Monday, 31 August 2015

Deflationary Collapse and Oil prices

If you want some real analysis rather than some half-baked opinions that you find on Facebook then read this.
Deflationary Collapse Ahead?

26 August, 2015

Both the stock market and oil prices have been plunging. Is this “just another cycle,” or is it something much worse? I think it is something much worse.

Back in January, I wrote a post called Oil and the Economy: Where are We Headed in 2015-16? In it, I said that persistent very low prices could be a sign that we are reaching limits of a finite world. In fact, the scenario that is playing out matches up with what I expected to happen in my January post. In that post, I said
Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:
  • The amount consumers can afford for oil
  • The cost of oil, if oil price matches the cost of production
This mismatch between rising costs of oil production and stagnating wages is what has been happening. The unaffordability problem can be hidden by a rising amount of debt for a while (since adding cheap debt helps make unaffordable big items seem affordable), but this scheme cannot go on forever.
Eventually, even at near zero interest rates, the amount of debt becomes too high, relative to income. Governments become afraid of adding more debt. Young people find student loans so burdensome that they put off buying homes and cars. The economic “pump” that used to result from rising wages and rising debt slows, slowing the growth of the world economy. With slow economic growth comes low demand for commodities that are used to make homes, cars, factories, and other goods. This slow economic growth is what brings the persistent trend toward low commodity prices experienced in recent years.
A chart I showed in my January post was this one:
Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.
Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.
The price of oil dropped dramatically in the latter half of 2008, partly because of the adverse impact high oil prices had on the economy, and partly because of a contraction in debt amounts at that time. It was only when banks were bailed out and the United States began its first round of Quantitative Easing (QE) to get longer term interest rates down even further that energy prices began to rise. Furthermore, China ramped up its debt in this time period, using its additional debt to build new homes, roads, and factories. This also helped pump energy prices back up again.

The price of oil was trending slightly downward between 2011 and 2014, suggesting that even then, prices were subject to an underlying downward trend. In mid-2014, there was a big downdraft in prices, which coincided with the end of US QE3 and with slower growth in debt in China. Prices rose for a time, but have recently dropped again, related to slowing Chinese, and thus world, economic growth. In part, China’s slowdown is occurring because it has reached limits regarding how many homes, roads and factories it needs.
I gave a list of likely changes to expect in my January post. These haven’t changed. I won’t repeat them all here. Instead, I will give an overview of what is going wrong and offer some thoughts regarding why others are not pointing out this same problem.

Overview of What is Going Wrong
  1. The big thing that is happening is that the world financial system is likely to collapse. Back in 2008, the world financial system almost collapsed. This time, our chances of avoiding collapse are very lim.

  2. Without the financial system, pretty much nothing else works: the oil extraction system, the electricity delivery system, the pension system, the ability of the stock market to hold its value. The change we are encountering is similar to losing the operating system on a computer, or unplugging a refrigerator from the wall.

  3. We don’t know how fast things will unravel, but things are likely to be quite different in as short a time as a year. World financial leaders are likely to “pull out the stops,” trying to keep things together. A big part of our problem is too much debt. This is hard to fix, because reducing debt reduces demand and makes commodity prices fall further. With low prices, production of commodities is likely to fall. For example, food production using fossil fuel inputs is likely to greatly decline over time, as is oil, gas, and coal production.

  4. The electricity system, as delivered by the grid, is likely to fail in approximately the same timeframe as our oil-based system. Nothing will fail overnight, but it seems highly unlikely that electricity will outlast oil by more than a year or two. All systems are dependent on the financial system. If the oil system cannot pay its workers and get replacement parts because of a collapse in the financial system, the same is likely to be true of the electrical grid system.

  5. Our economy is a self-organized networked system that continuously dissipates energy, known in physics as a dissipative structureOther examples of dissipative structures include all plants and animals (including humans) and hurricanes. All of these grow from small beginnings, gradually plateau in size, and eventually collapse and die. We know of a huge number of prior civilizations that have collapsed. This appears to have happened when the return on human labor has fallen too low. This is much like the after-tax wages of non-elite workers falling too low. Wages reflect not only the workers’ own energy (gained from eating food), but any supplemental energy used, such as from draft animals, wind-powered boats, or electricity. Falling median wages, especially of young people, are one of the indications that our economy is headed toward collapse, just like the other economies.

