Swedes at times say disparaging things about their neighbours and my compatriots, the Norweigans, things like being naive and somewhat dim-witted. I hate to admit it, but the Swedes may occasionally have a point.
Today the papers bring news about a group of some 20 aggrieved, and presumably wealthy, Norwegians having entered a formal complaint with the Norweigian Consumer Protection Bureau about the fact that Tesla has advertised their new P85D model as possessing 700 hp under the hood. However, such claim is only true to the extent that the P85D, being a 4-wheel drive, has two electric motors, one of about 500 hp for the front axle and another of about 200 hp for the rear. The local head of Tesla Norway has belatedly come out to explain that you cannot add these two up for propulsion power purposes, and that Tesla consequently has since refrained from making the 700 hp claim.
I guess this is where the Swedes get the idea that in Norway you don't necessarily have to be particularly intelligent in order to get rich.
The aggrieved claimants declare that the Tesla P85D performance is not up to what they thought they had paid for, which further shows a surprising lack of understanding of the prestige technologies they are willing to shell out so much money for.
The Tesla P85D is theoretically capable of reaching a top speed of 200 mph (320 kmph), but for technical reasons related to the functional safety of the battery pack (over 7,000 lithium-ion battery cells connected in series and parallels), maximum speed is blocked at 135 mph (215 kmph). The latter requires no more than 165 hp from motor-to-wheels, but would nevertheless drain the effectively available power from the 85 kWh battery pack in about a half hour.
However, the sexy thing about Tesla is acceleration. It is said to be capable of 0-to-60 mph (100 kmph) in 3.1 seconds. This would require about 440 hp under the hood. No need for 700 hp even here, and in any case I am not sure I would try it on a Norwegian road, particularly not at winter time.
Finally, there are not many places in Norway where the speed limit exceeds 50 mph (80 kmph), which at a steady pace the Tesla can handle with 20 hp from the electric motor, or about double that on a long, steep incline. There are a few of those in Norway.
So, my fellow Norskie Tesla freaks, would you get real, please!?
Wednesday, October 21, 2015
Thursday, October 15, 2015
THE GREAT VOLKSWAGEN DECEPTION
That car companies deceive their customers on actual fuel efficiency standards, and that governments all over have looked the other way, should come as no surprise to anyone. That Volkswagen has gone the extra mile to deliberately cheat with illigal software shows a degree of stupid arrogance that is decidedly Teutonic in character. Whenever the Germans screw up, they are prone to do it big time.
One of the German engineering arguments in favor of combustion engines in general, and diesel in particular, is "It makes no sense building clean electric cars when the power they consume come from a coal-fired electricity plant."
Well, it actually makes sense, even then. The Fuel-to-Wheels power efficiency of electric cars are more than four times greater than that of diesel-driven cars. This means that the CO2 emissions from a coal-fired power plant propelling an electric car is only about half the emissions caused by a car's diesel engine.
However, a more intriguing question to ask is how to solve the lengthy recharging dilemma when the use of electric cars eventually becomes widespread. Recent news stories from California describe nascent plug-in warfare and associated shenanigans around too scarce recharging outlets in relation to the as of yet relatively small number of electric cars in circulation.
Keep tuned in on this one.
One of the German engineering arguments in favor of combustion engines in general, and diesel in particular, is "It makes no sense building clean electric cars when the power they consume come from a coal-fired electricity plant."
Well, it actually makes sense, even then. The Fuel-to-Wheels power efficiency of electric cars are more than four times greater than that of diesel-driven cars. This means that the CO2 emissions from a coal-fired power plant propelling an electric car is only about half the emissions caused by a car's diesel engine.
However, a more intriguing question to ask is how to solve the lengthy recharging dilemma when the use of electric cars eventually becomes widespread. Recent news stories from California describe nascent plug-in warfare and associated shenanigans around too scarce recharging outlets in relation to the as of yet relatively small number of electric cars in circulation.
Keep tuned in on this one.
Tuesday, September 29, 2015
THE GULF STREAM AND CLIMATE CHANGE
I read in today's news that science, through new satelite imaging, has "discovered" an unexpected cold spot in the North Atlantic south of Iceland, reawakening the theory that cold fresh meltwater from the coastal glaciers of Greenland is upsetting the normal flow of the Gulf Stream. As we know, the Gulf Stream is the main reason why North-Western Europe has a liveable climate.
A quick visit with some facts should suggest that this is another piece of climate nonsense.
The Gulf Stream begins upstream of Cape Hatteras on the U.S. East Coast as a continuation of the Florida Current. The Stream changes directions during the year, shifting north in the fall and south in winter and early spring. Once the Gulf Stream reaches the Grand Banks, its structure changes from a single meandering front to multiple branching fronts. One branch becomes the North Atlantic Current, curving north along the continental shelf and eventually turning east between latitudes 50 and 52 North towards Northern Europe. The other branch becomes the Azores Current, flowing south-eastwards towards the Mid-Atlantic Ridge and recirculating off the coast of West Africa.
The dreaded North Atlantic cold spot is situated near the fork in the currents, which does not seem particularly unexpected to me.
The Gulf Stream transports about 110 million cubic meters of warm water per second at an average speed of 6.5 kilometers per hour. This works out to 3.5 million cubic kilometers per year, an amount of water greater than that carried by all the world's rivers combined.
The melt water released by Greenland's coastal glaciers amounts to about 200 cubic kilometers per year, 0.006% of the amount of Gulf Stream waters passing that way.
With this kind of proportional relationship, it is going to take some convincing as far as I am concerned that we are up against a major climate event.
A quick visit with some facts should suggest that this is another piece of climate nonsense.
The Gulf Stream begins upstream of Cape Hatteras on the U.S. East Coast as a continuation of the Florida Current. The Stream changes directions during the year, shifting north in the fall and south in winter and early spring. Once the Gulf Stream reaches the Grand Banks, its structure changes from a single meandering front to multiple branching fronts. One branch becomes the North Atlantic Current, curving north along the continental shelf and eventually turning east between latitudes 50 and 52 North towards Northern Europe. The other branch becomes the Azores Current, flowing south-eastwards towards the Mid-Atlantic Ridge and recirculating off the coast of West Africa.
The dreaded North Atlantic cold spot is situated near the fork in the currents, which does not seem particularly unexpected to me.
The Gulf Stream transports about 110 million cubic meters of warm water per second at an average speed of 6.5 kilometers per hour. This works out to 3.5 million cubic kilometers per year, an amount of water greater than that carried by all the world's rivers combined.
The melt water released by Greenland's coastal glaciers amounts to about 200 cubic kilometers per year, 0.006% of the amount of Gulf Stream waters passing that way.
With this kind of proportional relationship, it is going to take some convincing as far as I am concerned that we are up against a major climate event.
Friday, July 10, 2015
QUO VADIS, GREECE?
To quote the memorable duo Abbott & Costello - "This is another fine mess you have gotten us into!"
Greece and the European Union, pretty much in equal measures, have indeed made a whale of a mess and are now facing the real possibility of collosal debt default, financial market collapse and Greece's exit from the Euro. The International Monetary Fund, with U.S. encouragement from the sidelines, is urging debt forgiveness as part of a long term rescue plan. The main U.S. concern may not be primarily the financial issues involved, but rather strategic military concerns about seeing the collapse of NATO's south-eastern flank in times when relations with Russia are none too good. On the other hand, we have the Germans who cannot wait to see the back of the Greeks.
Incidentally, this is the same Germany that twice did its utmost to destroy Europe during the last 100 years, defaulted on its WWI debt obligations and was put back on its feet after WWII through massive aid and debt foregiveness from its former U.S. and European enemies. The past sins of the Greek have been rather more prosaic.
But to keep on lending money to the Greece we see today will solve nothing. If the European and NATO communities wish to save Greece, a long term "Marshall Plan" involving investments - not more debt - will have to be put in place. A quick look at some Greek macro-figures will tell why this is so.
Greece is a country with a population of about 10.8 million. The median age is 43.5 years - not far from that of stagnating Japan - and there is no population growth. Youth dependency rate is 22.5% and for the elderly it is 30.5% for a total of 53% of the population. Pretty much every citizen over 55 years of age is on pension. Over-all unemployment currently hovers around 25% and for youth around 55%.
Gross Domestic Product (GDP) has probably by now shrunk to around USD 230 billion, a miserable USD 21,300 per capita, about 60% of the European Union average. GDP is comprised of 96% private and public consumption, 12% investment, a total of 108% propped up by an unaffordable 8% trade deficit. A sustainable and progressive GDP makeup should be more like 80% + 20% + 0%, respectively.
How to get from here to there is the question which begs an answer. A 10-year program of annual direct investment by EU and IMF of around USD 20 billion (0.12% of EU GDP) should do the trick, coupled with labor market and pension structural reforms. But how to add an element of economic growth - say 2% p.a. - with a stagnant population?
Labor productivity growth would be one answer, but next to impossible to achieve in a national economic environment based on 3% agriculture, 16% industry and 81% services. First step would be to find jobs for one million who currently find themselves unemployed, say another 10 year program of 100,000 new jobs per year. After that there would have to be immigration, for which the Middle East has plenty of candidates already, as we speak.
For any of this to happen, there has to be willingness for meaningful assistance from the EU, as well as reciprocal willingness on the part of Greece to accept it. For EU and NATO, saving Greece is undoubtedly worth the effort. Time will show whether the parties are up to the task.
Greece and the European Union, pretty much in equal measures, have indeed made a whale of a mess and are now facing the real possibility of collosal debt default, financial market collapse and Greece's exit from the Euro. The International Monetary Fund, with U.S. encouragement from the sidelines, is urging debt forgiveness as part of a long term rescue plan. The main U.S. concern may not be primarily the financial issues involved, but rather strategic military concerns about seeing the collapse of NATO's south-eastern flank in times when relations with Russia are none too good. On the other hand, we have the Germans who cannot wait to see the back of the Greeks.
Incidentally, this is the same Germany that twice did its utmost to destroy Europe during the last 100 years, defaulted on its WWI debt obligations and was put back on its feet after WWII through massive aid and debt foregiveness from its former U.S. and European enemies. The past sins of the Greek have been rather more prosaic.
But to keep on lending money to the Greece we see today will solve nothing. If the European and NATO communities wish to save Greece, a long term "Marshall Plan" involving investments - not more debt - will have to be put in place. A quick look at some Greek macro-figures will tell why this is so.
Greece is a country with a population of about 10.8 million. The median age is 43.5 years - not far from that of stagnating Japan - and there is no population growth. Youth dependency rate is 22.5% and for the elderly it is 30.5% for a total of 53% of the population. Pretty much every citizen over 55 years of age is on pension. Over-all unemployment currently hovers around 25% and for youth around 55%.
Gross Domestic Product (GDP) has probably by now shrunk to around USD 230 billion, a miserable USD 21,300 per capita, about 60% of the European Union average. GDP is comprised of 96% private and public consumption, 12% investment, a total of 108% propped up by an unaffordable 8% trade deficit. A sustainable and progressive GDP makeup should be more like 80% + 20% + 0%, respectively.
How to get from here to there is the question which begs an answer. A 10-year program of annual direct investment by EU and IMF of around USD 20 billion (0.12% of EU GDP) should do the trick, coupled with labor market and pension structural reforms. But how to add an element of economic growth - say 2% p.a. - with a stagnant population?
Labor productivity growth would be one answer, but next to impossible to achieve in a national economic environment based on 3% agriculture, 16% industry and 81% services. First step would be to find jobs for one million who currently find themselves unemployed, say another 10 year program of 100,000 new jobs per year. After that there would have to be immigration, for which the Middle East has plenty of candidates already, as we speak.
For any of this to happen, there has to be willingness for meaningful assistance from the EU, as well as reciprocal willingness on the part of Greece to accept it. For EU and NATO, saving Greece is undoubtedly worth the effort. Time will show whether the parties are up to the task.
Wednesday, March 11, 2015
CREDIBILITY OF CLIMATE SCIENCE
Dictionary definitions of Science are "a particular branch of scientific knowledge", or alternatively, "ability to produce solutions in some problem domain". The word science originates from the Latin scientia, the meaning of which is "knowledge". In turn, knowledge is defined as "the psychological result of perception, learning and reasoning".
In other words, science is as often as not subjective, an adjective defined as "taking place within the mind and modified by individual bias".
Science, which to the individual scientist tends to be indisputable truth, has throughout history been hotly debated among opposing factions of dogmatists, often in less than polite terms and at times with fatal personal consequences to anyone expressing disagreement with generally held opinions. Not much original scientific dogma has survived intact. Were it so the Earth would still be flat and there would not be much sense in continued scientific research in fields already resting on generally accepted scientific opinion.
