The economic fundamentals of the United States have come unstuck, and the problem begins at the water's edge.
A country's Current Account is the balance of payments which records its exports and imports of goods and services, as well as transfer payments related to its foreign assets and liabilities. A persisting Current Account deficit implies that a country borrows funds abroad to sustain its level of economic activity at home.
This has been the case of the United States since the early 1980s, having by now reached a structural annual Balance of Trade deficit - adjusted for temporary effects of the recent financial crisis - of around $1,000 billion, or 7% of Gross National Product, and a structural annual Current Account deficit of around $800 billion.
In the 12 months to March 2011, total U.S. Public Debt increased by $601 billion to $9,652 billion, of which $4,479 were held on foreign hands. The two principal creditor nations were China with 26% of the total held abroad, and Japan with 20%. (So, it is not quite true what we so often hear, that the United States is borrowing all its money from China).
A quick aside on the subject of U.S. government debt might be in place, now that the impending increase of the Federal Debt Ceiling has become a political football in Congress.
At the end of March 2011, total government debt stood at $14,270 billion, of which the $9,652 billion referred to above is debt actually owed to the public, national and foreign. The remaining $4,618 billion is intra-governmental holdings, primarily represented by borrowings from the Social Security Trust Fund which since its inception has been taking in more money in taxes than it has paid out in benefits (a situation which is soon to expire).
The fundamental problem behind the $1,000 billion U.S. structural trade deficit is that non-agricultural imports are twice as large as non-agricultural exports. The classical free-trade answer to that problem would be that the United States needs to double its exports by an additional $1,000 billion.
May I be so free to ask - export exactly what, and to whom?
Dare I instead be so politically incorrect as to suggest that the solution lies in the opposite direction, namely to bring $1,000 billion worth of manufacturing and some 3.5 million jobs back to the United States from overseas? After all, the country also has a serious structural unemployment problem, and not everybody can make a good living from being bankers or lawyers.
Orthodoxy tells us that developed economies are service economies, leaving manufacturing to the low-wage developing world, and that world trade should flow freely and unfettered. The only problem is that the very word TRADE implies exchange of goods and services of equal value between two consenting parties. When such parity no longer exists, one of the parties will eventually go broke, and the other is not going to get paid.
What is more, the orthodoxy about the service economy is fundamentally flawed. Why should not a modern society seek to maintain a vibrant manufacturing sector, particularly the United States which has the privilege of being by far the largest consumer market "under one roof" in the world? Manufacturing, historically the fundamental backbone of the U.S. economy, is now reduced to 22% of Gross National Product, while in tiny Israel it is 33%, in dynamic Finland 29% and in Europe's power house, Germany, 28%. While we hear much about German engineering, we do not hear much about U.S. engineering anymore.
Bringing $1,000 billion worth of manufacturing back to the United States would put the sector close to 30% of GNP and the country back on a solid footing. Government should put in place policies to make it happen.
Thursday, May 26, 2011
Saturday, May 14, 2011
AFGHANISTAN
An article in the internet version of NYT/International Herald Tribune of May 11, 2011 quotes Senator Richard G. Lugar (R - Indiana):
"The broad scope of our activities suggest that we are trying to remake the economic, political and security culture Afghanistan - but that ambitious goal is beyond our power. A reassessment of our Afghanistan policy on the basis of whether our overall geostrategic interests are being served by spending roughly $10 billion a month in that country was needed before our troops took out Bin Laden"
You bet, Senator Lugar, right on!
There was also a panel discussion on the MSNBC "Morning Joe" show that same day about the efficacy of "bad-cop" U.S. special troops assassinating Taliban leaders in night raids, while regular daytime army units are trying to play "good-cops" and establish mutual confidence. The panelists expressed some doubt about the long term efficacy of these efforts.
There needs be no doubt. Any and all U.S. efforts in Afghanistan are doomed to failure, as has been the case of all foreign involvement in the area throughout history.
The first world power to come away from Afghanistan with a bloody nose was Alexander the Great during his Hindu Kush campaign during 327-26 BC. He ran into so much trouble that his normally invincible army revolted and demanded to return back home.
Next came the "Great Game" era, with the British and Russian empires hustling for control and influence in the region, the British being anxious to protect the flanks of its imperial "crown jewel", India. The First Anglo - Afghan War came in 1838, and a puppet regime was installed under Shuja Shah. (Comparison to America's current "local partner" Hamid Karzai, anyone?). By 1842 mobs were attacking British nationals in the streets of Kabul forcing full retreat of 14,000 troops, among which all but one of 690 Europeans were killed. The Second British - Afghan War with 40,000 troops came in 1878 fared no better.