  6. The reason that collapse happens quickly has to do with debt and derivatives. Our networked economy requires debt in order to extract fossil fuels from the ground and to create renewable energy sources, for several reasons: (a) Producers don’t have to save up as much money in advance, (b) Middle-men making products that use energy products (such cars and refrigerators) can “finance” their factories, so they don’t have to save up as much, (c) Consumers can afford to buy “big-ticket” items like homes and cars, with the use of plans that allow monthly payments, so they don’t have to save up as much, and (d) Most importantly, debt helps raise the price of commodities of all sorts (including oil and electricity), because it allows more customers to afford products that use them. The problem as the economy slows, and as we add more and more debt, is that eventually debt collapses. This happens because the economy fails to grow enough to allow the economy to generate sufficient goods and services to keep the system going–that is, pay adequate wages, even to non-elite workers; pay growing government and corporate overhead; and repay debt with interest, all at the same time. Figure 2 is an illustration of the problem with the debt component.
    Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.
    Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.
Where Did Modeling of Energy and the Economy Go Wrong?
  1. Today’s general level of understanding about how the economy works, and energy’s relationship to the economy, is dismally low. Economics has generally denied that energy has more than a very indirect relationship to the economy. Since 1800, world population has grown from 1 billion to more than 7 billion, thanks to the use of fossil fuels for increased food production and medicines, among other things. Yet environmentalists often believe that the world economy can somehow continue as today, without fossil fuels. There is a possibility that with a financial crash, we will need to start over, with new local economies based on the use of local resources. In such a scenario, it is doubtful that we can maintain a world population of even 1 billion.

  2. Economics modeling is based on observations of how the economy worked when we were far from limits of a finite world. The indications from this modeling are not at all generalizable to the situation when we are reaching limits of a finite world. The expectation of economists, based on past situations, is that prices will rise when there is scarcity. This expectation is completely wrong when the basic problem is lack of adequate wages for non-elite workers. When the problem is a lack of wages, workers find it impossible to purchase high-priced goods like homes, cars, and refrigerators. All of these products are created using commodities, so a lack of adequate wages tends to “feed back” through the system as low commodity prices. This is exactly the opposite of what standard economic models predict.

  3. M. King Hubbert’s “peak oil” analysis provided a best-case scenario that was clearly unrealistic, but it was taken literally by his followers. One of Hubbert’s sources of optimism was to assume that another energy product, such as nuclear, would arise in huge quantity, prior to the time when a decline in fossil fuels would become a problem.
    Figure 2. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.
    Figure 3. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.
    The way nuclear energy operates in Figure 2 seems to me to be pretty much equivalent to the output of a perpetual motion machine, adding an endless amount of cheap energy that can be substituted for fossil fuels. A related source of optimism has to do with the shape of a curve that is created by the sum of curves of a given type. There is no reason to expect that the “total” curve will be of the same shape as the underlying curves, unless a perfect substitute (that is, having low price, unlimited quantity, and the ability to work directly in current devices) is available for what is being modeled–here fossil fuels. When the amount of extraction is determined by price, and price can quickly swing from high to low, there is good reason to believe that the shape of the sum curve will be quite pointed, rather than rounded. For example we know that a square wave can be approximated using the sum of sine functions, using Fourier Series (Figure 4).
    Figure 3. Source: Wolfram Mathworld.
    Figure 4. Sum of sine waves converging to a square wave. Source:Wolfram Mathworld.
  1. The world economy operates on energy flows in a given year, even though most analysts today are accustomed to thinking on a discounted cash flow basis.  You and I eat food that was grown very recently. A model of food potentially available in the future is interesting, but it doesn’t satisfy our need for food when we are hungry. Similarly, our vehicles run on oil that has recently been extracted; our electrical system operates on electricity that has been produced, essentially simultaneously. The very close relationship in time between production and consumption of energy products is in sharp contrast to the way the financial system works. It makes promises, such as the availability of bank deposits, the amounts of pension payments, and the continuing value of corporate stocks, far out into the future. When these promises are made, there is no check made that goods and services will actually be available to repay these promises. We end up with a system that has promised very many more goods and services in the future than the real world will actually be able to produce. A break is inevitable; it looks like the break will be happening in the near future.

  2. Changes in the financial system have huge potential to disrupt the operation of the energy flow system. Demand in a given year comes from a combination of (wages and other income streams in a given year) plus the (change in debt in a given year). Historically, the (change in debt) has been positive. This has helped raise commodity prices. As soon as we start getting large defaults on debt, the (change in debt) component turns negative, and tends to bring down the price of commodities. (Note Point 6 in the previous section.) Once this happens, it is virtually impossible to keep prices up high enough to extract oil, coal and natural gas. This is a major reason why the system tends to crash.