Research nevertheless continues to be undertaken, for which we have to give thanks lest momentarily accepted "knowledge" takes permanent hold. However, researchers need funding to put food on the table and offspring through college, and entities or persons putting up the money not infrequently do so to elicit scientific support for their own opinions or vested interests in the subject at hand. Human nature being what it is, this should not come as a surprise.
Climate change, and the role of anthropogenic carbon dioxide emissions into Earth's atmosphere, is one current area of particularly intense and high-stake disputation. It was recently revealed that a certain academic, who happens to disagree with the majority opinion that atmospheric carbon dioxide concentrations are prime movers of global warming, had been funded by industry groups with economic interests at stake.
If I may be so bold as to ask, where else do we imagine this particular academic would obtain funding for his alleged heresies against "the declared findings of 97% of the world's climate scientists"?
Let us not be so naive as to think that the funders of that 97% - mostly national and multinational governmental institutions and NGOs - do not have personal or collective axes to grind in return for the monies they bestow on their set of researchers. We can expect equal amounts of preconceived bias on both sides of the table. That is after all what debating is all about.
Unfortunately, if there are areas where "scientia" should be treated with a dose of scepticism, climate change causations are high on the list. Fundamental changes in Earth's climate is a macro-millenial process, much of which is not well understood, or understood at all. By lucky coincidence, Earth's climate has been uncharacteristically benign and stable during the latest 12,000 years, the period when homo sapiens set out on the social and economic evolution towards where we find ourselves today. If Earth's past climate history is anything to go by, we can be pretty sure that the climate will in time again become a lot less amenable, almost certainly too cold rather than too hot.
Personally, I am all for finding viable long term energy and raw material alternatives to fossil fuels as soon as possible, but I would recommend we change our focus on the issue from disputable climate science to the undisputable fact that fossil fuels will one day be exhausted.
In other words, science is as often as not subjective, an adjective defined as "taking place within the mind and modified by individual bias".
Science, which to the individual scientist tends to be indisputable truth, has throughout history been hotly debated among opposing factions of dogmatists, often in less than polite terms and at times with fatal personal consequences to anyone expressing disagreement with generally held opinions. Not much original scientific dogma has survived intact. Were it so the Earth would still be flat and there would not be much sense in continued scientific research in fields already resting on generally accepted scientific opinion.
Research nevertheless continues to be undertaken, for which we have to give thanks lest momentarily accepted "knowledge" takes permanent hold. However, researchers need funding to put food on the table and offspring through college, and entities or persons putting up the money not infrequently do so to elicit scientific support for their own opinions or vested interests in the subject at hand. Human nature being what it is, this should not come as a surprise.
Climate change, and the role of anthropogenic carbon dioxide emissions into Earth's atmosphere, is one current area of particularly intense and high-stake disputation. It was recently revealed that a certain academic, who happens to disagree with the majority opinion that atmospheric carbon dioxide concentrations are prime movers of global warming, had been funded by industry groups with economic interests at stake.
If I may be so bold as to ask, where else do we imagine this particular academic would obtain funding for his alleged heresies against "the declared findings of 97% of the world's climate scientists"?
Let us not be so naive as to think that the funders of that 97% - mostly national and multinational governmental institutions and NGOs - do not have personal or collective axes to grind in return for the monies they bestow on their set of researchers. We can expect equal amounts of preconceived bias on both sides of the table. That is after all what debating is all about.
Unfortunately, if there are areas where "scientia" should be treated with a dose of scepticism, climate change causations are high on the list. Fundamental changes in Earth's climate is a macro-millenial process, much of which is not well understood, or understood at all. By lucky coincidence, Earth's climate has been uncharacteristically benign and stable during the latest 12,000 years, the period when homo sapiens set out on the social and economic evolution towards where we find ourselves today. If Earth's past climate history is anything to go by, we can be pretty sure that the climate will in time again become a lot less amenable, almost certainly too cold rather than too hot.
Personally, I am all for finding viable long term energy and raw material alternatives to fossil fuels as soon as possible, but I would recommend we change our focus on the issue from disputable climate science to the undisputable fact that fossil fuels will one day be exhausted.
Tuesday, August 19, 2014
MEDIAN HOUSEHOLD INCOME
On its own merit, I find median household income one of the more useless statistical concepts out there.
Median simply means that of 115,226,802 U.S. households (2012), 57,613,401 households had incomes below a yearly median of $ 51,371 and 57,613,401 households had income above the median. So what?
Dig a little deeper, and you will find that the average 2012 household income was $ 71,247, close to 40% above the median. Now a couple of relevant facts come to light. The first is that total annual household income was $ 71,247 x 115,226,802 households = $ 8.2 trillion. The second is that the poorest half of the households - the left leg of the statistical median bell curve - earns significantly less than those on the right bell curve leg, and very significantly less than the tail end of the right hand leg.
In 2012 total household debt in relation to household income - mortgages, student loans, car loans, credit card debt, etc. - was about 90%. Add that multiplier to total household income of $ 8.2 trillion and what do we get? U.S. Gross Domestic Product (GDP) of $ 15,7 trillion.
Simplistic, but relevant. At the end of the day it all comes down to household income plus how much households reasonably can and will borrow for consumption and private investment. In recent past household borrowing grew unsustainably to well over 100% of income, precipitating the 2008 financial crisis.
We must of course add business and government investment into the GDP formula, but where do business and government get their income from? Businesses from selling goods and services to households, government from taxing households and businesses (which, as noted, get their taxable earnings from household income).
And that brings me around to the question of inequality of income distribution - the unbalanced two legs of the median bell curve. This inequality is commonly expressed with the help of the so-called Gini Index, which measures the degree of inequality in distribution of family income in a country. A coefficient of 100.0 would mean that a single family receives all income, while a coefficient of 0.0 would mean that all families earn exactly the same.
The Gini Index of the United States has been climbing relentlessly and without pause from 0.35 in the late 1960s. It is now 0.45, registering by a wide margin the highest family income inequality among all developed nations. It outdoes in income inequality terms countries such as Nigeria, the Ivory Coast and Turkmenistan, just to mention three. On the other hand, it may not come as a surprise to find the world's lowest income inequality among the Scandinavian countires, which come in at an average 24.3 on the Gini scale.
Now, is it not the rich that make the economy go around, the supply-side job creators of trickle-down economics? I beg to differ. Where there is demand - i.e., purchasing power - there will be supply and consequently the prospects of economic progress. Not the other way around - businesses do not invest where demand for their output is stagnant or absent. Since the 1960s U.S. economic growth trends have inversely mirrored the Gini Index progression. I do not consider this to be a coincidence.
When family income surpasses a certain level, consumption and private investment ceases and surplus income gets more or less idly hoarded. The very rich simply have more money than they know what to do with, at which point they cease to be propellants of economic growth. And that income level of more than enough really is not all that high. Not in the millions of dollars, and certainly not in the billions.
As a Scandinavian I am fully aware of the fact that the socio-economic philosophy of that part of the world is not in the American DNA. All I therefore wish to suggest is that beefing up the earnings power on the left leg of the median bell curve and reversing the Gini Index trend line would significantly boost the prospects for long term U.S. economic growth.
Maybe Henry Ford - no bleeding-heart socialist - could serve as an example for the way forward. In 1914 he more than doubled the wage level of his workers to $ 5 per day, on the premise that he needed popular purchasing power for all the cars he would be turning out on his revolutionary assembly lines.
This lucid move helped kick-start the birth of the American middle class, now on the endangered species list.
Median simply means that of 115,226,802 U.S. households (2012), 57,613,401 households had incomes below a yearly median of $ 51,371 and 57,613,401 households had income above the median. So what?
Dig a little deeper, and you will find that the average 2012 household income was $ 71,247, close to 40% above the median. Now a couple of relevant facts come to light. The first is that total annual household income was $ 71,247 x 115,226,802 households = $ 8.2 trillion. The second is that the poorest half of the households - the left leg of the statistical median bell curve - earns significantly less than those on the right bell curve leg, and very significantly less than the tail end of the right hand leg.
In 2012 total household debt in relation to household income - mortgages, student loans, car loans, credit card debt, etc. - was about 90%. Add that multiplier to total household income of $ 8.2 trillion and what do we get? U.S. Gross Domestic Product (GDP) of $ 15,7 trillion.
Simplistic, but relevant. At the end of the day it all comes down to household income plus how much households reasonably can and will borrow for consumption and private investment. In recent past household borrowing grew unsustainably to well over 100% of income, precipitating the 2008 financial crisis.
We must of course add business and government investment into the GDP formula, but where do business and government get their income from? Businesses from selling goods and services to households, government from taxing households and businesses (which, as noted, get their taxable earnings from household income).
And that brings me around to the question of inequality of income distribution - the unbalanced two legs of the median bell curve. This inequality is commonly expressed with the help of the so-called Gini Index, which measures the degree of inequality in distribution of family income in a country. A coefficient of 100.0 would mean that a single family receives all income, while a coefficient of 0.0 would mean that all families earn exactly the same.
The Gini Index of the United States has been climbing relentlessly and without pause from 0.35 in the late 1960s. It is now 0.45, registering by a wide margin the highest family income inequality among all developed nations. It outdoes in income inequality terms countries such as Nigeria, the Ivory Coast and Turkmenistan, just to mention three. On the other hand, it may not come as a surprise to find the world's lowest income inequality among the Scandinavian countires, which come in at an average 24.3 on the Gini scale.
Now, is it not the rich that make the economy go around, the supply-side job creators of trickle-down economics? I beg to differ. Where there is demand - i.e., purchasing power - there will be supply and consequently the prospects of economic progress. Not the other way around - businesses do not invest where demand for their output is stagnant or absent. Since the 1960s U.S. economic growth trends have inversely mirrored the Gini Index progression. I do not consider this to be a coincidence.
When family income surpasses a certain level, consumption and private investment ceases and surplus income gets more or less idly hoarded. The very rich simply have more money than they know what to do with, at which point they cease to be propellants of economic growth. And that income level of more than enough really is not all that high. Not in the millions of dollars, and certainly not in the billions.
As a Scandinavian I am fully aware of the fact that the socio-economic philosophy of that part of the world is not in the American DNA. All I therefore wish to suggest is that beefing up the earnings power on the left leg of the median bell curve and reversing the Gini Index trend line would significantly boost the prospects for long term U.S. economic growth.
Maybe Henry Ford - no bleeding-heart socialist - could serve as an example for the way forward. In 1914 he more than doubled the wage level of his workers to $ 5 per day, on the premise that he needed popular purchasing power for all the cars he would be turning out on his revolutionary assembly lines.
This lucid move helped kick-start the birth of the American middle class, now on the endangered species list.
Monday, June 16, 2014
Will the Euro Survive?
The short answer is: I believe, it will not.
On the eve of the euro's introduction on January 01, 2001, the British newspaper, The Guardian, wrote:
"If the euro is to prove successful, history suggests that political ramifications will be significant."
Quotes from the British economist Dr. Gerard Lyons on the subject are also enlightening:
"The European Monetary Union (EMU) will need to become a political union to survive. This is one of the lessons from a historical analysis of monetary unions in the nineteenth and twentieth centuries. Monetary unions of large sovereign nations which do not have polical union eventually fail, sometimes after a long time."
"The lesson is that monetary unions of politically independent, large sovereign nations can fail, particiularly when there is an external shock, causing the economic environment to change. It is easier for unions to survive when the economic cycle is favorable."
Well, you may argue, the Brits have always been biased against the euro. They are just sore losers, hankering for the days of glorly when the British pound ruled world trade.
That could be so, but I believe they have got their facts right about monetary unions.
Indeed, things seemed to be moving merrily along until the economic environment took a sharp turn for the worse towards the end of the EMU's first decade. When one looks at the European Monetary Union in the aggregate, it does indeed look pretty good. With a joint GDP of around 18 trillion dollars, it runs a positive current account balance of about 1%. Look a little closer, however, and you will discover some serious structural fault lines which have been there all along but conveniently overlooked, only to crack wide open during the economic and financial crisis which ensued.
To wit, while Germany runs a current account surplus of some 210 billion dollars, France, Italy and Spain, in the aggregate, run a deficit of around 110 billion dollars. Nested within a full political union - like for example the United States of America - there would be no problem. But the prospects of a United States of Europe have never been further off the political map than after the recent elections to the European parliament.
While Germany lectures its EMU partners to get their act together, it refuses to share the spoils from its own benefits of the euro. Just imagine where the exchange rate of the German mark would have been today, not the least in relation to where the French franc, the Italian lira and the Spanish peseta would have been. The mutual current account pictures would have looked a lot different, and banks would not be lending money in abandon to the weaker currency nations without a hefty interest premium tacked on,
Now that the damage has been done, it is simply impossible for the large sovereign deficit nations to get their house in order without being releasted from the shackles of the euro.