Then came the turn of the Soviets. After having spent billions of dollars on Afghanistan between 1955 and 1978 to no effect, they finally invaded and slugged it out for ten years until giving up and withdrawing across the "Friendship Bridge" in 1989. A total of 620,000 Soviet troops were engaged during the period, much of Afghanistan's infrastructure was destroyed, and one-third of the population fled to Pakistan and Iran.
Ironically, it was U.S. money and covert supplies of weapons during this period that gave rise to the Taliban movement. The movie "Charlie Wilson's War" tells the story.
The Taliban are predominantly ethnic Pashtuns, and the Pashtuns constitute by far the largest segment (42%) of the Afghan population. There is a saying among them that "First we are Pathan, then we are (Sunni) Muslims, and finally we are either Pakistani or Afghan". Afghanistan has 8 million Pashtuns and Pakistan has 10 million, and the Pashtuns have never accepted the frontier drawn up in bygone times over a glass of port in an imperial officers' club in London.
The Pashtu Walie (Way of the Pathans) is the iron-bound Pakthun code of honor which has to be obeyed by all Pashtuns at all times, tenets of which sanction murder when honor is insulted. Men carry weapons at all times.
(1) Badal (Revenge) obligates members of a tribe to exact a revenge for a wrongdoing on other members of a tribe.
(2) Zar, Zan, Zamin (Gold, Women, Land) incite blood feuds which can last for generations. Families live in high-walled compounds complete with turrets and gun towers.
(3) Death to Old Enmity - Report in every edition of the Khyber Mail.
(4) Milmasthia - Bonds a tribe's members to serve a guest, and that includes giving sanctuary to anyone asking for it, even an enemy.
By paying heed to the above, it does not seem to me particularly difficult to draw some conclusion about the direction of U.S. policy towards Afghanistan, namely:
(a) Do not give money. It will be stolen or at least not used as intended.
(b) Do not think there is a Pashtun Afghanistan and a Pashtun Pakistan. There is only a "Pashtunistan".
(c) Do not believe that assassinating Taliban leaders will solve anything. To the contrary - it will only provoke a whole clan in eternal search of revenge. For generations on end, if necessary. Time is not of essence there.
(d) Do not waste time getting righteously upset at the Pakistani for giving succor to Bin Laden et al. Think Pashtu Walie.
(e) Stop wasting American lives and treasure on the place.
Leave it to the locals.
"The broad scope of our activities suggest that we are trying to remake the economic, political and security culture Afghanistan - but that ambitious goal is beyond our power. A reassessment of our Afghanistan policy on the basis of whether our overall geostrategic interests are being served by spending roughly $10 billion a month in that country was needed before our troops took out Bin Laden"
You bet, Senator Lugar, right on!
There was also a panel discussion on the MSNBC "Morning Joe" show that same day about the efficacy of "bad-cop" U.S. special troops assassinating Taliban leaders in night raids, while regular daytime army units are trying to play "good-cops" and establish mutual confidence. The panelists expressed some doubt about the long term efficacy of these efforts.
There needs be no doubt. Any and all U.S. efforts in Afghanistan are doomed to failure, as has been the case of all foreign involvement in the area throughout history.
The first world power to come away from Afghanistan with a bloody nose was Alexander the Great during his Hindu Kush campaign during 327-26 BC. He ran into so much trouble that his normally invincible army revolted and demanded to return back home.
Next came the "Great Game" era, with the British and Russian empires hustling for control and influence in the region, the British being anxious to protect the flanks of its imperial "crown jewel", India. The First Anglo - Afghan War came in 1838, and a puppet regime was installed under Shuja Shah. (Comparison to America's current "local partner" Hamid Karzai, anyone?). By 1842 mobs were attacking British nationals in the streets of Kabul forcing full retreat of 14,000 troops, among which all but one of 690 Europeans were killed. The Second British - Afghan War with 40,000 troops came in 1878 fared no better.
Then came the turn of the Soviets. After having spent billions of dollars on Afghanistan between 1955 and 1978 to no effect, they finally invaded and slugged it out for ten years until giving up and withdrawing across the "Friendship Bridge" in 1989. A total of 620,000 Soviet troops were engaged during the period, much of Afghanistan's infrastructure was destroyed, and one-third of the population fled to Pakistan and Iran.