  3. Researchers are expected to follow in the steps of researchers before them, rather than starting from a basic understudying of the whole problem. Trying to understand the whole problem, rather than simply trying to look at a small segment of a problem is difficult, especially if a researcher is expected to churn out a large number of peer reviewed academic articles each year. Unfortunately, there is a huge amount of research that might have seemed correct when it was written, but which is really wrong, if viewed through a broader lens. Churning out a high volume of articles based on past research tends to simply repeat past errors. This problem is hard to correct, because the field of energy and the economy cuts across many areas of study. It is hard for anyone to understand the full picture.

  4. In the area of energy and the economy, it is very tempting to tell people what they want to hear. If a researcher doesn’t understand how the system of energy and the economy works, and needs to guess, the guesses that are most likely to be favorably received when it comes time for publication are the ones that say, “All is well. Innovation will save the day.” Or, “Substitution will save the day.” This tends to bias research toward saying, “All is well.” The availability of financial grants on topics that appear hopeful adds to this effect.

  5. Energy Returned on Energy Investment (EROEI) analysis doesn’t really get to the point of today’s problems. Many people have high hopes for EROEI analysis, and indeed, it does make some progress in figuring out what is happening. But it misses many important points. One of them is that there are many different kinds of EROEI. The kind that matters, in terms of keeping the economy from collapsing, is the return on human labor. This type of EROEI is equivalent to after-tax wages of non-elite workers. This kind of return tends to drop too low if the total quantity of energy being used to leverage human labor is too low. We would expect a drop to occur in the quantity of energy used, if energy prices are too high, or if the quantity of energy products available is restricted.

  6. Instead of looking at wages of workers, most EROEI analyses consider returns on fossil fuel energy–something that is at least part of the puzzle, but is far from the whole picture. Returns on fossil fuel energy can be done either on a cash flow (energy flow) basis or on a “model” basis, similar to discounted cash flow. The two are not at all equivalent. What the economy needs is cash flow energy now, not modeled energy production in the future. Cash flow analyses probably need to be performed on an industry-wide basis; direct and indirect inputs in a given calendar year would be compared with energy outputs in the same calendar year. Man-made renewables will tend to do badly in such analyses, because considerable energy is used in making them, but the energy provided is primarily modeled future energy production, assuming that the current economy can continue to operate as today–something that seems increasingly unlikely.

  7. If we are headed for a near term sharp break in the economy, there is no point in trying to add man-made renewables to the electric grid. The whole point of adding man-made renewables is to try to keep what we have today longer. But if the system is collapsing, the whole plan is futile. We end up extracting more coal and oil today, in order to add wind or solar PV to what will soon become a useless grid electric system. The grid system will not last long, because we cannot pay workers and we cannot maintain the grid without a financial system. So if we add man-made renewables, most of what we get is their short-term disadvantages, with few of their hoped-for long-term advantages.

The analysis that comes closest to the situation we are reaching today is the 1972 analysis of limits of a finite world, published in the book “The Limits to Growth” by Donella Meadows and others. It models what can be expected to happen, if population and resource extraction grow as expected, gradually tapering off as diminishing returns are encountered. The base model seems to indicate that a collapse will happen about now.
Figure 5. Base scenario from 1972 Limits to Growth, printed using today's graphics by Charles Hall and John Day in "Revisiting Limits to Growth After Peak Oil"
Figure 5. Base scenario from 1972 Limits to Growth, printed using today’s graphics by Charles Hall and John Day in “Revisiting Limits to Growth After Peak Oil”

The shape of the downturn is not likely to be correct in Figure 5.  One reason is that the model was put together based on physical quantities of goods and people, without considering the role the financial system, particularly debt, plays. I expect that debt would tend to make collapse quicker. Also, the modelers had no experience with interactions in a contracting world economy, so had no idea regarding what adjustments to make. The authors have even said that the shapes of the curves, after the initial downturn, cannot be relied on. So we end up with something like Figure 6, as about all that we can rely on.
Figure 6. Figure 5, truncated shortly after production turns down, since modeled amounts are unreliable after that date.
Figure 6. Figure 5, truncated shortly after industrial output per capita (grey) and food per capita turns down, since modeled amounts are unreliable after that date.
If we are indeed facing the downturn forecast by Limits to Growth modeling, we are facing  a predicament that doesn’t have a real solution. We can make the best of what we have today, and we can try to strengthen bonds with family and friends. We can try to diversify our financial resources, so if one bank encounters problems early on, it won’t be a huge problem. We can perhaps keep a little food and water on hand, to tide us over a temporary shortage. We can study our religious beliefs for guidance.

