were up 0.3% in May and 2.7% y-o-y. The ISM Manufacturing Index increased 1.4 points to a stronger-than-expected 58.7. There have been only nine stronger monthly readings looking all the way back to August 2004. Prices Paid rose slightly to 79.5, the high since April 2011. ISM New Orders jumped 2.5 points to 63.7, the high since February. The Employment component rose 2.1 points to a solid 56.3. The Chicago Purchasing Managers index surged 5.1 points to 62.7, the high since January. The Dallas Manufacturing Outlook recovered five points to the high since February. A Friday afternoon CNBC (Jeff Cox) headline: “The US economy suddenly looks like it’s unstoppable.”

April Construction Spending was up a much stronger-than expected 1.8% (strongest since January), led by an 8.7% y-o-y increase in residential construction. This followed stronger-than-expected S&P CoreLogic house price inflation (up 6.79% y-o-y). May Conference Board Consumer Confidence gained 2.4 points to 128, just below February’s 130, the strongest reading going all the way back to November 2000. The Conference Board Present Situation component jumped 4.2 points to 161.7, the high back to March 2001. Also indicative of boom time conditions, Personal Spending jumped 0.6% in April. May auto sales almost across the board surpassed expectations, with sales estimated up 5% from a year ago.
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One Word: Contagion

One Word: Contagion

Terrible news, I’m afraid.

The trainwreck that is Italian politics has always been a hoot to watch. But this time around the implications to what happens in Rome are, as Trump would say, yuuuge.

You’ve probably seen the news-flow out of Europe.

Tasked with finding a suitable candidate to head a coalition between Luigi Di Maio’s Five Star Movement and the far-right League headed by Matteo Salvini, a coalition, which I might add has to be scaring the living isht out of Brussels, has not been an easy task.

Firstly, they went and chose someone nobody has ever heard about.

Why?

Well, Italy has many “colourful characters” in politics, and that is what scares Brussels more than anything else. Draghi’s worst nightmare must be sitting across the table from this guy discussing Italy’s bill to Germany.

In case you’re not up to speed on what these gents stand for here’s a sampling from Matteo Salvini.

Slaves of the European Union? No, thanks!

I can’t wait for Italy, with our government, to regain its sovereignty to defend the national interest in any way possible. Unacceptable intrusion from a European bureaucrat in Italy’s elections. The immigration policies and economic sacrifices imposed by the European Union have been a disaster and will be rejected by the free vote of Italians.

European bureaucrats calm down. League will always defend our fisheries and the agriculture of Italy. Enough with the European standards that slaughter our businesses and our territory!

No! What this coalition needed was someone entirely vanilla, very unlike their own leaders, a nobody, a perfectly useful idiot.

And so they picked Giuseppe Conte.

Who, I hear you say?

Precisely.

But poor Giuseppe didn’t last very long. Heck, he was tasked with what was one helluva job — sugarcoating this…

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Trump Started a Global Trade War Today: Canada, Mexico Responded, So Will Europe

Trump has been itching for a global trade war ever since he took office. He just confirmed one.

The U.S. will impose tariffs on steel and aluminum imports from Canada, Mexico and the European Union starting on Friday. Trump’s ill-advised Tariffs Provoked Anger and Retaliation from US Allies.

The tariffs make good on President Donald Trump’s threats and show the administration is maximizing pressure to win concessions from allies, while simultaneously negotiating through a high-stakes trade conflict with China, seen as an economic competitor.

Besides steel and aluminum, the U.S. administration is studying whether tariffs should be imposed on imported cars and auto parts under the same law that gives Mr. Trump wide authority to erect trade barriers under the banner of national security.

“This is dumb,” said Sen. Ben Sasse, a Nebraska Republican. “Europe, Canada, and Mexico are not China, and you don’t treat allies the same way you treat opponents.”

Sen. Orrin Hatch, chairman of the Senate Finance Committee, said in a statement: “Tariffs on steel and aluminum imports are a tax hike on Americans and will have damaging consequences for consumers, manufacturers and workers. I will continue to push the administration to change course.”

Trump Wants to Halt German Luxury Car Imports

Via translation from WirtschaftsWoche, Trump wants to block Daimler from the US market.

US President Donald Trump has announced to French President Emmanuel Macron to exclude German premium car makers from the US market. On Macron’s visit to Washington in April, Trump said he would maintain his trade policy until no Mercedes models rolled on Fifth Avenue in New York. This reports the WirtschaftsWoche, citing several diplomats from Europe and the United States.

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After Italy… Spain Risk Soars

After Italy… Spain Risk Soars

Political risk in Europe was largely ignored in international markets because of the mirage of the so-called “Macron effect”. The ECB’s massive quantitative easing program and a perception that everything was different this time in Europe added to the illusion of growth and stability.