Ironically, it was U.S. money and covert supplies of weapons during this period that gave rise to the Taliban movement. The movie "Charlie Wilson's War" tells the story.
The Taliban are predominantly ethnic Pashtuns, and the Pashtuns constitute by far the largest segment (42%) of the Afghan population. There is a saying among them that "First we are Pathan, then we are (Sunni) Muslims, and finally we are either Pakistani or Afghan". Afghanistan has 8 million Pashtuns and Pakistan has 10 million, and the Pashtuns have never accepted the frontier drawn up in bygone times over a glass of port in an imperial officers' club in London.
The Pashtu Walie (Way of the Pathans) is the iron-bound Pakthun code of honor which has to be obeyed by all Pashtuns at all times, tenets of which sanction murder when honor is insulted. Men carry weapons at all times.
(1) Badal (Revenge) obligates members of a tribe to exact a revenge for a wrongdoing on other members of a tribe.
(2) Zar, Zan, Zamin (Gold, Women, Land) incite blood feuds which can last for generations. Families live in high-walled compounds complete with turrets and gun towers.
(3) Death to Old Enmity - Report in every edition of the Khyber Mail.
(4) Milmasthia - Bonds a tribe's members to serve a guest, and that includes giving sanctuary to anyone asking for it, even an enemy.
By paying heed to the above, it does not seem to me particularly difficult to draw some conclusion about the direction of U.S. policy towards Afghanistan, namely:
(a) Do not give money. It will be stolen or at least not used as intended.
(b) Do not think there is a Pashtun Afghanistan and a Pashtun Pakistan. There is only a "Pashtunistan".
(c) Do not believe that assassinating Taliban leaders will solve anything. To the contrary - it will only provoke a whole clan in eternal search of revenge. For generations on end, if necessary. Time is not of essence there.
(d) Do not waste time getting righteously upset at the Pakistani for giving succor to Bin Laden et al. Think Pashtu Walie.
(e) Stop wasting American lives and treasure on the place.
Leave it to the locals.
Wednesday, May 11, 2011
THE ELECTRIC CAR & THE GASOLINE MARKET
I have been reading up on the NISSAN LEAF, the first mass produced family-type, fully electric car to come on the market. I did not realize how incredibly energy efficient electric engine technology is, or maybe rather how inherently inefficient the traditional internal combustion engines is.
The Leaf's energy consumption is 0.34 kWh per mile (0.21 kWh per km) and is capable of a top speed of 100 mph. A typical conventional gasoline-powered car on the American market, getting 25 miles to the gallon (9.4 liters per 100 km), will consume the equivalent of 1.41 kWh per mile, or 0.88 kWh per km, more than four times as much energy per distance driven as the all-electric Nissan Leaf. Even if the electricity consumed would be generated from coal, the Leaf is certainly a great deal more environmentally friendly than its gasoline equivalent, as well as cheaper to operate.
However, the battery packs needed to power those electric cars are heavy and still expensive. The Leaf batteries are reported to cost Nissan $13,000. The manufacturer guarantees them for 100,000 miles and claims a working life of five to ten years, depending on driving and recharging conditions. Frequent use of quick-charge options reduces battery life. Average driving range between charges is said to be 75 miles (120 km), again depending on driving conditions. Battery technology has improved by leaps and bounds and prices have come down, a trend that is likely to continue.
Here is the other side of the equation. There are currently about 250 million cars and light trucks in circulation in the United States, being driven an average of 35 miles per vehicle/day while on the average consuming 1.56 gallons of gasoline. That comes to 143 billion gallons of gasoline per year, or 540 billion liters. To put this in perspective, with 5% of world population the United States consumes 43% of the world's gasoline!
This disproportionate consumption of gasoline has its origin in the fact that the United States is a country where practically nothing is within walking distance, nor within easy reach of (mostly inexistent) public transportation. Its sprawling demographics is a direct consequence of relatively inexpensive automobiles, traditionally powered by cheap gasoline, as well as the fact that Americans like things big and comfortable, not least their cars.
Crude oil is not a uniform commodity, but varies greatly in quality from one source to the other. The proportion of light hydrocarbons - from which gasoline is produced - can be as high as 97% in weight from some fields, and as low as 50% in heavier oils and bitumens. While the rest of the world in the aggregate refines just short of 20% of its total crude oil consumption into gasoline, in the United States that proportion is 45%.