Some people believe that it is possible for groups of survivalists to continue, given adequate preparation. This may or may not be true. The only kind of renewables that we can truly count on for the long term are those used by our forefathers, such as wood, draft animals, and wind-driven boats. Anyone who decides to use today’s technology, such as solar panels and a pump adapted for use with solar panels, needs to plan for the day when that technology fails. At that point, hard decisions will need to be made regarding how the group will live without the technology.
We can’t say that no one warned us about the predicament we are facing. Instead, we chose not to listen. Public officials gave a further push in this direction, by channeling research funds toward distant theoretically solvable problems, instead of understanding the true nature of what we are up against. Too many people took what Hubbert said literally, without understanding that what he offered was a best-case scenario, if we could find something equivalent to a perpetual motion machine to help us out of our predicament

More warnings of global collapse

This Global Collapse Will Be Unlike Anything In Recorded History

WARNING: This Global Collapse Will Be Unlike Anything In Recorded History
30 August, 2015

John Ing:  “I am focused on the ramifications of the Chinese devaluation.  There is a lot of misinformation about this move but the reality and the point of the exercise is a product of the ongoing race to the bottom as far as currencies.  All of this is a result of unprecedented worldwide quantitative easing and liquidity….
Central planners feel bold because there have been not yet been any major consequences other than roaring stock markets.  The dollar is still the reserve currency of the world.  However, many currencies are locked to it and those countries are having difficulties.  Therefore, they are resorting to these devaluations in order to protect their economies.

