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.
Monday, June 16, 2014
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.
Subscribe to:
Posts (Atom)