Sooner or later, the EMU will be history.
On the eve of the euro's introduction on January 01, 2001, the British newspaper, The Guardian, wrote:
"If the euro is to prove successful, history suggests that political ramifications will be significant."
Quotes from the British economist Dr. Gerard Lyons on the subject are also enlightening:
"The European Monetary Union (EMU) will need to become a political union to survive. This is one of the lessons from a historical analysis of monetary unions in the nineteenth and twentieth centuries. Monetary unions of large sovereign nations which do not have polical union eventually fail, sometimes after a long time."
"The lesson is that monetary unions of politically independent, large sovereign nations can fail, particiularly when there is an external shock, causing the economic environment to change. It is easier for unions to survive when the economic cycle is favorable."
Well, you may argue, the Brits have always been biased against the euro. They are just sore losers, hankering for the days of glorly when the British pound ruled world trade.
That could be so, but I believe they have got their facts right about monetary unions.
Indeed, things seemed to be moving merrily along until the economic environment took a sharp turn for the worse towards the end of the EMU's first decade. When one looks at the European Monetary Union in the aggregate, it does indeed look pretty good. With a joint GDP of around 18 trillion dollars, it runs a positive current account balance of about 1%. Look a little closer, however, and you will discover some serious structural fault lines which have been there all along but conveniently overlooked, only to crack wide open during the economic and financial crisis which ensued.
To wit, while Germany runs a current account surplus of some 210 billion dollars, France, Italy and Spain, in the aggregate, run a deficit of around 110 billion dollars. Nested within a full political union - like for example the United States of America - there would be no problem. But the prospects of a United States of Europe have never been further off the political map than after the recent elections to the European parliament.
While Germany lectures its EMU partners to get their act together, it refuses to share the spoils from its own benefits of the euro. Just imagine where the exchange rate of the German mark would have been today, not the least in relation to where the French franc, the Italian lira and the Spanish peseta would have been. The mutual current account pictures would have looked a lot different, and banks would not be lending money in abandon to the weaker currency nations without a hefty interest premium tacked on,
Now that the damage has been done, it is simply impossible for the large sovereign deficit nations to get their house in order without being releasted from the shackles of the euro.
Sooner or later, the EMU will be history.
Sunday, May 25, 2014
Russia's Natural Gas Deal with China in Perspective
After years of haggling, a long term deal for Russia to sell natural gas to China was finally announced during President Putin's recent state visit to China, involving up to 38 billion cubic meters per year over a 30 year period starting in 2018, at a total estimated sales value of 400 billion dollars. To complete this transaction, Russia will need to invest 55 billion dollars in pipelines to the border with China, which in turn will need to make pipeline investments on its side.
Russia exports annually about 200 billion cubic meters of natural gas, three-fourths of which to customers in Western Europe. The country has been eager to lessen its dependence on Western markets, not the least now that regional relations are less than warm after Putin's Crimean and Ucrainean escapades.
There are reasons to believe that this may not be such a sweet long term deal for Russia as may first meet the eye. Here is why.
Start with the caveat "up to 38 billion cubic meters". Then let us have a look at how important or not this whole deal may be to China.
The natural gas involved is presumably destined for production of electricity, as China is in desperate need to reduce air pollution from coal-fired generating plants. China's current annual electricity consumption is around 5.5 trillion kWh, and by 2018 it is likely to have reached 7.5 trillion kWh.
38 billion m3 of natural gas is sufficient to produce some 200 billion kWh of electricity, which by 2018 will most likely represent less than 3% of China's total consumption.
In other words, we are looking at a big deal for Russia but an inconsequential one for China. This kind of inbalance is often a recipe for trouble down the line. Guess for whom?
Russia exports annually about 200 billion cubic meters of natural gas, three-fourths of which to customers in Western Europe. The country has been eager to lessen its dependence on Western markets, not the least now that regional relations are less than warm after Putin's Crimean and Ucrainean escapades.
There are reasons to believe that this may not be such a sweet long term deal for Russia as may first meet the eye. Here is why.
Start with the caveat "up to 38 billion cubic meters". Then let us have a look at how important or not this whole deal may be to China.
The natural gas involved is presumably destined for production of electricity, as China is in desperate need to reduce air pollution from coal-fired generating plants. China's current annual electricity consumption is around 5.5 trillion kWh, and by 2018 it is likely to have reached 7.5 trillion kWh.
38 billion m3 of natural gas is sufficient to produce some 200 billion kWh of electricity, which by 2018 will most likely represent less than 3% of China's total consumption.
In other words, we are looking at a big deal for Russia but an inconsequential one for China. This kind of inbalance is often a recipe for trouble down the line. Guess for whom?
Thursday, May 8, 2014
ALL ABOARD FLORIDA
Florida East Coast Railways (FEC) operates rail freight services on 351 miles of track between Miami and Jacksonville. It is a highly indebted company with interest expenses, except for 2013, exceeding its operating income in every year since 2009. The company's equity ratio to total assets was a low 23% in 2009, and an even lower 18% in 2013.
In addition to its core freight business, FEC aims to initiate a high speed passenger rail service between Miami, Fort Lauderdale, West Palm Beach and Orlando on its own right-of-way between Miami and Cocoa Beach, and from there on 40 miles of new track to be built to Orlando International Airport. In addition to several bridges along the way which need regularly to be opened for boat traffic, there are 350 high volume grade road crossings along the way, 114 of which in Palm Beach county alone. FEC plans to operate 16 trains offering a 3-hours transit time between Miami and Orlando with hourly departures in each direction, reportedly counting on three million passengers per year yielding operating revenue of $ 145 million. This works out to about $ 0.15 per passenger-mile. In 2012 the project was said to cost $ 1.0 billion, an amount currently stated to be $ 1.5 billion, still not unlikely to being seriously under-estimated.
It is my opinion that FEC and its financial backers would do well in reconsidering this venture.
A lot can be said against the technical practicality and safety issues of such a service on FEC tracks. For starters, high speed rail traffic in other parts of the world are fenced off over the entire length of the track and do not coexist with grade road crossings. As I understand it, FEC has no plans to invest in changing status quo in this respect. But before getting too worked up about these issues, I believe it to be relevant first to have a closer look at the economic fundamentals of the venture on the basis of well established data from the operation of high speed rail services in Europe.
Looking at 15 major European high speed rail services - which by chance work out to an average travel distance close to the one envisioned between Miami and Orlando - ticket prices average $ 0.40 per passenger-mile. Only a single one of these services, the one between Paris and Lyon, manages to exceed operating and capital costs. All the others lose money and are dependent on large tax-payer subsidies to stay in business.
We will understand why when we look at European high speed rail operating costs (capital costs not included) of more than $ 0.25 per seat-mile which, at typical average occupancy rates of 50%, works out to around $ 0.50 per passenger mile. Compare this to FEC's revenue projections for All Aboard Florida of of $ 0.15 per passenger-mile, and you will get the drift. And don't let anybody tell you that it can be done cheaper in the United States. European conditions for high speed rail services are vastly superior to ours.
And how likely is it that 3 million people would actually use this rail service?
Miami receives annually close to 7.0 million foreign visitors, Orlando about 4.5 million. Orlando statistics reveal that foreign visitors average 8.8 nights in Orlando and 16.1 nights in the United States, which brings me to the assumption that most of the foreign Orlando visitors come in through Miami and also spend time there. When visiting a European city you get around with public transporation. Two weeks in Florida is going to require a rental car, which will take you from Miami to Orlando in 3.5 hours for less than $ 0.10 per passenger-mile. Why then bother to lug a lot of luggage on and off a train, which ends up costing you more without really having saved any time? Not to mention that the foreign visitors to Florida are avid shoppers at the outlet malls along the route.
My prediction is that very few, if any of them, will ever set their foot on All Aboard Florida.
Then let us assume that 10% of the entire populations of Dade, Broward and Palm Beach counties visit Orlando once a year. This would render some 600,000 posible candidates for train travel. But do you seriously believe that they would pack their car, only to park it for a week in the All Aboard Florida rail terminal garage at $ 15 per day, rather than heading straight for Orlando via the Florida Turnpike? I, for one, don't.
Let us get real about this. The economics behind All Aboard Florida just are not there, nor are the practical traffic and safety realities on the ground. If you get the urge to delve deeper into the subject of high speed rail, I can recommend "High Speed Rail in Europe and Asia: Lessons for the United States".
In addition to its core freight business, FEC aims to initiate a high speed passenger rail service between Miami, Fort Lauderdale, West Palm Beach and Orlando on its own right-of-way between Miami and Cocoa Beach, and from there on 40 miles of new track to be built to Orlando International Airport. In addition to several bridges along the way which need regularly to be opened for boat traffic, there are 350 high volume grade road crossings along the way, 114 of which in Palm Beach county alone. FEC plans to operate 16 trains offering a 3-hours transit time between Miami and Orlando with hourly departures in each direction, reportedly counting on three million passengers per year yielding operating revenue of $ 145 million. This works out to about $ 0.15 per passenger-mile. In 2012 the project was said to cost $ 1.0 billion, an amount currently stated to be $ 1.5 billion, still not unlikely to being seriously under-estimated.
It is my opinion that FEC and its financial backers would do well in reconsidering this venture.
A lot can be said against the technical practicality and safety issues of such a service on FEC tracks. For starters, high speed rail traffic in other parts of the world are fenced off over the entire length of the track and do not coexist with grade road crossings. As I understand it, FEC has no plans to invest in changing status quo in this respect. But before getting too worked up about these issues, I believe it to be relevant first to have a closer look at the economic fundamentals of the venture on the basis of well established data from the operation of high speed rail services in Europe.
Looking at 15 major European high speed rail services - which by chance work out to an average travel distance close to the one envisioned between Miami and Orlando - ticket prices average $ 0.40 per passenger-mile. Only a single one of these services, the one between Paris and Lyon, manages to exceed operating and capital costs. All the others lose money and are dependent on large tax-payer subsidies to stay in business.
We will understand why when we look at European high speed rail operating costs (capital costs not included) of more than $ 0.25 per seat-mile which, at typical average occupancy rates of 50%, works out to around $ 0.50 per passenger mile. Compare this to FEC's revenue projections for All Aboard Florida of of $ 0.15 per passenger-mile, and you will get the drift. And don't let anybody tell you that it can be done cheaper in the United States. European conditions for high speed rail services are vastly superior to ours.
And how likely is it that 3 million people would actually use this rail service?
Miami receives annually close to 7.0 million foreign visitors, Orlando about 4.5 million. Orlando statistics reveal that foreign visitors average 8.8 nights in Orlando and 16.1 nights in the United States, which brings me to the assumption that most of the foreign Orlando visitors come in through Miami and also spend time there. When visiting a European city you get around with public transporation. Two weeks in Florida is going to require a rental car, which will take you from Miami to Orlando in 3.5 hours for less than $ 0.10 per passenger-mile. Why then bother to lug a lot of luggage on and off a train, which ends up costing you more without really having saved any time? Not to mention that the foreign visitors to Florida are avid shoppers at the outlet malls along the route.
My prediction is that very few, if any of them, will ever set their foot on All Aboard Florida.
Then let us assume that 10% of the entire populations of Dade, Broward and Palm Beach counties visit Orlando once a year. This would render some 600,000 posible candidates for train travel. But do you seriously believe that they would pack their car, only to park it for a week in the All Aboard Florida rail terminal garage at $ 15 per day, rather than heading straight for Orlando via the Florida Turnpike? I, for one, don't.
Let us get real about this. The economics behind All Aboard Florida just are not there, nor are the practical traffic and safety realities on the ground. If you get the urge to delve deeper into the subject of high speed rail, I can recommend "High Speed Rail in Europe and Asia: Lessons for the United States".
Tuesday, December 3, 2013
FOREST BIOMASS FUEL FOR ELECTRICITY GENERATION
I was recently made aware of an article published in "Scientific American", discussing trends towards mitigation of CO2 emissions by substituting coal for forest biomass - particularly wood pellets - which I found less than useful.
There are in general quite a lot of misconceptions floating around on this issue, particularly the drive for biomass-for-coal substitution plans in Europe involving transportation of forest biomass over long distances. The arch-example is the English Drax power plant, converting 2,000 MW installed capacity to burn 7.0 million metric tons of wood pellets per year (according to Scientific American - in my book probably it should read more like 9.0 million tons, but never mind that for the moment).
IS WOOD BIOMASS CARBON NEUTRAL?
A tree extracts CO2 from the atmosphere while it grows, stores carbon in maturity and releases CO2 as it dies off or is burnt. In northern boreal forests this takes place over a very long term cycle of nearly 100 years. In commercial and sustainably managed southern pine plantations the cycle is reduced to around 15 years, and in the case of commercial eucalyptus plantations for energy use, 5 years.