The last country to participate, and that will be soon, will be the United States.  So when you look at the ripple effect, what the Chinese are doing is very strategic.  This is all part of a reserve currency plan. They already have a reserve currency and reserve swaps with 28 other countries.  But what the Chinese want is for their currency to become like the euro and the yen.  So the IMF discussions are also very important to China.
But the other important point is that the Chinese have something on the order of $4 trillion of foreign exchange reserves, of which more than $1 trillion is in U.S. Treasuries.  The Chinese have devalued their currency because they have more than $1 trillion worth of obligations.  There are two ways for them to pay those long-term obligations.  One is to run down their foreign exchange reserves.  So they chose to devalue.
Expect Even Greater Fireworks In September And October
In the process they have been drawing down their foreign exchange reserves by $400 billion.  At the same time the Chinese have been dumping U.S. Treasuries.  This has put pressure on yields.  The market reaction this week has been to experience enormous destabilizing volatility, and this should lead to even greater fireworks as the markets head into September and October.
This Global Collapse Will Be Unlike Anything In Recorded History
KWN note:  Meanwhile, in the United States it’s business as usual (see chart below).
KWN Ing I 8:30:2015
One Hell Of A Collapse
King World News note continues:  You can see from the chart above that despite the hiccup in 2008 – 2009, the central planners are determined to continue inflating the global Ponzi debt scheme.  The problem is that everything eventually hits the wall.  The recent turmoil in global markets suggests that the ability of the world to sustain such massive debt levels is coming to an end.  If so, the Total Credit Market vs Share of GDP is in for one hell of a collapse. 
If you look at a simple reversion to the mean (the median point from the years 1840 – 1980), that would suggest a collapse from the current level (over 350%) to under 150%.  That will be a much larger credit implosion than the one that triggered the Great Depression.  Buckle up and buy physical gold because it will be a terrifying ride as holders of paper assets such as stocks and bonds get destroyed and the recent chaos in global markets is seen as just a warm-up.
Massive Starvation During The Last Great Depression
Russian researcher, Boris Borisov, in his article titled “The American Famine” estimated the victims of the financial crisis in the US at over seven million people. The researcher also directly compared the US events of 1932-1933 with Holodomor, or Famine, in the USSR during 1932-1933.
In the article, Borisov used the official data of the US Census Bureau. Having revised the number of the US population, birth and date rates, immigration and emigration, the researcher came to conclusion that the United States lost over seven million people during the famine of 1932-1933.
According to the US statistics, the US lost not less than 8 million 553 thousand people from 1931 to 1940. Afterwards, population growth indices change twice instantly exactly between 1930-1931: the indices drop and stay on the same level for ten years. There can no explanation to this phenomenon found in the extensive text of the report by the US Department of Commerce “Statistical Abstract of the United States,” the author wrote.
The researcher points out the movement of population at this point: “A lot more people left the country than arrived during the 1930s – the difference is estimated at 93,309 people, whereas 2.960,782 people arrived in the country a decade earlier. Well, let’s correct the number of total demographic losses in the USA during the 1930s by 3,054 people.”
Analyzing the period of the Great Depression in the USA, the author notes a remarkable similarity with events taking place in the USSR during the 1930s. He even introduced a new term for the USA – defarming – an analogue to dispossession of wealthy farmers in the Soviet Union. “Few people know about five million American farmers (about a million families) whom banks ousted from them lands because of debts. The US government did not provide them with land, work, social aid, pension – nothing,” the article says.
Every sixth American farmer was affected by famine. People were forced to leave their homes and go to nowhere without any money and any property. They found themselves in the middle of nowhere enveloped in massive unemployment, famine and gangsterism.”
The then state of affairs in the US society can be seen in Peter Jackson’s movie King Kong. The movie starts with scenes of the Great Depression and tells the story of an actress who did not eat for three days and tried to steal an apple from a street vendor. There is food in the city, but many people had no money to buy it in unemployment-paralyzed New York. People starve in the streets against the background of stores selling a variety of foodstuffs.
At the same time, the US government tried to get rid of redundant foodstuffs, which vendors could not sell. Market rules were observed strictly: unsold goods should always be categorized as redundant and they could not be given away to the poor because it could cause damage to businesses. A variety of methods was used to destroy redundant food. They burnt crops, drowned them in the ocean or plowed 10 million hectares of harvesting fields. “About 6.5 million pigs were killed at that time,” the researcher wrote.
The consequences of those policies were predictable, the author of the article wrote. “Here is what a child recollected about those years: “We changed our usual food for something for available. We used to eat bush leaves instead of cabbage. We ate frogs too. My mother and my older sister died during a year.” (Jack Griffin).”
So-called public works introduced by President Roosevelt became a salvation for a huge number of jobless and landless Americans. However, the salvation was only a phantom, Boris Borisov wrote. The works conducted under the aegis of the Public Works Administration and the Civil Works Administration were about building channels, roads or bridges in remote, wild and dangerous territories. Up to 3.3 million people were involved in those works at a time, whereas the total number of people amounted to 8.5 million, not to count prisoners.
Conditions and death rate at those works are to be studied separately. A member of public works would make $30, and pay $25 of taxes from this amount. So a person could make only $5 for a month of hard work in malarial swamps.”
The conditions, under which people were working for food, could be compared to Stalin’s GULAG camp.
The Public Works Administration (PWA) bore a striking resemblance to GULAG. The PWA was chaired by “American Beria,” the Secretary of Interior Affairs, Harold Ickes, who threw about two million people into camps for the unemployed youth,” Borisov wrote. “Harold LeClair Ickes (1874–1952) later interned USA’s ethnic Japanese in concentration camps. The first stage of the operation took only 72 hours (1941-1942).
In 1940, the US population was supposed to make up at least 141.856 million people upon the preservation of previous demographic trends. As a matter of fact, the USA had the 131.409-strong population in 1940, of which only 3.054 million can be explained with changes in migration dynamics. Thus, 7.394,000 people simply do not exist as of 1940. There are no official arguments to explain the phenomenon,” Boris Borisov wrote.

Andrew Maguire: Whistleblower, Independent London Metals Trader & Analyst – Andrew has 35 years trading experience, both as an institutional and independent trader. He is an accomplished veteran of the markets. In 2010 Andrew Maguire went public in an exclusive King World News interview and disclosed his notification to the United States regulators at the Commodity Futures Trading Commission (CFTC) of fraud being committed and price manipulation in the international gold and silver markets. This put him at the center of a storm for exposing what could be the largest fraud in history involving countries, banks and government leaders