However, a storm was brewing and the same old problems seen throughout the years in Europe were increasing.

In Italy, the shock came with an election that brought a coalition of extreme left and extreme right populists. Disillusion with the Euro was evident in Italy for years, as the economy continued to be in stagnation while debt soared. However, international bodies, mainstream analysts, and banks preferred to ignore the risk, instead continuing to announce impossible growth estimates for the following year and science-fiction banks’ profitability improvements.

Italy’s economic problems are self-inflicted, not due to the Euro. Governments of all ideologies have consistently promoted inefficient dinosaur “national champions” and state-owned semi-ministerial corporations at the expense of small and medium enterprises, competitiveness and growth, labor market rigidities created high unemployment, while banks were incentivized to lend to obsolete and indebted state-owned companies in their disastrous empire-building acquisitions, inefficient municipalities, as well as finance bloated local and national government spending. This led to the highest Non-Performing Loan figure in Europe.

Now, the new government wants to solve a problem of high government intervention with more government intervention. The measures outlined would imply an additional deficit of some €130bn by 2020 and shoot the 2020 Deficit/GDP to 8%, according to Fidentiis.

Italy’s large debt and non-performing loans can create a much bigger problem than Greece for the EU. Because this time, the ECB has no tools to manage it. With liquidity at all-time highs and bond yields at all-time lows, there is nothing that can be done from a monetary policy perspective to contain a political crisis.

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America’s Incredible Shrinking Influence

America’s Incredible Shrinking Influence

Just two weeks after President Trump pulled the US from the Iran nuclear agreement, his Secretary of State, Mike Pompeo, issued 12 demands to Iran that could never be satisfied. Pompeo knew his demands would be impossible to meet. They were designed that way. Just like Austria-Hungary’s ultimatum to Serbia in July, 1914, that led to the beginning of World War I. And just like the impossible demands made of Milosevic in 1999 and of Saddam Hussein in 1991 and 2003, and so many other times when Washington wanted war. These impossible demands are tools of war rather than steps toward peace.

Secretary Pompeo raged at Iran. The mainstream news media raged at Iran. Trump raged at Iran. But then a strange thing happened: nothing. The Iranians announced that they remained committed to diplomacy and would continue to uphold their end of the nuclear agreement if the Europeans and other partners were willing to do the same. Iranian and European officials then sought out contacts in defiance of Washington in hopes of preserving mutually-beneficial emerging commercial relations.

Washington responded to the European snub by threatening secondary sanctions on European companies that continued doing business with an Iran that had repeatedly been found in compliance with its end of the bargain. Any independent European relationship with Iran would be punished, Washington threatened. But then, again, very little happened.

Rather than jump on Washington’s bandwagon, German Chancellor Angela Merkel made two trips to Russia in May seeking closer ties and a way forward on Iran.

Russia and China were named as our prime enemies in the latest National Security Strategy for the United States, but both countries stand to benefit from the unilateral US withdrawal from the Iran deal. When the French oil company Total got spooked by Washington threats and pulled out of Iran, a Chinese firm eagerly took its place.

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Blowing Up: The Italian Debt Crisis, the Experts That Missed it – And What’s Next

Blowing Up: The Italian Debt Crisis, the Experts That Missed it – And What’s Next

With the crisis unfolding in Italy, I can’t help but remember the lessons from the underrated book – Fat Tail by Ian Bremmer.

This book is an excellent read and explains how political risks can lead to severe economic and social risks.

But first, what exactly is risk? I sum it up into three things. . .

1. Probability – how likely is the risk to happen

2. Impact – if it does happen, how big will the loss be

3. Consequences – what is exposed to the impact, what are the second order effects (basically what’s the chain reaction from it)

Once we know the three parts to risk, we can start to understand how it works and what will be affected.

Bremmer’s book shows that throughout history, the government’s political risks – caused by their near-sighted policies – can lead to unknown monumental shifts and catastrophes. . .

“What do we mean by a ‘fat tail’? Fat tails are the unexpectedly thick ‘tails’ – or bulges – that we find on the tail ends of distribution curves that measure risks and their impact. They represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it… – Ian Bremmer, Fat Tail.

For instance, in the mid-1700’s, England’s King George was facing severe financial problems. Because of the costly French and Indian War, the British Empire was deep in debt. They needed to generate revenue – and quickly.

The Empire’s solution was to pass a series of new taxes designed to profit from the colonies in the 1760’s – the infamous ‘stamp act’ and ‘tea tax’. But these were wildly unpopular. And led to the colonies fighting for their independence in the American Revolution.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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