If the harvesting of wood for energy purposes is equal to or lower than the regrowth cycle, the process is carbon neutral. If not, it is not. If the wood biomass is converted to pellets for the purpose of long distance transport economies, then the process is decidedly not carbon neutral. Let us look at the particular case of Drax.
To produce 7,000,000 ton pellets one needs 14,000,000 ton green wood. Let us assume that all this wood comes either from waste or sustainably managed plantations, or a combination of both. It requires close to 500 kWh energy to produce one ton pellets, mainly expended on evaporating water to reduce wood moisture content. Further assuming that this energy is generated with natural gas and not coal, we are still ending up with emitting around 1.5 million ton/a CO2, plus another 600,000 ton/a CO2 emitted from the ships bringing the pellets to England, plus whatever CO2 is emitted from fuel that is expended to bring the pellets to the port of embarcation.
Admittedly, from the point of view of England this may look like a brilliant ecological move, because were Drax to continue burning coal, the CO2 emissions would be something like 9.5 million ton/a. But this begs a question: Is CO2 emission a world problem or a national problem? It is obviously a world problem, in as much as CO2 accumulation in the atmosphere is not confined by national borders.
That being the case, and if our goal is to mitigate world CO2 emissions from fossil fuels, then why not place the power plant right inside sutainably managed forests, minimizing transport and avoiding alltogether the costly and wasteful conversion to wood pellets?
This is particularly the case for sub-Saharan Africa, which is both short on electricity and long on deforestation caused by scavenging of fuel wood. In European energy circles there has been serious consideration given to establishing very large forest plantations in Africa in order to supply European power plants with wood pellets.
When such reestablished and sustainably managed biomass resources can be converted to CO2 neutral electric power right at home, what could be more absurd than going to the trouble and expense to bring it all the way to Europe?
There are in general quite a lot of misconceptions floating around on this issue, particularly the drive for biomass-for-coal substitution plans in Europe involving transportation of forest biomass over long distances. The arch-example is the English Drax power plant, converting 2,000 MW installed capacity to burn 7.0 million metric tons of wood pellets per year (according to Scientific American - in my book probably it should read more like 9.0 million tons, but never mind that for the moment).
IS WOOD BIOMASS CARBON NEUTRAL?
A tree extracts CO2 from the atmosphere while it grows, stores carbon in maturity and releases CO2 as it dies off or is burnt. In northern boreal forests this takes place over a very long term cycle of nearly 100 years. In commercial and sustainably managed southern pine plantations the cycle is reduced to around 15 years, and in the case of commercial eucalyptus plantations for energy use, 5 years.
If the harvesting of wood for energy purposes is equal to or lower than the regrowth cycle, the process is carbon neutral. If not, it is not. If the wood biomass is converted to pellets for the purpose of long distance transport economies, then the process is decidedly not carbon neutral. Let us look at the particular case of Drax.
To produce 7,000,000 ton pellets one needs 14,000,000 ton green wood. Let us assume that all this wood comes either from waste or sustainably managed plantations, or a combination of both. It requires close to 500 kWh energy to produce one ton pellets, mainly expended on evaporating water to reduce wood moisture content. Further assuming that this energy is generated with natural gas and not coal, we are still ending up with emitting around 1.5 million ton/a CO2, plus another 600,000 ton/a CO2 emitted from the ships bringing the pellets to England, plus whatever CO2 is emitted from fuel that is expended to bring the pellets to the port of embarcation.
Admittedly, from the point of view of England this may look like a brilliant ecological move, because were Drax to continue burning coal, the CO2 emissions would be something like 9.5 million ton/a. But this begs a question: Is CO2 emission a world problem or a national problem? It is obviously a world problem, in as much as CO2 accumulation in the atmosphere is not confined by national borders.
That being the case, and if our goal is to mitigate world CO2 emissions from fossil fuels, then why not place the power plant right inside sutainably managed forests, minimizing transport and avoiding alltogether the costly and wasteful conversion to wood pellets?
This is particularly the case for sub-Saharan Africa, which is both short on electricity and long on deforestation caused by scavenging of fuel wood. In European energy circles there has been serious consideration given to establishing very large forest plantations in Africa in order to supply European power plants with wood pellets.
When such reestablished and sustainably managed biomass resources can be converted to CO2 neutral electric power right at home, what could be more absurd than going to the trouble and expense to bring it all the way to Europe?
Wednesday, April 3, 2013
THE GREAT WALL OF THE AMERICAS
No, this is not a pun on the Great Mall of the Americas of Minneapolis, Minnesota. I would rather wish it to be a light-hearted joke, but I am afraid it is not that, either.
Rep. Steven King (R-Iowa), an opponent of immigration, pronounced recently that building a fence along the approximately 2,000 mile long border with Mexico would not be too much of an engineering marvel.
"We can (sic) do the Panama Canal 100-plus years ago and I've been over there to take a look at the Great Wall of China that was built more than 2,000 years ago, and that's 5,500 miles long. So building a fence is not that hard; I'll just show you how to do it if it's too complicated for our public policy people to get their mind around."
For a Congress that cannot find the money to invest in straight-forward and badly needed infrastructure repairs such as fixing crumbling bridges and highways, it would for a starter be interesting to hear a floor debate on how to finance Rep. King's project. And as a point of fact, the Great Wall of China was not built 2,000 years ago. It was built, rebuilt and repaired over a period stretching from around 700 BC into the 1500s AD, so Rep. King's Great Wall of the Americas would presumably be a rather lengthy project too, under the best of circumstances.
The Chinese wall is not of uniform quality along its entire extension, but the more solid parts of it is on the average some 20 ft high, 20 ft across at the bottom and 16ft at the top. I assume Rep. King would not wish the United States government to be shamed into executing a project of lesser quality. For the 2,000 mile border with Mexico, that would mean a bit short of 34 billion cu.ft. (957 million m3) of construction material.
Let us compare the Great Wall of the Americas to another more recent Chinese mega-project, the Three Gorges hydro-power dam, which consumed 27.2 million m3 of concrete, 463,000 metric tons steel and 136 million manhours. Completed in 2006 the cost was $26 billion, with only a small fraction attributable to labor cost at Chinese wage levels.
Our Great Wall of the Americas would be equal to 35 Three Gorges dams in magnitude. In other words, 1.25 billion cu.yd of concrete, 18 million tons steel and 4.8 billion manhours. With Three Gorges cost equivalents brought current to 2013 as a yard stick, this should work out to $1,2 trillion for materials and equipment plus another $70 billion in (U.S.) labor for a total cost of, say, $1.5 trillion, without factoring in cost escalation during what presumably would be a rather lengthy construction period.
But asides from the massive misallocation of funds such a project would represent, why be anti-immigration at all in a country where 99.2% of the population is made up of immigrants? It is written thus on the New York harbor Statue of Liberty:
"Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore, Send these, the homeless, tempest tossed to me, I lift my lamp beside the golden door."
Those "huddled masses" of yore were indeed a mostly rag-tag collection of human beings, but I think we can all agree that they in time made their new home into a pretty successful nation. So why mess with a formula with such a splendid track record? The United States has the space and natural resources for further population growth and still has the good fortune to attract immigrants who wish to come here in order to improve their lot through hard work.
Instead of spending $1.5 trillion-plus on the Great Wall of the Americas, Target advertises 18"x30 welcome doormats for $12.99. I am sure we can get them wholesale (from China) at $5.00, at which price we could string them out edge-to-edge along the 2,000 mile border for a mere $20 million.
Rep. Steven King (R-Iowa), an opponent of immigration, pronounced recently that building a fence along the approximately 2,000 mile long border with Mexico would not be too much of an engineering marvel.
"We can (sic) do the Panama Canal 100-plus years ago and I've been over there to take a look at the Great Wall of China that was built more than 2,000 years ago, and that's 5,500 miles long. So building a fence is not that hard; I'll just show you how to do it if it's too complicated for our public policy people to get their mind around."
For a Congress that cannot find the money to invest in straight-forward and badly needed infrastructure repairs such as fixing crumbling bridges and highways, it would for a starter be interesting to hear a floor debate on how to finance Rep. King's project. And as a point of fact, the Great Wall of China was not built 2,000 years ago. It was built, rebuilt and repaired over a period stretching from around 700 BC into the 1500s AD, so Rep. King's Great Wall of the Americas would presumably be a rather lengthy project too, under the best of circumstances.
The Chinese wall is not of uniform quality along its entire extension, but the more solid parts of it is on the average some 20 ft high, 20 ft across at the bottom and 16ft at the top. I assume Rep. King would not wish the United States government to be shamed into executing a project of lesser quality. For the 2,000 mile border with Mexico, that would mean a bit short of 34 billion cu.ft. (957 million m3) of construction material.
Let us compare the Great Wall of the Americas to another more recent Chinese mega-project, the Three Gorges hydro-power dam, which consumed 27.2 million m3 of concrete, 463,000 metric tons steel and 136 million manhours. Completed in 2006 the cost was $26 billion, with only a small fraction attributable to labor cost at Chinese wage levels.
Our Great Wall of the Americas would be equal to 35 Three Gorges dams in magnitude. In other words, 1.25 billion cu.yd of concrete, 18 million tons steel and 4.8 billion manhours. With Three Gorges cost equivalents brought current to 2013 as a yard stick, this should work out to $1,2 trillion for materials and equipment plus another $70 billion in (U.S.) labor for a total cost of, say, $1.5 trillion, without factoring in cost escalation during what presumably would be a rather lengthy construction period.
But asides from the massive misallocation of funds such a project would represent, why be anti-immigration at all in a country where 99.2% of the population is made up of immigrants? It is written thus on the New York harbor Statue of Liberty:
"Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore, Send these, the homeless, tempest tossed to me, I lift my lamp beside the golden door."
Those "huddled masses" of yore were indeed a mostly rag-tag collection of human beings, but I think we can all agree that they in time made their new home into a pretty successful nation. So why mess with a formula with such a splendid track record? The United States has the space and natural resources for further population growth and still has the good fortune to attract immigrants who wish to come here in order to improve their lot through hard work.
Instead of spending $1.5 trillion-plus on the Great Wall of the Americas, Target advertises 18"x30 welcome doormats for $12.99. I am sure we can get them wholesale (from China) at $5.00, at which price we could string them out edge-to-edge along the 2,000 mile border for a mere $20 million.
Sunday, January 6, 2013
THE PUBLIC DEBT HYPE
By the end of the current month of January 2013, public debt of the United States of America will amount to somewhere around $ 16.5 trillion, or approximately 110% of Gross Domestic Product. There is no lack of hysterics around the subject, not to mention political gamesmanship, so I thought some facts could be in place to illuminate the subject.
Since one man's debt is another man's asset, let us take a look at who holds this public debt, and the likely consequences thereof.
FEDERAL RESERVE & INTRA-GOVERNMENTAL HOLDINGS
For starters, close to half the public debt, or nearly $ 8.0 trillion, is held by the government itself - at the Federal Reserve in consequence of current monetary policies, and as intra-governmental holdings mainly as the result of borrowings from a surplus in the Social Security Fund. Since government cannot by definition owe money to itself, this very substantial portion of the public debt is nothing but accounting smoke and mirrors.
FOREIGN & INTERNATIONAL HOLDINGS
These are equivalent to approximately one third of total nominal debt, or something short of $ 5.5 trillion, amost all of which is denominated in U.S. currency. This debt is fundamentally resulting from the fact that, since the 1980s, the United States has consistently been running a negative balance of trade with the rest of the world, currently amounting to some $ 550 billion per year. It means that we consume more than we produce, and that the rest of the world continues to accept U.S. Treasury IOUs in payment. It should be mentioned that this trade deficit is partly offset by some $ 100 billion of annual net positive inflows stemming from U.S. assets held abroad.
Incidentally, for those wailing about the United States of America being entirely in hoc to China, that country owns about 20% of the public debt held abroad, or somewhat in excess of $ 1.0 trillion.
Well, you may say, $ 5.5 trillion in public debt to the rest of the world is not peanuts. What would happen if the holders of this debt decided to divest themselves of U.S. dollar assets? Actually, nothing much, because the dollars would not evaporate into thin air, they would simply be held by someone else. If enough dollars started changing hands, the likely effect would be that the price of those dollars - the exchange rate relative to alternative currencies - would fall, something which has indeed been going on at a steady clip for the last ten years.
This is actually good for the United States. A cheaper dollar helps making American goods and services more competitive on the world market - and conversely - makes imported goods and services relatively less competitive against alternatives produced in the U.S. This will help increasing U.S. employment and reduce the trade deficit, the root cause of foreign indebtedness in the first place. Until then, the public debt held abroad will just keep growing and could eventually become a real problem.