Interview with Guy McPherson

Guy McPherson interviewed on Extinction Radio

Extinction Radio Podcast 23 8-30-2015: 0:08 Extinction Radio theme music by Gene Gibson 0:29 Music by Ross Ainslie 5:40 Program introduction with Mike Ferrigan 08:10 Interview with Guy McPherson by Ivey Cone and Peter Melton 45:38 Benjamin the Donkey 46:16 Genes Gems: Eric Michaels 51:04 Dispatch from the Endocene with Gail Zawacki 1:24:50 Benjamin the Donkey 1:25:12 Poetry with Debba Kale Earnshaw 1:27:46 Poetry by Rabid Poet, Rex Eagle 1:28:45 Kevin Hester with Peter Melton 1:45:05 Gene’s Gems: Eric Michaels and Johnny Richie 1:49:14 Q&A with Guy McPherson 1:56:13 Benjamin the Donkey 1:56:32 Carolyn Baker with Mike Ferrigan 2:14:50 Music: Copper Kettle 2:19:13 Extreme Weather Report by Ivey Cone 2:27:04 Benjamin the Donkey 2:27:42 John Compost Cossham 2:37:22 Music by Mimi German 2:41:37 Interview: Mick Collins with Peter Melton 3:01:16 Guy McPherson with Extreme Weather Update 3:02:51 Seemorerocks with Pam and Robin Westerna 3:22:22 Sam Carana Report with Debba Kale Earnshaw


Corporations spread their tentacles

Watch this first from the Artist Taxi Driver

Serco in New Zealand are running private prisons and want to spread their tentacles into rail. Their head, Tory and grandson of Winston Churchill, has just been in the country

Fight clubs, corrupt guards, prisoner beatings, rape, possibly a death, stand over tactics and a corporation that cooks its books to void punishment

Next set of Serco allegations to be worse

Stripping prisoners of their right to vote, abusing them and leaving them in poorly guarded environments where that abuse can become the norm should embarrass us. It will barely rate a mention during the Rugby World Cup coverage.

Serco eyes rail opportunities

30 August, 2015

Serco is looking at new opportunities in New Zealand, particularly in operating rail services chief executive Rupert Soames says.

The Serco boss does acknowledged recent controversy over his company's running of Mt Eden prison — where Corrections staff have stepped in to take over management — and an extended inquiry have to be worked through first.

"We are looking at rail services in particular, and also other opportunities, but we’ll see," Mr Soames said. "Let’s just get through this thing, because there is an issue of trust, and we have to go and satisfy people that we have responded correctly."

The UK-based Serco provides a range of services to governments, including rail, and there has been speculation it is interested in managing social housing in New Zealand.

In January, Serco was named as a rival to state-owned KiwiRail (the incumbent) in a tender to manager rail services in Wellington. The result tender, potentially worth hundreds of millions, will be announced later this year.

And in April, Auckland Transport said Serco was one of three companies it had invited to tender to operate passenger rail services from July 1, 2016 (the other two are Transdev Auckland - the incumbent - and KiwiRail).

On Friday, KiwiRail said it improved its earnings before interest, tax, depreciation and asset impairments to $91 million in the year to June 30, 2015, 17% ahead of the previous financial year.

After depreciation and writedowns on the value of the rail network KiwiRail owns, the state-owned enterprise reported a net loss of $167 million for the year, a 33%  improvement on last year's loss.

KiwiRail is locked in negotiations with government ministers and the Treasury on initiatives to establish the national value of its operations, since it cannot be expected to make a profit in the long term because there is too little freight in New Zealand to fully cover the cost of the 4000km network of tracks.

RAW DATA: The Nation - Lisa Owen interviews Serco chief executive Rupert Soames
Watch the full interview here

Lisa Owen: Now, they used to be the biggest company no one had ever heard of, but it’s fair to say that’s no longer true for troubled outsourcing giant Serco. It’s being investigated over a raft of allegations at Mt Eden Prison, including fight clubs, contraband and underreporting of prisoner violence, and last week we revealed their interest in providing back-room services to those buying state houses. Now, we have repeatedly asked Serco for an interview this year, and each time we’ve been turned down, so hearing that the global CEO, Rupert Soames, was in New Zealand, we decided to track him down instead. Now, Mr Soames had a very busy day yesterday. He told me he met with Corrections Minister Sam Lotu-Iiga, Corrections boss Ray Smith and that he visited both Mt Eden and the new Serco-run prison at Wiri.

Rupert Soames: Clearly this is a major issue for Serco and for Mt Eden Prison, so I want to make that we are cooperating fully with all the investigations and making sure that people are getting all the information that they need. Some of the allegations are very serious and need to be taken very seriously.