Anybody who has seen an oil refinery knows that it is a capital intensive, complex and dirty process, and refineries are designed and built to optimize the specific needs for hydrocarbons of its particular market environment. Once built, there is little leeway to jiggle its hydrocarbon output mix. Thus, U.S. refinery capacity has traditionally been built to handle light crudes, which are cheaper to refine but more expensive and progressively more scarce on the world market. The United States represent about 25% of total world consumption of crude oil, but light crudes represent less than half - and falling - of all currently known crude reserves. This is an added factor of vulnerability to the United States in an intensifying world struggle for crude oil supplies.
Eventually, Americans will have to get used to driving smaller cars using less gasoline. This is probably one reason why oil majors are in a hurry to get out of the refining business and selling at distress valuations. Now costing $4.00 per gallon at the pump - still a bargain in European eyes - the average U.S. household is spending close to $15.00 per day on gasoline, a social and political hot potato. Driving much less is hardly an option, unless American demographics could be totally rearranged overnight.
Electric and hybrid-electric cars will play a role in this process, but not a very significant one for a long, long time. The American household owns on average 2.2 cars which remain operative for over 15 years. The oldest and least fuel efficient cars tend to be owned and driven by the poorest segment of the population, least able to cope with high fuel prices.
The public and politicians are already clamoring for President Obama to "do something" about gasoline prices, and that something is definitely not a price increase in the form of European style carbon taxes. Watch the sequel.
The Leaf's energy consumption is 0.34 kWh per mile (0.21 kWh per km) and is capable of a top speed of 100 mph. A typical conventional gasoline-powered car on the American market, getting 25 miles to the gallon (9.4 liters per 100 km), will consume the equivalent of 1.41 kWh per mile, or 0.88 kWh per km, more than four times as much energy per distance driven as the all-electric Nissan Leaf. Even if the electricity consumed would be generated from coal, the Leaf is certainly a great deal more environmentally friendly than its gasoline equivalent, as well as cheaper to operate.
However, the battery packs needed to power those electric cars are heavy and still expensive. The Leaf batteries are reported to cost Nissan $13,000. The manufacturer guarantees them for 100,000 miles and claims a working life of five to ten years, depending on driving and recharging conditions. Frequent use of quick-charge options reduces battery life. Average driving range between charges is said to be 75 miles (120 km), again depending on driving conditions. Battery technology has improved by leaps and bounds and prices have come down, a trend that is likely to continue.
Here is the other side of the equation. There are currently about 250 million cars and light trucks in circulation in the United States, being driven an average of 35 miles per vehicle/day while on the average consuming 1.56 gallons of gasoline. That comes to 143 billion gallons of gasoline per year, or 540 billion liters. To put this in perspective, with 5% of world population the United States consumes 43% of the world's gasoline!
This disproportionate consumption of gasoline has its origin in the fact that the United States is a country where practically nothing is within walking distance, nor within easy reach of (mostly inexistent) public transportation. Its sprawling demographics is a direct consequence of relatively inexpensive automobiles, traditionally powered by cheap gasoline, as well as the fact that Americans like things big and comfortable, not least their cars.
Crude oil is not a uniform commodity, but varies greatly in quality from one source to the other. The proportion of light hydrocarbons - from which gasoline is produced - can be as high as 97% in weight from some fields, and as low as 50% in heavier oils and bitumens. While the rest of the world in the aggregate refines just short of 20% of its total crude oil consumption into gasoline, in the United States that proportion is 45%.
Anybody who has seen an oil refinery knows that it is a capital intensive, complex and dirty process, and refineries are designed and built to optimize the specific needs for hydrocarbons of its particular market environment. Once built, there is little leeway to jiggle its hydrocarbon output mix. Thus, U.S. refinery capacity has traditionally been built to handle light crudes, which are cheaper to refine but more expensive and progressively more scarce on the world market. The United States represent about 25% of total world consumption of crude oil, but light crudes represent less than half - and falling - of all currently known crude reserves. This is an added factor of vulnerability to the United States in an intensifying world struggle for crude oil supplies.
Eventually, Americans will have to get used to driving smaller cars using less gasoline. This is probably one reason why oil majors are in a hurry to get out of the refining business and selling at distress valuations. Now costing $4.00 per gallon at the pump - still a bargain in European eyes - the average U.S. household is spending close to $15.00 per day on gasoline, a social and political hot potato. Driving much less is hardly an option, unless American demographics could be totally rearranged overnight.
Electric and hybrid-electric cars will play a role in this process, but not a very significant one for a long, long time. The American household owns on average 2.2 cars which remain operative for over 15 years. The oldest and least fuel efficient cars tend to be owned and driven by the poorest segment of the population, least able to cope with high fuel prices.