However, a wholesale liquidation of dollar assets is not so easy, for lack of viable alternatives. 85% of all world foreign exchange transactions take place in U.S. dollars, a market involving an eye-watering $ 4 trillion plus per day! 60% of all the world's official foreign exchange reserves and 50% of all foreign debt securities are denominated in U.S. dollars. In other words, while a depreciating dollar may do the United States some good, there is a lot of counterparties out there on the losing end of this deal and therefore not that keen to see it happen.
Theoretically, the foreign holders of U.S. Treasuries could swap them for other U.S. assets - corporations, real estate or stocks - which would drive prices up of said assets if practiced on a large enough scale. Nice for the current U.S. owners of same, but political implications aside, let us not bet on this ever happening in a big way.
PUBLIC DEBT HOLDINGS AS INSTRUMENTS OF SAVINGS
The remaining 20% or so of the $ 16.5 trillion nominal debt, or $ 3.3 trillion, are held in the United States by state and local governments, insurance companies, pension and mutual funds and their likes, generally for the purpose of funding future pension and casualty obligations. These holders of the public debt will not evaporate. To the contrary, they will steadily increase their holdings pretty much in lock-step with GDP growth.
But what is currently a huge advantage for the federal government of being able to borrow money at what effectively are negative interest rates, is an equally huge time bomb for those holders of Treasuries that depend on the interest income to fund future liabilities with a present value - discounted at these low rates - way in excess of current funding values on hand.
SUMMA SUMMARUM (ON THE WHOLE)
Let us therefore stop waxing hysterical about the size of the public debt. It is at best nothing more than a political ploy to divert attention from the real underlying problems.
Which are: what to do about the trade deficit and, much more importantly, what to do about the time bomb of unfunded future entitlement benefits.
Since one man's debt is another man's asset, let us take a look at who holds this public debt, and the likely consequences thereof.
FEDERAL RESERVE & INTRA-GOVERNMENTAL HOLDINGS
For starters, close to half the public debt, or nearly $ 8.0 trillion, is held by the government itself - at the Federal Reserve in consequence of current monetary policies, and as intra-governmental holdings mainly as the result of borrowings from a surplus in the Social Security Fund. Since government cannot by definition owe money to itself, this very substantial portion of the public debt is nothing but accounting smoke and mirrors.
FOREIGN & INTERNATIONAL HOLDINGS
These are equivalent to approximately one third of total nominal debt, or something short of $ 5.5 trillion, amost all of which is denominated in U.S. currency. This debt is fundamentally resulting from the fact that, since the 1980s, the United States has consistently been running a negative balance of trade with the rest of the world, currently amounting to some $ 550 billion per year. It means that we consume more than we produce, and that the rest of the world continues to accept U.S. Treasury IOUs in payment. It should be mentioned that this trade deficit is partly offset by some $ 100 billion of annual net positive inflows stemming from U.S. assets held abroad.
Incidentally, for those wailing about the United States of America being entirely in hoc to China, that country owns about 20% of the public debt held abroad, or somewhat in excess of $ 1.0 trillion.
Well, you may say, $ 5.5 trillion in public debt to the rest of the world is not peanuts. What would happen if the holders of this debt decided to divest themselves of U.S. dollar assets? Actually, nothing much, because the dollars would not evaporate into thin air, they would simply be held by someone else. If enough dollars started changing hands, the likely effect would be that the price of those dollars - the exchange rate relative to alternative currencies - would fall, something which has indeed been going on at a steady clip for the last ten years.
This is actually good for the United States. A cheaper dollar helps making American goods and services more competitive on the world market - and conversely - makes imported goods and services relatively less competitive against alternatives produced in the U.S. This will help increasing U.S. employment and reduce the trade deficit, the root cause of foreign indebtedness in the first place. Until then, the public debt held abroad will just keep growing and could eventually become a real problem.
However, a wholesale liquidation of dollar assets is not so easy, for lack of viable alternatives. 85% of all world foreign exchange transactions take place in U.S. dollars, a market involving an eye-watering $ 4 trillion plus per day! 60% of all the world's official foreign exchange reserves and 50% of all foreign debt securities are denominated in U.S. dollars. In other words, while a depreciating dollar may do the United States some good, there is a lot of counterparties out there on the losing end of this deal and therefore not that keen to see it happen.
Theoretically, the foreign holders of U.S. Treasuries could swap them for other U.S. assets - corporations, real estate or stocks - which would drive prices up of said assets if practiced on a large enough scale. Nice for the current U.S. owners of same, but political implications aside, let us not bet on this ever happening in a big way.
PUBLIC DEBT HOLDINGS AS INSTRUMENTS OF SAVINGS
The remaining 20% or so of the $ 16.5 trillion nominal debt, or $ 3.3 trillion, are held in the United States by state and local governments, insurance companies, pension and mutual funds and their likes, generally for the purpose of funding future pension and casualty obligations. These holders of the public debt will not evaporate. To the contrary, they will steadily increase their holdings pretty much in lock-step with GDP growth.
But what is currently a huge advantage for the federal government of being able to borrow money at what effectively are negative interest rates, is an equally huge time bomb for those holders of Treasuries that depend on the interest income to fund future liabilities with a present value - discounted at these low rates - way in excess of current funding values on hand.
SUMMA SUMMARUM (ON THE WHOLE)
Let us therefore stop waxing hysterical about the size of the public debt. It is at best nothing more than a political ploy to divert attention from the real underlying problems.
Which are: what to do about the trade deficit and, much more importantly, what to do about the time bomb of unfunded future entitlement benefits.
Friday, January 4, 2013
AMERICA AND ITS GUNS
On December 14, 2012 we witnessed the wanton murder of 20 children between the ages of 6 and 7, as well as 6 adults, at an elementary school in Newtown, Connecticut. The perpetrator was an emotionally disturbed 20 year old man with automatic assault weapons, lifted from his divorced mother's ample gun collection. after having first murdered her in the home where they lived together.
There have been 61 mass shooting incidents in the United States since 1982, 30 since the Columbine incident in 1999, and 10 in the year 2012, alone. The record alone is shocking - the time-line trend even more so.
With about 30,000 gun-related deaths per year, of which about 17,000 are suicides, about 12,000 are homicides and the remaining 1,000 mostly killimg of innocent bystanders, this places the United States at 4.5 times the per capita average of all OECD nations.
How can a country justify combining its status as the most overtly Christian nation on earth with this record of violent behavior? Is it a problem of too many firearms at large, is violence an integral part of the American cultural DNA, or is it all of the above?
GUN OWNERSHIP
The Second Amendment to the United States' Constitution, enacted in 1791, states:
"A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed"
These few words have ever since been the subject of much political and judicial discord, often bordering on hysterical irrationality, particularly on whether the amendment should be interpreted as a right in the context of forming state militias, or as a wholly independent and personal right. The U.S. Supreme Court in 2008 ruled, in a narrow majority decision, that the amendment should indeed be interpreted as an individual right to bear arms.
Well before the enactment of the Second Amendment, common law, as well some early state constitutions, already affirmed people's right to keep and bear arms. There should be of little doubt that James Madison drafted this particular amendment with the purpose of securing the votes of moderate Anti-Federalists towards fullfillment of his wish to establish a centrally governed United States of America. Political expediency was not born yesterday.
But the Supreme Court in its 2008 ruling also afirms:
"Like most rights, the Second Amendment right is not unlimited. It is not a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose." (Italics mine).
Herein lies the seed of the reasonable, as well as maybe the possible, within the context of U.S. politics: a ban on private ownership of semi-automatic assault weapons which can fire multiple rounds of high caliber ammunition without the need for reloading. The only plausible end use for this category of arms is to kill people, as many as possible and in the shortest time possible.
My concern, however, is that this will not be the logical outcome from the fact that, for once, the nation has been shaken to the core by the Newtown massacre of small children. We may well end up with nothing more than a call for stricter background-check rules to keep firearms out of the hands of mentally disturbed people, the most likely perpetrators of mass shootings.
The uselessness of such a measure should be evident to anybody. There is no national database over mentally disturbed people. In most cases we do not even know who they are before it is too late.
Therefore, the only viable remedy is to make it more difficult for anybody to lay their hands on assault weapons, preferrably also making it a criminal offense to sell and own one.
A CULTURE OF VIOLENCE
This is where the country faces its biggest challenge - this unfathomable fascination with violence in so many aspects of daily life - in movies, television, video games, sports - and in the glorification of gun ownership.
It is interesting to note that in countries such as Finland, Sweden, Norway, France, Canada, Austria and Germany - all with long hunting traditions - in every one of them we find a gun ownership ratio of almost exactly 30 per 100 inhabitants.
It would be reasonable to believe that the gun-ownership-for-hunting ratio is similar in the United States. That leaves us with another 60 guns per 100 inhabitants, or close to 190 million firearms, laying around at the average of nearly two for every American household.
Since the actual number of households owning guns is situated somwhere between one third and one half the total, depending on who you believe, you may readily conclude that quite a few households contain lots of guns. For what purpose other than hunting? Self-defense?
There are no reliable statistics or credible studies attesting to the beneficial value of keeping or bearing guns for self defense. The conclusions reached by such studies are all over the map, depending on the authors' bias.
It is in most cases a criminal offense to kill an unarmed person under any circumstance, and your chances of successfully confronting and out-gunning an already armed perpetrator ready to pull the trigger is as close to nil as any odds can be.
On the other hand, we should be reminded of the 17,000 annual gun-related suicides. Shooting oneself is the least complicated way of committing suicide, and ready access to a gun in the home in the moment of ultimate despear certainly have an influence on the number of successful suicides actually carried out.
Furthermore, a substantial proportion of the annual 12,000 gun-related homicides occur in the home, perpetrated by familily members or persons known to the victim, frequently as a result of momentary personal altercations and by use of the victim's own weapon.
Anybody believing that the key to making America a safer and less violent place is more, rather than less, guns out there should have his head examined. Gun ownership for purposes other than hunting, as well as the level of gun violence, already exceed by a wide margin those of any other well established democracy. That alone should be proof enough that more guns does not make for a safer society.
The United States of America has many great attributes to be proud of and that the world would do well to emulate. Its attitudes to gun ownership and violence are not among them.
There have been 61 mass shooting incidents in the United States since 1982, 30 since the Columbine incident in 1999, and 10 in the year 2012, alone. The record alone is shocking - the time-line trend even more so.
With about 30,000 gun-related deaths per year, of which about 17,000 are suicides, about 12,000 are homicides and the remaining 1,000 mostly killimg of innocent bystanders, this places the United States at 4.5 times the per capita average of all OECD nations.
How can a country justify combining its status as the most overtly Christian nation on earth with this record of violent behavior? Is it a problem of too many firearms at large, is violence an integral part of the American cultural DNA, or is it all of the above?
GUN OWNERSHIP
The Second Amendment to the United States' Constitution, enacted in 1791, states:
"A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed"
These few words have ever since been the subject of much political and judicial discord, often bordering on hysterical irrationality, particularly on whether the amendment should be interpreted as a right in the context of forming state militias, or as a wholly independent and personal right. The U.S. Supreme Court in 2008 ruled, in a narrow majority decision, that the amendment should indeed be interpreted as an individual right to bear arms.
Well before the enactment of the Second Amendment, common law, as well some early state constitutions, already affirmed people's right to keep and bear arms. There should be of little doubt that James Madison drafted this particular amendment with the purpose of securing the votes of moderate Anti-Federalists towards fullfillment of his wish to establish a centrally governed United States of America. Political expediency was not born yesterday.
But the Supreme Court in its 2008 ruling also afirms:
"Like most rights, the Second Amendment right is not unlimited. It is not a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose." (Italics mine).
Herein lies the seed of the reasonable, as well as maybe the possible, within the context of U.S. politics: a ban on private ownership of semi-automatic assault weapons which can fire multiple rounds of high caliber ammunition without the need for reloading. The only plausible end use for this category of arms is to kill people, as many as possible and in the shortest time possible.
My concern, however, is that this will not be the logical outcome from the fact that, for once, the nation has been shaken to the core by the Newtown massacre of small children. We may well end up with nothing more than a call for stricter background-check rules to keep firearms out of the hands of mentally disturbed people, the most likely perpetrators of mass shootings.
The uselessness of such a measure should be evident to anybody. There is no national database over mentally disturbed people. In most cases we do not even know who they are before it is too late.
Therefore, the only viable remedy is to make it more difficult for anybody to lay their hands on assault weapons, preferrably also making it a criminal offense to sell and own one.
A CULTURE OF VIOLENCE
This is where the country faces its biggest challenge - this unfathomable fascination with violence in so many aspects of daily life - in movies, television, video games, sports - and in the glorification of gun ownership.