What makes you think you should keep your contract?

Well, that will not be for us to decide. It’s going to be— clearly, there’s an investigation going on at the moment. There are, it has to be said, many good things that have happened at Mt Eden over the last four years. If you go and look at the rate of drug dependency, it is far lower—
But, Mr Soames, with the greatest of respect, there is video circulating showing serious fight clubs at that prison. A number of officers have been stood down in recent times for inappropriate behaviour. What is going on there?

Well, there is a full-scale investigation going on, being led independently by the Chief Inspector, overseen by the Ombudsman, with which we are cooperating in ourselves. We also have our own investigation going on, and we take these very seriously.
How can the New Zealand taxpayer trust your company?

I suggest what should happen is that we let the investigation run its course.
Given the breadth and volume of allegations – serious allegations – involving Mt Eden Prison, it’s got to be one of two things, doesn’t it? It’s got to be that there is incompetence in that prison on the part of your company, or you’re being wilfully blind and your employees have been wilfully blind?

I don’t think either of those two conclusions are the case. What I do know is the case is that as is entirely appropriate when serious allegations which we care about very much, let me just— just remind ourselves of the facts, okay, is that Mt Eden Prison under our ownership— sorry, ownership is the wrong word – under our direction of managing the prison has gone from being one of the worst-rated prisons in New Zealand to being one of the best.It’s certainly not one of the best.

No, no, no, no, no. Okay, so there are now questions saying what’s going on? There’s serious allegations which we take really seriously, which is one of the reasons that I’m here, and there is a proper investigation going on.
So how does your staff—?

And there are—
Sorry to interrupt you, but this is really important.

Of course it’s important.
How could your staff not know what was going on there when prisoners seem to have been willy-nilly filming themselves in fight clubs, dealing in contraband, smoking and drinking? How could this happen under the nose of your staff?

Well, it shouldn’t happen. There is contraband in prisons. I have to say that the rate of contraband in prisons in Mt Eden is actually pretty low.
You’re trying to justify the videos that we’ve seen…

I’m not trying to justify—
or minimise? Because that sort of sounds like that.
I’m not trying to minimise it in the slightest at all. That's one of the reasons why I've come here — to make sure that the investigations that the Chief Inspector and the Ombudsman are doing; that we are fully cooperating with them. We have our own investigations going on. We take it very seriously. Can I just say that we don't fire people on the basis of allegations. You know, I don't know which bit of the Magna Carta says that you go and fire people. You properly investigate. There's a professional investigation going on to sort those which are wild allegations from those which are truthful allegations.
The mere existence of the video shows…

It's shocking.
Yeah. How would you describe it?

Oh, shocking. Two things are shocking. It is shocking that fighting is going on inside the prison. It is also shocking that there are mobile phones in the prison. I have to say I don't believe that Mt Eden is the only prison in New Zealand or, indeed, in the world where mobile phones are.
But that in of itself, the existence of the video, in and of itself, shows that you've failed in your duties to properly manage that prison, doesn't it?

But I have to say that we live in a real world here in which, let me tell you, that you are going to put a lot of often very violent men together, there is fighting. I don't justify it. I don't condone it. I think that the idea... I'm very worried about the idea of the existence of fight clubs, and, clearly, there is too much violence. In fact, in Mt Eden the level of violence has in the past few years it has dropped a lot. It has now picked up, and one of our issues there is to find out why and what we can do, and more importantly, what we should be doing better to run that prison. You ask who is responsible. I am responsible. I am the chief executive of Serco, therefore, the buck stops with me. But I would say to the taxpayers of New Zealand is that what the facts that we know show, and it may turn out that the reporting has been wrong, that there is something going on, if the reporting has been correct, that what the taxpayers had in New Zealand is a situation where one of the worst-rated prisons has become one of the best-rated prisons. It's been rated 

exceptional. Now, there may questions about that. And it has also been done at a cost that is substantially lower...I think the thing is, also, opposition politicians have said you're at the top of the league table because you are cooking the books. What is your response to that allegation, because it's a serious one?