The public and politicians are already clamoring for President Obama to "do something" about gasoline prices, and that something is definitely not a price increase in the form of European style carbon taxes. Watch the sequel.
Wednesday, May 4, 2011
US ALCOHOL AND DRUG POLICIES
It is interesting to compare the economic and social effects of U.S. drug policies with those for alcoholic beverages.
ALCOHOL
Through the Eighteenth Amendment to the Constitution, the United States resolved in 1920 to ban the sale of alcohol. It had some effect on consumption during the first couple of years of the Prohibition era, but by 1925 there were upwards of 100,000 speakeasy clubs serving liquor in New York City, alone. And the Prohibition unleashed a vicious period of violent organized crime. President Roosevelt saw the futility of it all and guided repeal of the Eighteenth Amendment through Congress in 1933.
Today, the U.S. Beer, Wine and Liquor industry posts annual revenue of around $45 billion, employs close to 170,000 people and pays in excess of $3 billion in wages. Not including income taxes, government earns about $ 6 billion in annual tax revenues from the legal sale of alcoholic beverages.
Not that alcohol is not cause for social problems. The United States is estimated to have in excess of 17 million alcoholics or persons with alcohol problems.
DRUGS
Due to its illegal status, reliable statistics about the underground drug industry are naturally hard to come by. World wide its estimated value is $400 billion, with the United States as its single biggest market with a retail value probably around $ 70 billion. About 60% of this goes on cocaine, 20% on heroin, 15% on marijuana and 5% on other narcotics.
There are around 17 million consumers of illegal drugs in the United States, coincidentally about the same amount of people estimated to have problems with alcohol. Among those drug users there are around 4 million hard core addicts responsible for about 70% of all drug purchases.
During the years between 1920 and 1970, the U.S. incarceration ratios were stable at just under 0.2% of total population. After President Nixon launched the "War on Drugs" in 1971, the incarceration ratio began rising steeply and steadily. It had reached 0.8% of total population by 2008. That would leave us with a current prison population of around 2.6 million, of which about 2 million would be in for drug related offenses if we take the old 0.2% core ratio as the base for other crimes. The United States has by a wide margin the highest incarceration ratio in the world, nearly eight times higher than the average ratios of Europe and Canada.
During 2010 the Federal Government spent over $15 billion in consequence of the "War on Drugs", while state and local governments spent at least another $25 billion.
Does this make sense?
ALCOHOL
Through the Eighteenth Amendment to the Constitution, the United States resolved in 1920 to ban the sale of alcohol. It had some effect on consumption during the first couple of years of the Prohibition era, but by 1925 there were upwards of 100,000 speakeasy clubs serving liquor in New York City, alone. And the Prohibition unleashed a vicious period of violent organized crime. President Roosevelt saw the futility of it all and guided repeal of the Eighteenth Amendment through Congress in 1933.
Today, the U.S. Beer, Wine and Liquor industry posts annual revenue of around $45 billion, employs close to 170,000 people and pays in excess of $3 billion in wages. Not including income taxes, government earns about $ 6 billion in annual tax revenues from the legal sale of alcoholic beverages.
Not that alcohol is not cause for social problems. The United States is estimated to have in excess of 17 million alcoholics or persons with alcohol problems.
DRUGS
Due to its illegal status, reliable statistics about the underground drug industry are naturally hard to come by. World wide its estimated value is $400 billion, with the United States as its single biggest market with a retail value probably around $ 70 billion. About 60% of this goes on cocaine, 20% on heroin, 15% on marijuana and 5% on other narcotics.
There are around 17 million consumers of illegal drugs in the United States, coincidentally about the same amount of people estimated to have problems with alcohol. Among those drug users there are around 4 million hard core addicts responsible for about 70% of all drug purchases.
During the years between 1920 and 1970, the U.S. incarceration ratios were stable at just under 0.2% of total population. After President Nixon launched the "War on Drugs" in 1971, the incarceration ratio began rising steeply and steadily. It had reached 0.8% of total population by 2008. That would leave us with a current prison population of around 2.6 million, of which about 2 million would be in for drug related offenses if we take the old 0.2% core ratio as the base for other crimes. The United States has by a wide margin the highest incarceration ratio in the world, nearly eight times higher than the average ratios of Europe and Canada.
During 2010 the Federal Government spent over $15 billion in consequence of the "War on Drugs", while state and local governments spent at least another $25 billion.
Does this make sense?
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