It is interesting to note that in countries such as Finland, Sweden, Norway, France, Canada, Austria and Germany - all with long hunting traditions - in every one of them we find a gun ownership ratio of almost exactly 30 per 100 inhabitants.
It would be reasonable to believe that the gun-ownership-for-hunting ratio is similar in the United States. That leaves us with another 60 guns per 100 inhabitants, or close to 190 million firearms, laying around at the average of nearly two for every American household.
Since the actual number of households owning guns is situated somwhere between one third and one half the total, depending on who you believe, you may readily conclude that quite a few households contain lots of guns. For what purpose other than hunting? Self-defense?
There are no reliable statistics or credible studies attesting to the beneficial value of keeping or bearing guns for self defense. The conclusions reached by such studies are all over the map, depending on the authors' bias.
It is in most cases a criminal offense to kill an unarmed person under any circumstance, and your chances of successfully confronting and out-gunning an already armed perpetrator ready to pull the trigger is as close to nil as any odds can be.
On the other hand, we should be reminded of the 17,000 annual gun-related suicides. Shooting oneself is the least complicated way of committing suicide, and ready access to a gun in the home in the moment of ultimate despear certainly have an influence on the number of successful suicides actually carried out.
Furthermore, a substantial proportion of the annual 12,000 gun-related homicides occur in the home, perpetrated by familily members or persons known to the victim, frequently as a result of momentary personal altercations and by use of the victim's own weapon.
Anybody believing that the key to making America a safer and less violent place is more, rather than less, guns out there should have his head examined. Gun ownership for purposes other than hunting, as well as the level of gun violence, already exceed by a wide margin those of any other well established democracy. That alone should be proof enough that more guns does not make for a safer society.
The United States of America has many great attributes to be proud of and that the world would do well to emulate. Its attitudes to gun ownership and violence are not among them.
Monday, November 19, 2012
MEDICARE
There are currently about 48 million people enrolled in the government-run comprehensive Medicare program covering people 65 years and older, at a projected annual 2012 cost of $585 billion, equivalent to $12,200 per person enrolled.
Overall annual health care expenditures in the United States are approximately $2.7 trillion, or $8,600 per capita. It would be only logical to accept that health care costs per individual for the elderly would be more expensive than for the population at large, but the statistics hide some startling facts compiled by the Health Care Financing Administration (HCFA).
40 percent of Medicare dollars cover care for people in their last month of life, at an annual cost of $234 billion. If we add people in the last two months of life we are looking at a cost in excess of $300 billion.
Furthermore, 10 percent of Medicare beneficiaries account for 70 percent of program spending, which is equivalent to $85,300 per beneficiary.
Thus, the cost of covering the remaining 90 percent of beneficiaries is actually a surprisingly low $4,100 per person given the age group in question, less than half the per capita cost for the population at large.
From this we may allow ourselves to draw some conclusions:
(1) In terms of the famously expensive United States health care system, government-run Medicare turns out to be not only comparatively cost efficient. It is also a program universally loved by the country's elderly, yours truly being among them.
(2) It makes no sense whatsoever to try saving program costs by increasing the age of eligibility, because it is not generally at this lower end that the larger expenditures occur. In addition, it would throw people in the 65 - 70 age bracket onto the mercy and good graces of the private for-profit health insurance industry. And you can imagine the premium cost at that age. That is, if you were lucky enough to be accepted.
(3) The problem lies squarely in the end-of-life-care decisions a society makes, and this is not unique to the United States. The medical community of my native Norway is debating whether, and how, to place monetary restraints on end-of-life care, an issue which the country's politicians are not eager to embrace. We need only recall Sarah Palin's "Death Panels".
We talk of the health care industry's mission to save lives as if life was eternal, while all one can hope for is to prolong a life. In the overwhelming number of cases this is a sacred mission, but not indiscriminately and under any circumstance.
Placing value on human life is humanly impossible, so in the end common sense and humility must prevail.
When my time comes I wish to go gracefully, at the least possible expense to my family and the community at large.
Overall annual health care expenditures in the United States are approximately $2.7 trillion, or $8,600 per capita. It would be only logical to accept that health care costs per individual for the elderly would be more expensive than for the population at large, but the statistics hide some startling facts compiled by the Health Care Financing Administration (HCFA).
40 percent of Medicare dollars cover care for people in their last month of life, at an annual cost of $234 billion. If we add people in the last two months of life we are looking at a cost in excess of $300 billion.
Furthermore, 10 percent of Medicare beneficiaries account for 70 percent of program spending, which is equivalent to $85,300 per beneficiary.
Thus, the cost of covering the remaining 90 percent of beneficiaries is actually a surprisingly low $4,100 per person given the age group in question, less than half the per capita cost for the population at large.
From this we may allow ourselves to draw some conclusions:
(1) In terms of the famously expensive United States health care system, government-run Medicare turns out to be not only comparatively cost efficient. It is also a program universally loved by the country's elderly, yours truly being among them.
(2) It makes no sense whatsoever to try saving program costs by increasing the age of eligibility, because it is not generally at this lower end that the larger expenditures occur. In addition, it would throw people in the 65 - 70 age bracket onto the mercy and good graces of the private for-profit health insurance industry. And you can imagine the premium cost at that age. That is, if you were lucky enough to be accepted.
(3) The problem lies squarely in the end-of-life-care decisions a society makes, and this is not unique to the United States. The medical community of my native Norway is debating whether, and how, to place monetary restraints on end-of-life care, an issue which the country's politicians are not eager to embrace. We need only recall Sarah Palin's "Death Panels".
We talk of the health care industry's mission to save lives as if life was eternal, while all one can hope for is to prolong a life. In the overwhelming number of cases this is a sacred mission, but not indiscriminately and under any circumstance.
Placing value on human life is humanly impossible, so in the end common sense and humility must prevail.
When my time comes I wish to go gracefully, at the least possible expense to my family and the community at large.
Monday, October 8, 2012
U.S. JOB MARKET PROSPECTS
I have been hearing Mr. Mitt Romney, nominee of the Republican party to the U.S. presidential elections in November, refer to the "fact" that a 3 percentage point drop in the unemployment rate, from current 8 percent to 5 percent, would create nine million new jobs. Whether this is a fib or lack of knowledge of basic labor market statistics, such statements are equally disturbing when coming from someone who's aim it is to lead the world's foremost economy.
The population of the United States is at the moment of writing around 312 million, and Mr. Romney's statement would be approximately correct if unemployment statistics were based on this total. However they are not, as that figure includes some 75 million persons under the age of 18 and around 41 million who are 65 years or older.
The unemployment rate is defined as the percentage of the labor force out of work at any one time.
The United States labor force currently numbers a bit above 153 million, which in turn represents 78 percent of the population's 18-to-64 age group segment.
So, if Mr. Romney's - so far unknown - economic policies were to bring the unemployment rate down to the 5 percent level, we are not talking about 9 million jobs, but rather about half that figure. Not an unsubstantial difference.
Mr. Romney is also pledging to create 12 million new jobs during the first four years of his presidency, were he to be elected. This is another statement that takes some credulity.
U.S. labor statistics indicate the total number of unemployed in 2011 to be about 13.7 million. A 5 percent unemployment rate is generally equated with full employment, and historically the rate seldom dips under this threshold. The math to refute Mr. Romney's 12 million new jobs claim is therefore not overly complex. He is again overstating the situation by a factor of two.
In this context it is also important to note that, during the remaining part of the decade, the 18-to-64 age segment - the main source of new labor - will only grow by less than a compounded 0.3% per year, primarily due to retirement of the baby-boom generation born during the years immediately following WWII.
On the opposite side of the political spectrum the incumbent presidential candidate, Mr. Obama, pleads with the electorate for the opportunity of another four years term to finish what he has begun, while admitting that there is still much to be done with respect to the level of employment.
When it comes to the jobs market, current trends actually do not bode badly for an Obama second term.
The dramatic increase in unemployment witnessed in the United States during the period 2008-10 was primarily rooted in the collapsing housing market, subsequently cascading over into plummeting state and local government employment levels forced on by shrinking tax revenues.
The housing market crash was a combined consequence of over-building and a simultaneous price bubble, aided and abetted by irresponsible and outright fraudulent financial market lending practices, leaving behind a household rate of debt never before experienced in the United States.
The long term rule of thumb for annual U.S. housing starts has been about 4.5 new units per 1,000 inhabitants. During the period between 2000 and 2006 this ratio climbed steadily to a peak of about 6.0, creating a situation of substantial over-supply. Subsequently, between 2006 and 2009 housing starts fell off a cliff, bottoming out at 1.2 units per 1,000 inhabitants.
When one realizes that housing starts - including attendant household goods industries - in normal times represent roughly 3 percent of U.S. Gross National Product, it is not hard to imagine what sort of impact sharp fluctuations in this market segment do to levels of national employment, in either direction.
The good news is that the 2000-06 housing over-supply has by now been corrected by the 2006-09 implosion of activity. The housing market is coming back to life, although still hampered by so-called "under water" mortgages, where the value of loans exceed the market value of the property.
With the supply over-hang out of the way, now would be a good time for the government to double down on unraveling the financial impediments still blocking the way to full recovery.
Further good news is that the U.S. auto sales, falling to 10 million units in 2009, is currently at some 15 million units and on its way back to the annual average16 million units prevailing in the early 2000s. This is further strengthened by a revitalized U.S. auto industry and a small but steady trickle of returning manufacturing jobs from overseas.
Darkness is greatest during the hours before dawn, and the United States deserves to be lead back into the sunlight by a leader who gets the facts straight.
The population of the United States is at the moment of writing around 312 million, and Mr. Romney's statement would be approximately correct if unemployment statistics were based on this total. However they are not, as that figure includes some 75 million persons under the age of 18 and around 41 million who are 65 years or older.
The unemployment rate is defined as the percentage of the labor force out of work at any one time.
The United States labor force currently numbers a bit above 153 million, which in turn represents 78 percent of the population's 18-to-64 age group segment.
So, if Mr. Romney's - so far unknown - economic policies were to bring the unemployment rate down to the 5 percent level, we are not talking about 9 million jobs, but rather about half that figure. Not an unsubstantial difference.
Mr. Romney is also pledging to create 12 million new jobs during the first four years of his presidency, were he to be elected. This is another statement that takes some credulity.
U.S. labor statistics indicate the total number of unemployed in 2011 to be about 13.7 million. A 5 percent unemployment rate is generally equated with full employment, and historically the rate seldom dips under this threshold. The math to refute Mr. Romney's 12 million new jobs claim is therefore not overly complex. He is again overstating the situation by a factor of two.
In this context it is also important to note that, during the remaining part of the decade, the 18-to-64 age segment - the main source of new labor - will only grow by less than a compounded 0.3% per year, primarily due to retirement of the baby-boom generation born during the years immediately following WWII.
On the opposite side of the political spectrum the incumbent presidential candidate, Mr. Obama, pleads with the electorate for the opportunity of another four years term to finish what he has begun, while admitting that there is still much to be done with respect to the level of employment.
When it comes to the jobs market, current trends actually do not bode badly for an Obama second term.
The dramatic increase in unemployment witnessed in the United States during the period 2008-10 was primarily rooted in the collapsing housing market, subsequently cascading over into plummeting state and local government employment levels forced on by shrinking tax revenues.
The housing market crash was a combined consequence of over-building and a simultaneous price bubble, aided and abetted by irresponsible and outright fraudulent financial market lending practices, leaving behind a household rate of debt never before experienced in the United States.
The long term rule of thumb for annual U.S. housing starts has been about 4.5 new units per 1,000 inhabitants. During the period between 2000 and 2006 this ratio climbed steadily to a peak of about 6.0, creating a situation of substantial over-supply. Subsequently, between 2006 and 2009 housing starts fell off a cliff, bottoming out at 1.2 units per 1,000 inhabitants.
When one realizes that housing starts - including attendant household goods industries - in normal times represent roughly 3 percent of U.S. Gross National Product, it is not hard to imagine what sort of impact sharp fluctuations in this market segment do to levels of national employment, in either direction.
The good news is that the 2000-06 housing over-supply has by now been corrected by the 2006-09 implosion of activity. The housing market is coming back to life, although still hampered by so-called "under water" mortgages, where the value of loans exceed the market value of the property.
With the supply over-hang out of the way, now would be a good time for the government to double down on unraveling the financial impediments still blocking the way to full recovery.
Further good news is that the U.S. auto sales, falling to 10 million units in 2009, is currently at some 15 million units and on its way back to the annual average16 million units prevailing in the early 2000s. This is further strengthened by a revitalized U.S. auto industry and a small but steady trickle of returning manufacturing jobs from overseas.
Darkness is greatest during the hours before dawn, and the United States deserves to be lead back into the sunlight by a leader who gets the facts straight.