It's an incredibly serious allegation. Incredibly serious. I mean, the citizens of New Zealand and our customers have the right to expect that the numbers and the issues that we are reporting to them are correct. When I say correct, I don’t mean completely error-free, but we have been properly reporting. Can I remind you also that since we’ve had this contract, we’ve been closely monitored by the Department of Corrections. There are four monitors on site. This is not something that’s operating in an island in itself. I personally—that’s why I want to get to the bottom of these allegations. Either Mt Eden has improved greatly under our ownership, or it hasn’t. If it has, okay, then I think Serco should be should praised and say, ‘Well done, Serco.’ If it hasn’t, then we will have to bear the consequences of it. I’m completely clear about this, and people have to be able trust that we are reporting what is actually going on.
What level of confidence can you express in your senior staff at the prison? Can you say you are 100% confident that the senior staff in your prison have behaved appropriately and administered the contract as they should?

Look, I think what we need to see is to see the results of the investigations. Staff are experienced. They have been working very closely with the Department of Corrections. These are serious allegations. Saying that I have confidence or no confidence doesn’t actually help anything.
You can’t express confidence in your own senior staff—your own senior management at the prison?

I have confidence in the way they have been running the prison, subject to—we need to see the results of these serious allegations. I have to say, prison are places that allegations get made about, and quite rightly, they should be investigated properly, but it is not necessarily the case that each one of them is true.Serco runs a lot of services overseas outside of prison services. So what interest do you have in expanding the services that you offer in New Zealand? Because I understand that you have been looking at the state housing situation.

Yes, and other opportunities here. We are committed to New Zealand. We wish to be good citizens here. We are often—We are active in the area of government services, and part of what—the reason I want to be here is to make sure that we are dealing and responding appropriately here so that if the Government, at the end, is going to go, ‘actually, we think you’ve done  it okay’—can I just say one thing that’s absolutely certain is that whatever comes out of this report, they are going to show up failings; things that we could have done better. I absolutely know that. We are working already to go and improve what we do.
Are you looking at youth justice?

No. We are look—we are looking at rail services in particular, and also other opportunities, but we’ll see. Let’s just get through this thing, because there is an issue of trust, and we have to go and satisfy people that we have responded correctly.

Okay, so, thank you.
I really do appreciate your frankness and your time.

How long before we get this in this country?

Private Prisons Threaten To Sue States Unless They Get More Inmates For Free Labor

24 June, 2015

Freedom is apparently bad for business. That’s the message from the private prison industry which is threatening to sue states if they don’t start locking more people up.

The private prison companies, well-known for profiting off of incarceration and crime, is now saying that the state’s they have contracted with aren’t keeping up their end of the bargain. The private prisons rely on a certain number of inmates for free and virtually-free slave labor.
That labor is used for a variety of trades, including making uniforms for popular restaurants like McDonalds and Applebee’s. But if the private prisons don’t have enough inmates locked up then production goes down correlative with the decrease in free labor (i.e. slavery).
It comes as a surprise to many Americans, but slavery was never actually abolished in the United States. That’s not a metaphor, it’s a matter of careful reading of the 13th amendment to the Constitution. That amendment – often lauded for abolishing slavery – actually makes an exception for prisons. Slavery is still completely legal as “punishment for a crime.”
USA Today explains the following:
Ratified at the end of the Civil War, the amendment abolished slavery, with one critical exception: Slavery and involuntary servitude actually remain lawful “as a punishment for crime whereof the party shall have been duly convicted.” In other words, according to this so-called punishment clause, if you get pulled over with the wrong controlled substance in your trunk, there’s nothing in the 13th Amendment to ensure you can’t be considered a slave of the state.
The punishment clause was taken directly from the Northwest Ordinance of 1787 and reflected the belief of the time that hard work was essential to prisoners’ moral rehabilitation. But the language was also ambiguous enough to be grossly abused. Soon, the clause was being used to reinstitute slavery under another guise.
Consider that there are more African Americans behind bars today than there were enslaved at any given time in American history and it becomes clear how corporations got their “work around” to keep slavery 100% legal. This is nothing new. This is the way it has been since slavery was supposedly abolished.
Now, the private prison industries say the government isn’t keeping up their end contracts for this slave labor.
Those government agencies signed contracts guaranteeing a minimum occupancy or quota of prisoner-slaves
California guarantees that prisons will be filled to 70% capacity at all times. Arizona promises almost 100% occupancy.
With crime dropping, the private prison industry is losing money and they are none too pleased.
In order to avoid these lawsuits, judges will have to dish out extra-long maximum sentences – not because the defendant deserves it, but because the state wants to keep these contracts in good standing with the private prison industry.
If you oppose slavery, then help us SPREAD THE WORD about this legal-loophole that has been keeping slavery in full effect since the 13th amendment was written.