Saturday, September 8, 2012
GLOBALIZATION AND FREE TRADE
In 1776 Adam Smith wrote in his "Wealth of Nations"
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.
The underlining is mine.
Trade is by definition the exchange of different commodities of equal value, and this is what Adam Smith refers to in his defense of free trade vs mercantilism. Adam Smith was a moral philosopher - the term economist was yet to be coined - and from a moral-philosophical point of view his thesis makes good sense. In practice, however, it has invariably been mercantilism which has propelled nations to prosperity and created those advantages which Adam Smith assumes to be phenomena of moral logic.
Adam Smith, and later David Ricardo, lived and wrote in agrarian times and were mainly concerned with the British Corn Laws which imposed prohibitive import duties on cheap foreign grains, a policy greatly favored by England's land owning classes who also happened to control Parliament. This kept food prices high and landowners comfortably rich, but in time it would come to affect required living wage levels in the factories of the nascent industrial revolution.
The rapidly growing class of industrial capitalists wished labor costs to be as low as possible, so as to develop export markets for their products. When these newly rich industrialists and tradesmen finally gained the political upper hand, the Corn Laws were abolished in favor of a new form of mercantilism, this time bent on protecting industrial export markets through monopoly corporations which became the backbone of the now defunct British Empire.
Industrialization has always been the driving force behind national economic development and wealth creation, and in every important instance it has been the consequence of mercantilism, the economic doctrine which states that government control of trade is of paramount importance to the prosperity of a nation, in particular by demanding a positive balance of trade. Thus, modern economic globalization began with England's industrial revolution.
In no small degree, British mercantilism lead to the American Revolution and the creation of a new nation which promptly adopted similar policies, in reverse. High tariffs on imported goods were the main source of U.S. Federal revenue from 1790 to 1914, often exceeding 90% of total revenues collected. Behind these tariff walls and aided by abundant cheap immigrant labor and bountiful natural resources, thus arose the world's mightiest economy. The United States ran consistent surpluses in foreign trade through the 1970s and was an ardent free-trade advocate. The country has since become a substantial net importer and a less enthusiastic economic globalizer.
Nascent Germany under Otto von Bismarck was an early adherent to the American form of mercantilism and has basically stayed on track to this day, favoring policies of substantial foreign trade surpluses to the detriment of its partners in the European Community, from which Germany now demands commensurate punishment for not being able to pay their bills. Japan chose a similar course and was not so long ago considered an invincible economic force.
Brazil started to stir in the 1950s, adding a new twist to barriers against imports, namely national content laws with the purpose of provoking inwards transfer of foreign capital and industrial know-how. China did the same a generation later, adding numerous other non-tariff barriers as well as foreign exchange rate manipulation to their bag of mercantilistic tricks.
Unfortunately, global free trade is an illusion except in the minds of moral philosophers. In the real world it is most ardently bandied about by trade surplus nations - the mercantilists - that have everything to gain from free and unfettered access to everybody else's markets.
That is not to say that trade is not advantageous - of course it is - so long as it is clearly for the reciprocal enrichment of the trading parties involved. This is patently what Adam Smith alludes to in the passage quoted above.
But a system of world trade based on a number of nations running consistently large trade surpluses - the hallmark of mercantilism - must necessarily lead to a number of nations running up equally large and negative balances of trade, financed by the creation of excess, and ultimately irredeemable, credit.
Exactly where we find ourselves today.
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.
The underlining is mine.
Trade is by definition the exchange of different commodities of equal value, and this is what Adam Smith refers to in his defense of free trade vs mercantilism. Adam Smith was a moral philosopher - the term economist was yet to be coined - and from a moral-philosophical point of view his thesis makes good sense. In practice, however, it has invariably been mercantilism which has propelled nations to prosperity and created those advantages which Adam Smith assumes to be phenomena of moral logic.
Adam Smith, and later David Ricardo, lived and wrote in agrarian times and were mainly concerned with the British Corn Laws which imposed prohibitive import duties on cheap foreign grains, a policy greatly favored by England's land owning classes who also happened to control Parliament. This kept food prices high and landowners comfortably rich, but in time it would come to affect required living wage levels in the factories of the nascent industrial revolution.
The rapidly growing class of industrial capitalists wished labor costs to be as low as possible, so as to develop export markets for their products. When these newly rich industrialists and tradesmen finally gained the political upper hand, the Corn Laws were abolished in favor of a new form of mercantilism, this time bent on protecting industrial export markets through monopoly corporations which became the backbone of the now defunct British Empire.
Industrialization has always been the driving force behind national economic development and wealth creation, and in every important instance it has been the consequence of mercantilism, the economic doctrine which states that government control of trade is of paramount importance to the prosperity of a nation, in particular by demanding a positive balance of trade. Thus, modern economic globalization began with England's industrial revolution.
In no small degree, British mercantilism lead to the American Revolution and the creation of a new nation which promptly adopted similar policies, in reverse. High tariffs on imported goods were the main source of U.S. Federal revenue from 1790 to 1914, often exceeding 90% of total revenues collected. Behind these tariff walls and aided by abundant cheap immigrant labor and bountiful natural resources, thus arose the world's mightiest economy. The United States ran consistent surpluses in foreign trade through the 1970s and was an ardent free-trade advocate. The country has since become a substantial net importer and a less enthusiastic economic globalizer.
Nascent Germany under Otto von Bismarck was an early adherent to the American form of mercantilism and has basically stayed on track to this day, favoring policies of substantial foreign trade surpluses to the detriment of its partners in the European Community, from which Germany now demands commensurate punishment for not being able to pay their bills. Japan chose a similar course and was not so long ago considered an invincible economic force.
Brazil started to stir in the 1950s, adding a new twist to barriers against imports, namely national content laws with the purpose of provoking inwards transfer of foreign capital and industrial know-how. China did the same a generation later, adding numerous other non-tariff barriers as well as foreign exchange rate manipulation to their bag of mercantilistic tricks.
Unfortunately, global free trade is an illusion except in the minds of moral philosophers. In the real world it is most ardently bandied about by trade surplus nations - the mercantilists - that have everything to gain from free and unfettered access to everybody else's markets.
That is not to say that trade is not advantageous - of course it is - so long as it is clearly for the reciprocal enrichment of the trading parties involved. This is patently what Adam Smith alludes to in the passage quoted above.
But a system of world trade based on a number of nations running consistently large trade surpluses - the hallmark of mercantilism - must necessarily lead to a number of nations running up equally large and negative balances of trade, financed by the creation of excess, and ultimately irredeemable, credit.
Exactly where we find ourselves today.
Saturday, June 30, 2012
ARE THE UNITED STATES LIVING OFF CHINESE MONEY?
Not infrequently we see and hear statements from allegedly authoritative sources that the United States is deeply in debt to China and is living from day to day thanks to borrowings from that country.
Here are the facts as they currently stand.
As of May 2012, U.S. government debt held by the public stood at $11.0 trillion, while intra-governmental debt amounted to $4.76 trillion to give a combined outstanding public debt of $15.76 trillion. (One could ask whether monies that the government owes to itself is debt in the true meaning of the word).
As of February 2012, $5.1 trillion of the debt held by the public was owned by foreign investors, the largest of which were China and Japan with just over $1.0 trillion each. Other substantial foreign investors, although on a smaller scale, are Brazil, Switzerland, United Kingdom and Singapore.
So, China is only the source of approximately 10% of U.S. public debt, and there has not been any significant change in the size this debt for some time.
Not so dramatic and humiliating as some will have us believe.
Here are the facts as they currently stand.
As of May 2012, U.S. government debt held by the public stood at $11.0 trillion, while intra-governmental debt amounted to $4.76 trillion to give a combined outstanding public debt of $15.76 trillion. (One could ask whether monies that the government owes to itself is debt in the true meaning of the word).
As of February 2012, $5.1 trillion of the debt held by the public was owned by foreign investors, the largest of which were China and Japan with just over $1.0 trillion each. Other substantial foreign investors, although on a smaller scale, are Brazil, Switzerland, United Kingdom and Singapore.
So, China is only the source of approximately 10% of U.S. public debt, and there has not been any significant change in the size this debt for some time.
Not so dramatic and humiliating as some will have us believe.
TRUTH IN ADVERTISING
Advertising laws are aimed at protecting consumers by requiring advertisers to be truthful about their products and to be able to substantiate their claims. All businesses must comply with advertising and marketing laws, and failure to do so could result in costly lawsuits and civil penalties.
The Federal Trade Commission (FTC) is the main federal agency that enforces advertising laws and regulations. Under the Federal Trade Commission Act advertising must be truthful and non-deceptive, advertisers must have evidence to back up their claims, and advertisements cannot be unfair.
Hundreds of millions of dollars are being expended on political advertising which not infrequently is patently untruthful, deceptive and unfair. Should not political advertising adhere to the same standards as the ones set for corporate America?
One could so wish, but purchase of political advertising is not held to such commercial standards, because their statements are considered "political speech" which falls under the protection of the First Amendment. The noble idea underpinning this different approach to advertising standards is the belief that voters have a right to uncensored opinion on which to base their political decisions.
A logical extension of this is that one also believes voters at the receiving end of the opinion are universally capable of separating the wheat from the chaff. I will let you be the judge of that.
Furthermore, "opinion" (from Latin opinionem - what one thinks) is defined in the dictionary as "the expression of a belief that is held with confidence but not substantiated by positive knowledge or proof", or otherwise, "a personal belief or judgement that is not founded on proof or certainty".
In other words, one has the right to broadcast one's opinion, but no obligation to be truthful or factual.
Caveat emptor - or, "Let the voter beware!"
The Federal Trade Commission (FTC) is the main federal agency that enforces advertising laws and regulations. Under the Federal Trade Commission Act advertising must be truthful and non-deceptive, advertisers must have evidence to back up their claims, and advertisements cannot be unfair.
Hundreds of millions of dollars are being expended on political advertising which not infrequently is patently untruthful, deceptive and unfair. Should not political advertising adhere to the same standards as the ones set for corporate America?
One could so wish, but purchase of political advertising is not held to such commercial standards, because their statements are considered "political speech" which falls under the protection of the First Amendment. The noble idea underpinning this different approach to advertising standards is the belief that voters have a right to uncensored opinion on which to base their political decisions.
A logical extension of this is that one also believes voters at the receiving end of the opinion are universally capable of separating the wheat from the chaff. I will let you be the judge of that.
Furthermore, "opinion" (from Latin opinionem - what one thinks) is defined in the dictionary as "the expression of a belief that is held with confidence but not substantiated by positive knowledge or proof", or otherwise, "a personal belief or judgement that is not founded on proof or certainty".
In other words, one has the right to broadcast one's opinion, but no obligation to be truthful or factual.
Caveat emptor - or, "Let the voter beware!"
Sunday, June 10, 2012
CHINA
"Of all external changes, demographics - defined as changes in population, its size, age structure, composition, employment, educational status and income - are the clearest. They are unambiguous. They have the most predictable consequences."
So said the late business thinker and writer Peter Drucker. And when we take a closer look at China's demographic trends, things do not look all that bright.
As is familiar to us all, China has in modern times experienced a remarkable economic transformation, particularly during the period since 1995 when year-on-year compound growth, measured in nominal PPP (Purchasing Power Parity) dollars, has exceeded 11%, a feat unrivaled by any other nation over such an extended period of time. How was this possible?
By mobilizing a vast, under-employed and cheap labor force into becoming the workshop to the world's rich economies, and in the process attracting huge amounts of inward capital and technology investments from rich-world corporations. This economic expansion has been financed through an exceptionally high domestic savings rate, as a well as through positive foreign current account balances cumulatively exceeding 5.0 trillion dollars in the period since 1995.
How likely is it that this state of affairs will continue? Time for a look at China's demographics.
In PPP terms China is already the world's second largest national economy and is slated to overtake number one, the United States, some time during the current decade. But GDP per capita tells an entirely different story. Here we find China in 120th place, with its nearest neighbors on the world rankings being Cook Islands, Jamaica, Monserrat and the Maldives above, and just below we find Equador, Belize, Bosnia and Palau.
In other words, China is a large - but poor - country and is quite likely to remain that way. Here is why.
Thanks not the least to its "one child" policy, China has long suffered from an exceptionally low birth rate, and the trend points toward further deterioration. As a consequence of the same policy there is also a marked unbalance between the number of adult men and women. Some 40 million Chinese will never find a mate.
The country's total population is in the process of peaking, but more disturbing pictures emerge when we look at age group distribution trends.The productive 15-64 years age group has already peaked at 73.6% of total population and will have fallen to 64.5% by 2030 and to 56.6% by 2050. During this same time span the over-65 age group will have grown from a current 8,9% to respectively 22.2% and 33.2%. In other words, China will have grown old before it has had time to become rich.
The already diminishing 15-64 age group will have serious economic consequences, because China's labor force participation within this group is already an extraordinarily high 83%. In comparison we find Germany with 81%, Brazil with 77% and the United States with 73%.
The China-as-world-workshop policy, the linchpin of economic globalization, has been a main cause of the serious imbalances we are now experiencing both in world labor markets as well as world financial markets. These imbalances are currently mainly manifesting themselves in rich world countries, but they will impact China soon enough.
It has long been pointed out that China needs to change tack and steer its economic development towards local consumption rather than savings, investment and export of manufactured goods. The problem is that this is much easier said than done.
A fairly standard national GNP structure is somewhere around 80% consumption and 20% gross investment. In 2011 China we find 46% consumption and 54% investment. On the supply side of the equation, we find 47% of value creation coming from the manufacturing sector. In terms of the national economy, this represents a huge over-capacity which can never be absorbed locally.
An economic restructuring of this magnitude could only lead to massive unemployment and serious social disturbances, to which history has taught us that the Chinese society is prone. Another risk factor in this direction is the country's rapidly growing income inequality as measured by the Gini index. Over a period of just two recent years China's position on this index has deteriorated by 16 percentage points.
And there is a diminishing probability that China's excess industrial capacity will continue to be absorbed by the rich-world economies, in the short term because they will not have the money, and in the longer term because the world manufacturing labor market will have to be brought back into balance to avoid unacceptably high rich-world unemployment rates. We already see signs of this happening in the United States, as steeply rising labor rates and general logistics costs are beginning to erode China's low cost advantage in some industrial sectors.
While total population is peaking, the rate of urbanization will continue unabated. By 2030 China's urban population will have increased by some 50% to nearly one billion people. Imagine the infrastructure investment requirements this will lead to. Where will the money come from, as exports and inward investments dry up? And does China have land and water resources to adequately feed such a large urban population without massive imports of food and energy?
Finally, in China there is hardly any health care and social security net to deal with more than 300 million old people by 2030. Where will the money for that come from?
There seems to be current consensus that China will continue to grow at a blistering pace, no longer at 11% per year but maybe at 7%. I would not bet on it.
So said the late business thinker and writer Peter Drucker. And when we take a closer look at China's demographic trends, things do not look all that bright.
As is familiar to us all, China has in modern times experienced a remarkable economic transformation, particularly during the period since 1995 when year-on-year compound growth, measured in nominal PPP (Purchasing Power Parity) dollars, has exceeded 11%, a feat unrivaled by any other nation over such an extended period of time. How was this possible?
By mobilizing a vast, under-employed and cheap labor force into becoming the workshop to the world's rich economies, and in the process attracting huge amounts of inward capital and technology investments from rich-world corporations. This economic expansion has been financed through an exceptionally high domestic savings rate, as a well as through positive foreign current account balances cumulatively exceeding 5.0 trillion dollars in the period since 1995.
How likely is it that this state of affairs will continue? Time for a look at China's demographics.
In PPP terms China is already the world's second largest national economy and is slated to overtake number one, the United States, some time during the current decade. But GDP per capita tells an entirely different story. Here we find China in 120th place, with its nearest neighbors on the world rankings being Cook Islands, Jamaica, Monserrat and the Maldives above, and just below we find Equador, Belize, Bosnia and Palau.
In other words, China is a large - but poor - country and is quite likely to remain that way. Here is why.
Thanks not the least to its "one child" policy, China has long suffered from an exceptionally low birth rate, and the trend points toward further deterioration. As a consequence of the same policy there is also a marked unbalance between the number of adult men and women. Some 40 million Chinese will never find a mate.
The country's total population is in the process of peaking, but more disturbing pictures emerge when we look at age group distribution trends.The productive 15-64 years age group has already peaked at 73.6% of total population and will have fallen to 64.5% by 2030 and to 56.6% by 2050. During this same time span the over-65 age group will have grown from a current 8,9% to respectively 22.2% and 33.2%. In other words, China will have grown old before it has had time to become rich.
The already diminishing 15-64 age group will have serious economic consequences, because China's labor force participation within this group is already an extraordinarily high 83%. In comparison we find Germany with 81%, Brazil with 77% and the United States with 73%.
The China-as-world-workshop policy, the linchpin of economic globalization, has been a main cause of the serious imbalances we are now experiencing both in world labor markets as well as world financial markets. These imbalances are currently mainly manifesting themselves in rich world countries, but they will impact China soon enough.
It has long been pointed out that China needs to change tack and steer its economic development towards local consumption rather than savings, investment and export of manufactured goods. The problem is that this is much easier said than done.
A fairly standard national GNP structure is somewhere around 80% consumption and 20% gross investment. In 2011 China we find 46% consumption and 54% investment. On the supply side of the equation, we find 47% of value creation coming from the manufacturing sector. In terms of the national economy, this represents a huge over-capacity which can never be absorbed locally.
An economic restructuring of this magnitude could only lead to massive unemployment and serious social disturbances, to which history has taught us that the Chinese society is prone. Another risk factor in this direction is the country's rapidly growing income inequality as measured by the Gini index. Over a period of just two recent years China's position on this index has deteriorated by 16 percentage points.
And there is a diminishing probability that China's excess industrial capacity will continue to be absorbed by the rich-world economies, in the short term because they will not have the money, and in the longer term because the world manufacturing labor market will have to be brought back into balance to avoid unacceptably high rich-world unemployment rates. We already see signs of this happening in the United States, as steeply rising labor rates and general logistics costs are beginning to erode China's low cost advantage in some industrial sectors.
While total population is peaking, the rate of urbanization will continue unabated. By 2030 China's urban population will have increased by some 50% to nearly one billion people. Imagine the infrastructure investment requirements this will lead to. Where will the money come from, as exports and inward investments dry up? And does China have land and water resources to adequately feed such a large urban population without massive imports of food and energy?
Finally, in China there is hardly any health care and social security net to deal with more than 300 million old people by 2030. Where will the money for that come from?
There seems to be current consensus that China will continue to grow at a blistering pace, no longer at 11% per year but maybe at 7%. I would not bet on it.
Thursday, May 3, 2012
TRICKLE-DOWN ECONOMICS
The best definition of Trickle-Down Economics I can think of is the metaphor about the richest 1% up in the tree eating cherries while popping the pits down on the 99% percent down below.
Economic activity is not driven by supply but by demand. Demand will generate supply, while it should be fairly obvious to anyone that supply without purchasing power generates only bankrupt companies unable to sell what is on offer. And to generate demand it is the 99% that need to be employed at decent wages. The 1% may have tons of money, but as consumers and generators of demand and economic activity they are not worth beans.
In case you are unaware of this, out of every 100 dollars of U.S. Gross Domestic Product, 75 dollars are generated by household consumption, 15 dollars from consumption by government (federal, state and local), with only 15 dollars being channeled towards gross private and public investment. You will have noticed that this adds up to 105 rather than 100 dollars. That is because we consume 5% more than we produce by importing from other countries more than we sell to them.
The above should make it pretty obvious where the attention has to be: ON THE PURCHASING POWER OF THE CONSUMER, NOT ON THE INVESTOR .
Henry Ford understood the relationship between demand and ability to purchase when he invented assembly line mass production of automobiles in the early 1920s. He doubled wages to 5 dollars per day so that his workers could afford to buy all those cars he was now able to turn out. The lesson has obviously long been lost.
Some politicians and pundits talk and think as if we were in an ordinary garden-variety short term cyclical recession, and that all we need is some fiscal discipline and lower taxes on wealthy one-percenters and corporations for them to regain confidence enough to start creating jobs with their idle cash. Those politicians and pundits are barking up the wrong tree.
From the time globalization got under way in a big way in the early 1980s, median U.S. household income measured in constant 2010 dollars has increase by 0.2% per year. In other words, not grown at all. Between 1999 and 2010 household income actually fell by 12% in real terms. But with credit being abundantly available consumption continued unabated, coming to a screeching halt only after household debt had doubled to an unsustainable 200% of median income and home equity collateral had disappeared.
Why has household income stagnated and declined, instead of accompanying the annual 2.3% real growth in gross national product during the period? After all, that was the way it used to be. It is because globalization in short order doubled the world labor force, and that over-supply of labor drove down wages everywhere. This has caused a massive transfer of wealth from the consuming 85% of the economy to the investing (and gambling) 15%.
And where did all that abundant credit come from? Thanks to globalization (and increasing oil prices) the value of world trade grew faster than the world economy. While you'd think world trade by definition should be a zero sum game (world exports equaling world imports), unfortunately this does not quite hold true. Most of the main export-driven economies and oil producers have no ready use for all the money they are raking in and consequently run huge current account surpluses.
These surpluses in turn have left the world financial system awash in funds for which the bankers desperately needed to find profitable outlets. Too much cash chasing too few quality investment opportunities drives bankers to increasing financial ingenuity, skullduggery and risk-taking. The first installment of that saga blew up in the face of western taxpayers in 2008, and worse is yet to come from a probable implosion of the Euro monetary union.
Let us have no illusions. We have been digging ourselves a hole for some 25 years, and it is not going to be easy nor painless to dig out again. We have accumulated the mother of all world debt overhangs which have to be pared back to sustainable levels. Since one person's or nation's debt is another's asset, much of those assets are in fact smoke and mirrors.
And then there is the unbalanced pattern of trade created by the globalization of world labor and the hunt for the lowest common denominator, which is fundamentally how we got ourselves into this mess. Until we find ways to gainfully employ the 99% at home where consumption takes place, the hole we have dug will just continue to deepen.
Economic activity is not driven by supply but by demand. Demand will generate supply, while it should be fairly obvious to anyone that supply without purchasing power generates only bankrupt companies unable to sell what is on offer. And to generate demand it is the 99% that need to be employed at decent wages. The 1% may have tons of money, but as consumers and generators of demand and economic activity they are not worth beans.
In case you are unaware of this, out of every 100 dollars of U.S. Gross Domestic Product, 75 dollars are generated by household consumption, 15 dollars from consumption by government (federal, state and local), with only 15 dollars being channeled towards gross private and public investment. You will have noticed that this adds up to 105 rather than 100 dollars. That is because we consume 5% more than we produce by importing from other countries more than we sell to them.
The above should make it pretty obvious where the attention has to be: ON THE PURCHASING POWER OF THE CONSUMER, NOT ON THE INVESTOR .
Henry Ford understood the relationship between demand and ability to purchase when he invented assembly line mass production of automobiles in the early 1920s. He doubled wages to 5 dollars per day so that his workers could afford to buy all those cars he was now able to turn out. The lesson has obviously long been lost.
Some politicians and pundits talk and think as if we were in an ordinary garden-variety short term cyclical recession, and that all we need is some fiscal discipline and lower taxes on wealthy one-percenters and corporations for them to regain confidence enough to start creating jobs with their idle cash. Those politicians and pundits are barking up the wrong tree.
From the time globalization got under way in a big way in the early 1980s, median U.S. household income measured in constant 2010 dollars has increase by 0.2% per year. In other words, not grown at all. Between 1999 and 2010 household income actually fell by 12% in real terms. But with credit being abundantly available consumption continued unabated, coming to a screeching halt only after household debt had doubled to an unsustainable 200% of median income and home equity collateral had disappeared.
Why has household income stagnated and declined, instead of accompanying the annual 2.3% real growth in gross national product during the period? After all, that was the way it used to be. It is because globalization in short order doubled the world labor force, and that over-supply of labor drove down wages everywhere. This has caused a massive transfer of wealth from the consuming 85% of the economy to the investing (and gambling) 15%.
And where did all that abundant credit come from? Thanks to globalization (and increasing oil prices) the value of world trade grew faster than the world economy. While you'd think world trade by definition should be a zero sum game (world exports equaling world imports), unfortunately this does not quite hold true. Most of the main export-driven economies and oil producers have no ready use for all the money they are raking in and consequently run huge current account surpluses.
These surpluses in turn have left the world financial system awash in funds for which the bankers desperately needed to find profitable outlets. Too much cash chasing too few quality investment opportunities drives bankers to increasing financial ingenuity, skullduggery and risk-taking. The first installment of that saga blew up in the face of western taxpayers in 2008, and worse is yet to come from a probable implosion of the Euro monetary union.
Let us have no illusions. We have been digging ourselves a hole for some 25 years, and it is not going to be easy nor painless to dig out again. We have accumulated the mother of all world debt overhangs which have to be pared back to sustainable levels. Since one person's or nation's debt is another's asset, much of those assets are in fact smoke and mirrors.
And then there is the unbalanced pattern of trade created by the globalization of world labor and the hunt for the lowest common denominator, which is fundamentally how we got ourselves into this mess. Until we find ways to gainfully employ the 99% at home where consumption takes place, the hole we have dug will just continue to deepen.
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